LOANS (Note 5)

The detail of the loan portfolio as of December 31, 2017 and 2016 was as follows:



	December 31, 2017						December 31, 2016
	Non-PCI Loans		PCI Loans*		Total		Non-PCI Loans		PCI Loans*		Total
	(in thousands)
Loans:
Commercial and industrial	$	2,549,065	$	192,360	$	2,741,425	$	2,357,018	$	281,177	$	2,638,195
Commercial real estate:
Commercial real estate	8,561,851		934,926		9,496,777		7,628,328		1,091,339		8,719,667
Construction	809,964		41,141		851,105		710,266		114,680		824,946
Total commercial real estate loans	9,371,815		976,067		10,347,882		8,338,594		1,206,019		9,544,613
Residential mortgage	2,717,744		141,291		2,859,035		2,684,195		183,723		2,867,918
Consumer:
Home equity	373,631		72,649		446,280		376,213		92,796		469,009
Automobile	1,208,804		98		1,208,902		1,139,082		145		1,139,227
Other consumer	723,306		4,750		728,056		569,499		7,642		577,141
Total consumer loans	2,305,741		77,497		2,383,238		2,084,794		100,583		2,185,377
Total loans	$	16,944,365	$	1,387,215	$	18,331,580	$	15,464,601	$	1,771,502	$	17,236,103


*	PCI loans include covered loans (mostly consisting of residential mortgage loans) totaling $38.7 million and $70.4 million at December 31, 2017 and 2016, respectively.

Total loans (excluding PCI covered loans) include net of unearned premiums and deferred loan costs totaling $22.2 million and $15.3 million at December 31, 2017 and 2016, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $1.5 billion and $1.9 billion at December 31, 2017 and 2016, respectively.

Valley transferred $313.2 million and $174.5 million of residential mortgage loans from the loan portfolio to loans held for sale in 2017 and 2016, respectively. These loans were sold resulting in net gains totaling $8.8 million and $7.3 million for the years ended December 31, 2017 and 2016, respectively. Exclusive of such transfers, there were no other sales or transfers of loans from the held for investment portfolio during 2017 and 2016.

Purchased Credit-Impaired 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. See Note 1 for additional information.

The following table presents changes in the accretable yield for PCI loans for the years ended December 31, 2017 and 2016:



	2017			2016
	(in thousands)
Balance, beginning of period	$	294,514		$	415,179
Accretion	(89,770		)	(107,482		)
Net increase (decrease) in expected cash flows	77,265			(9,989		)
Other, net	—			(3,194		)
Balance, end of period	$	282,009		$	294,514

The net increase (decrease) in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools. The net increase in the expected cash flows totaling approximately $77.3 million for the year ended December 31, 2017 was largely due to a decrease in the expected losses for certain PCI loan pools during the fourth quarter of 2017. Conversely, the net decrease of approximately $10.0 million for 2016 was largely due to accelerated cash flows caused by higher actual loan repayments within certain loan pools which reduced the remaining reforecasted accretable yield during the fourth quarter of 2016.

Related Party Loans

In the ordinary course of business, Valley has granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability.

The following table summarizes the changes in the total amounts of loans and advances to the related parties during the year ended December 31, 2017:



	2017
	(in thousands)
Outstanding at beginning of year	$	165,320
New loans and advances	7,307
Repayments	(21,362		)
Outstanding at end of year	$	151,265

All loans to related parties are performing as of December 31, 2017.

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, strong repayment performance, and high character. 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. Whenever possible, Valley 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 $401.8 million and $455.5 million at December 31, 2017 and 2016, respectively.

The commercial portfolio also includes taxi medallion loans, most of which consist of loans to fleet owners of New York City medallions. At December 31, 2017, the taxi medallion loans totaled $137.3 million and were largely classified as substandard and special mention loans. While the vast majority of these loans are performing at December 31, 2017, continued negative trends in the market valuations of the underlying taxi medallions could impact the future performance and internal classification of this portfolio. Valley's historical taxi medallion lending criteria has been conservative in regards to capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral in certain instances. We continue to closely monitor this portfolio's performance and the potential impact of the changes in market valuations for taxi medallions due to competing car service providers and other factors.

Commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans but generally they involve larger principal balances and longer repayment periods as compared to commercial and industrial loans. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real property. Repayment of most 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 presale 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, 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 80 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 the strength or weakness of 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. Unsecured consumer loans totaled approximately $18.1 million and $20.6 million, including $8.2 million and $7.0 million of credit card loans, at December 31, 2017 and 2016, respectively. Valley believes the aggregate risk exposure to unsecured loans and lines of credit was not significant at December 31, 2017.

