10-Q 1 vly-9302017x10q.htm 10-Q Document


 
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, 2017
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," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
x
Accelerated filer
¨
Emerging growth company
¨
 
 
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the 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 264,370,183 shares were outstanding as of November 6, 2017
 



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,
2017
 
December 31,
2016
Assets
(Unaudited)
 
 
Cash and due from banks
$
215,600

 
$
220,791

Interest bearing deposits with banks
128,226

 
171,710

Investment securities:
 
 
 
Held to maturity (fair value of $1,831,145 at September 30, 2017 and $1,924,597 at December 31, 2016)
1,823,622

 
1,925,572

Available for sale
1,447,737

 
1,297,373

Total investment securities
3,271,359

 
3,222,945

Loans held for sale, at fair value
13,321

 
57,708

Loans
18,201,462

 
17,236,103

Less: Allowance for loan losses
(118,966
)
 
(114,419
)
Net loans
18,082,496

 
17,121,684

Premises and equipment, net
289,153

 
291,180

Bank owned life insurance
386,874

 
391,830

Accrued interest receivable
72,063

 
66,816

Goodwill
690,637

 
690,637

Other intangible assets, net
42,861

 
45,484

Other assets
588,071

 
583,654

Total Assets
$
23,780,661

 
$
22,864,439

Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
5,099,376

 
$
5,252,825

Interest bearing:
 
 
 
Savings, NOW and money market
8,792,734

 
9,339,012

Time
3,420,656

 
3,138,871

Total deposits
17,312,766

 
17,730,708

Short-term borrowings
1,482,709

 
1,080,960

Long-term borrowings
2,215,219

 
1,433,906

Junior subordinated debentures issued to capital trusts
41,716

 
41,577

Accrued expenses and other liabilities
190,267

 
200,132

Total Liabilities
21,242,677

 
20,487,283

Shareholders’ Equity
 
 
 
Preferred stock, no par value; 50,000,000 shares authorized:
 
 
 
Series A (4,600,000 shares issued at September 30, 2017 and December 31, 2016)
111,590

 
111,590

Series B (4,000,000 shares issued at September 30, 2017)
98,101

 
—

Common stock (no par value, authorized 450,000,000 shares; issued 264,197,172 shares at September 30, 2017 and 263,804,877 shares at December 31, 2016)
92,569

 
92,353

Surplus
2,054,843

 
2,044,401

Retained earnings
214,981

 
172,754

Accumulated other comprehensive loss
(34,100
)
 
(42,093
)
Treasury stock, at cost (166,047 shares at December 31, 2016)
—

 
(1,849
)
Total Shareholders’ Equity
2,537,984

 
2,377,156

Total Liabilities and Shareholders’ Equity
$
23,780,661

 
$
22,864,439

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,
 
2017
 
2016
 
2017
 
2016
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans
$
186,773

 
$
171,143

 
$
547,647

 
$
506,640

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
17,922

 
14,232

 
54,439

 
42,487

Tax-exempt
3,752

 
4,023

 
11,726

 
11,447

Dividends
2,657

 
1,612

 
6,945

 
4,408

Interest on federal funds sold and other short-term investments
546

 
193

 
1,156

 
846

Total interest income
211,650

 
191,203

 
621,913

 
565,828

Interest Expense
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 
 
Savings, NOW and money market
15,641

 
10,165

 
38,538

 
29,369

Time
10,852

 
9,412

 
30,571

 
28,220

Interest on short-term borrowings
5,161

 
3,545

 
14,578

 
8,537

Interest on long-term borrowings and junior subordinated debentures
15,142

 
13,935

 
41,883

 
45,948

Total interest expense
46,796

 
37,057

 
125,570

 
112,074

Net Interest Income
164,854

 
154,146

 
496,343

 
453,754

Provision for credit losses
1,640

 
5,840

 
7,742

 
8,069

Net Interest Income After Provision for Credit Losses
163,214

 
148,306

 
488,601

 
445,685

Non-Interest Income
 
 
 
 
 
 
 
Trust and investment services
3,062

 
2,628

 
8,606

 
7,612

Insurance commissions
4,519

 
4,580

 
13,938

 
14,133

Service charges on deposit accounts
5,558

 
5,263

 
16,136

 
15,460

Gains (losses) on securities transactions, net
6

 
(10
)
 
5

 
258

Fees from loan servicing
1,895

 
1,598

 
5,541

 
4,753

Gains on sales of loans, net
5,520

 
4,823

 
14,439

 
9,723

Bank owned life insurance
1,541

 
1,683

 
5,705

 
5,464

Other
3,987

 
4,288

 
11,467

 
13,162

Total non-interest income
26,088

 
24,853

 
75,837

 
70,565

Non-Interest Expense
 
 
 
