Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - VALLEY NATIONAL BANCORPvly-3312017ex312.htm
EX-31.1 - EXHIBIT 31.1 - VALLEY NATIONAL BANCORPvly-3312017ex311.htm
EX-32 - EXHIBIT 32 - VALLEY NATIONAL BANCORPvly-3312017ex32.htm
EX-10.2 - EXHIBIT 10.2 - VALLEY NATIONAL BANCORPvly-33117ex102.htm
EX-10.3 - EXHIBIT 10.3 - VALLEY NATIONAL BANCORPvly-33117ex103.htm
EX-10.1 - EXHIBIT 10.1 - VALLEY NATIONAL BANCORPvly33117ex101.htm
EX-3.1 - EXHIBIT 3.1 - VALLEY NATIONAL BANCORPvly-33117ex31.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

FORM 10-Q
 
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2017
OR
¨

Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 1-11277 
 
 
VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
 
 
New Jersey
 
22-2477875
(State or other jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
 
1455 Valley Road
Wayne, NJ
 
07470
(Address of principal executive office)
 
(Zip code)
973-305-8800
(Registrant’s telephone number, including area code) 
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
x
Accelerated filer
¨
Emerging growth company
¨
 
 
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock (no par value), of which 263,971,550 shares were outstanding as of May 4, 2017
 




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


1




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share data)
 
March 31,
2017
 
December 31,
2016
Assets
(Unaudited)
 
 
Cash and due from banks
$
225,443

 
$
220,791

Interest bearing deposits with banks
111,283

 
171,710

Investment securities:
 
 
 
Held to maturity (fair value of $1,904,523 at March 31, 2017 and $1,924,597 at December 31, 2016)
1,902,329

 
1,925,572

Available for sale
1,454,331

 
1,297,373

Total investment securities
3,356,660

 
3,222,945

Loans held for sale (includes fair value of $11,184 at March 31, 2017 and $57,708 at December 31, 2016 for loans originated for sale)
115,067

 
57,708

Loans
17,449,498

 
17,236,103

Less: Allowance for loan losses
(115,443
)
 
(114,419
)
Net loans
17,334,055

 
17,121,684

Premises and equipment, net
289,426

 
291,180

Bank owned life insurance
392,295

 
391,830

Accrued interest receivable
68,245

 
66,816

Goodwill
690,637

 
690,637

Other intangible assets, net
44,958

 
45,484

Other assets
592,387

 
583,654

Total Assets
$
23,220,456

 
$
22,864,439

Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
5,213,451

 
$
5,252,825

Interest bearing:
 
 
 
Savings, NOW and money market
8,902,596

 
9,339,012

Time
3,215,094

 
3,138,871

Total deposits
17,331,141

 
17,730,708

Short-term borrowings
1,644,964

 
1,080,960

Long-term borrowings
1,634,008

 
1,433,906

Junior subordinated debentures issued to capital trusts
41,617

 
41,577

Accrued expenses and other liabilities
170,185

 
200,132

Total Liabilities
20,821,915

 
20,487,283

Shareholders’ Equity
 
 
 
Preferred stock (no par value, authorized 30,000,000 shares; issued 4,600,000 shares at March 31, 2017 and December 31, 2016)
111,590

 
111,590

Common stock (no par value, authorized 332,023,233 shares; issued 263,990,791 shares at March 31, 2017 and 263,804,877 shares at December 31, 2016)
92,370

 
92,353

Surplus
2,047,357

 
2,044,401

Retained earnings
188,089

 
172,754

Accumulated other comprehensive loss
(39,086
)
 
(42,093
)
Treasury stock, at cost (148,523 common shares at March 31, 2017 and 166,047 shares at December 31, 2016)
(1,779
)
 
(1,849
)
Total Shareholders’ Equity
2,398,541

 
2,377,156

Total Liabilities and Shareholders’ Equity
$
23,220,456

 
$
22,864,439

See accompanying notes to consolidated financial statements.

2




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data)
 
Three Months Ended
March 31,
 
2017
 
2016
Interest Income
 
 
 
Interest and fees on loans
$
175,014

 
$
166,071

Interest and dividends on investment securities:
 
 
 
Taxable
17,589

 
13,999

Tax-exempt
4,031

 
3,690

Dividends
2,151

 
1,480

Interest on federal funds sold and other short-term investments
331

 
357

Total interest income
199,116

 
185,597

Interest Expense
 
 
 
Interest on deposits:
 
 
 
Savings, NOW and money market
10,183

 
9,243

Time
9,553

 
9,585

Interest on short-term borrowings
3,901

 
1,872

Interest on long-term borrowings and junior subordinated debentures
12,950

 
16,744

Total interest expense
36,587

 
37,444

Net Interest Income
162,529

 
148,153

Provision for credit losses
2,470

 
800

Net Interest Income After Provision for Credit Losses
160,059

 
147,353

Non-Interest Income
 
 
 
Trust and investment services
2,744

 
2,440

Insurance commissions
5,061

 
4,708

Service charges on deposit accounts
5,236

 
5,103

(Losses) gains on securities transactions, net
(23
)
 
271

Fees from loan servicing
1,815

 
1,594

Gains on sales of loans, net
4,128

 
1,795

Bank owned life insurance
2,463

 
1,963

Other
3,635

 
3,574

Total non-interest income
25,059

 
21,448

Non-Interest Expense
 
 
 
Salary and employee benefits expense
63,716

 
60,259

Net occupancy and equipment expense
23,035

 
22,789

FDIC insurance assessment
5,127

 
5,099

Amortization of other intangible assets
2,536

 
2,849

Professional and legal fees
4,695

 
3,895

Amortization of tax credit investments
5,324

 
7,264

Telecommunication expense
2,659

 
2,386

Other
13,860

 
13,684

Total non-interest expense
120,952

 
118,225

Income Before Income Taxes
64,166

 
50,576

Income tax expense
18,071

 
14,389

Net Income
$
46,095

 
$
36,187

Dividends on preferred stock
1,797

 
1,797

Net Income Available to Common Shareholders
$
44,298

 
$
34,390

Earnings Per Common Share:
 
 
 
Basic
$
0.17

 
$
0.14

Diluted
0.17

 
0.14

Cash Dividends Declared per Common Share
0.11

 
0.11

Weighted Average Number of Common Shares Outstanding:
 
 
Basic
263,797,024

 
254,075,349

Diluted
264,546,266

 
254,347,420

See accompanying notes to consolidated financial statements.

3




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
 
Three Months Ended
March 31,
 
2017
 
2016
Net income
$
46,095

 
$
36,187

Other comprehensive income, net of tax:
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
Net gains arising during the period
1,307

 
8,283

Less reclassification adjustment for net losses (gains) included in net income
13

 
(170
)
Total
1,320

 
8,113

Non-credit impairment losses on available for sale securities
 
 
 
Net change in non-credit impairment losses on securities
113

 
(59
)
Less reclassification adjustment for accretion of credit impairment losses included in net income
(87
)
 
(286
)
Total
26

 
(345
)
Unrealized gains and losses on derivatives (cash flow hedges)
 
 
 
Net gains (losses) on derivatives arising during the period
127

 
(6,552
)
Less reclassification adjustment for net losses included in net income
1,475

 
1,741

Total
1,602

 
(4,811
)
Defined benefit pension plan
 
 
 
Amortization of net loss
59

 
43

Total other comprehensive income
3,007

 
3,000

Total comprehensive income
$
49,102

 
$
39,187

See accompanying notes to consolidated financial statements.


4




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
46,095

 
$
36,187

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,260

 
6,417

Stock-based compensation
4,127

 
2,369

Provision for credit losses
2,470

 
800

Net amortization of premiums and accretion of discounts on securities and borrowings
6,043

 
4,198

Amortization of other intangible assets
2,536

 
2,849

Losses (gains) on securities transactions, net
23

 
(271
)
Proceeds from sales of loans held for sale
161,325

 
54,907

Gains on sales of loans, net
(4,128
)
 
(1,795
)
Originations of loans held for sale
(112,682
)
 
(52,749
)
Losses on sales of assets, net
34

 
10

FDIC loss-share receivable (excluding reimbursements)
229

 
560

Net change in:
 
 
 
Fair value of borrowings hedged by derivative transactions
(454
)
 
4,719

Cash surrender value of bank owned life insurance
(2,463
)
 
(1,963
)
Accrued interest receivable
(1,429
)
 
581

Other assets
(6,924
)
 
(6,079
)
Accrued expenses and other liabilities
(35,145
)
 
3,993

Net cash provided by operating activities
65,917

 
54,733

Cash flows from investing activities:
 
 
 
Net loan originations and purchases
(323,470
)
 
(95,035
)
Investment securities held to maturity:
 
 
 
Purchases
(52,160
)
 
(83,955
)
Maturities, calls and principal repayments
77,141

 
58,907

Investment securities available for sale:
 
 
 
Purchases
(207,402
)
 
(302,321
)
Sales

 
2,081

Maturities, calls and principal repayments
50,543

 
366,882

Death benefit proceeds from bank owned life insurance
1,998

 

Proceeds from sales of real estate property and equipment
4,970

 
3,919

Purchases of real estate property and equipment
(5,627
)
 
(7,578
)
(Payments to) reimbursements from the FDIC
(408
)
 
370

Net cash used in investing activities
(454,415
)
 
(56,730
)
Cash flows from financing activities:
 
 
 
Net change in deposits
(399,567
)
 
154,875

Net change in short-term borrowings
564,004

 
93,632

Proceeds from issuance of long-term borrowings, net
200,000

 

Repayments of long-term borrowings

 
(155,000
)
Cash dividends paid to preferred shareholders
(1,797
)
 
(1,797
)
Cash dividends paid to common shareholders
(29,012
)
 
(27,916
)
Purchase of common shares to treasury
(2,151
)
 
(1,496
)
Common stock issued, net
1,246

 
2,392

Net cash provided by financing activities
332,723

 
64,690

Net change in cash and cash equivalents
(55,775
)
 
62,693

Cash and cash equivalents at beginning of year
392,501

 
413,800

Cash and cash equivalents at end of period
$
336,726

 
$
476,493



5




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)

 
Three Months Ended March 31,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 
 
 
Interest on deposits and borrowings
$
56,735

 
$
38,766

Federal and state income taxes
1,599

 
67

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
4,813

 
$
663

Transfer of loans to loans held for sale
103,884

 

See accompanying notes to consolidated financial statements.







 




6




VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey corporation (Valley), include the accounts of its commercial bank subsidiary, Valley National Bank (the “Bank”), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities.
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations and cash flows at March 31, 2017 and for all periods presented have been made. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year.
In preparing the unaudited consolidated financial statements in conformity with U.S. GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that are particularly susceptible to change are: the allowance for loan losses; the evaluation of goodwill and other intangible assets, and investment securities for impairment; fair value measurements of assets and liabilities; and income taxes. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP and industry practice have been condensed or omitted pursuant to rules and regulations of the SEC. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016.
On April 27, 2017, Valley's shareholders approved an amendment to Valley's Restated Certificate of Incorporation to increase the authorized shares of common stock and preferred stock to 450,000,000 shares and 50,000,000 shares, respectively.


7




Note 2. Earnings Per Common Share
The following table shows the calculation of both basic and diluted earnings per common share for the three months ended March 31, 2017 and 2016.
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands, except for share data)
Net income available to common shareholders
$
44,298

 
$
34,390

Basic weighted average number of common shares outstanding
263,797,024

 
254,075,349

Plus: Common stock equivalents
749,242

 
272,071

Diluted weighted average number of common shares outstanding
264,546,266

 
254,347,420

Earnings per common share:
 
 
 
Basic
$
0.17

 
$
0.14

Diluted
0.17

 
0.14


Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of performance-based restricted stock units, common stock options and warrants to purchase Valley’s common shares. Common stock options and warrants with exercise prices that exceed the average market price of Valley’s common stock during the periods presented have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation. Anti-dilutive common stock options and warrants equaled approximately 3.2 million and 4.6 million shares for the three months ended March 31, 2017 and 2016, respectively.
Note 3. Accumulated Other Comprehensive Loss

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three months ended March 31, 2017. 
 
Components of Accumulated Other Comprehensive Loss
 
Total
Accumulated
Other
Comprehensive
Loss
 
Unrealized Gains
and Losses on
Available for Sale
(AFS) Securities
 
Non-credit
Impairment
Losses on
AFS Securities
 
Unrealized Gains
and (Losses) on
Derivatives
 
Defined
Benefit
Pension Plan
 
 
(in thousands)
Balance at December 31, 2016
$
(10,094
)
 
$
(642
)
 
$
(12,464
)
 
$
(18,893
)
 
$
(42,093
)
Other comprehensive income before reclassifications
1,307

 
113

 
127

 

 
1,547

Amounts reclassified from other comprehensive income
13

 
(87
)
 
1,475

 
59

 
1,460

Other comprehensive income, net
1,320

 
26

 
1,602

 
59

 
3,007

Balance at March 31, 2017
$
(8,774
)
 
$
(616
)
 
$
(10,862
)
 
$
(18,834
)
 
$
(39,086
)

8




The following table presents amounts reclassified from each component of accumulated other comprehensive loss on a gross and net of tax basis for the three months ended March 31, 2017 and 2016
 
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
 
Three Months Ended
March 31,
 
 
Components of Accumulated Other Comprehensive Loss
 
2017
 
2016
 
Income Statement Line Item
 
 
(in thousands)
 
 
Unrealized (losses) gains on AFS securities before tax
 
$
(23
)
 
$
271

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

 
(101
)
 
 
Total net of tax
 
(13
)
 
170

 
 
Non-credit impairment losses on AFS securities before tax:
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
 
149

 
489

 
Interest and dividends on investment securities (taxable)
Tax effect
 
(62
)
 
(203
)
 
 
Total net of tax
 
87

 
286

 
 
Unrealized losses on derivatives (cash flow hedges) before tax
 
(2,518
)
 
(2,971
)
 
Interest expense
Tax effect
 
1,043

 
1,230

 
 
Total net of tax
 
(1,475
)
 
(1,741
)
 
 
Defined benefit pension plan:
 
 
 
 
 
 
Amortization of net loss
 
(101
)
 
(72
)
 
*
Tax effect
 
42

 
29

 
 
Total net of tax
 
(59
)
 
(43
)
 
 
Total reclassifications, net of tax
 
$
(1,460
)
 
$
(1,328
)
 
 
 
*
Amortization of net loss is included in the computation of net periodic pension cost.

9




Note 4. New Authoritative Accounting Guidance

Accounting Standards Update (ASU) No. 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities" shortens the amortization period for certain callable debt securities held at a premium. ASU No. 2017-08 requires the premium to be amortized to the earliest call date. The accounting for securities held at a discount does not change and the discount continues to be amortized as an adjustment to yield over the contractual life (to maturity) of the instrument. ASU No. 2017-08
is effective for Valley for the annual and interim reporting periods beginning January 1, 2018 with early adoption permitted, and is to be applied retrospectively. ASU No. 2017-08 is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" requires service cost to be reported in the same financial statement line item(s) as other current employee compensation costs. All other components of expense must be presented separately from service cost, and outside any subtotal of income from operations. Only the service cost component of expense is eligible to be capitalized. ASU No. 2017-07 is effective for Valley for its annual and interim reporting periods beginning January1, 2018 with early adoption permitted. ASU No. 2017-07 is not expected to have a significant impact on the presentation on Valley's consolidated financial statements.

ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test guidance) to measure a goodwill impairment charge. Instead, an entity will be required to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1 of the current guidance). In addition, ASU No. 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. However, an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for Valley for its annual or any interim goodwill impairment tests in fiscal years beginning January 1, 2020 and is not expected to have a significant impact on the presentation of Valley's consolidated financial statements. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.

ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" clarifies on how certain cash receipts and cash payments should be classified and presented in the statement of cash flow. The ASU No. 2016-15 includes guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for Valley for annual and interim reporting periods beginning January 1, 2018 and it should be applied using a retrospective transition method to each period presented. ASU No. 2016-15 is not expected to have a significant impact on the presentation of Valley's consolidated statements of cash flows.    

ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments. The ASU No. 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity is required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 is effective for Valley for reporting periods beginning January 1, 2020. Management is currently evaluating the impact of the ASU on Valley’s consolidated financial statements. Valley expects that the new guidance will result in an increase in its allowance for credit losses due to several factors, including: (i) the allowance related to Valley loans will increase to include credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions, (ii) the nonaccretable difference (as defined in Note 7) on PCI loans will be recognized as an allowance,

10




offset by an increase in the carrying value of the related loans, and (iii) an allowance will be established for estimated credit losses on investment securities classified as held to maturity. The extent of the increase is under evaluation, but will depend upon the nature and characteristics of the Valley's loan and investment portfolios at the adoption date, and the economic conditions and forecasts at that date.

ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" simplifies several aspects of the stock compensation guidance in Topic 718 and other related guidance. The amendments focus on income tax accounting upon vesting or exercise of share-based payments, award classification, liability classification exception for statutory tax withholding requirements, recognition methods for forfeitures within stock compensation expense, and the cash flow presentation. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively.  Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. ASU No. 2016-09 became effective for Valley for reporting periods after January 1, 2017 and did not have a significant impact on Valley's consolidated financial statements. At adoption, Valley elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method. Valley also elected to continue to estimate the forfeitures of stock awards as a component of total stock compensation expense based on the number of awards that are expected to vest.

ASU No. 2016-02, “Leases (Topic 842)” requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for Valley for reporting periods beginning January 1, 2019, with an early adoption permitted. Valley must apply a modified retrospective transition approach for the applicable leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Management is currently evaluating the impact of Topic 842 on Valley’s consolidated financial statements by reviewing its existing lease contracts and service contracts that may include embedded leases. Valley expects a gross-up of its consolidated statements of financial condition as a result of recognizing lease liabilities and right of use assets; the extent of such gross-up is under evaluation. Valley does not expect material changes to the recognition of operating lease expense in its consolidated statements of income.

ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities” requires that: (i) equity investments with readily determinable fair values must be measured at fair value with changes in fair value recognized in net income, (ii) equity investments without readily determinable fair values must be measured at either fair value or at cost adjusted for changes in observable prices minus impairment with changes in value under either of these methods recognized in net income, (iii) entities that record financial liabilities at fair value due to a fair value option election must recognize changes in fair value in other comprehensive income if it is related to instrument-specific credit risk, and (iv) entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities. ASU No. 2016-01 is effective for Valley for reporting periods beginning January 1, 2018 and is not expected to have a material effect on Valley’s consolidated financial statements.

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" implements a common revenue standard that clarifies the principles for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In 2016, the Financial Accounting Standards Board issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations

11




and Licensing,” to further clarify the new guidance under Topic 606. ASU No. 2014-09 and its aforementioned amendments are effective on January 1, 2018. Management is currently evaluating by identification of revenue within the scope of the guidance to assess potential impact. Management has not yet identified any material changes in the timing of revenue recognition and it does not expect the new revenue guidance to have a significant impact on Valley’s consolidated financial statements.
Note 5. Fair Value Measurement of Assets and Liabilities

Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
 
Level 1
Unadjusted exchange quoted prices in active markets for identical assets or liabilities, or identical liabilities traded as assets that the reporting entity has the ability to access at the measurement date.
 
Level 2
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly (i.e., quoted prices on similar assets), for substantially the full term of the asset or liability.
 
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).


12




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

The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at March 31, 2017 and December 31, 2016. The assets presented under “nonrecurring fair value measurements” in the table below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized). 
 
