UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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☒ | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2022March 31, 2023
OR
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☐ | 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)
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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):Act:
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Large accelerated filer | ☒ | Accelerated filer | ☐ | Smaller reporting company | ☐ |
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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 506,340,635507,875,088 shares were outstanding as of August 8, 2022.May 3, 2023.
TABLE OF CONTENTS
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PART I | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 5. | | |
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Item 6. | | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share data)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Assets | (Unaudited) | | |
Cash and due from banks | $ | 481,414 | | | $ | 205,156 | |
Interest bearing deposits with banks | 906,898 | | | 1,844,764 | |
Investment securities: | | | |
Equity securities | 41,716 | | | 36,473 | |
Trading debt securities | — | | | 38,130 | |
Available for sale debt securities | 1,382,551 | | | 1,128,809 | |
Held to maturity debt securities (net of allowance for credit losses of $1,508 at June 30, 2022 and $1,165 at December 31, 2021) | 3,718,469 | | | 2,667,532 | |
Total investment securities | 5,142,736 | | | 3,870,944 | |
Loans held for sale, at fair value | 18,348 | | | 139,516 | |
Loans | 43,560,777 | | | 34,153,657 | |
Less: Allowance for loan losses | (468,819) | | | (359,202) | |
Net loans | 43,091,958 | | | 33,794,455 | |
Premises and equipment, net | 360,819 | | | 326,306 | |
Lease right of use assets | 315,820 | | | 259,117 | |
Bank owned life insurance | 714,762 | | | 566,770 | |
Accrued interest receivable | 134,682 | | | 96,882 | |
Goodwill | 1,871,505 | | | 1,459,008 | |
Other intangible assets, net | 218,642 | | | 70,386 | |
Other assets | 1,181,223 | | | 813,139 | |
Total Assets | $ | 54,438,807 | | | $ | 43,446,443 | |
Liabilities | | | |
Deposits: | | | |
Non-interest bearing | $ | 16,139,559 | | | $ | 11,675,748 | |
Interest bearing: | | | |
Savings, NOW and money market | 23,547,951 | | | 20,269,620 | |
Time | 4,193,541 | | | 3,687,044 | |
Total deposits | 43,881,051 | | | 35,632,412 | |
Short-term borrowings | 1,522,804 | | | 655,726 | |
Long-term borrowings | 1,403,805 | | | 1,423,676 | |
Junior subordinated debentures issued to capital trusts | 56,587 | | | 56,413 | |
Lease liabilities | 368,920 | | | 283,106 | |
Accrued expenses and other liabilities | 1,000,727 | | | 311,044 | |
Total Liabilities | 48,233,894 | | | 38,362,377 | |
Shareholders’ Equity | | | |
Preferred stock, no par value; 50,000,000 authorized shares: | | | |
Series A (4,600,000 shares issued at June 30, 2022 and December 31, 2021) | 111,590 | | | 111,590 | |
Series B (4,000,000 shares issued at June 30, 2022 and December 31, 2021) | 98,101 | | | 98,101 | |
Common stock (no par value, authorized 650,000,000 shares; issued 507,896,910 and 423,034,027 shares at June 30, 2022 and December 31, 2021) | 178,185 | | | 148,482 | |
Surplus | 4,965,488 | | | 3,883,035 | |
Retained earnings | 982,146 | | | 883,645 | |
Accumulated other comprehensive loss | (108,337) | | | (17,932) | |
Treasury stock, at cost (1,568,384 common shares at June 30, 2022 and 1,596,959 common shares at December 31, 2021) | (22,260) | | | (22,855) | |
Total Shareholders’ Equity | 6,204,913 | | | 5,084,066 | |
Total Liabilities and Shareholders’ Equity | $ | 54,438,807 | | | $ | 43,446,443 | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Assets | (Unaudited) | | |
Cash and due from banks | $ | 444,690 | | | $ | 444,325 | |
Interest bearing deposits with banks | 5,260,998 | | | 503,622 | |
Investment securities: | | | |
Equity securities | 50,152 | | | 48,731 | |
Trading debt securities | 6,855 | | | 13,438 | |
Available for sale debt securities | 1,259,236 | | | 1,261,397 | |
Held to maturity debt securities (net of allowance for credit losses of $1,633 at March 31, 2023 and $1,646 at December 31, 2022) | 3,845,579 | | | 3,827,338 | |
Total investment securities | 5,161,822 | | | 5,150,904 | |
Loans held for sale, at fair value | 17,218 | | | 18,118 | |
Loans | 48,659,966 | | | 46,917,200 | |
Less: Allowance for loan losses | (436,898) | | | (458,655) | |
Net loans | 48,223,068 | | | 46,458,545 | |
Premises and equipment, net | 365,313 | | | 358,556 | |
Lease right of use assets | 302,740 | | | 306,352 | |
Bank owned life insurance | 717,339 | | | 717,177 | |
Accrued interest receivable | 223,608 | | | 196,606 | |
Goodwill | 1,868,936 | | | 1,868,936 | |
Other intangible assets, net | 187,171 | | | 197,456 | |
Other assets | 1,536,670 | | | 1,242,152 | |
Total Assets | $ | 64,309,573 | | | $ | 57,462,749 | |
Liabilities | | | |
Deposits: | | | |
Non-interest bearing | $ | 13,576,116 | | | $ | 14,463,645 | |
Interest bearing: | | | |
Savings, NOW and money market | 22,903,424 | | | 23,616,812 | |
Time | 11,111,376 | | | 9,556,457 | |
Total deposits | 47,590,916 | | | 47,636,914 | |
Short-term borrowings | 6,413,056 | | | 138,729 | |
Long-term borrowings | 2,197,656 | | | 1,543,058 | |
Junior subordinated debentures issued to capital trusts | 56,847 | | | 56,760 | |
Lease liabilities | 355,020 | | | 358,884 | |
Accrued expenses and other liabilities | 1,184,497 | | | 1,327,602 | |
Total Liabilities | 57,797,992 | | | 51,061,947 | |
Shareholders’ Equity | | | |
Preferred stock, no par value; 50,000,000 authorized shares: | | | |
Series A (4,600,000 shares issued at March 31, 2023 and December 31, 2022) | 111,590 | | | 111,590 | |
Series B (4,000,000 shares issued at March 31, 2023 and December 31, 2022) | 98,101 | | | 98,101 | |
Common stock (no par value, authorized 650,000,000 shares; issued 507,896,910 shares at March 31, 2023 and December 31, 2022) | 178,186 | | | 178,185 | |
Surplus | 4,967,662 | | | 4,980,231 | |
Retained earnings | 1,300,980 | | | 1,218,445 | |
Accumulated other comprehensive loss | (143,647) | | | (164,002) | |
Treasury stock, at cost (134,552 common shares at March 31, 2023 and 1,522,432 common shares at December 31, 2022) | (1,291) | | | (21,748) | |
Total Shareholders’ Equity | 6,511,581 | | | 6,400,802 | |
Total Liabilities and Shareholders’ Equity | $ | 64,309,573 | | | $ | 57,462,749 | |
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Interest Income | | | | | | | |
Interest and fees on loans | $ | 415,577 | | | $ | 315,314 | | | $ | 732,942 | | | $ | 628,495 | |
Interest and dividends on investment securities: | | | | | | | |
Taxable | 27,534 | | | 12,716 | | | 45,973 | | | 25,882 | |
Tax-exempt | 5,191 | | | 3,216 | | | 7,708 | | | 6,572 | |
Dividends | 3,076 | | | 2,167 | | | 4,752 | | | 4,038 | |
Interest on federal funds sold and other short-term investments | 1,569 | | | 235 | | | 2,030 | | | 459 | |
Total interest income | 452,947 | | | 333,648 | | | 793,405 | | | 665,446 | |
Interest Expense | | | | | | | |
Interest on deposits: | | | | | | | |
Savings, NOW and money market | 17,122 | | | 11,166 | | | 26,749 | | | 22,291 | |
Time | 3,269 | | | 6,279 | | | 6,100 | | | 17,372 | |
Interest on short-term borrowings | 4,083 | | | 1,168 | | | 4,889 | | | 2,926 | |
Interest on long-term borrowings and junior subordinated debentures | 10,313 | | | 14,128 | | | 19,838 | | | 29,283 | |
Total interest expense | 34,787 | | | 32,741 | | | 57,576 | | | 71,872 | |
Net Interest Income | 418,160 | | | 300,907 | | | 735,829 | | | 593,574 | |
Provision (credit) for credit losses for held to maturity securities | 286 | | | (30) | | | 343 | | | (388) | |
Provision for credit losses for loans | 43,712 | | | 8,777 | | | 47,212 | | | 17,791 | |
Net Interest Income After Provision for Credit Losses | 374,162 | | | 292,160 | | | 688,274 | | | 576,171 | |
Non-Interest Income | | | | | | | |
Wealth management and trust fees | 9,577 | | | 3,532 | | | 14,708 | | | 6,861 | |
Insurance commissions | 3,463 | | | 2,637 | | | 5,322 | | | 4,195 | |
Service charges on deposit accounts | 10,067 | | | 5,083 | | | 16,279 | | | 10,186 | |
(Losses) gains on securities transactions, net | (309) | | | 375 | | | (1,381) | | | 476 | |
Fees from loan servicing | 2,717 | | | 3,187 | | | 5,498 | | | 6,086 | |
Gains on sales of loans, net | 3,602 | | | 10,061 | | | 4,588 | | | 13,574 | |
| | | | | | | |
Bank owned life insurance | 2,113 | | | 2,475 | | | 4,159 | | | 4,806 | |
Other | 27,303 | | | 15,776 | | | 48,630 | | | 28,175 | |
Total non-interest income | 58,533 | | | 43,126 | | | 97,803 | | | 74,359 | |
Non-Interest Expense | | | | | | | |
Salary and employee benefits expense | 154,798 | | | 91,095 | | | 262,531 | | | 179,198 | |
Net occupancy expense | 22,429 | | | 18,550 | | | 44,420 | | | 39,230 | |
Technology, furniture and equipment expense | 49,866 | | | 23,220 | | | 75,880 | | | 43,950 | |
FDIC insurance assessment | 5,351�� | | | 3,374 | | | 9,509 | | | 6,650 | |
Amortization of other intangible assets | 11,400 | | | 5,449 | | | 15,837 | | | 11,455 | |
Professional and legal fees | 30,409 | | | 7,486 | | | 45,158 | | | 13,758 | |
| | | | | | | |
Loss on extinguishment of debt | — | | | 8,406 | | | — | | | 8,406 | |
Amortization of tax credit investments | 3,193 | | | 2,972 | | | 6,089 | | | 5,716 | |
Other | 22,284 | | | 11,341 | | | 37,646 | | | 23,743 | |
Total non-interest expense | 299,730 | | | 171,893 | | | 497,070 | | | 332,106 | |
Income Before Income Taxes | 132,965 | | | 163,393 | | | 289,007 | | | 318,424 | |
Income tax expense | 36,552 | | | 42,881 | | | 75,866 | | | 82,202 | |
Net Income | 96,413 | | | 120,512 | | | 213,141 | | | 236,222 | |
Dividends on preferred stock | 3,172 | | | 3,172 | | | 6,344 | | | 6,344 | |
Net Income Available to Common Shareholders | $ | 93,241 | | | $ | 117,340 | | | $ | 206,797 | | | $ | 229,878 | |
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (continued)
(in thousands, except for share data)
| | | | Three Months Ended March 31, | |
| | | 2023 | | 2022 | |
Interest Income | | Interest Income | | | | |
Interest and fees on loans | | Interest and fees on loans | $ | 655,226 | | | $ | 317,365 | | |
Interest and dividends on investment securities: | | Interest and dividends on investment securities: | | |
Taxable | | Taxable | 32,289 | | | 18,439 | | |
Tax-exempt | | Tax-exempt | 5,325 | | | 2,517 | | |
Dividends | | Dividends | 5,185 | | | 1,676 | | |
Interest on federal funds sold and other short-term investments | | Interest on federal funds sold and other short-term investments | 22,205 | | | 461 | | |
Total interest income | | Total interest income | 720,230 | | | 340,458 | | |
Interest Expense | | Interest Expense | | | | |
Interest on deposits: | | Interest on deposits: | | |
Savings, NOW and money market | | Savings, NOW and money market | 150,766 | | | 9,627 | | |
Time | | Time | 80,298 | | | 2,831 | | |
Interest on short-term borrowings | | Interest on short-term borrowings | 33,948 | | | 806 | | |
Interest on long-term borrowings and junior subordinated debentures | | Interest on long-term borrowings and junior subordinated debentures | 19,198 | | | 9,525 | | |
Total interest expense | | Total interest expense | 284,210 | | | 22,789 | | |
Net Interest Income | | Net Interest Income | 436,020 | | | 317,669 | | |
| Provision for credit losses for available for sale and held to maturity securities | | Provision for credit losses for available for sale and held to maturity securities | 4,987 | | | 57 | | |
Provision for credit losses for loans | | Provision for credit losses for loans | 9,450 | | | 3,500 | | |
Net Interest Income After Provision for Credit Losses | | Net Interest Income After Provision for Credit Losses | 421,583 | | | 314,112 | | |
Non-Interest Income | | Non-Interest Income | | | | |
Wealth management and trust fees | | Wealth management and trust fees | 9,587 | | | 5,131 | | |
Insurance commissions | | Insurance commissions | 2,420 | | | 1,859 | | |
Capital markets | | Capital markets | 10,892 | | | 14,360 | | |
Service charges on deposit accounts | | Service charges on deposit accounts | 10,476 | | | 6,212 | | |
Gains (losses) on securities transactions, net | | Gains (losses) on securities transactions, net | 378 | | | (1,072) | | |
| Fees from loan servicing | | Fees from loan servicing | 2,671 | | | 2,781 | | |
Gains on sales of loans, net | | Gains on sales of loans, net | 489 | | | 986 | | |
| Bank owned life insurance | | Bank owned life insurance | 2,584 | | | 2,046 | | |
Other | | Other | 14,802 | | | 6,967 | | |
Total non-interest income | | Total non-interest income | 54,299 | | | 39,270 | | |
Non-Interest Expense | | Non-Interest Expense | | | | |
Salary and employee benefits expense | | Salary and employee benefits expense | 144,986 | | | 107,733 | | |
Net occupancy expense | | Net occupancy expense | 23,256 | | | 21,991 | | |
Technology, furniture and equipment expense | | Technology, furniture and equipment expense | 36,508 | | | 26,015 | | |
FDIC insurance assessment | | FDIC insurance assessment | 9,155 | | | 4,158 | | |
Amortization of other intangible assets | | Amortization of other intangible assets | 10,519 | | | 4,437 | | |
Professional and legal fees | | Professional and legal fees | 16,814 | | | 14,749 | | |
| Amortization of tax credit investments | | Amortization of tax credit investments | 4,253 | | | 2,896 | | |
Other | | Other | 26,675 | | | 15,361 | | |
Total non-interest expense | | Total non-interest expense | 272,166 | | | 197,340 | | |
Income Before Income Taxes | | Income Before Income Taxes | 203,716 | | | 156,042 | | |
Income tax expense | | Income tax expense | 57,165 | | | 39,314 | | |
Net Income | | Net Income | 146,551 | | | 116,728 | | |
Dividends on preferred stock | | Dividends on preferred stock | 3,874 | | | 3,172 | | |
Net Income Available to Common Shareholders | | Net Income Available to Common Shareholders | $ | 142,677 | | | $ | 113,556 | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2022 | | 2021 | | 2022 | | 2021 | |
Earnings Per Common Share: | Earnings Per Common Share: | | | | | | | | Earnings Per Common Share: | | |
Basic | Basic | $ | 0.18 | | | $ | 0.29 | | | $ | 0.45 | | | $ | 0.57 | | Basic | $ | 0.28 | | | $ | 0.27 | | |
Diluted | Diluted | 0.18 | | | 0.29 | | | 0.44 | | | 0.56 | | Diluted | 0.28 | | | 0.27 | | |
Cash Dividends Declared per Common Share | 0.11 | | | 0.11 | | | 0.22 | | | 0.22 | | |
Weighted Average Number of Common Shares Outstanding: | | |
Basic | 506,302,464 | | | 405,963,209 | | | 464,172,210 | | | 405,560,146 | | |
Diluted | 508,479,206 | | | 408,660,778 | | | 466,320,683 | | | 408,152,458 | | |
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See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Net income | Net income | $ | 96,413 | | | $ | 120,512 | | | $ | 213,141 | | | $ | 236,222 | | Net income | $ | 146,551 | | | $ | 116,728 | | |
Other comprehensive loss, net of tax: | | |
Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | | |
Unrealized gains and losses on available for sale securities | Unrealized gains and losses on available for sale securities | | Unrealized gains and losses on available for sale securities | | |
Net losses arising during the period | (52,269) | | | (1,471) | | | (91,161) | | | (11,907) | | |
Less reclassification adjustment for net losses (gains) included in net income | — | | | 76 | | | (10) | | | 120 | | |
Net gains (losses) arising during the period | | Net gains (losses) arising during the period | 17,170 | | | (38,892) | | |
Less reclassification adjustment for net gains included in net income | | Less reclassification adjustment for net gains included in net income | — | | | (10) | | |
Total | Total | (52,269) | | | (1,395) | | | (91,171) | | | (11,787) | | Total | 17,170 | | | (38,902) | | |
| Unrealized gains and losses on derivatives (cash flow hedges) | Unrealized gains and losses on derivatives (cash flow hedges) | | | | | | | | Unrealized gains and losses on derivatives (cash flow hedges) | | | | |
Net (losses) gains on derivatives arising during the period | (23) | | | (147) | | | 195 | | | 27 | | |
Less reclassification adjustment for net (gains) losses included in net income | (80) | | | 534 | | | 306 | | | 1,185 | | |
Net gains on derivatives arising during the period | | Net gains on derivatives arising during the period | 2,798 | | | 218 | | |
Less reclassification adjustment for net losses included in net income | | Less reclassification adjustment for net losses included in net income | 379 | | | 386 | | |
Total | Total | (103) | | | 387 | | | 501 | | | 1,212 | | Total | 3,177 | | | 604 | | |
Defined benefit pension plan | | | | | | | | |
Defined benefit pension and postretirement benefit plans | | Defined benefit pension and postretirement benefit plans | | | | |
| Amortization of actuarial net loss | Amortization of actuarial net loss | 133 | | | 278 | | | 265 | | | 558 | | Amortization of actuarial net loss | 8 | | | 132 | | |
Total other comprehensive loss | (52,239) | | | (730) | | | (90,405) | | | (10,017) | | |
| Total other comprehensive income (loss) | | Total other comprehensive income (loss) | 20,355 | | | (38,166) | | |
Total comprehensive income | Total comprehensive income | $ | 44,174 | | | $ | 119,782 | | | $ | 122,736 | | | $ | 226,205 | | Total comprehensive income | $ | 166,906 | | | $ | 78,562 | | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the SixThree Months Ended June 30, 2022March 31, 2023
| | | Common Stock | | Accumulated | | | Common Stock | | Accumulated | |
| | Preferred Stock | | Shares | | Amount | | Surplus | | Retained Earnings | | Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity | | Preferred Stock | | Shares | | Amount | | Surplus | | Retained Earnings | | Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity |
| | (in thousands) | | (in thousands) |
Balance - December 31, 2021 | $ | 209,691 | | | 421,437 | | | $ | 148,482 | | | $ | 3,883,035 | | | $ | 883,645 | | | $ | (17,932) | | | $ | (22,855) | | | $ | 5,084,066 | | |
Balance - December 31, 2022 | | Balance - December 31, 2022 | $ | 209,691 | | | 506,374 | | | $ | 178,185 | | | $ | 4,980,231 | | | $ | 1,218,445 | | | $ | (164,002) | | | $ | (21,748) | | | $ | 6,400,802 | |
Adjustment due to the adoption of ASU 2022-02 | | Adjustment due to the adoption of ASU 2022-02 | — | | | — | | | — | | | — | | | 990 | | | — | | | — | | | 990 | |
Balance - January 1, 2023 | | Balance - January 1, 2023 | 209,691 | | | 506,374 | | | 178,185 | | | 4,980,231 | | | 1,219,435 | | | (164,002) | | | (21,748) | | | 6,401,792 | |
Net income | Net income | — | | | — | | | — | | | — | | | 116,728 | | | — | | | — | | | 116,728 | | Net income | — | | | — | | | — | | | — | | | 146,551 | | | — | | | — | | | 146,551 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (38,166) | | | — | | | (38,166) | | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | 20,355 | | | — | | | 20,355 | |
Cash dividends declared: | Cash dividends declared: | | Cash dividends declared: | |
Preferred stock, Series A, $0.39 per share | Preferred stock, Series A, $0.39 per share | — | | | — | | | — | | | — | | | (1,797) | | | — | | | — | | | (1,797) | | Preferred stock, Series A, $0.39 per share | — | | | — | | | — | | | — | | | (1,797) | | | — | | | — | | | (1,797) | |
Preferred stock, Series B, $0.34 per share | — | | | — | | | — | | | — | | | (1,375) | | | — | | | — | | | (1,375) | | |
Preferred stock, Series B, $0.52 per share | | Preferred stock, Series B, $0.52 per share | — | | | — | | | — | | | — | | | (2,077) | | | — | | | — | | | (2,077) | |
Common stock, $0.11 per share | Common stock, $0.11 per share | — | | | — | | | — | | | — | | | (46,803) | | | — | | | — | | | (46,803) | | Common stock, $0.11 per share | — | | | — | | | — | | | — | | | (56,488) | | | — | | | — | | | (56,488) | |
Effect of stock incentive plan, net | Effect of stock incentive plan, net | — | | | 972 | | | — | | | (10,799) | | | (5,173) | | | — | | | 13,220 | | | (2,752) | | Effect of stock incentive plan, net | — | | | 1,061 | | | 1 | | | (12,569) | | | (3,994) | | | — | | | 16,057 | | | (505) | |
Common stock issued | | Common stock issued | — | | | 327 | | | — | | | — | | | (650) | | | — | | | 4,400 | | | 3,750 | |
| Purchase of treasury stock | — | | | (1,015) | | | — | | | — | | | — | | | — | | | (13,517) | | | (13,517) | | |
Balance - March 31, 2022 | 209,691 | | | 421,394 | | | 148,482 | | | 3,872,236 | | | 945,225 | | | (56,098) | | | (23,152) | | | 5,096,384 | | |
Net income | — | | | — | | | — | | | — | | | 96,413 | | | — | | | — | | | 96,413 | | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (52,239) | | | — | | | (52,239) | | |
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 | — | | | — | | | — | | | — | | | (56,211) | | | — | | | — | | | (56,211) | | |
Effect of stock incentive plan, net | — | | | 72 | | | 1 | | | 5,125 | | | (109) | | | — | | | 892 | | | 5,909 | | |
Common stock issued in acquisition | — | | | 84,863 | | | 29,702 | | | 1,088,127 | | | — | | | — | | | — | | | 1,117,829 | | |
Balance - June 30, 2022 | $ | 209,691 | | | 506,329 | | | $ | 178,185 | | | $ | 4,965,488 | | | $ | 982,146 | | | $ | (108,337) | | | $ | (22,260) | | | $ | 6,204,913 | | |
Balance - March 31, 2023 | | Balance - March 31, 2023 | $ | 209,691 | | | 507,762 | | | $ | 178,186 | | | $ | 4,967,662 | | | $ | 1,300,980 | | | $ | (143,647) | | | $ | (1,291) | | | $ | 6,511,581 | |
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) (continued)
For the Three Months Ended March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | | | | Accumulated | | | | |
| Preferred Stock | | Shares | | Amount | | Surplus | | Retained Earnings | | Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity |
| (in thousands) |
Balance - December 31, 2021 | $ | 209,691 | | | 421,437 | | | $ | 148,482 | | | $ | 3,883,035 | | | $ | 883,645 | | | $ | (17,932) | | | $ | (22,855) | | | $ | 5,084,066 | |
Net income | — | | | — | | | — | | | — | | | 116,728 | | | — | | | — | | | 116,728 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (38,166) | | | — | | | (38,166) | |
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 | — | | | — | | | — | | | — | | | (46,803) | | | — | | | — | | | (46,803) | |
Effect of stock incentive plan, net | — | | | 972 | | | — | | | (10,799) | | | (5,173) | | | — | | | 13,220 | | | (2,752) | |
Purchase of treasury stock | — | | | (1,015) | | | — | | | — | | | — | | | — | | | (13,517) | | | (13,517) | |
| | | | | | | | | | | | | | | |
Balance - March 31, 2022 | $ | 209,691 | | | 421,394 | | | $ | 148,482 | | | $ | 3,872,236 | | | $ | 945,225 | | | $ | (56,098) | | | $ | (23,152) | | | $ | 5,096,384 | |
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See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Cash flows from operating activities: | | | |
Net income | $ | 146,551 | | | $ | 116,728 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | |
Depreciation and amortization | 11,515 | | | 7,486 | |
Stock-based compensation | 8,093 | | | 7,263 | |
Provision for credit losses | 14,437 | | | 3,557 | |
Net amortization of premiums and accretion of discounts on securities and borrowings | (397) | | | 7,487 | |
Amortization of other intangible assets | 10,519 | | | 4,437 | |
Losses on available for sale and held to maturity debt securities, net | 24 | | | 9 | |
Proceeds from sales of loans held for sale | 27,743 | | | 204,628 | |
Gains on sales of loans, net | (489) | | | (986) | |
Originations of loans held for sale | (26,588) | | | (144,485) | |
(Gains) losses on sales of assets, net | (125) | | | 64 | |
| | | |
Net change in: | | | |
Fair value of borrowings hedged by derivative transactions | 4,219 | | | (14,696) | |
Trading debt securities | 6,583 | | | 26,391 | |
Lease right of use assets | 3,600 | | | 766 | |
Cash surrender value of bank owned life insurance | (2,584) | | | (2,046) | |
Accrued interest receivable | (27,002) | | | (5,785) | |
Other assets | (298,076) | | | 20,156 | |
Accrued expenses and other liabilities | (147,705) | | | 265,029 | |
Net cash (used in) provided by operating activities | (269,682) | | | 496,003 | |
Cash flows from investing activities: | | | |
Net loan originations and purchases | (1,774,024) | | | (1,210,754) | |
Equity securities: | | | |
Purchases | (1,594) | | | (662) | |
Sales | 409 | | | 848 | |
Held to maturity debt securities: | | | |
Purchases | (79,961) | | | (545,462) | |
| | | |
Maturities, calls and principal repayments | 61,213 | | | 136,024 | |
Available for sale debt securities: | | | |
Purchases | — | | | (15,000) | |
| | | |
Maturities, calls and principal repayments | 22,264 | | | 73,008 | |
Death benefit proceeds from bank owned life insurance | 2,773 | | | 2,369 | |
Proceeds from sales of real estate property and equipment | 125 | | | 5,692 | |
| | | |
Purchases of real estate property and equipment | (18,263) | | | (22,749) | |
Cash distribution from tax credit investments | 2,500 | | | — | |
Cash and cash equivalent acquired in acquisitions, net | — | | | (8,607) | |
Net cash used in investing activities | (1,784,558) | | | (1,585,293) | |
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For the Six Months Ended June 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | | | | Accumulated | | | | |
| Preferred Stock | | Shares | | Amount | | Surplus | | Retained Earnings | | Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity |
| (in thousands) |
Balance - December 31, 2020 | $ | 209,691 | | | 403,859 | | | $ | 141,746 | | | $ | 3,637,468 | | | $ | 611,158 | | | $ | (7,718) | | | $ | (225) | | | $ | 4,592,120 | |
Net income | — | | | — | | | — | | | — | | | 115,710 | | | — | | | — | | | 115,710 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (9,287) | | | — | | | (9,287) | |
Cash dividends declared: | | | | | | | | | | | | | | | |
Preferred stock, Series A, $0.39 per share | — | | | — | | | — | | | — | | | (1,797) | | | — | | | — | | | (1,797) | |
Preferred stock, Series B, $0.34 per share | — | | | — | | | — | | | — | | | (1,375) | | | — | | | — | | | (1,375) | |
Common stock, $0.11 per share | — | | | — | | | — | | | — | | | (45,281) | | | — | | | — | | | (45,281) | |
Effect of stock incentive plan, net | — | | | 1,939 | | | 689 | | | 14,480 | | | (5,764) | | | — | | | 175 | | | 9,580 | |
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Balance - March 31, 2021 | 209,691 | | | 405,798 | | | 142,435 | | | 3,651,948 | | | 672,651 | | | (17,005) | | | (50) | | | 4,659,670 | |
Net income | — | | | — | | | — | | | — | | | 120,512 | | | — | | | — | | | 120,512 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (730) | | | — | | | (730) | |
Cash dividends declared: | | | | | | | | | | | | | | | |
Preferred stock, Series A, $0.39 per share | — | | | — | | | — | | | — | | | (1,797) | | | — | | | — | | | (1,797) | |
Preferred stock, Series B, $0.34 per share | — | | | — | | | — | | | — | | | (1,375) | | | — | | | — | | | (1,375) | |
Common stock, $0.11 per share | — | | | — | | | — | | | — | | | (45,093) | | | — | | | — | | | (45,093) | |
Effect of stock incentive plan, net | — | | | 286 | | | 115 | | | 6,688 | | | (130) | | | — | | | (53) | | | 6,620 | |
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Balance - June 30, 2021 | $ | 209,691 | | | 406,084 | | | $ | 142,550 | | | $ | 3,658,636 | | | $ | 744,768 | | | $ | (17,735) | | | $ | (103) | | | $ | 4,737,807 | |
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VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued) (in thousands) |
|
| Three Months Ended March 31, |
| 2023 | | 2022 |
Cash flows from financing activities: | | | |
Net change in deposits | $ | (45,998) | | | $ | 14,924 | |
Net change in short-term borrowings | 6,274,327 | | | (171,545) | |
Proceeds from issuance of long-term borrowings, net | 1,000,000 | | | — | |
Repayments of long-term borrowings | (350,000) | | | — | |
Cash dividends paid to preferred shareholders | (3,874) | | | (3,172) | |
Cash dividends paid to common shareholders | (57,612) | | | (46,205) | |
Purchase of common shares to treasury | (8,599) | | | (23,627) | |
Common stock issued, net | 3,750 | | | 95 | |
Other, net | (13) | | | (180) | |
Net cash provided by (used in) financing activities | 6,811,981 | | | (229,710) | |
Net change in cash and cash equivalents | 4,757,741 | | | (1,319,000) | |
Cash and cash equivalents at beginning of year | 947,947 | | | 2,049,920 | |
Cash and cash equivalents at end of period | $ | 5,705,688 | | | $ | 730,920 | |
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Supplemental disclosures of cash flow information: | | | |
Cash payments for: | | | |
Interest on deposits and borrowings | $ | 244,246 | | | $ | 19,682 | |
Federal and state income taxes | 8,782 | | | 6,842 | |
Supplemental schedule of non-cash investing activities: | | | |
Transfer of loans to other real estate owned | $ | 903 | | | $ | — | |
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Lease right of use assets obtained in exchange for operating lease liabilities | 7,461 | | | 6,836 | |
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Non-cash net assets acquired | — | | | 8,607 | |
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See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income | $ | 213,141 | | | $ | 236,222 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 33,185 | | | 27,681 | |
Stock-based compensation | 13,420 | | | 10,690 | |
Provision for credit losses | 47,555 | | | 17,403 | |
Net amortization of premiums and accretion of discounts on securities and borrowings | 9,680 | | | 14,112 | |
Amortization of other intangible assets | 15,837 | | | 11,455 | |
Losses (gains) on securities transactions, net | 1,381 | | | (476) | |
Proceeds from sales of loans held for sale | 331,298 | | | 690,844 | |
Gains on sales of loans, net | (4,588) | | | (13,574) | |
Originations of loans held for sale | (210,048) | | | (541,627) | |
Losses (gains) on sales of assets, net | 265 | | | (36) | |
Loss on extinguishment of debt | — | | | 8,406 | |
Net change in: | | | |
Fair value of borrowings hedged by derivative transactions | (20,194) | | | — | |
Trading debt securities | 38,130 | | | (21,216) | |
Cash surrender value of bank owned life insurance | (4,159) | | | (4,806) | |
Accrued interest receivable | (12,083) | | | 7,162 | |
Other assets | (205,964) | | | 131,345 | |
Accrued expenses and other liabilities | 558,675 | | | (119,331) | |
Net cash provided by operating activities | 805,531 | | | 454,254 | |
Cash flows from investing activities: | | | |
Net loan originations and purchases | (3,495,486) | | | (264,512) | |
Equity securities: | | | |
Purchases | (1,538) | | | (2,482) | |
Sales | 1,110 | | | 649 | |
Held to maturity debt securities: | | | |
Purchases | (545,934) | | | (744,868) | |
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Maturities, calls and principal repayments | 294,052 | | | 372,397 | |
Available for sale debt securities: | | | |
Purchases | (38,000) | | | (87,366) | |
Sales | 12,846 | | | 41,134 | |
Maturities, calls and principal repayments | 150,262 | | | 287,901 | |
Death benefit proceeds from bank owned life insurance | 3,089 | | | 3,850 | |
Proceeds from sales of real estate property and equipment | 7,265 | | | 2,747 | |
Proceeds from sales of loans held for investment | — | | | 4,498 | |
Purchases of real estate property and equipment | (35,164) | | | (12,207) | |
Cash and cash equivalent acquired in acquisitions, net | 321,540 | | | — | |
Net cash used in investing activities | (3,325,958) | | | (398,259) | |
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VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued) (in thousands) |
|
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash flows from financing activities: | | | |
Net change in deposits | $ | 1,218,642 | | | $ | 1,259,172 | |
Net change in short-term borrowings | 763,284 | | | (293,580) | |
Proceeds from issuance of long-term borrowings, net | — | | | 295,934 | |
Repayments of long-term borrowings | — | | | (710,595) | |
Cash dividends paid to preferred shareholders | (6,344) | | | (6,344) | |
Cash dividends paid to common shareholders | (92,618) | | | (90,201) | |
Purchase of common shares to treasury | (23,886) | | | (684) | |
Common stock issued, net | 106 | | | 6,194 | |
Other, net | (365) | | | (333) | |
Net cash provided by financing activities | 1,858,819 | | | 459,563 | |
Net change in cash and cash equivalents | (661,608) | | | 515,558 | |
Cash and cash equivalents at beginning of year | 2,049,920 | | | 1,329,205 | |
Cash and cash equivalents at end of period | $ | 1,388,312 | | | $ | 1,844,763 | |
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Supplemental disclosures of cash flow information: | | | |
Cash payments for: | | | |
Interest on deposits and borrowings | $ | 57,151 | | | $ | 82,596 | |
Federal and state income taxes | 77,285 | | | 117,562 | |
Supplemental schedule of non-cash investing activities: | | | |
Transfer of loans to other real estate owned | $ | — | | | $ | 141 | |
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Lease right of use assets obtained in exchange for operating lease liabilities | 24,745 | | | 1,993 | |
Acquisitions: | | | |
Non-cash assets acquired: | | | |
Equity securities | 6,239 | | | — | |
Investment securities available for sale | 505,928 | | | — | |
Investment securities held to maturity | 806,627 | | | — | |
Loans, net | 5,844,070 | | | — | |
Premises and equipment, net | 38,827 | | | — | |
Lease right of use assets | 49,434 | | | — | |
Bank owned life insurance | 126,861 | | | — | |
Accrued interest receivable | 25,717 | | | — | |
Goodwill | 407,522 | | | — | |
Other intangible assets, net | 159,587 | | | — | |
Other assets | 158,352 | | | — | |
Total non-cash assets acquired | $ | 8,129,164 | | | $ | — | |
Liabilities assumed: | | | |
Deposits | 7,029,997 | | | — | |
Short-term borrowings | 103,794 | | | — | |
Lease liabilities | 79,844 | | | — | |
Accrued expenses and other liabilities | 119,240 | | | — | |
Total liabilities assumed | $ | 7,332,875 | | | $ | — | |
Non-cash net assets acquired | $ | 796,289 | | | $ | — | |
Net cash and cash equivalents acquired in acquisition | $ | 321,540 | | | $ | — | |
Common stock issued in acquisition | $ | 1,117,829 | | | $ | — | |
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited consolidated financial statementsstatements of Valley National Bancorp, a New Jersey corporationCorporation (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.other entities in which Valley has a controlling financial interest. All inter-company transactions and balances have been eliminated.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, including changes to our segment reporting structure, as further discussed in Note 9 and Note 14.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, 2022March 31, 2023 and for all periods presented have been made. The results of operations for the three and six months ended June 30, 2022March 31, 2023 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, 2021.2022.
Significant Estimates. In preparing the unaudited consolidated financial statements in conformity with U.S. GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that require application of management’s most difficult, subjective or complex judgment and are particularly susceptible to change include: the allowance for credit losses, the evaluation of goodwill and other intangible assets for impairment and income taxes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates. Actual results may differ from those estimates. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date.
Note 2. Business Combinations
Acquisitions
Bank Leumi Le-Israel Corporation. On April 1, 2022, Valley completed its acquisition of Bank Leumi Le-Israel Corporation, the U.S. subsidiary of Bank Leumi Le-Israel B.M., and parent company of Bank Leumi USA, and collectively referred to as "Bank Leumi USA". Bank Leumi USA maintained its headquarters in New York City with commercial banking offices in Chicago, Los Angeles, Palo Alto, and Aventura, Florida. The common shareholders of Bank Leumi USA received 3.8025 shares of Valley common stock and $5.08 in cash for each Bank Leumi USA common share that they owned. As a result, Valley issued approximately 85 million shares of common stock and paid $113.4 million in cash in the transaction. Based on Valley’s closing stock price on March 31, 2022, the transaction was valued at $1.2 billion, inclusive of the value of options. As a result of the acquisition, Bank Leumi Le-Israel B.M. owned approximately 14 percent of Valley's common stock as of April 1, 2022.2022.
The transaction was accounted for under the acquisition methodMerger expenses, primarily consisting of accountingsalary and accordingly the results of Bank Leumi USA's operations have been included in Valley's consolidated financial statements employee benefit expense, totaled $4.1 million and $4.4 million for the three and six months ended June 30,March 31, 2023 and 2022, from the date of the acquisitionrespectively.
.
The following table sets forth assets acquired and liabilities assumed in the Bank Leumi USA acquisition, at their estimated fair values as of the closing date of the transaction:
| | | | | |
| April 1, 2022 |
| (in thousands) |
Assets acquired: | |
Cash and cash equivalents | $ | 443,588 | |
Equity securities | 6,239 | |
Available for sale debt securities | 505,928 | |
Held to maturity debt securities | 806,627 | |
Loans | 5,914,389 | |
Allowance for loan losses | (70,319) | |
Loans, net | 5,844,070 | |
Premises and equipment | 38,827 | |
Lease right of use assets | 49,273 | |
Bank owned life insurance | 126,861 | |
Accrued interest receivable | 25,717 | |
Goodwill | 403,151400,582 | |
Other intangible assets | 153,380 | |
Other assets | 158,352160,921 | |
Total assets acquired | $ | 8,562,013 | |
Liabilities assumed: | |
Deposits: | |
Non-interest bearing | $ | 4,511,537 | |
Interest bearing: | |
Savings, NOW and money market | 2,224,834 | |
Time | 293,626 | |
Total deposits | 7,029,997 | |
Short-term borrowings | 103,794 | |
Lease liabilities | 79,683 | |
Accrued expense and other liabilities | 117,269 | |
Total liabilities assumed | $ | 7,330,743 | |
Common stock issued in acquisition | 1,117,829 | |
Cash paid in acquisition | 113,441 | |
There were no
The determination ofchanges to the fair value ofestimates during the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information (existing at the date of closing) relative to closing date fair values becomes available.three months ended March 31, 2023.
Fair Value MeasurementDudley Ventures. On October 8, 2021, Valley acquired certain subsidiaries of Assets Acquired and Liabilities Assumed
Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumedDudley Ventures, an advisory firm specializing in the Bank Leumi USA acquisition.
Cashinvestment and cash equivalents.management of tax credits. The estimated fair valuestransaction price included $11.3 million of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term maturities.
Investment securities. The estimated fair value of equity securities, which represents a privately held Community Reinvestment Act (CRA) fund, was measured at net asset value (NAV). Other investment securities acquired from Bank Leumi USA were classified as available for sale and held to maturity debt securities based on Valley's intent at the acquisition date. Their estimated fair values were calculated utilizing Level 2 inputs similar to the valuation techniques used for Valley's investment portfolios detailed in Note 3.
Loans. The acquired loan portfolio was recorded at its estimated fair value based on a discounted cash flow methodology. The acquired loan portfolio was segregated into categories for valuation purposes primarily based on loan typeclosing date and loan risk rating. The estimated fair value incorporates adjustments related to market loss assumptions and prevailing market interest rates for comparable assets and other market factors such as liquidity from a market participant perspective. Management estimated the cash flows expected to be collected at the acquisition date by using valuation models that incorporated loan contractual characteristics (such as payment type, amortization type, and term to maturity) as well as estimates of key valuation assumptions (such as prepayment speeds, default rates, and loss severity rates).
The expected cash flows from the acquired loan portfolios were discounted to present value based on estimated market rates. The market rates were estimated using a buildup approach based on the following components: funding cost, servicing cost, andfixed future stock consideration of liquidity premium. In addition, coupon rates for recently originated loans and available market data regarding origination rates were also consideredtotaling $3.75 million, which resulted in the analysis. The methods used to estimate the Level 3 fair valuesissuance of loans are sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.
The acquired loans were also evaluated upon acquisition to determine whether they represented purchased credit-deteriorated (PCD) loans, defined as loans which have experienced a more-than-insignificant deterioration in credit quality since origination. Valley considered a variety of factors in assessing loans the PCD classification, including but not limited to risk grades, delinquency, non-performing status, current or previous troubled debt restructurings, watch list credits and other qualitative factors that indicated a deterioration in credit quality since origination.
For PCD loans, an initial allowance was determined based on Valley’s CECL methodology and was added to the acquisition date fair value of each PCD loan to establish its initial amortized cost basis. The difference between the unpaid principal balance of loans and the calculated amortized cost basis resulted in a net non-credit discount totaling $18.8 million. This net discount will be accreted into interest income over the loan's remaining life using the effective interest method.
The following table provides a reconciliation of the unpaid principal balance and fair value of loans identified as PCD acquired from Bank Leumi USA:
| | | | | | | | |
| | April 1, 2022 |
| | ($ in thousands) |
Unpaid Principal Balance of PCD loans | | $ | 1,922,272 | |
Allowance for credit losses at acquisition * | | (70,319) | |
Non-credit discount at acquisition | | (18,814) | |
Fair value of acquired PCD loans | | $ | 1,833,139 | |
* Represents the initial reserve for PCD loans, reported net of an additional $62.4 million charge-offs recognized at the date of acquisition in accordance with Valley's charge-off policy.
Other intangible assets. Other intangible assets recorded consist of core deposit intangibles (CDI) and other acquired client relationships. CDI assets are measures of the value of non-maturity checking, savings, NOW and
money market customer deposits that are acquired in a business combination. The fair value for CDI was estimated based on a discounted cash flow methodology considering expected customer attrition rates, net maintenance cost of the deposit base, alternative costs of funds, and the interest costs associated with the customer deposits. The CDI is amortized using an accelerated amortization method over an estimated useful life of 10 years. For other acquired client relationships, fair value is measured using the multi-period excess earnings methodology under the income approach. This method measures the future economic income that can be attributed to the existing client relationships acquired, after considering revenue and expense assumptions, expected client attrition rates, and subtracting returns for other complementary assets that contribute to the income over their expected remaining useful lives. The resulting net cash flows are discounted to present value using an estimated intangible asset discount rate. The other acquired client relationships are amortized using an accelerated amortization method over an estimated remaining useful life of 14 years.
Deposits. The fair values of deposit liabilities with no stated maturity (i.e., non-interest bearing accounts and savings, NOW and money market accounts) are equal to the carrying amounts payable on demand. The fair values of certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered on deposits with similar characteristics and remaining maturities.
Supplemental Pro Forma Financial Information (Unaudited). The following table summarizes supplemental pro forma financial information giving effect to the merger as if it had been completed on January 1, 2021:
| | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2022 | | 2021 |
| | | (in thousands) |
Net interest income | | | $ | 369,549 | | $ | 865,766 | | $ | 728,419 |
Non-interest income | | | 58,069 | | 134,483 | | 105,527 |
Net income | | | 104,639 | | 358,427 | | 211,823 |
The supplemental pro forma financial information does not necessarily reflect the results of operations that would have occurred had Valley merged with Bank Leumi USA on January 1, 2021. Costs savings and other business synergies related to the merger are not included in the supplemental pro forma financial information.
Other Recent Acquisitions
Landmark Insurance of the Palm Beaches. On February 1, 2022, the Bank's insurance agency subsidiary, Valley Insurance Services, acquired Landmark Insurance of the Palm Beaches Inc. (Landmark) agency. The purchase price included $8.6 million in cash and $1.0 million in contingent consideration. Goodwill and other intangible assets totaled $4.4 million and $6.2 million, respectively. The transaction was accounted for under the acquisition method of accounting and accordingly the results of Landmark's operations have been included in Valley's consolidated financial statements for the three and six months ended June 30, 2022 from the date of acquisition.
The Westchester Bank Holding Corporation. On December 1, 2021, Valley completed its acquisition of The Westchester Bank Holding Corporation (Westchester) and its principal subsidiary, The Westchester Bank which was headquartered in White Plains, New York. As of December 1, 2021, Westchester had approximately $1.4 billion in assets, $915.0 million in loans, and $1.2 billion in deposits, after purchase accounting adjustments, and a branch network of 7 locations in Westchester County, New York. The common shareholders of Westchester received 229.645327,083 shares of Valley common stock for each Westchester share they owned prior to the merger. The total consideration for the merger was $211.1 million, consistingformer principals of approximately 15.7 million shares of Valley common stock.Dudley Ventures in February 2023.
