# Valley National Bancorp: Form 10-Q for the period ended Jun 30, 2022

- Company: [Valley National Bancorp](/companies/vly.md) (CIK 714310)
- Form: 10-Q
- Filed: 2022-08-09
- Accepted by EDGAR: Aug 9, 2022, 15:05 ET
- Period: 2022-06-30
- Accession: 0000714310-22-000123
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/714310/000071431022000123/vly-20220630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/714310/000071431022000123/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $34.8m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-01-01 to 2022-06-30 | $57.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $36.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $75.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $96.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $213.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.18 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.44 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.18 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.45 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 508,479,206 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 466,320,683 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | $805.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-01-01 to 2022-06-30 | $35.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2022-01-01 to 2022-06-30 | $92.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2022-01-01 to 2022-06-30 | $23.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2022-06-30 | $54.44bn | us-gaap:Assets |
| Total liabilities | at 2022-06-30 | $48.23bn | us-gaap:Liabilities |
| Short-term borrowings | at 2022-06-30 | $1.52bn | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2022-06-30 | $6.20bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 131,743 characters.

The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report. The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its 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 our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “would,” “could,” “typically,” “usually,” “anticipate,” “may,” “estimate,” “outlook,” “project,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties 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 inability to realize expected cost savings and synergies from the Bank Leumi USA acquisition in amounts or in the timeframe anticipated;
- greater than expected costs or difficulties relating to Bank Leumi USA integration matters;
- the inability to retain customers and qualified employees of Bank Leumi USA;
- greater than expected non-recurring charges related to the Bank Leumi USA acquisition;
- the continued impact of COVID-19 on the U.S. and global economies, including business disruptions, reductions in employment, supply chain interruptions, inflation, Federal Reserve actions impacting the level of market interest rates and an increase in business failures, specifically among our clients;
- the continued impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases and new variants of COVID-19 may arise in our primary markets;
- continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets;
- the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral;
- the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies;
- damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters;
- a prolonged downturn in the economy, mainly in New Jersey, New York, Florida, Alabama, California, and Illinois, as well as an unexpected decline in commercial real estate values within our market areas;
- higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;
- the inability to grow customer deposits to keep pace with loan growth;
- a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;
- the 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, ransomware attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;
- results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;
- our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;
- unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events; and
- unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors.

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

We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

### Critical Accounting Policies and Estimates

Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. At June 30, 2022, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies and estimates with the Audit Committee of Valley’s Board of Directors. Our critical accounting policies and estimates are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2021, and there have been no material changes in such policies and estimates since the date of such report.

### New Authoritative Accounting Guidance

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

### Executive Summary

**Company Overview.** At June 30, 2022, Valley had consolidated total assets of approximately $54.4 billion, total net loans of $43.1 billion, total deposits of $43.9 billion and total shareholders’ equity of $6.2 billion. Valley operates many convenient branch office locations and commercial banking offices in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn and Queens, Long Island, Westchester County, New York, Florida, California, Alabama and Illinois. Of our current 238 branch network, 55 percent, 19 percent, 18 percent of the branches are in New Jersey, New York and Florida, respectively, with the remaining 8 percent of the branches in Alabama, California, and Illinois combined. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years both through organic efforts and bank acquisitions. Our most recent bank acquisition is discussed below.

**Bank Leumi Le-Israel Corporation.** On April 1, 2022, Valley completed its acquisition of Bank Leumi Le-Israel Corporation, the U.S. subsidiary of Bank Leumi Le-Israel B.M., and parent company of Bank Leumi USA, and collectively referred to as "Bank Leumi USA". At the acquisition date, Bank Leumi USA had approximately $8.1 billion in assets, $5.9 billion of loans and $7.0 billion of deposits, after purchase accounting adjustments. Valley issued approximately 85 million shares of common stock and paid $113.4 million in cash in the transaction. The consideration for the acquisition totaled approximately $1.2 billion, inclusive of the value of stock options. The transaction resulted in $403.2 million of goodwill and $153.4 million of combined core deposit and other intangible assets subject to amortization. See Note 2 to the consolidated financial statements for additional details regarding the acquisition of Bank Leumi USA and other recent acquisition activities.

**Impact of COVID-19.** During the second quarter 2022, the impact of the COVID pandemic and new global outbreaks of the COVID variants were mostly overshadowed by inflationary concerns. Inflation remains elevated, reflecting supply and demand imbalances related to the COVID pandemic, higher food and energy prices, and broader price pressures. In June 2022, travel restrictions were further loosened by eliminating COVID-19 test requirement to enter the U.S. We continue to monitor the impact of COVID-19 including the emergence of any new more severe variants closely, including its impact on our employees, customers, communities and results of operations and other government or Federal Reserve actions. See the "Operating Environment" section of MD&A for more details.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act and additional legislation that followed including the Consolidated Appropriations Act and the American Rescue Plan Act of 2021 provided funding for the SBA's Paycheck Protection Program (PPP) and established rules for qualifying borrowers to receive loan forgiveness by the SBA under this program. Valley extended a total of $3.2 billion PPP loans under the program, of which $3.1 billion of these loans have received forgiveness from the SBA. As of June 30, 2022, we had $136.0 million (including $45.7 million acquired from Bank Leumi USA) of PPP loans still outstanding.

**Quarterly Results.** Net income for the second quarter 2022 was $96.4 million, or $0.18 per diluted common share as compared to $120.5 million, or $0.29 per diluted common share, for the second quarter 2021. The $24.1 million decrease in quarterly net income as compared to the same quarter one year ago was mainly due to the following changes:

- a $127.8 million increase in non-interest expense largely due to $54.5 million of merger expenses incurred during the second quarter 2022 and our expanded banking operations resulting from the acquisition of Bank Leumi USA on April 1, 2022 and The Westchester Bank Holding Corporation (Westchester) on December 1, 2021; and
- a $35.3 million increase in our provision for credit losses mainly due to $41.0 million of provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA; partially offset by:
- a $117.3 million increase in net interest income mainly due to higher average loan balances driven by both acquired and organic loan volumes and increased yields on new and adjustable rate loans;
- a $15.4 million increase in non-interest income primarily driven by increases in wealth management and trust fees, service charges on deposit accounts and other income totaling $6.0 million, $5.0 million and $11.5 million, respectively, generated from the aforementioned bank acquisitions, partially offset by lower new gains on sales of loans; and
- a $6.3 million decrease in income tax expense mostly caused by lower pre-tax income.

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

**Operating Environment.** During the second quarter 2022, real gross domestic product (GDP) at an annual rate decreased 1.3 percent compared to a decline of 1.6 percent in the first quarter 2022. The second consecutive quarter of decline in economic activity was driven in large part by a decline in inventory restocking and household fixed investment. Otherwise, household demand for goods and services improved modestly despite a continued acceleration in overall prices.

In May, June and July 2022, the Federal Reserve raised the federal funds rate by 50 basis points, 75 basis points and 75 basis points, respectively, resulting in a current target range of 2.25 percent to 2.50 percent. In addition, the Federal Reserve continued to reduce its holdings of Treasury securities and agency debt and mortgage-backed securities. The Federal Reserve indicated it will reduce its Treasury and agency securities portfolio by $47.5 billion per month and after three months will increase to $95 billion per month. The changes in policy reflect the Federal Reserve’s strong commitment to returning inflation to its 2 percent objective.

The 10-year U.S. Treasury note yield ended the second quarter 2022 at 2.98 percent, 66 basis points higher compared with March 31, 2022. The spread between the 2- and 10-year U.S. Treasury note yields ended the quarter at 0.06 percent, 2 basis points higher compared to March 31, 2022.

For all commercial banks in the U.S., loans and leases increased approximately 3.9 percent from March 31, 2022 to June 30, 2022. The banking industry reported softening in demand for most commercial loan products (particularly for commercial real estate loans secured by non-farm nonresidential structures) in recent months as compared to the beginning of the year. During the second quarter 2022, Valley’s new loan originations experienced solid increases across most product types primarily driven by an increase in non-owner occupied commercial real estate, commercial and industrial, residential mortgage and automobile loans. However, further declines in GDP, continued increases in market interest rates, persistently high inflation, the lingering impact of the pandemic on supply chains and business opportunities, labor market conditions, and fallout from the Russia-Ukraine war, among other factors, add a high level of uncertainty to the future path of the U.S. economy and the risk of a recession. Should economic conditions continue to deteriorate causing business activity, spending and investment to decline, it would adversely impact the Bank’s financial results, as highlighted below in this MD&A.

**Loans.** Total loans increased $8.2 billion to $43.6 billion at June 30, 2022 from March 31, 2022 largely due to a combination of $5.9 billion of acquired loans from Bank Leumi USA and strong organic loan growth. Excluding acquired loans from Bank Leumi USA, our loan portfolio increased 26 percent on an annualized basis during the second quarter 2022 as a result of strong commercial loan volumes and a continued uptick in new residential mortgage loans originated for investment rather than sale. We sold approximately $125 million of residential mortgage loans resulting in total pre-tax gains of $3.6 million in the second quarter 2022. See further details on our loan activities under the “Loan Portfolio” section.

**Asset Quality.** Total accruing past due loans decreased $19.3 million to $73.5 million, or 0.17 percent of total loans, at June 30, 2022 as compared to $92.8 million, or 0.26 percent of total loans, at March 31, 2022. Non-accrual loans represented 0.72 percent and 0.65 percent of total loans at June 30, 2022 and March 31, 2022, respectively. See further details in the "Non-performing Assets" section below.

**Deposits and Other Borrowings.** Overall, average deposits increased by $7.1 billion to $42.9 billion for the second quarter 2022 as compared to the first quarter 2022 mostly due to deposits assumed from Bank Leumi USA on April 1, 2022, as well as continued growth in commercial and retail customer deposits without stated maturities. Average non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 38 percent, 54 percent and 8 percent of total deposits as of June 30, 2022, respectively. While we experienced some growth in time deposits due to recent CD promotions and deposits assumed from Bank Leumi USA, our overall mix of average deposits for the second quarter 2022 continued to shift away from higher cost time deposits to the non-maturity deposit categories as compared to the first quarter 2022.

Actual ending balances for deposits increased $8.2 billion to approximately $43.9 billion at June 30, 2022 from March 31, 2022 mostly due to $7.0 billion of assumed deposits from Bank Leumi USA and continued commercial customer deposit organic growth, and our increased utilization of brokered deposits, consisting of money market and time deposit accounts, in our funding mix. Total brokered deposits increased to $2.3 billion at June 30, 2022 as compared to $1.2 billion at March 31, 2022. Non-interest bearing deposits and the savings, NOW and money market category increased $4.2 billion and $3.3 billion, respectively, at June 30, 2022 as compared to March 31, 2022. The increase in non-interest bearing deposits during the second quarter 2022 was mainly attributable to $4.5 billion of deposits assumed from Bank Leumi USA. While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at June 30, 2022.

