VLY-6.30.2014-10Q


 
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 June 30, 2014
OR
¨
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 1-11277 
 
 

VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
 
 
New Jersey
 
22-2477875
(State or other jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
 
1455 Valley Road
Wayne, NJ
 
07470
(Address of principal executive office)
 
(Zip code)
973-305-8800
(Registrant’s telephone number, including area code) 
 
 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
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 200,585,104 shares were outstanding as of August 7, 2014.
 



TABLE OF CONTENTS
 
 
 
Page
Number
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 


1



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share data) 
 
June 30,
2014
 
December 31,
2013
Assets
(Unaudited)
 
 
Cash and due from banks
$
266,101

 
$
234,253

Interest bearing deposits with banks
40,580

 
134,915

Investment securities:
 
 
 
Held to maturity (fair value of $1,854,121 at June 30, 2014 and $1,711,427 at December 31, 2013)
1,826,143

 
1,731,737

Available for sale
783,205

 
829,692

Trading securities
14,221

 
14,264

Total investment securities
2,623,569

 
2,575,693

Loans held for sale, at fair value
16,068

 
10,488

Non-covered loans
11,750,875

 
11,471,447

Covered loans
62,553

 
96,165

Less: Allowance for loan losses
(103,053
)
 
(113,617
)
Net loans
11,710,375

 
11,453,995

Premises and equipment, net
273,746

 
270,138

Bank owned life insurance
347,045

 
344,023

Accrued interest receivable
53,650

 
53,964

Due from customers on acceptances outstanding
5,162

 
5,032

FDIC loss-share receivable
20,687

 
32,757

Goodwill
428,234

 
428,234

Other intangible assets, net
32,135

 
36,130

Other assets
518,615

 
576,919

Total Assets
$
16,335,967

 
$
16,156,541

Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
3,581,435

 
$
3,717,271

Interest bearing:
 
 
 
Savings, NOW and money market
5,643,128

 
5,422,722

Time
2,191,489

 
2,179,269

Total deposits
11,416,052

 
11,319,262

Short-term borrowings
354,230

 
281,455

Long-term borrowings
2,797,986

 
2,792,306

Junior subordinated debentures issued to capital trusts
41,171

 
41,089

Bank acceptances outstanding
5,162

 
5,032

Accrued expenses and other liabilities
147,710

 
176,357

Total Liabilities
14,762,311

 
14,615,501

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 200,477,484 shares at June 30, 2014 and 199,629,268 shares at December 31, 2013)
70,116

 
69,941

Surplus
1,408,325

 
1,403,375

Retained earnings
125,614

 
106,340

Accumulated other comprehensive loss
(30,297
)
 
(38,252
)
Treasury stock, at cost (10,183 common shares at June 30, 2014 and 36,159 common shares at December 31, 2013)
(102
)
 
(364
)
Total Shareholders’ Equity
1,573,656

 
1,541,040

Total Liabilities and Shareholders’ Equity
$
16,335,967

 
$
16,156,541

See accompanying notes to consolidated financial statements.

2



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans
$
136,338

 
$
133,966

 
$
267,417

 
$
266,965

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
15,709

 
12,925

 
32,165

 
27,414

Tax-exempt
3,700

 
3,673

 
7,386

 
7,322

Dividends
1,390

 
1,504

 
3,180

 
3,184

Interest on federal funds sold and other short-term investments
27

 
302

 
54

 
518

Total interest income
157,164

 
152,370

 
310,202

 
305,403

Interest Expense
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 
 
Savings, NOW and money market
4,530

 
4,369

 
8,811

 
9,071

Time
6,683

 
7,794

 
13,215

 
15,905

Interest on short-term borrowings
304

 
140

 
622

 
284

Interest on long-term borrowings and junior subordinated debentures
28,228

 
30,180

 
56,111

 
60,220

Total interest expense
39,745

 
42,483

 
78,759

 
85,480

Net Interest Income
117,419

 
109,887

 
231,443

 
219,923

Provision for credit losses
(5,671
)
 
2,552

 
(1,673
)
 
4,321

Net Interest Income After Provision for Credit Losses
123,090

 
107,335

 
233,116

 
215,602

Non-Interest Income
 
 
 
 
 
 
 
Trust and investment services
2,244

 
2,257

 
4,686

 
4,234

Insurance commissions
4,491

 
4,062

 
8,989

 
8,052

Service charges on deposit accounts
5,636

 
5,822

 
11,387

 
11,512

Gains (losses) on securities transactions, net
7

 
41

 
(1
)
 
