Loans

The detail of the loan portfolio as of March 31, 2016 and December 31, 2015 was as follows:



	March 31, 2016						December 31, 2015
	Non-PCI Loans		PCI Loans*		Total		Non-PCI Loans		PCI Loans*		Total
	(in thousands)
Loans:
Commercial and industrial	$	2,176,942	$	360,603	$	2,537,545	$	2,156,549	$	383,942	$	2,540,491
Commercial real estate:
Commercial real estate	6,304,974		1,280,165		7,585,139		6,069,532		1,355,104		7,424,636
Construction	633,559		142,498		776,057		607,694		147,253		754,947
Total commercial real estate loans	6,938,533		1,422,663		8,361,196		6,677,226		1,502,357		8,179,583
Residential mortgage	2,892,643		209,171		3,101,814		2,912,079		218,462		3,130,541
Consumer:
Home equity	380,459		111,096		491,555		391,809		119,394		511,203
Automobile	1,187,742		321		1,188,063		1,238,826		487		1,239,313
Other consumer	444,247		11,567		455,814		426,147		15,829		441,976
Total consumer loans	2,012,448		122,984		2,135,432		2,056,782		135,710		2,192,492
Total loans	$	14,020,566	$	2,115,421	$	16,135,987	$	13,802,636	$	2,240,471	$	16,043,107

____


*	PCI loans include covered loans (mostly consisting of residential mortgage and commercial real estate loans) totaling $86.8 million and $122.3 million at March 31, 2016 and December 31, 2015, respectively.

Total non-covered loans include net unearned premiums and deferred loan costs of $5.6 million and $3.5 million at March 31, 2016 and December 31, 2015, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $2.3 billion and $2.4 billion at March 31, 2016 and December 31, 2015, respectively.

There were no sales of loans from the held for investment portfolio during the three months ended March 31, 2016 and 2015.

Purchased Credit-Impaired Loans (Including Covered Loans)

PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses), and aggregated and accounted for as pools of loans based on common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools. Valley's PCI loan portfolio included covered loans (i.e., loans in which the Bank will share losses with the FDIC under loss-sharing agreements) totaling $86.8 million and $122.3 million at March 31, 2016 and December 31, 2015, respectively.

The following table presents changes in the accretable yield for PCI loans during the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,
	2016			2015
	(in thousands)
Balance, beginning of period	$	415,179		$	336,208
Accretion	(28,059		)	(26,350		)
Balance, end of period	$	387,120		$	309,858

FDIC Loss-Share Receivable

The receivable arising from the loss-sharing agreements with the FDIC is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans. The FDIC loss share receivable (which is included in other assets on Valley's consolidated statements of financial condition) totaled $7.3 million and $8.3 million at March 31, 2016 and December 31, 2015, respectively. The aggregate effect of changes in the FDIC loss-share receivable was a net reduction in non-interest income of $560 thousand and $3.9 million for the three months ended March 31, 2016 and 2015, respectively. The larger reduction during the first quarter of 2015 was mainly caused by the prospective recognition of the effect of additional cash flows from certain loan pools which were covered by commercial loan loss-sharing agreements 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 $402.7 million and $386.6 million at March 31, 2016 and December 31, 2015, 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 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, Florida, and eastern Pennsylvania. 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 personal lines of credit (including those secured by cash surrender value of life insurance), credit card loans and personal loans. Valley believes the aggregate risk exposure of these lines of credit and loans was not significant at March 31, 2016. Unsecured consumer loans totaled approximately $20.4 million and $18.8 million, including $6.6 million and $7.1 million of credit card loans, at March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015:



	Past Due and Non-Accrual Loans
	30-59 Days Past Due Loans		60-89 Days Past Due Loans		Accruing Loans 90 Days or More Past Due		Non-Accrual Loans		Total Past Due Loans		Current Non-PCI Loans		Total Non-PCI Loans
	(in thousands)
March 31, 2016
Commercial and industrial	$	8,395	$	613	$	221	$	11,484	$	20,713	$	2,156,229	$	2,176,942
Commercial real estate:
Commercial real estate	1,389		120		131		26,604		28,244		6,276,730		6,304,974
Construction	1,326		—		—		5,978		7,304		626,255		633,559
Total commercial real estate loans	2,715		120		131		32,582		35,548		6,902,985		6,938,533
Residential mortgage	14,628		3,056		2,613		16,747		37,044		2,855,599		2,892,643
Consumer loans:
Home equity	1,262		300		—		1,685		3,247		377,212		380,459
Automobile	1,336		374		65		122		1,897		1,185,845		1,187,742
Other consumer	602		57		1		—		660		443,587		444,247
Total consumer loans	3,200		731		66		1,807		5,804		2,006,644		2,012,448
Total	$	28,938	$	4,520	$	3,031	$	62,620	$	99,109	$	13,921,457	$	14,020,566
December 31, 2015
Commercial and industrial	$	3,920	$	524	$	213	$	10,913	$	15,570	$	2,140,979	$	2,156,549
Commercial real estate:
Commercial real estate	2,684		—		131		24,888		27,703		6,041,829		6,069,532
Construction	1,876		2,799		—		6,163		10,838		596,856		607,694
Total commercial real estate loans	4,560		2,799		131		31,051		38,541		6,638,685		6,677,226
Residential mortgage	6,681		1,626		1,504		17,930		27,741		2,884,338		2,912,079
Consumer loans:
Home equity	1,308		111		—		2,088		3,507		388,302		391,809
Automobile	1,969		491		164		118		2,742		1,236,084		1,238,826
Other consumer	71		24		44		—		139		426,008		426,147
Total consumer loans	3,348		626		208		2,206		6,388		2,050,394		2,056,782
Total	$	18,509	$	5,575	$	2,056	$	62,100	$	88,240	$	13,714,396	$	13,802,636

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.

The following table presents the information about impaired loans by loan portfolio class at March 31, 2016 and December 31, 2015:



	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
	(in thousands)
March 31, 2016
Commercial and industrial	$	7,758	$	19,838	$	27,596	$	33,913	$	3,578
Commercial real estate:
Commercial real estate	32,587		42,816		75,403		79,295		4,088
Construction	8,685		1,257		9,942		9,952		37
Total commercial real estate loans	41,272		44,073		85,345		89,247		4,125
Residential mortgage	7,356		14,624		21,980		23,907		1,267
Consumer loans:
Home equity	204		2,454		2,658		2,750		407
Total consumer loans	204		2,454		2,658		2,750		407
Total	$	56,590	$	80,989	$	137,579	$	149,817	$	9,377
December 31, 2015
Commercial and industrial	$	7,863	$	17,851	$	25,714	$	33,071	$	3,439
Commercial real estate:
Commercial real estate	30,113		37,440		67,553		71,263		3,354
Construction	8,847		5,530		14,377		14,387		317
Total commercial real estate loans	38,960		42,970		81,930		85,650		3,671
Residential mortgage	7,842		14,770		22,612		24,528		1,377
Consumer loans:
Home equity	263		1,869		2,132		2,224		295
Total consumer loans	263		1,869		2,132		2,224		295
Total	$	54,928	$	77,460	$	132,388	$	145,473	$	8,782

The following table present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	28,331	$	240	$	28,282	$	246
Commercial real estate:
Commercial real estate	72,398		639		78,523		486
Construction	9,802		48		16,670		150
Total commercial real estate loans	82,200		687		95,193		636
Residential mortgage	23,603		202		21,843		250
Consumer loans:
Home equity	2,359		23		3,485		30
Total consumer loans	2,359		23		3,485		30
Total	$	136,493	$	1,152	$	148,803	$	1,162

Interest income recognized on a cash basis (included in the table above) was immaterial for the three months ended March 31, 2016 and 2015.

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 $80.5 million and $77.6 million as of March 31, 2016 and December 31, 2015, respectively. Non-performing TDRs totaled $19.4 million and $21.0 million as of March 31, 2016 and December 31, 2015, respectively.

The following tables present loans by loan portfolio class modified as TDRs during the three months ended March 31, 2016 and 2015. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at March 31, 2016 and 2015, respectively.



