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 March 31, 2017
OR
¨

Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 1-11277  
 
 
VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
 
 
New Jersey
 
22-2477875
(State or other jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
 
1455 Valley Road
Wayne, NJ
 
07470
(Address of principal executive office)
 
(Zip code)
973-305-8800
(Registrant’s telephone number, including area code)  
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
x
Accelerated filer
¨
Emerging growth company
¨
 
 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock (no par value), of which 263,971,550 shares were outstanding as of May 4, 2017
 



TABLE OF CONTENTS
 
 
 
Page
Number
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 


1



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share data)
 
March 31,
2017
 
December 31,
2016
Assets
(Unaudited)
 
 
Cash and due from banks
$
225,443

 
$
220,791

Interest bearing deposits with banks
111,283

 
171,710

Investment securities:
 
 
 
Held to maturity (fair value of $1,904,523 at March 31, 2017 and $1,924,597 at December 31, 2016)
1,902,329

 
1,925,572

Available for sale
1,454,331

 
1,297,373

Total investment securities
3,356,660

 
3,222,945

Loans held for sale (includes fair value of $11,184 at March 31, 2017 and $57,708 at December 31, 2016 for loans originated for sale)
115,067

 
57,708

Loans
17,449,498

 
17,236,103

Less: Allowance for loan losses
(115,443
)
 
(114,419
)
Net loans
17,334,055

 
17,121,684

Premises and equipment, net
289,426

 
291,180

Bank owned life insurance
392,295

 
391,830

Accrued interest receivable
68,245

 
66,816

Goodwill
690,637

 
690,637

Other intangible assets, net
44,958

 
45,484

Other assets
592,387

 
583,654

Total Assets
$
23,220,456

 
$
22,864,439

Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
5,213,451

 
$
5,252,825

Interest bearing:
 
 
 
Savings, NOW and money market
8,902,596

 
9,339,012

Time
3,215,094

 
3,138,871

Total deposits
17,331,141

 
17,730,708

Short-term borrowings
1,644,964

 
1,080,960

Long-term borrowings
1,634,008

 
1,433,906

Junior subordinated debentures issued to capital trusts
41,617

 
41,577

Accrued expenses and other liabilities
170,185

 
200,132

Total Liabilities
20,821,915

 
20,487,283

Shareholders’ Equity
 
 
 
Preferred stock (no par value, authorized 30,000,000 shares; issued 4,600,000 shares at March 31, 2017 and December 31, 2016)
111,590

 
111,590

Common stock (no par value, authorized 332,023,233 shares; issued 263,990,791 shares at March 31, 2017 and 263,804,877 shares at December 31, 2016)
92,370

 
92,353

Surplus
2,047,357

 
2,044,401

Retained earnings
188,089

 
172,754

Accumulated other comprehensive loss
(39,086
)
 
(42,093
)
Treasury stock, at cost (148,523 common shares at March 31, 2017 and 166,047 shares at December 31, 2016)
(1,779
)
 
(1,849
)
Total Shareholders’ Equity
2,398,541

 
2,377,156

Total Liabilities and Shareholders’ Equity
$
23,220,456

 
$
22,864,439

See accompanying notes to consolidated financial statements.

2



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data)
 
Three Months Ended
March 31,
 
2017
 
2016
Interest Income
 
 
 
Interest and fees on loans
$
175,014

 
$
166,071

Interest and dividends on investment securities:
 
 
 
Taxable
17,589

 
13,999

Tax-exempt
4,031

 
3,690

Dividends
2,151

 
1,480

Interest on federal funds sold and other short-term investments
331

 
357

Total interest income
199,116

 
185,597

Interest Expense
 
 
 
Interest on deposits:
 
 
 
Savings, NOW and money market
10,183

 
9,243

Time
9,553

 
9,585

Interest on short-term borrowings
3,901

 
1,872

Interest on long-term borrowings and junior subordinated debentures
12,950

 
16,744

Total interest expense
36,587

 
37,444

Net Interest Income
162,529

 
148,153

Provision for credit losses
2,470

 
800

Net Interest Income After Provision for Credit Losses
160,059

 
147,353

Non-Interest Income
 
 
 
Trust and investment services
2,744

 
2,440

Insurance commissions
5,061

 
4,708

Service charges on deposit accounts
5,236

 
5,103

(Losses) gains on securities transactions, net
(23
)
 
271

Fees from loan servicing
1,815

 
1,594

Gains on sales of loans, net
4,128

 
1,795

Bank owned life insurance
2,463

 
1,963

Other
3,635

 
3,574

Total non-interest income
25,059

 
21,448

Non-Interest Expense
 
 
 
Salary and employee benefits expense
63,716

 
60,259

Net occupancy and equipment expense
23,035

 
22,789

FDIC insurance assessment
5,127

 
5,099

Amortization of other intangible assets
2,536

 
2,849

Professional and legal fees
4,695

 
3,895

Amortization of tax credit investments
5,324

 
7,264

Telecommunication expense
2,659

 
2,386

Other
13,860

 
13,684

Total non-interest expense
120,952

 
118,225

Income Before Income Taxes
64,166

 
50,576

Income tax expense
18,071

 
14,389

Net Income
$
46,095

 
$
36,187

Dividends on preferred stock
1,797

 
1,797

Net Income Available to Common Shareholders
$
44,298

 
$
34,390

Earnings Per Common Share:
 
 
 
Basic
$
0.17

 
$
0.14

Diluted
0.17

 
0.14

Cash Dividends Declared per Common Share
0.11

 
0.11

Weighted Average Number of Common Shares Outstanding:
 
 
Basic
263,797,024

 
254,075,349

Diluted
264,546,266

 
254,347,420

See accompanying notes to consolidated financial statements.

3



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
 
Three Months Ended
March 31,
 
2017
 
2016
Net income
$
46,095

 
$
36,187

Other comprehensive income, net of tax:
 
 
 
Unrealized gains and losses on available for sale securities
 
 
 
Net gains arising during the period
1,307

 
8,283

Less reclassification adjustment for net losses (gains) included in net income
13

 
(170
)
Total
1,320

 
8,113

Non-credit impairment losses on available for sale securities
 
 
 
Net change in non-credit impairment losses on securities
113

 
(59
)
Less reclassification adjustment for accretion of credit impairment losses included in net income
(87
)
 
(286
)
Total
26

 
(345
)
Unrealized gains and losses on derivatives (cash flow hedges)
 
 
 
Net gains (losses) on derivatives arising during the period
127

 
(6,552
)
Less reclassification adjustment for net losses included in net income
1,475

 
1,741

Total
1,602

 
(4,811
)
Defined benefit pension plan
 
 
 
Amortization of net loss
59

 
43

Total other comprehensive income
3,007

 
3,000

Total comprehensive income
$
49,102

 
$
39,187

See accompanying notes to consolidated financial statements.


4



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
46,095

 
$
36,187

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,260

 
6,417

Stock-based compensation
4,127

 
2,369

Provision for credit losses
2,470

 
800

Net amortization of premiums and accretion of discounts on securities and borrowings
6,043

 
4,198

Amortization of other intangible assets
2,536

 
2,849

Losses (gains) on securities transactions, net
23

 
(271
)
Proceeds from sales of loans held for sale
161,325

 
54,907

Gains on sales of loans, net
(4,128
)
 
(1,795
)
Originations of loans held for sale
(112,682
)
 
(52,749
)
Losses on sales of assets, net
34

 
10

FDIC loss-share receivable (excluding reimbursements)
229

 
560

Net change in:
 
 
 
Fair value of borrowings hedged by derivative transactions
(454
)
 
4,719

Cash surrender value of bank owned life insurance
(2,463
)
 
(1,963
)
Accrued interest receivable
(1,429
)
 
581

Other assets
(6,924
)
 
(6,079
)
Accrued expenses and other liabilities
(35,145
)
 
3,993

Net cash provided by operating activities
65,917

 
54,733

Cash flows from investing activities:
 
 
 
Net loan originations and purchases
(323,470
)
 
(95,035
)
Investment securities held to maturity:
 
 
 
Purchases
(52,160
)
 
(83,955
)
Maturities, calls and principal repayments
77,141

 
58,907

Investment securities available for sale:
 
 
 
Purchases
(207,402
)
 
(302,321
)
Sales
—

 
2,081

Maturities, calls and principal repayments
50,543

 
366,882

Death benefit proceeds from bank owned life insurance
1,998

 
—

Proceeds from sales of real estate property and equipment
4,970

 
3,919

Purchases of real estate property and equipment
(5,627
)
 
(7,578
)
(Payments to) reimbursements from the FDIC
(408
)
 
370

Net cash used in investing activities
(454,415
)
 
(56,730
)
Cash flows from financing activities:
 
 
 
Net change in deposits
(399,567
)
 
154,875

Net change in short-term borrowings
564,004

 
93,632

Proceeds from issuance of long-term borrowings, net
200,000

 
—

Repayments of long-term borrowings
—

 
(155,000
)
Cash dividends paid to preferred shareholders
(1,797
)
 
(1,797
)
Cash dividends paid to common shareholders
(29,012
)
 
(27,916
)
Purchase of common shares to treasury
(2,151
)
 
(1,496
)
Common stock issued, net
1,246

 
2,392

Net cash provided by financing activities
332,723

 
64,690

Net change in cash and cash equivalents
(55,775
)
 
62,693

Cash and cash equivalents at beginning of year
392,501

 
413,800

Cash and cash equivalents at end of period
$
336,726

 
$
476,493



5



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

 
Three Months Ended March 31,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 
 
 
Interest on deposits and borrowings
$
56,735

 
$
38,766

Federal and state income taxes
1,599

 
67

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
4,813

 
$
663

Transfer of loans to loans held for sale
103,884

 
—

See accompanying notes to consolidated financial statements.







 




6



VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey corporation (Valley), include the accounts of its commercial bank subsidiary, Valley National Bank (the “Bank”), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities.
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations and cash flows at March 31, 2017 and for all periods presented have been made. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year.
In preparing the unaudited consolidated financial statements in conformity with U.S. GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that are particularly susceptible to change are: the allowance for loan losses; the evaluation of goodwill and other intangible assets, and investment securities for impairment; fair value measurements of assets and liabilities; and income taxes. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP and industry practice have been condensed or omitted pursuant to rules and regulations of the SEC. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 .
On April 27, 2017, Valley's shareholders approved an amendment to Valley's Restated Certificate of Incorporation to increase the authorized shares of common stock and preferred stock to 450,000,000 shares and 50,000,000 shares, respectively.


7



Note 2. Earnings Per Common Share
The following table shows the calculation of both basic and diluted earnings per common share for the three months ended March 31, 2017 and 2016 .
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands, except for share data)
Net income available to common shareholders
$
44,298

 
$
34,390

Basic weighted average number of common shares outstanding
263,797,024

 
254,075,349

Plus: Common stock equivalents
749,242

 
272,071

Diluted weighted average number of common shares outstanding
264,546,266

 
254,347,420

Earnings per common share:
 
 
 
Basic
$
0.17

 
$
0.14

Diluted
0.17

 
0.14


Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of performance-based restricted stock units, common stock options and warrants to purchase Valley’s common shares. Common stock options and warrants with exercise prices that exceed the average market price of Valley’s common stock during the periods presented have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation. Anti-dilutive common stock options and warrants equaled approximately 3.2 million and 4.6 million shares for the three months ended March 31, 2017 and 2016 , respectively.
Note 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 months ended March 31, 2017 .  
 
Components of Accumulated Other Comprehensive Loss
 
Total
Accumulated
Other
Comprehensive
Loss
 
Unrealized Gains
and Losses on
Available for Sale
(AFS) Securities
 
Non-credit
Impairment
Losses on
AFS Securities
 
Unrealized Gains
and (Losses) on
Derivatives
 
Defined
Benefit
Pension Plan
 
 
(in thousands)
Balance at December 31, 2016
$
(10,094
)
 
$
(642
)
 
$
(12,464
)
 
$
(18,893
)
 
$
(42,093
)
Other comprehensive income before reclassifications
1,307

 
113

 
127

 
—

 
1,547

Amounts reclassified from other comprehensive income
13

 
(87
)
 
1,475

 
59

 
1,460

Other comprehensive income, net
1,320

 
26

 
1,602

 
59

 
3,007

Balance at March 31, 2017
$
(8,774
)
 
$
(616
)
 
$
(10,862
)
 
$
(18,834
)
 
$
(39,086
)

8



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 months ended March 31, 2017 and 2016 . 
 
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
 
Three Months Ended
March 31,
 
 
Components of Accumulated Other Comprehensive Loss
 
2017
 
2016
 
Income Statement Line Item
 
 
(in thousands)
 
 
Unrealized (losses) gains on AFS securities before tax
 
$
(23
)
 
$
271

 
(Losses) gains on securities transactions, net
Tax effect
 
10

 
(101
)
 
 
Total net of tax
 
(13
)
 
170

 
 
Non-credit impairment losses on AFS securities before tax:
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
 
149

 
489

 
Interest and dividends on investment securities (taxable)
Tax effect
 
(62
)
 
(203
)
 
 
Total net of tax
 
87

 
286

 
 
Unrealized losses on derivatives (cash flow hedges) before tax
 
(2,518
)
 
(2,971
)
 
Interest expense
Tax effect
 
1,043

 
1,230

 
 
Total net of tax
 
(1,475
)
 
(1,741
)
 
 
Defined benefit pension plan:
 
 
 
 
 
 
Amortization of net loss
 
(101
)
 
(72
)
 
*
Tax effect
 
42

 
29

 
 
Total net of tax
 
(59
)
 
(43
)
 
 
Total reclassifications, net of tax
 
$
(1,460
)
 
$
(1,328
)
 
 
 
*
Amortization of net loss is included in the computation of net periodic pension cost.

9



Note 4. New Authoritative Accounting Guidance

Accounting Standards Update (ASU) No. 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities" shortens the amortization period for certain callable debt securities held at a premium. ASU No. 2017-08 requires the premium to be amortized to the earliest call date. The accounting for securities held at a discount does not change and the discount continues to be amortized as an adjustment to yield over the contractual life (to maturity) of the instrument. ASU No. 2017-08
is effective for Valley for the annual and interim reporting periods beginning January 1, 2018 with early adoption permitted, and is to be applied retrospectively. ASU No. 2017-08 is not expected to have a significant impact on Valley's consolidated financial statements.

ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" requires service cost to be reported in the same financial statement line item(s) as other current employee compensation costs. All other components of expense must be presented separately from service cost, and outside any subtotal of income from operations. Only the service cost component of expense is eligible to be capitalized. ASU No. 2017-07 is effective for Valley for its annual and interim reporting periods beginning January1, 2018 with early adoption permitted. ASU No. 2017-07 is not expected to have a significant impact on the presentation on Valley's consolidated financial statements.

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

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

ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments. The ASU No. 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity is required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 is effective for Valley for reporting periods beginning January 1, 2020. Management is currently evaluating the impact of the ASU on Valley’s consolidated financial statements. Valley expects that the new guidance will result in an increase in its allowance for credit losses due to several factors, including: (i) the allowance related to Valley loans will increase to include credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions, (ii) the nonaccretable difference (as defined in Note 7) on PCI loans will be recognized as an allowance,

10



offset by an increase in the carrying value of the related loans, and (iii) an allowance will be established for estimated credit losses on investment securities classified as held to maturity. The extent of the increase is under evaluation, but will depend upon the nature and characteristics of the Valley's loan and investment portfolios at the adoption date, and the economic conditions and forecasts at that date.

ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" simplifies several aspects of the stock compensation guidance in Topic 718 and other related guidance. The amendments focus on income tax accounting upon vesting or exercise of share-based payments, award classification, liability classification exception for statutory tax withholding requirements, recognition methods for forfeitures within stock compensation expense, and the cash flow presentation. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively.  Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. ASU No. 2016-09 became effective for Valley for reporting periods after January 1, 2017 and did not have a significant impact on Valley's consolidated financial statements. At adoption, Valley elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method. Valley also elected to continue to estimate the forfeitures of stock awards as a component of total stock compensation expense based on the number of awards that are expected to vest.

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

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

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" implements a common revenue standard that clarifies the principles for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In 2016, the Financial Accounting Standards Board issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations

11



and Licensing,” to further clarify the new guidance under Topic 606. ASU No. 2014-09 and its aforementioned amendments are effective on January 1, 2018. Management is currently evaluating by identification of revenue within the scope of the guidance to assess potential impact. Management has not yet identified any material changes in the timing of revenue recognition and it does not expect the new revenue guidance to have a significant impact on Valley’s consolidated financial statements.
Note 5. Fair Value Measurement of Assets and Liabilities

Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
 
Level 1
Unadjusted exchange quoted prices in active markets for identical assets or liabilities, or identical liabilities traded as assets that the reporting entity has the ability to access at the measurement date.
 
Level 2
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly (i.e., quoted prices on similar assets), for substantially the full term of the asset or liability.
 
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).


12



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

The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at March 31, 2017 and December 31, 2016 . The assets presented under “nonrecurring fair value measurements” in the table below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized). 
 
March 31,
2017
 
Fair Value Measurements at Reporting Date Using:
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Recurring fair value measurements:
 
Assets
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
49,780

 
$
49,780

 
$
—

 
$
—

U.S. government agency securities
47,275

 
—

 
47,275

 
—

Obligations of states and political subdivisions
119,162

 
—

 
119,162

 
—

Residential mortgage-backed securities
1,158,064

 
—

 
1,148,704

 
9,360

Trust preferred securities
6,393

 
—

 
4,386

 
2,007

Corporate and other debt securities
62,717

 
8,009

 
54,708

 
—

Equity securities
10,940

 
1,093

 
9,847

 
—

Total available for sale
1,454,331

 
58,882

 
1,384,082

 
11,367

Loans held for sale (1)
11,184

 
—

 
11,184

 
—

Other assets (2)
25,466

 
—

 
25,466

 
—

Total assets
$
1,490,981

 
$
58,882

 
$
1,420,732

 
$
11,367

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
23,231

 
$
—

 
$
23,231

 
$
—

Total liabilities
$
23,231

 
$
—

 
$
23,231

 
$
—

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
3,470

 
$
—

 
$
—

 
$
3,470

Loan servicing rights
7,826

 
—

 
—

 
7,826

Foreclosed assets (4)
2,710

 
—

 
—

 
2,710

Total
$
14,006

 
$
—

 
$
—

 
$
14,006


13



 
 
 
Fair Value Measurements at Reporting Date Using:
 
December 31,
2016
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Recurring fair value measurements:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
49,591

 
$
49,591

 
$
—

 
$
—

U.S. government agency securities
23,041

 
—

 
23,041

 
—

Obligations of states and political subdivisions
119,767

 
—

 
119,767

 
—

Residential mortgage-backed securities
1,015,542

 
—

 
1,005,589

 
9,953

Trust preferred securities
8,009

 
—

 
6,074

 
1,935

Corporate and other debt securities
60,565

 
8,064

 
52,501

 
—

Equity securities
20,858

 
1,306

 
19,552

 
—

Total available for sale
1,297,373

 
58,961

 
1,226,524

 
11,888

Loans held for sale (1)
57,708

 
—

 
57,708

 
—

Other assets (2)
29,055

 
—

 
29,055

 
—

Total assets
$
1,384,136

 
$
58,961

 
$
1,313,287

 
$
11,888

Liabilities
 
 
 
 
 
 
 
Other liabilities (2)
$
44,077

 
$
—

 
$
44,077

 
$
—

Total liabilities
$
44,077

 
$
—

 
$
44,077

 
$
—

Non-recurring fair value measurements:
 
 
 
 
 
 
 
Collateral dependent impaired loans (3)
$
5,385

 
$
—

 
$
—

 
$
5,385

Loan servicing rights
6,489

 
—

 
—

 
6,489

Foreclosed assets (4)
4,532

 
—

 
—

 
4,532

Total
$
16,406

 
$
—

 
$
—

 
$
16,406

 
(1)
Loans held for sale carried at fair value (which consist of residential mortgage loans originated for sale) had contractual unpaid principal balances totaling approximately $11.2 million and $58.2 million at March 31, 2017 and December 31, 2016 , respectively.
(2)
Derivative financial instruments are included in this category.
(3)
Excludes PCI loans.
(4)
Includes covered (i.e., subject to loss-sharing agreements with the FDIC) other real estate owned totaling $300 thousand at December 31, 2016 . There were no covered other real estate owned properties at March 31, 2017 .









14



The changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2017 and 2016 are summarized below: 
 
Available for Sale Securities
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Balance, beginning of the period
$
11,888

 
$
13,793

Total net gains (losses) included in other comprehensive income
44

 
(585
)
Settlements, net
(565
)
 
(259
)
Balance, end of the period
$
11,367

 
$
12,949


No changes in unrealized gains or losses on Level 3 securities were included in earnings during the three months ended March 31, 2017 and 2016 . There were no transfers of assets into or out of Level 3, or between Level 1 and Level 2, during the three months ended March 31, 2017 and 2016 .

There have been no material changes in the valuation methodologies used at March 31, 2017 from December 31, 2016 .

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Available for sale securities.

All U.S. Treasury securities, certain corporate and other debt securities, and certain preferred equity securities are reported at fair value utilizing Level 1 inputs. The majority of other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. For certain securities, the inputs used by either dealer market participants or an independent pricing service may be derived from unobservable market information (Level 3 inputs). In these instances, Valley evaluates the appropriateness and quality of the assumption and the resulting price. In addition, Valley reviews the volume and level of activity for all available for sale and trading securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value and this results in fair values based on Level 3 inputs. In determining fair value, Valley utilizes unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing each security. In developing its assertion of market participant assumptions, Valley utilizes the best information that is both reasonable and available without undue cost and effort.

In calculating the fair value for the available for sale securities under Level 3, Valley prepared present value cash flow models for certain private label mortgage-backed securities. The cash flows for the residential mortgage-

15



backed securities incorporated the expected cash flow of each security adjusted for default rates, loss severities and prepayments of the individual loans collateralizing the security.

The following table presents quantitative information about Level 3 inputs used to measure the fair value of these securities at March 31, 2017 : 
Security Type
Valuation
Technique
 
Unobservable
Input
 
Range
 
Weighted
Average
 
 
 
 
 
 
 
 
Private label mortgage-backed securities
Discounted cash flow
 
Prepayment rate
 
       15.3 - 25.0%
 
21.5
%
 
 
 
Default rate
 
     3.4 - 36.4
 
9.3

 
 
 
Loss severity
 
   47.2 - 66.0
 
60.5


Significant increases or decreases in any of the unobservable inputs in the table above in isolation would result in a significantly lower or higher fair value measurement of the securities. Generally, a change in the assumption used for the default rate is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

For the Level 3 available for sale residential mortgage-backed securities (consisting of 4 private label securities), cash flow assumptions incorporated independent third party market participant data based on vintage year for each security. The discount rate utilized in determining the present value of cash flows for the mortgage-backed securities was arrived at by combining the yield on orderly transactions for similar maturity government sponsored mortgage-backed securities with (i) the historical average risk premium of similar structured private label securities, (ii) a risk premium reflecting current market conditions, including liquidity risk, and (iii) if applicable, a forecasted loss premium derived from the expected cash flows of each security. The estimated cash flows for each private label mortgage-backed security were then discounted at the aforementioned effective rate to determine the fair value. The quoted prices received from either market participants or independent pricing services are weighted with the internal price estimate to determine the fair value of each instrument.

For the Level 3 available for sale trust preferred securities (consisting of one pooled security), the resulting estimated future cash flow was discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. The discount rate was applied using a pricing matrix based on credit, security type and maturity characteristics to determine the fair value. The fair value calculation is received from an independent valuation adviser. In validating the fair value calculation from an independent valuation adviser, Valley reviews the accuracy of the inputs and the appropriateness of the unobservable inputs utilized in the valuation to ensure the fair value calculation is reasonable from a market participant perspective.

Loans held for sale.  The conforming residential mortgage loans originated for sale are reported at fair value using Level 2 inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. To determine these fair values, the mortgages held for sale are put into multiple tranches, or pools, based on the coupon rate and maturity of each mortgage. The market prices for each tranche are obtained from both Fannie Mae and Freddie Mac. The market prices represent a delivery price, which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. The market prices received from Fannie Mae and Freddie Mac are then averaged and interpolated or extrapolated, where required, to calculate the fair value of each tranche. Depending upon the time elapsed since the origination of each loan held for sale, non-performance risk and changes therein were addressed in the estimate of fair value based upon the delinquency data provided to both Fannie Mae and Freddie Mac for market pricing and changes in market credit spreads. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at March 31, 2017 and December 31, 2016 based on the short duration these assets were held, and the high credit quality of these loans.

Derivatives.  Derivatives are reported at fair value utilizing Level 2 inputs. The fair value of Valley’s derivatives are determined using third party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves. The fair value of mortgage banking derivatives,

16



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 March 31, 2017 and December 31, 2016 ), is determined based on the current market prices for similar instruments provided by Fannie Mae and Freddie Mac. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at March 31, 2017 and December 31, 2016 .

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

The following valuation techniques were used for certain non-financial assets measured at fair value on a nonrecurring basis, including impaired loans reported at the fair value of the underlying collateral, loan servicing rights and foreclosed assets, which are reported at fair value upon initial recognition or subsequent impairment as described below.

Impaired loans . Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values are estimated using Level 3 inputs, consisting of individual appraisals that are significantly adjusted based on certain discounting criteria. At March 31, 2017 , appraisals were discounted based on specific market data by location and property type. During the quarter ended March 31, 2017 , collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. The collateral dependent loan charge-offs to the allowance for loan losses totaled $219 thousand and $479 thousand for the three months ended March 31, 2017 and 2016 , respectively. At March 31, 2017 , collateral dependent impaired loans with a total recorded investment of $6.3 million were reduced by specific valuation allowance allocations totaling $2.8 million to a reported total net carrying amount of $3.5 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 March 31, 2017 , the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 24 percent and a discount rate of 8 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. Valley recorded an immaterial net recovery of net impairment charges on its loan servicing rights for the three months ended March 31, 2017 as compared to net impairment charges totaling $192 thousand for three months ended March 31, 2016.

Foreclosed assets . Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is adjusted based on certain discounting criteria, similar to the criteria used for impaired loans described above. There were no adjustments of the appraisals of foreclosed assets at March 31, 2017 . At March 31, 2017 , foreclosed assets included $2.7 million of assets that were measured at fair value upon initial recognition or subsequently re-measured during the quarter ended March 31, 2017 . The foreclosed assets charge-offs to the allowance for loan losses totaled $712 thousand and $139 thousand for the three months ended March 31, 2017 and 2016 , respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in net losses within non-interest expense of $290 thousand and $617 thousand for the three months ended March 31, 2017 and 2016 , respectively.

17



 
Other Fair Value Disclosures

ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented in the following table were based on pertinent market data and relevant information on the financial instruments available as of the valuation date. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portfolio of financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation, trust and investment management departments) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.


18



The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at March 31, 2017 and December 31, 2016 were as follows: 
 
Fair Value
Hierarchy
 
March 31, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
225,443

 
$
225,443

 
$
220,791

 
$
220,791

Interest bearing deposits with banks
Level 1
 
111,283

 
111,283

 
171,710

 
171,710

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
Level 1
 
138,793

 
147,419

 
138,830

 
147,495

U.S. government agency securities
Level 2
 
10,722

 
10,881

 
11,329

 
11,464

Obligations of states and political subdivisions
Level 2
 
538,032

 
551,788

 
566,590

 
577,826

Residential mortgage-backed securities
Level 2
 
1,113,413

 
1,103,770

 
1,112,460

 
1,102,802

Trust preferred securities
Level 2
 
59,810

 
48,034

 
59,804

 
47,290

Corporate and other debt securities
Level 2
 
41,559

 
42,631

 
36,559

 
37,720

Total investment securities held to maturity
 
 
1,902,329

 
1,904,523

 
1,925,572

 
1,924,597

Net loans
Level 3
 
17,334,055

 
16,961,749

 
17,121,684

 
16,756,655

Accrued interest receivable
Level 1
 
68,245

 
68,245

 
66,816

 
66,816

Federal Reserve Bank and Federal Home Loan Bank stock  (1)
Level 1
 
188,557

 
188,557

 
147,127

 
147,127

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
Level 1
 
14,116,047

 
14,116,047

 
14,591,837

 
14,591,837

Deposits with stated maturities
Level 2
 
3,215,094

 
3,235,676

 
3,138,871

 
3,160,572

Short-term borrowings
Level 1
 
1,644,964

 
1,648,547

 
1,080,960

 
1,081,751

Long-term borrowings
Level 2
 
1,634,008

 
1,723,673

 
1,433,906

 
1,523,386

Junior subordinated debentures issued to capital trusts
Level 2
 
41,617

 
46,084

 
41,577

 
45,785

Accrued interest payable (2)
Level 1
 
9,473

 
9,473

 
10,675

 
10,675

 
(1)
Included in other assets.
(2)
Included in accrued expenses and other liabilities.

