VALLEY NATIONAL BANCORP - Annual Report: 2019 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-11277
VALLEY NATIONAL BANCORP
(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) | ||
One Penn Plaza | |||
New York, | NY | 10119 | |
(Address of principal executive office) | (Zip code) |
973-305-8800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbols | Name of exchange on which registered |
Common Stock, no par value | VLY | The Nasdaq Stock Market LLC |
Non-Cumulative Perpetual Preferred Stock, Series A, no par value | VLYPP | The Nasdaq Stock Market LLC |
Non-Cumulative Perpetual Preferred Stock, Series B, no par value | VLYPO | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer | ☑ | Accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Non-accelerated filer | ☐ | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☑
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $3.5 billion on June 30, 2019.
There were 403,748,667 shares of Common Stock outstanding at March 10, 2020.
Documents incorporated by reference:
Certain portions of the registrant’s Definitive Proxy Statement (the “2020 Proxy Statement”) for the 2020 Annual Meeting of Shareholders to be held May 1, 2020 will be incorporated by reference in Part III. The 2020 Proxy Statement will be filed within 120 days of December 31, 2019.
TABLE OF CONTENTS
Page | ||
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Valley National Bancorp and Subsidiaries: | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
PART I
Item 1. | Business |
The disclosures set forth in this item are qualified by Item 1A—Risk Factors and the section captioned “Cautionary Statement Concerning Forward-Looking Statements” in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
Valley National Bancorp, headquartered in Wayne, New Jersey, is a New Jersey corporation organized in 1983 and is registered as a bank holding company with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended (“Holding Company Act”). The words “Valley,” “the Company,” “we,” “our” and “us” refer to Valley National Bancorp and its wholly owned subsidiaries, unless we indicate otherwise. At December 31, 2019, Valley had consolidated total assets of $37.4 billion, total net loans of $29.5 billion, total deposits of $29.2 billion and total shareholders’ equity of $4.4 billion. In addition to its principal subsidiary, Valley National Bank (commonly referred to as the “Bank” in this report), Valley owns all of the voting and common shares of GCB Capital Trust III, State Bancorp Capital Trusts I and II, and Aliant Statutory Trust II at December 31, 2019 through which trust preferred securities were issued. These trusts are not consolidated subsidiaries. See Note 12 to the consolidated financial statements.
Valley National Bank is a national banking association chartered in 1927 under the laws of the United States. Currently, the Bank has 238 branches serving northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn and Queens, Long Island, Florida and Alabama. The Bank offers a full suite of banking solutions through various commercial, retail, insurance and wealth management financial services products. These products include, but are not limited to, traditional commercial and industrial lending, commercial real estate financing, small business loans, equipment, basic consumer and commercial deposit products, personal financing solutions such as residential mortgages, home equity loans and automobile financing, as well as solutions for homeowners associations and a full service line of cash management solutions. The Bank provides a variety of banking services including automated teller machines, telephone and internet banking, remote deposit capture, overdraft facilities, drive-in and night deposit services, and safe deposit facilities. In addition, certain international banking services are available to customers including standby letters of credit, documentary letters of credit and related products, and certain ancillary services such as foreign exchange transactions, documentary collections, foreign wire transfers, as well as transaction accounts for non-resident aliens.
Our primary focus is to build and develop profitable customer relationships across all lines of business and create a convenient and innovative omni-channel customer experience beyond our traditional branch footprint, including our recent launch of ValleyDirect on-line savings account.
Valley National Bank’s wholly-owned subsidiaries are all included in the consolidated financial statements of Valley (See Exhibit 21 at Part IV, Item 15 for a list of subsidiaries). These subsidiaries include, but are not limited to:
• | an insurance agency offering property and casualty, life and health insurance; |
• | an asset management adviser that is a registered investment adviser with the Securities and Exchange Commission (SEC); |
• | a title insurance agency in New York which also provides services in New Jersey; |
• | subsidiaries which hold, maintain and manage investment assets for the Bank; |
• | a subsidiary which specializes in health care equipment lending and other commercial equipment leases; and |
• | a subsidiary which owns and services New York commercial loans. |
The Bank’s subsidiaries also include real estate investment trust subsidiaries (the REIT subsidiaries) which own real estate related investments and a REIT subsidiary, which owns some of the real estate utilized by the Bank and related real estate investments. Except for Valley’s REIT subsidiaries, all subsidiaries mentioned above are directly or indirectly wholly owned by the Bank. Because each REIT must have 100 or more shareholders to qualify as a REIT, each REIT has issued less than 20 percent of its outstanding non-voting preferred stock to individuals, most of whom are current and former (non-executive officer) Bank employees. The Bank owns the remaining preferred stock and all the common stock of the REITs.
Recent Acquisitions
Valley has grown significantly in the past five years primarily through bank acquisitions that expanded our branch footprint into Florida. Recent bank transactions are discussed further below.
3 | 2019 Form 10-K |
Oritani Financial Corp. On December 1, 2019, Valley completed its acquisition of Oritani Financial Corp. ("Oritani") and its wholly-owned subsidiary, Oritani Bank. Oritani had approximately $4.3 billion in assets, $3.4 billion in net loans, $2.9 billion in deposits, after purchase accounting adjustments, and a branch network of 26 locations. The acquisition represents a significant addition to Valley's New Jersey franchise, and will meaningfully enhance its presence in the Bergen County market. The common shareholders of Oritani received 1.60 shares of Valley common stock for each Oritani share that they owned prior to merger. The total consideration for the acquisition was approximately $835 million, consisting of approximately 71.1 million shares of Valley common stock and the outstanding Oritani stock-based awards.
USAmeriBancorp, Inc. On January 1, 2018, Valley completed its acquisition of USAmeriBancorp, Inc. (USAB) headquartered in Clearwater, Florida. USAB, largely through its wholly-owned subsidiary, USAmeriBank, had approximately $5.1 billion in assets, $3.7 billion in net loans and $3.6 billion in deposits, after purchase accounting adjustments, and maintained a branch network of 29 offices at December 31, 2018. The acquisition represents a significant addition to Valley’s Florida presence, primarily in the Tampa Bay market. The acquisition also brought Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where USAB maintained 15 of its branches. The common shareholders of USAB received 6.1 shares of Valley common stock for each USAB share they owned prior to merger. The total consideration for the acquisition was approximately $737 million, consisting of 64.9 million shares of Valley common stock and the outstanding USAB stock-based awards.
CNLBancshares, Inc. On December 1, 2015, Valley completed its acquisition of CNLBancshares, Inc. (CNL) and its wholly-owned subsidiary, CNLBank, headquartered in Orlando, Florida, a commercial bank with approximately $1.6 billion in assets, $825 million in loans, $1.2 billion in deposits and 16 branch offices on the date of its acquisition by Valley. The acquired branches allowed us to service Florida's west coast markets of Naples, Bonita Springs, Fort Myers and Sarasota. We also added three offices in the Jacksonville area and expanded our presence in the Orlando market. The common shareholders of CNL received 0.705 of a share of Valley common stock for each CNL share they owned prior to the merger. The total consideration for the acquisition was approximately $230 million, consisting of 20.6 million shares of Valley common stock.
Business Segments
Our business segments are reassessed by management, at least on an annual basis, to ensure the proper identification and reporting of our operating segments. Valley currently reports the results of its operations and manages its business through four business segments: commercial lending, consumer lending, investment management, and corporate and other adjustments. Valley’s Wealth Management Division comprised of trust, asset management and insurance services, is included in the consumer lending segment. See Note 23 to the consolidated financial statements for details of the financial performance of our business segments. We offer a variety of products and services within the commercial and consumer lending segments as described below.
Commercial Lending Segment
Commercial and industrial loans. Commercial and industrial loans totaled approximately $4.8 billion and represented 16.2 percent of the total loan portfolio at December 31, 2019. We make commercial loans to small and middle market businesses most often located in New Jersey, New York, Florida and Alabama. Loans originated from Florida accounted for approximately 30 percent of total commercial and industrial loans at December 31, 2019 as compared to 28 percent of such loans at December 31, 2018. A significant proportion of Valley’s commercial and industrial loan portfolio is granted to long-standing customers of proven ability, strong repayment performance, and high character. Underwriting standards are designed to assess the borrower’s ability to generate recurring cash flow sufficient to meet the debt service requirements of loans granted. While such recurring cash flow serves as the primary source of repayment, most of the loans are collateralized by borrower assets intended to serve as a secondary source of repayment should the need arise. Anticipated cash flows of borrowers, however, may not occur as expected and the collateral securing these loans may fluctuate in value. In the case of loans secured by accounts receivable, the ability of the borrower to collect all amounts due from its customers may be impaired. Our loan decisions include consideration of a borrower’s willingness to repay debts, collateral coverage, standing in the community and other forms of support. Strong consideration is given to long-term existing customers that have maintained a favorable relationship with the Bank. Commercial loan products offered consist of term loans for equipment purchases, working capital lines of credit that assist our customers’ financing of accounts receivable and inventory, and commercial mortgages for owner occupied properties. Working capital advances are generally used to finance seasonal requirements and are repaid at the end of the cycle. Short-term commercial business loans may be collateralized by a lien on accounts receivable, inventory, equipment and/or partly collateralized by real estate. Short-term loans may also be made on an unsecured basis based on a borrower’s financial strength and past performance. Whenever possible, we obtain the personal guarantee of the borrower’s principals to mitigate the risk. Unsecured loans, when made, are generally granted to the Bank’s most creditworthy borrowers. Unsecured commercial and industrial loans totaled $606.1 million at December 31, 2019. In addition, we provide financing to the health care and industrial equipment leasing market through our leasing subsidiary, Highland Capital Corp.
2019 Form 10-K | 4 |
The commercial portfolio also includes approximately $107.5 million and $7.3 million of New York City and Chicago taxi medallion loans at December 31, 2019, respectively, which we continue to closely monitor due to the weakness exhibited in the taxi industry caused by strong competition from alternative ride-sharing services. At December 31, 2019, the medallion portfolio included impaired loans totaling $87.1 million with related reserves of $35.5 million within the allowance for loan losses. While most of the taxi medallion loans within the portfolio at December 31, 2019 are currently performing to their contractual terms, negative trends in the market valuations of the underlying taxi medallion collateral and a decline in borrower cash flows, among other factors, could impact the future performance of this portfolio. See the “Non-performing Assets” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) for additional information regarding our taxi medallion loans.
Commercial real estate loans. Commercial real estate and construction loans totaled $17.6 billion and represented 59.5 percent of the total loan portfolio at December 31, 2019. We originate commercial real estate loans that are secured by various diversified property types across the New York metropolitan area (New Jersey, New York and Pennsylvania) along with Florida and our Alabama footprint. Property types in this portfolio range from multi-family residential properties to non-owner occupied commercial, industrial/warehouse and retail. Loans originated from Florida lending represented 25 percent of the total commercial real estate loans at December 31, 2019 as compared to 28 percent of such loans at December 31, 2018. Loans are generally written on an adjustable basis with rates tied to a specifically identified market rate index. Adjustment periods generally range between five to ten years and repayment is generally structured on a fully amortizing basis for terms up to thirty years. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans but generally they involve larger principal balances and longer repayment periods as compared to commercial and industrial loans. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real property. Repayment of most loans is dependent upon the cash flow generated from the property securing the loan or the business that occupies the property. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy and accordingly, conservative loan to value ratios are required at origination, as well as stress tested to evaluate the impact of market changes relating to key underwriting elements. The properties securing the commercial real estate portfolio represent diverse types, with most properties located within Valley’s primary markets. With respect to loans to developers and builders, we originate and manage construction loans structured on either a revolving or a non-revolving basis, depending on the nature of the underlying development project. Our construction loans totaling approximately $1.6 billion at December 31, 2019 are generally secured by the real estate to be developed and may also be secured by additional real estate to mitigate the risk. Within our construction portfolio we have a diverse mix of both residential (for sale and rental) and commercial development projects. Non-revolving construction loans often involve the disbursement of substantially all committed funds with repayment substantially dependent on the successful completion and sale, or lease, of the project. Sources of repayment for these types of loans may be from pre-committed permanent loans from other lenders, sales of developed property, or an interim loan commitment from Valley until permanent financing is obtained elsewhere. Revolving construction loans (generally relating to single-family residential construction) are controlled with loan advances dependent upon the presale of housing units financed. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Consumer Lending Segment
Residential mortgage loans. Residential mortgage loans totaled $4.4 billion and represented 14.7 percent of the total loan portfolio at December 31, 2019. Our residential mortgage loans include fixed and variable interest rate loans mostly located in New Jersey, New York and Florida. Valley’s ability to be repaid on such loans is closely linked to the economic and real estate market conditions in our lending markets. We also make mortgage loans secured by homes beyond this primary geographic area; however, lending outside this primary area is generally made in support of existing customer relationships, as well as targeted purchases of loans guaranteed by third parties. Mortgage loan originations are based on underwriting standards that generally comply with Fannie Mae and/or Freddie Mac requirements. Appraisals and valuations of real estate collateral are contracted through an approved appraisal management company. The appraisal management company adheres to all regulatory requirements. The Bank’s appraisal management policy and procedure is in accordance with regulatory requirements and guidance issued by the Bank’s primary regulator. Credit scoring, using FICO® and other proprietary, credit scoring models is employed in the ultimate, judgmental credit decision by Valley’s underwriting staff. Valley does not use third party contract underwriting services. In deciding whether to originate each residential mortgage, Valley considers the qualifications of the borrower, the value of the underlying property and other factors that we believe are predictive of future loan performance. Valley originated first mortgages include both fixed rate and adjustable rate mortgage (ARM) products with 10-year to 30-year maturities. The adjustable rate loans have a fixed-rate, fixed payment, introductory period of 5 to 10 years that is selected by the borrower. The adjustable rate residential mortgage loans totaled approximately $1.0 billion and $898 million at December 31, 2019 and 2018, respectively. Additionally, Valley began to originate interest-only (i.e., non-amortizing) residential mortgage loans during 2017 due to demand for this type of loan product in the New York City and northern New Jersey markets. Valley's interest-only residential mortgage loans have 15-year to 30-year maturities and totaled $54.6 million (or 1.3 percent of the total residential mortgage loan portfolio) at December 31, 2019. The
5 | 2019 Form 10-K |
Bank is also a servicer of residential mortgage portfolios, and it is compensated for loan administrative services performed for mortgage servicing rights related primarily to loans originated and sold by the Bank. See Note 5 to the consolidated financial statements for further details.
Other consumer loans. Other consumer loans totaled $2.9 billion and represented 9.6 percent of the total loan portfolio at December 31, 2019. Our other consumer loan portfolio is primarily comprised of direct and indirect automobile loans, loans secured by the cash surrender value of life insurance, home equity loans and lines of credit, and to a lesser extent, secured and unsecured other consumer loans (including credit card loans). Valley is an auto lender in New Jersey, New York, Pennsylvania, Florida, Connecticut, Delaware and Alabama offering indirect auto loans secured by either new or used automobiles. Automobile originations (including light truck and sport utility vehicles) are largely produced via indirect channels, originated through approved automobile dealers. Valley acquired an immaterial amount of automobile loans from its bank acquisitions in Florida since 2014, as auto lending was not a focus of the acquired operations. However, we implemented our indirect auto lending model in Florida during 2015, and Alabama in 2018 using our New Jersey based underwriting and loan servicing platform. The relatively new Florida auto dealer network generated over $169 million and $154 million of auto loans in 2019 and 2018, respectively, while the auto loans originated from Alabama totaled $39.4 million in 2019 as compared to $5.4 million in 2018. Home equity lending consists of both fixed and variable interest rate products mainly to provide home equity loans to our residential mortgage customers or take a secondary position to another lender’s first lien position within the footprint of our primary lending territories. We generally will not exceed a combined (i.e., first and second mortgage) loan-to-value ratio of 80 percent when originating a home equity loan. Other consumer loans include direct consumer term loans, both secured and unsecured, but are largely comprised of personal lines of credit secured by cash surrender value of life insurance. The product is mainly originated through the Bank’s retail branch network and third party financial advisors. Unsecured consumer loans totaled approximately $53.9 million, including $8.2 million of credit card loans, at December 31, 2019.
Wealth Management. Our Wealth Management and Insurance Services Division provides asset management advisory services, trust services, commercial and personal insurance products, and title insurance. Asset management advisory services include investment services for individuals and small to medium sized businesses, trusts and custom -tailored investment strategies designed for various types of retirement plans. Trust services include living and testamentary trusts, investment management, custodial and escrow services, and estate administration, primarily to individuals.
Investment Management Segment
Although we are primarily focused on our lending and wealth management services, a large portion of our income is generated through investments in various types of securities, and depending on our liquid cash position, interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York), as part of our asset/liability management strategies. As of December 31, 2019, our total investment securities and interest bearing deposits with banks were $3.9 billion and $178.4 million, respectively. See the “Investment Securities Portfolio” section of the MD&A and Note 4 to the consolidated financial statements for additional information concerning our investment securities.
Changes in Loan Portfolio Composition
At December 31, 2019 and 2018, approximately 76 percent and 74 percent, respectively, of Valley’s gross loans totaling $29.7 billion and $25.0 billion, respectively, consisted of commercial real estate (including construction loans), residential mortgage, and home equity loans. The remaining 24 percent and 26 percent at December 31, 2019 and 2018, respectively, consisted of loans not collateralized by real estate. Valley has no internally planned changes that would significantly impact the current composition of our loan portfolio by loan type. However, we have continued to diversify the geographic concentrations in the New Jersey and New York City Metropolitan area within our loan portfolio primarily through our bank acquisitions in Florida since 2014, including our acquisition of USAB on January 1, 2018. Many external factors outlined in “Item 1A. Risk Factors”, the “Executive Summary” section of our MD&A, and elsewhere in this report may impact our ability to maintain the current composition of our loan portfolio. See the “Loan Portfolio” section of Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in this report for further discussion of our loan composition and concentration risks.
2019 Form 10-K | 6 |
The following table presents the loan portfolio segments by state as an approximate percentage of each applicable segment and our percentage of total loans by state at December 31, 2019.
Percentage of Loan Portfolio Segment: | ||||||||||||||
Commercial and Industrial | Commercial Real Estate | Residential | Consumer | % of Total Loans | ||||||||||
New Jersey | 27 | % | 28 | % | 41 | % | 36 | % | 30 | % | ||||
New York | 27 | 37 | 28 | 28 | 34 | |||||||||
Florida | 30 | 25 | 20 | 17 | 24 | |||||||||
Pennsylvania | 1 | 3 | 2 | 8 | 3 | |||||||||
Alabama | 1 | 2 | 1 | 2 | 2 | |||||||||
California | 2 | 1 | 4 | 1 | 1 | |||||||||
Connecticut | 1 | * | 1 | 2 | 1 | |||||||||
Other | 11 | 4 | 3 | 6 | 5 | |||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
* | Represents less than one percent of the loan portfolio segment. |
Risk Management
Financial institutions must manage a variety of business risks that can significantly affect their financial performance. Significant risks we confront are credit risks and asset/liability management risks, which include interest rate and liquidity risks. Credit risk is the risk of not collecting payments pursuant to the contractual terms of loan, lease and investment assets. Interest rate risk results from changes in interest rates which may impact the re-pricing of assets and liabilities in different amounts or at different dates. Liquidity risk is the risk that we will be unable to fund obligations to loan customers, depositors or other creditors at a reasonable cost.
Valley’s Board performs its risk oversight function primarily through several standing committees, including the Risk Committee, all of which report to the full Board. The Risk Committee assists the Board by, among other things, establishing an enterprise-wide risk management framework that is appropriate for Valley’s capital, business activities, size and risk appetite. The Risk Committee also reviews and recommends to the Board appropriate risk tolerances and limits for strategic, credit, interest rate, liquidity, compliance, operational (including information security risk), reputation and price risk (and ensures that risks are managed within those tolerances), and monitors compliance with applicable laws and regulations. With guidance from and oversight by the Risk Committee, management continually refines and enhances its risk management policies, procedures and monitoring programs to maintain risk management programs and processes.
In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”) was signed into law. On July 6, 2018, the Board of Governors of the Federal Reserve System (FRB), Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) issued a joint interagency statement regarding the impact of the EGRRCPA. As a result of this statement and the EGRRCPA, Valley and the Bank are no longer subject to Dodd-Frank Act stress testing requirements. While Valley is no longer required to publish company-run annual stress tests, it continues to internally run stress tests of its capital position that are subject to review by Valley's primary regulators. Additionally, the results of the internal stress tests are considered in combination with other risk management and monitoring practices at Valley to maintain an effective risk management program.
Cyber Security
Information security is a significant operational risk for Valley. Information security includes the risk of losses resulting from cyber-attacks. Valley frequently experiences attempted cyber security attacks against its systems. However, to date, none of these incidents have resulted in material losses, known breaches of customer data or significant disruption of services to our customers. Within the past few years, we have significantly increased the resources dedicated to cyber security. We believe that further increases are likely to be required in the future, in anticipation of increases in the sophistication and persistency of cyber-attacks. We employ personnel dedicated to overseeing the infrastructure and systems necessary to defend against cyber security incidents. Senior management is briefed on information and cyber security matters, preparedness and any incidents requiring a response.
7 | 2019 Form 10-K |
Valley’s Board through its Risk Committee has primary oversight responsibility for information security and receives regular updates and reporting from management on information and cyber security matters, including information related to any third-party assessments of Valley’s cyber program. The Risk Committee periodically approves Valley’s information security policies.
We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures and if we experienced a cyber security breach of customer data, to make required notifications to customers and disclosure to government officials. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access is a high priority for us. While we have faith in our cyber security practices and personnel, we also know we are not immune from a costly and successful attack.
Credit Risk Management and Underwriting Approach
Credit risk management. For all loan types, we adhere to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk appetite. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by a Credit Committee. A reporting system supplements the review process by providing management with frequent reports concerning loan production, loan quality, internal loan classifications, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by us to manage the portfolio’s risk across business sectors and through cyclical economic circumstances.
Our historical and current loan underwriting practice prohibits the origination of payment option adjustable residential mortgages which allow for negative interest amortization and subprime loans. Virtually all of our residential mortgage loan originations in recent years have conformed to rules requiring documentation of income, assets sufficient to close the transactions and debt to income ratios that support the borrower’s ability to repay under the loan’s proposed terms and conditions. These rules are applied to all loans originated for retention in our portfolio or for sale in the secondary market.
Loan underwriting and loan documentation. Loans are well documented in accordance with specific and detailed underwriting policies and verification procedures. General underwriting guidance is consistent across all loan types with possible variations in procedures and due diligence dictated by specific loan requests. Due diligence standards require acquisition and verification of sufficient financial information to determine a borrower’s or guarantor’s credit worthiness, capital support, capacity to repay, collateral support, and character. Credit worthiness is generally verified using personal or business credit reports from independent credit reporting agencies. Capital support is determined by acquisition of independent verifications of deposits, investments or other assets. Capacity to repay the loan is based on verifiable liquidity and earnings capacity as shown on financial statements and/or tax returns, banking activity levels, operating statements, rent rolls or independent verification of employment. Finally, collateral valuation is determined via appraisals from independent, bank-approved, certified or licensed property appraisers, valuation services, or readily available market resources.
Types of collateral. Loan collateral, when required, may consist of any one or a combination of the following asset types depending upon the loan type and intended purpose: commercial or residential real estate; general business assets including working assets such as accounts receivable, inventory, or fixed assets such as equipment or rolling stock; marketable securities or other forms of liquid assets such as bank deposits or cash surrender value of life insurance; automobiles; or other assets wherein adequate protective value can be established and/or verified by reliable outside independent appraisers. In addition to these types of collateral, we, in many cases, will obtain the personal guarantee of the borrower’s principals or an affiliated corporate entity to mitigate the risk of certain commercial and industrial loans and commercial real estate loans.
Many times, we will underwrite loans to legal entities formed for the limited purpose of the business which is being financed. Credit granted to these entities and the ultimate repayment of such loans is primarily based on the cash flow generated from the property securing the loan or the business that occupies the property. The underlying real property securing the loans is considered a secondary source of repayment, and normally such loans are also supported by guarantees of the legal entity members. Absent such guarantees or approval by our credit committee, our commercial real estate underwriting guidelines require that the loan to value ratio (at origination) should not exceed 60 percent, except for certain low risk loan categories where the loan to value ratio requirement may be higher, based on the estimated market value of the property as established by an independent licensed appraiser.
Reevaluation of collateral values. Commercial loan renewals, refinancings and other subsequent transactions that include the advancement of new funds or result in the extension of the amortization period beyond the original term, require a new or updated appraisal. Renewals, refinancings and other subsequent transactions that do not include the advancement of new funds (other than for reasonable closing costs) or, in the case of commercial loans, the extension of the amortization period beyond the original term, do not require a new appraisal unless management believes there has been a material change in market conditions
2019 Form 10-K | 8 |
or the physical aspects of the property which may negatively impact the collectability of our loan. In general, the period of time an appraisal continues to be relevant will vary depending upon the circumstances affecting the property and the marketplace. Examples of factors that could cause material changes to reported values include the passage of time, the volatility of the local market, the availability of financing, the inventory of competing properties, new improvements to, or lack of maintenance of, the subject or competing surrounding properties, changes in zoning and environmental contamination.
Certain impaired loans are reported at the fair value of the underlying collateral (less estimated selling costs) if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values for such loans are typically estimated using individual appraisals performed every 12 months (or 18 months for impaired loans no greater than $1.0 million with current loan to value ratios less than 75 percent). Between scheduled appraisals, property values are monitored within the commercial portfolio by reference to recent trends in commercial property sales as published by leading industry sources. Property values are monitored within the residential mortgage portfolio by reference to available market indicators, including real estate price indices within Valley’s primary lending areas.
All refinanced residential mortgage loans require new appraisals for loans held in our loan portfolio. However, certain residential mortgage loans may be originated for sale and sold without new appraisals when the investor (Fannie Mae or Freddie Mac) presents a refinance of an existing government sponsored enterprise loan without the benefit of a new appraisal. Additionally, all loan types are assessed for full or partial charge-off when they are between 90 and 120 days past due (or sooner when the borrowers’ obligation has been released in bankruptcy) based upon their estimated net realizable value. See Note 1 to our consolidated financial statements for additional information concerning our loan portfolio risk elements, credit risk management and our loan charge-off policy.
Loan Renewals and Modifications
In the normal course of our lending business, we may renew loans to existing customers upon maturity of the existing loan. These renewals are granted provided that the new loan meets our standard underwriting criteria for such loan type. Additionally, on a case-by-case basis, we may extend, restructure, or otherwise modify the terms of existing loans from time to time to remain competitive and retain certain profitable customers, as well as assist 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).
