Edgar Filing: VALLEY NATIONAL BANCORP

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, 2018



¨	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 every Interactive Data File required to be submitted 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 such files.) Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):



Large accelerated filer	x	Accelerated filer	¨	Emerging growth company	¨

Non-accelerated filer	¨			Smaller reporting company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the

Exchange Act. ¨

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 331,491,620 shares were outstanding as of November 7, 2018

TABLE OF CONTENTS



		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition as of September 30, 2018 and December 31, 2017	2
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017	3
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	5
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	82

Item 4.	Controls and Procedures	82

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	84

Item 1A.	Risk Factors	84

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	84

Item 6.	Exhibits	84

SIGNATURES		85

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except for share data)



	September 30, 2018			December 31, 2017
Assets	(Unaudited)
Cash and due from banks	$	262,653		$	243,310
Interest bearing deposits with banks	93,726			172,800
Investment securities:
Held to maturity (fair value of $2,016,354 at September 30, 2018 and $1,837,620 at December 31, 2017)	2,072,363			1,842,691
Available for sale	1,749,001			1,493,905
Total investment securities	3,821,364			3,336,596
Loans held for sale, at fair value	31,675			15,119
Loans	24,111,290			18,331,580
Less: Allowance for loan losses	(144,963		)	(120,856		)
Net loans	23,966,327			18,210,724
Premises and equipment, net	341,060			287,705
Bank owned life insurance	438,238			386,079
Accrued interest receivable	92,666			73,990
Goodwill	1,085,710			690,637
Other intangible assets, net	80,771			42,507
Other assets	667,758			542,839
Total Assets	$	30,881,948		$	24,002,306
Liabilities
Deposits:
Non-interest bearing	$	6,135,001		$	5,224,928
Interest bearing:
Savings, NOW and money market	11,036,700			9,365,013
Time	5,416,571			3,563,521
Total deposits	22,588,272			18,153,462
Short-term borrowings	2,968,431			748,628
Long-term borrowings	1,728,805			2,315,819
Junior subordinated debentures issued to capital trusts	55,283			41,774
Accrued expenses and other liabilities	238,221			209,458
Total Liabilities	27,579,012			21,469,141
Shareholders’ Equity
Preferred stock, no par value; authorized 50,000,000:
Series A (4,600,000 shares issued at September 30, 2018 and December 31, 2017)	111,590			111,590
Series B (4,000,000 shares issued at September 30, 2018 and December 31, 2017)	98,101			98,101
Common stock (no par value, authorized 450,000,000 shares; issued 331,622,970 shares at September 30, 2018 and 264,498,643 shares at December 31, 2017)	116,154			92,727
Surplus	2,793,158			2,060,356
Retained earnings	262,368			216,733
Accumulated other comprehensive loss	(76,944		)	(46,005		)
Treasury stock, at cost (121,546 common shares at September 30, 2018 and 29,792 common shares at December 31, 2017)	(1,491		)	(337		)
Total Shareholders’ Equity	3,302,936			2,533,165
Total Liabilities and Shareholders’ Equity	$	30,881,948		$	24,002,306

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except for share data)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Interest Income
Interest and fees on loans	$	265,870		$	185,864	$	751,146		$	541,937
Interest and dividends on investment securities:
Taxable	21,362			17,922		64,907			54,439
Tax-exempt	5,023			3,752		16,383			11,726
Dividends	3,981			2,657		9,648			6,945
Interest on federal funds sold and other short-term investments	805			546		2,570			1,156
Total interest income	297,041			210,741		844,654			616,203
Interest Expense
Interest on deposits:
Savings, NOW and money market	28,775			15,641		75,848			38,538
Time	20,109			10,852		51,360			30,571
Interest on short-term borrowings	15,193			5,161		31,838			14,578
Interest on long-term borrowings and junior subordinated debentures	16,164			15,142		50,458			41,883
Total interest expense	80,241			46,796		209,504			125,570
Net Interest Income	216,800			163,945		635,150			490,633
Provision for credit losses	6,552			1,640		24,642			7,742
Net Interest Income After Provision for Credit Losses	210,248			162,305		610,508			482,891
Non-Interest Income
Trust and investment services	3,143			3,062		9,635			8,606
Insurance commissions	3,646			4,519		11,493			13,938
Service charges on deposit accounts	6,597			5,558		20,529			16,136
(Losses) gains on securities transactions, net	(79		)	6		(880		)	5
Fees from loan servicing	2,573			1,895		6,841			5,541
Gains on sales of loans, net	3,748			5,520		18,143			14,439
Bank owned life insurance	2,545			1,541		6,960			5,705
Other	6,865			4,896		26,637			17,177
Total non-interest income	29,038			26,997		99,358			81,547
Non-Interest Expense
Salary and employee benefits expense	80,778			69,286		253,014			198,777
Net occupancy and equipment expense	26,295			22,756		81,120			68,400
FDIC insurance assessment	7,421			4,603		20,963			14,658
Amortization of other intangible assets	4,697			2,498		13,607			7,596
Professional and legal fees	6,638			11,110		29,022			20,107
Amortization of tax credit investments	5,412			8,389		15,156			21,445
Telecommunication expense	3,327			2,464		9,936			7,830
Other	17,113			11,459		52,531			33,943
Total non-interest expense	151,681			132,565		475,349			372,756
Income Before Income Taxes	87,605			56,737		234,517			191,682
Income tax expense	18,046			17,088		50,191			55,873
Net Income	$	69,559		$	39,649	$	184,326		$	135,809
Dividends on preferred stock	3,172			2,683		9,516			6,277
Net Income Available to Common Shareholders	$	66,387		$	36,966	$	174,810		$	129,532
Earnings Per Common Share:
Basic	$	0.20		$	0.14	$	0.53		$	0.49
Diluted	0.20			0.14		0.53			0.49
Cash Dividends Declared per Common Share	0.11			0.11		0.33			0.33
Weighted Average Number of Common Shares Outstanding:
Basic	331,486,500			264,058,174		331,180,213			263,938,786
Diluted	333,000,242			264,936,220		332,694,080			264,754,845

