UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)



x☒	Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, ~~2017~~2019



¨ ☐	Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-11277

~~VALLEY NATIONAL BANCORP~~Valley National Bancorp

(Exact name of registrant as specified in its charter)



New Jersey		22-2477875
(State or other jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

~~1455 Valley Road~~ ~~Wayne, NJ~~	~~07470~~
One Penn Plaza
New York,	NY	10119
(Address of principal executive office)		(Zip code)

~~973-305-8800~~973-305-8800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbols	Name of exchange on which registered
Common Stock, no par value	VLY	The Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series A, no par value	VLYPP	The Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series B, no par value	VLYPO	The Nasdaq Stock Market LLC

Indicate by check mark whether the ~~Registrant~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐

Indicate by check mark whether the ~~Registrant~~registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files.) Yes x☒ No ¨☐

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



Large accelerated filer	x☒	Accelerated filer	¨☐	~~Emerging growth~~Smaller reporting company	¨☐

Non-accelerated filer	¨ ~~(Do not check if a smaller reporting company)~~ ☐			~~Smaller reporting~~Emerging growth company	¨☐

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

Exchange Act. ¨☐

Indicate by check mark whether the ~~Registrant~~registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock (no par value), of which ~~264,370,183~~331,800,601 shares were outstanding as of November ~~6, 2017~~7, 2019.

TABLE OF CONTENTS



		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018	2
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	3
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	45
	Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended September 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	58
	Notes to Consolidated Financial Statements	710

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4749

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8283

Item 4.	Controls and Procedures	8284

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	8384

Item 1A.	Risk Factors	8384

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8385

Item 6.	Exhibits	8485

SIGNATURES		8586

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except for share data)


	September 30, 2017			December 31, 2016			September 30, 2019			December 31, 2018
Assets	(Unaudited)						(Unaudited)
Cash and due from banks	$	215,600		$	220,791		$	312,396		$	251,541
Interest bearing deposits with banks	128,226			171,710			185,841			177,088
Investment securities:
Held to maturity (fair value of $1,831,145 at September 30, 2017 and $1,924,597 at December 31, 2016)	1,823,622			1,925,572
Held to maturity (fair value of $2,121,203 at September 30, 2019 and $2,034,943 at December 31, 2018)							2,093,757			2,068,246
Available for sale	1,447,737			1,297,373			1,628,062			1,749,544
Total investment securities	3,271,359			3,222,945			3,721,819			3,817,790
Loans held for sale, at fair value	13,321			57,708			41,621			35,155
Loans	18,201,462			17,236,103			26,567,159			25,035,469
Less: Allowance for loan losses	(118,966		)	(114,419		)	(161,853		)	(151,859		)
Net loans	18,082,496			17,121,684			26,405,306			24,883,610
Premises and equipment, net	289,153			291,180			309,730			341,630
Lease right of use assets							286,960			—
Bank owned life insurance	386,874			391,830			440,026			439,602
Accrued interest receivable	72,063			66,816			97,282			95,296
Goodwill	690,637			690,637			1,084,665			1,084,665
Other intangible assets, net	42,861			45,484			68,150			76,990
Other assets	588,071			583,654			811,743			659,721
Total Assets	$	23,780,661		$	22,864,439		$	33,765,539		$	31,863,088
Liabilities
Deposits:
Non-interest bearing	$	5,099,376		$	5,252,825		$	6,379,271		$	6,175,495
Interest bearing:
Savings, NOW and money market	8,792,734			9,339,012			11,294,679			11,213,495
Time	3,420,656			3,138,871			7,872,172			7,063,984
Total deposits	17,312,766			17,730,708			25,546,122			24,452,974
Short-term borrowings	1,482,709			1,080,960			1,825,417			2,118,914
Long-term borrowings	2,215,219			1,433,906			2,250,633			1,654,268
Junior subordinated debentures issued to capital trusts	41,716			41,577			55,631			55,370
Lease liabilities							311,145			3,125
Accrued expenses and other liabilities	190,267			200,132			218,516			227,983
Total Liabilities	21,242,677			20,487,283			30,207,464			28,512,634
Shareholders’ Equity
Preferred stock, no par value; 50,000,000 shares authorized:
Series A (4,600,000 shares issued at September 30, 2017 and December 31, 2016)	111,590			111,590
Series B (4,000,000 shares issued at September 30, 2017)	98,101			—
Common stock (no par value, authorized 450,000,000 shares; issued 264,197,172 shares at September 30, 2017 and 263,804,877 shares at December 31, 2016)	92,569			92,353
Preferred stock, no par value; 50,000,000 authorized shares:
Series A (4,600,000 shares issued at September 30, 2019 and December 31, 2018)							111,590			111,590
Series B (4,000,000 shares issued at September 30, 2019 and December 31, 2018)							98,101			98,101
Common stock (no par value, authorized 450,000,000 shares; issued 332,101,525 shares at September 30, 2019 and 331,634,951 shares at December 31, 2018)							116,650			116,240
Surplus	2,054,843			2,044,401			2,807,266			2,796,499
Retained earnings	214,981			172,754			454,020			299,642
Accumulated other comprehensive loss	(34,100		)	(42,093		)	(26,468		)	(69,431		)
Treasury stock, at cost (166,047 shares at December 31, 2016)	—			(1,849		)
Treasury stock, at cost (295,961 common shares at September 30, 2019 and 203,734 common shares at December 31, 2018)							(3,084		)	(2,187		)
Total Shareholders’ Equity	2,537,984			2,377,156			3,558,075			3,350,454
Total Liabilities and Shareholders’ Equity	$	23,780,661		$	22,864,439		$	33,765,539		$	31,863,088

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except for share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Interest Income
Interest and fees on loans	$	298,384		$	265,870		$	883,595		$	751,146
Interest and dividends on investment securities:
Taxable	21,801			21,362			67,166			64,907
Tax-exempt	4,219			5,023			13,379			16,383
Dividends	3,171			3,981			9,140			9,648
Interest on federal funds sold and other short-term investments	1,686			805			3,947			2,570
Total interest income	329,261			297,041			977,227			844,654
Interest Expense
Interest on deposits:
Savings, NOW and money market	35,944			28,775			110,247			75,848
Time	42,848			20,109			121,350			51,360
Interest on short-term borrowings	12,953			15,193			40,362			31,838
Interest on long-term borrowings and junior subordinated debentures	16,891			16,164			45,761			50,458
Total interest expense	108,636			80,241			317,720			209,504
Net Interest Income	220,625			216,800			659,507			635,150
Provision for credit losses	8,700			6,552			18,800			24,642
Net Interest Income After Provision for Credit Losses	211,925			210,248			640,707			610,508
Non-Interest Income
Trust and investment services	3,296			3,143			9,296			9,635
Insurance commissions	2,748			3,646			7,922			11,493
Service charges on deposit accounts	5,904			6,597			17,634			20,529
Losses on securities transactions, net	(93		)	(79		)	(114		)	(880		)
Other-than-temporary impairment losses on securities	—			—			(2,928		)	—
Portion recognized in other comprehensive income (before taxes)	—			—			—			—
Net impairment losses on securities recognized in earnings	—			—			(2,928		)	—
Fees from loan servicing	2,463			2,573			7,260			6,841
Gains on sales of loans, net	5,194			3,748			13,700			18,143
(Losses) gains on sales of assets, net	(159		)	(1,899		)	76,997			(2,121		)
Bank owned life insurance	2,687			2,545			6,779			6,960
Other	19,110			8,764			39,880			28,758
Total non-interest income	41,150			29,038			176,426			99,358
Non-Interest Expense
Salary and employee benefits expense	77,271			80,778			236,559			253,014
Net occupancy and equipment expense	29,203			26,295			86,789			81,120
FDIC insurance assessment	5,098			7,421			16,150			20,963
Amortization of other intangible assets	4,694			4,697			13,175			13,607
Professional and legal fees	5,870			6,638			15,286			29,022
Amortization of tax credit investments	4,385			5,412			16,421			15,156
Telecommunication expense	2,698			3,327			7,317			9,936
Other	16,658			17,113			43,712			52,531
Total non-interest expense	145,877			151,681			435,409			475,349
Income Before Income Taxes	107,198			87,605			381,724			234,517
Income tax expense	25,307			18,046			110,035			50,191
Net Income	81,891			69,559			271,689			184,326
Dividends on preferred stock	3,172			3,172			9,516			9,516
Net Income Available to Common Shareholders	$	78,719		$	66,387		$	262,173		$	174,810

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (continued)

(in thousands, except for share data)

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Interest Income
Interest and fees on loans $ 186,773
$ 171,143
$ 547,647
$ 506,640
Interest and dividends on investment securities:
Taxable 17,922
14,232
54,439
42,487
Tax-exempt 3,752
4,023
11,726
11,447
Dividends 2,657
1,612
6,945
4,408
Interest on federal funds sold and other short-term investments 546
193
1,156
846
Total interest income 211,650
191,203
621,913
565,828
Interest Expense
Interest on deposits:
Savings, NOW and money market 15,641
10,165
38,538
29,369
Time 10,852
9,412
30,571
28,220
Interest on short-term borrowings 5,161
3,545
14,578
8,537
Interest on long-term borrowings and junior subordinated debentures 15,142
13,935
41,883
45,948
Total interest expense 46,796
37,057
125,570
112,074
Net Interest Income 164,854
154,146
496,343
453,754
Provision for credit losses 1,640
5,840
7,742
8,069
Net Interest Income After Provision for Credit Losses 163,214
148,306
488,601
445,685
Non-Interest Income
Trust and investment services 3,062
2,628
8,606
7,612
Insurance commissions 4,519
4,580
13,938
14,133
Service charges on deposit accounts 5,558
5,263
16,136
15,460
Gains (losses) on securities transactions, net 6
(10 ) 5
258
Fees from loan servicing 1,895
1,598
5,541
4,753
Gains on sales of loans, net 5,520
4,823
14,439
9,723
Bank owned life insurance 1,541
1,683
5,705
5,464
Other 3,987
4,288
11,467
13,162
Total non-interest income 26,088
24,853
75,837
70,565
Non-Interest Expense
Salary and employee benefits expense 67,062
58,107
192,116
174,438
Net occupancy and equipment expense 22,756
20,658
68,400
65,615
FDIC insurance assessment 4,603
4,804
14,658
14,998
Amortization of other intangible assets 2,498
2,675
7,596
8,452
Professional and legal fees 11,110
4,031
20,107
13,398
Amortization of tax credit investments 8,389
6,450
21,445
21,360
Telecommunication expense 2,464
2,459
7,830
7,139
Other 13,683
14,084
40,604
45,896
Total non-interest expense 132,565
113,268
372,756
351,296
Income Before Income Taxes 56,737
59,891
191,682
164,954
Income tax expense 17,088
17,049
55,873
46,898
Net Income $ 39,649
$ 42,842
$ 135,809
$ 118,056
Dividends on preferred stock 2,683
1,797
6,277
5,391
Net Income Available to Common Shareholders $ 36,966
$ 41,045
$ 129,532
$ 112,665
Earnings Per Common Share:
Basic $ 0.14
$ 0.16
$ 0.49
$ 0.44
Diluted 0.14
0.16
0.49
0.44
Cash Dividends Declared per Common Share 0.11
0.11
0.33
0.33
Weighted Average Number of Common Shares Outstanding:
Basic 264,058,174
254,473,994
263,938,786
254,310,769
Diluted 264,936,220
254,940,307
264,754,845
254,698,593



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Earnings Per Common Share:
Basic	$	0.24	$	0.20	$	0.79	$	0.53
Diluted	0.24		0.20		0.79		0.53
Cash Dividends Declared per Common Share	0.11		0.11		0.33		0.33
Weighted Average Number of Common Shares Outstanding:
Basic	331,797,982		331,486,500		331,716,652		331,180,213
Diluted	333,405,196		333,000,242		333,039,436		332,694,080

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016			2017			2016			2019		2018			2019			2018
Net income	$	39,649		$	42,842		$	135,809		$	118,056		$	81,891	$	69,559		$	271,689		$	184,326
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale securities
Net gains arising during the period	1,457			4,902			4,660			12,550
Less reclassification adjustment for net (gains) losses included in net income	(4		)	6			(4		)	(162		)
Total	1,453			4,908			4,656			12,388
Non-credit impairment losses on available for sale securities
Net change in non-credit impairment losses on securities	(223		)	(74		)	(89		)	168
Less reclassification adjustment for accretion of credit impairment losses included in net income	(40		)	(50		)	(166		)	(336		)
Net gains (losses) arising during the period													8,135		(8,683		)	42,890			(36,129		)
Less reclassification adjustment for net losses included in net income													72		57			90			631
Total	(263		)	(124		)	(255		)	(168		)	8,207		(8,626		)	42,980			(35,498		)
Unrealized gains and losses on derivatives (cash flow hedges)
Net gains (losses) on derivatives arising during the period	198			1,735			(548		)	(6,939		)	76		221			(989		)	2,636
Less reclassification adjustment for net losses included in net income	1,132			2,095			3,963			5,943			324		472			806			2,127
Total	1,330			3,830			3,415			(996		)	400		693			(183		)	4,763
Defined benefit pension plan
Amortization of net loss	59			42			177			128			56		113			166			337
Total other comprehensive income	2,579			8,656			7,993			11,352
Total other comprehensive income (loss)													8,663		(7,820		)	42,963			(30,398		)
Total comprehensive income	$	42,228		$	51,498		$	143,802		$	129,408		$	90,554	$	61,739		$	314,652		$	153,928

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the Nine Months Ended September 30, 2019



			Common Stock								Accumulated
	Preferred Stock		Shares	Amount		Surplus		Retained Earnings			Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity
	($ in thousands)
Balance - December 31, 2018	$	209,691	331,431	$	116,240	$	2,796,499	$	299,642		$	(69,431	)	$	(2,187	)	$	3,350,454
Adjustment due to the adoption of ASU No. 2016-02	—		—	—		—		4,414			—			—			4,414
Adjustment due to the adoption of ASU No. 2017-08	—		—	—		—		(1,446		)	—			—			(1,446		)
Balance - January 1, 2019	209,691		331,431	116,240		2,796,499		302,610			(69,431		)	(2,187		)	3,353,422
Net income	—		—	—		—		113,330			—			—			113,330
Other comprehensive income, net of tax	—		—	—		—		—			16,174			—			16,174
Cash dividends declared:
Preferred stock, Series A, $0.39 per share	—		—	—		—		(1,797		)	—			—			(1,797		)
Preferred stock, Series B, $0.34 per share	—		—	—		—		(1,375		)	—			—			(1,375		)
Common stock, $0.11 per share	—		—	—		—		(36,686		)	—			—			(36,686		)
Effect of stock incentive plan, net	—		302	226		2,935		(99		)	—			(1,251		)	1,811
Balance - March 31, 2019	209,691		331,733	116,466		2,799,434		375,983			(53,257		)	(3,438		)	3,444,879
Net income	—		—	—		—		76,468			—			—			76,468
Other comprehensive income, net of tax	—		—	—		—		—			18,126			—			18,126
Cash dividends declared:
Preferred stock, Series A, $0.39 per share	—		—	—		—		(1,797		)	—			—			(1,797		)
Preferred stock, Series B, $0.34 per share	—		—	—		—		(1,375		)	—			—			(1,375		)
Common stock, $0.11 per share	—		—	—		—		(36,712		)	—			—			(36,712		)
Effect of stock incentive plan, net	—		55	105		4,625		(377		)	—			176			4,529
Balance - June 30, 2019	209,691		331,788	116,571		2,804,059		412,190			(35,131		)	(3,262		)	3,504,118
Net income	—		—	—		—		81,891			—			—			81,891
Other comprehensive income, net of tax	—		—	—		—		—			8,663			—			8,663
Cash dividends declared:
Preferred stock, Series A, $0.39 per share	—		—	—		—		(1,797		)	—			—			(1,797		)
Preferred stock, Series B, $0.34 per share	—		—	—		—		(1,375		)	—			—			(1,375		)
Common stock, $0.11 per share	—		—	—		—		(36,732		)	—			—			(36,732		)
Effect of stock incentive plan, net	—		18	79		3,207		(157		)	—			178			3,307
Balance - September 30, 2019	$	209,691	331,806	$	116,650	$	2,807,266	$	454,020		$	(26,468	)	$	(3,084	)	$	3,558,075

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)

For the Nine Months Ended September 30, 2018



			Common Stock								Accumulated
	Preferred Stock		Shares	Amount		Surplus		Retained Earnings			Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity
	($ in thousands)
Balance - December 31, 2017	$	209,691	264,469	$	92,727	$	2,060,356	$	216,733		$	(46,005	)	$	(337	)	$	2,533,165
Reclassification due to the adoption of ASU No. 2016-01	—		—	—		—		480			(480		)	—			—
Reclassification due to the adoption of ASU No. 2017-12	—		—	—		—		61			(61		)	—			—
Adjustment due to the adoption of ASU No. 2016-16	—		—	—		—		(17,611		)	—			—			(17,611		)
Balance - January 1, 2018	209,691		264,469	92,727		2,060,356		199,663			(46,546		)	(337		)	2,515,554
Net income	—		—	—		—		41,965			—			—			41,965
Other comprehensive loss, net of tax	—		—	—		—		—			(17,557		)	—			(17,557		)
Cash dividends declared:
Preferred stock, Series A, $0.39 per share	—		—	—		—		(1,797		)	—			—			(1,797		)
Preferred stock, Series B, $0.34 per share	—		—	—		—		(1,375		)	—			—			(1,375		)
Common stock, $0.11 per share	—		—	—		—		(36,635		)	—			—			(36,635		)
Effect of stock incentive plan, net	—		1,714	355		8,717		(2,266		)	—			(169		)	6,637
Common stock issued	—		65,007	22,742		715,121		—			—			348			738,211
Balance - March 31, 2018	209,691		331,190	115,824		2,784,194		199,555			(64,103		)	(158		)	3,245,003
Net income	—		—	—		—		72,802			—			—			72,802
Other comprehensive income, net of tax	—		—	—		—		—			(5,021		)	—			(5,021		)
Cash dividends declared:
Preferred stock, Series A, $0.39 per share	—		—	—		—		(1,797		)	—			—			(1,797		)
Preferred stock, Series B, $0.34 per share	—		—	—		—		(1,375		)	—			—			(1,375		)
Common stock, $0.11 per share	—		—	—		—		(36,534		)	—			—			(36,534		)
Effect of stock incentive plan, net	—		264	203		4,996		(58		)	—			(907		)	4,234
Balance - June 30, 2018	209,691		331,454	116,027		2,789,190		232,593			(69,124		)	(1,065		)	3,277,312
Net income	—		—	—		—		69,559			—			—			69,559
Other comprehensive income, net of tax	—		—	—		—		—			(7,820		)	—			(7,820		)
Cash dividends declared:
Preferred stock, Series A, $0.39 per share	—		—	—		—		(1,797		)	—			—			(1,797		)
Preferred stock, Series B, $0.34 per share	—		—	—		—		(1,375		)	—			—			(1,375		)
Common stock, $0.11 per share	—		—	—		—		(36,584		)	—			—			(36,584		)
Effect of stock incentive plan, net	—		47	127		3,968		(28		)	—			(426		)	3,641
Balance - September 30, 2018	$	209,691	331,501	$	116,154	$	2,793,158	$	262,368		$	(76,944	)	$	(1,491	)	$	3,302,936

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2019			2018
Cash flows from operating activities:
Net income	$	135,809		$	118,056		$	271,689		$	184,326
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,408			18,593			38,329			20,367
Stock-based compensation	9,563			7,382			11,504			15,840
Provision for credit losses	7,742			8,069			18,800			24,642
Net amortization of premiums and accretion of discounts on securities and borrowings	17,476			14,152			21,584			26,262
Amortization of other intangible assets	7,596			8,452			13,175			13,607
Gains on securities transactions, net	(5		)	(258		)
Losses on securities transactions, net							114			880
Proceeds from sales of loans held for sale	484,102			337,069			644,454			591,583
Gains on sales of loans, net	(14,439		)	(9,723		)	(13,700		)	(18,143		)
Net impairment losses on securities recognized in earnings							2,928			—
Originations of loans held for sale	(201,393		)	(342,989		)	(338,996		)	(307,623		)
Losses (gains) on sales of assets, net	359			(1,009		)
(Gains) losses on sales of assets, net							(76,997		)	2,121
Net change in:
Fair value of borrowings hedged by derivative transactions	—			6,646
Cash surrender value of bank owned life insurance	(5,705		)	(5,464		)	(6,779		)	(6,960		)
Accrued interest receivable	(5,247		)	(261		)	(1,986		)	(6,553		)
Other assets	(7,052		)	(1,029		)	(264,228		)	(39,119		)
Accrued expenses and other liabilities	(17,465		)	(9,888		)	92,542			(5,941		)
Net cash provided by operating activities	429,749			147,798			412,433			495,289
Cash flows from investing activities:
Net loan originations and purchases	(1,200,913		)	(776,662		)	(1,846,329		)	(2,324,977		)
Investment securities held to maturity:
Purchases	(127,318		)	(502,833		)	(317,794		)	(220,192		)
Maturities, calls and principal repayments	219,967			243,764			281,961			195,448
Investment securities available for sale:
Purchases	(293,788		)	(557,978		)	(19,892		)	(239,226		)
Sales	—			2,081			—			38,625
Maturities, calls and principal repayments	144,221			800,967			188,619			194,312
Death benefit proceeds from bank owned life insurance	10,661			2,406			6,354			2,546
Proceeds from sales of real estate property and equipment	7,717			18,243			107,132			6,665
Purchases of real estate property and equipment	(13,341		)	(17,155		)	(15,753		)	(16,880		)
Cash and cash equivalents acquired in acquisition							—			156,612
Net cash used in investing activities	(1,252,794		)	(787,167		)	(1,615,702		)	(2,207,067		)
Cash flows from financing activities:
Net change in deposits	(417,942		)	718,632			1,093,148			869,967
Net change in short-term borrowings	401,749			356,365			(293,497		)	1,569,824
Proceeds from issuance of long-term borrowings, net	965,000			385,000
Advances of long-term borrowings							850,000			—
Repayments of long-term borrowings	(185,000		)	(749,000		)	(255,000		)	(675,682		)
Proceeds from issuance of preferred stock, net	98,101			—
Cash dividends paid to preferred shareholders	(6,277		)	(5,391		)	(9,516		)	(9,516		)
Cash dividends paid to common shareholders	(84,143		)	(83,821		)	(110,037		)	(102,414		)
Purchase of common shares to treasury	(2,284		)	(1,700		)	(1,505		)	(2,780		)
Common stock issued, net	5,166			4,610			(351		)	2,648
Other, net							(365		)	—
Net cash provided by financing activities	774,370			624,695			1,272,877			1,652,047
Net change in cash and cash equivalents	(48,675		)	(14,674		)	69,608			(59,731		)
Cash and cash equivalents at beginning of year	392,501			413,800			428,629			416,110
Cash and cash equivalents at end of period	$	343,826		$	399,126		$	498,237		$	356,379

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

	Nine Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2019		2018
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings	$	125,433	$	115,253	$	312,663	$	205,821
Federal and state income taxes	27,003		24,464		106,296		47,217
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned	$	7,147	$	7,611	$	1,453	$	697
Transfer of loans to loans held for sale	225,541		174,501		302,861		289,633
Lease right of use assets obtained in exchange for operating lease liabilities					306,471		—
Acquisition:
Non-cash assets acquired:
Investment securities held to maturity					$	—	$	214,217
Investment securities available for sale					—		308,385
Loans					—		3,736,984
Premises and equipment					—		62,066
Bank owned life insurance					—		49,052
Accrued interest receivable					—		12,123
Goodwill					—		394,028
Other intangible assets					—		45,906
Other assets					—		100,059
Total non-cash assets acquired					$	—	$	4,922,820
Liabilities assumed:
Deposits					$	—	$	3,564,843
Short-term borrowings					—		649,979
Long-term borrowings					—		87,283
Junior subordinated debentures issued to capital trusts					—		13,249
Accrued expenses and other liabilities					—		26,848
Total liabilities assumed					—		4,342,202
Net non-cash assets acquired					$	—	$	580,618
Net cash and cash equivalents acquired in acquisition					$	—	$	156,612
Common stock issued in acquisition					$	—	$	737,230

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

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

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations, changes in shareholders' equity and cash flows at September 30, ~~2017~~2019 and for all periods presented have been made. The results of operations for the three and nine months ended on September 30, ~~2017~~2019 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;~~losses, purchased credit impaired loans, the evaluation of goodwill and other intangible assets ~~and investment securities~~ for ~~impairment; fair value measurements of assets and liabilities;~~impairment, 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.~~2018.

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,~~In June 2019, Valley announced that it will acquire Oritani Financial Corp. (“Oritani”) and its ~~entry into a merger agreement with USAmeriBancorp, Inc. (USAB)~~principal subsidiary, Oritani Bank, headquartered in ~~Clearwater, Florida. USAB, largely through its wholly-owned subsidiary, USAmeriBank,~~Washington Township, New Jersey. Oritani has approximately ~~$4.5~~$4.0 billion in assets, ~~$3.6~~$3.4 billion in ~~net~~ loans, ~~and $3.6~~$2.9 billion in deposits, and maintains a branch network of 30 ~~offices. The acquisition will expand Valley's Florida presence and establish a presence~~26 offices in ~~Alabama.~~New Jersey. The common shareholders of ~~USAB~~Oritani will receive ~~6.1~~1.60 shares of Valley common stock for each ~~USAB~~Oritani 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.own. The transaction is valued at an estimated ~~$816~~$740 million, based on Valley’s closing stock price on ~~July~~June 25, ~~2017.~~2019. The ~~acquisition~~transaction is expected to close in the ~~first~~fourth quarter of ~~2018, and~~2019. Valley has received all ~~necessary banking~~the requisite regulatory approvals to complete the merger. ~~However, the~~The merger ~~is still~~remains subject to ~~a number of~~other customary closing conditions, including the approval by the shareholders of both Valley and ~~USAB shareholder approvals~~Oritani at their respective ~~shareholder~~special meetings to be held on ~~December~~November 14, ~~2017.~~2019.

Note 3.2. Earnings Per Common Share

The following table shows the calculation of both basic and diluted earnings per common share for the three and nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands, except for share data)
Net income available to common shareholders	$	78,719	$	66,387	$	262,173	$	174,810
Basic weighted average number of common shares outstanding	331,797,982		331,486,500		331,716,652		331,180,213
Plus: Common stock equivalents	1,607,214		1,513,742		1,322,784		1,513,867
Diluted weighted average number of common shares outstanding	333,405,196		333,000,242		333,039,436		332,694,080
Earnings per common share:
Basic	$	0.24	$	0.20	$	0.79	$	0.53
Diluted	0.24		0.20		0.79		0.53

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~~265 thousand and 475 thousand shares for ~~both~~ the three and nine months ended September 30, ~~2017~~2019, respectively. Anti-dilutive warrants and ~~4.6~~common stock options equaled 2.9 millionshares and 3.3 million shares for ~~both~~ the three and nine months ended September 30, ~~2016,~~2018, respectively. All of Valley's outstanding warrants expired unexercised in the fourth quarter of 2018.

Note 4.3. Accumulated Other Comprehensive Loss

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three and nine months ended September 30, ~~2017.~~2019:

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		Unrealized Gains and (Losses) on Derivatives			Defined Benefit Pension Plan			Total Accumulated Other Comprehensive Loss
	(in thousands)
Balance at June 30, 2019	$	1,214	$	(4,614	)	$	(31,731	)	$	(35,131	)
Other comprehensive income before reclassification	8,135		76			—			8,211
Amounts reclassified from other comprehensive income	72		324			56			452
Other comprehensive income, net	8,207		400			56			8,663
Balance at September 30, 2019	$	9,421	$	(4,214	)	$	(31,675	)	$	(26,468	)

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 )



	Components of Accumulated Other Comprehensive Loss									Total Accumulated Other Comprehensive Loss
	Unrealized Gains and Losses on Available for Sale (AFS) Securities			Unrealized Gains and (Losses) on Derivatives			Defined Benefit Pension Plan			Total Accumulated Other Comprehensive Loss
	(in thousands)
Balance at December 31, 2018	$	(33,559	)	$	(4,031	)	$	(31,841	)	$	(69,431	)
Other comprehensive income (loss) before reclassification	42,890			(989		)	—			41,901
Amounts reclassified from other comprehensive income (loss)	90			806			166			1,062
Other comprehensive income (loss), net	42,980			(183		)	166			42,963
Balance at September 30, 2019	$	9,421		$	(4,214	)	$	(31,675	)	$	(26,468	)

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~~2019 and ~~2016.~~ 2018:


	Amounts Reclassified from Accumulated Other Comprehensive Loss													Amounts Reclassified from Accumulated Other Comprehensive Loss
	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
Components of Accumulated Other Comprehensive Loss	2017			2016			2017			2016			Income Statement Line Item	2019			2018			2019			2018			Income Statement Line Item
	(in thousands)													(in thousands)
Unrealized gains (losses) on AFS securities before tax	6			$	(10	)	5			258			Gains (losses) on securities transactions, net	$	(93	)	$	(86	)	$	(114	)	$	(881	)	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		)		21			29			24			250
Total net of tax	40			50			166			336				(72		)	(57		)	(90		)	(631		)
Unrealized losses on derivatives (cash flow hedges) before tax	(1,930		)	(3,578		)	(6,762		)	(10,146		)	Interest expense	(453		)	(660		)	(1,126		)	(2,977		)	Interest expense
Tax effect	798			1,483			2,799			4,203				129			188			320			850
Total net of tax	(1,132		)	(2,095		)	(3,963		)	(5,943		)		(324		)	(472		)	(806		)	(2,127		)
Defined benefit pension plan:
Amortization of net loss	(101		)	(71		)	(303		)	(215		)	*	(79		)	(157		)	(235		)	(471		)	*
Tax effect	42			29			126			87				23			44			69			134
Total net of tax	(59		)	(42		)	(177		)	(128		)		(56		)	(113		)	(166		)	(337		)
Total reclassifications, net of tax	$	(1,147	)	$	(2,093	)	$	(3,970	)	$	(5,573	)		$	(452	)	$	(642	)	$	(1,062	)	$	(3,095	)



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

Note 5.4. New Authoritative Accounting Guidance

New Accounting Guidance Adopted in 2019

Accounting Standards Update (ASU) No. ~~2017-12, "Derivatives~~2016-02, “Leases (Topic 842)” and ~~Hedging: Targeted Improvements~~subsequent related updates require lessees to ~~Accounting~~recognize leases on balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model that requires lessees to recognize a right of use (ROU) asset and related lease liability for ~~Hedging Activities" amends~~all leases with a term longer than 12 months. 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. Leases will continue to be classified as finance or operating, with classification affecting the ~~hedge accounting~~pattern and classification of expense recognition ~~and presentation requirements to better align a company’s financial reporting for hedging activities with~~in the ~~economic objectives of those activities. ASU No. 2017-12 is effective for Valley for the annual and interim reporting periods beginning~~income statement.

Effective January 1, 2019, ~~with early adoption permitted.~~Valley adopted ASU No. ~~2017-12 requires~~2016-02 (and subsequent related updates) and recorded ROU assets of approximately $216 million (net of the reversal of the deferred rent liability at such date) and lease obligations of approximately $241 million. Valley elected the "package of practical expedients," as permitted under the transition guidance within Topic 842. The practical expedients enable Valley to carry forward lease

classifications under the prior accounting guidance (Topic 840). Additionally, the expedients enable the use of hindsight, through which Valley reassessed the likelihood of extending leases under extension clauses available to Valley. This shortened the expected lives of certain leases. As a ~~modified retrospective method~~result, Valley recorded a $4.4 million (net of tax) credit adjustment to the opening balance of retained earnings as of January 1, 2019. Valley also made accounting policy elections to (i) separate non-lease components from its lease obligations with the non-lease components being charged to earnings when incurred and to (ii) exclude short-term leases of 12 months or less from the balance sheet. The comparative periods prior to the adoption date of Topic 842 will continue to be ~~used at adoption~~presented in the financial statements in accordance with ~~a cumulative-effect adjustment to opening retained earnings. While Valley continues to assess all~~prior GAAP (Topic 840). See Note 9 for 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.~~

additional required disclosures.

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 iswas effective for Valley ~~for the annual and interim reporting periods beginning~~on January 1, 2019 ~~with early adoption permitted,~~ and ~~is to be~~was applied using the modified retrospective ~~method. Additionally,~~method, resulting in a cumulative-effect adjustment to the ~~period~~opening balance of ~~adoption, entities should provide disclosures about a change in accounting principle.~~retained earnings totaling $1.4 million (net of tax) as of January 1, 2019. ASU No. 2017-08 isdid not ~~expected to~~ have a significant impact on Valley's consolidated financial statements.

