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 June 30, ~~2017~~2018



¨	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 or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):



Large accelerated filer	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 ~~264,029,734~~331,469,947 shares were outstanding as of August ~~3, 2017~~

8, 2018

TABLE OF CONTENTS



		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017	2
	Consolidated Statements of Income for the Three and Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	3
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	5
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4746

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8382

Item 4.	Controls and Procedures	8382

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	84

Item 1A.	Risk Factors	84

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8584

Item 6.	Exhibits	8684

SIGNATURES		8785

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except for share data)


	June 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Assets	(Unaudited)						(Unaudited)
Cash and due from banks	$	227,830		$	220,791		$	307,428		$	243,310
Interest bearing deposits with banks	129,959			171,710			164,838			172,800
Investment securities:
Held to maturity (fair value of $1,828,732 at June 30, 2017 and $1,924,597 at December 31, 2016)	1,822,263			1,925,572
Held to maturity (fair value of $1,988,782 at June 30, 2018 and $1,837,620 at December 31, 2017)							2,030,194			1,842,691
Available for sale	1,464,054			1,297,373			1,833,467			1,493,905
Total investment securities	3,286,317			3,222,945			3,863,661			3,336,596
Loans held for sale (includes fair value of $17,919 at June 30, 2017 and $57,708 at December 31, 2016 for loans originated for sale)	139,576			57,708
Loans held for sale, at fair value							32,670			15,119
Loans	17,710,760			17,236,103			23,234,716			18,331,580
Less: Allowance for loan losses	(116,446		)	(114,419		)	(138,762		)	(120,856		)
Net loans	17,594,314			17,121,684			23,095,954			18,210,724
Premises and equipment, net	290,001			291,180			348,396			287,705
Bank owned life insurance	393,997			391,830			437,037			386,079
Accrued interest receivable	69,732			66,816			88,155			73,990
Goodwill	690,637			690,637			1,078,892			690,637
Other intangible assets, net	43,700			45,484			83,966			42,507
Other assets	583,287			583,654			681,982			542,839
Total Assets	$	23,449,350		$	22,864,439		$	30,182,979		$	24,002,306
Liabilities
Deposits:
Non-interest bearing	$	5,197,997		$	5,252,825		$	6,217,420		$	5,224,928
Interest bearing:
Savings, NOW and money market	8,683,028			9,339,012			10,769,940			9,365,013
Time	3,368,993			3,138,871			4,653,412			3,563,521
Total deposits	17,250,018			17,730,708			21,640,772			18,153,462
Short-term borrowings	1,734,444			1,080,960			2,877,912			748,628
Long-term borrowings	1,819,615			1,433,906			2,103,993			2,315,819
Junior subordinated debentures issued to capital trusts	41,658			41,577			55,196			41,774
Accrued expenses and other liabilities	179,714			200,132			227,794			209,458
Total Liabilities	21,025,449			20,487,283			26,905,667			21,469,141
Shareholders’ Equity
Preferred stock (no par value, authorized 50,000,000 shares at June 30, 2017; issued 4,600,000 shares at June 30, 2017 and December 31, 2016)	111,590			111,590
Common stock (no par value, authorized 450,000,000 shares at June 30, 2017; issued 263,990,794 shares at June 30, 2017 and 263,804,877 shares at December 31, 2016)	92,423			92,353
Preferred stock, no par value; authorized 50,000,000:
Series A (4,600,000 shares issued at June 30, 2018 and December 31, 2017)							111,590			111,590
Series B (4,000,000 shares issued at June 30, 2018 and December 31, 2017)							98,101			98,101
Common stock (no par value, authorized 450,000,000 shares; issued 331,538,971 shares at June 30, 2018 and 264,498,643 shares at December 31, 2017)							116,027			92,727
Surplus	2,049,613			2,044,401			2,789,190			2,060,356
Retained earnings	207,177			172,754			232,593			216,733
Accumulated other comprehensive loss	(36,679		)	(42,093		)	(69,124		)	(46,005		)
Treasury stock, at cost (19,028 common shares at June 30, 2017 and 166,047 shares at December 31, 2016)	(223		)	(1,849		)
Treasury stock, at cost (84,946 common shares at June 30, 2018 and 29,792 common shares at December 31, 2017)							(1,065		)	(337		)
Total Shareholders’ Equity	2,423,901			2,377,156			3,277,312			2,533,165
Total Liabilities and Shareholders’ Equity	$	23,449,350		$	22,864,439		$	30,182,979		$	24,002,306

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except for share data)


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017			2016		2018			2017		2018			2017
Interest Income
Interest and fees on loans	$	185,860	$	169,426		$	360,874		$	335,497	$	247,690		$	181,720	$	485,276		$	356,073
Interest and dividends on investment securities:
Taxable	18,928		14,256			36,517			28,255		22,222			18,928		43,545			36,517
Tax-exempt	3,943		3,734			7,974			7,424		5,639			3,943		11,360			7,974
Dividends	2,137		1,316			4,288			2,796		3,728			2,137		5,667			4,288
Interest on federal funds sold and other short-term investments	279		296			610			653		839			279		1,765			610
Total interest income	211,147		189,028			410,263			374,625		280,118			207,007		547,613			405,462
Interest Expense
Interest on deposits:
Savings, NOW and money market	12,714		9,961			22,897			19,204		24,756			12,714		47,073			22,897
Time	10,166		9,223			19,719			18,808		16,635			10,166		31,251			19,719
Interest on short-term borrowings	5,516		3,120			9,417			4,992		10,913			5,516		16,645			9,417
Interest on long-term borrowings and junior subordinated debentures	13,791		15,269			26,741			32,013		17,062			13,791		34,294			26,741
Total interest expense	42,187		37,573			78,774			75,017		69,366			42,187		129,263			78,774
Net Interest Income	168,960		151,455			331,489			299,608		210,752			164,820		418,350			326,688
Provision for credit losses	3,632		1,429			6,102			2,229		7,142			3,632		18,090			6,102
Net Interest Income After Provision for Credit Losses	165,328		150,026			325,387			297,379		203,610			161,188		400,260			320,586
Non-Interest Income
Trust and investment services	2,800		2,544			5,544			4,984		3,262			2,800		6,492			5,544
Insurance commissions	4,358		4,845			9,419			9,553		4,026			4,358		7,847			9,419
Service charges on deposit accounts	5,342		5,094			10,578			10,197		6,679			5,342		13,932			10,578
Gains (losses) on securities transactions, net	22		(3		)	(1		)	268
(Losses) gains on securities transactions, net											(36		)	22		(801		)	(1		)
Fees from loan servicing	1,831		1,561			3,646			3,155		2,045			1,831		4,268			3,646
Gains on sales of loans, net	4,791		3,105			8,919			4,900		7,642			4,791		14,395			8,919
Bank owned life insurance	1,701		1,818			4,164			3,781		2,652			1,701		4,415			4,164
Other	3,845		5,300			7,480			8,874		11,799			7,985		19,772			12,281
Total non-interest income	24,690		24,264			49,749			45,712		38,069			28,830		70,320			54,550
Non-Interest Expense
Salary and employee benefits expense	61,338		56,072			125,054			116,331		78,944			63,564		172,236			129,491
Net occupancy and equipment expense	22,609		22,168			45,644			44,957		26,901			22,609		54,825			45,644
FDIC insurance assessment	4,928		5,095			10,055			10,194		8,044			4,928		13,542			10,055
Amortization of other intangible assets	2,562		2,928			5,098			5,777		4,617			2,562		8,910			5,098
Professional and legal fees	4,302		5,472			8,997			9,367		5,337			4,302		22,384			8,997
Amortization of tax credit investments	7,732		7,646			13,056			14,910		4,470			7,732		9,744			13,056
Telecommunication expense	2,707		2,294			5,366			4,680		3,015			2,707		6,609			5,366
Other	13,061		18,128			26,921			31,812		18,588			10,835		35,418			22,484
Total non-interest expense	119,239		119,803			240,191			238,028		149,916			119,239		323,668			240,191
Income Before Income Taxes	70,779		54,487			134,945			105,063		91,763			70,779		146,912			134,945
Income tax expense	20,714		15,460			38,785			29,849		18,961			20,714		32,145			38,785
Net Income	$	50,065	$	39,027		$	96,160		$	75,214	$	72,802		$	50,065	$	114,767		$	96,160
Dividends on preferred stock	1,797		1,797			3,594			3,594		3,172			1,797		6,344			3,594
Net Income Available to Common Shareholders	$	48,268	$	37,230		$	92,566		$	71,620	$	69,630		$	48,268	$	108,423		$	92,566
Earnings Per Common Share:
Basic	$	0.18	$	0.15		$	0.35		$	0.28	$	0.21		$	0.18	$	0.33		$	0.35
Diluted	0.18		0.15			0.35			0.28		0.21			0.18		0.33			0.35
Cash Dividends Declared per Common Share	0.11		0.11			0.22			0.22		0.11			0.11		0.22			0.22
Weighted Average Number of Common Shares Outstanding:	Weighted Average Number of Common Shares Outstanding:										Weighted Average Number of Common Shares Outstanding:
Basic	263,958,292		254,381,170			263,878,103			254,228,260		331,318,381			263,958,292		331,024,531			263,878,103
Diluted	264,778,242		254,771,213			264,662,863			254,575,873		332,895,483			264,778,242		332,599,991			264,662,863

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net income	$	50,065		$	39,027		$	96,160		$	75,214		$	72,802		$	50,065		$	114,767		$	96,160
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale securities
Net gains (losses) arising during the period	1,896			(635		)	3,203			7,648
Less reclassification adjustment for net (gains) losses included in net income	(13		)	2			—			(168		)
Net (losses) gains arising during the period													(6,461		)	1,896			(27,390		)	3,203
Less reclassification adjustment for net losses (gains) included in net income													30			(13		)	578			—
Total	1,883			(633		)	3,203			7,480			(6,431		)	1,883			(26,812		)	3,203
Non-credit impairment losses on available for sale securities
Net change in non-credit impairment losses on securities	21			301			134			242			212			21			(56		)	134
Less reclassification adjustment for accretion of credit impairment losses included in net income	(39		)	—			(126		)	(286		)	12			(39		)	(4		)	(126		)
Total	(18		)	301			8			(44		)	224			(18		)	(60		)	8
Unrealized gains and losses on derivatives (cash flow hedges)
Net losses on derivatives arising during the period	(873		)	(2,122		)	(746		)	(8,674		)
Net gains (losses) on derivatives arising during the period													455			(873		)	2,415			(746		)
Less reclassification adjustment for net losses included in net income	1,356			2,107			2,831			3,848			619			1,356			1,655			2,831
Total	483			(15		)	2,085			(4,826		)	1,074			483			4,070			2,085
Defined benefit pension plan
Amortization of net loss	59			43			118			86			112			59			224			118
Total other comprehensive income	2,407			(304		)	5,414			2,696
Total other comprehensive (loss) income													(5,021		)	2,407			(22,578		)	5,414
Total comprehensive income	$	52,472		$	38,723		$	101,574		$	77,910		$	67,781		$	52,472		$	92,189		$	101,574

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Six Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2018			2017
Cash flows from operating activities:
Net income	$	96,160		$	75,214		$	114,767		$	96,160
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,549			12,440			13,783			12,549
Stock-based compensation	6,872			5,184			12,153			6,872
Provision for credit losses	6,102			2,229			18,090			6,102
Net amortization of premiums and accretion of discounts on securities and borrowings	11,366			7,047			17,212			11,366
Amortization of other intangible assets	5,098			5,777			8,910			5,098
Losses (gains) on securities transactions, net	1			(268		)
Losses on securities transactions, net							801			1
Proceeds from sales of loans held for sale	303,268			185,577			437,876			303,268
Gains on sales of loans, net	(8,919		)	(4,900		)	(14,395		)	(8,919		)
Originations of loans held for sale	(154,475		)	(171,123		)	(446,849		)	(154,475		)
Losses (gains) on sales of assets, net	453			(699		)
Losses on sales of assets, net							222			453
Net change in:
Fair value of borrowings hedged by derivative transactions	—			6,779
Cash surrender value of bank owned life insurance	(4,164		)	(3,781		)	(4,415		)	(4,164		)
Accrued interest receivable	(2,916		)	(1,639		)	(2,042		)	(2,916		)
Other assets	(1,521		)	(17,932		)	(55,464		)	(1,521		)
Accrued expenses and other liabilities	(20,709		)	(743		)	(16,281		)	(20,709		)
Net cash provided by operating activities	249,165			99,162			84,368			249,165
Cash flows from investing activities:
Net loan originations and purchases	(707,654		)	(459,154		)	(1,158,514		)	(707,654		)
Investment securities held to maturity:
Purchases	(60,230		)	(309,507		)	(100,160		)	(60,230		)
Maturities, calls and principal repayments	157,351			134,389			120,876			157,351
Investment securities available for sale:
Purchases	(252,770		)	(432,530		)	(239,226		)	(252,770		)
Sales	—			2,081			38,625			—
Maturities, calls and principal repayments	87,188			760,312			124,635			87,188
Death benefit proceeds from bank owned life insurance	1,998			—			2,652			1,998
Proceeds from sales of real estate property and equipment	6,822			9,146			9,773			6,822
Purchases of real estate property and equipment	(12,976		)	(15,353		)	(12,811		)	(12,976		)
Cash and cash equivalents acquired in acquisition							156,612			—
Net cash used in investing activities	(780,271		)	(310,616		)	(1,057,538		)	(780,271		)
Cash flows from financing activities:
Net change in deposits	(480,690		)	102,507			(77,533		)	(480,690		)
Net change in short-term borrowings	653,484			334,853			1,479,305			653,484
Proceeds from issuance of long-term borrowings, net	560,000			—			—			560,000
Repayments of long-term borrowings	(175,000		)	(269,000		)	(300,027		)	(175,000		)
Cash dividends paid to preferred shareholders	(3,594		)	(3,594		)	(6,344		)	(3,594		)
Cash dividends paid to common shareholders	(58,000		)	(55,857		)	(65,989		)	(58,000		)
Purchase of common shares to treasury	(2,183		)	(1,615		)	(2,598		)	(2,183		)
Common stock issued, net	2,377			3,491			2,512			2,377
Net cash provided by financing activities	496,394			110,785			1,029,326			496,394
Net change in cash and cash equivalents	(34,712		)	(100,669		)	56,156			(34,712		)
Cash and cash equivalents at beginning of year	392,501			413,800			416,110			392,501
Cash and cash equivalents at end of period	$	357,789		$	313,131		$	472,266		$	357,789

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

	Six Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2018		2017
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings	$	100,380	$	76,693	$	124,816	$	100,380
Federal and state income taxes	7,683		12,964		29,280		7,683
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned	$	5,865	$	2,899	$	672	$	5,865
Transfer of loans to loans held for sale	225,541		—		263,324		225,541
Acquisition:
Non-cash assets acquired:
Investment securities held to maturity					$	214,217	$	—
Investment securities available for sale					308,385		—
Loans					3,744,682		—
Premises and equipment					62,066		—
Bank owned life insurance					49,052		—
Accrued interest receivable					12,123		—
Goodwill					388,255		—
Other intangible assets					45,906		—
Other assets					98,134		—
Total non-cash assets acquired					$	4,922,820	$	—
Liabilities assumed:
Deposits					$	3,564,843	$	—
Short-term borrowings					649,979		—
Long-term borrowings					87,283		—
Junior subordinated debentures issued to capital trusts					13,249		—
Accrued expenses and other liabilities					26,848		—
Total liabilities assumed					4,342,202		—
Net non-cash assets acquired					$	580,618	$	—
Net cash and cash equivalents acquired in acquisition					$	156,612	$	—
Common stock issued in acquisition					$	737,230	$	—

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey corporation ("Valley"), include the accounts of its commercial bank subsidiary, Valley National Bank (the “Bank”), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities. Certain prior period amounts have been reclassified to conform to the current presentation.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations and cash flows at June 30, ~~2017~~2018 and for all periods presented have been made. The results of operations for the three and six months ended on June 30, ~~2017~~2018 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; estimated cash flows from purchased credit impaired loans, 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.~~2017.

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.

Note 2. Business Combinations

On January 1, 2018, Valley completed its acquisition of USAmeriBancorp, Inc. (USAB) and its wholly-owned subsidiary, USAmeriBank, headquartered in Clearwater, Florida. USAB had approximately $5.1 billion in assets, $3.7 billion in net loans and $3.6 billion in deposits, after purchase accounting adjustments, and maintained a branch network of 29 offices. The acquisition represents a significant addition to Valley’s Florida franchise, specifically in the Tampa Bay market. The acquisition also brought Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where Valley now operates 15 of its branches. The common shareholders of USAB received 6.1 shares of Valley common stock for each USAB share they owned. The total consideration for the acquisition was approximately $737 million.

Merger expenses totaled $3.2 million and $16.8 million for the three and six months ended June 30, 2018, respectively, which primarily related to salary and employee benefits and other expense included in non-interest expense on the consolidated statements of income.

The following table sets forth assets acquired and liabilities assumed in the USAB acquisition, at their estimated fair values as of the closing date of the transaction:



	January 1, 2018
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	156,612
Investment securities held to maturity	214,217
Investment securities available for sale	308,385
Loans	3,744,682
Premises and equipment	62,066
Bank owned life insurance	49,052
Accrued interest receivable	12,123
Goodwill	388,255
Other intangible assets	45,906
Other assets:
Deferred taxes	8,698
Other real estate owned	4,073
FHLB and FRB stock	38,809
Tax credit investments	20,138
Other	26,416
Total other assets	98,134
Total assets acquired	$	5,079,432
Liabilities assumed:
Deposits:
Non-interest bearing	$	887,083
Savings, NOW and money market	1,678,115
Time	999,645
Total deposits	3,564,843
Short-term borrowings	649,979
Long-term borrowings	87,283
Junior subordinated debentures issued to capital trusts	13,249
Accrued expenses and other liabilities	26,848
Total liabilities assumed	$	4,342,202
Common stock issued in acquisition	737,230

The determination of the fair value of the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information (existing at the date of closing) relative to closing date fair values becomes available. As Valley continues to analyze the acquired assets and liabilities, there may be adjustments to the recorded carrying values. However, Valley does not expect significant future adjustments to the recorded amounts at January 1, 2018.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the USAB acquisition.

Cash and cash equivalents. The estimated fair values of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term maturities.

Investment securities. The estimated fair values of the investment securities were calculated utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service when available, or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. The prices are 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 reviewed 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.

Loans. The acquired loan portfolio was segregated into categories for valuation purposes primarily based on loan type (commercial, commercial real estate, residential and consumer) and credit risk rating. The estimated fair values were computed by discounting the expected cash flows from the respective portfolios. Management estimated the contractual cash flows expected to be collected at the acquisition date by using valuation models that incorporated estimates of current key assumptions, such as prepayment speeds, default rates, and loss severity rates. Prepayment assumptions were developed by reference to recent or historical prepayment speeds observed for loans with similar underlying characteristics. Prepayment assumptions were influenced by many factors, including, but not limited to, forward interest rates, loan and collateral types, payment status, and current loan-to-value ratios. Default and loss severity rates were developed by reference to recent or historical default and loss rates observed for loans with similar underlying characteristics. Default and loss severity assumptions were influenced by many factors, including, but not limited to, underwriting processes and documentation, vintages, collateral types, collateral locations, estimated collateral values, loan-to-value ratios, and debt-to-income ratios.

The expected cash flows from the acquired loan portfolios were discounted to present value based on the estimated market rates. The market rates were estimated using a buildup approach based on the following components: funding cost, servicing cost and consideration of liquidity premium. The funding cost estimated for the loans was based on a mix of wholesale borrowing and equity funding. The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

The difference between the fair value and the expected cash flows from the acquired loans will be accreted to interest income over the remaining term of the loans in accordance with Accounting Standards Codification (ASC) Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” See Note 8 for further details.

Other intangible assets. Other intangible assets mostly consisting of core deposit intangibles (CDI) are measures of the value of non-maturity checking, savings, NOW and money market deposits that are acquired in a business combination. The fair value of the CDI is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding. The CDI is amortized over an estimated useful life of 10 years to approximate the existing deposit relationships acquired.

Deposits. The fair values of deposit liabilities with no stated maturity (i.e., non-interest bearing accounts and savings, NOW and money market accounts) are equal to the carrying amounts payable on demand. The fair values of certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered on deposits with similar characteristics and remaining maturities.

Short-term borrowings. The short-term borrowings consist of securities sold under agreements to repurchase and FHLB advances. The carrying amounts approximate their fair values because they frequently re-price to a market rate.

Long-term borrowings. The fair values of long-term borrowings consisting of subordinated notes and FHLB advances were estimated by discounting the estimated future cash flows using market discount rates for borrowings with similar characteristics, terms and remaining maturities.

Junior subordinated debentures issued to capital trusts. There is no active market for the trust preferred

securities issued by Aliant Statutory Trust II; therefore, the fair value of junior subordinated debentures was estimated utilizing the income approach. Valuation methods under the income approach include those methods that provide for the direct capitalization of earnings estimates, as well as valuation methods calling for the forecasting of future benefits (earnings or cash flows) and then discounting those benefits to the present at an appropriate discount rate. Under the income approach, the expected cash flows over the remaining estimated life were discounted to the present at an appropriate discount rate.

Note 2.3. Earnings Per Common Share

The following table shows the calculation of both basic and diluted earnings per common share for the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
	(in thousands, except for share data)								(in thousands, except for share data)
Net income available to common shareholders	$	48,268	$	37,230	$	92,566	$	71,620	$	69,630	$	48,268	$	108,423	$	92,566
Basic weighted average number of common shares outstanding	263,958,292		254,381,170		263,878,103		254,228,260		331,318,381		263,958,292		331,024,531		263,878,103
Plus: Common stock equivalents	819,950		390,043		784,760		347,613		1,577,102		819,950		1,575,460		784,760
Diluted weighted average number of common shares outstanding	264,778,242		254,771,213		264,662,863		254,575,873		332,895,483		264,778,242		332,599,991		264,662,863
Earnings per common share:
Basic	$	0.18	$	0.15	$	0.35	$	0.28	$	0.21	$	0.18	$	0.33	$	0.35
Diluted	0.18		0.15		0.35		0.28		0.21		0.18		0.33		0.35

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 warrants and, to a lesser extent, common stock options ~~and warrants~~ equaled approximately 2.9 million and 3.3 millionsharesfor ~~both~~ the three and six months ended June 30, ~~2017~~2018 and ~~4.6 millionsharesfor both the three and six months ended June 30, 2016,~~2017, respectively.

Note 3.4. Accumulated Other Comprehensive Loss

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three and six months ended June 30, ~~2017.~~2018.

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 March 31, 2017 $ (8,774 ) $ (616 ) $ (10,862 ) $ (18,834 ) $ (39,086 )
Other comprehensive income before reclassifications 1,896
21
(873 ) —
1,044
Amounts reclassified from other comprehensive income (13 ) (39 ) 1,356
59
1,363
Other comprehensive income, net 1,883
(18 ) 483
59
2,407
Balance at June 30, 2017 $ (6,891 ) $ (634 ) $ (10,379 ) $ (18,775 ) $ (36,679 )



	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			Total Accumulated Other Comprehensive Loss
	(in thousands)
Balance at March 31, 2018	$	(32,865	)	$	(664	)	$	(5,403	)	$	(25,171	)	$	(64,103	)
Other comprehensive (loss) income before reclassifications	(6,461		)	212			455			—			(5,794		)
Amounts reclassified from other comprehensive (loss) income	30			12			619			112			773
Other comprehensive (loss) income, net	(6,431		)	224			1,074			112			(5,021		)
Balance at June 30, 2018	$	(39,296	)	$	(440	)	$	(4,329	)	$	(25,059	)	$	(69,124	)



	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			Total Accumulated Other Comprehensive Loss
	(in thousands)
Balance at December 31, 2017	$	(12,004	)	$	(380	)	$	(8,338	)	$	(25,283	)	$	(46,005	)
Reclassification due to the adoption of ASU No. 2016-01	(480		)	—			—			—			(480		)
Reclassification due to the adoption of ASU No. 2017-12	—			—			(61		)	—			(61		)
Balance at January 1, 2018	(12,484		)	(380		)	(8,399		)	(25,283		)	(46,546		)
Other comprehensive (loss) income before reclassification	(27,390		)	(56		)	2,415			—			(25,031		)
Amounts reclassified from other comprehensive (loss) income	578			(4		)	1,655			224			2,453
Other comprehensive (loss) income, net	(26,812		)	(60		)	4,070			224			(22,578		)
Balance at June 30, 2018	$	(39,296	)	$	(440	)	$	(4,329	)	$	(25,059	)	$	(69,124	)

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 3,203
134
(746 ) —
2,591
Amounts reclassified from other comprehensive income —
(126 ) 2,831
118
2,823
Other comprehensive income, net 3,203
8
2,085
118
5,414
Balance at June 30, 2017 $ (6,891 ) $ (634 ) $ (10,379 ) $ (18,775 ) $ (36,679 )

The following table presents amounts reclassified from each component of accumulated other comprehensive loss on a gross and net of tax basis for the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.


	Amounts Reclassified from Accumulated Other Comprehensive Loss													Amounts Reclassified from Accumulated Other Comprehensive Loss
	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,						Six Months Ended June 30,
Components of Accumulated Other Comprehensive Loss	2017			2016			2017			2016			Income Statement Line Item	2018			2017			2018			2017			Income Statement Line Item
	(in thousands)													(in thousands)
Unrealized gains (losses) on AFS securities before tax	22			$	(3	)	(1		)	268			Gains (losses) on securities transactions, net
Unrealized (losses) gains on AFS securities before tax														$	(36	)	$	22		$	(801	)	$	(1	)	(Losses) gains on securities transactions, net
Tax effect	(9		)	1			1			(100		)		6			(9		)	223			1
Total net of tax	13			(2		)	—			168				(30		)	13			(578		)	—
Non-credit impairment losses on AFS securities before tax:
Accretion of credit loss impairment due to an increase in expected cash flows	67			—			215			489			Interest and dividends on investment securities (taxable)	(16		)	67			6			215			Interest and dividends on investment securities (taxable)
Tax effect	(28		)	—			(89		)	(203		)		4			(28		)	(2		)	(89		)
Total net of tax	39			—			126			286				(12		)	39			4			126
Unrealized losses on derivatives (cash flow hedges) before tax	(2,314		)	(3,597		)	(4,832		)	(6,568		)	Interest expense	(866		)	(2,314		)	(2,317		)	(4,832		)	Interest expense
Tax effect	958			1,490			2,001			2,720				247			958			662			2,001
Total net of tax	(1,356		)	(2,107		)	(2,831		)	(3,848		)		(619		)	(1,356		)	(1,655		)	(2,831		)
Defined benefit pension plan:
Amortization of net loss	(101		)	(72		)	(202		)	(144		)	*	(157		)	(101		)	(314		)	(202		)	*
Tax effect	42			29			84			58				45			42			90			84
Total net of tax	(59		)	(43		)	(118		)	(86		)		(112		)	(59		)	(224		)	(118		)
Total reclassifications, net of tax	$	(1,363	)	$	(2,152	)	$	(2,823	)	$	(3,480	)		$	(773	)	$	(1,363	)	$	(2,453	)	$	(2,823	)



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

Note 4.5. New Authoritative Accounting Guidance

New Accounting Guidance Adopted in 2018

Accounting Standards Update (ASU) No. ~~2017-08, "Receivables—Nonrefundable Fees~~2017-12, "Derivatives and ~~Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities" shortens~~Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" amends the ~~amortization period~~hedge accounting recognition and presentation requirements to better align a company’s financial reporting for ~~certain callable debt securities held at a premium.~~hedging activities with the economic objectives of those activities. 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

2017-12 is effective ~~for Valley~~ for the annual and interim reporting periods beginning January 1, ~~2018~~2019 with early adoption ~~permitted,~~permitted. Valley elected to early adopt ASU No. 2017-12 for annual and isinterim reporting periods beginning January 1, 2018. The adoption of ASU No. 2017-12 required a modified retrospective method to be ~~applied retrospectively. ASU No. 2017-08 is not expected~~used by Valley and resulted in an immaterial cumulative-effect adjustment to ~~have a significant impact on Valley's consolidated financial statements.~~

retained earnings as of January 1, 2018 to eliminate the separate measurement of ineffectiveness from accumulated comprehensive income (see Note 4).

ASU No. 2017-07, ~~"Compensation—~~"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 isshould be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. ASU No. 2017-07 was effective for Valley for its annual and interim reporting periods beginning ~~January1,~~January

1, 2018. ASU No. 2017-07 did not have a significant impact on the presentation of Valley's consolidated financial statements.

ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory”. Under current GAAP, the tax effects of intercompany sales are deferred until the transferred asset is sold to a third party or otherwise recovered through amortization. This is an exception to the accounting for income taxes that generally requires recognition of current and deferred income taxes. ASU No. 2016-16 eliminates the exception for intercompany sales of assets. ASU No. 2016-16 was effective for Valley on January 1, 2018 and it was applied using the modified retrospective method. As a result, Valley recorded a $15.4 million cumulative effect adjustment that reduced retained earnings effective January 1, 2018 to record net deferred tax liabilities related to pre-existing transactions.

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

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 caused by a change in instrument-specific credit risk in other comprehensive income, (iv) entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities, and (v) entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU No. 2016-01 also eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet (see Note 6). ASU No. 2016-01 was effective for Valley for reporting periods beginning January 1, 2018 and did not have a material effect on Valley’s consolidated financial statements.

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related updates modify the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. The updates also require new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. Valley adopted the guidance on January 1, 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP. Accordingly, the new revenue recognition standard was not expected to have a material impact on Valley’s consolidated financial statements. Valley has completed its review of non-interest income revenue streams within the scope of the guidance and an assessment of its revenue contracts and did not identify material changes related to the timing or amount of revenue recognition. Therefore, Valley did not record an adjustment to opening retained earnings at January 1, 2018 due to the adoption of this standard. Valley has also concluded that additional disaggregation of revenue categories (as reported herein and consistent with the Annual Report on Form 10-K for the year ended December 31, 2017) that are within the scope of the new guidance is not necessary. Qualitative disclosures regarding such revenues, as required by the new guidance, are presented in Note 12.

New Accounting Guidance Not Yet Adopted

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, 2019 with early adoption ~~permitted.~~permitted, and is to be applied using the modified retrospective method. Additionally, in the period of adoption, entities should provide disclosures about a change in accounting principle. ASU No. ~~2017-07~~2017-08 is not expected to have a significant impact on ~~the presentation on~~ Valley's consolidated financial statements.

ASU No. 2017-04, ~~"Intangibles—~~"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.

dates.

