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, 2017
and for all periods presented have been made. The results of operations for the
three and nine
months ended
September 30, 2017
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, 2016
.
On April 27, 2017, Valley's shareholders approved an amendment to Valley's Restated Certificate of Incorporation to increase the authorized shares of common stock and preferred stock to
450,000,000
shares and
50,000,000
shares, respectively.
On August 3, 2017, Valley issued
4.0 million
shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, no par value per share, with a liquidation preference of
$25
per share for aggregate consideration of
$100 million
. Dividends on the preferred stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to
5.50 percent
from the original issuance date to, but excluding, September 30, 2022, and thereafter at a floating rate per annum equal to three-month LIBOR plus a spread of
3.578 percent
. Net proceeds to Valley after deducting underwriting discounts, commissions and offering expenses totaled
$98.1 million
.
Note 2. Business Combinations
On July 26, 2017, Valley announced its entry into a merger agreement with USAmeriBancorp, Inc. (USAB) headquartered in Clearwater, Florida. USAB, largely through its wholly-owned subsidiary, USAmeriBank, has approximately
$4.5 billion
in assets,
$3.6 billion
in net loans and
$3.6 billion
in deposits and maintains a branch network of
30
offices. The acquisition will expand Valley's Florida presence and establish a presence in Alabama. The common shareholders of USAB will receive
6.1
shares of Valley common stock for each USAB share they own, subject to adjustment in the event Valley’s average stock price falls below
$11.50
or rises above
$13.00
prior to closing. Both Valley and USAB have walkaway rights if the volume-weighted average closing price is below
$11.00
and USAB has a walkaway right if the volume-weighted average closing price is above
$13.50
. The transaction is valued at an estimated
$816 million
, based on Valley’s closing stock price on July 25, 2017. The acquisition is expected to close in the first quarter of 2018, and Valley has received all necessary banking regulatory approvals to complete the merger. However, the merger is still subject to a number of conditions, including Valley and USAB shareholder approvals at their respective shareholder meetings to be held on December 14, 2017.
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, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands, except for share data)
|
Net income available to common shareholders
|
$
|
36,966
|
|
|
$
|
41,045
|
|
|
$
|
129,532
|
|
|
$
|
112,665
|
|
Basic weighted average number of common shares outstanding
|
264,058,174
|
|
|
254,473,994
|
|
|
263,938,786
|
|
|
254,310,769
|
|
Plus: Common stock equivalents
|
878,046
|
|
|
466,313
|
|
|
816,059
|
|
|
387,824
|
|
Diluted weighted average number of common shares outstanding
|
264,936,220
|
|
|
254,940,307
|
|
|
264,754,845
|
|
|
254,698,593
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.14
|
|
|
$
|
0.16
|
|
|
$
|
0.49
|
|
|
$
|
0.44
|
|
Diluted
|
0.14
|
|
|
0.16
|
|
|
0.49
|
|
|
0.44
|
|
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
3.3 million
shares for both the
three and nine
months ended
September 30, 2017
and
4.6 million
shares
for both the
three and nine
months ended
September 30, 2016
, respectively.
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, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017
|
$
|
(6,891
|
)
|
|
$
|
(634
|
)
|
|
$
|
(10,379
|
)
|
|
$
|
(18,775
|
)
|
|
$
|
(36,679
|
)
|
Other comprehensive income before reclassifications
|
1,457
|
|
|
(223
|
)
|
|
198
|
|
|
—
|
|
|
1,432
|
|
Amounts reclassified from other comprehensive income
|
(4
|
)
|
|
(40
|
)
|
|
1,132
|
|
|
59
|
|
|
1,147
|
|
Other comprehensive income, net
|
1,453
|
|
|
(263
|
)
|
|
1,330
|
|
|
59
|
|
|
2,579
|
|
Balance at September 30, 2017
|
$
|
(5,438
|
)
|
|
$
|
(897
|
)
|
|
$
|
(9,049
|
)
|
|
$
|
(18,716
|
)
|
|
$
|
(34,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
$
|
(10,094
|
)
|
|
$
|
(642
|
)
|
|
$
|
(12,464
|
)
|
|
$
|
(18,893
|
)
|
|
$
|
(42,093
|
)
|
Other comprehensive income before reclassifications
|
4,660
|
|
|
(89
|
)
|
|
(548
|
)
|
|
—
|
|
|
4,023
|
|
Amounts reclassified from other comprehensive income
|
(4
|
)
|
|
(166
|
)
|
|
3,963
|
|
|
177
|
|
|
3,970
|
|
Other comprehensive income, net
|
4,656
|
|
|
(255
|
)
|
|
3,415
|
|
|
177
|
|
|
7,993
|
|
Balance at September 30, 2017
|
$
|
(5,438
|
)
|
|
$
|
(897
|
)
|
|
$
|
(9,049
|
)
|
|
$
|
(18,716
|
)
|
|
$
|
(34,100
|
)
|
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, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from
Accumulated Other Comprehensive Loss
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
Components of Accumulated Other Comprehensive Loss
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Income Statement Line Item
|
|
|
(in thousands)
|
|
|
Unrealized gains (losses) on AFS securities before tax
|
|
6
|
|
|
$
|
(10
|
)
|
|
5
|
|
|
258
|
|
|
Gains (losses) on securities transactions, net
|
Tax effect
|
|
(2
|
)
|
|
4
|
|
|
(1
|
)
|
|
(96
|
)
|
|
|
Total net of tax
|
|
4
|
|
|
(6
|
)
|
|
4
|
|
|
162
|
|
|
|
Non-credit impairment losses on AFS securities before tax:
|
|
|
|
|
|
|
|
|
|
|
Accretion of credit loss impairment due to an increase in expected cash flows
|
|
67
|
|
|
87
|
|
|
283
|
|
|
576
|
|
|
Interest and dividends on investment securities (taxable)
|
Tax effect
|
|
(27
|
)
|
|
(37
|
)
|
|
(117
|
)
|
|
(240
|
)
|
|
|
Total net of tax
|
|
40
|
|
|
50
|
|
|
166
|
|
|
336
|
|
|
|
Unrealized losses on derivatives (cash flow hedges) before tax
|
|
(1,930
|
)
|
|
(3,578
|
)
|
|
(6,762
|
)
|
|
(10,146
|
)
|
|
Interest expense
|
Tax effect
|
|
798
|
|
|
1,483
|
|
|
2,799
|
|
|
4,203
|
|
|
|
Total net of tax
|
|
(1,132
|
)
|
|
(2,095
|
)
|
|
(3,963
|
)
|
|
(5,943
|
)
|
|
|
Defined benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
(101
|
)
|
|
(71
|
)
|
|
(303
|
)
|
|
(215
|
)
|
|
*
|
Tax effect
|
|
42
|
|
|
29
|
|
|
126
|
|
|
87
|
|
|
|
Total net of tax
|
|
(59
|
)
|
|
(42
|
)
|
|
(177
|
)
|
|
(128
|
)
|
|
|
Total reclassifications, net of tax
|
|
$
|
(1,147
|
)
|
|
$
|
(2,093
|
)
|
|
$
|
(3,970
|
)
|
|
$
|
(5,573
|
)
|
|
|
|
|
|
*
|
Amortization of net loss is included in the computation of net periodic pension cost.
|
Note 5. New Authoritative Accounting Guidance
Accounting Standards Update (ASU) No. 2017-12, "Derivatives and Hedging: 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 Valley for the annual and interim reporting periods beginning January 1, 2019 with early adoption permitted. ASU No. 2017-12 requires a modified retrospective method to be used at adoption with a cumulative-effect adjustment to opening retained earnings. While Valley continues to assess all the potential impacts of the new guidance, ASU No. 2017-12 is not currently 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 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. 2017-07, "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 is effective for Valley for its annual and interim reporting periods beginning January1, 2018 with early adoption permitted. ASU No. 2017-07 is not expected to have a significant impact on the presentation 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 after January 1, 2017.
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 specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for Valley for annual and interim reporting periods beginning January 1, 2018 and it should be applied using a retrospective transition method to each period presented. ASU No. 2016-15 is not expected to have a significant impact on the presentation of Valley's consolidated statements of cash flows.
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 on Valley’s consolidated financial statements. Valley expects that the new guidance 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 the Valley's loan and investment portfolios at the adoption date, and the economic conditions and forecasts at that date.
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, recognition methods for forfeitures within stock compensation expense, and the cash flow presentation. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. ASU No. 2016-09 became effective for Valley for reporting periods after January 1, 2017 and did not have a significant impact on Valley's consolidated financial statements. At adoption, Valley elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method. Valley also elected to continue to estimate the forfeitures of stock awards as a component of total stock compensation expense based on the number of awards that are expected to vest.
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 by reviewing its existing lease contracts and service contracts that may include embedded leases. 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. Valley does not expect material changes to the recognition of operating lease expense in its consolidated statements of income.
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 in
other comprehensive income if it is related to instrument-specific credit risk, and (iv) 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. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related Updates modifies 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 requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. Valley will adopt the guidance on January 1, 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the new revenue recognition standard is not expected to have a material impact on Valley’s consolidated financial statements. Valley has substantially completed its review of non-interest income revenue streams within the scope of the guidance and an assessment of its revenue contracts. While Valley has not identified material changes related to the timing or amount of revenue recognition, Valley will continue to evaluate required disclosures and the need for additional disaggregation of significant categories of revenue in the consolidated financial statements that are within the scope of the new guidance.