ASU No. ~~2017-07, "Compensation - Retirement Benefits~~2019-01, "Leases (Topic ~~715)~~842): ~~Improving~~Codification Improvements" reinstates the ~~Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost"~~fair value exception in ASC 840, in which lessors will measure fair value, at lease commencement, as cost, reflecting any applicable volume or trade discounts. ASU No. 2019-01 also requires ~~service cost to be reported~~lessors that are depository or lending institutions in the ~~same financial statement line item(s)~~scope of Topic 842 to classify the principal portion of lease payments received under sales-type and direct financing leases as ~~other current employee compensation costs. All other components~~cash flows from investing activities. The interest portion of ~~expense must be presented separately~~those and all lease payments received under operating leases are classified as cash flows from ~~service cost, and outside any subtotal of income from operations. Only the service cost component of expense is eligible to be capitalized.~~operating activities. Effective January 1, 2019, Valley early adopted ASU No. ~~2017-07~~2019-01 concurrent with its adoption of Topic 842. The adoption of ASU No. 2019-01 did not have a material impact on Valley's consolidated financial statements.

New Accounting Guidance Not Yet Adopted

ASU No. 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief" provides transition relief for entities adopting the credit losses standard, ASU No. 2016-13. Specifically, this update amends ASU No. 2016-13 to allow companies to irrevocably elect, upon adoption of ASU No. 2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost, (2) are within the scope of the credit losses guidance in Topic 326-20, (3) are eligible for the fair value option under Topic 825-10, and (4) are not held-to-maturity debt securities. ASU No. 2019-05 is effective for Valley for ~~its annual and interim~~ reporting periods beginning ~~January1, 2018 with early adoption permitted.~~January 1, 2020. Management is currently evaluating the impact of the ASU ~~No. 2017-07 is not expected to have a significant impact~~ on ~~the presentation on Valley's~~Valley’s consolidated financial statements.

ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement. The most significant provisions of the ASU relate to how companies will estimate expected credit losses under Topic 326 by incorporating (1) expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) clarifying that contractual extensions or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. ASU No. 2019-04 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. See more details regarding our current implementation of Topic 326 and ASU No. 2016-13 below.

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.~~dates.

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 all expected losses over the lives of the assets rather than incurred losses. Under the new guidance, an entity is required to measure all expected credit losses for certain financial assets (including loans, held-to-maturity securities and other receivables) 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~~2020 and management is currently evaluating the impact of the ASU on Valley’s consolidated financial statements. Valley’s implementation effort is managed through several cross-functional working groups. These groups continue to evaluate selected loss models that accurately project lifetime expected loss estimates. In conjunction with the evaluation, Valley will assess the necessary changes to its operational processes and controls over the allowance for credit losses. Valley expects that the ~~new guidance~~adoption of ASU No. 2016-13 will result in an increase in its allowance for credit losses due to several factors, ~~including: (i)~~including 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)~~and an allowance will be established for estimated credit losses on investment securities classified as held to maturity. Additionally, the ~~nonaccretable~~non-accretable difference (as defined in Note 8)7) on PCI loans will be recognized as an allowance, offset by an increase in the carrying value of the related loans under the new accounting guidance.

Valley is currently performing parallel runs for the CECL model and ~~(iii)~~completing the implementation and documentation processes for the applicable internal controls, data sources, and the system configuration and validation, among other things. Based on the preliminary results of Valley's third parallel run, the overall CECL impact was estimated to be an increase of $50 million to $70 million in the allowance ~~will be established~~ for ~~estimated~~ credit losses ~~on investment securities classified~~ as ~~held~~compared to ~~maturity.~~these reserves at September 30, 2019 (See Note 8 for more information). The ~~extent~~estimated increase is exclusive of the ~~increase is under evaluation, but will depend upon the nature and characteristics~~expected balance sheet gross-up of the non-accretable difference (or "credit mark") on Valley's ~~loan and investment portfolios at~~PCI loans, as well as the impact of the proposed Oritani acquisition expected to be completed in the fourth quarter of 2019. Additionally, the adoption ~~date, and the economic conditions and forecasts at that date.~~

of ASU No. ~~2016-09, "Compensation - Stock Compensation (Topic 718): Improvements~~2016-13 is not expected 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~~regulatory capital ratios. The extent of the expected reserve increase is still under evaluation and will be significantly influenced by the composition, characteristics and quality of our loan and investment securities portfolios, as well as the prevailing economic conditions and forecasts as of the CECL 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~~date. Additionally, management will continue to ~~estimate~~refine and validate the ~~forfeitures~~new methodologies and models during the fourth quarter of ~~stock awards as a component of total stock compensation expense based on~~2019. These internal and external factors could materially affect 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 beginningactual impact 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 842CECL adoption 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 consolidatedValley's 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 6.5. Fair Value Measurement of Assets and Liabilities

~~Accounting Standards Codification (ASC)~~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~~2019 and December 31, ~~2016.~~2018. The assets presented under “nonrecurring fair value measurements” in the ~~table~~tables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized).

September 30,
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:						September 30, 2019		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)		September 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)								(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available for sale:
U.S. Treasury securities	$	49,591	$	49,591	$	—	$	—	$	70,965	$	70,965	$	—	$	—
U.S. government agency securities	23,041		—		23,041		—		30,037		—		30,037		—
Obligations of states and political subdivisions	119,767		—		119,767		—		180,467		—		179,787		680
Residential mortgage-backed securities	1,015,542		—		1,005,589		9,953		1,310,587		—		1,310,587		—
Trust preferred securities	8,009		—		6,074		1,935
Corporate and other debt securities	60,565		8,064		52,501		—		36,006		—		36,006		—
Equity securities	20,858		1,306		19,552		—
Total available for sale	1,297,373		58,961		1,226,524		11,888		1,628,062		70,965		1,556,417		680
Loans held for sale ⁽¹⁾	57,708		—		57,708		—		41,621		—		41,621		—
Other assets ⁽²⁾	29,055		—		29,055		—		217,035		—		217,035		—
Total assets	$	1,384,136	$	58,961	$	1,313,287	$	11,888	$	1,886,718	$	70,965	$	1,815,073	$	680
Liabilities
Other liabilities ⁽²⁾	$	44,077	$	—	$	44,077	$	—	$	60,087	$	—	$	60,087	$	—
Total liabilities	$	44,077	$	—	$	44,077	$	—	$	60,087	$	—	$	60,087	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	5,385	$	—	$	—	$	5,385	$	47,619	$	—	$	—	$	47,619
Loan servicing rights	6,489		—		—		6,489		715		—		—		715
Foreclosed assets	4,532		—		—		4,532		3,705		—		—		3,705
Total	$	16,406	$	—	$	—	$	16,406	$	52,039	$	—	$	—	$	52,039



			Fair Value Measurements at Reporting Date Using:
	December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available for sale:
U.S. Treasury securities	$	49,306	$	49,306	$	—	$	—
U.S. government agency securities	36,277		—		36,277		—
Obligations of states and political subdivisions	197,092		—		197,092		—
Residential mortgage-backed securities	1,429,782		—		1,429,782		—
Corporate and other debt securities	37,087		—		37,087		—
Total available for sale	1,749,544		49,306		1,700,238		—
Loans held for sale ⁽¹⁾	35,155		—		35,155		—
Other assets ⁽²⁾	48,979		—		48,979		—
Total assets	$	1,833,678	$	49,306	$	1,784,372	$	—
Liabilities
Other liabilities ⁽²⁾	$	23,681	$	—	$	23,681	$	—
Total liabilities	$	23,681	$	—	$	23,681	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	45,245	$	—	$	—	$	45,245
Loan servicing rights	273		—		—		273
Foreclosed assets	5,673		—		—		5,673
Total	$	51,191	$	—	$	—	$	51,191


(1)	Represents residential mortgage loans originated for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately ~~$13.1~~$40.8 million and ~~$58.2~~$34.6 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.


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


(3)	Excludes PCI loans.

~~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,~~

In calculating the ~~inputs used by either dealer market participants or an independent pricing service may be derived from unobservable market information (Level~~fair value of one impaired special revenue bond (within obligations of states and political subdivisions in the table above) under Level 3, ~~inputs). In these instances,~~ Valley ~~evaluates the appropriateness and quality~~prepared its best estimate of the ~~assumption and~~present value of the ~~resulting price. In addition, Valley reviews the volume and level of activity for all available for sale and trading securities and attempts~~cash flows 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 ordetermine an ~~independent pricing service may be adjusted, as necessary, to estimate fair value and this results in fair values based on Level 3 inputs.~~internal price estimate. In determining ~~fair value,~~the internal price, Valley ~~utilizes~~utilized recent financial information and developments provided by the issuer, as well as other 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~~defaulted 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 A quoted ~~prices~~price received from ~~either market participants or~~an independent pricing ~~services are~~service was weighted with the internal price estimate to determine the fair value of ~~each instrument.~~the instrument at September 30, 2019. See Note 6 for additional information regarding this impaired security.

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~~ 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~~2019 and December 31, ~~2016~~2018 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~~values 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~~2019 and December 31, ~~2016)~~2018), is determined based on the current market prices for similar ~~instruments provided by Fannie Mae and Freddie Mac.~~instruments. 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~~2019 and December 31, ~~2016.~~2018.

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,~~2019, certain appraisals were discounted based on specific market data by location and property type. During the quarter ended September 30, ~~2017,~~2019, 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$158 thousand and $1.1 million in 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 millionand$4.7 million for the~~ nine months ended September 30, ~~2017~~2019, respectively. The collateral dependent loan charge-offs to the allowance for loan losses for the three and ~~2016, respectively.~~ninemonths ended September 30, 2018 were immaterial. At September 30, ~~2017,~~2019, collateral dependent impaired loans with a total recorded investment of ~~$38.3~~$81.9 million were reduced by specific valuation allowance allocations totaling ~~$5.0~~$34.3 million to a reported total net carrying amount of ~~$33.3~~$47.6 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,~~2019, the fair value model used a blended prepayment ~~speeds~~speed (stated as constant prepayment rates) ~~from 0 percent up to 24~~of 12.0 percent and a discount rate of 89.6 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. At September 30, 2019, certain loan servicing rights were re-measured at fair value totaling $715 thousand. Valley recorded ~~net recoveries of~~ net impairment charges on its loan servicing rights totaling ~~$134~~$64 thousand and ~~$185~~net recoveries of impairment charges totaling $19 thousand for the three and nine months ended September 30, ~~2017, respectively. Valley recorded no~~2019, respectively, as compared to net recoveries of impairment charges ~~on its loan servicing rights~~totaling $48 thousand and $365 thousand for the three and ninemonths ended September 30, ~~2016 and net impairment charges totaling $457 thousand for the nine months ended September 30, 2016.~~2018, respectively.

Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is adjusted based on certain discounting criteria, similar to the criteria used for impaired loans described above. There were no discount adjustments of the appraisals of foreclosed assets at September 30, ~~2017.~~2019. At September 30, ~~2017,~~

2019, foreclosed assets included ~~$1.8~~$3.7 million of assets that were measured at fair value upon initial recognition or subsequently re-measured ~~during the quarter ended~~at September 30, ~~2017.~~2019. The foreclosed assets charge-offs to the allowance for the loan losses totaled ~~$536~~$668 thousand and ~~$245~~$267 thousand for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$1.5~~$2.1 million and ~~$1.2~~$1.5 million for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, 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~~$379 thousand and $245 thousand for the three months ended September 30, 2019 and 2018, respectively, and $539 thousand and $390 thousand for the nine months ended September 30, ~~2017,~~2019 and ~~$34 thousandand $946 thousand for three and nine months ended September 30, 2016,~~2018, respectively. There were no net losses onfrom re-measurement ~~during~~of foreclosed assets at fair value subsequent to their initial recognition for the three months ended September 30, ~~2017.~~2019 and 2018.

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.

1918

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~~2019 and December 31, ~~2016~~2018 were as follows:


	Fair Value Hierarchy	September 30, 2017				December 31, 2016				Fair Value Hierarchy	September 30, 2019				December 31, 2018
		Carrying Amount		Fair Value		Carrying Amount		Fair Value			Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(in thousands)									(in thousands)
Financial assets
Cash and due from banks	Level 1	$	215,600	$	215,600	$	220,791	$	220,791	Level 1	$	312,396	$	312,396	$	251,541	$	251,541
Interest bearing deposits with banks	Level 1	128,226		128,226		171,710		171,710		Level 1	185,841		185,841		177,088		177,088
Investment securities held to maturity:
U.S. Treasury securities	Level 1	138,714		147,126		138,830		147,495		Level 1	138,393		144,872		138,517		142,049
U.S. government agency securities	Level 2	9,984		10,188		11,329		11,464		Level 2	7,462		7,553		8,721		8,641
Obligations of states and political subdivisions	Level 2	495,157		511,159		566,590		577,826		Level 2	517,430		530,482		585,656		586,033
Residential mortgage-backed securities	Level 2	1,088,389		1,081,703		1,112,460		1,102,802		Level 2	1,360,903		1,374,825		1,266,770		1,235,605
Trust preferred securities	Level 2	49,819		38,998		59,804		47,290		Level 2	37,319		30,897		37,332		31,486
Corporate and other debt securities	Level 2	41,559		41,971		36,559		37,720		Level 2	32,250		32,574		31,250		31,129
Total investment securities held to maturity		1,823,622		1,831,145		1,925,572		1,924,597			2,093,757		2,121,203		2,068,246		2,034,943
Net loans	Level 3	18,082,496		17,741,813		17,121,684		16,756,655		Level 3	26,405,306		25,889,653		24,883,610		24,068,755
Accrued interest receivable	Level 1	72,063		72,063		66,816		66,816		Level 1	97,282		97,282		95,296		95,296
Federal Reserve Bank and Federal Home Loan Bank stock⁽¹⁾	Level 1	204,978		204,978		147,127		147,127		Level 1	235,965		235,965		232,080		232,080
Financial liabilities
Deposits without stated maturities	Level 1	13,892,110		13,892,110		14,591,837		14,591,837		Level 1	17,673,950		17,673,950		17,388,990		17,388,990
Deposits with stated maturities	Level 2	3,420,656		3,436,229		3,138,871		3,160,572		Level 2	7,872,172		7,891,568		7,063,984		7,005,573
Short-term borrowings	Level 1	1,482,709		1,485,695		1,080,960		1,081,751		Level 1	1,825,417		1,825,486		2,118,914		2,091,892
Long-term borrowings	Level 2	2,215,219		2,300,388		1,433,906		1,523,386		Level 2	2,250,633		2,467,403		1,654,268		1,751,194
Junior subordinated debentures issued to capital trusts	Level 2	41,716		42,244		41,577		45,785		Level 2	55,631		55,670		55,370		55,692
Accrued interest payable ⁽²⁾	Level 1	10,812		10,812		10,675		10,675		Level 1	30,819		30,819		25,762		25,762


(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

2019

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 7.6. 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~~2019 and December 31, ~~2016~~2018 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2019
U.S. Treasury securities	$	138,393	$	6,479	$	—		$	144,872
U.S. government agency securities	7,462		93		(2		)	7,553
Obligations of states and political subdivisions:
Obligations of states and state agencies	305,129		7,885		(585		)	312,429
Municipal bonds	212,301		5,777		(25		)	218,053
Total obligations of states and political subdivisions	517,430		13,662		(610		)	530,482
Residential mortgage-backed securities	1,360,903		17,687		(3,765		)	1,374,825
Trust preferred securities	37,319		53		(6,475		)	30,897
Corporate and other debt securities	32,250		430		(106		)	32,574
Total investment securities held to maturity	$	2,093,757	$	38,404	$	(10,958	)	$	2,121,203
December 31, 2018
U.S. Treasury securities	$	138,517	$	3,532	$	—		$	142,049
U.S. government agency securities	8,721		55		(135		)	8,641
Obligations of states and political subdivisions:
Obligations of states and state agencies	341,702		4,332		(5,735		)	340,299
Municipal bonds	243,954		3,141		(1,361		)	245,734
Total obligations of states and political subdivisions	585,656		7,473		(7,096		)	586,033
Residential mortgage-backed securities	1,266,770		3,203		(34,368		)	1,235,605
Trust preferred securities	37,332		77		(5,923		)	31,486
Corporate and other debt securities	31,250		96		(217		)	31,129
Total investment securities held to maturity	$	2,068,246	$	14,436	$	(47,739	)	$	2,034,943

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

2220

The age of unrealized losses and fair value of related securities held to maturity at September 30, ~~2017~~2019 and December 31, ~~2016~~2018were 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, 2019
U.S. government agency securities	$	2,093	$	(2	)	$	—	$	—		$	2,093	$	(2	)
Obligations of states and political subdivisions:
Obligations of states and state agencies	11,459		(45		)	35,927		(540		)	47,386		(585		)
Municipal bonds	4,379		(9		)	784		(16		)	5,163		(25		)
Total obligations of states and political subdivisions	15,838		(54		)	36,711		(556		)	52,549		(610		)
Residential mortgage-backed securities	117,588		(171		)	319,039		(3,594		)	436,627		(3,765		)
Trust preferred securities	—		—			29,491		(6,475		)	29,491		(6,475		)
Corporate and other debt securities	6,696		(54		)	4,947		(52		)	11,643		(106		)
Total	$	142,215	$	(281	)	$	390,188	$	(10,677	)	$	532,403	$	(10,958	)
December 31, 2018
U.S. government agency securities	$	—	$	—		$	6,074	$	(135	)	$	6,074	$	(135	)
Obligations of states and political subdivisions:
Obligations of states and state agencies	16,098		(266		)	138,437		(5,469		)	154,535		(5,735		)
Municipal bonds	3,335		(37		)	60,078		(1,324		)	63,413		(1,361		)
Total obligations of states and political subdivisions	19,433		(303		)	198,515		(6,793		)	217,948		(7,096		)
Residential mortgage-backed securities	72,240		(852		)	846,671		(33,516		)	918,911		(34,368		)
Trust preferred securities	—		—			30,055		(5,923		)	30,055		(5,923		)
Corporate and other debt securities	9,948		(52		)	4,835		(165		)	14,783		(217		)
Total	$	101,621	$	(1,207	)	$	1,086,150	$	(46,532	)	$	1,187,771	$	(47,739	)

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~~82 at September 30, ~~2017~~2019 and ~~132~~378 at December 31, ~~2016.~~2018.

The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at September 30, ~~2017 mainly~~2019 mostly 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~~2019 primarily related to ~~four~~4 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.~~2019.

As of September 30, ~~2017,~~2019, 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.~~$1.4 billion.

2321

The contractual maturities of investments in debt securities held to maturity at September 30, ~~2017~~2019 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, 2019
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	23,737	$	23,760
Due after one year through five years	247,505		254,040
Due after five years through ten years	220,403		230,852
Due after ten years	241,209		237,726
Residential mortgage-backed securities	1,360,903		1,374,825
Total investment securities held to maturity	$	2,093,757	$	2,121,203

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~~5.1 years at September 30, ~~2017.~~2019.

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)									(in thousands)
September 30, 2017
September 30, 2019
U.S. Treasury securities	$	51,003	$	6	$	(861	)	$	50,148	$	70,947	$	27	$	(9	)	$	70,965
U.S. government agency securities	43,896		342		(8		)	44,230		29,479		579		(21		)	30,037
Obligations of states and political subdivisions:
Obligations of states and state agencies	38,847		367		(204		)	39,010		83,794		510		(83		)	84,221
Municipal bonds	79,452		473		(533		)	79,392		95,381		1,019		(154		)	96,246
Total obligations of states and political subdivisions	118,299		840		(737		)	118,402		179,175		1,529		(237		)	180,467
Residential mortgage-backed securities	1,171,510		3,230		(13,583		)	1,161,157		1,300,050		14,191		(3,654		)	1,310,587
Trust preferred securities*	6,532		—		(1,139		)	5,393
Corporate and other debt securities	56,827		719		(119		)	57,427		35,422		584		—			36,006
Equity securities	10,505		929		(454		)	10,980
Total investment securities available for sale	$	1,458,572	$	6,066	$	(16,901	)	$	1,447,737	$	1,615,073	$	16,910	$	(3,921	)	$	1,628,062
December 31, 2016
December 31, 2018
U.S. Treasury securities	$	51,020	$	6	$	(1,435	)	$	49,591	$	50,975	$	—	$	(1,669	)	$	49,306
U.S. government agency securities	22,815		232		(6		)	23,041		36,844		71		(638		)	36,277
Obligations of states and political subdivisions:
Obligations of states and state agencies	40,696		70		(424		)	40,342		100,777		18		(3,682		)	97,113
Municipal bonds	80,045		147		(767		)	79,425		101,207		209		(1,437		)	99,979
Total obligations of states and political subdivisions	120,741		217		(1,191		)	119,767		201,984		227		(5,119		)	197,092
Residential mortgage-backed securities	1,029,827		2,061		(16,346		)	1,015,542		1,469,059		1,484		(40,761		)	1,429,782
Trust preferred securities*	10,164		—		(2,155		)	8,009
Corporate and other debt securities	60,651		436		(522		)	60,565		37,542		213		(668		)	37,087
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	$	1,796,404	$	1,995	$	(48,855	)	$	1,749,544



*	~~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~~2019 and December 31, ~~2016~~2018 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, 2019
U.S. Treasury securities	$	25,940	$	(9	)	$	—	$	—		$	25,940	$	(9	)
U.S. government agency securities	—		—			2,131		(21		)	2,131		(21		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	21,181		(11		)	10,270		(72		)	31,451		(83		)
Municipal bonds	2,226		(29		)	15,301		(125		)	17,527		(154		)
Total obligations of states and political subdivisions	23,407		(40		)	25,571		(197		)	48,978		(237		)
Residential mortgage-backed securities	96,615		(256		)	303,880		(3,398		)	400,495		(3,654		)
Total	$	145,962	$	(305	)	$	331,582	$	(3,616	)	$	477,544	$	(3,921	)
December 31, 2018
U.S. Treasury securities	$	—	$	—		$	49,306	$	(1,669	)	$	49,306	$	(1,669	)
U.S. government agency securities	2,120		(20		)	26,775		(618		)	28,895		(638		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	17,560		(95		)	75,718		(3,587		)	93,278		(3,682		)
Municipal bonds	5,018		(106		)	70,286		(1,331		)	75,304		(1,437		)
Total obligations of states and political subdivisions	22,578		(201		)	146,004		(4,918		)	168,582		(5,119		)
Residential mortgage-backed securities	119,645		(668		)	1,221,942		(40,093		)	1,341,587		(40,761		)
Corporate and other debt securities	12,339		(161		)	12,397		(507		)	24,736		(668		)
Total	$	156,682	$	(1,050	)	$	1,456,424	$	(47,805	)	$	1,613,106	$	(48,855	)

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~~2019 was ~~253~~177 as compared to ~~298~~545 at December 31, ~~2016.~~2018.

The unrealized losses for the residential mortgage-backed securities category of the available for sale portfolio at September 30, ~~2017~~2019 largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae and Fannie Mae.

As of September 30, ~~2017,~~2019, 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.~~$1.1 billion.

The contractual maturities of ~~investment~~debt securities available for sale at September 30, ~~2017~~2019 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, 2019
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	37,985	$	38,025
Due after one year through five years	114,646		115,107
Due after five years through ten years	65,745		66,839
Due after ten years	96,647		97,504
Residential mortgage-backed securities	1,300,050		1,310,587
Total investment securities available for sale	$	1,615,073	$	1,628,062

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

The weighted average remaining expected life for residential mortgage-backed securities available for sale was ~~8.2~~6.1 years at September 30, ~~2017.~~2019.

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~~

During the second quarter of 2019 and the nine months ended September 30, 2019, Valley recognized a $2.9 million other-than-temporary credit impairment charge on one special revenue bond classified as available for sale (within the obligations of states and state agencies in the tables above). The credit impairment was due to severe credit deterioration disclosed by ~~bank holding companies (including two pooled trust preferred securities)~~the issuer in the second quarter of 2019, as well as the issuer's default on its contractual payment. At September 30, 2019, the impaired security had an adjusted amortized cost and ~~corporate bonds issued by banks. These investments may pose a higher risk~~fair value 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~~$680 thousand. Comparatively, there were no0 other-than-temporary impairment losses on securities recognized in earnings for the three and nine months ended September 30, ~~2017~~2018.

The obligations of states and ~~2016.~~ political subdivisions include special revenue bonds which had an aggregated amortized cost and fair value of $300.8 million and $304.5 million, respectively, at September 30, 2019. The gross unrealized losses associated with the special revenue bonds totaled $757 thousand as of September 30, 2019. The special revenue bonds were largely issued by the states of (or municipalities within) Utah, Idaho, Minnesota, Florida, other state housing authorities, as well the Port Authority of New York. As part of Valley’s pre-purchase analysis and on-going quarterly assessment of impairment of the obligations of states and political subdivisions, our Credit Risk Management Department conducts a financial analysis and risk rating assessment of each security issuer based on the issuer’s most recently issued financial statements and other publicly available information. Exclusive of the impaired security, these investments are a mix of bonds with investment grade ratings or not rated paying in accordance with their contractual terms. The vast majority of the bonds not rated by the rating agencies are state housing finance agency revenue bonds secured by Ginnie Mae securities that are commonly referred to as Tax Exempt Mortgage Securities (TEMS). Valley will continue to closely monitor the special revenue bond portfolio as part of its quarterly impairment analysis.

The impaired special revenue bond was not accruing interest as of September 30, 2019. Valley discontinues the recognition of interest on debt securities if the securities meet both of the following criteria: (i) regularly scheduled

interest payments have not been paid or have been deferred by the issuer, and (ii) full collection of all contractual principal and interest payments is not deemed to be the most likely outcome, resulting in the recognition of other-than-temporary impairment of the security.

Management does not believe that any individual unrealized loss as of September 30, ~~2017~~2019 included in the investment portfolio tables above ~~represent~~represents other-than-temporary impairment, as management mainly attributes the declines in fair value to changes in interest rates and market volatility, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on ~~these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the~~any other 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 incomeexcept 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.special revenue bond discussed above.

~~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 8.7. Loans

The detail of the loan portfolio as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 was as follows:



	September 30, 2019						December 31, 2018
	Non-PCI Loans		PCI Loans		Total		Non-PCI Loans		PCI Loans		Total
	(in thousands)
Loans:
Commercial and industrial	$	4,038,064	$	657,544	$	4,695,608	$	3,590,375	$	740,657	$	4,331,032
Commercial real estate:
Commercial real estate	11,121,325		2,244,129		13,365,454		9,912,309		2,494,966		12,407,275
Construction	1,385,070		152,520		1,537,590		1,122,348		365,784		1,488,132
Total commercial real estate loans	12,506,395		2,396,649		14,903,044		11,034,657		2,860,750		13,895,407
Residential mortgage	3,770,500		362,831		4,133,331		3,682,984		428,416		4,111,400
Consumer:
Home equity	382,079		107,729		489,808		371,340		145,749		517,089
Automobile	1,436,313		295		1,436,608		1,319,206		365		1,319,571
Other consumer	896,640		12,120		908,760		846,821		14,149		860,970
Total consumer loans	2,715,032		120,144		2,835,176		2,537,367		160,263		2,697,630
Total loans	$	23,029,991	$	3,537,168	$	26,567,159	$	20,845,383	$	4,190,086	$	25,035,469

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~~$18.3 million and ~~$15.3~~$21.5 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled ~~$1.6~~$3.7 billion and ~~$1.9~~$4.4 billion at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

Valley transferred ~~$225.5~~$302.9 million and $289.6 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~~2019 and 2018, respectively. Excluding the loan transfers, there were no0 sales of loans from the held for investment portfolio during the ~~three and~~ nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018.

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.

2925

The following table presents changes in the accretable yield for PCI loans during the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)
Balance, beginning of period	$	853,887		$	630,550		$	875,958		$	282,009
Acquisition	—			—			—			474,208
Accretion	(47,475		)	(54,367		)	(155,981		)	(180,034		)
Net (decrease) increase in expected cash flows	(58,268		)	23,983			28,167			23,983
Balance, end of period	$	748,144		$	600,166		$	748,144		$	600,166

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~~net increase in expected cash flows for certain pools of loans (included in the ~~loss-sharing agreements with~~tables above) during the ~~FDIC~~nine months ended September 30, 2019 is ~~measured separately from~~recognized prospectively as an adjustment to the ~~covered loan portfolio because~~yield over the ~~agreements are not contractually part~~estimated remaining life of the ~~covered loans and are not transferable should~~individual pools. Based upon reforecasted cash flows, the ~~Bank choose to dispose of~~net increase for 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~~nine months ended September 30, ~~2017 and December 31, 2016, respectively.~~2019 was largely driven by additional advances on acquired lines of credit coupled with lower prospective loss expectations, partially offset by higher loan prepayments. The net decrease in expected cash flows for the three months ended September 30, 2019 was largely due to the high volume of contractual principal prepayments caused by the low level of market interest rates.

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.~~risk appetite. 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.

3026

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)~~basis) by loan portfolio class at September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:



	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, 2019
Commercial and industrial	$	5,702	$	3,158	$	4,133	$	75,311	$	88,304	$	3,949,760	$	4,038,064
Commercial real estate:
Commercial real estate	20,851		735		1,125		9,560		32,271		11,089,054		11,121,325
Construction	11,523		7,129		—		356		19,008		1,366,062		1,385,070
Total commercial real estate loans	32,374		7,864		1,125		9,916		51,279		12,455,116		12,506,395
Residential mortgage	12,945		4,417		1,347		13,772		32,481		3,738,019		3,770,500
Consumer loans:
Home equity	362		249		—		1,625		2,236		379,843		382,079
Automobile	9,118		1,220		648		207		11,193		1,425,120		1,436,313
Other consumer	3,599		108		108		218		4,033		892,607		896,640
Total consumer loans	13,079		1,577		756		2,050		17,462		2,697,570		2,715,032
Total	$	64,100	$	17,016	$	7,361	$	101,049	$	189,526	$	22,840,465	$	23,029,991
December 31, 2018
Commercial and industrial	$	13,085	$	3,768	$	6,156	$	70,096	$	93,105	$	3,497,270	$	3,590,375
Commercial real estate:
Commercial real estate	9,521		530		27		2,372		12,450		9,899,859		9,912,309
Construction	2,829		—		—		356		3,185		1,119,163		1,122,348
Total commercial real estate loans	12,350		530		27		2,728		15,635		11,019,022		11,034,657
Residential mortgage	16,576		2,458		1,288		12,917		33,239		3,649,745		3,682,984
Consumer loans:
Home equity	872		40		—		2,156		3,068		368,272		371,340
Automobile	7,973		1,299		308		80		9,660		1,309,546		1,319,206
Other consumer	895		47		33		419		1,394		845,427		846,821
Total consumer loans	9,740		1,386		341		2,655		14,122		2,523,245		2,537,367
Total	$	51,751	$	8,142	$	7,812	$	88,396	$	156,101	$	20,689,282	$	20,845,383

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.

3127

The following table presents ~~the~~ information about impaired loans by loan portfolio class at September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:



	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
	(in thousands)
September 30, 2019
Commercial and industrial	$	12,661	$	97,878	$	110,539	$	123,876	$	35,730
Commercial real estate:
Commercial real estate	23,857		25,913		49,770		51,676		1,287
Construction	354		—		354		354		—
Total commercial real estate loans	24,211		25,913		50,124		52,030		1,287
Residential mortgage	6,752		4,904		11,656		12,740		525
Consumer loans:
Home equity	186		549		735		836		57
Total consumer loans	186		549		735		836		57
Total	$	43,810	$	129,244	$	173,054	$	189,482	$	37,599
December 31, 2018
Commercial and industrial	$	8,339	$	89,513	$	97,852	$	104,007	$	29,684
Commercial real estate:
Commercial real estate	16,732		25,606		42,338		44,337		2,615
Construction	803		457		1,260		1,260		13
Total commercial real estate loans	17,535		26,063		43,598		45,597		2,628
Residential mortgage	7,826		6,078		13,904		14,948		600
Consumer loans:
Home equity	125		1,146		1,271		1,366		113
Total consumer loans	125		1,146		1,271		1,366		113
Total	$	33,825	$	122,800	$	156,625	$	165,918	$	33,025

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~~table presents, by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~ 2018:


	Three Months Ended September 30,								Three Months Ended September 30,
	2017				2016				2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)								(in thousands)
Commercial and industrial	$	70,135	$	300	$	31,499	$	293	$	114,233	$	763	$	87,414	$	422
Commercial real estate:
Commercial real estate	57,712		482		58,117		513		49,608		551		50,809		556
Construction	3,049		21		6,635		37		354		—		987		15
Total commercial real estate loans	60,761		503		64,752		550		49,962		551		51,796		571
Residential mortgage	15,630		183		20,193		225		11,592		76		14,112		152
Consumer loans:
Home equity	4,766		49		2,253		25		738		11		2,454		17
Total consumer loans	4,766		49		2,253		25		738		11		2,454		17
Total	$	151,292	$	1,035	$	118,697	$	1,093	$	176,525	$	1,401	$	155,776	$	1,162

3228



	Nine Months Ended September 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	112,308	$	1,777	$	88,376	$	1,348
Commercial real estate:
Commercial real estate	46,894		1,817		52,993		1,735
Construction	509		—		1,811		54
Total commercial real estate loans	47,403		1,817		54,804		1,789
Residential mortgage	12,574		315		13,707		502
Consumer loans:
Home equity	872		32		2,093		83
Total consumer loans	872		32		2,093		83
Total	$	173,157	$	3,941	$	158,980	$	3,722

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~~2019 and ~~2016.~~2018.