Credit Quality

The following tables present past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis) by loan portfolio class at December 31, 2017 and 2016:



	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)
December 31, 2017
Commercial and industrial	$	3,650	$	544	$	—	$	20,890	$	25,084	$	2,523,981	$	2,549,065
Commercial real estate:
Commercial real estate	11,223		—		27		11,328		22,578		8,539,273		8,561,851
Construction	12,949		18,845		—		732		32,526		777,438		809,964
Total commercial real estate loans	24,172		18,845		27		12,060		55,104		9,316,711		9,371,815
Residential mortgage	12,669		7,903		2,779		12,405		35,756		2,681,988		2,717,744
Consumer loans:
Home equity	1,009		94		—		1,777		2,880		370,751		373,631
Automobile	5,707		987		271		73		7,038		1,201,766		1,208,804
Other consumer	1,693		118		13		20		1,844		721,462		723,306
Total consumer loans	8,409		1,199		284		1,870		11,762		2,293,979		2,305,741
Total	$	48,900	$	28,491	$	3,090	$	47,225	$	127,706	$	16,816,659	$	16,944,365



	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)
December 31, 2016
Commercial and industrial	$	6,705	$	5,010	$	142	$	8,465	$	20,322	$	2,336,696	$	2,357,018
Commercial real estate:
Commercial real estate	5,894		8,642		474		15,079		30,089		7,598,239		7,628,328
Construction	6,077		—		1,106		715		7,898		702,368		710,266
Total commercial real estate loans	11,971		8,642		1,580		15,794		37,987		8,300,607		8,338,594
Residential mortgage	12,005		3,564		1,541		12,075		29,185		2,655,010		2,684,195
Consumer loans:
Home equity	929		415		—		1,028		2,372		373,841		376,213
Automobile	3,192		723		188		146		4,249		1,134,833		1,139,082
Other consumer	76		9		21		—		106		569,393		569,499
Total consumer loans	4,197		1,147		209		1,174		6,727		2,078,067		2,084,794
Total	$	34,878	$	18,363	$	3,472	$	37,508	$	94,221	$	15,370,380	$	15,464,601

If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $2.5 million, $2.1 million, and $3.5 million for the years ended December 31, 2017, 2016 and 2015, respectively; none of these amounts were included in interest income during these periods.

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 restructurings, 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 December 31, 2017 and 2016:



	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
	(in thousands)
December 31, 2017
Commercial and industrial	$	9,946	$	75,553	$	85,499	$	90,269	$	11,044
Commercial real estate:
Commercial real estate	28,709		29,771		58,480		62,286		2,718
Construction	1,904		467		2,371		2,394		17
Total commercial real estate loans	30,613		30,238		60,851		64,680		2,735
Residential mortgage	5,654		8,402		14,056		15,332		718
Consumer loans:
Home equity	3,096		664		3,760		4,917		64
Total consumer loans	3,096		664		3,760		4,917		64
Total	$	49,309	$	114,857	$	164,166	$	175,198	$	14,561
December 31, 2016
Commercial and industrial	$	3,609	$	27,031	$	30,640	$	35,957	$	5,864
Commercial real estate:
Commercial real estate	21,318		36,974		58,292		60,267		3,612
Construction	1,618		2,379		3,997		3,997		260
Total commercial real estate loans	22,936		39,353		62,289		64,264		3,872
Residential mortgage	8,398		9,958		18,356		19,712		725
Consumer loans:
Home equity	1,182		2,352		3,534		3,626		70
Total consumer loans	1,182		2,352		3,534		3,626		70
Total	$	36,125	$	78,694	$	114,819	$	123,559	$	10,531

Interest income recognized on a cash basis for impaired loans classified as non-accrual was not material for the years ended December 31, 2017, 2016 and 2015.

The following table presents, by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2017, 2016 and 2015:



	2017				2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	80,974	$	1,459	$	36,552	$	1,045	$	28,451	$	893
Commercial real estate:
Commercial real estate	54,799		1,908		59,633		2,122		77,154		2,380
Construction	3,258		86		5,790		182		16,399		534
Total commercial real estate loans	58,057		1,994		65,423		2,304		93,553		2,914
Residential mortgage	15,451		760		21,340		874		24,435		728
Consumer loans:
Home equity	4,295		160		2,626		68		3,852		111
Total consumer loans	4,295		160		2,626		68		3,852		111
Total	$	158,777	$	4,373	$	125,941	$	4,291	$	150,291	$	4,646

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 $117.2 million and $85.2 million as of December 31, 2017 and 2016, respectively. Non-performing TDRs totaled $27.0 million and $10.6 million as of December 31, 2017 and 2016, respectively.