3,999

Trading losses, net
(34
)
 
(270
)
 
(43
)
 
(2,472
)
Fees from loan servicing
1,786

 
1,721

 
3,456

 
3,238

Gains on sales of loans, net
679

 
14,366

 
1,592

 
29,426

Gains on sales of assets, net
276

 
678

 
128

 
410

Bank owned life insurance
1,614

 
1,424

 
3,022

 
2,765

Change in FDIC loss-share receivable
(7,711
)
 
(2,000
)
 
(7,787
)
 
(5,175
)
Other
3,422

 
4,793

 
6,503

 
8,201

Total non-interest income
12,410

 
32,894

 
31,932

 
64,190

Non-Interest Expense
 
 
 
 
 
 
 
Salary and employee benefits expense
47,094

 
47,733

 
95,182

 
98,305

Net occupancy and equipment expense
17,973

 
18,179

 
38,697

 
37,068

FDIC insurance assessment
3,393

 
5,574

 
6,680

 
8,927

Amortization of other intangible assets
2,346

 
1,927

 
4,697

 
3,530

Professional and legal fees
4,384

 
4,285

 
8,062

 
8,177

Advertising
533

 
1,850

 
1,150

 
3,652

Other
18,506

 
15,798

 
34,644

 
31,126

Total non-interest expense
94,229

 
95,346

 
189,112

 
190,785

Income Before Income Taxes
41,271

 
44,883

 
75,936

 
89,007

Income tax expense
11,751

 
10,961

 
12,581

 
23,775

Net Income
$
29,520

 
$
33,922

 
$
63,355

 
$
65,232

Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.17

 
$
0.32

 
$
0.33

Diluted
0.15

 
0.17

 
0.32

 
0.33

Cash Dividends Declared per Common Share
0.11

 
0.16

 
0.22

 
0.33

Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
200,472,592

 
199,244,243

 
200,301,438

 
199,085,501

Diluted
200,472,592

 
199,244,243

 
200,301,438

 
199,085,501

See accompanying notes to consolidated financial statements.

3



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
29,520

 
$
33,922

 
$
63,355

 
$
65,232

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
 
Net gains (losses) arising during the period
7,123

 
(16,353
)
 
14,339

 
(17,040
)
Less reclassification adjustment for net (gains) losses included in net income
(4
)
 
(25
)
 
1

 
(2,324
)
Total
7,119

 
(16,378
)
 
14,340

 
(19,364
)
Non-credit impairment losses on available for sale securities
 
 
 
 
 
 
 
Net change in non-credit impairment losses on securities
164

 
2,008

 
306

 
6,751

Less reclassification adjustment for accretion of credit impairment losses included in net income
(64
)
 
(43
)
 
(179
)
 
(109
)
Total
100

 
1,965

 
127

 
6,642

Unrealized gains and losses on derivatives (cash flow hedges)
 
 
 
 
 
 
 
Net (losses) gains on derivatives arising during the period
(4,862
)
 
2,036

 
(8,524
)
 
1,959

Less reclassification adjustment for net losses included in net income
973

 
995

 
1,938

 
2,086

Total
(3,889
)
 
3,031

 
(6,586
)
 
4,045

Defined benefit pension plan
 
 
 
 
 
 
 
Net gains arising during the period
—

 
18,784

 
—

 
18,769

Amortization of prior service cost
—

 
133

 
—

 
261

Amortization of net loss
37

 
471

 
74

 
936

Recognition of loss due to curtailment
—

 
468

 
—

 
468

Total
37

 
19,856

 
74

 
20,434

Total other comprehensive income
3,367

 
8,474

 
7,955

 
11,757

Total comprehensive income
$
32,887

 
$
42,396

 
$
71,310

 
$
76,989

See accompanying notes to consolidated financial statements.