	Three Months Ended March 31, 2016					Three Months Ended March 31, 2015
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	4	$	4,961	$	4,887	6	$	1,584	$	1,534
Commercial real estate	2	658		404		1	5,000		5,000
Residential mortgage	2	392		381		1	280		278
Consumer	1	54		53		—	—		—
Total	9	$	6,065	$	5,725	8	$	6,864	$	6,812

The majority of the TDR concessions made during the three months ended March 31, 2016 and 2015 involved an extension of the loan term. The total TDRs presented in the above table had allocated specific reserves for loan losses totaling $1.6 million and $759 thousand at March 31, 2016 and 2015, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 9. One commercial and industrial TDR loan totaling $209 thousand was fully charged-off during the three months ended March 31, 2016. There were no charge-offs related to TDR modifications during the first quarter of 2015.

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



	Three Months Ended March 31, 2016
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment
	($ in thousands)
Commercial and industrial	2	$	372
Commercial real estate	1	81
Residential mortgage	2	267
Consumer	1	30
Total	6	$	750

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

The following table presents the risk category of loans (excluding PCI loans) by class of loans at March 31, 2016 and December 31, 2015.



Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard		Doubtful		Total Non-PCI Loans
	(in thousands)
March 31, 2016
Commercial and industrial	$	2,075,347	$	57,283	$	44,312	$	—	$	2,176,942
Commercial real estate	6,136,061		71,897		97,016		—		6,304,974
Construction	622,460		857		10,242		—		633,559
Total	$	8,833,868	$	130,037	$	151,570	$	—	$	9,115,475
December 31, 2015
Commercial and industrial	$	2,049,752	$	68,243	$	36,254	$	2,300	$	2,156,549
Commercial real estate	5,893,354		79,279		96,899		—		6,069,532
Construction	596,530		1,102		10,062		—		607,694
Total	$	8,539,636	$	148,624	$	143,215	$	2,300	$	8,833,775

For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 2016 and December 31, 2015:



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Non-PCI Loans
	(in thousands)
March 31, 2016
Residential mortgage	$	2,875,896	$	16,747	$	2,892,643
Home equity	378,774		1,685		380,459
Automobile	1,187,620		122		1,187,742
Other consumer	444,247		—		444,247
Total	$	4,886,537	$	18,554	$	4,905,091
December 31, 2015
Residential mortgage	$	2,894,149	$	17,930	$	2,912,079
Home equity	389,721		2,088		391,809
Automobile	1,238,708		118		1,238,826
Other consumer	426,147		—		426,147
Total	$	4,948,725	$	20,136	$	4,968,861

Valley evaluates the credit quality of its PCI loan pools based on the expectation of the underlying cash flows of each pool, derived from the aging status and by payment activity of individual loans within the pool. The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of March 31, 2016 and December 31, 2015.



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total PCI Loans
	(in thousands)
March 31, 2016
Commercial and industrial	$	351,442	$	9,161	$	360,603
Commercial real estate	1,266,695		13,470		1,280,165
Construction	141,319		1,179		142,498
Residential mortgage	205,928		3,243		209,171
Consumer	117,050		5,934		122,984
Total	$	2,082,434	$	32,987	$	2,115,421
December 31, 2015
Commercial and industrial	$	373,665	$	10,277	$	383,942
Commercial real estate	1,342,030		13,074		1,355,104
Construction	141,547		5,706		147,253
Residential mortgage	214,713		3,749		218,462
Consumer	129,891		5,819		135,710
Total	$	2,201,846	$	38,625	$	2,240,471

Other real estate owned (OREO) totaled $14.7 million and $19.0 million (including $2.4 million and $5.0 million of OREO properties which are subject to loss-sharing agreements with the FDIC) at March 31, 2016 and December 31, 2015, respectively. OREO included foreclosed residential real estate properties totaling $7.2 million and $7.0 million at March 31, 2016 and December 31, 2015, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $13.3 million and $12.3 million at March 31, 2016 and December 31, 2015, respectively.