Loans

The detail of the loan portfolio as of September 30, 2016 and December 31, 2015 was as follows:



	September 30, 2016						December 31, 2015
	Non-PCI Loans		PCI Loans*		Total		Non-PCI Loans		PCI Loans*		Total
	(in thousands)
Loans:
Commercial and industrial	$	2,266,420	$	292,548	$	2,558,968	$	2,156,549	$	383,942	$	2,540,491
Commercial real estate:
Commercial real estate	7,178,836		1,135,019		8,313,855		6,069,532		1,355,104		7,424,636
Construction	670,801		131,767		802,568		607,694		147,253		754,947
Total commercial real estate loans	7,849,637		1,266,786		9,116,423		6,677,226		1,502,357		8,179,583
Residential mortgage	2,637,311		188,819		2,826,130		2,912,079		218,462		3,130,541
Consumer:
Home equity	377,682		99,138		476,820		391,809		119,394		511,203
Automobile	1,121,430		176		1,121,606		1,238,826		487		1,239,313
Other consumer	524,540		9,648		534,188		426,147		15,829		441,976
Total consumer loans	2,023,652		108,962		2,132,614		2,056,782		135,710		2,192,492
Total loans	$	14,777,020	$	1,857,115	$	16,634,135	$	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 $76.0 million and $122.3 million at September 30, 2016 and December 31, 2015, respectively.

Total non-covered loans include net unearned premiums and deferred loan costs of $10.5 million and $3.5 million at September 30, 2016 and December 31, 2015, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $2.0 billion and $2.4 billion at September 30, 2016 and December 31, 2015, respectively.

Valley transferred $174.5 million of residential mortgage loans from the loan portfolio to loans held for sale during the three months ended September 30, 2016. Exclusive of such transfers, there were no sales of loans from the held for investment portfolio during the three and nine months ended September 30, 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 $76.0 million and $122.3 million at September 30, 2016 and December 31, 2015, respectively.

The following table presents changes in the accretable yield for PCI loans during the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)
Balance, beginning of period	$	355,601		$	282,101		$	415,179		$	336,208
Accretion	(26,730		)	(24,814		)	(86,308		)	(78,921		)
Balance, end of period	$	328,871		$	257,287		$	328,871		$	257,287

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 $7.7 million and $8.3 million at September 30, 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 $313 thousand and $55 thousand for the three months ended September 30, 2016 and 2015, respectively, and $872 thousand and $3.4 million for the nine months ended September 30, 2016 and 2015, respectively. The larger net reduction during the nine months ended September 30, 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.

Credit Risk Management

For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. Valley closely monitors economic conditions and loan performance trends to manage and evaluate its exposure to credit risk. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, internal loan classification, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through cyclical economic circumstances.

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, 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)
September 30, 2016
Commercial and industrial	$	4,306	$	788	$	145	$	7,875	$	13,114	$	2,253,306	$	2,266,420
Commercial real estate:
Commercial real estate	9,385		4,291		478		14,452		28,606		7,150,230		7,178,836
Construction	—		—		1,881		1,136		3,017		667,784		670,801
Total commercial real estate loans	9,385		4,291		2,359		15,588		31,623		7,818,014		7,849,637
Residential mortgage	9,982		2,733		590		14,013		27,318		2,609,993		2,637,311
Consumer loans:
Home equity	693		527		—		820		2,040		375,642		377,682
Automobile	2,110		619		226		145		3,100		1,118,330		1,121,430
Other consumer	343		88		—		—		431		524,109		524,540
Total consumer loans	3,146		1,234		226		965		5,571		2,018,081		2,023,652
Total	$	26,819	$	9,046	$	3,320	$	38,441	$	77,626	$	14,699,394	$	14,777,020
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 September 30, 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)
September 30, 2016
Commercial and industrial	$	4,312	$	22,816	$	27,128	$	34,156	$	3,506
Commercial real estate:
Commercial real estate	20,428		42,363		62,791		65,076		4,152
Construction	1,972		4,326		6,298		6,298		423
Total commercial real estate loans	22,400		46,689		69,089		71,374		4,575
Residential mortgage	8,706		9,802		18,508		19,983		708
Consumer loans:
Home equity	214		1,509		1,723		1,820		210
Total consumer loans	214		1,509		1,723		1,820		210
Total	$	35,632	$	80,816	$	116,448	$	127,333	$	8,999
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 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, 2016 and 2015:



	Three Months Ended September 30,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	31,499	$	293	$	28,892	$	232
Commercial real estate:
Commercial real estate	58,117		513		76,509		538
Construction	6,635		37		20,007		139
Total commercial real estate loans	64,752		550		96,516		677
Residential mortgage	20,193		225		25,336		208
Consumer loans:
Home equity	2,253		25		4,275		43
Total consumer loans	2,253		25		4,275		43
Total	$	118,697	$	1,093	$	155,019	$	1,160