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net income	$	69,559		$	39,649		$	184,326		$	135,809
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale securities
Net (losses) gains arising during the period	(8,675		)	1,457			(36,065		)	4,660
Less reclassification adjustment for net losses (gains) included in net income	52			(4		)	630			(4		)
Total	(8,623		)	1,453			(35,435		)	4,656
Non-credit impairment losses on available for sale securities
Net change in non-credit impairment losses on securities	(8		)	(223		)	(64		)	(89		)
Less reclassification adjustment for accretion of credit impairment losses included in net income	5			(40		)	1			(166		)
Total	(3		)	(263		)	(63		)	(255		)
Unrealized gains and losses on derivatives (cash flow hedges)
Net gains (losses) on derivatives arising during the period	221			198			2,636			(548		)
Less reclassification adjustment for net losses included in net income	472			1,132			2,127			3,963
Total	693			1,330			4,763			3,415
Defined benefit pension plan
Amortization of net loss	113			59			337			177
Total other comprehensive (loss) income	(7,820		)	2,579			(30,398		)	7,993
Total comprehensive income	$	61,739		$	42,228		$	153,928		$	143,802

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net income	$	184,326		$	135,809
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,367			18,408
Stock-based compensation	15,840			9,563
Provision for credit losses	24,642			7,742
Net amortization of premiums and accretion of discounts on securities and borrowings	26,262			17,476
Amortization of other intangible assets	13,607			7,596
Losses (gains) on securities transactions, net	880			(5		)
Proceeds from sales of loans held for sale	591,583			484,102
Gains on sales of loans, net	(18,143		)	(14,439		)
Originations of loans held for sale	(307,623		)	(201,393		)
Losses on sales of assets, net	2,122			359
Net change in:
Cash surrender value of bank owned life insurance	(6,960		)	(5,705		)
Accrued interest receivable	(6,553		)	(5,247		)
Other assets	(39,120		)	(7,052		)
Accrued expenses and other liabilities	(5,941		)	(17,465		)
Net cash provided by operating activities	495,289			429,749
Cash flows from investing activities:
Net loan originations and purchases	(2,324,977		)	(1,200,913		)
Investment securities held to maturity:
Purchases	(220,192		)	(127,318		)
Maturities, calls and principal repayments	195,448			219,967
Investment securities available for sale:
Purchases	(239,226		)	(293,788		)
Sales	38,625			—
Maturities, calls and principal repayments	194,312			144,221
Death benefit proceeds from bank owned life insurance	2,546			10,661
Proceeds from sales of real estate property and equipment	6,665			7,717
Purchases of real estate property and equipment	(16,880		)	(13,341		)
Cash and cash equivalents acquired in acquisition	156,612			—
Net cash used in investing activities	(2,207,067		)	(1,252,794		)
Cash flows from financing activities:
Net change in deposits	869,967			(417,942		)
Net change in short-term borrowings	1,569,824			401,749
Proceeds from issuance of long-term borrowings, net	—			965,000
Repayments of long-term borrowings	(675,682		)	(185,000		)
Proceeds from issuance of preferred stock, net	—			98,101
Cash dividends paid to preferred shareholders	(9,516		)	(6,277		)
Cash dividends paid to common shareholders	(102,414		)	(84,143		)
Purchase of common shares to treasury	(2,780		)	(2,284		)
Common stock issued, net	2,648			5,166
Net cash provided by financing activities	1,652,047			774,370
Net change in cash and cash equivalents	(59,731		)	(48,675		)
Cash and cash equivalents at beginning of year	416,110			392,501
Cash and cash equivalents at end of period	$	356,379		$	343,826

