Document


 
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, 2016
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 254,529,715 shares were outstanding as of November 3, 2016
 



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)
 
September 30,
2016
 
December 31,
2015
Assets
(Unaudited)
 
 
Cash and due from banks
$
238,664

 
$
243,575

Interest bearing deposits with banks
160,462

 
170,225

Investment securities:
 
 
 
Held to maturity (fair value of $1,891,982 at September 30, 2016 and $1,621,039 at December 31, 2015)
1,845,151

 
1,596,385

Available for sale
1,276,709

 
1,506,861

Total investment securities
3,121,860

 
3,103,246

Loans held for sale (includes fair value of $27,868 at September 30, 2016 and $16,832 at December 31, 2015 for loans originated for sale)
202,369

 
16,382

Loans
16,634,135

 
16,043,107

Less: Allowance for loan losses
(110,697
)
 
(106,178
)
Net loans
16,523,438

 
15,936,929

Premises and equipment, net
294,165

 
298,943

Bank owned life insurance
390,600

 
387,542

Accrued interest receivable
63,815

 
63,554

Goodwill
689,589

 
686,339

Other intangible assets, net
44,038

 
48,882

Other assets
639,453

 
656,999

Total Assets
$
22,368,453

 
$
21,612,616

Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
5,092,740

 
$
4,914,285

Interest bearing:
 
 
 
Savings, NOW and money market
8,759,562

 
8,181,362

Time
3,119,881

 
3,157,904

Total deposits
16,972,183

 
16,253,551

Short-term borrowings
1,433,356

 
1,076,991

Long-term borrowings
1,450,818

 
1,810,728

Junior subordinated debentures issued to capital trusts
41,536

 
41,414

Accrued expenses and other liabilities
213,487

 
222,841

Total Liabilities
20,111,380

 
19,405,525

Shareholders’ Equity
 
 
 
Preferred stock (no par value, authorized 30,000,000 shares; issued 4,600,000 shares at September 30, 2016 and December 31, 2015)
111,590

 
111,590

Common stock (no par value, authorized 332,023,233 shares; issued 254,492,480 shares at September 30, 2016 and 253,787,561 shares at December 31, 2015)
89,007

 
88,626

Surplus
1,937,572

 
1,927,399

Retained earnings
153,531

 
125,171

Accumulated other comprehensive loss
(34,343
)
 
(45,695
)
Treasury stock, at cost (30,574 common shares at September 30, 2016)
(284
)
 
—

Total Shareholders’ Equity
2,257,073

 
2,207,091

Total Liabilities and Shareholders’ Equity
$
22,368,453

 
$
21,612,616

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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans
$
171,143

 
$
157,141

 
$
506,640

 
$
465,787

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
14,232

 
12,148

 
42,487

 
39,313

Tax-exempt
4,023

 
3,593

 
11,447

 
10,800

Dividends
1,612

 
1,658

 
4,408

 
5,013

Interest on federal funds sold and other short-term investments
193

 
150

 
846

 
516

Total interest income
191,203

 
174,690

 
565,828

 
521,429

Interest Expense
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 
 
Savings, NOW and money market
10,165

 
5,587

 
29,369

 
17,493

Time
9,412

 
9,535

 
28,220

 
25,637

Interest on short-term borrowings
3,545

 
126

 
8,537

 
427

Interest on long-term borrowings and junior subordinated debentures
13,935

 
25,482

 
45,948

 
75,649

Total interest expense
37,057

 
40,730

 
112,074

 
119,206

Net Interest Income
154,146

 
133,960

 
453,754

 
402,223

Provision for credit losses
5,840

 
94

 
8,069

 
4,594

Net Interest Income After Provision for Credit Losses
148,306

 
133,866

 
445,685

 
397,629

Non-Interest Income
 
 
 
 
 
 
 
Trust and investment services
2,628

 
2,450

 
7,612

 
7,520

Insurance commissions
4,580

 
4,119

 
14,133

 
12,454

Service charges on deposit accounts
5,263

 
5,241

 
15,460

 
15,794

(Losses) gains on securities transactions, net
(10
)
 
157

 
258

 
2,481

Fees from loan servicing
1,598

 
1,703

 
4,753

 
4,948

Gains on sales of loans, net
4,823

 
2,014

 
9,723

 
3,034

Gains (losses) on sales of assets, net
310

 
(558
)
 
