UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)



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

For the Quarterly Period Ended ~~June 30, 2018~~March 31, 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
(Address of principal executive office)		(Zip code)

973-305-8800

(Registrant’s telephone number, including area code)

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, 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

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock (no par value), of which ~~331,469,947~~331,748,009 shares were outstanding as of ~~August 8, 2018~~May 7, 2019

TABLE OF CONTENTS



		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018	2
	Consolidated Statements of Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	3
	Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	4
	Consolidated Statements of ~~Cash Flows~~Changes in Shareholders' Equity for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	6
	Notes to Consolidated Financial Statements	78

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4642

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8272

Item 4.	Controls and Procedures	8273

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	8473

Item 1A.	Risk Factors	8473

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8474

Item 6.	Exhibits	8474

SIGNATURES		8575

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except for share data)


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Assets	(Unaudited)						(Unaudited)
Cash and due from banks	$	307,428		$	243,310		$	282,250		$	251,541
Interest bearing deposits with banks	164,838			172,800			184,347			177,088
Investment securities:
Held to maturity (fair value of $1,988,782 at June 30, 2018 and $1,837,620 at December 31, 2017)	2,030,194			1,842,691
Held to maturity (fair value of $2,066,970 at March 31, 2019 and $2,034,943 at December 31, 2018)							2,074,399			2,068,246
Available for sale	1,833,467			1,493,905			1,723,106			1,749,544
Total investment securities	3,863,661			3,336,596			3,797,505			3,817,790
Loans held for sale, at fair value	32,670			15,119			31,903			35,155
Loans	23,234,716			18,331,580			25,423,118			25,035,469
Less: Allowance for loan losses	(138,762		)	(120,856		)	(154,381		)	(151,859		)
Net loans	23,095,954			18,210,724			25,268,737			24,883,610
Premises and equipment, net	348,396			287,705			312,677			341,630
Lease right of use assets							289,669			—
Bank owned life insurance	437,037			386,079			440,845			439,602
Accrued interest receivable	88,155			73,990			100,722			95,296
Goodwill	1,078,892			690,637			1,084,665			1,084,665
Other intangible assets, net	83,966			42,507			73,580			76,990
Other assets	681,982			542,839			610,091			659,721
Total Assets	$	30,182,979		$	24,002,306		$	32,476,991		$	31,863,088
Liabilities
Deposits:
Non-interest bearing	$	6,217,420		$	5,224,928		$	6,352,135		$	6,175,495
Interest bearing:
Savings, NOW and money market	10,769,940			9,365,013			11,447,043			11,213,495
Time	4,653,412			3,563,521			7,108,318			7,063,984
Total deposits	21,640,772			18,153,462			24,907,496			24,452,974
Short-term borrowings	2,877,912			748,628			2,062,576			2,118,914
Long-term borrowings	2,103,993			2,315,819			1,499,727			1,654,268
Junior subordinated debentures issued to capital trusts	55,196			41,774			55,457			55,370
Lease liabilities							313,525			3,125
Accrued expenses and other liabilities	227,794			209,458			193,331			227,983
Total Liabilities	26,905,667			21,469,141			29,032,112			28,512,634
Shareholders’ Equity
Preferred stock, no par value; authorized 50,000,000:
Series A (4,600,000 shares issued at June 30, 2018 and December 31, 2017)	111,590			111,590
Series B (4,000,000 shares issued at June 30, 2018 and December 31, 2017)	98,101			98,101
Common stock (no par value, authorized 450,000,000 shares; issued 331,538,971 shares at June 30, 2018 and 264,498,643 shares at December 31, 2017)	116,027			92,727
Preferred stock, no par value; 50,000,000 authorized shares:
Series A (4,600,000 shares issued at March 31, 2019 and December 31, 2018)							111,590			111,590
Series B (4,000,000 shares issued at March 31, 2019 and December 31, 2018)							98,101			98,101
Common stock (no par value, authorized 450,000,000 shares; issued 332,062,473 shares at March 31, 2019 and 331,634,951 shares at December 31, 2018)							116,466			116,240
Surplus	2,789,190			2,060,356			2,799,434			2,796,499
Retained earnings	232,593			216,733			375,983			299,642
Accumulated other comprehensive loss	(69,124		)	(46,005		)	(53,257		)	(69,431		)
Treasury stock, at cost (84,946 common shares at June 30, 2018 and 29,792 common shares at December 31, 2017)	(1,065		)	(337		)
Treasury stock, at cost (329,837 common shares at March 31, 2019 and 203,734 common shares at December 31, 2018)							(3,438		)	(2,187		)
Total Shareholders’ Equity	3,277,312			2,533,165			3,444,879			3,350,454
Total Liabilities and Shareholders’ Equity	$	30,182,979		$	24,002,306		$	32,476,991		$	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 June 30,					Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017		2018			2017			2019			2018
Interest Income
Interest and fees on loans	$	247,690		$	181,720	$	485,276		$	356,073		$	288,277		$	237,586
Interest and dividends on investment securities:
Taxable	22,222			18,928		43,545			36,517			22,876			21,323
Tax-exempt	5,639			3,943		11,360			7,974			4,804			5,721
Dividends	3,728			2,137		5,667			4,288			3,174			1,939
Interest on federal funds sold and other short-term investments	839			279		1,765			610			1,093			926
Total interest income	280,118			207,007		547,613			405,462			320,224			267,495
Interest Expense
Interest on deposits:
Savings, NOW and money market	24,756			12,714		47,073			22,897			36,283			22,317
Time	16,635			10,166		31,251			19,719			38,171			14,616
Interest on short-term borrowings	10,913			5,516		16,645			9,417			12,549			5,732
Interest on long-term borrowings and junior subordinated debentures	17,062			13,791		34,294			26,741			14,573			17,232
Total interest expense	69,366			42,187		129,263			78,774			101,576			59,897
Net Interest Income	210,752			164,820		418,350			326,688			218,648			207,598
Provision for credit losses	7,142			3,632		18,090			6,102			8,000			10,948
Net Interest Income After Provision for Credit Losses	203,610			161,188		400,260			320,586			210,648			196,650
Non-Interest Income
Trust and investment services	3,262			2,800		6,492			5,544			2,904			3,230
Insurance commissions	4,026			4,358		7,847			9,419			2,525			3,821
Service charges on deposit accounts	6,679			5,342		13,932			10,578			5,903			7,253
(Losses) gains on securities transactions, net	(36		)	22		(801		)	(1		)
Losses on securities transactions, net												(32		)	(765		)
Fees from loan servicing	2,045			1,831		4,268			3,646			2,430			2,223
Gains on sales of loans, net	7,642			4,791		14,395			8,919			4,576			6,753
Gains (losses) on sales of assets, net												77,720			(97		)
Bank owned life insurance	2,652			1,701		4,415			4,164			1,887			1,763
Other	11,799			7,985		19,772			12,281			9,760			8,070
Total non-interest income	38,069			28,830		70,320			54,550			107,673			32,251
Non-Interest Expense
Salary and employee benefits expense	78,944			63,564		172,236			129,491			83,105			93,292
Net occupancy and equipment expense	26,901			22,609		54,825			45,644			27,886			27,924
FDIC insurance assessment	8,044			4,928		13,542			10,055			6,121			5,498
Amortization of other intangible assets	4,617			2,562		8,910			5,098			4,311			4,293
Professional and legal fees	5,337			4,302		22,384			8,997			5,271			17,047
Amortization of tax credit investments	4,470			7,732		9,744			13,056			7,173			5,274
Telecommunication expense	3,015			2,707		6,609			5,366			2,268			3,594
Other	18,588			10,835		35,418			22,484			11,660			16,830
Total non-interest expense	149,916			119,239		323,668			240,191			147,795			173,752
Income Before Income Taxes	91,763			70,779		146,912			134,945			170,526			55,149
Income tax expense	18,961			20,714		32,145			38,785			57,196			13,184
Net Income	$	72,802		$	50,065	$	114,767		$	96,160		113,330			41,965
Dividends on preferred stock	3,172			1,797		6,344			3,594			3,172			3,172
Net Income Available to Common Shareholders	$	69,630		$	48,268	$	108,423		$	92,566		$	110,158		$	38,793
Earnings Per Common Share:
Basic	$	0.21		$	0.18	$	0.33		$	0.35		$	0.33		$	0.12
Diluted	0.21			0.18		0.33			0.35			0.33			0.12
Cash Dividends Declared per Common Share	0.11			0.11		0.22			0.22			0.11			0.11
Weighted Average Number of Common Shares Outstanding:	Weighted Average Number of Common Shares Outstanding:											Weighted Average Number of Common Shares Outstanding:
Basic	331,318,381			263,958,292		331,024,531			263,878,103			331,601,260			330,727,416
Diluted	332,895,483			264,778,242		332,599,991			264,662,863			332,834,466			332,465,527

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Net income	$	72,802		$	50,065		$	114,767		$	96,160		$	113,330		$	41,965
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale securities
Net (losses) gains arising during the period	(6,461		)	1,896			(27,390		)	3,203
Less reclassification adjustment for net losses (gains) included in net income	30			(13		)	578			—
Total	(6,431		)	1,883			(26,812		)	3,203
Non-credit impairment losses on available for sale securities
Net change in non-credit impairment losses on securities	212			21			(56		)	134
Less reclassification adjustment for accretion of credit impairment losses included in net income	12			(39		)	(4		)	(126		)
Net gains (losses) arising during the period													16,267			(21,197		)
Less reclassification adjustment for net losses included in net income													26			532
Total	224			(18		)	(60		)	8			16,293			(20,665		)
Unrealized gains and losses on derivatives (cash flow hedges)
Net gains (losses) on derivatives arising during the period	455			(873		)	2,415			(746		)
Net (losses) gains on derivatives arising during the period													(382		)	1,960
Less reclassification adjustment for net losses included in net income	619			1,356			1,655			2,831			208			1,036
Total	1,074			483			4,070			2,085			(174		)	2,996
Defined benefit pension plan
Amortization of net loss	112			59			224			118			55			112
Total other comprehensive (loss) income	(5,021		)	2,407			(22,578		)	5,414
Total other comprehensive income (loss)													16,174			(17,557		)
Total comprehensive income	$	67,781		$	52,472		$	92,189		$	101,574		$	129,504		$	24,408

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY



			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



			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

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Cash flows from operating activities:
Net income	$	114,767		$	96,160		$	113,330		$	41,965
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,783			12,549			12,798			7,247
Stock-based compensation	12,153			6,872			4,033			7,395
Provision for credit losses	18,090			6,102			8,000			10,948
Net amortization of premiums and accretion of discounts on securities and borrowings	17,212			11,366			7,560			8,495
Amortization of other intangible assets	8,910			5,098			4,311			4,293
Losses on securities transactions, net	801			1			32			765
Proceeds from sales of loans held for sale	437,876			303,268			196,165			237,360
Gains on sales of loans, net	(14,395		)	(8,919		)	(4,576		)	(6,753		)
Originations of loans held for sale	(446,849		)	(154,475		)	(89,564		)	(227,660		)
Losses on sales of assets, net	222			453
(Gains) losses on sales of assets, net							(77,720		)	97
Net change in:
Cash surrender value of bank owned life insurance	(4,415		)	(4,164		)	(1,887		)	(1,763		)
Accrued interest receivable	(2,042		)	(2,916		)	(5,426		)	(691		)
Other assets	(55,464		)	(1,521		)	(38,990		)	19,480
Accrued expenses and other liabilities	(16,281		)	(20,709		)	65,212			(15,295		)
Net cash provided by operating activities	84,368			249,165			193,278			85,883
Cash flows from investing activities:
Net loan originations and purchases	(1,158,514		)	(707,654		)	(493,689		)	(475,346		)
Investment securities held to maturity:
Purchases	(100,160		)	(60,230		)	(77,670		)	(52,945		)
Maturities, calls and principal repayments	120,876			157,351			68,165			58,227
Investment securities available for sale:
Purchases	(239,226		)	(252,770		)	—			(174,047		)
Sales	38,625			—			—			38,625
Maturities, calls and principal repayments	124,635			87,188			45,351			60,858
Death benefit proceeds from bank owned life insurance	2,652			1,998			644			560
Proceeds from sales of real estate property and equipment	9,773			6,822			101,916			7,378
Purchases of real estate property and equipment	(12,811		)	(12,976		)	(3,817		)	(4,260		)
Cash and cash equivalents acquired in acquisition	156,612			—			—			156,612
Net cash used in investing activities	(1,057,538		)	(780,271		)	(359,100		)	(384,338		)
Cash flows from financing activities:
Net change in deposits	(77,533		)	(480,690		)	454,522			241,541
Net change in short-term borrowings	1,479,305			653,484			(56,338		)	219,809
Proceeds from issuance of long-term borrowings, net	—			560,000
Repayments of long-term borrowings	(300,027		)	(175,000		)	(155,000		)	(50,000		)
Cash dividends paid to preferred shareholders	(6,344		)	(3,594		)	—			(3,172		)
Cash dividends paid to common shareholders	(65,989		)	(58,000		)	(37,053		)	(29,611		)
Purchase of common shares to treasury	(2,598		)	(2,183		)	(1,367		)	(2,083		)
Common stock issued, net	2,512			2,377			(855		)	2,521
Other, net							(119		)	—
Net cash provided by financing activities	1,029,326			496,394			203,790			379,005
Net change in cash and cash equivalents	56,156			(34,712		)	37,968			80,550
Cash and cash equivalents at beginning of year	416,110			392,501			428,629			416,110
Cash and cash equivalents at end of period	$	472,266		$	357,789		$	466,597		$	496,660

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)

	Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2019		2018
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings	$	124,816	$	100,380	$	93,405	$	58,881
Federal and state income taxes	29,280		7,683		3,204		8,843
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned	$	672	$	5,865	$	730	$	145
Transfer of loans to loans held for sale	263,324		225,541		99,976		150,522
Lease right of use assets obtained in exchange for operating lease liabilities					289,669		—
Acquisition:
Non-cash assets acquired:
Investment securities held to maturity	$	214,217	$	—	$	—	$	214,217
Investment securities available for sale	308,385		—		—		308,385
Loans	3,744,682		—		—		3,736,984
Premises and equipment	62,066		—		—		62,066
Bank owned life insurance	49,052		—		—		49,052
Accrued interest receivable	12,123		—		—		12,123
Goodwill	388,255		—		—		394,028
Other intangible assets	45,906		—		—		45,906
Other assets	98,134		—		—		100,059
Total non-cash assets acquired	$	4,922,820	$	—	$	—	$	4,922,820
Liabilities assumed:
Deposits	$	3,564,843	$	—	$	—	$	3,564,843
Short-term borrowings	649,979		—		—		649,979
Long-term borrowings	87,283		—		—		87,283
Junior subordinated debentures issued to capital trusts	13,249		—		—		13,249
Accrued expenses and other liabilities	26,848		—		—		26,848
Total liabilities assumed	4,342,202		—		—		4,342,202
Net non-cash assets acquired	$	580,618	$	—	$	—	$	580,618
Net cash and cash equivalents acquired in acquisition	$	156,612	$	—	$	—	$	156,612
Common stock issued in acquisition	$	737,230	$	—	$	—	$	737,230

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

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

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations and cash flows at ~~June 30, 2018~~March 31, 2019 and for all periods presented have been made. The results of operations for the three ~~and six~~ months ended on ~~June 30, 2018~~March 31, 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; estimated cash flows from~~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, ~~2017.~~

~~Note 2. Business Combinations~~

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

Merger expenses totaled $3.2 million and $16.8 million for the three and six months ended June 30, 2018, respectively, which primarily related to salary and employee benefits and other expense included in non-interest expense on the consolidated statements of income.

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

January 1, 2018
(in thousands)
Assets acquired:
Cash and cash equivalents $ 156,612
Investment securities held to maturity 214,217
Investment securities available for sale 308,385
Loans 3,744,682
Premises and equipment 62,066
Bank owned life insurance 49,052
Accrued interest receivable 12,123
Goodwill 388,255
Other intangible assets 45,906
Other assets:
Deferred taxes 8,698
Other real estate owned 4,073
FHLB and FRB stock 38,809
Tax credit investments 20,138
Other 26,416
Total other assets 98,134
Total assets acquired $ 5,079,432
Liabilities assumed:
Deposits:
Non-interest bearing $ 887,083
Savings, NOW and money market 1,678,115
Time 999,645
Total deposits 3,564,843
Short-term borrowings 649,979
Long-term borrowings 87,283
Junior subordinated debentures issued to capital trusts 13,249
Accrued expenses and other liabilities 26,848
Total liabilities assumed $ 4,342,202
Common stock issued in acquisition 737,230

The determination of the fair value of the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information (existing at the date of closing) relative to closing date fair values becomes available. As Valley continues to analyze the acquired assets and liabilities, there may be adjustments to the recorded carrying values. However, Valley does not expect significant future adjustments to the recorded amounts at January 1, 2018.

~~Fair Value Measurement of Assets Acquired and Liabilities Assumed~~

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

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

~~Investment securities.~~ The estimated fair values of the investment securities were calculated utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service when available, or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. The prices are derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviewed the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

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

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

The difference between the fair value and the expected cash flows from the acquired loans will be accreted to interest income over the remaining term of the loans in accordance with Accounting Standards Codification (ASC) Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” See Note 8 for further details.

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

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

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

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

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

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

Note 3.2. Earnings Per Common Share

The following table shows the calculation of both basic and diluted earnings per common share for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018:



	Three Months Ended March 31,
	2019		2018
	(in thousands, except for share data)
Net income available to common shareholders	$	110,158	$	38,793
Basic weighted average number of common shares outstanding	331,601,260		330,727,416
Plus: Common stock equivalents	1,233,206		1,738,111
Diluted weighted average number of common shares outstanding	332,834,466		332,465,527
Earnings per common share:
Basic	$	0.33	$	0.12
Diluted	0.33		0.12

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands, except for share data)
Net income available to common shareholders $ 69,630
$ 48,268
$ 108,423
$ 92,566
Basic weighted average number of common shares outstanding 331,318,381
263,958,292
331,024,531
263,878,103
Plus: Common stock equivalents 1,577,102
819,950
1,575,460
784,760
Diluted weighted average number of common shares outstanding 332,895,483
264,778,242
332,599,991
264,662,863
Earnings per common share:
Basic $ 0.21
$ 0.18
$ 0.33
$ 0.35
Diluted 0.21
0.18
0.33
0.35

Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of restricted stock units, common stock options, and warrants to purchase Valley’s common shares. Common stock options and warrants with exercise prices that exceed the average market price of

Valley’s common stock during the periods presented have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation. Anti-dilutive ~~warrants and, to a lesser extent,~~

common stock options equaled approximately ~~2.9~~1.3 million ~~and 3.3 millionshares~~for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019. Anti-dilutive warrants and ~~2017, respectively.~~common stock options equaled 2.9 millionsharesfor the three months ended March 31, 2018. 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 six~~ months ended ~~June 30, 2018.~~March 31, 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 March 31, 2018 $ (32,865 ) $ (664 ) $ (5,403 ) $ (25,171 ) $ (64,103 )
Other comprehensive (loss) income before reclassifications (6,461 ) 212
455
—
(5,794 )
Amounts reclassified from other comprehensive (loss) income 30
12
619
112
773
Other comprehensive (loss) income, net (6,431 ) 224
1,074
112
(5,021 )
Balance at June 30, 2018 $ (39,296 ) $ (440 )
$ (4,329 )
$ (25,059 ) $ (69,124 )



	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	16,267			(382		)	—			15,885
Amounts reclassified from other comprehensive income (loss)	26			208			55			289
Other comprehensive income (loss), net	16,293			(174		)	55			16,174
Balance at March 31, 2019	$	(17,266	)	$	(4,205	)	$	(31,786	)	$	(53,257	)

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, 2017 $ (12,004 ) $ (380 ) $ (8,338 ) $ (25,283 ) $ (46,005 )
Reclassification due to the adoption of ASU No. 2016-01 (480 ) —
—
—
(480 )
Reclassification due to the adoption of ASU No. 2017-12 —
—
(61 ) —
(61 )
Balance at January 1, 2018 (12,484 ) (380 ) (8,399 ) (25,283 ) (46,546 )
Other comprehensive (loss) income before reclassification (27,390 ) (56 ) 2,415
—
(25,031 )
Amounts reclassified from other comprehensive (loss) income 578
(4 ) 1,655
224
2,453
Other comprehensive (loss) income, net (26,812 ) (60 ) 4,070
224
(22,578 )
Balance at June 30, 2018 $ (39,296 ) $ (440 ) $ (4,329 ) $ (25,059 ) $ (69,124 )

The following table presents amounts reclassified from each component of accumulated other comprehensive loss on a gross and net of tax basis for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~ 2018:


	Amounts Reclassified from Accumulated Other Comprehensive Loss													Amounts Reclassified from Accumulated Other Comprehensive Loss
	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
Components of Accumulated Other Comprehensive Loss	2018			2017			2018			2017			Income Statement Line Item	2019			2018			Income Statement Line Item
	(in thousands)													(in thousands)
Unrealized (losses) gains on AFS securities before tax	$	(36	)	$	22		$	(801	)	$	(1	)	(Losses) gains on securities transactions, net
Tax effect	6			(9		)	223			1
Total net of tax	(30		)	13			(578		)	—
Non-credit impairment losses on AFS securities before tax:
Accretion of credit loss impairment due to an increase in expected cash flows	(16		)	67			6			215			Interest and dividends on investment securities (taxable)
Unrealized losses on AFS securities before tax														$	(32	)	$	(743	)	Losses on securities transactions, net
Tax effect	4			(28		)	(2		)	(89		)		6			211
Total net of tax	(12		)	39			4			126				(26		)	(532		)
Unrealized losses on derivatives (cash flow hedges) before tax	(866		)	(2,314		)	(2,317		)	(4,832		)	Interest expense	(290		)	(1,451		)	Interest expense
Tax effect	247			958			662			2,001				82			415
Total net of tax	(619		)	(1,356		)	(1,655		)	(2,831		)		(208		)	(1,036		)
Defined benefit pension plan:
Amortization of net loss	(157		)	(101		)	(314		)	(202		)	*	(78		)	(157		)	*
Tax effect	45			42			90			84				23			45
Total net of tax	(112		)	(59		)	(224		)	(118		)		(55		)	(112		)
Total reclassifications, net of tax	$	(773	)	$	(1,363	)	$	(2,453	)	$	(2,823	)		$	(289	)	$	(1,680	)



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

Note 5.4. New Authoritative Accounting Guidance

New Accounting Guidance Adopted in ~~2018~~2019

Accounting Standards Update (ASU) No. ~~2017-12, "Derivatives~~2016-02, “Leases (Topic 842)” and ~~Hedging (Topic 815): 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 the annual and interim reporting periods beginning~~income statement.

Effective January 1, 2019, ~~with early adoption permitted.~~Valley adopted ASU No. 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 ~~early adopt ASU No. 2017-12 for annual and interim reporting periods beginning January 1, 2018. The adoption~~carry forward lease classifications under the prior accounting guidance (Topic 840). Additionally, the expedients enable the use of ~~ASU No. 2017-12 required~~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 to be used by~~result, Valley ~~and resulted in an immaterial cumulative-effect~~recorded a $4.4 million (net of tax) credit adjustment to the opening balance of retained earnings as of January 1, ~~2018~~2019. Valley also made accounting policy elections to ~~eliminate~~(i) separate non-lease components from its lease obligations with the ~~separate measurement~~non-lease components being charged to earnings when incurred and to (ii) exclude short-term leases of ~~ineffectiveness~~12 months or less from ~~accumulated comprehensive income (see Note 4).~~

~~ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving~~ the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" requires service cost to be reported in the same financial statement line item(s) as other current employee compensation costs. All other components of expense must be presented separately from service cost, and outside any subtotal of income from operations. Only the service cost component of expense is eligible to be capitalized. ASU No. 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. ASU No. 2017-07 was effective for Valley for its annual and interim reportingbalance sheet. The comparative periods ~~beginning January~~

~~1, 2018. ASU No. 2017-07 did not have a significant impact on the presentation of Valley's consolidated financial statements.~~

ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory”. Under current GAAP, the tax effects of intercompany sales are deferred until the transferred asset is sold to a third party or otherwise recovered through amortization. This is an exceptionprior to the ~~accounting for income taxes that generally requires recognition~~adoption date of current and deferred income taxes. ASU No. 2016-16 eliminates the exception for intercompany sales of assets. ASU No. 2016-16 was effective for Valley on January 1, 2018 and it was applied using the modified retrospective method. As a result, Valley recorded a $15.4 million cumulative effect adjustment that reduced retained earnings effective January 1, 2018Topic 842 will continue to ~~record net deferred tax liabilities related to pre-existing transactions.~~

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

ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” requires that: (i) equity investments with readily determinable fair values must be measured at fair value with changes in fair value recognized in net income, (ii) equity investments without readily determinable fair values must be measured at either fair value or at cost adjusted for changes in observable prices minus impairment with changes in value under either of these methods recognized in net income, (iii) entities that record financial liabilities at fair value due to a fair value option election must recognize changes in fair value caused by a change in instrument-specific credit risk in other comprehensive income, (iv) entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities, and (v) entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU No. 2016-01 also eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet (seeprior GAAP (Topic 840). See Note ~~6). ASU No. 2016-01 was effective for Valley for reporting periods beginning January 1, 2018 and did not have a material effect on Valley’s consolidated financial statements.~~

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related updates modify the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. The updates also require new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. Valley adopted the guidance on January 1, 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP. Accordingly, the new revenue recognition standard was not expected to have a material impact on Valley’s consolidated financial statements. Valley has completed its review of non-interest income revenue streams within the scope of the guidance and an assessment of its revenue contracts and did not identify material changes related to the timing or amount of revenue recognition. Therefore, Valley did not record an adjustment to opening retained earnings at January 1, 2018 due to the adoption of this standard. Valley has also concluded that additional disaggregation of revenue categories (as reported herein and consistent with the Annual Report on Form 10-K9 for the ~~year ended December 31, 2017) that are within the scope of the new guidance is not necessary. Qualitative disclosures regarding such revenues, as~~additional required ~~by the new guidance, are presented in Note 12.~~

~~New Accounting Guidance Not Yet Adopted~~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. 2019-01, "Leases (Topic 842): Codification Improvements" reinstates the 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 lessors that are depository or lending institutions in the scope of ASC 842 to classify the principal portion of lease payments received under sales-type and direct financing leases as cash flows from investing activities. The interest portion of those and all lease payments received under operating leases are classified as cash flows from operating activities. Effective January 1, 2019, Valley early adopted ASU No. 2019-01 concurrent with its adoption of the ASC 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. 2019-04, "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.

ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments. ASU No. 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on all expected losses over the lives of the assets rather than incurred losses. Under the new guidance, an entity is required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 is effective for Valley for reporting periods beginning January 1, 2020. Management is currently evaluating the impact of the ASU on Valley’s consolidated financial statements. Valley’s implementation effort is managed through several cross-functional working groups. These groups continue to evaluate the requirements of the new standard, assess its impact on current operational processes, and develop loss models that accurately project lifetime expected loss estimates. Valley expects that the adoption of ASU No. 2016-13 will result in an increase in its allowance for credit losses due to several factors, including: (i) the allowance related to Valley loans will increase to include credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions, (ii) the ~~nonaccretable~~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, and (iii) an allowance will be established for estimated credit losses on investment securities classified as held to maturity. The extent of the increase is under evaluation but will depend upon the nature and characteristics of Valley's loan and investment portfolios at the adoption date, and the economic conditions and forecasts at that date.

ASU No. 2016-02, “Leases (Topic 842)” and subsequent related updates require the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for Valley for reporting periods beginning January 1, 2019, with early adoption permitted. Valley expects to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019 under the new optional

transition method provided by ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements". The comparative prior periods reported in the financial statements in the period of adoption will continue to be presented in accordance with current GAAP in Topic 840. In addition, the amendments in ASU No. 2018-11 provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component. Those components can be accounted for as a single component if the non-lease components would otherwise be accounted for under the new revenue guidance (Topic 606) when certain criteria are met. Overall, management continues to evaluate the impact of Topic 842 on Valley’s consolidated financial statements and presently evaluating all of its known leases for compliance with the new lease accounting guidance. Management has completed an initial review of Valley's contractual arrangements for embedded leases, and is currently validating the results of this review and accumulating the lease data necessary to apply the new guidance. Valley expects a gross-up of its consolidated statements of financial condition as a result of recognizing lease liabilities and right of use assets; the extent of such gross-up is under evaluation. Valley does not expect material changes to the recognition of operating lease expense in its consolidated statements of income.

