Edgar Filing: VALLEY NATIONAL BANCORP

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Form 10-Q

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, 2013

¨	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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

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 199,626,645 shares were outstanding as of November 5, 2013.

TABLE OF CONTENTS


		Page Number

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition as of September 30, 2013 and December 31, 2012		2
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012		3
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012		4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012		5
	Notes to Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		48

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		87

Item 4.	Controls and Procedures		87

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		88

Item 1A.	Risk Factors		88

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		88

Item 6.	Exhibits		88

SIGNATURES			90

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(in thousands, except for share data)


	September 30, 2013			December 31, 2012
Assets
Cash and due from banks	$	263,745		$	390,078
Interest bearing deposits with banks		86,656			463,022
Investment securities:
Held to maturity (fair value of $1,701,492 at September 30, 2013 and $1,657,950 at December 31, 2012)		1,703,779			1,599,707
Available for sale		910,809			807,816
Trading securities		14,270			22,157

Total investment securities		2,628,858			2,429,680

Loans held for sale, at fair value		9,611			120,230
Non-covered loans		11,275,661			10,842,125
Covered loans		121,520			180,674
Less: Allowance for loan losses		(112,585	)		(130,200	)

Net loans		11,284,596			10,892,599

Premises and equipment, net		269,762			278,615
Bank owned life insurance		342,373			339,876
Accrued interest receivable		52,888			52,375
Due from customers on acceptances outstanding		5,294			3,323
FDIC loss-share receivable		35,678			44,996
Goodwill		428,234			428,234
Other intangible assets, net		37,959			31,123
Other assets		531,289			538,495

Total Assets	$	15,976,943		$	16,012,646


Liabilities
Deposits:
Non-interest bearing	$	3,581,089		$	3,558,053
Interest bearing:
Savings, NOW and money market		5,331,895			5,197,199
Time		2,207,127			2,508,766

Total deposits		11,120,111			11,264,018

Short-term borrowings		158,283			154,323
Long-term borrowings		2,820,827			2,697,299
Junior subordinated debentures issued to capital trusts (includes fair value of $132,406 at September 30, 2013 and $147,595 at December 31, 2012 for VNB Capital Trust I)		173,454			188,522
Bank acceptances outstanding		5,294			3,323
Accrued expenses and other liabilities		178,918			202,784

Total Liabilities		14,456,887			14,510,269


Shareholders’ Equity
Preferred stock, (no par value, authorized 30,000,000 shares; none issued)		—			—
Common stock, (no par value, authorized 232,023,233 shares; issued 199,453,031 shares at September 30, 2013 and 198,499,275 shares at December 31, 2012)		69,826			69,494
Surplus		1,400,238			1,390,851
Retained earnings		88,703			93,495
Accumulated other comprehensive loss		(38,686	)		(50,909	)
Treasury stock, at cost (2,500 common shares at September 30, 2013 and 61,004 common shares at December 31, 2012)		(25	)		(554	)

Total Shareholders’ Equity		1,520,056			1,502,377

Total Liabilities and Shareholders’ Equity	$	15,976,943		$	16,012,646

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except for share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Interest Income
Interest and fees on loans	$	134,160		$	146,011		$	401,125		$	438,283
Interest and dividends on investment securities:
Taxable		14,440			15,733			41,854			54,598
Tax-exempt		3,566			3,424			10,888			9,770
Dividends		1,517			1,866			4,701			5,291
Interest on federal funds sold and other short-term investments		96			196			614			282

Total interest income		153,779			167,230			459,182			508,224

Interest Expense
Interest on deposits:
Savings, NOW and money market		4,359			5,051			13,430			15,095
Time		7,279			9,226			23,184			28,687
Interest on short-term borrowings		94			556			378			1,178
Interest on long-term borrowings and junior subordinated debentures		30,378			30,575			90,598			91,912

Total interest expense		42,110			45,408			127,590			136,872

Net Interest Income		111,669			121,822			331,592			371,352
Provision for credit losses		5,334			7,250			9,655			20,352

Net Interest Income After Provision for Credit Losses		106,335			114,572			321,937			351,000

Non-Interest Income
Trust and investment services		2,138			1,947			6,372			5,705
Insurance commissions		4,224			3,228			12,276			11,947
Service charges on deposit accounts		6,362			6,513			17,874			18,545
Gains on securities transactions, net		9			1,496			4,008			2,543
Other-than-temporary impairment losses on securities		—			—			—			—
Portion recognized in other comprehensive income (before taxes)		—			(4,697	)		—			(5,247	)

Net impairment losses on securities recognized in earnings		—			(4,697	)		—			(5,247	)
Trading gains (losses), net		2,231			6			(241	)		627
Fees from loan servicing		1,851			1,173			5,089			3,481
Gains on sales of loans, net		2,729			25,055			32,155			31,362
(Losses) gains on sales of assets, net		(1,010	)		195			(600	)		483
Bank owned life insurance		1,553			1,674			4,318			5,265
Change in FDIC loss-share receivable		(2,005	)		(390	)		(7,180	)		(7,502	)
Other		4,308			4,296			12,509			19,912

Total non-interest income		22,390			40,496			86,580			87,121

Non-Interest Expense
Salary and employee benefits expense		47,434			49,267			145,739			151,507
Net occupancy and equipment expense		18,430			17,466			55,498			51,731
FDIC insurance assessment		3,909			3,915			12,836			10,742
Amortization of other intangible assets		2,264			2,696			5,794			7,186
Professional and legal fees		4,112			3,471			12,289			10,440
Advertising		1,203			1,723			4,855			5,252
Other		17,109			14,681			48,235			42,419

Total non-interest expense		94,461			93,219			285,246			279,277

Income Before Income Taxes		34,264			61,849			123,271			158,844
Income tax expense		7,143			22,402			30,918			52,046

Net Income	$	27,121		$	39,447		$	92,353		$	106,798


Earnings Per Common Share:
Basic	$	0.14		$	0.20		$	0.46		$	0.54
Diluted		0.14			0.20			0.46			0.54
Cash Dividends Declared per Common Share		0.16			0.16			0.49			0.49
Weighted Average Number of Common Shares Outstanding:
Basic		199,445,874			197,437,988			199,206,945			197,205,865
Diluted		199,445,874			197,437,988			199,206,945			197,206,303

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Net income	$	27,121		$	39,447		$	92,353		$	106,798
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale securities
Net gains (losses) arising during the period		1,929			202			(15,111	)		7,323
Less reclassification adjustment for net gains included in net income		(6	)		(911	)		(2,330	)		(1,519	)

Total		1,923			(709	)		(17,441	)		5,804

Non-credit impairment losses on available for sale securities
Net change in non-credit impairment losses on securities		226			(2,161	)		6,977			9,497
Less reclassification adjustment for credit impairment losses included in net income		(110	)		2,415			(219	)		2,488

Total		116			254			6,758			11,985

Unrealized gains and losses on derivatives (cash flow hedges)
Net losses on derivatives arising during the period		(2,866	)		(1,219	)		(907	)		(3,389	)
Less reclassification adjustment for net losses included in net income		950			1,038			3,036			2,657

Total		(1,916	)		(181	)		2,129			(732	)

Defined benefit pension plan
Net gains arising during the period		—			—			18,769			—
Amortization of prior service cost		134			102			395			308
Amortization of net loss		209			338			1,145			1,013
Recognition of loss due to curtailment		—			—			468			—

Total		343			440			20,777			1,321

Total other comprehensive income		466			(196	)		12,223			18,378

Total comprehensive income	$	27,587		$	39,251		$	104,576		$	125,176

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	92,353		$	106,798
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,639			13,463
Stock-based compensation		4,743			3,816
Provision for credit losses		9,655			20,352
Net amortization of premiums and accretion of discounts on securities and borrowings		19,025			15,333
Amortization of other intangible assets		5,794			7,186
Gains on securities transactions, net		(4,008	)		(2,543	)
Net impairment losses on securities recognized in earnings		—			5,247
Proceeds from sales of loans held for sale		1,031,767			598,885
Gains on sales of loans, net		(32,155	)		(31,362	)
Originations of loans held for sale		(901,624	)		(568,330	)
Losses (gains) on sales of assets, net		600			(483	)
Change in FDIC loss-share receivable (excluding reimbursements)		7,180			7,502
Net change in:
Trading securities		7,887			(166	)
Fair value of borrowings carried at fair value		275			(461	)
Cash surrender value of bank owned life insurance		(4,318	)		(5,265	)
Accrued interest receivable		(513	)		2,273
Other assets		39,877			100,700
Accrued expenses and other liabilities		(23,354	)		(38,475	)

Net cash provided by operating activities		267,823			234,470

Cash flows from investing activities:
Net loan originations		(186,038	)		(305,713	)
Loans purchased		(231,008	)		(129,659	)
Investment securities held to maturity:
Purchases		(509,223	)		(258,764	)
Maturities, calls and principal repayments		394,003			582,651
Investment securities available for sale:
Purchases		(283,736	)		(229,037	)
Sales		4,401			221,603
Maturities, calls and principal repayments		153,421			196,082
Death benefit proceeds from bank owned life insurance		1,821			1,689
Proceeds from sales of real estate property and equipment		15,480			5,749
Purchases of real estate property and equipment		(9,458	)		(15,210	)
Reimbursements from the FDIC		2,138			14,950
Cash and cash equivalents acquired in acquisition		—			117,587