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 all expected losses over the lives of the assets 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’s implementation effort is managed through several cross-functional working groups. These groups continue to evaluate the requirements of the new standard, assess its impact on current operational processes, and develop loss models that accurately project lifetime expected loss estimates. Valley expects that the ~~new guidance~~adoption of ASU No. 2016-13 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)8) on PCI loans will be recognized as an allowance,

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~~and subsequent related updates require 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~~expects to initially apply Topic 842 at the adoption date and recognize a ~~modified retrospective~~ cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019 under the new optional

transition ~~approach for the applicable leases existing at, or entered into after, the beginning of the earliest~~method provided by ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements". The comparative ~~period presented~~prior periods reported in the financial ~~statements. The modified retrospective approach~~statements in the period of adoption will continue to be presented in accordance with current GAAP in Topic 840. In addition, the amendments in ASU No. 2018-11 provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component. Those components can be accounted for as a single component if the non-lease components would ~~not require any transition accounting~~otherwise be accounted for ~~leases that expired before~~under the ~~earliest comparative period presented. Management is currently evaluating~~new revenue guidance (Topic 606) when certain criteria are met. Overall, management continues to evaluate the impact of Topic 842 on Valley’s consolidated financial statements ~~by reviewing~~and presently evaluating all of its ~~existing~~known leases for compliance with the new lease ~~contracts~~accounting guidance. Management has completed an initial review of Valley's contractual arrangements for embedded leases, and ~~service contracts that may include embedded leases.~~is currently validating the results of this review and accumulating the lease data necessary to apply the new guidance. 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

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. While Valley has not identified any material changes in the timing of revenue recognition under the new guidance, its review is ongoing. However, Valley does not expect the new revenue guidance to have a significant impact on its consolidated financial statements.

Note 5.6. Fair Value Measurement of Assets and Liabilities

~~Accounting Standards Codification (ASC)~~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).

1215

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

The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at June 30, ~~2017~~2018 and December 31, ~~2016.~~2017. The assets presented under “nonrecurring fair value measurements” in the ~~table~~tables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized).


	June 30, 2017		Fair Value Measurements at Reporting Date Using:						June 30, 2018		Fair Value Measurements at Reporting Date Using:
	June 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		June 30, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)								(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available for sale:
U.S. Treasury securities	$	50,097	$	50,097	$	—	$	—	$	48,667	$	48,667	$	—	$	—
U.S. government agency securities	46,368		—		46,368		—		38,006		—		38,006		—
Obligations of states and political subdivisions	119,194		—		119,194		—		211,529		—		211,529		—
Residential mortgage-backed securities	1,163,720		—		1,154,868		8,852		1,477,846		—		1,471,403		6,443
Trust preferred securities	6,219		—		4,341		1,878		2,279		—		2,279		—
Corporate and other debt securities	67,674		7,956		59,718		—		55,140		7,629		47,511		—
Equity securities	10,782		920		9,862		—
Total available for sale	1,464,054		58,973		1,394,351		10,730		1,833,467		56,296		1,770,728		6,443
Loans held for sale ⁽¹⁾	17,919		—		17,919		—		32,670		—		32,670		—
Other assets ⁽²⁾	26,764		—		26,764		—		30,132		—		30,132		—
Total assets	$	1,508,737	$	58,973	$	1,439,034	$	10,730	$	1,896,269	$	56,296	$	1,833,530	$	6,443
Liabilities
Other liabilities ⁽²⁾	$	23,902	$	—	$	23,902	$	—	$	37,902	$	—	$	37,902	$	—
Total liabilities	$	23,902	$	—	$	23,902	$	—	$	37,902	$	—	$	37,902	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	31,489	$	—	$	—	$	31,489	$	36,957	$	—	$	—	$	36,957
Loan servicing rights	7,410		—		—		7,410		2,212		—		—		2,212
Foreclosed assets	1,340		—		—		1,340		1,239		—		—		1,239
Total	$	40,239	$	—	$	—	$	40,239	$	40,408	$	—	$	—	$	40,408

1316


			Fair Value Measurements at Reporting Date Using:								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)		December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)								(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available for sale:
U.S. Treasury securities	$	49,591	$	49,591	$	—	$	—	$	49,642	$	49,642	$	—	$	—
U.S. government agency securities	23,041		—		23,041		—		42,505		—		42,505		—
Obligations of states and political subdivisions	119,767		—		119,767		—		112,884		—		112,884		—
Residential mortgage-backed securities	1,015,542		—		1,005,589		9,953		1,223,295		—		1,215,935		7,360
Trust preferred securities	8,009		—		6,074		1,935		3,214		—		3,214		—
Corporate and other debt securities	60,565		8,064		52,501		—		51,164		7,783		43,381		—
Equity securities	20,858		1,306		19,552		—		11,201		1,382		9,819		—
Total available for sale	1,297,373		58,961		1,226,524		11,888		1,493,905		58,807		1,427,738		7,360
Loans held for sale ⁽¹⁾	57,708		—		57,708		—		15,119		—		15,119		—
Other assets ⁽²⁾	29,055		—		29,055		—		26,417		—		26,417		—
Total assets	$	1,384,136	$	58,961	$	1,313,287	$	11,888	$	1,535,441	$	58,807	$	1,469,274	$	7,360
Liabilities
Other liabilities ⁽²⁾	$	44,077	$	—	$	44,077	$	—	$	24,330	$	—	$	24,330	$	—
Total liabilities	$	44,077	$	—	$	44,077	$	—	$	24,330	$	—	$	24,330	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	5,385	$	—	$	—	$	5,385	$	48,373	$	—	$	—	$	48,373
Loan servicing rights	6,489		—		—		6,489		5,350		—		—		5,350
Foreclosed assets	4,532		—		—		4,532		3,472		—		—		3,472
Total	$	16,406	$	—	$	—	$	16,406	$	57,195	$	—	$	—	$	57,195


(1)	Represents residential mortgage loans originated for sale ~~(which consist of residential mortgage loans)~~ that are carried at fair value and had contractual unpaid principal balances totaling approximately ~~$17.5~~$32.1 million and ~~$58.2~~$14.8 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.


(2)	Derivative financial instruments are included in this category.


(3)	Excludes PCI loans.

The changes in Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 are summarized below:


	Available for Sale Securities												Available for Sale Securities
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in thousands)												(in thousands)
Balance, beginning of the period	$	11,367		$	12,949		$	11,888		$	13,793		$	6,498		$	11,367		$	7,360		$	11,888
Total net (losses) gains included in other comprehensive income	(31		)	514			13			(71		)
Total net gains (losses) included in other comprehensive income													313			(31		)	(85		)	13
Settlements, net	(606		)	(362		)	(1,171		)	(621		)	(368		)	(606		)	(832		)	(1,171		)
Balance, end of the period	$	10,730		$	13,101		$	10,730		$	13,101		$	6,443		$	10,730		$	6,443		$	10,730

No changes in unrealized gains or losses on Level 3 securities were included in earnings during the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017. There were no transfers of assets into or out of Level 3, or between Level 1 and Level 2, during the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.

There have been no material changes in the valuation methodologies used at June 30, ~~2017~~2018 from December 31, ~~2016.~~2017.

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~~four private label mortgage-backed securities. The cash flows for the ~~residential mortgage-backed~~Level 3 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 June 30, ~~2017:~~2018:



Security Type	Valuation Technique	Unobservable Input	Range	Weighted Average

Private label mortgage-backed securities	Discounted cash flow	Prepayment rate	~~6.2~~1.8 - ~~31.6%~~28.8%	~~19.8~~13.0	%
		Default rate	~~2.6~~3.1 - ~~36.7~~47.4	~~7.5~~8.9
		Loss severity	~~47.2~~45.4 - ~~66.0~~62.0	~~60.4~~57.1

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 cash flow assumptions 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 June 30, ~~2017~~2018 and December 31, ~~2016~~2017 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, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at June 30, ~~2017~~2018 and December 31, ~~2016)~~2017), 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 June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

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 may be adjusted based on certain discounting criteria. At June 30, ~~2017,~~2018, certain appraisals were discounted based on specific market data by location and property type. During the quarter ended June 30, ~~2017,~~2018, 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 $1.9 million and $473 thousand~~were immaterial for the three and six months ended June 30, ~~2017 and 2016, respectively,~~2018 as compared to $1.9 million and $2.1 million~~and$952 thousand~~ for the three and six months ended June 30, 2017, ~~and 2016,~~ respectively. At June 30, ~~2017,~~2018, collateral dependent impaired loans with a total recorded investment of ~~$35.2~~$60.3 million were reduced by specific valuation allowance allocations totaling ~~$3.7~~$23.3 million to a reported total net carrying amount of ~~$31.5~~$37.0 million.

Loan servicing rights. Fair values for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third party vendor that requires inputs that are both significant to the fair value measurement and unobservable (Level 3). The fair value model is based on various assumptions, including but not limited to, prepayment speeds, internal rate of return (“discount rate”), servicing cost, ancillary income, float rate, tax rate, and inflation. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At June 30, ~~2017,~~2018, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 2524 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 net recoveries of net impairment charges on its loan servicing rights totaling ~~$50~~$90 thousand and ~~$51~~$317 thousand for the three and six months ended June 30, ~~2017,~~2018, respectively, ~~as compared to net impairment charges totaling $265~~and $50 thousand and ~~$457~~$51 thousand for the three and sixmonths ended June 30, ~~2016,~~2017, respectively.

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 discount adjustments of the appraisals of foreclosed assets at June 30, ~~2017.~~2018. At June 30, ~~2017,~~2018, foreclosed assets included ~~$1.3~~$1.2 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during

the quarter ended June 30, ~~2017.~~2018. The foreclosed assets charge-offs to the allowance for the loan losses totaled ~~$282~~$649 thousand and ~~$489~~$282 thousand for the three months ended June 30, 2018 and 2017, respectively, and ~~2016, respectively,~~$1.2 million and $994 thousand ~~and $922 thousand~~ for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, 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~~$145 thousand and $290 thousand for ~~both~~ the ~~three and~~ six months ended June 30, ~~2017,~~2018 and ~~$295 thousandand $912 thousand for three and six months ended June 30, 2016,~~2017, respectively.

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.

The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 were as follows:


	Fair Value Hierarchy	June 30, 2017				December 31, 2016				Fair Value Hierarchy	June 30, 2018				December 31, 2017
		Carrying Amount		Fair Value		Carrying Amount		Fair Value			Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(in thousands)									(in thousands)
Financial assets
Cash and due from banks	Level 1	$	227,830	$	227,830	$	220,791	$	220,791	Level 1	$	307,428	$	307,428	$	243,310	$	243,310
Interest bearing deposits with banks	Level 1	129,959		129,959		171,710		171,710		Level 1	164,838		164,838		172,800		172,800
Investment securities held to maturity:
U.S. Treasury securities	Level 1	138,754		147,656		138,830		147,495		Level 1	138,598		141,605		138,676		145,257
U.S. government agency securities	Level 2	10,597		10,802		11,329		11,464		Level 2	9,447		9,280		9,859		9,981
Obligations of states and political subdivisions	Level 2	501,402		517,830		566,590		577,826		Level 2	615,651		616,786		465,878		477,479
Residential mortgage-backed securities	Level 2	1,070,137		1,062,008		1,112,460		1,102,802		Level 2	1,185,165		1,146,450		1,131,945		1,118,044
Trust preferred securities	Level 2	59,814		48,268		59,804		47,290		Level 2	49,833		43,334		49,824		40,088
Corporate and other debt securities	Level 2	41,559		42,168		36,559		37,720		Level 2	31,500		31,327		46,509		46,771
Total investment securities held to maturity		1,822,263		1,828,732		1,925,572		1,924,597			2,030,194		1,988,782		1,842,691		1,837,620
Net loans	Level 3	17,594,314		17,187,164		17,121,684		16,756,655		Level 3	23,095,954		22,752,737		18,210,724		17,562,153
Accrued interest receivable	Level 1	69,732		69,732		66,816		66,816		Level 1	88,155		88,155		73,990		73,990
Federal Reserve Bank and Federal Home Loan Bank stock⁽¹⁾	Level 1	201,116		201,116		147,127		147,127		Level 1	291,705		291,705		178,668		178,668
Financial liabilities
Deposits without stated maturities	Level 1	13,881,025		13,881,025		14,591,837		14,591,837		Level 1	16,987,360		16,987,360		14,589,941		14,589,941
Deposits with stated maturities	Level 2	3,368,993		3,375,127		3,138,871		3,160,572		Level 2	4,653,412		4,604,918		3,563,521		3,465,373
Short-term borrowings	Level 1	1,734,444		1,739,208		1,080,960		1,081,751		Level 1	2,877,912		2,580,009		748,628		679,316
Long-term borrowings	Level 2	1,819,615		1,906,668		1,433,906		1,523,386		Level 2	2,103,993		1,812,019		2,315,819		2,453,797
Junior subordinated debentures issued to capital trusts	Level 2	41,658		46,298		41,577		45,785		Level 2	55,196		48,918		41,774		37,289
Accrued interest payable ⁽²⁾	Level 1	10,931		10,931		10,675		10,675		Level 1	18,608		18,608		14,161		14,161


(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.

~~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.

2021

Note 6.7. Investment Securities

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)									(in thousands)
June 30, 2017
June 30, 2018
U.S. Treasury securities	$	138,754	$	8,902	$	—		$	147,656	$	138,598	$	3,007	$	—		$	141,605
U.S. government agency securities	10,597		205		—			10,802		9,447		21		(188		)	9,280
Obligations of states and political subdivisions:
Obligations of states and state agencies	249,607		9,623		(1,688		)	257,542		355,219		4,940		(5,862		)	354,297
Municipal bonds	251,795		8,519		(26		)	260,288		260,432		3,634		(1,577		)	262,489
Total obligations of states and political subdivisions	501,402		18,142		(1,714		)	517,830		615,651		8,574		(7,439		)	616,786
Residential mortgage-backed securities	1,070,137		7,658		(15,787		)	1,062,008		1,185,165		2,493		(41,208		)	1,146,450
Trust preferred securities	59,814		32		(11,578		)	48,268		49,833		78		(6,577		)	43,334
Corporate and other debt securities	41,559		927		(318		)	42,168		31,500		119		(292		)	31,327
Total investment securities held to maturity	$	1,822,263	$	35,866	$	(29,397	)	$	1,828,732	$	2,030,194	$	14,292	$	(55,704	)	$	1,988,782
December 31, 2016
December 31, 2017
U.S. Treasury securities	$	138,830	$	8,665	$	—		$	147,495	$	138,676	$	6,581	$	—		$	145,257
U.S. government agency securities	11,329		135		—			11,464		9,859		122		—			9,981
Obligations of states and political subdivisions:
Obligations of states and state agencies	252,185		6,692		(1,428		)	257,449		244,272		7,083		(1,653		)	249,702
Municipal bonds	314,405		6,438		(466		)	320,377		221,606		6,199		(28		)	227,777
Total obligations of states and political subdivisions	566,590		13,130		(1,894		)	577,826		465,878		13,282		(1,681		)	477,479
Residential mortgage-backed securities	1,112,460		8,432		(18,090		)	1,102,802		1,131,945		4,842		(18,743		)	1,118,044
Trust preferred securities	59,804		40		(12,554		)	47,290		49,824		60		(9,796		)	40,088
Corporate and other debt securities	36,559		1,190		(29		)	37,720		46,509		532		(270		)	46,771
Total investment securities held to maturity	$	1,925,572	$	31,592	$	(32,567	)	$	1,924,597	$	1,842,691	$	25,419	$	(30,490	)	$	1,837,620

2122

The age of unrealized losses and fair value of related securities held to maturity at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 were as follows:


	Less than Twelve Months					More than Twelve Months					Total					Less than Twelve Months					More than Twelve Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)															(in thousands)
June 30, 2017
June 30, 2018
U.S. government agency securities																$	6,527	$	(188	)	$	—	$	—		$	6,527	$	(188	)
Obligations of states and political subdivisions:
Obligations of states and state agencies	$	63,537	$	(1,688	)	$	—	$	—		$	63,537	$	(1,688	)	125,371		(2,503		)	46,899		(3,359		)	172,270		(5,862		)
Municipal bonds	4,664		(26		)	—		—			4,664		(26		)	87,785		(1,546		)	533		(31		)	88,318		(1,577		)
Total obligations of states and political subdivisions	68,201		(1,714		)	—		—			68,201		(1,714		)	213,156		(4,049		)	47,432		(3,390		)	260,588		(7,439		)
Residential mortgage-backed securities	622,527		(11,860		)	156,974		(3,927		)	779,501		(15,787		)	425,381		(12,139		)	555,355		(29,069		)	980,736		(41,208		)
Trust preferred securities	—		—			36,883		(11,578		)	36,883		(11,578		)	—		—			29,903		(6,577		)	29,903		(6,577		)
Corporate and other debt securities	4,682		(318		)	—		—			4,682		(318		)	10,478		(22		)	4,731		(270		)	15,209		(292		)
Total	$	695,410	$	(13,892	)	$	193,857	$	(15,505	)	$	889,267	$	(29,397	)	$	655,542	$	(16,398	)	$	637,421	$	(39,306	)	$	1,292,963	$	(55,704	)
December 31, 2016
December 31, 2017
Obligations of states and political subdivisions:
Obligations of states and state agencies	$	98,114	$	(1,428	)	$	—	$	—		$	98,114	$	(1,428	)	$	6,342	$	(50	)	$	53,034	$	(1,603	)	$	59,376	$	(1,653	)
Municipal bonds	27,368		(466		)	—		—			27,368		(466		)	4,644		(25		)	561		(3		)	5,205		(28		)
Total obligations of states and political subdivisions	125,482		(1,894		)	—		—			125,482		(1,894		)	10,986		(75		)	53,595		(1,606		)	64,581		(1,681		)
Residential mortgage-backed securities	692,108		(14,420		)	114,505		(3,670		)	806,613		(18,090		)	344,216		(2,357		)	570,969		(16,386		)	915,185		(18,743		)
Trust preferred securities	—		—			45,898		(12,554		)	45,898		(12,554		)	—		—			38,674		(9,796		)	38,674		(9,796		)
Corporate and other debt securities	2,971		(29		)	—		—			2,971		(29		)	9,980		(270		)	—		—			9,980		(270		)
Total	$	820,561	$	(16,343	)	$	160,403	$	(16,224	)	$	980,964	$	(32,567	)	$	365,182	$	(2,702	)	$	663,238	$	(27,788	)	$	1,028,420	$	(30,490	)

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 ~~121~~362 at June 30, ~~2017~~2018 and ~~132~~152 at December 31, ~~2016.~~2017.

The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at June 30, ~~2017 mainly~~2018 mostly related to investment grade securities issued by Ginnie Mae and Fannie Mae.

The unrealized losses existing for more than twelve months for trust preferred securities at June 30, ~~2017~~2018 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 June 30, 2018.

As of June 30, 2018, 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 June 30, 2018 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the

mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.



	June 30, 2018
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	13,524	$	13,580
Due after one year through five years	223,219		226,330
Due after five years through ten years	321,954		329,369
Due after ten years	286,332		273,053
Residential mortgage-backed securities	1,185,165		1,146,450
Total investment securities held to maturity	$	2,030,194	$	1,988,782

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 8.4 years at June 30, 2018.

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at June 30, 2018 and December 31, 2017 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
June 30, 2018
U.S. Treasury securities	$	50,986	$	—	$	(2,319	)	$	48,667
U.S. government agency securities	39,212		34		(1,240		)	38,006
Obligations of states and political subdivisions:
Obligations of states and state agencies	110,580		52		(2,636		)	107,996
Municipal bonds	104,922		281		(1,670		)	103,533
Total obligations of states and political subdivisions	215,502		333		(4,306		)	211,529
Residential mortgage-backed securities	1,525,041		1,330		(48,525		)	1,477,846
Trust preferred securities	2,583		—		(304		)	2,279
Corporate and other debt securities	55,629		219		(708		)	55,140
Total investment securities available for sale	$	1,888,953	$	1,916	$	(57,402	)	$	1,833,467
December 31, 2017
U.S. Treasury securities	$	50,997	$	—	$	(1,355	)	$	49,642
U.S. government agency securities	42,384		158		(37		)	42,505
Obligations of states and political subdivisions:
Obligations of states and state agencies	38,435		158		(374		)	38,219
Municipal bonds	74,752		477		(564		)	74,665
Total obligations of states and political subdivisions	113,187		635		(938		)	112,884
Residential mortgage-backed securities	1,239,534		2,423		(18,662		)	1,223,295
Trust preferred securities	3,726		—		(512		)	3,214
Corporate and other debt securities	50,701		623		(160		)	51,164
Equity securities	10,505		1,190		(494		)	11,201
Total investment securities available for sale	$	1,511,034	$	5,029	$	(22,158	)	$	1,493,905

The age of unrealized losses and fair value of related securities available for sale at June 30, 2018 and December 31, 2017 were as follows:



	Less than Twelve Months					More than Twelve Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
June 30, 2018
U.S. Treasury securities	$	901	$	(13	)	$	47,766	$	(2,306	)	$	48,667	$	(2,319	)
U.S. government agency securities	30,485		(1,240		)	—		—			30,485		(1,240		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	96,617		(2,301		)	8,041		(335		)	104,658		(2,636		)
Municipal bonds	69,301		(1,251		)	12,010		(419		)	81,311		(1,670		)
Total obligations of states and political subdivisions	165,918		(3,552		)	20,051		(754		)	185,969		(4,306		)
Residential mortgage-backed securities	875,444		(21,543		)	553,585		(26,982		)	1,429,029		(48,525		)
Trust preferred securities	—		—			2,279		(304		)	2,279		(304		)
Corporate and other debt securities	22,622		(460		)	14,756		(248		)	37,378		(708		)
Total	$	1,095,370	$	(26,808	)	$	638,437	$	(30,594	)	$	1,733,807	$	(57,402	)
December 31, 2017
U.S. Treasury securities	$	916	$	(2	)	$	48,726	$	(1,353	)	$	49,642	$	(1,355	)
U.S. government agency securities	31,177		(37		)	—		—			31,177		(37		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	13,337		(131		)	7,792		(243		)	21,129		(374		)
Municipal bonds	31,669		(256		)	12,133		(308		)	43,802		(564		)
Total obligations of states and political subdivisions	45,006		(387		)	19,925		(551		)	64,931		(938		)
Residential mortgage-backed securities	406,940		(2,461		)	599,167		(16,201		)	1,006,107		(18,662		)
Trust preferred securities	—		—			3,214		(512		)	3,214		(512		)
Corporate and other debt securities	5,855		(45		)	15,115		(115		)	20,970		(160		)
Equity securities	—		—			5,150		(494		)	5,150		(494		)
Total	$	489,894	$	(2,932	)	$	691,297	$	(19,226	)	$	1,181,191	$	(22,158	)

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 June 30, 2018 was 567 as compared to 327 at December 31, 2017.

The unrealized losses for the residential mortgage-backed securities category of the available for sale portfolio at June 30, 2018 largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac.

As of June 30, 2018, 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 $1.0 billion.

The contractual maturities of debt securities available for sale at June 30, 2018 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages

underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.



	June 30, 2018
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	18,801	$	18,876
Due after one year through five years	127,790		124,100
Due after five years through ten years	80,582		79,923
Due after ten years	136,739		132,723
Residential mortgage-backed securities	1,525,041		1,477,845
Total investment securities available for sale	$	1,888,953	$	1,833,467

The weighted average remaining expected life for residential mortgage-backed securities available for sale was 8.4 years at June 30, 2018.

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; 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 (including one pooled security at June 30, 2018) and corporate bonds (some 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 and six months ended June 30, 2018 and 2017. Management does not believe that any individual unrealized loss as of June 30, ~~2017~~2018 included in the ~~table~~investment portfolio tables 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.

~~As of~~At June 30, ~~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 $997.2 million.~~

~~The contractual maturities of investments in debt securities held to maturity at June 30, 2017 are set forth in the table below. Maturities may differ from contractual maturities in residential~~2018, four previously impaired private label mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.

June 30, 2017

Amortized
Cost

Fair
Value
(in thousands)
Due in one year $ 53,859
$ 54,621
Due after one year through five years 210,615
218,428
Due after five years through ten years 325,933
343,717
Due after ten years 161,719
149,958
Residential mortgage-backed securities 1,070,137
1,062,008
Total investment securities held to maturity $ 1,822,263
$ 1,828,732

~~The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 7.5 years at June 30, 2017.~~

~~Available for Sale~~

~~The~~had a combined amortized cost ~~gross unrealized gains and losses~~ and fair value of ~~securities available for sale at June 30, 2017~~$7.0 million and ~~December 31, 2016 were as follows:~~

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses
Fair Value
(in thousands)
June 30, 2017
U.S. Treasury securities $ 51,009
$ 7
$ (919 ) $ 50,097
U.S. government agency securities 46,147
292
(71 ) 46,368
Obligations of states and political subdivisions:
Obligations of states and state agencies 39,286
336
(218 ) 39,404
Municipal bonds 79,824
459
(493 ) 79,790
Total obligations of states and political subdivisions 119,110
795
(711 ) 119,194
Residential mortgage-backed securities 1,175,171
2,564
(14,015 ) 1,163,720
Trust preferred securities* 7,796
—
(1,577 ) 6,219
Corporate and other debt securities 67,177
701
(204 ) 67,674
Equity securities 10,505
737
(460 ) 10,782
Total investment securities available for sale $ 1,476,915
$ 5,096
$ (17,957 ) $ 1,464,054
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 June 30, 2017 and December 31, 2016.~~

$6.4 million, respectively.

Realized Gains and Losses

~~The age of unrealized losses and fair value of related securities available for sale at June 30, 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)
June 30, 2017
U.S. Treasury securities $ 49,168
$ (919 ) $ —
$ —
$ 49,168
$ (919 )
U.S. government agency securities 31,236
(68 ) 3,808
(3 ) 35,044
(71 )
Obligations of states and political subdivisions:
Obligations of states and state agencies 13,118
(169 ) 1,628
(49 ) 14,746
(218 )
Municipal bonds 18,302
(193 ) 11,059
(300 ) 29,361
(493 )
Total obligations of states and political subdivisions 31,420
(362 ) 12,687
(349 ) 44,107
(711 )
Residential mortgage-backed securities 739,362
(9,680 ) 136,402
(4,335 ) 875,764
(14,015 )
Trust preferred securities —
—
6,219
(1,577 ) 6,219
(1,577 )
Corporate and other debt securities 30,335
(75 ) 11,034
(129 ) 41,369
(204 )
Equity securities —
—
5,184
(460 ) 5,184
(460 )
Total $ 881,521
$ (11,104 ) $ 175,334
$ (6,853 ) $ 1,056,855
$ (17,957 )
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 for the residential mortgage-backed securities category of the available for sale portfolio at June 30, 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 June 30, 2017 in the table above largely relate to 2 pooled trust preferred securities with an amortized cost of $7.8 million and a fair value of $6.2 million. One of the two pooled trust preferred securities had unrealized loss of $703 thousand and an investment grade rating at June 30, 2017.

As of June 30, 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 $703.9 million.

The contractual maturities of investment securities available for sale at June 30, 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.

June 30, 2017

Amortized
Cost

Fair
Value
(in thousands)
Due in one year $ 24,831
$ 24,752
Due after one year through five years 70,802
74,052
Due after five years through ten years 115,497
114,927
Due after ten years 80,109
78,821
Residential mortgage-backed securities 1,175,171
1,163,720
Equity securities 10,505
10,782
Total investment securities available for sale $ 1,476,915
$ 1,467,054

~~The weighted average remaining expected life for residential mortgage-backed securities available for sale was 9.1 years at June 30, 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) and corporate bonds 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~~Net losses on securities ~~recognized in earnings~~transactions totaled $36 thousand and $801 thousand for the three and six months ended June 30, 2017 and 2016. At June 30, 2017, four previously impaired private label mortgage-backed securities (prior to December 31, 2012) had a combined amortized cost and fair value of $9.1 million and $8.9 million, respectively, while one previously impaired pooled trust preferred security had an amortized cost and fair value of $2.8 million and $1.9 million,2018, respectively. The ~~previously impaired pooled trust preferred security was not accruing interest during~~net losses on securities transactions for the ~~three and~~ six months ended June 30, ~~2017 and 2016.~~

~~The following table presents the changes in the credit loss component~~2018 were mainly related to sales of ~~cumulative other-than-temporary impairment losses on debt~~equity securities classified as ~~either held to maturity or~~ available for sale ~~that Valley has previously recognized in earnings, for which~~prior to the adoption of ASU No. 2016-01 on January 1, 2018 and a portion of the ~~impairment loss (non-credit factors) was recognized in other comprehensive income for the three and six months ended June 30, 2017 and 2016:~~

Three Months Ended
June 30, Six Months Ended
June 30,
2017 2016 2017 2016
(in thousands)
Balance, beginning of period $ 4,767
$ 5,348
$ 4,916
$ 5,837
Accretion of credit loss impairment due to an increase in expected cash flows (67 ) —
(216 ) (489 )
Balance, end of period $ 4,700
$ 5,348
$ 4,700
$ 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 debttotal municipal 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~~acquired from USAB. Net gains and losses ~~realized~~ on ~~sales, maturities and other investment~~ securities transactions ~~included in earnings~~ were immaterial for the three and six months ended June 30, ~~2017 and 2016.~~

2017.

2726

Note 7.8. Loans

The detail of the loan portfolio as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 was as follows:


	June 30, 2017						December 31, 2016						June 30, 2018						December 31, 2017
	Non-PCI Loans		PCI Loans*		Total		Non-PCI Loans		PCI Loans*		Total		Non-PCI Loans		PCI Loans*		Total		Non-PCI Loans		PCI Loans*		Total
	(in thousands)												(in thousands)
Loans:
Commercial and industrial	$	2,417,924	$	213,388	$	2,631,312	$	2,357,018	$	281,177	$	2,638,195	$	3,021,524	$	808,001	$	3,829,525	$	2,549,065	$	192,360	$	2,741,425
Commercial real estate:
Commercial real estate	8,201,235		1,029,279		9,230,514		7,628,328		1,091,339		8,719,667		9,109,645		2,804,185		11,913,830		8,561,851		934,926		9,496,777
Construction	825,196		55,877		881,073		710,266		114,680		824,946		996,702		380,030		1,376,732		809,964		41,141		851,105
Total commercial real estate loans	9,026,431		1,085,156		10,111,587		8,338,594		1,206,019		9,544,613		10,106,347		3,184,215		13,290,562		9,371,815		976,067		10,347,882
Residential mortgage	2,569,500		155,277		2,724,777		2,684,195		183,723		2,867,918		3,051,429		477,253		3,528,682		2,717,744		141,291		2,859,035
Consumer:
Home equity	369,372		81,138		450,510		376,213		92,796		469,009		358,043		162,806		520,849		373,631		72,649		446,280
Automobile	1,150,217		126		1,150,343		1,139,082		145		1,139,227		1,281,303		432		1,281,735		1,208,804		98		1,208,902
Other consumer	635,847		6,384		642,231		569,499		7,642		577,141		768,369		14,994		783,363		723,306		4,750		728,056
Total consumer loans	2,155,436		87,648		2,243,084		2,084,794		100,583		2,185,377		2,407,715		178,232		2,585,947		2,305,741		77,497		2,383,238
Total loans	$	16,169,291	$	1,541,469	$	17,710,760	$	15,464,601	$	1,771,502	$	17,236,103	$	18,587,015	$	4,647,701	$	23,234,716	$	16,944,365	$	1,387,215	$	18,331,580


*	PCI loans include covered loans (mostly consisting of residential mortgage ~~and commercial real estate~~ loans) totaling ~~$44.5~~$31.1 million and ~~$70.4~~$38.7 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Total loans (excluding PCI covered loans) include net unearned premiums and deferred loan costs of ~~$16.7~~$18.7 million and ~~$15.3~~$22.2 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled ~~$1.7~~$4.9 billion and ~~$1.9~~$1.5 billion at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Valley transferred ~~$225.5~~$263.3 million of residential mortgage loans from the loan portfolio to loans held for sale during the six months ended June 30, 2018 as compared to $225.5 million of loans transferred during the six months ended June 30, 2017. ~~Exclusive of such transfers, there~~There were no other sales of loans from the held for investment portfolio during the ~~three and~~ six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.