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

	Nine Months Ended September 30,
	2018		2017
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings	$	205,821	$	125,433
Federal and state income taxes	47,217		27,003
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned	$	697	$	7,147
Transfer of loans to loans held for sale	289,633		225,541
Acquisition:
Non-cash assets acquired:
Investment securities held to maturity	$	214,217	$	—
Investment securities available for sale	308,385		—
Loans	3,735,162		—
Premises and equipment	62,066		—
Bank owned life insurance	49,052		—
Accrued interest receivable	12,123		—
Goodwill	395,073		—
Other intangible assets	45,906		—
Other assets	100,836		—
Total non-cash assets acquired	$	4,922,820	$	—
Liabilities assumed:
Deposits	$	3,564,843	$	—
Short-term borrowings	649,979		—
Long-term borrowings	87,283		—
Junior subordinated debentures issued to capital trusts	13,249		—
Accrued expenses and other liabilities	26,848		—
Total liabilities assumed	4,342,202		—
Net non-cash assets acquired	$	580,618	$	—
Net cash and cash equivalents acquired in acquisition	$	156,612	$	—
Common stock issued in acquisition	$	737,230	$	—

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey corporation ("Valley"), include the accounts of its commercial bank subsidiary, Valley National Bank (the “Bank”), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities. Certain prior period amounts have been reclassified to conform to the current presentation.

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, 2018 and for all periods presented have been made. The results of operations for the three and nine months ended on September 30, 2018 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; estimated cash flows from purchased credit impaired loans; the evaluation of goodwill, 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.

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, 2017.

Note 2. Business Combinations

On January 1, 2018, Valley completed its acquisition of USAmeriBancorp, Inc. (USAB) and its wholly-owned subsidiary, USAmeriBank, headquartered in Clearwater, Florida. USAB had approximately $5.1 billion in assets, $3.7 billion in net loans and $3.6 billion in deposits, after purchase accounting adjustments, and maintained a branch network of 29 offices. The acquisition represents a significant addition to Valley’s Florida franchise, specifically in the Tampa Bay market. The acquisition also brought Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where Valley now operates 15 of its branches. The common shareholders of USAB received 6.1 shares of Valley common stock for each USAB share they owned. The total consideration for the acquisition was approximately $737 million.

Merger expenses totaled $1.3 million and $18.1 million for the three and nine months ended September 30, 2018, respectively, which primarily related to salary and employee benefits and other expense included in non-interest expense on the consolidated statements of income.

The following table sets forth assets acquired and liabilities assumed in the USAB acquisition, at their estimated fair values as of the closing date of the transaction:



	January 1, 2018
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	156,612
Investment securities held to maturity	214,217
Investment securities available for sale	308,385
Loans	3,735,162
Premises and equipment	62,066
Bank owned life insurance	49,052
Accrued interest receivable	12,123
Goodwill	395,073
Other intangible assets	45,906
Other assets:
Deferred taxes	11,400
Other real estate owned	4,073
FHLB and FRB stock	38,809
Tax credit investments	20,138
Other	26,416
Total other assets	100,836
Total assets acquired	$	5,079,432
Liabilities assumed:
Deposits:
Non-interest bearing	$	887,083
Savings, NOW and money market	1,678,115
Time	999,645
Total deposits	3,564,843
Short-term borrowings	649,979
Long-term borrowings	87,283
Junior subordinated debentures issued to capital trusts	13,249
Accrued expenses and other liabilities	26,848
Total liabilities assumed	$	4,342,202
Common stock issued in acquisition	737,230

The determination of the fair value of the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information (existing at the date of closing) relative to closing date fair values becomes available. During the third quarter of 2018, Valley revised the estimated fair values of the acquired assets as of the acquisition date as the result of additional information obtained. The adjustments related to the fair value of certain purchased credit-impaired (PCI) loans and deferred tax assets which, on a combined basis, resulted in a $6.8 million increase in goodwill (see Note 10 for amount of goodwill as allocated to Valley's business segments). While Valley continues to analyze the acquired assets and liabilities, it does not expect any significant future adjustments to the recorded amounts at January 1, 2018.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the USAB acquisition.

Cash and cash equivalents. The estimated fair values of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term maturities.

Investment securities. The estimated fair values of the investment securities were calculated utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service when available, or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. The prices are 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 reviewed 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.

Loans. The acquired loan portfolio was segregated into categories for valuation purposes primarily based on loan type (commercial, commercial real estate, residential and consumer) and credit risk rating. The estimated fair values were computed by discounting the expected cash flows from the respective portfolios. Management estimated the contractual cash flows expected to be collected at the acquisition date by using valuation models that incorporated estimates of current key assumptions, such as prepayment speeds, default rates, and loss severity rates. Prepayment assumptions were developed by reference to recent or historical prepayment speeds observed for loans with similar underlying characteristics. Prepayment assumptions were influenced by many factors, including, but not limited to, forward interest rates, loan and collateral types, payment status, and current loan-to-value ratios. Default and loss severity rates were developed by reference to recent or historical default and loss rates observed for loans with similar underlying characteristics. Default and loss severity assumptions were influenced by many factors, including, but not limited to, underwriting processes and documentation, vintages, collateral types, collateral locations, estimated collateral values, loan-to-value ratios, and debt-to-income ratios.