March 31,
2017
 
Fair Value Measurements at Reporting Date Using:
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Recurring fair value measurements:
 
Assets
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
49,780

 
$
49,780

 
$

 
$

U.S. government agency securities
47,275

 

 
47,275

 

Obligations of states and political subdivisions
119,162

 

 
119,162

 

Residential mortgage-backed securities
1,158,064

 

 
1,148,704

 
9,360

Trust preferred securities
6,393

 

 
4,386

 
2,007

Corporate and other debt securities
62,717

 
8,009

 
54,708

 

Equity securities
10,940

 
1,093

 
9,847

 

Total available for sale
1,454,331

 
58,882

 
1,384,082

 
11,367

Loans held for sale (1)
11,184

 

 
11,184

 

Other assets (2)
25,466

 

 
25,466

 

Total assets
$
1,490,981

 
$
58,882

 
$
1,420,732

 
$
11,367

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
23,231

 
$

 
$
23,231

 
$

Total liabilities
$
23,231

 
$

 
$
23,231

 
$

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
3,470

 
$

 
$

 
$
3,470

Loan servicing rights
7,826

 

 

 
7,826

Foreclosed assets (4)
2,710

 

 

 
2,710

Total
$
14,006

 
$

 
$

 
$
14,006


13




 
 
 
Fair Value Measurements at Reporting Date Using:
 
December 31,
2016
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Recurring fair value measurements:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
49,591

 
$
49,591

 
$

 
$

U.S. government agency securities
23,041

 

 
23,041

 

Obligations of states and political subdivisions
119,767

 

 
119,767

 

Residential mortgage-backed securities
1,015,542

 

 
1,005,589

 
9,953

Trust preferred securities
8,009

 

 
6,074

 
1,935

Corporate and other debt securities
60,565

 
8,064

 
52,501

 

Equity securities
20,858

 
1,306

 
19,552

 

Total available for sale
1,297,373

 
58,961

 
1,226,524

 
11,888

Loans held for sale (1)
57,708

 

 
57,708

 

Other assets (2)
29,055

 

 
29,055

 

Total assets
$
1,384,136

 
$
58,961

 
$
1,313,287

 
$
11,888

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
44,077

 
$

 
$
44,077

 
$

Total liabilities
$
44,077

 
$

 
$
44,077

 
$

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
5,385

 
$

 
$

 
$
5,385

Loan servicing rights
6,489

 

 

 
6,489

Foreclosed assets (4)
4,532

 

 

 
4,532

Total
$
16,406

 
$

 
$

 
$
16,406

 
(1)
Loans held for sale carried at fair value (which consist of residential mortgage loans originated for sale) had contractual unpaid principal balances totaling approximately $11.2 million and $58.2 million at March 31, 2017 and December 31, 2016, respectively.
(2)
Derivative financial instruments are included in this category.
(3)
Excludes PCI loans.
(4)
Includes covered (i.e., subject to loss-sharing agreements with the FDIC) other real estate owned totaling $300 thousand at December 31, 2016. There were no covered other real estate owned properties at March 31, 2017.









14




The changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2017 and 2016 are summarized below: 
 
Available for Sale Securities
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Balance, beginning of the period
$
11,888

 
$
13,793

Total net gains (losses) included in other comprehensive income
44

 
(585
)
Settlements, net
(565
)
 
(259
)
Balance, end of the period
$
11,367

 
$
12,949


No changes in unrealized gains or losses on Level 3 securities were included in earnings during the three months ended March 31, 2017 and 2016. There were no transfers of assets into or out of Level 3, or between Level 1 and Level 2, during the three months ended March 31, 2017 and 2016.

There have been no material changes in the valuation methodologies used at March 31, 2017 from December 31, 2016.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Available for sale securities.

All U.S. Treasury securities, certain corporate and other debt securities, and certain preferred equity securities are reported at fair value utilizing Level 1 inputs. The majority of other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. For certain securities, the inputs used by either dealer market participants or an independent pricing service may be derived from unobservable market information (Level 3 inputs). In these instances, Valley evaluates the appropriateness and quality of the assumption and the resulting price. In addition, Valley reviews the volume and level of activity for all available for sale and trading securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value and this results in fair values based on Level 3 inputs. In determining fair value, Valley utilizes unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing each security. In developing its assertion of market participant assumptions, Valley utilizes the best information that is both reasonable and available without undue cost and effort.

In calculating the fair value for the available for sale securities under Level 3, Valley prepared present value cash flow models for certain private label mortgage-backed securities. The cash flows for the residential mortgage-

15




backed securities incorporated the expected cash flow of each security adjusted for default rates, loss severities and prepayments of the individual loans collateralizing the security.

The following table presents quantitative information about Level 3 inputs used to measure the fair value of these securities at March 31, 2017
Security Type
Valuation
Technique
 
Unobservable
Input
 
Range
 
Weighted
Average
 
 
 
 
 
 
 
 
Private label mortgage-backed securities
Discounted cash flow
 
Prepayment rate
 
       15.3 - 25.0%
 
21.5
%
 
 
 
Default rate
 
     3.4 - 36.4
 
9.3

 
 
 
Loss severity
 
   47.2 - 66.0
 
60.5


Significant increases or decreases in any of the unobservable inputs in the table above in isolation would result in a significantly lower or higher fair value measurement of the securities. Generally, a change in the assumption used for the default rate is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

For the Level 3 available for sale residential mortgage-backed securities (consisting of 4 private label securities), cash flow assumptions incorporated independent third party market participant data based on vintage year for each security. The discount rate utilized in determining the present value of cash flows for the mortgage-backed securities was arrived at by combining the yield on orderly transactions for similar maturity government sponsored mortgage-backed securities with (i) the historical average risk premium of similar structured private label securities, (ii) a risk premium reflecting current market conditions, including liquidity risk, and (iii) if applicable, a forecasted loss premium derived from the expected cash flows of each security. The estimated cash flows for each private label mortgage-backed security were then discounted at the aforementioned effective rate to determine the fair value. The quoted prices received from either market participants or independent pricing services are weighted with the internal price estimate to determine the fair value of each instrument.

For the Level 3 available for sale trust preferred securities (consisting of one pooled security), the resulting estimated future cash flow was discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. The discount rate was applied using a pricing matrix based on credit, security type and maturity characteristics to determine the fair value. The fair value calculation is received from an independent valuation adviser. In validating the fair value calculation from an independent valuation adviser, Valley reviews the accuracy of the inputs and the appropriateness of the unobservable inputs utilized in the valuation to ensure the fair value calculation is reasonable from a market participant perspective.

Loans held for sale. The conforming residential mortgage loans originated for sale are reported at fair value using Level 2 inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. To determine these fair values, the mortgages held for sale are put into multiple tranches, or pools, based on the coupon rate and maturity of each mortgage. The market prices for each tranche are obtained from both Fannie Mae and Freddie Mac. The market prices represent a delivery price, which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. The market prices received from Fannie Mae and Freddie Mac are then averaged and interpolated or extrapolated, where required, to calculate the fair value of each tranche. Depending upon the time elapsed since the origination of each loan held for sale, non-performance risk and changes therein were addressed in the estimate of fair value based upon the delinquency data provided to both Fannie Mae and Freddie Mac for market pricing and changes in market credit spreads. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at March 31, 2017 and December 31, 2016 based on the short duration these assets were held, and the high credit quality of these loans.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair value of Valley’s derivatives are determined using third party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves. The fair value of mortgage banking derivatives,

16




consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at March 31, 2017 and December 31, 2016), is determined based on the current market prices for similar instruments provided by Fannie Mae and Freddie Mac. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at March 31, 2017 and December 31, 2016.

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

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

Impaired loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values are estimated using Level 3 inputs, consisting of individual appraisals that are significantly adjusted based on certain discounting criteria. At March 31, 2017, appraisals were discounted based on specific market data by location and property type. During the quarter ended March 31, 2017, collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. The collateral dependent loan charge-offs to the allowance for loan losses totaled $219 thousand and $479 thousand for the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, collateral dependent impaired loans with a total recorded investment of $6.3 million were reduced by specific valuation allowance allocations totaling $2.8 million to a reported total net carrying amount of $3.5 million.

Loan servicing rights. Fair values for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third party vendor that requires inputs that are both significant to the fair value measurement and unobservable (Level 3). The fair value model is based on various assumptions, including but not limited to, prepayment speeds, internal rate of return (“discount rate”), servicing cost, ancillary income, float rate, tax rate, and inflation. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At March 31, 2017, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 24 percent and a discount rate of 8 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. Valley recorded an immaterial net recovery of net impairment charges on its loan servicing rights for the three months ended March 31, 2017 as compared to net impairment charges totaling $192 thousand for three months ended March 31, 2016.

Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is adjusted based on certain discounting criteria, similar to the criteria used for impaired loans described above. There were no adjustments of the appraisals of foreclosed assets at March 31, 2017. At March 31, 2017, foreclosed assets included $2.7 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended March 31, 2017. The foreclosed assets charge-offs to the allowance for loan losses totaled $712 thousand and $139 thousand for the three months ended March 31, 2017 and 2016, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in net losses within non-interest expense of $290 thousand and $617 thousand for the three months ended March 31, 2017 and 2016, respectively.

17




 
Other Fair Value Disclosures

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

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

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


18




The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at March 31, 2017 and December 31, 2016 were as follows: 
 
Fair Value
Hierarchy
 
March 31, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
225,443

 
$
225,443

 
$
220,791

 
$
220,791

Interest bearing deposits with banks
Level 1
 
111,283

 
111,283

 
171,710

 
171,710

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
Level 1
 
138,793

 
147,419

 
138,830

 
147,495

U.S. government agency securities
Level 2
 
10,722

 
10,881

 
11,329

 
11,464

Obligations of states and political subdivisions
Level 2
 
538,032

 
551,788

 
566,590

 
577,826

Residential mortgage-backed securities
Level 2
 
1,113,413

 
1,103,770

 
1,112,460

 
1,102,802

Trust preferred securities
Level 2
 
59,810

 
48,034

 
59,804

 
47,290

Corporate and other debt securities
Level 2
 
41,559

 
42,631

 
36,559

 
37,720

Total investment securities held to maturity
 
 
1,902,329

 
1,904,523

 
1,925,572

 
1,924,597

Net loans
Level 3
 
17,334,055

 
16,961,749

 
17,121,684

 
16,756,655

Accrued interest receivable
Level 1
 
68,245

 
68,245

 
66,816

 
66,816

Federal Reserve Bank and Federal Home Loan Bank stock (1)
Level 1
 
188,557

 
188,557

 
147,127

 
147,127

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
Level 1
 
14,116,047

 
14,116,047

 
14,591,837

 
14,591,837

Deposits with stated maturities
Level 2
 
3,215,094

 
3,235,676

 
3,138,871

 
3,160,572

Short-term borrowings
Level 1
 
1,644,964

 
1,648,547

 
1,080,960

 
1,081,751

Long-term borrowings
Level 2
 
1,634,008

 
1,723,673

 
1,433,906

 
1,523,386

Junior subordinated debentures issued to capital trusts
Level 2
 
41,617

 
46,084

 
41,577

 
45,785

Accrued interest payable (2)
Level 1
 
9,473

 
9,473

 
10,675

 
10,675

 
(1)
Included in other assets.
(2)
Included in accrued expenses and other liabilities.

The following methods and assumptions were used to estimate the fair value of other financial assets and financial liabilities in the table above:

Cash and due from banks and interest bearing deposits with banks. The carrying amount is considered to be a reasonable estimate of fair value because of the short maturity of these items.

Investment securities held to maturity. Fair values are based on prices obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things (Level 2 inputs). Additionally, Valley reviews the volume and level of activity for all classes of held to maturity securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary. If applicable, the adjustment to fair value is derived based on present value cash flow model projections prepared by Valley utilizing assumptions similar to those incorporated by market participants.

19





Loans. Fair values of loans are estimated by discounting the projected future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loan. The discount rate is a product of both the applicable index and credit spread, subject to the estimated current new loan interest rates. The credit spread component is static for all maturities and may not necessarily reflect the value of estimating all actual cash flows re-pricing. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Accrued interest receivable and payable. The carrying amounts of accrued interest approximate their fair value due to the short-term nature of these items.

Federal Reserve Bank and Federal Home Loan Bank stock. Federal Reserve Bank and FHLB stock are non-marketable equity securities and are reported at their redeemable carrying amounts, which approximate fair value.

Deposits. The carrying amounts of deposits without stated maturities (i.e., non-interest bearing, savings, NOW, and money market deposits) approximate their estimated fair value. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.

Short-term and long-term borrowings. The carrying amounts of certain short-term borrowings, including securities sold under agreements to repurchase and FHLB borrowings (and from time to time, federal funds purchased) approximate their fair values because they frequently re-price to a market rate. The fair values of other short-term and long-term borrowings are estimated by obtaining quoted market prices of the identical or similar financial instruments when available. When quoted prices are unavailable, the fair values of the borrowings are estimated by discounting the estimated future cash flows using current market discount rates of financial instruments with similar characteristics, terms and remaining maturity.

Junior subordinated debentures issued to capital trusts. The fair value of debentures issued to capital trusts is estimated utilizing the income approach, whereby the expected cash flows, over the remaining estimated life of the security, are discounted using Valley’s credit spread over the current yield on a similar maturity of U.S. Treasury security or the three-month LIBOR for the variable rate indexed debentures (Level 2 inputs). The credit spread used to discount the expected cash flows was calculated based on the median current spreads for all fixed and variable publicly traded trust preferred securities issued by banks.

20





Note 6. Investment Securities

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at March 31, 2017 and December 31, 2016 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,793

 
$
8,626

 
$

 
$
147,419

U.S. government agency securities
10,722

 
159

 

 
10,881

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
250,905

 
8,005

 
(1,362
)
 
257,548

Municipal bonds
287,127

 
7,335

 
(222
)
 
294,240

Total obligations of states and political subdivisions
538,032

 
15,340

 
(1,584
)
 
551,788

Residential mortgage-backed securities
1,113,413

 
7,958

 
(17,601
)
 
1,103,770

Trust preferred securities
59,810

 
32

 
(11,808
)
 
48,034

Corporate and other debt securities
41,559

 
1,072

 

 
42,631

Total investment securities held to maturity
$
1,902,329

 
$
33,187

 
$
(30,993
)
 
$
1,904,523

December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,830

 
$
8,665

 
$

 
$
147,495

U.S. government agency securities
11,329

 
135

 

 
11,464

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
252,185

 
6,692

 
(1,428
)
 
257,449

Municipal bonds
314,405

 
6,438

 
(466
)
 
320,377

Total obligations of states and political subdivisions
566,590

 
13,130

 
(1,894
)
 
577,826

Residential mortgage-backed securities
1,112,460

 
8,432

 
(18,090
)
 
1,102,802

Trust preferred securities
59,804

 
40

 
(12,554
)
 
47,290

Corporate and other debt securities
36,559

 
1,190

 
(29
)
 
37,720

Total investment securities held to maturity
$
1,925,572

 
$
31,592

 
$
(32,567
)
 
$
1,924,597


21




The age of unrealized losses and fair value of related securities held to maturity at March 31, 2017 and December 31, 2016 were as follows: 
 
Less than
Twelve Months
 
More than
Twelve Months
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
75,169

 
$
(1,362
)
 
$

 
$

 
$
75,169

 
$
(1,362
)
Municipal bonds
21,820

 
(222
)
 

 

 
21,820

 
(222
)
Total obligations of states and political subdivisions
96,989

 
(1,584
)
 

 

 
96,989

 
(1,584
)
Residential mortgage-backed securities
648,365

 
(14,179
)
 
122,764

 
(3,422
)
 
771,129

 
(17,601
)
Trust preferred securities

 

 
46,649

 
(11,808
)
 
46,649

 
(11,808
)
Total
$
745,354

 
$
(15,763
)
 
$
169,413

 
$
(15,230
)
 
$
914,767

 
$
(30,993
)
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
98,114

 
$
(1,428
)
 
$

 
$

 
$
98,114

 
$
(1,428
)
Municipal bonds
27,368

 
(466
)
 

 

 
27,368

 
(466
)
Total obligations of states and political subdivisions
125,482

 
(1,894
)
 

 

 
125,482

 
(1,894
)
Residential mortgage-backed securities
692,108

 
(14,420
)
 
114,505

 
(3,670
)
 
806,613

 
(18,090
)
Trust preferred securities


 


 
45,898

 
(12,554
)
 
45,898

 
(12,554
)
Corporate and other debt securities
2,971

 
(29
)
 

 

 
2,971

 
(29
)
Total
$
820,561

 
$
(16,343
)
 
$
160,403

 
$
(16,224
)
 
$
980,964

 
$
(32,567
)

The unrealized losses on investment securities held to maturity are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 119 at March 31, 2017 and 132 at December 31, 2016.

The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at March 31, 2017 mainly related to investment grade securities issued by Ginnie Mae.
The unrealized losses existing for more than twelve months for trust preferred securities at March 31, 2017 primarily related to four non-rated single-issuer trust preferred securities issued by bank holding companies. All single-issuer trust preferred securities classified as held to maturity are paying in accordance with their terms, have no deferrals of interest or defaults and, if applicable, the issuers meet the regulatory capital requirements to be considered “well-capitalized institutions” at March 31, 2017.
Management does not believe that any individual unrealized loss as of March 31, 2017 included in the table above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates and market volatility, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.

22




As of March 31, 2017, the fair value of investments held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $1.1 billion.
The contractual maturities of investments in debt securities held to maturity at March 31, 2017 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.  
 
March 31, 2017
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
66,622

 
$
66,712

Due after one year through five years
220,086

 
229,218

Due after five years through ten years
338,507

 
353,152

Due after ten years
163,701

 
151,671

Residential mortgage-backed securities
1,113,413

 
1,103,770

Total investment securities held to maturity
$
1,902,329

 
$
1,904,523

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 7.3 years at March 31, 2017.


23




Available for Sale
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at March 31, 2017 and December 31, 2016 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
U.S. Treasury securities
$
51,014

 
$
6

 
$
(1,240
)
 
$
49,780

U.S. government agency securities
47,080

 
216

 
(21
)
 
47,275

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
39,624

 
133

 
(203
)
 
39,554

Municipal bonds
79,935

 
201

 
(528
)
 
79,608

Total obligations of states and political subdivisions
119,559

 
334

 
(731
)
 
119,162

Residential mortgage-backed securities
1,171,958

 
2,673

 
(16,567
)
 
1,158,064

Trust preferred securities*
7,848

 

 
(1,455
)
 
6,393

Corporate and other debt securities
62,411

 
599

 
(293
)
 
62,717

Equity securities
10,504

 
901

 
(465
)
 
10,940

Total investment securities available for sale
$
1,470,374

 
$
4,729

 
$
(20,772
)
 
$
1,454,331

December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
51,020

 
$
6

 
$
(1,435
)
 
$
49,591

U.S. government agency securities
22,815

 
232

 
(6
)
 
23,041

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
40,696

 
70

 
(424
)
 
40,342

Municipal bonds
80,045

 
147

 
(767
)
 
79,425

Total obligations of states and political subdivisions
120,741

 
217

 
(1,191
)
 
119,767

Residential mortgage-backed securities
1,029,827

 
2,061

 
(16,346
)
 
1,015,542

Trust preferred securities*
10,164

 

 
(2,155
)
 
8,009

Corporate and other debt securities
60,651

 
436

 
(522
)
 
60,565

Equity securities
20,505

 
1,114

 
(761
)
 
20,858

Total investment securities available for sale
$
1,315,723

 
$
4,066

 
$
(22,416
)
 
$
1,297,373

 
*
Includes two pooled trust preferred securities, principally collateralized by securities issued by banks and insurance companies, at March 31, 2017 and December 31, 2016.