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

*(in thousands)*

| Average short-term borrowings: | Three Months Ended June 30, 2022 | March 31, 2022 | June 30, 2021 | Six Months Ended June 30, 2022 | June 30, 2021 |
| --- | ---: | ---: | ---: | ---: | ---: |
| FHLB advances | $822,913 | $434,444 | $707,692 | $629,753 | $851,381 |
| Securities sold under repurchase agreements | 142,790 | 148,575 | 166,125 | 145,666 | 155,983 |
| Federal funds purchased | 637,495 | 11,278 | 110 | 326,116 | 13,094 |
| Total | $1,603,198 | $594,297 | $873,927 | $1,101,535 | $1,020,458 |
| **Average long-term borrowings:** |  |  |  |  |  |
| FHLB advances | $788,803 | $788,956 | $1,391,382 | $788,879 | $1,477,207 |
| Subordinated debt | 617,291 | 631,056 | 453,258 | 624,135 | 428,358 |
| Securities sold under repurchase agreements | — | — | 300,000 | — | 300,000 |
| Junior subordinated debentures issued to capital trusts | 56,544 | 56,457 | 56,196 | 56,501 | 56,154 |
| Total | $1,462,638 | $1,476,469 | $2,200,836 | $1,469,515 | $2,261,719 |

Average short-term borrowings increased $729.3 million during the second quarter 2022 as compared to the second quarter 2021 mostly due to an increase in the federal funds purchased balance as a part of our funding strategy. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) decreased $738.2 million from the second quarter 2021 largely due to the repayment of several maturing FHLB advances and repurchase agreements subsequent to the second quarter 2021.

Actual ending balances for short-term borrowings increased by $1.0 billion to $1.5 billion at June 30, 2022 as compared to March 31, 2022 largely due to additional FHLB advances, including approximately $103.8 million assumed from Bank Leumi USA, partially offset by a $125 million decrease in federal funds purchased at June 30, 2022. Long-term borrowings totaled $1.4 billion at June 30, 2022 and remained relatively unchanged from March 31, 2022.

**Non-GAAP Financial Measures.** The table below presents selected performance indicators, their comparative non-GAAP measures and the (non-GAAP) efficiency ratio for the periods indicated. The Company believes that the non-GAAP financial measures provide useful supplemental information to both management and investors in understanding Valley’s underlying operational performance, business, and performance trends, and may facilitate comparisons of our current and prior performance with the performance of others in the financial services industry. Management utilizes these measures for internal planning, forecasting and analysis purposes. Management believes that Valley’s presentation and discussion of this supplemental information, together with the accompanying reconciliations to the GAAP financial measures, also allows investors to view performance in a manner similar to management. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies.

*($ in thousands, except for %)*

| Selected Performance Indicators GAAP measures: | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net income, as reported | $96,413 | $120,512 | $213,141 | $236,222 |
| Return on average assets | 0.72% | 1.17% | 0.88% | 1.15% |
| Return on average shareholders’ equity | 6.18 | 10.24 | 7.51 | 10.10 |
| **Non-GAAP measures:** |  |  |  |  |
| Net income, as adjusted | $165,803 | $126,617 | $286,116 | $242,412 |
| Return on average assets, as adjusted | 1.25% | 1.23% | 1.18% | 1.18% |
| Return on average shareholders' equity, as adjusted | 10.63 | 10.76 | 10.09 | 10.37 |
| Return on average tangible shareholders' equity (ROATE) | 9.33 | 14.79 | 11.07 | 14.64 |
| ROATE, as adjusted | 16.05 | 15.54 | 14.87 | 15.03 |
| Efficiency ratio | 50.78 | 46.64 | 51.81 | 47.59 |

| Common Equity Per Share Data: | June 30, 2022 | December 31, 2021 |
| --- | ---: | ---: |
| Book value per common share (GAAP) | $11.84 | $11.57 |
| Tangible book value per common share (non-GAAP) | 7.71 | 7.94 |

### Non-GAAP Reconciliations to GAAP Financial Measures

Adjusted net income is computed as follows:

*(in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net income, as reported (GAAP) | $96,413 | $120,512 | $213,141 | $236,222 |
| Add: Loss on extinguishment of debt (net of tax) | — | 6,024 | — | 6,024 |
| Add: Losses on available for sale and held to maturity securities transactions (net of tax) (a) | (56) | 81 | (50) | 166 |
| Add: Non-PCD provision for credit losses (net of tax) (b) | 29,282 | — | 29,282 | — |
| Add: Merger related expenses (net of tax) (c) | 40,164 | — | 43,743 | — |
| Net income, as adjusted (non-GAAP) | $165,803 | $126,617 | $286,116 | $242,412 |

58

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

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

(c) Merger related expenses are primarily within salary and employee benefits expense, professional and legal fees, and other expense.

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

Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows:

*($ in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net income, as adjusted (non-GAAP) | $165,803 | $126,617 | $286,116 | $242,412 |
| Average assets | $53,211,422 | $41,161,459 | $48,417,469 | $40,967,174 |
| Annualized return on average assets, as adjusted (non-GAAP) | 1.25% | 1.23% | 1.18% | 1.18% |

Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:

*($ in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net income, as adjusted (non-GAAP) | $165,803 | $126,617 | $286,116 | $242,412 |
| Average shareholders' equity | $6,238,985 | $4,708,797 | $5,673,014 | $4,677,273 |
| Annualized return on average shareholders' equity, as adjusted (non-GAAP) | 10.63% | 10.76% | 10.09% | 10.37% |

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:

*($ in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net income, as reported (GAAP) | $96,413 | $120,512 | $213,141 | $236,222 |
| Net income, as adjusted (non-GAAP) | 165,803 | 126,617 | $286,116 | $242,412 |
| Average shareholders’ equity | $6,238,985 | $4,708,797 | $5,673,014 | $4,677,273 |
| Less: Average goodwill and other intangible assets | 2,105,585 | 1,449,388 | 1,823,538 | 1,450,562 |
| Average tangible shareholders’ equity | $4,133,400 | $3,259,409 | $3,849,476 | $3,226,711 |
| Annualized ROATE (non-GAAP) | 9.33% | 14.79% | 11.07% | 14.64% |
| Annualized ROATE, as adjusted (non-GAAP) | 16.05% | 15.54% | 14.87% | 15.03% |

59

The efficiency ratio is computed as follows:

*($ in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Total non-interest expense, as reported (GAAP) | $299,730 | $171,893 | $497,070 | $332,106 |
| Less: Loss on extinguishment of debt (pre-tax) | — | 8,406 | — | 8,406 |
| Less: Amortization of tax credit investments (pre-tax) | 3,193 | 2,972 | 6,089 | 5,716 |
| Less: Merger related expenses (pre-tax) (a) | 54,496 | — | 59,124 | — |
| Total non-interest expense, as adjusted (non-GAAP) | $242,041 | $160,515 | $431,857 | $317,984 |
| Net interest income, as reported (GAAP) | $418,160 | $300,907 | $735,829 | $593,574 |
| Total non-interest income, as reported (GAAP) | 58,533 | 43,126 | 97,803 | 74,359 |
| Add: Losses on available for sale and held to maturity securities transactions, net (pre-tax) (b) | (78) | 113 | (69) | 231 |
| Total net interest income and non-interest income, as adjusted (non-GAAP) | $476,615 | $344,146 | $833,563 | $668,164 |
| Efficiency ratio (non-GAAP) | 50.78% | 46.64% | 51.81% | 47.59% |

(a) Included primarily within salary and employee benefits expense, professional and legal fees, and other expense.

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

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

*($ in thousands, except for share data)*

|  | June 30, 2022 | December 31, 2021 |
| --- | ---: | ---: |
| Common shares outstanding | 506,328,526 | 421,437,068 |
| Shareholders’ equity | $6,204,913 | $5,084,066 |
| Less: Preferred stock | 209,691 | 209,691 |
| Less: Goodwill and other intangible assets | 2,090,147 | 1,529,394 |
| Tangible common shareholders’ equity | $3,905,075 | $3,344,981 |
| Tangible book value per common share (non-GAAP) | $7.71 | $7.94 |
| Book value per common share (GAAP) | $11.84 | $11.57 |

### 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 $419.6 million for the second quarter 2022 increased $101.2 million as compared to the first quarter 2022 and increased $117.8 million from the second quarter 2021. Interest income on a tax equivalent basis in the second quarter 2022 increased $113.2 million to $454.4 million as compared to the first quarter 2022. The increase was mostly due to higher average loan balances driven both by acquired and organic loans and increased yields on both new originations and adjustable rate loans in our portfolio. Interest expense of $34.8 million for the second quarter 2022 increased $12.0 million as compared to the first quarter 2022 largely due to a moderate increase in interest rates on both non-maturity deposits and short-term borrowings, as well as interest expense related to deposits and borrowings assumed in the Bank Leumi USA acquisition.

Average interest earning assets increased $11.0 billion to $48.9 billion for the second quarter 2022 as compared to the second quarter 2021 primarily due to the acquisitions of Bank Leumi USA and Westchester on April 1, 2022 and December 1, 2021, respectively, as well as strong organic loan growth over the 12-month period ended June 30, 2022. Compared to the first quarter 2022, average interest earning assets increased by $8.6 billion during the second quarter 2022. The increase was primarily driven by a $7.9 billion increase in average loan balances due to $5.9 billion of loans acquired form Bank Leumi USA and continued organic loan growth mainly in the non-PPP commercial loan categories, as well as residential mortgage loans.

Average interest bearing liabilities increased $4.2 billion to $29.7 billion for the second quarter 2022 as compared to the second quarter 2021 mainly due to $2.5 billion of interest bearing deposits assumed from Bank Leumi USA, strong growth in commercial and retail customer deposit balances without stated maturities, and $727 million of interest bearing deposits assumed from Westchester. As compared to the first quarter 2022, average interest bearing liabilities increased by $3.5 billion in the second quarter 2022 mainly due to the deposits from Bank Leumi USA and continued growth in average non-maturity deposits balances, including supplemental growth from commercial depositors, a relatively new niche product targeting professional service firms and an increased utilization of short-term borrowings as part of our funding and liquidity sources. Total average deposits, including non-interest bearing deposits, increased $7.1 billion to $42.9 billion for the second quarter 2022 as compared to the first quarter 2022. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.

Our net interest margin on a tax equivalent basis of 3.43 percent for the second quarter 2022 increased by 27 basis points and 25 basis points from 3.16 percent and 3.18 percent for the first quarter 2022 and second quarter 2021, respectively. The yield on average interest earning assets increased by 33 basis points on a linked quarter basis mostly due to the aforementioned higher yields on new and adjustable rate loans in the second quarter 2022 as compared to the first quarter 2022. The yield on average loans increased by 24 basis points to 3.91 percent for the second quarter 2022 as compared to the first quarter 2022 largely due to the higher level of market interest rates. The yields on average taxable and non-taxable investments also increased 39 basis points and 67 basis points, respectively, from the first quarter 2022 largely due to interest income, including discount accretion, on investment securities acquired from Bank Leumi USA. The overall cost of average interest bearing liabilities increased 12 basis points to 0.47 percent for the second quarter 2022 as compared to the first quarter 2022. The increase was mainly due to moderately higher pricing of non-maturity deposits combined with greater utilization of brokered deposits and short-term borrowings in our loan funding mix during the second quarter 2022. Our cost of total average deposits only increased to 0.19 percent for the second quarter 2022 from 0.14 percent for the first quarter 2022.