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).
|
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, 2017
and
December 31, 2016
. 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,
2017
|
|
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
|
$
|
50,148
|
|
|
$
|
50,148
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. government agency securities
|
44,230
|
|
|
—
|
|
|
44,230
|
|
|
—
|
|
Obligations of states and political subdivisions
|
118,402
|
|
|
—
|
|
|
118,402
|
|
|
—
|
|
Residential mortgage-backed securities
|
1,161,157
|
|
|
—
|
|
|
1,153,475
|
|
|
7,682
|
|
Trust preferred securities
|
5,393
|
|
|
—
|
|
|
3,278
|
|
|
2,115
|
|
Corporate and other debt securities
|
57,427
|
|
|
7,890
|
|
|
49,537
|
|
|
—
|
|
Equity securities
|
10,980
|
|
|
1,110
|
|
|
9,870
|
|
|
—
|
|
Total available for sale
|
1,447,737
|
|
|
59,148
|
|
|
1,378,792
|
|
|
9,797
|
|
Loans held for sale
(1)
|
13,321
|
|
|
—
|
|
|
13,321
|
|
|
—
|
|
Other assets
(2)
|
26,696
|
|
|
—
|
|
|
26,696
|
|
|
—
|
|
Total assets
|
$
|
1,487,754
|
|
|
$
|
59,148
|
|
|
$
|
1,418,809
|
|
|
$
|
9,797
|
|
Liabilities
|
|
|
|
|
|
|
|
Other liabilities
(2)
|
$
|
23,868
|
|
|
$
|
—
|
|
|
$
|
23,868
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
23,868
|
|
|
$
|
—
|
|
|
$
|
23,868
|
|
|
$
|
—
|
|
Non-recurring fair value measurements:
|
|
|
|
|
|
|
|
Collateral dependent impaired loans
(3)
|
$
|
33,260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,260
|
|
Loan servicing rights
|
7,072
|
|
|
—
|
|
|
—
|
|
|
7,072
|
|
Foreclosed assets
|
1,762
|
|
|
—
|
|
|
—
|
|
|
1,762
|
|
Total
|
$
|
42,094
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
December 31,
2016
|
|
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
|
$
|
49,591
|
|
|
$
|
49,591
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. government agency securities
|
23,041
|
|
|
—
|
|
|
23,041
|
|
|
—
|
|
Obligations of states and political subdivisions
|
119,767
|
|
|
—
|
|
|
119,767
|
|
|
—
|
|
Residential mortgage-backed securities
|
1,015,542
|
|
|
—
|
|
|
1,005,589
|
|
|
9,953
|
|
Trust preferred securities
|
8,009
|
|
|
—
|
|
|
6,074
|
|
|
1,935
|
|
Corporate and other debt securities
|
60,565
|
|
|
8,064
|
|
|
52,501
|
|
|
—
|
|
Equity securities
|
20,858
|
|
|
1,306
|
|
|
19,552
|
|
|
—
|
|
Total available for sale
|
1,297,373
|
|
|
58,961
|
|
|
1,226,524
|
|
|
11,888
|
|
Loans held for sale
(1)
|
57,708
|
|
|
—
|
|
|
57,708
|
|
|
—
|
|
Other assets
(2)
|
29,055
|
|
|
—
|
|
|
29,055
|
|
|
—
|
|
Total assets
|
$
|
1,384,136
|
|
|
$
|
58,961
|
|
|
$
|
1,313,287
|
|
|
$
|
11,888
|
|
Liabilities
|
|
|
|
|
|
|
|
Other liabilities
(2)
|
$
|
44,077
|
|
|
$
|
—
|
|
|
$
|
44,077
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
44,077
|
|
|
$
|
—
|
|
|
$
|
44,077
|
|
|
$
|
—
|
|
Non-recurring fair value measurements:
|
|
|
|
|
|
|
|
Collateral dependent impaired loans
(3)
|
$
|
5,385
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,385
|
|
Loan servicing rights
|
6,489
|
|
|
—
|
|
|
—
|
|
|
6,489
|
|
Foreclosed assets
|
4,532
|
|
|
—
|
|
|
—
|
|
|
4,532
|
|
Total
|
$
|
16,406
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,406
|
|
|
|
(1)
|
Represents residential mortgage loans originated for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately
$13.1 million
and
$58.2 million
at
September 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(2)
|
Derivative financial instruments are included in this category.
|
The changes in Level 3 assets measured at fair value on a recurring basis for the
three and nine
months ended
September 30, 2017
and
2016
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale Securities
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Balance, beginning of the period
|
$
|
10,730
|
|
|
$
|
13,101
|
|
|
$
|
11,888
|
|
|
$
|
13,793
|
|
Total net losses included in other comprehensive income
|
(448
|
)
|
|
(212
|
)
|
|
(435
|
)
|
|
(283
|
)
|
Settlements, net
|
(485
|
)
|
|
(492
|
)
|
|
(1,656
|
)
|
|
(1,113
|
)
|
Balance, end of the period
|
$
|
9,797
|
|
|
$
|
12,397
|
|
|
$
|
9,797
|
|
|
$
|
12,397
|
|
No
changes in unrealized gains or losses on Level 3 securities were included in earnings during the
three and nine
months ended
September 30, 2017
and
2016
. 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, 2017
and
2016
.
There have been no material changes in the valuation methodologies used at
September 30, 2017
from
December 31, 2016
.
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. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value and this results in fair values based on Level 3 inputs. In determining fair value, Valley utilizes unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing each security. In developing its assertion of market participant assumptions, Valley utilizes the best information that is both reasonable and available without undue cost and effort.
In calculating the fair value for the available for sale securities under Level 3, Valley prepared present value cash flow models for certain private label mortgage-backed securities. 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, 2017
:
|
|
|
|
|
|
|
|
|
|
Security Type
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
Private label mortgage-backed securities
|
Discounted cash flow
|
|
Prepayment rate
|
|
1.1 - 34.1%
|
|
18.0
|
%
|
|
|
|
Default rate
|
|
1.4 - 30.9
|
|
6.7
|
|
|
|
|
Loss severity
|
|
47.7 - 63.8
|
|
58.3
|
|
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 residential mortgage-backed securities (consisting of 4 private label 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 trust preferred securities (consisting of one pooled 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, 2017
and
December 31, 2016
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, 2017
and
December 31, 2016
), 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, 2017
and
December 31, 2016
.
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, 2017
, certain appraisals were discounted based on specific market data by location and property type. During the quarter ended
September 30, 2017
, 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
collateral dependent loan charge-offs to the allowance for loan losses for the
three months ended September 30, 2017
as compared to
$3.7 million
for the
three months ended September 30, 2016
and
$2.1 million
and
$4.7 million
for the
nine months ended September 30, 2017
and
2016
, respectively. At
September 30, 2017
, collateral dependent impaired loans with a total recorded investment of
$38.3 million
were reduced by specific valuation allowance allocations totaling
$5.0 million
to a reported total net carrying amount of
$33.3 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, 2017
, 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
$134 thousand
and
$185 thousand
for the
three and nine
months ended
September 30, 2017
, respectively. 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
.
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, 2017
. At
September 30, 2017
,
foreclosed assets included
$1.8 million
of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended
September 30, 2017
. The foreclosed assets charge-offs to the allowance for loan losses totaled
$536 thousand
and
$245 thousand
for the
three months ended September 30, 2017
and
2016
, respectively, and
$1.5 million
and
$1.2 million
for the
nine months ended September 30, 2017
and
2016
, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in net losses within non-interest expense of
$290 thousand
for the nine months ended
September 30, 2017
, and
$34 thousand
and
$946 thousand
for
three and nine
months ended
September 30, 2016
, 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, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Hierarchy
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
|
|
|
(in thousands)
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
Level 1
|
|
$
|
215,600
|
|
|
$
|
215,600
|
|
|
$
|
220,791
|
|
|
$
|
220,791
|
|
Interest bearing deposits with banks
|
Level 1
|
|
128,226
|
|
|
128,226
|
|
|
171,710
|
|
|
171,710
|
|
Investment securities held to maturity:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
Level 1
|
|
138,714
|
|
|
147,126
|
|
|
138,830
|
|
|
147,495
|
|
U.S. government agency securities
|
Level 2
|
|
9,984
|
|
|
10,188
|
|
|
11,329
|
|
|
11,464
|
|
Obligations of states and political subdivisions
|
Level 2
|
|
495,157
|
|
|
511,159
|
|
|
566,590
|
|
|
577,826
|
|
Residential mortgage-backed securities
|
Level 2
|
|
1,088,389
|
|
|
1,081,703
|
|
|
1,112,460
|
|
|
1,102,802
|
|
Trust preferred securities
|
Level 2
|
|
49,819
|
|
|
38,998
|
|
|
59,804
|
|
|
47,290
|
|
Corporate and other debt securities
|
Level 2
|
|
41,559
|
|
|
41,971
|
|
|
36,559
|
|
|
37,720
|
|
Total investment securities held to maturity
|
|
|
1,823,622
|
|
|
1,831,145
|
|
|
1,925,572
|
|
|
1,924,597
|
|
Net loans
|
Level 3
|
|
18,082,496
|
|
|
17,741,813
|
|
|
17,121,684
|
|
|
16,756,655
|
|
Accrued interest receivable
|
Level 1
|
|
72,063
|
|
|
72,063
|
|
|
66,816
|
|
|
66,816
|
|
Federal Reserve Bank and Federal Home Loan Bank stock
(1)
|
Level 1
|
|
204,978
|
|
|
204,978
|
|
|
147,127
|
|
|
147,127
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Deposits without stated maturities
|
Level 1
|
|
13,892,110
|
|
|
13,892,110
|
|
|
14,591,837
|
|
|
14,591,837
|
|
Deposits with stated maturities
|
Level 2
|
|
3,420,656
|
|
|
3,436,229
|
|
|
3,138,871
|
|
|
3,160,572
|
|
Short-term borrowings
|
Level 1
|
|
1,482,709
|
|
|
1,485,695
|
|
|
1,080,960
|
|
|
1,081,751
|
|
Long-term borrowings
|
Level 2
|
|
2,215,219
|
|
|
2,300,388
|
|
|
1,433,906
|
|
|
1,523,386
|
|
Junior subordinated debentures issued to capital trusts
|
Level 2
|
|
41,716
|
|
|
42,244
|
|
|
41,577
|
|
|
45,785
|
|
Accrued interest payable
(2)
|
Level 1
|
|
10,812
|
|
|
10,812
|
|
|
10,675
|
|
|
10,675
|
|
|
|
(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
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.