 
 
 
 
Salary and employee benefits expense
67,062

 
58,107

 
192,116

 
174,438

Net occupancy and equipment expense
22,756

 
20,658

 
68,400

 
65,615

FDIC insurance assessment
4,603

 
4,804

 
14,658

 
14,998

Amortization of other intangible assets
2,498

 
2,675

 
7,596

 
8,452

Professional and legal fees
11,110

 
4,031

 
20,107

 
13,398

Amortization of tax credit investments
8,389

 
6,450

 
21,445

 
21,360

Telecommunication expense
2,464

 
2,459

 
7,830

 
7,139

Other
13,683

 
14,084

 
40,604

 
45,896

Total non-interest expense
132,565

 
113,268

 
372,756

 
351,296

Income Before Income Taxes
56,737

 
59,891

 
191,682

 
164,954

Income tax expense
17,088

 
17,049

 
55,873

 
46,898

Net Income
$
39,649

 
$
42,842

 
$
135,809

 
$
118,056

Dividends on preferred stock
2,683

 
1,797

 
6,277

 
5,391

Net Income Available to Common Shareholders
$
36,966

 
$
41,045

 
$
129,532

 
$
112,665

Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.16

 
$
0.49

 
$
0.44

Diluted
0.14

 
0.16

 
0.49

 
0.44

Cash Dividends Declared per Common Share
0.11

 
0.11

 
0.33

 
0.33

Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
Basic
264,058,174

 
254,473,994

 
263,938,786

 
254,310,769

Diluted
264,936,220

 
254,940,307

 
264,754,845

 
254,698,593

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,
 
2017
 
2016
 
2017
 
2016
Net income
$
39,649

 
$
42,842

 
$
135,809

 
$
118,056

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
 
Net gains arising during the period
1,457

 
4,902

 
4,660

 
12,550

Less reclassification adjustment for net (gains) losses included in net income
(4
)
 
6

 
(4
)
 
(162
)
Total
1,453

 
4,908

 
4,656

 
12,388

Non-credit impairment losses on available for sale securities
 
 
 
 
 
 
 
Net change in non-credit impairment losses on securities
(223
)
 
(74
)
 
(89
)
 
168

Less reclassification adjustment for accretion of credit impairment losses included in net income
(40
)
 
(50
)
 
(166
)
 
(336
)
Total
(263
)
 
(124
)
 
(255
)
 
(168
)
Unrealized gains and losses on derivatives (cash flow hedges)
 
 
 
 
 
 
 
Net gains (losses) on derivatives arising during the period
198

 
1,735

 
(548
)
 
(6,939
)
Less reclassification adjustment for net losses included in net income
1,132

 
2,095

 
3,963

 
5,943

Total
1,330

 
3,830

 
3,415

 
(996
)
Defined benefit pension plan
 
 
 
 
 
 
 
Amortization of net loss
59

 
42

 
177

 
128

Total other comprehensive income
2,579

 
8,656

 
7,993

 
11,352

Total comprehensive income
$
42,228

 
$
51,498

 
$
143,802

 
$
129,408

See accompanying notes to consolidated financial statements.


4



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
Nine Months Ended
September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
135,809

 
$
118,056

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,408

 
18,593

Stock-based compensation
9,563

 
7,382

Provision for credit losses
7,742

 
8,069

Net amortization of premiums and accretion of discounts on securities and borrowings
17,476

 
14,152

Amortization of other intangible assets
7,596

 
8,452

Gains on securities transactions, net
(5
)
 
(258
)
Proceeds from sales of loans held for sale
484,102

 
337,069

Gains on sales of loans, net
(14,439
)
 
(9,723
)
Originations of loans held for sale
(201,393
)
 
(342,989
)
Losses (gains) on sales of assets, net
359

 
(1,009
)
Net change in:
 
 
 
Fair value of borrowings hedged by derivative transactions
—

 
6,646

Cash surrender value of bank owned life insurance
(5,705
)
 
(5,464
)
Accrued interest receivable
(5,247
)
 
(261
)
Other assets
(7,052
)
 
(1,029
)
Accrued expenses and other liabilities
(17,465
)
 
(9,888
)
Net cash provided by operating activities
429,749

 
147,798

Cash flows from investing activities:
 
 
 
Net loan originations and purchases
(1,200,913
)
 
(776,662
)
Investment securities held to maturity:
 
 
 
Purchases
(127,318
)
 