As noted in the "Operating Environment" section above, the Federal Reserve raised the federal funds rate by 50 basis points, 75 basis points and 75 basis points, in May, June, and July 2022, respectively, resulting in a current target range of 2.25 percent to 2.50 percent. Higher levels of market interest rates would benefit certain interest earning assets on our balance sheet and likely provide us the opportunity to reinvest any excess cash, including normal repayments of loans and investments, at higher rates. Funding costs also increased during the second quarter 2022 and the early stages of the third quarter 2022, however at this time, we expect a continued benefit to our net interest income from a certain amount of lag in higher funding costs due to the current market and our ability to manage the balance sheet. While our outlook for our net interest income for the remainder of 2022 is positive, we cannot provide any assurances that our net interest income or margin will remain at the levels reported for the second quarter 2022.

The following table reflects the components of net interest income for the three months ended June 30, 2022, March 31, 2022 and June 30, 2021:

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

### Net Interest Income on a Tax Equivalent Basis

*($ in thousands)*

| Assets Interest earning assets: | Three Months Ended June 30, 2022 Average Balance | Interest | Average Rate | March 31, 2022 Average Balance | Interest | Average Rate | June 30, 2021 Average Balance | Interest | Average Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans (1)(2) | $42,517,287 | $415,602 | 3.91% | $34,623,402 | $317,390 | 3.67% | $32,635,298 | $315,339 | 3.87% |
| Taxable investments (3) | 4,912,994 | 30,610 | 2.49 | 3,838,468 | 20,115 | 2.10 | 3,159,842 | 14,883 | 1.88 |
| Tax-exempt investments (1)(3) | 684,471 | 6,571 | 3.84 | 401,742 | 3,186 | 3.17 | 498,971 | 4,071 | 3.26 |
| Interest bearing deposits with banks | 776,478 | 1,569 | 0.81 | 1,419,436 | 461 | 0.13 | 1,613,303 | 235 | 0.06 |
| Total interest earning assets | 48,891,230 | 454,352 | 3.72 | 40,283,048 | 341,152 | 3.39 | 37,907,414 | 334,528 | 3.53 |
| Allowance for credit losses | (428,193) |  |  | (367,989) |  |  | (350,388) |  |  |
| Cash and due from banks | 426,187 |  |  | 281,883 |  |  | 335,083 |  |  |
| Other assets | 4,362,789 |  |  | 3,361,185 |  |  | 3,237,689 |  |  |
| Unrealized gains on securities available for sale, net | (40,591) |  |  | 12,124 |  |  | 31,661 |  |  |
| **Total assets** | $53,211,422 |  |  | $43,570,251 |  |  | $41,161,459 |  |  |
| **Liabilities and shareholders’ equity** |  |  |  |  |  |  |  |  |  |
| **Interest bearing liabilities:** |  |  |  |  |  |  |  |  |  |
| Savings, NOW and money market deposits | $23,027,347 | $17,122 | 0.30% | $20,522,629 | $9,627 | 0.19% | $17,784,985 | $11,166 | 0.25% |
| Time deposits | 3,601,088 | 3,269 | 0.36 | 3,554,520 | 2,831 | 0.32 | 4,609,778 | 6,279 | 0.54 |
| Total interest bearing deposits | 26,628,435 | 20,391 | 0.31 | 24,077,149 | 12,458 | 0.21 | 22,394,763 | 17,445 | 0.31 |
| Short-term borrowings | 1,603,198 | 4,083 | 1.02 | 594,297 | 806 | 0.54 | 873,927 | 1,168 | 0.53 |
| Long-term borrowings (4) | 1,462,638 | 10,313 | 2.82 | 1,476,469 | 9,525 | 2.58 | 2,200,836 | 14,128 | 2.57 |
| Total interest bearing liabilities | 29,694,271 | 34,787 | 0.47 | 26,147,915 | 22,789 | 0.35 | 25,469,526 | 32,741 | 0.51 |
| Non-interest bearing deposits | 16,267,946 |  |  | 11,686,534 |  |  | 10,328,412 |  |  |
| Other liabilities | 1,010,220 |  |  | 631,093 |  |  | 654,724 |  |  |
| Shareholders’ equity | 6,238,985 |  |  | 5,104,709 |  |  | 4,708,797 |  |  |
| **Total liabilities and shareholders’ equity** | $53,211,422 |  |  | $43,570,251 |  |  | $41,161,459 |  |  |
| Net interest income/interest rate spread (5) |  | $419,565 | 3.25% |  | $318,363 | 3.04% |  | $301,787 | 3.02% |
| Tax equivalent adjustment |  | (1,405) |  |  | (694) |  |  | (880) |  |
| **Net interest income, as reported** |  | $418,160 |  |  | $317,669 |  |  | $300,907 |  |
| Net interest margin (6) |  |  | 3.42% |  |  | 3.15% |  |  | 3.18% |
| Tax equivalent effect |  |  | 0.01 |  |  | 0.01 |  |  | — |
| Net interest margin on a fully tax equivalent basis (6) |  |  | 3.43% |  |  | 3.16% |  |  | 3.18% |

62

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

*($ in thousands)*

| Assets Interest earning assets: | Six Months Ended June 30, 2022 Average Balance | Interest | Average Rate | June 30, 2021 Average Balance | Interest | Average Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans (1)(2) | $38,592,151 | $732,991 | 3.80% | $32,609,034 | $628,545 | 3.86% |
| Taxable investments (3) | 4,377,990 | 50,725 | 2.32% | 3,135,614 | 29,920 | 1.91 |
| Tax-exempt investments (1)(3) | 543,646 | 9,757 | 3.59% | 506,349 | 8,319 | 3.29 |
| Interest bearing deposits with banks | 1,096,181 | 2,030 | 0.37% | 1,397,259 | 459 | 0.07 |
| Total interest earning assets | 44,609,968 | 795,503 | 3.57% | 37,648,256 | 667,243 | 3.54 |
| Allowance for credit losses | (398,258) |  |  | (348,834) |  |  |
| Cash and due from banks | 354,433 |  |  | 324,044 |  |  |
| Other assets | 3,864,997 |  |  | 3,305,222 |  |  |
| Unrealized gains on securities available for sale, net | (13,671) |  |  | 38,486 |  |  |
| **Total assets** | $48,417,469 |  |  | $40,967,174 |  |  |
| **Liabilities and shareholders’ equity** |  |  |  |  |  |  |
| **Interest bearing liabilities:** |  |  |  |  |  |  |
| Savings, NOW and money market deposits | $21,781,907 | $26,749 | 0.25% | 17,204,598 | 22,291 | 0.26% |
| Time deposits | 3,577,933 | 6,100 | 0.34 | 5,223,740 | 17,372 | 0.67 |
| Total interest bearing deposits | 25,359,840 | 32,849 | 0.26 | 22,428,338 | 39,663 | 0.35 |
| Short-term borrowings | 1,101,535 | 4,889 | 0.89 | 1,020,458 | 2,926 | 0.57 |
| Long-term borrowings (4) | 1,469,515 | 19,838 | 2.70 | 2,261,719 | 29,283 | 2.59 |
| Total interest bearing liabilities | 27,930,890 | 57,576 | 0.41 | 25,710,515 | 71,872 | 0.56 |
| Non-interest bearing deposits | 13,989,897 |  |  | 9,853,345 |  |  |
| Other liabilities | 823,668 |  |  | 726,041 |  |  |
| Shareholders’ equity | 5,673,014 |  |  | 4,677,273 |  |  |
| **Total liabilities and shareholders’ equity** | $48,417,469 |  |  | $40,967,174 |  |  |
| Net interest income/interest rate spread (5) |  | $737,927 | 3.16% |  | $595,371 | 2.98% |
| Tax equivalent adjustment |  | (2,098) |  |  | (1,797) |  |
| **Net interest income, as reported** |  | $735,829 |  |  | $593,574 |  |
| Net interest margin (6) |  |  | 3.30% |  |  | 3.15% |
| Tax equivalent effect |  |  | 0.01 |  |  | 0.01 |
| Net interest margin on a fully tax equivalent basis (6) |  |  | 3.31% |  |  | 3.16% |

(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.

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

*(in thousands)*

| Interest Income: | Three Months Ended June 30, 2022 Compared to June 30, 2021 Change Due to Volume | Change Due to Rate | Total Change | Six Months Ended June 30, 2022 Compared to June 30, 2021 Change Due to Volume | Change Due to Rate | Total Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans\* | $96,554 | $3,709 | $100,263 | $113,763 | $(9,317) | $104,446 |
| Taxable investments | 9,942 | 5,785 | 15,727 | 13,503 | 7,302 | 20,805 |
| Tax-exempt investments\* | 1,695 | 805 | 2,500 | 638 | 800 | 1,438 |
| Interest bearing deposits with banks | (183) | 1,517 | 1,334 | (119) | 1,690 | 1,571 |
| Total increase in interest income | 108,008 | 11,816 | 119,824 | 127,785 | 475 | 128,260 |
| **Interest Expense:** |  |  |  |  |  |  |
| Savings, NOW and money market deposits | 3,665 | 2,291 | 5,956 | 5,672 | (1,214) | 4,458 |
| Time deposits | (1,192) | (1,818) | (3,010) | (4,426) | (6,846) | (11,272) |
| Short-term borrowings | 1,398 | 1,517 | 2,915 | 249 | 1,714 | 1,963 |
| Long-term borrowings and junior subordinated debentures | (5,099) | 1,284 | (3,815) | (10,647) | 1,202 | (9,445) |
| Total (decrease) increase in interest expense | (1,228) | 3,274 | 2,046 | (9,152) | (5,144) | (14,296) |
| Total increase (decrease) in net interest income | $109,236 | $8,542 | $117,778 | $136,937 | $5,619 | $142,556 |

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

### Non-Interest Income

Non-interest income increased $15.4 million and $23.4 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods of 2021. The following table presents the components of non-interest income for the three and six months ended June 30, 2022 and 2021:

*(in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Wealth management and trust fees | $9,577 | $3,532 | $14,708 | $6,861 |
| Insurance commissions | 3,463 | 2,637 | 5,322 | 4,195 |
| Service charges on deposit accounts | 10,067 | 5,083 | 16,279 | 10,186 |
| (Losses) gains on securities transactions, net | (309) | 375 | (1,381) | 476 |
| Fees from loan servicing | 2,717 | 3,187 | 5,498 | 6,086 |
| Gains on sales of loans, net | 3,602 | 10,061 | 4,588 | 13,574 |
| Bank owned life insurance | 2,113 | 2,475 | 4,159 | 4,806 |
| Other | 27,303 | 15,776 | 48,630 | 28,175 |
| Total non-interest income | $58,533 | $43,126 | $97,803 | $74,359 |

64

Wealth management and trust fees income increased by $6.0 million and $7.8 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 mostly due to $4.4 million of brokerage fees resulting from the acquisition of Bank Leumi USA and its wholly-owned broker dealer subsidiary now legally named Valley Financial Management, Inc. The increases in both 2022 periods were also supplemented by an additional revenues generated by our advisory firm, Dudley Ventures, LLC, specializing in the investment and management of tax credit investments, which we acquired in October 2021.