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, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
138,714
|
|
|
$
|
8,412
|
|
|
$
|
—
|
|
|
$
|
147,126
|
|
U.S. government agency securities
|
9,984
|
|
|
204
|
|
|
—
|
|
|
10,188
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
Obligations of states and state agencies
|
247,277
|
|
|
9,412
|
|
|
(1,449
|
)
|
|
255,240
|
|
Municipal bonds
|
247,880
|
|
|
8,049
|
|
|
(10
|
)
|
|
255,919
|
|
Total obligations of states and political subdivisions
|
495,157
|
|
|
17,461
|
|
|
(1,459
|
)
|
|
511,159
|
|
Residential mortgage-backed securities
|
1,088,389
|
|
|
7,234
|
|
|
(13,920
|
)
|
|
1,081,703
|
|
Trust preferred securities
|
49,819
|
|
|
47
|
|
|
(10,868
|
)
|
|
38,998
|
|
Corporate and other debt securities
|
41,559
|
|
|
699
|
|
|
(287
|
)
|
|
41,971
|
|
Total investment securities held to maturity
|
$
|
1,823,622
|
|
|
$
|
34,057
|
|
|
$
|
(26,534
|
)
|
|
$
|
1,831,145
|
|
December 31, 2016
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
138,830
|
|
|
$
|
8,665
|
|
|
$
|
—
|
|
|
$
|
147,495
|
|
U.S. government agency securities
|
11,329
|
|
|
135
|
|
|
—
|
|
|
11,464
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
Obligations of states and state agencies
|
252,185
|
|
|
6,692
|
|
|
(1,428
|
)
|
|
257,449
|
|
Municipal bonds
|
314,405
|
|
|
6,438
|
|
|
(466
|
)
|
|
320,377
|
|
Total obligations of states and political subdivisions
|
566,590
|
|
|
13,130
|
|
|
(1,894
|
)
|
|
577,826
|
|
Residential mortgage-backed securities
|
1,112,460
|
|
|
8,432
|
|
|
(18,090
|
)
|
|
1,102,802
|
|
Trust preferred securities
|
59,804
|
|
|
40
|
|
|
(12,554
|
)
|
|
47,290
|
|
Corporate and other debt securities
|
36,559
|
|
|
1,190
|
|
|
(29
|
)
|
|
37,720
|
|
Total investment securities held to maturity
|
$
|
1,925,572
|
|
|
$
|
31,592
|
|
|
$
|
(32,567
|
)
|
|
$
|
1,924,597
|
|
The age of unrealized losses and fair value of related securities held to maturity at
September 30, 2017
and
December 31, 2016
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, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and state agencies
|
$
|
55,565
|
|
|
$
|
(1,449
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,565
|
|
|
$
|
(1,449
|
)
|
Municipal bonds
|
4,678
|
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
4,678
|
|
|
(10
|
)
|
Total obligations of states and political subdivisions
|
60,243
|
|
|
(1,459
|
)
|
|
—
|
|
|
—
|
|
|
60,243
|
|
|
(1,459
|
)
|
Residential mortgage-backed securities
|
551,490
|
|
|
(7,911
|
)
|
|
228,397
|
|
|
(6,009
|
)
|
|
779,887
|
|
|
(13,920
|
)
|
Trust preferred securities
|
—
|
|
|
—
|
|
|
37,597
|
|
|
(10,868
|
)
|
|
37,597
|
|
|
(10,868
|
)
|
Corporate and other debt securities
|
4,713
|
|
|
(287
|
)
|
|
—
|
|
|
—
|
|
|
4,713
|
|
|
(287
|
)
|
Total
|
$
|
616,446
|
|
|
$
|
(9,657
|
)
|
|
$
|
265,994
|
|
|
$
|
(16,877
|
)
|
|
$
|
882,440
|
|
|
$
|
(26,534
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and state agencies
|
$
|
98,114
|
|
|
$
|
(1,428
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
98,114
|
|
|
$
|
(1,428
|
)
|
Municipal bonds
|
27,368
|
|
|
(466
|
)
|
|
—
|
|
|
—
|
|
|
27,368
|
|
|
(466
|
)
|
Total obligations of states and political subdivisions
|
125,482
|
|
|
(1,894
|
)
|
|
—
|
|
|
—
|
|
|
125,482
|
|
|
(1,894
|
)
|
Residential mortgage-backed securities
|
692,108
|
|
|
(14,420
|
)
|
|
114,505
|
|
|
(3,670
|
)
|
|
806,613
|
|
|
(18,090
|
)
|
Trust preferred securities
|
—
|
|
|
—
|
|
|
45,898
|
|
|
(12,554
|
)
|
|
45,898
|
|
|
(12,554
|
)
|
Corporate and other debt securities
|
2,971
|
|
|
(29
|
)
|
|
—
|
|
|
—
|
|
|
2,971
|
|
|
(29
|
)
|
Total
|
$
|
820,561
|
|
|
$
|
(16,343
|
)
|
|
$
|
160,403
|
|
|
$
|
(16,224
|
)
|
|
$
|
980,964
|
|
|
$
|
(32,567
|
)
|
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
118
at
September 30, 2017
and
132
at
December 31, 2016
.
The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at
September 30, 2017
mainly related to investment grade securities issued by Ginnie Mae.
The unrealized losses existing for more than twelve months for trust preferred securities at
September 30, 2017
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, 2017
.
As of
September 30, 2017
, 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
$978.7 million
.
The contractual maturities of investments in debt securities held to maturity at
September 30, 2017
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, 2017
|
|
Amortized
Cost
|
|
Fair
Value
|
|
(in thousands)
|
Due in one year
|
$
|
54,778
|
|
|
$
|
55,334
|
|
Due after one year through five years
|
221,351
|
|
|
229,067
|
|
Due after five years through ten years
|
313,923
|
|
|
330,775
|
|
Due after ten years
|
145,181
|
|
|
134,266
|
|
Residential mortgage-backed securities
|
1,088,389
|
|
|
1,081,703
|
|
Total investment securities held to maturity
|
$
|
1,823,622
|
|
|
$
|
1,831,145
|
|
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
7.3 years
at
September 30, 2017
.
Available for Sale
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at
September 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
51,003
|
|
|
$
|
6
|
|
|
$
|
(861
|
)
|
|
$
|
50,148
|
|
U.S. government agency securities
|
43,896
|
|
|
342
|
|
|
(8
|
)
|
|
44,230
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
Obligations of states and state agencies
|
38,847
|
|
|
367
|
|
|
(204
|
)
|
|
39,010
|
|
Municipal bonds
|
79,452
|
|
|
473
|
|
|
(533
|
)
|
|
79,392
|
|
Total obligations of states and political subdivisions
|
118,299
|
|
|
840
|
|
|
(737
|
)
|
|
118,402
|
|
Residential mortgage-backed securities
|
1,171,510
|
|
|
3,230
|
|
|
(13,583
|
)
|
|
1,161,157
|
|
Trust preferred securities*
|
6,532
|
|
|
—
|
|
|
(1,139
|
)
|
|
5,393
|
|
Corporate and other debt securities
|
56,827
|
|
|
719
|
|
|
(119
|
)
|
|
57,427
|
|
Equity securities
|
10,505
|
|
|
929
|
|
|
(454
|
)
|
|
10,980
|
|
Total investment securities available for sale
|
$
|
1,458,572
|
|
|
$
|
6,066
|
|
|
$
|
(16,901
|
)
|
|
$
|
1,447,737
|
|
December 31, 2016
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
51,020
|
|
|
$
|
6
|
|
|
$
|
(1,435
|
)
|
|
$
|
49,591
|
|
U.S. government agency securities
|
22,815
|
|
|
232
|
|
|
(6
|
)
|
|
23,041
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
Obligations of states and state agencies
|
40,696
|
|
|
70
|
|
|
(424
|
)
|
|
40,342
|
|
Municipal bonds
|
80,045
|
|
|
147
|
|
|
(767
|
)
|
|
79,425
|
|
Total obligations of states and political subdivisions
|
120,741
|
|
|
217
|
|
|
(1,191
|
)
|
|
119,767
|
|
Residential mortgage-backed securities
|
1,029,827
|
|
|
2,061
|
|
|
(16,346
|
)
|
|
1,015,542
|
|
Trust preferred securities*
|
10,164
|
|
|
—
|
|
|
(2,155
|
)
|
|
8,009
|
|
Corporate and other debt securities
|
60,651
|
|
|
436
|
|
|
(522
|
)
|
|
60,565
|
|
Equity securities
|
20,505
|
|
|
1,114
|
|
|
(761
|
)
|
|
20,858
|
|
Total investment securities available for sale
|
$
|
1,315,723
|
|
|
$
|
4,066
|
|
|
$
|
(22,416
|
)
|
|
$
|
1,297,373
|
|
|
|
|
*
|
Includes two pooled trust preferred securities, principally collateralized by securities issued by banks and insurance companies, at September 30, 2017 and December 31, 2016.
|
The age of unrealized losses and fair value of related securities available for sale at
September 30, 2017
and
December 31, 2016
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, 2017
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
49,223
|
|
|
$
|
(861
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,223
|
|
|
$
|
(861
|
)
|
U.S. government agency securities
|
5,527
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
5,527
|
|
|
(8
|
)
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and state agencies
|
11,117
|
|
|
(153
|
)
|
|
1,544
|
|
|
(51
|
)
|
|
12,661
|
|
|
(204
|
)
|
Municipal bonds
|
18,688
|
|
|
(184
|
)
|
|
11,019
|
|
|
(349
|
)
|
|
29,707
|
|
|
(533
|
)
|
Total obligations of states and political subdivisions
|
29,805
|
|
|
(337
|
)
|
|
12,563
|
|
|
(400
|
)
|
|
42,368
|
|
|
(737
|
)
|
Residential mortgage-backed securities
|
599,413
|
|
|
(7,780
|
)
|
|
217,306
|
|
|
(5,803
|
)
|
|
816,719
|
|
|
(13,583
|
)
|
Trust preferred securities
|
—
|
|
|
—
|
|
|
5,394
|
|
|
(1,139
|
)
|
|
5,394
|
|
|
(1,139
|
)
|
Corporate and other debt securities
|
15,880
|
|
|
(17
|
)
|
|
15,241
|
|
|
(102
|
)
|
|
31,121
|
|
|
(119
|
)
|
Equity securities
|
—
|
|
|
—
|
|
|
5,190
|
|
|
(454
|
)
|
|
5,190
|
|
|
(454
|
)
|
Total
|
$
|
699,848
|
|
|
$
|
(9,003
|
)
|
|
$
|
255,694
|
|
|
$
|
(7,898
|
)
|
|
$
|
955,542
|
|
|
$
|
(16,901
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
48,660
|
|
|
$
|
(1,435
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,660
|
|
|
$
|
(1,435
|
)
|
U.S. government agency securities
|
2,530
|
|
|
(4
|
)
|
|
4,034
|
|
|
(2
|
)
|
|
6,564
|
|
|
(6
|
)
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and state agencies
|
28,628
|
|
|
(404
|
)
|
|
753
|
|
|
(20
|
)
|
|
29,381
|
|
|
(424
|
)
|
Municipal bonds
|
42,573
|
|
|
(506
|
)
|
|
11,081
|
|
|
(261
|
)
|
|
53,654
|
|
|
(767
|
)
|
Total obligations of states and political subdivisions
|
71,201
|
|
|
(910
|
)
|
|
11,834
|
|
|
(281
|
)
|
|
83,035
|
|
|
(1,191
|
)
|
Residential mortgage-backed securities
|
788,030
|
|
|
(11,889
|
)
|
|
132,718
|
|
|
(4,457
|
)
|
|
920,748
|
|
|
(16,346
|
)
|
Trust preferred securities
|
—
|
|
|
—
|
|
|
8,009
|
|
|
(2,155
|
)
|
|
8,009
|
|
|
(2,155
|
)
|
Corporate and other debt securities
|
32,292
|
|
|
(294
|
)
|
|
15,192
|
|
|
(228
|
)
|
|
47,484
|
|
|
(522
|
)
|
Equity securities
|
—
|
|
|
—
|
|
|
14,883
|
|
|
(761
|
)
|
|
14,883
|
|
|
(761
|
)
|
Total
|
$
|
942,713
|
|
|
$
|
(14,532
|
)
|
|
$
|
186,670
|
|
|
$
|
(7,884
|
)
|
|
$
|
1,129,383
|
|
|
$
|
(22,416
|
)
|
The unrealized losses on investment securities available for sale are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. The total number of security positions in the securities available for sale portfolio in an unrealized loss position at
September 30, 2017
was
253
as compared to
298
at
December 31, 2016
.
The unrealized losses for the residential mortgage-backed securities category of the available for sale portfolio at
September 30, 2017
largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae.
As of
September 30, 2017
, the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was
$692.2 million
.