Net cash (used in) provided by investing activities		(648,199	)		201,928

Cash flows from financing activities:
Net change in deposits		(143,907	)		(132,595	)
Net change in short-term borrowings		3,960			47,016
Advances of long-term borrowings		125,000			—
Repayments of long-term borrowings		(1,000	)		(27,000	)
Redemption of junior subordinated debentures		(15,000	)		(10,000	)
Dividends paid to common shareholders		(96,870	)		(93,785	)
Common stock issued, net		5,494			6,176

Net cash used in financing activities		(122,323	)		(210,188	)

Net change in cash and cash equivalents		(502,699	)		226,210
Cash and cash equivalents at beginning of year		853,100			379,049

Cash and cash equivalents at end of period	$	350,401		$	605,259

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)


	Nine Months Ended September 30,
	2013		2012
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings	$	129,502	$	137,138
Federal and state income taxes		15,267		49,936

Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned	$	16,589	$	11,831
Transfer of loans to loans held for sale		—		123,093
Acquisition:
Non-cash assets acquired:
Investment securities available for sale	$	—	$	275,650
Loans		—		1,088,421
Premises and equipment, net		—		9,457
Accrued interest receivable		—		5,294
Goodwill		—		109,758
Other intangible assets, net		—		8,050
Other assets		—		72,137

Total non-cash assets acquired	$	—	$	1,568,767

Liabilities assumed:
Deposits	$	—	$	1,380,293
Short-term borrowings		—		29,000
Junior subordinated debentures issued to capital trusts		—		15,645
Other liabilities		—		52,998

Total liabilities assumed		—		1,477,936

Net non-cash assets acquired	$	—	$	90,831


Net cash and cash equivalents acquired in acquisition	$	—	$	117,587
Common stock issued in acquisition	$	—	$	208,418

See accompanying notes to consolidated financial statements.

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, 2013 and for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2013 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, 2012.

Effective January 1, 2012, Valley acquired State Bancorp, Inc., the holding company for State Bank of Long Island, a commercial bank. See the supplemental schedule of non-cash investing activities of the Consolidated Statements of Cash Flows for additional information, as well as Valley’s Annual Report on Form 10-K for the year ended December 31, 2012.

On September 27, 2013, Valley issued $125 million of its 5.125 percent subordinated debentures (notes) due September 27, 2023 pursuant to an effective shelf registration statement previously filed with the SEC. In conjunction with the issuance, Valley entered into an interest rate swap transaction used to hedge the change in the fair value of the subordinated notes (see Note 13 for further details). The net proceeds from the subordinated notes together with other available funds were used to redeem all of the remaining trust preferred securities issued by (and junior subordinated debentures issued to) VNB Capital Trust I on October 25, 2013. See Note 15 for additional information.

Note 2. 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, 2013 and 2012:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands, except for share data)

Net income	$	27,121	$	39,447	$	92,353	$	106,798


Basic weighted-average number of common shares outstanding		199,445,874		197,437,988		199,206,945		197,205,865
Plus: Common stock equivalents		—		—		—		438

Diluted weighted-average number of common shares outstanding		199,445,874		197,437,988		199,206,945		197,206,303


Earnings per common share:
Basic	$	0.14	$	0.20	$	0.46	$	0.54
Diluted		0.14		0.20		0.46		0.54

Common stock equivalents, in the table above, represent the effect of outstanding common stock options and warrants to purchase Valley’s common shares, excluding those with exercise prices that exceed the average market price of Valley’s common stock during the periods presented and therefore would have an anti-dilutive effect on the diluted earnings per common share calculation. Anti-dilutive common stock options and warrants totaled approximately 7.2 million shares for both the three and nine months ended September 30, 2013, and 7.6 million shares for both the three and nine months ended September 30, 2012.

Note 3. 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, 2013.


	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			Total Accumulated Other Comprehensive Loss
	(in thousands)

Balance at June 30, 2013	$	(18,458	)	$	2,467		$	(8,631	)	$	(14,530	)	$	(39,152	)
Other comprehensive income before reclassifications		1,929			226			(2,866	)		—			(711	)
Amounts reclassified from other comprehensive income		(6	)		(110	)		950			343			1,177

Other comprehensive income, net		1,923			116			(1,916	)		343			466

Balance at September 30, 2013	$	(16,535	)	$	2,583		$	(10,547	)	$	(14,187	)	$	(38,686	)


Balance at December 31, 2012	$	906		$	(4,175	)	$	(12,676	)	$	(34,964	)	$	(50,909	)
Other comprehensive income before reclassifications		(15,111	)		6,977			(907	)		18,769			9,728
Amounts reclassified from other comprehensive income		(2,330	)		(219	)		3,036			2,008			2,495

Other comprehensive income, net		(17,441	)		6,758			2,129			20,777			12,223

Balance at September 30, 2013	$	(16,535	)	$	2,583		$	(10,547	)	$	(14,187	)	$	(38,686	)

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, 2013.


	Amounts Reclassified from Accumulated Other Comprehensive Loss						Income Statement Line Item
Components of Accumulated Other Comprehensive Loss	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013			Income Statement Line Item
	(in thousands)

Unrealized gains on AFS securities before tax	$	9		$	4,008		Gains on securities transactions, net
Tax effect		(3	)		(1,678	)

Total net of tax		6			2,330


Non-credit impairment losses on AFS securities before tax:
Accretion of credit loss impairment due to an increase in expected cash flows		190			378		Interest and dividends on investment
Tax effect		(80	)		(159	)	securities (taxable)

Total net of tax		110			219


Unrealized losses on derivatives (cash flow hedges) before tax		(1,637	)		(5,231	)	Interest expense
Tax effect		687			2,195

Total net of tax		(950	)		(3,036	)


Defined benefit pension plan:
Amortization of prior service cost		(229	)		(672	)	*
Amortization of net actuarial loss		(357	)		(1,962	)	*
Recognition of loss due to curtailment		—			(750	)	*

Total before tax		(586	)		(3,384	)
Tax effect		243			1,376

Total net of tax		(343	)		(2,008	)

Total reclassifications, net of tax	$	(1,177	)	$	(2,495	)

*	These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.

Note 4. New Authoritative Accounting Guidance

Accounting Standards Update (ASU) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. The ASU No. 2013-11 is effective for public entities for fiscal years beginning after December 15, 2013, and interim periods within those years, with an early adoption permitted and an option to apply the amendments retrospectively to each prior reporting period presented. Valley’s adoption of ASU No. 2013-11 is not expected to have a significant impact on its consolidated financial statements.

ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires disclosure of the effects of reclassifications out of accumulated other comprehensive income on net income line items only for those items that are reported in their entirety in net income in the period of reclassification. For reclassification items that are not reclassified in their entirety into net income, a cross reference is required to other U.S. GAAP disclosures. The ASU No. 2013-02 was effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Valley’s adoption of ASU No. 2013-02 did not have a significant impact on its consolidated financial statements. See Note 3 for related disclosures.

ASU No. 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution,” addresses subsequent measurement of an indemnification asset recognized in a government-assisted acquisition of a financial institution that includes a loss-sharing agreement. When an entity recognizes an indemnification asset (in

accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (i.e., the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU No. 2012-06 was effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012 with an early adoption permitted, and should be applied prospectively. Valley’s adoption of ASU No. 2012-06 did not have a significant impact on its consolidated financial statements.

ASU No. 2011-11, “Balance Sheet (Topic 210): “Disclosures about Offsetting Assets and Liabilities,” requires an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject an enforceable master netting arrangement or similar agreement regardless of whether they are presented net in the financial statements. ASU No. 2011-11 was effective for annual and interim periods beginning on January 1, 2013, and it is required to be applied retrospectively. Valley’s adoption of ASU No. 2011-11 did not have a significant impact on its consolidated financial statements. See Note 14 for related disclosures.

Note 5. Fair Value Measurement of Assets and Liabilities

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).

