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VALLEY NATIONAL BANCORP - Quarter Report: 2020 June (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2020
OR
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 1-11277 
 Valley National Bancorp
(Exact name of registrant as specified in its charter)
New Jersey
 
 
22-2477875
(State or other jurisdiction of
Incorporation or Organization)
 
 
(I.R.S. Employer
Identification Number)
 
 
 
 
 
 
One Penn Plaza
 
 
 
New York,
NY
 
 
10119
(Address of principal executive office)
 
 
(Zip code)
973-305-8800
(Registrant’s telephone number, including area code) 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of exchange on which registered
Common Stock, no par value
VLY
The Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series A, no par value
VLYPP
The Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series B, no par value
VLYPO
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
Accelerated filer
Smaller reporting company
 
 
 
 
 
 
Non-accelerated filer
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock (no par value), of which 403,797,596 shares were outstanding as of August 5, 2020.




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


1




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share data)
 
June 30,
2020
 
December 31,
2019
Assets
(Unaudited)
 
 
Cash and due from banks
$
388,753

 
$
256,264

Interest bearing deposits with banks
1,521,572

 
178,423

Investment securities:
 
 
 
Equity securities
54,379

 
41,410

Available for sale debt securities
1,689,388

 
1,566,801

Held to maturity debt securities (net of allowance for credit losses of $1,593 at June 30, 2020)
2,131,834

 
2,336,095

Total investment securities
3,875,601

 
3,944,306

Loans held for sale, at fair value
120,599

 
76,113

Loans
32,314,611

 
29,699,208

Less: Allowance for loan losses
(309,614
)
 
(161,759
)
Net loans
32,004,997

 
29,537,449

Premises and equipment, net
329,889

 
334,533

Lease right of use assets
273,811

 
285,129

Bank owned life insurance
535,383

 
540,169

Accrued interest receivable
122,807

 
105,637

Goodwill
1,375,409

 
1,373,625

Other intangible assets, net
77,921

 
86,772

Other assets
1,090,523

 
717,600

Total Assets
$
41,717,265

 
$
37,436,020

Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
8,989,818

 
$
6,710,408

Interest bearing:
 
 
 
Savings, NOW and money market
14,165,415

 
12,757,484

Time
8,272,772

 
9,717,945

Total deposits
31,428,005

 
29,185,837

Short-term borrowings
2,082,880

 
1,093,280

Long-term borrowings
2,907,535

 
2,122,426

Junior subordinated debentures issued to capital trusts
55,891

 
55,718

Lease liabilities
299,260

 
309,849

Accrued expenses and other liabilities
469,206

 
284,722

Total Liabilities
37,242,777

 
33,051,832

Shareholders’ Equity
 
 
 
Preferred stock, no par value; 50,000,000 authorized shares:
 
 
 
Series A (4,600,000 shares issued at June 30, 2020 and December 31, 2019)
111,590

 
111,590

Series B (4,000,000 shares issued at June 30, 2020 and December 31, 2019)
98,101

 
98,101

Common stock (no par value, authorized 650,000,000 shares; issued 403,823,728 shares at June 30, 2020 and 403,322,773 shares at December 31, 2019)
141,667

 
141,423

Surplus
3,628,792

 
3,622,208

Retained earnings
499,511

 
443,559

Accumulated other comprehensive loss
(4,938
)
 
(32,214
)
Treasury stock, at cost (28,029 common shares at June 30, 2020 and 44,383 common shares at December 31, 2019)
(235
)
 
(479
)
Total Shareholders’ Equity
4,474,488

 
4,384,188

Total Liabilities and Shareholders’ Equity
$
41,717,265

 
$
37,436,020

See accompanying notes to consolidated financial statements.

2




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans
$
321,883

 
$
296,934

 
$
654,951

 
$
585,211

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
19,447

 
22,489

 
41,380

 
45,365

Tax-exempt
3,692

 
4,356

 
7,618

 
9,160

Dividends
3,092

 
2,795

 
6,493

 
5,969

Interest on federal funds sold and other short-term investments
411

 
1,168

 
1,876

 
2,261

Total interest income
348,525

 
327,742

 
712,318

 
647,966

Interest Expense
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 

Savings, NOW and money market
16,627

 
38,020

 
51,140

 
74,303

Time
29,857

 
40,331

 
72,671

 
78,502

Interest on short-term borrowings
1,980

 
14,860

 
6,687

 
27,409

Interest on long-term borrowings and junior subordinated debentures
17,502

 
14,297

 
33,922

 
28,870

Total interest expense
65,966

 
107,508

 
164,420

 
209,084

Net Interest Income
282,559

 
220,234

 
547,898

 
438,882

Provision for credit losses for held to maturity securities
41

 

 
800

 

Provision for credit losses for loans
41,115

 
2,100

 
75,039

 
10,100

Net Interest Income After Provision for Credit Losses
241,403

 
218,134

 
472,059

 
428,782

Non-Interest Income
 
 
 
 
 
 
 
Trust and investment services
2,826

 
3,096

 
6,239

 
6,000

Insurance commissions
1,659

 
2,649

 
3,610

 
5,174

Service charges on deposit accounts
3,557

 
5,827

 
9,237

 
11,730

(Losses) gains on securities transactions, net
(41
)
 
11

 
(81
)
 
(21
)
Other-than-temporary impairment losses on securities

 
(2,928
)
 

 
(2,928
)
Portion recognized in other comprehensive income (before taxes)

 

 

 

Net impairment losses on securities recognized in earnings

 
(2,928
)
 

 
(2,928
)
Fees from loan servicing
2,227

 
2,367

 
4,975

 
4,797

Gains on sales of loans, net
8,337

 
3,930

 
12,887

 
8,506

(Losses) gains on sales of assets, net
(299
)
 
(564
)
 
(178
)
 
77,156

Bank owned life insurance
5,823

 
2,205

 
8,965

 
4,092

Other
20,741

 
11,010

 
40,573

 
20,770

Total non-interest income
44,830

 
27,603

 
86,227

 
135,276

Non-Interest Expense
 
 
 
 
 
 
 
Salary and employee benefits expense
78,532

 
76,183

 
164,260

 
159,288

Net occupancy and equipment expense
33,217

 
29,700

 
65,658

 
57,586

FDIC insurance assessment
6,135

 
4,931

 
10,011

 
11,052

Amortization of other intangible assets
6,681

 
4,170

 
12,151

 
8,481

Professional and legal fees
7,797

 
4,145

 
13,884

 
9,416

Amortization of tax credit investments
3,416

 
4,863

 
6,644

 
12,036

Telecommunication expense
2,866

 
2,351

 
5,153

 
4,619

Other
18,522

 
15,394

 
35,061

 
27,054

Total non-interest expense
157,166

 
141,737

 
312,822

 
289,532

Income Before Income Taxes
129,067

 
104,000

 
245,464

 
274,526

Income tax expense
33,466

 
27,532

 
62,595

 
84,728

Net Income
95,601

 
76,468

 
182,869

 
189,798

Dividends on preferred stock
3,172

 
3,172

 
6,344

 
6,344

Net Income Available to Common Shareholders
$
92,429

 
$
73,296

 
$
176,525

 
$
183,454


3





VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (continued)
(in thousands, except for share data)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.23

 
$
0.22

 
$
0.44

 
$
0.55

Diluted
0.23

 
0.22

 
0.44

 
0.55

Cash Dividends Declared per Common Share
0.11

 
0.11

 
0.22

 
0.22

Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
403,790,242

 
331,748,552

 
403,654,665

 
331,675,313

Diluted
404,631,845

 
332,959,802

 
405,043,183

 
332,929,359

See accompanying notes to consolidated financial statements.

4




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net income
$
95,601

 
$
76,468

 
$
182,869

 
$
189,798

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
 
Net gains arising during the period
3,013

 
18,488

 
29,081

 
34,755

Less reclassification adjustment for net losses (gains) included in net income
31

 
(8
)
 
58

 
18

Total
3,044

 
18,480

 
29,139

 
34,773

Unrealized gains and losses on derivatives (cash flow hedges)
 
 
 
 
 
 
 
Net losses on derivatives arising during the period
(1,280
)
 
(683
)
 
(2,337
)
 
(1,065
)
Less reclassification adjustment for net (gains) losses included in net income
(308
)
 
274

 
130

 
482

Total
(1,588
)
 
(409
)
 
(2,207
)
 
(583
)
Defined benefit pension plan
 
 
 
 
 
 
 
Amortization of actuarial net loss
172

 
55

 
344

 
110

Total other comprehensive income
1,628

 
18,126

 
27,276

 
34,300

Total comprehensive income
$
97,229

 
$
94,594

 
$
210,145

 
$
224,098

See accompanying notes to consolidated financial statements.


5




CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the Six Months Ended June 30, 2020
 
 
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
Preferred Stock
 
Shares
 
Amount
 
Surplus
 
Retained
Earnings
 
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Shareholders’
Equity
 
(in thousands)
Balance - December 31, 2019
$
209,691

 
403,278

 
$
141,423

 
$
3,622,208

 
$
443,559

 
$
(32,214
)
 
$
(479
)
 
$
4,384,188

Adjustment due to the adoption of ASU No. 2016-13

 

 

 

 
(28,187
)
 

 

 
(28,187
)
Balance - January 1, 2020
209,691

 
403,278

 
141,423

 
3,622,208

 
415,372

 
(32,214
)
 
(479
)
 
4,356,001

Net income

 

 

 

 
87,268

 

 

 
87,268

Other comprehensive income, net of tax

 

 

 

 

 
25,648

 

 
25,648

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, Series A, $0.39 per share

 

 

 

 
(1,797
)
 

 

 
(1,797
)
Preferred stock, Series B, $0.34 per share

 

 

 

 
(1,375
)
 

 

 
(1,375
)
Common stock, $0.11 per share

 

 

 

 
(44,979
)
 

 

 
(44,979
)
Effect of stock incentive plan, net

 
466

 
190

 
1,828

 
(2,065
)
 

 
279

 
232

Balance - March 31, 2020
209,691

 
403,744

 
141,613

 
3,624,036

 
452,424

 
(6,566
)
 
(200
)
 
4,420,998

Net income

 

 

 

 
95,601

 

 

 
95,601

Other comprehensive income, net of tax

 

 

 

 

 
1,628

 

 
1,628

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, Series A, $0.39 per share

 

 

 

 
(1,797
)
 

 

 
(1,797
)
Preferred stock, Series B, $0.34 per share

 

 

 

 
(1,375
)
 

 

 
(1,375
)
Common stock, $0.11 per share

 

 

 

 
(44,750
)
 

 

 
(44,750
)
Effect of stock incentive plan, net

 
52

 
54

 
4,756

 
(592
)
 

 
(35
)
 
4,183

Balance - June 30, 2020
$
209,691

 
403,796

 
$
141,667

 
$
3,628,792

 
$
499,511

 
$
(4,938
)
 
$
(235
)
 
$
4,474,488



6




For the Six Months Ended June 30, 2019
 
 
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
Preferred Stock
 
Shares
 
Amount
 
Surplus
 
Retained
Earnings
 
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Shareholders’
Equity
 
(in thousands)
Balance - December 31, 2018
$
209,691

 
331,431

 
$
116,240

 
$
2,796,499

 
$
299,642

 
$
(69,431
)
 
$
(2,187
)
 
$
3,350,454

Adjustment due to the adoption of ASU No. 2016-02

 

 

 

 
4,414

 

 

 
4,414

Adjustment due to the adoption of ASU No. 2017-08

 

 

 

 
(1,446
)
 

 

 
(1,446
)
Balance - January 1, 2019
209,691

 
331,431

 
116,240

 
2,796,499

 
302,610

 
(69,431
)
 
(2,187
)
 
3,353,422

Net income

 

 

 

 
113,330

 

 

 
113,330

Other comprehensive income, net of tax

 

 

 

 

 
16,174

 

 
16,174

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, Series A, $0.39 per share

 

 

 

 
(1,797
)
 

 

 
(1,797
)
Preferred stock, Series B, $0.34 per share

 

 

 

 
(1,375
)
 

 

 
(1,375
)
Common stock, $0.11 per share

 

 

 

 
(36,686
)
 

 

 
(36,686
)
Effect of stock incentive plan, net

 
302

 
226

 
2,935

 
(99
)
 

 
(1,251
)
 
1,811

Balance - March 31, 2019
209,691

 
331,733

 
116,466

 
2,799,434

 
375,983

 
(53,257
)
 
(3,438
)
 
3,444,879

Net income

 

 

 

 
76,468

 

 

 
76,468

Other comprehensive income, net of tax

 

 

 

 

 
18,126

 

 
18,126

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, Series A, $0.39 per share

 

 

 

 
(1,797
)
 

 

 
(1,797
)
Preferred stock, Series B, $0.34 per share

 

 

 

 
(1,375
)
 

 

 
(1,375
)
Common stock, $0.11 per share

 

 

 

 
(36,712
)
 

 

 
(36,712
)
Effect of stock incentive plan, net

 
55

 
105

 
4,625

 
(377
)
 

 
176

 
4,529

Balance - June 30, 2019
$
209,691

 
331,788

 
$
116,571

 
$
2,804,059

 
$
412,190

 
$
(35,131
)
 
$
(3,262
)
 
$
3,504,118


See accompanying notes to consolidated financial statements.

7




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
Six Months Ended
June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
182,869

 
$
189,798

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
29,608

 
25,240

Stock-based compensation
8,199

 
8,282

Provision for credit losses
75,839

 
10,100

Net amortization of premiums and accretion of discounts on securities and borrowings
15,305

 
14,287

Amortization of other intangible assets
12,151

 
8,481

Losses on securities transactions, net
81

 
21

Proceeds from sales of loans held for sale
408,785

 
205,429

Gains on sales of loans, net
(12,887
)
 
(8,506
)
Net impairment losses on securities, recognized in earnings

 
2,928

Originations of loans held for sale
(443,684
)
 
(200,877
)
Losses (gains) on sales of assets, net
178

 
(77,156
)
Net change in:
 
 
 
Cash surrender value of bank owned life insurance
(8,965
)
 
(4,092
)
Accrued interest receivable
(17,170
)
 
(3,769
)
Other assets
(426,776
)
 
(186,674
)
Accrued expenses and other liabilities
166,490

 
65,970

Net cash (used in) provided by operating activities
(9,977
)
 
49,462

Cash flows from investing activities:
 
 
 
Net loan originations and purchases
(2,568,893
)
 
(992,236
)
Equity securities:
 
 
 
Purchases
(5,365
)
 

Held to maturity debt securities:
 
 
 
Purchases
(107,136
)
 
(261,446
)
Maturities, calls and principal repayments
301,004

 
155,002

Available for sale debt securities:
 
 
 
Purchases
(302,071
)
 

Maturities, calls and principal repayments
213,348

 
109,045

Death benefit proceeds from bank owned life insurance
13,751

 
1,350

Proceeds from sales of real estate property and equipment
8,202

 
102,500

Proceeds from sales of loans held for investment
30,020

 
216,301

Purchases of real estate property and equipment
(14,469
)
 
(9,336
)
Net cash used in investing activities
(2,431,609
)
 
(678,820
)
 
 
 
 

8




 
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
 
 
Six Months Ended
June 30,
 
 
2020
 
2019
 
Cash flows from financing activities:
 
 
 
 
Net change in deposits
2,242,168

 
320,955

 
Net change in short-term borrowings
989,600

 
268,870

 
Proceeds from issuance of long-term borrowings, net
838,388

 
400,000

 
Repayments of long-term borrowings
(53,418
)
 
(255,000
)
 
Cash dividends paid to preferred shareholders
(6,344
)
 
(3,172
)
 
Cash dividends paid to common shareholders
(89,122
)
 
(73,546
)
 
Purchase of common shares to treasury
(4,924
)
 
(1,462
)
 
Common stock issued, net
1,140

 
(480
)
 
Other, net
(264
)
 
(240
)
 
Net cash provided by financing activities
3,917,224

 
655,925

 
Net change in cash and cash equivalents
1,475,638

 
26,567

 
Cash and cash equivalents at beginning of year
434,687

 
428,629

 
Cash and cash equivalents at end of period
$
1,910,325

 
$
455,196

 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Cash payments for:
 
 
 
 
Interest on deposits and borrowings
$
178,337

 
$
198,815

 
Federal and state income taxes
14,731

 
80,116

 
Supplemental schedule of non-cash investing activities:
 
 
 
 
Transfer of loans to other real estate owned
$
2,750

 
$
1,016

 
Transfer of loans to loans held for sale
30,020

 
216,301

 
Lease right of use assets obtained in exchange for operating lease liabilities
6,407

 
296,064

See accompanying notes to consolidated financial statements.

9




VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey corporation (Valley), include the accounts of its commercial bank subsidiary, Valley National Bank (the Bank), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities. Certain prior period amounts have been reclassified to conform to the current presentation.
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations, changes in shareholders' equity and cash flows at June 30, 2020 and for all periods presented have been made. The results of operations for the three and six months ended on June 30, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year or any subsequent interim period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP and industry practice have been condensed or omitted pursuant to rules and regulations of the SEC. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019.
Significant Estimates. In preparing the unaudited consolidated financial statements in conformity with U.S. GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that require application of management’s most difficult, subjective or complex judgment and are particularly susceptible to change include: the allowance for credit losses, the evaluation of goodwill and other intangible assets for impairment, and income taxes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates. Actual amounts as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date.
Impact of COVID-19. During the first half of 2020, economies throughout the world were severely disrupted by the effects of quarantines, business closures, and the reluctance of individuals to leave their homes as a result of the outbreak of the novel coronavirus (COVID-19). Our primary market areas within New Jersey, New York, Florida and Alabama have all experienced significant outbreaks and disruptions during the COVID-19 pandemic. The full impact of COVID-19 is unknown and still evolving. The outbreak and any preventative or protective actions that Valley or its customers have taken or may take in respect of this virus have resulted and may continue to result in extended periods of disruption to Valley, its customers, service providers, and third parties. Any future financial impact cannot be reasonably estimated at this time but may materially affect the business and Valley’s financial condition and results of operations. The extent to which COVID-19 impacts Valley’s results will depend on future developments, which are highly uncertain and cannot be predicted. Banking and financial services have been designated essential businesses; therefore, Valley’s operations are continuing, subject to certain modifications to business practices imposed to safeguard the health and wellness of Valley’s customers and employees, and to comply with applicable government directives.


10




Note 2. Business Combinations

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

Merger expenses totaled $366 thousand and $1.7 million for the three and six months ended June 30, 2020, respectively, which primarily related to professional and legal expenses and other expenses included in non-interest expense on the consolidated statements of income.

During the first quarter 2020, Valley revised the estimated fair values of the acquired assets as of the Oritani acquisition date due to additional information obtained that existed as of December 1, 2019. The adjustments mostly related to the fair value of certain loans and deferred tax assets as of the acquisition date and resulted in a $1.8 million increase in goodwill (see Note 9 for amount of goodwill as allocated to Valley's business segments). If additional information (that existed as of the acquisition date) becomes available, the fair value estimates for acquired assets and assumed liabilities are subject to change for up to one year after the acquisition date.
Note 3. Earnings Per Common Share
The following table shows the calculation of both basic and diluted earnings per common share for the three and six months ended June 30, 2020 and 2019:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands, except for share data)
Net income available to common shareholders
$
92,429

 
$
73,296

 
$
176,525

 
$
183,454

Basic weighted average number of common shares outstanding
403,790,242

 
331,748,552

 
403,654,665

 
331,675,313

Plus: Common stock equivalents
841,603

 
1,211,250

 
1,388,518

 
1,254,046

Diluted weighted average number of common shares outstanding
404,631,845

 
332,959,802

 
405,043,183

 
332,929,359

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.23

 
$
0.22

 
$
0.44

 
$
0.55

Diluted
0.23

 
0.22

 
0.44

 
0.55



Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of restricted stock units and common stock options to purchase Valley’s common shares. Common stock options with exercise prices that exceed the average market price per share of Valley’s common stock during the periods presented have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation. Anti-dilutive common stock options equaled approximately 2.7 million shares and 2.3 million shares for the three and six months ended June 30, 2020, respectively, and 482 thousand shares and 494 thousand shares for the three and six months ended June 30, 2019, respectively.

11




Note 4. Accumulated Other Comprehensive Loss

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three and six months ended June 30, 2020: 
 
Components of Accumulated Other Comprehensive Loss
 
Total
Accumulated
Other
Comprehensive
Loss
 
Unrealized Gains
and Losses on
Available for Sale
(AFS) Securities
 
Unrealized Gains
and Losses on
Derivatives
 
Defined
Benefit
Pension Plan
 
 
(in thousands)
Balance at March 31, 2020
$
31,917

 
$
(4,348
)
 
$
(34,135
)
 
$
(6,566
)
Other comprehensive income (loss) before reclassification
3,013

 
(1,280
)
 

 
1,733

Amounts reclassified from other comprehensive income
31

 
(308
)
 
172

 
(105
)
Other comprehensive income (loss), net
3,044

 
(1,588
)
 
172

 
1,628

Balance at June 30, 2020
$
34,961

 
$
(5,936
)
 
$
(33,963
)
 
$
(4,938
)

 
Components of Accumulated Other Comprehensive Loss
 
Total
Accumulated
Other
Comprehensive
Loss
 
Unrealized Gains
and Losses on
Available for Sale
(AFS) Securities
 
Unrealized Gains
and Losses on
Derivatives
 
Defined
Benefit
Pension Plan
 
 
(in thousands)
Balance at December 31, 2019
$
5,822

 
$
(3,729
)
 
$
(34,307
)
 
$
(32,214
)
Other comprehensive income (loss) before reclassification
29,081

 
(2,337
)
 

 
26,744

Amounts reclassified from other comprehensive income
58

 
130

 
344

 
532

Other comprehensive income (loss), net
29,139

 
(2,207
)
 
344

 
27,276

Balance at June 30, 2020
$
34,961

 
$
(5,936
)
 
$
(33,963
)
 
$
(4,938
)


The following table presents amounts reclassified from each component of accumulated other comprehensive loss on a gross and net of tax basis for the three and six months ended June 30, 2020 and 2019:
 
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
 
Components of Accumulated Other Comprehensive Loss
 
2020
 
2019
 
2020
 
2019
 
Income Statement Line Item
 
 
(in thousands)
 
 
Unrealized (losses) gains on AFS securities before tax
 
$
(41
)
 
$
11

 
$
(81
)
 
$
(21
)
 
(Losses) gains on securities transactions, net
Tax effect
 
10

 
(3
)
 
23

 
3

 
 
Total net of tax
 
(31
)
 
8

 
(58
)
 
(18
)
 
 
Unrealized gains (losses) on derivatives (cash flow hedges) before tax
 
438

 
(383
)
 
(177
)
 
(673
)
 
Interest expense
Tax effect
 
(130
)
 
109

 
47

 
191

 
 
Total net of tax
 
308

 
(274
)
 
(130
)
 
(482
)
 
 
Defined benefit pension plan:
 
 
 
 
 
 
 
 
 
 
Amortization of actuarial net loss
 
(229
)
 
(78
)
 
(465
)
 
(156
)
 
*
Tax effect
 
57

 
23

 
121

 
46

 
 
Total net of tax
 
(172
)
 
(55
)
 
(344
)
 
(110
)
 
 
Total reclassifications, net of tax
 
$
105

 
$
(321
)
 
$
(532
)
 
$
(610
)
 
 
 

*
Amortization of net loss is included in the computation of net periodic pension cost recognized within other non-interest expense.