4



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
 
Six Months Ended
June 30, 2014
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
63,355

 
$
65,232

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,016

 
9,886

Stock-based compensation
3,845

 
3,327

Provision for credit losses
(1,673
)
 
4,321

Net amortization of premiums and accretion of discounts on securities and borrowings
13,757

 
13,332

Amortization of other intangible assets
4,697

 
3,530

Losses (gains) on securities transactions, net
1

 
(3,999
)
Proceeds from sales of loans held for sale
56,579

 
935,834

Gains on sales of loans, net
(1,592
)
 
(29,426
)
Originations of loans held for sale
(53,568
)
 
(846,488
)
Gains on sales of assets, net
(128
)
 
(410
)
FDIC loss-share receivable (excluding reimbursements)
7,787

 
5,175

Net change in:
 
 
 
Trading securities
43

 
7,987

Fair value of borrowings carried at fair value
—

 
2,406

Cash surrender value of bank owned life insurance
(3,022
)
 
(2,765
)
Accrued interest receivable
314

 
(928
)
Other assets
37,596

 
38,758

Accrued expenses and other liabilities
(32,852
)
 
(27,077
)
Net cash provided by operating activities
105,155

 
178,695

Cash flows from investing activities:
 
 
 
Net loan (originations) repayments
(243,102
)
 
287,940

Loans purchased
(26,746
)
 
(178,486
)
Investment securities held to maturity:
 
 
 
Purchases
(279,718
)
 
(436,005
)
Maturities, calls and principal repayments
185,690

 
282,888

Investment securities available for sale:
 
 
 
Purchases
(9,180
)
 
(283,736
)
Sales
—

 
4,309

Maturities, calls and principal repayments
77,396

 
104,679

Death benefit proceeds from bank owned life insurance
—

 
628

Proceeds from sales of real estate property and equipment
10,172

 
6,574

Purchases of real estate property and equipment
(13,518
)
 
(6,828
)
Reimbursements from (payments to) the FDIC
4,283

 
(865
)
Net cash used in investing activities
(294,723
)
 
(218,902
)
Cash flows from financing activities:
 
 
 
Net change in deposits
96,790

 
(21,396
)
Net change in short-term borrowings
72,775

 
(29,263
)
Repayments of long-term borrowings
—

 
(1,000
)
Cash dividends paid to common shareholders
(43,995
)
 
(64,492
)
Common stock issued, net
1,511

 
3,583

Net cash provided by (used in) financing activities
127,081

 
(112,568
)
Net change in cash and cash equivalents
(62,487
)
 
(152,775
)
Cash and cash equivalents at beginning of year
369,168

 
853,100

Cash and cash equivalents at end of period
$
306,681

 
$
700,325





5




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

 
Six Months Ended  
 June 30,
 
2014
 
2013
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 
 
 
Interest on deposits and borrowings
$
78,549

 
$
84,640

Federal and state income taxes
20,102

 
6,614

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
6,340

 
$
13,384

Transfer of loans to loans held for sale
27,329

 
—

See accompanying notes to consolidated financial statements.







 




6



VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey Corporation (Valley), include the accounts of its commercial bank subsidiary, Valley National Bank (the “Bank”), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities.
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations and cash flows at June 30, 2014 and for all periods presented have been made. The results of operations for the three and six months ended June 30, 2014 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, 2013.
Note 2. Business Combinations

On May 8, 2014, Valley entered into a merger agreement to acquire 1st United Bancorp, Inc. (“1st United”) (Nasdaq: FUBC) and its wholly-owned subsidiary, 1st United Bank, with approximately $1.7 billion in assets, $1.1 billion in loans, and $1.4 billion in deposits. 1st United has a 21 branch network covering the some of the most attractive urban banking markets in Florida, including locations throughout southeast Florida, the Treasure Coast, central Florida and central Gulf Coast regions. The common shareholders of 1st United will receive 0.89 of a share of Valley common stock for each 1st United share they own, subject to adjustment in the event Valley’s average stock price falls below $8.09 or rises above $12.13 prior to closing. The transaction is valued at an estimated $312 million, based on Valley's closing stock price on May 5, 2014 (and includes the cash consideration that will be paid to 1st United stock option holders). The transaction closing is anticipated in the fourth quarter of 2014, subject to approvals from regulators, 1st United shareholder approval of the merger and Valley shareholder approval of an amendment of its certificate of incorporation to increase its authorized common shares, as well as other customary conditions.





7



Note 3. Earnings Per Common Share
The following table shows the calculation of both basic and diluted earnings per common share for the three and six months ended June 30, 2014 and 2013: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except for share data)
Net income
$
29,520

 
$
33,922

 
$
63,355

 
$
65,232

Basic weighted average number of common shares outstanding
200,472,592

 
199,244,243

 
200,301,438

 
199,085,501

Diluted weighted average number of common shares outstanding
200,472,592

 
199,244,243

 
200,301,438

 
199,085,501

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.17

 
$
0.32

 
$
0.33

Diluted
0.15

 
0.17

 
0.32

 
0.33


Common stock equivalents 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. All of Valley's common stock equivalents were anti-dilutive as of June 30, 2014 and 2013, and therefore excluded from the diluted weighted-average number of shares outstanding presented in the above table. Anti-dilutive common stock options and warrants totaled approximately 6.6 million shares for both the three and six months ended June 30, 2014 and 7.2 million shares for both the three and six months ended June 30, 2013.
Note 4. Accumulated Other Comprehensive Loss

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three and six months ended June 30, 2014. 
 
