10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

FORM 10-Q
 
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2015
OR
¨

Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 1-11277 
 
 

VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
 
 
New Jersey
 
22-2477875
(State or other jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
 
1455 Valley Road
Wayne, NJ
 
07470
(Address of principal executive office)
 
(Zip code)
973-305-8800
(Registrant’s telephone number, including area code) 
 
 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock (no par value), of which 232,867,360 shares were outstanding as of November 4, 2015
 




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)
 
September 30,
2015
 
December 31,
2014
Assets
(Unaudited)
 
 
Cash and due from banks
$
220,023

 
$
462,569

Interest bearing deposits with banks
71,756

 
367,838

Investment securities:
 
 
 
Held to maturity (fair value of $1,670,951 at September 30, 2015 and $1,815,976 at December 31, 2014)
1,637,310

 
1,778,316

Available for sale
797,389

 
886,970

Trading securities

 
14,233

Total investment securities
2,434,699

 
2,679,519

Loans held for sale, at fair value
18,184

 
24,295

Non-covered loans
14,887,323

 
13,262,022

Covered loans
129,491

 
211,891

Less: Allowance for loan losses
(104,551
)
 
(102,353
)
Net loans
14,912,263

 
13,371,560

Premises and equipment, net
291,084

 
282,997

Bank owned life insurance
380,828

 
375,640

Accrued interest receivable
57,532

 
57,333

Due from customers on acceptances outstanding
1,622

 
4,197

FDIC loss-share receivable
7,267

 
13,848

Goodwill
577,534

 
575,892

Other intangible assets, net
31,382

 
38,775

Other assets
567,358

 
539,392

Total Assets
$
19,571,532

 
$
18,793,855

Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
4,365,418

 
$
4,235,515

Interest bearing:
 
 
 
Savings, NOW and money market
6,979,804

 
7,056,133

Time
3,154,641

 
2,742,468

Total deposits
14,499,863

 
14,034,116

Short-term borrowings
302,941

 
146,781

Long-term borrowings
2,529,326

 
2,526,408

Junior subordinated debentures issued to capital trusts
41,374

 
41,252

Bank acceptances outstanding
1,622

 
4,197

Accrued expenses and other liabilities
199,457

 
178,084

Total Liabilities
17,574,583

 
16,930,838

Shareholders’ Equity
 
 
 
Preferred stock (no par value, authorized 30,000,000 shares; issued 4,600,000 shares at September 30, 2015)
111,590

 

Common stock (no par value, authorized 332,023,233 shares; issued 232,800,531 shares at September 30, 2015 and 232,127,098 shares at December 31, 2014)
81,352

 
81,072

Surplus
1,702,907

 
1,693,752

Retained earnings
150,255

 
130,845

Accumulated other comprehensive loss
(49,052
)
 
(42,495
)
Treasury stock, at cost (10,651 common shares at September 30, 2015 and 16,123 common shares at December 31, 2014)
(103
)
 
(157
)
Total Shareholders’ Equity
1,996,949

 
1,863,017

Total Liabilities and Shareholders’ Equity
$
19,571,532

 
$
18,793,855

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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans
$
157,141

 
$
135,108

 
$
465,787

 
$
402,525

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
12,148

 
15,134

 
39,313

 
47,299

Tax-exempt
3,593

 
3,647

 
10,800

 
11,033

Dividends
1,658

 
1,522

 
5,013

 
4,702

Interest on federal funds sold and other short-term investments
150

 
48

 
516

 
102

Total interest income
174,690

 
155,459

 
521,429

 
465,661

Interest Expense
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 
 
Savings, NOW and money market
5,587

 
4,860

 
17,493

 
13,671

Time
9,535

 
6,981

 
25,637

 
20,196

Interest on short-term borrowings
126

 
218

 
427

 
840

Interest on long-term borrowings and junior subordinated debentures
25,482

 
28,732

 
75,649

 
84,843

Total interest expense
40,730

 
40,791

 
119,206

 
119,550

Net Interest Income
133,960

 
114,668

 
402,223

 
346,111

Provision for credit losses
94

 
(423
)
 
4,594

 
(2,096
)
Net Interest Income After Provision for Credit Losses
133,866

 
115,091

 
397,629

 
348,207

Non-Interest Income
 
 
 
 
 
 
 
Trust and investment services
2,450

 
2,411

 
7,520

 
7,097

Insurance commissions
4,119

 
3,632

 
12,454

 
12,621

Service charges on deposit accounts
5,241

 
5,722

 
15,794

 
17,109

Gains on securities transactions, net
157

 
103

 
2,481

 
102

Fees from loan servicing
1,703

 
1,806

 
4,948

 
5,262

Gains (losses) on sales of loans, net
2,014

 
(95
)
 
3,034

 
1,497

(Losses) gains on sales of assets, net
(558
)
 
83

 
(77
)
 
211

Bank owned life insurance
1,806

 
1,571

 
5,188

 
4,593

Change in FDIC loss-share receivable
(55
)
 
(3,823
)
 
(3,380
)
 
(11,610
)
Other
4,042

 
3,371

 
11,802

 
11,171

Total non-interest income
20,919

 
14,781

 
59,764

 
48,053

Non-Interest Expense
 
 
 
 
 
 
 
Salary and employee benefits expense
54,315

 
45,501

 
165,601

 
140,683

Net occupancy and equipment expense
21,526

 
17,011

 
65,858

 
55,708

FDIC insurance assessment
4,168

 
3,534

 
11,972

 
10,214

Amortization of other intangible assets
2,232

 
2,201

 
6,721

 
6,898

Professional and legal fees
4,643

 
3,609

 
12,043

 
11,671

Amortization of tax credit investments
5,224

 
4,630

 
14,231

 
14,148

Advertising
732

 
1,664

 
4,092

 
2,814

Telecommunication expense
2,050

 
1,622

 
6,101

 
4,971

Other
13,762

 
11,764

 
37,563

 
34,881

Total non-interest expense
108,652

 
91,536

 
324,182

 
281,988

Income Before Income Taxes
46,133

 
38,336

 
133,211

 
114,272

Income tax expense
10,179

 
10,654

 
34,925

 
23,235

Net Income
$
35,954

 
$
27,682

 
$
98,286

 
$
91,037

Dividends on preferred stock
2,017

 

 
2,017

 

Net Income Available to Common Shareholders
$
33,937

 
$
27,682

 
$
96,269

 
$
91,037

Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.14

 
$
0.41

 
$
0.45

Diluted
0.15

 
0.14

 
0.41

 
0.45

Cash Dividends Declared per Common Share
0.11

 
0.11

 
0.33

 
0.33

Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
Basic
232,737,953

 
200,614,091

 
232,548,840

 
200,406,801

Diluted
232,780,219

 
200,614,091

 
232,565,695

 
200,406,801

See accompanying notes to consolidated financial statements.

3




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
35,954

 
$
27,682

 
$
98,286

 
$
91,037

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
 
Net gains (losses) arising during the period
4,586

 
(488
)
 
2,677

 
13,851

Less reclassification adjustment for net gains included in net income
(91
)
 
(60
)
 
(1,445
)
 
(59
)
Total
4,495

 
(548
)
 
1,232

 
13,792

Non-credit impairment losses on available for sale securities
 
 
 
 
 
 
 
Net change in non-credit impairment losses on securities
252

 
313

 
(200
)
 
619

Less reclassification adjustment for accretion of credit impairment losses included in net income
(267
)
 
(115
)
 
(371
)
 
(294
)
Total
(15
)
 
198

 
(571
)
 
325

Unrealized gains and losses on derivatives (cash flow hedges)
 
 
 
 
 
 
 
Net (losses) gains on derivatives arising during the period
(6,163
)
 
1,251

 
(10,291
)
 
(7,273
)
Less reclassification adjustment for net losses included in net income
772

 
973

 
2,714

 
2,911

Total
(5,391
)
 
2,224

 
(7,577
)
 
(4,362
)
Defined benefit pension plan
 
 
 
 
 
 
 
Amortization of net loss
119

 
36

 
359

 
110

Total other comprehensive (loss) income
(792
)
 
1,910

 
(6,557
)
 
9,865

Total comprehensive income
$
35,162

 
$
29,592

 
$
91,729

 
$
100,902

See accompanying notes to consolidated financial statements.


4




VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
Nine Months Ended
September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
98,286

 
$
91,037

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
15,213

 
14,562

Stock-based compensation
6,512

 
5,582

Provision for credit losses
4,594

 
(2,096
)
Net amortization of premiums and accretion of discounts on securities and borrowings
17,595

 
18,324

Amortization of other intangible assets
6,721

 
6,898

Gains on securities transactions, net
(2,481
)
 
(102
)
Proceeds from sales of loans held for sale
94,342

 
75,182

Gains on sales of loans, net
(3,034
)
 
(1,497
)
Originations of loans held for sale
(86,274
)
 
(67,483
)
Losses (gains) on sales of assets, net
77

 
(211
)
FDIC loss-share receivable (excluding reimbursements)
3,380

 
11,610

Net change in:
 
 
 
Trading securities
14,233

 
78

Fair value of borrowings hedged by derivative transactions
3,270

 

Cash surrender value of bank owned life insurance
(5,188
)
 
(4,593
)
Accrued interest receivable
(199
)
 
419

Other assets
(33,555
)
 
57,493

Accrued expenses and other liabilities
12,490

 
(36,048
)
Net cash provided by operating activities
145,982

 
169,155

Cash flows from investing activities:
 
 
 
Net loan originations
(486,862
)
 
(495,941
)
Loans purchased
(1,066,934
)
 
(128,684
)
Investment securities held to maturity:
 
 
 
Purchases
(201,681
)
 
(358,393
)
Sales
11,666

 

Maturities, calls and principal repayments
321,771

 
268,868

Investment securities available for sale:
 
 
 
Purchases
(38,819
)
 
(20,830
)
Sales
14,022

 
5,447

Maturities, calls and principal repayments
115,397

 
106,323

Proceeds from sales of real estate property and equipment
10,510

 
16,317

Purchases of real estate property and equipment
(23,139
)
 
(18,106
)
Reimbursements from the FDIC
2,835

 
4,967

Net cash used in investing activities
(1,341,234
)
 
(620,032
)
Cash flows from financing activities:
 
 
 
Net change in deposits
465,747

 
542,225

Net change in short-term borrowings
156,160

 
16,264

Proceeds from issuance of long-term borrowings, net
98,930

 

Repayments of long-term borrowings
(100,000
)
 

Proceeds from issuance of preferred stock, net
111,590

 

Cash dividends paid to preferred shareholders
(2,017
)
 

Cash dividends paid to common shareholders
(76,671
)
 
(66,047
)
Purchase of common shares to treasury
(2,108
)
 
(946
)
Common stock issued, net
4,993

 
3,667

Net cash provided by financing activities
656,624

 
495,163

Net change in cash and cash equivalents
(538,628
)
 
44,286

Cash and cash equivalents at beginning of year
830,407

 
369,168

Cash and cash equivalents at end of period
$
291,779

 
$
413,454



5




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

 
Nine Months Ended
September 30,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 
 
 
Interest on deposits and borrowings
$
121,907

 
$
120,086

Federal and state income taxes
49,932

 
28,669

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
8,711

 
$
9,053

Transfer of loans to loans held for sale

 
27,329

See accompanying notes to consolidated financial statements.







 




6




VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey Corporation (Valley), include the accounts of its commercial bank subsidiary, Valley National Bank (the “Bank”), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities.
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations and cash flows at September 30, 2015 and for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the entire fiscal year.
In preparing the unaudited consolidated financial statements in conformity with U.S. GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that are particularly susceptible to change are: the allowance for loan losses; the evaluation of goodwill and other intangible assets, and investment securities for impairment; fair value measurements of assets and liabilities; and income taxes. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP and industry practice have been condensed or omitted pursuant to rules and regulations of the SEC. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2014.
On June 19, 2015, Valley issued 4.6 million shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A (the "Preferred Stock”), no par value per share, with a liquidation preference of $25 per share. Dividends on the Preferred Stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to 6.25 percent from the original issue date to, but excluding, June 30, 2025, and thereafter at a floating rate per annum equal to three-month LIBOR plus a spread of 3.85 percent. The net proceeds from the offering and sale of the Preferred Stock totaled approximately $111.6 million.
Note 2. Business Combinations

CNLBancshares, Inc. On May 27, 2015, Valley entered into a merger agreement to acquire CNLBancshares, Inc. (CNLBancshares) and its wholly-owned subsidiary, CNLBank, headquartered in Orlando, Florida. CNLBancshares has approximately $1.4 billion in assets, $843 million in loans and $1.1 billion in deposits and maintains a branch network of 16 offices. The common shareholders of CNLBancshares will receive 0.75 of a share of Valley common stock for each CNLBancshares share they own, subject to adjustment in the event Valley’s average stock price falls below $8.80 or rises above $10.13 prior to closing. The transaction is valued at an estimated $207 million, based on Valley’s closing stock price on May 22, 2015 (and includes the stock consideration of $16.2 million that will be paid to CNLBancshares stock option holders). The merger has received all necessary regulatory and CNLBancshares shareholder approvals, and the transaction is expected to close in December 2015.




7




1st United Bancorp, Inc. On November 1, 2014, Valley acquired 1st United Bancorp, Inc. (1st United) and its wholly-owned subsidiary, 1st United Bank, a commercial bank with approximately $1.7 billion in assets, $1.2 billion in loans, and $1.4 billion in deposits, after purchase accounting adjustments. The 1st United acquisition provided Valley a 20 branch network covering some of the most attractive urban banking markets in Florida, including locations throughout southeast Florida, the Treasure Coast, central Florida and central Gulf Coast regions. The common shareholders of 1st United received 0.89 of a share of Valley common stock for each 1st United share they owned prior to the merger. The total consideration for the acquisition was approximately $300 million, consisting of 30.7 million shares of Valley common stock and $8.9 million of cash consideration paid to 1st United stock option holders.

During the first quarter of 2015, Valley revised the estimated fair values of the acquired assets as of the acquisition date as the result of additional information obtained. The adjustments mostly related to the fair value of certain purchased credit-impaired (PCI) loans, core deposit intangibles and deferred tax assets which, on a combined basis, resulted in a $1.6 million increase in goodwill (see Note 10 for amount of goodwill as allocated to Valley's business segments). Certain estimates for acquired assets and assumed liabilities are subject to change for up to one year after the closing date of the 1st United acquisition, as additional information becomes available.
Note 3. Earnings Per Common Share
The following table shows the calculation of both basic and diluted earnings per common share for the three and nine months ended September 30, 2015 and 2014.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except for share data)
Net income available to common shareholders
$
33,937

 
$
27,682

 
$
96,269

 
$
91,037

Basic weighted average number of common shares outstanding
232,737,953

 
200,614,091

 
232,548,840

 
200,406,801

Plus: Common stock equivalents
42,266

 

 
16,855

 

Diluted weighted average number of common shares outstanding
232,780,219

 
200,614,091

 
232,565,695

 
200,406,801

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.14

 
$
0.41

 
$
0.45

Diluted
0.15

 
0.14

 
0.41

 
0.45


Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of performance-based restricted stock units, common stock options and warrants to purchase Valley’s common shares. Common stock options and warrants with exercise prices that exceed the average market price of Valley’s common stock during the periods presented have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation. Anti-dilutive common stock options and warrants totaled approximately 5.0 million shares for both the three and nine months ended September 30, 2015 and 6.6 million shares for the three and nine months ended September 30, 2014. Restricted stock units not included in common stock equivalents for both the three and nine months ended September 30, 2015 and 2014 were immaterial.

8




Note 4. Accumulated Other Comprehensive Loss

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2015. 
 
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 June 30, 2015
$
(5,153
)
 
$
(411
)
 
$
(16,718
)
 
$
(25,978
)
 
$
(48,260
)
Other comprehensive income (loss) before reclassifications
4,586

 
252

 
(6,163
)
 

 
(1,325
)
Amounts reclassified from other comprehensive income (loss)
(91
)
 
(267
)
 
772

 
119

 
533

Other comprehensive income (loss), net
4,495

 
(15
)
 
(5,391
)
 
119

 
(792
)
Balance at September 30, 2015
$
(658
)
 
$
(426
)
 
$
(22,109
)
 
$
(25,859
)
 
$
(49,052
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
(1,890
)
 
$
145

 
$
(14,532
)
 
$
(26,218
)
 
$
(42,495
)
Other comprehensive income (loss) before reclassifications
2,677

 
(200
)
 
(10,291
)
 

 
(7,814
)
Amounts reclassified from other comprehensive income (loss)
(1,445
)
 
(371
)
 
2,714

 
359

 
1,257

Other comprehensive income (loss), net
1,232

 
(571
)
 
(7,577
)
 
359

 
(6,557
)
Balance at September 30, 2015
$
(658
)
 
$
(426
)
 
$
(22,109
)
 
$
(25,859
)
 
$
(49,052
)

The following table presents amounts reclassified from each component of accumulated other comprehensive loss on a gross and net of tax basis for the three and nine months ended September 30, 2015 and 2014
 
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
Components of Accumulated Other Comprehensive Loss
 
2015
 
2014
 
2015
 
2014
 
Income Statement
Line Item
 
 
(in thousands)
 
 
Unrealized gains (losses) on AFS securities before tax
 
$
157

 
$
103

 
$
2,481

 
$
102

 
Gains on securities transactions, net
Tax effect
 
(66
)
 
(43
)
 
(1,036
)
 
(43
)
 
 
Total net of tax
 
91

 
60

 
1,445

 
59

 
 
Non-credit impairment losses on AFS securities before tax:
 
 
 
 
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
 
458

 
198

 
636

 
506

 
Interest and dividends on  investment securities (taxable)
Tax effect
 
(191
)
 
(83
)
 
(265
)
 
(212
)
 
 
Total net of tax
 
267

 
115

 
371

 
294

 
 
Unrealized losses on derivatives (cash flow hedges) before tax
 
(1,323
)
 
(1,674
)
 
(4,651
)
 
(4,986
)
 
Interest expense
Tax effect
 
551

 
701

 
1,937

 
2,075

 
 
Total net of tax
 
(772
)
 
(973
)
 
(2,714
)
 
(2,911
)
 
 
Defined benefit pension plan:
 
 
 
 
 
 
 
 
 
 
Amortization of net loss
 
(205
)
 
(63
)
 
(616
)
 
(187
)
 
*
Tax effect
 
86

 
27

 
257

 
77

 
 
Total net of tax
 
(119
)
 
(36
)
 
(359
)
 
(110
)
 
 
Total reclassifications, net of tax
 
$
(533
)
 
$
(834
)
 
$
(1,257
)
 
$
(2,668
)
 
 
 
*
Amortization of net loss is included in the computation of net periodic pension cost.

9




Note 5. New Authoritative Accounting Guidance

Accounting Standards Update (ASU) No. 2015-12, "Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient" simplifies accounting for employee benefit plans as follows: (i) fully benefit-responsive investment contracts are now to be measured, presented and disclosed at contract value, (ii) the requirement to disclose investments that represent 5 percent or more of net assets available for benefits has been eliminated, (iii) the net appreciation or depreciation in investments for the period should be presented in the aggregate, but is no longer required to be disaggregated and disclosed by general type, (iv) if an investment is measured using the net asset value per share (or its equivalent) practical expedient in Topic 820, and that investment is in a fund that files a U.S. Department of Labor Form 5500, Annual Return/Report of Employee Benefit Plan, as a direct filing entity, disclosure of that investment’s strategy is no longer required, and (v) allows employers to measure (as a practical expedient) benefit plan assets on a month-end date nearest to the employer’s fiscal year end when the fiscal period does not coincide with a month end. ASU No. 2015-12 will be effective for fiscal years beginning after December 15, 2015 and is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2015-07, "Fair Value Measurement (Topic 820) - Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)", which removes the requirement to categorize within the fair value hierarchy all investments for which the fair value is measured using the net asset value per share practical expedient. ASU No. 2015-07 also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. ASU No. 2015-07 will be effective for Valley for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years with early adoption permitted. Management is currently evaluating the impact of adopting this new ASU on Valley's consolidated financial statements.

ASU No. 2015-03, "Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs" requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU No. 2015-03. ASU No. 2015-03 will become effective for Valley for reporting periods (including interim periods) beginning after December 15, 2015 and is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2014-14, "Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure" requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU No. 2014-14 became effective for Valley on January 1, 2015 and did not have a significant impact on its consolidated financial statements.

ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 became effective for Valley on January 1, 2015 and did not have a significant impact on its consolidated financial statements.

ASU No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" requires entities to account for repurchase-to-maturity transactions as secured borrowings rather than as sales with forward repurchase agreements and expands disclosure requirements related to certain transfers of financial assets that are

10




accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The accounting-related changes became effective for the first interim or annual period beginning after December 15, 2014. The disclosures for certain transactions accounted for as sales are required for interim and annual periods beginning after December 15, 2014. The disclosures for repos, securities lending transactions, and repos-to-maturity accounted for as secured borrowings are required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Valley's repurchase agreements are typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, Valley's adoption of ASU No. 2014-11 on January 1, 2015 did not have a significant impact on its consolidated financial statements.

ASU No. 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, this ASU requires interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 became effective for Valley on January 1, 2015 and did not to have a significant impact on its consolidated financial statements. See Note 8 for related disclosures.

ASU No. 2014-01, “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects,” amends existing guidance to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense or benefit. For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. ASU No. 2014-01 became effective for Valley on January 1, 2015 and did not have a significant impact on its consolidated financial statements. See Note 15 for related disclosures.
Note 6. Fair Value Measurement of Assets and Liabilities

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


11




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 September 30, 2015 and December 31, 2014. The assets presented under “nonrecurring fair value measurements” in the table below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized). 
 
September 30,
2015
 
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
$
50,468

 
$
50,468

 
$

 
$

U.S. government agency securities
25,513

 

 
25,513

 

Obligations of states and political subdivisions
43,469

 

 
43,469

 

Residential mortgage-backed securities
569,650

 

 
557,486

 
12,164

Trust preferred securities
8,593

 

 
6,411

 
2,182

Corporate and other debt securities
79,017

 
17,903

 
61,114

 

Equity securities
20,679

 
1,465

 
19,214

 

Total available for sale
797,389

 
69,836

 
713,207

 
14,346

Loans held for sale (1)(2)
18,184

 

 
18,184

 

Other assets (3)
34,114

 

 
34,114

 

Total assets
$
849,687

 
$
69,836

 
$
765,505

 
$
14,346

Liabilities
 
 
 
 
 
 
 
Other liabilities (3)
$
57,344

 
$

 
$
57,344

 
$

Total liabilities
$
57,344

 
$

 
$
57,344

 
$

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (4)
$
9,173

 
$

 
$

 
$
9,173

Loan servicing rights
2,922

 

 

 
2,922

Foreclosed assets (5)
10,058

 

 

 
10,058

Total
$
22,153

 
$

 
$

 
$
22,153


12




 
 
 
Fair Value Measurements at Reporting Date Using:
 
December 31,
2014
 
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
$
49,443

 
$
49,443

 
$

 
$

U.S. government agency securities
33,825

 

 
33,825

 

Obligations of states and political subdivisions
44,051

 

 
44,051

 

Residential mortgage-backed securities
644,276

 

 
629,696

 
14,580

Trust preferred securities
20,537

 

 
15,808

 
4,729

Corporate and other debt securities
74,012

 
18,241

 
55,771

 

Equity securities
20,826

 
1,337

 
19,489

 

Total available for sale
886,970

 
69,021

 
798,640

 
19,309

Trading securities
14,233

 

 
14,233

 

Loans held for sale (1)
17,165

 

 
17,165

 

Other assets (3)
20,987

 

 
20,987

 

Total assets
$
939,355

 
$
69,021

 
$
851,025

 
$
19,309

Liabilities
 
 
 
 
 
 
 
Other liabilities (3)
$
33,330

 
$

 
$
33,330

 
$

Total liabilities
$
33,330

 
$

 
$
33,330

 
$

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Non-performing loans held for sale
$
7,130

 
$

 
$

 
$
7,130

Collateral dependent impaired loans (4)
13,985

 

 

 
13,985

Loan servicing rights
3,987

 

 

 
3,987

Foreclosed assets (5)
18,098

 

 

 
18,098

Total
$
43,200

 
$

 
$

 
$
43,200

 
(1)
Loans held for sale carried at fair value (which consist of residential mortgages) had contractual unpaid principal balances totaling approximately $17.5 million and $16.9 million at September 30, 2015 and December 31, 2014, respectively.
(2)
Gains and losses related to the change in the fair value of loans held for sale are included in net gains on sales of loans within the non-interest income category of our consolidated statements of income and totaled to net gains of $660 thousand and $81 thousand for the three months ended September 30, 2015 and 2014, respectively, and $813 thousand and $453 thousand for the nine months ended September 30, 2015 and 2014, respectively.
(3)
Derivative financial instruments are included in this category.
(4)
Excludes PCI loans.
(5)
Includes covered other real estate owned totaling $1.3 million and $3.2 million at September 30, 2015 and December 31, 2014, respectively.