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 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.
Extension of Credit to Past Due Borrowers
Loans are placed on non-accrual status generally when they become 90 days past due and the full and timely collection of principal and interest becomes uncertain. Valley prohibits the advancement of additional funds on non-accrual and TDR loans, except under certain workout plans if such extension of credit is intended to mitigate losses.
Loans Originated by Third Parties
From time to time, the Bank makes purchases of commercial real estate loans and loan participations, residential mortgage loans, automobile loans, and other loan types, originated by, and sometimes serviced by, other financial institutions. The purchase decision is usually based on several factors, including current loan origination volumes, market interest rates, excess liquidity, our continuous efforts to meet the credit needs of certain borrowers under the Community Reinvestment Act (CRA), as well as other asset/liability management strategies. Valley purchased approximately $35 million and $105 million of 1-4 family loans, qualifying for CRA purposes during 2019 and 2018, respectively. All of the purchased loans are selected using Valley’s normal underwriting criteria at the time of purchase, or in some cases guaranteed by third parties. Purchased commercial and industrial, and commercial real estate participation loans are generally seasoned loans with expected shorter durations. Additionally, each purchased participation loan is stress-tested by Valley to assure its credit quality.
9 | 2019 Form 10-K |
Purchased commercial loans (including commercial and industrial and commercial real estate loans), and residential mortgage loans totaled approximately $741.7 million and $955.2 million, respectively, at December 31, 2019 representing 3.56 percent, and 21.82 percent of our total commercial and residential mortgage loans, respectively.
At December 31, 2019, the commercial real estate loans originated by third parties had loans past due 30 days or more totaling 1.51 percent as compared to 0.12 percent for our total commercial real estate portfolio, including all delinquencies. Residential mortgage loans originated by third parties had loans past due 30 days or more totaling 1.85 percent of these loans at December 31, 2019 as compared to 0.53 percent for our total residential mortgage portfolio.
Additionally, Valley has performed credit due diligence on the majority of the loans acquired in our bank acquisitions (disclosed under the "Recent Acquisitions" section above) in determining the estimated cash flows receivable from such loans. See the "Loan Portfolio" section of our MD&A of this report below for additional information.
Competition
Valley National Bank is one of the largest commercial banks headquartered in New Jersey, with its primary markets located in northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn and Queens, Long Island, Florida and Alabama. Valley ranked 17th in competitive ranking and market share based on the deposits reported by 187 FDIC-insured financial institutions in the New York, Northern New Jersey and Long Island deposit markets as of June 30, 2019. The FDIC also ranked Valley 7th, 37th, 22nd, and 16th in the states of New Jersey, New York, Florida, and Alabama, respectively, based on deposit market share as of June 30, 2019. While our FDIC rankings reflect a solid foundation in our primary markets, the market for banking and bank-related services is highly competitive and we face substantial competition in all phases of our operations. In addition to the FDIC-insured commercial banks in our principal metropolitan markets, we also compete with other providers of financial services such as savings institutions, credit unions, mutual funds, captive finance companies, mortgage companies, title agencies, asset managers, insurance companies and a growing list of other local, regional and national companies which offer various financial services. Many of these competitors may have fewer regulatory constraints, broader geographic service areas, greater capital, and, in some cases, lower cost structures.
In addition, competition has further intensified as a result of recent changes in regulation, and advances in technology and product delivery systems. We face strong competition for our borrowers, depositors, and other customers from financial technology (fintech) companies that provide innovative web-based solutions to traditional retail banking services and products. Fintech companies tend to have stronger operating efficiencies and fewer regulatory burdens than their traditional bank counterparts, including Valley. Within our markets, we also compete with some of the largest financial institutions in the world that have greater human and financial resources and are able to offer a large range of products and services at competitive rates and prices. In addition, we face an intense competition among direct banks because online banking provides customers the ability to rapidly deposit and withdraw funds and open and close accounts in favor of products and services offered by competitors. Nevertheless, we believe we can compete effectively as a result of utilizing various strategies including our long history of local customer service and convenience as part of a relationship management culture, in conjunction with the pricing of loans and deposits. Our customers are influenced by the convenience, quality of service from our knowledgeable staff, personal contacts and attention to customer needs, as well as availability of products and services and related pricing. We provide such convenience through our banking network of 238 branches, an extensive ATM network, and our telephone and on-line banking systems. Our competitive advantage also lies in our strong community presence with over 90 years of service. This longevity is especially appealing to customers seeking a strong, stable and service-oriented bank.
We continually review our pricing, products, locations, alternative delivery channels and various acquisition prospects, and periodically engage in discussions regarding possible acquisitions to maintain and enhance our competitive position.
Personnel
At December 31, 2019, Valley National Bank and its subsidiaries employed 3,174 full-time equivalent persons. Management considers relations with its employees to be satisfactory.
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Information about our Executive Officers
Name | Age at December 31, 2019 | Executive Officer Since | Office | Principal occupation during last five years other than Valley |
Ira Robbins | 45 | 2009 | Chairman of the Board, President, and Chief Executive Officer of Valley and Valley National Bank | |
Michael D. Hagedorn | 53 | 2019 | Senior Executive Vice President, Chief Financial Officer of Valley and Valley National Bank. | 2015 - 2018 Vice Chairman, UMB Financial Corporation, President and CEO, UMB Bank n.a. |
Thomas A. Iadanza | 61 | 2015 | Senior Executive Vice President of Valley and Chief Banking Officer of Valley National Bank | |
Ronald H. Janis | 71 | 2017 | Senior Executive Vice President, General Counsel, and Corporate Secretary of Valley and Valley National Bank | 1992 - 2016 Partner, SEC, Banking and Merger & Acquisitions, Day Pitney LLP |
Robert J. Bardusch | 54 | 2016 | Senior Executive Vice President of Valley and Chief Operating Officer of Valley National Bank | 2014 - 2016 Executive Vice President, Chief Information Officer, Head of Technology and Operations, MVB Financial Corp. |
Melissa F. Scofield | 60 | 2015 | Executive Vice President of Valley and Chief Risk Officer of Valley National Bank | 2015 Assistant Deputy Comptroller, National Bank Examiner and Federal Thrift Regulator, Office of the Comptroller of the Currency, New York Metro. Field Office |
Yvonne M. Surowiec | 59 | 2017 | Senior Executive Vice President of Valley and Chief Human Resources Officer of Valley National Bank | 2014 - 2016 Executive Vice President and Chief Human Resources Officer, CDK Global |
Mark Saeger | 55 | 2018 | Executive Vice President of Valley and Chief Credit Officer of Valley National Bank | 2012 - 2015 Managing Director of Credit, Santander Bank, N.A. |
Mitchell L. Crandell | 49 | 2007 | Executive Vice President, Chief Accounting Officer of Valley and Valley National Bank |
All officers serve at the pleasure of the Board of Directors.
Available Information
The SEC maintains a website at www.sec.gov which contains reports and other information filed with the SEC electronically. We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on our website at www.valley.com without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Also available on our website are Valley’s Code of Conduct and Ethics that applies to all of our employees including our executive officers and directors, Valley’s Audit Committee Charter, Valley’s Compensation and Human Resources Committee Charter, Valley’s Nominating and Corporate Governance Committee Charter, and Valley’s Corporate Governance Guidelines.
Additionally, we will provide without charge a copy of our Annual Report on Form 10-K or the Code of Conduct and Ethics to any shareholder by mail. Requests should be sent to Valley National Bancorp, Attention: Shareholder Relations, 1455 Valley Road, Wayne, NJ 07470.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on Valley or Valley National Bank. It is intended only to briefly summarize some material provisions.
11 | 2019 Form 10-K |
Bank Holding Company Regulation
Valley is a bank holding company within the meaning of the Holding Company Act. As a bank holding company, Valley is supervised by the FRB and is required to file reports with the FRB and provide such additional information as the FRB may require.
The Holding Company Act prohibits Valley, with certain exceptions, from acquiring direct or indirect ownership or control of five percent or more of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The Holding Company Act requires prior approval by the FRB of the acquisition by Valley of five percent or more of the voting stock of any other bank. Satisfactory capital ratios, Community Reinvestment Act ratings, and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy. Acquisitions through the Bank require approval of the OCC. The Holding Company Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows Valley to expand into insurance, securities and other activities that are financial in nature if Valley elects to become a financial holding company.
Regulation of Bank Subsidiary
Valley National Bank is subject to the supervision of, and to regular examination by, the OCC. Various laws and the regulations thereunder applicable to Valley and its bank subsidiary impose restrictions and requirements in many areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of loans and investments, consumer protection, employment practices, bank acquisitions and entry into new types of business. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.
Capital Requirements
The FRB and the OCC have rules establishing a comprehensive capital framework for U.S. banking organizations, referred to as the Basel III rules.
Under Basel III, the minimum capital ratios for us and Valley National Bank are as follows:
• | 4.5 percent CET1 (common equity Tier 1) to risk-weighted assets. |
• | 6.0 percent Tier 1 capital (i.e., CET1 plus Additional Tier 1) to risk-weighted assets. |
• | 8.0 percent Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets. |
• | 4.0 percent Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). |
As of January 1, 2019, Basel III required us and Valley National Bank to also maintain a 2.5 percent “capital conservation buffer” on top of the minimum risk-weighted asset ratios, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0 percent, (ii) Tier 1 capital to risk-weighted assets of at least 8.5 percent, and (iii) total capital to risk-weighted assets of at least 10.5 percent. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. Basel III also provides for a number of complex deductions from and adjustments to its various capital components.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution.
With respect to Valley National Bank, Basel III also revised the “prompt corrective action” regulations of FDICIA, by (i) introducing a CET1 ratio requirement at each capital quality level (other than critically undercapitalized); (ii) increasing the
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minimum Tier 1 capital ratio requirement for each category; and (iii) requiring a leverage ratio of 5 percent to be well-capitalized. The OCC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 8.0 percent, (iii) has a CET1 ratio of at least 6.5 percent, (iv) has a Tier 1 leverage ratio of at least 5.0 percent, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it meets the aforementioned minimum capital ratios under Basel III. An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 6.0 percent, (iii) has a CET1 ratio of less than 4.5 percent or (iv) has Tier 1 leverage ratio of less than 4.0 percent. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, (iii) has a CET1 ratio of less than 3.0 percent or (iv) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating. Similar categories apply to bank holding companies. On January 1, 2019, the capital conservation buffer was fully phased in, and as a result, the capital ratios applicable to depository institutions under Basel III now exceed the ratios to be considered well-capitalized under the prompt corrective action regulations.
Valley National Bank’s capital ratios were all above the minimum levels required for it to be considered a “well capitalized” financial institution at December 31, 2019, under the “prompt corrective action” regulations.
In December 2018, the Federal Banking Agencies issued a final rule to address regulatory capital treatment of credit loss allowances under the current expected credit loss (“CECL”) model. The CECL model was effective for Valley as of January 1, 2020. The final rule revised the Federal Banking Agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years any day-one adverse effects on regulatory capital that may result from the adoption of the CECL model.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act)
The Dodd-Frank Act was signed into law on July 21, 2010. The Dodd-Frank Act significantly changed the bank regulatory landscape and has impacted the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. Some of the effects are discussed below.
The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) and shifted most of the federal consumer protection rules applicable to banks and the enforcement power with respect to such rules to the CFPB.
Under the Durbin Amendment contained in the Dodd-Frank Act, the Federal Reserve Board (FRB) adopted rules applying to banks with more than $10 billion in assets which established a maximum permissible interchange fee equal to no more than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions. The FRB also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the FRB. The FRB also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product. Because we exceed $10 billion in assets, we are subject to the interchange fee cap.
On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”) was signed into law. On July 6, 2018, the Fed, the OCC and the FDIC issued a joint interagency statement regarding the impact of the EGRRCPA. As a result of this statement and the EGRRCPA, Valley and the Bank are no longer subject to Dodd-Frank Act stress testing requirements. However, under safety and soundness requirements we will continue to conduct stress testing of our own design.
Volcker Rule
The Volcker Rule (contained in the Dodd-Frank Act) prohibits an insured depository institution and its affiliates from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (Covered Funds). The rule also effectively prohibits most short-term trading strategies investments and prohibits the use of some hedging strategies. We identified no investments held as of December 31, 2019 that meet the definition of Covered Funds.
Incentive Compensation
The Dodd-Frank Act requires the federal bank regulators and the SEC to maintain guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including us and our Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity.
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The Federal Reserve reviews, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as us, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements.
Dividend Limitations
Valley is a legal entity separate and distinct from its subsidiaries. Valley’s revenues (on a parent company only basis) result in substantial part from dividends paid by the Bank. The Bank’s dividend payments, without prior regulatory approval, are subject to regulatory limitations. Under the National Bank Act, without consent, a national bank may declare, in any one year, dividends only in an amount aggregating not more than the sum of its net profits for such year and its retained net profits for the preceding two years. In addition, the bank regulatory agencies have the authority to prohibit us from paying dividends if the supervising agency determines that such payment would constitute an unsafe or unsound banking practice. Among other things, consultation with the FRB supervisory staff is required in advance of our declaration or payment of a dividend to our shareholders that exceeds our earnings for the trailing four-quarter period in which the dividend is being paid.
Transactions by the Bank with Related Parties
Valley National Bank’s authority to extend credit to its directors, executive officers and 10 percent shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of the National Bank Act, Sarbanes-Oxley Act and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by the Bank’s Board of Directors. Under the Sarbanes-Oxley Act, Valley and its subsidiaries, other than the Bank under the authority of Regulation O, may not extend or arrange for any personal loans to its directors and executive officers.
Section 22 of the Federal Reserve Act prohibits the Bank from paying to a director, officer, attorney or employee a rate on deposits that is greater than the rate paid to other depositors on similar deposits with the Bank. Regulation W governs and limits transactions between the Bank and Valley.
Community Reinvestment
Under the Community Reinvestment Act (CRA), as implemented by OCC regulations, a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OCC, in connection with its examination of a national bank, to assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. Valley National Bank received an overall “outstanding” CRA rating in its most recent examination.
A bank which does not have a CRA program that is deemed satisfactory or better by its regulator may be prevented from making acquisitions.
USA PATRIOT Act
As part of the USA PATRIOT Act, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Anti Money Laundering Act”). The Anti Money Laundering Act authorizes the Secretary of the U.S. Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Anti Money Laundering Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country.
Regulations implementing the due diligence requirements require minimum standards to verify customer identity and maintain accurate records, encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibit the anonymous use of “concentration accounts,” and require all covered financial institutions to have in place an anti-money laundering compliance program.
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The OCC, along with other banking agencies, have strictly enforced various anti-money laundering and suspicious activity reporting requirements using formal and informal enforcement tools to cause banks to comply with these provisions.
A bank which is issued a formal or informal enforcement requirement with respect to its Anti Money Laundering program will be prevented from making acquisitions.
Office of Foreign Assets Control Regulation (OFAC)
The U.S. Treasury Department’s OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. We and our Bank are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Consumer Financial Protection Bureau Supervision
As a financial institution with more than $10 billion in assets, Valley National Bank is supervised by the CFPB for consumer protection purposes. The CFPB’s regulation of Valley National Bank is focused on risks to consumers and compliance with the federal consumer financial laws and includes regular examinations of the Bank. The CFPB, along with the Department of Justice and bank regulatory authorities also seek to enforce discriminatory lending laws. In such actions, the CFPB and others have used a disparate impact analysis, which measures discriminatory results without regard to intent. Consequently, unintentional actions by Valley could have a material adverse impact on our lending and results of operations if the actions are found to be discriminatory by our regulators.
Valley National Bank is subject to federal consumer protection statutes and regulations promulgated under those laws, including, but not limited to the following:
• | Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers; |
• | Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide certain information about home mortgage and refinanced loans; |
• | Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit; |
• | Fair Credit Reporting Act and Regulation V, governing the provision of consumer information to credit reporting agencies and the use of consumer information; and |
• | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies. |
Valley National Bank’s deposit operations are also subject to the following federal statutes and regulations, among others:
• | The Truth in Savings Act and Regulation DD, which requires disclosure of deposit terms to consumers; |
• | Regulation CC, which relates to the availability of deposit funds to consumers; |
• | The Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and |
• | Electronic Funds Transfer Act and Regulation E, governing automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. |
The CFPB examines Valley National Bank’s compliance with such laws and the regulations under them.
Insurance of Deposit Accounts
The Bank’s deposits are insured up to applicable limits by the FDIC. Under the FDIC’s risk-based system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors with less risky institutions paying lower assessments on their deposits.
As required by the Dodd-Frank Act, the FDIC has adopted rules that revise the assessment base to consist of average consolidated total assets during the assessment period minus the average tangible equity during the assessment period. In addition, the rules eliminated the adjustment for secured borrowings, including Federal Home Loan Bank (FHLB) advances, and made certain other changes to the impact of unsecured borrowings and brokered deposits on an institution’s deposit insurance assessment.
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The rules also revised the assessment rate schedule to provide initial base assessment rates ranging from 5 to 35 basis points and total base assessment rates ranging from 2.5 to 45 basis points after adjustment. The Dodd-Frank Act made permanent a $250 thousand limit for federal deposit insurance.
In 2016, the FDIC added a surcharge to the insurance assessments for banks with over $10 billion in assets, which became effective in July 2016 and continued until the Bank's December 2018 assessment invoice, which covered the assessment period from July 1, 2018 through September 30, 2018. After that invoice, the FDIC assessment no longer included a quarterly surcharge.
London Interbank Offered Rate
Central banks around the world, including the Fed, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for the London Interbank Offered Rate (“LIBOR”) based on observable market transactions because of the probable phase out of LIBOR. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next year. This change may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in our financial assets and liabilities. A transition away from LIBOR also requires extensive changes to the contracts that govern these LIBOR-based products, as well as our systems and processes. A number of the Bank's commercial loans, certain residential loans, derivative positions, trust preferred securities issued to our capital trusts, and the reset provisions for our preferred stock issuances are based upon LIBOR. The Bank has established a working group to identify and prepare replacement provisions.
Prohibitions Against Tying Arrangements
Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Item 1A. | Risk Factors |
An investment in our securities is subject to risks inherent to our business. The material risks and uncertainties that management believes may affect Valley are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing Valley. Additional risks and uncertainties that management is not aware of or that management currently believes are immaterial may also impair Valley’s business operations. The value or market price of our securities could decline due to any of these identified or other risks, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.
We may fail to realize all of the anticipated benefits of the Oritani merger.
The success of our merger with Oritani (which was completed in the fourth quarter 2019) will depend, in part, on Valley’s ability to realize anticipated cost savings and to combine the businesses of Valley and Oritani in a manner that permits growth opportunities to be realized and does not materially disrupt the existing customer relationships of Oritani nor result in decreased revenues due to any loss of customers. However, to realize these anticipated benefits, the businesses of Valley and Oritani must be successfully combined. If the combined company is not able to achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. The anticipated cost savings from the merger are largely expected to derive from the closure of certain Valley or Oritani branches and from the absorption by Valley of many of Oritani’s back-office administrative functions and the conversion of Oritani’s operating platform to Valley’s systems. Valley completed the conversion of Oritani's operating platform and closed 6 of the 26 acquired branch offices during February 2020. However, some normal post-systems integration matters involving back-office and other functions, as well as further planned branch consolidation efforts, were still underway at the filing date of this report.
Another expected benefit from the merger is an expected increase in the revenues of the combined company from anticipated sales of Valley’s wider variety of financial products, and from increased lending out of Valley’s substantially larger capital base, to Oritani’s existing customers and to new customers in Oritani’s market area who may be attracted by the combined company’s enhanced offerings. An inability to successfully market Valley’s products to Oritani’s customer base could cause the earnings of the combined company to be less than anticipated.
Changes in interest rates could reduce our net interest income and earnings.
Valley’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and investment securities, and interest expense paid on
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interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond Valley’s control, including general economic conditions, competition, and policies of various governmental and regulatory agencies and, in particular, the policies of the FRB. Changes in interest rates driven by such factors could influence not only the interest Valley receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) Valley’s ability to originate loans and obtain deposits, (ii) the fair value of Valley’s financial assets, including the held to maturity and available for sale investment securities portfolios, and (iii) the average duration of Valley’s interest-earning assets and liabilities. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk). Any substantial or unexpected change in market interest rates could have a material adverse effect on Valley’s financial condition and results of operations. See additional information in the “Net Interest Income” and “Interest Rate Sensitivity” sections of our MD&A.
Our financial results and condition may be adversely impacted by changing economic conditions.
Financial institutions can be affected by changing conditions in the real estate and financial markets. Weak economic conditions could result in financial stress on our borrowers that would adversely affect our financial condition and results of operations. Volatility in the housing markets, real estate values and unemployment levels could result in significant write-downs of asset values by financial institutions. The majority of Valley’s lending is in northern and central New Jersey, the New York City metropolitan area, Florida and Alabama. As a result of this geographic concentration, a significant broad-based deterioration in economic conditions in these areas could have a material adverse impact on the quality of Valley’s loan portfolio, results of operations and future growth potential. Adverse economic conditions in our market areas can reduce our rate of growth, affect our customers’ ability to repay loans and adversely impact our financial condition and earnings. General economic conditions, including inflation, unemployment and money supply fluctuations, also may adversely affect our profitability.
Our business, financial condition and results of operations could be adversely affected by the outbreak of pandemic disease, acts of terrorism, and other external events.
The emergence of widespread health emergencies or pandemics, such as the potential spread of the coronavirus, could lead to regional quarantines, business shutdowns, labor shortages, disruptions to supply chains, and overall economic instability. Additionally, New York City and New Jersey remain central targets for potential acts of terrorism against the United States. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although we have established and regularly test disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Our investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our results of operations.
We invest in certain tax-advantaged investments that support qualified affordable housing projects, community development and, prior to 2019, renewable energy resources. Our investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. Third parties perform diligence on these investments for us on which we rely both at inception and on an on-going basis. We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, may fail to meet certain government compliance requirements and may not be able to be realized. The possible inability to realize these tax credits and other tax benefits may have a negative impact on our financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside our control, including changes in the applicable tax code and the ability of the projects to be completed.
We previously invested in mobile solar generators sold and leased back by DC Solar and its affiliates (DC Solar). DC Solar had its assets frozen in December 2018 by the U.S. Department of Justice. DC Solar and related entities are in Chapter 7 bankruptcy. A group of investors who purchased mobile solar generators from, and leased them back to, DC Solar, including us received tax credits for making these renewable resource investments. During the fourth quarter 2019, several of the co-conspirators pleaded guilty to fraud in the on-going federal investigation. Based upon this new information, Valley deemed that its tax positions related to the DC Solar funds did not meet the more likely than not recognition threshold in Valley's tax reserve assessment at December 31, 2019. As a result, our net income for the year ended December 31, 2019 included an increase to our provision for income taxes of $31.1 million, reflecting the reserve for uncertain tax liability positions related to tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. The principals pled guilty to fraud in early 2020.
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While we believe that Valley was fully reserved for the tax positions related to DC Solar at December 31, 2019, we continue to evaluate all our existing tax positions each quarter under U.S. GAAP. If we are required to recognize an increase to our uncertain tax position liability in our 2020 consolidated financial statements, the resulting charge to income tax expense may have an adverse impact on our results of operations and financial condition.
The replacement of the LIBOR benchmark interest rate may have an impact on Valley’s business, financial condition or results of operations.
On July 27, 2017, the Financial Conduct Authority (FCA), a regulator of financial services firms in the United Kingdom, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the FRB. Other financial services regulators and industry groups are evaluating the phase-out of LIBOR and the development of alternate reference rate indices or reference rates. Many of Valley’s assets and liabilities are indexed to LIBOR. We are evaluating the impact of the possible replacement of the LIBOR benchmark interest rate, and whether the alternative rates the FRB expects to publish will become market benchmarks in place of LIBOR, or what the impact of such a transition will have on Valley’s business, financial condition, or results of operations. The proposed Secured Overnight Financing Rate (SOFR) is a “near risk-free" rate whereas LIBOR is credit related.
The future impact of changes to the Internal Revenue Code is uncertain and may adversely affect our business.
The U.S. Congress passed significant reform of the Internal Revenue Code, known as the Tax Cuts and Jobs Act of 2017 (Tax Act) at the end of 2017. While the decline in the federal corporate tax rate from 35 percent to 21 percent lowered Valley’s income tax expense as a percentage of its taxable income in 2019 and 2018, other provisions of the Tax Act negatively impacted Valley's consolidated financial statements and it may adversely affect Valley in the future. For example, under the new provisions of the Tax Act, the $2.5 million and $3.3 million of the Bank's total FDIC insurance assessment for the years ended December 31, 2019 and 2018, respectively, was non-tax deductible based upon the asset size of the Bank.
The Tax Act also imposes limitations for individuals on the deductibility of interest and property tax expenses which may adversely impact the property values of real estate used to secure loans and create an additional tax burden for many borrowers, particularly in high tax jurisdictions such as New Jersey and New York where Valley operates. These and other federal tax changes could significantly impact the level of lending activity and the financial health of our customers. The negative impact to customers could potentially result in, among other things, an inability to repay loans or maintain deposits at Valley in states where Valley operates, especially New York and New Jersey. Any negative financial impact to our customers resulting from tax reform could adversely impact our financial condition and earnings. The future impact of the Tax Act or subsequent amendments to the tax rates and laws on our business and our customers may be adverse.
Claims and litigation could result in significant expenses, losses and damage to our reputation.
From time to time as part of Valley’s normal course of business, customers, bankruptcy trustees, former customers, contractual counterparties, third parties and current and former employees make claims and take legal action against Valley based on actions or inactions of Valley. If such claims and legal actions are not resolved in a manner favorable to Valley, they may result in financial liability and/or adversely affect the market perception of Valley and its products and services. This may also impact customer demand for Valley’s products and services. Any financial liability could have a material adverse effect on Valley’s financial condition and results of operations. Any reputation damage could have a material adverse effect on Valley’s business.
Cyber-attacks could compromise our information or result in the data of our customers being improperly divulged, which could expose us to liability, losses and escalating operating costs.
Valley regularly collects, processes, transmits and stores confidential information regarding its customers, employees and others for whom it services loans. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on Valley’s behalf.
Information security risks have increased because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. Many financial institutions and companies engaged in data processing have reported significant breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, denial-of-service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Although Valley frequently experiences attempted cybersecurity attacks against its systems, to date, none of these incidents have resulted in material losses, known breaches of customer data or significant disruption of services to Valley’s customers. However, there can be no assurance that Valley will not incur such issues in the future, exposing us to significant on-going operational costs and reputational harm.