Note 6.5. Fair Value Measurement of Assets and Liabilities

ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:



•	Level 1	- Unadjusted exchange quoted prices in active markets for identical assets or liabilities, or identical liabilities traded as assets that the reporting entity has the ability to access at the measurement date.



•	Level 2	- Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly (i.e., quoted prices on similar assets), for substantially the full term of the asset or liability.



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

1511

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

The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. The assets presented under “nonrecurring fair value measurements” in the tables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized).

June 30,
2018 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 $ 48,667
$ 48,667
$ —
$ —
U.S. government agency securities 38,006
—
38,006
—
Obligations of states and political subdivisions 211,529
—
211,529
—
Residential mortgage-backed securities 1,477,846
—
1,471,403
6,443
Trust preferred securities 2,279
—
2,279
—
Corporate and other debt securities 55,140
7,629
47,511
—
Total available for sale 1,833,467
56,296
1,770,728
6,443
Loans held for sale ⁽¹⁾
32,670
—
32,670
—
Other assets ⁽²⁾
30,132
—
30,132
—
Total assets $ 1,896,269
$ 56,296
$ 1,833,530
$ 6,443
Liabilities
Other liabilities ⁽²⁾
$ 37,902
$ —
$ 37,902
$ —
Total liabilities $ 37,902
$ —
$ 37,902
$ —
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾
$ 36,957
$ —
$ —
$ 36,957
Loan servicing rights 2,212
—
—
2,212
Foreclosed assets 1,239
—
—
1,239
Total $ 40,408
$ —
$ —
$ 40,408


			Fair Value Measurements at Reporting Date Using:						March 31, 2019		Fair Value Measurements at Reporting Date Using:
	December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		March 31, 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	$	49,642	$	49,642	$	—	$	—	$	49,854	$	49,854	$	—	$	—
U.S. government agency securities	42,505		—		42,505		—		34,553		—		34,553		—
Obligations of states and political subdivisions	112,884		—		112,884		—		193,950		—		193,950		—
Residential mortgage-backed securities	1,223,295		—		1,215,935		7,360		1,409,616		—		1,409,616		—
Trust preferred securities	3,214		—		3,214		—
Corporate and other debt securities	51,164		7,783		43,381		—		35,133		—		35,133		—
Equity securities	11,201		1,382		9,819		—
Total available for sale	1,493,905		58,807		1,427,738		7,360		1,723,106		49,854		1,673,252		—
Loans held for sale ⁽¹⁾	15,119		—		15,119		—		31,903		—		31,903		—
Other assets ⁽²⁾	26,417		—		26,417		—		79,252		—		79,252		—
Total assets	$	1,535,441	$	58,807	$	1,469,274	$	7,360	$	1,834,261	$	49,854	$	1,784,407	$	—
Liabilities
Other liabilities ⁽²⁾	$	24,330	$	—	$	24,330	$	—	$	22,676	$	—	$	22,676	$	—
Total liabilities	$	24,330	$	—	$	24,330	$	—	$	22,676	$	—	$	22,676	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	48,373	$	—	$	—	$	48,373	$	46,025	$	—	$	—	$	46,025
Loan servicing rights	5,350		—		—		5,350		1,938		—		—		1,938
Foreclosed assets	3,472		—		—		3,472		6,431		—		—		6,431
Total	$	57,195	$	—	$	—	$	57,195	$	54,394	$	—	$	—	$	54,394



			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 ~~$32.1~~$31.1 million and ~~$14.8~~$34.6 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~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 six months ended June 30, 2018 and 2017 are summarized below:~~

Available for Sale Securities
Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands)
Balance, beginning of the period $ 6,498
$ 11,367
$ 7,360
$ 11,888
Total net gains (losses) included in other comprehensive income 313
(31 ) (85 ) 13
Settlements, net (368 ) (606 ) (832 ) (1,171 )
Balance, end of the period $ 6,443
$ 10,730
$ 6,443
$ 10,730

No changes in unrealized gains or losses on Level 3 securities were included in earnings during the three and six months ended June 30, 2018 and 2017. There were no transfers of assets into or out of Level 3, or between Level 1 and Level 2, during the three and six months ended June 30, 2018 and 2017.

~~There have been no material changes in the valuation methodologies used at June 30, 2018 from December 31, 2017.~~

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Available for sale securities.

All U.S. Treasury securities, certain corporate and other debt securities, and certain preferred equity securities are reported at fair value utilizing Level 1 inputs. The majority of other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. For certain securities, the inputs used by either dealer market participants or an independent pricing service may be derived from unobservable market information (Level 3 inputs). In these instances, Valley evaluates the appropriateness and quality of the assumption and the resulting price. In addition, Valley reviews the volume and level of activity for all available for sale and trading securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value and this results in fair values based on Level 3 inputs. In determining fair value, Valley utilizes unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing each security. In developing its assertion of market participant assumptions, Valley utilizes the best information that is both reasonable and available without undue cost and effort.

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

~~The following table presents quantitative information about Level 3 inputs used to measure the fair value of these securities at June 30, 2018:~~



~~Security Type~~	~~Valuation~~ ~~Technique~~	~~Unobservable~~ ~~Input~~	~~Range~~	~~Weighted~~ ~~Average~~

~~Private label mortgage-backed securities~~	~~Discounted cash flow~~	~~Prepayment rate~~	~~1.8 - 28.8%~~	~~13.0~~	%
		~~Default rate~~	~~3.1 - 47.4~~	~~8.9~~
		~~Loss severity~~	~~45.4 - 62.0~~	~~57.1~~

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.

The cash flow assumptions for the Level 3 securities incorporated independent third party market participant data based on vintage year for each security. The discount rate utilized in determining the present value of cash flows for the mortgage-backed securities was arrived at by combining the yield on orderly transactions for similar maturity government sponsored mortgage-backed securities with (i) the historical average risk premium of similar structured private label securities, (ii) a risk premium reflecting current market conditions, including liquidity risk, and (iii) if applicable, a forecasted loss premium derived from the expected cash flows of each security. The estimated cash flows for each private label mortgage-backed security were then discounted at the aforementioned effective rate to determine the fair value. The quoted prices received from either market participants or independent pricing services are weighted with the internal price estimate to determine the fair value of each instrument.

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017)~~2018), is determined based on the current market prices for similar instruments provided by Fannie Mae and Freddie Mac. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~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 ~~June 30, 2018,~~March 31, 2019, certain appraisals were discounted based on specific market data by location and property type. During the quarter ended ~~June 30, 2018,~~March 31, 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. ~~The~~There were no collateral

dependent loan charge-offs to the allowance for loan losses ~~were immaterial~~ for the three ~~and six~~ months ended ~~June 30, 2018 as compared to $1.9 million~~March 31, 2019 and ~~$2.1 million for the three and six months ended June 30, 2017, respectively.~~2018. At ~~June 30, 2018,~~March 31, 2019, collateral dependent impaired loans with a total recorded investment of ~~$60.3~~$76.1 million were reduced by specific valuation allowance allocations totaling ~~$23.3~~$30.1 million to a reported total net carrying amount of ~~$37.0~~$46.0 million.

Loan servicing rights. Fair values for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third party vendor that requires inputs that are both significant to the fair value measurement and unobservable (Level 3). The fair value model is based on various assumptions, including but not limited to, prepayment speeds, internal rate of return (“discount rate”), servicing cost, ancillary income, float rate, tax rate, and inflation. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At ~~June 30, 2018,~~March 31, 2019, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 2429 percent and a discount rate of 8 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. Valley recorded net ~~recoveries of net~~ impairment charges on its loan servicing rights

totaling ~~$90 thousand and $317~~$24 thousand for the three ~~and six~~ months ended ~~June 30, 2018, respectively, and $50 thousand and $51~~March 31, 2019 as compared to net recoveries of net impairment charges totaling $227 thousand for the three ~~and six~~months ended ~~June 30, 2017,~~March 31, 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 ~~June 30, 2018.~~March 31, 2019. At ~~June 30, 2018,~~March 31, 2019, foreclosed assets included ~~$1.2~~$6.3 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended ~~June 30, 2018.~~March 31, 2019. The foreclosed assets charge-offs to the allowance for the loan losses totaled ~~$649~~$788 thousand and ~~$282~~$541 thousand for the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $1.2 million and $994 thousand for the six months ended June 30, 2018 and 2017,~~ respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in immaterial

net losses within non-interest expense ~~of $145 thousand~~ ~~and~~ ~~$290 thousand~~ for the ~~six~~three months ended ~~June 30, 2018 and 2017, respectively.~~March 31, 2019. There were no foreclosed assets that were remeasured at fair value subsequent to their initial recognition for the three months ended March 31, 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.

The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were as follows:


	Fair Value Hierarchy	June 30, 2018				December 31, 2017				Fair Value Hierarchy	March 31, 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	$	307,428	$	307,428	$	243,310	$	243,310	Level 1	$	282,250	$	282,250	$	251,541	$	251,541
Interest bearing deposits with banks	Level 1	164,838		164,838		172,800		172,800		Level 1	184,347		184,347		177,088		177,088
Investment securities held to maturity:
U.S. Treasury securities	Level 1	138,598		141,605		138,676		145,257		Level 1	138,478		142,899		138,517		142,049
U.S. government agency securities	Level 2	9,447		9,280		9,859		9,981		Level 2	8,236		8,069		8,721		8,641
Obligations of states and political subdivisions	Level 2	615,651		616,786		465,878		477,479		Level 2	551,501		559,838		585,656		586,033
Residential mortgage-backed securities	Level 2	1,185,165		1,146,450		1,131,945		1,118,044		Level 2	1,306,625		1,292,364		1,266,770		1,235,605
Trust preferred securities	Level 2	49,833		43,334		49,824		40,088		Level 2	37,309		31,601		37,332		31,486
Corporate and other debt securities	Level 2	31,500		31,327		46,509		46,771		Level 2	32,250		32,199		31,250		31,129
Total investment securities held to maturity		2,030,194		1,988,782		1,842,691		1,837,620			2,074,399		2,066,970		2,068,246		2,034,943
Net loans	Level 3	23,095,954		22,752,737		18,210,724		17,562,153		Level 3	25,268,737		24,766,120		24,883,610		24,068,755
Accrued interest receivable	Level 1	88,155		88,155		73,990		73,990		Level 1	100,722		100,722		95,296		95,296
Federal Reserve Bank and Federal Home Loan Bank stock⁽¹⁾	Level 1	291,705		291,705		178,668		178,668		Level 1	222,630		222,630		232,080		232,080
Financial liabilities
Deposits without stated maturities	Level 1	16,987,360		16,987,360		14,589,941		14,589,941		Level 1	17,799,178		17,799,178		17,388,990		17,388,990
Deposits with stated maturities	Level 2	4,653,412		4,604,918		3,563,521		3,465,373		Level 2	7,108,318		7,127,215		7,063,984		7,005,573
Short-term borrowings	Level 1	2,877,912		2,580,009		748,628		679,316		Level 1	2,062,576		2,006,439		2,118,914		2,091,892
Long-term borrowings	Level 2	2,103,993		1,812,019		2,315,819		2,453,797		Level 2	1,499,727		1,615,030		1,654,268		1,751,194
Junior subordinated debentures issued to capital trusts	Level 2	55,196		48,918		41,774		37,289		Level 2	55,457		55,474		55,370		55,692
Accrued interest payable ⁽²⁾	Level 1	18,608		18,608		14,161		14,161		Level 1	33,933		33,933		25,762		25,762


(1)	Included in other assets.


(2)	Included in accrued expenses and other liabilities.

2116

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
March 31, 2019
U.S. Treasury securities	$	138,478	$	4,421	$	—		$	142,899
U.S. government agency securities	8,236		16		(183		)	8,069
Obligations of states and political subdivisions:
Obligations of states and state agencies	315,954		5,994		(2,086		)	319,862
Municipal bonds	235,547		4,562		(133		)	239,976
Total obligations of states and political subdivisions	551,501		10,556		(2,219		)	559,838
Residential mortgage-backed securities	1,306,625		6,970		(21,231		)	1,292,364
Trust preferred securities	37,309		68		(5,776		)	31,601
Corporate and other debt securities	32,250		144		(195		)	32,199
Total investment securities held to maturity	$	2,074,399	$	22,175	$	(29,604	)	$	2,066,970
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)
June 30, 2018
U.S. Treasury securities $ 138,598
$ 3,007
$ —
$ 141,605
U.S. government agency securities 9,447
21
(188 ) 9,280
Obligations of states and political subdivisions:
Obligations of states and state agencies 355,219
4,940
(5,862 ) 354,297
Municipal bonds 260,432
3,634
(1,577 ) 262,489
Total obligations of states and political subdivisions 615,651
8,574
(7,439 ) 616,786
Residential mortgage-backed securities 1,185,165
2,493
(41,208 ) 1,146,450
Trust preferred securities 49,833
78
(6,577 ) 43,334
Corporate and other debt securities 31,500
119
(292 ) 31,327
Total investment securities held to maturity $ 2,030,194
$ 14,292
$ (55,704 ) $ 1,988,782
December 31, 2017
U.S. Treasury securities $ 138,676
$ 6,581
$ —
$ 145,257
U.S. government agency securities 9,859
122
—
9,981
Obligations of states and political subdivisions:
Obligations of states and state agencies 244,272
7,083
(1,653 ) 249,702
Municipal bonds 221,606
6,199
(28 ) 227,777
Total obligations of states and political subdivisions 465,878
13,282
(1,681 ) 477,479
Residential mortgage-backed securities 1,131,945
4,842
(18,743 ) 1,118,044
Trust preferred securities 49,824
60
(9,796 ) 40,088
Corporate and other debt securities 46,509
532
(270 ) 46,771
Total investment securities held to maturity $ 1,842,691
$ 25,419
$ (30,490 ) $ 1,837,620

2217

The age of unrealized losses and fair value of related securities held to maturity at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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)
March 31, 2019
U.S. government agency securities	$	—	$	—		$	5,707	$	(183	)	$	5,707	$	(183	)
Obligations of states and political subdivisions:
Obligations of states and state agencies	—		—			100,897		(2,086		)	100,897		(2,086		)
Municipal bonds	1,188		(20		)	15,236		(113		)	16,424		(133		)
Total obligations of states and political subdivisions	1,188		(20		)	116,133		(2,199		)	117,321		(2,219		)
Residential mortgage-backed securities	13,136		(85		)	835,504		(21,146		)	848,640		(21,231		)
Trust preferred securities	—		—			30,180		(5,776		)	30,180		(5,776		)
Corporate and other debt securities	4,947		(53		)	4,858		(142		)	9,805		(195		)
Total	$	19,271	$	(158	)	$	992,382	$	(29,446	)	$	1,011,653	$	(29,604	)
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)
June 30, 2018
U.S. government agency securities $ 6,527
$ (188 ) $ —
$ —
$ 6,527
$ (188 )
Obligations of states and political subdivisions:
Obligations of states and state agencies 125,371
(2,503 ) 46,899
(3,359 ) 172,270
(5,862 )
Municipal bonds 87,785
(1,546 ) 533
(31 ) 88,318
(1,577 )
Total obligations of states and political subdivisions 213,156
(4,049 ) 47,432
(3,390 ) 260,588
(7,439 )
Residential mortgage-backed securities 425,381
(12,139 ) 555,355
(29,069 ) 980,736
(41,208 )
Trust preferred securities —
—
29,903
(6,577 ) 29,903
(6,577 )
Corporate and other debt securities 10,478
(22 ) 4,731
(270 ) 15,209
(292 )
Total $ 655,542
$ (16,398 ) $ 637,421
$ (39,306 ) $ 1,292,963
$ (55,704 )
December 31, 2017
Obligations of states and political subdivisions:
Obligations of states and state agencies $ 6,342
$ (50 ) $ 53,034
$ (1,603 ) $ 59,376
$ (1,653 )
Municipal bonds 4,644
(25 ) 561
(3 ) 5,205
(28 )
Total obligations of states and political subdivisions 10,986
(75 ) 53,595
(1,606 ) 64,581
(1,681 )
Residential mortgage-backed securities 344,216
(2,357 ) 570,969
(16,386 ) 915,185
(18,743 )
Trust preferred securities —
—
38,674
(9,796 ) 38,674
(9,796 )
Corporate and other debt securities 9,980
(270 ) —
—
9,980
(270 )
Total $ 365,182
$ (2,702 ) $ 663,238
$ (27,788 ) $ 1,028,420
$ (30,490 )

The unrealized losses on investment securities held to maturity are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was ~~362~~268 at ~~June 30, 2018~~March 31, 2019 and ~~152~~378 at December 31, ~~2017.~~2018.

The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at ~~June 30, 2018~~March 31, 2019 mostly related to investment grade securities issued by Ginnie Mae and Fannie Mae.

The unrealized losses existing for more than twelve months for trust preferred securities at ~~June 30, 2018~~March 31, 2019 primarily related to four non-rated single-issuer trust preferred securities issued by bank holding companies. All single-issuer trust preferred securities classified as held to maturity are paying in accordance with their terms, have no deferrals of interest or defaults and, if applicable, the issuers meet the regulatory capital requirements to be considered “well-capitalized institutions” at ~~June 30, 2018.~~March 31, 2019.

As of ~~June 30, 2018,~~March 31, 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 ~~$1.1~~$1.2 billion.

The contractual maturities of investments in debt securities held to maturity at ~~June 30, 2018~~March 31, 2019 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the

2318

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.



	March 31, 2019
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	25,484	$	25,583
Due after one year through five years	252,960		257,616
Due after five years through ten years	250,865		260,318
Due after ten years	238,465		231,089
Residential mortgage-backed securities	1,306,625		1,292,364
Total investment securities held to maturity	$	2,074,399	$	2,066,970

June 30, 2018

Amortized
Cost

Fair
Value
(in thousands)
Due in one year $ 13,524
$ 13,580
Due after one year through five years 223,219
226,330
Due after five years through ten years 321,954
329,369
Due after ten years 286,332
273,053
Residential mortgage-backed securities 1,185,165
1,146,450
Total investment securities held to maturity $ 2,030,194
$ 1,988,782

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 ~~8.4~~8.0 years at ~~June 30, 2018.~~March 31, 2019.

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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)
June 30, 2018
March 31, 2019
U.S. Treasury securities	$	50,986	$	—	$	(2,319	)	$	48,667	$	50,969	$	—	$	(1,115	)	$	49,854
U.S. government agency securities	39,212		34		(1,240		)	38,006		34,734		57		(238		)	34,553
Obligations of states and political subdivisions:
Obligations of states and state agencies	110,580		52		(2,636		)	107,996		97,111		189		(2,840		)	94,460
Municipal bonds	104,922		281		(1,670		)	103,533		99,286		500		(296		)	99,490
Total obligations of states and political subdivisions	215,502		333		(4,306		)	211,529		196,397		689		(3,136		)	193,950
Residential mortgage-backed securities	1,525,041		1,330		(48,525		)	1,477,846		1,429,847		3,093		(23,324		)	1,409,616
Trust preferred securities	2,583		—		(304		)	2,279
Corporate and other debt securities	55,629		219		(708		)	55,140		35,410		102		(379		)	35,133
Total investment securities available for sale	$	1,888,953	$	1,916	$	(57,402	)	$	1,833,467	$	1,747,357	$	3,941	$	(28,192	)	$	1,723,106
December 31, 2017
December 31, 2018
U.S. Treasury securities	$	50,997	$	—	$	(1,355	)	$	49,642	$	50,975	$	—	$	(1,669	)	$	49,306
U.S. government agency securities	42,384		158		(37		)	42,505		36,844		71		(638		)	36,277
Obligations of states and political subdivisions:
Obligations of states and state agencies	38,435		158		(374		)	38,219		100,777		18		(3,682		)	97,113
Municipal bonds	74,752		477		(564		)	74,665		101,207		209		(1,437		)	99,979
Total obligations of states and political subdivisions	113,187		635		(938		)	112,884		201,984		227		(5,119		)	197,092
Residential mortgage-backed securities	1,239,534		2,423		(18,662		)	1,223,295		1,469,059		1,484		(40,761		)	1,429,782
Trust preferred securities	3,726		—		(512		)	3,214
Corporate and other debt securities	50,701		623		(160		)	51,164		37,542		213		(668		)	37,087
Equity securities	10,505		1,190		(494		)	11,201
Total investment securities available for sale	$	1,511,034	$	5,029	$	(22,158	)	$	1,493,905	$	1,796,404	$	1,995	$	(48,855	)	$	1,749,544

2419

The age of unrealized losses and fair value of related securities available for sale at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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)
March 31, 2019
U.S. Treasury securities	$	—	$	—		$	49,852	$	(1,115	)	$	49,852	$	(1,115	)
U.S. government agency securities	—		—			27,180		(238		)	27,180		(238		)
Obligations of states and political subdivisions:
Obligations of states and state agencies	1,549		(2		)	65,205		(2,838		)	66,754		(2,840		)
Municipal bonds	1,624		(47		)	40,689		(249		)	42,313		(296		)
Total obligations of states and political subdivisions	3,173		(49		)	105,894		(3,087		)	109,067		(3,136		)
Residential mortgage-backed securities	24,221		(98		)	1,163,750		(23,226		)	1,187,971		(23,324		)
Corporate and other debt securities	7,394		(106		)	14,642		(273		)	22,036		(379		)
Total	$	34,788	$	(253	)	$	1,361,318	$	(27,939	)	$	1,396,106	$	(28,192	)
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)
June 30, 2018
U.S. Treasury securities $ 901
$ (13 ) $ 47,766
$ (2,306 ) $ 48,667
$ (2,319 )
U.S. government agency securities 30,485
(1,240 ) —
—
30,485
(1,240 )
Obligations of states and political subdivisions:
Obligations of states and state agencies 96,617
(2,301 ) 8,041
(335 ) 104,658
(2,636 )
Municipal bonds 69,301
(1,251 ) 12,010
(419 ) 81,311
(1,670 )
Total obligations of states and political subdivisions 165,918
(3,552 ) 20,051
(754 ) 185,969
(4,306 )
Residential mortgage-backed securities 875,444
(21,543 ) 553,585
(26,982 ) 1,429,029
(48,525 )
Trust preferred securities —
—
2,279
(304 ) 2,279
(304 )
Corporate and other debt securities 22,622
(460 ) 14,756
(248 ) 37,378
(708 )
Total $ 1,095,370
$ (26,808 ) $ 638,437
$ (30,594 ) $ 1,733,807
$ (57,402 )
December 31, 2017
U.S. Treasury securities $ 916
$ (2 ) $ 48,726
$ (1,353 ) $ 49,642
$ (1,355 )
U.S. government agency securities 31,177
(37 ) —
—
31,177
(37 )
Obligations of states and political subdivisions:
Obligations of states and state agencies 13,337
(131 ) 7,792
(243 ) 21,129
(374 )
Municipal bonds 31,669
(256 ) 12,133
(308 ) 43,802
(564 )
Total obligations of states and political subdivisions 45,006
(387 ) 19,925
(551 ) 64,931
(938 )
Residential mortgage-backed securities 406,940
(2,461 ) 599,167
(16,201 ) 1,006,107
(18,662 )
Trust preferred securities —
—
3,214
(512 ) 3,214
(512 )
Corporate and other debt securities 5,855
(45 ) 15,115
(115 ) 20,970
(160 )
Equity securities —
—
5,150
(494 ) 5,150
(494 )
Total $ 489,894
$ (2,932 ) $ 691,297
$ (19,226 ) $ 1,181,191
$ (22,158 )

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 ~~June 30, 2018~~March 31, 2019 was ~~567~~449 as compared to ~~327~~545 at December 31, ~~2017.~~2018.

The unrealized losses for the residential mortgage-backed securities category of the available for sale portfolio at ~~June 30, 2018~~March 31, 2019 largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac.

As of ~~June 30, 2018,~~March 31, 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 ~~$1.0~~$1.1 billion.

The contractual maturities of debt securities available for sale at ~~June 30, 2018~~March 31, 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.



	March 31, 2019
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	5,705	$	5,692
Due after one year through five years	127,911		126,534
Due after five years through ten years	72,288		70,620
Due after ten years	111,606		110,644
Residential mortgage-backed securities	1,429,847		1,409,616
Total investment securities available for sale	$	1,747,357	$	1,723,106

June 30, 2018

Amortized
Cost

Fair
Value
(in thousands)
Due in one year $ 18,801
$ 18,876
Due after one year through five years 127,790
124,100
Due after five years through ten years 80,582
79,923
Due after ten years 136,739
132,723
Residential mortgage-backed securities 1,525,041
1,477,845
Total investment securities available for sale $ 1,888,953
$ 1,833,467

The weighted average remaining expected life for residential mortgage-backed securities available for sale was ~~8.4~~8.3 years at ~~June 30, 2018.~~March 31, 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; 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 (including one pooled security at June 30, 2018) and corporate bonds (some issued by banks). These investments may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S. economy and its potential negative effect on the future performance of the security issuers and, if applicable, the underlying mortgage loan collateral of the security.

There were no other-than-temporary impairment losses on securities recognized in earnings for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. Management does not believe that any individual unrealized loss as of ~~June 30, 2018~~March 31, 2019 included in the investment portfolio tables above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates and market volatility, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.

~~At June 30, 2018, four previously impaired private label mortgage-backed securities had a combined amortized cost and fair value of $7.0 million and $6.4 million, respectively.~~

Realized Gains and Losses

Net losses on securities transactions totaled ~~$36~~$32 thousand and ~~$801~~$765 thousand for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, respectively. ~~The net~~Net losses on securities transactions for the ~~six~~three months ended ~~June 30,~~March 31, 2018 were mainly related to sales of equity securities classified as available for sale prior to the adoption of ASU No. 2016-01 on January 1, 2018 and ~~a portion of the total~~certain municipal securities ~~acquired~~ from ~~USAB. Net gains and losses~~the acquisition of USAmeriBancorp, Inc. on ~~securities transactions were immaterial for the three and six months ended June 30, 2017.~~January 1, 2018.

2621

Note 8.7. Loans

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



	March 31, 2019						December 31, 2018
	Non-PCI Loans		PCI Loans		Total		Non-PCI Loans		PCI Loans		Total
	(in thousands)
Loans:
Commercial and industrial	$	3,786,742	$	718,185	$	4,504,927	$	3,590,375	$	740,657	$	4,331,032
Commercial real estate:
Commercial real estate	10,189,388		2,476,037		12,665,425		9,912,309		2,494,966		12,407,275
Construction	1,199,741		254,458		1,454,199		1,122,348		365,784		1,488,132
Total commercial real estate loans	11,389,129		2,730,495		14,119,624		11,034,657		2,860,750		13,895,407
Residential mortgage	3,660,983		410,254		4,071,237		3,682,984		428,416		4,111,400
Consumer:
Home equity	381,217		131,849		513,066		371,340		145,749		517,089
Automobile	1,347,405		354		1,347,759		1,319,206		365		1,319,571
Other consumer	853,302		13,203		866,505		846,821		14,149		860,970
Total consumer loans	2,581,924		145,406		2,727,330		2,537,367		160,263		2,697,630
Total loans	$	21,418,778	$	4,004,340	$	25,423,118	$	20,845,383	$	4,190,086	$	25,035,469

June 30, 2018 December 31, 2017

Non-PCI
Loans
PCI Loans* Total
Non-PCI
Loans
PCI Loans* Total
(in thousands)
Loans:
Commercial and industrial $ 3,021,524
$ 808,001
$ 3,829,525
$ 2,549,065
$ 192,360
$ 2,741,425
Commercial real estate:
Commercial real estate 9,109,645
2,804,185
11,913,830
8,561,851
934,926
9,496,777
Construction 996,702
380,030
1,376,732
809,964
41,141
851,105
Total commercial real estate loans 10,106,347
3,184,215
13,290,562
9,371,815
976,067
10,347,882
Residential mortgage 3,051,429
477,253
3,528,682
2,717,744
141,291
2,859,035
Consumer:
Home equity 358,043
162,806
520,849
373,631
72,649
446,280
Automobile 1,281,303
432
1,281,735
1,208,804
98
1,208,902
Other consumer 768,369
14,994
783,363
723,306
4,750
728,056
Total consumer loans 2,407,715
178,232
2,585,947
2,305,741
77,497
2,383,238
Total loans $ 18,587,015
$ 4,647,701
$ 23,234,716
$ 16,944,365
$ 1,387,215
$ 18,331,580


*	~~PCI loans include covered loans (mostly consisting of residential mortgage loans) totaling $31.1 million and $38.7 million at June 30, 2018 and December 31, 2017, respectively.~~

Total loans (excluding PCI covered loans) include net unearned premiums and deferred loan costs of ~~$18.7~~$20.5 million and ~~$22.2~~$21.5 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled ~~$4.9~~$4.2 billion and ~~$1.5~~$4.4 billion at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

Valley transferred ~~$263.3~~$100.0 million and $150.5 million of residential mortgage loans from the loan portfolio to loans held for sale during the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~as compared to $225.5 million of loans transferred during the six months ended June 30, 2017.~~respectively. There were no other sales of loans from the held for investment portfolio during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

Purchased Credit-Impaired 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.