13





The changes in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2015 and 2014 are summarized below: 
 
Available for Sale Securities
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance, beginning of the period
$
14,712

 
$
26,029

 
$
19,309

 
$
28,523

Total net (losses) gains included in other comprehensive income for the period
(26
)
 
341

 
(908
)
 
563

Sales

 

 
(2,675
)
 

Settlements
(340
)
 
(669
)
 
(1,380
)
 
(3,385
)
Balance, end of the period
$
14,346

 
$
25,701

 
$
14,346

 
$
25,701


No changes in unrealized gains or losses on Level 3 securities held at September 30, 2015 and 2014 were included in earnings during the three and nine months ended September 30, 2015 and 2014. There were no transfers of assets into and out of Level 3, or between Level 1 and Level 2, during the three and nine months ended September 30, 2015 and 2014.

There have been no material changes in the valuation methodologies used at September 30, 2015 from December 31, 2014.

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

14





In calculating the fair value for the available for sale securities under Level 3, Valley prepared present value cash flow models for certain private label mortgage-backed securities. The cash flows for the residential mortgage-backed securities incorporated the expected cash flow of each security adjusted for default rates, loss severities and prepayments of the individual loans collateralizing the security.

The following table presents quantitative information about Level 3 inputs used to measure the fair value of these securities at September 30, 2015
Security Type
Valuation
Technique
 
Unobservable
Input
 
Range
 
Weighted
Average
 
 
 
 
 
 
 
 
Private label mortgage-backed securities
Discounted cash flow
 
Prepayment rate
 
4.7 - 21.9%
 
14.7
%
 
 
 
Default rate
 
3.5 - 20.4
 
8.5

 
 
 
Loss severity
 
39.2 - 64.2
 
57.7


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

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

For the Level 3 available for sale pooled trust preferred securities (consisting of 1 security at September 30, 2015 and 2 securities at December 31, 2014), the resulting estimated future cash flows were discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. The discount rate for each security was applied using a pricing matrix based on credit, security type and maturity characteristics to determine the fair value. The fair value calculation is received from an independent valuation adviser. In validating the fair value calculation from an independent valuation adviser, Valley reviews the accuracy of the inputs and the appropriateness of the unobservable inputs utilized in the valuation to ensure the fair value calculation is reasonable from a market participant perspective.

Loans held for sale. The conforming residential mortgage loans originated for sale are reported at fair value using Level 2 inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. To determine these fair values, the mortgages held for sale are put into multiple tranches, or pools, based on the coupon rate and maturity of each mortgage. The market prices for each tranche are obtained from both Fannie Mae and Freddie Mac. The market prices represent a delivery price, which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. The market prices received from Fannie Mae and Freddie Mac are then averaged and interpolated or extrapolated, where required, to calculate the fair value of each tranche. Depending upon the time elapsed since the origination of each loan held for sale, non-performance risk and changes therein were addressed in the estimate of fair value based upon the delinquency data provided to both Fannie Mae and Freddie Mac for market pricing and changes in market credit spreads. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at September 30, 2015 and December 31, 2014 based on the short duration these assets were held, and the high credit quality of these loans.

15





Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair value of Valley’s derivatives are determined using third party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves. The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at September 30, 2015), is determined based on the current market prices for similar instruments provided by Freddie Mac and Fannie Mae. 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 September 30, 2015 and December 31, 2014.

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 non-performing loans held for sale carried at estimated fair value (less selling costs) when less than the unamortized cost, impaired loans reported at the fair value of the underlying collateral, loan servicing rights, other real estate owned and other repossessed assets, which are reported at fair value upon initial recognition or subsequent impairment as described below.

Non-performing loans held for sale. At December 31, 2014, non-performing loans held for sale consisted of one commercial real estate loan that was transferred to the loans held for sale account during the first quarter of 2014. At December 31, 2014, the loan was re-measured and reported at fair value based upon a non-binding sale agreement. This sale transaction was completed during the first quarter of 2015.

Impaired loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values are estimated using Level 3 inputs, consisting of individual appraisals that are significantly adjusted based on certain discounting criteria. At September 30, 2015, appraisals were discounted up to 13.5 percent based on specific market data by location and property type. During the quarter ended September 30, 2015, collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. The collateral dependent loan charge-offs to the allowance for loan losses totaled $366 thousand and $495 thousand for the three months ended September 30, 2015 and 2014, respectively, and $3.0 million and $3.7 million for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015, collateral dependent impaired loans with a total recorded investment of $11.2 million were reduced by specific valuation allowance allocations totaling $2.0 million to a reported total net carrying amount of $9.2 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 September 30, 2015, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 23 percent and a discount rate of 8.0 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 impairment charges on its loan servicing rights totaling $48 thousand and $131 thousand for the three months ended September 30, 2015 and 2014, respectively, and $209 thousand and $273 thousand for the nine months ended September 30, 2015 and 2014, respectively.


16




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. The appraisals of foreclosed assets were discounted up to 13.4 percent at September 30, 2015. At September 30, 2015, foreclosed assets included $10.1 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended September 30, 2015. The foreclosed assets charge-offs to the allowance for loan losses totaled $629 thousand and $1.7 million for the three months ended September 30, 2015 and 2014, respectively, and $1.5 million and $3.7 million for the nine months ended September 30, 2015 and 2014, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in net loss within non-interest expense of $1.3 million and $799 thousand for the three months ended September 30, 2015 and 2014, respectively, and $1.8 million and $2.7 million for the nine months ended September 30, 2015 and 2014, respectively.

Other Fair Value Disclosures

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

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

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


17




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 September 30, 2015 and December 31, 2014 were as follows: 
 
Fair Value
Hierarchy
 
September 30, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
220,023

 
$
220,023

 
$
462,569

 
$
462,569

Interest bearing deposits with banks
Level 1
 
71,756

 
71,756

 
367,838

 
367,838

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
Level 1
 
139,014

 
152,513

 
139,121

 
151,300

U.S. government agency securities
Level 2
 
12,973

 
13,400

 
14,081

 
14,385

Obligations of states and political subdivisions
Level 2
 
511,788

 
531,616

 
500,018

 
519,693

Residential mortgage-backed securities
Level 2
 
889,146

 
899,776

 
986,992

 
998,981

Trust preferred securities
Level 2
 
59,780

 
46,811

 
98,456

 
86,243

Corporate and other debt securities
Level 2
 
24,609

 
26,835

 
39,648

 
45,374

Total investment securities held to maturity
 
 
1,637,310

 
1,670,951

 
1,778,316

 
1,815,976

Net loans
Level 3
 
14,912,263

 
14,633,265

 
13,371,560

 
13,085,830

Accrued interest receivable
Level 1
 
57,532

 
57,532

 
57,333

 
57,333

Federal Reserve Bank and Federal Home Loan Bank stock (1)
Level 1
 
137,229

 
137,229

 
133,117

 
133,117

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
Level 1
 
11,345,222

 
11,345,222

 
11,291,648

 
11,291,648

Deposits with stated maturities
Level 2
 
3,154,641

 
3,202,590

 
2,742,468

 
2,807,522

Short-term borrowings
Level 1
 
302,941

 
302,941

 
146,781

 
146,781

Long-term borrowings
Level 2
 
2,529,326

 
2,696,964

 
2,526,408

 
2,738,122

Junior subordinated debentures issued to capital trusts
Level 2
 
41,374

 
43,950

 
41,252

 
44,584

Accrued interest payable (2)
Level 1
 
12,825

 
12,825

 
15,526

 
15,526

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

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

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

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

18




may be adjusted, as necessary. If applicable, the adjustment to fair value is derived based on present value cash flow model projections prepared by Valley utilizing assumptions similar to those incorporated by market participants.

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

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

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

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

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

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


19




Note 7. Investment Securities

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at September 30, 2015 and December 31, 2014 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
September 30, 2015
 
 
 
 
 
 
 
U.S. Treasury securities
$
139,014

 
$
13,499

 
$

 
$
152,513

U.S. government agency securities
12,973

 
427

 

 
13,400

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
195,143

 
9,471

 
(12
)
 
204,602

Municipal bonds
316,645

 
10,678

 
(309
)
 
327,014

Total obligations of states and political subdivisions
511,788

 
20,149

 
(321
)
 
531,616

Residential mortgage-backed securities
889,146

 
15,530

 
(4,900
)
 
899,776

Trust preferred securities
59,780

 
48

 
(13,017
)
 
46,811

Corporate and other debt securities
24,609

 
2,226

 

 
26,835

Total investment securities held to maturity
$
1,637,310

 
$
51,879

 
$
(18,238
)
 
$
1,670,951

December 31, 2014
 
 
 
 
 
 
 
U.S. Treasury securities
$
139,121

 
$
12,179

 
$

 
$
151,300

U.S. government agency securities
14,081

 
304

 

 
14,385

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
197,440

 
9,410

 
(412
)
 
206,438

Municipal bonds
302,578

 
10,955

 
(278
)
 
313,255

Total obligations of states and political subdivisions
500,018

 
20,365

 
(690
)
 
519,693

Residential mortgage-backed securities
986,992

 
18,233

 
(6,244
)
 
998,981

Trust preferred securities
98,456

 
167

 
(12,380
)
 
86,243

Corporate and other debt securities
39,648

 
5,726

 

 
45,374

Total investment securities held to maturity
$
1,778,316

 
$
56,974

 
$
(19,314
)
 
$
1,815,976


20




The age of unrealized losses and fair value of related securities held to maturity at September 30, 2015 and December 31, 2014 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)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$

 
$

 
$
1,957

 
$
(12
)
 
$
1,957

 
$
(12
)
Municipal bonds
19,027

 
(241
)
 
10,159

 
(68
)
 
29,186

 
(309
)
Total obligations of states and political subdivisions
19,027

 
(241
)
 
12,116

 
(80
)
 
31,143

 
(321
)
Residential mortgage-backed securities
223,653

 
(1,665
)
 
160,149

 
(3,235
)
 
383,802

 
(4,900
)
Trust preferred securities

 

 
45,409

 
(13,017
)
 
45,409

 
(13,017
)
Total
$
242,680

 
$
(1,906
)
 
$
217,674

 
$
(16,332
)
 
$
460,354

 
$
(18,238
)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
4,927

 
$
(50
)
 
$
19,050

 
$
(362
)
 
$
23,977

 
$
(412
)
Municipal bonds

 

 
28,815

 
(278
)
 
28,815

 
(278
)
Total obligations of states and political subdivisions
4,927

 
(50
)
 
47,865

 
(640
)
 
52,792

 
(690
)
Residential mortgage-backed securities
107,357

 
(563
)
 
276,580

 
(5,681
)
 
383,937

 
(6,244
)
Trust preferred securities

 

 
66,194

 
(12,380
)
 
66,194

 
(12,380
)
Total
$
112,284

 
$
(613
)
 
$
390,639

 
$
(18,701
)
 
$
502,923

 
$
(19,314
)

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. The total number of security positions in the securities held to maturity portfolio in an unrealized loss position at September 30, 2015 was 79 as compared to 57 at December 31, 2014.

The unrealized losses within the residential mortgage-backed securities category of the available for sale portfolio at September 30, 2015 largely related to several investment grade securities mainly issued by Fannie Mae.
The unrealized losses existing for more than twelve months for trust preferred securities at September 30, 2015 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 September 30, 2015.
Management does not believe that any individual unrealized loss as of September 30, 2015 included in the table above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates and market volatility, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.
During the first quarter of 2015, Valley sold one corporate debt security classified as held to maturity with amortized costs of $9.8 million. See "Realized Gains and Losses" section below for further details regarding this transaction.

21




As of September 30, 2015, 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 $1.0 billion.
The contractual maturities of investments in debt securities held to maturity at September 30, 2015 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.  
 
September 30, 2015
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
81,860

 
$
81,866

Due after one year through five years
71,354

 
75,970

Due after five years through ten years
374,915

 
400,050

Due after ten years
220,035

 
213,289

Residential mortgage-backed securities
889,146

 
899,776

Total investment securities held to maturity
$
1,637,310

 
$
1,670,951

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 5.9 years at September 30, 2015.


22




Available for Sale
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at September 30, 2015 and December 31, 2014 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
September 30, 2015
 
 
 
 
 
 
 
U.S. Treasury securities
$
51,047

 
$
20

 
$
(599
)
 
$
50,468

U.S. government agency securities
24,738

 
779

 
(4
)
 
25,513

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
10,980

 
22

 

 
11,002

Municipal bonds
33,215

 
60

 
(808
)
 
32,467

Total obligations of states and political subdivisions
44,195

 
82

 
(808
)
 
43,469

Residential mortgage-backed securities
569,182

 
5,865

 
(5,397
)
 
569,650

Trust preferred securities*
10,530

 

 
(1,937
)
 
8,593

Corporate and other debt securities
78,550

 
1,413

 
(946
)
 
79,017

Equity securities
21,022

 
815

 
(1,158
)
 
20,679

Total investment securities available for sale
$
799,264

 
$
8,974

 
$
(10,849
)
 
$
797,389

December 31, 2014
 
 
 
 
 
 
 
U.S. Treasury securities
$
51,063

 
$
2

 
$
(1,622
)
 
$
49,443

U.S. government agency securities
33,163

 
748

 
(86
)
 
33,825

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
11,160

 

 
(24
)
 
11,136

Municipal bonds
33,340

 
127

 
(552
)
 
32,915

Total obligations of states and political subdivisions
44,500

 
127

 
(576
)
 
44,051

Residential mortgage-backed securities
643,382

 
5,854

 
(4,960
)
 
644,276

Trust preferred securities*
23,194

 
296

 
(2,953
)
 
20,537

Corporate and other debt securities
73,585

 
1,645

 
(1,218
)
 
74,012

Equity securities
21,071

 
671

 
(916
)
 
20,826

Total investment securities available for sale
$
889,958

 
$
9,343

 
$
(12,331
)
 
$
886,970

 
*
Includes two and three pooled trust preferred securities, principally collateralized by securities issued by banks and insurance companies, at September 30, 2015 and December 31, 2014, respectively.


23




The age of unrealized losses and fair value of related securities available for sale at September 30, 2015 and December 31, 2014 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)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
49,516

 
$
(599
)
 
$

 
$

 
$
49,516

 
$
(599
)
U.S. government agency securities

 

 
4,857

 
(4
)
 
4,857

 
(4
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
19,764

 
(232
)
 
10,721

 
(576
)
 
30,485

 
(808
)
Total obligations of states and political subdivisions
19,764

 
(232
)
 
10,721

 
(576
)
 
30,485

 
(808
)
Residential mortgage-backed securities
107,912

 
(1,601
)
 
168,049

 
(3,796
)
 
275,961

 
(5,397
)
Trust preferred securities

 

 
8,593

 
(1,937
)
 
8,593

 
(1,937
)
Corporate and other debt securities
15,190

 
(131
)
 
36,908

 
(815
)
 
52,098

 
(946
)
Equity securities

 

 
14,486

 
(1,158
)
 
14,486

 
(1,158
)
Total
$
192,382

 
$
(2,563
)
 
$
243,614

 
$
(8,286
)
 
$
435,996

 
$
(10,849
)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$

 
$

 
$
48,504

 
$
(1,622
)
 
$
48,504

 
$
(1,622
)
U.S. government agency securities

 

 
5,442

 
(86
)
 
5,442

 
(86
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies

 

 
11,136

 
(24
)
 
11,136

 
(24
)
Municipal bonds
13,337

 
(426
)
 
14,637

 
(126
)
 
27,974

 
(552
)
Total obligations of states and political subdivisions
13,337

 
(426
)
 
25,773

 
(150
)
 
39,110

 
(576
)
Residential mortgage-backed securities
57,543

 
(121
)
 
244,910

 
(4,839
)
 
302,453

 
(4,960
)
Trust preferred securities
2,210

 
(117
)
 
12,085

 
(2,836
)
 
14,295

 
(2,953
)
Corporate and other debt securities
27,500

 
(294
)
 
28,269

 
(924
)
 
55,769

 
(1,218
)
Equity securities
158

 
(41
)
 
14,769

 
(875
)
 
14,927

 
(916
)
Total
$
100,748

 
$
(999
)
 
$
379,752

 
$
(11,332
)
 
$
480,500

 
$
(12,331
)
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 September 30, 2015 was 94 as compared to 96 at December 31, 2014.
The unrealized losses within the residential mortgage-backed securities category of the available for sale portfolio at September 30, 2015 largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae.
The unrealized losses for trust preferred securities at September 30, 2015 for more than twelve months in the table above largely relate to 2 pooled trust preferred securities with an amortized cost of $10.5 million and a fair value of $8.6 million. One of the two pooled trust preferred securities had a unrealized loss of $1.4 million and an investment grade rating at September 30, 2015. The second pooled trust preferred security had a non-investment grade rating and was initially other-than-temporarily impaired in 2008 with additional estimated credit losses recognized in 2009 and 2011, and is not accruing interest.

24




Management does not believe that any individual unrealized loss as of September 30, 2015 represents an other-than-temporary impairment, as management mainly attributes the declines in 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 has no 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, if necessary, maturity.
As of September 30, 2015, 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 $242.5 million.
The contractual maturities of investment securities available for sale at September 30, 2015 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
 
September 30, 2015
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
600

 
$
602

Due after one year through five years
70,286

 
71,237

Due after five years through ten years
71,953

 
70,566

Due after ten years
66,221

 
64,655

Residential mortgage-backed securities
569,182

 
569,650

Equity securities
21,022

 
20,679

Total investment securities available for sale
$
799,264

 
$
797,389

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 at September 30, 2015 was 4.8 years.
Other-Than-Temporary Impairment Analysis

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

There were no other-than-temporary impairment losses on securities recognized in earnings for the three and nine months ended September 30, 2015 and 2014. At September 30, 2015, four previously impaired private label mortgage-backed securities (prior to December 31, 2012) had a combined amortized cost and fair value of $12.3 million and $12.2 million, respectively, while one previously impaired pooled trust preferred security had an amortized cost and fair value of $2.8 million and $2.2 million, respectively. The previously impaired pooled trust preferred security was not accruing interest during the three and nine months ended September 30, 2015 and 2014. Additionally, one previously impaired

25




pooled trust preferred security was sold during the first quarter of 2015 for an immaterial gain. See the table and discussion below for additional information.

The following table presents the changes in the credit loss component of cumulative other-than-temporary impairment losses on debt securities classified as either held to maturity or available for sale that Valley has previously recognized in earnings, for which a portion of the impairment loss (non-credit factors) was recognized in other comprehensive income for the three and nine months ended September 30, 2015 and 2014: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance, beginning of period
$
6,387

 
$
9,682

 
$
8,947

 
$
9,990

Accretion of credit loss impairment due to an increase in expected cash flows
(458
)
 
(198
)
 
(636
)
 
(506
)
Sales

 

 
(2,382
)
 

Balance, end of period
$
5,929

 
$
9,484

 
$
5,929

 
$
9,484


The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to each period presented. Other-than-temporary impairments recognized in earnings for credit impaired debt securities are presented as additions in two components based upon whether the current period is the first time the debt security was credit impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairment). The credit loss component is reduced if Valley sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) Valley receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures, or (iii) the security is fully written down.
Realized Gains and Losses

Gross gains (losses) realized on sales, maturities and other securities transactions related to investment securities included in earnings for the three and nine months ended September 30, 2015 and 2014 were as follows: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Sales transactions:
 
 
 
 
 
 
 
Gross gains
$

 
$
103

 
$
3,274

 
$
103

Gross losses

 

 
(947
)
 

 
$

 
$
103

 
$
2,327

 
$
103

Maturities and other securities transactions:
 
 
 
 
 
 
 
Gross gains
$
158

 
$

 
$
287

 
$
8

Gross losses
(1
)
 

 
(133
)
 
(9
)
 
$
157

 
$

 
$
154

 
$
(1
)
Total gains on securities transactions, net
$
157

 
$
103

 
$
2,481

 
$
102


Valley recognized gross gains from sales transactions of investment securities totaling $3.3 million for the nine months ended September 30, 2015 due to the sale of corporate debt securities and trust preferred securities with amortized cost totaling $25.9 million. These transactions included a corporate debt security classified as held to maturity and a previously impaired pooled trust preferred security with amortized costs of $9.8 million and $2.6 million, respectively. Additionally, Valley recognized $947 thousand of gross losses during the nine months ended September 30, 2015 due to the sale of mostly trust preferred securities with a total amortized cost of $8.3 million. The vast majority of the sales of

26




investment securities were due to a investment portfolio re-balancing during the first quarter due to changes in our regulatory capital calculation under the new Basel III regulatory capital reform (effective for Valley on January 1, 2015). Under ASC Topic 320, “Investments - Debt and Equity Securities,” the sale of held to maturity securities based upon the change in capital requirements is permitted without tainting the remaining held to maturity investment portfolio.

Trading Securities

The fair value of trading securities (consisting of 2 single-issuer bank trust preferred securities) was $14.2 million at December 31, 2014. During the first quarter of 2015, one of the two securities was redeemed by the issuer and the other security was sold prior to its issuer's call date in April 2015. Both of the securities transactions resulted in an immaterial aggregate net trading loss for the nine months ended September 30, 2015 which was included in the other non-interest income category of our consolidated statements of income. Net trading losses were also immaterial for the three and nine months ended September 30, 2014. Interest income on trading securities totaled $213 thousand for the nine months ended September 30, 2015 and $290 thousand and $871 thousand for the three and nine months ended September 30, 2014, respectively.

Note 8. Loans

The detail of the loan portfolio as of September 30, 2015 and December 31, 2014 was as follows: 
 
September 30, 2015
 
December 31, 2014
 
Non-PCI
Loans
 
PCI Loans
 
Total
 
Non-PCI
Loans
 
PCI Loans
 
Total
 
(in thousands)
Non-covered loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,152,638

 
$
246,813

 
$
2,399,451

 
$
1,959,927

 
$
277,371

 
$
2,237,298

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
6,009,760

 
880,597

 
6,890,357

 
5,053,742

 
978,448

 
6,032,190

Construction
521,543

 
46,083

 
567,626

 
476,094

 
53,869

 
529,963

  Total commercial real estate loans
6,531,303

 
926,680

 
7,457,983

 
5,529,836

 
1,032,317

 
6,562,153

Residential mortgage
2,863,402

 
83,294

 
2,946,696

 
2,419,044

 
96,631

 
2,515,675

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
392,658

 
82,072

 
474,730

 
400,136

 
91,609

 
491,745

Automobile
1,219,734

 
24

 
1,219,758

 
1,144,780

 
51

 
1,144,831

Other consumer
379,291

 
9,414

 
388,705

 
298,389

 
11,931

 
310,320

Total consumer loans
1,991,683

 
91,510

 
2,083,193

 
1,843,305

 
103,591

 
1,946,896

Total non-covered loans
13,539,026

 
1,348,297

 
14,887,323

 
11,752,112

 
1,509,910

 
13,262,022

Covered loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial

 
1,167

 
1,167

 

 
13,813

 
13,813

Commercial real estate

 
70,320

 
70,320

 

 
128,691

 
128,691

Construction

 
2,027

 
2,027

 

 
3,171

 
3,171

Residential mortgage

 
52,566

 
52,566

 

 
60,697

 
60,697

Consumer

 
3,411

 
3,411

 

 
5,519

 
5,519

Total covered loans

 
129,491

 
129,491

 

 
211,891

 
211,891

Total loans
$
13,539,026

 
$
1,477,788

 
$
15,016,814

 
$
11,752,112

 
$
1,721,801

 
$
13,473,913


Total non-covered loans include net unearned premiums and deferred loan costs of $106 thousand at September 30, 2015 as compared to net unearned discounts and deferred loan fees of $9.0 million at December 31, 2014. The outstanding balances (representing contractual balances owed to Valley) for non-covered PCI loans and covered loans

27




totaled $1.4 billion and $149.3 million at September 30, 2015, respectively, and $1.6 billion and $253.7 million at December 31, 2014, respectively.

There were no sales of loans from the held for investment portfolio during the three and nine months ended September 30, 2015 and 2014.

Purchased Credit-Impaired Loans (Including Covered Loans)

PCI loans, which include loans acquired in FDIC-assisted transactions ("covered 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.