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Additionally, risk exposure to cyber security matters will remain elevated or increase in the future due to, among other things, the increasing size and prominence of Valley in the financial services industry, our expansion of Internet and mobile banking tools and products based on customer needs, and the system and customer account conversions associated with the integration of merger targets.
In managing our cyber risks, when entering a new vendor relationship, we review and gage the cyber security risk of such third-party service providers. A successful attack on one of our third-party service providers could adversely affect our business and result in the disclosure or misuse of our confidential information. While we believe we are taking reasonable, risk-based precautions to manage the risk of cyber-attacks against third-party service providers, there can be no assurance that our third-party service providers will not suffer a cyber-attack that exposes us to significant operational costs and damages.
While we believe we have risk based technology reasonably capable of discovering cyber-attacks, and personnel who are qualified to monitor our technology and systems to detect cyber-attacks, we can offer no assurance that we will be able to identify and prevent cyber-attacks when they occur. Significant damage may occur if Valley fails to identify, or there is a delay in identifying, a cyber-attack on our systems, or those of our third-party service providers.
A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could adversely affect our asset quality and profitability for those loans secured by real property and increase the number of defaults and the level of losses within our loan portfolio.
A significant portion of our loan portfolio is secured by real estate. As of December 31, 2019, approximately 76 percent of our total loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and could deteriorate in value during the time the credit is extended. A downturn in the real estate market in our primary market areas could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and shareholders’ equity could be adversely affected. The declines in home or commercial real estate prices in the New Jersey, New York and Florida markets we primarily serve, along with the reduced availability of mortgage credit, also may result in increases in delinquencies and losses in our loan portfolios. Unexpected decreases in home or commercial real estate prices coupled with slow economic growth and elevated levels of unemployment could drive losses beyond those which are provided for in our allowance for loan losses. In that event, our earnings could be adversely affected.
The secondary market for residential mortgage loans, for the most part, is limited to conforming Fannie Mae and Freddie Mac loans. The effects of this limited mortgage market combined with another correction in residential real estate market prices and reduced levels of home sales, could result in price reductions in home values, adversely affecting the value of collateral securing mortgage loans held, mortgage loan originations and gains on sale of mortgage loans. Declines in real estate values and home sales volumes, and financial stress on borrowers as a result of job losses or other factors, could have further adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods, which could adversely affect our financial condition or results of operations. For additional risks related to our sales of residential mortgages in the secondary market, see the “We may incur future losses in connection with repurchases and indemnification payments related to mortgages that we have sold into the secondary market” risk factor below.
Net gains on sales of residential mortgage loans are a significant component of our non-interest income and could fluctuate in future periods.
Net gains on sales of residential mortgage loans represented approximately 9 percent and 15 percent of our non-interest income for the years ended December 31, 2019 and 2018, respectively. Our ability or decision to sell a portion of our mortgage loan production in the secondary market is dependent upon, amongst other factors, the levels of market interest rates, consumer demand marketable loans, our sales and pricing strategies, the economy and our need to maintain the appropriate level of interest rate risk on our balance sheet. A change in one or more of these or other factors could significantly impact our ability to sell mortgage loans in the future and adversely impact the level of our non-interest income and financial results.
Our adoption of the CECL model for determining our allowance for credit losses expected to increase the level of our allowance and could add significant volatility to our provision for credit losses and earnings
Effective January 1, 2020, Valley adopted the FASB's new accounting guidance on the impairment of financial instruments, commonly known as the current expected credit loss (CECL) model. The CECL model requires the allowance for credit losses for certain financial assets, including loans, held to maturity securities and certain off-balance sheet credit exposures, to be calculated based on current expected credit losses over the lives of the assets rather than incurred losses as of a point in time.
The adoption of the CECL model is anticipated to increase our allowance for credit losses, which may have a material negative impact on our financial condition and results of operations. Actual allowance for credit losses may be materially different than
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the amounts reported due to the inherent uncertainty in the estimation process, including future loss estimates based upon reasonable and supportable economic forecasts. Also, future amount could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. See Note 1 to the consolidated financial statements for additional information regarding the impact of the adoption of the CECL model.
Higher charge-offs and weak credit conditions could require us to increase our allowance for credit losses through a provision charge to earnings.
The process for determining the amount of the allowance for credit losses is critical to our financial results and conditions. It requires difficult, subjective and complex judgments about the future, including the impact of national and regional economic conditions on the ability of our borrowers to repay their loans. If our judgment proves to be incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan and investment portfolios. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. Additionally, bank regulators review the classification of our loans in their examination of us and we may be required in the future to change the internal classification on certain loans, which may require us to increase our provision for credit losses or loan charge-offs. If actual net charge-offs were to exceed Valley’s allowance, its earnings would be negatively impacted by additional provisions for credit losses. Any increase in our allowance for credit losses or loan charge-offs as required by the OCC or otherwise could have an adverse effect on our results of operations or financial condition.
An increase in our non-performing assets may reduce our interest income and increase our net loan charge-offs, provision for loan losses, and operating expenses.
Our non-accrual loans increased from 0.22 percent of total loans at December 31, 2016 to 0.31 percent of total loans at December 31, 2019 largely due to a significant increase in non-accrual taxi medallion loans within our commercial and industrial loan portfolio since 2016. While most of the taxi medallion loans are currently performing to their contractual terms, continued negative trends in the market valuations of the underlying taxi medallion collateral caused by ride-sharing services could impact the future performance of such loans, the level of our loan charge-offs and the provision for credit losses. Additionally, a downturn in economic or real estate market conditions could result in increased charge-offs to our allowance for credit losses and lost interest income relating to non-performing loans.
Non-performing assets (including non-accrual loans, other real estate owned, and other repossessed assets) totaled $104.4 million at December 31, 2019. These non-performing assets can adversely affect our net income mainly through decreased interest income and increased operating expenses incurred to maintain such assets or loss charges related to subsequent declines in the estimated fair value of foreclosed assets. Adverse changes in the value of our non-performing assets, or the underlying collateral, or in the borrowers’ performance or financial conditions could adversely affect our business, results of operations and financial condition. There can be no assurance that we will not experience increases in non-performing loans in the future, or that our non-performing assets will not result in lower financial returns in the future.
The loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under our branch transformation strategy, may adversely impact our net interest income and net income.
Checking and savings, NOW, and money market deposit account balances and other forms of customer deposits can decrease when customers perceive alternative investments, such as the stock market or money market or fixed income mutual funds, as providing a better risk/return tradeoff. Additionally, our customers largely bank with us because of our local customer service and convenience. For a certain percentage customers, this convenience could be negatively impacted by recent branch consolidation activity undergone as part of our branch transformation strategy. If customers move money out of bank deposits and into other investments, Valley could lose a low cost source of funds, increasing its funding costs and reducing Valley’s net interest income and net income.
We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.
We are required to comply with anti-money laundering, anti-terrorism and other laws and regulations in the United States. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems and sophisticated monitoring and compliance personnel and have become the subject of enhanced government supervision.
While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, those policies and procedures may not completely eliminate instances in which we may be used by customers to engage in money laundering and other illegal or improper activities. To the extent we fail to fully comply with
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applicable laws and regulations, the OCC, along with other banking agencies, have the authority to impose fines and other penalties and sanctions on us. In addition, our business and reputation could suffer if customers use our banking network for money laundering or illegal or improper purposes.
Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business, results of operations and financial condition.
Management periodically reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
We could incur future goodwill impairment.
If our estimates of the fair value of our goodwill change as a result of changes in our business or other factors, we may determine a goodwill impairment charge is necessary. Estimates of the fair value of goodwill are determined using several factors and assumptions, including, but not limited to, industry pricing multiples and estimated cash flows. Based upon Valley’s 2019 goodwill impairment testing, the fair values of its four reporting units, wealth management, consumer lending, commercial lending, and investment management, were in excess of their carrying values. However, due to lower yields on our investment portfolio and reinvestment of normal repayments from investment securities into new loan originations, our investment management segment experienced downward pressure on its fair value. While not expected at this time, we may be required to record a charge to earnings should there be a deficiency in our estimated fair value of the investment management and other reporting units during our subsequent impairment tests. No assurance can be given that we will not record an impairment loss on goodwill in the future and any such impairment loss could have a material adverse effect on our results of operations and financial condition. At December 31, 2019, our goodwill totaled $1.4 billion. See Note 9 to the consolidated financial statements for additional information.
We may reduce or eliminate the cash dividend on our common stock, which could adversely affect the market price of our common stock.
Holders of our common stock are only entitled to receive such cash dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock cash dividend in the future depending upon our results of operations, financial condition or other metrics. This could adversely affect the market price of our common stock. Additionally, as a bank holding company, our ability to declare and pay dividends is dependent on federal regulatory policies and regulations including the supervisory policies and guidelines of the OCC and the FRB regarding capital adequacy and dividends. Among other things, consultation of the FRB supervisory staff is required in advance of our declaration or payment of a dividend that exceeds our earnings for a four-quarter period in which the dividend is being paid.
If our subsidiaries are unable to pay dividends or make distributions to us, we may be unable to make dividend payments to our preferred and common shareholders or interest payments on our long-term borrowings and junior subordinated debentures issued to capital trusts.
We are a separate and distinct legal entity from our banking and non-banking subsidiaries and depend on dividends, distributions, and other payments from the Bank and its non-banking subsidiaries to fund cash dividend payments on our preferred and common stock and to fund most payments on our other obligations. Regulations relating to capital requirements affect the ability of the Bank to pay dividends and other distributions to us and to make loans to us. Additionally, if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend payments to our preferred and common shareholders or interest payments on our long-term borrowings and junior subordinated debentures issued to capital trusts. Furthermore, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
Extensive regulation and supervision have a negative impact on our ability to compete in a cost-effective manner and may subject us to material compliance costs and penalties.
Valley, primarily through its principal subsidiary and certain non-bank subsidiaries, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole. Many laws and regulations affect Valley’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. They encourage Valley to ensure a satisfactory level of lending in defined areas and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. Congress, state legislatures, and federal and state regulatory agencies continually review banking laws, regulations and policies
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for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect Valley in substantial and unpredictable ways. Such changes could subject Valley to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on Valley’s business, financial condition and results of operations. Valley’s compliance with certain of these laws will be considered by banking regulators when reviewing bank merger and bank holding company acquisitions.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines. Private parties also may challenge an institution’s performance under fair lending laws in litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
Future acquisitions may dilute shareholder value, especially tangible book value per share.
We regularly evaluate opportunities to acquire other financial institutions. As a result, merger and acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value per common share may occur in connection with any future acquisitions.
Future offerings of common stock, preferred stock, debt or other securities may adversely affect the market price of our stock and dilute the holdings of existing shareholders.
In the future, we may increase our capital resources or, if our or the Bank’s actual or projected capital ratios fall below or near the current (Basel III) regulatory required minimums, we or the Bank could be forced to raise additional capital by making additional offerings of common stock, preferred stock or debt securities. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Upon liquidation, holders of our debt securities and shares of preferred stock, and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. In August 2017, Valley issued 4.0 million shares of non-cumulative perpetual stock with a dividend at issuance of 5.50 percent and a liquidation preference of $25 per share. See Note 19 to the consolidated financial statements for more details on our common and preferred stock.
Changes in accounting policies or accounting standards could cause us to change the manner in which we report our financial results and condition in adverse ways and could subject us to additional costs and expenses.
Valley’s accounting policies are fundamental to understanding its financial results and condition. Some of these policies require the use of estimates and assumptions that may affect the value of Valley’s assets or liabilities and financial results. Valley identified its accounting policies regarding the allowance for loan losses, purchased credit-impaired loans, goodwill and other intangible assets, and income taxes to be critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. Under each of these policies, it is possible that materially different amounts would be reported under different conditions, using different assumptions, or as new information becomes available.
From time to time, the FASB and the SEC change their guidance governing the form and content of Valley’s external financial statements. In addition, accounting standard setters and those who interpret U.S. generally accepted accounting principles (U.S. GAAP), such as the FASB, SEC, banking regulators and Valley’s independent registered public accounting firm, may change or even reverse their previous interpretations or positions on how these standards should be applied. Such changes are expected to continue and may accelerate dependent upon the FASB and International Accounting Standards Board commitments to achieving convergence between U.S. GAAP and International Financial Reporting Standards. Changes in U.S. GAAP and changes in current interpretations are beyond Valley’s control, can be hard to predict and could materially impact how Valley reports its financial results and condition. In certain cases, Valley could be required to apply new or revised guidance retroactively or apply existing guidance differently (also retroactively) which may result in Valley restating prior period financial statements for material amounts. Additionally, significant changes to U.S. GAAP may require costly technology changes, additional training and personnel, and other expenses that will negatively impact our results of operations.
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We may be unable to adequately manage our liquidity risk, which could affect our ability to meet our obligations as they become due, capitalize on growth opportunities, or pay regular dividends on our common stock.
Liquidity risk is the potential that Valley will be unable to meet its obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends on our common stock because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances.
Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and retention; principal and interest payments on loans; principal and interest payments on investment securities; sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources, such as the FHLB and certain brokered deposit channels established by the Bank.
Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could have a detrimental impact to our access to liquidity sources include a decrease in the level of our business activity due to persistent weakness, or downturn, in the economy or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not necessarily specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.
Our market share and income may be adversely affected by our inability to successfully compete against larger and more diverse financial service providers and digital fintech start-up firms.
Valley faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources than Valley to deal with the potential negative changes in the financial markets and regulatory landscape. Valley competes with other providers of financial services such as commercial and savings banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, title agencies, asset managers, insurance companies, and a large list of other local, regional and national institutions which offer financial services. Additionally, the financial services industry is facing a wave of digital disruption from fintech companies that provide innovative web-based solutions to traditional retail banking services and products. Fintech companies tend to have stronger operating efficiencies and fewer regulatory burdens than their traditional bank counterparts, including Valley.
Mergers and acquisitions of financial institutions within New Jersey, the New York Metropolitan area and Florida may also occur given the current difficult banking environment and add more competitive pressure to a substantial portion of our marketplace. Our profitability depends upon our continued ability to successfully compete in our market area. If Valley is unable to compete effectively, it may lose market share and its income generated from loans, deposits, and other financial products may decline.
Our ability to make opportunistic acquisitions is subject to significant risks, including the risk that regulators will not provide the requisite approvals.
We may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions, or related businesses from time to time that we expect may further our business strategy. Any possible acquisition will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration, diversion of management's attention from other business activities, changes in relationships with customers, and the potential loss of key employees. In addition, we may not be successful in identifying acquisition candidates, integrating acquired institutions, or preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions can be highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing or will even pursue future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into operations. Ability to grow may be limited if we choose not to pursue or are unable to successfully make acquisitions in the future.
Failure to successfully implement our growth strategies could cause us to incur substantial costs and expenses which may not be recouped and adversely affect our future profitability.
From time to time, Valley may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. Valley may invest significant time and resources to develop and market new lines of business and/or products and services. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting customer preferences, may also impact the successful implementation of a new line of
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business or a new product or service. Additionally, any new line of business and/or new product or service could have a significant impact on the effectiveness of Valley’s system of internal controls. Failure to successfully manage these risks could have a material adverse effect on Valley’s business, results of operations and financial condition.
We may not keep pace with technological change within the financial services industry, negatively affecting our ability to remain competitive and profitable.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Valley’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in Valley’s operations. Many of Valley’s competitors have substantially greater resources to invest in technological improvements. Valley may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on Valley’s business and, in turn, Valley’s financial condition and results of operations.
We rely on our systems, employees and certain service providers, and if our system fails, our operations could be disrupted.
We face the risk that the design of our controls and procedures, including those to mitigate the risk of fraud by employees or outsiders, may prove to be inadequate or are circumvented, thereby causing delays in detection of errors or inaccuracies in data and information. We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
We may also be subject to disruptions of our systems arising from events that are wholly or partially beyond our control (including, for example, electrical or telecommunications outages), which may give rise to losses in service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as us) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate. We maintain a system of comprehensive policies and a control framework designed to monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure or internal controls, (ii) changes in the vendor’s financial condition, (iii) changes in the vendor’s support for existing products and services and (iv) changes in the vendor’s strategic focus. While we believe these policies and procedures help to mitigate risk, the failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements could be disruptive to our operations, which could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we engage can be intense and we may not be able to hire people or to retain them. The unexpected loss of services of one or more of our key personnel, including, but not limited to, the executive officers disclosed in Item 1 of this Annual Report, could have a material adverse impact on our business because we would lose the employees’ skills, knowledge of the market, and years of industry experience and may have difficulty promptly finding qualified replacement personnel.
Climate change and severe weather could significantly impact our ability to conduct our business.
A significant portion of our primary markets is located near coastal waters which could generate naturally occurring severe weather, or in response to climate change, that could have a significant impact on our ability to conduct business. Many areas in New Jersey, New York, Florida and Alabama in which our branches operate are subject to severe flooding from time to time and significant weather related disruptions may become common events in the future. Heavy storms and hurricanes can also cause severe property damage and result in business closures, negatively impacting both the financial health of retail and commercial customers and our ability to operate our business. The risk of significant disruption and potential losses from future storm activity exists in all of our primary markets.
We are subject to environmental liability risk associated with lending activities which could have a material adverse effect on our financial condition and results of operations.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could
2019 Form 10-K | 24 |
be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review prior to originating certain commercial real estate loans, as well as before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
We may incur future losses in connection with repurchases and indemnification payments related to mortgages that we have sold into the secondary market.
We engage in the origination of residential mortgages for sale into the secondary market, while typically retaining the loan servicing. In connection with such sales, we make representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. The aggregate principal balances of residential mortgage loans serviced by the Bank for others approximated $3.4 billion and $3.2 billion at December 31, 2019 and 2018, respectively. Over the past several years, we have experienced a nominal amount of repurchase requests, and only a few of which have actually resulted in repurchases by Valley (only four and five loan repurchases in 2019 and 2018, respectively). None of the loan repurchases resulted in material loss. As of December 31, 2019, no reserves pertaining to loans sold were established on our financial statements. While we currently believe our repurchase risk remains low based upon our careful loan underwriting and documentation standards, it is possible that requests to repurchase loans could occur in the future and such requests may have a negative financial impact on us.
Item 1B. | Unresolved Staff Comments |
None.
25 | 2019 Form 10-K |
Item 2. | Properties |
We conduct our business at 238 retail banking centers locations in northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn and Queens, Long Island, Florida and Alabama. We own 106 of our banking center facilities and several non-branch operating facilities. The other properties are leased for various terms.
The following table summarizes our retail banking centers in each state:
Number of banking centers | % of Total | ||||
New Jersey | |||||
Northern | 117 | 49.2 | |||
Central | 25 | 10.5 | |||
Total New Jersey | 142 | 59.7 | |||
New York | |||||
Manhattan | 12 | 5.0 | |||
Long Island | 12 | 5.0 | |||
Brooklyn | 9 | 3.8 | |||
Queens | 5 | 2.2 | |||
Total New York | 38 | 16.0 | |||
Florida | 42 | 17.6 | |||
Alabama | 16 | 6.7 | |||
Total | 238 | 100.0 | % |
Our principal executive office is located at One Penn Plaza in Manhattan, New York. Many of our bank operations are located in Wayne, New Jersey, where we own five office buildings. Our New York City corporate headquarters are primarily used as a central hub for New York based lending activities of senior executives and other commercial lenders. We also lease six non-bank office facilities in Florida, used for operational, executive and lending purposes.
On December 1, 2019, the acquisition of Oritani added 26 banking centers mostly located in northern New Jersey. In February 2020, we closed and consolidated 6 of the 26 acquired branches into nearby legacy Valley branches. See Item 7 of Part II of this Annual Report "Executive Summary" section for details on other planned changes to our branch network in 2020.
The total net book value of our premises and equipment (including land, buildings, leasehold improvements and furniture and equipment) was $334.5 million at December 31, 2019. We believe that all of our properties and equipment are well maintained, in good operating condition and adequate for all of our present and anticipated needs.
Item 3. | Legal Proceedings |
In the normal course of business, we may be a party to various outstanding legal proceedings and claims. In the opinion of management, our financial condition, results of operations, and liquidity should not be materially affected by the outcome of such legal proceedings and claims.
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the NASDAQ Global Select Market under the ticker symbol “VLY”. There were 7,115 shareholders of record as of December 31, 2019.
2019 Form 10-K | 26 |
Performance Graph
The following graph compares the cumulative total return on a hypothetical $100 investment made on December 31, 2014 in: (a) Valley’s common stock; (b) the KBW Regional Banking Index (KRX) and (c) the Standard and Poor’s (S&P) 500 Stock Index. The graph is calculated assuming that all dividends are reinvested during the relevant periods. The graph shows how a $100 investment would increase or decrease in value over time based on dividends (stock or cash) and increases or decreases in the market price of the stock.
![chart-8aecb52ba9e65c61a3a.jpg](https://www.sec.gov/Archives/edgar/data/0000714310/000071431020000066/chart-8aecb52ba9e65c61a3a.jpg)
12/14 | 12/15 | 12/16 | 12/17 | 12/18 | 12/19 | |||||||||||||
Valley | $ | 100.00 | $ | 106.12 | $ | 131.11 | $ | 131.22 | $ | 107.87 | $ | 144.83 | ||||||
KBW Regional Banking Index (KRX) | 100.00 | 105.99 | 147.46 | 150.13 | 123.87 | 153.43 | ||||||||||||
S&P 500 | 100.00 | 101.37 | 113.49 | 138.26 | 132.19 | 173.80 |
Issuer Repurchase of Equity Securities
The following table presents the purchases of equity securities by the issuer and affiliated purchasers during the three months ended December 31, 2019:
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) | ||||||||
October 1, 2019 to October 31, 2019 | 4,510 | $ | 10.76 | — | 4,112,465 | |||||||
November 1, 2019 to November 30, 2019 | 9,440 | 11.99 | — | 4,112,465 | ||||||||
December 1, 2019 to December 31, 2019 | 12,312 | 11.55 | — | 4,112,465 | ||||||||
Total | 26,262 | — |
(1) | Represents repurchases made in connection with the vesting of employee 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 December 31, 2019. |
27 | 2019 Form 10-K |
Item 6. | Selected Financial Data |
The following selected financial data should be read in conjunction with Valley’s consolidated financial statements and the accompanying notes thereto presented herein in response to Item 8 of this Annual Report.
As of or for the Years Ended December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
($ in thousands, except for share data) | |||||||||||||||||||
Summary of Operations: | |||||||||||||||||||
Interest income—tax equivalent basis (1) | $ | 1,325,631 | $ | 1,164,967 | $ | 842,457 | $ | 770,270 | $ | 705,879 | |||||||||
Interest expense | 422,952 | 302,045 | 174,107 | 148,774 | 156,754 | ||||||||||||||
Net interest income—tax equivalent basis (1) | 902,679 | 862,922 | 668,350 | 621,496 | 549,125 | ||||||||||||||
Less: tax equivalent adjustment | 4,631 | 5,719 | 8,303 | 8,382 | 7,866 | ||||||||||||||
Net interest income | 898,048 | 857,203 | 660,047 | 613,114 | 541,259 | ||||||||||||||
Provision for credit losses | 24,218 | 32,501 | 9,942 | 11,869 | 8,101 | ||||||||||||||
Net interest income after provisions for credit losses | 873,830 | 824,702 | 650,105 | 601,245 | 533,158 | ||||||||||||||
Non-interest income: | |||||||||||||||||||
(Losses) gains on securities transactions, net | (150 | ) | (2,342 | ) | (20 | ) | 777 | 2,487 | |||||||||||
Gains on sales of loans, net | 18,914 | 20,515 | 20,814 | 22,030 | 4,245 | ||||||||||||||
Gains (losses) on sales of assets, net | 78,333 | (2,401 | ) | (95 | ) | 1,358 | 2,776 | ||||||||||||
Other non-interest income | 117,423 | 118,280 | 91,007 | 84,095 | 83,304 | ||||||||||||||
Total non-interest income | 214,520 | 134,052 | 111,706 | 108,260 | 92,812 | ||||||||||||||
Non-interest expense: | |||||||||||||||||||
Loss on extinguishment of debt | 31,995 | — | — | 315 | 51,129 | ||||||||||||||
Amortization of tax credit investments | 20,392 | 24,200 | 41,747 | 34,744 | 27,312 | ||||||||||||||
Other non-interest expense | 579,168 | 604,861 | 467,326 | 441,066 | 420,634 | ||||||||||||||
Total non-interest expense | 631,555 | 629,061 | 509,073 | 476,125 | 499,075 | ||||||||||||||
Income before income taxes | 456,795 | 329,693 | 252,738 | 233,380 | 126,895 | ||||||||||||||
Income tax expense | 147,002 | 68,265 | 90,831 | 65,234 | 23,938 | ||||||||||||||
Net income | 309,793 | 261,428 | 161,907 | 168,146 | 102,957 | ||||||||||||||
Dividends on preferred stock | 12,688 | 12,688 | 9,449 | 7,188 | 3,813 | ||||||||||||||
Net income available to common shareholders | $ | 297,105 | $ | 248,740 | $ | 152,458 | $ | 160,958 | $ | 99,144 | |||||||||
Per Common Share: | |||||||||||||||||||
Earnings per share: | |||||||||||||||||||
Basic | $ | 0.88 | $ | 0.75 | $ | 0.58 | $ | 0.63 | $ | 0.42 | |||||||||
Diluted | 0.87 | 0.75 | 0.58 | 0.63 | 0.42 | ||||||||||||||
Dividends declared | 0.44 | 0.44 | 0.44 | 0.44 | 0.44 | ||||||||||||||
Book value | 10.35 | 9.48 | 8.59 | 8.59 | 8.26 | ||||||||||||||
Tangible book value (2) | 6.73 | 5.97 | 6.01 | 5.80 | 5.36 | ||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||
Basic | 337,792,270 | 331,258,964 | 264,038,123 | 254,841,571 | 234,405,909 | ||||||||||||||
Diluted | 340,117,808 | 332,693,718 | 264,889,007 | 255,268,336 | 234,437,000 | ||||||||||||||
Ratios: | |||||||||||||||||||
Return on average assets | 0.93 | % | 0.86 | % | 0.69 | % | 0.76 | % | 0.53 | % | |||||||||
Return on average shareholders’ equity | 8.71 | 7.91 | 6.55 | 7.46 | 5.26 | ||||||||||||||
Return on average tangible shareholders’ equity (3) | 13.05 | 12.21 | 9.32 | 11.07 | 7.66 | ||||||||||||||
Average shareholders’ equity to average assets | 10.63 | 10.93 | 10.53 | 10.08 | 10.08 | ||||||||||||||
Tangible common equity to tangible assets (4) | 7.54 | 6.45 | 6.83 | 6.91 | 6.52 | ||||||||||||||
Efficiency ratio (5) | 56.77 | 63.46 | 65.96 | 66.00 | 78.71 | ||||||||||||||
Dividend payout | 50.57 | 58.67 | 75.86 | 69.80 | 105.00 | ||||||||||||||
Tier 1 leverage capital | 8.76 | 7.57 | 8.03 | 7.74 | 7.90 | ||||||||||||||
Common equity Tier 1 capital | 9.42 | 8.43 | 9.22 | 9.27 | 9.01 | ||||||||||||||
Tier 1 risk-based capital | 10.15 | 9.30 | 10.41 | 9.90 | 9.72 | ||||||||||||||
Total risk-based capital | 11.72 | 11.34 | 12.61 | 12.15 | 12.02 | ||||||||||||||
Financial Condition: | |||||||||||||||||||
Assets | $ | 37,436,020 | $ | 31,863,088 | $ | 24,002,306 | $ | 22,864,439 | $ | 21,612,616 | |||||||||
Net loans | 29,537,449 | 24,883,610 | 18,210,724 | 17,121,684 | 15,936,929 | ||||||||||||||
Deposits | 29,185,837 | 24,452,974 | 18,153,462 | 17,730,708 | 16,253,551 | ||||||||||||||
Shareholders’ equity | 4,384,188 | 3,350,454 | 2,533,165 | 2,377,156 | 2,207,091 |
See Notes to the Selected Financial Data that follow.
