UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 10-Q
(Mark One)
xQuarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 20182019
OR
¨


Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-11277
VALLEY NATIONAL BANCORPValley 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 Registrantregistrant (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 Registrantregistrant 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, 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 filerxAccelerated filer¨Emerging growthSmaller reporting company¨
      
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reportingEmerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolsName of exchange on which registered
Common Stock, no par valueVLYThe Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series A, no par valueVLYPPThe Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series B, no par valueVLYPOThe Nasdaq Stock Market LLC
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 331,261,486331,748,009 shares were outstanding as of May 9, 20187, 2019






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




1







PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share data)
March 31,
2018
 December 31,
2017
March 31,
2019
 December 31,
2018
Assets(Unaudited)  (Unaudited)  
Cash and due from banks$222,311
 $243,310
$282,250
 $251,541
Interest bearing deposits with banks274,349
 172,800
184,347
 177,088
Investment securities:      
Held to maturity (fair value of $2,014,954 at March 31, 2018 and $1,837,620 at December 31, 2017)2,048,583
 1,842,691
Held to maturity (fair value of $2,066,970 at March 31, 2019 and $2,034,943 at December 31, 2018)2,074,399
 2,068,246
Available for sale1,843,514
 1,493,905
1,723,106
 1,749,544
Total investment securities3,892,097
 3,336,596
3,797,505
 3,817,790
Loans held for sale, at fair value8,449
 15,119
31,903
 35,155
Loans22,552,767
 18,331,580
25,423,118
 25,035,469
Less: Allowance for loan losses(132,862) (120,856)(154,381) (151,859)
Net loans22,419,905
 18,210,724
25,268,737
 24,883,610
Premises and equipment, net346,700
 287,705
312,677
 341,630
Lease right of use assets289,669
 
Bank owned life insurance436,334
 386,079
440,845
 439,602
Accrued interest receivable86,804
 73,990
100,722
 95,296
Goodwill1,078,892
 690,637
1,084,665
 1,084,665
Other intangible assets, net86,487
 42,507
73,580
 76,990
Other assets612,029
 542,839
610,091
 659,721
Total Assets$29,464,357
 $24,002,306
$32,476,991
 $31,863,088
Liabilities      
Deposits:      
Non-interest bearing$6,124,256
 $5,224,928
$6,352,135
 $6,175,495
Interest bearing:      
Savings, NOW and money market11,077,789
 9,365,013
11,447,043
 11,213,495
Time4,757,801
 3,563,521
7,108,318
 7,063,984
Total deposits21,959,846
 18,153,462
24,907,496
 24,452,974
Short-term borrowings1,618,416
 748,628
2,062,576
 2,118,914
Long-term borrowings2,353,548
 2,315,819
1,499,727
 1,654,268
Junior subordinated debentures issued to capital trusts55,109
 41,774
55,457
 55,370
Lease liabilities313,525
 3,125
Accrued expenses and other liabilities232,435
 209,458
193,331
 227,983
Total Liabilities26,219,354
 21,469,141
29,032,112
 28,512,634
Shareholders’ Equity      
Preferred stock, no par value; 50,000,000 shares authorized:   
Series A (4,600,000 shares issued at March 31, 2018 and December 31, 2017)111,590
 111,590
Series B (4,000,000 shares issued at March 31, 2018 and December 31, 2017)98,101
 98,101
Common stock (no par value, authorized 450,000,000 shares; issued 331,202,537 shares at March 31, 2018 and 264,498,643 shares at December 31, 2017)115,824
 92,727
Preferred stock, no par value; 50,000,000 authorized shares:   
Series A (4,600,000 shares issued at March 31, 2019 and December 31, 2018)111,590
 111,590
Series B (4,000,000 shares issued at March 31, 2019 and December 31, 2018)98,101
 98,101
Common stock (no par value, authorized 450,000,000 shares; issued 332,062,473 shares at March 31, 2019 and 331,634,951 shares at December 31, 2018)116,466
 116,240
Surplus2,784,194
 2,060,356
2,799,434
 2,796,499
Retained earnings199,555
 216,733
375,983
 299,642
Accumulated other comprehensive loss(64,103) (46,005)(53,257) (69,431)
Treasury stock, at cost (12,678 common shares at March 31, 2018 and 29,792 common shares at December 31, 2017)(158) (337)
Treasury stock, at cost (329,837 common shares at March 31, 2019 and 203,734 common shares at December 31, 2018)(3,438) (2,187)
Total Shareholders’ Equity3,245,003
 2,533,165
3,444,879
 3,350,454
Total Liabilities and Shareholders’ Equity$29,464,357
 $24,002,306
$32,476,991
 $31,863,088
See accompanying notes to consolidated financial statements.


2







VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data)
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
Interest Income      
Interest and fees on loans$237,586
 $174,353
$288,277
 $237,586
Interest and dividends on investment securities:      
Taxable21,323
 17,589
22,876
 21,323
Tax-exempt5,721
 4,031
4,804
 5,721
Dividends1,939
 2,151
3,174
 1,939
Interest on federal funds sold and other short-term investments926
 331
1,093
 926
Total interest income267,495
 198,455
320,224
 267,495
Interest Expense      
Interest on deposits:      
Savings, NOW and money market22,317
 10,183
36,283
 22,317
Time14,616
 9,553
38,171
 14,616
Interest on short-term borrowings5,732
 3,901
12,549
 5,732
Interest on long-term borrowings and junior subordinated debentures17,232
 12,950
14,573
 17,232
Total interest expense59,897
 36,587
101,576
 59,897
Net Interest Income207,598
 161,868
218,648
 207,598
Provision for credit losses10,948
 2,470
8,000
 10,948
Net Interest Income After Provision for Credit Losses196,650
 159,398
210,648
 196,650
Non-Interest Income      
Trust and investment services3,230
 2,744
2,904
 3,230
Insurance commissions3,821
 5,061
2,525
 3,821
Service charges on deposit accounts7,253
 5,236
5,903
 7,253
Losses on securities transactions, net(765) (23)(32) (765)
Fees from loan servicing2,223
 1,815
2,430
 2,223
Gains on sales of loans, net6,753
 4,128
4,576
 6,753
Gains (losses) on sales of assets, net77,720
 (97)
Bank owned life insurance1,763
 2,463
1,887
 1,763
Other7,973
 4,296
9,760
 8,070
Total non-interest income32,251
 25,720
107,673
 32,251
Non-Interest Expense      
Salary and employee benefits expense93,292
 65,927
83,105
 93,292
Net occupancy and equipment expense27,924
 23,035
27,886
 27,924
FDIC insurance assessment5,498
 5,127
6,121
 5,498
Amortization of other intangible assets4,293
 2,536
4,311
 4,293
Professional and legal fees17,047
 4,695
5,271
 17,047
Amortization of tax credit investments5,274
 5,324
7,173
 5,274
Telecommunication expense3,594
 2,659
2,268
 3,594
Other16,830
 11,649
11,660
 16,830
Total non-interest expense173,752
 120,952
147,795
 173,752
Income Before Income Taxes55,149
 64,166
170,526
 55,149
Income tax expense13,184
 18,071
57,196
 13,184
Net Income$41,965
 $46,095
113,330
 41,965
Dividends on preferred stock3,172
 1,797
3,172
 3,172
Net Income Available to Common Shareholders$38,793
 $44,298
$110,158
 $38,793
Earnings Per Common Share:      
Basic$0.12
 $0.17
$0.33
 $0.12
Diluted0.12
 0.17
0.33
 0.12
Cash Dividends Declared per Common Share0.11
 0.11
0.11
 0.11
Weighted Average Number of Common Shares Outstanding:Weighted Average Number of Common Shares Outstanding:  Weighted Average Number of Common Shares Outstanding:  
Basic330,727,416
 263,797,024
331,601,260
 330,727,416
Diluted332,465,527
 264,546,266
332,834,466
 332,465,527
See accompanying notes to consolidated financial statements.


3







VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
Net income$41,965
 $46,095
$113,330
 $41,965
Other comprehensive income, net of tax:      
Unrealized gains and losses on available for sale securities      
Net (losses) gains arising during the period(20,929) 1,307
Net gains (losses) arising during the period16,267
 (21,197)
Less reclassification adjustment for net losses included in net income548
 13
26
 532
Total(20,381) 1,320
16,293
 (20,665)
Non-credit impairment losses on available for sale securities   
Net change in non-credit impairment losses on securities(268) 113
Less reclassification adjustment for accretion of credit impairment losses included in net income(16) (87)
Total(284) 26
Unrealized gains and losses on derivatives (cash flow hedges)      
Net gains on derivatives arising during the period1,960
 127
Net (losses) gains on derivatives arising during the period(382) 1,960
Less reclassification adjustment for net losses included in net income1,036
 1,475
208
 1,036
Total2,996
 1,602
(174) 2,996
Defined benefit pension plan      
Amortization of net loss112
 59
55
 112
Total other comprehensive (loss) income(17,557) 3,007
Total other comprehensive income (loss)16,174
 (17,557)
Total comprehensive income$24,408
 $49,102
$129,504
 $24,408
See accompanying notes to consolidated financial statements.




4







CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
   Common Stock     Accumulated    
 Preferred Stock Shares Amount Surplus 
Retained
Earnings
 
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Shareholders’
Equity
 ($ in thousands)
Balance - December 31, 2018$209,691
 331,431
 $116,240
 $2,796,499
 $299,642
 $(69,431) $(2,187) $3,350,454
Adjustment due to the adoption of ASU No. 2016-02
 
 
 
 4,414
 
 
 4,414
Adjustment due to the adoption of ASU No. 2017-08
 
 
 
 (1,446) 
 
 (1,446)
Balance - January 1, 2019209,691
 331,431
 116,240
 2,796,499
 302,610
 (69,431) (2,187) 3,353,422
Net income
 
 
 
 113,330
 
 
 113,330
Other comprehensive income, net of tax
 
 
 
 
 16,174
 
 16,174
Cash dividends declared:               
Preferred stock, Series A, $0.39 per share
 
 
 
 (1,797) 
 
 (1,797)
Preferred stock, Series B, $0.34 per share
 
 
 
 (1,375) 
 
 (1,375)
Common stock, $0.11 per share
 
 
 
 (36,686) 
 
 (36,686)
Effect of stock incentive plan, net
 302
 226
 2,935
 (99) 
 (1,251) 1,811
Balance - March 31, 2019$209,691
 331,733
 $116,466
 $2,799,434
 $375,983
 $(53,257) $(3,438) $3,444,879

   Common Stock     Accumulated    
 Preferred Stock Shares Amount Surplus 
Retained
Earnings
 
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Shareholders’
Equity
 ($ in thousands)
Balance - December 31, 2017$209,691
 264,469
 $92,727
 $2,060,356
 $216,733
 $(46,005) $(337) $2,533,165
Reclassification due to the adoption of ASU No. 2016-01
 
 
 
 480
 (480) 
 
Reclassification due to the adoption of ASU No. 2017-12
 
 
 
 61
 (61) 
 
Adjustment due to the adoption of ASU No. 2016-16
 
 
 
 (17,611) 
 
 (17,611)
Balance - January 1, 2018209,691
 264,469
 92,727
 2,060,356
 199,663
 (46,546) (337) 2,515,554
Net income
 
 
 
 41,965
 
 
 41,965
Other comprehensive loss, net of tax
 
 
 
 
 (17,557) 
 (17,557)
Cash dividends declared:               
Preferred stock, Series A, $0.39 per share
 
 
 
 (1,797) 
 
 (1,797)
Preferred stock, Series B, $0.34 per share
 
 
 
 (1,375) 
 
 (1,375)
Common stock, $0.11 per share
 
 
 
 (36,635) 
 
 (36,635)
Effect of stock incentive plan, net
 1,714
 355
 8,717
 (2,266) 
 (169) 6,637
Common stock issued
 65,007
 22,742
 715,121
 
 
 348
 738,211
Balance - March 31, 2018$209,691
 331,190
 $115,824
 $2,784,194
 $199,555
 $(64,103) $(158) $3,245,003

See accompanying notes to consolidated financial statements.


5




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months Ended
March 31,
Three Months Ended March 31,
2018 20172019 2018
Cash flows from operating activities:      
Net income$41,965
 $46,095
$113,330
 $41,965
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization7,247
 6,260
12,798

7,247
Stock-based compensation7,395
 4,127
4,033
 7,395
Provision for credit losses10,948
 2,470
8,000
 10,948
Net amortization of premiums and accretion of discounts on securities and borrowings8,495
 6,043
7,560
 8,495
Amortization of other intangible assets4,293
 2,536
4,311
 4,293
Losses on securities transactions, net765
 23
32
 765
Proceeds from sales of loans held for sale237,360
 161,325
196,165
 237,360
Gains on sales of loans, net(6,753) (4,128)(4,576) (6,753)
Originations of loans held for sale(227,660) (112,682)(89,564) (227,660)
Losses on sales of assets, net97
 34
(Gains) losses on sales of assets, net(77,720) 97
Net change in:      
Fair value of borrowings hedged by derivative transactions
 (454)
Cash surrender value of bank owned life insurance(1,763) (2,463)(1,887) (1,763)
Accrued interest receivable(691) (1,429)(5,426) (691)
Other assets19,480
 (7,103)(38,990) 19,480
Accrued expenses and other liabilities(15,295) (35,145)65,212

(15,295)
Net cash provided by operating activities85,883
 65,509
193,278
 85,883
Cash flows from investing activities:      
Net loan originations and purchases(475,346) (323,470)(493,689) (475,346)
Investment securities held to maturity:      
Purchases(52,945) (52,160)(77,670) (52,945)
Maturities, calls and principal repayments58,227
 77,141
68,165
 58,227
Investment securities available for sale:      
Purchases(174,047) (207,402)
 (174,047)
Sales38,625
 

 38,625
Maturities, calls and principal repayments60,858
 50,543
45,351
 60,858
Death benefit proceeds from bank owned life insurance560
 1,998
644
 560
Proceeds from sales of real estate property and equipment7,378
 4,970
101,916
 7,378
Purchases of real estate property and equipment(4,260) (5,627)(3,817) (4,260)
Cash and cash equivalents acquired in acquisition156,612
 

 156,612
Net cash used in investing activities(384,338) (454,007)(359,100) (384,338)
Cash flows from financing activities:      
Net change in deposits241,541
 (399,567)454,522
 241,541
Net change in short-term borrowings219,809
 564,004
(56,338) 219,809
Proceeds from issuance of long-term borrowings, net
 200,000
Repayments of long-term borrowings(50,000) 
(155,000) (50,000)
Cash dividends paid to preferred shareholders(3,172) (1,797)

(3,172)
Cash dividends paid to common shareholders(29,611) (29,012)(37,053)
(29,611)
Purchase of common shares to treasury(2,083) (2,151)(1,367) (2,083)
Common stock issued, net2,521
 1,246
(855) 2,521
Other, net(119) 
Net cash provided by financing activities379,005
 332,723
203,790
 379,005
Net change in cash and cash equivalents80,550
 (55,775)37,968
 80,550
Cash and cash equivalents at beginning of year416,110
 392,501
428,629
 416,110
Cash and cash equivalents at end of period$496,660
 $336,726
$466,597
 $496,660




56







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)

Three Months Ended
March 31,
Three Months Ended March 31,
2018 20172019 2018
Supplemental disclosures of cash flow information:      
Cash payments for:      
Interest on deposits and borrowings$58,881
 $56,735
$93,405
 $58,881
Federal and state income taxes8,843
 1,599
3,204
 8,843
Supplemental schedule of non-cash investing activities:      
Transfer of loans to other real estate owned$145
 $4,813
$730
 $145
Transfer of loans to loans held for sale
 103,884
99,976
 150,522
Lease right of use assets obtained in exchange for operating lease liabilities289,669


Acquisition:      
Non-cash assets acquired:      
Investment securities held to maturity$214,217
 $
$
 $214,217
Investment securities available for sale308,385
 

 308,385
Loans3,744,682
 

 3,736,984
Premises and equipment62,066
 

 62,066
Bank owned life insurance49,052
 

 49,052
Accrued interest receivable12,123
 

 12,123
Goodwill388,255
 

 394,028
Other intangible assets45,906
 

 45,906
Other assets98,134
 

 100,059
Total non-cash assets acquired$4,922,820
 $
$
 $4,922,820
Liabilities assumed:      
Deposits$3,564,843
 $
$
 $3,564,843
Short-term borrowings649,979
 

 649,979
Long-term borrowings87,283
 

 87,283
Junior subordinated debentures issued to capital trusts13,249
 

 13,249
Accrued expenses and other liabilities26,848
 

 26,848
Total liabilities assumed4,342,202
 

 4,342,202
Net non-cash assets acquired$580,618
 $
$
 $580,618
Net cash and cash equivalents acquired in acquisition$156,612
 $
$
 $156,612
Common stock issued in acquisition$737,230
 $
$
 $737,230
See accompanying notes to consolidated financial statements.
















 








67







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 March 31, 20182019 and for all periods presented have been made. The results of operations for the three months ended on March 31, 20182019 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;losses, purchased credit impaired loans, the evaluation of goodwill and other intangible assets and investment securities for impairment; fair value measurements of assets and liabilities;impairment, and income taxes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.
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, 2017.


7




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 $13.4 million for the three months ended March 31, 2018, which primarily related to salary and employee benefits and professional and legal fees 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 maturity214,217
Investment securities available for sale308,385
Loans3,744,682
Premises and equipment62,066
Bank owned life insurance49,052
Accrued interest receivable12,123
Goodwill388,255
Other intangible assets45,906
Other assets: 
Deferred taxes8,698
Other real estate owned4,073
FHLB and FRB stock38,809
Tax credit investments20,138
Other26,416
Total other assets98,134
Total assets acquired$5,079,432
Liabilities assumed: 
Deposits: 
Non-interest bearing$887,083
Savings, NOW and money market1,678,115
Time999,645
Total deposits3,564,843
Short-term borrowings649,979
Long-term borrowings87,283
Junior subordinated debentures issued to capital trusts13,249
Accrued expenses and other liabilities26,848
Total liabilities assumed$4,342,202
Common stock issued in acquisition737,230

8





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.


9




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 Alient 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 3.2. Earnings Per Common Share
The following table shows the calculation of both basic and diluted earnings per common share for the three months ended March 31, 20182019 and 2017.2018:
 Three Months Ended
March 31,
 2019 2018
 (in thousands, except for share data)
Net income available to common shareholders$110,158
 $38,793
Basic weighted average number of common shares outstanding331,601,260
 330,727,416
Plus: Common stock equivalents1,233,206
 1,738,111
Diluted weighted average number of common shares outstanding332,834,466
 332,465,527
Earnings per common share:   
Basic$0.33
 $0.12
Diluted0.33
 0.12

 Three Months Ended
March 31,
 2018 2017
 (in thousands, except for share data)
Net income available to common shareholders$38,793
 $44,298
Basic weighted average number of common shares outstanding330,727,416
 263,797,024
Plus: Common stock equivalents1,738,111
 749,242
Diluted weighted average number of common shares outstanding332,465,527
 264,546,266
Earnings per common share:   
Basic$0.12
 $0.17
Diluted0.12
 0.17


Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of 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

8




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 equaled approximately 2.91.3 million and 3.2 millionsharesfor the three months ended March 31, 20182019. Anti-dilutive warrants and 2017, respectively.common stock options equaled 2.9 millionsharesfor the three months ended March 31, 2018. All of Valley's outstanding warrants expired unexercised in the fourth quarter of 2018.

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Note 4.3. Accumulated Other Comprehensive Loss


The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three months ended March 31, 2018.2019:
 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, 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 reclassifications(20,929) (268) 1,960
 
 (19,237)
Amounts reclassified from other comprehensive (loss) income548
 (16) 1,036
 112
 1,680
Other comprehensive (loss) income, net(20,381) (284) 2,996
 112
 (17,557)
Balance at March 31, 2018$(32,865) $(664) $(5,403) $(25,171) $(64,103)
 Components of Accumulated Other Comprehensive Loss 
Total
Accumulated
Other
Comprehensive
Loss
 
Unrealized Gains
and Losses on
Available for Sale
(AFS) Securities
 
Unrealized Gains
and (Losses) on
Derivatives
 
Defined
Benefit
Pension Plan
 
 (in thousands)
Balance at December 31, 2018$(33,559) $(4,031) $(31,841) $(69,431)
Other comprehensive income (loss) before reclassification16,267
 (382) 
 15,885
Amounts reclassified from other comprehensive income (loss)26
 208
 55
 289
Other comprehensive income (loss), net16,293
 (174) 55
 16,174
Balance at March 31, 2019$(17,266) $(4,205) $(31,786) $(53,257)


The following table presents amounts reclassified from each component of accumulated other comprehensive loss on a gross and net of tax basis for the three months ended March 31, 20182019 and 2017. 2018:
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
  
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 Three Months Ended
March 31,
  Three Months Ended
March 31,
 
Components of Accumulated Other Comprehensive Loss 2018 2017 Income Statement Line Item 2019 2018 Income Statement Line Item
 (in thousands)   (in thousands)  
Unrealized losses on AFS securities before tax (765) $(23) Losses on securities transactions, net $(32) $(743) Losses on securities transactions, net
Tax effect 217
 10
 
Total net of tax (548) (13) 
Non-credit impairment losses on AFS securities before tax:     
Accretion of credit loss impairment due to an increase in expected cash flows 22
 149
 Interest and dividends on investment securities (taxable)
Tax effect (6) (62)  6
 211
 
Total net of tax 16
 87
  (26) (532) 
Unrealized losses on derivatives (cash flow hedges) before tax (1,451) (2,518) Interest expense (290) (1,451) Interest expense
Tax effect 415
 1,043
  82
 415
 
Total net of tax (1,036) (1,475)  (208) (1,036) 
Defined benefit pension plan:          
Amortization of net loss (157) (101) * (78) (157) *
Tax effect 45
 42
  23
 45
 
Total net of tax (112) (59)  (55) (112) 
Total reclassifications, net of tax $(1,680) $(1,460)  $(289) $(1,680) 
 

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


11





9





Note 5.4. New Authoritative Accounting Guidance


New Accounting Guidance Adopted in the First Quarter of 20182019

Accounting Standards Update (ASU) No. 2017-12, "Derivatives2016-02, “Leases (Topic 842)” and Hedging (Topic 815): Targeted Improvementssubsequent related updates require lessees to Accountingrecognize leases on balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model that requires lessees to recognize a right of use (ROU) asset and related lease liability for Hedging Activities" amendsall leases with a term longer than 12 months. 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. Leases will continue to be classified as finance or operating, with classification affecting the hedge accountingpattern and classification of expense recognition and presentation requirements to better align a company’s financial reporting for hedging activities within the economic objectives of those activities. ASU No. 2017-12 is effective for the annual and interim reporting periods beginningincome statement.

Effective January 1, 2019, with early adoption permitted.Valley adopted ASU No. 2016-02 (and subsequent related updates) and recorded ROU assets of approximately $216 million (net of the reversal of the deferred rent liability at such date) and lease obligations of approximately $241 million. Valley elected the "package of practical expedients," as permitted under the transition guidance within Topic 842.  The practical expedients enable Valley to early adopt ASU No. 2017-12 for annual and interim reporting periods beginning January 1, 2018. The adoptioncarry forward lease classifications under the prior accounting guidance (Topic 840). Additionally, the expedients enable the use of ASU No. 2017-12 requiredhindsight, through which Valley reassessed the likelihood of extending leases under extension clauses available to Valley. This shortened the expected lives of certain leases. As a modified retrospective method to be used byresult, Valley and resulted in an immaterial cumulative-effectrecorded a $4.4 million (net of tax) credit adjustment to the opening balance of retained earnings as of January 1, 20182019. Valley also made accounting policy elections to eliminate(i) separate non-lease components from its lease obligations with the separate measurementnon-lease components being charged to earnings when incurred and to (ii) exclude short-term leases of ineffectiveness12 months or less from accumulated comprehensive income (see Note 4).
ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" requires service cost to be reported in the same financial statement line item(s) as other current employee compensation costs. All other components of expense must be presented separately from service cost, and outside any subtotal of income from operations. Only the service cost component of expense is eligible to be capitalized. ASU No. 2017-07 should 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 reportingbalance sheet. The comparative periods beginning 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 exceptionprior to the accounting for income taxes that generally requires recognitionadoption date 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, 2018Topic 842 will continue 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 issuesfinancial statements in accordance 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 in other comprehensive income if it is related to instrument-specific credit risk, (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 (seeprior GAAP (Topic 840). See Note 6). ASU No. 2016-01 was effective for Valley for

12




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-K9 for the year ended December 31, 2017) that are within the scope of the new guidance is not necessary. Qualitative disclosures regarding such revenues, asadditional required by the new guidance, are presented in Note 12.
New Accounting Guidance Not Yet Adopteddisclosures.
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 iswas effective for Valley for the annual and interim reporting periods beginningon January 1, 2019 with early adoption permitted, and is to bewas applied using the modified retrospective method. Additionally,method, resulting in a cumulative-effect adjustment to the periodopening balance of adoption, entities should provide disclosures about a change in accounting principle.retained earnings totaling $1.4 million (net of tax) as of January 1, 2019. ASU No. 2017-08 isdid not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2019-01, "Leases (Topic 842): Codification Improvements" reinstates the fair value exception in ASC 840, in which lessors will measure fair value, at lease commencement, as cost, reflecting any applicable volume or trade discounts. ASU No. 2019-01 also requires lessors that are depository or lending institutions in the scope of ASC 842 to classify the principal portion of lease payments received under sales-type and direct financing leases as cash flows from investing activities. The interest portion of those and all lease payments received under operating leases are classified as cash flows from operating activities. Effective January 1, 2019, Valley early adopted ASU No. 2019-01 concurrent with its adoption of the ASC 842. The adoption of ASU No. 2019-01 did not have a material impact on Valley's consolidated financial statements.

New Accounting Guidance Not Yet Adopted

ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement. The most significant provisions of the ASU relate to how companies will estimate expected credit losses under Topic 326 by incorporating (1) expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) clarifying that contractual extensions or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. ASU No. 2019-04 is effective for Valley for reporting periods beginning

10




January 1, 2020. Management is currently evaluating the impact of the ASU on Valley’s consolidated financial statements. See more details regarding our current implementation of Topic 326 and ASU No. 2016-13 below.

ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test guidance) to measure a goodwill impairment charge. Instead, an entity will be required to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1 of the current guidance). In addition, ASU No. 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. However, an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for Valley for its annual or any interim goodwill impairment tests in fiscal years beginning January 1, 2020 and is not expected to have a significant impact on the presentation of Valley's consolidated financial statements. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.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. 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. Management has initiated aValley’s implementation effort is managed through several cross-functional working group with multiple members from applicable departmentsgroups. These groups continue to evaluate the requirements of the new standard, planning forassess its impact on current operational processes, and develop loss modeling requirements

13




consistent withmodels that accurately project lifetime expected loss estimates, and assessing the impact it will have on current processes.estimates. Valley expects that the 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 nonaccretablenon-accretable difference (as defined in Note 8)7) 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 Valley's loan and investment portfolios at the adoption date, and the economic conditions and forecasts at that date.
ASU No. 2016-02, “Leases (Topic 842)” requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for Valley for reporting periods beginning January 1, 2019, with early adoption permitted. Valley must apply a modified retrospective transition approach for the applicable leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Management is currently evaluating the impact of Topic 842 on Valley’s consolidated financial statements and presently evaluating all of its known leases for compliance with the new lease accounting guidance. Management has also made substantial progress in the review of contractual arrangements for embedded leases in an effort to identify Valley’s full lease population. 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.
Note 6.5. Fair Value Measurement of Assets and Liabilities


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).




1411







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


The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at March 31, 20182019 and December 31, 2017.2018. The assets presented under “nonrecurring fair value measurements” in the tabletables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized). 
 March 31,
2018
 Fair Value Measurements at Reporting Date Using:
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 (in thousands)
Recurring fair value measurements: 
Assets       
Investment securities:       
Available for sale:       
U.S. Treasury securities$48,906
 $48,906
 $
 $
U.S. government agency securities40,590
 
 40,590
 
Obligations of states and political subdivisions221,174
 
 221,174
 
Residential mortgage-backed securities1,474,075
 
 1,467,577
 6,498
Trust preferred securities3,183
 
 3,183
 
Corporate and other debt securities55,586
 7,690
 47,896
 
Total available for sale1,843,514
 56,596
 1,780,420
 6,498
Loans held for sale (1)
8,449
 
 8,449
 
Other assets (2)
25,982
 
 25,982
 
Total assets$1,877,945
 $56,596
 $1,814,851
 $6,498
Liabilities       
Other liabilities (2)
$30,119
 $
 $30,119
 $
Total liabilities$30,119
 $
 $30,119
 $
Non-recurring fair value measurements:       
Collateral dependent impaired loans (3)
$40,872
 $
 $
 $40,872
Loan servicing rights2,831
 
 
 2,831
Foreclosed assets923
 
 
 923
Total$44,626
 $
 $
 $44,626

15





  Fair Value Measurements at Reporting Date Using:March 31,
2019
 Fair Value Measurements at Reporting Date Using:
December 31,
2017
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
(in thousands)(in thousands)
Recurring fair value measurements:        
Assets              
Investment securities:              
Available for sale:              
U.S. Treasury securities$49,642
 $49,642
 $
 $
$49,854
 $49,854
 $
 $
U.S. government agency securities42,505
 
 42,505
 
34,553
 
 34,553
 
Obligations of states and political subdivisions112,884
 
 112,884
 
193,950
 
 193,950
 
Residential mortgage-backed securities1,223,295
 
 1,215,935
 7,360
1,409,616
 
 1,409,616
 
Trust preferred securities3,214
 
 3,214
 
Corporate and other debt securities51,164
 7,783
 43,381
 
35,133
 
 35,133
 
Equity securities11,201
 1,382
 9,819
 
Total available for sale1,493,905
 58,807
 1,427,738
 7,360
1,723,106
 49,854
 1,673,252
 
Loans held for sale (1)
15,119
 
 15,119
 
31,903
 
 31,903
 
Other assets (2)
26,417
 
 26,417
 
79,252
 
 79,252
 
Total assets$1,535,441
 $58,807
 $1,469,274
 $7,360
$1,834,261
 $49,854
 $1,784,407
 $
Liabilities              
Other liabilities (2)
$24,330
 $
 $24,330
 $
$22,676
 $
 $22,676
 $
Total liabilities$24,330
 $
 $24,330
 $
$22,676
 $
 $22,676
 $
Non-recurring fair value measurements:              
Collateral dependent impaired loans (3)
$48,373
 $
 $
 $48,373
$46,025
 $
 $
 $46,025
Loan servicing rights5,350
 
 
 5,350
1,938
 
 
 1,938
Foreclosed assets3,472
 
 
 3,472
6,431
 
 
 6,431
Total$57,195
 $
 $
 $57,195
$54,394
 $
 $
 $54,394

12




   Fair Value Measurements at Reporting Date Using:
 December 31,
2018
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 (in thousands)
Recurring fair value measurements:       
Assets       
Investment securities:       
Available for sale:       
U.S. Treasury securities$49,306
 $49,306
 $
 $
U.S. government agency securities36,277
 
 36,277
 
Obligations of states and political subdivisions197,092
 
 197,092
 
Residential mortgage-backed securities1,429,782
 
 1,429,782
 
Corporate and other debt securities37,087
 
 37,087
 
Total available for sale1,749,544
 49,306
 1,700,238
 
Loans held for sale (1)
35,155
 
 35,155
 
Other assets (2)
48,979
 
 48,979
 
Total assets$1,833,678
 $49,306
 $1,784,372
 $
Liabilities       
Other liabilities (2)
$23,681
 $
 $23,681
 $
Total liabilities$23,681
 $
 $23,681
 $
Non-recurring fair value measurements:       
Collateral dependent impaired loans (3)
$45,245
 $
 $
 $45,245
Loan servicing rights273
 
 
 273
Foreclosed assets5,673
 
 
 5,673
Total$51,191
 $
 $
 $51,191
 
(1)Represents residential mortgage loans originated for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $8.3$31.1 million and $14.8$34.6 million at March 31, 20182019 and December 31, 2017,2018, 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 months ended March 31, 2018 and 2017 are summarized below: 
 Available for Sale Securities
 Three Months Ended
March 31,
 2018 2017
 (in thousands)
Balance, beginning of the period$7,360
 $11,888
Total net (losses) gains included in other comprehensive income(398) 44
Settlements, net(464) (565)
Balance, end of the period$6,498
 $11,367


16




No changes in unrealized gains or losses on Level 3 securities were included in earnings during the three months ended March 31, 2018 and 2017. There were no transfers of assets into or out of Level 3, or between Level 1 and Level 2, during the three months ended March 31, 2018 and 2017.

There have been no material changes in the valuation methodologies used at March 31, 2018 from December 31, 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.

13




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 four private label mortgage-backed securities. The cash flows for the 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 March 31, 2018: 
Security Type
Valuation
Technique
Unobservable
Input
Range
Weighted
Average
Private label mortgage-backed securitiesDiscounted cash flowPrepayment rate       4.8 - 33.8%19.1%
Default rate    3.3 - 47.08.3
Loss severity   45.8 - 61.656.5


17




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.

The cash flow assumptions for the Level 3 securities 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.

Loans held for sale. The conforming residential Residential mortgage loans originated for sale are reported at fair value using Level 2 inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. To determine these fair values, the mortgages held for sale are put into multiple tranches, or pools, based on the coupon rate and maturity of each mortgage. The market prices for each tranche are obtained from both Fannie Mae and Freddie Mac. The market prices represent a delivery price, which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. The market prices received from Fannie Mae and Freddie Mac are then averaged and interpolated or extrapolated, where required, to calculate the fair value of each tranche. Depending upon the time elapsed since the origination of each loan held for sale, non-performance risk and changes therein were addressed in the estimate of fair value based upon the delinquency data provided to both Fannie Mae and Freddie Mac for market pricing and changes in market credit spreads. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at March 31, 20182019 and December 31, 20172018 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 valuevalues 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 March 31, 20182019 and December 31, 2017)2018), is determined based on the current market prices for similar instruments provided by Fannie Mae and Freddie Mac. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at March 31, 20182019 and December 31, 2017.2018.


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 March 31, 2018,2019, certain appraisals were discounted based on specific market data by location and property type. During the quarter ended March 31, 2018,2019, 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. There were no

18




collateral dependent loan charge-offs to the allowance for loan losses for the three months ended March 31, 2018 as compared to $219 thousand for the three months ended March 31, 2017.2019 and 2018. At March 31, 2018,2019, collateral dependent impaired loans with a total recorded investment of $60.9$76.1 million were reduced by specific valuation allowance allocations totaling $20.0$30.1 million to a reported total net carrying amount of $40.9$46.0 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 March 31, 2018,2019, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 2529 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 $227$24 thousand for the three months ended March 31, 2018. Valley recorded an immaterial2019 as compared to net recoveryrecoveries of net impairment charges on its loan servicing rightstotaling $227 thousand for the threemonths ended March 31, 2017.2018, respectively.


14





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 March 31, 2018.2019. At March 31, 2018,2019, foreclosed assets included $923 thousand$6.3 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended March 31, 2018.2019. The foreclosed assets charge-offs to the allowance for the loan losses totaled $788 thousand and $541 thousand for the three months ended March 31, 2019 and 2018, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in immaterial
net losses within non-interest expense of $290 thousand for the three months ended March 31, 2017.2019. There were no foreclosed assets that were remeasured at their fair value subsequently re-measured atsubsequent to their initial recognition for the three months ended March 31, 2018.


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.




1915







The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at March 31, 20182019 and December 31, 20172018 were as follows: 
Fair Value
Hierarchy
 March 31, 2018 December 31, 2017
Fair Value
Hierarchy
 March 31, 2019 December 31, 2018
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 banksLevel 1 $222,311
 $222,311
 $243,310
 $243,310
Level 1 $282,250
 $282,250
 $251,541
 $251,541
Interest bearing deposits with banksLevel 1 274,349
 274,349
 172,800
 172,800
Level 1 184,347
 184,347
 177,088
 177,088
Investment securities held to maturity:                
U.S. Treasury securitiesLevel 1 138,638
 142,731
 138,676
 145,257
Level 1 138,478
 142,899
 138,517
 142,049
U.S. government agency securitiesLevel 2 9,580
 9,437
 9,859
 9,981
Level 2 8,236
 8,069
 8,721
 8,641
Obligations of states and political subdivisionsLevel 2 619,271
 622,491
 465,878
 477,479
Level 2 551,501
 559,838
 585,656
 586,033
Residential mortgage-backed securitiesLevel 2 1,184,757
 1,151,067
 1,131,945
 1,118,044
Level 2 1,306,625
 1,292,364
 1,266,770
 1,235,605
Trust preferred securitiesLevel 2 49,828
 42,790
 49,824
 40,088
Level 2 37,309
 31,601
 37,332
 31,486
Corporate and other debt securitiesLevel 2 46,509
 46,438
 46,509
 46,771
Level 2 32,250
 32,199
 31,250
 31,129
Total investment securities held to maturity 2,048,583
 2,014,954
 1,842,691
 1,837,620
 2,074,399
 2,066,970
 2,068,246
 2,034,943
Net loansLevel 3 22,419,905
 21,819,997
 18,210,724
 17,562,153
Level 3 25,268,737
 24,766,120
 24,883,610
 24,068,755
Accrued interest receivableLevel 1 86,804
 86,804
 73,990
 73,990
Level 1 100,722
 100,722
 95,296
 95,296
Federal Reserve Bank and Federal Home Loan Bank stock (1)
Level 1 227,361
 227,361
 178,668
 178,668
Level 1 222,630
 222,630
 232,080
 232,080
Financial liabilities                
Deposits without stated maturitiesLevel 1 17,202,045
 17,202,045
 14,589,941
 14,589,941
Level 1 17,799,178
 17,799,178
 17,388,990
 17,388,990
Deposits with stated maturitiesLevel 2 4,757,801
 4,464,561
 3,563,521
 3,465,373
Level 2 7,108,318
 7,127,215
 7,063,984
 7,005,573
Short-term borrowingsLevel 1 1,618,416
 1,050,044
 748,628
 679,316
Level 1 2,062,576
 2,006,439
 2,118,914
 2,091,892
Long-term borrowingsLevel 2 2,353,548
 2,298,069
 2,315,819
 2,453,797
Level 2 1,499,727
 1,615,030
 1,654,268
 1,751,194
Junior subordinated debentures issued to capital trustsLevel 2 55,109
 55,899
 41,774
 37,289
Level 2 55,457
 55,474
 55,370
 55,692
Accrued interest payable (2)
Level 1 15,177
 15,177
 14,161
 14,161
Level 1 33,933
 33,933
 25,762
 25,762
 
(1)Included in other assets.
(2)Included in accrued expenses and other liabilities.






2016







Note 7.6. Investment Securities


Held to Maturity


The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at March 31, 20182019 and December 31, 20172018 were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
 (in thousands)
March 31, 2019       
U.S. Treasury securities$138,478
 $4,421
 $
 $142,899
U.S. government agency securities8,236
 16
 (183) 8,069
Obligations of states and political subdivisions:       
Obligations of states and state agencies315,954
 5,994
 (2,086) 319,862
Municipal bonds235,547
 4,562
 (133) 239,976
Total obligations of states and political subdivisions551,501
 10,556
 (2,219) 559,838
Residential mortgage-backed securities1,306,625
 6,970
 (21,231) 1,292,364
Trust preferred securities37,309
 68
 (5,776) 31,601
Corporate and other debt securities32,250
 144
 (195) 32,199
Total investment securities held to maturity$2,074,399
 $22,175
 $(29,604) $2,066,970
December 31, 2018       
U.S. Treasury securities$138,517
 $3,532
 $
 $142,049
U.S. government agency securities8,721
 55
 (135) 8,641
Obligations of states and political subdivisions:       
Obligations of states and state agencies341,702
 4,332
 (5,735) 340,299
Municipal bonds243,954
 3,141
 (1,361) 245,734
Total obligations of states and political subdivisions585,656
 7,473
 (7,096) 586,033
Residential mortgage-backed securities1,266,770
 3,203
 (34,368) 1,235,605
Trust preferred securities37,332
 77
 (5,923) 31,486
Corporate and other debt securities31,250
 96
 (217) 31,129
Total investment securities held to maturity$2,068,246
 $14,436
 $(47,739) $2,034,943

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
 (in thousands)
March 31, 2018       
U.S. Treasury securities$138,638
 $4,093
 $
 $142,731
U.S. government agency securities9,580
 30
 (173) 9,437
Obligations of states and political subdivisions:       
Obligations of states and state agencies354,277
 5,416
 (4,741) 354,952
Municipal bonds264,994
 3,960
 (1,415) 267,539
Total obligations of states and political subdivisions619,271
 9,376
 (6,156) 622,491
Residential mortgage-backed securities1,184,757
 3,162
 (36,852) 1,151,067
Trust preferred securities49,828
 21
 (7,059) 42,790
Corporate and other debt securities46,509
 218
 (289) 46,438
Total investment securities held to maturity$2,048,583
 $16,900
 $(50,529) $2,014,954
December 31, 2017       
U.S. Treasury securities$138,676
 $6,581
 $
 $145,257
U.S. government agency securities9,859
 122
 
 9,981
Obligations of states and political subdivisions:       
Obligations of states and state agencies244,272
 7,083
 (1,653) 249,702
Municipal bonds221,606
 6,199
 (28) 227,777
Total obligations of states and political subdivisions465,878
 13,282
 (1,681) 477,479
Residential mortgage-backed securities1,131,945
 4,842
 (18,743) 1,118,044
Trust preferred securities49,824
 60
 (9,796) 40,088
Corporate and other debt securities46,509
 532
 (270) 46,771
Total investment securities held to maturity$1,842,691
 $25,419
 $(30,490) $1,837,620


2117







The age of unrealized losses and fair value of related securities held to maturity at March 31, 20182019 and December 31, 20172018were as follows:
 
Less than
Twelve Months
 
More than
Twelve Months
 Total
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 (in thousands)
March 31, 2019           
U.S. government agency securities$
 $
 $5,707
 $(183) $5,707
 $(183)
Obligations of states and political subdivisions:           
Obligations of states and state agencies
 
 100,897
 (2,086) 100,897
 (2,086)
Municipal bonds1,188
 (20) 15,236
 (113) 16,424
 (133)
Total obligations of states and political subdivisions1,188
 (20) 116,133
 (2,199) 117,321
 (2,219)
Residential mortgage-backed securities13,136
 (85) 835,504
 (21,146) 848,640
 (21,231)
Trust preferred securities
 
 30,180
 (5,776) 30,180
 (5,776)
Corporate and other debt securities4,947
 (53) 4,858
 (142) 9,805
 (195)
Total$19,271
 $(158) $992,382
 $(29,446) $1,011,653
 $(29,604)
December 31, 2018           
U.S. government agency securities$
 $
 $6,074
 $(135) $6,074
 $(135)
Obligations of states and political subdivisions:           
Obligations of states and state agencies16,098
 (266) 138,437
 (5,469) 154,535
 (5,735)
Municipal bonds3,335
 (37) 60,078
 (1,324) 63,413
 (1,361)
Total obligations of states and political subdivisions19,433
 (303) 198,515
 (6,793) 217,948
 (7,096)
Residential mortgage-backed securities72,240
 (852) 846,671
 (33,516) 918,911
 (34,368)
Trust preferred securities
 
 30,055
 (5,923) 30,055
 (5,923)
Corporate and other debt securities9,948
 (52) 4,835
 (165) 14,783
 (217)
Total$101,621
 $(1,207) $1,086,150
 $(46,532) $1,187,771
 $(47,739)

 
Less than
Twelve Months
 
More than
Twelve Months
 Total
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 (in thousands)
March 31, 2018           
U.S. government agency securities$6,674
 $(173) $
 $
 $6,674
 $(173)
Obligations of states and political subdivisions:           
Obligations of states and state agencies$120,794
 $(1,759) $50,493
 $(2,982) $171,287
 $(4,741)
Municipal bonds86,817
 (1,385) 534
 (30) 87,351
 (1,415)
Total obligations of states and political subdivisions207,611
 (3,144) 51,027
 (3,012) 258,638
 (6,156)
Residential mortgage-backed securities448,658
 (10,831) 544,329
 (26,021) 992,987
 (36,852)
Trust preferred securities95
 (258) 29,673
 (6,801) 29,768
 (7,059)
Corporate and other debt securities7,211
 (289) 
 
 7,211
 (289)
Total$670,249
 $(14,695) $625,029
 $(35,834) $1,295,278
 $(50,529)
December 31, 2017           
Obligations of states and political subdivisions:           
Obligations of states and state agencies$6,342
 $(50) $53,034
 $(1,603) $59,376
 $(1,653)
Municipal bonds4,644
 (25) 561
 (3) 5,205
 (28)
Total obligations of states and political subdivisions10,986
 (75) 53,595
 (1,606) 64,581
 (1,681)
Residential mortgage-backed securities344,216
 (2,357) 570,969
 (16,386) 915,185
 (18,743)
Trust preferred securities
 
 38,674
 (9,796) 38,674
 (9,796)
Corporate and other debt securities9,980
 (270) 
 
 9,980
 (270)
Total$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 345268 at March 31, 20182019 and 152378 at December 31, 2017.2018.


The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at March 31, 20182019 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 March 31, 20182019 primarily related to four non-rated single-issuer trust preferred securities issued by bank holding companies. All single-issuer trust preferred securities classified as held to maturity are paying in accordance with their terms, have no deferrals of interest or defaults and, if applicable, the issuers meet the regulatory capital requirements to be considered “well-capitalized institutions” at March 31, 2018.2019.
As of March 31, 2018,2019, 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$1.2 billion.

22




The contractual maturities of investments in debt securities held to maturity at March 31, 20182019 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the

18




mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.  
 March 31, 2019
 
Amortized
Cost
 
Fair
Value
 (in thousands)
Due in one year$25,484
 $25,583
Due after one year through five years252,960
 257,616
Due after five years through ten years250,865
 260,318
Due after ten years238,465
 231,089
Residential mortgage-backed securities1,306,625
 1,292,364
Total investment securities held to maturity$2,074,399
 $2,066,970
 March 31, 2018
 
Amortized
Cost
 
Fair
Value
 (in thousands)
Due in one year$29,867
 $29,938
Due after one year through five years220,797
 224,495
Due after five years through ten years322,027
 330,712
Due after ten years291,135
 278,742
Residential mortgage-backed securities1,184,757
 1,151,067
Total investment securities held to maturity$2,048,583
 $2,014,954

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 8.68.0 years at March 31, 2018.2019.


23





Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at March 31, 20182019 and December 31, 20172018 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)
March 31, 2018       
March 31, 2019       
U.S. Treasury securities$50,992
 $
 $(2,086) $48,906
$50,969
 $
 $(1,115) $49,854
U.S. government agency securities41,140
 132
 (682) 40,590
34,734
 57
 (238) 34,553
Obligations of states and political subdivisions:              
Obligations of states and state agencies114,081
 55
 (1,853) 112,283
97,111
 189
 (2,840) 94,460
Municipal bonds109,876
 321
 (1,306) 108,891
99,286
 500
 (296) 99,490
Total obligations of states and political subdivisions223,957
 376
 (3,159) 221,174
196,397
 689
 (3,136) 193,950
Residential mortgage-backed securities1,514,862
 1,708
 (42,495) 1,474,075
1,429,847
 3,093
 (23,324) 1,409,616
Trust preferred securities3,628
 
 (445) 3,183
Corporate and other debt securities55,756
 324
 (494) 55,586
35,410
 102
 (379) 35,133
Total investment securities available for sale$1,890,335
 $2,540
 $(49,361) $1,843,514
$1,747,357
 $3,941
 $(28,192) $1,723,106
December 31, 2017       
December 31, 2018       
U.S. Treasury securities$50,997
 $
 $(1,355) $49,642
$50,975
 $
 $(1,669) $49,306
U.S. government agency securities42,384
 158
 (37) 42,505
36,844
 71
 (638) 36,277
Obligations of states and political subdivisions:              
Obligations of states and state agencies38,435
 158
 (374) 38,219
100,777
 18
 (3,682) 97,113
Municipal bonds74,752
 477
 (564) 74,665
101,207
 209
 (1,437) 99,979
Total obligations of states and political subdivisions113,187
 635
 (938) 112,884
201,984
 227
 (5,119) 197,092
Residential mortgage-backed securities1,239,534
 2,423
 (18,662) 1,223,295
1,469,059
 1,484
 (40,761) 1,429,782
Trust preferred securities3,726
 
 (512) 3,214
Corporate and other debt securities50,701
 623
 (160) 51,164
37,542
 213
 (668) 37,087
Equity securities10,505
 1,190
 (494) 11,201
Total investment securities available for sale$1,511,034
 $5,029
 $(22,158) $1,493,905
$1,796,404
 $1,995
 $(48,855) $1,749,544






2419







The age of unrealized losses and fair value of related securities available for sale at March 31, 20182019 and December 31, 20172018 were as follows:
 
Less than
Twelve Months
 
More than
Twelve Months
 Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 (in thousands)
March 31, 2019           
U.S. Treasury securities$
 $
 $49,852
 $(1,115) $49,852
 $(1,115)
U.S. government agency securities
 
 27,180
 (238) 27,180
 (238)
Obligations of states and political subdivisions:           
Obligations of states and state agencies1,549
 (2) 65,205
 (2,838) 66,754
 (2,840)
Municipal bonds1,624
 (47) 40,689
 (249) 42,313
 (296)
Total obligations of states and political subdivisions3,173
 (49) 105,894
 (3,087) 109,067
 (3,136)
Residential mortgage-backed securities24,221
 (98) 1,163,750
 (23,226) 1,187,971
 (23,324)
Corporate and other debt securities7,394
 (106) 14,642
 (273) 22,036
 (379)
Total$34,788
 $(253) $1,361,318
 $(27,939) $1,396,106
 $(28,192)
December 31, 2018           
U.S. Treasury securities$
 $
 $49,306
 $(1,669) $49,306
 $(1,669)
U.S. government agency securities2,120
 (20) 26,775
 (618) 28,895
 (638)
Obligations of states and political subdivisions:           
Obligations of states and state agencies17,560
 (95) 75,718
 (3,587) 93,278
 (3,682)
Municipal bonds5,018
 (106) 70,286
 (1,331) 75,304
 (1,437)
Total obligations of states and political subdivisions22,578
 (201) 146,004
 (4,918) 168,582
 (5,119)
Residential mortgage-backed securities119,645
 (668) 1,221,942
 (40,093) 1,341,587
 (40,761)
Corporate and other debt securities12,339
 (161) 12,397
 (507) 24,736
 (668)
Total$156,682
 $(1,050) $1,456,424
 $(47,805) $1,613,106
 $(48,855)
 
Less than
Twelve Months
 
More than
Twelve Months
 Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 (in thousands)
March 31, 2018           
U.S. Treasury securities$906
 $(11) $48,000
 $(2,075) $48,906
 $(2,086)
U.S. government agency securities32,584
 (682) 
 
 32,584
 (682)
Obligations of states and political subdivisions:           
Obligations of states and state agencies100,090
 (1,557) 7,674
 (296) 107,764
 (1,853)
Municipal bonds71,192
 (937) 12,067
 (369) 83,259
 (1,306)
Total obligations of states and political subdivisions171,282
 (2,494) 19,741
 (665) 191,023
 (3,159)
Residential mortgage-backed securities811,654
 (17,738) 565,498
 (24,757) 1,377,152
 (42,495)
Trust preferred securities
 
 3,183
 (445) 3,183
 (445)
Corporate and other debt securities24,426
 (284) 4,775
 (210) 29,201
 (494)
Total$1,040,852
 $(21,209) $641,197
 $(28,152) $1,682,049
 $(49,361)
December 31, 2017           
U.S. Treasury securities$916
 $(2) $48,726
 $(1,353) $49,642
 $(1,355)
U.S. government agency securities31,177
 (37) 
 
 31,177
 (37)
Obligations of states and political subdivisions:           
Obligations of states and state agencies13,337
 (131) 7,792
 (243) 21,129
 (374)
Municipal bonds31,669
 (256) 12,133
 (308) 43,802
 (564)
Total obligations of states and political subdivisions45,006
 (387) 19,925
 (551) 64,931
 (938)
Residential mortgage-backed securities406,940
 (2,461) 599,167
 (16,201) 1,006,107
 (18,662)
Trust preferred securities
 
 3,214
 (512) 3,214
 (512)
Corporate and other debt securities5,855
 (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 March 31, 20182019 was 548449 as compared to 327545 at December 31, 2017.2018.
The unrealized losses for the residential mortgage-backed securities category of the available for sale portfolio at March 31, 20182019 largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac.
As of March 31, 2018,2019, 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 $1.1 billion.