During the
six months ended
June 30, 2022, Valley revised the estimated fair values of the acquired assets as of the acquisition date of Westchester based upon additional information obtained that existed as of December 1, 2021. The adjustments related to the fair value of deferred tax assets and resulted in a $5.0 million increase in goodwill (see Note 9 for more information). 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.
Merger expenses mainly related the Bank Leumi USA acquisition above totaled $54.5 million and $58.9 million for the three and six months ended June 30, 2022, respectively. The merger expenses largely consisted of salaries and benefits expense, professional and legal fees, and other expense (largely consisting of technology related costs) within non-interest expense on the consolidated statements of income. Valley incurred no merger related expenses during the three and six months ended June 30, 2021. Incremental merger expenses related to this acquisition are expected to be incurred in future periods, including professional fees, technology and other expenses related to back office consolidation of the Bank operations.
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, 2022March 31, 2023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands, except for share data) |
Net income available to common shareholders | $ | 93,241 | | | $ | 117,340 | | | $ | 206,797 | | | $ | 229,878 | |
Basic weighted average number of common shares outstanding | 506,302,464 | | | 405,963,209 | | | 464,172,210 | | | 405,560,146 | |
Plus: Common stock equivalents | 2,176,742 | | | 2,697,569 | | | 2,148,473 | | | 2,592,312 | |
Diluted weighted average number of common shares outstanding | 508,479,206 | | | 408,660,778 | | | 466,320,683 | | | 408,152,458 | |
Earnings per common share: | | | | | | | |
Basic | $ | 0.18 | | | $ | 0.29 | | | $ | 0.45 | | | $ | 0.57 | |
Diluted | 0.18 | | | 0.29 | | | 0.44 | | | 0.56 | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| (in thousands, except for share and per share data) |
Net income available to common shareholders | $ | 142,677 | | | $ | 113,556 | | | | | |
Basic weighted average number of common shares outstanding | 507,111,295 | | | 421,573,843 | | | | | |
Plus: Common stock equivalents | 2,545,135 | | | 1,932,707 | | | | | |
Diluted weighted average number of common shares outstanding | 509,656,430 | | | 423,506,550 | | | | | |
Earnings per common share: | | | | | | | |
Basic | $ | 0.28 | | | $ | 0.27 | | | | | |
Diluted | 0.28 | | | 0.27 | | | | | |
Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of restricted stock units and common stock options to purchase Valley’s common shares. Common stock options with exercise prices that exceed the average market price per share of Valley’s common stock during the periods presented may have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation along with restricted stock units. Potential anti-dilutive weighted common shares were immaterial fototaled approximately 1.6 million andr 113 thousand for the threethree and six months ended June 30,March 31, 2023 and 2022, and 2021.respectively.
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, 2022:March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2022 | $ | (29,716) | | | $ | (728) | | | $ | (25,654) | | | $ | (56,098) | |
Other comprehensive loss before reclassification | (52,269) | | | (23) | | | — | | | (52,292) | |
Amounts reclassified from other comprehensive (loss) income | — | | | (80) | | | 133 | | | 53 | |
Other comprehensive (loss) income, net | (52,269) | | | (103) | | | 133 | | | (52,239) | |
Balance at June 30, 2022 | $ | (81,985) | | | $ | (831) | | | $ | (25,521) | | | $ | (108,337) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 and Postretirement Benefit Plans | |
| (in thousands) |
Balance at December 31, 2022 | $ | (127,818) | | | $ | 2,233 | | | $ | (38,417) | | | $ | (164,002) | |
Other comprehensive gain before reclassification | 17,170 | | | 2,798 | | | — | | | 19,968 | |
Amounts reclassified from other comprehensive income | — | | | 379 | | | 8 | | | 387 | |
Other comprehensive income, net | 17,170 | | | 3,177 | | | 8 | | | 20,355 | |
Balance at March 31, 2023 | $ | (110,648) | | | $ | 5,410 | | | $ | (38,409) | | | $ | (143,647) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2021 | $ | 9,186 | | | $ | (1,332) | | | $ | (25,786) | | | $ | (17,932) | |
Other comprehensive (loss) gain before reclassification | (91,161) | | | 195 | | | — | | | (90,966) | |
Amounts reclassified from other comprehensive (loss) income | (10) | | | 306 | | | 265 | | | 561 | |
Other comprehensive (loss) income, net | (91,171) | | | 501 | | | 265 | | | (90,405) | |
Balance at June 30, 2022 | $ | (81,985) | | | $ | (831) | | | $ | (25,521) | | | $ | (108,337) | |
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, 2022March 31, 2023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amounts Reclassified from Accumulated Other Comprehensive Loss | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
Components of Accumulated Other Comprehensive Loss | | 2022 | | 2021 | | 2022 | | 2021 | | Income Statement Line Item |
| | (in thousands) | | |
Unrealized (losses) gains on AFS securities before tax | | $ | — | | | $ | (103) | | | $ | 14 | | | $ | (162) | | | (Losses) gains on securities transactions, net |
Tax effect | | — | | | 27 | | | (4) | | | 42 | | | |
Total net of tax | | — | | | (76) | | | 10 | | | (120) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Unrealized gains (losses) on derivatives (cash flow hedges) before tax | | 116 | | | (749) | | | (426) | | | (1,664) | | | Interest expense |
Tax effect | | (36) | | | 215 | | | 120 | | | 479 | | | |
Total net of tax | | 80 | | | (534) | | | (306) | | | (1,185) | | | |
Defined benefit pension plan: | | | | | | | | | | |
Amortization of actuarial net loss | | (184) | | | (387) | | | (367) | | | (775) | | | * |
| | | | | | | | | | |
Tax effect | | 51 | | | 109 | | | 102 | | | 217 | | | |
Total net of tax | | (133) | | | (278) | | | (265) | | | (558) | | | |
Total reclassifications, net of tax | | $ | (53) | | | $ | (888) | | | $ | (561) | | | $ | (1,863) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Amounts Reclassified from Accumulated Other Comprehensive Loss | | |
| | Three Months Ended March 31, | | | | |
Components of Accumulated Other Comprehensive Loss | | 2023 | | 2022 | | | | | | Income Statement Line Item |
| | (in thousands) | | |
Unrealized gains on AFS securities before tax | | $ | — | | | $ | 14 | | | | | | | Gains (losses) on securities transactions, net |
Tax effect | | — | | | (4) | | | | | | | |
Total net of tax | | — | | | 10 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Unrealized losses on derivatives (cash flow hedges) before tax | | (531) | | | (542) | | | | | | | Interest expense |
Tax effect | | 152 | | | 156 | | | | | | | |
Total net of tax | | (379) | | | (386) | | | | | | | |
Defined benefit pension and postretirement benefit plans: | | | | | | | | | | |
Amortization of actuarial net loss | | (11) | | | (183) | | | | | | | * |
| | | | | | | | | | |
Tax effect | | 3 | | | 51 | | | | | | | |
Total net of tax | | (8) | | | (132) | | | | | | | |
Total reclassifications, net of tax | | $ | (387) | | | $ | (508) | | | | | | | |
| | | | | |
* | Amortization of actuarial net loss is included in the computation of net periodic pension cost recognized within other non-interest expense. |
Note 5. New Authoritative Accounting Guidance
New Accounting Guidance Adopted in 20222023
Accounting Standards Update (ASU) No. 2021-01 "Reference Rate Reform (Topic 848)" extends some of Accounting Standards Codification Topic 848’s optional expedients to derivative contracts impacted by the discounting transition, including for derivatives that do not reference LIBOR or other reference rates that are expected to be discontinued. ASU No. 2021-01 is effective for all entities immediately upon issuance and may be elected retrospectively to eligible modifications as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications made on or after any date within the interim period including January 7, 2021 and it can be applied through December 31, 2022, similar to the other reference rate reform relief provided under Topic 848. ASU No. 2021-01 is not expected to have a significant impact on Valley’s consolidated financial statements.
ASU No. 2021-05 "Lessors – Certain Leases with Variable Lease Payments" updates guidance in ASC 842, Leases and requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if: (i) the lease would have been classified as a sales-type lease or direct financing lease under ASC 842 classification criteria; and (ii) the lessor would have recognized a selling loss at lease commencement. Valley adopted ASU No. 2021-05 on January 1, 2022, and the new guidance did not have a significant impact on Valley’s consolidated financial statements.
New Accounting Guidance Issued in 2022
ASU No. 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging –Portfolio Layer Method” expands and clarifies the current guidance on accounting for fair value hedge basis adjustments under the portfolio layer method for both single-layer and multiple-layer hedges. This method allows entities to designate multiple hedging relationships with a single closed portfolio, and therefore a larger portion of the interest rate risk associated with such a portfolio is eligible to be hedged. ASU No. 2022-01 also clarifies that no assets may be added to a closed portfolio once it is designated in a portfolio layer method hedge. Valley adopted ASU No. 2022-01 will be effective for Valley on January 1, 2023 and it isthe guidance did not expected to have a significant impact on Valley's consolidated financial statements.
ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” eliminates the troubled debt restructuring (TDR) accounting model for creditors, such as Valley, that have adopted Topic 326, “Financial Instruments – Credit Losses.” ASU No. 2022-02
will requirerequires all loan modifications to be accounted for under the general loan modification guidance in Subtopic 310-20. On a prospective basis, entities
will also beare subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty. Public business entities within the scope of the Topic 326 vintage disclosure requirements
are also
will be required to prospectively disclose current-period gross write-off information by vintage.
However, gross recoveries will not be required.Entities can elect to adopt the guidance on TDRs using either a prospective or modified retrospective transition method. Valley adopted ASU No. 2022-02
will be effective for Valley on January 1, 2023
and elected to apply the modified retrospective transition method. The adoption of ASU No. 2022-02 resulted in a $1.4 million decrease in the allowance for loan losses, and a $990 thousand increase to retained earnings, net of taxes. See Note 8 for required disclosures.New Accounting Guidance Issued in 2023
ASU No. 2023-02, Investments –“Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method,” is intended to improve the accounting and
disclosures for investments in certain tax credit structures. ASU No. 2023-02 allows the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met. ASU No. 2023-02 will be effective on January 1, 2024 and it can be early adopted in any interim period. The new guidance can also be applied either on a modified retrospective or a retrospective basis, with earlyany adjustments resulting from adoption permitted.recognized in earnings on the date of adoption. Valley is currently evaluating the impact of ASU No. 2022-02 on its consolidated financial statements.
ASU No. 2022-03, "Fair Value Measurement of Equity Securities subject to Contractual Sale Restrictions” updates guidance in ASC 820, Fair Value Measurement and clarifies that a contractual sale restriction should not be considered in measuring fair value. It also requires entities with investments in equity securities subject to contractual sale restrictions to disclose certain qualitative and quantitative information about such securities including (i) the nature and remaining duration of the restriction; (ii) the circumstances that could cause a lapse in restrictions; and (iii) the fair value of the securities with contractual sale restrictions. ASU No. 2022-03 will be effective for Valley on January 1, 2024, and2023-02, but it can be applied prospectively, with any adjustments resulting from
adoption recognized in earnings on the date of adoption. The adoption of ASU No. 2022-03 is not expected to have a significant impact on Valley's consolidated financial statements.
Note 6. Fair Value Measurement of Assets and Liabilities
ASC Topic 820, “Fair Value Measurements” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
•Level 1 - Unadjusted exchange quoted prices in active markets for identical assets or liabilities, or identical liabilities traded as assets that the reporting entity has the ability to access at the measurement date.
•Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly (i.e., quoted prices on similar assets) for substantially the full term of the asset or liability.
•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Assets and Liabilities Measured at Fair Value on a Recurring and Non-Recurring Basis
The following tables present the assets and liabilities that are measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at June 30, 2022March 31, 2023 and December 31, 2021.2022. The assets presented under “non-recurring fair value measurements” in the tables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized).
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | 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) | $ | 35,931 | | | $ | 24,683 | | | $ | — | | | $ | — | |
| | | | | | | |
Available for sale debt securities: | | | | | | | |
U.S. Treasury securities | 292,398 | | | 292,398 | | | — | | | — | |
U.S. government agency securities | 30,533 | | | — | | | 30,533 | | | — | |
Obligations of states and political subdivisions | 157,478 | | | — | | | 157,478 | | | — | |
Residential mortgage-backed securities | 721,036 | | | — | | | 721,036 | | | — | |
Corporate and other debt securities | 181,106 | | | — | | | 181,106 | | | — | |
Total available for sale debt securities | 1,382,551 | | | 292,398 | | | 1,090,153 | | | — | |
Loans held for sale (2) | 18,348 | | | — | | | 18,348 | | | — | |
Other assets (3) | 344,189 | | | — | | | 344,189 | | | — | |
Total assets | $ | 1,781,019 | | | $ | 317,081 | | | $ | 1,452,690 | | | $ | — | |
Liabilities | | | | | | | |
Other liabilities (3) | $ | 364,266 | | | $ | — | | | $ | 364,266 | | | $ | — | |
Total liabilities | $ | 364,266 | | | $ | — | | | $ | 364,266 | | | $ | — | |
Non-recurring fair value measurements: | | | | | | | |
| | | | | | | |
Collateral dependent loans | $ | 66,144 | | | $ | — | | | $ | — | | | $ | 66,144 | |
| | | | | | | |
Foreclosed assets | 1,200 | | | — | | | — | | | 1,200 | |
Total | $ | 67,344 | | | $ | — | | | $ | — | | | $ | 67,344 | |
| | | | | Fair Value Measurements at Reporting Date Using: | | March 31, 2023 | | Fair Value Measurements at Reporting Date Using: |
| | December 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (in thousands) | | (in thousands) |
Recurring fair value measurements: | Recurring fair value measurements: | | Recurring fair value measurements: | |
Assets | Assets | | Assets | |
Investment securities: | Investment securities: | | Investment securities: | |
Equity securities (1) | Equity securities (1) | $ | 32,844 | | | $ | 21,284 | | | $ | — | | | $ | — | | Equity securities (1) | $ | 23,635 | | | $ | 23,635 | | | $ | — | | | $ | — | |
Equity securities at net asset value (NAV) | | Equity securities at net asset value (NAV) | 10,175 | | | — | | | — | | | — | |
Trading debt securities | Trading debt securities | 38,130 | | | — | | | 38,130 | | | — | | Trading debt securities | 6,855 | | | 3,477 | | | 3,378 | | | — | |
Available for sale debt securities: | Available for sale debt securities: | | Available for sale debt securities: | |
| U.S. Treasury securities | | U.S. Treasury securities | 286,745 | | | 286,745 | | | — | | | — | |
U.S. government agency securities | U.S. government agency securities | 20,925 | | | — | | | 20,925 | | | — | | U.S. government agency securities | 26,352 | | | — | | | 26,352 | | | — | |
Obligations of states and political subdivisions | Obligations of states and political subdivisions | 79,890 | | | — | | | 79,890 | | | — | | Obligations of states and political subdivisions | 152,775 | | | — | | | 152,775 | | | — | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 904,502 | | | — | | | 904,502 | | | — | | Residential mortgage-backed securities | 619,776 | | | — | | | 619,776 | | | — | |
| Corporate and other debt securities | Corporate and other debt securities | 123,492 | | | — | | | 123,492 | | | — | | Corporate and other debt securities | 173,588 | | | — | | | 173,588 | | | — | |
Total available for sale debt securities | Total available for sale debt securities | 1,128,809 | | | — | | | 1,128,809 | | | — | | Total available for sale debt securities | 1,259,236 | | | 286,745 | | | 972,491 | | | — | |
| Loans held for sale (2) | 139,516 | | | — | | | 139,516 | | | — | | |
Other assets (3) | 181,500 | | | — | | | 181,500 | | | — | | |
Loans held for sale (1) | | Loans held for sale (1) | 17,218 | | | — | | | 17,218 | | | — | |
Other assets (2) | | Other assets (2) | 446,749 | | | — | | | 446,749 | | | — | |
Total assets | Total assets | $ | 1,520,799 | | | $ | 21,284 | | | $ | 1,487,955 | | | $ | — | | Total assets | $ | 1,763,868 | | | $ | 313,857 | | | $ | 1,439,836 | | | $ | — | |
Liabilities | Liabilities | | | | | | | | Liabilities | | | | | | | |
Other liabilities (3) | $ | 52,376 | | | $ | — | | | $ | 52,376 | | | $ | — | | |
Other liabilities (2) | | Other liabilities (2) | $ | 494,552 | | | $ | — | | | $ | 494,552 | | | $ | — | |
Total liabilities | Total liabilities | $ | 52,376 | | | $ | — | | | $ | 52,376 | | | $ | — | | Total liabilities | $ | 494,552 | | | $ | — | | | $ | 494,552 | | | $ | — | |
Non-recurring fair value measurements: | Non-recurring fair value measurements: | | | | | | | | Non-recurring fair value measurements: | | | | | | | |
| Collateral dependent loans | Collateral dependent loans | $ | 47,871 | | | $ | — | | | $ | — | | | $ | 47,871 | | Collateral dependent loans | $ | 81,267 | | | $ | — | | | $ | — | | | $ | 81,267 | |
| Foreclosed assets | Foreclosed assets | 2,931 | | | — | | | — | | | 2,931 | | Foreclosed assets | 1,752 | | | — | | | — | | | 1,752 | |
Total | Total | $ | 50,802 | | | $ | — | | | $ | — | | | $ | 50,802 | | Total | $ | 83,019 | | | $ | — | | | $ | — | | | $ | 83,019 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using: |
| December 31, 2022 | | 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 | $ | 23,494 | | | $ | 23,494 | | | $ | — | | | $ | — | |
Equity securities at net asset value (NAV) | 10,099 | | | — | | | — | | | — | |
Trading debt securities | 13,438 | | | 3,282 | | | 10,156 | | | — | |
Available for sale debt securities: | | | | | | | |
U.S. Treasury securities | 279,498 | | | 279,498 | | | — | | | — | |
U.S. government agency securities | 26,964 | | | — | | | 26,964 | | | — | |
Obligations of states and political subdivisions | 146,811 | | | — | | | 146,811 | | | — | |
Residential mortgage-backed securities | 629,818 | | | — | | | 629,818 | | | — | |
| | | | | | | |
Corporate and other debt securities | 178,306 | | | — | | | 178,306 | | | — | |
Total available for sale debt securities | 1,261,397 | | | 279,498 | | | 981,899 | | | — | |
| | | | | | | |
Loans held for sale (1) | 18,118 | | | — | | | 18,118 | | | — | |
Other assets (2) | 467,127 | | | — | | | 467,127 | | | — | |
Total assets | $ | 1,793,673 | | | $ | 306,274 | | | $ | 1,477,300 | | | $ | — | |
Liabilities | | | | | | | |
Other liabilities (2) | $ | 607,237 | | | $ | — | | | $ | 607,237 | | | $ | — | |
Total liabilities | $ | 607,237 | | | $ | — | | | $ | 607,237 | | | $ | — | |
Non-recurring fair value measurements: | | | | | | | |
Collateral dependent loans | $ | 92,923 | | | $ | — | | | $ | — | | | $ | 92,923 | |
Foreclosed assets | 1,937 | | | — | | | — | | | 1,937 | |
Total | $ | 94,860 | | | $ | — | | | $ | — | | | $ | 94,860 | |
(1)Includes equity securities measured at net asset value (NAV) per share (or its equivalent) as a practical expedient totaling $11.2 million and $11.6 million at June 30, 2022 and December 31, 2021, respectively. These securities have not been classified in the fair value hierarchy.
(2)Represents residential mortgage loans held for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $18.3$17.1 million and $136.3$17.9 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
(3)(2)Derivative financial instruments are included in this category.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.securities. The fair value of equity securities consists of a publicly traded mutual fund, a CRACommunity Reinvestment Act (CRA) investment fund and an investment related to the development of new financial technologies that are carried at quoted prices in active markets.
Equity securities at NAV. Valley also has privately held CRA funds at fair value measured at NAV whichusing the most recently available financial information from the investee. Investments measured at NAV (or its equivalent) as a practical expedient are excluded from fair value hierarchy levels in the tables above.
Trading debt securities. The fair value of trading debt securities, consisting of U.S. Treasury securities and municipal bonds are reported at fair value utilizing Level 1 and Level 2 inputs, respectively. The prices for municipal bonds investments are derived from market quotations and matrix pricing obtained through an independent pricing service. Management reviews the data and assumptions used in pricing the securities by its third-party provider to ensure the highest level of significant inputs are derived from market observable data.
Available for sale debt securities. U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. The majority of other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley
has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third-party provider to ensure the highest level of significant inputs are derived from market observable data. In addition, Valley reviews the volume and level of activity for all available for sale debt securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume.
Loans held for sale. Residential mortgage loans originated for sale are reported at fair value using Level 2 inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. The market prices represent a delivery price, which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at June 30, 2022March 31, 2023 and December 31, 20212022 based on the short duration these assets were held, and the credit quality of these loans.
Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair values of Valley’s derivatives are determined using third-party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR, Overnight Index Swap and Secured Overnight Financing Rate (SOFR) curves for all cleared derivatives. The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at June 30, 2022March 31, 2023 and December 31, 2021)2022), 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, 2022March 31, 2023 and December 31, 2021.
2022.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The following valuation techniques were used for certain non-financial assets measured at fair value on a non-recurring basis, including collateral dependent loans reported at the fair value of the underlying collateral 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, 2022,March 31, 2023, collateral dependent loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses based on the fair value of the underlying
collateral. At June 30, 2022,March 31, 2023, collateral dependent loans with a total amortized cost of $144.6$140.1 million, including our taxi medallion loan portfolio, were reduced by specific allowance for loan losses allocations totaling $78.5$58.8 million to a reported total net carrying amount of $66.1$81.3 million.
Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets included in other assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value using Level 3 inputs, consisting of a third-party appraisal less estimated cost to sell. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If further declines in the estimated fair value of the asset occur, an asset is re-measured and reported at fair value through a write-down recorded in non-interest expense. There were no adjustments to the appraisals of foreclosed assets at June 30, 2022.March 31, 2023
and December 31, 2022
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,operations, 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.
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, 2022March 31, 2023 and December 31, 20212022 were as follows:
| | | Fair Value Hierarchy | | June 30, 2022 | | December 31, 2021 | | Fair Value Hierarchy | | March 31, 2023 | | December 31, 2022 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | | (in thousands) | | | | (in thousands) |
Financial assets | Financial assets | | Financial assets | |
Cash and due from banks | Cash and due from banks | Level 1 | | $ | 481,414 | | | $ | 481,414 | | | $ | 205,156 | | | $ | 205,156 | | Cash and due from banks | Level 1 | | $ | 444,690 | | | $ | 444,690 | | | $ | 444,325 | | | $ | 444,325 | |
Interest bearing deposits with banks | Interest bearing deposits with banks | Level 1 | | 906,898 | | | 906,898 | | | 1,844,764 | | | 1,844,764 | | Interest bearing deposits with banks | Level 1 | | 5,260,998 | | | 5,260,998 | | | 503,622 | | | 503,622 | |
Equity securities (1) | Equity securities (1) | Level 3 | | 5,785 | | | 5,785 | | | 3,629 | | | 3,629 | | Equity securities (1) | Level 3 | | 16,342 | | | 16,342 | | | 15,138 | | | 15,138 | |
Held to maturity debt securities: | Held to maturity debt securities: | | Held to maturity debt securities: | |
U.S. Treasury securities | U.S. Treasury securities | Level 1 | | 67,238 | | | 67,782 | | | 67,558 | | | 71,661 | | U.S. Treasury securities | Level 1 | | 66,747 | | | 66,182 | | | 66,911 | | | 65,889 | |
U.S. government agency securities | U.S. government agency securities | Level 2 | | 259,711 | | | 243,354 | | | 6,265 | | | 6,378 | | U.S. government agency securities | Level 2 | | 300,614 | | | 255,640 | | | 260,392 | | | 212,712 | |
Obligations of states and political subdivisions | Obligations of states and political subdivisions | Level 2 | | 504,767 | | | 486,334 | | | 337,962 | | | 344,164 | | Obligations of states and political subdivisions | Level 2 | | 473,597 | | | 452,919 | | | 480,298 | | | 453,195 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | Level 2 | | 2,775,928 | | | 2,492,737 | | | 2,166,142 | | | 2,152,301 | | Residential mortgage-backed securities | Level 2 | | 2,893,505 | | | 2,525,568 | | | 2,909,106 | | | 2,495,797 | |
Trust preferred securities | Trust preferred securities | Level 2 | | 37,033 | | | 31,453 | | | 37,020 | | | 31,916 | | Trust preferred securities | Level 2 | | 37,048 | | | 29,992 | | | 37,043 | | | 31,106 | |
Corporate and other debt securities | Corporate and other debt securities | Level 2 | | 75,300 | | | 72,055 | | | 53,750 | | | 54,185 | | Corporate and other debt securities | Level 2 | | 75,701 | | | 70,183 | | | 75,234 | | | 70,771 | |
Total held to maturity debt securities (2) | Total held to maturity debt securities (2) | | 3,719,977 | | | 3,393,715 | | | 2,668,697 | | | 2,660,605 | | Total held to maturity debt securities (2) | | 3,847,212 | | | 3,400,484 | | | 3,828,984 | | | 3,329,470 | |
Net loans | Net loans | Level 3 | | 43,091,958 | | | 42,056,562 | | | 33,794,455 | | | 33,283,251 | | Net loans | Level 3 | | 48,223,068 | | | 47,389,743 | | | 46,458,545 | | | 44,910,049 | |
Accrued interest receivable | Accrued interest receivable | Level 1 | | 134,682 | | | 134,682 | | | 96,882 | | | 96,882 | | Accrued interest receivable | Level 1 | | 223,608 | | | 223,608 | | | 196,606 | | | 196,606 | |
Federal Reserve Bank and Federal Home Loan Bank stock (3) | Federal Reserve Bank and Federal Home Loan Bank stock (3) | Level 2 | | 268,133 | | | 268,133 | | | 206,450 | | | 206,450 | | Federal Reserve Bank and Federal Home Loan Bank stock (3) | Level 2 | | 547,686 | | | 547,686 | | | 238,056 | | | 238,056 | |
Financial liabilities | Financial liabilities | | Financial liabilities | |
Deposits without stated maturities | Deposits without stated maturities | Level 1 | | 39,687,510 | | | 39,687,510 | | | 31,945,368 | | | 31,945,368 | | Deposits without stated maturities | Level 1 | | 36,479,540 | | | 36,479,540 | | | 38,080,457 | | | 38,080,457 | |
Deposits with stated maturities | Deposits with stated maturities | Level 2 | | 4,193,541 | | | 4,181,719 | | | 3,687,044 | | | 3,670,113 | | Deposits with stated maturities | Level 2 | | 11,111,376 | | | 11,040,582 | | | 9,556,457 | | | 9,443,253 | |
Short-term borrowings | Short-term borrowings | Level 1 | | 1,522,804 | | | 1,488,738 | | | 655,726 | | | 637,490 | | Short-term borrowings | Level 1 | | 6,413,056 | | | 6,392,459 | | | 138,729 | | | 138,729 | |
Long-term borrowings | Long-term borrowings | Level 2 | | 1,403,805 | | | 1,329,047 | | | 1,423,676 | | | 1,404,184 | | Long-term borrowings | Level 2 | | 2,197,656 | | | 2,110,305 | | | 1,543,058 | | | 1,395,991 | |
Junior subordinated debentures issued to capital trusts | Junior subordinated debentures issued to capital trusts | Level 2 | | 56,587 | | | 43,695 | | | 56,413 | | | 46,306 | | Junior subordinated debentures issued to capital trusts | Level 2 | | 56,847 | | | 55,042 | | | 56,760 | | | 50,923 | |
Accrued interest payable (4) | Accrued interest payable (4) | Level 1 | | 6,137 | | | 6,137 | | | 4,909 | | | 4,909 | | Accrued interest payable (4) | Level 1 | | 85,581 | | | 85,581 | | | 45,617 | | | 45,617 | |
(1)Represents equity securities without a readily determinable fair value measured at cost less impairment, if any.
(2)The carrying amount is presented gross without the allowance for credit losses.
(3)Included in other assets.
(4)Included in accrued expenses and other liabilities.
Note 7. Investment Securities
Equity Securities
Equity securities totaled
$41.7$50.2 million and
$36.5$48.7 million at
June 30, 2022March 31, 2023 and December 31,
2021,2022, respectively. See Note
6 for further details on equity securities.
Trading Debt Securities
The fair value of trading debt securities wholly consisting of municipal bonds, totaled $38.1$6.9 million and $13.4 million at March 31, 2023 and December 31, 2021. There were no trading debt securities at June 30, 2022.2022, respectively. Net trading gains and losses were included in net gains and losses on securities transactions within non-interest income. We recorded net trading gains of $402 thousand and net trading losses of $387 thousand and $1.4$1.1 million for three and six months ended June 30, 2022, respectively. Net trading gains totaled $489 thousand and $707 thousand for the three and six months ended June 30, 2021,March 31, 2023 and 2022, respectively.
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, 2022March 31, 2023 and December 31, 20212022 were as follows:
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (in thousands) | | (in thousands) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
U.S. Treasury securities | U.S. Treasury securities | $ | 305,371 | | | $ | — | | | $ | (12,973) | | | $ | 292,398 | | U.S. Treasury securities | $ | 309,524 | | | $ | — | | | $ | (22,779) | | | $ | 286,745 | |
U.S. government agency securities | U.S. government agency securities | 31,083 | | | 42 | | | (592) | | | 30,533 | | U.S. government agency securities | 28,394 | | | 46 | | | (2,088) | | | 26,352 | |
Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | Obligations of states and political subdivisions: | |
Obligations of states and state agencies | Obligations of states and state agencies | 13,252 | | | 10 | | | (331) | | | 12,931 | | Obligations of states and state agencies | 10,649 | | | — | | | (652) | | | 9,997 | |
Municipal bonds | Municipal bonds | 173,450 | | | 13 | | | (28,916) | | | 144,547 | | Municipal bonds | 171,219 | | | — | | | (28,441) | | | 142,778 | |
Total obligations of states and political subdivisions | Total obligations of states and political subdivisions | 186,702 | | | 23 | | | (29,247) | | | 157,478 | | Total obligations of states and political subdivisions | 181,868 | | | — | | | (29,093) | | | 152,775 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 780,624 | | | 216 | | | (59,804) | | | 721,036 | | Residential mortgage-backed securities | 699,214 | | | 60 | | | (79,498) | | | 619,776 | |
| Corporate and other debt securities | Corporate and other debt securities | 191,155 | | | 288 | | | (10,337) | | | 181,106 | | Corporate and other debt securities | 193,007 | | | — | | | (19,419) | | | 173,588 | |
Total | Total | $ | 1,494,935 | | | $ | 569 | | | $ | (112,953) | | | $ | 1,382,551 | | Total | $ | 1,412,007 | | | $ | 106 | | | $ | (152,877) | | | $ | 1,259,236 | |
December 31, 2021 | | | | | | | | |
| December 31, 2022 | | December 31, 2022 | | | | | | | |
U.S. Treasury securities | | U.S. Treasury securities | $ | 308,137 | | | $ | — | | | $ | (28,639) | | | $ | 279,498 | |
U.S. government agency securities | U.S. government agency securities | $ | 20,323 | | | $ | 608 | | | $ | (6) | | | $ | 20,925 | | U.S. government agency securities | 29,494 | | | 47 | | | (2,577) | | | 26,964 | |
Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | Obligations of states and political subdivisions: | |
Obligations of states and state agencies | Obligations of states and state agencies | 26,088 | | | 132 | | | (93) | | | 26,127 | | Obligations of states and state agencies | 10,899 | | | — | | | (493) | | | 10,406 | |
Municipal bonds | Municipal bonds | 53,530 | | | 349 | | | (116) | | | 53,763 | | Municipal bonds | 171,586 | | | — | | | (35,181) | | | 136,405 | |
Total obligations of states and political subdivisions | Total obligations of states and political subdivisions | 79,618 | | | 481 | | | (209) | | | 79,890 | | Total obligations of states and political subdivisions | 182,485 | | | — | | | (35,674) | | | 146,811 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 895,279 | | | 14,986 | | | (5,763) | | | 904,502 | | Residential mortgage-backed securities | 719,868 | | | 64 | | | (90,114) | | | 629,818 | |
| Corporate and other debt securities | Corporate and other debt securities | 120,871 | | | 3,177 | | | (556) | | | 123,492 | | Corporate and other debt securities | 197,927 | | | — | | | (19,621) | | | 178,306 | |
| Total | Total | $ | 1,116,091 | | | $ | 19,252 | | | $ | (6,534) | | | $ | 1,128,809 | | Total | $ | 1,437,911 | | | $ | 111 | | | $ | (176,625) | | | $ | 1,261,397 | |
The age of unrealized losses and fair value of the related available for sale debt securities at June 30, 2022March 31, 2023 and December 31, 20212022 were as follows:
| | | Less than Twelve Months | | More than Twelve Months | | Total | | Less than 12 Months | | More than 12 Months | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (in thousands) | | (in thousands) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
U.S. Treasury securities | U.S. Treasury securities | $ | 292,397 | | | $ | (12,973) | | | $ | — | | | $ | — | | | $ | 292,397 | | | $ | (12,973) | | U.S. Treasury securities | $ | 286,745 | | | $ | (22,779) | | | $ | — | | | $ | — | | | $ | 286,745 | | | $ | (22,779) | |
U.S. government agency securities | U.S. government agency securities | 26,224 | | | (575) | | | 1,202 | | | (17) | | | 27,426 | | | (592) | | U.S. government agency securities | 12,003 | | | (1,238) | | | 11,371 | | | (850) | | | 23,374 | | | (2,088) | |
Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | Obligations of states and political subdivisions: | |
Obligations of states and state agencies | Obligations of states and state agencies | 9,315 | | | (331) | | | — | | | — | | | 9,315 | | | (331) | | Obligations of states and state agencies | 2,231 | | | (17) | | | 7,766 | | | (635) | | | 9,997 | | | (652) | |
Municipal bonds | Municipal bonds | 141,951 | | | (28,916) | | | — | | | — | | | 141,951 | | | (28,916) | | Municipal bonds | 114,299 | | | (20,463) | | | 28,229 | | | (7,978) | | | 142,528 | | | (28,441) | |
Total obligations of states and political subdivisions | Total obligations of states and political subdivisions | 151,266 | | | (29,247) | | | — | | | — | | | 151,266 | | | (29,247) | | Total obligations of states and political subdivisions | 116,530 | | | (20,480) | | | 35,995 | | | (8,613) | | | 152,525 | | | (29,093) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 660,060 | | | (52,782) | | | 51,630 | | | (7,022) | | | 711,690 | | | (59,804) | | Residential mortgage-backed securities | 34,170 | | | (1,506) | | | 582,739 | | | (77,992) | | | 616,909 | | | (79,498) | |
| Corporate and other debt securities | Corporate and other debt securities | 148,818 | | | (10,337) | | | — | | | — | | | 148,818 | | | (10,337) | | Corporate and other debt securities | 108,625 | | | (9,446) | | | 64,964 | | | (9,973) | | | 173,589 | | | (19,419) | |
Total | Total | $ | 1,278,765 | | | $ | (105,914) | | | $ | 52,832 | | | $ | (7,039) | | | $ | 1,331,597 | | | $ | (112,953) | | Total | $ | 558,073 | | | $ | (55,449) | | | $ | 695,069 | | | $ | (97,428) | | | $ | 1,253,142 | | | $ | (152,877) | |
December 31, 2021 | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2022 | | | | | | | | | | | |
U.S. Treasury securities | | U.S. Treasury securities | $ | 279,498 | | | $ | (28,639) | | | $ | — | | | $ | — | | | $ | 279,498 | | | $ | (28,639) | |
U.S. government agency securities | U.S. government agency securities | $ | — | | | $ | — | | | $ | 1,326 | | | $ | (6) | | | $ | 1,326 | | | $ | (6) | | U.S. government agency securities | 22,831 | | | (2,538) | | | 1,116 | | | (39) | | | 23,947 | | | (2,577) | |
Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | Obligations of states and political subdivisions: | |
Obligations of states and state agencies | Obligations of states and state agencies | 10,549 | | | (93) | | | — | | | — | | | 10,549 | | | (93) | | Obligations of states and state agencies | 2,943 | | | (54) | | | 7,462 | | | (439) | | | 10,405 | | | (493) | |
Municipal bonds | Municipal bonds | 19,100 | | | (116) | | | — | | | — | | | 19,100 | | | (116) | | Municipal bonds | 112,029 | | | (26,044) | | | 24,127 | | | (9,137) | | | 136,156 | | | (35,181) | |
Total obligations of states and political subdivisions | Total obligations of states and political subdivisions | 29,649 | | | (209) | | | — | | | — | | | 29,649 | | | (209) | | Total obligations of states and political subdivisions | 114,972 | | | (26,098) | | | 31,589 | | | (9,576) | | | 146,561 | | | (35,674) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 371,256 | | | (4,770) | | | 25,960 | | | (993) | | | 397,216 | | | (5,763) | | Residential mortgage-backed securities | 311,836 | | | (27,152) | | | 314,834 | | | (62,962) | | | 626,670 | | | (90,114) | |
| Corporate and other debt securities | Corporate and other debt securities | 59,039 | | | (556) | | | — | | | — | | | 59,039 | | | (556) | | Corporate and other debt securities | 144,924 | | | (12,581) | | | 33,382 | | | (7,040) | | | 178,306 | | | (19,621) | |
| Total | Total | $ | 459,944 | | | $ | (5,535) | | | $ | 27,286 | | | $ | (999) | | | $ | 487,230 | | | $ | (6,534) | | Total | $ | 874,061 | | | $ | (97,008) | | | $ | 380,921 | | | $ | (79,617) | | | $ | 1,254,982 | | | $ | (176,625) | |
Within the available for sale debt securities portfolio, the total number of security positions in an unrealized loss position was 655715 and 139730 at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
As of June 30, 2022,March 31, 2023, 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 $446.4$870.4 million.
The contractual maturities of available for sale debt securities at June 30, 2022March 31, 2023 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, 2022 |
| Amortized Cost | | Fair Value |
| (in thousands) |
Due in one year | $ | 13,002 | | | $ | 12,941 | |
Due after one year through five years | 179,567 | | | 176,480 | |
Due after five years through ten years | 249,507 | | | 237,046 | |
Due after ten years | 272,235 | | | 235,048 | |
Residential mortgage-backed securities | 780,624 | | | 721,036 | |
Total | $ | 1,494,935 | | | $ | 1,382,551 | |
| | | | | | | | | | | |
| March 31, 2023 |
| Amortized Cost | | Fair Value |
| (in thousands) |
Due in one year | $ | 3,852 | | | $ | 3,834 | |
Due after one year through five years | 282,224 | | | 270,503 | |
Due after five years through ten years | 173,459 | | | 154,742 | |
Due after ten years | 253,258 | | | 210,381 | |
Residential mortgage-backed securities | 699,214 | | | 619,776 | |
Total | $ | 1,412,007 | | | $ | 1,259,236 | |
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 5.38.91 years at June 30, 2022.March 31, 2023.
Impairment Analysis of Available For Sale Debt Securities
Valley's available for sale debt securities portfolio includes corporate bonds and revenue bonds, among other securities. These types of securities may pose a higher risk of future impairment charges by Valley as a result of the changes in market interest rates, unpredictable nature of the U.S. economy and itstheir potential negative effect on the future performance of the security issuers, including due to current economic conditions and the effects of the COVID-19 pandemic.issuers.
Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis. Valley hasBased on a comparison of the present value of expected cash flows to the amortized cost, Valley recognized a credit related impairment of one corporate bond issued by Signature Bank resulting in a provision for credit losses and full charge-off of the bond totaling $5.0 million during the three months ended March 31, 2023. Valley also evaluated available for sale debt securities that are in an unrealized loss position as of June 30, 2022March 31, 2023 included in the table above and has determined that the declines in fair value are mainly attributable to interest rates, credit spreads, market volatility and liquidity conditions, not credit quality or other factors. BasedThere was no impairment recognized during the three months ended March 31, 2022.
Accrued interest on a comparison of the present value of expected cash flows toinvestments, which is excluded from the amortized cost management recognized no impairment duringof available for sale debt securities, totaled $5.1 million and $5.6 million at March 31, 2023 and December 31, 2022, respectively, and is presented within total accrued interest receivable on the consolidated statements of financial condition.
The following table details the activity in the allowance for credit losses for the three and six months ended June 30, 2022March 31, 2023.
| | | | | | | |
| Three Months Ended March 31, 2023 | | |
| | | |
| (in thousands) | | |
Beginning balance | $ | — | | | |
Provision for credit losses | 5,000 | | | |
Charge-offs | (5,000) | | | |
Ending balance | $ | — | | | |
Valley does not intend to sell any of its available for sale debt securities in an unrealized loss position prior to recovery of their amortized cost basis, and 2021. Thereit is more likely than not that Valley will not be required to sell any of its securities prior to recovery of their amortized cost basis. None of the available for sale debt securities were past due
as of March 31, 2023 and there was no allowance for credit losses for available for sale debt securities at June 30,March 31, 2023, December 31, 2022 and DecemberMarch 31, 2021.