1,009

 
(77
)
Bank owned life insurance
1,683

 
1,806

 
5,464

 
5,188

Change in FDIC loss-share receivable
(313
)
 
(55
)
 
(872
)
 
(3,380
)
Other
4,291

 
4,042

 
13,025

 
11,802

Total non-interest income
24,853

 
20,919

 
70,565

 
59,764

Non-Interest Expense
 
 
 
 
 
 
 
Salary and employee benefits expense
58,107

 
54,315

 
174,438

 
165,601

Net occupancy and equipment expense
20,658

 
21,526

 
65,615

 
65,858

FDIC insurance assessment
4,804

 
4,168

 
14,998

 
11,972

Amortization of other intangible assets
2,675

 
2,232

 
8,452

 
6,721

Professional and legal fees
4,031

 
4,643

 
13,398

 
12,043

Amortization of tax credit investments
6,450

 
5,224

 
21,360

 
14,231

Telecommunication expense
2,459

 
2,050

 
7,139

 
6,101

Other
14,084

 
14,494

 
45,896

 
41,655

Total non-interest expense
113,268

 
108,652

 
351,296

 
324,182

Income Before Income Taxes
59,891

 
46,133

 
164,954

 
133,211

Income tax expense
17,049

 
10,179

 
46,898

 
34,925

Net Income
$
42,842

 
$
35,954

 
$
118,056

 
$
98,286

Dividends on preferred stock
1,797

 
2,017

 
5,391

 
2,017

Net Income Available to Common Shareholders
$
41,045

 
$
33,937

 
$
112,665

 
$
96,269

Earnings Per Common Share:
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.15

 
$
0.44

 
$
0.41

Diluted
0.16

 
0.15

 
0.44

 
0.41

Cash Dividends Declared per Common Share
0.11

 
0.11

 
0.33

 
0.33

Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
Basic
254,473,994

 
232,737,953

 
254,310,769

 
232,548,840

Diluted
254,940,307

 
232,780,219

 
254,698,593

 
232,565,695

See accompanying notes to consolidated financial statements.

3



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
42,842

 
$
35,954

 
$
118,056

 
$
98,286

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
 
 
 
 
Net gains arising during the period
4,902

 
4,586

 
12,550

 
2,677

Less reclassification adjustment for net losses (gains) included in net income
6

 
(91
)
 
(162
)
 
(1,445
)
Total
4,908

 
4,495

 
12,388

 
1,232

Non-credit impairment losses on available for sale securities
 
 
 
 
 
 
 
Net change in non-credit impairment losses on securities
(74
)
 
252

 
168

 
(200
)
Less reclassification adjustment for accretion of credit impairment losses included in net income
(50
)
 
(267
)
 
(336
)
 
(371
)
Total
(124
)
 
(15
)
 
(168
)
 
(571
)
Unrealized gains and losses on derivatives (cash flow hedges)
 
 
 
 
 
 
 
Net gains (losses) on derivatives arising during the period
1,735

 
(6,163
)
 
(6,939
)
 
(10,291
)
Less reclassification adjustment for net losses included in net income
2,095

 
772

 
5,943

 
2,714

Total
3,830

 
(5,391
)
 
(996
)
 
(7,577
)
Defined benefit pension plan
 
 
 
 
 
 
 
Amortization of net loss
42

 
119

 
128

 
359

Total other comprehensive income (loss)
8,656

 
(792
)
 
11,352

 
(6,557
)
Total comprehensive income
$
51,498

 
$
35,162

 
$
129,408

 
$
91,729

See accompanying notes to consolidated financial statements.