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 $44.5 million and $70.4 million at June 30, 2017 and December 31, 2016, respectively.

2827

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the PCI loans acquired in the USAB acquisition as of January 1, 2018 (See Note 2 for more details):



	(in thousands)

Contractually required principal and interest	$	4,312,988
Contractual cash flows not expected to be collected (non-accretable difference)	(94,098		)
Expected cash flows to be collected	4,218,890
Interest component of expected cash flows (accretable yield)	(474,208		)
Fair value of acquired loans	$	3,744,682

The following table presents changes in the accretable yield for PCI loans during the three and six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in thousands)												(in thousands)
Balance, beginning of period	$	269,831		$	387,120		$	294,514		$	415,179		$	691,086		$	269,831		$	282,009		$	294,514
Acquisition													—			—			474,208			—
Accretion	(23,553		)	(31,519		)	(48,236		)	(59,578		)	(60,536		)	(23,553		)	(125,667		)	(48,236		)
Balance, end of period	$	246,278		$	355,601		$	246,278		$	355,601		$	630,550		$	246,278		$	630,550		$	246,278

~~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 $7.1 million and $7.2 million at June 30, 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.

2928

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)~~basis) by loan portfolio class at June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


	Past Due and Non-Accrual Loans														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		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)														(in thousands)
June 30, 2017
June 30, 2018
Commercial and industrial	$	2,391	$	2,686	$	—	$	11,072	$	16,149	$	2,401,775	$	2,417,924	$	6,780	$	1,533	$	560	$	53,596	$	62,469	$	2,959,055	$	3,021,524
Commercial real estate:
Commercial real estate	6,983		8,233		2,315		15,514		33,045		8,168,190		8,201,235		4,323		—		27		7,452		11,802		9,097,843		9,109,645
Construction	—		854		2,879		1,334		5,067		820,129		825,196		175		—		—		1,100		1,275		995,427		996,702
Total commercial real estate loans	6,983		9,087		5,194		16,848		38,112		8,988,319		9,026,431		4,498		—		27		8,552		13,077		10,093,270		10,106,347
Residential mortgage	4,677		1,721		3,353		12,825		22,576		2,546,924		2,569,500		7,961		1,978		2,324		19,303		31,566		3,019,863		3,051,429
Consumer loans:
Home equity	988		229		—		1,306		2,523		366,849		369,372		686		278		—		2,804		3,768		354,275		358,043
Automobile	3,242		774		255		103		4,374		1,145,843		1,150,217		5,482		545		164		80		6,271		1,275,032		1,281,303
Other consumer	163		4		20		—		187		635,660		635,847		405		37		34		119		595		767,774		768,369
Total consumer loans	4,393		1,007		275		1,409		7,084		2,148,352		2,155,436		6,573		860		198		3,003		10,634		2,397,081		2,407,715
Total	$	18,444	$	14,501	$	8,822	$	42,154	$	83,921	$	16,085,370	$	16,169,291	$	25,812	$	4,371	$	3,109	$	84,454	$	117,746	$	18,469,269	$	18,587,015
December 31, 2016
December 31, 2017
Commercial and industrial	$	6,705	$	5,010	$	142	$	8,465	$	20,322	$	2,336,696	$	2,357,018	$	3,650	$	544	$	—	$	20,890	$	25,084	$	2,523,981	$	2,549,065
Commercial real estate:
Commercial real estate	5,894		8,642		474		15,079		30,089		7,598,239		7,628,328		11,223		—		27		11,328		22,578		8,539,273		8,561,851
Construction	6,077		—		1,106		715		7,898		702,368		710,266		12,949		18,845		—		732		32,526		777,438		809,964
Total commercial real estate loans	11,971		8,642		1,580		15,794		37,987		8,300,607		8,338,594		24,172		18,845		27		12,060		55,104		9,316,711		9,371,815
Residential mortgage	12,005		3,564		1,541		12,075		29,185		2,655,010		2,684,195		12,669		7,903		2,779		12,405		35,756		2,681,988		2,717,744
Consumer loans:
Home equity	929		415		—		1,028		2,372		373,841		376,213		1,009		94		—		1,777		2,880		370,751		373,631
Automobile	3,192		723		188		146		4,249		1,134,833		1,139,082		5,707		987		271		73		7,038		1,201,766		1,208,804
Other consumer	76		9		21		—		106		569,393		569,499		1,693		118		13		20		1,844		721,462		723,306
Total consumer loans	4,197		1,147		209		1,174		6,727		2,078,067		2,084,794		8,409		1,199		284		1,870		11,762		2,293,979		2,305,741
Total	$	34,878	$	18,363	$	3,472	$	37,508	$	94,221	$	15,370,380	$	15,464,601	$	48,900	$	28,491	$	3,090	$	47,225	$	127,706	$	16,816,659	$	16,944,365

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.

3029

The following table presents the information about impaired loans by loan portfolio class at June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance		Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
	(in thousands)										(in thousands)
June 30, 2017
June 30, 2018
Commercial and industrial	$	3,933	$	56,304	$	60,237	$	65,809	$	6,746	$	10,241	$	76,929	$	87,170	$	92,073	$	24,817
Commercial real estate:
Commercial real estate	32,641		30,629		63,270		65,333		2,751		22,751		29,705		52,456		56,365		2,972
Construction	679		2,067		2,746		2,746		218		1,800		463		2,263		2,263		15
Total commercial real estate loans	33,320		32,696		66,016		68,079		2,969		24,551		30,168		54,719		58,628		2,987
Residential mortgage	8,464		7,725		16,189		17,488		582		6,226		6,623		12,849		13,838		632
Consumer loans:
Home equity	2,888		663		3,551		3,643		51		838		615		1,453		2,115		72
Total consumer loans	2,888		663		3,551		3,643		51		838		615		1,453		2,115		72
Total	$	48,605	$	97,388	$	145,993	$	155,019	$	10,348	$	41,856	$	114,335	$	156,191	$	166,654	$	28,508
December 31, 2016
December 31, 2017
Commercial and industrial	$	3,609	$	27,031	$	30,640	$	35,957	$	5,864	$	9,946	$	75,553	$	85,499	$	90,269	$	11,044
Commercial real estate:
Commercial real estate	21,318		36,974		58,292		60,267		3,612		28,709		29,771		58,480		62,286		2,718
Construction	1,618		2,379		3,997		3,997		260		1,904		467		2,371		2,394		17
Total commercial real estate loans	22,936		39,353		62,289		64,264		3,872		30,613		30,238		60,851		64,680		2,735
Residential mortgage	8,398		9,958		18,356		19,712		725		5,654		8,402		14,056		15,332		718
Consumer loans:
Home equity	1,182		2,352		3,534		3,626		70		3,096		664		3,760		4,917		64
Total consumer loans	1,182		2,352		3,534		3,626		70		3,096		664		3,760		4,917		64
Total	$	36,125	$	78,694	$	114,819	$	123,559	$	10,531	$	49,309	$	114,857	$	164,166	$	175,198	$	14,561

The following tables present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:

Three Months Ended June 30,
2017 2016

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized
(in thousands)
Commercial and industrial $ 46,283
$ 288
$ 24,157
$ 194
Commercial real estate:
Commercial real estate 60,119
483
70,194
475
Construction 2,759
20
10,027
53
Total commercial real estate loans 62,878
503
80,221
528
Residential mortgage 17,555
184
22,922
234
Consumer loans:
Home equity 4,799
34
3,071
20
Total consumer loans 4,799
34
3,071
20
Total $ 131,515
$ 1,009
$ 130,371
$ 976



	Three Months Ended June 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	87,674	$	212	$	46,283	$	288
Commercial real estate:
Commercial real estate	52,729		563		60,119		483
Construction	2,244		16		2,759		20
Total commercial real estate loans	54,973		579		62,878		503
Residential mortgage	12,914		185		17,555		184
Consumer loans:
Home equity	1,794		33		4,799		34
Total consumer loans	1,794		33		4,799		34
Total	$	157,355	$	1,009	$	131,515	$	1,009

3130


	Six Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)								(in thousands)
Commercial and industrial	$	38,371	$	596	$	26,244	$	434	$	88,865	$	926	$	38,371	$	596
Commercial real estate:
Commercial real estate	57,722		808		71,296		1,114		54,104		1,179		57,722		808
Construction	2,728		39		9,915		101		2,230		39		2,728		39
Total commercial real estate loans	60,450		847		81,211		1,215		56,334		1,218		60,450		847
Residential mortgage	18,974		392		23,262		436		13,502		350		18,974		392
Consumer loans:
Home equity	4,847		74		2,715		43		1,910		66		4,847		74
Total consumer loans	4,847		74		2,715		43		1,910		66		4,847		74
Total	$	122,642	$	1,909	$	133,432	$	2,128	$	160,611	$	2,560	$	122,642	$	1,909

Interest income recognized on a cash basis (included in the table above) was immaterial for the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.

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 ~~$109.8~~$83.7 million and ~~$85.2~~$117.2 million as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Non-performing TDRs totaled ~~$15.8~~$54.1 million and ~~$10.6~~$27.0 million as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

The following tables present loans by loan portfolio class modified as TDRs during the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017. The pre-modification and post-modification outstanding recorded investments disclosed in the ~~table~~tables below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.



	Three Months Ended June 30,
	2018					2017
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	11	$	8,822	$	8,575	47	$	40,077	$	38,367
Commercial real estate:
Commercial real estate	5	3,975		3,971		5	23,604		23,604
Construction	1	532		491		—	—		—
Total commercial real estate	6	4,507		4,462		5	23,604		23,604
Residential mortgage	2	393		389		2	549		545
Total	19	$	13,722	$	13,426	54	$	64,230	$	62,516


											Six Months Ended June 30,
	Three Months Ended June 30, 2017					Three Months Ended June 30, 2016					2018					2017
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		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)										($ in thousands)
Commercial and industrial	47	$	40,077	$	38,367	4	$	5,079	$	4,094	15	$	10,554	$	10,170	53	$	46,315	$	43,660
Commercial real estate:
Commercial real estate	5	23,604		23,604		2	6,111		6,077		6	4,170		4,164		6	23,782		23,777
Construction	—	—		—		—	—		—		2	564		503		1	560		480
Total commercial real estate	5	23,604		23,604		2	6,111		6,077		8	4,734		4,667		7	24,342		24,257
Residential mortgage	2	549		545		5	1,830		1,826		5	980		963		5	1,170		1,167
Consumer											1	88		85		—	—		—
Total	54	$	64,230	$	62,516	11	$	13,020	$	11,997	29	$	16,356	$	15,885	65	$	71,827	$	69,084

Six Months Ended
June 30, 2017 Six Months Ended
June 30, 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 53
$ 46,315
$ 43,660
6
$ 6,456
$ 5,437
Commercial real estate:
Commercial real estate 6
23,782
23,777
3
6,658
6,388
Construction 1
560
480
—
—
—
Total commercial real estate 7
24,342
24,257
3
6,658
6,388
Residential mortgage 5
1,170
1,167
7
2,222
2,206
Consumer —
—
—
1
55
53
Total 65
$ 71,827
$ 69,084
17
$ 15,391
$ 14,084

The total TDRs presented in the above table had allocated specific reserves for loan losses ~~totaling~~of approximately $5.3 million ~~and $2.1 million~~ at for both June 30, ~~2017~~2018 and ~~2016, respectively.~~2017. 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 ~~six months ended June 30, 2016.~~"Impaired Loans" section above. There were no charge-offs related to TDR modifications during the three and six months ended June 30, ~~2017.~~

2018 and 2017, respectively.

3332

The ~~following table presents~~ non-PCI loans modified as TDRs within the previous 12 months and for which there was a payment default (90 ~~days~~ or more days past due) ~~during~~for the three and six months ended June 30, 2018 and 2017 ~~and 2016.~~were as follows:

Three Months Ended
June 30, 2017 Three Months Ended
June 30, 2016
Troubled Debt Restructurings Subsequently Defaulted
Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment
($ in thousands)
Commercial and industrial 6
$ 5,358
—
$ —
Commercial real estate —
—
2
1,070
Residential mortgage —
—
1
74
Consumer —
—
1
30
Total 6
$ 5,358
4
$ 1,174


							Three Months Ended June 30,
	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016			2018			2017
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	($ in thousands)						($ in thousands)
Commercial and industrial	7	$	5,433	—	$	—	4	$	3,212	6	$	5,358
Commercial real estate	1	736		1	214
Residential mortgage	1	153		1	74
Consumer	—	—		1	30
Total	9	$	6,322	3	$	318	4	$	3,212	6	$	5,358



	Six Months Ended June 30,
	2018			2017
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	($ in thousands)
Commercial and industrial	4	$	3,212	7	$	5,433
Commercial real estate	—	—		1	736
Residential mortgage	—	—		1	153
Total	4	$	3,212	9	$	6,322

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 credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) at June 30, 2018 and December 31, 2017 based on the most recent analysis performed:



Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard		Doubtful		Total Non-PCI Loans
	(in thousands)
June 30, 2018
Commercial and industrial	$	2,853,692	$	62,369	$	56,095	$	49,368	$	3,021,524
Commercial real estate	9,019,309		35,200		55,136		—		9,109,645
Construction	994,407		523		1,772		—		996,702
Total	$	12,867,408	$	98,092	$	113,003	$	49,368	$	13,127,871
December 31, 2017
Commercial and industrial	$	2,375,689	$	62,071	$	96,555	$	14,750	$	2,549,065
Commercial real estate	8,447,865		48,009		65,977		—		8,561,851
Construction	808,091		360		1,513		—		809,964
Total	$	11,631,645	$	110,440	$	164,045	$	14,750	$	11,920,880

~~The following table presents the risk category of loans (excluding PCI loans) by class of loans at~~At June 30, ~~2017~~2018 and December 31, ~~2016.~~ 2017, the commercial and industrial loans with doubtful risk ratings in the above table mostly consisted of non-accrual taxi medallion loans.

Credit exposure - by internally assigned risk rating Pass
Special
Mention
Substandard Doubtful Total Non-PCI Loans
(in thousands)
June 30, 2017
Commercial and industrial $ 2,237,178
$ 76,419
$ 98,034
$ 6,293
$ 2,417,924
Commercial real estate 8,063,898
51,960
85,377
—
8,201,235
Construction 822,602
364
2,230
—
825,196
Total $ 11,123,678
$ 128,743
$ 185,641
$ 6,293
$ 11,444,355
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

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 June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Non-PCI Loans		Performing Loans		Non-Performing Loans		Total Non-PCI Loans
	(in thousands)						(in thousands)
June 30, 2017
June 30, 2018
Residential mortgage	$	2,556,675	$	12,825	$	2,569,500	$	3,032,126	$	19,303	$	3,051,429
Home equity	368,066		1,306		369,372		355,239		2,804		358,043
Automobile	1,150,114		103		1,150,217		1,281,223		80		1,281,303
Other consumer	635,847		—		635,847		768,250		119		768,369
Total	$	4,710,702	$	14,234	$	4,724,936	$	5,436,838	$	22,306	$	5,459,144
December 31, 2016
December 31, 2017
Residential mortgage	$	2,672,120	$	12,075	$	2,684,195	$	2,705,339	$	12,405	$	2,717,744
Home equity	375,185		1,028		376,213		371,854		1,777		373,631
Automobile	1,138,936		146		1,139,082		1,208,731		73		1,208,804
Other consumer	569,499		—		569,499		723,286		20		723,306
Total	$	4,755,740	$	13,249	$	4,768,989	$	5,009,210	$	14,275	$	5,023,485

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 June 30, ~~2017~~2018 and December 31, ~~2016.~~2017:


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total PCI Loans		Performing Loans		Non-Performing Loans		Total PCI Loans
	(in thousands)						(in thousands)
June 30, 2017
June 30, 2018
Commercial and industrial	$	201,297	$	12,091	$	213,388	$	776,200	$	31,801	$	808,001
Commercial real estate	1,014,923		14,356		1,029,279		2,785,190		18,995		2,804,185
Construction	54,775		1,102		55,877		378,495		1,535		380,030
Residential mortgage	150,031		5,246		155,277		470,447		6,806		477,253
Consumer	86,728		920		87,648		174,411		3,821		178,232
Total	$	1,507,754	$	33,715	$	1,541,469	$	4,584,743	$	62,958	$	4,647,701
December 31, 2016
December 31, 2017
Commercial and industrial	$	272,483	$	8,694	$	281,177	$	172,105	$	20,255	$	192,360
Commercial real estate	1,080,376		10,963		1,091,339		924,574		10,352		934,926
Construction	113,370		1,310		114,680		39,802		1,339		41,141
Residential mortgage	179,793		3,930		183,723		135,745		5,546		141,291
Consumer	98,469		2,114		100,583		76,901		596		77,497
Total	$	1,744,491	$	27,011	$	1,771,502	$	1,349,127	$	38,088	$	1,387,215

Other real estate owned (OREO) totaled ~~$10.2~~$11.8 million and $9.8 million at ~~both~~ June 30, ~~2017~~2018 and December 31, ~~2016 (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 June 30, 2017.~~2017, respectively. OREO included foreclosed residential real estate properties totaling ~~$2.3~~$8.1 million and ~~$1.6~~$7.3 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled ~~$6.2~~$1.8 million and ~~$7.1~~$3.8 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Note 8.9. 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 June 30, ~~2017~~2018 and December 31, ~~2016.~~

2017.

The following table summarizes the allowance for credit losses at June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

June 30,
2017 December 31,
2016
(in thousands)
Components of allowance for credit losses:
Allowance for loan losses $ 116,446
$ 114,419
Allowance for unfunded letters of credit 2,175
2,185
Total allowance for credit losses $ 118,621
$ 116,604



	June 30, 2018		December 31, 2017
	(in thousands)
Components of allowance for credit losses:
Allowance for loan losses	$	138,762	$	120,856
Allowance for unfunded letters of credit	4,392		3,596
Total allowance for credit losses	$	143,154	$	124,452

The following table summarizes the provision for credit losses for the periods indicated:


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016		2018		2017			2018		2017
	(in thousands)										(in thousands)
Components of provision for credit losses:
Provision for loan losses	$	3,710		$	1,363	$	6,112		$	2,092	$	6,592	$	3,710		$	17,294	$	6,112
Provision for unfunded letters of credit	(78		)	66		(10		)	137		550		(78		)	796		(10		)
Total provision for credit losses	$	3,632		$	1,429	$	6,102		$	2,229	$	7,142	$	3,632		$	18,090	$	6,102

The following table details activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:


	Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Total			Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Total
	(in thousands)															(in thousands)
Three Months Ended June 30, 2018
Allowance for loan losses:
Beginning balance																$	66,546		$	56,679		$	4,100		$	5,537		$	132,862
Loans charged-off																(642		)	(38		)	(99		)	(1,422		)	(2,201		)
Charged-off loans recovered																819			15			180			495			1,509
Net recoveries (charge-offs)																177			(23		)	81			(927		)	(692		)
Provision for loan losses																7,534			(2,844		)	443			1,459			6,592
Ending balance																$	74,257		$	53,812		$	4,624		$	6,069		$	138,762
Three Months Ended June 30, 2017
Allowance for loan losses:
Beginning balance	$	51,288		$	56,302		$	3,592		$	4,261		$	115,443		$	51,288		$	56,302		$	3,592		$	4,261		$	115,443
Loans charged-off	(2,910		)	(139		)	(229		)	(1,011		)	(4,289		)	(2,910		)	(139		)	(229		)	(1,011		)	(4,289		)
Charged-off loans recovered	312			640			235			395			1,582			312			640			235			395			1,582
Net (charge-offs) recoveries	(2,598		)	501			6			(616		)	(2,707		)	(2,598		)	501			6			(616		)	(2,707		)
Provision for loan losses	2,927			(1,348		)	588			1,543			3,710			2,927			(1,348		)	588			1,543			3,710
Ending balance	$	51,617		$	55,455		$	4,186		$	5,188		$	116,446		$	51,617		$	55,455		$	4,186		$	5,188		$	116,446
Three Months Ended June 30, 2016
Allowance for loan losses:
Beginning balance	$	48,417		$	48,454		$	4,209		$	4,335		$	105,415
Loans charged-off	(493		)	(414		)	(151		)	(697		)	(1,755		)
Charged-off loans recovered	990			1,458			94			523			3,065
Net recoveries (charge-offs)	497			1,044			(57		)	(174		)	1,310
Provision for loan losses	(889		)	2,379			(657		)	530			1,363
Ending balance	$	48,025		$	51,877		$	3,495		$	4,691		$	108,088

3735


	Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Total			Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Total
	(in thousands)															(in thousands)
Six Months Ended June 30, 2018
Allowance for loan losses:
Beginning balance																$	57,232		$	54,954		$	3,605		$	5,065		$	120,856
Loans charged-off																(773		)	(348		)	(167		)	(2,633		)	(3,921		)
Charged-off loans recovered																2,926			384			260			963			4,533
Net recoveries (charge-offs)																2,153			36			93			(1,670		)	612
Provision for loan losses																14,872			(1,178		)	926			2,674			17,294
Ending balance																$	74,257		$	53,812		$	4,624		$	6,069		$	138,762
Six Months Ended June 30, 2017
Allowance for loan losses:
Beginning balance	$	50,820		$	55,851		$	3,702		$	4,046		$	114,419		$	50,820		$	55,851		$	3,702		$	4,046		$	114,419
Loans charged-off	(4,624		)	(553		)	(359		)	(2,132		)	(7,668		)	(4,624		)	(553		)	(359		)	(2,132		)	(7,668		)
Charged-off loans recovered	1,160			782			683			958			3,583			1,160			782			683			958			3,583
Net (charge-offs) recoveries	(3,464		)	229			324			(1,174		)	(4,085		)	(3,464		)	229			324			(1,174		)	(4,085		)
Provision for loan losses	4,261			(625		)	160			2,316			6,112			4,261			(625		)	160			2,316			6,112
Ending balance	$	51,617		$	55,455		$	4,186		$	5,188		$	116,446		$	51,617		$	55,455		$	4,186		$	5,188		$	116,446
Six Months Ended June 30, 2016
Allowance for loan losses:
Beginning balance	$	48,767		$	48,006		$	4,625		$	4,780		$	106,178
Loans charged-off	(1,744		)	(519		)	(232		)	(1,771		)	(4,266		)
Charged-off loans recovered	1,516			1,547			109			912			4,084
Net (charge-offs) recoveries	(228		)	1,028			(123		)	(859		)	(182		)
Provision for loan losses	(514		)	2,843			(1,007		)	770			2,092
Ending balance	$	48,025		$	51,877		$	3,495		$	4,691		$	108,088

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 June 30, ~~2017~~2018 and December 31, ~~2016.~~2017. Loans individually evaluated for impairment represent Valley's impaired loans. Loans acquired with discounts related to credit quality represent Valley's PCI loans.

Commercial
and Industrial

Commercial
Real Estate

Residential
Mortgage
Consumer Total
(in thousands)
June 30, 2017
Allowance for loan losses:
Individually evaluated for impairment $ 6,746
$ 2,969
$ 582
$ 51
$ 10,348
Collectively evaluated for impairment 44,871
52,486
3,604
5,137
106,098
Total $ 51,617
$ 55,455
$ 4,186
$ 5,188
$ 116,446
Loans:
Individually evaluated for impairment $ 60,237
$ 66,016
$ 16,189
$ 3,551
$ 145,993
Collectively evaluated for impairment 2,357,687
8,960,415
2,553,311
2,151,885
16,023,298
Loans acquired with discounts related to credit quality 213,388
1,085,156
155,277
87,648
1,541,469
Total $ 2,631,312
$ 10,111,587
$ 2,724,777
$ 2,243,084
$ 17,710,760
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



	Commercial and Industrial		Commercial Real Estate		Residential Mortgage		Consumer		Total
	(in thousands)
June 30, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	24,817	$	2,987	$	632	$	72	$	28,508
Collectively evaluated for impairment	49,440		50,825		3,992		5,997		110,254
Total	$	74,257	$	53,812	$	4,624	$	6,069	$	138,762
Loans:
Individually evaluated for impairment	$	87,170	$	54,719	$	12,849	$	1,453	$	156,191
Collectively evaluated for impairment	2,934,354		10,051,628		3,038,580		2,406,262		18,430,824
Loans acquired with discounts related to credit quality	808,001		3,184,215		477,253		178,232		4,647,701
Total	$	3,829,525	$	13,290,562	$	3,528,682	$	2,585,947	$	23,234,716
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment	$	11,044	$	2,735	$	718	$	64	$	14,561
Collectively evaluated for impairment	46,188		52,219		2,887		5,001		106,295
Total	$	57,232	$	54,954	$	3,605	$	5,065	$	120,856
Loans:
Individually evaluated for impairment	$	85,499	$	60,851	$	14,056	$	3,760	$	164,166
Collectively evaluated for impairment	2,463,566		9,310,964		2,703,688		2,301,981		16,780,199
Loans acquired with discounts related to credit quality	192,360		976,067		141,291		77,497		1,387,215
Total	$	2,741,425	$	10,347,882	$	2,859,035	$	2,383,238	$	18,331,580

Note 9.10. Goodwill and Other Intangible Assets

~~Goodwill totaled $690.6 million at both June 30, 2017 and December 31, 2016. There were no~~The changes toin the carrying ~~amounts~~amount of goodwill as allocated to ~~Valley’s~~our business segments, or reporting units thereof, for goodwill impairment analysis ~~(as reported~~were:



	Business Segment / Reporting Unit*
	Wealth Management		Consumer Lending		Commercial Lending		Investment Management		Total
	(in thousands)
Balance at December 31, 2017	$	21,218	$	200,103	$	316,258	$	153,058	$	690,637
Goodwill from business combinations	—		85,649		238,052		64,554		388,255
Balance at June 30, 2018	$	21,218	$	285,752	$	554,310	$	217,612	$	1,078,892


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

During the six months ended June 30, 2018, goodwill from business combinations set forth in ~~Valley’s Annual Report on Form 10-K~~the table above relates to the acquisition of USAB (see Note 2 for further details). Certain estimates for acquired assets and assumed liabilities are subject to change for up to one year after the ~~year ended December 31, 2016).~~acquisition date. There was no impairment of goodwill during ~~the~~ three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.

The following table summarizes other intangible assets as of June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


	Gross Intangible Assets		Accumulated Amortization			Valuation Allowance			Net Intangible Assets		Gross Intangible Assets		Accumulated Amortization			Valuation Allowance			Net Intangible Assets
	(in thousands)										(in thousands)
June 30, 2017
June 30, 2018
Loan servicing rights	$	75,413	$	(54,253	)	$	(849	)	$	20,311	$	84,956	$	(59,975	)	$	(154	)	$	24,827
Core deposits	43,396		(21,941		)	—			21,455		80,470		(23,002		)	—			57,468
Other	4,087		(2,153		)	—			1,934		3,945		(2,274		)	—			1,671
Total other intangible assets	$	122,896	$	(78,347	)	$	(849	)	$	43,700	$	169,371	$	(85,251	)	$	(154	)	$	83,966
December 31, 2016
December 31, 2017
Loan servicing rights	$	73,002	$	(52,634	)	$	(900	)	$	19,468	$	79,138	$	(57,054	)	$	(471	)	$	21,613
Core deposits	61,504		(37,562		)	—			23,942		43,396		(24,297		)	—			19,099
Other	4,087		(2,013		)	—			2,074		4,087		(2,292		)	—			1,795
Total other intangible assets	$	138,593	$	(92,209	)	$	(900	)	$	45,484	$	126,621	$	(83,643	)	$	(471	)	$	42,507

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 56 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 1110 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. On January 1, 2018, Valley recorded approximately $44.6 million and $1.4 million of core deposit intangibles and loan servicing rights, respectively, resulting from the USAB acquisition. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.

The following table presents the estimated future amortization expense of other intangible assets for the remainder of ~~2017~~2018 through ~~2021:~~2022:


	Loan Servicing Rights		Core Deposits		Other		Loan Servicing Rights		Core Deposits		Other
	(in thousands)						(in thousands)
2017	$	2,719	$	2,356	$	139
2018	4,503		4,215		249		$	3,155	$	6,134	$	125
2019	3,557		3,671		235		5,148		10,961		235
2020	2,813		3,127		220		4,160		9,607		220
2021	2,115		2,582		206		3,243		8,252		206
2022							2,608		6,898		191

Valley recognized amortization expense on other intangible assets, including net impairment (or recovery of impairment) charges on loan servicing rights, totaling approximately ~~$2.6~~$4.6 million and ~~$2.9~~$2.6 million for the three

months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$5.1~~$8.9 million and ~~$5.8~~$5.1 million for the six months ended June 30, 2018 and 2017, ~~and 2016,~~ respectively.

Note ~~10.~~11. 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 June 30, ~~2017, 7.3~~2018, 5.5 million shares of common stock were available for issuance under the 2016 Stock Plan. The essential features of each award are described in the award agreement relating to that award. The grant, exercise, vesting, settlement or payment of an award may be based upon the fair value of Valley’s common stock on the last sale price reported for Valley’s common stock on such date or the last sale price reported preceding such date, except for performance-based awards with a market condition. The grant date fair values of performance-based awards that vest based on a market condition are determined by a third party specialist using a Monte Carlo valuation model.

In connection with the USAB acquisition on January 1, 2018, Valley assumed pre-existing stock awards consisting of options for 1.8 million shares of Valley common stock (of which options for 936 thousand shares remained outstanding as of June 30, 2018) at a weighted average exercise price of $5.49 and 336 thousand time-based RSUs (of which 179 thousand remained outstanding as of June 30, 2018). The stock plan under which the stock awards were issued is no longer active.

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 ~~482 thousand~~1.2 million shares and ~~498~~482 thousand shares during the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, to both executive officers and key employees of Valley. The majority of the awards have vesting periods of three years. Generally, the restrictions on such awards lapse at an annual rate of one-third of the total award commencing with the first anniversary of the date of grant. The average grant date fair value of the restricted stock awards granted during the six months ended June 30, 2018 and 2017 ~~and 2016~~ was ~~$11.71~~$11.86 per share and ~~$8.77~~$11.71 per share, respectively.

Restricted Stock ~~Units.~~Units (RSUs). Valley granted ~~371~~446 thousand ~~shares~~ and ~~431~~371 thousand shares of performance-based RSUs to certain executive officers for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The performance-based ~~awards~~RSUs will vest and be issued as common stock based on the attainment of (i) growth in tangible book value per share plus dividends (75 percent of ~~performance shares)~~the RSU award) and (ii) total shareholder return as compared to our peer group (25 percent of ~~performance shares)~~the RSU award). The ~~performance based awards~~RSUs "cliff" vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents ~~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 six months ended June 30, 2018 and 2017 ~~and 2016~~ was ~~$11.05~~$12.35 per share and ~~$8.32~~$11.05 per share, respectively.

Valley recorded total stock-based compensation expense of ~~$2.7~~$4.2 million and ~~$2.8~~$2.7 million for the three months ended June 30, ~~2017~~2018 and ~~2016, respectively,~~2017, and ~~$6.9~~$12.2 million and ~~$5.2~~$6.9 million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of June 30, ~~2017,~~2018, the unrecognized amortization expense for all stock-based employee compensation totaled approximately ~~$16.5~~$24.3 million and will be recognized over an average remaining vesting period of ~~2.1~~2.3 years.

Note 12. Revenue Recognition

On January 1, 2018, Valley adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related updates that modify the guidance used to recognize revenue from contracts with customers for transfers of goods and services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. The adoption did not materially change Valley's recognition of revenues within the scope of ASC Topic 606.