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, 2013 and December 31, 2012. 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, 2013		Fair Value Measurements at Reporting Date Using:
	September 30, 2013		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	$	87,676	$	87,676	$	—	$	—
U.S. government agency securities		51,269		—		51,269		—
Obligations of states and political subdivisions		37,553		—		37,553		—
Residential mortgage-backed securities		535,283		—		509,406		25,877
Trust preferred securities		67,906		—		15,572		52,334
Corporate and other debt securities		84,104		26,623		57,481		—
Equity securities		47,018		26,095		20,923		—

Total available for sale		910,809		140,394		692,204		78,211
Trading securities		14,270		—		14,270
Loans held for sale ⁽¹⁾		9,611		—		9,611		—
Other assets ⁽²⁾		11,659		—		11,659		—

Total assets	$	946,349	$	140,394	$	727,744	$	78,211


Liabilities
Junior subordinated debentures issued to VNB Capital Trust I ⁽³⁾	$	132,406	$	132,406	$	—	$	—
Other liabilities ⁽²⁾		21,096		—		21,096		—

Total liabilities	$	153,502	$	132,406	$	21,096	$	—


Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽⁴⁾	$	40,082	$	—	$	—	$	40,082
Loan servicing rights		4,479		—		—		4,479
Foreclosed assets		8,859		—		—		8,859

Total	$	53,420	$	—	$	—	$	53,420


			Fair Value Measurements at Reporting Date Using:
	December 31, 2012		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	$	97,625	$	97,625	$	—	$	—
U.S. government agency securities		45,762		—		45,762		—
Obligations of states and political subdivisions		16,627		—		16,627		—
Residential mortgage-backed securities		510,154		—		478,783		31,371
Trust preferred securities		57,432		—		17,129		40,303
Corporate and other debt securities		30,708		28,444		2,264		—
Equity securities		49,508		28,608		20,900		—

Total available for sale		807,816		154,677		581,465		71,674
Trading securities		22,157		—		22,157		—
Loans held for sale ⁽¹⁾		120,230		—		120,230		—
Other assets ⁽²⁾		7,916		—		7,916		—

Total assets	$	958,119	$	154,677	$	731,768	$	71,674


Liabilities
Junior subordinated debentures issued to VNB Capital Trust I ⁽³⁾	$	147,595	$	147,595	$	—	$	—
Other liabilities ⁽²⁾		26,594		—		26,594		—

Total liabilities	$	174,189	$	147,595	$	26,594	$	—


Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽⁴⁾	$	65,231	$	—	$	—	$	65,231
Loan servicing rights		16,201		—		—		16,201
Foreclosed assets		33,251		—		—		33,251

Total	$	114,683	$	—	$	—	$	114,683

⁽¹⁾	Loans held for sale (which consist of residential mortgages) are carried at fair value and had contractual unpaid principal balances totaling approximately $9.4 million and $115.4 million at September 30, 2013 and December 31, 2012, respectively.

⁽²⁾	Derivative financial instruments are included in this category.

⁽³⁾	The junior subordinated debentures had contractual unpaid principal obligations totaling $131.3 million and $146.7 million at September 30, 2013 and December 31, 2012, respectively.

⁽⁴⁾	Excludes covered loans acquired in the FDIC-assisted transactions and other purchased credit-impaired loans acquired in the first quarter of 2012.

The changes in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2013 and 2012 are summarized below:


	Available for Sale Securities
	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in thousands)

Balance, beginning of the period	$	79,112		$	89,091		$	71,674		$	77,311
Total net gains (losses) for the period included in:
Net income		—			(4,697	)		—			(5,247	)
Other comprehensive income		218			(150	)		11,657			18,804
Settlements		(1,119	)		(1,965	)		(5,120	)		(8,589	)

Balance, end of the period	$	78,211		$	82,279		$	78,211		$	82,279


Change in unrealized losses for the period included in earnings for assets held at the end of the reporting period*	$	—		$	(4,697	)	$	—		$	(5,247	)

*	Represents the net impairment losses on securities recognized in earnings for the period.

The table above includes previously impaired trust preferred securities which totaled $48.3 million of the $78.2 million in Level 3 assets measured at fair value as of September 30, 2013. These trust preferred securities were sold in October 2013 and resulted in the recognition of a gain during the fourth quarter of 2013. See Note 16 for more details.

During the three and nine months ended September 30, 2013 and 2012, there were no transfers of assets between Level 1 and Level 2.

There have been no material changes in the valuation methodologies used at September 30, 2013 from December 31, 2012.

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 and trading securities. All U.S. Treasury securities, certain corporate and other debt securities, and certain common and preferred equity securities (including certain trust preferred securities) are reported at fair values 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.

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 and trust preferred 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 cash flows for trust preferred securities reflected the contractual cash flow, adjusted if necessary for potential changes in the amount or timing of cash flows due to the underlying credit worthiness of each issuer.

The following table presents quantitative information about Level 3 inputs used to measure the fair value of these securities at September 30, 2013:


Security Type	Valuation Technique	Unobservable Input	Range			Weighted Average

Private label mortgage-backed securities	Discounted cash flow	Prepayment rate		14.6 - 27.9	%		19.0	%
		Default rate		3.6 - 27.9			9.2
		Loss severity		40.2 - 59.8			51.2

Single issuer trust preferred securities	Discounted cash flow	Loss severity		0.0 - 100.0	%		18.5	%
		Market credit spreads		5.2 - 5.8			5.5
		Discount rate		5.4 - 8.4			7.1

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 private label mortgage-backed 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 two single issuer trust preferred securities in the Level 3 available for sale trust preferred securities, the resulting estimated future cash flows were discounted at a yield, comprised of market rates applicable to the index of the underlying security, estimated market credit spread for similar non-rated securities and an illiquidity premium, if appropriate. The discount rate for each security was applied to three alternative cash flow scenarios, and subsequently weighted based on management’s expectations. The three cash flow alternatives for each security assume a scenario with full issuer repayment, a scenario with a partial issuer repayment and a scenario with a full issuer default.

For two pooled securities in the Level 3 available for sale trust preferred securities category, the resulting estimated future cash flows were discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. The discount rate for each security was applied using a pricing matrix based on credit, security type and maturity characteristics to determine the fair value. The fair value calculations for both securities are received from an independent valuation advisor. In validating the fair value calculation from an independent valuation advisor, 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, 2013 and December 31, 2012 based on the short duration these assets were held, and the high credit quality of these loans.

Junior subordinated debentures issued to capital trusts. The junior subordinated debentures issued to VNB Capital Trust I are reported at fair value using Level 1 inputs. The fair value was estimated using quoted prices in active markets for similar assets, specifically the quoted price of the VNB Capital Trust I preferred stock traded under ticker symbol “VLYPRA” on the New York Stock Exchange. The preferred stock and Valley’s junior subordinated debentures issued to the Trust have identical financial terms and therefore, the preferred stock’s quoted price moves in a similar manner to the estimated fair value and current settlement price of the junior subordinated debentures. The preferred stock’s quoted price includes market considerations for Valley’s credit and non-performance risk and is deemed to represent the transfer price that would be used if the junior subordinated debenture were assumed by a third party. Valley’s potential credit risk did not materially impact the fair value measurement of the junior subordinated debentures at September 30, 2013 and December 31, 2012.

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 analyses 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, 2013), is determined based on the current market prices for similar instruments provided by Freddie Mac and Fannie Mae. 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, 2013 and December 31, 2012.

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, other real estate owned and other repossessed assets (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 are significantly adjusted based on customized discounting criteria. At September 30, 2013, non-current appraisals were discounted up to 13.5 percent based on specific market data by location and property type. During the quarter ended September 30, 2013, 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. The collateral dependent loan charge-offs to the allowance for loan losses totaled $8.2 million and $21.6 million for the three and nine months ended September 30, 2013, respectively. At September 30, 2013, collateral dependent impaired loans with a total recorded investment of $48.2 million were reduced by specific valuation allowance allocations totaling $8.1 million to a reported total net carrying amount of $40.1 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, 2013, the fair value model used prepayment speeds (stated as constant prepayment rates) from 6 percent up to 23 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 recognized net recoveries of impairment charges totaling $357 thousand and $2.4 million for the three and nine months ended September 30, 2013, respectively.

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 customized discounting criteria, similar to the criteria used for impaired loans described above. The discounts on appraisals of foreclosed assets were immaterial at September 30, 2013. At September 30, 2013, foreclosed assets included $8.9 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended September 30, 2013. The foreclosed assets charge-offs to the allowance for loan losses totaled $1.5 million and $4.6 million for the three and nine months ended September 30, 2013, respectively. The re-measurement of repossessed assets at fair value subsequent to their initial recognition resulted in a loss of $1.1 million and $1.7 million within non-interest expense for the three and nine months ended September 30, 2013, respectively.

Other Fair Value Disclosures

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets and liabilities carried at fair value for the three and nine months ended September 30, 2013 and 2012:


Reported in Consolidated Statements of Financial Condition	Reported in Consolidated Statements of Income	Gains (Losses) on Change in Fair Value
		Three Months Ended September 30,					Nine Months Ended September 30,
		2013		2012			2013			2012
		(in thousands)
Assets:
Available for sale securities	Net impairment losses on securities	$	—	$	(4,697	)	$	—		$	(5,247	)
Trading securities	Trading gains (losses), net		100		65			34			166
Loans held for sale	Gains on sales of loans, net		2,729		25,055			32,155			31,362
Liabilities:
Junior subordinated debentures issued to capital trusts	Trading gains (losses), net		2,131		(59	)		(275	)		461

		$	4,960	$	20,364		$	31,914		$	26,742

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.

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, 2013 and December 31, 2012 were as follows:


	Fair Value Hierarchy	September 30, 2013				December 31, 2012
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial assets
Cash and due from banks	Level 1	$	263,745	$	263,745	$	390,078	$	390,078
Interest bearing deposits with banks	Level 1		86,656		86,656		463,022		463,022
Investment securities held to maturity:
U.S. Treasury securities	Level 1		99,752		108,031		99,869		115,329
Obligations of states and political subdivisions	Level 2		522,790		523,371		506,473		531,966
Residential mortgage-backed securities	Level 2		925,577		922,080		813,647		838,116
Trust preferred securities	Level 2		103,455		91,034		127,505		113,657
Corporate and other debt securities	Level 2		52,205		56,976		52,213		58,882

Total investment securities held to maturity			1,703,779		1,701,492		1,599,707		1,657,950


Net loans	Level 3		11,284,596		11,223,272		10,892,599		10,908,742
Accrued interest receivable	Level 1		52,888		52,888		52,375		52,375
Federal Reserve Bank and Federal Home Loan Bank stock⁽¹⁾	Level 1		138,359		138,359		138,533		138,533

Financial liabilities
Deposits without stated maturities	Level 1		8,912,984		8,912,984		8,755,252		8,755,252
Deposits with stated maturities	Level 2		2,207,127		2,240,849		2,508,766		2,563,726
Short-term borrowings	Level 1		158,283		158,283		154,323		154,323
Long-term borrowings	Level 2		2,820,827		3,110,298		2,697,299		3,100,173
Junior subordinated debentures issued to capital trusts	Level 2		41,048		42,764		40,927		40,776
Accrued interest payable⁽²⁾	Level 1		14,015		14,015		15,917		15,917

⁽¹⁾	Included in other assets.