Components of Accumulated Other Comprehensive Loss
 
Total
Accumulated
Other
Comprehensive
Loss
 
Unrealized Gains
and (Losses) on
Available for Sale
(AFS) Securities
 
Non-credit
Impairment
Losses on
AFS Securities
 
Unrealized Gains
and (Losses) on
Derivatives
 
Defined
Benefit
Pension Plan
 
 
(in thousands)
Balance at March 31, 2014
$
(13,634
)
 
$
(779
)

$
(8,968
)
 
$
(10,283
)
 
$
(33,664
)
Other comprehensive income before reclassifications
7,123

 
164


(4,862
)
 
—

 
2,425

Amounts reclassified from other comprehensive income
(4
)
 
(64
)

973

 
37

 
942

Other comprehensive income, net
7,119

 
100

 
(3,889
)
 
37

 
3,367

Balance at June 30, 2014
$
(6,515
)
 
$
(679
)
 
$
(12,857
)
 
$
(10,246
)
 
$
(30,297
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
(20,855
)
 
$
(806
)
 
$
(6,271
)
 
$
(10,320
)
 
$
(38,252
)
Other comprehensive income before reclassifications
14,339

 
306

 
(8,524
)
 
—

 
6,121

Amounts reclassified from other comprehensive income
1

 
(179
)
 
1,938

 
74

 
1,834

Other comprehensive income, net
14,340

 
127

 
(6,586
)
 
74

 
7,955

Balance at June 30, 2014
$
(6,515
)
 
$
(679
)
 
$
(12,857
)
 
$
(10,246
)
 
$
(30,297
)

8



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 six months ended June 30, 2014 and 2013. 
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
 
Components of Accumulated Other Comprehensive Loss
2014
 
2013
 
2014
 
2013
 
Income Statement
Line Item
 
(in thousands)
 
 
Unrealized gains (losses) on AFS securities before tax
$
7

 
$
41

 
$
(1
)
 
$
3,999

 
Gains (losses) on securities transactions, net
Tax effect
(3
)
 
(16
)
 
—

 
(1,675
)
 
 
Total net of tax
4

 
25

 
(1
)
 
2,324

 
 
Non-credit impairment losses on AFS securities before tax:
 
 
 
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
110

 
75

 
308

 
188

 
Interest and dividends on investment securities (taxable)
Tax effect
(46
)
 
(32
)
 
(129
)
 
(79
)
 
 
Total net of tax
64

 
43

 
179

 
109

 
 
Unrealized losses on derivatives (cash flow hedges) before tax
(1,664
)
 
(1,714
)
 
(3,312
)
 
(3,594
)
 
Interest expense
Tax effect
691

 
719

 
1,374

 
1,508

 
 
Total net of tax
(973
)
 
(995
)
 
(1,938
)
 
(2,086
)
 
 
Defined benefit pension plan:
 
 
 
 
 
 
 
 
 
Amortization of prior service cost
—

 
(241
)
 
—

 
(443
)
 
*
Amortization of net actuarial loss
(62
)
 
(811
)
 
(124
)
 
(1,605
)
 
*
Recognition of loss due to curtailment
—

 
(750
)
 
—

 
(750
)
 
*
Total before tax
(62
)
 
(1,802
)
 
(124
)
 
(2,798
)
 
 
Tax effect
25

 
730

 
50

 
1,133

 
 
Total net of tax
(37
)
 
(1,072
)
 
(74
)
 
(1,665
)
 
 
Total reclassifications, net of tax
$
(942
)
 
$
(1,999
)
 
$
(1,834
)
 
$
(1,318
)
 
 
 
 
 
 
 
 
 
 
 
 
 
*
These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.
Note 5. New Authoritative Accounting Guidance

Accounting Standards Update (ASU) No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 will be effective for reporting periods after January 1, 2015 and is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" requires entities to account for repurchase-to-maturity transactions as secured borrowings rather than as sales with forward repurchase agreements and expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The accounting-related changes are effective for the first interim or annual period beginning after December 15, 2014. The disclosures for certain transactions accounted for as sales are required for interim and annual periods beginning after December 15, 2014. The disclosures for

9



repos, securities lending transactions, and repos-to-maturity accounted for as secured borrowings are required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption of the ASU No. 2014-11 is prohibited. As of June 30, 2014, all of Valley's repurchase agreements were typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, Valley's adoption of ASU No. 2014-11 is not expected to have a significant impact on its consolidated financial statements.