Performance obligations. Valley's revenue contracts generally have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable, or distinct from other obligations within the contracts. Valley does not have a material amount of long-term customer agreements that include multiple performance obligations requiring price allocation and differences in the timing of revenue recognition. Valley has no customer contracts with variable fee agreements based upon performance.

The following table presents non-interest income for the three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
	(in thousands)
Trust and investment services	$	3,262		$	2,800	$	6,492		$	5,544
Insurance commissions	4,026			4,358		7,847			9,419
Service charges on deposit accounts	6,679			5,342		13,932			10,578
(Losses) gains on securities transactions, net	(36		)	22		(801		)	(1		)
Fees from loan servicing	2,045			1,831		4,268			3,646
Gains on sales of loans, net	7,642			4,791		14,395			8,919
Bank owned life insurance	2,652			1,701		4,415			4,164
Other	11,799			7,985		19,772			12,281
Total non-interest income	$	38,069		$	28,830	$	70,320		$	54,550

The following revenues from the table above are within the scope of ASC Topic 606:

Trust and investments services. Trust and investments services include fees from investment management, investment advisory, trust, custody and other products. Trust and investment management fee income is primarily from client assets under management (AUM) for which the fees are determined based upon a tiered scale relative to the market value of the AUM. The revenue from trust and investment services is typically earned over the service period specified in the contract.

Service charges on deposit accounts. Service charges on deposit accounts include fees from checking accounts, savings accounts, overdrafts, insufficient funds, ATM transactions and other activities. The revenues for most deposit related fees are recognized immediately upon performance of the service due to the short-term nature of the contractual terms.

Other income. Other income within the scope of ASC Topic 606 within this revenue category includes fee income related to derivative interest rate swaps executed with commercial loan customers, and fees from interchange, wire transfers, credit cards, safe deposit box, ACH, lockbox and various other products and services-related income. These fees are either recognized immediately at the related transaction date or over the period in which the related service is provided. Other income also consists of items which are outside the scope of ASC Topic 606, including letters of credit fees, net gains and losses on sales of assets and income or expense related to certain changes in FDIC loss-share receivables.

Note ~~11.~~13. Derivative Instruments and Hedging Activities

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

Valley terminated an interest rate cap with a notional amount of $125 million in May 2018. The terminated

swap, originally maturing in September 2023, was used to hedge the change in cash flows associated with prime rate indexed deposits, consisting of consumer and commercial money market accounts, which variable rates are indexed to the prime rate.

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

Valley sometimes enters into risk participation agreements with external lenders where the banks are sharing their risk of default on the interest rate swaps on participated loans. Valley either pays or receives a fee depending on the participation type. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. At June 30, ~~2017,~~2018, Valley had 13 credit swaps with an aggregate notional amount of $73.4 million related to risk participation agreements.

At June 30, 2018, Valley has one "steepener" swap with a total current notional amount of ~~$14.5~~$14.3 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the ~~rate~~rates paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in the three-month LIBOR rate and therefore provide an effective economic hedge.

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

June 30, 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 $ 528
$ 31
* $ 707,000
$ 802
$ 15,641
$ 707,000
Fair value hedge interest rate swaps —
836
7,889
—
986
7,999
Total derivatives designated as hedging instruments $ 528
$ 867
$ 714,889
$ 802
$ 16,627
$ 714,999
Derivatives not designated as hedging instruments:
Interest rate swaps and embedded derivatives $ 26,058
$ 22,870
* $ 1,288,274
$ 25,285
$ 25,284
$ 1,075,722
Mortgage banking derivatives 178
165
88,567
2,968
2,166
246,583
Total derivatives not designated as hedging instruments $ 26,236
$ 23,035
$ 1,376,841
$ 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.



	June 30, 2018						December 31, 2017
	Fair Value						Fair Value
	Other Assets		Other Liabilities		Notional Amount		Other Assets		Other Liabilities		Notional Amount
	(in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate swaps and caps	$	—	$	32	$	482,000	$	650	$	81	$	607,000
Fair value hedge interest rate swaps	—		419		7,657		—		637		7,775
Total derivatives designated as hedging instruments	$	—	$	451	$	489,657	$	650	$	718	$	614,775
Derivatives not designated as hedging instruments:
Interest rate swaps and embedded derivatives	$	29,834	$	37,135	$	2,996,861	$	25,696	$	23,494	$	1,687,005
Mortgage banking derivatives	298		316		126,994		71		118		113,233
Total derivatives not designated as hedging instruments	$	30,132	$	37,451	$	3,123,855	$	25,767	$	23,612	$	1,800,238

The Chicago Mercantile Exchange (CME) ~~amended their rules to legally characterize the~~and London Clearing House (LCH) have enacted rulebook changes that re-characterize 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~~The CME and LCH variation ~~margin~~margins are classified as a single-unit of account with the fair value of certain cash flow and non-designated derivative ~~instruments.~~instruments on a prospective basis effective January 1, 2017 for derivatives outstanding with the CME and January 1, 2018 for derivatives outstanding with the LCH. As a result, the fair value of the designated cash flow derivative assets, designated and non-designated interest rate swaps liabilities were offset by variation margins posted by (with) the applicable counterparties totaling $15.9 million, $796 thousand and $8.2 million, respectively, and reported in the table above on a net basis at June 30, 2018. The fair value of the designated cash flow derivatives and non-designated interest rate swaps cleared with the CME were offset by variation margins totaling ~~$13.0~~$9.5 million and ~~$3.3 million,~~$951 thousand, respectively, and reported in the table above on a net basis at ~~June 30,~~December 31, 2017.

~~Losses~~(Losses) gains included in the consolidated statements of income and in other comprehensive (loss) income, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in thousands)												(in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense	$	(2,314	)	$	(3,597	)	$	(4,832	)	$	(6,568	)	$	(866	)	$	(2,314	)	$	(2,317	)	$	(4,832	)
Amount of loss recognized in other comprehensive income	(1,482		)	(3,625		)	(1,265		)	(14,657		)
Amount of gain recognized in other comprehensive (loss) income													637			(1,482		)	3,388			(1,265		)

~~The net gains or losses related to cash flow hedge ineffectiveness were immaterial during the three and six months ended June 30, 2017 and 2016.~~

The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were ~~$10.4~~$4.3 million and ~~$12.5~~$8.3 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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 ~~$6.9~~$1.7 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 June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in thousands)												(in thousands)
Derivative - interest rate swaps:
Interest income	$	52		$	2		$	149		$	(97	)	$	88		$	52		$	219		$	149
Interest expense	—			2,069			—			6,797
Hedged item - loans and borrowings:
Hedged item - loans:
Interest income	$	(52	)	$	(2	)	$	(149	)	$	97		$	(88	)	$	(52	)	$	(219	)	$	(149	)
Interest expense	—			(2,060		)	—			(6,779		)

~~The amounts recognized in non-interest expense~~Fee income related to ~~ineffectiveness of fair value hedges were immaterial~~derivative interest rate swaps executed with commercial loan customers totaled $4.4 million and $4.1 million for the three months ended June 30, 2018 and 2017, respectively, and $7.7 million and $4.8 million for the six months ended June 30, 2018 and 2017, respectively, and ~~2016.~~was included in other non-interest income.

The following table presents the hedged items related to interest rate derivatives designated as hedges of fair value and the cumulative basis fair value adjustment included in the net carrying amount of the hedged items at June 30, 2018:



	June 30, 2018
Line Item in the Statement of Financial Position in Which the Hedged Item is Included	Carrying Amount of the Hedged Asset		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
	(in thousands)
Loans	$	8,076	$	419

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


	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016			2017			2016			2018		2017		2018		2017
	(in thousands)											(in thousands)
Non-designated hedge interest rate derivatives
Other non-interest expense	$	70	$	(92	)	$	(790	)	$	(389	)	$	230	$	70	$	448	$	(790	)

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

Valley has agreements with its derivative counterparties providing that if Valley defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Valley could also be declared in default on its derivative counterparty agreements. Additionally, Valley has an agreement with

several of its derivative counterparties that contains provisions that require Valley’s debt to maintain an investment grade credit rating from each of the major credit rating agencies from which it receives a credit rating. If Valley’s credit rating is reduced below investment grade, or such rating is withdrawn or suspended, then the counterparty could terminate the derivative positions and Valley would be required to settle its obligations under the agreements. As of June 30, ~~2017,~~2018, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of June 30, ~~2017,~~2018, 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 ~~$10.5~~$2.1 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. ~~At June 30, 2017,~~The aggregate fair value of collateral Valley ~~had $43.3 million in collateral~~ posted with counterparties ~~net of CME variation margin.~~related to derivative contracts totaled $4.4 million at June 30, 2018.

Note ~~12.~~14. Balance Sheet Offsetting

Certain financial instruments, including derivatives (consisting of interest rate ~~caps~~swaps and ~~swaps)~~caps) 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 June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


							Gross Amounts Not Offset															Gross Amounts Not Offset
	Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Presented		Financial Instruments			Cash Collateral				Net Amount		Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Presented		Financial Instruments			Cash Collateral				Net Amount
	(in thousands)															(in thousands)
June 30, 2017
June 30, 2018
Assets:
Interest rate caps and swaps	$	26,586	$	—	$	26,586	$	(3,888	)	$	—			$	22,698
Interest rate swaps																$	29,834	$	—	$	29,834	$	(336	)	$	—			$	29,498
Liabilities:
Interest rate caps and swaps	$	23,737	$	—	$	23,737	$	(3,888	)	$	(9,314	)	⁽¹⁾	$	10,535
Interest rate swaps																$	37,586	$	—	$	37,586	$	(336	)	$	(1,645	)	⁽¹⁾	$	35,605
Repurchase agreements	200,000		—		200,000		—			(200,000		)	⁽²⁾	—		150,000		—		150,000		—			(150,000		)	⁽²⁾	—
Total	$	223,737	$	—	$	223,737	$	(3,888	)	$	(209,314	)		$	10,535	$	187,586	$	—	$	187,586	$	(336	)	$	(151,645	)		$	35,605
December 31, 2016
December 31, 2017
Assets:
Interest rate caps and swaps	$	26,087	$	—	$	26,087	$	(5,268	)	$	—			$	20,819
Interest rate swaps and caps																$	26,346	$	—	$	26,346	$	(5,376	)	$	—			$	20,970
Liabilities:
Interest rate caps and swaps	$	41,911	$	—	$	41,911	$	(5,268	)	$	(36,643	)	⁽¹⁾	$	—
Interest rate swaps and caps																$	24,212	$	—	$	24,212	$	(5,376	)	$	(8,141	)	⁽¹⁾	$	10,695
Repurchase agreements	165,000		—		165,000		—			(165,000		)	⁽²⁾	—		200,000		—		200,000		—			(200,000		)	⁽²⁾	—
Total	$	206,911	$	—	$	206,911	$	(5,268	)	$	(201,643	)		$	—	$	224,212	$	—	$	224,212	$	(5,376	)	$	(208,141	)		$	10,695


(1)	Represents the amount of collateral posted with ~~derivatives~~derivative counterparties that offsets net ~~liabilities. Actual cash collateral posted with all counterparties totaled $59.6 million and $52.4 million at June 30, 2017 and December 31, 2016, respectively.~~liability positions.


(2)	Represents the fair value of non-cash pledged investment securities.

Note ~~13.~~15. Tax Credit Investments

Valley’s tax credit investments are primarily related to investments promoting qualified affordable housing projects, and other investments related to community development and renewable energy sources. Some of these tax-advantaged investments support Valley’s regulatory compliance with the 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 June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
	(in thousands)				(in thousands)
Other Assets:
Affordable housing tax credit investments, net	$	28,559	$	29,567	$	40,226	$	22,135
Other tax credit investments, net	36,204		44,763		31,129		42,015
Total tax credit investments, net	$	64,763	$	74,330	$	71,355	$	64,150
Other Liabilities:
Unfunded affordable housing tax credit commitments	$	4,690	$	4,850	$	4,978	$	3,690
Unfunded other tax credit commitments	3,582		7,276		4,773		15,020
Total unfunded tax credit commitments	$	8,272	$	12,126	$	9,751	$	18,710

The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the three and six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016		2017		2016		2018			2017		2018		2017
	(in thousands)								(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits	$	1,271	$	1,065	$	2,555	$	2,130	$	1,429		$	1,271	$	3,250	$	2,555
Other tax credit investment credits and tax benefits	8,680		3,268		14,966		6,536		5,680			8,680		11,165		14,966
Total reduction in income tax expense	$	9,951	$	4,333	$	17,521	$	8,666	$	7,109		$	9,951	$	14,415	$	17,521
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses	$	358	$	775	$	754	$	1,359	$	(319	)	$	358	$	667	$	754
Affordable housing tax credit investment impairment losses	130		60		254		200		515			130		1,102		254
Other tax credit investment losses	1,060		594		1,827		668		1,253			1,060		1,790		1,827
Other tax credit investment impairment losses	6,184		6,217		10,221		12,683		3,021			6,184		6,185		10,221
Total amortization of tax credit investments recorded in non-interest expense	$	7,732	$	7,646	$	13,056	$	14,910	$	4,470		$	7,732	$	9,744	$	13,056

Note ~~14.~~16. 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 or settlement 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~~remote. Disclosure is also required of the estimate of the reasonably possible loss or range of ~~loss.~~

~~Although there can~~loss, unless an estimate cannot reasonably 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.made. Liabilities are established for legal claims when payments associated with the claims become probable and the ~~costs~~possible losses related to the matter can be reasonably estimated.

~~Merrick Bank Corporation~~Maritza Gaston and George Gallart v. Valley National ~~Bank~~Bancorp and ~~American Express Travel Related Services v.~~ Valley National ~~Bank litigation.~~ Bank.~~For about~~ In April 2017, Valley was served with a ~~decade,~~Class and Collective Action Complaint, filed in the Eastern District of New York, alleging that Valley ~~served~~had violated both Federal and State wage and hour laws and seeking to recover overtime compensation on behalf of a class of Valley employees. While most Branch Service Managers are classified by Valley as ~~the depository bank~~“exempt” employees and do not receive overtime pay, plaintiffs' counsel claims that all Branch Service Managers perform non-exempt duties, and should therefore be classified as non-exempt hourly employees and be paid overtime for ~~various charter operators under regulations~~any time worked in excess of 40 hours per week. Valley filed an answer disputing Plaintiffs’ allegations. Plaintiffs filed a notice for conditional certification of the ~~Department of Transportation (DOT) and contracts entered into with charter operators under those regulations. The purported intent of~~class, which was granted by 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 intoFederal Magistrate in December 2017. In January 2018, Valley filed an ~~FDIC insured bank account. The funds for a flight are released when the charter operator certifies~~objection requesting that the ~~flight~~Federal Judge assigned to this case overturn the Federal Magistrate’s Order for Certification. The Court has ~~been completed. Valley stopped serving as a depository bank for the charter business due to the narrow profit in~~not acted on 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~~request. Plaintiffs and Valley ~~approved by the DOT under the DOT regulations. Direct Air commenced operations~~have agreed to enter into non-binding mediation. A mediation session was held in ~~2007 but~~June 2018 and another session is anticipated to occur 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 Marchlate August or early September 2018. 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 June 30, ~~2017,~~2018, Valley ~~could not~~was unable to 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.loss.

Note ~~15.~~17. 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.

~~Note 16. Subsequent Events~~

~~USAmeriBancorp, Inc. Merger Agreement~~

On July 26, 2017, Valley announced its entry into a merger agreement with USAmeriBancorp, Inc. (USAB) headquartered in Clearwater, Florida. USAB largely through its wholly-owned subsidiary, USAmeriBank, has approximately $4.4 billion in assets, $3.6 billion in loans and $3.5 billion in deposits and maintains a branch network of 30 offices. The acquisition will expand Valley's Florida presence and establish a presence in Alabama. The common shareholders of USAB will receive 6.1 shares of Valley common stock for each USAB share they own, subject to adjustment in the event Valley’s average stock price falls below $11.50 or rises above $13.00 prior to closing. Both Valley and USAB have walkaway rights if the volume-weighted average closing price is below $11.00 and USAB has a walkaway right if the volume-weighted average closing price is above $13.50. The transaction is valued at an estimated $816 million, based on Valley’s closing stock price on July 25, 2017. The acquisition is expected to close early in the first quarter of 2018, subject to standard regulatory approvals, shareholder approvals from Valley and USAB, as well as other customary conditions.

~~Issuance of Series B Preferred Stock~~

~~On August 3, 2017, Valley issued 4.0 million shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual~~

Preferred Stock, Series B, no par value per share, with a liquidation preference of $25 per share for aggregate consideration of $100 million. Dividends on the preferred stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to 5.50 percent from the original issuance date to, but excluding, September 30, 2022, and thereafter at a floating rate per annum equal to three-month LIBOR plus a spread of 3.578 percent. Net proceeds to Valley after deducting underwriting discounts, commissions and offering expenses are expected to be approximately $98.1 million.

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,” “will,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain

4746

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,~~2017, include, but are not limited to:

~~failure to obtain shareholder or regulatory approval for the merger of USAB with Valley or to satisfy other conditions to the merger on the proposed terms and within the proposed timeframe;~~

~~delays in closing the merger;~~

~~the inability to realize expected cost savings and synergies from the merger of USAB with Valley in the amounts or in the timeframe anticipated;~~

~~changes in the estimate of non-recurring charges;~~

~~the diversion of management's time on issues relating to the merger;~~

~~costs or difficulties relating to integration matters might be greater than expected;~~

~~material adverse changes in Valley’s or USAB’s operations or earnings;~~

an increase or decrease in the stock price of Valley during the 30 day pricing period prior to the closing of the merger which could cause an adjustment to the exchange ratio or give either Valley or USAB the right to terminate the merger agreement under certain circumstances;

~~the inability to retain USAB’s customers and employees;~~

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

the diversion of management's time on any remaining issues related to the USAB merger integration;

the inability to realize expected cost savings and synergies from the merger of USAB with Valley in the amounts or in the timeframe anticipated;

the inability to retain USAB’s customers and employees;

less than expected cost reductions and revenue enhancement from Valley's cost reduction plans including its earnings enhancement program called "LIFT"; and branch transformation strategy;

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

higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from the impact of the Tax Cuts and Jobs Act and other changes in tax laws, regulations and case law;

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;

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

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; and

the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships.

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~~At June 30, 2018, we identified our policies on the allowance for loan losses, purchased credit-impaired loans, 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.~~2017. Purchased credit-impaired loans became a significant portion of our loan portfolio due to our acquisition of USAB on January 1, 2018 and, as a result, a new critical accounting policy starting in the first quarter of 2018. See the "Purchased Credit-Impaired Loans" section elsewhere in this MD&A and Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2017 for more information on the accounting policy for purchased credit-impaired loans and the other significant accounting policies of Valley.

New Authoritative Accounting Guidance

See Note 45 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition.

Executive Summary

Company Overview. At June 30, ~~2017,~~2018, Valley had consolidated total assets of approximately ~~$23.4~~$30.2 billion, total net loans of ~~$17.6~~$23.1 billion, total deposits of ~~$17.3~~$21.6 billion and total shareholders’ equity of ~~$2.4~~$3.3 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and ~~Florida.~~Alabama. Of our current ~~209~~237 branch network, 6759 percent, 1816 percent, 19 percent and 156 percent of the branches are located in New Jersey, New York, Florida and ~~Florida,~~Alabama, respectively. WeDespite significant branch consolidation activity mainly in 2016, we have significantly grown ~~significantly~~both in asset size and locations 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.~~acquisitions.

USAmeriBancorp, Inc. ~~In July 2017, we announced our entry into a merger agreement with USAmeriBancorp, Inc. (USAB)~~On January 1, 2018, Valley completed its acquisition of USAB and its wholly-owned subsidiary, USAmeriBank, headquartered in Clearwater, Florida. USAB ~~largely through its wholly-owned subsidiary, USAmeriBank, has~~had approximately ~~$4.4~~$5.1 billion in assets, ~~$3.6~~$3.7 billion in net loans and ~~$3.5~~$3.6 billion in deposits and ~~maintains~~maintained a branch network of 3029 offices. The acquisition represents a significant addition to Valley’s Florida franchise, ~~and will meaningfully enhance its presence~~specifically in the Tampa Bay ~~market, which is Florida’s second largest metropolitan area by population.~~market. The acquisition ~~will~~ also ~~bring~~brought Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where ~~USAmeriBank maintains~~Valley now operates 15 ~~offices contributing approximately $1.1 billion~~branch office locations. The common shareholders of ~~deposits and $520 million in loans.~~

~~Each~~ USAB ~~shareholder will receive~~received 6.1 shares of Valley common stock for each USAB share they owned. The total consideration for the acquisition was approximately $737 million, and the transaction resulted in $388 million of ~~USAB common stock if Valley’s volume-weighted average closing price during~~goodwill and $46 million of core deposit intangible assets subject to amortization. Full systems integration was completed in the ~~30 day trading ending 5 days prior~~second quarter of 2018 with minimal disruption to ~~closing~~our customers.

Branch Transformation. Over the past six months, Valley has embarked on a strategy to overhaul its retail network. The Bank is ~~between $11.50~~striving to create a branch infrastructure that is more reflective of current and ~~$13.00. In~~future activity within our target markets. Our new model is going to place greater emphasis on service, sales, advisory and efficiency. We are in the ~~event~~process of upgrading many staff and training components, as well as placing greater importance on mobile and digital implementation and customer education and encouragement of those products. Valley's branch transformation will also focus on the repositioning, re-branding, functionality, aesthetics, and in many cases, reducing the square footage of our branches.

With that, we have updated our internal branch profitability and growth requirements, initially analyzing our New Jersey and New York network. We have identified 74 branches out of 177 within New Jersey and New York that presently do not meet our minimum hurdles for success. Of the ~~volume-weighted average closing price is less than $11.50, then the exchange ratio shall be $69.00 divided~~74 identified we expect to consolidate about 20 branches by the volume-weighted average closing price. If Valley’s volume-weighted average closing price is greater than $13.00, then the exchange ratio shall be $79.30 divided by the volume-weighted average closing price. Both Valley and USAB have walkaway rights if the volume-weighted average closing price is below $11.00 and USAB has a walkaway right if the volume-weighted average closing price is above $13.50. The transaction is valued at an estimated $816 million, based on Valley’s closing stock price on July 25, 2017. The acquisition is expected to close early inend of the first quarter 2019, resulting in an approximate estimated annual operating expense savings of ~~2018, subject to standard regulatory approvals, shareholder approvals from Valley~~$9 million.

For the remaining 54 branches, we are implementing tailored action plans focused on improving profitability and ~~USAB,~~deposit levels as well as ~~other customary conditions.~~

~~See Item 1 of Valley’s Annual Report on Form 10-K~~upgrades in staffing and training, within a defined timeline. Should the remaining branches not experience improvement within the associated timeline, they will be reviewed for ~~the year ended December 31, 2016 for more details regarding our other recent acquisitions.~~

potential consolidation as well.

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While we expect the consolidation process, repositioning and renovations to be mostly complete by the end of 2020, it is important to recognize the evolving retail banking landscape combined with the Bank's renewed expectation regarding profitability will make this activity a more permanent piece of Valley's strategy.

Earnings Enhancement Program. InIn December 2016, Valley announced a company-wide earnings enhancement initiative called LIFT. The LIFT program is a review of our business practices with goals of improving our overall efficiency, targeting resources to more value-added activities and delivering on the financial banking experience expected by our customers. ~~During~~In July 2017, we completed the idea generation and approval phase of the LIFT program. As a result of these efforts, we ~~plan~~currently expect to achieve approximately $22 million in total cost reductions and revenue enhancements on an annualized pre-tax run-rate ~~through a combination of workforce reduction and other efficiency and revenue initiatives. We estimate~~after the LIFT program is fully phased-in by June 30, 2019.

At June 30, 2018, Valley had completed LIFT enhancements that ~~these changes~~ will result in ~~employee severance and other implementation costs of approximately $11 million, the majority of which will be recorded in the third quarter of 2017. The implementation phase~~cost reductions greater than 60 percent of the ~~initiative enhancements is currently underway and is expected~~$22 million annual goal as compared to beapproximately 40 percent of such goal at March 31, 2018. We believe we remain on track to fully ~~phased-in over the next 24 months.~~

~~As part of~~implement the LIFT program generated enhancements and realize 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~~total cost reduction goal by June 30, ~~2017). This review~~2019, although we can provide no assurance that all of the program generated enhancements and cost reductions will ~~ensure~~ultimately be realized.

Tax Cuts and Jobs Act. On December 22, 2017, the ~~optimal performance of our retail operations, in conjunction with several other factors, including our customers’ delivery channel preferences, branch usage patterns,~~President signed the Tax Cuts and Jobs Act (Tax Act) into law. As a result, the ~~potential opportunity~~federal corporate income tax rate decreased from 35 percent to ~~move existing customer relationships to another branch location without imposing a negative impact on their banking experience.~~

~~Preferred Stock Offering.~~ On August 3, 2017, Valley issued 4.0 million shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, no par value per share, with a liquidation preference of $25 per share21 percent effective January 1, 2018. See the "Income Taxes" section below for aggregate consideration of $100 million. Dividends on the preferred stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to 5.50 percent from the original issuance date to, but excluding, September 30, 2022, and thereafter at a floating rate per annum equal to three-month LIBOR plus a spread of 3.578 percent. Valley intends to use the net proceeds for general corporate purposes and investments in Valley National Bank as regulatory capital. Net proceeds to Valley after deducting underwriting discounts, commissions and offering expenses are expected to be approximately $98.1 million.more details.

Quarterly Results. Net income for the second quarter of ~~2017~~2018 was ~~$50.1~~$72.8 million, or ~~$0.18~~$0.21 per diluted common share, compared to ~~$39.0~~$50.1 million, or ~~$0.15~~$0.18 per diluted common share, for the second quarter of ~~2016.~~2017. The ~~$11.0~~$22.7 million increasein quarterly net income as compared to the same quarter one year ago was largely due to: (i) a ~~$17.5~~$45.9 million increase in our net interest income mostly due to higher average loan balances driven by ~~both~~acquired loans from USAB and strong organic ~~and purchased~~ loan ~~volume~~volumes over the last 12 months, and, to a much lesser extent, the ~~modification~~benefit of reduced interest expense resulting from $405 million of ~~high cost~~ long-term borrowings modifications in the third quarter of ~~2016,~~2017, (ii) a $564 thousand decrease in non-interest expense mostly due to lower expense in several categories, including, but not limited to, advertising expense, professional and legal expense, operating losses, branch closing costs, and gains on other real estate owned, partially offset by higher salary and employee benefit expense, (iii) a $426 thousand$9.2 million increase in non-interest income ~~mostly~~ caused, in part, by an increase in net gains on sales of residential mortgage loans and higher fees resulting from the USAB acquisition and (iii) a $1.8 milliondecrease in income tax expense mostly due to the reduced corporate tax rate under the Tax Act, partially offset by (iv) a ~~$2.2~~$30.7 million increase in non-interest expense mostly caused by additional operating costs related to the acquisition of USAB, including merger expenses of $3.2 million, and additional salary and employee benefit expense largely related to our expanding team of residential mortgage loan consultants and technology personnel, and (v) a $3.5 millionincrease in our provision for credit losses ~~largely caused~~mainly driven by ~~loan growth, and (v) an increase in income tax expense mainly due~~higher reserves allocated to ~~higher pre-tax income.~~impaired taxi medallion loans. See the "Net Interest Income," "Non-Interest Income," ~~and~~ "Non-Interest Expense", and "Income Taxes" sections below for more details on the items above impacting our second quarter ~~2017~~2018 results, as well as other items discussed elsewhere in this MD&A.

Economic Overview. During the second quarter of ~~2017,~~2018, real gross domestic product (GDP) grew at a ~~2.6~~ 4.1percent annual rate after advancing ~~1.2~~2.0 percent in the first quarter of ~~2017.~~2018. This represented the fastest rate of growth during a quarter since the third quarter of 2014. The pace of hiring was largely unchanged while private wages for all employees accelerated ~~although wage growth remained~~ somewhat ~~subdued. Overall price growth decelerated~~and measures of core inflation rose back near the Federal Reserve’s 2 percent target.Over recent months, the trade weighted U.S. dollar index advanced notably ~~from~~compared to the ~~beginning~~first quarter which may weigh on import and overall prices. Additionally, consumer spending and business investment advanced during the second quarter of the year ~~business fixed investment increased modestly, and~~while residential fixed investment ~~declined as borrowing costs~~ remained ~~higher compared to levels experienced in 2016.~~weak.

The civilian unemployment rate ~~decreased~~declined from ~~4.5~~4.1 percent ~~as of~~at March 31, ~~2017~~2018 to ~~4.4~~4.0 percent ~~as of~~at June 30, ~~2017 even as the number of people entering the workforce increased, demonstrating the continued strength of the labor market.~~2018. The pace of hiring ~~accelerated~~was mostly unchanged from athe prior linked quarter. The monthly average ~~of 166~~change in payrolls was approximately 211 thousand ~~for~~in the first quarter of ~~2017~~2018 compared to ~~194~~207 thousand in the second quarter of ~~2017. Measures of~~2018.

Based on the quarterly average, the 12-month change in wage growth ~~remain subdued relative~~accelerated to ~~the level of slack~~2.71 percent in the ~~labor market, as measured by~~second quarter of 2018 compared to 2.66 percent in the ~~unemployment rate,~~prior quarter which ~~may be contributing to~~represented the ~~softness in household consumption.~~highest level since the middle of 2009.

5049

Business investment, which includes investment in structures, equipment and software, advanced at a solid rate compared to the prior quarter. Private nonresidential fixed investment advanced 7.3 percent in the second quarter of ~~2017, the pace of U.S. existing home sales decreased~~2018 compared to an increase of 11.5 percent in the first quarter of 2018. Offsetting this, investment in residential structures remained weak, declining 1.1 percent from the previous ~~quarter as inventory~~quarter. Over recent periods, the weakness was largely attributed to lower levels ~~increased. Home prices have appreciated to a level above the prior peak experienced~~of new construction for multifamily housing units; however, in ~~2007. In addition, borrowing costs remained higher compared to levels experienced in 2016. The average interest rate of a 30 year fixed rate mortgage during~~ the second quarter of ~~2017~~this year investment in multifamily structures increased 10.8 percent. The weakness in the quarter was ~~3.98 percent compared~~largely attributed to ~~3.59 percent~~investment in ~~2016.~~ single family structures which declined 4.5 percent.

~~Growth in personal~~

Personal consumption of goods and services ~~continued to grow~~grew notably in the second quarter of ~~2017 although below~~2018. The pace of growth accelerated to 4.0 percent in the ~~pace experienced~~second quarter compared to 0.5 percent in ~~2016. Although Valley's auto loan origination volumes were somewhat lower~~the first quarter of the year. The acceleration was broad based including growth in both durable and nondurable goods. Home prices rose further in the second quarter of ~~2017, U.S. automobile sales increased, reflecting confidence in the health of the~~2018 while equity market volatility declined which may have benefited consumer after a weaker first quarter of 2017. Household balance sheets continue to improve as equity and home prices rose in the second quarter of 2017. Further price appreciation may support consumer spending in the second half of 2017.spending.