⁽²⁾	Included in accrued expenses and other liabilities.

The following methods and assumptions that 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 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 non-covered loans (i.e., loans which are not subject to loss-sharing agreements with the FDIC) and covered loans (i.e., loans subject to loss-sharing agreements with the FDIC) 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. FRB and FHLB stock are non-marketable equity securities and are reported at their redeemable carrying amounts, which approximate the 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 agreement to repurchase (and from time to time, federal funds purchased and FHLB borrowings) 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 (excluding VNB Capital Trust I). There is no active market for the trust preferred securities issued by Valley capital trusts, except for the securities issued by VNB Capital Trust I whose related debentures are carried at fair value. Therefore, the fair value of debentures not carried at fair value 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). Valley’s credit spread was calculated based on the exchange quoted price for Valley’s trust preferred securities issued by VNB Capital Trust I.

Note 6. Investment Securities

As of September 30, 2013, Valley had approximately $1.7 billion, $910.8 million, and $14.3 million in held to maturity, available for sale, and trading investment securities, respectively. Valley records impairment charges on its investment securities when the decline in fair value is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities; decline in the creditworthiness of the issuer; absence of reliable pricing information for investment securities; adverse changes in business climate; adverse actions by regulators; prolonged decline in value of equity investments; or unanticipated changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. Valley’s investment portfolios include private label mortgage-backed securities, trust preferred securities principally issued by bank holding companies (including three pooled trust preferred securities), corporate bonds primarily issued by banks, and perpetual preferred and common equity securities issued by banks. These investments may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S. economy and its potential negative effect on the future performance of the security issuers and, if applicable, the underlying mortgage loan collateral of the security. See the “Other-Than-Temporary Impairment Analysis” section below for further discussion.

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at September 30, 2013 and December 31, 2012 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2013
U.S. Treasury securities	$	99,752	$	8,279	$	—		$	108,031
Obligations of states and political subdivisions:									—
Obligations of states and state agencies		193,196		2,726		(4,603	)		191,319
Municipal bonds		329,594		6,868		(4,410	)		332,052

Total obligations of states and political subdivisions		522,790		9,594		(9,013	)		523,371

Residential mortgage-backed securities		925,577		14,953		(18,450	)		922,080
Trust preferred securities		103,455		312		(12,733	)		91,034
Corporate and other debt securities		52,205		4,772		(1	)		56,976

Total investment securities held to maturity	$	1,703,779	$	37,910	$	(40,197	)	$	1,701,492


December 31, 2012
U.S. Treasury securities	$	99,869	$	15,460	$	—		$	115,329
Obligations of states and political subdivisions:
Obligations of states and state agencies		180,304		11,817		(105	)		192,016
Municipal bonds		326,169		13,873		(92	)		339,950

Total obligations of states and political subdivisions		506,473		25,690		(197	)		531,966

Residential mortgage-backed securities		813,647		24,824		(355	)		838,116
Trust preferred securities		127,505		930		(14,778	)		113,657
Corporate and other debt securities		52,213		6,669		—			58,882

Total investment securities held to maturity	$	1,599,707	$	73,573	$	(15,330	)	$	1,657,950

The age of unrealized losses and fair value of related securities held to maturity at September 30, 2013 and December 31, 2012 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, 2013
Obligations of states and political subdivisions:
Obligations of states and state agencies	$	75,201	$	(4,603	)	$	—	$	—		$	75,201	$	(4,603	)
Municipal bonds		61,225		(4,316	)		1,342		(94	)		62,567		(4,410	)

Total obligations of states and political subdivisions		136,426		(8,919	)		1,342		(94	)		137,768		(9,013	)

Residential mortgage-backed securities		434,690		(18,450	)		—		—			434,690		(18,450	)
Trust preferred securities		14,884		(289	)		50,942		(12,444	)		65,826		(12,733	)
Corporate and other debt securities		49		(1	)		—		—			49		(1	)

Total	$	586,049	$	(27,659	)	$	52,284	$	(12,538	)	$	638,333	$	(40,197	)


December 31, 2012
Obligations of states and political subdivisions:
Obligations of states and state agencies	$	7,463	$	(105	)	$	—	$	—		$	7,463	$	(105	)
Municipal bonds		8,055		(92	)		—		—			8,055		(92	)

Total obligations of states and political subdivisions		15,518		(197	)		—		—			15,518		(197	)

Residential mortgage-backed securities		80,152		(355	)		—		—			80,152		(355	)
Trust preferred securities		28,690		(208	)		48,802		(14,570	)		77,492		(14,778	)

Total	$	124,360	$	(760	)	$	48,802	$	(14,570	)	$	173,162	$	(15,330	)

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. The total number of security positions in the securities held to maturity portfolio in an unrealized loss position at September 30, 2013 was 104 as compared to 34 at December 31, 2012. The increase in long-term market interest rates since June 2013 materially decreased the fair value of lower yielding obligations of states and political subdivisions and residential mortgage-backed securities classified as held to maturity. The investments in obligations of states and political subdivisions are all investment grade with no bankruptcies or defaults.

The unrealized losses for the residential mortgage-backed securities category of the held to maturity portfolio at September 30, 2013 are all within the less than twelve months category and relate to investment grade mortgage-backed securities issued or guaranteed by Ginnie Mae and government sponsored enterprises.

The unrealized losses for trust preferred securities at September 30, 2013 primarily related to 4 non-rated single-issuer 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, 2013.

Management does not believe that any individual unrealized loss as of September 30, 2013 included in the table above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates, widening credit spreads, and lack of liquidity in the market place, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.

As of September 30, 2013, 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 $769.0 million.

The contractual maturities of investments in debt securities held to maturity at September 30, 2013 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, 2013
	Amortized Cost		Fair Value
	(in thousands)

Due in one year	$	133,726	$	134,039
Due after one year through five years		43,702		48,325
Due after five years through ten years		254,295		266,007
Due after ten years		346,479		331,041
Residential mortgage-backed securities		925,577		922,080

Total investment securities held to maturity	$	1,703,779	$	1,701,492

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 5.8 years at September 30, 2013.

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at September 30, 2013 and December 31, 2012 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2013
U.S. Treasury securities	$	99,837	$	—	$	(12,161	)	$	87,676
U.S. government agency securities		50,886		1,017		(634	)		51,269
Obligations of states and political subdivisions:
Obligations of states and state agencies		11,500		—		(828	)		10,672
Municipal bonds		27,785		603		(1,507	)		26,881

Total obligations of states and political subdivisions		39,285		603		(2,335	)		37,553

Residential mortgage-backed securities		547,303		3,928		(15,948	)		535,283
Trust preferred securities*		65,294		6,828		(4,216	)		67,906
Corporate and other debt securities		84,172		1,970		(2,038	)		84,104
Equity securities		47,927		991		(1,900	)		47,018

Total investment securities available for sale	$	934,704	$	15,337	$	(39,232	)	$	910,809


December 31, 2012
U.S. Treasury securities	$	99,843	$	—	$	(2,218	)	$	97,625
U.S. government agency securities		44,215		1,547		—			45,762
Obligations of states and political subdivisions:
Obligations of states and state agencies		207		6		—			213
Municipal bonds		16,003		411		—			16,414

Total obligations of states and political subdivisions		16,210		417		—			16,627

Residential mortgage-backed securities		506,695		6,818		(3,359	)		510,154
Trust preferred securities*		68,931		240		(11,739	)		57,432
Corporate and other debt securities		28,274		2,728		(294	)		30,708
Equity securities		49,306		2,071		(1,869	)		49,508

Total investment securities available for sale	$	813,474	$	13,821	$	(19,479	)	$	807,816

*	Includes three pooled trust preferred securities, principally collateralized by securities issued by banks and insurance companies.