4



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
118,056

 
$
98,286

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,593

 
15,213

Stock-based compensation
7,382

 
6,512

Provision for credit losses
8,069

 
4,594

Net amortization of premiums and accretion of discounts on securities and borrowings
14,152

 
17,595

Amortization of other intangible assets
8,452

 
6,721

Gains on securities transactions, net
(258
)
 
(2,481
)
Proceeds from sales of loans held for sale
337,069

 
94,342

Gains on sales of loans, net
(9,723
)
 
(3,034
)
Originations of loans held for sale
(342,989
)
 
(86,274
)
(Gains) losses on sales of assets, net
(1,009
)
 
77

FDIC loss-share receivable (excluding reimbursements)
872

 
3,380

Net change in:
 
 
 
Trading securities
—

 
14,233

Fair value of borrowings hedged by derivative transactions
6,646

 
3,270

Cash surrender value of bank owned life insurance
(5,464
)
 
(5,188
)
Accrued interest receivable
(261
)
 
(199
)
Other assets
(2,170
)
 
(33,555
)
Accrued expenses and other liabilities
(9,888
)
 
12,490

Net cash provided by operating activities
147,529

 
145,982

Cash flows from investing activities:
 
 
 
Net loan originations
(182,893
)
 
(486,862
)
Loans purchased
(593,769
)
 
(1,066,934
)
Investment securities held to maturity:
 
 
 
Purchases
(502,833
)
 
(201,681
)
Sales
—

 
11,666

Maturities, calls and principal repayments
243,764

 
321,771

Investment securities available for sale:
 
 
 
Purchases
(557,978
)
 
(38,819
)
Sales
2,081

 
14,022

Maturities, calls and principal repayments
800,967

 
115,397

Death benefit proceeds from bank owned life insurance
2,406

 
—

Proceeds from sales of real estate property and equipment
18,243

 
10,510

Purchases of real estate property and equipment
(17,155
)
 
(23,139
)
Reimbursements from the FDIC
269

 
2,835

Net cash used in investing activities
(786,898
)
 
(1,341,234
)
Cash flows from financing activities:
 
 
 
Net change in deposits
718,632

 
465,747

Net change in short-term borrowings
356,365

 
156,160

Proceeds from issuance of long-term borrowings, net
385,000

 
98,930

Repayments of long-term borrowings
(749,000
)
 
(100,000
)
Proceeds from issuance of preferred stock, net
—

 
111,590

Cash dividends paid to preferred shareholders
(5,391
)
 
(2,017
)
Cash dividends paid to common shareholders
(83,821
)
 
(76,671
)
Purchase of common shares to treasury
(1,700
)
 
(2,108
)
Common stock issued, net
4,610

 
4,993

Net cash provided by financing activities
624,695

 
656,624

Net change in cash and cash equivalents
(14,674
)
 
(538,628
)
Cash and cash equivalents at beginning of year
413,800

 
830,407

Cash and cash equivalents at end of period
$
399,126

 
$
291,779


5




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

 
Nine Months Ended
September 30,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 
 
 
Interest on deposits and borrowings
$
115,253

 
$
121,907

Federal and state income taxes
24,464

 
49,932

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
7,611

 
$
8,711

Transfer of loans to loans held for sale
174,501

 
—

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 September 30, 2016 and for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2016 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, 2015.
In August 2016, we elected to prepay $405 million of FHLB borrowings with various maturity dates in 2018. The prepaid borrowings with a total average cost of 3.69 percent were funded with a new fixed-rate five-year FHLB advance totaling $405 million. The transaction was accounted for as a debt modification under U.S. GAAP. As a result, the new advance has an adjusted annual interest rate of 2.51 percent, after amortization of prepayment penalties totaling $20 million paid to the FHLB.
Note 2. Business Combinations

On January 4, 2016, Masters Coverage Corp., an all-line insurance agency that is a wholly-owned subsidiary of the Bank, acquired certain assets of an independent insurance agency located in New York. The purchase price totaled approximately $1.4 million in cash and future cash consideration. The transaction generated goodwill and other intangible assets totaling $701 thousand and $660 thousand, respectively.

On December 1, 2015, Valley completed its acquisition of CNLBancshares, Inc. (CNL) and its wholly-owned subsidiary, CNLBank, headquartered in Orlando, Florida, a commercial bank with approximately $1.6 billion in assets, $825 million in loans, and $1.2 billion in deposits and 16 branch offices on the date of its acquisition by Valley. The common shareholders of CNL received 0.705 of a share of Valley common stock for each CNL share they owned prior to the merger. The total consideration for the acquisition was approximately $230 million, consisting of 20.6 million shares of Valley's common stock.