2019 Form 10-K | 28 |
Notes to Selected Financial Data
(1) | In this report a number of amounts related to net interest income and net interest margin are presented on a tax equivalent basis using a federal tax rate of 21 percent for 2019 and 2018 and 35 percent for 2017, 2016, and 2015. Valley believes that this presentation provides comparability of net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice and SEC rules. |
(2) | This Annual Report on Form 10-K contains supplemental financial information which has been determined by methods other than 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. |
Tangible book value per common share, which is a non-GAAP measure, is computed by dividing shareholders’ equity less goodwill and other intangible assets by common shares outstanding as follows:
At December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
($ in thousands, except for share data) | |||||||||||||||||||
Common shares outstanding | 403,278,390 | 331,431,217 | 264,468,851 | 263,638,830 | 253,787,561 | ||||||||||||||
Shareholders’ equity | $ | 4,384,188 | $ | 3,350,454 | $ | 2,533,165 | $ | 2,377,156 | $ | 2,207,091 | |||||||||
Less: Preferred stock | 209,691 | 209,691 | 209,691 | 111,590 | 111,590 | ||||||||||||||
Less: Goodwill and other intangible assets | 1,460,397 | 1,161,655 | 733,144 | 736,121 | 735,221 | ||||||||||||||
Tangible common shareholders’ equity | $ | 2,714,100 | $ | 1,979,108 | $ | 1,590,330 | $ | 1,529,445 | $ | 1,360,280 | |||||||||
Tangible book value per common share | $ | 6.73 | $ | 5.97 | $ | 6.01 | $ | 5.80 | $ | 5.36 |
(3) | Return on average tangible shareholders’ equity, 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: |
Years Ended December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Net income | $ | 309,793 | $ | 261,428 | $ | 161,907 | $ | 168,146 | $ | 102,957 | |||||||||
Average shareholders’ equity | $ | 3,555,483 | $ | 3,304,531 | $ | 2,471,751 | $ | 2,253,570 | $ | 1,958,757 | |||||||||
Less: Average goodwill and other intangible assets | 1,182,140 | 1,163,397 | 734,200 | 734,520 | 614,084 | ||||||||||||||
Average tangible shareholders’ equity | $ | 2,373,343 | $ | 2,141,134 | $ | 1,737,551 | $ | 1,519,050 | $ | 1,344,673 | |||||||||
Return on average tangible shareholders’ equity | 13.05 | % | 12.21 | % | 9.32 | % | 11.07 | % | 7.66 | % |
(4) | Tangible common shareholders’ equity to tangible assets, which is a non-GAAP measure, is computed by dividing tangible shareholders’ equity (shareholders’ equity less goodwill and other intangible assets) by tangible assets, as follows: |
At December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Tangible common shareholders’ equity | $ | 2,714,100 | $ | 1,979,108 | $ | 1,590,330 | $ | 1,529,445 | $ | 1,360,280 | |||||||||
Total assets | $ | 37,436,020 | $ | 31,863,088 | $ | 24,002,306 | $ | 22,864,439 | $ | 21,612,616 | |||||||||
Less: Goodwill and other intangible assets | 1,460,397 | 1,161,655 | 733,144 | 736,121 | 735,221 | ||||||||||||||
Tangible assets | $ | 35,975,623 | $ | 30,701,433 | $ | 23,269,162 | $ | 22,128,318 | $ | 20,877,395 | |||||||||
Tangible common shareholders’ equity to tangible assets | 7.54 | % | 6.45 | % | 6.83 | % | 6.91 | % | 6.52 | % |
(5) | The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. |
29 | 2019 Form 10-K |
Item 7. | Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations |
Cautionary Statement Concerning Forward-Looking Statements
This Annual Report on Form 10-K, 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 listed under the “Risk Factors” section in Part1, Item 1A of this Annual Report on Form 10-K include, but are not limited to:
• | the inability to realize expected cost savings and synergies from the Oritani merger in amounts or in the timeframe anticipated; |
• | costs or difficulties relating to Oritani integration matters might be greater than expected; |
• | the inability to retain customers and qualified employees of Oritani; |
• | higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law; |
• | weakness or a decline in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas; |
• | the inability to grow customer deposits to keep pace with loan growth; |
• | a material change in our expected allowance for credit losses due to the adoption of current expected credit loss (CECL) model effective January 1, 2020; |
• | the need to supplement debt or equity capital to maintain or exceed internal capital thresholds; |
• | greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations; |
• | the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy; |
• | cyber-attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems; |
• | results of examinations by the OCC, the FRB, the CFPB and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities; |
• | damage verdicts or settlements or restrictions related to existing or potential litigations arising from claims of violations of laws or regulations brought as class actions, breach of fiduciary responsibility, negligence, fraud, contractual claims, environmental laws, patent or trademark infringement, employment related claims, and other matters; |
• | our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings; |
• | unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events; |
• | unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors; and |
• | the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships. |
2019 Form 10-K | 30 |
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform, in all material respects, to U.S. GAAP. In preparing the consolidated financial statements, management has made estimates, judgments 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. Actual results could differ materially from those 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. We identified our policies for the allowance for loan losses, purchased credit-impaired loans, goodwill and other intangible assets, and income taxes to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies with the Audit Committee of Valley’s Board of Directors.
The judgments used by management in applying the critical accounting policies discussed below may be affected by significant changes in the economic environment, which may result in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in material changes in the allowance for loan losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain collateral dependent impaired loans (including New York City taxi medallion loan valuations based on the estimated value of the underlying medallions) could be adversely impacted by illiquidity or dislocation in certain markets, resulting in depressed market valuations of the underlying collateral, thus leading to additional provisions for loan losses.
Allowance for Loan Losses. The allowance for credit losses includes the allowance for loan losses and the reserve for unfunded commercial letters of credit and represents management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. The determination of the appropriate level of the allowance is based on periodic evaluations of the loan portfolios. There are numerous components that enter into the evaluation of the allowance for loan losses, which includes a quantitative analysis, as well as a qualitative review of its results. The qualitative review is subjective and requires a significant amount of judgment. Various banking regulators, as an integral part of their examination process, also review the allowance for loan losses. Such regulators 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. Additionally, our allowance for credit losses methodology includes loan portfolio evaluations at the portfolio segment level, which consists of the commercial and industrial, commercial real estate, construction, residential mortgage, home equity, automobile and other consumer loan portfolios.
The allowance for loan losses consists of the following:
• | specific reserves for individually impaired loans; |
• | reserves for adversely classified loans, and higher risk rated loans that are not impaired loans; |
• | reserves for other loans that are not impaired; and, if applicable, |
• | reserves for impairment of purchased credit-impaired (PCI) loans subsequent to their acquisition date. |
Our reserves on classified and non-classified loans also include reserves based on general economic conditions and other qualitative risk factors both internal and external to Valley, including changes in loan portfolio volume, the composition and concentrations of credit, new market initiatives, and the impact of competition on loan structuring and pricing.
Reserves for PCI loans within the Allowance for Loan Losses
We evaluated the acquired PCI loans and elected to account for them in accordance with Accounting Standards Codification (ASC) Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” since all of these loans were acquired at a discount attributable, at least in part, to credit quality. The PCI loans are initially recorded at their estimated fair values segregated into pools of loans sharing common risk characteristics. The fair values include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
The PCI loans are subject to our internal credit review. If and when unexpected credit deterioration occurs at the loan pool level subsequent to the acquisition date, a provision for credit losses for the PCI loans will be charged to earnings for the full amount of the decline in expected cash flows for the pool. Under the accounting guidance of ASC Subtopic 310-30, for acquired credit impaired loans, the allowance for loan losses on (or reserves for) PCI loans is measured at each financial reporting date based on future expected cash flows. This assessment and measurement are performed at the pool level and not at the individual loan level. Accordingly, decreases in expected cash flows resulting from further credit deterioration on a pool of acquired PCI
31 | 2019 Form 10-K |
loan pools as of such measurement date compared to those originally estimated are recognized by recording a provision and allowance for loan losses on PCI loans. Subsequent increases in the expected cash flows of the loans in that pool would first reduce any allowance for loan losses on PCI loans; and any excess will be accreted for prospectively as a yield adjustment. Valley had no allowance reserves related to PCI loans at December 31, 2019 and 2018.
Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in this MD&A.
Effective January 1, 2020, Valley adopted new accounting guidance which replaces the incurred loss impairment methodology (discussed above and elsewhere in this MD&A) with a current expected credit loss (CECL) model. Under the new guidance, Valley will be required to measure expected credit losses by utilizing forward-looking information to assess its allowance for credit losses. The guidance also requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. See Note 1 of the consolidated financial statements for further details.
Changes in Our Allowance for Loan Losses
Valley considers it difficult to quantify the impact of changes in forecast on its allowance for loan losses. However, management believes the following discussion may enable investors to better understand the variables that drive the allowance for loan losses, which amounted to $161.8 million at December 31, 2019.
For impaired credits, if the present value of expected cash flows were 10 percent higher or lower, the allowance would have decreased $2.2 million or increased $4.1 million, respectively, at December 31, 2019. If the fair value of the collateral (for collateral dependent loans) was 10 percent higher or lower, the allowance would have decreased $3.8 million or increased $4.5 million, respectively, at December 31, 2019.
The internal risk rating assigned to each non-classified credit is an important variable in determining the allowance. If each non-classified credit were rated one grade worse (special mention rate), the allowance would have increased by approximately $47.5 million as of December 31, 2019. Additionally, if the loss factors used to calculate the allowance for non-classified loans were 10 percent higher or lower, the allowance would have increased or decreased by approximately $11.6 million, respectively, at December 31, 2019. Moreover, if the expected loss rate applied to classified loans were to increase or decrease by 10 percent, the allowance would have been $740 thousand higher or lower, respectively, at December 31, 2019.
Purchased Credit-Impaired Loans. Purchased credit-impaired (PCI) loans are loans acquired at a discount (that is due, in part, to credit quality). Valley's PCI loan portfolio totaling $6.6 billion at December 31, 2019 primarily consists of loans acquired in business combinations subsequent to 2011. The PCI loans 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. We estimate the undiscounted cash flows expected to be collected by incorporating several key assumptions, including probability of default, loss given default, and the amount of actual prepayments after the acquisition dates. The 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.” The non-accretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses and uncollectable contractual interest expected to be incurred over the life of the loans. Prepayments affect the estimated life of PCI loans and could change the amount of interest income, and possibly principal, expected to be collected. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in our estimate of the expected cash flows of the loan pools.
On a quarterly, or more frequent basis, the Bank evaluates the remaining contractual required payments due and estimates of cash flows expected to be collected for the underlying loans of each PCI loan pool. These evaluations require the continued use of key assumptions and estimates 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.
PCI loans that may have been classified as non-performing loans by an acquired bank are no longer classified as non-performing because these loans are accounted for on a pooled basis. Management’s judgment is required in classifying loans in pools as performing loans, and is dependent on having a reasonable expectation about the timing and amount of the pool cash flows to be collected, even if certain loans within the pool are contractually past due.
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See Notes 1 and 5 to the consolidated financial statements, and the "Loan Portfolio" section included in this MD&A for further PCI loan details, including net increases and decreases in expected cash flows subsequent to the applicable PCI loan acquisition dates impacting the accretable yield in 2019 and 2018.
Goodwill and Other Intangible Assets. We record all assets, liabilities, and non-controlling interests in the acquiree in purchase acquisitions, including goodwill and other intangible assets, at fair value as of the acquisition date, and expense all acquisition related costs as incurred as required by ASC Topic 805, “Business Combinations.” Goodwill totaling $1.4 billion at December 31, 2019 is not amortized but is subject to annual tests for impairment or more often, if events or circumstances indicate it may be impaired. Other intangible assets totaling $86.8 million at December 31, 2019 are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount. Such evaluation of other intangible assets is based on undiscounted cash flow projections. The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities.
Prior to new accounting guidance effective January 1, 2020, the goodwill impairment analysis was generally a two-step test. During 2019, Valley elected to perform step one of the two-step goodwill impairment test for all of its reporting units but may choose to perform an optional qualitative assessment allowable for one or more units in future periods to determine whether it is necessary to perform a quantitative goodwill impairment test. Step one compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional step must be performed. That additional step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, i.e., by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step above, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting unit was being acquired in a business combination at the impairment test date. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The loss establishes a new basis in the goodwill and subsequent reversal of goodwill impairment losses is not permitted.
Based upon Valley’s 2019 goodwill impairment testing, the fair values of its four reporting units, wealth management, consumer lending, commercial lending, and investment management, were in excess of their carrying values. However, due to lower yields on our investment portfolio and reinvestment of normal repayments from investment securities into new loan originations, our investment management segment experienced downward pressure on its fair value. While not expected at this time, we may be required to record a charge to earnings should there be a deficiency in our estimated fair value of the investment management and other reporting units during our subsequent annual (or more frequent) impairment tests. See the "Business Segments" section below for more information regarding our business segments/reporting units.
Fair value may be determined using market prices, comparison to similar assets, market multiples, certain discounted cash flow analyses and other determinants. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may materially affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates, terminal values, and specific industry or market sector conditions. To assist in assessing the impact of potential goodwill or other intangible assets impairment charges at December 31, 2019, the impact of a five percent impairment charge on these intangible assets would result in a reduction in pre-tax income of approximately $73.0 million. Note 9 to the consolidated financial statements for additional information regarding goodwill and other intangible assets.
Income Taxes. We are subject to the income tax laws of the U.S., its states and municipalities. The income tax laws of the jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws to our business activities, as well as the timing of when certain items may affect taxable income.
Our interpretations may be subject to review during examination by taxing authorities and disputes may arise over the respective tax positions. We attempt to resolve these disputes during the tax examination and audit process and ultimately through the court systems when applicable. We monitor relevant tax authorities and revise our estimate of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory authorities on a quarterly basis. Revisions of our estimate of accrued income taxes also may result from our own income tax planning and from the resolution of income tax controversies. Such revisions in our estimates may be material to our operating results for any given quarter.
The provision for income taxes is composed of current and deferred taxes. Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes. Deferred tax assets are recognized if, in
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management’s judgment, their realizability is determined to be more likely than not. We perform regular reviews to ascertain the realizability of our deferred tax assets. These reviews include management’s estimates and assumptions regarding future taxable income, which also incorporate various tax planning strategies. In connection with these reviews, if we determine that a portion of the deferred tax asset is not realizable, a valuation allowance is established. Management determined it is more likely than not that Valley will realize its net deferred tax assets, except for immaterial valuation allowances, as of December 31, 2019 and 2018.
During 2018, we recognized a $2.3 million tax benefit related to the adjustment of the Tax Cuts and Jobs Act of 2017 (Tax Act) provisional amounts in our final 2017 tax returns completed in the fourth quarter 2018. In the fourth quarter 2017, we re-measured and reduced our deferred tax assets by $15.4 million for the estimated impact of the Tax Act, which decreased our federal income tax rate from 35 percent to 21 percent effective January 1, 2018. The adjustments of $2.3 million and $15.4 million to deferred tax assets were reflected as credits and charges, respectively, to our income tax expense for 2018 and 2017, respectively.
We also maintain a reserve related to certain tax positions that management believes contain an element of uncertainty. An uncertain tax position is measured based on the largest amount of benefit that management believes is more likely than not to be realized. During 2019, our income tax expense reflected an $31.1 million increase to our tax provision related to reserve for uncertain tax liability positions at December 31, 2019 as compared to a $3.3 million net tax benefit in 2018 related to the reduction of reserves caused by the expiration of the statute of limitations for certain tax positions.
See Notes 1 and 14 to the consolidated financial statements and the "Executive Summary" and “Income Taxes” sections in this MD&A for an additional discussion on the accounting for income taxes.
New Authoritative Accounting Guidance. See Note 1 of the consolidated financial statements for a description of recent accounting pronouncements including the dates of adoption and the anticipated effect on our results of operations and financial condition.
Executive Summary
Company Overview. At December 31, 2019, Valley had consolidated total assets of $37.4 billion, total net loans of $29.5 billion, total deposits of $29.2 billion and total shareholders’ equity of $4.4 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn and Queens, Long Island, Florida and Alabama. Of our current 238 branch network, 59 percent, 16 percent, 18 percent and 7 percent of the branches are located in New Jersey, New York, Florida and Alabama, respectively. Despite our current and past branch consolidation activity, we have grown both in asset size and locations significantly over the past several years primarily through bank acquisitions. On January 1, 2018, Valley completed its acquisition of USAmeriBancorp, Inc. (USAB) and meaningfully enhanced its presence in the Tampa Bay, Florida market. USAB, largely through its wholly-owned subsidiary, USAmeriBank, had approximately $5.1 billion in assets, $3.7 billion in net loans and $3.6 billion in deposits.
Acquisition of Oritani Financial Corp. Effective December 1, 2019, Valley completed its acquisition of Oritani Financial Corp. ("Oritani") and its wholly-owned subsidiary, Oritani Bank. Oritani had approximately $4.3 billion in assets, $3.4 billion in net loans, $2.9 billion in deposits, after purchase accounting adjustments, and a branch network of 26 locations. The acquisition represents a significant addition to Valley's New Jersey franchise, and will meaningfully enhance its presence in the Bergen County market. The common shareholders of Oritani received 1.60 shares of Valley common stock for each Oritani share that they owned. The total consideration for the acquisition was approximately $835 million, and the transaction resulted in $289 million of goodwill and $21 million of core deposit intangible assets subject to amortization. Full systems integration was completed in February 2020 with minimal disruption to our customers. However, some normal post-systems integration matters involving back-office and other functions were still underway at the filing date of this report.
We also closed and consolidated 6 of the 26 acquired Oritani branches into nearby legacy Valley branches during February 2020. Valley plans to close and consolidate three legacy Valley branches into branches acquired from Oritani during the second quarter 2020. We do not expect these branch closings to impact the timing of the planned closures discussed in the "Branch Transformation" section below.
Branch Transformation. As previously disclosed, Valley has embarked on a strategy to overhaul its retail network. Approximately one year ago, we established the foundation of what the transformation of our branch network would look like in coming years. At that time, we identified 74 branches that did not meet certain internal performance measures, including 20 branches that were closed and consolidated by the end of the first quarter 2019. For the remaining 54 branches, we implemented tailored action plans focused on improving profitability and deposit levels, as well as upgrades in staffing and training, within a defined timeline.
At December 31, 2019, the majority of the 54 branches have seen measurable success in terms of relative cost of deposits, deposit mix and overall balance growth. However, some locations have not met our established performance targets. As such, we currently expect to close approximately 10 branches during 2020.
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For the remaining branch network, we continue to monitor the operating performance of each branch and implement tailored action plans focused on improving profitability and deposit levels for those branches that underperform.
Sale Leaseback. During March 2019, Valley closed a sale-leaseback transaction for 26 properties resulting in a pre-tax gain of $78.5 million for the first quarter 2019.
Investment in DC Solar Funds. From 2013 to 2015, Valley invested in three federal renewable energy tax credit funds sponsored by DC Solar and claimed the related federal tax credit benefits of approximately $22.8 million in its consolidated financial statements during these periods. In late February 2019, we learned of allegations of fraudulent conduct by DC Solar, including information about asset seizures of DC Solar property and assets of its principals and ongoing federal investigations. Since learning of the allegations, Valley has conducted an ongoing investigation coordinated with other DC Solar fund investors, investors' outside counsel and a third party specialist.
During the nine months ended September 30, 2019, given the circumstances that we were aware of at that time and management's best judgments regarding the settlement of the tax positions that it would ultimately accept with the IRS, Valley expected a partial loss and tax benefit recapture. During the fourth quarter 2019, several of the co-conspirators pleaded guilty to fraud in the on-going federal investigation. Based upon this new information, Valley deemed that its tax positions related to the DC Solar funds did not meet the more likely than not recognition threshold in Valley's tax reserve assessment at December 31, 2019. As a result, our net income for the fourth quarter 2019 and the year ended December 31, 2019 includes increases to our provision for income taxes of $18.7 million and $31.1 million, respectively, reflecting the reserve for uncertain tax liability positions related to renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. During the first quarter 2019, we also recognized a full write down of the related unamortized investments totaling $2.4 million (previously presented in other assets) due to other than temporary impairment losses.
Valley believes it is fully reserved for its tax positions related to DC Solar at December 31, 2019. See Item 1A. Risk Factors as well as Notes 14 and 15 to the consolidated financial statements for additional information related to our tax credit investments and reserves for uncertain tax liability positions.
Annual Results. Net income totaled $309.8 million, or $0.87 per diluted common share, for the year ended December 31, 2019 compared to $261.4 million in 2018, or $0.75 per diluted common share. The increase in net income was largely due to: (i) a $40.8 million, or 4.8 percent, increase in our net interest income driven by a $2.9 billion increase in average loan balances and higher loan yields, partially offset by interest expense related to higher short-term interest rates and a $2.4 billion increase in average interest bearing liabilities as compared to 2018, (ii) a $80.5 million increase in non-interest income mostly related to a $78.5 million gain on the sale (and leaseback) of several Valley properties in the first quarter 2019, partially offset by (iii) a $78.7 million increase in income tax expense largely due to an increase in pre-tax income and a $31.1 million addition to our reserves for uncertain tax positions, (iv) a $8.3 million decline in our provision for credit losses and (v) a $2.5 million increase in total non-interest expense. See the “Net Interest Income,” “Non-Interest Income,” “Non-Interest Expense,” and “Income Taxes” sections below for more details on the items above and other infrequent items, including merger expenses and the loss on extinguishment of debt, impacting our 2019 annual results.
Operating Environment. During 2019, real gross domestic product expanded 2.3 percent as compared to 2.9 percent in 2018 due, in part, to weaker business fixed investment and a slower pace of services consumption by households.
The federal funds target rate was increased five times by the Federal Open Market Committee (FOMC) from mid-December 2017 to mid-December 2018. During 2019, the FOMC held the target range of 2.25 to 2.50 percent until the end of July 2019, and then cut the target three times to a range of 1.50 to 1.75 percent during the second half of 2019. In early March 2020, the FOMC cut interest rates by 50 basis points to a target range of 1.00 to 1.25 percent in an effort to contain the coronavirus's economic fallout. The interest rate cut was the first emergency rate move since the 2008 financial crisis.
The 10-year U.S. Treasury note yield ended 2019 at 1.92 percent, 77 basis points lower compared with December 31, 2018. The spread between the 2- and 10-year U.S. Treasury note yields ended the year at 0.34 percent, 13 basis points higher compared to the end of 2018. However, this spread has contracted during early March 2020 as compared to December 31, 2019 and could remain that way for an extended period due to current economic concerns.
For all commercial banks in the U.S., loans and leases grew approximately 4.2 percent from December 31, 2018 to December 31, 2019. For the industry, banks reported that demand for most commercial loan products had declined compared to the end of 2018. The decline was driven by weakening demand among small firms for commercial and industrial loans and tightening of underwriting standards, particularly for commercial real estate loans.
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Valley continued to see solid demand for commercial loans across its geographies during 2019, and was able to grow core deposits. However, should demand weaken for commercial loans and competition for deposits increase further in Valley's markets, these factors and others, including a flat or inverted yield curve environment, may challenge our business operations and results, as highlighted throughout the remaining MD&A discussion below.
Loans. Total loans increased by $4.7 billion to $29.7 billion at December 31, 2019 from December 31, 2018. Adjusted for $3.4 billion of loans acquired from Oritani on December 1, 2019 and approximately $800 million of sales from the commercial real estate loan portfolio in the fourth quarter 2019, total loans grew by over 9 percent in 2019 due to strong demand in most loan categories. For 2020, we are targeting net loan growth in the range of 6 to 8 percent. However, there can be no assurance that we will achieve such levels given the potential for unforeseen changes in the market and other conditions. See further details on our loan activities under the “Loan Portfolio” section below.
Asset Quality. Our past due loans and non-accrual loans, discussed further below, exclude PCI loans. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley. At December 31, 2019, our PCI loan portfolio totaled $6.6 billion, or 22.3 percent of our total loan portfolio, and includes all of the loans acquired from USAB and Oritani on January 1, 2018 and December 1, 2019, respectively.
Total non-PCI loan portfolio delinquencies (including loans past due 30 days or more and non-accrual loans) as a percentage of total loans were 0.54 percent and 0.62 percent at December 31, 2019 and 2018, respectively. Total accruing past due loans increased to $68.2 million at December 31, 2019 from $67.7 million at December 31, 2018. Non-accrual loans totaled $93.1 million, or 0.31 percent of our entire loan portfolio of $29.7 billion, at December 31, 2019 as compared to $88.4 million, or 0.35 percent of total loans, at December 31, 2018. The increase in non-accruals was largely due to a $6.6 million increase in commercial real estate loans, partially offset by a $1.5 million decrease in the commercial and industrial loan category. Overall, our non-performing assets increased by 5.9 percent to $104.4 million at December 31, 2019 as compared to $98.6 million at December 31, 2018 primarily due to the increase in non-accrual loans.
Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by an unexpected downturn in economic conditions or other geopolitical factors, management cannot provide assurance that our non-performing assets will remain at, or increase from, the levels reported as of December 31, 2019. See the “Non-performing Assets” section below for further analysis of our asset quality.