The following table presents changes in the accretable yield for PCI loans during the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance, beginning of period
$
282,101

 
$
122,342

 
$
336,208

 
$
223,799

Accretion
(24,814
)
 
(15,538
)
 
(78,921
)
 
(46,981
)
Net decrease in expected cash flows

 

 

 
(70,014
)
Balance, end of period
$
257,287

 
$
106,804

 
$
257,287

 
$
106,804


The net decrease 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 life of the individual pools. The net decrease during the nine months ended September 30, 2014 was mainly due to an increase in the expected repayment speeds for certain pools of non-covered PCI loans during the second quarter of 2014.

FDIC Loss-Share Receivable

The receivable arising from the loss-sharing agreements (referred to as the “FDIC loss-share receivable” on our consolidated statements of financial condition) is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans.


28




Changes in the FDIC loss-share receivable for the three and nine months ended September 30, 2015 and 2014 were as follows: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance, beginning of the period
$
8,404

 
$
20,687

 
$
13,848

 
$
32,757

Discount accretion of the present value at the acquisition dates
43

 
12

 
130

 
35

Effect of additional cash flows on covered loans (prospective recognition)

 
(4,500
)
 
(4,072
)
 
(8,460
)
Decrease in the provision for losses on covered loans

 

 

 
(4,417
)
Net (recovered) reimbursable expenses
(238
)
 
745

 
174

 
2,248

Reimbursements from the FDIC
(1,082
)
 
(684
)
 
(2,835
)
 
(4,967
)
Other
140

 
(80
)
 
22

 
(1,016
)
Balance, end of the period
$
7,267

 
$
16,180

 
$
7,267

 
$
16,180

The aggregate effect of changes in the FDIC loss-share receivable was a net reduction in non-interest income of $55 thousand and $3.8 million for the three months ended September 30, 2015 and 2014, respectively, and $3.4 million and $11.6 million for nine months ended September 30, 2015 and 2014, respectively. The reduction (in both the receivable and non-interest income) during the nine months ended September 30, 2015 was mainly caused by the increase in our prospective recognition of the effect of additional cash flows from certain pooled loans during the first quarter of 2015. There were no additional cash flows on pooled loans during the second and third quarter of 2015, as the receivable was prospectively reduced for such additional cash flows over the shorter term of the commercial loan loss-sharing agreements (related to Valley's 2010 FDIC-assisted transactions) that expired in March 2015.

Loan Portfolio Risk Elements and Credit Risk Management

Credit risk management. For all of its loan types discussed below, 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, 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.

Commercial and industrial loans. A significant proportion of Valley’s commercial and industrial loan portfolio is granted to long-standing customers of proven ability and strong repayment performance. Underwriting standards are designed to assess the borrower’s ability to generate recurring cash flow sufficient to meet the debt service requirements of loans granted. While such recurring cash flow serves as the primary source of repayment, a significant number of the loans are collateralized by borrower assets intended to serve as a secondary source of repayment should the need arise. Anticipated cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value, or in the case of loans secured by accounts receivable, the ability of the borrower to collect all amounts due from its customers. Short-term loans may be made on an unsecured basis based on a borrower’s financial strength and past performance. Valley, in most cases, will obtain the personal guarantee of the borrower’s principals to mitigate the risk. Unsecured loans, when made, are generally granted to the Bank’s most credit worthy borrowers. Unsecured commercial and industrial loans totaled $360.8 million and $345.1 million at September 30, 2015 and December 31, 2014, respectively.
Commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. Both Valley originated and purchased commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real property. Commercial real estate loans generally

29




involve larger principal balances and longer repayment periods as compared to commercial and industrial loans. Repayment of most commercial real estate loans is dependent upon the cash flow generated from the property securing the loan or the business that occupies the property. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy and accordingly conservative loan to value ratios are required at origination, as well as stress tested to evaluate the impact of market changes relating to key underwriting elements. The properties securing the commercial real estate portfolio represent diverse types, with most properties located within Valley’s primary markets.
Construction loans. With respect to loans to developers and builders, Valley originates and manages construction loans structured on either a revolving or non-revolving basis, depending on the nature of the underlying development project. These loans are generally secured by the real estate to be developed and may also be secured by additional real estate to mitigate the risk. Non-revolving construction loans often involve the disbursement of substantially all committed funds with repayment substantially dependent on the successful completion and sale, or lease, of the project. Sources of repayment for these types of loans may be from pre-committed permanent loans from other lenders, sales of developed property, or an interim loan commitment from Valley until permanent financing is obtained elsewhere. Revolving construction loans (generally relating to single-family residential construction) are controlled with loan advances dependent upon the pre-sale of housing units financed. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Residential mortgages. Valley originates residential, first mortgage loans based on underwriting standards that generally comply with Fannie Mae and/or Freddie Mac requirements. Appraisals and valuations of real estate collateral are contracted directly with independent appraisers or from valuation services and not through appraisal management companies. The Bank’s appraisal management policy and procedure is in accordance with regulatory requirements and guidance issued by the Bank’s primary regulator. Credit scoring, using FICO® and other proprietary credit scoring models, is employed in the ultimate, judgmental credit decision by Valley’s underwriting staff. Valley does not use third party contract underwriting services. Residential mortgage loans include fixed and variable interest rate loans secured by one to four family homes generally located in northern and central New Jersey, the New York City metropolitan area, eastern Pennsylvania, and to a much lesser extent, central and southeast Florida. Valley’s ability to be repaid on such loans is closely linked to the economic and real estate market conditions in these regions. In deciding whether to originate each residential mortgage loan, Valley considers the qualifications of the borrower as well as the value of the underlying property.
Home equity loans. Home equity lending consists of both fixed and variable interest rate products. Valley mainly provides home equity loans to its residential mortgage customers within the footprint of its primary lending territory. Valley generally will not exceed a combined (i.e., first and second mortgage) loan-to-value ratio of 75 percent when originating a home equity loan.
Automobile loans. Valley uses both judgmental and scoring systems in the credit decision process for automobile loans. Automobile originations (including light truck and sport utility vehicles) are largely produced via indirect channels, originated through approved automobile dealers. Automotive collateral is generally a depreciating asset and there are times in the life of an automobile loan where the amount owed on a vehicle may exceed its collateral value. Additionally, automobile charge-offs will vary based on strength or weakness in the used vehicle market, original advance rate, when in the life cycle of a loan a default occurs and the condition of the collateral being liquidated. Where permitted by law, and subject to the limitations of the bankruptcy code, deficiency judgments are sought and acted upon to ultimately collect all money owed, even when a default resulted in a loss at collateral liquidation. Valley uses a third party to actively track collision and comprehensive risk insurance required of the borrower on the automobile and this third party provides coverage to Valley in the event of an uninsured collateral loss.
Other consumer loans. Valley’s other consumer loan portfolio includes direct consumer term loans, both secured and unsecured. The other consumer loan portfolio includes exposures in credit card loans, personal lines of credit, personal loans and loans secured by cash surrender value of life insurance. Valley believes the aggregate risk exposure of these loans and lines of credit was not significant at September 30, 2015. Unsecured consumer loans totaled approximately

30




$17.4 million and $31.4 million, including $7.0 million and $7.6 million of credit card loans, at September 30, 2015 and December 31, 2014, respectively.

Credit Quality
The following table presents past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis, and non-performing loans held for sale) by loan portfolio class at September 30, 2015 and December 31, 2014: 
 
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)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,081

 
$
1,996

 
$
224

 
$
12,845

 
$
17,146

 
$
2,135,492

 
$
2,152,638

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
2,950

 
1,415

 
245

 
22,129

 
26,739

 
5,983,021

 
6,009,760

Construction
4,707

 

 

 
5,959

 
10,666

 
510,877

 
521,543

Total commercial real estate loans
7,657

 
1,415

 
245

 
28,088

 
37,405

 
6,493,898

 
6,531,303

Residential mortgage
5,617

 
1,977

 
3,468

 
16,657

 
27,719

 
2,835,683

 
2,863,402

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
1,285

 
218

 

 
1,576

 
3,079

 
389,579

 
392,658

Automobile
1,904

 
480

 
164

 

 
2,548

 
1,217,186

 
1,219,734

Other consumer
302

 
24

 
2

 
58

 
386

 
378,905

 
379,291

Total consumer loans
3,491

 
722

 
166

 
1,634

 
6,013

 
1,985,670

 
1,991,683

Total
$
18,846

 
$
6,110

 
$
4,103

 
$
59,224

 
$
88,283

 
$
13,450,743

 
$
13,539,026

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,630

 
$
1,102

 
$
226

 
$
8,467

 
$
11,425

 
$
1,948,502

 
$
1,959,927

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
8,938

 
113

 
49

 
22,098

 
31,198

 
5,022,544

 
5,053,742

Construction
448

 

 
3,988

 
5,223

 
9,659

 
466,435

 
476,094

Total commercial real estate loans
9,386

 
113

 
4,037

 
27,321

 
40,857

 
5,488,979

 
5,529,836

Residential mortgage
6,200

 
3,575

 
1,063

 
17,760

 
28,598

 
2,390,446

 
2,419,044

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
761

 
282

 

 
2,022

 
3,065

 
397,071

 
400,136

Automobile
1,902

 
391

 
126

 
90

 
2,509

 
1,142,271

 
1,144,780

Other consumer
319

 
91

 
26

 
97

 
533

 
297,856

 
298,389

Total consumer loans
2,982

 
764

 
152

 
2,209

 
6,107

 
1,837,198

 
1,843,305

Total
$
20,198

 
$
5,554

 
$
5,478

 
$
55,757

 
$
86,987

 
$
11,665,125

 
$
11,752,112


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.

31






The following table presents the information about impaired loans by loan portfolio class at September 30, 2015 and December 31, 2014:
 
Recorded
Investment
With No Related
Allowance
 
Recorded
Investment
With Related
Allowance
 
Total
Recorded
Investment
 
Unpaid
Contractual
Principal
Balance
 
Related
Allowance
 
(in thousands)
September 30, 2015
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
6,624

 
$
20,760

 
$
27,384

 
$
32,070

 
$
4,446

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
28,833

 
42,947

 
71,780

 
75,489

 
4,187

Construction
12,901

 
4,753

 
17,654

 
17,654

 
349

Total commercial real estate loans
41,734

 
47,700

 
89,434

 
93,143

 
4,536

Residential mortgage
7,269

 
16,155

 
23,424

 
16,166

 
1,632

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity
413

 
2,684

 
3,097

 
3,175

 
463

Total consumer loans
413

 
2,684

 
3,097

 
3,175

 
463

Total
$
56,040

 
$
87,299

 
$
143,339

 
$
144,554

 
$
11,077

December 31, 2014
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
6,579

 
$
21,645

 
$
28,224

 
$
33,677

 
$
4,929

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
29,784

 
44,713

 
74,497

 
77,007

 
5,342

Construction
14,502

 
2,299

 
16,801

 
20,694

 
160

Total commercial real estate loans
44,286

 
47,012

 
91,298

 
97,701

 
5,502

Residential mortgage
6,509

 
15,831

 
22,340

 
24,311

 
1,629

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity
235

 
2,911

 
3,146

 
3,247

 
465

Total consumer loans
235

 
2,911

 
3,146

 
3,247

 
465

Total
$
57,609

 
$
87,399

 
$
145,008

 
$
158,936

 
$
12,525

The following tables present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2015 and 2014
 
Three Months Ended September 30,
 
2015
 
2014
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(in thousands)
Commercial and industrial
$
28,892

 
$
232

 
$
30,387

 
$
172

Commercial real estate:
 
 
 
 
 
 
 
Commercial real estate
76,509

 
538

 
83,045

 
604

Construction
20,007

 
139

 
16,954

 
147

Total commercial real estate loans
96,516

 
677

 
99,999

 
751

Residential mortgage
25,336

 
208

 
25,382

 
227

Consumer loans:
 
 
 
 
 
 
 
Home equity
4,275

 
43

 
3,039

 
18

Total consumer loans
4,275

 
43

 
3,039

 
18

Total
$
155,019

 
$
1,160

 
$
158,807

 
$
1,168



32




 
Nine Months Ended September 30,
 
2015
 
2014
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(in thousands)
Commercial and industrial
$
27,570

 
$
689

 
$
37,229

 
$
831

Commercial real estate:
 
 
 
 
 
 
 
Commercial real estate
76,900

 
1,918

 
91,184

 
2,173

Construction
16,066

 
415

 
18,541

 
445

Total commercial real estate loans
92,966

 
2,333

 
109,725

 
2,618

Residential mortgage
23,261

 
707

 
26,447

 
709

Consumer loans:
 
 
 
 
 
 
 
Home equity
4,125

 
111

 
1,855

 
47

Total consumer loans
4,125

 
111

 
1,855

 
47

Total
$
147,922

 
$
3,840

 
$
175,256

 
$
4,205

Interest income recognized on a cash basis (included in the table above) was immaterial for the three and nine months ended September 30, 2015 and 2014.
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 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 $91.2 million and $97.7 million as of September 30, 2015 and December 31, 2014, respectively. Non-performing TDRs totaled $14.8 million and $19.4 million as of September 30, 2015 and December 31, 2014, respectively.


33




The following tables present loans by loan portfolio class modified as TDRs during the three and nine months ended September 30, 2015 and 2014. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at September 30, 2015 and 2014, respectively. 
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2014
Troubled Debt Restructurings
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
($ in thousands)
Commercial and industrial
2

 
$
1,530

 
$
1,530

 
1

 
$
3,159

 
$
3,159

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

 

 

 
4

 
6,111

 
2,865

Construction
2

 
4,974

 
3,451

 
1

 
403

 
500

Total commercial real estate
2

 
4,974

 
3,451

 
5

 
6,514

 
3,365

Residential mortgage
3

 
1,080

 
1,050

 
3

 
568

 
557

Consumer

 

 

 
2

 
1,803

 
1,803

Total
7

 
$
7,584

 
$
6,031

 
11

 
$
12,044

 
$
8,884


 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
Troubled Debt Restructurings
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
($ in thousands)
Commercial and industrial
12

 
$
4,621

 
$
4,081

 
9

 
$
11,340

 
$
10,361

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
4

 
6,562

 
6,444

 
12

 
22,282

 
18,011

Construction
3

 
5,474

 
4,635

 
3

 
5,731

 
4,232

Total commercial real estate
7

 
12,036

 
11,079

 
15

 
28,013

 
22,243

Residential mortgage
6

 
2,458

 
2,420

 
7

 
2,893

 
2,640

Consumer
1

 
1,081

 
1,072

 
3

 
1,935

 
1,935

Total
26

 
$
20,196

 
$
18,652

 
34

 
$
44,181

 
$
37,179


The majority of the TDR concessions made during the three and nine months ended September 30, 2015 and 2014 involved an extension of the loan term. The total TDRs presented in the above table had allocated specific reserves for loan losses totaling $602 thousand and $3.8 million at September 30, 2015 and 2014, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 9. Partial loan charge-offs related to loans modified as TDRs in the table above totaled $861 thousand during the nine months ended September 30, 2014. There were no charge-offs related to TDR modifications during the three and nine months ended September 30, 2015 and the third quarter of 2014.

There were no non-PCI loans modified as TDRs within the previous 12 months for which there was a payment default (90 days or more past due) during the three and nine months ended September 30, 2015.
Credit quality indicators. Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes. Under Valley’s internal risk rating system, loan relationships could be classified as “Pass,” “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Substandard loans include loans that exhibit well-defined weakness and are characterized by

34




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. Loans that do not currently pose a sufficient risk to warrant classification in one of the aforementioned categories, but pose weaknesses that deserve management’s close attention are deemed Special Mention. Loans rated as Pass do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants.
The following table presents the risk category of loans (excluding PCI loans) by class of loans based on the most recent analysis performed at September 30, 2015 and December 31, 2014
Credit exposure - by internally assigned risk rating
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Non-PCI Loans
 
(in thousands)
September 30, 2015
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,045,297

 
$
66,354

 
$
39,152

 
$
1,835

 
$
2,152,638

Commercial real estate
5,842,344

 
61,842

 
105,574

 

 
6,009,760

Construction
507,223

 
982

 
13,338

 

 
521,543

Total
$
8,394,864

 
$
129,178

 
$
158,064

 
$
1,835

 
$
8,683,941

December 31, 2014
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,865,472

 
$
50,453

 
$
44,002

 
$

 
$
1,959,927

Commercial real estate
4,903,185

 
40,232

 
110,325

 

 
5,053,742

Construction
455,145

 
1,923

 
16,482

 
2,544

 
476,094

Total
$
7,223,802

 
$
92,608

 
$
170,809

 
$
2,544

 
$
7,489,763

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 September 30, 2015 and December 31, 2014: 
Credit exposure - by payment activity
Performing
Loans
 
Non-Performing
Loans
 
Total Non-PCI
Loans
 
(in thousands)
September 30, 2015
 
 
 
 
 
Residential mortgage
$
2,846,745

 
$
16,657

 
$
2,863,402

Home equity
391,082

 
1,576

 
392,658

Automobile
1,219,734

 

 
1,219,734

Other consumer
379,233

 
58

 
379,291

Total
$
4,836,794

 
$
18,291

 
$
4,855,085

December 31, 2014
 
 
 
 
 
Residential mortgage
$
2,401,284

 
$
17,760

 
$
2,419,044

Home equity
398,114

 
2,022

 
400,136

Automobile
1,144,690

 
90

 
1,144,780

Other consumer
298,292

 
97

 
298,389

Total
$
4,242,380

 
$
19,969

 
$
4,262,349


35




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 September 30, 2015 and December 31, 2014. 
Credit exposure - by payment activity
Performing
Loans
 
Non-Performing
Loans
 
Total
PCI Loans
 
(in thousands)
September 30, 2015
 
 
 
 
 
Commercial and industrial
$
244,445

 
$
3,535

 
$
247,980

Commercial real estate
940,668

 
10,249

 
950,917

Construction
47,216

 
894

 
48,110

Residential mortgage
132,649

 
3,211

 
135,860

Consumer
90,582

 
4,339

 
94,921

Total
$
1,455,560

 
$
22,228

 
$
1,477,788

December 31, 2014
 
 
 
 
 
Commercial and industrial
$
272,027

 
$
19,157

 
$
291,184

Commercial real estate
1,091,784

 
15,355

 
1,107,139

Construction
52,802

 
4,238

 
57,040

Residential mortgage
153,789

 
3,539

 
157,328

Consumer
103,686

 
5,424

 
109,110

Total
$
1,674,088

 
$
47,713

 
$
1,721,801

Other real estate owned totaled $20.1 million at September 30, 2015 and included foreclosed residential real estate properties totaling $5.8 million. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $12.3 million at September 30, 2015.

Note 9. Allowance for Credit Losses

The allowance for credit losses consists of the allowance for losses on non-covered loans and allowance for losses on covered loans related to credit impairment of certain covered loan pools subsequent to acquisition, as well as 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 losses on non-covered loans is based on ongoing evaluations of the probable estimated losses inherent in the non-covered loan portfolio, including unexpected credit impairment or reduction in the provision of non-covered PCI loan pools subsequent to the acquisition date.

The following table summarizes the allowance for credit losses at September 30, 2015 and December 31, 2014
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Components of allowance for credit losses:
 
 
 
Allowance for non-covered loans
$
104,351

 
$
102,153

Allowance for covered loans
200

 
200

Total allowance for loan losses
104,551

 
102,353

Allowance for unfunded letters of credit
2,146

 
1,934

Total allowance for credit losses
$
106,697

 
$
104,287



36



The following table summarizes the provision for credit losses for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Components of provision for credit losses:
 
 
 
 
 
 
 
Provision for non-covered loans
$

 
$

 
$
4,382

 
$
4,949

Provision for covered loans

 

 

 
(5,671
)
Total provision for loan losses

 

 
4,382

 
(722
)
Provision for unfunded letters of credit
94

 
(423
)
 
212

 
(1,374
)
Total provision for credit losses
$
94

 
$
(423
)
 
$
4,594

 
$
(2,096
)

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 and 2014:
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
Three Months Ended
September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
41,714

 
$
44,185

 
$
5,055

 
$
5,542

 
$
6,339

 
$
102,835

Loans charged-off
(1,124
)
 
(40
)
 
(111
)
 
(734
)
 

 
(2,009
)
Charged-off loans recovered
2,550

 
536

 
151

 
488

 

 
3,725

Net recoveries (charge-offs)
1,426

 
496

 
40

 
(246
)
 

 
1,716

Provision for loan losses
4,397

 
(2,403
)
 
(546
)
 
(829
)
 
(619
)
 

Ending balance
$
47,537

 
$
42,278

 
$
4,549

 
$
4,467

 
$
5,720

 
$
104,551

Three Months Ended
September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
48,421

 
$
35,267

 
$
7,018

 
$
5,368

 
$
6,979

 
$
103,053

Loans charged-off (1)
(1,852
)
 
(181
)
 
(240
)
 
(72
)
 

 
(2,345
)
Charged-off loans recovered
1,190

 
26

 
8

 
506

 

 
1,730

Net (charge-offs) recoveries
(662
)
 
(155
)
 
(232
)
 
434

 

 
(615
)
Provision for loan losses
(1,388
)
 
1,954

 
(610
)
 
(22
)
 
66

 

Ending balance
$
46,371

 
$
37,066

 
$
6,176

 
$
5,780

 
$
7,045

 
$
102,438



37



 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
Nine Months Ended
September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
43,676

 
$
42,840

 
$
5,093

 
$
5,179

 
$
5,565

 
$
102,353

Loans charged-off
(5,103
)
 
(2,780
)
 
(499
)
 
(2,642
)
 

 
(11,024
)
Charged-off loans recovered
5,587

 
1,686

 
395

 
1,172

 

 
8,840

Net recoveries (charge-offs)
484

 
(1,094
)
 
(104
)
 
(1,470
)
 

 
(2,184
)
Provision for loan losses
3,377

 
532

 
(440
)
 
758

 
155

 
4,382

Ending balance
$
47,537

 
$
42,278

 
$
4,549

 
$
4,467

 
$
5,720

 
$
104,551

Nine Months Ended
September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
51,551

 
$
42,343

 
$
7,786

 
$
4,359

 
$
7,578

 
$
113,617

Loans charged-off (1)
(11,806
)
 
(6,703
)
 
(515
)
 
(2,311
)
 

 
(21,335
)
Charged-off loans recovered (2)
6,154

 
2,831

 
244

 
1,649

 

 
10,878

Net charge-offs
(5,652
)
 
(3,872
)
 
(271
)
 
(662
)
 

 
(10,457
)
Provision for loan losses
472

 
(1,405
)
 
(1,339
)
 
2,083

 
(533
)
 
(722
)
Ending balance
$
46,371

 
$
37,066

 
$
6,176

 
$
5,780


$
7,045

 
$
102,438

 
(1)
Includes covered loans charge-offs totaling $433 thousand and $1.2 million for three and nine months ended September 30, 2014, respectively. There were no covered loan charge-offs during 2015.
(2)
Included covered loans recoveries totaling $462 thousand for nine months ended September 30, 2014. There were no covered loan recoveries for the third quarters of 2014 and 2015, and the nine months ended September 30, 2015.