7



During the first quarter of 2016, Valley revised the estimated fair values of the acquired assets as of the acquisition date as the result of additional information obtained. The adjustments mostly related to the fair value of certain purchased credit-impaired (PCI) loans, core deposit intangibles and time deposits which, on a combined basis, resulted in a $2.5 million increase in goodwill (see Note 10 for amount of goodwill as allocated to Valley's business segments). If additional information (that existed at the date of close) becomes available, the fair value estimates for acquired assets and assumed liabilities are subject to change for up to one year after the closing date of the CNL acquisition.
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 nine months ended September 30, 2016 and 2015.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except for share data)
Net income available to common shareholders
$
41,045

 
$
33,937

 
$
112,665

 
$
96,269

Basic weighted average number of common shares outstanding
254,473,994

 
232,737,953

 
254,310,769

 
232,548,840

Plus: Common stock equivalents
466,313

 
42,266

 
387,824

 
16,855

Diluted weighted average number of common shares outstanding
254,940,307

 
232,780,219

 
254,698,593

 
232,565,695

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.15

 
$
0.44

 
$
0.41

Diluted
0.16

 
0.15

 
0.44

 
0.41


Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of performance-based restricted stock units, common stock options and warrants to purchase Valley’s common shares. Common stock options and warrants with exercise prices that exceed the average market price of Valley’s common stock during the periods presented have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation. Anti-dilutive common stock options and warrants equaled approximately 4.6 million shares for both the three and nine months ended September 30, 2016 and 5.0 million shares for both the three and nine months ended September 30, 2015.

8



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 nine months ended September 30, 2016. 

 
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 June 30, 2016
$
2,144

 
$
(564
)
 
$
(22,470
)
 
$
(22,109
)
 
$
(42,999
)
Other comprehensive income (loss) before reclassifications
4,902

 
(74
)
 
1,735

 
—

 
6,563

Amounts reclassified from other comprehensive income (loss)
6

 
(50
)
 
2,095

 
42

 
2,093

Other comprehensive income (loss), net
4,908

 
(124
)
 
3,830

 
42

 
8,656

Balance at September 30, 2016
$
7,052

 
$
(688
)
 
$
(18,640
)
 
$
(22,067
)
 
$
(34,343
)

 
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 December 31, 2015
$
(5,336
)
 
$
(520
)
 
$
(17,644
)
 
$
(22,195
)
 
$
(45,695
)
Other comprehensive income (loss) before reclassifications
12,550

 
168

 
(6,939
)
 
—

 
5,779

Amounts reclassified from other comprehensive income (loss)
(162
)
 
(336
)
 
5,943

 
128

 
5,573

Other comprehensive income (loss), net
12,388

 
(168
)
 
(996
)
 
128

 
11,352

Balance at September 30, 2016
$
7,052

 
$
(688
)
 
$
(18,640
)
 
$
(22,067
)
 
$
(34,343
)


9



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, 2016 and 2015. 
 
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
Components of Accumulated Other Comprehensive Loss
 
2016
 
2015
 
2016
 
2015
 
Income Statement
Line Item
 
 
(in thousands)
 
 
Unrealized gains (losses) on AFS securities before tax
 
$
(10
)
 
$
157

 
$
258

 
$
2,481

 
(Losses) gains on securities transactions, net
Tax effect
 
4

 
(66
)
 
(96
)
 
(1,036
)
 
 
Total net of tax
 
(6
)
 
91

 
162

 
1,445

 
 
Non-credit impairment losses on AFS securities before tax:
 
 
 
 
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
 
87

 
458

 
576

 
636

 
Interest and dividends on  investment securities (taxable)
Tax effect
 
(37
)
 
(191
)
 
(240
)
 
(265
)
 
 
Total net of tax
 
50

 
267

 
336

 
371

 
 
Unrealized losses on derivatives (cash flow hedges) before tax
 
(3,578
)
 
(1,323
)
 
(10,146
)
 
(4,651
)
 
Interest expense
Tax effect
 
1,483

 
551

 
4,203

 
1,937

 
 
Total net of tax
 
(2,095
)
 
(772
)
 
(5,943
)
 
(2,714
)
 
 
Defined benefit pension plan:
 
 
 
 
 
 
 
 
 
 
Amortization of net loss
 
(71
)
 
(205
)
 
(215
)
 
(616
)
 
*
Tax effect
 
29

 
86

 
87

 
257

 
 
Total net of tax
 
(42
)
 
(119
)
 
(128
)
 
(359
)
 
 
Total reclassifications, net of tax
 
$
(2,093
)
 
$
(533
)
 
$
(5,573
)
 
$
(1,257
)
 
 
 
*
Amortization of net loss is included in the computation of net periodic pension cost.