20




The contractual maturities of debt securities available for sale at March 31, 20182019 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages

25




underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
 March 31, 2019
 
Amortized
Cost
 
Fair
Value
 (in thousands)
Due in one year$5,705
 $5,692
Due after one year through five years127,911
 126,534
Due after five years through ten years72,288
 70,620
Due after ten years111,606
 110,644
Residential mortgage-backed securities1,429,847
 1,409,616
Total investment securities available for sale$1,747,357
 $1,723,106
 March 31, 2018
 
Amortized
Cost
 
Fair
Value
 (in thousands)
Due in one year$19,047
 $19,133
Due after one year through five years123,697
 120,633
Due after five years through ten years83,785
 83,376
Due after ten years148,944
 146,297
Residential mortgage-backed securities1,514,862
 1,474,075
Total investment securities available for sale$1,890,335
 $1,843,514

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted average remaining expected life for residential mortgage-backed securities available for sale was 8.78.3 years at March 31, 2018.2019.
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 March 31, 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 months ended March 31, 20182019 and 2017.2018. Management does not believe that any individual unrealized loss as of March 31, 20182019 included in the investment portfolio tables above representrepresents 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.

At March 31, 2018, four previously impaired private label mortgage-backed securities had a combined amortized cost and fair value of $7.4 million and $6.5 million, respectively.


Realized Gains and Losses


Net losses on securities transactions totaled $32 thousand and $765 thousand for the three months ended March 31, 2019 and 2018, andrespectively. Net losses on securities transactions for the three months ended March 31, 2018 were mainly related to sales of equity securities previously classified as available for sale prior to the adoption of ASU No. 2016-01 on January 1, 2018 and a portion of the totalcertain municipal securities acquired from USAB.the acquisition of USAmeriBancorp, Inc. on January 1, 2018.




2621







Note 8.7. Loans


The detail of the loan portfolio as of March 31, 20182019 and December 31, 20172018 was as follows:
 March 31, 2019 December 31, 2018
 
Non-PCI
Loans
 PCI Loans Total 
Non-PCI
Loans
 PCI Loans Total
 (in thousands)
Loans:           
Commercial and industrial$3,786,742
 $718,185
 $4,504,927
 $3,590,375
 $740,657
 $4,331,032
Commercial real estate:           
Commercial real estate10,189,388
 2,476,037
 12,665,425
 9,912,309
 2,494,966
 12,407,275
Construction1,199,741
 254,458
 1,454,199
 1,122,348
 365,784
 1,488,132
  Total commercial real estate loans11,389,129
 2,730,495
 14,119,624
 11,034,657
 2,860,750
 13,895,407
Residential mortgage3,660,983
 410,254
 4,071,237
 3,682,984
 428,416
 4,111,400
Consumer:           
Home equity381,217
 131,849
 513,066
 371,340
 145,749
 517,089
Automobile1,347,405
 354
 1,347,759
 1,319,206
 365
 1,319,571
Other consumer853,302
 13,203
 866,505
 846,821
 14,149
 860,970
Total consumer loans2,581,924
 145,406
 2,727,330
 2,537,367
 160,263
 2,697,630
Total loans$21,418,778
 $4,004,340
 $25,423,118
 $20,845,383
 $4,190,086
 $25,035,469

 March 31, 2018 December 31, 2017
 
Non-PCI
Loans
 PCI Loans* Total 
Non-PCI
Loans
 PCI Loans* Total
 (in thousands)
Loans:           
Commercial and industrial$2,736,170
 $895,427
 $3,631,597
 $2,549,065
 $192,360
 $2,741,425
Commercial real estate:           
Commercial real estate8,804,701
 2,901,527
 11,706,228
 8,561,851
 934,926
 9,496,777
Construction950,765
 421,743
 1,372,508
 809,964
 41,141
 851,105
  Total commercial real estate loans9,755,466
 3,323,270
 13,078,736
 9,371,815
 976,067
 10,347,882
Residential mortgage2,817,057
 504,503
 3,321,560
 2,717,744
 141,291
 2,859,035
Consumer:           
Home equity372,348
 176,981
 549,329
 373,631
 72,649
 446,280
Automobile1,222,253
 468
 1,222,721
 1,208,804
 98
 1,208,902
Other consumer733,640
 15,184
 748,824
 723,306
 4,750
 728,056
Total consumer loans2,328,241
 192,633
 2,520,874
 2,305,741
 77,497
 2,383,238
Total loans$17,636,934
 $4,915,833
 $22,552,767
 $16,944,365
 $1,387,215
 $18,331,580
*PCI loans include covered loans (mostly consisting of residential mortgage loans) totaling $33.2 million and $38.7 million at March 31, 2018 and December 31, 2017, respectively.


Total loans (excluding PCI covered loans) include net unearned premiums and deferred loan costs of $22.0$20.5 million and $22.2$21.5 million at March 31, 20182019 and December 31, 2017,2018, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $5.1$4.2 billion and $1.5$4.4 billion at March 31, 20182019 and December 31, 2017,2018, respectively.


There were no transfersValley transferred $100.0 million and $150.5 million of residential mortgage loans from the loan portfolio to loans held for sale during the three months ended March 31, 2019 and 2018, as compared to $103.9 million of loans transferred during the three months ended March 31, 2017.respectively. There were no other sales of loans from the held for investment portfolio during the three months ended March 31, 20182019 and 2017.2018.


Purchased Credit-Impaired 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.


2722







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 the 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 months ended March 31, 20182019 and 2017:2018:
 Three Months Ended
March 31,
 2019 2018
 (in thousands)
Balance, beginning of period$875,958
 $282,009
Acquisition
 559,907
Accretion(53,492) (65,131)
Net increase in expected cash flows68,305
 
Balance, end of period$890,771
 $776,785

 Three Months Ended
March 31,
 2018 2017
 (in thousands)
Balance, beginning of period$282,009
 $294,514
Acquisition474,208
 
Accretion(65,131) (24,683)
Balance, end of period$691,086
 $269,831


The net increase in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools. Based upon the most recent reforecasted cash flows during the first quarter of 2019, the net increase in accretable yield for the three months ended March 31, 2019 was largely driven by the impact of current interest rate environment on the adjustable portion of the PCI loan portfolio, changes in the expected duration of certain loan pools and additional advances on lines of credit.

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. 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.












2823







Credit Quality
The following table presents past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis) by loan portfolio class at March 31, 20182019 and December 31, 2017:2018:
 Past Due and Non-Accrual Loans    
 
30-59
Days
Past Due
Loans
 
60-89
Days
Past Due
Loans
 
Accruing Loans
90 Days or More
Past Due
 
Non-Accrual
Loans
 
Total
Past Due
Loans
 
Current
Non-PCI
Loans
 
Total
Non-PCI
Loans
 (in thousands)
March 31, 2019             
Commercial and industrial$5,120
 $1,756
 $2,670
 $76,270
 $85,816
 $3,700,926
 $3,786,742
Commercial real estate:             
Commercial real estate39,362
 2,156
 
 2,663
 44,181
 10,145,207
 10,189,388
Construction1,911
 
 
 378
 2,289
 1,197,452
 1,199,741
Total commercial real estate loans41,273
 2,156
 
 3,041
 46,470
 11,342,659
 11,389,129
Residential mortgage15,856
 3,635
 1,402
 11,921
 32,814
 3,628,169
 3,660,983
Consumer loans:             
Home equity797
 19
 
 1,806
 2,622
 378,595
 381,217
Automobile5,024
 917
 513
 148
 6,602
 1,340,803
 1,347,405
Other consumer826
 54
 10
 224
 1,114
 852,188
 853,302
Total consumer loans6,647
 990
 523
 2,178
 10,338
 2,571,586
 2,581,924
Total$68,896
 $8,537
 $4,595
 $93,410
 $175,438
 $21,243,340
 $21,418,778
December 31, 2018             
Commercial and industrial$13,085
 $3,768
 $6,156
 $70,096
 $93,105
 $3,497,270
 $3,590,375
Commercial real estate:             
Commercial real estate9,521
 530
 27
 2,372
 12,450
 9,899,859
 9,912,309
Construction2,829
 
 
 356
 3,185
 1,119,163
 1,122,348
Total commercial real estate loans12,350
 530
 27
 2,728
 15,635
 11,019,022
 11,034,657
Residential mortgage16,576
 2,458
 1,288
 12,917
 33,239
 3,649,745
 3,682,984
Consumer loans:             
Home equity872
 40
 
 2,156
 3,068
 368,272
 371,340
Automobile7,973
 1,299
 308
 80
 9,660
 1,309,546
 1,319,206
Other consumer895
 47
 33
 419
 1,394
 845,427
 846,821
Total consumer loans9,740
 1,386
 341
 2,655
 14,122
 2,523,245
 2,537,367
Total$51,751
 $8,142
 $7,812
 $88,396
 $156,101
 $20,689,282
 $20,845,383

 Past Due and Non-Accrual Loans    
 
30-59
Days
Past Due
Loans
 
60-89
Days
Past Due
Loans
 
Accruing Loans
90 Days or More
Past Due
 
Non-Accrual
Loans
 
Total
Past Due
Loans
 
Current
Non-PCI
Loans
 
Total
Non-PCI
Loans
 (in thousands)
March 31, 2018             
Commercial and industrial$5,405
 $804
 $653
 $25,112
 $31,974
 $2,704,196
 $2,736,170
Commercial real estate:             
Commercial real estate3,699
 
 27
 8,679
 12,405
 8,792,296
 8,804,701
Construction532
 1,099
 
 732
 2,363
 948,402
 950,765
Total commercial real estate loans4,231
 1,099
 27
 9,411
 14,768
 9,740,698
 9,755,466
Residential mortgage6,460
 4,081
 3,361
 22,694
 36,596
 2,780,461
 2,817,057
Consumer loans:             
Home equity642
 602
 
 2,890
 4,134
 368,214
 372,348
Automobile4,170
 854
 362
 88
 5,474
 1,216,779
 1,222,253
Other consumer432
 33
 10
 126
 601
 733,039
 733,640
Total consumer loans5,244
 1,489
 372
 3,104
 10,209
 2,318,032
 2,328,241
Total$21,340
 $7,473
 $4,413
 $60,321
 $93,547
 $17,543,387
 $17,636,934
December 31, 2017             
Commercial and industrial$3,650
 $544
 $
 $20,890
 $25,084
 $2,523,981
 $2,549,065
Commercial real estate:             
Commercial real estate11,223
 
 27
 11,328
 22,578
 8,539,273
 8,561,851
Construction12,949
 18,845
 
 732
 32,526
 777,438
 809,964
Total commercial real estate loans24,172
 18,845
 27
 12,060
 55,104
 9,316,711
 9,371,815
Residential mortgage12,669
 7,903
 2,779
 12,405
 35,756
 2,681,988
 2,717,744
Consumer loans:             
Home equity1,009
 94
 
 1,777
 2,880
 370,751
 373,631
Automobile5,707
 987
 271
 73
 7,038
 1,201,766
 1,208,804
Other consumer1,693
 118
 13
 20
 1,844
 721,462
 723,306
Total consumer loans8,409
 1,199
 284
 1,870
 11,762
 2,293,979
 2,305,741
Total$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.






2924







The following table presents the information about impaired loans by loan portfolio class at March 31, 20182019 and December 31, 2017:2018:
 
Recorded
Investment
With No Related
Allowance
 
Recorded
Investment
With Related
Allowance
 
Total
Recorded
Investment
 
Unpaid
Contractual
Principal
Balance
 
Related
Allowance
 (in thousands)
March 31, 2019         
Commercial and industrial$12,658
 $93,412
 $106,070
 $116,256
 $31,508
Commercial real estate:         
Commercial real estate17,046
 26,395
 43,441
 45,473
 2,615
Construction414
 
 414
 416
 
Total commercial real estate loans17,460
 26,395
 43,855
 45,889
 2,615
Residential mortgage6,181
 6,512
 12,693
 13,769
 676
Consumer loans:         
Home equity324
 574
 898
 997
 51
Total consumer loans324
 574
 898
 997
 51
Total$36,623
 $126,893
 $163,516
 $176,911
 $34,850
December 31, 2018         
Commercial and industrial$8,339
 $89,513
 $97,852
 $104,007
 $29,684
Commercial real estate:         
Commercial real estate16,732
 25,606
 42,338
 44,337
 2,615
Construction803
 457
 1,260
 1,260
 13
Total commercial real estate loans17,535
 26,063
 43,598
 45,597
 2,628
Residential mortgage7,826
 6,078
 13,904
 14,948
 600
Consumer loans:         
Home equity125
 1,146
 1,271
 1,366
 113
Total consumer loans125
 1,146
 1,271
 1,366
 113
Total$33,825
 $122,800
 $156,625
 $165,918
 $33,025
 
Recorded
Investment
With No Related
Allowance
 
Recorded
Investment
With Related
Allowance
 
Total
Recorded
Investment
 
Unpaid
Contractual
Principal
Balance
 
Related
Allowance
 (in thousands)
March 31, 2018         
Commercial and industrial$10,676
 $78,992
 $89,668
 $94,333
 $21,664
Commercial real estate:         
Commercial real estate25,856
 29,122
 54,978
 58,901
 2,656
Construction1,504
 465
 1,969
 1,992
 16
Total commercial real estate loans27,360
 29,587
 56,947
 60,893
 2,672
Residential mortgage6,033
 7,997
 14,030
 15,168
 705
Consumer loans:         
Home equity1,283
 605
 1,888
 3,004
 60
Total consumer loans1,283
 605
 1,888
 3,004
 60
Total$45,352
 $117,181
 $162,533
 $173,398
 $25,101
December 31, 2017         
Commercial and industrial$9,946
 $75,553
 $85,499
 $90,269
 $11,044
Commercial real estate:         
Commercial real estate28,709
 29,771
 58,480
 62,286
 2,718
Construction1,904
 467
 2,371
 2,394
 17
Total commercial real estate loans30,613
 30,238
 60,851
 64,680
 2,735
Residential mortgage5,654
 8,402
 14,056
 15,332
 718
Consumer loans:         
Home equity3,096
 664
 3,760
 4,917
 64
Total consumer loans3,096
 664
 3,760
 4,917
 64
Total$49,309
 $114,857
 $164,166
 $175,198
 $14,561

The following tables presenttable presents, by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 20182019 and 2017:2018: 
 Three Months Ended March 31,
 2019 2018
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 (in thousands)
Commercial and industrial$117,089
 $571
 $90,069
 $714
Commercial real estate:       
Commercial real estate44,789
 719
 55,493
 616
Construction822
 1
 2,217
 23
Total commercial real estate loans45,611
 720
 57,710
 639
Residential mortgage13,898
 143
 14,098
 165
Consumer loans:       
Home equity1,136
 11
 2,026
 33
Total consumer loans1,136
 11
 2,026
 33
Total$177,734
 $1,445
 $163,903
 $1,551

 Three Months Ended March 31,
 2018 2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 (in thousands)
Commercial and industrial$90,069
 $714
 $30,459
 $308
Commercial real estate:       
Commercial real estate55,493
 616
 55,325
 324
Construction2,217
 23
 2,696
 19
Total commercial real estate loans57,710
 639
 58,021
 343
Residential mortgage14,098
 165
 20,393
 208
Consumer loans:       
Home equity2,026
 33
 4,895
 40
Total consumer loans2,026
 33
 4,895
 40
Total$163,903
 $1,551
 $113,768
 $899


Interest income recognized on a cash basis (included in the table above) was immaterial for the three months ended March 31, 20182019 and 2017.2018.


3025







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 $116.4$73.1 million and $117.2$77.2 million as of March 31, 20182019 and December 31, 2017,2018, respectively. Non-performing TDRs totaled $24.3$64.9 million and $27.0$55.0 million as of March 31, 20182019 and December 31, 2017,2018, respectively.


The following tables presenttable presents non-PCI loans by loan portfolio class modified as TDRs during the three months ended March 31, 20182019 and 2017.2018. The pre-modification and post-modification outstanding recorded investments disclosed in the tabletables below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at March 31, 2019 and 2018, and 2017, respectively.

 Three Months Ended March 31,
 Three Months Ended
March 31, 2018
 Three Months Ended
March 31, 2017
 2019 2018
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 6
 $3,908
 $3,777
 9
 $10,282
 $9,235
 36
 $23,553
 $23,241
 6
 $3,908
 $3,777
Commercial real estate:                        
Commercial real estate 1
 196
 195
 1
 177
 173
 1
 1,597
 1,597
 1
 196
 195
Construction 1
 32
 23
 1
 560
 480
 
 
 
 1
 32
 23
Total commercial real estate 2
 228
 218
 2
 737
 653
 1
 1,597
 1,597
 2
 228
 218
Residential mortgage 3
 587
 581
 3
 621
 622
 
 
 
 3
 587
 581
Consumer 1
 88
 86
 
 
 
 
 
 
 1
 88
 86
Total 12
 $4,811
 $4,662
 14
 $11,640
 $10,510
 37
 $25,150
 $24,838
 12
 $4,811
 $4,662


The total TDRs presented in the above table had allocated specific reserves for loan losses totaling $958 thousandof approximately $7.9 million and $2.0$1.0 million at for March 31, 20182019 and 2017, respectively.2018. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in the "Impaired Loans" section above. There were no$913 thousand of partial charge-offs related to TDR modifications during the three months ended March 31, 20182019 and 2017, respectively.no charge-offs for such loans during the three months ended March 31, 2018.




3126







The non-PCI loans modified as TDRs within the previous 12 months and for which there was a payment default (90 or more days past due) for the three months ended March 31, 20182019 and 20172018 were as follows:


  Three Months Ended March 31,
  2019 2018
Troubled Debt Restructurings Subsequently Defaulted 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
  ($ in thousands)
Commercial and industrial 10
 $8,626
 
 $
Commercial real estate 
 
 1
 165
Residential mortgage 5
 702
 
 
Consumer 1
 18
 
 
Total 16
 $9,346
 1
 $165

  Three Months Ended
March 31, 2018
 Three Months Ended
March 31, 2017
Troubled Debt Restructurings Subsequently Defaulted 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
  ($ in thousands)
Commercial and industrial 
 $
 1
 $2,000
Commercial real estate 1
 165
 2
 807
Residential mortgage 
 
 1
 321
Total 1
 $165
 4
 $3,128
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,”“Pass”, “Special Mention,” “Substandard,” “Doubtful,”Mention”, “Substandard”, “Doubtful” and “Loss.”“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 March 31, 20182019 and December 31, 20172018 based on the most recent analysis performed. performed:


Credit exposure - by internally assigned risk rating Pass 
Special
Mention
 Substandard Doubtful Total Non-PCI Loans
  (in thousands)
March 31, 2019          
Commercial and industrial $3,595,459
 $37,340
 $80,011
 $73,932
 $3,786,742
Commercial real estate 10,098,803
 45,373
 44,279
 933
 10,189,388
Construction 1,197,680
 1,684
 377
 
 1,199,741
Total $14,891,942
 $84,397
 $124,667
 $74,865
 $15,175,871
December 31, 2018          
Commercial and industrial $3,399,426
 $31,996
 $92,320
 $66,633
 $3,590,375
Commercial real estate 9,828,744
 30,892
 51,710
 963
 9,912,309
Construction 1,121,321
 215
 812
 
 1,122,348
Total $14,349,491
 $63,103
 $144,842
 $67,596
 $14,625,032
Credit exposure - by internally assigned risk rating Pass 
Special
Mention
 Substandard Doubtful Total Non-PCI Loans
  (in thousands)
March 31, 2018          
Commercial and industrial $2,569,935
 $62,434
 $84,437
 $19,364
 $2,736,170
Commercial real estate 8,716,586
 33,000
 55,115
 
 8,804,701
Construction 949,675
 358
 732
 
 950,765
Total $12,236,196
 $95,792
 $140,284
 $19,364
 $12,491,636
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

At March 31, 20182019 and December 31, 2017,2018, the commercial and industrial loans with risk ratings ofrated substandard and doubtful in the above table partly consisted ofincluded performing TDR taxi medallion loans and non-accrual (but mostly performing to their contractual terms) taxi medallion loans, respectively.



3227







For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 20182019 and December 31, 2017:2018:
Credit exposure - by payment activity 
Performing
Loans
 
Non-Performing
Loans
 
Total Non-PCI
Loans
  (in thousands)
March 31, 2019      
Residential mortgage $3,649,062
 $11,921
 $3,660,983
Home equity 379,411
 1,806
 381,217
Automobile 1,347,257
 148
 1,347,405
Other consumer 853,078
 224
 853,302
Total $6,228,808
 $14,099
 $6,242,907
December 31, 2018      
Residential mortgage $3,670,067
 $12,917
 $3,682,984
Home equity 369,184
 2,156
 371,340
Automobile 1,319,126
 80
 1,319,206
Other consumer 846,402
 419
 846,821
Total $6,204,779
 $15,572
 $6,220,351

Credit exposure - by payment activity 
Performing
Loans
 
Non-Performing
Loans
 
Total Non-PCI
Loans
  (in thousands)
March 31, 2018      
Residential mortgage $2,794,363
 $22,694
 $2,817,057
Home equity 369,458
 2,890
 372,348
Automobile 1,222,165
 88
 1,222,253
Other consumer 733,514
 126
 733,640
Total $5,119,500
 $25,798
 $5,145,298
December 31, 2017      
Residential mortgage $2,705,339
 $12,405
 $2,717,744
Home equity 371,854
 1,777
 373,631
Automobile 1,208,731
 73
 1,208,804
Other consumer 723,286
 20
 723,306
Total $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 March 31, 20182019 and December 31, 2017.2018:
Credit exposure - by payment activity 
Performing
Loans
 
Non-Performing
Loans
 
Total
PCI Loans
  (in thousands)
March 31, 2019      
Commercial and industrial $690,301
 $27,884
 $718,185
Commercial real estate 2,455,693
 20,344
 2,476,037
Construction 253,476
 982
 254,458
Residential mortgage 405,111
 5,143
 410,254
Consumer 143,577
 1,829
 145,406
Total $3,948,158
 $56,182
 $4,004,340
December 31, 2018      
Commercial and industrial $710,045
 $30,612
 $740,657
Commercial real estate 2,478,990
 15,976
 2,494,966
Construction 364,815
 969
 365,784
Residential mortgage 421,609
 6,807
 428,416
Consumer 158,502
 1,761
 160,263
Total $4,133,961
 $56,125
 $4,190,086

Credit exposure - by payment activity 
Performing
Loans
 
Non-Performing
Loans
 
Total
PCI Loans
  (in thousands)
March 31, 2018      
Commercial and industrial $867,135
 $28,292
 $895,427
Commercial real estate 2,877,254
 24,273
 2,901,527
Construction 419,991
 1,752
 421,743
Residential mortgage 498,036
 6,467
 504,503
Consumer 190,560
 2,073
 192,633
Total $4,852,976
 $62,857
 $4,915,833
December 31, 2017      
Commercial and industrial $172,105
 $20,255
 $192,360
Commercial real estate 924,574
 10,352
 934,926
Construction 39,802
 1,339
 41,141
Residential mortgage 135,745
 5,546
 141,291
Consumer 76,901
 596
 77,497
Total $1,349,127
 $38,088
 $1,387,215
Other real estate owned (OREO) totaled $13.8$7.3 million and $9.8$9.5 million at March 31, 20182019 and December 31, 2017,2018, respectively. OREO included foreclosed residential real estate properties totaling $10.1$1.5 millionand $7.3 million$852 thousand at March 31, 20182019 and December 31, 2017,2018, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $3.9$1.2 millionand $3.8$1.8 million at March 31, 20182019 and December 31, 2017,2018, respectively.