38



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 September 30, 2015 and December 31, 2014. 
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,446

 
$
4,536

 
$
1,632

 
$
463

 
$

 
$
11,077

Collectively evaluated for impairment
42,921

 
37,742

 
2,917

 
3,974

 
5,720

 
93,274

Loans acquired with discounts related to credit quality
170

 

 

 
30

 

 
200

Total
$
47,537

 
$
42,278

 
$
4,549

 
$
4,467

 
$
5,720

 
$
104,551

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
27,384

 
$
89,434

 
$
23,424

 
$
3,097

 
$

 
$
143,339

Collectively evaluated for impairment
2,125,254

 
6,441,869

 
2,839,978

 
1,988,586

 

 
13,395,687

Loans acquired with discounts related to credit quality
247,980

 
999,027

 
135,860

 
94,921

 

 
1,477,788

Total
$
2,400,618

 
$
7,530,330

 
$
2,999,262

 
$
2,086,604

 
$

 
$
15,016,814

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,929

 
$
5,502

 
$
1,629

 
$
465

 
$

 
$
12,525

Collectively evaluated for impairment
38,577

 
37,338

 
3,434

 
4,714

 
5,565

 
89,628

Loans acquired with discounts related to credit quality
170

 

 
30

 

 

 
200

Total
$
43,676

 
$
42,840

 
$
5,093

 
$
5,179

 
$
5,565

 
$
102,353

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
28,224

 
$
91,298

 
$
22,340

 
$
3,146

 
$

 
$
145,008

Collectively evaluated for impairment
1,931,703

 
5,438,538

 
2,396,704

 
1,840,159

 

 
11,607,104

Loans acquired with discounts related to credit quality
291,184

 
1,164,179

 
157,328

 
109,110

 

 
1,721,801

Total
$
2,251,111

 
$
6,694,015

 
$
2,576,372

 
$
1,952,415

 
$

 
$
13,473,913


39




Note 10. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill as allocated to Valley'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, 2014
$
20,517

 
$
168,922

 
$
252,900

 
$
133,553

 
$
575,892

Goodwill from business combinations

 
450

 
869

 
323

 
1,642

Balance at September 30, 2015
$
20,517

 
$
169,372

 
$
253,769

 
$
133,876

 
$
577,534

 
*
Valley’s Wealth Management Division is comprised of trust, asset management, and insurance services. This reporting unit is included in the Consumer Lending segment for financial reporting purposes.
Goodwill from business combinations, in the table above, represents the effect of the combined adjustments to the estimated fair values of the acquired assets (including core deposits presented in the table below) and liabilities as of the acquisition date related to the acquisition of the 1st United (see Note 2 for further details). There was no impairment of goodwill during the three and nine months ended September 30, 2015 and 2014.
The following table summarizes other intangible assets as of September 30, 2015 and December 31, 2014: 
 
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Valuation
Allowance
 
Net
Intangible
Assets
 
(in thousands)
September 30, 2015
 
 
 
 
 
 
 
Loan servicing rights
$
75,477

 
$
(58,027
)
 
$
(383
)
 
$
17,067

Core deposits
43,384

 
(30,888
)
 

 
12,496

Other
4,374

 
(2,555
)
 

 
1,819

Total other intangible assets
$
123,235

 
$
(91,470
)
 
$
(383
)
 
$
31,382

December 31, 2014
 
 
 
 
 
 
 
Loan servicing rights
$
72,154

 
$
(51,708
)
 
$
(592
)
 
$
19,854

Core deposits
46,694

 
(29,916
)
 

 
16,778

Other
4,591

 
(2,448
)
 

 
2,143

Total other intangible assets
$
123,439

 
$
(84,072
)
 
$
(592
)
 
$
38,775


Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets in proportion to, and over the period of estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. See the "Assets and Liabilities Measured at Fair Value on a Non-recurring Basis" section of Note 6 for additional information regarding the fair valuation and impairment of loan servicing rights.

Core deposits are amortized using an accelerated method and have a weighted average amortization period of 11 years. The line item labeled “Other” included in the table above primarily consists of customer lists and covenants not to compete, which are amortized over their expected lives generally using a straight-line method and have a weighted average amortization period of approximately 19 years. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three and nine months ended September 30, 2015 and 2014.


40




The following table presents the estimated future amortization expense of other intangible assets for the remainder of 2015 through 2019: 
 
Loan
Servicing
Rights
 
Core
Deposits
 
Other
 
(in thousands)
2015
$
1,373

 
$
777

 
$
108

2016
4,336

 
2,648

 
233

2017
3,404

 
2,120

 
220

2018
2,601

 
1,767

 
193

2019
1,915

 
1,497

 
181


Valley recognized amortization expense on other intangible assets, including net recoveries of impairment charges on loan servicing rights, totaling approximately $2.2 million and $2.2 million for the three months ended September 30, 2015 and 2014, respectively, and $6.7 million and $6.9 million for nine months ended September 30, 2015 and 2014, respectively.
Note 11. Stock–Based Compensation

Valley has one active employee equity plan, the 2009 Long-Term Stock Incentive Plan (as amended, the “Employee Stock Incentive Plan”), administered by the Compensation and Human Resources Committee (the “Committee”) appointed by Valley’s Board of Directors. The Committee can grant incentive awards to officers and key employees of Valley, whose substantial contributions are essential to the continued growth and success of Valley. As of September 30, 2015, 2.6 million shares of common stock were available for issuance under the Employee Stock Incentive Plan.

Under the Employee Stock Incentive Plan, Valley may award shares to its employees in the form of stock appreciation rights, incentive stock options, non-qualified stock options, restricted stock and restricted stock units (RSUs). 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 restricted stock and RSUs 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.

Valley awarded time-based restricted stock totaling 492 thousand shares and 539 thousand shares during the nine months ended September 30, 2015 and 2014, respectively, to both executive officers and key employees of Valley. Valley also awarded 313 thousand shares of performance-based RSUs and 240 thousand shares of performance-based restricted stock during the nine months ended September 30, 2015 and 2014, respectively, to certain executive officers. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common share) over the applicable performance period. Dividend equivalents and accrued interest, per the terms of the agreements, are accumulated and paid to the grantee at the vesting date, or forfeited if the performance conditions are not met.

The performance-based awards vest based on (i) growth in tangible book value per share plus dividends (75 percent of performance shares) and (ii) total shareholder return as compared to our peer group (25 percent of performance shares). The majority of the performance-based awards "cliff" vest after three years based on the cumulative performance of Valley during that time period. The non-performance based awards have vesting periods ranging from three to six years. Generally, the restrictions on such awards lapse at an annual or bi-annual rate of one-third of the total award commencing with the first or second anniversary of the date of grant, respectively. The average grant date fair value of non-performance and performance-based restricted stock awarded during the nine months ended September 30, 2015 was $9.25 and $8.98 per share, respectively.


41




Valley recorded stock-based compensation expense of $2.0 million and $1.8 million for the three months ended September 30, 2015 and 2014, respectively and $6.5 million and $5.6 million for the nine months ended September 30, 2015 and 2014, respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of September 30, 2015, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $15.1 million and will be recognized over an average remaining vesting period of approximately 4 years.
Note 12. Guarantees

Guarantees that have been entered into by Valley include standby letters of credit of $191.1 million as of September 30, 2015. Standby letters of credit represent the guarantee by Valley of the obligations or performance of a customer in the event the customer is unable to meet or perform its obligations to a third party. Of the total standby letters of credit, $129.6 million, or 67.8 percent, are secured and, in the event of non-performance by the customer, Valley has rights to the underlying collateral, which include commercial real estate, business assets (physical plant or property, inventory or receivables), marketable securities and cash in the form of bank savings accounts and certificates of deposit. As of September 30, 2015, Valley had a $725 thousand liability related to the standby letters of credit.
Note 13. Derivative Instruments and Hedging Activities

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

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

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

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

Under a program, Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

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

42




into the secondary market and forward commitments for the future delivery of such loans. Valley enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on Valley’s commitments to fund the loans as well as on its portfolio of mortgage loans held for sale.

In 2014, Valley issued $25 million of market linked certificates of deposit through a broker dealer. The rate paid on these hybrid instruments is based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. This type of instrument is referred to as a "steepener" since it derives its value from the slope of the CMS curve. Valley has determined that these hybrid instruments contain an embedded swap contract which has been bifurcated from the host contract. Valley entered into a swap (with a total notional amount of $25 million) almost simultaneously with the deposit issuance where the receive rate on the swap mirrors the pay rate on the brokered deposits. The bifurcated derivative and the stand alone swap are both marked to market through other non-interest expense. Although these instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in 90 day LIBOR rate and therefore provide an effective economic hedge.

Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows: 
 
September 30, 2015
 
December 31, 2014
 
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
$
1,253

 
$
32,281

 
$
907,000

 
$
2,229

 
$
19,302

 
$
1,007,000

Fair value hedge interest rate swaps
9,469

 
1,471

 
133,260

 
6,257

 
1,482

 
133,406

Total derivatives designated as hedging instruments
$
10,722

 
$
33,752

 
$
1,040,260

 
$
8,486

 
$
20,784

 
$
1,140,406

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and embedded derivatives
$
23,278

 
$
23,274

 
$
528,767

 
$
12,464

 
$
12,455

 
$
378,849

Mortgage banking derivatives
114

 
318

 
61,658

 
37

 
91

 
40,857

Total derivatives not designated as hedging instruments
$
23,392

 
$
23,592

 
$
590,425

 
$
12,501

 
$
12,546

 
$
419,706


Gains (losses) included in the consolidated statements of income and in other comprehensive income, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense
$
(1,323
)
 
$
(1,674
)
 
$
(4,651
)
 
$
(4,986
)
Amount of (loss) gain recognized in other comprehensive income
(10,588
)
 
2,155

 
(17,604
)
 
(12,511
)
The net gains or losses related to cash flow hedge ineffectiveness were immaterial during the three and nine months ended September 30, 2015 and 2014. The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $22.1 million and $14.5 million at September 30, 2015 and December 31, 2014, respectively.

43




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 $12.8 million will be reclassified as an increase to interest expense over the next twelve months.

Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Derivative - interest rate swaps:
 
 
 
 
 
 
 
Interest income
$
(93
)
 
$
116

 
$
10

 
$
43

Interest expense
4,302

 
(84
)
 
3,211

 
5,748

Hedged item - loans, deposits and long-term borrowings:
 
 
 
 
 
 
 
Interest income
$
93

 
$
(116
)
 
$
(10
)
 
$
(43
)
Interest expense
(4,329
)
 
45

 
(3,270
)
 
(5,755
)

During the three and nine months ended September 30, 2015 and 2014, the amounts recognized in non-interest expense related to ineffectiveness of fair value hedges were immaterial. Valley recognized a net reduction to interest expense of $100 thousand for the nine months ended September 30, 2014 related to Valley’s fair value hedges on brokered time deposits, which include net settlements on the derivatives. The fair value hedges on brokered time deposits expired in March 2014.

The net (losses) gains included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Non-designated hedge interest rate derivatives
 
 
 
 
 
 
 
Other non-interest expense
$
(263
)
 
$
44

 
$
(155
)
 
$
(172
)

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 September 30, 2015, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of September 30, 2015, 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 $12.1 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. At September 30, 2015, Valley had $56.8 million in collateral posted with its counterparties.

44




Note 14. Balance Sheet Offsetting
Certain financial instruments, including derivatives (consisting of interest rate caps and swaps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default. The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of September 30, 2015 and December 31, 2014.
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
 
 
 
Gross Amounts
Recognized
 
Gross Amounts
Offset
 
Net Amounts
Presented
 
Financial
Instruments
 
Cash
Collateral
 
Net
Amount
 
(in thousands)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
34,000

 
$

 
$
34,000

 
$
(10,721
)
 
$

 
$
23,279

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
57,026

 
$

 
$
57,026

 
$
(10,721
)
 
$
(46,305
)
 
$

Repurchase agreements
395,000

 

 
395,000

 

 
(395,000
)
*

Total
$
452,026

 
$

 
$
452,026

 
$
(10,721
)
 
$
(441,305
)
 
$

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
20,950

 
$

 
$
20,950

 
$
(8,504
)
 
$

 
$
12,446

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
33,239

 
$

 
$
33,239

 
$
(8,504
)
 
$
(24,735
)
 
$

Repurchase agreements
395,000

 

 
395,000

 

 
(395,000
)
*

Total
$
428,239

 
$

 
$
428,239

 
$
(8,504
)
 
$
(419,735
)
 
$

 
*
Represents fair value of non-cash pledged investment securities.
Note 15. Tax Credit Investments

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

Valley’s tax credit investments are carried in other assets on the consolidated statements of financial condition. Valley’s unfunded capital and other commitments related to the tax credit investments are carried in accrued expenses and other liabilities on the consolidated statements of financial condition. Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense of the consolidated statements

45




of income using the equity method of accounting. An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value.

The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at September 30, 2015 and December 31, 2014.
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Other Assets:
 
 
 
Affordable housing tax credit investments, net
$
33,514

 
$
36,009

Other tax credit investments, net
54,872

 
66,023

Total tax credit investments, net
$
88,386

 
$
102,032

Other Liabilities:
 
 
 
Unfunded affordable housing tax credit commitments
$
8,080

 
$
8,800

Unfunded other tax credit commitments
418

 
418

    Total unfunded tax credit commitments
$
8,498

 
$
9,218


The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the three and nine months ended September 30, 2015 and 2014
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Components of Income Tax Expense:
 
 
 
 
 
 
 
Affordable housing tax credits and other tax benefits
$
1,660

 
$
2,164

 
$
4,774

 
$
6,148

Other tax credit investment credits and tax benefits
7,510

 
3,269

 
16,031

 
9,953

Total reduction in income tax expense
$
9,170

 
$
5,433

 
$
20,805

 
$
16,101

Amortization of Tax Credit Investments:
 
 
 
 
 
 
 
Affordable housing tax credit investment losses
$
543

 
$
1,073

 
$
1,516

 
$
2,291

Affordable housing tax credit investment impairment losses
451

 
375

 
979

 
2,889

Other tax credit investment losses
144

 
747

 
934

 
1,829

Other tax credit investment impairment losses
4,086

 
2,435

 
10,802

 
7,139

Total amortization of tax credit investments recorded in non-interest expense
$
5,224

 
$
4,630

 
$
14,231

 
$
14,148

Note 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.
Note 17. Subsequent Event
During October 2015, Valley elected to prepay $795 million of its long-term borrowings with maturities in 2017 at an average cost of 3.78 percent. The settlement of such borrowings will result in the recognition of pre-tax prepayment penalty charges totaling $50.3 million during the fourth quarter of 2015. Funding for the entire transaction was obtained from new sources consisting of both brokered money market deposits and securities sold under agreements to repurchase (repos) totaling $800 million. The new fixed rate instruments have a weighted average duration of approximately one year and an average interest cost of 0.56 percent.

46





Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

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

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

This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors disclosed in Valley’s Annual Report on Form 10-K for the year ended December 31, 2014, include, but are not limited to:

weakness or a decline in the U.S. economy, in particular in New Jersey, the New York City metropolitan area (including Long Island) and Florida;
unexpected changes in market interest rates for interest earning assets and/or interest bearing liabilities;
less than expected cost savings from the prepayment or maturity of long-term borrowings from 2015 to 2018;
less than expected cost savings from Valley's Branch Efficiency and Cost Reduction Plans in 2016 and 2017;
claims and litigation pertaining to fiduciary responsibility, contractual issues, environmental laws and other matters;
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;
government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve;
our inability to pay dividends at current levels, or at all, because of inadequate future earnings, regulatory restrictions or limitations, and changes in the composition of qualifying regulatory capital and minimum capital requirements (including those resulting from the U.S. implementation of Basel III requirements);
higher than expected loan losses within one or more segments of our loan portfolio;

47




declines in value in our investment portfolio, including additional other-than-temporary impairment charges on our investment securities;
unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments or other factors;
unanticipated credit deterioration in our loan portfolio;
lower than expected cash flows from purchased credit-impaired loans;
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;
higher than expected tax rates, including increases resulting from changes in tax laws, regulations and case law;
a decline in real estate values within our market areas;
higher than expected FDIC insurance assessments;
the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships;
lack of liquidity to fund our various cash obligations;
unanticipated reduction in our deposit base;
potential acquisitions that may disrupt our business;
future goodwill impairment due to changes in our business, changes in market conditions, or other factors;
legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations) subject us to additional regulatory oversight which may result in higher compliance costs and/or require us to change our business model;
changes in accounting policies or accounting standards;
our inability to promptly adapt to technological changes;
our internal controls and procedures may not be adequate to prevent losses;
failure to complete the merger of CNLBancshares with Valley in the proposed timeframe;
the inability to realize expected revenue synergies from the proposed CNLBancshares merger or the recent 1st United merger in the amounts or in the timeframe anticipated;
costs or difficulties relating to CNLBancshares integration matters might be greater than expected;
inability to retain customers and employees, including those of CNLBancshares and 1st United; and
other unexpected material adverse changes in our operations or earnings.
Critical Accounting Policies and Estimates

Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Our significant accounting policies are presented in Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2014. We identified our policies on the allowance for loan losses, security valuations and impairments, goodwill and other intangible assets, and income taxes to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies with the Audit Committee of Valley’s Board of Directors. Our critical accounting policies are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2014.

48




New Authoritative Accounting Guidance

See Note 5 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 September 30, 2015, Valley had consolidated total assets of approximately $19.6 billion, total net loans of $14.9 billion, total deposits of $14.5 billion and total shareholders’ equity of $2.0 billion. Our commercial bank operations include branch office locations in northern and central New Jersey and the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island and southeast and central Florida. Of our current 217 branch network, 71 percent, 20 percent and 9 percent of the branches are located in New Jersey, New York and Florida, respectively. We have grown both in asset size and locations significantly over the past several years primarily through bank acquisitions. Our most recent acquisition of 1st United during November 2014 provided Valley its first locally positioned access to Florida's high growth market through 1st United's experienced management team and a 20 branch network covering some of the most attractive urban banking markets in Florida.

In May 2015, we announced our entry into a merger agreement with CNLBancshares and its wholly-owned subsidiary, CNLBank, headquartered in Orlando, Florida. CNLBancshares has approximately $1.4 billion in assets, $843 million in loans and $1.1 billion in deposits and maintains a branch network of 16 offices. The proposed merger will expand Valley's Florida branch network to 36 offices, strengthen Valley's existing Florida footprint and expand Valley's branch network into desirable new markets within southwest and northeast Florida. Our ability to quickly integrate 1st United's systems into Valley during the first quarter of 2015 and our experienced Florida team allowed us to act quickly on this attractive opportunity to continue the expansion of Valley's presence in many of the best urban markets of Florida.
The common shareholders of CNLBancshares will receive 0.75 of a share of Valley common stock for each CNLBancshares share they own, subject to adjustment in the event Valley’s average stock price falls below $8.80 or rises above $10.13 prior to closing. The transaction is valued at an estimated $207 million, based on Valley’s closing stock price on May 22, 2015 (and includes the stock consideration of $16.2 million that will be paid to CNLBancshares stock option holders). The acquisition received all regulatory and CNLBancshares shareholder approvals, and is expected to close in December 2015.

See Item 1 of Valley’s Annual Report on Form 10-K for the year ended December 31, 2014 for more details regarding our acquisition of 1st United and other past merger activity.

Borrowing Strategy. As part of its funding and asset/liability management strategies, Valley has been assessing the viability of the prepayment of various levels of debt on its balance sheet, including a portion of its relatively high cost borrowings (mostly from the Federal Home Loan Bank of New York) totaling over $1.6 billion at September 30, 2015. The $1.6 billion of borrowings, with an average cost of 3.82 percent, start to contractually mature during the fourth quarter of 2015 through the end of 2018. As we move closer to such maturity dates, the cash charge (or the "prepayment penalty") related to the early repayment of these borrowings, while substantial, has declined and become a more advantageous option to Valley in the current low interest rate environment. As a result, we have elected to prepay $795 million of these borrowings during October 2015. The prepaid borrowings have maturities in 2017 and an average cost of 3.78 percent. The settlement of such borrowings will result in the recognition of pre-tax prepayment penalty charges of $50.3 million ($32.7 million after-tax) in the fourth quarter of 2015. Funding for the entire transaction was obtained from new sources consisting of both brokered money market deposits and securities sold under agreements to repurchase (repos) totaling $800 million. The new fixed rate instruments have a weighted average duration of approximately one year and an average interest cost of 0.56 percent. The shorter duration of the new borrowings is expected to cause only a moderate shift in the overall interest sensitivity of our balance sheet. In addition, approximately $182 million of borrowings with an average cost of 4.69 percent will mature between March and April 2016. Moving forward, we will continue to evaluate all of our remaining high cost borrowings maturing in 2016 and 2018 through 2022 for future opportunities, including potential prepayments, to

49




enhance our net interest income and margin. Our ability to take action is dependent on the level of market interest rates, our ability to obtain similar amounts of debt instruments, as well as other factors. Although we can provide no assurance as to the declaration of cash dividends by our Board, we do not believe the prepayment penalty to be recognized in the fourth quarter of 2015 will impact our ability to continue to pay our normal quarterly common stock dividend at its current rate of $0.11 per share.
For additional information on other Valley cost saving initiatives, see the "Branch Efficiency and Cost Reduction Plans" section below.
Quarterly Results. Net income for the third quarter of 2015 was $36.0 million, or $0.15 per diluted common share, compared to $27.7 million, or $0.14 per diluted common share, for the third quarter of 2014. The $8.3 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a $19.3 million increase in our net interest income mostly due to higher average loan balances (due to both acquired loans and organic growth) and the prepayment of $275 million of high cost long-term borrowings in the fourth quarter of 2014, (ii) a $6.1 million increase in non-interest income mostly caused by changes in our FDIC loss-share receivable due to the expiration of certain FDIC loss-sharing agreements in March 2015 and an increase in net gains on sales of residential mortgage loans, partially offset by (iii) a $17.1 million increase in non-interest expense mostly due to higher salary and employee benefit expense, net occupancy and equipment expense, and other expenses related to the November 2014 acquisition of 1st United, and to a much lesser extent, costs incurred related to the proposed acquisition of CNLBancshares. See the "Net Interest Income," "Non-Interest Income," and "Non-Interest Expense" sections below for more details on the items above impacting our third quarter 2015 results, as well as other items discussed elsewhere in this MD&A.

50




Economic Overview and Indicators. During the third quarter of 2015, real gross domestic product (GDP) grew at a 1.5 percent annual rate after advancing 3.9 percent in the second quarter of 2015. Consumer spending on both goods and services continued to advance at a strong pace. Business investment also grew, albeit at a slower pace compared to the previous quarter. Volatility in financial markets remained elevated in the third quarter of 2015 driven partly by international events and the uncertainty of U.S. monetary policy.

The labor market continued to improve, but the pace of job growth slowed somewhat. The civilian unemployment rate ended the third quarter at 5.1 percent. However, there are some indicators that suggest an underutilization of labor resources has persisted, in particular the U6 level of unemployment (which includes discouraged workers not looking for employment and part-time workers looking for full-time employment) which has remained elevated compared to levels experienced before the recession.

The pace of U.S. existing home sales, particularly in the South, continued to accelerate in the third quarter of 2015. Home sales remain on pace to surpass 5 million units sold this year. Housing market conditions remain generally favorable as mortgage rates continue to run below longer-run averages and signs that first-time homebuyers may be coming into the market at greater pace.

Consumer spending, particularly on services, remained strong in the third quarter of 2015. Spending activity should continue to expand moderately through the end of the year as real disposable income remains bolstered by low energy prices. Equity and home prices, on average, were higher compared to the second quarter of 2015 which should also support consumer spending through the end of the year.

At the Federal Reserve’s Open Market Committee (FOMC) meeting in October 2015, the members maintained a target range of zero to 0.25 percent for its federal funds rate. In determining how long to maintain current policy, the FOMC will assess progress - both realized and expected - toward its objectives of maximum employment and two percent inflation. The Committee continued its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and will continue rolling over maturing Treasury securities at auction. This policy should help maintain accommodative financial conditions. The FOMC has continued to emphasize that any change in monetary policy will be data dependent.

The 10-year U.S. Treasury note yield ended the third quarter at 2.06 percent, 29 basis points lower compared with June 30, 2015. The spread between the 2- and 10-year U.S. Treasury note yields ended the third quarter of 2015 at 1.42 percentage points, 29 basis points lower sequentially and 52 basis points lower compared to the second quarter of 2014.

During the third quarter of 2015, interest rates for residential mortgages, on average, increased modestly as compared to the first quarter of 2015. The increase from the second quarter of the year did not spur any significant increase in mortgage refinance activity during the third quarter of 2015. We continued to see increased demand for commercial real estate and construction loans in the third quarter of 2015, especially within the New York City markets. Despite the moderate pace of economic activity and lack of wage growth, some commercial customers are expanding their operations. However, we still believe the current low interest rate environment and the underutilization of the labor market may continue to challenge our business operations and results, as highlighted throughout the remaining MD&A discussion below.


51




The following economic indicators are just a few of the many factors that may be used to assess the market conditions in our primary markets of northern and central New Jersey, the New York City metropolitan area, and Florida.
 