Investments. During the year ended December 31, 2019, we recognized net impairment losses on securities totaling $2.9 million in earnings due to one bond in default of its contractual payments. There were no net impairment losses on securities during 2018 and 2017. During the year ended December 31, 2019, we recognized net losses on securities transactions of $150 thousand as compared to net losses totaling $2.3 million in 2018 and $20 thousand in 2017. The 2018 net losses were partly related to the sale of all the private label mortgage-backed securities classified as available for sale in our investment portfolio during the fourth quarter. See further details in the “Investment Securities Portfolio” section below and Note 4 to the consolidated financial statements.
Deposits and Other Borrowings. Our mix of total deposits slightly shifted to time deposits during 2019 as compared to 2018 largely due to the greater use of brokered time deposits since the second half of 2018 relative to other wholesale funding sources included in other borrowings. Non-interest bearing deposits represented approximately 25 percent of total average deposits for the year ended December 31, 2019, while savings, NOW and money market accounts were 45 percent and time deposits were 30 percent. Average non-interest bearing deposits increased $171.1 million to approximately $6.4 billion for the year ended December 31, 2019 as compared to 2018 due, in large part, to our continuous efforts to encourage new and existing loan borrowers to maintain deposit accounts at Valley and, to a lesser extent, $142.6 million of deposits assumed from Oritani on December 1, 2019. Average savings, NOW and money market account balances increased $312.9 million to $11.4 billion in 2019 largely due to several retail and business account initiatives and $1.6 billion of such deposits assumed from Oritani. Average time deposits also increased $2.4 billion to $7.5 billion in 2019 due to (i) increased use of brokered CDs as an alternative to more costly FHLB borrowings with shorter or similar maturities, (ii) successful retail deposit gathering efforts and (iii) $1.2 billion of deposits assumed from USAB. Ending balances of brokered deposits (consisting of both time and money market deposit accounts) were $4.1 billion and $3.2 billion at December 31, 2019 and 2018, respectively.
Average short-term borrowings decreased $117.7 million to $2.1 billion for 2019 as compared to 2018 largely due to a decline in FHLB advances used for funding of loan growth caused by the success of our retail and brokered deposit gathering efforts. Valley assumed only $10.5 million of very short duration borrowings in the Oritani acquisition during 2019.
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Average long-term borrowings decreased $165.4 million to approximately $2.0 billion for 2019 as compared to 2018 largely due to an normal repayments of FHLB borrowings during 2019 and, to a much lesser extent, the prepayment of $635 million of high cost FHLB borrowings in December 2019. See further discussion of our average interest bearing liabilities under the “Net Interest Income” section below.
Net Interest Income
Net interest income consists of interest income and dividends earned on interest earning assets less interest expense on interest bearing liabilities and represents the main source of income for Valley. The net interest margin on a fully tax equivalent basis is calculated by dividing tax equivalent net interest income by average interest earning assets and is a key measurement used in the banking industry to measure income from interest earning assets.
Annual Period 2019. Net interest income on a tax equivalent basis increased by $39.8 million to $902.7 million for 2019 as compared to 2018. The increase was mainly driven by a $2.9 billion increase in average loan balances and a 14 basis point increase in loan yield, partially offset by interest expense related to a $2.4 billion increase in average interest bearing liabilities and a 37 basis point increase in the cost of such liabilities as compared to 2018. See further discussion of the changes in our average interest earning assets and interest bearing liabilities below.
The net interest margin on a tax equivalent basis was 2.95 percent for the year ended December 31, 2019 and decreased 16 basis points as compared to 2018. However, the yield on average interest earning assets increased 13 basis points mainly attributable to the increased yield on average loans. The yield on average loans increased 14 basis points to 4.57 percent for 2019 as compared to 4.43 percent in 2018 largely due to new loan volumes and higher market interest rates in the second half of 2018 and a gradual decline in 2019. Our average non-taxable investment portfolio yield decreased 30 basis points during 2019 as compared to one year ago due to repayment and prepayment of mostly higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments in 2019. Offsetting the increase in the yield on average interest earning assets, the cost of average interest bearing liabilities increased 37 basis points to 1.84 percent for 2019. The increase in the overall cost as compared to 2018 was mainly driven by higher market rates on most new stated rate maturity deposits and term funding in the second half of 2018 through approximately the first nine months of 2019. The cost of funds were largely influenced by a 33 basis point increase in the annual average of the daily effective federal funds rate to 2.16 percent for 2019 from 1.83 percent in 2018, as well as strong market competition for customer deposits. The federal funds target rate was increased five times by the FOMC from mid-December 2017 to mid-December 2018. In 2019, the FOMC held the target range of 2.25 to 2.50 percent until the end of July 2019, and then cut the target three times to a range of 1.50 to 1.75 percent during the second half of 2019.
Average interest earning assets totaling $30.6 billion for the year ended December 31, 2019 increased $2.9 billion, or 10.4 percent, as compared to 2018. Average loan balances increased $2.9 billion to $26.2 billion in 2019 and drove approximately 80 percent of the $164.9 million increase in the interest income on a tax equivalent basis for loans as compared to 2018. The growth in average loans during 2019 was mostly due to strong loan demand and successful lending team efforts, particularly in the commercial loan categories, over the last two years. The new loan production in the commercial area came from a blend of new and existing customer relationships with significant geographic and product diversification across our primary markets. Average federal funds sold and other interest bearing deposits increased $79.8 million to $298.7 million for the year ended December 31, 2019 as compared to 2018 due to slightly higher levels of overnight liquidity primarily caused by fluctuations in the timing of new loan originations. Average investment securities decreased $102.1 million to approximately $4.0 billion in 2019 due to normal securities repayment activity and higher reinvestment of such funds in new loan originations.
Average interest bearing liabilities increased $2.4 billion to $22.9 billion for the year ended December 31, 2019 from the same period in 2018 due to increases in most of our deposit product categories. Average savings, NOW and money market accounts increased $312.9 million largely due to retail money market account gathering initiatives during late 2018 and 2019, partially offset by continued lower utilization of brokered money market account balances in our loan growth funding strategy and other liquidity needs in 2019. Average time deposits increased $2.4 billion to $7.5 billion for 2019 as compared to 2018 mainly due to retail CDs strategies executed in both 2018 and 2019 and increased use of brokered CDs since the second half of 2018. Average short-term and long-term borrowings decreased $117.7 million and $165.4 million in 2019, respectively, as compared to 2018 primarily due to a lower level of FHLB borrowings used to fund new loan activities. See the "Fourth Quarter 2019" section below for more information regarding changes in our interest bearing liabilities during 2019.
Fourth Quarter 2019. Net interest income on a tax equivalent basis totaling $239.6 million for the fourth quarter 2019 increased $16.2 million and $17.9 million as compared to the fourth quarter 2018 and third quarter 2019, respectively. The increase compared to the third quarter 2019 was largely due to higher average loan balances and lower costs of interest-bearing liabilities, partly offset by low loan yields. Interest income on a tax equivalent basis increased $14.5 million to $344.8 million for the fourth quarter 2019 as compared to the third quarter 2019 mainly due to a $1.8 billion increase in average loans, partly offset by 6 basis point decrease in the yield on average loans. Interest expense of $105.2 million for the three months ended December 31, 2019
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decreased $3.4 million from the third quarter 2019 largely due to lower interest rates on many of our interest-bearing deposit products and other borrowings, partly offset by additional interest expense from a $1.4 billion increase in average interest-bearing liabilities. The increase in average interest-bearing liabilities was largely driven by both brokered and retail time deposit gathering initiatives, as well as the Oritani acquisition.
The net interest margin on a tax equivalent basis of 2.96 percent for the fourth quarter 2019 decreased 14 basis points as compared to 3.10 percent for the fourth quarter 2018, and increased 5 basis points from 2.91 percent for the third quarter 2019. The yield on average interest earning assets decreased by 6 basis points on a linked quarter basis due to the lower yields on average loans and investment securities. The yield on average loans decreased to 4.51 percent for the fourth quarter 2019 from 4.57 percent for the third quarter 2019 mostly due to the high volume of new loan originations at current market rates and repayment of higher yielding loans. The decreased yield on average investment securities was partly caused by an increase in premium amortization on residential mortgage-backed securities, due to higher prepayments on such financial instruments. The overall cost of average interest-bearing liabilities decreased by 16 basis points to 1.74 percent for the fourth quarter 2019 as compared to the linked third quarter 2019 due to lower interest rates on certain deposits and borrowings repricing during the second half of 2019. Our prepayment of $635 million in higher cost long-term borrowings during December 2019 is expected to positively impact our average cost of funds for its first full period of extinguishment during the first quarter 2020. Our cost of total average deposits was 1.20 percent for the fourth quarter 2019 as compared to 1.27 percent for the three months ended September 30, 2019.
Looking forward, we expect moderate interest rate pressures on the level of our net interest margin for the first quarter 2020 due to lower yielding loan originations and one less day during the quarter. However, we are encouraged by the current level of market interest rates for most of our funding sources and the potential ability to reprice stated maturity deposits and other borrowings coming due for us over the next 12-month period. Based upon our most recent projection, we anticipate net interest income growth of approximately 13 to 16 percent for the full year of 2020 as compared to 2019.
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The following table reflects the components of net interest income for each of the three years ended December 31, 2019, 2018 and 2017:
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||||||||
Loans (1)(2) | $ | 26,235,253 | $ | 1,198,908 | 4.57 | % | $ | 23,340,330 | $ | 1,033,996 | 4.43 | % | $ | 17,819,003 | $ | 734,485 | 4.12 | % | ||||||||||||||
Taxable investments (3) | 3,394,397 | 98,949 | 2.92 | 3,409,687 | 100,515 | 2.95 | 2,910,390 | 82,488 | 2.83 | |||||||||||||||||||||||
Tax-exempt investments (1)(3) | 647,178 | 22,051 | 3.41 | 733,956 | 27,220 | 3.71 | 569,469 | 23,691 | 4.16 | |||||||||||||||||||||||
Interest bearing deposits with banks | 298,702 | 5,723 | 1.92 | 218,938 | 3,236 | 1.48 | 189,636 | 1,793 | 0.95 | |||||||||||||||||||||||
Total interest earning assets | 30,575,530 | 1,325,631 | 4.34 | 27,702,911 | 1,164,967 | 4.21 | 21,488,498 | 842,457 | 3.92 | |||||||||||||||||||||||
Allowance for loan losses | (157,562 | ) | (136,775 | ) | (117,529 | ) | ||||||||||||||||||||||||||
Cash and due from banks | 275,619 | 278,181 | 236,297 | |||||||||||||||||||||||||||||
Other assets | 2,762,478 | 2,431,537 | 1,886,035 | |||||||||||||||||||||||||||||
Unrealized losses on securities available for sale, net | (13,327 | ) | (46,578 | ) | (14,503 | ) | ||||||||||||||||||||||||||
Total assets | $ | 33,442,738 | $ | 30,229,276 | $ | 23,478,798 | ||||||||||||||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||
Savings, NOW and money market deposits | $ | 11,406,073 | $ | 145,177 | 1.27 | % | $ | 11,093,136 | $ | 108,394 | 0.98 | % | $ | 8,934,335 | $ | 55,300 | 0.62 | % | ||||||||||||||
Time deposits | 7,521,338 | 166,693 | 2.22 | 5,131,167 | 81,959 | 1.60 | 3,329,693 | 42,546 | 1.28 | |||||||||||||||||||||||
Total interest bearing deposits | 18,927,411 | 311,870 | 1.65 | 16,224,303 | 190,353 | 1.17 | 12,264,028 | 97,846 | 0.80 | |||||||||||||||||||||||
Short-term borrowings | 2,070,258 | 47,862 | 2.31 | 2,187,998 | 45,930 | 2.10 | 1,486,001 | 18,034 | 1.21 | |||||||||||||||||||||||
Long-term borrowings (4) | 1,951,203 | 63,220 | 3.24 | 2,116,619 | 65,762 | 3.11 | 1,890,288 | 58,227 | 3.08 | |||||||||||||||||||||||
Total interest bearing liabilities | 22,948,872 | 422,952 | 1.84 | 20,528,920 | 302,045 | 1.47 | 15,640,317 | 174,107 | 1.11 | |||||||||||||||||||||||
Non-interest bearing deposits | 6,364,986 | 6,193,839 | 5,192,087 | |||||||||||||||||||||||||||||
Other liabilities | 573,397 | 201,986 | 174,643 | |||||||||||||||||||||||||||||
Shareholders’ equity | 3,555,483 | 3,304,531 | 2,471,751 | |||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 33,442,738 | $ | 30,229,276 | $ | 23,478,798 | ||||||||||||||||||||||||||
Net interest income/interest rate spread (5) | 902,679 | 2.50 | % | 862,922 | 2.74 | % | 668,350 | 2.81 | % | |||||||||||||||||||||||
Tax equivalent adjustment | (4,631 | ) | (5,719 | ) | (8,303 | ) | ||||||||||||||||||||||||||
Net interest income, as reported | $ | 898,048 | $ | 857,203 | $ | 660,047 | ||||||||||||||||||||||||||
Net interest margin (6) | 2.94 | % | 3.09 | % | 3.07 | % | ||||||||||||||||||||||||||
Tax equivalent effect | 0.01 | 0.02 | 0.04 | % | ||||||||||||||||||||||||||||
Net interest margin on a fully tax equivalent basis (6) | 2.95 | % | 3.11 | % | 3.11 | % |
(1) | Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate for both 2019 and 2018, respectively, and a 35 percent federal tax rate for 2017. |
(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 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. |
39 | 2019 Form 10-K |
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 Valley 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
Years Ended December 31, | |||||||||||||||||||||||
2019 Compared to 2018 | 2018 Compared to 2017 | ||||||||||||||||||||||
Change Due to Volume | Change Due to Rate | Total Change | Change Due to Volume | Change Due to Rate | Total Change | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Interest income: | |||||||||||||||||||||||
Loans* | $ | 131,473 | $ | 33,439 | $ | 164,912 | $ | 241,292 | $ | 58,219 | $ | 299,511 | |||||||||||
Taxable investments | (449 | ) | (1,117 | ) | (1,566 | ) | 14,611 | 3,416 | 18,027 | ||||||||||||||
Tax-exempt investments* | (3,063 | ) | (2,106 | ) | (5,169 | ) | 6,303 | (2,774 | ) | 3,529 | |||||||||||||
Federal funds sold and other interest bearing deposits | 1,372 | 1,115 | 2,487 | 311 | 1,132 | 1,443 | |||||||||||||||||
Total increase in interest income | 129,333 | 31,331 | 160,664 | 262,517 | 59,993 | 322,510 | |||||||||||||||||
Interest expense: | |||||||||||||||||||||||
Savings, NOW and money market deposits | 3,137 | 33,646 | 36,783 | 15,640 | 37,454 | 53,094 | |||||||||||||||||
Time deposits | 46,254 | 38,480 | 84,734 | 26,955 | 12,458 | 39,413 | |||||||||||||||||
Short-term borrowings | (2,558 | ) | 4,490 | 1,932 | 10,962 | 16,934 | 27,896 | ||||||||||||||||
Long-term borrowings and junior subordinated debentures | (5,282 | ) | 2,740 | (2,542 | ) | 7,028 | 507 | 7,535 | |||||||||||||||
Total increase in interest expense | 41,551 | 79,356 | 120,907 | 60,585 | 67,353 | 127,938 | |||||||||||||||||
Increase (decrease) in net interest income | $ | 87,782 | $ | (48,025 | ) | $ | 39,757 | $ | 201,932 | $ | (7,360 | ) | $ | 194,572 |
* | Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate for 2019 and 2018, respectively, and a 35 percent federal tax rate for 2017. |
2019 Form 10-K | 40 |
Non-Interest Income
Non-interest income represented 14.0 percent and 10.4 percent of total interest income plus non-interest income for 2019 and 2018, respectively. For the year ended December 31, 2019, non-interest income increased $80.5 million as compared to the year ended December 31, 2018 largely due to the gain on the sale of several Valley properties in 2019. See further details below.
The following table presents the components of non-interest income for the years ended December 31, 2019, 2018, and 2017:
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Trust and investment services | $ | 12,646 | $ | 12,633 | $ | 11,538 | |||||
Insurance commissions | 10,409 | 15,213 | 18,156 | ||||||||
Service charges on deposit accounts | 23,636 | 26,817 | 21,529 | ||||||||
Losses on securities transactions, net | (150 | ) | (2,342 | ) | (20 | ) | |||||
Other-than-temporary impairment losses on securities | (2,928 | ) | — | — | |||||||
Portion recognized in other comprehensive income (before taxes) | — | — | — | ||||||||
Net impairment losses on securities recognized in earnings | (2,928 | ) | — | — | |||||||
Fees from loan servicing | 9,794 | 9,319 | 7,384 | ||||||||
Gains on sales of loans, net | 18,914 | 20,515 | 20,814 | ||||||||
Gains (losses) on sales of assets, net | 78,333 | (2,401 | ) | (95 | ) | ||||||
Bank owned life insurance | 8,232 | 8,691 | 7,338 | ||||||||
Other | 55,634 | 45,607 | 25,062 | ||||||||
Total non-interest income | $ | 214,520 | $ | 134,052 | $ | 111,706 |
Insurance commissions decreased $4.8 million for the year ended December 31, 2019 from $15.2 million in 2018 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.
Service charges on deposit accounts decreased $3.2 million for the year ended December 31, 2019 as compared to 2018 mostly due to lower checking and ATM fees.
Net losses on securities transactions decreased $2.2 million for the year ended December 31, 2019 as compared to 2018. The higher level of net losses in 2018 was partly due to the sale of all of our private label mortgage-backed securities classified as available for sale for an aggregate net loss of $1.5 million during the fourth quarter 2018, as well as the sale of equity securities previously classified as available for sale and certain municipal securities acquired from USAB.
Other-than-temporary impairment losses on securities for the year ended December 31, 2019 relate to one special revenue bond in default of its contractual payments. See the “Investment Securities Portfolio” section of this MD&A and Note 4 to the consolidated financial statements for further details on our investment securities impairment analysis.
Fees from loan servicing increased $475 thousand for the year ended December 31, 2019 from $9.3 million in 2018 mainly due to additional fees from mortgage servicing rights of loans originated and sold by us during the last 12 months. The aggregate principal balances of residential mortgage loans serviced by us for others increased approximately $113 million to $3.4 billion, at December 31, 2019 from $3.2 billion at December 31, 2018.
Net gains on sales of loans decreased $1.6 million for the year ended December 31, 2019 as compared to 2018, largely due to lower volume of residential mortgage loan sales and interest rate spreads on loans sold. During 2019, we sold $934.5 million of residential mortgages as compared to $965.5 million of residential mortgage loans sold during 2018, including $436 million and $290 million of pre-existing loans sold from our residential mortgage loan portfolio, respectively. Residential mortgage loan originations (including both new and refinanced loans) decreased 9.2 percent to $1.6 billion for the year ended December 31, 2019 as compared to $1.7 billion in 2018. 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 gains in the fair value of loans held for sale totaled $1.0 million and $211 thousand in 2019 and 2018, respectively. See further discussions of our residential mortgage loan origination activity under “Loans” in the "Executive Summary" section of this MD&A above and the fair valuation of our loans held for sale at Note 3 of the consolidated financial statements.
Net gains (losses) on sales of assets increased $80.7 million primarily due to a $78.5 million gain on the sale (and leaseback) of 25 branches and 1 corporate location recognized during the first quarter 2019.
41 | 2019 Form 10-K |
Other non-interest income increased $10.0 million for the year ended December 31, 2019 from 2018 mainly due to a $17.0 million increase in fee income related to derivative interest rate swaps executed with commercial lending customers. Swap fee income totaled $33.4 million and $16.4 million for the years ended December 31, 2019 and 2018, respectively. The increase in swap fees was partially offset by a decrease in other income during 2019 related to a $6.5 million gain realized on the sale of our Visa Class B shares during the fourth quarter 2018.
Non-Interest Expense
Non-interest expense increased $2.5 million to $631.6 million for the year ended December 31, 2019 as compared to 2018. The following table presents the components of non-interest expense for the years ended December 31, 2019, 2018 and 2017:
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Salary and employee benefits expense | $ | 327,431 | $ | 333,816 | $ | 263,337 | |||||
Net occupancy and equipment expense | 118,191 | 108,763 | 92,243 | ||||||||
FDIC insurance assessment | 21,710 | 28,266 | 19,821 | ||||||||
Amortization of other intangible assets | 18,080 | 18,416 | 10,016 | ||||||||
Professional and legal fees | 20,810 | 34,141 | 25,834 | ||||||||
Loss on extinguishment of debt | 31,995 | — | — | ||||||||
Amortization of tax credit investments | 20,392 | 24,200 | 41,747 | ||||||||
Telecommunication expense | 9,883 | 12,102 | 9,921 | ||||||||
Other | 63,063 | 69,357 | 46,154 | ||||||||
Total non-interest expense | $ | 631,555 | $ | 629,061 | $ | 509,073 |
Salary and employee benefits expense decreased $6.4 million for the year ended December 31, 2019 as compared to 2018, largely due to (i) lower headcount caused by our recent branch transformation and new universal banker model, as well as other operational improvements, (ii) a $4.5 million decrease in stock-based compensation expense, and (iii) a $2.8 million decrease in commission expense mainly related to our home mortgage consultant teams. These decreases were partially offset by higher merger related and other corporate severance expense. The change in control, severance and retention expenses related to bank acquisitions totaled $13.9 million and $9.8 million for the years ended December 31, 2019 and 2018, respectively. Severance costs related to our branch transformation strategy totaled $4.8 million and $2.7 million for the years ended December 31, 2019 and 2018, respectively.
Net occupancy and equipment expenses increased $9.4 million for the year ended December 31, 2019 as compared to 2018
largely due to higher rental expense resulting from the sale leaseback transaction for 26 locations closed during the first quarter 2019. In addition, repair and equipment expense, and depreciation expense increased $4.5 million and $1.8 million, respectively, for the year ended December 31, 2019 as compared to 2018. Merger expenses related to bank acquisitions within the category totaled $870 thousand and $856 thousand for the years ended December 31, 2019 and 2018, respectively.
The FDIC insurance assessment decreased $6.6 million for the year ended December 31, 2019 as compared to 2018 largely due to the FDIC's termination of the large bank surcharge portion of our quarterly assessment effective September 30, 2018.
Professional and legal fees decreased $13.3 million for the year ended December 31, 2019 as compared to 2018. The decrease was mainly caused by a $12.2 million litigation reserve charge recognized in 2018. Professional and legal fees included merger expenses of approximately $1.9 million related to the Oritani acquisition and $837 thousand of merger expense related to the USAB acquisition for the year ended December 31, 2019 and 2018, respectively.
Loss on extinguishment of debt totaling $32.0 million for the year ended December 31, 2019 related to prepayment of $635.0 million of the long-term FHLB advances during the fourth quarter 2019 accounted for as an early debt extinguishment. See Note 11 for additional details.
Amortization of tax credit investments decreased $3.8 million for the year ended December 31, 2019 as compared to 2018 mostly due to normal differences in the timing and amount of such investments and recognition of the related tax credits, partially offset by a $2.4 million other-than-temporary impairment charge related to investments in three federal renewable energy tax credit funds during the year ended December 31, 2019. Tax credit 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 15 to the consolidated financial statements for additional information.
2019 Form 10-K | 42 |
Telecommunications expense decreased $2.2 million for the year ended December 31, 2019 as compared to 2018 partly due to branch reductions and other operating efficiencies.
Other non-interest expense decreased $6.3 million for the year ended December 31, 2019 as compared to 2018. The decrease was mainly due to $5.6 million of USAB merger related charges recognized during 2018 and a $1.4 million increase in net gains on sale of OREO properties. Merger expenses related to the Oritani acquisition were immaterial within other non-interest expense during 2019. Advertising expense included in this category decreased $1.3 million to $4.5 million for the year ended December 31, 2019 as compared to 2018. During 2019, we also experienced moderate decreases in several other significant components of other expense, such as travel, debit card and ATM expense, postage, and stationery and print expenses. The positive impact of these items was partially offset by higher data processing costs during 2019 as compared to 2018.
Efficiency Ratio. The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted mostly by the loss on extinguishment of debt, amortization of tax credit investments, merger related expenses, and the gain on our sale-leaseback transaction during 2019. See table below for more details.
The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for such items during the years ended December 31, 2019, 2018 and 2017:
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
($ in thousands) | |||||||||||
Total non-interest expense, as reported | $ | 631,555 | $ | 629,061 | $ | 509,073 | |||||
Less: Loss on extinguishment of debt (pre-tax) | 31,995 | — | — | ||||||||
Less: Amortization of tax credit investments (pre-tax) | 20,392 | 24,200 | 41,747 | ||||||||
Less: LIFT program expenses (pre-tax )(1) | — | — | 9,875 | ||||||||
Less: Merger related expenses (pre-tax)(2) | 16,579 | 17,445 | 2,620 | ||||||||
Less: Severance expense (mainly branch transformation, pre-tax)(3) | 4,838 | 2,662 | — | ||||||||
Less: Legal expenses (litigation reserve impact only, pre-tax) | — | 12,184 | — | ||||||||
Total non-interest expense, as adjusted | $ | 557,751 | $ | 572,570 | $ | 454,831 | |||||
Net interest income | 898,048 | 857,203 | 660,047 | ||||||||
Total non-interest income, as reported | 214,520 | 134,052 | 111,706 | ||||||||
Add: Net impairment losses on securities (pre-tax) | 2,928 | — | — | ||||||||
Add: Branch related asset impairment (pre-tax)(4) | — | 1,821 | — | ||||||||
Add: Losses on securities transactions, net (pre-tax) | 150 | 2,342 | 20 | ||||||||
Less: Gain on the sale of Visa Class B shares (pre-tax)(5) | — | 6,530 | — | ||||||||
Less: Gain on sale leaseback transaction (pre-tax)(6) | 78,505 | — | — | ||||||||
Total non-interest income, as adjusted | $ | 139,093 | $ | 131,685 | $ | 111,726 | |||||
Gross operating income, as adjusted | $ | 1,037,141 | $ | 988,888 | $ | 771,773 | |||||
Efficiency ratio | 56.77 | % | 63.46 | % | 65.96 | % | |||||
Efficiency ratio, adjusted | 53.78 | % | 57.90 | % | 58.93 | % |
(1) | Costs related to implementation of Valley's LIFT earnings enhancement program in 2017 are primarily within professional and legal fees and salary and employee benefits expense. |
(2) | Merger related expenses are primarily within salary and employee benefits expense, professional and legal fees, and other expense. |
(3) | Severance expenses are included in salary and employee benefits. |
(4) | Branch related asset impairment is included in net losses on sale of assets within non-interest income. |
(5) | The gain from the sale of non-marketable securities is included in other non-interest income. |
(6) | The gain on sale leaseback transactions is included in gains on the sales of assets within other non-interest income. |
Management continuously monitors its expenses in an effort to optimize Valley's performance. Based upon these efforts and our revenue goals, we achieved an adjusted efficiency ratio (as shown in the table above) of 53.78 percent for 2019 that exceeded
43 | 2019 Form 10-K |
our previously announced goal of 55 percent or lower for the year. Valley expects to achieve an adjusted efficiency ratio of 51 percent or lower for the full year of 2020 as it remains committed to technology and business process enhancements throughout the organization. However, we can provide no assurance that our adjusted efficiency ratio will meet our target for 2020 or remain at the level reported for 2019.
