# VALLEY NATIONAL BANCORP (VLY) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from VALLEY NATIONAL BANCORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/714310/000071431022000063/vly-20211231.htm
Accession: 0000714310-22-000063
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/VLY/
All MD&A years: /company/VLY/mda/
Next year: /company/VLY/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing Valley’s results of operations and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document. For comparison of our results of operations for the years ended December 31, 2021 and 2020, please refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.

Cautionary Statement Concerning Forward-Looking Statements

This report, both in MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” "may," "estimate," 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 in addition to those risk factors listed under the “Risk Factors” section in Part1, Item 1A of this Annual Report on Form 10-K include, but are not limited to:

•failure to obtain the remaining regulatory approvals for the acquisition of Bank Leumi USA on the anticipated terms and within the anticipated timeframe;

•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;

•changes in estimates of 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 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;

[[GREPCENT_TABLE]]
[["2021 Form 10-K","36"]]
[[/GREPCENT_TABLE]]

•the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral;

•the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies;

•damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters;

•a prolonged downturn in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas;

•higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;

•the inability to grow customer deposits to keep pace with loan growth;

•a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;

•the need to supplement debt or equity capital to maintain or exceed internal capital thresholds;

•greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations;

•the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy;

•cyber attacks, ransomware attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;

•results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;

•our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;

•unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events; and

•unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform, in all material respects, to U.S. GAAP. In preparing the consolidated financial statements, management has made estimates, judgments 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. Actual results could differ materially from those estimates.

Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Our significant accounting policies are presented in Note 1 to the consolidated financial statements. We identified our policies for the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical 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.

The judgments used by management in applying the critical accounting policies discussed below may be affected by significant changes in the economic environment, which may result in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in material changes in the allowance for credit losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses.

[[GREPCENT_TABLE]]
[["","37","2021 Form 10-K"]]
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Allowance for Credit Losses. Determining the allowance for credit losses for loans has historically been identified as a critical accounting estimate. On January 1, 2020, we adopted new accounting guidance which requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans, unfunded credit commitments and held to maturity debt securities measured at amortized cost. Prior to 2020, an allowance for credit losses for loans was recognized based on probable incurred losses. See Notes 1, 4 and 5 to the consolidated financial statements for further discussion of our accounting policies and methodologies for establishing the allowance for credit losses.

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

•Changes in the provision for credit losses can materially affect our financial results;

•Estimates relating to the allowance for credit losses require us to project future borrower performance, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default;

•The allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in gross domestic product (GDP), unemployment, housing prices, interest rates, inflation, and energy prices; and

•Judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses.

Management’s determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the credit risk we ascribe to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on individually evaluated loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Changes in such estimates could significantly impact our allowance and provision for credit losses. Accordingly, our actual credit loss experience may not be in line with our expectations.

Changes in Our Allowance for Credit Losses for Loans

Valley considers it difficult to quantify the impact of changes in the economic forecast on its allowance for credit losses for loans. However, management believes the following discussion may enable investors to better understand the variables that drive the allowance for credit losses for loans, which totaled $375.7 million and $351.4 million at December 31, 2021 and 2020, respectively.

As discussed further in the "Allowance for Credit Losses" section in this MD&A, we incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at December 31, 2021 and 2020. Due to continuous actual and expected improvements in economic conditions during 2021, including a significant decrease in the uncertain impact of the COVID-19 pandemic since December 31, 2020, we decreased our probability weighting for the most severe economic scenario at December 31, 2021. As a result, the qualitative economic component of our reserves at December 31, 2021 declined by more than $34 million as compared to December 31, 2020. Other qualitative non-economic reserves largely based upon management judgements about the uncertain impact of the COVID-19 pandemic on the performance of our loan portfolio declined by approximately $7 million as compared to December 31, 2020. The positive developments in these significant judgmental factors during 2021 were more than offset by increases in the quantitative portion of our allowance based upon 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.

Specific reserves totaling $71.5 million and $75.9 million, respectively, within the allowance at December 31, 2021 and 2020 are also largely based upon management's valuation of collateral for collateral dependent loans and the present value of expected cash flows for certain troubled debt restructured loans. The majority of these reserves at both December 31, 2021 and 2020 related to New York City taxi medallion loan valuations based on the estimated value of the underlying medallions. The valuation of the underlying medallions could be adversely impacted by further illiquidity or dislocation in the market, resulting in depressed market valuations of the underlying collateral, thus leading to additional provisions for loan losses. See additional taxi medallion loan valuation sensitivity analysis under the "Non-performing Assets" section of this MD&A.

Goodwill and Other Intangible Assets. We have significant goodwill and other intangible assets related to our acquisitions totaling $1.5 billion and $70.4 million at December 31, 2021, respectively. We record all acquired assets, including goodwill and other intangible assets, and assumed liabilities in purchase acquisitions at fair value as of the acquisition date, and

[[GREPCENT_TABLE]]
[["2021 Form 10-K","38"]]
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expense all acquisition related costs as incurred as required by ASC Topic 805, “Business Combinations.” The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities. Goodwill is subject to annual tests for impairment or more often, if events or circumstances indicate it may be impaired. Our determination of whether or not goodwill is impaired requires us to make significant judgments and to use significant estimates and assumptions regarding estimated future cash flows. If we change our strategy or if market conditions shift, our judgments may change, which may result in adjustments to the recorded goodwill balance. Other intangible assets are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount. Such evaluation of other intangible assets is based on undiscounted cash flow projections.

On January 1, 2020, we adopted ASU No. 2017-04 intended to simplify the goodwill impairment test by eliminating a second step which required an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an impairment loss is now recognized if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill recorded.

We perform our annual goodwill impairment test in the second quarter of each year, or more often if events or circumstances warrant. In addition to the annual impairment test, we assessed the impact of the COVID-19 pandemic on macroeconomic variables and economic forecasts and how those might impact the fair value of our reporting units each quarter end. After consideration of these variables and other possible triggering events or circumstances, as well as our operating results, we determined it was more-likely-than-not that the fair values of our four reporting units, wealth management, consumer lending, commercial lending, and investment management, were in excess of their carrying values during 2021. Therefore, we concluded there were no triggering events that would require additional goodwill impairment test of the reporting units during 2021.

Based upon Valley’s 2021 annual goodwill impairment testing, the fair values of its four reporting units were in excess of their carrying values. In 2022, we will continue to monitor and evaluate the impact of COVID-19 and its impact on our market capitalization, overall economic conditions, and any triggering events that may indicate a possible impairment of goodwill allocated to our reporting units. While not expected at this time, we may be required to record a charge to earnings should there be a deficiency in our estimated fair value of one or more of our reporting units during our subsequent annual (or more frequent) impairment tests. See the "Business Segments" section in this MD&A for more information regarding our business segments/reporting units.

Fair value is determined using certain discounted cash flow and market multiple methods. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may materially affect the estimates include, among others, impact of the COVID-19 pandemic on macroeconomic variables and economic forecasts, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates, growth rate, terminal values, and specific industry or market sector conditions. To assist in assessing the impact of potential goodwill or other intangible assets impairment charges at December 31, 2021, the impact of a five percent impairment charge on these intangible assets would result in a reduction in pre-tax income of approximately $76.5 million. See Note 8 to the consolidated financial statements for additional information regarding goodwill and other intangible assets.

Income Taxes. We are subject to the income tax laws of the U.S., its states and municipalities. The income tax laws of the jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws to our business activities, as well as the timing of when certain items may affect taxable income.

Our interpretations may be subject to review during examination by taxing authorities and disputes may arise over the respective tax positions. We attempt to resolve these disputes during the tax examination and audit process and ultimately through the court systems when applicable. We monitor relevant tax authorities and revise our estimate of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory authorities on a quarterly basis. Revisions of our estimate of accrued income taxes also may result from our own income tax planning and from the resolution of income tax controversies. Such revisions in our estimates may be material to our operating results for any given quarter.

The provision for income taxes is composed of current and deferred taxes. Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. We perform regular reviews to ascertain the realizability of our deferred tax assets. These reviews include management’s estimates and assumptions regarding future taxable income, which also incorporate various tax planning strategies. In connection with these reviews, if we determine that a

[[GREPCENT_TABLE]]
[["","39","2021 Form 10-K"]]
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portion of the deferred tax asset is not realizable, a valuation allowance is established. Management determined it is more likely than not that Valley will realize its net deferred tax assets, except for immaterial valuation allowances, as of December 31, 2021 and 2020.

We also maintain a reserve related to certain tax positions that management believes contain an element of uncertainty. An uncertain tax position is measured based on the largest amount of benefit that management believes is more likely than not to be realized. During 2021, 2020 and 2019, our income tax expense reflected increases of $1.2 million, $1.5 million and $31.1 million, respectively, to our tax provision related to reserve for uncertain tax liability positions and/or accrued interest related to such positions at December 31, 2021, 2020 and 2019, respectively.

See Notes 1 and 13 to the consolidated financial statements and the "Executive Summary" and “Income Taxes” sections in this MD&A for an additional discussion on the accounting for income taxes.

New Authoritative Accounting Guidance. See Note 1 of the consolidated financial statements for a description of recent accounting pronouncements including the dates of adoption and the anticipated effect on our results of operations and financial condition.

Executive Summary

Company Overview. At December 31, 2021, Valley had consolidated total assets of $43.4 billion, total net loans of $33.8 billion, total deposits of $35.6 billion and total shareholders’ equity of $5.1 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn and Queens, Long Island, Westchester County, New York, Florida and Alabama. Of our current 232 branch network, 56 percent, 19 percent, 18 percent and 7 percent of the branches are located in New Jersey, New York, Florida and Alabama, respectively. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years primarily both through organic efforts and through bank acquisitions discussed below and elsewhere in this report.

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. 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 seven locations in Westchester County, New York. The acquisition represented a significant addition to Valley's New York franchise, and enabled Valley to expand into the Westchester County, New York market. Full systems integration was completed in February 2022 with minimal disruption to our customers. However, some normal post-systems integration matters involving back-office and other functions were still underway at the filing date of this report.

Dudley Ventures. On October 8, 2021, Valley acquired certain subsidiaries of Arizona-based Dudley Ventures (DV), an advisory firm specializing in the investment and management of tax credits. The transaction price included $11.3 million of cash at the closing date, fixed future stock consideration totaling $3.8 million, and contingent cash earn-out payments based upon revenue growth of the acquired entities over a five-year period. On November 16, 2021, Valley also acquired DV Financial Services, a registered broker-dealer regulated by FINRA, which is largely inactive. The DV related acquisitions are expected to support our efforts to build differentiated sources of non-interest income.

Bank Leumi Le-Israel Corporation. On September 23, 2021, Valley announced that it will acquire 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 maintains its headquarters in New York City and also has commercial banking offices in Chicago, Los Angeles, Palo Alto, and Aventura, Florida. As of December 31, 2021, Bank Leumi USA had total assets of $8.3 billion, total deposits of $7.1 billion, and gross loans of $5.8 billion. Valley has received regulatory approval from the FRB and OCC, as well as Valley shareholder approval of the issuance of Valley common stock in connection with the acquisition. The acquisition remains subject to regulatory approval by the New York State Department of Financial Services, as well as other customary closing conditions. The acquisition is anticipated to close in the second quarter of 2022.

See Note 2 to the consolidated financial statements for additional details regarding these recent and pending acquisitions.

Impact of COVID-19. Economic activity and businesses continued to improve in the second half of 2021, although the emergence of the Omicron variant of the COVID-19 virus, which spread rapidly both globally and in the U.S., cast some uncertainty on the strength of the economic recovery. The U.S. is experiencing significant global supply chain disruptions and labor shortages which have contributed to a spike in inflation. We continue to monitor the impact of COVID-19 closely, including its impact on our employees, customers, communities and results of operations and other government stimulus or

[[GREPCENT_TABLE]]
[["2021 Form 10-K","40"]]
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Federal Reserve actions. The extent to which the COVID-19 pandemic will impact our operations and financial results during 2022 and beyond is highly uncertain. We continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant and will follow proper protocols designed to ensure safety of our employees and customers. See the "Operating Environment" section of MD&A for more details.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act and additional legislation that followed including the Consolidated Appropriations Act and the American Rescue Plan Act of 2021 provided funding for the SBA's Paycheck Protection Program (PPP) and established rules for qualifying borrowers to receive loan forgiveness by the SBA under this program. Valley extended a total of $3.2 billion PPP loans under the program, of which $2.8 billion of these loans have received forgiveness from the SBA, most of which occurred during 2021. As of December 31, 2021, we had $436 million of PPP loans still outstanding.

In response to the COVID-19 pandemic and its economic impact on certain customers and in accordance with provisions set forth by the CARES Act, Valley implemented short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. As of December 31, 2021, Valley had approximately $28.0 million of outstanding loans remaining in their payment deferral periods under short-term modifications representing approximately 0.1 percent of our total loan portfolio at December 31, 2021 as compared to approximately $361 million, or 1.1 percent of total loans at December 31, 2020.