ASU No. 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, this ASU requires interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for annual and interim periods beginning after December 15, 2014. Valley’s adoption of ASU No. 2014-04 is not expected to have a significant impact on its consolidated financial statements.

ASU No. 2014-01, “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects,” amends existing guidance to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense or benefit. For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. ASU No. 2014-01 is effective for annual periods and interim reporting periods within those annual periods beginning after December 15, 2014. Early adoption is permitted. Valley’s adoption of ASU No. 2014-01 is not expected to have a significant impact on its consolidated financial statements.

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 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. ASU No. 2013-11 became effective for Valley on January 1, 2014 and did not have a significant impact on its consolidated financial statements.
Note 6. 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.

10



 
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 June 30, 2014 and December 31, 2013. 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). 
 
June 30,
2014
 
Fair Value Measurements at Reporting Date Using:
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Recurring fair value measurements:
 
Assets
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
91,887

 
$
91,887

 
$
—

 
$
—

U.S. government agency securities
46,041

 
—

 
46,041

 
—

Obligations of states and political subdivisions
38,015

 
—

 
38,015

 
—

Residential mortgage-backed securities
478,132

 
—

 
456,630

 
21,502

Trust preferred securities
20,650

 
—

 
16,123

 
4,527

Corporate and other debt securities
84,536

 
27,473

 
57,063

 
—

Equity securities
23,944

 
2,170

 
21,774

 
—

Total available for sale
783,205

 
121,530

 
635,646

 
26,029

Trading securities
14,221

 
—

 
14,221

 
 
Loans held for sale (1)
8,218

 
—

 
8,218

 
—

Other assets (2)
14,499

 
—

 
14,499

 
—

Total assets
$
820,143

 
$
121,530

 
$
672,584

 
$
26,029

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
26,666

 
$
—

 
$
26,666

 
$
—

Total liabilities
$
26,666

 
$
—

 
$
26,666

 
$
—

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Non-performing loans held for sale
$
7,850

 
$
—

 
$
7,850

 
$
—

Collateral dependent impaired loans (3)
21,740

 
—

 
—

 
21,740

Loan servicing rights
2,314

 
—

 
—

 
2,314

Foreclosed assets (4)
12,715

 
—

 
—

 
12,715

Total
$
44,619

 
$
—

 
$
7,850

 
$
36,769


11



 
 
 
Fair Value Measurements at Reporting Date Using:
 
December 31,
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
$
84,665

 
$
84,665

 
$
—

 
$
—

U.S. government agency securities
48,627

 
—

 
48,627

 
—

Obligations of states and political subdivisions
37,700

 
—

 
37,700

 
—

Residential mortgage-backed securities
508,029

 
—

 
483,277

 
24,752

Trust preferred securities
19,215

 
—

 
15,444

 
3,771

Corporate and other debt securities
83,398

 
27,273

 
56,125

 
—

Equity securities
48,058

 
26,905

 
21,153

 
—

Total available for sale
829,692

 
138,843

 
662,326

 
28,523

Trading securities
14,264

 
—

 
14,264

 
—

Loans held for sale (1)
10,488

 
—

 
10,488

 
—

Other assets (2)
15,122

 
—

 
15,122

 
—

Total assets
$
869,566

 
$
138,843

 
$
702,200

 
$
28,523

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
20,586

 
$
—

 
$
20,586

 
$
—

Total liabilities
$
20,586

 
$
—

 
$
20,586

 
$
—

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
35,700

 
$
—

 
$
—

 
$
35,700

Loan servicing rights
3,677

 
—

 
—

 
3,677

Foreclosed assets (4)
25,929

 
—

 
—

 
25,929

Total
$
65,306

 
$
—

 
$
—

 
$
65,306

 
(1)
Loans held for sale carried at fair value (which consist of residential mortgages) had contractual unpaid principal balances totaling approximately $8.0 million and $10.4 million at June 30, 2014 and December 31, 2013, respectively.
(2)
Derivative financial instruments are included in this category.
(3)
Excludes PCI loans.
(4)
Includes covered real estate owned totaling $2.8 million and $7.6 million at June 30, 2014 and December 31, 2013, respectively.