10



Note 5. New Authoritative Accounting Guidance

Accounting Standards Update (ASU) No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" clarifies on how certain cash receipts and cash payments should be classified and presented in the statement of cash flow. The ASU No. 2016-15 includes guidance on eight cash flow classification issues. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017 and is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments. The ASU No. 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity is required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 is effective for Valley for reporting periods beginning January 1, 2020. Management is currently evaluating the impact of the ASU No. 2016-13 on Valley’s consolidated financial statements.

ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" simplifies several aspects of the stock compensation guidance in Topic 718 and other related guidance. The amendments focus on income tax accounting upon vesting or exercise of share-based payments, award classification, liability classification exception for statutory tax withholding requirements, estimating forfeitures, and cash flow presentation. ASU No. 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018 with an early adoption permitted. ASU No. 2016-09 is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2016-02, “Leases (Topic 842)” requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for Valley for reporting periods beginning January 1, 2019, with an early adoption permitted. Valley must apply a modified retrospective transition approach for the applicable leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Management is currently evaluating the impact of Topic 842 on Valley’s consolidated financial statements.

ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities” requires that: (i) equity investments with readily determinable fair values must be measured at fair value with changes in fair value recognized in net income, (2) equity investments without readily determinable fair values must be measured at either fair value or at cost adjusted for changes in observable prices minus impairment. Changes in value under either of these methods would be recognized in net income, (3) entities that record financial liabilities at fair value due to a fair value option election must recognize changes in fair value in other comprehensive income if it is related to instrument-specific credit risk, and (4) entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities. ASU No. 2016-01 is effective for Valley for reporting periods beginning January 1, 2018 and is not expected to have a material effect on Valley’s consolidated financial statements.

ASU No. 2015-07, "Fair Value Measurement (Topic 820) - Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)", which removes the requirement to categorize within the fair value hierarchy all investments for which the fair value is measured using the net asset value per share practical

11



expedient. ASU No. 2015-07 also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. ASU No. 2015-07 began effective for Valley for reporting periods after January 1, 2016 and did not have an impact on Valley's fair value measurement disclosures at Note 6.

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" implements a common revenue standard that clarifies the principles for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In 2016, the Financial Accounting Standards Board issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing,” to further clarify the new guidance under Topic 606. ASU No. 2014-09 and its aforementioned amendments are effective on January 1, 2018. Management is currently evaluating the new revenue guidance but does not expect it to have a significant impact on Valley’s consolidated financial statements.
Note 6. Fair Value Measurement of Assets and Liabilities

Accounting Standards Codification (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).


12



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, 2016 and December 31, 2015. 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,
2016
 
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
$
51,791

 
$
51,791

 
$
—

 
$
—

U.S. government agency securities
24,097

 
—

 
24,097

 
—

Obligations of states and political subdivisions
125,290

 
—

 
125,290

 
—

Residential mortgage-backed securities
966,638

 
—

 
956,266

 
10,372

Trust preferred securities
8,156

 
—

 
6,131

 
2,025

Corporate and other debt securities
80,567

 
17,579

 
62,988

 
—

Equity securities
20,170

 
536

 
19,634

 
—

Total available for sale
1,276,709

 
69,906

 
1,194,406

 
12,397

Loans held for sale (1)
27,868

 
—

 
27,868

 
—

Other assets (2)
46,019

 
—

 
46,019

 
—

Total assets
$
1,350,596

 
$
69,906

 
$
1,268,293

 
$
12,397

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
72,672

 
$
—

 
$
72,672

 
$
—

Total liabilities
$
72,672

 
$
—

 
$
72,672

 
$
—

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
2,214

 
$
—

 
$
—

 
$
2,214

Loan servicing rights
7,358

 
—

 
—

 
7,358

Foreclosed assets (4)
1,711

 
—

 
—

 
1,711

Total
$
11,283

 
$
—

 
$
—

 
$
11,283


13



 
 
 
Fair Value Measurements at Reporting Date Using:
 