Annual Results. Net income totaled $473.8 million, or $1.12 per diluted common share, for the year ended December 31, 2021 compared to $390.6 million in 2020, or $0.93 per diluted common share. The increase in net income in 2021 compared to 2020 was largely due to:

•a $91.0 million, or 8.1 percent, increase in our net interest income primarily driven by (i) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities, (ii) run-off of higher cost time deposits, (iii) lower average other borrowings due to normal maturities of FHLB advances and long-term repos, as well as our prepayments of certain long-term FHLB borrowings in December 2020 and June 2021 and (iv) a $1.2 billion increase in average earnings assets largely due to solid organic loan growth, partially offset by lower yields on average loans and investments;

•a $93.1 million decrease in our provision for credit losses mostly due to improvements in the economic forecast component of our CECL model during 2021; partially offset by:

•a $28.0 million decrease in non-interest income due to the combination of lower gains on sales of residential mortgage loans and lower fee income related to derivative interest rate swaps executed with commercial lending customers, partially offset by moderate increases in several other fee categories;

•a $45.4 million increase in non-interest expense largely due to salary and benefit costs which, among other things, was driven higher by strategic increases in our headcount to enhance lending and operations, increases in our branch compensation, higher medical insurance costs, as well as $7.6 million of merger expenses associated with our 2021 merger activities; and

•a $27.4 million increase in income tax expense mostly caused by higher 2021 pre-tax income.

See the “Net Interest Income,” “Non-Interest Income,” “Non-Interest Expense,” and “Income Taxes” sections in this MD&A for more details on the items above and other infrequent items, including merger expenses and the loss on extinguishment of debt, impacting our 2021 annual results.

Operating Environment. During 2021, real gross domestic product increased 5.7 percent compared to a decline of 3.4 percent in 2020. Growth was driven by increases in household consumption (particularly for services), business fixed investment and inventory restocking. Demand in these categories more than offset the decline in net exports and slowing government consumption.

To support economic activity, the Federal Reserve maintained the target range for the federal funds rate between zero and 0.25 percent. In addition, the Federal Reserve continued to purchase Treasury securities and agency residential and commercial mortgage-backed securities. The Federal Reserve indicated at its recent meeting that it expects to reduce accommodation, though it will continue to monitor the impact of incoming information on the economic outlook in their decisions.

The 10-year U.S. Treasury note yield ended 2021 at 1.52 percent, 59 basis points higher than at December 31, 2020. The spread between the 2- and 10-year U.S. Treasury note yields ended the year at 0.79 percent, 1 basis point lower compared to the end of 2020.

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For all commercial banks in the U.S., loans and leases grew approximately 4.1 percent from December 31, 2020 to December 31, 2021. For the industry, banks reported that demand for most commercial loan products increased sharply compared to 2020. The increase was broad-based across commercial real estate lending and for loans to middle market firms. Overall, the industry reported that underwriting standards remained mostly unchanged for commercial loan products. Our loan originations were strong across most products and geographies as economic activity expanded during 2021. While the outlook for the economy and our industry remain mostly positive for 2022, many difficult to predict adverse factors largely resulting from the prolonged COVID-19 pandemic, or geopolitical events, could weigh on the economy and, as a result, our financial operations and results, as highlighted in the remaining MD&A discussion below.

Loans. Total loans increased $1.9 billion to $34.2 billion at December 31, 2021 from December 31, 2020 in spite of a $1.7 billion decrease in PPP loans within the commercial and industrial loan category caused by SBA loan forgiveness. The overall increase in non-PPP loans was mainly due to strong organic growth during the year and $915 million of loans that we acquired from Westchester. Excluding acquired loans from Westchester, commercial real estate (including construction), non-PPP commercial and industrial, residential mortgage and automobile loans increased 9.3 percent, 8.7 percent, 7.9 percent, and 15.8 respectively, during the year ended December 31, 2021. Additionally, we originated $1.0 billion of residential mortgage loans for sale rather than held for investment. Loans held for sale totaled $139.5 million and $301.4 million at December 31, 2021 and 2020, respectively.

For 2022, we are targeting net loan growth in the range of 7 to 9 percent based on gross non-PPP loans of approximately $33.7 billion at December 31, 2021, excluding PPP loans of $436 million at December 31, 2021. However, there can be no assurance that we will achieve such levels given the potential for unforeseen changes in the market and other conditions detailed in our risk factors set forth under Item 1A. of this Report. See further details on our loan activities under the “Loan Portfolio” section below.

Asset Quality. Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $50.8 million, or 26.1 percent to $245.4 million at December 31, 2021 as compared to December 31, 2020. This increase was largely due to higher non-accrual loans in the commercial real estate, construction and residential mortgage loan categories. Non-accrual loans totaled $240.2 million, or 0.70 percent of our entire loan portfolio of $34.2 billion, at December 31, 2021 as compared to $185.3 million, or 0.58 percent of total loans, at December 31, 2020.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $43.1 million to $55.9 million, or 0.16 percent of total loans at December 31, 2021 as compared to $99.0 million, or 0.31 percent of total loans, at December 31, 2020. The decrease was largely due to lower early stage delinquencies in the commercial real estate, residential mortgage and total consumer loan categories reported at December 31, 2021.

Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the downturn in economic conditions impacted by the COVID-19 pandemic or other factors, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at December 31, 2021. See the “Non-performing Assets” section below for further analysis of our asset quality.

Deposits and Borrowings. Overall, average deposits increased by $2.5 billion to $33.2 billion for the year ended December 31, 2021 as compared to 2020 largely due to continued growth in both commercial and retail customer balances. Average non-interest bearing deposits represented approximately 31 percent of total average deposits for the year ended December 31, 2021, whereas savings, NOW and money market accounts were 55 percent and time deposits were 14 percent of total average deposits for the year ended December 31, 2021. Average non-interest bearing deposits, savings, NOW and money market accounts, and time deposits were 27 percent, 47 percent, and 26 percent, respectively, for the year ended December 31, 2020. Our mix of total deposits at December 31, 2021 as compared to December 31, 2020 reflects the shift in customer preference for deposits without stated maturities resulting from the low interest rates offered on our time deposits, as well as some funding from maturing retail CDs continued to migrate to the more liquid deposit products categories. Ending balances of brokered deposits were $1.4 billion at December 31, 2021, consisting of money market deposit accounts, as compared to $3.1 billion at December 31, 2020. The decline was largely due to the maturity and repayment of all brokered CDs throughout 2021 as organic deposit growth outweighed the need for wholesale funding sources. While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at December 31, 2021.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","42"]]
[[/GREPCENT_TABLE]]

The following table presents average short-term and long-term borrowings for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["","(in thousands)"],["Average short-term borrowings:"],["FHLB advances","$","722,192","","","$","1,281,121"],["Securities sold under repurchase agreements","163,223","","","152,392"],["Federal funds purchased","6,493","","","188,068"],["Total","$","891,908","","","$","1,621,581"],["Average long-term borrowings:"],["FHLB advances","$","1,136,661","","","$","2,100,874"],["Subordinated debt","533,754","","","356,273"],["Securities sold under repurchase agreements","170,685","","","337,159"],["Junior subordinated debentures issued to capital trusts","56,243","","","55,907"],["Total","$","1,897,343","","","$","2,850,213"]]
[[/GREPCENT_TABLE]]

Average short-term borrowings presented in the above table decreased largely due to the success of our retail, commercial and government deposit gathering efforts in 2021. Average long-term borrowings decreased largely due the combination of (i) $534 million and $248 million of FHLB advances which were prepaid in December 2020 and June 2021, respectively, (ii) normal repayments upon the maturities of FHLB advances and (iii) $300 million of long-term repurchase agreements which matured during the third quarter 2021. These decreases were partially offset by $300 million of subordinated notes issued in May 2021. See the “Net Interest Income” section below and Note 10 to the consolidated financial statements for additional details on our borrowed funds.

Selected Performance Indicators. The following table presents our annualized performance ratios for the three years ended December 31, 2021, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["Return on average assets","1.14","%","","0.96","%","","0.93","%"],["Return on average assets, as adjusted","1.18","","","0.99","","","0.98"],["Return on average shareholders\u2019 equity","9.98","","","8.68","","","8.71"],["Return on average shareholders\u2019 equity, as adjusted","10.27","","","8.93","","","9.19"],["Return on average tangible shareholders\u2019 equity (ROATE)","14.40","","","12.82","","","13.05"],["ROATE, as adjusted","14.82","","","13.19","","","13.77"]]
[[/GREPCENT_TABLE]]

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 that these measures facilitate comparisons of our prior performance with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. The non-GAAP measure reconciliations are presented below.

[[GREPCENT_TABLE]]
[["","43","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

Adjusted net income for the three years ended December 31, 2021, 2020 and 2019 was computed as follows:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","(in thousands)"],["Net income, as reported","$","473,840","","","$","390,606","","","$","309,793"],["Add: Loss on extinguishment of debt (net of tax)","6,024","","","8,649","","","22,992"],["Add: Net impairment losses on securities (net of tax)","\u2014","","","\u2014","","","2,104"],["Add: (Gains) losses on available for sale and held to maturity securities transactions (net of tax) (1)","(390)","","","(377)","","","108"],["Add: Severance expense (net of tax) (2)","\u2014","","","1,489","","","3,477"],["Add: Tax credit investment impairment (net of tax) (3)","\u2014","","","\u2014","","","1,746"],["Add: Merger related expenses (net of tax) (4)","6,698","","","1,371","","","11,929"],["Add: Litigation reserve (net of tax) (5)","1,505","","","\u2014","","","\u2014"],["Add: Income tax expense (6)","\u2014","","","\u2014","","","31,123"],["Less: Gain on sale-leaseback transaction (net of tax) (7)","\u2014","","","\u2014","","","(56,414)"],["Net income, as adjusted","487,677","","","401,738","","","326,858"]]
[[/GREPCENT_TABLE]]

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

(2)    Severance expense is included in salary and employee benefits expense.

(3)    Impairment is included in the amortization of tax credit investments.

(4)    Merger related expenses are primarily within salary and employee benefits expense, professional and legal fees, and other non-interest expenses.

(5)    Litigation reserve included in professional and legal fees.

(6)    Income tax expense related to reserves for uncertain tax positions initially recorded in 2019.

(7)    The gain on sale leaseback transactions is included in net gains on the sales of assets within other non-interest income.

In addition to the items used to calculate net income, as adjusted, in the tables above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans and swap fees recognized from commercial loan customer transactions. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, 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 for the three years ended December 31, 2021, 2020 and 2019 was computed by dividing adjusted net income by average assets, as follows:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","($ in thousands)"],["Net income, as adjusted","$","487,677","","$","401,738","","$","326,858"],["Average assets","41,475,682","","40,557,326","","33,442,738"],["Return on average assets, as adjusted","1.18","%","","0.99","%","","0.98","%"]]
[[/GREPCENT_TABLE]]

Adjusted annualized return on average shareholders' equity for the three years ended December 31, 2021, 2020 and 2019 was computed by dividing adjusted net income by average shareholders' equity, as follows:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","($ in thousands)"],["Net income, as adjusted","$","487,677","","$","401,738","","$","326,858"],["Average shareholders' equity","4,747,745","","4,500,067","","3,555,483"],["Return on average shareholders' equity, as adjusted","10.27","%","","8.93","%","","9.19","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2021 Form 10-K","44"]]
[[/GREPCENT_TABLE]]

ROATE and adjusted ROATE for the three years ended December 31, 2021, 2020 and 2019 were computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","($ in thousands)"],["Net income","$","473,840","","$","390,606","","$","309,793"],["Net income, as adjusted","$","487,677","","$","401,738","","$","326,858"],["Average shareholders\u2019 equity","$","4,747,745","","$","4,500,067","","$","3,555,483"],["Less: Average goodwill and other intangible assets","1,457,519","","1,454,349","","1,182,140"],["Average tangible shareholders\u2019 equity","$","3,290,226","","$","3,045,718","","$","2,373,343"],["ROATE","14.40","%","","12.82","%","","13.05","%"],["ROATE, as adjusted","14.82","%","","13.19","%","","13.77","%"]]
[[/GREPCENT_TABLE]]

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. The net interest margin on a fully tax equivalent basis is calculated by dividing tax equivalent net interest income by average interest earning assets and is a key measurement used in the banking industry to measure income from interest earning assets.

Annual Period 2021. Net interest income on a tax equivalent basis increased by $90.2 million to $1.2 billion for 2021 as compared to 2020. Interest expense decreased $140.5 million to $124.3 million for 2021 mainly driven by (i) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities, (ii) run-off of higher cost time deposits, and (iii) lower average other borrowings due to normal debt maturities and our prepayments of $534 million and $248 million of long-term FHLB borrowings in December 2020 and June 2021, respectively. Interest income on a tax equivalent basis decreased $50.3 million to $1.3 billion for 2021 largely due to lower overall yields on average loans and investments, partially offset by a $1.2 billion increase in average earnings assets largely due to solid organic loan growth. Interest and fee income related to PPP loans totaled $84.9 million for 2021 as compared to $43.6 million for 2020.

The net interest margin on a tax equivalent basis was 3.17 percent for the year ended December 31, 2021 and increased 14 basis points as compared to 2020. The yield on average interest earning assets decreased 25 basis points mainly attributable to decreased yields on average loans and average taxable investments. The yield on average loans decreased 21 basis points to 3.83 percent for 2021 as compared to 4.04 percent in 2020 largely due to new and refinanced loan originations at lower market interest rates, loan prepayments, and interest rates resetting on adjustable rate loans throughout 2021. Our average taxable investment portfolio yield decreased 45 basis points during 2021 as compared to the prior year due to our reinvestment of principal repayments at lower rates. More than offsetting the decrease in the yield on average interest earning assets, the cost of average interest bearing liabilities decreased 50 basis points to 0.49 percent for 2021 as compared to the prior year. The decrease in the overall cost as compared to 2020 was mainly due to our ability to reprice our sources of funding at lower rates.

