Loans

The detail of the loan portfolio as of September 30, 2018 and December 31, 2017 was as follows:



	September 30, 2018						December 31, 2017
	Non-PCI Loans		PCI Loans*		Total		Non-PCI Loans		PCI Loans*		Total
	(in thousands)
Loans:
Commercial and industrial	$	3,243,622	$	771,658	$	4,015,280	$	2,549,065	$	192,360	$	2,741,425
Commercial real estate:
Commercial real estate	9,607,279		2,643,952		12,251,231		8,561,851		934,926		9,496,777
Construction	1,022,332		393,927		1,416,259		809,964		41,141		851,105
Total commercial real estate loans	10,629,611		3,037,879		13,667,490		9,371,815		976,067		10,347,882
Residential mortgage	3,331,985		450,987		3,782,972		2,717,744		141,291		2,859,035
Consumer:
Home equity	366,941		154,856		521,797		373,631		72,649		446,280
Automobile	1,288,500		402		1,288,902		1,208,804		98		1,208,902
Other consumer	820,596		14,253		834,849		723,306		4,750		728,056
Total consumer loans	2,476,037		169,511		2,645,548		2,305,741		77,497		2,383,238
Total loans	$	19,681,255	$	4,430,035	$	24,111,290	$	16,944,365	$	1,387,215	$	18,331,580


*	PCI loans include covered loans (mostly consisting of residential mortgage loans) totaling $29.1 million and $38.7 million at September 30, 2018 and December 31, 2017, respectively.

Total loans (excluding PCI covered loans) include net unearned premiums and deferred loan costs of $16.7 million and $22.2 million at September 30, 2018 and December 31, 2017, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $4.6 billion and $1.5 billion at September 30, 2018 and December 31, 2017, respectively.

Valley transferred $289.6 million of residential mortgage loans from the loan portfolio to loans held for sale during the nine months ended September 30, 2018 as compared to $225.5 million of loans transferred during the nine months ended September 30, 2017. There were no other sales of loans from the held for investment portfolio during the nine months ended September 30, 2018 and 2017.

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.

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the PCI loans acquired in the USAB acquisition as of January 1, 2018 (See Note 2 for more details):



	(in thousands)

Contractually required principal and interest	$	4,312,988
Contractual cash flows not expected to be collected (non-accretable difference)	(103,618		)
Expected cash flows to be collected	4,209,370
Interest component of expected cash flows (accretable yield)	(474,208		)
Fair value of acquired loans	$	3,735,162

The following table presents changes in the accretable yield for PCI loans during the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in thousands)
Balance, beginning of period	$	630,550		$	246,278		$	282,009		$	294,514
Acquisition	—			—			474,208			—
Accretion	(54,367		)	(20,626		)	(180,034		)	(68,862		)
Net increase in expected cash flows	23,983			—			23,983			—
Balance, end of period	$	600,166		$	225,652		$	600,166		$	225,652

Credit Risk Management

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

Credit Quality

The following table presents past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis) by loan portfolio class at September 30, 2018 and December 31, 2017:



	Past Due and Non-Accrual Loans
	30-59 Days Past Due Loans		60-89 Days Past Due Loans		Accruing Loans 90 Days or More Past Due		Non-Accrual Loans		Total Past Due Loans		Current Non-PCI Loans		Total Non-PCI Loans
	(in thousands)
September 30, 2018
Commercial and industrial	$	9,462	$	1,431	$	1,618	$	52,929	$	65,440	$	3,178,182	$	3,243,622
Commercial real estate:
Commercial real estate	3,387		2,502		27		7,103		13,019		9,594,260		9,607,279
Construction	15,576		36		—		—		15,612		1,006,720		1,022,332
Total commercial real estate loans	18,963		2,538		27		7,103		28,631		10,600,980		10,629,611
Residential mortgage	10,058		3,270		1,877		16,083		31,288		3,300,697		3,331,985
Consumer loans:
Home equity	506		265		—		2,060		2,831		364,110		366,941
Automobile	5,950		619		261		72		6,902		1,281,598		1,288,500
Other consumer	987		365		21		116		1,489		819,107		820,596
Total consumer loans	7,443		1,249		282		2,248		11,222		2,464,815		2,476,037
Total	$	45,926	$	8,488	$	3,804	$	78,363	$	136,581	$	19,544,674	$	19,681,255
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

Impaired loans. Impaired loans, consisting of non-accrual commercial and industrial loans and commercial real estate loans over $250 thousand and all loans which were modified in troubled debt restructuring, are individually evaluated for impairment. PCI loans are not classified as impaired loans because they are accounted for on a pool basis.

The following table presents information about impaired loans by loan portfolio class at September 30, 2018 and December 31, 2017:



	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
	(in thousands)
September 30, 2018
Commercial and industrial	$	5,294	$	81,319	$	86,613	$	91,998	$	27,662
Commercial real estate:
Commercial real estate	22,279		28,638		50,917		54,904		2,768
Construction	421		460		881		881		14
Total commercial real estate loans	22,700		29,098		51,798		55,785		2,782
Residential mortgage	6,362		6,420		12,782		13,801		620
Consumer loans:
Home equity	186		620		806		901		79
Total consumer loans	186		620		806		901		79
Total	$	34,542	$	117,457	$	151,999	$	162,485	$	31,143
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

The following tables present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	87,414	$	422	$	70,135	$	300
Commercial real estate:
Commercial real estate	50,809		556		57,712		482
Construction	987		15		3,049		21
Total commercial real estate loans	51,796		571		60,761		503
Residential mortgage	14,112		152		15,630		183
Consumer loans:
Home equity	2,454		17		4,766		49
Total consumer loans	2,454		17		4,766		49
Total	$	155,776	$	1,162	$	151,292	$	1,035



	Nine Months Ended September 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	88,376	$	1,348	$	49,037	$	896
Commercial real estate:
Commercial real estate	52,993		1,735		57,718		1,290
Construction	1,811		54		2,836		60
Total commercial real estate loans	54,804		1,789		60,554		1,350
Residential mortgage	13,707		502		17,851		575
Consumer loans:
Home equity	2,093		83		4,820		123
Total consumer loans	2,093		83		4,820		123
Total	$	158,980	$	3,722	$	132,262	$	2,944

Interest income recognized on a cash basis (included in the table above) was immaterial for the three and nine months ended September 30, 2018 and 2017.