12




Note 5. New Authoritative Accounting Guidance

New Accounting Guidance Adopted in 2020

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

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

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

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

New Accounting Guidance issued in 2020

ASU No. 2020-04, "Reference Rate Reform (Topic 848)" provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform

13




as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU No. 2020-04 became effective for all entities as of March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022.
Note 6. Fair Value Measurement of Assets and Liabilities

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

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


14




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

The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at June 30, 2020 and December 31, 2019. The assets presented under “nonrecurring fair value measurements” in the tables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized). 

 
June 30,
2020
 
Fair Value Measurements at Reporting Date Using:
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Recurring fair value measurements:
 
Assets
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
Equity securities (1)
$
54,379

 
$
46,897

 
$

 
$

Available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
52,621

 
52,621

 

 

U.S. government agency securities
27,924

 

 
27,924

 

Obligations of states and political subdivisions
147,505

 

 
146,140

 
1,365

Residential mortgage-backed securities
1,382,726

 

 
1,382,726

 

Corporate and other debt securities
78,612

 

 
78,612

 

Total available for sale debt securities
1,689,388

 
52,621

 
1,635,402

 
1,365

Loans held for sale (2)
120,599

 

 
120,599

 

Other assets (3)
468,275

 

 
468,275

 

Total assets
$
2,332,641

 
$
99,518


$
2,224,276

 
$
1,365

Liabilities
 
 
 
 
 
 
 
Other liabilities (3)
$
170,273

 
$

 
$
170,273

 
$

Total liabilities
$
170,273

 
$

 
$
170,273

 
$

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent loans
$
42,807

 
$

 
$

 
$
42,807

Loan servicing rights
14,373

 

 

 
14,373

Foreclosed assets
6,679

 

 

 
6,679

Total
$
63,859

 
$

 
$

 
$
63,859


15




 
 
 
Fair Value Measurements at Reporting Date Using:
 
December 31,
2019
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Recurring fair value measurements:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
Equity securities at fair value
$
41,410

 
$
41,410

 
$

 
$

Available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
50,943

 
50,943

 

 

U.S. government agency securities
29,243

 

 
29,243

 

Obligations of states and political subdivisions
170,051

 

 
169,371

 
680

Residential mortgage-backed securities
1,254,786

 

 
1,254,786

 

Corporate and other debt securities
61,778

 

 
61,778

 

Total available for sale
1,566,801

 
50,943

 
1,515,178

 
680

Loans held for sale (2)
76,113

 

 
76,113

 

Other assets (3)
158,532

 

 
158,532

 

Total assets
$
1,842,856

 
$
92,353

 
$
1,749,823

 
$
680

Liabilities
 
 
 
 
 
 
 
Other liabilities (3)
$
43,926

 
$

 
$
43,926

 
$

Total liabilities
$
43,926

 
$

 
$
43,926

 
$

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans
$
39,075

 
$

 
$

 
$
39,075

Loan servicing rights
1,591

 

 

 
1,591

Foreclosed assets
10,807

 

 

 
10,807

Total
$
51,473

 
$

 
$

 
$
51,473

 
(1)
Includes equity securities measured at net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy totaling $7.5 million at June 30, 2020.
(2)
Represents residential mortgage loans originated for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $115.0 million and $74.5 million at June 30, 2020 and December 31, 2019, respectively.
(3)
Derivative financial instruments are included in this category.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Equity securities. The fair value of equity securities, primarily consists of one publicly traded mutual fund, is derived from quoted market prices in active markets. Equity securities also include Community Reinvestment Act (CRA) investment funds carried at quoted market prices if publicly traded, and at NAV if privately held.
  



16





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

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

Loans held for sale. Residential mortgage loans originated for sale are reported at fair value using Level 2 inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. The market prices represent a delivery price, which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at June 30, 2020 and December 31, 2019 based on the short duration these assets were held, and the high credit quality of these loans.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair values of Valley’s derivatives are determined using third-party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves. The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at June 30, 2020 and December 31, 2019), is determined based on the current market prices for similar instruments. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at June 30, 2020 and December 31, 2019.

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

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

Collateral Dependent Loans. Collateral dependent loans are loans when foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and substantially all of the repayment is expected from the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral. Collateral values are estimated using Level 3 inputs, consisting of individual third-party appraisals that may be adjusted based on certain discounting criteria. Certain real estate appraisals may be discounted based on specific market data by location and property type. At June 30, 2020, collateral dependent loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for credit loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. At June 30, 2020, collateral dependent

17




loans, primarily consisting of taxi medallion loans, with a total amortized cost of $110.9 million were reduced by specific valuation allowance allocations totaling $68.1 million to a reported total net carrying amount of $42.8 million.

Loan servicing rights. Fair values for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third-party vendor that requires inputs that are both significant to the fair value measurement and unobservable (Level 3). The fair value model is based on various assumptions, including but not limited to, prepayment speeds, internal rate of return (discount rate), servicing cost, ancillary income, float rate, tax rate, and inflation. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At June 30, 2020, the fair value model used a blended prepayment speed (stated as constant prepayment rates) of 17.0 percent and a discount rate of 9.6 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. At June 30, 2020, certain loan servicing rights were re-measured at fair value totaling $14.4 million. See Note 9 for additional information.

Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value using Level 3 inputs, consisting of a third-party appraisal adjusted to the lower of cost or estimated fair value, less estimated cost to sell. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If further declines in the estimated fair value of the asset occur, an asset is re-measured and reported at fair value through a write-down recorded in non-interest expense. There were no discount adjustments of the appraisals of foreclosed assets at June 30, 2020.

Other Fair Value Disclosures

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

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

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


18




The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at June 30, 2020 and December 31, 2019 were as follows: 
 
Fair Value
Hierarchy
 
June 30, 2020
 
December 31, 2019
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
388,753

 
$
388,753

 
$
256,264

 
$
256,264

Interest bearing deposits with banks
Level 1
 
1,521,572

 
1,521,572

 
178,423

 
178,423

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
Level 1
 
138,268

 
147,415

 
138,352

 
144,113

U.S. government agency securities
Level 2
 
6,657

 
6,921

 
7,345

 
7,362

Obligations of states and political subdivisions
Level 2
 
466,836

 
481,736

 
500,705

 
513,607

Residential mortgage-backed securities
Level 2
 
1,451,581

 
1,495,599

 
1,620,119

 
1,629,572

Trust preferred securities
Level 2
 
37,335

 
29,900

 
37,324

 
31,382

Corporate and other debt securities
Level 2
 
32,750

 
33,305

 
32,250

 
32,684

Total investment securities held to maturity (1)
 
 
2,133,427

 
2,194,876

 
2,336,095

 
2,358,720

Net loans
Level 3
 
32,004,997

 
31,815,938

 
29,537,449

 
28,964,396

Accrued interest receivable
Level 1
 
122,807

 
122,807

 
105,637

 
105,637

Federal Reserve Bank and Federal Home Loan Bank stock (2)
Level 2
 
282,755

 
282,755

 
214,421

 
214,421

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
Level 1
 
23,155,233

 
23,155,233

 
19,467,892

 
19,467,892

Deposits with stated maturities
Level 2
 
8,272,772

 
8,335,442

 
9,717,945

 
9,747,867

Short-term borrowings
Level 2
 
2,082,880

 
2,083,500

 
1,093,280

 
1,081,879

Long-term borrowings
Level 2
 
2,907,535

 
3,023,213

 
2,122,426

 
2,181,401

Junior subordinated debentures issued to capital trusts
Level 2
 
55,891

 
44,231

 
55,718

 
53,889

Accrued interest payable (3)
Level 1
 
19,148

 
19,148

 
33,066

 
33,066

 
(1)
The carrying amount is presented gross without the allowance for credit losses.
(2)
Included in other assets.
(3)
Included in accrued expenses and other liabilities.



19




Note 7. Investment Securities

Equity Securities

Equity securities carried at fair value totaled $54.4 million and $41.4 million at June 30, 2020 and December 31, 2019, respectively. Valley's equity securities consist mainly of one publicly traded money market mutual fund totaling $41.8 million and $41.4 million at June 30, 2020 and December 31, 2019, respectively. The remainder of the balance at June 30, 2020 represents investments made for CRA purposes.

Available for Sale Debt Securities

The amortized cost, gross unrealized gains and losses and fair value of available for sale debt securities at June 30, 2020 and December 31, 2019 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
U.S. Treasury securities
$
50,940

 
$
1,681

 
$

 
$
52,621

U.S. government agency securities
26,778

 
1,174

 
(28
)
 
27,924

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
65,620

 
1,477

 
(54
)
 
67,043

Municipal bonds
79,100

 
1,363

 
(1
)
 
80,462

Total obligations of states and political subdivisions
144,720

 
2,840

 
(55
)
 
147,505

Residential mortgage-backed securities
1,340,614

 
43,039

 
(927
)
 
1,382,726

Corporate and other debt securities
78,225

 
1,251

 
(864
)
 
78,612

Total investment securities available for sale
$
1,641,277

 
$
49,985

 
$
(1,874
)
 
$
1,689,388

December 31, 2019
 
 
 
 
 
 
 
U.S. Treasury securities
$
50,952

 
$
12

 
$
(21
)
 
$
50,943

U.S. government agency securities
28,982

 
280

 
(19
)
 
29,243

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
78,116

 
540

 
(83
)
 
78,573

Municipal bonds
90,662

 
902

 
(86
)
 
91,478

Total obligations of states and political subdivisions
168,778

 
1,442

 
(169
)
 
170,051

Residential mortgage-backed securities
1,248,814

 
11,234

 
(5,262
)
 
1,254,786

Corporate and other debt securities
61,261

 
628

 
(111
)
 
61,778

Total investment securities available for sale
$
1,558,787

 
$
13,596

 
$
(5,582
)
 
$
1,566,801





20




The age of unrealized losses and fair value of related securities available for sale at June 30, 2020 and December 31, 2019 were as follows: 
 
Less than
Twelve Months
 
More than
Twelve Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities
$

 
$

 
$
1,627

 
$
(28
)
 
$
1,627

 
$
(28
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
24,913

 
(37
)
 
1,036

 
(17
)
 
25,949

 
(54
)
Municipal bonds
210

 
(1
)
 

 

 
210

 
(1
)
Total obligations of states and political subdivisions
25,123

 
(38
)
 
1,036

 
(17
)
 
26,159

 
(55
)
Residential mortgage-backed securities
101,162

 
(458
)
 
49,368

 
(469
)
 
150,530

 
(927
)
Corporate and other debt securities
27,194

 
(864
)
 

 

 
27,194

 
(864
)
Total
$
153,479

 
$
(1,360
)
 
$
52,031

 
$
(514
)
 
$
205,510

 
$
(1,874
)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
25,019

 
$
(21
)
 
$

 
$

 
$
25,019

 
$
(21
)
U.S. government agency securities

 

 
1,783

 
(19
)
 
1,783

 
(19
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
18,540

 
(21
)
 
8,755

 
(62
)
 
27,295

 
(83
)
Municipal bonds

 

 
13,177

 
(86
)
 
13,177

 
(86
)
Total obligations of states and political subdivisions
18,540

 
(21
)
 
21,932

 
(148
)
 
40,472

 
(169
)
Residential mortgage-backed securities
240,412

 
(1,194
)
 
282,798

 
(4,068
)
 
523,210

 
(5,262
)
Corporate and other debt securities
5,139

 
(111
)
 

 

 
5,139

 
(111
)
Total
$
289,110

 
$
(1,347
)
 
$
306,513

 
$
(4,235
)
 
$
595,623

 
$
(5,582
)

Within the available for sale debt securities portfolio, the total number of security positions in an unrealized loss position was 95 and 182 at June 30, 2020 and December 31, 2019, respectively.
As of June 30, 2020, the fair value of available for sale debt securities that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $1.1 billion.

21




The contractual maturities of available for sale debt securities at June 30, 2020 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
 
June 30, 2020
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
26,643

 
$
26,742

Due after one year through five years
97,248

 
99,501

Due after five years through ten years
104,076

 
106,154

Due after ten years
72,696

 
74,265

Residential mortgage-backed securities
1,340,614

 
1,382,726

Total investment securities available for sale
$
1,641,277

 
$
1,689,388


Actual maturities of available for sale debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted average remaining expected life for residential mortgage-backed securities available for sale was 4.8 years at June 30, 2020.
Impairment Analysis of Available For Sale Debt Securities
Valley's available for sale debt securities portfolio includes corporate bonds and special revenue bonds, among other securities, which may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S. economy and its potential negative effect on the future performance of the security issuers, including due to the economic effects of COVID-19.
Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis. In performing an assessment of whether any decline in fair value is due to a credit loss, Valley considers the extent to which the fair value is less than the amortized cost, changes in credit ratings, any adverse economic conditions, as well as all relevant information at the individual security level such as credit deterioration of the issuer or collateral underlying the security. In assessing the impairment, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security. If it is determined that the decline in fair value was due to credit losses, an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. The non-credit related decrease in the fair value, such as a decline due to changes in market interest rates, is recorded in other comprehensive income, net of tax. Valley also assesses the intent to sell the securities (as well as the likelihood of a near-term recovery). If Valley intends to sell an available for sale debt security or it is more likely than not that Valley will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged to the debt security’s fair value at the reporting date with any incremental impairment reported in earnings.

The obligations of states and political subdivisions classified as available for sale include special revenue bonds which had an aggregate amortized cost and fair value of $80.2 million and $81.8 million, respectively, at June 30, 2020. There were $56 thousand in gross unrealized losses associated with the special revenue bonds as of June 30, 2020. Approximately 54 percent of the special revenue bonds were issued by the states of (or municipalities within) Utah, Illinois, North Carolina and Florida. As part of Valley’s pre-purchase analysis and on-going quarterly assessment of impairment of the obligations of states and political subdivisions, our Credit Risk Management Department conducts a financial analysis and risk rating assessment of each security issuer based on the issuer’s most recently issued financial statements and other publicly available information. These investments are a mix of municipal bonds with investment grade ratings or non-rated revenue bonds paying in accordance with their contractual terms. The vast majority of the bonds not rated by the rating agencies are state housing finance agency revenue bonds secured by Ginnie Mae securities

22




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

Valley has evaluated available for sale debt securities that are in an unrealized loss position as of June 30, 2020 included in the table above and has determined that the declines in fair value are mainly attributable to market volatility, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment during the three and six months ended June 30, 2020 and, as a result, there is no allowance for credit losses for available for sale debt securities at June 30, 2020.

During the three months ended June 30, 2019, Valley recognized a $2.9 million other-than-temporary credit impairment charge on one special revenue bond classified as available for sale (within the obligations of states and state agencies in the tables above). The credit impairment was due to severe credit deterioration disclosed by the issuer in the second quarter of 2019, as well as the issuer's default on its contractual payment. At June 30, 2020, the impaired security had an adjusted amortized cost and fair value of $680 thousand and $1.4 million, respectively.

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

Held to Maturity Debt Securities

The amortized cost, gross unrealized gains and losses and fair value of debt securities held to maturity at June 30, 2020 and December 31, 2019 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,268

 
$
9,147

 
$

 
$
147,415

U.S. government agency securities
6,657

 
264

 

 
6,921

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
280,187

 
8,569

 
(545
)
 
288,211

Municipal bonds
186,649

 
6,876

 

 
193,525

Total obligations of states and political subdivisions
466,836

 
15,445

 
(545
)
 
481,736

Residential mortgage-backed securities
1,451,581

 
44,327

 
(309
)
 
1,495,599

Trust preferred securities
37,335

 
48

 
(7,483
)
 
29,900

Corporate and other debt securities
32,750

 
556

 
(1
)
 
33,305

Total investment securities held to maturity
$
2,133,427

 
$
69,787

 
$
(8,338
)
 
$
2,194,876

December 31, 2019
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,352

 
$
5,761

 
$

 
$
144,113

U.S. government agency securities
7,345

 
58

 
(41
)
 
7,362

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
297,454

 
7,745

 
(529
)
 
304,670

Municipal bonds
203,251

 
5,696

 
(10
)
 
208,937

Total obligations of states and political subdivisions
500,705

 
13,441

 
(539
)
 
513,607

Residential mortgage-backed securities
1,620,119

 
14,803

 
(5,350
)
 
1,629,572

Trust preferred securities
37,324

 
39

 
(5,981
)
 
31,382

Corporate and other debt securities
32,250

 
454

 
(20
)
 
32,684

Total investment securities held to maturity
$
2,336,095

 
$
34,556

 
$
(11,931
)
 
$
2,358,720



23




The age of unrealized losses and fair value of related debt securities held to maturity at June 30, 2020 and December 31, 2019 were as follows: 
 
Less than
Twelve Months
 
More than
Twelve Months
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
10,544

 
$
(266
)
 
$
20,022

 
$
(279
)
 
$
30,566

 
$
(545
)
Total obligations of states and political subdivisions
10,544

 
(266
)
 
20,022

 
(279
)
 
30,566

 
(545
)
Residential mortgage-backed securities
37,394

 
(305
)
 
2,710

 
(4
)
 
40,104

 
(309
)
Trust preferred securities

 

 
28,499

 
(7,483
)
 
28,499

 
(7,483
)
Corporate and other debt securities
17,749

 
(1
)
 

 

 
17,749

 
(1
)
Total
$
65,687

 
$
(572
)
 
$
51,231

 
$
(7,766
)
 
$
116,918

 
$
(8,338
)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities
$
5,183

 
$
(41
)
 
$

 
$

 
$
5,183

 
$
(41
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
11,178

 
(55
)
 
32,397

 
(474
)
 
43,575

 
(529
)
Municipal bonds

 

 
798

 
(10
)
 
798

 
(10
)
Total obligations of states and political subdivisions
11,178

 
(55
)
 
33,195

 
(484
)
 
44,373

 
(539
)
Residential mortgage-backed securities
307,885

 
(1,387
)
 
254,915

 
(3,963
)
 
562,800

 
(5,350
)
Trust preferred securities

 

 
29,990

 
(5,981
)
 
29,990

 
(5,981
)
Corporate and other debt securities

 

 
4,980

 
(20
)
 
4,980

 
(20
)
Total
$
324,246

 
$
(1,483
)
 
$
323,080

 
$
(10,448
)
 
$
647,326

 
$
(11,931
)


Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 26 and 82 at June 30, 2020 and December 31, 2019, respectively.
As of June 30, 2020, the fair value of debt securities held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $1.3 billion.








24




The contractual maturities of investments in debt securities held to maturity at June 30, 2020 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.  
 
June 30, 2020
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
92,432

 
$
93,313

Due after one year through five years
171,778

 
179,833

Due after five years through ten years
203,555

 
215,200

Due after ten years
214,081

 
210,931

Residential mortgage-backed securities
1,451,581

 
1,495,599

Total investment securities held to maturity
$
2,133,427

 
$
2,194,876


Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 3.9 years at June 30, 2020.


25




Credit Quality Indicators
Valley monitors the credit quality of the held to maturity debt securities through the use of the most current credit ratings from external rating agencies. The following table summarizes the amortized cost of held to maturity debt securities by external credit rating at June 30, 2020 and December 31, 2019.
 
AAA/AA/A Rated
 
BBB rated
 
Non-investment grade rated
 
Non-rated
 
Total
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,268

 
$

 
$

 
$

 
$
138,268

U.S. government agency securities
6,657

 

 

 

 
6,657

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 

Obligations of states and state agencies
239,811

 

 
5,686

 
34,690

 
280,187

Municipal bonds
182,140

 

 

 
4,509

 
186,649

Total obligations of states and political subdivisions
421,951

 

 
5,686

 
39,199

 
466,836

Residential mortgage-backed securities
1,451,581

 

 

 

 
1,451,581

Trust preferred securities

 

 

 
37,335

 
37,335

Corporate and other debt securities

 
5,000

 

 
27,750

 
32,750

Total investment securities held to maturity
$
2,018,457

 
$
5,000

 
$
5,686

 
$
104,284

 
$
2,133,427

December 31, 2019
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,352

 
$

 
$

 
$

 
$
138,352

U.S. government agency securities
7,345

 

 

 

 
7,345

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
248,533

 
5,722

 

 
43,199

 
297,454

Municipal bonds
202,642

 

 

 
609

 
203,251

Total obligations of states and political subdivisions
451,175

 
5,722

 

 
43,808

 
500,705

Residential mortgage-backed securities
1,620,119

 

 

 

 
1,620,119

Trust preferred securities

 

 

 
37,324

 
37,324

Corporate and other debt securities

 
5,000

 

 
27,250

 
32,250

Total investment securities held to maturity
$
2,216,991

 
$
10,722

 
$

 
$
108,382

 
$
2,336,095



Obligations of states and political subdivisions include municipal bonds and revenue bonds issued by various municipal corporations. At June 30, 2020, most of the obligations of states and political subdivisions were rated investment grade and the "non-rated" category included mostly TEMS securities secured by Ginnie Mae securities. Trust preferred securities consist of non-rated single-issuer securities, issued by bank holding companies. Corporate bonds consist of debt primarily issued by banks.

Allowance for Credit Losses for Held to Maturity Debt Securities

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

To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third-party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. The model is adjusted for a probability

26




weighted multi-scenario economic forecast to estimate future credit losses. Valley uses a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the investment security. The economic forecast methodology and governance for debt securities is aligned with Valley's economic forecast used for the loan portfolio discussed in more detail in Note 8. Accrued interest receivable is excluded from the estimate of credit losses.

At June 30, 2020, held to maturity debt securities were carried net of allowance for credit losses totaling $1.6 million.
The provision was not material during three and six months ended June 30, 2020, respectively, and there were no net charge-offs of debt securities in the respective periods.
Note 8. Loans and Allowance for Credit Losses for Loans

The detail of the loan portfolio as of June 30, 2020 and December 31, 2019 was as follows: 
 
June 30, 2020

December 31, 2019
 
(in thousands)
Loans:
 
 
 
Commercial and industrial *
$
6,884,689

 
$
4,825,997

Commercial real estate:
 
 
 
Commercial real estate
16,571,877

 
15,996,741

Construction
1,721,352

 
1,647,018

Total commercial real estate loans
18,293,229

 
17,643,759

Residential mortgage
4,405,147

 
4,377,111

Consumer:
 
 
 
Home equity
471,115

 
487,272

Automobile
1,369,489

 
1,451,623

Other consumer
890,942

 
913,446

Total consumer loans
2,731,546

 
2,852,341

Total loans
$
32,314,611

 
$
29,699,208


 

*
Includes $2.2 billion of loans originated under the SBA Paycheck Protection Program (PPP), net of unearned fees totaling $62.1 million at June 30, 2020.