The following methods and assumptions were used to estimate the fair value of other financial assets and financial liabilities in the table above:

Cash and due from banks and interest bearing deposits with banks. The carrying amount is considered to be a reasonable estimate of fair value because of the short maturity of these items.

Investment securities held to maturity . Fair values are based on prices obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things (Level 2 inputs). Additionally, Valley reviews the volume and level of activity for all classes of held to maturity securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary. If applicable, the adjustment to fair value is derived based on present value cash flow model projections prepared by Valley utilizing assumptions similar to those incorporated by market participants.

19




Loans . Fair values of loans are estimated by discounting the projected future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loan. The discount rate is a product of both the applicable index and credit spread, subject to the estimated current new loan interest rates. The credit spread component is static for all maturities and may not necessarily reflect the value of estimating all actual cash flows re-pricing. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Accrued interest receivable and payable. The carrying amounts of accrued interest approximate their fair value due to the short-term nature of these items.

Federal Reserve Bank and Federal Home Loan Bank stock. Federal Reserve Bank and FHLB stock are non-marketable equity securities and are reported at their redeemable carrying amounts, which approximate fair value.

Deposits. The carrying amounts of deposits without stated maturities (i.e., non-interest bearing, savings, NOW, and money market deposits) approximate their estimated fair value. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.

Short-term and long-term borrowings. The carrying amounts of certain short-term borrowings, including securities sold under agreements to repurchase and FHLB borrowings (and from time to time, federal funds purchased) approximate their fair values because they frequently re-price to a market rate. The fair values of other short-term and long-term borrowings are estimated by obtaining quoted market prices of the identical or similar financial instruments when available. When quoted prices are unavailable, the fair values of the borrowings are estimated by discounting the estimated future cash flows using current market discount rates of financial instruments with similar characteristics, terms and remaining maturity.

Junior subordinated debentures issued to capital trusts. The fair value of debentures issued to capital trusts is estimated utilizing the income approach, whereby the expected cash flows, over the remaining estimated life of the security, are discounted using Valley’s credit spread over the current yield on a similar maturity of U.S. Treasury security or the three-month LIBOR for the variable rate indexed debentures (Level 2 inputs). The credit spread used to discount the expected cash flows was calculated based on the median current spreads for all fixed and variable publicly traded trust preferred securities issued by banks.

20




Note 6. Investment Securities

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at March 31, 2017 and December 31, 2016 were as follows:  
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,793

 
$
8,626

 
$
—

 
$
147,419

U.S. government agency securities
10,722

 
159

 
—

 
10,881

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
250,905

 
8,005

 
(1,362
)
 
257,548

Municipal bonds
287,127

 
7,335

 
(222
)
 
294,240

Total obligations of states and political subdivisions
538,032

 
15,340

 
(1,584
)
 
551,788

Residential mortgage-backed securities
1,113,413

 
7,958

 
(17,601
)
 
1,103,770

Trust preferred securities
59,810

 
32

 
(11,808
)
 
48,034

Corporate and other debt securities
41,559

 
1,072

 
—

 
42,631

Total investment securities held to maturity
$
1,902,329

 
$
33,187

 
$
(30,993
)
 
$
1,904,523

December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
138,830

 
$
8,665

 
$
—

 
$
147,495

U.S. government agency securities
11,329

 
135

 
—

 
11,464

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
252,185

 
6,692

 
(1,428
)
 
257,449

Municipal bonds
314,405

 
6,438

 
(466
)
 
320,377

Total obligations of states and political subdivisions
566,590

 
13,130

 
(1,894
)
 
577,826

Residential mortgage-backed securities
1,112,460

 
8,432

 
(18,090
)
 
1,102,802

Trust preferred securities
59,804

 
40

 
(12,554
)
 
47,290

Corporate and other debt securities
36,559

 
1,190

 
(29
)
 
37,720

Total investment securities held to maturity
$
1,925,572

 
$
31,592

 
$
(32,567
)
 
$
1,924,597


21



The age of unrealized losses and fair value of related securities held to maturity at March 31, 2017 and December 31, 2016 were as follows:  
 
Less than
Twelve Months
 
More than
Twelve Months
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
75,169

 
$
(1,362
)
 
$
—

 
$
—

 
$
75,169

 
$
(1,362
)
Municipal bonds
21,820

 
(222
)
 
—

 
—

 
21,820

 
(222
)
Total obligations of states and political subdivisions
96,989

 
(1,584
)
 
—

 
—

 
96,989

 
(1,584
)
Residential mortgage-backed securities
648,365

 
(14,179
)
 
122,764

 
(3,422
)
 
771,129

 
(17,601
)
Trust preferred securities
—

 
—

 
46,649

 
(11,808
)
 
46,649

 
(11,808
)
Total
$
745,354

 
$
(15,763
)
 
$
169,413

 
$
(15,230
)
 
$
914,767

 
$
(30,993
)
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
$
98,114

 
$
(1,428
)
 
$
—

 
$
—

 
$
98,114

 
$
(1,428
)
Municipal bonds
27,368

 
(466
)
 
—

 
—

 
27,368

 
(466
)
Total obligations of states and political subdivisions
125,482

 
(1,894
)
 
—

 
—

 
125,482

 
(1,894
)
Residential mortgage-backed securities
692,108

 
(14,420
)
 
114,505

 
(3,670
)
 
806,613

 
(18,090
)
Trust preferred securities


 


 
45,898

 
(12,554
)
 
45,898

 
(12,554
)
Corporate and other debt securities
2,971

 
(29
)
 
—

 
—

 
2,971

 
(29
)
Total
$
820,561

 
$
(16,343
)
 
$
160,403

 
$
(16,224
)
 
$
980,964

 
$
(32,567
)

The unrealized losses on investment securities held to maturity are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 119 at March 31, 2017 and 132 at December 31, 2016 .

The unrealized losses within the residential mortgage-backed securities category of the held to maturity portfolio at March 31, 2017 mainly related to investment grade securities issued by Ginnie Mae.
The unrealized losses existing for more than twelve months for trust preferred securities at March 31, 2017 primarily related to four non-rated single-issuer trust preferred securities issued by bank holding companies. All single-issuer trust preferred securities classified as held to maturity are paying in accordance with their terms, have no deferrals of interest or defaults and, if applicable, the issuers meet the regulatory capital requirements to be considered “well-capitalized institutions” at March 31, 2017 .
Management does not believe that any individual unrealized loss as of March 31, 2017 included in the table above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates and market volatility, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.

22



As of March 31, 2017 , the fair value of investments held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $1.1 billion .
The contractual maturities of investments in debt securities held to maturity at March 31, 2017 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.  
 
March 31, 2017
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
66,622

 
$
66,712

Due after one year through five years
220,086

 
229,218

Due after five years through ten years
338,507

 
353,152

Due after ten years
163,701

 
151,671

Residential mortgage-backed securities
1,113,413

 
1,103,770

Total investment securities held to maturity
$
1,902,329

 
$
1,904,523

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 7.3 years at March 31, 2017 .


23



Available for Sale
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at March 31, 2017 and December 31, 2016 were as follows:  
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
U.S. Treasury securities
$
51,014

 
$
6

 
$
(1,240
)
 
$
49,780

U.S. government agency securities
47,080

 
216

 
(21
)
 
47,275

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
39,624

 
133

 
(203
)
 
39,554

Municipal bonds
79,935

 
201

 
(528
)
 
79,608

Total obligations of states and political subdivisions
119,559

 
334

 
(731
)
 
119,162

Residential mortgage-backed securities
1,171,958

 
2,673

 
(16,567
)
 
1,158,064

Trust preferred securities*
7,848

 
—

 
(1,455
)
 
6,393

Corporate and other debt securities
62,411

 
599

 
(293
)
 
62,717

Equity securities
10,504

 
901

 
(465
)
 
10,940

Total investment securities available for sale
$
1,470,374

 
$
4,729

 
$
(20,772
)
 
$
1,454,331

December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
51,020

 
$
6

 
$
(1,435
)
 
$
49,591

U.S. government agency securities
22,815

 
232

 
(6
)
 
23,041

Obligations of states and political subdivisions:
 
 
 
 
 
 
 
Obligations of states and state agencies
40,696

 
70

 
(424
)
 
40,342

Municipal bonds
80,045

 
147

 
(767
)
 
79,425

Total obligations of states and political subdivisions
120,741

 
217

 
(1,191
)
 
119,767

Residential mortgage-backed securities
1,029,827

 
2,061

 
(16,346
)
 
1,015,542

Trust preferred securities*
10,164

 
—

 
(2,155
)
 
8,009

Corporate and other debt securities
60,651

 
436

 
(522
)
 
60,565

Equity securities
20,505

 
1,114

 
(761
)
 
20,858

Total investment securities available for sale
$
1,315,723

 
$
4,066

 
$
(22,416
)
 
$
1,297,373

 
*
Includes two pooled trust preferred securities, principally collateralized by securities issued by banks and insurance companies, at March 31, 2017 and December 31, 2016.


24



The age of unrealized losses and fair value of related securities available for sale at March 31, 2017 and December 31, 2016 were as follows:  
 
Less than
Twelve Months
 
More than
Twelve Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
48,852

 
$
(1,240
)
 
$
—

 
$
—

 
$
48,852

 
$
(1,240
)
U.S. government agency securities
29,314

 
(18
)
 
3,940

 
(3
)
 
33,254

 
(21
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
16,778

 
(203
)
 
—

 
—

 
16,778

 
(203
)
Municipal bonds
29,738

 
(314
)
 
11,136

 
(214
)
 
40,874

 
(528
)
Total obligations of states and political subdivisions
46,516

 
(517
)
 
11,136

 
(214
)
 
57,652

 
(731
)
Residential mortgage-backed securities
732,989

 
(11,579
)
 
141,743

 
(4,988
)
 
874,732

 
(16,567
)
Trust preferred securities
—

 
—

 
6,393

 
(1,455
)
 
6,393

 
(1,455
)
Corporate and other debt securities
26,384

 
(92
)
 
15,113

 
(201
)
 
41,497

 
(293
)
Equity securities
—

 
—

 
5,179

 
(465
)
 
5,179

 
(465
)
Total
$
884,055

 
$
(13,446
)
 
$
183,504

 
$
(7,326
)
 
$
1,067,559

 
$
(20,772
)
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
48,660

 
$
(1,435
)
 
$
—

 
$
—

 
$
48,660

 
$
(1,435
)
U.S. government agency securities
2,530

 
(4
)
 
4,034

 
(2
)
 
6,564

 
(6
)
Obligations of states and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and state agencies
28,628

 
(404
)
 
753

 
(20
)
 
29,381

 
(424
)
Municipal bonds
42,573

 
(506
)
 
11,081

 
(261
)
 
53,654

 
(767
)
Total obligations of states and political subdivisions
71,201

 
(910
)
 
11,834

 
(281
)
 
83,035

 
(1,191
)
Residential mortgage-backed securities
788,030

 
(11,889
)
 
132,718

 
(4,457
)
 
920,748

 
(16,346
)
Trust preferred securities


 


 
8,009

 
(2,155
)
 
8,009

 
(2,155
)
Corporate and other debt securities
32,292

 
(294
)
 
15,192

 
(228
)
 
47,484

 
(522
)
Equity securities
—

 
—

 
14,883

 
(761
)
 
14,883

 
(761
)
Total
$
942,713

 
$
(14,532
)
 
$
186,670

 
$
(7,884
)
 
$
1,129,383

 
$
(22,416
)
The unrealized losses on investment securities available for sale are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. The total number of security positions in the securities available for sale portfolio in an unrealized loss position at March 31, 2017 was 288 as compared to 298 at December 31, 2016 .
The unrealized losses more than twelve months for the residential mortgage-backed securities category of the available for sale portfolio at March 31, 2017 largely related to several investment grade residential mortgage-backed securities mainly issued by Ginnie Mae.
The unrealized losses more than twelve months for trust preferred securities at March 31, 2017 in the table above largely relate to 2 pooled trust preferred securities with an amortized cost of $7.9 million and a fair value of $6.4 million . One of the two pooled trust preferred securities had unrealized loss of $709 thousand and an investment grade rating at March 31, 2017 .

25




As of March 31, 2017 , the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $547.5 million .
The contractual maturities of investment securities available for sale at March 31, 2017 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
 
March 31, 2017
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year
$
24,953

 
$
24,844

Due after one year through five years
69,116

 
69,513

Due after five years through ten years
113,108

 
111,725

Due after ten years
80,735

 
79,245

Residential mortgage-backed securities
1,171,958

 
1,158,064

Equity securities
10,504

 
10,940

Total investment securities available for sale
$
1,470,374

 
$
1,454,331

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted average remaining expected life for residential mortgage-backed securities available for sale was 9.1 years at March 31, 2017 .
Other-Than-Temporary Impairment Analysis

Valley records impairment charges on its investment securities when the decline in fair value is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities; decline in the creditworthiness of the issuer; absence of reliable pricing information for investment securities; adverse changes in business climate; adverse actions by regulators; prolonged decline in value of equity investments; or unanticipated changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. Valley’s investment portfolios include private label mortgage-backed securities, trust preferred securities principally issued by bank holding companies (including two pooled trust preferred securities), corporate bonds and perpetual preferred securities 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 months ended March 31, 2017 and 2016 . At March 31, 2017 , four previously impaired private label mortgage-backed securities (prior to December 31, 2012) had a combined amortized cost and fair value of $9.7 million and $9.4 million , respectively, while one previously impaired pooled trust preferred security had an amortized cost and fair value of $2.8 million and $2.0 million , respectively. The previously impaired pooled trust preferred security was not accruing interest during the three months ended March 31, 2017 and 2016 .


26



The following table presents the changes in the credit loss component of cumulative other-than-temporary impairment losses on debt securities classified as either held to maturity or available for sale that Valley has previously recognized in earnings, for which a portion of the impairment loss (non-credit factors) was recognized in other comprehensive income for the three months ended March 31, 2017 and 2016 :  
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Balance, beginning of period
$
4,916

 
$
5,837

Accretion of credit loss impairment due to an increase in expected cash flows
(149
)
 
(489
)
Balance, end of period
$
4,767

 
$
5,348


The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to each period presented. The credit loss component increases if other-than-temporary impairments (initial and subsequent) are recognized in earnings for credit impaired debt securities. The credit loss component is reduced if (i) Valley receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures, (iii) the security is fully written down, or (iv) Valley sells, intends to sell or believes it will be required to sell previously credit impaired debt securities.
Realized Gains and Losses

Gross gains (losses) realized on sales, maturities and other securities transactions related to investment securities included in earnings were immaterial for the three months ended March 31, 2017 and 2016 .  



27



Note 7. Loans

The detail of the loan portfolio as of March 31, 2017 and December 31, 2016 was as follows:  
 
March 31, 2017
 
December 31, 2016
 
Non-PCI
Loans
 
PCI Loans*
 
Total
 
Non-PCI
Loans
 
PCI Loans*
 
Total
 
(in thousands)
Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,398,154

 
$
244,165

 
$
2,642,319

 
$
2,357,018

 
$
281,177

 
$
2,638,195

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
7,951,229

 
1,065,189

 
9,016,418

 
7,628,328

 
1,091,339

 
8,719,667

Construction
758,263

 
77,591

 
835,854

 
710,266

 
114,680

 
824,946

  Total commercial real estate loans
8,709,492

 
1,142,780

 
9,852,272

 
8,338,594

 
1,206,019

 
9,544,613

Residential mortgage
2,574,346

 
171,101

 
2,745,447

 
2,684,195

 
183,723

 
2,867,918

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
369,232

 
89,659

 
458,891

 
376,213

 
92,796

 
469,009

Automobile
1,149,918

 
135

 
1,150,053

 
1,139,082

 
145

 
1,139,227

Other consumer
593,655

 
6,861

 
600,516

 
569,499

 
7,642

 
577,141

Total consumer loans
2,112,805

 
96,655

 
2,209,460

 
2,084,794

 
100,583

 
2,185,377

Total loans
$
15,794,797

 
$
1,654,701

 
$
17,449,498

 
$
15,464,601

 
$
1,771,502

 
$
17,236,103

 
*
PCI loans include covered loans (mostly consisting of residential mortgage and commercial real estate loans) totaling $47.8 million and $70.4 million at March 31, 2017 and December 31, 2016 , respectively.

Total loans (excluding PCI covered loans) include net unearned premiums and deferred loan costs of $15.7 million and $15.3 million at March 31, 2017 and December 31, 2016 , respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $1.8 billion and $1.9 billion at March 31, 2017 and December 31, 2016 , respectively.

Valley transferred $103.9 million of residential mortgage loans from the loan portfolio to loans held for sale during the three months ended March 31, 2017 . Exclusive of such transfers, there were no sales of loans from the held for investment portfolio during the three months ended March 31, 2017 and 2016 .

Purchased Credit-Impaired Loans (Including Covered Loans)

PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses), and aggregated and accounted for as pools of loans based on common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools. Valley's PCI loan portfolio included covered loans (i.e., loans in which the Bank will share losses with the FDIC under loss-sharing agreements) totaling $47.8 million and $70.4 million at March 31, 2017 and December 31, 2016 , respectively.


28



The following table presents changes in the accretable yield for PCI loans during the three months ended March 31, 2017 and 2016 :
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Balance, beginning of period
$
294,514

 
$
415,179

Accretion
(24,683
)
 
(28,059
)
Balance, end of period
$
269,831

 
$
387,120


FDIC Loss-Share Receivable

The receivable arising from the loss-sharing agreements with the FDIC is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans. The FDIC loss share receivable (which is included in other assets on Valley's consolidated statements of financial condition) totaled $7.4 million and $7.2 million at March 31, 2017 and December 31, 2016 , respectively.

Credit Risk Management

For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. Valley closely monitors economic conditions and loan performance trends to manage and evaluate its exposure to credit risk. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, internal loan classification, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through cyclical economic circumstances.






29



Credit Quality
The following table presents past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis, and non-performing loans held for sale) by loan portfolio class at March 31, 2017 and December 31, 2016 :  
 
Past Due and Non-Accrual Loans
 
 
 
 
 
30-59
Days
Past Due
Loans
 
60-89
Days
Past Due
Loans
 
Accruing Loans
90 Days or More
Past Due
 
Non-Accrual
Loans
 
Total
Past Due
Loans
 
Current
Non-PCI
Loans
 
Total
Non-PCI
Loans
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
29,734

 
$
341

 
$
405

 
$
8,676

 
$
39,156

 
$
2,358,998

 
$
2,398,154

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
11,637

 
359

 
—

 
15,106

 
27,102

 
7,924,127

 
7,951,229

Construction
7,760

 
—

 
—

 
1,461

 
9,221

 
749,042

 
758,263

Total commercial real estate loans
19,397

 
359

 
—

 
16,567

 
36,323

 
8,673,169

 
8,709,492

Residential mortgage
7,533

 
4,177

 
1,355

 
11,650

 
24,715

 
2,549,631

 
2,574,346

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
725

 
297

 
—

 
1,285

 
2,307

 
366,925

 
369,232

Automobile
2,508

 
471

 
288

 
110

 
3,377

 
1,146,541

 
1,149,918

Other consumer
507

 
19

 
26

 
—

 
552

 
593,103

 
593,655

Total consumer loans
3,740

 
787

 
314

 
1,395

 
6,236

 
2,106,569

 
2,112,805

Total
$
60,404

 
$
5,664

 
$
2,074

 
$
38,288

 
$
106,430

 
$
15,688,367

 
$
15,794,797

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
6,705

 
$
5,010

 
$
142

 
$
8,465

 
$
20,322

 
$
2,336,696

 
$
2,357,018

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
5,894

 
8,642

 
474

 
15,079

 
30,089

 
7,598,239

 
7,628,328

Construction
6,077

 
—

 
1,106

 
715

 
7,898

 
702,368

 
710,266

Total commercial real estate loans
11,971

 
8,642

 
1,580

 
15,794

 
37,987

 
8,300,607

 
8,338,594

Residential mortgage
12,005

 
3,564

 
1,541

 
12,075

 
29,185

 
2,655,010

 
2,684,195

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
929

 
415

 
—

 
1,028

 
2,372

 
373,841

 
376,213

Automobile
3,192

 
723

 
188

 
146

 
4,249

 
1,134,833

 
1,139,082

Other consumer
76

 
9

 
21

 
—

 
106

 
569,393

 
569,499

Total consumer loans
4,197

 
1,147

 
209

 
1,174

 
6,727

 
2,078,067

 
2,084,794

Total
$
34,878

 
$
18,363

 
$
3,472

 
$
37,508

 
$
94,221

 
$
15,370,380

 
$
15,464,601


Impaired loans. Impaired loans, consisting of non-accrual commercial and industrial loans and commercial real estate loans over $250 thousand and all loans which were modified in troubled debt restructuring, are individually evaluated for impairment. PCI loans are not classified as impaired loans because they are accounted for on a pool basis.



30



The following table presents the information about impaired loans by loan portfolio class at March 31, 2017 and December 31, 2016 :
 
Recorded
Investment
With No Related
Allowance
 
Recorded
Investment
With Related
Allowance
 
Total
Recorded
Investment
 
Unpaid
Contractual
Principal
Balance
 
Related
Allowance
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,755

 
$
27,306

 
$
30,061

 
$
34,157

 
$
5,688

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
25,713

 
31,594

 
57,306

 
59,501

 
3,156

Construction
698

 
2,079

 
2,777

 
2,776

 
220

Total commercial real estate loans
26,411

 
33,673

 
60,083

 
62,277

 
3,376

Residential mortgage
9,431

 
9,126

 
18,557

 
19,872

 
686

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity
1,322

 
2,462

 
3,784

 
3,876

 
93

Total consumer loans
1,322

 
2,462

 
3,784

 
3,876

 
93

Total
$
39,919

 
$
72,567

 
$
112,485

 
$
120,182

 
$
9,843

December 31, 2016
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
3,609

 
$
27,031

 
$
30,640

 
$
35,957

 
$
5,864

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
21,318

 
36,974

 
58,292

 
60,267

 
3,612

Construction
1,618

 
2,379

 
3,997

 
3,997

 
260

Total commercial real estate loans
22,936

 
39,353

 
62,289

 
64,264

 
3,872

Residential mortgage
8,398

 
9,958

 
18,356

 
19,712

 
725

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity
1,182

 
2,352

 
3,534

 
3,626

 
70

Total consumer loans
1,182

 
2,352

 
3,534

 
3,626

 
70

Total
$
36,125

 
$
78,694

 
$
114,819

 
$
123,559

 
$
10,531

The following tables present by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2017 and 2016 : 
 
Three Months Ended March 31,
 
2017
 
2016
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(in thousands)
Commercial and industrial
$
30,459

 
$
308

 
$
28,331

 
$
240

Commercial real estate:
 
 
 
 
 
 
 
Commercial real estate
55,325

 
324

 
72,398

 
639

Construction
2,696

 
19

 
9,802

 
48

Total commercial real estate loans
58,021

 
343

 
82,200

 
687

Residential mortgage
20,393

 
208

 
23,603

 
202

Consumer loans:
 
 
 
 
 
 
 
Home equity
4,895

 
40

 
2,359

 
23

Total consumer loans
4,895

 
40

 
2,359

 
23

Total
$
113,768

 
$
899

 
$
136,493

 
$
1,152

Interest income recognized on a cash basis (included in the table above) was immaterial for the three months ended March 31, 2017 and 2016 .

31



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 $80.4 million and $85.2 million as of March 31, 2017 and December 31, 2016 , respectively. Non-performing TDRs totaled $13.1 million and $10.6 million as of March 31, 2017 and December 31, 2016 , respectively.

The following tables present loans by loan portfolio class modified as TDRs during the three months ended March 31, 2017 and 2016 . The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at March 31, 2017 and 2016 , respectively.  
 
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
Troubled Debt Restructurings
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
($ in thousands)
Commercial and industrial
 
9

 
$
10,282

 
$
9,235

 
4

 
$
4,961

 
$
4,887

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
1

 
177

 
173

 
2

 
658

 
404

Construction
 
1

 
560

 
480

 
—

 
—

 
—

Total commercial real estate
 
2

 
737

 
653

 
2

 
658

 
404

Residential mortgage
 
3

 
621

 
622

 
2

 
392

 
381

Consumer
 
—

 
—

 
—

 
1

 
54

 
53

Total
 
14

 
$
11,640

 
$
10,510

 
9

 
$
6,065

 
$
5,725


The total TDRs presented in the above table had allocated specific reserves for loan losses totaling $2.0 million and $1.6 million at March 31, 2017 and 2016 , respectively.   These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 8. One commercial and industrial TDR loan totaling $209 thousand was fully charged-off during the three months ended March 31, 2016 . There were no charge-offs related to TDR modifications during the quarter ended March 31, 2017 .



32



The following table presents non-PCI loans modified as TDRs within the previous 12 months for which there was a payment default ( 90 days or more past due) during the three months ended March 31, 2017 and March 31, 2016 .

 
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
Troubled Debt Restructurings Subsequently Defaulted
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
 
($ in thousands)
Commercial and industrial
 
1

 
$
2,000

 
2

 
$
372

Commercial real estate
 
2

 
807

 
1

 
81

Residential mortgage
 
1

 
321

 
2

 
267

Consumer
 
—

 
—

 
1

 
30

Total
 
4

 
$
3,128

 
6

 
$
750

Credit quality indicators . Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes. Under Valley’s internal risk rating system, loan relationships could be classified as “Pass,” “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Substandard loans include loans that exhibit well-defined weakness and are characterized by the distinct possibility that Valley will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged-off immediately to the allowance for loan losses, and, therefore, not presented in the table below. Loans that do not currently pose a sufficient risk to warrant classification in one of the aforementioned categories, but pose weaknesses that deserve management’s close attention are deemed Special Mention. Loans rated as Pass do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants.
The following table presents the risk category of loans (excluding PCI loans) by class of loans at March 31, 2017 and December 31, 2016 . 
Credit exposure - by internally assigned risk rating
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Non-PCI Loans
 
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,226,553

 
$
87,059

 
$
82,376

 
$
2,166

 
$
2,398,154

Commercial real estate
 
7,814,338

 
57,289

 
79,602

 
—

 
7,951,229

Construction
 
755,848

 
2,415

 
—

 
—

 
758,263

Total
 
$
10,796,739

 
$
146,763

 
$
161,978

 
$
2,166

 
$
11,107,646

December 31, 2016
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,246,457

 
$
44,316

 
$
64,649

 
$
1,596

 
$
2,357,018

Commercial real estate
 
7,486,469

 
57,591

 
84,268

 
—

 
7,628,328

Construction
 
708,070

 
200

 
1,996

 
—

 
710,266

Total
 
$
10,440,996

 
$
102,107

 
$
150,913

 
$
1,596

 
$
10,695,612


33



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 March 31, 2017 and December 31, 2016 :  
Credit exposure - by payment activity
 
Performing
Loans
 
Non-Performing
Loans
 
Total Non-PCI
Loans
 
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
Residential mortgage
 
$
2,562,696

 
$
11,650

 
$
2,574,346

Home equity
 
367,947

 
1,285

 
369,232

Automobile
 
1,149,808

 
110

 
1,149,918

Other consumer
 
593,655

 
—

 
593,655

Total
 
$
4,674,106

 
$
13,045

 
$
4,687,151

December 31, 2016
 
 
 
 
 
 
Residential mortgage
 
$
2,672,120

 
$
12,075

 
$
2,684,195

Home equity
 
375,185

 
1,028

 
376,213

Automobile
 
1,138,936

 
146

 
1,139,082

Other consumer
 
569,499

 
—

 
569,499

Total
 
$
4,755,740

 
$
13,249

 
$
4,768,989

Valley evaluates the credit quality of its PCI loan pools based on the expectation of the underlying cash flows of each pool, derived from the aging status and by payment activity of individual loans within the pool. The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of March 31, 2017 and December 31, 2016 .  
Credit exposure - by payment activity
 
Performing
Loans
 
Non-Performing
Loans
 
Total
PCI Loans
 
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
Commercial and industrial
 
$
235,700

 
$
8,465

 
$
244,165

Commercial real estate
 
1,054,623

 
10,566

 
1,065,189

Construction
 
76,496

 
1,095

 
77,591

Residential mortgage
 
167,510

 
3,591

 
171,101

Consumer
 
94,515

 
2,140

 
96,655

Total
 
$
1,628,844

 
$
25,857

 
$
1,654,701

December 31, 2016
 
 
 
 
 
 
Commercial and industrial
 
$
272,483

 
$
8,694

 
$
281,177

Commercial real estate
 
1,080,376

 
10,963

 
1,091,339

Construction
 
113,370

 
1,310

 
114,680

Residential mortgage
 
179,793

 
3,930

 
183,723

Consumer
 
98,469

 
2,114

 
100,583

Total
 
$
1,744,491

 
$
27,011

 
$
1,771,502

Other real estate owned (OREO) totaled $10.7 million and $10.2 million at March 31, 2017 and December 31, 2016 , respectively, (including $558 thousand of OREO properties which are subject to loss-sharing agreements with the FDIC at December 31, 2016 ). There were no covered OREO properties at March 31, 2017. OREO included foreclosed residential real estate properties totaling $2.4 million and $1.6 million at March 31, 2017 and December 31, 2016 , respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $5.3 million and $7.1 million at March 31, 2017 and December 31, 2016 , respectively.