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, 2022March 31, 2023 and December 31, 20212022 were as follows:
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Allowance for Credit Losses | | Net Carrying Value |
| | (in thousands) | | (in thousands) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
U.S. Treasury securities | U.S. Treasury securities | $ | 67,238 | | | $ | 573 | | | $ | (29) | | | $ | 67,782 | | U.S. Treasury securities | $ | 66,747 | | | $ | — | | | $ | (565) | | | $ | 66,182 | | | $ | — | | | $ | 66,747 | |
U.S. government agency securities | U.S. government agency securities | 259,711 | | | 138 | | | (16,495) | | | 243,354 | | U.S. government agency securities | 300,614 | | | 25 | | | (44,999) | | | 255,640 | | | — | | | 300,614 | |
Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | Obligations of states and political subdivisions: | |
Obligations of states and state agencies | Obligations of states and state agencies | 102,677 | | | 222 | | | (2,468) | | | 100,431 | | Obligations of states and state agencies | 96,693 | | | 341 | | | (4,149) | | | 92,885 | | | 257 | | | 96,436 | |
Municipal bonds | Municipal bonds | 402,090 | | | 520 | | | (16,707) | | | 385,903 | | Municipal bonds | 376,904 | | | 112 | | | (16,982) | | | 360,034 | | | 86 | | | 376,818 | |
Total obligations of states and political subdivisions | Total obligations of states and political subdivisions | 504,767 | | | 742 | | | (19,175) | | | 486,334 | | Total obligations of states and political subdivisions | 473,597 | | | 453 | | | (21,131) | | | 452,919 | | | 343 | | | 473,254 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 2,775,928 | | | 814 | | | (284,005) | | | 2,492,737 | | Residential mortgage-backed securities | 2,893,505 | | | 2,752 | | | (370,689) | | | 2,525,568 | | | — | | | 2,893,505 | |
Trust preferred securities | Trust preferred securities | 37,033 | | | 3 | | | (5,583) | | | 31,453 | | Trust preferred securities | 37,048 | | | 1 | | | (7,057) | | | 29,992 | | | 775 | | | 36,273 | |
Corporate and other debt securities | Corporate and other debt securities | 75,300 | | | 31 | | | (3,276) | | | 72,055 | | Corporate and other debt securities | 75,701 | | | — | | | (5,518) | | | 70,183 | | | 515 | | | 75,186 | |
Total | Total | $ | 3,719,977 | | | $ | 2,301 | | | $ | (328,563) | | | $ | 3,393,715 | | Total | $ | 3,847,212 | | | $ | 3,231 | | | $ | (449,959) | | | $ | 3,400,484 | | | $ | 1,633 | | | $ | 3,845,579 | |
December 31, 2021 | | | | | | | | |
December 31, 2022 | | December 31, 2022 | | | | | | | | | | | |
U.S. Treasury securities | U.S. Treasury securities | $ | 67,558 | | | $ | 4,103 | | | $ | — | | | $ | 71,661 | | U.S. Treasury securities | $ | 66,911 | | | $ | — | | | $ | (1,022) | | | $ | 65,889 | | | $ | — | | | $ | 66,911 | |
U.S. government agency securities | U.S. government agency securities | 6,265 | | | 113 | | | — | | | 6,378 | | U.S. government agency securities | 260,392 | | | — | | | (47,680) | | | 212,712 | | | — | | | 260,392 | |
Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | Obligations of states and political subdivisions: | |
Obligations of states and state agencies | Obligations of states and state agencies | 141,015 | | | 3,065 | | | (312) | | | 143,768 | | Obligations of states and state agencies | 99,238 | | | 305 | | | (3,869) | | | 95,674 | | | 252 | | | 98,986 | |
Municipal bonds | Municipal bonds | 196,947 | | | 3,536 | | | (87) | | | 200,396 | | Municipal bonds | 381,060 | | | 76 | | | (23,615) | | | 357,521 | | | 41 | | | 381,019 | |
Total obligations of states and political subdivisions | Total obligations of states and political subdivisions | 337,962 | | | 6,601 | | | (399) | | | 344,164 | | Total obligations of states and political subdivisions | 480,298 | | | 381 | | | (27,484) | | | 453,195 | | | 293 | | | 480,005 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 2,166,142 | | | 14,599 | | | (28,440) | | | 2,152,301 | | Residential mortgage-backed securities | 2,909,106 | | | 1,723 | | | (415,032) | | | 2,495,797 | | | — | | | 2,909,106 | |
Trust preferred securities | Trust preferred securities | 37,020 | | | 5 | | | (5,109) | | | 31,916 | | Trust preferred securities | 37,043 | | | 1 | | | (5,938) | | | 31,106 | | | 888 | | | 36,155 | |
Corporate and other debt securities | Corporate and other debt securities | 53,750 | | | 559 | | | (124) | | | 54,185 | | Corporate and other debt securities | 75,234 | | | — | | | (4,463) | | | 70,771 | | | 465 | | | 74,769 | |
Total | Total | $ | 2,668,697 | | | $ | 25,980 | | | $ | (34,072) | | | $ | 2,660,605 | | Total | $ | 3,828,984 | | | $ | 2,105 | | | $ | (501,619) | | | $ | 3,329,470 | | | $ | 1,646 | | | $ | 3,827,338 | |
The age of unrealized losses and fair value of related debt securities held to maturity at June 30, 2022March 31, 2023 and December 31, 20212022 were as follows:
| | | Less than Twelve Months | | More than Twelve Months | | Total | | Less than 12 Months | | More than 12 Months | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (in thousands) | | (in thousands) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
U.S. Treasury securities | U.S. Treasury securities | $ | 34,914 | | | $ | (29) | | | $ | — | | | $ | — | | | $ | 34,914 | | | $ | (29) | | U.S. Treasury securities | $ | 66,182 | | | $ | (565) | | | $ | — | | | $ | — | | | $ | 66,182 | | | $ | (565) | |
U.S. government agency securities | U.S. government agency securities | 220,737 | | | (16,495) | | | — | | | — | | | 220,737 | | | (16,495) | | U.S. government agency securities | 211,526 | | | (44,773) | | | 2,925 | | | (226) | | | 214,451 | | | (44,999) | |
Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | Obligations of states and political subdivisions: | |
Obligations of states and state agencies | Obligations of states and state agencies | 61,460 | | | (1,466) | | | 9,610 | | | (1,002) | | | 71,070 | | | (2,468) | | Obligations of states and state agencies | 20,457 | | | (789) | | | 39,627 | | | (3,360) | | | 60,084 | | | (4,149) | |
Municipal bonds | Municipal bonds | 251,294 | | | (16,606) | | | 1,311 | | | (101) | | | 252,605 | | | (16,707) | | Municipal bonds | 226,278 | | | (13,671) | | | 26,411 | | | (3,311) | | | 252,689 | | | (16,982) | |
Total obligations of states and political subdivisions | Total obligations of states and political subdivisions | 312,754 | | | (18,072) | | | 10,921 | | | (1,103) | | | 323,675 | | | (19,175) | | Total obligations of states and political subdivisions | 246,735 | | | (14,460) | | | 66,038 | | | (6,671) | | | 312,773 | | | (21,131) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 1,931,648 | | | (197,148) | | | 524,191 | | | (86,857) | | | 2,455,839 | | | (284,005) | | Residential mortgage-backed securities | 381,802 | | | (33,941) | | | 1,944,360 | | | (336,748) | | | 2,326,162 | | | (370,689) | |
Trust preferred securities | Trust preferred securities | — | | | — | | | 30,450 | | | (5,583) | | | 30,450 | | | (5,583) | | Trust preferred securities | — | | | — | | | 28,990 | | | (7,057) | | | 28,990 | | | (7,057) | |
Corporate and other debt securities | Corporate and other debt securities | 67,524 | | | (3,276) | | | — | | | — | | | 67,524 | | | (3,276) | | Corporate and other debt securities | 37,579 | | | (2,122) | | | 24,604 | | | (3,396) | | | 62,183 | | | (5,518) | |
Total | Total | $ | 2,567,577 | | | $ | (235,020) | | | $ | 565,562 | | | $ | (93,543) | | | $ | 3,133,139 | | | $ | (328,563) | | Total | $ | 943,824 | | | $ | (95,861) | | | $ | 2,066,917 | | | $ | (354,098) | | | $ | 3,010,741 | | | $ | (449,959) | |
December 31, 2021 | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2022 | | | | | | | | | | | |
U.S. Treasury securities | | U.S. Treasury securities | $ | 65,889 | | | $ | (1,022) | | | $ | — | | | $ | — | | | $ | 65,889 | | | $ | (1,022) | |
U.S. government agency securities | | U.S. government agency securities | 209,863 | | | (47,508) | | | 1,673 | | | (172) | | | 211,536 | | | (47,680) | |
Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | Obligations of states and political subdivisions: | |
Obligations of states and state agencies | Obligations of states and state agencies | $ | 17,000 | | | $ | (254) | | | $ | 5,517 | | | $ | (58) | | | $ | 22,517 | | | $ | (312) | | Obligations of states and state agencies | 62,443 | | | (2,020) | | | 18,231 | | | (1,849) | | | 80,674 | | | (3,869) | |
Municipal bonds | Municipal bonds | 9,403 | | | (87) | | | — | | | — | | | 9,403 | | | (87) | | Municipal bonds | 251,970 | | | (20,457) | | | 15,534 | | | (3,158) | | | 267,504 | | | (23,615) | |
Total obligations of states and political subdivisions | Total obligations of states and political subdivisions | 26,403 | | | (341) | | | 5,517 | | | (58) | | | 31,920 | | | (399) | | Total obligations of states and political subdivisions | 314,413 | | | (22,477) | | | 33,765 | | | (5,007) | | | 348,178 | | | (27,484) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 1,381,405 | | | (22,365) | | | 206,520 | | | (6,075) | | | 1,587,925 | | | (28,440) | | Residential mortgage-backed securities | 962,690 | | | (109,532) | | | 1,413,590 | | | (305,500) | | | 2,376,280 | | | (415,032) | |
Trust preferred securities | Trust preferred securities | — | | | — | | | 30,912 | | | (5,109) | | | 30,912 | | | (5,109) | | Trust preferred securities | — | | | — | | | 30,105 | | | (5,938) | | | 30,105 | | | (5,938) | |
Corporate and other debt securities | Corporate and other debt securities | 32,627 | | | (124) | | | — | | | — | | | 32,627 | | | (124) | | Corporate and other debt securities | 57,245 | | | (2,989) | | | 13,525 | | | (1,474) | | | 70,770 | | | (4,463) | |
Total | Total | $ | 1,440,435 | | | $ | (22,830) | | | $ | 242,949 | | | $ | (11,242) | | | $ | 1,683,384 | | | $ | (34,072) | | Total | $ | 1,610,100 | | | $ | (183,528) | | | $ | 1,492,658 | | | $ | (318,091) | | | $ | 3,102,758 | | | $ | (501,619) | |
Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 717766 and 108802 at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
As of June 30, 2022,March 31, 2023, 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 $892.6 million.
$2.5 billion.
The contractual maturities of investments in debt securities held to maturity at June 30, 2022March 31, 2023 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, 2022 | | March 31, 2023 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (in thousands) | | (in thousands) |
Due in one year | Due in one year | $ | 33,206 | | | $ | 33,186 | | Due in one year | $ | 63,872 | | | $ | 63,355 | |
Due after one year through five years | Due after one year through five years | 220,521 | | | 219,462 | | Due after one year through five years | 169,205 | | | 165,906 | |
Due after five years through ten years | Due after five years through ten years | 73,729 | | | 72,398 | | Due after five years through ten years | 96,385 | | | 92,034 | |
Due after ten years | Due after ten years | 616,593 | | | 575,932 | | Due after ten years | 624,245 | | | 553,621 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 2,775,928 | | | 2,492,737 | | Residential mortgage-backed securities | 2,893,505 | | | 2,525,568 | |
Total | Total | $ | 3,719,977 | | | $ | 3,393,715 | | Total | $ | 3,847,212 | | | $ | 3,400,484 | |
Actual maturities of held to maturity debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 7.711.67 years at June 30, 2022.
March 31, 2023.
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, 2022March 31, 2023 and December 31, 2021.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AAA/AA/A Rated | | BBB rated | | Non-investment grade rated | | Non-rated | | Total |
| (in thousands) |
June 30, 2022 | | | | | | | | | |
U.S. Treasury securities | $ | 67,238 | | | $ | — | | | $ | — | | | $ | — | | | $ | 67,238 | |
U.S. government agency securities | 259,711 | | | — | | | — | | | — | | | 259,711 | |
Obligations of states and political subdivisions: | | | | | | | | | |
Obligations of states and state agencies | 76,322 | | | — | | | 5,537 | | | 20,818 | | | 102,677 | |
Municipal bonds | 346,261 | | | — | | | — | | | 55,829 | | | 402,090 | |
Total obligations of states and political subdivisions | 422,583 | | | — | | | 5,537 | | | 76,647 | | | 504,767 | |
Residential mortgage-backed securities | 2,775,928 | | | — | | | — | | | — | | | 2,775,928 | |
Trust preferred securities | — | | | — | | | — | | | 37,033 | | | 37,033 | |
Corporate and other debt securities | 2,000 | | | 6,000 | | | — | | | 67,300 | | | 75,300 | |
Total | $ | 3,527,460 | | | $ | 6,000 | | | $ | 5,537 | | | $ | 180,980 | | | $ | 3,719,977 | |
December 31, 2021 | | | | | | | | | |
U.S. Treasury securities | $ | 67,558 | | | $ | — | | | $ | — | | | $ | — | | | $ | 67,558 | |
U.S. government agency securities | 6,265 | | | — | | | — | | | — | | | 6,265 | |
Obligations of states and political subdivisions: | | | | | | | | | |
Obligations of states and state agencies | 118,368 | | | — | | | 5,576 | | | 17,071 | | | 141,015 | |
Municipal bonds | 148,854 | | | — | | | — | | | 48,093 | | | 196,947 | |
Total obligations of states and political subdivisions | 267,222 | | | — | | | 5,576 | | | 65,164 | | | 337,962 | |
Residential mortgage-backed securities | 2,166,142 | | | — | | | — | | | — | | | 2,166,142 | |
Trust preferred securities | — | | | — | | | — | | | 37,020 | | | 37,020 | |
Corporate and other debt securities | 2,000 | | | 6,000 | | | — | | | 45,750 | | | 53,750 | |
Total | $ | 2,509,187 | | | $ | 6,000 | | | $ | 5,576 | | | $ | 147,934 | | | $ | 2,668,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AAA/AA/A Rated | | BBB rated | | Non-investment grade rated | | Non-rated | | Total |
| (in thousands) |
March 31, 2023 | | | | | | | | | |
U.S. Treasury securities | $ | 66,747 | | | $ | — | | | $ | — | | | $ | — | | | $ | 66,747 | |
U.S. government agency securities | 300,614 | | | — | | | — | | | — | | | 300,614 | |
Obligations of states and political subdivisions: | | | | | | | | | |
Obligations of states and state agencies | 73,278 | | | — | | | 5,437 | | | 17,978 | | | 96,693 | |
Municipal bonds | 328,202 | | | — | | | — | | | 48,702 | | | 376,904 | |
Total obligations of states and political subdivisions | 401,480 | | | — | | | 5,437 | | | 66,680 | | | 473,597 | |
Residential mortgage-backed securities | 2,893,505 | | | — | | | — | | | — | | | 2,893,505 | |
Trust preferred securities | — | | | — | | | — | | | 37,048 | | | 37,048 | |
Corporate and other debt securities | — | | | 6,000 | | | — | | | 69,701 | | | 75,701 | |
Total | $ | 3,662,346 | | | $ | 6,000 | | | $ | 5,437 | | | $ | 173,429 | | | $ | 3,847,212 | |
December 31, 2022 | | | | | | | | | |
U.S. Treasury securities | $ | 66,911 | | | $ | — | | | $ | — | | | $ | — | | | $ | 66,911 | |
U.S. government agency securities | 260,392 | | | — | | | — | | | — | | | 260,392 | |
Obligations of states and political subdivisions: | | | | | | | | | |
Obligations of states and state agencies | 74,943 | | | — | | | 5,497 | | | 18,798 | | | 99,238 | |
Municipal bonds | 333,488 | | | — | | | — | | | 47,572 | | | 381,060 | |
Total obligations of states and political subdivisions | 408,431 | | | — | | | 5,497 | | | 66,370 | | | 480,298 | |
Residential mortgage-backed securities | 2,909,106 | | | — | | | — | | | — | | | 2,909,106 | |
Trust preferred securities | — | | | — | | | — | | | 37,043 | | | 37,043 | |
Corporate and other debt securities | 2,000 | | | 6,000 | | | — | | | 67,234 | | | 75,234 | |
Total | $ | 3,646,840 | | | $ | 6,000 | | | $ | 5,497 | | | $ | 170,647 | | | $ | 3,828,984 | |
Obligations of states and political subdivisions include municipal bonds and revenue bonds issued by various municipal corporations. At June 30, 2022,March 31, 2023, most of the obligations of states and political subdivisions were rated investment grade and a large portion of the "non-rated" category included TEMStax exempt mortgage securities (TEMS) secured by Ginnie Mae securities. Trust preferred securities consist of non-rated single-issuer securities, issued by bank holding companies. Corporate bondsand other debt securities in the non-rated category mostly consist of debt primarilyhigh quality foreign issued by banks.
bonds.
Allowance for Credit Losses for Held to Maturity Debt Securities
Valley has a zero losszero-loss expectation for certain securities within the held to maturity portfolio, and therefore it is not required to estimate an allowance for credit losses related to these securities under the CECL standard. After an evaluation of qualitative factors, Valley identified the following securities types which it believes qualify for this exclusion: U.S. Treasury securities, U.S. government agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and TEMS collateralized municipal bonds called TEMS.bonds.
HeldAccrued interest on investments, which is excluded from the amortized cost of held to maturity debt securities, were carried net of allowance for credit losses totaling $1.5totaled $12.7 million and $13.5 million at June 30, 2022 March 31, 2023 and $1.2 million at December 31, 2021. Valley recorded a provision for credit losses of $286 thousand2022, respectively, and $343is presented
thousandwithin total accrued interest receivable on the consolidated statements of financial condition. Held to maturity debt securities are carried net of an allowance for credit losses.
The following table details the three and six months ended June 30, 2022, respectively, and a credit (negative) provisionactivity in the allowance for credit losses of $30 thousand and $388 thousand, respectively, for the three and six months ended June 30, 2021.March 31, 2023 and 2022:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (in thousands) |
Beginning balance | $ | 1,646 | | | $ | 1,165 | |
(Credit) provision for credit losses | (13) | | | 57 | |
Ending balance | $ | 1,633 | | | $ | 1,222 | |
There were no sales of available for sale and held to maturity debt securities debt securities during the three months ended March 31, 2023 and 2022, respectively.
Note 8. Loans and Allowance for Credit Losses for Loans
The detail of the loan portfolio as of June 30, 2022March 31, 2023 and December 31, 20212022 was as follows:
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | (in thousands) | | (in thousands) |
Loans: | Loans: | | Loans: | |
Commercial and industrial: | | |
| Commercial and industrial | Commercial and industrial | $ | 8,378,454 | | | $ | 5,411,601 | | Commercial and industrial | $ | 9,043,946 | | | $ | 8,804,830 | |
Commercial and industrial PPP loans * | 136,004 | | | 435,950 | | |
Total commercial and industrial loans | 8,514,458 | | | 5,847,551 | | |
Commercial real estate: | Commercial real estate: | | | | Commercial real estate: | |
Commercial real estate | Commercial real estate | 23,535,086 | | | 18,935,486 | | Commercial real estate | 27,051,111 | | | 25,732,033 | |
Construction | Construction | 3,374,373 | | | 1,854,580 | | Construction | 3,725,967 | | | 3,700,835 | |
Total commercial real estate loans | Total commercial real estate loans | 26,909,459 | | | 20,790,066 | | Total commercial real estate loans | 30,777,078 | | | 29,432,868 | |
Residential mortgage | Residential mortgage | 5,005,069 | | | 4,545,064 | | Residential mortgage | 5,486,280 | | | 5,364,550 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 431,455 | | | 400,779 | | Home equity | 516,592 | | | 503,884 | |
Automobile | Automobile | 1,673,482 | | | 1,570,036 | | Automobile | 1,717,141 | | | 1,746,225 | |
Other consumer | Other consumer | 1,026,854 | | | 1,000,161 | | Other consumer | 1,118,929 | | | 1,064,843 | |
Total consumer loans | Total consumer loans | 3,131,791 | | | 2,970,976 | | Total consumer loans | 3,352,662 | | | 3,314,952 | |
Total loans | Total loans | $ | 43,560,777 | | | $ | 34,153,657 | | Total loans | $ | 48,659,966 | | | $ | 46,917,200 | |
|
*Represents SBA Paycheck Protection Program (PPP) loans, net of unearned fees totaling $2.5 million and $12.1 million at June 30, 2022 and December 31, 2021, respectively.
Total loans includesinclude net unearned discounts and deferreddeferred loan fees of $141.2$125.4 million and $78.5 and $120.5 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The increase in total loans at June 30, 2022 is partially attributed to $5.9 billion of loans acquired in the Bank Leumi USA acquisition, which was inclusive of a $98.6 million net purchase discount at the acquisition date.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $115.7$192.6 million and $83.7$175.9 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, and is presented within total accrued interest receivable on the consolidated statements of financial condition.
condition.
There were no sales of loans from the held for investment portfolio during the three and six months ended June 30, 2022March 31, 2023 and 2021.2022.
Credit Risk Management
For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk appetite. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, internal loan classification, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through
cyclical economic circumstances. Additionally, Valley does not accept crypto assets as loan collateral for any of its loan portfolio classes. See Valley’s Annual Report on Form 10-K for the year ended December 31, 20212022 for further details.
Credit Quality
The following table presents past due, current and non-accrual loans without an allowance for loan losses by loan portfolio class at June 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | Past Due and Non-Accrual Loans | | | 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 Loan Losses | | 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 Loan Losses |
| | (in thousands) | | (in thousands) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
Commercial and industrial | Commercial and industrial | $ | 7,143 | | | $ | 3,870 | | | $ | 15,470 | | | $ | 148,404 | | | $ | 174,887 | | | $ | 8,339,571 | | | $ | 8,514,458 | | | $ | 6,648 | | Commercial and industrial | $ | 20,716 | | | $ | 24,118 | | | $ | 8,927 | | | $ | 78,606 | | | $ | 132,367 | | | $ | 8,911,579 | | | $ | 9,043,946 | | | $ | 6,675 | |
Commercial real estate: | Commercial real estate: | | Commercial real estate: | |
Commercial real estate | Commercial real estate | 10,516 | | | 630 | | | — | | | 85,807 | | | 96,953 | | | 23,438,133 | | | 23,535,086 | | | 68,128 | | Commercial real estate | 13,580 | | | — | | | — | | | 67,938 | | | 81,518 | | | 26,969,593 | | | 27,051,111 | | | 66,587 | |
Construction | Construction | 9,108 | | | 3,862 | | | — | | | 49,780 | | | 62,750 | | | 3,311,623 | | | 3,374,373 | | | 9,494 | | Construction | — | | | — | | | 6,450 | | | 68,649 | | | 75,099 | | | 3,650,868 | | | 3,725,967 | | | 15,791 | |
Total commercial real estate loans | Total commercial real estate loans | 19,624 | | | 4,492 | | | — | | | 135,587 | | | 159,703 | | | 26,749,756 | | | 26,909,459 | | | 77,622 | | Total commercial real estate loans | 13,580 | | | — | | | 6,450 | | | 136,587 | | | 156,617 | | | 30,620,461 | | | 30,777,078 | | | 82,378 | |
Residential mortgage | Residential mortgage | 12,326 | | | 2,410 | | | 1,188 | | | 25,847 | | | 41,771 | | | 4,963,298 | | | 5,005,069 | | | 14,889 | | Residential mortgage | 12,599 | | | 2,133 | | | 1,668 | | | 23,483 | | | 39,883 | | | 5,446,397 | | | 5,486,280 | | | 18,694 | |
Consumer loans: | Consumer loans: | | Consumer loans: | |
Home equity | Home equity | 377 | | | 2 | | | — | | | 2,920 | | | 3,299 | | | 428,156 | | | 431,455 | | | 126 | | Home equity | 412 | | | 287 | | | 48 | | | 2,965 | | | 3,712 | | | 512,880 | | | 516,592 | | | — | |
Automobile | Automobile | 4,696 | | | 588 | | | 267 | | | 262 | | | 5,813 | | | 1,667,669 | | | 1,673,482 | | | — | | Automobile | 4,598 | | | 502 | | | 282 | | | 262 | | | 5,644 | | | 1,711,497 | | | 1,717,141 | | | — | |
Other consumer | Other consumer | 936 | | | 112 | | | — | | | 97 | | | 1,145 | | | 1,025,709 | | | 1,026,854 | | | — | | Other consumer | 2,835 | | | 730 | | | 417 | | | 91 | | | 4,073 | | | 1,114,856 | | | 1,118,929 | | | — | |
Total consumer loans | Total consumer loans | 6,009 | | | 702 | | | 267 | | | 3,279 | | | 10,257 | | | 3,121,534 | | | 3,131,791 | | | 126 | | Total consumer loans | 7,845 | | | 1,519 | | | 747 | | | 3,318 | | | 13,429 | | | 3,339,233 | | | 3,352,662 | | | — | |
Total | Total | $ | 45,102 | | | $ | 11,474 | | | $ | 16,925 | | | $ | 313,117 | | | $ | 386,618 | | | $ | 43,174,159 | | | $ | 43,560,777 | | | $ | 99,285 | | Total | $ | 54,740 | | | $ | 27,770 | | | $ | 17,792 | | | $ | 241,994 | | | $ | 342,296 | | | $ | 48,317,670 | | | $ | 48,659,966 | | | $ | 107,747 | |
| | | Past Due and Non-Accrual Loans | | | | | | | 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 Loan Losses | | 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 Loan Losses |
| | (in thousands) | | | | (in thousands) | | |
December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Commercial and industrial | Commercial and industrial | $ | 6,717 | | | $ | 7,870 | | | $ | 1,273 | | | $ | 99,918 | | | $ | 115,778 | | | $ | 5,731,773 | | | $ | 5,847,551 | | | $ | 9,066 | | Commercial and industrial | $ | 11,664 | | | $ | 12,705 | | | $ | 18,392 | | | $ | 98,881 | | | $ | 141,642 | | | $ | 8,663,188 | | | $ | 8,804,830 | | | $ | 5,659 | |
Commercial real estate: | Commercial real estate: | | Commercial real estate: | |
Commercial real estate | Commercial real estate | 14,421 | | | — | | | 32 | | | 83,592 | | | 98,045 | | | 18,837,441 | | | 18,935,486 | | | 70,719 | | Commercial real estate | 6,638 | | | 3,167 | | | 2,292 | | | 68,316 | | | 80,413 | | | 25,651,620 | | | 25,732,033 | | | 66,066 | |
Construction | Construction | 1,941 | | | — | | | — | | | 17,641 | | | 19,582 | | | 1,834,998 | | | 1,854,580 | | | — | | Construction | — | | | — | | | 3,990 | | | 74,230 | | | 78,220 | | | 3,622,615 | | | 3,700,835 | | | 16,120 | |
Total commercial real estate loans | Total commercial real estate loans | 16,362 | | | — | | | 32 | | | 101,233 | | | 117,627 | | | 20,672,439 | | | 20,790,066 | | | 70,719 | | Total commercial real estate loans | 6,638 | | | 3,167 | | | 6,282 | | | 142,546 | | | 158,633 | | | 29,274,235 | | | 29,432,868 | | | 82,186 | |
Residential mortgage | Residential mortgage | 10,999 | | | 3,314 | | | 677 | | | 35,207 | | | 50,197 | | | 4,494,867 | | | 4,545,064 | | | 20,401 | | Residential mortgage | 16,146 | | | 3,315 | | | 1,866 | | | 25,160 | | | 46,487 | | | 5,318,063 | | | 5,364,550 | | | 14,224 | |
Consumer loans: | Consumer loans: | | Consumer loans: | |
Home equity | Home equity | 242 | | | 98 | | | — | | | 3,517 | | | 3,857 | | | 396,922 | | | 400,779 | | | 4 | | Home equity | 955 | | | 254 | | | — | | | 2,810 | | | 4,019 | | | 499,865 | | | 503,884 | | | 117 | |
Automobile | Automobile | 6,391 | | | 656 | | | 271 | | | 240 | | | 7,558 | | | 1,562,478 | | | 1,570,036 | | | — | | Automobile | 5,974 | | | 630 | | | 1 | | | 271 | | | 6,876 | | | 1,739,349 | | | 1,746,225 | | | — | |
Other consumer | Other consumer | 178 | | | 266 | | | 518 | | | 101 | | | 1,063 | | | 999,098 | | | 1,000,161 | | | — | | Other consumer | 2,158 | | | 695 | | | 46 | | | 93 | | | 2,992 | | | 1,061,851 | | | 1,064,843 | | | — | |
Total consumer loans | Total consumer loans | 6,811 | | | 1,020 | | | 789 | | | 3,858 | | | 12,478 | | | 2,958,498 | | | 2,970,976 | | | 4 | | Total consumer loans | 9,087 | | | 1,579 | | | 47 | | | 3,174 | | | 13,887 | | | 3,301,065 | | | 3,314,952 | | | 117 | |
Total | Total | $ | 40,889 | | | $ | 12,204 | | | $ | 2,771 | | | $ | 240,216 | | | $ | 296,080 | | | $ | 33,857,577 | | | $ | 34,153,657 | | | $ | 100,190 | | Total | $ | 43,535 | | | $ | 20,766 | | | $ | 26,587 | | | $ | 269,761 | | | $ | 360,649 | | | $ | 46,556,551 | | | $ | 46,917,200 | | | $ | 102,186 | |
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. Pass rated loans 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.
The following table presents the internal loan classification risk by loan portfolio class by origination year based on the most recent analysis performed at June 30, 2022March 31, 2023 and December 31, 2021:2022, as well as the gross loan charge-offs by year of origination for the three months ended March 31, 2023:
| | | | Term Loans | | | | | | | Term Loans | | | | |
| | Amortized Cost Basis by Origination Year | | | Amortized Cost Basis by Origination Year | |
June 30, 2022 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | Total | |
March 31, 2023 | | March 31, 2023 | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior to 2019 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | Total |
| | | (in thousands) | | | (in thousands) |
Commercial and industrial | Commercial and industrial | | Commercial and industrial | |
Risk Rating: | Risk Rating: | | Risk Rating: | |
Pass | Pass | | $ | 1,087,572 | | | $ | 1,322,828 | | | $ | 740,213 | | | $ | 407,985 | | | $ | 306,393 | | | $ | 423,058 | | | $ | 3,964,927 | | | $ | 184 | | | $ | 8,253,160 | | Pass | | $ | 435,733 | | | $ | 1,418,804 | | | $ | 1,021,874 | | | $ | 549,408 | | | $ | 304,137 | | | $ | 628,117 | | | $ | 4,450,850 | | | $ | 130 | | | $ | 8,809,053 | |
Special Mention | Special Mention | | 2,654 | | | 7,639 | | | 670 | | | 2,827 | | | 4,987 | | | 5,708 | | | 57,210 | | | 10 | | | 81,705 | | Special Mention | | 1,573 | | | 27,386 | | | 2,591 | | | 19,260 | | | 3,658 | | | 7,443 | | | 61,455 | | | 7 | | | 123,373 | |
Substandard | Substandard | | — | | | 2,049 | | | 5,704 | | | 3,727 | | | 4,722 | | | 4,790 | | | 70,131 | | | 66 | | | 91,189 | | Substandard | | 10 | | | 517 | | | 2,832 | | | 2,617 | | | 1,203 | | | 6,904 | | | 25,847 | | | — | | | 39,930 | |
Doubtful | Doubtful | | 1,102 | | | 141 | | | — | | | 2,712 | | | — | | | 78,067 | | | 6,382 | | | — | | | 88,404 | | Doubtful | | — | | | 777 | | | 1,552 | | | — | | | 2,683 | | | 63,707 | | | 2,871 | | | — | | | 71,590 | |
| Total commercial and industrial | Total commercial and industrial | | $ | 1,091,328 | | | $ | 1,332,657 | | | $ | 746,587 | | | $ | 417,251 | | | $ | 316,102 | | | $ | 511,623 | | | $ | 4,098,650 | | | $ | 260 | | | $ | 8,514,458 | | Total commercial and industrial | | $ | 437,316 | | | $ | 1,447,484 | | | $ | 1,028,849 | | | $ | 571,285 | | | $ | 311,681 | | | $ | 706,171 | | | $ | 4,541,023 | | | $ | 137 | | | $ | 9,043,946 | |
Commercial real estate | Commercial real estate | | | | | | | | | | | | | | | | | | | Commercial real estate | | | | | | | | | | | | | | | | | | |
Risk Rating: | Risk Rating: | | Risk Rating: | |
Pass | Pass | | $ | 3,704,273 | | | $ | 5,379,241 | | | $ | 3,371,598 | | | $ | 2,752,901 | | | $ | 1,659,319 | | | $ | 5,504,795 | | | $ | 288,599 | | | $ | 13,193 | | | $ | 22,673,919 | | Pass | | $ | 1,607,961 | | | $ | 6,740,087 | | | $ | 5,201,027 | | | $ | 3,287,689 | | | $ | 2,520,271 | | | $ | 6,316,475 | | | $ | 490,136 | | | $ | 3,407 | | | $ | 26,167,053 | |
Special Mention | Special Mention | | 73,171 | | | 40,956 | | | 82,875 | | | 34,661 | | | 64,861 | | | 129,785 | | | 15,052 | | | — | | | 441,361 | | Special Mention | | 26,512 | | | 55,889 | | | 46,317 | | | 63,647 | | | 71,474 | | | 251,353 | | | 6,720 | | | — | | | 521,912 | |
Substandard | Substandard | | — | | | 43,945 | | | 39,372 | | | 39,803 | | | 58,886 | | | 229,266 | | | 8,358 | | | — | | | 419,630 | | Substandard | | — | | | 33,613 | | | 35,924 | | | 30,090 | | | 34,765 | | | 219,838 | | | 7,916 | | | — | | | 362,146 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | 176 | | | — | | | — | | | 176 | | |
| | Total commercial real estate | Total commercial real estate | | $ | 3,777,444 | | | $ | 5,464,142 | | | $ | 3,493,845 | | | $ | 2,827,365 | | | $ | 1,783,066 | | | $ | 5,864,022 | | | $ | 312,009 | | | $ | 13,193 | | | $ | 23,535,086 | | Total commercial real estate | | $ | 1,634,473 | | | $ | 6,829,589 | | | $ | 5,283,268 | | | $ | 3,381,426 | | | $ | 2,626,510 | | | $ | 6,787,666 | | | $ | 504,772 | | | $ | 3,407 | | | $ | 27,051,111 | |
Construction | Construction | | | | | | | | | | | | | | | | | | | Construction | | | | | | | | | | | | | | | | | | |
Risk Rating: | Risk Rating: | | Risk Rating: | |
Pass | Pass | | $ | 472,849 | | | $ | 631,399 | | | $ | 157,587 | | | $ | 59,657 | | | $ | 10,664 | | | $ | 25,089 | | | $ | 1,900,402 | | | $ | — | | | $ | 3,257,647 | | Pass | | $ | 120,282 | | | $ | 928,489 | | | $ | 415,212 | | | $ | 70,371 | | | $ | 15,502 | | | $ | 36,863 | | | $ | 2,079,911 | | | $ | — | | | $ | 3,666,630 | |
Special Mention | | 28,296 | | | — | | | — | | | — | | | — | | | — | | | 25,610 | | | — | | | 53,906 | | |
| Substandard | Substandard | | — | | | 13,059 | | | — | | | — | | | — | | | 17,616 | | | 19,531 | | | — | | | 50,206 | | Substandard | | — | | | 13 | | | 12,290 | | | — | | | 964 | | | 17,600 | | | 7,351 | | | — | | | 38,218 | |
Doubtful | Doubtful | | 498 | | | 643 | | | 11,473 | | | — | | | — | | | — | | | — | | | — | | | 12,614 | | Doubtful | | 447 | | | 8,341 | | | 670 | | | 11,661 | | | — | | | — | | | — | | | — | | | 21,119 | |
Total construction | Total construction | | $ | 501,643 | | | $ | 645,101 | | | $ | 169,060 | | | $ | 59,657 | | | $ | 10,664 | | | $ | 42,705 | | | $ | 1,945,543 | | | $ | — | | | $ | 3,374,373 | | Total construction | | $ | 120,729 | | | $ | 936,843 | | | $ | 428,172 | | | $ | 82,032 | | | $ | 16,466 | | | $ | 54,463 | | | $ | 2,087,262 | | | $ | — | | | $ | 3,725,967 | |
Gross loan charge-offs | | Gross loan charge-offs | | $ | — | | | $ | 6,035 | | | $ | 20,286 | | | $ | 123 | | | $ | 72 | | | $ | 1,636 | | | $ | 3,593 | | | $ | — | | | $ | 31,745 | |
| | | | Term Loans | | | | | | | Term Loans | | | | |
| | Amortized Cost Basis by Origination Year | | | Amortized Cost Basis by Origination Year | |
December 31, 2021 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior to 2017 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | Total | |
December 31, 2022 | | December 31, 2022 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | Total |
| | | (in thousands) | | | (in thousands) |
Commercial and industrial | Commercial and industrial | | Commercial and industrial | |
Risk Rating: | Risk Rating: | | Risk Rating: | |
Pass | Pass | | $ | 1,563,050 | | | $ | 743,165 | | | $ | 461,022 | | | $ | 362,748 | | | $ | 143,753 | | | $ | 337,713 | | | $ | 1,968,513 | | | $ | 247 | | | $ | 5,580,211 | | Pass | | $ | 1,600,747 | | | $ | 1,089,386 | | | $ | 590,406 | | | $ | 322,564 | | | $ | 250,031 | | | $ | 386,085 | | | $ | 4,307,163 | | | $ | 144 | | | $ | 8,546,526 | |
Special Mention | Special Mention | | 4,182 | | | 1,195 | | | 3,217 | | | 14,143 | | | 1,726 | | | 9,869 | | | 102,145 | | | 40 | | | 136,517 | | Special Mention | | 31,557 | | | 3,367 | | | 19,492 | | | 4,732 | | | 4,369 | | | 3,558 | | | 51,021 | | | 7 | | | 118,103 | |
Substandard | Substandard | | 8,248 | | | 4,823 | | | 3,139 | | | 7,077 | | | 910 | | | 408 | | | 19,642 | | | 109 | | | 44,356 | | Substandard | | 288 | | | 1,734 | | | 4,121 | | | 1,412 | | | 4,256 | | | 4,879 | | | 31,698 | | | — | | | 48,388 | |
Doubtful | Doubtful | | — | | | — | | | 2,733 | | | — | | | 16,355 | | | 67,379 | | | — | | | — | | | 86,467 | | Doubtful | | 886 | | | 20,844 | | | — | | | 2,692 | | | — | | | 64,158 | | | 3,233 | | | — | | | 91,813 | |
| Total commercial and industrial | Total commercial and industrial | | $ | 1,575,480 | | | $ | 749,183 | | | $ | 470,111 | | | $ | 383,968 | | | $ | 162,744 | | | $ | 415,369 | | | $ | 2,090,300 | | | $ | 396 | | | $ | 5,847,551 | | Total commercial and industrial | | $ | 1,633,478 | | | $ | 1,115,331 | | | $ | 614,019 | | | $ | 331,400 | | | $ | 258,656 | | | $ | 458,680 | | | $ | 4,393,115 | | | $ | 151 | | | $ | 8,804,830 | |
Commercial real estate | Commercial real estate | | | | | | | | | | | | | | | | | | | Commercial real estate | | | | | | | | | | | | | | | | | | |
Risk Rating: | Risk Rating: | | Risk Rating: | |
Pass | Pass | | $ | 4,517,917 | | | $ | 2,983,140 | | | $ | 2,702,580 | | | $ | 1,734,922 | | | $ | 1,474,770 | | | $ | 4,557,011 | | | $ | 195,851 | | | $ | 13,380 | | | $ | 18,179,571 | | Pass | | $ | 6,815,115 | | | $ | 5,168,127 | | | $ | 3,246,885 | | | $ | 2,672,223 | | | $ | 1,536,327 | | | $ | 5,027,128 | | | $ | 452,461 | | | $ | 3,504 | | | $ | 24,921,770 | |
Special Mention | Special Mention | | 7,700 | | | 50,019 | | | 46,911 | | | 44,187 | | | 65,623 | | | 143,540 | | | 50,168 | | | — | | | 408,148 | | Special Mention | | 93,286 | | | 48,007 | | | 60,169 | | | 45,447 | | | 62,111 | | | 125,414 | | | 8,188 | | | — | | | 442,622 | |
Substandard | Substandard | | 735 | | | 34,655 | | | 29,029 | | | 41,231 | | | 70,941 | | | 169,041 | | | 1,949 | | | — | | | 347,581 | | Substandard | | 15,088 | | | 34,475 | | | 32,630 | | | 34,622 | | | 59,337 | | | 183,341 | | | 7,986 | | | — | | | 367,479 | |
Doubtful | Doubtful | | — | | | — | | | — | | | — | | | — | | | 186 | | | — | | | — | | | 186 | | Doubtful | | — | | | — | | | — | | | — | | | — | | | 162 | | | — | | | — | | | 162 | |
| Total commercial real estate | Total commercial real estate | | $ | 4,526,352 | | | $ | 3,067,814 | | | $ | 2,778,520 | | | $ | 1,820,340 | | | $ | 1,611,334 | | | $ | 4,869,778 | | | $ | 247,968 | | | $ | 13,380 | | | $ | 18,935,486 | | Total commercial real estate | | $ | 6,923,489 | | | $ | 5,250,609 | | | $ | 3,339,684 | | | $ | 2,752,292 | | | $ | 1,657,775 | | | $ | 5,336,045 | | | $ | 468,635 | | | $ | 3,504 | | | $ | 25,732,033 | |
Construction | Construction | | | | | | | | | | | | | | | | | | | Construction | | | | | | | | | | | | | | | | | | |
Risk Rating: | Risk Rating: | | Risk Rating: | |
Pass | Pass | | $ | 274,097 | | | $ | 98,609 | | | $ | 48,555 | | | $ | 32,781 | | | $ | 6,061 | | | $ | 28,419 | | | $ | 1,313,555 | | | $ | — | | | $ | 1,802,077 | | Pass | | $ | 942,380 | | | $ | 512,046 | | | $ | 61,131 | | | $ | 22,845 | | | $ | 8,676 | | | $ | 20,599 | | | $ | 2,040,866 | | | $ | — | | | $ | 3,608,543 | |
Special Mention | Special Mention | | 4,131 | | | — | | | 1,009 | | | — | | | — | | | — | | | 18,449 | | | — | | | 23,589 | | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | 14,268 | | | — | | | 14,268 | |
Substandard | Substandard | | 199 | | | 19 | | | 6 | | | 246 | | | — | | | 17,842 | | | 10,602 | | | — | | | 28,914 | | Substandard | | 12,969 | | | 12,601 | | | — | | | 974 | | | — | | | 17,599 | | | 20,138 | | | — | | | 64,281 | |
| Doubtful | | Doubtful | | — | | | — | | | — | | | — | | | — | | | 13,743 | | | — | | | — | | | 13,743 | |
Total construction | Total construction | | $ | 278,427 | | | $ | 98,628 | | | $ | 49,570 | | | $ | 33,027 | | | $ | 6,061 | | | $ | 46,261 | | | $ | 1,342,606 | | | $ | — | | | $ | 1,854,580 | | Total construction | | $ | 955,349 | | | $ | 524,647 | | | $ | 61,131 | | | $ | 23,819 | | | $ | 8,676 | | | $ | 51,941 | | | $ | 2,075,272 | | | $ | — | | | $ | 3,700,835 | |
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 and by payment activity. The following table presents the amortized cost in those loan classes based on payment activity, by origination year as of June 30, 2022March 31, 2023 and December 31, 2021.2022, as well as the gross loan charge-offs by year of origination for the three months ended March 31, 2023:
| | | | Term Loans | | | | | | | Term Loans | | | | |
| | Amortized Cost Basis by Origination Year | | | Amortized Cost Basis by Origination Year | |
June 30, 2022 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | Total | |
March 31, 2023 | | March 31, 2023 | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior to 2019 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | Total |
| | | (in thousands) | | | (in thousands) |
Residential mortgage | Residential mortgage | | Residential mortgage | |
Performing | Performing | | $ | 768,137 | | | $ | 1,518,240 | | | $ | 593,271 | | | $ | 515,561 | | | $ | 363,811 | | | $ | 1,162,383 | | | $ | 75,509 | | | $ | — | | | $ | 4,996,912 | | Performing | | $ | 222,494 | | | $ | 1,317,372 | | | $ | 1,521,543 | | | $ | 572,064 | | | $ | 478,014 | | | $ | 1,300,107 | | | $ | 66,947 | | | $ | — | | | $ | 5,478,541 | |
90 days or more past due | 90 days or more past due | | — | | | — | | | 1,370 | | | 1,511 | | | 2,044 | | | 3,232 | | | — | | | — | | | 8,157 | | 90 days or more past due | | — | | | 1,473 | | | 1,754 | | | — | | | 499 | | | 4,013 | | | — | | | — | | | 7,739 | |
Total residential mortgage | Total residential mortgage | | $ | 768,137 | | | $ | 1,518,240 | | | $ | 594,641 | | | $ | 517,072 | | | $ | 365,855 | | | $ | 1,165,615 | | | $ | 75,509 | | | $ | — | | | $ | 5,005,069 | | Total residential mortgage | | $ | 222,494 | | | $ | 1,318,845 | | | $ | 1,523,297 | | | $ | 572,064 | | | $ | 478,513 | | | $ | 1,304,120 | | | $ | 66,947 | | | $ | — | | | $ | 5,486,280 | |
Consumer loans | Consumer loans | | | | | | | | | | | | | | | | | | | Consumer loans | | | | | | | | | | | | | | | | | | |
Home equity | Home equity | | Home equity | |
Performing | Performing | | $ | 21,198 | | | $ | 13,068 | | | $ | 4,946 | | | $ | 5,645 | | | $ | 6,212 | | | $ | 15,064 | | | $ | 324,606 | | | $ | 39,702 | | | $ | 430,441 | | Performing | | $ | 7,251 | | | $ | 46,566 | | | $ | 12,085 | | | $ | 4,448 | | | $ | 4,891 | | | $ | 18,499 | | | $ | 383,948 | | | $ | 37,984 | | | $ | 515,672 | |
90 days or more past due | 90 days or more past due | | — | | | — | | | — | | | — | | | — | | | 1 | | | 425 | | | 588 | | | 1,014 | | 90 days or more past due | | — | | | — | | | — | | | — | | | — | | | — | | | 285 | | | 635 | | | 920 | |
Total home equity | Total home equity | | 21,198 | | | 13,068 | | | 4,946 | | | 5,645 | | | 6,212 | | | 15,065 | | | 325,031 | | | 40,290 | | | 431,455 | | Total home equity | | 7,251 | | | 46,566 | | | 12,085 | | | 4,448 | | | 4,891 | | | 18,499 | | | 384,233 | | | 38,619 | | | 516,592 | |
Automobile | Automobile | | | | | | | | | | | | | | | | | | | Automobile | | | | | | | | | | | | | | | | | | |
Performing | Performing | | 408,872 | | | 621,275 | | | 252,127 | | | 215,999 | | | 113,834 | | | 60,789 | | | — | | | — | | | 1,672,896 | | Performing | | 141,743 | | | 687,328 | | | 480,634 | | | 181,994 | | | 144,130 | | | 80,995 | | | — | | | — | | | 1,716,824 | |
90 days or more past due | 90 days or more past due | | — | | | 90 | | | 57 | | | 132 | | | 214 | | | 93 | | | — | | | — | | | 586 | | 90 days or more past due | | — | | | 1 | | | 51 | | | 19 | | | 105 | | | 141 | | | — | | | — | | | 317 | |
Total automobile | Total automobile | | 408,872 | | | 621,365 | | | 252,184 | | | 216,131 | | | 114,048 | | | 60,882 | | | — | | | — | | | 1,673,482 | | Total automobile | | 141,743 | | | 687,329 | | | 480,685 | | | 182,013 | | | 144,235 | | | 81,136 | | | — | | | — | | | 1,717,141 | |
Other consumer | Other consumer | | | | | | | | | | | | | | | | | | | Other consumer | | | | | | | | | | | | | | | | | | |
Performing | Performing | | 14,481 | | | 3,094 | | | 7,339 | | | 7,610 | | | 7,156 | | | 4,821 | | | 982,353 | | | — | | | 1,026,854 | | Performing | | 4,898 | | | 23,313 | | | 9,056 | | | 8,020 | | | 7,374 | | | 2,615 | | | 1,063,356 | | | — | | | 1,118,632 | |
| 90 days or more past due | | 90 days or more past due | | — | | | 28 | | | — | | | 2 | | | — | | | 38 | | | 229 | | | — | | | 297 | |
Total other consumer | Total other consumer | | 14,481 | | | 3,094 | | | 7,339 | | | 7,610 | | | 7,156 | | | 4,821 | | | 982,353 | | | — | | | 1,026,854 | | Total other consumer | | 4,898 | | | 23,341 | | | 9,056 | | | 8,022 | | | 7,374 | | | 2,653 | | | 1,063,585 | | | — | | | 1,118,929 | |
Total consumer | Total consumer | | $ | 444,551 | | | $ | 637,527 | | | $ | 264,469 | | | $ | 229,386 | | | $ | 127,416 | | | $ | 80,768 | | | $ | 1,307,384 | | | $ | 40,290 | | | $ | 3,131,791 | | Total consumer | | $ | 153,892 | | | $ | 757,236 | | | $ | 501,826 | | | $ | 194,483 | | | $ | 156,500 | | | $ | 102,288 | | | $ | 1,447,818 | | | $ | 38,619 | | | $ | 3,352,662 | |
Gross loan charge-offs | | Gross loan charge-offs | | $ | — | | | $ | 146 | | | $ | 109 | | | $ | 4 | | | $ | 170 | | | $ | 388 | | | $ | 11 | | | $ | — | | | $ | 828 | |
| | | | Term Loans | | | | | | | Term Loans | | | | |
| | Amortized Cost Basis by Origination Year | | | Amortized Cost Basis by Origination Year | |
December 31, 2021 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior to 2017 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | Total | |
December 31, 2022 | | December 31, 2022 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | Total |
| | | (in thousands) | | | (in thousands) |
Residential mortgage | Residential mortgage | | Residential mortgage | |
Performing | Performing | | $ | 1,448,602 | | | $ | 635,531 | | | $ | 572,911 | | | $ | 425,152 | | | $ | 368,164 | | | $ | 1,014,190 | | | $ | 70,342 | | | $ | — | | | $ | 4,534,892 | | Performing | | $ | 1,302,279 | | | $ | 1,502,622 | | | $ | 571,390 | | | $ | 500,197 | | | $ | 338,062 | | | $ | 1,073,995 | | | $ | 66,706 | | | $ | — | | | $ | 5,355,251 | |
90 days or more past due | 90 days or more past due | | — | | | 357 | | | 2,627 | | | 2,056 | | | 2,794 | | | 2,338 | | | — | | | — | | | 10,172 | | 90 days or more past due | | — | | | 197 | | | 217 | | | 1,835 | | | 2,876 | | | 4,174 | | | — | | | — | | | 9,299 | |
Total residential mortgage | Total residential mortgage | | $ | 1,448,602 | | | $ | 635,888 | | | $ | 575,538 | | | $ | 427,208 | | | $ | 370,958 | | | $ | 1,016,528 | | | $ | 70,342 | | | $ | — | | | $ | 4,545,064 | | Total residential mortgage | | $ | 1,302,279 | | | $ | 1,502,819 | | | $ | 571,607 | | | $ | 502,032 | | | $ | 340,938 | | | $ | 1,078,169 | | | $ | 66,706 | | | $ | — | | | $ | 5,364,550 | |
Consumer loans | Consumer loans | | | | | | | | | | | | | | | | | | | Consumer loans | | | | | | | | | | | | | | | | | | |
Home equity | Home equity | | Home equity | |
Performing | Performing | | $ | 13,847 | | | $ | 5,723 | | | $ | 6,994 | | | $ | 7,384 | | | $ | 5,359 | | | $ | 13,597 | | | $ | 303,888 | | | $ | 42,822 | | | $ | 399,614 | | Performing | | $ | 47,084 | | | $ | 12,432 | | | $ | 4,592 | | | $ | 5,024 | | | $ | 5,581 | | | $ | 13,007 | | | $ | 376,608 | | | $ | 38,570 | | | $ | 502,898 | |
90 days or more past due | 90 days or more past due | | — | | | — | | | — | | | — | | | — | | | 35 | | | 536 | | | 594 | | | 1,165 | | 90 days or more past due | | — | | | — | | | — | | | — | | | — | | | — | | | 276 | | | 710 | | | 986 | |
Total home equity | Total home equity | | 13,847 | | | 5,723 | | | 6,994 | | | 7,384 | | | 5,359 | | | 13,632 | | | 304,424 | | | 43,416 | | | 400,779 | | Total home equity | | 47,084 | | | 12,432 | | | 4,592 | | | 5,024 | | | 5,581 | | | 13,007 | | | 376,884 | | | 39,280 | | | 503,884 | |
Automobile | Automobile | | | | | | | | | | | | | | | | | | | Automobile | | | | | | | | | | | | | | | | | | |
Performing | Performing | | 735,446 | | | 309,856 | | | 278,828 | | | 157,450 | | | 72,753 | | | 15,171 | | | — | | | — | | | 1,569,504 | | Performing | | 724,557 | | | 525,017 | | | 204,578 | | | 166,103 | | | 80,012 | | | 45,415 | | | — | | | — | | | 1,745,682 | |
90 days or more past due | 90 days or more past due | | 129 | | | — | | | 78 | | | 163 | | | 81 | | | 81 | | | — | | | — | | | 532 | | 90 days or more past due | | 38 | | | 116 | | | 36 | | | 180 | | | 101 | | | 72 | | | — | | | — | | | 543 | |
Total automobile | Total automobile | | 735,575 | | | 309,856 | | | 278,906 | | | 157,613 | | | 72,834 | | | 15,252 | | | — | | | — | | | 1,570,036 | | Total automobile | | 724,595 | | | 525,133 | | | 204,614 | | | 166,283 | | | 80,113 | | | 45,487 | | | — | | | — | | | 1,746,225 | |
Other consumer | Other consumer | | | | | | | | | | | | | | | | | | | Other consumer | | | | | | | | | | | | | | | | | | |
Performing | Performing | | 2,949 | | | 6,717 | | | 6,468 | | | 7,017 | | | 1,009 | | | 14,483 | | | 961,027 | | | — | | | 999,670 | | Performing | | 24,140 | | | 10,144 | | | 8,206 | | | 7,435 | | | 7,406 | | | 15,736 | | | 991,737 | | | — | | | 1,064,804 | |
90 days or more past due | 90 days or more past due | | — | | | — | | | — | | | — | | | — | | | — | | | 491 | | | — | | | 491 | | 90 days or more past due | | — | | | — | | | — | | | — | | | — | | | 38 | | | 1 | | | — | | | 39 | |
Total other consumer | Total other consumer | | 2,949 | | | 6,717 | | | 6,468 | | | 7,017 | | | 1,009 | | | 14,483 | | | 961,518 | | | — | | | 1,000,161 | | Total other consumer | | 24,140 | | | 10,144 | | | 8,206 | | | 7,435 | | | 7,406 | | | 15,774 | | | 991,738 | | | — | | | 1,064,843 | |
Total consumer | Total consumer | | $ | 752,371 | | | $ | 322,296 | | | $ | 292,368 | | | $ | 172,014 | | | $ | 79,202 | | | $ | 43,367 | | | $ | 1,265,942 | | | $ | 43,416 | | | $ | 2,970,976 | | Total consumer | | $ | 795,819 | | | $ | 547,709 | | | $ | 217,412 | | | $ | 178,742 | | | $ | 93,100 | | | $ | 74,268 | | | $ | 1,368,622 | | | $ | 39,280 | | | $ | 3,314,952 | |
Troubled debt restructured loans
Loan modifications to borrowers experiencing financial difficulty.. From time to time, Valley mayextend, 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. IfPrior to 2023, a loan was classified as a troubled debt restructuring (TDR) if the borrower iswas experiencing financial difficulties and a concession has been made at the time of such modification,modification.