The expected cash flows from the acquired loan portfolios were discounted to present value based on the estimated market rates. The market rates were estimated using a buildup approach based on the following components: funding cost, servicing cost and consideration of liquidity premium. The funding cost estimated for the loans was based on a mix of wholesale borrowing and equity funding. The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

The difference between the fair value and the expected cash flows from the acquired loans will be accreted to interest income over the remaining term of the loans in accordance with Accounting Standards Codification (ASC)

Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” See Note 8 for further details.

Other intangible assets. Other intangible assets mostly consisting of core deposit intangibles (CDI) are measures of the value of non-maturity checking, savings, NOW and money market deposits that are acquired in a business combination. The fair value of the CDI is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding. The CDI is amortized over an estimated useful life of 10 years to approximate the existing deposit relationships acquired.

Deposits. The fair values of deposit liabilities with no stated maturity (i.e., non-interest bearing accounts and savings, NOW and money market accounts) are equal to the carrying amounts payable on demand. The fair values of certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered on deposits with similar characteristics and remaining maturities.

Short-term borrowings. The short-term borrowings consist of securities sold under agreements to repurchase and FHLB advances. The carrying amounts approximate their fair values because they frequently re-price to a market rate.

Long-term borrowings. The fair values of long-term borrowings consisting of subordinated notes and FHLB advances were estimated by discounting the estimated future cash flows using market discount rates for borrowings with similar characteristics, terms and remaining maturities.

Junior subordinated debentures issued to capital trusts. There is no active market for the trust preferred

securities issued by Aliant Statutory Trust II; therefore, the fair value of junior subordinated debentures was estimated utilizing the income approach. Valuation methods under the income approach include those methods that provide for the direct capitalization of earnings estimates, as well as valuation methods calling for the forecasting of future benefits (earnings or cash flows) and then discounting those benefits to the present at an appropriate discount rate. Under the income approach, the expected cash flows over the remaining estimated life were discounted to the present at an appropriate discount rate.

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, 2018 and 2017:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands, except for share data)
Net income available to common shareholders	$	66,387	$	36,966	$	174,810	$	129,532
Basic weighted average number of common shares outstanding	331,486,500		264,058,174		331,180,213		263,938,786
Plus: Common stock equivalents	1,513,742		878,046		1,513,867		816,059
Diluted weighted average number of common shares outstanding	333,000,242		264,936,220		332,694,080		264,754,845
Earnings per common share:
Basic	$	0.20	$	0.14	$	0.53	$	0.49
Diluted	0.20		0.14		0.53		0.49

Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of 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

warrants and, to a lesser extent, common stock options equaled approximately 2.9 million and 3.3 million shares for the three and nine months ended September 30, 2018 and 2017, respectively.

Note 4. Accumulated Other Comprehensive Loss

The following tables present the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2018:



	Components of Accumulated Other Comprehensive Loss												Total Accumulated Other Comprehensive Loss
	Unrealized Gains and Losses on Available for Sale (AFS) Securities			Non-credit Impairment Losses on AFS Securities			Unrealized Gains and (Losses) on Derivatives			Defined Benefit Pension Plan			Total Accumulated Other Comprehensive Loss
	(in thousands)
Balance at June 30, 2018	$	(39,296	)	$	(440	)	$	(4,329	)	$	(25,059	)	$	(69,124	)
Other comprehensive (loss) income before reclassifications	(8,675		)	(8		)	221			—			(8,462		)
Amounts reclassified from other comprehensive (loss) income	52			5			472			113			642
Other comprehensive (loss) income, net	(8,623		)	(3		)	693			113			(7,820		)
Balance at September 30, 2018	$	(47,919	)	$	(443	)	$	(3,636	)	$	(24,946	)	$	(76,944	)



	Components of Accumulated Other Comprehensive Loss												Total Accumulated Other Comprehensive Loss
	Unrealized Gains and Losses on Available for Sale (AFS) Securities			Non-credit Impairment Losses on AFS Securities			Unrealized Gains and (Losses) on Derivatives			Defined Benefit Pension Plan			Total Accumulated Other Comprehensive Loss
	(in thousands)
Balance at December 31, 2017	$	(12,004	)	$	(380	)	$	(8,338	)	$	(25,283	)	$	(46,005	)
Reclassification due to the adoption of ASU No. 2016-01	(480		)	—			—			—			(480		)
Reclassification due to the adoption of ASU No. 2017-12	—			—			(61		)	—			(61		)
Balance at January 1, 2018	(12,484		)	(380		)	(8,399		)	(25,283		)	(46,546		)
Other comprehensive (loss) income before reclassification	(36,065		)	(64		)	2,636			—			(33,493		)
Amounts reclassified from other comprehensive (loss) income	630			1			2,127			337			3,095
Other comprehensive (loss) income, net	(35,435		)	(63		)	4,763			337			(30,398		)
Balance at September 30, 2018	$	(47,919	)	$	(443	)	$	(3,636	)	$	(24,946	)	$	(76,944	)

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, 2018 and 2017:



	Amounts Reclassified from Accumulated Other Comprehensive Loss
	Three Months Ended September 30,						Nine Months Ended September 30,
Components of Accumulated Other Comprehensive Loss	2018			2017			2018			2017			Income Statement Line Item
	(in thousands)
Unrealized (losses) gains on AFS securities before tax	$	(79	)	$	6		$	(880	)	$	5		(Losses) gains on securities transactions, net
Tax effect	27			(2		)	250			(1		)
Total net of tax	(52		)	4			(630		)	4
Non-credit impairment losses on AFS securities before tax:
Accretion of credit loss impairment due to an increase in expected cash flows	(7		)	67			(1		)	283			Interest and dividends on investment securities (taxable)
Tax effect	2			(27		)	—			(117		)
Total net of tax	(5		)	40			(1		)	166
Unrealized losses on derivatives (cash flow hedges) before tax	(660		)	(1,930		)	(2,977		)	(6,762		)	Interest expense
Tax effect	188			798			850			2,799
Total net of tax	(472		)	(1,132		)	(2,127		)	(3,963		)
Defined benefit pension plan:
Amortization of net loss	(157		)	(101		)	(471		)	(303		)	*
Tax effect	44			42			134			126
Total net of tax	(113		)	(59		)	(337		)	(177		)
Total reclassifications, net of tax	$	(642	)	$	(1,147	)	$	(3,095	)	$	(3,970	)



*	Amortization of net loss is included in the computation of net periodic pension cost recognized within other non-interest expense.

Note 5. New Authoritative Accounting Guidance

New Accounting Guidance Adopted in 2018

Accounting Standards Update (ASU) No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" eliminates, amends and adds disclosure requirements for fair value measurements. In addition, the amendments eliminate the term "at a minimum" from the disclosure requirements under Topic 820 to promote an appropriate exercise of discretion to consider materiality when evaluating required disclosures. ASU No. 2018-13 is effective for all entities for reporting periods beginning January 1, 2020 with early adoption permitted. Early adoption is allowed for any period for which the financial statements have not been issued yet or have not been made available for issuance. As a result, Valley elected to early adopt ASU No. 2018-13 for the third quarter ended September 30, 2018. The adoption resulted in the removal of Level 3 assets roll-forward and qualitative and quantitative disclosures regarding valuation techniques and unobservable inputs used to measure the fair value of Level 3 assets from Note 6 due to the immaterial amount of such assets at September 30, 2018.

ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" amends the hedge accounting recognition and presentation requirements to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU No. 2017-12 is effective for the annual and interim reporting periods beginning January 1, 2019 with early adoption permitted. Valley elected to early adopt ASU No. 2017-12 for annual and interim reporting periods beginning January 1, 2018. The adoption of ASU No. 2017-12 required a modified retrospective method to be used by Valley and resulted in an

immaterial cumulative-effect adjustment to retained earnings as of January 1, 2018 to eliminate the separate measurement of ineffectiveness from accumulated comprehensive income (see Note 4).

ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" requires service cost to be reported in the same financial statement line item(s) as other current employee compensation costs. All other components of expense must be presented separately from service cost, and outside any subtotal of income from operations. Only the service cost component of expense is eligible to be capitalized. ASU No. 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. ASU No. 2017-07 was effective for Valley for its annual and interim reporting periods beginning January 1, 2018. ASU No. 2017-07 did not have a significant impact on the presentation of Valley's consolidated financial statements.

ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory”. Under current GAAP, the tax effects of intercompany sales are deferred until the transferred asset is sold to a third party or otherwise recovered through amortization. This is an exception to the accounting for income taxes that generally requires recognition of current and deferred income taxes. ASU No. 2016-16 eliminates the exception for intercompany sales of assets. ASU No. 2016-16 was effective for Valley on January 1, 2018 and it was applied using the modified retrospective method. As a result, Valley recorded a $15.4 million cumulative effect adjustment that reduced retained earnings effective January 1, 2018 to record net deferred tax liabilities related to pre-existing transactions.

ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" clarifies how certain cash receipts and cash payments should be classified and presented in the statement of cash flows. ASU No. 2016-15 includes guidance on eight specific cash flow issues with the objective of reducing the existing diversity of practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 was effective for Valley for annual and interim reporting periods beginning January 1, 2018 and it was applied using a retrospective transition method to each period presented. ASU No. 2016-15 did not have a significant impact on the presentation of Valley's consolidated statements of cash flows.

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, (ii) 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 with changes in value under either of these methods recognized in net income, (iii) entities that record financial liabilities at fair value due to a fair value option election must recognize changes in fair value caused by a change in instrument-specific credit risk in other comprehensive income, (iv) entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities, and (v) entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU No. 2016-01 also eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet (see Note 6). ASU No. 2016-01 was effective for Valley for reporting periods beginning January 1, 2018 and did not have a material effect on Valley’s consolidated financial statements.

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related updates modify the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. The updates also require new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. Valley adopted the guidance on January 1, 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP. Accordingly, the new revenue recognition standard was not expected to have a material impact on Valley’s

consolidated financial statements. Valley has completed its review of non-interest income revenue streams within the scope of the guidance and an assessment of its revenue contracts and did not identify material changes related to the timing or amount of revenue recognition. Therefore, Valley did not record an adjustment to opening retained earnings at January 1, 2018 due to the adoption of this standard. Valley has also concluded that additional disaggregation of revenue categories (as reported herein and consistent with the Annual Report on Form 10-K for the year ended December 31, 2017) that are within the scope of the new guidance is not necessary. Qualitative disclosures regarding such revenues, as required by the new guidance, are presented in Note 12.