34


Note 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 March 31, 2017 and December 31, 2016 .

The following table summarizes the allowance for credit losses at March 31, 2017 and December 31, 2016 : 
 
March 31,
2017
 
December 31,
2016
 
(in thousands)
Components of allowance for credit losses:
 
 
 
Allowance for loan losses
$
115,443

 
$
114,419

Allowance for unfunded letters of credit
2,253

 
2,185

Total allowance for credit losses
$
117,696

 
$
116,604


The following table summarizes the provision for credit losses for the periods indicated:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Components of provision for credit losses:
 
 
 
Provision for loan losses
$
2,402

 
$
729

Provision for unfunded letters of credit
68

 
71

Total provision for credit losses
$
2,470

 
$
800


The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 and 2016 :
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
Three Months Ended
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
50,820

 
$
55,851

 
$
3,702

 
$
4,046

 
$
—

 
$
114,419

Loans charged-off
(1,714
)
 
(414
)
 
(130
)
 
(1,121
)
 
—

 
(3,379
)
Charged-off loans recovered
848

 
142

 
448

 
563

 
—

 
2,001

Net (charge-offs) recoveries
(866
)
 
(272
)
 
318

 
(558
)
 
—

 
(1,378
)
Provision for loan losses
1,334

 
723

 
(428
)
 
773

 


 
2,402

Ending balance
$
51,288

 
$
56,302

 
$
3,592

 
$
4,261

 
$
—

 
$
115,443

Three Months Ended
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
48,767

 
$
48,006

 
$
4,625

 
$
4,780

 
$
—

 
$
106,178

Loans charged-off
(1,251
)
 
(105
)
 
(81
)
 
(1,074
)
 
—

 
(2,511
)
Charged-off loans recovered
526

 
89

 
15

 
389

 
—

 
1,019

Net (charge-offs) recoveries
(725
)
 
(16
)
 
(66
)
 
(685
)
 
—

 
(1,492
)
Provision for loan losses
375

 
464

 
(350
)
 
240

 
—

 
729

Ending balance
$
48,417

 
$
48,454

 
$
4,209

 
$
4,335

 
$
—

 
$
105,415


35


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 March 31, 2017 and December 31, 2016 .  
 
Commercial
and Industrial
 
Commercial
Real Estate
 
Residential
Mortgage
 
Consumer
 
Total
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,688

 
$
3,376

 
$
686

 
$
93

 
$
9,843

Collectively evaluated for impairment
45,600

 
52,926

 
2,906

 
4,168

 
105,600

Total
$
51,288

 
$
56,302

 
$
3,592

 
$
4,261

 
$
115,443

Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
30,061

 
$
60,083

 
$
18,557

 
$
3,784

 
$
112,485

Collectively evaluated for impairment
2,368,094

 
8,649,408

 
2,555,789

 
2,109,021

 
15,682,312

Loans acquired with discounts related to credit quality
244,165

 
1,142,780

 
171,101

 
96,655

 
1,654,701

Total
$
2,642,320

 
$
9,852,271

 
$
2,745,447

 
$
2,209,460

 
$
17,449,498

December 31, 2016
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,864

 
$
3,872

 
$
725

 
$
70

 
$
10,531

Collectively evaluated for impairment
44,956

 
51,979

 
2,977

 
3,976

 
103,888

Total
$
50,820

 
$
55,851

 
$
3,702

 
$
4,046

 
$
114,419

Loans:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
30,640

 
$
62,289

 
$
18,356

 
$
3,534

 
$
114,819

Collectively evaluated for impairment
2,326,378

 
8,276,305

 
2,665,839

 
2,081,260

 
15,349,782

Loans acquired with discounts related to credit quality
281,177

 
1,206,019

 
183,723

 
100,583

 
1,771,502

Total
$
2,638,195

 
$
9,544,613

 
$
2,867,918

 
$
2,185,377

 
$
17,236,103



Note 9. Goodwill and Other Intangible Assets
Goodwill totaled $690.6 million at both March 31, 2017 and December 31, 2016 . There were no changes to the carrying amounts of goodwill allocated to Valley’s business segments, or reporting units thereof, for goodwill impairment analysis (as reported in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 ). There was no impairment of goodwill during the three months ended March 31, 2017 and 2016 .
The following table summarizes other intangible assets as of March 31, 2017 and December 31, 2016 :  
 
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Valuation
Allowance
 
Net
Intangible
Assets
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
Loan servicing rights
$
74,108

 
$
(52,954
)
 
$
(899
)
 
$
20,255

Core deposits
43,396

 
(20,697
)
 
—

 
22,699

Other
4,087

 
(2,083
)
 
—

 
2,004

Total other intangible assets
$
121,591

 
$
(75,734
)
 
$
(899
)
 
$
44,958

December 31, 2016
 
 
 
 
 
 
 
Loan servicing rights
$
73,002

 
$
(52,634
)
 
$
(900
)
 
$
19,468

Core deposits
61,504

 
(37,562
)
 
—

 
23,942

Other
4,087

 
(2,013
)
 
—

 
2,074

Total other intangible assets
$
138,593

 
$
(92,209
)
 
$
(900
)
 
$
45,484



36



Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets in proportion to, and over the period of, estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. See the "Assets and Liabilities Measured at Fair Value on a Non-recurring Basis" section of Note 5 for additional information regarding the fair valuation and impairment of loan servicing rights.

Core deposits are amortized using an accelerated method and have a weighted average amortization period of 11 years . The line item labeled “Other” included in the table above primarily consists of customer lists and covenants not to compete, which are amortized over their expected lives generally using a straight-line method and have a weighted average amortization period of approximately 20 years . Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three months ended March 31, 2017 and 2016 .

The following table presents the estimated future amortization expense of other intangible assets for the remainder of 2017 through 2021 :  
 
Loan
Servicing
Rights
 
Core
Deposits
 
Other
 
(in thousands)
2017
$
3,892

 
$
3,599

 
$
210

2018
4,278

 
4,215

 
249

2019
3,362

 
3,671

 
235

2020
2,647

 
3,127

 
220

2021
1,973

 
2,582

 
206


Valley recognized amortization expense on other intangible assets, including net impairment (or recovery of impairment) charges on loan servicing rights, totaling approximately $ 2.5 million and $ 2.8 million for the three months ended March 31, 2017 and 2016 , respectively.
Note 10. Stock–Based Compensation
Valley currently has one active employee stock option plan, the 2016 Long-Term Stock Incentive Plan (the “2016 Stock Plan”), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016. The purpose of the 2016 Plan is to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.
Under the 2016 Stock Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors. As of March 31, 2017 , 7.4 million shares of common stock were available for issuance under the 2016 Stock Plan. The essential features of each award are described in the award agreement relating to that award. The grant, exercise, vesting, settlement or payment of an award may be based upon the fair value of Valley’s common stock on the last sale price reported for Valley’s common stock on such date or the last sale price reported preceding such date, except for performance-based awards with a market condition. The grant date fair values of performance-based awards that vest based on a market condition are determined by a third party specialist using a Monte Carlo valuation model.
Restricted Stock. Restricted stock is awarded to key employees, providing for the immediate award of our common stock subject to certain vesting and restrictions under the 2016 Stock Plan. Compensation expense is measured based on the grant-date fair value of the shares. Valley awarded time-based restricted stock totaling 393 thousand shares and 494 thousand shares during the three months ended March 31, 2017 and 2016 , respectively, to

37



both executive officers and key employees of Valley. The awards have vesting periods ranging from three to six years . Generally, the restrictions on such awards lapse at an annual or bi-annual rate of one-third of the total award commencing with the first or second anniversary of the date of grant, respectively. The average grant date fair value of the restricted stock awards granted during the three months ended March 31, 2017 and 2016 was $11.66 per share and $8.77 per share, respectively.
Restricted Stock Units. Valley granted 371 thousand shares and 431 thousand shares of performance-based RSUs to certain executive officers for the three months ended March 31, 2017 and 2016 , respectively. The performance-based awards vest based on (i) growth in tangible book value per share plus dividends ( 75 percent of performance shares) and (ii) total shareholder return as compared to our peer group ( 25 percent of performance shares). The performance based awards "cliff" vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents and accrued interest (if applicable), per the terms of the agreements, are accumulated and paid to the grantee at the vesting date, or forfeited if the performance conditions are not met. The grant date fair value of the RSUs granted during the three months ended March 31, 2017 and 2016 was $11.05 per share and $8.32 per share, respectively.

Valley recorded total stock-based compensation expense of $4.1 million and $2.4 million for the three months ended March 31, 2017 and 2016 , respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of March 31, 2017 , the unrecognized amortization expense for all stock-based employee compensation totaled approximately $19.1 million and will be recognized over an average remaining vesting period of approximately 2.2 years .
Note 11. Derivative Instruments and Hedging Activities

Valley enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

Cash Flow Hedges of Interest Rate Risk . Valley’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Valley uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

Fair Value Hedges of Fixed Rate Assets and Liabilities . Valley is exposed to changes in the fair value of certain of its fixed rate assets or liabilities due to changes in benchmark interest rates based on one-month LIBOR. From time to time, Valley uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Valley includes the gain or loss on the hedged items in the same income statement line item as the loss or gain on the related derivatives.

Non-designated Hedges. Derivatives not designated as hedges may be used to manage Valley’s exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. Derivatives not designated as hedges are not entered into for speculative purposes.

Under a program, Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge

38



accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

At March 31, 2017 , Valley has one "steepener" swap with a total current notional amount of $23.0 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the rate paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in three-month LIBOR rate and therefore provide an effective economic hedge.

Valley regularly enters into mortgage banking derivatives which are non-designated hedges. These derivatives include interest rate lock commitments provided to customers to fund certain residential mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. Valley enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on Valley’s commitments to fund the loans as well as on its portfolio of mortgage loans held for sale.

Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows:  
 
March 31, 2017
 
December 31, 2016
 
Fair Value
 
 
 
Fair Value
 
 
 
Other Assets
 
Other Liabilities
 
Notional Amount
 
Other Assets
 
Other Liabilities
 
Notional Amount
 
(in thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedge interest rate caps and swaps
$
588

 
$
343

*
$
707,000

 
$
802

 
$
15,641

 
$
707,000

Fair value hedge interest rate swaps
—

 
888

 
7,944

 
—

 
986

 
7,999

Total derivatives designated as hedging instruments
$
588

 
$
1,231

 
$
714,944

 
$
802

 
$
16,627

 
$
714,999

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and embedded derivatives
$
24,817

 
$
21,882

*
$
1,108,416

 
$
25,285

 
$
25,284

 
$
1,075,722

Mortgage banking derivatives
61

 
118

 
53,851

 
2,968

 
2,166

 
246,583

Total derivatives not designated as hedging instruments
$
24,878

 
$
22,000

 
$
1,162,267

 
$
28,253

 
$
27,450

 
$
1,322,305

 
* The fair value for the Chicago Mercantile Exchange cleared derivative positions is inclusive of accrued interest payable and the portion of the cash collateral representing the variation margin posted with (or by) the applicable counterparties.

Chicago Mercantile Exchange (CME) amended their rules to legally characterize the variation margin posted between counterparties to be classified as settlements of the outstanding derivative contracts instead of cash collateral.  Effective January 1, 2017, Valley adopted the new rule on a prospective basis to classify its CME variation margin as a single-unit of account with the fair value of certain cash flow and non-designated derivative instruments. As a result, the fair value of the designated cash flow derivatives and non-designated interest rate swaps cleared with the CME were mostly offset by variation margins totaling $13.5 million and $3.1 million , respectively, and reported in the table above on a net basis at March 31, 2017 .

39



Gains (losses) included in the consolidated statements of income and in other comprehensive income, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows: 
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense
$
(2,518
)
 
$
(2,971
)
Amount of gain (loss) recognized in other comprehensive income
217

 
(11,032
)
The net gains or losses related to cash flow hedge ineffectiveness were immaterial during the three months ended March 31, 2017 and 2016 . The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $18.5 million and $12.5 million at March 31, 2017 and December 31, 2016 , respectively.
Amounts reported in accumulated other comprehensive loss related to cash flow interest rate derivatives are reclassified to interest expense as interest payments are made on the hedged variable interest rate liabilities. Valley estimates that $7.4 million will be reclassified as an increase to interest expense over the next 12 months.

Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Derivative - interest rate swaps:
 
 
 
Interest income
$
97

 
$
(99
)
Interest expense
—

 
4,728

Hedged item - loans and borrowings:
 
 
 
Interest income
$
(97
)
 
$
99

Interest expense
—

 
(4,719
)

The amounts recognized in non-interest expense related to ineffectiveness of fair value hedges were immaterial for the three months ended March 31, 2017 and 2016 .

The net 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,
 
2017
 
2016
 
(in thousands)
Non-designated hedge interest rate derivatives
 
 
 
Other non-interest expense
$
(860
)
 
$
(297
)

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.


40



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 March 31, 2017 , Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of March 31, 2017 , the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $3.6 million . Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. At March 31, 2017 , Valley had $34.1 million in collateral posted with counterparties, net of CME variation margin.
Note 12. Balance Sheet Offsetting
Certain financial instruments, including derivatives (consisting of interest rate caps and swaps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default. The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of March 31, 2017 and December 31, 2016 .
 
 
 
 
 
 
 
Gross Amounts Not Offset
 
 
 
Gross Amounts
Recognized
 
Gross Amounts
Offset
 
Net Amounts
Presented
 
Financial
Instruments
 
Cash
Collateral
 
Net
Amount
 
(in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
25,405

 
$
—

 
$
25,405

 
$
(5,853
)
 
$
—

 
$
19,552

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
23,113

 
$
—

 
$
23,113

 
$
(5,853
)
 
$
(2,270
)
(1)  
$
14,990

Repurchase agreements
165,000

 
—

 
165,000

 
—

 
(165,000
)
(2)  
—

Total
$
188,113

 
$
—

 
$
188,113

 
$
(5,853
)
 
$
(167,270
)
 
$
14,990

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
26,087

 
$
—

 
$
26,087

 
$
(5,268
)
 
$
—

 
$
20,819

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps and swaps
$
41,911

 
$
—

 
$
41,911

 
$
(5,268
)
 
$
(36,643
)
(1)  
$
—

Repurchase agreements
165,000

 
—

 
165,000

 
—

 
(165,000
)
(2)  
—

Total
$
206,911

 
$
—

 
$
206,911

 
$
(5,268
)
 
$
(201,643
)
 
$
—

 
(1)
Represents the amount of collateral posted with derivatives counterparties that offsets net liabilities. Actual cash collateral posted with all counterparties totaled $50.7 million and $52.4 million at March 31, 2017 and December 31, 2016 , respectively.
(2)
Represents the fair value of non-cash pledged investment securities.

41



Note 13. Tax Credit Investments

Valley’s tax credit investments are primarily related to investments promoting qualified affordable housing projects, and other investments related to community development and renewable energy sources. Some of these tax-advantaged investments support Valley’s regulatory compliance with the Community Reinvestment Act (CRA). Valley’s investments in these entities generate a return primarily through the realization of federal income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction of income tax expense.

Valley’s tax credit investments are carried in other assets on the consolidated statements of financial condition. Valley’s unfunded capital and other commitments related to the tax credit investments are carried in accrued expenses and other liabilities on the consolidated statements of financial condition. Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense of the consolidated statements of income using the equity method of accounting. An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value.

The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at March 31, 2017 and December 31, 2016 .
 
March 31,
2017
 
December 31,
2016
 
(in thousands)
Other Assets:
 
 
 
Affordable housing tax credit investments, net
$
29,047

 
$
29,567

Other tax credit investments, net
39,959

 
44,763

Total tax credit investments, net
$
69,006

 
$
74,330

Other Liabilities:
 
 
 
Unfunded affordable housing tax credit commitments
$
4,690

 
$
4,850

Unfunded other tax credit commitments
7,276

 
7,276

    Total unfunded tax credit commitments
$
11,966

 
$
12,126


The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the three months ended March 31, 2017 and 2016 : 
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Components of Income Tax Expense:
 
 
 
Affordable housing tax credits and other tax benefits
$
1,284

 
$
1,065

Other tax credit investment credits and tax benefits
6,286

 
3,268

Total reduction in income tax expense
$
7,570

 
$
4,333

Amortization of Tax Credit Investments:
 
 
 
Affordable housing tax credit investment losses
$
396

 
$
584

Affordable housing tax credit investment impairment losses
124

 
140

Other tax credit investment losses
767

 
74

Other tax credit investment impairment losses
4,037

 
6,466

Total amortization of tax credit investments recorded in non-interest expense
$
5,324

 
$
7,264


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Note 14. Litigation
In the normal course of business, Valley is a party to various outstanding legal proceedings and claims. In the opinion of management, the financial condition, results of operations and liquidity of Valley should not be materially affected by the outcome of such legal proceedings and claims. However, in the event of an unexpected adverse outcome in one or more of our legal proceedings, operating results for a particular period may be negatively impacted. Disclosure is required when a risk of material loss in a litigation or claim is more than remote, even when the risk of a material loss is less than likely. Unless an estimate cannot be made, disclosure is also required of the estimate of the reasonably possible loss or range of loss.
Although there can be no assurance as to the ultimate outcome, Valley has generally denied, or believes it has a meritorious defense and will deny liability in litigation pending against Valley and claims made, including the matter described below. Valley intends to defend vigorously each case against it. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated.
Merrick Bank Corporation v. Valley National Bank and American Express Travel Related Services v. Valley National Bank litigation. For about a decade, Valley served as the depository bank for various charter operators under regulations of the Department of Transportation (DOT) and contracts entered into with charter operators under those regulations. The purported intent of the regulations is to afford some protection to the customers of the charter operators. A charter operator has several options with regard to fulfilling its obligations under the regulations, with one option requiring the charter operator to deposit the proceeds of tickets purchased for a charter flight into an FDIC insured bank account. The funds for a flight are released when the charter operator certifies that the flight has been completed. Valley stopped serving as a depository bank for the charter business due to the narrow profit in that business combined with the legal expenses incurred to defend itself in a prior case in which Valley was completely successful and the anticipated legal expenses from the following similar cases that are still pending.
Valley served as the depository bank for Myrtle Beach Direct Air (Direct Air) under a contract between Direct Air and Valley approved by the DOT under the DOT regulations. Direct Air commenced operations in 2007 but in March 2012 Direct Air ceased operations and filed for bankruptcy. Thereafter the United States Justice Department charged three of the principals of Direct Air with criminal fraud; that case is expected to go to trial in September 2017. Merrick Bank Corp. (Merrick) was the merchant bank for Direct Air and processed credit card purchases for Direct Air. Following the bankruptcy of Direct Air, Merrick incurred chargebacks in the approximate amount of $26.2 million when the Direct Air customers whose flights had been canceled obtained a credit from their card issuing banks for the cost of the ticket or other item purchased from Direct Air. Merrick was not able to recover the chargebacks from Direct Air. Direct Air’s depository account at Valley contained approximately $1.0 million at the time Direct Air ceased operations.
Merrick filed an action against Valley with ten counts in December 2013. Valley moved to dismiss five of the counts and, in March 2015, the court dismissed four of the five counts. American Express Travel Related Services (American Express) filed a similar action against Valley claiming about $3.0 million in chargebacks. Five of American Express’ eleven counts have been dismissed. The two cases have now been consolidated in the Federal District Court of New Jersey.
During April 2017, all parties attended a mediation, however it was unsuccessful. Shortly before the mediation, Valley filed summary judgment motions on all of the remaining counts in both the Merrick and American Express cases. Merrick and American Express also filed summary judgment motions against Valley. Valley does not anticipate an immediate decision to be rendered on the motions.
At March 31, 2017 , Valley could not estimate an amount or range of reasonably possible losses related to the matter described above. Based upon information currently available and advice of counsel, Valley believes that the eventual outcome of such claims will not have a material adverse effect on Valley’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of the matters, if unfavorable, may be material to Valley’s results of operations for a particular period.

43



Note 15. 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,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors disclosed in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 , include, but are not limited to:

•
weakness or a decline in the U.S. economy, in particular in New Jersey, New York Metropolitan area (including Long Island) and Florida as well as an unexpected decline in commercial real estate values within our market areas;
•
less than expected cost savings and revenue enhancement from Valley's cost reduction plans including its earnings enhancement program called "LIFT";
•
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, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;
•
results of examinations by the OCC, the FRB, the CFPB and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, require us to reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;

44



•
changes in accounting policies or accounting standards, including the new authoritative accounting guidance (known as the current expected credit loss (CECL) model) which may increase the required level of our allowance for credit losses after adoption on January 1, 2020;
•
higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in tax laws, regulations and case law;
•
our inability to pay dividends at current levels, or at all, because of inadequate future earnings, regulatory restrictions or limitations, and changes in our capital requirements;
•
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;
•
the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships; and
•
inability to retain and attract customers and qualified employees.
Critical Accounting Policies and Estimates

Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Our significant accounting policies are presented in Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 . We identified our policies on the allowance for loan losses, 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, 2016 .
New Authoritative Accounting Guidance

See Note 4 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 March 31, 2017 , Valley had consolidated total assets of approximately $23.2 billion , total net loans of $17.3 billion , total deposits of $17.3 billion and total shareholders’ equity of $2.4 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, and Florida. Of our current 209 branch network, 67 percent , 18 percent and 15 percent of the branches are located in New Jersey, New York and Florida, respectively. We have grown significantly in asset size over the past several years primarily through bank acquisitions that expanded our operating footprint into several Florida markets in 2014 and 2015, as well as normal lending activity. See Item 1 of Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 for more details regarding our most recent acquisitions.
Quarterly Results. Net income for the first quarter of 2017 was $46.1 million , or $0.17 per diluted common share, compared to $36.2 million , or $0.14 per diluted common share, for the first quarter of 2016 . The $9.9 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a $14.4 million increase in our net interest income mostly due to higher average loan balances driven by both strong organic and purchased loan volume over the last 12 months and the modification of $405 million of high cost long-term

45



borrowings in the third quarter of 2016, (ii) a $3.6 million increase in non-interest income mostly caused by increases in net gains on sales of residential mortgage loans and, to a lesser extent, higher bank owned life insurance income, partially offset by (iii) a $2.7 million increase in non-interest expense mostly due to higher salary and employee benefit expense, (iv) a $1.7 million increase in the provision for credit losses largely caused by loan growth, and (v) an increase in income tax expense mainly due to higher pre-tax income. See the "Net Interest Income," "Non-Interest Income," and "Non-Interest Expense" sections below for more details on the items above impacting our first quarter 2017 results, as well as other items discussed elsewhere in this MD&A.
Economic Overview . During the first quarter of 2017, real gross domestic product (GDP) grew at a 0.9 percent annual rate after advancing 2.1 percent in the fourth quarter of 2016. The pace of hiring remained solid, although household spending slowed somewhat in the first quarter. The combination of past declines in commodity prices and continued wage gains did not bolster consumption. Increased business fixed investment was partly supported by stability in commodity prices, and growth in residential fixed investment was solid even as borrowing costs generally increased in the first quarter.

The civilian unemployment rate decreased from 4.7 percent as of December 31, 2016 to 4.5 percent as of March 31, 2017 even as the number of people entering the workforce increased, demonstrating the continued strength of the labor market. The pace of hiring accelerated somewhat from a monthly average of 147 thousand in linked fourth quarter to 178 thousand in the first quarter of 2017. Measures of wages increased modestly over recent months which may be contributing to the slowing in household consumption.

In the first quarter of 2017, the pace of U.S. existing home sales increased compared to the previous linked quarter and the same period one year ago. Higher readings on consumer confidence boosted by the strong labor market supported the housing market even as borrowing costs remained high relative to recent quarters. The average market rate on a 30-year fixed rate mortgage loan was 4.17 percent during the first quarter of 2017, the highest rate since the second quarter of 2014. Market conditions remain generally favorable although the low levels of home inventory may weigh on unit sales.
 
Growth in personal consumption of goods and services decelerated modestly in the first quarter of 2017 after advancing at a solid pace throughout most of 2016. However, sales for automobiles were particularly weak in the first quarter of 2017. Additionally, slowing sales of goods may negatively impact business inventories which may result in slower overall business investment. Equity and home prices however, continued to rise in the first quarter of 2017, which may support consumer spending as we move forward in 2017.

In March 2017, the Federal Reserve’s Open Market Committee (FOMC) raised the target for the federal funds rate by 25 basis points for the third time in the last 15 months to a current target range of 0.75 to 1.00 percent. Despite these actions, the FOMC remains concerned about the continued low levels of inflation and inflation expectations. In determining future policy actions, the FOMC will assess progress - both realized and expected - toward its objectives of maximum employment and 2-percent inflation. The FOMC has maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities into agency mortgage-backed securities and will continue rolling over maturing U.S. Treasury securities at auction. This policy should help maintain accommodative financial conditions. The FOMC has continued to emphasize that future changes in monetary policy will be data dependent.

The 10-year U.S. Treasury note yield ended the first quarter at 2.40 percent, 13 basis points higher compared to December 31, 2016. The spread between the 2- and 10-year U.S. Treasury note yields was 1.13 percent at March 31, 2017, or 7 basis points lower than at December 31, 2016 and 6 basis points higher than compared to March 31, 2016.
    
While we are currently witnessing higher interest rates on pending loan originations within most of our loan pipelines in the early stages of the second quarter of 2017, we do see some offset potentially coming in the form of higher deposit and borrowing costs in our primary markets. To that end, despite strong loan demand, particularly in commercial real estate lending, our business operations and results may be challenged in the future due to several

46



factors, including, but not limited to, the decline in the spread between short- and long-term market interest rates and/or slower than expected economic activity within our markets.
Loans. Loans increased by $ 213.4 million , or 5.0 percent on an annualized basis, to $17.4 billion at March 31, 2017 from December 31, 2016 largely due to a $307.7 million net increase in total commercial real estate loans. The overall loan growth was partially offset by a decrease of $122.5 million in residential mortgage loans caused, in part, by the transfer of approximately $104 million of performing 30-year fixed rate mortgages to loans held for sale at March 31, 2017. The sale of these loans is expected to be completed during the second quarter of 2017 and result in a pre-tax gain of approximately $3 million. Total new organic loan originations, excluding new lines of credit and purchased loans, totaled approximately $740 million mostly within the commercial loan categories during the first quarter of 2017. See further details on our loan activities, including the covered loan portfolio, 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. As of March 31, 2017 , PCI loans totaled $1.7 billion and represented approximately 9.5 percent of our total loan portfolio.
Total non-PCI loan portfolio delinquencies (including loans past due 30 days or more and non-accrual loans) as a percentage of total loans increase d to 0.61 percent at March 31, 2017 as compared to 0.55 percent at December 31, 2016 mostly due to an increase in commercial loans past due 30 to 59 days. At March 31, 2017 , accruing past due loans totaled $68.1 million and included $15.3 million of matured performing loans (collateralized by taxi cab medallions) in the normal process of renewal. Non-performing assets (including non-accrual loans) increase d by 4.2 percent to $51.5 million at March 31, 2017 as compared to $49.4 million at December 31, 2016 mostly due to a 2.1 percent increase in non-accrual loans to $38.3 million , as well as a moderate increase in other real estate owned.
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, management cannot provide assurance that our non-performing assets will not increase from the levels reported as of March 31, 2017 . See the "Non-Performing Assets" section below for further analysis of our asset quality.
Deposits and Other Borrowings . The mix of the deposit categories of total average deposits for the first quarter of 2017 remained relatively unchanged as compared to the fourth quarter of 2016 . Non-interest bearing deposits represented approximately 30 percent of total average deposits for the three months ended March 31, 2017 , while savings, NOW and money market accounts were 52 percent and time deposits were 18 percent of the total average deposits. Overall, average deposits totaling $17.4 billion for the first quarter of 2017 decreased by $61.9 million as compared to the fourth quarter of 2016 due, in large part, to lower average non-interest bearing deposits. Actual ending balances for deposits also decreased $399.6 million , or 2.3 percent , to approximately $17.3 billion at March 31, 2017 from December 31, 2016 mostly due to runoff related to one large commercial money market customer and a $68.6 million decrease in brokered money market deposit account balances in January 2017. However, time deposits increased $76.2 million to $3.2 billion at March 31, 2017 from December 31, 2016 due, in part, to the successful promotional campaign for our 12-month certificates of deposit.
Average short-term borrowings increased $296.7 million , or 23.4 percent, to $1.6 billion for the three months ended March 31, 2017 as compared to the fourth quarter of 2016 mostly due to increased use of short-term FHLB advances for additional liquidity to fund new loan volumes. Actual ending balances for short-term borrowings increased $564.0 million to $1.6 billion at March 31, 2017 as compared to December 31, 2016 mostly due to the higher level of FHLB advances used as alternate funding, which totaled approximately $1.4 billion at March 31, 2017 .