Effective January 1, 2023, Valley adopted ASU No. 2022-02 which eliminated the accounting guidance for TDR loans while enhancing disclosure requirements for certain loan modifications by creditors when a borrower is experiencing financial difficulty. Valley adopted ASU No. 2022-02 using the modified retrospective transition method. At the date of adoption, Valley was no longer required to utilize a loan-level discounted cash flow approach for determining the allowance for certain modified loans previously classified as TDR loans. As a troubled debt restructured loan (TDR).
Generally,result, Valley elected to utilize its collective reserve methodology for pools of loans that share common risk characteristic for determining the concessions madereserves for TDRs involve lowering the monthly payments onmodified 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 reflectedformerly classified as TDR loans. This change resulted in the interest rate, orrecognition of a combinationcumulative-effect adjustment which decreased the allowance for loan losses with an offsetting entry to retained earnings, net of these two methods. The concessions may also involve payment deferrals but rarely result in the forgiveness of principal or accrued interest. In addition, Valley frequently obtains additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms of the loan and Valley’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
Performing TDRs (not reported as non-accrual loans) totaled $67.3 million and $71.3 million as of June 30, 2022 and December 31, 2021, respectively. Non-performing TDRs totaled $154.4 million and $117.2 million as of June 30, 2022 and December 31, 2021, respectively.
deferred taxes, at January 1, 2023.
The following table presentsshows the amortized cost basis of loans to borrowers experiencing financial difficulty at March 31, 2023 that were modified during the three months ended March 31, 2023, disaggregated by class of financing receivable and type of modification. Each of the types of modifications was less than one percent of their respective loan categories.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | Term extension | | | | | | | | Term extension and interest rate reduction | | Total | | | | | | |
| | ($ in thousands) |
Commercial and industrial | | $ | 1,281 | | | | | | | | | $ | 523 | | | $ | 1,804 | | | | | | | |
Commercial real estate | | 46,328 | | | | | | | | | — | | | 46,328 | | | | | | | |
Residential mortgage | | 213 | | | | | | | | | — | | | 213 | | | | | | | |
Consumer | | 60 | | | | | | | | | — | | | 60 | | | | | | | |
Total | | $ | 47,882 | | | | | | | | | $ | 523 | | | $ | 48,405 | | | | | | | |
The following table describes the types of modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2023:
| | | | | | | | | | | | |
| | |
| | Types of Modifications | | | | |
Commercial and industrial | | 12 month term extensions; and 12 month term extensions combined with interest rate reductions from 2.11 percent to 1 percent | | | | |
Commercial real estate | | 6 - 36 month term extensions | | | | |
| | | | | | |
Residential mortgage | | 12 month term extensions | | | | |
Consumer | | 60 month term extensions | | | | |
Valley closely monitors the performance of modified loans to borrowers experiencing financial difficulty to understand the effectiveness of modification efforts. All loans to borrowers experiencing financial difficulty that have been modified during the three months ended March 31, 2023 were current to their contractual payments as of March 31, 2023.
Valley did not extend any commitments to lend additional funds to borrowers experiencing financial difficulty whose loans had been modified during the three months ended March 31, 2023.
Troubled debt restructured loans. The following tables present the pre- and post-modification amortized cost of TDR loans by loan class modified as TDRs during the three and six months ended June 30, 2022 and 2021.March 31, 2022. Post-modification amounts are presented as of June 30,March 31, 2022 and 2021.using the allowance methodology for TDRs prior to the adoption of ASU 2022-02.
| | | Three Months Ended June 30, | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | | Three Months Ended March 31, 2022 |
Troubled Debt Restructurings | Troubled Debt Restructurings | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | Troubled Debt Restructurings | | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| | | ($ in thousands) | | | | ($ in thousands) |
Commercial and industrial | Commercial and industrial | | 49 | | | $ | 82,120 | | | $ | 78,051 | | | 9 | | | $ | 8,592 | | | $ | 8,529 | | Commercial and industrial | | | 11 | | | $ | 9,684 | | | $ | 9,662 | |
| Commercial real estate | Commercial real estate | | 1 | | | 8,811 | | | 8,735 | | | 6 | | | 12,237 | | | 12,223 | | Commercial real estate | | | 2 | | | 5,260 | | | 5,251 | |
| Residential mortgage | Residential mortgage | | 7 | | | 4,970 | | | 4,969 | | | 2 | | | 1,089 | | | 1,079 | | Residential mortgage | | | 1 | | | 121 | | | 117 | |
Consumer | | 1 | | | 125 | | | 124 | | | — | | | — | | | — | | |
| Total | Total | | 58 | | | $ | 96,026 | | | $ | 91,879 | | | 17 | | | $ | 21,918 | | | $ | 21,831 | | Total | | | 14 | | | $ | 15,065 | | | $ | 15,030 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
Troubled Debt Restructurings | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| | ($ in thousands) |
Commercial and industrial | | 60 | | | $ | 91,804 | | | $ | 87,685 | | | 13 | | | $ | 20,855 | | | $ | 19,648 | |
| | | | | | | | | | | | |
Commercial real estate | | 3 | | | 14,072 | | | 13,986 | | | 6 | | | 12,237 | | | 12,223 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Residential mortgage | | 8 | | | 5,090 | | | 5,087 | | | 8 | | | 2,618 | | | 2,586 | |
Consumer | | 1 | | | 125 | | | 124 | | | 1 | | | 169 | | | 166 | |
Total | | 72 | | | $ | 111,091 | | | $ | 106,882 | | | 28 | | | $ | 35,879 | | | $ | 34,623 | |
The total TDRs presented in the above tabletables had allocated allowance for loan losses of $56.0$7.8 million and $4.5 millionat June 30, 2022 and 2021, respectively.March 31, 2022. There were $1.5 million inno charge-offs related to TDRs for the three and six months ended June 30,March 31, 2022. There were charge-offs of $697 thousand and $5.8 million related to TDRs for the three and six months ended June 30, 2021, 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, 2022March 31, 2022.
Performing TDRs (not reported as non-accrual loans) and 2021.
non-performing TDRs totaled $56.5 million and $104.7 million as of March 31, 2022.
Loans modified as TDRs within the previous 12 months and for which there was a payment default (90 or more days past due) for the three and six months ended June 30,March 31, 2022 and 2021 were as follows:
| | | | Three Months Ended June 30, | | | | | | | | | | | | | |
| | 2022 | | 2021 | | | | Three Months Ended March 31, 2022 |
Troubled Debt Restructurings Subsequently Defaulted | Troubled Debt Restructurings Subsequently Defaulted | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | Troubled Debt Restructurings Subsequently Defaulted | | | Number of Contracts | | Recorded Investment |
| | | ($ in thousands) | | | | ($ in thousands) |
| Commercial and industrial | | Commercial and industrial | | | 2 | | | $ | 1,850 | |
| Construction | Construction | | 2 | | | $ | 17,599 | | | — | | | $ | — | | Construction | | | 2 | | | 17,599 | |
| Residential mortgage | | — | | | — | | | 1 | | | 445 | | |
| | Total | Total | | 2 | | | $ | 17,599 | | | 1 | | | $ | 445 | | Total | | | 4 | | | $ | 19,449 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
Troubled Debt Restructurings Subsequently Defaulted | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
| | ($ in thousands) |
Commercial and industrial | | — | | | $ | — | | | 15 | | | $ | 12,384 | |
| | | | | | | | |
| | | | | | | | |
Construction | | 2 | | | 17,599 | | | — | | | — | |
| | | | | | | | |
Residential mortgage | | — | | | — | | | 2 | | | 692 | |
| | | | | | | | |
Total | | 2 | | | $ | 17,599 | | | 17 | | | $ | 13,076 | |
Loans in Processprocess of Foreclosure.foreclosure. Other real estate owned (OREO) totaled $422$1.2 million and $286 thousand and $2.3 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. There were 0 foreclosed no foreclosed residential real estate properties included in OREO at June 30, 2022March 31, 2023 and at December 31, 2021.2022. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.0$1.5 millionand $2.5$2.6 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
Collateral dependent loans. Loans are collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When Valley determines that foreclosure is probable, the collateral dependent loan balances are written down to the estimated current fair value (less estimated selling costs) resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s collection process.
The following table presents collateral dependent loans by class as of June 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | (in thousands) | | (in thousands) |
Collateral dependent loans: | Collateral dependent loans: | | Collateral dependent loans: | |
Commercial and industrial * | Commercial and industrial * | $ | 100,783 | | | $ | 95,335 | | Commercial and industrial * | $ | 74,481 | | | $ | 94,433 | |
Commercial real estate: | | |
| Commercial real estate | Commercial real estate | 94,248 | | | 110,174 | | Commercial real estate | 144,892 | | | 130,199 | |
Construction | 50,176 | | | — | | |
Total commercial real estate loans | 144,424 | | | 110,174 | | |
| Residential mortgage | Residential mortgage | 21,695 | | | 35,745 | | Residential mortgage | 18,694 | | | 33,865 | |
Home equity | Home equity | 2 | | | 4 | | Home equity | — | | | 195 | |
Total | Total | $ | 266,904 | | | $ | 241,258 | | Total | $ | 238,067 | | | $ | 258,692 | |
* The majority ofCommercial and industrial loans presented in the loanstable above are primarily collateralized by taxi medallions for all periods.medallions.
Allowance for Credit Losses for Loans
The allowance for credit losses (ACL) for loans consists of the allowance for loan losses and the allowance for unfunded credit commitments. The ACL for loans increased $115.3decreased $22.3 million from Decemberat March 31, 2021 largely reflecting a net ACL of $70.3 million for PCD loans acquired from Bank Leumi USA that was recorded at April 1, 2022 and recognition of a $41.0 million provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA during the three months ended June 30, 2022. Overall, an increased economic forecast reserve component of our CECL model caused by elevated uncertainty in economic conditions was largely offset by lower expected quantitative loss experience at June 30, 20222023 as compared to December 31, 2021.
The following table summarizes the ACL for loans at June 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (in thousands) |
Components of allowance for credit losses for loans: | | | |
Allowance for loan losses | $ | 468,819 | | | $ | 359,202 | |
Allowance for unfunded credit commitments | 22,144 | | | 16,500 | |
Total allowance for credit losses for loans | $ | 490,963 | | | $ | 375,702 | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
Components of allowance for credit losses for loans: | | | |
Allowance for loan losses | $ | 436,898 | | | $ | 458,655 | |
Allowance for unfunded credit commitments | 24,071 | | | 24,600 | |
Total allowance for credit losses for loans | $ | 460,969 | | | $ | 483,255 | |
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, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | (in thousands) | | (in thousands) |
Components of provision for credit losses for loans: | Components of provision for credit losses for loans: | | Components of provision for credit losses for loans: | | |
Provision for loan losses | Provision for loan losses | $ | 38,310 | | | $ | 5,810 | | | $ | 41,568 | | | $ | 14,502 | | Provision for loan losses | $ | 9,979 | | | $ | 3,258 | | |
Provision for unfunded credit commitments | 5,402 | | | 2,967 | | | 5,644 | | | 3,289 | | |
(Credit) provision for unfunded credit commitments | | (Credit) provision for unfunded credit commitments | (529) | | | 242 | | |
Total provision for credit losses for loans | Total provision for credit losses for loans | $ | 43,712 | | | $ | 8,777 | | | $ | 47,212 | | | $ | 17,791 | | Total provision for credit losses for loans | $ | 9,450 | | | $ | 3,500 | | |
The following table details the activity in the allowance for loan losses by loan portfolio segment for the three and six months ended June 30, 2022March 31, 2023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | Commercial Real Estate | | Residential Mortgage | | Consumer | | Total |
| (in thousands) |
Three Months Ended June 30, 2022 | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | |
Beginning balance | $ | 101,203 | | | $ | 219,949 | | | $ | 28,189 | | | $ | 13,169 | | | $ | 362,510 | |
Allowance for purchased credit deteriorated (PCD) loans * | 33,452 | | | 36,618 | | | 206 | | | 43 | | | 70,319 | |
Loans charged-off | (4,540) | | | — | | | (1) | | | (726) | | | (5,267) | |
Charged-off loans recovered | 1,952 | | | 224 | | | 74 | | | 697 | | | 2,947 | |
Net (charge-offs) recoveries | (2,588) | | | 224 | | | 73 | | | (29) | | | (2,320) | |
Provision for loan losses | 12,472 | | | 20,436 | | | 1,421 | | | 3,981 | | | 38,310 | |
Ending balance | $ | 144,539 | | | $ | 277,227 | | | $ | 29,889 | | | $ | 17,164 | | | $ | 468,819 | |
Three Months Ended June 30, 2021 | | | | | | | | | |
Allowance for losses: | | | | | | | | | |
Beginning balance | $ | 126,408 | | | $ | 174,236 | | | $ | 27,172 | | | $ | 15,064 | | | $ | 342,880 | |
| | | | | | | | | |
| | | | | | | | | |
Loans charged-off | (10,893) | | | — | | | (1) | | | (1,480) | | | (12,374) | |
Charged-off loans recovered | 678 | | | 665 | | | 191 | | | 1,474 | | | 3,008 | |
Net (charge-offs) recoveries | (10,215) | | | 665 | | | 190 | | | (6) | | | (9,366) | |
(Credit) provision for loan losses | (6,504) | | | 14,238 | | | (2,059) | | | 135 | | | 5,810 | |
Ending balance | $ | 109,689 | | | $ | 189,139 | | | $ | 25,303 | | | $ | 15,193 | | | $ | 339,324 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | Commercial Real Estate | | Residential Mortgage | | Consumer | | Total |
| (in thousands) |
Six Months Ended June 30, 2022 | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | |
Beginning balance | $ | 103,090 | | | $ | 217,490 | | | $ | 25,120 | | | $ | 13,502 | | | $ | 359,202 | |
Allowance for PCD loans * | 33,452 | | | 36,618 | | | 206 | | | 43 | | | 70,319 | |
Loans charged-off | (6,111) | | | (173) | | | (27) | | | (1,551) | | | (7,862) | |
Charged-off loans recovered | 2,776 | | | 331 | | | 531 | | | 1,954 | | | 5,592 | |
Net (charge-offs) recoveries | (3,335) | | | 158 | | | 504 | | | 403 | | | (2,270) | |
Provision for loan losses | 11,332 | | | 22,961 | | | 4,059 | | | 3,216 | | | 41,568 | |
Ending balance | $ | 144,539 | | | $ | 277,227 | | | $ | 29,889 | | | $ | 17,164 | | | $ | 468,819 | |
Six Months Ended June 30, 2021 | | | | | | | | | |
Allowance for losses: | | | | | | | | | |
Beginning balance | $ | 131,070 | | | $ | 164,113 | | | $ | 28,873 | | | $ | 16,187 | | | $ | 340,243 | |
| | | | | | | | | |
| | | | | | | | | |
Loans charged-off | (18,035) | | | (382) | | | (139) | | | (2,618) | | | (21,174) | |
Charged-off loans recovered | 2,267 | | | 734 | | | 348 | | | 2,404 | | | 5,753 | |
Net (charge-offs) recoveries | (15,768) | | | 352 | | | 209 | | | (214) | | | (15,421) | |
(Credit) provision for loan losses | (5,613) | | | 24,674 | | | (3,779) | | | (780) | | | 14,502 | |
Ending balance | $ | 109,689 | | | $ | 189,139 | | | $ | 25,303 | | | $ | 15,193 | | | $ | 339,324 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | Commercial Real Estate | | Residential Mortgage | | Consumer | | Total |
| (in thousands) |
Three Months Ended March 31, 2023 | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | |
Beginning balance | $ | 139,941 | | | $ | 259,408 | | | $ | 39,020 | | | $ | 20,286 | | | $ | 458,655 | |
Impact of the adoption of ASU No. 2022-02 * | (739) | | | (589) | | | (12) | | | (28) | | | (1,368) | |
Beginning balance, adjusted | $ | 139,202 | | | $ | 258,819 | | | $ | 39,008 | | | $ | 20,258 | | | $ | 457,287 | |
Loans charged-off | (26,047) | | | (5,698) | | | — | | | (828) | | | (32,573) | |
Charged-off loans recovered | 1,399 | | | 24 | | | 21 | | | 761 | | | 2,205 | |
Net (charge-offs) recoveries | (24,648) | | | (5,674) | | | 21 | | | (67) | | | (30,368) | |
Provision (credit) for loan losses | 13,438 | | | (9,813) | | | 2,679 | | | 3,675 | | | 9,979 | |
Ending balance | $ | 127,992 | | | $ | 243,332 | | | $ | 41,708 | | | $ | 23,866 | | | $ | 436,898 | |
Three Months Ended March 31, 2022 | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | |
Beginning balance | $ | 103,090 | | | $ | 217,490 | | | $ | 25,120 | | | $ | 13,502 | | | $ | 359,202 | |
| | | | | | | | | |
| | | | | | | | | |
Loans charged-off | (1,571) | | | (173) | | | (26) | | | (825) | | | (2,595) | |
Charged-off loans recovered | 824 | | | 107 | | | 457 | | | 1,257 | | | 2,645 | |
Net (charge-offs) recoveries | (747) | | | (66) | | | 431 | | | 432 | | | 50 | |
(Credit) provision for loan losses | (1,140) | | | 2,525 | | | 2,638 | | | (765) | | | 3,258 | |
Ending balance | $ | 101,203 | | | $ | 219,949 | | | $ | 28,189 | | | $ | 13,169 | | | $ | 362,510 | |
* Represents the allowance for acquired PCD loans, net of PCD loan charge-offs totaling $62.4 million in the second quarter 2022.
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, 2022March 31, 2023 and December 31, 2021.2022.
| | | Commercial and Industrial | | Commercial Real Estate | | Residential Mortgage | | Consumer | | Total | | Commercial and Industrial | | Commercial Real Estate | | Residential Mortgage | | Consumer | | Total |
| | (in thousands) | | (in thousands) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
Allowance for loan losses: | Allowance for loan losses: | | Allowance for loan losses: | |
Individually evaluated for credit losses | Individually evaluated for credit losses | $ | 93,698 | | | $ | 10,757 | | | $ | 641 | | | $ | 100 | | | $ | 105,196 | | Individually evaluated for credit losses | $ | 46,151 | | | $ | 13,445 | | | $ | 34 | | | $ | — | | | $ | 59,630 | |
Collectively evaluated for credit losses | Collectively evaluated for credit losses | 50,841 | | | 266,470 | | | 29,248 | | | 17,064 | | | 363,623 | | Collectively evaluated for credit losses | 81,841 | | | 229,887 | | | 41,674 | | | 23,866 | | | 377,268 | |
Total | Total | $ | 144,539 | | | $ | 277,227 | | | $ | 29,889 | | | $ | 17,164 | | | $ | 468,819 | | Total | $ | 127,992 | | | $ | 243,332 | | | $ | 41,708 | | | $ | 23,866 | | | $ | 436,898 | |
Loans: | Loans: | | | | | | | | | | Loans: | | | | | | | | | |
Individually evaluated for credit losses | Individually evaluated for credit losses | $ | 164,235 | | | $ | 169,737 | | | $ | 32,303 | | | $ | 1,531 | | | $ | 367,806 | | Individually evaluated for credit losses | $ | 74,625 | | | $ | 144,892 | | | $ | 12,028 | | | $ | 6,929 | | | $ | 238,474 | |
Collectively evaluated for credit losses | Collectively evaluated for credit losses | 8,350,223 | | | 26,739,722 | | | 4,972,766 | | | 3,130,260 | | | 43,192,971 | | Collectively evaluated for credit losses | 8,969,321 | | | 30,632,186 | | | 5,474,252 | | | 3,345,733 | | | 48,421,492 | |
Total | Total | $ | 8,514,458 | | | $ | 26,909,459 | | | $ | 5,005,069 | | | $ | 3,131,791 | | | $ | 43,560,777 | | Total | $ | 9,043,946 | | | $ | 30,777,078 | | | $ | 5,486,280 | | | $ | 3,352,662 | | | $ | 48,659,966 | |
December 31, 2021 | | | | | | | | | | |
December 31, 2022 | | December 31, 2022 | | | | | | | | | |
Allowance for loan losses: | Allowance for loan losses: | | Allowance for loan losses: | |
Individually evaluated for credit losses | Individually evaluated for credit losses | $ | 64,359 | | | $ | 6,277 | | | $ | 470 | | | $ | 390 | | | $ | 71,496 | | Individually evaluated for credit losses | $ | 68,745 | | | $ | 13,174 | | | $ | 337 | | | $ | 4,338 | | | $ | 86,594 | |
Collectively evaluated for credit losses | Collectively evaluated for credit losses | 38,731 | | | 211,213 | | | 24,650 | | | 13,112 | | | 287,706 | | Collectively evaluated for credit losses | 71,196 | | | 246,234 | | | 38,683 | | | 15,948 | | | 372,061 | |
Total | Total | $ | 103,090 | | | $ | 217,490 | | | $ | 25,120 | | | $ | 13,502 | | | $ | 359,202 | | Total | $ | 139,941 | | | $ | 259,408 | | | $ | 39,020 | | | $ | 20,286 | | | $ | 458,655 | |
Loans: | Loans: | | | | | | | | | | Loans: | | | | | | | | | |
Individually evaluated for credit losses | Individually evaluated for credit losses | $ | 119,760 | | | $ | 134,135 | | | $ | 42,469 | | | $ | 2,431 | | | $ | 298,795 | | Individually evaluated for credit losses | $ | 117,644 | | | $ | 213,522 | | | $ | 28,869 | | | $ | 14,058 | | | $ | 374,093 | |
Collectively evaluated for credit losses | Collectively evaluated for credit losses | 5,727,791 | | | 20,655,931 | | | 4,502,595 | | | 2,968,545 | | | 33,854,862 | | Collectively evaluated for credit losses | 8,687,186 | | | 29,219,346 | | | 5,335,681 | | | 3,300,894 | | | 46,543,107 | |
Total | Total | $ | 5,847,551 | | | $ | 20,790,066 | | | $ | 4,545,064 | | | $ | 2,970,976 | | | $ | 34,153,657 | | Total | $ | 8,804,830 | | | $ | 29,432,868 | | | $ | 5,364,550 | | | $ | 3,314,952 | | | $ | 46,917,200 | |
Note 9. Goodwill and Other Intangible Assets
The changes in the carrying amountamounts of goodwill as allocated to Valley's business segments, or reporting units thereof, for goodwill impairment analysis were:at both March 31, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Business Segment / Reporting Unit * |
| Wealth Management | | Consumer Lending | | Commercial Lending | | | | Total |
| (in thousands) |
Balance at December 31, 2021 | $ | 36,399 | | | $ | 284,366 | | | $ | 1,138,243 | | | | | $ | 1,459,008 | |
Goodwill from business combinations | 15,564 | | | 85 | | | 396,848 | | | | | 412,497 | |
Balance at June 30, 2022 | $ | 51,963 | | | $ | 284,451 | | | $ | 1,535,091 | | | | | $ | 1,871,505 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Business Segment / Reporting Unit * |
| Wealth Management | | Consumer Banking | | Commercial Banking | | | | Total |
| (in thousands) |
| | | | | | | | | |
| | | | | | | | | |
| $ | 49,767 | | | $ | 284,873 | | | $ | 1,534,296 | | | | | $ | 1,868,936 | |
* Valley’s Wealth Management and Insurance Division is comprised of trust, asset management, brokerage, insurance and tax credit advisory services. This reporting unit is included in the Consumer LendingBanking segment for financial reporting purposes.
During the second quarter 2022, Valley performedthree months ended March 31, 2023, there were no triggering events that would more likely than not
reduce the annualfair value of any reporting unit below its carrying amount. There was no impairment of goodwill impairment test at its normal assessment date. The results of the 2022 annual impairment test resulted in no impairment. As discussed in Note 14, Valley made changes to its operating structure and strategyrecognized during the second quarter 2022 (and subsequent to the annual goodwill impairment test), which resulted in changes in its operating segmentsthree months ended March 31, 2023 and reporting units to reflect how the CEO, who is the chief operating decision maker, intends to manage Valley, allocate resources and measure performance. Goodwill balances were reallocated across the new operating segments and reporting units (as reflected in the table above) based on their relative fair values using the valuation performed during the second quarter 2022.
The goodwill from business combinations set forth in the above table during the six months ended June 30, 2022, related to the acquisitions of Bank Leumi USA and Landmark totaled $403.2 million and $4.4 million, respectively. The goodwill from Landmark transaction was allocated entirely to the Wealth Management reporting unit. During the six months ended June 30, 2022, Valley recorded $5.0 million of additional goodwill reflecting an adjustment to the deferred tax assets acquired from Westchester as of the acquisition date. See Note 2 for details related to these acquisitions.
The following table summarizes other intangible assets as of June 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | Gross Intangible Assets | | Accumulated Amortization | | | Net Intangible Assets | | Gross Intangible Assets | | Accumulated Amortization | | | Net Intangible Assets |
| | (in thousands) | | (in thousands) |
June 30, 2022 | | | | |
March 31, 2023 | | March 31, 2023 | | | |
Loan servicing rights | Loan servicing rights | $ | 119,142 | | | $ | (93,697) | | | | $ | 25,445 | | Loan servicing rights | $ | 120,177 | | | $ | (97,332) | | | | $ | 22,845 | |
Core deposits | Core deposits | 223,670 | | | (76,447) | | | | 147,223 | | Core deposits | 215,620 | | | (92,048) | | | | 123,572 | |
Other | Other | 51,299 | | | (5,325) | | | | 45,974 | | Other | 50,393 | | | (9,639) | | | | 40,754 | |
Total other intangible assets | Total other intangible assets | $ | 394,111 | | | $ | (175,469) | | | | $ | 218,642 | | Total other intangible assets | $ | 386,190 | | | $ | (199,019) | | | | $ | 187,171 | |
December 31, 2021 | | | | | | | |
December 31, 2022 | | December 31, 2022 | | | | | | |
Loan servicing rights | Loan servicing rights | $ | 114,636 | | | $ | (90,951) | | | | $ | 23,685 | | Loan servicing rights | $ | 119,943 | | | $ | (96,136) | | | | $ | 23,807 | |
Core deposits | Core deposits | 109,290 | | | (65,488) | | | | 43,802 | | Core deposits | 223,670 | | | (92,486) | | | | 131,184 | |
Other | Other | 6,092 | | | (3,193) | | | | 2,899 | | Other | 51,299 | | | (8,834) | | | | 42,465 | |
Total other intangible assets | Total other intangible assets | $ | 230,018 | | | $ | (159,632) | | | | $ | 70,386 | | Total other intangible assets | $ | 394,912 | | | $ | (197,456) | | | | $ | 197,456 | |
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. There was no net impairment recognized during the three and six months ended June 30,March 31, 2023 and 2022. Valley recorded net recoveries of impairment charges on its loan servicing rights totaling $42 thousand and $833 thousand for the three and six months ended June 30, 2021.
Core deposits are amortized using an accelerated method over a period of 1010.0 years. Valley recorded $114.4 million of core deposit intangibles resulting from the Bank Leumi USA acquisition.
The line item labeled “Other” included in the table above primarily consists of customer lists, certain financial asset servicing contracts 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 13.313.4 years. Valley recorded $39.0 million and $6.2 million of other intangible assets during the six months ended June 30, 2022 resulting from the Bank Leumi USA and Landmark acquisitions, respectively.
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, 2022March 31, 2023 and 2021.2022.
The following table presents the estimated future amortization expense of other intangible assets for the remainder of 20222023 through 2026:2027:
| Year | | Year | Loan Servicing Rights | | Core Deposits | | Other |
| | Loan Servicing Rights | | Core Deposits | | Other | | (in thousands) |
| (in thousands) | |
2022 | $ | 1,792 | | | $ | 16,039 | | | $ | 3,509 | | |
2023 | 2023 | 3,253 | | | 28,746 | | | 6,522 | | 2023 | $ | 2,365 | | | $ | 21,135 | | | $ | 4,810 | |
2024 | 2024 | 2,849 | | | 24,897 | | | 5,951 | | 2024 | 2,813 | | | 24,897 | | | 5,951 | |
2025 | 2025 | 2,483 | | | 21,048 | | | 5,380 | | 2025 | 2,461 | | | 21,048 | | | 5,380 | |
2026 | 2026 | 2,153 | | | 17,223 | | | 4,805 | | 2026 | 2,143 | | | 17,223 | | | 4,805 | |
2027 | | 2027 | 1,861 | | | 13,544 | | | 4,205 | |
Valley recognized amortization expense on other intangible assets totaling approximately $11.4$10.5 million and $5.4$4.4 million (including net recoveries of impairment charges on loan servicing rights) for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and $15.8 million and $11.5 million for the six months ended June 30, 2022 and 2021, respectively.
Note 10. Deposits
Included in time deposits are certificates of deposit over $250 thousand totaling $1.7 billion and $1.8 billion at March 31, 2023 and December 31, 2022, respectively. Interest expense on time deposits of $250 thousand or more totaled $2.8 million and $107 thousand for the three months ended March 31, 2023 and 2022, respectively.
The scheduled maturities of time deposits as of March 31, 2023 were as follows:
| | | | | | | | |
Year | | Amount |
| | (in thousands) |
2023 | | 6,859,391 | |
2024 | | 2,578,459 | |
2025 | | 61,015 | |
2026 | | 120,032 | |
2027 | | 45,077 | |
Thereafter | | 1,447,402 | |
Total time deposits | | $ | 11,111,376 | |
Note 11. Borrowed Funds
Short-Term Borrowings
Short-term borrowings at March 31, 2023 and December 31, 2022 consisted of the following:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
FHLB advances | $ | 6,300,000 | | | $ | 24,035 | |
| | | |
Securities sold under agreements to repurchase | 113,056 | | | 114,694 | |
Total short-term borrowings | $ | 6,413,056 | | | $ | 138,729 | |
The weighted average interest rate for short-term FHLB advances was 5.18 percent and 1.6 percent at March 31, 2023 and December 31, 2022, respectively.
Long-Term Borrowings
Long-term borrowings at March 31, 2023 and December 31, 2022 consisted of the following:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
FHLB advances, net (1) | $ | 1,438,361 | | | $ | 788,419 | |
Subordinated debt, net (2) | 759,295 | | | 754,639 | |
| | | |
Total long-term borrowings | $ | 2,197,656 | | | $ | 1,543,058 | |
| | | | | |
(1) | FHLB advances are presented net of unamortized premiums totaling $361 thousand and $419 thousand at March 31, 2023 and December 31, 2022, respectively. |
(2) | Subordinated debt is presented net of unamortized debt issuance costs totaling $6.5 million and $6.9 million at March 31, 2023 and December 31, 2022, respectively. |
FHLB Advances. Long-term FHLB advances had a weighted average interest rate of 3.66 percent and 1.88 percent at March 31, 2023 and December 31, 2022, 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.
The long-term FHLB advances at March 31, 2023 are scheduled for contractual balance repayments as follows:
| | | | | | | | |
Year | | Amount |
| | (in thousands) |
| | |
2024 | | $ | 165,000 | |
2025 | | 273,000 | |
2026 | | 350,000 | |
2027 | | 425,000 | |
Thereafter | | 225,000 | |
Total long-term FHLB advances | | $ | 1,438,000 | |
There are no FHLB advances reported in the table above, which are callable for early redemption by the FHLB during the next 12 months.
Subordinated debt. There were no new issuances of the subordinated debt during the three months ended March 31, 2023. See Note 10 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2022 for details on the outstanding subordinated debt.
Note 12. Stock–Based Compensation
On April 19, 2021,25, 2023, Valley's shareholders approved the Valley National Bancorp 2023 Incentive Compensation Plan (the 2023 Plan). The purpose of the 2023 Plan is to provide additional long-term incentives to employees, directors and officers whose contributions are essential to the continued growth and success of Valley. Upon shareholder approval of the 2023 Plan, Valley ceased granting awards under the Valley National Bancorp 2021 Incentive Compensation Plan (the 2021 Plan) administered by.
Under the Compensation2023 Plan, Valley may issue awards to its officers, employees and Human Capital Management Committee as appointed by Valley's Boardnon-employee directors in amounts up to 14.5 million shares of Directors. The purposescommon stock, less one share for every share granted after December 31, 2022 under the 2021 Plan. These awards may be in the form of stock appreciation rights, incentive and non-qualified stock options, restricted stock, and restricted stock units (RSUs). If after December 31, 2022, share awards granted under the 2021 Plan are to provide additional incentives to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essentialforfeited, expire, settled for cash, withheld for tax obligations, or otherwise not issued, the shares will be added to the continued growth and success of Valley, and to attract and retain officers, other employees and non-employee directors whose efforts will result in the continued and long-term growth of Valley's business.
As of June 30, 2022, 5.2 millionshares of common stock were available for issuance under the 2021 Plan. The essential features of each award are described in the award agreement relating to that award.2023 Plan's share reserve. 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 datedate; or the last sale price reported preceding such date, except for performance-baseddate. Performance-based awards withmay also be based on 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.
On April 1, 2022, Valley issued replacement options for the pre-existing and fully vested stock awards consisting of Bank Leumi USA options for 2.7 million shares of Valley common stock (which all remained outstanding at June 30, 2022) at a weighted average exercise price of $8.47. The stock plan under which the original Bank Leumi stock awards were issued is no longer active at the acquisition date.
Valley granted 937 thousand1.5 million and 109 thousand of1.2 million time-based restricted stock units (RSUs)RSUs during the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and 2.1 million and 1.2 million for the six months ended June 30, 2022 and 2021, respectively. Generally, time-based RSUs vest ratably over a three-year period. The average grant date fair value of the RSUs granted during the sixthree months ended June 30,March 31, 2023 and 2022 and 2021 was $13.51$11.91 per share and $11.63$14.05 per share, respectively.
Valley granted 619723 thousand and 604567 thousand of performance-based RSUs to certain officers for the sixthree months ended June 30,March 31, 2023 and 2022, and 2021, 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 dividendsdividends; and RSUs, with vesting conditions based upon Valley's total shareholder return as compared to its peer group. The RSUs “cliff” vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn
dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents accumulate and are accumulated and paid to the grantee at the vesting date, or forfeited if the performance conditions are not met. The grant date fair value of the performance-based RSUs granted during the sixthree months ended June 30,March 31, 2023 and 2022 and 2021 was $14.72$12.80 per share and $12.36$14.82 per share, respectively.
Valley recorded total stock-based compensation expense of $6.2$8.1 million and $5.2$7.3 million for the three months ended June 30,March 31, 2023 and 2022, and2021, respectively, and $13.4 million and $10.7 million for the six months ended June 30, 2022 and 2021, respectively. TheStock award fair values of stock awards are expensed over the shorter of the vesting or required service period. As of June 30, 2022,March 31, 2023, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $43.3 million and$56.6 million. This expense will be recognized over an average remaining vesting period of approximately 2.18 years. 2.2 years.
Note 11.13. 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 and currency 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.
At March 31, 2023, Valley had six interest rate swaps with a total notional amount of $600 million, to hedge the changes in cash flows associated with certain variable rate loans. Valley is required to pay variable rate amounts based on one-month CME Term SOFR and receives fixed rate payments based on the tenor of each swap. Expiration dates for the swaps range from November 2024 to November 2026.
Fair Value Hedges of Fixed Rate Assets and LiabilitiesLiabilities. . Valley is exposed to changes in the fair value of fixed-rate subordinated debt due to changes in interest rates. Valley uses interest rate swaps to manage its exposure to changes in fair value on fixed rate debt instruments attributable to changes in the designated benchmark interest rate. rate. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings.
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.
Valley had 5 interest rate swaps with a total notional amount of $500 million that matured during the six months ended June 30, 2022. These swaps were used to hedge the changes in cash flows associated with certain short-term Federal Home Loan Bank of New York (FHLB) advances.
Non-designated Hedges. Derivatives not designated as hedges aremay be used to manage Valley’s exposure to interest rate movements foreign currency risk, credit risk, andor to provide servicesa service to customers or for other purposes. These derivativesbut do not meet the requirements for hedge accounting under U.S. GAAP. Derivatives not designated as hedges are not entered into for speculative purposes.
Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions. As these interest rate swaps do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
Valley sometimes enters into risk participation agreements with external lenders where the banks are sharing their risk of default on the interest rate swaps on participated loans. Valley either pays or receives a fee depending on the participation type. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. At June 30, 2022,March 31, 2023, Valley had 2633 credit swaps with an aggregate notional amount of $243.9$409.2 million related to risk participation agreements.
At June 30, 2022,March 31, 2023, Valley had 2two “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.
Valley enters into foreign currency forward and option contracts, primarily to accommodate our customers, that are not designated as hedging instruments. Upon the origination of a certain foreign currency denominated transactions (including foreign currency holdings and non-U.S. dollar denominated loans) with a client, we enter into a respective hedging contract with a third party financial institution to mitigate the economic impact of foreign currency exchange rate fluctuation.
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, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | Fair Value | | | Fair Value | | | Fair Value | | | Fair Value | |
| | Other Assets | | Other Liabilities | | Notional Amount | | Other Assets | | Other Liabilities | | Notional Amount | | Other Assets | | Other Liabilities | | Notional Amount | | Other Assets | | Other Liabilities | | Notional Amount |
| | (in thousands) | | (in thousands) |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | Derivatives designated as hedging instruments: | |
Cash flow hedge interest rate swaps | Cash flow hedge interest rate swaps | $ | 490 | | | $ | — | | | $ | 200,000 | | | $ | — | | | $ | 310 | | | $ | 700,000 | | Cash flow hedge interest rate swaps | $ | 7,866 | | | $ | — | | | $ | 600,000 | | | $ | 3,971 | | | $ | 4 | | | $ | 600,000 | |
Fair value hedge interest rate swaps | Fair value hedge interest rate swaps | — | | | 22,056 | | | 300,000 | | | — | | | 3,335 | | | 300,000 | | Fair value hedge interest rate swaps | — | | | 27,858 | | | 300,000 | | | — | | | 29,794 | | | 300,000 | |
Total derivatives designated as hedging instruments | Total derivatives designated as hedging instruments | $ | 490 | | | $ | 22,056 | | | $ | 500,000 | | | $ | — | | | $ | 3,645 | | | $ | 1,000,000 | | Total derivatives designated as hedging instruments | $ | 7,866 | | | $ | 27,858 | | | $ | 900,000 | | | $ | 3,971 | | | $ | 29,798 | | | $ | 900,000 | |
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | | | | | | | | | | | Derivatives not designated as hedging instruments: | | | | | | | | | | | |
Interest rate swaps and other contracts* | Interest rate swaps and other contracts* | $ | 318,521 | | | $ | 318,277 | | | $ | 12,523,601 | | | $ | 180,701 | | | $ | 47,044 | | | $ | 10,179,294 | | Interest rate swaps and other contracts* | $ | 429,195 | | | $ | 457,508 | | | $ | 15,298,441 | | | $ | 449,280 | | | $ | 564,678 | | | $ | 14,753,330 | |
Foreign currency derivatives | Foreign currency derivatives | 24,489 | | | 23,481 | | | 1,590,130 | | | 311 | | | 233 | | | 122,166 | | Foreign currency derivatives | 9,540 | | | 8,944 | | | 1,848,883 | | | 13,709 | | | 12,604 | | | 1,273,735 | |
Mortgage banking derivatives | Mortgage banking derivatives | 689 | | | 452 | | | 86,421 | | | 488 | | | 1,454 | | | 312,428 | | Mortgage banking derivatives | 148 | | | 242 | | | 51,106 | | | 167 | | | 157 | | | 31,299 | |
Total derivatives not designated as hedging instruments | Total derivatives not designated as hedging instruments | $ | 343,699 | | | $ | 342,210 | | | $ | 14,200,152 | | | $ | 181,500 | | | $ | 48,731 | | | $ | 10,613,888 | | Total derivatives not designated as hedging instruments | $ | 438,883 | | | $ | 466,694 | | | $ | 17,198,430 | | | $ | 463,156 | | | $ | 577,439 | | | $ | 16,058,364 | |
* Other derivativesderivative contracts include risk participation agreements.
The Chicago Mercantile Exchange and London Clearing House variation margins are classified as a single-unit of account as settlements of the cash flow hedges and other non-designated derivative instruments. As a result, the fair value of the applicable derivative assets and liabilities are reported net of variation margin at June 30, 2022March 31, 2023 and December 31, 20212022 in the table above.
above.