December 31,
2015
 
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
$
549,473

 
$
549,473

 
$
—

 
$
—

U.S. government agency securities
29,963

 
—

 
29,963

 
—

Obligations of states and political subdivisions
124,966

 
—

 
124,966

 
—

Residential mortgage-backed securities
696,428

 
—

 
684,777

 
11,651

Trust preferred securities
8,404

 
—

 
6,262

 
2,142

Corporate and other debt securities
77,552

 
17,710

 
59,842

 
—

Equity securities
20,075

 
1,198

 
18,877

 
—

Total available for sale
1,506,861

 
568,381

 
924,687

 
13,793

Loans held for sale (1)
16,382

 
—

 
16,382

 
—

Other assets (2)
33,774

 
—

 
33,774

 
—

Total assets
$
1,557,017

 
$
568,381

 
$
974,843

 
$
13,793

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
50,844

 
$
—

 
$
50,844

 
$
—

Total liabilities
$
50,844

 
$
—

 
$
50,844

 
$
—

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
15,427

 
$
—

 
$
—

 
$
15,427

Loan servicing rights
2,571

 
—

 
—

 
2,571

Foreclosed assets (4)
16,672

 
—

 
—

 
16,672

Total
$
34,670

 
$
—

 
$
—

 
$
34,670

 
(1)
Loans held for sale carried at fair value (which consist of residential mortgages) had contractual unpaid principal balances totaling approximately $27.0 million and $16.1 million at September 30, 2016 and December 31, 2015, respectively.
(2)
Derivative financial instruments are included in this category.
(3)
Excludes PCI loans.
(4)
Includes covered (i.e., subject to loss-sharing agreements with the FDIC) other real estate owned totaling $200 thousand and $4.2 million at September 30, 2016 and December 31, 2015, respectively.









14



The changes in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2016 and 2015 are summarized below: 
 
Available for Sale Securities
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Balance, beginning of the period
$
13,101

 
$
14,712

 
$
13,793

 
$
19,309

Total net losses included in other comprehensive income for the period
(212
)
 
(26
)
 
(283
)
 
(908
)
Sales
—

 
—

 
—

 
(2,675
)
Settlements
(492
)
 
(340
)
 
(1,113
)
 
(1,380
)
Balance, end of the period
$
12,397

 
$
14,346

 
$
12,397

 
$
14,346


No changes in unrealized gains or losses on Level 3 securities were included in earnings during the three and nine months ended September 30, 2016 and 2015. There were no transfers of assets into or out of Level 3, or between Level 1 and Level 2, during the three and nine months ended September 30, 2016 and 2015.

There have been no material changes in the valuation methodologies used at September 30, 2016 from December 31, 2015.

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 securities.

All U.S. Treasury securities, certain corporate and other debt securities, and certain common and preferred equity 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.


15



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 September 30, 2016: 
Security Type
Valuation
Technique
 
Unobservable
Input
 
Range
 
Weighted
Average
 
 
 
 
 
 
 
 
Private label mortgage-backed securities
Discounted cash flow
 
Prepayment rate
 
       4.8-20.9%
 
12.3
%
 
 
 
Default rate
 
   3.8-27.0
 
9.1

 
 
 
Loss severity
 
 45.3-66.7
 
60.6


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 (consisting of 4 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 the Level 3 available for sale one pooled trust preferred security, the resulting estimated future cash flow was discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. The discount rate was applied using a pricing matrix based on credit, security type and maturity characteristics to determine the fair value. The fair value calculation is received from an independent valuation adviser. In validating the fair value calculation from an independent valuation adviser, 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, 2016 and December 31, 2015 based on the short duration these assets were held, and the high credit quality of these loans.


16



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 September 30, 2016 and December 31, 2015), is determined based on the current market prices for similar instruments provided by Fannie Mae and Freddie Mac. 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, 2016 and December 31, 2015.

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, 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.