	Nine Months Ended September 30,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	28,008	$	727	$	27,570	$	689
Commercial real estate:
Commercial real estate	66,871		1,627		76,900		1,918
Construction	8,814		138		16,066		415
Total commercial real estate loans	75,685		1,765		92,966		2,333
Residential mortgage	22,232		660		23,261		707
Consumer loans:
Home equity	2,560		68		4,125		111
Total consumer loans	2,560		68		4,125		111
Total	$	128,485	$	3,220	$	147,922	$	3,840

Interest income recognized on a cash basis (included in the table above) was immaterial for the three and nine months ended September 30, 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 of the loan and Valley’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

Performing TDRs (not reported as non-accrual loans) totaled $81.1 million and $77.6 million as of September 30, 2016 and December 31, 2015, respectively. Non-performing TDRs totaled $13.0 million and $21.0 million as of September 30, 2016 and December 31, 2015, respectively.

The following tables present loans by loan portfolio class modified as TDRs during the three and nine months ended September 30, 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 September 30, 2016 and 2015, respectively.



	Three Months Ended September 30, 2016					Three Months Ended September 30, 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	7	$	6,389	$	6,248	2	$	1,530	$	1,530
Commercial real estate:
Commercial real estate	1	1,667		1,870		—	—		—
Construction	2	2,078		2,078		2	4,974		3,451
Total commercial real estate	3	3,745		3,948		2	4,974		3,451
Residential mortgage	1	78		77		3	1,080		1,050
Consumer	1	23		18		—	—		—
Total	12	$	10,235	$	10,291	7	$	7,584	$	6,031



	Nine Months Ended September 30, 2016					Nine Months Ended September 30, 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	12	$	11,700	$	11,088	12	$	4,621	$	4,081
Commercial real estate:
Commercial real estate	4	8,325		8,174		4	6,562		6,444
Construction	2	2,079		2,078		3	5,474		4,635
Total commercial real estate	6	10,404		10,252		7	12,036		11,079
Residential mortgage	8	2,300		2,271		6	2,458		2,420
Consumer	2	77		69		1	1,081		1,072
Total	28	$	24,481	$	23,680	26	$	20,196	$	18,652

The TDR concessions made during the three and nine months ended September 30, 2016 and 2015 were mainly extensions of the loan terms. The total TDRs presented in the above table had allocated specific reserves for loan losses totaling $2.4 million and $602 thousand at September 30, 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 nine months ended September 30, 2016. There were no charge-offs related to TDR modifications during the third quarters of 2016 and 2015 and the nine months ended September 30, 2015.

We had four of residential non-PCI loans modified as TDRs within the previous 12 months for which there was a payment default (90 days or more past due) totaling $1.1 million during the three and nine months ended September 30, 2016 and none for 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 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 September 30, 2016 and December 31, 2015.



Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard		Doubtful		Total Non-PCI Loans
	(in thousands)
September 30, 2016
Commercial and industrial	$	2,158,585	$	46,209	$	59,972	$	1,654	$	2,266,420
Commercial real estate	7,015,861		79,331		83,644		—		7,178,836
Construction	667,008		100		3,693		—		670,801
Total	$	9,841,454	$	125,640	$	147,309	$	1,654	$	10,116,057
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 September 30, 2016 and December 31, 2015:



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Non-PCI Loans
	(in thousands)
September 30, 2016
Residential mortgage	$	2,623,298	$	14,013	$	2,637,311
Home equity	376,862		820		377,682
Automobile	1,121,285		145		1,121,430
Other consumer	524,540		—		524,540
Total	$	4,645,985	$	14,978	$	4,660,963
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 September 30, 2016 and December 31, 2015.



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total PCI Loans
	(in thousands)
September 30, 2016
Commercial and industrial	$	283,759	$	8,789	$	292,548
Commercial real estate	1,123,123		11,896		1,135,019
Construction	130,442		1,325		131,767
Residential mortgage	185,790		3,029		188,819
Consumer	103,946		5,016		108,962
Total	$	1,827,060	$	30,055	$	1,857,115
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 $11.3 million and $19.0 million (including $1.0 million and $5.0 million of OREO properties which are subject to loss-sharing agreements with the FDIC) at September 30, 2016 and December 31, 2015, respectively. OREO included foreclosed residential real estate properties totaling $7.4 million and $7.0 million at September 30, 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 $7.7 million and $12.3 million at September 30, 2016 and December 31, 2015, respectively.