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~~$79.4 million and ~~$85.2~~$77.2 million as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. Non-performing TDRs totaled ~~$18.7~~$70.1 million and ~~$10.6~~$55.0 million as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

3329

The following ~~tables present~~table presents non-PCI loans by loan ~~portfolio~~ class modified as TDRs during the three and nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018. The pre-modification and post-modification outstanding recorded investments disclosed in the ~~table~~tables below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.


											Three Months Ended September 30,
	Three Months Ended September 30, 2017					Three Months Ended September 30, 2016					2019					2018
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		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)										($ in thousands)
Commercial and industrial	10	$	12,522	$	11,655	7	$	6,389	$	6,248	53	$	42,902	$	41,772	6	$	3,970	$	3,751
Commercial real estate:
Commercial real estate	4	5,931		5,929		1	1,667		1,870		1	75		75		1	233		231
Construction	2	628		625		2	2,078		2,078
Total commercial real estate	6	6,559		6,554		3	3,745		3,948		1	75		75		1	233		231
Residential mortgage	2	561		557		1	78		77
Consumer	—	—		—		1	23		18		1	19		19		—	—		—
Total	18	$	19,642	$	18,766	12	$	10,235	$	10,291	55	$	42,996	$	41,866	7	$	4,203	$	3,982


											Nine Months Ended September 30,
	Nine Months Ended September 30, 2017					Nine Months Ended September 30, 2016					2019					2018
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		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)										($ in thousands)
Commercial and industrial	61	$	57,338	$	52,694	12	$	11,700	$	11,088	104	$	78,601	$	72,183	22	$	14,719	$	13,904
Commercial real estate:
Commercial real estate	7	23,806		23,217		4	8,325		8,174		3	4,740		4,699		6	4,207		4,504
Construction	3	1,188		994		2	2,079		2,078		—	—		—		2	565		285
Total commercial real estate	10	24,994		24,211		6	10,404		10,252		3	4,740		4,699		8	4,772		4,789
Residential mortgage	6	1,514		1,495		8	2,300		2,271		1	155		154		5	980		952
Consumer	—	—		—		2	77		69		1	19		19		1	88		83
Total	77	$	83,846	$	78,400	28	$	24,481	$	23,680	109	$	83,515	$	77,055	36	$	20,559	$	19,728

The total TDRs presented in the above table had allocated specific reserves for loan losses ~~totaling $5.3~~of $29.6 million and ~~$2.4~~$6.3 millionat September 30, ~~2017~~2019 and ~~2016,~~2018, 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~~the "Impaired Loans" section above. There were 0 partial charge-offs related to TDR loan ~~totaling $209 thousand was fully charged-off~~modifications during the three months ended September 30, 2019 as compared to $2.0 million of partial charge-offs for the nine months ended September 30, ~~2016.~~2019. There were no0 charge-offs related to TDR loan modifications during the three and nine months ended September 30, ~~2017 and 2016, respectively.~~2018.

3430

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~~The non-PCI loans modified as TDRs within the previous 12 months and for which there was a payment default (90 ~~days~~ or more days past due) ~~totaling $1.1 million during both~~for the three and nine months ended September 30, ~~2016.~~2019 and 2018 were as follows:



	Three Months Ended September 30,
	2019			2018
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	($ in thousands)
Commercial and industrial	1	$	604	4	$	3,645
Residential mortgage	1	154		5	1,015
Total	2	$	758	9	$	4,660



	Nine Months Ended September 30,
	2019			2018
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	($ in thousands)
Commercial and industrial	19	$	12,235	8	$	6,770
Commercial real estate	1	283		—	—
Residential mortgage	3	369		5	1,015
Consumer	1	18		—	—
Total	24	$	12,905	13	$	7,785

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,”~~“Pass”, “Special ~~Mention,” “Substandard,” “Doubtful,”~~Mention”, “Substandard”, “Doubtful” and ~~“Loss.”~~“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 credit exposure by internally assigned risk ~~category~~rating by class of loans (excluding PCI loans) ~~by class of loans~~ at September 30, ~~2017~~2019 and December 31, ~~2016.~~ 2018 based on the most recent analysis performed:



Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard		Doubtful		Total Non-PCI Loans
	(in thousands)
September 30, 2019
Commercial and industrial	$	3,866,300	$	32,858	$	71,483	$	67,423	$	4,038,064
Commercial real estate	11,000,256		74,046		46,137		886		11,121,325
Construction	1,384,715		—		355		—		1,385,070
Total	$	16,251,271	$	106,904	$	117,975	$	68,309	$	16,544,459
December 31, 2018
Commercial and industrial	$	3,399,426	$	31,996	$	92,320	$	66,633	$	3,590,375
Commercial real estate	9,828,744		30,892		51,710		963		9,912,309
Construction	1,121,321		215		812		—		1,122,348
Total	$	14,349,491	$	63,103	$	144,842	$	67,596	$	14,625,032

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
At September 30, 2019 and December 31, 2018, the commercial and industrial loans rated substandard and doubtful in the above table included performing TDR taxi medallion loans and non-accrual (but mostly performing to their contractual terms) taxi medallion loans, respectively.

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~~2019 and December 31, ~~2016:~~2018:



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Non-PCI Loans
	(in thousands)
September 30, 2019
Residential mortgage	$	3,756,728	$	13,772	$	3,770,500
Home equity	380,454		1,625		382,079
Automobile	1,436,106		207		1,436,313
Other consumer	896,422		218		896,640
Total	$	6,469,710	$	15,822	$	6,485,532
December 31, 2018
Residential mortgage	$	3,670,067	$	12,917	$	3,682,984
Home equity	369,184		2,156		371,340
Automobile	1,319,126		80		1,319,206
Other consumer	846,402		419		846,821
Total	$	6,204,779	$	15,572	$	6,220,351

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~~2019 and December 31, ~~2016.~~2018:



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total PCI Loans
	(in thousands)
September 30, 2019
Commercial and industrial	$	628,545	$	28,999	$	657,544
Commercial real estate	2,221,154		22,975		2,244,129
Construction	149,870		2,650		152,520
Residential mortgage	356,413		6,418		362,831
Consumer	117,664		2,480		120,144
Total	$	3,473,646	$	63,522	$	3,537,168
December 31, 2018
Commercial and industrial	$	710,045	$	30,612	$	740,657
Commercial real estate	2,478,990		15,976		2,494,966
Construction	364,815		969		365,784
Residential mortgage	421,609		6,807		428,416
Consumer	158,502		1,761		160,263
Total	$	4,133,961	$	56,125	$	4,190,086

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~~$6.4 million and ~~$10.2~~$9.5 million at September 30, ~~2017~~2019 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, 2017.2018, respectively. OREO included foreclosed residential real estate properties totaling ~~$7.2~~$1.5 millionand ~~$1.6 million~~$852 thousand at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled ~~$4.9~~$1.7 millionand ~~$7.1~~$1.8 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

Note 9.8. 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~~2019 and December 31, ~~2016.~~

2018.

The following table summarizes the allowance for credit losses at September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:



	September 30, 2019		December 31, 2018
	(in thousands)
Components of allowance for credit losses:
Allowance for loan losses	$	161,853	$	151,859
Allowance for unfunded letters of credit	2,917		4,436
Total allowance for credit losses	$	164,770	$	156,295

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,
	2019			2018		2019			2018
	(in thousands)
Components of provision for credit losses:
Provision for loan losses	$	8,757		$	6,432	$	20,319		$	23,726
Provision for unfunded letters of credit	(57		)	120		(1,519		)	916
Total provision for credit losses	$	8,700		$	6,552	$	18,800		$	24,642

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~~tables detail activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:



	Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Total
	(in thousands)
Three Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	94,384		$	48,978		$	5,219		$	6,524		$	155,105
Loans charged-off	(527		)	(158		)	(111		)	(2,191		)	(2,987		)
Charged-off loans recovered	330			28			3			617			978
Net (charge-offs) recoveries	(197		)	(130		)	(108		)	(1,574		)	(2,009		)
Provision for loan losses	6,815			(77		)	191			1,828			8,757
Ending balance	$	101,002		$	48,771		$	5,302		$	6,778		$	161,853
Three Months Ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	74,257		$	53,812		$	4,624		$	6,069		$	138,762
Loans charged-off	(833		)	—			—			(1,150		)	(1,983		)
Charged-off loans recovered	1,131			12			9			600			1,752
Net recoveries (charge-offs)	298			12			9			(550		)	(231		)
Provision for loan losses	9,442			(3,694		)	286			398			6,432
Ending balance	$	83,997		$	50,130		$	4,919		$	5,917		$	144,963

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			Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Total
	(in thousands)															(in thousands)
Nine Months Ended September 30, 2017
Nine Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	50,820		$	55,851		$	3,702		$	4,046		$	114,419		$	90,956		$	49,650		$	5,041		$	6,212		$	151,859
Loans charged-off	(4,889		)	(553		)	(488		)	(3,467		)	(9,397		)	(7,882		)	(158		)	(126		)	(5,971		)	(14,137		)
Charged-off loans recovered	3,480			824			903			1,324			6,531			2,008			71			13			1,720			3,812
Net (charge-offs) recoveries	(1,409		)	271			415			(2,143		)	(2,866		)	(5,874		)	(87		)	(113		)	(4,251		)	(10,325		)
Provision for loan losses	5,278			(823		)	(225		)	3,183			7,413			15,920			(792		)	374			4,817			20,319
Ending balance	$	54,689		$	55,299		$	3,892		$	5,086		$	118,966		$	101,002		$	48,771		$	5,302		$	6,778		$	161,853
Nine Months Ended September 30, 2016
Nine Months Ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	48,767		$	48,006		$	4,625		$	4,780		$	106,178		$	57,232		$	54,954		$	3,605		$	5,065		$	120,856
Loans charged-off	(5,507		)	(519		)	(750		)	(2,553		)	(9,329		)	(1,606		)	(348		)	(167		)	(3,783		)	(5,904		)
Charged-off loans recovered	2,418			1,591			604			1,194			5,807			4,057			396			269			1,563			6,285
Net (charge-offs) recoveries	(3,089		)	1,072			(146		)	(1,359		)	(3,522		)
Net recoveries (charge-offs)																2,451			48			102			(2,220		)	381
Provision for loan losses	5,074			3,382			(1,101		)	686			8,041			24,314			(4,872		)	1,212			3,072			23,726
Ending balance	$	50,752		$	52,460		$	3,378		$	4,107		$	110,697		$	83,997		$	50,130		$	4,919		$	5,917		$	144,963

3835

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~~2019 and December 31, ~~2016.~~2018.Loans individually evaluated for impairment represent Valley's impaired loans. Loans acquired with discounts related to credit quality represent Valley's PCI loans.



	Commercial and Industrial		Commercial Real Estate		Residential Mortgage		Consumer		Total
	(in thousands)
September 30, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	35,730	$	1,287	$	525	$	57	$	37,599
Collectively evaluated for impairment	65,272		47,484		4,777		6,721		124,254
Total	$	101,002	$	48,771	$	5,302	$	6,778	$	161,853
Loans:
Individually evaluated for impairment	$	110,539	$	50,124	$	11,656	$	735	$	173,054
Collectively evaluated for impairment	3,927,525		12,456,271		3,758,844		2,714,297		22,856,937
Loans acquired with discounts related to credit quality	657,544		2,396,649		362,831		120,144		3,537,168
Total	$	4,695,608	$	14,903,044	$	4,133,331	$	2,835,176	$	26,567,159
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	29,684	$	2,628	$	600	$	113	$	33,025
Collectively evaluated for impairment	61,272		47,022		4,441		6,099		118,834
Total	$	90,956	$	49,650	$	5,041	$	6,212	$	151,859
Loans:
Individually evaluated for impairment	$	97,852	$	43,598	$	13,904	$	1,271	$	156,625
Collectively evaluated for impairment	3,492,523		10,991,059		3,669,080		2,536,096		20,688,758
Loans acquired with discounts related to credit quality	740,657		2,860,750		428,416		160,263		4,190,086
Total	$	4,331,032	$	13,895,407	$	4,111,400	$	2,697,630	$	25,035,469

Note 9. Leases

Lessor Arrangements

Valley's lessor arrangements primarily consist of direct financing and sales-type leases for equipment included in the commercial and industrial loan portfolio. Lease agreements may include options to renew and for the lessee to purchase the leased equipment at the end of the lease term.

At September 30, 2019, the total net investment in direct financing and sales-type leases was $422.0 million, comprised of $420.7 million in lease receivables and $1.3 million in unguaranteed residuals. Total lease income was $5.0 million and $3.6 million for the three months ended September 30, 2019 and 2018, respectively, and $13.9 million and $10.8 million for the nine months ended September 30, 2019 and 2018, respectively.

Lessee Arrangements

Valley's lessee arrangements predominantly consist of operating and finance leases for premises and equipment. The majority of the operating leases include one or more options to renew that can significantly extend the lease terms. Valley’s leases have a wide range of lease expirations through the year 2062.

Operating and finance leases are recognized as right of use (ROU) assets and lease liabilities in the consolidated statements of financial position. The ROU assets represent the right to use underlying assets for the lease terms and

lease liabilities represent Valley’s obligations to make lease payments arising from the lease. The ROU assets include any prepaid lease payments and initial direct costs, less any lease incentives. At the commencement dates of leases, ROU assets and lease liabilities are initially recognized based on their net present values with the lease terms including options to extend or terminate the lease when Valley is reasonably certain that the options will be exercised to extend. ROU assets are amortized into net occupancy and equipment expense over the expected lives of the leases.

Lease liabilities are discounted to their net present values on the balance sheet based on incremental borrowing rates as determined at the lease commencement dates using quoted interest rates for readily available borrowings, such as fixed rate FHLB advances, with similar terms as the lease obligations. Lease liabilities are reduced by actual lease payments.

In March 2019, Valley closed a sale-leaseback transaction for 26 properties, consisting of 25 branches and 1 corporate office, for an aggregate sales price of $100.5 million. As a result, Valley recorded a pre-tax net gain totaling $78.5 million during the first quarter of 2019. Additionally, Valley recorded ROU assets and lease obligations totaling $78.4 million, respectively, for the lease of the 26 properties with an expected term of 12 years. The lease was determined to be an operating lease and Valley expects to record lease costs of approximately $7.9 million within occupancy and equipment expense on a straight-line basis annually over the term of the lease.

The following table presents the components of ROU assets and lease liabilities by lease type at September 30, 2019.



	September 30, 2019
	(in thousands)
ROU assets:
Operating leases	$	286,014
Finance leases	946
Total	$	286,960
Lease liabilities:
Operating leases	$	309,228
Finance leases	1,917
Total	$	311,145

The following table presents the components by lease type, of total lease cost recognized in the consolidated statement of income for the three and nine months ended September 30, 2019:



	Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019
	(in thousands)
Finance lease cost:
Amortization of ROU assets	$	72		$	218
Interest on lease liabilities	47			148
Operating lease cost	9,096			25,019
Short-term lease cost	134			268
Variable lease cost	723			2,695
Sublease income	(779		)	(2,465		)
Total lease cost (included in net occupancy and equipment expense)	$	9,293		$	25,883

The following table presents supplemental cash flow information related to leases for thenine months ended September 30, 2019:

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



	Nine Months Ended
	September 30, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	25,813
Operating cash flows from finance leases	148
Financing cash flows from finance leases	365

The following table presents supplemental information related to leases at September 30, 2019:



	September 30, 2019
Weighted-average remaining lease term
Operating leases	12.95 years
Finance leases	3.25 years
Weighted-average discount rate
Operating leases	3.69	%
Finance leases	8.25	%

The following table presents a maturity analysis of lessor and lessee arrangements outstanding as of September 30, 2019:



	Lessor			Lessee
	Direct Financing and Sales-Type Leases			Operating Leases			Finance Leases
	(in thousands)
2019	$	34,982		$	8,865		$	171
2020	125,406			35,660			684
2021	107,213			35,068			684
2022	84,768			33,520			684
2023	61,462			30,124			—
Thereafter	48,374			253,421			—
Total lease payments	462,205			396,658			2,223
Less: present value discount	(40,201		)	(87,430		)	(306		)
Total	$	422,004		$	309,228		$	1,917

The following table presents minimum aggregate lease payments in accordance with Topic 840 at September 30, 2018:



	Gross Rents		Sublease Income		Net Rents
	(in thousands)
2018	$	6,916	$	556	$	6,360
2019	27,781		2,196		25,585
2020	27,930		2,152		25,778
2021	27,103		2,086		25,017
2022	26,100		1,970		24,130
Thereafter	273,997		8,707		265,290
Total lease payments	$	389,827	$	17,667	$	372,160

Net occupancy and equipment expense included lease cost of $7.9 million and $24.3 million, net of sublease income of $871 thousand and $2.7 million, for the three and nine months ended September 30, 2018, respectively.

Note 10. Goodwill and Other Intangible Assets

Goodwill totaled ~~$690.6 million~~$1.1 billion at ~~both~~ September 30, ~~2017~~2019 and December 31, ~~2016.~~2018. There were no changes to the carrying amounts of goodwill allocated to ~~Valley’s~~Valley's business segments, or reporting units thereof, for goodwill impairment analysis (as reported in ~~Valley’s~~Valley's Annual Report on Form 10-K for the year ended December 31, ~~2016)~~2018). There was no0 impairment of goodwill during the three and nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018.

The following table summarizes other intangible assets as of September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:



	Gross Intangible Assets		Accumulated Amortization			Valuation Allowance			Net Intangible Assets
	(in thousands)
September 30, 2019
Loan servicing rights	$	91,991	$	(68,225	)	$	(64	)	$	23,702
Core deposits	80,470		(37,392		)	—			43,078
Other	3,945		(2,575		)	—			1,370
Total other intangible assets	$	176,406	$	(108,192	)	$	(64	)	$	68,150
December 31, 2018
Loan servicing rights	$	87,354	$	(63,161	)	$	(83	)	$	24,110
Core deposits	80,470		(29,136		)	—			51,334
Other	3,945		(2,399		)	—			1,546
Total other intangible assets	$	171,769	$	(94,696	)	$	(83	)	$	76,990

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 the economic life of the assets arising from 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~~Non-Recurring Basis" section of Note 65 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 118.2 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 207.6 years. Valley evaluates core deposits and other

intangibles for impairment when an indication of impairment exists. NoNaN impairment was recognized during the three and nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018.

The following table presents the estimated future amortization expense of other intangible assets for the remainder of ~~2017~~2019 through ~~2021:~~2023:



	Loan Servicing Rights		Core Deposits		Other
	(in thousands)
2019	$	1,132	$	2,705	$	59
2020	4,031		9,607		220
2021	3,314		8,252		206
2022	2,731		6,898		191
2023	2,252		5,544		131

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~~$4.7 million and ~~$2.7~~$4.7 million for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$7.6~~$13.2 million and ~~$8.5~~$13.6 million for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

Note 11. Stock–Based Compensation

Valley currently has ~~one~~1 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 primary purpose of the 2016 Stock 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.~~directors (for acting in their roles as board members). As of September 30, ~~2017, 7.3~~2019, 4.3 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~~Valley has awarded restricted stock ~~is awarded~~ to executive officers, key employees and directors of Valley, providing for the immediate award of ~~our~~Valley 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~~did not award any shares of restricted stock ~~totaling 482 thousand shares and 534 thousand shares~~ during the nine months ended September 30, ~~2017 and 2016, respectively,~~2019 as compared to ~~both executive officers and key employees~~1.2 million shares of ~~Valley.~~time-based restricted stock awarded during the nine months ended September 30, 2018. 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~~2018 was ~~$11.71~~$11.88 per ~~share and $8.58 per share, respectively.~~share.

Restricted Stock ~~Units.~~Units (RSUs). Valley granted ~~371~~868 thousand shares of time-based RSUs during the nine months ended September 30, 2019. Valley did 0t grant time-based restricted stock units during the nine months ended September 30, 2018. 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 the grant. The average grant date fair value of the RSUs granted during the nine months ended September 30, 2019 was $10.43 per share.

Valley granted 532 thousand and ~~431~~446 thousand shares of performance-based RSUs to certain executive officers for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The performance-based RSU awards ~~vest~~include RSUs with vesting conditions based ~~on (i)~~upon certain levels of growth in Valley's tangible book value per share plus dividends ~~(75 percent of performance shares)~~ and ~~(ii)~~RSUs with vesting conditions based upon Valley's total shareholder return as compared to our peer ~~group (25 percent of performance shares).~~group. The ~~performance based awards~~RSUs "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~~2019 and ~~2016~~2018 was ~~$11.05~~$10.43 per share and ~~$8.32~~$12.35 per share, respectively.

Valley recorded total stock-based compensation expense of ~~$2.7~~$3.2 million and ~~$2.2~~$3.7 million for the three months ended September 30, ~~2017~~2019 and~~2016,~~2018, respectively, and ~~$9.6~~$11.5 million and ~~$7.4~~$15.8 million for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of September 30, ~~2017,~~2019, the unrecognized amortization expense for all stock-based employee compensation totaled approximately ~~$13.8~~$18.9 million and will be recognized over an average remaining vesting period of ~~1.9~~2 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~~has used 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.

Valley sometimes enters into risk participation agreements with external lenders where the banks are sharing their risk of default on the interest rate swaps on participated loans. Valley either pays or receives a fee depending on the participation type. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in

credit derivatives are recognized directly in earnings. At September 30, 2019, Valley had 19 credit swaps with an aggregate notional amount of $110.9 million related to risk participation agreements.

At September 30, ~~2017,~~2019, Valley ~~has~~had one "steepener" swap with a total current notional amount of ~~$14.5~~$10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the ~~rate~~rates 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 the 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~~rate on ~~Valley’s~~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, 2019						December 31, 2018
	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 swaps	$	—	$	1,941	$	255,000	$	—	$	27	$	332,000
Fair value hedge interest rate swaps	—		290		7,346		—		347		7,536
Total derivatives designated as hedging instruments	$	—	$	2,231	$	262,346	$	—	$	374	$	339,536
Derivatives not designated as hedging instruments:
Interest rate swaps and embedded derivatives	$	216,340	$	57,180	$	3,840,078	$	48,642	$	22,533	$	3,390,578
Mortgage banking derivatives	695		676		254,021		337		774		105,247
Total derivatives not designated as hedging instruments	$	217,035	$	57,856	$	4,094,099	$	48,979	$	23,307	$	3,495,825

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~~London Clearing House 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~~margins are 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~~interest rate swaps assets and designated and non-designated interest rate swaps ~~cleared with the CME~~liabilities were offset by variation margins ~~totaling $10.9 million and $3.1 million, respectively,~~posted by (with) the applicable counterparties and reported in the table above on a net basis at September 30, ~~2017.~~2019 and December 31, 2018.

~~Losses~~Gains (Losses) included in the consolidated statements of income and in other comprehensive income (loss), 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,
	2019			2018			2019			2018
	(in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense	$	(453	)	$	(660	)	$	(1,126	)	$	(2,977	)
Amount of gain (loss) recognized in other comprehensive income (loss)	108			310			(1,404		)	3,698

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~~$4.2 million and ~~$12.5~~$4.0 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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~~$2.7 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,
	2019			2018			2019			2018
	(in thousands)
Derivative - interest rate swaps:
Interest income	$	48		$	73		$	121		$	292
Hedged item - loans:
Interest income	$	(48	)	$	(73	)	$	(121	)	$	(292	)

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~~Fee income related to ~~ineffectiveness of fair value hedges were immaterial~~derivative interest rate swaps executed with commercial loan customers totaled $13.9 million and $4.0 million for the three months ended September 30, 2019 and 2018, respectively, and $23.4 million and $11.7 million for the nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018, respectively, and was included in other non-interest income.

The following table presents the hedged items related to interest rate derivatives designated as hedges of fair value and the cumulative basis fair value adjustment included in the net carrying amount of the hedged items at September 30, 2019 and December 31, 2018.



Line Item in the Statement of Financial Position in Which the Hedged Item is Included	Carrying Amount of the Hedged Asset				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(in thousands)
Loans	$	7,636	$	7,882	$	290	$	346

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,
	2019			2018			2019			2018
	(in thousands)
Non-designated hedge interest rate derivatives
Other non-interest expense	$	(468	)	$	(8	)	$	(1,225	)	$	440

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,~~2019, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of September 30, ~~2017,~~2019, 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~~$24.3 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~~swaps and ~~swaps)~~caps) 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~~2019 and December 31, ~~2016.~~2018.

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 ) $ —



							Gross Amounts Not Offset
	Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Presented		Financial Instruments			Cash Collateral				Net Amount
	(in thousands)
September 30, 2019
Assets:
Interest rate swaps	$	216,340	$	—	$	216,340	$	(14,579	)	$	—			$	201,761
Liabilities:
Interest rate swaps	$	59,411	$	—	$	59,411	$	(14,579	)	$	(23,737	)	⁽¹⁾	$	21,095
Repurchase agreements	350,000		—		350,000		—			(350,000		)	⁽²⁾	—
Total	$	409,411	$	—	$	409,411	$	(14,579	)	$	(373,737	)		$	21,095
December 31, 2018
Assets:
Interest rate swaps and caps	$	48,642	$	—	$	48,642	$	(1,214	)	$	—			$	47,428
Liabilities:
Interest rate swaps and caps	$	22,907	$	—	$	22,907	$	(1,214	)	$	(1,852	)	⁽¹⁾	$	19,841
Repurchase agreements	150,000		—		150,000		—			(150,000		)	⁽²⁾	—
Total	$	172,907	$	—	$	172,907	$	(1,214	)	$	(151,852	)		$	19,841


(1)	Represents the amount of collateral posted with ~~derivatives~~derivative 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.~~liability positions.


(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~~After initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair ~~value~~values are increased to reflect Valley's share of income of the ~~tax credit investment is less than~~investee and are reduced to reflect its ~~carrying value.~~share of losses of the investee, dividends received and other-than-temporary impairments, if applicable (See "Other-Than-Temporary Impairment Analysis" section below).

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~~2019 and December 31, ~~2016.~~2018:



	September 30, 2019		December 31, 2018
	(in thousands)
Other Assets:
Affordable housing tax credit investments, net	$	26,352	$	36,961
Other tax credit investments, net	50,174		68,052
Total tax credit investments, net	$	76,526	$	105,013
Other Liabilities:
Unfunded affordable housing tax credit commitments	$	1,556	$	4,520
Unfunded other tax credit commitments	4,911		8,756
Total unfunded tax credit commitments	$	6,467	$	13,276

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~~2019 and ~~2016:~~2018:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits	$	1,666	$	1,761	$	5,087	$	5,011
Other tax credit investment credits and tax benefits	1,902		5,817		6,863		16,982
Total reduction in income tax expense	$	3,568	$	7,578	$	11,950	$	21,993
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses	$	530	$	708	$	1,796	$	1,375
Affordable housing tax credit investment impairment losses	857		558		2,381		1,660
Other tax credit investment losses	1,093		1,103		4,589		2,893
Other tax credit investment impairment losses	1,905		3,043		7,655		9,228
Total amortization of tax credit investments recorded in non-interest expense	$	4,385	$	5,412	$	16,421	$	15,156

Other-Than-Temporary Impairment Analysis

An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value. The determination of whether a decline in value of a tax credit investment is other-than-temporary requires significant judgment and is performed separately for each investment. The tax credit investments are reviewed for impairment quarterly, or whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. These circumstances can include, but are not limited to, the following factors:

Evidence that we do not have the ability to recover the carrying amount of the investment;

The inability of the investee to sustain earnings;

A current fair value of the investment based upon cash flow projections that is less than the carrying amount; and

Change in the economic or technological environment that could adversely affect the investee’s operations

On a quarterly basis, Valley obtains financial reporting on its underlying tax credit investment assets for each fund from the fund manager who is independent of us and the Fund Sponsor. The financial reporting is reviewed for deterioration in the financial condition of the fund, the level of cash flows and any significant losses or impairment

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

charges. Valley also regularly reviews the condition and continuing prospects of the underlying operations of the investment with the fund manager, including any observations from site visits and communications with the fund sponsor, if available. Annually, Valley obtains the audited financial statements prepared by an independent accounting firm for each investment, as well as the annual tax returns. Generally, none of the aforementioned review factors are individually conclusive and the relative importance of each factor will vary based on facts and circumstances. However, the longer the expected period of recovery, the stronger and more objective the positive evidence needs to be in order to overcome the presumption that the impairment is other than temporary. If management determines that a decline in value is other than temporary per its quarterly and annual reviews, including current probable cash flow projections, the applicable tax credit investment is written down to its estimated fair value through an impairment charge to earnings, which establishes the new cost basis of the investment.

The aggregate unamortized investment related to 3 federal renewable energy tax credit funds sponsored by DC Solar represented approximately $2.4 million (or approximately $800 thousand for each fund) of the $68.1 million of net other tax credit investments reported as of December 31, 2018. These funds are disclosed in detail in Note 15. During the first quarter of 2019, Valley determined that future cash flows related to the remaining investments in all 3 funds were not probable based upon new information available, including the sponsor’s bankruptcy proceedings which were reclassified to Chapter 7 from Chapter 11 in late March 2019. As a result, we recognized an other-than-temporary impairment charge for the entire aggregate unamortized investment of $2.4 million during the first quarter, which is included within amortization of tax credit investments for the nine months ended September 30, 2019.

Note 15. ~~Litigation~~Income Taxes

The federal energy investment tax credit (FEITC) program encourages the use of renewable energy, including solar energy. The energy program reduces federal income taxes by offering a 30 percent tax credit to owners of energy property that meets established performance and quality standards. In addition, there are other returns from tax losses and cash flows generated by the ~~normal course~~investment. Typically, an owner and the tax credit investor, such as Valley, establish a limited partnership. The tax credit investor usually has a substantial, but passive, interest in the partnership and the owner of ~~business,~~the solar energy property has a small interest. The ownership structure permits the tax benefits to pass through to the tax credit investor with an expected exit from ownership after five years.

The amount of the FEITC is calculated based on the total cost of a renewable energy property. From 2013 to 2015, Valley invested in 3 FEITC funds (Fund VI, Fund XII and Fund XIX) sponsored by DC Solar to purchase a total of 512 mobile solar generator units. The valuation of the unit price of the solar units was supported by an appraisal prepared by a well-recognized national appraisal firm. The total tax credits of $22.8 million were used to reduce Valley’s federal income taxes payable in its consolidated financial statements from 2013 to 2015.

The full value of the FEITC is earned immediately when a solar energy property is placed in service. However, the tax credit is subject to recapture for federal tax purposes for a five-year compliance period, if the property ceases to remain eligible for the tax credit. A property may become ineligible during the compliance period due to (i) a sale or disposal of the property, (ii) lease of the property to a tax exempt entity or (3) its removal from service (i.e., no longer available for lease). During the first year after the property has been placed in service, the recapture rate is 100 percent of the tax credit. The rate declines by 20 percent each year thereafter until the end of the fifth year. The compliance period expires at the end of the fifth year after the property has been placed in service. All 3 funds leased the mobile solar generator units to DC Solar Distributions, which stated its intention to sublease the units to third parties.

An entity shall initially recognize the financial statement effects of a tax position when it is more likely than not (or a likelihood of more than 50 percent), based on the technical merits, that the position will be sustained upon examination. The level of evidence that is necessary and appropriate to support an entity's assessment of the technical merits of a tax position is a ~~party to various outstanding~~matter of judgment that depends on all available information. At each of the investment dates, Valley obtained 2 tax opinions from national law firms that, based upon the facts recited,

support the recognition of the tax credits in its tax returns. Based upon management's review of the tax opinions on the investment’s legal ~~proceedings~~structure, Valley recognized and ~~claims. In~~measured each tax position at 100 percent of 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 risktax credit.