The Federal ~~Reserve’s~~ Open Market Committee ~~(FOMC) raised~~(FOMC or Committee) increased the target range for the federal funds rate to ~~1.00~~1.75 to ~~1.25~~2.00 percent at their June ~~2017 meeting, although~~2018 meeting. The Committee viewed that the risks to the economic outlook were roughly balanced between their two objectives of price stability and maximum employment. Further, the Committee ~~remained concerned about continued low levels of inflation and inflation expectations. In determining future policy actions, the FOMC will assess progress~~expects - ~~both~~based on realized and expected labor market conditions and inflation - ~~toward its objectives of maximum employment and 2-percent inflation.~~additional gradual increases in the target range for the federal funds rate. The FOMC ~~has maintained~~continued its ~~existing~~ policy, which was initiated in October 2017, of ~~reinvesting~~gradually reducing the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and will continue rolling over maturing Treasury securities at auction. This policy should help maintain accommodative financial conditions. The FOMC has continued to emphasize that changes in monetary policy will be data dependent.those securities.

The 10-year U.S. Treasury note yield ended the second quarter at ~~2.31~~2.85 percent, 911 basis points ~~lower~~higher compared with March 31, ~~2017.~~2018. The spread between the 2- and 10-year U.S. Treasury note yields ~~was 0.93~~ended the second quarter of 2018 at 0.33 percentage ~~at June 30, 2017, 20~~point, 14 basis points lower compared to ~~March~~the end of the first quarter of 2018 and 18 basis points lower compared to December 31, 2017.

~~While we are currently witnessing slightly higher interest rates on pending~~

On a year over year basis, loan ~~originations within most of our loan pipelines~~growth for all commercial banks in the ~~early stages~~U.S. accelerated modestly from 4.0 percent in the first quarter of 2018 to 4.8 percent in the second quarter despite higher borrowing costs and banks reporting weaker demand for most loan products. In the second quarter of the ~~third quarter of 2017, we do~~year, the Bank’s originations for its consumer products increased modestly. In addition, the Bank continued to see ~~some offset potentially coming in the form of higher deposit and borrowing costs in our primary markets. To that end, despite strong loan~~solid demand ~~particularly in~~for commercial real estate ~~lending,~~and construction loans across our geographies in the second quarter of 2018. However, should demand weaken for commercial loans and the yield curve further compress, these conditions may challenge our business operations and results, ~~could be challenged~~as highlighted throughout the remaining MD&A discussion below.

On a year over year basis, loan growth for all commercial banks in the ~~future due to several external factors, including, but not limited to, the decline~~U.S. accelerated modestly from 4.0 percent in the ~~spread between short-~~first quarter of 2018 to 4.8 percent in the second quarter despite higher borrowing costs and ~~long-term market interest rates and/or slower than expected economic activity within~~banks reporting weaker demand for most loan products. In the second quarter of the year, the Bank’s originations for its consumer products increased modestly. In addition, the Bank continued to see solid demand for commercial real estate and construction loans across our ~~markets.~~geographies in the second quarter of 2018. However, should demand weaken for commercial loans and the yield curve further compress, these conditions may challenge our business operations and results, as highlighted throughout the remaining MD&A discussion below.

Loans. Loans increased ~~by $261.3~~$681.9 million, or ~~6.0~~12.1 percent on an annualized basis, to ~~$17.7~~approximately $23.2 billion at June 30, ~~2017~~2018 from March 31, ~~2017 largely~~2018. The increase was mainly due to ~~a net increase of $259.3 million~~strong quarter over quarter organic growth in total commercial real estate loans, commercial and industrial loans and residential mortgage loans. ~~The overall loan growth was partially offset by a decrease~~During the second quarter of ~~$20.7~~2018, Valley also originated $219 million inof residential mortgage loans ~~caused by the transfer of approximately $122 million of performing 30-year fixed rate mortgages to~~for sale rather than held for investment. Residential mortgage loans held for sale totaled $32.7 million and $15.1 million at June 30, ~~2017. The sale of these loans is expected~~2018 and March 31, 2018, respectively.

We are optimistic that our lending activity will continue to be ~~completed~~brisk during the ~~third quarter~~remainder of ~~2017~~2018, despite the risk of potential setbacks in customer loan demand due to higher market interest rates or other negative market and ~~result~~economic factors. For the full year 2018, we currently expect to grow our loan portfolio in ~~a pre-tax gain~~the range of ~~approximately $4 million.~~8 to 10 percent, adjusted for the recent USAB acquisition and loan sales. However, there can be no assurance that we will

achieve such levels given the potential for unforeseen changes in consumer confidence, the economy and other market conditions, or that the overall loan portfolio balance will not decline from June 30, 2018. See further details on our loan activities 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 June 30, 2017,~~Our PCI ~~loans~~loan portfolio totaled ~~$1.5~~$4.6 billion, ~~and represented approximately 8.7~~or 20.0 percent of our total loan ~~portfolio.~~portfolio, at June 30, 2018 and is largely comprised of loans acquired from USAB.

Total ~~non-PCI loan portfolio delinquencies (including~~accruing past due loans (i.e., loans past due 30 days or more and ~~non-accrual loans) as a percentage~~still accruing interest) were $33.3 million, or 0.14 percent of total loans, ~~decreased to 0.47 percent~~ at June 30, ~~2017~~2018 and remained relatively unchanged as compared to ~~0.61~~$33.2 million, or 0.15 percent of total loans, at March 31, ~~2017 mostly due~~2018. Total non-performing assets, consisting of non-accrual loans, other real estate owned (OREO) and other repossessed assets increased $22.1 million to ~~a decrease in commercial loans past due 30 to 59 days. Non-performing assets (including non-accrual loans) increased by 5.9 percent to $54.6~~$97.1 million at June 30, ~~2017~~2018 as compared to ~~$51.5 million at~~ March 31, ~~2017~~2018 mainly due to ~~a $3.9~~an increase of $24.1 million ~~increase~~ in non-accrual loans, partially offset by a ~~moderate~~$2.0 million decline in ~~both foreclosed assets and~~OREO during the second quarter of 2018. The increase in non-accrual ~~debt securities.~~loans was primarily related to taxi medallion loans totaling $31.1 million. As a result, non-accrual loans increased to 0.36 percent of total loans at June 30, 2018 as compared to 0.27 percent of total loans at March 31, 2018.

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, as well as other market factors that may continue to negatively impact the performance of our ~~$140.5~~

$134.9 million taxi medallion loan portfolio, management cannot provide assurance that our non-performing assets will not increase from the levels reported as of June 30, ~~2017.~~2018. 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 second quarter of ~~2017~~2018 remained ~~relatively unchanged~~stable as compared to the first quarter of ~~2017. Non-interest~~2018 with moderate balance shifts to both non-interest bearing and time deposits ~~represented approximately 30 percent of total average~~from the other deposit categories. Average non-interest bearing deposits, ~~for the three months ended June 30, 2017, while~~ savings, NOW and money market ~~accounts were 51 percent~~deposits, and time deposits ~~were 19~~represented approximately 28 percent, 50 percent and 22 percent of ~~the~~ total ~~average deposits.~~deposits as of June 30, 2018, respectively. Overall, average deposits totaled ~~$17.3~~$21.8 billion for the second quarter of ~~2017~~2018 and decreased by ~~$78.3~~$35.5 million as compared to the first quarter of ~~2017~~2018, and actual ending balances for deposits decreased $319.1 million to approximately $21.6 billion at June 30, 2018 from March 31, 2018. The decreases in both average and ending deposit balances were largely due ~~in large part,~~ to ~~lower average savings,~~run-off within the NOW and money market deposit accounts caused, in part, by strong market competition for deposits, ~~partially offset by higher average balances~~as well as normal fluctuations in municipal and other escrow deposit account balances. In response, Valley implemented several new deposit gathering campaigns and strategies in the ~~other~~later part of the second quarter of 2018 and July 2018 to better position its deposit ~~categories.~~ offerings for both consumers and businesses.

Average ~~savings, NOW and money market deposits declined $246.4~~short-term borrowings increased $679.6 million to ~~$8.8~~$2.2 billion for the second quarter of ~~2017~~2018 as compared to the first quarter of 2017 due to fluctuations in commercial and retail deposit accounts, as well as a decrease of approximately $102 million in average brokered money market deposit account balances. Actual ending balances for deposits also decreased $81.1 million, or 0.5 percent, to approximately $17.3 billion at June 30, 2017 from March 31, 2017 mostly due to the aforementioned changes impacting average money market deposits during the second quarter of 2017. However, time deposits increased $153.9 million to $3.4 billion at June 30, 2017 as compared to March 31, 2017 largely due to new initiatives in our certificate of deposit portfolio which commenced in the second quarter of 2017.

Average short-term borrowings increased $274.8 million, or 17.6 percent, to $1.8 billion for the second quarter of 2017 as compared to the first quarter of 2017 mostly due to our increased use of short-term FHLB advances for additional liquidity to fund new loan volumes starting in the first quarter.2018. Actual ending balances for short-term borrowings also increased ~~$89.5 million~~$1.3 billion to ~~$1.7~~$2.9 billion at June 30, ~~2017~~2018 as compared to March 31, ~~2017 mostly~~2018. Both the increases in average and ending short-term borrowings were largely due to a new ~~$100 million repo borrowing~~FHLB advances used ~~as alternate~~for normal loan funding activity and liquidity purposes, and supplementing the expected short term decline in ~~May 2017.~~deposits at June 30, 2018.

Average long-term borrowings (which include junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition) ~~increased~~decreased by $148.4 million to ~~$1.7~~$2.3 billion for the second quarter of ~~2017 and increased$185.4 million~~2018 as compared to the first quarter of ~~2017.~~2018. Actual ending balances for long-term borrowings also ~~increased $185.6~~decreased $249.6 million to ~~$1.8~~$2.1 billion at June 30, ~~2017~~2018 as compared to March 31, ~~2017.~~2018. Both the ~~increases~~decreases in average and ending ~~balances~~long-term borrowings were ~~primarily~~ due, in part, to ~~the new~~a few FHLB ~~advances with contractual terms between 13~~advance maturities and ~~15 months.~~a moderate shift to short-term borrowings at June 30, 2018.

Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Return on average assets	0.86	%	0.72	%	0.83	%	0.69	%	0.98	%	0.86	%	0.78	%	0.83	%
Return on average assets, as adjusted									1.01		0.86		0.93		0.83

Return on average shareholders’ equity	8.27		6.97		7.98		6.75		8.88		8.27		6.99		7.98
Return on average shareholders’ equity, as adjusted									9.17		8.27		8.33		7.98

Return on average tangible shareholders’ equity (ROATE)	11.88		10.38		11.48		10.07		13.76		11.88		10.82		11.48
ROATE, as adjusted									14.21		11.87		12.91		11.48

Adjusted return on average assets, adjusted return on average shareholders' equity, ROATE ~~which is a~~and adjusted ROATE included in the table above are 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
June 30, Six Months Ended
June 30,
2017 2016 2017 2016
($ in thousands)
Net income $ 50,065
$ 39,027
$ 96,160
$ 75,214
Average shareholders’ equity 2,420,848
2,238,510
2,410,063
2,229,040
Less: Average goodwill and other intangible assets (734,616 ) (735,115 ) (735,393 ) (735,276 )
Average tangible shareholders’ equity $ 1,686,232
$ 1,503,395
$ 1,674,670
$ 1,493,764
Annualized ROATE 11.88 % 10.38 % 11.48 % 10.07 %

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

Adjusted net income is computed as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018		2017
	($ in thousands)
Net income, as reported	$	72,802	$	50,065		$	114,767	$	96,160
Add: Losses (gains) on securities transactions (net of tax)	26		(13		)	574		1
Add: Legal expenses (litigation reserve impact only, net of tax)	—		—			7,520		—
Add: Merger related expenses (net of tax)*	2,326		—			12,014		—
Add: Income Tax Expense (USAB charge impact only)	—		—			2,000		—
Net income, as adjusted	$	75,154	$	50,052		$	136,875	$	96,161

* Merger related expenses are primarily within salary and employee benefits and other expense.

~~All of~~Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	($ in thousands)
Net income, as adjusted	$	75,154		$	50,052		$	136,875		$	96,161
Average assets	$	29,778,210		$	23,396,259		$	29,536,301		$	23,197,377
Annualized return on average assets, as adjusted	1.01		%	0.86		%	0.93		%	0.83		%

Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	($ in thousands)
Net income, as adjusted	$	75,154		$	50,052		$	136,875		$	96,161
Average shareholders' equity	$	3,279,616		$	2,420,848		$	3,284,687		$	2,410,063
Annualized return on average shareholders' equity, as adjusted	9.17		%	8.27		%	8.33		%	7.98		%

ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	($ in thousands)
Net income	$	72,802		$	50,065		$	114,767		$	96,160
Net income, as adjusted	$	75,154		$	50,052		$	136,875		$	96,161
Average shareholders’ equity	$	3,279,616		$	2,420,848		$	3,284,687		$	2,410,063
Less: Average goodwill and other intangible assets	(1,163,575		)	(734,616		)	(1,163,901		)	(735,393		)
Average tangible shareholders’ equity	$	2,116,041		$	1,686,232		$	2,120,786		$	1,674,670
Annualized ROATE	13.76		%	11.88		%	10.82		%	11.48		%
Annualized ROATE, as adjusted	14.21		%	11.87		%	12.91		%	11.48		%

In addition to the items used to calculate the net income, as adjusted, in the tables above, ~~ratios are,~~our net income is, 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”~~Income" section below for more details.

Net Interest Income

Net interest income consists of interest income and dividends earned on interest earning assets, less interest expense on interest bearing liabilities, and represents the main source of income for Valley. For the three and six months ended June 30, 2018, Valley elected to reclassify fee income related to derivative interest rate swaps executed with commercial loan customers totaling $3.3 million and $7.7 million, respectively, from interest and fees on loans to other non-interest income within the presentation of our net interest margin below and consolidated financial statements. The applicable prior period amounts have also been reclassified to conform to this current presentation. See further discussion of the swap fees in the "Non-Interest Income" section below.

Net interest income on a tax equivalent basis totaling ~~$171.1~~$212.3 million for the second quarter of ~~2017~~2018 increased ~~$17.6~~$45.3 million and $3.1 million as compared to the second quarter of ~~2016~~2017 and first quarter of 2018, respectively. The increase as compared to the second quarter of 2017 was largely due to the USAB acquisition effective January 1, 2018. Interest income on a tax equivalent basis increased ~~$6.4~~$12.6 million to $281.6 million for the second quarter of 2018 as compared to the first quarter of 2018 mainly due to a $537.2 million increase in average loans and an 8 basis point increase in the yield on average loans. Interest expense of $69.4 million for the second quarter of 2018 increased $9.5 million as compared to the first quarter of 2017. Interest income on a tax equivalent basis increased $12.0 million to $213.3 million for the second quarter of 2017 as compared to the first quarter of 2017 mainly due to a 16 basis point increase in the yield on average loans, and increases of $388.6 million and $131.4 million in average loans and taxable investments, respectively. The increase in yield on average loans for the second quarter of 2017 as compared to the linked first quarter was2018 largely due to higher ~~market~~ interest rates on ~~new loan originations,~~many of our interest bearing deposit products and short-term borrowings, as well as a ~~$3.5~~$679.6 million increase in periodic commercial loan fee income related to derivative interest rate swaps executed with customers. Interest expense of $42.2 million for the second quarter of 2017 increased $5.6 million as compared to the first quarter of 2017. During the second quarter of 2017, our interest expense on deposits increased by approximately $3.1 million from the linked first quarter largely due to an increase inaverage short-term market interest rates, a $101.7 million decrease in our average low cost brokered money market deposit account balances and one more day during the second quarter. Interest expense on short-term and long-term borrowings also increased $1.6 million and $840 thousand, respectively, in the second quarter of 2017 as compared to the first quarter of 2017 due, in part, to increases of $274.8 million and $185.4 million in the average balances, respectively. Average short-term and long-term borrowings increased as compared to the first quarter of 2017 mostly due to new FHLB borrowings used to offset a decline in deposits and fund new loans during the second quarter of 2017.borrowings.

Average interest earning assets increased $5.8 billion to ~~$21.4~~$27.3 billion for the second quarter of ~~2017~~2018 as compared to ~~approximately $19.5 billion for~~ the second quarter of ~~2016~~2017 largely due to $3.7 billion and $522.6 million of loans and investments, respectively, acquired from USAB on January 1, 2018, as well as strong organic ~~and purchased~~ loan growth over the last 12 month period. The broad-based loan growth within several loan categories since June 30, 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) over the last 12 months ended June 30, 2017. Compared to the first quarter of 2017, average interest earning assets increased by $467.2 million from $20.9 billion largely due to continued loan growth. Average loans increased $388.6 million to $17.7 billion for the second quarter of 2017 from the first quarter of 2017 mostly due to organic loan growth within the commercial real estate and other consumer loan portfolios. Average total investments increased $99.7 million during the second quarter of 2017 and helped drive a $21.1 million decline in average overnight cash balances, along with normal

~~fluctuations in overnight cash balances~~first quarter of 2018, average interest earning assets increased by $506.2 million from $26.8 billion largely due to the ~~timing~~organic loan growth during the first half of 2018. Average loans increased $537.2 million to $22.8 billion for the second quarter of 2018 from the first quarter of 2018 mainly due to loan ~~originations~~growth within the commercial real estate loan, commercial and ~~additional borrowings to fund such loans.~~industrial loans and residential mortgage loan portfolios.

Average interest bearing liabilities increased ~~$1.3~~$4.5 billion to ~~$15.6~~$20.1 billion for the second quarter of ~~2017~~2018 as compared to the second quarter of ~~2016~~2017 mainly due to $3.4 billion of interest bearing liabilities assumed in the USAB acquisition and deposit growth primarily from time deposit and money market account initiatives, as well as greater use of both ~~low cost brokered money market deposits~~short- and ~~short-term~~long-term FHLB advances as part of our overall funding and liquidity strategy over the last 12 month period. Compared to the first quarter of ~~2017,~~2018, average interest bearing liabilities increased ~~$325.8~~$439.3 million in the second quarter of ~~2017~~2018 mostly due to ~~higher levels~~greater use of ~~FHLB~~short-term borrowings and higher average time ~~deposit account balances,~~deposits, partially offset by ~~lower~~run-off in the NOW and money market deposit ~~account~~accounts, including some seasonal fluctuations in municipal and other escrow 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 ~~3.20~~3.11 percent for the second quarter of 2018 decreased by 1 basis point and 2 basis points from 3.12 percent and 3.13 percent for the second quarter of 2017 ~~increased by 6 basis points as compared to both the second quarter of 2016~~ and first quarter of ~~2017.~~2018, respectively. The yield on average interest earning assets increased by 1411 basis points on a linked quarter basis mostly due to higher yields on both average loans and taxable investments, as well as one more day during the ~~higher yield on average loans.~~second quarter of 2018. The yield on average loans increased 16by 8 basis points to ~~4.20~~4.34 percent for the second quarter of ~~2017 and was positively impacted by the aforementioned increases in market interest rates and periodic commercial loan fees~~2018 as compared to the first quarter of ~~2017.~~2018 due to the high volume of new loan originations at current market rates. The yield on average taxable ~~investment~~ securities increased ~~by 6~~28 basis points to ~~2.84~~3.02 percent for the second quarter of ~~2017 from~~2018 as compared to the first quarter of ~~2017 largely~~2018 due, in part, to ~~a decline in premium amortization expense caused by lower principal repayments~~purchases of higher yielding securities over the last six months and the positive impact of increased market interest rates on ~~residential mortgage-backed securities.~~the variable rate portion of our securities portfolio. The overall cost of average interest bearing liabilities increased ~~by 12~~16 basis points to 1.08 percent during the second quarter of 2017 from 0.96 percent in the linked first quarter of 2017. The increase was due, in part, to higher interest rates on most deposits and short-term borrowings and one more day during the second quarter of 2017, partially offset by a 19 basis point decrease in the cost of long-term borrowings mostly caused by new lower cost FHLB borrowings. Our cost of total deposits was 0.531.38 percent for the second quarter of ~~2017~~2018 as compared to ~~0.45~~the linked first quarter of 2018 due to 12 and 47 basis point increases in the cost of average interest bearing deposits and short-term borrowings, respectively, largely driven by higher market interest rates. Our cost of total average deposits was 0.76 percent for the second quarter of 2018 as compared to 0.68 percent for the first quarter of ~~2017.~~2018.

Looking forward, we expect modest pressure on the level of our net interest margin for the third quarter of ~~2017~~2018 as compared to the second quarter of 2018 due to strong market competition for deposits and the need to fund our targeted loan growth. However, our net interest margin may decline as compared to the second quarter of ~~2017~~2018 due to a ~~decline in variable interest income items, such as derivative swap and loan fee income, as well as a~~ multitude of other 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, further repayment of higher yielding interest earning assets, and the re-pricing risk related to interest bearing deposits and short-term borrowings due to a rise in short-term market interest rates. 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 current level of weighted average interest rates on new loan originations, as well as the higher rates on variable rate loans due to the increase in both the U.S. and Valley prime rates (to ~~4.25~~5.00 percent and ~~5.25~~5.875 percent, respectively) in response to the Federal Reserve's 25 basis point increase in the targeted federal funds rate in ~~mid-June 2017~~Mid-June 2018 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 third quarter of 2017) is anticipated to positively impact our future net interest income.

The following table reflects the components of net interest income for the three months ended June 30, ~~2017,~~2018, March 31, ~~2017~~2018 and June 30, ~~2016:~~2017:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and

Net Interest Income on a Tax Equivalent Basis


	Three Months Ended																								Three Months Ended
	June 30, 2017								March 31, 2017								June 30, 2016								June 30, 2018								March 31, 2018								June 30, 2017
	Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
	($ in thousands)																								($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)	$	17,701,676		$	185,863		4.20	%	$	17,313,100		$	175,017		4.04	%	$	16,252,915		$	169,430		4.17	%	$	22,840,235		$	247,691		4.34	%	$	22,302,991		$	237,587		4.26	%	$	17,701,676		$	181,723		4.11	%
Taxable investments (3)	2,967,729			21,065			2.84		2,836,300			19,740			2.78		2,433,896			15,572			2.56		3,438,842			25,950			3.02		3,401,743			23,262			2.74		2,967,805			21,065			2.84
Tax-exempt investments (1)(3)	581,263			6,066			4.17		612,946			6,201			4.05		585,948			5,745			3.92		750,896			7,138			3.80		741,001			7,242			3.91		581,263			6,066			4.17
Federal funds sold and other interest bearing deposits	166,003			279			0.67		187,118			331			0.71		264,813			296			0.45		226,986			839			1.48		305,071			926			1.21		166,003			279			0.67
Total interest earning assets	21,416,671			213,273			3.98		20,949,464			201,289			3.84		19,537,572			191,043			3.91		27,256,959			281,618			4.13		26,750,806			269,017			4.02		21,416,747			209,133			3.91
Allowance for loan losses	(116,254		)						(115,300		)						(107,892		)						(134,741		)						(123,559		)						(116,254		)
Cash and due from banks	231,960								241,346								294,046								274,557								259,190								231,960
Other assets	1,879,853								1,938,949								2,003,679								2,428,459								2,423,553								1,879,853
Unrealized (losses) gains on securities available for sale, net	(15,971		)						(18,173		)						2,972								(47,024		)						(18,287		)						(16,047		)
Total assets	$	23,396,259							$	22,996,286							$	21,730,377							$	29,778,210							$	29,291,703							$	23,396,259
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits	$	8,803,028		$	12,715		0.58	%	$	9,049,446		$	10,183		0.45	%	$	8,369,553		$	9,961		0.48	%	$	10,978,067		$	24,756		0.90	%	$	11,175,982		$	22,317		0.80	%	$	8,803,028		$	12,715		0.58	%
Time deposits	3,290,407			10,166			1.24		3,178,452			9,553			1.20		3,070,113			9,223			1.20		4,700,456			16,635			1.42		4,594,368			14,616			1.27		3,290,407			10,166			1.24
Total interest bearing deposits	12,093,435			22,881			0.76		12,227,898			19,736			0.65		11,439,666			19,184			0.67		15,678,523			41,391			1.06		15,770,350			36,933			0.94		12,093,435			22,881			0.76
Short-term borrowings	1,837,809			5,516			1.20		1,563,000			3,901			1.00		1,218,154			3,120			1.02		2,166,837			10,913			2.01		1,487,272			5,732			1.54		1,837,809			5,516			1.20
Long-term borrowings (4)	1,679,691			13,790			3.28		1,494,273			12,950			3.47		1,623,136			15,269			3.76		2,284,132			17,062			2.99		2,432,543			17,232			2.83		1,679,691			13,790			3.28
Total interest bearing liabilities	15,610,935			42,187			1.08		15,285,171			36,587			0.96		14,280,956			37,573			1.05		20,129,492			69,366			1.38		19,690,165			59,897			1.22		15,610,935			42,187			1.08
Non-interest bearing deposits	5,195,052								5,138,870								5,013,821								6,168,059								6,111,684								5,195,052
Other liabilities	169,424								173,086								197,090								201,043								200,039								169,424
Shareholders’ equity	2,420,848								2,399,159								2,238,510								3,279,616								3,289,815								2,420,848
Total liabilities and shareholders’ equity	$	23,396,259							$	22,996,286							$	21,730,377							$	29,778,210							$	29,291,703							$	23,396,259
Net interest income/interest rate spread (5)				$	171,086		2.90	%				$	164,702		2.88	%				$	153,470		2.86	%				$	212,252		2.75	%				$	209,120		2.80	%				$	166,946		2.83	%
Tax equivalent adjustment				(2,126		)						(2,173		)						(2,015		)						(1,500		)						(1,522		)						(2,126		)
Net interest income, as reported				$	168,960							$	162,529							$	151,455							$	210,752							$	207,598							$	164,820
Net interest margin (6)							3.16	%							3.10	%							3.10	%							3.09	%							3.10	%							3.08	%
Tax equivalent effect							0.04	%							0.04	%							0.04	%							0.02	%							0.03	%							0.04	%
Net interest margin on a fully tax equivalent basis (6)							3.20	%							3.14	%							3.14	%							3.11	%							3.13	%							3.12	%

The following table reflects the components of net interest income for the six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:

Analysis of Average Assets, Liabilities and Shareholders’ Equity and

Net Interest Income on a Tax Equivalent Basis



	Six Months Ended
	June 30, 2018								June 30, 2017
	Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
	($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)	$	22,573,097		$	485,278		4.30	%	$	17,508,461		$	356,079		4.07	%
Taxable investments (3)	3,420,395			49,212			2.88		2,902,505			40,805			2.81
Tax-exempt investments (1)(3)	745,976			14,380			3.86		597,017			12,267			4.11
Federal funds sold and other interest bearing deposits	265,813			1,765			1.33		176,502			610			0.69
Total interest earning assets	27,005,281			550,635			4.08		21,184,485			409,761			3.87
Allowance for loan losses	(129,181		)						(115,780		)
Cash and due from banks	266,916								236,627
Other assets	2,426,020								1,909,238
Unrealized (losses) gains on securities available for sale, net	(32,735		)						(17,193		)
Total assets	$	29,536,301							$	23,197,377
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits	11,076,478			47,073			0.85	%	8,925,556			22,898			0.51	%
Time deposits	4,647,705			31,251			1.34		3,234,739			19,719			1.22
Total interest bearing deposits	15,724,183			78,324			1.00		12,160,295			42,617			0.70
Short-term borrowings	1,828,932			16,645			1.82		1,701,164			9,417			1.11
Long-term borrowings (4)	2,357,928			34,294			2.91		1,587,494			26,740			3.37
Total interest bearing liabilities	19,911,043			129,263			1.30		15,448,953			78,774			1.02
Non-interest bearing deposits	6,140,027								5,167,116
Other liabilities	200,544								171,245
Shareholders’ equity	3,284,687								2,410,063
Total liabilities and shareholders’ equity	$	29,536,301							$	23,197,377
Net interest income/interest rate spread (5)				$	421,372		2.78	%				$	330,987		2.85	%
Tax equivalent adjustment				(3,022		)						(4,299		)
Net interest income, as reported				$	418,350							$	326,688
Net interest margin (6)							3.10	%							3.08	%
Tax equivalent effect							0.02	%							0.04	%
Net interest margin on a fully tax equivalent basis (6)							3.12	%							3.12	%

Six Months Ended
June 30, 2017 June 30, 2016

Average
Balance
Interest
Average
Rate

Average
Balance
Interest
Average
Rate
($ in thousands)
Assets
Interest earning assets:
Loans (1)(2) $ 17,508,461
$ 360,880
4.12 % $ 16,123,229
$ 335,506
4.16 %
Taxable investments (3) 2,902,378
40,805
2.81
2,465,941
31,051
2.52
Tax-exempt investments (1)(3) 597,017
12,267
4.11
577,607
11,422
3.95
Federal funds sold and other interest bearing deposits 176,502
610
0.69
345,745
653
0.38
Total interest earning assets 21,184,358
414,562
3.91
19,512,522
378,632
3.88
Allowance for loan losses (115,780 ) (107,466 )
Cash and due from banks 236,627
295,384

Other assets 1,909,238
2,008,389

Unrealized losses on securities available for sale, net (17,066 ) (3,501 )
Total assets $ 23,197,377
$ 21,705,328

Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits 8,925,556
22,898
0.51 % 8,351,921
19,204
0.46 %
Time deposits 3,234,739
19,719
1.22
3,098,978
18,808
1.21
Total interest bearing deposits 12,160,295
42,617
11,450,899
38,012
0.66
Short-term borrowings 1,701,164
9,417
1.11
1,139,583
4,992
0.88
Long-term borrowings (4) 1,587,494
26,740
3.37
1,717,846
32,013
3.73
Total interest bearing liabilities 15,448,953
78,774
1.02
14,308,328
75,017
1.05
Non-interest bearing deposits 5,167,116
4,966,142

Other liabilities 171,245
201,818

Shareholders’ equity 2,410,063
2,229,040

Total liabilities and shareholders’ equity $ 23,197,377
$ 21,705,328

Net interest income/interest rate spread (5) $ 335,788
2.89 % $ 303,615
2.83 %
Tax equivalent adjustment (4,299 ) (4,007 )
Net interest income, as reported $ 331,489
$ 299,608

Net interest margin (6) 3.13 % 3.07 %
Tax equivalent effect 0.04 % 0.04 %
Net interest margin on a fully tax equivalent basis (6) 3.17 % 3.11 %


(1)	Interest income is presented on a tax equivalent basis using a 21 percent and 35 percent federal tax ~~rate.~~rate for 2018 and 2017, respectively.


(2)	Loans are stated net of unearned income and include non-accrual loans.


(3)	The yield for securities that are classified as available for sale is based on the average historical amortized cost.


(4)	Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated

statements of financial condition.


(5)	Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.


(6)	Net interest income as a percentage of total average interest earning assets.