Service charges on deposit accounts increased by $5.0 million and $6.1 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 mostly driven by additional checking accounts related revenues resulting from deposit accounts acquired from Leumi USA.

Net losses on securities transactions of $1.4 million for the six months ended June 30, 2022 were mostly due to

net trading losses related to our trading municipal bond portfolio.

Net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each reporting period end. Net gains on sales of loans decreased $6.5 million and $9.0 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods of 2021. The quarter over quarter decrease was mostly due to lower loan sale volumes and spreads (i.e., margin on individual loan sales). During the second quarter 2022, we sold approximately $125.0 million of residential mortgage loans as compared to $326.2 million during the second quarter 2021. The mark to market change on loans held for sale at fair value resulted in net gains totaling $1.5 million for the three months ended June 30, 2022 as compared to $460 thousand of net losses for the same period of 2021, and net losses totaling $3.3 million and $10.0 million for the six months ended June 30, 2022 and 2021, respectively. Our ability to generate net gains on sales of loans could continue to be challenged by a number of factors, including increases in market interest rates, lower customer demand for conforming loan products and our potential decision to change the mix of loans originated for investment in our loan portfolio rather than sale. See further discussion of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Other non-interest income increased $11.5 million and $20.5 million for the three and six months ended June 30, 2022 as compared to the same periods in 2021, respectively, mostly due to higher fee income from derivative interest rate swaps executed with commercial lending customers caused by a greater volume of transactions and higher foreign exchange fees. Swap fee income totaled $11.1 million and $7.6 million for the three months ended June 30, 2022 and 2021, respectively, and $25.1 million and $13.8 million for the six months ended June 30, 2022 and 2021, respectively. While we believe our commercial loan swap based product will remain attractive to borrowers in the current interest rate environment, we can provide no assurance that our swap fees will remain at the level reported for the second quarter 2022. Foreign exchange fees totaled $2.1 million and $2.5 million three and six months ended June 30, 2022, respectively. Foreign exchange fees for the respective reporting periods in 2021 were not material.

### Non-Interest Expense

Non-interest expense increased $127.8 million and $165.0 million for the three and six months ended June 30, 2022 as compared to the same periods in 2021, respectively. The following table presents the components of non-interest expense for the three and six months ended June 30, 2022 and 2021:

*(in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Salary and employee benefits expense | $154,798 | $91,095 | $262,531 | $179,198 |
| Net occupancy expense | 22,429 | 18,550 | 44,420 | 39,230 |
| Technology, furniture and equipment expense | 49,866 | 23,220 | 75,880 | 43,950 |
| FDIC insurance assessment | 5,351 | 3,374 | 9,509 | 6,650 |
| Amortization of other intangible assets | 11,400 | 5,449 | 15,837 | 11,455 |
| Professional and legal fees | 30,409 | 7,486 | 45,158 | 13,758 |
| Loss on extinguishment of debt | — | 8,406 | — | 8,406 |
| Amortization of tax credit investments | 3,193 | 2,972 | 6,089 | 5,716 |
| Other | 22,284 | 11,341 | 37,646 | 23,743 |
| Total non-interest expense | $299,730 | $171,893 | $497,070 | $332,106 |

Salary and employee benefits expense increased $63.7 million and $83.3 million for the three and six months ended June 30, 2022 as compared to the same periods of 2021, respectively. The increases in both 2022 periods were primarily due to strategic increases in our headcount to enhance lending and operations (including additions to staff due to the Bank Leumi USA and Westchester acquisitions), increases in our branch compensation to preserve staffing and service levels, and to keep pace with the increases in wage demand across the industry. In addition, salary and employee benefits expense included approximately $28.0 million in merger expense, primarily consisting of change in control and severance payments, related to Bank Leumi USA during the second quarter 2022.

Net occupancy expense increased $3.9 million and $5.2 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods of 2021 mainly due to higher depreciation expense and repair and maintenance costs.

Technology, furniture and equipment expense increased $26.6 million and $31.9 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods of 2021. The increases were due, in part, to Bank Leumi USA merger related expenses (largely consisting of technology related costs) totaling $15.3 million in the second quarter 2022 and higher data processing costs.

FDIC insurance assessment expense increased $2.0 million and $2.9 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods of 2021 mainly due to the Bank Leumi USA acquisition and continued organic loan growth.

Amortization of other intangible assets increased $6.0 million and $4.4 million for the three and six months ended June 30, 2022, respectively, as compared to the same period of 2021 mostly due to additional core deposit and other intangible assets resulting from the Bank Leumi USA acquisition. See Notes 2 and 9 to the consolidated financial statements for additional information.

Professional and legal fees increased $22.9 million and $31.4 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods of 2021. The increases were due, in part, to services expense, increased consulting expense mainly related to technology transformation and new product initiatives during the three and six months and merger related expenses. Merger related expenses totaled $11.4 million (related to the Bank Leumi USA acquisition) and $12.2 million for the three and six months ended June 30, 2022, respectively.

Loss on extinguishment of debt totaled $8.4 million for the three and six months ended June 30, 2021 reflecting the

prepayment of approximately $248 million of long-term FHLB advances during the second quarter 2021.

Other non-interest expense increased $10.9 million and $13.9 million for the three and six months ended June 30, 2022 as compared to the same periods of 2021. These increases within this expense category related to advertising and other incrementally higher operating expenses due to the expansion of our operations, including acquisitions of Bank Leumi USA on April 1, 2022 and Westchester on December 1, 2021.

### Income Taxes

Income tax expense totaled $36.6 million for the second quarter 2022 as compared to $39.3 million and $42.9 million for the first quarter 2022 and second quarter 2021, respectively. Our effective tax rate was 27.5 percent, 25.2 percent and 26.2 percent for the second quarter 2022, first quarter 2022 and second quarter 2021, respectively. The increase in the effective tax rate in the second quarter 2022 as compared to the first quarter 2022 was mainly due to the tax effect of an increase in permanent difference disallowances, lower discrete tax items, as well as moderate state tax rate adjustments recognized during the second quarter 2022. The decrease in income tax expense as compared to the second quarter 2021 was mainly due to lower pre-tax income.

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. Based on the current information available, we anticipate that our effective tax rate will range from 26 percent to 28 percent for 2022, exclusive of pending

potential tax rate increases.

### Operating Segments

Prior to the second quarter 2022, Valley operated as four reportable segments: Consumer Lending, Commercial Lending, Investment Management, and Corporate and Other Adjustments. Valley re-evaluated its segment reporting during the second quarter 2022 to consider the Bank Leumi USA acquisition on April 1, 2022 along with other factors, including changes in the internal structure of operations, discrete financial information reviewed by key decision-makers, balance sheet management strategies and personnel. As a result, Valley determined it operated reportable segments consisting of Consumer Lending, Commercial Lending and Treasury and Corporate Other at June 30, 2022. Treasury and Corporate Other was reorganized to consolidate Treasury and other corporate-wide functions, including the Treasury managed investment securities portfolios and overnight interest earning cash balances formerly reported under Investment Management. The discrete financial information related to the activities previously reported in the Investment Management segment is no longer provided to Valley's CEO, who is the chief operating decision maker. Each operating segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Valley regularly assesses its strategic plans, operations, and reporting structures to identify its reportable segments.

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 prior-period balances reflect reclassifications to conform the presentation in those periods to the current operating segment structure. Valley's consolidated results were not impacted by the changes discussed above and remain unchanged for all periods presented.

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

*($ in thousands)*

|  | Three Months Ended June 30, 2022 Consumer Lending | Commercial Lending | Treasury and Corporate Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Average interest earning assets | $7,967,305 | $34,549,982 | $6,373,943 | $48,891,230 |
| Income (loss) before income taxes | 13,678 | 127,007 | (7,720) | 132,965 |
| Annualized return on average interest earning assets (before tax) | 0.69% | 1.47% | (0.48)% | 1.09% |

*($ in thousands)*

|  | Three Months Ended June 30, 2021 Consumer Lending | Commercial Lending | Treasury and Corporate Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Average interest earning assets | $7,150,137 | $25,485,161 | $5,272,116 | $37,907,414 |
| Income (loss) before income taxes | 35,777 | 140,733 | (13,117) | 163,393 |
| Annualized return on average interest earning assets (before tax) | 2.00% | 2.21% | (1.00)% | 1.72% |

See Note 14 to the consolidated financial statements for additional details.

### Consumer Lending

Consumer Lending represented 18.7 percent of our loan portfolio at June 30, 2022, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented 11.5 percent of our loan portfolio at June 30, 2022) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 3.8 percent of total loans at June 30, 2022) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. Consumer Lending also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, brokerage, insurance and tax credit advisory services.

Average interest earning assets in Consumer Lending increased $817.2 million to $8.0 billion for the three months ended June 30, 2022 as compared to the second quarter 2021. The increase was largely due to solid new and refinanced residential mortgage loan volumes over the last 12-month period, as well as growth in automobile loans and secured personal lines of credit. Loans acquired from Bank Leumi USA on April 1, 2022 and Westchester on December 1, 2021 did not materially impact this operating segment.

Income before income taxes generated by Consumer Lending decreased $22.1 million to $13.7 million for the second quarter 2022 as compared to the second quarter 2021 largely due to a $17.8 million increase in the internal transfer expense, $4.7 million increase in the provision for loan losses, and lower non-interest income. The negative impact of these items was partially offset by a $4.2 million increase in net interest income. The higher internal transfer expense was mostly driven by general increases related to organic growth in our retail business and the recent bank acquisitions. The increase in the provision for loan losses was mainly due to higher quantitative reserves for residential mortgage loans, as well as loan growth in this category. Non-interest income decreased $4.8 million or the second quarter 2022 as compared to the second quarter 2021 largely due to lower gains on sales of residential mortgage loans. The negative impact of these items was partially offset by a $4.2 million increase in net interest income mainly driven by higher average loan balances.

The net interest margin on the Consumer Lending portfolio decreased 9 basis points to 2.94 percent for the second quarter 2022 as compared to the second quarter 2021 mainly due to a 15 basis point decrease in the yield on average loans, partially offset by a 6 basis point decrease in the costs associated with our funding sources. The 15 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments over the last 12-month period. The decrease in our funding costs was mainly due to continued runoff of higher cost time deposits, greater mix of non-interest bearing deposits. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources.

### Commercial Lending

Commercial Lending is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, Commercial Lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $8.5 billion and represented 19.5 percent of the total loan portfolio at June 30, 2022. Commercial real estate loans and construction loans totaled $26.9 billion and represented 61.8 percent of the total loan portfolio at June 30, 2022.

Average interest earning assets in this segment increased approximately $9.1 billion to $34.5 billion for the three months ended June 30, 2022 as compared to the second quarter 2021 mostly due to acquired loans from Bank Leumi USA and Westchester and strong new organic loan originations primarily concentrated in the commercial real estate loan portfolio, partially offset by run-off of commercial and industrial PPP loans due to SBA loan forgiveness.