Average interest earning assets totaling $38.2 billion for the year ended December 31, 2021 increased $1.2 billion, or 3.3 percent, as compared to 2020. Average loan balances increased $1.0 billion to $32.8 billion in 2021 and partially offset the decrease in interest income driven by the lower yields on average loans and taxable investments as compared to 2020. The growth in average loans during 2021 was due in large part, to organic loan growth in a number of non-PPP loan categories, which was significantly offset by a $1.7 billion decrease in PPP loans caused by SBA forgiveness during the year ended December 31, 2021. The new loan production in 2021 came from a blend of new and existing customer relationships with significant geographic and product diversification across our primary markets.

Average interest bearing liabilities decreased $1.3 billion to $25.6 billion for the year ended December 31, 2021 from the same period in 2020 mainly due to the strong growth we experienced in deposits from both commercial and retail customers and the customer shift from time deposits to transactional deposits without stated maturities. The average non-interest bearing deposits and savings, NOW and money market account balances increased by $2.2 billion and $3.9 billion, respectively, and were partially offset by a $3.6 billion decrease in average time deposits for the year ended December 31, 2021 as compared to the prior year. Average short-term and long-term borrowings decreased by $729.7 million and $952.9 million, respectively, in 2021, as compared to 2020 due, in part, to strong growth in deposits which provided excess liquidity and enabled us to reduce our other sources of funds.

[[GREPCENT_TABLE]]
[["","45","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

Fourth Quarter 2021. Net interest income on a tax equivalent basis totaling $316.0 million for the fourth quarter 2021 increased $14.3 million and $27.2 million as compared to the third quarter 2021 and fourth quarter 2020, respectively. Interest income on a tax equivalent basis increased $11.2 million to $340.7 million for the fourth quarter 2021 as compared to the third quarter 2021 due to (i) increases of $639.7 million and $248.6 million in average loans and investment securities, respectively, (ii) a $2.4 million increase in periodic non-PPP loan fees and interest recovery income, and (iii) an $877 thousand increase in PPP loan related interest and fees caused by loan forgiveness in the fourth quarter 2021. Interest expense of $24.7 million for the fourth quarter 2021 decreased $3.1 million as compared to the third quarter 2021 as we continue to reduce our cost of funding from both deposits and the repayment of other borrowings, primarily FHLB advances.

The net interest margin on a tax equivalent basis of 3.23 percent for the fourth quarter 2021 increased 8 basis points as compared to 3.15 percent for the third quarter 2021, and increased 17 basis points from 3.06 percent for the fourth quarter 2020. The yield on average interest earning assets increased by 4 basis points on a linked quarter basis mostly due to the higher yield on averages loans. The yields on average loans increased to 3.83 percent for the fourth quarter 2021 from 3.79 percent for the third quarter 2021 largely due to the increases in non-PPP loan fees, interest recovery income, and PPP interest and fees combined with a $493 million decline in average PPP loans during the fourth quarter 2021. The overall cost of average interest-bearing liabilities decreased by 5 basis points to 0.39 percent for the fourth quarter 2021 as compared to the linked third quarter 2021 due to the continued customer shift to lower cost deposits, as well as lower average short and long-term borrowings caused by normal repayments funded by excess liquidity. Our cost of total average deposits was 0.15 percent for the fourth quarter 2021 as compared to 0.18 percent for the third quarter 2021.

Many financial market participants currently anticipate higher interest rates in 2022 as compared to 2021. Higher levels of market interest rates would benefit certain interest earning assets on our balance sheet and likely provide us the opportunity to reinvest excess liquidity at higher rates. Under this scenario, we would also anticipate a lag in higher funding costs given the significant excess liquidity currently present in the U.S. banking system. Based upon our estimates at December 31, 2021, we anticipate net interest income growth of approximately 5 to 7 percent for the full year of 2022 as compared to 2021, excluding the impact of the Bank Leumi USA acquisition expected to close in the second quarter of 2022.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","46"]]
[[/GREPCENT_TABLE]]

The following table reflects the components of net interest income for each of the three years ended December 31, 2021, 2020 and 2019:

ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND

NET INTEREST INCOME ON A TAX EQUIVALENT BASIS

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","Average Balance","","Interest","","Average Rate","","Average Balance","","Interest","","Average Rate","","Average Balance","","Interest","","Average Rate"],["","($ in thousands)"],["Assets"],["Interest earning assets:"],["Loans (1)(2)","$","32,816,985","","","$","1,257,489","","","3.83","%","","$","31,785,859","","","$","1,284,807","","","4.04","%","","$","26,235,253","","","$","1,198,908","","","4.57","%"],["Taxable investments (3)","3,285,543","","","63,383","","","1.93","","","3,446,670","","","81,893","","","2.38","","","3,394,397","","","98,949","","","2.92"],["Tax-exempt investments (1)(3)","464,833","","","14,830","","","3.19","","","549,204","","","18,434","","","3.36","","","647,178","","","22,051","","","3.41"],["Interest bearing deposits with banks","1,660,454","","","1,738","","","0.10","","","1,229,200","","","2,556","","","0.21","","","298,702","","","5,723","","","1.92"],["Total interest earning assets","38,227,815","","","1,337,440","","","3.50","","","37,010,933","","","1,387,690","","","3.75","","","30,575,530","","","1,325,631","","","4.34"],["Allowance for loan losses","(349,877)","","","","","","","(295,131)","","","","","","","(157,562)"],["Cash and due from banks","279,578","","","","","","","309,539","","","","","","","275,619"],["Other assets","3,285,731","","","","","","","3,495,464","","","","","","","2,762,478"],["Unrealized gains (1osses) on securities available for sale, net","32,435","","","","","","","36,521","","","","","","","(13,327)"],["Total assets","$","41,475,682","","","","","","","$","40,557,326","","","","","","","$","33,442,738"],["Liabilities and Shareholders\u2019 Equity"],["Interest bearing liabilities:"],["Savings, NOW and money market deposits","$","18,223,279","","","$","42,879","","","0.24","%","","$","14,280,137","","","$","76,169","","","0.53","%","","$","11,406,073","","","$","145,177","","","1.27","%"],["Time deposits","4,574,337","","","25,094","","","0.55","","","8,125,869","","","106,067","","","1.31","","","7,521,338","","","166,693","","","2.22"],["Total interest bearing deposits","22,797,616","","","67,973","","","0.30","","","22,406,006","","","182,236","","","0.81","","","18,927,411","","","311,870","","","1.65"],["Short-term borrowings","891,908","","","5,374","","","0.60","","","1,621,581","","","11,372","","","0.70","","","2,070,258","","","47,862","","","2.31"],["Long-term borrowings","1,897,343","","","50,978","","","2.69","","","2,850,213","","","71,207","","","2.50","","","1,951,203","","","63,220","","","3.24"],["Total interest bearing liabilities","25,586,867","","","124,325","","","0.49","","","26,877,800","","","264,815","","","0.99","","","22,948,872","","","422,952","","","1.84"],["Non-interest bearing deposits","10,441,816","","","","","","","8,284,376","","","","","","","6,364,986"],["Other liabilities","699,254","","","","","","","895,083","","","","","","","573,397"],["Shareholders\u2019 equity","4,747,745","","","","","","","4,500,067","","","","","","","3,555,483"],["Total liabilities and shareholders\u2019 equity","$","41,475,682","","","","","","","$","40,557,326","","","","","","","$","33,442,738"],["Net interest income/interest rate spread (5)","","","1,213,115","","","3.01","%","","","","1,122,875","","","2.76","%","","","","902,679","","","2.50","%"],["Tax equivalent adjustment","","","(3,214)","","","","","","","(3,971)","","","","","","","(4,631)"],["Net interest income, as reported","","","$","1,209,901","","","","","","","$","1,118,904","","","","","","","$","898,048"],["Net interest margin (6)","","","","","3.16","%","","","","","","3.02","%","","","","","","2.94","%"],["Tax equivalent effect","","","","","0.01","","","","","","","0.01","","","","","","","0.01"],["Net interest margin on a fully tax equivalent basis (6)","","","","","3.17","%","","","","","","3.03","%","","","","","","2.95","%"]]
[[/GREPCENT_TABLE]]

(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 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.

[[GREPCENT_TABLE]]
[["","47","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

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 Valley 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

[[GREPCENT_TABLE]]
[["","2021 Compared to 2020","","2020 Compared to 2019"],["","Change Due to Volume","","Change Due to Rate","","Total Change","","Change Due to Volume","","Change Due to Rate","","Total Change"],["","(in thousands)"],["Interest income:"],["Loans*","$","40,846","","","$","(68,164)","","","$","(27,318)","","","$","234,704","","","$","(148,805)","","","$","85,899"],["Taxable investments","(3,685)","","","(14,825)","","","(18,510)","","","1,502","","","(18,558)","","","(17,056)"],["Tax-exempt investments*","(2,726)","","","(878)","","","(3,604)","","","(3,293)","","","(324)","","","(3,617)"],["Federal funds sold and other interest bearing deposits","712","","","(1,530)","","","(818)","","","5,471","","","(8,638)","","","(3,167)"],["Total increase (decrease) in interest income","35,147","","","(85,397)","","","(50,250)","","","238,384","","","(176,325)","","","62,059"],["Interest expense:"],["Savings, NOW and money market deposits","17,145","","","(50,435)","","","(33,290)","","","30,152","","","(99,160)","","","(69,008)"],["Time deposits","(34,806)","","","(46,167)","","","(80,973)","","","12,497","","","(73,123)","","","(60,626)"],["Short-term borrowings","(4,568)","","","(1,430)","","","(5,998)","","","(8,658)","","","(27,832)","","","(36,490)"],["Long-term borrowings and junior subordinated debentures","(25,271)","","","5,042","","","(20,229)","","","24,674","","","(16,687)","","","7,987"],["Total (decrease) increase in interest expense","(47,500)","","","(92,990)","","","(140,490)","","","58,665","","","(216,802)","","","(158,137)"],["Increase (decrease) in net interest income","$","82,647","","","$","7,593","","","$","90,240","","","$","179,719","","","$","40,477","","","$","220,196"]]
[[/GREPCENT_TABLE]]

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

Non-Interest Income

Non-interest income represented 10.4 percent and 11.7 percent of total interest income plus non-interest income for 2021 and 2020, respectively. For the year ended December 31, 2021, non-interest income decreased $28.0 million as compared to the year ended December 31, 2020 largely due to both lower gains on sales of loans and swap fee income derived from new commercial loan transactions. See further details below.

The following table presents the components of non-interest income for the years ended December 31, 2021, 2020, and 2019: 

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","(in thousands)"],["Trust and investment services","$","14,910","","","$","12,415","","","$","12,646"],["Insurance commissions","7,810","","","7,398","","","10,409"],["Service charges on deposit accounts","21,424","","","18,257","","","23,636"],["Gains (losses) on securities transactions, net","1,758","","","524","","","(150)"],["Net impairment losses on securities recognized in earnings","\u2014","","","\u2014","","","(2,928)"],["Fees from loan servicing","11,651","","","10,352","","","9,794"],["Gains on sales of loans, net","26,669","","","42,251","","","18,914"],["Gains (losses) on sales of assets, net","901","","","(1,891)","","","78,333"],["Bank owned life insurance","8,817","","","10,083","","","8,232"],["Other","61,073","","","83,643","","","55,634"],["Total non-interest income","$","155,013","","","$","183,032","","","$","214,520"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2021 Form 10-K","48"]]
[[/GREPCENT_TABLE]]

Trust and investment services income increased $2.5 million for the year ended December 31, 2021 from $12.4 million in 2020 mainly due to higher fees generated by the Bank's asset management subsidiary due to appreciation in customer balances as well as investment advisory fees generated by DV in the fourth quarter 2021.

Service charges on deposit accounts which increased $3.2 million for the year ended December 31, 2021 as compared to 2020 are mostly attributable to a reduction in waived fees related to COVID-19 customer relief efforts.

Gains on securities transactions, net increased by $1.2 million for the year ended December 31, 2021 as compared to 2020 mainly due to net trading gains from the launch of our new municipal bond trading platform in the first quarter 2021.

Fees from loan servicing increased $1.3 million for the year ended December 31, 2021 from $10.4 million in 2020 mainly due to additional fees from mortgage servicing rights on loans originated and sold by us during the year ended December 31, 2021. The aggregate principal balances of residential mortgage loans serviced by us for others increased approximately $76 million to $3.6 billion at December 31, 2021 from $3.5 billion at December 31, 2020.

Net gains on sales of loans decreased $15.6 million for the year ended December 31, 2021 as compared to 2020. Our net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans held for sale carried at fair value at each period end. The change in the fair value of loans held for sale totaled $11.8 million of net losses for the year ended December 31, 2021 as compared to the net gains of $13.5 million the year ended December 31, 2020. Excluding the effect of the change in the fair value, the net gain on actual sales of loans increased $9.7 million or the year ended December 31, 2021 as compared to 2020. This increase was mainly due to higher volume of loans sold in 2021, as well as improved spreads on the sales of individual loans which were on average approximately 21 basis points higher as compared to the prior year. During 2021, we sold $1.2 billion of residential mortgages as compared to $1.0 billion of residential mortgage loans sold during 2020. Residential mortgage loan originations (including both new and refinanced loans) increased 32.2 percent to $2.6 billion for the year ended December 31, 2021 as compared to $1.9 billion in 2020. See further discussions of our residential mortgage loan origination activity under “Loans” in the "Executive Summary" section of this MD&A above and Note 3 to the consolidated financial statements for details about the fair value methodology.