Total loans includes net unearned discounts and deferred loan fees of $131.3 million at June 30, 2020 and net unearned premiums and deferred loan costs of $12.6 million at December 31, 2019. Net unearned discounts and deferred loan fees at June 30, 2020 include the non-credit discount on PCD loans and net unearned fees related to SBA PPP loans.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $104.2 million and $86.3 million at June 30, 2020 and December 31, 2019, respectively, and is presented separately in the consolidated statements of financial condition.

Valley transferred and sold approximately $30.0 million and $216.3 million of residential mortgage loans from the loan portfolio to loans held for sale during the six months ended June 30, 2020 and 2019, respectively. Excluding the loan transfers, there were no sales of loans from the held for investment portfolio during the six months ended June 30, 2020 and 2019.

Credit Risk Management

For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk appetite. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant

27




dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, internal loan classification, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through cyclical economic circumstances. See Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 for further details.

Credit Quality

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

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

The following table presents past due, current and non-accrual loans without an allowance for credit losses by loan portfolio class (including PCD loans) at June 30, 2020.
 
Past Due and Non-Accrual Loans
 
 
 
 
 
 
 
30-59  Days 
Past Due Loans
 
60-89  Days 
Past Due Loans
 
90 Days or More
Past Due Loans
 
Non-Accrual Loans
 

Total Past Due Loans
 

Current Loans
 

Total Loans
 
Non-Accrual Loans Without Allowance for Credit Losses
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
6,206

 
$
4,178

 
$
5,220

 
$
130,876

 
$
146,480

 
$
6,738,209

 
$
6,884,689

 
$
13,501

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
13,912

 
1,543

 

 
43,678

 
59,133

 
16,512,744

 
16,571,877

 
40,476

Construction

 

 

 
3,308

 
3,308

 
1,718,044

 
1,721,352

 
2,830

Total commercial real estate loans
13,912

 
1,543

 

 
46,986

 
62,441

 
18,230,788

 
18,293,229

 
43,306

Residential mortgage
35,263

 
4,169

 
3,812

 
25,776

 
69,020

 
4,336,127

 
4,405,147

 
13,717

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
3,236

 
864

 
363

 
5,326

 
9,789

 
461,326

 
471,115

 
145

Automobile
8,254

 
2,171

 
1,173

 
1,621

 
13,219

 
1,356,270

 
1,369,489

 

Other consumer
1,472

 
751

 
546

 

 
2,769

 
888,173

 
890,942

 

Total consumer loans
12,962

 
3,786

 
2,082

 
6,947

 
25,777

 
2,705,769

 
2,731,546

 
145

Total
$
68,343

 
$
13,676

 
$
11,114

 
$
210,585

 
$
303,718

 
$
32,010,893

 
$
32,314,611

 
$
70,669




28




The following table presents past due, non-accrual and current loans by loan portfolio class at December 31, 2019. At December 31, 2019, purchased credit-impaired (PCI) loans were excluded from past due and non-accrual loans reported because they continued to earn interest income from the accretable yield at the pool level. The PCI loan pools are accounted for as PCD loans (on a loan level basis with a related allowance for credit losses) under the CECL standard adopted at January 1, 2020 and reported in the past due loans and non-accrual loans in the tables above at June 30, 2020.
 
Past Due and Non-Accrual Loans
 
 
 
 
 

30-59
Days
Past Due Loans
 
60-89 
Days
Past Due Loans
 
90 Days or More
Past Due Loans
 
Non-Accrual Loans
 

Total Past Due Loans
 

Current Non-PCI Loans
 
PCI Loans
 
(in thousands)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
11,700

 
$
2,227

 
$
3,986

 
$
68,636

 
$
86,549

 
$
4,057,434

 
$
682,014

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
2,560

 
4,026

 
579

 
9,004

 
16,169

 
10,886,724

 
5,093,848

Construction
1,486

 
1,343

 

 
356

 
3,185

 
1,492,532

 
151,301

Total commercial real estate loans
4,046

 
5,369

 
579

 
9,360

 
19,354

 
12,379,256

 
5,245,149

Residential mortgage
17,143

 
4,192

 
2,042

 
12,858

 
36,235

 
3,760,707

 
580,169

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
1,051

 
80

 

 
1,646

 
2,777

 
373,243

 
111,252

Automobile
11,482

 
1,581

 
681

 
334

 
14,078

 
1,437,274

 
271

Other consumer
1,171

 
866

 
30

 
224

 
2,291

 
900,411

 
10,744

Total consumer loans
13,704

 
2,527

 
711

 
2,204

 
19,146

 
2,710,928

 
122,267

Total
$
46,593

 
$
14,315

 
$
7,318

 
$
93,058

 
$
161,284

 
$
22,908,325

 
$
6,629,599



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

29




The following table presents the internal loan classification risk by loan portfolio class by origination year (including PCD loans) based on the most recent analysis performed at June 30, 2020:
 
 
Term Loans
 
 
 
 
 
 
 
 
Amortized Cost Basis by Origination Year
 
 
 
 
 
 
June 30, 2020
 
2020

2019

2018

2017

2016
 
Prior to 2016
 
Revolving Loans Amortized Cost Basis
 
Revolving Loans Converted to Term Loans
 
Total
 
 
(in thousands)
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
2,680,515

 
$
697,134

 
$
644,080

 
$
306,259

 
$
169,439

 
$
422,608

 
$
1,705,273

 
$
466

 
$
6,625,774

Special Mention
 
77

 
9,522

 
1,408

 
10,669

 
11,138

 
15,595

 
45,635

 
88

 
94,132

Substandard
 
5,963

 
7,356

 
1,269

 
2,155

 
3,331

 
13,704

 
13,040

 
57

 
46,875

Doubtful
 

 
1,340

 

 
17,577

 

 
97,769

 
1,222

 

 
117,908

Total commercial and industrial
 
$
2,686,555

 
$
715,352

 
$
646,757

 
$
336,660

 
$
183,908

 
$
549,676

 
$
1,765,170

 
$
611

 
$
6,884,689

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
1,589,407

 
$
3,175,366

 
$
2,480,315

 
$
2,059,141

 
$
1,957,684

 
$
4,775,400

 
$
198,836

 
$
12,031

 
$
16,248,180

Special Mention
 

 
18,913

 
31,799

 
18,620

 
32,853

 
73,609

 
3,496

 

 
179,290

Substandard
 
4,783

 
100

 
10,855

 
18,186

 
5,636

 
102,424

 

 

 
141,984

Doubtful
 

 

 

 
811

 

 
1,612

 

 

 
2,423

Total commercial real estate
 
$
1,594,190

 
$
3,194,379

 
$
2,522,969

 
$
2,096,758

 
$
1,996,173

 
$
4,953,045

 
$
202,332

 
$
12,031

 
$
16,571,877

Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
43,118

 
$
135,181

 
$
160,452

 
$
28,928

 
$
49,000

 
$
99,014

 
$
1,186,010

 
$

 
$
1,701,703

Special Mention
 

 

 

 

 
9,774

 
435

 
6,114

 

 
16,323

Substandard
 

 

 

 

 
2,405

 
921

 

 

 
3,326

Total construction
 
$
43,118

 
$
135,181

 
$
160,452

 
$
28,928

 
$
61,179

 
$
100,370

 
$
1,192,124

 
$

 
$
1,721,352



30




For residential mortgages, automobile, home equity and other consumer loan portfolio classes, Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the amortized cost in those loan classes (including PCD loans) based on payment activity by origination year as of June 30, 2020.
 
 
Term Loans
 
 
 
 
 
 
 
 
Amortized Cost Basis by Origination Year
 
 
 
 
 
 
June 30, 2020
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior to 2016
 
Revolving Loans Amortized Cost Basis
 
Revolving Loans Converted to Term Loans
 
Total
 
 
(in thousands)
Residential mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
 
$
414,014

 
$
827,300

 
$
851,792

 
$
701,366

 
$
426,897

 
$
1,097,287

 
$
73,757

 
$

 
$
4,392,413

90 days or more past due
 

 
1,316

 
2,973

 
3,880

 
4,565

 

 

 

 
12,734

Total residential mortgage
 
$
414,014

 
$
828,616

 
$
854,765

 
$
705,246

 
$
431,462

 
$
1,097,287

 
$
73,757

 
$

 
$
4,405,147

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
 
$
3,816

 
$
12,678

 
$
15,090

 
$
11,387

 
$
6,941

 
$
18,823

 
$
347,142

 
$
53,086

 
$
468,963

90 days or more past due
 

 

 

 

 
25

 
321

 
1,046

 
760

 
2,152

Total home equity
 
3,816

 
12,678

 
15,090

 
11,387

 
6,966

 
19,144

 
348,188

 
53,846

 
471,115

Automobile
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
 
184,095

 
524,849

 
338,665

 
200,947

 
75,553

 
42,550

 

 

 
1,366,659

90 days or more past due
 
49

 
921

 
824

 
620

 
197

 
219

 

 

 
2,830

Total automobile
 
184,144

 
525,770

 
339,489

 
201,567

 
75,750

 
42,769

 

 

 
1,369,489

Other Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
 
910

 
6,286

 
13,232

 
1,306

 
1,723

 
12,179

 
854,340

 
408

 
890,384

90 days or more past due
 

 
15

 

 

 

 
4

 
539

 

 
558

Total other consumer
 
910

 
6,301

 
13,232

 
1,306

 
1,723

 
12,183

 
854,879

 
408

 
890,942

Total Consumer
 
$
188,870

 
$
544,749

 
$
367,811

 
$
214,260

 
$
84,439

 
$
74,096

 
$
1,203,067

 
$
54,254

 
$
2,731,546



The following table presents the credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) based on the most recent analysis performed at December 31, 2019
Credit exposure—
by internally assigned risk rating
 
 
 
Special
 
 
 
 
 
Total Non-PCI
 
Pass
 
Mention
 
Substandard
 
Doubtful
 
Loans
 
 
(in thousands)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,982,453

 
$
33,718

 
$
66,511

 
$
61,301

 
$
4,143,983

Commercial real estate
 
10,781,587

 
77,884

 
42,560

 
862

 
10,902,893

Construction
 
1,487,877

 
7,486

 
354

 

 
1,495,717

Total
 
$
16,251,917

 
$
119,088

 
$
109,425

 
$
62,163

 
$
16,542,593






31




For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which is presented above, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2019:
Credit exposure—
by payment activity
 
Performing
Loans
 
Non-Performing
Loans
 
Total Non-PCI
Loans
 
 
(in thousands)
December 31, 2019
 
 
 
 
 
 
Residential mortgage
 
$
3,784,084

 
$
12,858

 
$
3,796,942

Home equity
 
374,374

 
1,646

 
376,020

Automobile
 
1,451,018

 
334

 
1,451,352

Other consumer
 
902,478

 
224

 
902,702

Total
 
$
6,511,954

 
$
15,062

 
$
6,527,016


The following table summarizes information pertaining to loans that were identified as PCI loans by class based on individual loan payment activity as of December 31, 2019:  
Credit exposure—
by payment activity
 
Performing
Loans
 
Non-Performing
Loans
 
Total Non-PCI
Loans
 
 
(in thousands)
December 31, 2019
 
 
 
 
 
 
Commercial and industrial
 
$
653,997

 
$
28,017

 
$
682,014

Commercial real estate
 
5,065,388

 
28,460

 
5,093,848

Construction
 
148,692

 
2,609

 
151,301

Residential mortgage
 
571,006

 
9,163

 
580,169

Consumer
 
120,356

 
1,911

 
122,267

Total
 
$
6,559,439

 
$
70,160

 
$
6,629,599


Troubled debt restructured loans. From time to time, Valley may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a troubled debt restructured loan (TDR). At the adoption of ASU 2016-13, Valley was not required to reassess whether modifications to individual PCI loans prior to January 1, 2020 met the TDR loan criteria.
The majority of the concessions made for TDRs involve lowering the monthly payments on loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. The concessions rarely result in the forgiveness of principal or accrued interest. In addition, Valley frequently obtains additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms of the loan and Valley’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
Performing TDRs (not reported as non-accrual loans) totaled $53.9 million and $73.0 million as of June 30, 2020 and December 31, 2019, respectively. Non-performing TDRs totaled $85.6 million and $65.1 million as of June 30, 2020 and December 31, 2019, respectively.





32




The following table presents the pre- and post-modification amortized cost of loans by loan class modified as TDRs (excluding PCI loans prior to the adoption of ASU 2016-13) during the three and six months ended June 30, 2020 and 2019. Post-modification amounts are presented as of June 30, 2020 and 2019.
 
 
Three Months Ended June 30,
 
 
2020

2019
Troubled Debt Restructurings
 
Number
of
Contracts
 
Pre-Modification
Amortized Carrying Amount
 
Post-Modification
Amortized Carrying Amount

 
Number
of
Contracts
 
Pre-Modification
Amortized Carrying Amount
 
Post-Modification
Amortized Carrying Amount
 
 
($ in thousands)
Commercial and industrial
 
4

 
$
9,052

 
$
7,047

 
17

 
$
14,663

 
$
14,187

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
1

 
885

 
900

 
1

 
3,067

 
3,067

Construction
 
2

 
435

 
218

 

 

 

Total commercial real estate
 
3

 
1,320

 
1,118

 
1

 
3,067

 
3,067

Residential mortgage
 

 

 

 
1

 
155

 
155

Total
 
7

 
$
10,372

 
$
8,165

 
19

 
$
17,885

 
$
17,409


 
 
Six Months Ended June 30,
 
 
2020
 
2019
Troubled Debt Restructurings
 
Number
of
Contracts
 
Pre-Modification
Amortized Carrying Amount
 
Post-Modification
Amortized Carrying Amount

 
Number
of
Contracts
 
Pre-Modification
Amortized Carrying Amount
 
Post-Modification
Amortized Carrying Amount
 
 
($ in thousands)
Commercial and industrial
 
20

 
$
22,196

 
$
19,674

 
53

 
$
38,216

 
$
37,248

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
2

 
4,748

 
4,762

 
2

 
4,665

 
4,665

Construction
 
2

 
435

 
218

 

 

 

Total commercial real estate
 
4

 
5,183

 
4,980

 
2

 
4,665

 
4,665

Residential mortgage
 

 

 

 
1

 
155

 
155

Total
 
24

 
$
27,379

 
$
24,654

 
56

 
$
43,036

 
$
42,068


The total TDRs presented in the above table had allocated reserves for loan losses of $8.4 million and $11.7 million at June 30, 2020 and 2019, respectively. There were $2.9 million and $3.7 million of partial charge-offs related to TDRs for the three and six months ended June 30, 2020, respectively. There were $1.1 million and $2.0 million of partial charge-offs related to TDRs for the three and six months ended June 30, 2019, respectively. Valley did not extend any commitments to lend additional funds to borrowers whose loans have been modified as TDRs during the three and six months ended June 30, 2020 and 2019.












33




Loans modified as TDRs (excluding PCI loan modifications prior to the adoption of ASU 2016-13) within the previous 12 months and for which there was a payment default (90 or more days past due) for the three and six months ended June 30, 2020 and 2019 were as follows:
 
 
Three Months Ended June 30,
 
 
2020
 
2019
Troubled Debt Restructurings Subsequently Defaulted
 
Number of
Contracts
 
Amortized Cost
 
Number of
Contracts
 
Recorded
Investment
 
 
($ in thousands)
Commercial and industrial
 
20

 
$
14,986

 
18

 
$
12,322

Commercial real estate
 

 

 
1

 
383

Residential mortgage
 
1

 
220

 

 

Consumer
 
2

 
204

 

 

Total
 
23

 
$
15,410

 
19

 
$
12,705


 
 
Six Months Ended June 30,
 
 
2020
 
2019
Troubled Debt Restructurings Subsequently Defaulted
 
Number of
Contracts
 
Amortized Cost
 
Number of
Contracts
 
Recorded
Investment
 
 
($ in thousands)
Commercial and industrial
 
20

 
$
14,986

 
18

 
$
12,322

Commercial real estate
 

 

 
1

 
383

Residential mortgage
 
1

 
220

 
2

 
215

Consumer
 
2

 
204

 
1

 
18

Total
 
23

 
$
15,410

 
22

 
$
12,938



In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that were insignificant, when requested by customers. These modifications complied with the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. As of June 30, 2020, Valley had approximately 7,000 loans totaling approximately $3.1 billion in their contractual deferred payment period in accordance with short-term modification terms. Under the applicable guidance, none of these loans were considered TDRs as of June 30, 2020.
Loans in Process of Foreclosure. Other real estate owned (OREO) totaled $8.3 million and $9.4 million at June 30, 2020 and December 31, 2019, respectively. OREO included foreclosed residential real estate properties totaling $2.5 million and $2.1 million at June 30, 2020 and December 31, 2019, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1.8 million and $2.8 million at June 30, 2020 and December 31, 2019, respectively.

34




Allowance for Credit Losses for Loans
The allowance for credit losses for loans under the new CECL standard adopted on January 1, 2020, consisted of: (1) the allowance for loan losses and (2) the allowance for unfunded credit commitments. Prior periods reflect the allowance for credit losses for loans under the incurred loss model.
The following table summarizes the allowance for credit losses for loans at June 30, 2020 and December 31, 2019
 
June 30,
2020
 
December 31,
2019
 
(in thousands)
Components of allowance for credit losses for loans:
 
 
 
Allowance for loan losses
$
309,614

 
$
161,759

Allowance for unfunded credit commitments
10,109

 
2,845

Total allowance for credit losses for loans
$
319,723

 
$
164,604


The following table summarizes the provision for credit losses for loans for the periods indicated:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Components of provision for credit losses for loans:
 
 
 
 
 
 
 
Provision for loan losses
$
41,025

 
$
3,706

 
$
74,876

 
$
11,562

Provision for unfunded credit commitments
90

 
(1,606
)
 
163

 
(1,462
)
Total provision for credit losses for loans
$
41,115

 
$
2,100

 
$
75,039

 
$
10,100


Allowance for Loan Losses

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

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

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

35




Reserves for loans that that do not share common risk characteristics. Valley measures specific reserves for individual loans that do not share common risk characteristics with other loans, consisting of collateral dependent, TDR, and expected TDR loans, based on the amount of lifetime expected credit losses calculated on those loans and charge-offs of those amounts determined to be uncollectible. Factors considered by Valley in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable.

When Valley determines that foreclosure is probable, collateral dependent loan balances are written down to the estimated current fair value (less estimated selling costs) of each loan’s underlying collateral resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s collection process. Valley elected a practical expedient to use the estimated current fair value (less estimated selling costs) of the collateral to measure expected credit losses on collateral dependent loans when foreclosure is not probable.
The following table presents collateral dependent loans by class as of June 30, 2020:
 
June 30,
2020
 
(in thousands)
Commercial and industrial
$
124,323

Commercial real estate:
 
Commercial real estate
51,386

Construction
2,830

Total commercial real estate loans
54,216

Residential mortgage
15,581

Home equity
276

Total
$
194,396



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

Allowance for Unfunded Credit Commitments

The allowance for unfunded credit commitments generally consists of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit valued using a similar methodology as used for loans. Management's estimate of expected losses inherent in these off-balance sheet credit exposures also incorporates estimated usage factors over the commitment's contractual period or an expected pull-through rate for new loan commitments. The allowance for unfunded credit commitments totaling $10.1 million at June 30, 2020 is included in accrued expenses and other liabilities on the consolidated statements of financial condition.


36




The following table details the activity in the allowance for loan losses by loan portfolio segment for three and six months ended June 30, 2020 and 2019
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Total
 
(in thousands)
Three Months Ended
June 30, 2020
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
127,437

 
$
111,585

 
$
29,456

 
$
14,864

 
$
283,342

Loans charged-off
(14,024
)
 
(27
)
 
(5
)
 
(2,601
)
 
(16,657
)
Charged-off loans recovered
799

 
51

 
545

 
509

 
1,904

Net (charge-offs) recoveries
(13,225
)
 
24

 
540

 
(2,092
)
 
(14,753
)
Provision for loan losses
17,827

 
20,093

 
(366
)
 
3,471

 
41,025

Ending balance
$
132,039

 
$
131,702

 
$
29,630

 
$
16,243

 
$
309,614

Three Months Ended
June 30, 2019
 
 
 
 
 
 
 
 
 
Allowance for losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
94,630

 
$
47,762

 
$
5,139

 
$
6,850

 
$
154,381

Loans charged-off
(3,073
)
 

 

 
(1,752
)
 
(4,825
)
Charged-off loans recovered
1,195

 
22

 
9

 
617

 
1,843

Net (charge-offs) recoveries
(1,878
)
 
22

 
9

 
(1,135
)
 
(2,982
)
Provision for loan losses
1,632

 
1,194

 
71

 
809

 
3,706

Ending balance
$
94,384

 
$
48,978

 
$
5,219

 
$
6,524

 
$
155,105


 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Total
 
(in thousands)
Six Months Ended
June 30, 2020
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
104,059

 
$
45,673

 
$
5,060

 
$
6,967

 
$
161,759

Impact of ASU 2016-13 adoption*
15,169

 
49,797

 
20,575

 
6,990

 
92,531

Loans charged-off
(17,384
)
 
(71
)
 
(341
)
 
(5,166
)
 
(22,962
)
Charged-off loans recovered
1,368

 
144

 
595

 
1,303

 
3,410

Net (charge-offs) recoveries
(16,016
)
 
73

 
254

 
(3,863
)
 
(19,552
)
Provision for loan losses
28,827

 
36,159

 
3,741

 
6,149

 
74,876

Ending balance
$
132,039

 
$
131,702

 
$
29,630

 
$
16,243

 
$
309,614

Six Months Ended
June 30, 2019
 
 
 
 
 
 
 
 
 
Allowance for losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
90,956

 
$
49,650

 
$
5,041

 
$
6,212

 
$
151,859

Loans charged-off
(7,355
)
 

 
(15
)
 
(3,780
)
 
(11,150
)
Charged-off loans recovered
1,678

 
43

 
10

 
1,103

 
2,834

Net (charge-offs) recoveries
(5,677
)
 
43

 
(5
)
 
(2,677
)
 
(8,316
)
Provision for loan losses
9,105

 
(715
)
 
183

 
2,989

 
11,562

Ending balance
$
94,384

 
$
48,978

 
$
5,219

 
$
6,524

 
$
155,105

 
*
Includes a $61.6 million reclassification adjustment representing the estimated expected credit losses for PCD loans.
    