Income before income taxes for the three months ended June 30, 2022 for Commercial Lending decreased $13.7 million to $127.0 million as compared to the second quarter 2021. The decrease was mainly driven by an increase in the internal transfer expense coupled with higher provision for loan losses, partially offset by increases in both net interest income and non-interest income. Internal transfer expense increased $86.2 million for the second quarter 2022 as compared to the second quarter 2021 due to general increases related to both organic and acquired growth in our business. The provision for loan losses increased by $30.2 million as compared to the second quarter 2021 mainly due to the provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA. See further details in the "Allowance for Credit Losses for Loans" section of this MD&A. Net interest income for this segment increased $95.3 million to $332.7 million for the second quarter 2022 as compared to the same period in 2021 primarily due to additional income generated on higher average loan balances. Non-interest income increased $4.6 million to $14.4 million for the three months ended June 30, 2022 as compared to the second quarter 2021 mainly due to a $3.5 million increase in swap fee income from derivative interest rate swaps executed with commercial loan customers.

The net interest margin for this segment increased 12 basis points to 3.85 percent for the second quarter 2022 as compared to the second quarter 2021 due to a 6 basis point decrease in the cost of our funding sources and a 6 basis point increase in the yield on average loans.

### Treasury and Corporate Other

Treasury and Corporate Other largely consists of the Treasury managed held to maturity debt securities and available for sale debt securities portfolios mainly utilized in the liquidity management needs of our lending segments and income and expense items resulting from support functions not directly attributable to a specific segment. Interest income is generated through investments in various types of securities (mainly comprised of fixed rate securities) and interest-bearing deposits with other banks (primarily the Federal Reserve Bank of New York). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from Treasury and Corporate Other to the Consumer Lending and Commercial Lending segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a transfer pricing methodology, which involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities outstanding for the period. Other items disclosed in this segment include net gains and losses on available for sale and held to maturity securities transactions, not reported in the investment management segment above, interest expense related to subordinated notes, amortization and impairment of tax credit investments, as well as other non-core items, including merger expenses.

Average interest earning assets in this segment increased $1.1 billion during the three months ended June 30, 2022

mainly due to an increase of $1.8 billion in average investment securities, partially offset by lower average interest bearing deposits with banks. The increase in the average investment securities balance was mainly due to $1.3 billion of investment securities acquired from Bank Leumi USA. The $836.8 million decrease in average interest bearing deposits with banks as compared to the same period in 2021 was mainly due to continued funding of loan growth and fluctuations in the timing of loan and investment activity.

Treasury and Corporate Other recognized pre-tax losses of $7.7 million and $13.1 million for the three months ended June 30, 2022 and 2021, respectively. The $5.4 million decrease in the pre-tax loss during the 2022 period was due to increases in internal transfer income, net interest income and non-interest income that were more than offset by an increase in non-interest expense. The internal transfer income increased by $103.9 million to $195.0 million for the three months ended June 30, 2022 as compared to the same period a year ago mostly due to general increases related to our growth and recent acquisitions. Non-interest expense increased $131.6 million to $256.5 million during the three months ended June 30, 2022 as compared to the same period a year ago largely due to $54.5 million of merger expenses incurred during the second quarter 2022 and our expanded banking operations resulting from the Bank Leumi USA acquisition. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.

The net interest margin for this segment increased 102 basis points to 2.12 percent for the for the second quarter 2022 as compared to the second quarter 2021 due to a 96 basis point increase in the yield on average investments, and a 6 basis point decrease in cost of our funding sources. The increase in the yield on average investments as

compared to the second quarter 2021 was largely due to higher interest income, including discount accretion, on securities acquired from Bank Leumi USA.

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

*($ in thousands)*

|  | Six Months Ended June 30, 2022 Consumer Lending | Commercial Lending | Treasury and Corporate Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Average interest earning assets | $7,848,764 | $30,743,387 | $6,017,817 | $44,609,968 |
| Income (loss) before income taxes | 36,659 | 263,838 | (11,490) | 289,007 |
| Annualized return on average interest earning assets (before tax) | 0.93% | 1.72% | (0.38)% | 1.30% |

*($ in thousands)*

|  | Six Months Ended June 30, 2021 Consumer Lending | Commercial Lending | Treasury and Corporate Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Average interest earning assets | $7,099,973 | $25,509,061 | $5,039,222 | $37,648,256 |
| Income (loss) before income taxes | 67,176 | 269,785 | (18,537) | 318,424 |
| Annualized return on average interest earning assets (before tax) | 1.89% | 2.12% | (0.74)% | 1.69% |

70

### Consumer Lending

Consumer Lending's average interest earning assets increased $748.8 million to $7.8 billion for the six months ended June 30, 2022 as compared to the same period in 2021. The increase was largely due to solid new and refinanced residential mortgage loan volumes over the last 12-month period, as well as growth in automobile loans and secured personal lines of credit.

Income before income taxes generated by Consumer Lending decreased $30.5 million to $36.7 million for the six months ended June 30, 2022 as compared to the same period in 2021 largely due to a $26.9 million increase in the internal transfer expense coupled with higher provision for loan losses and non-interest expense. The provision for loan losses increased $9.2 million for the six months ended June 30, 2022 from $1.9 million credit (negative) provision for the same period of 2021. The increase in provision was mainly due to higher reserves related to residential loan growth. See further details in the "Allowance for Credit Losses" section of this MD&A. Net interest income increased $6.0 million primarily due to the lower funding costs, as well as additional income generated on higher average loan balances. The higher net interest income was largely offset by a $4.7 million decrease in non-interest income, which was mostly attributable to lower net gains on sales of residential mortgage loans for the six months ended June 30, 2022 as compared to the same period in 2021.

Net interest margin on the Consumer Lending portfolio decreased 14 basis points to 2.92 percent for the six months ended June 30, 2022 as compared to the same period one year ago mainly due to a 27 basis point decrease in the yield on average loans, partially offset by a 13 basis point decrease in the costs associated with our funding sources. The 27 basis point decrease in loan yield was largely due to lower yielding new loan volumes prior to the second quarter 2022 and normal loan repayments. The decrease in our funding costs was mainly due to a greater mix of non-interest bearing deposits, deposits continuing to reprice at lower interest rates prior to the second quarter 2022 and the repayment of maturing higher cost borrowings.

### Commercial Lending

Average interest earning assets in Commercial Lending increased $5.2 billion to $30.7 billion for the six months ended June 30, 2022 as compared to the same period in 2021. This increase was primarily due to strong organic loan growth over the 12-month period ended June 30, 2022, as well as loans acquired from Bank Leumi USA and Westchester.

For the six months ended June 30, 2022, income before income taxes for Commercial Lending decreased $5.9 million to $263.8 million as compared to the same period in 2021 mainly driven by increases in internal transfer expense and provision for loan losses, largely offset by higher net interest income and non-interest income. Internal transfer expense increased $115.5 million to $257.3 million for the six months ended June 30, 2022 as compared to the same period in 2021. The provision for credit losses increased $20.2 million to $39.9 million during the six months ended June 30, 2022 as compared to $19.7 million for the same period in 2021 mainly due to the provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA. See the "Allowance for Credit Losses for Loans" section below for further details. The negative impact of the aforementioned items was largely offset by increases in net interest income and non-interest income. Net interest income increased $112.8 million to $579.3 million for the six months ended June 30, 2022 as compared to the same period in 2021 largely due to higher average commercial loan balances during the 2022 period. Non-interest income increased $13.8 million for the six months ended June 30, 2022 as compared to the same period in 2021 primarily due to a $11.3 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers.

The net interest margin for this segment increased 12 basis points to 3.77 percent for the six months ended June 30, 2022 as compared to the same period in 2021 due to a 13 basis point decrease in the cost of our funding sources, partially offset by a 1 basis point decrease in yield on average loans.

### Treasury and Corporate Other

Treasury and Corporate Other's average interest earning assets increased $978.6 million during the six months ended June 30, 2022 as compared to the same period in 2021. Within the category, a $1.2 billion increase in taxable investment securities was partially offset by a $301.1 million decrease in average interest bearing deposits with banks. The increase in the average investment securities balance was mainly due to $1.3 billion of investment securities acquired from Bank Leumi USA. The lower levels of excess liquidity were mainly due to the strong organic loan growth over the last 12-month period.

The pre-tax net loss for this segment totaled $11.5 million for the six months ended June 30, 2022 as compared to $18.5 million for the same period in 2021. The positive change of $7.0 million was mainly due to increases in internal transfer income and non-interest income, partially offset by higher non-interest expense. Internal transfer income increased $142.4 million to $323.6 million for the six months ended June 30, 2022 as compared to the same period in 2021. The increase in net interest income totaled $23.5 million and was mostly driven by higher yields and average investment balances. Non-interest expense increased $172.5 million to $412.2 million for the six months ended June 30, 2022 as compared to the same period in 2021 partially due to $54.5 million of merger expenses incurred during the second quarter 2022 and other increases in expenses related to our expanded banking operations and organic business growth, partially offset by the loss on extinguishment of debt recorded during the comparative 2021 period. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.

Treasury and Corporate Other's net interest margin increased 67 basis points to 1.81 percent for the six months ended June 30, 2022 as compared to the same period in 2021 due to a 54 basis point increase in the yield on average investments, and a 13 basis point decrease in cost of our funding sources. The increase in the yield on average investments as compared to the same period in 2021 was largely driven by the higher amortization expense in the prior year caused, in part, by acceleration of principal repayments in the low interest rate environment mostly during the second half of 2021.

### 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 June 30, 2022. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of June 30, 2022. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model.

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of June 30, 2022. Although the size of Valley’s balance sheet is forecasted to remain static as of June 30, 2022 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the second quarter 2022. The model also utilizes an immediate parallel shift in market interest rates at June 30, 2022.

The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet.

Convexity is a measure of how the duration of a financial instrument changes as market interest rates change. Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative impact on our net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected in the table below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income.

The following table reflects management’s expectations of the change in our net interest income over the next 12- month period considering the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below.

*($ in thousands)*

| Changes in Interest Rates (in basis points) | Estimated Change in Future Net Interest Income Dollar Change | Percentage Change |
| --- | ---: | ---: |
| +200 | $148,467 | 8.38% |
| +100 | 82,263 | 4.64 |
| –100 | (82,438) | (4.65) |
| –200 | (144,574) | (8.16) |

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 month period by 4.64 percent. Management believes the interest rate sensitivity remains within an acceptable tolerance range at June 30, 2022. However, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including potential changes in our balance sheet strategies, the slope of the yield curve and projected cash flows.

### Liquidity and Cash Requirements

### Bank Liquidity

Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is carefully performed and routinely reported by our Treasury Department to two board committees. Among other actions, Treasury reviews historical funding requirements, our 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 June 30, 2022.