The contractual maturities of investment securities available for sale at
September 30, 2017
are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Amortized
Cost
|
|
Fair
Value
|
|
(in thousands)
|
Due in one year
|
$
|
25,341
|
|
|
$
|
25,295
|
|
Due after one year through five years
|
65,472
|
|
|
65,631
|
|
Due after five years through ten years
|
108,222
|
|
|
107,858
|
|
Due after ten years
|
77,522
|
|
|
76,816
|
|
Residential mortgage-backed securities
|
1,171,510
|
|
|
1,161,157
|
|
Equity securities
|
10,505
|
|
|
10,980
|
|
Total investment securities available for sale
|
$
|
1,458,572
|
|
|
$
|
1,447,737
|
|
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 available for sale was
8.2 years
at
September 30, 2017
.
Other-Than-Temporary Impairment Analysis
Valley records impairment charges on its investment securities when the decline in fair value is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities; decline in the creditworthiness of the issuer; absence of reliable pricing information for investment securities; adverse changes in business climate; adverse actions by regulators; prolonged decline in value of equity investments; or unanticipated changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. Valley’s investment portfolios include private label mortgage-backed securities, trust preferred securities principally issued by bank holding companies (including two pooled trust preferred securities) and corporate bonds issued by banks. These investments may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S. economy and its potential negative effect on the future performance of the security issuers and, if applicable, the underlying mortgage loan collateral of the security.
There were
no
other-than-temporary impairment losses on securities recognized in earnings for the
three and nine
months ended
September 30, 2017
and
2016
. Management does not believe that any individual unrealized loss as of
September 30, 2017
included in the investment portfolio tables above represent 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.
At
September 30, 2017
, four previously impaired private label mortgage-backed securities (prior to December 31, 2012) had a combined amortized cost and fair value of
$8.6 million
and
$7.9 million
, respectively, while one previously impaired pooled trust preferred security had an amortized cost and fair value of
$2.8 million
and
$2.1 million
,
respectively. The previously impaired pooled trust preferred security was not accruing interest during the
three and nine
months ended
September 30, 2017
and
2016
.
The following table presents the changes in the credit loss component of cumulative other-than-temporary impairment losses on debt securities classified as either held to maturity or available for sale that Valley has previously recognized in earnings, for which a portion of the impairment loss (non-credit factors) was recognized in other comprehensive income for the
three and nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
|
|
|
|
Balance, beginning of period
|
$
|
4,700
|
|
|
$
|
5,348
|
|
|
$
|
4,916
|
|
|
$
|
5,837
|
|
Accretion of credit loss impairment due to an increase in expected cash flows
|
(67
|
)
|
|
(87
|
)
|
|
(283
|
)
|
|
(576
|
)
|
Balance, end of period
|
$
|
4,633
|
|
|
$
|
5,261
|
|
|
$
|
4,633
|
|
|
$
|
5,261
|
|
The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to each period presented. The credit loss component increases if other-than-temporary impairments (initial and subsequent) are recognized in earnings for credit impaired debt securities. The credit loss component is reduced if (i) Valley receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures, (iii) the security is fully written down, or (iv) Valley sells, intends to sell or believes it will be required to sell previously credit impaired debt securities.
Realized Gains and Losses
Gross gains and losses realized on sales, maturities and other investment securities transactions included in earnings were immaterial for the three and
nine months ended September 30, 2017
and
2016
.
Note 8. Loans
The detail of the loan portfolio as of
September 30, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Non-PCI
Loans
|
|
PCI Loans*
|
|
Total
|
|
Non-PCI
Loans
|
|
PCI Loans*
|
|
Total
|
|
(in thousands)
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,504,655
|
|
|
$
|
202,257
|
|
|
$
|
2,706,912
|
|
|
$
|
2,357,018
|
|
|
$
|
281,177
|
|
|
$
|
2,638,195
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
8,359,833
|
|
|
991,235
|
|
|
9,351,068
|
|
|
7,628,328
|
|
|
1,091,339
|
|
|
8,719,667
|
|
Construction
|
858,682
|
|
|
44,958
|
|
|
903,640
|
|
|
710,266
|
|
|
114,680
|
|
|
824,946
|
|
Total commercial real estate loans
|
9,218,515
|
|
|
1,036,193
|
|
|
10,254,708
|
|
|
8,338,594
|
|
|
1,206,019
|
|
|
9,544,613
|
|
Residential mortgage
|
2,791,779
|
|
|
149,656
|
|
|
2,941,435
|
|
|
2,684,195
|
|
|
183,723
|
|
|
2,867,918
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
371,130
|
|
|
77,712
|
|
|
448,842
|
|
|
376,213
|
|
|
92,796
|
|
|
469,009
|
|
Automobile
|
1,171,579
|
|
|
106
|
|
|
1,171,685
|
|
|
1,139,082
|
|
|
145
|
|
|
1,139,227
|
|
Other consumer
|
671,949
|
|
|
5,931
|
|
|
677,880
|
|
|
569,499
|
|
|
7,642
|
|
|
577,141
|
|
Total consumer loans
|
2,214,658
|
|
|
83,749
|
|
|
2,298,407
|
|
|
2,084,794
|
|
|
100,583
|
|
|
2,185,377
|
|
Total loans
|
$
|
16,729,607
|
|
|
$
|
1,471,855
|
|
|
$
|
18,201,462
|
|
|
$
|
15,464,601
|
|
|
$
|
1,771,502
|
|
|
$
|
17,236,103
|
|
|
|
*
|
PCI loans include covered loans (mostly consisting of residential mortgage and commercial real estate loans) totaling
$42.6 million
and
$70.4 million
at
September 30, 2017
and
December 31, 2016
, respectively.
|
Total loans (excluding PCI covered loans) include net unearned premiums and deferred loan costs of
$18.5 million
and
$15.3 million
at
September 30, 2017
and
December 31, 2016
, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled
$1.6 billion
and
$1.9 billion
at
September 30, 2017
and
December 31, 2016
, respectively.
Valley transferred
$225.5 million
of residential mortgage loans from the loan portfolio to loans held for sale during the
nine months ended
September 30, 2017
. Exclusive of such transfers, there were
no
sales of loans from the held for investment portfolio during the
three and nine
months ended
September 30, 2017
and
2016
.
Purchased Credit-Impaired Loans (Including Covered Loans)
PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses), and aggregated and accounted for as pools of loans based on common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools. Valley's PCI loan portfolio included covered loans (i.e., loans in which the Bank will share losses with the FDIC under loss-sharing agreements) totaling
$42.6 million
and
$70.4 million
at
September 30, 2017
and
December 31, 2016
, respectively.
The following table presents changes in the accretable yield for PCI loans during the
three and nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
|
|
|
|
Balance, beginning of period
|
$
|
246,278
|
|
|
$
|
355,601
|
|
|
$
|
294,514
|
|
|
$
|
415,179
|
|
Accretion
|
(20,626
|
)
|
|
(26,730
|
)
|
|
(68,862
|
)
|
|
(83,114
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,194
|
)
|
Balance, end of period
|
$
|
225,652
|
|
|
$
|
328,871
|
|
|
$
|
225,652
|
|
|
$
|
328,871
|
|
FDIC Loss-Share Receivable
The receivable arising from the loss-sharing agreements with the FDIC is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans. The FDIC loss share receivable (which is included in other assets on Valley's consolidated statements of financial condition) totaled
$6.8 million
and
$7.2 million
at
September 30, 2017
and
December 31, 2016
, respectively.
Credit Risk Management
For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. Valley closely monitors economic conditions and loan performance trends to manage and evaluate its exposure to credit risk. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, internal loan classification, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through cyclical economic circumstances.
Credit Quality
The following table presents past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis, and non-performing loans held for sale) by loan portfolio class at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past Due and Non-Accrual Loans
|
|
|
|
|
|
30-59
Days
Past Due
Loans
|
|
60-89
Days
Past Due
Loans
|
|
Accruing Loans
90 Days or More
Past Due
|
|
Non-Accrual
Loans
|
|
Total
Past Due
Loans
|
|
Current
Non-PCI
Loans
|
|
Total
Non-PCI
Loans
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,186
|
|
|
$
|
3,043
|
|
|
$
|
125
|
|
|
$
|
11,983
|
|
|
$
|
16,337
|
|
|
$
|
2,488,318
|
|
|
$
|
2,504,655
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
4,755
|
|
|
626
|
|
|
389
|
|
|
13,870
|
|
|
19,640
|
|
|
8,340,193
|
|
|
8,359,833
|
|
Construction
|
—
|
|
|
2,518
|
|
|
—
|
|
|
1,116
|
|
|
3,634
|
|
|
855,048
|
|
|
858,682
|
|
Total commercial real estate loans
|
4,755
|
|
|
3,144
|
|
|
389
|
|
|
14,986
|
|
|
23,274
|
|
|
9,195,241
|
|
|
9,218,515
|
|
Residential mortgage
|
7,942
|
|
|
1,604
|
|
|
1,433
|
|
|
12,974
|
|
|
23,953
|
|
|
2,767,826
|
|
|
2,791,779
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
591
|
|
|
432
|
|
|
—
|
|
|
1,766
|
|
|
2,789
|
|
|
368,341
|
|
|
371,130
|
|
Automobile
|
4,089
|
|
|
566
|
|
|
297
|
|
|
78
|
|
|
5,030
|
|
|
1,166,549
|
|
|
1,171,579
|
|
Other consumer
|
525
|
|
|
21
|
|
|
4
|
|
|
—
|
|
|
550
|
|
|
671,399
|
|
|
671,949
|
|
Total consumer loans
|
5,205
|
|
|
1,019
|
|
|
301
|
|
|
1,844
|
|
|
8,369
|
|
|
2,206,289
|
|
|
2,214,658
|
|
Total
|
$
|
19,088
|
|
|
$
|
8,810
|
|
|
$
|
2,248
|
|
|
$
|
41,787
|
|
|
$
|
71,933
|
|
|
$
|
16,657,674
|
|
|
$
|
16,729,607
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
6,705
|
|
|
$
|
5,010
|
|
|
$
|
142
|
|
|
$
|
8,465
|
|
|
$
|
20,322
|
|
|
$
|
2,336,696
|
|
|
$
|
2,357,018
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
5,894
|
|
|
8,642
|
|
|
474
|
|
|
15,079
|
|
|
30,089
|
|
|
7,598,239
|
|
|
7,628,328
|
|
Construction
|
6,077
|
|
|
—
|
|
|
1,106
|
|
|
715
|
|
|
7,898
|
|
|
702,368
|
|
|
710,266
|
|
Total commercial real estate loans
|
11,971
|
|
|
8,642
|
|
|
1,580
|
|
|
15,794
|
|
|
37,987
|
|
|
8,300,607
|
|
|
8,338,594
|
|
Residential mortgage
|
12,005
|
|
|
3,564
|
|
|
1,541
|
|
|
12,075
|
|
|
29,185
|
|
|
2,655,010
|
|
|
2,684,195
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
929
|
|
|
415
|
|
|
—
|
|
|
1,028
|
|
|
2,372
|
|
|
373,841
|
|
|
376,213
|
|
Automobile
|
3,192
|
|
|
723
|
|
|
188
|
|
|
146
|
|
|
4,249
|
|
|
1,134,833
|
|
|
1,139,082
|
|
Other consumer
|
76
|
|
|
9
|
|
|
21
|
|
|
—
|
|
|
106
|
|
|
569,393
|
|
|
569,499
|
|
Total consumer loans
|
4,197
|
|
|
1,147
|
|
|
209
|
|
|
1,174
|
|
|
6,727
|
|
|
2,078,067
|
|
|
2,084,794
|
|
Total
|
$
|
34,878
|
|
|
$
|
18,363
|
|
|
$
|
3,472
|
|
|
$
|
37,508
|
|
|
$
|
94,221
|
|
|
$
|
15,370,380
|
|
|
$
|
15,464,601
|
|
Impaired loans.