3328





Note 9.8. Allowance for Credit Losses


The allowance for credit losses consists of the allowance for loan losses and the allowance for unfunded letters of credit. Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of the loan portfolio and unfunded letter of credit commitments at the balance sheet date. The allowance for loan losses is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio, including unexpected additional credit impairment of PCI loan pools subsequent to acquisition. There was no allowance allocation for PCI loan losses at March 31, 20182019 and December 31, 2017.2018.
The following table summarizes the allowance for credit losses at March 31, 20182019 and December 31, 2017:2018: 
 March 31,
2019
 December 31,
2018
 (in thousands)
Components of allowance for credit losses:   
Allowance for loan losses$154,381
 $151,859
Allowance for unfunded letters of credit4,580
 4,436
Total allowance for credit losses$158,961
 $156,295

 March 31,
2018
 December 31,
2017
 (in thousands)
Components of allowance for credit losses:   
Allowance for loan losses$132,862
 $120,856
Allowance for unfunded letters of credit3,842
 3,596
Total allowance for credit losses$136,704
 $124,452
The following table summarizes the provision for credit losses for the periods indicated:
 Three Months Ended
March 31,
 2019 2018
 (in thousands)
Components of provision for credit losses:   
Provision for loan losses$7,856
 $10,702
Provision for unfunded letters of credit144
 246
Total provision for credit losses$8,000
 $10,948

 Three Months Ended
March 31,
 2018 2017
 (in thousands)
Components of provision for credit losses:   
Provision for loan losses$10,702
 $2,402
Provision for unfunded letters of credit246
 68
Total provision for credit losses$10,948
 $2,470
The following table detailstables detail activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 20182019 and 2017:2018:
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 Consumer Total
 (in thousands)
Three Months Ended
March 31, 2019
         
Allowance for loan losses:         
Beginning balance$90,956
 $49,650
 $5,041
 $6,212
 $151,859
Loans charged-off(4,282) 
 (2,028) (15) (6,325)
Charged-off loans recovered483
 21
 1
 486
 991
Net (charge-offs) recoveries(3,799) 21
 (2,027) 471
 (5,334)
Provision for loan losses7,473
 (1,909) 2,125
 167
 7,856
Ending balance$94,630
 $47,762
 $5,139
 $6,850
 $154,381
Three Months Ended
March 31, 2018
         
Allowance for loan losses:         
Beginning balance$57,232
 $54,954
 $3,605
 $5,065
 $120,856
Loans charged-off(131) (310) (68) (1,211) (1,720)
Charged-off loans recovered2,107
 369
 80
 468
 3,024
Net recoveries (charge-offs)1,976
 59
 12
 (743) 1,304
Provision for loan losses7,338
 1,666
 483
 1,215
 10,702
Ending balance$66,546
 $56,679
 $4,100
 $5,537
 $132,862

 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 Consumer Total
 (in thousands)
Three Months Ended
March 31, 2018
         
Allowance for loan losses:         
Beginning balance$57,232
 $54,954
 $3,605
 $5,065
 $120,856
Loans charged-off(131) (310) (68) (1,211) (1,720)
Charged-off loans recovered2,107
 369
 80
 468
 3,024
Net recoveries (charge-offs)1,976
 59
 12
 (743) 1,304
Provision for loan losses7,338
 1,666
 483
 1,215
 10,702
Ending balance$66,546
 $56,679
 $4,100
 $5,537
 $132,862
Three Months Ended
March 31, 2017
         
Allowance for loan losses:         
Beginning balance$50,820
 $55,851
 $3,702
 $4,046
 $114,419
Loans charged-off(1,714) (414) (130) (1,121) (3,379)
Charged-off loans recovered848
 142
 448
 563
 2,001
Net (charge-offs) recoveries(866) (272) 318
 (558) (1,378)
Provision for loan losses1,334
 723
 (428) 773
 2,402
Ending balance$51,288
 $56,302
 $3,592
 $4,261
 $115,443


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The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology at March 31, 20182019 and December 31, 2017.2018.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)
March 31, 2019         
Allowance for loan losses:         
Individually evaluated for impairment$31,508
 $2,615
 $676
 $51
 $34,850
Collectively evaluated for impairment63,122
 45,147
 4,463
 6,799
 119,531
Total$94,630
 $47,762
 $5,139
 $6,850
 $154,381
Loans:         
Individually evaluated for impairment$106,070
 $43,855
 $12,693
 $898
 $163,516
Collectively evaluated for impairment3,680,672
 11,345,274
 3,648,290
 2,581,026
 21,255,262
Loans acquired with discounts related to credit quality718,185
 2,730,495
 410,254
 145,406
 4,004,340
Total$4,504,927
 $14,119,624
 $4,071,237
 $2,727,330
 $25,423,118
December 31, 2018         
Allowance for loan losses:         
Individually evaluated for impairment$29,684
 $2,628
 $600
 $113
 $33,025
Collectively evaluated for impairment61,272
 47,022
 4,441
 6,099
 118,834
Total$90,956
 $49,650
 $5,041
 $6,212
 $151,859
Loans:         
Individually evaluated for impairment$97,852
 $43,598
 $13,904
 $1,271
 $156,625
Collectively evaluated for impairment3,492,523
 10,991,059
 3,669,080
 2,536,096
 20,688,758
Loans acquired with discounts related to credit quality740,657
 2,860,750
 428,416
 160,263
 4,190,086
Total$4,331,032
 $13,895,407
 $4,111,400
 $2,697,630
 $25,035,469

Note 9. Leases
Lessor Arrangements
Valley's lessor arrangements primarily consist of direct financing and sales-type leases for equipment included in the commercial and industrial loan portfolio. Lease agreements may include options to renew and for the lessee to purchase the leased equipment at the end of the lease term.
At March 31, 2019, the total net investment in direct financing and sales-type leases was $351.2 million, comprised of $350.0 million in lease receivables and $1.2 million in unguaranteed residuals. Total lease income was $4.3 million for the three months ended March 31, 2019.
Lessee Arrangements
Valley's lessee arrangements predominantly consist of operating and finance leases for premises and equipment. The majority of the operating leases include one or more options to renew, that can significantly extend the lease terms. Valley’s leases have a wide range of lease expirations through the year 2062. 
Operating and finance leases are recognized as right of use (ROU) assets and lease liabilities in the consolidated statements of financial position. The ROU assets represent the right to use underlying assets for the lease terms and

30




lease liabilities represent Valley’s obligations to make lease payments arising from the lease. The ROU assets include any prepaid lease payments and initial direct costs, less any lease incentives. At the commencement dates of leases, ROU assets and lease liabilities are initially recognized based on their net present values with the lease terms including options to extend or terminate the lease when Valley is reasonably certain that the options will be exercised to extend. ROU assets are amortized into net occupancy and equipment expense over the expected lives of the leases.
Lease liabilities are discounted to their net present values on the balance sheet based on incremental borrowing rates as determined at the lease commencement dates using quoted interest rates for readily available borrowings, such as fixed rate FHLB advances, with similar terms as the lease obligations. Lease liabilities are reduced by actual lease payments.

During March 2019, Valley closed a sale-leaseback transaction for 26 properties, consisting of 25 branches and 1 corporate office, for an aggregate sales price of $100.5 million. As a result, Valley recorded a pre-tax net gain totaling $78.5 million during the first quarter of 2019. Additionally, Valley recorded ROU assets and lease obligations totaling $78.4 million, respectively, for the lease of the 26 properties with an expected term of 12 years. The lease was determined to be an operating lease and Valley expects to record lease costs of approximately $7.9 million within occupancy and equipment expense on a straight-line basis annually over the term of the lease. 
The following table presents the components of ROU assets and lease liabilities by lease type at March 31, 2019.
 March 31, 2019
 (in thousands)
ROU assets: 
Operating leases$288,577
Finance leases1,092
Total$289,669
Lease liabilities: 
Operating leases$311,362
Finance leases2,163
Total$313,525

The following table presents the components by lease type, of total lease cost recognized in the consolidated statement of income for the three months ended March 31, 2019:
 Three Months Ended
 March 31, 2019
 (in thousands)
Finance lease cost: 
Amortization of ROU assets$73
Interest on lease liabilities52
Operating lease cost6,974
Short-term lease cost75
Variable lease cost948
Sublease income(903)
Total lease cost (included in net occupancy and equipment expense)$7,219


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The following table presents supplemental cash flow information related to leases for thethree months ended March 31, 2019:
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 Consumer Total
 (in thousands)
March 31, 2018         
Allowance for loan losses:         
Individually evaluated for impairment$21,664
 $2,672
 $705
 $60
 $25,101
Collectively evaluated for impairment44,882
 54,007
 3,395
 5,477
 107,761
Total$66,546
 $56,679
 $4,100
 $5,537
 $132,862
Loans:         
Individually evaluated for impairment$89,668
 $56,947
 $14,030
 $1,888
 $162,533
Collectively evaluated for impairment2,646,113
 9,698,719
 2,803,027
 2,326,353
 17,474,212
Loans acquired with discounts related to credit quality895,427
 3,323,270
 504,503
 192,633
 4,915,833
Total$3,631,208
 $13,078,936
 $3,321,560
 $2,520,874
 $22,552,578
December 31, 2017         
Allowance for loan losses:         
Individually evaluated for impairment$11,044
 $2,735
 $718
 $64
 $14,561
Collectively evaluated for impairment46,188
 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 impairment2,463,566
 9,310,964
 2,703,688
 2,301,981
 16,780,199
Loans acquired with discounts related to credit quality192,360
 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
 Three Months Ended
 March 31, 2019
 (in thousands)
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows from operating leases$8,199
Operating cash flows from finance leases52
Financing cash flows from finance leases119

The following table presents supplemental information related to leases at March 31, 2019:
March 31, 2019
Weighted-average remaining lease term
Operating leases13.23 years
Finance leases3.75 years
Weighted-average discount rate
Operating leases3.72%
Finance leases8.25%


The following table presents a maturity analysis of lessor and lessee arrangements outstanding as of March 31, 2019:
 Lessor Lessee
 Direct Financing and Sales-Type Leases Operating Leases Finance Leases
 (in thousands)
2019$86,787
 $26,352
 $513
202096,830
 35,103
 684
202180,580
 34,295
 684
202259,226
 32,639
 684
202337,135
 29,195
 
Thereafter23,260
 244,608
 
Total lease payments383,818
 402,192
 2,565
Less: present value discount(33,823) (90,830) (402)
Total$349,995
 $311,362
 $2,163


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The following table presents minimum aggregate lease payments in accordance with Topic 840 at March 31, 2018:
 Gross Rents Sublease Income Net Rents
 (in thousands)
2018$20,776
 $1,644
 $19,132
201927,570
 2,124
 25,446
202027,709
 2,077
 25,632
202126,872
 2,009
 24,863
202225,860
 1,891
 23,969
Thereafter270,431
 8,130
 262,301
Total lease payments$399,218
 $17,875
 $381,343

Net occupancy and equipment expense included lease cost of $8.2 million, net of sublease income of $911 thousand for the three months ended March 31, 2018.
Note 10. Goodwill and Other Intangible Assets
The
Goodwill totaled $1.1 billion at March 31, 2019 and December 31, 2018. There were no changes into the carrying amountamounts of goodwill as allocated to ourValley's business segments, or reporting units thereof, for goodwill impairment analysis 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 March 31, 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(as reported in Valley's Annual Report on Form 10-K for financial reporting purposes.

During the three monthsyear ended MarchDecember 31, 2018, goodwill from business combinations set forth in the table above relates to the acquisition of USAB (see Note 2 for further details)2018). Certain estimates for acquired assets and assumed liabilities are subject to change for up to one year after the acquisition date. There was no impairment of goodwill during the three months ended March 31, 20182019 and 2017.2018.


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The following table summarizes other intangible assets as of March 31, 20182019 and December 31, 2017:2018:
 
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Valuation
Allowance
 
Net
Intangible
Assets
 (in thousands)
March 31, 2019       
Loan servicing rights$88,557
 $(64,939) $(107) $23,511
Core deposits80,470
 (31,888) 
 48,582
Other3,945
 (2,458) 
 1,487
Total other intangible assets$172,972
 $(99,285) $(107) $73,580
December 31, 2018       
Loan servicing rights$87,354
 $(63,161) $(83) $24,110
Core deposits80,470
 (29,136) 
 51,334
Other3,945
 (2,399) 
 1,546
Total other intangible assets$171,769
 $(94,696) $(83) $76,990

 
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Valuation
Allowance
 
Net
Intangible
Assets
 (in thousands)
March 31, 2018       
Loan servicing rights$82,879
 $(58,440) $(244) $24,195
Core deposits80,470
 (19,911) 
 60,559
Other3,945
 (2,212) 
 1,733
Total other intangible assets$167,294
 $(80,563) $(244) $86,487
December 31, 2017       
Loan servicing rights$79,138
 $(57,054) $(471) $21,613
Core deposits43,396
 (24,297) 
 19,099
Other4,087
 (2,292) 
 1,795
Total other intangible assets$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-recurringNon-Recurring Basis" section of Note 65 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 108.2 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 207.6 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

33




intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three months ended March 31, 20182019 and 2017.2018.


The following table presents the estimated future amortization expense of other intangible assets for the remainder of 20182019 through 2022:2023:
 
Loan Servicing
Rights
 
Core
Deposits
 Other
 (in thousands)
2019$4,305
 $8,209
 $176
20204,749
 9,607
 220
20213,750
 8,252
 206
20222,980
 6,898
 191
20232,372
 5,544
 131

 
Loan
Servicing
Rights
 
Core
Deposits
 Other
 (in thousands)
2018$4,460
 $9,224
 $187
20194,816
 10,961
 235
20203,873
 9,607
 220
20212,997
 8,252
 206
20222,400
 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 $4.3 million and $2.5 million for the three months ended March 31, 20182019 and 2017, respectively.2018.

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Note 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 primary purpose of the 2016 Stock 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.directors (for acting in their roles as board members). As of March 31, 2018, 5.62019, 4.3 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 USAB acquisition onRestricted Stock. Prior to January 1, 2018, Valley assumed pre-existing2019, restricted stock awards consisting of options for 1.8 million shares of Valley common stock (of which options for 1.2 million shares remained outstanding as of March 31, 2018) at a weighted average exercise price of $4.97 and 336 thousand time-based RSUs (of which 199 thousand remained outstanding as of March 31, 2018). The stock plan under which the stock awards were issued is no longer active.
Restricted Stock. Restricted stock iswas 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-baseddid not award any restricted stock totaling 1.1 million shares and 393 thousand shares during the three months ended March 31, 2019 as compared to 1.1 million shares of time-based restricted stock awarded during the three months ended March 31, 2018 and 2017, respectively, to both executive officers, and key employees and directors 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 three months ended March 31, 2018 and 2017 was $11.81 per share and $11.66 per share, respectively.share.
Restricted Stock Units (RSUs). Valley granted 532 thousand and 450 thousand and 371 thousandshares of performance-based RSUs to certain executive officers for the three months ended March 31, 20182019 and 2017,2018, respectively. The performance-based RSU awards include RSUs will vest and be issued as common stockwith vesting conditions based on the attainmentupon certain levels of (i) growth in Valley's tangible book value per share plus dividends (75 percent of the RSU award) and (ii)RSUs with vesting conditions based upon Valley's total shareholder return as compared to our peer group (25 percent of the RSU award).group. The RSUs "cliff" vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents and accrued interest (if applicable), per the terms of the agreements, are accumulated and paid to the

34




grantee at the vesting date or forfeited if the performance conditions are not met. The grant date fair value of the RSUs granted during the three months ended March 31, 2019 and 2018 was $10.43 per share and 2017 was $12.35 per share, and $11.05 per share, respectively.


Valley recorded total stock-based compensation expense of $8.0$4.1 million and $4.1$8.0 million for the three months ended March 31, 2019 and2018, and2017.respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of March 31, 2018,2019, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $27.5$25.4 million and will be recognized over an average remaining vesting period of 2.42.37 years.

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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 months ended March 31, 2018 and 2017:
 Three Months Ended
March 31,
 2018 2017
 (in thousands)
Trust and investment services$3,230
 $2,744
Insurance commissions3,821
 5,061
Service charges on deposit accounts7,253
 5,236
Losses on securities transactions, net(765) (23)
Fees from loan servicing2,223
 1,815
Gains on sales of loans, net6,753
 4,128
Bank owned life insurance1,763
 2,463
Other7,973
 4,296
Total non-interest income$32,251
 $25,720

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 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 FDIC loss-share receivables.

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Note 13.12. Derivative Instruments and Hedging Activities


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


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


Fair Value Hedges of Fixed Rate Assets and Liabilities. Valley is exposed to changes in the fair value of certain of its fixed rate assets or liabilities due to changes in benchmark interest rates based on one-month LIBOR. From time to time, Valley useshas used 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 March 31, 2018,2019, Valley had 1118 credit swaps with an aggregate notional amount of $63.4$109.4 million related to risk participation agreements. 


At March 31, 2018,2019, Valley has one "steepener" swap with a total current notional amount of $14.5$10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the rates paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting

35




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

39




entered into in order to economically hedge the effect of future changes in interest ratesrate on Valley’sValley's commitments to fund the loans as well as on its portfolio of mortgage loans held for sale.


Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows:
 March 31, 2019 December 31, 2018
 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$
 $1,317
 $282,000
 $
 $27
 $332,000
Fair value hedge interest rate swaps
 338
 7,474
 
 347
 7,536
Total derivatives designated as hedging instruments$
 $1,655
 $289,474
 $
 $374
 $339,536
Derivatives not designated as hedging instruments:           
Interest rate swaps and embedded derivatives$78,782
 $20,436
 $3,332,581
 $48,642
 $22,533
 $3,390,578
Mortgage banking derivatives470
 585
 103,947
 337
 774
 105,247
Total derivatives not designated as hedging instruments$79,252
 $21,021
 $3,436,528
 $48,979
 $23,307
 $3,495,825

 March 31, 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 caps and swaps$644
 $119
 $607,000
 $650
 $81
 $607,000
Fair value hedge interest rate swaps
 507
 7,717
 
 637
 7,775
Total derivatives designated as hedging instruments$644
 $626
 $614,717
 $650
 $718
 $614,775
Derivatives not designated as hedging instruments:           
Interest rate swaps and embedded derivatives$25,132
 $29,270
 $2,731,500
 $25,696
 $23,494
 $1,687,005
Mortgage banking derivatives206
 223
 109,385
 71
 118
 113,233
Total derivatives not designated as hedging instruments$25,338
 $29,493
 $2,840,885
 $25,767
 $23,612
 $1,800,238

The Chicago Mercantile Exchange (CME) and London Clearing House (LCH) have enacted rulebook changes that re-characterize variation margin as settlements of the outstanding derivative instead of cash collateral. The CME and LCH variation margins are classified as a single-unit of account with the fair value of certain cash flow and non-designated derivative 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.instruments. As a result, the fair value of the designated cash flow derivativeinterest rate swaps assets and designated and non-designated interest rate swaps liabilities were offset by variation margins posted by (with) the applicable counterparties totaling $11.1 million and $9.9 million, respectively, and reported in the table above on a net basis at March 31, 2018. The fair value of the designated cash flow derivatives2019 and non-designated interest rate swaps cleared with the CME were offset by variation margins totaling $9.5 million and $951 thousand, respectively, and reported in the table above on a net basis at December 31, 2017.2018.


Gains (Losses) gains included in the consolidated statements of income and in other comprehensive income (loss) income,, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows: 
 Three Months Ended
March 31,
 2019 2018
 (in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense$(290) $(1,451)
Amount of (loss) gain recognized in other comprehensive income (loss)(550) 2,751
 Three Months Ended
March 31,
 2018 2017
 (in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense$(1,451) $(2,518)
Amount of gain recognized in other comprehensive (loss) income2,751
 217

The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $5.4$4.2 million and $8.3$4.0 million at March 31, 20182019 and December 31, 2017,2018, 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 $2.6$1.8 million will be reclassified as an increase to interest expense over the next 12 months.


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Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
 Three Months Ended
March 31,
 2019 2018
 (in thousands)
Derivative - interest rate swaps:   
Interest income$24
 $131
Hedged item - loans:   
Interest income$(24) $(131)

 Three Months Ended
March 31,
 2018 2017
 (in thousands)
Derivative - interest rate swaps:   
Interest income$131
 $97
Hedged item - loans:   
Interest income$(131) $(97)


Fee income related to derivative interest rate swaps executed with commercial loan customers totaled $3.3$4.1 million and $661 thousand$3.3 million for the three months ended March 31, 20182019 and 2017,2018, respectively, and 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 March 31, 2019 and December 31, 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
  March 31, 2019 December 31, 2018 March 31, 2019 December 31, 2018
  (in thousands)
Loans $7,811
 $7,882
 $337
 $346

 March 31, 2018
 (in thousands)
Hedged item - loans: 
Loan receivable - carrying amount$8,224
Cumulative fair value adjustment(507)


The net gains (losses) included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows:
 Three Months Ended
March 31,
 2019 2018
 (in thousands)
Non-designated hedge interest rate derivatives   
Other non-interest expense$(410) $218

 Three Months Ended
March 31,
 2018 2017
 (in thousands)
Non-designated hedge interest rate derivatives   
Other non-interest expense$218
 $(860)


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 March 31, 2018,2019, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of March 31, 2018,2019, 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 $2.4$5.7 million. Valley

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has derivative counterparty agreements that require minimum collateral posting thresholds for certain

41




counterparties. At March 31, 2018, Valley had $41.3 million in collateral posted with counterparties, net of CME and LCH variation margins.
Note 14.13. Balance Sheet Offsetting
Certain financial instruments, including derivatives (consisting of interest rate capsswaps 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 March 31, 20182019 and December 31, 2017.2018.
      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)
March 31, 2018           
March 31, 2019           
Assets:                      
Interest rate caps and swaps$25,776
 $
 $25,776
 $(725) $
 $25,051
Interest rate swaps$78,782
 $
 $78,782
 $(4,494) $
 $74,288
Liabilities:                      
Interest rate caps and swaps$29,896
 $
 $29,896
 $(725) $(1,874)
(1) 
$27,297
Interest rate swaps$22,091
 $
 $22,091
 $(4,494) $(5,273)
(1) 
$12,324
Repurchase agreements150,000
 
 150,000
 
 (150,000)
(2) 

150,000
 
 150,000
 
 (150,000)
(2) 

Total$179,896
 $
 $179,896
 $(725) $(151,874) $27,297
$172,091
 $
 $172,091
 $(4,494) $(155,273) $12,324
December 31, 2017           
December 31, 2018           
Assets:                      
Interest rate caps and swaps$26,346
 $
 $26,346
 $(5,376) $
 $20,970
Interest rate swaps and caps$48,642
 $
 $48,642
 $(1,214) $
 $47,428
Liabilities:                      
Interest rate caps and swaps$24,212
 $
 $24,212
 $(5,376) $(8,141)
(1) 
$10,695
Interest rate swaps and caps$22,907
 $
 $22,907
 $(1,214) $(1,852)
(1) 
$19,841
Repurchase agreements200,000
 
 200,000
 
 (200,000)
(2) 

150,000
 
 150,000
 
 (150,000)
(2) 

Total$224,212
 $
 $224,212
 $(5,376) $(208,141) $10,695
$172,907
 $
 $172,907
 $(1,214) $(151,852) $19,841
 
(1)Represents the amount of collateral posted with derivativesderivative counterparties that offsets net liability positions. Actual cash collateral posted with all counterparties totaled $41.3 million and $51.4 million at March 31, 2018 and December 31, 2017, respectively.
(2)Represents the fair value of non-cash pledged investment securities.
Note 15.14. 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


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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 whenAfter initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair valuevalues, are increased to reflect Valley's share of income of the tax credit investment is less thaninvestee and are reduced to reflect its carrying value.share of losses of the investee, dividends received and other-than-temporary impairments, if applicable (See "Other-Than-Temporary Impairment Analysis" section below).


The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at March 31, 20182019 and December 31, 2017.2018:
 March 31,
2019
 December 31,
2018
 (in thousands)
Other Assets:   
Affordable housing tax credit investments, net$35,278
 $36,961
Other tax credit investments, net55,669
 68,052
Total tax credit investments, net$90,947
 $105,013
Other Liabilities:   
Unfunded affordable housing tax credit commitments$2,781
 $4,520
Unfunded other tax credit commitments8,756
 8,756
    Total unfunded tax credit commitments$11,537
 $13,276

 March 31,
2018
 December 31,
2017
 (in thousands)
Other Assets:   
Affordable housing tax credit investments, net$40,568
 $22,135
Other tax credit investments, net35,976
 42,015
Total tax credit investments, net$76,544
 $64,150
Other Liabilities:   
Unfunded affordable housing tax credit commitments$5,256
 $3,690
Unfunded other tax credit commitments12,682
 15,020
    Total unfunded tax credit commitments$17,938
 $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 months ended March 31, 20182019 and 2017:2018: 
 Three Months Ended
March 31,
 2019 2018
 (in thousands)
Components of Income Tax Expense:   
Affordable housing tax credits and other tax benefits$1,713
 $1,821
Other tax credit investment credits and tax benefits2,803
 5,485
Total reduction in income tax expense$4,516
 $7,306
Amortization of Tax Credit Investments:   
Affordable housing tax credit investment losses$673
 $986
Affordable housing tax credit investment impairment losses730
 587
Other tax credit investment losses987
 537
Other tax credit investment impairment losses4,783
 3,164
Total amortization of tax credit investments recorded in non-interest expense$7,173
 $5,274


Other-Than-Temporary Impairment Analysis

An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value. The determination of whether a decline in value of a tax credit investment is other-than-temporary requires significant judgment and is performed separately for each investment. The tax credit investments are reviewed for impairment quarterly, or whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. These circumstances can include, but are not limited to, the following factors:

Evidence that we do not have the ability to recover the carrying amount of the investment;
The inability of the investee to sustain earnings;

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 Three Months Ended
March 31,
 2018 2017
 (in thousands)
Components of Income Tax Expense:   
Affordable housing tax credits and other tax benefits$1,821
 $1,284
Other tax credit investment credits and tax benefits5,485
 6,286
Total reduction in income tax expense$7,306
 $7,570
Amortization of Tax Credit Investments:   
Affordable housing tax credit investment losses$986
 $396
Affordable housing tax credit investment impairment losses587
 124
Other tax credit investment losses537
 767
Other tax credit investment impairment losses3,164
 4,037
Total amortization of tax credit investments recorded in non-interest expense$5,274
 $5,324

A current fair value of the investment based upon cash flow projections that is less than the carrying amount; and
Change in the economic or technological environment that could adversely affect the investee’s operations

On a quarterly basis, Valley obtains financial reporting on the underlying investment assets for each fund from the Fund Manager who is independent of us and the Fund Sponsor. The financial reporting is reviewed for deterioration in the financial condition of the fund, the level of cash flows and any significant losses or impairment charges. Valley also regularly reviews the condition and continuing prospects of the underlying operations of the investment with the Fund Manager, including any observations from site visits and communications with the Fund Sponsor, if available. Annually, Valley obtains the audited financial statements prepared by an independent accounting firm for each investment, as well as the annual tax returns. Generally, none of the aforementioned review factors are individually conclusive and the relative importance of each factor will vary based on facts and circumstances. However, the longer the expected period of recovery, the stronger and more objective the positive evidence needs to be in order to overcome the presumption that the impairment is other than temporary. If management determines that a decline in value is other than temporary per its quarterly and annual reviews, including current probable cash flow projections, the applicable tax credit investment is written down to its fair value through an impairment charge to earnings, which establishes the new cost basis of the investment.

The aggregate unamortized investment related to three federal renewable energy tax credit funds sponsored by DC Solar represented approximately $2.4 million (or approximately $800 thousand for each fund) of the $68.1 million of net other tax credit investments reported as of December 31, 2018. These funds are described in detail in Note 15 below. During the first quarter of 2019, Valley determined that future cash flows related to the remaining investments in all three funds were not probable based upon new information available, including the sponsor’s current bankruptcy proceeding which were reclassified to Chapter 7 in late March 2019. As a result, we recognized an other-than-temporary impairment charge for the entire aggregate unamortized investment of $2.4 million within amortization of tax credit investments for the three months ended March 31, 2019.
Note 16. Litigation15. Income Taxes
A reconciliation of Valley’s gross unrecognized tax benefits at March 31, 2019 and 2018 are presented in the table below:
 Three Months Ended
March 31,
 2019 2018
  
Beginning balance$
 $4,238
Additions based on tax positions related to prior years12,100
 
Ending balance$12,100
 $4,238

The entire balance of unrecognized tax benefits, if recognized, would favorably affect our effective income tax rate. Valley’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Valley accrued approximately $1.9 million and $1.8 million of interest associated with Valley’s uncertain tax positions at March 31, 2019 and 2018, respectively.
From 2013 to 2015, Valley invested in three federal renewable energy tax credit funds (Fund VI, Fund XII and Fund XIX) sponsored by DC Solar and claimed the related federal tax credit benefits of approximately $22.8 million in its consolidated financial statements during the same period. All three funds own mobile solar generator units leased to DC Solar Distributions, which stated its intention to sublease the units to third parties.
An entity shall initially recognize the financial statement effects of a tax position when it is more likely than not (or a likelihood of more than 50 percent), based on the technical merits, that the position will be sustained upon examination. The level of evidence that is necessary and appropriate to support an entity's assessment of the technical merits of a tax position is a matter of judgment that depends on all available information. At each of the

40




investment dates, Valley obtained two tax opinions from national law firms that should successfully support the recognition of the tax credits in its tax returns if challenged by the IRS. Based upon management's review of the tax opinions on the investment’s legal structure, Valley recognized and measured each tax position at a 100 percent of the tax credit.
Valley's subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances, and information available at quarterly reporting date. A change in judgment that results in subsequent derecognition or change in measurement of a tax position taken in a prior annual period (including any related interest and penalties) is recognized as a discrete item in the period in which the change occurs.
In late February 2019, Valley learned of Federal Bureau of Investigation (FBI) allegations of fraudulent conduct by DC Solar, including information about asset seizures of DC Solar property and assets of its principals and ongoing federal investigations. Since learning of the normal course of business,allegations, Valley ishas conducted an ongoing investigation coordinated with 10 other DC Solar fund investors, investors' outside counsel and a third party specialist. The facts uncovered 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 affecteddate by the outcomeinvestor group impact each investor differently, affecting their likelihood of such legal proceedingsloss and claims. However,the ultimate amount of tax benefit likely to be recaptured. To date, over 91 percent of the 512 solar generator units owned by Valley's three funds have been positively identified by a third party specialist at several leasee and other locations throughout the United States. Valley has also learned through its investigation that the IRS has challenged the valuation appraisals of similar solar generator units that were used to determine the federal renewable energy tax credits related to another DC Solar fund owned by an unrelated investor.