(502,833
)
Maturities, calls and principal repayments
219,967

 
243,764

Investment securities available for sale:
 
 
 
Purchases
(293,788
)
 
(557,978
)
Sales
—

 
2,081

Maturities, calls and principal repayments
144,221

 
800,967

Death benefit proceeds from bank owned life insurance
10,661

 
2,406

Proceeds from sales of real estate property and equipment
7,717

 
18,243

Purchases of real estate property and equipment
(13,341
)
 
(17,155
)
Net cash used in investing activities
(1,252,794
)
 
(787,167
)
Cash flows from financing activities:
 
 
 
Net change in deposits
(417,942
)
 
718,632

Net change in short-term borrowings
401,749

 
356,365

Proceeds from issuance of long-term borrowings, net
965,000

 
385,000

Repayments of long-term borrowings
(185,000
)
 
(749,000
)
Proceeds from issuance of preferred stock, net
98,101

 
—

Cash dividends paid to preferred shareholders
(6,277
)
 
(5,391
)
Cash dividends paid to common shareholders
(84,143
)
 
(83,821
)
Purchase of common shares to treasury
(2,284
)
 
(1,700
)
Common stock issued, net
5,166

 
4,610

Net cash provided by financing activities
774,370

 
624,695

Net change in cash and cash equivalents
(48,675
)
 
(14,674
)
Cash and cash equivalents at beginning of year
392,501

 
413,800

Cash and cash equivalents at end of period
$
343,826

 
$
399,126



5



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

 
Nine Months Ended
September 30,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 
 
 
Interest on deposits and borrowings
$
125,433

 
$
115,253

Federal and state income taxes
27,003

 
24,464

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
7,147

 
$
7,611

Transfer of loans to loans held for sale
225,541

 
174,501

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, 2017 and for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2017 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, 2016.
On April 27, 2017, Valley's shareholders approved an amendment to Valley's Restated Certificate of Incorporation to increase the authorized shares of common stock and preferred stock to 450,000,000 shares and 50,000,000 shares, respectively.
On August 3, 2017, Valley issued 4.0 million shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, no par value per share, with a liquidation preference of $25 per share for aggregate consideration of $100 million. Dividends on the preferred stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to 5.50 percent from the original issuance date to, but excluding, September 30, 2022, and thereafter at a floating rate per annum equal to three-month LIBOR plus a spread of 3.578 percent. Net proceeds to Valley after deducting underwriting discounts, commissions and offering expenses totaled $98.1 million.


7



Note 2. Business Combinations
On July 26, 2017, Valley announced its entry into a merger agreement with USAmeriBancorp, Inc. (USAB) headquartered in Clearwater, Florida. USAB, largely through its wholly-owned subsidiary, USAmeriBank, has approximately $4.5 billion in assets, $3.6 billion in net loans and $3.6 billion in deposits and maintains a branch network of 30 offices. The acquisition will expand Valley's Florida presence and establish a presence in Alabama. The common shareholders of USAB will receive 6.1 shares of Valley common stock for each USAB share they own, subject to adjustment in the event Valley’s average stock price falls below $11.50 or rises above $13.00 prior to closing. Both Valley and USAB have walkaway rights if the volume-weighted average closing price is below $11.00 and USAB has a walkaway right if the volume-weighted average closing price is above $13.50. The transaction is valued at an estimated $816 million, based on Valley’s closing stock price on July 25, 2017. The acquisition is expected to close in the first quarter of 2018, and Valley has received all necessary banking regulatory approvals to complete the merger. However, the merger is still subject to a number of conditions, including Valley and USAB shareholder approvals at their respective shareholder meetings to be held on December 14, 2017.
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, 2017 and 2016.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except for share data)
Net income available to common shareholders
$
36,966

 
$
41,045

 
$
129,532

 
$
112,665

Basic weighted average number of common shares outstanding
264,058,174

 
254,473,994

 
263,938,786

 
254,310,769

Plus: Common stock equivalents
878,046

 
466,313

 
816,059

 
387,824

Diluted weighted average number of common shares outstanding
264,936,220

 
254,940,307

 
264,754,845

 
254,698,593

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.16

 
$
0.49

 
$
0.44

Diluted
0.14

 
0.16

 
0.49

 
0.44


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 equaled approximately 3.3 million shares for both the three and nine months ended September 30, 2017 and 4.6 million shares for both the three and nine months ended September 30, 2016, respectively.


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, 2017. 
 