Impaired loans, consisting of non-accrual commercial and industrial loans and commercial real estate loans over
$250 thousand
and all loans which were modified in troubled debt restructuring, are individually evaluated for impairment. PCI loans are not classified as impaired loans because they are accounted for on a pool basis.
The following table presents the information about impaired loans by loan portfolio class at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Investment
With No Related
Allowance
|
|
Recorded
Investment
With Related
Allowance
|
|
Total
Recorded
Investment
|
|
Unpaid
Contractual
Principal
Balance
|
|
Related
Allowance
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
12,580
|
|
|
$
|
56,364
|
|
|
$
|
68,944
|
|
|
$
|
72,680
|
|
|
$
|
7,104
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
31,058
|
|
|
29,709
|
|
|
60,767
|
|
|
62,686
|
|
|
2,626
|
|
Construction
|
2,675
|
|
|
470
|
|
|
3,145
|
|
|
3,145
|
|
|
18
|
|
Total commercial real estate loans
|
33,733
|
|
|
30,179
|
|
|
63,912
|
|
|
65,831
|
|
|
2,644
|
|
Residential mortgage
|
5,620
|
|
|
8,693
|
|
|
14,313
|
|
|
15,343
|
|
|
733
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
Home equity
|
1,078
|
|
|
2,171
|
|
|
3,249
|
|
|
3,379
|
|
|
69
|
|
Total consumer loans
|
1,078
|
|
|
2,171
|
|
|
3,249
|
|
|
3,379
|
|
|
69
|
|
Total
|
$
|
53,011
|
|
|
$
|
97,407
|
|
|
$
|
150,418
|
|
|
$
|
157,233
|
|
|
$
|
10,550
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
3,609
|
|
|
$
|
27,031
|
|
|
$
|
30,640
|
|
|
$
|
35,957
|
|
|
$
|
5,864
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
21,318
|
|
|
36,974
|
|
|
58,292
|
|
|
60,267
|
|
|
3,612
|
|
Construction
|
1,618
|
|
|
2,379
|
|
|
3,997
|
|
|
3,997
|
|
|
260
|
|
Total commercial real estate loans
|
22,936
|
|
|
39,353
|
|
|
62,289
|
|
|
64,264
|
|
|
3,872
|
|
Residential mortgage
|
8,398
|
|
|
9,958
|
|
|
18,356
|
|
|
19,712
|
|
|
725
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
Home equity
|
1,182
|
|
|
2,352
|
|
|
3,534
|
|
|
3,626
|
|
|
70
|
|
Total consumer loans
|
1,182
|
|
|
2,352
|
|
|
3,534
|
|
|
3,626
|
|
|
70
|
|
Total
|
$
|
36,125
|
|
|
$
|
78,694
|
|
|
$
|
114,819
|
|
|
$
|
123,559
|
|
|
$
|
10,531
|
|
The following tables present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the
three and nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2017
|
|
2016
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
(in thousands)
|
Commercial and industrial
|
$
|
70,135
|
|
|
$
|
300
|
|
|
$
|
31,499
|
|
|
$
|
293
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial real estate
|
57,712
|
|
|
482
|
|
|
58,117
|
|
|
513
|
|
Construction
|
3,049
|
|
|
21
|
|
|
6,635
|
|
|
37
|
|
Total commercial real estate loans
|
60,761
|
|
|
503
|
|
|
64,752
|
|
|
550
|
|
Residential mortgage
|
15,630
|
|
|
183
|
|
|
20,193
|
|
|
225
|
|
Consumer loans:
|
|
|
|
|
|
|
|
Home equity
|
4,766
|
|
|
49
|
|
|
2,253
|
|
|
25
|
|
Total consumer loans
|
4,766
|
|
|
49
|
|
|
2,253
|
|
|
25
|
|
Total
|
$
|
151,292
|
|
|
$
|
1,035
|
|
|
$
|
118,697
|
|
|
$
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
(in thousands)
|
Commercial and industrial
|
$
|
49,037
|
|
|
$
|
896
|
|
|
$
|
28,008
|
|
|
$
|
727
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial real estate
|
57,718
|
|
|
1,290
|
|
|
66,871
|
|
|
1,627
|
|
Construction
|
2,836
|
|
|
60
|
|
|
8,814
|
|
|
138
|
|
Total commercial real estate loans
|
60,554
|
|
|
1,350
|
|
|
75,685
|
|
|
1,765
|
|
Residential mortgage
|
17,851
|
|
|
575
|
|
|
22,232
|
|
|
660
|
|
Consumer loans:
|
|
|
|
|
|
|
|
Home equity
|
4,820
|
|
|
123
|
|
|
2,560
|
|
|
68
|
|
Total consumer loans
|
4,820
|
|
|
123
|
|
|
2,560
|
|
|
68
|
|
Total
|
$
|
132,262
|
|
|
$
|
2,944
|
|
|
$
|
128,485
|
|
|
$
|
3,220
|
|
Interest income recognized on a cash basis (included in the table above) was immaterial for the
three and nine
months ended
September 30, 2017
and
2016
.
Troubled debt restructured loans
. From time to time, Valley may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a troubled debt restructured loan (TDR). Valley’s PCI loans are excluded from the TDR disclosures below because they are evaluated for impairment on a pool by pool basis. When an individual PCI loan within a pool is modified as a TDR, it is not removed from its pool. All TDRs are classified as impaired loans and are included in the impaired loan disclosures above.
The majority of the concessions made for TDRs involve lowering the monthly payments on loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. The concessions rarely result in the forgiveness of principal or accrued interest. In addition, Valley frequently obtains additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms of the loan and Valley’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally
six
consecutive months of payments) and both principal and interest are deemed collectible.
Performing TDRs (not reported as non-accrual loans) totaled
$113.7 million
and
$85.2 million
as of
September 30, 2017
and
December 31, 2016
, respectively. Non-performing TDRs totaled
$18.7 million
and
$10.6 million
as of
September 30, 2017
and
December 31, 2016
, respectively.
The following tables present loans by loan portfolio class modified as TDRs during the
three and nine
months ended
September 30, 2017
and
2016
. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at
September 30, 2017
and
2016
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2017
|
|
Three Months Ended
September 30, 2016
|
Troubled Debt Restructurings
|
|
Number
of
Contracts
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Number
of
Contracts
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
|
($ in thousands)
|
Commercial and industrial
|
|
10
|
|
|
$
|
12,522
|
|
|
$
|
11,655
|
|
|
7
|
|
|
$
|
6,389
|
|
|
$
|
6,248
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
4
|
|
|
5,931
|
|
|
5,929
|
|
|
1
|
|
|
1,667
|
|
|
1,870
|
|
Construction
|
|
2
|
|
|
628
|
|
|
625
|
|
|
2
|
|
|
2,078
|
|
|
2,078
|
|
Total commercial real estate
|
|
6
|
|
|
6,559
|
|
|
6,554
|
|
|
3
|
|
|
3,745
|
|
|
3,948
|
|
Residential mortgage
|
|
2
|
|
|
561
|
|
|
557
|
|
|
1
|
|
|
78
|
|
|
77
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
23
|
|
|
18
|
|
Total
|
|
18
|
|
|
$
|
19,642
|
|
|
$
|
18,766
|
|
|
12
|
|
|
$
|
10,235
|
|
|
$
|
10,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2017
|
|
Nine Months Ended
September 30, 2016
|
Troubled Debt Restructurings
|
|
Number
of
Contracts
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Number
of
Contracts
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
|
($ in thousands)
|
Commercial and industrial
|
|
61
|
|
|
$
|
57,338
|
|
|
$
|
52,694
|
|
|
12
|
|
|
$
|
11,700
|
|
|
$
|
11,088
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
7
|
|
|
23,806
|
|
|
23,217
|
|
|
4
|
|
|
8,325
|
|
|
8,174
|
|
Construction
|
|
3
|
|
|
1,188
|
|
|
994
|
|
|
2
|
|
|
2,079
|
|
|
2,078
|
|
Total commercial real estate
|
|
10
|
|
|
24,994
|
|
|
24,211
|
|
|
6
|
|
|
10,404
|
|
|
10,252
|
|
Residential mortgage
|
|
6
|
|
|
1,514
|
|
|
1,495
|
|
|
8
|
|
|
2,300
|
|
|
2,271
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
77
|
|
|
69
|
|
Total
|
|
77
|
|
|
$
|
83,846
|
|
|
$
|
78,400
|
|
|
28
|
|
|
$
|
24,481
|
|
|
$
|
23,680
|
|
The total TDRs presented in the above table had allocated specific reserves for loan losses totaling
$5.3 million
and
$2.4 million
at
September 30, 2017
and
2016
, respectively.
These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 9. One commercial and industrial TDR loan totaling
$209 thousand
was fully charged-off during the
nine months ended September 30, 2016
. There were
no
charge-offs related to TDR modifications during the three and nine months ended
September 30, 2017
and
2016
, respectively.
We had
7
commercial and industrial loans and
1
commercial real estate loan modified as TDRs within the previous 12 months for which there was a payment default (
90
days or more past due) totaling
$6.4 million
and
$732 thousand
, respectively during the nine months ended
September 30, 2017
. There were no payment defaults during three months ended
September 30, 2017
.
We had
4
residential mortgage loans modified as TDRs within the previous 12 months for which there was a payment default (
90
days or more past due) totaling
$1.1 million
during both the
three and nine
months ended September 30, 2016.
Credit quality indicators
. Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes. Under Valley’s internal risk rating system, loan relationships could be classified as “Pass,” “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Substandard loans include loans that exhibit well-defined weakness and are characterized by the distinct possibility that Valley will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged-off immediately to the allowance for loan losses, and, therefore, not presented in the table below. Loans that do not currently pose a sufficient risk to warrant classification in one of the aforementioned categories, but pose weaknesses that deserve management’s close attention are deemed Special Mention. Loans rated as Pass do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants.