New Accounting Guidance Not Yet Adopted

ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” requires implementation costs incurred in cloud computing arrangements which do not include a software license to be deferred and expensed over the term of the hosting arrangement. The implementation costs should be deferred using the Topic 350-40 “Internal-Use Software” model to determine which implementation costs are eligible to be capitalized based on the project stage and nature of the cost. The expense should be presented in the same income statement line item as the fees associated with the cloud computing arrangement. ASU No. 2018-15 will be effective for public entities annual and interim reporting periods beginning January 1, 2020 with early adoption permitted. ASU No. 2018-15 should be applied either retrospectively or prospectively. However, prospective transition would be applied to any eligible costs incurred on or after the adoption date related to arrangements entered before and after the adoption date. During the fourth quarter of 2018, Valley adopted ASU No. 2017-08 on a prospective basis. The adoption of ASU No. 2017-08 is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities" shortens the amortization period for certain callable debt securities held at a premium. ASU No. 2017-08 requires the premium to be amortized to the earliest call date. The accounting for securities held at a discount does not change and the discount continues to be amortized as an adjustment to yield over the contractual life (to maturity) of the instrument. ASU No. 2017-08 is effective for Valley for the annual and interim reporting periods beginning January 1, 2019 with early adoption permitted, and is to be applied using the modified retrospective method. Additionally, in the period of adoption, entities should provide disclosures about a change in accounting principle. ASU No. 2017-08 is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test guidance) to measure a goodwill impairment charge. Instead, an entity will be required to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1 of the current guidance). In addition, ASU No. 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. However, an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for Valley for its annual or any interim goodwill impairment tests in fiscal years beginning January 1, 2020 and is not expected to have a significant impact on the presentation of Valley's consolidated financial statements. Early adoption is permitted for annual and interim goodwill impairment testing dates.

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. 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 all expected losses over the lives of the assets 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 on Valley’s consolidated financial statements. Valley’s implementation effort is managed through several cross-functional working groups. These groups continue to evaluate the requirements of the new standard, assess its impact on current operational processes, and develop loss models that accurately project lifetime expected loss estimates. Valley expects that the adoption of ASU No. 2016-13 will result in an increase in its allowance for credit losses due to several factors, including: (i) the allowance related to Valley loans will increase to include credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions, (ii) the nonaccretable difference (as defined in Note 8) on PCI loans will be recognized as an allowance, offset by an increase in the carrying value of the related loans, and (iii) an allowance will be established for estimated credit losses on investment securities classified as held to maturity. The extent of the increase is under evaluation, but will depend upon the nature and characteristics of Valley's loan and investment portfolios at the adoption date, and the economic conditions and forecasts at that date.

ASU No. 2016-02, “Leases (Topic 842)” and subsequent related updates require 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 early adoption permitted. Valley expects to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019 under the new optional transition method provided by ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements". The comparative prior periods reported in the financial statements in the period of adoption will continue to be presented in accordance with current GAAP in Topic 840. In addition, the amendments in ASU No. 2018-11 provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component. Those components can be accounted for as a single component if the non-lease components would otherwise be accounted for under the new revenue guidance (Topic 606) when certain criteria are met.

Overall, management continues to evaluate the impact of Topic 842 on Valley’s consolidated financial statements and is presently evaluating all of its known leases for compliance with the new lease accounting guidance. Management has completed an initial review of Valley's contractual arrangements for embedded leases, and is currently validating the results of this review, including the accumulated lease data necessary to apply the new guidance. Valley expects a gross-up of its consolidated statements of financial condition as a result of recognizing lease liabilities and right of use assets; the extent of such gross-up is under evaluation. Based upon current estimates, Valley expects to record right of use assets ranging from $200 million to $250 million (net of the reversal of the current deferred rent liability) and lease obligations ranging from $230 million to $280 million as of January 1, 2019. The estimated range of additional right of use assets is expected to negatively impact total risk-based capital by approximately 10 to 12 basis points and tier 1 capital by approximately 7 to 9 basis points. Actual results of our implementation may differ from the current estimated ranges due to several factors, including, but not limited to changes in our incremental borrowing rates at the date of adoption, expectations regarding exercise of certain lease renewal periods, lease modifications and early terminations, new leases and contracts, or the discovery of additional existing or embedded leases during the fourth quarter of 2018.

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.