For the Month Ended
Selected Economic Indicators:
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
Unemployment rate:
 
 
 
 
 
 
 
 
 
U.S.
5.10
%
 
5.30
%
 
5.50
%
 
5.60
%
 
5.90
%
New York Metro Region*
5.10
%
 
5.60
%
 
6.50
%
 
5.60
%
 
6.30
%
New Jersey
5.60
%
 
6.10
%
 
6.50
%
 
6.20
%
 
6.50
%
New York
5.10
%
 
5.50
%
 
5.70
%
 
5.20
%
 
5.20
%
Florida
5.20
%
 
5.50
%
 
5.70
%
 
5.60
%
 
6.10
%
Miami-Fort Lauderdale Metro Region
5.70
%
 
5.60
%
 
5.30
%
 
5.60
%
 
6.60
%
 
 
Three Months Ended
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
 
($ in millions)
Personal income:
 
 
 
 
 
 
 
 
 
New Jersey
NA

 
$
531,772

 
$
520,328

 
$
514,301

 
$
509,563

New York
NA

 
$
1,131,830

 
$
1,145,645

 
$
1,125,667

 
$
1,116,714

Florida
NA

 
$
886,918

 
$
875,451

 
$
862,595

 
$
853,465

New consumer bankruptcies:
 
 
 
 
 
 
 
 
 
New Jersey
NA

 
0.11
 %
 
0.10
%
 
0.11
 %
 
0.11
 %
New York
NA

 
0.06
 %
 
0.05
%
 
0.06
 %
 
0.06
 %
Florida
NA

 
0.10
 %
 
0.10
%
 
0.11
 %
 
0.11
 %
Change in home prices:
 
 
 
 
 
 
 
 
 
U.S.
%
 
0.70
 %
 
0.10
%
 
(0.10
)%
 
(0.10
)%
New York Metro Region*
%
 
(0.69
)%
 
1.82
%
 
0.25
 %
 
(0.31
)%
Florida
%
 
(1.07
)%
 
1.78
%
 
2.38
 %
 
0.48
 %
New consumer foreclosures:
 
 
 
 
 
 
 
 
 
New Jersey
NA

 
0.05
 %
 
0.06
%
 
0.07
 %
 
0.07
 %
New York
NA

 
0.03
 %
 
0.06
%
 
0.04
 %
 
0.03
 %
Florida
NA

 
0.05
 %
 
0.05
%
 
0.07
 %
 
0.07
 %
Homeowner vacancy rates:
 
 
 
 
 
 
 
 
 
New Jersey
1.40
%
 
1.80
 %
 
1.80
%
 
1.60
 %
 
1.40
 %
New York
1.60
%
 
1.90
 %
 
2.20
%
 
2.20
 %
 
1.70
 %
Florida
2.60
%
 
1.90
 %
 
2.20
%
 
2.80
 %
 
2.30
 %
 
NA - not available
*
As reported by the Bureau of Labor Statistics for the NY-NJ-PA Metropolitan Statistical Area.
Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve Bank of New York, S&P Indices, and the U.S. Census Bureau.
Loans. Total non-covered loans (i.e., loans which are not subject to our loss-sharing agreements with the FDIC) increased by $552.3 million, or 15.4 percent on an annualized basis, to $14.9 billion at September 30, 2015 from June 30, 2015 largely due to increases of $298.0 million and $174.0 million in residential mortgage loans and total commercial real estate loans, respectively. The increase in residential mortgage loans largely related to the purchase of 1-4 family loans totaling $334 million during the third quarter of 2015. The commercial real estate loan growth,

52




totaling 9.6 percent on an annualized basis, compared to the total balance at June 30, 2015, resulted from both organic growth and purchased loan participations in multi-family loans in our local market. A portion of the purchased multi-family loans totaling over $95 million during the third quarter of 2015 is expected to qualify as part of Valley's continuous effort to meet the credit needs of certain borrowers under Community Reinvestment Act (CRA). Additionally, the majority of these purchased loans are seasoned loans with expected shorter durations. Higher volumes within other consumer loans, commercial and industrial loans, and automobile loans also contributed to the third quarter growth, as total September 30, 2015 outstanding balances in these categories increased by $34.2 million, $28.7 million, and $21.7 million, respectively, or 38.6 percent, 4.8 percent, and 7.2 percent, on an annualized basis, respectively, compared to June 30, 2015. During the third quarter of 2015, Valley sold approximately $40.4 million of residential mortgage loans originated for sale.
See further details on our loan activities, including the covered loan portfolio, under the “Loan Portfolio” section below.
Asset Quality. Our past due loans and non-accrual loans, discussed further below, exclude PCI loans. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley. All of the loans acquired from 1st United in the fourth quarter of 2014 are accounted for as PCI loans. As of September 30, 2015, PCI loans totaled $1.5 billion and represented approximately 9.8 percent of our total loan portfolio.

Total non-PCI loan portfolio delinquencies (including loans past due 30 days or more and non-accrual loans) as a percentage of total loans increased to 0.59 percent at September 30, 2015 compared to 0.50 percent at June 30, 2015 largely due to an increase in loans past due 30 to 59 days. The loans past due 30 to 59 days increased $8.7 million largely due to two matured performing loans in the normal process of renewal and one loan that was repaid during October 2015 which accounted for a combined total of $7.3 million of the increase in this past due category. Non-accrual loans moderately increased to $59.2 million, or 0.39 percent of our entire loan portfolio of $15.0 billion, at September 30, 2015 as compared to $54.7 million, or 0.38 percent of total loans, at June 30, 2015. Overall, our non-performing assets increased by 5.1 percent to $76.5 million at September 30, 2015 as compared to $72.8 million at June 30, 2015 largely due to the increase in non-accrual loans.
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 somewhat unpredictable direction of the U.S. economy and the housing and labor markets, management cannot provide assurance that our non-performing assets will remain at, or decline from, the levels reported as of September 30, 2015. See the "Non-Performing Assets" section below for further analysis of our asset quality.
Deposits and Other Borrowings. The mix of the deposit categories of total average deposits for the third quarter of 2015 remained relatively unchanged as compared to the second quarter of 2015. Non-interest bearing deposits represented approximately 30 percent of total average deposits for the three months ended September 30, 2015, while savings, NOW and money market accounts were 49 percent and time deposits were 21 percent. Overall, average deposits totaling $14.6 billion for the third quarter of 2015 increased by $391.3 million as compared to the second quarter of 2015 due, in large part, to increased organic retail volumes in time deposits and, to a lesser extent, non-interest bearing deposits. Time deposits grew mainly due to the success of several retail promotions for certificates of deposit that began in the second quarter of 2015.

Average short-term borrowings decreased $85.0 million, or 33.3 percent to $170.1 million for the three months ended September 30, 2015 as compared to the second quarter of 2015 mostly due to a $124.2 million decrease in short-term FHLB advances, partially offset by higher customer repo account balances. The third quarter decline in FHLB advances was mostly due to the use of alternative liquidity and loan funding from our issuance of $100 million of 4.55 percent subordinated debentures (the "notes") and $115 million of Valley's Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A (the "Preferred Stock”) in June 2015.


53




Average long-term borrowings (which include junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition) totaled approximately $2.6 billion for both the third and second quarters of 2015. Ending balances of long-term borrowings decreased $95.8 million at September 30, 2015 as compared to June 30, 2015 primarily due to the maturity of Valley's $100 million of 5 percent subordinated notes which were repaid in July 2015. The June 2015 issuance of $100 million of 4.55 percent notes was mainly intended to replace the maturity of these 5 percent notes in July 2015. The new notes qualify as total risk-based (Tier 2) regulatory capital at September 30, 2015.

Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Return on average assets
0.74
%
 
0.67
%
 
0.68
%
 
0.74
%
Return on average shareholders’ equity
7.20

 
7.00

 
6.82

 
7.76

Return on average tangible shareholders’ equity (ROATE)
10.36

 
9.86

 
10.00

 
11.00


ROATE, which is a non-GAAP measure, is computed by dividing net income by average shareholders’ equity less average goodwill and average other intangible assets, as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
($ in thousands)
Net income
$
35,954

 
$
27,682

 
$
98,286

 
$
91,037

Average shareholders’ equity
1,997,369

 
1,581,877

 
1,921,578

 
1,564,585

Less: Average goodwill and other intangible assets
(609,632
)
 
(459,210
)
 
(611,540
)
 
(461,249
)
Average tangible shareholders’ equity
$
1,387,737

 
$
1,122,667

 
$
1,310,038

 
$
1,103,336

Annualized ROATE
10.36
%
 
9.86
%
 
10.00
%
 
11.00
%

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

All of the above ratios are, from time to time, impacted by net gains and losses on securities transactions, net gains on sales of loans and net impairment losses on securities recognized in non-interest income. These amounts can vary widely from period to period due to, among other factors, the level of sales of our investment securities classified as available for sale, the amount of residential mortgage loans originated for sale, and the results of our quarterly impairment analysis of the held to maturity and available for sale investment portfolios. See the “Non-Interest Income” section below for more details.

54




Net Interest Income
Net interest income on a tax equivalent basis totaling $135.9 million for the third quarter of 2015 decreased $2.2 million from the second quarter of 2015 and increased $19.3 million as compared to the third quarter of 2014, respectively. Interest income on a tax equivalent basis decreased approximately $1.0 million to $176.6 million for the third quarter of 2015 as compared to the second quarter of 2015 largely due to a 20 basis point decrease in the yield on average loans, partially offset by a $566.0 million increase in average loans and one more day during the third quarter of 2015. The decline in yield on average loans for the third quarter of 2015 as compared to the linked second quarter was due, in part, to a $4.6 million decrease in (1) fee income from derivative interest rate swaps executed with commercial lending customers to facilitate the risk management strategies of both Valley and the customers, (2) interest income from closed ("zero-balance") PCI loan pools, and (3) loan recovery income from collections related to our non-PCI loan portfolio, on a combined basis. Interest expense increased $1.2 million to $40.7 million for the three months ended September 30, 2015 as compared to the second quarter of 2015. The increase in interest expense was primarily driven by a $311.6 million increase in average time deposits, a 7 basis point increase in the cost of such time deposits and one more day during the third quarter of 2015.
Average interest earning assets increased to $17.6 billion for the third quarter of 2015 as compared to approximately $14.8 billion for the third quarter of 2014 largely due to organic and purchased loan growth over the last twelve month period, and the loans and investments totaling $1.2 billion and $224.0 million, respectively, acquired in the acquisition of 1st United on November 1, 2014. The broad-based loan growth within several loan categories since September 30, 2014 was largely supplemented by purchases of loan participations in multi-family loans and 1-4 family loans totaling a combined $1.0 billion from local third party originators during the first nine months of 2015. Compared to the second quarter of 2015, average interest earning assets increased by $465.6 million from $17.1 billion largely due to purchased loans and loan participations of approximately $334 million and $95 million within residential mortgage and commercial real estate loans, respectively, as well as organic origination volumes in commercial and industrial, commercial real estate, automobile and other consumer loans during the second quarter of 2015. As a result of the loan growth, average loans increased $566.0 million from the second quarter of 2015, while our average investments declined $128.7 million due to normal payments and prepayments during the third quarter.
Average interest bearing liabilities increased $1.8 billion to $12.9 billion for the third quarter of 2015 as compared to the third quarter of 2014 mainly due to deposits and short-term borrowings totaling $1.4 billion and $16.8 million, respectively, assumed in the acquisition of 1st United during the fourth quarter of 2014, retail time deposit campaigns in the fourth quarter of 2014 and the six months ended September 30, 2015, and an increase in our use of brokered money market accounts as a low cost funding source for loan growth and other liquidity needs since beginning of September 2014. Compared to the second quarter of 2015, average interest bearing liabilities increased $240.8 million in the third quarter of 2015 mostly due to an increase in time deposits from the aforementioned retail campaigns, partially offset by a decline in the use of short-term FHLB advances for liquidity and loan funding.
The net interest margin on a tax equivalent basis of 3.09 percent for the third quarter of 2015 decreased 13 basis points and 7 basis points as compared to the second quarter of 2015 and the three months ended September 30, 2014, respectively. The yield on average interest earning assets also decreased by 14 basis points on a linked quarter basis. The lower yield was mainly a result of the aforementioned decrease in the yield on average loans to 4.27 percent for the third quarter of 2015. This was largely caused by the $4.6 million decline in periodic fee income from derivative interest rate swap transactions, income from zero-balance PCI loan pools and loan recovery income. The $4.6 million decrease represented approximately 13 basis points of the 20 basis point decline in the yield on average loans and 10 basis points of the 13 basis point decline in our net interest margin from the second quarter of 2015. Additionally, new and refinanced loan volumes remain at relatively low interest rates as compared to the overall yield of our loan portfolio and continue to put downward pressure on the overall portfolio yield and our margin. The level of yields on new loans is impacted not only by the Federal Reserve's current monetary policy, but also from intense competition in our markets for quality borrowers. Our higher yielding PCI loan portfolio also declined $171.4 million, or 10.4 percent from June 30, 2015 to approximately $1.5 billion at September 30, 2015 due to normal repayment and prepayment activity. However, our yield on average taxable investment securities increased by 17 basis points during the third quarter of 2015 from 2.50 percent for the second quarter of 2015 largely due to lower premium amortization expense on certain mortgage-backed securities caused by a decline in principal repayments. The overall cost of average interest bearing

55




liabilities increased by 1 basis point from 1.25 percent in the linked second quarter of 2015 primarily due to the aforementioned 7 basis point increase in the cost of average time deposits and one more day during the third quarter. Our cost of total deposits was 0.41 percent for the third quarter of 2015, and increased 1 basis point as compared to the three months ended June 30, 2015.

Our margin will likely continue to face downward pressure from the relatively low levels of interest rates on most interest earning asset alternatives and further repayment of higher yielding interest earning assets. However, our prepayment of $795 million in certain high cost borrowings during the fourth quarter of 2015 combined with potential future loan growth from solid loan demand in our primary markets is anticipated to positively impact our future net interest income and margin. We believe that the maturity of our remaining high interest rate borrowings, primarily over the next 36 months, should also reduce the risk of future margin compression. Additionally, we entered into several forward starting interest rate swap derivative transactions during 2013 to hedge the risk of an increase in current market interest rates before the maturity of a portion of such borrowings through the first half of 2016. See Note 13 to the consolidated financial statements for additional information on our derivative hedging transactions.



56




The following table reflects the components of net interest income for the three months ended September 30, 2015, June 30, 2015 and September 30, 2014:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
 
Three Months Ended
 
September 30, 2015
 
June 30, 2015
 
September 30, 2014
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
($ in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)
$
14,709,618

 
$
157,146

 
4.27
%
 
$
14,143,580

 
$
158,169

 
4.47
%
 
$
11,907,275

 
$
135,115

 
4.54
%
Taxable investments (3)
2,070,806

 
13,806

 
2.67

 
2,214,976

 
13,849

 
2.50

 
2,203,431

 
16,656

 
3.02

Tax-exempt investments (1)(3)
553,225

 
5,528

 
4.00

 
537,777

 
5,531

 
4.11

 
548,548

 
5,611

 
4.09

Federal funds sold and other interest bearing deposits
263,642

 
150

 
0.23

 
235,353

 
146

 
0.25

 
104,580

 
48

 
0.18

Total interest earning assets
17,597,291

 
176,630

 
4.01

 
17,131,686

 
177,695

 
4.15

 
14,763,834

 
157,430

 
4.27

Allowance for loan losses
(105,114
)
 
 
 
 
 
(104,446
)
 
 
 
 
 
(105,714
)
 
 
 
 
Cash and due from banks
244,748

 

 
 
 
281,877

 
 
 
 
 
283,859

 
 
 
 
Other assets
1,792,769

 
 
 
 
 
1,798,802

 
 
 
 
 
1,555,032

 
 
 
 
Unrealized (losses) gains on securities available for sale, net
(9,529
)
 
 
 
 
 
320

 
 
 
 
 
(13,675
)
 
 
 
 
Total assets
$
19,520,165

 
 
 
 
 
$
19,108,239

 
 
 
 
 
$
16,483,336

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW and money market deposits
$
7,090,155

 
$
5,587

 
0.32
%
 
$
7,076,104

 
$
5,911

 
0.33
%
 
$
5,830,967

 
$
4,860

 
0.33
%
Time deposits
3,104,238

 
9,535

 
1.23

 
2,792,637

 
8,128

 
1.16

 
2,169,590

 
6,981

 
1.29

Total interest bearing deposits
10,194,393

 
15,122

 
0.59

 
9,868,741

 
14,039

 
0.57

 
8,000,557

 
11,841

 
0.59

Short-term borrowings
170,115

 
126

 
0.30

 
255,097

 
207

 
0.32

 
261,801

 
218

 
0.33

Long-term borrowings (4)
2,582,734

 
25,482

 
3.95

 
2,582,616

 
25,331

 
3.92

 
2,839,365

 
28,732

 
4.05

Total interest bearing liabilities
12,947,242

 
40,730

 
1.26

 
12,706,454

 
39,577

 
1.25

 
11,101,723

 
40,791

 
1.47

Non-interest bearing deposits
4,397,325

 
 
 
 
 
4,331,647

 
 
 
 
 
3,640,054

 
 
 
 
Other liabilities
178,229

 
 
 
 
 
173,929

 
 
 
 
 
159,682

 
 
 
 
Shareholders’ equity
1,997,369

 
 
 
 
 
1,896,209

 
 
 
 
 
1,581,877

 
 
 
 
Total liabilities and shareholders’ equity
$
19,520,165

 
 
 
 
 
$
19,108,239

 
 
 
 
 
$
16,483,336

 
 
 
 
Net interest income/interest rate spread (5)

 
$
135,900

 
2.75
%
 
 
 
$
138,118

 
2.90
%
 
 
 
$
116,639

 
2.80
%
Tax equivalent adjustment
 
 
(1,940
)
 
 
 
 
 
(1,941
)
 
 
 
 
 
(1,971
)
 
 
Net interest income, as reported
 
 
$
133,960

 
 
 
 
 
$
136,177

 
 
 
 
 
$
114,668

 
 
Net interest margin (6)
 
 
 
 
3.05
%
 
 
 
 
 
3.18
%
 
 
 
 
 
3.11
%
Tax equivalent effect
 
 
 
 
0.04
%
 
 
 
 
 
0.04
%
 
 
 
 
 
0.05
%
Net interest margin on a fully tax equivalent basis (6)
 
 
 
 
3.09
%
 
 
 
 
 
3.22
%
 
 
 
 
 
3.16
%






57




The following table reflects the components of net interest income for the nine months ended September 30, 2015 and 2014:

Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
 
Nine months ended
 
September 30, 2015
 
September 30, 2014
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
($ in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)
$
14,144,921

 
$
465,803

 
4.39
%
 
$
11,757,957

 
$
402,545

 
4.56
%
Taxable investments (3)
2,189,527

 
44,326

 
2.70

 
2,215,162

 
52,001

 
3.13

Tax-exempt investments (1)(3)
543,992

 
16,616

 
4.07

 
560,469

 
16,974

 
4.04

Federal funds sold and other interest bearing deposits
280,663

 
516

 
0.25

 
77,783

 
102

 
0.17

Total interest earning assets
17,159,103

 
527,261

 
4.10

 
14,611,371

 
471,622

 
4.30

Allowance for loan losses
(104,650
)
 
 
 
 
 
(110,126
)
 
 
 
 
Cash and due from banks
319,936

 
 
 
 
 
273,348

 
 
 
 
Other assets
1,791,633

 
 
 
 
 
1,577,516

 
 
 
 
Unrealized losses on securities available for sale, net
(4,091
)
 
 
 
 
 
(26,458
)
 
 
 
 
Total assets
$
19,161,931

 
 
 
 
 
$
16,325,651

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW and money market deposits
$
7,103,105

 
$
17,493

 
0.33
%
 
$
5,647,871

 
$
13,671

 
0.32
%
Time deposits
2,885,922

 
25,637

 
1.18

 
2,159,402

 
20,196

 
1.25

Total interest bearing deposits
9,989,027

 
43,130

 
0.58

 
7,807,273

 
33,867

 
0.58

Short-term borrowings
184,586

 
427

 
0.31

 
331,737

 
840

 
0.34

Long-term borrowings (4)
2,578,452

 
75,649

 
3.91

 
2,837,837

 
84,843

 
3.99

Total interest bearing liabilities
12,752,065

 
119,206

 
1.25

 
10,976,847

 
119,550

 
1.45

Non-interest bearing deposits
4,313,620

 
 
 
 
 
3,616,587

 
 
 
 
Other liabilities
174,668

 
 
 
 
 
167,632

 
 
 
 
Shareholders’ equity
1,921,578

 
 
 
 
 
1,564,585

 
 
 
 
Total liabilities and shareholders’ equity
$
19,161,931

 
 
 
 
 
$
16,325,651

 
 
 
 
Net interest income/interest rate spread (5)
 
 
$
408,055

 
2.85
%
 
 
 
$
352,072

 
2.85
%
Tax equivalent adjustment
 
 
(5,832
)
 
 
 
 
 
(5,961
)
 
 
Net interest income, as reported
 
 
$
402,223

 
 
 
 
 
$
346,111

 
 
Net interest margin (6)
 
 
 
 
3.13
%
 
 
 
 
 
3.16
%
Tax equivalent effect
 
 
 
 
0.04
%
 
 
 
 
 
0.05
%
Net interest margin on a fully tax equivalent basis (6)
 
 
 
 
3.17
%
 
 
 
 
 
3.21
%

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


58




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
September 30, 2015
Compared to September 30, 2014
 
Nine Months Ended September 30, 2015 Compared to September 30, 2014
 
Change
Due to
Volume
 
Change
Due to
Rate
 
Total
Change
 
Change
Due to
Volume
 
Change
Due to
Rate
 
Total
Change
 
(in thousands)
Interest Income:
 
 
 
 
 
 
 
 
 
 
 
Loans*
$
30,309

 
$
(8,278
)
 
$
22,031

 
$
79,097

 
$
(15,839
)
 
$
63,258

Taxable investments
(963
)
 
(1,887
)
 
(2,850
)
 
(595
)
 
(7,080
)
 
(7,675
)
Tax-exempt investments*
48

 
(131
)
 
(83
)
 
(502
)
 
144

 
(358
)
Federal funds sold and other interest bearing deposits
88

 
14

 
102

 
359

 
55

 
414

Total increase (decrease) in interest income
29,482

 
(10,282
)
 
19,200

 
78,359

 
(22,720
)
 
55,639

Interest Expense:
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW and money market deposits
1,004

 
(277
)
 
727

 
3,580

 
242

 
3,822

Time deposits
2,884

 
(330
)
 
2,554

 
6,498

 
(1,057
)
 
5,441

Short-term borrowings
(70
)
 
(22
)
 
(92
)
 
(346
)
 
(67
)
 
(413
)
Long-term borrowings and junior subordinated debentures
(2,546
)
 
(704
)
 
(3,250
)
 
(7,635
)
 
(1,559
)
 
(9,194
)
Total increase (decrease) in interest expense
1,272

 
(1,333
)
 
(61
)
 
2,097

 
(2,441
)
 
(344
)
Total increase (decrease) in net interest income
$
28,210

 
$
(8,949
)
 
$
19,261

 
$
76,262

 
$
(20,279
)
 
$
55,983

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

The following table presents the components of non-interest income for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Trust and investment services
$
2,450

 
$
2,411

 
$
7,520

 
$
7,097

Insurance commissions
4,119

 
3,632

 
12,454

 
12,621

Service charges on deposit accounts
5,241

 
5,722

 
15,794

 
17,109

Gains on securities transactions, net
157

 
103

 
2,481

 
102

Fees from loan servicing
1,703

 
1,806

 
4,948

 
5,262

Gains (losses) on sales of loans, net
2,014

 
(95
)
 
3,034

 
1,497

(Losses) gains on sales of assets, net
(558
)
 
83

 
(77
)
 
211

Bank owned life insurance
1,806

 
1,571

 
5,188

 
4,593

Change in FDIC loss-share receivable
(55
)
 
(3,823
)
 
(3,380
)
 
(11,610
)
Other
4,042

 
3,371

 
11,802

 
11,171

Total non-interest income
$
20,919

 
$
14,781

 
$
59,764

 
$
48,053


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Service charges on deposit accounts decreased $481 thousand and $1.3 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 mostly due to general decreases in service charges on checking accounts, ATM fees and overdraft fees. Generally, the decline in these fees relates to better account management by our customers as well as certain limitations imposed on our customer account-based fees driven by bank regulations.

Net gains on securities transactions increased $2.4 million for the nine months ended September 30, 2015 as compared with the same period in 2014 mostly due to the sale of corporate debt securities and trust preferred securities with a total unamortized cost of approximately $34.2 million, including one corporate debt security classified as held to maturity with amortized cost of $9.8 million during the first quarter of 2015. The sales of these securities were primarily due to a investment portfolio re-balancing during the first quarter due to changes in our regulatory capital calculation under the new Basel III regulatory capital reform (effective for Valley on January 1, 2015). Under ASC Topic 320, “Investments - Debt and Equity Securities,” the sale of held to maturity securities based upon the change in capital requirements is permitted without tainting the remaining held to maturity investment portfolio.

Net gains on sales of loans increased $2.1 million and $1.5 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 mostly due to increases of approximately 69 percent and 85 percent in residential mortgage loan originations (including both new and refinanced loans) during the the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014. Our net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans held for sale carried at fair value at each period end.
The net change in the fair value of loans held for sale resulted in net gains of $660 thousand and $81 thousand for the three months ended September 30, 2015 and 2014, respectively, and $813 thousand and $453 thousand for the nine months ended September 30, 2015 and 2014, respectively. Our decision to either sell or retain our mortgage loan production is dependent upon, among other factors, the levels of interest rates, consumer demand, the economy and our ability to maintain the appropriate level of interest rate risk on our balance sheet. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A above and the fair valuation of our loans held for sale at Note 6 of the consolidated financial statements.