The age of unrealized losses and fair value of related securities available for sale at September 30, 2013 and December 31, 2012 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, 2013
U.S. Treasury securities	$	87,676	$	(12,161	)	$	—	$	—		$	87,676	$	(12,161	)
U.S. government agency securities		27,447		(634	)		—		—			27,447		(634	)
Obligations of states and political subdivisions:
Obligations of states and state agencies		10,626		(828	)		—		—			10,626		(828	)
Municipal bonds		13,335		(1,507	)		—		—			13,335		(1,507	)

Total obligations of states and political subdivisions		23,961		(2,335	)		—		—			23,961		(2,335	)

Residential mortgage-backed securities		412,356		(14,340	)		12,585		(1,608	)		424,941		(15,948	)
Trust preferred securities		769		(18	)		31,718		(4,198	)		32,487		(4,216	)
Corporate and other debt securities		54,087		(1,948	)		2,410		(90	)		56,497		(2,038	)
Equity securities		1,402		(129	)		12,688		(1,771	)		14,090		(1,900	)

Total	$	607,698	$	(31,565	)	$	59,401	$	(7,667	)	$	667,099	$	(39,232	)


December 31, 2012
U.S. Treasury securities	$	97,625	$	(2,218	)	$	—	$	—		$	97,625	$	(2,218	)
Residential mortgage-backed securities		269,895		(1,256	)		21,089		(2,103	)		290,984		(3,359	)
Trust preferred securities		760		(511	)		27,865		(11,228	)		28,625		(11,739	)
Corporate and other debt securities		5,394		(58	)		2,264		(236	)		7,658		(294	)
Equity securities		969		(75	)		12,664		(1,794	)		13,633		(1,869	)

Total	$	374,643	$	(4,118	)	$	63,882	$	(15,361	)	$	438,525	$	(19,479	)

The unrealized losses on investment securities available for sale 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. The total number of security positions in the securities available for sale portfolio in an unrealized loss position at September 30, 2013 was 108 as compared to 74 at December 31, 2012. The increase in long-term market interest rates since June 30, 2013 materially decreased the fair value of lower yielding U.S. Treasury securities, obligations of states and political subdivisions, and residential mortgage-backed securities classified as available for sale. The investments in obligations of states and political subdivisions are all investment grade with no bankruptcies or defaults.

The unrealized losses within the residential mortgage-backed securities category of the available for sale portfolio at September 30, 2013 included $4.4 million related to three investment grade private label mortgage-backed securities, and $1.0 million of unrealized losses related to three private label mortgage-backed securities that were previously other-than-temporarily impaired. The remaining $10.5 million related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae.

The unrealized losses for trust preferred securities at September 30, 2013 in the table above relate to 3 pooled trust preferred and 10 single-issuer bank issued trust preferred securities. The unrealized losses include $3.1 million attributable to 3 pooled trust preferred securities with an amortized cost of $13.8 million and a fair value of $10.7 million and $255 thousand attributable to trust preferred securities of one issuance by one deferring bank holding company with an amortized cost of $16.5 million and a fair value of $16.3 million. The three pooled trust preferred securities included one security with an unrealized loss of $1.8 million and an investment grade rating at September 30, 2013. The other two pooled trust preferred securities had non-investment grade ratings and were initially other-than-temporarily impaired in 2008 with additional estimated credit losses recognized during the period 2009 through 2011. The trust preferred issuances by one deferring holding company were initially other-than-temporarily impaired in 2011 with additional estimated credit impairments recognized during 2012. See “Other-Than-Temporarily Impaired Analysis” section below for more details. All of the remaining single-issuer trust preferred securities are all paying in accordance with their terms and have no deferrals of interest or defaults and, if applicable, meet the regulatory capital requirements to be considered “well-capitalized institutions” at September 30, 2013.

The unrealized losses within the corporate and other debt securities category (mostly existing for less than twelve months) totaling $2.0 million at September 30, 2013 mainly resulted from an increase in long-term market interest rates since June 30, 2013, which decreased their fair values.

The unrealized losses existing for more than twelve months for equity securities are mostly related to two perpetual preferred security positions with a combined $10.0 million amortized cost and a $1.5 million unrealized loss. At September 30, 2013, these perpetual preferred securities had investment grade ratings and are currently performing and paying quarterly dividends.

Management does not believe that any individual unrealized loss as of September 30, 2013 represents an other-than-temporary impairment, as management mainly attributes the declines in value to changes in interest rates and recent market volatility and wider credit spreads, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley has no intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or, if necessary, maturity.

As of September 30, 2013, the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $404.1 million.

The contractual maturities of investment securities available for sale at September 30, 2013 are set forth in the following table. 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, 2013
	Amortized Cost		Fair Value
	(in thousands)

Due in one year	$	150	$	151
Due after one year through five years		56,119		55,262
Due after five years through ten years		106,520		103,815
Due after ten years		176,685		169,280
Residential mortgage-backed securities		547,303		535,283
Equity securities		47,927		47,018

Total investment securities available for sale	$	934,704	$	910,809

The weighted average remaining expected life for residential mortgage-backed securities available for sale at September 30, 2013 was 4.1 years.

Other-Than-Temporary Impairment Analysis

To determine whether a security’s impairment is other-than-temporary, Valley considers several factors that include, but are not limited to the following:

•

The severity and duration of the decline, including the causes of the decline in fair value, such as an issuer’s credit problems, interest rate fluctuations, or market volatility;

•

Adverse conditions specifically related to the issuer of the security, an industry, or geographic area;

•

Failure of the issuer of the security to make scheduled interest or principal payments;

•

Any changes to the rating of the security by a rating agency or, if applicable, any regulatory actions impacting the security issuer;

•

Recoveries or additional declines in fair value after the balance sheet date;

•

Our ability and intent to hold equity security investments until they recover in value, as well as the likelihood of such a recovery in the near term; and

•

Our intent to sell debt security investments, or if it is more likely than not that we will be required to sell such securities before recovery of their individual amortized cost basis.

For debt securities, the primary consideration in determining whether impairment is other-than-temporary is whether or not we expect to collect all contractual cash flows.

In assessing the level of other-than-temporary impairment attributable to credit loss for debt securities, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings, while the amount related to other factors is recognized in other comprehensive income or loss. The total other-than-temporary impairment loss is presented in the consolidated statements of income, less the portion recognized in other comprehensive income or loss. Subsequent assessments may result in additional estimated credit losses on previously impaired securities. These additional estimated credit losses are recorded as reclassifications from the portion of other-than-temporary impairment previously recognized in other comprehensive income or loss to earnings in the period of such assessments. The amortized cost basis of an impaired debt security is reduced by the portion of the total impairment related to credit loss.

At September 30, 2013, approximately 55 percent of the $562.1 million carrying value of obligations of states and political subdivisions were issued by the states of (or municipalities within) New Jersey, New York and Pennsylvania. The obligations of states and political subdivisions mainly consist of general obligation bonds and, to much lesser extent, special revenue bonds which had an aggregated amortized cost and fair value of $18.4 million and $18.0 million, respectively, at September 30, 2013. The special revenue bonds were mainly issued by the Port Authorities of New York and New Jersey, as well as various school districts. The gross unrealized losses associated with the obligations of states and political subdivisions totaling $11.4 million as of September 30, 2013 were primarily driven by changes in interest rates and not due to the credit quality of the issuer. Substantially all of these investments are investment grade. The securities were generally underwritten in accordance with Valley’s investment standards prior to the decision to purchase. As part of Valley’s pre-purchase analysis and on-going quarterly assessment of impairment of the obligations of states and political subdivisions, our Credit Risk Management (CRM) Department conducts an independent financial analysis and risk rating assessment of each security issuer based on the issuer’s most recently issued financial statements and other publicly available information. The internal risk rating was developed by CRM using a risk acceptance criteria (RAC) score which considers a multitude of credit factors, including the issuer’s operating results, debt levels, liquidity and debt service capacity. The analysis of debt levels includes unfunded liabilities and assesses these obligations relative to the economy and aggregate debt burden on a per capita basis, if applicable. The RAC score is used as a guideline by CRM for determining the final internal risk rating assigned to the issuer. CRM also obtains the external credit rating agencies’ debt ratings for the issuer and incorporates the lowest external debt rating in the RAC score. Specifically, the external debt rating is one of eight credit factors assessed in the development of the RAC score and represents, along with the rating agency outlook for the issuer, 25 percent of the final composite RAC score. As a result, Valley does not solely rely on external credit ratings in determining our final internal risk rating. For many securities, Valley believes the external credit ratings may not accurately reflect the actual credit quality of the security and therefore should not be viewed in isolation as a measure of the quality of our investments. Additionally, CRM does not consider potential credit support offered by insurance guarantees on certain bond securities in determining the internal risk rating, either at the date of the pre-purchase investment analysis or in subsequent assessments of impairment. Obligations of states and political subdivisions will continue to be monitored as part of our ongoing impairment analysis, and as of September 30, 2013 are expected to perform in accordance with their contractual terms. As a result, Valley expects to recover the entire amortized cost basis of these securities.

For residential mortgage-backed securities, Valley estimates loss projections for each security by stressing the cash flows from the individual loans collateralizing the security using expected default rates, loss severities, and prepayment speeds, in conjunction with the underlying credit enhancement (if applicable) for each security. Based on collateral and origination vintage specific assumptions, a range of possible cash flows is identified to determine whether other-than-temporary impairment exists. No other-than-temporary impairment losses were recognized as a result of our impairment analysis of these securities at September 30, 2013.

For the single-issuer trust preferred securities and corporate and other debt securities, Valley reviews each portfolio to determine if all the securities are paying in accordance with their terms and have no deferrals of interest or defaults. Over the past several years, an increasing number of banking institutions have been required to defer trust preferred payments and various banking institutions have been put in receivership by the FDIC. A deferral event by a bank holding company for which Valley holds trust preferred securities may require the recognition of an other-than-temporary impairment charge if Valley determines that it is more likely than not that all contractual interest and principal cash flows may not be collected. Among other factors, the probability of the collection of all interest and principal determined by Valley in its impairment analysis declines if there is an increase in the estimated deferral period of the issuer. Additionally, a FDIC receivership for any single-issuer would result in an impairment and significant loss. Including the other factors outlined above, Valley analyzes the performance of the issuers on a quarterly basis, including a review of performance data from the issuers’ most recent bank regulatory report, if applicable, to assess their credit risk and the probability of impairment of the contractual cash flows of the applicable security. All of the issuers had capital ratios at September 30, 2013 that were at or above the minimum amounts to be considered a “well-capitalized” financial institution, if applicable, and/or have maintained performance levels adequate to support the contractual cash flows of the trust preferred securities.