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

Change in Net Interest Income on a Tax Equivalent Basis


	Three Months Ended June 30, 2017 Compared to June 30, 2016									Six Months Ended June 30, 2017 Compared to June 30, 2016									Three Months Ended June 30, 2018 Compared to June 30, 2017							Six Months Ended June 30, 2018 Compared to June 30, 2017
	Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume		Change Due to Rate			Total Change		Change Due to Volume		Change Due to Rate			Total Change
	(in thousands)																		(in thousands)
Interest Income:
Loans*	$	13,999		$	2,434		$	16,433		$	27,396		$	(2,022	)	$	25,374		$	55,242	$	10,726		$	65,968	$	107,911	$	21,288		$	129,199
Taxable investments	3,665			1,828			5,493			5,882			3,872			9,754			3,494		1,391			4,885		7,432		975			8,407
Tax-exempt investments*	(46		)	367			321			391			454			845			1,649		(577		)	1,072		2,909		(796		)	2,113
Federal funds sold and other interest bearing deposits	(134		)	117			(17		)	(418		)	375			(43		)	131		429			560		409		746			1,155
Total increase in interest income	17,484			4,746			22,230			33,251			2,679			35,930			60,516		11,969			72,485		118,661		22,213			140,874
Interest Expense:
Savings, NOW and money market deposits	537			2,217			2,754			1,376			2,318			3,694			3,681		8,360			12,041		6,491		17,684			24,175
Time deposits	675			268			943			827			84			911			4,830		1,639			6,469		9,331		2,201			11,532
Short-term borrowings	1,791			605			2,396			2,883			1,542			4,425			1,127		4,270			5,397		755		6,473			7,228
Long-term borrowings and junior subordinated debentures	517			(1,996		)	(1,479		)	(2,326		)	(2,947		)	(5,273		)	4,605		(1,333		)	3,272		11,594		(4,040		)	7,554
Total increase in interest expense	3,520			1,094			4,614			2,760			997			3,757			14,243		12,936			27,179		28,171		22,318			50,489
Total increase in net interest income	$	13,964		$	3,652		$	17,616		$	30,491		$	1,682		$	32,173		$	46,273	$	(967	)	$	45,306	$	90,490	$	(105	)	$	90,385


*	Interest income is presented on a tax equivalent basis using a 21 percent and 35 percent federal tax ~~rate.~~ rate for 2018 and 2017, respectively.

Non-Interest Income

Non-interest income increased $9.2 million and $15.8 million for the three and six months ended June 30, 2018 as compared to the same periods of 2017. The following table presents the components of non-interest income for the three and six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017			2016		2018			2017		2018			2017
	(in thousands)										(in thousands)
Trust and investment services	$	2,800	$	2,544		$	5,544		$	4,984	$	3,262		$	2,800	$	6,492		$	5,544
Insurance commissions	4,358		4,845			9,419			9,553		4,026			4,358		7,847			9,419
Service charges on deposit accounts	5,342		5,094			10,578			10,197		6,679			5,342		13,932			10,578
Gains (losses) on securities transactions, net	22		(3		)	(1		)	268
(Losses) gains on securities transactions, net											(36		)	22		(801		)	(1		)
Fees from loan servicing	1,831		1,561			3,646			3,155		2,045			1,831		4,268			3,646
Gains on sales of loans, net	4,791		3,105			8,919			4,900		7,642			4,791		14,395			8,919
Bank owned life insurance	1,701		1,818			4,164			3,781		2,652			1,701		4,415			4,164
Other	3,845		5,300			7,480			8,874		11,799			7,985		19,772			12,281
Total non-interest income	$	24,690	$	24,264		$	49,749		$	45,712	$	38,069		$	28,830	$	70,320		$	54,550

~~Non-interest income~~Insurance commissions decreased $1.6 million for the six months ended June 30, 2018 as compared to the same period in 2017 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts increased ~~$426 thousand~~$1.3 million and ~~$4.0~~$3.4 million for the three and six months ended June 30, ~~2017, respectively,~~2018 as compared ~~with~~to the same periods in ~~2016 primarily due to an increase in net gains~~2017 mostly driven by the acquisition of USAB on ~~sales of loans, partially offset by lower other non-interest income.~~January 1, 2018.

Net gains on sales of loans increased ~~$1.7~~$2.9 million and ~~$4.0~~$5.5 million for the three and six months ended June 30, ~~2017, respectively,~~2018 as compared to the same periods in ~~2016. The increase was~~2017 largely ~~driven by the completion~~due to a higher volume of ~~the sale of approximately $104 million of performing 30-year fixed rate mortgages transferred to~~residential mortgage loans ~~held~~originated for sale ~~at March 31,~~and better spreads resulting in higher gains on transactions executed in the second quarter of 2018. Residential mortgage loan originations (including both new and refinanced loans) increased $242.8 million to $437.2 million for the second quarter of 2018 from $194.4 million for the second quarter of 2017. During the second quarter of ~~2017,~~2018, we sold ~~a total~~$195 million of ~~$159.9~~residential mortgages originated for sale as compared to $160 million of residential mortgage loans ~~(including $115.1 million of loans held for sale at March 31, 2017) as compared to $54.0 million in~~sold during the second quarter of ~~2016.~~2017. During the six months ended June 30, ~~2017,~~2018, we sold ~~$296.5~~$430 million of residential mortgage loans as compared to ~~$182.8~~$297 million for the same period one year ago. Our net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each period end. The net change in the fair value of loans held for sale resulted in net losses of ~~$157~~$432 thousand and ~~$849~~net gains of $167 thousand for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and net gains of ~~$848~~$265 thousand and ~~$123~~$848 thousand for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Other non-interest income ~~decreased $1.5~~increased $3.8 million and ~~$1.4~~$7.5 million for the three and six months ended June 30, ~~2017~~2018 as compared to the same periods in ~~2016.~~2017. The ~~decrease~~increase during the quarter was due, in part, to the aggregate effect of changes in the FDIC loss-share receivable which amounted to a net gain of $745 thousand for the second quarter of 2018 as compared to net reductions of $452 thousand for the same quarter in 2017, as well as a $699 thousand insurance recovery. The increase for the first half of 2018 as compared to the same period of 2017 was largely due to a ~~decline~~$2.9 million increase in ~~net gains on sales of assets~~fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $7.7 million for the six months ended June 30, 2018 as compared to $4.8 million for the six months ended June 30, 2017, and the aforementioned items for the second quarter of ~~2017 as compared to the same quarter in 2016 caused by net gains from the sale of two closed branch locations recognized in~~2018. Swap fee income totaled $4.4 million and $4.1 million for the second ~~quarter~~quarters of ~~2016.~~2018 and 2017, respectively.

Non-Interest Expense

Non-interest expense increased $30.7 million and $83.5 million for the three and six months ended June 30, 2018 as compared to the same periods of 2017. The following table presents the components of non-interest expense for the three and six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:

Three Months Ended
June 30, Six Months Ended
June 30,
2017 2016 2017 2016
(in thousands)
Salary and employee benefits expense $ 61,338
$ 56,072
$ 125,054
$ 116,331
Net occupancy and equipment expense 22,609
22,168
45,644
44,957
FDIC insurance assessment 4,928
5,095
10,055
10,194
Amortization of other intangible assets 2,562
2,928
5,098
5,777
Professional and legal fees 4,302
5,472
8,997
9,367
Amortization of tax credit investments 7,732
7,646
13,056
14,910
Telecommunications expense 2,707
2,294
5,366
4,680
Other 13,061
18,128
26,921
31,812
Total non-interest expense $ 119,239
$ 119,803
$ 240,191
$ 238,028

~~Non-interest expense decreased $564 thousand for the three months ended June 30, 2017 and increased~~$2.2 million for the six months ended June 30, 2017 as compared with the same periods in 2016. The increase during the first half of 2017 as compared to the 2016 period was mainly due to higher salary and employee benefits expense, partially offset by decreases in other non-interest expense and amortization of tax credit investments.



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)
Salary and employee benefits expense	$	78,944	$	63,564	$	172,236	$	129,491
Net occupancy and equipment expense	26,901		22,609		54,825		45,644
FDIC insurance assessment	8,044		4,928		13,542		10,055
Amortization of other intangible assets	4,617		2,562		8,910		5,098
Professional and legal fees	5,337		4,302		22,384		8,997
Amortization of tax credit investments	4,470		7,732		9,744		13,056
Telecommunications expense	3,015		2,707		6,609		5,366
Other	18,588		10,835		35,418		22,484
Total non-interest expense	$	149,916	$	119,239	$	323,668	$	240,191

Salary and employee benefits expense increased ~~$5.3~~$15.4 million and ~~$8.7~~$42.7 million for the three and six months ended June 30, ~~2017~~2018 as compared to the same periods in ~~2016 mainly~~2017. The increases were due, to increased salaries and cash incentive compensation for the three and six months ended June 30, 2017, respectively. In addition, health insurance expenses increased by $728 thousand and $985 thousand during the three and six months ended June 30, 2017, respectively, as compared with the same periods in 2016. Our health care expenses are at times volatile due to self-funding of a large portion of our insurance plan and these medical expenses can and will fluctuate in the future based on our plan experience. The increase in salary and employee benefits expense during the six months ended June 30, 2017 was also attributable to a $1.6 million increase in stock-based compensation expense as comparedpart, to the ~~same period of 2016.~~

~~Professional and legal fees decreased $1.2 million for the three months ended June 30, 2017 as compared~~additional staffing costs related to the ~~same period~~USAB acquisition, including $9.8 million of change in ~~2016 largely due to a decrease in legal fees related to general corporate matters~~control, severance and ~~litigation.~~

~~Amortization of tax credit investments decreased $1.9 million~~retention expenses for the six months ended June 30, ~~2017~~2018, as ~~compared with~~well as increases in both cash and stock-based incentive compensation expense. In addition to normal increases in annual compensation, Valley has also increased its investment in the ~~same period in 2016 mainly due to~~technology and home mortgage consultant teams over the lower level of net tax credit investments held at June 30, 2017 as compared to June 30, 2016. These investments, while negatively impacting the level of our operating expenses and efficiency ratio, produce tax credits that reduce our income tax expense and effective tax rate. See Note 13 to the consolidated financial statements for more details regarding our tax credit investments.last 12-month period.

~~Other non-interest income expenses decreased $5.1~~Net occupancy and equipment expense increased $4.3 million and ~~$4.9~~$9.2 million for the three and six months ended June 30, ~~2017, respectively,~~2018 as compared ~~with~~to the same periods in ~~2016~~2017 mainly due to ~~declines~~higher technology equipment related expense and increased occupancy and other costs related to the 29-branch network acquired from USAB. Net occupancy and equipment expense included $1.1 million of USAB merger related expenses for the six months ended June 30, 2018. Merger expenses within the category were immaterial for the second quarter of 2018.

Professional and legal fees increased $13.4 million for the six months ended June 30, 2018 as compared to the same period in ~~both operating losses and branch closing costs and~~2017 mainly due to a $10.5 million charge related to an increase in ~~net gains on~~our litigation reserves during the first quarter of 2018, as well as $815 thousand of merger related expenses in the first six months of 2018. See Note 16 to the consolidated financial statements for additional information regarding litigation matters.

Amortization of other ~~real estate owned.~~intangible assets increased $2.1 million and $3.8 million for the three and six months ended June 30, 2018as compared to the same periods in 2017. The increases were mainly due to higher amortization expense of core deposit intangibles (CDI) during the first six months of 2018 caused by $45.9 million of such intangibles generated by the USAB acquisition. See Note 10 to the consolidated financial statements for more details.

Other non-interest expense increased $7.8 million and $12.9 million for the three and six months ended June 30, 2018 as compared to the same periods in 2017 mainly due to moderate increases in several significant components of other expense, such as data processing, travel and entertainment, debit card and ATM expense, postage, and stationery and print expenses during the second quarter of 2018 largely caused by our growth both organically and through the acquisition of USAB. Other non-interest expense also included $2.6 million and $5.0 million of USAB merger related expenses for the three and six months ended June 30, 2018.

Efficiency ~~Ratios~~Ratio

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

expense resulting from litigation reserves and merger expenses related to the acquisition of USAB.

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	($ in thousands)												($ in thousands)
Total non-interest expense	$	119,239		$	119,803		$	240,191		$	238,028		$	149,916		$	119,239		$	323,668		$	240,191
Less: Amortization of tax credit investments	7,732			7,646			13,056			14,910
Less: Amortization of tax credit investments (pre-tax)													(4,470		)	(7,732		)	(9,744		)	(13,056		)
Less: Legal expenses (litigation reserve impact only, pre-tax)													—			—			(10,500		)	—
Less: Merger related expenses (pre-tax)													(3,248		)	—			(16,776		)	—
Total non-interest expense, adjusted	$	111,507		$	112,157		$	227,135		$	223,118		$	142,198		$	111,507		$	286,648		$	227,135

Net interest income	$	168,960		$	151,455		$	331,489		$	299,608		$	210,752		$	164,820		$	418,350		$	326,688
Total non-interest income	24,690			24,264			49,749			45,712			38,069			28,830			70,320			54,550
Total net interest income and non-interest income	$	193,650		$	175,719		$	381,238		$	345,320		$	248,821		$	193,650		$	488,670		$	381,238
Efficiency ratio	61.57		%	68.18		%	63.00		%	68.93		%	60.25		%	61.57		%	66.23		%	63.00		%
Efficiency ratio, adjusted	57.58		%	63.83		%	59.58		%	64.61		%	57.15		%	57.58		%	58.66		%	59.58		%

Management continuously monitors its expenses in an effort to optimize Valley's performance. Based upon these efforts and our revenue goals, we seek to achieve an adjusted efficiency ratio (as defined above) of 54 percent or less by the fourth quarter of 2018. However, we can provide no assurance that our adjusted efficiency ratio will meet our target or remain at the level reported for the third quarter of 2018.

Income Taxes

Effective January 1, 2018, the federal corporate income tax rate decreased from 35 percent to 21 percent under the Tax Act. Income tax expense ~~was $20.7 million and $15.5~~totaled $19.0 million for the ~~three months ended June 30,~~second quarter of 2018 as compared to $13.2 million and $20.7 million for the first quarter of 2018 and second quarter of 2017, ~~and 2016,~~ respectively, and ~~$38.8~~$32.1 million and ~~$29.8~~$38.8 million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Our effective tax rate was ~~29.3~~20.7 percent, 23.9 percent and ~~28.4~~29.3 percent for the ~~three months ended June 30,~~second quarter of 2018, first quarter of 2018, and second quarter of 2017, ~~and 2016,~~ respectively, and ~~28.7~~21.9 percent and ~~28.4~~28.7 percent for the six months ended June 30, 2018 and 2017, respectively. The decline in the effective tax rate from the first quarter of 2018 was largely attributable to a $2 million charge included in income tax expense for the first quarter of 2018 related to effect of the USAB acquisition on our state deferred tax assets.

On July 1, 2018, the State of New Jersey enacted new legislation that created a temporary surtax effective for tax years 2018 through 2021 and ~~2016, respectively.~~will require companies to file combined tax returns beginning in 2019. Management is currently evaluating the effect of this new legislation on our net deferred tax asset and future tax expense. We anticipate that we will realize an immaterial tax benefit during the third quarter of 2018 due to the write up of our net deferred tax asset and, prospectively, our state tax expense will increase.

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,~~2018, we ~~anticipate~~currently estimate that our effective tax rate will range from 2821 percent to ~~31 percent. The~~23 percent primarily reflecting the impacts of the changes in federal and state tax laws (including the New Jersey surtax effective ~~tax rate is generally lower than the statutory rate primarily due to tax credits derived from our~~July 1, 2018), tax-exempt income, tax-advantaged investments ~~in qualified affordable housing projects~~ and ~~other investments related to community development and renewable energy sources, as well as earnings from other tax-exempt investments.~~general business credits. See Note 1315 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’~~segment's 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 June 30, ~~2017~~2018 and ~~2016:~~2017:


	Three Months Ended June 30, 2017															Three Months Ended June 30, 2018
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total			Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)															($ in thousands)
Average interest earning assets	$	5,125,615		$	12,576,063		$	3,714,993		$	—		$	21,416,671		$	6,005,266		$	16,834,969		$	4,416,724		$	—		$	27,256,959
Income (loss) before income taxes	15,055			58,387			9,864			(12,527		)	70,779			15,713			78,640			11,761			(14,351		)	91,763
Annualized return on average interest earning assets (before tax)	1.17		%	1.86		%	1.06		%	N/A			1.32		%	1.05		%	1.87		%	1.07		%	N/A			1.35		%


	Three Months Ended June 30, 2016															Three Months Ended June 30, 2017
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total			Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)															($ in thousands)
Average interest earning assets	$	5,099,474		$	11,153,441		$	3,284,657		$	—		$	19,537,572		$	5,125,615		$	12,576,061		$	3,715,071		$	—		$	21,416,747
Income (loss) before income taxes	14,160			47,425			5,359			(12,457		)	54,487			15,055			58,387			9,864			(12,527		)	70,779
Annualized return on average interest earning assets (before tax)	1.11		%	1.70		%	0.65		%	N/A			1.12		%	1.17		%	1.86		%	1.06		%	N/A			1.32		%

Consumer Lending

This segment, representing approximately ~~28.0~~26.3 percent of our loan portfolio at June 30, ~~2017,~~2018, 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 ~~15.4~~15.2 percent of our loan portfolio at June 30, ~~2017, including covered loans)~~2018) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing ~~6.5~~5.5 percent of total loans at June 30, ~~2017)~~2018) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, and insurance services.

Average interest earning assets in this segment increased $~~26.1~~879.7 million to ~~$5.1~~$6.0 billion for the three months ended June 30, ~~2017~~2018 as compared to the second quarter of ~~2016.~~2017. The increase was largely due to ~~solid organic~~$365.9 million and $109.8 million of residential mortgage loans and home equity loans, respectively, acquired from USAB on January 1, 2018 and loan growth ~~in secured~~mainly from new and refinanced residential mortgage loan originations held for investment and collateralized personal lines of credit ~~and auto loans, partially offset by a decline in residential mortgage loans caused by a high volume of loan sales into~~over the secondary market. Home equity loan volumes and customer usage of existing home equity lines of credit also steadily declined since June 30, 2016 despite the relatively favorable interest rate environment.last 12 months.

Income before income taxes generated by the consumer lending segment increased ~~$895~~$658 thousand to ~~$15.1~~$15.7 million for the second quarter of ~~2017~~2018 as compared to ~~$14.2~~$15.1 million for the second quarter of ~~2016 largely due to an increase in~~2017. The net interest income and non-interest income ~~of $2.1~~increased $5.1 million and ~~a decrease of $1.4~~$2.8 million ~~in internal transfer expense~~ for the second quarter of 2017 as compared to the same period in 2016. The increase in non-interest income was mostly driven by a $1.7 million increase in the net gains on sales of loans caused by the increased level of sales during second quarter of 2017. The positive impact of the aforementioned items was partially offset by a $2.3 million

~~increase in the provision for loan losses during the three months ended June 30, 2017~~2018 as compared to the second quarter of ~~2016. See further details~~2017. The increase in net interest income was mostly due to the ~~"Allowance~~increase in average loans and a higher overall yield on such loans, while the increase in non-interest income was mainly due to higher gains on sales of residential mortgage loans. Non-interest expense increased $5.7 million for ~~Credit Losses" section.~~the second quarter of 2018 as compared to the same quarter of 2017 mainly due to higher salaries and employee benefits expenses related to the USAB acquisition. The internal transfer expense increased $1.8 million for the second quarter of 2018 as compared to the same quarter of 2017.

The net interest margin on the consumer lending portfolio ~~increased 2~~decreased 6 basis points to ~~2.79~~2.73 percent for the second quarter of ~~2017~~2018 as compared to the same quarter one year ~~ago. The net interest margin was positively impacted by~~ago mainly due to a ~~4 basis point increase in yield on average loans, partially offset by a 2~~23 basis point increase in the costs associated with our funding ~~sources.~~sources, partially offset by a 17 basis point increase in yield on average loans. The increase in our cost of funds was ~~largely~~primarily due to increased short-term interest rates resulting from the Federal Reserve's gradual increase in short-term market interest rates during 2017 and 2018 and strong competition for new and existing deposits. The increase in loan yield was mainly due to higher market interest rates on ~~most deposits and short-term borrowings. The increase in the cost of short-term borrowings was mostly due to~~ new ~~FHLB borrowings used to offset a decline in deposits and fund new loans during the second quarter of 2017.~~loan volumes. 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~~$3.8 billion and represented ~~14.8~~16.5 percent of the total loan portfolio at June 30, ~~2017.~~2018. Commercial real estate loans and construction loans totaled ~~$10.1~~$13.3 billion and represented ~~57.1~~57.2 percent of the total loan portfolio at June 30, ~~2017.~~2018.

Average interest earning assets in this segment increased $~~1.4~~4.3 billion to ~~$12.6~~$16.8 billion for the three months ended June 30, ~~2017~~2018 as compared to the second quarter of ~~2016.~~2017. This increase was mostly due ~~in part,~~ to ~~solid~~approximately $3.3 billion of commercial PCI loans acquired from USAB, organic ~~commercial real estate~~ loan growth ~~across many segments of borrowers~~ and, to a much lesser extent, purchases of loan participations ~~(mostly consisting of multi-family loans in New York City) totaling over $551 million~~ during the last 12 months.

For the three months ended June 30, ~~2017,~~2018, income before income taxes for the commercial lending segment increased ~~$11.0~~$20.3 million to ~~$58.4~~$78.6 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 internal transfer expense.~~2017. Net interest income increased $~~12.5~~38.3 million to ~~$117.8~~$152 million for the second quarter of 2018 as compared to the same quarter in 2017 largely due to higher average balances, as well as an increase in yield on new loan originations. Internal transfer expense and non-interest expense increased $12.4 million and $2.6 million, respectively, during the second quarter of 2018 as compared to the same quarter in 2017 due, in part, to the USAB acquisition. The provision for credit losses increased $3.7 million to $5.1 million during the three months ended June 30, 2018 as compared to $1.4 million for the second quarter of 2017 ~~as compared to the same period in 2016 largely~~ due to higher allocated reserves related to impaired loans and loan growth. See further details in the ~~aforementioned organic and purchased loan growth over the last 12 months~~. ~~Internal transfer expense increased $849 thousand during the second quarter of 2017 as compared to the same period~~"Allowance for Credit Losses" section in ~~2016.~~this MD&A.

The net interest margin for this segment decreased 31 basis ~~points~~point to ~~3.75~~3.61 percent for the second quarter of ~~2017~~2018 as compared to the same ~~quarter one year ago as~~period of 2017 largely due to a ~~result of a 1 basis point decline in yield on average loans and a 2~~23 basis point increase in the cost of our funding ~~sources. The decrease~~sources, mostly offset by a 22 basis point increase in ~~the~~ yield on ~~loans was primarily due to the new and refinanced commercial loan volumes at interest rates that are lower somewhat lower than compared to the overall portfolio yield for the second quarter of 2016.~~average loans.

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 ~~$430.3~~$701.7 million during the second quarter of ~~2017~~2018 as compared to the second quarter of ~~2016.~~2017. The increase was ~~mainly~~largely due to ~~purchases of residential mortgage-backed~~investment securities ~~classified as held for maturity~~acquired from USAB and ~~available for sale in the last 12 months, partially offset by~~ a ~~$98.8~~$61.0 million ~~decrease~~increase in average federal funds sold and other interest bearing deposits for the three months ended June 30, ~~2017~~2018 as compared to the same ~~period in 2016.~~

quarter of 2017.

For the quarter ended June 30, ~~2017,~~2018, income before income taxes for the investment management segment increased ~~$4.5~~$1.9 million to ~~$9.9~~$11.8 million as compared to the second quarter in ~~2016 mainly~~2017 largely due to a ~~$4.9~~$2.6 million increase in net interest ~~income. The increase in net interest~~ income ~~was~~ mainly driven by the higher average investment balances and ~~higher~~better yields on ~~average~~new investments inpurchased during the ~~second quarter~~first six months of ~~2017 as compared to the same period in 2016.~~2018.

The net interest margin for this segment ~~increased~~decreased 3011 basis points to ~~2.22~~2.11 percent for the second quarter of ~~2017~~2018 as compared to the same quarter ~~one year ago~~of 2017 largely due to a ~~32 basis point increase in the yield on average investments partially offset by a 2~~23 basis point increase in costs associated with our funding ~~sources.~~sources, partially offset by a 12 basis point increase in the yield on average investments. The increase in the yield on average investments was ~~largely~~partly due to ~~a decline in premium amortization expense caused by lower principal repayments~~purchases of higher yielding securities over the last six months and the positive impact of increased market interest rates on ~~residential mortgage-backed securities.~~the variable rate portion of our securities portfolio.

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, and interest expense related to subordinated notes, as well as ~~income~~other infrequent charges related to bank acquisitions and ~~expense from derivative financial instruments.~~litigation reserves.

The pre-tax net loss for the corporate segment ~~moderately~~ increased ~~$70 thousand~~$1.8 million to ~~$12.5~~$14.4 million for the three months ended June 30, ~~2017~~2018 as compared to the second quarter in 2017. The increase in the net loss for this segment was mainly due to an increase in non-interest expense, partially offset by an increase in internal transfer income. The non-interest expense increased $22.3 million to $105.3 millionfor the three months ended June 30, 2018 as compared to the three months ended June 30, ~~2016.~~2017. This increase was largely due to charges related to higher salaries and employee benefits, net occupancy and equipment, and other non-interest expenses. See further details in the "Non-

Interest Expense" section above. Internal transfer income increased $15.8 million to $86.2 million for the three months ended June 30, 2018 as compared to the second quarter in 2017.

The following tables present the financial data for each business segment for the six months ended June 30, ~~2017~~2018 and ~~2016:~~

2017:


	Six Months Ended June 30, 2017															Six Months Ended June 30, 2018
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total			Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)															($ in thousands)
Average interest earning assets	$	5,085,438		$	12,423,025		$	3,675,895		$	—		$	21,184,358		$	5,953,524		$	16,619,573		$	4,432,184		$	—		$	27,005,281
Income (loss) before income taxes	30,459			107,765			19,576			(22,855		)	134,945			30,760			145,606			20,830			(50,284		)	146,912
Annualized return on average interest earning assets (before tax)	1.20		%	1.73		%	1.07		%	N/A			1.27		%	1.03		%	1.75		%	0.94		%	N/A			1.09		%


	Six Months Ended June 30, 2016															Six Months Ended June 30, 2017
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total			Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)															($ in thousands)
Average interest earning assets	$	5,147,551		$	10,975,678		$	3,389,293		$	—		$	19,512,522		$	5,085,438		$	12,423,023		$	3,676,024		$	—		$	21,184,485
Income (loss) before income taxes	28,261			91,292			9,362			(23,852		)	105,063			30,459			107,765			19,576			(22,855		)	134,945
Annualized return on average interest earning assets (before tax)	1.10		%	1.66		%	0.55		%	N/A			1.08		%	1.20		%	1.73		%	1.07		%	N/A			1.27		%

Consumer Lending

Average interest earning assets in this segment ~~decreased $62.1~~increased$868.1 million to ~~$5.1~~$6.0 billion for the six months ended June 30, ~~2017~~2018 as compared to the same period in ~~2016.~~2017. The ~~decrease~~increase was largely due to ~~declines in~~$365.9 million and $109.8 million of residential mortgage loans and home equity ~~loans. The decline in~~loans, respectively, acquired from USAB on January 1, 2018 and loan growth mainly from new and refinanced residential mortgage ~~loans~~loan originations held for investment and collateralized personal lines of credit over the last 12 months was largely driven by normal repayment activity, a high percentage of loans originated for sale rather than investment, and the transfer and the sale of approximately $170 million and $104 million of performing fixed rate mortgagesmonths.

from loans held for investment portfolio to loans held for sale in the fourth quarter of 2016 and the first quarter of 2017, respectively. The negative impact of the decline average residential mortgage loan balance was partially offset by higher auto and secured personal lines of credit loan volumes.

Income before income taxes generated by the consumer lending segment increased ~~$2.2 million~~$301 thousand to ~~$30.5~~$30.8 million for the six months ended June 30, ~~2017~~2018 as compared to ~~$28.3~~$30.5 million for the same period in ~~2016~~2017 largely due to anincreases of $11.7 million and $3.5 million in net interest income and non-interest income, respectively. The increased net interest income was mostly due to higher average loans and yields on new loan volumes, while the increase in non-interest income was largely due to higher gains on sales of ~~$5.5~~residential mortgage loans. Non-interest expense increased $10.6 million ~~and a decrease of $2.6 million in internal transfer expense~~ for the six months ended June 30, ~~2017~~2018 as compared to the same period in ~~2016.~~2017 mainly due to higher salaries and employee benefits expenses related to the USAB acquisition. The ~~increase in non-interest income was mostly driven by a $4.0~~internal transfer expense increased $3.2 million increase in the net gains on sales of loans caused by a higher level of sales volumes during the six months ended June 30, 2017. The positive impact of the aforementioned items was partially offset by increases of $2.8 million and $2.5 million in the provision for loan losses and non-interest expense, respectively, for the six months ended June 30, ~~2017~~2018 as compared to the same period in ~~2016.~~2017. The provision for loan losses increased $1.0 million largely due to loan growth. See further detail in the "Allowance for Credit Losses" section.

The net interest margin on the consumer lending portfolio ~~remained unchanged at 2.78~~decreased 1 basis point to 2.77 percent for the six months ended June 30, ~~2017~~2018 as compared to the same period one year ~~ago. However, the net interest margin results were comprised of~~ago mainly due to a 221 basis point ~~decline in yield on average loans which was offset by a 2 basis point decrease~~increase in the costs associated with our funding ~~sources.~~sources, mostly offset by a 20 basis point increase in yield on average loans. The ~~decrease~~increase in our cost of funds was primarily due to ~~a 36 basis point decline~~increased short-term interest rates resulting from the Federal Reserve's gradual increase in ~~the cost of~~short-term market interest rates during 2017 and 2018 and intense competition for deposits specifically in our ~~average long-term borrowings as compared to six months ended June 30, 2016 largely~~New Jersey and New York markets. The increase in yield was mainly due to ~~modification and maturity of certain high cost borrowings in the second half of 2016.~~higher

market interest rates on new loan volumes. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our deposits and other borrowings.

Commercial Lending

Average interest earning assets in this segment increased $~~1.4~~4.2 billion to ~~$12.4~~$16.6 billion for the six months ended June 30, ~~2017~~2018 as compared to the same period in ~~2016.~~2017. This increase was mostly due ~~in part,~~ to ~~solid~~approximately $3.3 billion of commercial PCI loans acquired from USAB, organic ~~commercial real estate~~ loan ~~volumes in New York, New Jersey~~growth and, ~~Florida and~~to a much lesser extent, purchases of loan participations during the last 12 months.

For the six months ended June 30, ~~2017,~~2018, income before income taxes for the commercial lending segment increased ~~$16.5~~$37.8 million to ~~$107.8~~$145.6 million as compared to the same period ~~of 2016 mostly due to an increase~~ in ~~net interest income, partially offset by increases in the provision for credit losses and internal transfer expense.~~2017. Net interest income increased $~~23.4~~76.0 million to ~~$230.2~~$301.3 million for the six months ended June 30, ~~2017~~2018 as compared to the same period in ~~2016~~2017 largely due to higher average balances, as well as an increase in yield on new loan originations. Non-interest income increased $4.7 million for the ~~aforementioned organic~~six months ended June 30, 2018 as compared to the same period in 2017 mainly due to fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $7.7 million for the six months ended June 30, 2018 as compared to $4.8 million for the same period in 2017. Internal transfer expense and ~~purchased~~non-interest expense increased $21.3 million and ~~loan growth over~~$10.5 million, respectively, during the ~~last 12~~six months ended June 30, 2018 as compared to the same period in 2017 due, in part, to the USAB acquisition. . The provision for credit losses increased ~~$1.1~~$11.0 million to ~~$3.4~~$14.4 million during the six months ended June 30, ~~2017~~2018 as compared to ~~$2.3~~$3.4 million for the same period in ~~2016.~~2017 due to higher allocated reserves related to impaired loans and loan growth. See further details in the "Allowance for Credit Losses" ~~section. Internal transfer expense increased $4.7 million during the six months ended June 30, 2017 as compared to the same period~~section in ~~2016.~~this MD&A.

