VALLEY NATIONAL BANCORP The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part 1, Item 1 of this report. The words "Valley," the "Company," "we," "our" and "us" refer toValley 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 thanU.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 withU.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. Cautionary Statement Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations, including the potential effects of the COVID-19 pandemic on our businesses and financial results and conditions. These statements may be identified by such forward-looking terminology as "should," "expect," "believe," "view," "will," "opportunity," "allow," "continues," "would," "could," "typically," "usually," "anticipate," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, include, but are not limited to: •the continued impact of COVID-19 on theU.S. and global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients; •the continued impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 may arise in our primary markets; •potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory and government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic or as a result of our actions in response to, or failure to implement or effectively implement, federal, state and local laws, rules or executive orders requiring that we grant forbearances or not act to collect our loans; •the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral; •the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies; •damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters; •a prolonged downturn in the economy, mainly inNew Jersey ,New York ,Florida andAlabama , as well as an unexpected decline in commercial real estate values within our market areas; •higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law; 41 -------------------------------------------------------------------------------- •the inability to grow customer deposits to keep pace with loan growth; •a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios; •the need to supplement debt or equity capital to maintain or exceed internal capital thresholds; •greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations; •the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy; •cyber-attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems; •results of examinations by theOffice of the Comptroller of the Currency (OCC), theFederal Reserve Bank (FRB), theConsumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities; •our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings; •unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events; •unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors; and •the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships. A detailed discussion of factors that could affect our results is included in ourSEC filings, including the "Risk Factors" section of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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. AtMarch 31, 2021 , we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies with the Audit Committee of Valley's Board of Directors. Our critical accounting policies are described in detail in Part II, Item 7 in Valley's Annual Report on Form 10-K for the year endedDecember 31, 2020 . New Authoritative Accounting Guidance See Note 4 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. AtMarch 31, 2021 , Valley had consolidated total assets of approximately$41.2 billion , total net loans of$32.3 billion , total deposits of$32.6 billion and total shareholders' equity of$4.7 billion . Our commercial bank operations include branch office locations in northern and centralNew Jersey , theNew York City 42 -------------------------------------------------------------------------------- Boroughs ofManhattan ,Brooklyn ,Queens , andLong Island ,Florida andAlabama . Of our current 226 branch network, 58 percent, 17 percent, 18 percent and 7 percent of the branches are inNew Jersey ,New York ,Florida andAlabama , respectively. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions. Impact of COVID-19. During the first quarter 2021, the COVID-19 pandemic continued to cause uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including the markets that we serve. However, the overall level of economic activity and our outlook improved during the first quarter 2021 largely due to government stimulus programs, central bank policies, strong vaccine rollout efforts and consumers and businesses eager to return to a state of normalcy after almost a year of lockdowns. The American Rescue Plan Act of 2021, signed into law onMarch 11, 2021 , is a$1.9 trillion economic stimulus package intended to continue to facilitate the recovery from the economic and health effects of the COVID-19 pandemic. This new law combined with the Consolidated Appropriations Act, 2021 signed into law onDecember 27, 2020 , provides, amongst other stimulus, additional funding under the SBA's Paycheck Protection Program (PPP). Valley's PPP loan portfolio increased$212.5 million to$2.4 billion atMarch 31, 2021 fromDecember 31, 2020 , which was net of over$630 million of PPP loans forgiven by the SBA during the first quarter 2021. During the second quarter 