Within the available for sale portfolio, Valley has other-than-temporarily impaired trust preferred securities issued by one deferring bank holding company with a combined amortized cost and fair value of $41.8 million and $48.3 million, respectively, after credit impairment charges prior to September 30, 2013. (During October 2013, Valley sold its entire position for these impaired trust preferred securities for net proceeds of $52.5 million and will realize a gain of $10.7 million for the fourth quarter of 2013.) The issuer of the trust preferred securities has deferred interest payments on these securities since late 2009 as required by an operating agreement with its bank regulators. In assessing whether a credit loss exists for the securities of the deferring issuer, Valley considers numerous other factors, including but not limited to, such factors highlighted in the bullet points above. From the dates of deferral up to and including the bank holding company’s most recent regulatory filing, the bank issuer continued to accrue and capitalize the interest owed, but has not remitted the interest to its trust preferred security holders. Additionally, the bank subsidiary of the issuer continued to report capital ratios that were above the minimum amounts to be considered a “well-capitalized” financial institution in its most recent regulatory filing. During the fourth quarter of 2011, Valley estimated a decline in the expected cash flows from the securities as it lengthened the estimate of the timeframe over which it could reasonably anticipate receiving such cash flows, and during the third quarter of 2012, Valley estimated an additional decline in cash flows under one of three weighted alternative scenarios utilized to assess impairment of the securities. The declines in estimated cash flows, after careful assessment of all other available factors, resulted in credit impairment charges of $18.3 million and $4.5 million during the fourth quarter of 2011 and third quarter of 2012, respectively. Valley no longer accrued interest on the securities after the initial impairment in 2011. No additional impairment was recognized as a result of our impairment analysis of these securities at September 30, 2013. See Note 5 for information regarding the Level 3 valuation technique used to measure the fair value of these trust preferred securities at September 30, 2013.

For the three pooled trust preferred securities, Valley evaluates the projected cash flows from each of its tranches in the three securities to determine if they are adequate to support their future contractual principal and interest payments. Valley assesses the credit risk and probability of impairment of the contractual cash flows by projecting the default rates over the life of the security. Higher projected default rates will decrease the expected future cash flows from each security. If the projected decrease in cash flows affects the cash flows projected for the tranche held by Valley, the security would be considered to be other-than-temporarily impaired. Two of the pooled trust preferred securities were initially impaired in 2008 with additional estimated credit losses recognized during 2009 and 2011, and are not accruing interest.

The perpetual preferred securities, reported in equity securities, are hybrid investments that are assessed for impairment by Valley as if they were debt securities. Therefore, Valley assessed the creditworthiness of each security issuer, as well as any potential change in the anticipated cash flows of the securities as of September 30, 2013. Based on this analysis, management believes the declines in fair value of these securities are attributable to a lack of liquidity in the marketplace and are not reflective of any deterioration in the creditworthiness of the issuers.

Other-Than-Temporarily Impaired Securities

The following table provides information regarding our other-than-temporary impairment losses on securities recognized in earnings for the three and nine months ended September 30, 2013 and 2012.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)
Available for sale:
Residential mortgage-backed securities	$	—	$	172	$	—	$	722
Trust preferred securities		—		4,525		—		4,525

Net impairment losses on securities recognized in earnings	$	—	$	4,697	$	—	$	5,247

There were no other-than-temporary impairment losses on securities recognized in earnings for the three and nine months ended September 30, 2013. For the three and nine months ended September 30, 2012, Valley recognized net impairment losses on residential mortgage backed securities in earnings, due to additional estimated credit losses on one of six previously impaired private label mortgage-backed securities, as well as additional estimated credit losses related to the trust preferred securities issued by one bank holding company due to further credit deterioration in financial condition of the issuer. At September 30, 2013, the previously impaired private label mortgage-backed securities had a combined amortized cost of $26.7 million and fair value of $25.9 million, while all previously impaired trust preferred securities (including two impaired pooled trust preferred securities) had a combined amortized cost and fair value of $47.2 million and $52.3 million, respectively.

Realized Gains and Losses

Gross gains (losses) realized on sales, maturities and other securities transactions related to investment securities included in earnings for the three and nine months ended September 30, 2013 and 2012 were as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
	(in thousands)
Sales transactions:
Gross gains	$	1	$	4,513		$	3,382		$	5,887
Gross losses		—		—			—			(298	)

	$	1	$	4,513		$	3,382		$	5,589

Maturities and other securities transactions:
Gross gains	$	8	$	2,242		$	657		$	2,261
Gross losses		—		(5,259	)		(31	)		(5,307	)

	$	8	$	(3,017	)	$	626		$	(3,046	)

Total gains on securities transactions, net	$	9	$	1,496		$	4,008		$	2,543

Valley recognized gross losses totaling $5.3 million for the third quarter of 2012 due to the early redemption of trust preferred securities issued by one bank holding company.

The following table presents the changes in the credit loss component of cumulative other-than-temporary impairment losses on debt securities classified as either held to maturity or available for sale that Valley has recognized in earnings, for which a portion of the impairment loss (non-credit factors) was recognized in other comprehensive income for the three and nine months ended September 30, 2013 and 2012:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in thousands)

Balance, beginning of period	$	33,102		$	29,251		$	33,290		$	29,070
Additions:
Subsequent credit impairments		—			4,697			—			5,247
Reductions:
Accretion of credit loss impairment due to an increase in expected cash flows		(190	)		(590	)		(378	)		(959	)

Balance, end of period	$	32,912		$	33,358		$	32,912		$	33,358

The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to each period presented. Other-than-temporary impairments recognized in earnings for credit impaired debt securities are presented as additions in two components based upon whether the current period is the first time the debt security was credit impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairment). The credit loss component is reduced if Valley sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) Valley receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures or (iii) the security is fully written down.

Trading Securities

The fair value of trading securities (consisting of 2 single-issuer bank trust preferred securities) was $14.3 million at September 30, 2013 and $22.2 million (consisting of 3 single-issuer bank trust preferred securities) at December 31, 2012. Interest income on trading securities totaled $290 thousand and $442 thousand for the three months ended September 30, 2013 and 2012, respectively, and $1.1 million and $1.3 million for the nine months ended September 30, 2013 and 2012, respectively.

Note 7. Loans

The detail of the loan portfolio as of September 30, 2013 and December 31, 2012 was as follows:


	September 30, 2013						December 31, 2012
	Non-PCI Loans		PCI Loans		Total		Non-PCI Loans		PCI Loans		Total
	(in thousands)
Non-covered loans:
Commercial and industrial	$	1,816,413	$	180,940	$	1,997,353	$	1,832,743	$	252,083	$	2,084,826
Commercial real estate:
Commercial real estate		4,300,444		514,226		4,814,670		3,772,084		645,625		4,417,709
Construction		401,319		22,470		423,789		399,855		25,589		425,444

Total commercial real estate loans		4,701,763		536,696		5,238,459		4,171,939		671,214		4,843,153

Residential mortgage		2,517,756		14,614		2,532,370		2,445,627		16,802		2,462,429
Consumer:
Home equity		410,607		38,702		449,309		438,881		46,577		485,458
Automobile		862,843		—		862,843		786,528		—		786,528
Other consumer		195,119		208		195,327		179,417		314		179,731

Total consumer loans		1,468,569		38,910		1,507,479		1,404,826		46,891		1,451,717

Total non-covered loans	$	10,504,501	$	771,160	$	11,275,661	$	9,855,135	$	986,990	$	10,842,125


Covered loans:
Commercial and industrial	$	—	$	29,542	$	29,542	$	—	$	46,517	$	46,517
Commercial real estate		—		81,204		81,204		—		120,268		120,268
Construction		—		1,020		1,020		—		1,924		1,924
Residential mortgage		—		8,822		8,822		—		9,659		9,659
Consumer		—		932		932		—		2,306		2,306

Total covered loans		—		121,520		121,520		—		180,674		180,674

Total loans	$	10,504,501	$	892,680	$	11,397,181	$	9,855,135	$	1,167,664	$	11,022,799

Total non-covered loans are net of unearned discount and deferred loan fees totaling $6.3 million and $3.4 million at September 30, 2013 and December 31, 2012, respectively. The outstanding balances (representing contractual balances owed to Valley) for non-covered PCI loans and covered loans totaled $843.6 million and $255.1 million at September 30, 2013, and $1.1 billion and $321.9 million at December 31, 2012, respectively.

There were no sales of loans from the held for investment portfolio during the three and nine months ended September 30, 2013 and 2012.