24




The age of unrealized losses and fair value of related securities available for sale at March 31, 2017 and December 31, 2016 were as follows: 
 
Less than
Twelve Months
 
More than
Twelve Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
48,852

 
$
(1,240
)
 
$

 
$

 
$
48,852

 
$
(1,240
)
U.S. government agency securities
29,314

 
(18
)
 
3,940

 
(3
)
 
33,254

 
(21
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
16,778

 
(203
)
 

 

 
16,778

 
(203
)
Municipal bonds
29,738

 
(314
)
 
11,136

 
(214
)
 
40,874

 
(528
)
Total obligations of states and political subdivisions
46,516

 
(517
)
 
11,136

 
(214
)
 
57,652

 
(731
)
Residential mortgage-backed securities
732,989

 
(11,579
)
 
141,743

 
(4,988
)
 
874,732

 
(16,567
)
Trust preferred securities

 

 
6,393

 
(1,455
)
 
6,393

 
(1,455
)
Corporate and other debt securities
26,384

 
(92
)
 
15,113

 
(201
)
 
41,497

 
(293
)
Equity securities

 

 
5,179

 
(465
)
 
5,179

 
(465
)
Total
$
884,055

 
$
(13,446
)
 
$
183,504

 
$
(7,326
)
 
$
1,067,559

 
$
(20,772
)
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
48,660

 
$
(1,435
)
 
$

 
$

 
$
48,660

 
$
(1,435
)
U.S. government agency securities
2,530

 
(4
)
 
4,034

 
(2
)
 
6,564

 
(6
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
28,628

 
(404
)
 
753

 
(20
)
 
29,381

 
(424
)
Municipal bonds
42,573

 
(506
)
 
11,081

 
(261
)
 
53,654

 
(767
)
Total obligations of states and political subdivisions
71,201

 
(910
)
 
11,834

 
(281
)
 
83,035

 
(1,191
)
Residential mortgage-backed securities
788,030

 
(11,889
)
 
132,718

 
(4,457
)
 
920,748

 
(16,346
)
Trust preferred securities


 


 
8,009

 
(2,155
)
 
8,009

 
(2,155
)
Corporate and other debt securities
32,292

 
(294
)
 
15,192

 
(228
)
 
47,484

 
(522
)
Equity securities

 

 
14,883

 
(761
)
 
14,883

 
(761
)
Total
$
942,713

 
$
(14,532
)
 
$
186,670

 
$
(7,884
)
 
$
1,129,383

 
$
(22,416
)
The unrealized losses on investment securities available for sale are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. The total number of security positions in the securities available for sale portfolio in an unrealized loss position at March 31, 2017 was 288 as compared to 298 at December 31, 2016.
The unrealized losses more than twelve months for the residential mortgage-backed securities category of the available for sale portfolio at March 31, 2017 largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae.
The unrealized losses more than twelve months for trust preferred securities at March 31, 2017 in the table above largely relate to 2 pooled trust preferred securities with an amortized cost of $7.9 million and a fair value of $6.4 million. One of the two pooled trust preferred securities had unrealized loss of $709 thousand and an investment grade rating at March 31, 2017.

25





As of March 31, 2017, the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $547.5 million.
The contractual maturities of investment securities available for sale at March 31, 2017 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
 
March 31, 2017
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
24,953

 
$
24,844

Due after one year through five years
69,116

 
69,513

Due after five years through ten years
113,108

 
111,725

Due after ten years
80,735

 
79,245

Residential mortgage-backed securities
1,171,958

 
1,158,064

Equity securities
10,504

 
10,940

Total investment securities available for sale
$
1,470,374

 
$
1,454,331

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted average remaining expected life for residential mortgage-backed securities available for sale was 9.1 years at March 31, 2017.
Other-Than-Temporary Impairment Analysis

Valley records impairment charges on its investment securities when the decline in fair value is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities; decline in the creditworthiness of the issuer; absence of reliable pricing information for investment securities; adverse changes in business climate; adverse actions by regulators; prolonged decline in value of equity investments; or unanticipated changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. Valley’s investment portfolios include private label mortgage-backed securities, trust preferred securities principally issued by bank holding companies (including two pooled trust preferred securities), corporate bonds and perpetual preferred securities issued by banks. These investments may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S. economy and its potential negative effect on the future performance of the security issuers and, if applicable, the underlying mortgage loan collateral of the security.

There were no other-than-temporary impairment losses on securities recognized in earnings for the three months ended March 31, 2017 and 2016. At March 31, 2017, four previously impaired private label mortgage-backed securities (prior to December 31, 2012) had a combined amortized cost and fair value of $9.7 million and $9.4 million, respectively, while one previously impaired pooled trust preferred security had an amortized cost and fair value of $2.8 million and $2.0 million, respectively. The previously impaired pooled trust preferred security was not accruing interest during the three months ended March 31, 2017 and 2016.


26




The following table presents the changes in the credit loss component of cumulative other-than-temporary impairment losses on debt securities classified as either held to maturity or available for sale that Valley has previously recognized in earnings, for which a portion of the impairment loss (non-credit factors) was recognized in other comprehensive income for the three months ended March 31, 2017 and 2016: 
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Balance, beginning of period
$
4,916

 
$
5,837

Accretion of credit loss impairment due to an increase in expected cash flows
(149
)
 
(489
)
Balance, end of period
$
4,767

 
$
5,348


The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to each period presented. The credit loss component increases if other-than-temporary impairments (initial and subsequent) are recognized in earnings for credit impaired debt securities. The credit loss component is reduced if (i) Valley receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures, (iii) the security is fully written down, or (iv) Valley sells, intends to sell or believes it will be required to sell previously credit impaired debt securities.
Realized Gains and Losses

Gross gains (losses) realized on sales, maturities and other securities transactions related to investment securities included in earnings were immaterial for the three months ended March 31, 2017 and 2016. 



27




Note 7. Loans

The detail of the loan portfolio as of March 31, 2017 and December 31, 2016 was as follows: 
 
March 31, 2017
 
December 31, 2016
 
Non-PCI
Loans
 
PCI Loans*
 
Total
 
Non-PCI
Loans
 
PCI Loans*
 
Total
 
(in thousands)
Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,398,154

 
$
244,165

 
$
2,642,319

 
$
2,357,018

 
$
281,177

 
$
2,638,195

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
7,951,229

 
1,065,189

 
9,016,418

 
7,628,328

 
1,091,339

 
8,719,667

Construction
758,263

 
77,591

 
835,854

 
710,266

 
114,680

 
824,946

  Total commercial real estate loans
8,709,492

 
1,142,780

 
9,852,272

 
8,338,594

 
1,206,019

 
9,544,613

Residential mortgage
2,574,346

 
171,101

 
2,745,447

 
2,684,195

 
183,723

 
2,867,918

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
369,232

 
89,659

 
458,891

 
376,213

 
92,796

 
469,009

Automobile
1,149,918

 
135

 
1,150,053

 
1,139,082

 
145

 
1,139,227

Other consumer
593,655

 
6,861

 
600,516

 
569,499

 
7,642

 
577,141

Total consumer loans
2,112,805

 
96,655

 
2,209,460

 
2,084,794

 
100,583

 
2,185,377

Total loans
$
15,794,797

 
$
1,654,701

 
$
17,449,498

 
$
15,464,601

 
$
1,771,502

 
$
17,236,103

 
*
PCI loans include covered loans (mostly consisting of residential mortgage and commercial real estate loans) totaling $47.8 million and $70.4 million at March 31, 2017 and December 31, 2016, respectively.

Total loans (excluding PCI covered loans) include net unearned premiums and deferred loan costs of $15.7 million and $15.3 million at March 31, 2017 and December 31, 2016, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $1.8 billion and $1.9 billion at March 31, 2017 and December 31, 2016, respectively.

Valley transferred $103.9 million of residential mortgage loans from the loan portfolio to loans held for sale during the three months ended March 31, 2017. Exclusive of such transfers, there were no sales of loans from the held for investment portfolio during the three months ended March 31, 2017 and 2016.

Purchased Credit-Impaired Loans (Including Covered Loans)

PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses), and aggregated and accounted for as pools of loans based on common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools. Valley's PCI loan portfolio included covered loans (i.e., loans in which the Bank will share losses with the FDIC under loss-sharing agreements) totaling $47.8 million and $70.4 million at March 31, 2017 and December 31, 2016, respectively.


28




The following table presents changes in the accretable yield for PCI loans during the three months ended March 31, 2017 and 2016:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Balance, beginning of period
$
294,514

 
$
415,179

Accretion
(24,683
)
 
(28,059
)
Balance, end of period
$
269,831

 
$
387,120


FDIC Loss-Share Receivable

The receivable arising from the loss-sharing agreements with the FDIC is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans. The FDIC loss share receivable (which is included in other assets on Valley's consolidated statements of financial condition) totaled $7.4 million and $7.2 million at March 31, 2017 and December 31, 2016, respectively.

Credit Risk Management

For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. Valley closely monitors economic conditions and loan performance trends to manage and evaluate its exposure to credit risk. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, internal loan classification, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through cyclical economic circumstances.






29




Credit Quality
The following table presents past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis, and non-performing loans held for sale) by loan portfolio class at March 31, 2017 and December 31, 2016: 
 
Past Due and Non-Accrual Loans
 
 
 
 
 
30-59
Days
Past Due
Loans
 
60-89
Days
Past Due
Loans
 
Accruing Loans
90 Days or More
Past Due
 
Non-Accrual
Loans
 
Total
Past Due
Loans
 
Current
Non-PCI
Loans
 
Total
Non-PCI
Loans
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
29,734

 
$
341

 
$
405

 
$
8,676

 
$
39,156

 
$
2,358,998

 
$
2,398,154

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
11,637

 
359

 

 
15,106

 
27,102

 
7,924,127

 
7,951,229

Construction
7,760

 

 

 
1,461

 
9,221

 
749,042

 
758,263

Total commercial real estate loans
19,397

 
359

 

 
16,567

 
36,323

 
8,673,169

 
8,709,492

Residential mortgage
7,533

 
4,177

 
1,355

 
11,650

 
24,715

 
2,549,631

 
2,574,346

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
725

 
297

 

 
1,285

 
2,307

 
366,925

 
369,232

Automobile
2,508

 
471

 
288

 
110

 
3,377

 
1,146,541

 
1,149,918

Other consumer
507

 
19

 
26

 

 
552

 
593,103

 
593,655

Total consumer loans
3,740

 
787

 
314

 
1,395

 
6,236

 
2,106,569

 
2,112,805

Total
$
60,404

 
$
5,664

 
$
2,074

 
$
38,288

 
$
106,430

 
$
15,688,367

 
$
15,794,797

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
6,705

 
$
5,010

 
$
142

 
$
8,465

 
$
20,322

 
$
2,336,696

 
$
2,357,018

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
5,894

 
8,642

 
474

 
15,079

 
30,089

 
7,598,239

 
7,628,328

Construction
6,077

 

 
1,106

 
715

 
7,898

 
702,368

 
710,266

Total commercial real estate loans
11,971

 
8,642

 
1,580

 
15,794

 
37,987

 
8,300,607

 
8,338,594

Residential mortgage
12,005

 
3,564

 
1,541

 
12,075

 
29,185

 
2,655,010

 
2,684,195

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
929

 
415

 

 
1,028

 
2,372

 
373,841

 
376,213

Automobile
3,192

 
723

 
188

 
146

 
4,249

 
1,134,833

 
1,139,082

Other consumer
76

 
9

 
21

 

 
106

 
569,393

 
569,499

Total consumer loans
4,197

 
1,147

 
209

 
1,174

 
6,727

 
2,078,067

 
2,084,794

Total
$
34,878

 
$
18,363

 
$
3,472

 
$
37,508

 
$
94,221

 
$
15,370,380

 
$
15,464,601


Impaired loans. Impaired loans, consisting of non-accrual commercial and industrial loans and commercial real estate loans over $250 thousand and all loans which were modified in troubled debt restructuring, are individually evaluated for impairment. PCI loans are not classified as impaired loans because they are accounted for on a pool basis.



30




The following table presents the information about impaired loans by loan portfolio class at March 31, 2017 and December 31, 2016:
 
Recorded
Investment
With No Related
Allowance
 
Recorded
Investment
With Related
Allowance
 
Total
Recorded
Investment
 
Unpaid
Contractual
Principal
Balance
 
Related
Allowance
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,755

 
$
27,306

 
$
30,061

 
$
34,157

 
$
5,688

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
25,713

 
31,594

 
57,306

 
59,501

 
3,156

Construction
698

 
2,079

 
2,777

 
2,776

 
220

Total commercial real estate loans
26,411

 
33,673

 
60,083

 
62,277

 
3,376

Residential mortgage
9,431

 
9,126

 
18,557

 
19,872

 
686

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity
1,322

 
2,462

 
3,784

 
3,876

 
93

Total consumer loans
1,322

 
2,462

 
3,784

 
3,876

 
93

Total
$
39,919

 
$
72,567

 
$
112,485

 
$
120,182

 
$
9,843

December 31, 2016
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
3,609

 
$
27,031

 
$
30,640

 
$
35,957

 
$
5,864

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
21,318

 
36,974

 
58,292

 
60,267

 
3,612

Construction
1,618

 
2,379

 
3,997

 
3,997

 
260

Total commercial real estate loans
22,936

 
39,353

 
62,289

 
64,264

 
3,872

Residential mortgage
8,398

 
9,958

 
18,356

 
19,712

 
725

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity
1,182

 
2,352

 
3,534

 
3,626

 
70

Total consumer loans
1,182

 
2,352

 
3,534

 
3,626

 
70

Total
$
36,125

 
$
78,694

 
$
114,819

 
$
123,559

 
$
10,531

The following tables present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2017 and 2016
 
Three Months Ended March 31,
 
2017
 
2016
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(in thousands)
Commercial and industrial
$
30,459

 
$
308

 
$
28,331

 
$
240

Commercial real estate:
 
 
 
 
 
 
 
Commercial real estate
55,325

 
324

 
72,398

 
639

Construction
2,696

 
19

 
9,802

 
48

Total commercial real estate loans
58,021

 
343

 
82,200

 
687

Residential mortgage
20,393

 
208

 
23,603

 
202

Consumer loans:
 
 
 
 
 
 
 
Home equity
4,895

 
40

 
2,359

 
23

Total consumer loans
4,895

 
40

 
2,359

 
23

Total
$
113,768

 
$
899

 
$
136,493

 
$
1,152

Interest income recognized on a cash basis (included in the table above) was immaterial for the three months ended March 31, 2017 and 2016.

31




Troubled debt restructured loans. From time to time, Valley may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a troubled debt restructured loan (TDR). Valley’s PCI loans are excluded from the TDR disclosures below because they are evaluated for impairment on a pool by pool basis. When an individual PCI loan within a pool is modified as a TDR, it is not removed from its pool. All TDRs are classified as impaired loans and are included in the impaired loan disclosures above.
The majority of the concessions made for TDRs involve lowering the monthly payments on loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. The concessions rarely result in the forgiveness of principal or accrued interest. In addition, Valley frequently obtains additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms of the loan and Valley’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
Performing TDRs (not reported as non-accrual loans) totaled $80.4 million and $85.2 million as of March 31, 2017 and December 31, 2016, respectively. Non-performing TDRs totaled $13.1 million and $10.6 million as of March 31, 2017 and December 31, 2016, respectively.

The following tables present loans by loan portfolio class modified as TDRs during the three months ended March 31, 2017 and 2016. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at March 31, 2017 and 2016, respectively. 
 
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
Troubled Debt Restructurings
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
($ in thousands)
Commercial and industrial
 
9

 
$
10,282

 
$
9,235

 
4

 
$
4,961

 
$
4,887

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
1

 
177

 
173

 
2

 
658

 
404

Construction
 
1

 
560

 
480

 

 

 

Total commercial real estate
 
2

 
737

 
653

 
2

 
658

 
404

Residential mortgage
 
3

 
621

 
622

 
2

 
392

 
381

Consumer
 

 

 

 
1

 
54

 
53

Total
 
14

 
$
11,640

 
$
10,510

 
9

 
$
6,065

 
$
5,725


The total TDRs presented in the above table had allocated specific reserves for loan losses totaling $2.0 million and $1.6 million at March 31, 2017 and 2016, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 8. One commercial and industrial TDR loan totaling $209 thousand was fully charged-off during the three months ended March 31, 2016. There were no charge-offs related to TDR modifications during the quarter ended March 31, 2017.



32




The following table presents non-PCI loans modified as TDRs within the previous 12 months for which there was a payment default (90 days or more past due) during the three months ended March 31, 2017 and March 31, 2016.

 
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
Troubled Debt Restructurings Subsequently Defaulted
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
 
($ in thousands)
Commercial and industrial
 
1

 
$
2,000

 
2

 
$
372

Commercial real estate
 
2

 
807

 
1

 
81

Residential mortgage
 
1

 
321

 
2

 
267

Consumer
 

 

 
1

 
30

Total
 
4

 
$
3,128

 
6

 
$
750

Credit quality indicators. Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes. Under Valley’s internal risk rating system, loan relationships could be classified as “Pass,” “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Substandard loans include loans that exhibit well-defined weakness and are characterized by the distinct possibility that Valley will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged-off immediately to the allowance for loan losses, and, therefore, not presented in the table below. Loans that do not currently pose a sufficient risk to warrant classification in one of the aforementioned categories, but pose weaknesses that deserve management’s close attention are deemed Special Mention. Loans rated as Pass do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants.
The following table presents the risk category of loans (excluding PCI loans) by class of loans at March 31, 2017 and December 31, 2016
Credit exposure - by internally assigned risk rating
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Non-PCI Loans
 
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,226,553

 
$
87,059

 
$
82,376

 
$
2,166

 
$
2,398,154

Commercial real estate
 
7,814,338

 
57,289

 
79,602

 

 
7,951,229

Construction
 
755,848

 
2,415

 

 

 
758,263

Total
 
$
10,796,739

 
$
146,763

 
$
161,978

 
$
2,166

 
$
11,107,646

December 31, 2016
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,246,457

 
$
44,316

 
$
64,649

 
$
1,596

 
$
2,357,018

Commercial real estate
 
7,486,469

 
57,591

 
84,268

 

 
7,628,328

Construction
 
708,070

 
200

 
1,996

 

 
710,266

Total
 
$
10,440,996

 
$
102,107

 
$
150,913

 
$
1,596

 
$
10,695,612


33




For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 2017 and December 31, 2016: 
Credit exposure - by payment activity
 
Performing
Loans
 
Non-Performing
Loans
 
Total Non-PCI
Loans
 
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
Residential mortgage
 
$
2,562,696

 
$
11,650

 
$
2,574,346

Home equity
 
367,947

 
1,285

 
369,232

Automobile
 
1,149,808

 
110

 
1,149,918

Other consumer
 
593,655

 

 
593,655

Total
 
$
4,674,106

 
$
13,045

 
$
4,687,151

December 31, 2016
 
 
 
 
 
 
Residential mortgage
 
$
2,672,120

 
$
12,075

 
$
2,684,195

Home equity
 
375,185

 
1,028

 
376,213

Automobile
 
1,138,936

 
146

 
1,139,082

Other consumer
 
569,499

 

 
569,499

Total
 
$
4,755,740

 
$
13,249

 
$
4,768,989

Valley evaluates the credit quality of its PCI loan pools based on the expectation of the underlying cash flows of each pool, derived from the aging status and by payment activity of individual loans within the pool. The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of March 31, 2017 and December 31, 2016. 
Credit exposure - by payment activity
 
Performing
Loans
 
Non-Performing
Loans
 
Total
PCI Loans
 
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
Commercial and industrial
 
$
235,700

 
$
8,465

 
$
244,165

Commercial real estate
 
1,054,623

 
10,566

 
1,065,189

Construction
 
76,496

 
1,095

 
77,591

Residential mortgage
 
167,510

 
3,591

 
171,101

Consumer
 
94,515

 
2,140

 
96,655

Total
 
$
1,628,844

 
$
25,857

 
$
1,654,701

December 31, 2016
 
 
 
 
 
 
Commercial and industrial
 
$
272,483

 
$
8,694

 
$
281,177

Commercial real estate
 
1,080,376

 
10,963

 
1,091,339

Construction
 
113,370

 
1,310

 
114,680

Residential mortgage
 
179,793

 
3,930

 
183,723

Consumer
 
98,469

 
2,114

 
100,583

Total
 
$
1,744,491

 
$
27,011

 
$
1,771,502

Other real estate owned (OREO) totaled $10.7 million and $10.2 million at March 31, 2017 and December 31, 2016, respectively, (including $558 thousand of OREO properties which are subject to loss-sharing agreements with the FDIC at December 31, 2016). There were no covered OREO properties at March 31, 2017. OREO included foreclosed residential real estate properties totaling $2.4 million and $1.6 million at March 31, 2017 and December 31, 2016, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $5.3 million and $7.1 million at March 31, 2017 and December 31, 2016, respectively.