Gains (losses) included in the consolidated statements of income and other comprehensive loss, 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, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Amount of gain (loss) reclassified from accumulated other comprehensive loss to interest expense | $ | 116 | | | $ | (749) | | | $ | (426) | | | $ | (1,664) | |
Amount of gain (loss) recognized in other comprehensive loss | 121 | | | (158) | | | 441 | | | 19 | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| (in thousands) |
Amount of loss reclassified from accumulated other comprehensive loss to interest expense | $ | (531) | | | $ | (542) | | | | | |
Amount of gain recognized in other comprehensive loss | 3,898 | | | 320 | | | | | |
The accumulated after-tax lossesgains related to effective cash flow hedges included in accumulated other comprehensive loss were $831 thousand$5.4 million and $1.3$2.2 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, 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 $730 thousand2.1 million before tax will be reclassified as an increase to interest expense over the next 12 months.
Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | (in thousands) | | (in thousands) |
Derivative - interest rate swap: | Derivative - interest rate swap: | | Derivative - interest rate swap: | | |
| Interest expense | Interest expense | $ | 76 | | | $ | 80 | | | $ | 606 | | | $ | 80 | | Interest expense | $ | 4,692 | | | $ | 530 | | |
Hedged item - subordinated debt | Hedged item - subordinated debt | | Hedged item - subordinated debt | | |
| Interest expense | Interest expense | $ | (147) | | | $ | (83) | | | $ | (477) | | | $ | (83) | | Interest expense | $ | (4,772) | | | $ | (530) | | |
The changes in the fair value of the hedged item designated as a qualifying hedge are captured as an
adjustment to the carrying amount of the hedged item (basis adjustment). The following table presents the hedged item related to interest rate derivatives designated as fair value hedges and the cumulative basis fair value adjustment included in the net carrying amount of the hedged item at June 30, 2022.March 31, 2023 and December 31, 2022, respectively.
| Line Item in the Statement of Financial Position in Which the Hedged Item is Included | Line Item in the Statement of Financial Position in Which the Hedged Item is Included | Carrying Amount of the Hedged Liability | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability | Line Item in the Statement of Financial Position in Which the Hedged Item is Included | Net Carrying Amount of the Hedged Liability * | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability |
| | (in thousands) | | (in thousands) |
March 31, 2023 | | March 31, 2023 | |
Long-term borrowings | Long-term borrowings | $ | 277,486 | | | $ | (22,514) | | Long-term borrowings | $ | 272,051 | | | $ | (25,360) | |
December 31, 2022 | | December 31, 2022 | |
Long-term borrowings | | Long-term borrowings | $ | 267,076 | | | $ | (30,132) | |
* Net carrying amount includes unamortized debt issuance costs of $2.6 million and $2.8 million at March 31, 2023 and December 31, 2022, respectively.
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, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | (in thousands) | | (in thousands) |
Non-designated hedge interest rate swaps and credit derivatives | Non-designated hedge interest rate swaps and credit derivatives | | Non-designated hedge interest rate swaps and credit derivatives | | |
Other non-interest expense | Other non-interest expense | $ | 1,143 | | | $ | (2,210) | | | $ | (1,654) | | | $ | (425) | | Other non-interest expense | $ | 208 | | | $ | (2,797) | | |
OtherCapital markets income reported in 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 $11.1and foreign exchange fees with a combined total of $9.9 million and $7.6$14.4 million for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and $25.1 million and $13.8 million for the six months ended June 30, 2022 and 2021, respectively.
Collateral Requirements and Credit Risk Related Contingent Features.Features. By using derivatives, Valley is exposed to credit risk if counterparties to the derivative contracts do not perform as expected. Management attempts to minimize counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral where appropriate. Credit risk exposure associated with derivative contracts is managed at Valley in conjunction with Valley’s consolidated counterparty risk management process. Valley’s counterparties and the risk limits monitored by management are periodically reviewed and approved by the Board of Directors.
Valley has agreements with its derivative counterparties providing that if Valley defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Valley could also be declared in default on its derivative counterparty agreements. Additionally, Valley has an agreement with several of its derivative counterparties that contains provisions that require Valley’s debt to maintain an investment grade credit rating from each of the major credit rating agencies from which it receives a credit rating. If Valley’s credit rating is reduced below investment grade, or such rating is withdrawn or suspended, then the counterpartycounterparties could terminate the derivative positions and Valley would be required to settle its obligations under the agreements. As of June 30, 2022,March 31, 2023, Valley was in compliance with all of the provisions of its derivative counterparty agreements. AsThe aggregate fair value of June 30, 2022, there were 0 derivativesall derivative financial instruments with credit risk-related contingent features in an aggregatea net liability position. position at March 31, 2023 was not material. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties.
Note 12.14. Balance Sheet Offsetting
Certain financial instruments, including certain over-the-counter (OTC) derivatives (mostly interest rate swaps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated statements of financial condition and/or subject to master netting arrangements or similar agreements. OTC derivatives include interest rate swaps executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house (presented in the table below). The credit risk associated with bilateral OTC derivatives is managed through obtaining collateral and enforceable master netting agreements.
Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the swap or repurchase agreement should Valley be in default. The total amount of collateral held or pledged cannot exceed the net derivative fair values with the counterparty.
The table below presents information about Valley’s financial instruments eligible for offset in the consolidated statements of financial condition as of June 30, 2022March 31, 2023 and December 31, 2021.2022.
| | | | | | | | | Gross Amounts Not Offset | | | | | | | | | | Gross Amounts Not Offset | | |
| | Gross Amounts Recognized | | Gross Amounts Offset | | Net Amounts Presented | | Financial Instruments | | Cash Collateral * | | Net Amount | | Gross Amounts Recognized | | Gross Amounts Offset | | Net Amounts Presented | | Financial Instruments | | Cash Collateral * | | Net Amount |
| | (in thousands) | | (in thousands) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
Assets | Assets | | Assets | |
Interest rate swaps | Interest rate swaps | $ | 319,011 | | | $ | — | | | $ | 319,011 | | | $ | 11,492 | | | $ | 307,724 | | | $ | — | | Interest rate swaps | $ | 437,061 | | | $ | — | | | $ | 437,061 | | | $ | 30,473 | | | $ | (301,740) | | | $ | 165,794 | |
Liabilities | Liabilities | | Liabilities | |
Interest rate swaps | Interest rate swaps | $ | 340,333 | | | $ | — | | | $ | 340,333 | | | $ | (11,492) | | | $ | (1,142) | | | $ | 327,699 | | Interest rate swaps | $ | 485,366 | | | $ | — | | | $ | 485,366 | | | $ | (30,473) | | | $ | (681) | | | $ | 454,212 | |
| December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Assets | Assets | | Assets | |
Interest rate swaps | Interest rate swaps | $ | 180,701 | | | $ | — | | | $ | 180,701 | | | $ | — | | | $ | — | | | $ | 180,701 | | Interest rate swaps | $ | 453,251 | | | $ | — | | | $ | 453,251 | | | $ | 12,766 | | | $ | (342,480) | | | $ | 123,537 | |
Liabilities | Liabilities | | Liabilities | |
Interest rate swaps | Interest rate swaps | $ | 50,689 | | | $ | — | | | $ | 50,689 | | | $ | — | | | $ | (44,231) | | | $ | 6,458 | | Interest rate swaps | $ | 594,476 | | | $ | — | | | $ | 594,476 | | | $ | (12,766) | | | $ | (432) | | | $ | 581,278 | |
|
* Cash collateral received (pledged)from or pledged to our counterparties in relation to market value exposures of OTC derivative contacts in a an asset/liability position.
Note 13.15. 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 CRA.Community Reinvestment Act. Valley’s investments in these entities generate a return primarily through the realization of federal income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction of income tax expense.
Valley’s tax credit investments are carried in other assets on the consolidated statements of financial condition. Valley’s unfunded capital and other commitments related to the tax credit investments are carried in accrued expenses and other liabilities on the consolidated statements of financial condition. Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense in the consolidated statements of income using the equity method of accounting. After initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair values are increased to reflect Valley's share of income of the investee and are reduced to reflect its share of losses of the investee, dividends received and impairments, if applicable.
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, 2022March 31, 2023 and December 31, 2021:2022:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (in thousands) |
Other Assets: | | | |
Affordable housing tax credit investments, net | $ | 26,003 | | | $ | 15,343 | |
Other tax credit investments, net | 49,483 | | | 57,006 | |
Total tax credit investments, net | $ | 75,486 | | | $ | 72,349 | |
Other Liabilities: | | | |
Unfunded affordable housing tax credit commitments | $ | 1,360 | | | $ | 1,360 | |
| | | |
Total unfunded tax credit commitments | $ | 1,360 | | | $ | 1,360 | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (in thousands) |
Other Assets: | | | |
Affordable housing tax credit investments, net | $ | 22,813 | | | $ | 24,198 | |
Other tax credit investments, net | 53,812 | | | 56,551 | |
Total tax credit investments, net | $ | 76,625 | | | $ | 80,749 | |
Other Liabilities: | | | |
Unfunded affordable housing tax credit commitments | $ | 1,338 | | | $ | 1,338 | |
| | | |
Total unfunded tax credit commitments | $ | 1,338 | | | $ | 1,338 | |
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, 2022March 31, 2023 and 2021: 2022:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| (in thousands) |
Components of Income Tax Expense: | | | | | | | |
Affordable housing tax credits and other tax benefits | $ | 1,459 | | | $ | 744 | | | | | |
Other tax credit investment credits and tax benefits | 3,221 | | | 2,551 | | | | | |
Total reduction in income tax expense | $ | 4,680 | | | $ | 3,295 | | | | | |
Amortization of Tax Credit Investments: | | | | | | | |
Affordable housing tax credit investment losses | $ | 937 | | | $ | 415 | | | | | |
Affordable housing tax credit investment impairment losses | 448 | | | 262 | | | | | |
Other tax credit investment losses | 6 | | | 309 | | | | | |
Other tax credit investment impairment losses | 2,862 | | | 1,910 | | | | | |
Total amortization of tax credit investments recorded in non-interest expense | $ | 4,253 | | | $ | 2,896 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Components of Income Tax Expense: | | | | | | | |
Affordable housing tax credits and other tax benefits | $ | 1,614 | | | $ | 899 | | | $ | 2,358 | | | $ | 1,796 | |
Other tax credit investment credits and tax benefits | 2,539 | | | 2,743 | | | 5,090 | | | 5,428 | |
Total reduction in income tax expense | $ | 4,153 | | | $ | 3,642 | | | $ | 7,448 | | | $ | 7,224 | |
Amortization of Tax Credit Investments: | | | | | | | |
Affordable housing tax credit investment losses | $ | 653 | | | $ | 460 | | | $ | 1,068 | | | $ | 1,003 | |
Affordable housing tax credit investment impairment losses | 363 | | | 431 | | | 625 | | | 772 | |
Other tax credit investment losses | 386 | | | 351 | | | 695 | | | 524 | |
Other tax credit investment impairment losses | 1,791 | | | 1,730 | | | 3,701 | | | 3,417 | |
Total amortization of tax credit investments recorded in non-interest expense | $ | 3,193 | | | $ | 2,972 | | | $ | 6,089 | | | $ | 5,716 | |
Note 14.16. Operating Segments
Prior to the second quarterAt March 31, 2023 and December 31, 2022, Valley operated as 4 reportable segments: Consumer Lending, Commercial Lending, Investment Management, and Corporate and Other Adjustments. Valley re-evaluatedmanaged its segment reporting during the second quarter 2022 to consider the Bank Leumi USA acquisition on April 1, 2022 along with other factors, including changes in the internal structure ofbusiness operations discrete financial information reviewed by key decision-makers, balance sheet management strategies and personnel. As a result, Valley determined it operatedunder reportable segments consisting of Consumer Lending,Banking, Commercial LendingBanking and Treasury and Corporate Other at June 30, 2022. Treasury and Corporate Other was reorganized to consolidate Treasury and other corporate-wide functions, including the Treasury managed investment securities portfolios and overnight interest earning cash balances formerly reported under Investment Management. The discrete financial information related to the activities previously reported in the Investment Management segment is no longer provided to Valley's CEO, who is the chief operating decision maker.Other. Each operating segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Valley regularly assesses its strategic plans, operations and reporting structures to identify its reportable segments.
segments and no changes to the reportable segments were determined necessary during the first quarter 2023.Consumer LendingBanking is mainly comprised of residential mortgages and automobile loans, and to a lesser extent, secured personal lines of credit, home equity loans and other consumer loans. The duration of the residential mortgage loan portfolio is subject to movements in the market level of interest rates and forecasted prepayment speeds. The average weighted life of the automobile loans within the portfolio is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. Consumer LendingBanking also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, brokerage, insurance and tax credit advisory services.
Commercial LendingBanking 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 lendingCommercial Banking is Valley’s operating segment that is most sensitive to movements in market interest rates.
Treasury and Corporate Other largely consists of the Treasury managed held to maturity debt securities and available for sale debt securities portfolios mainly utilized in the liquidity management needs of our lending segments and income and expense items resulting from support functions not directly attributable to a specific segment. Interest income is generated through investments in various types of securities (mainly comprised of fixed rate securities) and interest-bearing deposits with other banks (primarily the Federal Reserve Bank of New York). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from Treasury and Corporate Other to the Consumer Lending and Commercial LendingBanking segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each operating 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. 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. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. The prior period balances presented for the three months ended March 31, 2022 in the tables below reflect reclassifications to conform with the presentation in those periods toof the current operating segment structure.structure, which was implemented in the second quarter 2022. These reclassifications did not impact Valley's consolidated results were not impacted byresults. See Valley's Form 10-K for the changes discussed above and remain unchangedyear ended December 31, 2022 for all periods presented.
additional information.
The following tables represent the financial data for Valley’s operating segments for the three and six months ended June 30, 2022March 31, 2023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Consumer Lending | | Commercial Lending | | Treasury and Corporate Other | | Total |
| ($ in thousands) |
Average interest earning assets | $ | 7,967,305 | | | $ | 34,549,982 | | | $ | 6,373,943 | | $ | 48,891,230 | |
| | | | | | | |
Interest income | $ | 63,137 | | | $ | 352,440 | | | $ | 37,370 | | $ | 452,947 | |
Interest expense | 4,723 | | | 19,735 | | | 10,329 | | 34,787 | |
Net interest income | 58,414 | | | 332,705 | | | 27,041 | | 418,160 | |
Provision for credit losses | 5,402 | | | 38,310 | | | 286 | | 43,998 | |
Net interest income after provision for credit losses | 53,012 | | | 294,395 | | | 26,755 | | 374,162 | |
Non-interest income | 17,086 | | | 14,425 | | | 27,022 | | 58,533 | |
Non-interest expense | 18,791 | | | 24,448 | | | 256,491 | | 299,730 | |
Internal transfer expense (income) | 37,629 | | | 157,365 | | | (194,994) | | — | |
Income (loss) before income taxes | $ | 13,678 | | | $ | 127,007 | | | $ | (7,720) | | $ | 132,965 | |
Return on average interest earning assets (pre-tax) | 0.69 | % | | 1.47 | % | | (0.48) | % | | 1.09 | % |
| | | Three Months Ended June 30, 2021 | | Three Months Ended March 31, 2023 |
| | Consumer Lending | | Commercial Lending | | Treasury and Corporate Other | | Total | | Consumer Banking | | Commercial Banking | | Treasury and Corporate Other | | Total |
| | ($ in thousands) | | ($ in thousands) |
Average interest earning assets | Average interest earning assets | $ | 7,150,137 | | | $ | 25,485,161 | | | $ | 5,272,116 | | $ | 37,907,414 | | Average interest earning assets | $ | 8,768,482 | | | $ | 39,090,889 | | | $ | 7,503,419 | | $ | 55,362,790 | |
| Interest income | Interest income | $ | 59,419 | | | $ | 255,895 | | | $ | 18,334 | | $ | 333,648 | | Interest income | $ | 85,316 | | | $ | 569,910 | | | $ | 65,004 | | $ | 720,230 | |
Interest expense | Interest expense | 5,192 | | | 18,467 | | | 9,082 | | 32,741 | | Interest expense | 43,006 | | | 191,723 | | | 49,481 | | 284,210 | |
Net interest income | Net interest income | 54,227 | | | 237,428 | | | 9,252 | | 300,907 | | Net interest income | 42,310 | | | 378,187 | | | 15,523 | | 436,020 | |
Provision (credit) for credit losses | 711 | | | 8,066 | | | (30) | | 8,747 | | |
Provision for credit losses | | Provision for credit losses | 6,444 | | | 3,006 | | | 4,987 | | 14,437 | |
Net interest income after provision for credit losses | Net interest income after provision for credit losses | 53,516 | | | 229,362 | | | 9,282 | | 292,160 | | Net interest income after provision for credit losses | 35,866 | | | 375,181 | | | 10,536 | | 421,583 | |
Non-interest income | Non-interest income | 21,915 | | | 9,819 | | | 11,392 | | 43,126 | | Non-interest income | 14,290 | | | 15,747 | | | 24,262 | | 54,299 | |
Non-interest expense | Non-interest expense | 19,792 | | | 27,241 | | | 124,860 | | 171,893 | | Non-interest expense | 18,249 | | | 35,723 | | | 218,194 | | 272,166 | |
Internal transfer expense (income) | Internal transfer expense (income) | 19,862 | | | 71,207 | | | (91,069) | | — | | Internal transfer expense (income) | 30,883 | | | 131,595 | | | (162,478) | | — | |
Income (loss) before income taxes | Income (loss) before income taxes | $ | 35,777 | | | $ | 140,733 | | | $ | (13,117) | | $ | 163,393 | | Income (loss) before income taxes | $ | 1,024 | | | $ | 223,610 | | | $ | (20,918) | | $ | 203,716 | |
Return on average interest earning assets (pre-tax) | Return on average interest earning assets (pre-tax) | 2.00 | % | | 2.21 | % | | (1.00) | % | | 1.72 | % | Return on average interest earning assets (pre-tax) | 0.05 | % | | 2.29 | % | | (1.12) | % | | 1.47 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Consumer Banking | | Commercial Banking | | Treasury and Corporate Other | | Total |
| ($ in thousands) |
Average interest earning assets | $ | 7,638,942 | | | $ | 26,984,460 | | | $ | 5,659,646 | | $ | 40,283,048 | |
| | | | | | | |
Interest income | $ | 59,459 | | | $ | 257,906 | | | $ | 23,093 | | $ | 340,458 | |
Interest expense | 3,207 | | | 11,327 | | | 8,255 | | 22,789 | |
Net interest income | 56,252 | | | 246,579 | | | 14,838 | | 317,669 | |
Provision for credit losses | 1,873 | | | 1,627 | | | 57 | | 3,557 | |
Net interest income after provision for credit losses | 54,379 | | | 244,952 | | | 14,781 | | 314,112 | |
Non-interest income | 13,817 | | | 16,880 | | | 8,573 | | 39,270 | |
Non-interest expense | 16,568 | | | 25,085 | | | 155,687 | | 197,340 | |
Internal transfer expense (income) | 28,647 | | | 99,916 | | | (128,563) | | — | |
Income (loss) before income taxes | $ | 22,981 | | | $ | 136,831 | | | $ | (3,770) | | $ | 156,042 | |
Return on average interest earning assets (pre-tax) | 1.20 | % | | 2.03 | % | | (0.27) | % | | 1.55 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Consumer Lending | | Commercial Lending | | Treasury and Corporate Other | | Total |
| ($ in thousands) |
Average interest earning assets | $ | 7,848,764 | | | $ | 30,743,387 | | | $ | 6,017,817 | | $ | 44,609,968 | |
| | | | | | | |
Interest income | $ | 122,596 | | | $ | 610,346 | | | $ | 60,463 | | $ | 793,405 | |
Interest expense | 7,930 | | | 31,062 | | | 18,584 | | 57,576 | |
Net interest income (loss) | 114,666 | | | 579,284 | | | 41,879 | | 735,829 | |
Provision for credit losses | 7,275 | | | 39,937 | | | 343 | | 47,555 | |
Net interest income (loss) after provision for credit losses | 107,391 | | | 539,347 | | | 41,536 | | 688,274 | |
Non-interest income | 30,903 | | | 31,305 | | | 35,595 | | 97,803 | |
Non-interest expense | 35,359 | | | 49,533 | | | 412,178 | | 497,070 | |
Internal transfer expense (income) | 66,276 | | | 257,281 | | | (323,557) | | — | |
Income (loss) before income taxes | $ | 36,659 | | | $ | 263,838 | | | $ | (11,490) | | $ | 289,007 | |
Return on average interest earning assets (pre-tax) | 0.93 | % | | 1.72 | % | | (0.38) | % | | 1.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Consumer Lending | | Commercial Lending | | Treasury and Corporate Other | | Total |
| ($ in thousands) |
Average interest earning assets | $ | 7,099,973 | | | $ | 25,509,061 | | | $ | 5,039,222 | | $ | 37,648,256 | |
| | | | | | | |
Interest income | $ | 120,264 | | | $ | 508,231 | | | $ | 36,951 | | $ | 665,446 | |
Interest expense | 11,607 | | | 41,702 | | | 18,563 | | 71,872 | |
Net interest income | 108,657 | | | 466,529 | | | 18,388 | | 593,574 | |
(Credit) provision for credit losses | (1,924) | | | 19,715 | | | (388) | | 17,403 | |
Net interest income after provision for credit losses | 110,581 | | | 446,814 | | | 18,776 | | 576,171 | |
Non-interest income | 35,600 | | | 17,533 | | | 21,226 | | 74,359 | |
Non-interest expense | 39,641 | | | 52,772 | | | 239,693 | | 332,106 | |
Internal transfer expense (income) | 39,364 | | | 141,790 | | | (181,154) | | — | |
Income (loss) before income taxes | $ | 67,176 | | | $ | 269,785 | | | $ | (18,537) | | $ | 318,424 | |
Return on average interest earning assets (pre-tax) | 1.89 | % | | 2.12 | % | | (0.74) | % | | 1.69 | % |
Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations
The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report. The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its wholly owned subsidiaries, unless we indicate otherwise. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred to as the “Bank” in this MD&A.
The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (U.S. GAAP) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitate comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies.
Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “intend,” “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “would,” “could,” “typically,” “usually,” “anticipate,” “may,” “estimate,” “outlook,” “project,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actualuncertainties. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to:
•the inability to realize expected cost savings and synergies from the Bank Leumi USA acquisition in amounts or in the timeframe anticipated;
•greater than expected costs or difficulties relating to Bank Leumi USA integration matters;
•the inability to retain customers and qualified employees of Bank Leumi USA;
•greater than expected non-recurring charges related to the Bank Leumi USA acquisition;
•the continued impact of COVID-19 on the U.S. and global economies, including business disruptions, reductions in employment, supply chain interruptions, inflation, Federal Reserve actions impacting the level of market interest rates and an increaseincreases in business failures, specifically among our clients;
•the continued impact of COVID-19clients, as well as on our business, our employees and our ability to provide services to our customers and respond to their needs as more cases and new variants of COVID-19 may arise in our primary markets;customers;
•continued deteriorationthe potential impact of recent and possible future bank failures on the business environment in generalwhich we operate, including potential customer deposit withdrawals from Valley National Bank or business and economic conditionsdisruptions or turbulence in domestic or global financial markets;liquidity issues that may affect our customers;
•the impact of forbearancesunfavorable macroeconomic conditions or deferrals we are requireddownturns, instability or agree tovolatility in financial markets, unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by and factors outside of our control, such as a resultgeopolitical instabilities or events; natural and other disasters (including severe weather events) and health emergencies, acts of customer requests and/terrorism or government actions,other external events;
•risks associated with our acquisition of Bank Leumi Le-Israel Corporation (Bank Leumi USA), including but not limited to our potential(i) the inability to recover fully deferred paymentsrealize expected cost savings and synergies from the borroweracquisition in the amounts or timeframe anticipated and (ii) greater than expected costs or difficulties relating to integration matters;
•the collateral;loss of or decrease in lower-cost funding sources within our deposit base;
•the need to supplement debt or equity capital to maintain or exceed internal capital thresholds;
•the inability to attract new customer deposits to keep pace with loan growth strategies;
•a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;
•greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations;
•the risks related to the discontinuationreplacement of the London Interbank Offered Rate with Secured Overnight Financing Rate and other reference rates, including increased expenses, andrisk of litigation and the effectiveness of hedging strategies;
•cyber-attacks, ransomware attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;
•damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters;
•a prolonged downturnchanges to laws and regulations, including changes affecting oversight of the financial services industry; changes in the economy, mainlyenforcement and interpretation of such laws and regulations; and changes in New Jersey, New York, Florida, Alabama, California,accounting and Illinois, as well as an unexpected decline in commercial real estate values within our market areas;reporting standards;
•higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;
•the inability to grow customer deposits to keep pace with loan growth;
•a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;
•the need to supplement debt or equity capital to maintain or exceed internal capital thresholds;
•greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations;
•the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy;
•cyber-attacks, ransomware attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;
•results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;
•our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;
•unanticipated loan delinquencies, loss of collateral, decreased service revenues,a prolonged downturn in the economy, mainly in New Jersey, New York, Florida, Alabama, California, and other potential negative effects onIllinois, as well as an unexpected decline in commercial real estate values within our business caused by severe weather, the COVID-19 pandemic or other external events;market areas; and
•unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors.
A detailed discussion of factors that could affect our results is included in our SEC filings, including the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.2022, and in Part II, Item 1A of this Form 10-Q.
We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Critical Accounting Policies and Estimates
Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions in accordance with these policies that affect the reported amounts of
assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. At June 30, 2022,March 31, 2023, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies and estimates with the Audit Committee of Valley’s Board of Directors. Our critical accounting policies and estimates are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, and there have been no material changes in such policies and estimates since the date of such report.
New Authoritative Accounting Guidance
See Note 5 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition. Executive Summary
Company Overview. At June 30, 2022,March 31, 2023, Valley had consolidated total assets of approximately $54.4$64.3 billion, total net loans of $43.1$48.2 billion, total deposits of $43.9$47.6 billion and total shareholders’ equity of $6.2$6.5 billion. Valley operates many convenient branch office locations and commercial banking offices in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn and Queens, Long Island, Westchester County, New York, Florida, California, Alabama and Illinois. Of our current 238230 branch network, 5556 percent, 1918 percent, and 18 percent of the branches are in New Jersey, New York and Florida, respectively, with the remaining 8 percent of the branches in Alabama, California, and Illinois combined. Despite targeted branch consolidation activity, weWe have grown significantly grown both in asset size and locations over the past several years both through organic efforts and bank acquisitions. Our most recent bank acquisition is discussed below.
Bank Leumi Le-Israel Corporation. On April 1, 2022, Valley completed itsacquisitions, including our acquisition of Bank Leumi Le-Israel Corporation,USA on April 1, 2022.
Recent Industry Developments. Recent events, including the U.S. subsidiarybank failures in March and April 2023, the rising level of interest rates and recessionary pressures have heightened concerns in the bank sector. We have consistently operated the Bank Leumi Le-Israel B.M.,with a focus on diversification to maintain stability through various cycles. During the first quarter of 2023, we continued to position our balance sheet to mitigate potential risks from the market turmoil affecting the banking industry in general and parent companyValley, its clients and communities in particular.
•Total assets increased to $64.3 billion at March 31, 2023, an increase of 11.9 percent from December 31, 2022. Liquidity remained strong with total liquid assets of approximately $7.2 billion at March 31, 2023, representing 12.1 percent of earning assets. We continue to maintain the ability to access readily available, diverse funding sources to fulfill both short-term and long-term capital needs. See "Bank Liquidity" section for additional information.
•Total deposits were $47.6 billion at March 31, 2023 and remained relatively unchanged as compared to December 31, 2022. Our deposit base is highly diversified with 625 thousand commercial and retail deposit customers, an average account size of $58 thousand and an average customer relationship with Valley exceeding 10 years as of March 31, 2023. Approximately $32.0 billion of our $47.6 billion in deposits at March 31, 2023 are generated from our branch network. See the "Deposits and Other Borrowings" section for more details.
•Capital remained strong with ratios of both Valley and the Bank Leumi USA,exceeding all capital adequacy requirements at March 31, 2023. Total shareholders' equity increased $110.8 million to $6.5 billion at March 31, 2023 as compared to December 31, 2022. See the "Capital Adequacy" section for additional details.
•Total loans increased $1.7 billion, or 14.9 percent on an annualized basis to $48.7 billion at March 31, 2023 from December 31, 2022 largely due to strong organic commercial loan volumes and collectively referred to as "Bank Leumi USA". At the acquisition date, Bank Leumi USA had approximately $8.1slow prepayments. See "Loan Portfolio" section for more information.
billion in•Asset quality continued to reflect our disciplined underwriting and lending practices during the first quarter 2023. Non-performing assets $5.9 billion(NPAs) as a percentage of total loans and $7.0 billion of deposits, after purchase accounting adjustments. Valley issued approximately 85 million shares of common stockNPAs totaled 0.50 percent and paid $113.4 million in cash in0.58 percent at March 31, 2023 and December 31, 2022, respectively. See the transaction. The consideration for the acquisition totaled approximately $1.2 billion, inclusive of the value of stock options. The transaction resulted in $403.2 million of goodwill and $153.4 million of combined core deposit and other intangible assets subject to amortization. See Note 2 to the consolidated financial statements"Non-Performing Assets" section for additional details regarding the acquisitioninformation.
•Total investment securities were $5.2 billion, or 8.0 percent of Bank Leumi USAtotal assets, at March 31, 2023 and other recent acquisition activities.
Impact of COVID-19. During the second quarter 2022, the impact of the COVID pandemic and new global outbreaks of the COVID variants were mostly overshadowed by inflationary concerns. Inflation remains elevated, reflecting supply and demand imbalances relatedremained relatively unchanged as compared to the COVID pandemic, higher food and energy prices, and broader price pressures. In June 2022, travel restrictions were further loosened by eliminating COVID-19 test requirement to enter the U.S. We continue to monitor the impact of COVID-19 including the emergence of any new more severe variants closely, including its impact on our employees, customers, communities and results of operations and other government or Federal Reserve actions.December 31, 2022. See the "Operating Environment""Investment Securities Portfolio" section of MD&A for more details.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and additional legislation that followed including the Consolidated Appropriations Act and the American Rescue Plan Act of 2021 provided funding for the SBA's Paycheck Protection Program (PPP) and established rules for qualifying borrowers to receive loan forgiveness by the SBA under this program. Valley extended a total of $3.2 billion PPP loans under the program, of which $3.1 billion of these loans have received forgiveness from the SBA. As of June 30, 2022, we had $136.0 million (including $45.7 million acquired from Bank Leumi USA) of PPP loans still outstanding.
Quarterly Results. Net income for the secondfirst quarter 20222023 was $96.4$146.6 million, or $0.18$0.28 per diluted common share as compared to $120.5$116.7 million, or $0.29$0.27 per diluted common share, for the secondfirst quarter 2021.2022. The $24.1$29.8 million decreaseincrease in quarterly net income as compared to the same quarter one year ago was mainly due to the following changes:
•a $127.8 million increase in non-interest expense largely due to $54.5 million of merger expenses incurred during the second quarter 2022 and our expanded banking operations resulting from the acquisition of Bank Leumi USA on April 1, 2022 and The Westchester Bank Holding Corporation (Westchester) on December 1, 2021; and
•a $35.3 million increase in our provision for credit losses mainly due to $41.0 million of provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA; partially offset by:
•a $117.3$118.4 million increase in net interest income mainly due to higher average loan balances driven by both acquired and organic loan volumes and increased yields on new and adjustable rate loans;adjustable-rate loans, partially offset by higher cost of deposits; and
•a $15.4$15.0 million increase in non-interest income primarily driven by increasesdue to bank acquisition-driven growth in wealth management and trust fees, service charges on deposit accounts and other income, totaling $6.0 million, $5.0 million and $11.5 million, respectively, generated from the aforementioned bank acquisitions, partially offset by lower new gainsa decline in swap fee income within capital markets fees;
These items were partially offset by:
•a $10.9 million increase in our provision for credit losses due, in part, to a $5 million provision for credit losses on sales of loans;available for sale investment securities;
•a $74.8 million increase in non-interest expense largely due to our expanded banking operations and higher FDIC insurance assessment expense; and
•a $6.3$17.9 million decreaseincrease in income tax expense mostly caused by lowerdue to higher pre-tax income.income in the first quarter 2023.
See the “Net"Net Interest Income”Income", “Non-Interest Income”"Non-Interest Income", “Non-Interest Expense”,"Non-Interest Expense" and “Income Taxes”"Income Taxes" sections below for more details on the impact of the items above impactingon our secondfirst quarter 20222023 results.
Operating Environment.U.S. Economic Conditions. During tDuring the secondhe first quarter 2022,2023, real gross domestic product (GDP) increased at an annual rate decreased 1.3of 1.1 percent as compared to a declinean increase of 1.62.6 percent during the fourth quarter 2022. The 1.1 percent increase in real GDP reflected higher consumer spending, exports, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in private inventory investment and residential fixed investment.
During the first quarter 2022. The second consecutive quarter of decline in economic activity was driven in large part by a decline in inventory restocking and household fixed investment. Otherwise, household demand for goods and services improved modestly despite a continued acceleration in overall prices.
In May, June and July 2022,2023, the Federal Reserve raised the target range for the federal funds rate by 50 basis points, 75 basis points, bringing the target range to 4.75 to 5 percent at March 31, 2023, and 75by an additional 25 basis points respectively, resulting in May 2023 to a current target range of 2.25 percent5 to 2.505.25 percent. In addition, the Federal Reserve continued to reduceConsistent with its holdings of Treasury securities and agency debt and mortgage-backed securities. The Federal Reserve indicated it will reduce its Treasury and agency securities portfolio by $47.5 billion per month and after three months will increase to $95 billion per month. The changes in policypreviously announced plan, these actions reflect the Federal Reserve’s strong commitment to returning inflation to its 2 percent objective.
The Federal Open Market Committee has indicated it will continue to increase the federal funds rate, but at a slower pace, to stabilize pricing while remaining highly attentive toward the recent banking developments, and the delay in which the cumulative tightening of its monetary policy affects the economy.
The 10-year U.S. Treasury note yield ended the secondfirst quarter of 2023 at 3.48 percent, or 40 basis points lower as compared to the fourth quarter 2022, at 2.98 percent, 66 basis points higher compared with March 31, 2022. The spread betweenand the 2- and 10-year2-year U.S. Treasury note yieldsyield ended the first quarter 2023 at 0.064.06 percent, 2or 35 basis points higherlower as compared to March 31,the fourth quarter 2022.
For all commercial banks in the U.S., commercial and industrial loans and leases increaseddecreased approximately 3.9by 1.8 percent fromat March 31, 2022 to June 30, 2022. The banking industry reported softening in demand for most commercial loan products (particularly for commercial real estate loans secured by non-farm nonresidential structures) in recent months2023 as compared to December 31, 2022 largely due to decreased customer need for financing inventory
and accounts receivables, investment in property or equipment and mergers or acquisitions. Many banks increased the beginningcost of credit lines through widening the year. Duringspreads of loan rates over the second quarter 2022, Valley’s newcosts of funds to firms of all sizes and increasing premiums for riskier loans, while a significant portion of banks also tightened loan originations experienced solid increases across most product types primarily driven by an increase in non-owner occupied commercial real estate,covenants and collateralization requirements for firms of all sizes. A majority of banks that reported tightening standards or terms on commercial and industrial residential mortgageloans cited a less favorable or more uncertain economic outlook and automobile loans. However, further declines in GDP, continuedreduced risk tolerance.
Further increases in market interest rates, persistently high inflation, heightened recessionary concerns and the lingering impact of the pandemic on supply chains and business opportunities, labor market conditions, andpotential for additional fallout from the Russia-Ukraine war,recent banking crisis, including bank regulatory actions, among other factors, addhave added a highhigher level of uncertainty to the future path of the U.S. economy and thean elevated risk of a recession. Should economic conditions continue to deteriorate, causing business activity, spending and investment to decline, it wouldmay adversely impact the Bank’sour financial results, as highlighted below in this MD&A.
Loans. Total loans increased $8.2 billion to $43.6 billion at June 30, 2022 from March 31, 2022 largely due to a combination of $5.9 billion of acquired loans from Bank Leumi USA and strong organic loan growth. Excluding acquired loans from Bank Leumi USA, our loan portfolio increased 26 percent on an annualized basis during the second quarter 2022 as a result of strong commercial loan volumes and a continued uptick in new residential mortgage loans originated for investment rather than sale. We sold approximately $125 million of residential mortgage loans resulting in total pre-tax gains of $3.6 million in the second quarter 2022. See further details on our loan activities under the “Loan Portfolio” section.
Asset Quality. Total accruing past due loans decreased $19.3 million to $73.5 million, or 0.17 percent of total loans, at June 30, 2022 as compared to $92.8 million, or 0.26 percent of total loans, at March 31, 2022. Non-accrual loans represented 0.72 percent and 0.65 percent of total loans at June 30, 2022 and March 31, 2022, respectively. See further details in the "Non-performing Assets" section below.
Deposits and Other Borrowings.
Overall, average deposits increased by $7.1 billion$918.1 million to $42.9$47.2 billion for the secondfirst quarter 20222023 as compared to the firstfourth quarter 2022, mostly due to higher time deposits assumed from Bank Leumi USA on April 1, 2022, as well as continued growthdriven by an increased utilization of fully insured brokered deposits, partially offset by a decrease in commercial and retail customer deposits without stated maturities. Averageaverage non-interest bearing depositdeposits. s;Average non-interest-bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 3830 percent, 5450 percent and 821 percent of total deposits as of June 30, 2022,March 31, 2023, respectively. While we experienced some growth in time deposits due to recent CD promotions and deposits assumed from Bank Leumi USA, our overall mix of average deposits for the second quarter 2022 continued to shift away from higher cost time deposits to the non-maturity deposit categories as compared to the first quarter 2022.
Actual ending balances for deposits increased $8.2 billiondecreased $46.0 million to approximately $43.9 billion at June 30, 2022 from March 31, 2022 mostly due to $7.0 billion of assumed deposits from Bank Leumi USA and continued commercial customer deposit organic growth, and our increased utilization of brokered deposits, consisting of money market and time deposit accounts, in our funding mix. Total brokered deposits increased to $2.3 billion at June 30, 2022 as compared to $1.2$47.6 billion at March 31, 2023 from December 31, 2022. Non-interestWithin the deposit categories, non-interest bearing deposits, and the savings, NOW and money market categorydeposits decreased $887.5 million and $713.4 million, respectively, and were mostly offset by an increase in time deposits. Time deposits increased $4.2$1.6 billion to $11.1 billion within our overall deposit mix at March 31, 2023 from December 31, 2022 largely due to higher fully FDIC-insured brokered CD balances at March 31, 2023. Total fully insured brokered deposits, consisting of time deposits and $3.3money market accounts, increased $1.2 billion respectively,to $7.1 billion at June 30, 2022March 31, 2023 as compared to $5.9 billion at December 31, 2022. Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 29 percent, 48 percent and 23 percent of total deposits as of March 31, 2022. 2023, respectively, as compared to 30 percent, 50 percent and 20 percent of total deposits as of December 31, 2022, respectively.
The increase in non-interest bearingfollowing table lists, by maturity, uninsured certificates of deposit at March 31, 2023:
| | | | | |
| |
| (in thousands) |
Less than three months | $ | 349,067 | |
Three to six months | 97,841 | |
Six to twelve months | 77,179 | |
More than twelve months | 1,208,902 | |
Total | $ | 1,732,989 | |
Total estimated uninsured deposits were approximately $14.9 billion, or 31 percent of total deposits, at March 31, 2023.
While our diversified commercial and consumer deposit base has remained stable during the early stages of the second quarter 2022 was mainly attributable to $4.5 billion of deposits assumed from Bank Leumi USA. While we2023, we believe the current operating environment will likely
continue to be favorable for Valley’s deposit gathering initiatives may remain challenging due to market competition, attractive investment alternatives, such as U.S. Treasury securities, changes in customer behavior and other factors. As a result, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at June 30, 2022.March 31, 2023.
The following table presents average short-term and long-term borrowings for the periods indicated:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, 2022 | | March 31, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | |
| | (in thousands) | | (in thousands) |
Average short-term borrowings: | Average short-term borrowings: | | Average short-term borrowings: | | |
FHLB advances | FHLB advances | $ | 822,913 | | | $ | 434,444 | | | $ | 707,692 | | | $ | 629,753 | | | $ | 851,381 | | FHLB advances | $ | 2,513,983 | | | $ | 429,529 | | | $ | 434,444 | | |
Securities sold under repurchase agreements | Securities sold under repurchase agreements | 142,790 | | | 148,575 | | | 166,125 | | | 145,666 | | | 155,983 | | Securities sold under repurchase agreements | 99,546 | | | 118,263 | | | 148,575 | | |
Federal funds purchased | Federal funds purchased | 637,495 | | | 11,278 | | | 110 | | | 326,116 | | | 13,094 | | Federal funds purchased | 190,214 | | | 332,823 | | | 11,278 | | |
Total | Total | $ | 1,603,198 | | | $ | 594,297 | | | $ | 873,927 | | | $ | 1,101,535 | | | $ | 1,020,458 | | Total | $ | 2,803,743 | | | $ | 880,615 | | | $ | 594,297 | | |
| Average long-term borrowings: | Average long-term borrowings: | | Average long-term borrowings: | | |
FHLB advances | FHLB advances | $ | 788,803 | | | $ | 788,956 | | | $ | 1,391,382 | | | $ | 788,879 | | | $ | 1,477,207 | | FHLB advances | $ | 875,053 | | | $ | 788,496 | | | $ | 788,956 | | |
Subordinated debt | Subordinated debt | 617,291 | | | 631,056 | | | 453,258 | | | 624,135 | | | 428,358 | | Subordinated debt | 754,972 | | | 753,165 | | | 631,056 | | |
Securities sold under repurchase agreements | — | | | — | | | 300,000 | | | — | | | 300,000 | | |
| Junior subordinated debentures issued to capital trusts | Junior subordinated debentures issued to capital trusts | 56,544 | | | 56,457 | | | 56,196 | | | 56,501 | | | 56,154 | | Junior subordinated debentures issued to capital trusts | 56,805 | | | 56,718 | | | 56,457 | | |
| Total | Total | $ | 1,462,638 | | | $ | 1,476,469 | | | $ | 2,200,836 | | | $ | 1,469,515 | | | $ | 2,261,719 | | Total | $ | 1,686,830 | | | $ | 1,598,379 | | | $ | 1,476,469 | | |
Average short-term borrowings increased $729.3 million$2.2 billion during the secondfirst quarter 20222023 as compared to the secondfirst quarter 20212022 mostly due to anthe higher utilization of FHLB advances in March 2023 to prudently increase in the federal funds purchased balance as a part of our funding strategy. Averageexcess liquidity position. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) decreased $738.2increased $210.4 million fromas compared to the secondfirst quarter 2021 largely2022 mainly due to the repaymentissuance of several maturing$150 million of subordinated notes during the third quarter 2022 and new FHLB advances and repurchase agreements subsequent toissued during the secondfirst quarter 2021.2023.
Actual ending balances for short-term borrowings increased by $1.0$6.3 billion to $6.4 billion at March 31, 2023 as compared to December 31, 2022. In March 2023, we significantly increased our short-term borrowings, mostly consisting of FHLB advances, to bolster our liquidity position out of an abundance of caution in the wake of the two recent bank failures. Since March 31, 2023, many of our short-term FHLB advances have matured and been repaid, resulting in a more normal liquidity position. We continue to closely monitor changes in the current banking environment and have substantial access to additional liquidity. Long-term borrowings increased to approximately $2.2 billion at March 31, 2023 as compared to $1.5 billion at June 30, 2022 as compared to MarchDecember 31, 2022 largelymainly due to additionalnew FHLB advances including approximately $103.8 million assumed from Bank Leumi USA, partially offset by a $125 million decrease in federal funds purchased at June 30, 2022. Long-term borrowings totaled $1.4 billion at June 30, 2022also issued during the first quarter 2023 as part of our overall funding and remained relatively unchanged from March 31, 2022.liquidity strategies.
See the "Bank Liquidity" section for more details on our available funding sources.