37





The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the allowance measurement methodology at June 30, 2020 and December 31, 2019.
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Total
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for credit losses
$
69,333

 
$
1,237

 
$
430

 
$
498

 
$
71,498

Collectively evaluated for credit losses
62,706

 
130,465

 
29,200

 
15,745

 
238,116

Total
$
132,039

 
$
131,702

 
$
29,630

 
$
16,243

 
$
309,614

Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for credit losses
$
138,120

 
$
77,914

 
$
22,148

 
$
3,096

 
$
241,278

Collectively evaluated for credit losses
6,746,569

 
18,215,315

 
4,382,999

 
2,728,450

 
32,073,333

Total
$
6,884,689

 
$
18,293,229

 
$
4,405,147

 
$
2,731,546

 
$
32,314,611

December 31, 2019
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for credit losses
$
36,662

 
$
1,338

 
$
518

 
$
58

 
$
38,576

Collectively evaluated for credit losses
67,397

 
44,335

 
4,542

 
6,909

 
123,183

Total
$
104,059

 
$
45,673

 
$
5,060

 
$
6,967

 
$
161,759

Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for credit losses
$
100,860

 
$
51,242

 
$
10,689

 
$
853

 
$
163,644

Collectively evaluated for credit losses
4,043,123

 
12,347,368

 
3,786,253

 
2,729,221

 
22,905,965

Loans acquired with discounts related to credit quality
682,014

 
5,245,149

 
580,169

 
122,267

 
6,629,599

Total
$
4,825,997

 
$
17,643,759

 
$
4,377,111

 
$
2,852,341

 
$
29,699,208



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



















38





The following table presents information about impaired loans by loan portfolio class at December 31, 2019:
 
Recorded
Investment
With No
Related
Allowance
 
Recorded
Investment
With
Related
Allowance
 
Total
Recorded
Investment
 
Unpaid
Contractual
Principal
Balance
 
Related
Allowance
 
(in thousands)
December 31, 2019
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
14,617

 
$
86,243

 
$
100,860

 
$
114,875

 
$
36,662

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
26,046

 
24,842

 
50,888

 
51,258

 
1,338

Construction
354

 

 
354

 
354

 

Total commercial real estate loans
26,400

 
24,842

 
51,242

 
51,612

 
1,338

Residential mortgage
5,836

 
4,853

 
10,689

 
11,800

 
518

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity
366

 
487

 
853

 
956

 
58

Total consumer loans
366

 
487

 
853

 
956

 
58

Total
$
47,219

 
$
116,425

 
$
163,644

 
$
179,243

 
$
38,576



Purchased Credit-Impaired Loans

The table below includes disclosure requirements prior to the adoption of ASU No. 2016-13 on January 1, 2020, and presents the changes in the accretable yield for PCI loans during the three and six months ended June 30, 2019:
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
(in thousands)
Balance, beginning of period
$
890,771

 
$
875,958

Accretion
(55,014
)
 
(108,506
)
Net increase in expected cash flows
18,130

 
86,435

Balance, end of period
$
853,887

 
$
853,887


Note 9. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill as allocated to our business segments, or reporting units thereof, for goodwill impairment analysis were:
 
Business Segment / Reporting Unit*
 
Wealth
Management
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Total
 
(in thousands)
Balance at December 31, 2019
$
21,218

 
$
306,572

 
$
825,767

 
$
220,068

 
$
1,373,625

Goodwill from business combinations

 
121

 
1,654

 
9

 
1,784

Balance at June 30, 2020
$
21,218

 
$
306,693

 
$
827,421

 
$
220,077

 
$
1,375,409

 
*
Valley’s Wealth Management Division is comprised of trust, asset management and insurance services. This reporting unit is included in the Consumer Lending segment for financial reporting purposes.

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

39




During the second quarter 2020, Valley performed the annual goodwill impairment test at its normal assessment date. As a result, there was no charge for impairment of goodwill during the three and six months ended June 30, 2020 and 2019.

The following table summarizes other intangible assets as of June 30, 2020 and December 31, 2019: 
 
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Valuation
Allowance
 
Net
Intangible
Assets
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
Loan servicing rights
$
98,127

 
$
(74,624
)
 
$
(825
)
 
$
22,678

Core deposits
101,160

 
(47,118
)
 

 
54,042

Other
3,945

 
(2,744
)
 

 
1,201

Total other intangible assets
$
203,232

 
$
(124,486
)
 
$
(825
)
 
$
77,921

December 31, 2019
 
 
 
 
 
 
 
Loan servicing rights
$
94,827

 
$
(70,095
)
 
$
(47
)
 
$
24,685

Core deposits
101,160

 
(40,384
)
 

 
60,776

Other
3,945

 
(2,634
)
 

 
1,311

Total other intangible assets
$
199,932

 
$
(113,113
)
 
$
(47
)
 
$
86,772



Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets over the period of the economic life of the assets arising from estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. Valley recorded net impairment charges on its loan servicing rights totaling $669 thousand and $778 thousand for the three and six months ended June 30, 2020, respectively. Valley recorded net recoveries of impairment charges on its loan servicing rights totaling $107 thousand and $83 thousand for the three and six months ended June 30, 2019, respectively. See the “Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis” section of Note 6 for additional information regarding the fair valuation.

Core deposits are amortized using an accelerated method and have a weighted average amortization period of 8.9 years. The line item labeled “Other” included in the table above primarily consists of customer lists and covenants not to compete, which are amortized over their expected lives generally using a straight-line method and have a weighted average amortization period of approximately 7.6 years. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three and six months ended June 30, 2020 and 2019.

The following table presents the estimated future amortization expense of other intangible assets for the remainder of 2020 through 2024: 
 
Loan Servicing
Rights
 
Core
Deposits
 
Other
 
(in thousands)
2020
$
5,161

 
$
6,629

 
$
110

2021
4,179

 
11,607

 
206

2022
3,226

 
9,876

 
191

2023
2,483

 
8,146

 
131

2024
1,931

 
6,537

 
117



Valley recognized amortization expense on other intangible assets, including net impairment (or recovery of impairment) charges on loan servicing rights, totaling approximately $6.7 million and $4.2 million for the three

40




months ended June 30, 2020 and 2019, respectively, and $12.2 million and $8.5 million for the six months ended June 30, 2020 and 2019, respectively.
Note 10. Borrowed Funds

Short-Term Borrowings

Short-term borrowings at June 30, 2020 and December 31, 2019 consisted of the following: 
 
June 30,
2020

December 31,
2019
 
(in thousands)
FHLB advances
$
1,235,000

 
$
940,000

Federal funds purchased
678,900

 

Securities sold under agreements to repurchase
168,980

 
153,280

Total short-term borrowings
$
2,082,880

 
$
1,093,280



The contractual weighted average interest rate for short-term borrowings was 0.37 percent and 1.68 percent at June 30, 2020 and December 31, 2019, respectively. Short-term FHLB advances totaling $500 million were hedged with cash flow interest rate swaps during the six months ended June 30, 2020. See Note 12 for additional details.

Long-Term Borrowings

Long-term borrowings at June 30, 2020 and December 31, 2019 consisted of the following: 
 
June 30,
2020
 
December 31,
2019
 
(in thousands)
FHLB advances, net (1)
$
2,153,052

 
$
1,480,012

Subordinated debt, net (2)
404,455

 
292,414

Securities sold under agreements to repurchase
350,000

 
350,000

Other
28

 

Total long-term borrowings
$
2,907,535

 
$
2,122,426

 
(1)
FHLB advances are presented net of unamortized prepayment penalties and other purchase accounting adjustments totaling $1.2 million and $2.8 million at June 30, 2020 and December 31, 2019, respectively.
(2)
Subordinated debt is presented net of unamortized debt issuance costs totaling $2.9 million and $1.2 million at June 30, 2020 and December 31, 2019, respectively.


FHLB advances. Long-term FHLB advances had a weighted average interest rate of 2.13 percent and 2.23 percent at June 30, 2020 and December 31, 2019, respectively. FHLB advances are secured by pledges of certain eligible collateral, including but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans.

41




The long-term FHLB advances at June 30, 2020 are scheduled for contractual balance repayments as follows: 
Year
 
Amount
 
 
(in thousands)
2020
 
$
30,000

2021
 
994,769

2022
 
121,420

2023
 
428,164

2024
 
300,000

Thereafter
 
279,931

Total long-term FHLB advances
 
$
2,154,284



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

Securities sold under agreements to repurchase (repos). The long-term repos had a weighted average interest rate of 2.88 percent and 1.94 percent at June 30, 2020 and December 31, 2019, respectively.

The long-term repos at June 30, 2020 are scheduled for contractual balance repayments as follows:
Year
 
Amount
 
 
(in thousands)
2021
 
$
300,000

2022
 
50,000

Total long-term securities sold under agreements to repurchase
 
$
350,000



Subordinated debt. On June 5, 2020, Valley issued $115.0 million of 5.25 percent Fixed-to-Floating Rate subordinated notes due June 15, 2030. Interest on the subordinated notes during the initial five year term through June 15, 2025 is payable semi-annually on June 15 and December 15. Thereafter, interest is expected to be set based on Three-Month Term SOFR plus 514 basis points and paid quarterly through maturity of the notes. The subordinated notes had a carrying value of $113.1 million at June 30, 2020, net of debt issuance costs.
Valley also had the following subordinated debt outstanding at June 30, 2020:
$100 million of 4.55 percent subordinated notes due July 30, 2025 with no call dates or prepayments allowed unless certain conditions exist;
$125 million of 5.125 percent subordinated notes due September 27, 2023 with no call dates or prepayments allowed, unless certain conditions exist; and
$60 million of 6.25 percent subordinated notes due April 1, 2026 and callable beginning April 1, 2021.
See Note 11 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 for further details.
Note 11. Stock–Based Compensation
Valley currently has one active employee stock plan, the 2016 Long-Term Stock Incentive Plan (the 2016 Stock Plan), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016. The 2016 Stock Plan is administered by the Compensation and Human Resources Committee (the Committee) appointed by Valley's Board of Directors. The Committee can grant awards to officers and key employees of Valley. The primary purpose of the 2016 Stock Plan is to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.

42




Under the 2016 Stock Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors (for acting in their roles as board members). As of June 30, 2020, 2.5 million shares of common stock were available for issuance under the 2016 Stock Plan. The essential features of each award are described in the award agreement relating to that award. The grant, exercise, vesting, settlement or payment of an award may be based upon the fair value of Valley’s common stock on the last sale price reported for Valley’s common stock on such date or the last sale price reported preceding such date, except for performance-based awards with a market condition. The grant date fair values of performance-based awards that vest based on a market condition are determined by a third-party specialist using a Monte Carlo valuation model.
Restricted Stock Units (RSUs). Valley granted 142 thousand and 92 thousand of time-based RSUs during the three months ended June 30, 2020 and 2019, respectively, and 1.2 million and 826 thousand during the six months ended June 30, 2020 and 2019, respectively. Generally, time-based RSUs vest ratably one-third each year over a three-year vesting period. The average grant date fair value of the RSUs granted during the six months ended June 30, 2020 and 2019 was $10.48 per share and $10.40 per share, respectively.
Valley granted 589 thousand and 532 thousand of performance-based RSUs to certain executive officers for the six months ended June 30, 2020 and 2019, respectively. The performance-based RSU awards include RSUs with vesting conditions based upon certain levels of growth in Valley's tangible book value per share plus dividends and RSUs with vesting conditions based upon Valley's total shareholder return as compared to our peer group. The RSUs “cliff” vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents are accumulated and paid to the grantee at the vesting date or forfeited if the performance conditions are not met. The grant date fair value of the RSUs granted during the six months ended June 30, 2020 and 2019 was $10.82 per share and $10.43 per share, respectively.

Valley recorded total stock-based compensation expense of $4.2 million for both the three months ended June 30, 2020 and 2019, and $8.2 million and $8.3 million for the six months ended June 30, 2020 and 2019, respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of June 30, 2020, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $25.4 million and will be recognized over an average remaining vesting period of 2.0 years.
Note 12. Derivative Instruments and Hedging Activities

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

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

During the six months ended June 30, 2020, Valley entered into new interest rate swap agreements designated as cash flow hedges with a total notional amount of $900 million. The swaps are intended to hedge the changes in cash flows associated with certain FHLB advances and brokered deposits. Valley is required to pay fixed-rates of interest ranging from 0.46 percent to 0.67 percent and receives variable rates of interest that reset quarterly based on three-month LIBOR. Expiration dates for the swaps range from April 2021 to March 2022.

Fair Value Hedges of Fixed Rate Assets and Liabilities. Valley is exposed to changes in the fair value of certain of its fixed rate assets or liabilities due to changes in benchmark interest rates based on one-month LIBOR. From time to time, Valley has used interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional

43




amount. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Valley includes the gain or loss on the hedged items in the same income statement line item as the loss or gain on the related derivatives.

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

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

Valley sometimes enters into risk participation agreements with external lenders where the banks are sharing their risk of default on the interest rate swaps on participated loans. Valley either pays or receives a fee depending on the participation type. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. At June 30, 2020, Valley had 22 credit swaps with an aggregate notional amount of $166.4 million related to risk participation agreements. 

At June 30, 2020, Valley had two “steepener” swaps, each with a current notional amount of $10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the rates paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in the three-month LIBOR rate and therefore provide an effective economic hedge.

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

44




Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows: 
 
June 30, 2020
 
December 31, 2019
 
Fair Value
 
 
 
Fair Value
 
 
 
Other Assets
 
Other Liabilities
 
Notional Amount
 
Other Assets
 
Other Liabilities
 
Notional Amount
 
(in thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedge interest rate swaps
$

 
$
4,722

 
$
1,030,000

 
$

 
$
1,484

 
$
180,000

Fair value hedge interest rate swaps

 
147

 
7,147

 

 
229

 
7,281

Total derivatives designated as hedging instruments
$

 
$
4,869

 
$
1,037,147

 
$

 
$
1,713

 
$
187,281

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and embedded derivatives
$
467,606

 
$
161,997

 
$
7,293,947

 
$
158,382

 
$
42,020

 
$
4,113,106

Mortgage banking derivatives
669

 
3,407

 
558,379

 
150

 
193

 
142,760

Total derivatives not designated as hedging instruments
$
468,275

 
$
165,404

 
$
7,852,326

 
$
158,532

 
$
42,213

 
$
4,255,866


The Chicago Mercantile Exchange and London Clearing House variation margins are classified as a single-unit of account with the fair value of certain cash flow and non-designated derivative instruments. As a result, the fair value of the designated cash flow interest rate swaps assets and designated and non-designated interest rate swaps liabilities were offset by variation margins posted by (with) the applicable counterparties and reported in the table above on a net basis at June 30, 2020 and December 31, 2019.
Gains (losses) included in the consolidated statements of income and other comprehensive income, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Amount of gain (loss) reclassified from accumulated other comprehensive loss to interest expense
$
438

 
$
(383
)
 
$
(177
)
 
$
(673
)
Amount of loss recognized in other comprehensive income
(1,773
)
 
(962
)
 
(3,253
)
 
(1,512
)

The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $5.9 million and $3.7 million at June 30, 2020 and December 31, 2019, respectively.
Amounts reported in accumulated other comprehensive loss related to cash flow interest rate derivatives are reclassified to interest expense as interest payments are made on the hedged variable interest rate liabilities. Valley estimates that $4.5 million will be reclassified as an increase to interest expense over the next 12 months.






45





Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Derivative - interest rate swaps:
 
 
 
 
 
 
 
Interest income
$
71

 
$
49

 
$
82

 
$
73

Hedged item - loans:
 
 
 
 
 
 
 
Interest income
$
(71
)
 
$
(49
)
 
$
(82
)
 
$
(73
)

The following table presents the hedged items related to interest rate derivatives designated as hedges of fair value and the cumulative basis fair value adjustment included in the net carrying amount of the hedged items at June 30, 2020 and December 31, 2019.
Line Item in the Statement of Financial Condition in Which the Hedged Item is Included
 
Carrying Amount of the Hedged Asset
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
 
 
June 30, 2020
 
December 31, 2019
 
June 30, 2020
 
December 31, 2019
 
 
(in thousands)
Loans
 
$
7,294

 
$
7,510

 
$
147

 
$
229



The net losses (gains) included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows: 

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Non-designated hedge interest rate swaps and credit derivatives
 
 
 
 
 
 
 
Other non-interest expense
$
1,416

 
$
(347
)
 
$
1,505

 
$
(757
)


Other non-interest income included fee income related to non-designated hedge derivative interest rate swaps (not designated as hedging instruments) executed with commercial loan customers totaling $14.7 million and $5.4 million for the three months ended June 30, 2020 and 2019, respectively, and $28.9 million and $9.5 million for the six months ended June 30, 2020 and 2019, respectively.

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

Valley has agreements with its derivative counterparties providing that if Valley defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Valley could also be declared in default on its derivative counterparty agreements. Additionally, Valley has an agreement with several of its derivative counterparties that contains provisions that require Valley’s debt to maintain an investment grade credit rating from each of the major credit rating agencies from which it receives a credit rating. If Valley’s

46




credit rating is reduced below investment grade, or such rating is withdrawn or suspended, then the counterparty could terminate the derivative positions and Valley would be required to settle its obligations under the agreements. As of June 30, 2020, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of June 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $176.7 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties.
Note 13. Balance Sheet Offsetting
Certain financial instruments, including interest rate swap derivatives and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds (i.e., the threshold for posting collateral is reduced to zero, subject to certain minimum transfer amounts). Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default.
The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of June 30, 2020 and December 31, 2019.
 
 
 
 
 
 
 
Gross Amounts Not Offset
 
 
 
Gross Amounts
Recognized
 
Gross Amounts
Offset
 
Net Amounts
Presented
 
Financial
Instruments
 
Cash
Collateral
 
Net
Amount
 
(in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
467,606

 
$

 
$
467,606

 
$

 
$

 
$
467,606

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
166,866

 
$

 
$
166,866

 
$

 
$
(166,866
)
 
$

Repurchase agreements
350,000

 

 
350,000

 
(350,000
)
*

 

Total
$
516,866

 
$

 
$
516,866

 
$
(350,000
)
 
$
(166,866
)
 
$

December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
158,382

 
$

 
$
158,382

 
$
(118
)
 
$

 
$
158,264

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
43,733

 
$

 
$
43,733

 
$
(118
)
 
$
(16,881
)
 
$
26,734

Repurchase agreements
350,000

 

 
350,000

 
(350,000
)
*

* 

Total
$
393,733

 
$

 
$
393,733

 
$
(350,118
)
 
$
(16,881
)
 
$
26,734

 
*
Represents the fair value of non-cash pledged investment securities.
Note 14. Tax Credit Investments

Valley’s tax credit investments are primarily related to investments promoting qualified affordable housing projects, and other investments related to community development and renewable energy sources. Some of these tax-advantaged investments support Valley’s regulatory compliance with the Community Reinvestment Act (CRA). Valley’s investments in these entities generate a return primarily through the realization of federal income tax

47




credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction of income tax expense.

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

The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at June 30, 2020 and December 31, 2019:
 
June 30,
2020
 
December 31,
2019
 
(in thousands)
Other Assets:
 
 
 
Affordable housing tax credit investments, net
$
22,874

 
$
25,049

Other tax credit investments, net
51,569

 
59,081

Total tax credit investments, net
$
74,443

 
$
84,130

Other Liabilities:
 
 
 
Unfunded affordable housing tax credit commitments
$
1,402

 
$
1,539

Unfunded other tax credit commitments
1,139

 
1,139

    Total unfunded tax credit commitments
$
2,541

 
$
2,678



The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the three and six months ended June 30, 2020 and 2019
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Components of Income Tax Expense:
 
 
 
 
 
 
 
Affordable housing tax credits and other tax benefits
$
1,393

 
$
1,708

 
$
2,627

 
$
3,421

Other tax credit investment credits and tax benefits
2,540

 
2,158

 
3,840

 
4,961

Total reduction in income tax expense
$
3,933

 
$
3,866

 
$
6,467

 
$
8,382

Amortization of Tax Credit Investments:
 
 
 
 
 
 
 
Affordable housing tax credit investment losses
$
537

 
$
593

 
$
1,091

 
$
1,266

Affordable housing tax credit investment impairment losses
665

 
794

 
1,083

 
1,524

Other tax credit investment losses
679

 
2,509

 
1,223

 
3,496

Other tax credit investment impairment losses
1,535

 
967

 
3,247

 
5,750

Total amortization of tax credit investments recorded in non-interest expense
$
3,416

 
$
4,863

 
$
6,644

 
$
12,036




48




Note 15. Business Segments

Valley has four business segments that it monitors and reports on to manage Valley’s business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Valley’s reportable segments have been determined based upon its internal structure of operations and lines of business. Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Expenses related to the branch network, all other components of retail banking, along with the back office departments of our subsidiary bank are allocated from the corporate and other adjustments segment to each of the other three business segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a transfer pricing methodology, which involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities outstanding for the period. The financial reporting for each segment contains allocations and reporting in line with Valley’s operations, which may not necessarily be comparable to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data.
 