The net interest margin for this segment ~~decreased 7~~increased 1 basis ~~points~~point to ~~3.70~~3.63 percent for the six months ended June 30, ~~2017~~2018 as compared to the same period ~~one year ago~~of 2017 as a ~~result of a 9~~22 basis point ~~decline~~increase in yield on average loans was partially offset by a 221 basis point ~~decrease~~increase in the cost of our funding sources. ~~The decrease in the yield on loans was primarily due to the new and refinanced loan volumes during the past 12 months at lower interest rates compared to the overall yield of our loan portfolio.~~

Investment Management

Average interest earning assets in this segment increased ~~$286.6~~$756.2 million ~~for~~during the six months ended June 30, ~~2017~~2018 as compared to the same period in ~~2016.~~2017. The increase was ~~mainly~~largely due to ~~purchases of residential mortgage-backed~~investment securities ~~classified as held for maturity~~acquired from USAB and ~~available for sale in the last 12 months, partially offset by a $169.2~~an $89.3 million ~~decrease~~increase in average federal funds sold and other interest bearing deposits for the six months ended June 30, ~~2017~~2018 as compared to the same period in ~~2016.~~2017.

For the six months ended June 30, ~~2017,~~2018, income before income taxes for the investment management segment increased ~~$10.2~~$1.3 million to ~~$19.6~~$20.8 million as compared to the same period in ~~2016~~2017 mainly due to a ~~$10.0~~$4.3 million

increase in net interest ~~income.~~income, partially offset by a $3.2 million increase in the internal transfer expense. The increase in net interest income was mainly driven by the higher average investment balances ~~and higher yield on average investments~~ during the six months ended June 30, ~~2017~~2018 as compared to the same period of 2017, partially offset by lower yield on tax-exempt securities caused, in ~~2016.~~part, by the changes in tax law.

The net interest margin for this segment ~~increased 40~~ decreased 18 basis points to ~~2.23~~2.05 percentfor the six months ended June 30, ~~2017~~2018 as compared to the same period ~~one year ago mostly~~of 2017 largely due to a 3821 basis point increase in costs associated with our funding sources, partially offset by a 3 basis point increase in the yield on average ~~investments and a 2 basis point decrease in costs associated with our funding sources.~~investments. The increase in the yield on average investments was ~~largely~~partly due to ~~a decline in premium amortization expense caused by lower principal repayments on residential mortgage-backed~~purchases of higher yielding securities ~~during~~mainly over the last six months ~~ended June 30, 2017.~~and the positive impact of increased market interest rates on the variable rate portion of our securities portfolio.

Corporate and other adjustments

The pre-tax net loss for the corporate segment ~~decreased $997 thousand~~increased $27.4 million to ~~$22.9~~$50.3 million for the six months ended June 30, ~~2017~~2018 as compared to ~~$23.9 million for~~ the same period in ~~2016~~2017. The increase in the net loss for this segment was mainly due to ~~a $2.3 million~~an increase ~~in internal transfer income and $1.3 milliondecrease~~ in non-interest expense, partially offset by ~~$1.8 million~~a decrease in ~~non-interest~~internal transfer income. The ~~increase in~~ non-interest expense ~~related~~increased $62.2 million to several general expense categories, including, but not limited to, salary and employee benefits expense and amortization of tax credit investments. Non-interest income decreased largely due to a decline in other non-interest income, as well as a $269 thousand decrease in net gains on securities transactions $230.7 millionfor the six months ended June 30, ~~2017~~2018 as compared ~~with~~to the ~~same period in 2016.~~six

months ended June 30, 2017. This increase was largely due to higher salaries and employee benefits expenses related to the USAB acquisition and charges related to USAB merger expense and professional and legal fees for litigation reserves recognized during the first half of 2018. See further details in the "Non-Interest ~~Income" and "Non-Interest~~ Expense" ~~sections~~section above. Internal transfer income increased $27.7 million to $172.1 million for the six months ended June 30, 2018 as compared to the same period in 2017.

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~~attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominately focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities.

We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of June 30, ~~2017.~~2018. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of June 30, ~~2017.~~2018. 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 June 30, ~~2017.~~2018. Although the size of Valley’s balance sheet is forecasted to remain static as of June 30, ~~2017~~2018 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate

spreads utilizing our actual originations during the second quarter of ~~2017.~~2018. The model also utilizes an immediate parallel shift in the market interest rates at June 30, ~~2017.~~2018.

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.~~below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income.

The following table reflects management’s expectations of the change in our net interest income over the next 12- month period in light of the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below.


	Estimated Change in Future Net Interest Income					Estimated Change in Future Net Interest Income
Changes in Interest Rates	Dollar Change			Percentage Change		Dollar Change			Percentage Change
(in basis points)	($ in thousands)					($ in thousands)
+200	$	(4,721	)	(0.72	)%	$	(3,900	)	(0.42	)%
+100	(830		)	(0.13	)	(782		)	(0.09	)
–100	(23,033		)	(3.50	)	(29,558		)	(3.24	)

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~~increase net interest income over the next 12 months by ~~0.13~~0.09 percent. The Bank’s sensitivity to changes in market rates ~~changed in both size and direction~~declined as compared to December 31, ~~2016~~2017 (which ~~was an increase~~projected a decrease of ~~0.03~~0.35 percent in net interest income over a 12 month period). The change in the sensitivity of our balance sheet since December 31, 2017 was primarily due to the impact of the interest earning assets and interest bearing liabilities acquired from USAB in the first quarter of 2018. 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 toof the acquired financial instruments was largely mitigated by a ~~100 basis point immediate~~significant 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.~~short-term borrowings during the second quarter of 2018. Future changes including, but not limited to, deposit and borrowings strategies, 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 three-month LIBOR rate or 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~~$482 million at June 30, ~~2017~~2018 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~~relatively 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 six months ended June 30, ~~2017.~~2018. 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. ~~However, $100 million of the $582 million in notional value swaps expired in July 2017 and will reduce the overall negative impact of such instruments on our future net interest income.~~ See Note 1113 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 on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at June 30, ~~2017.~~2018.

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 ~~$2.1 billion, representing 9.7 percent of earning assets, at June 30, 2017 and $1.8~~$2.4 billion, representing 8.9 percent of earning assets, at June 30, 2018 and $2.0 billion, representing 9.3 percent of earning assets, at December 31, ~~2016.~~2017. Of the ~~$2.1~~$2.4 billion of liquid assets at June 30, ~~2017,~~2018, approximately ~~$704 million~~$1.0 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately ~~$364~~$428 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 June 30, ~~2017)~~2018) are projected to be approximately ~~$4.5~~$6.1 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~~$19.6 billion and ~~$14.7~~$15.4 billion for the six months ended June 30, ~~2017~~2018 and for the year ended December 31, ~~2016,~~2017, respectively, representing ~~72.1~~72.7 percent and ~~73.9~~71.8 percent of average earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous correspondent banks. While there are no firm lending commitments currently in place, management believes that we could borrow approximately ~~$727~~$707 million for a short ~~time~~term from these banks on a collective basis. The Bank is also a member of the Federal Home Loan Bank of New York (FHLB) and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. Furthermore, we are able to obtain overnight borrowings from the Federal Reserve Bank via the discount window as a contingency for additional liquidity. At June 30, ~~2017,~~2018, 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~~Short-term borrowings increased ~~$654 million~~$2.1 billion to ~~$1.7~~$2.9 billion at June 30, ~~2017~~2018 as compared to December 31, ~~2016~~2017 mostly due to ~~increases of $625 million and $29 million in~~

~~FHLB advances and repo balances, respectively. The~~ new FHLB advances ~~were~~ used ~~as alternate~~for normal loan funding ~~for a decline in money market deposits~~activity and liquidity purposes during the first half of ~~2017, as well as~~2018. Additionally, we assumed $650 billion of borrowings in the USAB acquisition, consisting of FHLB borrowings and securities sold under agreements to repurchase. The change in short-term borrowings is generally driven by the levels of loan originations both for ~~additional liquidity~~

investment and ~~loan~~sale, repayments of long-term borrowings, and our use of time deposits, fully insured brokered deposits and other short-term funding ~~purposes.~~in our current liquidity/funding strategies.

Corporation Liquidity

Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our on-going asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures. These cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the bank 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 June 30, ~~2017,~~2018, we had ~~$1.8~~$2.0 billion and ~~$1.5~~$1.8 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,~~agency securities, tax-exempt issuances of states and political subdivisions, residential mortgage-backed securities (including 9 private label mortgage-backed securities), single-issuer trust preferred securities principally issued by bank holding companies (including 21 pooled ~~securities),~~security) and high quality corporate bonds ~~and equity securities~~ issued by banks at June 30, ~~2017.~~2018. 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,~~2017 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.

The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at June 30, ~~2017.~~2018:


	June 30, 2017									June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)									(in thousands)
Held to maturity investment grades:*
AAA Rated	$	1,368,246	$	24,681	$	(15,790	)	$	1,377,137	$	1,557,675	$	9,178	$	(43,161	)	$	1,523,692
AA Rated	241,927		9,331		(26		)	251,232		290,368		4,329		(1,922		)	292,775
A Rated	35,541		1,596		—			37,137		39,984		547		(321		)	40,210
BBB Rated										3,000		49		—			3,049
Non-investment grade	3,618		117		(41		)	3,694		7,413		57		(1,149		)	6,321
Not rated	172,931		141		(13,540		)	159,532		131,754		132		(9,151		)	122,735
Total investment securities held to maturity	$	1,822,263	$	35,866	$	(29,397	)	$	1,828,732	$	2,030,194	$	14,292	$	(55,704	)	$	1,988,782
Available for sale investment grades:*
AAA Rated	$	1,312,640	$	2,986	$	(15,403	)	$	1,300,223	$	1,669,102	$	965	$	(52,074	)	$	1,617,993
AA Rated	56,910		296		(236		)	56,970		96,485		70		(1,907		)	94,648
A Rated	21,994		13		(57		)	21,950		43,431		143		(481		)	43,093
BBB Rated	41,276		573		(155		)	41,694		12,145		67		(272		)	11,940
Non-investment grade	11,860		737		(1,346		)	11,251		20,281		587		(1,450		)	19,418
Not rated	32,235		491		(760		)	31,966		47,509		84		(1,218		)	46,375
Total investment securities available for sale	$	1,476,915	$	5,096	$	(17,957	)	$	1,464,054	$	1,888,953	$	1,916	$	(57,402	)	$	1,833,467



*	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 unrealized losses in the AAA rated category (in the above table) in both held to maturity and available for sale investments securities are mainly related to residential mortgage-backed securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac. The held to maturity portfolio includes ~~$172.9~~$131.8 million in investments not rated by the rating agencies with aggregate unrealized losses of ~~$13.5~~$9.2 million at June 30, ~~2017.~~2018. The unrealized losses for this category ~~primarily relate~~included $6.6 million of unrealized losses related to 4four single-issuer bank trust preferred issuances with a combined amortized cost of ~~$35.9~~$36.0 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 June 30, ~~2017,~~2018, 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 and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 as the collateral supporting much of the investment securities has improved or performed as expected.

Loan Portfolio

The following table reflects the composition of the loan portfolio as of the dates presented:


	June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016			June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017
	($ in thousands)															($ in thousands)
Loans
Commercial and industrial	$	2,631,312		$	2,642,319		$	2,638,195		$	2,558,968		$	2,528,749		$	3,829,525		$	3,631,597		$	2,741,425		$	2,706,912		$	2,631,312
Commercial real estate:
Commercial real estate	9,230,514			9,016,418			8,719,667			8,313,855			8,018,794			11,913,830			11,706,228			9,496,777			9,351,068			9,230,514
Construction	881,073			835,854			824,946			802,568			768,847			1,376,732			1,372,508			851,105			903,640			881,073
Total commercial real estate	10,111,587			9,852,272			9,544,613			9,116,423			8,787,641			13,290,562			13,078,736			10,347,882			10,254,708			10,111,587
Residential mortgage	2,724,777			2,745,447			2,867,918			2,826,130			3,055,353			3,528,682			3,321,560			2,859,035			2,941,435			2,724,777
Consumer:
Home equity	450,510			458,891			469,009			476,820			485,730			520,849			549,329			446,280			448,842			450,510
Automobile	1,150,343			1,150,053			1,139,227			1,121,606			1,141,793			1,281,735			1,222,721			1,208,902			1,171,685			1,150,343
Other consumer	642,231			600,516			577,141			534,188			499,914			783,363			748,824			728,056			677,880			642,231
Total consumer loans	2,243,084			2,209,460			2,185,377			2,132,614			2,127,437			2,585,947			2,520,874			2,383,238			2,298,407			2,243,084
Total loans ⁽¹⁾⁽²⁾	$	17,710,760		$	17,449,498		$	17,236,103		$	16,634,135		$	16,499,180
Total loans ^*																$	23,234,716		$	22,552,767		$	18,331,580		$	18,201,462		$	17,710,760
As a percent of total loans:
Commercial and industrial	14.8		%	15.1		%	15.3		%	15.4		%	15.3		%	16.5		%	16.1		%	15.0		%	14.9		%	14.8		%
Commercial real estate	57.1		%	56.5		%	55.4		%	54.8		%	53.3		%	57.2		%	58.0		%	56.4		%	56.3		%	57.1		%
Residential mortgage	15.4		%	15.7		%	16.6		%	17.0		%	18.5		%	15.2		%	14.7		%	15.6		%	16.2		%	15.4		%
Consumer loans	12.7		%	12.7		%	12.7		%	12.8		%	12.9		%	11.1		%	11.2		%	13.0		%	12.6		%	12.7		%
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	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 $44.5 million, $47.8 million, $70.4 million, $76.0 million, and $81.1 million at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016, respectively.


~~(2)~~*	Includes net unearned premiums and deferred loan costs of ~~$16.7~~$18.7 million, ~~$15.7~~$22.0 million, ~~$15.3~~$22.2 million, ~~$10.5~~$18.5 million, and ~~$8.3~~$16.7 million at June 30, ~~2017,~~2018, March 31, ~~2017,~~2018, December 31, ~~2016,~~2017, September 30, ~~2016~~2017 and June 30, ~~2016,~~2017, respectively.

~~Total loans~~Loans increased ~~$261.3~~$681.9 million to approximately ~~$17.7~~$23.2 billion at June 30, ~~2017~~2018 from March 31, 2017. 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 June 30, 2017, our PCI loan portfolio decreased $113.2 million to $1.5 billion as compared to March 31, 2017 primarily2018. The increase was mainly due to continued larger loan repayments, of which some resulted from continued efforts by management to encourage borrower prepayment. The increase in non-PCI loan portion of the loan portfolio (net of $122 million in performing residential mortgage loans transferred to loans held for sale during the second quarter) was largely due to a $259.3 million increasestrong quarter over quarter organic growth in total commercial real estate loans, commercial and industrial loans and residential mortgage loans. During the second quarter of ~~2017,~~2018, Valley also originated ~~$36.8~~$219 millionof residential mortgage loans for sale rather than held for investment. ~~Loans~~Residential mortgage loans held for sale totaled ~~$139.6~~$32.7 million and ~~$115.1~~$15.1 million at June 30, ~~2017~~2018 and March 31, ~~2017,~~2018, respectively. ~~See additional information regarding our residential mortgage loan activities below.~~

Total commercial and industrial loans ~~decreased $11.0~~increased $197.9 million from March 31, ~~2017~~2018 to approximately ~~$2.6~~$3.8 billion at June 30, ~~2017.~~ ~~The loan volumes were outpaced by a~~ ~~$30.8~~2018, despite the $87.4 million decline in the PCI loan portion of the portfolio during the second quarter of ~~2017.~~2018. Exclusive of the decline in PCI loans, the non-PCI commercial and industrial ~~loan portfolio~~loans increased by ~~$19.8~~$285.4 million, or ~~approximately 3.3~~41.7 percent on an annualized basis, mostly due to ~~$2.4~~strong quarter over quarter organic growth during the second quarter of 2018.

Commercial real estate loans (excluding construction loans) increased $207.6 million from March 31, 2018 to $11.9 billion at June 30, ~~2017~~2018, net of a normal decline in PCI loans. During the second quarter of 2018, non-PCI loans increased $304.9 million, or 13.9 percent on an annualized basis, due to solid organic loan volumes generated across a broad based segment of borrowers within the commercial real estate portfolio. Construction loans increased $4.2 million (net of a $41.7 million decline in PCI loans) to $1.4 billion at June 30, 2018 from March 31, ~~2017. The~~2018.

Total residential mortgage loans increased $207.1 million to approximately $3.5 billion at June 30, 2018 from March 31, 2018 due to strong production from our growing team of home mortgage consultants during the second quarter ~~growth in non-PCI loans was largely due~~of 2018. New and refinanced residential mortgage loan originations totaled approximately $437 million for the second quarter of 2018 as compared to ~~a secured commercial lending arrangement with a large regional auto retailer. In addition to~~$372 millionand $194 million for the ~~PCI loan repayments, the level~~first quarter of ~~loan growth within this portfolio continues to be challenged by strong market competition for both new~~2018 and ~~existing commercial loan borrowers within our primary markets.~~second

~~Commercial real estate loans (excluding construction loans) increased $214.1 million from March 31,~~quarter of 2017, to $9.2 billion at June 30, 2017 mainly due to a $250 million, or 12.6 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, New Jersey and Florida, particularly amongst our pre-existing long-term customer base, as well asrespectively. We sold approximately ~~$22~~$195 million of ~~loan participations purchased in~~residential mortgage loans during the second quarter of ~~2017. Each purchased participation loan is reviewed~~2018.

Home equity loans totaling $520.8 million at June 30, 2018 decreased by ~~Valley under its normal underwriting criteria and stress-tested~~$28.5 million as compared to ~~assure its credit quality. The organic loan volumes generated across~~March 31, 2018 partly due to a ~~broad-based segment~~decline of ~~borrowers within the commercial real estate portfolio were partially offset by a $35.9~~$14.2 million ~~decline~~ in the ~~acquired~~ PCI loan portion of the ~~portfolio. Construction loans increased $45.2 million to $881.1 million at June 30, 2017 from March 31, 2017. The increase was mostly due to advances on existing construction projects.~~

Total residential mortgage loans decreased $20.7 million, or approximately 3.0 percent on an annualized basis, to approximately $2.7 billion at June 30, 2017 from March 31, 2017 mostly due to the aforementioned transfer of $122 million in mortgage loans to loans held for sale and new loans originated for sale rather than investmentportfolio during the second quarter of 2017. Valley sold approximately $136.6 million of residential mortgage loans (including $115.1 million of loans held for sale at March 31, 2017) during the second quarter of 2017. New and refinanced residential mortgage loan originations totaled approximately $194.4 million for the second quarter of 2017 as compared to $163.7 million and $177.7 million for the first quarter of 2017 and second quarter of 2016, respectively. Of the $194.4 million in total originations, $23.8 million, or 12.3 percent, represented new Florida residential mortgage loans.

~~Home equity loans decreased $8.4 million to $450.5 million at June 30, 2017 as compared to March 31, 2017 mostly due to PCI loan repayment activity.~~2018. New home equity loan volumes and customer usage of existing home equity lines of credit continue to be ~~weak, despite~~weak. We believe this trend may continue in 2018 due to many factors, including the ~~relatively favorable low~~Tax Act changes that limit the deductibility of mortgage interest ~~rate environment.~~expense for homeowners.

Automobile loans increased by ~~$290 thousand~~$59.0 million, or 19.3 percent on an annualized basis, to ~~$1.2~~$1.3 billion at June 30, ~~2017~~2018 as compared to March 31, ~~2017. The~~2018. Overall loan volumes improved during the second quarter of 2018 largely due to the impact of inclement weather on auto ~~loan portfolio remained relatively unchanged as new auto loan origination volumes declined as compared to~~sales in the Northeast region during the first quarter of ~~2017 largely due to slower application activity during the first half of the second quarter of 2017.~~2018. Our Florida dealership network contributed ~~over $23~~$41 million in auto loan originations, representing approximately 1822 percent of Valley's total new auto loan production ~~for~~during the second quarter of ~~2017 as compared to approximately $24 million, or 17 percent, of Valley's total auto originations for~~2018 and was relatively consistent with the linked first quarter of ~~2017.~~2018.

Other consumer loans increased ~~$41.7~~$34.5 million ~~or 27.8 percent on an annualized basis,~~ to ~~$642.2~~$783.4 million at June 30, ~~2017~~2018 as compared to ~~$600.5~~$748.8 million at March 31, ~~2017 mainly~~2018 mostly 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, Florida and, ~~Florida,~~to a much lesser extent, Alabama, 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. However, the New Jersey and New York Metropolitan markets continue to account for a disproportionately larger percentage of our lending activity. To mitigate ~~these~~our geographic risks, we ~~are making~~make efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector. Geographically, we may make further inroads into the Florida lending market, through bank acquisitions (such as our recently announced merger agreement with USAB - See "Executive Summary" section above for details), select de novo branch efforts or adding lending staff.

Purchased Credit-Impaired Loans ~~(Including Covered Loans)~~

PCI loans ~~totaled $1.5~~increased $3.2 billion ~~and $1.8~~to $4.6 billion at June 30, ~~2017 and~~2018 from $1.4 billion at December 31, ~~2016, respectively, mostly consisting~~2017, mainly due to $3.7 billion of PCI loans acquired from USAB on January 1, 2018. Our PCI loans also include loans acquired in business combinations subsequent to 2011 and, to a much lesser extent, 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~~other consumer loans, totaled ~~$44.5~~$31.1 million and ~~$70.4~~$38.7 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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

As required by U.S. GAAP, 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~~under ASC Subtopic ~~310-30 and are initially recorded at fair value (as determined by~~310-30. This accounting guidance requires the ~~present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses), and~~PCI loans to be aggregated and accounted for as pools of loans based on common risk characteristics. ~~The~~A pool is accounted for as one asset with a single composite interest rate, aggregate fair value and expected cash flows. For PCI loan pools accounted for under ASC Subtopic 310-30, the difference between the contractually required payments due and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the non-accretable difference. The contractually required payments due represent the total undiscounted amount of all uncollected principal and interest payments. Contractually required payments due may increase or decrease for a variety of reasons, e.g. when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. The Bank estimates the undiscounted cash flows expected to be collected by incorporating several key assumptions, including probability of default, loss given default, and the amount of actual prepayments after the acquisition dates. The non-accretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses and uncollectable contractual interest expected to be incurred over the life of the loans. The excess of the undiscounted cash flows expected at the acquisition ~~and~~date over the ~~initial~~ carrying amount (fair value) of the PCI loans oris referred to as the ~~“accretable yield,”~~accretable yield. This amount is ~~recognized as~~accreted into interest income ~~utilizing the level-yield method~~ over the remaining life of ~~each pool. Contractually required~~the loans, or pool of loans, using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment assumptions, and changes in expected principal and interest payments ~~for~~over the estimated lives of the loans. Prepayments affect the estimated life of PCI loans and could change the amount of interest income, and possibly 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.~~to be

collected. 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.

At acquisition, we use a third party service provider to assist with our assessment of the contractual and estimated cash flows. During subsequent annual evaluation periods, Valley uses a third party software application to assess the contractual and estimated cash flows. Using updated loan-level information derived from Valley’s main operating system, contractually required loan payments and expected cash flows for each pool level, the software reforecasts both the contractual cash flows and cash flows expected to be collected. The loan-level information used to reforecast the cash flows was subsequently aggregated on a pool basis. The expected payment data, discount rates, impairment data and changes to the accretable yield were reviewed by Valley to determine whether this information is accurate and the resulting financial statement effects are reasonable.

WeSimilar to contractual cash flows, 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~~Valley analyzes the actual cash flow versus the forecasts at the loan pool level and variances are reviewed to determine their cause. ~~If a re-forecast of~~In re-forecasting future estimated cash flow, ~~is necessary, we~~Valley will adjust the credit loss expectations for ~~the~~ loan ~~pools.~~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~~Valley does not 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.

The following ~~tables summarize~~table summarizes 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 and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017:


	Three Months Ended June 30,												Three Months Ended June 30,
	2017						2016						2018						2017
	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
	(in thousands)												(in thousands)
PCI loans:
Balance, beginning of the period	$	1,654,701		$	269,831		$	2,115,421		$	387,120		$	4,915,833		$	691,086		$	1,654,701		$	269,831
Accretion	23,553			(23,553		)	28,325			(28,325		)	60,536			(60,536		)	23,553			(23,553		)
Payments received	(136,785		)	—			(167,439		)	—			(328,620		)	—			(136,785		)	—
Transfers to other real estate owned	—			—			(906		)	—			(48		)	—			—			—
Other, net	—			—			—			(3,194		)
Balance, end of the period	$	1,541,469		$	246,278		$	1,975,401		$	355,601		$	4,647,701		$	630,550		$	1,541,469		$	246,278


	Six Months Ended June 30,												Six Months Ended June 30,
	2017						2016						2018						2017
	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
	(in thousands)												(in thousands)
PCI loans:
Balance, beginning of the period	$	1,771,502		$	294,514		2,240,471			415,179			$	1,387,215		$	282,009		$	1,771,502		$	294,514
Acquisition													3,744,682			474,208			—			—
Accretion	48,236			(48,236		)	56,384			(56,384		)	125,667			(125,667		)	48,236			(48,236		)
Payments received	(274,735		)	—			(317,084		)	—			(609,670		)	—			(274,735		)	—
Transfers to other real estate owned	(3,534		)	—			(1,176		)	—			(193		)	—			(3,534		)	—
Other, net	—			—			(3,194		)	(3,194		)
Balance, end of the period	$	1,541,469		$	246,278		$	1,975,401		$	355,601		$	4,647,701		$	630,550		$	1,541,469		$	246,278

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

Non-performing Assets

Non-performing assets (excluding PCI loans) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which ~~mainly~~ consist of automobiles) ~~and non-accrual debt securities~~ at June 30, ~~2017.~~2018. 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 cost or fair value, less estimated costs to sell, ~~or cost~~ thereafter. Our non-performing assets totaling ~~$54.6~~$97.1 million at June 30, ~~2017~~2018 increased ~~5.9~~29.5 percent and 77.9 percent from March 31, ~~2017 primarily due to a moderate increase in non-accrual loans, but decreased 11.0 percent as compared to~~2018 and June 30, ~~2016~~2017, respectively, (as shown in the table below). The increase in non-performing assets at June 30, 2018 was mainly due to the addition of $31.1 million of taxi medallion loans to non-accrual commercial and industrial loans during the second quarter of 2018. Non-performing assets as a percentage of total loans and non-performing assets totaled ~~0.31 percent and 0.29~~0.42 percent at June 30, 2017 and March 31, 2017, respectively. 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.

2018. 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 78 to the consolidated financial statements.

7574

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

June 30, 2017 March 31,
2017 December 31,
2016 September 30,
2016 June 30, 2016
($ in thousands)
Accruing past due loans: ⁽¹⁾

30 to 59 days past due:
Commercial and industrial $ 2,391
$ 29,734
$ 6,705
$ 4,306
$ 5,187
Commercial real estate 6,983
11,637
5,894
9,385
5,076
Construction —
7,760
6,077
—
—
Residential mortgage 4,677
7,533
12,005
9,982
10,177
Total Consumer 4,393
3,740
4,197
3,146
2,535
Total 30 to 59 days past due 18,444
60,404
34,878
26,819
22,975
60 to 89 days past due:
Commercial and industrial 2,686
341
5,010
788
5,714
Commercial real estate 8,233
359
8,642
4,291
834
Construction 854
—
—
—
—
Residential mortgage 1,721
4,177
3,564
2,733
2,326
Total Consumer 1,007
787
1,147
1,234
644
Total 60 to 89 days past due 14,501
5,664
18,363
9,046
9,518
90 or more days past due:
Commercial and industrial —
405
142
145
218
Commercial real estate 2,315
—
474
478
131
Construction 2,879
—
1,106
1,881
—
Residential mortgage 3,353
1,355
1,541
590
314
Total Consumer 275
314
209
226
139
Total 90 or more days past due 8,822
2,074
3,472
3,320
802
Total accruing past due loans $ 41,767
$ 68,142
$ 56,713
$ 39,185
$ 33,295
Non-accrual loans:⁽¹⁾

Commercial and industrial $ 11,072
$ 8,676
$ 8,465
$ 7,875
$ 6,573
Commercial real estate 15,514
15,106
15,079
14,452
19,432
Construction 1,334
1,461
715
1,136
5,878
Residential mortgage 12,825
11,650
12,075
14,013
14,866
Total Consumer 1,409
1,395
1,174
965
1,130
Total non-accrual loans 42,154
38,288
37,508
38,441
47,879
Other real estate owned (OREO)⁽²⁾
10,182
10,737
9,612
10,257
10,903
Other repossessed assets 342
475
384
307
369
Non-accrual debt securities ⁽³⁾
1,878
2,007
1,935
2,025
2,118
Total non-performing assets (NPAs) $ 54,556
$ 51,507
$ 49,439
$ 51,030
$ 61,269
Performing troubled debt restructured loans $ 109,802
$ 80,360
$ 85,166
$ 81,093
$ 82,140
Total non-accrual loans as a % of loans 0.24 % 0.22 % 0.22 % 0.23 % 0.29 %
Total NPAs as a % of loans and NPAs 0.31
0.29
0.29
0.31
0.37
Total accruing past due and non-accrual loans as a % of loans 0.47
0.61
0.55
0.47
0.49
Allowance for loan losses as a % of non-accrual loans 276.24
301.51
305.05
287.97
225.75



	June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017
	($ in thousands)
Accruing past due loans:*
30 to 59 days past due:
Commercial and industrial	$	6,780		$	5,405		$	3,650		$	1,186		$	2,391
Commercial real estate	4,323			3,699			11,223			4,755			6,983
Construction	175			532			12,949			—			—
Residential mortgage	7,961			6,460			12,669			7,942			4,677
Total Consumer	6,573			5,244			8,409			5,205			4,393
Total 30 to 59 days past due	25,812			21,340			48,900			19,088			18,444
60 to 89 days past due:
Commercial and industrial	1,533			804			544			3,043			2,686
Commercial real estate	—			—			—			626			8,233
Construction	—			1,099			18,845			2,518			854
Residential mortgage	1,978			4,081			7,903			1,604			1,721
Total Consumer	860			1,489			1,199			1,019			1,007
Total 60 to 89 days past due	4,371			7,473			28,491			8,810			14,501
90 or more days past due:
Commercial and industrial	560			653			—			125			—
Commercial real estate	27			27			27			389			2,315
Construction	—			—			—			—			2,879
Residential mortgage	2,324			3,361			2,779			1,433			3,353
Total Consumer	198			372			284			301			275
Total 90 or more days past due	3,109			4,413			3,090			2,248			8,822
Total accruing past due loans	$	33,292		$	33,226		$	80,481		$	30,146		$	41,767
Non-accrual loans:*
Commercial and industrial	$	53,596		$	25,112		$	20,890		$	11,983		$	11,072
Commercial real estate	7,452			8,679			11,328			13,870			15,514
Construction	1,100			732			732			1,116			1,334
Residential mortgage	19,303			22,694			12,405			12,974			12,825
Total Consumer	3,003			3,104			1,870			1,844			1,409
Total non-accrual loans	84,454			60,321			47,225			41,787			42,154
Other real estate owned (OREO)	11,760			13,773			9,795			10,770			10,182
Other repossessed assets	864			858			441			480			342
Non-accrual debt securities	—			—			—			2,115			1,878
Total non-performing assets (NPAs)	$	97,078		$	74,952		$	57,461		$	55,152		$	54,556
Performing troubled debt restructured loans	$	83,694		$	116,414		$	117,176		$	113,677		$	109,802
Total non-accrual loans as a % of loans	0.36		%	0.27		%	0.26		%	0.23		%	0.24		%
Total NPAs as a % of loans and NPAs	0.42			0.33			0.31			0.30			0.31
Total accruing past due and non-accrual loans as a % of loans	0.51			0.41			0.70			0.40			0.47
Allowance for loan losses as a % of non-accrual loans	164.30			220.26			255.92			284.70			276.24

* Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis.