Valley's subsequent measurement of a ~~material loss~~tax position is ~~less than likely. Unless an estimate cannot be made, disclosure is also required~~based on management’s best judgment given the facts, circumstances, and information available at the latest quarterly reporting date. A change in judgment that results in subsequent derecognition or change in measurement 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 itselftax position taken in a prior ~~case~~annual period (including any related interest and penalties) is recognized as a discrete item in the period in which the change occurs.

In late February 2019, Valley ~~was completely successful~~learned of Federal Bureau of Investigation (FBI) allegations of fraudulent conduct by DC Solar, including information about asset seizures of DC Solar property and assets of its principals and ongoing federal investigations. Since learning of the allegations, Valley has conducted an ongoing investigation coordinated with other DC Solar fund investors, investors' outside counsel and a third party specialist. The facts uncovered to date by the investor group impact each investor differently, affecting their likelihood of loss and the ~~anticipated legal expenses~~ultimate amount of tax benefit likely to be recaptured. To date, over 93 percent of the 512 solar generator units purchased by Valley's 3 funds have been positively identified by a third party specialist at several leasee and other locations throughout the United States. Valley has also learned through its investigation that the IRS has challenged the valuation appraisals of similar solar generator units that were used to determine the federal renewable energy tax credits related to another DC Solar fund owned by an unrelated investor.

Given the circumstances at this time, including the aforementioned IRS challenge of the appraisals of similar units used by an unrelated fund investor, and management's best judgments regarding the settlement of the tax positions that it would ultimately accept with the IRS, Valley currently expects a partial loss and tax benefit recapture. As a result of this quarterly assessment, our net income for the three and nine months ended September 30, 2019 includes an increase to our provision for income taxes of $133 thousand and $12.5 million, respectively, reflecting the reserve for uncertain tax liability positions (shown in the table below) related to renewable energy tax credits and other tax benefits previously recognized from the ~~following similar cases~~investments in the DC Solar funds plus interest. Valley can provide no assurance that it will not recognize additional tax provisions related to this uncertain tax liability as management learns and analyzes additional facts and information, or that Valley will not ultimately incur a complete loss on the related tax positions, which is currently estimated to be $29.8 million (inclusive of tax provisions totaling $12.5 million for the nine months ended September 30, 2019).

A reconciliation of Valley’s gross unrecognized tax benefits at September 30, 2019 and 2018 are ~~still pending.~~presented in the table below:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018

Beginning balance	$	12,323	$	4,238	$	—	$	4,238
Additions based on tax positions related to current year	133		—		12,456		—
Ending balance	$	12,456	$	4,238	$	12,456	$	4,238

The entire balance of unrecognized tax benefits, if recognized, would favorably affect our effective income tax rate. Valley’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Accrued interest associated with uncertain tax positions totaled approximately $2.3 million and $1.8 million at September 30, 2019 and December 31, 2018, respectively.

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 banksmonitors its tax positions for the ~~cost~~underlying facts, circumstances, and information available including the federal investigation 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~~DC Solar and changes in ~~December 2013. Valley moved to dismiss five~~tax laws, case law and regulations that may necessitate subsequent de-recognition 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.previous tax benefits.

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.

Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its wholly owned subsidiaries, unless we indicate otherwise. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred to as the “Bank” in this MD&A.

The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (U.S. GAAP) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and ~~facilitates~~facilitate comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies.

Cautionary Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “will,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors disclosed in Valley’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, include, but are not limited to:

failure to obtain shareholder approval for the acquisition of Oritani Financial Corp. or to satisfy other conditions to the merger on the proposed terms and within the proposed timeframe;

47the inability to realize expected cost savings and synergies from the Oritani merger in amounts or in the timeframe anticipated;

costs or difficulties relating to Oritani integration matters might be greater than expected;

material adverse changes in Valley’s or Oritani’s operations or earnings;

the inability to retain customers and qualified employees of Oritani;

the inability to repay $635 million of higher cost FHLB borrowings in conjunction with the Oritani merger;

developments in the DC Solar bankruptcy and federal investigations that, after careful analysis by management, could require the recognition of additional tax provision charges related to uncertain tax liability positions;

higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;

weakness or a decline in the economy, mainly in New Jersey, New York, Florida and ~~Florida, as well as an unexpected~~Alabama;

a decline in commercial real estate values within our market ~~areas;~~areas, including the potential negative impact of recent changes to New York City's rent laws;

the inability to grow customer deposits to keep pace with loan growth;

an increase in our allowance for credit losses due to higher than expected loan losses within one or more segments of our loan portfolio;

less than expected cost ~~reductions and revenue enhancement~~savings from Valley's ~~cost reduction plans including its earnings enhancement program called "LIFT";~~branch transformation strategy;

~~damage verdicts~~

greater than expected technology related costs due to, among other factors, prolonged or settlements or restrictions related to existing or potential litigations arising from claims of breach of fiduciary responsibility, negligence, fraud, contractual claims, environmental laws, patent or trade mark infringement, employment related claims,failed implementations, additional project staffing and ~~other matters;~~obsolescence caused by continuous and rapid market innovations;

the loss of or decrease in lower-cost funding sources within our deposit base, ~~may adversely impact~~including our ~~net interest income and net income;~~inability to achieve deposit retention targets under Valley's branch transformation strategy;

~~cyber attacks,~~cyber-attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;

results of examinations by the OCC, the FRB, the CFPB and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, ~~require us to~~ reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;

damage verdicts or settlements or restrictions related to existing or potential litigations arising from claims of violations of laws or regulations brought as class actions, breach of fiduciary responsibility, negligence, fraud, contractual claims, environmental laws, patent or trademark infringement, employment related claims, and other matters;

changes in accounting policies or accounting standards, including the new authoritative accounting guidance (known as the current expected credit loss (CECL) model) which may increase the ~~required~~ level of our allowance for credit losses after adoption on January 1, 2020;

~~higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in tax laws, regulations and case law;~~

our inability or determination not to pay dividends at current levels, or at all, because of inadequate ~~future~~ earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;

~~higher than expected loan losses within one or more segments of our loan portfolio;~~

unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;

unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors; and

the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships.

failure to close the merger with USAB for any reason, including the failure to obtain shareholder approval for the merger within the proposed timeframe or changes in the stock price of Valley during the 30 day pricing period prior to the closing of the merger that gives either Valley or USAB the right to terminate the merger agreement;

~~the risk that the businesses of Valley and USAB may not be combined successfully, or such combination may take longer or be more difficult, time-consuming or costly to accomplish than expected;~~

~~the diversion of management's time on issues relating to the merger with USAB;~~

~~the inability to realize expected cost savings and synergies from the merger of USAB with Valley in the amounts or in the timeframe anticipated; and~~

~~the inability to retain USAB’s customers and employees.~~

Critical Accounting Policies and Estimates

Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. ~~Our significant accounting policies are presented in Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016. We~~At September 30, 2019, we identified our policies on the allowance for loan losses, ~~security valuations and impairments,~~purchased credit-impaired loans, goodwill and other intangible assets, and income taxes to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts

would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies with the Audit Committee of Valley’s Board of Directors. Our critical accounting policies are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

New Authoritative Accounting Guidance

See Note 54 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition.

Executive Summary

Company Overview. At September 30, ~~2017,~~2019, Valley had consolidated total assets of approximately ~~$23.8~~$33.8 billion, total net loans of ~~$18.1~~$26.4 billion, total deposits of ~~$17.3~~$25.5 billion and total shareholders’ equity of ~~$2.5~~$3.6 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and ~~Florida.~~Alabama. Of our current ~~209~~217 branch network, 6756 percent, 18 percent, 19 percent and 157 percent of the branches are ~~located~~ in New Jersey, New York, Florida and ~~Florida,~~Alabama, respectively. WeDespite targeted branch consolidation activity, we have significantly grown ~~significantly~~both in asset

size and locations over the past several years primarily through bank acquisitions, ~~that expanded~~including our ~~operating footprint into several Florida markets since 2014, as well as normal lending activity.~~

~~USAmeriBancorp, Inc.~~ ~~In July 2017, we announced our entry into a merger agreement with~~acquisition of USAmeriBancorp, Inc. ~~(USAB)~~("USAB") on January 1, 2018.

Oritani Financial Corp. Merger. In June 2019, Valley announced that it will acquire Oritani Financial Corp. (“Oritani”) and its principal subsidiary, Oritani Bank, headquartered in ~~Clearwater, Florida. USAB largely through its wholly-owned subsidiary, USAmeriBank,~~Washington Township, New Jersey. Oritani has approximately ~~$4.5~~$4.0 billion in assets, ~~$3.6~~$3.4 billion in ~~net~~ loans, ~~and $3.6~~$2.9 billion in deposits, and maintains a branch network of ~~30 offices.~~26 offices in New Jersey. The ~~acquisition represents a significant addition to Valley’s Florida franchise,~~merger will double Valley's market share in demographically attractive Bergen County and ~~will meaningfully~~ enhance its presence in ~~the Tampa Bay market, which is Florida’s second largest metropolitan area by population.~~ Hudson County.

The ~~acquisition will also bring Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where USAmeriBank maintains 15 offices, contributing approximately $1.2 billion~~common shareholders of ~~deposits and $515 million in loans.~~

~~Each USAB shareholder~~Oritani will receive ~~6.1~~1.60 shares of Valley common stock for each Oritani share of USAB common stock if Valley’s volume-weighted average closing price during the 30 day trading ending 5 days prior to closing is between $11.50 and $13.00. In the event that the volume-weighted average closing price is less than $11.50, then the exchange ratio shall be $69.00 divided by the volume-weighted average closing price. If Valley’s volume-weighted average closing price is greater than $13.00, then the exchange ratio shall be $79.30 divided by the volume-weighted average closing price. 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.they own. The transaction is valued at an estimated ~~$816~~$740 million, based on Valley’s closing stock price on ~~July~~June 25, ~~2017.~~

2019. The ~~acquisition of USAB~~transaction is expected to close in the ~~first~~fourth quarter of ~~2018, and~~2019. Valley has received all ~~necessary banking~~the requisite regulatory approvals to complete the merger. ~~However, the~~The merger ~~is still~~remains subject to ~~a number of~~other customary closing conditions, including the approval by the shareholders of both Valley and ~~USAB shareholder approvals~~Oritani at their respective ~~shareholder~~special meetings to be held on ~~December~~November 14, ~~2017.~~2019.

~~See Item 1~~We currently plan to consolidate nine branches, consisting of ~~Valley’s~~six Oritani branches and three legacy Valley branches, upon completion of our subsequent systems conversion for the Oritani operations. We do not expect these branch closings to impact the timing of the planned closures discussed in the "Branch Transformation" section below.

Branch Transformation. As previously disclosed, Valley has embarked on a strategy to overhaul its retail network. Approximately one year ago, we established the foundation of what the transformation of our branch network would look like in coming years. At that time, we identified 74 branches that did not meet certain internal performance measures, including 20 branches that were closed and consolidated by the end of the first quarter of 2019. For the remaining 54 branches, we implemented tailored action plans focused on improving profitability and deposit levels, as well as upgrades in staffing and training, within a defined timeline.

At September 30, 2019, the majority of the 54 branches have seen measurable success in terms of relative cost of deposits, deposit mix and overall balance growth. However, some locations have not met our established performance targets. As such, we currently expect to close approximately 10 branches by the end of the second quarter of 2020.

For the remaining branch network, we continue to monitor the operating performance of each branch and implement tailored action plans focused on improving profitability and deposit levels for those branches that underperform.

Sale Leaseback. During March 2019, Valley closed a sale-leaseback transaction for 26 properties resulting in a pre-tax gain of $78.5 million for the first quarter of 2019.

Investment in DC Solar Funds. From 2013 to 2015, Valley invested in three federal renewable energy tax credit funds sponsored by DC Solar and claimed the related federal tax credit benefits of approximately $22.8 million in its consolidated financial statements during these periods. In late February 2019, we learned of allegations of fraudulent conduct by DC Solar, including information about asset seizures of DC Solar property and assets of its principals and ongoing federal investigations. We referred to these matters in our Annual Report on Form 10-K for ~~the year ended December 31, 2016 for more details regarding our other recent acquisitions.~~

~~Earnings Enhancement Program.~~ In December 2016, Valley announced a company-wide earnings enhancement initiative called LIFT. The LIFT program is a review of our business practices with goals of improving our overall efficiency, targeting resources to more value-added activities and delivering on the financial banking experience expected by our customers. During July 2017, we completed the idea generation and approval phase2018. Since learning of the ~~LIFT program.~~allegations, Valley has conducted an ongoing investigation coordinated with other DC Solar fund investors, investors' outside counsel and a third party specialist.

Given the circumstances that we are aware of at this time and management's best judgments regarding the settlement of the tax positions that it would ultimately accept with the IRS, we currently expect a partial loss and tax benefit recapture. As a result of ~~these efforts, we plan~~this quarterly assessment, our net income for the three and nine months ended September 30, 2019 includes an increase to ~~achieve approximately $22~~our provision for income taxes of $133 thousand and $12.5 million, ~~in total cost reductions and revenue enhancements on an annualized pre-tax run-rate through a combination of workforce reduction~~respectively, reflecting the reserve for uncertain tax liability positions related to renewable energy tax credits and other ~~efficiency and revenue initiatives. We estimate that these changes will result~~tax benefits previously recognized from the investments in ~~employee severance and other~~the DC Solar funds plus interest. During the first quarter of 2019, we also recognized a full write down of the related unamortized investments totaling $2.4 million

4951

~~implementation costs of approximately $11~~(previously presented in other assets) due to other than temporary impairment losses. We can provide no assurance that we will not recognize additional tax provisions related to this uncertain tax liability as we learn and analyze additional facts and information, or that we will not ultimately incur a complete loss on the related tax positions, which is currently estimated to be $29.8 million ~~the majority of which was recognized in the third quarter of 2017. The implementation phase~~(inclusive of the ~~initiative enhancements is expected to be fully phased-in by June 30, 2019. During~~$12.5 million provision during the third quarter of 2017, Valley already implemented several enhancements that is expected to result in cost reductions of approximately $9 million on an annualized pre-tax basis beginning in the fourth quarter of 2017.

As part of the LIFT program and the regular on-going review of our business, we will evaluate the operational efficiency of our entire branch network (consisting of 110 leased and 99 owned office locations atnine months ended September 30, ~~2017)~~2019). ~~This review will ensure~~See Notes 14 and 15 to the ~~optimal performance of~~consolidated financial statements for additional information related to our ~~retail operations, in conjunction with several other factors, including our customers’ delivery channel preferences, branch usage patterns,~~tax credit investments and ~~the potential opportunity to move existing customer relationships to another branch location without imposing a negative impact on their banking experience.~~

~~Preferred Stock Offering.~~ 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 sharereserves 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. Valley intends to use the net proceeds for general corporate purposes and investment in Valley National Bank as regulatory capital. Net proceeds to Valley after deducting underwriting discounts, commissions and offering expenses were $98.1 million.uncertain tax liability positions.

Quarterly Results. Net income for the third quarter of ~~2017~~2019 was ~~$39.6~~$81.9 million, or ~~$0.14~~$0.24 per diluted common share, compared to ~~$42.8~~$69.6 million, or ~~$0.16~~$0.20 per diluted common share, for the third quarter of ~~2016.~~2018. The ~~$3.2~~$12.3 million ~~decrease~~increase in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a ~~$19.3~~$12.1 million increase in non-interest ~~expense mostly caused by $11.1 million of charges that largely consist of professional fees~~income mainly due to higher swap fee income from commercial loan customer transactions and ~~employee severance expense related to our LIFT program, and, to a lesser extent, merger expenses related to~~increased net gains on the ~~proposed acquisition of USAB, as well as higher salary and employee benefit expense partly related to our expanding team~~sale of residential mortgage ~~loan consultants and technology personnel, partially offset by~~loans, (ii) a ~~$10.7~~$3.8 million increase in our net interest income mostly due to higher average loan balances driven by ~~both~~ strong organic ~~and purchased~~ loan ~~volume~~growth over the last 12 months and ~~the full benefit of reduced interest~~higher loan yield, (iii) a $5.8 million decrease in non-interest expense ~~resulting from $405 million of long-term borrowings modifications~~due, in part, to decreases in the ~~third quarter~~FDIC insurance assessment, salaries and employee benefits and amortization of ~~2016, (iii)~~tax credit investments, partially offset by (iv) a ~~$1.2~~$7.3 million increase in ~~non-interest~~ income ~~mostly caused by an~~tax expense largely due to higher pre-tax income and (v) a $2.1 million increase in ~~net gains on sales of residential mortgage loans and (iv) a $4.2 million decrease in the~~our provision for credit ~~losses mainly caused by continued low level of actual loan loss experience and the continued positive impact of the current economic cycle on our credit quality.~~losses. See the "Net Interest Income," "Non-Interest Income," ~~and~~ "Non-Interest Expense", and "Income Taxes" sections below for more details on the items above impacting our third quarter ~~2017~~2019 results, as well as other items discussed elsewhere in this MD&A.

~~Economic Overview.~~ Operating Environment. During 2018, the ~~third quarter of 2017, real gross domestic product (GDP) grew at a 3.0percent annual rate after advancing 3.1 percent in~~Federal Reserve gradually increased the second quarter of 2017. The pace of hiring decelerated considerably, although the figures released during the third quarter were likely impacted by severe weather in the South, particularly in Texas and Florida. Overall price growth has accelerated in the past few months, although core readings, which exclude food and energy related items, have remained mostly unchanged. Compared to the prior quarter, consumer spending improved, business fixed investment increased modestly, and growth in residential fixed investment declinedtarget range for the ~~second consecutive quarter.~~

~~The civilian unemployment rate decreased~~federal funds rate. As a result, the target range increased from ~~4.4~~1.25 percent to 1.50 percent as of ~~June 30, 2017~~January 1, 2018 to ~~4.2~~2.25 percent as of September 30, 2017 even as the number of people entering the workforce increased, demonstrating the continued strength of the labor market. The pace of hiring decelerated from a monthly average of 187 thousand during the second quarter of 2017 to ~~91 thousand in the third quarter of 2017. Measures of wage growth picked up notably in September although the impact of severe weather in Texas and Florida may have distorted the figures.~~

In the third quarter of 2017, the pace of U.S. existing home sales decreased compared to the second quarter as inventory levels increased. In addition, borrowing costs have incrementally increased as the average 30 year fixed

~~rate mortgage during the third quarter of 2017 was 3.88~~2.50 percent ~~compared to 3.65 percent in the third quarter of 2016. However, home prices have appreciated to a level above the prior peak experienced in 2007.~~

Growth in personal consumption of goods and services improved in the third quarter of 2017. After a weak start for sales of automobiles and related parts, consumption in this category increased in the third quarter of 2017. Household balance sheets continue to improve as equity and home prices rose in the third quarter of 2017. Further price appreciation may support consumer spending into the end of the year.

at December 31, 2018. The Federal ~~Reserve’s Open Market Committee (FOMC) maintained~~Reserve elected to cut the target range for the federal funds rate by 0.25 percent at ~~1.00 to 1.25 percent since~~ their ~~June 2017 meeting. The~~Federal Open Market Committee ~~remained concerned about continued low levels of inflation~~meetings held in both July 2019 and inflation expectations. In determining future policy actions, the FOMC will assess progress - both realized and expected - toward its objectives of maximum employment and 2-percent inflation. The FOMC has indicated it will begin a balance sheet normalization program inSeptember 2019. On October ~~2017. This program will gradually reduce~~30, 2019, the Federal ~~Reserve's securities holdings~~Reserve cut interest rates by ~~decreasing reinvestment~~0.25 percent again, resulting in a current target range for the federal funds rate of ~~principal payments from those securities.~~1.50 to 1.75 percent. The ~~FOMC has continued~~Federal Reserve Chairman Jerome H. Powell indicated that the recent cut was made to ~~emphasize~~help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks. These and other comments by the Federal Reserve Chairman appear to signal that ~~changes in monetary policy~~the Federal Reserve will ~~be data dependent.~~pause and assess incoming date before it considers lowering borrowing costs again.

The 10-year U.S. Treasury note yield ended the third quarter at ~~2.33~~1.68 percent, 232 basis points ~~higher than~~lower compared with June 30, ~~2017. However, the~~2019. The spread between the 2- and 10-year U.S. Treasury note yields ended the third quarter of ~~2017~~2019 at ~~0.86 percentage points, or 7~~0.05 percent, 20 basis points lower compared to the end of the second quarter of ~~2017.~~2019 and 19 basis points lower compared to September 30, 2018.

~~We are currently witnessing~~

For all U.S. commercial banks, loans and leases grew approximately 2.4 percent on an annual basis in the third quarter of 2019 compared to the previous quarter. For the industry, fewer banks reported waning demand for commercial and industrial loan products to large and middle market firms compared to the previous quarter. Similarly, demand remained weak for most commercial real estate loans secured by nonfarm nonresidential structures during the quarter. Alternatively, a ~~mix~~small number of ~~interest rates~~banks reported demand for multifamily loans had increased, the first such reading in several quarters. Valley continued to see strong demand for commercial real estate and commercial and industrial loans across its geographies in the third quarter of 2019. However, should demand weaken for commercial loans and competition for deposits increase further in Valley's markets, these factors, along with the potential for a prolonged flat yield curve environment, may challenge our business operations and results, as highlighted throughout the remaining MD&A discussion below.

Loans. Loans increased $765.0 million, or 11.9 percent on ~~pending~~an annualized basis to approximately $26.6 billion at September 30, 2019 from June 30, 2019. The increase was mainly due to continued strong quarter over quarter organic growth in commercial real estate and commercial and industrial loans, as well as stronger automobile loan ~~originations, that are on average higher~~volumes during the third quarter of 2019. During the third quarter of 2019, we originated $139 million of residential mortgage loans for sale rather than held for investment and sold approximately $87 million of pre-existing loans from our residential mortgage loan portfolio. Residential mortgage loans held for sale totaled $41.6 million and $36.6 million at September 30, 2019 and June 30, 2019, respectively.

For the full year of 2019, we established a goal to grow our overall loan portfolio ~~yield, during~~in the range of 6 to 8 percent. We have maintained this guidance in the early stages of the fourth quarter of ~~2017. However, we do see some offset potentially coming in the form of higher deposit~~2019 given our current loan pipeline and borrowing costs in our primary markets. To that end, despite solid loan demand, particularly in commercial real estate and residential mortgage lending, our business operations and results could be challenged in the future due to several external factors, including, but not limited to, the decline in the spread between short- and long-term market ~~interest rates and/or slower than expected economic activity within our markets.~~

~~Loans.~~ Loans increased by $490.7 million, or 11.1 percent on an annualized basis, to $18.2 billion at September 30, 2017 from June 30, 2017 largely due to net increases of $216.7 million, $143.1 million and $75.6 million in residential mortgage loans, total commercial real estate loans and commercial and industrial loans, respectively. The residential mortgage loan growth was largely driven by solid loan production from our expanding internal home mortgage consultant team covering New Jersey, New York and Florida. Additionally, we sold $176 million of residential mortgage loans (including approximately $139 million of loans held for sale at June 30, 2017) resulting in pre-tax gains of $5.5 million during the third quarter of 2017.conditions. See further details on our loan activities under the “Loan Portfolio” section below.

~~Hurricane Irma.~~ The credit quality of our Florida loan portfolio has remained resilient in the aftermath of Hurricane Irma, which hit Florida in mid-September. Through our loan customer outreach efforts, we offered loan payment deferrals up to 90 days to distressed borrowers. Under the deferral program, we have currently granted 53 loan deferral requests with a combined outstanding balance of approximately $37.6 million. At this time, no material loan losses are expected as a result of the hurricane.

Asset Quality. Our past due loans and non-accrual loans discussed further below exclude PCI loans. Under U.S. GAAP, ~~the~~ PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley. ~~As of September 30, 2017,~~Our PCI ~~loans~~loan portfolio totaled ~~$1.5~~$3.5 billion, ~~and represented approximately 8.1~~or 13.3 percent, of our total loan ~~portfolio.~~ portfolio at September 30, 2019.

Total ~~non-PCI~~non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $4.0 million to $110.7 million at September 30, 2019 as compared to June 30, 2019 mainly due to an increase of $4.5 million in non-accrual loans during the third quarter of 2019. Non-accrual loans increased due, in part, to a $3.9 million commercial real estate loan ~~portfolio delinquencies (including~~at September 30, 2019 previously reported in loans past due 30 to 59 days at June 30, 2019. The $3.9 million non-accrual loan had no related reserves within the allowance for loan losses based upon the adequacy of the collateral valuation at September 30, 2019. Non-accrual loans represented 0.38 percent of total loans at September 30, 2019 as compared to 0.37 percent at June 30, 2019.

Total accruing past due loans (i.e., loans past due 30 days or more and ~~non-accrual loans) as a percentage~~still accruing interest) increased $21.4 million to $88.5 million, or 0.33 percent of total loans, ~~decreased to 0.40 percent~~ at September 30, ~~2017~~2019 as compared to ~~0.47~~$67.0 million, or 0.26 percent of total loans, at June 30, ~~2017 mostly~~2019. The higher level of accruing past due toloans at September 30, 2019 was largely caused by a ~~decrease in~~few large matured performing commercial real estate and construction loans in the normal process of renewal. While we are required to report these matured performing loans as accruing past due ~~60 to 89 days and several loan types within~~loans, we believe the loans ~~past due 90 days or more category. Non-performing assets (including non-accrual loans) increased by 1.1 percent to $55.2 million~~are well-secured, in the process of collection and do not represent a material negative trend in our credit quality at September 30, ~~2017 as compared to $54.6 million at June 30, 2017 mainly due to a moderate increase in foreclosed assets during the third quarter of 2017.~~2019.

Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the unpredictable future strength of the U.S. economy and the housing and labor markets, as well as other market factors that may continue to negatively impact the performance of our $139.3 million taxi medallion loan portfolio, management cannot provide assurance that our non-performing assets will not increase from the levels reported as of September 30, ~~2017.~~2019. See the "Non-Performing Assets" section below for further analysis of our asset quality.

Deposits and Other Borrowings. ~~The~~ Our mix of the deposit categories of total average deposits for the third quarter of ~~2017~~2019 remained relatively unchanged as compared to the second quarter of ~~2017. Non-interest~~2019 with a continued moderate shift to time deposits. Average non-interest bearing ~~deposits represented approximately 30 percent of total average deposits for the third quarter of 2017, while~~deposits; savings, NOW and money market ~~deposits were 51 percent~~deposits; and time deposits ~~were 19~~represented approximately 26 percent, 44 percent and 30 percent of ~~the~~ total ~~average deposits.~~deposits as of September 30, 2019, respectively. Overall, average deposits totaled ~~$17.4~~$24.8 billion for the third quarter of ~~2017~~2019 and increased by ~~$64.6~~$137.1 million as compared to the second quarter of ~~2017~~2019. The increase in average deposit balances was largely due ~~in large part,~~ to ~~higher average balances~~increases of $335.9 million and $29.2 million in time deposits ~~resulting from the success of our current retail certificate of deposit products,~~and non-interest bearing deposits, respectively, partially offset by a decrease in money market deposits during the third quarter of ~~approximately $18.2 million~~2019. The increase in the average time deposits and decrease in money market deposits was largely due to increased use of brokered time deposits and a decline in the use of brokered money market ~~deposit account balances~~deposits, respectively, during the third quarter due to normal liquidity management and ~~a moderate decline~~changes in ~~average non-interest bearing deposits.~~ market interest rates and availability of such instruments.

Actual ending balances for deposits increased ~~$62.7~~$772.2 million to approximately ~~$17.3~~$25.5 billion at September 30, ~~2017~~2019 from June 30, ~~2017~~2019 largely due to ~~increases~~a $534.0 million increase in ~~the~~time deposits. Savings, NOW and money market ~~accounts, as well as time~~ deposits ~~resulting from ongoing retail~~ and ~~business account initiatives in 2017. However,~~ non-interest bearing deposits ~~and brokered money market account balances declined $98.6~~also increased by $186.7 million and ~~$96.2~~$51.5 million at September 30, ~~2017, respectively,~~2019 from June 30, 2019, respectively. Time deposits primarily increased due to the greater use of short-term brokered certificates of deposit with interest rates comparable or favorable to similar duration wholesale borrowings available from other funding sources, such as the FHLB, in the third quarter of 2019. Total brokered deposits (consisting of both time and money market deposit accounts) were $3.7 billion at September 30, 2019 as compared to $3.2 billion at June 30, ~~2017.~~2019.

Average short-term borrowings decreased ~~$300.2~~$114.8 million to ~~$1.5~~$2.3 billion for the third quarter of ~~2017~~2019 as compared to the second quarter of ~~2017. Actual ending balances for short-term borrowings also decreased $251.7 million to $1.5 billion at September 30, 2017 as compared to June 30, 2017~~2019 largely due to the maturity and repayment of ~~several~~ short-term FHLB ~~advances. Valley largely replaced matured short-term borrowings during both the second and third quarters of 2017 with new long-term FHLB~~ borrowings. Average

~~Average~~

long-term borrowings ~~(which include~~(including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased by ~~$352.4~~$536.4 million to ~~$2.0~~$2.1 billion for the third quarter of ~~2017~~2019 as compared to the second quarter of ~~2017.~~ 2019 mainly due to higher long-term FHLB borrowings and long-term institutional repos balances.

Actual ending balances for ~~long-term~~short-term borrowings ~~also increased $395.6~~decreased $562.4 million ~~to $2.2 billion~~ at September 30, ~~2017~~2019 as compared to June 30, ~~2017 mostly~~2019 largely due to ~~new FHLB advances with contractual terms less than two years. The new~~the maturity and repayment of $695 million of FHLB borrowings that were ~~utilized~~mostly funded by a mix of new brokered time deposits, long-term FHLB borrowings and long-term institutional repos. As a result, long-term borrowings increased $450.5 million to ~~replace the funding from matured short-term advances and provide additional liquidity for loan growth during the third quarter of 2017.~~$2.3 billion at September 30, 2019 as compared to June 30, 2019.

Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Return on average assets	0.67	%	0.78	%	0.78	%	0.72	%	0.98	%	0.91	%	1.10	%	0.82	%
Return on average assets, as adjusted	0.79		0.78		0.81		0.72		1.00		0.96		0.96		0.94

Return on average shareholders’ equity	6.34		7.61		7.42		7.04		9.26		8.41		10.44		7.46
Return on average shareholders’ equity, as adjusted	7.42		7.61		7.79		7.04		9.40		8.84		9.10		8.50

Return on average tangible shareholders’ equity (ROATE)	8.96		11.29		10.61		10.48		13.75		12.96		15.65		11.54
ROATE, as adjusted	10.50		11.29		11.14		10.48		13.96		13.61		13.65		13.14

Adjusted return on average assets, adjusted return on average shareholders' equity, ROATE and adjusted ROATE included in the table above are non-GAAP measures. Management believes these measures provide information useful to management and investors in understanding our underlying operational performance, business and

performance trends, and the measures facilitate comparisons of our prior performance with the performance of others in the financial services industry. ~~The~~These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. The non-GAAP measure reconciliations are ~~as follows:~~presented below.

Adjusted net income is computed as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2019		2018		2019			2018
	($ in thousands)								(in thousands)
Net income, as reported	$	39,649	$	42,842	$	135,809	$	118,056	$	81,891	$	69,559	$	271,689		$	184,326
Add: LIFT program expenses (net of tax)⁽¹⁾	5,753		—		5,753		—
Add: Merger related expenses (net of tax)⁽²⁾	1,043		—		1,044		—
Add: Net impairment losses on securities (net of tax)									—		—		2,078			—
Add: Losses on securities transactions (net of tax)									67		56		82			630
Add: Severance expense (net of tax)⁽¹⁾									—		—		3,433			—
Add: Tax credit investment impairment (net of tax)⁽²⁾									—		—		1,757			—
Add: Branch related asset impairment (net of tax) ⁽³⁾									—		1,304		—			1,304
Add: Legal expenses (litigation reserve impact only, net of tax)									—		1,206		—			8,726
Add: Merger related expenses (net of tax)⁽⁴⁾									1,043		935		1,068			12,949
Add: Income Tax Expense ⁽⁵⁾									133		—		12,456			2,000
Less: Gain on sale-leaseback transaction (net of tax) ⁽⁶⁾									—		—		(55,707		)	—
Net income, as adjusted	$	46,445	$	42,842	$	142,606	$	118,056	$	83,134	$	73,060	$	236,856		$	209,935

⁽¹⁾ Severance expense is included in salary and employee benefits expense.

⁽²⁾ Impairment is included in the amortization of tax credit investments.