The Bank and the FDIC share in the losses on loans and real estate owned as part of the loss-sharing agreements entered into on our previous FDIC-assisted transactions, including loss-sharing agreements acquired from 1st United on November 1, 2014. The asset arising from the loss-sharing agreements is referred to as the “FDIC loss-share receivable” in our consolidated statements of financial condition. Within the non-interest income category, we may recognize income or expense related to the change in the FDIC loss-share receivable resulting from (i) a change in the estimated credit losses on the pools of covered loans, (ii) income from reimbursable expenses incurred during the period, (iii) accretion of the discount resulting from the present value of the receivable recorded at the acquisition dates, and (iv) prospective recognition of decreases in the receivable attributable to better than originally estimated cash flows on certain covered loan pools. The aggregate effect of changes in the FDIC loss-share receivable amounted to a $55 thousand and $3.4 million net reductions in non-interest income for the three and nine months ended September 30, 2015, respectively. The majority of the reduction in both the receivable and non-interest income during nine months ended September 30, 2015 relates to the prospective adjustment to the receivable related to better than originally estimated cash flows on certain pools of covered loans since the acquisition date. There was no reduction in non-interest income related to additional cash flows on pooled loans during the second and third quarters of 2015, as the receivable was prospectively reduced for such additional cash flows over the shorter term of the commercial loan loss-sharing agreements (related to Valley's 2010 FDIC-assisted transactions) that expired in March 2015.

See the “FDIC Loss-Share Receivable Related to Covered Loans and Foreclosed Assets” section below in this MD&A and Note 8 to the consolidated financial statements for further details.



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Non-Interest Expense

The following table presents the components of non-interest expense for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
Salary and employee benefits expense
$
54,315

 
$
45,501

 
$
165,601

 
$
140,683

Net occupancy and equipment expense
21,526

 
17,011

 
65,858

 
55,708

FDIC insurance assessment
4,168

 
3,534

 
11,972

 
10,214

Amortization of other intangible assets
2,232

 
2,201

 
6,721

 
6,898

Professional and legal fees
4,643

 
3,609

 
12,043

 
11,671

Amortization of tax credit investments
5,224

 
4,630

 
14,231

 
14,148

Advertising
732

 
1,664

 
4,092

 
2,814

Telecommunications expense
2,050

 
1,622

 
6,101

 
4,971

Other
13,762

 
11,764

 
37,563

 
34,881

Total non-interest expense
$
108,652

 
$
91,536

 
$
324,182

 
$
281,988


Salary and employee benefits expense increased $8.8 million and $24.9 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 largely due to increases in salary expense and related payroll taxes, cash bonus accruals, stock-based incentive compensation expense, 401(k) plan expense, and employee medical insurance expense. The higher salary expenses were mainly due to additional staffing expenses related to our acquisition of 1st United on November 1, 2014. Our health care expenses increased by $820 thousand and $2.2 million during the three and nine months ended September 30, 2015, respectively, as compared to the same periods one year ago due, in part, to the acquisition of 1st United. However, our health care expenses are at times volatile due to self-funding of a large portion of our insurance plan and these medical expenses can fluctuate based on our plan experience into the foreseeable future.

Net occupancy and equipment expenses increased $4.5 million and $10.2 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 mainly due to higher rental expense caused by the 1st United acquisition, as well as an increase in buildings and equipment repairs and maintenance expenses.

FDIC insurance assessments increased $634 thousand and $1.8 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 largely due to growth resulting from the acquisition of the 1st United, as well as increases in our balance sheet caused by solid loan growth over the last twelve month period.

Professional and legal fees increased $1.0 million and $372 thousand for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 largely due to increases in legal and consulting fees in connection with regulatory compliance and general corporate matters, as well as additional expenses related to the acquisition of CNLBancshares.

Advertising expense decreased $932.0 thousand and increased $1.3 million during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014. The decrease during the third quarter of 2015 was mainly caused by a reduction in Valley's promotion of its residential refinance programs as compared to the same quarter in 2014. The increase during the first nine months of 2015 as compared to the same 2014 period was mostly driven by an increase in the promotion of the $499 residential mortgage refinance program in New Jersey, New York and Florida due to the relatively low level of mortgage interest rates, as well as promotional television commercials in both English and Spanish.


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Other non-interest expense increased $2.0 million and $2.7 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014, partly due to higher data processing and immaterial fluctuations in other significant components of other non-interest expense such stationery and printing, title search fees, service fees, insurance, and postage.

The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. Our efficiency ratio was 70.15 percent and 70.17 percent for the three and nine months ended September 30, 2015, respectively, as compared to 70.71 percent and 71.54 percent for the same periods in 2014. The decrease our efficiency ratio as compared to both periods in 2014 was mainly caused by an increase in net interest income. However, our overall efficiency ratio is negatively impacted by the amortization of tax credit investments within our non-interest expense that result in tax credits that reduce our income tax expense. Additionally, our non-interest income was reduced by the changes in the FDIC loss-share receivable during the nine months ended September 30, 2015 and the three and nine months ended September 30, 2014 largely due to prospective reductions in the receivable related to additional cash flows from certain loan pools under commercial loss-sharing agreements expiring in March 2015. If the impact of the amortization of tax credit investments and the change in the FDIC loss-share receivable totaling $17.6 million and $25.8 million for the nine months ended September 30, 2015 and 2014, respectively, were excluded, our efficiency ratio would have been 66.60 percent and 66.01 percent, respectively, for the same periods of 2015 and 2014.

We believe the efficiency ratio, which is a non-GAAP financial measure, provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry.

Branch Efficiency and Cost Reduction Plans

In the second quarter of 2015, we disclosed a branch efficiency plan to "right-size" our branch network. We, like many in the banking industry, have experienced a significant decline in branch foot traffic as the emergence of self-service technology continues to reshape the banking industry. In response to these shifts in customer preference we have invested in new delivery channels and systems that will modernize the branch banking experience. Mobile banking, remote deposit, interactive ATMs, online account opening, video tellers, cash recyclers and enhanced online services are part of our modernization plan and will redefine the traditional banking experience at Valley.

As a result of our reviews and the evolution of banking in general, our current plan includes the closure and consolidation of 13 branch locations during the second half of 2015 and an additional 15 branches (at yet to be determined locations) by the end of 2016. The 28 branches, representing approximately 12.5 percent of Valley’s branch network at June 30, 2015, consist mostly of New Jersey locations and are a mix of leased and owned properties. During the third quarter, we closed 7 branches and we expect the remaining 6 planned closures for 2015 to occur by December 31, 2015.

Non-cash impairment charges and other branch closing costs (mainly related to contract obligations) were immaterial during the nine months ended September 30, 2015. Valley estimates that the 28 branch closure plan will result in an annualized reduction of approximately $10 million in ongoing operating expenses, of which 45 percent should be realized by the end of 2016.

We will continue to evaluate the operational efficiency of our entire branch network (consisting of 113 leased and 104 owned office locations at September 30, 2015) to ensure the optimal performance of our retail operations, in conjunction with several other factors, including our customers’ delivery channel preferences, branch usage patterns, and the potential opportunity to move existing customer relationships to another branch location without imposing a negative impact on their banking experience.

In addition to the branch closures, Valley intends to implement a cost reduction plan aimed at achieving operational efficiencies through streamlining various aspects of Valley's business model, staff reductions and further utilization

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of technological enhancements. These measures are expected to save $5 million in pre-tax operating expenses starting in 2016 and are expected to increase to approximately $8 million in 2017.
Income Taxes

Income tax expense was $10.2 million for the three months ended September 30, 2015 reflecting an effective tax rate of 22.1 percent, as compared to $12.5 million for the second quarter of 2015 reflecting an effective tax rate of 28.1 percent and $10.7 million for the third quarter of 2014 reflecting an effective tax rate of 27.8 percent. The decrease in the effective tax rate during the third quarter of 2015 was primarily related to an increase in tax credit investments which generate general business credits. 

Income tax expense was $34.9 million and $23.2 million for the nine months ended September 30, 2015 and 2014, respectively. The effective rate increased 5.9 basis points to 26.2 percent for the nine months ended September 30, 2015 as compared to 20.3 percent for the same period in 2014 largely due to a $8.3 million tax benefit recorded as a component of total income tax expense during the first quarter of 2014 related to the completion of a tax examination.

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 fourth quarter of 2015, we anticipate that our effective tax rate will range from 25 percent to 27 percent, exclusive of $17.6 million of income tax benefits related to pre-tax prepayment penalty charges on borrowings totaling $50.3 million, primarily reflecting the impacts of tax-exempt income, tax-advantaged investments and general business credits.
Business Segments

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


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The following tables present the financial data for each business segment for the three months ended September 30, 2015 and 2014:
 
Three Months Ended September 30, 2015
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
4,904,768

 
$
9,804,850

 
$
2,887,673

 
$

 
$
17,597,291

Income (loss) before income taxes
12,018

 
38,192

 
4,291

 
(8,368
)
 
46,133

Annualized return on average interest earning assets (before tax)
0.98
%
 
1.56
%
 
0.59
%
 
N/A

 
1.05
%
 
 
Three Months Ended September 30, 2014
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
4,118,304

 
$
7,788,971

 
$
2,856,559

 
$

 
$
14,763,834

Income (loss) before income taxes
8,558

 
30,220

 
5,589

 
(6,031
)
 
38,336

Annualized return on average interest earning assets (before tax)
0.83
%
 
1.55
%
 
0.78
%
 
N/A

 
1.04
%
Consumer Lending

This segment, representing approximately 33.9 percent of our loan portfolio at September 30, 2015, is mainly comprised of residential mortgage loans, home equity loans and automobile loans. The duration of the residential mortgage loan portfolio including covered loans (which represented 20.0 percent of our loan portfolio at September 30, 2015) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 8.1 percent of total loans at September 30, 2015) 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 Division, comprised of trust, asset management, insurance services, and asset-based lending support services.

Average interest earning assets for the three months ended September 30, 2015 increased $786.5 million as compared to the third quarter of 2014 largely due to purchased and acquired residential mortgage loans, an increase in organic residential mortgage originations over the last 12-month period due to the low level of mortgage interest rates, as well as continued solid organic automobile loan and secured personal lines of credit growth. At September 30, 2015, our consumer lending portfolio included $230.8 million of PCI loans (mostly consisting of residential mortgage loans and home equity loans) acquired from 1st United during the fourth quarter of 2014. Additionally, we supplemented our organic originations with the purchase of approximately $389 million in loan purchases from third party originators during the nine months ended September 30, 2015.

Income before income taxes increased $3.5 million to $12.0 million for the third quarter of 2015 as compared to $8.6 million for the same quarter of 2014 largely due to a $6.8 million increase in net interest income after provision for credit losses for the third quarter of 2015. The net interest income expansion as compared to the same period one year ago was mainly due to higher average loan balances caused by the aforementioned residential mortgage loan activity since September 30, 2014. The increase in net interest income was partially offset by an increase in internal transfer expense totaling $3.6 million to $18.9 million as compared to the third quarter of 2014.


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The net interest margin increased 8 basis points to 2.71 percent for the third quarter of 2015 as compared to the same quarter one year ago as a result of a 18 basis point decrease in the costs associated with our funding sources, partially offset by 10 basis point decrease in yield on average loans. The decrease in yield on average loans was largely caused by purchase, new and refinanced loan volumes that remain at relatively low interest rates as compared to the overall yield of our loan portfolio. The decrease in our cost of funds was was primarily driven by the prepayment of $275 million in high cost long-term borrowings in December 2014, which had a combined weighted average interest rate of 4.52 percent.
Commercial Lending

The commercial lending segment is mainly comprised of floating rate and adjustable rate commercial and industrial loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $2.4 billion and represented 16.0 percent of the total loan portfolio at September 30, 2015. Commercial real estate loans and construction loans totaled $7.5 billion and represented 50.1 percent of the total loan portfolio at September 30, 2015.

Average interest earning assets for the three months ended September 30, 2015 increased $2.0 billion as compared to the same quarter of 2014. This increase was largely attributable to the $1.2 billion of PCI loans acquired from 1st United in November 2014 and our purchase of participations in multi-family loans (mostly in New York City) totaling over $677 million during the first nine months of 2015. A portion of the purchased loans are expected to qualify for CRA purposes. The remaining growth in average loans as compared to the third quarter of 2014 mostly resulted from demand across many segments of commercial real estate borrowers in our markets over the last 12 months, supplemented by loan production from our Florida lending team since the 1st United acquisition in November 2014.

For the three months ended September 30, 2015, income before income taxes increased $8.0 million to $38.2 million as compared to the same quarter in 2014 mostly due an increase in net interest income coupled with an increase in non-interest income, partially offset by increases in the provision for credit losses, non-interest expense and internal transfer expense. Net interest income increased $15.0 million to $92.4 million for the third quarter of 2015 as compared to the same quarter of 2014 largely due to the increase in average loans. Non-interest income increased $3.2 million as compared to the third quarter of 2014. The provision for credit losses increased $1.3 million during the third quarter of 2015 as compared to $79 thousand for the third quarter of 2014. Non-interest expense and internal transfer expense increased $1.9 million and $7.0 million, respectively, during the third quarter of 2015 as compared to the same quarter in 2014.

The net interest margin decreased 19 basis points to 3.77 percent for the third quarter of 2015 as compared to the same quarter one year ago as a result of a 37 basis point decline in yield on average loans, partially offset by a 18 basis point decrease in the cost of our funding sources. The decrease in the yield on loans was primarily due to the new and refinanced loan volumes at current interest rates that are relatively low compared to the overall yield of our loan portfolio, as well as a large volume of higher yielding PCI loan repayments over the last 12-month period.
Investment Management

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

Average investments increased $31.1 million during the third quarter of 2015 as compared to the same quarter in 2014 primarily due to a $159.1 million increase in average federal funds sold and other interest bearing deposit

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balances, offset by some normal run-off within the taxable investment portfolio and funding of new loan growth. The increase in our average excess liquidity (mostly held in overnight interest bearing deposits at the Federal Reserve Bank of New York) was mainly caused by strong retail deposit volumes mostly over the last nine month period and the timing of loan purchases and new loan originations.

For the quarter ended September 30, 2015, income before income taxes decreased approximately $1.3 million to $4.3 million compared to $5.6 million for the same quarter in 2014 mostly due to a $1.6 million decrease in net interest income. The decrease in net interest income was largely due to increased premium amortization expense on certain mortgage-backed securities caused by higher principal repayments, the purchases of new investments at lower current market yields and a greater mix of average investments held in low yielding overnight deposits to fund loan growth.

The net interest margin decreased 24 basis points to 1.84 percent for the third quarter of 2015 as compared to the same quarter one year ago largely due to a 42 basis point decrease in the yield on average investments, partially offset by a 18 basis point decrease in costs associated with our funding sources.
Corporate and other adjustments

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

The loss before income taxes for the corporate segment increased $2.4 million to $8.4 million for the three months ended September 30, 2015 as compared to $6.0 million for the three months ended September 30, 2014 mainly due to a $13.2 million increase in non-interest expense related to increases in several general expense categories, including, but not limited to, salaries expense, net occupancy and equipment and legal expense related to the acquisition of the 1st United, partially offset by a $10.6 million increase in internal transfer income as compared to the third quarter of 2014.
The following tables present the financial data for each business segment for the nine months ended September 30, 2015 and 2014:
 
Nine Months Ended September 30, 2015
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
4,670,699

 
$
9,474,222

 
$
3,014,182

 
$

 
$
17,159,103

Income (loss) before income taxes
30,158

 
116,283

 
11,963

 
(25,193
)
 
133,211

Annualized return on average interest earning assets (before tax)
0.86
%
 
1.64
%
 
0.53
%
 
N/A

 
1.04
%
 
 
Nine Months Ended September 30, 2014
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
4,059,691

 
$
7,698,266

 
$
2,853,414

 
$

 
$
14,611,371

Income (loss) before income taxes
22,525

 
88,923

 
16,716

 
(13,892
)
 
114,272

Annualized return on average interest earning assets (before tax)
0.74
%
 
1.54
%
 
0.78
%
 
N/A

 
1.04
%


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Consumer Lending

Average interest earning assets for the nine months ended September 30, 2015 increased $611.0 million as compared to the same period in 2014 largely due to continued solid organic automobile loan and secured personal lines of credit growth over the last 12-month period, higher residential mortgage loan originations held for investment purposes, and purchased and acquired residential mortgage loans. These increases were partially offset by a decline in our home equity loan portfolio which is partly the result of a lack of demand from our residential mortgage loan customers despite the relatively favorable interest rate environment.

Income before income taxes increased $7.6 million to $30.2 million for the nine months ended September 30, 2015 as compared to the same period of 2014 mainly due to an increase of $12.6 million in net interest income after provision for credit losses caused by higher average loan balances, as well as an increase in non-interest income of $2.0 million. The increase was partially negated by increases in both non-interest expense and internal transfer expense. Non-interest expense increased $2.6 million to $45.3 million for the nine months ended September 30, 2015 as compared to the same period in 2014. Internal transfer expense increased $4.4 million as compared to the nine months ended September 30, 2014.

The net interest margin increased 1 basis point to 2.72 percent for the nine months ended September 30, 2015 as compared to the same period of 2014 as a result of a 16 basis point decrease in costs associated with our funding sources, partially offset by a 15 basis point decrease in yield on average loans largely caused by purchased, new and refinanced loan volumes at current interest rates.
Commercial Lending

Average interest earning assets increased $1.8 billion for the nine months ended September 30, 2015 as compared to the same period in 2014. This increase was primarily attributable to the aforementioned $1.2 billion of PCI loans acquired from 1st United in November 2014, the purchase of commercial real estate loan participations totaling over $677 million during nine months of 2015, and continued loan growth mostly within the non-PCI commercial real estate loan portfolio over the last 12 months.

For the nine months ended September 30, 2015, income before income taxes increased $27.4 million to $116.3 million as compared to the same period in 2014 mostly due an increase in net interest income coupled with an increase in non-interest income, partially offset by increases in the provision for credit losses, non-interest expense and internal transfer expense. Net interest income increased $49.2 million to $279.8 million for the nine months ended September 30, 2015 as compared to the same period in 2014 largely due to the increase in average loans. Non-interest income increased $7.4 million as compared to the same period in 2014 mainly due to the positive aggregate effect of changes in the FDIC loss-share receivable. The provision for credit losses related to the commercial portfolios increased $6.9 million to $4.1 million for the nine months ended September 30, 2015 as compared to negative (credit) provision of $2.8 million for the same period in 2014. Non-interest expense and internal transfer expense increased $7.0 million and $15.4 million, respectively, for the nine months ended September 30, 2015 as compared to the same period in 2014.

The net interest margin decreased 5 basis points to 3.9 percent for the nine months ended September 30, 2015 as compared to the same period one year ago mainly as a result of a 21 basis point decline in the yield on average loans, partially offset by a 16 basis point decrease in the cost of our funding sources. The decrease in the yield on loans was primarily due to the purchased, new and refinanced loan volumes at current interest rates that are relatively low compared to the overall yield of our loan portfolio, as well as a large volume of higher yielding PCI loan prepayments and repayments over the last 12-month period.
Investment Management

Average investments increased $160.8 million for the nine months ended September 30, 2015 as compared to the same period in 2014 primarily due to a $202.9 million increase in average federal funds sold and other interest bearing deposit balances. This increase in our average excess liquidity (mostly held in overnight interest bearing

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deposits at the Federal Reserve Bank of New York) was mainly caused by strong retail deposit volumes primarily over the last nine month period and the timing loan purchases and new loan originations.

For the nine months ended September 30, 2015 income before income taxes decreased approximately $4.8 million to $12.0 million compared to the same period in 2014 mostly due to a $5.3 million decrease in net interest income. The decrease in net interest income was mainly driven by normal investment repayments, the purchases of new investments at lower current market yields, and the increased mix of investments held in low yielding overnight deposits for liquidity purposes to fund new loans.

The net interest margin decreased 35 basis points to 1.86 percent for the nine months ended September 30, 2015 as compared to the same period in 2014 largely due to a 51 basis point decrease in the yield on investments, partially offset by a 16 basis point decrease in costs associated with our funding sources.
Corporate and other adjustments

The loss before income taxes for the corporate segment increased $11.3 million to $25.2 million for the nine months ended September 30, 2015 as compared to $13.9 million for the same period in 2014 mainly due to a $32.8 million
increase in non-interest expense, partially offset by an $20.1 million increase in the internal transfer income. The increase in non-interest expense for the nine months ended September 30, 2015 was due to increases in several general expense categories, including, but not limited to, salaries expense, net occupancy and equipment, advertising expense and our FDIC insurance assessment as compared to the same period of 2014.
ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempts to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominately focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities.

We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of September 30, 2015. The model assumes changes in interest rates without any proactive change in the composition or size of the balance sheet by management. In the model, the forecasted shape of the yield curve remains static as of September 30, 2015. 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 September 30, 2015. Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, 2015 in our model, the composition is adjusted to reflect new interest earning assets and funding originations

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coupled with rate spreads utilizing our actual originations during the third quarter of 2015. The model also utilizes an immediate parallel shift in the market interest rates at September 30, 2015.

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

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

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:
 
Estimated Change in
Future Net Interest Income*
Changes in Interest Rates
Dollar
Change
 
Percentage
Change
(in basis points)
($ in thousands)
+200
$
(1,841
)
 
(0.34
)%
+100
(4,298
)
 
(0.81
)
–100
(12,139
)
 
(2.27
)
____
*
The estimate above is based upon interest earning assets and interest bearing liabilities held as of September 30, 2015, and excludes the impact of Valley's prepayment of $795 million of high cost borrowings during October 2015. See the discussion below for additional information.

As noted in the table above, a 100 basis point immediate increase in interest rates is projected to decrease net interest income over the next 12 months by 0.81 percent. Our balance sheet sensitivity to such a move in interest rates at September 30, 2015 decreased as compared to June 30, 2015 (which was a decrease of 1.83 percent in net interest income over a 12 month period). Additionally, our current asset sensitivity to a 100 basis point increase in interest rates is impacted in the model by the fact that approximately $1.6 billion of our adjustable rate loans at September 30, 2015 are tied to the Valley prime rate (set by management), which currently exceeds the U.S. prime rate by 125 basis points. The Valley prime rate is not projected to increase under the 100 basis point immediate increase scenario in our simulation, but would increase and positively impact our net interest income in a 200 basis point immediate increase in interest rates scenario. Our projections for such prime rate based loans could vary from the actual movements in the Valley prime rate, which is set by management and may change prior to the U.S. prime rate reaching its current level of 4.50 percent. According, if Valley were to maintain the current 125 basis point spread above the U.S. prime rate, we believe the projected decrease in net interest income under the rising interest rate simulations presented in the table above would be more than mitigated by additional interest income from such loans. 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.


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As noted above, any increase in the Valley prime rate will have an immediate benefit to our interest income in a rising interest rate environment, as we attempt to manage the Bank’s aggregate sensitivity in a manner to mitigate the potential lag in the portfolio's re-pricing. We expect interest income and yield on many of our residential mortgage-backed securities with unamortized purchase premiums to improve if interest rates were to move upward and prepayment speeds on the underlying mortgages decline. The decline in prepayments will lengthen the expected life of each security and reduce the amount of premium amortization expense recognized against interest income each period.

Our interest rate swaps and caps designated as cash flow hedging relationships are designed to protect us from upward movements in interest rates on certain deposits based on the prime rate (as reported by The Wall Street Journal). We have 4 cash flow hedge interest rate swaps with a total notional value of $300 million at September 30, 2015 that currently pay fixed and receive floating rates, as well as 3 interest rate caps with a total notional value of $225 million. Additionally, we also currently utilize fair value and non-designated hedge interest rate swaps to effectively convert fixed rate loans, brokered certificates of deposit and long-term borrowings to floating rate instruments. The cash flow hedges are expected to benefit our net interest income in a rising interest rate environment. However, due to the prolonged low level of market interest rates and the strike rate of these instruments, the cash flow hedge interest rate swaps, as well as a large portion of our interest rate caps, negatively impacted our net interest income during both the nine months ended September 30, 2015 and 2014. Despite the expiration of two of the three interest rate caps in the third quarter of 2015, we expect this negative trend to continue for the remaining derivatives into the foreseeable future due to the Federal Reserve’s current monetary policies impacting the level of market interest rates. See Note 13 to the consolidated financial statements for further details on our derivative transactions.