~~(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, and $1.2 million at December 31, 2016, September 30, 2016, and June 30, 2016, respectively. There were no covered OREO properties at June 30, 2017 and 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 $875 thousand, $745 thousand, $817 thousand, $728 thousand, $634 thousand at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016, respectively.

Loans past due 30 to 59 days ~~decreased $42.0~~increased $4.5 million to ~~$18.4~~$25.8 million at June 30, ~~2017~~2018 as compared to March 31, ~~2017. Within the past~~2018 largely due ~~category, commercial~~to increases in several loan types. Commercial and industrial loans ~~decreased $27.3~~increased $1.4 million mainly due to ~~$19.2 million~~NYC taxi medallion loans ~~collateralized by New York City (NYC) taxi cab medallions~~at the early stage of delinquency reported inwithin this ~~delinquency~~ category at ~~March 31, 2017 which were current~~June 30, 2018 that are subsequently performing to their contractual ~~payments at June 30, 2017, as well as normal fluctuations~~terms or in ~~this early stage delinquency category. Commercial real estate loans past due 30 to 59 days decreased by $4.7 million largely due to migration~~the process of one internally classified relationship totaling $5.9 million included from this delinquency category at March 31, 2017 to loans past due 60 to 89 days at June 30, 2017. There were no construction loans past due 30 to 59 days at June 30, 2017 as compared to $7.8 million at March 31, 2017 due to a few previously past due loans that were current to their contractual payments at June 30, 2017.renewal.

Loans past due 60 to 89 days ~~increased $8.8~~decreased $3.1 million to ~~$14.5~~$4.4 million at June 30, ~~2017~~2018 as compared to March 31, ~~2017~~2018 mainly due to decreases across most of the loan types within this delinquency category. Construction loans decreased $1.1 million due to the migration of one potential problem loan relationship at March 31, 2018 to the non-accrual loans category at June 30, 2018. Residential loan delinquencies within this past due category decreased $1.5 million largely due to a $7.9 million increase in past due commercial real estate loans caused, in part, by the aforementioned migration of one internally classified relationship totaling $5.9 million reported within the 30 to 59 days past due delinquency category at March 31, 2017. Commercial and industrial loans also increased $2.3 million to $2.7 million at June 30, 2017 as compared to March 31, 2017 mostly due to three loans collateralized by NYC taxi cab medallions totaling $2.4 million. Partially offsetting these increases, residential mortgage delinquencies declined $2.5 million at June 30, 2017 as compared to March 31, 2017.improved performance.

Loans past due 90 days or more and still accruing ~~increased $6.7~~decreased $1.3 million to ~~$8.8~~$3.1 million at June 30, ~~2017~~2018 as compared to ~~$2.1~~$4.4 million at March 31, ~~2017 largely~~2018 mainly due to ~~performing matured construction and commercial real estate loans in the normal process of renewal totaling $5.2 million.~~improved performance. 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 ~~$3.9~~$24.1 million to ~~$42.2~~$84.5 million at June 30, ~~2017~~2018 as compared to ~~$38.3~~$60.3 million at March 31, ~~2017 largely~~2018 mainly due to ~~two impaired Chicago~~ taxi medallion ~~relationships (within~~loans totaling $31.1 million (See further discussion of our taxi medallion lending below) moved to non-accrual status during the ~~commercial and industrial category) with~~second quarter of 2018. As a ~~combined~~result, non-accrual loans increased to 0.36 percent of total ~~of $5.6 million that were placed on non-accrual~~loans at June 30, ~~2017.~~2018 as compared to 0.27 percent of total loans at March 31, 2018. In addition, non-accrual construction loans increased $368 thousand due to the aforementioned $1.1 million loan that migrated from the 90 days or more past due delinquency category, partially offset by one non-accrual loan totaling $732 thousand reported at March 31, 2018 that paid-off during the second quarter of 2018.

~~At June 30, 2017,~~During the second quarter of 2018, we continued to closely monitor our ~~entire taxi medallion loan portfolio totaled $140.5 million, consisting of $130.4 million and $10.1 million of~~ NYC and Chicago taxi medallion loans ~~respectively.~~totaling $125.9 million and $9.0 million, respectively, within the commercial and industrial loan portfolio at June 30, 2018. While the vast majority of the taxi medallion loans are currently performing, negative trends in the market valuations of the underlying taxi medallion collateral could impact the future performance and internal classification of this portfolio. At June 30, ~~2017,~~2018, the medallion portfolio included impaired loans ~~of $37.4~~totaling $64.7 million with related reserves of ~~$3.7~~$23.2 million within the allowance for loan losses as compared to impaired loans ~~of $6.3~~totaling $65.0 million with related reserves of ~~$2.6~~$19.9 million at March 31, ~~2017.~~2018. At June 30, ~~2017,~~2018, the impaired medallion loans largely consisted of performing troubled debt restructured (TDR) loans ~~and the aforementioned~~classified as substandard loans, as well as $44.7 million of non-accrual ~~Chicago~~ taxi cab medallion loans ~~totaling $5.6 million. Loans past~~classified as doubtful. Our non-accrual taxi medallion loans increased from $13.9 million at March 31, 2018 primarily due 30 to ~~59 days~~weakened levels of cash flow, collateral and guarantor support in relation to several previously impaired TDR loans, ~~past~~and not due 60 to 89 days include $809 thousand and $2.4 million of NYC taxi medallions at June 30, 2017, respectively, which are all outstanding to one borrower. We are currently renegotiating the terms of these past due loans. actual loan performance.

Valley's historical taxi medallion lending criteria ~~has~~had 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.~~in certain instances. However, ~~we continue to closely monitor~~the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, increased the level of our allowance for loan losses at June 30, 2018 (See the "Allowance for Credit Losses" section below). Potential further declines in the market valuation of taxi medallions could also negatively impact the future performance of this ~~portfolio's performance and the potential impact~~portfolio. For example, a 25 percent decline in our current estimated market value of the ~~changes in market valuation for~~ taxi medallions ~~due~~would require additional allocated reserves of approximately $10 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at June 30, 2018. Additionally, Valley currently has $32.1 million of performing non-impaired taxi medallion loans which are scheduled to ~~competing car service providers~~mature during 2018 and ~~other factors.~~

2019, and $21.0 million that mature between 2023 and 2027. If the loans with 2018 and 2019 maturities became TDRs upon maturity and renewal, an additional reserve of $9.9 million would be required based on the allowance methodology at June 30, 2018.

OREO properties decreased ~~$555 thousand~~$2.0 million to ~~$10.2~~$11.8 million at June 30, ~~2017~~2018 from ~~$10.7~~$13.8 million at March 31, ~~2017.~~2018 primarily due to higher volume of sales of OREO properties. Net gains and losses on the sale of OREO were immaterial during the six months ended June 30, 2018. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled ~~$6.2~~$1.8 million at June 30, ~~2017.~~

2018.

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~~Troubled debt restructured loans (TDRs)~~TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) ~~increased $29.4~~decreased $32.7 million to ~~$109.8~~$83.7 million at June 30, ~~2017~~2018 as compared to ~~$80.4~~$116.4 million at March 31, ~~2017~~2018 mainly due to taxi medallion loans totaling ~~$33.4~~$27.9 million ~~that were restructured and classified as TDR during the second quarter of 2017.~~migrating to non-accrual loans category. Performing TDRs consisted of ~~124~~101 loans (primarily in the commercial and industrial loan and commercial real estate portfolios). at June 30, 2018. On an aggregate basis, the ~~$109.8~~$83.7 million in performing TDRs at June 30, ~~2017~~2018 had a modified weighted average interest rate of approximately ~~4.53~~5.46 percent as compared to a pre-modification weighted average interest rate of ~~4.30~~4.83 percent. The increase in the modified weighted average interest rate of the performing TDRs as compared to the pre-modification weighted average interest rate was largely due to ~~several~~ loans restructured at higher current market interest rates, but with extended loan terms.

Despite the increase in taxi medallion loans classified as TDR and non-accrual loans during the second quarter of 2017, we believe our overall credit quality metrics continued to reflect our solid underwriting standards at June 30, 2017. However, we can provide no assurances as to the future level of our loan delinquencies.

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 and industrial, 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.~~2017.

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.

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The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for the periods indicated.


	Three Months Ended									Six Months Ended						Three Months Ended									Six Months Ended
	June 30, 2017			March 31, 2017			June 30, 2016			June 30, 2017			June 30, 2016			June 30, 2018			March 31, 2018			June 30, 2017			June 30, 2018			June 30, 2017
	($ in thousands)															($ in thousands)
Average loans outstanding	$	17,701,676		$	17,313,100		$	16,252,915		$	17,508,461		$	16,123,229		$	22,840,235		$	22,302,991		$	17,701,676		$	22,573,097		$	17,508,461
Beginning balance - Allowance for credit losses	117,696			116,604			107,675			116,604			108,367			136,704			124,452			117,696			124,452			116,604
Loans charged-off:
Commercial and industrial	(2,910		)	(1,714		)	(493		)	(4,624		)	(1,744		)	(642		)	(131		)	(2,910		)	(773		)	(4,624		)
Commercial real estate	(139		)	(414		)	(414		)	(553		)	(519		)	(38		)	(310		)	(139		)	(348		)	(553		)
Construction	—			—			—			—			—			—			—			—			—			—
Residential mortgage	(229		)	(130		)	(151		)	(359		)	(232		)	(99		)	(68		)	(229		)	(167		)	(359		)
Total Consumer	(1,011		)	(1,121		)	(697		)	(2,132		)	(1,771		)	(1,422		)	(1,211		)	(1,011		)	(2,633		)	(2,132		)
Total charge-offs	(4,289		)	(3,379		)	(1,755		)	(7,668		)	(4,266		)	(2,201		)	(1,720		)	(4,289		)	(3,921		)	(7,668		)
Charged-off loans recovered:
Commercial and industrial	312			848			990			1,160			1,516			819			2,107			312			2,926			1,160
Commercial real estate	346			142			1,458			488			1,547			15			369			346			384			488
Construction	294			—			—			294			—			—			—			294			—			294
Residential mortgage	235			448			94			683			109			180			80			235			260			683
Total Consumer	395			563			523			958			912			495			468			395			963			958
Total recoveries	1,582			2,001			3,065			3,583			4,084			1,509			3,024			1,582			4,533			3,583
Net (charge-offs) recoveries	(2,707		)	(1,378		)	1,310			(4,085		)	(182		)	(692		)	1,304			(2,707		)	612			(4,085		)
Provision charged for credit losses	3,632			2,470			1,429			6,102			2,229			7,142			10,948			3,632			18,090			6,102
Ending balance - Allowance for credit losses	$	118,621		$	117,696		$	110,414		$	118,621		$	110,414		$	143,154		$	136,704		$	118,621		$	143,154		$	118,621
Components of allowance for credit losses:
Allowance for loan losses	$	116,446		$	115,443		$	108,088		$	116,446		$	108,088		$	138,762		$	132,862		$	116,446		$	138,762		$	116,446
Allowance for unfunded letters of credit	2,175			2,253			2,326			2,175			2,326			4,392			3,842			2,175			4,392			2,175
Allowance for credit losses	$	118,621		$	117,696		$	110,414		$	118,621		$	110,414		$	143,154		$	136,704		$	118,621		$	143,154		$	118,621
Components of provision for credit losses:
Provision for losses on loans	$	3,710		$	2,402		$	1,363		$	6,112		$	2,092		$	6,592		$	10,702		$	3,710		$	17,294		$	6,112
Provision for unfunded letters of credit	(78		)	68			66			(10		)	137			550			246			(78		)	796			(10		)
Provision for credit losses	$	3,632		$	2,470		$	1,429		$	6,102		$	2,229		$	7,142		$	10,948		$	3,632		$	18,090		$	6,102
Annualized ratio of net charge-offs (recoveries) to average loans outstanding	0.06		%	0.03		%	(0.03		)%	0.05		%	0.00		%	0.01		%	(0.02		)%	0.06		%	(0.01		)%	0.05		%
Allowance for credit losses as a % of non-PCI loans	0.73			0.75			0.76			0.73			0.76			0.77			0.78			0.73			0.77			0.73
Allowance for credit losses as a % of total loans	0.67			0.67			0.67			0.67			0.67			0.62			0.61			0.67			0.62			0.67

During the second quarter of 2018 and 2017, we recognized net loan charge-offs oftotaling $692 thousand and $2.7 million, respectively, as compared to ~~$1.4~~net recoveries of loan charge-offs of $1.3 million ~~for~~in the first quarter of ~~2017, and net~~2018. The overall level of loan ~~recoveries of $1.3 million the second quarter of 2016. The~~charge-offs has continued to be low, despite a moderate increase in ~~net~~automobile loan charge-offs within the total consumer category during the six months ended June 30, 2018 as compared to the ~~first quarter of 2017 was largely due to one charged-off impaired loan totaling $1.9 million within the commercial and industrial loan portfolio during the second quarter~~same period of 2017.

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During the second quarter of ~~2017,~~2018, we recorded a ~~$3.6~~$7.1 million provision for credit losses as compared to ~~$2.5~~$10.9 million and ~~$1.4~~$3.6 million for the first quarter of ~~2017~~2018 and the second quarter of ~~2016,~~2017, respectively. ~~The quarter over quarter increase in~~For the first half of 2018, the provision ~~was~~for credit losses increased $12.0 million as compared to the same period in 2017 mainly due ~~in part,~~ to ~~solid second quarter loan growth and an increase in~~higher specific reserves allocated ~~reserves for~~to impaired taxi medallion loans at June 30, ~~2017.~~2018, as well as strong non-PCI loan growth during the first half of 2018.

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:

June 30, 2017 March 31, 2017 June 30, 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* $ 53,792
2.04 % $ 53,541
2.03 % $ 50,351
1.99 %
Commercial real estate loans:
Commercial real estate 37,180
0.40 % 38,146
0.42 % 35,869
0.45 %
Construction 18,275
2.07 % 18,156
2.17 % 16,008
2.08 %
Total commercial real estate loans 55,455
0.55 % 56,302
0.57 % 51,877
0.59 %
Residential mortgage loans 4,186
0.15 % 3,592
0.13 % 3,495
0.11 %
Consumer loans:
Home equity 582
0.13 % 433
0.09 % 968
0.20 %
Auto and other consumer 4,606
0.26 % 3,828
0.22 % 3,723
0.23 %
Total consumer loans 5,188
0.23 % 4,261
0.19 % 4,691
0.22 %
Total allowance for credit losses $ 118,621
0.67 % $ 117,696
0.67 % $ 110,414
0.67 %



	June 30, 2018				March 31, 2018				June 30, 2017
	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*	$	78,649	2.05	%	$	70,388	1.94	%	$	53,792	2.04	%
Commercial real estate loans:
Commercial real estate	33,234		0.28	%	36,109		0.31	%	37,180		0.40	%
Construction	20,578		1.49	%	20,570		1.50	%	18,275		2.07	%
Total commercial real estate loans	53,812		0.40	%	56,679		0.43	%	55,455		0.55	%
Residential mortgage loans	4,624		0.13	%	4,100		0.12	%	4,186		0.15	%
Consumer loans:
Home equity	604		0.12	%	547		0.10	%	582		0.13	%
Auto and other consumer	5,465		0.26	%	4,990		0.25	%	4,606		0.26	%
Total consumer loans	6,069		0.23	%	5,537		0.22	%	5,188		0.23	%
Total allowance for credit losses	$	143,154	0.62	%	$	136,704	0.61	%	$	118,621	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 0.62 percent, 0.61 percent and 0.67 percent at June 30, ~~2017~~, 2018, March 31, ~~2017~~2018 and June 30, ~~2016.~~2017, respectively. At June 30, ~~2017,~~2018, our allowance allocations for losses as a percentage of total loans remained relatively ~~stable in most loan categories~~unchanged as compared to March 31, ~~2017, but declined 0.10 basis points~~2018 for ~~construction~~most loan categories, except for commercial and industrial loans ~~primarily~~which increased 0.11 percent largely due to ~~the continued low level of recent loss experience in this portfolio. There were no construction loan charge-offs during the six months endedJune 30, 2017~~higher specific reserves for impaired taxi medallion loans and, ~~the year ended December 31, 2016.~~

to a much lesser extent, internally classified loans.

Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately ~~$1.5~~$4.6 billion) was 0.77 percent, 0.78 percent and 0.73 percent at June 30, ~~2017, as compared to 0.75 percent and 0.76 percent at~~2018, March 31, ~~2017~~2018 and June 30, ~~2016,~~2017, respectively. 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 June 30, ~~2017,~~2018, March 31, ~~2017~~2018 and June 30, ~~2016.~~2017.

Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At ~~both~~ June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, shareholders’ equity totaled approximately ~~$2.4~~$3.3 billion and $2.5 billion, respectively, and represented ~~10.3~~10.9 percent and ~~10.4~~10.6 percent of total assets, respectively. During the six months ended June 30, ~~2017,~~2018, total shareholders’ equity increased by ~~$46.7~~$744.1 million primarily due to (i) the additional capital of $737.2 million issued in the USAB acquisition, (ii) net income of ~~$96.2~~$114.8 million, ~~(ii) a $5.4 million decrease in our accumulated other comprehensive loss,~~ (iii) ~~a $4.5~~an $8.6 million increase attributable to the effect of our stock incentive plan and (iv) net proceeds of ~~$2.2~~$1.0 million from the re-issuance of treasury and authorized common shares issued under our dividend reinvestment plan totaling a combined ~~186~~87 thousand shares. These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a ~~combined $61.6 million. See Note 3 to the~~

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combined $79.5 million, (ii) $23.1 million of other comprehensive losses, and (iii) a $14.9 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2018. See Note 4 to the consolidated financial statements for additional information regarding changes in our accumulated other comprehensive loss during the three and six months ended June 30, ~~2017.~~2018.

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 January 1, 2018, Valley and Valley National Bank are required to maintain a capital conservation buffer of 1.875 percent. As of June 30, ~~2017,~~2018, and December 31, ~~2016,~~2017, Valley and Valley National Bank exceeded all capital adequacy requirements with the capital conservation buffer required to be phased in at these dates 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 June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


	Actual				Minimum Capital Requirements with Capital Conservation Buffer				To Be Well Capitalized Under Prompt Corrective Action Provision				Actual				Minimum Capital Requirements				To Be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	($ in thousands)												($ in thousands)
As of June 30, 2017
As of June 30, 2018
Total Risk-based Capital
Valley	$	2,132,436	11.99	%	$	1,644,928	9.250	%	N/A		N/A		$	2,699,896	11.77	%	$	2,264,603	9.875	%	N/A		N/A
Valley National Bank	2,076,401		11.70		1,641,551		9.250		$	1,774,650	10.00	%	2,613,737		11.42		2,260,587		9.875		$	2,289,202	10.00	%
Common Equity Tier 1 Capital
Valley	1,631,680		9.18		1,022,523		5.750		N/A		N/A		1,997,937		8.71		1,461,959		6.375		N/A		N/A
Valley National Bank	1,857,730		10.47		1,020,423		5.750		1,153,522		6.50		2,370,583		10.36		1,459,366		6.375		1,487,981		6.50
Tier 1 Risk-based Capital
Valley	1,744,690		9.81		1,289,268		7.250		N/A		N/A		2,212,742		9.65		1,805,949		7.875		N/A		N/A
Valley National Bank	1,857,730		10.47		1,286,621		7.250		1,419,720		8.00		2,370,583		10.36		1,802,746		7.875		1,831,361		8.00
Tier 1 Leverage Capital
Valley	1,744,690		7.69		907,078		4.00		N/A		N/A		2,212,742		7.72		1,146,571		4.00		N/A		N/A
Valley National Bank	1,857,730		8.21		905,662		4.00		1,132,078		5.00		2,370,583		8.28		1,144,983		4.00		1,431,229		5.00

8180


	Actual				Minimum Capital Requirements with Capital Conservation Buffer				To Be Well Capitalized Under Prompt Corrective Action Provision				Actual				Minimum Capital Requirements				To Be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	($ in thousands)												($ in thousands)
As of December 31, 2016
As of December 31, 2017
Total Risk-based Capital
Valley	$	2,084,531	12.15	%	$	1,480,006	8.625	%	N/A		N/A		$	2,258,044	12.61	%	$	1,656,575	9.25	%	N/A		N/A
Valley National Bank	2,023,857		11.82		1,476,767		8.625		$	1,712,193	10.00	%	2,185,967		12.23		1,653,088		9.25		$	1,787,122	10.00	%
Common Equity Tier 1 Capital
Valley	1,590,825		9.27		879,424		5.125		N/A		N/A		1,651,849		9.22		1,029,763		5.75		N/A		N/A
Valley National Bank	1,807,201		10.55		877,499		5.125		1,112,926		6.50		1,961,316		10.97		1,027,595		5.75		1,161,629		6.50
Tier 1 Risk-based Capital
Valley	1,698,767		9.90		1,136,816		6.625		N/A		N/A		1,864,279		10.41		1,298,397		7.25		N/A		N/A
Valley National Bank	1,807,201		10.55		1,134,328		6.625		1,369,755		8.00		1,961,316		10.97		1,295,663		7.25		1,429,698		8.00
Tier 1 Leverage Capital
Valley	1,698,767		7.74		878,244		4.00		N/A		N/A		1,864,279		8.03		928,484		4.00		N/A		N/A
Valley National Bank	1,807,201		8.25		876,026		4.00		1,095,032		5.00		1,961,316		8.47		926,459		4.00		1,158,074		5.00

The Dodd-Frank Act ~~requires~~required federal banking agencies to issue regulations that require banks with total consolidated assets of more than $10.0 billion to conduct and publish company-run annual stress tests to assess the potential impact of different scenarios on the consolidated earnings and capital of each bank and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities. ~~On October 9, 2012,~~

In May 2018, the ~~FRB published final rules implementing~~Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was enacted which altered several provisions of the Dodd-Frank Act, including requirements of company-run stress tests. With the enactment, bank holding companies with assets of less than $100 billion are no longer subject to company-run stress testing requirements for banks with total consolidated assets of more than $10.0 billion but less than $50.0 billion. These rules set forth the timing and type of stress test activities, as well as rules governing controls, oversight and disclosure.

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, 2016) to the FRB on July 27, 2017. The full disclosure~~in section 165(i)(2) of the ~~stress testing results,~~Dodd-Frank Act, including ~~the results for Valley National Bank,~~publishing a summary of the ~~supervisory severely adverse scenario and additional information regarding~~results. Subsequently, the ~~methodologies used~~OCC issued a letter to ~~conduct~~each covered bank with assets less than $100 billion that officially communicated an extension, through November 25, 2019, with respect to the stress ~~test at December 31, 2016 will be available under~~tests that would have been required for the ~~Shareholder Relations section~~2018 and 2019 stress-test cycles. While Valley is no longer required to publish company-run annual stress tests, it continues to internally run stress tests of ~~our website (www.valleynationalbank.com) under the Dodd-Frank Act Stress Test Reports section when the FRB discloses the results~~its capital position that are subject to ~~the public in October 2017. The previous year results (utilizing data as of December 31, 2015) can currently be found on our website.~~

review by Valley's primary regulators.

Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows:


	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
	($ in thousands, except for share data)				($ in thousands, except for share data)
Common shares outstanding	263,971,766		263,638,830		331,454,025		264,468,851
Shareholders’ equity	$	2,423,901	$	2,377,156	$	3,277,312	$	2,533,165
Less: Preferred stock	111,590		111,590		209,691		209,691
Less: Goodwill and other intangible assets	734,337		736,121		1,162,858		733,144
Tangible common shareholders’ equity	$	1,577,974	$	1,529,445	$	1,904,763	$	1,590,330
Tangible book value per common share	$	5.98	$	5.80	$	5.75	$	6.01
Book value per common share	$	8.76	$	8.59	$	9.26	$	8.79

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

accordance with U.S. GAAP. This non-GAAP financial measure may also be calculated differently from similar measures disclosed by other companies.

Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common stockholders) per common share. Our retention ratio was ~~37.1~~33.3 percent for the six months ended June 30, ~~2017~~2018 as compared to ~~30.2~~24.1 percent for the year ended December 31, ~~2016. We expect~~2017. Our retention ratio increased from the year ended December 31, 2017, however it was negatively impacted by infrequent charges, including legal expenses related to litigation reserves, USAB merger expense and a charge to income tax expense related to the effect of the USAB acquisition on our state deferred tax assets during the six months ended June 30, 2018. Our retention ratio is expected to improve during the remainder of ~~2017~~2018 due to, among other factors, ~~solid~~higher earnings from continued loan growth, synergies from the USAB acquisition, including the full systems integration completed in the second quarter of 2018, and ~~potential earnings improvement from~~further implementation of our LIFT ~~our earnings enhancement initiative to review our business practices with the primary goal of improving Valley's overall efficiency.~~initiatives.

Cash dividends declared amounted to $0.22 per common share for both the six months ended June 30, 2018 and 2017, ~~and 2016.~~respectively. 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.~~decision. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow 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~~2017 in the MD&A section - “Off-Balance Sheet Arrangements” and Notes 1113 and 1214 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 6566 for a discussion of interest rate sensitivity.



Item 4.	Controls and Procedures

(a) Disclosure 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 a result 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~~material weakness in Valley’s internal control over financial reporting ~~during~~previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 10-K”), Valley’s disclosure controls and procedures were not effective as of June 30, 2018.

As previously disclosed in the 2017 10-K, management identified the following material weakness in internal controls as of December 31, 2017:

Valley did not assign appropriate levels of responsibility and authority to its Ethics and Compliance group to identify and evaluate the severity and financial reporting implications of allegations of non-compliance with laws and regulations, Company policies and procedures and other complaints. Additionally, Valley did not establish controls over required communications of such matters to senior management or others within the organization and to those charged with governance to enable them to conduct or monitor the investigation and resolution of such matters on a timely basis.

During the first quarter of 2018, Valley initiated remediation efforts. Management reviewed the design and operation of the controls and made enhancements to the proper identification and escalation of allegations of non-compliance with laws and regulations, Company policies and procedures and other complaints that require the attention of senior management and those charged with governance. During the second quarter of 2018, management continued to refine and implement such enhancements. Management is still evaluating these new controls and procedures. Once placed in operation for a sufficient period of time, Valley will subject them to appropriate tests in order to determine whether they are operating effectively.

(b) Changes in internal controls over financial reporting. As discussed above, management has continued to remediate the underlying causes of the material weakness disclosed in the 2017 10-K. Other than the plan for remediation described above, there has been no change in Valley’s internal control over financial reporting in the quarter ended June 30, ~~2017~~2018 that ~~have~~has materially affected, or ~~are~~is 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.

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 1416 to the consolidated financial statements for further details.



Item 1A.	Risk Factors

~~Other than the additional risk factor described below, there~~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.~~

~~The acquisition of USAmeriBancorp, Inc. may not be successful, which may adversely affect our business, financial condition and results of operation.~~

In July 2017, we announced our entry into a merger agreement with USAmeriBancorp, Inc. (USAB) and its wholly-owned subsidiary, USAmeriBank, headquartered in Clearwater, Florida. The acquisition of USAB is subject to several conditions, including the receipt of necessary shareholder and regulatory approvals. The satisfaction of such conditions could delay the acquisition of USAB for a significant period or prevent it from occurring. In addition, both Valley and USAB may terminate the merger agreement under certain circumstances, including but not limited to, if Valley’s share price falls below $11.00 in the preclosing measurement period. If we do not complete the acquisition of USAB or if it is significantly delayed, the expected benefits of such acquisition may not be fully realized, if at all, and we may incur significant expenses and our business and results of operations may be materially adversely affected.2017.



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

During the quarter, we did not sell any equity securities not registered under the Securities Act of 1933, as amended. Purchases of equity securities by the issuer and affiliated purchasers during the three months ended June 30, ~~2017~~2018 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

Period
Total Number of
Shares Purchased (1)

Average
Price Paid
Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (2)

Maximum Number of
Shares that May Yet Be
Purchased Under the Plans (2)
April 1, 2017 to April 30, 2017 —
$ —
—
4,112,465
May 1, 2017 to May 31, 2017 2,719
11.72
—
4,112,465
June 1, 2017 to June 30, 2017 —
—
—
4,112,465
Total 2,719
$ 11.72
—



Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans (2)	Maximum Number of Shares that May Yet Be Purchased Under the Plans (2)
April 1, 2018 to April 30, 2018	32,458	$	12.08	—	4,112,465
May 1, 2018 to May 31, 2018	2,584	12.95		—	4,112,465
June 1, 2018 to June 30, 2018	7,088	12.59		—	4,112,465
Total	42,130	$	12.58	—


(1)	Represents repurchases made in connection with the vesting of employee restricted stock awards.


(2)	On January 17, 2007, Valley publicly announced its intention to repurchase up to 4.7 million outstanding common shares in the open market or in privately negotiated transactions. The repurchase plan has no stated expiration date. No repurchase plans or programs expired or terminated during the three months ended June 30, ~~2017.~~2018.



Item 6.	Exhibits



~~(2)~~	~~Plan of acquisition, reorganization, arrangement, liquidation or succession:~~
	~~(2.1)~~	Agreement and Plan of Merger, dated July 26, 2017, by and between Valley National Bancorp and USAmeriBancorp, Inc., incorporated herein by reference to Exhibit 2.1 to the Registrant’s Form 8-K Current Report filed on July 28, 2017.
(3)	Articles of Incorporation and By-laws:
	(3.1)	~~Certificate of Amendment to the~~ Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 ofto the ~~Registrant's~~Registrant’s Form 10-Q ~~Quarterly~~ Report filed on ~~May 8,~~November 7, 2017.
	(3.2)	Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 of the Registrant's Form 8-K Current Report filed on August 1, 2017.
	~~(3.3)~~	~~Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.A of the Registrant's Form 10-K Annual Report filed on February 29, 2016.~~
	~~(3.4)~~	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)~~	Underwriting Agreement, dated July 27, 2017, by and between the Company and Keefe, Bruyette & Woods, Inc., as representative of the underwriters named therein, incorporated herein by reference to Exhibit 1.1 to the Registrant’s Form 8-K Current Report filed on August 1, 2017.
	~~(10.2)~~	Amended and Restated Change in Control Agreement dated June 28, 2017 between Valley, Valley National Bank and Dianne M. Grenz.+*
	~~(10.3)~~	Severance Agreement dated June 28, 2017 between Valley, Valley National Bank and Dianne M. Grenz.+*
(31.1)	Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by ~~Gerald H. Lipkin, Chairman of the Board~~Ira Robbins, President 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~~Ira Robbins, President 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.~~

8684

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~~Ira Robbins
August ~~7, 2017~~8, 2018				~~Gerald H. Lipkin~~Ira Robbins
				~~Chairman of the Board~~President
				and Chief Executive Officer

Date:				/s/ Alan D. Eskow
August ~~7, 2017~~8, 2018				Alan D. Eskow
				Senior Executive Vice President and
				Chief Financial Officer

8785