Average long-term borrowings (which include junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition) totaled $1.5 billion for the first quarter of 2017

47



and remained relatively unchanged as compared to the fourth quarter of 2016 . Actual ending balances for long-term borrowings increased $200.1 million to $1.6 billion at March 31, 2017 as compared to December 31, 2016 primarily due to two new FHLB advances with contractual terms between 13 and 15 months.

Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:
 
Three Months Ended
March 31,
 
2017
 
2016
Return on average assets
0.80
%
 
0.67
%
Return on average shareholders’ equity
7.69

 
6.52

Return on average tangible shareholders’ equity (ROATE)
11.09

 
9.75


ROATE, which is a non-GAAP measure, is computed by dividing net income by average shareholders’ equity less average goodwill and average other intangible assets, as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
 
($ in thousands)
Net income
$
46,095

 
$
36,187

Average shareholders’ equity
2,399,159

 
2,219,570

Less: Average goodwill and other intangible assets
(736,178
)
 
(735,438
)
Average tangible shareholders’ equity
$
1,662,981

 
$
1,484,132

Annualized ROATE
11.09
%
 
9.75
%

Management believes the ROATE measure provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and the measure 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. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies.

All of the above ratios are, from time to time, impacted by net gains and losses on securities transactions, 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 level of sales of our investment securities classified as available for sale, 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 on a tax equivalen t basis totaling $164.7 million for the first quarter of 2017 increased $14.6 million from the first quarter of 2016 and decreased $1.9 million as compared to the fourth quarter of 2016 . Interest income on a tax equivalent basis decreased $2.0 million to $201.3 million for the first quarter of 2017 as compared to the fourth quarter of 2016 mainly due to a 23 basis point decline in the yield on average loans, partially offset by increases of $533.3 million and $156.1 million in average loans and taxable investments, respectively, and a 18 basis point increase in the yield on average taxable investments. The decrease in yield on average loans for the first quarter of 2017 as compared to the linked fourth quarter was mostly due to a decline of $5.9 million in periodic commercial loan fee income related to derivative interest rate swaps executed with customers and loan prepayment penalty fees. Interest expense of $36.6 million for the three months ended March 31, 2017 decreased $113 thousand as compared to the fourth quarter of 2016 . During first quarter of 2017 , our interest expense on deposits and long-term borrowings declined by approximately $237 thousand and $292 thousand , respectively, from the linked fourth quarter largely due to

48



two less days during the first quarter of 2017. The reduction in interest expense from these interest bearing liabilities was largely offset by additional interest expense from increased short-term borrowings during the first quarter of 2017 . Average short-term borrowings increased $296.7 million as compared to the fourth quarter of 2016 due to new FHLB borrowings used to offset a decline in deposits and fund new loans during the first quarter of 2017 .
Average interest earning assets increased to $20.9 billion for the first quarter of 2017 as compared to approximately $19.5 billion for the first quarter of 2016 largely due to strong organic and purchased loan growth over the last 12 month period. The broad-based loan growth within several loan categories since March 31, 2016 was largely supplemented by purchased loans, primarily consisting of participations in multi-family loans and whole 1-4 family loans (that were a mix of qualifying and non-qualifying CRA loans with adjustable and fixed rates), totaling $753 million over the last 12 months ended March 31, 2017 . Compared to the fourth quarter of 2016 , average interest earning assets increased by $561.0 million from $20.4 billion largely due to continued loan growth. Average loans increased $533.3 million to $17.3 billion for the first quarter of 2017 from the fourth quarter of 2016 due to both organic and purchased loan growth mainly within commercial real estate and other consumer loans. Average total investments increased $137.1 million during the first quarter of 2017 and helped drive a $109.4 million decline in average overnight cash balances, along with normal fluctuations in overnight cash balances due to the timing of loan originations and additional borrowings to fund such loans.
Average interest bearing liabilities increased $949.5 million to $15.3 billion for the first quarter of 2017 as compared to the first quarter of 2016 mainly due to continued and greater use of low cost brokered money market deposits, as well as short-term FHLB advances issued as part of our overall funding and liquidity strategy over the last 12 month period. Compared to the fourth quarter of 2016 , average interest bearing liabilities increased $357.0 million in the first quarter of 2017 mostly due to higher levels of both short-term FHLB advances and time deposit account balances. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.
Our net interest margin on a tax equivalent basis of 3.14 percent for the first quarter of 2017 increased by 6 basis points as compared to the first quarter of 2016 , and decreased 13 basis points from the fourth quarter of 2016 . The yield on average interest earning assets decreased by 15 basis points on a linked quarter basis mostly due to the lower yield on average loans. The yield on average loans decrease d 23 basis points to 4.04 percent for the first quarter of 2017 and was negatively impacted by the aforementioned decreases in periodic commercial loan fees as compared to the fourth quarter of 2016 . The yield on average taxable investment securities increased by 18 basis points to 2.78 percent for the first quarter of 2017 from the fourth quarter of 2016 largely due to a decline in premium amortization expense caused by lower principal repayments on residential mortgage-backed securities. The overall cost of average interest bearing liabilities decreased by 2 basis points during the first quarter of 2017 from 0.98 percent in the linked fourth quarter of 2016 . The decrease was due, in part, to a 8 basis point decline in the cost of long-term borrowings mostly caused by two less days during the first quarter of 2017 . Our cost of total deposits was 0.45 percent for the first quarter of 2017 as compared to 0.46 percent for the fourth quarter of 2016 .
Looking forward, our net interest margin for the second quarter of 2017 may decline as compared to the first quarter of 2017 due to a decline in variable interest income items, such as derivative swap and loan fee income, as well as a multitude of conditional, and sometimes unpredictable, factors that can impact our actual margin results. For example, our margin may continue to face the risk of compression in the future due to, among other factors, the relatively low level of long-term market interest rates (which have moderately declined since March 31, 2017), further repayment of higher yielding interest earning assets, and the re-pricing risk related to interest bearing deposits and short-term borrowings. Additionally, our investment portfolios include a large number of residential mortgage-backed securities purchased at a premium. The amortization of such premiums, which impacts both the yield and interest income recognized on such securities, may increase or decrease depending upon the level of principal prepayments and market interest rates. To manage these risks, we continuously explore ways to maximize our mix of interest earning assets on our balance sheet, while maintaining a low cost of funds to optimize our net interest margin and overall returns. The increase in both the U.S. and Valley prime rates (to 4.00 percent and 5.125 percent, respectively) in response to the Federal Reserve's 25 basis point increase in the targeted federal funds rate in mid-March 2017 should benefit both our future net interest income and margin. Additionally, potential future loan growth from both the commercial and consumer lending segments (based upon solid loan pipelines seen in the early stages of the second quarter of 2017) is anticipated to positively impact our future net interest income.

49





The following table reflects the components of net interest income for the three months ended March 31, 2017 , December 31, 2016 and March 31, 2016 :

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
 
Three Months Ended
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
 
($ in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)
$
17,313,100

 
$
175,017

 
4.04
%
 
$
16,779,765

 
$
179,275

 
4.27
%
 
$
15,993,543

 
$
166,075

 
4.15
%
Taxable investments (3)
2,836,300

 
19,740

 
2.78

 
2,680,175

 
17,454

 
2.60

 
2,497,986

 
15,479

 
2.48

Tax-exempt investments (1)(3)
612,946

 
6,201

 
4.05

 
632,011

 
6,292

 
3.98

 
569,265

 
5,677

 
3.99

Federal funds sold and other interest bearing deposits
187,118

 
331

 
0.71

 
296,535

 
280

 
0.38

 
426,676

 
357

 
0.33

Total interest earning assets
20,949,464

 
201,289

 
3.84

 
20,388,486

 
203,301

 
3.99

 
19,487,470

 
187,588

 
3.85

Allowance for loan losses
(115,300
)
 
 
 
 
 
(111,865
)
 
 
 
 
 
(107,039
)
 
 
 
 
Cash and due from banks
241,346

 

 
 
 
293,693

 
 
 
 
 
296,721

 
 
 
 
Other assets
1,938,949

 
 
 
 
 
2,100,979

 
 
 
 
 
2,013,099

 
 
 
 
Unrealized (losses) gains on securities available for sale, net
(18,173
)
 
 
 
 
 
8,698

 
 
 
 
 
(9,973
)
 
 
 
 
Total assets
$
22,996,286

 
 
 
 
 
$
22,679,991

 
 
 
 
 
$
21,680,278

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW and money market deposits
$
9,049,446

 
$
10,183

 
0.45
%
 
$
9,034,605

 
$
10,418

 
0.46
%
 
$
8,334,289

 
$
9,243

 
0.44
%
Time deposits
3,178,452

 
9,553

 
1.20

 
3,137,057

 
9,555

 
1.22

 
3,127,842

 
9,585

 
1.23

Total interest bearing deposits
12,227,898

 
19,736

 
0.65

 
12,171,662

 
19,973

 
0.66

 
11,462,131

 
18,828

 
0.66

Short-term borrowings
1,563,000

 
3,901

 
1.00

 
1,266,311

 
3,485

 
1.10

 
1,061,011

 
1,872

 
0.71

Long-term borrowings (4)
1,494,273

 
12,950

 
3.47

 
1,490,187

 
13,242

 
3.55

 
1,812,556

 
16,744

 
3.70

Total interest bearing liabilities
15,285,171

 
36,587

 
0.96

 
14,928,160

 
36,700

 
0.98

 
14,335,698

 
37,444

 
1.04

Non-interest bearing deposits
5,138,870

 
 
 
 
 
5,256,984

 
 
 
 
 
4,918,463

 
 
 
 
Other liabilities
173,086

 
 
 
 
 
190,639

 
 
 
 
 
206,547

 
 
 
 
Shareholders’ equity
2,399,159

 
 
 
 
 
2,304,208

 
 
 
 
 
2,219,570

 
 
 
 
Total liabilities and shareholders’ equity
$
22,996,286

 
 
 
 
 
$
22,679,991

 
 
 
 
 
$
21,680,278

 
 
 
 
Net interest income/interest rate spread (5)

 
$
164,702

 
2.88
%
 
 
 
$
166,601

 
3.01
%
 
 
 
$
150,144

 
2.81
%
Tax equivalent adjustment
 
 
(2,173
)
 
 
 
 
 
(2,206
)
 
 
 
 
 
(1,991
)
 
 
Net interest income, as reported
 
 
$
162,529

 
 
 
 
 
$
164,395

 
 
 
 
 
$
148,153

 
 
Net interest margin (6)
 
 
 
 
3.10
%
 
 
 
 
 
3.23
%
 
 
 
 
 
3.04
%
Tax equivalent effect
 
 
 
 
0.04
%
 
 
 
 
 
0.04
%
 
 
 
 
 
0.04
%
Net interest margin on a fully tax equivalent basis (6)
 
 
 
 
3.14
%
 
 
 
 
 
3.27
%
 
 
 
 
 
3.08
%

50





 
 
(1)
Interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.
(2)
Loans are stated net of unearned income and include non-accrual loans.
(3)
The yield for securities that are classified as available for sale is based on the average historical amortized cost.
(4)
Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated
statements of financial condition.
(5)
Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6)
Net interest income as a percentage of total average interest earning assets.

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 March 31, 2017
Compared to March 31, 2016
 
Change
Due to
Volume
 
Change
Due to
Rate
 
Total
Change
 
(in thousands)
Interest Income:
 
 
 
 
 
Loans*
$
13,427

 
$
(4,485
)
 
$
8,942

Taxable investments
2,232

 
2,029

 
4,261

Tax-exempt investments*
441

 
83

 
524

Federal funds sold and other interest bearing deposits
(275
)
 
249

 
(26
)
Total increase (decrease) in interest income
15,825

 
(2,124
)
 
13,701

Interest Expense:
 
 
 
 
 
Savings, NOW and money market deposits
803

 
137

 
940

Time deposits
154

 
(186
)
 
(32
)
Short-term borrowings
1,081

 
948

 
2,029

Long-term borrowings and junior subordinated debentures
(2,806
)
 
(988
)
 
(3,794
)
Total (decrease) increase in interest expense
(768
)
 
(89
)
 
(857
)
Total increase (decrease) in net interest income
$
16,593

 
$
(2,035
)
 
$
14,558

 
*
Interest income is presented on a tax equivalent basis using a 35 percent tax rate.

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Non-Interest Income

The following table presents the components of non-interest income for the three months ended March 31, 2017 and 2016 :
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Trust and investment services
$
2,744

 
$
2,440

Insurance commissions
5,061

 
4,708

Service charges on deposit accounts
5,236

 
5,103

(Losses) gains on securities transactions, net
(23
)
 
271

Fees from loan servicing
1,815

 
1,594

Gains on sales of loans, net
4,128

 
1,795

Bank owned life insurance
2,463

 
1,963

Other
3,635

 
3,574

Total non-interest income
$
25,059

 
$
21,448


Non-interest income increased $3.6 million for the three months ended March 31, 2017 as compared with the same period in 2016 primarily due to increases in n et gains on sales of loans and non-interest income from bank owned life insurance.

Net gains on sales of loans increased $2.3 million for the three months ended March 31, 2017 as compared to the same period in 2016 largely due to a higher volume of residential mortgage loans originated for sale during the three months ended March 31, 2017 . Loans originated for sale (including both new and refinanced loans) increased $80.1 million to $163.7 million for the first quarter of 2017 as compared to $83.6 million for the first quarter of 2016 . During the first quarter of 2017 , we sold $159.9 million of residential mortgage loans originated for sale (including $57.7 million of loans held for sale at December 31, 2016 ) as compared to $54.0 million in the first quarter of 2016 . 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 held for sale carried at fair value at each period end. The net change in the fair value of loans held for sale resulted in net gains of $267 thousand and $499 thousand for the three months ended March 31, 2017 and 2016 , respectively. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Bank owned life insurance increased $500 thousand for the three months ended March 31, 2017 as compared to the same period in 2016 largely related to certain death benefits received in the first quarter of 2017 .



52



Non-Interest Expense

The following table presents the components of non-interest expense for the three months ended March 31, 2017 and 2016 :
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in thousands)
Salary and employee benefits expense
$
63,716

 
$
60,259

Net occupancy and equipment expense
23,035

 
22,789

FDIC insurance assessment
5,127

 
5,099

Amortization of other intangible assets
2,536

 
2,849

Professional and legal fees
4,695

 
3,895

Amortization of tax credit investments
5,324

 
7,264

Telecommunications expense
2,659

 
2,386

Other
13,860

 
13,684

Total non-interest expense
$
120,952

 
$
118,225


Non-interest expense increased $2.7 million for the three months ended March 31, 2017 as compared with the same period in 2016 primarily due to increases in the salary and employee benefits expense and professional and legal fees, partially offset by a decrease in the amortization of tax credit investments.

Salary and employee benefits expense increased $3.5 million for the three months ended March 31, 2017 as compared to the same period in 2016 largely due to increases in stock-based compensation expense and cash incentive compensation accrual totaling a combined $2.4 million. The remaining net increase in the category was mainly related to an increase in payroll taxes for the three months ended March 31, 2017 compared to the same period in 2016 , as well as an increase in 401(k) plan expense.

Professional and legal fees increased $800 thousand for the three months ended March 31, 2017 as compared to the same period in 2016 largely due to an increase in legal fees related to on-going litigation, as well as other corporate matters during the first quarter of 2017.

Amortization of tax credit investments decreased $1.9 million for the three months ended March 31, 2017 as compared with the same period in 2016 mainly due to the lower level of net tax credit investments held at March 31, 2017 as compared to March 31, 2016. These investments, while negatively impacting the level of our operating expenses and efficiency ratio, directly reduce our income tax expense and effective tax rate. See Note 13 to the consolidated financial statements for more details regarding our tax credit investments.

Efficiency Ratios
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 within non-interest expense.


53



The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three months ended March 31, 2017 and 2016 :
 
Three Months Ended
March 31,
 
2017
 
2016
 
($ in thousands)
Total non-interest expense
$
120,952

 
$
118,225

Less: Amortization of tax credit investments
5,324

 
7,264

Total non-interest expense, adjusted
$
115,628

 
$
110,961

 
 
 
 
Net interest income
$
162,529

 
$
148,153

Total non-interest income
25,059

 
21,448

Total net interest income and non-interest income
$
187,588

 
$
169,601

Efficiency ratio
64.48
%
 
69.71
%
Efficiency ratio, adjusted
61.64
%
 
65.42
%

Earnings Enhancement Program
In December 2016, Valley announced a company-wide earnings enhancement initiative called LIFT. The LIFT program will seek to identify both additional operating expense reductions and revenue enhancement opportunities, which together are anticipated to contribute to sustainable improvement in our earnings for years to come. Valley has selected EHS Partners, LLC, a New York based consulting firm, to help achieve its program goals. The discovery and feasibility study phases for LIFT are currently underway and expected to be completed on schedule in the second quarter of 2017. The implementation phase of the initiative will commence in the third quarter of 2017 and is expected to be fully phased-in over a 24 month period. We expect this endeavor, combined with our continued growth strategies, to help position Valley to deliver on its future performance goals, while enhancing our focus on delivering the financial banking experience expected in today's rapidly changing financial services environment.
As part of the LIFT program and the normal on-going review of our business, we will evaluate the operational efficiency of our entire branch network (consisting of 110 leased and 99 owned office locations at March 31, 2017 ). This review will ensure the optimal performance of our retail operations, in conjunction with several other factors, including our customers’ delivery channel preferences, branch usage patterns, and the potential opportunity to move existing customer relationships to another branch location without imposing a negative impact on their banking experience.
Income Taxes

Income tax expense was $18.1 million and $14.4 million for the three months ended March 31, 2017 and 2016 , respectively. Our effective tax rate was 28.2 percent and 28.5 percent for the first quarter s of 2017 and 2016 , respectively.

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 2017 , we anticipate that our effective tax rate will range from 28 percent to 31 percent. The effective tax rate is generally lower than the statutory rate primarily due to tax credits derived from our investments in qualified affordable housing projects and other investments related to community development and renewable energy sources, as well as earnings from other

54



tax-exempt investments. See Note 13 to the consolidated financial statements for additional information regarding our tax credit investments.
Business Segments

We have four business segments that we monitor and report on to manage our business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Our reportable segments have been determined based upon Valley’s internal structure of operations and lines of business. Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Expenses related to the branch network, all other components of retail banking, along with the back office departments of our subsidiary bank are allocated from the corporate and other adjustments segment to each of the other three business segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a “pool funding” methodology, which involves the allocation of uniform funding cost based on each segments’ 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 March 31, 2017 and 2016 :
 
Three Months Ended March 31, 2017
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
5,044,814

 
$
12,268,286

 
$
3,636,364

 
$
—

 
$
20,949,464

Income (loss) before income taxes
15,404

 
49,378

 
9,712

 
(10,328
)
 
64,166

Annualized return on average interest earning assets (before tax)
1.22
%
 
1.61
%
 
1.07
%
 
N/A

 
1.23
%
 
 
Three Months Ended March 31, 2016
 
Consumer
Lending
 
Commercial
Lending
 
Investment
Management
 
Corporate
and Other
Adjustments
 
Total
 
($ in thousands)
Average interest earning assets
$
5,195,629

 
$
10,797,914

 
$
3,493,927

 
$
—

 
$
19,487,470

Income (loss) before income taxes
14,101

 
43,867

 
4,003

 
(11,395
)
 
50,576

Annualized return on average interest earning assets (before tax)
1.09
%
 
1.63
%
 
0.46
%
 
N/A

 
1.04
%
Consumer Lending

This segment, representing approximately 28.4 percent of our loan portfolio at March 31, 2017 , 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 15.7 percent of our loan portfolio at March 31, 2017 , including covered loans) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 6.6 percent of total loans at March 31, 2017 ) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new

55



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 Division, comprised of trust, asset management, and insurance services.

Average interest earning assets in this segment decreased $150.8 million to $5.0 billion for the three months ended March 31, 2017 as compared to the first quarter of 2016 . The decrease was largely due to declines in residential mortgage loans and home equity loans. The decline in residential mortgage loans over the last 12 months was largely driven by normal repayment activity, high percentage of loans originated for sale rather than investment, and the transfer and the sale of approximately $170 million of performing fixed rate mortgages from loans held for sale in the fourth quarter of 2016. Home equity loan volumes and customer usage of existing home equity lines of credit also steadily declined since March 31, 2016 despite the relatively favorable low interest rate environment.

Income before income taxes generated by the consumer lending segment increased $1.3 million to $15.4 million for the first quarter of 2017 as compared to $14.1 million for the first quarter of 2016 largely due to an increase in non-interest income of $3.4 million and a decrease of $1.3 million in internal transfer expense for the first quarter of 2017 as compared to the same period in 2016 . The increase in non-interest income was mostly driven by a $2.3 million increase in the net gains on sales of loans caused by a higher level of sales volumes during first quarter of 2017 . The positive impact of the aforementioned items was partially offset by a $1.2 million decrease in net interest income mainly due to the lower average loan balances since March 31, 2016 and a 8 basis point decline in the yield on average loans as the new loan volume was generated at current market interest rates below the yield on the average portfolio.

The net interest margin on the consumer lending portfolio decreased 1 basis point to 2.78 percent for the first quarter of 2017 as compared to the same quarter one year ago. The net interest margin was negatively impacted by a 8 basis point decline in yield on average loans, partially offset by a 7 basis point decrease in the costs associated with our funding sources. The decrease in our cost of funds was primarily due to the lower cost of our average long-term borrowings driven by the prepayment, modification and maturity of high cost borrowings over the last 12 months. 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 $2.6 billion and represented 15.1 percent of the total loan portfolio at March 31, 2017 . Commercial real estate loans and construction loans totaled $9.9 billion and represented 56.5 percent of the total loan portfolio at March 31, 2017 .

Average interest earning assets in this segment increased $1.5 billion to $12.3 billion for the three months ended March 31, 2017 as compared to the first quarter of 2016 . This increase was due, in part, to solid organic commercial real estate loan growth across many segments of borrowers and purchases of loan participations (mostly consisting of multi-family loans in New York City) totaling over $750 million during the last 12 months.

For the three months ended March 31, 2017 , income before income taxes for the commercial lending segment increased $5.5 million to $49.4 million as compared to the same quarter of 2016 mostly due to an increase in net interest income, partially offset by an increase in the provision for credit losses and internal transfer expense. Net interest income increased $10.9 million to $112.4 million for the first quarter of 2017 as compared to the same period in 2016 largely due to the aforementioned organic, purchased and acquired loan growth over the last 12 months . The p rovision for credit losses increased $1.2 million during the three months ended March 31, 2017 as compared to $838 thousand for the first quarter of 2016 . See further details in the "Allowance for Credit Losses" section. Internal transfer expense increased $3.9 million during the first quarter of 2017 as compared to the same period in 2016 .

56




The net interest margin for this segment decreased 10 basis points to 3.66 percent for the first quarter of 2017 as compared to the same quarter one year ago as a result of a 17 basis point decline in yield on average loans, partially offset by a 7 basis point decrease in the cost of our funding sources. The decrease in the yield on loans was primarily due to the new and refinanced loan volumes at current interest rates that are relatively low compared to the overall yield of our loan portfolio.
I nvestment 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 $142.4 million during the first quarter of 2017 as compared to the first quarter of 2016 . The increase was mainly due to purchases of residential mortgage-backed securities classified as held for maturity and available for sale in the last 12 months, partially offset by a $239.6 million decrease in average federal funds sold and other interest bearing deposits for the three months ended March 31, 2017 as compared to the same period in 2016 .

For the quarter ended March 31, 2017 , income before income taxes for the investment management segment increased approximately $5.7 million to $9.7 million compared to the first quarter in 2016 mainly due to a $5.2 million increase in net interest income. The increase in net interest income was mainly driven by the higher average investment balances in the first quarter of 2017 as compared to the same period in 2016 .

The net interest margin for this segment increased 50 basis points to 2.25 percent for the first quarter of 2017 as compared to the same quarter one year ago largely due to a 43 basis point increase in the yield on average investments and a 7 basis point decrease in costs associated with our funding sources.
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, interest expense related to subordinated notes, as well as income and expense from derivative financial instruments.

The pre-tax net loss for the corporate segment decreased $1.1 million to $10.3 million for the three months ended March 31, 2017 as compared to $11.4 million for the three months ended March 31, 2016 mainly due to an increase in internal transfer income and non-interest income totaling $2.5 million , partially offset by a $540 thousand increase in non-interest expense and $417 thousand decrease in non-interest income. The increase in non-interest expense related to increases in several general expense categories, including, but not limited to, salary and employee benefits expense and amortization of tax credit investments. Non-interest income decreased mainly due to a $294 thousand decrease in net gains on securities transactions for the three months ended March 31, 2017 as compared with the same period in 2016 . See further details in the "Non-Interest Income" and "Non-Interest Expense" sections above.

57



ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempts 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 March 31, 2017 . 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 March 31, 2017 . 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 March 31, 2017 . Although the size of Valley’s balance sheet is forecasted to remain static as of March 31, 2017 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 first quarter of 2017 . The model also utilizes an immediate parallel shift in the market interest rates at March 31, 2017 .

The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet.

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

58




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
Changes in Interest Rates
Dollar
Change
 
Percentage
Change
(in basis points)
($ in thousands)
+200
$
(5,680
)
 
(0.88
)%
+100
(1,536
)
 
(0.24
)
–100
(17,627
)
 
(2.74
)

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 decrease net interest income over the next 12 months by 0.24 percent. The Bank’s sensitivity to changes in market rates changed in both size and direction as compared to December 31, 2016 (which was an increase of 0.03 percent in net interest income over a 12 month period). However, the change in sensitivity is not expected to materially impact Valley’s ability to generate net interest income. In addition, we believe the balance sheet remains well-positioned to respond positively to a rising market interest rate environment. Our current asset sensitivity to a 100 basis point immediate increase in interest rates is impacted by, among other factors, asset cash flow and repricing characteristics, complemented by a funding structure that provides for very stable earnings and low volatility. Future changes including, but not limited to, 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 and caps 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 prime rate (as reported by The Wall Street Journal) or the three-month LIBOR rate. Our cash flow interest rate swaps had a total notional value of $582 million at March 31, 2017 and currently pay fixed and receive floating rates. We also utilize fair value and non-designated hedge interest rate swaps to effectively convert fixed rate loans, and a much smaller amount of certain brokered certificates of deposit, to floating rate instruments. The cash flow hedges are expected to benefit our net interest income in a rising interest rate environment. However, due to the prolonged 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 three months ended March 31, 2017 . This negative trend will likely continue based upon the current market expectations regarding the Federal Reserve’s monetary policies which are designed to impact the level of market interest rates. See Note 11 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

59



on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at March 31, 2017 .