Net gains on sales of assets increased $2.8 million for the year ended December 31, 2021 as compared to $1.9 million net losses in 2020 primarily due to the net gains on the sale of a few former branch properties and other repossessed assets during 2021. In addition, the net losses recorded during 2020 included impairment charges recognized on certain technology assets.

Other non-interest income decreased $22.6 million for the year ended December 31, 2021 as compared to 2020 mainly due to a $32.1 million decrease in swap fee income caused by lower transaction volume of interest rate swaps executed with commercial lending customers. Swap fee income totaled $26.9 million and $59.0 million for the years ended December 31, 2021 and 2020, respectively. The decrease in swap fee income was partially offset by moderately higher fees and income in various other categories, including a $2.8 million increase in credit card and debit card fees mainly driven by greater card utilization.

Non-Interest Expense

Non-interest expense increased $45.4 million to $691.5 million for the year ended December 31, 2021 as compared to 2020 mainly driven by higher salary and employee benefits expense, as well as higher professional and legal fees. See further details below. The following table presents the components of non-interest expense for the years ended December 31, 2021, 2020 and 2019: 

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","","","(in thousands)"],["Salary and employee benefits expense","$","375,865","","","$","333,221","","","$","327,431"],["Net occupancy and equipment expense","132,098","","","129,002","","","118,191"],["FDIC insurance assessment","14,183","","","18,949","","","21,710"],["Amortization of other intangible assets","21,827","","","24,645","","","18,080"],["Professional and legal fees","38,432","","","32,348","","","20,810"],["Loss on extinguishment of debt","8,406","","","12,036","","","31,995"],["Amortization of tax credit investments","10,910","","","13,335","","","20,392"],["Telecommunication expense","11,409","","","10,737","","","9,883"],["Other","78,412","","","71,875","","","63,063"],["Total non-interest expense","$","691,542","","","$","646,148","","","$","631,555"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","49","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

Salary and employee benefits expense increased $42.6 million for the year ended December 31, 2021 as compared to 2020. The increase was primarily due to the combination of strategic increases in our headcount to enhance lending and operations, and increases in our branch compensation to preserve staffing and service levels, and to keep pace with the increases in wage demand across the industry. In addition, higher cash and stock-based incentive compensation accruals and health insurance costs also attributed to the 2021 increase. Change in control, severance and retention expenses related to our 2021 merger activities was $6.5 million for the year ended December 31, 2021. Severance costs related to operational restructuring efforts and our branch transformation strategy totaled $2.1 million for the year ended December 31, 2020.

Net occupancy and equipment expenses increased $3.1 million for the year ended December 31, 2021 as compared to 2020 largely due to higher cleaning, maintenance and repair costs.

The FDIC insurance assessment of $14.2 million decreased $4.8 million during 2021 as compared to the prior year largely due to the Bank's improved capital position and overall risk profile.

Amortization of other intangibles decreased $2.8 million for the year ended December 31, 2021 as compared to 2020 largely due to lower amortization expense of core deposit intangibles, as well as a full impairment adjustment recovery of the $865 thousand valuation allowance on loan servicing rights at December 31, 2020. See Note 8 to the consolidated financial statements for additional information.

Professional and legal fees increased $6.1 million for the year ended December 31, 2021 as compared to 2020. The increase was largely attributable to (i) higher consulting expenses mostly related to our technology transformation efforts and new product initiatives, (ii) a $2.1 million accrual for general litigation reserves, and (iii) $1.7 million of merger related costs during the year ended December 31, 2021.

Loss on extinguishment of debt totaling $8.4 million for the year ended December 31, 2021 reflects the prepayment of approximately $248 million of long-term FHLB advances during the second quarter 2021. During the year ended December 31, 2020, we also incurred a loss on extinguishment of debt totaling $12.0 million related to prepayments of long-term FHLB advances and institutional repo borrowings totaling $534.3 million and $50 million, respectively. All of the prepayments were funded by excess cash liquidity at the Bank. See Note 10 to the consolidated financial statements for additional information.

Amortization of tax credit investments decreased $2.4 million for the year ended December 31, 2021 as compared to 2020 mainly due to lower amortization on low income and new market tax credits and is attributable to differences in the timing and amount of such investments and recognition of the related tax credits. Tax credit investments, while negatively impacting the level of our operating expenses and efficiency ratio, directly reduce our income tax expense and effective tax rate. See Note 14 to the consolidated financial statements for additional information.

Other non-interest expense increased $6.5 million for the year ended December 31, 2021 as compared to 2020. The net increase in this expense category was largely due to a $4.7 million increase in data processing costs and incrementally higher operating expenses in several categories stemming from increased loan originations and expansion of our operations.

Efficiency Ratio. The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted primarily by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense, including, but not limited to the loss on extinguishment of debt, merger expenses and the net gain on sale-leaseback transactions.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","50"]]
[[/GREPCENT_TABLE]]

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for such items during the years ended December 31, 2021, 2020 and 2019: 

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","($ in thousands)"],["Total non-interest expense, as reported","$","691,542","","","$","646,148","","","$","631,555"],["Less: Loss on extinguishment of debt (pre-tax)","8,406","","","12,036","","","31,995"],["Less: Amortization of tax credit investments (pre-tax)","10,910","","","13,335","","","20,392"],["Less: Merger related expenses (pre-tax) (1)","8,900","","","1,907","","","16,579"],["Less: Litigation reserve (pre-tax) (2)","2,100","","","\u2014","","","\u2014"],["Less: Severance expense (mainly branch transformation, pre-tax) (3)","\u2014","","","2,072","","","4,838"],["Total non-interest expense, as adjusted","661,226","","","616,798","","","557,751"],["Net interest income","1,209,901","","","1,118,904","","","898,048"],["Total non-interest income, as reported","155,013","","","183,032","","","214,520"],["Add: (Gains) losses on available for sale and held to maturity debt securities transactions, net (pre-tax)","(545)","","","(524)","","","150"],["Add: Net impairment losses on securities (pre-tax)","\u2014","","","\u2014","","","2,928"],["Less: Gain on sale leaseback transaction (pre-tax)(4)","\u2014","","","\u2014","","","78,505"],["Total non-interest income, as adjusted","$","154,468","","","$","182,508","","","$","139,093"],["Gross operating income, as adjusted","$","1,364,369","","","$","1,301,412","","","$","1,037,141"],["Efficiency ratio","50.67","%","","49.63","%","","56.77","%"],["Efficiency ratio, adjusted","48.46","%","","47.39","%","","53.78","%"]]
[[/GREPCENT_TABLE]]

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

(2)Litigation reserve included in professional and legal fees.

(3)Severance expenses are included in salary and employee benefits expense.

(4)The gain on sale leaseback transactions is included in net gains on the sales of assets within other non-interest income.

Management continuously monitors its expenses in an effort to optimize Valley's performance. Based upon these efforts and our revenue goals, we achieved an efficiency ratio of 50.67 percent and adjusted efficiency ratio (as shown in the table above) of 48.46 percent for 2021. We will strive to preserve our adjusted efficiency ratio at or below 50 percent during 2022, however, we can provide no assurance that our adjusted efficiency ratio will remain at the level reported for 2021.

Income Taxes

Income tax expense was $166.9 million for the year ended December 31, 2021, reflecting an effective tax rate of 26.0 percent, as compared to $139.5 million for the year ended December 31, 2020, reflecting an effective tax rate of 26.3 percent. The increase in income tax expense during 2021 as compared to 2020 was mainly driven by higher pre-tax income. The CARES Act did not have a material impact on our reported income tax expense for the years ended December 31, 2021 and 2020.

Our uncertain tax liability positions totaling $30.4 million and $31.9 million at December 31, 2021 and 2020, respectively, relate to renewable energy tax credits and other tax benefits previously recognized from our investments in mobile generators sold and leased back by DC Solar and its affiliates.

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.

See additional information regarding our income taxes under our “Critical Accounting Policies and Estimates” section above, as well as Note 13 to the consolidated financial statements.

[[GREPCENT_TABLE]]
[["","51","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

Business Segments

We have four business segments that we monitor and report on to manage our business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Our reportable segments have been determined based upon Valley’s internal structure of operations and lines of business. Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from the corporate and other adjustments segment to each of the other three business segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a transfer pricing methodology, which

involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities outstanding for the period. The financial reporting for each segment contains allocations and reporting in line with our operations, which may not necessarily be comparable to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data.

Consumer lending. The consumer lending segment represented 22.0 percent of the total loan portfolio at December 31, 2021, 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 13.3 percent of our total loan portfolio at December 31, 2021) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans portfolio (representing 4.6 percent of total loans at December 31, 2021) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, insurance and tax credit advisory services.

Average interest earning assets in this segment increased $102.0 million to $7.3 billion for the year ended December 31, 2021 as compared to 2020. The increase was largely due to strong consumer demand for new vehicles which generated strong loan volume through our indirect auto loan channel, particularly during the first half of 2021. Also, to a lesser extent, we experienced growth in our residential mortgage portfolio held for investment and customer usage of personal lines of credit secured by the cash surrender value of life insurance. However, we continued to originate a high volume of residential mortgage loans for sale rather than investment during 2021, which led to only moderate growth in average assets for the consumer segment.

Income before income taxes generated by the consumer lending segment increased $14.1 million to $138.2 million for the year ended December 31, 2021 as compared to $124.1 million for the year ended December 31, 2020 largely due to an increase of $10.1 million in net interest income coupled with a $6.8 million credit recorded to our provision for loan losses, partially offset by a $9.4 million decrease in non-interest income. The increase in net interest income from 2020 was mostly due to the combination of a decline in our funding cost and higher average interest earning assets in 2021, which more than offset the lower yield on average interest earning assets in the consumer segment. The credit to our provision for loan losses was mainly due to improvement in the economic forecast component of our CECL model in 2021 as general conditions and uncertainty from the COVID-19 pandemic improved from December 31, 2020. See further details in the "Allowance for Credit Losses" section of this MD&A. The lower non-interest income was largely due to lower gains on sales of residential mortgage loans mostly resulting from a decline in the fair value adjustment on loans held for sale as of December 31, 2021 as compared to December 31, 2020.

The net interest margin on the consumer lending portfolio increased 11 basis points to 3.03 percent for the year ended December 31, 2021 as compared to 2020 due to a 41 basis point decrease in the costs associated with our funding sources, partially offset by a 30 basis point decrease in the yield on average loans. The decrease in our funding costs was mainly due to a greater mix of non-interest bearing deposits, deposits continuing to reprice at lower interest rates, maturity of higher cost time deposits and borrowings, and prepayment of certain long-term borrowings. The 30 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our loans, deposits and other borrowings.

The return on average interest earning assets before income taxes for the consumer lending segment was 1.90 percent for 2021 compared to 1.73 percent for 2020.

Commercial lending. The commercial lending segment is mainly 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.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","52"]]
[[/GREPCENT_TABLE]]

Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $5.8 billion and represented 17.1 percent of the total loan portfolio at December 31, 2021. Commercial real estate loans and construction loans totaled $20.8 billion and represented 60.9 percent of the total loan portfolio at December 31, 2021.

Average interest earning assets in this segment increased $929.1 million to $25.6 billion for the year ended December 31, 2021 as compared to 2020. The increase was mainly due to the strong organic commercial real estate loan growth across the markets and geographies of our franchise, partially offset by significant PPP loan forgiveness mostly in the second half of 2021.

For the year ended December 31, 2021, income before income taxes for the commercial lending segment increased $103.8 million to $552.4 million as compared to 2020 mainly driven by an increase in net interest income and a lower provision for loan losses. Net interest income increased $87.7 million to $951.4 million for the year ended December 31, 2021 as compared to 2020 mainly due to the $96.8 million decrease in interest expense caused by the reduction in our cost of funds, increased PPP loan fees and the higher average commercial loan balances during 2021. The $73.9 million decrease in the provision for credit losses to $39.7 million for the year ended December 31, 2021 as compared to 2020 was mainly due to an improvement in the economic forecast component of the allowance for loan losses and a reduction in other qualitative factors related to the COVID-19 pandemic. See the "Allowance for Credit Losses" section below for further details. Non-interest income decreased $29.2 million for the year ended December 31, 2021 as compared to 2020 primarily due to lower fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $26.9 million for the year ended December 31, 2021 as compared to $59.0 million in 2020. Non-interest expense and internal transfer expense increased $9.9 million and $18.7 million, respectively, during 2021 as compared to the prior year. The increase is non-interest expenses was due to higher general and administrative loan expenses and internal transfer expense allocation was higher, mostly due to higher averages assets for the year ended December 31, 2021 as compared to 2020.

The net interest margin for this segment increased 23 basis points to 3.73 percent during 2021 as compared to 2020 due to a 41 basis point decrease in the cost of our funding sources, partially offset by a 18 basis point decrease in the yield on average loans.

The return on average interest earning assets before income taxes for this segment was 2.16 percent for 2021 compared to 1.82 percent for the prior year period.

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

Average interest earning assets increased $185.8 million to $5.4 billion for the year ended December 31, 2021 as compared to 2020 primarily due to a $431.3 million increase in average interest bearing deposits with banks, partially offset by a $245.5 million decline in average investment securities. The increase in our excess liquidity held in overnight interest bearing deposits with banks was mainly caused by strong deposits growth over the 12-month period and management's slower rate of reinvestment principal repayments in investment securities throughout 2021 due to the low interest rate environment.