In October 2015, Valley elected to prepay $795 million of borrowings with 2017 maturities and an average cost of 3.78 percent. Funding for the entire transaction was obtained from both brokered deposits and repos totaling $800 million with an weighted average duration of approximately one year and an average interest cost of 0.56 percent. The shorter duration of the new borrowings is expected to cause only a moderate shift in the overall interest sensitivity of our balance sheet, while the new average cost will significantly benefit our future net interest income. In addition, approximately $182 million of borrowings with an average cost of 4.69 percent will contractually mature between March and April 2016, and is also expected to positively impact our net interest income. See the "Borrowing Strategy" section elsewhere in this MD&A for additional information.
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 asset-based liquidity to cover potential funding requirements in order to minimize our dependence on volatile and potentially unstable funding markets.

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 120 percent and non-core funding (which generally includes certificates of deposit $100 thousand and over, federal funds purchased, repurchase agreements and FHLB advances) greater than 50 percent of total assets. The Bank was in compliance with the foregoing policies at September 30, 2015.

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

70




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 $1.2 billion, representing 7.0 percent of earning assets, at September 30, 2015 and $1.9 billion, representing 11.3 percent of earning assets, at December 31, 2014. Of the $1.2 billion of liquid assets at September 30, 2015, approximately $242.5 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $458.1 million in principal from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at September 30, 2015) are projected to be approximately $4.3 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 funds, and short-term and long-term borrowings. Our core deposit base, which generally excludes certificates of deposit over $100 thousand as well as brokered certificates of deposit, represents the largest of these sources. Core deposits averaged approximately $12.8 billion and $10.8 billion for the third quarter of 2015 and for the year ended December 31, 2014, respectively, representing 74.4 percent and 71.9 percent of average earning assets for the periods of September 30, 2015 and December 31, 2014, respectively. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

Additional funding may be provided from short-term liquidity borrowings through deposit gathering networks and in the form of federal funds purchased through our well established relationships with several correspondent banks. While there are no firm lending commitments currently in place, management believes that we could borrow approximately $750 million for a short time from these banks on a collective basis. The Bank is also a member of the Federal Home Loan Bank of New York (FHLB) and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. In addition to the FHLB advances, the Bank has pledged such assets to collateralize a $350 million letter of credit issued by the FHLB on Valley’s behalf to secure certain public deposits at September 30, 2015. Furthermore, we are able to obtain overnight borrowings from the Federal Reserve Bank via the discount window as a contingency for additional liquidity. At September 30, 2015, our borrowing capacity under the Federal Reserve's discount window was approximately $1.1 billion.

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Our short-term borrowings increased $156.2 million to $302.9 million at September 30, 2015 as compared to December 31, 2014 due to a $80 million increase in overnight federal funds purchased and a $76.2 million increase in repo balance activity. At September 30, 2015 and December 31, 2014, all short-term repos represent customer deposit balances being swept into this vehicle overnight.




71




Corporation Liquidity

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

During June 2015, Valley issued $115 million of Preferred Stock and $100 million of notes. Valley used the net proceeds (and other funds) for additional investments in and receivables from its principal subsidiary, Valley National Bank, which qualify as regulatory capital.
Investment Securities Portfolio

As of September 30, 2015, we had approximately $1.7 billion and $797.4 million in held to maturity and available for sale investment securities, respectively. During the first quarter of 2015, the two single-issuer bank trust preferred securities classified as trading at December 31, 2014 were either sold or redeemed by the issuer. Both of the securities transactions resulted in an immaterial aggregate net trading loss which is included in the other non-interest income category of our consolidated statements of income for the nine months ended September 30, 2015.

At September 30, 2015, our investment portfolio was comprised of U.S. Treasury securities, U.S. government agencies, tax-exempt issues of states and political subdivisions, residential mortgage-backed securities (including 12 private label mortgage-backed securities), single-issuer trust preferred securities principally issued by bank holding companies (including 2 pooled securities), high quality corporate bonds and perpetual preferred and common equity securities issued by banks. 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, perpetual preferred securities, equity securities, and bank issued corporate bonds may pose a higher risk of future impairment charges to us as a result of the uncertain economic recovery and its potential negative effect on the future performance of the security issuers and, if applicable, the underlying mortgage loan collateral of the security.
Other-Than-Temporary Impairment Analysis

We may be required to record impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio and may result in other-than temporary impairment on our investment securities in future periods. See our Annual Report on Form 10-K for the year ended December 31, 2014 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

72




assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio.

The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at September 30, 2015.
 
September 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held to maturity investment grades:*
 
 
 
 
 
 
 
AAA Rated
$
1,191,886

 
$
37,838

 
$
(4,988
)
 
$
1,224,736

AA Rated
250,546

 
9,950

 
(233
)
 
260,263

A Rated
44,502

 
4,034

 

 
48,536

Non-investment grade
891

 
8

 
(75
)
 
824

Not rated
149,485

 
49

 
(12,942
)
 
136,592

Total investment securities held to maturity
$
1,637,310

 
$
51,879

 
$
(18,238
)
 
$
1,670,951

Available for sale investment grades:*
 
 
 
 
 
 
 
AAA Rated
$
655,851

 
$
5,924

 
$
(5,142
)
 
$
656,633

AA Rated
25,627

 
810

 
(1,612
)
 
24,825

A Rated
24,755

 
31

 
(176
)
 
24,610

BBB Rated
50,201

 
631

 
(1,434
)
 
49,398

Non-investment grade
18,822

 
1,048

 
(1,582
)
 
18,288

Not rated
24,008

 
530

 
(903
)
 
23,635

Total investment securities available for sale
$
799,264

 
$
8,974

 
$
(10,849
)
 
$
797,389

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

The held to maturity portfolio includes $149.5 million in investments not rated by the rating agencies with aggregate unrealized losses of $12.9 million at September 30, 2015. The unrealized losses for this category primarily relate to 4 single-issuer bank trust preferred issuances with a combined amortized cost of $35.9 million. All single-issuer trust preferred securities classified as held to maturity, including the aforementioned four securities, are paying in accordance with their terms and have no deferrals of interest or defaults. Additionally, we analyze the performance of each issuer on a quarterly basis, including a review of performance data from the issuer’s most recent bank regulatory report to assess the company’s credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon our quarterly review at September 30, 2015, all of the issuers appear to meet the regulatory capital minimum requirements to be considered a “well-capitalized” financial institution and/or have maintained performance levels adequate to support the contractual cash flows of the security.

There was no other-than-temporary impairment recognized in earnings as a result of Valley's impairment analysis of its securities during the three and nine months ended September 30, 2015 and 2014 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:
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31, 2014
 
September 30,
2014
 
($ in thousands)
Non-covered loans
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,399,451

 
$
2,370,794

 
$
2,361,987

 
$
2,237,298

 
$
2,076,512

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
6,890,357

 
6,700,426

 
6,097,017

 
6,032,190

 
5,346,818

Construction
567,626

 
583,538

 
538,937

 
529,963

 
457,163

Total commercial real estate
7,457,983

 
7,283,964

 
6,635,954

 
6,562,153

 
5,803,981

Residential mortgage
2,946,696

 
2,648,692

 
2,585,782

 
2,515,675

 
2,436,022

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
474,730

 
479,027

 
482,265

 
491,745

 
435,450

Automobile
1,219,758

 
1,198,064

 
1,162,963

 
1,144,831

 
1,091,287

Other consumer
388,705

 
354,522

 
321,784

 
310,320

 
275,834

Total consumer loans
2,083,193

 
2,031,613

 
1,967,012

 
1,946,896

 
1,802,571

Total non-covered loans
14,887,323

 
14,335,063

 
13,550,735

 
13,262,022

 
12,119,086

Covered loans (1)
129,491

 
145,231

 
183,726

 
211,891

 
46,291

Total loans (2)
$
15,016,814

 
$
14,480,294

 
$
13,734,461

 
$
13,473,913

 
$
12,165,377

As a percent of total loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial
15.9
%
 
16.4
%
 
17.3
%
 
16.6
%
 
17.1
%
Commercial real estate
49.7
%
 
50.3
%
 
48.3
%
 
48.7
%
 
47.7
%
Residential mortgage
19.6
%
 
18.3
%
 
18.8
%
 
18.7
%
 
20.0
%
Consumer loans
13.9
%
 
14.0
%
 
14.3
%
 
14.4
%
 
14.8
%
Covered loans
0.9
%
 
1.0
%
 
1.3
%
 
1.6
%
 
0.4
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
(1)
Covered loans primarily consist of commercial real estate loans and residential mortgage loans.
(2)
Total non-covered loans include net unearned premiums and deferred loan costs of $106 thousand at September 30, 2015, as compared to net unearned discounts and deferred loan fees of $2.1 million, $9.2 million, $9.0 million, and $8.0 million at June 30, 2015, March 31, 2015, December 31, 2014 and September 30, 2014, respectively.
Non-covered Loans

Non-covered loans (loans not subject to loss-sharing agreements with the FDIC) increased $552.3 million, or 15.4 percent on an annualized basis, to approximately $14.9 billion at September 30, 2015 from June 30, 2015, despite a decline of $77.9 million in our non-covered PCI loan portion of this portfolio primarily due to normal loan repayments. The increase in total non-covered loans was mainly due to purchased and organic origination volumes of 1-4 family and multi-family loans in the residential mortgage and commercial real estate loan portfolios, respectively.
Total commercial and industrial loans increased $28.7 million from June 30, 2015 to approximately $2.4 billion at September 30, 2015 largely due to new loan demand from a mix of new and existing customers within the New York and New Jersey markets. While these new loan volumes more than offset our normal repayment and refinance activity, including an $12.9 million reduction in the non-covered PCI loan portion of the portfolio, we continued to experience significant market competition for quality credits during the third quarter, as well as some normal seasonal declines in loan demand from our customer base. Valley's commercial and industrial loans includes approximately $159 million of performing taxi medallion loans at September 30, 2015, mostly consisting of both PCI and non-PCI loans to fleet owners of New York City medallions. Valley's historical taxi medallion lending criteria has been conservative in regards to capping the loan amounts in relation to market valuations, as well as

74




obtaining personal guarantees whenever possible. While this portion of the portfolio continues to perform well, Valley will continue to closely monitor its performance and the potential impact of changes in market valuations for taxi medallions due to new competing services, such as ride-sharing companies, as well as other factors.
Total commercial real estate loans (excluding construction loans) increased $189.9 million from June 30, 2015 to $6.9 billion at September 30, 2015. Loan origination volumes and demand were seen across many segments of commercial real estate borrowers in all of our markets, including Florida which accounted for approximately $22.3 million of the third quarter loan growth. The continued organic growth within the commercial real estate portfolio was largely supplemented by our purchase of participations in multi-family loans (mostly in New York City) totaling over $95 million during the second quarter of 2015 (as compared to approximately $477 million and $97 million during the second and first quarters of 2015, respectively). A portion of the purchased loans are expected to qualify for CRA purposes, and are seasoned loans with expected shorter durations. Each of these purchased participation loans were thoroughly examined by Valley under its normal underwriting criteria to further satisfy ourselves as to their credit quality. Construction loans outstanding totaled $567.6 million at September 30, 2015 and decreased $15.9 million from June 30, 2015 primarily due to normal completion of certain customer projects and migration of such balances to permanent loan financing during the third quarter of 2015.

Total residential mortgage loans increased $298.0 million to approximately $2.9 billion at September 30, 2015 from June 30, 2015 mostly due to due to the purchase of 1-4 family loans totaling $334 million during the third quarter of 2015. The purchased loan volume was partially offset by a 36.5 percent decrease in Valley loan originations as compared to the second quarter of 2015, as well as a lower amount of loan originations retained for investment purposes during the third quarter of 2015. Residential mortgage loan originations totaled approximately $115.1 million for the third quarter of 2015 as compared to $181.2 million and $76.4 million for the second quarter of 2015 and the third quarter of 2014, respectively. During the third quarter of 2015, Valley sold approximately $40.4 million of fixed-rate residential mortgage loans originated for sale.
Total consumer loans increased $51.6 million to $2.1 billion at September 30, 2015 from June 30, 2015 largely due to increases in both the automobile and other consumer loan portfolios during the third quarter of 2015. Automobile loans increased by $21.7 million to $1.2 billion at September 30, 2015 as compared to June 30, 2015 as our new organic loan volumes continued to be solid due to the overall strength of the U.S. auto markets and some positive initial production from our new Florida auto dealer network which contributed approximately $4 million for the third quarter of 2015. Valley has achieved its auto loan growth without participation in the subprime auto lending markets. Other consumer loans increased $34.2 million to $388.7 million at September 30, 2015 as compared to $354.5 million at June 30, 2015 mainly due to continued growth and customer usage of collateralized personal lines of credit. However, home equity loans moderately decreased by $4.3 million to $474.7 million at September 30, 2015 as compared to June 30, 2015 largely due to normal repayments and the continued lower level of customer demand, despite the relatively favorable low interest rate environment.
With our relatively new access to the strong Florida market, continued commercial real estate loan demand in most of our markets and the low level of long-term market interest rates, we are cautiously optimistic that we will continue to experience solid loan growth. However, we continue to experience strong market competition for high quality commercial credits and we can make no assurances that our total loans will increase, or remain at current levels in the future.

Most of our lending is in northern and central New Jersey, New York City and Long Island, with the exception of loans acquired in our recent acquisition of 1st United (mostly sourced in Florida) and smaller auto and residential mortgage loan portfolios derived from the other neighboring states, which could present a geographic and credit risk if there was another significant broad based economic downturn or a prolonged economic recovery within the region. We are witnessing new loan activity across Valley’s entire geographic footprint, including new loans and strong loan pipelines from our Florida lending operations. However, the New York and Long Island markets continue to account for a disproportionate percentage of our lending activity. To mitigate these risks, we are making efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector. Geographically, we intend to make further inroads into the Florida lending market,

75




through our prospective acquisition of CNLBancshares headquartered in Orlando, Florida. Additionally, our Florida loan pipeline, consisting predominantly of commercial purpose loans, was over $200 million at September 30, 2015.
Purchased Credit-Impaired Loans (Including Covered Loans)

PCI loans mostly consist of loans acquired in business combinations in 2014 and 2012, including covered loans in which the Bank will share losses with the FDIC under loss-sharing agreements acquired from 1st United. Our covered PCI loan portfolio also includes a small amount of residential mortgage and consumer loans related to our 2010 FDIC-assisted transactions. Our non-covered and covered PCI loan portfolios totaled $1.3 billion and $129.5 million at September 30, 2015, 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 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 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 both acquisition and subsequent quarterly reporting dates, we use a third party service provider to assist with validation of our assessment of the contractual and estimated cash flows. Valley provides the third party with updated loan-level information derived from Valley’s main operating system, contractually required loan payments and expected cash flows for each loan pool individually reviewed by us. Using this information, the third party provider determines both the contractual cash flows and cash flows expected to be collected. The loan-level information used to reforecast the cash flows was subsequently aggregated on a pool basis. The expected payment data, discount rates, impairment data and changes to the accretable yield received back from the third party were 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

76




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 tables summarize the changes in the carrying amounts of non-covered PCI loans and covered loans (net of the allowance for losses on covered loans), and the accretable yield on these loans for the three and nine months ended September 30, 2015 and 2014. 
 
Three Months Ended September 30,
 
2015
 
2014
 
Carrying
Amount, Net
 
Accretable
Yield
 
Carrying
Amount, Net
 
Accretable
Yield
 
(in thousands)
Non-covered PCI loans:
 
 
 
 
 
 
 
Balance, beginning of the period
$
1,426,240

 
$
249,406

 
$
613,052

 
$
98,910

Accretion
23,609

 
(23,609
)
 
12,182

 
(12,182
)
Payments received
(100,623
)
 

 
(41,837
)
 

Transfers to other real estate owned
(929
)
 

 

 

Balance, end of the period
$
1,348,297

 
$
225,797

 
$
583,397

 
$
86,728

Covered loans:
 
 
 
 
 
 
 
Balance, beginning of the period
$
145,031

 
$
32,695

 
$
61,442

 
$
23,432

Accretion
1,205

 
(1,205
)
 
3,356

 
(3,356
)
Payments received
(15,870
)
 

 
(19,185
)
 

Transfers to other real estate owned
(1,075
)
 

 

 

Balance, end of the period
$
129,291

 
$
31,490

 
$
45,613

 
$
20,076


 
Nine Months Ended September 30,
 
2015
 
2014
 
Carrying
Amount, Net
 
Accretable
Yield
 
Carrying
Amount, Net
 
Accretable
Yield
 
(in thousands)
Non-covered PCI loans:
 
 
 
 
 
 
 
Balance, beginning of the period
$
1,509,910

 
$
280,766

 
$
710,103

 
$
198,198

Accretion
70,789

 
(70,789
)
 
34,389

 
(34,389
)
Payments received
(261,731
)
 

 
(160,800
)
 

Net decrease in expected cash flows

 

 

 
(77,081
)
Transfers to other real estate owned
(929
)
 

 

 

Other, net
30,258

 
15,820

 
(295
)
 

Balance, end of the period
$
1,348,297

 
$
225,797

 
$
583,397

 
$
86,728

Covered loans:
 
 
 
 
 
 
 
Balance, beginning of the period
$
211,691

 
$
55,442

 
$
89,095

 
$
25,601

Accretion
8,132

 
(8,132
)
 
12,592

 
(12,592
)
Payments received
(57,536
)
 

 
(58,950
)
 

Net increase in expected cash flows

 

 

 
7,067

Transfers to other real estate owned
(2,155
)
 

 
(2,795
)
 

 Other, net
(30,841
)
 
(15,820
)
 
5,671

 

Balance, end of the period
$
129,291

 
$
31,490

 
$
45,613

 
$
20,076


Covered loans in the table above are presented net of the allowance for losses on covered loans, which totaled $200 thousand at September 30, 2015 as compared to $678 thousand at September 30, 2014. This allowance was established due to a decrease in the expected cash flows for certain pools of covered loans based on higher levels of

77




credit impairment than originally forecasted by us at the acquisition dates. We reclassified covered PCI loans totaling $30.7 million for the nine months ended September 30, 2015 (included in the "other, net" categories in the tables above) to non-covered PCI loans. The reclassification was due to the expiration of a commercial (i.e., non-single family) loan loss-sharing agreement with the FDIC on December 31, 2014 that was acquired in the 1st United acquisition on November 1, 2014.

Although we recognized additional credit impairment for certain covered pools in 2011 and the lower levels of accretion shown in the table above due to the normal contraction in the PCI loan portfolios year over year, on an aggregate basis the acquired pools of covered and non-covered loans continue to perform better than originally expected at the acquisition dates. Based on our current estimates, we expect to receive more future cash flows than originally modeled at the acquisition dates. For the pools with better than expected cash flows, the forecasted increase is recorded as a prospective adjustment to our interest income on these loan pools over future periods. The decrease in the FDIC loss-share receivable due to the increase in expected cash flows for covered loan pools is recognized on a prospective basis over the shorter period of the lives of the loan pools and the loss-share agreements accordingly with a corresponding reduction in non-interest income for the period (see table in the next section below).
FDIC Loss-Share Receivable Related to Covered Loans and Foreclosed Assets

The receivable arising from the loss sharing agreements (referred to as the “FDIC loss-share receivable” in our statements of financial condition) is measured separately from the covered loan pools because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans. As of the acquisition dates for the FDIC-assisted transactions, we recorded an aggregate FDIC loss-share receivable of $108.0 million, consisting of the present value of the expected future cash flows the Bank expected to receive from the FDIC under the loss sharing agreements. During the fourth quarter of 2014, we recorded a $7.5 million addition to the FDIC loss-share receivable related to the estimated amounts receivable under loss-sharing agreements acquired from 1st United on November 1, 2014. The FDIC loss-share receivable is reduced as the loss sharing payments are received from the FDIC for losses realized on covered loans and other real estate owned acquired in the FDIC-assisted transactions. Actual or expected losses in excess of the acquisition date estimates, accretion of the acquisition date present value discount, and other reimbursable expenses covered by the FDIC loss-sharing agreements will result in an increase in the FDIC loss-share receivable and the immediate recognition of non-interest income in our financial statements, together with an increase in the non-accretable difference. A decrease in expected losses would generally result in a corresponding decline in the FDIC loss-share receivable and the non-accretable difference. Reductions in the FDIC loss-share receivable due to actual or expected losses that are less than the acquisition date estimates are recognized prospectively over the shorter of (i) the estimated life of the applicable pools of covered loans or (ii) the term of the loss sharing agreements with the FDIC.


78




The following table presents changes in the FDIC loss-share receivable for the three and nine months ended September 30, 2015 and 2014: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Balance, beginning of the period
$
8,404

 
$
20,687

 
$
13,848

 
$
32,757

Discount accretion of the present value at the acquisition dates
43

 
12

 
130

 
35

Effect of additional cash flows on covered loans (prospective recognition)

 
(4,500
)
 
(4,072
)
 
(8,460
)
Decrease in the provision for losses on covered loans

 

 

 
(4,417
)
Net (recovered) reimbursable expenses
(238
)
 
745

 
174

 
2,248

Reimbursements from the FDIC
(1,082
)
 
(684
)
 
(2,835
)
 
(4,967
)
Other
140

 
(80
)
 
22

 
(1,016
)
Balance, end of the period
$
7,267

 
$
16,180

 
$
7,267

 
$
16,180

The aggregate effect of changes in the FDIC loss-share receivable was a net reduction in non-interest income of $55 thousand and $3.8 million for the three months ended September 30, 2015 and 2014, respectively, and $3.4 million and $11.6 million for nine months ended September 30, 2015 and 2014, respectively. The reduction (in both the receivable and non-interest income) during the nine months ended September 30, 2015 was mainly caused by the increase in our prospective recognition of the effect of additional cash flows from certain pooled loans during the first quarter of 2015. There were no additional cash flows on pooled loans during the second and third quarters of 2015, as the receivable was prospectively reduced for such additional cash flows over the shorter term of the commercial loan loss-sharing agreements (related to Valley's 2010 FDIC-assisted transactions) that expired in March 2015.
Non-performing Assets
Non-performing assets (excluding PCI loans) include non-accrual loans, other real estate owned (OREO), other repossessed assets (which mainly consist of automobiles) and non-accrual debt securities at September 30, 2015. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less cost to sell at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter. The level of non-performing assets has decreased 13.9 percent over the last 12 month period (as shown in the table below) and remained relatively low as a percentage of the total loan portfolio at September 30, 2015. Past due loans and non-accrual loans in the table below exclude non-covered and covered 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 8 to the consolidated financial statements.


79




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: 
 
September 30, 2015
 
June 30,
2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
($ in thousands)
Accruing past due loans: (1)
 
30 to 59 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,081

 
$
1,080

 
$
4,472

 
$
1,630

 
$
476

Commercial real estate
2,950

 
1,542

 
4,775

 
8,938

 
1,194

Construction
4,707

 
404

 
6,577

 
448

 

Residential mortgage
5,617

 
4,690

 
12,498

 
6,200

 
8,871

Consumer
3,491

 
2,440

 
2,875

 
2,982

 
3,741

Total 30 to 59 days past due
18,846

 
10,156

 
31,197

 
20,198

 
14,282

60 to 89 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
1,996

 
475

 
90

 
1,102

 
629

Commercial real estate
1,415

 
2,182

 
1,883

 
113

 
788

Construction

 

 

 

 
154

Residential mortgage
1,977

 
1,280

 
1,782

 
3,575

 
2,304

Consumer
722

 
644

 
837

 
764

 
913

Total 60 to 89 days past due
6,110

 
4,581

 
4,592

 
5,554

 
4,788

90 or more days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
224

 
226

 
208

 
226

 
256

Commercial real estate
245

 
133

 
2,792

 
49

 
52

Construction

 

 

 
3,988

 
9,833

Residential mortgage
3,468

 
3,014

 
564

 
1,063

 
2,057

Consumer
166

 
160

 
262

 
152

 
278

Total 90 or more days past due
4,103

 
3,533

 
3,826

 
5,478

 
12,476

Total accruing past due loans
$
29,059

 
$
18,270

 
$
39,615

 
$
31,230

 
$
31,546

Non-accrual loans: (1)
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
12,845

 
$
9,019

 
$
8,285

 
$
8,467

 
$
7,251

Commercial real estate
22,129

 
21,760

 
24,850

 
22,098

 
26,379

Construction
5,959

 
4,775

 
5,144

 
5,223

 
6,578

Residential mortgage
16,657

 
17,269

 
17,127

 
17,760

 
17,305

Consumer
1,634

 
1,855

 
2,138

 
2,209

 
2,380

Total non-accrual loans
59,224

 
54,678

 
57,544

 
55,757

 
59,893

Non-performing loans held for sale

 

 

 
7,130

 
7,350

Other real estate owned (OREO) (2)
14,691

 
14,476

 
13,184

 
14,249

 
15,534

Other repossessed assets
369

 
1,510

 
477

 
1,232

 
1,260

Non-accrual debt securities (3)
2,182

 
2,123

 
2,030

 
4,729

 
4,725

Total non-performing assets (NPAs)
$
76,466

 
$
72,787

 
$
73,235

 
$
83,097

 
$
88,762

Performing troubled debt restructured loans
$
91,210

 
$
97,625

 
$
100,524

 
$
97,743

 
$
107,134

Total non-accrual loans as a % of loans
0.39
%
 
0.38
%
 
0.42
%
 
0.41
%
 
0.49
%
Total NPAs as a % of loans and NPAs
0.51

 
0.50

 
0.53

 
0.61

 
0.72

Total accruing past due and non-accrual loans as a % of loans
0.59

 
0.50

 
0.71

 
0.65

 
0.75

Allowance for losses on non-covered loans as a % of non-accrual loans
176.20

 
187.71

 
178.00

 
183.21

 
169.90


80





 

(1)
Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis.
(2)
This table excludes covered OREO properties related to FDIC-assisted transactions totaling $5.4 million at both September 30, 2015 and June 30, 2015, and $8.6 million, $9.2 million and $6.2 million at March 31, 2015, December 31, 2014 and September 30, 2014, respectively.
(3)
Includes other-than-temporarily impaired trust preferred securities classified as available for sale, which are presented at carrying value, net of net unrealized losses totaling $570 thousand, $630 thousand, $723 thousand, $621 thousand and $625 thousand at September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014 and September 30, 2014, respectively.