Income Taxes
Effective January 1, 2018, the federal corporate income tax rate decreased from 35 percent to 21 percent under the Tax Act. Income tax expense was $147.0 million for the year ended December 31, 2019, reflecting an effective tax rate of 32.2 percent, as compared to $68.3 million for the year ended 2018, reflecting an effective tax rate of 20.7 percent. The increase in both income tax expense and the effective tax rate in 2019 as compared to 2018 was largely caused by an $31.2 million increase in Valley's reserve for uncertain tax liability positions at December 31, 2019 related to renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. As a result, Valley believes it is fully reserved for its tax positions related to DC Solar at December 31, 2019. In addition, the income tax expense and effective tax rate for 2018 reflect a net tax benefit of $3.3 million related to the reduction in our reserve for unrecognized tax benefits due to the expiration of the statute of limitations for certain tax positions.
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. Based on the current information available, we anticipate that our effective tax rate will range from 24 percent to 26 percent for 2020.
See additional information regarding our income taxes under our “Critical Accounting Policies and Estimates” section above, as well as Note 14 to the consolidated financial statements.
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. See Note 23 to the consolidated financial statements for the segments’ financial data.
Consumer lending. The consumer lending segment representing 24.3 percent of the total loan portfolio at December 31, 2019, is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).The duration of the residential mortgage loan portfolio (which represented 14.7 percent of our total loan portfolio at December 31, 2019) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans portfolio (representing 4.9 percent of total loans at December 31, 2019) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management Division, comprised of trust, asset management, and insurance services.
Average interest earning assets in this segment increased $694.3 million to $6.9 billion for the year ended December 31, 2019 as compared to 2018. The increase was largely due to loan growth from new and refinanced residential mortgage loan originations held for investment generated from our home mortgage consulting team, moderately low level of market mortgage interest rates, and strength of the labor markets, net of loan portfolio transfers and sales in 2019. Automobile loans and other
2019 Form 10-K | 44 |
consumer loans (mainly consisting of collateralized personal lines of credits) also grew by 10.0 percent and 6.1 percent, respectively, over the last 12 months.
Income before income taxes generated by the consumer lending segment increased $20.2 million to $77.5 million for the year ended December 31, 2019 as compared to $57.3 million for the year ended December 31, 2018, largely due to lower non-interest expense coupled with an increase in net interest income, partially offset by a decrease in non-interest income. Non-interest expense decreased $16.4 million as compared to 2018 due, in part, to lower salary and employee benefits expense. Net interest income increased $9.8 million mostly due to the increase in average loans. The decrease of $3.3 million in non-interest income for the year ended December 31, 2019 was largely due to lower insurance commissions generated by the Wealth Management Division and a moderate decline in net gains of sale of residential mortgage loans.
The net interest margin on the consumer lending portfolio was 2.63 percent and 2.77 percent for the years ended December 31, 2018 and December 31, 2019, respectively. The 2019 margin decreased 14 basis points from 2018 due to a 30 basis point increase in the costs associated with our funding sources, partially offset by16 basis point increase in the yield on average loans. The increase in our cost of funds was primarily due to greater use of brokered and retail time deposit funding in our overall mix of deposit balances and higher rates on most deposit products and wholesale borrowings during the first half of 2019. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our loans, deposits and other borrowings.
The return on average interest earning assets before income taxes for the consumer lending segment was 1.12 percent for 2019 compared to 0.92 percent for 2018.
Commercial lending. The commercial lending segment is mainly 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 $4.8 billion and represented 16.2 percent of the total loan portfolio at December 31, 2019. Commercial real estate loans and construction loans totaled $17.6 billion and represented 59.5 percent of the total loan portfolio at December 31, 2019.
Average interest earning assets in this segment increased $2.2 billion to $19.3 billion for the year ended December 31, 2019 as compared to 2018. The average increase was primarily attributable to solid organic loan growth during both 2019 and 2018.
For the year ended December 31, 2019, income before income taxes for the commercial lending segment increased $60.8 million to $369.2 million as compared to 2018. Net interest income increased $47.0 million to $668.7 million for the year ended December 31, 2019 as compared to 2018 largely due to higher average balances and an increase in yield on new loan originations, partially offset by higher interest expense. Non-interest income increased $18.9 million for the year ended December 31, 2019 as compared to 2018 mainly due to fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $33.4 million for the year ended December 31, 2019 as compared to $16.4 million in 2018. The provision for credit losses decreased $9.4 million to $17.5 million for the year ended December 31, 2019 as compared to 2018. (See details in the "Allowance for Credit Losses" section of this MD&A). Internal transfer expense and non-interest expense increased $7.7 million and $6.8 million for the year ended December 31, 2019, respectively, as compared to 2018.
The net interest margin for this segment decreased 17 basis points to 3.46 percent during 2019 as a result of a 30 basis point increase in the cost of our funding sources, partially offset by a 13 basis point increase in the yield on average loans as compared to 2018. The increase in yield on average loans was largely due to new loan volumes at higher market interest rates in the second half of 2018 and a gradual decline in the new loan interest rates in 2019.
The return on average interest earning assets before income taxes for this segment was 1.91 percent for 2019 compared to 1.80 percent for the prior year period.
Investment management. The investment management segment generates a large portion of our income through investments in various types of securities and interest-bearing deposits with other banks. These investments are mainly comprised of fixed rate securities and, depending on our liquid cash position, federal funds sold and interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York) as part of our asset/liability management strategies. The fixed rate investments are one of Valley’s least sensitive assets to changes in market interest rates. However, a portion of the investment portfolio is invested in shorter-duration securities to maintain the overall asset sensitivity of our balance sheet. See the “Asset/Liability Management” section below for further analysis.
Average interest earning assets decreased $22.3 million to $4.3 billion for the year ended December 31, 2019 as compared to 2018 mostly due to a decline of $102.1 million in average investment securities partially offset by a $79.8 million increase in federal funds sold and other interest bearing deposits. Average investments declined due to the reinvestment of normal cash flows into higher yielding new loan activity in 2019. Average federal funds sold and other interest bearing deposits increased to $298.7
45 | 2019 Form 10-K |
million for the year ended December 31, 2019 as compared to 2018 due to higher levels of overnight liquidity primarily caused by normal fluctuations in the timing of new loan originations and other treasury management activity.
For the year ended December 31, 2019, income before income taxes for the investment management segment decreased $11.9 million to $27.0 million as compared to 2018 primarily due to a $17.0 million decrease in net interest income, partially offset by a $4.7 million decrease in the internal transfer expense. The decrease in net interest income was mainly driven by lower average investment balances and normal repayment of higher yielding securities during the year ended December 31, 2019 as compared to 2018.
The net interest margin for this segment decreased 38 basis points to 1.59 percent during the year ended December 31, 2019 as compared to 2018 as a result of a 30 basis point increase in costs associated with our funding sources and an 8 basis point decrease in the yield on average investments. The decrease in the yield on average investments during 2019 as compared to one year ago was mainly due to repayment and prepayment of mostly higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased during 2019.
The return on average interest earning assets before income taxes for this segment was 0.62 percent for 2019 compared to 0.89 percent for 2018.
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 gains and losses on securities and net impairment losses not reported in the investment management segment above, interest expense related to subordinated notes, amortization of tax credit investments, as well as infrequent items, such as the loss on extinguishment of debt, gain on sale leaseback transactions and merger expenses.
The pre-tax net loss for the corporate segment decreased $58.0 million for the year ended December 31, 2019 to $17.0 million as compared to $75.0 million in 2018. The lower net loss during 2019 for this segment was mainly due to a increase in non-interest income, as well as internal transfer income, partially offset by a increase in non-interest expense. The non-interest income increased $64.8 million to $106.6 million for the year ended December 31, 2019 from 2018 primarily due to a $78.5 million net gain on the sale (and leaseback) of 26 Valley properties during the first quarter 2019. Internal transfer income increased $4.6 million to $349.5 million for the year ended December 31, 2019 as compared to the prior year. The non-interest expense increased $12.4 million to $452.6 million for the year ended December 31, 2019 as compared to 2018 largely due to a loss on extinguishment of debt totaling $32.0 million for 2019, partially offset by decreases in several items, including professional and legal fees. See further details in the "Non-Interest Expense" section in this MD&A.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and 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 December 31, 2019. The model assumes changes in interest rates without any proactive change in the composition or size of the balance sheet by management. In the model, the forecasted shape of the yield curve remains static as of December 31, 2019. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model.
Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of December 31, 2019. Although the size of Valley’s balance sheet is forecasted to remain static as of December 31, 2019, in our model, the composition
2019 Form 10-K | 46 |
is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during 2019. The model utilizes an immediate parallel shift in the market interest rates at December 31, 2019.
The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table above, 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.
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 | $ | 13,025 | 1.32 | % | ||||
+100 | 7,980 | 0.81 | ||||||
- 100 | 31,600 | 3.19 | ||||||
- 200 | 53,548 | 5.42 |
As noted in the table above, a 100 basis point immediate decrease in interest rates combined with a static balance sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 months by 3.19 percent. This is primarily due to a significant volume of term retail deposit funding that will reprice lower over the next 12 months. Valley's sensitivity to changes in market rates as compared to December 31, 2018 (which projected a decrease of 0.49 percent in net interest income over a 12-month period) increased partly due to changes in balance sheet structure related to funding composition and a slightly longer asset duration. Management believes the interest rate sensitivity remains within an acceptable tolerance range at December 31, 2019. However, the level of net interest income sensitivity may increase or decrease in the future as a result of changes in deposit and borrowings strategies, the slope of the yield curve and projected cash flows.
47 | 2019 Form 10-K |
The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding at December 31, 2019 and their associated fair values. The expected cash flows are categorized based on each financial instrument’s anticipated maturity or interest rate reset date in each of the future periods presented.
INTEREST RATE SENSITIVITY ANALYSIS
Rate | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total Balance | Fair Value | ||||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||
Interest sensitive assets: | ||||||||||||||||||||||||||||||||||
Interest bearing deposits with banks | 2.00 | % | $ | 178,423 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 178,423 | $ | 178,423 | ||||||||||||||||
Equity securities | 2.09 | 28,454 | 1,148 | 1,148 | 1,148 | 1,148 | 8,364 | 41,410 | 41,410 | |||||||||||||||||||||||||
Investment securities available for sale | 2.55 | 399,818 | 273,267 | 275,683 | 133,200 | 93,466 | 391,367 | 1,566,801 | 1,566,801 | |||||||||||||||||||||||||
Investment securities held to maturity | 3.12 | 600,600 | 424,736 | 328,684 | 242,926 | 140,282 | 598,867 | 2,336,095 | 2,358,720 | |||||||||||||||||||||||||
Loans held for sale, at fair value | 3.78 | 76,113 | — | — | — | — | — | 76,113 | 76,113 | |||||||||||||||||||||||||
Loans | 4.30 | 8,564,837 | 4,378,981 | 3,223,970 | 2,422,534 | 1,846,143 | 9,262,743 | 29,699,208 | 28,964,396 | |||||||||||||||||||||||||
Total interest sensitive assets | 4.12 | % | $ | 9,848,245 | $ | 5,078,132 | $ | 3,829,485 | $ | 2,799,808 | $ | 2,081,039 | $ | 10,261,341 | $ | 33,898,050 | $ | 33,185,863 | ||||||||||||||||
Interest sensitive liabilities: | ||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||
Savings, NOW and money market | 0.72 | % | $ | 12,757,484 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 12,757,484 | $ | 12,757,484 | ||||||||||||||||
Time | 2.18 | 8,507,854 | 657,365 | 343,225 | 134,800 | 56,775 | 17,926 | 9,717,945 | 9,747,868 | |||||||||||||||||||||||||
Short-term borrowings | 1.67 | 1,093,280 | — | — | — | — | — | 1,093,280 | 1,081,879 | |||||||||||||||||||||||||
Long-term borrowings | 2.55 | 83,418 | 1,294,768 | 171,419 | 267,821 | 200,000 | 105,000 | 2,122,426 | 2,181,401 | |||||||||||||||||||||||||
Junior subordinated debentures | 6.00 | — | — | — | — | — | 55,718 | 55,718 | 53,889 | |||||||||||||||||||||||||
Total interest sensitive liabilities | 1.47 | % | $ | 22,442,036 | $ | 1,952,133 | $ | 514,644 | $ | 402,621 | $ | 256,775 | $ | 178,644 | $ | 25,746,853 | $ | 25,822,521 | ||||||||||||||||
Interest sensitivity gap | $ | (12,593,791 | ) | $ | 3,125,999 | $ | 3,314,841 | $ | 2,397,187 | $ | 1,824,264 | $ | 10,082,697 | $ | 8,151,197 | $ | 7,363,342 | |||||||||||||||||
Ratio of interest sensitive assets to interest sensitive liabilities | 0.44:1 | 2.6:1 | 7.44:1 | 6.95:1 | 8.1:1 | 57.44:1 | 1.32:1 | 1.29:1 |
The above table provides an approximation of the projected re-pricing of assets and liabilities at December 31, 2019 on the basis of contractual maturities, adjusted for anticipated prepayments of principal (including anticipated call dates on long-term borrowings and junior subordinated debentures), and scheduled rate adjustments. The prepayment experience reflected herein is based on historical experience combined with market consensus expectations derived from independent external sources. The actual repayments of these instruments could vary substantially if future prepayments differ from historical experience or current market expectations. While all non-maturity deposit liabilities are reflected in the 2019 column in the table above, management controls the re-pricing of the vast majority of the interest-bearing instruments within these liabilities.
Our cash flow derivatives are designed to protect us from upward movement in interest rates on certain deposits and other borrowings. The interest rate sensitivity table reflects the sensitivity at current interest rates. As a result, the notional amount of our derivatives is not included in the table. We use various assumptions to estimate fair values. See Note 3 of the consolidated financial statements for further discussion of fair value measurements.
The total gap re-pricing within one year as of December 31, 2019 was a negative $12.6 billion, representing a ratio of interest sensitive assets to interest sensitive liabilities of 0.44:1. The total gap re-pricing position, as reported in the table above, reflects the projected interest rate sensitivity of our principal cash flows based on market conditions as of December 31, 2019. As the market level of interest rates and associated prepayment speeds move, the total gap re-pricing position will change accordingly, but not likely in a linear relationship. Management does not view our one-year gap position as of December 31, 2019 as presenting an unusually high risk potential, although no assurances can be given that we are not at risk from interest rate increases or decreases.
2019 Form 10-K | 48 |
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 carefully performed and reported by our Treasury Department to two Board committees. Among other actions, Treasury reviews historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements.
The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy requires that we may not have a ratio of loans to deposits in excess of 125 percent or reliance on wholesale funding greater than 27.5 percent of total funding. The Bank was in compliance with the foregoing policies at December 31, 2019.
On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available for sale, loans held for sale, and, from time to time, federal funds sold and receivables related to unsettled securities transactions. Our equities securities carried at fair value are restricted assets held for certain Valley obligations at December 31, 2019 and unavailable as liquidity sources. Liquid assets totaled approximately $2.2 billion, representing 6.4 percent of earning assets, at December 31, 2019 and $2.3 billion, representing 8.0 percent of earning assets, at December 31, 2018. Of the $2.2 billion of liquid assets at December 31, 2019, approximately $1.0 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $1.2 billion 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 December 31, 2019) are projected to be approximately $8.6 billion over the next 12 months. As a contingency plan for significant funding needs, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio, or from the temporary curtailment of lending activities.
On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $20.4 billion and $18.1 billion for the years ended December 31, 2019 and 2018, respectively, representing 66.8 percent and 65.3 percent of average earning assets at December 31, 2019 and 2018, 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.
The following table lists, by maturity, all certificates of deposit of $250 thousand and over at December 31, 2019:
2019 | |||
(in thousands) | |||
Less than three months | $ | 654,225 | |
Three to six months | 445,433 | ||
Six to twelve months | 389,515 | ||
More than twelve months | 197,307 | ||
Total | $ | 1,686,480 |
Additional funding may be provided from short-term liquidity borrowings through deposit gathering networks and in the form of federal funds purchased obtained through our well established relationships with several correspondent banks. While there are no firm lending commitments currently in place, management believes that we could borrow approximately $1.0 billion 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 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 of New York via the discount window as a contingency for additional liquidity. At December 31, 2019, our borrowing capacity under the Federal Reserve Bank's discount window was approximately $1.8 billion.
49 | 2019 Form 10-K |
We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased $1.0 billion to $1.1 billion at December 31, 2019 as compared to $2.1 billion at December 31, 2018 largely due to a decrease of $792 million in FHLB advances and lower repo and federal funds purchased balances. The change in short-term borrowings is generally driven by the levels of loan originations both for investment and sale, the success of our deposit gathering initiatives (including brokered deposits) and changes in long-term borrowings used in our current liquidity/funding strategies.
Average short-term FHLB advances exceeded 30 percent of total shareholders' equity at December 31, 2019 and 2018, respectively. The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the years ended December 31, 2019 and 2018:
2019 | 2018 | ||||||
($ in thousands) | |||||||
FHLB advances: | |||||||
Average balance outstanding | $ | 1,681,844 | $ | 1,828,751 | |||
Maximum outstanding at any month-end during the period | 2,510,000 | 2,607,000 | |||||
Balance outstanding at end of period | 940,000 | 1,732,000 | |||||
Weighted average interest rate during the period | 1.88 | % | 1.00 | % | |||
Weighted average interest rate at the end of the period | 1.85 | 2.44 |
Corporation Liquidity. Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our on-going asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures. These cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the bank subsidiary. 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
The primary purpose of the investment portfolio is to provide a source of earnings, be a source of liquidity, and serve as a tool for managing interest rate risk. The decision to purchase or sell securities is based upon the current assessment of long and short-term economic and financial conditions, including the interest rate environment and other statement of financial condition components. See additional information under "Interest Rate Sensitivity", "Liquidity" and "Capital Adequacy" sections elsewhere in this MD&A.
As of December 31, 2019, our investment portfolio was comprised of equity securities (consisting of a money market mutual fund), U.S. Treasury securities, U.S. government agency securities, taxable and tax-exempt issues of states and political subdivisions, residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies and high quality corporate bonds. 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 and Fannie Mae. Securities with limited marketability and/or restrictions, such as Federal Home Loan Bank and Federal Reserve Bank stocks, are carried at cost and are included in other assets.
Among other securities, our investments in trust preferred securities, bank issued corporate bonds and special revenue bonds may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers.
2019 Form 10-K | 50 |
Investment securities at December 31, 2019, 2018 and 2017 were as follows:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Equity securities * | $ | 41,410 | $ | — | $ | 11,201 | |||||
Available for sale debt securities | |||||||||||
U.S. Treasury securities | 50,943 | 49,306 | 49,642 | ||||||||
U.S. government agency securities | 29,243 | 36,277 | 42,505 | ||||||||
Obligations of states and political subdivisions: | |||||||||||
Obligations of states and state agencies | 78,573 | 97,113 | 38,219 | ||||||||
Municipal bonds | 91,478 | 99,979 | 74,665 | ||||||||
Total obligations of states and political subdivisions | 170,051 | 197,092 | 112,884 | ||||||||
Residential mortgage-backed securities | 1,254,786 | 1,429,782 | 1,223,295 | ||||||||
Trust preferred securities | — | — | 3,214 | ||||||||
Corporate and other debt securities | 61,778 | 37,087 | 51,164 | ||||||||
Total available for sale debt securities | 1,566,801 | 1,749,544 | 1,482,704 | ||||||||
Total investment securities (fair value) | $ | 1,608,211 | $ | 1,749,544 | $ | 1,493,905 | |||||
Held to maturity debt securities | |||||||||||
U.S. Treasury securities | $ | 138,352 | $ | 138,517 | $ | 138,676 | |||||
U.S. government agency securities | 7,345 | 8,721 | 9,859 | ||||||||
Obligations of states and political subdivisions: | |||||||||||
Obligations of states and state agencies | 297,454 | 341,702 | 244,272 | ||||||||
Municipal bonds | 203,251 | 243,954 | 221,606 | ||||||||
Total obligations of states and political subdivisions | 500,705 | 585,656 | 465,878 | ||||||||
Residential mortgage-backed securities | 1,620,119 | 1,266,770 | 1,131,945 | ||||||||
Trust preferred securities | 37,324 | 37,332 | 49,824 | ||||||||
Corporate and other debt securities | 32,250 | 31,250 | 46,509 | ||||||||
Total investment securities held to maturity (amortized cost) | $ | 2,336,095 | $ | 2,068,246 | $ | 1,842,691 | |||||
Total investment securities | $ | 3,944,306 | $ | 3,817,790 | $ | 3,336,596 |
* | Equity securities at December 31, 2017 were reclassified from available for sale securities to conform to the current presentation in accordance with Accounting Standards Update No. 2016-01 adopted on January 1, 2018. |
As of December 31, 2019, total investments increased $126.5 million or 3.3 percent as compared to 2018 largely due to a combined net increase of $178.4 million in residential mortgage-backed securities classified as held for maturity and available for sale and a $41.4 million increase in equity securities, partially offset by a combined $112.0 million decrease in obligations of states and state agencies classified as held to maturity and available for sale. The net increase in total residential mortgage-backed securities was mainly driven by purchases of Ginnie Mae and Fannie Mae securities classified as held to maturity and securities acquired from Oritani classified as available for sale that were offset by a high level of paydowns during 2019. We acquired $335.9 million of available for sale debt securities from Oritani, consisting mostly of residential mortgage-backed securities. See Note 2 to the consolidated financial statements for additional information. The decrease in obligations of states and state agencies from 2018 was largely a result of a high level of calls and redemptions within the held for maturity portfolio during 2019.
At December 31, 2019, we had $1.6 billion and $1.3 billion of residential mortgage-backed securities classified as held to maturity and available for sale, respectively. Approximately 56 percent and 66 percent of these residential mortgage-backed securities, respectively, were issued and guaranteed by Ginnie Mae. The remainder of our outstanding residential mortgage-backed security balances at December 31, 2019 were issued by either Fannie Mae or Freddie Mac.
51 | 2019 Form 10-K |
The following table presents the remaining contractual maturities (unadjusted for any expected prepayments) with the corresponding weighted-average yields of held to maturity and available for sale debt securities at December 31, 2019:
0-1 year | 1-5 years | 5-10 years | Over 10 years | Total | ||||||||||||||||||||||||||||||
Amount (1) | Yield (2) | Amount (1) | Yield (2) | Amount (1) | Yield (2) | Amount (1) | Yield (2) | Amount (1) | Yield (2) | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||
Available for sale debt securities | ||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 905 | 1.84 | % | $ | 50,038 | 1.59 | % | $ | — | — | % | $ | — | — | % | $ | 50,943 | 1.59 | % | ||||||||||||||
U.S. government agency securities | 10 | 3.10 | 2,726 | 0.22 | — | 26,507 | 2.89 | 29,243 | 2.64 | |||||||||||||||||||||||||
Obligations of states and political subdivisions: (3) | ||||||||||||||||||||||||||||||||||
Obligations of states and state agencies | 5,781 | 3.08 | 16,369 | 3.82 | 17,020 | 6.05 | 39,403 | 4.25 | 78,573 | 4.46 | ||||||||||||||||||||||||
Municipal bonds | 10,405 | 3.06 | 28,604 | 2.68 | 28,008 | 4.10 | 24,461 | 5.20 | 91,478 | 3.83 | ||||||||||||||||||||||||
Total obligations of states and political subdivisions | 16,186 | 3.07 | 44,973 | 3.09 | 45,028 | 4.84 | 63,864 | 4.61 | 170,051 | 4.12 | ||||||||||||||||||||||||
Residential mortgage-backed securities (4) | 3,837 | 0.09 | 21,487 | 2.04 | 88,105 | 2.76 | 1,141,357 | 2.53 | 1,254,786 | 2.53 | ||||||||||||||||||||||||
Corporate and other debt securities | 2,510 | 3.32 | 13,064 | 2.69 | 46,204 | 4.53 | — | 61,778 | 4.09 | |||||||||||||||||||||||||
Total | $ | 23,448 | 2.56 | % | $ | 132,288 | 2.26 | % | $ | 179,337 | 3.74 | % | $ | 1,231,728 | 2.65 | % | $ | 1,566,801 | 2.74 | % | ||||||||||||||
Held to maturity debt securities | ||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 69,624 | 2.91 | % | $ | 39,807 | 2.88 | % | $ | 28,921 | 3.06 | % | $ | — | — | % | $ | 138,352 | 2.93 | % | ||||||||||||||
U.S. government agency securities | — | — | — | 7,345 | 2.53 | 7,345 | 2.53 | |||||||||||||||||||||||||||
Obligations of states and political subdivisions: (3) | ||||||||||||||||||||||||||||||||||
Obligations of states and state agencies | 1,013 | 3.12 | 40,722 | 4.34 | 112,610 | 4.88 | 143,109 | 3.62 | 297,454 | 4.19 | ||||||||||||||||||||||||
Municipal bonds | 16,593 | 3.96 | 79,837 | 3.89 | 60,553 | 3.75 | 46,268 | 4.74 | 203,251 | 4.05 | ||||||||||||||||||||||||
Total obligations of states and political subdivisions | 17,606 | 3.91 | 120,559 | 4.04 | 173,163 | 4.48 | 189,379 | 3.89 | 500,705 | 4.13 | ||||||||||||||||||||||||
Residential mortgage-backed securities (4) | — | 8,821 | 3.01 | 11,611 | 2.87 | 1,599,687 | 2.64 | 1,620,119 | 2.64 | |||||||||||||||||||||||||
Trust preferred securities | — | — | 1,353 | 8.23 | 35,971 | 4.04 | 37,324 | 4.19 | ||||||||||||||||||||||||||
Corporate and other debt securities | 9,000 | 2.66 | 10,250 | 3.81 | 13,000 | 4.81 | — | 32,250 | 3.89 | |||||||||||||||||||||||||
Total | $ | 96,230 | 3.70 | % | $ | 179,437 | 3.72 | % | $ | 228,048 | 4.26 | % | $ | 1,832,382 | 2.80 | % | $ | 2,336,095 | 3.02 | % |
(1) | Held to maturity debt securities amounts are presented at amortized costs, stated at cost less principal reductions, if any, and adjusted for accretion of discounts and amortization of premiums. Available for sale amounts are presented at fair value. |
(2) | Average yields are calculated on a yield-to-maturity basis. |
(3) | Average yields on obligations of states and political subdivisions are generally tax-exempt and calculated on a tax-equivalent basis using a statutory federal income tax rate of 21 percent. |
(4) | Residential mortgage-backed securities are shown using stated final maturity. |
The residential mortgage-backed securities portfolio is a significant source of our liquidity through the monthly cash flow of principal and interest. Mortgage-backed securities, like all securities, are sensitive to change in the interest rate environment, increasing and decreasing in value as interest rates fall and rise. As interest rates fall, the potential increase in prepayments can reduce the yield on the mortgage-backed securities portfolio, and reinvestment of the proceeds will be at lower yields. Conversely, rising interest rates may reduce cash flows from prepayments and extend anticipated duration of these assets. We monitor the changes in interest rates, cash flows and duration, in accordance with our investment policies. Management seeks out investment securities with an attractive spread over our cost of funds.
