Investment Securities

As of September 30, 2014, Valley had approximately $1.8 billion, $758.4 million, and $14.2 million in held to maturity, available for sale, and trading investment securities, respectively. 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 three pooled trust preferred securities), corporate bonds primarily issued by banks, 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. See the “Other-Than-Temporary Impairment Analysis” section below for further discussion.

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at September 30, 2014 and December 31, 2013 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2014
U.S. Treasury securities	$	139,156	$	9,329	$	—		$	148,485
U.S. government agency securities	13,881		326		—			14,207
Obligations of states and political subdivisions:
Obligations of states and state agencies	198,027		8,494		(419		)	206,102
Municipal bonds	303,285		10,965		(597		)	313,653
Total obligations of states and political subdivisions	501,312		19,459		(1,016		)	519,755
Residential mortgage-backed securities	1,020,852		15,988		(12,438		)	1,024,402
Trust preferred securities	98,454		185		(12,165		)	86,474
Corporate and other debt securities	39,657		5,655		(3		)	45,309
Total investment securities held to maturity	$	1,813,312	$	50,942	$	(25,622	)	$	1,838,632
December 31, 2013
U.S. Treasury securities	$	139,255	$	5,567	$	(515	)	$	144,307
U.S. government agency securities	4,427		—		(62		)	4,365
Obligations of states and political subdivisions:
Obligations of states and state agencies	192,653		1,944		(5,473		)	189,124
Municipal bonds	353,233		6,053		(5,259		)	354,027
Total obligations of states and political subdivisions	545,886		7,997		(10,732		)	543,151
Residential mortgage-backed securities	886,043		12,609		(27,631		)	871,021
Trust preferred securities	103,458		363		(12,332		)	91,489
Corporate and other debt securities	52,668		4,426		—			57,094
Total investment securities held to maturity	$	1,731,737	$	30,962	$	(51,272	)	$	1,711,427

The age of unrealized losses and fair value of related securities held to maturity at September 30, 2014 and December 31, 2013 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, 2014
Obligations of states and political subdivisions:
Obligations of states and state agencies	$	16,384	$	(30	)	$	24,744	$	(389	)	$	41,128	$	(419	)
Municipal bonds	—		—			51,368		(597		)	51,368		(597		)
Total obligations of states and political subdivisions	16,384		(30		)	76,112		(986		)	92,496		(1,016		)
Residential mortgage-backed securities	135,266		(851		)	327,191		(11,587		)	462,457		(12,438		)
Trust preferred securities	—		—			66,406		(12,165		)	66,406		(12,165		)
Corporate and other debt securities	247		(3		)	—		—			247		(3		)
Total	$	151,897	$	(884	)	$	469,709	$	(24,738	)	$	621,606	$	(25,622	)
December 31, 2013
U.S. Treasury securities	$	64,537	$	(515	)	$	—	$	—		$	64,537	$	(515	)
U.S. government agency securities	4,365		(62		)	—		—			4,365		(62		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	80,612		(5,473		)	—		—			80,612		(5,473		)
Municipal bonds	85,988		(5,154		)	1,326		(105		)	87,314		(5,259		)
Total obligations of states and political subdivisions	166,600		(10,627		)	1,326		(105		)	167,926		(10,732		)
Residential mortgage-backed securities	465,400		(27,631		)	—		—			465,400		(27,631		)
Trust preferred securities	9,750		(250		)	56,480		(12,082		)	66,230		(12,332		)
Total	$	710,652	$	(39,085	)	$	57,806	$	(12,187	)	$	768,458	$	(51,272	)

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, 2014 was 86 as compared to 133 at December 31, 2013.

The unrealized losses for the residential mortgage-backed securities category of the held to maturity portfolio at September 30, 2014 relate to investment grade mortgage-backed securities issued or guaranteed by Ginnie Mae and government sponsored enterprises.

The unrealized losses for trust preferred securities at September 30, 2014 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, 2014.

Management does not believe that any individual unrealized loss as of September 30, 2014 included in the table above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates, widening credit spreads, and lack of liquidity in the market place, credit losses or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.

As of September 30, 2014, 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 $910.0 million.

The contractual maturities of investments in debt securities held to maturity at September 30, 2014 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, 2014
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	67,436	$	67,471
Due after one year through five years	51,163		56,054
Due after five years through ten years	338,008		355,791
Due after ten years	335,853		334,914
Residential mortgage-backed securities	1,020,852		1,024,402
Total investment securities held to maturity	$	1,813,312	$	1,838,632

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.