34



Note 8. Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan losses and the allowance for unfunded letters of credit. Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of the loan portfolio and unfunded letter of credit commitments at the balance sheet date. The allowance for loan losses is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio, including unexpected additional credit impairment of PCI loan pools subsequent to acquisition. There was no allowance allocation for PCI loan losses at March 31, 2017 and December 31, 2016.

The following table summarizes the allowance for credit losses at March 31, 2017 and December 31, 2016
 
March 31,
2017
 
December 31,
2016
 
(in thousands)
Components of allowance for credit losses:
 
 
 
Allowance for loan losses
$
115,443

 
$
114,419

Allowance for unfunded letters of credit
2,253

 
2,185

Total allowance for credit losses
$
117,696

 
$
116,604


The following table summarizes the provision for credit losses for the periods indicated:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Components of provision for credit losses:
 
 
 
Provision for loan losses
$
2,402

 
$
729

Provision for unfunded letters of credit
68

 
71

Total provision for credit losses
$
2,470

 
$
800


The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 and 2016:
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
Three Months Ended
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
50,820

 
$
55,851

 
$
3,702

 
$
4,046

 
$

 
$
114,419

Loans charged-off
(1,714
)
 
(414
)
 
(130
)
 
(1,121
)
 

 
(3,379
)
Charged-off loans recovered
848

 
142

 
448

 
563

 

 
2,001

Net (charge-offs) recoveries
(866
)
 
(272
)
 
318

 
(558
)
 

 
(1,378
)
Provision for loan losses
1,334

 
723

 
(428
)
 
773

 


 
2,402

Ending balance
$
51,288

 
$
56,302

 
$
3,592

 
$
4,261

 
$

 
$
115,443

Three Months Ended
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
48,767

 
$
48,006

 
$
4,625

 
$
4,780

 
$

 
$
106,178

Loans charged-off
(1,251
)
 
(105
)
 
(81
)
 
(1,074
)
 

 
(2,511
)
Charged-off loans recovered
526

 
89

 
15

 
389

 

 
1,019

Net (charge-offs) recoveries
(725
)
 
(16
)
 
(66
)
 
(685
)
 

 
(1,492
)
Provision for loan losses
375

 
464

 
(350
)
 
240

 

 
729

Ending balance
$
48,417

 
$
48,454

 
$
4,209

 
$
4,335

 
$

 
$
105,415


35



The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology at March 31, 2017 and December 31, 2016. 
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Total
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,688

 
$
3,376

 
$
686

 
$
93

 
$
9,843

Collectively evaluated for impairment
45,600

 
52,926

 
2,906

 
4,168

 
105,600

Total
$
51,288

 
$
56,302

 
$
3,592

 
$
4,261

 
$
115,443

Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
30,061

 
$
60,083

 
$
18,557

 
$
3,784

 
$
112,485

Collectively evaluated for impairment
2,368,094

 
8,649,408

 
2,555,789

 
2,109,021

 
15,682,312

Loans acquired with discounts related to credit quality
244,165

 
1,142,780

 
171,101

 
96,655

 
1,654,701

Total
$
2,642,320

 
$
9,852,271

 
$
2,745,447

 
$
2,209,460

 
$
17,449,498

December 31, 2016
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,864

 
$
3,872

 
$
725

 
$
70

 
$
10,531

Collectively evaluated for impairment
44,956

 
51,979

 
2,977

 
3,976

 
103,888

Total
$
50,820

 
$
55,851

 
$
3,702

 
$
4,046

 
$
114,419

Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
30,640

 
$
62,289

 
$
18,356

 
$
3,534

 
$
114,819

Collectively evaluated for impairment
2,326,378

 
8,276,305

 
2,665,839

 
2,081,260

 
15,349,782

Loans acquired with discounts related to credit quality
281,177

 
1,206,019

 
183,723

 
100,583

 
1,771,502

Total
$
2,638,195

 
$
9,544,613

 
$
2,867,918

 
$
2,185,377

 
$
17,236,103



Note 9. Goodwill and Other Intangible Assets
Goodwill totaled $690.6 million at both March 31, 2017 and December 31, 2016. There were no changes to the carrying amounts of goodwill allocated to Valley’s business segments, or reporting units thereof, for goodwill impairment analysis (as reported in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016). There was no impairment of goodwill during the three months ended March 31, 2017 and 2016.
The following table summarizes other intangible assets as of March 31, 2017 and December 31, 2016: 
 
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Valuation
Allowance
 
Net
Intangible
Assets
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
Loan servicing rights
$
74,108

 
$
(52,954
)
 
$
(899
)
 
$
20,255

Core deposits
43,396

 
(20,697
)
 

 
22,699

Other
4,087

 
(2,083
)
 

 
2,004

Total other intangible assets
$
121,591

 
$
(75,734
)
 
$
(899
)
 
$
44,958

December 31, 2016
 
 
 
 
 
 
 
Loan servicing rights
$
73,002

 
$
(52,634
)
 
$
(900
)
 
$
19,468

Core deposits
61,504

 
(37,562
)
 

 
23,942

Other
4,087

 
(2,013
)
 

 
2,074

Total other intangible assets
$
138,593

 
$
(92,209
)
 
$
(900
)
 
$
45,484



36




Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets in proportion to, and over the period of, estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. See the "Assets and Liabilities Measured at Fair Value on a Non-recurring Basis" section of Note 5 for additional information regarding the fair valuation and impairment of loan servicing rights.

Core deposits are amortized using an accelerated method and have a weighted average amortization period of 11 years. The line item labeled “Other” included in the table above primarily consists of customer lists and covenants not to compete, which are amortized over their expected lives generally using a straight-line method and have a weighted average amortization period of approximately 20 years. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three months ended March 31, 2017 and 2016.

The following table presents the estimated future amortization expense of other intangible assets for the remainder of 2017 through 2021: 
 
Loan
Servicing
Rights
 
Core
Deposits
 
Other
 
(in thousands)
2017
$
3,892

 
$
3,599

 
$
210

2018
4,278

 
4,215

 
249

2019
3,362

 
3,671

 
235

2020
2,647

 
3,127

 
220

2021
1,973

 
2,582

 
206


Valley recognized amortization expense on other intangible assets, including net impairment (or recovery of impairment) charges on loan servicing rights, totaling approximately $2.5 million and $2.8 million for the three months ended March 31, 2017 and 2016, respectively.
Note 10. Stock–Based Compensation
Valley currently has one active employee stock option plan, the 2016 Long-Term Stock Incentive Plan (the “2016 Stock Plan”), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016. The purpose of the 2016 Plan is to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.
Under the 2016 Stock Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors. As of March 31, 2017, 7.4 million shares of common stock were available for issuance under the 2016 Stock Plan. The essential features of each award are described in the award agreement relating to that award. The grant, exercise, vesting, settlement or payment of an award may be based upon the fair value of Valley’s common stock on the last sale price reported for Valley’s common stock on such date or the last sale price reported preceding such date, except for performance-based awards with a market condition. The grant date fair values of performance-based awards that vest based on a market condition are determined by a third party specialist using a Monte Carlo valuation model.
Restricted Stock. Restricted stock is awarded to key employees, providing for the immediate award of our common stock subject to certain vesting and restrictions under the 2016 Stock Plan. Compensation expense is measured based on the grant-date fair value of the shares. Valley awarded time-based restricted stock totaling 393 thousand shares and 494 thousand shares during the three months ended March 31, 2017 and 2016, respectively, to

37




both executive officers and key employees of Valley. The awards have vesting periods ranging from three to six years. Generally, the restrictions on such awards lapse at an annual or bi-annual rate of one-third of the total award commencing with the first or second anniversary of the date of grant, respectively. The average grant date fair value of the restricted stock awards granted during the three months ended March 31, 2017 and 2016 was $11.66 per share and $8.77 per share, respectively.
Restricted Stock Units. Valley granted 371 thousand shares and 431 thousand shares of performance-based RSUs to certain executive officers for the three months ended March 31, 2017 and 2016, respectively. The performance-based awards vest based on (i) growth in tangible book value per share plus dividends (75 percent of performance shares) and (ii) total shareholder return as compared to our peer group (25 percent of performance shares). The performance based awards "cliff" vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents and accrued interest (if applicable), per the terms of the agreements, are accumulated and paid to the grantee at the vesting date, or forfeited if the performance conditions are not met. The grant date fair value of the RSUs granted during the three months ended March 31, 2017 and 2016 was $11.05 per share and $8.32 per share, respectively.

Valley recorded total stock-based compensation expense of $4.1 million and $2.4 million for the three months ended March 31, 2017 and 2016, respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of March 31, 2017, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $19.1 million and will be recognized over an average remaining vesting period of approximately 2.2 years.
Note 11. Derivative Instruments and Hedging Activities

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

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

Fair Value Hedges of Fixed Rate Assets and Liabilities. Valley is exposed to changes in the fair value of certain of its fixed rate assets or liabilities due to changes in benchmark interest rates based on one-month LIBOR. From time to time, Valley uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Valley includes the gain or loss on the hedged items in the same income statement line item as the loss or gain on the related derivatives.

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

Under a program, Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge

38




accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

At March 31, 2017, Valley has one "steepener" swap with a total current notional amount of $23.0 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the rate paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in three-month LIBOR rate and therefore provide an effective economic hedge.

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

Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows: 
 
March 31, 2017
 
December 31, 2016
 
Fair Value
 
 
 
Fair Value
 
 
 
Other Assets
 
Other Liabilities
 
Notional Amount
 
Other Assets
 
Other Liabilities
 
Notional Amount
 
(in thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedge interest rate caps and swaps
$
588

 
$
343

*
$
707,000

 
$
802

 
$
15,641

 
$
707,000

Fair value hedge interest rate swaps

 
888

 
7,944

 

 
986

 
7,999

Total derivatives designated as hedging instruments
$
588

 
$
1,231

 
$
714,944

 
$
802

 
$
16,627

 
$
714,999

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and embedded derivatives
$
24,817

 
$
21,882

*
$
1,108,416

 
$
25,285

 
$
25,284

 
$
1,075,722

Mortgage banking derivatives
61

 
118

 
53,851

 
2,968

 
2,166

 
246,583

Total derivatives not designated as hedging instruments
$
24,878

 
$
22,000

 
$
1,162,267

 
$
28,253

 
$
27,450

 
$
1,322,305

 
* The fair value for the Chicago Mercantile Exchange cleared derivative positions is inclusive of accrued interest payable and the portion of the cash collateral representing the variation margin posted with (or by) the applicable counterparties.

Chicago Mercantile Exchange (CME) amended their rules to legally characterize the variation margin posted between counterparties to be classified as settlements of the outstanding derivative contracts instead of cash collateral.  Effective January 1, 2017, Valley adopted the new rule on a prospective basis to classify its CME variation margin as a single-unit of account with the fair value of certain cash flow and non-designated derivative instruments. As a result, the fair value of the designated cash flow derivatives and non-designated interest rate swaps cleared with the CME were mostly offset by variation margins totaling $13.5 million and $3.1 million, respectively, and reported in the table above on a net basis at March 31, 2017.

39




Gains (losses) included in the consolidated statements of income and in other comprehensive income, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows: 
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense
$
(2,518
)
 
$
(2,971
)
Amount of gain (loss) recognized in other comprehensive income
217

 
(11,032
)
The net gains or losses related to cash flow hedge ineffectiveness were immaterial during the three months ended March 31, 2017 and 2016. The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $18.5 million and $12.5 million at March 31, 2017 and December 31, 2016, respectively.
Amounts reported in accumulated other comprehensive loss related to cash flow interest rate derivatives are reclassified to interest expense as interest payments are made on the hedged variable interest rate liabilities. Valley estimates that $7.4 million will be reclassified as an increase to interest expense over the next 12 months.

Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Derivative - interest rate swaps:
 
 
 
Interest income
$
97

 
$
(99
)
Interest expense

 
4,728

Hedged item - loans and borrowings:
 
 
 
Interest income
$
(97
)
 
$
99

Interest expense

 
(4,719
)

The amounts recognized in non-interest expense related to ineffectiveness of fair value hedges were immaterial for the three months ended March 31, 2017 and 2016.

The net losses included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows: 
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Non-designated hedge interest rate derivatives
 
 
 
Other non-interest expense
$
(860
)
 
$
(297
)

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


40




Valley has agreements with its derivative counterparties providing that if Valley defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Valley could also be declared in default on its derivative counterparty agreements. Additionally, Valley has an agreement with several of its derivative counterparties that contains provisions that require Valley’s debt to maintain an investment grade credit rating from each of the major credit rating agencies from which it receives a credit rating. If Valley’s credit rating is reduced below investment grade, or such rating is withdrawn or suspended, then the counterparty could terminate the derivative positions and Valley would be required to settle its obligations under the agreements. As of March 31, 2017, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of March 31, 2017, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $3.6 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. At March 31, 2017, Valley had $34.1 million in collateral posted with counterparties, net of CME variation margin.
Note 12. Balance Sheet Offsetting
Certain financial instruments, including derivatives (consisting of interest rate caps and swaps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default. The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of March 31, 2017 and December 31, 2016.
 
 
 
 
 
 
 
Gross Amounts Not Offset
 
 
 
Gross Amounts
Recognized
 
Gross Amounts
Offset
 
Net Amounts
Presented
 
Financial
Instruments
 
Cash
Collateral
 
Net
Amount
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
25,405

 
$

 
$
25,405

 
$
(5,853
)
 
$

 
$
19,552

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
23,113

 
$

 
$
23,113

 
$
(5,853
)
 
$
(2,270
)
(1) 
$
14,990

Repurchase agreements
165,000

 

 
165,000

 

 
(165,000
)
(2) 

Total
$
188,113

 
$

 
$
188,113

 
$
(5,853
)
 
$
(167,270
)
 
$
14,990

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
26,087

 
$

 
$
26,087

 
$
(5,268
)
 
$

 
$
20,819

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
41,911

 
$

 
$
41,911

 
$
(5,268
)
 
$
(36,643
)
(1) 
$

Repurchase agreements
165,000

 

 
165,000

 

 
(165,000
)
(2) 

Total
$
206,911

 
$

 
$
206,911

 
$
(5,268
)
 
$
(201,643
)
 
$

 
(1)
Represents the amount of collateral posted with derivatives counterparties that offsets net liabilities. Actual cash collateral posted with all counterparties totaled $50.7 million and $52.4 million at March 31, 2017 and December 31, 2016, respectively.
(2)
Represents the fair value of non-cash pledged investment securities.

41




Note 13. Tax Credit Investments

Valley’s tax credit investments are primarily related to investments promoting qualified affordable housing projects, and other investments related to community development and renewable energy sources. Some of these tax-advantaged investments support Valley’s regulatory compliance with the Community Reinvestment Act (CRA). Valley’s investments in these entities generate a return primarily through the realization of federal income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction of income tax expense.

Valley’s tax credit investments are carried in other assets on the consolidated statements of financial condition. Valley’s unfunded capital and other commitments related to the tax credit investments are carried in accrued expenses and other liabilities on the consolidated statements of financial condition. Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense of the consolidated statements of income using the equity method of accounting. An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value.

The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at March 31, 2017 and December 31, 2016.
 
March 31,
2017
 
December 31,
2016
 
(in thousands)
Other Assets:
 
 
 
Affordable housing tax credit investments, net
$
29,047

 
$
29,567

Other tax credit investments, net
39,959

 
44,763

Total tax credit investments, net
$
69,006

 
$
74,330

Other Liabilities:
 
 
 
Unfunded affordable housing tax credit commitments
$
4,690

 
$
4,850

Unfunded other tax credit commitments
7,276

 
7,276

    Total unfunded tax credit commitments
$
11,966

 
$
12,126


The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the three months ended March 31, 2017 and 2016
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Components of Income Tax Expense:
 
 
 
Affordable housing tax credits and other tax benefits
$
1,284

 
$
1,065

Other tax credit investment credits and tax benefits
6,286

 
3,268

Total reduction in income tax expense
$
7,570

 
$
4,333

Amortization of Tax Credit Investments:
 
 
 
Affordable housing tax credit investment losses
$
396

 
$
584

Affordable housing tax credit investment impairment losses
124

 
140

Other tax credit investment losses
767

 
74

Other tax credit investment impairment losses
4,037

 
6,466

Total amortization of tax credit investments recorded in non-interest expense
$
5,324

 
$
7,264


42




Note 14. Litigation
In the normal course of business, Valley is a party to various outstanding legal proceedings and claims. In the opinion of management, the financial condition, results of operations and liquidity of Valley should not be materially affected by the outcome of such legal proceedings and claims. However, in the event of an unexpected adverse outcome in one or more of our legal proceedings, operating results for a particular period may be negatively impacted. Disclosure is required when a risk of material loss in a litigation or claim is more than remote, even when the risk of a material loss is less than likely. Unless an estimate cannot be made, disclosure is also required of the estimate of the reasonably possible loss or range of loss.
Although there can be no assurance as to the ultimate outcome, Valley has generally denied, or believes it has a meritorious defense and will deny liability in litigation pending against Valley and claims made, including the matter described below. Valley intends to defend vigorously each case against it. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated.
Merrick Bank Corporation v. Valley National Bank and American Express Travel Related Services v. Valley National Bank litigation. For about a decade, Valley served as the depository bank for various charter operators under regulations of the Department of Transportation (DOT) and contracts entered into with charter operators under those regulations. The purported intent of the regulations is to afford some protection to the customers of the charter operators. A charter operator has several options with regard to fulfilling its obligations under the regulations, with one option requiring the charter operator to deposit the proceeds of tickets purchased for a charter flight into an FDIC insured bank account. The funds for a flight are released when the charter operator certifies that the flight has been completed. Valley stopped serving as a depository bank for the charter business due to the narrow profit in that business combined with the legal expenses incurred to defend itself in a prior case in which Valley was completely successful and the anticipated legal expenses from the following similar cases that are still pending.
Valley served as the depository bank for Myrtle Beach Direct Air (Direct Air) under a contract between Direct Air and Valley approved by the DOT under the DOT regulations. Direct Air commenced operations in 2007 but in March 2012 Direct Air ceased operations and filed for bankruptcy. Thereafter the United States Justice Department charged three of the principals of Direct Air with criminal fraud; that case is expected to go to trial in September 2017. Merrick Bank Corp. (Merrick) was the merchant bank for Direct Air and processed credit card purchases for Direct Air. Following the bankruptcy of Direct Air, Merrick incurred chargebacks in the approximate amount of $26.2 million when the Direct Air customers whose flights had been canceled obtained a credit from their card issuing banks for the cost of the ticket or other item purchased from Direct Air. Merrick was not able to recover the chargebacks from Direct Air. Direct Air’s depository account at Valley contained approximately $1.0 million at the time Direct Air ceased operations.
Merrick filed an action against Valley with ten counts in December 2013. Valley moved to dismiss five of the counts and, in March 2015, the court dismissed four of the five counts. American Express Travel Related Services (American Express) filed a similar action against Valley claiming about $3.0 million in chargebacks. Five of American Express’ eleven counts have been dismissed. The two cases have now been consolidated in the Federal District Court of New Jersey.
During April 2017, all parties attended a mediation, however it was unsuccessful. Shortly before the mediation, Valley filed summary judgment motions on all of the remaining counts in both the Merrick and American Express cases. Merrick and American Express also filed summary judgment motions against Valley. Valley does not anticipate an immediate decision to be rendered on the motions.
At March 31, 2017, Valley could not estimate an amount or range of reasonably possible losses related to the matter described above. Based upon information currently available and advice of counsel, Valley believes that the eventual outcome of such claims will not have a material adverse effect on Valley’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of the matters, if unfavorable, may be material to Valley’s results of operations for a particular period.