2722

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the PCI loans acquired in the USAB acquisition as of January 1, 2018 (See Note 2 for more details):

(in thousands)

Contractually required principal and interest $ 4,312,988
Contractual cash flows not expected to be collected (non-accretable difference) (94,098 )
Expected cash flows to be collected 4,218,890
Interest component of expected cash flows (accretable yield) (474,208 )
Fair value of acquired loans $ 3,744,682

The following table presents changes in the accretable yield for PCI loans during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:



	Three Months Ended March 31,
	2019			2018
	(in thousands)
Balance, beginning of period	$	875,958		$	282,009
Acquisition	—			559,907
Accretion	(53,492		)	(65,131		)
Net increase in expected cash flows	68,305			—
Balance, end of period	$	890,771		$	776,785

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands)
Balance, beginning of period $ 691,086
$ 269,831
$ 282,009
$ 294,514
Acquisition —
—
474,208
—
Accretion (60,536 ) (23,553 ) (125,667 ) (48,236 )
Balance, end of period $ 630,550
$ 246,278
$ 630,550
$ 246,278

The net increase in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools. Based upon the most recent reforecasted cash flows during the first quarter of 2019, the net increase in accretable yield for the three months ended March 31, 2019 was largely driven by the impact of current interest rate environment on the adjustable portion of the PCI loan portfolio, changes in the expected duration of certain loan pools and additional advances on lines of credit.

Credit Risk Management

For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. 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.

2823

Credit Quality

The following table presents past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis) by loan portfolio class at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~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)
March 31, 2019
Commercial and industrial	$	5,120	$	1,756	$	2,670	$	76,270	$	85,816	$	3,700,926	$	3,786,742
Commercial real estate:
Commercial real estate	39,362		2,156		—		2,663		44,181		10,145,207		10,189,388
Construction	1,911		—		—		378		2,289		1,197,452		1,199,741
Total commercial real estate loans	41,273		2,156		—		3,041		46,470		11,342,659		11,389,129
Residential mortgage	15,856		3,635		1,402		11,921		32,814		3,628,169		3,660,983
Consumer loans:
Home equity	797		19		—		1,806		2,622		378,595		381,217
Automobile	5,024		917		513		148		6,602		1,340,803		1,347,405
Other consumer	826		54		10		224		1,114		852,188		853,302
Total consumer loans	6,647		990		523		2,178		10,338		2,571,586		2,581,924
Total	$	68,896	$	8,537	$	4,595	$	93,410	$	175,438	$	21,243,340	$	21,418,778
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)
June 30, 2018
Commercial and industrial $ 6,780
$ 1,533
$ 560
$ 53,596
$ 62,469
$ 2,959,055
$ 3,021,524
Commercial real estate:
Commercial real estate 4,323
—
27
7,452
11,802
9,097,843
9,109,645
Construction 175
—
—
1,100
1,275
995,427
996,702
Total commercial real estate loans 4,498
—
27
8,552
13,077
10,093,270
10,106,347
Residential mortgage 7,961
1,978
2,324
19,303
31,566
3,019,863
3,051,429
Consumer loans:
Home equity 686
278
—
2,804
3,768
354,275
358,043
Automobile 5,482
545
164
80
6,271
1,275,032
1,281,303
Other consumer 405
37
34
119
595
767,774
768,369
Total consumer loans 6,573
860
198
3,003
10,634
2,397,081
2,407,715
Total $ 25,812
$ 4,371
$ 3,109
$ 84,454
$ 117,746
$ 18,469,269
$ 18,587,015
December 31, 2017
Commercial and industrial $ 3,650
$ 544
$ —
$ 20,890
$ 25,084
$ 2,523,981
$ 2,549,065
Commercial real estate:
Commercial real estate 11,223
—
27
11,328
22,578
8,539,273
8,561,851
Construction 12,949
18,845
—
732
32,526
777,438
809,964
Total commercial real estate loans 24,172
18,845
27
12,060
55,104
9,316,711
9,371,815
Residential mortgage 12,669
7,903
2,779
12,405
35,756
2,681,988
2,717,744
Consumer loans:
Home equity 1,009
94
—
1,777
2,880
370,751
373,631
Automobile 5,707
987
271
73
7,038
1,201,766
1,208,804
Other consumer 1,693
118
13
20
1,844
721,462
723,306
Total consumer loans 8,409
1,199
284
1,870
11,762
2,293,979
2,305,741
Total $ 48,900
$ 28,491
$ 3,090
$ 47,225
$ 127,706
$ 16,816,659
$ 16,944,365

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.

2924

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



	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
	(in thousands)
March 31, 2019
Commercial and industrial	$	12,658	$	93,412	$	106,070	$	116,256	$	31,508
Commercial real estate:
Commercial real estate	17,046		26,395		43,441		45,473		2,615
Construction	414		—		414		416		—
Total commercial real estate loans	17,460		26,395		43,855		45,889		2,615
Residential mortgage	6,181		6,512		12,693		13,769		676
Consumer loans:
Home equity	324		574		898		997		51
Total consumer loans	324		574		898		997		51
Total	$	36,623	$	126,893	$	163,516	$	176,911	$	34,850
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)
June 30, 2018
Commercial and industrial $ 10,241
$ 76,929
$ 87,170
$ 92,073
$ 24,817
Commercial real estate:
Commercial real estate 22,751
29,705
52,456
56,365
2,972
Construction 1,800
463
2,263
2,263
15
Total commercial real estate loans 24,551
30,168
54,719
58,628
2,987
Residential mortgage 6,226
6,623
12,849
13,838
632
Consumer loans:
Home equity 838
615
1,453
2,115
72
Total consumer loans 838
615
1,453
2,115
72
Total $ 41,856
$ 114,335
$ 156,191
$ 166,654
$ 28,508
December 31, 2017
Commercial and industrial $ 9,946
$ 75,553
$ 85,499
$ 90,269
$ 11,044
Commercial real estate:
Commercial real estate 28,709
29,771
58,480
62,286
2,718
Construction 1,904
467
2,371
2,394
17
Total commercial real estate loans 30,613
30,238
60,851
64,680
2,735
Residential mortgage 5,654
8,402
14,056
15,332
718
Consumer loans:
Home equity 3,096
664
3,760
4,917
64
Total consumer loans 3,096
664
3,760
4,917
64
Total $ 49,309
$ 114,857
$ 164,166
$ 175,198
$ 14,561

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 six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:



	Three Months Ended March 31,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	117,089	$	571	$	90,069	$	714
Commercial real estate:
Commercial real estate	44,789		719		55,493		616
Construction	822		1		2,217		23
Total commercial real estate loans	45,611		720		57,710		639
Residential mortgage	13,898		143		14,098		165
Consumer loans:
Home equity	1,136		11		2,026		33
Total consumer loans	1,136		11		2,026		33
Total	$	177,734	$	1,445	$	163,903	$	1,551

Three Months Ended June 30,
2018 2017

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized
(in thousands)
Commercial and industrial $ 87,674
$ 212
$ 46,283
$ 288
Commercial real estate:
Commercial real estate 52,729
563
60,119
483
Construction 2,244
16
2,759
20
Total commercial real estate loans 54,973
579
62,878
503
Residential mortgage 12,914
185
17,555
184
Consumer loans:
Home equity 1,794
33
4,799
34
Total consumer loans 1,794
33
4,799
34
Total $ 157,355
$ 1,009
$ 131,515
$ 1,009

Six Months Ended June 30,
2018 2017

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized
(in thousands)
Commercial and industrial $ 88,865
$ 926
$ 38,371
$ 596
Commercial real estate:
Commercial real estate 54,104
1,179
57,722
808
Construction 2,230
39
2,728
39
Total commercial real estate loans 56,334
1,218
60,450
847
Residential mortgage 13,502
350
18,974
392
Consumer loans:
Home equity 1,910
66
4,847
74
Total consumer loans 1,910
66
4,847
74
Total $ 160,611
$ 2,560
$ 122,642
$ 1,909

Interest income recognized on a cash basis (included in the table above) was immaterial for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~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 ~~$83.7~~$73.1 million and ~~$117.2~~$77.2 million as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. Non-performing TDRs totaled ~~$54.1~~$64.9 million and ~~$27.0~~$55.0 million as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

The following ~~tables present~~table presents non-PCI loans by loan ~~portfolio~~ class modified as TDRs during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.


	Three Months Ended June 30,										Three Months Ended March 31,
	2018					2017					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	11	$	8,822	$	8,575	47	$	40,077	$	38,367	36	$	23,553	$	23,241	6	$	3,908	$	3,777
Commercial real estate:
Commercial real estate	5	3,975		3,971		5	23,604		23,604		1	1,597		1,597		1	196		195
Construction	1	532		491		—	—		—		—	—		—		1	32		23
Total commercial real estate	6	4,507		4,462		5	23,604		23,604		1	1,597		1,597		2	228		218
Residential mortgage	2	393		389		2	549		545		—	—		—		3	587		581
Consumer											—	—		—		1	88		86
Total	19	$	13,722	$	13,426	54	$	64,230	$	62,516	37	$	25,150	$	24,838	12	$	4,811	$	4,662

Six Months Ended June 30,
2018 2017
Troubled Debt Restructurings
Number
of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment

Number
of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment
($ in thousands)
Commercial and industrial 15
$ 10,554
$ 10,170
53
$ 46,315
$ 43,660
Commercial real estate:
Commercial real estate 6
4,170
4,164
6
23,782
23,777
Construction 2
564
503
1
560
480
Total commercial real estate 8
4,734
4,667
7
24,342
24,257
Residential mortgage 5
980
963
5
1,170
1,167
Consumer 1
88
85
—
—
—
Total 29
$ 16,356
$ 15,885
65
$ 71,827
$ 69,084

The total TDRs presented in the above table had allocated specific reserves for loan losses of approximately ~~$5.3~~$7.9 million and $1.0 millionfor ~~both June 30, 2018~~March 31, 2019 and ~~2017.~~2018. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in the "Impaired Loans" section above. There were no$913 thousand of partial charge-offs related to TDR modifications during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017, respectively.~~no charge-offs for such loans during the three months ended March 31, 2018.

3226

The non-PCI loans modified as TDRs within the previous 12 months and for which there was a payment default (90 or more days past due) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were as follows:



	Three Months Ended March 31,
	2019			2018
Troubled Debt Restructurings Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	($ in thousands)
Commercial and industrial	10	$	8,626	—	$	—
Commercial real estate	—	—		1	165
Residential mortgage	5	702		—	—
Consumer	1	18		—	—
Total	16	$	9,346	1	$	165

Three Months Ended June 30,
2018 2017
Troubled Debt Restructurings Subsequently Defaulted
Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment
($ in thousands)
Commercial and industrial 4
$ 3,212
6
$ 5,358
Total 4
$ 3,212
6
$ 5,358

Six Months Ended June 30,
2018 2017
Troubled Debt Restructurings Subsequently Defaulted
Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment
($ in thousands)
Commercial and industrial 4
$ 3,212
7
$ 5,433
Commercial real estate —
—
1
736
Residential mortgage —
—
1
153
Total 4
$ 3,212
9
$ 6,322

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 rating by class of loans (excluding PCI loans) at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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)
March 31, 2019
Commercial and industrial	$	3,595,459	$	37,340	$	80,011	$	73,932	$	3,786,742
Commercial real estate	10,098,803		45,373		44,279		933		10,189,388
Construction	1,197,680		1,684		377		—		1,199,741
Total	$	14,891,942	$	84,397	$	124,667	$	74,865	$	15,175,871
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)
June 30, 2018
Commercial and industrial $ 2,853,692
$ 62,369
$ 56,095
$ 49,368
$ 3,021,524
Commercial real estate 9,019,309
35,200
55,136
—
9,109,645
Construction 994,407
523
1,772
—
996,702
Total $ 12,867,408
$ 98,092
$ 113,003
$ 49,368
$ 13,127,871
December 31, 2017
Commercial and industrial $ 2,375,689
$ 62,071
$ 96,555
$ 14,750
$ 2,549,065
Commercial real estate 8,447,865
48,009
65,977
—
8,561,851
Construction 808,091
360
1,513
—
809,964
Total $ 11,631,645
$ 110,440
$ 164,045
$ 14,750
$ 11,920,880

At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the commercial and industrial loans ~~with~~rated substandard and doubtful ~~risk ratings~~ in the above table ~~mostly consisted of non-accrual~~included performing TDR taxi medallion ~~loans.~~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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Non-PCI Loans
	(in thousands)
March 31, 2019
Residential mortgage	$	3,649,062	$	11,921	$	3,660,983
Home equity	379,411		1,806		381,217
Automobile	1,347,257		148		1,347,405
Other consumer	853,078		224		853,302
Total	$	6,228,808	$	14,099	$	6,242,907
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)
June 30, 2018
Residential mortgage $ 3,032,126
$ 19,303
$ 3,051,429
Home equity 355,239
2,804
358,043
Automobile 1,281,223
80
1,281,303
Other consumer 768,250
119
768,369
Total $ 5,436,838
$ 22,306
$ 5,459,144
December 31, 2017
Residential mortgage $ 2,705,339
$ 12,405
$ 2,717,744
Home equity 371,854
1,777
373,631
Automobile 1,208,731
73
1,208,804
Other consumer 723,286
20
723,306
Total $ 5,009,210
$ 14,275
$ 5,023,485

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:



Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total PCI Loans
	(in thousands)
March 31, 2019
Commercial and industrial	$	690,301	$	27,884	$	718,185
Commercial real estate	2,455,693		20,344		2,476,037
Construction	253,476		982		254,458
Residential mortgage	405,111		5,143		410,254
Consumer	143,577		1,829		145,406
Total	$	3,948,158	$	56,182	$	4,004,340
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)
June 30, 2018
Commercial and industrial $ 776,200
$ 31,801
$ 808,001
Commercial real estate 2,785,190
18,995
2,804,185
Construction 378,495
1,535
380,030
Residential mortgage 470,447
6,806
477,253
Consumer 174,411
3,821
178,232
Total $ 4,584,743
$ 62,958
$ 4,647,701
December 31, 2017
Commercial and industrial $ 172,105
$ 20,255
$ 192,360
Commercial real estate 924,574
10,352
934,926
Construction 39,802
1,339
41,141
Residential mortgage 135,745
5,546
141,291
Consumer 76,901
596
77,497
Total $ 1,349,127
$ 38,088
$ 1,387,215

Other real estate owned (OREO) totaled ~~$11.8~~$7.3 million and ~~$9.8~~$9.5 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. OREO included foreclosed residential real estate properties totaling ~~$8.1~~$1.5 millionand ~~$7.3 million~~$852 thousand at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled ~~$1.8~~$1.2 millionand ~~$3.8~~$1.8 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

3428

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

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



	March 31, 2019		December 31, 2018
	(in thousands)
Components of allowance for credit losses:
Allowance for loan losses	$	154,381	$	151,859
Allowance for unfunded letters of credit	4,580		4,436
Total allowance for credit losses	$	158,961	$	156,295

June 30,
2018 December 31,
2017
(in thousands)
Components of allowance for credit losses:
Allowance for loan losses $ 138,762
$ 120,856
Allowance for unfunded letters of credit 4,392
3,596
Total allowance for credit losses $ 143,154
$ 124,452

The following table summarizes the provision for credit losses for the periods indicated:



	Three Months Ended March 31,
	2019		2018
	(in thousands)
Components of provision for credit losses:
Provision for loan losses	$	7,856	$	10,702
Provision for unfunded letters of credit	144		246
Total provision for credit losses	$	8,000	$	10,948

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands)
Components of provision for credit losses:
Provision for loan losses $ 6,592
$ 3,710
$ 17,294
$ 6,112
Provision for unfunded letters of credit 550
(78 ) 796
(10 )
Total provision for credit losses $ 7,142
$ 3,632
$ 18,090
$ 6,102

The following ~~table details~~tables detail activity in the allowance for loan losses by portfolio segment for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:



	Commercial and Industrial			Commercial Real Estate			Residential Mortgage			Consumer			Total
	(in thousands)
Three Months Ended March 31, 2019
Allowance for loan losses:
Beginning balance	$	90,956		$	49,650		$	5,041		$	6,212		$	151,859
Loans charged-off	(4,282		)	—			(2,028		)	(15		)	(6,325		)
Charged-off loans recovered	483			21			1			486			991
Net (charge-offs) recoveries	(3,799		)	21			(2,027		)	471			(5,334		)
Provision for loan losses	7,473			(1,909		)	2,125			167			7,856
Ending balance	$	94,630		$	47,762		$	5,139		$	6,850		$	154,381
Three Months Ended March 31, 2018
Allowance for loan losses:
Beginning balance	$	57,232		$	54,954		$	3,605		$	5,065		$	120,856
Loans charged-off	(131		)	(310		)	(68		)	(1,211		)	(1,720		)
Charged-off loans recovered	2,107			369			80			468			3,024
Net recoveries (charge-offs)	1,976			59			12			(743		)	1,304
Provision for loan losses	7,338			1,666			483			1,215			10,702
Ending balance	$	66,546		$	56,679		$	4,100		$	5,537		$	132,862

Commercial
and Industrial

Commercial
Real Estate

Residential
Mortgage
Consumer Total
(in thousands)
Three Months Ended
June 30, 2018
Allowance for loan losses:
Beginning balance $ 66,546
$ 56,679
$ 4,100
$ 5,537
$ 132,862
Loans charged-off (642 ) (38 ) (99 ) (1,422 ) (2,201 )
Charged-off loans recovered 819
15
180
495
1,509
Net recoveries (charge-offs) 177
(23 ) 81
(927 ) (692 )
Provision for loan losses 7,534
(2,844 ) 443
1,459
6,592
Ending balance $ 74,257
$ 53,812
$ 4,624
$ 6,069
$ 138,762
Three Months Ended
June 30, 2017
Allowance for loan losses:
Beginning balance $ 51,288
$ 56,302
$ 3,592
$ 4,261
$ 115,443
Loans charged-off (2,910 ) (139 ) (229 ) (1,011 ) (4,289 )
Charged-off loans recovered 312
640
235
395
1,582
Net (charge-offs) recoveries (2,598 ) 501
6
(616 ) (2,707 )
Provision for loan losses 2,927
(1,348 ) 588
1,543
3,710
Ending balance $ 51,617
$ 55,455
$ 4,186
$ 5,188
$ 116,446

3529

Commercial
and Industrial

Commercial
Real Estate

Residential
Mortgage
Consumer Total
(in thousands)
Six Months Ended
June 30, 2018
Allowance for loan losses:
Beginning balance $ 57,232
$ 54,954
$ 3,605
$ 5,065
$ 120,856
Loans charged-off (773 ) (348 ) (167 ) (2,633 ) (3,921 )
Charged-off loans recovered 2,926
384
260
963
4,533
Net recoveries (charge-offs) 2,153
36
93
(1,670 ) 612
Provision for loan losses 14,872
(1,178 ) 926
2,674
17,294
Ending balance $ 74,257
$ 53,812
$ 4,624
$ 6,069
$ 138,762
Six Months Ended
June 30, 2017
Allowance for loan losses:
Beginning balance $ 50,820
$ 55,851
$ 3,702
$ 4,046
$ 114,419
Loans charged-off (4,624 ) (553 ) (359 ) (2,132 ) (7,668 )
Charged-off loans recovered 1,160
782
683
958
3,583
Net (charge-offs) recoveries (3,464 ) 229
324
(1,174 ) (4,085 )
Provision for loan losses 4,261
(625 ) 160
2,316
6,112
Ending balance $ 51,617
$ 55,455
$ 4,186
$ 5,188
$ 116,446

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~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)
March 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	31,508	$	2,615	$	676	$	51	$	34,850
Collectively evaluated for impairment	63,122		45,147		4,463		6,799		119,531
Total	$	94,630	$	47,762	$	5,139	$	6,850	$	154,381
Loans:
Individually evaluated for impairment	$	106,070	$	43,855	$	12,693	$	898	$	163,516
Collectively evaluated for impairment	3,680,672		11,345,274		3,648,290		2,581,026		21,255,262
Loans acquired with discounts related to credit quality	718,185		2,730,495		410,254		145,406		4,004,340
Total	$	4,504,927	$	14,119,624	$	4,071,237	$	2,727,330	$	25,423,118
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 March 31, 2019, the total net investment in direct financing and sales-type leases was $351.2 million, comprised of $350.0 million in lease receivables and $1.2 million in unguaranteed residuals. Total lease income was $4.3 million for the three months ended March 31, 2019.

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.

During 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 March 31, 2019.



	March 31, 2019
	(in thousands)
ROU assets:
Operating leases	$	288,577
Finance leases	1,092
Total	$	289,669
Lease liabilities:
Operating leases	$	311,362
Finance leases	2,163
Total	$	313,525

The following table presents the components by lease type, of total lease cost recognized in the consolidated statement of income for the three months ended March 31, 2019:



	Three Months Ended
	March 31, 2019
	(in thousands)
Finance lease cost:
Amortization of ROU assets	$	73
Interest on lease liabilities	52
Operating lease cost	6,974
Short-term lease cost	75
Variable lease cost	948
Sublease income	(903		)
Total lease cost (included in net occupancy and equipment expense)	$	7,219

The following table presents supplemental cash flow information related to leases for thethree months ended March 31, 2019:

Commercial
and Industrial

Commercial
Real Estate

Residential
Mortgage
Consumer Total
(in thousands)
June 30, 2018
Allowance for loan losses:
Individually evaluated for impairment $ 24,817
$ 2,987
$ 632
$ 72
$ 28,508
Collectively evaluated for impairment 49,440
50,825
3,992
5,997
110,254
Total $ 74,257
$ 53,812
$ 4,624
$ 6,069
$ 138,762
Loans:
Individually evaluated for impairment $ 87,170
$ 54,719
$ 12,849
$ 1,453
$ 156,191
Collectively evaluated for impairment 2,934,354
10,051,628
3,038,580
2,406,262
18,430,824
Loans acquired with discounts related to credit quality 808,001
3,184,215
477,253
178,232
4,647,701
Total $ 3,829,525
$ 13,290,562
$ 3,528,682
$ 2,585,947
$ 23,234,716
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment $ 11,044
$ 2,735
$ 718
$ 64
$ 14,561
Collectively evaluated for impairment 46,188
52,219
2,887
5,001
106,295
Total $ 57,232
$ 54,954
$ 3,605
$ 5,065
$ 120,856
Loans:
Individually evaluated for impairment $ 85,499
$ 60,851
$ 14,056
$ 3,760
$ 164,166
Collectively evaluated for impairment 2,463,566
9,310,964
2,703,688
2,301,981
16,780,199
Loans acquired with discounts related to credit quality 192,360
976,067
141,291
77,497
1,387,215
Total $ 2,741,425
$ 10,347,882
$ 2,859,035
$ 2,383,238
$ 18,331,580



	Three Months Ended
	March 31, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	8,199
Operating cash flows from finance leases	52
Financing cash flows from finance leases	119

The following table presents supplemental information related to leases at March 31, 2019:



	March 31, 2019
Weighted-average remaining lease term
Operating leases	13.23 years
Finance leases	3.75 years
Weighted-average discount rate
Operating leases	3.72	%
Finance leases	8.25	%

The following table presents a maturity analysis of lessor and lessee arrangements outstanding as of March 31, 2019:



	Lessor			Lessee
	Direct Financing and Sales-Type Leases			Operating Leases			Finance Leases
	(in thousands)
2019	$	86,787		$	26,352		$	513
2020	96,830			35,103			684
2021	80,580			34,295			684
2022	59,226			32,639			684
2023	37,135			29,195			—
Thereafter	23,260			244,608			—
Total lease payments	383,818			402,192			2,565
Less: present value discount	(33,823		)	(90,830		)	(402		)
Total	$	349,995		$	311,362		$	2,163

The following table presents minimum aggregate lease payments in accordance with Topic 840 at March 31, 2018:



	Gross Rents		Sublease Income		Net Rents
	(in thousands)
2018	$	20,776	$	1,644	$	19,132
2019	27,570		2,124		25,446
2020	27,709		2,077		25,632
2021	26,872		2,009		24,863
2022	25,860		1,891		23,969
Thereafter	270,431		8,130		262,301
Total lease payments	$	399,218	$	17,875	$	381,343

Net occupancy and equipment expense included lease cost of $8.2 million, net of sublease income of $911 thousand for the three months ended March 31, 2018.

Note 10. Goodwill and Other Intangible Assets

~~The~~

Goodwill totaled $1.1 billion at March 31, 2019 and December 31, 2018. There were no changes into the carrying ~~amount~~amounts of goodwill as allocated to ~~our~~Valley's business segments, or reporting units thereof, for goodwill impairment analysis ~~were:~~

Business Segment / Reporting Unit*

Wealth
Management

Consumer
Lending

Commercial
Lending

Investment
Management
Total
(in thousands)
Balance at December 31, 2017 $ 21,218
$ 200,103
$ 316,258
$ 153,058
$ 690,637
Goodwill from business combinations —
85,649
238,052
64,554
388,255
Balance at June 30, 2018 $ 21,218
$ 285,752
$ 554,310
$ 217,612
$ 1,078,892


*	~~Wealth Management is comprised of trust, asset management and insurance services. This reporting unit is included in the Consumer Lending segment~~(as reported in Valley's Annual Report on Form 10-K for ~~financial reporting purposes.~~

~~During~~ the ~~six months~~year ended ~~June 30, 2018, goodwill from business combinations set forth in the table above relates to the acquisition of USAB (see Note 2 for further details)~~December 31, 2018). ~~Certain estimates for acquired assets and assumed liabilities are subject to change for up to one year after the acquisition date.~~ There was no impairment of goodwill during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

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



	Gross Intangible Assets		Accumulated Amortization			Valuation Allowance			Net Intangible Assets
	(in thousands)
March 31, 2019
Loan servicing rights	$	88,557	$	(64,939	)	$	(107	)	$	23,511
Core deposits	80,470		(31,888		)	—			48,582
Other	3,945		(2,458		)	—			1,487
Total other intangible assets	$	172,972	$	(99,285	)	$	(107	)	$	73,580
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)
June 30, 2018
Loan servicing rights $ 84,956
$ (59,975 ) $ (154 ) $ 24,827
Core deposits 80,470
(23,002 ) —
57,468
Other 3,945
(2,274 ) —
1,671
Total other intangible assets $ 169,371
$ (85,251 ) $ (154 ) $ 83,966
December 31, 2017
Loan servicing rights $ 79,138
$ (57,054 ) $ (471 ) $ 21,613
Core deposits 43,396
(24,297 ) —
19,099
Other 4,087
(2,292 ) —
1,795
Total other intangible assets $ 126,621
$ (83,643 ) $ (471 ) $ 42,507

Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets in proportion to, and over the period of, estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. See the "Assets and Liabilities Measured at Fair Value on a ~~Non-recurring~~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 108.2 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. ~~On January 1, 2018, Valley recorded approximately $44.6 million and $1.4 million of core deposit intangibles and loan servicing rights, respectively, resulting from the USAB acquisition.~~ Valley evaluates core deposits and other

intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

The following table presents the estimated future amortization expense of other intangible assets for the remainder of ~~2018~~2019 through ~~2022:~~2023:



	Loan Servicing Rights		Core Deposits		Other
	(in thousands)
2019	$	4,305	$	8,209	$	176
2020	4,749		9,607		220
2021	3,750		8,252		206
2022	2,980		6,898		191
2023	2,372		5,544		131

Loan
Servicing
Rights

Core
Deposits
Other
(in thousands)
2018 $ 3,155
$ 6,134
$ 125
2019 5,148
10,961
235
2020 4,160
9,607
220
2021 3,243
8,252
206
2022 2,608
6,898
191

Valley recognized amortization expense on other intangible assets, including net impairment (or recovery of impairment) charges on loan servicing rights, totaling approximately ~~$4.6 million and $2.6~~$4.3 million for the three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017, respectively, and $8.9 million and $5.1 million for the six months ended June 30, 2018 and 2017, respectively.~~2018.