The following table presents the risk category of loans (excluding PCI loans) by class of loans at
September 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure - by internally assigned risk rating
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Doubtful
|
|
Total Non-PCI Loans
|
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,337,467
|
|
|
$
|
58,376
|
|
|
$
|
102,649
|
|
|
$
|
6,163
|
|
|
$
|
2,504,655
|
|
Commercial real estate
|
|
8,241,629
|
|
|
42,145
|
|
|
76,059
|
|
|
—
|
|
|
8,359,833
|
|
Construction
|
|
856,363
|
|
|
364
|
|
|
1,955
|
|
|
—
|
|
|
858,682
|
|
Total
|
|
$
|
11,435,459
|
|
|
$
|
100,885
|
|
|
$
|
180,663
|
|
|
$
|
6,163
|
|
|
$
|
11,723,170
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,246,457
|
|
|
$
|
44,316
|
|
|
$
|
64,649
|
|
|
$
|
1,596
|
|
|
$
|
2,357,018
|
|
Commercial real estate
|
|
7,486,469
|
|
|
57,591
|
|
|
84,268
|
|
|
—
|
|
|
7,628,328
|
|
Construction
|
|
708,070
|
|
|
200
|
|
|
1,996
|
|
|
—
|
|
|
710,266
|
|
Total
|
|
$
|
10,440,996
|
|
|
$
|
102,107
|
|
|
$
|
150,913
|
|
|
$
|
1,596
|
|
|
$
|
10,695,612
|
|
For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.
The following table presents the recorded investment in those loan classes based on payment activity as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure - by payment activity
|
|
Performing
Loans
|
|
Non-Performing
Loans
|
|
Total Non-PCI
Loans
|
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
2,778,805
|
|
|
$
|
12,974
|
|
|
$
|
2,791,779
|
|
Home equity
|
|
369,364
|
|
|
1,766
|
|
|
371,130
|
|
Automobile
|
|
1,171,501
|
|
|
78
|
|
|
1,171,579
|
|
Other consumer
|
|
671,949
|
|
|
—
|
|
|
671,949
|
|
Total
|
|
$
|
4,991,619
|
|
|
$
|
14,818
|
|
|
$
|
5,006,437
|
|
December 31, 2016
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
2,672,120
|
|
|
$
|
12,075
|
|
|
$
|
2,684,195
|
|
Home equity
|
|
375,185
|
|
|
1,028
|
|
|
376,213
|
|
Automobile
|
|
1,138,936
|
|
|
146
|
|
|
1,139,082
|
|
Other consumer
|
|
569,499
|
|
|
—
|
|
|
569,499
|
|
Total
|
|
$
|
4,755,740
|
|
|
$
|
13,249
|
|
|
$
|
4,768,989
|
|
Valley evaluates the credit quality of its PCI loan pools based on the expectation of the underlying cash flows of each pool, derived from the aging status and by payment activity of individual loans within the pool. The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of
September 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure - by payment activity
|
|
Performing
Loans
|
|
Non-Performing
Loans
|
|
Total
PCI Loans
|
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
189,158
|
|
|
$
|
13,099
|
|
|
$
|
202,257
|
|
Commercial real estate
|
|
984,789
|
|
|
6,446
|
|
|
991,235
|
|
Construction
|
|
44,294
|
|
|
664
|
|
|
44,958
|
|
Residential mortgage
|
|
144,998
|
|
|
4,658
|
|
|
149,656
|
|
Consumer
|
|
83,203
|
|
|
546
|
|
|
83,749
|
|
Total
|
|
$
|
1,446,442
|
|
|
$
|
25,413
|
|
|
$
|
1,471,855
|
|
December 31, 2016
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
272,483
|
|
|
$
|
8,694
|
|
|
$
|
281,177
|
|
Commercial real estate
|
|
1,080,376
|
|
|
10,963
|
|
|
1,091,339
|
|
Construction
|
|
113,370
|
|
|
1,310
|
|
|
114,680
|
|
Residential mortgage
|
|
179,793
|
|
|
3,930
|
|
|
183,723
|
|
Consumer
|
|
98,469
|
|
|
2,114
|
|
|
100,583
|
|
Total
|
|
$
|
1,744,491
|
|
|
$
|
27,011
|
|
|
$
|
1,771,502
|
|
Other real estate owned (OREO) totaled
$10.8 million
and
$10.2 million
at
September 30, 2017
and
December 31, 2016
, respectively (including
$558 thousand
of OREO properties which are subject to loss-sharing agreements with the FDIC at
December 31, 2016
). There were
no
covered OREO properties at
September 30, 2017
. OREO included foreclosed residential real estate properties totaling
$7.2 million
and
$1.6 million
at
September 30, 2017
and
December 31, 2016
, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled
$4.9 million
and
$7.1 million
at
September 30, 2017
and
December 31, 2016
, respectively.
Note 9. Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the allowance for unfunded letters of credit. Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of the loan portfolio and unfunded letter of credit commitments at the balance sheet date. The allowance for loan losses is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio, including unexpected additional credit impairment of PCI loan pools subsequent to acquisition. There was no allowance allocation for PCI loan losses at
September 30, 2017
and
December 31, 2016
.
The following table summarizes the allowance for credit losses at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(in thousands)
|
Components of allowance for credit losses:
|
|
|
|
Allowance for loan losses
|
$
|
118,966
|
|
|
$
|
114,419
|
|
Allowance for unfunded letters of credit
|
2,514
|
|
|
2,185
|
|
Total allowance for credit losses
|
$
|
121,480
|
|
|
$
|
116,604
|
|
The following table summarizes the provision for credit losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Components of provision for credit losses:
|
|
|
|
|
|
|
|
Provision for loan losses
|
$
|
1,301
|
|
|
$
|
5,949
|
|
|
$
|
7,413
|
|
|
$
|
8,041
|
|
Provision for unfunded letters of credit
|
339
|
|
|
(109
|
)
|
|
329
|
|
|
28
|
|
Total provision for credit losses
|
$
|
1,640
|
|
|
$
|
5,840
|
|
|
$
|
7,742
|
|
|
$
|
8,069
|
|
The following table details activity in the allowance for loan losses by portfolio segment for the three and
nine months ended September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and Industrial
|
|
Commercial
Real Estate
|
|
Residential
Mortgage
|
|
Consumer
|
|
Total
|
|
(in thousands)
|
Three Months Ended
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
51,617
|
|
|
$
|
55,455
|
|
|
$
|
4,186
|
|
|
$
|
5,188
|
|
|
$
|
116,446
|
|
Loans charged-off
|
(265
|
)
|
|
—
|
|
|
(129
|
)
|
|
(1,335
|
)
|
|
(1,729
|
)
|
Charged-off loans recovered
|
2,320
|
|
|
42
|
|
|
220
|
|
|
366
|
|
|
2,948
|
|
Net recoveries (charge-offs)
|
2,055
|
|
|
42
|
|
|
91
|
|
|
(969
|
)
|
|
1,219
|
|
Provision for loan losses
|
1,017
|
|
|
(198
|
)
|
|
(385
|
)
|
|
867
|
|
|
1,301
|
|
Ending balance
|
$
|
54,689
|
|
|
$
|
55,299
|
|
|
$
|
3,892
|
|
|
$
|
5,086
|
|
|
$
|
118,966
|
|
Three Months Ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
48,025
|
|
|
$
|
51,877
|
|
|
$
|
3,495
|
|
|
$
|
4,691
|
|
|
$
|
108,088
|
|
Loans charged-off
|
(3,763
|
)
|
|
—
|
|
|
(518
|
)
|
|
(782
|
)
|
|
(5,063
|
)
|
Charged-off loans recovered
|
902
|
|
|
44
|
|
|
495
|
|
|
282
|
|
|
1,723
|
|
Net (charge-offs) recoveries
|
(2,861
|
)
|
|
44
|
|
|
(23
|
)
|
|
(500
|
)
|
|
(3,340
|
)
|
Provision for loan losses
|
5,588
|
|
|
539
|
|
|
(94
|
)
|
|
(84
|
)
|
|
5,949
|
|
Ending balance
|
$
|
50,752
|
|
|
$
|
52,460
|
|
|
$
|
3,378
|
|
|
$
|
4,107
|
|
|
$
|
110,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and Industrial
|
|
Commercial
Real Estate
|
|
Residential
Mortgage
|
|
Consumer
|
|
Total
|
|
(in thousands)
|
Nine Months Ended
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
50,820
|
|
|
$
|
55,851
|
|
|
$
|
3,702
|
|
|
$
|
4,046
|
|
|
$
|
114,419
|
|
Loans charged-off
|
(4,889
|
)
|
|
(553
|
)
|
|
(488
|
)
|
|
(3,467
|
)
|
|
(9,397
|
)
|
Charged-off loans recovered
|
3,480
|
|
|
824
|
|
|
903
|
|
|
1,324
|
|
|
6,531
|
|
Net (charge-offs) recoveries
|
(1,409
|
)
|
|
271
|
|
|
415
|
|
|
(2,143
|
)
|
|
(2,866
|
)
|
Provision for loan losses
|
5,278
|
|
|
(823
|
)
|
|
(225
|
)
|
|
3,183
|
|
|
7,413
|
|
Ending balance
|
$
|
54,689
|
|
|
$
|
55,299
|
|
|
$
|
3,892
|
|
|
$
|
5,086
|
|
|
$
|
118,966
|
|
Nine Months Ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
48,767
|
|
|
$
|
48,006
|
|
|
$
|
4,625
|
|
|
$
|
4,780
|
|
|
$
|
106,178
|
|
Loans charged-off
|
(5,507
|
)
|
|
(519
|
)
|
|
(750
|
)
|
|
(2,553
|
)
|
|
(9,329
|
)
|
Charged-off loans recovered
|
2,418
|
|
|
1,591
|
|
|
604
|
|
|
1,194
|
|
|
5,807
|
|
Net (charge-offs) recoveries
|
(3,089
|
)
|
|
1,072
|
|
|
(146
|
)
|
|
(1,359
|
)
|
|
(3,522
|
)
|
Provision for loan losses
|
5,074
|
|
|
3,382
|
|
|
(1,101
|
)
|
|
686
|
|
|
8,041
|
|
Ending balance
|
$
|
50,752
|
|
|
$
|
52,460
|
|
|
$
|
3,378
|
|
|
$
|
4,107
|
|
|
$
|
110,697
|
|
The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology at
September 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and Industrial
|
|
Commercial
Real Estate
|
|
Residential
Mortgage
|
|
Consumer
|
|
Total
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
7,104
|
|
|
$
|
2,644
|
|
|
$
|
733
|
|
|
$
|
69
|
|
|
$
|
10,550
|
|
Collectively evaluated for impairment
|
47,585
|
|
|
52,655
|
|
|
3,159
|
|
|
5,017
|
|
|
108,416
|
|
Total
|
$
|
54,689
|
|
|
$
|
55,299
|
|
|
$
|
3,892
|
|
|
$
|
5,086
|
|
|
$
|
118,966
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
68,944
|
|
|
$
|
63,912
|
|
|
$
|
14,313
|
|
|
$
|
3,249
|
|
|
$
|
150,418
|
|
Collectively evaluated for impairment
|
2,435,711
|
|
|
9,154,603
|
|
|
2,777,466
|
|
|
2,211,409
|
|
|
16,579,189
|
|
Loans acquired with discounts related to credit quality
|
202,257
|
|
|
1,036,193
|
|
|
149,656
|
|
|
83,749
|
|
|
1,471,855
|
|
Total
|
$
|
2,706,912
|
|
|
$
|
10,254,708
|
|
|
$
|
2,941,435
|
|
|
$
|
2,298,407
|
|
|
$
|
18,201,462
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
5,864
|
|
|
$
|
3,872
|
|
|
$
|
725
|
|
|
$
|
70
|
|
|
$
|
10,531
|
|
Collectively evaluated for impairment
|
44,956
|
|
|
51,979
|
|
|
2,977
|
|
|
3,976
|
|
|
103,888
|
|
Total
|
$
|
50,820
|
|
|
$
|
55,851
|
|
|
$
|
3,702
|
|
|
$
|
4,046
|
|
|
$
|
114,419
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
30,640
|
|
|
$
|
62,289
|
|
|
$
|
18,356
|
|
|
$
|
3,534
|
|
|
$
|
114,819
|
|
Collectively evaluated for impairment
|
2,326,378
|
|
|
8,276,305
|
|
|
2,665,839
|
|
|
2,081,260
|
|
|
15,349,782
|
|
Loans acquired with discounts related to credit quality
|
281,177
|
|
|
1,206,019
|
|
|
183,723
|
|
|
100,583
|
|
|
1,771,502
|
|
Total
|
$
|
2,638,195
|
|
|
$
|
9,544,613
|
|
|
$
|
2,867,918
|
|
|
$
|
2,185,377
|
|
|
$
|
17,236,103
|
|
Note 10. Goodwill and Other Intangible Assets
Goodwill totaled
$690.6 million
at both
September 30, 2017
and
December 31, 2016
. There were no changes to the carrying amounts of goodwill allocated to Valley’s business segments, or reporting units thereof, for goodwill impairment analysis (as reported in Valley’s Annual Report on Form 10-K for the year ended
December 31, 2016
). There was
no
impairment of goodwill during the
three and nine
months ended
September 30, 2017
and
2016
.