For the year ended December 31, 2021, income before income taxes for the investment management segment decreased $7.2 million to $12.4 million as compared to 2020 mainly due to lower net interest income and higher internal transfer and non-interest expenses. Net interest income decreased $2.3 million for the year ended December 31, 2021 as compared to 2020 due to lower yields on both the taxable and non-taxable investment portfolios, largely offset by the positive effect of the lower cost of funding. Internal transfer and non-interest expenses increased $3.8 million and $2.5 million, respectively, for the year ended December 31, 2021 as compared to 2020.

The net interest margin for this segment decreased 8 basis points to 1.22 percent during the year ended December 31, 2021 as compared to 2020 due to a 49 basis point decrease in the yield on average investments, partially offset by a 41 basis point decrease in costs associated with our funding sources. The decrease in the yield on average investments during 2021 as compared to one year ago was mainly due to higher levels of excess liquidity held in low yielding overnight investments and lower yielding new investment securities.

The return on average interest earning assets before income taxes for this segment was 0.23 percent for 2021 compared to 0.37 percent for 2020.

[[GREPCENT_TABLE]]
[["","53","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

The pre-tax net loss for the corporate segment totaled $62.3 million for the year ended December 31, 2021 was relatively unchanged as compared to $62.2 million in 2020. The net loss in 2021 was driven by fluctuations in various income and expense components. Non-interest income increased $10.1 million to $36.8 million for the year ended December 31, 2021 from 2020 due to higher fees and income in several categories, including investment management, service charges, and gains on sales of assets. Non-interest expense increased $31.8 million to $500.5 million for the year ended December 31, 2021 as compared to 2020 largely due to increases in salaries and employee benefits expenses and professional and legal fees. See further details in the "Non-Interest Expense" section in this MD&A. Internal transfer income increased $26.1 million to $428.3 million for the year ended December 31, 2021 as compared to the same period in 2020 largely due to general increases related to our growth.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominately 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 December 31, 2021. 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 December 31, 2021. 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 December 31, 2021. Although the size of Valley’s balance sheet is forecasted to remain static as of December 31, 2021, 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 2021. The model utilizes an immediate parallel shift in the market interest rates at December 31, 2021.

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

[[GREPCENT_TABLE]]
[["2021 Form 10-K","54"]]
[[/GREPCENT_TABLE]]

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. 

[[GREPCENT_TABLE]]
[["","","Estimated Change in Future Net Interest Income"],["Changes in Interest Rates","","Dollar Change","","Percentage Change"],["(in basis points)","","($ in thousands)"],["+200","","$","125,033","","","10.26","%"],["+100","","62,478","","","5.13"],["- 100","","(57,491)","","","(4.72)"],["- 200","","(85,949)","","","(7.05)"]]
[[/GREPCENT_TABLE]]

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12-month period by 5.13 percent. Management believes the interest rate sensitivity remains within an expected tolerance range at December 31, 2021. 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.

[[GREPCENT_TABLE]]
[["","55","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding at December 31, 2021 and their associated fair values. The expected cash flows are categorized based on each financial instrument’s anticipated maturity or interest rate reset date in each of the future periods presented.

INTEREST RATE SENSITIVITY ANALYSIS

[[GREPCENT_TABLE]]
[["","Rate","","2022","","2023","","2024","","2025","","2026","","Thereafter","","Total Balance","","Fair Value"],["","($ in thousands)"],["Interest sensitive assets:"],["Interest bearing deposits with banks","0.15","%","","$","1,844,764","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","1,844,764","","","$","1,844,764"],["Equity securities","2.79","","","36,473","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","36,473","","","36,473"],["Trading debt securities","1.89","","","38,130","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","38,130","","","38,130"],["Available for sale debt securities","2.05","","","270,800","","","165,678","","","128,942","","","123,965","","","87,309","","","352,115","","","1,128,809","","","1,128,809"],["Held to maturity debt securities","2.22","","","407,645","","","413,461","","","290,240","","","272,391","","","207,638","","","1,077,322","","","2,668,697","","","2,660,605"],["Loans held for sale, at fair value","3.08","","","139,516","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","139,516","","","139,516"],["Loans","3.58","","","10,148,155","","","5,711,345","","","4,124,150","","","2,844,642","","","2,090,287","","","9,235,078","","","34,153,657","","","33,283,251"],["Total interest sensitive assets","3.28","%","","$","12,885,483","","","$","6,290,484","","","$","4,543,332","","","$","3,240,998","","","$","2,385,234","","","$","10,664,515","","","$","40,010,046","","","$","39,131,548"],["Interest sensitive liabilities:"],["Deposits:"],["Savings, NOW and money market","0.15","%","","$","20,269,620","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","20,269,620","","","$","20,269,620"],["Time","0.41","","","2,986,056","","","434,952","","","72,499","","","40,134","","","88,132","","","65,271","","","3,687,044","","","3,670,113"],["Short-term borrowings","0.31","","","655,726","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","655,726","","","637,490"],["Long-term borrowings","2.86","","","\u2014","","","470,676","","","165,000","","","373,000","","","\u2014","","","415,000","","","1,423,676","","","1,404,184"],["Junior subordinated debentures","2.68","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","56,413","","","56,413","","","46,306"],["Total interest sensitive liabilities","0.34","%","","$","23,911,402","","","$","905,628","","","$","237,499","","","$","413,134","","","$","88,132","","","$","536,684","","","$","26,092,479","","","$","26,027,713"],["Interest sensitivity gap","","","$","(11,025,919)","","","$","5,384,856","","","$","4,305,833","","","$","2,827,864","","","$","2,297,102","","","$","10,127,831","","","$","13,917,567","","","$","13,103,835"],["Ratio of interest sensitive assets to interest sensitive liabilities","","","0.54:1","","6.95:1","","19.13:1","","7.84:1","","27.06:1","","19.87:1","","1.53:1","","1.5:1"]]
[[/GREPCENT_TABLE]]

The above table provides an approximation of the projected re-pricing of assets and liabilities at December 31, 2021 based on the contractual maturities, adjusted for anticipated prepayments of principal (including anticipated call dates on long-term borrowings and junior subordinated debentures), and scheduled rate adjustments. The prepayment experience reflected herein is based on historical experience combined with market consensus expectations derived from independent external sources. The actual repayments of these instruments could vary substantially if future prepayments differ from historical experience or current market expectations. While all non-maturity deposit liabilities are reflected in the 2022 column in the table above, management controls the re-pricing of the vast majority of the interest-bearing instruments within these liabilities.

Our cash flow derivatives are designed to protect us from upward movement in interest rates on certain deposits and other borrowings. The interest rate sensitivity table reflects the sensitivity at current interest rates. As a result, the notional amount of our derivatives is not included in the table. We use various assumptions to estimate fair values. See Note 3 to the consolidated financial statements for further discussion of fair value measurements.

The total gap re-pricing within one year as of December 31, 2021 was a negative $11.0 billion, representing a ratio of interest sensitive assets to interest sensitive liabilities of 0.54:1. The total gap re-pricing position, as reported in the table above, reflects the projected interest rate sensitivity of our principal cash flows based on market conditions as of December 31, 2021. As the market level of interest rates and associated prepayment speeds move, the total gap re-pricing position will change accordingly, but not likely in a linear relationship. Management does not view our one-year gap position as of December 31, 2021 as presenting an unusually high risk potential, although no assurances can be given that we are not at risk from interest rate increases or decreases.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","56"]]
[[/GREPCENT_TABLE]]

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 reported by our Treasury Department to two board committees. Among other actions, Treasury reviews historical funding requirements, our current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements.

The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy requires that we may not have a ratio of loans to deposits in excess of 110 percent or reliance on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at December 31, 2021.

At December 31, 2021, the Bank had various contractual obligations totaling $3.8 billion and $2.4 billion of maturing liabilities due in 12 months or less and greater than 1 year, respectively.

The following table summarizes maturities of contractual obligations of the Bank at December 31, 2021:

[[GREPCENT_TABLE]]
[["","","One Year or Less","","One to Three Years","","Three to Five Years","","Over Five Years","","Total"],["","","(in thousands)"],["Time deposits","","$","2,986,056","","","$","507,451","","","$","128,266","","","$","65,271","","","$","3,687,044"],["Short-term borrowings","","655,726","","","\u2014","","","\u2014","","","\u2014","","","655,726"],["Long-term borrowings","","\u2014","","","640,000","","","373,000","","","415,000","","","1,428,000"],["Junior subordinated debentures issued to capital trusts","","\u2014","","","\u2014","","","\u2014","","","60,827","","","60,827"],["Lease obligations","","36,402","","","65,200","","","59,781","","","121,723","","","283,106"],["Capital expenditures","","59,966","","","793","","","\u2014","","","\u2014","","","60,759"],["Other purchase obligations","","34,808","","","3,191","","","114","","","628","","","38,741"],["Total","","$","3,772,958","","","$","1,216,635","","","$","561,161","","","$","663,449","","","$","6,214,203"]]
[[/GREPCENT_TABLE]]

In the ordinary course of operations, the Bank enters into various financial obligations, including contractual obligations that may require future cash payments. As a financial services provider, we routinely enter into commitments to extend credit, including loan commitments, standby and commercial letters of credit. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Bank. We enter 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 rates on Bank's commitments to fund the loans, as well as on its portfolio of mortgage loans held for sale. Commitments to extend credit and standby letters of credit are subject to change since many of these commitments are expected to expire unused or only partially used based upon our historical experience, the total amounts of these commitments do not necessarily reflect future cash requirements. At December 31, 2021 our off-balance sheet commitments totaled $10.1 billion, inclusive of commitments of $6.7 billion due in 12 months or less. See Note 15 to the consolidated financial statements for further details.

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. Liquid assets totaled approximately $3.5 billion, representing 8.7 percent of earning assets, at December 31, 2021 and $3.1 billion, representing 8.3 percent of earning assets, at December 31, 2020. Of the $3.5 billion of liquid assets at December 31, 2021, approximately $568.7 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $736.0 million in principal from securities in the total investment portfolio over the next 12-month period due to

[[GREPCENT_TABLE]]
[["","57","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at December 31, 2021) are projected to be approximately $9.4 billion over the next 12-month period. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio, or alleviated from the temporary curtailment of lending activities.

On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $29.4 billion and $25.8 billion for the years ended December 31, 2021 and 2020, respectively, representing 78.3 percent and 69.8 percent of average earning assets at December 31, 2021 and 2020, respectively. 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.

The following table lists, by maturity, all certificates of deposit of $250 thousand and over at December 31, 2021: 

[[GREPCENT_TABLE]]
[["","2021"],["","(in thousands)"],["Less than three months","$","430,387"],["Three to six months","167,815"],["Six to twelve months","161,783"],["More than twelve months","101,531"],["Total","$","861,516"]]
[[/GREPCENT_TABLE]]

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased obtained through our well established relationships with several correspondent banks. While these lending lines are uncommitted, management believes that we could borrow approximately $1.5 billion for a short time from these banks on a collective basis. The Bank is also a member of the Federal Home Loan Bank of New York and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. Additionally, Valley's collateral pledged to the FHLB may be used to obtain Municipal Letters of Credit (MULOC) to collateralize certain municipal deposits held by Valley. At December 31, 2021, Valley had $1.1 billion of MULOCs outstanding for this purpose. Furthermore, we are able to obtain overnight borrowings from the Federal Reserve Bank of New York via the discount window as a contingency for additional liquidity. At December 31, 2021, our borrowing capacity (excluding added capacity available to us by pledging PPP loans), under the Federal Reserve Bank's discount window was approximately $1.9 billion.

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased $492.2 million to $655.7 million at December 31, 2021 from December 31, 2020 mainly due to a decrease in short-term FHLB advances utilized as a funding source due to deposit growth and excess liquidity in 2021.

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

During the second quarter 2021, Valley redeemed $60 million of callable subordinated notes and issued $300 million of 3.00 percent subordinated notes. See Note 10 to the consolidated financial statements for additional information.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","58"]]
[[/GREPCENT_TABLE]]

Investment Securities Portfolio

As of December 31, 2021, our investment securities portfolio consisted of equity and debt securities, with the debt securities classified as either trading, available for sale or held to maturity. The equity securities consisted of one publicly traded mutual fund, 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 mixture of both publicly traded and privately held entities. Our trading debt securities portfolio wholly consists of investment grade municipal bonds. Held to maturity and available for sale debt securities portfolios which comprise the majority of the securities we own include U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions, residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies, and high quality corporate bonds. Among other securities, our available for sale debt securities include securities such as bank issued and other corporate bonds, as well as municipal special revenue bonds, that may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers.

The primary purpose of our held to maturity and available for sale investment portfolios is to provide a source of earnings and liquidity, as well as serve as a tool for managing interest rate risk. The decision to purchase or sell securities is based upon the current assessment of long and short-term economic and financial conditions, including the interest rate environment and other statement of financial condition components. See additional information under "Interest Rate Sensitivity," "Liquidity and Cash Requirements" and "Capital Adequacy" sections elsewhere in this MD&A.