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 $2.0 billion , representing 9.5 percent of earning assets, at March 31, 2017 and $1.8 billion , representing 8.9 percent of earning assets, at December 31, 2016 . Of the $2.0 billion of liquid assets at March 31, 2017 , approximately $548 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $578 million in principal 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 March 31, 2017 ) are projected to be approximately $4.2 billion over the next 12 months. As a contingency plan for significant funding needs, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio, or from the temporary curtailment of lending activities.

On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $15.3 billion and $14.7 billion at March 31, 2017 and December 31, 2016 , respectively, representing 73.1 percent and 73.9 percent of average earning assets at March 31, 2017 and December 31, 2016 , respectively. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous correspondent banks. While there are no firm lending commitments currently in place, management believes that we could borrow approximately $727 million for a short time 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 obtain overnight borrowings from the Federal Reserve Bank via the discount window as a contingency for additional liquidity. At March 31, 2017 , our borrowing capacity under the Federal Reserve's discount window was $1.1 billion .

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Our short-term borrowings increased $564 million to $1.6 billion at March 31, 2017 as compared to December 31, 2016 due to a $650 million increase in FHLB advances, partially offset by a decrease of $86 million in repo balances. The new FHLB advances were used as alternate funding for a decline in money market deposits during the first quarter of 2017, as well as for additional liquidity and loan funding purposes.
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

60



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. 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 March 31, 2017 , we had approximately $1.9 billion and $1.5 billion in held to maturity and available for sale investment securities, respectively. Our total investment portfolio was comprised of U.S. Treasury securities, U.S. government agencies, tax-exempt issuances of states and political subdivisions, residential mortgage-backed securities (including 12 private label mortgage-backed securities), single-issuer trust preferred securities principally issued by bank holding companies (including 2 pooled securities), high quality corporate bonds and equity securities issued by banks at March 31, 2017 . There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac.

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

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


61



The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at March 31, 2017 .
 
March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held to maturity investment grades:*
 
 
 
 
 
 
 
AAA Rated
$
1,412,566

 
$
23,271

 
$
(17,693
)
 
$
1,418,144

AA Rated
249,056

 
7,901

 
(187
)
 
256,770

A Rated
35,720

 
1,848

 
—

 
37,568

Non-investment grade
3,645

 
17

 
(33
)
 
3,629

Not rated
201,342

 
150

 
(13,080
)
 
188,412

Total investment securities held to maturity
$
1,902,329

 
$
33,187

 
$
(30,993
)
 
$
1,904,523

Available for sale investment grades:*
 
 
 
 
 
 
 
AAA Rated
$
1,306,605

 
$
2,658

 
$
(17,527
)
 
$
1,291,736

AA Rated
65,803

 
237

 
(1,038
)
 
65,002

A Rated
24,223

 
13

 
(35
)
 
24,201

BBB Rated
33,910

 
545

 
(201
)
 
34,254

Non-investment grade
12,500

 
911

 
(1,292
)
 
12,119

Not rated
27,333

 
365

 
(679
)
 
27,019

Total investment securities available for sale
$
1,470,374

 
$
4,729

 
$
(20,772
)
 
$
1,454,331

 
*
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 held to maturity portfolio includes $201.3 million in investments not rated by the rating agencies with aggregate unrealized losses of $13.1 million at March 31, 2017 . The unrealized losses for this category primarily relate to 4 single-issuer bank trust preferred issuances with a combined amortized cost of $35.9 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 credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon our quarterly review at March 31, 2017 , 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 months ended March 31, 2017 and 2016 as the collateral supporting much of the investment securities has improved or performed as expected.

62



Loan Portfolio

The following table reflects the composition of the loan portfolio as of the dates presented:
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
($ in thousands)
Loans
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,642,319

 
$
2,638,195

 
$
2,558,968

 
$
2,528,749

 
$
2,537,545

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
9,016,418

 
8,719,667

 
8,313,855

 
8,018,794

 
7,585,139

Construction
835,854

 
824,946

 
802,568

 
768,847

 
776,057

Total commercial real estate
9,852,272

 
9,544,613

 
9,116,423

 
8,787,641

 
8,361,196

Residential mortgage
2,745,447

 
2,867,918

 
2,826,130

 
3,055,353

 
3,101,814

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
458,891

 
469,009

 
476,820

 
485,730

 
491,555

Automobile
1,150,053

 
1,139,227

 
1,121,606

 
1,141,793

 
1,188,063

Other consumer
600,516

 
577,141

 
534,188

 
499,914

 
455,814

Total consumer loans
2,209,460

 
2,185,377

 
2,132,614

 
2,127,437

 
2,135,432

Total loans (1)(2)
$
17,449,498

 
$
17,236,103

 
$
16,634,135

 
$
16,499,180

 
$
16,135,987

As a percent of total loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial
15.1
%
 
15.3
%
 
15.4
%
 
15.3
%
 
15.8
%
Commercial real estate
56.5
%
 
55.4
%
 
54.8
%
 
53.3
%
 
51.8
%
Residential mortgage
15.7
%
 
16.6
%
 
17.0
%
 
18.5
%
 
19.2
%
Consumer loans
12.7
%
 
12.7
%
 
12.8
%
 
12.9
%
 
13.2
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
(1)
I ncludes covered loans subject to loss-sharing agreements with the FDIC (primarily consisting of residential mortgage loans and commercial real estate loans) totaling $47.8 million , $70.4 million, $76.0 million, $81.1 million, and $86.8 million at March 31, 2017 , December 31, 2016 , September 30, 2016 , June 30, 2016 and March 31, 2016 , respectively.
(2)
Includes net unearned premiums and deferred loan costs of $15.7 million , $15.3 million, $10.5 million, $8.3 million, $5.6 million at March 31, 2017 , December 31, 2016 , September 30, 2016 , June 30, 2016 and March 31, 2016 , respectively.

Total loans increased $213.4 million to approximately $17.4 billion at March 31, 2017 from December 31, 2016 . Our loan portfolio includes purchased credit-impaired (PCI) loans, which are loans acquired at a discount that is due, in part, to credit quality. At March 31, 2017 , our PCI loan portfolio decreased $116.8 million to $1.7 billion as compared to December 31, 2016 primarily due to continued larger loan repayments, of which some resulted from continued efforts by management to encourage borrower prepayment. The non-PCI loan portion of the loan portfolio increased $330.2 million (net of $103.9 million in performing residential mortgage loans transferred to loans held for sale during the first quarter) to approximately $15.8 billion at March 31, 2017 as compared to December 31, 2016 largely due to an increase in total commercial real estate loans. During the first quarter of 2017 , Valley also originated $112.7 million of residential mortgage loans for sale rather than investment. Loans held for sale totaled $115.1 million and $57.7 million at March 31, 2017 and December 31, 2016 , respectively. See additional information regarding our residential mortgage loan activities below.
Total commercial and industrial loans increased $4.1 million from December 31, 2016 to approximately $2.6 billion at March 31, 2017 , despite a $37.0 million decline in the PCI loan portion of the portfolio during the first quarter of 2017 . Exclusive of the decline in PCI loans, the non-PCI commercial and industrial loan portfolio increased by $41.1 million , or approximately 7.0 percent on an annualized basis, to $2.4 billion at March 31, 2017 from December 31, 2016 . This growth in non-PCI loans was largely due to a few large customer relationships, including a secured commercial lending arrangement with a large regional auto retailer. In addition to the PCI loan

63



repayments, the level of loan growth within this portfolio continues to be challenged by strong market competition for both new and existing commercial loan borrowers within our primary markets.
Commercial real estate loans (excluding construction loans) increased $296.8 million from December 31, 2016 to $9.0 billion at March 31, 2017 mainly due to a $322.9 million , or 16.9 percent on an annualized basis, increase in the non-PCI loan portfolio. The increase in non-PCI loans was primarily due to solid organic loan volumes in New York and New Jersey, as well as approximately $178 million of loan participations (mostly multi-family loans in New York City) purchased in the first quarter of 2017 . The purchased participation loans continue to be predominantly seasoned loans with expected shorter durations. Each purchased participation loan is reviewed by Valley under its normal underwriting criteria and stress-tested to assure its credit quality. The organic loan volumes generated across a broad-based segment of borrowers within the commercial real estate portfolio were partially offset by a $26.2 million decline in the acquired PCI loan portion of the portfolio. Construction loans increased $10.9 million to $835.9 million at March 31, 2017 from December 31, 2016 . The increase was mostly due to advances on existing construction projects.
Total residential mortgage loans decreased $122.5 million , or approximately 17.1 percent on an annualized basis, to approximately $2.7 billion at March 31, 2017 from December 31, 2016 mostly due to the aforementioned transfer of $103.9 million in mortgage loans to loans held for sale, as well as a large percentage of new loans originated for sale rather than investment during the first quarter of 2017 . Valley sold approximately $159.9 million of residential mortgage loans originated for sale (including $57.7 million of loans held for sale at December 31, 2016 ) during the first quarter of 2017 . New and refinanced residential mortgage loan originations totaled approximately $163.7 million for the first quarter of 2017 as compared to $371.3 million and $83.6 million for the fourth quarter of 2016 and first quarter of 2016 , respectively. Of the $163.7 million in total originations, $15.3 million , or 9.3 percent , represented new Florida residential mortgage loans. We expect to continue to sell a large portion of our new fixed rate residential mortgage loan originations as part of our overall interest rate risk management strategies.
Home equity loans decreased $10.1 million to $458.9 million at March 31, 2017 as compared to December 31, 2016 mostly due to normal repayment activity, including a $3.1 million decline in the PCI loan portion of the portfolio. New home equity loan volumes and customer usage of existing home equity lines of credit continue to be weak, despite the relatively favorable low interest rate environment.
Automobile loans increased by $10.8 million , or 3.8 percent on an annualized basis, to $1.2 billion at March 31, 2017 as compared to December 31, 2016 . Our auto loan volumes have continued to outpace repayments for two consecutive quarters since we introduced an automated tool to improve the decision-making process for our auto dealer network during the third quarter of 2016. The enhanced decision model and continued growth in our relatively new Florida markets are expected to continue a moderately positive growth trend in the auto portfolio during the second quarter of 2017. During the first quarter of 2017, the Florida dealership network contributed over $24 million in auto loan originations, representing approximately 17 percent of Valley's total new auto loan production for the period.
Other consumer loans increased $23.4 million , or 16.2 percent on an annualized basis, to $600.5 million at March 31, 2017 as compared to $577.1 million at December 31, 2016 mainly due to continued growth and customer usage of collateralized personal lines of credit.
Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, with the exception of smaller auto and residential mortgage loan portfolios derived from the other neighboring states of New Jersey, which could present a geographic and credit risk if there was another significant broad based economic downturn or a prolonged economic recovery within these regions. We are witnessing new loan activity across Valley's entire geographic footprint, including new loans and solid loan pipelines from our Florida lending operations. The Florida operations accounted for approximately $167 million of approximately $768 million in new and purchased commercial loan volume, excluding lines of credit, during the first quarter of 2017 . However, the New Jersey and New York Metropolitan markets continue to account for a disproportionately larger percentage of our lending activity. To mitigate these risks, we are making efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector. Geographically, we may

64



make further inroads into the Florida lending market, through acquisition, select de novo branch efforts or adding lending staff.
Purchased Credit-Impaired Loans (Including Covered Loans)

PCI loans totaled $1.7 billion and $1.8 billion at March 31, 2017 and December 31, 2016 , respectively, mostly consisting of loans acquired in business combinations subsequent to 2011 and covered loans in which the Bank will share losses with the FDIC under loss-sharing agreements. Our covered loans, consisting primarily of residential mortgage loans and commercial real estate loans, totaled $47.8 million and $70.4 million at March 31, 2017 and December 31, 2016 , respectively. The decrease in covered loans was largely due to the expiration of a commercial loss-sharing agreement acquired from 1st United Bancorp, Inc. effective January 1, 2017 and the reclassification of such loans to non-covered PCI loans during the first quarter of 2017. Additional information regarding all of our loss-sharing agreements with the FDIC can be found in our Annual Report on Form 10-K for the year ended December 31, 2016.

PCI loans are accounted for in accordance with 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, loss accrual or 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.

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

On a quarterly basis, we also analyze 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, we 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 we don't reforecast estimated cash flows, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events which transpired during the current reporting period.

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




65



The following tables summarize the changes in the carrying amounts of PCI loans (net of the allowance for loan losses, if applicable), and the accretable yield on these loans for the three months ended March 31, 2017 and 2016 .  
 
Three Months Ended March 31,
 
2017
 
2016
 
Carrying
Amount
 
Accretable
Yield
 
Carrying
Amount
 
Accretable
Yield
 
(in thousands)
PCI loans:
 
 
 
 
 
 
 
Balance, beginning of the period
$
1,771,502

 
$
294,514

 
$
2,240,471

 
$
415,179

Accretion
24,683

 
(24,683
)
 
28,059

 
(28,059
)
Payments received
(137,950
)
 
—

 
(149,645
)
 
—

Transfers to other real estate owned
(3,534
)
 
—

 
(270
)
 
—

 Other, net
—

 


 
(3,194
)
 
—

Balance, end of the period
$
1,654,701

 
$
269,831

 
$
2,115,421

 
$
387,120



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

The receivable arising from the loss-sharing agreements with the FDIC is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans. The FDIC loss share receivable (which is included in other assets on Valley's consolidated statements of financial condition) totaled $7.4 million and $7.2 million at March 31, 2017 and December 31, 2016 , respectively.
Non-performing Assets
Non-performing assets (excluding PCI loans) include non-accrual loans, other real estate owned (OREO), other repossessed assets (which mainly consist of automobiles) and non-accrual debt securities at March 31, 2017 . 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 fair value, less estimated costs to sell, or cost thereafter. Our non-performing assets of $51.5 million at March 31, 2017 moderately increased from December 31, 2016, but decreased 33.6 percent as compared to March 31, 2016 (as shown in the table below) due to a steady downward trend within the non-accrual loan category during 2016. However, non-performing assets as a percentage of total loans and non-performing assets totaled 0.29 percent at both March 31, 2017 and December 31, 2016. Overall, we believe total non-performing assets has remained relatively low as a percentage of the total loan portfolio and non-performing assets over the last 12 month period and is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. 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 7 to the consolidated financial statements.



66



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:  
 
March 31, 2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
 
March 31, 2016
 
($ in thousands)
Accruing past due loans: (1)
 
30 to 59 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
29,734

 
$
6,705

 
$
4,306

 
$
5,187

 
$
8,395

Commercial real estate
11,637

 
5,894

 
9,385

 
5,076

 
1,389

Construction
7,760

 
6,077

 
—

 
—

 
1,326

Residential mortgage
7,533

 
12,005

 
9,982

 
10,177

 
14,628

Total Consumer
3,740

 
4,197

 
3,146

 
2,535

 
3,200

Total 30 to 59 days past due
60,404

 
34,878

 
26,819

 
22,975

 
28,938

60 to 89 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
341

 
5,010

 
788

 
5,714

 
613

Commercial real estate
359

 
8,642

 
4,291

 
834

 
120

Construction
—

 
—

 
—

 
—

 
—

Residential mortgage
4,177

 
3,564

 
2,733

 
2,326

 
3,056

Total Consumer
787

 
1,147

 
1,234

 
644

 
731

Total 60 to 89 days past due
5,664

 
18,363

 
9,046

 
9,518

 
4,520

90 or more days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
405

 
142

 
145

 
218

 
221

Commercial real estate
—

 
474

 
478

 
131

 
131

Construction
—

 
1,106

 
1,881

 
—

 
—

Residential mortgage
1,355

 
1,541

 
590

 
314

 
2,613

Total Consumer
314

 
209

 
226

 
139

 
66

Total 90 or more days past due
2,074

 
3,472

 
3,320

 
802

 
3,031

Total accruing past due loans
$
68,142

 
$
56,713

 
$
39,185

 
$
33,295

 
$
36,489

Non-accrual loans:  (1)
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
8,676

 
$
8,465

 
$
7,875

 
$
6,573

 
$
11,484

Commercial real estate
15,106

 
15,079

 
14,452

 
19,432

 
26,604

Construction
1,461

 
715

 
1,136

 
5,878

 
5,978

Residential mortgage
11,650

 
12,075

 
14,013

 
14,866

 
16,747

Total Consumer
1,395

 
1,174

 
965

 
1,130

 
1,807

Total non-accrual loans
38,288

 
37,508

 
38,441

 
47,879

 
62,620

Other real estate owned (OREO)  (2)
10,737

 
9,612

 
10,257

 
10,903

 
12,368

Other repossessed assets
475

 
384

 
307

 
369

 
495

Non-accrual debt securities (3)
2,007

 
1,935

 
2,025

 
2,118

 
2,102

Total non-performing assets (NPAs)
$
51,507

 
$
49,439

 
$
51,030

 
$
61,269

 
$
77,585

Performing troubled debt restructured loans
$
80,360

 
$
85,166

 
$
81,093

 
$
82,140

 
$
80,506

Total non-accrual loans as a % of loans
0.22
%
 
0.22
%
 
0.23
%
 
0.29
%
 
0.39
%
Total NPAs as a % of loans and NPAs
0.29

 
0.29

 
0.31

 
0.37

 
0.48

Total accruing past due and non-accrual loans as a % of loans
0.61

 
0.55

 
0.47

 
0.49

 
0.61

Allowance for loan losses as a % of non-accrual loans
301.51

 
305.05

 
287.97

 
225.75

 
168.34



67



 

(1)
Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis.
(2)
This table excludes covered OREO properties related to FDIC-assisted transactions totaling $558 thousand, $1.0 million, $1.2 million, $2.4 million at December 31, 2016 , September 30, 2016 , June 30, 2016 , and March 31, 2016 , respectively. There were no covered OREO properties at March 31, 2017 .
(3)
Includes other-than-temporarily impaired trust preferred securities classified as available for sale, which are presented at carrying value, net of net unrealized losses totaling $745 thousand, $817 thousand, $728 thousand, $634 thousand, $651 thousand at March 31, 2017 , December 31, 2016 , September 30, 2016 , June 30, 2016 and March 31, 2016 , respectively.

Loans past due 30 to 59 days increased $25.5 million to $60.4 million at March 31, 2017 as compared to December 31, 2016 . Within the past due category, commercial and industrial loans increased $23.0 million mainly due to loans collateralized by New York City (NYC) taxi cab medallions totaling $21.6 million, of which $15.3 million represented performing matured loans in the normal process of renewal. Commercial real estate loans also increased by $5.7 million largely due to one internally classified relationship totaling $5.9 million. Partially offsetting these increases, residential mortgage delinquencies declined $4.5 million during the first quarter of 2017 as compared to December 31, 2016.

Loans past due 60 to 89 days decreased $12.7 million to $5.7 million at March 31, 2017 as compared to December 31, 2016 largely due to a $8.3 million decrease in past due commercial real estate loans. The decrease in past due commercial real estate loans was caused, in part, by the renewal of two matured performing loans with a combined total of $4.5 million reported within this delinquency category at December 31, 2016 . In addition, one potential problem loan of $3.8 million included within this delinquency category at December 31, 2016 migrated to 30 to 59 days past due category at March 31, 2017 . Commercial and industrial loans also decreased $4.7 million to $ 341 thousand at March 31, 2017 from $5.0 million at December 31, 2016 mostly due to the renewal of matured performing loans reported within this delinquency category at December 31, 2016 .

Loans past due 90 days or more and still accruing decreased $1.4 million to $2.1 million at March 31, 2017 as compared to $3.5 million at December 31, 2016 largely due to the renewal of both matured construction and commercial real estate loans reported in this delinquency category reported at December 31, 2016 . 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 $780 thousand to $38.3 million at March 31, 2017 as compared to $37.5 million at December 31, 2016 . At March 31, 2017 , our non-accrual commercial and industrial loans included $1.5 million of impaired loans collateralized by Chicago taxi medallions. At March 31, 2017 , our entire taxi medallion loan portfolio totaled $150.2 million, consisting of $139.4 million and $10.8 million of NYC and Chicago taxi medallion loans, respectively. The Chicago medallion portfolio included impaired loans totaling $6.3 million with related reserves of $2.6 million within the allowance for loan losses. The NYC taxi medallion loans included the aforementioned $21.6 million of loans past due 30 to 59 days at March 31, 2017 which were mostly in the process of renewal. Valley's historical taxi medallion lending criteria has been conservative in regards to capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral whenever possible. We will continue to closely monitor this portfolio's performance and the potential impact of the changes in market valuations for taxi medallions due to competing car service providers and other factor.

OREO properties increased $1.1 million to $10.7 million at March 31, 2017 from $9.6 million at December 31, 2016 . During the quarter ended March 31, 2017 , covered OREO properties totaling $375 thousand were reclassified to non-covered OREO due to the expiration of certain FDIC loss-share agreements and, as a result, we had no covered OREO properties at March 31, 2017 . The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $5.3 million at March 31, 2017 .

Troubled debt restructured loans (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) totaled $80.4 million at March 31, 2017 and consisted of 93 loans (primarily in the commercial and industrial loan and commercial real estate portfolios). On an aggregate basis, the

68



$80.4 million in performing TDRs at March 31, 2017 had a modified weighted average interest rate of approximately 4.75 percent as compared to a pre-modification weighted average interest rate of 4.78 percent.
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, commercial real estate (including construction), residential mortgage, and other consumer loans (including automobile and home equity loans);
•
tracking the historical levels of classified loans and delinquencies;
•
assessing the nature and trend of loan charge-offs;
•
providing specific reserves on impaired loans; and
•
evaluating the PCI loan pools for additional credit impairment subsequent to the acquisition dates.
Additionally, the qualitative factors, such as the volume of non-performing loans, concentration risks by size, type, and geography, new markets, collateral adequacy, credit policies and procedures, staffing, underwriting consistency, loan review and economic conditions are taken into consideration when evaluating the adequacy of the allowance for credit losses. The allowance for credit loss methodology and accounting policy are fully described in Part II, Item 7 and Note 1 to the consolidated financial statements in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 .

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.

69



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
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
 
($ in thousands)
Average loans outstanding
$
17,313,100

 
$
16,779,765

 
$
15,993,543

Beginning balance - Allowance for credit losses
$
116,604

 
$
112,914

 
$
108,367

Loans charged-off:
 
 
 
 
 
Commercial and industrial
(1,714
)
 
(483
)
 
(1,251
)
Commercial real estate
(414
)
 
(131
)
 
(105
)
Construction
—

 
—

 
—

Residential mortgage
(130
)
 
(116
)
 
(81
)
Total Consumer
(1,121
)
 
(911
)
 
(1,074
)
Total charge-offs
(3,379
)
 
(1,641
)
 
(2,511
)
Charged-off loans recovered:
 
 
 
 
 
Commercial and industrial
848

 
435

 
526

Commercial real estate
142

 
466

 
89

Construction
—

 
—

 
—

Residential mortgage
448

 
171

 
15

Total Consumer
563

 
459

 
389

Total recoveries
2,001

 
1,531

 
1,019

Net charge-offs
(1,378
)
 
(110
)
 
(1,492
)
Provision charged for credit losses
2,470

 
3,800

 
800

Ending balance - Allowance for credit losses
$
117,696

 
$
116,604

 
$
107,675

Components of allowance for credit losses:
 
 
 
 
 
Allowance for loan losses
$
115,443

 
$
114,419

 
$
105,415

Allowance for unfunded letters of credit
2,253

 
2,185

 
2,260

Allowance for credit losses
$
117,696

 
$
116,604

 
$
107,675

Components of provision for credit losses:
 
 
 
 
 
Provision for losses on loans
$
2,402

 
$
3,832

 
$
729

Provision for unfunded letters of credit
68

 
(32
)
 
71

Provision for credit losses
$
2,470

 
$
3,800

 
$
800

Annualized ratio of net charge-offs to average loans outstanding
0.03
%
 
—
%
 
0.04
%
Allowance for credit losses as a % of non-PCI loans
0.75

 
0.75

 
0.77

Allowance for credit losses as a % of total loans
0.67

 
0.68

 
0.67


During the first quarter of 2017 , we recognized net loan charge-offs of $1.4 million as compared to $110 thousand and $1.5 million for the fourth quarter of 2016 and the first quarter of 2016 , respectively. The quarter over quarter increase in net loan charge-offs was mainly due to the full charge-off of one loan relationship totaling $1.5 million within the commercial and industrial loan portfolio.

During the first quarter of 2017 , we recorded a $2.5 million provision for credit losses as compared to provisions of $3.8 million and $800 thousand for the fourth quarter of 2016 and the first quarter of 2016 , respectively. The quarter over quarter increase in the provision was mostly due to solid first quarter loan growth and an increase in allocated reserves for internally classified loans at March 31, 2017 .


70



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:
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
Allowance
Allocation
 
Allocation
as a % of
Loan
Category
 
($ in thousands)
Loan Category:
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial loans*
$
53,541

 
2.03
%
 
$
53,005

 
2.01
%
 
$
50,677

 
2.00
%
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
38,146

 
0.42
%
 
36,405

 
0.42
%
 
31,812

 
0.42
%
Construction
18,156

 
2.17
%
 
19,446

 
2.36
%
 
16,642

 
2.14
%
Total commercial real estate loans
56,302

 
0.57
%
 
55,851

 
0.59
%
 
48,454

 
0.58
%
Residential mortgage loans
3,592

 
0.13
%
 
3,702

 
0.13
%
 
4,209

 
0.14
%
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Home equity
433

 
0.09
%
 
486

 
0.10
%
 
1,061

 
0.22
%
Auto and other consumer
3,828

 
0.22
%
 
3,560

 
0.21
%
 
3,274

 
0.20
%
Total consumer loans
4,261

 
0.19
%
 
4,046

 
0.19
%
 
4,335

 
0.20
%
Total allowance for credit losses
$
117,696

 
0.67
%
 
$
116,604

 
0.68
%
 
$
107,675

 
0.67
%
 
*
Includes the reserve for unfunded letters of credit.

The allowance for credit losses comprised of our allowance for loan losses and reserve for unfunded letters of credit, as a percentage of total loans was 0.67 percent at March 31, 2017 as compared to 0.68 percent and 0.67 percent of total loans at December 31, 2016 and March 31, 2016 , respectively. At March 31, 2017 , our allowance allocations for losses as a percentage of total loans remained relatively stable in most loan categories as compared to December 31, 2016 , but declined 0.19 percent for construction loans primarily due to the continued low level of recent loss experience in this portfolio. There were no construction loan charge-offs in the first quarter of 2017 and the year ended December 31, 2016.

Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately $1.7 billion ) was 0.75 percent at both March 31, 2017 and December 31, 2016 , as compared to 0.77 percent at March 31, 2016 . 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 March 31, 2017 , December 31, 2016 and March 31, 2016 .
Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At both March 31, 2017 and December 31, 2016, shareholders’ equity totaled approximately $2.4 billion and represented 10.3 percent and 10.4 percent of total assets, respectively. During the three months ended March 31, 2017 , total shareholders’ equity increased by $21.4 million primarily due to (i) net income of $46.1 million , (ii) a $3.0 million decrease in our accumulated other comprehensive loss, (iii) a $1.9 million increase attributable to the effect of our stock incentive plan, and (iv) net proceeds of $1.1 million from the re-issuance of treasury and authorized common shares issued under our dividend reinvestment plan totaling a combined 90 thousand shares. These positive changes were partially offset by cash dividends declared on common and preferred stock totaling a combined $30.7 million . See Note 3 to the consolidated financial statements for additional information regarding changes in our accumulated other comprehensive loss during the three months ended March 31, 2017 .

71



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 the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Basel III final rules require a new 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 new rule changes included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer is subject to a three year phase-in period that started on January 1, 2016, at 0.625 percent of risk-weighted assets and increases each subsequent year by 0.625 percent until reaching its final level of 2.5 percent when fully phased-in on January 1, 2019. As of March 31, 2017 , and December 31, 2016 , Valley and Valley National Bank exceeded all capital adequacy requirements with the capital conservation buffer under the Basel III Capital Rules (see tables below).