43




Note 15. Business Segments
The information under the caption “Business Segments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

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

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

This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors disclosed in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016, include, but are not limited to:

weakness or a decline in the U.S. economy, in particular in New Jersey, New York Metropolitan area (including Long Island) and Florida as well as an unexpected decline in commercial real estate values within our market areas;
less than expected cost savings and revenue enhancement from Valley's cost reduction plans including its earnings enhancement program called "LIFT";
damage verdicts or settlements or restrictions related to existing or potential litigations arising from claims of breach of fiduciary responsibility, negligence, fraud, contractual claims, environmental laws, patent or trade mark infringement, employment related claims, and other matters;
the loss of or decrease in lower-cost funding sources within our deposit base may adversely impact our net interest income and net income;
cyber attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;
results of examinations by the OCC, the FRB, the 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, require us to reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;

44




changes in accounting policies or accounting standards, including the new authoritative accounting guidance (known as the current expected credit loss (CECL) model) which may increase the required level of our allowance for credit losses after adoption on January 1, 2020;
higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in tax laws, regulations and case law;
our inability to pay dividends at current levels, or at all, because of inadequate future earnings, regulatory restrictions or limitations, and changes in our capital requirements;
higher than expected loan losses within one or more segments of our loan portfolio;
unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;
unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors;
the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships; and
inability to retain and attract customers and qualified employees.
Critical Accounting Policies and Estimates

Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Our significant accounting policies are presented in Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016. We identified our policies on the allowance for loan losses, security valuations and impairments, 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. Our critical accounting policies are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016.
New Authoritative Accounting Guidance

See Note 4 to the consolidated financial statements for a description of new authoritative accounting guidance including the respective dates of adoption and effects on results of operations and financial condition.

Executive Summary

Company Overview. At March 31, 2017, Valley had consolidated total assets of approximately $23.2 billion, total net loans of $17.3 billion, total deposits of $17.3 billion and total shareholders’ equity of $2.4 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, and Florida. Of our current 209 branch network, 67 percent, 18 percent and 15 percent of the branches are located in New Jersey, New York and Florida, respectively. We have grown significantly in asset size over the past several years primarily through bank acquisitions that expanded our operating footprint into several Florida markets in 2014 and 2015, as well as normal lending activity. See Item 1 of Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 for more details regarding our most recent acquisitions.
Quarterly Results. Net income for the first quarter of 2017 was $46.1 million, or $0.17 per diluted common share, compared to $36.2 million, or $0.14 per diluted common share, for the first quarter of 2016. The $9.9 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a $14.4 million increase in our net interest income mostly due to higher average loan balances driven by both strong organic and purchased loan volume over the last 12 months and the modification of $405 million of high cost long-term

45




borrowings in the third quarter of 2016, (ii) a $3.6 million increase in non-interest income mostly caused by increases in net gains on sales of residential mortgage loans and, to a lesser extent, higher bank owned life insurance income, partially offset by (iii) a $2.7 million increase in non-interest expense mostly due to higher salary and employee benefit expense, (iv) a $1.7 million increase in the provision for credit losses largely caused by loan growth, and (v) an increase in income tax expense mainly due to higher pre-tax income. See the "Net Interest Income," "Non-Interest Income," and "Non-Interest Expense" sections below for more details on the items above impacting our first quarter 2017 results, as well as other items discussed elsewhere in this MD&A.
Economic Overview. During the first quarter of 2017, real gross domestic product (GDP) grew at a 0.9 percent annual rate after advancing 2.1 percent in the fourth quarter of 2016. The pace of hiring remained solid, although household spending slowed somewhat in the first quarter. The combination of past declines in commodity prices and continued wage gains did not bolster consumption. Increased business fixed investment was partly supported by stability in commodity prices, and growth in residential fixed investment was solid even as borrowing costs generally increased in the first quarter.

The civilian unemployment rate decreased from 4.7 percent as of December 31, 2016 to 4.5 percent as of March 31, 2017 even as the number of people entering the workforce increased, demonstrating the continued strength of the labor market. The pace of hiring accelerated somewhat from a monthly average of 147 thousand in linked fourth quarter to 178 thousand in the first quarter of 2017. Measures of wages increased modestly over recent months which may be contributing to the slowing in household consumption.

In the first quarter of 2017, the pace of U.S. existing home sales increased compared to the previous linked quarter and the same period one year ago. Higher readings on consumer confidence boosted by the strong labor market supported the housing market even as borrowing costs remained high relative to recent quarters. The average market rate on a 30-year fixed rate mortgage loan was 4.17 percent during the first quarter of 2017, the highest rate since the second quarter of 2014. Market conditions remain generally favorable although the low levels of home inventory may weigh on unit sales.
 
Growth in personal consumption of goods and services decelerated modestly in the first quarter of 2017 after advancing at a solid pace throughout most of 2016. However, sales for automobiles were particularly weak in the first quarter of 2017. Additionally, slowing sales of goods may negatively impact business inventories which may result in slower overall business investment. Equity and home prices however, continued to rise in the first quarter of 2017, which may support consumer spending as we move forward in 2017.

In March 2017, the Federal Reserve’s Open Market Committee (FOMC) raised the target for the federal funds rate by 25 basis points for the third time in the last 15 months to a current target range of 0.75 to 1.00 percent. Despite these actions, the FOMC remains concerned about the continued low levels of inflation and inflation expectations. In determining future policy actions, the FOMC will assess progress - both realized and expected - toward its objectives of maximum employment and 2-percent inflation. The FOMC has maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities into agency mortgage-backed securities and will continue rolling over maturing U.S. Treasury securities at auction. This policy should help maintain accommodative financial conditions. The FOMC has continued to emphasize that future changes in monetary policy will be data dependent.

The 10-year U.S. Treasury note yield ended the first quarter at 2.40 percent, 13 basis points higher compared to December 31, 2016. The spread between the 2- and 10-year U.S. Treasury note yields was 1.13 percent at March 31, 2017, or 7 basis points lower than at December 31, 2016 and 6 basis points higher than compared to March 31, 2016.
    
While we are currently witnessing higher interest rates on pending loan originations within most of our loan pipelines in the early stages of the second quarter of 2017, we do see some offset potentially coming in the form of higher deposit and borrowing costs in our primary markets. To that end, despite strong loan demand, particularly in commercial real estate lending, our business operations and results may be challenged in the future due to several

46




factors, including, but not limited to, the decline in the spread between short- and long-term market interest rates and/or slower than expected economic activity within our markets.
Loans. Loans increased by $213.4 million, or 5.0 percent on an annualized basis, to $17.4 billion at March 31, 2017 from December 31, 2016 largely due to a $307.7 million net increase in total commercial real estate loans. The overall loan growth was partially offset by a decrease of $122.5 million in residential mortgage loans caused, in part, by the transfer of approximately $104 million of performing 30-year fixed rate mortgages to loans held for sale at March 31, 2017. The sale of these loans is expected to be completed during the second quarter of 2017 and result in a pre-tax gain of approximately $3 million. Total new organic loan originations, excluding new lines of credit and purchased loans, totaled approximately $740 million mostly within the commercial loan categories during the first quarter of 2017. See further details on our loan activities, including the covered loan portfolio, under the “Loan Portfolio” section below.
Asset Quality. Our past due loans and non-accrual loans, discussed further below, exclude PCI loans. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley. As of March 31, 2017, PCI loans totaled $1.7 billion and represented approximately 9.5 percent of our total loan portfolio.
Total non-PCI loan portfolio delinquencies (including loans past due 30 days or more and non-accrual loans) as a percentage of total loans increased to 0.61 percent at March 31, 2017 as compared to 0.55 percent at December 31, 2016 mostly due to an increase in commercial loans past due 30 to 59 days. At March 31, 2017, accruing past due loans totaled $68.1 million and included $15.3 million of matured performing loans (collateralized by taxi cab medallions) in the normal process of renewal. Non-performing assets (including non-accrual loans) increased by 4.2 percent to $51.5 million at March 31, 2017 as compared to $49.4 million at December 31, 2016 mostly due to a 2.1 percent increase in non-accrual loans to $38.3 million, as well as a moderate increase in other real estate owned.
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 unpredictable future strength of the U.S. economy and the housing and labor markets, management cannot provide assurance that our non-performing assets will not increase from the levels reported as of March 31, 2017. See the "Non-Performing Assets" section below for further analysis of our asset quality.
Deposits and Other Borrowings. The mix of the deposit categories of total average deposits for the first quarter of 2017 remained relatively unchanged as compared to the fourth quarter of 2016. Non-interest bearing deposits represented approximately 30 percent of total average deposits for the three months ended March 31, 2017, while savings, NOW and money market accounts were 52 percent and time deposits were 18 percent of the total average deposits. Overall, average deposits totaling $17.4 billion for the first quarter of 2017 decreased by $61.9 million as compared to the fourth quarter of 2016 due, in large part, to lower average non-interest bearing deposits. Actual ending balances for deposits also decreased $399.6 million, or 2.3 percent, to approximately $17.3 billion at March 31, 2017 from December 31, 2016 mostly due to runoff related to one large commercial money market customer and a $68.6 million decrease in brokered money market deposit account balances in January 2017. However, time deposits increased $76.2 million to $3.2 billion at March 31, 2017 from December 31, 2016 due, in part, to the successful promotional campaign for our 12-month certificates of deposit.
Average short-term borrowings increased $296.7 million, or 23.4 percent, to $1.6 billion for the three months ended March 31, 2017 as compared to the fourth quarter of 2016 mostly due to increased use of short-term FHLB advances for additional liquidity to fund new loan volumes. Actual ending balances for short-term borrowings increased $564.0 million to $1.6 billion at March 31, 2017 as compared to December 31, 2016 mostly due to the higher level of FHLB advances used as alternate funding, which totaled approximately $1.4 billion at March 31, 2017.

Average long-term borrowings (which include junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition) totaled $1.5 billion for the first quarter of 2017

47




and remained relatively unchanged as compared to the fourth quarter of 2016. Actual ending balances for long-term borrowings increased $200.1 million to $1.6 billion at March 31, 2017 as compared to December 31, 2016 primarily due to two new FHLB advances with contractual terms between 13 and 15 months.

Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:
 
Three Months Ended
March 31,
 
2017
 
2016
Return on average assets
0.80
%
 
0.67
%
Return on average shareholders’ equity
7.69

 
6.52

Return on average tangible shareholders’ equity (ROATE)
11.09

 
9.75


ROATE, which is a non-GAAP measure, is computed by dividing net income by average shareholders’ equity less average goodwill and average other intangible assets, as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
 
($ in thousands)
Net income
$
46,095

 
$
36,187

Average shareholders’ equity
2,399,159

 
2,219,570

Less: Average goodwill and other intangible assets
(736,178
)
 
(735,438
)
Average tangible shareholders’ equity
$
1,662,981

 
$
1,484,132

Annualized ROATE
11.09
%
 
9.75
%

Management believes the ROATE measure provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and the measure facilitates comparisons with the performance of others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies.

All of the above ratios are, from time to time, impacted by net gains and losses on securities transactions, net gains on sales of loans and net impairment losses on securities recognized in non-interest income. These amounts can vary widely from period to period due to, among other factors, the level of sales of our investment securities classified as available for sale, the amount of residential mortgage loans originated for sale, and the results of our quarterly impairment analysis of the held to maturity and available for sale investment portfolios. See the “Non-Interest Income” section below for more details.
Net Interest Income
Net interest income on a tax equivalent basis totaling $164.7 million for the first quarter of 2017 increased $14.6 million from the first quarter of 2016 and decreased $1.9 million as compared to the fourth quarter of 2016. Interest income on a tax equivalent basis decreased $2.0 million to $201.3 million for the first quarter of 2017 as compared to the fourth quarter of 2016 mainly due to a 23 basis point decline in the yield on average loans, partially offset by increases of $533.3 million and $156.1 million in average loans and taxable investments, respectively, and a 18 basis point increase in the yield on average taxable investments. The decrease in yield on average loans for the first quarter of 2017 as compared to the linked fourth quarter was mostly due to a decline of $5.9 million in periodic commercial loan fee income related to derivative interest rate swaps executed with customers and loan prepayment penalty fees. Interest expense of $36.6 million for the three months ended March 31, 2017 decreased $113 thousand as compared to the fourth quarter of 2016. During first quarter of 2017, our interest expense on deposits and long-term borrowings declined by approximately $237 thousand and $292 thousand, respectively, from the linked fourth quarter largely due to

48




two less days during the first quarter of 2017. The reduction in interest expense from these interest bearing liabilities was largely offset by additional interest expense from increased short-term borrowings during the first quarter of 2017. Average short-term borrowings increased $296.7 million as compared to the fourth quarter of 2016 due to new FHLB borrowings used to offset a decline in deposits and fund new loans during the first quarter of 2017.
Average interest earning assets increased to $20.9 billion for the first quarter of 2017 as compared to approximately $19.5 billion for the first quarter of 2016 largely due to strong organic and purchased loan growth over the last 12 month period. The broad-based loan growth within several loan categories since March 31, 2016 was largely supplemented by purchased loans, primarily consisting of participations in multi-family loans and whole 1-4 family loans (that were a mix of qualifying and non-qualifying CRA loans with adjustable and fixed rates), totaling $753 million over the last 12 months ended March 31, 2017. Compared to the fourth quarter of 2016, average interest earning assets increased by $561.0 million from $20.4 billion largely due to continued loan growth. Average loans increased $533.3 million to $17.3 billion for the first quarter of 2017 from the fourth quarter of 2016 due to both organic and purchased loan growth mainly within commercial real estate and other consumer loans. Average total investments increased $137.1 million during the first quarter of 2017 and helped drive a $109.4 million decline in average overnight cash balances, along with normal fluctuations in overnight cash balances due to the timing of loan originations and additional borrowings to fund such loans.
Average interest bearing liabilities increased $949.5 million to $15.3 billion for the first quarter of 2017 as compared to the first quarter of 2016 mainly due to continued and greater use of low cost brokered money market deposits, as well as short-term FHLB advances issued as part of our overall funding and liquidity strategy over the last 12 month period. Compared to the fourth quarter of 2016, average interest bearing liabilities increased $357.0 million in the first quarter of 2017 mostly due to higher levels of both short-term FHLB advances and time deposit account balances. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.
Our net interest margin on a tax equivalent basis of 3.14 percent for the first quarter of 2017 increased by 6 basis points as compared to the first quarter of 2016, and decreased 13 basis points from the fourth quarter of 2016. The yield on average interest earning assets decreased by 15 basis points on a linked quarter basis mostly due to the lower yield on average loans. The yield on average loans decreased 23 basis points to 4.04 percent for the first quarter of 2017 and was negatively impacted by the aforementioned decreases in periodic commercial loan fees as compared to the fourth quarter of 2016. The yield on average taxable investment securities increased by 18 basis points to 2.78 percent for the first quarter of 2017 from the fourth quarter of 2016 largely due to a decline in premium amortization expense caused by lower principal repayments on residential mortgage-backed securities. The overall cost of average interest bearing liabilities decreased by 2 basis points during the first quarter of 2017 from 0.98 percent in the linked fourth quarter of 2016. The decrease was due, in part, to a 8 basis point decline in the cost of long-term borrowings mostly caused by two less days during the first quarter of 2017. Our cost of total deposits was 0.45 percent for the first quarter of 2017 as compared to 0.46 percent for the fourth quarter of 2016.
Looking forward, our net interest margin for the second quarter of 2017 may decline as compared to the first quarter of 2017 due to a decline in variable interest income items, such as derivative swap and loan fee income, as well as a multitude of conditional, and sometimes unpredictable, factors that can impact our actual margin results. For example, our margin may continue to face the risk of compression in the future due to, among other factors, the relatively low level of long-term market interest rates (which have moderately declined since March 31, 2017), further repayment of higher yielding interest earning assets, and the re-pricing risk related to interest bearing deposits and short-term borrowings. Additionally, our investment portfolios include a large number of residential mortgage-backed securities purchased at a premium. The amortization of such premiums, which impacts both the yield and interest income recognized on such securities, may increase or decrease depending upon the level of principal prepayments and market interest rates. To manage these risks, we continuously explore ways to maximize our mix of interest earning assets on our balance sheet, while maintaining a low cost of funds to optimize our net interest margin and overall returns. The increase in both the U.S. and Valley prime rates (to 4.00 percent and 5.125 percent, respectively) in response to the Federal Reserve's 25 basis point increase in the targeted federal funds rate in mid-March 2017 should benefit both our future net interest income and margin. Additionally, potential future loan growth from both the commercial and consumer lending segments (based upon solid loan pipelines seen in the early stages of the second quarter of 2017) is anticipated to positively impact our future net interest income.