Investment securities at December 31, 2021 and 2020 were as follows: 

[[GREPCENT_TABLE]]
[["","2021","","2020"],["","(in thousands)"],["Equity securities","$","36,473","","","$","29,378"],["Trading debt securities","38,130","","","\u2014"],["Available for sale debt securities"],["U.S. Treasury securities","\u2014","","","51,393"],["U.S. government agency securities","20,925","","","26,157"],["Obligations of states and political subdivisions:"],["Obligations of states and state agencies","26,127","","","41,799"],["Municipal bonds","53,763","","","38,151"],["Total obligations of states and political subdivisions","79,890","","","79,950"],["Residential mortgage-backed securities","904,502","","","1,090,022"],["Corporate and other debt securities","123,492","","","91,951"],["Total available for sale debt securities","1,128,809","","","1,339,473"],["Total investment securities (fair value)","$","1,203,412","","","$","1,368,851"],["Held to maturity debt securities"],["U.S. Treasury securities","$","67,558","","","$","68,126"],["U.S. government agency securities","6,265","","","6,222"],["Obligations of states and political subdivisions:"],["Obligations of states and state agencies","141,015","","","262,762"],["Municipal bonds","196,947","","","207,497"],["Total obligations of states and political subdivisions","337,962","","","470,259"],["Residential mortgage-backed securities","2,166,142","","","1,550,306"],["Trust preferred securities","37,020","","","37,348"],["Corporate and other debt securities","53,750","","","40,750"],["Total investment securities held to maturity (amortized cost)","$","2,668,697","","","$","2,173,011"],["Allowance for credit losses","1,165","","","1,428"],["Total investment securities held to maturity, net of allowance for credit losses","2,667,532","","","2,171,583"],["Total investment securities","$","3,870,944","","","$","3,540,434"]]
[[/GREPCENT_TABLE]]

During the year ended 2021, we purchased approximately $1.5 million of residential mortgage backed securities mainly within the held to maturity portfolio. The purchases were largely to reinvest continued repayments and prepayments within both

[[GREPCENT_TABLE]]
[["","59","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

the available for sale and held to maturity portfolios, as well as utilize excess liquidity from our operations. The decrease in states and municipal obligations was due to a combination of several large call provisions exercised by the securities issuers, principal paydowns and maturities. The U.S. Treasury securities in our available for sale portfolio at December 31, 2020 were sold during 2021 and resulted in a gain of $825 thousand for the year ended December 31, 2021.

At December 31, 2021, we had $2.2 billion and $904.5 million of residential mortgage-backed securities classified as held to maturity and available for sale, respectively. Approximately 45 percent and 47 percent, respectively, were issued and guaranteed by Fannie Mae, and approximately 38 percent and 42 percent of these residential mortgage-backed securities, respectively, were issued and guaranteed by Ginnie Mae. The remainder of our outstanding residential mortgage-backed security balances at December 31, 2021 were issued by Freddie Mac.

The following table presents the weighted-average yields, calculated on a yield-to-maturity basis, on the remaining contractual maturities (unadjusted for expected prepayments) of held to maturity debt securities at December 31, 2021:

[[GREPCENT_TABLE]]
[["","0-1 year","","1-5 years","","5-10 years","","Over 10 years","","Total"],["Held to maturity debt securities"],["U.S. Treasury securities","\u2014","%","","3.22","%","","\u2014","%","","\u2014","%","","3.22","%"],["U.S. government agency securities","2.23","","","\u2014","","","\u2014","","","2.85","","","2.83"],["Obligations of states and political subdivisions: (1)"],["Obligations of states and state agencies","2.97","","","4.50","","","4.31","","","3.89","","","4.09"],["Municipal bonds","2.63","","","3.54","","","4.35","","","4.23","","","3.67"],["Total obligations of states and political subdivisions","2.66","","","3.83","","","4.33","","","4.04","","","3.85"],["Residential mortgage-backed securities (2)","\u2014","","","2.93","","","3.16","","","1.76","","","1.77"],["Trust preferred securities","\u2014","","","\u2014","","","8.12","","","2.27","","","2.43"],["Corporate and other debt securities","\u2014","","","3.48","","","3.63","","","\u2014","","","3.53"],["Total","2.65","%","","3.57","%","","4.08","%","","1.91","%","","2.11","%"]]
[[/GREPCENT_TABLE]]

(1)Average yields on obligations of states and political subdivisions are generally tax-exempt and calculated on a tax-equivalent basis using a statutory federal income tax rate of 21 percent.

(2)Residential mortgage-backed securities yields are shown using stated final maturity dates.

The residential mortgage-backed securities portfolio is a significant source of our liquidity through the monthly cash flow of principal and interest. Mortgage-backed securities, like all securities, are sensitive to changes in the interest rate environment, increasing and decreasing in value as interest rates fall and rise. As interest rates fall, the potential increase in prepayments can reduce the yield on the mortgage-backed securities portfolio, and reinvestment of the proceeds will be at lower yields. Conversely, rising interest rates may reduce cash flows from prepayments and extend anticipated duration of these assets. We monitor the changes in interest rates, cash flows and duration, in accordance with our investment policies. Management seeks out investment securities with an attractive spread over our cost of funds.

Allowance for Credit Losses and Impairment Analysis

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

We have evaluated all available for sale debt securities that are in an unrealized loss position as of December 31, 2021 and December 31, 2020 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the years ended December 31, 2021 and 2020 and, as a result, there was no allowance for credit losses for available for sale debt

[[GREPCENT_TABLE]]
[["2021 Form 10-K","60"]]
[[/GREPCENT_TABLE]]

securities at December 31, 2021 and December 31, 2020. During 2019, Valley recognized a $2.9 million impairment charge under the other-than-temporary impairment model on one special revenue bond classified as available for sale included in the states and state agencies category.

Held to maturity debt securities. As discussed further in Note 4 to the consolidated financial statements, Valley has a zero loss expectation for certain securities within the held to maturity portfolio, including, U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. Held to maturity debt securities were carried net of an allowance for credit losses totaling $1.2 million and $1.4 million at December 31, 2021 and 2020, respectively. We recorded a net credit of $263 thousand for the year ended December 31, 2021 and a provision of $635 thousand for the year ended December 31, 2020.

The net credit to provision for credit losses in 2021 was mostly a result of our improved economic forecast component of the CECL model at December 31, 2021 as compared to December 31, 2020. The provision in 2020 reflected the negative economic forecast incorporated within the allowance model from the onset of the COVID-19 pandemic in 2020 (which anticipated elevated levels of defaults, particularly on corporate bonds). There were no net charge-offs of held to maturity debt securities during 2021 and 2020.

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

The following table presents the held to maturity and available for sale debt investment securities portfolios by investment grades at December 31, 2021.

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["","Amortized Cost","","Gross Unrealized Gains","","Gross Unrealized Losses","","Fair Value"],["","(in thousands)"],["Available for sale investment grades:*"],["AAA Rated","$","943,554","","","$","15,851","","","$","(5,770)","","","$","953,635"],["AA Rated","58,227","","","224","","","(399)","","","58,052"],["A Rated","4,987","","","55","","","\u2014","","","5,042"],["BBB Rated","29,304","","","812","","","(126)","","","29,990"],["Non-investment grade","4,997","","","\u2014","","","(15)","","","4,982"],["Not rated","75,022","","","2,310","","","(224)","","","77,108"],["Total","$","1,116,091","","","$","19,252","","","$","(6,534)","","","$","1,128,809"],["Held to maturity investment grades:*"],["AAA Rated","$","2,345,588","","","$","21,932","","","$","(28,470)","","","$","2,339,050"],["AA Rated","151,115","","","3,175","","","(61)","","","154,229"],["A Rated","12,484","","","340","","","\u2014","","","12,824"],["BBB Rated","6,000","","","346","","","\u2014","","","6,346"],["Non-investment grade","5,576","","","\u2014","","","(59)","","","5,517"],["Not rated","147,934","","","187","","","(5,482)","","","142,639"],["Total","$","2,668,697","","","$","25,980","","","$","(34,072)","","","$","2,660,605"]]
[[/GREPCENT_TABLE]]

*    Rated using external rating agencies. Ratings categories include 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.

[[GREPCENT_TABLE]]
[["","61","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

The unrealized losses in the AAA rated category of the held to maturity debt securities (in the above table) are mainly related to residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae. The debt securities held to maturity portfolio included $147.9 million in investments not rated by the rating agencies with aggregate unrealized losses of $5.5 million at December 31, 2021 mostly related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.

See Note 4 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 for the years indicated.

[[GREPCENT_TABLE]]
[["","At December 31,"],["","2021","","2020"],["","($ in thousands)"],["Commercial and industrial","$","5,411,601","","","$","4,709,569"],["Commercial and industrial PPP loans","435,950","","","2,152,139"],["Total commercial and industrial","5,847,551","","","6,861,708"],["Commercial real estate:"],["Commercial real estate","18,935,486","","","16,724,998"],["Construction","1,854,580","","","1,745,825"],["Total commercial real estate","20,790,066","","","18,470,823"],["Residential mortgage","4,545,064","","","4,183,743"],["Consumer:"],["Home equity","400,779","","","431,553"],["Automobile","1,570,036","","","1,355,955"],["Other consumer","1,000,161","","","913,330"],["Total consumer loans","2,970,976","","","2,700,838"],["Total loans *","$","34,153,657","","","$","32,217,112"],["As a percent of total loans:"],["Commercial and industrial","17.1","%","","21.3","%"],["Commercial real estate","60.9","","","57.3"],["Residential mortgage","13.3","","","13.0"],["Consumer loans","8.7","","","8.4"],["Total","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

*    Includes net unearned discount and deferred loan fees of $78.5 million and $95.8 million at December 31, 2021 and 2020, respectively. Net unearned discounts and deferred loans fees at December 31, 2021 include the non-credit discount on purchased credit deteriorated (PCD) loans, and $12.1 million and $43.2 million of net unearned fees related to PPP loans at December 31, 2021 and 2020, respectively.

Total loans increased by $1.9 billion, or 6.0 percent to $34.2 billion at December 31, 2021 from December 31, 2020 largely due to a combination of strong organic loan growth and $915 million in loans acquired from Westchester, partially offset by a $1.7 billion decline in PPP loans. During 2021, Valley also originated $1.0 billion of residential mortgage loans for sale rather than investment. Loans held for sale totaled $139.5 million and $301.4 million at December 31, 2021 and 2020, respectively. See additional information regarding our residential mortgage loan activities below.

Commercial and industrial loans decreased $1.0 billion to $5.8 billion at December 31, 2021 from December 31, 2020 due to $1.7 billion of PPP loans that were forgiven by the SBA during 2021. Non-PPP commercial and industrial loans increased $702.0 million largely due, in part, to expansion of our commercial lending team during 2021, solid demand in certain customer segments, including healthcare lending, and approximately $293 million of acquired loans from Westchester. Valley expects the vast majority of the remaining $436 million of PPP loans at December 31, 2021 to qualify for forgiveness under the guidelines of the SBA program, which is expected to negatively impact our ability to organically grow this segment of the portfolio in the early stages of 2022.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","62"]]
[[/GREPCENT_TABLE]]

Commercial real estate loans (excluding construction loans) increased $2.2 billion to $18.9 billion at December 31, 2021 from December 31, 2020 reflecting solid organic growth mainly due to demand for non-owner occupied loans across our geographic footprint, as well as $579 million of acquired loans from Westchester. Our organic approach to growth is a balance of loan production through expansion of lending with our existing clients and establishing new relationships with key players in our marketplaces. During 2021, our commercial real estate production exhibited particular strength in loans secured by multi-family dwellings, warehouses and healthcare facilities. During 2021, we also modestly expanded our commercial lending activities beyond our primary markets into other select areas of Pennsylvania, Georgia and Tennessee. We believe this expansion, and the expansion which is expected to result from our pending acquisition of Bank Leumi USA, will provide both growth and further diversification of our commercial real estate and other commercial lending portfolios.

Construction loans totaled $1.9 billion at December 31, 2021 and increased $108.8 million from December 31, 2020, mainly driven by demand for commercial and residential construction projects. The Westchester acquisition contributed only $22 million of acquired loans to the construction loan portfolio during December 2021. 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 during 2021. Construction demand in our Florida markets was particularly robust in 2021 and partly due to a faster paced reopening during the COVID-19 pandemic. We continue to be strategically competitive for the strongest borrowers and projects in all our primary markets.

Residential mortgage loans totaled $4.5 billion at December 31, 2021 and increased by $361.3 million from December 31, 2020 largely due to a 32 percent increase in origination of new and refinanced residential mortgage loans totaling $2.6 billion for the year ended December 31, 2021 as compared to $1.9 billion in 2020. The Westchester acquisition contributed only $30 million of acquired loans to the residential mortgage loan portfolio during December 2021. Florida originations totaled approximately $681 million and represented 26.6 percent of total originations during 2021. During 2021, we sold $1.2 billion of residential mortgages as compared to $1.0 billion of residential mortgage loans sold during 2020 and may continue to sell a large portion of our new fixed rate residential mortgage loan originations during 2022 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet. We retain mortgage originations based on credit criteria and loan to value levels, the composition of our interest earning assets and interest bearing liabilities and our ability to manage the interest rate risk associated with certain levels of these instruments. From time to time, we purchase residential mortgage loans originated by, and sometimes serviced by, other financial institutions based on several factors, including current loan origination volumes, market interest rates, excess liquidity, CRA and other asset/liability management strategies. Purchased residential mortgage loans are generally selected using Valley’s normal underwriting criteria at the time of purchase and are sometimes partially or fully guaranteed by third parties or insured by government agencies such as the Federal Housing Administration. Valley purchased approximately $58.3 million and $24.3 million of 1-4 family loans, qualifying for CRA purposes during 2021 and 2020, respectively.