The following tables present Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at March 31, 2017 and December 31, 2016 :
 
Actual
 
Minimum Capital
Requirements with Capital Conservation Buffer
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
  ($ in thousands)
As of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
$
2,101,511

 
11.96
%
 
$
1,625,701

 
9.250
%
 
N/A

 
N/A

Valley National Bank
2,047,974

 
11.68

 
1,621,895

 
9.250

 
$
1,753,400

 
10.00
%
Common Equity Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,602,823

 
9.12

 
1,010,571

 
5.750

 
N/A

 
N/A

Valley National Bank
1,830,170

 
10.44

 
1,008,205

 
5.750

 
1,139,710

 
6.50

Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,714,619

 
9.76

 
1,274,198

 
7.250

 
N/A

 
N/A

Valley National Bank
1,830,170

 
10.44

 
1,271,215

 
7.250

 
1,402,720

 
8.00

Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,714,619

 
7.70

 
890,795

 
4.00

 
N/A

 
N/A

Valley National Bank
1,830,170

 
8.23

 
889,271

 
4.00

 
1,111,589

 
5.00



72



 
Actual
 
Minimum Capital
Requirements with Capital Conservation Buffer
 
To Be Well Capitalized
Under Prompt Corrective
Action Provision
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
  ($ in thousands)
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Total Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
$
2,084,531

 
12.15
%
 
$
1,480,006

 
8.625
%
 
N/A

 
N/A

Valley National Bank
2,023,857

 
11.82

 
1,476,767

 
8.625

 
$
1,712,193

 
10.00
%
Common Equity Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,590,825

 
9.27

 
879,424

 
5.125

 
N/A

 
N/A

Valley National Bank
1,807,201

 
10.55

 
877,499

 
5.125

 
1,112,926

 
6.50

Tier 1 Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,698,767

 
9.90

 
1,136,816

 
6.625

 
N/A

 
N/A

Valley National Bank
1,807,201

 
10.55

 
1,134,328

 
6.625

 
1,369,755

 
8.00

Tier 1 Leverage Capital
 
 
 
 
 
 
 
 
 
 
 
Valley
1,698,767

 
7.74

 
878,244

 
4.00

 
N/A

 
N/A

Valley National Bank
1,807,201

 
8.25

 
876,026

 
4.00

 
1,095,032

 
5.00


In March 2014, the FRB, OCC, and FDIC issued final supervisory guidance for these stress tests. This joint final supervisory guidance discusses supervisory expectations for stress test practices, provides examples of practices that would be consistent with those expectations, and offers additional details about stress test methodologies. It also emphasizes the importance of stress testing as an ongoing risk management practice.

We submitted our latest stress testing results (utilizing data as of December 31, 2015) to the FRB on July 28, 2016. The full disclosure of the stress testing results, including the results for Valley National Bank, a summary of the supervisory severely adverse scenario and additional information regarding the methodologies used to conduct the stress test may be found on the Shareholder Relations section of our website (www.valleynationalbank.com) under the Dodd-Frank Act Stress Test Reports section. In 2017, Valley will submit its stress testing results (utilizing data as of December 31, 2016) to the FRB by the required due date of July 31, 2017 and will disclose the results to the public in October 2017.

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: 
 
March 31,
2017
 
December 31,
2016
 
($ in thousands, except for share data)
Common shares outstanding
263,842,268

 
263,638,830

Shareholders’ equity
$
2,398,541

 
$
2,377,156

Less: Preferred stock
111,590

 
111,590

Less: Goodwill and other intangible assets
735,595

 
736,121

Tangible shareholders’ equity
$
1,551,356

 
$
1,529,445

Tangible book value per common share
$
5.88

 
$
5.80

Book value per common share
$
8.67

 
$
8.59

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.

73



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 35.3 percent for the three months ended March 31, 2017 as compared to 30.2 percent for the year ended December 31, 2016. We expect our retention ratio to improve during the remainder of 2017 due to, among other factors, solid loan growth and potential earnings improvement from LIFT, our earnings enhancement program discussed in the "Non-Interest Expense" section of this MD&A.
Cash dividends declared amounted to $0.11 per common share for both the three months ended March 31, 2017 and 2016 . The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision in this economic environment. 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 the increased capital levels as required under the Basel III rules. Prior to the date of this filing, Valley has received no objection or adverse guidance from the FRB or the OCC regarding the current level of its quarterly common stock dividend.
Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters

For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2016 in the MD&A section - “Off-Balance Sheet Arrangements” and Notes 11 and 12 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 58 for a discussion of interest rate sensitivity.

Item 4.
Controls and Procedures
Valley’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), with the assistance of other members of Valley’s management, have evaluated the effectiveness of Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, Valley’s CEO and CFO have concluded that Valley’s disclosure controls and procedures are effective as of the end of the period covered by this report.
Valley’s CEO and CFO have also concluded that there have not been any changes in Valley’s internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting.
Valley’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a 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 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 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 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.

74




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 Note 14 to the consolidated financial statements for further details.

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, 2016.

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 March 31, 2017 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)
January 1, 2017 to January 31, 2017
 
132,142

 
$
12.12

 
—

 
4,112,465

February 1, 2017 to February 28, 2017
 
37,403

 
12.43

 
—

 
4,112,465

March 1, 2017 to March 31, 2017
 
6,817

 
12.36

 
—

 
4,112,465

Total
 
176,362

 
$
12.19

 
—

 
 
 
(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 March 31, 2017 .


75



Item 6.
Exhibits
 
 
 
 
(3)
Articles of Incorporation and By-laws:
 
(3.1)
Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, filed as of May 4, 2017.*
 
(3.2)
Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.A of the Registrant's Annual Report on Form 10-K filed on February 29, 2016.
 
(3.3)
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.
(10)
Material Contracts
 
 
 
 
(10.1)
Valley National Bancorp 2016 Long-Term Stock Incentive Plan, as amended.+*
 
(10.2)
Form of Valley National Bancorp Restricted Stock Award Agreement.+*
 
(10.3)
Form of Valley National Bancorp Director Restricted Stock Award Agreement.+*
(31.1)
 
Certification pursuant to Securities Exchange Rule 13a-14(a)/15d-14(a) signed by Gerald H. Lipkin, Chairman of the Board 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 Gerald H. Lipkin, Chairman of the Board 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.
+
Management contract and compensatory plan or agreement.


76



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
VALLEY NATIONAL BANCORP
 
 
 
 
(Registrant)
 
 
 
Date:
 
 
 
/s/ Gerald H. Lipkin
May 8, 2017
 
 
 
Gerald H. Lipkin
 
 
 
 
Chairman of the Board
 
 
 
 
and Chief Executive Officer
 
 
 
Date:
 
 
 
/s/ Alan D. Eskow
May 8, 2017
 
 
 
Alan D. Eskow
 
 
 
 
Senior Executive Vice President and
 
 
 
 
Chief Financial Officer

77



EXHIBIT 3.1

CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
VALLEY NATIONAL BANCORP

Valley National Bancorp, a New Jersey corporation, pursuant to Section 14A:9-4 of the New Jersey Business Corporation Act, does hereby certifies as follows:
FIRST:        The name of the corporation is Valley National Bancorp (the “Corporation”).
SECOND:    Article V(A) of the Restated Certificate of Incorporation is amended to read in its entirety as follows:
The total authorized capital stock of the Corporation shall be 500,000,000 shares, consisting of 450,000,000 shares of common stock and 50,000,000 shares of preferred stock which may be issued in one or more classes or series. The shares of common stock shall constitute a single class and shall be without nominal or par value. The shares of preferred stock of each class or series shall be without nominal or par value, except that the amendment authorizing the initial issuance of any class or series, adopted by the Board of Directors as provided herein, may provide that shares of any class or series shall have a specified par value per share, in which event all of the shares of such class or series shall have the par value per share so specified.
THIRD:    The foregoing amendment to the Restated Certificate of Incorporation was approved by the board of directors and thereafter duly adopted by the shareholders of the Corporation on the 27th day of April, 2017.
FOURTH:    The number of shares of common stock, no par value per share, of the Corporation (the “Common Stock”) outstanding at the time of the adoption of the amendment was 263,833,405. The





total number of shares of Common Stock entitled to vote thereon was 229,973,848. There were no other classes of shares of capital stock authorized to vote.
FIFTH:        The number of shares of Common Stock voting for and against the amendment is as follows:
Number of Shares Voting For Amendment      Number of Shares Voting Against Amendment
101,341,988                     75,024,300
SIXTH:        This Certificate of Amendment to the Restated Certificate of Incorporation shall become effective upon filing.
IN WITNESS WHEREOF, Alan D. Eskow, being the Senior Executive Vice President and Chief Financial Officer of the Corporation, has executed this Certificate of Amendment to the Restated Certificate of Incorporation of Valley National Bancorp on behalf of the Corporation on this 4 th day of May, 2017.

VALLEY NATIONAL BANCORP
/s/ Alan D. Eskow
By: Alan D. Eskow
Title: Senior Executive Vice President and
Chief Financial Officer

                        



97042693.2
                                    
                                                
                                         


EXHIBIT 10.1


VALLEY NATIONAL BANCORP
2016 LONG-TERM STOCK INCENTIVE PLAN
(Adopted by Directors January 29, 2016)
(Adopted by Shareholders April 28, 2016)
(Amended by Directors March 28, 2017)
1.      Purpose. The purpose of the Plan is to provide additional incentive to those officers and key employees of the Company and its Subsidiaries and members of the Board of Directors of the Company whose substantial contributions are essential to the continued growth and success of the Company’s business in order to strengthen their commitment to the Company and its Subsidiaries, to motivate such officers, employees and Directors to faithfully and diligently perform their assigned responsibilities and to attract and retain competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company. To accomplish such purposes, the Plan provides that the Company may grant Incentive Stock Options, Nonqualified Stock Options, Restricted Stock Awards, Restricted Stock Units and Stock Appreciation Rights to officers and employees and may grant Restricted Stock Awards and Restricted Stock Units to Directors.
2.      Definitions. For purposes of this Plan:
(a)
“Accelerated Restricted Stock” means Shares of Restricted Stock granted at any time by the Company which are (i) held by Grantees who at any time were named executive officers (as determined under Item 402 of Regulation S-K of the Exchange Act) and (ii) for which restrictions upon such Shares lapse for any reason in connection with any termination of employment. For purposes of clarity, Shares of Accelerated Restricted Stock upon which restrictions lapse pursuant to Section 8(c)(2) in connection with a Change in Control will not be deemed Accelerated Restricted Stock even if a termination of employment occurs in connection with the Change in Control.
(b)
“Accelerated Restricted Stock Units” means Restricted Stock Units granted at any time by the Company which are (i) held by Grantees who at any time were named executive officers (as determined under Item 402 of Regulation S-K of the Exchange Act) and (ii) for which restrictions upon such Restricted Stock Units lapse for any reason in connection with any termination of employment. For purposes of clarity, Accelerated Restricted Stock Units upon which restrictions lapse pursuant to Section 9(c)(2) in connection with a Change in Control will not be deemed Accelerated Restricted Stock Units even if a termination of employment occurs in connection with the Change in Control.
(c)
“Accelerated Stock Options” means any Option granted at any time by the Company which is (i) held by a Grantee who at any time was a named executive officer (as determined under Item 402 of Regulation S-K of the Exchange Act) and (ii) for which either (A) the exercisability (i.e. the vesting) of such Option is accelerated for any reason in connection with any termination of employment or (B) the exercise period of such Option is extended by the Committee under Section 6(g). For purposes of clarity, Options for which vesting accelerates pursuant to Section 6(h) in connection with a Change in Control will not be deemed Accelerated Stock Options even if a termination of employment occurs in connection with the Change in Control.
(d)
“Agreement” means the written agreement between the Company and an Optionee or Grantee evidencing the grant of an Option or Award and setting forth the terms and conditions thereof.


                                    
                                                
                                         

(e)
“Award” means a grant of Restricted Stock, Restricted Stock Units or Stock Appreciation Rights, or any combination of the foregoing.
(f)
“Bank” means Valley National Bank, a Subsidiary.
(g)
“Board” means the Board of Directors of the Company.
(h)
“Cause” means the willful failure by an Optionee or Grantee to perform his duties with the Company or with any Subsidiary or the willful engaging in conduct which is injurious to the Company or any Subsidiary, monetarily or otherwise.
(i)
“Change in Capitalization” means any increase, reduction, change or exchange of Shares for a different number or kind of shares or other securities of the Company by reason of a reclassification, recapitalization, merger, consolidation, reorganization, issuance of warrants or rights, extraordinary cash dividend, stock dividend, stock split or reverse stock split, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise.
(j)
“Change in Control” means any of the following events: (i) when any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of the Company or a Subsidiary or an employee benefit plan established or maintained by the Company, a Subsidiary or any of their respective affiliates, is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of the Company representing more than twenty-five percent (25%) of the combined voting power of the Company’s then outstanding securities (a “Control Person”), (ii) the consummation of (A) a transaction, other than a Non‑Control Transaction, pursuant to which the Company is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation, (B) a sale or disposition of all or substantially all of the Company’s assets or (C) a plan of liquidation or dissolution of the Company, or (iii) if during any period of two (2) consecutive years, individuals (the “Continuing Directors”) who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof or, following a Non‑Control Transaction, a majority of the board of directors of the Surviving Corporation; provided that any individual whose election or nomination for election as a member of the Board (or, following a Non‑Control Transaction, the board of directors of the Surviving Corporation) was approved by a vote of at least two‑thirds of the Continuing Directors then in office shall be considered a Continuing Director. For purposes of this paragraph: (I) the Company will be deemed to have become a subsidiary of another corporation if any other corporation (which term shall include, in addition to a corporation, a limited liability company, partnership, trust, or other organization) owns, directly or indirectly, 50 percent or more of the total combined outstanding voting power of all classes of stock of the Company or any successor to the Company; (II) “Non‑Control Transaction” means a transaction in which the Company is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation pursuant to a definitive agreement providing that at least a majority of the directors of the Surviving Corporation immediately after the transaction are persons who were directors of the Company on the day before the first public announcement relating to the transaction; (III) “Surviving Corporation” means (A) in a transaction in which the Company becomes the subsidiary of another corporation, the ultimate parent entity of the Company or the Company’s successor, and (B) in any other transaction pursuant to which the Company is merged with or into another corporation, the surviving or resulting corporation in the merger or consolidation.
(k)
“Code” means the Internal Revenue Code of 1986, as amended.


                                    
                                                
                                         

(l)
“Committee” means the Compensation and Human Resources Committee of the Board or such other committee designated by the Board consisting solely of two (2) or more directors who are Non-Employee Directors (as defined in Rule 16b-3 of the Exchange Act as it may be amended from time to time) of the Company and outside directors as defined pursuant to Section 162(m) of the Code (as it may be amended from time to time) appointed by the Board to administer the Plan and to perform the functions set forth herein. Directors appointed by the Board to the Committee shall have the authority to act notwithstanding the failure to be so qualified. With respect to administration of the Plan as it relates to Awards granted to Directors, the term “Committee” when used in the Plan shall be deemed to mean the Board.
(m)
“Company” means Valley National Bancorp, a New Jersey corporation.
(n)
“Director” means a member of the Board who is not also serving as an employee of the Company or any Subsidiary.
(o)
“Eligible Employee” means any officer or other key employee of the Company or a Subsidiary designated by the Committee as eligible to receive Options or Awards subject to the conditions set forth herein. References to the term “Eligible Employee” in the Plan shall be read to include “Director” as the context may require.
(p)
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
(q)
“Fair Market Value” means the fair market value of the Shares as determined by the Committee in its sole discretion using a method that complies with Section 409A of the Code; provided, however, that (A) if the Shares are listed on the New York Stock Exchange (“NYSE”) or other national securities exchange, Fair Market Value on any date shall be the last sale price reported for the Shares on such exchange on such date or on the last date preceding such date on which a sale was reported, or (B) if the Shares are then traded in an over-the-counter market, Fair Market Value on any date shall be the mean of the high bid and low asked prices for the Shares in such over-the-counter market for such date or on the last date preceding such date on which high bid and low asked prices exist.
(r)
“Grantee” means a person to whom an Award has been granted under the Plan.
(s)
“Incentive Stock Option” means an Option within the meaning of Section 422 of the Code.
(t)
“Nonqualified Stock Option” means an Option which is not an Incentive Stock Option.
(u)
“Option” means an Incentive Stock Option, a Nonqualified Stock Option, or either or both of them.
(v)
“Optionee” means an Eligible Employee to whom an Option has been granted under the Plan.
(w)
“Parent” means any corporation in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock of one of the other corporations in such chain.
(x)
“Plan” means the Valley National Bancorp 2016 Long-Term Stock Incentive Plan as set forth in this instrument and as it may be amended from time to time.
(y)
“Prior Plan” means the Valley National Bancorp 2009 Long-Term Stock Incentive Plan (and together with the Valley National Bancorp 1999 Long-Term Stock Incentive Plan, the “Prior Plans”).


                                    
                                                
                                         

(z)
“Restricted Stock” means Shares issued or transferred to an Eligible Employee which are subject to restrictions as provided in Section 8 hereof.
(aa)
“Restricted Stock Unit” means a right to receive an amount equivalent to one Share payable in Common Stock or cash at the discretion of the Committee upon the satisfaction of terms and conditions as provided in Section 9 hereof, including without limitation the satisfaction of specified performance criteria. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided by the Committee.
(ab)
“Retirement” means the retirement from active employment with the Company of an employee or officer, but only if such person meets all of the requirements contained in clause (i) or contained in clause (ii) below:
(i)
he has a minimum combined total of years of service and age equal to eighty (80); he is age fifty-five (55) or older; and he provides twelve (12) months prior written notice to the Company of the retirement; or
(ii)
he has a minimum of five (5) years of service; he is age sixty-five (65) or older and he provides twelve (12) months prior written notice to the Company of the retirement.
“Years of Service” shall be defined as follows: (i) for participants in the Valley National Bank Benefit Equalization Plan (the “BEP”), the same way the term “Years of Credited Service” is defined under the BEP, as in effect on the Effective Date, and (ii) for all other employees or officers, the same way “years of Credited Service” is defined under the Valley National Bank Pension Plan, as in effect on the Effective Date (the “Pension Plan”), provided that for the purpose of the Pension Plan, years of service will mean only employment by the Company, and will not include employment by any company or entity acquired by the Company for the period prior to its acquisition by the Company. An employee or officer who retires but fails to meet such requirements shall not be deemed to be within the definition of “Retirement” for any purpose under this Plan or any Award or Option granted thereunder; provided, however, after a Change in Control transaction, no prior notice of a Retirement shall be required for purposes of this Plan only. This definition of “Years of Service” is not impacted or altered by the 2014 freeze of the BEP and the Pension Plan, nor will it be impacted by any future amendment, including with respect to the definition of Years of Credited Service, or termination of such plans.
For Directors, the term “Retirement” shall mean the date on which the Director ceases to be a member of the Board after both attaining age sixty five (65) and completing at least five (5) years of service on the Board.
(ac)
“Shares” means the common stock, no par value, of the Company (including any new, additional or different stock or securities resulting from a Change in Capitalization).
(ad)
“Stock Appreciation Right” means a right to receive all or some portion of the increase in the value of shares of Common Stock as provided in Section 7 hereof.
(ae)
“Subsidiary” means any corporation in an unbroken chain of corporations, beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.


                                    
                                                
                                         

(af)
“Ten-Percent Shareholder” means an Eligible Employee, who, at the time an Incentive Stock Option is to be granted to him, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, a Parent or a Subsidiary within the meaning of Section 422(b)(6) of the Code.
3.      Administration.
(a)
Except as set forth in Section 3(b) below, the Plan shall be administered by the Committee which shall hold meetings at such times as may be necessary for the proper administration of the Plan. The Committee shall keep minutes of its meetings. A majority of the Committee shall constitute a quorum and a majority of a quorum may authorize any action. Each member of the Committee shall be a Non-Employee Director (as defined in Rule 16b-3 of the Exchange Act as it may be amended from time to time) and an outside director as defined pursuant to Section 162(m) of the Code as it may be amended from time to time. No failure to be so qualified shall invalidate any Option or Award or any action or inaction under the Plan.
Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time:
(1)
to determine those Eligible Employees to whom Options shall be granted under the Plan and the number of Incentive Stock Options and/or Nonqualified Options to be granted to each Eligible Employee and to prescribe the terms and conditions (which need not be identical) of each Option, including the purchase price per share of each Option;
(2)
to select those Eligible Employees to whom Awards shall be granted under the Plan and to determine the number of shares of Restricted Stock, Restricted Stock Units and/or Stock Appreciation Rights to be granted pursuant to each Award, the terms and conditions of each Award, including the restrictions or performance criteria relating to such shares, units or rights, the purchase price per share, if any, of Restricted Stock or Restricted Stock Units and whether Stock Appreciation Rights will be granted alone or in conjunction with an Option;
(3)
to construe and interpret the Plan and the Options and Awards granted thereunder and to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Agreement, in the manner and to the extent it shall deem necessary or advisable to make the Plan fully effective, and all decisions and determinations by the Committee in the exercise of this power shall be final and binding upon the Company or a Subsidiary, the Optionees and the Grantees, as the case may be;
(4)
to determine the duration and purposes for leaves of absence which may be granted to an Optionee or Grantee without constituting a termination of employment or service for purposes of the Plan; and
(5)
generally, to exercise such powers and to perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan.
(b)
The Board shall serve to administer and interpret the Plan with respect to any grants of Awards made to Directors. Directors shall only be eligible to receive Restricted Stock Awards pursuant to Section 8 and/or Restricted Stock Units pursuant to Section 9. Any such Awards, and all duties, powers and authority given to the Committee in this Plan, including those provided for in this Section 3 and


                                    
                                                
                                         

elsewhere in the Plan, in connection with Awards to Grantees shall be deemed to be given to the Board in its sole discretion in connection with Awards to Directors. The Board may request of the Committee, its Nominating and Corporate Governance Committee or any other Board committee composed entirely of independent Directors, its recommendation on the level of Awards for this purpose.
(c)
No member of the Committee or the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, the Options or the Awards, and all members of the Committee and the Board shall be fully indemnified by the Company with respect to any such action, determination or interpretation.
4.      Stock Subject to Plan.
(a)
The maximum number of Shares that may be issued or transferred pursuant to all Options and Awards under this Plan is 9,400,000, less one (1) Share for every one (1) Share granted under the Prior Plan after December 31, 2015. The maximum number of Shares that may be granted pursuant to Options and Stock Appreciation Rights to any one Eligible Employee in any calendar year is 1,000,000. The maximum grant date fair value of Shares that may be issued or transferred pursuant to Awards of Restricted Stock and Restricted Stock Units to any one Eligible Employee in any calendar year is $7,000,000. The maximum grant date fair value of Shares that may be issued or transferred pursuant to Awards of Restricted Stock and Restricted Stock Units to any one Director in any calendar year is $300,000. Subject to the foregoing aggregate limitations, the maximum number of Shares that may be granted pursuant to Incentive Stock Options shall be 9,400,000. In each case, upon a Change in Capitalization after the adoption of this Plan by the Board, the Shares shall be adjusted to the number and kind of Shares of stock or other securities existing after such Change in Capitalization in accordance with Section 11. Any Shares issued under the Plan may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares purchased in the open market or otherwise.
(b)
Whenever any outstanding Option or Award under this Plan (or any option or award under the Prior Plans that is outstanding after December 31, 2015) or any portion thereof expires or is cancelled, forfeited or otherwise terminated (excluding termination due to exercise of Options or Stock Appreciation Rights) for any reason, including failure to meet applicable performance goals, the Shares allocable to the expired, cancelled, forfeited or otherwise terminated portion of such Option or Award may again be the subject of Options and Awards under this Plan.
(c)
Whenever any Shares subject to an Award other than an Option or Stock Appreciation Right granted under this Plan (or any award other than an option or stock appreciation right under the Prior Plans that is outstanding after December 31, 2015) are tendered (either actually or by attestation) or withheld by the Company to satisfy tax withholding requirements, such Shares may again be the subject of Awards under this Plan. Notwithstanding anything to the contrary contained herein, the following Shares shall not again be subject to Awards under this Plan: (i) Shares tendered by the Participant or withheld by the Company in payment of the purchase price of an Option or, after December 31, 2015, an option under the Prior Plans, (ii) Shares tendered by the Participant or withheld by the Company to satisfy any tax withholding obligation with respect to Options or Stock Appreciation Rights or, after December 31, 2015, options or stock appreciation rights under the Prior Plans, (iii) Shares subject to a Stock Appreciation Right or, after December 31, 2015, a stock appreciation right under the Prior Plans that are not issued in connection with its stock settlement on exercise thereof, and (iv) Shares reacquired by the Company on the open market or otherwise using cash proceeds from the exercise of Options or, after December 31, 2015, options under the Prior Plans.