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, 2017
$
(6,891
)
 
$
(634
)
 
$
(10,379
)
 
$
(18,775
)
 
$
(36,679
)
Other comprehensive income before reclassifications
1,457

 
(223
)
 
198

 
—

 
1,432

Amounts reclassified from other comprehensive income
(4
)
 
(40
)
 
1,132

 
59

 
1,147

Other comprehensive income, net
1,453

 
(263
)
 
1,330

 
59

 
2,579

Balance at September 30, 2017
$
(5,438
)
 
$
(897
)
 
$
(9,049
)
 
$
(18,716
)
 
$
(34,100
)

 
Components of Accumulated Other Comprehensive Loss
 
Total
Accumulated
Other
Comprehensive
Loss
 
Unrealized Gains
and Losses on
Available for Sale
(AFS) Securities
 
Non-credit
Impairment
Losses on
AFS Securities
 
Unrealized Gains
and (Losses) on
Derivatives
 
Defined
Benefit
Pension Plan
 
 
(in thousands)
Balance at December 31, 2016
$
(10,094
)
 
$
(642
)
 
$
(12,464
)
 
$
(18,893
)
 
$
(42,093
)
Other comprehensive income before reclassifications
4,660

 
(89
)
 
(548
)
 
—

 
4,023

Amounts reclassified from other comprehensive income
(4
)
 
(166
)
 
3,963

 
177

 
3,970

Other comprehensive income, net
4,656

 
(255
)
 
3,415

 
177

 
7,993

Balance at September 30, 2017
$
(5,438
)
 
$
(897
)
 
$
(9,049
)
 
$
(18,716
)
 
$
(34,100
)

9



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, 2017 and 2016. 
 
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
Components of Accumulated Other Comprehensive Loss
 
2017
 
2016
 
2017
 
2016
 
Income Statement Line Item
 
 
(in thousands)
 
 
Unrealized gains (losses) on AFS securities before tax
 
6

 
$
(10
)
 
5

 
258

 
Gains (losses) on securities transactions, net
Tax effect
 
(2
)
 
4

 
(1
)
 
(96
)
 
 
Total net of tax
 
4

 
(6
)
 
4

 
162

 
 
Non-credit impairment losses on AFS securities before tax:
 
 
 
 
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
 
67

 
87

 
283

 
576

 
Interest and dividends on investment securities (taxable)
Tax effect
 
(27
)
 
(37
)
 
(117
)
 
(240
)
 
 
Total net of tax
 
40

 
50

 
166

 
336

 
 
Unrealized losses on derivatives (cash flow hedges) before tax
 
(1,930
)
 
(3,578
)
 
(6,762
)
 
(10,146
)
 
Interest expense
Tax effect
 
798

 
1,483

 
2,799

 
4,203

 
 
Total net of tax
 
(1,132
)
 
(2,095
)
 
(3,963
)
 
(5,943
)
 
 
Defined benefit pension plan:
 
 
 
 
 
 
 
 
 
 
Amortization of net loss
 
(101
)
 
(71
)
 
(303
)
 
(215
)
 
*
Tax effect
 
42

 
29

 
126

 
87

 
 
Total net of tax
 
(59
)
 
(42
)
 
(177
)
 
(128
)
 
 
Total reclassifications, net of tax
 
$
(1,147
)
 
$
(2,093
)
 
$
(3,970
)
 
$
(5,573
)
 
 
 
*
Amortization of net loss is included in the computation of net periodic pension cost.

10



Note 5. New Authoritative Accounting Guidance

Accounting Standards Update (ASU) No. 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities" amends the hedge accounting recognition and presentation requirements to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU No. 2017-12 is effective for Valley for the annual and interim reporting periods beginning January 1, 2019 with early adoption permitted. ASU No. 2017-12 requires a modified retrospective method to be used at adoption with a cumulative-effect adjustment to opening retained earnings. While Valley continues to assess all the potential impacts of the new guidance, ASU No. 2017-12 is not currently expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities" shortens the amortization period for certain callable debt securities held at a premium. ASU No. 2017-08 requires the premium to be amortized to the earliest call date. The accounting for securities held at a discount does not change and the discount continues to be amortized as an adjustment to yield over the contractual life (to maturity) of the instrument. ASU No. 2017-08 is effective for Valley for the annual and interim reporting periods beginning January 1, 2019 with early adoption permitted, and is to be applied using modified retrospective method. Additionally, in the period of adoption, entities should provide disclosures about a change in accounting principle. ASU No. 2017-08 is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" requires service cost to be reported in the same financial statement line item(s) as other current employee compensation costs. All other components of expense must be presented separately from service cost, and outside any subtotal of income from operations. Only the service cost component of expense is eligible to be capitalized. ASU No. 2017-07 is effective for Valley for its annual and interim reporting periods beginning January1, 2018 with early adoption permitted. ASU No. 2017-07 is not expected to have a significant impact on the presentation on Valley's consolidated financial statements.

ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test guidance) to measure a goodwill impairment charge. Instead, an entity will be required to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1 of the current guidance). In addition, ASU No. 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. However, an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for Valley for its annual or any interim goodwill impairment tests in fiscal years beginning January 1, 2020 and is not expected to have a significant impact on the presentation of Valley's consolidated financial statements. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.

ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" clarifies on how certain cash receipts and cash payments should be classified and presented in the statement of cash flow. The ASU No. 2016-15 includes guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for Valley for annual and interim reporting periods beginning January 1, 2018 and it should be applied using a retrospective transition method to each period presented. ASU No. 2016-15 is not expected to have a significant impact on the presentation of Valley's consolidated statements of cash flows.    


11



ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments. The ASU No. 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity is required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 is effective for Valley for reporting periods beginning January 1, 2020. Management is currently evaluating the impact of the ASU on Valley’s consolidated financial statements. Valley expects that the new guidance will result in an increase in its allowance for credit losses due to several factors, including: (i) the allowance related to Valley loans will increase to include credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions, (ii) the nonaccretable difference (as defined in Note 8) on PCI loans will be recognized as an allowance, offset by an increase in the carrying value of the related loans, and (iii) an allowance will be established for estimated credit losses on investment securities classified as held to maturity. The extent of the increase is under evaluation, but will depend upon the nature and characteristics of the Valley's loan and investment portfolios at the adoption date, and the economic conditions and forecasts at that date.

ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" simplifies several aspects of the stock compensation guidance in Topic 718 and other related guidance. The amendments focus on income tax accounting upon vesting or exercise of share-based payments, award classification, liability classification exception for statutory tax withholding requirements, recognition methods for forfeitures within stock compensation expense, and the cash flow presentation. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively.  Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. ASU No. 2016-09 became effective for Valley for reporting periods after January 1, 2017 and did not have a significant impact on Valley's consolidated financial statements. At adoption, Valley elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method. Valley also elected to continue to estimate the forfeitures of stock awards as a component of total stock compensation expense based on the number of awards that are expected to vest.

ASU No. 2016-02, “Leases (Topic 842)” requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for Valley for reporting periods beginning January 1, 2019, with an early adoption permitted. Valley must apply a modified retrospective transition approach for the applicable leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Management is currently evaluating the impact of Topic 842 on Valley’s consolidated financial statements by reviewing its existing lease contracts and service contracts that may include embedded leases. Valley expects a gross-up of its consolidated statements of financial condition as a result of recognizing lease liabilities and right of use assets; the extent of such gross-up is under evaluation. Valley does not expect material changes to the recognition of operating lease expense in its consolidated statements of income.

ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities” requires that: (i) equity investments with readily determinable fair values must be measured at fair value with changes in fair value recognized in net income, (ii) equity investments without readily determinable fair values must be measured at either fair value or at cost adjusted for changes in observable prices minus impairment with changes in value under either of these methods recognized in net income, (iii) entities that record financial liabilities at fair value due to a fair value option election must recognize changes in fair value in

12



other comprehensive income if it is related to instrument-specific credit risk, and (iv) entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities. ASU No. 2016-01 is effective for Valley for reporting periods beginning January 1, 2018 and is not expected to have a material effect on Valley’s consolidated financial statements.

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related Updates modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. The updates also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. Valley will adopt the guidance on January 1, 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the new revenue recognition standard is not expected to have a material impact on Valley’s consolidated financial statements. Valley has substantially completed its review of non-interest income revenue streams within the scope of the guidance and an assessment of its revenue contracts. While Valley has not identified material changes related to the timing or amount of revenue recognition, Valley will continue to evaluate required disclosures and the need for additional disaggregation of significant categories of revenue in the consolidated financial statements that are within the scope of the new guidance.
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).