The following tables represent the financial data for Valley’s four business segments for the three and six months ended June 30, 2020 and 2019:
 
Three Months Ended June 30, 2020
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
7,214,368

 
$
24,826,832

 
$
5,737,187

 
$

 
$
37,778,387

 
 
 
 
 
 
 
 
 
 
Interest income
$
66,807

 
$
255,152

 
$
27,623

 
$
(1,057
)
 
$
348,525

Interest expense
11,469

 
40,640

 
9,728

 
4,129

 
65,966

Net interest income (loss)
55,338

 
214,512

 
17,895

 
(5,186
)
 
282,559

Provision for credit losses
3,106

 
38,009

 
41

 

 
41,156

Net interest income (loss) after provision for credit losses
52,232

 
176,503

 
17,854

 
(5,186
)
 
241,403

Non-interest income
17,175

 
16,172

 
5,823

 
5,660

 
44,830

Non-interest expense
20,440

 
23,250

 
642

 
112,834

 
157,166

Internal expense transfer
19,406

 
66,858

 
15,505

 
(101,769
)
 

Income (loss) before income taxes
$
29,561

 
$
102,567

 
$
7,530

 
$
(10,591
)
 
$
129,067

Return on average interest earning assets (pre-tax)
1.64
%
 
1.65
%
 
0.52
%
 
N/A

 
1.37
%


49




 
Three Months Ended June 30, 2019
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
6,756,322

 
$
18,796,093

 
$
4,324,969

 
$

 
$
29,877,384

 
 
 
 
 
 
 
 
 
 
Interest income
$
67,617

 
$
229,366

 
$
31,966

 
$
(1,207
)
 
$
327,742

Interest expense
23,428

 
65,141

 
14,994

 
3,945

 
107,508

Net interest income (loss)
44,189

 
164,225

 
16,972

 
(5,152
)
 
220,234

Provision for credit losses
885

 
1,215

 

 

 
2,100

Net interest income (loss) after provision for credit losses
43,304

 
163,010

 
16,972

 
(5,152
)
 
218,134

Non-interest income
13,037

 
7,688

 
2,560

 
4,318

 
27,603

Non-interest expense
18,392

 
26,324

 
216

 
96,805

 
141,737

Internal expense transfer
19,291

 
53,722

 
12,399

 
(85,412
)
 

Income (loss) before income taxes
$
18,658

 
$
90,652

 
$
6,917

 
$
(12,227
)
 
$
104,000

Return on average interest earning assets (pre-tax)
1.10
%
 
1.93
%
 
0.64
%
 
N/A

 
1.39
%

 
Six Months Ended June 30, 2020
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
7,215,756

 
$
23,804,558

 
$
5,205,918

 
$

 
$
36,226,232

 
 
 
 
 
 
 
 
 
 
Interest income
$
135,062

 
$
520,027

 
$
59,392

 
$
(2,163
)
 
$
712,318

Interest expense
31,169

 
102,826

 
22,488

 
7,937

 
164,420

Net interest income (loss)
103,893

 
417,201

 
36,904

 
(10,100
)
 
547,898

Provision for credit losses
9,891

 
65,148

 
800

 

 
75,839

Net interest income (loss) after provision for credit losses
94,002

 
352,053

 
36,104

 
(10,100
)
 
472,059

Non-interest income
31,852

 
31,771

 
8,965

 
13,639

 
86,227

Non-interest expense
40,311

 
47,408

 
1,029

 
224,074

 
312,822

Internal expense transfer
39,741

 
131,054

 
28,680

 
(199,475
)
 

Income (loss) before income taxes
$
45,802

 
$
205,362

 
$
15,360

 
$
(21,060
)
 
$
245,464

Return on average interest earning assets (pre-tax)
1.27
%
 
1.73
%
 
0.59
%
 
N/A

 
1.36
%


50




 
Six Months Ended June 30, 2019
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
6,788,511

 
$
18,615,885

 
$
4,316,619

 
$

 
$
29,721,015

 
 
 
 
 
 
 
 
 
 
Interest income
$
135,644

 
$
449,650

 
$
65,190

 
$
(2,518
)
 
$
647,966

Interest expense
45,952

 
126,012

 
29,220

 
7,900

 
209,084

Net interest income (loss)
89,692

 
323,638

 
35,970

 
(10,418
)
 
438,882

Provision for credit losses
2,983

 
7,117

 

 

 
10,100

Net interest income (loss) after provision for credit losses
86,709

 
316,521

 
35,970

 
(10,418
)
 
428,782

Non-interest income
26,819

 
14,470

 
4,678

 
89,309

 
135,276

Non-interest expense
37,097

 
51,568

 
303

 
200,564

 
289,532

Internal expense transfer
38,718

 
106,259

 
24,686

 
(169,663
)
 

Income (loss) before income taxes
$
37,713

 
$
173,164

 
$
15,659

 
$
47,990

 
$
274,526

Return on average interest earning assets (pre-tax)
1.11
%
 
1.86
%
 
0.73
%
 
N/A

 
1.85
%

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

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

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

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

the impact of COVID-19 on the U.S. and the global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients;

51




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

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

52




Critical Accounting Policies and Estimates

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

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

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

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

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

As discussed further in the "Allowance for Credit Losses" section in this MD&A, we incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at June 30, 2020. As a result of the deterioration in economic conditions caused by the COVID-19 pandemic during the first half of 2020 and the related increase in economic uncertainty, we increased our probability weighting for the most severe economic scenario as compared to those at January 1, 2020. As a result, over 40 percent of the provision of credit losses for loans totaling $75.0 million for the six months ended June 30, 2020 reflected the impact of the adverse economic forecast within Valley's lifetime expected credit loss estimate.

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

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





53




Executive Summary

Company Overview. At June 30, 2020, Valley had consolidated total assets of approximately $41.7 billion, total net loans of $32.0 billion, total deposits of $31.4 billion and total shareholders’ equity of $4.5 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and Alabama. Of our current 236 branch network, 59 percent, 16 percent, 18 percent and 7 percent of the branches are in New Jersey, New York, Florida and Alabama, respectively. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions, including our acquisition of Oritani Financial Corp. (Oritani) on December 1, 2019. See Note 2 to the consolidated financial statements for more information regarding the Oritani acquisition.

Impact of COVID-19. The widespread outbreak of the novel Coronavirus Disease 2019 (COVID-19) has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity, including in the markets that we serve. Our markets within Florida and Alabama have experienced a recent increase in COVID-19 infection rates and such negative trends could hamper reopening and economic recovery in these markets. Uncertainties and disruptions from COVID-19 have slowed our traditional new commercial loan volumes and many consumer loan products, such as automobile loans during the second quarter 2020. Any sustained economic downturn or other long-term changes in consumer and business behaviors from COVID-19 may also adversely impact the value of assets that serve as collateral for our loans.

The $659 billion Paycheck Protection Program (PPP) provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as supplemented by the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act), was designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee 8 to 24 weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. Valley National Bank is a certified Small Business Administration (SBA) lender and during the second quarter of 2020 dedicated significant staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the program, obtain SBA approval and receive funding as quickly as possible. To date, Valley has facilitated over 12,800 SBA-approved PPP loans and had over $2.2 billion of these loans outstanding as of June 30, 2020. We expect the majority of these loans to be forgiven in accordance with rules, application and documentation requirements for this program, some of which have only recently been released. The loan forgiveness rules may be subject to further revisions and additional SBA guidance in the coming months.
 
During the latter part of second quarter 2020, we have taken steps to reopen most branches in New Jersey and New York that had been either temporarily closed or had reduced lobby services due to COVID-19, while acting with an abundance of caution in order to safeguard the health and wellness of our customers and employees. We will continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant, which may necessitate resumption of certain branch or other office closures and reduced lobby services. Our business continuity plan continues to remain in effect and a significant portion of our non-customer facing employees continue to work remotely as we work through our return to work plans and monitor the level of the health crisis in our primary markets.

In response to the COVID-19 pandemic and its economic impact on certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. To date, Valley has granted over 10,000 loan forbearances totaling approximately $4.6 billion in support of our customers. Of these, approximately 5,000 loans totaling $1.9 billion have completed the contractual deferral period and returned to regularly scheduled payments.


54




Significant uncertainties as to future economic conditions exist, and we have taken purposeful actions in response, including continued heightened levels of balance sheet liquidity during the second quarter 2020. Additionally, the economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to an increased provision for credit losses for the first half of 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act, Enhancement Act and other government stimulus or Federal Reserve actions. However, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain. See the "Operating Environment" section and our risk factors under Part II Item 1A below for more details.

Branch Transformation. As previously disclosed, Valley has embarked on a strategy to overhaul its retail network. Over one year ago, we established the foundation of what the transformation of our branch network would look like in coming years. At that time, we identified 74 branches that did not meet certain internal performance measures, including 20 branches that were closed and consolidated by the end of the first quarter 2019. For the remaining 54 branches, we implemented tailored action plans focused on improving profitability and deposit levels, as well as upgrades in staffing and training, within a defined timeline. During the first quarter 2020, we permanently closed an additional 9 branches located in New Jersey, including the consolidation of 6 acquired Oritani branches into nearby legacy Valley branches. We currently expect to permanently close 10 branches during the remainder of 2020. For the remaining branch network, we continue to monitor the operating performance of each branch and implement tailored action plans focused on improving profitability and deposit levels for those branches that underperform. At this time, we plan to reopen branches temporarily closed due to the impact of the COVID-19 pandemic, although the timing of reopening these branches is uncertain.
Quarterly Results. Net income for the second quarter 2020 was $95.6 million, or $0.23 per diluted common share, compared to $76.5 million, or $0.22 per diluted common share, for the second quarter 2019. The $19.1 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a $62.3 million increase in net interest income driven by organic and Oritani acquired loan growth over the last 12 months combined with our ability to significantly reduce our deposit and other funding costs in the current low interest rate environment, (ii) a $17.2 million increase in non-interest income mainly caused by strong commercial loan customer swap fees, higher BOLI income and additional gains on the sales of residential mortgage loans, partially offset by (iii) a $39.1 million increase in our provision for credit losses for loans due to the adoption of CECL and the impact of the COVID-19 pandemic on the model results, (iv) a $15.4 million increase in non-interest expense due to our expanded franchise following the Oritani acquisition, higher technology consulting and certain additional expenses due to COVID-19, and (v) a $5.9 million increase in income tax expense. See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the items above impacting our second quarter 2020 results, as well as other items discussed elsewhere in this MD&A, for more details on the impact of the items above on our second quarter 2020 results.

Operating Environment. During the second quarter 2020, real gross domestic product declined 32.9 percent. COVID-19 and the measures taken to mitigate the health crisis have caused households and businesses to sharply reduce consumption and investment. As a result, job losses have increased sharply while prices for goods and services have fallen. The unemployment rate was 11.1 percent in June 2020 compared to 4.4 percent in March of this year. The ongoing public health crisis will weigh heavily on economic activity, employment and inflation. To support the flow of credit, the Federal Reserve reduced the target range for the federal funds rate earlier this year. In addition, the Federal Reserve began purchasing Treasury securities and agency residential and commercial mortgage-backed securities. Currently, the target range for the federal funds rate is between zero and 0.25 percent. The 10-year U.S. Treasury note yield ended the second quarter at 0.66 percent, 134 basis points lower compared with June 30, 2019.

The current economic environment has weakened traditional commercial loan demand, while residential mortgage loan volumes for both purchased and refinanced activity are relatively solid in the early stages of the third quarter 2020. The low market interest rates for new loans will continue to put pressure on our overall loan yields and net interest margin. In parts of the Bank’s footprint, particularly Florida, the number have COVID-19 cases have

55




recently increased, which may hinder attempts to resume normal business activity in those regions. More broadly, the ongoing health crisis has caused household and business confidence to remain subdued which is likely to weigh on Valley’s financial results, as highlighted in the remaining MD&A discussion below.
Loans. Loans increased $1.9 billion to approximately $32.3 billion at June 30, 2020 from March 31, 2020 largely due to approximately $2.2 billion of SBA PPP loan originations within the commercial and industrial loan category during the second quarter 2020. Commercial real estate loans increased $181.6 million, or 4.4 percent on an annualized basis, to $16.6 billion at June 30, 2020 as compared to March 31, 2020 mainly due to our strong loan commitment pipeline at March 31, 2020 and slower repayment activity in the second quarter. Residential mortgage and the consumer loan categories all experienced moderate declines in the second quarter due to the impact of COVID-19 and our normal mortgage banking sales activity. During the second quarter 2020, we originated $296 million of residential mortgage loans for sale rather than held for investment and sold approximately $237 million of these loans. Residential mortgage loans held for sale at fair value totaled $120.6 million and $58.9 million at June 30, 2020 and March 31, 2020, respectively. See further details on our loan activities under the “Loan Portfolio” section below.
Asset Quality. Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $3.7 million to $224.2 million at June 30, 2020 as compared to March 31, 2020. Non-accrual loans increased $4.7 million to $210.6 million at June 30, 2020 as compared to March 31, 2020 partially due to one commercial real estate loan which moved to non-accrual status during the second quarter 2020, as well as a moderately higher level of non-accrual consumer loans at June 30, 2020. Non-accrual loans represented 0.65 percent of total loans at June 30, 2020, as compared to 0.68 percent at March 31, 2020.
Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $66.3 million to $93.1 million, or 0.29 percent of total loans, at June 30, 2020 as compared to $159.4 million, or 0.52 percent of total loans, at March 31, 2020 due to a decline in early stage delinquencies for all loan categories. Commercial real estate loans past due 30 to 59 days and 60 to 89 days decreased by $27.8 million and $14.4 million, respectively, as compared to March 31, 2020. The improved performance within the 30 to 59 day category was mainly due to restored customer payments delayed by business disruptions caused by COVID-19 related factors at the end of the first quarter 2020. Commercial real estate loans past due 60 to 90 days at June 30, 2020 declined primarily due to the normal renewal of a $13.8 million performing matured loan reported in this category at March 31, 2020. See further details in the "Non-performing Assets" section below.
Deposits and Other Borrowings. Average non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 27 percent, 45 percent and 28 percent of total deposits as of June 30, 2020, respectively. Overall, average deposits increased by $2.0 billion to $30.8 billion for the second quarter 2020 as compared to the first quarter 2020. Our mix of the deposit categories of total average deposits for the second quarter 2020 as compared to the first quarter 2020 experienced a shift to non-interest bearing deposits largely due to new deposits resulting from the funding of customer PPP loans, as well as a continued migration of maturing retail CD customers into more flexible and lower-cost transaction account types.
Actual ending balances for deposits increased $2.4 billion to approximately $31.4 billion at June 30, 2020 from March 31, 2020 largely due to increases of $2.0 billion and $666.6 million in non-interest bearing deposits and interest-bearing deposits without stated maturities, respectively. The increases were mostly driven by the aforementioned deposits from PPP loan customers, higher depositor balances due to the uncertain financial markets, as well as a partial shift to more liquid account types for maturing retail CD customers. As a result, time deposits decreased $294.3 million at June 30, 2020 as compared to March 31, 2020. Total brokered deposits (consisting of both time and money market deposit accounts) were $3.6 billion at June 30, 2020 as compared to $3.4 billion at March 31, 2020. While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at June 30, 2020. Additionally, the vast majority of the PPP loan customers that are Valley depositors are expected to use the funds for qualifying payroll and other costs over an 8 to 24 week period to obtain loan

56




forgiveness. The resulting outflow of funds for such expenditures may contribute to lower levels of deposit balances in the second half of 2020.
Average short-term borrowings increased $1.0 billion to $2.3 billion for the second quarter 2020 as compared to the first quarter 2020 driven by our prudent steps to increase our liquidity levels starting in the end of the first quarter 2020 in the face of the escalating economic crisis created by the COVID-19 pandemic. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased by $111.0 million to $2.9 billion for the second quarter 2020 as compared to the first quarter 2020 mostly due to $100 million of new long-term FHLB advances executed in March 2020 as part of our overall liquidity strategy.
Actual ending balances for short-term borrowings moderately decreased by $12.8 million to $2.1 billion at June 30, 2020 as compared to March 31, 2020. Long-term borrowings increased $101.9 million to $2.9 billion at June 30, 2020 as compared to March 31, 2020 mainly due to our $115.0 million issuance of 5.25 percent fixed-to-floating rate subordinated notes on June 5, 2020.
Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020

2019
Return on average assets
0.92
%
 
0.94
%
 
0.92
%
 
1.17
%
Return on average assets, as adjusted
0.92

 
0.96

 
0.93

 
0.95

 
 
 
 
 
 
 
 
Return on average shareholders’ equity
8.54

 
8.79

 
8.23

 
11.04

Return on average shareholders’ equity, as adjusted
8.57

 
9.05

 
8.29

 
8.94

 
 
 
 
 
 
 
 
Return on average tangible shareholders’ equity (ROATE)
12.66

 
13.16

 
12.26

 
16.65

ROATE, as adjusted
12.70

 
13.56

 
12.34

 
13.49


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


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Adjusted net income is computed as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Net income, as reported
$
95,601

 
$
76,468

 
$
182,869

 
$
189,798

Add: Net impairment losses on securities (net of tax)

 
2,078

 

 
2,078

Add: Losses (gains) on securities transactions (net of tax)
29

 
(8
)
 
58

 
15

Add: Severance expense (net of tax) (1)

 

 

 
3,433

Add: Tax credit investment impairment (net of tax) (2)

 

 

 
1,757

Add: Merger related expenses (net of tax) (3)
263

 
25

 
1,199

 
25

Add: Income tax expense (4)

 
223

 

 
12,323

Less: Gain on sale-leaseback transaction (net of tax) (5)

 

 

 
(55,707
)
Net income, as adjusted
$
95,893

 
$
78,786

 
$
184,126

 
$
153,722

 
(1)    Severance expense is included in salary and employee benefits expense.
(2)    Impairment is included in the amortization of tax credit investments.
(3) 
Merger related expenses are primarily within salary and employee benefits expense, professional and legal fees, and other non-interest expenses.
(4) 
Income tax expense related to reserves for uncertain tax positions.
(5) 
The gain on sale leaseback transactions is included in net gains on the sales of assets within other non-interest income.

Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020

2019
 
2020
 
2019
 
($ in thousands)
Net income, as adjusted
$
95,893

 
$
78,786

 
$
184,126

 
$
153,722

Average assets
$
41,503,514

 
$
32,707,144

 
$
39,800,441

 
$
32,502,744

Annualized return on average assets, as adjusted
0.92
%
 
0.96
%
 
0.93
%
 
0.95
%

Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
($ in thousands)
Net income, as adjusted
$
95,893

 
$
78,786

 
$
184,126

 
$
153,722

Average shareholders' equity
$
4,477,446

 
$
3,481,519

 
$
4,443,016

 
$
3,438,344

Annualized return on average shareholders' equity, as adjusted
8.57
%
 
9.05
%
 
8.29
%
 
8.94
%


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ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
($ in thousands)
Net income
$
95,601

 
$
76,468

 
$
182,869

 
$
189,798

Net income, as adjusted
$
95,893

 
$
78,786

 
$
184,126

 
$
153,722

Average shareholders’ equity
$
4,477,446

 
$
3,481,519

 
$
4,443,016

 
$
3,438,344

Less: Average goodwill and other intangible assets
1,456,781

 
1,156,703

 
1,458,885

 
1,158,596

Average tangible shareholders’ equity
$
3,020,665

 
$
2,324,816

 
$
2,984,131

 
$
2,279,748

Annualized ROATE
12.66
%
 
13.16
%
 
12.26
%
 
16.65
%
Annualized ROATE, as adjusted
12.70
%
 
13.56
%
 
12.34
%
 
13.49
%

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

59




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 $283.5 million for the second quarter 2020 increased $62.1 million as compared to the second quarter 2019 and increased $17.2 million as compared to the first quarter 2020. The increase as compared to the first quarter 2020 was largely driven by our ability to significantly reduce our deposit and other funding costs in the current low interest rate environment and a $2.0 billion increase in average loan balances largely resulting from PPP loan originations. Interest expense of $66.0 million for the second quarter 2020 decreased $32.5 million as compared to the first quarter 2020 largely due to the overall lower cost of funds, partially offset by the interest cost associated with higher average interest-bearing deposits without stated maturities and other borrowings. However, interest income on a tax equivalent basis decreased $15.3 million to $349.5 million for the second quarter 2020 as compared to the first quarter 2020. The decrease was mainly due to overall lower loan yields caused, in part, by normal repayments of higher yielding loans, variable rate loan resets and a $3.1 million decline in loan discount accretion in second quarter 2020 due to lower prepayments for certain loans.

Average interest earning assets increased $7.9 billion to $37.8 billion for the second quarter 2020 as compared to the second quarter 2019 primarily due to $3.8 billion of interest earning assets acquired from Oritani and organic loan growth over the 12-month period, including $2.2 billion of PPP loans originated in the second quarter 2020. As compared to the first quarter 2020, average interest earning assets increased by $3.1 billion from $34.7 billion largely due to the PPP loan originations and higher overnight funds resulting from our increased liquidity levels in response to the COVID-19 pandemic.

Average interest bearing liabilities increased $5.3 billion to $27.6 billion for the second quarter 2020 as compared to the second quarter 2019 mainly due to deposits and borrowings totaling a combined $3.4 billion assumed in the Oritani acquisition, organic growth of retail deposits and additional long-term borrowings caused by the funding of loan growth and our increased liquidity in response to COVID-19. As compared to the first quarter 2020, average interest bearing liabilities increased by $1.4 billion in the second quarter 2020 primarily due to increased levels of short-term borrowings and growth in deposits driven by PPP loan customers and organic growth from higher depositor balances partly caused by the uncertain financial markets. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.

Our net interest margin on a tax equivalent basis of 3.00 percent for the second quarter 2020 increased by 4 basis points from 2.96 percent in second quarter 2019 and decreased by 7 basis points from 3.07 percent for the first quarter 2020. The yield on average interest earning assets decreased by 51 basis points on a linked quarter basis mostly due to the impact of the lower interest rate environment. The yield on average loans decreased by 42 basis points to 4.02 percent for the second quarter 2020 as compared to the first quarter 2020 largely due to the repayment of higher yielding loans, lower yielding variable and new loans, including the origination of $2.2 billion of PPP loans in second quarter 2020, and an increase in excess liquidity held in low yield overnight investments. The overall cost of average interest bearing liabilities decreased 54 basis points to 0.96 percent for the second quarter 2020 as compared to the linked first quarter 2020 due to the significantly lower interest rates paid on deposits and borrowings. During the first half of 2020, we also benefited from the prepayment of $635 million high cost FHLB advances in December 2019. Our cost of total average deposits was 0.60 percent for the second quarter 2020 as compared to 1.07 percent for the first quarter 2020.