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. For debt securities, the primary consideration in determining whether impairment is other-than-temporary is whether or not Valley expects to collect all contractual cash flows.
2019 Form 10-K | 52 |
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.
See Note 4 to our consolidated financial statements for additional information regarding our other-than-temporary impairment analysis.
The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at December 31, 2019.
December 31, 2019 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(in thousands) | |||||||||||||||
Available for sale investment grades:* | |||||||||||||||
AAA Rated | $ | 1,386,925 | $ | 12,252 | $ | (5,324 | ) | $ | 1,393,853 | ||||||
AA Rated | 67,598 | 566 | (34 | ) | 68,130 | ||||||||||
A Rated | 21,050 | 222 | (22 | ) | 21,250 | ||||||||||
BBB Rated | 28,069 | 353 | — | 28,422 | |||||||||||
Non-investment grade | 6,827 | — | (51 | ) | 6,776 | ||||||||||
Not rated | 48,318 | 203 | (151 | ) | 48,370 | ||||||||||
Total debt securities available for sale | $ | 1,558,787 | $ | 13,596 | $ | (5,582 | ) | $ | 1,566,801 | ||||||
Held to maturity investment grades:* | |||||||||||||||
AAA Rated | $ | 1,979,283 | $ | 27,745 | $ | (5,391 | ) | $ | 2,001,637 | ||||||
AA Rated | 220,202 | 5,779 | (10 | ) | 225,971 | ||||||||||
A Rated | 17,507 | 401 | — | 17,908 | |||||||||||
BBB Rated | 10,722 | 325 | (48 | ) | 10,999 | ||||||||||
Not rated | 108,381 | 306 | (6,482 | ) | 102,205 | ||||||||||
Total securities held to maturity | $ | 2,336,095 | $ | 34,556 | $ | (11,931 | ) | $ | 2,358,720 |
* | Rated using external rating agencies. Ratings categories include entire range. For example, “A Rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels. |
The unrealized losses in the AAA rated category for both available for sale and held to maturity investment debt securities presented in the table above are mostly related to residential mortgage-backed securities primarily issued by Ginnie Mae, Fannie Mae and Freddie Mac. The held to maturity portfolio includes $108.4 million in investments not rated by the rating agencies with aggregate unrealized losses of $6.5 million at December 31, 2019. The unrealized losses for this category included $6.0 million of unrealized losses related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million. All single-issuer bank 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 December 31, 2019, all of the issuers appear to meet the regulatory capital minimum requirements to be considered a “well-capitalized” financial institution and/or have maintained performance levels adequate to support the contractual cash flows of the security.
During 2019, Valley recognized a $2.9 million other-than-temporary credit impairment charge on one special revenue bond classified as available for sale (within the obligations of states and state agencies in the tables above). The credit impairment was due to severe credit deterioration disclosed by the issuer in the second quarter 2019, as well as the issuer's default on its contractual payment. At December 31, 2019, the impaired security had an adjusted amortized cost and fair value of $680 thousand. Comparatively, there was no other-than-temporary impairment recognized in earnings during the years ended December 31, 2018 and 2017. During the fourth quarter 2018, we sold all of our private label mortgage-backed securities classified as available for sale, including securities that were previously impaired and rated non-investment grade, for an aggregate net loss of $1.5 million.
53 | 2019 Form 10-K |
Loan Portfolio
The following table reflects the composition of the loan portfolio for the years indicated.
At December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Commercial and industrial | $ | 4,825,997 | $ | 4,331,032 | $ | 2,741,425 | $ | 2,638,195 | $ | 2,540,491 | |||||||||
Commercial real estate: | |||||||||||||||||||
Commercial real estate | 15,996,741 | 12,407,275 | 9,496,777 | 8,719,667 | 7,424,636 | ||||||||||||||
Construction | 1,647,018 | 1,488,132 | 851,105 | 824,946 | 754,947 | ||||||||||||||
Total commercial real estate | 17,643,759 | 13,895,407 | 10,347,882 | 9,544,613 | 8,179,583 | ||||||||||||||
Residential mortgage | 4,377,111 | 4,111,400 | 2,859,035 | 2,867,918 | 3,130,541 | ||||||||||||||
Consumer: | |||||||||||||||||||
Home equity | 487,272 | 517,089 | 446,280 | 469,009 | 511,203 | ||||||||||||||
Automobile | 1,451,623 | 1,319,571 | 1,208,902 | 1,139,227 | 1,239,313 | ||||||||||||||
Other consumer | 913,446 | 860,970 | 728,056 | 577,141 | 441,976 | ||||||||||||||
Total consumer loans | 2,852,341 | 2,697,630 | 2,383,238 | 2,185,377 | 2,192,492 | ||||||||||||||
Total loans * | $ | 29,699,208 | $ | 25,035,469 | $ | 18,331,580 | $ | 17,236,103 | $ | 16,043,107 | |||||||||
As a percent of total loans: | |||||||||||||||||||
Commercial and industrial | 16.2 | % | 17.3 | % | 15.0 | % | 15.3 | % | 15.8 | % | |||||||||
Commercial real estate | 59.5 | 55.5 | 56.4 | 55.4 | 51.0 | ||||||||||||||
Residential mortgage | 14.7 | 16.4 | 15.6 | 16.6 | 19.5 | ||||||||||||||
Consumer loans | 9.6 | 10.8 | 13.0 | 12.7 | 13.7 | ||||||||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
* | Total loans are net of unearned premiums and deferred loan costs of $12.6 million, $21.5 million, $22.2 million, $15.3 million, and $3.5 million at December 31, 2019, 2018, 2017, 2016, and 2015, respectively. |
Total loans increased by $4.7 billion, or 18.6 percent to $29.7 billion at December 31, 2019 from December 31, 2018. Adjusted for $3.2 billion of acquired Oritani loan balances as of December 31, 2019 and the $800 million of commercial real estate loans sold, total loans grew by 8.8 percent in 2019 due to strong demand in most loan categories as discussed further below. During 2019, Valley also originated $538.0 million of residential mortgage loans for sale. Loans held for sale totaled $76.1 million and $35.2 million at December 31, 2019 and 2018, respectively. See additional information regarding our residential mortgage loan activities below.
Our loan portfolio includes PCI loans, which are loans acquired at a discount that is due, in part, to credit quality. At December 31, 2019, our PCI loan portfolio increased $2.4 billion to $6.6 billion as compared to December 31, 2018 primarily due to the PCI loan classification of all the loans acquired from Oritani on December 1, 2019, partially offset by normal loan repayments.
Commercial and industrial loans totaled $4.8 billion at December 31, 2019 and increased by $495.0 million from December 31, 2018 mainly due to a $553.6 million increase in the non-PCI loan portfolio, partially offset by $58.6 million decrease in PCI loans. The increase in non-PCI loans was due to strong organic growth mostly driven by new small to middle market lending relationships within our markets aided by our ability to hire strong lending talent and the success of focused calling efforts in 2019. In addition, our premium finance division grew by approximately $41 million during 2019 from a year ago. Commercial and industrial loans acquired from Oritani during the fourth quarter 2019 were not material.
Commercial real estate loans (excluding construction loans) increased $3.6 billion to $16.0 billion at December 31, 2019 from December 31, 2018 mainly due to $3.0 billion of PCI loans acquired from Oritani and a $1.0 billion increase in the non-PCI loan portfolio, partly offset by normal PCI loan repayments. The increase in non-PCI loans was primarily due to strong organic loan volumes generated across a broad-based segment of borrowers within the commercial real estate portfolio mainly from new and pre-exiting relationships in our Florida market area, as well as targeted growth in New Jersey and New York and some migration of completed construction projects to permanent financing during 2019. The increase in non-PCI loans was partially offset by the aforementioned sale of approximately $800 million of commercial real estate loans, mostly within New York City during the fourth quarter 2019. Construction loans totaled $1.6 billion at December 31, 2019 and increased $158.9 million from December 31, 2018. Exclusive of a $214.5 million decline in PCI loans, the non-PCI construction loans increased $373.4 million or 33.3 percent largely
2019 Form 10-K | 54 |
due to strong demand for investor occupied projects within our primary markets, and to a lesser extent, migration of completed construction projects to permanent financing.
Residential mortgage loans totaled $4.4 billion at December 31, 2019 and increased by $265.7 million from December 31, 2018 partly due to a $114.0 million increase in our non-PCI loans. Our PCI loans increased $151.7 million largely due to $248.3 million of loans acquired from Oritani, net of normal repayment activity. Our new and refinanced residential mortgage loan originations decreased 9.2 percent to $1.6 billion for the year ended December 31, 2019 as compared to $1.7 billion in 2018. Of the $1.6 billion in total originations, $333 million represented Florida residential mortgage loans. During 2019, we sold $934.5 million of residential mortgages as compared to $965.5 million of residential mortgage loans sold during 2018, including $436 million and $290 million of pre-existing loans sold from our residential mortgage loan portfolio, respectively. We retain mortgage originations based on credit criteria and loan to value levels, the composition of our interest earning assets and interest bearing liabilities and our ability to manage the interest rate risk associated with certain levels of these instruments. From time to time, we purchase residential mortgage loans originated by, and sometimes serviced by, other financial institutions based on several factors, including current loan origination volumes, market interest rates, excess liquidity, CRA and other asset/liability management strategies. Purchased residential mortgage loans are generally selected using Valley’s normal underwriting criteria at the time of purchase and are sometimes partially or fully guaranteed by third parties or insured by government agencies such as the Federal Housing Administration. Valley purchased approximately $35 million and $105 million of 1-4 family loans, qualifying for CRA purposes during 2019 and 2018, respectively.
Consumer loans totaled $2.9 billion at December 31, 2019 and increased $154.7 million from December 31, 2018 mainly due to increases in automobile and secured personal lines of credit, partially offset by a decrease in the home equity loan portfolio. Automobile loans increased $132.1 million or 10.0 percent to $1.5 billion at December 31, 2019 from December 31, 2018 primarily due to higher indirect auto application activity during 2019. Additionally, our Florida dealership network contributed over $169 million in auto loan originations, representing approximately 23 percent of Valley's total new auto loan production for 2019 as compared to $155 million, or 24 percent, of total originations in 2018. Other consumer loans increased $52.5 million to $913.4 million at December 31, 2019 as compared to 2018 largely due to continued strong growth and customer usage of collateralized personal lines of credit that allow the customer to manage their liquidity needs by accessing the cash value of their whole life insurance policy. Home equity loans decreased $29.8 million in 2019 from $517.1 million at December 31, 2018. The modest organic growth of $4.7 million in non-PCI loans during 2019 was more than offset by $34.5 million decline in PCI loans caused by normal repayments.
For 2020, we anticipate overall loan portfolio growth in the range of 6 to 8 percent. However, there can be no assurance that we will achieve such levels, or balances will not decline from December 31, 2019 given the potential for unforeseen changes in consumer confidence, the economy and other market conditions.
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 primarily from other neighboring states of New Jersey, which could present a geographic and credit risk if there was another significant broad-based economic downturn within these regions. To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector.
The following table reflects the contractual maturity distribution of the commercial and industrial and construction loans within our loan portfolio as of December 31, 2019:
One Year or Less | One to Five Years | Over Five Years | Total | ||||||||||||
(in thousands) | |||||||||||||||
Commercial and industrial—fixed-rate | $ | 599,716 | $ | 800,798 | $ | 847,794 | $ | 2,248,308 | |||||||
Commercial and industrial—adjustable-rate | 714,997 | 721,193 | 1,141,499 | 2,577,689 | |||||||||||
Construction—fixed-rate | 211,720 | 109,893 | 169,998 | 491,611 | |||||||||||
Construction—adjustable-rate | 834,397 | 260,144 | 60,866 | 1,155,407 | |||||||||||
$ | 2,360,830 | $ | 1,892,028 | $ | 2,220,157 | $ | 6,473,015 |
We may renew loans at maturity when requested by a customer. In such instances, we generally conduct a review which includes an analysis of the borrower’s financial condition and, if applicable, a review of the adequacy of collateral via a new appraisal from an independent, bank approved, certified or licensed property appraiser or readily available market resources. A rollover of the loan at maturity may require a principal reduction or other modified terms.
55 | 2019 Form 10-K |
Purchased Credit-Impaired Loans
PCI loans increased $2.4 billion to $6.6 billion at December 31, 2019 from $4.2 billion at December 31, 2018 mainly due to $3.4 billion of PCI loans acquired from Oritani on December 1, 2019, partially offset by normal repayment activity. Our PCI loans almost entirely include loans acquired in business combinations subsequent to 2011.
As required by U.S. GAAP, all of our PCI loans are accounted for under ASC Subtopic 310-30. This accounting guidance requires the PCI loans to be aggregated and accounted for as pools of loans based on common risk characteristics. A pool is accounted for as one asset with a single composite interest rate, aggregate fair value and expected cash flows. For PCI loan pools accounted for under ASC Subtopic 310-30, the difference between the contractually required payments due and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the non-accretable difference. The contractually required payments due represent the total undiscounted amount of all uncollected principal and interest payments. Contractually required payments due may increase or decrease for a variety of reasons, e.g. when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. The Bank estimates the undiscounted cash flows expected to be collected by incorporating several key assumptions, including probability of default, loss given default, and the amount of actual prepayments after the acquisition dates. The non-accretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses and uncollectable contractual interest expected to be incurred over the life of the loans. The excess of the undiscounted cash flows expected at the acquisition date over the carrying amount (fair value) of the PCI loans is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the loans, or pool of loans, using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment assumptions, and changes in expected principal and interest payments over the estimated lives of the loans. Prepayments affect the estimated life of PCI loans and could change the amount of interest income, and possibly principal, expected to be collected. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools.
At acquisition, we use a third party service provider to assist with our assessment of the contractual and estimated cash flows. During subsequent evaluation periods, Valley uses a third party software application to assess the contractual and estimated cash flows. Using updated loan-level information derived from Valley’s main operating system, contractually required loan payments and expected cash flows for each pool level, the software reforecasts both the contractual cash flows and cash flows expected to be collected. The loan-level information used to reforecast the cash flows is subsequently aggregated on a pool basis. The expected payment data, discount rates, impairment data and changes to the accretable yield are reviewed by Valley to determine whether this information is accurate and the resulting financial statement effects are reasonable.
Similar to contractual cash flows, we reevaluate expected cash flows on a quarterly, or more frequent basis. Unlike contractual cash flows which are determined based on known factors, significant management assumptions are necessary in forecasting the estimated cash flows. We attempt to ensure the forecasted expectations are reasonable based on the information currently available; however, due to the uncertainties inherent in the use of estimates, actual cash flow results may differ from our forecast and the differences may be significant. To mitigate such differences, we carefully prepare and review the assumptions utilized in forecasting estimated cash flows.
On a quarterly basis, Valley analyzes the actual cash flow versus the forecasts at the loan pool level and variances are reviewed to determine their cause. In re-forecasting future estimated cash flow, Valley will adjust the credit loss expectations for loan pools, as necessary. These adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which Valley does not reforecast estimated cash flows, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events which transpired during the current reporting period.
The following tables summarize the changes in the carrying amounts of PCI loans and the accretable yield on these loans for the years ended December 31, 2019 and 2018.
2019 | 2018 | ||||||||||||||
Carrying Amount | Accretable Yield | Carrying Amount | Accretable Yield | ||||||||||||
(in thousands) | |||||||||||||||
Balance, beginning of the period | $ | 4,190,086 | $ | 875,958 | $ | 1,387,215 | $ | 282,009 | |||||||
Acquisition | 3,380,841 | 600,178 | 3,736,984 | 559,907 | |||||||||||
Accretion | 214,415 | (214,415 | ) | 235,741 | (235,741 | ) | |||||||||
Payments received | (1,152,793 | ) | — | (1,169,661 | ) | — | |||||||||
Net (decrease) increase in expected cash flows | — | (10,995 | ) | — | 269,783 | ||||||||||
Transfers to other real estate owned | (2,950 | ) | — | (193 | ) | — | |||||||||
Balance, end of the period | $ | 6,629,599 | $ | 1,250,726 | $ | 4,190,086 | $ | 875,958 |
2019 Form 10-K | 56 |
The net (decrease) increase in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools. The net decrease in the expected cash flows totaling approximately $11.0 million for the year ended December 31, 2019 was largely due to the high volume of contractual principal prepayments caused by the low level of market interest rates. The net increase in the expected cash flows totaling $269.8 million for the year ended December 31, 2018 was largely due to higher interest rates and increased construction loan balances (mainly acquired from USAB) captured in the cash flow reforecast in the fourth quarter 2018.
Non-performing Assets
Non-performing assets (NPAs), which exclude non-performing PCI loans, include non-accrual loans, other real estate owned (OREO), other repossessed assets (which consist of automobiles) and non-accrual debt securities at December 31, 2019. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less cost to sell at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter. The non-performing assets totaling $104.4 million at December 31, 2019 increased 5.9 percent over the last 12-month period (as shown in the table below) primarily due to higher non-accrual commercial real estate loans. NPAs as a percentage of total loans and NPAs totaled 0.35 percent and 0.39 percent at December 31, 2019 and 2018, respectively. We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio over the past five years. The moderate level of NPAs is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. Past due loans and non-accrual loans in the table below exclude PCI loans. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley. For details regarding performing and non-performing PCI loans, see the "Credit quality indicators" section in Note 5 to the consolidated financial statements.
57 | 2019 Form 10-K |
The following table sets forth by loan category, accruing past due and non-performing assets on the dates indicated in conjunction with our asset quality ratios:
At December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Accruing past due loans* | |||||||||||||||||||
30 to 59 days past due | |||||||||||||||||||
Commercial and industrial | $ | 11,700 | $ | 13,085 | $ | 3,650 | $ | 6,705 | $ | 3,920 | |||||||||
Commercial real estate | 2,560 | 9,521 | 11,223 | 5,894 | 2,684 | ||||||||||||||
Construction | 1,486 | 2,829 | 12,949 | 6,077 | 1,876 | ||||||||||||||
Residential mortgage | 17,143 | 16,576 | 12,669 | 12,005 | 6,681 | ||||||||||||||
Total Consumer | 13,704 | 9,740 | 8,409 | 4,197 | 3,348 | ||||||||||||||
Total 30 to 59 days past due | 46,593 | 51,751 | 48,900 | 34,878 | 18,509 | ||||||||||||||
60 to 89 days past due | |||||||||||||||||||
Commercial and industrial | 2,227 | 3,768 | 544 | 5,010 | 524 | ||||||||||||||
Commercial real estate | 4,026 | 530 | — | 8,642 | — | ||||||||||||||
Construction | 1,343 | — | 18,845 | — | 2,799 | ||||||||||||||
Residential mortgage | 4,192 | 2,458 | 7,903 | 3,564 | 1,626 | ||||||||||||||
Total Consumer | 2,527 | 1,386 | 1,199 | 1,147 | 626 | ||||||||||||||
Total 60 to 89 days past due | 14,315 | 8,142 | 28,491 | 18,363 | 5,575 | ||||||||||||||
90 or more days past due | |||||||||||||||||||
Commercial and industrial | 3,986 | 6,156 | — | 142 | 213 | ||||||||||||||
Commercial real estate | 579 | 27 | 27 | 474 | 131 | ||||||||||||||
Construction | — | — | — | 1,106 | — | ||||||||||||||
Residential mortgage | 2,042 | 1,288 | 2,779 | 1,541 | 1,504 | ||||||||||||||
Total Consumer | 711 | 341 | 284 | 209 | 208 | ||||||||||||||
Total 90 or more days past due | 7,318 | 7,812 | 3,090 | 3,472 | 2,056 | ||||||||||||||
Total accruing past due loans | $ | 68,226 | $ | 67,705 | $ | 80,481 | $ | 56,713 | $ | 26,140 | |||||||||
Non-accrual loans* | |||||||||||||||||||
Commercial and industrial | $ | 68,636 | $ | 70,096 | $ | 20,890 | $ | 8,465 | $ | 10,913 | |||||||||
Commercial real estate | 9,004 | 2,372 | 11,328 | 15,079 | 24,888 | ||||||||||||||
Construction | 356 | 356 | 732 | 715 | 6,163 | ||||||||||||||
Residential mortgage | 12,858 | 12,917 | 12,405 | 12,075 | 17,930 | ||||||||||||||
Total Consumer | 2,204 | 2,655 | 1,870 | 1,174 | 2,206 | ||||||||||||||
Total non-accrual loans | 93,058 | 88,396 | 47,225 | 37,508 | 62,100 | ||||||||||||||
Other real estate owned (OREO) | 9,414 | 9,491 | 9,795 | 9,612 | 13,563 | ||||||||||||||
Other repossessed assets | 1,276 | 744 | 441 | 384 | 437 | ||||||||||||||
Non-accrual debt securities | 680 | — | — | 1,935 | 2,142 | ||||||||||||||
Total non-performing assets (NPAs) | $ | 104,428 | $ | 98,631 | $ | 57,461 | $ | 49,439 | $ | 78,242 | |||||||||
Performing troubled debt restructured loans | $ | 73,012 | $ | 77,216 | $ | 117,176 | $ | 85,166 | $ | 77,627 | |||||||||
Total non-accrual loans as a % of loans | 0.31 | % | 0.35 | % | 0.26 | % | 0.22 | % | 0.39 | % | |||||||||
Total NPAs as a % of loans and NPAs | 0.35 | 0.39 | 0.31 | 0.29 | 0.49 | ||||||||||||||
Total accruing past due and non-accrual loans as a % of loans | 0.54 | 0.62 | 0.70 | 0.55 | 0.55 | ||||||||||||||
Allowance for loan losses as a % of non-accrual loans | 173.83 | 171.79 | 255.92 | 305.05 | 170.98 |
* | Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis. |
2019 Form 10-K | 58 |
Loans past due 30 to 59 days decreased $5.2 million to $46.6 million at December 31, 2019 as compared to $51.8 million at December 31, 2018, mostly due to improved performance in all commercial loan delinquency categories, partially offset by increases in residential mortgage and consumer loan delinquencies. We do not believe that the higher level of residential mortgage and consumer loan delinquencies at December 31, 2019 represent any material negative trend within our total loan portfolio. All of the loans in this delinquency category are generally well secured and in the process of collection.
Loans past due 60 to 89 days increased $6.2 million to $14.3 million at December 31, 2019 as compared to December 31, 2018 partly due to two loan relationships totaling $3.7 million and $1.3 million within the commercial real estate and construction loan delinquencies, respectively, at December 31, 2019. The construction loan relationship was in the normal matured loan in the process of renewal and was subsequently brought current to its contractual terms.
Loans 90 days or more past due and still accruing decreased $494 thousand to $7.3 million at December 31, 2019 as compared to December 31, 2018. Commercial and industrial loan delinquencies decreased $2.2 million as compared to 2018 mainly due to one large loan relationship in the process of collection included in this category at December 31, 2018. All of the loans past due 90 days or more and still accruing are considered to be well secured and in the process of collection.
Non-accrual loans increased $4.7 million to $93.1 million at December 31, 2019 as compared to December 31, 2018 mainly due to an increase in commercial real estate loans, partially offset by a decrease in commercial and industrial loans. The $6.6 million increase in commercial real estate loans was partly due to a $3.9 million non-accrual loan at December 31, 2019. This loan had no related reserves within the allowance for loan losses at December 31, 2019 based upon the adequacy of the collateral valuation. The decrease in commercial and industrial loan category was mainly driven by non-accrual taxi medallion loans charge-offs totaling $6.5 million for the year ended December 31, 2019. Non-accrual taxi medallion loans totaled $63.3 million at December 31, 2019 as compared to $58.5 million at December 31, 2018 mainly due to continued weakness in the New York City taxi industry. The majority of the non-accrual taxi medallion loans were previously performing troubled debt restructured (TDR) loans and included in our impaired loans at both December 31, 2019 and 2018. See further discussion of our taxi medallion loan portfolio below.
Although the timing of collection is uncertain, management believes that most of the non-accrual loans at December 31, 2019, are well secured and largely collectible based on, in part, our quarterly review of impaired loans and the valuation of the underlying collateral, if applicable. Our impaired loans (mainly consisting of non-accrual commercial and industrial loans and commercial real estate loans over $250 thousand and all troubled debt restructured loans) totaled $163.6 million at December 31, 2019 and had $38.6 million in related specific reserves included in our total allowance for loan losses. If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $2.5 million, $3.6 million and $2.5 million for the years ended December 31, 2019, 2018 and 2017, respectively; none of these amounts were included in interest income during these periods.
During 2019, we continued to closely monitor the performance of our New York City and Chicago taxi medallion loans totaling $107.5 million and $7.3 million, respectively, within the commercial and industrial loan portfolio at December 31, 2019. While most of the taxi medallion loans are currently performing to their contractual terms, continued negative trends in the market valuations of the underlying taxi medallion collateral due to competing car service providers and other external factors could impact the future performance and internal classification of this portfolio. At December 31, 2019, the medallion portfolio included impaired loans totaling $87.1 million with related reserves of $35.5 million within the allowance for loan losses as compared to impaired loans totaling $73.7 million with related reserves of $27.9 million at December 31, 2018. At December 31, 2019, the impaired medallion loans largely consisted of $63.3 million of non-accrual taxi cab medallion loans classified as doubtful, and $23.8 million performing TDR loans classified as substandard loans.