13



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, 2017 and December 31, 2016. 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,
2017
 
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
$
50,148

 
$
50,148

 
$
—

 
$
—

U.S. government agency securities
44,230

 
—

 
44,230

 
—

Obligations of states and political subdivisions
118,402

 
—

 
118,402

 
—

Residential mortgage-backed securities
1,161,157

 
—

 
1,153,475

 
7,682

Trust preferred securities
5,393

 
—

 
3,278

 
2,115

Corporate and other debt securities
57,427

 
7,890

 
49,537

 
—

Equity securities
10,980

 
1,110

 
9,870

 
—

Total available for sale
1,447,737

 
59,148

 
1,378,792

 
9,797

Loans held for sale (1)
13,321

 
—

 
13,321

 
—

Other assets (2)
26,696

 
—

 
26,696

 
—

Total assets
$
1,487,754

 
$
59,148

 
$
1,418,809

 
$
9,797

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
23,868

 
$
—

 
$
23,868

 
$
—

Total liabilities
$
23,868

 
$
—

 
$
23,868

 
$
—

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
33,260

 
$
—

 
$
—

 
$
33,260

Loan servicing rights
7,072

 
—

 
—

 
7,072

Foreclosed assets
1,762

 
—

 
—

 
1,762

Total
$
42,094

 
$
—

 
$
—

 
$
42,094


14



 
 
 
Fair Value Measurements at Reporting Date Using:
 
December 31,
2016
 
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
$
49,591

 
$
49,591

 
$
—

 
$
—

U.S. government agency securities
23,041

 
—

 
23,041

 
—

Obligations of states and political subdivisions
119,767

 
—

 
119,767

 
—

Residential mortgage-backed securities
1,015,542

 
—

 
1,005,589

 
9,953

Trust preferred securities
8,009

 
—

 
6,074

 
1,935

Corporate and other debt securities
60,565

 
8,064

 
52,501

 
—

Equity securities
20,858

 
1,306

 
19,552

 
—

Total available for sale
1,297,373

 
58,961

 
1,226,524

 
11,888

Loans held for sale (1)
57,708

 
—

 
57,708

 
—

Other assets (2)
29,055

 
—

 
29,055

 
—

Total assets
$
1,384,136

 
$
58,961

 
$
1,313,287

 
$
11,888

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
44,077

 
$
—

 
$
44,077

 
$
—

Total liabilities
$
44,077

 
$
—

 
$
44,077

 
$
—

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
5,385

 
$
—

 
$
—

 
$
5,385

Loan servicing rights
6,489

 
—

 
—

 
6,489

Foreclosed assets
4,532

 
—

 
—

 
4,532

Total
$
16,406

 
$
—

 
$
—

 
$
16,406

 
(1)
Represents residential mortgage loans originated for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $13.1 million and $58.2 million at September 30, 2017 and December 31, 2016, respectively.
(2)
Derivative financial instruments are included in this category.
(3)
Excludes PCI loans.










15



The changes in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2017 and 2016 are summarized below: 
 
Available for Sale Securities
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Balance, beginning of the period
$
10,730

 
$
13,101

 
$
11,888

 
$
13,793

Total net losses included in other comprehensive income
(448
)
 
(212
)
 
(435
)
 
(283
)
Settlements, net
(485
)
 
(492
)
 
(1,656
)
 
(1,113
)
Balance, end of the period
$
9,797

 
$
12,397

 
$
9,797

 
$
12,397


No changes in unrealized gains or losses on Level 3 securities were included in earnings during the three and nine months ended September 30, 2017 and 2016. There were no transfers of assets into or out of Level 3, or between Level 1 and Level 2, during the three and nine months ended September 30, 2017 and 2016.

There have been no material changes in the valuation methodologies used at September 30, 2017 from December 31, 2016.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following valuation techniques were used for financial instruments measured at fair value on a recurring basis. All the valuation techniques described below apply to the unpaid principal balance, excluding any accrued interest or dividends at the measurement date. Interest income and expense are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.

Available for sale securities.

All U.S. Treasury securities, certain corporate and other debt securities, and certain preferred equity securities are reported at fair value utilizing Level 1 inputs. The majority of other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. 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.


16



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, 2017: 
Security Type
Valuation
Technique
 
Unobservable
Input
 
Range
 
Weighted
Average
 
 
 
 
 
 
 
 
Private label mortgage-backed securities
Discounted cash flow
 
Prepayment rate
 
       1.1 - 34.1%
 
18.0
%
 
 
 
Default rate
 
    1.4 - 30.9
 
6.7

 
 
 
Loss severity
 
   47.7 - 63.8
 
58.3


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 residential mortgage-backed securities (consisting of 4 private label 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 trust preferred securities (consisting of one pooled security), the resulting estimated future cash flow was discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. The discount rate 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, 2017 and December 31, 2016 based on the short duration these assets were held, and the high credit quality of these loans.


17



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, 2017 and December 31, 2016), is determined based on the current market prices for similar instruments provided by Fannie Mae and Freddie Mac. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at September 30, 2017 and December 31, 2016.

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

The following valuation techniques were used for certain non-financial assets measured at fair value on a nonrecurring basis, including impaired loans reported at the fair value of the underlying collateral, loan servicing rights and foreclosed assets, which are reported at fair value upon initial recognition or subsequent impairment as described below.