Note 11. Stock–Based Compensation

Valley currently has one active employee stock 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 ~~June 30, 2018, 5.5~~March 31, 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.

~~In connection with the USAB acquisition on~~Restricted Stock. Prior to January 1, ~~2018, Valley assumed pre-existing~~2019, restricted stock awards consisting of options for 1.8 million shares of Valley common stock (of which options for 936 thousand shares remained outstanding as of June 30, 2018) at a weighted average exercise price of $5.49 and 336 thousand time-based RSUs (of which 179 thousand remained outstanding as of June 30, 2018). The stock plan under which the stock awards were issued is no longer active.

~~Restricted Stock.~~ ~~Restricted stock is~~was awarded to key employees, providing for the immediate award of our common stock subject to certain vesting and restrictions under the 2016 Stock Plan. Compensation expense is measured based on the grant-date fair value of the shares. Valley ~~awarded~~did not award any restricted stock shares during the three months ended March 31, 2019 as compared to 1.1 million shares of time-based restricted stock ~~totaling 1.2 million shares and 482 thousand shares~~awarded during the ~~six~~three months ended ~~June 30,~~March 31, 2018 ~~and 2017, respectively,~~ to ~~both~~ executive officers, ~~and~~ key employees and directors of Valley. The majority of the awards have vesting periods of three years. Generally, the restrictions on such awards lapse at an annual rate of one-third of the total award commencing with the first anniversary of the date of grant. The average grant date fair value of the restricted stock awards granted during the ~~six~~three months ended ~~June 30,~~March 31, 2018 ~~and 2017~~ was ~~$11.86~~$11.81 per ~~share and $11.71 per share, respectively.~~share.

Restricted Stock Units (RSUs). Valley granted ~~446~~532 thousand and ~~371~~450 thousand shares of performance-based RSUs to certain executive officers for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The performance-based RSU awards include RSUs ~~will vest and be issued as common stock~~with vesting conditions based ~~on the attainment~~upon certain levels of ~~(i)~~ growth in Valley's tangible book value per share plus dividends ~~(75 percent of the RSU award)~~ and ~~(ii)~~RSUs with vesting conditions based upon Valley's total shareholder return as compared to our peer ~~group (25 percent of the RSU award).~~group. The 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 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 ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 was $10.43 per share and ~~2017 was~~ $12.35 per share, ~~and $11.05 per share,~~ respectively.

Valley recorded total stock-based compensation expense of ~~$4.2~~$4.1 million and ~~$2.7~~$8.0 million for the three months ended ~~June 30,~~ March 31, 2019 and2018, ~~and2017, and $12.2 million and $6.9 million for the six months ended June 30, 2018 and 2017,~~ respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of ~~June 30, 2018,~~March 31, 2019, the unrecognized amortization expense for all stock-based employee compensation totaled approximately ~~$24.3~~$25.4 million and will be recognized over an average remaining vesting period of ~~2.3~~2.37 years.

~~Note 12. Revenue Recognition~~

On January 1, 2018, Valley adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related updates that modify the guidance used to recognize revenue from contracts with customers for transfers of goods and services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. The adoption did not materially change Valley's recognition of revenues within the scope of ASC Topic 606.

~~Performance obligations.~~ Valley's revenue contracts generally have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable, or distinct from other obligations within the contracts. Valley does not have a material amount of long-term customer agreements that include multiple performance obligations requiring price allocation and differences in the timing of revenue recognition. Valley has no customer contracts with variable fee agreements based upon performance.

~~The following table presents non-interest income for the three and six months ended June 30, 2018 and 2017:~~

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands)
Trust and investment services $ 3,262
$ 2,800
$ 6,492
$ 5,544
Insurance commissions 4,026
4,358
7,847
9,419
Service charges on deposit accounts 6,679
5,342
13,932
10,578
(Losses) gains on securities transactions, net (36 ) 22
(801 ) (1 )
Fees from loan servicing 2,045
1,831
4,268
3,646
Gains on sales of loans, net 7,642
4,791
14,395
8,919
Bank owned life insurance 2,652
1,701
4,415
4,164
Other 11,799
7,985
19,772
12,281
Total non-interest income $ 38,069
$ 28,830
$ 70,320
$ 54,550

~~The following revenues from the table above are within the scope of ASC Topic 606:~~

~~Trust and investments services.~~ Trust and investments services include fees from investment management, investment advisory, trust, custody and other products. Trust and investment management fee income is primarily from client assets under management (AUM) for which the fees are determined based upon a tiered scale relative to the market value of the AUM. The revenue from trust and investment services is typically earned over the service period specified in the contract.

~~Service charges on deposit accounts.~~ Service charges on deposit accounts include fees from checking accounts, savings accounts, overdrafts, insufficient funds, ATM transactions and other activities. The revenues for most deposit related fees are recognized immediately upon performance of the service due to the short-term nature of the contractual terms.

~~Other income.~~ Other income within the scope of ASC Topic 606 within this revenue category includes fee income related to derivative interest rate swaps executed with commercial loan customers, and fees from interchange, wire transfers, credit cards, safe deposit box, ACH, lockbox and various other products and services-related income. These fees are either recognized immediately at the related transaction date or over the period in which the related service is provided. Other income also consists of items which are outside the scope of ASC Topic 606, including letters of credit fees, net gains and losses on sales of assets and income or expense related to certain changes in FDIC loss-share receivables.

Note ~~13.~~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.

~~Valley terminated an interest rate cap with a notional amount of $125 million in May 2018. The terminated~~

swap, originally maturing in September 2023, was used to hedge the change in cash flows associated with prime rate indexed deposits, consisting of consumer and commercial money market accounts, which variable rates are indexed to the prime rate.

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 ~~June 30, 2018,~~March 31, 2019, Valley had 1318 credit swaps with an aggregate notional amount of ~~$73.4~~$109.4 million related to risk participation agreements.

At ~~June 30, 2018,~~March 31, 2019, Valley has one "steepener" swap with a total current notional amount of ~~$14.3~~$10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the 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:



	March 31, 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	$	—	$	1,317	$	282,000	$	—	$	27	$	332,000
Fair value hedge interest rate swaps	—		338		7,474		—		347		7,536
Total derivatives designated as hedging instruments	$	—	$	1,655	$	289,474	$	—	$	374	$	339,536
Derivatives not designated as hedging instruments:
Interest rate swaps and embedded derivatives	$	78,782	$	20,436	$	3,332,581	$	48,642	$	22,533	$	3,390,578
Mortgage banking derivatives	470		585		103,947		337		774		105,247
Total derivatives not designated as hedging instruments	$	79,252	$	21,021	$	3,436,528	$	48,979	$	23,307	$	3,495,825

June 30, 2018 December 31, 2017
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 and caps $ —
$ 32
$ 482,000
$ 650
$ 81
$ 607,000
Fair value hedge interest rate swaps —
419
7,657
—
637
7,775
Total derivatives designated as hedging instruments $ —
$ 451
$ 489,657
$ 650
$ 718
$ 614,775
Derivatives not designated as hedging instruments:
Interest rate swaps and embedded derivatives $ 29,834
$ 37,135
$ 2,996,861
$ 25,696
$ 23,494
$ 1,687,005
Mortgage banking derivatives 298
316
126,994
71
118
113,233
Total derivatives not designated as hedging instruments $ 30,132
$ 37,451
$ 3,123,855
$ 25,767
$ 23,612
$ 1,800,238

The Chicago Mercantile Exchange ~~(CME)~~ and London Clearing House ~~(LCH) have enacted rulebook changes that re-characterize variation margin as settlements of the outstanding derivative instead of cash collateral. The CME and LCH~~ variation margins are classified as a single-unit of account with the fair value of certain cash flow and non-designated derivative ~~instruments on a prospective basis effective January 1, 2017 for derivatives outstanding with the CME and January 1, 2018 for derivatives outstanding with the LCH.~~instruments. As a result, the fair value of the designated cash flow ~~derivative~~interest rate swaps assets and designated and non-designated interest rate swaps liabilities were offset by variation margins posted by (with) the applicable counterparties ~~totaling $15.9 million, $796 thousand and $8.2 million, respectively,~~ and reported in the table above on a net basis at ~~June 30, 2018. The fair value of the designated cash flow derivatives~~March 31, 2019 and ~~non-designated interest rate swaps cleared with the CME were offset by variation margins totaling $9.5 million and $951 thousand, respectively, and reported in the table above on a net basis at~~ December 31, ~~2017.~~2018.

Gains (Losses) ~~gains~~ included in the consolidated statements of income and in other comprehensive income (loss) ~~income,~~, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows:



	Three Months Ended March 31,
	2019			2018
	(in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense	$	(290	)	$	(1,451	)
Amount of (loss) gain recognized in other comprehensive income (loss)	(550		)	2,751

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense $ (866 ) $ (2,314 ) $ (2,317 ) $ (4,832 )
Amount of gain recognized in other comprehensive (loss) income 637
(1,482 ) 3,388
(1,265 )

The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were ~~$4.3~~$4.2 million and ~~$8.3~~$4.0 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~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 ~~$1.7~~$1.8 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 March 31,
	2019			2018
	(in thousands)
Derivative - interest rate swaps:
Interest income	$	24		$	131
Hedged item - loans:
Interest income	$	(24	)	$	(131	)

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands)
Derivative - interest rate swaps:
Interest income $ 88
$ 52
$ 219
$ 149
Hedged item - loans:
Interest income $ (88 ) $ (52 ) $ (219 ) $ (149 )

Fee income related to derivative interest rate swaps executed with commercial loan customers totaled ~~$4.4~~$4.1 million and ~~$4.1~~$3.3 million for the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $7.7 million and $4.8 million for the six months ended June 30, 2018 and 2017,~~ 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 ~~June 30, 2018:~~March 31, 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
	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
	(in thousands)
Loans	$	7,811	$	7,882	$	337	$	346

June 30, 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
(in thousands)
Loans $ 8,076
$ 419

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 March 31,
	2019			2018
	(in thousands)
Non-designated hedge interest rate derivatives
Other non-interest expense	$	(410	)	$	218

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands)
Non-designated hedge interest rate derivatives
Other non-interest expense $ 230
$ 70
$ 448
$ (790 )

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 ~~June 30, 2018,~~March 31, 2019, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of ~~June 30, 2018,~~March 31, 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 ~~$2.1~~$5.7 million. Valley

has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. ~~The aggregate fair value of collateral Valley posted with counterparties related to derivative contracts totaled $4.4 million at June 30, 2018.~~

Note ~~14.~~13. Balance Sheet Offsetting

Certain financial instruments, including derivatives (consisting of interest rate swaps and 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.


							Gross Amounts Not Offset															Gross Amounts Not Offset
	Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Presented		Financial Instruments			Cash Collateral				Net Amount		Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Presented		Financial Instruments			Cash Collateral				Net Amount
	(in thousands)															(in thousands)
June 30, 2018
March 31, 2019
Assets:
Interest rate swaps	$	29,834	$	—	$	29,834	$	(336	)	$	—			$	29,498	$	78,782	$	—	$	78,782	$	(4,494	)	$	—			$	74,288
Liabilities:
Interest rate swaps	$	37,586	$	—	$	37,586	$	(336	)	$	(1,645	)	⁽¹⁾	$	35,605	$	22,091	$	—	$	22,091	$	(4,494	)	$	(5,273	)	⁽¹⁾	$	12,324
Repurchase agreements	150,000		—		150,000		—			(150,000		)	⁽²⁾	—		150,000		—		150,000		—			(150,000		)	⁽²⁾	—
Total	$	187,586	$	—	$	187,586	$	(336	)	$	(151,645	)		$	35,605	$	172,091	$	—	$	172,091	$	(4,494	)	$	(155,273	)		$	12,324
December 31, 2017
December 31, 2018
Assets:
Interest rate swaps and caps	$	26,346	$	—	$	26,346	$	(5,376	)	$	—			$	20,970	$	48,642	$	—	$	48,642	$	(1,214	)	$	—			$	47,428
Liabilities:
Interest rate swaps and caps	$	24,212	$	—	$	24,212	$	(5,376	)	$	(8,141	)	⁽¹⁾	$	10,695	$	22,907	$	—	$	22,907	$	(1,214	)	$	(1,852	)	⁽¹⁾	$	19,841
Repurchase agreements	200,000		—		200,000		—			(200,000		)	⁽²⁾	—		150,000		—		150,000		—			(150,000		)	⁽²⁾	—
Total	$	224,212	$	—	$	224,212	$	(5,376	)	$	(208,141	)		$	10,695	$	172,907	$	—	$	172,907	$	(1,214	)	$	(151,852	)		$	19,841


(1)	Represents the amount of collateral posted with derivative counterparties that offsets net liability positions.


(2)	Represents the fair value of non-cash pledged investment securities.

Note ~~15.~~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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018:



	March 31, 2019		December 31, 2018
	(in thousands)
Other Assets:
Affordable housing tax credit investments, net	$	35,278	$	36,961
Other tax credit investments, net	55,669		68,052
Total tax credit investments, net	$	90,947	$	105,013
Other Liabilities:
Unfunded affordable housing tax credit commitments	$	2,781	$	4,520
Unfunded other tax credit commitments	8,756		8,756
Total unfunded tax credit commitments	$	11,537	$	13,276

June 30,
2018 December 31,
2017
(in thousands)
Other Assets:
Affordable housing tax credit investments, net $ 40,226
$ 22,135
Other tax credit investments, net 31,129
42,015
Total tax credit investments, net $ 71,355
$ 64,150
Other Liabilities:
Unfunded affordable housing tax credit commitments $ 4,978
$ 3,690
Unfunded other tax credit commitments 4,773
15,020
Total unfunded tax credit commitments $ 9,751
$ 18,710

The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:



	Three Months Ended March 31,
	2019		2018
	(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits	$	1,713	$	1,821
Other tax credit investment credits and tax benefits	2,803		5,485
Total reduction in income tax expense	$	4,516	$	7,306
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses	$	673	$	986
Affordable housing tax credit investment impairment losses	730		587
Other tax credit investment losses	987		537
Other tax credit investment impairment losses	4,783		3,164
Total amortization of tax credit investments recorded in non-interest expense	$	7,173	$	5,274

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits $ 1,429
$ 1,271
$ 3,250
$ 2,555
Other tax credit investment credits and tax benefits 5,680
8,680
11,165
14,966
Total reduction in income tax expense $ 7,109
$ 9,951
$ 14,415
$ 17,521
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses $ (319 ) $ 358
$ 667
$ 754
Affordable housing tax credit investment impairment losses 515
130
1,102
254
Other tax credit investment losses 1,253
1,060
1,790
1,827
Other tax credit investment impairment losses 3,021
6,184
6,185
10,221
Total amortization of tax credit investments recorded in non-interest expense $ 4,470
$ 7,732
$ 9,744
$ 13,056

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;

4539

~~Note 16. Litigation~~A current fair value of the investment based upon cash flow projections that is less than the carrying amount; and

InChange in the ~~normal course~~economic or technological environment that could adversely affect the investee’s operations

On a quarterly basis, Valley obtains financial reporting on the underlying investment assets for each fund from the Fund Manager who is independent of ~~business, Valley~~us and the Fund Sponsor. The financial reporting is ~~a party to various outstanding legal proceedings and claims. In the opinion of management,~~reviewed for deterioration in 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 adverse outcome or settlement 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. Disclosure is also required of the ~~estimate~~fund, the level of cash flows and any significant losses or impairment charges. Valley also regularly reviews the condition and continuing prospects of the ~~reasonably possible loss or range~~underlying operations of ~~loss, unless an estimate cannot reasonably be made. Liabilities are established for legal claims when payments associated~~the investment with the ~~claims become probable~~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 ~~possible losses~~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 fair value through an impairment charge to earnings, which establishes the new cost basis of the investment.

The aggregate unamortized investment related to three 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 described in detail in Note 15 below. During the first quarter of 2019, Valley determined that future cash flows related to the ~~matter can be reasonably estimated.~~remaining investments in all three funds were not probable based upon new information available, including the sponsor’s current bankruptcy proceeding which were reclassified to Chapter 7 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 within amortization of tax credit investments for the three months ended March 31, 2019.

~~Maritza Gaston~~

Note 15. Income Taxes

A reconciliation of Valley’s gross unrecognized tax benefits at March 31, 2019 and ~~George Gallart v. Valley National Bancorp and Valley National Bank.~~ ~~In April 2017, Valley was served with a Class and Collective Action Complaint, filed~~2018 are presented in the ~~Eastern District~~table below:



	Three Months Ended March 31,
	2019		2018

Beginning balance	$	—	$	4,238
Additions based on tax positions related to prior years	12,100		—
Ending balance	$	12,100	$	4,238

The entire balance of ~~New York, alleging~~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. Valley accrued approximately $1.9 million and $1.8 million of interest associated with Valley’s uncertain tax positions at March 31, 2019 and 2018, respectively.

From 2013 to 2015, Valley invested in three federal renewable energy tax credit funds (Fund VI, Fund XII and Fund XIX) sponsored by DC Solar and claimed the related federal tax credit benefits of approximately $22.8 million in its consolidated financial statements during the same period. All three funds own mobile solar generator units leased 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 matter of judgment that depends on all available information. At each of the

investment dates, Valley obtained two tax opinions from national law firms that should successfully support the recognition of the tax credits in its tax returns if challenged by the IRS. Based upon management's review of the tax opinions on the investment’s legal structure, Valley recognized and measured each tax position at a 100 percent of the tax credit.

Valley's subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances, and information available at quarterly reporting date. A change in judgment that results in subsequent derecognition or change in measurement of a tax position taken in a prior 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 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 10 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 ultimate amount of tax benefit likely to be recaptured. To date, over 91 percent of the 512 solar generator units owned by Valley's three 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 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 assessment, Valley's first quarter of 2019 net income includes an increase to the provision for income taxes of $12.1 million, reflecting the reserve for uncertain tax liability position (shown in the table above) related to renewable energy tax credits and other tax benefits previously recognized from the 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 additional facts and information, or that Valley ~~had violated both Federal and State wage and hour laws and seeking~~will not ultimately incur a complete loss on the related tax positions, which is currently estimated to recover overtime compensation on behalf of a class of Valley employees. While most Branch Service Managers are classified by Valley as “exempt” employees and do not receive overtime pay, plaintiffs' counsel claims that all Branch Service Managers perform non-exempt duties, and should therefore be classified as non-exempt hourly employees and be paid overtime for any time worked in excess of 40 hours per week. Valley filed an answer disputing Plaintiffs’ allegations. Plaintiffs filed a notice for conditional certification$28.8 million (inclusive of the ~~class, which was granted by~~$12.1 millionprovision for the ~~Federal Magistrate~~first quarter of 2019).

Valley continuously monitors its tax positions for the underlying facts, circumstances, and information available including the federal investigation of DC Solar and changes in ~~December 2017. In January 2018, Valley filed an objection requesting~~tax laws, case law and regulations that the Federal Judge assigned to this case overturn the Federal Magistrate’s Order for Certification. The Court has not acted on that request. Plaintiffs and Valley have agreed to enter into non-binding mediation. A mediation session was held in June 2018 and another session is anticipated to occur in late August or early September 2018. At June 30, 2018, Valley was unable to estimate an amount or rangemay necessitate subsequent de-recognition of ~~reasonably possible loss.~~previous tax benefits.

Note ~~17.~~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 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, ~~2017,~~2018, include, but are not limited to:

due diligence issues or other matters prevent the expected sale and leaseback of three branch properties or expenses that reduce the additional pre-tax net gain expected to be recognized in the second quarter of 2019;

developments in the DC Solar bankruptcy and federal investigations that 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 liability positions, tax laws, regulations and case law;

weakness or a decline in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas;

the ~~diversion of management's time on any remaining issues related to the USAB merger integration;~~

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

an increase in our allowance for credit losses due to higher than expected ~~cost savings and synergies from the merger~~loan losses within one or more segments of ~~USAB with Valley in the amounts or in the timeframe anticipated;~~

~~the inability to retain USAB’s customers and employees;~~our loan portfolio;

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

greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and ~~branch transformation strategy;~~obsolescence caused by continuous and rapid market innovations;

the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy;

higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from the impact of the Tax Cuts and Jobs Act and other changes in tax laws, regulations and case law;

damage verdicts 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, and other matters;

~~the loss of or decrease in lower-cost funding sources within our deposit base may adversely impact our net interest income and net income;~~

~~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, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;

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;

our inability or determination not to pay dividends at current levels, or at all, because of inadequate 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.

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. At ~~June 30, 2018,~~March 31, 2019, we identified our policies on the allowance for loan losses, purchased credit-impaired loans, ~~security valuations and impairments,~~ 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, 2017. Purchased credit-impaired loans became a significant portion of our loan portfolio due to our acquisition of USAB on January 1, 2018 and, as a result, a new critical accounting policy starting in the first quarter of 2018. See the "Purchased Credit-Impaired Loans" section elsewhere in this MD&A and Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2017 for more information on the accounting policy for purchased credit-impaired loans and the other significant accounting policies of Valley.

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 ~~June 30, 2018,~~March 31, 2019, Valley had consolidated total assets of approximately ~~$30.2~~$32.5 billion, total net loans of ~~$23.1~~$25.3 billion, total deposits of ~~$21.6~~$24.9 billion and total shareholders’ equity of ~~$3.3~~$3.4 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 Alabama. Of our current ~~237~~219 branch network, 5956 percent, 1617 percent, 1920 percent and 67 percent of the branches are ~~located~~ in New Jersey, New York, Florida and Alabama, respectively. Despite ~~significant~~targeted branch consolidation activity, ~~mainly in 2016,~~ we have significantly grown both in asset size and locations over the past several years primarily through bank ~~acquisitions.~~

acquisitions, including our acquisition of USAmeriBancorp, Inc. On ("USAB") on January 1, ~~2018,~~ 2018.

Sale Leaseback Transaction. Valley ~~completed its acquisition~~closed a sale-leaseback transaction for 26 of ~~USAB~~the previously announced 29 properties in March 2019. The properties, consisting of 25 branches and ~~its wholly-owned subsidiary, USAmeriBank, headquartered in Clearwater, Florida. USAB had approximately $5.1 billion in assets, $3.7 billion in~~1 corporate location, were sold for an aggregate sales price of $100.5 million. The pre-tax net ~~loans and $3.6 billion in deposits and maintained a branch network of 29 offices. The acquisition represents a significant addition to Valley’s Florida franchise, specifically in~~gain associated with the Tampa Bay market. The acquisition also brought Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where Valley now operates 15 branch office locations. The common shareholders of USAB received 6.1 shares of Valley common stock for each USAB share they owned. The total consideration26 properties was $78.5 million (after transaction-related expenses) for the ~~acquisition was approximately $737 million, and~~first quarter of 2019.

Valley expects to close the ~~transaction resulted in $388 million~~sale of ~~goodwill and $46 million of core deposit intangible assets subject to amortization. Full systems integration was completed in~~three additional properties during the second quarter of ~~2018 with minimal disruption~~2019, which remain subject to ~~our customers.~~due diligence. The remaining properties are expected to result in a pre-tax net gain of more than $3 million.

Branch ~~Transformation.~~ ~~Over the past six months,~~Transformation and Other Operational Improvements. As previously disclosed, Valley has embarked on a strategy to overhaul its retail network. ~~The Bank is striving to create a branch infrastructure~~During 2018, we identified several branches that is more reflective of current and future activity within our target markets. Our new model is going to place greater emphasis on service, sales, advisory and efficiency. We are in the process of upgrading many staff and training components, as well as placing greater importance on mobile and digital implementation and customer education and encouragement of those products. Valley's branch transformation will also focus on the repositioning, re-branding, functionality, aesthetics, and in many cases, reducing the square footage of our branches.

With that, we have updated our internal branch profitability and growth requirements, initially analyzing our New Jersey and New York network. We have identified 74 branches out of 177 within New Jersey and New York that presently dodid not meet ~~our minimum hurdles for success.~~certain internal performance measures. Of ~~the 74~~those identified, we ~~expect to consolidate about 20~~closed 7 branches ~~by the end of~~in 2018 and 13 additional branches during the first quarter ~~2019, resulting in an approximate~~of 2019. The estimated annual operating expense savings offrom the 20 branch closures is expected to be approximately $9 million. During the fourth quarter of 2018, we recognized severance costs of $2.7 million related to the branch closures and branch staff reductions.

For the remaining ~~54 branches,~~branch network, we ~~are implementing~~continue to monitor the operating performance of each branch and implement tailored action plans focused on improving profitability and deposit levels ~~as well as upgrades~~for those branches that underperform.

In addition, Valley recently announced a plan to improve its operating efficiencies. The annualized salary and benefit expense savings associated with the plan is expected to exceed $5 million, excluding $4.8 million of severance charges recognized in ~~staffing and training, within a defined timeline. Should~~ the ~~remaining branches not experience improvement within~~first quarter of 2019. Valley expects to implement the ~~associated timeline, they will be reviewed for potential consolidation as well.~~

~~While we expect the consolidation process, repositioning and renovations to be mostly complete~~majority of cost saves by the end of ~~2020,~~the second 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 2018. Since learning of the allegations, Valley has conducted an ongoing investigation coordinated with 10 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 ultimate amount of tax benefit likely to be recaptured.

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 ~~is important to recognize the evolving retail banking landscape combined~~would ultimately accept with the ~~Bank's renewed expectation regarding profitability will make this activity~~IRS, we currently expect a ~~more permanent piece of Valley's strategy.~~

~~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 activitiespartial loss and ~~delivering on the financial banking experience expected by our customers. In July 2017, we completed the idea generation and approval phase of the LIFT program.~~tax benefit recapture. As a result of ~~these efforts,~~this assessment, our first quarter of 2019 net income includes an increase to our provision for income taxes of $12.1 million, reflecting the reserve for uncertain tax liability positions related to renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. Additionally, we ~~currently expect to achieve approximately $22 million in total cost reductions and revenue enhancements on an annualized pre-tax run-rate after the LIFT program is fully phased-in by June 30, 2019.~~

~~At June 30, 2018, Valley had completed LIFT enhancements that will result in cost reductions greater than 60 percent~~recognized a full write down of the ~~$22~~related unamortized investments totaling $2.4 million ~~annual goal as compared~~(previously presented in other assets) due to ~~approximately 40 percent~~other than temporary impairment losses during the first quarter of ~~such goal at March 31, 2018.~~2019. We ~~believe we remain on track to fully implement the LIFT program generated enhancements and realize the total cost reduction goal by June 30, 2019, although we~~ can provide no assurance that ~~all~~we will not recognize additional tax provisions related to this uncertain tax liability as we learn 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 $28.8 million (inclusive of the ~~program generated enhancements~~$12.1 million provision for the first quarter of 2019). See Notes 14 and ~~cost reductions will ultimately be realized.~~

~~Tax Cuts~~15 to the consolidated financial statements for additional information related to our tax credit investments and ~~Jobs Act.~~ ~~On December 22, 2017, the President signed the Tax Cuts and Jobs Act (Tax Act) into law. As a result, the federal corporate income~~reserves for uncertain tax ~~rate decreased from 35 percent to 21 percent effective January 1, 2018. See the "Income Taxes" section below for more details.~~liability positions.