	Level 3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Assets and Liabilities Measured at Fair Value on a Recurring and Non-Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at September 30, 2018 and December 31, 2017. The assets presented under “nonrecurring fair value measurements” in the tables 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, 2018		Fair Value Measurements at Reporting Date Using:
	September 30, 2018		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	$	48,363	$	48,363	$	—	$	—
U.S. government agency securities	36,513		—		36,513		—
Obligations of states and political subdivisions	205,237		—		205,237		—
Residential mortgage-backed securities	1,412,849		—		1,406,671		6,178
Trust preferred securities	1,590		—		1,590		—
Corporate and other debt securities	44,449		7,587		36,862		—
Total available for sale	1,749,001		55,950		1,686,873		6,178
Loans held for sale ⁽¹⁾	31,675		—		31,675		—
Other assets ⁽²⁾	28,539		—		28,539		—
Total assets	$	1,809,215	$	55,950	$	1,747,087	$	6,178
Liabilities
Other liabilities ⁽²⁾	$	44,917	$	—	$	44,917	$	—
Total liabilities	$	44,917	$	—	$	44,917	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	36,957	$	—	$	—	$	36,957
Loan servicing rights	373		—		—		373
Foreclosed assets	4,450		—		—		4,450
Total	$	41,780	$	—	$	—	$	41,780



			Fair Value Measurements at Reporting Date Using:
	December 31, 2017		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	$	49,642	$	49,642	$	—	$	—
U.S. government agency securities	42,505		—		42,505		—
Obligations of states and political subdivisions	112,884		—		112,884		—
Residential mortgage-backed securities	1,223,295		—		1,215,935		7,360
Trust preferred securities	3,214		—		3,214		—
Corporate and other debt securities	51,164		7,783		43,381		—
Equity securities	11,201		1,382		9,819		—
Total available for sale	1,493,905		58,807		1,427,738		7,360
Loans held for sale ⁽¹⁾	15,119		—		15,119		—
Other assets ⁽²⁾	26,417		—		26,417		—
Total assets	$	1,535,441	$	58,807	$	1,469,274	$	7,360
Liabilities
Other liabilities ⁽²⁾	$	24,330	$	—	$	24,330	$	—
Total liabilities	$	24,330	$	—	$	24,330	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	48,373	$	—	$	—	$	48,373
Loan servicing rights	5,350		—		—		5,350
Foreclosed assets	3,472		—		—		3,472
Total	$	57,195	$	—	$	—	$	57,195


(1)	Represents residential mortgage loans originated for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $31.4 million and $14.8 million at September 30, 2018 and December 31, 2017, respectively.


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


(3)	Excludes PCI loans.

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 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.

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, 2018 and December 31, 2017 based on the short duration these assets were held, and the high credit quality of these loans.

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, 2018 and December 31, 2017), 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, 2018 and December 31, 2017.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

The following valuation techniques were used for certain non-financial assets measured at fair value on a nonrecurring basis, including impaired loans reported at the fair value of the underlying collateral, loan servicing rights and foreclosed 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 may be adjusted based on certain discounting criteria. At September 30, 2018, certain appraisals were discounted based on specific market data by location and property type. During the quarter ended September 30, 2018, 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. There were no impaired collateral dependent loan charge-offs to the allowance for loan losses for the three months ended September 30, 2018 and 2017. The collateral dependent loan charge-offs to the allowance for loan losses were immaterial for the nine months ended September 30, 2018 as compared to $2.1 million for the nine months ended September 30, 2017. At September 30, 2018, collateral dependent impaired loans with a total recorded

investment of $60.2 million were reduced by specific valuation allowance allocations totaling $23.2 million to a reported total net carrying amount of $37.0 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, 2018, 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 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 net recoveries of net impairment charges on its loan servicing rights totaling $48 thousand and $365 thousand for the three and nine months ended September 30, 2018, respectively, and $134 thousand and $185 thousand for the three and nine months ended September 30, 2017, 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. There were no discount adjustments of the appraisals of foreclosed assets at September 30, 2018. At September 30, 2018, foreclosed assets included $4.5 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended September 30, 2018. The foreclosed assets charge-offs to the allowance for the loan losses totaled $267 thousand and $536 thousand for the three months ended September 30, 2018 and 2017, respectively, and $1.5 million and $1.5 million for the nine months ended September 30, 2018 and 2017, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in net losses within non-interest expense of $245 thousand for the three months ended September 30, 2018, and $390 thousand and $290 thousand for the nine months ended September 30, 2018 and 2017, respectively. There were no losses on re-measurement during the three months ended September 30, 2017.

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.

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, 2018 and December 31, 2017 were as follows:



	Fair Value Hierarchy	September 30, 2018				December 31, 2017
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(in thousands)
Financial assets
Cash and due from banks	Level 1	$	262,653	$	262,653	$	243,310	$	243,310
Interest bearing deposits with banks	Level 1	93,726		93,726		172,800		172,800
Investment securities held to maturity:
U.S. Treasury securities	Level 1	138,557		140,269		138,676		145,257
U.S. government agency securities	Level 2	8,846		8,541		9,859		9,981
Obligations of states and political subdivisions	Level 2	596,360		593,423		465,878		477,479
Residential mortgage-backed securities	Level 2	1,259,772		1,211,756		1,131,945		1,118,044
Trust preferred securities	Level 2	37,328		31,153		49,824		40,088
Corporate and other debt securities	Level 2	31,500		31,212		46,509		46,771
Total investment securities held to maturity		2,072,363		2,016,354		1,842,691		1,837,620
Net loans	Level 3	23,966,327		23,104,688		18,210,724		17,562,153
Accrued interest receivable	Level 1	92,666		92,666		73,990		73,990
Federal Reserve Bank and Federal Home Loan Bank stock⁽¹⁾	Level 1	271,905		271,905		178,668		178,668
Financial liabilities
Deposits without stated maturities	Level 1	17,171,701		17,171,701		14,589,941		14,589,941
Deposits with stated maturities	Level 2	5,416,571		5,351,921		3,563,521		3,465,373
Short-term borrowings	Level 1	2,968,431		2,786,568		748,628		679,316
Long-term borrowings	Level 2	1,728,805		1,639,788		2,315,819		2,453,797
Junior subordinated debentures issued to capital trusts	Level 2	55,283		47,715		41,774		37,289
Accrued interest payable ⁽²⁾	Level 1	17,844		17,844		14,161		14,161