Impaired loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values are estimated using Level 3 inputs, consisting of individual appraisals that may be adjusted based on certain discounting criteria. At September 30, 2017, certain appraisals were discounted based on specific market data by location and property type. During the quarter ended September 30, 2017, collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. There were no collateral dependent loan charge-offs to the allowance for loan losses for the three months ended September 30, 2017 as compared to $3.7 million for the three months ended September 30, 2016 and $2.1 million and $4.7 million for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, collateral dependent impaired loans with a total recorded investment of $38.3 million were reduced by specific valuation allowance allocations totaling $5.0 million to a reported total net carrying amount of $33.3 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, 2017, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 24 percent and a discount rate of 8 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. Valley recorded net recoveries of net impairment charges on its loan servicing rights totaling $134 thousand and $185 thousand for the three and nine months ended September 30, 2017, respectively. Valley recorded no net impairment charges on its loan servicing rights for the three months ended September 30, 2016 and net impairment charges totaling $457 thousand for the nine months ended September 30, 2016.

Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is adjusted based on certain discounting criteria, similar to the criteria used for impaired loans described above. There were no discount adjustments of the appraisals of foreclosed assets at September 30, 2017. At September 30, 2017,

18



foreclosed assets included $1.8 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended September 30, 2017. The foreclosed assets charge-offs to the allowance for loan losses totaled $536 thousand and $245 thousand for the three months ended September 30, 2017 and 2016, respectively, and $1.5 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in net losses within non-interest expense of $290 thousand for the nine months ended September 30, 2017, and $34 thousand and $946 thousand for three and nine months ended September 30, 2016, respectively. There were no losses on re-measurement during the three months ended September 30, 2017.
 
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.


19



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, 2017 and December 31, 2016 were as follows: 
 
Fair Value
Hierarchy
 
September 30, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
215,600

 
$
215,600

 
$
220,791

 
$
220,791

Interest bearing deposits with banks
Level 1
 
128,226

 
128,226

 
171,710

 
171,710

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
Level 1
 
138,714

 
147,126

 
138,830

 
147,495

U.S. government agency securities
Level 2
 
9,984

 
10,188

 
11,329

 
11,464

Obligations of states and political subdivisions
Level 2
 
495,157

 
511,159

 
566,590

 
577,826

Residential mortgage-backed securities
Level 2
 
1,088,389

 
1,081,703

 
1,112,460

 
1,102,802

Trust preferred securities
Level 2
 
49,819

 
38,998

 
59,804

 
47,290

Corporate and other debt securities
Level 2
 
41,559

 
41,971

 
36,559

 
37,720

Total investment securities held to maturity
 
 
1,823,622

 
1,831,145

 
1,925,572

 
1,924,597

Net loans
Level 3
 
18,082,496

 
17,741,813

 
17,121,684

 
16,756,655

Accrued interest receivable
Level 1
 
72,063

 
72,063

 
66,816

 
66,816

Federal Reserve Bank and Federal Home Loan Bank stock (1)
Level 1
 
204,978

 
204,978

 
147,127

 
147,127

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
Level 1
 
13,892,110

 
13,892,110

 
14,591,837

 
14,591,837

Deposits with stated maturities
Level 2
 
3,420,656

 
3,436,229

 
3,138,871

 
3,160,572

Short-term borrowings
Level 1
 
1,482,709

 
1,485,695

 
1,080,960

 
1,081,751

Long-term borrowings
Level 2
 
2,215,219

 
2,300,388

 
1,433,906

 
1,523,386

Junior subordinated debentures issued to capital trusts
Level 2
 
41,716

 
42,244

 
41,577

 
45,785

Accrued interest payable (2)
Level 1
 
10,812

 
10,812

 
10,675

 
10,675

 
(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

20



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 FHLB borrowings (and from time to time, federal funds purchased) 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.