49






The following table reflects the components of net interest income for the three months ended March 31, 2017, December 31, 2016 and March 31, 2016:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
 
Three Months Ended
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
($ in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)
$
17,313,100

 
$
175,017

 
4.04
%
 
$
16,779,765

 
$
179,275

 
4.27
%
 
$
15,993,543

 
$
166,075

 
4.15
%
Taxable investments (3)
2,836,300

 
19,740

 
2.78

 
2,680,175

 
17,454

 
2.60

 
2,497,986

 
15,479

 
2.48

Tax-exempt investments (1)(3)
612,946

 
6,201

 
4.05

 
632,011

 
6,292

 
3.98

 
569,265

 
5,677

 
3.99

Federal funds sold and other interest bearing deposits
187,118

 
331

 
0.71

 
296,535

 
280

 
0.38

 
426,676

 
357

 
0.33

Total interest earning assets
20,949,464

 
201,289

 
3.84

 
20,388,486

 
203,301

 
3.99

 
19,487,470

 
187,588

 
3.85

Allowance for loan losses
(115,300
)
 
 
 
 
 
(111,865
)
 
 
 
 
 
(107,039
)
 
 
 
 
Cash and due from banks
241,346

 

 
 
 
293,693

 
 
 
 
 
296,721

 
 
 
 
Other assets
1,938,949

 
 
 
 
 
2,100,979

 
 
 
 
 
2,013,099

 
 
 
 
Unrealized (losses) gains on securities available for sale, net
(18,173
)
 
 
 
 
 
8,698

 
 
 
 
 
(9,973
)
 
 
 
 
Total assets
$
22,996,286

 
 
 
 
 
$
22,679,991

 
 
 
 
 
$
21,680,278

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW and money market deposits
$
9,049,446

 
$
10,183

 
0.45
%
 
$
9,034,605

 
$
10,418

 
0.46
%
 
$
8,334,289

 
$
9,243

 
0.44
%
Time deposits
3,178,452

 
9,553

 
1.20

 
3,137,057

 
9,555

 
1.22

 
3,127,842

 
9,585

 
1.23

Total interest bearing deposits
12,227,898

 
19,736

 
0.65

 
12,171,662

 
19,973

 
0.66

 
11,462,131

 
18,828

 
0.66

Short-term borrowings
1,563,000

 
3,901

 
1.00

 
1,266,311

 
3,485

 
1.10

 
1,061,011

 
1,872

 
0.71

Long-term borrowings (4)
1,494,273

 
12,950

 
3.47

 
1,490,187

 
13,242

 
3.55

 
1,812,556

 
16,744

 
3.70

Total interest bearing liabilities
15,285,171

 
36,587

 
0.96

 
14,928,160

 
36,700

 
0.98

 
14,335,698

 
37,444

 
1.04

Non-interest bearing deposits
5,138,870

 
 
 
 
 
5,256,984

 
 
 
 
 
4,918,463

 
 
 
 
Other liabilities
173,086

 
 
 
 
 
190,639

 
 
 
 
 
206,547

 
 
 
 
Shareholders’ equity
2,399,159

 
 
 
 
 
2,304,208

 
 
 
 
 
2,219,570

 
 
 
 
Total liabilities and shareholders’ equity
$
22,996,286

 
 
 
 
 
$
22,679,991

 
 
 
 
 
$
21,680,278

 
 
 
 
Net interest income/interest rate spread (5)

 
$
164,702

 
2.88
%
 
 
 
$
166,601

 
3.01
%
 
 
 
$
150,144

 
2.81
%
Tax equivalent adjustment
 
 
(2,173
)
 
 
 
 
 
(2,206
)
 
 
 
 
 
(1,991
)
 
 
Net interest income, as reported
 
 
$
162,529

 
 
 
 
 
$
164,395

 
 
 
 
 
$
148,153

 
 
Net interest margin (6)
 
 
 
 
3.10
%
 
 
 
 
 
3.23
%
 
 
 
 
 
3.04
%
Tax equivalent effect
 
 
 
 
0.04
%
 
 
 
 
 
0.04
%
 
 
 
 
 
0.04
%
Net interest margin on a fully tax equivalent basis (6)
 
 
 
 
3.14
%
 
 
 
 
 
3.27
%
 
 
 
 
 
3.08
%

50






 
 
(1)
Interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.
(2)
Loans are stated net of unearned income and include non-accrual loans.
(3)
The yield for securities that are classified as available for sale is based on the average historical amortized cost.
(4)
Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated
statements of financial condition.
(5)
Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6)
Net interest income as a percentage of total average interest earning assets.

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

Change in Net Interest Income on a Tax Equivalent Basis
 
Three Months Ended March 31, 2017
Compared to March 31, 2016
 
Change
Due to
Volume
 
Change
Due to
Rate
 
Total
Change
 
(in thousands)
Interest Income:
 
 
 
 
 
Loans*
$
13,427

 
$
(4,485
)
 
$
8,942

Taxable investments
2,232

 
2,029

 
4,261

Tax-exempt investments*
441

 
83

 
524

Federal funds sold and other interest bearing deposits
(275
)
 
249

 
(26
)
Total increase (decrease) in interest income
15,825

 
(2,124
)
 
13,701

Interest Expense:
 
 
 
 
 
Savings, NOW and money market deposits
803

 
137

 
940

Time deposits
154

 
(186
)
 
(32
)
Short-term borrowings
1,081

 
948

 
2,029

Long-term borrowings and junior subordinated debentures
(2,806
)
 
(988
)
 
(3,794
)
Total (decrease) increase in interest expense
(768
)
 
(89
)
 
(857
)
Total increase (decrease) in net interest income
$
16,593

 
$
(2,035
)
 
$
14,558

 
*
Interest income is presented on a tax equivalent basis using a 35 percent tax rate.

51





Non-Interest Income

The following table presents the components of non-interest income for the three months ended March 31, 2017 and 2016:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Trust and investment services
$
2,744

 
$
2,440

Insurance commissions
5,061

 
4,708

Service charges on deposit accounts
5,236

 
5,103

(Losses) gains on securities transactions, net
(23
)
 
271

Fees from loan servicing
1,815

 
1,594

Gains on sales of loans, net
4,128

 
1,795

Bank owned life insurance
2,463

 
1,963

Other
3,635

 
3,574

Total non-interest income
$
25,059

 
$
21,448


Non-interest income increased $3.6 million for the three months ended March 31, 2017 as compared with the same period in 2016 primarily due to increases in net gains on sales of loans and non-interest income from bank owned life insurance.

Net gains on sales of loans increased $2.3 million for the three months ended March 31, 2017 as compared to the same period in 2016 largely due to a higher volume of residential mortgage loans originated for sale during the three months ended March 31, 2017. Loans originated for sale (including both new and refinanced loans) increased $80.1 million to $163.7 million for the first quarter of 2017 as compared to $83.6 million for the first quarter of 2016. During the first quarter of 2017, we sold $159.9 million of residential mortgage loans originated for sale (including $57.7 million of loans held for sale at December 31, 2016) as compared to $54.0 million in the first quarter of 2016. 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 net change in the fair value of loans held for sale resulted in net gains of $267 thousand and $499 thousand for the three months ended March 31, 2017 and 2016, respectively. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Bank owned life insurance increased $500 thousand for the three months ended March 31, 2017 as compared to the same period in 2016 largely related to certain death benefits received in the first quarter of 2017.



52




Non-Interest Expense

The following table presents the components of non-interest expense for the three months ended March 31, 2017 and 2016:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Salary and employee benefits expense
$
63,716

 
$
60,259

Net occupancy and equipment expense
23,035

 
22,789

FDIC insurance assessment
5,127

 
5,099

Amortization of other intangible assets
2,536

 
2,849

Professional and legal fees
4,695

 
3,895

Amortization of tax credit investments
5,324

 
7,264

Telecommunications expense
2,659

 
2,386

Other
13,860

 
13,684

Total non-interest expense
$
120,952

 
$
118,225


Non-interest expense increased $2.7 million for the three months ended March 31, 2017 as compared with the same period in 2016 primarily due to increases in the salary and employee benefits expense and professional and legal fees, partially offset by a decrease in the amortization of tax credit investments.

Salary and employee benefits expense increased $3.5 million for the three months ended March 31, 2017 as compared to the same period in 2016 largely due to increases in stock-based compensation expense and cash incentive compensation accrual totaling a combined $2.4 million. The remaining net increase in the category was mainly related to an increase in payroll taxes for the three months ended March 31, 2017 compared to the same period in 2016, as well as an increase in 401(k) plan expense.

Professional and legal fees increased $800 thousand for the three months ended March 31, 2017 as compared to the same period in 2016 largely due to an increase in legal fees related to on-going litigation, as well as other corporate matters during the first quarter of 2017.

Amortization of tax credit investments decreased $1.9 million for the three months ended March 31, 2017 as compared with the same period in 2016 mainly due to the lower level of net tax credit investments held at March 31, 2017 as compared to March 31, 2016. These 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 13 to the consolidated financial statements for more details regarding our tax credit investments.

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


53




The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three months ended March 31, 2017 and 2016:
 
Three Months Ended
March 31,
 
2017
 
2016
 
($ in thousands)
Total non-interest expense
$
120,952

 
$
118,225

Less: Amortization of tax credit investments
5,324

 
7,264

Total non-interest expense, adjusted
$
115,628

 
$
110,961

 
 
 
 
Net interest income
$
162,529

 
$
148,153

Total non-interest income
25,059

 
21,448

Total net interest income and non-interest income
$
187,588

 
$
169,601

Efficiency ratio
64.48
%
 
69.71
%
Efficiency ratio, adjusted
61.64
%
 
65.42
%

Earnings Enhancement Program
In December 2016, Valley announced a company-wide earnings enhancement initiative called LIFT. The LIFT program will seek to identify both additional operating expense reductions and revenue enhancement opportunities, which together are anticipated to contribute to sustainable improvement in our earnings for years to come. Valley has selected EHS Partners, LLC, a New York based consulting firm, to help achieve its program goals. The discovery and feasibility study phases for LIFT are currently underway and expected to be completed on schedule in the second quarter of 2017. The implementation phase of the initiative will commence in the third quarter of 2017 and is expected to be fully phased-in over a 24 month period. We expect this endeavor, combined with our continued growth strategies, to help position Valley to deliver on its future performance goals, while enhancing our focus on delivering the financial banking experience expected in today's rapidly changing financial services environment.
As part of the LIFT program and the normal on-going review of our business, we will evaluate the operational efficiency of our entire branch network (consisting of 110 leased and 99 owned office locations at March 31, 2017). This review will ensure the optimal performance of our retail operations, in conjunction with several other factors, including our customers’ delivery channel preferences, branch usage patterns, and the potential opportunity to move existing customer relationships to another branch location without imposing a negative impact on their banking experience.
Income Taxes

Income tax expense was $18.1 million and $14.4 million for the three months ended March 31, 2017 and 2016, respectively. Our effective tax rate was 28.2 percent and 28.5 percent for the first quarters of 2017 and 2016, respectively.

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. For the remainder of 2017, we anticipate that our effective tax rate will range from 28 percent to 31 percent. The effective tax rate is generally lower than the statutory rate primarily due to tax credits derived from our investments in qualified affordable housing projects and other investments related to community development and renewable energy sources, as well as earnings from other

54




tax-exempt investments. See Note 13 to the consolidated financial statements for additional information regarding our tax credit investments.
Business Segments

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

The following tables present the financial data for each business segment for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31, 2017
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
5,044,814

 
$
12,268,286

 
$
3,636,364

 
$

 
$
20,949,464

Income (loss) before income taxes
15,404

 
49,378

 
9,712

 
(10,328
)
 
64,166

Annualized return on average interest earning assets (before tax)
1.22
%
 
1.61
%
 
1.07
%
 
N/A

 
1.23
%
 
 
Three Months Ended March 31, 2016
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
5,195,629

 
$
10,797,914

 
$
3,493,927

 
$

 
$
19,487,470

Income (loss) before income taxes
14,101

 
43,867

 
4,003

 
(11,395
)
 
50,576

Annualized return on average interest earning assets (before tax)
1.09
%
 
1.63
%
 
0.46
%
 
N/A

 
1.04
%
Consumer Lending

This segment, representing approximately 28.4 percent of our loan portfolio at March 31, 2017, is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented 15.7 percent of our loan portfolio at March 31, 2017, including covered loans) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 6.6 percent of total loans at March 31, 2017) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new

55




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 Division, comprised of trust, asset management, and insurance services.

Average interest earning assets in this segment decreased $150.8 million to $5.0 billion for the three months ended March 31, 2017 as compared to the first quarter of 2016. The decrease was largely due to declines in residential mortgage loans and home equity loans. The decline in residential mortgage loans over the last 12 months was largely driven by normal repayment activity, high percentage of loans originated for sale rather than investment, and the transfer and the sale of approximately $170 million of performing fixed rate mortgages from loans held for sale in the fourth quarter of 2016. Home equity loan volumes and customer usage of existing home equity lines of credit also steadily declined since March 31, 2016 despite the relatively favorable low interest rate environment.

Income before income taxes generated by the consumer lending segment increased $1.3 million to $15.4 million for the first quarter of 2017 as compared to $14.1 million for the first quarter of 2016 largely due to an increase in non-interest income of $3.4 million and a decrease of $1.3 million in internal transfer expense for the first quarter of 2017 as compared to the same period in 2016. The increase in non-interest income was mostly driven by a $2.3 million increase in the net gains on sales of loans caused by a higher level of sales volumes during first quarter of 2017. The positive impact of the aforementioned items was partially offset by a $1.2 million decrease in net interest income mainly due to the lower average loan balances since March 31, 2016 and a 8 basis point decline in the yield on average loans as the new loan volume was generated at current market interest rates below the yield on the average portfolio.

The net interest margin on the consumer lending portfolio decreased 1 basis point to 2.78 percent for the first quarter of 2017 as compared to the same quarter one year ago. The net interest margin was negatively impacted by a 8 basis point decline in yield on average loans, partially offset by a 7 basis point decrease in the costs associated with our funding sources. The decrease in our cost of funds was primarily due to the lower cost of our average long-term borrowings driven by the prepayment, modification and maturity of high cost borrowings over the last 12 months. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our deposits and other borrowings.
Commercial Lending

The commercial lending segment is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $2.6 billion and represented 15.1 percent of the total loan portfolio at March 31, 2017. Commercial real estate loans and construction loans totaled $9.9 billion and represented 56.5 percent of the total loan portfolio at March 31, 2017.

Average interest earning assets in this segment increased $1.5 billion to $12.3 billion for the three months ended March 31, 2017 as compared to the first quarter of 2016. This increase was due, in part, to solid organic commercial real estate loan growth across many segments of borrowers and purchases of loan participations (mostly consisting of multi-family loans in New York City) totaling over $750 million during the last 12 months.

For the three months ended March 31, 2017, income before income taxes for the commercial lending segment increased $5.5 million to $49.4 million as compared to the same quarter of 2016 mostly due to an increase in net interest income, partially offset by an increase in the provision for credit losses and internal transfer expense. Net interest income increased $10.9 million to $112.4 million for the first quarter of 2017 as compared to the same period in 2016 largely due to the aforementioned organic, purchased and acquired loan growth over the last 12 months. The provision for credit losses increased $1.2 million during the three months ended March 31, 2017 as compared to $838 thousand for the first quarter of 2016. See further details in the "Allowance for Credit Losses" section. Internal transfer expense increased $3.9 million during the first quarter of 2017 as compared to the same period in 2016.

56





The net interest margin for this segment decreased 10 basis points to 3.66 percent for the first quarter of 2017 as compared to the same quarter one year ago as a result of a 17 basis point decline in yield on average loans, partially offset by a 7 basis point decrease in the cost of our funding sources. The decrease in the yield on loans was primarily due to the new and refinanced loan volumes at current interest rates that are relatively low compared to the overall yield of our loan portfolio.
Investment Management

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

Average interest earning assets in this segment increased $142.4 million during the first quarter of 2017 as compared to the first quarter of 2016. The increase was mainly due to purchases of residential mortgage-backed securities classified as held for maturity and available for sale in the last 12 months, partially offset by a $239.6 million decrease in average federal funds sold and other interest bearing deposits for the three months ended March 31, 2017 as compared to the same period in 2016.

For the quarter ended March 31, 2017, income before income taxes for the investment management segment increased approximately $5.7 million to $9.7 million compared to the first quarter in 2016 mainly due to a $5.2 million increase in net interest income. The increase in net interest income was mainly driven by the higher average investment balances in the first quarter of 2017 as compared to the same period in 2016.

The net interest margin for this segment increased 50 basis points to 2.25 percent for the first quarter of 2017 as compared to the same quarter one year ago largely due to a 43 basis point increase in the yield on average investments and a 7 basis point decrease in costs associated with our funding sources.
Corporate and other adjustments

The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net securities gains and losses not reported in the investment management segment above, interest expense related to subordinated notes, as well as income and expense from derivative financial instruments.

The pre-tax net loss for the corporate segment decreased $1.1 million to $10.3 million for the three months ended March 31, 2017 as compared to $11.4 million for the three months ended March 31, 2016 mainly due to an increase in internal transfer income and non-interest income totaling $2.5 million, partially offset by a $540 thousand increase in non-interest expense and $417 thousand decrease in non-interest income. The increase in non-interest expense related to increases in several general expense categories, including, but not limited to, salary and employee benefits expense and amortization of tax credit investments. Non-interest income decreased mainly due to a $294 thousand decrease in net gains on securities transactions for the three months ended March 31, 2017 as compared with the same period in 2016. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections above.

57




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 attempts 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 March 31, 2017. 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 March 31, 2017. The impact of interest rate derivatives, such as interest rate swaps and caps, is also included in the model.

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of March 31, 2017. Although the size of Valley’s balance sheet is forecasted to remain static as of March 31, 2017 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the first quarter of 2017. The model also utilizes an immediate parallel shift in the market interest rates at March 31, 2017.

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

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

58





The following table reflects management’s expectations of the change in our net interest income over the next 12- month period in light of the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below.
 
Estimated Change in
Future Net Interest Income
Changes in Interest Rates
Dollar
Change
 
Percentage
Change
(in basis points)
($ in thousands)
+200
$
(5,680
)
 
(0.88
)%
+100
(1,536
)
 
(0.24
)
–100
(17,627
)
 
(2.74
)

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 decrease net interest income over the next 12 months by 0.24 percent. The Bank’s sensitivity to changes in market rates changed in both size and direction as compared to December 31, 2016 (which was an increase of 0.03 percent in net interest income over a 12 month period). However, the change in sensitivity is not expected to materially impact Valley’s ability to generate net interest income. In addition, we believe the balance sheet remains well-positioned to respond positively to a rising market interest rate environment. Our current asset sensitivity to a 100 basis point immediate increase in interest rates is impacted by, among other factors, asset cash flow and repricing characteristics, complemented by a funding structure that provides for very stable earnings and low volatility. Future changes including, but not limited to, the slope of the yield curve and projected cash flows will affect our net interest income results and may increase or decrease the level of net interest income sensitivity.

Our interest rate swaps and caps designated as cash flow hedging relationships are designed to protect us from upward movements in interest rates on certain deposits and other borrowings based on the prime rate (as reported by The Wall Street Journal) or the three-month LIBOR rate. Our cash flow interest rate swaps had a total notional value of $582 million at March 31, 2017 and currently pay fixed and receive floating rates. We also utilize fair value and non-designated hedge interest rate swaps to effectively convert fixed rate loans, and a much smaller amount of certain brokered certificates of deposit, to floating rate instruments. The cash flow hedges are expected to benefit our net interest income in a rising interest rate environment. However, due to the prolonged low level of market interest rates and the strike rate of these instruments, the cash flow hedge interest rate swaps and cap negatively impacted our net interest income during the three months ended March 31, 2017. This negative trend will likely continue based upon the current market expectations regarding the Federal Reserve’s monetary policies which are designed to impact the level of market interest rates. See Note 11 to the consolidated financial statements for further details on our derivative transactions.
Liquidity

Bank Liquidity

Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is monitored by our Asset/Liability Management Committee and the Investment Committee of the Board of Directors of Valley National Bank, which review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements.

The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in excess of 125 percent or reliance

59




on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at March 31, 2017.