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

On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities classified as trading and available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions. Total liquid assets were approximately $3.0 billion, representing 6.0 percent of earning assets at June 30, 2022 and $3.5 billion, representing 8.7 percent of earning assets at December 31, 2021. Of the $3.0 billion of liquid assets at June 30, 2022, approximately $446.4 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $1.6 billion in principal payments from securities in the total investment portfolio at June 30, 2022 over the next 12 month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments from total loans and loans held for sale at June 30, 2022 are projected in accordance with their scheduled contractual terms to be approximately $12.4 billion over the next 12 month period. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtailment of lending activities.

On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $36.8 billion and $29.4 billion for the six months ended June 30, 2022 and for the year ended December 31, 2021, respectively, representing 82.5 percent and 78.3 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 $1.9 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 June 30, 2022, Valley had $1.6 billion of MULOCs outstanding for this purpose. Furthermore, we can obtain overnight borrowings from the Federal Reserve Bank of New York via the discount window as a contingency for additional liquidity. At June 30, 2022, our borrowing capacity under the Federal Reserve Bank's discount window was $2.0 billion.

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased approximately $867.1 million to $1.5 billion at June 30, 2022 as compared to December 31, 2021 largely due to normal repayments of FHLB advances, partially offset by $125 million of federal funds purchased at June 30, 2022.

### Corporation Liquidity

Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our on-going asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures and subordinated notes. Valley's cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest 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.

### Investment Securities Portfolio

As of June 30, 2022, we had $41.7 million, $1.4 billion, and $3.7 billion in equity, available for sale and held to maturity debt securities, respectively. There were no trading debt securities at June 30, 2022. The equity securities consisted of two publicly traded mutual funds, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in a partnership that invests in such companies. Our CRA and other equity investments are a mix of both publicly traded entities and privately held entities. The available for sale and held to maturity debt securities portfolios, which comprise the majority of the securities we own, include U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions, residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies, and high quality corporate bonds. Among other securities, our available for sale debt securities include securities such as bank issued and other corporate bonds, as well as municipal special revenue bonds, that may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers.

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

### Allowance for Credit Losses and Impairment Analysis

**Available for sale debt securities.** Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes.

We have evaluated all available for sale debt securities that are in an unrealized loss position as of June 30, 2022 and December 31, 2021 and determined that the declines in fair value were mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and six months ended June 30, 2022 and the year ended December 31, 2021, as a result, there was no allowance for credit losses for available for sale debt securities at June 30, 2022 and December 31, 2021.

**Held to maturity debt securities.** Valley estimates the expected credit losses on held to maturity debt securities that have loss expectations using a discounted cash flow model developed by a third party. Valley has a zero loss expectation for certain securities within the held to maturity portfolio, including U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. Held to maturity debt securities were carried net of an allowance for credit losses totaling approximately $1.5 million and $1.2 million at June 30, 2022 and December 31, 2021, respectively. There were no net charge-offs of held to maturity debt securities for the three and six months ended June 30, 2022 and 2021.

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

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

*(in thousands)*

| Available for sale investment grades: \* | June 30, 2022 Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| AAA Rated | $1,153,626 | $264 | $(78,607) | $1,075,283 |
| AA Rated | 149,516 | 14 | (24,967) | 124,563 |
| A Rated | 12,041 | — | (640) | 11,401 |
| BBB Rated | 84,590 | 108 | (4,006) | 80,692 |
| Not rated | 95,162 | 183 | (4,733) | 90,612 |
| Total | $1,494,935 | $569 | $(112,953) | $1,382,551 |
| **Held to maturity investment grades: \*** |  |  |  |  |
| AAA Rated | $3,260,777 | $1,871 | $(306,324) | $2,956,324 |
| AA Rated | 256,294 | 342 | (11,623) | 245,013 |
| A Rated | 10,389 | 25 | (125) | 10,289 |
| BBB Rated | 6,000 | 31 | (141) | 5,890 |
| Non-investment grade | 5,537 | — | (760) | 4,777 |
| Not rated | 180,980 | 32 | (9,590) | 171,422 |
| Total | $3,719,977 | $2,301 | $(328,563) | $3,393,715 |
| Allowance for credit losses | 1,508 | — | — | — |
| Total, net of allowance for credit losses | $3,718,469 | $2,301 | $(328,563) | $3,393,715 |

\* Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels.

The unrealized losses in the AAA and AA rated categories of both the held to maturity and available for sale debt securities portfolios (in the above table) were mainly related to residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac and were driven by the rising interest rate environment during the second quarter 2022. The investment securities held to maturity portfolio included $181.0 million of investments not rated by the rating agencies with aggregate unrealized losses of $9.6 million at June 30, 2022 mostly 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 investment securities portfolio.

### Loan Portfolio

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

*($ in thousands)*

| Loans Commercial and industrial: | June 30, 2022 | March 31, 2022 | December 31, 2021 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | $8,378,454 | $5,587,781 | $5,411,601 |
| Commercial and industrial PPP loans | 136,004 | 203,609 | 435,950 |
| Total commercial and industrial \* | 8,514,458 | 5,791,390 | 5,847,551 |
| Commercial real estate: |  |  |  |
| Commercial real estate | 23,535,086 | 19,763,202 | 18,935,486 |
| Construction | 3,374,373 | 2,174,542 | 1,854,580 |
| Total commercial real estate | 26,909,459 | 21,937,744 | 20,790,066 |
| Residential mortgage | 5,005,069 | 4,691,935 | 4,545,064 |
| Consumer: |  |  |  |
| Home equity | 431,455 | 393,538 | 400,779 |
| Automobile | 1,673,482 | 1,552,928 | 1,570,036 |
| Other consumer | 1,026,854 | 996,870 | 1,000,161 |
| Total consumer loans | 3,131,791 | 2,943,336 | 2,970,976 |
| Total loans\* | $43,560,777 | $35,364,405 | $34,153,657 |
| As a percent of total loans: |  |  |  |
| Commercial and industrial | 19.5% | 16.4% | 17.1% |
| Commercial real estate | 61.8 | 62.0 | 60.9 |
| Residential mortgage | 11.5 | 13.3 | 13.3 |
| Consumer loans | 7.2 | 8.3 | 8.7 |
| Total | 100.0% | 100.0% | 100.0% |

\* Includes net unearned discount and deferred loan fees of $141.2 million, $62.0 million, and $78.5 million at June 30, 2022, March 31, 2022, and December 31, 2021, respectively. The linked quarter increase was largely due to a $98 million net purchase discount associated with the loans acquired from Bank Leumi USA on April 1, 2022.

Total loans increased $8.2 billion to approximately $43.6 billion at June 30, 2022 from March 31, 2022 largely due to a combination of acquired loans from Bank Leumi USA totaling $5.9 billion and strong organic loan growth. Excluding the Bank Leumi USA acquired loans, non-PPP commercial and industrial, total commercial real estate (including construction) and residential mortgage loans increased 37 percent, 26 percent, and 25 percent, respectively, on an annualized basis during the second quarter 2022.

Commercial and industrial loans increased $2.7 billion to $8.5 billion at June 30, 2022 as compared to March 31, 2022. Excluding $2.4 billion of loan acquired from Bank Leumi USA and PPP loans, the non-commercial and industrial loan organic growth totaled $514.4 million during the second quarter 2022 mainly due to the solid new loan pipeline in most of our markets driven by direct calling efforts of our growing commercial lending team. The PPP loans decreased $67.6 million to $136.0 million at June 30, 2022 compared to $203.6 million at March 31, 2022 mainly due to loan forgiveness (repayments), partially offset by $45.7 million of PPP loans acquired from Bank Leumi USA.

Commercial real estate loans (excluding construction loans) increased $3.8 billion to $23.5 billion at June 30, 2022 from March 31, 2022. Excluding $3.1 billion of loans acquired from Bank Leumi USA, the approximate $700 million increase was driven by solid organic growth across most of our geographic footprints. Construction loans increased $1.2 billion to $3.4 billion at June 30, 2022 from March 31, 2022 due, in part, to approximately $834 million of loans acquired from Bank Leumi USA and higher volume of advances on new, and to a lesser extent, pre-existing loan projects during the second quarter 2022.

Residential mortgage loans increased $313.1 million, or 26.7 percent on an annualized basis, during the second quarter 2022 primarily due to new loan activity in the purchased home market and an increase in such loans originated for investment rather than sale. Residential mortgage loans acquired from Bank Leumi USA were not material. New and refinanced residential mortgage loans totaled $540.7 million for the second quarter 2022 as compared to $552.6 million and $753.2 million for the first quarter 2022 and second quarter 2021, respectively. Florida originations totaled approximately $154.9 million and represented 28.7 percent of total residential mortgage loan originations in the quarter. Of the total originations in the second quarter 2022, only $61.9 million of residential mortgage loans were originated for sale rather than held for investment as compared to $144.5 million during the first quarter 2022. During the second quarter 2022, we retained approximately 89 percent of the total residential mortgages originations in our held for investment loan portfolio. We sold approximately $125.0 million of residential mortgage loans held for sale during the second quarter 2022. We may continue to retain a higher percentage of new loan volumes during the third quarter 2022 due to several factors, including consumer demand and preferences for certain mortgage products and our management of the interest rate risk and the mix of the interest earning assets on our balance sheet. Additionally, refinanced loan applications continue to be a low percentage of our volume in the early stages of the third quarter 2022 due to the increase in the level of mortgage interest rates and may challenge our ability to grow this loan category.

Home equity loans increased by $37.9 million to $431.5 million at June 30, 2022 compared to March 31, 2022. New home equity loan volumes and customer usage of existing home equity lines of credit continue to be modest and challenged by a less favorable rising interest rate environment.

Automobile loans increased by $120.6 million, or 31.1 percent on an annualized basis, to $1.7 billion at June 30, 2022 as compared to March 31, 2022 as loan originations volumes outpaced loan repayments during the second quarter 2022. Loan originations were mainly driven by high consumer demand for vehicle purchases and our competitive rates offered for new and used car financing. We originated $278.2 million in auto loans through our dealership network during the second quarter 2022 as compared to $148.1 million in the fourth quarter 2021. Of the total originations, our Florida dealership network contributed $40.6 million in auto loan originations, representing approximately 15 percent of new loans, during the second quarter 2022. The current low levels of new and used automobile inventories and rising interest rates could negatively impact our auto loan growth during the third quarter 2022.

Other consumer loans increased $30.0 million to $1.0 billion at June 30, 2022 from March 31, 2022.

A large part of our lending is in northern and central New Jersey, New York City, Long Island, and Florida. To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector.

For the remainder of 2022, we anticipate strong organic commercial and industrial non-PPP and commercial real estate loan growth. In the early stages of the third quarter 2022, we are encouraged that our commercial loan origination pipelines remain robust and overall loan growth should remain well-diversified across our markets in our commercial loan categories. Based upon current projections, we anticipate 8 to 10 percent annualized loan growth for the second half of 2022. However, there can be no assurance that those positive trends will continue, or balances will not decline from June 30, 2022 given the forecasted slowdown of the U.S. economy growth due to several factors, including the Russia-Ukraine war, persistently high inflation, and the impact of the Federal Reserve's rapid monetary policy tightening. In addition, we anticipate that consumer loan activity will slow meaningfully for the remainder of the year.