Given the circumstances at this time and management's best judgments regarding the settlement of the tax positions that it would ultimately accept with the IRS, Valley currently expects a partial loss and tax benefit recapture. As a result of this assessment, Valley's first quarter of 2019 net income includes an increase to the provision for income taxes of $12.1 million, reflecting the reserve for uncertain tax liability position (shown in the event of an adverse outcometable above) related to renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. Valley can provide no assurance that it will not recognize additional tax provisions related to this uncertain tax liability as management learns additional facts and information, or settlement in one or more of our legal proceedings, operating results forthat Valley will not ultimately incur a particular period maycomplete loss on the related tax positions, which is currently estimated to be negatively impacted. Disclosure is required when a risk of material loss in a litigation or claim is more than remote. Disclosure is also required$28.8 million (inclusive of the estimate of the reasonably possible loss or range of loss, unless an estimate cannot reasonably be made. Liabilities are established$12.1 millionprovision for legal claims when payments associated with the claims become probable and the possible losses related to the matter can be reasonably estimated. Valley recognized $10.5 million within professional and legal fees during the first quarter of 2018 for such liabilities.2019).
The following is a description of significant litigation and claims made against Valley.

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Merrick Bank Corporation, American Express Travel Related Services, and JetPay Merchant Services LLC v. Valley National Bank. For about a decade, Valley served as the depository bank for various charter operators under regulations of the Department of Transportation (DOT) and contracts entered into with charter operators under those regulations. Valley stopped serving as a depository bankcontinuously monitors its tax positions for the charter business several years ago. Valley served asunderlying facts, circumstances, and information available including the depository bank for Myrtle Beach Direct Air (Direct Air). Direct Air, a charter operator, commenced operationsfederal investigation of DC Solar and changes in 2007 but in March 2012 Direct Air ceased operationstax laws, case law and filed for bankruptcy. Merrick Bank Corporation (Merrick) was the merchant bank for Direct Air and processed credit card purchases for Direct Air. Following the bankruptcyregulations that may necessitate subsequent de-recognition 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. JetPay Merchant Services LLC (JetPay) was the payment processor for Direct Air. American Express Travel Related Services (American Express) also incurred chargebacks related to Direct Air. Merrick filed an action against Valley in December 2013. American Express and JetPay filed a similar action against Valley in 2014. All the cases were consolidated in the Federal District Court of New Jersey. In April 2018, Valley settled all the claims brought against it by the parties.
Maritza Gaston and George Gallart v. Valley National Bancorp and Valley National Bank. On April 6, 2017, Valley was served with a Class and Collective Action Complaint, filed in the Eastern District of New York, alleging that Valley had violated both Federal and State wage and hour laws and the Fair Labor Standards Act and seeking to recover overtime compensation on behalf of a class of Valley employees. While Branch Service Managers are classified by Valley as “exempt” employees and do not receive overtime pay, plaintiff’s counsel claims that Branch Service Managers perform non-exempt duties, and should therefore be classified as non-exempt hourly employees and be paid overtime for any time worked in excess of 40 hours per week. Valley filed an answer disputing Plaintiffs’ allegations. Plaintiffs filed a formal Notice for Conditional Certification of the Class, which was granted by the Federal Magistrate on December 6, 2017. On January 5, 2018, Valley filed an Objection Brief requesting that the Federal Judge assigned to this case overturn the Federal Magistrate’s Order for Certification. The Court has not acted on that request. Plaintiffs and Valley have agreed to enter into non-binding mediation which is presently scheduled for June 2018. Because the action is in a preliminary stage, Valley is unable to estimate an amount or range of reasonably possible loss.previous tax benefits.
Note 17.16. 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.


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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 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, 2017,2018, include, but are not limited to:


due diligence issues or other matters prevent the expected sale and leaseback of three branch properties or expenses that reduce the additional pre-tax net gain expected to be recognized in the second quarter of 2019;
developments in the DC Solar bankruptcy and federal investigations that could require the recognition of additional tax provision charges related to uncertain tax liability positions;
higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax liability positions, tax laws, regulations and case law;
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 risk that the businesses of Valley and USAB may not be combined successfully, or such combination may take longer or be more difficult, time-consuming or costly to accomplish than expected;
the diversion of management's time on issues relating to merger integration;
the inability to realizegrow customer deposits to keep pace with loan growth;
an increase in our allowance for credit losses due to higher than expected cost savings and synergies from the mergerloan losses within one or more segments of USAB with Valley in the amounts or in the timeframe anticipated;
the inability to retain USAB’s customers and employees;our loan portfolio;
less than expected cost reductions and revenue enhancementsavings from Valley's branch transformation strategy and cost reduction plans including its earnings enhancement program called "LIFT";plans;
higher or lowergreater than expected income tax expensetechnology related costs due to, among other factors, prolonged or tax rates,failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations;
the loss of or decrease in lower-cost funding sources within our deposit base, including increasesour inability to achieve deposit retention targets under Valley's branch transformation strategy;
cyber-attacks, computer viruses or decreases resulting fromother malware that may breach the impactsecurity 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 Tax Cuts and Jobs ActOCC, the FRB, the CFPB and other changes in tax laws, regulations and case law;regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses,

42




write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;
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;

45




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, 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;
our inability or determination not to pay dividends at current levels, or at all, because of inadequate future earnings, regulatory restrictions or limitations, changes in our capital 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. At March 31, 2018,2019, 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, 2017. Purchased credit-impaired loans became a significant portion of our loan portfolio during the first quarter of 2018 due to our acquisition of USAmeriBancorp, Inc. and, as a result, a critical accounting policy at March 31, 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 54 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition.


Executive Summary


Company Overview. At March 31, 2018,2019, Valley had consolidated total assets of approximately $29.5$32.5 billion, total net loans of $22.4$25.3 billion, total deposits of $22.0$24.9 billion and total shareholders’ equity of $3.2$3.4 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and Alabama. Of our current 237219 branch network, 5956 percent, 1617 percent, 1920 percent and 67 percent of the branches are located in New Jersey, New York, Florida and Alabama, respectively. Despite significanttargeted branch consolidation activity, mainly in 2016, we have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions.

USAmeriBancorp, Inc. On January 1, 2018, Valley completed itsacquisitions, including our acquisition of USAmeriBancorp, Inc. (USAB)("USAB") on January 1, 2018.
Sale Leaseback Transaction. Valley closed a sale-leaseback transaction for 26 of the previously announced 29 properties in March 2019. The properties, consisting of 25 branches and its wholly-owned subsidiary, USAmeriBank, headquartered1 corporate location, were sold for an aggregate sales price of $100.5 million. The pre-tax net gain associated with the 26 properties was $78.5 million (after transaction-related expenses) for the first quarter of 2019.
Valley expects to close the sale of three additional properties during the second quarter of 2019, which remain subject to due diligence. The remaining properties are expected to result in Clearwater, Florida. USAB had approximatelya pre-tax net gain of more than $3 million.


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$5.1 billion
Branch Transformation and Other Operational Improvements. As previously disclosed, Valley has embarked on a strategy to overhaul its retail network. During 2018, we identified several branches that did not meet certain internal performance measures. Of those identified, we closed 7 branches in assets, $3.7 billion in net loans2018 and $3.6 billion in deposits and maintained a13 additional branches during the first quarter of 2019. The estimated annual operating expense savings from the 20 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 branch office locations. 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, and the transaction resulted in $388 million of goodwill and $46 million of core deposit intangible assets subject to amortization. Full systems integrationclosures is expected to be completed inapproximately $9 million. During the secondfourth quarter of 2018.2018, we recognized severance costs of $2.7 million related to the branch closures and branch staff reductions.


Earnings Enhancement Program. For the remaining branch network, we continue to monitor the operating performance of each branch and implement tailored action plans focused on improving profitability and deposit levels for those branches that underperform.

In December 2016,addition, Valley recently announced a company-wide earnings enhancement initiative called LIFT.plan to improve its operating efficiencies. The LIFT programannualized salary and benefit expense savings associated with the plan is a reviewexpected to exceed $5 million, excluding $4.8 million 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. In July 2017, we completed the idea generation and approval phase of the LIFT program. As a result of these efforts, we currently expect to achieve approximately $22 million in total cost reductions and revenue enhancements on an annualized pre-tax run-rate after fully phased-in by June 30, 2019.

Mostly during the second half of 2017, Valley implemented several enhancements that resulted in pre-tax cost reductions of $5.6 million for the year ended December 31, 2017. These enhancements and others recently completedseverance charges recognized in the first quarter of 2018 resulted2019. Valley expects to implement the majority of cost saves by the end of the second quarter of 2019.

Investment in total pre-tax cost reductionsDC Solar Funds. From 2013 to 2015, Valley invested in three federal renewable energy tax credit funds sponsored by DC Solar and claimed the related federal tax credit benefits of approximately $3.4$22.8 million in its consolidated financial statements during these periods. In late February 2019, we learned of allegations of fraudulent conduct by DC Solar, including information about asset seizures of DC Solar property and assets of its principals and ongoing federal investigations. We referred to these matters in our Annual Report on Form 10-K for 2018. Since learning of the allegations, Valley has conducted an ongoing investigation coordinated with 10 other DC Solar fund investors, investors' outside counsel and a third party specialist. The facts uncovered to date by the investor group impact each investor differently, affecting their likelihood of loss and the ultimate amount of tax benefit likely to be recaptured.

Given the circumstances that we are aware of at this time and management's best judgments regarding the settlement of the tax positions that it would ultimately accept with the IRS, we currently expect a partial loss and tax benefit recapture. As a result of this assessment, our first quarter of 2019 net income includes an increase to our provision for income taxes of $12.1 million, reflecting the reserve for uncertain tax liability positions related to renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. Additionally, we recognized a full write down of the related unamortized investments totaling $2.4 million (previously presented in other assets) due to other than temporary impairment losses during the first quarter of 2018. The implemented enhancements2019. We can provide no assurance that we will not recognize additional tax provisions related to date underthis uncertain tax liability as we learn additional facts and information, or that we will not ultimately incur a complete loss on the LIFT program are expectedrelated tax positions, which is currently estimated to result in cost reductionsbe $28.8 million (inclusive of approximately $13.5the $12.1 million on an annualized pre-tax basis beginning inprovision for the secondfirst quarter of 2018.

Branch Transformation. We are currently performing a comprehensive evaluation of2019). See Notes 14 and 15 to the operational efficiency ofconsolidated financial statements for additional information related to our entire branch network. This review will ensure the optimal performance of our retail operations, in conjunction with several other factors, including our customers’ delivery channel preferences, branch usage patterns,tax credit investments and the potential opportunity to move existing customer relationships to another branch location without imposing a negative impact on their banking experience. We anticipate providing phase one details of this initiative in conjunction with our second quarter of 2018 earnings release in July 2018.

Tax Cuts and Jobs Act. On December 22, 2017, the President signed the Tax Cuts and Jobs Act (Tax Act) into law. As a result, the federal corporate incomereserves for uncertain tax rate decreased from 35 percent to 21 percent effective January 1, 2018. See the "Income Taxes" section below for more details.liability positions.
Quarterly Results. Net income for the first quarter of 20182019 was $42.0$113.3 million, or $0.12$0.33 per diluted common share, compared to $46.1$42.0 million, or $0.17$0.12 per diluted common share, for the first quarter of 2017.2018. The $4.1$71.4 million decreaseincrease in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a $52.8$75.4 million increase in non-interest expenseincome mostly caused by additional operating costs related to a $78.5 million gain on the acquisitionsale (and leaseback) of several Valley properties, (ii) a $26.0 million decrease in non-interest expense partly due to USAB including merger expenses of $13.4 million (mostly within salary and employee benefits and professional and legal fees), additional salary and employee benefit expense largely related to our expanding teamlitigation reserve charges of residential mortgage loan consultants$13.4 million and technology personnel and a $12.4 million increase in professional and legal expense mostly related to additional litigation reserves of $10.5 million, (ii) a $8.5 millionincreaserespectively, recognized in our provision for credit losses mainly driven by specific reserves allocated to impaired taxi medallion loans, partially offset bythe first quarter of 2018, (iii) a $45.7$11.1 million increase in our net interest income mostly due to higher average loan balances driven by acquired loans from USAB and strong organic loan volumesgrowth over the last 12 months as well as the full benefit of reduced interest expense resulting from $405 million of long-term borrowings modifications in the third quarter of 2017,and (iv) a $6.5$2.9 milliondecrease in our provision for credit losses, partially offset by (v) a $44.0 million increase in non-interest income mostly caused by an increase in net gains on sales of residential mortgage loans, swap fee income from commercial loan customers, and higher fees resulting from the USAB acquisition and (v) a $4.9 milliondecrease in income tax expense largely due in part, to the reduced corporatehigher pre-tax income and an additional provision for income taxes of $12.1 million related to uncertain tax rate under the Tax Act.liability positions at March 31, 2019. See the "Net Interest Income," "Non-Interest Income," "Non-Interest Expense", and "Income Taxes" sections below for more details on the items above impacting our first quarter 20182019 results, as well as other items discussed elsewhere in this MD&A.

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Economic Overview.


Operating Environment. During the first quarter of 2018,2019, real gross domestic product (GDP) grew at a 2.3expanded 3.2 percent annual rate after advancing 2.9compared to 2.2 percent in the fourth quarter of 2017. This represented the fastest rate2018. The acceleration in economic activity was supported by net exports, restocking of growth in

47




the first quarter of a calendar year since 2015. The pace of hiring was largely unchanged while private wages for all employees acceleratedinventories, and measures of core inflation approached the Federal Reserve’s two percent target.On balance, the trade weighted U.S. dollar index declined further in the first quarter, supporting higher import prices. Additionally, consumer spending and residential fixed investment slowed during the first three months of the yeargovernment expenditures while business fixed investment remained solid.
The civilian unemployment rate, during the first quarter, was unchanged from 4.1 percent as of December 31, 2017 as the number of people entering the workforce increased, demonstrating continued strength of the labor market. The pace of hiring was mostly unchanged from the prior quarter. The monthly average change in payrolls was approximately 221 thousand in the fourth quarter of 2017 compared to 202 thousand in the first quarter of 2018. On average, quarterly measures of wage growth picked up notably as the year over year change in hourly earnings for all private employees increased to the highest level since the second quarter of 2009.
Business investment, which includes investment in structures, equipment and software, remained solid compared to the prior quarter. Private nonresidential fixed investment advanced 6.1 percent in the first quarter of 2018 compared to an increase of 6.8 percent in the fourth quarter of 2017. Alternatively, investment in residential structures decelerated, largely attributed to lower levels of new construction for multifamily housing units. Growth in private residential fixed investment was essentially flat in the first quarter compared to 12.8 percent growth in the fourth quarter of 2017 as investment in multifamily structures declined 1.5 percent in the first three months of the year.

Growth in personal consumption of goods and services decelerated modestly in the first quarter of 2018. The deceleration was largely attributed to a decline in durable goods which include items such as motor vehicles, furnishing and other household equipment. While home prices rose in the first quarter of 2018, equity market volatility increased notably which may have adversely impacted consumer spending. More recently, volatility has subsided somewhat which in combination with further price appreciation in housing may support consumer spending intoslowed somewhat.
During 2018, the end of the year.

The Federal Open Market Committee (FOMC)Reserve gradually increased the target range for the federal funds rate by 25 basis pointsfour times throughout the year. As a result, the target range increased from 1.25 percent to a range1.50 percent as of 1.50January 1, 2018 to 1.752.25 percent to 2.50 percent at theirDecember 31, 2018. At its March 2018 meeting. The Committee remained vigilant about the continued low levels of inflation and inflation expectations, but expects economic conditions to further warrant gradual rate increases this year. In determining future policy actions, the FOMC assesses progress (both realized and expected) toward its objectives of maximum employment and two percent inflation. Beginning in October 2017, the FOMC has gradually reduced2019 meeting, the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities. The FOMC has continuedReserve maintained the target range for the federal funds rate at 2.25 to emphasize that changes in monetary policy will be data dependent.
2.50 percent, citing concern about global economic and financial developments, as well as muted inflation pressures.
The 10-year U.S. Treasury note yield ended the first quarter at 2.742.41 percent, 2928 basis points higherlower compared with December 31, 2017.2018. The spread between the 2- and 10-year U.S. Treasury note yields ended the first quarter of 20182019 at 0.47 percentage points, 40.14 percent, 7 basis points lower compared to December 31, 2018 and 33 basis points lower compared to March 31, 2018.
For the end of the fourth quarter of 2017.
Market interest rates, on average, remained above levels experienced in 2017. Despite higher rates inindustry, many banks reported waning demand for commercial loan products, particularly from smaller firms, during the first quarter of 2019. Demand for most consumer loans also appeared to weaken during the year, residential mortgage loan originations increased largely due to our sales efforts in the purchase loan market. In addition,quarter. However, we continued to seeexperience solid demand for commercial and industrial loans and commercial real estate and construction loans across most of our primary geographies in the first quarter of 2018. However, should2019 (See "Loans" section below). While we are encouraged by our first quarter loan growth, the spread between yields on longerlevel of demand for commercial loans, strong competition for deposits, and shorter dated securities continue to contract, this environmenta flattened yield curve may challenge our business operations and results as highlighted throughoutin the remaining MD&A discussion below.discussion.
Loans. Loans increased $4.2 billion$387.6 million, or 6.2 percent on an annualized basis, to approximately $22.6$25.4 billion at March 31, 20182019 from December 31, 2017 largely due to $3.7 billion in acquired PCI loans from USAB on January 1, 2018. The remaining increase was mainly due to strongsolid quarter over quarter organic growth in total commercial real estate loans, commercial and industrial loans and commercial real estate loans, partially offset by moderate declines in construction and residential mortgage loans. Additionally,During the first quarter of 2019, we sold $234.2originated $89.6 million of residential mortgage loans resulting in pre-tax gainsfor sale rather than held for investment and also sold both pre-existing loans of $6.8approximately $100 million during the first quarter of 2018.from our residential mortgage loan portfolio and a small retail credit card portfolio. Residential mortgage loans held for sale totaled $31.9 million and $35.2 million at March 31, 2019 and December 31, 2018, respectively.

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We are optimistic that our lending activity will continue to be brisk during the remainder of 2018, despite the expectation for a gradual increase in market interest rates and, while not anticipated, any potential setbacks that could occur. For the full year 2018,of 2019, we have established a goal to grow our overall loan portfolio in the range of 76 to 9 percent, adjusted for the recent USAB acquisition and loan sales.8 percent. However, there can be no assurance that we will achieve such levels given the potential for unforeseen changes in consumer confidence, the economymarket and other market conditions, or that the overall loan portfolio balance will not decline from March 31, 2018.conditions. 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. Our PCI loan portfolio totaled $4.9$4.0 billion, or 21.815.8 percent, of our total loan portfolio at March 31, 2018 and included $3.6 billion of loans acquired from USAB.2019.

Total accruing past due non-PCI loans (i.e., loans past due 30 days or more and still accruing interest) decreased $47.3 million to $33.2were $82.0 million, or 0.150.32 percent of total loans, at March 31, 20182019 as compared to $80.5$67.7 million, or 0.440.27 percent of total loans, at December 31, 2017. 2018. The $14.3 million increase from December 31, 2018 was partially due to a matured performing commercial real estate loan in the normal process of renewal totaling $15.0 million within the loans 30 - 59 days past due category, as well as a few other large commercial real estate loans within this past due category that are now current to their contractual payments.

Total non-performing assets, consisting of non-accrual loans, other real estate owned (OREO) and other repossessed assets increased $17.5$4.7 million to $75.0$103.4 million at March 31, 20182019 as compared to December 31, 20172018 mainly due to increases of $5.0 million and $1.9 million in non-accrual loans and OREOother repossessed assets, respectively, during the first quarter of 2018.2019, partially offset by a decline in OREO totaled $13.8 millionbalances largely caused by sales activity. The increase in

45




non-accrual loans was mainly due to taxi medallion loans within the commercial and industrial loan, while other repossessed assets increased due to our repossession of eight New York City medallions from one non-performing loan relationship during the first quarter of 2019. Non-accrual loans increased to 0.37 percent of total loans at March 31, 2018 and included $4.1 million2019 as compared to 0.35 percent of acquired OREO from USAB.total loans at December 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 $136.1 million taxi medallion loan portfolio, management cannot provide assurance that our non-performing assets will not increase from the levels reported as of March 31, 2018.2019. See the "Non-Performing Assets" section below for further analysis of our asset quality.
Deposits and Other Borrowings. The Our mix of the deposit categories of total average deposits for the first quarter of 2018 reflected a moderate decline in non-interest bearing deposits and corresponding increase in time deposits2019 remained relatively unchanged as compared to the fourth quarter of 2017.2018 with a slight shift to time deposits. Average non-interest bearing deposits,deposits; savings, NOW and money market deposits,deposits; and time deposits represented approximately 2825 percent, 5146 percent and 2129 percent of total deposits as of March 31, 2018,2019, respectively. Overall, average deposits totaled $21.9$24.8 billion for the first quarter of 20182019 and increased by $4.1$1.1 billion as compared to the fourth quarter of 2017, and actual2018. Actual ending balances for deposits increased $3.8 billion$454.5 million to approximately $22.0$24.9 billion at March 31, 20182019 from December 31, 2017.2018. The increasesincrease in both average and ending deposit balances were largely due to increases in money market deposits and time deposits driven by the $3.6 billionsuccess of deposits assumed from USAB on January 1,several new commercial and consumer deposit initiatives commenced in the second half of 2018, as well our increased use of brokered CDs as an alternative to other borrowings in the latter part of the fourth quarter of 2018. The remaining increases were largelyincrease in ending deposit balances was partially driven by non-interest bearing deposits, which increased by $176.6 million to $6.4 billion at March 31, 2019 from December 31, 2018 due to the continued successstrong retail and commercial volumes, including one substantial commercial loan customer account. Ending brokered deposit balances totaled $3.2 billion (consisting of ourboth time and money market deposit accounts) at March 31, 2019 and other interest bearing deposit initiatives commencing in 2017.remained relatively unchanged from December 31, 2018.
Average short-term borrowings increased $476.1decreased $304.6 million to $1.5$2.0 billion for the first quarter of 20182019 as compared to the fourth quarter of 2017.2018. Actual ending balances for short-term borrowings also increased $869.8decreased $56.3 million to $1.6$2.1 billion at March 31, 20182019 as compared to December 31, 2017. Both the increases in average and ending short-term borrowings were largely due to $650 million of borrowings assumed in the USAB acquisition, consisting of FHLB borrowings and securities sold under agreements to repurchase. The change in average short-term borrowings was also impacted by significant repayments of FHLB advances in the latter half of the fourth quarter of 2017 caused by deposit growth and a slight shift to additional long-term borrowings in our funding composition.
2018. Average long-term borrowings (which include(including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition) increaseddecreased by $88.3$100.4 million to $2.4$1.7 billion for the first quarter of 20182019 as compared to the fourth quarter of 2017.2018. Actual ending balances for long-term borrowings also increased $37.7decreased $154.5 million to $2.4$1.5 billion at March 31, 20182019 as compared to December 31, 2017. Both the increases2018. The decreases in average and ending short-term and long-term borrowings were mostly due in part, to subordinated notesrepayment of matured FHLB advances and junior subordinated debentures issuedour ability to capital trusts assumedreduce wholesale funding because of deposit growth and the net proceeds from the sale leaseback transaction in the USAB acquisition.first quarter of 2019.

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Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
Return on average assets0.57% 0.80%1.40% 0.57%
Return on average assets, as adjusted0.84
 0.80
0.93
 0.84
      
Return on average shareholders’ equity5.10
 7.69
13.35
 5.10
Return on average shareholders’ equity, as adjusted7.48
 7.69
8.83
 7.50
      
Return on average tangible shareholders’ equity (ROATE)7.90
 11.09
20.29
 7.90
ROATE, as adjusted11.57
 11.09
13.42
 11.61


Adjusted return on average assets, adjusted return on average shareholders' equity, ROATE and adjusted ROATE included in the table above are non-GAAP measures. Management believes these measures provide information useful to management and investors in understanding our underlying operational performance, business and performance trends, and the measures facilitate comparisons of our prior performance with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation

46




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
March 31,
Three Months Ended
March 31,
2018 20172019 2018
($ in thousands)(in thousands)
Net income, as reported$41,965
 $46,095
$113,330
 $41,965
Add: Losses on securities transactions (net of tax)446
 13
23
 548
Add: Severance expense (net of tax) (1)
3,433
 
Add: Tax credit investment impairment (net of tax) (2)
1,757
 
Add: Legal expenses (litigation reserve impact only, net of tax)7,520
 

 7,520
Add: Merger related expenses (net of tax)*9,575
 
Add: Income Tax Expense (USAB charge and Tax Act impacts only)2,000
 
Add: Merger related expenses (net of tax) (3)

 9,688
Add: Income Tax Expense (4)
12,100
 2,000
Less: Gain on sale-leaseback transaction (net of tax) (5)
(55,707) 
Net income, as adjusted$61,506
 $46,108
$74,936
 $61,721
 
*(1)    Severance expense is included in salary and employee benefits expense.
(2)    Impairment is included in the amortization of tax credit investments.
(3)    Merger related expenses are primarily within salary and employee benefits and professional and legal fees.other expense.
(4)Income tax expense related to reserves for uncertain tax positions in 2019 and a USAB charge in 2018.
(5)    The gain on sale-leaseback transaction is included in gains on the sales of assets within other non-interest income.


Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows:
Three Months Ended
March 31,
Three Months Ended
March 31,
2018
20172019
2018
($ in thousands)($ in thousands)
Net income, as adjusted$61,506
 $46,108
$74,936
 $61,721
Average assets$29,291,703
 $22,996,286
$32,296,070
 $29,291,703
Annualized return on average assets, as adjusted0.84% 0.80%0.93% 0.84%


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Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
($ in thousands)($ in thousands)
Net income, as adjusted$61,506
 $46,108
$74,936
 $61,721
Average shareholders' equity$3,289,815
 $2,399,159
$3,394,688
 $3,289,815
Annualized return on average shareholders' equity, as adjusted7.48% 7.69%8.83% 7.50%



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ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows:
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
($ in thousands)($ in thousands)
Net income$41,965
 $46,095
$113,330
 $41,965
Net income, as adjusted$61,506
 $46,108
$74,936
 $61,721
Average shareholders’ equity$3,289,815
 $2,399,159
$3,394,688
 $3,289,815
Less: Average goodwill and other intangible assets(1,164,230) (736,178)1,160,510
 1,164,230
Average tangible shareholders’ equity$2,125,585
 $1,662,981
$2,234,178
 $2,125,585
Annualized ROATE7.90% 11.09%20.29% 7.90%
Annualized ROATE, as adjusted11.57% 11.09%13.42% 11.61%


In addition to the items used to calculate the net income, as adjusted, in the tables above, our net income is, from time to time, impacted by 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 amount of residential mortgage loans originated for sale and the results of our quarterly impairment analysis of the held to maturity and available for sale investment portfolios. See the “Non-Interest Income" section below for more details.
Net Interest Income


Net interest income 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. During the first quarter of 2018, Valley elected to reclassify fee income related to derivative interest rate swaps executed with commercial loan customers totaling $3.3 million 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 equivalentequivalent basis totaling $209.1$219.9 million for the first quarter of 20182019 increased $45.1 million and $37.7$10.8 million as compared to the first quarter of 20172018 and decreased $3.5 million as compared to the fourth quarter of 2017, respectively,2018. The decrease as compared to the fourth quarter of 2018 was largely due to a combination of higher costs of deposits, a slight decline in yield on loans (mostly caused by a decline in interest recovery income and other loan fees) and two less days in the USAB acquisition.first quarter. Interest income on a tax equivalent basis increased $49.1$5.5 million to $269.0$321.5 million for the first quarter of 20182019 as compared to the fourth quarter of 20172018 mainly due to a $4.1 billion$723.8 million increase in average loans, partially offset by a lower4 basis point decrease in the yield on average investment securities. The decrease in yield on average investments for the first quarter of 2018 as compared to the linked fourth quarter was due, in part, to a lower tax equivalent yield on non-taxable securities caused by the Tax Act.loans. Interest expense of $59.9$101.6 million for the first quarter of 20182019 increased $11.4to $9.0 million as compared to the fourth quarter of 20172018 largely due to higher costs and average balances for both money market and certificate of deposit accounts, partially offset by decreases of $304.6 million and $100.4 million in average short-term and long-term borrowings, respectively. These decreases were mostly driven by the interest bearing liabilities assumedrepayment of maturing FHLB advances made possible by increased liquidity from USAB and organic growthdeposits, as well as the net proceeds from our current deposit gathering initiatives.recent sale leaseback transaction.

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Average interest earning assets increased $5.8$2.8 billion to $26.8$29.6 billion for the first quarter of 20182019 as compared to the first quarter of 2017 largely2018 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 loan growth over the last 12 month12-month period. Compared to the fourth quarter of 2017,2018, average interest earning assets increased by $4.8$756.3 million from $28.8 billion from $21.9 billion largely due to the USAB acquisition and continued organic loan growth.growth during the first three months of 2019 and a moderate increase in overnight funds, partially offset by lower average investments. Average loans increased $4.1$723.8 million to $25.3 billion for the first quarter of 2019 from the fourth quarter of 2018 mainly due to solid loan growth within the commercial and industrial loan and commercial real estate loan portfolios.

Average interest bearing liabilities increased $2.7 billion to $22.3 billion for the first quarter of 2018 from the fourth quarter of 2017 due to the loans acquired from USAB and organic loan growth within the commercial real estate loan, commercial and industrial loans and residential mortgage loan portfolios. Average total investments increased $682.9 million during the first quarter of 2018 as compared to the fourth quarter of 2017 mostly due to the investments acquired from USAB.
Average interest bearing liabilities increased $4.4 billion to $19.7 billion for the first quarter of 20182019 as compared to the first quarter of 20172018 mainly due to $3.4 billion of interest bearing liabilities assumed in the USAB acquisitionboth retail and brokered time deposit growth, primarily from time deposit and money market account initiatives, as well as greaterpartly fueled by our use of both short- and long-termbrokered CDs as a cost effective alternative to shorter term FHLB advances as part ofborrowings in our overall funding and liquidity strategy oversince the last 12 month period.second half of 2018. Compared to the fourth quarter of 2017,2018, average interest bearing liabilities increased $3.8 billion$828.8 million in the first quarter of 2018 mostly2019 primarily due to the assumed interest bearing liabilities from USAB.a $888.0 million increase in average brokered certificates of deposit

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and higher money market deposit balance partially offset by run-off in both short-term and long-term FHLB advances. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.


Our net interest margin on a tax equivalent basis of 2.98 percent for the first quarter of 2019 decreased by 15 basis points and 12 basis points from 3.13 percent and 3.10 percent for the first quarter of 2018 remained unchanged as compared to both the first quarter of 2017 and the fourth quarter of 2017.2018, respectively. The yield on average interest earning assets increaseddecreased by 14 basis pointpoints on a linked quarter basis mostly due to an increasea decline in the yield on average loans, partially offset by a decline in yield on average investment securities and two less days during the first quarter of 2018.loans. The yield on average loans increaseddecreased by 4 basis points to 4.264.57 percent for the first quarter of 20182019 as compared to the fourth quarter of 20172018 largely due to the high volume of newdecline in interest recovery income and other loan originations, but was partially offset by somewhat elevated repayments of high yielding loans over the last six month period, as well as moderately lower accretion on the pre-existing purchased credit-impaired (PCI) loan portfolio (exclusive of recently acquired USAB loans). The yield on average taxablefees and non-taxable investment securitiestwo less days in the first quarter of 2018 decreased by 14 basis points and 37 basis points, respectively, as compared to the fourth quarter of 2017.2019. The overall cost of average interest bearing liabilities was 1.22increased 10 basis points to 1.82 percent for the first quarter of 2018 and remained unchanged2019 as compared to the linked fourth quarter of 2017.2018 due to 15, 7, and 4 basis point increases in the cost of average interest bearing deposits, short-term borrowings, and long-term borrowings, respectively, largely driven by higher market interest rates. Our cost of total average deposits was 0.681.20 percent for the first quarter of 20182019 as compared to 0.651.07 percent for the fourth quarter of 2017 due to a slight shift in average non-interest bearing deposits within the mix of total average deposits.2018.

Looking forward, we expect our net interest margin to moderately increase for the second quarter of 2018 to be relatively unchanged2019 as compared to the first quarter of 2018.2019 due to the current level of market interest rates, balance sheet repayment and prepayment assumptions and one more day during the second quarter. For the full year of 2019, we anticipate net interest income growth of approximately 5 to 7 percent. However, our actual net interest margin may decline as compared toand net interest income for the firstsecond quarter of 20182019 and the full year of 2019, respectively, could materially differ from our expected results due to 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 4.75 percent and 5.75 percent, respectively) in response to the Federal Reserve's 25 basis point increase in the targeted federal funds rate in the latter half of March 2018 should benefit both our future net interest income and margin.factors.


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The following table reflects the components of net interest income for the three months ended March 31, 2018,2019, December 31, 20172018 and March 31, 2017:2018:


Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
Three Months EndedThree Months Ended
March 31, 2018 December 31, 2017 March 31, 2017March 31, 2019 December 31, 2018 March 31, 2018
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)$22,302,991
 $237,587
 4.26% $18,242,690
 $192,539
 4.22% $17,313,100
 $174,356
 4.03%$25,254,733
 $288,277
 4.57% $24,530,919
 $282,847
 4.61% $22,302,991
 $237,587
 4.26%
Taxable investments (3)3,401,743
 23,262
 2.74
 2,931,144
 21,104
 2.88
 2,836,300
 19,740
 2.78
3,390,609
 26,050
 3.07
 3,398,396
 25,960
 3.06
 3,401,743
 23,262
 2.74
Tax-exempt investments (1)(3)741,001
 7,242
 3.91
 528,681
 5,651
 4.28
 612,946
 6,201
 4.05
689,675
 6,081
 3.53
 713,552
 6,482
 3.63
 741,001
 7,242
 3.91
Federal funds sold and other interest bearing deposits305,071
 926
 1.21
 230,002
 637
 1.11
 187,118
 331
 0.71
Interest bearing deposits with banks227,890
 1,093
 1.92
 163,753
 666
 1.63
 305,071
 926
 1.21
Total interest earning assets26,750,806
 269,017
 4.02
 21,932,517
 219,931
 4.01
 20,949,464
 200,628
 3.83
29,562,907
 321,501
 4.35
 28,806,620
 315,955
 4.39
 26,750,806
 269,017
 4.02
Allowance for loan losses(123,559)     (120,560)     (115,300)    (152,961)     (147,092)     (123,559)    
Cash and due from banks259,190
 
   240,425
     241,346
    287,449
 
   288,694
     259,190
 
  
Other assets2,423,553
     1,865,737
     1,938,949
    2,643,727
     2,445,609
     2,423,553
    
Unrealized (losses) gains on securities available for sale, net(18,287)     (11,108)     (18,173)    (45,052)     (65,102)     (18,287)    
Total assets$29,291,703
     $23,907,011
     $22,996,286
    $32,296,070
     $31,328,729
     $29,291,703
    
Liabilities and shareholders’ equity                                  
Interest bearing liabilities:                                  
Savings, NOW and money market deposits$11,175,982
 $22,317
 0.80% $9,085,986
 $16,762
 0.74% $9,049,446
 $10,183
 0.45%$11,450,943
 $36,283
 1.27% $11,186,180
 $32,546
 1.16% $11,175,982
 $22,317
 0.80%
Time deposits4,594,368
 14,616
 1.27
 3,478,046
 11,975
 1.38
 3,178,452
 9,553
 1.20
7,214,863
 38,171
 2.12
 6,245,803
 30,599
 1.96
 4,594,368
 14,616
 1.27
Total interest bearing deposits15,770,350
 36,933
 0.94
 12,564,032
 28,737
 0.91
 12,227,898
 19,736
 0.65
18,665,806
 74,454
 1.60
 17,431,983
 63,145
 1.45
 15,770,350
 36,933
 0.94
Short-term borrowings1,487,272
 5,732
 1.54
 1,011,130
 3,456
 1.37
 1,563,000
 3,901
 1.00
2,011,428
 12,549
 2.50
 2,316,020
 14,092
 2.43
 1,487,272
 5,732
 1.54
Long-term borrowings (4)2,432,543
 17,232
 2.83
 2,344,220
 16,344
 2.79
 1,494,273
 12,950
 3.47
1,666,794
 14,573
 3.50
 1,767,194
 15,304
 3.46
 2,432,543
 17,232
 2.83
Total interest bearing liabilities19,690,165
 59,897
 1.22
 15,919,382
 48,537
 1.22
 15,285,171
 36,587
 0.96
22,344,028
 101,576
 1.82
 21,515,197
 92,541
 1.72
 19,690,165
 59,897
 1.22
Non-interest bearing deposits6,111,684
     5,248,311
     5,138,870
    6,116,953
     6,270,902
     6,111,684
    
Other liabilities200,039
     176,992
     173,086
    440,401
     202,219
     200,039
    
Shareholders’ equity3,289,815
     2,562,326
     2,399,159
    3,394,688
     3,340,411
     3,289,815
    
Total liabilities and shareholders’ equity$29,291,703
     $23,907,011
     $22,996,286
    $32,296,070
     $31,328,729
     $29,291,703
    
Net interest income/interest rate spread (5)
 $209,120
 2.80%   $171,394
 2.79%   $164,041
 2.87%
 $219,925
 2.53%   $223,414
 2.67%   $209,120
 2.80%
Tax equivalent adjustment  (1,522)     (1,980)     (2,173)    (1,277)     (1,361)     (1,522)  
Net interest income, as reported  $207,598
     $169,414
     $161,868
    $218,648
     $222,053
     $207,598
  
Net interest margin (6)    3.10%     3.09%     3.09%    2.96%     3.08%     3.10%
Tax equivalent effect    0.03%     0.04%     0.04%    0.02%     0.02%     0.03%
Net interest margin on a fully tax equivalent basis (6)    3.13%     3.13%     3.13%    2.98%     3.10%     3.13%
 
(1)Interest income is presented on a tax equivalent basis using a 21 percent and 35 percent federal tax rate for 2018 and 2017, respectively.rate.
(2)Loans are stated net of unearned income and include non-accrual loans.
(3)The yield for securities that are classified as available for sale is based on the average historical amortized cost.
(4)Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated

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statements of financial condition.

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


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


Change in Net Interest Income on a Tax Equivalent Basis
Three Months Ended March 31, 2018 Compared to March 31, 2017Three Months Ended March 31, 2019 Compared to March 31, 2018
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*$52,671
 $10,560
 $63,231
$32,904
 $17,786
 $50,690
Taxable investments3,872
 (350) 3,522
(76) 2,864
 2,788
Tax-exempt investments*1,258
 (217) 1,041
(481) (680) (1,161)
Federal funds sold and other interest bearing deposits279
 316
 595
Interest bearing deposits with banks(276) 443
 167
Total increase in interest income58,080
 10,309
 68,389
32,071
 20,413
 52,484
Interest Expense:          
Savings, NOW and money market deposits2,824
 9,310
 12,134
562
 13,404
 13,966
Time deposits4,476
 587
 5,063
10,893
 12,662
 23,555
Short-term borrowings(197) 2,028
 1,831
2,474
 4,343
 6,817
Long-term borrowings and junior subordinated debentures6,981
 (2,699) 4,282
(6,153) 3,494
 (2,659)
Total increase in interest expense14,084
 9,226
 23,310
7,776
 33,903
 41,679
Total increase in net interest income$43,996
 $1,083
 $45,079
$24,295
 $(13,490) $10,805
 
*
Interest income is presented on a tax equivalent basis using a 21 percent as the federal tax rate.
rate for 2019 and 2018.


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Non-Interest Income


Non-interest income increased $6.5$75.4 million for the three months ended March 31, 20182019 as compared to the same period of 2017.2018. The following table presents the components of non-interest income for the three months ended March 31, 20182019 and 2017:2018:
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
(in thousands)(in thousands)
Trust and investment services$3,230
 $2,744
$2,904
 $3,230
Insurance commissions3,821
 5,061
2,525
 3,821
Service charges on deposit accounts7,253
 5,236
5,903
 7,253
Losses on securities transactions, net(765) (23)(32) (765)
Fees from loan servicing2,223
 1,815
2,430
 2,223
Gains on sales of loans, net6,753
 4,128
4,576
 6,753
Gains (losses) on sales of assets, net77,720
 (97)
Bank owned life insurance1,763
 2,463
1,887
 1,763
Other7,973
 4,296
9,760
 8,070
Total non-interest income$32,251
 $25,720
$107,673
 $32,251


Insurance commissions decreased $1.2$1.3 million for the three months ended March 31, 20182019 as compared to the firstsame quarter of 2017in 2018 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts increased $2.0decreased $1.4 million for the three months ended March 31, 20182019 as compared to the first quarter of 2017 mostly driven by the acquisition of USAB on January 1, 2018.

Net gains on sales of loans increased $2.6 million for the three months ended March 31, 2018 as compared to the first quarter of 2017 largely due to a higher volume of residential mortgage loans originated for sale during the first quarter of 2018. Residential mortgage loan originations (including both new and refinanced loans) increased $208.5 million to $372.2 million for the firstsame quarter of 2018 as compareddue to $163.7 million for the first quarter of 2017. During the first quarter of 2018, we sold $234.2 million of residential mortgages originated for sale as compared to $159.9 million of residential mortgage loans sold during the first quarter of 2017. lower checking and ATM fees.
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 valueNet gains on sales of loans totaled $4.6 million for the first quarter of 2019 and included a gain of $1.1 million on the sale of our retail credit card portfolio totaling approximately $6.2 million in loans. However, net gains on sales of loans decreased $2.2 million for the first quarter of 2019 as compared to the first quarter of 2018 largely due to lower volume of residential mortgage loans sales. During the first quarter of 2019, we sold $193.1 million of residential mortgages as compared to $234.2 million of residential mortgage loans sold during the first quarter of 2018, including $100.0 million and $150.5 million of pre-existing loans sold from our residential mortgage loan portfolio, respectively. Residential mortgage originations for sale rather than held for sale resulted in net lossesinvestment totaled $89.6 million during the first quarter of $167 thousand and net gains2019 as compared to $77.1 millionfor the first quarter of $267 thousand for the three months ended March 31, 2018 and 2017, respectively.2018. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.


Net gains (losses) on sales of assets increased $77.8 million primarily due to a $78.5 million gain on the sale (and leaseback) of 25 branches and 1 corporate location recognized during the first quarter of 2019.

Other non-interest income increased $3.7$1.7 million for the three months ended March 31, 20182019 as compared to the firstsame quarter of 2017.2018. The increase was mostly due, in part, to an increase of $839 thousand in fee income related to derivative interest rate swaps executed with commercial loanlending customers, whichas well as an increase in credit and debit card interchange fees during the first quarter of 2019. Swap fee income totaled $4.1 million and $3.3 million for the first quarters of 2019 and 2018, respectively.




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Non-Interest Expense

Non-interest expense decreased $26.0 million for the three months ended March 31, 2018 as compared to $661 thousand for the first quarter of 2017.

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Non-Interest Expense

Non-interest expense increased $52.8 million for the three months ended March 31, 20182019 as compared to the same period in 2017.of 2018. The following table presents the components of non-interest expense for the three months ended March 31, 20182019 and 2017:2018:
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
(in thousands)(in thousands)
Salary and employee benefits expense$93,292
 $65,927
$83,105
 $93,292
Net occupancy and equipment expense27,924
 23,035
27,886
 27,924
FDIC insurance assessment5,498
 5,127
6,121
 5,498
Amortization of other intangible assets4,293
 2,536
4,311
 4,293
Professional and legal fees17,047
 4,695
5,271
 17,047
Amortization of tax credit investments5,274
 5,324
7,173
 5,274
Telecommunications expense3,594
 2,659
2,268
 3,594
Other16,830
 11,649
11,660
 16,830
Total non-interest expense$173,752
 $120,952
$147,795
 $173,752


Salary and employee benefits expense increased $27.4decreased $10.2 million for the three months ended March 31, 20182019 as compared to the first quartersame period of 2017. The increase was2018 primarily due in part, to the additional staffing costslower headcount caused by our recent branch closures and new universal banker model and $9.6 million of change in control, severance and retention expenses related to the USAB acquisition as well as increasesrecognized in both cashthe first quarter of 2018, partially offset by severance expense of $4.8 million for the first quarter of 2019.

Professional and stock-based incentive compensation expense. In addition to normal increases in annual compensation, Valley has also increased its investment in both technology and home mortgage consultant teams over the last 12-month period.

Net occupancy and equipment expense increased $4.9legal fees decreased $11.8 million for the three months ended March 31, 20182019 as compared to the same period of 20172018. The decrease was mainly due to higher technology equipment related expense, increased occupancy and other costs related to the 29-branch network acquired from USAB and higher seasonal cleaning and maintenance expenses partly due to weather conditions in the Northeast regiondriven by a $10.5 million litigation reserve charge recognized during the first quarter of 2018.


ProfessionalAmortization of tax credit investments increased $1.9 million for the three months ended March 31, 2019 as compared to the same period of 2018 largely due to a $2.4 million other-than-temporary impairment charge related to our remaining net investments in three federal renewable energy tax credit funds sponsored by DC Solar. See Note 14 to the consolidated financial statements for more details. Tax credit investments, while negatively impacting the level of our operating expenses and legal fees increased $12.4efficiency ratio, produce tax credits that reduce our income tax expense and effective tax rate.

Telecommunications expense decreased $1.3 million for the three months ended March 31, 2018 as compared to the first quarter of 2017 mainly due to a $10.5 million charge related to an increase in our litigation reserves during the first quarter of 2018. See Note 16 to the consolidated financial statements for additional information.

Amortization of other intangible assets increased $1.8 million for the three months ended March 31, 20182019 as compared to the same period in 2017. The increase was primarilyof 2018 partly due to higher amortization expensebranch reductions and other operating efficiencies, including a reduction of core deposit intangibles (CDI) duringapproximately $184 thousand due to USAB merger expenses incurred in the first quarter of 2018 caused by $45.9 million of such intangibles generated by the USAB acquisition, as well as a moderate increase in the amortization expense of loan servicing rights. See Note 10 to the consolidated financial statements for more details.2018.


Other non-interest expenses increasedexpense decreased $5.2 million for the three months ended March 31, 20182019 as compared to the same period in 2017 mainlyfirst quarter of 2018 mostly due to moderate increases$2.2 million of USAB merger related charges recognized during the first quarter of 2018 and an $836 thousand increase in net gains on sale of OREO properties during the first quarter of 2019. For the 2019 period, several significant components of other expense suchdeclined as data processing, travel and entertainment, debit card and ATM expense, postage, and stationery and print expenses duringcompared to 2018 partly due to the firstintegration of USAB's operations completed in the second quarter of 2018, largely caused by our growth both organicallybranch closures and through the acquisition of USAB.other cost reduction initiatives.


Efficiency Ratio
The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in

53




the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively

56




impacted by the amortization of tax credit investments, as well as infrequent charges within non-interest expense resulting from litigation reservesincome and merger expenses related to the acquisition of USAB.expense.


The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three months ended March 31, 20182019 and 2017:2018:
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
($ in thousands)($ in thousands)
Total non-interest expense$173,752
 $120,952
$147,795
 $173,752
Less: Severance expense (pre-tax)4,838
 
Less: Amortization of tax credit investments (pre-tax)5,274
 5,324
7,173
 5,274
Less: Legal expenses (litigation reserve impact only, pre-tax)10,500
 

 10,500
Less: Merger related expenses (pre-tax)
13,369
 

 13,528
Total non-interest expense, adjusted$144,609
 $115,628
$135,784
 $144,450
      
Net interest income$207,598
 $161,868
$218,648
 $207,598
Total non-interest income32,251
 25,720
107,673
 32,251
Less: Gain on sale-leaseback transaction (pre-tax)78,505
 
Add: Losses on securities transactions, net (pre-tax)32
 765
Total net interest income and non-interest income$239,849
 $187,588
$247,848
 $240,614
Efficiency ratio72.44% 64.48%45.29% 72.44%
Efficiency ratio, adjusted60.29% 61.64%54.79% 60.03%

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 shown in the table above) below 55 percent for 2019. However, we can provide no assurance that our adjusted efficiency ratio will meet our target or remain at the level reported for the first quarter of 2019.
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 totaled $13.2$57.2 million for the first quarter of 20182019 as compared to $35.0$18.1 million and $18.1$13.2 million for the fourth quarter of 20172018 and first quarter of 2017,2018, respectively. Our effective tax rate was 23.933.5 percent, 57.319.0 percent and 28.2 percent23.9 and for the first quarter of 2018,2019, fourth quarter of 2017,2018, and first quarter of 2017,2018, respectively. The higher income tax expense and effective tax rate forincrease as compared to the fourth quarter of 2017 reflects2018 was mainly due to an additional provision for income taxes of $12.1 million related to uncertain tax liability positions at March 31, 2019, as well as a $15.4$2.3 million charge resulting fromtax benefit recognized in the re-measurement of Valley's estimated net deferred tax assets as of December 31, 2017 under the Tax Act. The firstfourth quarter of 2018 also included a $2 million charge related to effectthe adjustment of the USAB acquisition onTax Cuts and Jobs Act provisional amounts in our state deferredfinal 2017 tax assets.returns. See additional information regarding our uncertain tax liability positions at Note 15 of the consolidated financial statements.


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 2018,2019, we currently estimate that our effective tax rate will range from 2025.5 percent to 22 percent primarily reflecting the impacts of the Tax Act, tax-exempt income, tax-advantaged investments and general business credits. See Note 15 to the consolidated financial statements for additional information regarding our tax credit investments.27.5 percent.
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

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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,

57




which involves the allocation of uniform funding cost based on each 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 March 31, 20182019 and 2017:2018:
Three Months Ended March 31, 2018Three Months Ended March 31, 2019
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$5,901,208
 $16,401,783
 $4,447,815
 $
 $26,750,806
$6,821,057
 $18,433,676
 $4,308,174
 $
 $29,562,907
Income (loss) before income taxes15,047
 66,966
 9,069
 (35,933) 55,149
19,055
 82,512
 8,742
 60,217
 170,526
Annualized return on average interest earning assets (before tax)1.02% 1.63% 0.82% N/A
 0.82%1.12% 1.79% 0.81% N/A
 2.31%
Three Months Ended March 31, 2017Three Months Ended March 31, 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$5,044,814
 $12,268,286
 $3,636,364
 $
 $20,949,464
$5,901,208
 $16,401,783
 $4,447,815
 $
 $26,750,806
Income (loss) before income taxes15,404
 49,378
 9,712
 (10,328) 64,166
15,047
 66,966
 9,069
 (35,933) 55,149
Annualized return on average interest earning assets (before tax)1.22% 1.61% 1.07% N/A
 1.23%1.02% 1.63% 0.82% N/A
 0.82%
Consumer Lending


This segment, representing approximately 25.926.7 percent of our loan portfolio at March 31, 2018,2019, 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 14.716.0 percentof our loan portfolio at March 31, 2018)2019) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 5.45.3 percent of total loans at March 31, 2018)2019) 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$856.4919.8 million to $5.9$6.8 billion for the three months ended March 31, 20182019as compared to the first quarter of 2017.2018. The increase was largely due to $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 mainly from new and

55




refinanced residential mortgage loan originations, including a higher level of non-conforming jumbo mortgages held for investment over the last 12 month period, as well as growth in both automobile loans and and collateralized personal lines of credit over the last 12 months.credit.