                                    
                                                
                                         

(d)
Shares subject to Awards granted under this Plan (or awards under the Prior Plans that are outstanding after December 31, 2015) settled in cash may again be the subject of Options and Awards under this Plan.
5.      Eligibility. Subject to the provisions of the Plan, the Committee shall have full and final authority to select those Eligible Employees who will receive Options and/or Awards but no person shall receive any Options or Awards unless he is an employee of the Company or a Subsidiary at the time the Option or Award is granted.
6.      Stock Options. The Committee may grant Options in accordance with the Plan, the terms and conditions of which shall be set forth in an Agreement. Each Option and Option Agreement shall be subject to the following conditions:
(a)
Purchase Price. The purchase price or the manner in which the purchase price is to be determined for Shares under each Option shall be set forth in the Agreement, provided that the purchase price per Share under each Incentive Stock Option shall not be less than 100% of the Fair Market Value of a Share at the time the Option is granted (110% in the case of an Incentive Stock Option granted to a Ten-Percent Shareholder) and under each Nonqualified Stock Option shall not be less than 100% of the Fair Market Value of a Share at the time the Option is granted.
(b)
Duration. Options granted hereunder shall be for such term as the Committee shall determine, provided that (i) no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date it is granted (five (5) years in the case of an Incentive Stock Option granted to a Ten-Percent Shareholder) and (ii) no Nonqualified Stock Option shall be exercisable after the expiration of ten (10) years and one (1) day from the date it is granted. The Committee may, subsequent to the granting of any Option, extend the term thereof but in no event shall the term as so extended exceed the maximum term provided for in the preceding sentence. Any such extension shall only be made in accordance with Section 409A of the Code.
(c)
Non-Transferability. No Option granted hereunder shall be transferable by the Optionee to whom granted otherwise than by will or the laws of descent and distribution, and an Option may be exercised during the lifetime of such Optionee only by the Optionee or his guardian or legal representative. The terms of such Option shall be binding upon the beneficiaries, executors, administrators, heirs and successors of the Optionee.
(d)
Stock Options; Vesting. Subject to Section 6(h) hereof, each Option shall be exercisable in such installments (which need not be equal) and at such times as may be designated by the Committee and set forth in the Option Agreement. Unless otherwise provided in the Agreement, to the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires. Unless otherwise provided in the Option Agreement, upon the death or Retirement of an Optionee, all Options shall become immediately exercisable. Notwithstanding the foregoing, the Committee may accelerate the exercisability of any Option or portion thereof at any time.
(e)
Method of Exercise. The exercise of an Option shall be made only by a written notice delivered in person or by mail (including electronic mail) to the Secretary of the Company at the Company’s principal executive office, specifying the number of Shares to be purchased and accompanied by payment therefor, as well as for any required tax withholding, and otherwise in accordance with the Agreement pursuant to which the Option was granted. The purchase price and required tax withholding for any shares purchased pursuant to the exercise of an Option shall be paid in full upon such exercise


                                    
                                                
                                         

(i) in cash, (ii) by check, (iii) by transferring Shares having a Fair Market Value on the day preceding the date of exercise of such option equal to the aggregate purchase price for the Shares being purchased to the Company and satisfying such other terms and conditions as may be imposed by the Committee, (iv) by having Shares that would otherwise have been delivered to the Participant upon exercise of an Option withheld by the Company or (v) such other method as approved by the Committee at the discretion of the Committee. If requested by the Committee, the Optionee shall deliver the Agreement evidencing the Option and the Agreement evidencing any related Stock Appreciation Right to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Optionee. Not less than 100 Shares may be purchased at any time upon the exercise of an Option unless the number of Shares so purchased constitutes the total number of Shares then purchasable under the Option.
(f)
Rights of Optionees. No Optionee shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (i) the Option shall have been exercised pursuant to the terms thereof, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee’s name shall have been entered as a shareholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such Shares.
(g)
Termination of Employment. In the event that an Optionee ceases to be employed by the Company or any Subsidiary, any outstanding Options held by such Optionee shall, unless the Option Agreement evidencing such Option provides otherwise, terminate as follows:
(1)
If the Optionee’s termination of employment is due to his death, the Option or portion thereof that is exercisable or becomes exercisable on the date of termination shall remain outstanding and be exercisable for a period of one (1) year following such termination of employment, and shall thereafter terminate; provided, however , that the Company shall have given written notice to the Optionee’s designated beneficiary for the Plan as permitted under Section 17(c) or, if there is no designated beneficiary for the Plan, then to the Optionee’s designated beneficiaries under the Company’s group term life insurance plan, within the six (6) months following the Optionee’s termination of employment. If the Company’s notice is given more than six (6) months after the date of the Optionee’s termination of employment, the Option shall be exercisable for six (6) months from the date of such notice, and shall thereafter terminate; provided, however , that in no event shall the Option be exercisable beyond two (2) years following the Optionee’s termination of employment. If no notice is given by the Company, the Option shall be exercisable for a period of two (2) years following such termination of employment, and shall thereafter terminate. The written notice to be given under this paragraph may be given by regular mail and shall identify the option including the number of Shares subject to the option, the current exercise price and remaining exercise period and such other appropriate information as the Company may determine, provided that any defect in the notice shall not affect the validity of the notice;
(2)
If the Optionee’s termination of employment is by the Company or a Subsidiary for Cause or is by the Optionee (other than due to the Optionee’s Retirement), the Option shall terminate on the date of the Optionee’s termination of employment;
(3)
If the termination of employment is due to the Optionee’s Retirement, the Option or portion thereof that is exercisable or becomes exercisable on the date of termination shall remain outstanding and be exercisable for the remaining term of the Option and thereafter shall be unaffected by the death of the Optionee. (An Optionee who exercises his or her Options more


                                    
                                                
                                         

than 90 days after the termination of employment due to Retirement shall acknowledge that the Options so exercised will not be Incentive Stock Options.); and
(4)
If the Optionee’s termination of employment is for any other reason (including an Optionee’s ceasing to be employed by a Subsidiary as a result of the sale of such Subsidiary or an interest in such Subsidiary), the Option (to the extent exercisable at the time of the Optionee’s termination of employment) shall be exercisable for a period of ninety (90) days following such termination of employment, and shall thereafter terminate.
Notwithstanding the foregoing, the Committee may provide, either at the time an Option is granted or thereafter, that the Option may be exercised after the periods provided for in this Section 6(g), but in no event beyond the term of the Option. To the extent that the exercise period is extended by the Committee after the Option is granted, such extension may only be made in accordance with Section 409A of the Code.
With respect to any Accelerated Stock Options, the following restrictions will apply unless otherwise provided in the Agreement:
(i) in the case of a termination of employment for any reason other than death, disability (as determined in the judgment of the Committee) or Retirement, a minimum of 50% of any Shares obtained upon the exercise of an Accelerated Stock Option must be retained by the Grantee until the date 24 months after the date of such termination;
(ii) in the case of a termination of employment by reason of Retirement, a minimum of 50% of any Shares obtained upon the exercise of an Accelerated Stock Option must be retained by the Grantee until the date 18 months after the date of Retirement;
(iii) in the case of a termination of employment due to death or disability (as determined in the judgment of the Committee), there will be no retention requirement under this paragraph.
To effectuate the foregoing, the Shares subject to the retention requirements above obtained upon the exercise of an Accelerated Stock Option shall be issued in book entry form with a stop-transfer order restricting transfers for the applicable period.
(h)
Effect of Change in Control. In the event of a Change in Control, all Options outstanding on the date of such Change in Control shall become immediately and fully exercisable. The Committee shall have the authority to make Option Awards under Agreements which provide that the Option does not become immediately and fully exercisable upon a Change in Control. The Committee may do so by any means including by providing in an Agreement that such Option will become immediately and fully exercisable upon the termination by the Company of the employment of the Grantee following a Change in Control.
(i)
Substitution and Modification. Subject to the terms of the Plan, the Committee may modify outstanding Options or accept the surrender of outstanding Options (to the extent not exercised) and grant new Options in substitution for them. Notwithstanding the foregoing, no modification of an Option shall alter or impair any rights or obligations under the Option without the Optionee’s consent, except as provided for in this Plan or the Agreement. In addition, notwithstanding the foregoing, other than pursuant to Section 11, the Committee shall not without the approval of the Company’s shareholders (a) reduce the purchase price per Share of an Option after it is granted, (b) cancel an Option when the purchase price per Share exceeds the Fair Market Value of one Share in exchange


                                    
                                                
                                         

for cash or another Award (other than in connection with a Change in Control), or (c) take any other action with respect to an Option that would be treated as a repricing under the rules and regulations of the national securities exchange on which the Shares are then listed.
7.      Stock Appreciation Rights. The Committee may, in its discretion, either alone or in connection with the grant of an Option, grant Stock Appreciation Rights in accordance with the Plan, the terms and conditions of which shall be set forth in an Agreement. If granted in relation to an Option, a Stock Appreciation Right shall cover the same shares covered by the Option (or such lesser number of shares as the Committee may determine) and shall, except as provided in this Section 7, be subject to the same terms and conditions as the related Option.
(a)
Time of Grant. A Stock Appreciation Right may be granted:
(i)
at any time if unrelated to an Option; or
(ii)
if related to an Option, either at the time of grant, or at any time thereafter during the term of the Option.
(b)
Stock Appreciation Rights Related to an Option.
(i)
Payment. A Stock Appreciation Right granted in relation to an Option shall entitle the holder thereof, upon exercise of the Stock Appreciation Right or any portion thereof, to receive payment of an amount computed pursuant to Section 7(b)(iii).
(ii)
Exercise. A Stock Appreciation Right granted in relation to an Option shall be exercisable at such time or times and only to the extent that the related Option is exercisable, and will not be transferable except to the extent the related Option may be transferable. A Stock Appreciation Right granted in relation to an Incentive Stock Option shall be exercisable only if the Fair Market Value of a Share on the date of exercise exceeds the purchase price specified in the related Incentive Stock Option.
(iii)
Amount Payable. Upon the exercise of a Stock Appreciation Right related to an Option, the Grantee shall be entitled to receive an amount determined by multiplying (A) the excess of the Fair Market Value of a Share on the date of exercise of such Stock Appreciation Right over the per Share purchase price under the related Option, by (B) the number of Shares as to which such Stock Appreciation Right is being exercised. Notwithstanding the foregoing, the Committee may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit in the Agreement evidencing the Stock Appreciation Right at the time it is granted.
(iv)
Treatment of Related Options and Stock Appreciation Rights Upon Exercise. Except as provided in Section 7(b)(v), (A) upon the exercise of a Stock Appreciation Right granted in relation to an Option, the Option shall be cancelled to the extent of the number of Shares as to which the Stock Appreciation Right is exercised and (B) upon the exercise of an Option granted in relation to a Stock Appreciation Right, the Stock Appreciation Right shall be cancelled to the extent of the number of Shares as to which the Option is exercised.
(v)
Simultaneous Exercise of Stock Appreciation Right and Option. The Committee may provide, either at the time a Stock Appreciation Right is granted in relation to a Nonqualified Stock Option or thereafter during the term of the Stock Appreciation Right, that upon exercise of such Option, the Stock Appreciation Right shall automatically be deemed to be exercised to


                                    
                                                
                                         

the extent of the number of Shares as to which the Option is exercised. In such event, the Grantee shall be entitled to receive the amount described in Section 7(b)(iii) hereof (or some percentage of such amount if so provided in the Agreement evidencing the Stock Appreciation Right), in addition to the Shares acquired pursuant to the exercise of the Option. The inclusion in an Agreement evidencing a Stock Appreciation Right of a provision described in this Section 7(b)(v) may be in addition to and not in lieu of the right to exercise the Stock Appreciation Right as otherwise provided herein and in the Agreement.
(c)
Stock Appreciation Rights Unrelated to an Option. The Committee may grant to Eligible Employees Stock Appreciation Rights unrelated to Options. Stock Appreciation Rights unrelated to Options shall contain such terms and conditions as to exercisability, vesting and duration as the Committee shall determine, but in no event shall they have a term of greater than ten (10) years. Unless otherwise provided in the Agreement, upon the death or Retirement of a Grantee, all Stock Appreciation Rights shall become immediately and fully exercisable. Unless otherwise provided in the Agreement, upon the death of a Grantee, the Stock Appreciation Rights held by the Grantee that are exercisable or become exercisable upon death, shall be exercisable for a period of one (1) year following such termination of employment, and shall thereafter terminate. Unless otherwise provided in the Agreement, upon the Retirement of a Grantee, the Stock Appreciation Rights held by the Grantee that are exercisable or become exercisable upon such Retirement shall remain outstanding and be exercisable for the remaining term of the Stock Appreciation Right and thereafter shall be unaffected by the death of the Grantee, and shall thereafter terminate. The amount payable upon exercise of such Stock Appreciation Rights shall be determined in accordance with Section 7(b)(iii), except that “Fair Market Value of a Share on the date of the grant of the Stock Appreciation Right” shall be substituted for “purchase price under the related Option.”
(d)
Method of Exercise. Stock Appreciation Rights shall be exercised by a Grantee only by a written notice delivered in person or by mail to the Secretary of the Company at the Company’s principal executive office, specifying the number of Shares with respect to which the Stock Appreciation Right is being exercised. If requested by the Committee, the Grantee shall deliver the Agreement evidencing the Stock Appreciation Right being exercised and the Agreement evidencing any related Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreements to the Grantee.
(e)
Form of Payment. Payment of the amount determined under Sections 7(b)(iii) or 7(c), may be made solely in whole shares of Common Stock in a number determined at their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole discretion of the Committee, solely in cash, or in a combination of cash and Shares as the Committee deems advisable. If the Committee decides to make full payment in Shares, and the amount payable results in a fractional Share, payment for the fractional Share will be made in cash. If the Committee decides to make payment in Shares, the Committee in its discretion has the right, if requested by the Grantee, to cancel Shares to be delivered to the Grantee having a Fair Market Value, on the day preceding the date of exercise, equal to the aggregate required tax withholding in connection with such exercise, and to apply the value of such Shares as payment for the Grantee’s aggregate required tax withholding arising upon exercise.
(f)
Substitution and Modification. Subject to the terms of the Plan, the Committee may modify outstanding Stock Appreciation Rights or accept the surrender of outstanding Stock Appreciation Rights (to the extent not exercised) and grant new Stock Appreciation Rights in substitution for them. Notwithstanding the foregoing, no modification of an Stock Appreciation Right shall alter or impair any rights or obligations under the Stock Appreciation Right without the Grantee’s consent, except


                                    
                                                
                                         

as provided for in this Plan or the Agreement. In addition, notwithstanding the foregoing, other than pursuant to Section 11, the Committee shall not without the approval of the Company’s stockholders (a) reduce the purchase price per Share of a Stock Appreciation Right after it is granted, (b) cancel a Stock Appreciation Right when the purchase price per Share exceeds the Fair Market Value of one Share in exchange for cash or another Award (other than in connection with a Change in Control), or (c) take any other action with respect to a Stock Appreciation Right that would be treated as a repricing under the rules and regulations of the national securities exchange on which the Shares are then listed.
(g)
Effect of Change in Control. In the event of a Change in Control, all Stock Appreciation Rights shall become immediately and fully exercisable. The Committee shall have the authority to make Awards of Stock Appreciation Rights under Agreements which provide that the Award does not become immediately and fully exercisable upon a Change in Control. The Committee may do so by any means including by providing in an Agreement that such Awards will become immediately and fully exercisable upon the termination by the Company of the employment of the Grantee following a Change in Control.
8.      Restricted Stock. The Committee (or, with respect to Directors, the Board) may grant Awards of Restricted Stock which shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, terms and conditions as the Committee may require. Awards of Restricted Stock shall be subject to the following terms and provisions:
(a)
Rights of Grantee. Shares of Restricted Stock granted pursuant to an Award hereunder shall be issued in the name of the Grantee as soon as reasonably practicable after the Award is granted and the purchase price, if any, is paid by the Grantee, provided that the Grantee has executed an Agreement evidencing the Award and any other documents which the Committee, in its absolute discretion, may require as a condition to the issuance of such Shares. If a Grantee shall fail to execute the Agreement evidencing a Restricted Stock Award, or shall fail to pay the purchase price, if any, for the Restricted Stock, the Award shall be null and void. Shares of Restricted Stock shall be issued in book entry form in a restricted account with the Company’s transfer agent (or such other administrator as designated by the Committee) with appropriate restrictions and stop-transfer orders imposed thereon. Except as restricted by the terms of the Agreement, upon the issuance of the Shares, the Grantee shall have all of the rights of a shareholder with respect to such Shares, including the right to vote the shares and to receive, subject to Section 8(d), all dividends or other distributions paid or made with respect to the Shares.
(b)
Non-Transferability. Until any restrictions upon the Shares of Restricted Stock awarded to a Grantee shall have lapsed in the manner set forth in Section 8(c), such Shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated, nor shall they be delivered to the Grantee. Upon the termination of employment (or cessation of service) of the Grantee, all of such Shares with respect to which restrictions have not lapsed shall be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company if no purchase price had been paid for such Shares. The Committee may also impose such other restrictions and conditions on the Shares as it deems appropriate.
(c)
Lapse of Restrictions.
(1)
Restrictions upon Shares of Restricted Stock awarded hereunder shall lapse at such time or times and on such terms, conditions and satisfaction of performance criteria as the Committee may determine; provided, however, that the restrictions upon such Shares shall lapse only if the Grantee on the date of such lapse is then and has continuously been an employee of the


                                    
                                                
                                         

Company or a Subsidiary or a Director of the Company from the date the Award was granted, or unless the Committee sets a later date for the lapse of such restrictions. The Board may determine, in its discretion, to grant Restricted Stock Awards to Directors that vest in whole or in part immediately upon grant.
(2)
In the event of a Change in Control, all restrictions upon any Shares of Restricted Stock shall lapse immediately and all such Shares shall become fully vested in the Grantee thereof. The Committee shall have the authority to make Awards of Restricted Stock under Agreements which provide that restrictions do not immediately lapse upon a Change in Control. The Committee may do so by any means including by providing in an Agreement that such restrictions shall lapse upon the termination by the Company of the employment of the Grantee following a Change in Control.
(3)
In the event of termination of employment (or cessation of service) as a result of death or Retirement of a Grantee, all restrictions upon Shares of Restricted Stock awarded to such Grantee shall thereupon immediately lapse. The Committee shall have the authority to make Awards of Restricted Stock under Agreements which provide that restrictions do not immediately lapse upon the death or Retirement of the Grantee. The Committee may do so by any means including by providing in an Agreement that Shares of Restricted Stock not yet vested shall be forfeited to the Company automatically and immediately upon the Grantee’s ceasing to be employed by the Company (or ceasing to serve as a Director) for any reason whatsoever.
(4)
The Committee may also decide at any time in its absolute discretion and on such terms and conditions as it deems appropriate, to remove or modify the restrictions upon Shares of Restricted Stock awarded hereunder, unless the Committee sets a later date for the lapse of such restrictions.
(5)
With respect to any Shares of Accelerated Restricted Stock, the following restrictions will apply unless otherwise provided in the Agreement:
(i) in the case of a termination of employment for any reason other than death, disability (as determined in the judgment of the Committee) or Retirement, a minimum of 50% of any Shares of Accelerated Restricted Stock must be retained by the Grantee for a period of 24 months;
(ii) in the case of a termination of employment by reason of Retirement, a minimum of 50% of any Shares of Accelerated Restricted Stock must be retained by the Grantee for a period of 18 months;
(iii) in the case of a termination of employment due to death or disability (as determined in the judgment of the Committee), there will be no retention requirement under this paragraph 8(c)(5).
To effectuate the foregoing, the Shares of Accelerated Restricted Stock shall have the appropriate restriction or stop-transfer orders imposed by the Company’s transfer agent (or other administrator as designated by the Committee) effectuating the retention requirements above and restricting transfers for the applicable period.


                                    
                                                
                                         

(6)
Notwithstanding anything to the contrary in the Plan, the Committee shall have the authority to make Awards of Restricted Stock to a Grantee in Agreements under which restrictions on all or a portion of such Shares shall not immediately lapse and become fully vested upon a Change in Control of the Company or the death or Retirement of the Grantee.
(d)
Treatment of Cash Dividends. At the time of an Award of Shares of Restricted Stock, the Committee may, in its discretion, determine to pay to the Grantee cash dividends, or a specified portion thereof, declared or paid on Shares of Restricted Stock by the Company. Any such cash dividends paid with respect to Shares of Restricted Stock shall be deferred until the earlier to occur of (i) the lapsing of the restrictions imposed upon such Shares, in which case such cash dividends shall be paid over to the Grantee, or (ii) the forfeiture of such Shares under Section 8(b) hereof, in which case such cash dividends shall be forfeited to the Company. In the Committee’s sole discretion, interest may be credited on the amount of any cash dividends held by the Company for the account of the Grantee from time to time at such rate per annum as the Committee, in its discretion, may determine. Payment of deferred cash dividends, together with any interest accrued thereon as aforesaid, shall be made upon the earlier to occur of the events specified in (i) and (ii) of the immediately preceding sentence, in the manner specified therein.
(e)
Delivery of Shares. When the restrictions imposed hereunder and in the Plan expire or have been cancelled with respect to one or more Shares of Restricted Stock, the Company shall notify the Grantee of same. The Company shall instruct its transfer agent (or other administrator designated by the Committee) to remove the restrictions or stop-transfer orders for those Shares of Restricted Stock no longer subject to restrictions. Notwithstanding the foregoing, if requested by a Director or a Grantee who is an Eligible Employee 20 calendar days or more in advance of the date of vesting of the Restricted Stock (provided that such date is not during a blackout period), the Committee shall cancel Shares of Restricted Stock to be delivered to the Grantee having a Fair Market Value, on the day preceding the date of vesting of the Restricted Stock, equal to (i) the aggregate required tax withholding in connection with such vesting, or (ii) a higher amount up to the aggregate amount of taxes that may be owed by the Eligible Employee or Director as a result of the vesting of the shares of Restricted Stock assuming the highest marginal rate of federal, state and local taxes that could be applicable to the Eligible Employee or Director in the calendar year of vesting, and to apply the value of such Shares of Restricted Stock as payment for the Grantee’s aggregate required tax withholding for the vesting of any Shares of Restricted Stock.
9.
Restricted Stock Units. The Committee (or, with respect to Directors, the Board) may grant Awards of Restricted Stock Units which shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, terms and conditions as the Committee may require. Awards of Restricted Stock Units shall be subject to the following terms and provisions:
(a)
Rights of Grantee. Restricted Stock Units granted pursuant to an Award hereunder shall be issued in the name of the Grantee as soon as reasonably practicable after the Award is granted and the purchase price, if any, is paid by the Grantee, provided that the Grantee has executed an Agreement evidencing the Award and any other documents which the Committee, in its absolute discretion, may require as a condition to the issuance of such Restricted Stock Units. If a Grantee shall fail to execute the Agreement evidencing a Restricted Stock Unit Award or shall fail to pay the purchase price, if any, for the Restricted Stock Units, the Award shall be null and void. The Grantee shall not have any of the rights of a shareholder with respect to Restricted Stock Units, subject to Section 9(d).
(b)
Non-Transferability. Until any restrictions upon the Restricted Stock Units awarded to a Grantee shall have lapsed in the manner set forth in Section 9(c), such Restricted Stock Units shall not be


                                    
                                                
                                         

sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. Upon the termination of employment (or cessation of service) of the Grantee, all of such Restricted Stock Units with respect to which restrictions have not lapsed shall be forfeited at no cost to the Company if no purchase price had been paid for such Restricted Stock Units. The Committee may also impose such other restrictions and conditions on the Restricted Stock Units as it deems appropriate.
(c)
Lapse of Restrictions.
(1)
Restrictions upon Restricted Stock Units awarded hereunder shall lapse at such time or times and on such terms, conditions and satisfaction of performance criteria as the Committee may determine; provided, however, that the restrictions upon such Restricted Stock Units shall lapse only if the Grantee on the date of such lapse is then and has continuously been an employee of the Company or a Subsidiary or a Director of the Company from the date the Award was granted, or unless the Committee sets a later date for the lapse of such restrictions. The Board may determine, in its discretion, to grant Restricted Stock Unit Awards to Directors that vest in whole or in part immediately upon grant.
(2)
In the event of a Change in Control, all restrictions upon any Restricted Stock Units shall lapse immediately and all such Restricted Stock Units shall become fully vested in the Grantee thereof. The Committee shall have the authority to make Awards of Restricted Stock Units under Agreements which provide that restrictions do not immediately lapse upon a Change in Control. The Committee may do so by any means including by providing in an Agreement that such restrictions shall lapse upon the termination by the Company of the employment of the Grantee following a Change in Control.
(3)
In the event of termination of employment (or cessation of service as a Director) as a result of death or Retirement of a Grantee, all restrictions upon Restricted Stock Units awarded to such Grantee shall thereupon immediately lapse. The Committee shall have the authority to make Awards of Restricted Stock Units under Agreements which provide that restrictions do not immediately lapse upon the death or Retirement of the Grantee. The Committee may do so by any means including by providing in an Agreement that Restricted Stock Units not yet vested shall be forfeited to the Company automatically and immediately upon the Grantee’s ceasing to be employed by the Company (or ceasing to serve as a Director) for any reason whatsoever.
(4)
The Committee may also decide at any time in its absolute discretion and on such terms and conditions as it deems appropriate, to remove or modify the restrictions upon Restricted Stock Units awarded hereunder, unless the Committee sets a later date for the lapse of such restrictions.
(5)
With respect to any Accelerated Restricted Stock Units, the following restrictions will apply unless otherwise provided in the Agreement:
(i) in the case of a termination of employment for any reason other than death, disability (as determined in the judgment of the Committee) or Retirement, a minimum of 50% of any Shares issued upon vesting of Accelerated Restricted Stock Units must be retained by the Grantee for a period of 24 months;


                                    
                                                
                                         

(ii) in the case of a termination of employment by reason of Retirement, a minimum of 50% of any Shares issued upon vesting of Accelerated Restricted Stock Units must be retained by the Grantee for a period of 18 months;
(iii) in the case of a termination of employment due to death or disability (as determined in the judgment of the Committee), there will be no retention requirement under this paragraph 9(c)(5).
To effectuate the foregoing, the Shares issued in book entry form upon vesting of Accelerated Restricted Stock Units shall have the appropriate restrictions or stop-transfer orders imposed by the Company’s transfer agent (or other administrator as designated by the Committee) effectuating the retention requirements above and restricting transfers for the applicable period.
(6)
Notwithstanding anything to the contrary in the Plan, the Committee shall have the authority to make Awards of Restricted Stock Units to a Grantee in Agreements under which restrictions on all or a portion of such Restricted Stock Units shall not immediately lapse and become fully vested upon a Change in Control of the Company or the death or Retirement of the Grantee.
(d)
Treatment of Cash Dividends. At the time of an Award of Restricted Stock Units, the Committee may, in its discretion, determine to provide the Grantee with the right to receive cash Dividend Equivalents with respect to the Restricted Stock Units subject to the Award, or a specified portion thereof. A “Dividend Equivalent” is an amount equal to the cash dividend payable per Share, if any, multiplied by the number of Shares then underlying the Award with respect to any cash dividends declared or paid by the Company while the Award is outstanding. Any such Dividend Equivalents shall be credited to the Grantee at the time the Company pays any cash dividend on its Shares. Until such time as the Dividend Equivalents vest or are forfeited, interest may be credited, in the Committee’s sole discretion, on the amount of such Dividend Equivalents held by the Company for the account of the Grantee from time to time at such rate per annum as the Committee, in its discretion, may determine. Any Dividend Equivalents credited to the Grantee, and any interest accrued thereon, shall vest at the same time as the underlying Restricted Stock Units, and payment of credited Dividend Equivalents, together with any interest accrued thereon, shall be made at the time when the underlying Restricted Stock Units convert to Shares. In the event any Restricted Stock Units are forfeited under Section 9(c) hereof, any Dividend Equivalents credited to Grantee with respect to such forfeited Restricted Stock Units and any interest accrued thereon shall be forfeited to the Company, and the Grantee shall have no rights and the Company shall have no liability as to such Dividend Equivalents or interest.
(e)
Form of Payment. When the restrictions imposed hereunder and in the Plan expire or have been cancelled with respect to one or more of the Restricted Stock Units granted under the Plan, the Company shall notify the Grantee of same. The Company shall then deliver to the Grantee (or such Grantee’s legal representative, beneficiary or heir), subject to any determination of the Committee in its sole discretion to settle the Restricted Stock Units in cash or in a combination of cash and Shares, Shares in book entry form, without any stop-transfer orders or restrictions (except those required by any federal or state securities laws), equivalent to the number of Restricted Stock Units for which restrictions have been cancelled or have expired. If the Committee determines to settle any Restricted Stock Units in cash, the Company shall deliver to the Grantee (or such Grantee’s legal representative, beneficiary or heir), cash in amount equal to the Fair Market Value of a Share on the date of vesting multiplied by the number of Restricted Stock Units then vesting and determined by the Committee to be paid in cash. Notwithstanding the foregoing, if requested by a Director or a Grantee who is an


                                    
                                                
                                         

Eligible Employee 20 calendar days or more in advance of the date of vesting of the Restricted Stock Units (provided that such date is not during a blackout period), the Committee shall cancel Shares of Restricted Stock to be delivered to the Grantee having a Fair Market Value, on the day preceding the date of vesting of the Restricted Stock Units, equal to (i) the aggregate required tax withholding in connection with such vesting, or (ii) a higher amount up to the aggregate amount of taxes that may be owed by the Eligible Employee or Director as a result of the vesting of the shares of Restricted Stock Units assuming the highest marginal rate of federal, state and local taxes that could be applicable to the Eligible Employee or Director in the calendar year of vesting, and to apply the value of such Shares of Restricted Stock as payment for the Grantee’s aggregate required tax withholding for the vesting of any Restricted Stock Units.
(f)
Compliance with Section 409A of the Code. Restricted Stock Units are intended to comply with Section 409A of the Code and provisions of the Plan and Awards shall be interpreted in a manner intended to be consistent with Section 409A.
10.      Performance Goals
(a)
If, at the time of grant, the Committee intends a Restricted Stock Award or Restricted Stock Unit Award to qualify as “other performance based compensation” within the meaning of Code Section 162(m), the Committee must establish performance goals for the applicable Performance Period no later than 90 days after the Performance Period begins (or by such other date as may be required under Code Section 162(m)). Such performance goals must be based on one or more of the criteria described in Section 10(b). “Performance Period” means the period selected by the Committee during which performance is measured for purpose of determining the extent to which an award of Restricted Stock or Restricted Stock Units has been earned.
(b)
A performance goal described in Section 10(a) shall be based on one or more of the following criteria: earnings, earnings growth, earnings per share, stock price (including growth measures and total shareholder return), improvement of financial ratings, internal rate of return, market share, cash flow, operating income, operating margin, net profit after tax, earnings before or after deduction for all or any portion of interest, taxes, depreciation, or amortization, whether or not on a continuing operations or an aggregate or per share basis, gross profit, operating profit, cash generation, revenues, asset quality, return on equity, return on assets, return on operating assets, cost saving levels, efficiency ratio, net income, marketing-spending efficiency, core non-interest income, change in working capital, return on capital, book value or tangible book value, or shareholder return. The performance goals may be described in terms of objectives that are related to the individual Grantee or objectives that are Company-wide or related to a Subsidiary, division, department, region, branch, function or business unit and may, but need not be, measured on an absolute or cumulative basis or on the basis of percentage of improvement over time, measured in terms of Company performance (or performance of the applicable Subsidiary, division, department, region, branch, function or business unit) or measured relative to selected peer companies or a market index. Any performance goals that are financial metrics, may be determined in accordance with Generally Accepted Accounting Principles (“GAAP”), or may be adjusted when established to include or exclude any items otherwise includable or excludable under GAAP. For any Award not intended to meet the requirements of Code Section 162(m), the Committee may establish performance goals based on any other performance criteria it deems appropriate. These performance goals are subject to approval by shareholders at the Company’s 2016 annual meeting, and once approved, should be re-approved by the Company’s shareholders no later than the 2021 annual shareholder meeting, and thereafter, once every five years. 