2021, Valley originated approximately$108 million of additional PPP loans throughMay 4, 2021 , which was the last day the SBA's PPP loan application window was open for most lenders. In response to the COVID-19 pandemic and its economic impact on certain customers and in accordance with provisions set forth by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Valley implemented short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days. Any extensions beyond this period were made in accordance with applicable regulatory guidance. As ofMarch 31, 2021 , Valley had$284 million of outstanding loans remaining in their payment deferral period under short-term modifications representing approximately 0.9 percent of our total loan portfolio atMarch 31, 2021 as compared to$361 million , or 1.1 percent of total loans atDecember 31, 2020 . We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act, Enhancement Act and other government stimulus orFederal Reserve actions. However, the extent to which the COVID-19 pandemic will impact our operations and financial results during the second quarter 2021 and beyond is highly uncertain. See the "Operating Environment" section of MD&A for more details. We continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant, which may necessitate certain branch or other office closures and reduced lobby services. Our business continuity plan continues to remain in effect with many of our non-customer facing employees continuing to work remotely. Quarterly Results. Net income for the first quarter 2021 was$115.7 million , or$0.28 per diluted common share, compared to$87.3 million , or$0.21 per diluted common share, for the first quarter 2020. The$28.4 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: •a$27.3 million increase in net interest income mainly due to (i) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities, (ii) continued run-off of higher cost time deposits, (iii) interest and fee income from PPP loans, and (iv) the prepayment of$534 million of long-term FHLB advances with a combined weighted average interest rate of 2.48 percent inDecember 2020 ; and •a$26.0 million decrease in our provision for credit losses mainly due to the improved economic forecast component of the reserve as compared toMarch 31, 2020 , 43 --------------------------------------------------------------------------------
partially offset by:
•a
•a
•a
See the "Net Interest Income", "Non-Interest Income", "Non-Interest Expense", and "Income Taxes" sections below for more details on the items above impacting our first quarter 2021 results. Operating Environment. During the first quarter 2021, real gross domestic product expanded 6.4 percent compared to 4.3 percent growth in the fourth quarter 2020. The acceleration in growth was broad-based as a result of increased investments and households consumption for a range of goods and services. Economic activity is likely to remain strong as COVID-19 cases are expected to decline and vaccination rates in the country increase. In addition, the recent passage of the American Rescue Plan Act of 2021 should further support this outlook. TheFederal Reserve continued to assist economic activity and the return to sustained expansion. At their meeting in March, theFederal Open Market Committee maintained the target range for the federal funds rate between 0.00 and 0.25 percent. The 10-yearU.S. Treasury note yield ended the first quarter at 1.74 percent, 81 basis points higher compared withDecember 31, 2020 . The spread between the 2- and 10-yearU.S. Treasury note yields ended the first quarter 2021 at 1.58 percent, a 78 basis point widening as compared to the end of the fourth quarter 2020.
For all commercial banks in the
In the first quarter 2021, Valley's originations increased across most products, particularly from residential mortgage and consumer lending. Valley also benefited from a stronger origination pipeline for non-PPP commercial and industrial and commercial real estate loans across its geographies, particularly inFlorida , partly driven by expansion of its lending teams. However, should loan demand weaken or the expected recovery from the pandemic in Valley's primary markets be prolonged, our business operations and results could be adversely impacted, as highlighted elsewhere in this MD&A. Loans. Loans increased$469.3 million to approximately$32.7 billion atMarch 31, 2021 fromDecember 31, 2020 . The increase was largely due to new loan volumes within the commercial and industrial, commercial real estate and automobile loan portfolios in the first quarter 2021. Within commercial and industrial loans, PPP loans increased$212.5 million to approximately$2.4 billion atMarch 31, 2021 fromDecember 31, 2020 . Our first quarter new and refinanced loan originations included approximately$288 million of residential mortgage loans originated for sale rather than investment. Net gains on sales of residential loans were$3.5 million and$16.0 million in the first quarter 2021 and fourth quarter 2020, respectively. See further details on our loan activities under the "Loan Portfolio" section below. Asset Quality. Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and a non-accrual debt security increased$16.0 million to$210.5 million atMarch 31, 2021 as compared toDecember 31, 2020 . Non-accrual loans increased$18.7 million to$204.0 million atMarch 31, 2021 as compared toDecember 31, 2020 mainly due to one commercial real estate loan and an increase in non-accrual residential mortgage loans partially caused by the migration of loans previously reported in the 60-89 44 -------------------------------------------------------------------------------- days past due category atDecember 31, 2020 . Non-accrual loans represented 0.62 percent of total loans atMarch 31, 2021 , as compared to 0.58 percent atDecember 31, 2020 . Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased$46.2 million to$52.8 million , or 0.16 percent of total loans, atMarch 31, 2021 as compared to$99.0 million , or 0.31 percent of total loans, atDecember 31, 2020 mainly due to declines in early stage delinquencies for most loan categories. See further details in the "Non-performing Assets" section below. Deposits and Other Borrowings. Average non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 30 percent, 52 percent and 18 percent of total deposits as ofMarch 31, 2021 , respectively. Overall, average deposits increased by$79.4 million to$31.8 billion for the first quarter 2021 as compared to the fourth quarter 2020. Our mix of the deposit categories within total average deposits for the first quarter 2021 as compared to the fourth quarter 2020 experienced a continued shift of maturing time deposits and consumer preference to non-maturity deposit account due to the low level of interest rates. Actual ending balances for deposits increased$649.6 million to approximately$32.6 billion atMarch 31, 2021 fromDecember 31, 2020 largely due to increases of$847.8 million and$1.1 billion in the non-interest bearing and non-maturity interest bearing deposit categories, respectively, partially offset by a$1.3 billion decrease in time deposits. The decrease in time deposits was driven by normal run-off of maturing retail and brokered CDs with some continued migration of retail balances to more liquid deposit product categories. Total brokered deposits (consisting of both time and money market deposit accounts) decreased approximately$800 million to$2.3 billion atMarch 31, 2021 as compared to$3.1 billion atDecember 31, 2020 . Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 31 percent, 52 percent and 17 percent of total deposits as ofMarch 31, 2021 , respectively. While we believe the current operating environment will likely continue to be favorable for Valley's deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported atMarch 31, 2021 . Average short-term borrowings decreased$148.1 million to$1.2 billion for the first quarter 2021 as compared to the fourth quarter 2020 due to reductions in our excess liquidity levels. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) decreased by$456.4 million to$2.3 billion for the first quarter 2021 as compared to the fourth quarter 2020 mainly due to the prepayment of$534 million of long-term FHLB borrowings inDecember 2020 . Actual ending balances for short-term borrowings decreased by$63.3 million to$1.1 billion atMarch 31, 2021 from the fourth quarter 2020 due to the decline in overnight borrowings. Long-term borrowings decreased by$52.7 million to$2.2 billion atMarch 31, 2021 as compared toDecember 31, 2020 mainly attributable to the normal maturities of FHLB advances. Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated: Three Months Ended March 31, 2021 2020 Return on average assets 1.14 % 0.92 % Return on average assets, as adjusted 1.14
0.93
Return on average shareholders' equity 9.96
7.92
Return on average shareholders' equity, as adjusted 9.97
8.01
Return on average tangible shareholders' equity (ROATE) 14.49 11.84
ROATE, as adjusted 14.50 11.97
45
-------------------------------------------------------------------------------- Adjusted return on average assets, adjusted return on average shareholders' equity, ROATE and adjusted ROATE included in the table above are non-GAAP measures. Management believes these measures provide information useful to management and investors in understanding our underlying operational performance, business and performance trends, and the measures facilitate comparisons of our prior performance with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance withU.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. The non-GAAP measure reconciliations are presented below.
Adjusted net income is computed as follows:
Three Months Ended
March 31,
2021 2020
(in thousands)
Net income, as reported $ 115,710 $ 87,268
Add: Losses on securities transactions (net of tax) 85 29
Add: Merger related expenses (net of tax) (*) - 936
Net income, as adjusted $ 115,795 $ 88,233
(*) Merger related expenses are primarily within professional and legal fees, and other non-interest expense.
In addition to the items used to calculate net income, as adjusted, in the table above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans and swap fees recognized from commercial loan customer transactions. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, loan portfolio sales and commercial loan customer demand for certain products. See the "Non-Interest Income" section below for more details.
Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows:
Three Months Ended
March 31,
2021 2020
($ in thousands)
Net income, as adjusted $ 115,795 $ 88,233
Average assets $ 40,770,731 $ 38,116,850
Annualized return on average assets, as adjusted 1.14 % 0.93 %
Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:
Three Months Ended
March 31,
2021 2020
($ in thousands)
Net income, as adjusted $ 115,795 $ 88,233
Average shareholders' equity $ 4,645,400 $ 4,408,585
Annualized return on average shareholders' equity, as
adjusted 9.97 % 8.01 %
46
--------------------------------------------------------------------------------
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
March 31,
2021 2020
($ in thousands)
Net income $ 115,710 $ 87,268
Net income, as adjusted 115,795 88,233
Average shareholders' equity $ 4,645,400 $ 4,408,585
Less: Average goodwill and other intangible assets 1,451,750 1,460,988
Average tangible shareholders' equity $ 3,193,650 $ 2,947,597
Annualized ROATE 14.49 % 11.84 %
Annualized ROATE, as adjusted 14.50 % 11.97 %
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$293.6 million for the first quarter 2021 increased$4.8 million and$27.2 million as compared to the fourth quarter 2020 and first quarter 2020, respectively. The increase as compared to the fourth quarter 2020 was mainly due to (i) increased interest and fee income from PPP loans, (ii) continued run-off of higher cost time deposits, (iii) the prepayment of$534 million of long-term FHLB advances with a combined weighted average interest rate of 2.48 percent inDecember 2020 , and (iv) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities. Interest expense of$39.1 million for the first quarter 2021 decreased$7.0 million as compared to the fourth quarter 2020. Interest income on a tax equivalent basis in the first quarter 2021 decreased by$2.3 million to$332.7 million as compared to the fourth quarter 2020 mainly due to lower overall yields on average taxable investment securities and loans and a decline in average balances within the investment portfolio due to normal repayment activity, partially offset by a$8.7 million increase in interest and fees on PPP loans caused by recognition of fee income on loans forgiven by the SBA during the first quarter 2021. Average interest earning assets increased$2.7 billion to$37.4 billion for the first quarter 2021 as compared to the first quarter 2020 primarily due to organic loan growth over the 12-month period, including$2.3 billion of PPP loans. As compared to the fourth quarter 2020, average interest earning assets decreased by$420.3 million from$37.8 billion partly driven by lower level of excess liquidity held in overnight interest bearing deposits with banks. The decrease in average overnight interest bearing deposits with banks was largely caused by funds used in the prepayment of long-term FHLB borrowings totaling$534 million inDecember 2020 . Average interest bearing liabilities decreased$280.9 million to$26.0 billion for the first quarter 2021 as compared to the first quarter 2020 primarily due to the repayments of long-term FHLB advances and a decline in overnight borrowings, partially offset by higher average deposit levels caused by general increases in customer balances. As compared to the fourth quarter 2020, average interest bearing liabilities decreased by$754.0 million in the first quarter 2021 mainly due to decreases in long- and short-term borrowings largely attributable to theDecember 2020 prepayment and normal maturities of FHLB advances, respectively, as we reduced our reliance on wholesale funding sources. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above. Our net interest margin on a tax equivalent basis of 3.14 percent for the first quarter 2021 increased by 8 basis points and 7 basis points from 3.06 percent and 3.07 percent for the first quarter 2020 and fourth quarter 2020, respectively. The yield on average interest earning assets increased by 2 basis points on a linked quarter basis, 47 -------------------------------------------------------------------------------- mostly due to the higher yield on the PPP loan portfolio and reduced excess liquidity held in overnight investments. The yield on average loans decreased by 1 basis point to 3.85 percent for the first quarter 2021 as compared to the fourth quarter 2020. This decrease was mainly due to new and refinanced loan originations at lower market interest rates and two less days during the first quarter 2021, which were mostly offset by the increased yield on our PPP loan portfolio. The overall cost of average interest bearing liabilities decreased 9 basis points to 0.60 percent for the first quarter 2021 as compared to the linked fourth quarter 2020, largely due to the lower rates offered on deposit products, maturing time deposits and a 4 basis point decrease in the average cost of short-term borrowings. Our cost of total average deposits was 0.28 percent for the first quarter 2021 as compared to 0.33 percent for the fourth quarter 2020. Looking forward, we expect moderate ongoing interest rate pressures on our net interest margin for the second quarter 2021 and beyond due to the low level of market rates and the potential negative impact on the overall yield on new and refinanced loan originations. However, we are also encouraged by the continued potential opportunity to repay or reprice stated maturity deposits and borrowings maturing at low costs during the remainder of 2021. OnApril 1, 2021 , we elected to call and prepay$60 million of subordinated notes that were bearing interest of 6.25 percent per annum and had an original contractual maturity date ofApril 1, 2026 . 48 --------------------------------------------------------------------------------
The following table reflects the components of net interest income for the three
months ended
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