Income before income taxes generated by the consumer lending segment decreased $357 thousandincreased $4.0 millionto $15.0$19.1 millionfor the first quarter of 20182019 as compared to $15.4the first quarter of 2018. Net interest income increased $3.9 million and was mainly driven by the increase in average loans. Non-interest expense decreased $3.2 million for the first quarter of 2017 largely due to increases in non-interest expense, internal transfer expense and provision for loan losses, partially offset by an increase in net

58




interest income. Non-interest expense increased $4.9 million for the first quarter of 20182019 as compared to the same quarter of 2017 mainly2018 partly due to higher salarieslower residential mortgage commission expense caused by lower origination volume and employee benefits expenses related to the USAB acquisition.commission rates. The internal transfer expense increased $1.4 million for the first quarter of 2018 as compared to the same quarter of 2017. The provision for loan losses increased $1.2 million largely due to loan growth. See further detail in the "Allowance for Credit Losses" section. The negativepositive impact of the aforementioned items was partially offset by a $6.5$2.5 million increasedecrease in net interestnon-interest income mostlyfor the first quarter of 2019 as compared to the first quarter of 2018 mainly due to the increasea decline in average loans, as well as a higher overall yieldgains on suchsales of residential mortgage loans.


The net interest margin on the consumer lending portfolio increased 4decreased 15 basis points to 2.822.67 percent for the first quarter of 20182019 as compared to the same quarter one year ago mainly due to a 24 basis point increase in yield on average loans, partially offset by a 2048 basis point increase in the costs associated with our funding sources. Thesources, partially offset by a 33 basis point increase in yield was mainly due to higher market interest rates on new loan volumes.average loans. The increase in our cost of funds was 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 (commencing in late March 2018) and strong competition for deposits specificallywhich have driven up the level of interest rates on many of our interest bearing deposit products and other wholesale funding. The increase in our New Jersey and New York markets.loan yield was mainly due to 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


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 $3.6$4.5 billionand represented 16.117.7 percent of the total loan portfolio at March 31, 2018.2019. Commercial real estate loans and construction loans totaled $13.1$14.1 billion and represented 58.055.6 percentof the total loan portfolio at March 31, 2018.2019.


Average interest earning assets in this segment increased$4.12.0 billion to $16.4$18.4 billion for the three months ended March 31, 20182019 as compared to the first quarter of 2017. This2018. The increase was mostly due to approximately $3.3 billion of commercial PCI loans acquired from USAB,strong organic loan growth within the commercial and to a much lesser extent, purchases ofindustrial loan participations duringand commercial real estate loan portfolios over the last 12 months.12-month period.


For the three months ended March 31, 2018,2019, income before income taxes for the commercial lending segment increased $17.6$15.5 millionto $67.0$82.5 million as compared to the same quarter of 20172018 mainly due to increases inhigher net interest income and non-interest income, partially offset by increases in the internal transfer expense, non-interest expense and thea lower provision for loan losses. Net interest income increased$37.610.1 million to $149.3$159.4 million for the first quarter of 20182019 as compared to the same quarter in 20172018 largely due to higher average balances, as well as an increase in yield on new loan originations. Non-interest income increased $4.0 million for the first quarter of 2018 as compared to the same quarter in 2017 mainly due to fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $3.3 million for the three months ended March 31, 2018 as compared to $661 thousand for the first quarter of 2017. Internal transfer expense and non-interest expense increased $8.9 million and $7.9 million, respectively, during the first quarter of 2018 as compared to the same quarter in 2017 due, in part, to the USAB acquisition. balances. The provisionprovision for credit losses increased $7.2decreased $3.3 million to $9.2$5.9 million during the three months ended March 31, 20182019 as compared to $2.0$9.2 million for the first quarter of 2017 due to higher allocated reserves related to impaired loans and loan growth.2018. See further details in the "Allowance for Credit Losses" section in this MD&A.


The net interest margin for this segment remained unchanged at 3.64decreased 18 basis points to 3.46 percent for the first quarter of 20182019 as compared to the same period of 2017 as2018 largely due to a 20 basis point increase in yield on average loans was offset by a 2048 basis point increase in the cost of our funding sources.sources, partially offset by a 30 basis point increase in the yield on average loans.


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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

56




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 $811.5decreased $139.6 million during the first quarter of 20182019 as compared to the first quarter of 2017. The increase was2018 largely due to normal investment securities acquired from USABmaturities and a $118.0 million increase in average federalrepayments within our investment portfolio coupled with lower levels of excess liquidity (maintained overnight funds sold and other interest bearing deposits for the three months ended March 31, 2018 as compareddeposits). Investments and overnight funds both declined due to the same quarter of 2017.strong organic loan growth over the last 12-month period.


For the quarter ended March 31, 2018,2019, income before income taxes for the investment management segment decreased $643$327 thousand to $9.1$8.7 million as compared to the first quarter in 2017 mainlyof 2018. The decline was largely due to a $1.6$3.1 million increase in the internal transfer expense, partially offset by $1.7 million increase in net interest income. The increasedecrease in net interest income was mainly drivencaused by the higherlower average investment balances duringfor the first quarter of 2018 as compared to the first quarter of 2017,three months ended March 31, 2019, partially offset by lower yield on securities.a $2.2 million decrease in internal transfer expense and moderately higher non-interest income.


The net interest margin for this segment decreased2623basis points to 1.991.76 percentfor the first quarter of 20182019 as compared to the same quarter of 20172018 largely due to a 6 basis point decrease in the yield on average investments and a 2048 basis point increase in costs associated with our funding sources.sources, partially offset by a 25 basis point increase in the yield on average investments. The decreaseincrease in the yield on average investments was partly due to the repaymentpurchases of higher yielding securities over the last 12 months.months and the positive impact of increased market interest rates on 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, amortization of tax credit investments, as well as other infrequent charges related to bank acquisitionsnon-core items, including merger expenses, litigation reserves and litigation reserves.the gain on the sale leaseback transaction.


The pre-tax net loss for the corporate segment increased $25.6 million to $35.9recognized pre-tax income of $60.2 million for the three months ended March 31, 20182019 as compared to a pre-tax loss of $35.9 million for the first quarter in 2018. Non-interest income increased $76.1 million to $85.0 million for the three months ended March 31, 2019 as compared to the first quarter in 2017. The increase in the net loss for this segment was mainly2018 primarily due to an increase in non-interesta $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter of 2019. Non-interest expense partially offset by an increase in internal transfer income. The non-interest expense increased $39.9decreased $21.7 million to $125.4103.8 millionfor the three months ended March 31, 20182019 as compared to the three months ended March 31, 2017. This increase was2018 largely due to charges related to USAB mergerdeclines in several expense categories, including salaries and employee benefits, legal and professional fees, and legal fees for litigation reserves recognized during the first quarter of 2018.other non-interest expense. See further details in the "Non-Interest Income" and "Non-Interest Expense" section above. Internal transfer income increased $11.9 million to $86.0 million for the three months ended March 31, 2018 as compared to the first quarter in 2017.sections of this MD&A.
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

60




utilize fair value analysis and attemptsattempt 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

57




levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities.


We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of March 31, 2018.2019. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of March 31, 2018.2019. The impact of interest rate derivatives, such as interest rate swaps, and caps, is also included in the model.


Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of March 31, 2018.2019. Although the size of Valley’s balance sheet is forecasted to remain static as of March 31, 20182019 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the first quarter of 2018.2019. The model also utilizes an immediate parallel shift in the market interest rates at March 31, 2018.2019.


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.

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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$26,830
 3.13%$20,919
 2.37%
+10014,935
 1.74
11,185
 1.27
–100(40,192) (4.68)(9,045) 0.67
–200(32,036) 0.57


As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance

58




sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to moderately
increase net interest income over the next 12 months by 1.741.27 percent. The Bank’s sensitivity to changes in market
rates changed in both size and directionincreased as compared to December 31, 20172018 (which projected a decreasean increase of 0.351.04 percent in net interest income over a 12 month period). The change in interest ratethe sensitivity of our balance sheet partiallysince December 31, 2018 was partly due to the USAB acquisition in the first quarter of 2018, remains within our current objectives for generating 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 toslightly longer term-funding structure (including borrowings and brokered deposits), as well as a 100 basis point immediate increase in interest rates is impacted by, among other factors, assetmoderately shorter cash flow and repricing characteristics, complemented by a funding structure that providesprofile for very stable earnings and low volatility.the loan portfolio. 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 cap 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). Our cash flow interest rate swaps had a total notional value of $482 million at March 31, 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 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 three months ended March 31, 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. See Note 13 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 2530 percent of total funding. The Bank was in compliance with the foregoing policies at March 31, 2018.2019.


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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 $2.4$2.3 billion, representing 9.27.9 percent of earning assets, at March 31, 20182019 and $2.0$2.3 billion, representing 9.38.0 percent of earning assets, at December 31, 2017.2018. Of the $2.4$2.3 billion of liquid assets at March 31, 2018,2019, approximately $1.1 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $428$791 million in principal payments from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.


Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at March 31, 2018)2019) are projected to be approximately $6.2$7.1 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 $19.4$20.5 billion and $15.4$18.1 billion for the three months ended March 31, 20182019 and for the year ended December 31, 2017,2018, respectively, representing 72.770.0 percent and 71.865.3 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.



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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 $707$717 million for a short timeterm 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 tocan obtain overnight borrowings from the Federal Reserve Bank via the discount window as a contingency for additional liquidity. At March 31, 2018,2019, our borrowing capacity under the Federal Reserve's discount window was $1.1$1.2 billion.


We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings increased $869.8(consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased approximately $56.3 million to $1.6$2.1 billion at March 31, 20182019 as compared to December 31, 2017 largely due to $650 million of borrowings assumed in the USAB acquisition, consisting of FHLB borrowings and securities sold under agreements to repurchase. The remaining increase was2018 mostly due to newrepayment of matured FHLB advances used for normal loanand our ability to reduce wholesale funding activitybecause of deposit growth and liquidity purposesthe net proceeds from the sale-leaseback transaction during the first quarter of 2018. The change in short-term borrowings is generally driven by the levels of loan originations (including residential mortgages originated for sale), repayments of long-term borrowings, and our use of time deposits, fully insured brokered deposits and other short-term funding in our current liquidity/funding strategies.2019.
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

63




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.Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods up to five years, but not beyond the stated maturity dates, and subject to other conditions.
Investment Securities Portfolio


As of March 31, 2018,2019, we had $2.0$2.1 billion and $1.8$1.7 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 1 pooled security) and high quality corporate bonds issued by banks at March 31, 2018.2019. 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 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

60




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, 20172018 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.

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The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at March 31, 2018.2019:
March 31, 2018March 31, 2019
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:*       
Held to maturity investment grades: *       
AAA Rated$1,558,038
 $11,134
 $(38,128) $1,531,044
$1,648,304
 $15,722
 $(21,556) $1,642,470
AA Rated295,004
 4,910
 (1,708) 298,206
276,041
 5,703
 (240) 281,504
A Rated40,002
 617
 (313) 40,306
33,412
 416
 (27) 33,801
Non-investment grade3,509
 87
 (16) 3,580
BBB Rated3,000
 124
 
 3,124
Not rated152,030
 152
 (10,364) 141,818
113,642
 210
 (7,781) 106,071
Total investment securities held to maturity$2,048,583
 $16,900
 $(50,529) $2,014,954
$2,074,399
 $22,175
 $(29,604) $2,066,970
Available for sale investment grades:*       
Available for sale investment grades: *       
AAA Rated$1,658,739
 $1,335
 $(44,756) $1,615,318
$1,575,495
 $3,562
 $(24,869) $1,554,188
AA Rated104,307
 84
 (1,463) 102,928
84,137
 203
 (443) 83,897
A Rated36,916
 54
 (466) 36,504
21,113
 82
 (119) 21,076
BBB Rated20,710
 150
 (223) 20,637
17,984
 48
 (192) 17,840
Non-investment grade7,286
 369
 (1,641) 6,014
10,427
 
 (1,857) 8,570
Not rated62,377
 548
 (812) 62,113
38,201
 46
 (712) 37,535
Total investment securities available for sale$1,890,335
 $2,540
 $(49,361) $1,843,514
$1,747,357
 $3,941
 $(28,192) $1,723,106
 
*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 investment 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 $152.0$113.6 million in investments not rated by the rating agencies with aggregate unrealized losses of $10.4$7.8 million at March 31, 2018.2019. The unrealized losses for this category included $6.8$5.8 million of unrealized losses related to four single-issuer bank trust preferred issuances with a combined amortized cost of $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’scompany's credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon our quarterly review at March 31, 2018,2019, 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.


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There was no other-than-temporary impairment recognized in earnings as a result of Valley's impairment analysis of its securities during the three months ended March 31, 20182019 and 20172018 as the collateral supporting much of the investment securities has improved or performed as expected.

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Loan Portfolio


The following table reflects the composition of the loan portfolio as of the dates presented:
March 31,
2018
 December 31,
2017
 September 30,
2017
 June 30,
2017
 March 31,
2017
March 31,
2019
 December 31,
2018
 September 30,
2018
 June 30,
2018
 March 31,
2018
($ in thousands)($ in thousands)
Loans                  
Commercial and industrial$3,631,597
 $2,741,425
 $2,706,912
 $2,631,312
 $2,642,319
$4,504,927
 $4,331,032
 $4,015,280
 $3,829,525
 $3,631,597
Commercial real estate:                  
Commercial real estate11,706,228
 9,496,777
 9,351,068
 9,230,514
 9,016,418
12,665,425
 12,407,275
 12,251,231
 11,913,830
 11,706,228
Construction1,372,508
 851,105
 903,640
 881,073
 835,854
1,454,199
 1,488,132
 1,416,259
 1,376,732
 1,372,508
Total commercial real estate13,078,736
 10,347,882
 10,254,708
 10,111,587
 9,852,272
14,119,624
 13,895,407
 13,667,490
 13,290,562
 13,078,736
Residential mortgage3,321,560
 2,859,035
 2,941,435
 2,724,777
 2,745,447
4,071,237
 4,111,400
 3,782,972
 3,528,682
 3,321,560
Consumer:                  
Home equity549,329
 446,280
 448,842
 450,510
 458,891
513,066
 517,089
 521,797
 520,849
 549,329
Automobile1,222,721
 1,208,902
 1,171,685
 1,150,343
 1,150,053
1,347,759
 1,319,571
 1,288,902
 1,281,735
 1,222,721
Other consumer748,824
 728,056
 677,880
 642,231
 600,516
866,505
 860,970
 834,849
 783,363
 748,824
Total consumer loans2,520,874
 2,383,238
 2,298,407
 2,243,084
 2,209,460
2,727,330
 2,697,630
 2,645,548
 2,585,947
 2,520,874
Total loans *
$22,552,767
 $18,331,580
 $18,201,462
 $17,710,760
 $17,449,498
$25,423,118
 $25,035,469
 $24,111,290
 $23,234,716
 $22,552,767
As a percent of total loans:                  
Commercial and industrial16.1% 15.0% 14.9% 14.8% 15.1%17.7% 17.3% 16.7% 16.5% 16.1%
Commercial real estate58.0% 56.4% 56.3% 57.1% 56.5%55.6
 55.5
 56.6
 57.2
 58.0
Residential mortgage14.7% 15.6% 16.2% 15.4% 15.7%16.0
 16.4
 15.7
 15.2
 14.7
Consumer loans11.2% 13.0% 12.6% 12.7% 12.7%10.7
 10.8
 11.0
 11.1
 11.2
Total100.0% 100.0% 100.0% 100.0% 100.0%100.0% 100.0% 100.0% 100.0% 100.0%
 
*Includes net unearned premiums and deferred loan costs of $22.0$20.5 million, $22.2 million, $18.5$21.5 million, $16.7 million, $18.7 million and $15.7$22.0 million at March 31, 2018,2019, December 31, 2017,2018, September 30, 2017,2018, June 30, 20172018 and March 31, 2017,2018, respectively.


Loans increased $4.2 billion$387.6 million to approximately $22.6$25.4 billion at March 31, 20182019 from December 31, 2017 largely due to $3.7 billion in acquired PCI loans from USAB on January 1, 2018. The remaining increase was mainly due to strong quarter over quarter organic growth in totalcommercial and industrial loans and commercial real estate loans, commercial and industrial loanspartially offset by moderate declines in construction and residential mortgage loans. During the first quarter of 2018, Valley also2019, we originated $228$89.6 million of residential mortgage loans for sale rather than held for investment.investment and we also sold approximately $100 million of pre-existing loans from our residential mortgage loan portfolio. Residential mortgage loans held for sale totaled $8.4$31.9 million and $15.1$35.2 million at March 31, 20182019 and December 31, 2017,2018, respectively.


Total commercial and industrial loans increased $890.2$173.9 million, or 16.1 percent on an annualized basis, from December 31, 20172018 to approximately $3.6$4.5 billion at March 31, 20182019. The increase was mostly duedriven by new small to $721.6 million in PCI loans acquired from USABmiddle market lending relationships within our markets largely established by focused calling efforts by our experienced lending teams and, strong organic growth largely within the newly expanded Florida markets.to a lesser extent, by increased business investment by existing relationships.

Commercial real estate loans (excluding construction loans) increased $2.2 billion from December 31, 2017 to $11.7 billion at March 31, 2018 mostly due to $2.0 billion in PCI loans acquired from USAB. The non-PCI loans increased $242.9$258.2 million, or 11.38.3 percent on an annualized basis, to $12.7 billion at March 31, 2019 from December 31, 2018. The increase was mainly due to solid organicstrong loan volumes in our primary markets including approximately $129 millionin Florida, targeted growth in New Jersey and New York and some migration of loans from the new Florida markets. completed construction projects to permanent financing.

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Construction loans increased $521.4decreased $33.9 million, net of a $111.3 million decline in PCI loans (partly due to $1.4migration of completed construction projects to permanent commercial real estate loans) to $1.5 billion at March 31, 20182019 from December 31, 2017 largely due to $384.5 million2018. Exclusive of PCI loans acquired from USAB. The remaining net increase was mainly driven by organic growth in the new Florida markets, as well as advances on existing construction projects.
Total residential mortgage loans increased $462.5 million to approximately $3.3 billion at March 31, 2018 from December 31, 2017 mostly due to $365.9 milliondecline in PCI loans, acquired from USAB and new and refinanced loan originations held for investment. Our growing team of home mortgage consultants continued to produce strong

66




origination volumesthe non-PCI construction loans increased $77.4 million or 27.6 percent on an annualized basis during the first quarter of 2018.2019 due, in part, to strong demand for investor occupied projects within our primary markets.

Total residential mortgage loans decreased $40.2 million to approximately $4.1 billion at March 31, 2019 from December 31, 2018 due to lower loan origination volumes, particularly non-conforming loans, and sale of approximately $100 million of pre-existing loans from our residential mortgage loan portfolio. New and refinanced residential mortgage loan originations totaled approximately $372$254.1 million for the first quarter of 20182019 as compared to $291$436.7 millionand $164$372.2 million for the fourth quarter of 20172018 and first quarter of 2017,2018, respectively.
Home equity loans totaling $549.3$513.1 million at March 31, 2018 increased2019 decreased by $103.0only $4.0 million as compared to December 31, 2017 due to $109.8 million of PCI loans acquired from USAB. Exclusive of the acquired loans, new2018. New home equity loan volumes and customer usage of existing home equity lines of credit continuescontinued to be weak.modest in the first quarter of 2019. We believe this trend maywill likely continue in 2018for the second quarter of 2019 due to manyseveral factors, including the recent Tax Act changes that limit the deductibility of mortgage interest expense deductibility limits for homeowners.
Automobile loans increased by $13.8$28.2 million or 4.6 percent on an annualized basis, to $1.2$1.3 billion at March 31, 20182019 as compared to December 31, 2017. However, the overall new auto loan origination volumes decreased approximately 12.9 percent during the2018. The first quarter of 2018annualized growth was 8.5 percent, but it moderately declined as compared to the fourth quarter of 2017 mainly2018 due to the impact of inclement weather on auto sales in the Northeast region.lower application volumes coupled with normal loan repayments. Our Florida dealership network contributed over $35$40.8 million in auto loan originations, representing approximately 2425 percent of Valley's total new auto loan production during the first quarter of 20182019 and was relatively consistent with the linked fourth quarter of 2017.2018.
Other consumer loans increased $20.8only $5.5 million to $748.8$866.5 million at March 31, 20182019 as compared to $728.1$861.0 million at December 31, 2017 partly2018 mostly due to $10.6 millionlower volumes of PCI loans acquired from USAB and continued growth and customer usage ofnew collateralized personal lines of credit.credit as compared to the fourth quarter of 2018.
Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, and, to a much lesser extent, Alabama, with the exception ofexcept for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey, which could present a geographic and credit risk if there was another significant broad based economic downturn within these regions. To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector.
Purchased Credit-Impaired Loans


PCI loans increased $3.5 billiondecreased $185.7 million to $4.9$4.0 billion at March 31, 20182019 from $1.4$4.2 billion at December 31, 2017,2018, mainly due to $3.7 billion in acquired PCI loans from USAB on January 1, 2018.normal repayment activity. Our PCI loans also include loans acquired in business combinations subsequent to 2011 and, to a much lesser extent, covered loans in which the Bankwe will share losses with the FDIC under loss-sharing agreements. Our coveredCovered loans, consisting primarily of residential mortgage and other consumer loans, totaled $33.2$25.3 million and $38.7$27.6 millionat March 31, 20182019 and December 31, 2017,2018, respectively.


As required by U.S. GAAP, all of our PCI loans are accounted for under ASC Subtopic 310-30. This accounting guidance requires the PCI loans to be aggregated and accounted for as pools of loans based on common risk characteristics. 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

63




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 date over the carrying amount (fair value) of the PCI loans is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of 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

67




changes in expected principal and interest payments 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, expected 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 wasis subsequently aggregated on a pool basis. The expected payment data, discount rates, impairment data and changes to the accretable yield wereare reviewed by Valley to determine whether this information is accurate and the resulting financial statement effects are reasonable.
Similar to contractual cash flows, we reevaluate expected 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, Valley analyzes the actual cash flow versus the forecasts at the loan pool level and variances are reviewed to determine their cause. In re-forecasting future estimated cash flow, Valley will adjust the credit loss expectations for loan pools, as necessary. These adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which 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.


The following table summarizes the changes in the carrying amounts of PCI loans and the accretable yield on these loans for the three months ended March 31, 20182019 and 2017.2018:
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
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$1,387,215
 $282,009
 $1,771,502
 $294,514
$4,190,086
 $875,958
 $1,387,215
 $282,009
Acquisition3,744,682
 474,208
 
 

 
 3,744,682
 559,907
Accretion65,131
 (65,131) 24,683
 (24,683)53,492
 (53,492) 65,131
 (65,131)
Payments received(281,050) 
 (137,950) 
(238,630) 
 (281,050) 
Net increase in expected cash flows
 68,305
 
 
Transfers to other real estate owned(145) 
 (3,534) 
(608) 
 (145) 
Balance, end of the period$4,915,833
 $691,086
 $1,654,701
 $269,831
$4,004,340
 $890,771
 $4,915,833
 $776,785



The net increase in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools. Based upon the most recent reforecasted cash flows during the first quarter of 2019, the net increase in accretable yield for the three months ended March 31, 2019 was largely driven by the impact of current interest rate environment on the

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adjustable portion of the PCI loan portfolio, changes in the expected duration of certain loan pools and additional advances on lines of credit.
Non-performing Assets
Non-performing assets (excluding PCI loans) include non-accrual loans, other real estate owned (OREO) and other repossessed assets (which consist of automobiles)automobiles and taxi cab medallions) at March 31, 2018.2019. 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, thereafter. Our non-performing assets totaling $75.0$103.4 million at March 31, 20182019 increased 30.44.8 percent from December 31, 20172018 and 45.5increased 37.9 percent from March 31, 2017,2018, respectively (as shown in the table below). The $4.7 million increase fromin non-performing assets at March 31, 2017 was2019 as compared to December 31, 2018 mainly due to higherincreases of $5.0 million and $1.9 million in non-accrual loanloans and other repossessed assets, respectively, during the first quarter of 2019, partially offset by a decline in OREO balances within the commercial and industrial and residential loan categories, as well as higher OREO balances.largely caused by sales activity. Non-performing assets as a percentage of total loans and non-performing assets totaled 0.33 percent and 0.310.40 percent at March 31, 2018 and2019 as compared to 0.39 percent at December 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 87 to the consolidated financial statements.