Quarterly Results. Net income for the ~~second~~first quarter of ~~2018~~2019 was ~~$72.8~~$113.3 million, or ~~$0.21~~$0.33 per diluted common share, compared to ~~$50.1~~$42.0 million, or ~~$0.18~~$0.12 per diluted common share, for the ~~second~~first quarter of ~~2017.~~2018. The ~~$22.7~~$71.4 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a ~~$45.9~~$75.4 million increase in non-interest income mostly related to a $78.5 million gain on the sale (and leaseback) of several Valley properties, (ii) a $26.0 million decrease in non-interest expense partly due to USAB merger expenses (mostly within salary and employee benefits and professional and legal fees) and litigation reserve charges of $13.4 million and $10.5 million, respectively, recognized in the first quarter of 2018, (iii) a $11.1 million increase in our net interest income mostly due to higher average loan balances driven by ~~acquired loans from USAB and~~ strong organic loan ~~volumes~~growth over the last 12 months and to a much lesser extent, the benefit of reduced interest expense resulting from $405 million of long-term borrowings modifications in the third quarter of 2017, (ii) a $9.2 million increase in non-interest income caused, in part, by an increase in net gains on sales of residential mortgage loans and higher fees resulting from the USAB acquisition and (iii) a $1.8 million~~decrease in income tax expense mostly due to the reduced corporate tax rate under the Tax Act, partially offset by~~ (iv) a ~~$30.7~~$2.9 million increase in non-interest expense mostly caused by additional operating costs related to the acquisition of USAB, including merger expenses of $3.2 million, and additional salary and employee benefit expense largely related to our expanding team of residential mortgage loan consultants and technology personnel, and (v) a $3.5 million~~increase~~decrease in our provision for credit losses, ~~mainly driven~~partially offset by (v) a $44.0 million increase in income tax expense largely due to higher ~~reserves allocated~~pre-tax income and an additional provision for income taxes of $12.1 million related to ~~impaired taxi medallion loans.~~uncertain tax liability positions at March 31, 2019. See the "Net Interest Income," "Non-Interest Income," "Non-Interest Expense", and "Income Taxes" sections below for more details on the items above impacting our ~~second~~first quarter ~~2018~~2019 results, as well as other items discussed elsewhere in this MD&A.

~~Economic Overview.~~

Operating Environment. During the ~~second~~first quarter of ~~2018,~~2019, real gross domestic product ~~(GDP) grew at a 4.1~~expanded 3.2 percent ~~annual rate after advancing 2.0~~compared to 2.2 percent in the first quarter of 2018. This represented the fastest rate of growth during a quarter since the third quarter of 2014. The pace of hiring was largely unchanged while private wages for all employees accelerated somewhat and measures of core inflation rose back near the Federal Reserve’s 2 percent target.Over recent months, the trade weighted U.S. dollar index advanced notably compared to the first quarter which may weigh on import and overall prices. Additionally, consumer spending and business investment advanced during the second quarter of the year while residential fixed investment remained weak.

The civilian unemployment rate declined from 4.1 percent at March 31, 2018 to 4.0 percent at June 30, 2018. The pace of hiring was mostly unchanged from the prior linked quarter. The monthly average change in payrolls was approximately 211 thousand in the first quarter of 2018 compared to 207 thousand in the second quarter of 2018.

Based on the quarterly average, the 12-month change in wage growth accelerated to 2.71 percent in the second quarter of 2018 compared to 2.66 percent in the prior quarter which represented the highest level since the middle of 2009.

Business investment, which includes investment in structures, equipment and software, advanced at a solid rate compared to the prior quarter. Private nonresidential fixed investment advanced 7.3 percent in the second quarter of 2018 compared to an increase of 11.5 percent in the first quarter of 2018. Offsetting this, investment in residential structures remained weak, declining 1.1 percent from the previous quarter. Over recent periods, the weakness was largely attributed to lower levels of new construction for multifamily housing units; however, in the second quarter of this year investment in multifamily structures increased 10.8 percent. The weakness in the quarter was largely attributed to investment in single family structures which declined 4.5 percent.

~~Personal consumption of goods and services grew notably in the second~~fourth quarter of 2018. The ~~pace~~acceleration in economic activity was supported by net exports, restocking of ~~growth accelerated to 4.0 percent in~~inventories, and government expenditures while business fixed investment and consumer spending slowed somewhat.

During 2018, the second quarter compared to 0.5 percent in the first quarter of the year. The acceleration was broad based including growth in both durable and nondurable goods. Home prices rose further in the second quarter of 2018 while equity market volatility declined which may have benefited consumer spending.

~~The~~ Federal ~~Open Market Committee (FOMC or Committee)~~Reserve gradually increased the target range for the federal funds rate four times throughout the year. As a result, the target range increased from 1.25 percent to ~~1.75~~1.50 percent as of January 1, 2018 to ~~2.00~~2.25 percent to 2.50 percent at ~~their June 2018 meeting. The Committee viewed that~~December 31, 2018. At its March 2019 meeting, the risks to the economic outlook were roughly balanced between their two objectives of price stability and maximum employment. Further, the Committee expects - based on realized and expected labor market conditions and inflation - additional gradual increases inFederal Reserve maintained the target range for the federal funds rate. The FOMC continued its policy, which was initiated in October 2017, of gradually reducing the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities.

rate at 2.25 to 2.50 percent, citing concern about global economic and financial developments, as well as muted inflation pressures.

The 10-year U.S. Treasury note yield ended the ~~second~~first quarter at ~~2.85~~2.41 percent, 1128 basis points ~~higher~~lower compared with ~~March~~December 31, 2018. The spread between the 2- and 10-year U.S. Treasury note yields ended the ~~second quarter of 2018 at 0.33 percentage point, 14 basis points lower compared to the end of the~~ first quarter of ~~2018 and 18~~2019 at 0.14 percent, 7 basis points lower compared to December 31, ~~2017.~~2018 and 33 basis points lower compared to March 31, 2018.

~~On a year over year basis,~~For the industry, many banks reported waning demand for commercial loan ~~growth~~products, particularly from smaller firms, during the first quarter of 2019. Demand for ~~all~~most consumer loans also appeared to weaken during the quarter. However, we continued to experience solid demand for commercial ~~banks in the U.S. accelerated modestly from 4.0 percent~~and industrial loans and commercial real estate loans across most of our primary geographies in the first quarter of ~~2018 to 4.8 percent in~~2019 (See "Loans" section below). While we are encouraged by our first quarter loan growth, the ~~second quarter despite higher borrowing costs and banks reporting weaker demand for most loan products. In the second quarter~~level of ~~the year, the Bank’s originations for its consumer products increased modestly. In addition, the Bank continued to see solid~~ demand for commercial ~~real estate~~loans, strong competition for deposits, and ~~construction loans across our geographies in the second quarter of 2018. However, should demand weaken for commercial loans and the~~a flattened yield curve ~~further compress, these conditions~~ may challenge our business operations and results as highlighted ~~throughout~~in the remaining MD&A ~~discussion below.~~

On a year over year basis, loan growth for all commercial banks in the U.S. accelerated modestly from 4.0 percent in the first quarter of 2018 to 4.8 percent in the second quarter despite higher borrowing costs and banks reporting weaker demand for most loan products. In the second quarter of the year, the Bank’s originations for its consumer products increased modestly. In addition, the Bank continued to see solid demand for commercial real estate and construction loans across our geographies in the second quarter of 2018. However, should demand weaken for commercial loans and the yield curve further compress, these conditions may challenge our business operations and results, as highlighted throughout the remaining MD&A discussion below.discussion.

Loans. Loans increased ~~$681.9~~$387.6 million, or ~~12.1~~6.2 percent on an annualized basis, to approximately ~~$23.2~~$25.4 billion at ~~June 30, 2018~~March 31, 2019 from ~~March~~December 31, 2018. The increase was mainly due to ~~strong~~solid quarter over quarter organic growth in ~~total~~commercial and industrial loans and commercial real estate loans, ~~commercial and industrial loans~~partially offset by moderate declines in construction and residential mortgage loans. During the ~~second~~first quarter of ~~2018, Valley also~~2019, we originated ~~$219~~$89.6 million of residential mortgage loans for sale rather than held for ~~investment.~~investment and also sold both pre-existing loans of approximately $100 million from our residential mortgage loan portfolio and a small retail credit card portfolio. Residential mortgage loans held for sale totaled ~~$32.7~~$31.9 million and ~~$15.1~~$35.2 million at ~~June 30, 2018~~March 31, 2019 and ~~March~~December 31, 2018, respectively.

We are optimistic that our lending activity will continue to be brisk during the remainder of 2018, despite the risk of potential setbacks in customer loan demand due to higher market interest rates or other negative market and economic factors. For the full year ~~2018,~~of 2019, we ~~currently expect~~have established a goal to grow our overall loan portfolio in the range of 6 to 8 ~~to 10 percent, adjusted for the recent USAB acquisition and loan sales.~~percent. However, there can be no assurance that we will

achieve such levels given the potential for unforeseen changes in ~~consumer confidence,~~ the ~~economy~~market and other ~~market conditions, or that the overall loan portfolio balance will not decline from June 30, 2018.~~conditions. See further details on our loan activities under the “Loan Portfolio” section below.

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. Our PCI loan portfolio totaled ~~$4.6~~$4.0 billion, or ~~20.0~~15.8 percent, of our total loan portfolio at ~~June 30, 2018 and is largely comprised of loans acquired from USAB.~~March 31, 2019.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) were ~~$33.3~~$82.0 million, or ~~0.14 percent of total loans, at June 30, 2018 and remained relatively unchanged as compared to $33.2 million, or 0.15~~0.32 percent of total loans, at March 31, 2019 as compared to $67.7 million, or 0.27 percent of total loans, at December 31, 2018. The $14.3 million increase from December 31, 2018 was partially due to a matured performing commercial real estate loan in the normal process of renewal totaling $15.0 million within the loans 30 - 59 days past due category, as well as a few other large commercial real estate loans within this past due category that are now current to their contractual payments.

Total non-performing assets, consisting of non-accrual loans, other real estate owned (OREO) and other repossessed assets increased ~~$22.1~~$4.7 million to ~~$97.1~~$103.4 million at ~~June 30, 2018~~March 31, 2019 as compared to ~~March~~December 31, 2018 mainly due to ~~an increase~~increases of ~~$24.1~~$5.0 million and $1.9 million in non-accrual loans and other repossessed assets, respectively, during the first quarter of 2019, partially offset by a ~~$2.0 million~~ decline in OREO ~~during the second quarter of 2018.~~balances largely caused by sales activity. The increase in

non-accrual loans was ~~primarily related~~mainly due to taxi medallion loans ~~totaling $31.1 million. As a result, non-accrual~~within the commercial and industrial loan, while other repossessed assets increased due to our repossession of eight New York City medallions from one non-performing loan relationship during the first quarter of 2019. Non-accrual loans increased to ~~0.36 percent of total loans at June 30, 2018 as compared to 0.27~~0.37 percent of total loans at March 31, 2019 as compared to 0.35 percent of total loans at December 31, 2018.

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 $134.9 million taxi medallion loan portfolio, management cannot provide assurance that our non-performing assets will not increase from the levels reported as of ~~June 30, 2018.~~March 31, 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 ~~second~~first quarter of ~~2018~~2019 remained ~~stable~~relatively unchanged as compared to the ~~first~~fourth quarter of 2018 with ~~moderate balance shifts~~a slight shift to ~~both~~time deposits. Average non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 25 percent, 46 percent and 29 percent of total deposits as of March 31, 2019, respectively. Overall, average deposits totaled $24.8 billion for the first quarter of 2019 and increased by $1.1 billion as compared to the fourth quarter of 2018. Actual ending balances for deposits increased $454.5 million to approximately $24.9 billion at March 31, 2019 from ~~the other~~December 31, 2018. The increase in average deposit ~~categories. Average non-interest bearing deposits, savings, NOW and~~balances were largely due to increases in money market deposits and time deposits ~~represented approximately 28 percent, 50 percent~~driven by the success of several new commercial and ~~22 percent~~consumer deposit initiatives commenced in the second half of ~~total~~2018, as well our increased use of brokered CDs as an alternative to other borrowings in the latter part of the fourth quarter of 2018. The increase in ending deposit balances was partially driven by non-interest bearing deposits, aswhich increased by $176.6 million to $6.4 billion at March 31, 2019 from December 31, 2018 due to strong retail and commercial volumes, including one substantial commercial loan customer account. Ending brokered deposit balances totaled $3.2 billion (consisting of ~~June 30, 2018, respectively. Overall, average deposits totaled $21.8~~both time and money market deposit accounts) at March 31, 2019 and remained relatively unchanged from December 31, 2018.

Average short-term borrowings decreased $304.6 million to $2.0 billion for the ~~second~~first quarter of ~~2018 and decreased by $35.5 million~~2019 as compared to the first quarter of 2018, and actual ending balances for deposits decreased $319.1 million to approximately $21.6 billion at June 30, 2018 from March 31, 2018. The decreases in both average and ending deposit balances were largely due to run-off within the NOW and money market deposit accounts caused, in part, by strong market competition for deposits, as well as normal fluctuations in municipal and other escrow deposit account balances. In response, Valley implemented several new deposit gathering campaigns and strategies in the later part of the second quarter of 2018 and July 2018 to better position its deposit offerings for both consumers and businesses.

~~Average short-term borrowings increased $679.6 million to $2.2 billion for the second quarter of 2018 as compared to the first~~fourth quarter of 2018. Actual ending balances for short-term borrowings also ~~increased $1.3 billion~~decreased $56.3 million to ~~$2.9~~$2.1 billion at ~~June 30, 2018~~March 31, 2019 as compared to ~~March~~December 31, 2018. Both the increases in average and ending short-term borrowings were largely due to new FHLB advances used for normal loan funding activity and liquidity purposes, and supplementing the expected short term decline in deposits at June 30, 2018.

Average long-term borrowings ~~(which include~~(including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition) decreased by ~~$148.4~~$100.4 million to ~~$2.3~~$1.7 billion for the ~~second~~first quarter of ~~2018~~2019 as compared to the ~~first~~fourth quarter of 2018. Actual ending balances for long-term borrowings also decreased ~~$249.6~~$154.5 million to ~~$2.1~~$1.5 billion at ~~June 30, 2018~~March 31, 2019 as compared to ~~March~~December 31, 2018. ~~Both the~~The decreases in average and ending short-term and long-term borrowings were mostly due to repayment of matured FHLB advances and our ability to reduce wholesale funding because of deposit growth and the net proceeds from the sale leaseback transaction in ~~part, to a few FHLB advance maturities and a moderate shift to short-term borrowings at June 30, 2018.~~the first quarter of 2019.

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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
Return on average assets	0.98	%	0.86	%	0.78	%	0.83	%	1.40	%	0.57	%
Return on average assets, as adjusted	1.01		0.86		0.93		0.83		0.93		0.84

Return on average shareholders’ equity	8.88		8.27		6.99		7.98		13.35		5.10
Return on average shareholders’ equity, as adjusted	9.17		8.27		8.33		7.98		8.83		7.50

Return on average tangible shareholders’ equity (ROATE)	13.76		11.88		10.82		11.48		20.29		7.90
ROATE, as adjusted	14.21		11.87		12.91		11.48		13.42		11.61

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. 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 presented below.

Adjusted net income is computed as follows:


	Three Months Ended June 30,					Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017			2018		2017		2019			2018
	($ in thousands)									(in thousands)
Net income, as reported	$	72,802	$	50,065		$	114,767	$	96,160	$	113,330		$	41,965
Add: Losses (gains) on securities transactions (net of tax)	26		(13		)	574		1
Add: Losses on securities transactions (net of tax)										23			548
Add: Severance expense (net of tax)⁽¹⁾										3,433			—
Add: Tax credit investment impairment (net of tax)⁽²⁾										1,757			—
Add: Legal expenses (litigation reserve impact only, net of tax)	—		—			7,520		—		—			7,520
Add: Merger related expenses (net of tax)*	2,326		—			12,014		—
Add: Income Tax Expense (USAB charge impact only)	—		—			2,000		—
Add: Merger related expenses (net of tax)⁽³⁾										—			9,688
Add: Income Tax Expense ⁽⁴⁾										12,100			2,000
Less: Gain on sale-leaseback transaction (net of tax) ⁽⁵⁾										(55,707		)	—
Net income, as adjusted	$	75,154	$	50,052		$	136,875	$	96,161	$	74,936		$	61,721

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

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

(3) Merger related expenses are primarily within salary and employee benefits and other expense.


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

(5) The gain on sale-leaseback transaction is included in 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 June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
	($ in thousands)												($ in thousands)
Net income, as adjusted	$	75,154		$	50,052		$	136,875		$	96,161		$	74,936		$	61,721
Average assets	$	29,778,210		$	23,396,259		$	29,536,301		$	23,197,377		$	32,296,070		$	29,291,703
Annualized return on average assets, as adjusted	1.01		%	0.86		%	0.93		%	0.83		%	0.93		%	0.84		%

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



	Three Months Ended March 31,
	2019			2018
	($ in thousands)
Net income, as adjusted	$	74,936		$	61,721
Average shareholders' equity	$	3,394,688		$	3,289,815
Annualized return on average shareholders' equity, as adjusted	8.83		%	7.50		%

5247

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
($ in thousands)
Net income, as adjusted $ 75,154
$ 50,052
$ 136,875
$ 96,161
Average shareholders' equity $ 3,279,616
$ 2,420,848
$ 3,284,687
$ 2,410,063
Annualized return on average shareholders' equity, as adjusted 9.17 % 8.27 % 8.33 % 7.98 %

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 June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
	($ in thousands)												($ in thousands)
Net income	$	72,802		$	50,065		$	114,767		$	96,160		$	113,330		$	41,965
Net income, as adjusted	$	75,154		$	50,052		$	136,875		$	96,161		$	74,936		$	61,721
Average shareholders’ equity	$	3,279,616		$	2,420,848		$	3,284,687		$	2,410,063		$	3,394,688		$	3,289,815
Less: Average goodwill and other intangible assets	(1,163,575		)	(734,616		)	(1,163,901		)	(735,393		)	1,160,510			1,164,230
Average tangible shareholders’ equity	$	2,116,041		$	1,686,232		$	2,120,786		$	1,674,670		$	2,234,178		$	2,125,585
Annualized ROATE	13.76		%	11.88		%	10.82		%	11.48		%	20.29		%	7.90		%
Annualized ROATE, as adjusted	14.21		%	11.87		%	12.91		%	11.48		%	13.42		%	11.61		%

In addition to the items used to calculate ~~the~~ net income, as adjusted, in the tables above, our net income is, from time to time, impacted by net gains on sales of loans and net impairment losses on securities recognized in non-interest income. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale and the results of our quarterly impairment analysis of the held to maturity and available for sale investment portfolios. See the “Non-Interest 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. For the three and six months ended June 30, 2018, Valley elected to reclassify fee income related to derivative interest rate swaps executed with commercial loan customers totaling $3.3 million and $7.7 million, respectively, from interest and fees on loans to other non-interest income within the presentation of our net interest margin below and consolidated financial statements. The applicable prior period amounts have also been reclassified to conform to this current presentation. See further discussion of the swap fees in the "Non-Interest Income" section below.

Net interest income on a tax ~~equivalen~~tequivalent basis totaling ~~$212.3~~$219.9 million for the ~~second~~first quarter of ~~2018~~2019 increased ~~$45.3 million and $3.1~~$10.8 million as compared to the ~~second quarter of 2017 and~~ first quarter of 2018 ~~respectively. The increase~~and decreased $3.5 million as compared to the ~~second~~fourth quarter of ~~2017~~2018. The decrease as compared to the fourth quarter of 2018 was largely due to a combination of higher costs of deposits, a slight decline in yield on loans (mostly caused by a decline in interest recovery income and other loan fees) and two less days in the ~~USAB acquisition effective January 1, 2018.~~first quarter. Interest income on a tax equivalent basis increased ~~$12.6~~$5.5 million to ~~$281.6~~$321.5 million for the ~~second~~first quarter of 2019 as compared to the fourth quarter of 2018 mainly due to a $723.8 million increase in average loans, partially offset by a 4 basis point decrease in the yield on average loans. Interest expense of $101.6 million for the first quarter of 2019 increased to $9.0 million as compared to the fourth quarter of 2018 largely due to higher costs and average balances for both money market and certificate of deposit accounts, partially offset by decreases of $304.6 million and $100.4 million in average short-term and long-term borrowings, respectively. These decreases were mostly driven by the repayment of maturing FHLB advances made possible by increased liquidity from deposits, as well as the net proceeds from our recent sale leaseback transaction.

Average interest earning assets increased $2.8 billion to $29.6 billion for the first quarter of 2019 as compared to the first quarter of 2018 due to strong organic loan growth over the last 12-month period. Compared to the fourth quarter of 2018, average interest earning assets increased by $756.3 million from $28.8 billion due to continued organic loan growth during the first three months of 2019 and a moderate increase in overnight funds, partially offset by lower average investments. Average loans increased $723.8 million to $25.3 billion for the first quarter of 2019 from the fourth quarter of 2018 mainly due to solid loan growth within the commercial and industrial loan and commercial real estate loan portfolios.

Average interest bearing liabilities increased $2.7 billion to $22.3 billion for the first quarter of 2019 as compared to the first quarter of 2018 mainly due to ~~a $537.2 million increase in average loans~~both retail and ~~an 8 basis point increase in the yield on average loans. Interest expense~~brokered time deposit growth, partly fueled by our use of $69.4 million for the second quarter of 2018 increased $9.5 million as compared to the first quarter of 2018 largely due to higher interest rates on many of our interest bearing deposit products and short-term borrowings, as wellbrokered CDs as a ~~$679.6 million increase~~cost effective alternative to shorter term FHLB borrowings in ~~average short-term borrowings.~~

Average interest earning assets increased $5.8 billion to $27.3 billion for the second quarter of 2018 as compared to the second quarter of 2017 largely due to $3.7 billion and $522.6 million of loans and investments, respectively, acquired from USAB on January 1, 2018, as well as strong organic loan growth over the last 12 month period. Compared to the

first quarter of 2018, average interest earning assets increased by $506.2 million from $26.8 billion largely due to the organic loan growth during the first half of 2018. Average loans increased $537.2 million to $22.8 billion for the second quarter of 2018 from the first quarter of 2018 mainly due to loan growth within the commercial real estate loan, commercial and industrial loans and residential mortgage loan portfolios.

Average interest bearing liabilities increased $4.5 billion to $20.1 billion for the second quarter of 2018 as compared to the second quarter of 2017 mainly due to $3.4 billion of interest bearing liabilities assumed in the USAB acquisition and deposit growth primarily from time deposit and money market account initiatives, as well as greater use of both short- and long-term FHLB advances as part of our ~~overall~~ funding and liquidity strategy ~~over~~since the ~~last 12 month period.~~second half of 2018. Compared to the ~~first~~fourth quarter of 2018, average interest bearing liabilities increased ~~$439.3~~$828.8 million in the ~~second~~first quarter of ~~2018 mostly~~2019 primarily due to ~~greater use~~a $888.0 million increase in average brokered certificates of ~~short-term borrowings~~ deposit

and higher ~~average time deposits,~~money market deposit balance partially offset by run-off in ~~the NOW~~both short-term and ~~money market deposit accounts, including some seasonal fluctuations in municipal and other escrow balances.~~long-term FHLB advances. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.

Our net interest margin on a tax equivalent basis of ~~3.11~~2.98 percent for the ~~second~~first quarter of 2019 decreased by 15 basis points and 12 basis points from 3.13 percent and 3.10 percent for the first quarter of 2018 ~~decreased by 1 basis point~~ and ~~2 basis points from 3.12 percent and 3.13 percent for the second quarter of 2017 and first~~fourth quarter of 2018, respectively. The yield on average interest earning assets ~~increased~~decreased by 114 basis points on a linked quarter basis mostly due to ~~higher yields~~a decline in the yield on ~~both average loans and taxable investments, as well as one more day during the second quarter of 2018.~~loans. The yield on average loans ~~increased~~decreased by 84 basis points to ~~4.34~~4.57 percent for the ~~second~~first quarter of ~~2018~~2019 as compared to the ~~first~~fourth quarter of 2018 largely due to the ~~high volume of new~~decline in interest recovery income and other loan ~~originations at current market rates. The yield on average taxable securities increased 28 basis points to 3.02 percent for the second quarter of 2018 as compared to~~fees and two less days in the first quarter of 2018 due, in part, to purchases of higher yielding securities over the last six months and the positive impact of increased market interest rates on the variable rate portion of our securities portfolio.2019. The overall cost of average interest bearing liabilities increased 1610 basis points to ~~1.38~~1.82 percent for the ~~second~~first quarter of ~~2018~~2019 as compared to the linked ~~first~~fourth quarter of 2018 due to 1215, 7, and 474 basis point increases in the cost of average interest bearing deposits, short-term borrowings, and ~~short-term~~long-term borrowings, respectively, largely driven by higher market interest rates. Our cost of total average deposits was ~~0.76 percent for the second quarter of 2018 as compared to 0.68~~1.20 percent for the first quarter of 2019 as compared to 1.07 percent for the fourth quarter of 2018.

Looking forward, we expect ~~modest pressure on the level of~~ our net interest margin to moderately increase for the ~~third~~second quarter of ~~2018~~2019 as compared to the ~~second~~first quarter of ~~2018~~2019 due to ~~strong~~the current level of market ~~competition for deposits~~interest rates, balance sheet repayment and prepayment assumptions and one more day during the ~~need~~second quarter. For the full year of 2019, we anticipate net interest income growth of approximately 5 to ~~fund our targeted loan growth.~~7 percent. However, our actual net interest margin ~~may decline as compared to~~and net interest income for the second quarter of ~~2018~~2019 and the full year of 2019, respectively, could materially differ from our expected results due to a multitude of other 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 current level of weighted average interest rates on new loan originations, as well as the higher rates on variable rate loans due to the increase in both the U.S. and Valley prime rates (to 5.00 percent and 5.875 percent, respectively) in response to the Federal Reserve's 25 basis point increase in the targeted federal funds rate in Mid-June 2018 should benefit both our future net interest income and margin.factors.