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The following table reflects the components of net interest income for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
 
Three Months Ended
 
June 30, 2020

March 31, 2020
 
June 30, 2019
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
($ in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)
$
32,041,200

 
$
321,883

 
4.02
%
 
$
29,999,428

 
$
333,068

 
4.44
%
 
$
25,552,415

 
$
296,934

 
4.65
%
Taxable investments (3)
3,673,090

 
22,539

 
2.45

 
3,557,913

 
25,334

 
2.85

 
3,453,676

 
25,284

 
2.93

Tax-exempt investments (1)(3)
562,172

 
4,673

 
3.32

 
585,987

 
4,970

 
3.39

 
658,727

 
5,514

 
3.35

Interest bearing deposits with banks
1,501,925

 
411

 
0.11

 
530,747

 
1,465

 
1.10

 
212,566

 
1,168

 
2.20

Total interest earning assets
37,778,387

 
349,506

 
3.70

 
34,674,075

 
364,837

 
4.21

 
29,877,384

 
328,900

 
4.40

Allowance for loan losses
(284,184
)
 
 
 
 
 
(256,675
)
 
 
 
 
 
(156,747
)
 
 
 
 
Cash and due from banks
424,625

 

 
 
 
293,276

 
 
 
 
 
265,015

 

 
 
Other assets
3,540,513

 
 
 
 
 
3,378,372

 
 
 
 
 
2,744,661

 
 
 
 
Unrealized gains (losses) on securities available for sale, net
44,173

 
 
 
 
 
8,316

 
 
 
 
 
(23,169
)
 
 
 
 
Total assets
$
41,503,514

 
 
 
 
 
$
38,097,364

 
 
 
 
 
$
32,707,144

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW and money market deposits
$
13,788,951

 
$
16,627

 
0.48
%
 
$
13,219,896

 
$
34,513

 
1.04
%
 
$
11,293,885

 
$
38,020

 
1.35
%
Time deposits
8,585,782

 
29,857

 
1.39

 
8,897,934

 
42,814

 
1.92

 
7,047,319

 
40,331

 
2.29

Total interest bearing deposits
22,374,733

 
46,484

 
0.83

 
22,117,830

 
77,327

 
1.40

 
18,341,204

 
78,351

 
1.71

Short-term borrowings
2,317,992

 
1,980

 
0.34

 
1,322,699

 
4,707

 
1.42

 
2,380,294

 
14,860

 
2.50

Long-term borrowings (4)
2,886,016

 
17,502

 
2.43

 
2,775,049

 
16,420

 
2.37

 
1,607,046

 
14,297

 
3.56

Total interest bearing liabilities
27,578,741

 
65,966

 
0.96

 
26,215,578

 
98,454

 
1.50

 
22,328,544

 
107,508

 
1.93

Non-interest bearing deposits
8,463,230

 
 
 
 
 
6,694,102

 
 
 
 
 
6,358,034

 
 
 
 
Other liabilities
984,097

 
 
 
 
 
779,099

 
 
 
 
 
539,047

 
 
 
 
Shareholders’ equity
4,477,446

 
 
 
 
 
4,408,585

 
 
 
 
 
3,481,519

 
 
 
 
Total liabilities and shareholders’ equity
$
41,503,514

 
 
 
 
 
$
38,097,364

 
 
 
 
 
$
32,707,144

 
 
 
 
Net interest income/interest rate spread (5)

 
$
283,540

 
2.74
%
 
 
 
$
266,383

 
2.71
%
 
 
 
$
221,392

 
2.47
%
Tax equivalent adjustment
 
 
(981
)
 
 
 
 
 
(1,044
)
 
 
 
 
 
(1,158
)
 
 
Net interest income, as reported
 
 
$
282,559

 
 
 
 
 
$
265,339

 
 
 
 
 
$
220,234

 
 
Net interest margin (6)
 
 
 
 
2.99
%
 
 
 
 
 
3.06
%
 
 
 
 
 
2.95
%
Tax equivalent effect
 
 
 
 
0.01
%
 
 
 
 
 
0.01
%
 
 
 
 
 
0.01
%
Net interest margin on a fully tax equivalent basis (6)
 
 
 
 
3.00
%
 
 
 
 
 
3.07
%
 
 
 
 
 
2.96
%


61




The following table reflects the components of net interest income for the six months ended June 30, 2020 and 2019:

 
Six Months Ended
 
June 30, 2020
 
June 30, 2019
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
($ in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)
$
31,020,314

 
$
654,951

 
4.22
%
 
$
25,404,396

 
$
585,211

 
4.61
%
Taxable investments (3)
3,615,502

 
47,873

 
2.65

 
3,422,317

 
51,334

 
3.00

Tax-exempt investments (1)(3)
574,080

 
9,643

 
3.36

 
674,116

 
11,595

 
3.44

Interest bearing deposits with banks
1,016,336

 
1,876

 
0.37

 
220,186

 
2,261

 
2.05

Total interest earning assets
36,226,232

 
714,343

 
3.94

 
29,721,015

 
650,401

 
4.38

Allowance for loan losses
(270,430
)
 
 
 
 
 
(154,864
)
 
 
 
 
Cash and due from banks
358,951

 
 
 
 
 
276,170

 
 
 
 
Other assets
3,459,443

 
 
 
 
 
2,694,473

 
 
 
 
Unrealized gains (losses) on securities available for sale, net
26,245

 
 
 
 
 
(34,050
)
 
 
 
 
Total assets
$
39,800,441

 
 
 
 
 
$
32,502,744

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW and money market deposits
$
13,504,424

 
$
51,140

 
0.76
%
 
$
11,371,980

 
$
74,303

 
1.31
%
Time deposits
8,741,858

 
72,671

 
1.66

 
7,130,628

 
78,502

 
2.20

Total interest bearing deposits
22,246,282

 
123,811

 
1.11

 
18,502,608

 
152,805

 
1.65

Short-term borrowings
1,820,346

 
6,687

 
0.73

 
2,196,880

 
27,409

 
2.50

Long-term borrowings (4)
2,830,533

 
33,922

 
2.40

 
1,636,755

 
28,870

 
3.53

Total interest bearing liabilities
26,897,161

 
164,420

 
1.22

 
22,336,243

 
209,084

 
1.87

Non-interest bearing deposits
7,578,666

 
 
 
 
 
6,238,159

 
 
 
 
Other liabilities
881,598

 
 
 
 
 
489,998

 
 
 
 
Shareholders’ equity
4,443,016

 
 
 
 
 
3,438,344

 
 
 
 
Total liabilities and shareholders’ equity
$
39,800,441

 
 
 
 
 
$
32,502,744

 
 
 
 
Net interest income/interest rate spread (5)
 
 
$
549,923

 
2.72
%
 
 
 
$
441,317

 
2.51
%
Tax equivalent adjustment
 
 
(2,025
)
 
 
 
 
 
(2,435
)
 
 
Net interest income, as reported
 
 
$
547,898

 
 
 
 
 
$
438,882

 
 
Net interest margin (6)
 
 
 
 
3.02
%
 
 
 
 
 
2.95
%
Tax equivalent effect
 
 
 
 
0.02
%
 
 
 
 
 
0.02
%
Net interest margin on a fully tax equivalent basis (6)
 
 
 
 
3.04
%
 
 
 
 
 
2.97
%
 
(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.


62




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

Change in Net Interest Income on a Tax Equivalent Basis
 
Three Months Ended June 30, 2020 Compared to June 30, 2019
 
Six Months Ended June 30, 2020 Compared to June 30, 2019
 
Change
Due to
Volume
 
Change
Due to
Rate
 
Total
Change
 
Change
Due to
Volume
 
Change
Due to
Rate
 
Total
Change
 
(in thousands)
Interest Income:
 
 
 
 
 
 
 
 
 
 
 
Loans*
$
68,741

 
$
(43,792
)
 
$
24,949

 
$
121,530

 
$
(51,790
)
 
$
69,740

Taxable investments
1,533

 
(4,278
)
 
(2,745
)
 
2,787

 
(6,248
)
 
(3,461
)
Tax-exempt investments*
(803
)
 
(38
)
 
(841
)
 
(1,686
)
 
(266
)
 
(1,952
)
Interest bearing deposits with banks
1,265

 
(2,022
)
 
(757
)
 
2,709

 
(3,094
)
 
(385
)
Total increase (decrease) in interest income
70,736

 
(50,130
)
 
20,606

 
125,340

 
(61,398
)
 
63,942

Interest Expense:
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW and money market deposits
7,019

 
(28,412
)
 
(21,393
)
 
12,126

 
(35,289
)
 
(23,163
)
Time deposits
7,570

 
(18,044
)
 
(10,474
)
 
15,654

 
(21,485
)
 
(5,831
)
Short-term borrowings
(379
)
 
(12,501
)
 
(12,880
)
 
(4,050
)
 
(16,672
)
 
(20,722
)
Long-term borrowings and junior subordinated debentures
8,791

 
(5,586
)
 
3,205

 
16,367

 
(11,315
)
 
5,052

Total increase (decrease) in interest expense
23,001

 
(64,543
)
 
(41,542
)
 
40,097

 
(84,761
)
 
(44,664
)
Total increase in net interest income
$
47,735

 
$
14,413

 
$
62,148

 
$
85,243

 
$
23,363

 
$
108,606

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

63




Non-Interest Income

Non-interest income increased $17.2 million and $49.0 million for the three and six months ended June 30, 2020 as compared to the same periods of 2019. The following table presents the components of non-interest income for the three and six months ended June 30, 2020 and 2019:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Trust and investment services
$
2,826

 
$
3,096

 
$
6,239

 
$
6,000

Insurance commissions
1,659

 
2,649

 
3,610

 
5,174

Service charges on deposit accounts
3,557

 
5,827

 
9,237

 
11,730

(Losses) gains on securities transactions, net
(41
)
 
11

 
(81
)
 
(21
)
Net impairment losses on securities recognized in earnings

 
(2,928
)
 

 
(2,928
)
Fees from loan servicing
2,227

 
2,367

 
4,975

 
4,797

Gains on sales of loans, net
8,337

 
3,930

 
12,887

 
8,506

(Losses) gains on sales of assets, net
(299
)
 
(564
)
 
(178
)
 
77,156

Bank owned life insurance
5,823

 
2,205

 
8,965

 
4,092

Other
20,741

 
11,010

 
40,573

 
20,770

Total non-interest income
$
44,830

 
$
27,603

 
$
86,227

 
$
135,276


Insurance commissions declined $1.0 million and $1.6 million for the three and six months ended June 30, 2020 as compared to the corresponding periods in 2019 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts decreased by $2.3 million and $2.5 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in 2019 mostly due to waived fees related to COVID-19 customer relief efforts in the second quarter 2020.

The other-than-temporary impairment losses on securities for the three and six months ended June 30, 2019 related to one special revenue bond in default of its contractual payments starting in the second quarter 2019.
  
Our net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each period end. The net gains from the change in the fair value of loans held for sale totaled $3.2 million and $4.0 million for the three and six months ended June 30, 2020, respectively, as compared to $225 thousand and $549 thousand for the three and six months ended June 30, 2019. During the second quarter 2020, we sold approximately $237 million of residential mortgage loans as compared to $223 million during the second quarter 2019. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Net gains on sales of assets decreased $77.3 million for the six months ended June 30, 2020, primarily due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter 2019.

Bank owned life insurance income increased $3.6 million and $4.9 million for the three and six months ended June 30, 2020, respectively as compared to the same periods in 2019 due to income from bank owned life insurance acquired from Oritani during the fourth quarter 2019 and death benefits received in the 2020 periods.
 
Other non-interest income increased $9.7 million and $19.8 million for the three and six months ended June 30, 2020 as compared to the same periods in 2019. The increase was primarily due to swap fee income related to

64




derivative interest rate swaps executed with commercial loan customers totaling $14.7 million and $5.4 million for the three months ended June 30, 2020 and June 30, 2019, respectively and $28.9 million and $9.5 million for the six months ended June 30, 2020 and June 30, 2019, respectively.
Non-Interest Expense

Non-interest expense increased $15.4 million and $23.3 million for the three and six months ended June 30, 2020 as compared to the same periods of 2019. The following table presents the components of non-interest expense for the three and six months ended June 30, 2020 and 2019:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Salary and employee benefits expense
$
78,532

 
$
76,183

 
$
164,260

 
$
159,288

Net occupancy and equipment expense
33,217

 
29,700

 
65,658

 
57,586

FDIC insurance assessment
6,135

 
4,931

 
10,011

 
11,052

Amortization of other intangible assets
6,681

 
4,170

 
12,151

 
8,481

Professional and legal fees
7,797

 
4,145

 
13,884

 
9,416

Amortization of tax credit investments
3,416

 
4,863

 
6,644

 
12,036

Telecommunications expense
2,866

 
2,351

 
5,153

 
4,619

Other
18,522

 
15,394

 
35,061

 
27,054

Total non-interest expense
$
157,166

 
$
141,737

 
$
312,822

 
$
289,532


Salary and employee benefits expense increased $2.3 million and $5.0 million for the three and six months ended June 30, 2020, respectively. As compared to second quarter 2019, the increase was largely due to additional salaries related to bank branch and other operational staff retained from the Oritani acquisition and higher accrued cash incentive compensation. These additional expenses were partially offset by cost reductions from our ongoing branch transformation efforts and other operational improvements over the last 12 months. The increase for the six months ended June 30, 2020 as compared to the same period in 2019 was also partly driven by a $1.8 million special bonus paid to hourly employees impacted by COVID-19 that was incurred in the first quarter of 2020.

Net occupancy and equipment expense increased $3.5 million and $8.1 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods of 2019. These increases were mostly due to additional costs associated with branches and other facilities acquired from Oritani, which were partially offset by costs savings from branch closures over the last 12 months. During the three and six months ended June 30, 2020, we incurred higher expenses for equipment and certain other COVID-19 related expenses which included additional cleaning services for facilities to maintain employee and customer safety. In addition, the increase for the six months June 30, 2020 was driven by rental expenses resulting from a sale leaseback transaction completed towards the end of the first quarter of 2019.

Amortization of other intangibles increased $2.5 million and $3.7 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods of 2019 largely due to higher amortization expense of loan servicing rights and core deposit intangible amortization acquired in the recent Oritani acquisition. See Note 9 to the consolidated financial statements for more details.

Professional and legal fees increased $3.7 million and $4.5 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods of 2019, largely due to higher costs from technology transformation consulting services and remote work readiness costs incurred in the second quarter 2020.

Amortization of tax credit investments decreased $1.4 million and $5.4 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods of 2019. The first half of 2019 included a $2.4 million impairment charge related to investments in three federal renewable energy tax credit funds sponsored by DC Solar. The remainder of the variances from the prior periods were mainly due to normal differences in the timing and

65




amount of such investments and recognition of the related tax credits. Tax credit investments, while negatively impacting the level of our operating expenses and efficiency ratio, produce tax credits that reduce our income tax expense and effective tax rate. See Note 14 to the consolidated financial statements for more details on our tax credit investments.

Other non-interest expense increased $3.1 million and $8.0 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods of 2019. The increases were primarily due to incrementally higher operating expenses in several categories due to the expansion of our operations both organically and through the acquisition of Oritani in the fourth quarter 2020, certain PPP loan costs, such as advertising, and other COVID-19 related costs. Net gains on the sales of OREO properties also declined $583 thousand and $1.3 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods of 2019.

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

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and six months ended June 30, 2020 and 2019:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
 
($ in thousands)
Total non-interest expense
$
157,166

 
$
141,737

 
$
312,822

 
$
289,532

Less: Severance expense (pre-tax)

 

 

 
4,838

Less: Amortization of tax credit investments (pre-tax)
3,416

 
4,863

 
6,644

 
12,036

Less: Merger related expenses (pre-tax) 
366

 
35

 
1,668

 
35

Total non-interest expense, adjusted
$
153,384

 
$
136,839

 
$
304,510

 
$
272,623

Net interest income
$
282,559

 
$
220,234

 
$
547,898

 
$
438,882

Total non-interest income
44,830

 
27,603


86,227

 
135,276

Less: Gain on sale-leaseback transaction (pre-tax)

 

 

 
78,505

Add: Losses (gains) on securities transactions, net (pre-tax)
41

 
(11
)
 
81

 
21

Add: Net impairment losses on securities (pre-tax)

 
2,928

 

 
2,928

Total net interest income and non-interest income
$
327,430

 
$
250,754

 
$
634,206

 
$
498,602

Efficiency ratio
48.01
%
 
57.19
%
 
49.33
%
 
50.43
%
Efficiency ratio, adjusted
46.84
%
 
54.57
%
 
48.01
%
 
54.68
%
Income Taxes

Income tax expense totaled $33.5 million for the second quarter 2020 as compared to $29.1 million and $27.5 million for the first quarter 2020 and second quarter 2019, respectively. Our effective tax rate was 25.9 percent, 25.0 percent and 26.5 percent for the second quarter 2020, first quarter 2020 and second quarter 2019, respectively. The slightly higher effective tax rate in the second quarter 2020 as compared to the first quarter 2020 was primarily attributable to higher pre-tax income in second quarter 2020.

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

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

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

The following tables present the financial data for each business segment for the three months ended June 30, 2020 and 2019:
 
Three Months Ended June 30, 2020
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
7,214,368

 
$
24,826,832

 
$
5,737,187

 
$

 
$
37,778,387

Income (loss) before income taxes
29,561

 
102,567

 
7,530

 
(10,591
)
 
129,067

Annualized return on average interest earning assets (before tax)
1.64
%
 
1.65
%
 
0.52
%
 
N/A

 
1.37
%
 
 
Three Months Ended June 30, 2019
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
6,756,322

 
$
18,796,093

 
$
4,324,969

 
$

 
$
29,877,384

Income (loss) before income taxes
18,658

 
90,652

 
6,917

 
(12,227
)
 
104,000

Annualized return on average interest earning assets (before tax)
1.10
%
 
1.93
%
 
0.64
%
 
N/A

 
1.39
%
Consumer Lending

This segment, representing approximately 22.1 percent of our loan portfolio at June 30, 2020, is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan

66




portfolio (which represented 13.6 percent of our loan portfolio at June 30, 2020) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 4.2 percent of total loans at June 30, 2020) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, and insurance services.

Average interest earning assets in this segment increased $458.0 million to $7.2 billion for the three months ended June 30, 2020 as compared to the second quarter 2019. The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations for investment over most of the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit prior to the second quarter 2020 economic slowdown due to the COVID-19 pandemic.

Income before income taxes generated by the consumer lending segment increased $10.9 million to $29.6 million for the second quarter 2020 as compared to the second quarter 2019 largely due to an $11.1 million increase in net interest income mainly driven by lower funding costs and the increase in average loans. The increase in net interest income was partially offset by increases of $2.2 million and $2.0 million in the provision for loan losses and non-interest expense, respectively. The increase in non-interest expense was partly due to higher amortization expense of loan servicing rights for the three months ended June 30, 2020 as compared to the second quarter 2019. The increase in the provision for loan losses for the second quarter 2020 as compared to the second quarter 2019 was mainly due to the impact of the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment. See further details in the "Allowance for Credit Losses" section of this MD&A.
 
The net interest margin on the consumer lending portfolio increased 44 basis points to 3.05 percent for the second quarter 2020 as compared to the second quarter 2019 mainly due to a 74 basis point decrease in the costs associated with our funding sources, partially offset by a 30 basis point decrease in the yield on average loans. The decrease in our funding costs was mainly due to both deposits and borrowings continuing to reprice at lower interest rates and the prepayment of the $635 million high cost FHLB advances in December 2019. The 30 basis point decrease in loan yield was largely due to lower yielding new loan volumes. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources.
Commercial Lending

The commercial lending segment is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $6.9 billion and represented 21.3 percent of the total loan portfolio at June 30, 2020. Commercial real estate loans and construction loans totaled $18.3 billion and represented 56.6 percent of the total loan portfolio at June 30, 2020.

Average interest earning assets in this segment increased approximately $6.0 billion to $24.8 billion for the three months ended June 30, 2020 as compared to the second quarter 2019. The increase was mostly due to strong organic loan growth within the commercial and industrial and commercial real estate loan portfolios over most of the last 12-month period, including $2.2 billion of PPP loans originated in the second quarter 2020, as well as loans acquired from Oritani during the fourth quarter 2019.
 
For the three months ended June 30, 2020, income before income taxes for the commercial lending segment increased $11.9 million to $102.6 million as compared to the same quarter 2019 mainly due to increases in both net interest income and non-interest income. Net interest income increased $50.3 million to $214.5 million for the second quarter 2020 as compared to the same period in 2019 largely due to higher average loan balances. Non-interest income increased $8.5 million to $16.2 million during the three months ended June 30, 2020 as compared to

67




the second quarter 2019 mainly due to a $9.3 million increase in swap fee income related to derivative interest rate swaps executed with commercial loan customers. The positive impact of the aforementioned items was partially offset by a $36.8 million increase in the provision for credit losses mainly due to the adverse economic forecast for lifetime expected credit losses, higher specific reserves associated with our tax medallion loan portfolio and additional qualitative management adjustments to reflect the potential for higher levels of credit stress for COVID-19 impacted borrowers. Internal transfer expense also increased $13.1 million for the second quarter 2020 as compared to the second quarter 2019 partly due to acquired and organic growth in our business since June 30, 2019.

The net interest margin for this segment decreased 3 basis points to 3.46 percent for the second quarter 2020 as compared to the first quarter 2019 largely due to a 77 basis point decrease in the yield on average loans, partially offset by a 74 basis point decrease in the cost of our funding sources.
Investment Management

The investment management segment generates a large portion of our income through investments in various types of securities and interest-bearing deposits with other banks. These investments are mainly comprised of fixed rate securities and, depending on our liquid cash position, federal funds sold and interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York) as part of our asset/liability management strategies. The fixed rate investments are one of Valley’s least sensitive assets to changes in market interest rates. However, a portion of the investment portfolio is invested in shorter-duration securities to maintain the overall asset sensitivity of our balance sheet. See the “Asset/Liability Management” section below for further analysis.

Average interest earning assets in this segment increased $1.4 billion during the second quarter 2020 as compared to the second quarter 2019 primarily due to a $1.3 billion increase in average interest bearing deposits with banks and, to a lesser extent, an increase in the investment securities portfolio. The increase in average overnight interest bearing deposits with banks was primarily caused by our prudent strategy to increase our excess liquidity during second quarter 2020, as well as the normal timing of loan and investment activity, including SBA PPP loan originations within the commercial lending segment.

For the quarter ended June 30, 2020, income before income taxes for the investment management segment increased $613 thousand to $7.5 million as compared to the second quarter 2019 mainly due to a $923 thousand increase in net interest income.

The net interest margin for this segment decreased 29 basis points to 1.28 percent for the second quarter 2020 as compared to the same quarter 2019 largely due to a 103 basis point decrease in the yield on average investments, partially offset by a 74 basis point decrease in costs associated with our funding sources. The decrease in the yield on average investments as compared to the second quarter 2019 was mainly due to repayment and prepayment of higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased over the last 12 months, and higher levels of average overnight investments at a yield of 11 basis points during the second quarter 2020.
Corporate and other adjustments

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

The corporate segment recognized a $10.6 million and $12.2 million pre-tax loss for the three months ended June 30, 2020 and 2019, respectively. Lower pre-tax loss for the second quarter 2020 was mainly due to a $1.3 million increase in non-interest income. Non-interest expense increased $16.0 million and was more than offset by a $16.4 million increase in internal transfer income for the three months ended June 30, 2020 from the second quarter 2019. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.

68




 
The following tables present the financial data for each business segment for the six months ended June 30, 2020 and 2019:

 
Six Months Ended June 30, 2020
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
7,215,756

 
$
23,804,558

 
$
5,205,918

 
$

 
$
36,226,232

Income (loss) before income taxes
45,802

 
205,362

 
15,360

 
(21,060
)
 
245,464

Annualized return on average interest earning assets (before tax)
1.27
%
 
1.73
%
 
0.59
%
 
N/A

 
1.36
%

 
Six Months Ended June 30, 2019
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
6,788,511

 
$
18,615,885

 
$
4,316,619

 
$

 
$
29,721,015

Income before income taxes
37,713

 
173,164

 
15,659

 
47,990

 
274,526

Annualized return on average interest earning assets (before tax)
1.11
%
 
1.86
%
 
0.73
%
 
N/A

 
1.85
%

Consumer Lending

Average interest earning assets in this segment increased $427.2 million to $7.2 billion for the six months ended June 30, 2020 as compared to the same period in 2019. The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations for investment over most of the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit prior to the second quarter 2020 economic slowdown due to the COVID-19 pandemic.

Income before income taxes generated by the consumer lending segment increased $8.1 million to $45.8 million for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to increases of $14.2 million and $5.0 million in net interest income and non-interest income, respectively. The increase in net interest income was mainly driven by lower funding costs and the increase in average loans. The increase in non-interest income was largely attributable to higher net gains on sales of loans for the six months ended June 30, 2020 as compared to the same period in 2019. The positive impact of the aforementioned items was partially offset by increases of $6.9 million and $3.2 million in provision for loan losses and non-interest expense, respectively. The increase in the provision for loan losses for the first half of 2020 as compared to the same period of 2019 was mainly due to the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment. See further details in the "Allowance for Credit Losses" section of this MD&A.

The net interest margin on the consumer lending portfolio increased 23 basis points to 2.88 percent for the six months ended June 30, 2020 as compared to the same period one year ago mainly due to a 49 basis point decrease in the costs associated with our funding sources, partially offset by a 26 basis point decrease in the yield on average loans. The decrease in our funding costs was mainly due to both deposits and borrowings continuing to reprice at lower interest rates and the prepayment of the $635 million high cost FHLB advances in December 2019. The 26 basis point decrease in loan yield was largely due to lower yielding new loan volumes.