12




The changes in Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, 2014 and 2013 are summarized below: 
 
Available for Sale Securities
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Balance, beginning of the period
$
26,911

 
$
77,920

 
$
28,523

 
$
71,674

Total net gains for the period included in other comprehensive income
174

 
3,406

 
222

 
11,439

Settlements
(1,056
)
 
(2,214
)
 
(2,716
)
 
(4,001
)
Balance, end of the period
$
26,029

 
$
79,112

 
$
26,029

 
$
79,112


No changes in unrealized losses on Level 3 securities held at June 30, 2014 and 2013 were included in earnings during the three and six months ended June 30, 2014 and 2013. There were also no transfers of assets between Level 1 and Level 2 during the three and six months ended June 30, 2014 and 2013.

There have been no material changes in the valuation methodologies used at June 30, 2014 from December 31, 2013.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Available for sale 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 value utilizing Level 1 inputs. The majority of other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. For certain securities, the inputs used by either dealer market participants or an independent pricing service may be derived from unobservable market information (Level 3 inputs). In these instances, Valley evaluates the appropriateness and quality of the assumption and the resulting price. In addition, Valley reviews the volume and level of activity for all available for sale and trading securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value and this results in fair values based on Level 3 inputs. In determining fair value, Valley utilizes unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing each security. In developing its assertion of market participant assumptions, Valley utilizes the best information that is both reasonable and available without undue cost and effort.


13



In calculating the fair value for the available for sale securities under Level 3, Valley prepared present value cash flow models for certain private label mortgage-backed securities. The cash flows for the residential mortgage-backed securities incorporated the expected cash flow of each security adjusted for default rates, loss severities and prepayments of the individual loans collateralizing the security.

The following table presents quantitative information about Level 3 inputs used to measure the fair value of these securities at June 30, 2014: 
Security Type
Valuation
Technique
 
Unobservable
Input
 
Range
 
Weighted
Average
 
 
 
 
 
 
 
 
Private label mortgage-backed securities
Discounted cash flow
 
Prepayment rate
 
1.30 - 44.30
 
14.4
%
 
 
 
Default rate
 
2.4 - 22.96
 
7.9

 
 
 
Loss severity
 
40.0 - 52.90
 
48.9


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 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 June 30, 2014 and December 31, 2013 based on the short duration these assets were held, and the high credit quality of these loans.


14



Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair value of Valley’s derivatives are determined using third party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves. The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at June 30, 2014), 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 June 30, 2014 and December 31, 2013.

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 non-performing loans held for sale carried at estimated fair value (less selling costs) when less than the unamortized cost, impaired loans reported at the fair value of the underlying collateral, as well as loan servicing rights, other real estate owned and other repossessed assets which are reported at fair value upon initial recognition or subsequent impairment as described below.

Non-performing loans held for sale. At June 30, 2014, non-performing loans held for sale consisted of one commercial real estate loan that was transferred to the loans held for sale account during the first quarter of 2014. The fair value of the loan was determined using Level 2 inputs, and a third party broker was engaged to solicit interest from potential purchasers. The broker coordinated loan level due diligence with interested parties and established a formal bidding process in which each participant was required to provide an indicative non-binding bid. Based on the most recent bids received for this loan, Valley established the fair market value based on both qualitative and quantitative information received from the broker. The loan was re-measured and reported at fair value of $7.9 million at June 30, 2014 resulting in a write-down of $2.3 million charged to non-interest income during the three months ended June 30, 2014.

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 certain discounting criteria. At June 30, 2014, appraisals were discounted up to 26.4 percent based on specific market data by location and property type. During the quarter ended June 30, 2014, 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 $2.2 million and $3.2 million for the three and six months ended June 30, 2014, respectively. At June 30, 2014, collateral dependent impaired loans with a total recorded investment of $23.6 million were reduced by specific valuation allowance allocations totaling $1.9 million to a reported total net carrying amount of $21.7 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 June 30, 2014, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 25 percent and a discount rate of 8.0 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 $42 thousand and $142 thousand for the three and six months ended June 30, 2014, respectively.