### Non-performing Assets

Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consists of automobiles and taxi medallions) at June 30, 2022. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell.

Our NPAs increased $82.1 million to $314.7 million at June 30, 2022 as compared to March 31, 2022 mostly due to $70.5 million of acquired non-accrual loans from Bank Leumi USA. NPAs as a percentage of total loans and NPAs totaled 0.72 percent and 0.65 percent at June 30, 2022 and March 31, 2022, respectively (as shown in the table below). We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio and the level of NPAs is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements.

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

optimistic regarding the overall future performance of our loan portfolio. During 2021 and the first half of 2022, our overall credit trends remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the continuing challenges of the COVID-19 pandemic and the uncertain economy. However, management cannot provide assurance that the non-performing assets will not increase substantially from the levels reported at June 30, 2022 due to high inflation, aggressive tightening of the U.S. monetary policy and the resulting potential for credit deterioration.

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:

*($ in thousands)*

| Accruing past due loans: 30 to 59 days past due: | June 30, 2022 | March 31, 2022 | December 31, 2021 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | $7,143 | $6,723 | $6,717 |
| Commercial real estate | 10,516 | 30,807 | 14,421 |
| Construction | 9,108 | 1,708 | 1,941 |
| Residential mortgage | 12,326 | 9,266 | 10,999 |
| Total consumer | 6,009 | 5,862 | 6,811 |
| Total 30 to 59 days past due | 45,102 | 54,366 | 40,889 |
| 60 to 89 days past due: |  |  |  |
| Commercial and industrial | 3,870 | 14,461 | 7,870 |
| Commercial real estate | 630 | 6,314 | — |
| Construction | 3,862 | 3,125 | — |
| Residential mortgage | 2,410 | 2,560 | 3,314 |
| Total consumer | 702 | 554 | 1,020 |
| Total 60 to 89 days past due | 11,474 | 27,014 | 12,204 |
| 90 or more days past due: |  |  |  |
| Commercial and industrial | 15,470 | 9,261 | 1,273 |
| Commercial real estate | — | — | 32 |
| Residential mortgage | 1,188 | 1,746 | 677 |
| Total consumer | 267 | 400 | 789 |
| Total 90 or more days past due | 16,925 | 11,407 | 2,771 |
| Total accruing past due loans | $73,501 | $92,787 | $55,864 |
| **Non-accrual loans:** |  |  |  |
| Commercial and industrial | $148,404 | $96,631 | $99,918 |
| Commercial real estate | 85,807 | 79,180 | 83,592 |
| Construction | 49,780 | 17,618 | 17,641 |
| Residential mortgage | 25,847 | 33,275 | 35,207 |
| Total consumer | 3,279 | 3,754 | 3,858 |
| Total non-accrual loans | 313,117 | 230,458 | 240,216 |
| Other real estate owned (OREO) | 422 | 1,024 | 2,259 |
| Other repossessed assets | 1,200 | 1,176 | 2,931 |
| Total non-performing assets (NPAs) | $314,739 | $232,658 | $245,406 |
| Performing troubled debt restructured loans | $67,274 | $56,538 | $71,330 |
| Total non-accrual loans as a % of loans | 0.72% | 0.65% | 0.70% |
| Total NPAs as a % of loans and NPAs | 0.72 | 0.65 | 0.71 |
| Total accruing past due and non-accrual loans as a % of loans | 0.89 | 0.91 | 0.87 |
| Allowance for loan losses as a % of non-accrual loans | 149.73 | 157.30 | 149.53 |

Loans past due 30 to 59 days decreased $9.3 million to $45.1 million at June 30, 2022 as compared to March 31, 2022. Commercial real estate loans past due 30 to 59 days decreased $20.3 million to $10.5 million at June 30, 2022 as compared to March 31, 2022 due, in part, to a $13.2 million loan included in this delinquency category at March 31, 2022 that moved to non-accrual loans as of June 30, 2022. The decrease in commercial real estate loans was partially offset by higher construction loan delinquencies mostly due to one loan acquired from Bank Leumi USA included in this category at June 30, 2022.

Loans past due 60 to 89 days decreased $15.5 million to $11.5 million at June 30, 2022 as compared to March 31, 2022. Commercial and industrial within this delinquency category decreased $10.6 million largely due to the migration of loans totaling $8.8 million to the 90 days or more past due category at June 30, 2022. Commercial real estate loans delinquencies decreased $5.7 million at June 30, 2022 mainly due to a $6.0 million loan included in this delinquency category at March 31, 2022 that became current as to all contractual payments at June 30, 2022.

Loans past due 90 days or more and still accruing interest increased $5.5 million to $16.9 million at June 30, 2022 as compared to March 31, 2022. The increase was mainly driven by the aforementioned migration of commercial and industrial loans totaling $8.8 million from the 60 to 89 days past due category at June 30, 2022. All of the loans past due 90 days or more and still accruing interest reported at June 30, 2022 are considered to be well-secured and in the process of collection.

Non-accrual loans increased $82.7 million to $313.1 million at June 30, 2022 as compared to $230.5 million at March 31, 2022. Commercial and industrial loans increased $51.8 million mainly due to a $43 million borrower relationship with related reserves of $22.0 million within the allowance for loan losses at June 30, 2022. Construction loan delinquencies increased $32.2 million mainly due to two loan relationships acquired from Bank Leumi USA. The $6.6 million increase in non-accrual commercial real estate loans was mainly due to the aforementioned $13.2 million non-performing loan at June 30, 2022 that was previously reported in the 30 to 59 days past due delinquency category at March 31, 2022.

Non-accrual commercial and industrial loans totaled $148.4 million at June 30, 2022 and included non-performing taxi medallion loans totaling $80.4 million. At June 30, 2022, the taxi medallion loans (mostly collateralized by New York City medallions) had related reserves of $55.3 million, or 68.8 percent of such loans. The tax medallion loans and related reserves remained relatively unchanged from March 31, 2022. Potential declines in the market valuation of taxi medallions and the stressed operating environment mainly within New York City due to the COVID-19 pandemic could negatively impact the future performance of this portfolio. For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $5.5 million within the allowance for loan losses based upon the taxi medallion loan balances at June 30, 2022. See the "Allowance for Credit Losses" section below for further details on our reserves.

OREO properties totaled $422 thousand at June 30, 2022 and declined $602 thousand as compared to March 31, 2022. Net gains from sales of OREO totaled $309 thousand and $623 thousand for the three and six months ended June 30, 2022 respectively. Net gains and losses from sales of OREO totaled $300 thousand and $335 thousand, respectively, for the three and six months ended June 30, 2021. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.0 million and $2.5 million at June 30, 2022 and December 31, 2021, respectively.

TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing interest or as non-accrual loans) totaled $67.3 million at June 30, 2022 as compared to $56.5 million at March 31, 2022. Performing TDRs consisted of 93 loans at June 30, 2022. On an aggregate basis, the $67.3 million in performing TDRs at June 30, 2022 had a modified weighted average interest rate of approximately 4.58 percent as compared to a pre-modification weighted average interest rate of 4.21 percent.

### Allowance for Credit Losses for Loans

The allowance for credit losses (ACL) for loans includes the allowance for loan losses and the reserve for unfunded credit commitments. Under CECL, our methodology to establish the allowance for loan losses has two basic components: (i) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent, TDR, and expected TDR loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial standby letters of credit.

Valley estimated the collective ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances. In estimating the component of the allowance on a collective basis we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) the impact of the reasonable and supportable economic forecast, relative probability weightings and reversion period, (ii) other asset specific risks to the extent they do not exist in the historical loss information, and (iii) net expected recoveries of charged-off loan balances. These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses. The expected lifetime loss rate is the life of loan loss percentage from the transition matrix model plus the impact of the adjustments for qualitative factors. The expected credit losses are the product of multiplying the model’s expected lifetime loss rate by the exposure at default at period end on an undiscounted basis.

Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan on a straight-line basis. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses and is governed by a cross-functional committee. The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information. The model projects economic variables under each scenario based on detailed statistical analyses. We have identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index.

For the second quarter 2022, we incorporated a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios. At June 30, 2022, Valley maintained the majority of its probability weighting to the Moody’s Baseline scenario with less emphasis on the S-3 downside and S-4 (most adverse) scenarios relatively consistent with its weighting in the March 31, 2022 ACL analysis. However, the Baseline forecast and weighting at June 30, 2022 reflects a less optimistic outlook than at March 31, 2022 in terms of GDP growth and unemployment levels and potential near term negative economic impacts, given present uncertain economic conditions.

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

- GDP expansion by about 3.6 percent in the third quarter 2022;
- Unemployment of 3.4 percent in the third quarter 2022 and 3.4 to 3.6 percent over the remainder of the forecast period ending in the first quarter 2024; and
- U.S. economic growth continues in 2022 as the impact of COVID-19 wanes and consumer spending increases on entertainment and travel.

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

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

*($ in thousands)*

|  | Three Months Ended June 30, 2022 | March 31, 2022 | June 30, 2021 | Six Months Ended June 30, 2022 | June 30, 2021 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Average loans outstanding | $42,517,287 | $34,623,402 | $32,635,298 | $38,592,151 | $32,609,034 |
| **Allowance for credit losses for loans** |  |  |  |  |  |
| Beginning balance | $379,252 | $375,702 | $354,313 | $375,702 | $351,354 |
| Allowance for purchased credit deteriorated (PCD) loans (1) | 70,319 | — | — | 70,319 | — |
| Loans charged-off: |  |  |  |  |  |
| Commercial and industrial | (4,540) | (1,571) | (10,893) | (6,111) | (18,035) |
| Commercial real estate | — | (173) | — | (173) | (382) |
| Residential mortgage | (1) | (26) | (1) | (27) | (139) |
| Total consumer | (726) | (825) | (1,480) | (1,551) | (2,618) |
| Total charge-offs | (5,267) | (2,595) | (12,374) | (7,862) | (21,174) |
| Charged-off loans recovered: |  |  |  |  |  |
| Commercial and industrial | 1,952 | 824 | 678 | 2,776 | 2,267 |
| Commercial real estate | 224 | 107 | 665 | 331 | 730 |
| Construction | — | — | — | — | 4 |
| Residential mortgage | 74 | 457 | 191 | 531 | 348 |
| Total consumer | 697 | 1,257 | 1,474 | 1,954 | 2,404 |
| Total recoveries | 2,947 | 2,645 | 3,008 | 5,592 | 5,753 |
| Net loan (charge-offs) recoveries | (2,320) | 50 | (9,366) | (2,270) | (15,421) |
| Provision charged for credit losses | 43,712 | 3,500 | 8,777 | 47,212 | 17,791 |
| Ending balance | $490,963 | $379,252 | $353,724 | $490,963 | $353,724 |
| **Components of allowance for credit losses for loans:** |  |  |  |  |  |
| Allowance for loan losses | $468,819 | $362,510 | $339,324 | $468,819 | $339,324 |
| Allowance for unfunded credit commitments | 22,144 | 16,742 | 14,400 | 22,144 | 14,400 |
| Allowance for credit losses for loans | $490,963 | $379,252 | $353,724 | $490,963 | $353,724 |
| **Components of provision for credit losses for loans:** |  |  |  |  |  |
| Provision for credit losses for loans (2) | $38,310 | $3,258 | $5,810 | $41,568 | $14,502 |
| Provision for unfunded credit commitments (2) | 5,402 | 242 | 2,967 | 5,644 | 3,289 |
| Total provision for credit losses for loans | $43,712 | $3,500 | $8,777 | $47,212 | $17,791 |
| Annualized ratio of net charge-offs (recoveries) to average loans outstanding | 0.02% | 0.00% | 0.11% | 0.01% | 0.09% |

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

(2) Includes $36.3 million and $4.7 million of provision related to non-PCD loans and unfunded credit commitments, respectively, acquired from Bank Leumi USA in the second quarter 2022.