The following table summarizes other intangible assets as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Valuation
Allowance
|
|
Net
Intangible
Assets
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
|
Loan servicing rights
|
$
|
77,072
|
|
|
$
|
(55,613
|
)
|
|
$
|
(715
|
)
|
|
$
|
20,744
|
|
Core deposits
|
43,396
|
|
|
(23,142
|
)
|
|
—
|
|
|
20,254
|
|
Other
|
4,087
|
|
|
(2,224
|
)
|
|
—
|
|
|
1,863
|
|
Total other intangible assets
|
$
|
124,555
|
|
|
$
|
(80,979
|
)
|
|
$
|
(715
|
)
|
|
$
|
42,861
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Loan servicing rights
|
$
|
73,002
|
|
|
$
|
(52,634
|
)
|
|
$
|
(900
|
)
|
|
$
|
19,468
|
|
Core deposits
|
61,504
|
|
|
(37,562
|
)
|
|
—
|
|
|
23,942
|
|
Other
|
4,087
|
|
|
(2,013
|
)
|
|
—
|
|
|
2,074
|
|
Total other intangible assets
|
$
|
138,593
|
|
|
$
|
(92,209
|
)
|
|
$
|
(900
|
)
|
|
$
|
45,484
|
|
Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets in proportion to, and over the period of, estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. See the "Assets and Liabilities Measured at Fair Value on a Non-recurring Basis" section of Note 6 for additional information regarding the fair valuation and impairment of loan servicing rights.
Core deposits are amortized using an accelerated method and have a weighted average amortization period of
11 years
. The line item labeled “Other” included in the table above primarily consists of customer lists and covenants not to compete, which are amortized over their expected lives generally using a straight-line method and have a weighted average amortization period of approximately
20 years
. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists.
No
impairment was recognized during the
three and nine
months ended
September 30, 2017
and
2016
.
The following table presents the estimated future amortization expense of other intangible assets for the remainder of
2017
through
2021
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Servicing
Rights
|
|
Core
Deposits
|
|
Other
|
|
(in thousands)
|
2017
|
$
|
1,439
|
|
|
$
|
1,154
|
|
|
$
|
69
|
|
2018
|
4,798
|
|
|
4,215
|
|
|
249
|
|
2019
|
3,812
|
|
|
3,671
|
|
|
235
|
|
2020
|
3,031
|
|
|
3,127
|
|
|
220
|
|
2021
|
2,301
|
|
|
2,582
|
|
|
206
|
|
Valley recognized amortization expense on other intangible assets, including net impairment (or recovery of impairment) charges on loan servicing rights, totaling approximately $
2.5 million
and $
2.7 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$7.6 million
and
$8.5 million
for the
nine months ended September 30, 2017
and
2016
, respectively.
Note 11. Stock–Based Compensation
Valley currently has one active employee stock option plan, the 2016 Long-Term Stock Incentive Plan (the “2016 Stock Plan”), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016. The purpose of the 2016 Plan is to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.
Under the 2016 Stock Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors. As of
September 30, 2017
,
7.3 million
shares of common stock were available for issuance under the 2016 Stock Plan. The essential features of each award are described in the award agreement relating to that award. The grant, exercise, vesting, settlement or payment of an award may be based upon the fair value of Valley’s common stock on the last sale price reported for Valley’s common stock on such date or the last sale price reported preceding such date, except for performance-based awards with a market condition. The grant date fair values of performance-based awards that vest based on a market condition are determined by a third party specialist using a Monte Carlo valuation model.
Restricted Stock.
Restricted stock is awarded to key employees, providing for the immediate award of our common stock subject to certain vesting and restrictions under the 2016 Stock Plan. Compensation expense is
measured based on the grant-date fair value of the shares. Valley awarded time-based restricted stock totaling
482 thousand
shares and
534 thousand
shares during the
nine months ended September 30, 2017
and
2016
, respectively, to both executive officers and key employees of Valley. The majority of the awards have vesting periods of
three
years. Generally, the restrictions on such awards lapse at an annual rate of
one-third
of the total award commencing with the first anniversary of the date of grant. The average grant date fair value of the restricted stock awards granted during the
nine months ended September 30, 2017
and
2016
was
$11.71
per share and
$8.58
per share, respectively.
Restricted Stock Units.
Valley granted
371 thousand
shares and
431 thousand
shares of performance-based RSUs to certain executive officers for the
nine months ended September 30, 2017
and
2016
, respectively. The performance-based awards vest based on (i) growth in tangible book value per share plus dividends (
75 percent
of performance shares) and (ii) total shareholder return as compared to our peer group (
25 percent
of performance shares). The performance based awards "cliff" vest after
three
years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents and accrued interest (if applicable), per the terms of the agreements, are accumulated and paid to the grantee at the vesting date, or forfeited if the performance conditions are not met. The grant date fair value of the RSUs granted during the
nine months ended September 30, 2017
and
2016
was
$11.05
per share and
$8.32
per share, respectively.
Valley recorded total stock-based compensation expense of
$2.7 million
and
$2.2 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$9.6 million
and
$7.4 million
for the
nine months ended September 30, 2017
and
2016
, respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period.
As of September 30, 2017
, the unrecognized amortization expense for all stock-based employee compensation totaled approximately
$13.8 million
and will be recognized over an average remaining vesting period of
1.9 years
.
Note 12. Derivative Instruments and Hedging Activities
Valley enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
Cash Flow Hedges of Interest Rate Risk
. Valley’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Valley uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
Fair Value Hedges of Fixed Rate Assets and Liabilities
. Valley is exposed to changes in the fair value of certain of its fixed rate assets or liabilities due to changes in benchmark interest rates based on one-month LIBOR. From time to time, Valley uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Valley includes the gain or loss on the hedged items in the same income statement line item as the loss or gain on the related derivatives.
Non-designated Hedges.
Derivatives not designated as hedges may be used to manage Valley’s exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. Derivatives not designated as hedges are not entered into for speculative purposes.
Under a program, Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
At
September 30, 2017
, Valley has one "steepener" swap with a total current notional amount of
$14.5 million
where the receive rate on the swap mirrors the pay rate on the brokered deposits and the rate paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in three-month LIBOR rate and therefore provide an effective economic hedge.
Valley regularly enters into mortgage banking derivatives which are non-designated hedges. These derivatives include interest rate lock commitments provided to customers to fund certain residential mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. Valley enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on Valley’s commitments to fund the loans as well as on its portfolio of mortgage loans held for sale.
Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Fair Value
|
|
|
|
Fair Value
|
|
|
|
Other Assets
|
|
Other Liabilities
|
|
Notional Amount
|
|
Other Assets
|
|
Other Liabilities
|
|
Notional Amount
|
|
(in thousands)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge interest rate caps and swaps
|
$
|
514
|
|
|
$
|
—
|
|
*
|
$
|
607,000
|
|
|
$
|
802
|
|
|
$
|
15,641
|
|
|
$
|
707,000
|
|
Fair value hedge interest rate swaps
|
—
|
|
|
762
|
|
|
7,832
|
|
|
—
|
|
|
986
|
|
|
7,999
|
|
Total derivatives designated as hedging instruments
|
$
|
514
|
|
|
$
|
762
|
|
|
$
|
614,832
|
|
|
$
|
802
|
|
|
$
|
16,627
|
|
|
$
|
714,999
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and embedded derivatives
|
$
|
25,999
|
|
|
$
|
22,972
|
|
*
|
$
|
1,279,055
|
|
|
$
|
25,285
|
|
|
$
|
25,284
|
|
|
$
|
1,075,722
|
|
Mortgage banking derivatives
|
183
|
|
|
134
|
|
|
113,555
|
|
|
2,968
|
|
|
2,166
|
|
|
246,583
|
|
Total derivatives not designated as hedging instruments
|
$
|
26,182
|
|
|
$
|
23,106
|
|
|
$
|
1,392,610
|
|
|
$
|
28,253
|
|
|
$
|
27,450
|
|
|
$
|
1,322,305
|
|
* The fair value for the Chicago Mercantile Exchange cleared derivative positions is inclusive of accrued interest payable and the portion of the cash collateral representing the variation margin posted with (or by) the applicable counterparties.
Chicago Mercantile Exchange (CME) amended their rules to legally characterize the variation margin posted between counterparties to be classified as settlements of the outstanding derivative contracts instead of cash collateral. Effective January 1, 2017, Valley adopted the new rule on a prospective basis to classify its CME variation margin as a single-unit of account with the fair value of certain cash flow and non-designated derivative instruments. As a result, the fair value of the designated cash flow derivatives and non-designated interest rate swaps cleared with the CME were offset by variation margins totaling
$10.9 million
and
$3.1 million
, respectively, and reported in the table above on a net basis at
September 30, 2017
.
Losses included in the consolidated statements of income and in other comprehensive income, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Amount of loss reclassified from accumulated other comprehensive loss to interest expense
|
$
|
(1,930
|
)
|
|
$
|
(3,578
|
)
|
|
$
|
(6,762
|
)
|
|
$
|
(10,146
|
)
|
Amount of gain (loss) recognized in other comprehensive income
|
329
|
|
|
2,962
|
|
|
(936
|
)
|
|
(11,695
|
)
|
The net gains or losses related to cash flow hedge ineffectiveness were immaterial during the three and
nine months ended September 30, 2017
and
2016
. The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were
$9.0 million
and
$12.5 million
at
September 30, 2017
and
December 31, 2016
, respectively.