5449

The following table reflects the components of net interest income for the three months ended ~~June 30, 2018,~~ March 31, 2019, December 31, 2018 and ~~June 30, 2017:~~March 31, 2018:

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

Net Interest Income on a Tax Equivalent Basis

Three Months Ended
June 30, 2018 March 31, 2018 June 30, 2017

Average
Balance
Interest
Average
Rate

Average
Balance
Interest
Average
Rate

Average
Balance
Interest
Average
Rate
($ in thousands)
Assets
Interest earning assets:
Loans (1)(2) $ 22,840,235
$ 247,691
4.34 % $ 22,302,991
$ 237,587
4.26 % $ 17,701,676
$ 181,723
4.11 %
Taxable investments (3) 3,438,842
25,950
3.02
3,401,743
23,262
2.74
2,967,805
21,065
2.84
Tax-exempt investments (1)(3) 750,896
7,138
3.80
741,001
7,242
3.91
581,263
6,066
4.17
Federal funds sold and other interest bearing deposits 226,986
839
1.48
305,071
926
1.21
166,003
279
0.67
Total interest earning assets 27,256,959
281,618
4.13
26,750,806
269,017
4.02
21,416,747
209,133
3.91
Allowance for loan losses (134,741 ) (123,559 ) (116,254 )
Cash and due from banks 274,557

259,190
231,960

Other assets 2,428,459
2,423,553
1,879,853

Unrealized (losses) gains on securities available for sale, net (47,024 ) (18,287 ) (16,047 )
Total assets $ 29,778,210
$ 29,291,703
$ 23,396,259

Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits $ 10,978,067
$ 24,756
0.90 % $ 11,175,982
$ 22,317
0.80 % $ 8,803,028
$ 12,715
0.58 %
Time deposits 4,700,456
16,635
1.42
4,594,368
14,616
1.27
3,290,407
10,166
1.24
Total interest bearing deposits 15,678,523
41,391
1.06
15,770,350
36,933
0.94
12,093,435
22,881
0.76
Short-term borrowings 2,166,837
10,913
2.01
1,487,272
5,732
1.54
1,837,809
5,516
1.20
Long-term borrowings (4) 2,284,132
17,062
2.99
2,432,543
17,232
2.83
1,679,691
13,790
3.28
Total interest bearing liabilities 20,129,492
69,366
1.38
19,690,165
59,897
1.22
15,610,935
42,187
1.08
Non-interest bearing deposits 6,168,059
6,111,684
5,195,052

Other liabilities 201,043
200,039
169,424

Shareholders’ equity 3,279,616
3,289,815
2,420,848

Total liabilities and shareholders’ equity $ 29,778,210
$ 29,291,703
$ 23,396,259

Net interest income/interest rate spread (5)
$ 212,252
2.75 % $ 209,120
2.80 % $ 166,946
2.83 %
Tax equivalent adjustment (1,500 ) (1,522 ) (2,126 )
Net interest income, as reported $ 210,752
$ 207,598
$ 164,820

Net interest margin (6) 3.09 % 3.10 % 3.08 %
Tax equivalent effect 0.02 % 0.03 % 0.04 %
Net interest margin on a fully tax equivalent basis (6) 3.11 % 3.13 % 3.12 %

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

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

~~Net Interest Income on a Tax Equivalent Basis~~


	Six Months Ended																Three Months Ended
	June 30, 2018								June 30, 2017								March 31, 2019								December 31, 2018								March 31, 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
	($ in thousands)																($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)	$	22,573,097		$	485,278		4.30	%	$	17,508,461		$	356,079		4.07	%	$	25,254,733		$	288,277		4.57	%	$	24,530,919		$	282,847		4.61	%	$	22,302,991		$	237,587		4.26	%
Taxable investments (3)	3,420,395			49,212			2.88		2,902,505			40,805			2.81		3,390,609			26,050			3.07		3,398,396			25,960			3.06		3,401,743			23,262			2.74
Tax-exempt investments (1)(3)	745,976			14,380			3.86		597,017			12,267			4.11		689,675			6,081			3.53		713,552			6,482			3.63		741,001			7,242			3.91
Federal funds sold and other interest bearing deposits	265,813			1,765			1.33		176,502			610			0.69
Interest bearing deposits with banks																	227,890			1,093			1.92		163,753			666			1.63		305,071			926			1.21
Total interest earning assets	27,005,281			550,635			4.08		21,184,485			409,761			3.87		29,562,907			321,501			4.35		28,806,620			315,955			4.39		26,750,806			269,017			4.02
Allowance for loan losses	(129,181		)						(115,780		)						(152,961		)						(147,092		)						(123,559		)
Cash and due from banks	266,916								236,627								287,449								288,694								259,190
Other assets	2,426,020								1,909,238								2,643,727								2,445,609								2,423,553
Unrealized (losses) gains on securities available for sale, net	(32,735		)						(17,193		)						(45,052		)						(65,102		)						(18,287		)
Total assets	$	29,536,301							$	23,197,377							$	32,296,070							$	31,328,729							$	29,291,703
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits	11,076,478			47,073			0.85	%	8,925,556			22,898			0.51	%	$	11,450,943		$	36,283		1.27	%	$	11,186,180		$	32,546		1.16	%	$	11,175,982		$	22,317		0.80	%
Time deposits	4,647,705			31,251			1.34		3,234,739			19,719			1.22		7,214,863			38,171			2.12		6,245,803			30,599			1.96		4,594,368			14,616			1.27
Total interest bearing deposits	15,724,183			78,324			1.00		12,160,295			42,617			0.70		18,665,806			74,454			1.60		17,431,983			63,145			1.45		15,770,350			36,933			0.94
Short-term borrowings	1,828,932			16,645			1.82		1,701,164			9,417			1.11		2,011,428			12,549			2.50		2,316,020			14,092			2.43		1,487,272			5,732			1.54
Long-term borrowings (4)	2,357,928			34,294			2.91		1,587,494			26,740			3.37		1,666,794			14,573			3.50		1,767,194			15,304			3.46		2,432,543			17,232			2.83
Total interest bearing liabilities	19,911,043			129,263			1.30		15,448,953			78,774			1.02		22,344,028			101,576			1.82		21,515,197			92,541			1.72		19,690,165			59,897			1.22
Non-interest bearing deposits	6,140,027								5,167,116								6,116,953								6,270,902								6,111,684
Other liabilities	200,544								171,245								440,401								202,219								200,039
Shareholders’ equity	3,284,687								2,410,063								3,394,688								3,340,411								3,289,815
Total liabilities and shareholders’ equity	$	29,536,301							$	23,197,377							$	32,296,070							$	31,328,729							$	29,291,703
Net interest income/interest rate spread (5)				$	421,372		2.78	%				$	330,987		2.85	%				$	219,925		2.53	%				$	223,414		2.67	%				$	209,120		2.80	%
Tax equivalent adjustment				(3,022		)						(4,299		)						(1,277		)						(1,361		)						(1,522		)
Net interest income, as reported				$	418,350							$	326,688							$	218,648							$	222,053							$	207,598
Net interest margin (6)							3.10	%							3.08	%							2.96	%							3.08	%							3.10	%
Tax equivalent effect							0.02	%							0.04	%							0.02	%							0.02	%							0.03	%
Net interest margin on a fully tax equivalent basis (6)							3.12	%							3.12	%							2.98	%							3.10	%							3.13	%


(1)	Interest income is presented on a tax equivalent basis using a 21 percent ~~and 35 percent~~ federal tax ~~rate for 2018 and 2017, respectively.~~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.

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 June 30, 2018 Compared to June 30, 2017							Six Months Ended June 30, 2018 Compared to June 30, 2017							Three Months Ended March 31, 2019 Compared to March 31, 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
	(in thousands)														(in thousands)
Interest Income:
Loans*	$	55,242	$	10,726		$	65,968	$	107,911	$	21,288		$	129,199	$	32,904		$	17,786		$	50,690
Taxable investments	3,494		1,391			4,885		7,432		975			8,407		(76		)	2,864			2,788
Tax-exempt investments*	1,649		(577		)	1,072		2,909		(796		)	2,113		(481		)	(680		)	(1,161		)
Federal funds sold and other interest bearing deposits	131		429			560		409		746			1,155
Interest bearing deposits with banks															(276		)	443			167
Total increase in interest income	60,516		11,969			72,485		118,661		22,213			140,874		32,071			20,413			52,484
Interest Expense:
Savings, NOW and money market deposits	3,681		8,360			12,041		6,491		17,684			24,175		562			13,404			13,966
Time deposits	4,830		1,639			6,469		9,331		2,201			11,532		10,893			12,662			23,555
Short-term borrowings	1,127		4,270			5,397		755		6,473			7,228		2,474			4,343			6,817
Long-term borrowings and junior subordinated debentures	4,605		(1,333		)	3,272		11,594		(4,040		)	7,554		(6,153		)	3,494			(2,659		)
Total increase in interest expense	14,243		12,936			27,179		28,171		22,318			50,489		7,776			33,903			41,679
Total increase in net interest income	$	46,273	$	(967	)	$	45,306	$	90,490	$	(105	)	$	90,385	$	24,295		$	(13,490	)	$	10,805


*	Interest income is presented on a tax equivalent basis using a 21 percent ~~and 35 percent~~as the federal tax rate for ~~2018~~2019 and ~~2017, respectively.~~2018.

5751

Non-Interest Income

Non-interest income increased ~~$9.2 million and $15.8~~$75.4 million for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 as compared to the same ~~periods~~period of ~~2017.~~2018. The following table presents the components of non-interest income for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017		2018			2017			2019			2018
	(in thousands)											(in thousands)
Trust and investment services	$	3,262		$	2,800	$	6,492		$	5,544		$	2,904		$	3,230
Insurance commissions	4,026			4,358		7,847			9,419			2,525			3,821
Service charges on deposit accounts	6,679			5,342		13,932			10,578			5,903			7,253
(Losses) gains on securities transactions, net	(36		)	22		(801		)	(1		)
Losses on securities transactions, net												(32		)	(765		)
Fees from loan servicing	2,045			1,831		4,268			3,646			2,430			2,223
Gains on sales of loans, net	7,642			4,791		14,395			8,919			4,576			6,753
Gains (losses) on sales of assets, net												77,720			(97		)
Bank owned life insurance	2,652			1,701		4,415			4,164			1,887			1,763
Other	11,799			7,985		19,772			12,281			9,760			8,070
Total non-interest income	$	38,069		$	28,830	$	70,320		$	54,550		$	107,673		$	32,251

Insurance commissions decreased ~~$1.6~~$1.3 million for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 as compared to the same ~~period~~quarter in ~~2017~~2018 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts ~~increased $1.3 million and $3.4~~decreased $1.4 million for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 as compared to the same ~~periods in 2017 mostly driven by the acquisition of USAB on January 1, 2018.~~

Net gains on sales of loans increased $2.9 million and $5.5 million for the three and six months ended June 30, 2018 as compared to the same periods in 2017 largely due to a higher volume of residential mortgage loans originated for sale and better spreads resulting in higher gains on transactions executed in the second quarter of 2018. Residential mortgage loan originations (including both new and refinanced loans) increased $242.8 million to $437.2 million for the second quarter of 2018 ~~from $194.4 million for the second quarter of 2017. During the second quarter of 2018, we sold $195 million of residential mortgages originated for sale as compared~~due to $160 million of residential mortgage loans sold during the second quarter of 2017. During the six months ended June 30, 2018, we sold $430 million of residential mortgage loans as compared to $297 million for the same period one year ago. lower checking and ATM fees.

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 totaled $4.6 million for the first quarter of 2019 and included a gain of $1.1 million on the sale of our retail credit card portfolio totaling approximately $6.2 million in loans. However, net gains on sales of loans decreased $2.2 million for the first quarter of 2019 as compared to the first quarter of 2018 largely due to lower volume of residential mortgage loans sales. During the first quarter of 2019, we sold $193.1 million of residential mortgages as compared to $234.2 million of residential mortgage loans sold during the first quarter of 2018, including $100.0 million and $150.5 million of pre-existing loans sold from our residential mortgage loan portfolio, respectively. Residential mortgage originations for sale rather than held for ~~sale resulted in net losses~~investment totaled $89.6 million during the first quarter of ~~$432 thousand and net gains~~2019 as compared to $77.1 millionfor the first quarter of ~~$167 thousand for the three months ended June 30, 2018 and 2017, respectively, and net gains of $265 thousand and $848 thousand for the six months ended June 30, 2018 and 2017, respectively.~~2018. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Net gains (losses) on sales of assets increased $77.8 million primarily due to a $78.5 million gain on the sale (and leaseback) of 25 branches and 1 corporate location recognized during the first quarter of 2019.

Other non-interest income increased ~~$3.8 million and $7.5~~$1.7 million for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 as compared to the same ~~periods in 2017.~~quarter of 2018. The increase ~~during the quarter~~ was due, in part, to ~~the aggregate effect~~an increase of ~~changes in the FDIC loss-share receivable which amounted to a net gain of $745~~$839 thousand for the second quarter of 2018 as compared to net reductions of $452 thousand for the same quarter in 2017, as well as a $699 thousand insurance recovery. The increase for the first half of 2018 as compared to the same period of 2017 was largely due to a $2.9 million increase in fee income related to derivative interest rate swaps executed with commercial ~~loan~~lending customers, ~~which totaled $7.7 million for~~as well as an increase in credit and debit card interchange fees during the ~~six months ended June 30, 2018 as compared to $4.8 million for the six months ended June 30, 2017, and the aforementioned items for the second~~first quarter of ~~2018.~~2019. Swap fee income totaled ~~$4.4~~$4.1 million and ~~$4.1~~$3.3 million for the ~~second~~first quarters of ~~2018~~2019 and ~~2017,~~2018, respectively.

5852

Non-Interest Expense

Non-interest expense ~~increased $30.7 million and $83.5~~decreased $26.0 million for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 as compared to the same ~~periods~~period of ~~2017.~~2018. The following table presents the components of non-interest expense for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
	(in thousands)								(in thousands)
Salary and employee benefits expense	$	78,944	$	63,564	$	172,236	$	129,491	$	83,105	$	93,292
Net occupancy and equipment expense	26,901		22,609		54,825		45,644		27,886		27,924
FDIC insurance assessment	8,044		4,928		13,542		10,055		6,121		5,498
Amortization of other intangible assets	4,617		2,562		8,910		5,098		4,311		4,293
Professional and legal fees	5,337		4,302		22,384		8,997		5,271		17,047
Amortization of tax credit investments	4,470		7,732		9,744		13,056		7,173		5,274
Telecommunications expense	3,015		2,707		6,609		5,366		2,268		3,594
Other	18,588		10,835		35,418		22,484		11,660		16,830
Total non-interest expense	$	149,916	$	119,239	$	323,668	$	240,191	$	147,795	$	173,752

Salary and employee benefits expense ~~increased $15.4 million and $42.7~~decreased $10.2 million for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 as compared to the same ~~periods in 2017. The increases were~~period of 2018 primarily due ~~in part,~~ to ~~the additional staffing costs related to the USAB acquisition, including $9.8~~lower headcount caused by our recent branch closures and new universal banker model and $9.6 million of change in control, severance and retention expenses ~~for~~related to the six months ended June 30, 2018, as well as increases in both cash and stock-based incentive compensation expense. In addition to normal increases in annual compensation, Valley has also increased its investmentUSAB acquisition recognized in the ~~technology and home mortgage consultant teams over the last 12-month period.~~

~~Net occupancy and equipment~~first quarter of 2018, partially offset by severance expense ~~increased $4.3 million and $9.2~~of $4.8 million for the three and six months ended June 30, 2018 as compared to the same periods in 2017 mainly due to higher technology equipment related expense and increased occupancy and other costs related to the 29-branch network acquired from USAB. Net occupancy and equipment expense included $1.1 million of USAB merger related expenses for the six months ended June 30, 2018. Merger expenses within the category were immaterial for the secondfirst quarter of ~~2018.~~2019.

Professional and legal fees ~~increased $13.4~~decreased $11.8 million for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 as compared to the same period ~~in 2017~~of 2018. The decrease was mainly ~~due to~~driven by a $10.5 million litigation reserve charge ~~related to an increase in our litigation reserves~~recognized during the first quarter of ~~2018, as well as $815 thousand of merger related expenses in the first six months of~~ 2018. ~~See Note 16 to the consolidated financial statements for additional information regarding litigation matters.~~

Amortization of ~~other intangible assets~~tax credit investments increased ~~$2.1~~$1.9 million ~~and~~ ~~$3.8 million~~ for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 as compared to the same ~~periods in 2017. The increases were mainly~~period of 2018 largely due to ~~higher amortization expense of core deposit intangibles (CDI) during the first six months of 2018 caused~~a $2.4 million other-than-temporary impairment charge related to our remaining net investments in three federal renewable energy tax credit funds sponsored by ~~$45.9 million of such intangibles generated by the USAB acquisition.~~DC Solar. See Note 1014 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.

~~Other non-interest~~Telecommunications expense ~~increased $7.8 million and $12.9~~decreased $1.3 million for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 as compared to the same ~~periods in 2017 mainly~~period of 2018 partly due to ~~moderate increases~~branch reductions and other operating efficiencies, including a reduction of approximately $184 thousand due to USAB merger expenses incurred in the first quarter of 2018.

Other non-interest expense decreased $5.2 million for the three months ended March 31, 2019 as compared to the first quarter of 2018 mostly due to $2.2 million of USAB merger related charges recognized during the first quarter of 2018 and an $836 thousand increase in net gains on sale of OREO properties during the first quarter of 2019. For the 2019 period, several significant components of other expense ~~such~~declined as ~~data processing, travel and entertainment, debit card and ATM expense, postage, and stationery and print expenses during~~compared to 2018 partly due to the integration of USAB's operations completed in the second quarter of 2018, ~~largely caused by our growth both organically~~branch closures and ~~through the acquisition of USAB. Other non-interest expense also included $2.6 million and $5.0 million of USAB merger related expenses for the three and six months ended June 30, 2018.~~other cost reduction initiatives.

Efficiency 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 litigation reserves~~income and ~~merger expenses related to the 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 six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
	($ in thousands)												($ in thousands)
Total non-interest expense	$	149,916		$	119,239		$	323,668		$	240,191		$	147,795		$	173,752
Less: Severance expense (pre-tax)													4,838			—
Less: Amortization of tax credit investments (pre-tax)	(4,470		)	(7,732		)	(9,744		)	(13,056		)	7,173			5,274
Less: Legal expenses (litigation reserve impact only, pre-tax)	—			—			(10,500		)	—			—			10,500
Less: Merger related expenses (pre-tax)	(3,248		)	—			(16,776		)	—			—			13,528
Total non-interest expense, adjusted	$	142,198		$	111,507		$	286,648		$	227,135		$	135,784		$	144,450

Net interest income	$	210,752		$	164,820		$	418,350		$	326,688		$	218,648		$	207,598
Total non-interest income	38,069			28,830			70,320			54,550			107,673			32,251
Less: Gain on sale-leaseback transaction (pre-tax)													78,505			—
Add: Losses on securities transactions, net (pre-tax)													32			765
Total net interest income and non-interest income	$	248,821		$	193,650		$	488,670		$	381,238		$	247,848		$	240,614
Efficiency ratio	60.25		%	61.57		%	66.23		%	63.00		%	45.29		%	72.44		%
Efficiency ratio, adjusted	57.15		%	57.58		%	58.66		%	59.58		%	54.79		%	60.03		%

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 ~~defined~~shown in the table above) ~~of 54~~below 55 percent ~~or less by the fourth quarter of 2018.~~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 ~~third~~first quarter of ~~2018.~~2019.

Income Taxes

~~Effective January 1, 2018, the federal corporate income tax rate decreased from 35 percent to 21 percent under the Tax Act.~~ Income tax expense totaled ~~$19.0 million for the second quarter of 2018 as compared to $13.2 million and $20.7~~$57.2 million for the first quarter of ~~2018~~2019 as compared to $18.1 million and ~~second quarter of 2017, respectively, and $32.1 million and $38.8~~$13.2 million for the ~~six months ended June 30,~~fourth quarter of 2018 and ~~2017,~~first quarter of 2018, respectively. Our effective tax rate was ~~20.7~~33.5 percent, ~~23.9~~19.0 percent and ~~29.3 percent for the second quarter of 2018, first quarter of 2018,~~23.9 and second quarter of 2017, respectively, and 21.9 percent and 28.7 percent for the six months ended June 30, 2018 and 2017, respectively. The decline in the effective tax rate from the first quarter of 2018 was largely attributable to a $2 million charge included in income tax expense for the first quarter of 2019, fourth quarter of 2018, and first quarter of 2018, respectively. The increase as compared to the fourth quarter of 2018 was mainly due to an additional provision for income taxes of $12.1 million related to uncertain tax liability positions at March 31, 2019, as well as a $2.3 million tax benefit recognized in the fourth quarter of 2018 related to ~~effect~~the adjustment of the ~~USAB acquisition on~~Tax Cuts and Jobs Act provisional amounts in our ~~state deferred~~final 2017 tax ~~assets.~~returns. See additional information regarding our uncertain tax liability positions at Note 15 of the consolidated financial statements.

On July 1, 2018, the State of New Jersey enacted new legislation that created a temporary surtax effective for tax years 2018 through 2021 and will require companies to file combined tax returns beginning in 2019. Management is currently evaluating the effect of this new legislation on our net deferred tax asset and future tax expense. We anticipate that we will realize an immaterial tax benefit during the third quarter of 2018 due to the write up of our net deferred tax asset and, prospectively, our state tax expense will increase.

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 of ~~2018,~~2019, we currently estimate that our effective tax rate will range from 2125.5 percent to 23 percent primarily reflecting the impacts of the changes in federal and state tax laws (including the New Jersey surtax effective July 1, 2018), tax-exempt income, tax-advantaged investments and general business credits. See Note 15 to the consolidated financial statements for additional information regarding our tax credit investments.27.5 percent.

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 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 ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended June 30, 2018															Three Months Ended March 31, 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	$	6,005,266		$	16,834,969		$	4,416,724		$	—		$	27,256,959		$	6,821,057		$	18,433,676		$	4,308,174		$	—	$	29,562,907
Income (loss) before income taxes	15,713			78,640			11,761			(14,351		)	91,763			19,055			82,512			8,742			60,217		170,526
Annualized return on average interest earning assets (before tax)	1.05		%	1.87		%	1.07		%	N/A			1.35		%	1.12		%	1.79		%	0.81		%	N/A		2.31		%


	Three Months Ended June 30, 2017															Three Months Ended March 31, 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	$	5,125,615		$	12,576,061		$	3,715,071		$	—		$	21,416,747		$	5,901,208		$	16,401,783		$	4,447,815		$	—		$	26,750,806
Income (loss) before income taxes	15,055			58,387			9,864			(12,527		)	70,779			15,047			66,966			9,069			(35,933		)	55,149
Annualized return on average interest earning assets (before tax)	1.17		%	1.86		%	1.06		%	N/A			1.32		%	1.02		%	1.63		%	0.82		%	N/A			0.82		%

Consumer Lending

This segment, representing approximately ~~26.3~~26.7 percent of our loan portfolio at ~~June 30, 2018,~~March 31, 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 ~~15.2~~16.0 percentof our loan portfolio at ~~June 30, 2018)~~March 31, 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 ~~5.5~~5.3 percent of total loans at ~~June 30, 2018)~~March 31, 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$~~879.7~~919.8 million to ~~$6.0~~$6.8 billion for the three months ended ~~June 30, 2018~~March 31, 2019as compared to the ~~second~~first quarter of ~~2017.~~2018. The increase was largely due to ~~$365.9 million and $109.8 million of residential mortgage loans and home equity loans, respectively, acquired from USAB on January 1, 2018 and~~ loan growth ~~mainly~~ from new and

refinanced residential mortgage loan originations, including a higher level of non-conforming jumbo mortgages held for investment over the last 12 month period, as well as growth in both automobile loans and and collateralized personal lines of ~~credit over the last 12 months.~~credit.

Income before income taxes generated by the consumer lending segment increased ~~$658 thousand~~$4.0 millionto ~~$15.7~~$19.1 millionfor the ~~second~~first quarter of ~~2018 as compared to $15.1 million for the second quarter of 2017. The net interest income and non-interest income increased $5.1 million and $2.8 million for the second quarter of 2018~~2019 as compared to the ~~second~~first quarter of ~~2017. The increase in net~~2018. Net interest income increased $3.9 million and was ~~mostly due to~~mainly driven by the increase in average ~~loans~~loans. Non-interest expense decreased $3.2 million for the first quarter of 2019 as compared to the same quarter of 2018 partly due to lower residential mortgage commission expense caused by lower origination volume and commission rates. The positive impact of the aforementioned items was partially offset by a ~~higher overall yield on such loans, while the increase~~$2.5 milliondecrease in non-interest income ~~was~~for the first quarter of 2019 as compared to the first quarter of 2018 mainly due to ~~higher~~a decline in gains on sales of residential mortgage loans. Non-interest expense increased $5.7 million for the second quarter of 2018 as compared to the same quarter of 2017 mainly due to higher salaries and employee benefits expenses related to the USAB acquisition. The internal transfer expense increased $1.8 million for the second quarter of 2018 as compared to the same quarter of 2017.

The net interest margin on the consumer lending portfolio decreased 615 basis points to ~~2.73~~2.67 percent for the ~~second~~first quarter of ~~2018~~2019 as compared to the same quarter one year ago mainly due to a 2348 basis point increase in the costs associated with our funding sources, partially offset by a 1733 basis point increase in yield on average loans. The increase in our cost of funds was primarily due to increased short-term interest rates resulting from the Federal Reserve's gradual increase in short-term ~~market~~ interest rates during ~~2017 and~~ 2018 (commencing in late March 2018) and strong competition for ~~new~~deposits which have driven up the level of interest rates on many of our interest bearing deposit products and ~~existing deposits.~~other wholesale funding. The increase in loan yield was mainly due to 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 and other borrowings.

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 ~~$3.8~~$4.5 billionand represented ~~16.5~~17.7 percent of the total loan portfolio at ~~June 30, 2018.~~March 31, 2019. Commercial real estate loans and construction loans totaled ~~$13.3~~$14.1 billion and represented ~~57.2~~55.6 percentof the total loan portfolio at ~~June 30, 2018.~~March 31, 2019.

Average interest earning assets in this segment increased$~~4.3~~2.0 billion to ~~$16.8~~$18.4 billion for the three months ended ~~June 30, 2018~~March 31, 2019 as compared to the ~~second~~first quarter of ~~2017. This~~2018. The increase was mostly due to ~~approximately $3.3 billion of commercial PCI loans acquired from USAB,~~strong organic loan growth within the commercial and ~~to a much lesser extent, purchases of~~industrial loan ~~participations during~~and commercial real estate loan portfolios over the last ~~12 months.~~12-month period.

For the three months ended ~~June 30, 2018,~~March 31, 2019, income before income taxes for the commercial lending segment increased ~~$20.3~~$15.5 millionto ~~$78.6~~$82.5 million as compared to the same quarter of ~~2017.~~2018 mainly due to higher net interest income and a lower provision for loan losses. Net interest income increased$~~38.3~~10.1 million to ~~$152~~$159.4 million for the ~~second~~first quarter of ~~2018~~2019 as compared to the same quarter in ~~2017~~2018 largely due to higher average balances, as well as an increase in yield on new loan originations. Internal transfer expense and non-interest expense increased $12.4 million and $2.6 million, respectively, during the second quarter of 2018 as compared to the same quarter in 2017 due, in part, to the USAB acquisition. balances. The p~~rovision~~provision for credit losses ~~increased $3.7~~decreased $3.3 million to ~~$5.1~~$5.9 million during the three months ended ~~June 30, 2018~~March 31, 2019 as compared to ~~$1.4~~$9.2 million for the ~~second~~first quarter of ~~2017 due to higher allocated reserves related to impaired loans and loan growth.~~2018. See further details in the "Allowance for Credit Losses" section in this MD&A.

The net interest margin for this segment decreased 118 basis ~~point~~points to ~~3.61~~3.46 percent for the ~~second~~first quarter of ~~2018~~2019 as compared to the same period of ~~2017~~2018 largely due to a 2348 basis point increase in the cost of our funding sources, ~~mostly~~partially offset by a 2230 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 $701.7~~decreased $139.6 million during the ~~second~~first quarter of ~~2018~~2019 as compared to the ~~second~~first quarter of ~~2017. The increase was~~2018 largely due to normal investment ~~securities acquired from USAB~~maturities and ~~a $61.0 million increase in average federal~~repayments within our investment portfolio coupled with lower levels of excess liquidity (maintained overnight funds ~~sold~~ and ~~other~~ interest bearing ~~deposits for the three months ended June 30, 2018 as compared~~deposits). Investments and overnight funds both declined due to the ~~same quarter of 2017.~~strong organic loan growth over the last 12-month period.

For the quarter ended ~~June 30, 2018,~~March 31, 2019, income before income taxes for the investment management segment ~~increased $1.9 million~~decreased $327 thousand to ~~$11.8~~$8.7 million as compared to the ~~second~~first quarter ~~in 2017~~of 2018. The decline was largely due to a ~~$2.6~~$3.1 million ~~increase~~decrease in net interest income ~~mainly driven~~caused by ~~the higher~~lower average investment balances for the three months ended March 31, 2019, partially offset by a $2.2 million decrease in internal transfer expense and ~~better yields on new investments purchased during the first six months of 2018.~~moderately higher non-interest income.

The net interest margin for this segment decreased1123basis points to ~~2.11~~1.76 percentfor the ~~second~~first quarter of ~~2018~~2019 as compared to the same quarter of ~~2017~~2018 largely due to a 2348 basis point increase in costs associated with our funding sources, partially offset by a 1225 basis point increase in the yield on average investments. The increase in the yield on average investments was partly due to purchases of higher yielding securities over the last ~~six~~12 months and the positive impact of increased market interest rates on the variable rate portion of our securities portfolio.

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 not reported in the investment management segment above, ~~and~~ interest expense related to subordinated notes, amortization of tax credit investments, as well as ~~other infrequent charges related to bank acquisitions~~non-core items, including merger expenses, litigation reserves and ~~litigation reserves.~~the gain on the sale leaseback transaction.