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Commercial Lending

Average interest earning assets in this segment increased $5.2 billion to $23.8 billion for the six months ended June 30, 2020 as compared to the same period in 2019. This increase was primarily due to organic loan growth over most of the last 12-month period, including SBA PPP loans originations of $2.2 billion in the second quarter 2020, and loans acquired from Oritani.

For the six months ended June 30, 2020, income before income taxes for the commercial lending segment increased $32.2 million to $205.4 million as compared to the same period in 2019. Net interest income increased $93.6 million to $417.2 million for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to the higher average loan balances. Non-interest income also increased $17.3 million for the six months ended June 30, 2020 as compared to the same period in 2019 due, in part, to a $19.4 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers. The positive impact of the aforementioned items was partially offset by a $58.0 million increase in the provision for credit losses to $65.1 million during the six months ended June 30, 2020 as compared to $7.1 million for the same period in 2019. The increase in the provision for credit losses mainly due to the adverse economic forecast for lifetime expected credit losses during the first half of 2020, higher specific reserves for tax medallion loans and qualitative adjustments for potential credit stress related to COVID-19 impacted borrowers. See further details in the "Allowance for Credit Losses" section in this MD&A.

The net interest margin for this segment increased 3 basis points to 3.51 percent for the six months ended June 30, 2020 as compared to the same period in 2019 due to a 49 basis point decrease in the cost of our funding sources, partially offset by a 46 basis point decrease in yield on average loans.
Investment Management

Average interest earning assets in this segment increased $889.3 million during the six months ended June 30, 2020 as compared to the same period in 2019 largely due to increases of $796.2 million and $93.1 million in average interest bearing deposits with banks and average investments, respectively. The increase in overnight investments and deposits with other banks was largely due to our higher levels of excess liquidity during the second quarter 2020.

For the six months ended June 30, 2020, income before income taxes for the investment management segment moderately decreased $299 thousand to $15.4 million as compared to the same period in 2019. Net interest income increased $934 thousand during the six months ended June 30, 2020 as compared to the same period of 2019 but was partially offset by a $800 thousand provision for credit losses for debt securities held to maturity during the first half of 2020 under the new CECL standard. Non-interest income increased $4.3 million to $9.0 million for the six months ended June 30, 2020 as compared to the same period of 2019 partly due to higher bank owned life insurance income. However, internal transfer expense increased $4.0 million for the six months ended June 30, 2020 as compared to the same period of 2019.

The net interest margin for this segment decreased 25 basis points to 1.42 percent for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to a 74 basis point decrease in the yield on average investments, partially offset by a 49 basis point decrease in costs associated with our funding sources. The decrease in the yield on average investments as compared to the same period of 2019 was mainly due to repayment and prepayment of higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased over the last 12 months, and low yielding excess liquidity held in overnight investments.
Corporate and other adjustments

The pre-tax net loss for the corporate segment totaled $21.1 million for the six months ended June 30, 2020 as compared to the net income of $48.0 million for the same period in 2019. The negative change of $69.1 million was mainly due to a decrease in non-interest income coupled with an increase in non-interest expense. The non-interest

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income decreased $75.7 million to $13.6 million for the six months ended June 30, 2020 as compared to the same period in 2019 primarily due to a $78.5 million gain on the sale (and leaseback) of several bank locations recognized during the first half of 2019. Non-interest expense increased $23.5 million to $224.1 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 largely due to increases in net occupancy and equipment expense, salaries and employee benefits expenses and professional and legal fees. (See further details in the "Non-Interest Expense" section above). Internal transfer income increased $29.8 million to $199.5 million for the six months ended June 30, 2020 as compared to the same period in 2019.
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, 2020. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of June 30, 2020. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model.

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

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

71




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 in light of the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below.
 
Estimated Change in
Future Net Interest Income
Changes in Interest Rates
Dollar
Change
 
Percentage
Change
(in basis points)
($ in thousands)
+200
$
63,164

 
5.55
%
+100
35,521

 
3.12

–100
(21,298
)
 
(1.87
)

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance
sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 months by 3.12 percent. Valley's sensitivity to changes in market rates as compared to March 31, 2020 is mostly due to the significant changes in items included in interest income and Valley's slightly asset sensitive profile. Management believes the interest rate sensitivity remains within an acceptable tolerance range at June 30, 2020 and sees the likelihood of rates decreasing further as a minimal risk whereas an increase in rates longer term has a higher probability of occurrence. However, the level of net interest income sensitivity may increase or decrease in the future as a result of changes in deposit and borrowings strategies, the slope of the yield curve and projected cash flows.
Liquidity

Bank Liquidity

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

The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in excess of 110 percent or reliance on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at June 30, 2020.
 
During March 2020, Valley activated a contingent funding plan to prudently increase our liquidity position in response to the financial and public health crisis caused by the COVID-19 pandemic. At June 30, 2020, our cash

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and cash equivalents totaled $1.9 billion, an increase from $1.0 billion at March 31, 2020. In the early stage of the third quarter 2020, we continue to believe that holding excess liquidity is prudent given the uncertain environment that we currently face. Going forward, we will closely monitor external events and adjust our mix and levels of funding accordingly. See the "Deposits and Other Borrowings" section and Note 10 to the consolidated financial statements for more information.

On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions. Total liquid assets were approximately $3.8 billion, representing 10.1 percent of earning assets at June 30, 2020 and $2.2 billion, representing 6.4 percent of earning assets at December 31, 2019. Of the $3.8 billion of liquid assets at June 30, 2020, approximately $1.1 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $1.1 billion in principal payments from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at June 30, 2020) are projected in accordance with their scheduled contractual terms to be approximately $8.8 billion over the next 12 months. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtailment of lending activities.

On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $24.8 billion and $20.4 billion for the six months ended June 30, 2020 and for the year ended December 31, 2019, respectively, representing 68.3 percent and 66.8 percent of average earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous correspondent banks. While there are no firm lending commitments currently in place, management believes that we could borrow approximately $1.2 billion for a short term 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. Furthermore, we can obtain overnight borrowings from the FRB via the discount window as a contingency for additional liquidity. At June 30, 2020, our traditional borrowing capacity, excluding PPP loans, under the Federal Reserve's discount window was $1.6 billion.

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased approximately $1.0 billion to $2.1 billion at June 30, 2020, as compared to December 31, 2019. The increase in both short-term borrowings was primarily driven by our goal to increase liquidity levels in response to the COVID-19 crisis, as well as funding of SBA PPP loan originations in the second quarter 2020. As of June 30, 2020, the short-term borrowings mainly consisted of FHLB advances totaling $1.2 billion with a weighted interest rate of 0.55 percent and federal funds purchased totaling $678.9 million.


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Average short-term FHLB advances exceeded 30 percent of total shareholders' equity at June 30, 2020 and December 31, 2019, respectively. The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the year to date periods ended June 30, 2020 and December 31, 2019:
 
June 30,
2020
 
December 31,
2019
 
($ in thousands)
FHLB advances:
 
 
 
Average balance outstanding
$
1,383,104

 
$
1,681,844

Maximum outstanding at any month-end during the period
1,930,000

 
2,510,000

Balance outstanding at end of period
1,235,000

 
940,000

Weighted average interest rate during the period
0.28
%
 
1.88
%
Weighted average interest rate at the end of the period
0.55

 
1.85

Corporation Liquidity

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

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

As of June 30, 2020, we had $54.4 million, $1.7 billion and $2.1 billion in equities, available for sale debt securities and held to maturity debt securities, respectively. Our equity securities portfolio was comprised of a money market mutual fund and, to a lesser extent, investments in public and private Community Reinvestment Act funds. Our held to maturity and available for sale debt securities portfolios were comprised of U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions (including special revenue bonds), residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies, and high quality corporate bonds issued by banks at June 30, 2020. There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae. Additionally, certain securities with limited marketability and/or restrictions, such as FHLB and FRB stocks, are carried at cost and are included in other assets. See Note 7 to the consolidated financial statements for additional information.
Allowance for Credit Losses and Impairment Analysis

Effective January 1, 2020, Valley adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires an estimate of lifetime expected credit

74




losses for held to maturity debt securities established as an allowance for credit losses and replaces the other-than-temporarily impaired model for available for sale debt securities.

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

We have evaluated all available for sale debt securities that are in an unrealized loss position as of June 30, 2020 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and six months ended June 30, 2020 and, as a result, no allowance for credit losses for available for sale debt securities at June 30, 2020.
 
Held to maturity debt securities. As discussed in Note 7 to the consolidated financial statements, Valley has a zero loss expectation for certain securities within the held to maturity portfolio, including, U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. At June 30, 2020, held to maturity debt securities were carried net of allowance for credit losses totaling $1.6 million. We recorded a provision of $41 thousand and $800 thousand during three and six months ended June 30, 2020, respectively, and no net charge-offs of debt securities in the respective periods.

See Note 7 to the consolidated financial statements for additional information regarding our available for sale and held to maturity securities.

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

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The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at June 30, 2020:
 
June 30, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held to maturity investment grades: *
 
 
 
 
 
 
 
AAA Rated
$
1,802,760

 
$
61,704

 
$
(309
)
 
$
1,864,155

AA Rated
199,665

 
6,870

 

 
206,535

A Rated
16,032

 
462

 

 
16,494

BBB Rated
5,000

 
348

 

 
5,348

Non-investment grade
5,686

 

 
(232
)
 
5,454

Not rated
104,284

 
403

 
(7,797
)
 
96,890

Total investment securities held to maturity
$
2,133,427

 
$
69,787

 
$
(8,338
)
 
$
2,194,876

Available for sale investment grades: *
 
 
 
 
 
 
 
AAA Rated
$
1,471,623

 
$
46,898

 
$
(955
)
 
$
1,517,566

AA Rated
53,538

 
864

 
(28
)
 
54,374

A Rated
17,777

 
416

 

 
18,193

BBB Rated
24,389

 
588

 
(21
)
 
24,956

Non-investment grade
11,828

 
51

 
(475
)
 
11,404

Not rated
62,122

 
1,168

 
(395
)
 
62,895

Total investment securities available for sale
$
1,641,277

 
$
49,985

 
$
(1,874
)
 
$
1,689,388

 
*
Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels.
The investment securities held to maturity portfolio includes $104.3 million in investments not rated by the rating agencies with aggregate unrealized losses of $7.8 million at June 30, 2020. The unrealized losses for this category included $7.5 million of unrealized losses related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.

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Loan Portfolio

The following table reflects the composition of the loan portfolio as of the dates presented:
 
June 30,
2020
 
March 31,
2020
 
December 31,
2019
 
September 30,
2019
 
June 30,
2019
 
($ in thousands)
Loans
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
6,884,689

 
$
4,998,731


$
4,825,997

 
$
4,695,608

 
$
4,615,765

Commercial real estate:
 
 



 
 
 
 
Commercial real estate
16,571,877

 
16,390,236


15,996,741

 
13,365,454

 
12,798,017

Construction
1,721,352

 
1,727,046


1,647,018

 
1,537,590

 
1,528,968

Total commercial real estate
18,293,229

 
18,117,282

 
17,643,759

 
14,903,044

 
14,326,985

Residential mortgage
4,405,147

 
4,478,982


4,377,111

 
4,133,331

 
4,072,450

Consumer:
 
 


 
 
 
 
 
Home equity
471,115

 
481,751


487,272

 
489,808

 
501,646

Automobile
1,369,489

 
1,436,734


1,451,623

 
1,436,608

 
1,362,466

Other consumer
890,942

 
914,587


913,446

 
908,760

 
922,850

Total consumer loans
2,731,546

 
2,833,072

 
2,852,341

 
2,835,176

 
2,786,962

Total loans*
$
32,314,611

 
$
30,428,067

 
$
29,699,208

 
$
26,567,159

 
$
25,802,162

As a percent of total loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial
21.3
%
 
16.5
%
 
16.2
%
 
17.7
%
 
17.9
%
Commercial real estate
56.6

 
59.5

 
59.5

 
56.1

 
55.5

Residential mortgage
13.6

 
14.6

 
14.7

 
15.5

 
15.8

Consumer loans
8.5

 
9.4

 
9.6

 
10.7

 
10.8

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
*
Includes net unearned discount and deferred loan fees of $131.3 million and $76.4 million at June 30, 2020 and March 31, 2020, respectively, and net unearned premiums and deferred loan fees of $12.6 million, $18.3 million and $19.6 million at December 31, 2019, September 30, 2019 and June 30, 2019, respectively. Net unearned discounts and deferred loan fees at June 30, 2020 and March 31, 2020 include the non-credit discount on PCD loans as well as $62.1 million of net unearned fees related to SBA PPP loans at June 30, 2020.

Loans increased $1.9 billion to approximately $32.3 billion at June 30, 2020 from March 31, 2020 largely due to approximately $2.2 billion of SBA PPP loan originations within the commercial and industrial loan category during the second quarter 2020, partially offset by moderate declines in residential mortgage and the consumer loan categories. During the second quarter 2020, we originated $296 million of residential mortgage loans for sale (rather than held for investment) and sold approximately $237 million. Residential mortgage loans held for sale totaled $120.6 million and $58.9 million at June 30, 2020 and March 31, 2020, respectively.

Total commercial and industrial loans increased $1.9 billion from March 31, 2020 to approximately $6.9 billion at June 30, 2020 largely due to the $2.2 billion of SBA PPP loan originations in the second quarter. Excluding the SBA PPP loans, commercial and industrial loans decreased $328.4 million, or 26.3 percent on an annualized basis, at June 30, 2020 compared to March 31, 2020 as the lack of economic activity has weighed on loan demand in our markets. Additionally, commercial and industrial line utilization moderately declined from March 31, 2020.

Commercial real estate loans (excluding construction loans) increased $181.6 million, or 4.4 percent on an annualized basis, to $16.6 billion at June 30, 2020 from March 31, 2020 mainly due to a strong refinance market driven by historic low interest rates and slower repayment activity in the second quarter 2020. Construction loans decreased $5.7 million to $1.7 billion at June 30, 2020 from March 31, 2020 mainly due to migration of completed  existing construction projects to permanent financing during the second quarter 2020.


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Total residential mortgage loans decreased $73.8 million to approximately $4.4 billion at June 30, 2020 from March 31, 2020 largely due to higher mortgage banking sales activity. New and refinanced residential mortgage loan originations totaled approximately $494.2 million for the second quarter 2020, as compared to $358.9 million and $347.1 million for the first quarter 2020 and second quarter 2019, respectively. Of the total originations for the second quarter 2020, $296 million of residential mortgage loans were originated for sale rather than held for investment and sold approximately $237 million of these loans. We expect to continue to sell a large portion of our new fixed rate residential mortgage loan originations during the remainder of 2020 assuming the low level of market interest rates continues and we are able to maintain an appropriate mix of residential mortgage loans on our balance sheet.
Home equity loans totaled $471.1 million at June 30, 2020, and decreased $10.6 million from March 31, 2020 largely due to normal repayments that outpaced new loan origination and line activity.
Automobile loans decreased by $67.2 million to $1.4 billion at June 30, 2020 as compared to March 31, 2020. The second quarter annualized decline was 18.7 percent due to lower application volumes as compared to the first quarter 2020 largely due to the COVID-19 impact. During the second quarter 2020, auto dealerships in our primary market areas were largely shut down as a result of shelter-in-place restrictions in connection with the pandemic. Our Florida dealership network contributed $14.3 million in auto loan originations, representing approximately 20 percent of Valley's total new auto loan production during the second quarter 2020, as compared to $28.3 million, representing approximately 21 percent, during the first quarter 2020.
Other consumer loans decreased $23.6 million to $890.9 million at June 30, 2020, as compared to $914.6 million at March 31, 2020 mostly due to lower volumes of new collateralized personal lines of credit as compared to the first quarter 2020.
Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, except for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey, which could present a geographic and credit risk due to the recent economic downturn within these regions caused by the COVID-19 pandemic and the uncertain path forward to restart the U.S. economy. To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan, to guard against a potential downward turn in any one economic sector.
During the second quarter COVID-related economic shutdowns in our markets have slowed both new loan originations and contractual principal and interest payments. As traditional commercial origination activity has slowed, we focused additional resources on assisting our clients through the economic crisis and managing the demands of the SBA PPP loan forgiveness. As of mid-July 2020, we had originated approximately 12,800 PPP loans with an aggregate balance of $2.3 billion before unearned loan fees and costs. Our expectation is that approximately 75 percent of loans made under this program will be either fully or partially forgiven and are expected to come off our balance sheet over the next 12 months. During the early stages of the third quarter 2020, we have seen some improved levels of commercial loan activity, solid new and refinanced residential mortgage loan volumes, as well as better auto loan applications activity from borrowers with strong credit scores.


 






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Non-performing Assets
Prior to our adoption of the CECL standard on January 1, 2020, our past due loans and non-accrual loans discussed further below excluded those loans which were classified as Purchased Credit-Impaired (PCI) loans. Under previous U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) were accounted for on a pool basis and not subject to delinquency classification in the same manner as loans originated by Valley. Under the CECL standard, Valley's former PCI loan pools are accounted for as purchased credit deteriorated (PCD) loans on a loan level basis and, if applicable, are reported in our past due and non-accrual loans at June 30, 2020 and March 31, 2020.
Non-performing assets include non-accrual loans, other real estate owned (OREO), other repossessed assets (which primarily consists of automobiles and taxi medallions) and non-accrual debt securities at June 30, 2020. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell. Our non-performing assets increased $3.7 million to $224.2 million at June 30, 2020 as compared to March 31, 2020, mainly due to a $4.7 million increase in non-accrual loans, partially offset by a decline in OREO during the second quarter 2020. Non-performing assets as a percentage of total loans and non-performing assets totaled 0.69 percent and 0.72 percent at June 30, 2020 and March 31, 2020, respectively (as shown in the table below). For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements.

Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the recent downturn in economic conditions impacted by the COVID-19 pandemic and a number of our borrowers performing under short-term forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at June 30, 2020.






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The following table sets forth by loan category accruing past due and non-performing assets on the dates indicated in conjunction with our asset quality ratios: 
 
June 30,
2020
 
March 31,
2020
 
December 31,
2019
 
September 30,
2019
 
June 30,
2019
 
($ in thousands)
Accruing past due loans: *
 
30 to 59 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
6,206

 
$
9,780

 
$
11,700

 
$
5,702

 
$
14,119

Commercial real estate
13,912

 
41,664

 
2,560

 
20,851

 
6,202

Construction

 
7,119

 
1,486

 
11,523

 

Residential mortgage
35,263

 
38,965

 
17,143

 
12,945

 
19,131

Total Consumer
12,962

 
19,508

 
13,704

 
13,079

 
11,932

Total 30 to 59 days past due
68,343

 
117,036

 
46,593

 
64,100

 
51,384

60 to 89 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
4,178

 
7,624

 
2,227

 
3,158

 
4,135

Commercial real estate
1,543

 
15,963

 
4,026

 
735

 
354

Construction

 
49

 
1,343

 
7,129

 
1,342

Residential mortgage
4,169

 
9,307

 
4,192

 
4,417

 
3,635

Total Consumer
3,786

 
2,309

 
2,527

 
1,577

 
1,484

Total 60 to 89 days past due
13,676

 
35,252

 
14,315

 
17,016

 
10,950

90 or more days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
5,220

 
4,049

 
3,986

 
4,133

 
3,298

Commercial real estate

 
161

 
579

 
1,125

 

Residential mortgage
3,812

 
1,798

 
2,042

 
1,347

 
1,054

Total Consumer
2,082

 
1,092

 
711

 
756

 
359

Total 90 or more days past due
11,114

 
7,100

 
7,318

 
7,361

 
4,711

Total accruing past due loans
$
93,133

 
$
159,388

 
$
68,226

 
$
88,477

 
$
67,045

Non-accrual loans: *
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
130,876

 
$
132,622

 
$
68,636

 
$
75,311

 
$
76,216

Commercial real estate
43,678

 
41,616

 
9,004

 
9,560

 
6,231

Construction
3,308

 
2,972

 
356

 
356

 

Residential mortgage
25,776

 
24,625

 
12,858

 
13,772

 
12,069

Total Consumer
6,947

 
4,095

 
2,204

 
2,050

 
1,999

Total non-accrual loans
210,585

 
205,930

 
93,058

 
101,049

 
96,515

Other real estate owned (OREO)
8,283

 
10,198

 
9,414

 
6,415

 
7,161

Other repossessed assets
3,920

 
3,842

 
1,276

 
2,568

 
2,358

Non-accrual debt securities
1,365

 
531

 
680

 
680

 
680

Total non-performing assets (NPAs)
$
224,153

 
$
220,501

 
$
104,428

 
$
110,712

 
$
106,714

Performing troubled debt restructured loans
$
53,936

 
$
48,024

 
$
73,012

 
$
79,364

 
$
74,385

Total non-accrual loans as a % of loans
0.65
%
 
0.68
%
 
0.31
%
 
0.38
%
 
0.37
%
Total NPAs as a % of loans and NPAs
0.69

 
0.72

 
0.35

 
0.41

 
0.41

Total accruing past due and non-accrual loans as a % of loans
0.94

 
1.20

 
0.54

 
0.71

 
0.63

Allowance for loan losses as a % of non-accrual loans
147.03

 
137.59

 
173.83

 
160.17

 
160.71

 
*
Past due loans and non-accrual loans presented in periods prior to March 31, 2020 exclude PCI loans. PCI loans were accounted for on a pool basis and are were not subject to delinquency classification.
    
Loans past due 30 to 59 days decreased $48.7 million to $68.3 million at June 30, 2020 as compared to March 31, 2020 due to improved performance across most categories. Commercial real estate loan delinquencies within this category decreased by $27.8 million as compared to March 31, 2020 mainly due to restored customer payments delayed by business disruptions caused by COVID-19 related factors at the end of the first quarter 2020. In addition, commercial real estate and construction loans decreased mainly due to matured performing commercial real estate and

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construction loans totaling $4.3 million and $5.0 million, respectively, that were in the normal process of renewal reported in this category at March 31, 2020.

Loans past due 60 to 89 days decreased $21.6 million to $13.7 million at June 30, 2020 as compared to March 31, 2020 mainly due to matured performing commercial real estate and commercial and industrial loans totaling $13.8 million and $4.5 million, respectively, that were in the normal process of renewal reported in this category at March 31, 2020.

Loans past due 90 days or more and still accruing interest increased $4.0 million to $11.1 million at June 30, 2020 as compared to $7.1 million at March 31, 2020. All of the loans past due 90 days or more and still accruing are considered to be well secured and in the process of collection.

Non-accrual loans increased $4.7 million to $210.6 million at June 30, 2020 as compared to $205.9 million at March 31, 2020. The increase in non-accrual loans was partially due to one commercial real estate loan which moved to non-accrual status during the second quarter 2020, as well as a moderately higher level of non-accrual consumer loans at June 30, 2020. Non-accrual loans represented 0.65 percent of total loans at June 30, 2020 compared to 0.68 percent at March 31, 2020.