Non-GAAP Financial Measures.Measures
The table below presents selected performance indicators, their comparative non-GAAP measures and the (non-GAAP) efficiency ratio for the periods indicated. The CompanyValley believes that the non-GAAP financial measures provide useful supplemental information to both management and investors in understanding Valley’sits underlying operational performance, business, and performance trends, and may facilitate comparisons of our current and prior performance with the performance of others in the financial services industry. Management utilizes these measures for internal planning, forecasting and analysis purposes. Management believes that Valley’s presentation and discussion of this supplemental information, together with the accompanying reconciliations to the GAAP financial measures, also allows investors to view performance in a manner similar to management. These non-GAAP financial measures should not be considered in isolation, or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Selected Performance Indicators | ($ in thousands, except for %) |
GAAP measures: | | | | | | | |
Net income, as reported | $ | 96,413 | | | $ | 120,512 | | | $ | 213,141 | | | $ | 236,222 | |
Return on average assets | 0.72 | % | | 1.17 | % | | 0.88 | % | | 1.15 | % |
Return on average shareholders’ equity | 6.18 | | | 10.24 | | | 7.51 | | | 10.10 | |
Non-GAAP measures: | | | | | | | |
Net income, as adjusted | $ | 165,803 | | | $ | 126,617 | | | $ | 286,116 | | | $ | 242,412 | |
Return on average assets, as adjusted | 1.25 | % | | 1.23 | % | | 1.18 | % | | 1.18 | % |
Return on average shareholders' equity, as adjusted | 10.63 | | | 10.76 | | | 10.09 | | | 10.37 | |
Return on average tangible shareholders' equity (ROATE) | 9.33 | | | 14.79 | | | 11.07 | | | 14.64 | |
ROATE, as adjusted | 16.05 | | | 15.54 | | | 14.87 | | | 15.03 | |
Efficiency ratio | 50.78 | | | 46.64 | | | 51.81 | | | 47.59 | |
53
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Common Equity Per Share Data: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Book value per common share (GAAP) | $ | 11.84 | | | $ | 11.57 | |
Tangible book value per common share (non-GAAP) | 7.71 | | | 7.94 | |
The following table presents our annualize performance ratios:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Selected Performance Indicators | ($ in thousands) |
GAAP measures: | | | | | | | |
Net income, as reported | $ | 146,551 | | | $ | 116,728 | | | | | |
Return on average assets | 0.98 | % | | 1.07 | % | | | | |
Return on average shareholders’ equity | 9.10 | | | 9.15 | | | | | |
Non-GAAP measures: | | | | | | | |
Net income, as adjusted | $ | 154,530 | | | $ | 120,313 | | | | | |
Return on average assets, as adjusted | 1.03 | % | | 1.10 | % | | | | |
Return on average shareholders' equity, as adjusted | 9.60 | | | 9.43 | | | | | |
Return on average tangible shareholders' equity (ROATE) | 13.39 | | | 13.09 | | | | | |
ROATE, as adjusted | 14.12 | | | 13.49 | | | | | |
Efficiency ratio | 53.79 | | | 53.18 | | | | | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Common Equity Per Share Data: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Book value per common share (GAAP) | $ | 12.41 | | | $ | 12.23 | |
Tangible book value per common share (non-GAAP) | 8.36 | | | 8.15 | |
Non-GAAP Reconciliations to GAAP Financial Measures
Adjusted net income is computed as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | (in thousands) | | (in thousands) |
Net income, as reported (GAAP) | Net income, as reported (GAAP) | $ | 96,413 | | | $ | 120,512 | | | $ | 213,141 | | | $ | 236,222 | | Net income, as reported (GAAP) | $ | 146,551 | | | $ | 116,728 | | |
Add: Loss on extinguishment of debt (net of tax) | — | | | 6,024 | | | — | | | 6,024 | | |
Add: Losses on available for sale and held to maturity securities transactions (net of tax) (a) | (56) | | | 81 | | | (50) | | | 166 | | |
| Add: Non-PCD provision for credit losses (net of tax) (b) | 29,282 | | | — | | | 29,282 | | | — | | |
Add: Losses on available for sale and held to maturity debt securities, net (net of tax) (a) | | Add: Losses on available for sale and held to maturity debt securities, net (net of tax) (a) | 17 | | | 6 | | |
| Add: Provision for credit losses for available for sale securities (b) | | Add: Provision for credit losses for available for sale securities (b) | 5,000 | | | — | | |
Add: Merger related expenses (net of tax) (c) | Add: Merger related expenses (net of tax) (c) | 40,164 | | | — | | | 43,743 | | | — | | Add: Merger related expenses (net of tax) (c) | 2,962 | | | 3,579 | | |
| Net income, as adjusted (non-GAAP) | Net income, as adjusted (non-GAAP) | $ | 165,803 | | | $ | 126,617 | | | $ | 286,116 | | | $ | 242,412 | | Net income, as adjusted (non-GAAP) | $ | 154,530 | | | $ | 120,313 | | |
(a) Included in gains (losses) gains on securities transactions, net.
(b)Represents Provision relates to one security fully charged off with no resulting tax benefit during the provision for credit losses for non-PCD loans, unfunded credit commitments and held to maturity debt securities acquired from Bank Leumi USA on April 1, 2022.three months ended March 31, 2023.
(c) Merger related expenses are primarily within salary and employee benefits expense professionalfor the three months ended March 31, 2023 and legal fees, and other expense.2022.
In addition to the items used to calculate net income, as adjusted, in the table above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans, wealth management fees, and swap fees recognized from commercial loan customer transactions. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, loan portfolio sales, brokerage fees, and commercial loan customer demand for certain products. See the “Non-Interest Income” section below for more details.
Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| ($ in thousands) |
Net income, as adjusted (non-GAAP) | $ | 154,530 | | $ | 120,313 | | | | |
Average assets | $ | 59,867,002 | | $ | 43,570,251 | | | | |
Annualized return on average assets, as adjusted (non-GAAP) | 1.03 | % | | 1.10 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| ($ in thousands) |
Net income, as adjusted (non-GAAP) | $ | 165,803 | | $ | 126,617 | | $ | 286,116 | | $ | 242,412 |
Average assets | $ | 53,211,422 | | $ | 41,161,459 | | $ | 48,417,469 | | $ | 40,967,174 |
Annualized return on average assets, as adjusted (non-GAAP) | 1.25 | % | | 1.23 | % | | 1.18 | % | | 1.18 | % |
Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| ($ in thousands) |
Net income, as adjusted (non-GAAP) | $ | 165,803 | | $ | 126,617 | | $ | 286,116 | | $ | 242,412 |
Average shareholders' equity | $ | 6,238,985 | | $ | 4,708,797 | | $ | 5,673,014 | | $ | 4,677,273 |
Annualized return on average shareholders' equity, as adjusted (non-GAAP) | 10.63 | % | | 10.76 | % | | 10.09 | % | | 10.37 | % |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| ($ in thousands) |
Net income, as adjusted (non-GAAP) | $ | 154,530 | | $ | 120,313 | | | | |
Average shareholders' equity | $ | 6,440,215 | | $ | 5,104,709 | | | | |
Annualized return on average shareholders' equity, as adjusted (non-GAAP) | 9.60 | % | | 9.43 | % | | | | |
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, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | ($ in thousands) | | ($ in thousands) |
Net income, as reported (GAAP) | Net income, as reported (GAAP) | $ | 96,413 | | $ | 120,512 | | $ | 213,141 | | $ | 236,222 | Net income, as reported (GAAP) | $ | 146,551 | | $ | 116,728 | |
Net income, as adjusted (non-GAAP) | Net income, as adjusted (non-GAAP) | 165,803 | | 126,617 | | $ | 286,116 | | $ | 242,412 | Net income, as adjusted (non-GAAP) | 154,530 | | 120,313 | |
Average shareholders’ equity | Average shareholders’ equity | $ | 6,238,985 | | $ | 4,708,797 | | $ | 5,673,014 | | $ | 4,677,273 | Average shareholders’ equity | $ | 6,440,215 | | $ | 5,104,709 | |
Less: Average goodwill and other intangible assets | Less: Average goodwill and other intangible assets | 2,105,585 | | 1,449,388 | | 1,823,538 | | 1,450,562 | Less: Average goodwill and other intangible assets | 2,061,361 | | 1,538,356 | |
Average tangible shareholders’ equity | Average tangible shareholders’ equity | $ | 4,133,400 | | $ | 3,259,409 | | $ | 3,849,476 | | $ | 3,226,711 | Average tangible shareholders’ equity | $ | 4,378,854 | | $ | 3,566,353 | |
Annualized ROATE (non-GAAP) | Annualized ROATE (non-GAAP) | 9.33 | % | | 14.79 | % | | 11.07 | % | | 14.64 | % | Annualized ROATE (non-GAAP) | 13.39 | % | | 13.09 | % | |
Annualized ROATE, as adjusted (non-GAAP) | Annualized ROATE, as adjusted (non-GAAP) | 16.05 | % | | 15.54 | % | | 14.87 | % | | 15.03 | % | Annualized ROATE, as adjusted (non-GAAP) | 14.12 | % | | 13.49 | % | |
The efficiency ratio is computed as follows: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| ($ in thousands) |
Total non-interest expense, as reported (GAAP) | $ | 272,166 | | | $ | 197,340 | | | | | |
| | | | | | | |
| | | | | | | |
Less: Amortization of tax credit investments (pre-tax) | 4,253 | | | 2,896 | | | | | |
Less: Merger related expenses (pre-tax) (a) | 4,133 | | | 4,628 | | | | | |
Total non-interest expense, as adjusted (non-GAAP) | $ | 263,780 | | | $ | 189,816 | | | | | |
Net interest income, as reported (GAAP) | $ | 436,020 | | | $ | 317,669 | | | | | |
Total non-interest income, as reported (GAAP) | 54,299 | | | 39,270 | | | | | |
Add: Losses on available for sale and held to maturity debt securities, net (pre-tax) (b) | 24 | | | 9 | | | | | |
Total net interest income and non-interest income, as adjusted (non-GAAP) | $ | 490,343 | | | $ | 356,948 | | | | | |
| | | | | | | |
Efficiency ratio (non-GAAP) | 53.79 | % | | 53.18 | % | | | | |
The efficiency ratio is computed as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| ($ in thousands) |
Total non-interest expense, as reported (GAAP) | $ | 299,730 | | | $ | 171,893 | | | $ | 497,070 | | | $ | 332,106 | |
Less: Loss on extinguishment of debt (pre-tax) | — | | | 8,406 | | | — | | | 8,406 | |
| | | | | | | |
Less: Amortization of tax credit investments (pre-tax) | 3,193 | | | 2,972 | | | 6,089 | | | 5,716 | |
Less: Merger related expenses (pre-tax) (a) | 54,496 | | | — | | | 59,124 | | | — | |
Total non-interest expense, as adjusted (non-GAAP) | $ | 242,041 | | | $ | 160,515 | | | $ | 431,857 | | | $ | 317,984 | |
Net interest income, as reported (GAAP) | $ | 418,160 | | | $ | 300,907 | | | $ | 735,829 | | | $ | 593,574 | |
Total non-interest income, as reported (GAAP) | 58,533 | | | 43,126 | | | 97,803 | | | 74,359 | |
Add: Losses on available for sale and held to maturity securities transactions, net (pre-tax) (b) | (78) | | | 113 | | | (69) | | | 231 | |
Total net interest income and non-interest income, as adjusted (non-GAAP) | $ | 476,615 | | | $ | 344,146 | | | $ | 833,563 | | | $ | 668,164 | |
| | | | | | | |
Efficiency ratio (non-GAAP) | 50.78 | % | | 46.64 | % | | 51.81 | % | | 47.59 | % |
(a) IncludedMerger related expenses are primarily within salary and employee benefits expense professionalfor the three months ended March 31, 2023 and legal fees, and other expense.2022.
(b) Included in gains (losses) on securities transactions, net.
Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding, as follows:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| ($ in thousands, except for share data) |
Common shares outstanding | 506,328,526 | | | 421,437,068 | |
Shareholders’ equity | $ | 6,204,913 | | | $ | 5,084,066 | |
Less: Preferred stock | 209,691 | | | 209,691 | |
Less: Goodwill and other intangible assets | 2,090,147 | | | 1,529,394 | |
Tangible common shareholders’ equity | $ | 3,905,075 | | | $ | 3,344,981 | |
Tangible book value per common share (non-GAAP) | $ | 7.71 | | | $ | 7.94 | |
Book value per common share (GAAP) | $ | 11.84 | | | $ | 11.57 | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| ($ in thousands, except for share data) |
Common shares outstanding | 507,762,358 | | | 506,374,478 | |
Shareholders’ equity | $ | 6,511,581 | | | $ | 6,400,802 | |
Less: Preferred stock | 209,691 | | | 209,691 | |
Less: Goodwill and other intangible assets | 2,056,107 | | | 2,066,392 | |
Tangible common shareholders’ equity | $ | 4,245,783 | | | $ | 4,124,719 | |
Book value per common share (GAAP) | $ | 12.41 | | | $ | 12.23 | |
Tangible book value per common share (non-GAAP) | $ | 8.36 | | | $ | 8.15 | |
Net Interest Income
Net interest income consists of interest income and dividends earned on interest earning assets, less interest expense on interest bearing liabilities, and represents the main source of income for Valley.
Net interest income on a tax equivalent basis totaling $419.6$437.5 million for the secondfirst quarter 2022 increased $101.22023 decreased $29.8 million as compared to the firstfourth quarter 2022 and increased $117.8$119.1 million from the second quarter 2021. Interest income on a tax equivalent basis in the second quarter 2022 increased $113.2 million to $454.4 million as compared to the first quarter 2022. The decrease as compared to the fourth quarter 2022 was mainly due to (i) the negative impact of the significant increase wasin our excess cash liquidity and other borrowings resulting from prudent and cautionary measures taken by us during the market turmoil of March 2023, (ii) higher interest rates on our average interest bearing deposits and other borrowings, as well as (iii) fewer days in the first quarter 2023. Interest expense increased $103.5 million to $284.2 million for the first quarter 2023 as compared to the fourth quarter 2022 largely due to a $4.0 billion increase in average interest bearing liabilities, including increases of $2.1 billion and $1.9 billion in average time deposits and short-term borrowings, respectively. Interest income on a tax equivalent basis increased $73.7 million to $721.7 millionin the first quarter 2023 as compared to the fourth quarter 2022. The increase was mostly due to higher average loan balances driven both by acquired andour organic loansnew loan volumes, slowing loan prepayments, and increased yields on both new originations and adjustable rate loans in our portfolio. Interest expense of $34.8 million
Average interest earning assets increased $15.1 billion to $55.4 billion for the secondfirst quarter 2022 increased $12.0 million2023 as compared to the first quarter 2022 largelymainly due to a moderate$13.2 billion increase in interest rates on both non-maturity depositsaverage loan balances and short-term borrowings, as well as interest expense related to deposits and borrowings assumed inhigher average investment balances partly caused by the Bank Leumi USA acquisition.
Average interest earning assets increased $11.0 billion to $48.9 billion for the second quarter 2022 as compared to the second quarter 2021 primarily due to the acquisitionsacquisition of Bank Leumi USA and Westchester on April 1, 2022
and December 1, 2021, respectively, as well as strong organic loan growth over the 12-month period ended June 30, 2022. Compared to the firstfourth quarter 2022, average interest earning assets increased by $8.6$3.0 billion during the secondfirst quarter 2022.2023. The increase was primarily driven by a $7.9$1.8 billion increase in average loan balances due to $5.9 billion of loans acquired form Bank Leumi USA and continued organic loan growth mainly in the non-PPP commercial loan categories and $1.1 billion increase in average interest bearing cash held mainly overnight with the Federal Reserve Bank of New York as well as residential mortgage loans.part of our liquidity management.
Average interest bearing liabilities increased $4.2$11.5 billion to $29.7$37.6 billion for the secondfirst quarter 20222023 as compared to the secondfirst quarter 20212022 mainly due to increases of $2.59.1 billion and $2.2 billion in average time deposits and short-term borrowings, respectively. The increases in average time deposits and short-term borrowings were largely due to the liquidity management efforts during March 2023, and our increased usage of interest bearing deposits assumed from Bank Leumi USA, strongfully FDIC-insured brokered CD and successful retail CD initiatives as part of our funding sources for loan growth in commercial and retail customer deposit balances without stated maturities, and $727 million of interest bearing deposits assumed from Westchester.over the last 12 months. As compared to the firstfourth quarter 2022, average interest bearing liabilities increased by $3.5$4.0 billion in the secondfirst quarter 2022 mainly 2023 largely due to the deposits from Bank Leumi USA and continued growtha $2.1 billion increase in average non-maturitytime deposits mainly driven by the higher fully insured brokered CD balances including supplemental growth from commercial depositors, a relatively new niche product targeting professional service firms and an increased utilization of additional FHLB advances within short-term borrowings as part of our funding and liquidity sources. Total average deposits, including non-interest bearing deposits, increased $7.1 billion to $42.9 billion for the second quarter 2022 as compared to the first quarter 2022. borrowings. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.
Our netNet interest margin on a tax equivalent basis of 3.43 percent for the second quarter 2022 increased by 27 basis points and 25 basis points from 3.16 percent and 3.18 percent for the first quarter 2023 decreased by 41 basis points from 3.57 percent for the fourth quarter 2022 and secondremained unchanged from the first quarter 2021, respectively.2022. The decrease as
compared to the fourth quarter was largely driven by (i) the net impact of the excess liquidity measures taken in March 2023 and (ii) two fewer days during the first quarter 2023, partially offset by higher yields on average interest earning assets. The yield on average interest earning assets increased by 3326 basis points on a linked quarter basis mostly due to the aforementioned higher yields on new and adjustable rate loans in the secondfirst quarter 20222023 as compared to the firstfourth quarter 2022. The yield on average loans increased by 2428 basis points to 3.915.48 percent for the secondfirst quarter 20222023 as compared to the firstfourth quarter 2022 largely due to the higher level of market interest rates. The yields on average taxable and non-taxable investments also increased 3912 basis points and 679 basis points, respectively, from the fourth quarter 2022, largely due to investment maturities and repayments redeployed into new higher yielding securities, as well as lower premium amortization expense caused by a decline in prepayments on mortgage-backed securities during the first quarter 2022 largely due2023. Our cost of total average deposits increased to interest income, including discount accretion, on investment securities acquired1.96 percent for the first quarter 2023 from Bank Leumi USA.1.36 percent for the fourth quarter 2022. The overall cost of average interest bearing liabilitiesliabilities also increased 1287 basis points to 0.473.02 percent for the secondfirst quarter 20222023 as compared to the firstfourth quarter 2022. The increase was mainly2022 largely due to moderately higher pricing of non-maturity deposits combined with greater utilization of brokered deposits and short-term borrowingsa 148 basis point increase in our loan funding mix during the second quarter 2022. Our cost of total average deposits only increasedshort-term borrowings.
Based upon our revised estimates at March 31, 2023, we anticipate net interest income growth of approximately 10 to 0.1912 percent for the second quarter 2022full year of 2023, down from 0.1416 to 18 percent previously estimated in the MD&A of Valley's Form 10-K for the first quarteryear ended December 31, 2022.
As noted in the "Operating Environment" section above, the Federal Reserve raised the federal funds rate by 50 basis points, 75 basis points and 75 basis points, in May, June, and July 2022, respectively, resulting in a current target range of 2.25 percent to 2.50 percent. Higher levels of market interest rates would benefit certain interest earning assets on our balance sheet and likely provide us the opportunity to reinvest any excess cash, including normal repayments of loans and investments, at higher rates. Funding costs also increased during the second quarter 2022 and the early stages of the third quarter 2022, however at this time, we expect a continued benefit to our net interest income from a certain amount of lag in higher funding costs due to the current market and our ability to manage the balance sheet. While our revised outlook for our net interest income for the remainder of 2022 is still positive, we cannot provide any assurances with respect to the future trajectory of market interest rates or that our net interest incomemargin or marginincome will remain at the levels reported for the second first quarter 2022.
2023.
The following table reflects the components of net interest income for the three months ended June 30, 2022, March 31, 2023, December 31, 2022 and June 30, 2021:March 31, 2022:
Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
| | | Three Months Ended | | Three Months Ended |
| | June 30, 2022 | | March 31, 2022 | | June 30, 2021 | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate |
| | ($ in thousands) | | ($ in thousands) |
Assets | Assets | | Assets | |
Interest earning assets: | Interest earning assets: | | Interest earning assets: | |
Loans (1)(2) | Loans (1)(2) | $ | 42,517,287 | | | $ | 415,602 | | | 3.91 | % | | $ | 34,623,402 | | | $ | 317,390 | | | 3.67 | % | | $ | 32,635,298 | | | $ | 315,339 | | | 3.87 | % | Loans (1)(2) | $ | 47,859,371 | | | $ | 655,250 | | | 5.48 | % | | $ | 46,086,363 | | | $ | 599,040 | | | 5.20 | % | | $ | 34,623,402 | | | $ | 317,390 | | | 3.67 | % |
Taxable investments (3) | Taxable investments (3) | 4,912,994 | | | 30,610 | | | 2.49 | | | 3,838,468 | | | 20,115 | | | 2.10 | | | 3,159,842 | | | 14,883 | | | 1.88 | | Taxable investments (3) | 5,033,134 | | | 37,474 | | | 2.98 | | | 4,934,084 | | | 35,278 | | | 2.86 | | | 3,838,468 | | | 20,115 | | | 2.10 | |
Tax-exempt investments (1)(3) | Tax-exempt investments (1)(3) | 684,471 | | | 6,571 | | | 3.84 | | | 401,742 | | | 3,186 | | | 3.17 | | | 498,971 | | | 4,071 | | | 3.26 | | Tax-exempt investments (1)(3) | 623,145 | | | 6,739 | | | 4.33 | | | 623,322 | | | 6,608 | | | 4.24 | | | 401,742 | | | 3,186 | | | 3.17 | |
Interest bearing deposits with banks | Interest bearing deposits with banks | 776,478 | | | 1,569 | | | 0.81 | | | 1,419,436 | | | 461 | | | 0.13 | | | 1,613,303 | | | 235 | | | 0.06 | | Interest bearing deposits with banks | 1,847,140 | | | 22,205 | | | 4.81 | | | 761,832 | | | 7,038 | | | 3.70 | | | 1,419,436 | | | 461 | | | 0.13 | |
Total interest earning assets | Total interest earning assets | 48,891,230 | | | 454,352 | | | 3.72 | | | 40,283,048 | | | 341,152 | | | 3.39 | | | 37,907,414 | | | 334,528 | | | 3.53 | | Total interest earning assets | 55,362,790 | | | 721,668 | | | 5.21 | | | 52,405,601 | | | 647,964 | | | 4.95 | | | 40,283,048 | | | 341,152 | | | 3.39 | |
Allowance for credit losses | Allowance for credit losses | (428,193) | | | | | (367,989) | | | | | (350,388) | | | | | Allowance for credit losses | (466,837) | | | | | (483,580) | | | | | (367,989) | | | | |
Cash and due from banks | Cash and due from banks | 426,187 | | | 281,883 | | | 335,083 | | | Cash and due from banks | 445,005 | | | 408,891 | | | 281,883 | | |
Other assets | Other assets | 4,362,789 | | | 3,361,185 | | | 3,237,689 | | | Other assets | 4,702,376 | | | 4,775,113 | | | 3,361,185 | | |
Unrealized gains on securities available for sale, net | Unrealized gains on securities available for sale, net | (40,591) | | | 12,124 | | | 31,661 | | | Unrealized gains on securities available for sale, net | (176,332) | | | (192,810) | | | 12,124 | | |
Total assets | Total assets | $ | 53,211,422 | | | $ | 43,570,251 | | | $ | 41,161,459 | | | Total assets | $ | 59,867,002 | | | $ | 56,913,215 | | | $ | 43,570,251 | | |
Liabilities and shareholders’ equity | Liabilities and shareholders’ equity | | | | | | | Liabilities and shareholders’ equity | | | | | | |
Interest bearing liabilities: | Interest bearing liabilities: | | Interest bearing liabilities: | |
Savings, NOW and money market deposits | Savings, NOW and money market deposits | $ | 23,027,347 | | | $ | 17,122 | | | 0.30 | % | | $ | 20,522,629 | | | $ | 9,627 | | | 0.19 | % | | $ | 17,784,985 | | | $ | 11,166 | | | 0.25 | % | Savings, NOW and money market deposits | $ | 23,389,569 | | | $ | 150,766 | | | 2.58 | % | | $ | 23,476,111 | | | $ | 109,286 | | | 1.86 | % | | $ | 20,522,629 | | | $ | 9,627 | | | 0.19 | % |
Time deposits | Time deposits | 3,601,088 | | | 3,269 | | | 0.36 | | | 3,554,520 | | | 2,831 | | | 0.32 | | | 4,609,778 | | | 6,279 | | | 0.54 | | Time deposits | 9,738,608 | | | 80,298 | | | 3.30 | | | 7,641,769 | | | 48,417 | | | 2.53 | | | 3,554,520 | | | 2,831 | | | 0.32 | |
Total interest bearing deposits | Total interest bearing deposits | 26,628,435 | | | 20,391 | | | 0.31 | | | 24,077,149 | | | 12,458 | | | 0.21 | | | 22,394,763 | | | 17,445 | | | 0.31 | | Total interest bearing deposits | 33,128,177 | | | 231,064 | | | 2.79 | | | 31,117,880 | | | 157,703 | | | 2.03 | | | 24,077,149 | | | 12,458 | | | 0.21 | |
Short-term borrowings | Short-term borrowings | 1,603,198 | | | 4,083 | | | 1.02 | | | 594,297 | | | 806 | | | 0.54 | | | 873,927 | | | 1,168 | | | 0.53 | | Short-term borrowings | 2,803,743 | | | 33,948 | | | 4.84 | | | 880,615 | | | 7,404 | | | 3.36 | | | 594,297 | | | 806 | | | 0.54 | |
Long-term borrowings (4) | Long-term borrowings (4) | 1,462,638 | | | 10,313 | | | 2.82 | | | 1,476,469 | | | 9,525 | | | 2.58 | | | 2,200,836 | | | 14,128 | | | 2.57 | | Long-term borrowings (4) | 1,686,830 | | | 19,198 | | | 4.55 | | | 1,598,379 | | | 15,624 | | | 3.91 | | | 1,476,469 | | | 9,525 | | | 2.58 | |
Total interest bearing liabilities | Total interest bearing liabilities | 29,694,271 | | | 34,787 | | | 0.47 | | | 26,147,915 | | | 22,789 | | | 0.35 | | | 25,469,526 | | | 32,741 | | | 0.51 | | Total interest bearing liabilities | 37,618,750 | | | 284,210 | | | 3.02 | | | 33,596,874 | | | 180,731 | | | 2.15 | | | 26,147,915 | | | 22,789 | | | 0.35 | |
Non-interest bearing deposits | Non-interest bearing deposits | 16,267,946 | | | | | 11,686,534 | | | | | 10,328,412 | | | | | Non-interest bearing deposits | 14,024,742 | | | | | 15,116,977 | | | | | 11,686,534 | | | | |
Other liabilities | Other liabilities | 1,010,220 | | | 631,093 | | | 654,724 | | | Other liabilities | 1,783,295 | | | 1,871,394 | | | 631,093 | | |
Shareholders’ equity | Shareholders’ equity | 6,238,985 | | | 5,104,709 | | | 4,708,797 | | | Shareholders’ equity | 6,440,215 | | | 6,327,970 | | | 5,104,709 | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 53,211,422 | | | $ | 43,570,251 | | | $ | 41,161,459 | | | Total liabilities and shareholders’ equity | $ | 59,867,002 | | | $ | 56,913,215 | | | $ | 43,570,251 | | |
Net interest income/interest rate spread (5) | Net interest income/interest rate spread (5) | | | $ | 419,565 | | | 3.25 | % | | | | $ | 318,363 | | | 3.04 | % | | | | $ | 301,787 | | | 3.02 | % | Net interest income/interest rate spread (5) | | | $ | 437,458 | | | 2.19 | % | | | | $ | 467,233 | | | 2.80 | % | | | | $ | 318,363 | | | 3.04 | % |
Tax equivalent adjustment | Tax equivalent adjustment | | (1,405) | | | | | (694) | | | | | (880) | | | | Tax equivalent adjustment | | (1,438) | | | | | (1,414) | | | | | (694) | | | |
Net interest income, as reported | Net interest income, as reported | | $ | 418,160 | | | $ | 317,669 | | | $ | 300,907 | | | Net interest income, as reported | | $ | 436,020 | | | $ | 465,819 | | | $ | 317,669 | | |
Net interest margin (6) | Net interest margin (6) | | | | 3.42 | % | | | | 3.15 | % | | | | 3.18 | % | Net interest margin (6) | | | | 3.15 | % | | | | 3.56 | % | | | | 3.15 | % |
Tax equivalent effect | Tax equivalent effect | | 0.01 | | | 0.01 | | | — | | Tax equivalent effect | | 0.01 | | | 0.01 | | | 0.01 | |
Net interest margin on a fully tax equivalent basis (6) | Net interest margin on a fully tax equivalent basis (6) | | 3.43 | % | | 3.16 | % | | 3.18 | % | Net interest margin on a fully tax equivalent basis (6) | | 3.16 | % | | 3.57 | % | | 3.16 | % |
The following table reflects the components of net interest income for the six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended |
| June 30, 2022 | | June 30, 2021 |
| Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate |
| ($ in thousands) |
Assets | | | | | | | | | | | |
Interest earning assets: | | | | | | | | | | | |
Loans (1)(2) | $ | 38,592,151 | | | $ | 732,991 | | | 3.80 | % | | $ | 32,609,034 | | | $ | 628,545 | | | 3.86 | % |
Taxable investments (3) | 4,377,990 | | | 50,725 | | | 2.32 | % | | 3,135,614 | | | 29,920 | | | 1.91 | |
Tax-exempt investments (1)(3) | 543,646 | | | 9,757 | | | 3.59 | % | | 506,349 | | | 8,319 | | | 3.29 | |
Interest bearing deposits with banks | 1,096,181 | | | 2,030 | | | 0.37 | % | | 1,397,259 | | | 459 | | | 0.07 | |
Total interest earning assets | 44,609,968 | | | 795,503 | | | 3.57 | % | | 37,648,256 | | | 667,243 | | | 3.54 | |
Allowance for credit losses | (398,258) | | | | | | | (348,834) | | | | | |
Cash and due from banks | 354,433 | | | | | | | 324,044 | | | | | |
Other assets | 3,864,997 | | | | | | | 3,305,222 | | | | | |
Unrealized gains on securities available for sale, net | (13,671) | | | | | | | 38,486 | | | | | |
Total assets | $ | 48,417,469 | | | | | | | $ | 40,967,174 | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | |
Savings, NOW and money market deposits | $ | 21,781,907 | | | $ | 26,749 | | | 0.25 | % | | 17,204,598 | | | 22,291 | | | 0.26 | % |
Time deposits | 3,577,933 | | | 6,100 | | | 0.34 | | | 5,223,740 | | | 17,372 | | | 0.67 | |
Total interest bearing deposits | 25,359,840 | | | 32,849 | | | 0.26 | | | 22,428,338 | | | 39,663 | | | 0.35 | |
Short-term borrowings | 1,101,535 | | | 4,889 | | | 0.89 | | | 1,020,458 | | | 2,926 | | | 0.57 | |
Long-term borrowings (4) | 1,469,515 | | | 19,838 | | | 2.70 | | | 2,261,719 | | | 29,283 | | | 2.59 | |
Total interest bearing liabilities | 27,930,890 | | | 57,576 | | | 0.41 | | | 25,710,515 | | | 71,872 | | | 0.56 | |
Non-interest bearing deposits | 13,989,897 | | | | | | | 9,853,345 | | | | | |
Other liabilities | 823,668 | | | | | | | 726,041 | | | | | |
Shareholders’ equity | 5,673,014 | | | | | | | 4,677,273 | | | | | |
Total liabilities and shareholders’ equity | $ | 48,417,469 | | | | | | | $ | 40,967,174 | | | | | |
Net interest income/interest rate spread (5) | | | $ | 737,927 | | | 3.16 | % | | | | $ | 595,371 | | | 2.98 | % |
Tax equivalent adjustment | | | (2,098) | | | | | | | (1,797) | | | |
Net interest income, as reported | | | $ | 735,829 | | | | | | | $ | 593,574 | | | |
Net interest margin (6) | | | | | 3.30 | % | | | | | | 3.15 | % |
Tax equivalent effect | | | | | 0.01 | | | | | | | 0.01 | |
Net interest margin on a fully tax equivalent basis (6) | | | | | 3.31 | % | | | | | | 3.16 | % |
_____________
(1)Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate.
(2)Loans are stated net of unearned income and include non-accrual loans.
(3)The yield for securities that are classified as available for sale is based on the average historical amortized cost.
(4)Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated
statements of financial condition.
(5)Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6)Net interest income as a percentage of total average interest earning assets.
The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category.
Change in Net Interest Income on a Tax Equivalent Basis
| | | Three Months Ended June 30, 2022 Compared to June 30, 2021 | | Six Months Ended June 30, 2022 Compared to June 30, 2021 | | Three Months Ended March 31, 2023 Compared to March 31, 2022 | |
| | Change Due to Volume | | Change Due to Rate | | Total Change | | Change Due to Volume | | Change Due to Rate | | Total Change | | Change Due to Volume | | Change Due to Rate | | Total Change | |
| | (in thousands) | | (in thousands) |
Interest Income: | Interest Income: | | Interest Income: | | |
Loans* | Loans* | $ | 96,554 | | | $ | 3,709 | | | $ | 100,263 | | | $ | 113,763 | | | $ | (9,317) | | | $ | 104,446 | | Loans* | $ | 147,471 | | | $ | 190,389 | | | $ | 337,860 | | |
Taxable investments | Taxable investments | 9,942 | | | 5,785 | | | 15,727 | | | 13,503 | | | 7,302 | | | 20,805 | | Taxable investments | 7,381 | | | 9,978 | | | 17,359 | | |
Tax-exempt investments* | Tax-exempt investments* | 1,695 | | | 805 | | | 2,500 | | | 638 | | | 800 | | | 1,438 | | Tax-exempt investments* | 2,141 | | | 1,412 | | | 3,553 | | |
Interest bearing deposits with banks | Interest bearing deposits with banks | (183) | | | 1,517 | | | 1,334 | | | (119) | | | 1,690 | | | 1,571 | | Interest bearing deposits with banks | 180 | | | 21,564 | | | 21,744 | | |
Total increase in interest income | Total increase in interest income | 108,008 | | | 11,816 | | | 119,824 | | | 127,785 | | | 475 | | | 128,260 | | Total increase in interest income | 157,173 | | | 223,343 | | | 380,516 | | |
Interest Expense: | Interest Expense: | | | | | | | | | | | | Interest Expense: | | | | | | |
Savings, NOW and money market deposits | Savings, NOW and money market deposits | 3,665 | | | 2,291 | | | 5,956 | | | 5,672 | | | (1,214) | | | 4,458 | | Savings, NOW and money market deposits | 1,531 | | | 139,608 | | | 141,139 | | |
Time deposits | Time deposits | (1,192) | | | (1,818) | | | (3,010) | | | (4,426) | | | (6,846) | | | (11,272) | | Time deposits | 12,150 | | | 65,317 | | | 77,467 | | |
Short-term borrowings | Short-term borrowings | 1,398 | | | 1,517 | | | 2,915 | | | 249 | | | 1,714 | | | 1,963 | | Short-term borrowings | 10,580 | | | 22,562 | | | 33,142 | | |
Long-term borrowings and junior subordinated debentures | Long-term borrowings and junior subordinated debentures | (5,099) | | | 1,284 | | | (3,815) | | | (10,647) | | | 1,202 | | | (9,445) | | Long-term borrowings and junior subordinated debentures | 1,520 | | | 8,153 | | | 9,673 | | |
Total (decrease) increase in interest expense | (1,228) | | | 3,274 | | | 2,046 | | | (9,152) | | | (5,144) | | | (14,296) | | |
Total increase in interest expense | | Total increase in interest expense | 25,781 | | | 235,640 | | | 261,421 | | |
Total increase (decrease) in net interest income | Total increase (decrease) in net interest income | $ | 109,236 | | | $ | 8,542 | | | $ | 117,778 | | | $ | 136,937 | | | $ | 5,619 | | | $ | 142,556 | | Total increase (decrease) in net interest income | $ | 131,392 | | | $ | (12,297) | | | $ | 119,095 | | |
*Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate.
Non-Interest Income
Non-interest income increased $15.4 million and $23.4 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods of 2021. The following table presents the components of non-interest income for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Wealth management and trust fees | $ | 9,577 | | | $ | 3,532 | | | $ | 14,708 | | | $ | 6,861 | |
Insurance commissions | 3,463 | | | 2,637 | | | 5,322 | | | 4,195 | |
Service charges on deposit accounts | 10,067 | | | 5,083 | | | 16,279 | | | 10,186 | |
(Losses) gains on securities transactions, net | (309) | | | 375 | | | (1,381) | | | 476 | |
Fees from loan servicing | 2,717 | | | 3,187 | | | 5,498 | | | 6,086 | |
Gains on sales of loans, net | 3,602 | | | 10,061 | | | 4,588 | | | 13,574 | |
| | | | | | | |
Bank owned life insurance | 2,113 | | | 2,475 | | | 4,159 | | | 4,806 | |
Other | 27,303 | | | 15,776 | | | 48,630 | | | 28,175 | |
Total non-interest income | $ | 58,533 | | | $ | 43,126 | | | $ | 97,803 | | | $ | 74,359 | |
Wealth management and trust fees income increased by $6.0 million and $7.8 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 mostly due to $4.4 million of brokerage fees resulting from the acquisition of Bank Leumi USA and its wholly-owned broker dealer subsidiary now legally named Valley Financial Management, Inc. The increases in both 2022 periods were also supplemented by an additional revenues generated by our advisory firm, Dudley Ventures, LLC, specializing in the investment and management of tax credit investments, which we acquired in October 2021.
Service charges on deposit accounts increased by $5.0 million and $6.1 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021 mostly driven by additional checking accounts related revenues resulting from deposit accounts acquired from Leumi USA.
Net losses on securities transactions of $1.4 million for the six months ended June 30, 2022 were mostly due to
net trading losses related to our trading municipal bond portfolio.
Net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each reporting period end. Net gains on sales of loans decreased $6.5 million and $9.0 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods of 2021. The quarter over quarter decrease was mostly due to lower loan sale volumes and spreads (i.e., margin on individual loan sales). During the second quarter 2022, we sold approximately $125.0 million of residential mortgage loans as compared to $326.2 million during the second quarter 2021. The mark to market change on loans held for sale at fair value resulted in net gains totaling $1.5 million for the three months ended June 30, 2022 as compared to $460 thousand of net losses for the same period of 2021, and net losses totaling $3.3 million and $10.0 million for the six months ended June 30, 2022 and2021, respectively. Our ability to generate net gains on sales of loans could continue to be challenged by a number of factors, including increases in market interest rates, lower customer demand for conforming loan products and our potential decision to change the mix of loans originated for investment in our loan portfolio rather than sale. See further discussion of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.
Other non-interest income increased $11.5 million and $20.5 million for the three and six months ended June 30, 2022 as compared to the same periods in 2021, respectively, mostly due to higher fee income from derivative interest rate swaps executed with commercial lending customers caused by a greater volume of transactions and higher foreign exchange fees. Swap fee income totaled $11.1 million and $7.6 million for the three months ended June 30, 2022 and 2021, respectively, and $25.1 million and $13.8 million for the six months ended June 30, 2022 and2021, respectively. While we believe our commercial loan swap based product will remain attractive to borrowers in the current interest rate environment, we can provide no assurance that our swap fees will remain at the level reported for the second quarter 2022. Foreign exchange fees totaled $2.1 million and $2.5 million three and six months ended June 30, 2022, respectively. Foreign exchange fees for the respective reporting periods in 2021 were not material.
Non-Interest Income
Non-interest income increased $15.0 million for the three months ended March 31, 2023 as compared to the same period of 2022. The following table presents the components of non-interest income for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| (in thousands) |
Wealth management and trust fees | $ | 9,587 | | | $ | 5,131 | | | | | |
Insurance commissions | 2,420 | | | 1,859 | | | | | |
Capital markets | 10,892 | | | 14,360 | | | | | |
Service charges on deposit accounts | 10,476 | | | 6,212 | | | | | |
Gains (losses) on securities transactions, net | 378 | | | (1,072) | | | | | |
| | | | | | | |
Fees from loan servicing | 2,671 | | | 2,781 | | | | | |
Gains on sales of loans, net | 489 | | | 986 | | | | | |
| | | | | | | |
Bank owned life insurance | 2,584 | | | 2,046 | | | | | |
Other | 14,802 | | | 6,967 | | | | | |
Total non-interest income | $ | 54,299 | | | $ | 39,270 | | | | | |
Wealth management and trust fees income increased $4.5 million for the three months ended March 31, 2023 as compared to the same period in 2022 primarily due to higher brokerage fees resulting from the acquisition of Bank Leumi USA and its wholly owned broker dealer subsidiary on April 1, 2022. Brokerage fees totaled $4.8 million for the three months ended March 31, 2023.
Capital markets income decreased $3.5 million for the three months ended March 31, 2023 as compared to the same quarter in 2022. This decrease was largely driven by lower fee income from transactions executed for commercial customer related interest rate swaps, partially offset by an increase in foreign exchange fees. Swap fees income totaled $7.8 million and $14.0 million for the three months ended March 31, 2023 and 2022, respectively. Foreign exchange fees totaled $2.0 million and $369 thousand for the three months ended March 31, 2023 and 2022, respectively.
Service charges on deposit accounts increased $4.3 million for the three months ended March 31, 2023 as compared to the same period in 2022 largely related to higher checking account revenues resulting from additional deposit accounts acquired from Bank Leumi USA.
Net gains and losses on securities transactions for the three months ended March 31, 2023 and 2022 were almost entirely due to net trading gains and losses related to our municipal bond trading portfolio.
Other non-interest income increased $7.8 million for the three months ended March 31, 2023 as compared to the same quarter in 2022 mostly due to incremental increases in several operating non-interest income categories caused by the acquisition of Bank Leumi USA and organic growth of our business operations over the last 12 months.
Non-Interest Expense
Non-interest expense increased $127.8 million and $165.0$74.8 million for the three and six months ended June 30, 2022March 31, 2023 as compared to the same periodsperiod in 2021, respectively.2022. The following table presents the components of non-interest expense for the three and six months ended June 30, 2022March 31, 2023 and 2021:2022:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | (in thousands) | | (in thousands) |
Salary and employee benefits expense | Salary and employee benefits expense | $ | 154,798 | | | $ | 91,095 | | | $ | 262,531 | | | $ | 179,198 | | Salary and employee benefits expense | $ | 144,986 | | | $ | 107,733 | | |
Net occupancy expense | Net occupancy expense | 22,429 | | | 18,550 | | | 44,420 | | | 39,230 | | Net occupancy expense | 23,256 | | | 21,991 | | |
Technology, furniture and equipment expense | Technology, furniture and equipment expense | 49,866 | | | 23,220 | | | 75,880 | | | 43,950 | | Technology, furniture and equipment expense | 36,508 | | | 26,015 | | |
FDIC insurance assessment | FDIC insurance assessment | 5,351 | | | 3,374 | | | 9,509 | | | 6,650 | | FDIC insurance assessment | 9,155 | | | 4,158 | | |
Amortization of other intangible assets | Amortization of other intangible assets | 11,400 | | | 5,449 | | | 15,837 | | | 11,455 | | Amortization of other intangible assets | 10,519 | | | 4,437 | | |
Professional and legal fees | Professional and legal fees | 30,409 | | | 7,486 | | | 45,158 | | | 13,758 | | Professional and legal fees | 16,814 | | | 14,749 | | |
Loss on extinguishment of debt | — | | | 8,406 | | | — | | | 8,406 | | |
| Amortization of tax credit investments | Amortization of tax credit investments | 3,193 | | | 2,972 | | | 6,089 | | | 5,716 | | Amortization of tax credit investments | 4,253 | | | 2,896 | | |
Other | Other | 22,284 | | | 11,341 | | | 37,646 | | | 23,743 | | Other | 26,675 | | | 15,361 | | |
Total non-interest expense | Total non-interest expense | $ | 299,730 | | | $ | 171,893 | | | $ | 497,070 | | | $ | 332,106 | | Total non-interest expense | $ | 272,166 | | | $ | 197,340 | | |
Salary and employee benefits expense increased $63.7 million and $83.3$37.3 million for the three and six months ended June 30, 2022March 31, 2023 as compared to the same periodsperiod of 2021, respectively.2022. The increases in both 2022 periods wereincrease was primarily due to strategic increases in our headcount to enhance lending andsupport our expansion of operations (including additions to staff due toresulting from the Bank Leumi USA and Westchester acquisitions), increasesacquisition, significant organic growth in our branch compensation to preserve staffing and service levels, and to keep pace withoperations, as well as inflationary pressures in the increases in wage demand across the industry. In addition, salarylabor market. Salary and employee benefits expense also included approximately $28.0$4.1 million inof merger expense,related expenses primarily consisting of change in controlseverance and severance payments, related to Bank Leumi USA duringretention compensation for the second quarter 2022.three months ended March 31, 2023.
Net occupancy expense increased $3.9 million and $5.2$1.3 million for the three and six months ended June 30, 2022, respectively,March 31, 2023 as compared to the same periodsperiod of 20212022 mainly due to higher rent and depreciation expense, andpartially offset by lower repair and maintenance costs.costs in the first quarter 2023.
Technology, furniture and equipment expense increased $26.6 million and $31.9$10.5 million for the three and six months ended June 30, 2022, respectively,March 31, 2023 as compared to the same periods of 2021.2022. The increases were due,increase was largely driven by additional investments in part, to Bank Leumi USA merger related expenses (largely consisting of technology related costs) totaling $15.3 millionand equipment and higher depreciation expense in the secondfirst quarter 2022 and higher data processing costs.2023.
FDIC insurance assessment expense increased $2.0 million and $2.9$5.0 million for the three and six months ended June 30, 2022, respectively,March 31, 2023 as compared toto the same periodsperiod of 20212022 mainly due to growth in our balance sheet, as well as a two basis point increase in the Bank Leumi USA acquisition and continued organic loan growth.initial base rate effective for the first quarter 2023.
Amortization of other intangible assets increased $6.0 million and $4.4$6.1 million for the three and six months ended June 30, 2022, respectively,March 31, 2023 as compared to the same period of 2021 mostly2022 mainly due to additionalhigher amortization expense of core depositdeposits and other intangible assets resulting from the Bank Leumi USA acquisition. See Notes 2 and Note 9 to the consolidated financial statements for additional information. Professional and legal fees increased $22.9$2.1 million and $31.4 millionfor the three and six months ended June 30, 2022, respectively,March 31, 2023 as compared to the same periodsperiod of 2021.2022. The increases wereincrease was primarily due in part, to services expense, increasedhigher consulting expense mainly related to technology transformation and new product initiatives, duringpartially offset by lower managed services expense in the three and six months and merger related expenses. Merger related expenses totaled $11.4 million (related to the Bank Leumi USA acquisition) and $12.2 million for the three and six months ended June 30, 2022, respectively.
Loss on extinguishment of debt totaled $8.4 million for the three and six months ended June 30, 2021 reflecting the
prepayment of approximately $248 million of long-term FHLB advances during the secondfirst quarter 2021.
Other non-interest expense increased $10.9 million and $13.9$11.3 million for the three and six months ended June 30, 2022March 31, 2023 as compared to the same periodsperiod of 2021. These2022 largely due to general increaseswithin this expense category related to the Bank Leumi acquisition, advertising and charges related to collateral liabilities in connection with derivative transactionsother incrementally higher operating expenses due to the expansion of our operations, including acquisitions of Bank Leumi USA on April 1, 2022 and Westchester on December 1, 2021..