(1)	Included in other assets.


(2)	Included in accrued expenses and other liabilities.

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, 2018 and December 31, 2017 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2018
U.S. Treasury securities	$	138,557	$	1,853	$	(141	)	$	140,269
U.S. government agency securities	8,846		—		(305		)	8,541
Obligations of states and political subdivisions:
Obligations of states and state agencies	347,775		3,717		(6,970		)	344,522
Municipal bonds	248,585		2,561		(2,245		)	248,901
Total obligations of states and political subdivisions	596,360		6,278		(9,215		)	593,423
Residential mortgage-backed securities	1,259,772		1,573		(49,589		)	1,211,756
Trust preferred securities	37,328		38		(6,213		)	31,153
Corporate and other debt securities	31,500		47		(335		)	31,212
Total investment securities held to maturity	$	2,072,363	$	9,789	$	(65,798	)	$	2,016,354
December 31, 2017
U.S. Treasury securities	$	138,676	$	6,581	$	—		$	145,257
U.S. government agency securities	9,859		122		—			9,981
Obligations of states and political subdivisions:
Obligations of states and state agencies	244,272		7,083		(1,653		)	249,702
Municipal bonds	221,606		6,199		(28		)	227,777
Total obligations of states and political subdivisions	465,878		13,282		(1,681		)	477,479
Residential mortgage-backed securities	1,131,945		4,842		(18,743		)	1,118,044
Trust preferred securities	49,824		60		(9,796		)	40,088
Corporate and other debt securities	46,509		532		(270		)	46,771
Total investment securities held to maturity	$	1,842,691	$	25,419	$	(30,490	)	$	1,837,620

The age of unrealized losses and fair value of related securities held to maturity at September 30, 2018 and December 31, 2017 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, 2018
U.S. Treasury securities	$	34,660	$	(141	)	$	—	$	—		$	34,660	$	(141	)
U.S. government agency securities	8,541		(305		)	—		—			8,541		(305		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	129,321		(3,414		)	48,862		(3,556		)	178,183		(6,970		)
Municipal bonds	89,065		(2,208		)	528		(37		)	89,593		(2,245		)
Total obligations of states and political subdivisions	218,386		(5,622		)	49,390		(3,593		)	267,776		(9,215		)
Residential mortgage-backed securities	467,711		(9,928		)	662,345		(39,661		)	1,130,056		(49,589		)
Trust preferred securities	—		—			29,761		(6,213		)	29,761		(6,213		)
Corporate and other debt securities	15,386		(114		)	4,779		(221		)	20,165		(335		)
Total	$	744,684	$	(16,110	)	$	746,275	$	(49,688	)	$	1,490,959	$	(65,798	)
December 31, 2017
Obligations of states and political subdivisions:
Obligations of states and state agencies	$	6,342	$	(50	)	$	53,034	$	(1,603	)	$	59,376	$	(1,653	)
Municipal bonds	4,644		(25		)	561		(3		)	5,205		(28		)
Total obligations of states and political subdivisions	10,986		(75		)	53,595		(1,606		)	64,581		(1,681		)
Residential mortgage-backed securities	344,216		(2,357		)	570,969		(16,386		)	915,185		(18,743		)
Trust preferred securities	—		—			38,674		(9,796		)	38,674		(9,796		)
Corporate and other debt securities	9,980		(270		)	—		—			9,980		(270		)
Total	$	365,182	$	(2,702	)	$	663,238	$	(27,788	)	$	1,028,420	$	(30,490	)

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 409 at September 30, 2018 and 152 at December 31, 2017.

The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at September 30, 2018 mostly related to investment grade securities issued by Ginnie Mae and Fannie Mae.

The unrealized losses existing for more than twelve months for trust preferred securities at September 30, 2018 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, 2018.

As of September 30, 2018, 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 $1.2 billion.

The contractual maturities of investments in debt securities held to maturity at September 30, 2018 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, 2018
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	21,825	$	21,850
Due after one year through five years	231,676		233,954
Due after five years through ten years	295,711		300,013
Due after ten years	263,379		248,781
Residential mortgage-backed securities	1,259,772		1,211,756
Total investment securities held to maturity	$	2,072,363	$	2,016,354

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 6.8 years at September 30, 2018