Consumer loans increased $270.1 million to $3.0 billion at December 31, 2021 from December 31, 2020 mainly due to higher volumes of automobile loans and personal lines of credit. The Westchester acquisition contributed only $5 million of acquired loans to the consumer loan portfolio during December 2021. Automobile loans increased $214.1 million or 15.8 percent to $1.6 billion at December 31, 2021 from December 31, 2020 driven by strong consumer demand for new and used vehicles. We originated $872 million in auto loans through our dealership network during 2021 as compared to $492 million in 2020. Of the total originations, our Florida dealership network contributed approximately 16 percent and 17 percent of Valley's total new auto loan production for 2021 and 2020, respectively. Other consumer loans increased $86.8 million to $1.0 billion at December 31, 2021 as compared to 2020 mainly due to both higher usage and demand within our collateralized personal lines of credit portfolio. Home equity loans decreased $30.8 million in 2021 from $431.6 million at December 31, 2020.

For 2022, we anticipate strong organic non-PPP loan growth of between 7 to 9 percent. In the early stages of the first quarter 2022, we are encouraged that our loan origination pipelines remain robust and overall non-PPP loan growth should remain well-diversified across our markets and most loan categories. However, there can be no assurance that those positive trends will continue, or balances will not decline from December 31, 2021 given the uncertain economic environment.

[[GREPCENT_TABLE]]
[["","63","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

The following table presents the contractual maturity distribution of loans by category at December 31, 2021: 

[[GREPCENT_TABLE]]
[["","1 Year or Less","","1 to 5 Years","","5 to 15 Years","","Over 15 Years","","Total"],["","(in thousands)"],["Commercial and industrial","$","1,213,731","","","$","2,489,051","","","$","1,010,419","","","$","1,134,350","","","$","5,847,551"],["Commercial real estate","1,352,142","","","5,483,620","","","9,259,107","","","2,840,617","","","18,935,486"],["Construction","505,032","","","887,536","","","279,283","","","182,729","","","1,854,580"],["Residential mortgage","151,400","","","166,240","","","495,664","","","3,731,760","","","4,545,064"],["Consumer","31,022","","","948,276","","","1,965,302","","","26,376","","","2,970,976"],["Total loans","$","3,253,327","","","$","9,974,723","","","$","13,009,775","","","$","7,915,832","","","$","34,153,657"]]
[[/GREPCENT_TABLE]]

We may renew loans at maturity when requested by a customer. In such instances, we generally conduct a review which includes an analysis of the borrower’s financial condition and, if applicable, a review of the adequacy of collateral via a new appraisal from an independent, bank approved, certified or licensed property appraiser or readily available market resources. A rollover of the loan at maturity may require a principal reduction or other modified terms.

The following table presents the contractual maturities after one year for fixed and adjustable rate loans within each loan category at December 31, 2021: 

[[GREPCENT_TABLE]]
[["","Loans Maturing After One Year"],["","Fixed Rate","","Adjustable Rate","","Total"],["","(in thousands)"],["Commercial and industrial","$","2,624,766","","","$","2,009,054","","","$","4,633,820"],["Commercial real estate","5,769,391","","","11,813,953","","","17,583,344"],["Construction","307,672","","","1,041,876","","","1,349,548"],["Residential mortgage","3,520,267","","","873,397","","","4,393,664"],["Consumer","1,616,023","","","1,323,931","","","2,939,954"],["Total loans","$","13,838,119","","","$","17,062,211","","","$","30,900,330"]]
[[/GREPCENT_TABLE]]

Non-performing Assets

Non-performing assets (NPAs) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which consist of automobiles and taxi medallions) at December 31, 2021. 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 cost to sell.

Non-performing assets totaling $245.4 million at December 31, 2021 increased $50.8 million, or 26.1 percent, from December 31, 2020 (as shown in the table below) mainly due to higher non-accrual loans in the commercial real estate, construction and residential mortgage categories, partially offset by a decrease in the commercial and industrial loan category and lower OREO balances. NPAs as a percentage of total loans and NPAs totaled 0.71 percent and 0.60 percent at December 31, 2021 and 2020, respectively. We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio over the past two years, despite the uptick in non-accrual borrowers mainly caused by the COVID-19 pandemic. The level of NPAs is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 5 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, our overall credit trends remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the continuing challenges of the COVID-19 pandemic. However, management cannot provide assurance that the non-performing assets will not increase substantially from the levels reported at December 31, 2021 due to the continuing economic uncertainty and potentially for credit deterioration. In addition, a few borrowers are still performing under forbearance agreements at December 31, 2021 as discussed under the "Loan Forbearance" section below.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","64"]]
[[/GREPCENT_TABLE]]

The following table sets forth by loan category, accruing past due and non-performing assets on the dates indicated in conjunction with our asset quality ratios:

[[GREPCENT_TABLE]]
[["","At December 31,"],["","2021","","2020"],["","($ in thousands)"],["Accruing past due loans"],["30 to 59 days past due"],["Commercial and industrial","$","6,717","","","$","6,393"],["Commercial real estate","14,421","","","35,030"],["Construction","1,941","","","315"],["Residential mortgage","10,999","","","17,717"],["Total consumer","6,811","","","10,257"],["Total 30 to 59 days past due","40,889","","","69,712"],["60 to 89 days past due"],["Commercial and industrial","7,870","","","2,252"],["Commercial real estate","\u2014","","","1,326"],["Residential mortgage","3,314","","","10,351"],["Total consumer","1,020","","","1,823"],["Total 60 to 89 days past due","12,204","","","15,752"],["90 or more days past due"],["Commercial and industrial","1,273","","","9,107"],["Commercial real estate","32","","","993"],["Residential mortgage","677","","","3,170"],["Total consumer","789","","","271"],["Total 90 or more days past due","2,771","","","13,541"],["Total accruing past due loans","$","55,864","","","$","99,005"],["Non-accrual loans*"],["Commercial and industrial","$","99,918","","","$","106,693"],["Commercial real estate","83,592","","","46,879"],["Construction","17,641","","","84"],["Residential mortgage","35,207","","","25,817"],["Total consumer","3,858","","","5,809"],["Total non-accrual loans","240,216","","","185,282"],["Other real estate owned (OREO)","2,259","","","5,118"],["Other repossessed assets","2,931","","","3,342"],["Non-accrual debt securities","\u2014","","","815"],["Total non-performing assets (NPAs)","$","245,406","","","$","194,557"],["Performing troubled debt restructured loans","$","71,330","","","$","57,367"],["Total non-accrual loans as a % of loans","0.70","%","","0.58","%"],["Total NPAs as a % of loans and NPAs","0.71","","","0.60"],["Total accruing past due and non-accrual loans as a % of loans","0.87","","","0.88"],["Allowance for loan losses as a % of non-accrual loans","149.53","","","183.64"]]
[[/GREPCENT_TABLE]]

Loans past due 30 to 59 days decreased $28.8 million at December 31, 2021 as compared to December 31, 2020 partially due to two commercial real estate loans totaling $20.7 million reported in this delinquency category on December 31, 2020 that migrated to non-accrual status during 2021. The residential mortgage loan and consumer loan delinquencies within this category decreased by $6.7 million and $3.4 million, respectively, from December 31, 2020 mainly due to improved performance and the results of our 2021 collection efforts.

[[GREPCENT_TABLE]]
[["","65","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

Loans past due 60 to 89 days decreased $3.5 million to $12.2 million at December 31, 2021 as compared to December 31, 2020 mostly due to lower residential mortgage loan delinquencies, partially offset by an increase in commercial and industrial loan delinquencies in this category. Residential loans past due 60 to 89 days decreased by $7.0 million as compared to December 31, 2020 due, in part, to loans that migrated to non-accrual status.

Loans 90 days or more past due and still accruing decreased $10.8 million to $2.8 million at December 31, 2021 as compared to December 31, 2020 partly due to premium finance loans (related to two insurance carriers) totaling $6.1 million in the commercial and industrial category reclassified to non-accrual status in 2021. All the loans past due 90 days or more and still accruing are considered to be well secured and in the process of collection.

Non-accrual loans increased $54.9 million to $240.2 million at December 31, 2021 as compared to December 31, 2020. The increase was partially attributable to three loans totaling $31.0 million and one loan totaling $10.3 million that migrated to non-accrual status from the 30-59 days and 60 to 89 days past due categories during 2021. These non-accrual loans totaling $41.1 million have allocated reserves of $2.0 million within our allowance for loan losses at December 31, 2021. In addition, non-accrual construction loans increased $17.6 million at December 31, 2021 as compared to December 31, 2020 and related to one construction borrower relationship with allocated reserves of $1.4 million at December 31, 2021. Partially offsetting these increases, non-accrual commercial and industrial loans decreased $6.8 million mostly due to full and partial charge-offs of certain taxi medallion loans during 2021. See further discussion of our taxi medallion loan portfolio below.

Although the timing of collection is uncertain, management believes that most of the non-accrual loans at December 31, 2021, are well secured and largely collectible based on, in part, our quarterly review of collateral dependent loans and the valuation of the underlying collateral, if applicable. If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $7.1 million, $6.2 million and $2.5 million for the years ended December 31, 2021, 2020 and 2019, respectively; none of these amounts were included in interest income during these periods. 

Non-accrual taxi medallion loans. Valley's historical taxi medallion lending criteria was conservative in regard to capping the loan amounts in relation to the prevailing market valuations, as well as obtaining personal guarantees and other collateral in certain instances. However, the severe decline in the market valuation of taxi medallions over the last several years has adversely affected the estimated fair valuation of these loans. During 2021, we closely monitored the performance of our New York City and Chicago taxi medallion loans. Due to continued negative trends in estimated fair valuations of the underlying taxi medallion collateral, a weak operating environment for ride services and uncertain borrower performance, all of the taxi medallion loans remain on non-accrual status at December 31, 2021. At December 31, 2021, taxi medallion loans totaling $86.0 million had related reserves of $58.5 million, or 68.0 percent of such loans, within the allowance for loan losses as compared to $97.5 million of loans with related reserves of $66.4 million December 31, 2020. Potential declines in the market valuation of taxi medallions and the stressed operating environment mainly within New York City due to the COVID-19 pandemic could negatively impact future performance of this portfolio. For example, a 25 percent further decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $5.7 million within the allowance for loan losses based upon the taxi medallion loan balances at December 31, 2021.

OREO (which consisted mostly of commercial properties) decreased to $2.3 million at December 31, 2021 as compared to $5.1 million at December 31, 2020. OREO sales resulted in total proceeds of approximately $2.9 million and net losses of $152 thousand for the year ended December 31, 2021 as compared to total proceeds of $9.0 million and net gains of $674 thousand for the year ended December 31, 2020. See Notes 1 and 3 to the consolidated financial statements for additional information regarding OREO and other repossessed assets, including our foreclosed asset activity.

TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased $14.0 million to $71.3 million at December 31, 2021 as compared to $57.4 million at December 31, 2020. Performing TDRs consisted of 98 loans and 87 loans (primarily in the commercial and industrial loan and commercial real estate portfolios) at December 31, 2021 and 2020, respectively. On an aggregate basis, the $71.3 million in performing TDRs at December 31, 2021 had a modified weighted average interest rate of approximately 4.19 percent as compared to a pre-modification weighted average interest rate of 4.29 percent. See Note 5 to the consolidated financial statements for additional disclosures regarding our TDRs.

Loan Forbearance. In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment, when requested by customers, all of which were insignificant. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley could extend for an additional 90 days. Any extensions beyond this period were provided in accordance with applicable regulatory guidance. Under the applicable guidance, none of these loans were classified

[[GREPCENT_TABLE]]
[["2021 Form 10-K","66"]]
[[/GREPCENT_TABLE]]

as TDRs at December 31, 2021 and December 31, 2020. Valley had approximately $28 million of outstanding loans remaining in their payment deferral periods under short-term modifications representing approximately 0.1 percent of our total loan portfolio at December 31, 2021 as compared to approximately $361 million, or 1.1 percent of total loans at December 31, 2020.

Asset Concentration and Risk Elements

Most of our lending is in northern and central New Jersey, New York City, Long Island, Westchester County, New York, Florida and Alabama, except for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey. As part of our business strategy, we have expanded commercial real estate lending to new customers in a few targeted states beyond our geographic footprint. In addition to our primary markets, automobile loans are mostly originated in several other contiguous states. 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. Due to the level of our underwriting standards applied to all loans, management believes the out of market loans generally present no more risk than those made within the market. However, each loan or group of loans made outside of our primary markets poses different geographic risks based upon the economy of that particular region.

For our commercial loan portfolio, comprised of commercial and industrial loans, commercial real estate loans, and construction loans, a separate credit department is responsible for risk assessment and periodically evaluating overall creditworthiness of a borrower. Additionally, efforts are made to limit concentrations of credit to minimize the impact of a downturn in any one economic sector. We believe our loan portfolio is diversified as to type of borrower and loan. However, loans collateralized by real estate represent approximately 75 percent of total loans at December 31, 2021. Most of the loans collateralized by real estate are in northern and central New Jersey, New York City and Florida presenting a geographical credit risk if there was a further significant broad-based deterioration in economic conditions within these regions impacted by COVID-19 pandemic. See Item 1A. Risk Factors -"Risks Related to the COVID-19 Pandemic".