Income Taxes
Income tax expense totaled $36.6 millionfor the second quarter 2022 as compared to $39.3$57.2 million and $42.9$39.3 million for the first quarterthree months ended March 31, 2023 and 2022, and second quarter 2021, respectively. Our effective tax rate was 27.5 percent, 25.228.1 percent and 26.225.2 percent for the second quarterthree months ended March 31, 2023 and 2022, first quarter 2022 and second quarter 2021, respectively. The increase in the effective tax rate in the secondfirst quarter 20222023 as compared to the first quartersame period of 2022 was mainly due to the tax effect of an increasea smaller benefit in permanent difference disallowances, lower discrete tax items, as well as moderate state tax rate adjustments recognized during the second quarter 2022. The decrease in income tax expense as compared to the second quarter 2021 was mainly due to lower pre-tax income.excess stock compensation and a newly established valuation allowance against a loss provision on available for sale debt securities.
U.S. GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year. Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods. Factors that could impact management’s judgment include changes in income, tax laws and regulations and tax planning strategies. Based on the current information available, we anticipate that our effective tax rate will range from 26 percent to 28 percent for 2022, exclusive of pending
potential tax rate increases.strategies.
Operating Segments
Prior to the second quarterAt March 31, 2023 and December 31, 2022, Valley operated as four reportable segments: Consumer Lending, Commercial Lending, Investment Management, and Corporate and Other Adjustments. Valley re-evaluatedmanaged its segment reporting during the second quarter 2022 to consider the Bank Leumi USA acquisition on April 1, 2022 along with other factors, including changes in the internal structure ofbusiness operations discrete financial information reviewed by key decision-makers, balance sheet management strategies and personnel. As a result, Valley determined it operatedunder reportable segments consisting of Consumer Lending,Banking, Commercial LendingBanking and Treasury and Corporate Other at June 30, 2022. Treasury and Corporate Other was reorganized to consolidate Treasury and other corporate-wide functions, including the Treasury managed investment securities portfolios and overnight interest earning cash balances formerly reported under Investment Management. The discrete financial information related to the activities previously reported in the Investment Management segment is no longer provided to Valley's CEO, who is the chief operating decision maker.Other. Each operating segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Valley regularly assesses its strategic plans, operations and reporting structures to identify its reportable segments.segments and no changes to the reportable segments were determined necessary during the first quarter 2023.
The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. The prior-period balances presented for three months ended March 31, 2022 in the tables below reflect reclassifications to conform with the presentation in those periods toof the current operating segment structure.structure implemented in the second quarter 2022. These reclassifications did not impact Valley's consolidated results were not impacted byresults. See Valley's Form 10-K for the changes discussed above and remain unchangedyear ended December 31, 2022 for all periods presented.
The following tables present the financial data for Valley's operating segments for the three months ended June 30, 2022March 31, 2023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Consumer Lending | | Commercial Lending | | Treasury and Corporate Other | | Total |
| ($ in thousands) |
Average interest earning assets | $ | 7,967,305 | | $ | 34,549,982 | | $ | 6,373,943 | | $ | 48,891,230 |
Income (loss) before income taxes | 13,678 | | 127,007 | | (7,720) | | 132,965 |
Annualized return on average interest earning assets (before tax) | 0.69 | % | | 1.47 | % | | (0.48) | % | | 1.09 | % |
| | | Three Months Ended June 30, 2021 | | Three Months Ended March 31, 2023 |
| | Consumer Lending | | Commercial Lending | | Treasury and Corporate Other | | Total | | Consumer Banking | | Commercial Banking | | Treasury and Corporate Other | | Total |
| | ($ in thousands) | | ($ in thousands) |
Average interest earning assets | Average interest earning assets | $ | 7,150,137 | | $ | 25,485,161 | | $ | 5,272,116 | | $ | 37,907,414 | Average interest earning assets | $ | 8,768,482 | | $ | 39,090,889 | | $ | 7,503,419 | | $ | 55,362,790 |
Income (loss) before income taxes | Income (loss) before income taxes | 35,777 | | 140,733 | | (13,117) | | 163,393 | Income (loss) before income taxes | 1,024 | | 223,610 | | (20,918) | | 203,716 |
Annualized return on average interest earning assets (before tax) | Annualized return on average interest earning assets (before tax) | 2.00 | % | | 2.21 | % | | (1.00) | % | | 1.72 | % | Annualized return on average interest earning assets (before tax) | 0.05 | % | | 2.29 | % | | (1.12) | % | | 1.47 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Consumer Banking | | Commercial Banking | | Treasury and Corporate Other | | Total |
| ($ in thousands) |
Average interest earning assets | $ | 7,638,942 | | $ | 26,984,460 | | $ | 5,659,646 | | $ | 40,283,048 |
Income (loss) before income taxes | 22,981 | | 136,831 | | (3,770) | | 156,042 |
Annualized return on average interest earning assets (before tax) | 1.20 | % | | 2.03 | % | | (0.27) | % | | 1.55 | % |
See Note 1416 to the consolidated financial statements for additional details.
Consumer LendingBanking
Consumer LendingBanking represented 18.718.2 percent of our loan portfolio at June 30, 2022,March 31, 2023, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented 11.511.3 percentof our loan portfolio at June 30, 2022)March 31, 2023) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 3.8(which represented 3.5 percent of total loans at June 30, 2022)March 31, 2023) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. Consumer LendingBanking also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, brokerage, insurance and tax credit advisory services.
Average interest earning assets inwithin Consumer LendingBanking increased $817.2 million$1.1 billion to $8.0$8.8 billion for the three months ended June 30, 2022March 31, 2023 as compared to the second quarter 2021.same period of 2022. The increase was largely due to solid new and refinanced residential mortgage loan volumes originated for investment rather than sale over the last 12-month period, as well asand, to a lesser extent, growth in automobile, loanshome equity and secured personal lines of credit. Loans acquired from Bank Leumi USA on April 1, 2022 and Westchester on December 1, 2021 did not materially impact this operating segment.
Income before income taxes generated byfor Consumer Lending Banking decreased $22.1$22.0 millionto $13.7$1.0 millionfor the secondfirst quarter 20222023 as compared to the secondfirst quarter 2021 largely due2022 mainly driven by lower net interest income, and, to a $17.8 million increase in the internal transfer expense, $4.7 million increaselesser extent, increases in the provision for loan losses and lower non-interest income. The negative impactinternal transfer expense. Net interest income decreased $13.9 million in the first quarter 2023 as compared to the same period of these items was partially offset by a $4.2 million2022 due to additional interest expense generated from higher average deposit and other borrowing balances, as well as an increase in net interest income. The higher internal transfer expense was mostly driven byrate general increases related to organic growth in our retail business and the recent bank acquisitions.s. The increase in the provision for loan losses was mainly increased $4.6 million for the three months ended March 31, 2023 due to higher quantitativeadditional reserves forrelated to residential mortgage loans,loan growth, as well as loan growthdeterioration in this category. Non-interest income decreased $4.8 million or the second quarter 2022our economic forecast component within our CECL model as compared to one year ago. See further details in the second“Allowance for Credit Losses” section of this MD&A. Internal transfer expense increased $2.2 million for the first quarter 2021 largely due2023 as compared to lower gains on sales of residential mortgage loans. The negative impact of these items was partially offset by a $4.2 million increase in net interest income mainly driven by higher average loan balances.the first quarter 2022.
The netNet interest margin on the Consumer LendingBanking portfolio decreased 9101 basis points to 2.941.93 percent for the secondfirst quarter 20222023 as compared to the secondfirst quarter 20212022 mainly due to a 15179 basis point decrease in the yield on average loans, partially offset by a 6 basis point decreaseincrease in the costs associated with our funding sources. The 15rces, partially offset by a 78 basis point decreaseincrease in the yield on average loans. The increase in our funding costs was mainly driven by higher interest rates on most of our interest bearing commercial and retail deposit products, increased utilization of fully FDIC-insured brokered deposits and higher cost of other borrowings held during the first quarter 2023. The 78 basis point increase in loan yield was largely due to lowerhigher yielding new loan volumes and normal loan repayments over the last 12-month period. The decreaseadjustable rate loans in our funding costs was mainly due to continued runoff of higher cost time deposits, greater mix of non-interest bearing deposits.portfolio. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources.
The return on average interest earning assets before income taxes for the consumer banking segment was 0.05 percent for the first quarter 2023 compared to 1.20 percent for the first quarter 2022.
Commercial LendingBanking
Commercial LendingBanking 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 LendingBanking is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $8.5$9.0 billionand represented 19.518.6 percent of the total loan portfolio at June 30, 2022.March 31, 2023. Commercial real estate loans and construction loans totaled $26.9$30.8 billion and represented 61.863.2 percentof the total loan portfolio at June 30, 2022.March 31, 2023.
Average interest earning assets in this segmentCommercial Banking increasedapproximately$9.1 $12.1 billion to $34.5$39.1 billion for the three months ended June 30, 2022March 31, 2023 as compared to the secondfirst quarter 2021 mostly2022. This increase was primarily due to acquired loans from Bank Leumi USA and Westchester and strong new organic loan originations primarilygrowth concentrated in the commercial real estate loan portfolio partially offset by run-off ofas well as commercial and industrial PPP loans due to SBA loan forgiveness.acquired from Bank Leumi USA.
Income before income taxes for Commercial Banking increased $86.8 million to $223.6 million for the three months ended June 30, 2022 for Commercial Lending decreased $13.7 millionto $127.0 millionMarch 31, 2023 as compared to the second quarter 2021. The decrease wassame period of 2022 mainly driven bydue to an increase in the internal transfer expense coupled with higher provision for loan losses,net interest income, partially offset by increases in both net higher internal transfer expense and non-interest expense. Net interest income for this segment increased $131.6 million to $378.2 million for the first quarter 2023 as compared to the same period in 2022 primarily due to higher average commercial loan balances and non-interest income. higher interest rates on new and adjustable loans. Internal transfer expense increased $86.2$31.7 million to $131.6 million for the second quarter 2022three months ended March 31, 2023 as compared to the secondfirst quarter 20212022 largely due to general increasesincreases related to both organic and acquired growth in our business. business operations over the last 12-month period. Non-interest expense also increased $10.6 million to $35.7 million for the three months ended March 31, 2023 as compared to the first quarter 2022. The provision for loancredit losses increased by $30.2$1.4 million to $3.0 million as compared to the second quarter 2021same period in 2022 mainly due to the provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA.a moderate increase in certain qualitative reserves. See further details in the "Allowance for Credit Losses for Loans" section of this MD&A.Net interest income for this segment increased $95.3 million to $332.7 million for the second quarter 2022 as compared to the same period in 2021 primarily due to additional income generated on higher average loan balances. Non-interest income increased $4.6 million to $14.4 million for the three months ended June 30, 2022 as compared to the second quarter 2021 mainly due to a $3.5 million increase in swap fee income from derivative interest rate swaps executed with commercial loan customers.
The net interest margin for this segment increased 1222 basis pointspoints to 3.853.87 percent for the secondfirst quarter 20222023 as compared to the secondfirst quarter 20212022 due to a 6 basis point decrease in the cost of our funding sources and a 6201 basis point increase in the yield on average loans.loans, partially offset by a 179 basis point increase in the cost of our funding sources.
The return on average interest earning assets before income taxes for the consumer banking segment was 2.29 percent for the three months ended March 31, 2023 compared to 2.03 percent to the same period in 2022.
Treasury and Corporate Other
Treasury and Corporate Other largely consists of the Treasury managed held to maturity debt securities and available for sale debt securities portfolios mainly utilized in the liquidity management needs of our lending segments and income and expense items resulting from support functions not directly attributable to a specific segment. Interest income is generated through investments in various types of securities (mainly comprised of fixed rate securities) and interest-bearing deposits with other banks (primarily the Federal Reserve Bank of New York). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from Treasury and Corporate Other to the Consumer LendingBanking and Commercial LendingBanking segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a transfer pricing methodology, which involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities outstanding for the period. Other items disclosed in this segment include net gains and losses on available for sale
and held to maturity securities transactions, not reported in the investment management segment above, interest expense related to subordinated notes, amortization and impairment(and impairment) of tax credit investments, as well as other non-core items, including merger expenses.
Average interest earning assets in this segmentwithin Treasury and Corporate Other increased $1.1$1.8 billion duringto $7.5 billion for the three months ended June 30, 2022
March 31, 2023 mainly due to an increase of $1.8 billion in average investment securities, partially offset by lower average interest bearing deposits with banks. The increase in the average investment securities balance was mainly due to $1.3 billion of investment securities acquired from Bank Leumi USA.USA, as well as other select investment securities purchases largely classified as held to maturity over the last 12-month period The $836.8 million decrease in average. Average interest bearing deposits with banks increased $427.7 million as compared to the same period in 2021 was mainly2022 due to continued funding of loan growth and fluctuationsadditional cash held as a cautionary liquidity management measure in the timing of loan and investment activity.March 2023.
Treasury and Corporate Other recognized pre-tax losses of $7.7 million and $13.1 million forFor the three months ended June 30, 2022 and 2021, respectively.March 31, 2023, loss before income taxes in this segment totaled $20.9 million compared to $3.8 million for the same period in 2022. The $5.4$17.1 million decreaseincrease in the pre-tax loss during the 2022first quarter 2023 period was mainly due to higher non-interest expense, partially offset by increases in internal transfer income net interest income and non-interest income that were more than offset by an increase in non-interest expense. The internal transfer incomeincome. Non-interest expense increased by $103.9$62.5 million to $195.0$218.2 million forduring the three months ended June 30, 2022March 31, 2023 as compared to the same period a year ago mostly due to general increases related to our growth and recent acquisitions. Non-interest expense increased $131.6 million to $256.5 million during the three months ended June 30,in 2022 as compared to the same period a year ago largely due to $54.5 million of merger expenses incurred during the second quarter 2022 andrelated to our expanded banking operations resulting from the Bank Leumi USA acquisition. and organic business growth including higher salary and employee benefits expense, net occupancy, technology, furniture and equipment, professional and legal fees and other. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. The internal transfer income increased $33.9 million to $162.5 million for the three months ended March 31, 2023 as compared to the same period a year ago due to the higher allocation of non-interest expense over the same period. Non-interest income increased $15.7 million during the three months ended March 31, 2023 as compared to the same period in 2022 mostly due to incremental increases in several operating non-interest income categories caused by the acquisition of Bank Leumi
USA and organic growth of our business operations over the last 12-month period. Provision for credit losses increased $4.9 million mainly due to a corporate bond issued by Signature Bank within our AFS debt securities portfolio that was fully charged-off during the first quarter 2023.
The net interest margin for this segment increased 1025 basis points to 2.121.51 percent for the for the secondfirst quarter 20222023 as compared to the secondfirst quarter 20212022 due to a 96184 basis point increase in the yield on average investments, and a 6 basis point decrease in cost of our funding sources. The increase in the yield on average investments as
compared to the second quarter 2021 was largely due to higher interest income, including discount accretion, on securities acquired from Bank Leumi USA.
The following tables present the financial data for Valley's operating segment for the six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Consumer Lending | | Commercial Lending | | Treasury and Corporate Other | | Total |
| ($ in thousands) |
Average interest earning assets | $ | 7,848,764 | | $ | 30,743,387 | | $ | 6,017,817 | | $ | 44,609,968 |
Income (loss) before income taxes | 36,659 | | 263,838 | | (11,490) | | 289,007 |
Annualized return on average interest earning assets (before tax) | 0.93 | % | | 1.72 | % | | (0.38) | % | | 1.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Consumer Lending | | Commercial Lending | | Treasury and Corporate Other | | Total |
| ($ in thousands) |
Average interest earning assets | $ | 7,099,973 | | $ | 25,509,061 | | $ | 5,039,222 | | $ | 37,648,256 |
Income (loss) before income taxes | 67,176 | | 269,785 | | (18,537) | | 318,424 |
Annualized return on average interest earning assets (before tax) | 1.89 | % | | 2.12 | % | | (0.74) | % | | 1.69 | % |
Consumer Lending
Consumer Lending's average interest earning assets increased $748.8 million to $7.8 billion for the six months ended June 30, 2022 as compared to the same period in 2021. The increase was largely due to solid new and refinanced residential mortgage loan volumes over the last 12-month period, as well as growth in automobile loans and secured personal lines of credit.
Income before income taxes generated by Consumer Lending decreased $30.5 million to $36.7 millionfor the six months ended June 30, 2022 as compared to the same period in 2021 largely due to a $26.9 million increase in the internal transfer expense coupled with higher provision for loan losses and non-interest expense. The provision for loan losses increased $9.2 million for the six months ended June 30, 2022 from $1.9 million credit (negative) provision for the same period of 2021. The increase in provision was mainly due to higher reserves related to residential loan growth. See further details in the "Allowance for Credit Losses" section of this MD&A. Net interest income increased $6.0 million primarily due to the lower funding costs, as well as additional income generated on higher average loan balances. The higher net interest income was largely offset by a $4.7 million decrease in non-interest income, which was mostly attributable to lower net gains on sales of residential mortgage loans for the six months ended June 30, 2022 as compared to the same period in 2021.
Net interest margin on the Consumer Lending portfolio decreased 14 basis points to 2.92 percent for the six months ended June 30, 2022 as compared to the same period one year ago mainly due to a 27 basis point decrease in the yield on average loans, partially offset by a 13 basis point decrease in the costs associated with our funding sources. The 27 basis point decrease in loan yield was largely due to lower yielding new loan volumes prior to the second quarter 2022 and normal loan repayments. The decrease in our funding costs was mainly due to a greater mix of non-interest bearing deposits, deposits continuing to reprice at lower interest rates prior to the second quarter 2022 and the repayment of maturing higher cost borrowings.
Commercial Lending
Average interest earning assets in Commercial Lending increased $5.2 billion to $30.7 billion for the six months ended June 30, 2022 as compared to the same period in 2021. This increase was primarily due to strong organic loan growth over the 12-month period ended June 30, 2022, as well as loans acquired from Bank Leumi USA and Westchester.
For the six months ended June 30, 2022, income before income taxes for Commercial Lending decreased $5.9 million to $263.8 million as compared to the same period in 2021 mainly driven by increases in internal transfer expense and provision for loan losses, largely offset by higher net interest income and non-interest income. Internal transfer expense increased $115.5 million to $257.3 million for the six months ended June 30, 2022 as compared to the same period in 2021. The provision for credit losses increased $20.2 million to $39.9 million during the six months ended June 30, 2022 as compared to $19.7 million for the same period in 2021 mainly due to the provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA. See the "Allowance for Credit Losses for Loans" section below for further details. The negative impact of the aforementioned items was largely offset by increases in net interest income and non-interest income. Net interest income increased $112.8 million to $579.3 million for the six months ended June 30, 2022 as compared to the same period in 2021 largely due to higher average commercial loan balances during the 2022 period. Non-interest income increased $13.8 millionfor the six months ended June 30, 2022 as compared to the same period in 2021 primarily due to a $11.3 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers.
The net interest margin for this segment increased 12 basis points to 3.77 percent for the six months ended June 30, 2022 as compared to the same period in 2021 due to a 13 basis point decrease in the cost of our funding sources, partially offset by a 1 basis point decrease in yield on average loans.
Treasury and Corporate Other
Treasury and Corporate Other's average interest earning assets increased $978.6 million during the six months ended June 30, 2022 as compared to the same period in 2021. Within the category, a $1.2 billion increase in taxable investment securities was partially offset by a $301.1 million decrease in average interest bearing deposits with banks. The increase in the average investment securities balance was mainly due to $1.3 billion of 179investment securities acquired from Bank Leumi USA. The lower levels of excess liquidity were mainly due to the strong organic loan growth over the last 12-month period.
The pre-tax net loss for this segment totaled $11.5 million for the six months ended June 30, 2022 as compared to $18.5 million for the same period in 2021. The positive change of $7.0 million was mainly due to increases in internal transfer income and non-interest income, partially offset by higher non-interest expense. Internal transfer income increased $142.4 million to $323.6 million for the six months ended June 30, 2022 as compared to the same period in 2021. The increase in net interest income totaled $23.5 million and was mostly driven by higher yields and average investment balances. Non-interest expense increased $172.5 million to $412.2 million for the six months ended June 30, 2022 as compared to the same period in 2021 partially due to $54.5 million of merger expenses incurred during the second quarter 2022 and other increases in expenses related to our expanded banking operations and organic business growth, partially offset by the loss on extinguishment of debt recorded during the comparative 2021 period. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.
Treasury and Corporate Other's net interest margin increased 67 basis points to 1.81 percent for the six months ended June 30, 2022 as compared to the same period in 2021 due to a 54 basis point increase in the yield on average investments, and a 13 basis point decrease in cost of our funding sources. The increase in the yield on average investments as compared to the same period in 2021a year ago was largely driven by thenew higher yielding investments and a reduction in premium amortization expense in the prior yearmostly caused in part, by acceleration ofslower principal repayments in the lowrising interest rate environment mostly during the second half of 2021.environment.
ASSET/LIABILITY MANAGEMENT
Interest Rate SensitivityRisk
Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominantly focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities.
We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of June 30, 2022.March 31, 2023. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the
forecasted shape of the yield curve remains static as of June 30, 2022.March 31, 2023. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model.
Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of June 30, 2022.March 31, 2023. Although the size of Valley’s balance sheet is forecasted to remain static as of June 30, 2022March 31, 2023 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the secondfirst quarter 2022.2023. The model also utilizes an immediate parallel shift in market interest rates at June 30, 2022.March 31, 2023.
The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our
net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet.
Convexity is a measure of how the duration of a financial instrument changes as market interest rates change. Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative impact on our net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected in the table below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income.
The following table reflects management’s expectations of the change in our net interest income over the next 12- month period considering the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below.
| | | Estimated Change in Future Net Interest Income | | Estimated Change in Future Net Interest Income |
Changes in Interest Rates | Changes in Interest Rates | Dollar Change | | Percentage Change | Changes in Interest Rates | Dollar Change | | Percentage Change |
(in basis points) | (in basis points) | ($ in thousands) | (in basis points) | ($ in thousands) |
+300 | | +300 | $ | 148,153 | | | 8.19 | % |
+200 | +200 | $ | 148,467 | | | 8.38 | % | +200 | 98,911 | | | 5.47 | |
+100 | +100 | 82,263 | | | 4.64 | | +100 | 49,316 | | | 2.73 | |
–100 | –100 | (82,438) | | | (4.65) | | –100 | (33,830) | | | (1.87) | |
–200 | –200 | (144,574) | | | (8.16) | | –200 | (75,645) | | | (4.18) | |
–300 | | –300 | (131,350) | | | (7.26) | |
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 month12-month period by 4.642.73 percent. Management believes the interest rate sensitivity of our balance sheet remains within an acceptable tolerance range at June 30, 2022.March 31, 2023. However, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including potential changes in our balance sheet strategies, the slope of the yield curve and projected cash flows.
Liquidity and Cash Requirements
Bank Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is carefully performed and routinely reported by our Treasury Department to two board committees. Among other actions, Treasury reviews historical funding requirements, our current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements.
The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to ancertain internal liquidity policy. The current policy maintains that we may not have a ratioguidelines including ratios of loans to deposits in exbelowcess of 110 percent or reliance onand wholesale funding greater thanto total funding below 25 percent. Management maintains flexibility to temporarily exceed these limits in certain operating environments. Our loan to deposits and wholesale funding to total funding ratios were approximately 102.2 percent and 26.9 percent at March 31, 2023, respectively. The level of total funding. The Bankwholesale funding and resulting excess cash on our balance sheet at March 31, 2023 was mostly due to the cautionary liquidity actions taken in compliance with the foregoing policies at June 30, 2022.March 2023.
Valley's short and long-term cash requirements include contractual obligations under borrowings, deposits, payment related to leases, capital expenditures and other purchase commitments. In the ordinary course of operations, the Bank also enters into various financial obligations, including contractual obligations that may require future cash payments. Management believes the Bank has the ability to generate and obtain adequate amounts of cash to meet its short-term and long-term obligations as they come due by utilizing various cash resources described below.
On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities classified as trading and available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions. Total liquid assets were approximately $3.07.2 billion, representing 6.012.1 percent of earning assets at June 30, 2022March 31, 2023 and $3.5$2.4 billion, representing 8.74.6 percent of earning assets at December 31, 2021.2022. Of the $3.07.2 billion of liquid assets at June 30, 2022,March 31, 2023, approximately $446.4$870 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $1.6 billion$521.1 million in principal payments from securities in the total investment portfolio at June 30, 2022March 31, 2023 over the next 12 month12-month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.
Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments from total loans and loans held for sale at June 30, 2022March 31, 2023 are projected in accordance with their scheduled contractual terms to be approximately $12.4$16.8 billion over the next 12 month12-month period. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtailment of lending activities.
On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, fully FDIC-insured brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes all fully insured brokered deposits, and bothas well as retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $36.8$44.9 billion and $29.4$38.1 billion for the sixthree months ended June 30, 2022March 31, 2023 and for the year ended December 31, 2021,2022, respectively, representing 82.581.2 percent and 78.379.2 percent of average earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.
Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous banks. While these lending lines are uncommitted, management believes thatIn addition to direct customer deposits, the Bank could borrow approximately $1.9 billion from these banks on a collective basis.
has ample access to readily available, diverse funding sources to fulfill its current and projected capital needs. 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. At March 31, 2023, available borrowing potential, above and beyond amounts already utilized, at these institutions totaled $11.8 billion, including borrowing capacity under the Federal Reserve Bank's discount window totaling $4.3 billion. Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well-established relationships with numerous banks. The Bank has access to approximately $1.5 billion of uncommitted lines for the purchase of federal funds from these banks on a collective basis. Additionally, Valley's collateral pledged to the FHLB may be used to obtain Municipal Lettersmunicipal letters of Creditcredit (MULOC) to collateralize certain municipal deposits held by Valley. At June 30, 2022,March 31, 2023, Valley had $1.6had $1.0 billion of MULOCs outstanding for this purpose. Furthermore, we can obtain overnight borrowings from the Federal Reserve Bank of New York via the discount window as a contingency for additional liquidity. At June 30, 2022, our borrowing capacity under the Federal Reserve Bank's discount window was $2.0 billion.
We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from timeincreased $6.3 billion to time, federal funds purchased) decreased approximately $867.1 million to $1.5$6.4 billion at June 30, 2022March 31, 2023 as compared to December 31, 2021 largely due2022. In March 2023, we increased our short-term borrowings out of an abundance of caution to normal repaymentsprudently bolster our liquidity position in the wake of the two recent bank failures. Since March 31, 2023, short-term FHLB advances partially offset by $125 millionhave been allowed to mature resulting in a more normal liquidity
position. We continue to closely monitor changes in the current banking environment and have substantial access to additional liquidity as highlighted above.
Additionally, the Federal Reserve established the Bank Term Funding Program on March 12, 2023 as funding source for eligible depository institutions. The Program can provide short-term liquidity (up to one year) against the par value of federal funds purchased at June 30, 2022.certain high-quality collateral, such as U.S. Treasury securities, and eliminate the potential need for an institution to sell those securities in times of stress. Advances under the Program can be requested until March 11, 2024. As of March 31, 2023, Valley did not participate in this Program, but currently has this option as an available short-term liquidity source.
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-goingongoing asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures and subordinated notes. Valley's cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods of up to five years, but not beyond the stated maturity dates, and subject to other conditions.
Investment Securities Portfolio
As of June 30, 2022,March 31, 2023, we had $41.7$50.2 million, $1.4$1.3 billion, and $3.7$3.8 billion in equity, available for sale debt securities and held to maturity debt securities, respectively. There were no trading debt securities at June 30, 2022. The equity securities consisted of two publicly traded mutual funds, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in a partnership that invests in such companies. Our CRA and other equity investments are a mix of both publicly traded entities and privately held entities. The available for sale and held to maturity debt securities portfolios, which comprise the majority of the securities we own, includeinclude: U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions, residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies and high quality corporate bonds. Among other securities, our available for sale debt securities include securities such as bank issued and other corporate bonds, as well as municipal special revenue bonds, thatwhich may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers.
The equity securities consisted
of two publicly traded mutual funds, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in partnerships that invest in such companies. Our CRA and other equity investments are a mix of both publicly traded entities and privately held entities. We also had $6.9 million of trading debt securities at March 31, 2023 consisting of investment grade municipal bonds and U.S. Treasury securities.
We acquired $6.2 million, $505.9 million,continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and $806.6 millionthe level of equityinterest rate risk to which we are exposed to. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments primarily made into the available for sale debt and held to maturity debt securities respectively, from Bank Leumi USA on April 1, 2022.portfolios.
Allowance for Credit Losses and Impairment Analysis
Available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.
If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a
credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income,loss, net of applicable taxes.
We have evaluated all available for sale debt securities that are in an unrealized loss position as of June 30, 2022March 31, 2023 and December 31, 20212022 and determined that the declines in fair value were mainly attributable to changes in market volatility,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, managementValley recognized noa credit related impairment chargesof one corporate bond issued by Signature Bank resulting in both a provision for credit losses and full charge-off of the security totaling $5.0 million during the three and six months ended June 30, 2022March 31, 2023. There was no other impairment recognized within the available for sale debt securities portfolio during the three months ended March 31, 2023.
Valley does not intend to sell any of its available for sale debt securities in an unrealized loss position prior to
recovery of our amortized cost basis, and it is more likely than not that Valley will not be required to sell any of its securities prior to recovery of our amortized cost basis. None of the year ended Decemberavailable for sale debt securities were past due as of March 31, 2021, as a result, there2023 and there was no allowance for credit losses for available for sale debt securities at June 30, 2022March 31, 2023 and December 31, 2021.2022.
Held to maturity debt securities. Valley estimates the expected credit losses on held to maturity debt securities that have loss expectations using a discounted cash flow model developed by a third party. Valley has a zero losszero-loss expectation for certain securities within the held to maturity portfolio, including U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. Held to maturity debt securities were carried net of an allowance for credit losses totaling approximately $1.5 million and $1.2$1.6 million at June 30, 2022both March 31, 2023 and December 31, 2021, respectively. There were no net charge-offs of held to maturity debt securities for the three and six months ended June 30, 2022 and 2021.2022.
Investment grades. The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the date of our purchase of the securities. For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio.
The following table presents the available for sale and held to maturity and available for sale debt investment securities portfolios by investment grades at June 30, 2022:March 31, 2023:
| | | June 30, 2022 | | March 31, 2023 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (in thousands) | | (in thousands) |
Available for sale investment grades: * | Available for sale investment grades: * | | Available for sale investment grades: * | |
AAA Rated | AAA Rated | $ | 1,153,626 | | | $ | 264 | | | $ | (78,607) | | | $ | 1,075,283 | | AAA Rated | $ | 1,072,166 | | | $ | 106 | | | $ | (109,683) | | | $ | 962,589 | |
AA Rated | AA Rated | 149,516 | | | 14 | | | (24,967) | | | 124,563 | | AA Rated | 150,571 | | | — | | | (24,559) | | | 126,012 | |
A Rated | A Rated | 12,041 | | | — | | | (640) | | | 11,401 | | A Rated | 10,111 | | | — | | | (1,196) | | | 8,915 | |
BBB Rated | BBB Rated | 84,590 | | | 108 | | | (4,006) | | | 80,692 | | BBB Rated | 69,826 | | | — | | | (6,072) | | | 63,754 | |
| Not rated | Not rated | 95,162 | | | 183 | | | (4,733) | | | 90,612 | | Not rated | 104,333 | | | — | | | (10,765) | | | 93,568 | |
Total | Total | $ | 1,494,935 | | | $ | 569 | | | $ | (112,953) | | | $ | 1,382,551 | | Total | $ | 1,412,007 | | | $ | 106 | | | $ | (152,877) | | | $ | 1,259,236 | |
Held to maturity investment grades: * | Held to maturity investment grades: * | | | | | | | | Held to maturity investment grades: * | | | | | | | |
AAA Rated | AAA Rated | $ | 3,260,777 | | | $ | 1,871 | | | $ | (306,324) | | | $ | 2,956,324 | | AAA Rated | $ | 3,406,081 | | | $ | 2,844 | | | $ | (422,459) | | | $ | 2,986,466 | |
AA Rated | AA Rated | 256,294 | | | 342 | | | (11,623) | | | 245,013 | | AA Rated | 249,672 | | | 384 | | | (12,288) | | | 237,768 | |
A Rated | A Rated | 10,389 | | | 25 | | | (125) | | | 10,289 | | A Rated | 6,593 | | | 2 | | | (134) | | | 6,461 | |
BBB Rated | BBB Rated | 6,000 | | | 31 | | | (141) | | | 5,890 | | BBB Rated | 6,000 | | | — | | | (647) | | | 5,353 | |
Non-investment grade | Non-investment grade | 5,537 | | | — | | | (760) | | | 4,777 | | Non-investment grade | 5,437 | | | — | | | (833) | | | 4,604 | |
Not rated | Not rated | 180,980 | | | 32 | | | (9,590) | | | 171,422 | | Not rated | 173,429 | | | 1 | | | (13,598) | | | 159,832 | |
Total | Total | $ | 3,719,977 | | | $ | 2,301 | | | $ | (328,563) | | | $ | 3,393,715 | | Total | $ | 3,847,212 | | | $ | 3,231 | | | $ | (449,959) | | | $ | 3,400,484 | |
Allowance for credit losses | Allowance for credit losses | 1,508 | | | — | | | — | | | — | | Allowance for credit losses | 1,633 | | | — | | | — | | | 1,633 | |
Total, net of allowance for credit losses | Total, net of allowance for credit losses | $ | 3,718,469 | | | $ | 2,301 | | | $ | (328,563) | | | $ | 3,393,715 | | Total, net of allowance for credit losses | $ | 3,845,579 | | | $ | 3,231 | | | $ | (449,959) | | | $ | 3,398,851 | |
| | | | | |
* | Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels. |
The unrealized losses in the AAA and AA rated categories of both the available for sale and held to maturity and available for sale debt securities portfolios (in the above table) were mainlylargely related to residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac and werecontinued to be driven by the rising interest rate environment during the second quarter 2022.last 12 months. The investment securities available for sale and held to maturity portfolio included $181.0$104.3 million and $173.4 million, respectively, of investments not rated by the rating agencies with aggregate unrealized losses of $9.6$10.8 million and $13.6 million, respectively, at June 30, 2022March 31, 2023. The unrealized losses within non-rated available for sale debt securities was mostly related to several large corporate bonds negatively impacted by rising interest rates, and not changes in underlying credit. The unrealized losses within non-rated held to maturity debt securities mostly related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.million and several corporate and other debt securities.
See Note 7 to the consolidated financial statements for additional information regarding our investment securities portfolio.
Loan Portfolio
The following table reflects the composition of the loan portfolio as of the dates presented: | | | June 30, 2022 | | March 31, 2022 | | December 31, 2021 | | | March 31, 2023 | | December 31, 2022 | |
| | ($ in thousands) | | ($ in thousands) |
Loans | Loans | | | Loans | | |
Commercial and industrial: | | | |
| Commercial and industrial | Commercial and industrial | $ | 8,378,454 | | | $ | 5,587,781 | | | $ | 5,411,601 | | | Commercial and industrial | $ | 9,043,946 | | | $ | 8,804,830 | | |
Commercial and industrial PPP loans | 136,004 | | | 203,609 | | | 435,950 | | | |
Total commercial and industrial * | 8,514,458 | | | 5,791,390 | | | 5,847,551 | | | |
Commercial real estate: | Commercial real estate: | | | Commercial real estate: | | |
Commercial real estate | Commercial real estate | 23,535,086 | | | 19,763,202 | | | 18,935,486 | | | Commercial real estate | 27,051,111 | | | 25,732,033 | | |
Construction | Construction | 3,374,373 | | | 2,174,542 | | | 1,854,580 | | | Construction | 3,725,967 | | | 3,700,835 | | |
Total commercial real estate | Total commercial real estate | 26,909,459 | | | 21,937,744 | | | 20,790,066 | | | Total commercial real estate | 30,777,078 | | | 29,432,868 | | |
Residential mortgage | Residential mortgage | 5,005,069 | | | 4,691,935 | | | 4,545,064 | | | Residential mortgage | 5,486,280 | | | 5,364,550 | | |
Consumer: | Consumer: | | | Consumer: | | |
Home equity | Home equity | 431,455 | | | 393,538 | | | 400,779 | | | Home equity | 516,592 | | | 503,884 | | |
Automobile | Automobile | 1,673,482 | | | 1,552,928 | | | 1,570,036 | | | Automobile | 1,717,141 | | | 1,746,225 | | |
Other consumer | Other consumer | 1,026,854 | | | 996,870 | | | 1,000,161 | | | Other consumer | 1,118,929 | | | 1,064,843 | | |
Total consumer loans | Total consumer loans | 3,131,791 | | | 2,943,336 | | | 2,970,976 | | | Total consumer loans | 3,352,662 | | | 3,314,952 | | |
Total loans* | Total loans* | $ | 43,560,777 | | | $ | 35,364,405 | | | $ | 34,153,657 | | | Total loans* | $ | 48,659,966 | | | $ | 46,917,200 | | |
As a percent of total loans: | As a percent of total loans: | | | | | | | As a percent of total loans: | | | | |
Commercial and industrial | Commercial and industrial | 19.5 | % | | 16.4 | % | | 17.1 | % | | Commercial and industrial | 18.6 | % | | 18.8 | % | |
Commercial real estate | Commercial real estate | 61.8 | | | 62.0 | | | 60.9 | | | Commercial real estate | 63.2 | | | 62.7 | | |
Residential mortgage | Residential mortgage | 11.5 | | | 13.3 | | | 13.3 | | | Residential mortgage | 11.3 | | | 11.4 | | |
Consumer loans | Consumer loans | 7.2 | | | 8.3 | | | 8.7 | | | Consumer loans | 6.9 | | | 7.1 | | |
Total | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | Total | 100.0 | % | | 100.0 | % | |
* Includes net unearned discount and deferred loan fees of $141.2 million, $62.0$125.4 million and $78.5$120.5 million at June 30, 2022, March 31, 2022,2023 and December 31, 2021,2022, respectively. The linked quarter increase was largely due to a $98 million net purchase discount associated with the loans acquired from Bank Leumi USA on April 1, 2022.
Total loans increased $8.2$1.7 billion, or 14.9 percent on an annualized basis to approximately $43.6$48.7 billion at June 30, 2022 from March 31, 2023 from December 31, 2022 largelymainly due to a combination of acquired loans from Bank Leumi USA totaling $5.9 billion andcontinued strong organic loan growth. Excludinggrowth in commercial loan categories and a slower loan prepayment activity within the Bank Leumi USA acquired loans, non-PPP commercial and industrial, totalloan portfolio during the first quarter 2023. Total commercial real estate (including construction) and residential mortgagecommercial and industrial loans increased 37 percent, 2618.3 percent and 2510.9 percent, respectively, on an annualized basis during the secondfirst quarter 2022.2023. Residential mortgage loans held for sale at fair value totaled $17.2 million and $18.1 million at March 31, 2023 and December 31, 2022, respectively.
Commercial and industrial loans increased $2.7 billion$239.1 million to $8.5$9.0 billion at June 30, 2022March 31, 2023 as compared to MarchDecember 31, 2022. Excluding $2.4 billion of loan acquired from Bank Leumi USA and PPP loans, the non-commercial and industrial loanThe organic growth totaled $514.4 million during the second quarter 2022was mainly due toa result of the solid new loan pipeline involumes from our pre-existing long-term customer base across most of our markets driven by direct callinggeographic footprints, as well as the continued efforts of our growing commercial lending team. The PPP loans decreased $67.6 million to $136.0 million at June 30, 2022 compared to $203.6 million at March 31, 2022 mainly due to loan forgiveness (repayments), partially offset by $45.7 million of PPP loans acquired from Bank Leumi USA.banking relationship teams.
Commercial real estate loans (excluding construction loans) increased $3.8$1.3 billion to $23.5$27.1 billion at June 30, 2022 from March 31, 2022. Excluding2023 from December 31, 2022 reflecting solid organic growth mainly due to demand for non-owner occupied loans across our geographic footprint. Our organic approach of loan production is primarily the expansion of lending with our existing clients while also establishing new relationships in our primary and new market areas. We continue to grow our commercial lending activities from out of market expansion efforts in states such as Pennsylvania, Georgia and Tennessee, as well as our relatively new markets in California and Illinois. In addition, our commercial real estate production remained strong in loans secured by multi-family dwellings, warehouses and healthcare facilities. At March 31, 2023, commercial real estate loans collateralized by office buildings were approximately $3.1 billion of the $27.1 billion portfolio. These loans acquired from Bank Leumi USA, the approximate $700 million increase was driven by solid organic growthare geographically disbursed largely across mostFlorida, Alabama, New Jersey, New York, and Manhattan with a combined weighted average loan to value ratio of our geographic footprints. Construction loans increased $1.2 billion to $3.4 billion at June 30, 2022 from March 31, 2022 due, in part, to approximately $834 million54 percent and debt service coverage ratio of loans acquired from Bank Leumi USA and higher volume of advances on new, and to a lesser extent, pre-existing loan projects during the second quarter 2022.1.90.
Construction loans increased only $25.1 million to $3.7 billion at March 31, 2023 from December 31, 2022 mainly driven by advances on pre-exiting construction loan projects in New Jersey, New York and Florida. The growth in new construction loans was partially offset by the run-off of completed existing projects, and, to a lesser extent, migration of such completed projects to permanent financing.
Residential mortgage loans increased $313.1$121.7 million, or 26.79.1 percent on an annualized basis, during the secondfirst quarter 2022 primarily due to2023 as we largely originated new loan activity inloans for the purchased home market and an increase in such loans originatedheld for investment portfolio rather than for sale. Residential mortgage loans acquired from Bank Leumi USA were not material. New and refinanced residential mortgage loansloan originations totaled $540.7194.4 million for the secondfirst quarter 20222023 as compared to $552.6$309.1 millionand $753.2$552.6 million for the firstfourth quarter 2022 and secondfirst quarter 2021,2022, respectively. Florida originations totaled approximately $154.9$53.6 million and represented 28.727.6 percent of total residential mortgage loan originations in the quarter. During the first quarter 2023, we retained approximately 86.3 percent of the total residential mortgage originations in our held for investment loan portfolio. Of the total originations in the secondfirst quarter 2022,2023, only $61.9$26.6 million of residential mortgage loans were originated for sale rather than held for investment as compared to $144.5 million during the first quarter 2022. During the second quarter 2022 we retained approximately 89 percent of the total residential mortgages originations in our held for investment loan portfolio. We sold approximately $125.0 million of residential mortgage loans held for sale during the second quarter 2022.. We may continue to retain a higher percentage of new loan volumes during the thirdsecond quarter 20222023 mainly due to several factors, including consumer demand and preferences for certain mortgage products and our management of the interest rate risk and the mix of the interest earning assets on our balance sheet. Additionally, the volume of both new and refinanced loan applications continue to be ahas remained relatively low percentage of our volume in the early stages of the thirdsecond quarter 20222023 due to the increase in thehigh level of mortgage interest rates and tight housing inventories and may challenge our ability to grow this loan category.
Home equity loans increased by $37.9$12.7 million to $431.5$516.6 million at June 30, 2022March 31, 2023 compared to MarchDecember 31, 2022. New home equity loan volumes and customer usage2022 as a result of existing home equity lines of credit continuemodest growth in new originations that continues to be modest and challenged by a less favorable risingthe unfavorable high interest rate environment.
Automobile loans increaseddecreased by $120.6$29.1 million, or 31.16.7 percent on an annualized basis, to $1.7 billion at June 30, 2022March 31, 2023 as compared to MarchDecember 31, 2022 as loan originations volumes outpaced loan repayments during the second quarter 2022. Loan originations were mainly driven by highlargely due to lower consumer demand for vehicle purchases and our competitive rates offered for new and used vehicle financing because of the higher interest rate environment. During the first quarter 2023, the interest rates on new car financing. Weloans reached the highest level since 2008. We originated $278.2$31.5 million in auto loans through our dealership network during the secondfirst quarter 20222023 as compared to $148.1$73.1 million in the fourth quarter 2021.2022. Of the total originations, our Florida dealership network contributed $40.6 million in auto loan originations, representingrepresented approximately 1518 percent of new loans, during the secondfirst quarter 2022. The current low levels of2023. Despite increased new and used automobile inventories andavailable to consumers, we anticipate that the impact of inflation on average new vehicle prices coupled with rising interest rates could negativelycontinue to have a negative impact on our autoability to grow this loan growthcategory during the thirdsecond quarter 2022.2023.
Other consumer loans increased $30.0$54.1 million to $1.0$1.1 billion at June 30, 2022 from March 31, 2022.2023 as compared to December 31, 2022mainly due to moderate growth in our collateralized personal lines of credit portfolio.
A largesignificant part of our lending is in northern and central New Jersey, New York City, Long Island and Florida. To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector.
For the remainder of 2022, we anticipate strong organic commercial and industrial non-PPP and commercial real estate loan growth. In the early stages of the third quarter 2022, we are encouraged that our commercial loan origination pipelines remain robust and overall loan growth should remain well-diversified across our marketsWhile confident in our commercial loan categories. Based upon current projections, we anticipate 8 to 10 percent annualizedpipelines and diverse residential and consumer loan growth for the second half of 2022. However, offerings, there can be no assurance that those positivethe growth trends experienced in most loan categories during the first quarter 2023 will continue, or loan balances will not decline from June 30, 2022 givenMarch 31, 2023. We expect a more challenging overall loan origination environment moving forward, especially in the forecasted slowdown of the U.S. economy growthresidential mortgage and consumer loan portfolios, due to several factors, including the Russia-Ukraine war, persistently high inflation, and the impact of the Federal Reserve's rapid monetary policy tightening. In addition, we anticipate that consumer loan activity will slow meaningfully for the remainderhigher market interest rates on customer demand and selective tightening of the year.certain underwriting standards by Valley.