⁽³⁾ Branch related asset impairment is included in net losses on sales of assets within non-interest income.


~~(1)~~	~~LIFT program expenses are primarily within professional and legal fees, and salary and employee benefits expense.~~


~~(2)~~ ⁽⁴⁾	Merger related expenses are primarily within professional and legal ~~fees.~~fees in 2019 and salary and employee benefits and other expense in 2018.


⁽⁵⁾	Income tax expense related to reserves for uncertain tax positions in 2019 and a USAB acquisition charge in 2018.


⁽⁶⁾	The gain on sale leaseback transactions is included in net gains on the sales of assets within other non-interest income.

Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2019			2018			2019			2018
	($ in thousands)												($ in thousands)
Net income, as adjusted	$	46,445		$	42,842		$	142,606		$	118,056		$	83,134		$	73,060		$	236,856		$	209,935
Average assets	$	23,604,252		$	22,081,470		$	23,334,491		$	21,831,622		$	33,419,137		$	30,493,175		$	32,811,565		$	29,858,764
Annualized return on average assets, as adjusted	0.79		%	0.78		%	0.81		%	0.72		%	1.00		%	0.96		%	0.96		%	0.94		%

Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2019			2018			2019			2018
	($ in thousands)												($ in thousands)
Net income, as adjusted	$	46,445		$	42,842		$	142,606		$	118,056		$	83,134		$	73,060		$	236,856		$	209,935
Average shareholders' equity	$	2,502,538		$	2,251,461		$	2,441,227		$	2,236,569		$	3,536,528		$	3,307,690		$	3,471,432		$	3,292,439
Annualized return on average shareholders' equity, as adjusted	7.42		%	7.61		%	7.79		%	7.04		%	9.40		%	8.84		%	9.10		%	8.50		%

ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2019			2018			2019			2018
	($ in thousands)												($ in thousands)
Net income	$	39,649		$	42,842		$	135,809		$	118,056		$	81,891		$	69,559		$	271,689		$	184,326
Net income, as adjusted	$	46,445		$	42,842		$	142,606		$	118,056		$	83,134		$	73,060		$	236,856		$	209,935
Average shareholders’ equity	$	2,502,538		$	2,251,461		$	2,441,227		$	2,236,559		$	3,536,528		$	3,307,690		$	3,471,432		$	3,292,439
Less: Average goodwill and other intangible assets	(733,450		)	(733,830		)	(734,738		)	(734,791		)	1,154,462			1,161,167			1,157,203			1,162,980
Average tangible shareholders’ equity	$	1,769,088		$	1,517,631		$	1,706,489		$	1,501,768		$	2,382,066		$	2,146,523		$	2,314,229		$	2,129,459
Annualized ROATE	8.96		%	11.29		%	10.61		%	10.48		%	13.75		%	12.96		%	15.65		%	11.54		%
Annualized ROATE, as adjusted	10.50		%	11.29		%	11.14		%	10.48		%	13.96		%	13.61		%	13.65		%	13.14		%

~~Additionally,~~In addition to the items used to calculate net income, as adjusted, in the tables above, our net income is, from time to time, impacted by ~~net gains and losses on securities transactions,~~fluctuations in the level of net gains on sales of loans and ~~net impairment losses on securities~~swap fees recognized ~~in non-interest income.~~from commercial loan customer transactions. These amounts can vary widely from period to period due to, among other factors, the ~~level of sales of our investment securities classified as available for sale, the~~ amount of residential mortgage loans originated for sale, bulk loan portfolio sales and ~~the results of our quarterly impairment analysis of the held to maturity and available~~commercial loan customer demand for ~~sale investment portfolios.~~certain products. See the “Non-Interest ~~Income” and "Non-Interest Expense" sections~~Income" section below for more details.

Net Interest Income

Net interest income consists of interest income and dividends earned on interest earning assets, less interest expense on interest bearing liabilities, and represents the main source of income for Valley.

Net interest income on a tax ~~equivalen~~tequivalent basis totaling ~~$166.9~~$221.7 million for the third quarter of ~~2017~~2019 increased ~~$10.6~~$3.6 million as compared to the third quarter of ~~2016~~2018 and ~~decreased $4.2 million from~~increased $355 thousand as compared to the second quarter of ~~2017.~~2019. The increase as compared to the second quarter of 2019 was largely due to higher average loan balances and lower costs of interest-bearing liabilities, partly offset by lower yielding loans. Interest income on a tax equivalent basis increased ~~$401 thousand~~$1.5 million to ~~$213.7~~$330.4 million for the third quarter of ~~2017~~2019 as compared to the second quarter of ~~2017~~2019 mainly due to a ~~$304.6~~$584.3 million increase in average loans, partially offset by a 5 basis point decrease in the yield on average loans. The decrease in yield on average loans for the third quarter of 2017 as compared to the linked second quarter was largely due to a decrease of $4.1 million in periodic commercial loan fee income related to derivative interest rate swaps executed with customers and interest income recoveries from non-performing loans. Interest expense of ~~$46.8~~$108.6 million for the third quarter of ~~2017~~2019 increased ~~$4.6~~$1.1 million as compared to the second quarter of ~~2017. During the third quarter of 2017, our interest expense on deposits increased by approximately $3.6 million from the linked second quarter~~2019 largely due to ~~an increase in short-term market interest rates on interest bearing deposits without stated maturities and one more day during the third quarter compared to the second quarter. Interest expense on~~higher average balances for long-term borrowings ~~also increased $1.4 million in~~and time deposits, partially offset by the ~~third quarter~~overall lower cost of 2017 as compared to the second quarter of 2017 due, in part, to an increase of $352.4 million in the average balances. Average long-term borrowings increased as compared to the second quarter of 2017 mostly due to new long-term FHLB borrowings replacing short-term FHLB advances that matured during the second and third quarters of 2017. As a result, the interest expense on short-term borrowings and average balances declined by $355 thousand and $300.2 million, respectively, during the third quarter of 2017 as compared to the second quarter of 2017.funds.

Average interest earning assets increased $2.5 billion to ~~$21.6~~$30.5 billion for the third quarter of 2017 as compared to approximately $19.9 billion for the third quarter of 2016 largely due to strong organic and purchased loan growth over the last 12 month period. The broad-based loan growth within several loan categories since September 30, 2016 was largely supplemented by purchased loans, primarily consisting of participations in multi-family loans and whole 1-4 family loans (that were a mix of qualifying and non-qualifying CRA loans with adjustable and fixed rates) over the last 12 months ended September 30, 2017. Compared to the second quarter of 2017, average interest earning assets increased by $226.2 million from $21.4 billion largely due to continued loan growth, partially offset by normal investment securities portfolio repayments that were redeployed to fund loans in the third quarter of 2017. Average loans increased $304.6 million to $18.0 billion for the third quarter of 2017 from the second quarter of 2017 mostly due to organic loan growth within the residential mortgage loan and commercial real estate loan portfolios. Average total investments decreased $87.5 million during the third quarter of 2017, while average overnight cash balances increased $9.1 million

~~as compared to the second quarter of 2017 mostly due to the timing of loan originations, investment repayments and additional borrowings to fund such loans.~~

~~Average interest bearing liabilities increased $1.2 billion to $15.7 billion for the third quarter of 2017~~2019 as compared to the third quarter of ~~2016 mainly~~2018 due to ~~greater use of low cost brokered money market deposits, time deposits and both short- and long-term FHLB advances as part of our overall funding and liquidity strategy~~strong organic loan growth over the last ~~12 month~~12-month period. Compared to the second quarter of ~~2017,~~2019, average interest earning assets increased by $617.2 million from $29.9 billion due to continued organic loan growth during the third quarter of 2019 and higher average overnight funds mostly due to fluctuations in the timing of loan and investment activity, partially offset by a moderate decrease in the investment securities portfolio. Average loans increased $584.3 million to $26.1 billion for the third quarter of 2019 from the second quarter of 2019 mainly due to the strong loan growth within the commercial and industrial, commercial real estate and automobile loan portfolios.

Average interest bearing liabilities increased $2.1 billion to $22.9 billion for the third quarter of 2019 as compared to the third quarter of 2018 mainly due to both retail and brokered time deposit growth, partly caused by our increased use of brokered CDs as a cost effective alternative to shorter term FHLB borrowings in our funding and liquidity strategy. Compared to the second quarter of 2019, average interest bearing liabilities increased ~~$126.8~~by $529.6 million in the third quarter of ~~2017 mostly due to higher levels of FHLB~~2019. Increases in both average deposits and long-term borrowings ~~and time deposit account balances,~~were partially offset by ~~slightly lower money market deposit account balances.~~a decrease in average short-term borrowings caused by the maturity of short-term FHLB borrowings during the third quarter of 2019. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.

Our net interest margin on a tax equivalent basis of ~~3.08~~2.91 percent for the third quarter of ~~2017~~2019 decreased by 621 basis points and 125 basis points ~~as compared to~~from 3.12 percent and 2.96 percent for the third quarter of ~~2016~~2018 and second quarter of ~~2017,~~2019, respectively. The yield on average interest earning assets decreased by 37 basis points on a linked quarter basis mostly due to ~~the aforementioned decline~~a decrease in ~~commercial loan swap fees and interest income recoveries which negatively impacted~~ the yield ~~by 8 basis points.~~on loans. The yield on average loans ~~also~~ decreased 5by 8 basis points to ~~4.15~~4.57 percent for the third quarter of ~~2017~~2019 as compared to the second quarter of ~~2017~~2019 partly due to ~~the aforementioned decreases which negatively impacted the loan yield by approximately 9 basis points. The~~repayment of higher yielding loans and a decline in accretable yield on ~~average taxable and non-taxable investment securities also moderately decreased by 1 basis point and 2 basis points, respectively, as compared to~~PCI loans in the ~~second~~third quarter of ~~2017.~~2019. The overall cost of average interest bearing liabilities ~~increased by 11~~decreased 3 basis points to 1.19 percent during the third quarter of 2017 from 1.08 percent in the linked second quarter of 2017. The increase was due, in part, to higher interest rates on most deposits and short-term borrowings, a shift in the overall mix of borrowings from short-term to more long-term FHLB advances (with maturities less than two years), as well as one more day during the third quarter of 2017 compared to the second quarter. Our cost of total deposits was 0.611.90 percent for the third quarter of ~~2017~~2019 as compared to ~~0.53~~the linked second quarter of 2019 due to lower interest rates on certain deposits and borrowings repricing during the third quarter. Our cost of total average deposits was 1.27 percent for the third quarter of 2019 and remained unchanged as compared to the second quarter of ~~2017.~~2019.

Looking forward, we expect the interest rate pressures on the level of our net interest margin ~~for~~to remain during the fourth quarter of ~~2017 may decline~~2019 due, in part, to lower market interest rates on new and renewed loan originations and a prolonged flat yield curve environment. However, continued repricing of stated maturity deposits and other borrowings over the next 12-month period should largely mitigate the expected lower loan yields. Based upon our most recent projection, we anticipate net interest income growth will equal approximately 3.5 to 4.5 percent for the full year of 2019 as compared to the third quarter of 2017 due to a multitude of conditional, and sometimes unpredictable, factors that can impact our actual margin results. For example, our margin may continue to face the risk of compression in the future due to, among other factors, the relatively low level of long-term market interest rates, further repayment of higher yielding interest earning assets, and the re-pricing risk related to interest bearing deposits and short-term borrowings due to a rise in short-term market interest rates. Additionally, our investment portfolios include a large number of residential mortgage-backed securities purchased at a premium. The amortization of such premiums, which impacts both the yield and interest income recognized on such securities, may increase or decrease depending upon the level of principal prepayments and market interest rates. To manage these risks, we continuously explore ways to maximize our mix of interest earning assets on our balance sheet, while maintaining a low cost of funds to optimize our net interest margin and overall returns. The increase in both the U.S. and Valley prime rates (to 4.25 percent and 5.25 percent, respectively) in response to the Federal Reserve's 25 basis point increase in the targeted federal funds rate in mid-June 2017 may more fully benefit both our future net interest income and margin in the fourth quarter as compared to the third quarter as we close additional new variable loans at these rates.2018.

5556

The following table reflects the components of net interest income for the three months ended September 30, ~~2017,~~2019, June 30, ~~2017~~2019 and September 30, ~~2016:~~2018:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and

Net Interest Income on a Tax Equivalent Basis


	Three Months Ended																								Three Months Ended
	September 30, 2017								June 30, 2017								September 30, 2016								September 30, 2019								June 30, 2019								September 30, 2018
	Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
	($ in thousands)																								($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)	$	18,006,274		$	186,776		4.15	%	$	17,701,676		$	185,863		4.20	%	$	16,570,723		$	171,146		4.13	%	$	26,136,745		$	298,384		4.57	%	$	25,552,415		$	296,934		4.65	%	$	23,659,190		$	265,871		4.50	%
Taxable investments (3)	2,905,400			20,579			2.83		2,967,729			21,065			2.84		2,531,202			15,844			2.50		3,411,330			24,972			2.93		3,453,676			25,284			2.93		3,399,910			25,343			2.98
Tax-exempt investments (1)(3)	556,061			5,773			4.15		581,263			6,066			4.17		628,951			6,189			3.94		632,709			5,341			3.38		658,727			5,514			3.35		730,711			6,358			3.48
Federal funds sold and other interest bearing deposits	175,111			546			1.25		166,003			279			0.67		165,956			193			0.47
Interest bearing deposits with banks																									313,785			1,686			2.15		212,566			1,168			2.20		181,901			805			1.77
Total interest earning assets	21,642,846			213,674			3.95		21,416,671			213,273			3.98		19,896,832			193,372			3.89		30,494,569			330,383			4.33		29,877,384			328,900			4.40		27,971,712			298,377			4.27
Allowance for loan losses	(117,938		)						(116,254		)						(109,504		)						(157,176		)						(156,747		)						(141,400		)
Cash and due from banks	231,518								231,960								279,720								267,331								265,015								289,829
Other assets	1,860,683								1,879,853								2,012,532								2,812,665								2,744,661								2,428,322
Unrealized (losses) gains on securities available for sale, net	(12,857		)						(15,971		)						1,890								1,748								(23,169		)						(55,288		)
Total assets	$	23,604,252							$	23,396,259							$	22,081,470							$	33,419,137							$	32,707,144							$	30,493,175
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits	$	8,799,955		$	15,641		0.71	%	$	8,803,028		$	12,715		0.58	%	$	8,509,793		$	10,165		0.48	%	$	11,065,959		$	35,944		1.30	%	$	11,293,885		$	38,020		1.35	%	$	11,032,866		$	28,775		1.04	%
Time deposits	3,368,153			10,852			1.29		3,290,407			10,166			1.24		3,082,100			9,412			1.22		7,383,202			42,848			2.32		7,047,319			40,331			2.29		4,967,691			20,109			1.62
Total interest bearing deposits	12,168,108			26,493			0.87		12,093,435			22,881			0.76		11,591,893			19,577			0.68		18,449,161			78,792			1.71		18,341,204			78,351			1.71		16,000,557			48,884			1.22
Short-term borrowings	1,537,562			5,161			1.34		1,837,809			5,516			1.20		1,439,352			3,545			0.99		2,265,528			12,953			2.29		2,380,294			14,860			2.50		2,766,398			15,193			2.20
Long-term borrowings (4)	2,032,068			15,142			2.98		1,679,691			13,790			3.28		1,518,757			13,935			3.67		2,143,432			16,891			3.15		1,607,046			14,297			3.56		1,991,294			16,164			3.25
Total interest bearing liabilities	15,737,738			46,796			1.19		15,610,935			42,187			1.08		14,550,002			37,057			1.02		22,858,121			108,636			1.90		22,328,544			107,508			1.93		20,758,249			80,241			1.55
Non-interest bearing deposits	5,184,991								5,195,052								5,077,032								6,387,188								6,358,034								6,222,646
Other liabilities	178,985								169,424								202,975								637,300								539,047								204,590
Shareholders’ equity	2,502,538								2,420,848								2,251,461								3,536,528								3,481,519								3,307,690
Total liabilities and shareholders’ equity	$	23,604,252							$	23,396,259							$	22,081,470							$	33,419,137							$	32,707,144							$	30,493,175
Net interest income/interest rate spread (5)				$	166,878		2.76	%				$	171,086		2.90	%				$	156,315		2.87	%				$	221,747		2.43	%				$	221,392		2.47	%				$	218,136		2.72	%
Tax equivalent adjustment				(2,024		)						(2,126		)						(2,169		)						(1,122		)						(1,158		)						(1,336		)
Net interest income, as reported				$	164,854							$	168,960							$	154,146							$	220,625							$	220,234							$	216,800
Net interest margin (6)							3.05	%							3.16	%							3.10	%							2.89	%							2.95	%							3.10	%
Tax equivalent effect							0.03	%							0.04	%							0.04	%							0.02	%							0.01	%							0.02	%
Net interest margin on a fully tax equivalent basis (6)							3.08	%							3.20	%							3.14	%							2.91	%							2.96	%							3.12	%

5657

The following table reflects the components of net interest income for the nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:

Analysis of Average Assets, Liabilities and Shareholders’ Equity and

Net Interest Income on a Tax Equivalent Basis


	Nine Months Ended																Nine Months Ended
	September 30, 2017								September 30, 2016								September 30, 2019								September 30, 2018
	Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
	($ in thousands)																($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)	$	17,676,222		$	547,656		4.13	%	$	16,273,482		$	506,652		4.15	%	$	25,651,195		$	883,595		4.59	%	$	22,939,106		$	751,149		4.37	%
Taxable investments (3)	2,903,396			61,384			2.82		2,487,853			46,895			2.51		3,418,614			76,306			2.98		3,413,492			74,555			2.91
Tax-exempt investments (1)(3)	583,215			18,040			4.12		594,846			17,611			3.95		660,162			16,936			3.42		740,832			20,738			3.73
Federal funds sold and other interest bearing deposits	176,033			1,156			0.88		285,378			846			0.40
Interest bearing deposits with banks																	251,728			3,947			2.09		237,535			2,570			1.44
Total interest earning assets	21,338,866			628,236			3.93		19,641,559			572,004			3.88		29,981,699			980,784			4.36		27,330,965			849,012			4.14
Allowance for loan losses	(116,507		)						(108,150		)						(155,643		)						(133,299		)
Cash and due from banks	234,905								290,124								273,191								274,638
Other assets	1,892,875								2,009,780								2,734,304								2,426,795
Unrealized losses on securities available for sale, net	(15,648		)						(1,691		)
Unrealized (losses) gains on securities available for sale, net																	(21,986		)						(40,335		)
Total assets	$	23,334,491							$	21,831,622							$	32,811,565							$	29,858,764
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits	8,883,229			38,538			0.58	%	8,404,929			29,369			0.47	%	$	11,268,852		$	110,247		1.30	%	$	11,061,781		$	75,848		0.91	%
Time deposits	3,279,699			30,571			1.24		3,093,311			28,220			1.22		7,215,745			121,350			2.24		4,755,539			51,360			1.44
Total interest bearing deposits	12,162,928			69,109			0.76		11,498,240			57,589			0.67		18,484,597			231,597			1.67		15,817,320			127,208			1.07
Short-term borrowings	1,646,030			14,578			1.18		1,240,235			8,537			0.92		2,220,014			40,362			2.42		2,144,854			31,838			1.98
Long-term borrowings (4)	1,737,314			41,883			3.21		1,650,999			45,948			3.71		1,807,503			45,761			3.38		2,234,373			50,458			3.01
Total interest bearing liabilities	15,546,272			125,570			1.08		14,389,474			112,074			1.04	%	22,512,114			317,720			1.88		20,196,547			209,504			1.38
Non-interest bearing deposits	5,173,140								5,003,375								6,288,382								6,167,869
Other liabilities	173,852								202,204								539,637								201,909
Shareholders’ equity	2,441,227								2,236,569								3,471,432								3,292,439
Total liabilities and shareholders’ equity	$	23,334,491							$	21,831,622							$	32,811,565							$	29,858,764
Net interest income/interest rate spread (5)				$	502,666		2.85	%				$	459,930		2.84	%				$	663,064		2.48	%				$	639,508		2.76	%
Tax equivalent adjustment				(6,323		)						(6,176		)						(3,557		)						(4,358		)
Net interest income, as reported				$	496,343							$	453,754							$	659,507							$	635,150
Net interest margin (6)							3.10	%							3.08	%							2.93	%							3.10	%
Tax equivalent effect							0.04	%							0.04	%							0.02	%							0.02	%
Net interest margin on a fully tax equivalent basis (6)							3.14	%							3.12	%							2.95	%							3.12	%


(1)	Interest income is presented on a tax equivalent basis using a 3521 percent federal tax rate.


(2)	Loans are stated net of unearned income and include non-accrual loans.


(3)	The yield for securities that are classified as available for sale is based on the average historical amortized cost.


(4)	Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated

statements of financial condition.


(5)	Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.


(6)	Net interest income as a percentage of total average interest earning assets.

5758

The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category.

Change in Net Interest Income on a Tax Equivalent Basis


	Three Months Ended September 30, 2017 Compared to September 30, 2016									Nine Months Ended September 30, 2017 Compared to September 30, 2016									Three Months Ended September 30, 2019 Compared to September 30, 2018									Nine Months Ended September 30, 2019 Compared to September 30, 2018
	Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate			Total Change
	(in thousands)																		(in thousands)
Interest Income:
Loans*	$	14,888		$	742		$	15,630		$	43,472		$	(2,468	)	$	41,004		$	28,226		$	4,287		$	32,513		$	92,014		$	40,432		$	132,446
Taxable investments	2,505			2,230			4,735			8,384			6,105			14,489			85			(456		)	(371		)	112			1,639			1,751
Tax-exempt investments*	(744		)	328			(416		)	(349		)	778			429			(832		)	(185		)	(1,017		)	(2,151		)	(1,651		)	(3,802		)
Federal funds sold and other interest bearing deposits	11			342			353			(419		)	729			310
Interest bearing deposits with banks																			680			201			881			162			1,215			1,377
Total increase in interest income	16,660			3,642			20,302			51,088			5,144			56,232			28,159			3,847			32,006			90,137			41,635			131,772
Interest Expense:
Savings, NOW and money market deposits	358			5,118			5,476			1,748			7,421			9,169			87			7,082			7,169			1,445			32,954			34,399
Time deposits	904			536			1,440			1,728			623			2,351			12,019			10,720			22,739			33,698			36,292			69,990
Short-term borrowings	256			1,360			1,616			3,220			2,821			6,041			(2,843		)	603			(2,240		)	1,149			7,375			8,524
Long-term borrowings and junior subordinated debentures	4,141			(2,934		)	1,207			2,312			(6,377		)	(4,065		)	1,209			(482		)	727			(10,354		)	5,657			(4,697		)
Total increase in interest expense	5,659			4,080			9,739			9,008			4,488			13,496			10,472			17,923			28,395			25,938			82,278			108,216
Total increase in net interest income	$	11,001		$	(438	)	$	10,563		$	42,080		$	656		$	42,736		$	17,687		$	(14,076	)	$	3,611		$	64,199		$	(40,643	)	$	23,556


*	Interest income is presented on a tax equivalent basis using a 3521 percent as the federal tax ~~rate.~~ rate for 2019 and 2018.

Non-Interest Income

Non-interest income increased $12.1 million and $77.1 million for the three and nine months ended September 30, 2019 as compared to the same periods of 2018, respectively. The following table presents the components of non-interest income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended September 30,						Nine Months Ended September 30,
	2017		2016			2017		2016		2019			2018			2019			2018
	(in thousands)									(in thousands)
Trust and investment services	$	3,062	$	2,628		$	8,606	$	7,612	$	3,296		$	3,143		$	9,296		$	9,635
Insurance commissions	4,519		4,580			13,938		14,133		2,748			3,646			7,922			11,493
Service charges on deposit accounts	5,558		5,263			16,136		15,460		5,904			6,597			17,634			20,529
Gains (losses) on securities transactions, net	6		(10		)	5		258
Losses on securities transactions, net										(93		)	(79		)	(114		)	(880		)
Other-than-temporary impairment losses on securities										—			—			(2,928		)	—
Portion recognized in other comprehensive income (before taxes)										—			—			—			—
Net impairment losses on securities recognized in earnings										—			—			(2,928		)	—
Fees from loan servicing	1,895		1,598			5,541		4,753		2,463			2,573			7,260			6,841
Gains on sales of loans, net	5,520		4,823			14,439		9,723		5,194			3,748			13,700			18,143
(Losses) gains on sales of assets, net										(159		)	(1,899		)	76,997			(2,121		)
Bank owned life insurance	1,541		1,683			5,705		5,464		2,687			2,545			6,779			6,960
Other	3,987		4,288			11,467		13,162		19,110			8,764			39,880			28,758
Total non-interest income	$	26,088	$	24,853		$	75,837	$	70,565	$	41,150		$	29,038		$	176,426		$	99,358

~~Non-interest income increased $1.2 million~~ Insurance commissions decreased $898 thousandand ~~$5.3~~$3.6 million for the three and nine months ended September 30, ~~2017,~~2019, respectively, ~~as compared with the same periods in 2016 primarily due to an increase in net gains on sales of loans, partially offset by lower other non-interest income.~~

~~Net gains on sales of loans increased $697 thousand and $4.7 million for the three and nine months ended September 30, 2017, respectively,~~ as compared to the same periods in ~~2016. The increases were largely~~2018 mainly due to ~~sales~~lower volumes of ~~residential mortgage loans totaling approximately $176 million and $472~~business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts decreased$2.9 million for the ~~three and~~ nine months ended September 30, ~~2017, respectively,~~2019 as compared to ~~$149 million~~the same period of 2018 mostly due to lower checking and ~~$332 million~~ATM fees.

Other-than-temporary impairment losses on securities for the ~~same periods~~nine months ended September 30, 2019 relates to one special revenue bond in default of ~~2016, respectively.~~ its contractual payments. See the “Investment Securities Portfolio” section of this MD&A and Note 6 to the consolidated financial statements for further details on our investment securities impairment analysis.

Our net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each period end. ~~The net change in the fair value~~Net gains on sales of loans ~~held for sale resulted in net losses of $140 thousand~~increased $1.4 million and ~~net gains of $655 thousand~~decreased $4.4 million for the three and nine months ended September 30, ~~2017~~2019, respectively, as compared to the same periods of 2018, largely due to fluctuations in volume of residential mortgage loan sales. During the third quarter of 2019, we sold $221 million of residential mortgage loans as compared to $177 millionsold during the third quarter of 2018, including $87 million and ~~2016, respectively, and~~$26 million of pre-existing loans sold from our residential mortgage loan portfolio, respectively. During the nine months ended September 30, 2019, we sold $637 million of residential mortgage loans as compared to $870 million for the same period one year ago. In addition, the net gains on sales of ~~$709 thousand and $532 thousand~~loans for the nine months ended September 30, ~~2017 and 2016, respectively.~~2019 included a gain of $1.1 million on the sale of our retail credit card portfolio totaling approximately $6.2 million in loans. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

~~Other non-interest income decreased$1.7~~

Net gains on sales of assets increased $79.1 million for the nine months ended September 30, ~~2017~~2019 primarily due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter of 2019.

Other non-interest income increased $10.3 million and $11.1 million for the three and nine months ended September 30, 2019, respectively, as compared to the same periods ~~in 2016.~~of 2018. The ~~decrease was largely~~increases were mostly due to ~~a decline in net gains on sales of assets~~fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $13.9 million and $23.4 million for the three and nine months ended September 30, ~~2017~~2019, respectively, as compared to $4.1 million and $11.8 million for the three and nine months ended September 30, 2018, respectively.

Non-Interest Expense

Non-interest expense decreased $5.8 million and $39.9 million for the three and nine months ended September 30, 2019 as compared to the same ~~period in 2016 caused by net gains from the sale~~periods of ~~two closed branch locations recognized in the second quarter of 2016.~~

~~Non-Interest Expense~~

2018, respectively. The following table presents the components of non-interest expense for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2019		2018		2019		2018
	(in thousands)								(in thousands)
Salary and employee benefits expense	$	67,062	$	58,107	$	192,116	$	174,438	$	77,271	$	80,778	$	236,559	$	253,014
Net occupancy and equipment expense	22,756		20,658		68,400		65,615		29,203		26,295		86,789		81,120
FDIC insurance assessment	4,603		4,804		14,658		14,998		5,098		7,421		16,150		20,963
Amortization of other intangible assets	2,498		2,675		7,596		8,452		4,694		4,697		13,175		13,607
Professional and legal fees	11,110		4,031		20,107		13,398		5,870		6,638		15,286		29,022
Amortization of tax credit investments	8,389		6,450		21,445		21,360		4,385		5,412		16,421		15,156
Telecommunications expense	2,464		2,459		7,830		7,139		2,698		3,327		7,317		9,936
Other	13,683		14,084		40,604		45,896		16,658		17,113		43,712		52,531
Total non-interest expense	$	132,565	$	113,268	$	372,756	$	351,296	$	145,877	$	151,681	$	435,409	$	475,349

~~Non-interest~~Salary and employee benefits expense ~~increased $19.3~~decreased $3.5 million and ~~$21.5~~$16.5 million for the three and nine months ended September 30, ~~2017,~~2019, respectively, as compared to the same periods ~~in 2016. The increases are largely~~of 2018 partially due to ~~higher salary~~lower headcount caused by our recent branch transformation and ~~employee benefits~~other operational improvements. The decrease for the nine months ended September 30, 2019 was also due to $9.6 million of change in control, severance and retention expenses related to the USAB acquisition recognized in the first quarter of 2018, partially offset by non-merger related severance expense ~~net~~of $4.8 million for the first quarter of 2019.

Net occupancy and equipment ~~expense, and professional and legal fees.~~

~~Salary and employee benefits expense~~ increased ~~$9.0~~$2.9 million and ~~$17.7~~$5.7 million for the three and nine months ended September 30, ~~2017,~~2019, respectively, as compared to the same periods ~~in 2016 mainly~~of 2018. The increase was mostly due to ~~increased salaries and cash incentive compensation (both paid and accrued)~~higher rental expense resulting from the sale leaseback transaction for the three and nine months ended September 30, 2017. The increases were largely due to normal increases in annual compensation and incentives, expansion of our technology and home mortgage consultant teams, as well as severance costs totaling $3.8 million related to our LIFT initiative recognized26 locations closed during the ~~third~~first quarter of ~~2017. Health insurance expenses, which can be volatile due to self-funding of a large portion of our insurance plan, increased by $642 thousand~~2019 and ~~$1.6 million during the three and nine months ended September 30, 2017, respectively, as compared with the same periods in 2016. The increase in salary and~~

~~employee benefits during the nine months ended September 30, 2017 was also attributable to a $2.0 million increase in stock-based compensation expense as compared to the same period of 2016.~~

~~Net occupancy~~higher repair and equipment ~~expense increased $2.1~~expense.

The FDIC insurance assessment decreased $2.3 million and ~~$2.8~~$4.8 million for the three and nine months ended September 30, ~~2017,~~2019, respectively, as compared to the same periods ~~in 2016 mainly~~of 2018 largely due to ~~an increase in periodic repair and maintenance expenses during~~ the ~~third quarter~~FDIC's termination of ~~2017.~~the large bank surcharge portion of our quarterly assessment effective September 30, 2018.

Professional and legal fees decreased $13.7 million for the nine months ended September 30, 2019 as compared to the same period of 2018 mainly caused by a $12.2 million litigation reserve charge recognized in 2018. Professional and legal fees included merger expenses of approximately $1.4 million related to the pending Oritani acquisition and $828 thousand of merger expense related to the USAB acquisition for the nine months ended September 30, 2019 and 2018, respectively.

Amortization of tax credit investments decreased $1.0 million and increased ~~$7.1 million and $6.7~~$1.3 million for the three and nine months ended September 30, ~~2017,~~2019, respectively, as compared to the same periods ~~in 2016~~of 2018. The third quarter decrease was largely ~~due to advisory and legal fees related to our LIFT program and the proposed acquisition of USAB.~~

~~Amortization of tax credit investments increased $1.9 million for the three months ended September 30, 2017 as compared with the same period in 2016 mostly~~ due to normal differences in the timing and amount of such investments and recognition of the

related tax credits. ~~These~~The increase for the nine months of 2019 was primarily due to a $2.4 million other-than-temporary impairment charge related to investments in three federal renewable energy tax credit funds. See Note 14 to the consolidated financial statements for more details. Tax credit investments, while negatively impacting the level of our operating expenses and efficiency ratio, produce tax credits that reduce our income tax expense and effective tax rate. ~~See Note 14 to the consolidated financial statements for more details regarding our tax credit investments.~~

~~Other non-interest expenses~~Telecommunications expense decreased ~~$5.3~~$2.6 million for the nine months ended September 30, ~~2017~~2019 as compared ~~with~~to the same period ~~in 2016 mainly~~of 2018 partly due to ~~declines~~branch reductions and other operating efficiencies.