Total NPAs increased $3.7 million to $76.5 million at September 30, 2015 from June 30, 2015 largely due to a $4.5 million increase in non-accrual loans, partially offset by a decrease of $1.1 million in other repossessed assets.

Loans past due 30 to 59 days increased $8.7 million to $18.8 million at September 30, 2015 as compared to June 30, 2015 due to increases across all loan types within the category. However, the commercial and industrial loans, commercial real estate loans and construction categories included matured performing loans in the normal process of renewal and one loan that paid off during October 2015 which accounted for a combined total of $7.3 million of the $8.7 million increase in this past due category.

Loans past due 60 to 89 days increased $1.5 million to $6.1 million at September 30, 2015 as compared to June 30, 2015. Within this past due category, commercial and industrial loans increased $1.5 million primarily due to one potential problem loan totaling $1.7 million.

Loans past due 90 days or more and still accruing increased $570 thousand to $4.1 million at September 30, 2015 compared to $3.5 million at June 30, 2015 mostly due to a moderate increase in residential mortgage loans.

Non-accrual loans increased $4.5 million to $59.2 million at September 30, 2015 as compared to $54.7 million at June 30, 2015 mainly due to increases of $3.8 million and $1.2 million in commercial and industrial and construction loans, respectively. The commercial and industrial loans category increased mainly due to two new non-accrual loans totaling a combined $3.9 million. The increase within the construction category was mostly caused by one new non-accrual loan totaling $4.0 million, partially offset by the repayment of one loan relationship totaling $2.2 million.

Other repossessed assets decreased $1.1 million to $369 thousand at September 30, 2015 as compared to $1.5 million at June 30, 2015. The decrease was primarily due to the sale of one repossessed aircraft totaling $987 thousand during the third quarter of 2015. The sale resulted in the recognition of an immaterial loss for the the third quarter of 2015.

OREO properties increased $215 thousand to $14.7 million at September 30, 2015 from $14.5 million at June 30, 2015. Our residential mortgage loan foreclosure activity remains low due to the nominal amount of individual loan delinquencies within the residential mortgage and home equity portfolios and the average time to complete a foreclosure in the State of New Jersey, which currently exceeds two and a half years. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $12.3 million at September 30, 2015. Although we have experienced an increase in the amount of foreclosures working through the courts, we believe this lengthy legal process negatively impacts the level of our non-accrual loans, NPAs, and the ability to compare our NPA levels to similar banks located outside of our primary markets.

Troubled debt restructured loans (TDRs) represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) totaled $91.2 million at September 30, 2015 and consisted of 101 loans (primarily in the commercial and industrial loan and commercial real estate portfolios). On an aggregate basis,

81




the $91.2 million in performing TDRs at September 30, 2015 had a modified weighted average interest rate of approximately 4.74 percent as compared to a pre-modification weighted average interest rate of 5.06 percent.
Allowance for Credit Losses

The allowance for credit losses consists of the allowance for losses on non-covered loans, the allowance for unfunded letters of credit, and the allowance for losses on covered loans related to credit impairment of certain covered loan pools subsequent to acquisition. Management maintains the allowance for credit losses at a level estimated to absorb probable losses inherent in the loan portfolio and unfunded letters 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 non-covered loans includes:
 
segmentation of the loan portfolio based on the major loan categories, which consist of commercial, commercial real estate (including construction), residential mortgage and other consumer loans (including automobile and home equity loans);
tracking both the historical and current levels and trends of classified loans and delinquencies;
assessing the nature and trend of loan charge-offs, including those specific to loans internally classified as "special mention," "substandard," or "doubtful";
providing specific reserves on impaired loans;
evaluating the non-covered PCI loan pools for additional credit impairment subsequent to the acquisition dates; and
applying economic outlook factors, assigning specific incremental reserves where necessary.
Additionally, 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. Allowance for credit losses 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, 2014.

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.


82




The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
June 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
 
($ in thousands)
Average loans outstanding
$
14,709,618

 
$
14,143,580

 
$
11,907,275

 
$
14,144,921

 
$
11,757,957

Beginning balance - Allowance for credit losses
$
104,887

 
$
104,565

 
$
105,597

 
$
104,287

 
$
117,112

Loans charged-off:*
 
 
 
 
 
 
 
 
 
Commercial and industrial
(1,124
)
 
(3,226
)
 
(1,852
)
 
(5,103
)
 
(11,806
)
Commercial real estate

 
(1,787
)
 
(181
)
 
(1,864
)
 
(4,894
)
Construction
(40
)
 
(803
)
 

 
(916
)
 
(1,809
)
Residential mortgage
(111
)
 
(339
)
 
(240
)
 
(499
)
 
(515
)
Consumer
(734
)
 
(1,194
)
 
(72
)
 
(2,642
)
 
(2,311
)
 
(2,009
)
 
(7,349
)
 
(2,345
)
 
(11,024
)
 
(21,335
)
Charged-off loans recovered:
 
 
 
 
 
 
 
 
 
Commercial and industrial
2,550

 
1,986

 
1,190

 
5,587

 
6,154

Commercial real estate
535

 
215

 
26

 
773

 
1,919

Construction
1

 
475

 

 
913

 
912

Residential mortgage
151

 
130

 
8

 
395

 
244

Consumer
488

 
365

 
506

 
1,172

 
1,649

 
3,725

 
3,171

 
1,730

 
8,840

 
10,878

Net recoveries (charge-offs)*
1,716

 
(4,178
)
 
(615
)
 
(2,184
)
 
(10,457
)
Provision charged for credit losses
94

 
4,500

 
(423
)
 
4,594

 
(2,096
)
Ending balance - Allowance for credit losses
$
106,697

 
$
104,887

 
$
104,559

 
$
106,697

 
$
104,559

Components of allowance for credit losses:
 
 
 
 
 
 
 
 
 
Allowance for non-covered loans
$
104,351

 
$
102,635

 
$
101,760

 
$
104,351

 
$
101,760

Allowance for covered loans
200

 
200

 
678

 
200

 
678

Allowance for loan losses
104,551

 
102,835

 
102,438

 
104,551

 
102,438

Allowance for unfunded letters of credit
2,146

 
2,052

 
2,121

 
2,146

 
2,121

Allowance for credit losses
$
106,697

 
$
104,887

 
$
104,559

 
$
106,697

 
$
104,559

Components of provision for credit losses:
 
 
 
 
 
 
 
 
 
Provision for losses on non-covered loans
$

 
$
4,382

 
$

 
$
4,382

 
$
4,949

Provision for losses on covered loans

 

 

 

 
(5,671
)
Provision for loan losses

 
4,382

 

 
4,382

 
(722
)
Provision for unfunded letters of credit
94

 
118

 
(423
)
 
212

 
(1,374
)
Provision for credit losses
$
94

 
$
4,500

 
$
(423
)
 
$
4,594

 
$
(2,096
)
 
 
 
 
 
 
 
 
 
 
Ratio of net charge-offs of non-covered loans to average loans outstanding
(0.05
)%
 
0.12
%
 
0.01
%
 
0.02
%
 
0.11
%
Ratio of total net charge-offs to average loans outstanding
(0.05
)
 
0.12

 
0.02

 
0.02

 
0.12

Allowance for non-covered loan losses as a % of non-covered loans
0.70

 
0.72

 
0.84

 
0.70

 
0.84

Allowance for credit losses as a % of total loans
0.71

 
0.72

 
0.86

 
0.71

 
0.86



83





 
*
There were no loan charge-offs or charged off loan recoveries related to covered loans during the third and second quarters of 2015 and the nine months ended September 30, 2015. For the three and nine months ended September 30, 2014, loan charge-offs and charged-off loan recoveries included $433 thousand and $1.2 million, respectively, related to covered loans. Covered loan charge-offs are substantially offset by reimbursements under the FDIC loss-sharing agreements.

During the third quarter of 2015, we recognized net loan recoveries on non-covered loans totaling $1.7 million as compared to net loan charge-offs on non-covered loans of $4.2 million and $182 thousand for the second quarter of 2015 and third quarter of 2014, respectively. The decrease in net loan charge-offs compared to the linked second quarter was primarily due to a decline in gross loan charge-offs within all loan categories during the third quarter of 2015 as compared to the second quarter of 2015. Gross loan recoveries of non-covered loans charge-offs during the third quarter of 2015 included two commercial and industrial loans recoveries totaling $1.4 million. Total net non-covered loan charge-offs for the nine months ended September 30, 2015 decreased $5.9 million as compared to $9.7 million for the same period of 2014 mostly due to lower gross loan charge-offs in the commercial loan categories.

During the third quarter of 2015, we recorded a $94 thousand provision for losses on non-covered loans and unfunded letters of credit as compared to a $4.5 million provision for the second quarter of 2015 and a $423 thousand credit (negative) provision for the third quarter of 2014. The decrease in the provision from the linked second quarter was mainly due to the aforementioned decline in non-covered loan charge-off activity, as well as several other factors that impacted our analysis of the allowance for non-covered loan losses at September 30, 2015.
During the nine months ended September 30, 2015, we recorded no provision for losses on covered loans as compared to a credit (negative) provision totaling $5.7 million during the nine months ended September 30, 2014. The $5.7 million negative provision was first recorded in the second quarter of 2014 due to a decrease in the estimated additional credit impairment of certain loan pools subsequent to acquisition.

84




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:
 
September 30, 2015
 
June 30, 2015
 
September 30, 2014
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
($ in thousands)
Loan Category:
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial loans*
$
49,512

 
2.06
%
 
$
43,595

 
1.84
%
 
$
47,843

 
2.30
%
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
29,950

 
0.43
%
 
30,515

 
0.46
%
 
26,204

 
0.49
%
Construction
12,328

 
2.17
%
 
13,670

 
2.34
%
 
10,862

 
2.38
%
Total commercial real estate loans
42,278

 
0.57
%
 
44,185

 
0.61
%
 
37,066

 
0.64
%
Residential mortgage loans
4,549

 
0.15
%
 
5,025

 
0.19
%
 
6,147

 
0.25
%
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Home equity
1,127

 
0.24
%
 
1,649

 
0.34
%
 
1,365

 
0.31
%
Auto and other consumer
3,311

 
0.21
%
 
3,894

 
0.25
%
 
4,415

 
0.32
%
Total consumer loans
4,438

 
0.21
%
 
5,543

 
0.27
%
 
5,780

 
0.32
%
Unallocated
5,720

 

 
6,339

 

 
7,045

 

Allowance for non-covered loans and unfunded letters of credit
106,497

 
0.72
%
 
104,687

 
0.73
%
 
103,881

 
0.86
%
Allowance for covered loans
200

 
0.15
%
 
200

 
0.14
%
 
678

 
1.46
%
Total allowance for credit losses
$
106,697

 
0.71
%
 
$
104,887

 
0.72
%
 
$
104,559

 
0.86
%
 
*
Includes the reserve for unfunded letters of credit.

The allowance for non-covered loans and unfunded letters of credit as a percentage of total non-covered loans was 0.72 percent at September 30, 2015 as compared to 0.73 percent and 0.86 percent at June 30, 2015 and September 30, 2014, respectively. At September 30, 2015, our allowance allocations for losses as a percentage of total loans moderately decreased within several loan categories as compared to June 30, 2015 due, in part, to the lower level of net loan charge-offs during the third quarter; mostly stable levels of delinquent, impaired and internally classified loans; and our somewhat improved outlook for economic conditions impacting our portfolio at September 30, 2015. The allowance allocation for losses within the commercial and industrial loan category in the table above increased 0.22 percent to 2.06 percent of total loans within the category at September 30, 2015 as compared to June 30, 2015 primarily due to our estimate of a somewhat longer loss emergence period (i.e., the average expected time necessary for an incurred loss to be realized in the portfolio) based upon our most recent loss experience study completed in the third quarter. The overall mix of these items, loan growth, as well as other factors impacted our estimate of the allowance for credit losses at September 30, 2015.
Our allowance for non-covered loans and unfunded letters of credit as a percentage of total non-covered loans (excluding non-covered PCI loans with carrying values totaling approximately $1.3 billion) was 0.79 percent at September 30, 2015 as compared to 0.81 percent at June 30, 2015. Non-covered and covered 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 non-covered PCI loans at September 30, 2015, June 30, 2015 and September 30, 2014. The allowance for covered PCI loans is included in the table above.

Management believes that the unallocated allowance is appropriate given, among other factors, the uncertain strength of the economic and housing market conditions, the size and expansion of the loan portfolio, and level of loan delinquencies at September 30, 2015.


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Loan Repurchase Contingencies

We engage in the origination of residential mortgages for sale into the secondary market. In connection with loan sales, we make representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred due to such loans. However, the performance of our loans sold has been historically strong due to our strict underwriting standards and procedures. Over the past several years, we have experienced a nominal amount of repurchase requests, only a few of which have actually resulted in repurchases by Valley (only two loan repurchases in 2014 and none in 2015). None of the loan repurchases resulted in losses. Accordingly, no reserves pertaining to loans sold were established on our consolidated financial statements at September 30, 2015 and December 31, 2014. See Part I, Item 1A. Risk Factors - “We may incur future losses in connection with repurchases and indemnification payments related to mortgages that we have sold into the secondary market” of Valley’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional information.
Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. Our shareholders’ equity totaled approximately $2.0 billion at September 30, 2015 and $1.9 billion at December 31, 2014, and represented 10.2 percent and 9.9 percent of total assets at each of the respective dates. During the nine months ended September 30, 2015, total shareholders’ equity increased $133.9 million, which was comprised of (i) $111.6 million of net proceeds from the issuance of 4.6 million shares of Preferred Stock, (ii) net income of $98.3 million, (iii) a $5.0 million in net proceeds from the re-issuance of 517 thousand shares of treasury stock or authorized common shares issued under our dividend reinvestment plan, and (iv) a $4.4 million increase attributable to the effect of our stock incentive plan, partially offset by (v) cash dividends declared on common and preferred stock totaling $76.8 million and $2.0 million, respectively, and (vi) a $6.6 million increase in our accumulated other comprehensive loss. See Note 4 to the consolidated financial statements for additional information regarding changes in our accumulated other comprehensive loss during the three and nine months ended September 30, 2015.
On June 19, 2015, we issued $115 million (4.6 million shares) of Preferred Stock, no par value per share, with a liquidation preference of $25 per share which was included in Valley's Tier 1 capital and total risk-based capital at September 30, 2015. Dividends on the preferred stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to 6.25 percent from the original issue date to, but excluding, June 30, 2025, and thereafter at a floating rate per annum equal to three-month LIBOR plus a spread of 3.85 percent.
In June 2015, we also issued $100 million of notes due June 30, 2025 mainly to replace our $100 million of 5 percent subordinated notes which matured and were repaid in July 2015. The new subordinated notes were included in Valley's total risk-based (Tier 2) capital at September 30, 2015.
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. As of September 30, 2015 and December 31, 2014, Valley exceeded all capital adequacy requirements to which it was subject (see tables below).

On January 1, 2015, the final rules implementing the Basel Committee on Banking Supervision capital guidelines for banking organizations (Basel III) regulatory capital framework and related Dodd-Frank Act changes became effective for Valley. These rules supersede the federal banking agencies' general risk-based capital rules (Basel I). Full compliance with all of the final rule's requirements is phased in over a multi-year transition period ending on January 1, 2019. Basel III revises minimum capital requirements and adjust prompt corrective action thresholds. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by Valley and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0 percent to 6.0 percent, require a minimum ratio of total capital to risk-weighted assets of 8.0 percent, and require a minimum leverage ratio of 4.0 percent. A new

86




capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This conservation buffer will be phased in beginning January 1, 2016 at 0.625 percent of risk-weighted assets and increase each subsequent year by an additional 0.625 percent until reaching its final level of 2.5 percent of risk-weighted assets on January 1, 2019. The final rule also revised the definition and calculation of Tier 1 capital, total capital and risk-weighted assets.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under risk-based capital guidelines of Basel III at September 30, 2015.
 
Basel III*
 
Actual
 
Minimum Capital
Requirements
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 ($ in thousands)
As of September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
$
1,815,347

 
12.4
%
 
$
1,168,769

 
8.0
%
 
$ N/A
 
N/A

Valley National Bank
1,727,533

 
11.8

 
1,168,112

 
8.0

 
1,460,140

 
10.0

Common Equity Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,340,445

 
9.2

 
657,432

 
4.5

 
N/A

 
N/A

Valley National Bank
1,520,836

 
10.4

 
657,063

 
4.5

 
949,091

 
6.5

Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,450,650

 
9.9

 
876,577

 
6.0

 
N/A

 
N/A

Valley National Bank
1,520,836

 
10.4

 
876,084

 
6.0

 
1,168,112

 
8.0

Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,450,650

 
7.7

 
756,423

 
4.0

 
N/A

 
N/A

Valley National Bank
1,520,836

 
8.1

 
756,009

 
4.0

 
945,011

 
5.0

_______
* September 30, 2015 capital positions and ratios were calculated under Basel III rules which became effective January 1, 2015.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under risk-based capital guidelines of Basel I at December 31, 2014.
 
 Basel I
 
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, 2014
 
 
 
 
 
 
 
 
 
 
 
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
$
1,547,753

 
11.4
%
 
$
1,084,479

 
8.0
%
 
$ N/A

 
N/A%

Valley National Bank
1,481,184

 
10.9

 
1,083,516

 
8.0

 
1,354,395

 
10.0

Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,318,466

 
9.7

 
542,240

 
4.0

 
N/A

 
N/A

Valley National Bank
1,376,897

 
10.2

 
541,758

 
4.0

 
813,637

 
6.0

Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,318,466

 
7.5

 
707,082

 
4.0

 
N/A

 
N/A

Valley National Bank
1,376,897

 
7.8

 
706,992

 
4.0

 
883,740

 
5.0



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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. On October 9, 2012, the FRB published final rules implementing the stress testing requirements for banks, such as the Company, with total consolidated assets of more than $10.0 billion but less than $50.0 billion.  These rules set forth the timing and type of stress test activities, as well as rules governing controls, oversight and disclosure.

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

We submitted our latest Dodd-Frank Act company-run annual stress testing results (utilizing data as of December 31, 2014 and projecting over an eight-quarter horizon as instructed by our primary regulators due to the acquisition of 1st United in the fourth quarter of 2014) to the FRB and the OCC on March 31, 2015. The stress test results do not represent Valley's economic forecast. Additionally, the results do not include Valley's $100 million of notes and $115 million of Preferred Stock, both issued in June 2015. 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 the Shareholder Relations section of our website at www.valleynationalbank.com.
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: 
 
September 30,
2015
 
December 31,
2014
 
($ in thousands, except for share data)
Common shares outstanding
232,789,880

 
232,110,975

Shareholders’ equity
$
1,996,949

 
$
1,863,017

Less: Preferred stock
111,590

 

Less: Goodwill and other intangible assets
608,916

 
614,667

Tangible shareholders’ equity
$
1,276,443

 
$
1,248,350

Tangible book value per common share
$
5.48

 
$
5.38

Book value per common share
$
8.10

 
$
8.03

Management believes the tangible book value per common share ratio provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and facilitates comparisons with the performance of others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. This non-GAAP financial measure may also be calculated differently from similar measures disclosed by other companies.
Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common stockholders) per common share. Our retention ratio was 19.5 percent for the nine months ended September 30, 2015 as compared to 21.6 percent for the year ended December 31, 2014. Our rate of earnings retention for the nine months ended September 30, 2015 was negatively impacted by, among other factors, additional operating expenses related to Florida-based data systems and back office staff prior to the systems integration completed in February 2015 for the 1st United acquisition. We expect our synergies realized from the integration of 1st United's back office operations, potential future loan growth (in all of our primary lending markets) our Branch Efficiency and Cost Reductions Plans, and our prepayment of $795 million in high cost borrowings (exclusive of $32.7 million in after-tax penalty charges) during the fourth quarter of 2015 will help increase our future retention rate.

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Cash dividends declared amounted to $0.33 per common share for both the nine months ended September 30, 2015 and 2014. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision in this economic environment. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow in light of the new higher capital levels as required under the new Basel III rules. Although we can provide no assurance as to the declaration of cash dividends by our Board, we do not believe the borrowings prepayment penalty of $32.7 million (after-taxes) to be recognized in the fourth quarter of 2015 will impact our ability to continue to pay our normal quarterly common stock dividend at its current rate of $0.11 per share.
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, 2014 in the MD&A section -“Off-Balance Sheet Arrangements” and Notes 12, 13 and 14 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 69 for a discussion of interest rate sensitivity.
Item 4.
Controls and Procedures
Valley’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), with the assistance of other members of Valley’s management, have evaluated the effectiveness of Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, Valley’s CEO and CFO have concluded that Valley’s disclosure controls and procedures are effective as of the end of the period covered by this report.
Valley’s CEO and CFO have also concluded that there have not been any changes in Valley’s internal control over financial reporting during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting.
Valley’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Valley have been or will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

89





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. There have been no material changes in the legal proceedings previously disclosed under Part I, Item 3 of Valley’s Annual Report on Form 10-K for the year ended December 31, 2014.

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, 2014.


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 September 30, 2015 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES 
Period
 
Total  Number of
Shares  Purchased (2)
 
Average
Price Paid
Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (1)
 
Maximum Number of
Shares that May Yet Be
Purchased Under the Plans (1)
July 1, 2015 to July 31, 2015
 
2,328

 
$
10.26

 

 
4,112,465

August 1, 2015 to August 31, 2015
 
169

 
9.94

 

 
4,112,465

September 1, 2015 to September 30, 2015
 

 

 

 
4,112,465

Total
 
2,497

 
$
10.23

 

 
 
 
(1)
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 September 30, 2015.
(2)
Represents repurchases made in connection with the vesting of employee restricted stock awards.


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Item 6.
Exhibits
 
 
 
 
(3)
Articles of Incorporation and By-laws:
 
A.
Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.A of the Registrant's Current Report on Form 10-Q filed on August 7, 2015.
 
B.
Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on June 19, 2015.
 
C.
By-laws of the Registrant, as amended, incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on December 5, 2013.
 
 
 
(10)
 
Valley National Bancorp Benefit Equalization Plan as Amended and Restated *
(31.1)
 
Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by Gerald H. Lipkin, Chairman of the Board, President and Chief Executive Officer of the Company.*
 
 
 
(31.2)
 
Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by Alan D. Eskow, Senior Executive Vice President and Chief Financial Officer of the Company.*
 
 
 
(32)
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Gerald H. Lipkin, Chairman of the Board, President and Chief Executive Officer of the Company, and Alan D. Eskow, Senior Executive Vice President and Chief Financial Officer of the Company.*
 
 
 
(101)
 
Interactive Data File *
 
*
Filed herewith.
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: November 6, 2015
 
 
 
/s/ Gerald H. Lipkin
 
 
 
 
Gerald H. Lipkin
 
 
 
 
Chairman of the Board, President
 
 
 
 
and Chief Executive Officer
 
 
 
Date: November 6, 2015
 
 
 
/s/ Alan D. Eskow
 
 
 
 
Alan D. Eskow
 
 
 
 
Senior Executive Vice President and
 
 
 
 
Chief Financial Officer


91