Amounts reported in accumulated other comprehensive loss related to cash flow interest rate derivatives are reclassified to interest expense as interest payments are made on the hedged variable interest rate liabilities. Valley estimates that
$6.4 million
will be reclassified as an increase to interest expense over the next 12 months.
Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Derivative - interest rate swaps:
|
|
|
|
|
|
|
|
Interest income
|
$
|
75
|
|
|
$
|
129
|
|
|
$
|
224
|
|
|
$
|
32
|
|
Interest expense
|
—
|
|
|
(127
|
)
|
|
—
|
|
|
6,670
|
|
Hedged item - loans and borrowings:
|
|
|
|
|
|
|
|
Interest income
|
$
|
(75
|
)
|
|
$
|
(129
|
)
|
|
$
|
(224
|
)
|
|
$
|
(32
|
)
|
Interest expense
|
—
|
|
|
133
|
|
|
—
|
|
|
(6,646
|
)
|
The amounts recognized in non-interest expense related to ineffectiveness of fair value hedges were immaterial for the three and
nine months ended September 30, 2017
and
2016
.
The net gains (losses) included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Non-designated hedge interest rate derivatives
|
|
|
|
|
|
|
|
Other non-interest expense
|
$
|
37
|
|
|
$
|
171
|
|
|
$
|
(753
|
)
|
|
$
|
(218
|
)
|
Credit Risk Related Contingent Features.
By using derivatives, Valley is exposed to credit risk if counterparties to the derivative contracts do not perform as expected. Management attempts to minimize counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral where appropriate. Credit risk exposure associated with derivative contracts is managed at Valley in conjunction with Valley’s consolidated
counterparty risk management process. Valley’s counterparties and the risk limits monitored by management are periodically reviewed and approved by the Board of Directors.
Valley has agreements with its derivative counterparties providing that if Valley defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Valley could also be declared in default on its derivative counterparty agreements. Additionally, Valley has an agreement with several of its derivative counterparties that contains provisions that require Valley’s debt to maintain an investment grade credit rating from each of the major credit rating agencies from which it receives a credit rating. If Valley’s credit rating is reduced below investment grade, or such rating is withdrawn or suspended, then the counterparty could terminate the derivative positions and Valley would be required to settle its obligations under the agreements.
As of September 30, 2017
, Valley was in compliance with all of the provisions of its derivative counterparty agreements.
As of September 30, 2017
, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was
$11.4 million
. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. At
September 30, 2017
, Valley had
$43.6 million
in collateral posted with counterparties, net of CME variation margin.
Note 13. Balance Sheet Offsetting
Certain financial instruments, including derivatives (consisting of interest rate caps and swaps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default. The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of
September 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
|
|
|
|
Gross Amounts
Recognized
|
|
Gross Amounts
Offset
|
|
Net Amounts
Presented
|
|
Financial
Instruments
|
|
Cash
Collateral
|
|
Net
Amount
|
|
(in thousands)
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps and swaps
|
$
|
26,513
|
|
|
$
|
—
|
|
|
$
|
26,513
|
|
|
$
|
(3,509
|
)
|
|
$
|
—
|
|
|
$
|
23,004
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps and swaps
|
$
|
23,734
|
|
|
$
|
—
|
|
|
$
|
23,734
|
|
|
$
|
(3,509
|
)
|
|
$
|
(10,187
|
)
|
(1)
|
$
|
10,038
|
|
Repurchase agreements
|
200,000
|
|
|
—
|
|
|
200,000
|
|
|
—
|
|
|
(200,000
|
)
|
(2)
|
—
|
|
Total
|
$
|
223,734
|
|
|
$
|
—
|
|
|
$
|
223,734
|
|
|
$
|
(3,509
|
)
|
|
$
|
(210,187
|
)
|
|
$
|
10,038
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps and swaps
|
$
|
26,087
|
|
|
$
|
—
|
|
|
$
|
26,087
|
|
|
$
|
(5,268
|
)
|
|
$
|
—
|
|
|
$
|
20,819
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps and swaps
|
$
|
41,911
|
|
|
$
|
—
|
|
|
$
|
41,911
|
|
|
$
|
(5,268
|
)
|
|
$
|
(36,643
|
)
|
(1)
|
$
|
—
|
|
Repurchase agreements
|
165,000
|
|
|
—
|
|
|
165,000
|
|
|
—
|
|
|
(165,000
|
)
|
(2)
|
—
|
|
Total
|
$
|
206,911
|
|
|
$
|
—
|
|
|
$
|
206,911
|
|
|
$
|
(5,268
|
)
|
|
$
|
(201,643
|
)
|
|
$
|
—
|
|
|
|
(1)
|
Represents the amount of collateral posted with derivatives counterparties that offsets net liabilities. Actual cash collateral posted with all counterparties totaled
$57.7 million
and
$52.4 million
at
September 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(2)
|
Represents the fair value of non-cash pledged investment securities.
|
Note 14. Tax Credit Investments
Valley’s tax credit investments are primarily related to investments promoting qualified affordable housing projects, and other investments related to community development and renewable energy sources. Some of these tax-advantaged investments support Valley’s regulatory compliance with the Community Reinvestment Act (CRA). Valley’s investments in these entities generate a return primarily through the realization of federal income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction of income tax expense.
Valley’s tax credit investments are carried in other assets on the consolidated statements of financial condition. Valley’s unfunded capital and other commitments related to the tax credit investments are carried in accrued expenses and other liabilities on the consolidated statements of financial condition. Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense of the consolidated statements of income using the equity method of accounting. An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value.
The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at
September 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(in thousands)
|
Other Assets:
|
|
|
|
Affordable housing tax credit investments, net
|
$
|
26,397
|
|
|
$
|
29,567
|
|
Other tax credit investments, net
|
40,191
|
|
|
44,763
|
|
Total tax credit investments, net
|
$
|
66,588
|
|
|
$
|
74,330
|
|
Other Liabilities:
|
|
|
|
Unfunded affordable housing tax credit commitments
|
$
|
3,690
|
|
|
$
|
4,850
|
|
Unfunded other tax credit commitments
|
10,194
|
|
|
7,276
|
|
Total unfunded tax credit commitments
|
$
|
13,884
|
|
|
$
|
12,126
|
|
The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the
three and nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Components of Income Tax Expense:
|
|
|
|
|
|
|
|
Affordable housing tax credits and other tax benefits
|
$
|
1,965
|
|
|
$
|
1,065
|
|
|
$
|
4,520
|
|
|
$
|
3,195
|
|
Other tax credit investment credits and tax benefits
|
7,859
|
|
|
6,118
|
|
|
22,825
|
|
|
12,654
|
|
Total reduction in income tax expense
|
$
|
9,824
|
|
|
$
|
7,183
|
|
|
$
|
27,345
|
|
|
$
|
15,849
|
|
Amortization of Tax Credit Investments:
|
|
|
|
|
|
|
|
Affordable housing tax credit investment losses
|
$
|
1,183
|
|
|
$
|
33
|
|
|
$
|
1,937
|
|
|
$
|
1,392
|
|
Affordable housing tax credit investment impairment losses
|
979
|
|
|
128
|
|
|
1,233
|
|
|
328
|
|
Other tax credit investment losses
|
307
|
|
|
107
|
|
|
2,134
|
|
|
775
|
|
Other tax credit investment impairment losses
|
5,920
|
|
|
6,182
|
|
|
16,141
|
|
|
18,865
|
|
Total amortization of tax credit investments recorded in non-interest expense
|
$
|
8,389
|
|
|
$
|
6,450
|
|
|
$
|
21,445
|
|
|
$
|
21,360
|
|
Note 15. Litigation
In the normal course of business, Valley is a party to various outstanding legal proceedings and claims. In the opinion of management, the financial condition, results of operations and liquidity of Valley should not be materially affected by the outcome of such legal proceedings and claims. However, in the event of an unexpected adverse outcome in one or more of our legal proceedings, operating results for a particular period may be negatively impacted. Disclosure is required when a risk of material loss in a litigation or claim is more than remote, even when the risk of a material loss is less than likely. Unless an estimate cannot be made, disclosure is also required of the estimate of the reasonably possible loss or range of loss.
Although there can be no assurance as to the ultimate outcome, Valley has generally denied, or believes it has a meritorious defense and will deny liability in litigation pending against Valley and claims made, including the matter described below. Valley intends to defend vigorously each case against it. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated.
Merrick Bank Corporation v. Valley National Bank and American Express Travel Related Services v. Valley National Bank litigation.
For about a decade, Valley served as the depository bank for various charter operators under regulations of the Department of Transportation (DOT) and contracts entered into with charter operators under those regulations. The purported intent of the regulations is to afford some protection to the customers of the charter operators. A charter operator has several options with regard to fulfilling its obligations under the regulations, with one option requiring the charter operator to deposit the proceeds of tickets purchased for a charter flight into an FDIC insured bank account. The funds for a flight are released when the charter operator certifies that the flight has been completed. Valley stopped serving as a depository bank for the charter business due to the narrow profit in that business combined with the legal expenses incurred to defend itself in a prior case in which Valley was completely successful and the anticipated legal expenses from the following similar cases that are still pending.
Valley served as the depository bank for Myrtle Beach Direct Air (Direct Air) under a contract between Direct Air and Valley approved by the DOT under the DOT regulations. Direct Air commenced operations in 2007 but in March 2012 Direct Air ceased operations and filed for bankruptcy. Thereafter the United States Justice Department charged three of the principals of Direct Air with criminal fraud; that case is expected to go to trial in March 2018. Merrick Bank Corp. (Merrick) was the merchant bank for Direct Air and processed credit card purchases for Direct Air. Following the bankruptcy of Direct Air, Merrick incurred chargebacks in the approximate amount of
$26.2 million
when the Direct Air customers whose flights had been canceled obtained a credit from their card issuing banks for the cost of the ticket or other item purchased from Direct Air. Merrick was not able to recover the
chargebacks from Direct Air. Direct Air’s depository account at Valley contained approximately
$1.0 million
at the time Direct Air ceased operations.
Merrick filed an action against Valley with
ten
counts in December 2013. Valley moved to dismiss
five
of the counts and, in March 2015, the court dismissed
four
of the five counts. American Express Travel Related Services (American Express) filed a similar action against Valley claiming about
$3.0 million
in charge-backs.
Five
of American Express’
eleven
counts have been dismissed. The
two
cases have now been consolidated in the Federal District Court of New Jersey.
During April 2017, all parties attended a mediation, however it was unsuccessful. Shortly before the mediation, Valley filed summary judgment motions on all of the remaining counts in both the Merrick and American Express cases. Merrick and American Express also filed summary judgment motions against Valley. As of the present time, the Court has not rendered any decisions on these pending motions.
At
September 30, 2017
, Valley could not estimate an amount or range of reasonably possible losses related to the matter described above. Based upon information currently available and advice of counsel, Valley believes that the eventual outcome of such claims will not have a material adverse effect on Valley’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of the matters, if unfavorable, may be material to Valley’s results of operations for a particular period.
Note 16. Business Segments
The information under the caption “Business Segments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.