Other non-interest expense decreased$8.8 million for the nine months ended September 30, 2019 as compared to the same period of 2018. The decrease was due, in ~~both bank operating losses~~part, to $2.2 million of USAB merger related charges recognized during the first quarter of 2018 and ~~branch closing costs and an~~a $1.6 million increase in net gains on sale of OREO properties during the nine months ended September 30, 2019. In addition, several significant components of other ~~real estate owned.~~expense declined as compared to the same period of 2018 partly due to the integration of USAB's operations completed in the second quarter of 2018, branch closures and other cost reduction initiatives.

Efficiency ~~Ratios~~Ratio

The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted by the amortization of tax credit investments, as well as infrequent charges within non-interest ~~expense resulting from our LIFT program~~income and ~~the proposed acquisition of USAB.~~expense.

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2019			2018			2019			2018
	($ in thousands)												($ in thousands)
Total non-interest expense	$	132,565		$	113,268		$	372,756		$	351,296		$	145,877		$	151,681		$	435,409		$	475,349
Less: Severance expense (pre-tax)													—			—			4,838			—
Less: Amortization of tax credit investments (pre-tax)	8,389			6,450			21,445			21,360			4,385			5,412			16,421			15,156
Less: LIFT program expenses (pre-tax) ⁽¹⁾	9,875			—			9,875			—
Less: Merger related expenses (pre-tax)⁽²⁾	1,241			—			1,242			—
Less: Legal expenses (litigation reserve impact only, pre-tax)													—			1,684			—			12,184
Less: Merger related expenses (pre-tax)													1,434			1,304			1,469			18,080
Total non-interest expense, adjusted	$	113,060		$	106,818		$	340,194		$	329,936		$	140,058		$	143,281		$	412,681		$	429,929

Net interest income	$	164,854		$	154,146		$	496,343		$	453,754		$	220,625		$	216,800		$	659,507		$	635,150
Total non-interest income	26,088			24,853			75,837			70,565			41,150			29,038			176,426			99,358
Less: Gain on sale-leaseback transaction (pre-tax)													—			—			78,505			—
Add: Losses on securities transactions, net (pre-tax)													93			79			114			880
Add: Net impairment losses on securities (pre-tax)													—			—			2,928			—
Add: Branch related asset impairment (pre-tax)													—			1,821			—			1,821
Total net interest income and non-interest income	$	190,942		$	178,999		$	572,180		$	524,319		$	261,868		$	247,738		$	760,470		$	737,209
Efficiency ratio	69.43		%	63.28		%	65.15		%	67.00		%	55.73		%	61.70		%	52.09		%	64.72		%
Efficiency ratio, adjusted	59.21		%	59.68		%	59.46		%	62.93		%	53.48		%	57.84		%	54.27		%	58.32		%

Management continuously monitors its expenses in an effort to optimize Valley's performance. Based upon these efforts and our revenue goals, we seek to achieve an adjusted efficiency ratio (as shown in the table above) below 55 percent for 2019. However, we can provide no assurance that our adjusted efficiency ratio will meet our target or remain at the level reported for the fourth quarter of 2019.


~~(1)~~	~~LIFT program expenses are primarily within professional and legal fees and salary and employee benefits expense.~~


~~(2)~~	~~Merger related expenses are primarily within professional and legal fees.~~

Income Taxes

Income tax expense ~~was $17.1~~totaled $25.3 millionfor the third quarter of 2019 as compared to $27.5 million and ~~$17.0~~$18.0 million for the ~~three months ended September 30, 2017~~second quarter of 2019 and ~~2016, respectively, and $55.9 million and $46.9 million for the nine months ended September 30, 2017 and 2016,~~third quarter of 2018, respectively. Our effective tax rate was ~~30.1~~23.6 percent, 26.5 percent, and ~~28.5~~20.6 percent for the ~~three months ended~~third quarter of 2019, second quarter of 2019, and third quarter of 2018, respectively. The decline in the effective tax rate from the second quarter of 2019 was mostly due to reduced state tax expense, while the increase from the third quarter of 2018 was partly caused by a change in the State of New Jersey tax laws effective July 1, 2018 and higher tax credits benefiting the third quarter of 2018.

Our uncertain tax liabilities totaled $12.5 million at September 30, ~~2017~~2019 and ~~2016, respectively,~~relate to renewable energy tax credits and ~~29.1 percent and 28.4 percent for~~other tax benefits previously recognized from investments in the ~~nine months ended September 30, 2017 and 2016, respectively.~~DC Solar funds. See additional information regarding our uncertain tax liability positions at Note 15 of the consolidated financial statements.

U.S. GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year. Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies. For the ~~remainder~~fourth quarter of ~~2017,~~2019, we ~~anticipate~~currently estimate that our effective tax rate will range from 2824 percent to 3126 percent. The effective tax rate is generally lower than the statutory rate primarily due to tax credits derived from our investments in qualified affordable housing projects and other investments related to community development and renewable energy sources, as well as earnings from other tax-exempt investments. See Note 14 to the consolidated financial statements for additional information regarding our tax credit investments.

Business Segments

We have four business segments that we monitor and report on to manage our business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Our reportable segments have been determined based upon Valley’s internal structure of operations and lines of business. Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Expenses related to the branch network, all other components of retail banking, along with the back office departments of our subsidiary bank are allocated from the corporate and other adjustments segment to each of the other three business segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a “pool funding” methodology, which involves the allocation of uniform funding cost based on each ~~segments’~~segment's average earning assets outstanding for the period. The financial reporting for each segment contains allocations and reporting in line with our operations, which may not necessarily be comparable to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data.

The following tables present the financial data for each business segment for the three months ended September 30, ~~2017~~2019 and ~~2016:~~2018:


	Three Months Ended September 30, 2017															Three Months Ended September 30, 2019
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total			Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)															($ in thousands)
Average interest earning assets	$	5,226,964		$	12,779,310		$	3,636,572		$	—		$	21,642,846		$	6,858,216		$	19,278,529		$	4,357,824		$	—		$	30,494,569
Income (loss) before income taxes	15,609			55,036			9,118			(23,026		)	56,737			18,300			91,629			6,781			(9,512		)	107,198
Annualized return on average interest earning assets (before tax)	1.19		%	1.72		%	1.00		%	N/A			1.05		%	1.07		%	1.90		%	0.62		%	N/A			1.41		%

6163


	Three Months Ended September 30, 2016															Three Months Ended September 30, 2018
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total			Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)															($ in thousands)
Average interest earning assets	$	5,038,230		$	11,532,493		$	3,326,109		$	—		$	19,896,832		$	6,264,778		$	17,394,412		$	4,312,522		$	—		$	27,971,712
Income (loss) before income taxes	17,071			46,456			6,657			(10,293		)	59,891			12,684			80,768			9,732			(15,579		)	87,605
Annualized return on average interest earning assets (before tax)	1.36		%	1.61		%	0.80		%	N/A			1.20		%	0.81		%	1.86		%	0.90		%	N/A			1.25		%

Consumer Lending

This segment, representing approximately ~~28.8~~26.2 percent of our loan portfolio at September 30, ~~2017,~~2019, is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented ~~16.2~~15.5 percentof our loan portfolio at September 30, ~~2017, including covered loans)~~2019) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing ~~6.4~~5.4 percent of total loans at September 30, ~~2017)~~2019) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, and insurance services.

Average interest earning assets in this segment increased$~~188.7~~593.4 million to ~~$5.2~~$6.9 billion for the three months ended September 30, ~~2017~~2019as compared to the third quarter of ~~2016.~~2018. The increase was largely due to ~~solid organic~~loan growth ~~in secured personal lines~~from new and refinanced residential mortgage loan originations, including a higher level of ~~credit and auto loans~~non-conforming jumbo mortgages held for investment over the last 12 ~~months, partially offset by a decline in average residential mortgage~~month period, as well as solid demand for both automobile loans ~~as compared to the third quarter of 2016 caused by a high volume of loan sales into the secondary market since September 30, 2016. Home equity loan volumes~~ and ~~customer usage of existing home equity~~collateralized personal lines of ~~credit also steadily declined since September 30, 2016 despite the relatively favorable interest rate environment.~~credit.

Income before income taxes generated by the consumer lending segment ~~decreased $1.5~~increased $5.6 millionto ~~$15.6~~$18.3 millionfor the third quarter of ~~2017~~2019 as compared to ~~$17.1~~the third quarter of 2018. Net interest income increased $2.6 million and was mainly driven by the increase in average loans, partially offset by higher funding costs. Non-interest expense decreased $4.2 million for the third quarter of ~~2016 largely~~2019 as compared to the same quarter of 2018 partly due to ~~an increase~~lower residential mortgage loan commission rates paid in ~~non-interest expense~~2019. The positive impact of ~~$3.4 million,~~the aforementioned items was partially offset by a $1.3 millionincrease in ~~non-interest income, as well as lower internal transfer expense~~the provision for loan losses for the third quarter of ~~2017. The increase in non-interest expense was largely driven by infrequent charges related~~2019 as compared to ~~our LIFT initiative and proposed USAB merger. The increase in non-interest income was due, in part, to a $697 thousand increase in~~ the ~~net gains on sales of loans caused by the higher level of sales during~~ third quarter of ~~2017.~~2018 mainly driven by the strong loan growth.

The net interest margin on the consumer lending portfolio decreased 68 basis points to ~~2.74~~2.61 percent for the third quarter of ~~2017~~2019 as compared to the ~~same~~third quarter ~~one year ago. The net interest margin was negatively impacted by~~of 2018, mainly due to a 1228 basis point increase in the costs associated with our funding sources, partially offset by a 620 basis point increase in the yield on average loans. ~~The increase~~Despite a decline in short-term interest rates during third quarter of 2019 as compared to the second quarter of 2019 caused by monetary policy actions at the Federal Reserve, our cost of funds ~~was~~increased from one year ago mainly due to the Federal Reserve's gradual increase in ~~part, to higher~~short-term interest rates during 2018 (commencing in late March 2018) and strong competition for deposits which increased the level of interest rates on ~~most deposits~~many of our interest bearing deposit products and ~~short-term borrowing and a shift~~other wholesale funding. The 20 basis point increase in ~~the overall mix of borrowings from short-term~~loan yield was mainly due to ~~longer term FHLB advances (primarily with maturities less than two years) during the third quarter of 2017.~~higher market interest rates on new loan volumes. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our ~~deposits~~net interest margin and ~~other borrowings.~~funding sources.

Commercial Lending

The commercial lending segment is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s

interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in

market interest rates. Commercial and industrial loans totaled approximately ~~$2.7~~$4.7 billionand represented ~~14.9~~17.7 percent of the total loan portfolio at September 30, ~~2017.~~2019. Commercial real estate loans and construction loans totaled ~~$10.3~~$14.9 billion and represented ~~56.3~~56.1 percentof the total loan portfolio at September 30, ~~2017.~~2019.

Average interest earning assets in this segment increasedapproximately$~~1.2~~1.9 billion to ~~$12.8~~$19.3 billion for the three months ended September 30, ~~2017~~2019 as compared to the third quarter of ~~2016. This~~2018. The increase was mostly due ~~in part,~~ to ~~solid~~strong organic loan growth within the commercial and industrial and commercial real estate loan ~~growth across many segments of borrowers and purchases of loan participations (mostly consisting of multi-family loans in New York City) totaling~~portfolios over ~~$499 million during~~ the last ~~12 months.~~12-month period.

For the three months ended September 30, ~~2017,~~2019, income before income taxes for the commercial lending segment increased ~~$8.6~~$10.9 millionto ~~$55.0~~$91.6 million as compared to the same quarter of ~~2016 mostly~~2018 mainly due to ~~an increase~~increases in non-interest income and net interest ~~income and a decrease in the provision for loan losses, partially offset by an increase in the internal transfer expense. Net interest~~income. Non-interest income increased~~$7.1~~ $10.1 million to ~~$114.6 million for the third quarter of 2017 as compared to the same period in 2016 largely due to the aforementioned organic and purchased loan growth over the last 12 months. The provision for credit losses decreased $4.4 million to $1.2~~$15.1 million during the three months ended September 30, ~~2017~~2019 as compared to ~~$5.6~~the third quarter of 2018 mainly due to a $9.8 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers. Net interest income increased$4.6 million to $164.0 million for the third quarter of ~~2016 (See details in the "Allowance for Credit Losses" section elsewhere in this MD&A). Internal transfer expense increased $2.0 million during the third quarter of 2017~~2019 as compared to the same period in ~~2016.~~2018 largely due to higher average loan balances. The positive impact of the aforementioned items was partially offset by a $2.3 million increase in internal transfer expense for the third quarter of 2019 as compared to the third quarter of 2018 largely due to higher salaries and employee benefits expenses for this business segment caused, in part, by expansion of our commercial lending teams.

The net interest margin for this segment decreased 1325 basis points to ~~3.59~~3.41 percent for the third quarter of ~~2017~~2019 as compared to the ~~same~~second quarter ~~one year ago as~~of 2018 largely due to a ~~result of a 1 basis point decline in yield on average loans and a 12~~28 basis point increase in the cost of our funding ~~sources.~~sources, partially offset by a 3 basis point increase in the yield on average loans.

Investment Management

The investment management segment generates a large portion of our income through investments in various types of securities and interest-bearing deposits with other banks. These investments are mainly comprised of fixed rate securities and, depending on our liquid cash position, federal funds sold and interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York) as part of our asset/liability management strategies. The fixed rate investments are one of Valley’s least sensitive assets to changes in market interest rates. However, a portion of the investment portfolio is invested in shorter-duration securities to maintain the overall asset sensitivity of our balance sheet. See the “Asset/Liability Management” section below for further analysis.

Average interest earning assets in this segment increased ~~$310.5~~$45.3 million during the third quarter of ~~2017~~2019 as compared to the third quarter of ~~2016. The increase was mainly~~2018 largely due to ~~purchases of residential mortgage-backed securities classified as held for maturity and available for sale in the last 12 months and~~ a ~~$9.2~~$101.2 million increase in average ~~federal~~overnight funds ~~sold~~ and ~~other~~ interest bearing deposits, ~~for~~partially offset by lower average investment security balances. The increase in average interest bearing deposits related to excess liquidity fluctuations caused by the ~~three months ended September 30, 2017 as compared to the same period in 2016.~~timing of loan and investment activity.

For the quarter ended September 30, ~~2017,~~2019, income before income taxes for the investment management segment ~~increased $2.5~~decreased $3.0 million to ~~$9.1~~$6.8 million as compared to the third quarter ~~in 2016. Net interest income increased $2.9 million as compared to the third quarter in 2016 as a result~~ of ~~the increase in average taxable investment balances, as well as a higher overall yield on average investments partly~~2018. The decline was largely due to a ~~decline~~$3.6 million decrease in ~~premium amortization~~net interest income caused by higher interest expense ~~recognized on certain residential mortgage-backed securities.~~for the three months ended September 30, 2019, partially offset by a $599 thousand decrease in internal transfer expense.

The net interest margin for this segment ~~increased~~17decreased36basis points to ~~2.15~~1.57 percentfor the third quarter of ~~2017~~2019 as compared to the same quarter ~~one year ago~~of 2018 largely due to a 28 basis point increase in ~~the yield on average investments partially offset by a 12 basis point increase in~~ costs associated with our funding ~~sources.~~sources and an 8 basis point decrease in the yield on average investments. The ~~increase~~decrease in the yield on average investments was ~~largely~~mainly due to maturities of higher yielding securities over the ~~aforementioned decline in premium amortization expense mostly caused by lower principal repayments on these securities.~~last 12 months.

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Corporate and other adjustments

The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net securities gains and losses, including net impairment losses, not reported in the investment management segment above, interest expense related to subordinated notes, amortization of tax credit investments, as well as ~~income~~non-core items, including merger expenses, litigation reserves and ~~expense from derivative financial instruments.~~the gain on the sale leaseback transaction.

The ~~pre-tax net loss for the~~ corporate segment ~~increased $12.7~~recognized $9.5 million ~~to $23.0~~and $15.6 million of pre-tax loss for the three months ended September 30, ~~2017~~2019 and 2018, respectively, mainly due to decreases in non-interest expense and internal transfer expense, as well as an increases in both internal transfer income and non-interest income. Non-interest expense decreased $2.4 million to $100.6 millionfor the three months ended September 30, 2019 as compared to the three months ended September 30, ~~2016 mainly~~2018 largely due to ~~higher salary~~declines in several expense categories, including salaries and employee benefits, ~~expense, net occupancy~~legal and ~~equipment expense,~~ professional ~~and legal~~ fees, and ~~amortization~~other non-interest expense. Internal transfer income increased $2.3 million for the three months ended September 30, 2019 from the third quarter of ~~tax credit investments.~~2018. Non-interest income increased $1.1 million to $8.3 million for the three months ended September 30, 2019 as compared to the third quarter in 2018. See further details in the "Non-Interest Income" and "Non-Interest Expense" ~~section above.~~sections of this MD&A.

The following tables present the financial data for each business segment for the nine months ended September 30, ~~2017~~2019 and ~~2016:~~

2018:


	Nine Months Ended September 30, 2017															Nine Months Ended September 30, 2019
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total			Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments		Total
	($ in thousands)															($ in thousands)
Average interest earning assets	$	5,133,132		$	12,543,090		$	3,662,644		$	—		$	21,338,866		$	6,812,001		$	18,839,194		$	4,330,504		$	—	$	29,981,699
Income (loss) before income taxes	46,068			162,801			28,694			(45,881		)	191,682			56,013			264,793			22,440			38,478		381,724
Annualized return on average interest earning assets (before tax)	1.20		%	1.73		%	1.04		%	N/A			1.20		%	1.10		%	1.87		%	0.69		%	N/A		1.70		%


	Nine Months Ended September 30, 2016															Nine Months Ended September 30, 2018
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total			Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)															($ in thousands)
Average interest earning assets	$	5,110,845		$	11,162,637		$	3,368,077		$	—		$	19,641,559		$	6,058,416		$	16,880,690		$	4,391,859		$	—		$	27,330,965
Income (loss) before income taxes	45,332			137,748			16,019			(34,145		)	164,954			43,444			226,373			30,562			(65,862		)	234,517
Annualized return on average interest earning assets (before tax)	1.18		%	1.65		%	0.63		%	N/A			1.12		%	0.96		%	1.79		%	0.93		%	N/A			1.14		%

Consumer Lending

Average interest earning assets in this segment increased ~~$22.3~~$753.6 million to ~~$5.1~~$6.8 billion for the nine months ended September 30, ~~2017~~2019as compared to the same period in ~~2016.~~2018. The increase was largely due to ~~aforementioned organic~~loan growth ~~in secured~~from new and refinanced residential mortgage loan originations held for investment, automobile loans and collateralized personal lines of credit ~~and auto loans~~ over the last 12 months, partially offset by lower average residential mortgage loans and home equity loans. The decline in residential mortgage loans over the last 12 months was largely driven by normal repayment activity, a high percentage of loans originated for sale rather than investment during the fourth quarter of 2016 and first quarter of 2017, and the transfer and the sale of approximately $226 million and $104 million of performing fixed rate mortgages from loans held for investment portfolio to loans held for sale during the first half of 2017 and the fourth quarter of 2016, respectively.months.

Income before income taxes generated by the consumer lending segment increased ~~$736 thousand~~$12.6 million to ~~$46.1~~$56.0 millionfor the nine months ended September 30, ~~2017~~2019 as compared to ~~$45.3 million for~~ the same period in ~~2016. This increase was~~2018 largely ~~attributable~~due to an increase ~~in non-interest income~~ of ~~$6.8 million and a decrease of $3.1~~$9.8 million in ~~internal transfer~~net interest income. The increased net interest income was mostly due to higher average loans and yields on new loan volumes. Non-interest expense ~~partially offset by increases of $3.0~~also decreased $12.6 million ~~and $5.9 million in the provision for loan losses and non-interest expense, respectively,~~ for the nine months ended September 30, ~~2017. The increase~~2019 as compared to the same period in 2018 mainly due to lower salaries and employee benefits

expenses, which was offset by a $7.9 million decrease in non-interest income ~~was mostly driven by a $4.7 million increase in the net gains on sales of loans caused by the higher level of residential mortgage loan sales during~~for the nine months ended September 30, ~~2017.~~2019. The ~~increase~~decrease in ~~the~~

~~provision for loan losses~~non-interest income was ~~mainly~~largely due to ~~the loan growth, while non-interest expense increased due,~~lower gains on sales of loans and a decline in ~~part, to higher salary and employee benefits expense.~~wealth management revenues.

The net interest margin on the consumer lending portfolio decreased 211 basis ~~points~~point to ~~2.77~~2.63 percent for the nine months ended September 30, ~~2017~~2019 as compared to the same period one year ~~ago. The net interest margin results were comprised of~~ago mainly due to a 339 basis point increase in the costs associated with our funding sources, partially offset by a 128 basis point increase in the yield on average loans. The increase in our cost of funds was primarily due to ~~increased short-term~~greater use of wholesale and brokered deposit funding and higher rates on most deposit products. Although the operating and interest ~~rates resulting from the Federal Reserve's three~~ rate ~~hikes pushing the upper limit target for the federal funds rate from 0.50 percent~~environment remains volatile, we did see average deposit costs peak in ~~December 2016 to 1.25 percent in June 2017. The negative impact to our cost of deposits~~May 2019 and ~~short-term borrowings was partially offset by a~~ decline in the ~~cost~~second and third quarters of ~~our average long-term borrowings as compared to the nine months ended September 30, 2016 mostly due to the modification and maturity of certain high cost borrowings~~2019.

This trend has continued during the ~~second half~~early stages of ~~2016.~~the fourth quarter of 2019. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our deposits and other borrowings.

Commercial Lending

Average interest earning assets in this segment increased$~~1.4~~2.0 billion to ~~$12.5~~$18.8 billion for the nine months ended September 30, ~~2017~~2019 as compared to the same period in ~~2016.~~2018. This increase was mostly due ~~in part,~~ to ~~solid~~ organic ~~commercial real estate~~ loan ~~volumes in New York, New Jersey and Florida and purchases of loan participations~~growth during the last 12 months.

For the nine months ended September 30, ~~2017,~~2019, income before income taxes for the commercial lending segment increased ~~$25.1~~$38.4 millionto ~~$162.8~~$264.8 million as compared to the same period ~~of 2016 mostly due to an increase~~ in ~~net interest income and a decrease in the provision for credit losses, partially offset by increases in both non-interest expense and internal transfer expense.~~2018. Net interest income increased$~~30.5~~26.9 million to ~~$344.8~~$487.6 million for the nine months ended September 30, ~~2017~~2019 as compared to the same period in ~~2016~~2018 largely due to higher average balances and an increase in yield on new loan originations, partially offset by higher interest expense. Non-interest income also increased $13.3 million for the ~~aforementioned organic~~nine months ended September 30, 2019 as compared to the same period in 2018 largely due to an $11.6 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $23.4 million and ~~purchased loan growth over~~$11.8 million for the ~~last 12~~nine months. ended September 30, 2019 and 2018, respectively. The p~~rovision~~provision for credit losses decreased ~~$3.3~~$6.4 million to ~~$4.6~~$13.8 million during the nine months ended September 30, ~~2017~~2019 as compared to ~~$7.9~~$20.2 million for the same period in ~~2016 (See~~2018. See further details in the "Allowance for Credit Losses" section ofin this MD~~&A). Non-interest expense and internal transfer expense increased$1.8 million and $6.6 million during the nine months ended September 30, 2017, respectively, as compared to the same period in 2016.~~&A.

The net interest margin for this segment decreased 1018 basis ~~points~~point to ~~3.66~~3.45 percent for the nine months ended September 30, ~~2017~~2019 as compared to the same period ~~one year ago~~in 2018 as a ~~result of a 7 basis point decline in yield on average loans and a 3~~39 basis point increase in the cost of our funding ~~sources. The decrease~~sources was partially offset by a 21 basis point increase in ~~the~~ yield on ~~loans was primarily due to the normal repayment of higher rate loans during the last 12 months.~~average loans.

Investment Management

Average interest earning assets in this segment ~~increased $294.6~~decreased $61.4 million ~~for~~during the nine months ended September 30, ~~2017~~2019 as compared to the same period in ~~2016.~~2018. The ~~increase~~decrease was ~~mainly~~largely due to ~~purchases~~a decline of ~~residential mortgage-backed securities classified as held for maturity and available for sale~~$80.7 million in ~~the last 12 months,~~average non-taxable investments, partially offset by a ~~$109.3~~$14.2 million ~~decrease~~increase in ~~average~~ federal funds sold and other interest bearing deposits, respectively, for the nine months ended September 30, ~~2017~~2019 as compared to the same period in ~~2016.~~2018.

For the nine months ended September 30, ~~2017,~~2019, income before income taxes for the investment management segment ~~increased $12.7~~decreased $8.1 million to ~~$28.7~~$22.4 million as compared to the same period in ~~2016~~2018 mainly due to a ~~$13.0~~$13.1 million ~~increase~~decrease in net interest ~~income.~~income, partially offset by a $4.2 million decrease in the internal transfer expense. The ~~increase~~decrease in net interest income was mainly driven by ~~both~~ the ~~higher~~lower average investment balances and normal repayment of higher ~~yield on average investments~~yielding securities during the nine months ended September 30, ~~2017~~2019 as compared to the same period of 2018.

The net interest margin for this segment decreased37basis points to 1.63 percentfor the nine months ended September 30, 2019 as compared to the same period in ~~2016.~~

~~The net interest margin for this segment increased 31 basis points to 2.20 percent for the nine months ended September 30, 2017 as compared to the same period one year ago mostly~~2018 largely due to a ~~34 basis point increase in the yield on average investments, partially offset by a 3~~39 basis point increase in costs associated with our funding ~~sources. The~~sources, partially offset by a 2 basis point increase in the yield on average ~~investments was due, in part, to a decline in premium amortization~~investments.

6567

~~expense caused by lower principal repayments on residential mortgage-backed securities during the nine months ended September 30, 2017.~~

Corporate and other adjustments

The pre-tax net ~~loss~~income for the corporate segment ~~increased $11.7 million to $45.9~~totaled $38.5 million for the nine months ended September 30, ~~2017~~2019 as compared to ~~$34.1~~a net loss of $65.9 million for the same period in ~~2016~~2018. The positive change of $104.3 million was mainly due to ~~a $13.8 million~~an increase in non-interest ~~expense and~~income coupled with a ~~$1.5 million~~ decrease in non-interest expense. The non-interest income ~~partially offset by~~increased $71.2 million to $97.6 million for the nine months ended September 30, 2019 as compared to the same period in 2018 primarily due to a ~~$4.2~~$78.5 million ~~increase in internal transfer income. Non-interest~~gain on the sale (and leaseback) of 26 locations recognized during the first quarter of 2019. The non-interest expense ~~increased~~decreased $32.6 million to $301.2 millionfor the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. This decrease was largely due to ~~higher salary~~salaries and employee benefits ~~expense,~~expenses related to the pre-operations conversion of the USAB acquisition, USAB merger expenses, and professional and legal fees ~~mostly related to~~for litigation reserves recognized during the ~~LIFT initiative and proposed USAB merger charges incurred in the third quarter of 2017. See~~nine months ended September 30, 2018 (See further details in the "Non-Interest ~~Income" and "Non-Interest~~ Expense" ~~sections above.~~section above).

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and ~~attempts~~attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominately focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities.

We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of September 30, ~~2017.~~2019. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of September 30, ~~2017.~~2019. The impact of interest rate derivatives, such as interest rate swaps, ~~and caps,~~ is also included in the model.

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of September 30, ~~2017.~~2019. Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, ~~2017~~2019 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the third quarter of ~~2017.~~2019. The model also utilizes an immediate parallel shift in ~~the~~ market interest rates at September 30, ~~2017.~~2019.

The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash

flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while

structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet.

Convexity is a measure of how the duration of a financial instrument changes as market interest rates change. Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative impact on our net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected in the table ~~above.~~below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income.

The following table reflects management’s expectations of the change in our net interest income over the next 12- month period in light of the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below.


	Estimated Change in Future Net Interest Income					Estimated Change in Future Net Interest Income
Changes in Interest Rates	Dollar Change			Percentage Change		Dollar Change			Percentage Change
(in basis points)	($ in thousands)					($ in thousands)
+200	$	(4,656	)	(0.70	)%	$	35,861		3.98	%
+100	(1,092		)	(0.16	)	21,780			2.42
–100	(22,816		)	(3.42	)	(39,211		)	(4.35	)
–200						(65,120		)	(7.23	)

As noted in the table above, a 100 basis point immediate ~~increase~~decrease in interest rates combined with a static balance

sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to decrease net interest income over the next 12 months by ~~0.16~~4.35 percent. ~~The Bank’s~~Valley's sensitivity to changes in market rates ~~changed in both size and direction~~increased as compared to December 31, ~~2016~~2018 (which ~~was an increase~~projected a decrease of ~~0.03~~0.49 percent in net interest income over a 12 month period)~~. However,~~ partly due to changes in model assumptions related to non-maturity deposit account studies completed in the third quarter of 2019. Management believes the interest rate sensitivity ~~of our balance sheet~~ remains within ~~our current objectives for generating~~an acceptable tolerance range at September 30, 2019. However, the level of net interest ~~income. In addition, we believe~~income sensitivity may increase or decrease in the ~~balance sheet remains well-positioned to respond positively to~~future as a ~~rising market interest rate environment. Our current asset sensitivity to a 100 basis point immediate increase~~result of changes in ~~interest rates is impacted by, among other factors, asset cash flow~~deposit and ~~repricing characteristics, complemented by a funding structure that provides for very stable earnings and low volatility. Future changes including, but not limited to,~~borrowings strategies, the slope of the yield curve and projected cash ~~flows will affect our net interest income results and may increase or decrease the level of net interest income sensitivity.~~flows.

Our interest rate swaps and cap designated as cash flow hedging relationships are designed to protect us from upward movements in interest rates on certain deposits and other borrowings based on the three-month LIBOR rate or the prime rate (as reported by The Wall Street Journal). Our cash flow interest rate swaps had a total notional value of $482 million at September 30, 2017 and currently pay fixed and receive floating rates. We also utilize fair value and non-designated hedge interest rate swaps to effectively convert fixed rate loans, and a much smaller amount of certain brokered certificates of deposit, to floating rate instruments. The cash flow hedges are expected to benefit our net interest income in a rising interest rate environment. However, due to the relatively low level of market interest rates and the strike rate of these instruments, the cash flow hedge interest rate swaps and cap negatively impacted our net interest income during the nine months ended September 30, 2017. This negative trend will likely continue based upon the current market expectations regarding the Federal Reserve’s monetary policies which are designed to impact the level of market interest rates. See Note 12 to the consolidated financial statements for further details on our derivative transactions.

Liquidity

Bank Liquidity

Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is ~~monitored~~carefully performed and reported by our ~~Asset/Liability Management Committee and the Investment Committee of the~~Treasury Department to two Board ~~of Directors of Valley National Bank, which review~~committees. Among other actions, Treasury reviews historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements.

The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in excess of 125 percent or reliance

on wholesale funding greater than 2527.5 percent of total funding. The Bank was in compliance with the foregoing policies at September 30, ~~2017.~~2019.

On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available for sale, loans held for sale, and, from time to time, federal funds sold and receivables related to unsettled securities transactions. These liquid assets totaled approximately ~~$1.9~~$2.3 billion, representing ~~8.8~~7.4 percent of earning assets, at September 30, ~~2017~~2019 and ~~$1.8~~$2.3 billion, representing ~~8.9~~8.0 percent of earning assets, at December 31, ~~2016.~~2018. Of the ~~$1.9~~$2.3 billion of liquid assets at September 30, ~~2017,~~2019, approximately ~~$692 million~~$1.1 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately ~~$374~~$986 million in principal payments from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at September 30, ~~2017)~~2019) are projected to be approximately ~~$4.8~~$6.6 billion over the next 12 months. As a contingency plan for significant funding needs, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio, or from the temporary curtailment of lending activities.

On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately ~~$15.4~~$19.8 billion and ~~$14.7~~$18.1 billion for the nine months ended September 30, ~~2017~~2019 and for the year ended December 31, ~~2016,~~2018, respectively, representing ~~72.0~~66.1 percent and ~~73.9~~65.3 percent of average earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous correspondent banks. While there are no firm lending commitments currently in place, management believes that we could borrow approximately ~~$727~~$827 million for a short ~~time~~term from these banks on a collective basis. The Bank is also a member of the Federal Home Loan Bank of New York (FHLB) and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. Furthermore, we ~~are able to~~can obtain overnight borrowings from the Federal Reserve Bank via the

discount window as a contingency for additional liquidity. At September 30, ~~2017,~~2019, our borrowing capacity under the Federal Reserve's discount window was ~~$1.1~~$1.7 billion.