The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 7.3 years at September 30, 2014.

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at September 30, 2014 and December 31, 2013 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2014
U.S. Treasury securities	$	99,829	$	—	$	(6,833	)	$	92,996
U.S. government agency securities	44,504		756		(246		)	45,014
Obligations of states and political subdivisions:
Obligations of states and state agencies	11,220		—		(108		)	11,112
Municipal bonds	27,018		92		(607		)	26,503
Total obligations of states and political subdivisions	38,238		92		(715		)	37,615
Residential mortgage-backed securities	465,092		3,852		(9,367		)	459,577
Trust preferred securities*	23,228		430		(2,414		)	21,244
Corporate and other debt securities	77,413		1,506		(1,004		)	77,915
Equity securities	23,071		1,576		(587		)	24,060
Total investment securities available for sale	$	771,375	$	8,212	$	(21,166	)	$	758,421
December 31, 2013
U.S. Treasury securities	$	99,835	$	—	$	(15,170	)	$	84,665
U.S. government agency securities	48,407		923		(703		)	48,627
Obligations of states and political subdivisions:
Obligations of states and state agencies	11,441		—		(798		)	10,643
Municipal bonds	27,671		751		(1,365		)	27,057
Total obligations of states and political subdivisions	39,112		751		(2,163		)	37,700
Residential mortgage-backed securities	524,781		3,967		(20,719		)	508,029
Trust preferred securities*	23,333		113		(4,231		)	19,215
Corporate and other debt securities	83,819		1,682		(2,103		)	83,398
Equity securities	47,617		1,614		(1,173		)	48,058
Total investment securities available for sale	$	866,904	$	9,050	$	(46,262	)	$	829,692



*	Includes three pooled trust preferred securities, principally collateralized by securities issued by banks and insurance companies.

The age of unrealized losses and fair value of related securities available for sale at September 30, 2014 and December 31, 2013 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, 2014
U.S. Treasury securities	$	—	$	—		$	92,996	$	(6,833	)	$	92,996	$	(6,833	)
U.S. government agency securities	—		—			20,574		(246		)	20,574		(246		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	—		—			11,111		(108		)	11,111		(108		)
Municipal bonds	10,939		(323		)	14,495		(284		)	25,434		(607		)
Total obligations of states and political subdivisions	10,939		(323		)	25,606		(392		)	36,545		(715		)
Residential mortgage-backed securities	59,755		(422		)	300,773		(8,945		)	360,528		(9,367		)
Trust preferred securities	—		—			12,557		(2,414		)	12,557		(2,414		)
Corporate and other debt securities	25,297		(145		)	28,499		(859		)	53,796		(1,004		)
Equity securities	46		(2		)	15,059		(585		)	15,105		(587		)
Total	$	96,037	$	(892	)	$	496,064	$	(20,274	)	$	592,101	$	(21,166	)
December 31, 2013
U.S. Treasury securities	$	84,665	$	(15,170	)	$	—	$	—		$	84,665	$	(15,170	)
U.S. government agency securities	26,402		(703		)	—		—			26,402		(703		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	10,598		(798		)	—		—			10,598		(798		)
Municipal bonds	13,461		(1,365		)	—		—			13,461		(1,365		)
Total obligations of states and political subdivisions	24,059		(2,163		)	—		—			24,059		(2,163		)
Residential mortgage-backed securities	368,306		(18,434		)	24,734		(2,285		)	393,040		(20,719		)
Trust preferred securities	2,024		(25		)	15,022		(4,206		)	17,046		(4,231		)
Corporate and other debt securities	53,654		(2,073		)	2,471		(30		)	56,125		(2,103		)
Equity securities	223		(6		)	14,248		(1,167		)	14,471		(1,173		)
Total	$	559,333	$	(38,574	)	$	56,475	$	(7,688	)	$	615,808	$	(46,262	)

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, 2014 was 90 as compared to 99 at December 31, 2013.

The unrealized losses within the residential mortgage-backed securities category of the available for sale portfolio at September 30, 2014 largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae. The unrealized losses for more than twelve months also include $1.3 million related to four non-investment grade private label mortgage-backed securities (including three of the five private label mortgage-backed securities that were previously other-than-temporarily impaired prior to December 31, 2012).