Consumer loans are comprised of residential mortgage loans, home equity loans, automobile loans and other consumer loans. Residential mortgage loans are secured by 1-4 family properties mostly located in New Jersey, New York and Florida. We do provide mortgage loans secured by homes beyond this primary geographic area; however, lending outside this primary area has generally consisted of loans made in support of existing customer relationships, as well as targeted purchases of certain loans guaranteed by third parties. Our mortgage loan originations are comprised of both jumbo (i.e., loans with balances above conventional conforming loan limits) and conventional loans based on underwriting standards that generally comply with Fannie Mae and/or Freddie Mac requirements. The weighted average loan-to-value ratio of all residential mortgage originations in 2021 was 67 percent while FICO® (independent objective criteria measuring the creditworthiness of a borrower) scores averaged 760. Home equity and automobile loans are secured loans and are made based on an evaluation of the collateral and the borrower’s creditworthiness.

Management realizes that some degree of risk must be expected in the normal course of lending activities. Allowances are maintained to absorb such lifetime expected credit losses inherent in the portfolio.

See the "Loan Portfolio Risk Elements and Credit Risk Management" section in Note 4 to the consolidated financial statements for additional information.

Allowance for Credit Losses

The allowance for credit losses (ACL) 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: (1) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (2) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent, TDR, and expected TDR loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial standby letters of credit.

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

[[GREPCENT_TABLE]]
[["","67","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

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.

At December 31, 2020, Valley maintained a higher combined weighting on the S-3 and S-4 alternative downside scenarios as compared to the Moody's Baseline scenario to reflect downside risk factors. During 2021, we discontinued the use of the S-4 (most adverse) downside scenario as a result of the continued actual and expected economic recovery, increased vaccination levels, strong housing and labor market conditions during 2021, and began to incorporate the S-1 moderate upside scenario.

At December 31, 2021, Valley maintained the majority of its probability weighting to the Moody’s Baseline scenario with less emphasis on the S-3 downside and S-1 upside scenarios. The Baseline weighting and the S-1 scenario reflect the positive economic outlook including higher GDP growth and lower unemployment levels that are expected to improve labor market conditions and promote stronger economic growth during 2022. However, this positive outlook could still be tempered by, among other factors, the uncertainty associated with the COVID-19 pandemic, acceleration in consumer prices caused by elevated levels of inflation, as well as continuing supply chain issues contributing to a downside risk to the near-term forecast.

At December 31, 2021, the Moody's Baseline forecast included the following specific assumptions:

•GDP expansion by over 5.4 percent in the first quarter 2022;

•Unemployment of 4.5 percent in the fourth quarter 2021 and improving to 3.9 percent in the first quarter 2022 and around 3.5 percent over the remainder of the forecast period ending fourth quarter 2023; and

•Strong U.S. economic growth driven by continued consumer spending.

The allowance for credit losses for loans methodology and accounting policy are fully described in Note 1 to the consolidated financial statements.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","68"]]
[[/GREPCENT_TABLE]]

The following table summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for the years indicated:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","2019"],["Allowance for credit losses for loans","($ in thousands)"],["Beginning balance","$","351,354","","$","164,604","","$","156,295"],["Impact of the adoption of ASU No. 2016-13 *","\u2014","","37,989","","\u2014"],["Allowance for purchased credit deteriorated (PCD) loans *","6,542","","61,643","","\u2014"],["Beginning balance, adjusted","357,896","","264,236","","156,295"],["Loans charged-off: (2)"],["Commercial and industrial","(21,507)","","(34,630)","","(13,260)"],["Commercial real estate","(382)","","(767)","","(158)"],["Residential mortgage","(140)","","(598)","","(126)"],["Total Consumer","(4,303)","","(9,294)","","(8,671)"],["Total charge-offs","(26,332)","","(45,289)","","(22,215)"],["Charged-off loans recovered:"],["Commercial and industrial","3,934","","1,956","","2,397"],["Commercial real estate","2,553","","1,054","","1,237"],["Construction","4","","452","","\u2014"],["Residential mortgage","676","","670","","66"],["Total Consumer","4,075","","3,188","","2,606"],["Total recoveries","11,242","","7,320","","6,306"],["Net charge-offs","(15,090)","","(37,969)","","(15,909)"],["Provision charged for credit losses","32,896","","125,087","","24,218"],["Ending balance","$","375,702","","$","351,354","","$","164,604"],["Components of allowance for credit losses for loans:"],["Allowance for loan losses","$","359,202","","$","340,243","","$","161,759"],["Allowance for unfunded credit commitments","16,500","","11,111","","2,845"],["Allowance for credit losses for loans","$","375,702","","$","351,354","","$","164,604"],["Components of provision for credit losses for loans:"],["Provision for credit losses for loans","$","27,507","","$","123,922","","$","25,809"],["Provision for unfunded credit commitments","5,389","","1,165","","(1,591)"],["Provision for credit losses for loans","$","32,896","","$","125,087","","$","24,218"],["Allowance for credit losses for loans to total loans","1.10","%","","1.09","%","","0.55","%"]]
[[/GREPCENT_TABLE]]

*    The adjustment for the year ended December 31, 2020 represents an increase in the allowance for credit losses for loans as a result of the adoption of ASU 2016-13 effective January 1, 2020.

See Note 5 to the consolidated financial statements for additional information regarding our allowance for credit losses for loans.

[[GREPCENT_TABLE]]
[["","69","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","2019"],["","($ in thousands)"],["Net loan (charge-offs) recoveries"],["Commercial and industrial","$","(17,573)","","$","(32,674)","","$","(10,863)"],["Commercial real estate","2,171","","287","","1,079"],["Construction","4","","452","","\u2014"],["Residential mortgage","536","","72","","(60)"],["Total consumer","(228)","","(6,106)","","(6,065)"],["Total","(15,090)","","(37,969)","","(15,909)"],["Average loans outstanding"],["Commercial and industrial","$","6,334,612","","$","6,418,813","","$","4,589,906"],["Commercial real estate","17,444,293","","16,506,542","","13,231,860"],["Construction","1,775,272","","1,699,711","","1,522,025"],["Residential mortgage","4,401,881","","4,395,582","","4,187,264"],["Total consumer","2,860,927","","2,765,211","","2,704,198"],["Total","32,816,985","","31,785,859","","26,235,253"],["Net loan charge-offs (recoveries) to average loans outstanding"],["Commercial and industrial","0.28%","","0.51%","","0.24%"],["Commercial real estate","(0.01)","","0.00","","(0.01)"],["Construction","0.00","","(0.03)","","0.00"],["Residential mortgage","(0.01)","","0.00","","0.00"],["Total consumer","0.01","","0.22","","0.22"]]
[[/GREPCENT_TABLE]]

Our net loan charge-offs decreased $22.9 million to $15.1 million in 2021 as compared to $38.0 million in 2020 mainly due to lower net charge-offs related to borrowers impacted by the COVID-19 pandemic (largely within the commercial and industrial loan category). Partial loan charge-offs of taxi medallion loans totaled $4.8 million and $12.5 million, respectively, within the commercial and industrial loan category for the years ended December 31, 2021 and 2020.

The overall level of net loan charge-offs (as presented in the above table) continued to trend within management's expectations for the credit quality of the loan portfolio for 2021. While we have a positive outlook for the future performance of the loan portfolio, there can be no assurance that our levels of net charge-offs will not deteriorate in 2022, given the uncertain path of the recovery from the COVID-19 pandemic.

[[GREPCENT_TABLE]]
[["2021 Form 10-K","70"]]
[[/GREPCENT_TABLE]]

The following table summarizes the allocation of the allowance for credit losses to specific loan portfolio categories for the years ended December 31,: 

[[GREPCENT_TABLE]]
[["","2021","","2020"],["","Allowance Allocation","","Percent of Loan Category to total loans","","Allowance Allocation","","Percent of Loan Category to total loans"],["","($ in thousands)"],["Loan Category:"],["Commercial and industrial","$","103,090","","","17.1","%","","$","131,070","","","21.3","%"],["Commercial real estate:"],["Commercial real estate","193,258","","","55.5","","","146,009","","","51.9"],["Construction","24,232","","","5.4","","","18,104","","","5.4"],["Total commercial real estate","217,490","","","60.9","","","164,113","","","57.3"],["Residential mortgage","25,120","","","13.3","","","28,873","","","13.0"],["Total consumer","13,502","","","8.7","","","16,187","","","8.4"],["Total allowance for loan losses","359,202","","","100.0","%","","340,243","","","100.0","%"],["Allowance for unfunded credit commitments","16,500","","","","","11,111"],["Total allowance for credit losses for loans","$","375,702","","","","","$","351,354"]]
[[/GREPCENT_TABLE]]

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments (including letters of credit), as a percentage of total loans was 1.10 percent at December 31, 2021 and 1.09 percent at December 31, 2020. The allowance for credit losses for loans increased $24.3 million at December 31, 2021 as compared to December 31, 2020 due, in large part, to higher quantitative reserves, particularly for non-owner occupied loans within the commercial real estate loan portfolio during 2021. During the fourth quarter 2021, we also recorded a $6.5 million increase to the allowance of credit losses for loans related to PCD loans acquired from Westchester and our provision for credit losses for loans included $6.2 million for non-PCD loans and unfunded credit commitments acquired from Westchester. These items were partially offset by decreases in both the economic forecast and non-economic qualitative reserve components of our CECL model largely due to improved economic outlook and lower levels of uncertainty related to the impact of the COVID-19 pandemic on credit quality of our loan portfolio at December 31, 2021 as compared to December 31, 2020.

Loan Repurchase Contingencies

We engage in the origination of residential mortgages for sale into the secondary market. Our loan sales totaled approximately $1.2 billion, $1.0 billion and $935 million for 2021, 2020 and 2019, respectively. Over the last three years, loan sales increased significantly, as new loan originations and refinance activity strengthened due to the favorably low interest rate environment complemented, from time to time, by sales from the held for investment portfolio.

In connection with loan sales, we make representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred due to such loans. However, the performance of our loans sold has been historically strong due to our strict underwriting standards and procedures. Over the past several years, we have experienced a nominal amount of repurchase requests, only a few of which have actually resulted in repurchases by Valley (only five loan repurchases in 2021 and two loan repurchases in 2020). None of the loan repurchases resulted in material loss. Accordingly, no reserves pertaining to loans sold were established on our consolidated financial statements at December 31, 2021 and 2020. See Item 1A. Risk Factors - "We may incur future losses in connection with repurchases and indemnification payments related to mortgages that we have sold into the secondary market” of this report for additional information.

Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At December 31, 2021 and 2020, shareholders’ equity totaled approximately $5.1 billion and $4.6 billion, or 11.7 percent and 11.3 percent of total assets, respectively. During 2021, total shareholders’ equity increased by $491.9 million primarily due to (i) net income of $473.8 million, (ii) the additional capital issued in the Westchester acquisition totaling $211.1 million, (iii) a $35.4 million increase attributable to the effect of share issuances under our stock incentive plan. These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $195.1 million (ii) a net loss of $10.2 million recorded in accumulated comprehensive loss and (ii) repurchases of $23.1 million or our common stock with these shares held as treasury stock.

[[GREPCENT_TABLE]]
[["","71","2021 Form 10-K"]]
[[/GREPCENT_TABLE]]

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 of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of December 31, 2021 and 2020, Valley and Valley National Bank exceeded all capital adequacy requirements. See Note 17 to the consolidated financial statements for Valley’s and Valley National Bank’s regulatory capital positions and capital ratios at December 31, 2021 and 2020.

For regulatory capital purposes, in accordance with the Federal Reserve Board’s final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $28.2 million after-tax was deferred for a two-year period ending January 1, 2022, and will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent, or $19.1 million on an after tax basis of the reserve build (i.e., provision for credit losses less net charge-offs) since CECL adoption through December 31, 2021 is being phased in over the same time frame. We estimate these deferrals when fully phased in will reduce our risk based capital ratios by approximately 14 basis points.

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 60.7 percent and 52.7 percent for the years ended December 31, 2021 and 2020, respectively.

Cash dividends declared amounted to $0.44 per common share for both years ended December 31, 2021 and 2020. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow considering the increased capital levels as required under the Basel III rules. Prior to the date of this filing, Valley has received no objection or adverse guidance from the FRB or the OCC regarding the current level of its quarterly common stock dividend. However, the FRB has reiterated its long-standing guidance that banking organizations should consult them before declaring dividends in excess of earnings for the corresponding quarter. The renewed guidance was largely due to the increased risk of the COVID-19 pandemic negatively impacting the future level of bank earnings. See Item 1A. Risk Factors of this report for additional information.

Valley maintains an effective shelf registration statement with the SEC that allows us to periodically offer and sell in one or more offerings, individually or in any combination, our common stock, preferred stock and other non-equity securities. The shelf registration statement provides Valley with capital raising flexibility and enables Valley to promptly access the capital markets in order to pursue growth opportunities that may become available in the future and permits Valley to comply with any changes in the regulatory environment that call for increased capital requirements. Valley’s ability, and any decision to issue and sell securities pursuant to the shelf registration statement, is subject to market conditions and Valley’s capital needs at such time. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both. Such offerings may be necessary in the future due to several reasons beyond management’s control, including numerous external factors that could negatively impact the strength of the U.S. economy or our ability to maintain or increase the level of our net income. See Note 18 to the consolidated financial statements for additional information on Valley’s preferred stock issuances.