The following table presents non-PCI loans by loan class modified as TDRs during the years ended December 31, 2017 and 2016. 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 December 31, 2017 and 2016, respectively.



Troubled Debt Restructurings	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
		($ in thousands)
December 31, 2017
Commercial and industrial	90	$	75,894	$	69,020
Commercial real estate:
Commercial real estate	6	23,781		23,548
Construction	3	1,188		932
Total commercial real estate	9	24,969		24,480
Residential mortgage	7	1,769		1,727
Total	106	$	102,632	$	95,227
December 31, 2016
Commercial and industrial	19	$	18,186	$	16,277
Commercial real estate:
Commercial real estate	4	8,325		7,092
Construction	3	2,922		3,626
Total commercial real estate	7	11,247		10,718
Residential mortgage	7	1,867		1,826
Consumer	1	54		51
Total	34	$	31,354	$	28,872

The total TDRs presented in the table above had allocated specific reserves for loan losses that totaled $8.7 million and $4.8 million at December 31, 2017 and 2016, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 6. There were no loan charge-offs related to loans modified as TDRs during 2017 and 2016. At December 31, 2017, the commercial and industrial loan category in the above table largely consisted of performing TDR taxi cab medallion loans classified as substandard and non-accrual doubtful loans.

The non-PCI loans modified as TDRs within the previous 12 months and for which there was a payment default (90 or more days past due) for the years ended December 31, 2017 and 2016 were as follows:



	Years Ended December 31,
	2017			2016
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	($ in thousands)
Commercial and industrial	7	$	5,841	—	$	—
Commercial real estate	1	165		2	357
Residential mortgage	5	1,125		—	—
Consumer	—	—		4	853
Total	13	$	7,131	6	$	1,210

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 credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) based on the most recent analysis performed at December 31, 2017 and 2016.



Credit exposure— by internally assigned risk rating			Special						Total Non-PCI
Credit exposure— by internally assigned risk rating	Pass		Mention		Substandard		Doubtful		Loans
	(in thousands)
December 31, 2017
Commercial and industrial	$	2,375,689	$	62,071	$	96,555	$	14,750	$	2,549,065
Commercial real estate	8,447,865		48,009		65,977		—		8,561,851
Construction	808,091		360		1,513		—		809,964
Total	$	11,631,645	$	110,440	$	164,045	$	14,750	$	11,920,880
December 31, 2016
Commercial and industrial	$	2,246,457	$	44,316	$	64,649	$	1,596	$	2,357,018
Commercial real estate	7,486,469		57,591		84,268		—		7,628,328
Construction	708,070		200		1,996		—		710,266
Total	$	10,440,996	$	102,107	$	150,913	$	1,596	$	10,695,612

At December 31, 2017, the commercial and industrial loans rated substandard and doubtful in the above table partly consisted of performing TDR taxi medallion loans and non-accrual taxi cab medallion loans, respectively.

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 December 31, 2017 and 2016:



Credit exposure— by payment activity	Performing Loans		Non-Performing Loans		Total Non-PCI Loans
	(in thousands)
December 31, 2017
Residential mortgage	$	2,705,339	$	12,405	$	2,717,744
Home equity	371,854		1,777		373,631
Automobile	1,208,731		73		1,208,804
Other consumer	723,286		20		723,306
Total	$	5,009,210	$	14,275	$	5,023,485
December 31, 2016
Residential mortgage	$	2,672,120	$	12,075	$	2,684,195
Home equity	375,185		1,028		376,213
Automobile	1,138,936		146		1,139,082
Other consumer	569,499		—		569,499
Total	$	4,755,740	$	13,249	$	4,768,989

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 December 31, 2017 and 2016:



Credit exposure—	Performing		Non-Performing		Total
by payment activity	Loans		Loans		PCI Loans
	(in thousands)
December 31, 2017
Commercial and industrial	$	172,105	$	20,255	$	192,360
Commercial real estate	924,574		10,352		934,926
Construction	39,802		1,339		41,141
Residential mortgage	135,745		5,546		141,291
Consumer	76,901		596		77,497
Total	$	1,349,127	$	38,088	$	1,387,215
December 31, 2016
Commercial and industrial	$	272,483	$	8,694	$	281,177
Commercial real estate	1,080,376		10,963		1,091,339
Construction	113,370		1,310		114,680
Residential mortgage	179,793		3,930		183,723
Consumer	98,469		2,114		100,583
Total	$	1,744,491	$	27,011	$	1,771,502