15




Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is adjusted based on certain discounting criteria, similar to the criteria used for impaired loans described above. The appraisals of of foreclosed assets discounted up to 12.0 percent at June 30, 2014. At June 30, 2014, foreclosed assets included $12.7 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended June 30, 2014. The foreclosed assets charge-offs to the allowance for loan losses totaled $527 thousand and $2.0 million for the three and six months ended June 30, 2014, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in a net loss of $75 thousand and $1.9 million within non-interest expense for the three and six months ended June 30, 2014, 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 six months ended June 30, 2014 and 2013: 
Reported in Consolidated Statements of Financial Condition
 
Reported in
Consolidated Statements
of Income
 
Gains (Losses) on Change in Fair Value
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Trading securities
 
Trading losses, net
 
$
(34
)
 
$
(36
)
 
$
(43
)
 
$
(66
)
Loans held for sale
 
Gains on sales of loans, net
 
679

 
14,366

 
1,592

 
29,426

Liabilities:
 
 
 
 
 
 
 
 
 
 
Junior subordinated debentures issued to capital trusts
 
Trading losses, net
 
—

 
(234
)
 
—

 
(2,406
)
 
 
 
 
$
645

 
$
14,096

 
$
1,549

 
$
26,954


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.


16



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 June 30, 2014 and December 31, 2013 were as follows: 
 
Fair Value
Hierarchy
 
June 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
266,101

 
$
266,101

 
$
234,253

 
$
234,253

Interest bearing deposits with banks
Level 1
 
40,580

 
40,580

 
134,915

 
134,915

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
Level 1
 
139,192

 
149,128

 
139,255

 
144,307

U.S. government agency securities
Level 2
 
14,346

 
14,718

 
4,427

 
4,365

Obligations of states and political subdivisions
Level 2
 
515,402

 
530,393

 
545,886

 
543,151

Residential mortgage-backed securities
Level 2
 
1,019,086

 
1,028,120

 
886,043

 
871,021

Trust preferred securities
Level 2
 
98,452

 
85,886

 
103,458

 
91,489

Corporate and other debt securities
Level 2
 
39,665

 
45,876

 
52,668

 
57,094

Total investment securities held to maturity
 
 
1,826,143

 
1,854,121

 
1,731,737

 
1,711,427

Net loans
Level 3
 
11,710,375

 
11,513,205

 
11,453,995

 
11,294,348

Accrued interest receivable
Level 1
 
53,650

 
53,650

 
53,964

 
53,964

Federal Reserve Bank and Federal Home Loan Bank stock (1)
Level 1
 
138,180

 
138,180

 
137,234

 
137,234

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
Level 1
 
9,224,563

 
9,224,563

 
9,139,993

 
9,139,993

Deposits with stated maturities
Level 2
 
2,191,489

 
2,254,453

 
2,179,269

 
2,206,427

Short-term borrowings
Level 1
 
354,230

 
354,230

 
281,455

 
281,455

Long-term borrowings
Level 2
 
2,797,986

 
3,040,487

 
2,792,306

 
3,036,953

Junior subordinated debentures issued to capital trusts
Level 2
 
41,171

 
45,191

 
41,089

 
45,261

Accrued interest payable (2)
Level 1
 
16,652

 
16,652

 
16,442

 
16,442

 
(1)
Included in other assets.
(2)
Included in accrued expenses and other liabilities.

The following methods and assumptions were used to estimate the fair value of other financial assets and financial liabilities in the table above:

Cash and due from banks and interest bearing deposits with banks. The carrying amount is considered to be a reasonable estimate of fair value because of the short maturity of these items.

Investment securities held to maturity. Fair values are based on prices obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things (Level 2 inputs). Additionally, Valley reviews the volume and level of activity for all classes of held to maturity securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service

17



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. Federal Reserve 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 agreements 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. The fair value of debentures issued to capital trusts 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). The credit spread used to discount the expected cash flows was calculated based on the median current spreads for all fixed and variable publicly traded trust preferred securities issued by banks.
Note 7. Investment Securities

As of June 30, 2014, Valley had approximately $1.8 billion, $783.2 million, and $14.2 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

18



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 June 30, 2014 and December 31, 2013 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
June 30, 2014
 
 
 
 
 
 
 
U.S. Treasury securities
$
139,192

 
$
9,936

 
$
—

 
$
149,128

U.S. government agency securities
14,346

 
372

 
—

 
14,718

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
198,610

 
7,056

 
(1,291
)
 
204,375

Municipal bonds
316,792

 
10,441

 
(1,215
)
 