The unrealized losses for trust preferred securities at September 30, 2014 for more than twelve months in the table above largely relate to 2 pooled trust preferred securities with an amortized cost of $10.9 million and a fair value of $8.9 million. One of the two pooled trust preferred securities had a unrealized loss of $1.3 million and an investment grade rating at September 30, 2014. 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 during the period 2009 through 2011. All of the single-issuer trust preferred securities are paying in accordance with their terms and have no deferrals of interest or defaults and, if applicable, meet the regulatory capital requirements to be considered “well-capitalized institutions” at September 30, 2014.

Management does not believe that any individual unrealized loss as of September 30, 2014 represents an other-than-temporary impairment, as management mainly attributes the declines in value to changes in interest rates and recent market volatility and wider credit spreads, credit losses 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, 2014, 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 $508.0 million.

The contractual maturities of investment securities available for sale at September 30, 2014 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, 2014
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	115	$	115
Due after one year through five years	69,007		70,015
Due after five years through ten years	84,257		80,698
Due after ten years	129,833		123,956
Residential mortgage-backed securities	465,092		459,577
Equity securities	23,071		24,060
Total investment securities available for sale	$	771,375	$	758,421

The weighted average remaining expected life for residential mortgage-backed securities available for sale at September 30, 2014 was 5.3 years.

Other-Than-Temporary Impairment Analysis

To determine whether a security’s impairment is other-than-temporary, Valley considers several factors that include, but are not limited to the following:


•	The severity and duration of the decline, including the causes of the decline in fair value, such as an issuer’s credit problems, interest rate fluctuations, or market volatility;


•	Adverse conditions specifically related to the issuer of the security, an industry, or geographic area;


•	Failure of the issuer of the security to make scheduled interest or principal payments;


•	Any changes to the rating of the security by a rating agency or, if applicable, any regulatory actions impacting the security issuer;


•	Recoveries or additional declines in fair value after the balance sheet date;


•	Our ability and intent to hold equity security investments until they recover in value, as well as the likelihood of such a recovery in the near term; and


•	Our intent to sell debt security investments, or if it is more likely than not that we will be required to sell such securities before recovery of their individual amortized cost basis.

For debt securities, the primary consideration in determining whether impairment is other-than-temporary is whether or not we expect to collect all contractual cash flows.

In assessing the level of other-than-temporary impairment attributable to credit loss for debt securities, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings, while the amount related to other factors is recognized in other comprehensive income or loss. The total other-than-temporary impairment loss is presented in the consolidated statements of income, less the portion recognized in other comprehensive income or loss. Subsequent assessments may result in additional estimated credit losses on previously impaired securities. These additional estimated credit losses are recorded as reclassifications from the portion of other-than-temporary impairment previously recognized in other comprehensive income or loss to earnings in the period of such assessments. The amortized cost basis of an impaired debt security is reduced by the portion of the total impairment related to credit loss.

At September 30, 2014, approximately 52 percent of the $538.9 million carrying value of obligations of states and political subdivisions were issued by the states of (or municipalities within) New Jersey, New York and Pennsylvania. The obligations of states and political subdivisions mainly consist of general obligation bonds and, to a much lesser extent, special revenue bonds which had an aggregated amortized cost and fair value of $18.4 million and $19.2 million, respectively, at September 30, 2014. The special revenue bonds were mainly issued by the Port Authorities of New York and New Jersey, as well as various school districts. The gross unrealized losses associated with the obligations of states and political subdivisions totaled $1.7 million at September 30, 2014 as compared to $12.9 million at December 31, 2013. The decrease in gross losses was primarily driven by changes in interest rates. Substantially all of these investments are investment grade. The securities were generally underwritten in accordance with Valley’s investment standards prior to the decision to purchase. As part of Valley’s pre-purchase analysis and on-going quarterly assessment of impairment of the obligations of states and political subdivisions, our Credit Risk Management (CRM) Department conducts an independent financial analysis and risk rating assessment of each security issuer based on the issuer’s most recently issued financial statements and other publicly available information. As part of this analysis, Valley does not solely rely on external credit ratings in determining its final internal risk rating. For many securities, Valley believes the external credit ratings may not accurately reflect the actual credit quality of the security and therefore should not be viewed in isolation as a measure of the quality of our investments. Additionally, CRM does not consider potential credit support offered by insurance guarantees on certain bond securities in determining the internal risk rating, either at the date of the pre-purchase investment analysis or in subsequent assessments of impairment. Obligations of states and political subdivisions will continue to be monitored as part of our ongoing impairment analysis, and as of September 30, 2014 are expected to perform in accordance with their contractual terms. As a result, Valley expects to recover the entire amortized cost basis of these securities.