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The following table sets forth by loan category accruing past due and non-performing assets on the dates indicated in conjunction with our asset quality ratios:
 March 31,
2018
 December 31,
2017
 September 30,
2017
 June 30,
2017
 March 31, 2017
 ($ in thousands)
Accruing past due loans:* 
30 to 59 days past due:         
Commercial and industrial$5,405
 $3,650
 $1,186
 $2,391
 $29,734
Commercial real estate3,699
 11,223
 4,755
 6,983
 11,637
Construction532
 12,949
 
 
 7,760
Residential mortgage6,460
 12,669
 7,942
 4,677
 7,533
Total Consumer5,244
 8,409
 5,205
 4,393
 3,740
Total 30 to 59 days past due21,340
 48,900
 19,088
 18,444
 60,404
60 to 89 days past due:         
Commercial and industrial804
 544
 3,043
 2,686
 341
Commercial real estate
 
 626
 8,233
 359
Construction1,099
 18,845
 2,518
 854
 
Residential mortgage4,081
 7,903
 1,604
 1,721
 4,177
Total Consumer1,489
 1,199
 1,019
 1,007
 787
Total 60 to 89 days past due7,473
 28,491
 8,810
 14,501
 5,664
90 or more days past due:         
Commercial and industrial653
 
 125
 
 405
Commercial real estate27
 27
 389
 2,315
 
Construction
 
 
 2,879
 
Residential mortgage3,361
 2,779
 1,433
 3,353
 1,355
Total Consumer372
 284
 301
 275
 314
Total 90 or more days past due4,413
 3,090
 2,248
 8,822
 2,074
Total accruing past due loans$33,226
 $80,481
 $30,146
 $41,767
 $68,142
Non-accrual loans:*         
Commercial and industrial$25,112
 $20,890
 $11,983
 $11,072
 $8,676
Commercial real estate8,679
 11,328
 13,870
 15,514
 15,106
Construction732
 732
 1,116
 1,334
 1,461
Residential mortgage22,694
 12,405
 12,974
 12,825
 11,650
Total Consumer3,104
 1,870
 1,844
 1,409
 1,395
Total non-accrual loans60,321
 47,225
 41,787
 42,154
 38,288
Other real estate owned (OREO)13,773
 9,795
 10,770
 10,182
 10,737
Other repossessed assets858
 441
 480
 342
 475
Non-accrual debt securities
 
 2,115
 1,878
 2,007
Total non-performing assets (NPAs)$74,952
 $57,461
 $55,152
 $54,556
 $51,507
Performing troubled debt restructured loans$116,414
 $117,176
 $113,677
 $109,802
 $80,360
Total non-accrual loans as a % of loans0.27% 0.26% 0.23% 0.24% 0.22%
Total NPAs as a % of loans and NPAs0.33
 0.31
 0.30
 0.31
 0.29
Total accruing past due and non-accrual loans as a % of loans0.41
 0.70
 0.40
 0.47
 0.61
Allowance for loan losses as a % of non-accrual loans220.26
 255.92
 284.70
 276.24
 301.51


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 March 31,
2019
 December 31,
2018
 September 30,
2018
 June 30,
2018
 March 31,
2018
 ($ in thousands)
Accruing past due loans: * 
30 to 59 days past due:         
Commercial and industrial$5,120
 $13,085
 $9,462
 $6,780
 $5,405
Commercial real estate39,362
 9,521
 3,387
 4,323
 3,699
Construction1,911
 2,829
 15,576
 175
 532
Residential mortgage15,856
 16,576
 10,058
 7,961
 6,460
Total Consumer6,647
 9,740
 7,443
 6,573
 5,244
Total 30 to 59 days past due68,896
 51,751
 45,926
 25,812
 21,340
60 to 89 days past due:         
Commercial and industrial1,756
 3,768
 1,431
 1,533
 804
Commercial real estate2,156
 530
 2,502
 
 
Construction
 
 36
 
 1,099
Residential mortgage3,635
 2,458
 3,270
 1,978
 4,081
Total Consumer990
 1,386
 1,249
 860
 1,489
Total 60 to 89 days past due8,537
 8,142
 8,488
 4,371
 7,473
90 or more days past due:         
Commercial and industrial2,670
 6,156
 1,618
 560
 653
Commercial real estate
 27
 27
 27
 27
Residential mortgage1,402
 1,288
 1,877
 2,324
 3,361
Total Consumer523
 341
 282
 198
 372
Total 90 or more days past due4,595
 7,812
 3,804
 3,109
 4,413
Total accruing past due loans$82,028
 $67,705
 $58,218
 $33,292
 $33,226
Non-accrual loans: *         
Commercial and industrial$76,270
 $70,096
 $52,929
 $53,596
 $25,112
Commercial real estate2,663
 2,372
 7,103
 7,452
 8,679
Construction378
 356
 
 1,100
 732
Residential mortgage11,921
 12,917
 16,083
 19,303
 22,694
Total Consumer2,178
 2,655
 2,248
 3,003
 3,104
Total non-accrual loans93,410
 88,396
 78,363
 84,454
 60,321
Other real estate owned (OREO)7,317
 9,491
 9,863
 11,760
 13,773
Other repossessed assets2,628
 744
 445
 864
 858
Total non-performing assets (NPAs)$103,355
 $98,631
 $88,671
 $97,078
 $74,952
Performing troubled debt restructured loans$73,081
 $77,216
 $81,141
 $83,694
 $116,414
Total non-accrual loans as a % of loans0.37% 0.35% 0.33% 0.36% 0.27%
Total NPAs as a % of loans and NPAs0.40
 0.39
 0.37
 0.42
 0.33
Total accruing past due and non-accrual loans as a % of loans0.69
 0.62
 0.57
 0.51
 0.41
Allowance for loan losses as a % of non-accrual loans165.27
 171.79
 184.99
 164.30
 220.26
 
* Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis.



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Loans past due 30 to 59 days decreased $27.6increased $17.1 million to $21.3$68.9 million at March 31, 20182019 as compared to December 31, 2017 largely due to decreases across most of the loan types mostly due to improved performance. Construction loans past due 30 to 59 days decreased by $12.4 million mainly due to 2 loan relationships included in this category at December 31, 2017 which were current to their contractual payments at March 31, 2018. The commercial real estate loans past due 30 to 59 days decreased $7.5 million at March 31, 2018 largely due to the first quarter refinance of 3an increase in commercial real estate loan delinquencies, partially offset by a decrease in commercial and industrial loan delinquencies. Commercial real estate loan delinquencies increased $29.8 million as compared to December 31, 2018 partly due to a $15.0 million matured performing matured loanscommercial real estate loan in the normal process of renewal, included at December 31, 2017.as well as a few other large loans within this past due category that are now current to their contractual payments.


Loans past due 60 to 89 days decreased $21.0 millionincreased $395 thousand to $7.5$8.5 million at March 31, 20182019 as compared to December 31, 2017 mostly2018 largely due to a $17.7 million decreasemoderate increases in construction loan delinquenciescommercial real estate loans and residential loans within this past duedelinquency category. This decrease was mainly due to a few loan relationships in the normal process of renewal or collection that were included in this loan category at December 31, 2017.

Loans past due 90 days or more and still accruing increased $1.3interest decreased $3.2 million to $4.4$4.6 million at March 31, 20182019 as compared to $3.1$7.8 million at December 31, 2017.2018. 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 $13.1$5.0 million to $60.3$93.4 million at March 31, 20182019 as compared to $47.2$88.4 million at December 31, 2017 mainly2018. The increase was primarily due to increases in residential andadditional non-accrual taxi cab medallion loans reported within the commercial and industrial loan delinquencies. Non-accrual residential mortgage loans increased by $10.3 millioncategory at March 31, 2018 from December 31, 2017 and represent 0.682019. As a result, non-accrual loans increased to 0.37 percent of total residential mortgage loans at March 31, 2018. While we can provide no assurances, we believe the overall performance2019 as compared to 0.35 percent of the residential mortgage loan portfolio is stable and the increase does not present an expected negative future trend in credit quality. Commercial and industrial non-accrualtotal loans increased $4.2 million fromat December 31, 2017 mainly due to a $4.6 million classified loan that was placed on non-accrual at March 31, 2018. Non-accrual classified taxi cab medallions included within this delinquency category totaled $13.9 million and $14.2 million at March 31, 2018 and December 31, 2017, respectively. See further discussion of our taxi cab medallion loan portfolio below.


During the first quarter of 2018,2019, we continued to closely monitor our NYCNew York City and Chicago taxi medallion loans totaling $118.8 million and $8.1 million, respectively, within the commercial and industrial loan portfolio.portfolio at March 31, 2019. While the vast majoritymost 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 March 31, 2018, the NYC and Chicago taxi medallion loans totaling $126.8 million and $9.3 million, respectively, were largely classified as substandard and special mention loans. The criticized loan classifications are primarily due to the elevated general risk associated with the current medallion market. At March 31, 2018,2019, the medallion portfolio included impaired loans totaling $65.0$79.6 million with related reserves of $19.9$29.6 million within the allowance for loan losses as compared to impaired loans totaling $63.9$73.7 million with related reserves of $9.1$27.9 million at December 31, 2017.2018. At March 31, 2018,2019, the impaired medallion loans largely consisted of $68.8 million of non-accrual taxi cab medallion loans classified as doubtful and $10.8 million of performing troubled debt restructured (TDR) loans classified as substandard loans, as well as $13.9 million of non-accrual taxi cab medallion loans classified as doubtful loans.
Valley's historical taxi medallion lending criteria had been conservative in regards toregarding capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral in certain instances. However, the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, increased the level of our allowance for loan losses at March 31, 20182019 (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. For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of approximately $10.5$11.1 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at March 31, 2018.2019. Additionally, Valley currently has $13.9 million of performing non-impaired taxi medallion loans which are scheduled to mature in 2019, and $19.2 million that mature between 2023 and 2028. If the loans with 2019 maturities became TDRs upon maturity and renewal, an additional reserve of $5.7 million would be required based on the allowance methodology at March 31, 2019. 
OREO properties increased $4.0decreased $2.2 million to $13.8$7.3 million at March 31, 20182019 from $9.8$9.5 million at December 31, 2017 primarily2018 mainly due to a higher volume of OREO properties acquired inproperty sales. Net gains on the USAB acquisition duringsale of OREO totaled $881 thousand for the first quarterthree months ended March 31, 2019. The net gain on sale of 2018. See Note 2 to

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OREO for the consolidated financial statements for further details.three months ended March 31, 2018 was immaterial. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $3.9$1.2 million at March 31, 2018.2019.
Other repossessed assets increased $1.9 million to $2.6 million at March 31, 2019 from December 31, 2018 mainly due to the repossession of eight New York City medallions from one non-performing loan relationship during the first quarter of 2019.

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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) decreased $762 thousand$4.1 million to $116.4$73.1 million at March 31, 20182019 as compared to $117.2$77.2 million at December 31, 2017.2018. Performing TDRs consisted of 139118 loans (primarily in the commercial and industrial loan and commercial real estate portfolios). at March 31, 2019. On an aggregate basis, the $116.4$73.1 million in performing TDRs at March 31, 20182019 had a modified weighted average interest rate of approximately 4.455.59 percent as compared to a pre-modification weighted average interest rate of 4.305.34 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 loans restructured at higher current market interest rates, but with extended loan terms.
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, 2017.2018.


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 EndedThree Months Ended
March 31,
2018
 December 31,
2017
 March 31,
2017
March 31,
2019
 December 31,
2018
 March 31,
2018
($ in thousands)($ in thousands)
Average loans outstanding$22,302,991
 $18,242,690
 $17,313,100
$25,254,733
 $24,530,919
 $22,302,991
Beginning balance - Allowance for credit losses124,452
 121,480
 116,604
156,295
 149,475
 124,452
Loans charged-off:          
Commercial and industrial(131) (532) (1,714)(4,282) (909) (131)
Commercial real estate(310) (6) (414)
 
 (310)
Construction
 
 

 
 
Residential mortgage(68) (42) (130)(15) (56) (68)
Total Consumer(1,211) (1,097) (1,121)(2,028) (1,194) (1,211)
Total charge-offs(1,720) (1,677) (3,379)(6,325) (2,159) (1,720)
Charged-off loans recovered:          
Commercial and industrial2,107
 1,256
 848
483
 566
 2,107
Commercial real estate369
 22
 142
21
 21
 369
Construction
 579
 

 
 
Residential mortgage80
 113
 448
1
 3
 80
Total Consumer468
 479
 563
486
 530
 468
Total recoveries3,024
 2,449
 2,001
991
 1,120
 3,024
Net recoveries (charge-offs)1,304
 772
 (1,378)
Net (charge-offs) recoveries(5,334) (1,039) 1,304
Provision charged for credit losses10,948
 2,200
 2,470
8,000
 7,859
 10,948
Ending balance - Allowance for credit losses$136,704
 $124,452
 $117,696
$158,961
 $156,295
 $136,704
Components of allowance for credit losses:          
Allowance for loan losses$132,862
 $120,856
 $115,443
$154,381
 $151,859
 $132,862
Allowance for unfunded letters of credit3,842
 3,596
 2,253
4,580
 4,436
 3,842
Allowance for credit losses$136,704
 $124,452
 $117,696
$158,961
 $156,295
 $136,704
Components of provision for credit losses:          
Provision for losses on loans$10,702
 $1,118
 $2,402
$7,856
 $7,935
 $10,702
Provision for unfunded letters of credit246
 1,082
 68
144
 (76) 246
Provision for credit losses$10,948
 $2,200
 $2,470
$8,000
 $7,859
 $10,948
Annualized ratio of net (recoveries) charge-offs to average loans outstanding(0.02)% (0.02)% 0.03%
Annualized ratio of net charge-offs (recoveries) to average loans outstanding0.08% 0.02% (0.02)%
Allowance for credit losses as a % of non-PCI loans0.78
 0.73
 0.75
0.74
 0.75
 0.78
Allowance for credit losses as a % of total loans0.61
 0.68
 0.67
0.63
 0.62
 0.61


Net loan charge-offs totaled $5.3 million for the first quarter of 2019 as compared to $1.0 million for the fourth quarter of 2018, and $1.3 million of net recoveries of loan charge-offs during the first quarter of 2018. The increase in loan charge-offs was mainly due to partial charge-offs of 4 impaired loans totaling $3.8 million within the commercial and industrial loan portfolio and an increase in consumer loan charge-offs during the first quarter of 2019. Despite the increase in net charge-offs due to a relatively low number of loans, the overall level of loan charge-offs (as presented in the above table) continues to trend within management's expectations for the credit quality of the loan portfolio.
During the first quarter of 2018 and fourth quarter of 2017, we recognized net recoveries of loan charge-offs totaling $1.3 million and $772 thousand, respectively, as compared to net loan charge-offs of $1.4 million in the first quarter of 2017. The net loan recoveries during the first quarter of 2018 were mainly due to a $1.6 million recovery of a previously charged-off commercial and industrial loan, as well as the continued low level of loan charge-offs.
During the first quarter of 2018,2019, we recorded a $10.9an $8.0 million provision for credit losses as compared to $2.2$7.9 million and $2.5$10.9 million for the fourth quarter of 20172018 and the first quarter of 2017,2018, respectively. The quarter over quarter increase inlevel of the provision was mainly due to higher specific reserves allocated to impaired taxi medallion loans at March 31, 2018, as well as non-PCI loan growth during the first quarter of 2018.2019 was largely due to additional allocated reserves for impaired taxi medallion loans, loan growth, and the moderate increase in charge-offs.



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The following table summarizes the allocation of the allowance for credit losses to specific loan portfolio categories and the allocations as a percentage of each loan category:
March 31, 2018 December 31, 2017 March 31, 2017March 31, 2019 December 31, 2018 March 31, 2018
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
($ in thousands)($ in thousands)
Loan Category:                      
Commercial and Industrial loans*$70,388
 1.94% $60,828
 2.22% $53,541
 2.03%$99,210
 2.20% $95,392
 2.20% $70,388
 1.94%
Commercial real estate loans:                      
Commercial real estate36,109
 0.31% 36,293
 0.38% 38,146
 0.42%24,261
 0.19% 26,482
 0.21% 36,109
 0.31%
Construction20,570
 1.50% 18,661
 2.19% 18,156
 2.17%23,501
 1.62% 23,168
 1.56% 20,570
 1.50%
Total commercial real estate loans56,679
 0.43% 54,954
 0.53% 56,302
 0.57%47,762
 0.34% 49,650
 0.36% 56,679
 0.43%
Residential mortgage loans4,100
 0.12% 3,605
 0.13% 3,592
 0.13%5,139
 0.13% 5,041
 0.12% 4,100
 0.12%
Consumer loans:                      
Home equity547
 0.10% 579
 0.13% 433
 0.09%523
 0.10% 598
 0.12% 547
 0.10%
Auto and other consumer4,990
 0.25% 4,486
 0.23% 3,828
 0.22%6,327
 0.29% 5,614
 0.26% 4,990
 0.25%
Total consumer loans5,537
 0.22% 5,065
 0.21% 4,261
 0.19%6,850
 0.25% 6,212
 0.23% 5,537
 0.22%
Total allowance for credit losses$136,704
 0.61% $124,452
 0.68% $117,696
 0.67%$158,961
 0.63% $156,295
 0.62% $136,704
 0.61%
 
*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 0.61 percent, 0.68 percent and 0.67 percent at March 31, 2018, December 31, 2017 and March 31, 2017, respectively. At March 31, 2018,2019, our allowance allocations for losses as a percentage of total loans decreased across most loan categoriesremained relatively stable as compared to December 31, 2017 mainly due to higher2018 for most loan balances resulting from the USAB acquisition on January 1, 2018 and the prolonged low level of net loan charge-offs in the portfolio.
categories. Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately $4.9$4.0 billion) was 0.780.74 percent, 0.730.75 percent and 0.750.78 percent at March 31, 2018,2019, December 31, 20172018 and March 31, 2017,2018, 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 March 31, 2018,2019, December 31, 20172018 and March 31, 2017.2018.
Capital Adequacy


A significant measure of the strength of a financial institution is its shareholders’ equity. At March 31, 20182019 and December 31, 2017,2018, shareholders’ equity totaled approximately $3.2$3.4 billion, and $2.5 billion, respectively, and represented 11.010.6 percent and 10.610.5 percent of total assets, respectively. During the three months ended March 31, 2018,2019, total shareholders’ equity increased by $711.8$94.4 million primarily due to (i) the additional capital of $737.2 million issued in the USAB acquisition, (ii) net income of $42.0$113.3 million, (ii) other comprehensive income of $16.2 million, (iii) a $4.4 million increase attributable to the effect of our stock incentive plan and (iv) net proceeds of $1.0 million from the re-issuance of treasury and authorized common shares issued under our dividend reinvestment plan totaling a combined 87 thousand shares. These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $39.8 million, (ii) $18.1 million of other comprehensive losses, and (iii) a $14.9$3.0 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2018. See Note 42019 and (iv) a $1.8 million increase attributable to the consolidated financial statements for additional information regardingeffect of our stock incentive plan. These positive changes in our accumulated other comprehensive loss during the three months ended March 31, 2018.

74




were partially offset by cash dividends declared on common and preferred stock totaling a combined $39.9 million.
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 implemented2016, the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Basel III final new rules requirerequired a 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 rule changes also included the

70




implementation of a new2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. Thepurposes, subject to a three-year phase-in period. On January 1, 2019, 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 whenwas 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.phased-in. As of March 31, 2018,2019, and December 31, 2017,2018, 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 March 31, 20182019 and December 31, 2017:2018:
Actual 
Minimum Capital
Requirements
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
Actual 
Minimum Capital
Requirements
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
Amount Ratio Amount Ratio Amount RatioAmount Ratio Amount Ratio Amount Ratio
 ($ in thousands)
 ($ in thousands)
As of March 31, 2018           
As of March 31, 2019           
Total Risk-based Capital                      
Valley$2,652,962
 11.89% $2,204,143
 9.875% N/A
 N/A
$2,870,699
 11.37% $2,651,185
 10.500% N/A
 N/A
Valley National Bank2,570,201
 11.54
 2,200,234
 9.875
 $2,228,085
 10.00%2,796,524
 11.08
 2,649,372
 10.500
 $2,523,212
 10.00%
Common Equity Tier 1 Capital                      
Valley1,957,453
 8.77
 1,422,928
 6.375
 N/A
 N/A
2,152,933
 8.53
 1,767,456
 7.000
 N/A
 N/A
Valley National Bank2,333,497
 10.47
 1,420,404
 6.375
 1,448,255
 6.50
2,537,563
 10.06
 1,766,248
 7.000
 1,640,088
 6.50
Tier 1 Risk-based Capital                      
Valley2,172,258
 9.73
 1,757,734
 7.875
 N/A
 N/A
2,367,738
 9.38
 2,146,197
 8.500
 N/A
 N/A
Valley National Bank2,333,497
 10.47
 1,754,617
 7.875
 1,782,468
 8.00
2,537,563
 10.06
 2,144,730
 8.500
 2,018,569
 8.00
Tier 1 Leverage Capital                      
Valley2,172,258
 7.71
 1,126,989
 4.00
 N/A
 N/A
2,367,738
 7.58
 1,249,488
 4.00
 N/A
 N/A
Valley National Bank2,333,497
 8.29
 1,125,457
 4.00
 1,406,821
 5.00
2,537,563
 8.13
 1,248,310
 4.00
 1,560,388
 5.00
As of December 31, 2018           
Total Risk-based Capital           
Valley$2,786,971
 11.34% $2,426,975
 9.875% N/A
 N/A
Valley National Bank2,698,654
 10.99
 2,424,059
 9.875
 $2,454,743
 10.00%
Common Equity Tier 1 Capital           
Valley2,071,871
 8.43
 1,566,781
 6.375
 N/A
 N/A
Valley National Bank2,442,359
 9.95
 1,564,899
 6.375
 1,595,583
 6.50
Tier 1 Risk-based Capital           
Valley2,286,676
 9.30
 1,935,435
 7.875
 N/A
 N/A
Valley National Bank2,442,359
 9.95
 1,933,110
 7.875
 1,963,794
 8.00
Tier 1 Leverage Capital           
Valley2,286,676
 7.57
 1,208,882
 4.00
 N/A
 N/A
Valley National Bank2,442,359
 8.09
 1,207,039
 4.00
 1,508,798
 5.00




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 Actual 
Minimum Capital
Requirements
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
 Amount Ratio Amount Ratio Amount Ratio
 
 ($ in thousands)
As of December 31, 2017           
Total Risk-based Capital           
Valley$2,258,044
 12.61% $1,656,575
 9.25% N/A
 N/A
Valley National Bank2,185,967
 12.23
 1,653,088
 9.25
 $1,787,122
 10.00%
Common Equity Tier 1 Capital           
Valley1,651,849
 9.22
 1,029,763
 5.75
 N/A
 N/A
Valley National Bank1,961,316
 10.97
 1,027,595
 5.75
 1,161,629
 6.50
Tier 1 Risk-based Capital           
Valley1,864,279
 10.41
 1,298,397
 7.25
 N/A
 N/A
Valley National Bank1,961,316
 10.97
 1,295,663
 7.25
 1,429,698
 8.00
Tier 1 Leverage Capital           
Valley1,864,279
 8.03
 928,484
 4.00
 N/A
 N/A
Valley National Bank1,961,316
 8.47
 926,459
 4.00
 1,158,074
 5.00

The Dodd-Frank Act requires 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. In 2014, the FRB, OCC, and FDIC issued final supervisory guidance for these stress tests. The guidance provides supervisory expectations for stress test practices, examples of practices that would be consistent with those expectations, and 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 of the stress testing results, including the results for Valley National Bank, a summary of the supervisory severely adverse scenario and additional information regarding the methodologies used to conduct the stress test may be found under "Regulatory Disclosures" within the Shareholder Information section of our website www.valleynationalbank.com. Under current law, Valley will be required to submit its stress testing results (utilizing data as of December 31, 2017) to the FRB by July 31, 2018 and disclose the results to the public in October 2018.


Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows: 
March 31,
2018
 December 31,
2017
March 31,
2019
 December 31,
2018
($ in thousands, except for share data)($ in thousands, except for share data)
Common shares outstanding331,189,859
 264,468,851
331,732,636
 331,431,217
Shareholders’ equity$3,245,003
 $2,533,165
$3,444,879
 $3,350,454
Less: Preferred stock(209,691) (209,691)209,691
 209,691
Less: Goodwill and other intangible assets(1,165,379) (733,144)1,158,245
 1,161,655
Tangible common shareholders’ equity$1,869,933
 $1,590,330
$2,076,943
 $1,979,108
Tangible book value per common share$5.65
 $6.01
$6.26
 $5.97
Book value per common share$9.16
 $8.79
$9.75
 $9.48
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

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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 5.766.89 percent for the three months ended March 31, 20182019 as compared to 24.141.3 percent for the year ended December 31, 2017.2018. Our retention ratio decreasedincreased from the year ended December 31, 2017 mostly2018 mainly due to infrequent charges, including legal expenses related to litigation reserves, USAB merger expense and a $2 million charge to income tax expense related to the effect of the USAB acquisition on our state deferred tax assets. Our retention ratio is expected to improve during the remainder of 2018 due to, among other factors, higher earnings partly caused by the net gain from our sale-leaseback transaction and the expected lower effective tax rate, solid loan growth, synergies from the USAB acquisition, including the full systems integration expected to be completed in the second quarter of 2018, and furthercontinued implementation of our LIFT initiatives.operational improvement strategies.
Cash dividends declared amounted to $0.11per common share for botheach of the three months ended March 31, 20182019 and 2017, respectively.2018. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow in light ofconsidering 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, 20172018 in the MD&A section - “Off-Balance Sheet Arrangements” and Notes 1312 and 1413 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 6057 for a discussion of interest rate sensitivity.


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Item 4.Controls and Procedures


(a) Disclosure controls and procedures. Valley maintains disclosure controls and procedures which, consistent with Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, are defined to mean controls and other procedures that are designed to ensure that information required to be disclosed in the reports that Valley files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is accumulated and communicated to Valley’s management, including Valley’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.

Valley’s CEO and CFO, with the assistance of other members of Valley’s management, have evaluated the effectiveness of Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on such evaluation, Valley’s CEO and CFO have concluded that as a result of the material weakness in Valley’s internal control over financial reporting 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 notare effective as of March 31, 2018.
As previously disclosed in Valley’s 2017 10-K, as of December 31, 2017, management identified the following material weakness in internal controls:
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

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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 has reviewed the design and operationend 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, and continues to refine 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.covered by this report.

(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, Valley’s CEO and CFO have also concluded that there hashave not been no changeany changes in Valley’s internal control over financial reporting in the quarter ended March 31, 20182019 that has materially affected, or 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 over financial reporting will prevent all errorerrors and all fraud. A system of internal control, system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the system of internal control system are met. The design of a system of internal 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 a simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controlsinternal control is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Overconditions; 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. SeeThere have been no material changes in the legal proceedings previously disclosed under Part I, Item 3 and Note 1615 to the consolidated financial statements within Valley’s Annual Report on Form 10-K for further details.the year ended December 31, 2018.

Item 1A.Risk Factors


There has been no material change in the risk factors previously disclosed under Part I, Item 1A of Valley’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.



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


During the quarter, we did not sell any equity securities not registered under the Securities Act of 1933, as amended. Purchases of equity securities by the issuer and affiliated purchasers during the three months ended March 31, 20182019 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES
Period 
Total  Number of
Shares  Purchased (1)
 
Average
Price Paid
Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (2)
 
Maximum Number of
Shares that May Yet Be
Purchased Under the Plans (2)
January 1, 2018 to January 31, 2018 80,641
 $12.49
 
  
February 1, 2018 to February 28, 2018 164,056
 12.71
 
  
March 1, 2018 to March 31, 2018 19,179
 12.65
 
  
Total 263,876
 $12.63
 
  
Period 
Total  Number of
Shares  Purchased (1)
 
Average
Price Paid
Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (2)
 
Maximum Number of
Shares that May Yet Be
Purchased Under the Plans (2)
January 1, 2019 to January 31, 2019 32,513
 $10.30
 
 4,112,465
February 1, 2019 to February 28, 2019 83,534
 10.25
 
 4,112,465
March 1, 2019 to March 31, 2019 17,625
 9.97
 
 4,112,465
Total 133,672
   
  
 
(1)Represents repurchases made in connection with the vesting of employee restricted stock awards.
(2)On January 17, 2007, Valley publicly announced its intention to repurchase up to 4.7 million outstanding common shares in the open market or in privately negotiated transactions. The repurchase plan has no stated expiration date. No repurchase plans or programs expired or terminated during the three months ended March 31, 2018.2019.


Item 6.Exhibits
(3)Articles of Incorporation and By-laws:
 (3.1)
 (3.2)
(10)Material Contracts
(10.1)

(10.2)

(31.1)
(31.2)
(32)
(101)Interactive Data File *
 
*Filed herewith.



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
    VALLEY NATIONAL BANCORP
    (Registrant)
   
Date:   /s/ Ira Robbins
May 9, 20182019   Ira Robbins
    President
    and Chief Executive Officer
   
Date:   /s/ Alan D. Eskow
May 9, 20182019   Alan D. Eskow
    Senior Executive Vice President and
    Chief Financial Officer


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