Troubled debt restructured loans. From time to time, Valley may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a troubled debt restructured loan (TDR). Valley’s PCI loans are excluded from the TDR disclosures below because they are evaluated for impairment on a pool by pool basis. When an individual PCI loan within a pool is modified as a TDR, it is not removed from its pool. All TDRs are classified as impaired loans and are included in the impaired loan disclosures above.

The majority of the concessions made for TDRs involve lowering the monthly payments on loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. The concessions rarely result in the forgiveness of principal or accrued interest. In addition, Valley frequently obtains additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms of the loan and Valley’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

Performing TDRs (not reported as non-accrual loans) totaled $81.1 million and $117.2 million as of September 30, 2018 and December 31, 2017, respectively. Non-performing TDRs totaled $54.8 million and $27.0 million as of September 30, 2018 and December 31, 2017, respectively.

The following tables present loans by loan portfolio class modified as TDRs during the three and nine months ended September 30, 2018 and 2017. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at September 30, 2018 and 2017, respectively.



	Three Months Ended September 30,
	2018					2017
Troubled Debt Restructurings	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	($ in thousands)
Commercial and industrial	6	$	3,970	$	3,751	10	$	12,522	$	11,655
Commercial real estate:
Commercial real estate	1	233		231		4	5,931		5,929
Construction	—	—		—		2	628		625
Total commercial real estate	1	233		231		6	6,559		6,554
Residential mortgage	—	—		—		2	561		557
Total	7	$	4,203	$	3,982	18	$	19,642	$	18,766



	Nine Months Ended September 30,
	2018					2017
Troubled Debt Restructurings	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	($ in thousands)
Commercial and industrial	22	$	14,719	$	13,904	61	$	57,338	$	52,694
Commercial real estate:
Commercial real estate	6	4,207		4,504		7	23,806		23,217
Construction	2	565		285		3	1,188		994
Total commercial real estate	8	4,772		4,789		10	24,994		24,211
Residential mortgage	5	980		952		6	1,514		1,495
Consumer	1	88		83		—	—		—
Total	36	$	20,559	$	19,728	77	$	83,846	$	78,400

The total TDRs presented in the above table had allocated specific reserves for loan losses of approximately $6.3 million and $5.3 million for September 30, 2018 and 2017. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in the "Impaired Loans" section above. There were no charge-offs related to TDR modifications during the three and nine months ended September 30, 2018 and 2017, respectively.

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 three and nine months ended September 30, 2018 and 2017 were as follows:



	Three Months Ended September 30,
	2018			2017
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	($ in thousands)
Commercial and industrial	4	$	3,645	—	$	—
Residential mortgage	5	1,015		4	1,093
Total	9	$	4,660	4	$	1,093



	Nine Months Ended September 30,
	2018			2017
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	($ in thousands)
Commercial and industrial	8	$	6,770	7	$	6,430
Commercial real estate	—	—		1	732
Residential mortgage	5	1,015		—	—
Total	13	$	7,785	8	$	7,162

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) at September 30, 2018 and December 31, 2017 based on the most recent analysis performed:



Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard		Doubtful		Total Non-PCI Loans
	(in thousands)
September 30, 2018
Commercial and industrial	$	3,059,312	$	52,555	$	82,212	$	49,543	$	3,243,622
Commercial real estate	9,518,179		29,334		59,766		—		9,607,279
Construction	1,021,179		545		608		—		1,022,332
Total	$	13,598,670	$	82,434	$	142,586	$	49,543	$	13,873,233
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

At September 30, 2018 and December 31, 2017, the commercial and industrial loans with doubtful risk ratings in the above table mostly consisted of non-accrual taxi medallion loans.

For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of September 30, 2018 and December 31, 2017:



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Non-PCI Loans
	(in thousands)
September 30, 2018
Residential mortgage	$	3,315,902	$	16,083	$	3,331,985
Home equity	364,881		2,060		366,941
Automobile	1,288,428		72		1,288,500
Other consumer	820,480		116		820,596
Total	$	5,789,691	$	18,331	$	5,808,022
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

Valley evaluates the credit quality of its PCI loan pools based on the expectation of the underlying cash flows of each pool, derived from the aging status and by payment activity of individual loans within the pool. The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of September 30, 2018 and December 31, 2017:



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total PCI Loans
	(in thousands)
September 30, 2018
Commercial and industrial	$	729,872	$	41,786	$	771,658
Commercial real estate	2,622,330		21,622		2,643,952
Construction	392,873		1,054		393,927
Residential mortgage	443,776		7,211		450,987
Consumer	165,762		3,749		169,511
Total	$	4,354,613	$	75,422	$	4,430,035
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

Other real estate owned (OREO) totaled $9.9 million and $9.8 million at September 30, 2018 and December 31, 2017, respectively. OREO included foreclosed residential real estate properties totaling $1.6 million and $7.3 million at September 30, 2018 and December 31, 2017, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.2 million and $3.8 million at September 30, 2018 and December 31, 2017, respectively.