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). ~~Our short-term~~Short-term borrowings ~~increased $402~~(consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased approximately $293.5 million to ~~$1.5~~$1.8 billion at September 30, ~~2017~~2019 as compared to December 31, ~~2016 due to increases~~2018. The decrease was caused by declines of ~~$395~~$337 million and $7$116.5 million in

repos and FHLB ~~advances and repo balances, respectively. The new short-term FHLB advances were primarily used as alternate funding for~~borrowings, respectively, partially offset by a ~~decline~~$160 million increase in ~~money market deposits during the first half of 2017, as well as for additional liquidity and loan funding purposes.~~federal funds purchased at September 30, 2019.

Corporation Liquidity

Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our ~~on-going~~on-

going asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures. These cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the ~~bank subsidiary.~~Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods up to five years, but not beyond the stated maturity dates, and subject to other conditions.

Investment Securities Portfolio

As of September 30, ~~2017,~~2019, we had ~~$1.8~~$2.1 billion and ~~$1.4~~$1.6 billion in held to maturity and available for sale investment securities, respectively. Our total investment portfolio was comprised of U.S. Treasury securities, U.S. government ~~agencies,~~agency securities, tax-exempt and taxable issuances of states and political subdivisions (including special revenue bonds), residential mortgage-backed securities, ~~(including 9 private label mortgage-backed securities),~~ single-issuer trust preferred securities principally issued by bank holding companies, ~~(including 2 pooled securities),~~and high quality corporate bonds ~~and equity securities~~ issued by banks at September 30, ~~2017.~~2019. There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac.

Among other securities, our investments in the ~~private label mortgage-backed securities,~~ trust preferred securities, ~~equity securities, and~~ bank issued corporate bonds and special revenue bonds may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers and, if applicable, the underlying mortgage loan collateral of the security.

Other-Than-Temporary Impairment Analysis

We may be required to record impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio and may result in other-than temporary impairment on our investment securities in future periods. See our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018 for additional information regarding our impairment analysis by security type.

The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the date of our purchase of the securities. For many securities, the rating agencies may not have performed an independent analysis of the tranches

owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio.

The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at September 30, ~~2017.~~2019:


	September 30, 2017									September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)									(in thousands)
Held to maturity investment grades:*
Held to maturity investment grades: *
AAA Rated	$	1,385,423	$	23,500	$	(13,920	)	$	1,395,003	$	1,723,548	$	31,488	$	(3,776	)	$	1,751,260
AA Rated	233,198		8,762		(10		)	241,950		224,559		5,816		(17		)	230,358
A Rated	41,759		1,527		—			43,286		23,205		478		—			23,683
Non-investment grade	3,595		125		(31		)	3,689
BBB Rated										10,739		305		(35		)	11,009
Not rated	159,647		143		(12,573		)	147,217		111,706		317		(7,130		)	104,893
Total investment securities held to maturity	$	1,823,622	$	34,057	$	(26,534	)	$	1,831,145	$	2,093,757	$	38,404	$	(10,958	)	$	2,121,203
Available for sale investment grades:*
Available for sale investment grades: *
AAA Rated	$	1,306,578	$	3,703	$	(13,940	)	$	1,296,341	$	1,459,398	$	15,546	$	(3,728	)	$	1,471,216
AA Rated	54,255		353		(213		)	54,395		75,242		618		(42		)	75,818
A Rated	23,494		10		(60		)	23,444		21,071		219		(21		)	21,269
BBB Rated	30,757		541		(91		)	31,207		17,986		382		—			18,368
Non-investment grade	11,349		926		(1,795		)	10,480		7,502		—		(95		)	7,407
Not rated	32,139		533		(802		)	31,870		33,874		145		(35		)	33,984
Total investment securities available for sale	$	1,458,572	$	6,066	$	(16,901	)	$	1,447,737	$	1,615,073	$	16,910	$	(3,921	)	$	1,628,062



*	Rated using external rating agencies (primarily S&P and Moody’s). Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels.

The unrealized losses in the AAA rated category (in the above table) in both held to maturity and available for sale investment securities are mainly related to residential mortgage-backed securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac. The held to maturity portfolio includes ~~$159.6~~$111.7 million in investments not rated by the rating agencies with aggregate unrealized losses of ~~$12.6~~$7.1 million at September 30, ~~2017.~~2019. The unrealized losses for this category ~~primarily relate~~included $6.5 million of unrealized losses related to 4four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million. All single-issuer trust preferred securities classified as held to maturity, including the aforementioned four securities, are paying in accordance with their terms and have no deferrals of interest or defaults. Additionally, we analyze the performance of each issuer on a quarterly basis, including a review of performance data from the issuer’s most recent bank regulatory report to assess the ~~company’s~~company's credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon our quarterly review at September 30, ~~2017,~~2019, all of the issuers appear to meet the regulatory capital minimum requirements to be considered a “well-capitalized” financial institution and/or have maintained performance levels adequate to support the contractual cash flows of the security.

~~There was no other-than-temporary impairment recognized in earnings as a result of Valley's impairment analysis of its securities during~~During the ~~three and~~ nine months ended September 30, ~~2017~~2019, Valley recognized a $2.9 million other-than-temporary credit impairment charge related to one special revenue bond classified as available for sale (within obligations of states and ~~2016~~state agencies reported in Note 6 of the consolidated financial statements). The credit impairment was due to severe credit deterioration disclosed by the issuer in the second quarter of 2019, as well as the ~~collateral supporting much~~issuer's default to its contractual payment during the same period. At September 30, 2019, the impaired security had an adjusted amortized cost and fair value of $680 thousand (after the credit impairment) and is reported in the "non-investment grade" category in the table above. Comparatively, there were no other-than-temporary impairment losses on securities recognized in earnings for the nine months ended September 30, 2018. See additional information regarding our other-than-temporary impairment analysis and special revenue bond portfolio at Note 6 to the consolidated financial statements.

The impaired municipal bond discussed above was not accruing interest as of September 30, 2019. Valley discontinues the recognition of interest on debt securities if the securities meet both of the ~~investment securities has improved~~following criteria: (i) regularly scheduled interest payments have not been paid or ~~performed as expected.~~have been deferred by the issuer, and (ii) full collection of all contractual principal and interest payments is not deemed to be the most likely outcome, resulting in the recognition of other-than-temporary impairment of the security.

Loan Portfolio

The following table reflects the composition of the loan portfolio as of the dates presented:


	September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
	($ in thousands)															($ in thousands)
Loans
Commercial and industrial	$	2,706,912		$	2,631,312		$	2,642,319		$	2,638,195		$	2,558,968		$	4,695,608		$	4,615,765		$	4,504,927		$	4,331,032		$	4,015,280
Commercial real estate:
Commercial real estate	9,351,068			9,230,514			9,016,418			8,719,667			8,313,855			13,365,454			12,798,017			12,665,425			12,407,275			12,251,231
Construction	903,640			881,073			835,854			824,946			802,568			1,537,590			1,528,968			1,454,199			1,488,132			1,416,259
Total commercial real estate	10,254,708			10,111,587			9,852,272			9,544,613			9,116,423			14,903,044			14,326,985			14,119,624			13,895,407			13,667,490
Residential mortgage	2,941,435			2,724,777			2,745,447			2,867,918			2,826,130			4,133,331			4,072,450			4,071,237			4,111,400			3,782,972
Consumer:
Home equity	448,842			450,510			458,891			469,009			476,820			489,808			501,646			513,066			517,089			521,797
Automobile	1,171,685			1,150,343			1,150,053			1,139,227			1,121,606			1,436,608			1,362,466			1,347,759			1,319,571			1,288,902
Other consumer	677,880			642,231			600,516			577,141			534,188			908,760			922,850			866,505			860,970			834,849
Total consumer loans	2,298,407			2,243,084			2,209,460			2,185,377			2,132,614			2,835,176			2,786,962			2,727,330			2,697,630			2,645,548
Total loans ⁽¹⁾⁽²⁾	$	18,201,462		$	17,710,760		$	17,449,498		$	17,236,103		$	16,634,135
Total loans^*																$	26,567,159		$	25,802,162		$	25,423,118		$	25,035,469		$	24,111,290
As a percent of total loans:
Commercial and industrial	14.9		%	14.8		%	15.1		%	15.3		%	15.4		%	17.7		%	17.9		%	17.7		%	17.3		%	16.7		%
Commercial real estate	56.3		%	57.1		%	56.5		%	55.4		%	54.8		%	56.1			55.5			55.6			55.5			56.6
Residential mortgage	16.2		%	15.4		%	15.7		%	16.6		%	17.0		%	15.5			15.8			16.0			16.4			15.7
Consumer loans	12.6		%	12.7		%	12.7		%	12.7		%	12.8		%	10.7			10.8			10.7			10.8			11.0
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%


~~(1)~~	Includes covered loans subject to loss-sharing agreements with the FDIC (primarily consisting of residential mortgage loans and commercial real estate loans) totaling $42.6 million, $44.5 million, $47.8 million, $70.4 million and $76.0 million at September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016 and September 30, 2016, respectively.


~~(2)~~*	Includes net unearned premiums and deferred loan costs of ~~$18.5~~$18.3 million, ~~$16.7~~$19.6 million, ~~$15.7~~$20.5 million, ~~$15.3~~$21.5 million and ~~$10.5~~$16.7 million at September 30, ~~2017,~~2019, June 30, ~~2017,~~2019, March 31, ~~2017,~~2019, December 31, ~~2016~~2018, and September 30, ~~2016,~~2018, respectively.

~~Total loans~~Loans increased ~~$490.7~~$765.0 million, or 11.9 percent on an annualized basis, to approximately ~~$18.2~~$26.6 billion at September 30, ~~2017~~2019 from June 30, ~~2017 primarily~~2019. The increase was mainly due to ~~solid~~continued strong quarter over quarter organic growth in ~~the residential mortgage loan and~~ commercial real estate ~~loan, supplemented by steady consumer loan volumes~~ and ~~an uptick in our~~ commercial and industrial loans, ~~portfolios~~as well as stronger automobile loan volumes during the third quarter of ~~2017.~~2019. During the third quarter of ~~2017, Valley also~~2019, we originated ~~$49.4~~$139 million of residential mortgage loans for sale rather than ~~investment. Loans~~held for investment and we also sold approximately $87 million of pre-existing loans from our residential mortgage loan portfolio. Residential mortgage loans held for sale totaled ~~$13.3~~$41.6 million and ~~$139.6~~$35.2 million at September 30, ~~2017~~2019 and ~~June 30, 2017,~~December 31, 2018, respectively.

Our loan portfolio includes purchased credit-impaired (PCI) loans, which are loans acquired at a discount that is due, in part, to credit quality. At September 30, 2017, our PCI loan portfolio decreased $69.6 million to $1.5 billion as compared to June 30, 2017 primarily due to continued larger loan repayments, of which some resulted from continued efforts by management to encourage borrower prepayment. See "Purchased Credit-Impaired Loans (Including Covered Loans)" section below for more information.

Total commercial and industrial loans increased ~~$75.6~~$79.8 million, or 6.9 percent on an annualized basis, from June 30, ~~2017~~2019 to approximately ~~$2.7~~$4.7 billion at September 30, ~~2017 due to~~2019. Exclusive of a ~~$86.7~~decline in PCI loans, commercial and industrial loans increased $119.2 million, ~~increase in~~or 12.2 percent on an annualized basis during the ~~non-PCI loan portfolio, partially offset by normal run-off in the PCI loan portfolio. The~~ third quarter ~~growth in non-PCI loans~~of 2019. The increase was ~~largely due~~mostly driven by new small to ~~increased new customer business experienced in our community lending and~~ middle market lending ~~portfolios combined with~~relationships within our markets aided by our ability to hire strong lending talent, focused calling efforts and, to a lesser extent, by increased business investment byfrom existing ~~customers. The increase was seen in all our primary markets. While we are~~relationships.

7173

~~optimistic about the fourth quarter growth and current loan pipeline, the portfolio continues to be challenged by very strong market competition for quality borrowers, as well as PCI loan repayments.~~

Commercial real estate loans (excluding construction loans) increased $120.6 million from June 30, 2017 to $9.4 billion at September 30, 2017 mainly due to a $158.6 million increase in the non-PCI loan portfolio. The increase in non-PCI loans was primarily due to solid organic loan volumes in New York, New Jersey and Florida, particularly amongst our pre-existing long-term customer base during the third quarter of 2017. The organic loan volumes generated across a broad-based segment of borrowers within the commercial real estate portfolio were partially offset by a $38.0 million decline in the acquired PCI loan portion of the portfolio. Construction loans increased $22.6 million to $903.6 million at September 30, 2017 from June 30, 2017. The increase was mostly due to advances on existing construction projects.

~~Total residential mortgage loans increased $216.7~~$567.4 million, or ~~approximately 31.8~~17.7 percent on an annualized basis to ~~approximately $2.9~~$13.4 billion at September 30, ~~2017~~2019 from June 30, ~~2017 mostly due to strong loan volumes generated by our new and expanding internal home mortgage consultant team covering our primary markets and a high level~~2019. Exclusive of ~~such~~an $83.8 million decline in PCI loans, ~~originated for portfolio investment rather than sale~~commercial real estate loans increased $651.2 million, or 24.9 percent on an annualized basis during the third quarter of ~~2017.~~2019. The increase was mainly due to continued strong loan volumes in our primary markets in Florida, New Jersey and New York and some migration of completed construction projects to permanent financing.

Construction loans increased $8.6 million to $1.5 billion at September 30, 2019 from June 30, 2019. During the third quarter of 2019, loan advances on new and existing construction projects were largely offset by loan repayments and the mitigation of completed projects to permanent commercial real estate loan financing.

Total residential mortgage loans increased $60.9 million to approximately $4.1 billion at September 30, 2019 from June 30, 2019. The loan growth was partially offset by the sale of pre-existing loans totaling $87 million and a $15.2 million decline in PCI loans during the third quarter of 2019. New and refinanced residential mortgage loan originations totaled approximately ~~$307.0~~$477 million for the third quarter of ~~2017~~2019 as compared to ~~$194.4~~$347 millionand ~~$258.3~~$497 million for the second quarter of ~~2017~~2019 and third quarter of ~~2016,~~2018, respectively.

Home equity loans ~~decreased $1.7 million to $448.8~~totaled $489.8 million at September 30, ~~2017~~2019 and decreased by $11.8 million as compared to June 30, ~~2017 mostly~~2019. The decrease was largely due to a $7.9 million decline in PCI ~~loan repayment activity. New home equity loan volumes and customer usage of existing home equity lines of credit continue to be weak, despite the relatively favorable low interest rate environment.~~loans caused by normal repayments.

Automobile loans increased by ~~$21.3~~$74.1 million to ~~$1.2~~$1.4 billion at September 30, ~~2017~~2019 as compared to June 30, ~~2017. New auto loan origination volumes increased approximately 12.9 percent during the~~2019. The third quarter ~~of 2017~~annualized growth was 21.8 percent due to higher application volumes as compared to the second quarter of ~~2017 largely due to stronger application activity during the third quarter of 2017.~~2019. Our Florida dealership network contributed ~~over $25~~$47.9 million in auto loan originations, representing approximately 1723 percent of Valley's total new auto loan production ~~for~~during the third quarter of ~~2017~~2019 and was relatively consistent with the linked second quarter of 2019.

Other consumer loans decreased $14.1 million to $908.8 million at September 30, 2019 as compared to ~~approximately $23~~$922.9 million ~~or 18 percent,~~at June 30, 2019 mostly due to lower volumes of ~~Valley's total auto originations for~~new collateralized personal lines of credit as compared to the second quarter of ~~2017.~~

Other consumer loans increased $35.6 million, or 22.2 percent on an annualized basis, to $677.9 million at September 30, 2017 as compared to $642.2 million at June 30, 2017 mainly due to continued growth and customer usage of collateralized personal lines of credit.2019.

Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, ~~with the exception of~~except for smaller auto and residential mortgage loan portfolios derived from ~~the~~ other neighboring states of New Jersey, which could present a geographic and credit risk if there was another significant broad based economic downturn ~~or a prolonged economic recovery~~ within these regions. We are witnessing new loan activity across Valley's entire geographic footprint, including new loans and solid loan pipelines from our Florida lending operations. However, the New Jersey and New York Metropolitan markets continue to account for a disproportionately larger percentage of our lending activity. To mitigate ~~these~~our geographic risks, we ~~are making~~make efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector. Geographically, we may make further inroads into the Florida lending market through bank acquisitions, such as our proposed acquisition of USAB, as well as select de novo branch efforts or adding lending staff.

Purchased Credit-Impaired Loans ~~(Including Covered Loans)~~

PCI loans ~~totaled $1.5 billion and $1.8~~decreased $652.9 million to $3.5 billion at September 30, ~~2017 and~~2019 from $4.2 billion at December 31, ~~2016, respectively, mostly consisting~~2018, mainly due to both scheduled repayment and prepayment of contractual principal balances. Our PCI loans include loans acquired in business combinations subsequent to 2011 and, to a much lesser extent, covered loans in which ~~the Bank~~we will share losses with the FDIC under loss-sharing agreements. ~~Our covered~~Covered loans, consisting ~~primarily~~ of residential mortgage ~~loans~~ and ~~commercial real estate~~other consumer loans, totaled ~~$42.6~~$23.8 million and ~~$70.4~~$27.6 millionat September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. ~~The decrease in covered loans was largely due to the expiration of a~~

commercial loss-sharing agreement acquired from another financial institution effective January 1, 2017 and the reclassification of such loans to non-covered PCI loans during the first quarter of 2017. Additional information regardingAs required by U.S. GAAP, all of our ~~loss-sharing agreements with the FDIC can be found in our Annual Report on Form 10-K for the year ended December 31, 2016.~~

PCI loans are accounted for ~~in accordance with~~under 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~~310-30. This accounting guidance requires PCI loans to be aggregated and accounted for as pools of loans based on common risk characteristics. ~~The~~A pool is accounted for as one asset with a single composite interest rate, aggregate fair value and expected cash flows. For PCI loan pools accounted for under ASC Subtopic 310-30, the difference between the contractually required payments due and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the non-accretable difference. The contractually required payments due represent the total undiscounted amount of all uncollected principal and interest payments. Contractually required payments due may increase or decrease for a variety of reasons, e.g. when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. The Bank estimates the undiscounted cash flows expected to be collected by incorporating several key assumptions,

including probability of default, loss given default, and the amount of actual prepayments after the acquisition dates. The non-accretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses and uncollectable contractual interest expected to be incurred over the life of the loans. The excess of the undiscounted cash flows expected at the acquisition ~~and~~date over the ~~initial~~ carrying amount (fair value) of ~~the~~ PCI loans oris referred to as the ~~“accretable yield,”~~accretable yield. This amount is ~~recognized as~~accreted into interest income ~~utilizing the level-yield method~~ over the remaining life of ~~each pool. Contractually required~~the loans, or pool of loans, using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment assumptions, and changes in expected principal and interest payments ~~for~~over the estimated lives of the loans. Prepayments affect the estimated life of PCI loans and could change the amount of interest income, and possibly principal, ~~that exceed the undiscounted cash flows~~ expected ~~at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, loss accrual or valuation allowance.~~to be collected. 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.

At acquisition, we use a third party service provider to assist with our assessment of the contractual and estimated cash flows. During subsequent annual evaluation periods, Valley uses a third party software application to assess the contractual and estimated cash flows. Using updated loan-level information derived from Valley’s main operating system, contractually required loan payments and expected cash flows for each pool level, the software reforecasts both the contractual cash flows and cash flows expected to be collected. The loan-level information used to reforecast the cash flows is subsequently aggregated on a pool basis. The expected payment data, discount rates, impairment data and changes to the accretable yield are reviewed by Valley to determine whether this information is accurate and the resulting financial statement effects are reasonable.

WeSimilar to contractual cash flows, we reevaluate expected ~~and contractual~~ cash flows on a quarterly basis. Unlike contractual cash flows which are determined based on known factors, significant management assumptions are necessary in forecasting the estimated cash flows. We attempt to ensure the forecasted expectations are reasonable based on the information currently available; however, due to the uncertainties inherent in the use of estimates, actual cash flow results may differ from our forecast and the differences may be significant. To mitigate such differences, we carefully prepare and review the assumptions utilized in forecasting estimated cash flows.

On a quarterly basis, ~~we also analyze~~Valley analyzes the actual cash flow versus the forecasts at the loan pool level and variances are reviewed to determine their cause. ~~If a re-forecast of~~In re-forecasting future estimated cash flow, ~~is necessary, we~~Valley will adjust the credit loss expectations for ~~the~~ loan ~~pools.~~pools, as necessary. These adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which ~~we don't~~Valley does not reforecast estimated cash flows, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events which transpired during the current reporting period.

For the pools with better than expected cash flows, the forecasted increase is recorded as a prospective adjustment to our interest income on these loan pools over future periods. The decrease in the FDIC loss-share receivable due to the increase in expected cash flows for covered loan pools, if applicable, is recognized on a prospective basis over the shorter period of the lives of the loan pools and the loss-share agreements accordingly with a corresponding reduction in non-interest income for the period. Conversely, an increase or decrease in expected future cash flows of covered loans since the acquisition dates will increase or decrease (if applicable) the clawback liability (the amount the FDIC requires us to pay back if certain thresholds are met) accordingly.

The following tables summarize the changes in the carrying amounts of PCI loans ~~(net of the allowance for loan losses, if applicable),~~ and the accretable yield on these loans for the three and nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018:


	Three Months Ended September 30,												Three Months Ended September 30,
	2017						2016						2019						2018
	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
	(in thousands)												(in thousands)
PCI loans:
Balance, beginning of the period	$	1,541,469		$	246,278		$	1,975,401		$	355,601		$	3,771,957		$	853,887		$	4,647,701		$	630,550
Acquisition													—			—			(9,520		)	—
Accretion	20,626			(20,626		)	26,730			(26,730		)	47,475			(47,475		)	54,367			(54,367		)
Payments received	(90,240		)	—			(145,016		)	—			(282,103		)	—			(262,513		)	—
Net (decrease) increase in expected cash flows													—			(58,268		)	—			23,983
Transfers to other real estate owned													(161		)	—			—			—
Balance, end of the period	$	1,471,855		$	225,652		$	1,857,115		$	328,871		$	3,537,168		$	748,144		$	4,430,035		$	600,166

7375


	Nine Months Ended September 30,												Nine Months Ended September 30,
	2017						2016						2019						2018
	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
	(in thousands)												(in thousands)
PCI loans:
Balance, beginning of the period	$	1,771,502		$	294,514		2,240,471			415,179			$	4,190,086		$	875,958		$	1,387,215		$	282,009
Acquisition													—			—			3,735,162			474,208
Accretion	68,862			(68,862		)	83,114			(83,114		)	155,981			(155,981		)	180,034			(180,034		)
Payments received	(364,975		)	—			(462,100		)	—			(806,937		)	—			(872,183		)	—
Net increase in expected cash flows													—			28,167			—			23,983
Transfers to other real estate owned	(3,534		)	—			(1,176		)	—			(1,962		)	—			(193		)	—
Other, net	—			—			(3,194		)	(3,194		)
Balance, end of the period	$	1,471,855		$	225,652		$	1,857,115		$	328,871		$	3,537,168		$	748,144		$	4,430,035		$	600,166

~~FDIC Loss-Share Receivable Related to Covered Loans and Foreclosed Assets~~

The ~~receivable arising from~~net increase in expected cash flows for certain pools of loans (included in the ~~loss-sharing agreements with~~tables above) during the ~~FDIC~~nine months ended September 30, 2019 is ~~measured separately from~~recognized prospectively as an adjustment to the ~~covered loan portfolio because~~yield over the ~~agreements are not contractually part~~estimated remaining life of the ~~covered loans and are not transferable should~~individual pools. Based upon our 2019 reforecasted cash flows, the ~~Bank choose to dispose of~~net increase for 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~~nine months ended September 30, ~~2017 and December 31, 2016, respectively.~~2019 was largely driven by additional advances on acquired lines of credit coupled with lower prospective loss expectations, partially offset by higher loan prepayments. The net decrease in expected cash flows for the three months ended September 30, 2019 was largely due to the high volume of contractual principal prepayments caused by the low level of market interest rates.

Non-performing Assets

Non-performing assets (excluding PCI loans) include non-accrual loans, other real estate owned (OREO), other repossessed assets (which consist of ~~automobiles)~~automobiles and taxicab medallions) and non-accrual debt securities at September 30, ~~2017.~~2019. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less cost to sell at the time of acquisition and at the lower of cost or fair value, less estimated costs to sell, thereafter. Our non-performing assets totaling ~~$55.2~~$110.7 million at September 30, ~~2017~~2019 increased ~~1.1 percent and 8.1~~3.7 percent from June 30, ~~2017~~2019 and increased 24.9 percent from September 30, ~~2016,~~2018, respectively (as shown in the table below). The $4.0 million increase ~~from~~in non-performing assets at September 30, ~~2016~~2019 as compared to June 30, 2019 was ~~primarily~~mainly due to ~~higher~~an increase of $4.5 million in non-accrual loans ~~balances within~~and higher repossessed assets during the ~~commercial and industrial loan category.~~third quarter of 2019, partially offset by a decline in OREO balances. Non-performing assets as a percentage of total loans and non-performing assets totaled ~~0.30 percent and 0.31~~0.41 percent at both September 30, ~~2017~~2019 and June 30, 2017, respectively. Overall, we believe total non-performing assets has remained relatively low as a percentage of the total loan portfolio and non-performing assets over the last 12 month period and is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties.2019. Past due loans and non-accrual loans in the table below exclude PCI loans. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley. For details regarding performing and non-performing PCI loans, see the "Credit quality indicators" section in Note 87 to the consolidated financial statements.

7476

The following table sets forth by loan category accruing past due and non-performing assets on the dates indicated in conjunction with our asset quality ratios:

September 30,
2017 June 30,
2017 March 31,
2017 December 31,
2016 September 30, 2016
($ in thousands)
Accruing past due loans: ⁽¹⁾

30 to 59 days past due:
Commercial and industrial $ 1,186
$ 2,391
$ 29,734
$ 6,705
$ 4,306
Commercial real estate 4,755
6,983
11,637
5,894
9,385
Construction —
—
7,760
6,077
—
Residential mortgage 7,942
4,677
7,533
12,005
9,982
Total Consumer 5,205
4,393
3,740
4,197
3,146
Total 30 to 59 days past due 19,088
18,444
60,404
34,878
26,819
60 to 89 days past due:
Commercial and industrial 3,043
2,686
341
5,010
788
Commercial real estate 626
8,233
359
8,642
4,291
Construction 2,518
854
—
—
—
Residential mortgage 1,604
1,721
4,177
3,564
2,733
Total Consumer 1,019
1,007
787
1,147
1,234
Total 60 to 89 days past due 8,810
14,501
5,664
18,363
9,046
90 or more days past due:
Commercial and industrial 125
—
405
142
145
Commercial real estate 389
2,315
—
474
478
Construction —
2,879
—
1,106
1,881
Residential mortgage 1,433
3,353
1,355
1,541
590
Total Consumer 301
275
314
209
226
Total 90 or more days past due 2,248
8,822
2,074
3,472
3,320
Total accruing past due loans $ 30,146
$ 41,767
$ 68,142
$ 56,713
$ 39,185
Non-accrual loans:⁽¹⁾

Commercial and industrial $ 11,983
$ 11,072
$ 8,676
$ 8,465
$ 7,875
Commercial real estate 13,870
15,514
15,106
15,079
14,452
Construction 1,116
1,334
1,461
715
1,136
Residential mortgage 12,974
12,825
11,650
12,075
14,013
Total Consumer 1,844
1,409
1,395
1,174
965
Total non-accrual loans 41,787
42,154
38,288
37,508
38,441
Other real estate owned (OREO)⁽²⁾
10,770
10,182
10,737
9,612
10,257
Other repossessed assets 480
342
475
384
307
Non-accrual debt securities ⁽³⁾
2,115
1,878
2,007
1,935
2,025
Total non-performing assets (NPAs) $ 55,152
$ 54,556
$ 51,507
$ 49,439
$ 51,030
Performing troubled debt restructured loans $ 113,677
$ 109,802
$ 80,360
$ 85,166
$ 81,093
Total non-accrual loans as a % of loans 0.23 % 0.24 % 0.22 % 0.22 % 0.23 %
Total NPAs as a % of loans and NPAs 0.30
0.31
0.29
0.29
0.31
Total accruing past due and non-accrual loans as a % of loans 0.40
0.47
0.61
0.55
0.47
Allowance for loan losses as a % of non-accrual loans 284.70
276.24
301.51
305.05
287.97



	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
	($ in thousands)
Accruing past due loans: *
30 to 59 days past due:
Commercial and industrial	$	5,702		$	14,119		$	5,120		$	13,085		$	9,462
Commercial real estate	20,851			6,202			39,362			9,521			3,387
Construction	11,523			—			1,911			2,829			15,576
Residential mortgage	12,945			19,131			15,856			16,576			10,058
Total Consumer	13,079			11,932			6,647			9,740			7,443
Total 30 to 59 days past due	64,100			51,384			68,896			51,751			45,926
60 to 89 days past due:
Commercial and industrial	3,158			4,135			1,756			3,768			1,431
Commercial real estate	735			354			2,156			530			2,502
Construction	7,129			1,342			—			—			36
Residential mortgage	4,417			3,635			3,635			2,458			3,270
Total Consumer	1,577			1,484			990			1,386			1,249
Total 60 to 89 days past due	17,016			10,950			8,537			8,142			8,488
90 or more days past due:
Commercial and industrial	4,133			3,298			2,670			6,156			1,618
Commercial real estate	1,125			—			—			27			27
Residential mortgage	1,347			1,054			1,402			1,288			1,877
Total Consumer	756			359			523			341			282
Total 90 or more days past due	7,361			4,711			4,595			7,812			3,804
Total accruing past due loans	$	88,477		$	67,045		$	82,028		$	67,705		$	58,218
Non-accrual loans: *
Commercial and industrial	$	75,311		$	76,216		$	76,270		$	70,096		$	52,929
Commercial real estate	9,560			6,231			2,663			2,372			7,103
Construction	356			—			378			356			—
Residential mortgage	13,772			12,069			11,921			12,917			16,083
Total Consumer	2,050			1,999			2,178			2,655			2,248
Total non-accrual loans	101,049			96,515			93,410			88,396			78,363
Other real estate owned (OREO)	6,415			7,161			7,317			9,491			9,863
Other repossessed assets	2,568			2,358			2,628			744			445
Non-accrual debt securities **	680			680			—			—			—
Total non-performing assets (NPAs)	$	110,712		$	106,714		$	103,355		$	98,631		$	88,671
Performing troubled debt restructured loans	$	79,364		$	74,385		$	73,081		$	77,216		$	81,141
Total non-accrual loans as a % of loans	0.38		%	0.37		%	0.37		%	0.35		%	0.33		%
Total NPAs as a % of loans and NPAs	0.41			0.41			0.40			0.39			0.37
Total accruing past due and non-accrual loans as a % of loans	0.71			0.63			0.69			0.62			0.57
Allowance for loan losses as a % of non-accrual loans	160.17			160.71			165.27			171.79			184.99

* Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis.


~~(1)~~	~~Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis.~~


~~(2)~~	This table excludes covered OREO properties related to FDIC-assisted transactions totaling $558 thousand and $1.0 million at December 31, 2016 and September 30, 2016, respectively. There were no covered OREO properties at September 30, 2017, June 30, 2017, and March 31, 2017.

~~(3)~~**

Includes an other-than-temporarily impaired ~~trust preferred security~~special revenue bond classified as available for sale ~~which is~~ presented at carrying value ~~net of net unrealized losses totaling $637 thousand, $875 thousand, $745 thousand, $817 thousand, and $728 thousand~~ at September 30, ~~2017,~~2019 and June 30, ~~2017, March 31, 2017, December 31, 2016 and September 30, 2016, respectively.~~2019.