On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available for sale, loans held for sale, and, from time to time, federal funds sold and receivables related to unsettled securities transactions. These liquid assets totaled approximately $2.0 billion, representing 9.5 percent of earning assets, at March 31, 2017 and $1.8 billion, representing 8.9 percent of earning assets, at December 31, 2016. Of the $2.0 billion of liquid assets at March 31, 2017, approximately $548 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $578 million in principal from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at March 31, 2017) are projected to be approximately $4.2 billion over the next 12 months. As a contingency plan for significant funding needs, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio, or 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 $15.3 billion and $14.7 billion at March 31, 2017 and December 31, 2016, respectively, representing 73.1 percent and 73.9 percent of average earning assets at March 31, 2017 and December 31, 2016, 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.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous correspondent banks. While there are no firm lending commitments currently in place, management believes that we could borrow approximately $727 million 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 (FHLB) and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. Furthermore, we are able to obtain overnight borrowings from the Federal Reserve Bank via the discount window as a contingency for additional liquidity. At March 31, 2017, our borrowing capacity under the Federal Reserve's discount window was $1.1 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). Our short-term borrowings increased $564 million to $1.6 billion at March 31, 2017 as compared to December 31, 2016 due to a $650 million increase in FHLB advances, partially offset by a decrease of $86 million in repo balances. The new FHLB advances were used as alternate funding for a decline in money market deposits during the first quarter of 2017, as well as for additional liquidity and loan funding purposes.
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

60




common stock under its share repurchase program or redeem its callable junior subordinated debentures. These cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the bank 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.
Investment Securities Portfolio

As of March 31, 2017, we had approximately $1.9 billion and $1.5 billion in held to maturity and available for sale investment securities, respectively. Our total investment portfolio was comprised of U.S. Treasury securities, U.S. government agencies, tax-exempt issuances of states and political subdivisions, residential mortgage-backed securities (including 12 private label mortgage-backed securities), single-issuer trust preferred securities principally issued by bank holding companies (including 2 pooled securities), high quality corporate bonds and equity securities issued by banks at March 31, 2017. There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac.

Among other securities, our investments in the private label mortgage-backed securities, trust preferred securities, equity securities, and bank issued corporate bonds 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 and, if applicable, the underlying mortgage loan collateral of the security.
Other-Than-Temporary Impairment Analysis

We may be required to record impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio and may result in other-than temporary impairment on our investment securities in future periods. See our Annual Report on Form 10-K for the year ended December 31, 2016, for additional information regarding our impairment analysis by security type.

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.


61




The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at March 31, 2017.
 
March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held to maturity investment grades:*
 
 
 
 
 
 
 
AAA Rated
$
1,412,566

 
$
23,271

 
$
(17,693
)
 
$
1,418,144

AA Rated
249,056

 
7,901

 
(187
)
 
256,770

A Rated
35,720

 
1,848

 

 
37,568

Non-investment grade
3,645

 
17

 
(33
)
 
3,629

Not rated
201,342

 
150

 
(13,080
)
 
188,412

Total investment securities held to maturity
$
1,902,329

 
$
33,187

 
$
(30,993
)
 
$
1,904,523

Available for sale investment grades:*
 
 
 
 
 
 
 
AAA Rated
$
1,306,605

 
$
2,658

 
$
(17,527
)
 
$
1,291,736

AA Rated
65,803

 
237

 
(1,038
)
 
65,002

A Rated
24,223

 
13

 
(35
)
 
24,201

BBB Rated
33,910

 
545

 
(201
)
 
34,254

Non-investment grade
12,500

 
911

 
(1,292
)
 
12,119

Not rated
27,333

 
365

 
(679
)
 
27,019

Total investment securities available for sale
$
1,470,374

 
$
4,729

 
$
(20,772
)
 
$
1,454,331

 
*
Rated using external rating agencies (primarily S&P and Moody’s). Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels.

The held to maturity portfolio includes $201.3 million in investments not rated by the rating agencies with aggregate unrealized losses of $13.1 million at March 31, 2017. The unrealized losses for this category primarily relate to 4 single-issuer bank trust preferred issuances with a combined amortized cost of $35.9 million. All single-issuer trust preferred securities classified as held to maturity, including the aforementioned four securities, are paying in accordance with their terms and have no deferrals of interest or defaults. Additionally, we analyze the performance of each issuer on a quarterly basis, including a review of performance data from the issuer’s most recent bank regulatory report to assess the company’s credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon our quarterly review at March 31, 2017, all of the issuers appear to meet the regulatory capital minimum requirements to be considered a “well-capitalized” financial institution and/or have maintained performance levels adequate to support the contractual cash flows of the security.

There was no other-than-temporary impairment recognized in earnings as a result of Valley's impairment analysis of its securities during the three months ended March 31, 2017 and 2016 as the collateral supporting much of the investment securities has improved or performed as expected.

62




Loan Portfolio

The following table reflects the composition of the loan portfolio as of the dates presented:
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
($ in thousands)
Loans
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,642,319

 
$
2,638,195

 
$
2,558,968

 
$
2,528,749

 
$
2,537,545

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
9,016,418

 
8,719,667

 
8,313,855

 
8,018,794

 
7,585,139

Construction
835,854

 
824,946

 
802,568

 
768,847

 
776,057

Total commercial real estate
9,852,272

 
9,544,613

 
9,116,423

 
8,787,641

 
8,361,196

Residential mortgage
2,745,447

 
2,867,918

 
2,826,130

 
3,055,353

 
3,101,814

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
458,891

 
469,009

 
476,820

 
485,730

 
491,555

Automobile
1,150,053

 
1,139,227

 
1,121,606

 
1,141,793

 
1,188,063

Other consumer
600,516

 
577,141

 
534,188

 
499,914

 
455,814

Total consumer loans
2,209,460

 
2,185,377

 
2,132,614

 
2,127,437

 
2,135,432

Total loans (1)(2)
$
17,449,498

 
$
17,236,103

 
$
16,634,135

 
$
16,499,180

 
$
16,135,987

As a percent of total loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial
15.1
%
 
15.3
%
 
15.4
%
 
15.3
%
 
15.8
%
Commercial real estate
56.5
%
 
55.4
%
 
54.8
%
 
53.3
%
 
51.8
%
Residential mortgage
15.7
%
 
16.6
%
 
17.0
%
 
18.5
%
 
19.2
%
Consumer loans
12.7
%
 
12.7
%
 
12.8
%
 
12.9
%
 
13.2
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
(1)
Includes covered loans subject to loss-sharing agreements with the FDIC (primarily consisting of residential mortgage loans and commercial real estate loans) totaling $47.8 million, $70.4 million, $76.0 million, $81.1 million, and $86.8 million at March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, respectively.
(2)
Includes net unearned premiums and deferred loan costs of $15.7 million, $15.3 million, $10.5 million, $8.3 million, $5.6 million at March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, respectively.

Total loans increased $213.4 million to approximately $17.4 billion at March 31, 2017 from December 31, 2016. Our loan portfolio includes purchased credit-impaired (PCI) loans, which are loans acquired at a discount that is due, in part, to credit quality. At March 31, 2017, our PCI loan portfolio decreased $116.8 million to $1.7 billion as compared to December 31, 2016 primarily due to continued larger loan repayments, of which some resulted from continued efforts by management to encourage borrower prepayment. The non-PCI loan portion of the loan portfolio increased $330.2 million (net of $103.9 million in performing residential mortgage loans transferred to loans held for sale during the first quarter) to approximately $15.8 billion at March 31, 2017 as compared to December 31, 2016 largely due to an increase in total commercial real estate loans. During the first quarter of 2017, Valley also originated $112.7 million of residential mortgage loans for sale rather than investment. Loans held for sale totaled $115.1 million and $57.7 million at March 31, 2017 and December 31, 2016, respectively. See additional information regarding our residential mortgage loan activities below.
Total commercial and industrial loans increased $4.1 million from December 31, 2016 to approximately $2.6 billion at March 31, 2017, despite a $37.0 million decline in the PCI loan portion of the portfolio during the first quarter of 2017. Exclusive of the decline in PCI loans, the non-PCI commercial and industrial loan portfolio increased by $41.1 million, or approximately 7.0 percent on an annualized basis, to $2.4 billion at March 31, 2017 from December 31, 2016. This growth in non-PCI loans was largely due to a few large customer relationships, including a secured commercial lending arrangement with a large regional auto retailer. In addition to the PCI loan

63




repayments, the level of loan growth within this portfolio continues to be challenged by strong market competition for both new and existing commercial loan borrowers within our primary markets.
Commercial real estate loans (excluding construction loans) increased $296.8 million from December 31, 2016 to $9.0 billion at March 31, 2017 mainly due to a $322.9 million, or 16.9 percent on an annualized basis, increase in the non-PCI loan portfolio. The increase in non-PCI loans was primarily due to solid organic loan volumes in New York and New Jersey, as well as approximately $178 million of loan participations (mostly multi-family loans in New York City) purchased in the first quarter of 2017. The purchased participation loans continue to be predominantly seasoned loans with expected shorter durations. Each purchased participation loan is reviewed by Valley under its normal underwriting criteria and stress-tested to assure its credit quality. The organic loan volumes generated across a broad-based segment of borrowers within the commercial real estate portfolio were partially offset by a $26.2 million decline in the acquired PCI loan portion of the portfolio. Construction loans increased $10.9 million to $835.9 million at March 31, 2017 from December 31, 2016. The increase was mostly due to advances on existing construction projects.
Total residential mortgage loans decreased $122.5 million, or approximately 17.1 percent on an annualized basis, to approximately $2.7 billion at March 31, 2017 from December 31, 2016 mostly due to the aforementioned transfer of $103.9 million in mortgage loans to loans held for sale, as well as a large percentage of new loans originated for sale rather than investment during the first quarter of 2017. Valley sold approximately $159.9 million of residential mortgage loans originated for sale (including $57.7 million of loans held for sale at December 31, 2016) during the first quarter of 2017. New and refinanced residential mortgage loan originations totaled approximately $163.7 million for the first quarter of 2017 as compared to $371.3 million and $83.6 million for the fourth quarter of 2016 and first quarter of 2016, respectively. Of the $163.7 million in total originations, $15.3 million, or 9.3 percent, represented new Florida residential mortgage loans. We expect to continue to sell a large portion of our new fixed rate residential mortgage loan originations as part of our overall interest rate risk management strategies.
Home equity loans decreased $10.1 million to $458.9 million at March 31, 2017 as compared to December 31, 2016 mostly due to normal repayment activity, including a $3.1 million decline in the PCI loan portion of the portfolio. New home equity loan volumes and customer usage of existing home equity lines of credit continue to be weak, despite the relatively favorable low interest rate environment.
Automobile loans increased by $10.8 million, or 3.8 percent on an annualized basis, to $1.2 billion at March 31, 2017 as compared to December 31, 2016. Our auto loan volumes have continued to outpace repayments for two consecutive quarters since we introduced an automated tool to improve the decision-making process for our auto dealer network during the third quarter of 2016. The enhanced decision model and continued growth in our relatively new Florida markets are expected to continue a moderately positive growth trend in the auto portfolio during the second quarter of 2017. During the first quarter of 2017, the Florida dealership network contributed over $24 million in auto loan originations, representing approximately 17 percent of Valley's total new auto loan production for the period.
Other consumer loans increased $23.4 million, or 16.2 percent on an annualized basis, to $600.5 million at March 31, 2017 as compared to $577.1 million at December 31, 2016 mainly due to continued growth and customer usage of collateralized personal lines of credit.
Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, with the exception of smaller auto and residential mortgage loan portfolios derived from the other neighboring states of New Jersey, which could present a geographic and credit risk if there was another significant broad based economic downturn or a prolonged economic recovery within these regions. We are witnessing new loan activity across Valley's entire geographic footprint, including new loans and solid loan pipelines from our Florida lending operations. The Florida operations accounted for approximately $167 million of approximately $768 million in new and purchased commercial loan volume, excluding lines of credit, during the first quarter of 2017. However, the New Jersey and New York Metropolitan markets continue to account for a disproportionately larger percentage of our lending activity. To mitigate these risks, we are making 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. Geographically, we may

64




make further inroads into the Florida lending market, through acquisition, select de novo branch efforts or adding lending staff.
Purchased Credit-Impaired Loans (Including Covered Loans)

PCI loans totaled $1.7 billion and $1.8 billion at March 31, 2017 and December 31, 2016, respectively, mostly consisting of loans acquired in business combinations subsequent to 2011 and covered loans in which the Bank will share losses with the FDIC under loss-sharing agreements. Our covered loans, consisting primarily of residential mortgage loans and commercial real estate loans, totaled $47.8 million and $70.4 million at March 31, 2017 and December 31, 2016, respectively. The decrease in covered loans was largely due to the expiration of a commercial loss-sharing agreement acquired from 1st United Bancorp, Inc. effective January 1, 2017 and the reclassification of such loans to non-covered PCI loans during the first quarter of 2017. Additional information regarding all of our loss-sharing agreements with the FDIC can be found in our Annual Report on Form 10-K for the year ended December 31, 2016.

PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses), and aggregated and accounted for as pools of loans based on common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, loss accrual or valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools.

We reevaluate expected and contractual cash flows on a quarterly basis. Unlike contractual cash flows which are determined based on known factors, significant management assumptions are necessary in forecasting the estimated cash flows. We attempt to ensure the forecasted expectations are reasonable based on the information currently available; however, due to the uncertainties inherent in the use of estimates, actual cash flow results may differ from our forecast and the differences may be significant. To mitigate such differences, we carefully prepare and review the assumptions utilized in forecasting estimated cash flows.

On a quarterly basis, we also analyze the actual cash flow versus the forecasts at the loan pool level and variances are reviewed to determine their cause. In re-forecasting future estimated cash flow, we will adjust the credit loss expectations for loan pools, as necessary. These adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which we don't reforecast estimated cash flows, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events which transpired during the current reporting period.

For the pools with better than expected cash flows, the forecasted increase is recorded as a prospective adjustment to our interest income on these loan pools over future periods. The decrease in the FDIC loss-share receivable due to the increase in expected cash flows for covered loan pools, if applicable, is recognized on a prospective basis over the shorter period of the lives of the loan pools and the loss-share agreements accordingly with a corresponding reduction in non-interest income for the period. Conversely, an increase or decrease in expected future cash flows of covered loans since the acquisition dates will increase or decrease (if applicable) the clawback liability (the amount the FDIC requires us to pay back if certain thresholds are met) accordingly. 




65




The following tables summarize the changes in the carrying amounts of PCI loans (net of the allowance for loan losses, if applicable), and the accretable yield on these loans for the three months ended March 31, 2017 and 2016. 
 
Three Months Ended March 31,
 
2017
 
2016
 
Carrying
Amount
 
Accretable
Yield
 
Carrying
Amount
 
Accretable
Yield
 
(in thousands)
PCI loans:
 
 
 
 
 
 
 
Balance, beginning of the period
$
1,771,502

 
$
294,514

 
$
2,240,471

 
$
415,179

Accretion
24,683

 
(24,683
)
 
28,059

 
(28,059
)
Payments received
(137,950
)
 

 
(149,645
)
 

Transfers to other real estate owned
(3,534
)
 

 
(270
)
 

 Other, net

 


 
(3,194
)
 

Balance, end of the period
$
1,654,701

 
$
269,831

 
$
2,115,421

 
$
387,120



FDIC Loss-Share Receivable Related to Covered Loans and Foreclosed Assets

The receivable arising from the loss-sharing agreements with the FDIC is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans. The FDIC loss share receivable (which is included in other assets on Valley's consolidated statements of financial condition) totaled $7.4 million and $7.2 million at March 31, 2017 and December 31, 2016, respectively.
Non-performing Assets
Non-performing assets (excluding PCI loans) include non-accrual loans, other real estate owned (OREO), other repossessed assets (which mainly consist of automobiles) and non-accrual debt securities at March 31, 2017. 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 at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter. Our non-performing assets of $51.5 million at March 31, 2017 moderately increased from December 31, 2016, but decreased 33.6 percent as compared to March 31, 2016 (as shown in the table below) due to a steady downward trend within the non-accrual loan category during 2016. However, non-performing assets as a percentage of total loans and non-performing assets totaled 0.29 percent at both March 31, 2017 and December 31, 2016. Overall, we believe total non-performing assets has remained relatively low as a percentage of the total loan portfolio and non-performing assets over the last 12 month period and is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. Past due loans and non-accrual loans in the table below exclude PCI loans. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley. For details regarding performing and non-performing PCI loans, see the "Credit quality indicators" section in Note 7 to the consolidated financial statements.



66




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: 
 
March 31, 2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
 
March 31, 2016
 
($ in thousands)
Accruing past due loans: (1)
 
30 to 59 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
29,734

 
$
6,705

 
$
4,306

 
$
5,187

 
$
8,395

Commercial real estate
11,637

 
5,894

 
9,385

 
5,076

 
1,389

Construction
7,760

 
6,077

 

 

 
1,326

Residential mortgage
7,533

 
12,005

 
9,982

 
10,177

 
14,628

Total Consumer
3,740

 
4,197

 
3,146

 
2,535

 
3,200

Total 30 to 59 days past due
60,404

 
34,878

 
26,819

 
22,975

 
28,938

60 to 89 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
341

 
5,010

 
788

 
5,714

 
613

Commercial real estate
359

 
8,642

 
4,291

 
834

 
120

Construction

 

 

 

 

Residential mortgage
4,177

 
3,564

 
2,733

 
2,326

 
3,056

Total Consumer
787

 
1,147

 
1,234

 
644

 
731

Total 60 to 89 days past due
5,664

 
18,363

 
9,046

 
9,518

 
4,520

90 or more days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
405

 
142

 
145

 
218

 
221

Commercial real estate

 
474

 
478

 
131

 
131

Construction

 
1,106

 
1,881

 

 

Residential mortgage
1,355

 
1,541

 
590

 
314

 
2,613

Total Consumer
314

 
209

 
226

 
139

 
66

Total 90 or more days past due
2,074

 
3,472

 
3,320

 
802

 
3,031

Total accruing past due loans
$
68,142

 
$
56,713

 
$
39,185

 
$
33,295

 
$
36,489

Non-accrual loans: (1)
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
8,676

 
$
8,465

 
$
7,875

 
$
6,573

 
$
11,484

Commercial real estate
15,106

 
15,079

 
14,452

 
19,432

 
26,604

Construction
1,461

 
715

 
1,136

 
5,878

 
5,978

Residential mortgage
11,650

 
12,075

 
14,013

 
14,866

 
16,747

Total Consumer
1,395

 
1,174

 
965

 
1,130

 
1,807

Total non-accrual loans
38,288

 
37,508

 
38,441

 
47,879

 
62,620

Other real estate owned (OREO) (2)
10,737

 
9,612

 
10,257

 
10,903

 
12,368

Other repossessed assets
475

 
384

 
307

 
369

 
495

Non-accrual debt securities (3)
2,007

 
1,935

 
2,025

 
2,118

 
2,102

Total non-performing assets (NPAs)
$
51,507

 
$
49,439

 
$
51,030

 
$
61,269

 
$
77,585

Performing troubled debt restructured loans
$
80,360

 
$
85,166

 
$
81,093

 
$
82,140

 
$
80,506

Total non-accrual loans as a % of loans
0.22
%
 
0.22
%
 
0.23
%
 
0.29
%
 
0.39
%
Total NPAs as a % of loans and NPAs
0.29

 
0.29

 
0.31

 
0.37

 
0.48

Total accruing past due and non-accrual loans as a % of loans
0.61

 
0.55

 
0.47

 
0.49

 
0.61

Allowance for loan losses as a % of non-accrual loans
301.51

 
305.05

 
287.97

 
225.75

 
168.34



67




 

(1)
Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis.
(2)
This table excludes covered OREO properties related to FDIC-assisted transactions totaling $558 thousand, $1.0 million, $1.2 million, $2.4 million at December 31, 2016, September 30, 2016, June 30, 2016, and March 31, 2016, respectively. There were no covered OREO properties at March 31, 2017.
(3)
Includes other-than-temporarily impaired trust preferred securities classified as available for sale, which are presented at carrying value, net of net unrealized losses totaling $745 thousand, $817 thousand, $728 thousand, $634 thousand, $651 thousand at March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, respectively.