Purchased Credit-Impaired Loans (Including Covered Loans)

Purchased Credit-Impaired (PCI) loans, which include loans acquired in FDIC-assisted transactions (“covered loans”) subject to loss-sharing agreements, are acquired at a discount that is due, in part, to credit quality. 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 changes in the accretable yield for PCI loans during the three and nine months ended September 30, 2013 and 2012:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in thousands)
Balance, beginning of period	$	256,383		$	209,417		$	169,309		$	66,724
Acquisitions		—			—			—			186,262
Accretion		(16,990	)		(21,284	)		(50,864	)		(64,853	)
Net increase in expected cash flows		—			—			120,948			—

Balance, end of period	$	239,393		$	188,133		$	239,393		$	188,133

The net increase 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 life of the individual pools. The net increase was largely due to additional cash flows caused by longer than originally expected durations for certain non-covered PCI loans which increased the average expected life of our non-covered PCI loans (which represent 86 percent of total PCI loans at September 30, 2013) during the second quarter of 2013 from 2.5 years (at the date of acquisition) to approximately 4.0 years. Additionally, a $20.1 million decrease in the expected credit losses for certain non-covered pools is another component of the net increase in cash flows.

FDIC Loss-Share Receivable

The receivable arising from the loss-sharing agreements (referred to as the “FDIC loss-share receivable” on our consolidated statements of financial condition) is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans.

Changes in the FDIC loss-share receivable for the three and nine months ended September 30, 2013 and 2012 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in thousands)
Balance, beginning of the period	$	40,686		$	59,741		$	44,996		$	74,390
Discount accretion of the present value at the acquisition dates		33			82			98			244
Effect of additional cash flows on covered loans (prospective recognition)		(3,075	)		(2,091	)		(8,024	)		(5,959	)
Decrease in the provision for losses on covered loans		—			—			(2,783	)		—
Other reimbursable expenses		1,037			1,619			3,529			4,173
Reimbursements from the FDIC		(3,003	)		(7,413	)		(2,138	)		(14,950	)
Other		—			—			—			(5,960	)

Balance, end of the period	$	35,678		$	51,938		$	35,678		$	51,938

The aggregate effect of changes in the FDIC loss-share receivable was a reduction in non-interest income of $2.0 million and $390 thousand for the three months ended September 30, 2013 and 2012, respectively, and a reduction of $7.2 million and $7.5 million to non-interest income for the nine months ended September 30, 2013 and 2012, respectively. The reductions in non-interest income for the nine months ended September 30, 2012 included $6.0 million related to the FDIC’s portion of the estimated losses on unused lines of credit assumed in the FDIC-assisted transactions, which had expired during the second quarter of 2012.

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. Valley, in most cases, 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 $304.2 million and $307.0 million at September 30, 2013 and December 31, 2012, respectively.

Commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real property. Loans generally involve larger principal balances and longer repayment periods as compared to commercial and industrial loans. 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, and eastern Pennsylvania. Valley’s ability to be repaid on such loans is closely linked to the economic and real estate market conditions in this region. 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 75 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 strength or weakness in 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 credit card loans, personal lines of credit, personal loans and loans secured by cash surrender value of life insurance. Valley believes the aggregate risk exposure of these loans and lines of credit was not significant at September 30, 2013. Unsecured consumer loans totaled approximately $24.5 million and $44.0 million, including $8.1 million and $8.6 million of credit card loans, at September 30, 2013 and December 31, 2012, respectively.

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, 2013 and December 31, 2012:


	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, 2013

Commercial and industrial	$	3,065	$	957	$	342	$	23,941	$	28,305	$	1,788,108	$	1,816,413
Commercial real estate:
Commercial real estate		6,276		23,828		232		53,752		84,088		4,216,356		4,300,444
Construction		—		—		—		13,070		13,070		388,249		401,319

Total commercial real estate loans		6,276		23,828		232		66,822		97,158		4,604,605		4,701,763

Residential mortgage		8,221		1,857		1,980		23,414		35,472		2,482,284		2,517,756
Consumer loans:
Home equity		572		211		—		1,710		2,493		408,114		410,607
Automobile		2,867		608		230		196		3,901		858,942		862,843
Other consumer		334		45		5		—		384		194,735		195,119

Total consumer loans		3,773		864		235		1,906		6,778		1,461,791		1,468,569

Total	$	21,335	$	27,506	$	2,789	$	116,083	$	167,713	$	10,336,788	$	10,504,501


December 31, 2012

Commercial and industrial	$	3,397	$	181	$	283	$	22,424	$	26,285	$	1,806,458	$	1,832,743
Commercial real estate:
Commercial real estate		11,214		2,031		2,950		58,625		74,820		3,697,264		3,772,084
Construction		1,793		4,892		2,575		14,805		24,065		375,790		399,855

Total commercial real estate loans		13,007		6,923		5,525		73,430		98,885		4,073,054		4,171,939

Residential mortgage		13,730		5,221		2,356		32,623		53,930		2,391,697		2,445,627
Consumer loans:
Home equity		391		311		—		2,398		3,100		435,781		438,881
Automobile		4,519		924		469		305		6,217		780,311		786,528
Other consumer		977		105		32		628		1,742		177,675		179,417

Total consumer loans		5,887		1,340		501		3,331		11,059		1,393,767		1,404,826

Total	$	36,021	$	13,665	$	8,665	$	131,808	$	190,159	$	9,664,976	$	9,855,135

Impaired loans. Impaired loans, consisting of non-accrual commercial and industrial loans and commercial real estate loans over $250 thousand and all loans which were modified in troubled debt restructuring, are individually evaluated for impairment. PCI loans are not classified as impaired loans because they are accounted for on a pool basis. The following table presents the information about impaired loans by loan portfolio class at September 30, 2013 and December 31, 2012:


	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
	(in thousands)
September 30, 2013
Commercial and industrial	$	5,603	$	51,317	$	56,920	$	68,263	$	9,490
Commercial real estate:
Commercial real estate		22,550		85,690		108,240		124,211		11,666
Construction		5,533		19,021		24,554		27,081		3,328

Total commercial real estate loans		28,083		104,711		132,794		151,292		14,994

Residential mortgage		11,447		15,820		27,267		31,159		2,474
Consumer loans:
Home equity		983		180		1,163		1,342		15

Total consumer loans		983		180		1,163		1,342		15

Total	$	46,116	$	172,028	$	218,144	$	252,056	$	26,973


December 31, 2012
Commercial and industrial	$	3,236	$	46,461	$	49,697	$	62,183	$	12,088
Commercial real estate:
Commercial real estate		26,724		84,151		110,875		125,875		11,788
Construction		6,339		14,002		20,341		23,678		4,793

Total commercial real estate loans		33,063		98,153		131,216		149,553		16,581

Residential mortgage		8,232		16,659		24,891		27,059		2,329
Consumer loans:
Home equity		672		258		930		1,169		15

Total consumer loans		672		258		930		1,169		15

Total	$	45,203	$	161,531	$	206,734	$	239,964	$	31,013

The following table presents by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2013 and 2012:


	Three Months Ended September 30,
	2013				2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	59,874	$	415	$	43,184	$	347
Commercial real estate:
Commercial real estate		109,226		612		108,561		993
Construction		22,457		23		21,920		97

Total commercial real estate loans		131,683		635		130,481		1,090

Residential mortgage		27,356		245		26,325		225
Consumer loans:
Home equity		1,158		29		1,908		2

Total consumer loans		1,158		29		1,908		2

Total	$	220,071	$	1,324	$	201,898	$	1,664


	Nine Months Ended September 30,
	2013				2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	57,069	$	1,203	$	49,272	$	1,095
Commercial real estate:
Commercial real estate		112,216		2,229		99,939		1,984
Construction		20,528		162		21,882		183

Total commercial real estate loans		132,744		2,391		121,821		2,167

Residential mortgage		28,357		777		22,804		599
Consumer loans:
Home equity		1,182		55		829		9

Total consumer loans		1,182		55		829		9

Total	$	219,352	$	4,426	$	194,726	$	3,870

Interest income recognized on a cash basis (included in the table above) was immaterial for the three and nine months ended September 30, 2013 and 2012.

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 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 $116.9 million and $105.4 million as of September 30, 2013 and December 31, 2012, respectively. Non-performing TDRs totaled $43.5 million and $41.8 million as of September 30, 2013 and December 31, 2012, respectively.

The following table presents loans by loan portfolio class modified as TDRs during the three and nine months ended September 30, 2013 and 2012. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at September 30, 2013 and 2012, respectively.


	Three Months Ended September 30, 2013						Three Months Ended September 30, 2012
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		4	$	9,685	$	8,799		3	$	11,512	$	11,503
Commercial real estate:
Commercial real estate		—		—		—		3		3,971		3,968
Construction		2		6,402		7,836		1		493		293

Total commercial real estate		2		6,402		7,836		4		4,464		4,261
Residential mortgage		6		2,307		2,001		28		6,566		6,463
Consumer		1		48		48		18		1,641		1,641

Total		13	$	18,442	$	18,684		53	$	24,183	$	23,868


	Nine Months Ended September 30, 2013						Nine Months Ended September 30, 2012
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		11	$	20,140	$	17,455		16	$	31,212	$	27,828
Commercial real estate:
Commercial real estate		9		10,304		10,219		17		39,697		39,256
Construction		6		10,882		12,826		5		7,204		3,935

Total commercial real estate		15		21,186		23,045		22		46,901		43,191
Residential mortgage		28		6,887		5,997		41		10,344		8,817
Consumer		7		500		454		20		1,710		1,706

Total		61	$	48,713	$	46,951		99	$	90,167	$	81,542

The majority of the TDR concessions made during the three and nine months ended September 30, 2013 and 2012 involved an extension of the loan term and/or an interest rate reduction. The total TDRs presented in the above table for the three months ended September 30, 2013 and 2012 had allocated specific reserves for loan losses totaling $2.1 million and $3.3 million, respectively, and $5.3 million and $13.1 million for the nine months ended September 30, 2013 and 2012, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 8.