During the second quarter 2020, we continued to closely monitor our New York City and Chicago taxi medallion loans totaling $99.8 million and $7.0 million, respectively, within the commercial and industrial loan portfolio at June 30, 2020. Due to continued negative trends in market valuations of the underlying taxi medallion collateral, a weak operating environment and uncertain borrower performance, the remainder of our previously accruing taxi medallion loans were placed on non-accrual status during the first quarter 2020. At June 30, 2020, non-accrual taxi medallion loans totaling $106.8 million had related reserves of $61.6 million within the allowance for loan losses as compared to $109.8 million with related reserves of $56.8 million at March 31, 2020.

Valley's historical taxi medallion lending criteria had been conservative regarding capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral in certain instances. However, the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, increased the level of our allowance for loan losses at June 30, 2020 (See the "Allowance for Credit Losses" section below). Potential further declines in the market valuation of taxi medallions and the stressed operating environment within both New York City and Chicago due to COVID-19 could also negatively impact the future performance of this portfolio. For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $16.0 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at June 30, 2020.

OREO properties decreased $1.9 million to $8.3 million at June 30, 2020 from $10.2 million at March 31, 2020 due to sales of several properties. Sales of OREO properties resulted in net gains of $274 thousand and $431 thousand for the three and six months ended June 30, 2020, respectively, as compared to net gains of $857 thousand and $1.7 million for the three and six months ended June 30, 2019, respectively. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1.8 million at June 30, 2020.

TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased $5.9 million to $53.9 million at June 30, 2020 as compared to $48.0 million at March 31, 2020. Performing TDRs consisted of 87 loans at June 30, 2020. On an aggregate basis, the $53.9 million in performing TDRs at June 30, 2020 had a modified weighted average interest rate of approximately 4.92 percent as compared to a pre-modification weighted average interest rate of 4.72 percent.
Loan Forbearance. In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. Generally, the modification terms allow for a

81




deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. To date, Valley has granted over 10,000 loan forbearances totaling approximately $4.6 billion in support of our customers. Of these, approximately 5,000 loans totaling $1.9 billion have completed the contractual deferral period and returned to regularly scheduled payments.
Higher Risk COVID-19 Credit Exposures. Valley has identified certain borrower industries as being potentially exposed to the effects of economic shutdowns related to COVID-19. These industries include doctor and surgery centers, retail trade, hotels and hospitality, restaurants and food service, and entertainment and recreation. As of June 30, 2020, Valley had outstanding loans of approximately $2.1 billion to borrowers in these industries representing approximately 7 percent of total outstanding loans. Industries that may have secondary exposure to the COVID-19 pandemic include nursing and residential care, wholesale trade, manufacturing, and child care and education. As of June 30, 2020, Valley had outstanding loans of approximately $2.4 billion to borrowers in these industries representing approximately 7.8 percent of total outstanding loans. The large majority of loans to the aforementioned industries were pass-rated under Valley’s internal risk rating system as of June 30, 2020. As of July 10, 2020, Valley had loans in forbearance representing approximately 12 percent of our loans in the aforementioned industries.
Allowance for Credit Losses for Loans
The allowance for credit losses for loans consists of the allowance for loan losses and the reserve for unfunded credit commitments. Effective January 1, 2020, we adopted the new CECL standard, which is based on lifetime expected credit losses rather than incurred losses. At adoption, Valley recorded a $99.6 million increase to its allowance for credit losses for loans, including reserves of $61.6 million related to PCD loans. See Note 5 to the consolidated financial statements for further details on the Day 1 CECL adoption.

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




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For the second quarter 2020, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios. The S-4 forecast is the most severe economic scenario and includes the following assumptions:

Assumes that the COVID-19 crisis will persist and continue to meaningfully impact the economy;
National unemployment rate will remain elevated throughout the remainder of the year and peak at 13.2 percent in the fourth quarter 2021;
Federal funds interest rates will remain at or near zero for foreseeable future; and
A prolonged downturn in the economy until the fourth quarter 2021.

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


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The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated.
 
Three Months Ended
 
Six Months Ended
 
June 30,
2020
 
March 31,
2020
 
June 30,
2019
 
June 30,
2020
 
June 30,
2019
 
($ in thousands)
Average loans outstanding
$
32,041,200

 
$
29,999,428

 
$
25,552,415

 
$
31,020,314

 
$
25,404,396

Beginning balance - Allowance for credit losses for loans
293,361

 
164,604

 
158,961

 
164,604

 
156,295

Impact of ASU No. 2016-13 adoption on January 1, 2020 (1)

 
37,989

 

 
37,989

 

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

 
61,643

 

 
61,643

 

Beginning balance, adjusted
293,361

 
264,236

 
158,961

 
264,236

 
156,295

Loans charged-off: (2)
 
 
 
 
 
 
 
 
 
Commercial and industrial
(14,024
)
 
(3,360
)
 
(3,073
)
 
(17,384
)
 
(7,355
)
Commercial real estate
(27
)
 
(44
)
 

 
(71
)
 

Residential mortgage
(5
)
 
(336
)
 

 
(341
)
 
(15
)
Total Consumer
(2,601
)
 
(2,565
)
 
(1,752
)
 
(5,166
)
 
(3,780
)
Total charge-offs
(16,657
)
 
(6,305
)
 
(4,825
)
 
(22,962
)
 
(11,150
)
Charged-off loans recovered:
 
 
 
 
 
 
 
 
 
Commercial and industrial
799

 
569

 
1,195

 
1,368

 
1,678

Commercial real estate
31

 
73

 
22

 
104

 
43

Construction
20

 
20

 

 
40

 

Residential mortgage
545

 
50

 
9

 
595

 
10

Total Consumer
509

 
794

 
617

 
1,303

 
1,103

Total recoveries
1,904

 
1,506

 
1,843

 
3,410

 
2,834

Net charge-offs
(14,753
)
 
(4,799
)
 
(2,982
)
 
(19,552
)
 
(8,316
)
Provision charged for credit losses
41,115

 
33,924

 
2,100

 
75,039

 
10,100

Ending balance - Allowance for credit for losses
$
319,723

 
$
293,361

 
$
158,079

 
$
319,723

 
$
158,079

Components of allowance for credit losses for loans:
 
 
 
 
 
 
 
 
 
Allowance for loan losses
$
309,614

 
$
283,342

 
$
155,105

 
$
309,614

 
$
155,105

Allowance for unfunded credit commitments
10,109

 
10,019

 
2,974

 
10,109

 
2,974

Allowance for credit losses for loans
$
319,723

 
$
293,361

 
$
158,079

 
$
319,723

 
$
158,079

Components of provision for credit losses for loans:
 
 
 
 
 
 
 
 
 
Provision for credit losses for loans
$
41,025

 
$
33,851

 
$
3,706

 
$
74,876

 
$
11,562

Provision for unfunded credit commitments (3)
90

 
73

 
(1,606
)
 
163

 
(1,462
)
Total provision for credit losses for loans
$
41,115

 
$
33,924

 
$
2,100

 
$
75,039

 
$
10,100

 
 
 
 
 
 
 
 
 
 
Annualized ratio of net charge-offs to average loans outstanding
0.18
%
 
0.06
%
 
0.05
%
 
0.13
%
 
0.07
%
 
(1)
The adjustment represents an increase in the allowance for credit losses for loans as a result of the adoption of ASU 2016-13 effective January 1, 2020.
(2)
Charge-offs and recoveries presented for periods prior to March 31, 2020 exclude loans formerly accounting for as PCI loans.
(3)
Periods prior to March 31, 2020 represent the allowance and provision for unfunded letters of credit only.


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Net loan charge-offs totaled $14.8 million for the second quarter 2020 as compared to $4.8 million and $3.0 million for the first quarter 2020 and second quarter 2019, respectively. The increase in net loan charge-offs was largely due to the partial charge-off of one commercial and industrial loan totaling $7.8 million for the second quarter 2020. Additionally, gross loan charge-offs related to taxi medallion loans totaled $3.2 million, $1.3 million and $2.3 million for the second quarter 2020, first quarter 2020 and second quarter 2019, respectively. The overall level of loan charge-offs (as presented in the above table) continues to trend within management's expectations for the credit quality of the loan portfolio.
During the second quarter 2020, we recorded a $41.1 million provision for credit losses as compared to $33.9 million and $2.1 million for the first quarter 2020 and the second quarter 2019, respectively. The second quarter 2020 provision mainly reflects the reserve build caused by deterioration in Valley's view of the macroeconomic outlook since the end of the first quarter, higher specific reserves associated with our taxi medallion loan portfolio and additional qualitative management adjustments to reflect the potential for higher levels of credit stress for COVID-19 impacted borrowers.
The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category:
 
June 30, 2020
 
March 31, 2020
 
June 30, 2019
 
Allowance
Allocation *
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation*
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation*
 
Allocation
as a % of
Loan
Category
 
($ in thousands)
Loan Category:
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial loans
$
132,039

 
1.92
%
 
$
127,437

 
2.55
%
 
$
94,384

 
2.11
%
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
117,743

 
0.71
%
 
97,876

 
0.60
%
 
23,796

 
0.19
%
Construction
13,959

 
0.81
%
 
13,709

 
0.79
%
 
25,182

 
1.65
%
Total commercial real estate loans
131,702

 
0.72
%
 
111,585

 
0.62
%
 
48,978

 
0.34
%
Residential mortgage loans
29,630

 
0.67
%
 
29,456

 
0.66
%
 
5,219

 
0.13
%
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Home equity
4,766

 
1.01
%
 
4,463

 
0.93
%
 
505

 
0.10
%
Auto and other consumer
11,477

 
0.51
%
 
10,401

 
0.44
%
 
6,019

 
0.26
%
Total consumer loans
16,243

 
0.59
%
 
14,864

 
0.52
%
 
6,524

 
0.23
%
Total allowance for loan losses
309,614

 
0.96
%
 
283,342

 
0.93
%
 
155,105

 
0.60
%
Allowance for unfunded credit commitments
10,109

 
 
 
10,019

 
 
 
2,974

 
 
Total allowance for credit losses for loans
$
319,723

 
 
 
$
293,361

 
 
 
$
158,079

 
 
Allowance for credit losses for loans as a % loans
 
 
0.99
%
 
 
 
0.96
%
 
 
 
0.61
%
 
*
CECL was adopted January 1, 2020. Prior periods reflect the allowance for credit losses for loans under the incurred loss model.
The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 0.99 percent, 0.96 percent and 0.61 percent at June 30, 2020, March 31, 2020 and June 30, 2019, respectively. At June 30, 2020, the allowance allocations for credit losses as a percentage of total loans increased for most loan categories as compared to March 31, 2020. However, the allocated reserves as a percentage of commercial and industrial loans declined by 0.63 percent due to $2.2 billion of SBA PPP loans with no related allowance at June 30, 2020. PPP loans originated in the second quarter 2020 are 100 percent guaranteed by the SBA and totaled approximately $2.2 billion at June 30, 2020. Our allowance of credit losses for loans as a percentage of non-PPP loans was 1.06 percent at June 30, 2020.

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Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At June 30, 2020 and December 31, 2019, shareholders’ equity totaled approximately $4.5 billion and $4.4 billion, which represented 10.7 percent and 11.7 percent of total assets, respectively. During the six months ended June 30, 2020, total shareholders’ equity increased by $90.3 million primarily due to (i) net income of $182.9 million, (ii) an increase in other comprehensive income of $27.3 million, and (iii) a $4.4 million increase attributable to the effect of our stock incentive plan. These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $96.1 million, and (ii) a $28.2 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2020.
Valley and Valley National Bank are subject to the regulatory capital requirements administered by the FRB and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.

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

For regulatory capital purposes, in connection with the Federal Reserve Board’s final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) net of taxes for the six months ended June 30, 2020 will be phased in over the same time frame.

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The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at June 30, 2020 and December 31, 2019:
 
Actual
 
Minimum Capital
Requirements
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 ($ in thousands)
As of June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
$
3,672,021

 
12.19
%
 
$
3,162,478

 
10.50
%
 
N/A

 
N/A

Valley National Bank
3,688,957

 
12.25

 
3,161,772

 
10.50

 
$
3,011,211

 
10.00
%
Common Equity Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
2,864,828

 
9.51

 
2,108,319

 
7.00

 
N/A

 
N/A

Valley National Bank
3,385,605

 
11.24

 
2,107,848

 
7.00

 
1,957,287

 
6.50

Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
3,079,669

 
10.23

 
2,560,101

 
8.50

 
N/A

 
N/A

Valley National Bank
3,385,605

 
11.24

 
2,559,530

 
8.50

 
2,408,969

 
8.00

Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
3,079,669

 
7.70

 
1,599,880

 
4.00

 
N/A

 
N/A

Valley National Bank
3,385,605

 
8.47

 
1,599,569

 
4.00

 
1,999,461

 
5.00

As of December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
$
3,427,134

 
11.72
%
 
$
3,070,687

 
10.50
%
 
N/A

 
N/A

Valley National Bank
3,416,674

 
11.69

 
3,069,894

 
10.50

 
$
2,923,709

 
10.00
%
Common Equity Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
2,754,524

 
9.42

 
2,047,125

 
7.00

 
N/A

 
N/A

Valley National Bank
3,152,070

 
10.78

 
2,046,596

 
7.00

 
1,900,411

 
6.50

Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
2,968,530

 
10.15

 
2,485,795

 
8.50

 
N/A

 
N/A

Valley National Bank
3,152,070

 
10.78

 
2,485,153

 
8.50

 
2,338,967

 
8.00

Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
2,968,530

 
8.76

 
1,355,378

 
4.00

 
N/A

 
N/A

Valley National Bank
3,152,070

 
9.31

 
1,354,693

 
4.00

 
1,693,366

 
5.00


Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows: 
 
June 30,
2020
 
December 31,
2019
 
($ in thousands, except for share data)
Common shares outstanding
403,795,699

 
403,278,390

Shareholders’ equity
$
4,474,488

 
$
4,384,188

Less: Preferred stock
209,691

 
209,691

Less: Goodwill and other intangible assets
1,453,330

 
1,460,397

Tangible common shareholders’ equity
$
2,811,467

 
$
2,714,100

Tangible book value per common share
$
6.96

 
$
6.73

Book value per common share
$
10.56

 
$
10.35


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Management believes the tangible book value per common share ratio provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and facilitates comparisons with the performance of others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. This non-GAAP financial measure may also be calculated differently from similar measures disclosed by other companies.
Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common stockholders) per common share. Our retention ratio was approximately 50.0 percent for the six months ended June 30, 2020 as compared to 49.4 percent for the year ended December 31, 2019.
Cash dividends declared amounted to $0.22 per common share for each of the six months ended June 30, 2020 and 2019. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow considering the increased capital levels as required under the Basel III rules. Prior to the date of this filing, Valley has received no objection or adverse guidance from the FRB or the OCC regarding the current level of its quarterly common stock dividend. However, the FRB recently reiterated its long-standing guidance that banking organizations should consult them before declaring dividends in excess of earnings for the corresponding quarter. The renewed guidance was largely due to the increased risk of the COVID-19 pandemic negatively impacting the future level of bank earnings. See the risk factors at Part II, Item 1A of this report for additional information.
Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters

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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See page 71 for a discussion of interest rate sensitivity.

Item 4.
Controls and Procedures

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

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


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

Valley has not experienced any material impact to Valley’s internal controls over financial reporting due to the fact that most of Valley’s employees responsible for financial reporting are working remotely during the COVID-19 pandemic. Valley is continually monitoring and assessing the impact of the COVID-19 pandemic on Valley’s internal controls to minimize the impact to their design and operating effectiveness

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

PART II - OTHER INFORMATION 
Item 1.
Legal Proceedings

In the normal course of business, we may be a party to various outstanding legal proceedings and claims. There have been no material changes in the legal proceedings, if any, previously disclosed under Part I, Item 3 of Valley’s Annual Report on Form 10-K for the year ended December 31, 2019.

Item 1A.
Risk Factors

The section titled Risk Factors in Part I, Item 1A of our 2019 Annual Report on Form 10-K includes a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity). The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2019 Annual Report on Form 10-K. Except as presented below, there have been no material changes to these risk factors.
The COVID-19 pandemic is adversely affecting us and our customers, counterparties, employees, and third-party service providers, and the full extent of the adverse impacts on our business, financial position, results of operations, and prospects could be significant.
The spread of COVID-19 has created a global public-health crisis that has resulted in widespread volatility and deteriorations in business, economic, and market conditions and household incomes, including in the states of New

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Jersey, New York, Florida and Alabama where we conduct nearly all of our business. The extent of the impact of the COVID-19 pandemic on our capital and liquidity, and on our business, results of operations, financial position and prospects generally will depend on a number of evolving factors, including:
The duration, extent, and severity of the pandemic. COVID-19 has not yet been contained and could affect significantly more households and businesses. The duration and severity of the pandemic, including the degree of resurgence after the initial containment, continue to be impossible to predict. Following any containment, there is also substantial uncertainty surrounding the pace of economic recovery and the return of business and consumer confidence.
The response of governmental and nongovernmental authorities. Many of their actions have been directed toward curtailing household and business activity to contain COVID-19 while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. These actions are not always coordinated or consistent across jurisdictions but, in general, have rapidly expanded in scope and intensity, contributing to substantial market volatility.
The effect on our customers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and uncertainties, including increased unemployment rates, are affecting individuals, households, and businesses differently and unevenly. Many, however, have already changed their behavior in response to governmental mandates and advisories to sharply restrain commercial and social interactions and discretionary spending. As a result, in the near term, our credit, operational, and other risks have generally increased and, for the foreseeable future, are expected to remain elevated or increase further.
The effect on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional, and local economies (including the local economies in the markets areas which we serve) and markets could suffer disruptions that are lasting. Governmental actions are meaningfully influencing the interest-rate environment and financial-market activity, which could adversely affect our results of operations and financial condition.
During the first half of 2020, the most notable impacts to our results of operations were a higher provision expense for credit losses, which we expect to continue. Our provision expense was $75.8 million for the first half of 2020 as compared to $10.1 million for the first half of 2019. With recent increases in COVID-19 infection rates in Florida and Alabama, our forecast of macroeconomic conditions and operating results, including expected lifetime credit losses on our loan portfolio, remains subject to meaningful uncertainty.
Governments have taken unprecedented steps to partially mitigate the adverse effects of their containment measures. For example, on March 27, 2020, the CARES Act was enacted to inject more than $2 trillion of financial assistance into the U.S. economy. The FRB has taken decisive and sweeping actions as well. Since March 15, 2020, these have included a reduction in the target range for the federal funds rate to 0 to 0.25 percent, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses.
The degree to which our actions and those of governments and others will directly or indirectly assist our customers, counterparties, and third-party service providers and advance our business and the economy generally is not yet clear. For example, while our short-term loan modifications granted to certain customers impacted by COVID-19 may better position them to resume their regular payments to us in the future and enhance our brand and customer loyalty, these modifications may negatively impact our cash flows and results of operations at least in the near term, may produce a higher degree of requests for extensions and rewrites than we have anticipated, and may not be as successful as we expect in managing our credit risk. In addition, while the FRB’s accommodative monetary policy may benefit us to some degree by supporting economic activity among our customers, this policy and sudden shifts in it may inhibit our ability to grow or sustain net interest income and effectively manage interest rate risk.
In order to safeguard the health and wellness of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including temporarily closure of certain offices, restricting employee travel and directing employees to work from home whenever possible, temporary closure of

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some branches and, in branches that remain open, offering only restricted drive-up service or lobby service by appointment, and have implemented our business continuity plans to the extent necessary. These measures, and further actions we may take as required by government authorities or that we otherwise determine are in the best interests of our customers and employees, could increase certain risks, including cybersecurity risks, impair our ability to perform critical functions and adversely impact our results of operations.
We are unable to estimate the near-term and ultimate impacts of COVID-19 on our business and operations at this time. The pandemic could cause us to experience higher credit losses in our lending portfolio, additional increases in our allowance for credit losses, impairment of our goodwill and other financial assets, diminished access to capital markets and other funding sources, further reduced demand for our products and services, and other negative impacts on our financial position, results of operations, and prospects. In addition, sustained adverse effects may impair our capital and liquidity positions, require us to take capital actions, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, result in downgrades in our credit ratings, and the reduction or elimination of our common stock dividend in future periods.
As a participating lender in the SBA Paycheck Protection Program, we are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties, which could have a significant adverse impact on our business, financial position, results of operations, and prospects.
The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. On April 16, 2020, the SBA notified lenders that the original $349.0 billion of funding under the PPP was exhausted, and on April 24, 2020, Congress allocated an additional $310.0 billion to the program. We participated as a lender in both rounds of the PPP because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was and continues to be some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. Since the opening of the PPP banks have been subject to class action litigation regarding the process and procedures that such banks used in processing applications for the PPP and their refusal to pay agent fees. Class action litigation has been filed against us, along with many other banks claiming the banks are obligated to pay agent fees. If these cases are not resolved in a manner favorable to us, it may result in significant financial liability and adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial position, results of operations and prospects.
We may have a credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us, which could adversely impact our business, financial position, results of operations and prospects.

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

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


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

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

During the quarter, we did not sell any equity securities not registered under the Securities Act of 1933, as amended. Purchases of equity securities by the issuer and affiliated purchasers during the three months ended June 30, 2020 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES 
Period
 
Total  Number of
Shares  Purchased (1)
 
Average
Price Paid
Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (2)
 
Maximum Number of
Shares that May Yet Be
Purchased Under the Plans (2)
April 1, 2020 to April 30, 2020
 
1,254

 
$
7.14

 

 
4,112,465

May 1, 2020 to May 31, 2020
 
1,837

 
7.61

 

 
4,112,465

June 1, 2020 to June 30, 2020
 
3,650

 
7.77

 

 
4,112,465

Total
 
6,741

 
$
7.61

 

 
 
 
(1)
Represents repurchases made in connection with the vesting of employee restricted stock awards.
(2)
On January 17, 2007, Valley publicly announced its intention to repurchase up to 4.7 million outstanding common shares in the open market or in privately negotiated transactions. The repurchase plan has no stated expiration date. No repurchase plans or programs expired or terminated during the three months ended June 30, 2020.


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Item 6.
Exhibits
 
(3)
Articles of Incorporation and By-laws:
 
(3.1)
 
(3.2)
(10)
Material Contracts
 
(10.1)

(31.1)
(31.2)
(32)
(101)
Interactive Data File (XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) **
(104)
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 
*
Filed herewith.
**
Furnished herewith


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
VALLEY NATIONAL BANCORP
 
 
 
 
 
(Registrant)
 
 
 
 
Date:
 
 
 
 
/s/ Ira Robbins
August 7, 2020
 
 
 
 
Ira Robbins
 
 
 
 
 
Chairman of the Board, President
 
 
 
 
 
and Chief Executive Officer
 
 
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
 
 
 
 
/s/ Michael D. Hagedorn
August 7, 2020
 
 
 
 
Michael D. Hagedorn
 
 
 
 
 
Senior Executive Vice President and
 
 
 
 
 
Chief Financial Officer
 
 
 
 
 
(Principal Financial Officer)

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