21




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, 2017 and December 31, 2016 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
September 30, 2017
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,714

 
$
8,412

 
$
—

 
$
147,126

U.S. government agency securities
9,984

 
204

 
—

 
10,188

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
247,277

 
9,412

 
(1,449
)
 
255,240

Municipal bonds
247,880

 
8,049

 
(10
)
 
255,919

Total obligations of states and political subdivisions
495,157

 
17,461

 
(1,459
)
 
511,159

Residential mortgage-backed securities
1,088,389

 
7,234

 
(13,920
)
 
1,081,703

Trust preferred securities
49,819

 
47

 
(10,868
)
 
38,998

Corporate and other debt securities
41,559

 
699

 
(287
)
 
41,971

Total investment securities held to maturity
$
1,823,622

 
$
34,057

 
$
(26,534
)
 
$
1,831,145

December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,830

 
$
8,665

 
$
—

 
$
147,495

U.S. government agency securities
11,329

 
135

 
—

 
11,464

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
252,185

 
6,692

 
(1,428
)
 
257,449

Municipal bonds
314,405

 
6,438

 
(466
)
 
320,377

Total obligations of states and political subdivisions
566,590

 
13,130

 
(1,894
)
 
577,826

Residential mortgage-backed securities
1,112,460

 
8,432

 
(18,090
)
 
1,102,802

Trust preferred securities
59,804

 
40

 
(12,554
)
 
47,290

Corporate and other debt securities
36,559

 
1,190

 
(29
)
 
37,720

Total investment securities held to maturity
$
1,925,572

 
$
31,592

 
$
(32,567
)
 
$
1,924,597


22



The age of unrealized losses and fair value of related securities held to maturity at September 30, 2017 and December 31, 2016 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, 2017
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
55,565

 
$
(1,449
)
 
$
—

 
$
—

 
$
55,565

 
$
(1,449
)
Municipal bonds
4,678

 
(10
)
 
—

 
—

 
4,678

 
(10
)
Total obligations of states and political subdivisions
60,243

 
(1,459
)
 
—

 
—

 
60,243

 
(1,459
)
Residential mortgage-backed securities
551,490

 
(7,911
)
 
228,397

 
(6,009
)
 
779,887

 
(13,920
)
Trust preferred securities
—

 
—

 
37,597

 
(10,868
)
 
37,597

 
(10,868
)
Corporate and other debt securities
4,713

 
(287
)
 
—

 
—

 
4,713

 
(287
)
Total
$
616,446

 
$
(9,657
)
 
$
265,994

 
$
(16,877
)
 
$
882,440

 
$
(26,534
)
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
98,114

 
$
(1,428
)
 
$
—

 
$
—

 
$
98,114

 
$
(1,428
)
Municipal bonds
27,368

 
(466
)
 
—

 
—

 
27,368

 
(466
)
Total obligations of states and political subdivisions
125,482

 
(1,894
)
 
—

 
—

 
125,482

 
(1,894
)
Residential mortgage-backed securities
692,108

 
(14,420
)
 
114,505

 
(3,670
)
 
806,613

 
(18,090
)
Trust preferred securities
—

 
—

 
45,898

 
(12,554
)
 
45,898

 
(12,554
)
Corporate and other debt securities
2,971

 
(29
)
 
—

 
—

 
2,971

 
(29
)
Total
$
820,561

 
$
(16,343
)
 
$
160,403

 
$
(16,224
)
 
$
980,964

 
$
(32,567
)

The unrealized losses on investment securities held to maturity are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 118 at September 30, 2017 and 132 at December 31, 2016.

The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at September 30, 2017 mainly related to investment grade securities issued by Ginnie Mae.
The unrealized losses existing for more than twelve months for trust preferred securities at September 30, 2017 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, 2017.
As of September 30, 2017, 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 $978.7 million.

23



The contractual maturities of investments in debt securities held to maturity at September 30, 2017 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, 2017
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
54,778

 
$
55,334

Due after one year through five years
221,351

 
229,067

Due after five years through ten years
313,923

 
330,775

Due after ten years
145,181

 
134,266

Residential mortgage-backed securities
1,088,389

 
1,081,703

Total investment securities held to maturity
$
1,823,622

 
$
1,831,145

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, 2017.


24



Available for Sale
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at September 30, 2017 and December 31, 2016 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
September 30, 2017
 
 
 
 
 
 
 
U.S. Treasury securities
$
51,003

 
$
6

 
$
(861
)
 
$
50,148

U.S. government agency securities
43,896

 
342

 
(8
)
 
44,230

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
38,847

 
367

 
(204
)
 
39,010

Municipal bonds
79,452

 
473

 
(533
)
 
79,392

Total obligations of states and political subdivisions
118,299

 
840

 
(737
)
 
118,402

Residential mortgage-backed securities
1,171,510

 
3,230

 
(13,583
)
 
1,161,157

Trust preferred securities*
6,532

 
—

 
(1,139
)
 
5,393

Corporate and other debt securities
56,827

 
719

 
(119
)
 
57,427

Equity securities
10,505

 
929

 
(454
)
 
10,980

Total investment securities available for sale
$
1,458,572

 
$
6,066

 
$
(16,901
)
 
$
1,447,737

December 31, 2016