BUSINESS SEGMENTS (Note 22)

Valley has four business segments that it monitors and reports on to manage Valley’s business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Valley’s reportable segments have been determined based upon its internal structure of operations and lines of business. Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Expenses related to the branch network, all other components of retail banking, along with the back office departments of our subsidiary bank are allocated from the corporate and other adjustments segment to each of the other three business segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a “pool funding” methodology, which involves the allocation of uniform funding cost based on each segments’ average earning assets outstanding for the period. The financial reporting for each segment contains allocations and reporting in line with Valley’s operations, which may not necessarily be comparable to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting, and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data.

The consumer lending segment is mainly comprised of residential mortgages and automobile loans, and to a lesser extent, secured personal lines of credit, home equity loans and other consumer loans. The duration of the residential mortgage loan portfolio is subject to movements in the market level of interest rates and forecasted prepayment speeds. The average weighted life of the automobile loans within the portfolio is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management Division, comprised of trust, asset management and insurance services.

The commercial lending segment is mainly comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates.

The investment management segment generates a large portion of Valley’s income through investments in various types of securities and interest-bearing deposits with other banks. These investments are mainly comprised of fixed rate securities and depending on Valley's liquid cash position, interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York), as part of its asset/liability management strategies. The fixed rate investments are among Valley’s assets that are least sensitive to changes in market interest rates. However, a portion of the investment portfolio is invested in shorter-duration securities to maintain the overall asset sensitivity of Valley’s balance sheet.

The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net gains and losses on securities not reported in the investment management segment above, interest expense related to subordinated notes, as well as income and expense from derivative financial instruments.

The following tables represent the financial data for Valley’s four business segments for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31, 2018
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)
Average interest earning assets (unaudited)	$	6,197,161		$	17,143,169		$	4,362,581		$	—		$	27,702,911

Interest income	$	235,264		$	798,974		$	130,971		$	(5,961	)	$	1,159,248
Interest expense	64,083			177,273			45,112			15,577			302,045
Net interest income (loss)	171,181			621,701			85,859			(21,538		)	857,203
Provision for credit losses	5,550			26,951			—			—			32,501
Net interest income (loss) after provision for credit losses	165,631			594,750			85,859			(21,538		)	824,702
Non-interest income	61,280			22,275			8,691			41,806			134,052
Non-interest expense	92,462			95,171			1,251			440,177			629,061
Internal expense transfer	77,164			213,399			54,353			(344,916		)	—
Income (loss) before income taxes	$	57,285		$	308,455		$	38,946		$	(74,993	)	$	329,693
Return on average interest earning assets (pre-tax) (unaudited)	0.92		%	1.80		%	0.89		%	N/A			1.19		%



	Year Ended December 31, 2017
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)
Average interest earning assets (unaudited)	$	5,166,171		$	12,652,832		$	3,669,495		$	—		$	21,488,498

Interest income	$	182,508		$	552,297		$	107,972		$	(8,623	)	$	834,154
Interest expense	39,018			95,562			27,714			11,813			174,107
Net interest income (loss)	143,490			456,735			80,258			(20,436		)	660,047
Provision for credit losses	3,197			6,745			—			—			9,942
Net interest income (loss) after provision for credit losses	140,293			449,990			80,258			(20,436		)	650,105
Non-interest income	63,375			11,414			7,745			29,172			111,706
Non-interest expense	72,207			71,216			1,193			364,457			509,073
Internal expense transfer	68,007			166,847			48,393			(283,247		)	—
Income (loss) before income taxes	$	63,454		$	223,341		$	38,417		$	(72,474	)	$	252,738
Return on average interest earning assets (pre-tax) (unaudited)	1.23		%	1.77		%	1.05		%	N/A			1.18		%



	Year Ended December 31, 2016
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)
Average interest earning assets (unaudited)	$	5,081,798		$	11,318,947		$	3,428,567		$	—		$	19,829,312

Interest income	$	176,929		$	504,341		$	89,378		$	(8,760	)	$	761,888
Interest expense	35,175			78,347			23,732			11,520			148,774
Net interest income (loss)	141,754			425,994			65,646			(20,280		)	613,114
Provision for credit losses	905			10,964			—			—			11,869
Net interest income (loss) after provision for credit losses	140,849			415,030			65,646			(20,280		)	601,245
Non-interest income	63,443			8,327			6,694			29,796			108,260
Non-interest expense	62,721			70,145			1,281			341,978			476,125
Internal expense transfer	71,578			160,198			48,475			(280,251		)	—
Income (loss) before income taxes	$	69,993		$	193,014		$	22,584		$	(52,211	)	$	233,380
Return on average interest earning assets (pre-tax) (unaudited)	1.38		%	1.71		%	0.66		%	N/A			1.18		%