Loans past due 30 to 59 days increased ~~$644 thousand~~$12.7 million to ~~$19.1~~$64.1 million at September 30, ~~2017~~2019 as compared to June 30, ~~2017~~2019. The increase was largely due to ~~a $3.3 million increase in residential mortgage delinquencies caused by normal fluctuations in this category, partially offset by a $2.2 million decline in~~matured performing construction and commercial real estate loans ~~primarily due to improved performance. The commercial real estate loans past due 30 to 59 days~~that were in the normal process of renewal totaling $11.5 million and $10.6 million at September 30, ~~2017 is~~2019, respectively. These

increases were partially offset by an $8.4 million decrease in commercial and industrial loans at September 30, 2019 mainly ~~comprised~~due to the renewal of ~~one internally classified~~a $10.0 million loan ~~totaling $3.4 million.~~that was reported in this delinquency category at June 30, 2019.

Loans past due 60 to 89 days ~~decreased $5.7~~increased $6.1 million to ~~$8.8~~$17.0 million at September 30, ~~2017~~2019 as compared to June 30, ~~2017~~2019 largely due to a ~~$7.6 million decrease in past due commercial real estate loans, partially offset by $1.7~~$5.8 million increase in construction loan delinquencies within this past due category. The decrease within the commercial real estate loans category was mainly due to the improved performance of one internally classified relationship totaling $5.9 million that was reported within this delinquency category at June 30, 2017.delinquencies. Construction loans past due 60 to 89 days ~~included an additional loan relationship totaling $1.8~~totaled $7.1 million ~~and one performing matured loan totaling $675 thousand~~ at September 30, ~~2017.~~2019 and consisted of two matured performing loans in the normal process of renewal.

Loans past due 90 days or more and still accruing ~~decreased $6.6~~interest increased $2.7 million to ~~$2.2~~$7.4 million at September 30, ~~2017~~2019 as compared to ~~$8.8~~$4.7 million at June 30, ~~2017 largely due to the completion of the renewal underwriting process for two performing matured construction and commercial real estate loans totaling $5.2 million.~~2019. All of the loans past due 90 days or more and still accruing are considered to be well secured and in the process of collection.

Non-accrual loans ~~decreased $367 thousand~~increased $4.5 million to ~~$41.8~~$101.0 million at September 30, ~~2017~~2019 as compared to ~~$42.2~~$96.5 million at June 30, ~~2017 mainly~~2019. The increase was due, in part, to a ~~$1.6~~$3.9 million ~~decrease within~~ commercial real estate loan at September 30, 2019 previously reported in loans ~~partially offset by moderate increases in most other~~past due 30 to 59 days at June 30, 2019. The $3.9 million non-accrual loan ~~categories.~~had no related reserves within the allowance for loan losses based upon the adequacy of the collateral valuation at September 30, 2019.

During the third quarter of ~~2017,~~2019, we continued to closely monitor our ~~NYC~~New York City and Chicago taxi medallion loans totaling $111.8 million and $7.6 million, respectively, within the commercial and industrial loan ~~portfolio.~~portfolio at September 30, 2019. While ~~the vast majority~~most of the taxi medallion loans are currently performing, negative trends in ~~the~~ market valuations of the underlying taxi medallion collateral could impact the future performance and internal classification of this portfolio. At September 30, ~~2017,~~2019, the ~~NYC and Chicago~~ taxi medallion loans totaling $129.3 million and $10.0 million, respectively, are largely classified as substandard and special mention loans within the credit quality table disclosures in Note 8 of our consolidated financial statements. The criticized loan classifications are primarily due to the elevated general risk associated with the current medallion market.

~~At September 30, 2017, the~~ medallion portfolio included impaired loans ~~of $40.5~~totaling $91.1 million with related reserves of ~~$5.0~~$34.2 million within the allowance for loan losses as compared to impaired loans ~~of $37.4~~totaling $78.3 million with related reserves of ~~$3.7~~$29.5 million at June 30, ~~2017.~~2019. The increase in both impaired taxi medallion loans and related reserves as compared to June 30, 2019 was largely due to the previously disclosed $13.7 million of performing non-impaired taxi medallion loans which matured in June 2019 that were subsequently restructured and classified as performing troubled debt restructured (TDR) loans in the third quarter of 2019. At September 30, ~~2017,~~2019, the impaired taxi medallion loans largely consisted of $67.1 million of non-accrual loans and $24.0 million of performing troubled debt restructured (TDR) loans classified as substandard ~~loans, as well as $5.6 million of non-accrual Chicago taxi cab medallion loans classified as doubtful~~ loans. At September 30, 2017, loans past due 60 to 89 days included $2.2 million of matured performing NYC taxi medallions. We are currently renegotiating the terms of these past due loans. In addition, $18.2 million of performing NYC taxi medallion loans have contractual maturity dates in the fourth quarter of 2017.

Valley's historical taxi medallion lending criteria ~~has~~had been conservative ~~in regards to~~regarding capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral in certain instances.

However, ~~potential~~the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, increased the level of our allowance for loan losses at September 30, 2019 (See the "Allowance for Credit Losses" section below). Potential further declines in the market valuation of taxi medallions could also negatively impact the future performance of this portfolio. For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $12.3 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at September 30, 2019.

OREO properties ~~increased $588~~decreased $746 thousand to ~~$10.8~~$6.4 million at September 30, ~~2017~~2019 from ~~$10.2~~$7.2 million at June 30, ~~2017.~~2019. Sales of OREO properties resulted in net losses of $417 thousand and net gains of $1.7 million for the three and nine months ended September 30, 2019, respectively. The net losses on the sales of OREO properties were immaterial for both the three and nine months ended September 30, 2018. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled ~~$4.9~~$1.7 million at September 30, ~~2017.~~2019.

TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased ~~$3.9~~$5.0 million to ~~$113.7~~$79.4 million at September 30, ~~2017~~2019 as compared to ~~$109.8~~$74.4 million at June 30, ~~2017.~~2019. Performing TDRs consisted of ~~128~~123 loans (primarily in the commercial and industrial loan and commercial real estate portfolios). at September 30, 2019. On an aggregate basis, the ~~$113.7~~$79.4 million in performing TDRs at September 30, ~~2017~~2019 had a modified weighted average interest rate of approximately ~~4.59~~5.39 percent as compared to a pre-modification weighted average interest rate of ~~4.54~~5.64 percent. The increase in the modified weighted average interest rate of the performing TDRs as compared to the pre-modification weighted average interest rate was largely due to loans restructured at higher current market interest rates, but with extended loan terms.

Despite the increase in taxi medallion loans classified as impaired TDR, we believe our overall credit quality metrics continued to reflect our solid underwriting standards at September 30, 2017. However, we can provide no assurances as to the future level of our loan delinquencies.

Allowance for Credit Losses

The allowance for credit losses includes the allowance for loan losses and the reserve for unfunded commercial letters of credit. Management maintains the allowance for credit losses at a level estimated to absorb probable losses inherent in the loan portfolio and unfunded letter of credit commitments at the balance sheet dates, based on ongoing evaluations of the loan portfolio. Our methodology for evaluating the appropriateness of the allowance for loan losses includes:

segmentation of the loan portfolio based on the major loan categories, which consist of commercial and industrial, commercial real estate (including construction), residential mortgage, and other consumer loans (including automobile and home equity loans);

tracking the historical levels of classified loans and delinquencies;

assessing the nature and trend of loan charge-offs;

providing specific reserves on impaired loans; and

evaluating the PCI loan pools for additional credit impairment subsequent to the acquisition dates.

Additionally, the qualitative factors, such as the volume of non-performing loans, concentration risks by size, type, and geography, new markets, collateral adequacy, credit policies and procedures, staffing, underwriting consistency, loan review and economic conditions are taken into consideration when evaluating the adequacy of the allowance for credit losses. The allowance for credit loss methodology and accounting policy are fully described in Part II, Item 7 and Note 1 to the consolidated financial statements in Valley’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses is dependent upon a variety of factors largely beyond our control, including the view of the OCC toward loan classifications, performance of the loan portfolio, and the economy. The OCC may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the allowance for loan losses when their credit evaluations differ from those of management.

7779

The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for the periods indicated.


	Three Months Ended									Nine Months Ended						Three Months Ended									Nine Months Ended
	September 30, 2017			June 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			September 30, 2019			June 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
	($ in thousands)															($ in thousands)
Average loans outstanding	$	18,006,274		$	17,701,676		$	16,570,723		$	17,676,222		$	16,273,482		$	26,136,745		$	25,552,415		$	23,659,190		$	25,651,195		$	22,939,106
Beginning balance - Allowance for credit losses	118,621			117,696			110,414			116,604			108,367			158,079			158,961			143,154			156,295			124,452
Loans charged-off:
Commercial and industrial	(265		)	(2,910		)	(3,763		)	(4,889		)	(5,507		)	(527		)	(3,073		)	(833		)	(7,882		)	(1,606		)
Commercial real estate	—			(139		)	—			(553		)	(519		)	(158		)	—			—			(158		)	(348		)
Construction	—			—			—			—			—			—			—			—			—			—
Residential mortgage	(129		)	(229		)	(518		)	(488		)	(750		)	(111		)	—			—			(126		)	(167		)
Total Consumer	(1,335		)	(1,011		)	(782		)	(3,467		)	(2,553		)	(2,191		)	(1,752		)	(1,150		)	(5,971		)	(3,783		)
Total charge-offs	(1,729		)	(4,289		)	(5,063		)	(9,397		)	(9,329		)	(2,987		)	(4,825		)	(1,983		)	(14,137		)	(5,904		)
Charged-off loans recovered:
Commercial and industrial	2,320			312			902			3,480			2,418			330			1,195			1,131			2,008			4,057
Commercial real estate	42			346			34			530			1,581			28			22			12			71			396
Construction	—			294			10			294			10			—			—			—			—			—
Residential mortgage	220			235			495			903			604			3			9			9			13			269
Total Consumer	366			395			282			1,324			1,194			617			617			600			1,720			1,563
Total recoveries	2,948			1,582			1,723			6,531			5,807			978			1,843			1,752			3,812			6,285
Net recoveries (charge-offs)	1,219			(2,707		)	(3,340		)	(2,866		)	(3,522		)
Net (charge-offs) recoveries																(2,009		)	(2,982		)	(231		)	(10,325		)	381
Provision charged for credit losses	1,640			3,632			5,840			7,742			8,069			8,700			2,100			6,552			18,800			24,642
Ending balance - Allowance for credit losses	$	121,480		$	118,621		$	112,914		$	121,480		$	112,914		$	164,770		$	158,079		$	149,475		$	164,770		$	149,475
Components of allowance for credit losses:
Allowance for loan losses	$	118,966		$	116,446		$	110,697		$	118,966		$	110,697		$	161,853		$	155,105		$	144,963		$	161,853		$	144,963
Allowance for unfunded letters of credit	2,514			2,175			2,217			2,514			2,217			2,917			2,974			4,512			2,917			4,512
Allowance for credit losses	$	121,480		$	118,621		$	112,914		$	121,480		$	112,914		$	164,770		$	158,079		$	149,475		$	164,770		$	149,475
Components of provision for credit losses:
Provision for losses on loans	$	1,301		$	3,710		$	5,949		$	7,413		$	8,041		$	8,757		$	3,706		$	6,432		$	20,319		$	23,726
Provision for unfunded letters of credit	339			(78		)	(109		)	329			28			(57		)	(1,606		)	120			(1,519		)	916
Provision for credit losses	$	1,640		$	3,632		$	5,840		$	7,742		$	8,069		$	8,700		$	2,100		$	6,552		$	18,800		$	24,642
Annualized ratio of net (recoveries) charge-offs to average loans outstanding	(0.03		)%	0.06		%	0.08		%	0.02		%	0.03		%
Annualized ratio of net charge-offs (recoveries) to average loans outstanding																0.03		%	0.05		%	0.00		%	0.05		%	0.00		%
Allowance for credit losses as a % of non-PCI loans	0.73			0.73			0.76			0.73			0.76			0.72			0.72			0.76			0.72			0.76
Allowance for credit losses as a % of total loans	0.67			0.67			0.68			0.67			0.68			0.62			0.61			0.62			0.62			0.62

~~During~~Net loan charge-offs totaled $2.0 million for the third quarter of ~~2017, we recognized net recoveries of loan charge-offs totaling $1.2 million~~2019 as compared to ~~net loan charge-offs of $2.7~~$3.0 million ~~and $3.3 million in~~for the second quarter of ~~2017~~2019, and $231 thousand during the third quarter of ~~2016, respectively.~~2018. The ~~improvement~~decrease in net loan charge-offs as compared to the second quarter of ~~2017~~2019 was mainly due to ~~one large~~better performance within the commercial and industrial loan ~~recovery totaling $1.8 million during~~category in the third quarter of ~~2017~~2019. There were no taxi medallion loan charge-offs during the third quarters of 2019 and ~~a decline in charge-offs within the same loan category mainly due~~2018 as compared to ~~an unrelated charged-off loan relationship totaling $1.9~~$2.3 million infor the second quarter of ~~2017.~~2019. The overall level of loan charge-offs (as presented in the above table) continues to trend within management's expectations for the credit quality of the loan portfolio.

7880

During the third quarter of ~~2017,~~2019, we recorded ~~a $1.6~~an $8.7 million provision for credit losses as compared to ~~$3.6~~$2.1 million and ~~$5.8~~$6.6 million for the second quarter of ~~2017~~2019 and the third quarter of ~~2016,~~2018, respectively. The ~~quarter over quarter decrease~~increase in the third quarter of 2019 provision as compared to the second quarter of 2019 was largely due ~~in part,~~ to ~~our aforementioned net recoveries~~additional allocated reserves of loan charge-offs and the moderate levels of actual and estimated loss experience across the majority of the loan portfolio which is reflective of both Valley's underwriting standards and current economic conditions. Additionally, our analysis of the adequacy of the allowance for loan losses included an assessment of the impact of Hurricane Irma on our Florida loan portfolio at September 30, 2017. As result of the assessment, we do not expect a material amount of loan losses$5.4 million related to ~~Hurricane Irma. However, we can provide no assurances~~the $13.7 million of impaired taxi medallion loans classified as toTDR loans upon renewal during the ~~future level~~third quarter of ~~our loan charge-offs.~~2019.

The following table summarizes the allocation of the allowance for credit losses to specific loan portfolio categories and the allocations as a percentage of each loan category:

September 30, 2017 June 30, 2017 September 30, 2016

Allowance
Allocation

Allocation
as a % of
Loan
Category

Allowance
Allocation

Allocation
as a % of
Loan
Category

Allowance
Allocation

Allocation
as a % of
Loan
Category
($ in thousands)
Loan Category:
Commercial and Industrial loans* $ 57,203
2.11 % $ 53,792
2.04 % $ 52,969
2.07 %
Commercial real estate loans:
Commercial real estate 36,626
0.39 % 37,180
0.40 % 35,513
0.43 %
Construction 18,673
2.07 % 18,275
2.07 % 16,947
2.11 %
Total commercial real estate loans 55,299
0.54 % 55,455
0.55 % 52,460
0.58 %
Residential mortgage loans 3,892
0.13 % 4,186
0.15 % 3,378
0.12 %
Consumer loans:
Home equity 592
0.13 % 582
0.13 % 796
0.17 %
Auto and other consumer 4,494
0.24 % 4,606
0.26 % 3,311
0.20 %
Total consumer loans 5,086
0.22 % 5,188
0.23 % 4,107
0.19 %
Total allowance for credit losses $ 121,480
0.67 % $ 118,621
0.67 % $ 112,914
0.68 %



	September 30, 2019				June 30, 2019				September 30, 2018
	Allowance Allocation		Allocation as a % of Loan Category		Allowance Allocation		Allocation as a % of Loan Category		Allowance Allocation		Allocation as a % of Loan Category
	($ in thousands)
Loan Category:
Commercial and Industrial loans*	$	103,919	2.21	%	$	97,358	2.11	%	$	88,509	2.20	%
Commercial real estate loans:
Commercial real estate	23,044		0.17	%	23,796		0.19	%	29,093		0.24	%
Construction	25,727		1.67	%	25,182		1.65	%	21,037		1.49	%
Total commercial real estate loans	48,771		0.33	%	48,978		0.34	%	50,130		0.37	%
Residential mortgage loans	5,302		0.13	%	5,219		0.13	%	4,919		0.13	%
Consumer loans:
Home equity	487		0.10	%	505		0.10	%	576		0.11	%
Auto and other consumer	6,291		0.27	%	6,019		0.26	%	5,341		0.25	%
Total consumer loans	6,778		0.24	%	6,524		0.23	%	5,917		0.22	%
Total allowance for credit losses	$	164,770	0.62	%	$	158,079	0.61	%	$	149,475	0.62	%



*	Includes the reserve for unfunded letters of credit.

The allowance for credit losses, comprised of our allowance for loan losses and reserve for unfunded letters of credit, as a percentage of total loans was 0.67 percent at both September 30, 2017 and June 30, 2017 and 0.68 percent at September 30, 2016. At September 30, ~~2017,~~2019, our allowance allocations for losses as a percentage of total loans remained relatively stable ~~in most loan categories~~ as compared to June 30, ~~2017, but increased 0.07 percent~~2019 and September 30, 2018 for most loan categories. However, the allocation for commercial and industrial ~~loans. The increase was partly attributable~~loans increased 0.10 percent to ~~an increase in specific and qualitative~~2.21 percent at September 30, 2019 as compared to June 30, 2019 largely due to additional allocated reserves ~~related to the collateral valuation of~~for impaired taxi medallion ~~loans.~~

loans within this loan category. Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately ~~$1.5~~$3.5 billion) was ~~0.73~~0.72 percent, ~~at both September 30, 2017~~0.72 percent and ~~June 30, 2017, as compared to~~ 0.76 percent at September 30, ~~2016.~~2019, June 30, 2019 and September 30, 2018, respectively. PCI loans are accounted for on a pool basis and initially recorded net of fair valuation discounts related to credit which may be used to absorb future losses on such loans before any allowance for loan losses is recognized subsequent to acquisition. Due to the adequacy of such discounts, there were no allowance reserves related to PCI loans at September 30, ~~2017,~~2019, June 30, ~~2017~~2019 and September 30, ~~2016.~~2018.

Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, shareholders’ equity totaled approximately ~~$2.5~~$3.6 billion and ~~$2.4~~$3.4 billion, ~~respectively,~~ and represented ~~10.7 percent and 10.4~~10.5 percent of total ~~assets, respectively.~~assets. During the nine months ended September 30, ~~2017,~~2019, total shareholders’ equity increased by ~~$160.8~~$207.6 million primarily due to (i) net income of ~~$135.8~~$271.7 million, (ii) ~~$98.1 million of net proceeds from the issuance of our Series B preferred stock, (iii)~~ an ~~$8.0 million decrease~~increase in ~~our accumulated~~ other comprehensive ~~loss, (iv)~~income of $43.0 million, (iii) a ~~$7.2~~$9.5 million increase attributable to the effect of our stock incentive plan, and ~~(v)~~(iv) a $3.0 million net ~~proceeds~~cumulative effect adjustment to retained earnings for the adoption of ~~$5.2 million from the re-issuance~~new accounting guidance as of ~~treasury and authorized common shares issued under our dividend reinvestment plan totaling a combined 451 thousand shares.~~January 1, 2019. These positive changes were partially offset by cash dividends declared on common and preferred stock totaling a combined ~~$93.5 million. See Note 4 to~~$119.6 million for the ~~consolidated financial statements for additional information regarding changes in our accumulated other comprehensive loss during the three and~~ nine months ended September 30, ~~2017.~~2019.

Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.

Effective January 1, ~~2015, Valley implemented~~2016, the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)~~. Basel III final~~ new rules ~~require~~required a ~~new~~ common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent. The ~~new~~ rule changes also included the implementation of a ~~new~~2.5 percent capital conservation buffer ~~that is~~ added to the minimum requirements for capital adequacy ~~purposes. The~~purposes, subject to a three-year phase-in period. On January 1, 2019, the capital conservation buffer is subject to a three year phase-in period that started on January 1, 2016, at 0.625 percent of risk-weighted assets and increases each subsequent year by 0.625 percent until reaching its final level of 2.5 percent whenwas fully ~~phased-in on January 1, 2019.~~phased-in. As of September 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, Valley and Valley National Bank exceeded all capital adequacy requirements ~~with the capital conservation buffer under the Basel III Capital Rules~~ (see tables below).

The following tables present Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:


	Actual				Minimum Capital Requirements with Capital Conservation Buffer				To Be Well Capitalized Under Prompt Corrective Action Provision				Actual				Minimum Capital Requirements				To Be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	($ in thousands)												($ in thousands)
As of September 30, 2017
As of September 30, 2019
Total Risk-based Capital
Valley	$	2,252,853	12.61	%	$	1,653,162	9.250	%	N/A		N/A		$	2,919,188	11.03	%	$	2,778,657	10.500	%	N/A		N/A
Valley National Bank	2,186,146		12.26		1,648,937		9.250		$	1,782,635	10.00	%	2,895,016		10.95		2,776,070		10.500		$	2,643,876	10.00	%
Common Equity Tier 1 Capital
Valley	1,648,540		9.22		1,027,641		5.750		N/A		N/A		2,245,482		8.49		1,852,438		7.000		N/A		N/A
Valley National Bank	1,964,544		11.02		1,025,015		5.750		1,158,713		6.50		2,630,246		9.95		1,850,713		7.000		1,718,520		6.50
Tier 1 Risk-based Capital
Valley	1,862,159		10.42		1,295,722		7.250		N/A		N/A		2,460,418		9.30		2,249,389		8.500		N/A		N/A
Valley National Bank	1,964,544		11.02		1,292,410		7.250		1,426,108		8.00		2,630,246		9.95		2,247,295		8.500		2,115,101		8.00
Tier 1 Leverage Capital
Valley	1,862,159		8.13		916,309		4.00		N/A		N/A		2,460,418		7.61		1,292,785		4.00		N/A		N/A
Valley National Bank	1,964,544		8.59		914,953		4.00		1,143,691		5.00		2,630,246		8.14		1,292,084		4.00		1,615,105		5.00
As of December 31, 2018
Total Risk-based Capital
Valley													$	2,786,971	11.34	%	$	2,426,975	9.875	%	N/A		N/A
Valley National Bank													2,698,654		10.99		2,424,059		9.875		$	2,454,743	10.00	%
Common Equity Tier 1 Capital
Valley													2,071,871		8.43		1,566,781		6.375		N/A		N/A
Valley National Bank													2,442,359		9.95		1,564,899		6.375		1,595,583		6.50
Tier 1 Risk-based Capital
Valley													2,286,676		9.30		1,935,435		7.875		N/A		N/A
Valley National Bank													2,442,359		9.95		1,933,110		7.875		1,963,794		8.00
Tier 1 Leverage Capital
Valley													2,286,676		7.57		1,208,882		4.00		N/A		N/A
Valley National Bank													2,442,359		8.09		1,207,039		4.00		1,508,798		5.00

8082

Actual
Minimum Capital
Requirements with Capital Conservation Buffer

To Be Well Capitalized
Under Prompt Corrective
Action Provision
Amount Ratio Amount Ratio Amount Ratio

($ in thousands)
As of December 31, 2016
Total Risk-based Capital
Valley $ 2,084,531
12.15 % $ 1,480,006
8.625 % N/A
N/A
Valley National Bank 2,023,857
11.82
1,476,767
8.625
$ 1,712,193
10.00 %
Common Equity Tier 1 Capital
Valley 1,590,825
9.27
879,424
5.125
N/A
N/A
Valley National Bank 1,807,201
10.55
877,499
5.125
1,112,926
6.50
Tier 1 Risk-based Capital
Valley 1,698,767
9.90
1,136,816
6.625
N/A
N/A
Valley National Bank 1,807,201
10.55
1,134,328
6.625
1,369,755
8.00
Tier 1 Leverage Capital
Valley 1,698,767
7.74
878,244
4.00
N/A
N/A
Valley National Bank 1,807,201
8.25
876,026
4.00
1,095,032
5.00

The Dodd-Frank Act requires federal banking agencies to issue regulations that require banks with total consolidated assets of more than $10.0 billion to conduct and publish company-run annual stress tests to assess the potential impact of different scenarios on the consolidated earnings and capital of each bank and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities. The FRB, OCC, and FDIC issued final supervisory guidance for these stress tests. The guidance provides supervisory expectations for stress test practices, examples of practices that would be consistent with those expectations, and details about stress test methodologies. It also emphasizes the importance of stress testing as an ongoing risk management practice.

On July 27, 2017, we submitted our latest stress testing results, utilizing data as of December 31, 2016, to the FRB. The full disclosure of the stress testing results, including the results for Valley National Bank, a summary of the supervisory severely adverse scenario and additional information regarding the methodologies used to conduct the stress test may be found on the Shareholder Relations section of our website (www.valleynationalbank.com) under the Dodd-Frank Act Stress Test Reports section.

Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows:


	September 30, 2017			December 31, 2016			September 30, 2019		December 31, 2018
	($ in thousands, except for share data)						($ in thousands, except for share data)
Common shares outstanding	264,197,172			263,638,830			331,805,564		331,431,217
Shareholders’ equity	$	2,537,984		$	2,377,156		$	3,558,075	$	3,350,454
Less: Preferred stock	(209,691		)	(111,590		)	209,691		209,691
Less: Goodwill and other intangible assets	(733,498		)	(736,121		)	1,152,815		1,161,655
Tangible common shareholders’ equity	$	1,594,795		$	1,529,445		$	2,195,569	$	1,979,108
Tangible book value per common share	$	6.04		$	5.80		$	6.62	$	5.97
Book value per common share	$	8.81		$	8.59		$	10.09	$	9.48

Management believes the tangible book value per common share ratio provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and facilitates comparisons with the performance of others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in

accordance with U.S. GAAP. This non-GAAP financial measure may also be calculated differently from similar measures disclosed by other companies.

Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common stockholders) per common share. Our retention ratio was ~~32.7~~58.2 percent for the nine months ended September 30, ~~2017~~2019 as compared to ~~30.2~~41.3 percent for the year ended December 31, ~~2016.~~2018. Our retention ratio ~~may improve during~~increased from the ~~fourth~~year ended December 31, 2018 mainly due to the net gain from our sale leaseback transaction in the first quarter of ~~2017 due to, among other factors, expected solid loan growth~~2019 and incremental earnings improvement from LIFT initiatives completed during the third quarter of 2017. See the "Earnings Enhancement Program" section of the Executive Summary in this MD&A for more informationa continued strong focus by management on ~~LIFT.~~our operational efficiency.

Cash dividends declared amounted to $0.33per common share for ~~both~~each of the nine months ended September 30, ~~2017~~2019 and ~~2016, respectively.~~2018. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend ~~decision in this economic environment.~~decision. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow ~~in light of~~considering the increased capital levels as required under the Basel III rules. Prior to the date of this filing, Valley has received no objection or adverse guidance from the FRB or the OCC regarding the current level of its quarterly common stock dividend.

Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters

For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 in the MD&A section - “Off-Balance Sheet Arrangements” and Notes 12 and 13 to the consolidated financial statements included in this report.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See page 6668 for a discussion of interest rate sensitivity.



Item 4.	Controls and Procedures

(a) Disclosure controls and procedures. Valley maintains disclosure controls and procedures which, consistent with Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, ("Exchange Act") are defined to mean controls and other procedures that are designed to ensure that information required to be disclosed in the reports that Valley files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is accumulated and communicated to Valley’s management, including Valley’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.

Valley’s CEO and CFO, with the assistance of other members of Valley’s management, have evaluated the effectiveness of Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, Valley’s CEO and CFO have concluded that Valley’s disclosure controls and procedures ~~are~~were effective as of the end of the period covered by this report.

(b) Changes in internal controls over financial reporting.Valley’s CEO and CFO have also concluded that there have not been any changes in Valley’s internal control over financial reporting ~~during~~in the quarter ended September 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting.

Valley’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all ~~error~~errors and all fraud. A system of internal control, ~~system,~~ no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the system of internal control ~~system~~ are met. The design of a system of internal control ~~system~~ reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Valley have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of a simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of ~~controls~~internal control is based in part upon certain assumptions about the likelihood of future events. There can be no

assurance that any design will succeed in achieving its stated goals under all future ~~conditions. Over~~conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION



Item 1.	Legal Proceedings

In the normal course of business, we may be a party to various outstanding legal proceedings and claims. ~~See~~There have been no material changes in the legal proceedings previously disclosed under Part I, Item 3 and Note 15 to the consolidated financial statements within Valley’s Annual Report on Form 10-K for ~~further details.~~the year ended December 31, 2018.



Item 1A.	Risk Factors

~~Other than the additional risk factor described below, there~~There has been no material change in the risk factors previously disclosed under Part I, Item 1A of Valley’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

~~The acquisition of USAmeriBancorp, Inc. may not be successful, which may adversely affect our business, financial condition and results of operation.~~

In July 2017, we announced our entry into a merger agreement with USAmeriBancorp, Inc. (USAB) and its wholly-owned subsidiary, USAmeriBank, headquartered in Clearwater, Florida. The acquisition of USAB is subject to several conditions, including the receipt of necessary shareholder approvals. The satisfaction of such conditions could delay the acquisition of USAB for a significant period or prevent it from occurring. In addition, both Valley and USAB may terminate the merger agreement under certain circumstances, including but not limited to, if Valley’s share price falls below $11.00 in the preclosing measurement period. If we do not complete the acquisition of USAB or if it is significantly delayed, the expected benefits of such acquisition may not be fully realized, if at all, and we may incur significant expenses and our business and results of operations may be materially adversely affected.



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

During the quarter, we did not sell any equity securities not registered under the Securities Act of 1933, as amended. Purchases of equity securities by the issuer and affiliated purchasers during the three months ended September 30, ~~2017~~2019 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

Period
Total Number of
Shares Purchased (1)

Average
Price Paid
Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (2)

Maximum Number of
Shares that May Yet Be
Purchased Under the Plans (2)
July 1, 2017 to July 31, 2017 7,202
$ 11.83
—
4,112,465
August 1, 2017 to August 31, 2017 —
—
—
4,112,465
September 1, 2017 to September 30, 2017 1,484
11.19
—
4,112,465
Total 8,686
$ 11.72
—



Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans (2)	Maximum Number of Shares that May Yet Be Purchased Under the Plans (2)
July 1, 2019 to July 31, 2019	3,808	$	10.80	—	4,112,465
August 1, 2019 to August 31, 2019	859	11.07		—	4,112,465
September 1, 2019 to September 30, 2019	1,502	11.07		—	4,112,465
Total	6,169	$	10.89	—


(1)	Represents repurchases made in connection with the vesting of employee restricted stock awards.


(2)	On January 17, 2007, Valley publicly announced its intention to repurchase up to 4.7 million outstanding common shares in the open market or in privately negotiated transactions. The repurchase plan has no stated expiration date. No repurchase plans or programs expired or terminated during the three months ended September 30, ~~2017.~~2019.



Item 6.	Exhibits



~~(2)~~	~~Plan of acquisition, reorganization, arrangement, liquidation or succession:~~
	~~(2.1)~~	Agreement and Plan of Merger, dated July 26, 2017, by and between Valley National Bancorp and USAmeriBancorp, Inc., incorporated herein by reference to Exhibit 2.1 to the Registrant’s Form 8-K Current Report filed on July 28, 2017.
(3)	Articles of Incorporation and By-laws:
	(3.1)	Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 10-Q Quarterly Report filed ~~as of~~on November 7, 2017.*
	(3.2)	By-laws of the Registrant, as amended and restated, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K Current Report filed on ~~December 7, 2016.~~October 23, 2018.
(10)	Material Contracts
	(10.1)	Form of Change in Control Agreement for Senior Executive Vice President (covering Michael Hagedorn).*
(31.1)	Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by ~~Gerald H. Lipkin,~~Ira Robbins, Chairman of the Board, President and Chief Executive Officer of the Company.*
(31.2)	Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by ~~Alan~~Michael D. ~~Eskow,~~Hagedorn, Senior Executive Vice President and Chief Financial Officer of the Company.*
(32)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by ~~Gerald H. Lipkin,~~Ira Robbins, Chairman of the Board, President and Chief Executive Officer of the Company, and ~~Alan~~Michael D. ~~Eskow,~~Hagedorn, Senior Executive Vice President and Chief Financial Officer of the Company.*
(101)	Interactive Data File (XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) *
(104)	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)



*	Filed herewith.

8485

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




				VALLEY NATIONAL BANCORP
				(Registrant)

Date:				/s/ ~~Gerald H. Lipkin~~Ira Robbins
November 7, ~~2017~~2019				~~Gerald H. Lipkin~~Ira Robbins
				Chairman of the Board, President
				and Chief Executive Officer

Date:				/s/ ~~Alan~~Michael D. ~~Eskow~~Hagedorn
November 7, ~~2017~~2019				~~Alan~~Michael D. ~~Eskow~~Hagedorn
				Senior Executive Vice President and
				Chief Financial Officer

8586



	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



	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