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 September 30, 2016, appraisals were discounted based on specific market data by location and property type. During the quarter ended September 30, 2016, 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 $3.7 million and $366 thousand for the three months ended September 30, 2016 and 2015, respectively, and $4.7 million and $3.0 million for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, collateral dependent impaired loans with a total recorded investment of $2.6 million were reduced by specific valuation allowance allocations totaling $350 thousand to a reported total net carrying amount of $2.2 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, 2016, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 24 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 recorded no net impairment charges on its loan servicing rights for the three months ended September 30, 2016 and net impairment charges totaling $457 thousand for the nine months ended September 30, 2016. Valley recorded net recoveries of impairment charges totaling $48 thousand and $209 thousand for three and nine months ended September 30, 2015, 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 certain discounting criteria, similar to the criteria used for impaired loans described above. The appraisals of foreclosed assets were adjusted up to 4.8 percent at September 30, 2016. At September 30, 2016, foreclosed assets

17



included $1.7 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended September 30, 2016. The foreclosed assets charge-offs to the allowance for loan losses totaled $245 thousand and $629 thousand for the three months ended September 30, 2016 and 2015, respectively and $1.2 million and $1.5 million for nine months ended September 30, 2016 and 2015, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in net loss within non-interest expense of $34 thousand and $1.3 million for the three months ended September 30, 2016 and 2015, respectively and $946 thousand and $1.8 million for nine months ended September 30, 2016 and 2015, respectively.
 
Other Fair Value Disclosures

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.


18



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, 2016 and December 31, 2015 were as follows: 
 
Fair Value
Hierarchy
 
September 30, 2016
 
December 31, 2015
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
238,664

 
$
238,664

 
$
243,575

 
$
243,575

Interest bearing deposits with banks
Level 1
 
160,462

 
160,462

 
170,225

 
170,225

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
Level 1
 
138,866

 
154,042

 
138,978

 
149,483

U.S. government agency securities
Level 2
 
11,549

 
12,106

 
12,859

 
13,130

Obligations of states and political subdivisions
Level 2
 
568,212

 
595,525

 
504,865

 
527,263

Residential mortgage-backed securities
Level 2
 
1,030,165

 
1,046,387

 
852,289

 
855,272

Trust preferred securities
Level 2
 
59,800

 
45,726

 
59,785

 
46,437

Corporate and other debt securities
Level 2
 
36,559

 
38,196

 
27,609

 
29,454

Total investment securities held to maturity
 
 
1,845,151

 
1,891,982

 
1,596,385

 
1,621,039

Net loans
Level 3
 
16,523,438

 
16,511,137

 
15,936,929

 
15,824,475

Accrued interest receivable
Level 1
 
63,815

 
63,815

 
63,554

 
63,554

Federal Reserve Bank and Federal Home Loan Bank stock (1)
Level 1
 
162,584

 
162,584

 
145,068

 
145,068

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
Level 1
 
13,852,302

 
13,852,302

 
13,095,647

 
13,095,647

Deposits with stated maturities
Level 2
 
3,119,881

 
3,148,902

 
3,157,904

 
3,203,389

Short-term borrowings
Level 1
 
1,433,356

 
1,433,356

 
1,076,991

 
1,076,991

Long-term borrowings
Level 2
 
1,450,818

 
1,612,654

 
1,810,728

 
1,945,741

Junior subordinated debentures issued to capital trusts
Level 2
 
41,536

 
43,751

 
41,414

 
44,127

Accrued interest payable (2)
Level 1
 
9,931

 
9,931

 
13,110

 
13,110

 
(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

19



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 loans 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 Bank and FHLB stock are non-marketable equity securities and are reported at their redeemable carrying amounts, which approximate 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 FHLB borrowings (and from time to time, federal funds purchased) 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 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.


20



Note 7. Investment Securities

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at September 30, 2016 and December 31, 2015 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
September 30, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,866

 
$
15,176

 
$
—

 
$
154,042

U.S. government agency securities
11,549

 
557

 
—

 
12,106

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
192,735

 
13,353

 
—

 
206,088

Municipal bonds
375,477

 
13,960

 
—

 
389,437

Total obligations of states and political subdivisions
568,212

 
27,313

 
—

 
595,525

Residential mortgage-backed securities
1,030,165

 
17,642

 
(1,420
)
 
1,046,387

Trust preferred securities
59,800

 
28

 
(14,102
)
 
45,726

Corporate and other debt securities
36,559

 
1,637

 
—

 
38,196

Total investment securities held to maturity
$
1,845,151

 
$
62,353

 
$
(15,522
)
 