For residential mortgage-backed securities, Valley estimates loss projections for each security by stressing the cash flows from the individual loans collateralizing the security using expected default rates, loss severities, and prepayment speeds, in conjunction with the underlying credit enhancement (if applicable) for each security. Based on collateral and origination vintage specific assumptions, a range of possible cash flows is identified to determine whether other-than-temporary impairment exists. No other-than-temporary impairment losses were recognized as a result of our impairment analysis of these securities at September 30, 2014.

For the single-issuer trust preferred securities and corporate and other debt securities, Valley reviews each portfolio to determine if all the securities are paying in accordance with their terms and have no deferrals of interest or defaults. Over the past several years, an increasing number of banking institutions have been required to defer trust preferred payments and various banking institutions have been put in receivership by the FDIC. A deferral event by a bank holding company for which Valley holds trust preferred securities may require the recognition of an other-than-temporary impairment charge if Valley determines that it is more likely than not that all contractual interest and principal cash flows may not be collected. Among other factors, the probability of the collection of all interest and principal determined by Valley in its impairment analysis declines if there is an increase in the estimated deferral period of the issuer. Additionally, a FDIC receivership for any single-issuer would result in an impairment and significant loss. Including the other factors outlined above, Valley analyzes the performance of the issuers on a quarterly basis, including a review of performance data from the issuers’ most recent bank regulatory report, if applicable, to assess their credit risk and the probability of impairment of the contractual cash flows of the applicable security. All of the issuers had capital ratios at September 30, 2014 that were at or above the minimum amounts required to be considered a “well-capitalized” financial institution, if applicable, and/or have maintained performance levels adequate to support the contractual cash flows of the trust preferred securities.

For the two pooled trust preferred securities, Valley evaluates the projected cash flows from each of its tranches in the three securities to determine if they are adequate to support their future contractual principal and interest payments. Valley assesses the credit risk and probability of impairment of the contractual cash flows by projecting the default rates over the life of the security. Higher projected default rates will decrease the expected future cash flows from each security. If the projected decrease in cash flows affects the cash flows projected for the tranche held by Valley, the security would be considered to be other-than-temporarily impaired. Two of the pooled trust preferred securities were initially impaired in 2008 with additional estimated credit losses recognized during 2009 and 2011, and are not accruing interest.

The perpetual preferred securities, reported in equity securities, are hybrid investments that are assessed for impairment by Valley as if they were debt securities. Therefore, Valley assessed the creditworthiness of each security issuer, as well as any potential change in the anticipated cash flows of the securities as of September 30, 2014. Based on this analysis, management believes the declines in fair value of these securities are attributable to a lack of liquidity in the marketplace and are not reflective of any deterioration in the creditworthiness of the issuers.

Other-Than-Temporarily Impaired Securities

There were no other-than-temporary impairment losses on securities recognized in earnings for the three and nine months ended September 30, 2014 and 2013. At September 30, 2014, five previously impaired private label mortgage-backed securities (prior to December 31, 2012) had a combined amortized cost and fair value of $21.2 million and $21.0 million, respectively, while two previously impaired pooled trust preferred securities had a combined amortized cost and fair value of $5.4 million and $4.7 million, respectively. The pooled trust preferred securities were not accruing interest as of September 30, 2014.

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, 2014 and 2013 were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014			2013
	(in thousands)
Sales transactions:
Gross gains	$	103	$	1	$	103		$	3,382
Maturities and other securities transactions:
Gross gains	$	—	$	8	$	8		$	657
Gross losses	—		—		(9		)	(31		)
	$	—	$	8	$	(1	)	$	626
Total gains on securities transactions, net	$	103	$	9	$	102		$	4,008

Valley recognized gross gains from sales transactions totaling $3.4 million (as shown in the table above) for the nine months ended September 30, 2013 primarily due to the sales of zero percent yielding Freddie Mac and Fannie Mae perpetual preferred stock with amortized cost totaling $941 thousand.

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, 2014 and 2013:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in thousands)
Balance, beginning of period	$	9,682		$	33,102		$	9,990		$	33,290
Accretion of credit loss impairment due to an increase in expected cash flows	(198		)	(190		)	(506		)	(378		)
Balance, end of period	$	9,484		$	32,912		$	9,484		$	32,912

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.

Trading Securities

The fair value of trading securities (consisting of 2 single-issuer bank trust preferred securities) was $14.2 million and $14.3 million at September 30, 2014 and December 31, 2013, respectively. Interest income on trading securities totaled $290 thousand for both the three months ended September 30, 2014 and 2013 and $871 thousand and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.