326,018

Total obligations of states and political subdivisions
515,402

 
17,497

 
(2,506
)
 
530,393

Residential mortgage-backed securities
1,019,086

 
20,233

 
(11,199
)
 
1,028,120

Trust preferred securities
98,452

 
193

 
(12,759
)
 
85,886

Corporate and other debt securities
39,665

 
6,213

 
(2
)
 
45,876

Total investment securities held to maturity
$
1,826,143

 
$
54,444

 
$
(26,466
)
 
$
1,854,121

December 31, 2013
 
 
 
 
 
 
 
U.S. Treasury securities
$
139,255

 
$
5,567

 
$
(515
)
 
$
144,307

U.S. government agency securities
4,427

 
—

 
(62
)
 
4,365

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
192,653

 
1,944

 
(5,473
)
 
189,124

Municipal bonds
353,233

 
6,053

 
(5,259
)
 
354,027

Total obligations of states and political subdivisions
545,886

 
7,997

 
(10,732
)
 
543,151

Residential mortgage-backed securities
886,043

 
12,609

 
(27,631
)
 
871,021

Trust preferred securities
103,458

 
363

 
(12,332
)
 
91,489

Corporate and other debt securities
52,668

 
4,426

 
—

 
57,094

Total investment securities held to maturity
$
1,731,737

 
$
30,962

 
$
(51,272
)
 
$
1,711,427


19



The age of unrealized losses and fair value of related securities held to maturity at June 30, 2014 and December 31, 2013 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)
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
10,364

 
$
(12
)
 
$
46,593

 
$
(1,279
)
 
$
56,957

 
$
(1,291
)
Municipal bonds
2,276

 
(9
)
 
55,006

 
(1,206
)
 
57,282

 
(1,215
)
Total obligations of states and political subdivisions
12,640

 
(21
)
 
101,599

 
(2,485
)
 
114,239

 
(2,506
)
Residential mortgage-backed securities
126,574

 
(1,558
)
 
272,328

 
(9,641
)
 
398,902

 
(11,199
)
Trust preferred securities
9,800

 
(200
)
 
56,009

 
(12,559
)
 
65,809

 
(12,759
)
Corporate and other debt securities
248

 
(2
)
 
—

 
—

 
248

 
(2
)
Total
$
149,262

 
$
(1,781
)
 
$
429,936

 
$
(24,685
)
 
$
579,198

 
$
(26,466
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
64,537

 
$
(515
)
 
$
—

 
$
—

 
$
64,537

 
$
(515
)
U.S. government agency securities
4,365

 
(62
)
 
—

 
—

 
4,365

 
(62
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
80,612

 
(5,473
)
 
—

 
—

 
80,612

 
(5,473
)
Municipal bonds
85,988

 
(5,154
)
 
1,326

 
(105
)
 
87,314

 
(5,259
)
Total obligations of states and political subdivisions
166,600

 
(10,627
)
 
1,326

 
(105
)
 
167,926

 
(10,732
)
Residential mortgage-backed securities
465,400

 
(27,631
)
 
—

 
—

 
465,400

 
(27,631
)
Trust preferred securities
9,750

 
(250
)
 
56,480

 
(12,082
)
 
66,230

 
(12,332
)
Total
$
710,652

 
$
(39,085
)
 
$
57,806

 
$
(12,187
)
 
$
768,458

 
$
(51,272
)

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 June 30, 2014 was 80 as compared to 133 at December 31, 2013.

The increase in the level of long-term market interest rates since the second half of 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 June 30, 2014 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 June 30, 2014 primarily related to four non-rated single-issuer trust preferred securities issued by bank holding companies. All single-issuer trust preferred securities classified as held to maturity are paying in accordance with their terms, have no deferrals of interest or defaults and, if applicable, the issuers meet the regulatory capital requirements to be considered “well-capitalized institutions” at June 30, 2014.
Management does not believe that any individual unrealized loss as of June 30, 2014 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, credit losses or other factors. Based on a

20



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 June 30, 2014, 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 $925.9 million.
The contractual maturities of investments in debt securities held to maturity at June 30, 2014 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.  
 
June 30, 2014
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
80,902

 
$
80,962

Due after one year through five years
37,304

 
42,340

Due after five years through ten years
329,793

 
346,954

Due after ten years
359,058

 
355,745

Residential mortgage-backed securities
1,019,086

 
1,028,120

Total investment securities held to maturity
$
1,826,143

 
$
1,854,121