$
1,891,982

December 31, 2015
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,978

 
$
10,505

 
$
—

 
$
149,483

U.S. government agency securities
12,859

 
271

 
—

 
13,130

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
194,547

 
10,538

 
(10
)
 
205,075

Municipal bonds
310,318

 
11,955

 
(85
)
 
322,188

Total obligations of states and political subdivisions
504,865

 
22,493

 
(95
)
 
527,263

Residential mortgage-backed securities
852,289

 
11,018

 
(8,035
)
 
855,272

Trust preferred securities
59,785

 
36

 
(13,384
)
 
46,437

Corporate and other debt securities
27,609

 
1,894

 
(49
)
 
29,454

Total investment securities held to maturity
$
1,596,385

 
$
46,217

 
$
(21,563
)
 
$
1,621,039


21



The age of unrealized losses and fair value of related securities held to maturity at September 30, 2016 and December 31, 2015 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, 2016
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
185,774

 
$
(867
)
 
$
128,211

 
$
(553
)
 
$
313,985

 
$
(1,420
)
Trust preferred securities
—

 
—

 
44,344

 
(14,102
)
 
44,344

 
(14,102
)
Total
$
185,774

 
$
(867
)
 
$
172,555

 
$
(14,655
)
 
$
358,329

 
$
(15,522
)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
6,837

 
$
(5
)
 
$
1,965

 
$
(5
)
 
$
8,802

 
$
(10
)
Municipal bonds
8,814

 
(72
)
 
10,198

 
(13
)
 
19,012

 
(85
)
Total obligations of states and political subdivisions
15,651

 
(77
)
 
12,163

 
(18
)
 
27,814

 
(95
)
Residential mortgage-backed securities
244,440

 
(2,916
)
 
162,756

 
(5,119
)
 
407,196

 
(8,035
)
Trust preferred securities
—

 
—

 
45,047

 
(13,384
)
 
45,047

 
(13,384
)
Corporate and other debt securities
2,951

 
(49
)
 
—

 
—

 
2,951

 
(49
)
Total
$
263,042

 
$
(3,042
)
 
$
219,966

 
$
(18,521
)
 
$
483,008

 
$
(21,563
)

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. Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 52 at September 30, 2016 and 74 at December 31, 2015.

The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at September 30, 2016 mainly related to certain investment grade securities issued by Ginnie Mae.
The unrealized losses existing for more than twelve months for trust preferred securities at September 30, 2016 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 September 30, 2016.
Management does not believe that any individual unrealized loss as of September 30, 2016 included in the table above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates and market volatility, 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, 2016, 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 $860.6 million.

22



The contractual maturities of investments in debt securities held to maturity at September 30, 2016 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, 2016
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
85,384

 
$
85,388

Due after one year through five years
181,107

 
192,968

Due after five years through ten years
369,454

 
398,494

Due after ten years
179,041

 
168,745

Residential mortgage-backed securities
1,030,165

 
1,046,387

Total investment securities held to maturity
$
1,845,151

 
$
1,891,982

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 6.5 years at September 30, 2016.


23



Available for Sale
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at September 30, 2016 and December 31, 2015 were as follows: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
September 30, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
51,025

 
$
766

 
$
—

 
$
51,791

U.S. government agency securities
23,764

 
339

 
(6
)
 
24,097

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
42,466

 
1,091

 
(40
)
 
43,517

Municipal bonds
80,155

 
1,939

 
(321
)
 
81,773

Total obligations of states and political subdivisions
122,621

 
3,030

 
(361
)
 
125,290

Residential mortgage-backed securities
958,531

 
11,021

 
(2,914
)
 
966,638

Trust preferred securities*
10,231

 
—

 
(2,075
)
 
8,156

Corporate and other debt securities
79,148

 
1,623

 
(204
)
 
80,567

Equity securities
20,522

 
445

 
(797
)
 
20,170

Total investment securities available for sale
$
1,265,842

 
$
17,224

 
$
(6,357
)
 
$
1,276,709

December 31, 2015
 
 
 
 
 
 
 
U.S. Treasury securities
$
551,173

 
$
4

 
$
(1,704
)
 
$
549,473

U.S. government agency securities
29,316

 
665

 
(18
)
 
29,963

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
44,285

 
196

 
(67
)
 
44,414

Municipal bonds
80,717

 
209