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

*($ in thousands)*

| Net loan (charge-offs) recoveries | Three Months Ended June 30, 2022 | March 31, 2022 | June 30, 2021 | Six Months Ended June 30, 2022 | June 30, 2021 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $(2,588) | $(747) | $(10,215) | $(3,335) | $(15,768) |
| Commercial real estate | 224 | (66) | 665 | 158 | 348 |
| Construction | — | — | — | — | 4 |
| Residential mortgage | 73 | 431 | 190 | 504 | 209 |
| Total consumer | (29) | 432 | (6) | 403 | (214) |
| Total | $(2,320) | $50 | $(9,366) | $(2,270) | $(15,421) |
| Average loans outstanding |  |  |  |  |  |
| Commercial and industrial | $8,304,822 | $5,727,350 | $6,899,503 | $7,017,820 | $6,895,469 |
| Commercial real estate | 23,319,419 | 19,342,697 | 16,831,259 | 21,303,889 | 16,872,338 |
| Construction | 2,925,741 | 1,914,413 | 1,754,399 | 2,421,678 | 1,741,254 |
| Residential mortgage | 4,727,481 | 4,681,417 | 4,292,052 | 4,706,695 | 4,363,650 |
| Total consumer | 3,239,824 | 2,957,525 | 2,858,085 | 3,142,069 | 2,736,323 |
| Total | $42,517,287 | $34,623,402 | $32,635,298 | $38,592,151 | $32,609,034 |
| Net loan charge-offs (recoveries) to average loans outstanding |  |  |  |  |  |
| Commercial and industrial | 0.03% | 0.01% | 0.15% | 0.05% | 0.23% |
| Commercial real estate | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Construction | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Residential mortgage | 0.00 | (0.01) | 0.00 | (0.01) | 0.00 |
| Total consumer | 0.00 | (0.01) | 0.00 | (0.01) | 0.01 |

Net loan charge-offs totaled $2.3 million (excluding $62.4 million of Day 1 PCD loan charge-offs related to the Bank Leumi USA acquisition) for the second quarter 2022 as compared to net recoveries of $50 thousand for the first quarter 2022 and net loan charge-offs of $9.4 million for the second quarter 2021. Gross partial loan charge-offs of taxi medallion loans totaled $2.7 million within the commercial and industrial loan category for the second quarter 2022 as compared to $1.4 million and $206 thousand during the second quarter 2021 and first quarter 2022, respectively. The overall level of loan charge-offs (as presented in the above table) continued to remain very low and trend well within management's expectations for the credit quality of the loan portfolio for the second quarter 2022.

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:

*($ in thousands)*

| Loan Category: | June 30, 2022 Allowance Allocation | Allocation as a % of Loan Category | March 31, 2022 Allowance Allocation | Allocation as a % of Loan Category | June 30, 2021 Allowance Allocation | Allocation as a % of Loan Category |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial loans | $144,539 | 1.70% | $101,203 | 1.75% | $109,689 | 1.80% |
| Commercial real estate loans: |  |  |  |  |  |  |
| Commercial real estate | 227,457 | 0.97 | 189,927 | 0.96 | 168,220 | 0.96 |
| Construction | 49,770 | 1.47 | 30,022 | 1.38 | 20,919 | 1.19 |
| Total commercial real estate loans | 277,227 | 1.03 | 219,949 | 1.00 | 189,139 | 0.98 |
| Residential mortgage loans | 29,889 | 0.60 | 28,189 | 0.60 | 25,303 | 0.60 |
| Consumer loans: |  |  |  |  |  |  |
| Home equity | 3,907 | 0.91 | 3,656 | 0.93 | 4,602 | 1.12 |
| Auto and other consumer | 13,257 | 0.49 | 9,513 | 0.37 | 10,591 | 0.43 |
| Total consumer loans | 17,164 | 0.55 | 13,169 | 0.45 | 15,193 | 0.53 |
| Allowance for loan losses | 468,819 | 1.08 | 362,510 | 1.03 | 339,324 | 1.05 |
| Allowance for unfunded credit commitments | 22,144 |  | 16,742 |  | 14,400 |  |
| Total allowance for credit losses for loans | $490,963 |  | $379,252 |  | $353,724 |  |
| Allowance for credit losses for loans as a % total loans |  | 1.13% |  | 1.07% |  | 1.09% |

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 1.13 percent at June 30, 2022 as compared to 1.07 percent and 1.09 percent at March 31, 2022 and June 30, 2021, respectively. The allowance for credit losses at June 30, 2022 was impacted by (i) the total provision for credit losses for loans during the second quarter 2022, (ii) a net $70.3 million allowance for credit losses for PCD loans acquired from Bank Leumi USA recorded at the acquisition date, and (iii) the net loan charge-offs during the second quarter 2022.

During the second quarter 2022, the provision for credit losses for loans totaled $43.7 million as compared to $3.5 million and $8.8 million for the first quarter 2022 and second quarter 2021, respectively. The increase in the second quarter 2022 provision as compared to the first quarter 2022 was primarily due to $36.3 million and $4.7 million of provision related to non-PCD loans and unfunded credit commitments, respectively, acquired from Bank Leumi USA. Overall, an increased economic forecast reserve component of our CECL model was largely offset by lower expected quantitative loss experience at June 30, 2022 as compared to March 31, 2022.

### Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At June 30, 2022 and December 31, 2021, shareholders’ equity totaled approximately $6.2 billion and $5.1 billion, which represented 11.4 percent and 11.7 percent of total assets, respectively. During the six months ended June 30, 2022, total shareholders’ equity increased by $1.1 billion primarily due to:

- additional capital of $1.1 billion issued in the Bank Leumi USA acquisition,
- net income of $213.1 million,
- a $3.2 million increase attributable to the effect of our stock incentive plan, partially offset by
- cash dividends declared on common and preferred stock totaling a combined $109.4 million,
- an other comprehensive loss of $90.4 million, and
- repurchases of $13.5 million of our common stock with these shares held as treasury stock.

Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.

We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of June 30, 2022 and December 31, 2021, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).

For regulatory capital purposes, in accordance with the Federal Reserve Board’s final interim rule as of April 3, 2020, we deferred 100 percent of the CECL Day 1 impact to shareholders' equity plus 25 percent of the reserve build (i.e. provision for credit losses less net charge-offs) for a two-year period ending January 1, 2022. Starting January 1, 2022, the deferral amount totaling $47.3 million after-tax will be phased-in 25 percent per year until fully phased-in on January 1, 2025. As of June 30, 2022, approximately $11.8 million of the $47.3 million deferral amount was recognized as a reduction to regulatory capital and, as a result, decreased our risk based capital ratios by approximately 3 basis points.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at June 30, 2022 and December 31, 2021:

*($ in thousands)*

| As of June 30, 2022 Total Risk-based Capital | Actual Amount | Ratio | Minimum Capital Requirements Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provision Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Valley | $5,146,322 | 11.53% | $4,686,340 | 10.50% | N/A | N/A |
| Valley National Bank | 5,326,861 | 11.94 | 4,684,699 | 10.50 | $4,461,618 | 10.00% |
| Common Equity Tier 1 Capital |  |  |  |  |  |  |
| Valley | 4,043,465 | 9.06 | 3,124,227 | 7.00 | N/A | N/A |
| Valley National Bank | 4,977,845 | 11.16 | 3,123,133 | 7.00 | 2,900,052 | 6.50 |
| Tier 1 Risk-based Capital |  |  |  |  |  |  |
| Valley | 4,258,306 | 9.54 | 3,793,704 | 8.50 | N/A | N/A |
| Valley National Bank | 4,977,845 | 11.16 | 3,792,375 | 8.50 | 3,569,294 | 8.00 |
| Tier 1 Leverage Capital |  |  |  |  |  |  |
| Valley | 4,258,306 | 8.33 | 2,045,320 | 4.00 | N/A | N/A |
| Valley National Bank | 4,977,845 | 9.74 | 2,044,412 | 4.00 | 2,555,515 | 5.00 |
| **As of December 31, 2021** |  |  |  |  |  |  |
| Total Risk-based Capital |  |  |  |  |  |  |
| Valley | $4,454,485 | 13.10% | $3,569,144 | 10.50% | N/A | N/A |
| Valley National Bank | 4,571,448 | 13.45 | 3,567,618 | 10.50 | $3,397,732 | 10.00% |
| Common Equity Tier 1 Capital |  |  |  |  |  |  |
| Valley | 3,417,930 | 10.06 | 2,379,429 | 7.00 | N/A | N/A |
| Valley National Bank | 4,308,734 | 12.68 | 2,378,412 | 7.00 | 2,208,526 | 6.50 |
| Tier 1 Risk-based Capital |  |  |  |  |  |  |
| Valley | 3,632,771 | 10.69 | 2,889,307 | 8.50 | N/A | N/A |
| Valley National Bank | 4,308,734 | 12.68 | 2,888,072 | 8.50 | 2,718,185 | 8.00 |
| Tier 1 Leverage Capital |  |  |  |  |  |  |
| Valley | 3,632,771 | 8.88 | 1,635,508 | 4.00 | N/A | N/A |
| Valley National Bank | 4,307,734 | 10.53 | 1,636,097 | 4.00 | 2,045,121 | 5.00 |

Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common shareholders) per common share. Our retention ratio was approximately 50.0 percent for the six months ended June 30, 2022 as compared to 60.7 percent for the year ended December 31, 2021.

Cash dividends declared amounted to $0.22 per common share for each of the six months ended June 30, 2022 and 2021. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision.

### Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters

For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2021 in the MD&A section - “Liquidity and Cash Requirements” and Notes 11 and 12 to the consolidated financial statements included in this report.

## Market risk

As filed, 264 characters.

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 56 for a discussion of interest rate sensitivity.

## Controls and procedures

As filed, 3,210 characters.

(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. 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 June 30, 2022 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting.

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.

## Risk factors

As filed, 209 characters.

There have been no material changes in the risk factors previously disclosed in the section titled "Risk Factors" in Part I, Item 1A of Valley’s Annual Report on Form 10-K for the year ended December 31, 2021.

Filed Aug 9, 2022.
Source: SEC EDGAR, the filing index for accession 0000714310-22-000123. Last ingested by Listed: Nov 5, 2026, 17:26 ET. No prices; not investment advice.