The following table presents non-PCI loans modified as TDRs within the previous 12 months from, and for which there was a payment default (90 days or more past due) during the three and nine months ended September 30, 2013:


	Three Months Ended September 30, 2013				Nine Months Ended September 30, 2013
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	($ in thousands)
Commercial and industrial		—	$	—		1	$	1,172
Commercial real estate		—		—		1		364
Residential mortgage		—		—		7		1,614
Consumer		3		97		4		249

Total		3	$	97		13	$	3,399

One TDR within the commercial and industrial loan category of the table above resulted in a $1.1 million partial charge-off during the nine months ended September 30, 2013. Additionally, two commercial loans totaling $6.1 million with one borrower that were modified as TDR’s during the second quarter of 2013 were fully charged-off during the three months ended September 30, 2013. These TDR loans were both performing, but internally classified as substandard, prior to the borrower’s bankruptcy in October 2013 (and were excluded from the TDR payment default table above). There were no charge-offs resulting from loans modified as TDRs during the three and nine months ended September 30, 2012.

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 we 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. 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” loans do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants.

The following table presents the risk category of loans (excluding PCI loans) by class of loans based on the most recent analysis performed at September 30, 2013 and December 31, 2012.


Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
September 30, 2013
Commercial and industrial	$	1,674,147	$	58,384	$	83,882	$	—	$	1,816,413
Commercial real estate		4,107,675		62,243		130,526		—		4,300,444
Construction		362,364		16,926		16,229		5,800		401,319

Total	$	6,144,186	$	137,553	$	230,637	$	5,800	$	6,518,176


December 31, 2012
Commercial and industrial	$	1,673,604	$	64,777	$	94,184	$	178	$	1,832,743
Commercial real estate		3,563,530		59,175		149,379		—		3,772,084
Construction		340,357		32,817		19,521		7,160		399,855

Total	$	5,577,491	$	156,769	$	263,084	$	7,338	$	6,004,682

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, 2013 and December 31, 2012:


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Non-PCI Loans
	(in thousands)
September 30, 2013
Residential mortgage	$	2,494,342	$	23,414	$	2,517,756
Home equity		408,897		1,710		410,607
Automobile		862,647		196		862,843
Other consumer		195,119		—		195,119

Total	$	3,961,005	$	25,320	$	3,986,325


December 31, 2012
Residential mortgage	$	2,413,004	$	32,623	$	2,445,627
Home equity		436,483		2,398		438,881
Automobile		786,223		305		786,528
Other consumer		178,789		628		179,417

Total	$	3,814,499	$	35,954	$	3,850,453

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, 2013 and December 31, 2012.


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total PCI Loans
	(in thousands)
September 30, 2013
Commercial and industrial	$	194,796	$	15,686	$	210,482
Commercial real estate		557,169		38,261		595,430
Construction		16,867		6,623		23,490
Residential mortgage		19,791		3,645		23,436
Consumer		38,538		1,304		39,842

Total	$	827,161	$	65,519	$	892,680


December 31, 2012
Commercial and industrial	$	292,163	$	6,437	$	298,600
Commercial real estate		715,812		50,081		765,893
Construction		17,967		9,546		27,513
Residential mortgage		22,173		4,288		26,461
Consumer		47,689		1,508		49,197

Total	$	1,095,804	$	71,860	$	1,167,664

Note 8. Allowance for Credit Losses

The allowance for credit losses consists of the allowance for losses on non-covered loans and allowance for losses on covered loans related to credit impairment of certain covered loan pools subsequent to acquisition, as well as the allowance for unfunded letters of credit. Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of the loan portfolio and unfunded letter of credit commitments at the balance sheet date. The allowance for losses on non-covered loans is based on ongoing evaluations of the probable estimated losses inherent in the non-covered loan portfolio, including unexpected credit impairment of non-covered PCI loan pools subsequent to the acquisition date.

The following table summarizes the allowance for credit losses at September 30, 2013 and December 31, 2012:


	September 30, 2013		December 31, 2012
	(in thousands)
Components of allowance for credit losses:
Allowance for non-covered loans	$	105,515	$	120,708
Allowance for covered loans		7,070		9,492

Total allowance for loan losses		112,585		130,200
Allowance for unfunded letters of credit		3,490		2,295

Total allowance for credit losses	$	116,075	$	132,495

The following table summarizes the provision for credit losses for the periods indicated:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
	(in thousands)
Components of provision for credit losses:
Provision for non-covered loans	$	4,280	$	7,582		$	10,736		$	20,385
Provision for covered loans		—		—			(2,276	)		—

Total provision for loan losses		4,280		7,582			8,460			20,385

Provision for unfunded letters of credit		1,054		(332	)		1,195			(33	)

Total provision for credit losses	$	5,334	$	7,250		$	9,655		$	20,352

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2013 and 2012:


	Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Unallocated			Total
	(in thousands)
Three Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	53,732		$	43,179		$	8,521		$	5,084		$	6,928		$	117,444
Loans charged-off		(8,556	)		(947	)		(780	)		(1,723	)		—			(12,006	)
Charged-off loans recovered		1,103			896			230			638			—			2,867

Net charge-offs		(7,453	)		(51	)		(550	)		(1,085	)		—			(9,139	)
Provision for loan losses		3,453			184			56			80			507			4,280

Ending balance	$	49,732		$	43,312		$	8,027		$	4,079		$	7,435		$	112,585


Three Months Ended September 30, 2012:
Allowance for loan losses:
Beginning balance	$	70,522		$	35,558		$	10,740		$	5,809		$	7,225		$	129,854
Loans charged-off*		(3,649	)		(3,736	)		(870	)		(1,111	)		—			(9,366	)
Charged-off loans recovered		601			16			13			547			—			1,177

Net charge-offs		(3,048	)		(3,720	)		(857	)		(564	)		—			(8,189	)
Provision for loan losses		(1,955	)		9,432			(27	)		418			(286	)		7,582

Ending balance	$	65,519		$	41,270		$	9,856		$	5,663		$	6,939		$	129,247

*	The allowance for covered loans was reduced by loan charge-offs totaling $2.3 million during the third quarter of 2012.

The following tables detail the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2013 and 2012, including both covered and non-covered loans:


	Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Unallocated			Total
	(in thousands)
Nine Months Ended September 30, 2013:
Allowance for loan losses:
Beginning balance	$	64,370		$	44,069		$	9,423		$	5,542		$	6,796		$	130,200
Loans charged-off*		(17,322	)		(7,329	)		(3,338	)		(4,092	)		—			(32,081	)
Charged-off loans recovered		3,043			961			368			1,634			—			6,006

Net charge-offs		(14,279	)		(6,368	)		(2,970	)		(2,458	)		—			(26,075	)
Provision for loan losses		(359	)		5,611			1,574			995			639			8,460

Ending balance	$	49,732		$	43,312		$	8,027		$	4,079		$	7,435		$	112,585


Nine Months Ended September 30, 2012:
Allowance for loan losses:
Beginning balance	$	73,649		$	34,637		$	9,120		$	8,677		$	7,719		$	133,802
Loans charged-off*		(13,862	)		(10,195	)		(2,629	)		(3,609	)		—			(30,295	)
Charged-off loans recovered		2,910			252			638			1,555			—			5,355

Net charge-offs		(10,952	)		(9,943	)		(1,991	)		(2,054	)		—			(24,940	)
Provision for loan losses		2,822			16,576			2,727			(960	)		(780	)		20,385

Ending balance	$	65,519		$	41,270		$	9,856		$	5,663		$	6,939		$	129,247

*	The allowance for covered loans was reduced by loan charge-offs totaling $146 thousand and $4.0 million for the nine months ended September 30, 2013 and 2012, respectively.

The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology at September 30, 2013 and December 31, 2012.


	Commercial and Industrial		Commercial Real Estate		Residential Mortgage		Consumer		Unallocated		Total
	(in thousands)
September 30, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	9,490	$	14,994	$	2,474	$	15	$	—	$	26,973
Collectively evaluated for impairment		39,730		21,886		5,430		4,061		7,435		78,542
Loans acquired with discounts related to credit quality		512		6,432		123		3		—		7,070

Total	$	49,732	$	43,312	$	8,027	$	4,079	$	7,435	$	112,585

Loans:
Individually evaluated for impairment	$	56,920	$	132,794	$	27,267	$	1,163	$	—	$	218,144
Collectively evaluated for impairment		1,759,493		4,568,969		2,490,489		1,467,406		—		10,286,357
Loans acquired with discounts related to credit quality		210,482		618,920		23,436		39,842		—		892,680

Total	$	2,026,895	$	5,320,683	$	2,541,192	$	1,508,411	$	—	$	11,397,181


December 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	12,088	$	16,581	$	2,329	$	15	$	—	$	31,013
Collectively evaluated for impairment		44,877		25,463		7,032		5,527		6,796		89,695
Loans acquired with discounts related to credit quality		7,405		2,025		62

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