Non-performing Assets
Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consistsconsist of automobiles and taxi medallions) at June 30, 2022.March 31, 2023. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of
collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell.
Our NPAs increased $82.1decreased $27.0 million to $314.7$244.9 million at June 30, 2022March 31, 2023 as compared to MarchDecember 31, 2022 mostlymainly due to $70.5 million of acquiredtwo large charge-offs within non-accrual commercial and industrial and construction loans from Bank Leumi USA.during the first quarter 2023. NPAs as a percentage of total loans and NPAs totaled 0.720.50 percent and 0.650.58 percent at June 30, 2022March 31, 2023 and MarchDecember 31, 2022, respectively (as shown in the table below). We believe ourOur total NPAs has remained relatively low as a percentage of the total loan portfolio and the level of NPAs, which is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements. Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain
optimistic regarding the overall future performance of our loan portfolio. During 2021 and the first half of 2022,three months ended March 31, 2023, our overall credit trends have remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the continuingunexpected challenges ofacross the COVID-19 pandemicbanking system, slower economic growth, persistently elevated inflation and the overall uncertain economy.economy. However, management cannot provide assurance that the non-performing assets will not materially increase substantially from the levels reported at June 30, 2022March 31, 2023 due to high inflation, aggressive tightening of the U.S. monetary policy and the resulting potential for credit deterioration.aforementioned or other factors potentially impacting our lending customers.
The following table sets forth by loan category accruing past due and non-performing assets at the dates indicated in conjunction with our asset quality ratios:
| | | June 30, 2022 | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 | |
| | ($ in thousands) | | ($ in thousands) |
Accruing past due loans: | Accruing past due loans: | | | Accruing past due loans: | | |
30 to 59 days past due: | 30 to 59 days past due: | | 30 to 59 days past due: | | |
Commercial and industrial | Commercial and industrial | $ | 7,143 | | | $ | 6,723 | | | $ | 6,717 | | Commercial and industrial | $ | 20,716 | | | $ | 11,664 | | |
Commercial real estate | Commercial real estate | 10,516 | | | 30,807 | | | 14,421 | | Commercial real estate | 13,580 | | | 6,638 | | |
Construction | 9,108 | | | 1,708 | | | 1,941 | | |
| Residential mortgage | Residential mortgage | 12,326 | | | 9,266 | | | 10,999 | | Residential mortgage | 12,599 | | | 16,146 | | |
Total consumer | Total consumer | 6,009 | | | 5,862 | | | 6,811 | | Total consumer | 7,845 | | | 9,087 | | |
Total 30 to 59 days past due | Total 30 to 59 days past due | 45,102 | | | 54,366 | | | 40,889 | | Total 30 to 59 days past due | 54,740 | | | 43,535 | | |
60 to 89 days past due: | 60 to 89 days past due: | | | | | | 60 to 89 days past due: | | | | |
Commercial and industrial | Commercial and industrial | 3,870 | | | 14,461 | | | 7,870 | | Commercial and industrial | 24,118 | | | 12,705 | | |
Commercial real estate | Commercial real estate | 630 | | | 6,314 | | | — | | Commercial real estate | — | | | 3,167 | | |
Construction | 3,862 | | | 3,125 | | | — | | |
| Residential mortgage | Residential mortgage | 2,410 | | | 2,560 | | | 3,314 | | Residential mortgage | 2,133 | | | 3,315 | | |
Total consumer | Total consumer | 702 | | | 554 | | | 1,020 | | Total consumer | 1,519 | | | 1,579 | | |
Total 60 to 89 days past due | Total 60 to 89 days past due | 11,474 | | | 27,014 | | | 12,204 | | Total 60 to 89 days past due | 27,770 | | | 20,766 | | |
90 or more days past due: | 90 or more days past due: | | | | | | 90 or more days past due: | | | | |
Commercial and industrial | Commercial and industrial | 15,470 | | | 9,261 | | | 1,273 | | Commercial and industrial | 8,927 | | | 18,392 | | |
Commercial real estate | Commercial real estate | — | | | — | | | 32 | | Commercial real estate | — | | | 2,292 | | |
| Construction | | Construction | 6,450 | | | 3,990 | | |
Residential mortgage | Residential mortgage | 1,188 | | | 1,746 | | | 677 | | Residential mortgage | 1,668 | | | 1,866 | | |
Total consumer | Total consumer | 267 | | | 400 | | | 789 | | Total consumer | 747 | | | 47 | | |
Total 90 or more days past due | Total 90 or more days past due | 16,925 | | | 11,407 | | | 2,771 | | Total 90 or more days past due | 17,792 | | | 26,587 | | |
Total accruing past due loans | Total accruing past due loans | $ | 73,501 | | | $ | 92,787 | | | $ | 55,864 | | Total accruing past due loans | $ | 100,302 | | | $ | 90,888 | | |
Non-accrual loans: | Non-accrual loans: | | | | | | Non-accrual loans: | | | | |
Commercial and industrial | Commercial and industrial | $ | 148,404 | | | $ | 96,631 | | | $ | 99,918 | | Commercial and industrial | $ | 78,606 | | | $ | 98,881 | | |
Commercial real estate | Commercial real estate | 85,807 | | | 79,180 | | | 83,592 | | Commercial real estate | 67,938 | | | 68,316 | | |
Construction | Construction | 49,780 | | | 17,618 | | | 17,641 | | Construction | 68,649 | | | 74,230 | | |
Residential mortgage | Residential mortgage | 25,847 | | | 33,275 | | | 35,207 | | Residential mortgage | 23,483 | | | 25,160 | | |
Total consumer | Total consumer | 3,279 | | | 3,754 | | | 3,858 | | Total consumer | 3,318 | | | 3,174 | | |
Total non-accrual loans | Total non-accrual loans | 313,117 | | | 230,458 | | | 240,216 | | Total non-accrual loans | 241,994 | | | 269,761 | | |
| Other real estate owned (OREO) | Other real estate owned (OREO) | 422 | | | 1,024 | | | 2,259 | | Other real estate owned (OREO) | 1,189 | | | 286 | | |
Other repossessed assets | Other repossessed assets | 1,200 | | | 1,176 | | | 2,931 | | Other repossessed assets | 1,752 | | | 1,937 | | |
Total non-performing assets (NPAs) | Total non-performing assets (NPAs) | $ | 314,739 | | | $ | 232,658 | | | $ | 245,406 | | Total non-performing assets (NPAs) | $ | 244,935 | | | $ | 271,984 | | |
Performing troubled debt restructured loans | $ | 67,274 | | | $ | 56,538 | | | $ | 71,330 | | |
| Total non-accrual loans as a % of loans | Total non-accrual loans as a % of loans | 0.72 | % | | 0.65 | % | | 0.70 | % | Total non-accrual loans as a % of loans | 0.50 | % | | 0.57 | % | |
Total NPAs as a % of loans and NPAs | Total NPAs as a % of loans and NPAs | 0.72 | | | 0.65 | | | 0.71 | | Total NPAs as a % of loans and NPAs | 0.50 | | | 0.58 | | |
Total accruing past due and non-accrual loans as a % of loans | Total accruing past due and non-accrual loans as a % of loans | 0.89 | | | 0.91 | | | 0.87 | | Total accruing past due and non-accrual loans as a % of loans | 0.70 | | | 0.77 | | |
Allowance for loan losses as a % of non-accrual loans | Allowance for loan losses as a % of non-accrual loans | 149.73 | | | 157.30 | | | 149.53 | | Allowance for loan losses as a % of non-accrual loans | 180.54 | | | 170.02 | | |
Loans past due 30 to 59 days decreased $9.3increased $11.2 million to $45.1$54.7 million at June 30, 2022March 31, 2023 as compared to MarchDecember 31, 2022. Commercial2022 mostly due to several large commercial and industrial loans and one matured commercial real estate loans past due 30 to 59 days decreased $20.3 million to $10.5 million at June 30, 2022 as compared to March 31, 2022 due,loan in part, to a $13.2 million loanthe process of renewal included in this delinquency category at March 31, 2022 that moved to non-accrual loans as of June 30, 2022. The decrease in commercial real estate loans was 2023. These increases were partially offset by higher constructionimproved performance within the residential mortgage and consumer loan delinquencies mostlycategories.
Loans past due 60 to 89 days increased $7.0 million to $27.8 million at March 31, 2023 as compared to December 31, 2022 primarily due to one loan acquired from Bank Leumi USAhigher commercial and industrial loans largely driven by a few large loans included in this delinquency category at June 30, 2022.March 31, 2023.
Loans past due 60 to 89 days decreased $15.5 million to $11.5 million at June 30, 2022 as compared to March 31, 2022. Commercial and industrial within this delinquency category decreased $10.6 million largely due to the migration of loans totaling $8.8 million to the 90 days or more past due categoryand still accruing interest decreased $8.8 million to $17.8 million at June 30, 2022. Commercial real estate loans delinquencies decreased $5.7 million at June 30,March 31, 2023 as compared to December 31, 2022 mainly due to a $6.0 million loanthe renewals in the normal course of two matured loans during the first quarter 2023 that were previously included in this delinquency category at MarchDecember 31, 2022 that became current as to all contractual payments at June 30, 2022.
Loans past due All loans 90 days or more past due and still accruing interest increased $5.5 million to $16.9 million at June 30, 2022 as compared to March 31, 2022. The increase was mainly driven by the aforementioned migration of commercial and industrial loans totaling $8.8 million from the 60 to 89 days past due category at June 30, 2022. All of the loans past due 90 days or more and still accruing interest reported at June 30, 2022 are considered to be well-secured and in the process of collection.
Non-accrual loans increaseddecreased $82.7$27.8 million to $313.1 million at June 30, 2022 as compared to $230.5$242.0 million at March 31, 2022.2023 as compared to $269.8 million at December 31, 2022 mainly driven by decreases in Commercialcommercial and industrial loans increasedand $51.8construction loans. Non-accrual commercial and industrial loans decreased $20.3 million mainlyprimarily due to athe charge-off of one loan participation that was fully reserved for in our allowance for loan losses at December 31, 2022. The $43decrease of $5.6 million borrowerin construction loans is mostly related to the partial charge-off of one loan relationship during thewithfirst quarter 2023 that had related allowance reserves totaling $4.3 million at December 31, 2022.
Although the timing of collection is uncertain, management believes that the majority of the non-accrual loans at March 31, 2023, are well secured and largely collectible based in part, on our quarterly review of collateral dependent loans and the valuation of the underlying collateral, if applicable. Any estimated shortfall in each collateral valuation results in an allocation of specific reserves within our allowance for credit losses for loans.
Non-performing taxi medallion loans totaled $66.0 million of the $78.6 million non-accrual commercial and industrial loans at March 31, 2023. At March 31, 2023, all taxi medallion loans in the loan portfolio were on non-accrual status and had related reserves of $22.0$41.9 million, or 64.0 percent of such loans, within the allowance for loan losses at June 30, 2022. Construction loan delinquencies increased $32.2 million mainly due to two loan relationships acquired from Bank Leumi USA. The $6.6 million increase in non-accrual commercial real estate loans was mainly due to the aforementioned $13.2 million non-performing loan at June 30, 2022 that was previously reported in the 30 to 59 days past due delinquency category at March 31, 2022.
Non-accrual commercial and industrial loans totaled $148.4 million at June 30, 2022 and included non-performing taxi medallion loans totaling $80.4 million. At June 30, 2022, the taxi medallion loans (mostly collateralized by New York City medallions) had related reserves of $55.3 million, or 68.8 percent of such loans. The tax medallion loans and related reserves remained relatively unchanged from March 31, 2022.losses. Potential further declines in the market valuation of taxi medallions and the stressedcurrent operating environment mainly within New York City due to the COVID-19 pandemic couldmay negatively impact the future performance of this portfolio. For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $5.5 million within the allowance for loan losses based upon the taxi medallion loan balances at June 30, 2022. See the "Allowance for Credit Losses" section below for further details on our reserves.
OREO properties totaled $422 thousand$1.2 million at June 30, 2022March 31, 2023 and declined $602increased $903 thousand as compared to MarchDecember 31, 2022. Net gains fromThere were no sales of OREO totaled $309 thousandproperties in the first quarter 2023 and $623 thousand for the three and six months ended June 30, 2022 respectively. Netnet gains and losses fromon sales of OREO totaled $300 thousand and $335 thousand, respectively, forin the three and six months ended June 30, 2021.first quarter 2022 were not material. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.0$1.5 million and $2.5 million at June 30, 2022 and December 31, 2021, respectively.
TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing interest or as non-accrual loans) totaled $67.3 million at June 30, 2022 as compared to $56.52.6 million at March 31, 2022. Performing TDRs consisted of 93 loans at June 30, 2022. On an aggregate basis, the $67.3 million in performing TDRs at June 30,2023 and December 31, 2022, had a modified weighted average interest rate of approximately 4.58 percent as compared to a pre-modification weighted average interest rate of 4.21 percent.respectively.
Allowance for Credit Losses for Loans
The allowance for credit losses (ACL) for loans includes the allowance for loan losses and the reserve for unfunded credit commitments. Under CECL, our methodology to establish the allowance for loan losses has two basic components: (i) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent TDR, and expected TDR loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial standby letters of credit.
Valley estimated the collective ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances. In estimating the component of the allowance on a collective basis, we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans within the commercial and industrial loan categories from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) the impact of the reasonable and supportable economic forecast, relative probability weightings and reversion period, (ii) other asset specific risks to the extent that they do not exist in the historical loss information, and (iii) net expected recoveries of charged-off loan balances. These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses. The expected lifetime loss rate is the life of loan loss percentage from the transition matrix model plus the impact of the adjustments for qualitative factors. The expected
credit losses are the product of multiplying the model’s expected lifetime loss rate by the exposure at default at period end on an undiscounted basis.
Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan on a straight-line basis. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses and is governed by a cross-functional committee. The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information. The model projects economic variables under each scenario based on detailed statistical analyses. We have identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index.
ForAt March 31, 2023, the second quarter 2022, we incorporated a probability weighted three-scenarioweightings used in our economic forecast, includinginclusive of the Moody's Baseline, S-3 and S-4 scenarios. At June 30, 2022, Valley maintained the majority of its probability weighting to the Moody’s Baseline scenario with less emphasis on the S-3 downside and S-4 (most adverse)adverse scenarios, relatively consistent with its weighting in the Marchremained unchanged from December 31, 2022 ACL analysis. However, the2022. The standalone Moody's Baseline forecast and weighting at June 30, 2022scenario reflects a less slightly more optimistic outlook than at Marchas compared to December 31, 2022 in terms of GDP growth and unemployment levels, and potential near term negative economic impacts, given present uncertain economic conditions. but the overall outlook remained relatively weak. The updated Moody's forecasts were not materially impacted by the recent bank failures, as they noted the failures did not appear to be symptomatic of serious broad-based issues in the financial system.
At June 30, 2022,March 31, 2023, the Moody's Baseline forecast included the following specific assumptions:
•GDP expansion by about 3.6approximately 1 percent in the thirdsecond quarter 2022;2023;
•Unemployment of 3.43.5 percent in the thirdsecond quarter 20222023 and 3.43.7 to 3.64.0 percent over the remainder of the forecast period ending in the first quarter 2025;
•Continued concerns about increased federal debt burden pushed by rising interest rates, high inflation, elevated house prices and lower consumer spending;
•The Federal Reserve continues its tightening monetary policy, including an increase of 25 basis points at its May 2023 meeting but intends to keep rates steady through 2023 with no reductions until 2024; and
•U.S. economic growthInflation remains elevated but continues to trend downward, while reporting at approximately 5 percent in 2022 as the impact of COVID-19 wanes and consumer spending increases on entertainment and travel.March 2023.
See more details regarding our allowance for credit losses for loans in Note 8 to the consolidated financial statements.
The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated.indicated:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, 2022 | | March 31, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | |
| | ($ in thousands) | | ($ in thousands) |
Average loans outstanding | $ | 42,517,287 | | $ | 34,623,402 | | $ | 32,635,298 | | $ | 38,592,151 | | $ | 32,609,034 | |
| Allowance for credit losses for loans | Allowance for credit losses for loans | | | | | | | | | | Allowance for credit losses for loans | | | | |
Beginning balance | Beginning balance | $ | 379,252 | | $ | 375,702 | | $ | 354,313 | | $ | 375,702 | | $ | 351,354 | Beginning balance | $ | 483,255 | | $ | 498,408 | | $ | 375,702 | |
Allowance for purchased credit deteriorated (PCD) loans (1) | 70,319 | | — | | — | | 70,319 | | — | |
Impact of the adoption of ASU No. 2022-02 (1) | | Impact of the adoption of ASU No. 2022-02 (1) | (1,368) | | — | | — | |
Beginning balance, adjusted | | Beginning balance, adjusted | 481,887 | | 498,408 | | 375,702 | |
Loans charged-off: | Loans charged-off: | | Loans charged-off: | | | | | | |
Commercial and industrial | Commercial and industrial | (4,540) | | (1,571) | | (10,893) | | (6,111) | | (18,035) | Commercial and industrial | (26,047) | | (22,106) | | (1,571) | |
Commercial real estate | Commercial real estate | — | | (173) | | — | | (173) | | (382) | Commercial real estate | — | | (388) | | (173) | |
| Construction | | Construction | (5,698) | | — | | — | |
Residential mortgage | Residential mortgage | (1) | | (26) | | (1) | | (27) | | (139) | Residential mortgage | — | | (1) | | (26) | |
Total consumer | Total consumer | (726) | | (825) | | (1,480) | | (1,551) | | (2,618) | Total consumer | (828) | | (1,544) | | (825) | |
Total charge-offs | Total charge-offs | (5,267) | | (2,595) | | (12,374) | | (7,862) | | (21,174) | Total charge-offs | (32,573) | | (24,039) | | (2,595) | |
Charged-off loans recovered: | Charged-off loans recovered: | | | | | | | | | | Charged-off loans recovered: | | | | | | |
Commercial and industrial | Commercial and industrial | 1,952 | | 824 | | 678 | | 2,776 | | 2,267 | Commercial and industrial | 1,399 | | 1,069 | | 824 | |
Commercial real estate | Commercial real estate | 224 | | 107 | | 665 | | 331 | | 730 | Commercial real estate | 24 | | 13 | | 107 | |
Construction | — | | — | | — | | — | | 4 | |
| Residential mortgage | Residential mortgage | 74 | | 457 | | 191 | | 531 | | 348 | Residential mortgage | 21 | | 17 | | 457 | |
Total consumer | Total consumer | 697 | | 1,257 | | 1,474 | | 1,954 | | 2,404 | Total consumer | 761 | | 498 | | 1,257 | |
Total recoveries | Total recoveries | 2,947 | | 2,645 | | 3,008 | | 5,592 | | 5,753 | Total recoveries | 2,205 | | 1,597 | | 2,645 | |
Net loan (charge-offs) recoveries | (2,320) | | 50 | | (9,366) | | (2,270) | | (15,421) | |
Total net loan (charge-offs) recoveries | | Total net loan (charge-offs) recoveries | (30,368) | | (22,442) | | 50 | |
Provision charged for credit losses | Provision charged for credit losses | 43,712 | | 3,500 | | 8,777 | | 47,212 | | 17,791 | Provision charged for credit losses | 9,450 | | 7,289 | | 3,500 | |
Ending balance | Ending balance | $ | 490,963 | | $ | 379,252 | | $ | 353,724 | | $ | 490,963 | | $ | 353,724 | Ending balance | $ | 460,969 | | $ | 483,255 | | $ | 379,252 | |
Components of allowance for credit losses for loans: | Components of allowance for credit losses for loans: | | | | | | | | | | Components of allowance for credit losses for loans: | | | | | | |
Allowance for loan losses | Allowance for loan losses | $ | 468,819 | | $ | 362,510 | | $ | 339,324 | | $ | 468,819 | | $ | 339,324 | Allowance for loan losses | $ | 436,898 | | $ | 458,655 | | $ | 362,510 | |
Allowance for unfunded credit commitments | Allowance for unfunded credit commitments | 22,144 | | 16,742 | | 14,400 | | 22,144 | | 14,400 | Allowance for unfunded credit commitments | 24,071 | | 24,600 | | 16,742 | |
Allowance for credit losses for loans | Allowance for credit losses for loans | $ | 490,963 | | $ | 379,252 | | $ | 353,724 | | $ | 490,963 | | $ | 353,724 | Allowance for credit losses for loans | $ | 460,969 | | $ | 483,255 | | $ | 379,252 | |
Components of provision for credit losses for loans: | Components of provision for credit losses for loans: | | | | | | | | | | Components of provision for credit losses for loans: | | | | | | |
Provision for credit losses for loans (2) | $ | 38,310 | | $ | 3,258 | | $ | 5,810 | | $ | 41,568 | | $ | 14,502 | |
Provision for unfunded credit commitments (2) | 5,402 | | 242 | | 2,967 | | 5,644 | | 3,289 | |
Provision for credit losses for loans | | Provision for credit losses for loans | $ | 9,979 | | $ | 5,353 | | $ | 3,258 | |
Provision for unfunded credit commitments | | Provision for unfunded credit commitments | (529) | | 1,936 | | 242 | |
Total provision for credit losses for loans | Total provision for credit losses for loans | $ | 43,712 | | $ | 3,500 | | $ | 8,777 | | $ | 47,212 | | $ | 17,791 | Total provision for credit losses for loans | $ | 9,450 | | $ | 7,289 | | $ | 3,500 | |
| Annualized ratio of net charge-offs (recoveries) to average loans outstanding | 0.02 | % | | 0.00 | % | | 0.11 | % | | 0.01 | % | | 0.09 | % | |
| Allowance for credit losses for loans as a % of total loans | | Allowance for credit losses for loans as a % of total loans | 0.95 | % | | 1.03 | % | | 1.07 | % | |
| | | | | | | | | | | | | | |
(1) Represents the opening adjustment for the adoption of ASU No. 2022-02 effective January 1, 2023. |
|
(1) Represents the allowance for acquired PCD loans, net of PCD loan charge-offs totaling $62.4 million in the second quarter 2022.
(2) Includes $36.3 million and $4.7 million of provision related to non-PCD loans and unfunded credit commitments, respectively, acquired from Bank Leumi USA in the second quarter 2022.
The following table presents the relationship among net loans charged-off and recoveries, and average loan balances outstanding for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | March 31, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| ($ in thousands) |
Net loan (charge-offs) recoveries | | | | | | | | | |
Commercial and industrial | $ | (2,588) | | $ | (747) | | $ | (10,215) | | $ | (3,335) | | $ | (15,768) |
Commercial real estate | 224 | | (66) | | 665 | | 158 | | 348 |
Construction | — | | — | | — | | — | | 4 |
Residential mortgage | 73 | | 431 | | 190 | | 504 | | 209 |
Total consumer | (29) | | 432 | | (6) | | 403 | | (214) |
Total | $ | (2,320) | | $ | 50 | | $ | (9,366) | | $ | (2,270) | | $ | (15,421) |
Average loans outstanding | | | | | | | | | |
Commercial and industrial | $ | 8,304,822 | | $ | 5,727,350 | | $ | 6,899,503 | | $ | 7,017,820 | | $ | 6,895,469 |
Commercial real estate | 23,319,419 | | 19,342,697 | | 16,831,259 | | 21,303,889 | | 16,872,338 |
Construction | 2,925,741 | | 1,914,413 | | 1,754,399 | | 2,421,678 | | 1,741,254 |
Residential mortgage | 4,727,481 | | 4,681,417 | | 4,292,052 | | 4,706,695 | | 4,363,650 |
Total consumer | 3,239,824 | | 2,957,525 | | 2,858,085 | | 3,142,069 | | 2,736,323 |
Total | $ | 42,517,287 | | $ | 34,623,402 | | $ | 32,635,298 | | $ | 38,592,151 | | $ | 32,609,034 |
Net loan charge-offs (recoveries) to average loans outstanding | | | | | | | | | |
Commercial and industrial | 0.03% | | 0.01% | | 0.15% | | 0.05% | | 0.23% |
Commercial real estate | 0.00 | | 0.00 | | 0.00 | | 0.00 | | 0.00 |
Construction | 0.00 | | 0.00 | | 0.00 | | 0.00 | | 0.00 |
Residential mortgage | 0.00 | | (0.01) | | 0.00 | | (0.01) | | 0.00 |
Total consumer | 0.00 | | (0.01) | | 0.00 | | (0.01) | | 0.01 |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | | | |
| ($ in thousands) |
Net loan (charge-offs) recoveries | | | | | | | | | |
Commercial and industrial | $ | (24,648) | | $ | (21,037) | | $ | (747) | | | | |
Commercial real estate | 24 | | (375) | | (66) | | | | |
Construction | (5,698) | | — | | — | | | | |
Residential mortgage | 21 | | 16 | | 431 | | | | |
Total consumer | (67) | | (1,046) | | 432 | | | | |
Total | $ | (30,368) | | $ | (22,442) | | $ | 50 | | | | |
Average loans outstanding | | | | | | | | | |
Commercial and industrial | $ | 8,754,853 | | $ | 8,688,005 | | $ | 5,727,350 | | | | |
Commercial real estate | 26,555,421 | | 25,233,650 | | 19,342,697 | | | | |
Construction | 3,780,615 | | 3,753,155 | | 1,914,413 | | | | |
Residential mortgage | 5,363,421 | | 5,158,615 | | 4,681,417 | | | | |
Total consumer | 3,405,061 | | 3,252,938 | | 2,957,525 | | | | |
Total | $ | 47,859,371 | | $ | 46,086,363 | | $ | 34,623,402 | | | | |
Annualized net loan charge-offs (recoveries) to average loans outstanding | | | | | | | | | |
Commercial and industrial | 1.13% | | 0.97% | | 0.05% | | | | |
Commercial real estate | 0.00 | | 0.01 | | 0.00 | | | | |
Construction | 0.60 | | 0.00 | | 0.00 | | | | |
Residential mortgage | 0.00 | | 0.00 | | (0.04) | | | | |
Total consumer | 0.01 | | 0.13 | | (0.06) | | | | |
Total loans | 0.25 | | 0.19 | | 0.00 | | | | |
Net loan charge-offs totaled $2.3$30.4 million (excluding $62.4 million of Day 1 PCD loan charge-offs related to the Bank Leumi USA acquisition) for the secondfirst quarter 20222023 as compared to $22.4 million for the fourth quarter 2022 and net recoveries of loan charge-offs $50 thousand for the first quarter 2022 and2022. The first quarter 2023 net loan charge-offs of $9.4 million for the second quarter 2021. Gross partial loan charge-offs of taxi medallion loans totaled $2.7 million within thelargely related to one commercial and industrial loan categoryparticipation charged-off. This loan was fully reserved for the second quarterin our allowance for loan losses as of December 31, 2022 as compared to $1.4 million and $206 thousand during the second quarter 2021 and first quarter 2022, respectively.its remaining balance, net of charge-offs, was immaterial at March 31, 2023. The overall levelamount of net loan charge-offs (as presented in the above table) and the low level of individual loan charge-offs for the first quarter 2023 continued to remain very low and trend well within management's expectations for the credit quality of the loan portfolio for the second quarter 2022.at March 31, 2023.
The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category:
| | | June 30, 2022 | | March 31, 2022 | | June 30, 2021 | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| | Allowance Allocation | | Allocation as a % of Loan Category | | Allowance Allocation | | Allocation as a % of Loan Category | | Allowance Allocation | | Allocation as a % of Loan Category | | Allowance Allocation | | Allocation as a % of Loan Category | | Allowance Allocation | | Allocation as a % of Loan Category | | Allowance Allocation | | Allocation as a % of Loan Category |
| | ($ in thousands) | | ($ in thousands) |
Loan Category: | Loan Category: | | Loan Category: | |
Commercial and industrial loans | Commercial and industrial loans | $ | 144,539 | | | 1.70 | % | | $ | 101,203 | | | 1.75 | % | | $ | 109,689 | | | 1.80 | % | Commercial and industrial loans | $ | 127,992 | | | 1.42 | % | | $ | 140,008 | | | 1.59 | % | | $ | 101,203 | | | 1.75 | % |
Commercial real estate loans: | Commercial real estate loans: | | Commercial real estate loans: | |
Commercial real estate | Commercial real estate | 227,457 | | | 0.97 | | | 189,927 | | | 0.96 | | | 168,220 | | | 0.96 | | Commercial real estate | 190,420 | | | 0.70 | | | 200,248 | | | 0.78 | | | 189,927 | | | 0.96 | |
Construction | Construction | 49,770 | | | 1.47 | | | 30,022 | | | 1.38 | | | 20,919 | | | 1.19 | | Construction | 52,912 | | | 1.42 | | | 58,987 | | | 1.59 | | | 30,022 | | | 1.38 | |
Total commercial real estate loans | Total commercial real estate loans | 277,227 | | | 1.03 | | | 219,949 | | | 1.00 | | | 189,139 | | | 0.98 | | Total commercial real estate loans | 243,332 | | | 0.79 | | | 259,235 | | | 0.88 | | | 219,949 | | | 1.00 | |
Residential mortgage loans | Residential mortgage loans | 29,889 | | | 0.60 | | | 28,189 | | | 0.60 | | | 25,303 | | | 0.60 | | Residential mortgage loans | 41,708 | | | 0.76 | | | 39,020 | | | 0.73 | | | 28,189 | | | 0.60 | |
Consumer loans: | Consumer loans: | | Consumer loans: | |
Home equity | Home equity | 3,907 | | | 0.91 | | | 3,656 | | | 0.93 | | | 4,602 | | | 1.12 | | Home equity | 4,417 | | | 0.86 | | | 4,332 | | | 0.86 | | | 3,656 | | | 0.93 | |
Auto and other consumer | Auto and other consumer | 13,257 | | | 0.49 | | | 9,513 | | | 0.37 | | | 10,591 | | | 0.43 | | Auto and other consumer | 19,449 | | | 0.69 | | | 16,060 | | | 0.57 | | | 9,513 | | | 0.37 | |
Total consumer loans | Total consumer loans | 17,164 | | | 0.55 | | | 13,169 | | | 0.45 | | | 15,193 | | | 0.53 | | Total consumer loans | 23,866 | | | 0.71 | | | 20,392 | | | 0.62 | | | 13,169 | | | 0.45 | |
Allowance for loan losses | Allowance for loan losses | 468,819 | | | 1.08 | | | 362,510 | | | 1.03 | | | 339,324 | | | 1.05 | | Allowance for loan losses | 436,898 | | | 0.90 | | | 458,655 | | | 0.98 | | | 362,510 | | | 1.03 | |
Allowance for unfunded credit commitments | Allowance for unfunded credit commitments | 22,144 | | | 16,742 | | | 14,400 | | | Allowance for unfunded credit commitments | 24,071 | | | 24,600 | | | 16,742 | | |
Total allowance for credit losses for loans | Total allowance for credit losses for loans | $ | 490,963 | | | $ | 379,252 | | | $ | 353,724 | | | Total allowance for credit losses for loans | $ | 460,969 | | | $ | 483,255 | | | $ | 379,252 | | |
Allowance for credit losses for loans as a % total loans | Allowance for credit losses for loans as a % total loans | | | 1.13 | % | | | | 1.07 | % | | | | 1.09 | % | Allowance for credit losses for loans as a % total loans | | | 0.95 | % | | | | 1.03 | % | | | | 1.07 | % |
The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 1.13 percent at June 30, 2022 as compared to 1.07 percent and 1.090.95 percent at March 31, 2023 as compared to 1.03 percent and 1.07 percent at December 31, 2022 and June 30, 2021,March 31, 2022, respectively. The allowance for credit losses at June 30, 2022 was impacted by (i) the total provision for credit losses for loans during the second quarter 2022, (ii) a net $70.3 million allowance for credit losses for PCD loans acquired from Bank Leumi USA recorded at the acquisition date, and (iii) the net loan charge-offs during the second quarter 2022.
During the secondfirst quarter 2022,2023, the provision for credit losses for loans totaled $43.7$9.5 million as compared to $3.5$7.3 million and $8.8$3.5 million for the fourth quarter 2022 and first quarter 2022, and second quarter 2021, respectively. The increase in the second quarter 2022 provisionAt March 31, 2023, our allowance for credit losses for loans as a percentage of total loans decreased as compared to December 31, 2022 largely due to the impact of the first quarter 20222023 loan charge-offs with prior allocated reserves. The reduction in allocated reserves for specific loans was primarily due to $36.3 millionpartially offset by a moderate uptick in non-economic qualitative reserves for commercial and $4.7 million of provision related to non-PCDindustrial loans and unfunded credit commitments, respectively, acquired from Bank Leumi USA. Overall, an increasedwithin our CECL model at March 31, 2023. The economic forecast reserve component of our current CECL model was largely offset by lower expected quantitative loss experience at June 30, 2022relatively stable as compared to MarchDecember 31, 2022.
Capital Adequacy
A significant measure of the strength of a financial institution is its shareholders’ equity. At June 30, 2022March 31, 2023 and December 31, 2021,2022, shareholders’ equity totaled approximately $6.2$6.5 billion and $5.1$6.4 billion, which represented 11.410.1 percent and 11.711.1 percent of total assets, respectively.
During the sixthree months ended June 30, 2022,March 31, 2023, total shareholders’ equity increased by approximately $1.1 billion110.8 million primarily due to:
•additional capitalnet income of $1.1 billion issued in the Bank Leumi USA acquisition,$146.6 million,
•netother comprehensive income of $213.1 $20.4 million,
•additional capital issued totaling $3.8 million,
•a $3.2 million increase attributable$990 thousand net cumulative effect adjustment to retained earnings for the effectadoption of our stock incentive plan,ASU 2022-02, partially offset by
•cash dividends declared on common and preferred stock totaling a combined $109.4 million,
•an other comprehensive loss of $90.460.4 million and
•repurchases of $13.5 milliona $505 thousand decrease attributable to the effect of our common stock with these shares held as treasury stock.incentive plan.
Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.
We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and a minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of June 30, 2022March 31, 2023 and December 31, 2021,2022, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).
For regulatory capital purposes, in accordance with the Federal Reserve Board’s final interim rule as of April 3, 2020, we deferred 100 percent of the CECL Day 1 impact to shareholders' equity plus 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) for a two-year period ending January 1, 2022. StartingOn January 1, 2022, the deferral amount totaling $47.3 million after-tax willstarted to be phased-in by 25 percent and will increase 25 percent per year until fully phased-in on January 1, 2025. As of June 30, 2022,March 31, 2023, approximately $11.8$23.6 million of the $47.3 million deferral amount was recognized as a reduction to regulatory capital and, as a result, decreased our risk basedrisk-based capital ratios by approximately 36 basis points.
The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at June 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | Actual | | Minimum Capital Requirements | | To Be Well Capitalized Under Prompt Corrective Action Provision | | Actual | | Minimum Capital Requirements | | To Be Well Capitalized Under Prompt Corrective Action Provision |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | ($ in thousands) | | ($ in thousands) |
As of June 30, 2022 | | |
As of March 31, 2023 | | As of March 31, 2023 | |
Total Risk-based Capital | Total Risk-based Capital | | Total Risk-based Capital | |
Valley | Valley | $ | 5,146,322 | | | 11.53 | % | | $ | 4,686,340 | | | 10.50 | % | | N/A | | N/A | Valley | $ | 5,656,193 | | | 11.58 | % | | $ | 5,126,496 | | | 10.50 | % | | N/A | | N/A |
Valley National Bank | Valley National Bank | 5,326,861 | | | 11.94 | | | 4,684,699 | | | 10.50 | | | $ | 4,461,618 | | | 10.00 | % | Valley National Bank | 5,736,909 | | | 11.75 | | | 5,125,168 | | | 10.50 | | | $ | 4,881,112 | | | 10.00 | % |
Common Equity Tier 1 Capital | Common Equity Tier 1 Capital | | Common Equity Tier 1 Capital | |
Valley | Valley | 4,043,465 | | | 9.06 | | | 3,124,227 | | | 7.00 | | | N/A | | N/A | Valley | 4,402,540 | | | 9.02 | | | 3,417,664 | | | 7.00 | | | N/A | | N/A |
Valley National Bank | Valley National Bank | 4,977,845 | | | 11.16 | | | 3,123,133 | | | 7.00 | | | 2,900,052 | | | 6.50 | | Valley National Bank | 5,362,097 | | | 10.99 | | | 3,416,778 | | | 7.00 | | | 3,172,723 | | | 6.50 | |
Tier 1 Risk-based Capital | Tier 1 Risk-based Capital | | | Tier 1 Risk-based Capital | | | | |
Valley | Valley | 4,258,306 | | | 9.54 | | | 3,793,704 | | | 8.50 | | | N/A | | N/A | Valley | 4,617,381 | | | 9.46 | | | 4,150,021 | | | 8.50 | | | N/A | | N/A |
Valley National Bank | Valley National Bank | 4,977,845 | | | 11.16 | | | 3,792,375 | | | 8.50 | | | 3,569,294 | | | 8.00 | | Valley National Bank | 5,362,097 | | | 10.99 | | | 4,148,945 | | | 8.50 | | | 3,904,890 | | | 8.00 | |
Tier 1 Leverage Capital | Tier 1 Leverage Capital | | Tier 1 Leverage Capital | |
Valley | Valley | 4,258,306 | | | 8.33 | | | 2,045,320 | | | 4.00 | | | N/A | | N/A | Valley | 4,617,381 | | | 7.96 | | | 2,319,296 | | | 4.00 | | | N/A | | N/A |
Valley National Bank | Valley National Bank | 4,977,845 | | | 9.74 | | | 2,044,412 | | | 4.00 | | | 2,555,515 | | | 5.00 | | Valley National Bank | 5,362,097 | | | 9.25 | | | 2,319,185 | | | 4.00 | | | 2,898,982 | | | 5.00 | |
As of December 31, 2021 | | |
As of December 31, 2022 | | As of December 31, 2022 | |
Total Risk-based Capital | Total Risk-based Capital | | Total Risk-based Capital | |
Valley | Valley | $ | 4,454,485 | | | 13.10 | % | | $ | 3,569,144 | | | 10.50 | % | | N/A | | N/A | Valley | $ | 5,569,639 | | | 11.63 | % | | $ | 5,026,621 | | | 10.50 | % | | N/A | | N/A |
Valley National Bank | Valley National Bank | 4,571,448 | | | 13.45 | | | 3,567,618 | | | 10.50 | | | $ | 3,397,732 | | | 10.00 | % | Valley National Bank | 5,659,511 | | | 11.84 | | | 5,018,129 | | | 10.50 | | | $ | 4,779,170 | | | 10.00 | % |
Common Equity Tier 1 Capital | Common Equity Tier 1 Capital | | Common Equity Tier 1 Capital | |
Valley | Valley | 3,417,930 | | | 10.06 | | | 2,379,429 | | | 7.00 | | | N/A | | N/A | Valley | 4,315,659 | | | 9.01 | | | 3,351,080 | | | 7.00 | | | N/A | | N/A |
Valley National Bank | Valley National Bank | 4,308,734 | | | 12.68 | | | 2,378,412 | | | 7.00 | | | 2,208,526 | | | 6.50 | | Valley National Bank | 5,284,372 | | | 11.06 | | | 3,345,419 | | | 7.00 | | | 3,106,461 | | | 6.50 | |
Tier 1 Risk-based Capital | Tier 1 Risk-based Capital | | Tier 1 Risk-based Capital | |
Valley | Valley | 3,632,771 | | | 10.69 | | | 2,889,307 | | | 8.50 | | | N/A | | N/A | Valley | 4,530,500 | | | 9.46 | | | 4,069,169 | | | 8.50 | | | N/A | | N/A |
Valley National Bank | Valley National Bank | 4,308,734 | | | 12.68 | | | 2,888,072 | | | 8.50 | | | 2,718,185 | | | 8.00 | | Valley National Bank | 5,284,372 | | | 11.06 | | | 4,062,295 | | | 8.50 | | | 3,823,336 | | | 8.00 | |
Tier 1 Leverage Capital | Tier 1 Leverage Capital | | Tier 1 Leverage Capital | |
Valley | Valley | 3,632,771 | | | 8.88 | | | 1,635,508 | | | 4.00 | | | N/A | | N/A | Valley | 4,530,500 | | | 8.23 | | | 2,200,822 | | | 4.00 | | | N/A | | N/A |
Valley National Bank | Valley National Bank | 4,307,734 | | | 10.53 | | | 1,636,097 | | | 4.00 | | | 2,045,121 | | | 5.00 | | Valley National Bank | 5,284,372 | | | 9.60 | | | 2,200,891 | | | 4.00 | | | 2,751,114 | | | 5.00 | |
Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common shareholders) per common share. Our retention ratio was approximately 50.060.7 percent for the sixthree months ended June 30, 2022March 31, 2023 as compared to 60.761.4 percent for the year ended December 31, 2021.2022.
Cash dividends declared amounted to $0.22$0.11 per common share for each of the sixthree months ended June 30, 2022March 31, 2023 and 2021.2022. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision.
Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters
For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 20212022 in the MD&A section - “Liquidity and Cash Requirements” and Notes 1113 and 1214 to the consolidated financial statements included in this report.
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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 5665 for a discussion of interest rate sensitivity.risk.
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Item 4. | Controls and Procedures |
(a) Disclosure controls and procedures. Valley maintains disclosure controls and procedures which, consistent with Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), are defined to mean controls and other procedures that are designed to ensure that information required to be disclosed in the reports that Valley files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is accumulated and communicated to Valley’s management, including Valley’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
Valley’s CEO and CFO, with the assistance of other members of Valley’s management, have evaluated the effectiveness of Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, Valley’s CEO and CFO have concluded that Valley’s disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Changes in internal controls over financial reporting. 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, 2022March 31, 2023 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting.
Valley’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A system of internal control, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the system of internal control are met. The design of a system of internal control reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Valley have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of a simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of internal control is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
In the normal course of business, we are a party to various outstanding legal proceedings and claims. There have been no material changes in the legal proceedings, if any, previously disclosed under Part I, Item 3 of Valley’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
There have been no material changes in the risk factors previously disclosed in the section titled "Risk Factors" in Part I, Item 1A of Valley’s Annual Report on Form 10-K for the year ended December 31, 2021.2022, except as described below:
Our financial results and condition may be adversely impacted by recent events in the banking industry or any future similar events.
Recent events impacting the banking industry, including the bank failures in March and April 2023, have resulted in significant disruption and volatility in the capital markets, reduced current valuations of bank securities, and decreased confidence in banks among depositors and other counterparties as well as investors. These events occurred in the context of rapidly rising interest rates which, among other things, have resulted in unrealized losses in longer duration debt securities and loans held by banks, increased competition for deposits and potentially increased the risk of recession. These events have had, and may continue to have, an adverse impact on the market price of our common stock.
While the Department of the Treasury, the Federal Reserve, and the FDIC took steps to ensure that depositors of recently failed banks would have access to their insured and uninsured deposits, and to facilitate sales of certain failed banks, there is no assurance that these or similar actions will restore customer confidence in the banking system, and we may be further impacted by concerns regarding the soundness of other financial institutions, or other future bank failures or disruptions. Any loss of client deposits or changes in our credit ratings could increase the cost of funding, limit access to capital markets or negatively impact our overall liquidity or capitalization. The cost of resolving the recent bank failures may also prompt the FDIC to increase its premiums above current levels or to issue additional special assessments.
These recent events and any future similar events may also result in changes to laws or regulations governing bank holding companies and banks, including higher capital requirements, or the imposition of restrictions through supervisory or enforcement activities, which could materially impact our business.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the quarter, we did not sell any equity securities not registered under the Securities Act of 1933, as amended. Purchases of equity securities by the issuer and affiliated purchasers during the three months ended June 30, 2022March 31, 2023 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans (2) (3) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans (3) |
April 1, 2022 to April 30, 2022 | | 1,130 | | | $ | 12.60 | | | — | | | 25,000,000 | |
May 1, 2022 to May 31, 2022 | | 10,142 | | | 11.98 | | | — | | | 25,000,000 | |
June 1, 2022 to June 30, 2022 | | 9,031 | | | 13.63 | | | — | | | 25,000,000 | |
Total | | 20,303 | | | $ | 12.75 | | | — | | | |
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares that May Yet Be Purchased Under the Plans (2) |
January 1, 2023 to January 31, 2023 | | 4,739 | | | $ | 11.32 | | | — | | | 25,000,000 | |
February 1, 2023 to February 28, 2023 | | 711,344 | | | 11.91 | | | — | | | 25,000,000 | |
March 1, 2023 to March 31, 2023 | | 6,362 | | | 11.55 | | | — | | | 25,000,000 | |
Total | | 722,445 | | | $ | 11.90 | | | — | | | |
(1)Includes 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. On April 26, 2022, Valley terminated its 2007 stock repurchase plan.
(3)On April 26, 2022, Valley publicly announced a stock repurchase program for up to 25 million shares of Valley common stock. The authorization to repurchase will expire on April 25, 2024.
Ronald H. Janis, Senior Executive Vice President and General Counsel of the Company, notified the Company in April 2022 of his intention to retire as of May 1, 2022. Gary G. Michael, who joined the Company in November 2006, most recently serving as the Company’s Deputy General Counsel since January 2017, was appointed as Executive Vice President and General Counsel effective May 1, 2022.
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(3) | Articles of Incorporation and By-laws: | |
| (3.1) | | |
| (3.2) | | |
(10) | Material Contracts: |
| (10.1) | | |
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(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) | |
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* | 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.
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| | | | | VALLEY NATIONAL BANCORP |
| | | | | (Registrant) |
| | | |
Date: | | | | | /s/ Ira Robbins |
August 9, 2022May 5, 2023 | | | | | Ira Robbins |
| | | | | Chairman of the Board and |
| | | | | Chief Executive Officer |
| | | | | (Principal Executive Officer) |
| | | |
Date: | | | | | /s/ Michael D. Hagedorn |
August 9, 2022May 5, 2023 | | | | | Michael D. Hagedorn |
| | | | | Senior Executive Vice President and |
| | | | | Chief Financial Officer |
| | | | | (Principal Financial Officer) |