                                    
                                                
                                         

(c)
When the Committee determines whether a performance goal has been satisfied for any period, the Committee may include or exclude unusual, infrequently occurring or non-recurring charges, asset write downs, losses from discontinued operations, restatements and accounting changes and other unplanned special charges such as restructuring expenses, acquisitions, acquisition or disposition expenses, including expenses related to goodwill and other intangible assets, stock offerings, stock repurchases and loan loss provisions; provided that in the case of an Award intended to qualify for the exemption from the limitation on deductibility imposed by Code Section 162(m), such inclusion or exclusion shall be made in compliance with Code Section 162(m).
(d)
If the Committee determines that a performance goal has been satisfied and the satisfaction of such goal was intended to meet the requirements of Code Section 162(m), the Committee shall certify that the goal has been satisfied in accordance with the requirements set forth under Code Section 162(m).
11.      Adjustment Upon Changes in Capitalization.
(a)
In the event of a Change in Capitalization, the Committee shall conclusively determine the appropriate adjustments, if any, to the maximum number and class of shares of stock with respect to which Options or Awards may be granted under the Plan, the number and class of shares as to which Options or Awards have been granted under the Plan, and the purchase price therefor, if applicable.
(b)
Any such adjustment in the Shares or other securities subject to outstanding Incentive Stock Options (including any adjustments in the purchase price) shall be made in such manner as not to constitute a modification as defined by Section 424(h)(3) of the Code and only to the extent otherwise permitted by Sections 422 and 424 of the Code.
(c)
If, by reason of a Change in Capitalization, a Grantee of an Award shall be entitled to new, additional or different shares of stock or securities, such new additional or different shares shall thereupon be subject to all of the conditions, restrictions and performance criteria which were applicable to the Shares or units pursuant to the Award prior to such Change in Capitalization.
12.      Effect of Certain Transactions. In the event of (i) the liquidation or dissolution of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation or (iii) the sale or disposition of all or substantially all of the Company’s assets, provision shall be made in connection with such transaction for the assumption of the Plan and the Options or Awards theretofore granted under the Plan, or the substitution for such Options or Awards of new options or awards of the surviving corporation, with appropriate adjustment as to the number and kind of shares and the purchase price for shares thereunder. Notwithstanding the foregoing, any other provision in this Plan or in an Option or Award Agreement, in the event of a transaction listed above or a Change in Control, the Committee, with the approval of the Board, shall have the right and authority to cancel and terminate all outstanding Options and Awards by paying each holder of an Option or Award in cash the difference between the exercise price, if any, and the Fair Market Value of the Shares underlying the Option or Award on the date of the consummation of the transaction or Change in Control. If the Committee elects to exercise its authority hereunder it shall provide each holder of an Option with the right to exercise the option (regardless of any vesting period) immediately prior to the transaction or Change in Control and shall provide each holder of an Award the right to fully vest that Award immediately prior to the transaction or Change in Control. A decision to exercise its right and authority, the manner of exercising its right and authority and interpretations by the Committee under the foregoing provision shall be final and binding on the holders of all Options and Awards.
13.      Termination and Amendment of the Plan. The Plan shall terminate on the day preceding the tenth anniversary of the Effective Date, as defined in Section 18 below, and no Option or Award may be granted


                                    
                                                
                                         

thereafter. The Board may sooner terminate or amend the Plan at any time, and from time to time; provided, however, that, except as provided in Sections 11 and 12 hereof, no amendment shall be effective unless approved by the shareholders of the Company in accordance with applicable law and regulations at an annual or special meeting held within twelve months before or after the date of adoption of such amendment, where approval of such amendment is required under applicable laws, policies or regulations or applicable listing or other requirements of the national securities exchange upon which the Shares are then listed, including amendments that will:
(a)
increase the number of Shares as to which Options or Awards may be granted under the Plan;
(b)
change the class of persons eligible to participate in the Plan;
(c)
materially extend the term of the Plan; or
(d)
cause Options or Stock Appreciation Rights issued under the Plan to be repriced or otherwise modified in a manner contemplated under Section 6(i) and Section 7(f) of the Plan.
Except as provided in Sections 11 and 12 hereof, rights and obligations under any Option or Award granted before any amendment of the Plan shall not be altered or impaired by such amendment, except with the consent of the Optionee or Grantee, as the case may be.
14.      Non-Exclusivity of the Plan. The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases.
15.      Limitation of Liability. As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to:
(a)
give any person any right to be granted an Option or Award other than at the sole discretion of the Committee;
(b)
give any person any rights whatsoever with respect to Shares except as specifically provided in the Plan;
(c)
limit in any way the right of the Company to terminate the employment of any person at any time; or
(d)
be evidence of any agreement or understanding, expressed or implied, that the Company will employ any person in any particular position at any particular rate of compensation or for any particular period of time.
16.      Regulations and Other Approvals; Governing Law.
(a)
This Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of New Jersey without giving effect to the choice of law principles thereof, except to the extent that such law is preempted by federal law.
(b)
The obligation of the Company to sell or deliver Shares with respect to Options and Awards granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable


                                    
                                                
                                         

federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee.
(c)
The Plan is intended to comply with Rule 16b-3 promulgated under the Exchange Act and, with respect to the grant of Options and certain Awards, Section 162(m) of the Code (each as amended from time to time) and the Committee shall interpret and administer the provisions of the Plan or any Agreement in a manner consistent therewith to the extent necessary. Any provisions inconsistent with such Rule or Section shall be inoperative but shall not affect the validity of the Plan or any grants thereunder.
(d)
Except as otherwise provided in Section 13, the Board may make such changes as may be necessary or appropriate to comply with the rules and regulations of any government authority or to obtain for Eligible Employees granted Incentive Stock Options the tax benefits under the applicable provisions of the Code and regulations promulgated thereunder.
(e)
Each Option and Award is subject to the requirement that, if at any time the Committee determines, in its absolute discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or the issuance of Shares, no Options shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions unacceptable to the Committee.
(f)
In the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act of 1933, as amended, or regulations thereunder, and the Committee may require any individual receiving Shares pursuant to the Plan, as a condition precedent to receipt of such Shares (including upon exercise of an Option), to represent to the Company in writing that the Shares acquired by such individual are acquired for investment only and not with a view to distribution.
17.      Miscellaneous.
(a)
Multiple Agreements. The terms of each Option or Award may differ from other Options or Awards granted under the Plan at the same time, or at some other time. The Committee may also grant more than one Option or Award to a given Eligible Employee during the term of the Plan, either in addition to, or in substitution for, one or more Options or Awards previously granted to that Eligible Employee. The grant of multiple Options and/or Awards may be evidenced by a single Agreement or multiple Agreements, as determined by the Committee.
(b)
Withholding of Taxes. The Company shall have the right to deduct from any distribution of cash to any Optionee or Grantee who is an Eligible Employee an amount equal to the federal, state and local income taxes and other amounts required by law to be withheld with respect to any Option or Award. Notwithstanding anything to the contrary contained herein, if any such Optionee or Grantee is entitled to receive Shares upon exercise of an Option or pursuant to an Award, the Company shall have the right to require such Optionee or Grantee, prior to the delivery of such Shares, to pay to the Company the amount of any federal, state or local income taxes and other amounts which the Company is required by law to withhold. An Optionee or Grantee who is a Director or an Eligible Employee shall be permitted to satisfy (i) any amounts required to be withheld by the Company under applicable federal, state and local tax laws in effect from time to time, or (ii) a higher amount up to the aggregate


                                    
                                                
                                         

amount of taxes that may be owed by the Eligible Employee or Director assuming the highest marginal rate of federal, state and local income taxes that could be applicable to the Eligible Employee or Director in the calendar year of vesting, by electing to have the Company withhold a portion of the Shares to be delivered for the payment of such taxes. The Agreement evidencing any Incentive Stock Options granted under this Plan shall provide that if the Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to him or her pursuant to his or her exercise of the Incentive Stock Option within the two-year period commencing on the day after the date of grant of such Option or within the one-year period commencing on the day after the date of transfer of the Share or Shares to the Optionee pursuant to the exercise of such Option, he or she shall, within ten (10) days of such disposition, notify the Company thereof and immediately deliver to the Company any amount of federal income tax withholding required by law.
(c)
Designation of Beneficiary. Each Optionee and Grantee may, with the consent of the Committee, designate a person or persons to receive in the event of his/her death, any Option or Award or any amount payable pursuant thereto, to which he/she would then be entitled. Such designation will be made upon forms supplied by and delivered to the Company and may be revoked in writing. If an Optionee or Grantee fails effectively to designate a beneficiary, then the beneficiary or beneficiaries named by the Optionee or Grantee under the Company’s group term life insurance plan will be deemed to be the beneficiary.
(d)
Recoupment. Notwithstanding anything to the contrary, an Agreement may provide that the Committee may cancel an Option or Award if the Optionee or Grantee has engaged in or engages in activity that is in conflict with or adverse to the interest of the Company while employed by or providing services to the Company or any Subsidiary, including fraud or conduct contributing to any financial restatements or irregularities. The Committee may also provide in an Agreement that in such event, the Optionee or Grantee will forfeit any compensation, gain or other value realized thereafter on the vesting, exercise or settlement of such Option or Award, the sale or other transfer of such Option or Award, or the sale of Shares acquired in respect of such Option or Award, and must promptly repay such amounts to the Company. The Committee may also provide in an Agreement that if the Optionee or Grantee receives any amount in excess of what should have been received under the terms of the Option or Award for any reason (including without limitation by reason of a financial restatement, mistake in calculations or other administrative error), then the Optionee or Grantee shall be required to promptly repay any such excess amount to the Company. Furthermore, to the extent required by applicable law (including, without limitation, Section 304 of the Sarbanes-Oxley Act and Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act) and/or the rules and regulations of any securities exchange or inter-dealer quotation service on which the Shares are listed or quoted, or if so required pursuant to a written policy adopted by the Company, Options and Awards shall be subject (including on a retroactive basis) to clawback, forfeiture or similar requirements.
18.      Effective Date. The effective date of the Plan shall be the date of its approval by shareholders following its adoption by the Board (the “Effective Date”). This Plan shall be effective only upon the approval by the affirmative vote of a majority of the votes cast at a meeting of shareholders at which a quorum is present to be held within twelve (12) months of the Board’s adoption of the Plan. Awards may be granted under the Plan after its adoption by the Board but prior to the Effective Date provided that all such Awards shall be null and void if the Plan is not approved by the requisite shareholder vote at the 2016 annual meeting. From and after the Effective Date of the Plan, no further awards shall be granted under the Prior Plan, and the Prior Plan shall remain in effect only so long as options or awards granted thereunder shall remain outstanding.






EXHIBIT 10.2

Name of Employee:                                      No. of Shares:


VALLEY NATIONAL BANCORP
RESTRICTED STOCK AWARD AGREEMENT

VALLEY NATIONAL BANCORP, a New Jersey corporation (the “Company”), this ____ day of ___________ (the “Award Date”), hereby grants to ________________ (the “Employee”), an employee of the Company, pursuant to the Company’s 2016 Long-Term Stock Incentive Plan (the “Plan”), shares of the Common Stock, no par value, of the Company subject to the restrictions set forth herein (“Restricted Stock”) in the amount and on the terms and conditions hereinafter set forth.
1.
     Incorporation by Reference of Plan. The provisions of the Plan, which is available on the VNB Intranet to the Employee, are incorporated by reference herein and shall govern as to all matters not expressly provided for in this Agreement. Capitalized terms not defined herein have the meanings set forth in the Plan. In the event of any conflict between the terms of this Agreement and the Plan, the terms of the Plan shall govern.
2.      Award of Restricted Stock . A record of the Restricted Stock awarded hereunder (the “Shares”) shall be evidenced by the Company in restricted book entry accounts maintained with the Company’s transfer agent, or such other administrator designated by the Compensation Committee of the Company's Board of Directors (the "Committee"), subject to such stop-transfer orders and other terms deemed appropriate by the Committee to reflect the restrictions applicable to such Award (the “Restrictions”), until all the Restrictions specifically set forth in this Agreement and in Section 8 of the Plan with respect to the Shares shall expire or be canceled. Upon the lapse of Restrictions relating to any Shares, the Company shall remove the Restrictions on any such Shares issued in book-entry form. Restricted Stock shall have all dividends (including cash and stock dividends) and voting rights as set forth in Section 8 of the Plan. However, dividends (including cash and stock dividends) paid on the Restricted Stock shall be deferred until the Restrictions with respect to the Shares upon which such dividends were paid expire or are canceled, at which time the Company shall evidence the delivery to the Employee of all such dividends in the restricted book entry accounts. If the Employee forfeits any Shares awarded hereunder, such Shares and any dividends (including cash and stock dividends) with respect thereto shall automatically revert to the Company (without any payment by the Company to the Employee) and shall no longer be reflected in the restricted book entry account. No interest will be accrued with respect to any credited dividends.
3.      Restrictions      (a)      Vesting . The Shares and all related dividends shall not be delivered to the Employee and may not be sold, assigned, transferred, pledged or otherwise encumbered by the Employee until such Shares have vested in accordance with the following schedule:
Percentage of Shares Which Vest
Date on Which Such Shares Vest
33%
1 year after Award Date
66%
2 years after Award Date
100%
3 years after Award Date

(b)      Acceleration . In the event of a Change in Control (as such term is defined in the Plan) of the Company, all Restrictions upon any Shares shall immediately lapse.
(c)      Forfeiture . Shares not yet vested (and any related dividends, including cash and stock dividends) shall be forfeited to the Company automatically and immediately upon the Employee’s ceasing





to be employed by the Company and its Subsidiaries for any reason whatsoever, other than death or Retirement (as such term is defined above in Section 1) of the Employee. Upon termination of employment by reason of death or Retirement (as such term is defined above in Section 1) all restrictions upon the Shares shall thereupon immediately lapse.
4.
     Accelerated Restricted Stock . With respect to an Employee who is or was at any time a named executive officer (as determined under Item 402 of Regulation S-K of the Securities Exchange Act of 1934, as amended), the Shares are subject to all the terms and conditions set forth in the Plan regarding Accelerated Restricted Stock including, but not limited to, the following:
a.
The retention requirements as provided in Section 8(c) of the Plan;
b.
The imposition of Restrictions reflecting the retention requirements as provided in Section 8(c) of the Plan; and
c.
The continued Restrictions on the Shares until the expiration of the retention requirements as provided in Section 8(c) of the Plan.
5.
     Registration . If Shares are issued in a transaction exempt from registration under the Securities Act of 1933, as amended, then, if deemed necessary by Company’s counsel, as a condition to the Company issuing the Shares, the Employee shall represent in writing to the Company that the Employee is acquiring the Shares for investment purposes only and not with a view to distribution, and Restrictions shall be imposed on the Shares to the effect that such Shares may not be transferred without an applicable exemption under the Securities Act of 1933 or registration thereunder.
6.      Incorporation of Plan . The Employee hereby acknowledges that the Employee has access to the Plan on the VNB Intranet (and is aware that he or she may request a written copy) and represents and warrants that the Employee has read and is familiar with the terms and conditions of the Plan. The execution of this Agreement by the Employee shall constitute the Employee’s acceptance of and agreement to all of the terms and conditions of the Plan and this Agreement.
7.      Notices . Except as specifically provided in the Plan or this Agreement, all notices and other communications required or permitted under the Plan and this Agreement shall be in writing and shall be given either by (i) personal delivery or regular mail, in each case against receipt, or (ii) first class registered or certified mail, return receipt requested. Any such communication shall be deemed to have been given (i) on the date of receipt in the cases referred to in clause (i) of the preceding sentence and (ii) on the second day after the date of mailing in the cases referred to in clause (ii) of the preceding sentence. All such communications to the Company shall be addressed to it, to the attention of its Secretary or Treasurer, at its then principal office and to the Employee at the Employee’s last address appearing on the records of the Company or, in each case, to such other person or address as may be designated by like notice hereunder.
8.      Tax Withholding . If requested by the Employee, the Committee shall cancel Shares of Restricted Stock to be delivered to the Employee having a Fair Market Value, on the day preceding the date of vesting of the Restricted Stock, equal to the aggregate required tax withholding (or a rate that is higher than the minimum statutory withholding rate) in connection with such vesting, and to apply the value of such Shares of Restricted Stock as payment for the Employee’s aggregate required tax withholding for the vesting of any Shares of Restricted Stock. The form to be used in making this request is attached.
9.      Clawback .      In the event that the Committee, within 3 years of the date of the Award hereunder, determines that the Award of Restricted Stock made under this Agreement was based on materially inaccurate financial statements (including, but not limited to, statements of earnings, revenues, or gains) or other materially inaccurate performance metric criteria, then the Company has the right to cancel the unvested Restricted Stock awarded to the Employee under this Agreement and, with respect to vested Restricted Stock awarded under this Agreement, the Employee agrees that the Company has the right to cancel the Shares awarded to the Employee under this Agreement if still owned by the Employee or, if such Shares are no longer owned by the Employee or the Company is otherwise unable to cancel the Shares, to recover from the Employee the value of the vested Restricted Stock awarded under this Agreement. The Committee may





also cancel this Award if the Employee has engaged in or engages in an activity that is in conflict with or adverse to the interest of the Company while employed by or providing services to the Company or any Subsidiary, including fraud or conduct contributing to any financial restatements or irregularities.      In addition, to the extent required by applicable law (including, without limitation, Section 304 of the Sarbanes-Oxley Act and Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act) and/or the rules and regulations of any securities exchange or inter-dealer quotation service on which the Company’s Shares are listed or quoted, or if so required pursuant to a written policy adopted by the Company, this Award shall be subject (including on a retroactive basis) to clawback, forfeiture or similar requirements.
10.      Miscellaneous .  This Agreement and the Plan contain a complete statement of all the arrangements between the parties with respect to the subject matter hereof, and this Agreement cannot be changed except by a writing executed by both parties. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed exclusively in New Jersey.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
VALLEY NATIONAL BANCORP                  EMPLOYEE


__________________________________                ________________________________
By: Gerald Korde                          By:
                        


Awards of incentive compensation are also subject to the Valley National Bancorp Clawback Policy which is attached.








Tax Withholding Election Form

This form cannot be executed during a blackout period; and must be submitted to Stock Option Support in the Accounting Department at least 20 days prior to a scheduled restricted stock vesting.
The undersigned has received, pursuant to one or all of the Company’s 2016 Long-Term Stock Incentive Plan, 2009 Long-Term Stock Incentive Plan and 1999 Long-Term Stock Incentive Plan (the “Plans”), shares of the Common Stock, no par value, of the Company (“Restricted Stock”) subject to the restrictions set forth in one or more Restricted Stock Award Agreement(s) (each an “Agreement”). Capitalized terms used herein without definition shall have the meanings ascribed to them in the appropriate Plan pursuant to which the Restricted Stock was granted.
With respect to the satisfaction of any and all withholding tax obligations relating to the vesting of the Restricted Stock (except those shares of Restricted Stock covered by the Agreements listed below) and pursuant to the terms of the appropriate Agreement, the undersigned hereby voluntarily elects (please choose one and initial on the space provided):
____
(i)
to have the Company withhold a number of shares of Common Stock otherwise issuable or deliverable sufficient to cover the undersigned’s withholding tax obligations (or, if requested by the undersigned and permitted by the Company, a rate that is higher than the minimum statutory withholding rate) in connection with the vesting of the Restricted Stock subject to the Agreement.
____
(ii)
to withdraw the voluntary election dated _________ in connection with the vesting of the Restricted Stock subject to the Agreement. This tax withholding election shall be deemed revoked by the undersigned when the Company receives a superseding Tax Withholding Election Form where this item (ii) is checked.

The undersigned understands that the Company may defer issuance and delivery of Common Stock until all tax withholding requirements are satisfied.
The vesting of the Restricted Stock subject to the Agreement may at times occur during a blackout period. In such an event, you would be unable to elect to have shares of Common Stock withheld to cover withholding tax obligations. Thus, consistent with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, where item (i) above is checked, this Tax Withholding Election Form serves as your authorization to have the Company withhold a number of shares of Common Stock otherwise issuable or deliverable sufficient to cover the undersigned’s withholding tax obligations in connection with the vesting of the Restricted Stock subject to the Agreement.
By executing this Tax Withholding Election Form, the undersigned represents and warrants that as of the date hereof he/she is not aware of any material nonpublic information with respect to the Company or any of its securities.
 
 
Date
Employee Name (Print)
 


 
Employee Signature






Valley National Bancorp Clawback Policy

The Compensation and Human Resources Committee of Valley National Bancorp (the “Company”) operates under the following Clawback Policy:
•
Triggers to Recoup Unvested Awards: The Company may cancel any unvested stock awards granted to and cancel the payout of any unpaid cash bonus award to be paid to (recoup) any executive officer of the Company or its subsidiaries upon the following events:
1.
A material restatement of the Company’s financial statements and the award was based upon materially inaccurate performance metrics, in which case the recoupment applies to the relevant period.
2.
The Executive is terminated for cause involving material misconduct detrimental to the Company, in which case the recoupment applies to all periods on or after the material misconduct.
•
Triggers to Recoup Vested Awards: The Company may recoup vested incentive awards of stock and cash made to any executive in the following events:
1.
The executive engaged in intentional fraud against the Company or any of its subsidiaries, in which case the recoupment may apply to any awards from the date of the fraud.
2.
Because of intentional misconduct detrimental to the Company, the Company suffers a material financial loss and governmental enforcement action against the Company or its subsidiaries.
•
Procedures for Applying Policy: The Compensation and Human Resources Committee of the Company will be responsible for exercising the Company’s rights under this Policy. In exercising its authority under this policy, the Committee shall take into account uncertainties and mitigating circumstances. The Committee shall not be obligated in any case under this policy to exercise its discretion to obtain recoupment. Conversely, the Committee shall not be prevented from exercising its right to obtain recoupment due to uncertainties or mitigating circumstances.
•
Amendments: The Committee may amend or supplement this policy at any time. However no such amendment or supplement which is materially adverse to the executive may apply retroactively.




                                                                                                                                             

EXHIBIT 10.3

Name of Director:                                      No. of Shares:

VALLEY NATIONAL BANCORP
DIRECTOR RESTRICTED STOCK AWARD AGREEMENT

VALLEY NATIONAL BANCORP, a New Jersey corporation (the “ Company ”), this 27 th day of April, 2017 (the “ Award Date ”), hereby grants to ____________________, a non-employee Director of the Company (the “ Director ”), pursuant to the Company’s 2016 Long-Term Stock Incentive Plan (the “ Plan ”), shares of the Common Stock, no par value, of the Company, subject to the restrictions set forth herein (“ Restricted Stock ”) in the amount and on the terms and conditions hereinafter set forth.
1.      Incorporation by Reference of Plan. The provisions of the Plan are incorporated by reference herein and shall govern as to all matters not expressly provided for in this Agreement. Capitalized terms not defined herein have the meanings set forth in the Plan. In the event of any conflict between the terms of this Agreement and the Plan, the terms of the Plan shall govern.
2.      Award of Restricted Stock . The Company hereby grants the Director ___________________ shares of Restricted Stock. The shares of Restricted Stock awarded hereunder (the “ Shares ”) shall be evidenced by the Company in restricted book entry accounts maintained for the Director with the Company’s transfer agent, or such other administrator designated by the Company’s Board of Directors (the “ Board ”), until the Restrictions set forth in Section 3 below and in Section 8 of the Plan with respect to the Shares shall expire or are canceled because the vesting requirements are not met. Upon the lapse of Restrictions relating to any Shares, the Company shall remove the notations on any such Shares issued in book-entry form, and the Shares will be free of all Restrictions. The Shares shall have voting rights and be credited with dividends as set forth in Section 8 of the Plan. Dividends with respect to the Shares shall be deferred until the Restrictions with respect to the Shares upon which such dividends were attributable expire or are canceled, at which time the Company shall evidence the delivery to the Director of all such dividends. If the Director forfeits any Shares awarded hereunder, such Shares and any dividends with respect thereto shall automatically and immediately be forfeited to the Company (without any payment by the Company to the Director) and shall no longer be reflected in the restricted book entry account for the Director. No interest will be accrued with respect to any credited dividends.
3.      Restrictions
(a) Vesting . The Shares and all related dividends shall not be delivered to the Director and may not be sold, assigned, transferred, pledged or otherwise encumbered by the Director until such Shares have vested subject to the terms of this Agreement. The Shares shall vest upon the earlier of (i) the date of the next Annual Meeting of Shareholders following the Award Date or (ii) one year after the Award Date (the “ Vesting Date ”), subject to the Director’s continuous service on the Board from the Award Date through the Vesting Date except as provided otherwise below:
(i) Death; Disability . Upon death or disability of the Director, all Restrictions upon the Restricted Stock shall lapse and such Shares shall immediately vest and the Shares (as well as any associated dividends) shall be paid within thirty (30) days to the Director or to the Director’s executors, administrators, heirs or distributes, as the case may be. For this purpose only, “disability” shall mean that the Director is unable to continue to serve as a director due to physical or mental disability.


                                                                                                                                             

(ii) Change in Control . Upon the event of a Change in Control (as such term is defined in the Plan) of the Company, all Restrictions upon the Restricted Stock shall lapse and such Shares shall immediately vest and the Shares (as well as any associated dividends) shall be paid to the Director upon consummation of the Change in Control.
(b) Forfeiture Events . For the avoidance of doubt, Shares not yet vested (and any related dividends) shall be forfeited to the Company automatically and immediately upon the cessation of service as a Director for any reason whatsoever, other than cessation of service due to death or disability (as such term is defined in Section 3(a)(i) above) of the Director or a Change in Control. If a Director’s service ceases between annual meetings of the Company, and the Director is eligible for Retirement (as such term is defined in the Plan), the Retirement shall not cause the vesting of the Shares. The Board retains the right to vest Shares in its discretion.
4.      Registration . If Shares are issued in a transaction exempt from registration under the Securities Act of 1933, as amended, then, if deemed necessary by Company’s counsel, as a condition to the Company issuing certificates representing the Shares, the Director shall represent in writing to the Company that the Director is acquiring the Shares for investment purposes only and not with a view to distribution, and the certificates representing the Shares shall bear the following legend:
“These shares have not been registered under the Securities Act of 1933. No transfer of the shares may be affected without an opinion of counsel to the Company stating that the transfer is exempt from registration under the Act and any applicable state securities laws or that the transfer of the shares is covered by an effective registration statement with respect to the shares.”
5.      Incorporation of Plan . The Director hereby acknowledges that the Director has access to the Plan, which is contained in the Company Proxy Statement dated March 18, 2016. The Director represents and warrants that the Director has read and is familiar with the terms and conditions of the Plan. The execution of this Agreement by the Director shall constitute the Director’s acceptance of and agreement to all of the terms and conditions of the Plan and this Agreement.
6.      Notices . Except as specifically provided in the Plan or this Agreement, all notices and other communications required or permitted under the Plan and this Agreement shall be in writing and shall be given either by email to the email addresses for the director or the Company as the case may be, by personal delivery or by regular mail. All such communications to the Company shall be addressed to it, to the attention of its Chief Executive Officer, and to the Director at the Director’s last address appearing on the records of the Company or, in each case, to such other person or address as may be designated by like notice hereunder.
7.      Miscellaneous . This Agreement and the Plan contain a complete statement of all the arrangements between the parties with respect to the subject matter hereof, and this Agreement cannot be changed except by a writing executed by both parties. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed exclusively in New Jersey.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
                            
 
VALLEY NATIONAL BANCORP DIRECTOR
By: ________________________________     
 
        
Gerald H. Lipkin, Chairman and CEO     
(Director Signature)



EXHIBIT 31.1



CERTIFICATION
I, Gerald H. Lipkin, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Valley National Bancorp;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

  Date:  May 8, 2017
 
 
/s/ Gerald H. Lipkin
Gerald H. Lipkin
Chairman of the Board and
Chief Executive Officer



EXHIBIT 31.2



I, Alan D. Eskow, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Valley National Bancorp;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


  Date: May 8, 2017

 
/s/ Alan D. Eskow
Alan D. Eskow
Senior Executive Vice President and
Chief Financial Officer



EXHIBIT (32)



CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Valley National Bancorp (the “Company”) for the period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Gerald H. Lipkin, as Chief Executive Officer of the Company, and Alan D. Eskow, as Chief Financial Officer of the Company, each hereby certify, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
/s/ Gerald H. Lipkin
Gerald H. Lipkin
Chairman of the Board and
Chief Executive Officer
May 8, 2017
 
 
/s/ Alan D. Eskow
Alan D. Eskow
Senior Executive Vice President and
Chief Financial Officer
May 8, 2017