The ~~pre-tax net loss for the~~ corporate segment ~~increased $1.8 million to $14.4~~recognized pre-tax income of $60.2 million for the three months ended ~~June 30, 2018~~March 31, 2019 as compared to a pre-tax loss of $35.9 million for the ~~second~~first quarter in ~~2017. The increase in the net loss for this segment was mainly due~~2018. Non-interest income increased $76.1 million to ~~an increase in non-interest expense, partially offset by an increase in internal transfer income. The non-interest expense increased $22.3~~$85.0 million to ~~$105.3 million~~for the three months ended ~~June 30,~~March 31, 2019 as compared to the first quarter in 2018 primarily due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter of 2019. Non-interest expense decreased $21.7 million to $103.8 millionfor the three months ended March 31, 2019 as compared to the three months ended ~~June 30, 2017. This increase was~~March 31, 2018 largely due to ~~charges related to higher~~declines in several expense categories, including salaries and employee benefits, ~~net occupancy~~legal and ~~equipment,~~professional fees, and other non-interest ~~expenses. See further details in the "Non-~~

~~Interest Expense" section above. Internal transfer income increased $15.8 million to $86.2 million for the three months ended June 30, 2018 as compared to the second quarter in 2017.~~

~~The following tables present the financial data for each business segment for the six months ended June 30, 2018 and 2017:~~

Six Months Ended June 30, 2018

Consumer
Lending

Commercial
Lending

Investment
Management

Corporate
and Other
Adjustments
Total
($ in thousands)
Average interest earning assets $ 5,953,524
$ 16,619,573
$ 4,432,184
$ —
$ 27,005,281
Income (loss) before income taxes 30,760
145,606
20,830
(50,284 ) 146,912
Annualized return on average interest earning assets (before tax) 1.03 % 1.75 % 0.94 % N/A
1.09 %

Six Months Ended June 30, 2017

Consumer
Lending

Commercial
Lending

Investment
Management

Corporate
and Other
Adjustments
Total
($ in thousands)
Average interest earning assets $ 5,085,438
$ 12,423,023
$ 3,676,024
$ —
$ 21,184,485
Income (loss) before income taxes 30,459
107,765
19,576
(22,855 ) 134,945
Annualized return on average interest earning assets (before tax) 1.20 % 1.73 % 1.07 % N/A
1.27 %

~~Consumer Lending~~

~~Average interest earning assets in this segment increased$868.1 million to $6.0 billion for the six months ended June 30, 2018~~as compared to the same period in 2017. The increase was largely due to $365.9 million and $109.8 million of residential mortgage loans and home equity loans, respectively, acquired from USAB on January 1, 2018 and loan growth mainly from new and refinanced residential mortgage loan originations held for investment and collateralized personal lines of credit over the last 12 months.

~~Income before income taxes generated by the consumer lending segment increased $301 thousandto $30.8 million~~for the six months ended June 30, 2018 as compared to $30.5 million for the same period in 2017 largely due to increases of $11.7 million and $3.5 million in net interest income and non-interest income, respectively. The increased net interest income was mostly due to higher average loans and yields on new loan volumes, while the increase in non-interest income was largely due to higher gains on sales of residential mortgage loans. Non-interest expense increased $10.6 million for the six months ended June 30, 2018 as compared to the same period in 2017 mainly due to higher salaries and employee benefits expenses related to the USAB acquisition. The internal transfer expense increased $3.2 million for the six months ended June 30, 2018 as compared to the same period in 2017. The provision for loan losses increased $1.0 million ~~largely due to loan growth. See further detail in the "Allowance for Credit Losses" section.~~

The net interest margin on the consumer lending portfolio decreased 1 basis point to 2.77 percent for the six months ended June 30, 2018 as compared to the same period one year ago mainly due to a 21 basis point increase in the costs associated with our funding sources, mostly offset by a 20 basis point increase in yield on average loans. The increase in our cost of funds was primarily due to increased short-term interest rates resulting from the Federal Reserve's gradual increase in short-term market interest rates during 2017 and 2018 and intense competition for deposits specifically in our New Jersey and New York markets. The increase in yield was mainly due to 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 and other borrowings.~~

~~Commercial Lending~~

~~Average interest earning assets in this segment increased~~$4.2 billion to $16.6 billion for the six months ended June 30, 2018 as compared to the same period in 2017. This increase was mostly due to approximately $3.3 billion of commercial PCI loans acquired from USAB, organic loan growth and, to a much lesser extent, purchases of loan participations during the last 12 months.

~~For the six months ended June 30, 2018, income before income taxes for the commercial lending segment increased $37.8 millionto $145.6 million as compared to the same period in 2017. Net interest income increased~~$76.0 million to $301.3 million for the six months ended June 30, 2018 as compared to the same period in 2017 largely due to higher average balances, as well as an increase in yield on new loan originations. Non-interest income increased $4.7 million for the six months ended June 30, 2018 as compared to the same period in 2017 mainly due to fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $7.7 million for the six months ended June 30, 2018 as compared to $4.8 million for the same period in 2017. Internal transfer expense and non-interest expense increased $21.3 million and $10.5 million, respectively, during the six months ended June 30, 2018 as compared to the same period in 2017 due, in part, to the USAB acquisition. ~~The p~~rovision for credit losses increased $11.0 million to $14.4 million during the six months ended June 30, 2018 as compared to $3.4 million for the same period in 2017 due to higher allocated reserves related to impaired loans and loan growth. See further details in the "Allowance for Credit Losses" section in this MD&A.

The net interest margin for this segment increased 1 basis point to 3.63 percent for the six months ended June 30, 2018 as compared to the same period of 2017 as a 22 basis point increase in yield on average loans was partially offset by a 21 basis point increase in the cost of our funding sources.

I~~nvestment Management~~

Average interest earning assets in this segment increased $756.2 million during the six months ended June 30, 2018 as compared to the same period in 2017. The increase was largely due to investment securities acquired from USAB and an $89.3 million increase in average federal funds sold and other interest bearing deposits for the six months ended June 30, 2018 as compared to the same period in 2017.

For the six months ended June 30, 2018, income before income taxes for the investment management segment increased $1.3 million to $20.8 million as compared to the same period in 2017 mainly due to a $4.3 million increase in net interest income, partially offset by a $3.2 million increase in the internal transfer expense. The increase in net interest income was mainly driven by the higher average investment balances during the six months ended June 30, 2018 as compared to the same period of 2017, partially offset by lower yield on tax-exempt securities caused, in part, by the changes in tax law.

~~The net interest margin for this segment decreased~~ 18 ~~basis points to 2.05 percent~~for the six months ended June 30, 2018 as compared to the same period of 2017 largely due to a 21 basis point increase in costs associated with our funding sources, partially offset by a 3 basis point increase in the yield on average investments. The increase in the yield on average investments was partly due to purchases of higher yielding securities mainly over the last six months and the positive impact of increased market interest rates on the variable rate portion of our securities portfolio.

~~Corporate and other adjustments~~

The pre-tax net loss for the corporate segment increased $27.4 million to $50.3 million for the six months ended June 30, 2018 as compared to the same period in 2017. The increase in the net loss for this segment was mainly due to an increase in non-interest expense, partially offset by a decrease in internal transfer income. The non-interest expense increased $62.2 million to $230.7 million~~for the six months ended June 30, 2018 as compared to the six~~

months ended June 30, 2017. This increase was largely due to higher salaries and employee benefits expenses related to the USAB acquisition and charges related to USAB merger expense and professional and legal fees for litigation reserves recognized during the first half of 2018. See further details in the "Non-Interest Income" and "Non-Interest Expense" ~~section above. Internal transfer income increased $27.7 million to $172.1 million for the six months ended June 30, 2018 as compared to the same period in 2017.~~sections of this MD&A.

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 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 ~~June 30, 2018.~~March 31, 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 ~~June 30, 2018.~~March 31, 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 ~~June 30, 2018.~~March 31, 2019. Although the size of Valley’s balance sheet is forecasted to remain static as of ~~June 30, 2018~~March 31, 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 ~~second~~first quarter of ~~2018.~~2019. The model also utilizes an immediate parallel shift in the market interest rates at ~~June 30, 2018.~~March 31, 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 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	$	(3,900	)	(0.42	)%	$	20,919		2.37	%
+100	(782		)	(0.09	)	11,185			1.27
–100	(29,558		)	(3.24	)	(9,045		)	0.67
–200						(32,036		)	0.57

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

sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to moderately

increase net interest income over the next 12 months by ~~0.09~~1.27 percent. The Bank’s sensitivity to changes in market

rates ~~declined~~increased as compared to December 31, ~~2017~~2018 (which projected ~~a decrease~~an increase of ~~0.35~~1.04 percent in net interest income over a 12 month period). The change in the sensitivity of our balance sheet since December 31, ~~2017~~2018 was ~~primarily~~partly due to a slightly longer term-funding structure (including borrowings and brokered deposits), as well as a moderately shorter cash flow profile for the impact of the interest earning assets and interest bearing liabilities acquired from USAB in the first quarter of 2018. However, the net asset sensitivity of the acquired financial instruments was largely mitigated by a significant increase in short-term borrowings during the second quarter of 2018.loan portfolio. Future changes including, but not limited to, deposit and 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.

Our interest rate swaps 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 June 30, 2018 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 six months ended June 30, 2018. 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 13 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 by our Asset/Liability Management Committee and the Investment Committee of the Board of Directors of Valley National Bank, which review 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 2530 percent of total funding. The Bank was in compliance with the foregoing policies at ~~June 30, 2018.~~March 31, 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 ~~$2.4~~$2.3 billion, representing ~~8.9~~7.9 percent of earning assets, at ~~June 30, 2018~~March 31, 2019 and ~~$2.0~~$2.3 billion, representing ~~9.3~~8.0 percent of earning assets, at December 31, ~~2017.~~2018. Of the ~~$2.4~~$2.3 billion of liquid assets at ~~June 30, 2018,~~March 31, 2019, approximately ~~$1.0~~$1.1 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately ~~$428~~$791 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 ~~June 30, 2018)~~March 31, 2019) are projected to be approximately ~~$6.1~~$7.1 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 ~~$19.6~~$20.5 billion and ~~$15.4~~$18.1 billion for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and for the year ended December 31, ~~2017,~~2018, respectively, representing ~~72.7~~70.0 percent and ~~71.8~~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 ~~$707~~$717 million for a short 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 ~~June 30, 2018,~~March 31, 2019, our borrowing capacity under the Federal Reserve's discount window was ~~$1.1~~$1.2 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). Short-term borrowings ~~increased~~(consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased approximately $56.3 million to $2.1 billion ~~to $2.9 billion~~ at ~~June 30, 2018~~March 31, 2019 as compared to December 31, ~~2017~~2018 mostly due to ~~new~~repayment of matured FHLB advances ~~used for normal loan~~and our ability to reduce wholesale funding ~~activity~~because of deposit growth and ~~liquidity purposes~~the net proceeds from the sale-leaseback transaction during the first ~~half~~quarter of 2018. Additionally, we assumed $650 billion of borrowings in the USAB acquisition, consisting of FHLB borrowings and securities sold under agreements to repurchase. The change in short-term borrowings is generally driven by the levels of loan originations both for

~~investment and sale, repayments of long-term borrowings, and our use of time deposits, fully insured brokered deposits and other short-term funding in our current liquidity/funding strategies.~~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 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 ~~June 30, 2018,~~March 31, 2019, we had ~~$2.0~~$2.1 billion and ~~$1.8~~$1.7 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 agency securities, tax-exempt issuances of states and political subdivisions, residential mortgage-backed securities, ~~(including 9 private label mortgage-backed securities),~~ single-issuer trust preferred securities principally issued by bank holding companies, ~~(including 1 pooled security)~~ and high quality corporate bonds issued by banks at ~~June 30, 2018.~~March 31, 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 and bank issued corporate 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, ~~2017~~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 ~~June 30, 2018:~~March 31, 2019:


	June 30, 2018									March 31, 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	$	1,557,675	$	9,178	$	(43,161	)	$	1,523,692	$	1,648,304	$	15,722	$	(21,556	)	$	1,642,470
AA Rated	290,368		4,329		(1,922		)	292,775		276,041		5,703		(240		)	281,504
A Rated	39,984		547		(321		)	40,210		33,412		416		(27		)	33,801
BBB Rated	3,000		49		—			3,049		3,000		124		—			3,124
Non-investment grade	7,413		57		(1,149		)	6,321
Not rated	131,754		132		(9,151		)	122,735		113,642		210		(7,781		)	106,071
Total investment securities held to maturity	$	2,030,194	$	14,292	$	(55,704	)	$	1,988,782	$	2,074,399	$	22,175	$	(29,604	)	$	2,066,970
Available for sale investment grades:*
Available for sale investment grades: *
AAA Rated	$	1,669,102	$	965	$	(52,074	)	$	1,617,993	$	1,575,495	$	3,562	$	(24,869	)	$	1,554,188
AA Rated	96,485		70		(1,907		)	94,648		84,137		203		(443		)	83,897
A Rated	43,431		143		(481		)	43,093		21,113		82		(119		)	21,076
BBB Rated	12,145		67		(272		)	11,940		17,984		48		(192		)	17,840
Non-investment grade	20,281		587		(1,450		)	19,418		10,427		—		(1,857		)	8,570
Not rated	47,509		84		(1,218		)	46,375		38,201		46		(712		)	37,535
Total investment securities available for sale	$	1,888,953	$	1,916	$	(57,402	)	$	1,833,467	$	1,747,357	$	3,941	$	(28,192	)	$	1,723,106



*	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 ~~investments~~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 ~~$131.8~~$113.6 million in investments not rated by the rating agencies with aggregate unrealized losses of ~~$9.2~~$7.8 million at ~~June 30, 2018.~~March 31, 2019. The unrealized losses for this category included ~~$6.6~~$5.8 million of unrealized losses related to four 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 ~~June 30, 2018,~~March 31, 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 the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ as the collateral supporting much of the investment securities has improved or performed as expected.

Loan Portfolio

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


	June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018
	($ in thousands)															($ in thousands)
Loans
Commercial and industrial	$	3,829,525		$	3,631,597		$	2,741,425		$	2,706,912		$	2,631,312		$	4,504,927		$	4,331,032		$	4,015,280		$	3,829,525		$	3,631,597
Commercial real estate:
Commercial real estate	11,913,830			11,706,228			9,496,777			9,351,068			9,230,514			12,665,425			12,407,275			12,251,231			11,913,830			11,706,228
Construction	1,376,732			1,372,508			851,105			903,640			881,073			1,454,199			1,488,132			1,416,259			1,376,732			1,372,508
Total commercial real estate	13,290,562			13,078,736			10,347,882			10,254,708			10,111,587			14,119,624			13,895,407			13,667,490			13,290,562			13,078,736
Residential mortgage	3,528,682			3,321,560			2,859,035			2,941,435			2,724,777			4,071,237			4,111,400			3,782,972			3,528,682			3,321,560
Consumer:
Home equity	520,849			549,329			446,280			448,842			450,510			513,066			517,089			521,797			520,849			549,329
Automobile	1,281,735			1,222,721			1,208,902			1,171,685			1,150,343			1,347,759			1,319,571			1,288,902			1,281,735			1,222,721
Other consumer	783,363			748,824			728,056			677,880			642,231			866,505			860,970			834,849			783,363			748,824
Total consumer loans	2,585,947			2,520,874			2,383,238			2,298,407			2,243,084			2,727,330			2,697,630			2,645,548			2,585,947			2,520,874
Total loans ^*	$	23,234,716		$	22,552,767		$	18,331,580		$	18,201,462		$	17,710,760		$	25,423,118		$	25,035,469		$	24,111,290		$	23,234,716		$	22,552,767
As a percent of total loans:
Commercial and industrial	16.5		%	16.1		%	15.0		%	14.9		%	14.8		%	17.7		%	17.3		%	16.7		%	16.5		%	16.1		%
Commercial real estate	57.2		%	58.0		%	56.4		%	56.3		%	57.1		%	55.6			55.5			56.6			57.2			58.0
Residential mortgage	15.2		%	14.7		%	15.6		%	16.2		%	15.4		%	16.0			16.4			15.7			15.2			14.7
Consumer loans	11.1		%	11.2		%	13.0		%	12.6		%	12.7		%	10.7			10.8			11.0			11.1			11.2
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%


*	Includes net unearned premiums and deferred loan costs of $20.5 million, $21.5 million, $16.7 million, $18.7 million and $22.0 million ~~$22.2 million, $18.5 million, and $16.7 million~~ at March 31, 2019, December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018, ~~December 31, 2017, September 30, 2017 and June 30, 2017,~~ respectively.

Loans increased ~~$681.9~~$387.6 million to approximately ~~$23.2~~$25.4 billion at ~~June 30, 2018~~March 31, 2019 from ~~March~~December 31, 2018. The increase was mainly due to strong quarter over quarter ~~organic~~ growth in ~~total~~commercial and industrial loans and commercial real estate loans, ~~commercial and industrial loans~~partially offset by moderate declines in construction and residential mortgage loans. During the ~~second~~first quarter of ~~2018, Valley also~~2019, we originated ~~$219~~$89.6 million of residential mortgage loans for sale rather than held for ~~investment.~~investment and we also sold approximately $100 million of pre-existing loans from our residential mortgage loan portfolio. Residential mortgage loans held for sale totaled ~~$32.7~~$31.9 million and ~~$15.1~~$35.2 million at ~~June 30, 2018~~March 31, 2019 and ~~March~~December 31, 2018, respectively.

Total commercial and industrial loans increased ~~$197.9~~$173.9 million, or 16.1 percent on an annualized basis, from ~~March~~December 31, 2018 to approximately ~~$3.8~~$4.5 billion at ~~June 30, 2018, despite the $87.4~~March 31, 2019. The increase was mostly driven by new small to middle market lending relationships within our markets largely established by focused calling efforts by our experienced lending teams and, to a lesser extent, by increased business investment by existing relationships.

Commercial real estate loans (excluding construction loans) increased $258.2 million, or 8.3 percent on an annualized basis, to $12.7 billion at March 31, 2019 from December 31, 2018. The increase was mainly due to strong loan volumes in our primary markets in Florida, targeted growth in New Jersey and New York and some migration of completed construction projects to permanent financing.

Construction loans decreased $33.9 million, net of a $111.3 million decline in ~~the~~ PCI ~~loan portion~~loans (partly due to migration of ~~the portfolio during the second quarter of~~completed construction projects to permanent commercial real estate loans) to $1.5 billion at March 31, 2019 from December 31, 2018. Exclusive of the decline in PCI loans, the non-PCI ~~commercial and industrial~~construction loans increased ~~by $285.4~~$77.4 million or ~~41.7~~27.6 percent on an annualized basis ~~mostly~~during the first quarter of 2019 due, in part, to strong ~~quarter over quarter organic growth during the second quarter of 2018.~~demand for investor occupied projects within our primary markets.

Commercial real estate loans (excluding construction loans) increased $207.6 million from March 31, 2018 to $11.9 billion at June 30, 2018, net of a normal decline in PCI loans. During the second quarter of 2018, non-PCI loans increased $304.9 million, or 13.9 percent on an annualized basis, due to solid organic loan volumes generated across a broad based segment of borrowers within the commercial real estate portfolio. Construction loans increased $4.2 million (net of a $41.7 million decline in PCI loans) to $1.4 billion at June 30, 2018 from March 31, 2018.

Total residential mortgage loans ~~increased $207.1~~decreased $40.2 million to approximately ~~$3.5~~$4.1 billion at ~~June 30, 2018~~March 31, 2019 from ~~March~~December 31, 2018 due to ~~strong production~~lower loan origination volumes, particularly non-conforming loans, and sale of approximately $100 million of pre-existing loans from our ~~growing team of home~~residential mortgage ~~consultants during the second quarter of 2018.~~loan portfolio. New and refinanced residential mortgage loan originations totaled approximately ~~$437 million for the second quarter of 2018 as compared to $372 millionand $194~~$254.1 million for the first quarter of 2019 as compared to $436.7 millionand $372.2 million for the fourth quarter of 2018 and ~~second~~

first quarter of ~~2017,~~2018, respectively. ~~We sold approximately $195 million of residential mortgage loans during the second quarter of 2018.~~

Home equity loans totaling ~~$520.8~~$513.1 million at ~~June 30, 2018~~March 31, 2019 decreased by ~~$28.5~~only $4.0 million as compared to ~~March~~December 31, ~~2018 partly due to a decline of $14.2 million in the PCI loan portion of the portfolio during the second quarter of~~ 2018. New home equity loan volumes and customer usage of existing home equity lines of credit ~~continue~~continued to be ~~weak.~~modest in the first quarter of 2019. We believe this trend ~~may~~will likely continue ~~in 2018~~for the second quarter of 2019 due to ~~many~~several factors, including ~~the Tax Act changes that limit the deductibility of~~ mortgage interest expense deductibility limits for homeowners.

Automobile loans increased by ~~$59.0~~$28.2 million ~~or 19.3 percent on an annualized basis,~~ to $1.3 billion at ~~June 30, 2018~~March 31, 2019 as compared to ~~March~~December 31, 2018. ~~Overall loan volumes improved during~~The first quarter annualized growth was 8.5 percent, but it moderately declined as compared to the ~~second~~fourth quarter of 2018 ~~largely~~ due to ~~the impact of inclement weather on auto sales in the Northeast region during the first quarter of 2018.~~lower application volumes coupled with normal loan repayments. Our Florida dealership network contributed ~~$41~~$40.8 million in auto loan originations, representing approximately 2225 percent of Valley's total new auto loan production during the ~~second~~first quarter of ~~2018~~2019 and was relatively consistent with the linked ~~first~~fourth quarter of 2018.

Other consumer loans increased ~~$34.5~~only $5.5 million to ~~$783.4 million at June 30, 2018 as compared to $748.8~~$866.5 million at March 31, 2019 as compared to $861.0 million at December 31, 2018 mostly due ~~continued growth and customer usage~~to lower volumes of new collateralized personal lines of ~~credit.~~credit as compared to the fourth quarter of 2018.

Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, ~~and, to a much lesser extent, Alabama, with the exception of~~except for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey, which could present a geographic and credit risk if there was another significant broad based economic downturn within these regions. To mitigate our geographic risks, we 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.

Purchased Credit-Impaired Loans

PCI loans ~~increased $3.2 billion~~decreased $185.7 million to ~~$4.6~~$4.0 billion at ~~June 30, 2018~~March 31, 2019 from ~~$1.4~~$4.2 billion at December 31, ~~2017,~~2018, mainly due to ~~$3.7 billion of PCI loans acquired from USAB on January 1, 2018.~~normal repayment activity. Our PCI loans ~~also~~ 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 and other consumer loans, totaled ~~$31.1~~$25.3 million and ~~$38.7~~$27.6 millionat ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

As required by U.S. GAAP, all of our PCI loans are accounted for under ASC Subtopic 310-30. This accounting guidance requires ~~the~~ PCI loans to be aggregated and accounted for as pools of loans based on common risk characteristics. 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 date over the carrying amount (fair value) of ~~the~~ PCI loans is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of 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 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, expected 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 ~~was~~is subsequently aggregated on a pool basis. The expected payment data, discount rates, impairment data and changes to the accretable yield ~~were~~are reviewed by Valley to determine whether this information is accurate and the resulting financial statement effects are reasonable.

Similar to contractual cash flows, we reevaluate expected 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, Valley analyzes the actual cash flow versus the forecasts at the loan pool level and variances are reviewed to determine their cause. In re-forecasting future estimated cash flow, Valley will adjust the credit loss expectations for loan 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 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.

The following table summarizes the changes in the carrying amounts of PCI loans and the accretable yield on these loans for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended June 30,												Three Months Ended March 31,
	2018						2017						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	$	4,915,833		$	691,086		$	1,654,701		$	269,831		$	4,190,086		$	875,958		$	1,387,215		$	282,009
Acquisition													—			—			3,744,682			559,907
Accretion	60,536			(60,536		)	23,553			(23,553		)	53,492			(53,492		)	65,131			(65,131		)
Payments received	(328,620		)	—			(136,785		)	—			(238,630		)	—			(281,050		)	—
Net increase in expected cash flows													—			68,305			—			—
Transfers to other real estate owned	(48		)	—			—			—			(608		)	—			(145		)	—
Balance, end of the period	$	4,647,701		$	630,550		$	1,541,469		$	246,278		$	4,004,340		$	890,771		$	4,915,833		$	776,785

Six Months Ended June 30,
2018 2017

Carrying
Amount

Accretable
Yield

Carrying
Amount

Accretable
Yield
(in thousands)
PCI loans:
Balance, beginning of the period $ 1,387,215
$ 282,009
$ 1,771,502
$ 294,514
Acquisition 3,744,682
474,208
—
—
Accretion 125,667
(125,667 ) 48,236
(48,236 )
Payments received (609,670 ) —
(274,735 ) —
Transfers to other real estate owned (193 ) —
(3,534 ) —
Balance, end of the period $ 4,647,701
$ 630,550
$ 1,541,469
$ 246,278

adjustable portion of the PCI loan portfolio, changes in the expected duration of certain loan pools and additional advances on lines of credit.

Non-performing Assets

Non-performing assets (excluding PCI loans) include non-accrual loans, other real estate owned (OREO) and other repossessed assets (which consist of ~~automobiles)~~automobiles and taxi cab medallions) at ~~June 30, 2018.~~March 31, 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 ~~$97.1~~$103.4 million at ~~June 30,~~March 31, 2019 increased 4.8 percent from December 31, 2018 ~~increased29.5 percent~~ and ~~77.9~~increased 37.9 percent from March 31, 2018, ~~and June 30, 2017,~~ respectively (as shown in the table below). The $4.7 million increase in non-performing assets at ~~June 30,~~March 31, 2019 as compared to December 31, 2018 ~~was~~ mainly due to ~~the addition~~increases of ~~$31.1~~$5.0 million ~~of taxi medallion~~and $1.9 million in non-accrual loans ~~to non-accrual commercial~~ and ~~industrial loans~~other repossessed assets, respectively, during the ~~second~~first quarter of ~~2018.~~2019, partially offset by a decline in OREO balances largely caused by sales activity. Non-performing assets as a percentage of total loans and non-performing assets totaled ~~0.42~~0.40 percent at ~~June 30,~~March 31, 2019 as compared to 0.39 percent at December 31, 2018. 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.

7465

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:


	June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018
	($ in thousands)															($ in thousands)
Accruing past due loans:*
Accruing past due loans: *
30 to 59 days past due:
Commercial and industrial	$	6,780		$	5,405		$	3,650		$	1,186		$	2,391		$	5,120		$	13,085		$	9,462		$	6,780		$	5,405
Commercial real estate	4,323			3,699			11,223			4,755			6,983			39,362			9,521			3,387			4,323			3,699
Construction	175			532			12,949			—			—			1,911			2,829			15,576			175			532
Residential mortgage	7,961			6,460			12,669			7,942			4,677			15,856			16,576			10,058			7,961			6,460
Total Consumer	6,573			5,244			8,409			5,205			4,393			6,647			9,740			7,443			6,573			5,244
Total 30 to 59 days past due	25,812			21,340			48,900			19,088			18,444			68,896			51,751			45,926			25,812			21,340
60 to 89 days past due:
Commercial and industrial	1,533			804			544			3,043			2,686			1,756			3,768			1,431			1,533			804
Commercial real estate	—			—			—			626			8,233			2,156			530			2,502			—			—
Construction	—			1,099			18,845			2,518			854			—			—			36			—			1,099
Residential mortgage	1,978			4,081			7,903			1,604			1,721			3,635			2,458			3,270			1,978			4,081
Total Consumer	860			1,489			1,199			1,019			1,007			990			1,386			1,249			860			1,489
Total 60 to 89 days past due	4,371			7,473			28,491			8,810			14,501			8,537			8,142			8,488			4,371			7,473
90 or more days past due:
Commercial and industrial	560			653			—			125			—			2,670			6,156			1,618			560			653
Commercial real estate	27			27			27			389			2,315			—			27			27			27			27
Construction	—			—			—			—			2,879
Residential mortgage	2,324			3,361			2,779			1,433			3,353			1,402			1,288			1,877			2,324			3,361
Total Consumer	198			372			284			301			275			523			341			282			198			372
Total 90 or more days past due	3,109			4,413			3,090			2,248			8,822			4,595			7,812			3,804			3,109			4,413
Total accruing past due loans	$	33,292		$	33,226		$	80,481		$	30,146		$	41,767		$	82,028		$	67,705		$	58,218		$	33,292		$	33,226
Non-accrual loans:*
Non-accrual loans: *
Commercial and industrial	$	53,596		$	25,112		$	20,890		$	11,983		$	11,072		$	76,270		$	70,096		$	52,929		$	53,596		$	25,112
Commercial real estate	7,452			8,679			11,328			13,870			15,514			2,663			2,372			7,103			7,452			8,679
Construction	1,100			732			732			1,116			1,334			378			356			—			1,100			732
Residential mortgage	19,303			22,694			12,405			12,974			12,825			11,921			12,917			16,083			19,303			22,694
Total Consumer	3,003			3,104			1,870			1,844			1,409			2,178			2,655			2,248			3,003			3,104
Total non-accrual loans	84,454			60,321			47,225			41,787			42,154			93,410			88,396			78,363			84,454			60,321
Other real estate owned (OREO)	11,760			13,773			9,795			10,770			10,182			7,317			9,491			9,863			11,760			13,773
Other repossessed assets	864			858			441			480			342			2,628			744			445			864			858
Non-accrual debt securities	—			—			—			2,115			1,878
Total non-performing assets (NPAs)	$	97,078		$	74,952		$	57,461		$	55,152		$	54,556		$	103,355		$	98,631		$	88,671		$	97,078		$	74,952
Performing troubled debt restructured loans	$	83,694		$	116,414		$	117,176		$	113,677		$	109,802		$	73,081		$	77,216		$	81,141		$	83,694		$	116,414
Total non-accrual loans as a % of loans	0.36		%	0.27		%	0.26		%	0.23		%	0.24		%	0.37		%	0.35		%	0.33		%	0.36		%	0.27		%
Total NPAs as a % of loans and NPAs	0.42			0.33			0.31			0.30			0.31			0.40			0.39			0.37			0.42			0.33
Total accruing past due and non-accrual loans as a % of loans	0.51			0.41			0.70			0.40			0.47			0.69			0.62			0.57			0.51			0.41
Allowance for loan losses as a % of non-accrual loans	164.30			220.26			255.92			284.70			276.24			165.27			171.79			184.99			164.30			220.26

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

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Loans past due 30 to 59 days increased ~~$4.5~~$17.1 million to ~~$25.8~~$68.9 million at ~~June 30, 2018~~March 31, 2019 as compared to ~~March~~December 31, 2018 largely due to ~~increases~~an increase in ~~several~~commercial real estate loan ~~types. Commercial~~delinquencies, partially offset by a decrease in commercial and industrial ~~loans~~loan delinquencies. Commercial real estate loan delinquencies increased ~~$1.4~~$29.8 million ~~mainly~~as compared to December 31, 2018 partly due to ~~NYC taxi medallion~~a $15.0 million matured performing commercial real estate loan in the normal process of renewal, as well as a few other large loans ~~at the early stage of delinquency reported~~ within this past due category ~~at June 30, 2018~~ that are ~~subsequently performing~~now current to their contractual ~~terms or in the process of renewal.~~payments.