Loans past due 30 to 59 days increased $25.5 million to $60.4 million at March 31, 2017 as compared to December 31, 2016. Within the past due category, commercial and industrial loans increased $23.0 million mainly due to loans collateralized by New York City (NYC) taxi cab medallions totaling $21.6 million, of which $15.3 million represented performing matured loans in the normal process of renewal. Commercial real estate loans also increased by $5.7 million largely due to one internally classified relationship totaling $5.9 million. Partially offsetting these increases, residential mortgage delinquencies declined $4.5 million during the first quarter of 2017 as compared to December 31, 2016.

Loans past due 60 to 89 days decreased $12.7 million to $5.7 million at March 31, 2017 as compared to December 31, 2016 largely due to a $8.3 million decrease in past due commercial real estate loans. The decrease in past due commercial real estate loans was caused, in part, by the renewal of two matured performing loans with a combined total of $4.5 million reported within this delinquency category at December 31, 2016. In addition, one potential problem loan of $3.8 million included within this delinquency category at December 31, 2016 migrated to 30 to 59 days past due category at March 31, 2017. Commercial and industrial loans also decreased $4.7 million to $341 thousand at March 31, 2017 from $5.0 million at December 31, 2016 mostly due to the renewal of matured performing loans reported within this delinquency category at December 31, 2016.

Loans past due 90 days or more and still accruing decreased $1.4 million to $2.1 million at March 31, 2017 as compared to $3.5 million at December 31, 2016 largely due to the renewal of both matured construction and commercial real estate loans reported in this delinquency category reported at December 31, 2016. All of the loans past due 90 days or more and still accruing are considered to be well secured and in the process of collection.

Non-accrual loans increased $780 thousand to $38.3 million at March 31, 2017 as compared to $37.5 million at December 31, 2016. At March 31, 2017, our non-accrual commercial and industrial loans included $1.5 million of impaired loans collateralized by Chicago taxi medallions. At March 31, 2017, our entire taxi medallion loan portfolio totaled $150.2 million, consisting of $139.4 million and $10.8 million of NYC and Chicago taxi medallion loans, respectively. The Chicago medallion portfolio included impaired loans totaling $6.3 million with related reserves of $2.6 million within the allowance for loan losses. The NYC taxi medallion loans included the aforementioned $21.6 million of loans past due 30 to 59 days at March 31, 2017 which were mostly in the process of renewal. Valley's historical taxi medallion lending criteria has been conservative in regards to capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral whenever possible. We will continue to closely monitor this portfolio's performance and the potential impact of the changes in market valuations for taxi medallions due to competing car service providers and other factor.

OREO properties increased $1.1 million to $10.7 million at March 31, 2017 from $9.6 million at December 31, 2016. During the quarter ended March 31, 2017, covered OREO properties totaling $375 thousand were reclassified to non-covered OREO due to the expiration of certain FDIC loss-share agreements and, as a result, we had no covered OREO properties at March 31, 2017. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $5.3 million at March 31, 2017.

Troubled debt restructured loans (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) totaled $80.4 million at March 31, 2017 and consisted of 93 loans (primarily in the commercial and industrial loan and commercial real estate portfolios). On an aggregate basis, the

68




$80.4 million in performing TDRs at March 31, 2017 had a modified weighted average interest rate of approximately 4.75 percent as compared to a pre-modification weighted average interest rate of 4.78 percent.
Allowance for Credit Losses
The allowance for credit losses includes the allowance for loan losses and the reserve for unfunded commercial letters of credit. Management maintains the allowance for credit losses at a level estimated to absorb probable losses inherent in the loan portfolio and unfunded letter of credit commitments at the balance sheet dates, based on ongoing evaluations of the loan portfolio. Our methodology for evaluating the appropriateness of the allowance for loan losses includes:
segmentation of the loan portfolio based on the major loan categories, which consist of commercial, commercial real estate (including construction), residential mortgage, and other consumer loans (including automobile and home equity loans);
tracking the historical levels of classified loans and delinquencies;
assessing the nature and trend of loan charge-offs;
providing specific reserves on impaired loans; and
evaluating the PCI loan pools for additional credit impairment subsequent to the acquisition dates.
Additionally, the qualitative factors, such as the volume of non-performing loans, concentration risks by size, type, and geography, new markets, collateral adequacy, credit policies and procedures, staffing, underwriting consistency, loan review and economic conditions are taken into consideration when evaluating the adequacy of the allowance for credit losses. The allowance for credit loss methodology and accounting policy are fully described in Part II, Item 7 and Note 1 to the consolidated financial statements in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016.

While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses is dependent upon a variety of factors largely beyond our control, including the view of the OCC toward loan classifications, performance of the loan portfolio, and the economy. The OCC may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the allowance for loan losses when their credit evaluations differ from those of management.

69




The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for the periods indicated.
 
Three Months Ended
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
 
($ in thousands)
Average loans outstanding
$
17,313,100

 
$
16,779,765

 
$
15,993,543

Beginning balance - Allowance for credit losses
$
116,604

 
$
112,914

 
$
108,367

Loans charged-off:
 
 
 
 
 
Commercial and industrial
(1,714
)
 
(483
)
 
(1,251
)
Commercial real estate
(414
)
 
(131
)
 
(105
)
Construction

 

 

Residential mortgage
(130
)
 
(116
)
 
(81
)
Total Consumer
(1,121
)
 
(911
)
 
(1,074
)
Total charge-offs
(3,379
)
 
(1,641
)
 
(2,511
)
Charged-off loans recovered:
 
 
 
 
 
Commercial and industrial
848

 
435

 
526

Commercial real estate
142

 
466

 
89

Construction

 

 

Residential mortgage
448

 
171

 
15

Total Consumer
563

 
459

 
389

Total recoveries
2,001

 
1,531

 
1,019

Net charge-offs
(1,378
)
 
(110
)
 
(1,492
)
Provision charged for credit losses
2,470

 
3,800

 
800

Ending balance - Allowance for credit losses
$
117,696

 
$
116,604

 
$
107,675

Components of allowance for credit losses:
 
 
 
 
 
Allowance for loan losses
$
115,443

 
$
114,419

 
$
105,415

Allowance for unfunded letters of credit
2,253

 
2,185

 
2,260

Allowance for credit losses
$
117,696

 
$
116,604

 
$
107,675

Components of provision for credit losses:
 
 
 
 
 
Provision for losses on loans
$
2,402

 
$
3,832

 
$
729

Provision for unfunded letters of credit
68

 
(32
)
 
71

Provision for credit losses
$
2,470

 
$
3,800

 
$
800

Annualized ratio of net charge-offs to average loans outstanding
0.03
%
 
%
 
0.04
%
Allowance for credit losses as a % of non-PCI loans
0.75

 
0.75

 
0.77

Allowance for credit losses as a % of total loans
0.67

 
0.68

 
0.67


During the first quarter of 2017, we recognized net loan charge-offs of $1.4 million as compared to $110 thousand and $1.5 million for the fourth quarter of 2016 and the first quarter of 2016, respectively. The quarter over quarter increase in net loan charge-offs was mainly due to the full charge-off of one loan relationship totaling $1.5 million within the commercial and industrial loan portfolio.

During the first quarter of 2017, we recorded a $2.5 million provision for credit losses as compared to provisions of $3.8 million and $800 thousand for the fourth quarter of 2016 and the first quarter of 2016, respectively. The quarter over quarter increase in the provision was mostly due to solid first quarter loan growth and an increase in allocated reserves for internally classified loans at March 31, 2017.


70




The following table summarizes the allocation of the allowance for credit losses to specific loan portfolio categories and the allocations as a percentage of each loan category:
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
($ in thousands)
Loan Category:
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial loans*
$
53,541

 
2.03
%
 
$
53,005

 
2.01
%
 
$
50,677

 
2.00
%
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
38,146

 
0.42
%
 
36,405

 
0.42
%
 
31,812

 
0.42
%
Construction
18,156

 
2.17
%
 
19,446

 
2.36
%
 
16,642

 
2.14
%
Total commercial real estate loans
56,302

 
0.57
%
 
55,851

 
0.59
%
 
48,454

 
0.58
%
Residential mortgage loans
3,592

 
0.13
%
 
3,702

 
0.13
%
 
4,209

 
0.14
%
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Home equity
433

 
0.09
%
 
486

 
0.10
%
 
1,061

 
0.22
%
Auto and other consumer
3,828

 
0.22
%
 
3,560

 
0.21
%
 
3,274

 
0.20
%
Total consumer loans
4,261

 
0.19
%
 
4,046

 
0.19
%
 
4,335

 
0.20
%
Total allowance for credit losses
$
117,696

 
0.67
%
 
$
116,604

 
0.68
%
 
$
107,675

 
0.67
%
 
*
Includes the reserve for unfunded letters of credit.

The allowance for credit losses comprised of our allowance for loan losses and reserve for unfunded letters of credit, as a percentage of total loans was 0.67 percent at March 31, 2017 as compared to 0.68 percent and 0.67 percent of total loans at December 31, 2016 and March 31, 2016, respectively. At March 31, 2017, our allowance allocations for losses as a percentage of total loans remained relatively stable in most loan categories as compared to December 31, 2016, but declined 0.19 percent for construction loans primarily due to the continued low level of recent loss experience in this portfolio. There were no construction loan charge-offs in the first quarter of 2017 and the year ended December 31, 2016.

Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately $1.7 billion) was 0.75 percent at both March 31, 2017 and December 31, 2016, as compared to 0.77 percent at March 31, 2016. PCI loans are accounted for on a pool basis and initially recorded net of fair valuation discounts related to credit which may be used to absorb future losses on such loans before any allowance for loan losses is recognized subsequent to acquisition. Due to the adequacy of such discounts, there were no allowance reserves related to PCI loans at March 31, 2017, December 31, 2016 and March 31, 2016.
Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At both March 31, 2017 and December 31, 2016, shareholders’ equity totaled approximately $2.4 billion and represented 10.3 percent and 10.4 percent of total assets, respectively. During the three months ended March 31, 2017, total shareholders’ equity increased by $21.4 million primarily due to (i) net income of $46.1 million, (ii) a $3.0 million decrease in our accumulated other comprehensive loss, (iii) a $1.9 million increase attributable to the effect of our stock incentive plan, and (iv) net proceeds of $1.1 million from the re-issuance of treasury and authorized common shares issued under our dividend reinvestment plan totaling a combined 90 thousand shares. These positive changes were partially offset by cash dividends declared on common and preferred stock totaling a combined $30.7 million. See Note 3 to the consolidated financial statements for additional information regarding changes in our accumulated other comprehensive loss during the three months ended March 31, 2017.

71




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.

Effective January 1, 2015, Valley implemented the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Basel III final rules require a new 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. The new rule changes included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer is subject to a three year phase-in period that started on January 1, 2016, at 0.625 percent of risk-weighted assets and increases each subsequent year by 0.625 percent until reaching its final level of 2.5 percent when fully phased-in on January 1, 2019. As of March 31, 2017, and December 31, 2016, Valley and Valley National Bank exceeded all capital adequacy requirements with the capital conservation buffer under the Basel III Capital Rules (see tables below).

The following tables present Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at March 31, 2017 and December 31, 2016:
 
Actual
 
Minimum Capital
Requirements with Capital Conservation Buffer
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 ($ in thousands)
As of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
$
2,101,511

 
11.96
%
 
$
1,625,701

 
9.250
%
 
N/A

 
N/A

Valley National Bank
2,047,974

 
11.68

 
1,621,895

 
9.250

 
$
1,753,400

 
10.00
%
Common Equity Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,602,823

 
9.12

 
1,010,571

 
5.750

 
N/A

 
N/A

Valley National Bank
1,830,170

 
10.44

 
1,008,205

 
5.750

 
1,139,710

 
6.50

Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,714,619

 
9.76

 
1,274,198

 
7.250

 
N/A

 
N/A

Valley National Bank
1,830,170

 
10.44

 
1,271,215

 
7.250

 
1,402,720

 
8.00

Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,714,619

 
7.70

 
890,795

 
4.00

 
N/A

 
N/A

Valley National Bank
1,830,170

 
8.23

 
889,271

 
4.00

 
1,111,589

 
5.00



72




 
Actual
 
Minimum Capital
Requirements with Capital Conservation Buffer
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 ($ in thousands)
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
$
2,084,531

 
12.15
%
 
$
1,480,006

 
8.625
%
 
N/A

 
N/A

Valley National Bank
2,023,857

 
11.82

 
1,476,767

 
8.625

 
$
1,712,193

 
10.00
%
Common Equity Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,590,825

 
9.27

 
879,424

 
5.125

 
N/A

 
N/A

Valley National Bank
1,807,201

 
10.55

 
877,499

 
5.125

 
1,112,926

 
6.50

Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,698,767

 
9.90

 
1,136,816

 
6.625

 
N/A

 
N/A

Valley National Bank
1,807,201

 
10.55

 
1,134,328

 
6.625

 
1,369,755

 
8.00

Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,698,767

 
7.74

 
878,244

 
4.00

 
N/A

 
N/A

Valley National Bank
1,807,201

 
8.25

 
876,026

 
4.00

 
1,095,032

 
5.00


In March 2014, the FRB, OCC, and FDIC issued final supervisory guidance for these stress tests. This joint final supervisory guidance discusses supervisory expectations for stress test practices, provides examples of practices that would be consistent with those expectations, and offers additional details about stress test methodologies. It also emphasizes the importance of stress testing as an ongoing risk management practice.

We submitted our latest stress testing results (utilizing data as of December 31, 2015) to the FRB on July 28, 2016. The full disclosure of the stress testing results, including the results for Valley National Bank, a summary of the supervisory severely adverse scenario and additional information regarding the methodologies used to conduct the stress test may be found on the Shareholder Relations section of our website (www.valleynationalbank.com) under the Dodd-Frank Act Stress Test Reports section. In 2017, Valley will submit its stress testing results (utilizing data as of December 31, 2016) to the FRB by the required due date of July 31, 2017 and will disclose the results to the public in October 2017.

Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows: 
 
March 31,
2017
 
December 31,
2016
 
($ in thousands, except for share data)
Common shares outstanding
263,842,268

 
263,638,830

Shareholders’ equity
$
2,398,541

 
$
2,377,156

Less: Preferred stock
111,590

 
111,590

Less: Goodwill and other intangible assets
735,595

 
736,121

Tangible shareholders’ equity
$
1,551,356

 
$
1,529,445

Tangible book value per common share
$
5.88

 
$
5.80

Book value per common share
$
8.67

 
$
8.59

Management believes the tangible book value per common share ratio provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and facilitates comparisons with the performance of others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. This non-GAAP financial measure may also be calculated differently from similar measures disclosed by other companies.

73




Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common stockholders) per common share. Our retention ratio was 35.3 percent for the three months ended March 31, 2017 as compared to 30.2 percent for the year ended December 31, 2016. We expect our retention ratio to improve during the remainder of 2017 due to, among other factors, solid loan growth and potential earnings improvement from LIFT, our earnings enhancement program discussed in the "Non-Interest Expense" section of this MD&A.
Cash dividends declared amounted to $0.11 per common share for both the three months ended March 31, 2017 and 2016. 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 in this economic environment. 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 in light of 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.
Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters

For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 in the MD&A section - “Off-Balance Sheet Arrangements” and Notes 11 and 12 to the consolidated financial statements included in this report.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See page 58 for a discussion of interest rate sensitivity.

Item 4.
Controls and Procedures
Valley’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), with the assistance of other members of Valley’s management, have evaluated the effectiveness of Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, Valley’s CEO and CFO have concluded that Valley’s disclosure controls and procedures are effective as of the end of the period covered by this report.
Valley’s CEO and CFO have also concluded that there have not been any changes in Valley’s internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting.
Valley’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Valley have been or will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

74





PART II - OTHER INFORMATION 
Item 1.
Legal Proceedings

In the normal course of business, we may be a party to various outstanding legal proceedings and claims. See Note 14 to the consolidated financial statements for further details.

Item 1A.
Risk Factors

There has been no material change in the risk factors previously disclosed under Part I, Item 1A of Valley’s Annual Report on Form 10-K for the year ended December 31, 2016.

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

During the quarter, we did not sell any equity securities not registered under the Securities Act of 1933, as amended. Purchases of equity securities by the issuer and affiliated purchasers during the three months ended March 31, 2017 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES 
Period
 
Total  Number of
Shares  Purchased (1)
 
Average
Price Paid
Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (2)
 
Maximum Number of
Shares that May Yet Be
Purchased Under the Plans (2)
January 1, 2017 to January 31, 2017
 
132,142

 
$
12.12

 

 
4,112,465

February 1, 2017 to February 28, 2017
 
37,403

 
12.43

 

 
4,112,465

March 1, 2017 to March 31, 2017
 
6,817

 
12.36

 

 
4,112,465

Total
 
176,362

 
$
12.19

 

 
 
 
(1)
Represents repurchases made in connection with the vesting of employee restricted stock awards.
(2)
On January 17, 2007, Valley publicly announced its intention to repurchase up to 4.7 million outstanding common shares in the open market or in privately negotiated transactions. The repurchase plan has no stated expiration date. No repurchase plans or programs expired or terminated during the three months ended March 31, 2017.


75




Item 6.
Exhibits
 
 
 
 
(3)
Articles of Incorporation and By-laws:
 
(3.1)
Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, filed as of May 4, 2017.*
 
(3.2)
Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.A of the Registrant's Annual Report on Form 10-K filed on February 29, 2016.
 
(3.3)
By-laws of the Registrant, as amended and restated, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K Current Report filed on December 7, 2016.
(10)
Material Contracts
 
 
 
 
(10.1)
Valley National Bancorp 2016 Long-Term Stock Incentive Plan, as amended.+*
 
(10.2)
Form of Valley National Bancorp Restricted Stock Award Agreement.+*
 
(10.3)
Form of Valley National Bancorp Director Restricted Stock Award Agreement.+*
(31.1)
 
Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by Gerald H. Lipkin, Chairman of the Board and Chief Executive Officer of the Company.*
 
 
 
(31.2)
 
Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by Alan D. Eskow, Senior Executive Vice President and Chief Financial Officer of the Company.*
 
 
 
(32)
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Gerald H. Lipkin, Chairman of the Board and Chief Executive Officer of the Company, and Alan D. Eskow, Senior Executive Vice President and Chief Financial Officer of the Company.*
 
 
 
(101)
 
Interactive Data File *
 
*
Filed herewith.
+
Management contract and compensatory plan or agreement.


76




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
VALLEY NATIONAL BANCORP
 
 
 
 
(Registrant)
 
 
 
Date:
 
 
 
/s/ Gerald H. Lipkin
May 8, 2017
 
 
 
Gerald H. Lipkin
 
 
 
 
Chairman of the Board
 
 
 
 
and Chief Executive Officer
 
 
 
Date:
 
 
 
/s/ Alan D. Eskow
May 8, 2017
 
 
 
Alan D. Eskow
 
 
 
 
Senior Executive Vice President and
 
 
 
 
Chief Financial Officer

77