Loans past due 60 to 89 days ~~decreased $3.1 million~~increased $395 thousand to ~~$4.4~~$8.5 million at ~~June 30, 2018~~March 31, 2019 as compared to ~~March~~December 31, 2018 ~~mainly~~largely due to ~~decreases across most of the loan types~~moderate increases in commercial real estate loans and residential loans within this delinquency category. Construction loans decreased $1.1 million due to the migration of one potential problem loan relationship at March 31, 2018 to the non-accrual loans category at June 30, 2018. Residential loan delinquencies within this past due category decreased $1.5 million largely due to improved performance.

Loans past due 90 days or more and still accruing interest decreased ~~$1.3~~$3.2 million to ~~$3.1 million at June 30, 2018 as compared to $4.4~~$4.6 million at March 31, ~~2018 mainly due~~2019 as compared to ~~improved performance.~~$7.8 million at December 31, 2018. 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 increased ~~$24.1~~$5.0 million to ~~$84.5 million at June 30, 2018 as compared to $60.3~~$93.4 million at March 31, ~~2018 mainly~~2019 as compared to $88.4 million at December 31, 2018. The increase was primarily due to additional non-accrual taxi cab medallion loans ~~totaling $31.1 million (See further discussion of our taxi medallion lending below) moved to non-accrual status during~~reported within the ~~second quarter of 2018.~~commercial and industrial loan category at March 31, 2019. As a result, non-accrual loans increased to ~~0.36 percent of total loans at June 30, 2018 as compared to 0.27~~0.37 percent of total loans at March 31, ~~2018. In addition, non-accrual construction~~2019 as compared to 0.35 percent of total loans increased $368 thousand due to the aforementioned $1.1 million loan that migrated from the 90 days or more past due delinquency category, partially offset by one non-accrual loan totaling $732 thousand reported at ~~March~~December 31, ~~2018 that paid-off during the second quarter of~~ 2018.

During the ~~second~~first quarter of ~~2018,~~2019, we continued to closely monitor our ~~NYC~~New York City and Chicago taxi medallion loans totaling ~~$125.9~~$118.8 million and ~~$9.0~~$8.1 million, respectively, within the commercial and industrial loan portfolio at ~~June 30, 2018.~~March 31, 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 ~~June 30, 2018,~~March 31, 2019, the medallion portfolio included impaired loans totaling ~~$64.7~~$79.6 million with related reserves of ~~$23.2~~$29.6 million within the allowance for loan losses as compared to impaired loans totaling ~~$65.0~~$73.7 million with related reserves of ~~$19.9~~$27.9 million at ~~March~~December 31, 2018. At ~~June 30, 2018,~~March 31, 2019, the impaired medallion loans largely consisted of $68.8 million of non-accrual taxi cab medallion loans classified as doubtful and $10.8 million of performing troubled debt restructured (TDR) loans classified as substandard loans, as well as $44.7 million of non-accrual taxi cab medallion loans classified as doubtful. Our non-accrual taxi medallion loans increased from $13.9 million at March 31, 2018 primarily due to weakened levels of cash flow, collateral and guarantor support in relation to several previously impaired TDR loans, and not due to actual loan performance.loans.

Valley's historical taxi medallion lending criteria 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, 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 ~~June 30, 2018~~March 31, 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 ~~approximately $10~~$11.1 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at ~~June 30, 2018.~~March 31, 2019. Additionally, Valley currently has ~~$32.1~~$13.9 million of performing non-impaired taxi medallion loans which are scheduled to mature ~~during 2018 and~~in 2019, and ~~$21.0~~$19.2 million that mature between 2023 and ~~2027.~~2028. If the loans with ~~2018 and~~ 2019 maturities became TDRs upon maturity and renewal, an additional reserve of ~~$9.9~~$5.7 million would be required based on the allowance methodology at ~~June 30, 2018.~~March 31, 2019.

OREO properties decreased ~~$2.0~~$2.2 million to ~~$11.8 million at June 30, 2018 from $13.8~~$7.3 million at March 31, 2019 from $9.5 million at December 31, 2018 ~~primarily~~mainly due to a higher volume of ~~sales of~~ OREO ~~properties.~~property sales. Net gains ~~and losses~~ on the sale of OREO ~~were immaterial during~~totaled $881 thousand for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. The net gain on sale of OREO for the three months ended March 31, 2018 was immaterial. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled ~~$1.8~~$1.2 million at ~~June 30, 2018.~~March 31, 2019.

Other repossessed assets increased $1.9 million to $2.6 million at March 31, 2019 from December 31, 2018 mainly due to the repossession of eight New York City medallions from one non-performing loan relationship during the first quarter of 2019.

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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) decreased ~~$32.7~~$4.1 million to ~~$83.7 million at June 30, 2018 as compared to $116.4~~$73.1 million at March 31, ~~2018 mainly due~~2019 as compared to ~~taxi medallion loans totaling $27.9~~$77.2 million ~~migrating to non-accrual loans category.~~at December 31, 2018. Performing TDRs consisted of ~~101~~118 loans (primarily in the commercial and industrial loan and commercial real estate portfolios) at ~~June 30, 2018.~~March 31, 2019. On an aggregate basis, the ~~$83.7~~$73.1 million in performing TDRs at ~~June 30, 2018~~March 31, 2019 had a modified weighted average interest rate of approximately ~~5.46~~5.59 percent as compared to a pre-modification weighted average interest rate of ~~4.83~~5.34 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.

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, ~~2017.~~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.

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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									Six Months Ended						Three Months Ended
	June 30, 2018			March 31, 2018			June 30, 2017			June 30, 2018			June 30, 2017			March 31, 2019			December 31, 2018			March 31, 2018
	($ in thousands)															($ in thousands)
Average loans outstanding	$	22,840,235		$	22,302,991		$	17,701,676		$	22,573,097		$	17,508,461		$	25,254,733		$	24,530,919		$	22,302,991
Beginning balance - Allowance for credit losses	136,704			124,452			117,696			124,452			116,604			156,295			149,475			124,452
Loans charged-off:
Commercial and industrial	(642		)	(131		)	(2,910		)	(773		)	(4,624		)	(4,282		)	(909		)	(131		)
Commercial real estate	(38		)	(310		)	(139		)	(348		)	(553		)	—			—			(310		)
Construction	—			—			—			—			—			—			—			—
Residential mortgage	(99		)	(68		)	(229		)	(167		)	(359		)	(15		)	(56		)	(68		)
Total Consumer	(1,422		)	(1,211		)	(1,011		)	(2,633		)	(2,132		)	(2,028		)	(1,194		)	(1,211		)
Total charge-offs	(2,201		)	(1,720		)	(4,289		)	(3,921		)	(7,668		)	(6,325		)	(2,159		)	(1,720		)
Charged-off loans recovered:
Commercial and industrial	819			2,107			312			2,926			1,160			483			566			2,107
Commercial real estate	15			369			346			384			488			21			21			369
Construction	—			—			294			—			294			—			—			—
Residential mortgage	180			80			235			260			683			1			3			80
Total Consumer	495			468			395			963			958			486			530			468
Total recoveries	1,509			3,024			1,582			4,533			3,583			991			1,120			3,024
Net (charge-offs) recoveries	(692		)	1,304			(2,707		)	612			(4,085		)	(5,334		)	(1,039		)	1,304
Provision charged for credit losses	7,142			10,948			3,632			18,090			6,102			8,000			7,859			10,948
Ending balance - Allowance for credit losses	$	143,154		$	136,704		$	118,621		$	143,154		$	118,621		$	158,961		$	156,295		$	136,704
Components of allowance for credit losses:
Allowance for loan losses	$	138,762		$	132,862		$	116,446		$	138,762		$	116,446		$	154,381		$	151,859		$	132,862
Allowance for unfunded letters of credit	4,392			3,842			2,175			4,392			2,175			4,580			4,436			3,842
Allowance for credit losses	$	143,154		$	136,704		$	118,621		$	143,154		$	118,621		$	158,961		$	156,295		$	136,704
Components of provision for credit losses:
Provision for losses on loans	$	6,592		$	10,702		$	3,710		$	17,294		$	6,112		$	7,856		$	7,935		$	10,702
Provision for unfunded letters of credit	550			246			(78		)	796			(10		)	144			(76		)	246
Provision for credit losses	$	7,142		$	10,948		$	3,632		$	18,090		$	6,102		$	8,000		$	7,859		$	10,948
Annualized ratio of net charge-offs (recoveries) to average loans outstanding	0.01		%	(0.02		)%	0.06		%	(0.01		)%	0.05		%	0.08		%	0.02		%	(0.02		)%
Allowance for credit losses as a % of non-PCI loans	0.77			0.78			0.73			0.77			0.73			0.74			0.75			0.78
Allowance for credit losses as a % of total loans	0.62			0.61			0.67			0.62			0.67			0.63			0.62			0.61

~~During~~Net loan charge-offs totaled $5.3 million for the ~~second~~first quarter of 2019 as compared to $1.0 million for the fourth quarter of 2018, and ~~2017, we recognized net loan charge-offs totaling $692 thousand and $2.7~~$1.3 million ~~respectively, as compared to~~of net recoveries of loan charge-offs ~~of $1.3 million in~~during the first quarter of 2018. The increase in loan charge-offs was mainly due to partial charge-offs of 4 impaired loans totaling $3.8 million within the commercial and industrial loan portfolio and an increase in consumer loan charge-offs during the first quarter of 2019. Despite the increase in net charge-offs due to a relatively low number of loans, the overall level of loan charge-offs ~~has continued~~(as presented in the above table) continues to ~~be low, despite a moderate increase in automobile~~trend within management's expectations for the credit quality of the loan ~~charge-offs within the total consumer category during the six months ended June 30, 2018 as compared to the same period of 2017.~~

portfolio.

During the ~~second~~first quarter of ~~2018,~~2019, we recorded ~~a $7.1~~an $8.0 million provision for credit losses as compared to $7.9 million and $10.9 million for the fourth quarter of 2018 and ~~$3.6 million for~~ the first quarter of 2018, ~~and~~respectively. The level of the ~~second~~provision during the first quarter of ~~2017, respectively. For the first half of 2018, the provision for credit losses increased $12.0 million as compared to the same period in 2017 mainly~~2019 was largely due to ~~higher specific~~additional allocated reserves ~~allocated to~~for impaired taxi medallion loans, ~~at June 30, 2018, as well as strong non-PCI~~ loan growth, ~~during~~and the ~~first half of 2018.~~moderate increase in charge-offs.

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:


	June 30, 2018				March 31, 2018				June 30, 2017				March 31, 2019				December 31, 2018				March 31, 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		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)												($ in thousands)
Loan Category:
Commercial and Industrial loans*	$	78,649	2.05	%	$	70,388	1.94	%	$	53,792	2.04	%	$	99,210	2.20	%	$	95,392	2.20	%	$	70,388	1.94	%
Commercial real estate loans:
Commercial real estate	33,234		0.28	%	36,109		0.31	%	37,180		0.40	%	24,261		0.19	%	26,482		0.21	%	36,109		0.31	%
Construction	20,578		1.49	%	20,570		1.50	%	18,275		2.07	%	23,501		1.62	%	23,168		1.56	%	20,570		1.50	%
Total commercial real estate loans	53,812		0.40	%	56,679		0.43	%	55,455		0.55	%	47,762		0.34	%	49,650		0.36	%	56,679		0.43	%
Residential mortgage loans	4,624		0.13	%	4,100		0.12	%	4,186		0.15	%	5,139		0.13	%	5,041		0.12	%	4,100		0.12	%
Consumer loans:
Home equity	604		0.12	%	547		0.10	%	582		0.13	%	523		0.10	%	598		0.12	%	547		0.10	%
Auto and other consumer	5,465		0.26	%	4,990		0.25	%	4,606		0.26	%	6,327		0.29	%	5,614		0.26	%	4,990		0.25	%
Total consumer loans	6,069		0.23	%	5,537		0.22	%	5,188		0.23	%	6,850		0.25	%	6,212		0.23	%	5,537		0.22	%
Total allowance for credit losses	$	143,154	0.62	%	$	136,704	0.61	%	$	118,621	0.67	%	$	158,961	0.63	%	$	156,295	0.62	%	$	136,704	0.61	%



*	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 0.62 percent, 0.61 percent and 0.67 percent at June 30, 2018,At March 31, ~~2018 and June 30, 2017, respectively. At June 30, 2018,~~2019, our allowance allocations for losses as a percentage of total loans remained relatively ~~unchanged~~stable as compared to ~~March~~December 31, 2018 for most loan categories, except for commercial and industrial loans which increased 0.11 percent largely due to higher specific reserves for impaired taxi medallion loans and, to a much lesser extent, internally classified loans.

categories. Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately ~~$4.6~~$4.0 billion) was ~~0.77~~0.74 percent, 0.75 percent and 0.78 percent ~~and 0.73 percent~~ at ~~June 30, 2018,~~ March 31, 2019, December 31, 2018 and ~~June 30, 2017,~~March 31, 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 ~~June 30, 2018,~~ March 31, 2019, December 31, 2018 and ~~June 30, 2017.~~March 31, 2018.

Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, shareholders’ equity totaled approximately ~~$3.3~~$3.4 billion, and ~~$2.5 billion, respectively, and~~ represented ~~10.9~~10.6 percent and ~~10.6~~10.5 percent of total assets, respectively. During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, total shareholders’ equity increased by ~~$744.1~~$94.4 million primarily due to (i) ~~the additional capital of $737.2 million issued in the USAB acquisition, (ii)~~ net income of ~~$114.8~~$113.3 million, (ii) other comprehensive income of $16.2 million, (iii) an $8.6 million increase attributable to the effect of our stock incentive plan and (iv) net proceeds of $1.0 million from the re-issuance of treasury and authorized common shares issued under our dividend reinvestment plan totaling a ~~combined 87 thousand shares. These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a~~

~~combined $79.5 million, (ii) $23.1 million of other comprehensive losses, and (iii) a $14.9~~$3.0 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, ~~2018. See Note 4~~2019 and (iv) a $1.8 million increase attributable to the ~~consolidated financial statements for additional information regarding~~effect of our stock incentive plan. These positive changes ~~in our accumulated other comprehensive loss during the three~~were partially offset by cash dividends declared on common and ~~six months ended June 30, 2018.~~preferred stock totaling a combined $39.9 million.

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 common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets 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 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, 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 ~~January 1, 2018, Valley and Valley National Bank are required to maintain a capital conservation buffer of 1.875 percent. As of June 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, Valley and Valley National Bank exceeded all capital adequacy requirements ~~with the capital conservation buffer required to be phased in at these dates 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	Actual				Minimum Capital Requirements				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 June 30, 2018
As of March 31, 2019
Total Risk-based Capital
Valley	$	2,699,896	11.77	%	$	2,264,603	9.875	%	N/A		N/A		$	2,870,699	11.37	%	$	2,651,185	10.500	%	N/A		N/A
Valley National Bank	2,613,737		11.42		2,260,587		9.875		$	2,289,202	10.00	%	2,796,524		11.08		2,649,372		10.500		$	2,523,212	10.00	%
Common Equity Tier 1 Capital
Valley	1,997,937		8.71		1,461,959		6.375		N/A		N/A		2,152,933		8.53		1,767,456		7.000		N/A		N/A
Valley National Bank	2,370,583		10.36		1,459,366		6.375		1,487,981		6.50		2,537,563		10.06		1,766,248		7.000		1,640,088		6.50
Tier 1 Risk-based Capital
Valley	2,212,742		9.65		1,805,949		7.875		N/A		N/A		2,367,738		9.38		2,146,197		8.500		N/A		N/A
Valley National Bank	2,370,583		10.36		1,802,746		7.875		1,831,361		8.00		2,537,563		10.06		2,144,730		8.500		2,018,569		8.00
Tier 1 Leverage Capital
Valley	2,212,742		7.72		1,146,571		4.00		N/A		N/A		2,367,738		7.58		1,249,488		4.00		N/A		N/A
Valley National Bank	2,370,583		8.28		1,144,983		4.00		1,431,229		5.00		2,537,563		8.13		1,248,310		4.00		1,560,388		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

8071

Actual
Minimum Capital
Requirements

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

($ in thousands)
As of December 31, 2017
Total Risk-based Capital
Valley $ 2,258,044
12.61 % $ 1,656,575
9.25 % N/A
N/A
Valley National Bank 2,185,967
12.23
1,653,088
9.25
$ 1,787,122
10.00 %
Common Equity Tier 1 Capital
Valley 1,651,849
9.22
1,029,763
5.75
N/A
N/A
Valley National Bank 1,961,316
10.97
1,027,595
5.75
1,161,629
6.50
Tier 1 Risk-based Capital
Valley 1,864,279
10.41
1,298,397
7.25
N/A
N/A
Valley National Bank 1,961,316
10.97
1,295,663
7.25
1,429,698
8.00
Tier 1 Leverage Capital
Valley 1,864,279
8.03
928,484
4.00
N/A
N/A
Valley National Bank 1,961,316
8.47
926,459
4.00
1,158,074
5.00

The Dodd-Frank Act required 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.

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was enacted which altered several provisions of the Dodd-Frank Act, including requirements of company-run stress tests. With the enactment, bank holding companies with assets of less than $100 billion are no longer subject to company-run stress testing requirements in section 165(i)(2) of the Dodd-Frank Act, including publishing a summary of the results. Subsequently, the OCC issued a letter to each covered bank with assets less than $100 billion that officially communicated an extension, through November 25, 2019, with respect to the stress tests that would have been required for the 2018 and 2019 stress-test cycles. While Valley is no longer required to publish company-run annual stress tests, it continues to internally run stress tests of its capital position that are subject to review by Valley's primary regulators.

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:


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
	($ in thousands, except for share data)				($ in thousands, except for share data)
Common shares outstanding	331,454,025		264,468,851		331,732,636		331,431,217
Shareholders’ equity	$	3,277,312	$	2,533,165	$	3,444,879	$	3,350,454
Less: Preferred stock	209,691		209,691		209,691		209,691
Less: Goodwill and other intangible assets	1,162,858		733,144		1,158,245		1,161,655
Tangible common shareholders’ equity	$	1,904,763	$	1,590,330	$	2,076,943	$	1,979,108
Tangible book value per common share	$	5.75	$	6.01	$	6.26	$	5.97
Book value per common share	$	9.26	$	8.79	$	9.75	$	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 ~~33.3~~66.89 percent for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 as compared to ~~24.1~~41.3 percent for the year ended December 31, ~~2017.~~2018. Our retention ratio increased from the year ended December 31, 2017, however it was negatively impacted by infrequent charges, including legal expenses related to litigation reserves, USAB merger expense and a charge to income tax expense related to the effect of the USAB acquisition on our state deferred tax assets during the six months ended June 30, 2018. Our retention ratio is expected to improve during the remainder of 2018 mainly due to ~~among other factors,~~ higher earnings partly caused by the net gain from ~~continued loan growth, synergies from the USAB acquisition, including the full systems integration completed in the second quarter of 2018,~~our sale-leaseback transaction and ~~further~~continued implementation of ~~our LIFT initiatives.~~operational improvement strategies.

Cash dividends declared amounted to ~~$0.22~~$0.11 per common share for ~~both~~each of the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017, 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. 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, ~~2017~~2018 in the MD&A section - “Off-Balance Sheet Arrangements” and Notes 1312 and 1413 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 6657 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, 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 Securities Exchange Act of 1934, as amended, 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 as a result of the material weakness in Valley’s internal control over financial reporting previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 10-K”), Valley’s disclosure controls and procedures ~~were not~~are effective as of ~~June 30, 2018.~~

~~As previously disclosed in~~ the ~~2017 10-K, management identified the following material weakness in internal controls as of December 31, 2017:~~

Valley did not assign appropriate levels of responsibility and authority to its Ethics and Compliance group to identify and evaluate the severity and financial reporting implications of allegations of non-compliance with laws and regulations, Company policies and procedures and other complaints. Additionally, Valley did not establish controls over required communications of such matters to senior management or others within the organization and to those charged with governance to enable them to conduct or monitor the investigation and resolution of such matters on a timely basis.

~~During the first quarter of 2018, Valley initiated remediation efforts. Management reviewed the design and operation~~end of the controls and made enhancements to the proper identification and escalation of allegations of non-compliance with laws and regulations, Company policies and procedures and other complaints that require the attention of senior management and those charged with governance. During the second quarter of 2018, management continued to refine and implement such enhancements. Management is still evaluating these new controls and procedures. Once placed in operation for a sufficient period ~~of time, Valley will subject them to appropriate tests in order to determine whether they are operating effectively.~~covered by this report.

(b) Changes in internal controls over financial reporting. ~~As discussed above, management has continued to remediate the underlying causes of the material weakness disclosed in the 2017 10-K. Other than the plan for remediation described above,~~ Valley’s CEO and CFO have also concluded that there ~~has~~have not been ~~no change~~any changes in Valley’s internal control over financial reporting in the quarter ended ~~June 30, 2018~~March 31, 2019 that has materially affected, or is 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 1615 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

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, ~~2017.~~2018.



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 ~~June 30, 2018~~March 31, 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)
April 1, 2018 to April 30, 2018 32,458
$ 12.08
—
4,112,465
May 1, 2018 to May 31, 2018 2,584
12.95
—
4,112,465
June 1, 2018 to June 30, 2018 7,088
12.59
—
4,112,465
Total 42,130
$ 12.58
—



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)
January 1, 2019 to January 31, 2019	32,513	$	10.30	—	4,112,465
February 1, 2019 to February 28, 2019	83,534	10.25		—	4,112,465
March 1, 2019 to March 31, 2019	17,625	9.97		—	4,112,465
Total	133,672			—


(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 ~~June 30, 2018.~~March 31, 2019.



Item 6.	Exhibits



(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 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)	Agreement and Sale of Purchase, dated February 13, 2019, between Valley National Bank and Oak Street Real Estate Capital Fund IV REIT, LLC, incorporated herein by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report filed on February 13, 2019.
	(10.2)	Form of Lease Agreement between Valley National Bank and Oak Street Real Estate Capital Fund IV REIT, LLC, incorporated herein by reference to Exhibit 10.2 to the Registrant's Form 8-K Current Report filed on February 13, 2019.
(31.1)	Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by Ira Robbins, 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 D. Eskow, 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 Ira Robbins, President and Chief Executive Officer of the Company, and Alan D. Eskow, Senior Executive Vice President and Chief Financial Officer of the Company.*
(101)	Interactive Data File *



*	Filed herewith.

8474

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/ Ira Robbins
~~August 8, 2018~~May 9, 2019				Ira Robbins
				President
				and Chief Executive Officer

Date:				/s/ Alan D. Eskow
~~August 8, 2018~~May 9, 2019				Alan D. Eskow
				Senior Executive Vice President and
				Chief Financial Officer

8575



	January 1, 2018
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	156,612
Investment securities held to maturity	214,217
Investment securities available for sale	308,385
Loans	3,744,682
Premises and equipment	62,066
Bank owned life insurance	49,052
Accrued interest receivable	12,123
Goodwill	388,255
Other intangible assets	45,906
Other assets:
Deferred taxes	8,698
Other real estate owned	4,073
FHLB and FRB stock	38,809
Tax credit investments	20,138
Other	26,416
Total other assets	98,134
Total assets acquired	$	5,079,432
Liabilities assumed:
Deposits:
Non-interest bearing	$	887,083
Savings, NOW and money market	1,678,115
Time	999,645
Total deposits	3,564,843
Short-term borrowings	649,979
Long-term borrowings	87,283
Junior subordinated debentures issued to capital trusts	13,249
Accrued expenses and other liabilities	26,848
Total liabilities assumed	$	4,342,202
Common stock issued in acquisition	737,230



	Available for Sale Securities
	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(in thousands)
Balance, beginning of the period	$	6,498		$	11,367		$	7,360		$	11,888
Total net gains (losses) included in other comprehensive income	313			(31		)	(85		)	13
Settlements, net	(368		)	(606		)	(832		)	(1,171		)
Balance, end of the period	$	6,443		$	10,730		$	6,443		$	10,730



	(in thousands)

Contractually required principal and interest	$	4,312,988
Contractual cash flows not expected to be collected (non-accretable difference)	(94,098		)
Expected cash flows to be collected	4,218,890
Interest component of expected cash flows (accretable yield)	(474,208		)
Fair value of acquired loans	$	3,744,682



	Six Months Ended June 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	88,865	$	926	$	38,371	$	596
Commercial real estate:
Commercial real estate	54,104		1,179		57,722		808
Construction	2,230		39		2,728		39
Total commercial real estate loans	56,334		1,218		60,450		847
Residential mortgage	13,502		350		18,974		392
Consumer loans:
Home equity	1,910		66		4,847		74
Total consumer loans	1,910		66		4,847		74
Total	$	160,611	$	2,560	$	122,642	$	1,909



	Business Segment / Reporting Unit*
	Wealth Management		Consumer Lending		Commercial Lending		Investment Management		Total
	(in thousands)
Balance at December 31, 2017	$	21,218	$	200,103	$	316,258	$	153,058	$	690,637
Goodwill from business combinations	—		85,649		238,052		64,554		388,255
Balance at June 30, 2018	$	21,218	$	285,752	$	554,310	$	217,612	$	1,078,892



	Loan Servicing Rights		Core Deposits		Other
	(in thousands)
2018	$	3,155	$	6,134	$	125
2019	5,148		10,961		235
2020	4,160		9,607		220
2021	3,243		8,252		206
2022	2,608		6,898		191



	Six Months Ended June 30, 2018
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)
Average interest earning assets	$	5,953,524		$	16,619,573		$	4,432,184		$	—		$	27,005,281
Income (loss) before income taxes	30,760			145,606			20,830			(50,284		)	146,912
Annualized return on average interest earning assets (before tax)	1.03		%	1.75		%	0.94		%	N/A			1.09		%



	Six Months Ended June 30, 2017
	Consumer Lending			Commercial Lending			Investment Management			Corporate and Other Adjustments			Total
	($ in thousands)
Average interest earning assets	$	5,085,438		$	12,423,023		$	3,676,024		$	—		$	21,184,485
Income (loss) before income taxes	30,459			107,765			19,576			(22,855		)	134,945
Annualized return on average interest earning assets (before tax)	1.20		%	1.73		%	1.07		%	N/A			1.27		%