Valley's historical taxi medallion lending criteria was conservative in regard to capping the loan amounts in relation to the prevailing market valuations at the time of origination, as well as obtaining personal guarantees and other collateral in certain instances. However, the severe decline in the market valuation of taxi medallions over the last several years has adversely affected the estimated fair valuation of these loans and, as a result, increased the level of our allowance for loan losses at December 31, 2019 (See the "Allowance for Credit Losses" section below). Potential further declines in the market valuation of taxi medallions could also negatively impact the future performance of this portfolio. For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $11.8 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at December 31, 2019.
OREO (which consisted of 30 commercial and residential properties) decreased to $9.4 million at December 31, 2019 as compared to $9.5 million at December 31, 2018. During 2019, we transferred 13 properties totaling $5.1 million and sold 35 properties for total proceeds of $6.6 million. The sales of OREO properties resulted in net gains of $1.3 million for the year ended December 31, 2019 as compared to an immaterial net loss for the year ended December 31, 2018. See additional information
59 | 2019 Form 10-K |
regarding OREO and other repossessed assets, including our foreclosed asset activity, in Notes 1 and 3 to the consolidated financial statements.
TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) decreased $4.2 million to $73.0 million at December 31, 2019 as compared to $77.2 million at December 31, 2018 mainly due to paydowns of several commercial and industrial loans during 2019. Performing TDRs consisted of 120 loans and 119 loans (primarily in the commercial and industrial loan and commercial real estate portfolios) at December 31, 2019 and 2018, respectively. On an aggregate basis, the $73.0 million in performing TDRs at December 31, 2019 had a modified weighted average interest rate of approximately 5.45 percent as compared to a pre-modification weighted average interest rate of 4.89 percent. See Note 5 to the consolidated financial statements for additional disclosures regarding our TDRs. The increase in the modified weighted average interest rate of the performing TDRs as compared to the pre-modification weighted average interest rate was largely due to loans restructured at higher interest rates due to the level of current market interest rates, but with extended loan terms and/or new contractual interest rates below market terms for similar credit risk profiles.
Potential Problem Loans
Although we believe that substantially all risk elements at December 31, 2019 have been disclosed in the categories presented above, it is possible that for a variety of reasons, including economic conditions, certain borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial loans. As part of the analysis of the loan portfolio, management determined that there were approximately $91.7 million and $142.8 million in potential problem loans (consisting mostly of commercial and industrial loans) at December 31, 2019 and 2018, respectively. Potential problem loans were not classified as non-accrual loans in the non-performing asset table above. Potential problem loans are defined as performing loans for which management has concerns about the ability of such borrowers to comply with the loan repayment terms and which may result in a non-performing loan. Our decision to include performing loans in potential problem loans does not necessarily mean that management expects losses to occur, but that management recognizes potential problem loans carry a higher probability of default. At December 31, 2019, the potential problem loans consisted of various types of performing commercial credits internally risk rated substandard, including taxi medallion loans, because the loans exhibited well-defined weaknesses and required additional attention by management. See further discussion regarding our internal loan classification system at Note 5 to the consolidated financial statements. There can be no assurance that Valley has identified all of its potential problem loans at December 31, 2019.
Asset Quality and Risk Elements
Lending is one of the most important functions performed by Valley and, by its very nature, lending is also the most complicated, risky and profitable part of our business. For our commercial loan portfolio, comprised of commercial and industrial loans, commercial real estate loans, and construction loans, a separate credit department is responsible for risk assessment and periodically evaluating overall creditworthiness of a borrower. Additionally, efforts are made to limit concentrations of credit so as to minimize the impact of a downturn in any one economic sector. We believe our loan portfolio is diversified as to type of borrower and loan. However, loans collateralized by real estate, including $5.9 billion of PCI loans, represent approximately 76 percent of total loans at December 31, 2019. Most of the loans collateralized by real estate are in northern and central New Jersey, New York City and Florida presenting a geographical credit risk if there was a further significant broad-based deterioration in economic conditions within these regions (see Part I, Item 1A. Risk Factors - "Our financial results and condition may be adversely impacted by changing economic conditions").
Consumer loans are comprised of residential mortgage loans, home equity loans, automobile loans and other consumer loans. Residential mortgage loans are secured by 1-4 family properties mostly located in New Jersey, New York and Florida. We do provide mortgage loans secured by homes beyond this primary geographic area; however, lending outside this primary area has generally consisted of loans made in support of existing customer relationships, as well as targeted purchases of certain loans guaranteed by third parties. Our mortgage loan originations are comprised of both jumbo (i.e., loans with balances above conventional conforming loan limits) and conventional loans based on underwriting standards that generally comply with Fannie Mae and/or Freddie Mac requirements. The weighted average loan-to-value ratio of all residential mortgage originations in 2019 was 72 percent while FICO® (independent objective criteria measuring the creditworthiness of a borrower) scores averaged 751. Home equity and automobile loans are secured loans and are made based on an evaluation of the collateral and the borrower’s creditworthiness. In addition to our primary markets, automobile loans are mostly originated in several other contiguous states. Due to the level of our underwriting standards applied to all loans, management believes the out of market loans generally present no more risk than those made within the market. However, each loan or group of loans made outside of our primary markets poses different geographic risks based upon the economy of that particular region.
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Management realizes that some degree of risk must be expected in the normal course of lending activities. Allowances are maintained to absorb such loan losses inherent in the portfolio. The allowance for credit losses and related provision are an expression of management’s evaluation of the credit portfolio and economic climate.
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 loan losses consists of four elements: (i) specific reserves for individually impaired credits, (ii) reserves for adversely classified, or higher risk rated, loans that are not impaired, (iii) reserves for other loans based on historical loss factors (using the appropriate loss look-back and loss emergence periods) adjusted for both internal and external qualitative risk factors to Valley, including the aforementioned factors, as well as changes in both organic and purchased loan portfolio volumes, the composition and concentrations of credit, new market initiatives, and the impact of competition on loan structuring and pricing, and (iv) an allowance for PCI loan pools impaired subsequent to the acquisition date, if applicable.
The Credit Risk Management Department individually evaluates non-accrual (non-homogeneous) loans within the commercial and industrial loan and commercial real estate loan portfolio segments over $250 thousand and troubled debt restructured loans within all the loan portfolio segments for impairment based on the underlying anticipated method of payment consisting of either the expected future cash flows or the related collateral. If payment is expected solely based on the underlying collateral, an appraisal is completed to assess the fair value of the collateral. Collateral dependent impaired loan balances are written down to the current fair value (less estimated selling costs) of each loan’s underlying collateral resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s collection process. (See the “Assets and Liabilities Measured at Fair Value on Non-recurring Basis” section of Note 3 to the consolidated financial statements for further details). If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as a specific valuation allowance in the allowance for credit losses. At December 31, 2019, a $38.6 million specific valuation allowance was included in the allowance for credit losses related to $163.6 million of impaired loans that had such an allowance. See Note 5 to the consolidated financial statements for more details regarding impaired loans.
The allowance allocations for non-classified loans within all of our loan portfolio segments are calculated by applying historical loss factors by specific loan types to the applicable outstanding loans and unfunded commitments. Loss factors are based on the Bank’s historical loss experience over a look-back period determined to provide the appropriate amount of data to accurately estimate expected losses as of period end. Additionally, management assesses the loss emergence period for the expected losses of each loan segment and adjusts each historical loss factor accordingly. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first full or partial loan charge-off) and is determined based upon a study of our past loss experience by loan segment. The loss factors may also be adjusted for significant changes in the current loan portfolio quality that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.
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The following table summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for the years indicated:
Years Ended December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Average loans outstanding | $ | 26,235,253 | $ | 23,340,330 | $ | 17,819,003 | $ | 16,400,745 | $ | 14,447,020 | |||||||||
Beginning balance—Allowance for credit losses | $ | 156,295 | $ | 124,452 | $ | 116,604 | $ | 108,367 | $ | 104,287 | |||||||||
Loans charged-off: | |||||||||||||||||||
Commercial and industrial | (13,260 | ) | (2,515 | ) | (5,421 | ) | (5,990 | ) | (7,928 | ) | |||||||||
Commercial real estate | (158 | ) | (348 | ) | (559 | ) | (650 | ) | (1,864 | ) | |||||||||
Construction | — | — | — | — | (926 | ) | |||||||||||||
Residential mortgage | (126 | ) | (223 | ) | (530 | ) | (866 | ) | (813 | ) | |||||||||
Total Consumer | (8,671 | ) | (4,977 | ) | (4,564 | ) | (3,463 | ) | (3,441 | ) | |||||||||
Total loan charge-offs | (22,215 | ) | (8,063 | ) | (11,074 | ) | (10,969 | ) | (14,972 | ) | |||||||||
Charged-off loans recovered: | |||||||||||||||||||
Commercial and industrial | 2,397 | 4,623 | 4,736 | 2,852 | 7,233 | ||||||||||||||
Commercial real estate | 1,237 | 417 | 552 | 2,047 | 846 | ||||||||||||||
Construction | — | — | 873 | 10 | 913 | ||||||||||||||
Residential mortgage | 66 | 272 | 1,016 | 774 | 421 | ||||||||||||||
Total Consumer | 2,606 | 2,093 | 1,803 | 1,654 | 1,538 | ||||||||||||||
Total loan recoveries | 6,306 | 7,405 | 8,980 | 7,337 | 10,951 | ||||||||||||||
Net charge-offs | (15,909 | ) | (658 | ) | (2,094 | ) | (3,632 | ) | (4,021 | ) | |||||||||
Provision charged for credit losses | 24,218 | 32,501 | 9,942 | 11,869 | 8,101 | ||||||||||||||
Ending balance—Allowance for credit losses | $ | 164,604 | $ | 156,295 | $ | 124,452 | $ | 116,604 | $ | 108,367 | |||||||||
Components of allowance for credit losses: | |||||||||||||||||||
Allowance for loan losses | $ | 161,759 | $ | 151,859 | $ | 120,856 | $ | 114,419 | $ | 106,178 | |||||||||
Allowance for unfunded letters of credit | 2,845 | 4,436 | 3,596 | 2,185 | 2,189 | ||||||||||||||
Allowance for credit losses | $ | 164,604 | $ | 156,295 | $ | 124,452 | $ | 116,604 | $ | 108,367 | |||||||||
Components of provision for credit losses: | |||||||||||||||||||
Provision for loan losses | $ | 25,809 | $ | 31,661 | $ | 8,531 | $ | 11,873 | $ | 7,846 | |||||||||
Provision for unfunded letters of credit | (1,591 | ) | 840 | 1,411 | (4 | ) | 255 | ||||||||||||
Provision for credit losses | $ | 24,218 | $ | 32,501 | $ | 9,942 | $ | 11,869 | $ | 8,101 | |||||||||
Ratio of net charge-offs during the period to average loans outstanding | 0.06 | % | 0.00 | % | 0.01 | % | 0.02 | % | 0.03 | % | |||||||||
Allowance for credit losses as a % of non-PCI loans | 0.71 | 0.75 | 0.73 | 0.75 | 0.79 | ||||||||||||||
Allowance for credit losses as a % of total loans | 0.55 | 0.62 | 0.68 | 0.68 | 0.68 |
Our net loan charge-offs increased $15.3 million to $15.9 million in 2019 as compared to $658 thousand in 2018 mainly due to higher gross charge-offs in the commercial and industrial and consumer loan categories, as well as lower gross commercial and industrial loan recoveries during 2019. The higher level of commercial and industrial loan charge-offs in 2019 was mostly driven by taxi medallion loan partial charge-offs totaling $6.5 million and 5 other larger loan charge-offs totaling a combined $5.1 million for the year ended December 31, 2019.
Net charge-offs increased during 2019, but have remained relatively low over the last five years and within management's expectations for the credit quality of Valley's loan portfolio, its underwriting standards and the current economic environment. During this five-year period, our net charge-offs were at a high of 0.06 percent of average loans during 2019 and near zero during 2018. While we have a positive outlook for the future performance of the loan portfolio and the economy, there can be no assurance
2019 Form 10-K | 62 |
that our levels of net charge-offs will not deteriorate in 2020, especially given the relatively low levels realized in the past five years.
The provision for credit losses decreased $8.3 million to $24.2 million in 2019 as compared to 2018 largely due to continued improvements in the credit quality of the loan portfolio, including internally assigned risk ratings of commercial loans, higher impaired taxi medallion loans charge-offs and lower loan concentration risk in certain loan categories during 2019. Additionally, the decline in the provision in 2019 as compared to 2018 was partly due to a $1.6 million decrease in reserves for unfunded letters of credit (reported in the commercial and industrial loans category).
The following table summarizes the allocation of the allowance for credit losses to specific loan portfolio categories for the past five years:
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
Allowance Allocation | Percent of Loan Category to total loans | Allowance Allocation | Percent of Loan Category to total loans | Allowance Allocation | Percent of Loan Category to total loans | Allowance Allocation | Percent of Loan Category to total loans | Allowance Allocation | Percent of Loan Category to total loans | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||
Loan Category: | ||||||||||||||||||||||||||||||||||
Commercial and industrial* | $ | 106,904 | 16.2 | % | $ | 95,392 | 17.3 | % | $ | 60,828 | 15.0 | % | $ | 53,005 | 15.3 | % | $ | 50,956 | 15.8 | % | ||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||
Commercial real estate | 20,019 | 53.9 | 26,482 | 49.6 | 36,293 | 51.8 | 36,405 | 50.6 | 32,037 | 46.3 | ||||||||||||||||||||||||
Construction | 25,654 | 5.6 | 23,168 | 5.9 | 18,661 | 4.6 | 19,446 | 4.8 | 15,969 | 4.7 | ||||||||||||||||||||||||
Total commercial real estate | 45,673 | 59.5 | 49,650 | 55.5 | 54,954 | 56.4 | 55,851 | 55.4 | 48,006 | 51.0 | ||||||||||||||||||||||||
Residential mortgage | 5,060 | 14.7 | 5,041 | 16.4 | 3,605 | 15.6 | 3,702 | 16.6 | 4,625 | 19.5 | ||||||||||||||||||||||||
Total Consumer | 6,967 | 9.6 | 6,212 | 10.8 | 5,065 | 13.0 | 4,046 | 12.7 | 4,780 | 13.7 | ||||||||||||||||||||||||
Total allowance for credit losses | $ | 164,604 | 100 | % | $ | 156,295 | 100 | % | $ | 124,452 | 100 | % | $ | 116,604 | 100 | % | $ | 108,367 | 100 | % |
* Includes the allowance 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 0.55 percent at December 31, 2019 and 0.62 percent at December 31, 2018. Our allowance allocations for losses at December 31, 2019 increased across most loan categories mainly due to strong organic loan growth. The increased allowance allocation for the commercial and industrial loans category (see table above) at December 31, 2019 was also partly due to higher specific reserves for impaired taxi medallion loans. At December 31, 2019, the allowance allocation for commercial real estate loans declined to $20.0 million from $26.5 million at December 31, 2018 mainly due to a continued decline in historical loss rates over the prolonged current economic cycle.
Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately $6.6 billion) was 0.71 percent at December 31, 2019 as compared to 0.75 percent at December 31, 2018. PCI loans, largely acquired through prior bank acquisitions, 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 December 31, 2019 and 2018. See Notes 1 and 6 to the consolidated financial statements for additional information regarding our allowance for loan losses.
Loan Repurchase Contingencies
We engage in the origination of residential mortgages for sale into the secondary market. During 2016, loan sales increased significantly from 2015 as refinance activity once again strengthened due to a favorably low interest rate environment for most of the year. While refinance activity declined in 2017, Valley expanded its efforts in the purchased home loan market and expanded its team of home mortgage consultants. As a result of these efforts combined with portfolio loan sales, loan sales totaled approximately $934 million and $676 million for 2019 and 2018, respectively.
In connection with loan sales, we make representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred due to such loans. However,
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the performance of our loans sold has been historically strong due to our strict underwriting standards and procedures. Over the past several years, we have experienced a nominal amount of repurchase requests, only a few of which have actually resulted in repurchases by Valley (only four loan repurchases in 2019 and five loan repurchase in 2018). None of the loan repurchases resulted in material loss. Accordingly, no reserves pertaining to loans sold were established on our consolidated financial statements at December 31, 2019 and 2018. See Item 1A. Risk Factors - "We may incur future losses in connection with repurchases and indemnification payments related to mortgages that we have sold into the secondary market” of this Annual Report for additional information.
Capital Adequacy
A significant measure of the strength of a financial institution is its shareholders’ equity. At December 31, 2019 and 2018, shareholders’ equity totaled approximately $4.4 billion and $3.4 billion, or 11.7 percent and 10.5 percent of total assets, respectively. During 2019, total shareholders’ equity increased by $1.0 billion primarily due to (i) the additional capital of $835.3 million issued in the Oritani acquisition, (ii) net income of $309.8 million, (iii) $37.2 million of other comprehensive income, (iv) $15.9 million increase attributable to the effect of our stock incentive plan, and (v) a $3.0 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2019. These positive changes were partially offset by cash dividends declared on common and preferred stock totaling a combined $167.4 million.
Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.
We are required to maintain 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, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of December 31, 2019 and 2018, Valley and Valley National Bank exceeded all capital adequacy requirements. See Note 18 for Valley’s and Valley National Bank’s regulatory capital positions and capital ratios at December 31, 2019 and 2018.
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 49.4 percent and 41.3 percent for the years ended December 31, 2019 and 2018, respectively. Our retention ratio increased from the year ended December 31, 2018 mainly due to higher net interest income driven by strong loan growth and continued focus by management on our operational efficiency, partially offset by net charges from several infrequent items within our non-interest income and expense discussed elsewhere in this MD&A.
Cash dividends declared amounted to $0.44 per common share for both years ended December 31, 2019 and 2018. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow considering the increased capital levels as required under the Basel III rules. Prior to the date of this filing, Valley has received no objection or adverse guidance from the FRB or the OCC regarding the current level of its quarterly common stock dividend.
Valley maintains an effective shelf registration statement with the SEC that allows us to periodically offer and sell in one or more offerings, individually or in any combination, our common stock, preferred stock and other non-equity securities. The shelf registration statement provides Valley with capital raising flexibility and enables Valley to promptly access the capital markets in order to pursue growth opportunities that may become available in the future and permits Valley to comply with any changes in the regulatory environment that call for increased capital requirements. Valley’s ability, and any decision to issue and sell securities pursuant to the shelf registration statement, is subject to market conditions and Valley’s capital needs at such time. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both. Such offerings may be necessary in the future due to several reasons beyond management’s control, including numerous external factors that could negatively impact the strength of the U.S. economy or our ability to maintain or increase the level of our net income. See Note 19 to the consolidated financial statements for additional information on Valley’s preferred stock issuances.
2019 Form 10-K | 64 |
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations and Commitments. In the ordinary course of operations, Valley enters into various financial obligations, including contractual obligations that may require future cash payments. As a financial services provider, we routinely enter into commitments to extend credit, including loan commitments, standby and commercial letters of credit. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Bank. See Note 15 of the consolidated financial statements for additional information.
The following table summarizes Valley’s contractual obligations and other commitments to make future payments as of December 31, 2019. Payments for deposits, borrowings and debentures do not include interest. Payments related to leases, capital expenditures, other purchase obligations and commitments to sell loans are based on actual payments specified in the underlying contracts. Commitments to extend credit and standby letters of credit are presented at contractual amounts; however, since many of these commitments are expected to expire unused or only partially used based upon our historical experience, the total amounts of these commitments do not necessarily reflect future cash requirements.
Note to Financial Statements | One Year or Less | One to Three Years | Three to Five Years | Over Five Years | Total | |||||||||||||||||
(in thousands) | ||||||||||||||||||||||
Contractual obligations: | ||||||||||||||||||||||
Time deposits | Note 10 | $ | 8,507,854 | $ | 1,000,590 | $ | 191,575 | $ | 17,926 | $ | 9,717,945 | |||||||||||
Long-term borrowings (1) | Note 11 | 83,418 | 1,466,188 | 408,164 | 160,000 | 2,117,770 | ||||||||||||||||
Junior subordinated debentures issued to capital trusts (1) | Note 12 | — | — | — | 60,827 | 60,827 | ||||||||||||||||
Operating leases | Note 7 | 36,022 | 69,311 | 59,887 | 228,644 | 393,864 | ||||||||||||||||
Capital expenditures | 14,805 | — | — | — | 14,805 | |||||||||||||||||
Other purchase obligations (2) | 40,592 | 959 | 1,402 | — | 42,953 | |||||||||||||||||
Total | $ | 8,682,691 | $ | 2,537,048 | $ | 661,028 | $ | 467,397 | $ | 12,348,164 | ||||||||||||
Other commitments: | ||||||||||||||||||||||
Commitments to extend credit | Note 16 | $ | 4,518,984 | $ | 1,338,786 | $ | 374,973 | $ | 978,510 | $ | 7,211,253 | |||||||||||
Standby letters of credit | Note 16 | 238,305 | 9,598 | 40,699 | 7,434 | 296,036 | ||||||||||||||||
Commitments to sell loans | Note 16 | 68,492 | — | — | — | 68,492 | ||||||||||||||||
Total | $ | 4,825,781 | $ | 1,348,384 | $ | 415,672 | $ | 985,944 | $ | 7,575,781 |
(1) | Amounts presented consist of the contractual principal balances. Carrying values and call dates are set forth in Notes 11 and 12 to the consolidated financial statements for long-term borrowings and junior subordinated debentures issued to capital trusts, respectively. |
(2) | This category primarily consists of contractual obligations for communication and technology costs. |
Valley also has obligations under its pension and other benefit plans, not included in the above table, as further described in Note 13 of the consolidated financial statements.
Derivative Instruments and Hedging Activities. We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate and liquidity risks, primarily by managing the amount, sources, and duration of our assets and liabilities and, from time to time, the use of derivative financial instruments. Specifically, we enter 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. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments mainly related to certain variable-rate borrowings and fixed-rate loan assets. Valley also 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.
65 | 2019 Form 10-K |
See Note 15 to the consolidated financial statements for quantitative information on our derivative financial instruments and hedging activities.
Trust Preferred Securities. In addition to the commitments and derivative financial instruments of the types described above, our off-balance sheet arrangements include a $1.8 million ownership interest in the common securities of our statutory trusts to issue trust preferred securities at December 31, 2019. See Note 12 of the consolidated financial statements for additional information on our statutory trusts and the related junior subordinated debentures and trust preferred securities.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Information regarding Quantitative and Qualitative Disclosures About Market Risk is discussed in the "Interest Rate Sensitivity" section contained in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations" and it is incorporated herein by reference.
2019 Form 10-K | 66 |
Item 8. | Financial Statements and Supplementary Data |
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, | |||||||
2019 | 2018 | ||||||
(in thousands except for share data) | |||||||
Assets | |||||||
Cash and due from banks | $ | 256,264 | $ | 251,541 | |||
Interest bearing deposits with banks | 178,423 | 177,088 | |||||
Investment securities: | |||||||
Equity securities | 41,410 | — | |||||
Available for sale debt securities | 1,566,801 | 1,749,544 | |||||
Held to maturity debt securities (fair value of $2,358,720 at December 31, 2019 and $2,034,943 at December 31, 2018) | 2,336,095 | 2,068,246 | |||||
Total investment securities | 3,944,306 | 3,817,790 | |||||
Loans held for sale, at fair value | 76,113 | 35,155 | |||||
Loans | 29,699,208 | 25,035,469 | |||||
Less: Allowance for loan losses | (161,759 | ) | (151,859 | ) | |||
Net loans | 29,537,449 | 24,883,610 | |||||
Premises and equipment, net | 334,533 | 341,630 | |||||
Lease right of use assets | 285,129 | — | |||||
Bank owned life insurance | 540,169 | 439,602 | |||||
Accrued interest receivable | 105,637 | 95,296 | |||||
Goodwill | 1,373,625 | 1,084,665 | |||||
Other intangible assets, net | 86,772 | 76,990 | |||||
Other assets | 717,600 | 659,721 | |||||
Total Assets | $ | 37,436,020 | $ | 31,863,088 | |||
Liabilities | |||||||
Deposits: | |||||||
Non-interest bearing | $ | 6,710,408 | $ | 6,175,495 | |||
Interest bearing: | |||||||
Savings, NOW and money market | 12,757,484 | 11,213,495 | |||||
Time | 9,717,945 | 7,063,984 | |||||
Total deposits | 29,185,837 | 24,452,974 | |||||
Short-term borrowings | 1,093,280 | 2,118,914 | |||||
Long-term borrowings | 2,122,426 | 1,654,268 | |||||
Junior subordinated debentures issued to capital trusts | 55,718 | 55,370 | |||||
Lease liabilities | 309,849 | 3,125 | |||||
Accrued expenses and other liabilities | 284,722 | 227,983 | |||||
Total Liabilities | 33,051,832 | 28,512,634 | |||||
Shareholders’ Equity | |||||||
Preferred stock, no par value; authorized 50,000,000 shares: | |||||||
Series A (4,600,000 shares issued at December 31, 2019 and December 31, 2018) | 111,590 | 111,590 | |||||
Series B (4,000,000 shares issued at December 31, 2019 and December 31, 2018) | 98,101 | 98,101 | |||||
Common stock (no par value, authorized 450,000,000 shares; issued 403,322,773 shares at December 31, 2019 and 331,634,951 shares at December 31, 2018) | 141,423 | 116,240 | |||||
Surplus | 3,622,208 | 2,796,499 | |||||
Retained earnings | 443,559 | 299,642 | |||||
Accumulated other comprehensive loss | (32,214 | ) | (69,431 | ) | |||
Treasury stock, at cost (44,383 common shares at December 31, 2019 and 203,734 common shares at December 31, 2018) | (479 | ) | (2,187 | ) | |||
Total Shareholders’ Equity | 4,384,188 | 3,350,454 | |||||
Total Liabilities and Shareholders’ Equity | $ | 37,436,020 | $ | 31,863,088 |
See accompanying notes to consolidated financial statements.
67 | 2019 Form 10-K |
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands, except for share data) | |||||||||||
Interest Income | |||||||||||
Interest and fees on loans | $ | 1,198,908 | $ | 1,033,993 | $ | 734,474 | |||||
Interest and dividends on investment securities: | |||||||||||
Taxable | 86,926 | 87,306 | 72,676 | ||||||||
Tax-exempt | 17,420 | 21,504 | 15,399 | ||||||||
Dividends | 12,023 | 13,209 | 9,812 | ||||||||
Interest on other short-term investments | 5,723 | 3,236 | 1,793 | ||||||||
Total interest income | 1,321,000 | 1,159,248 | 834,154 | ||||||||
Interest Expense | |||||||||||
Interest on deposits: | |||||||||||
Savings, NOW and money market | 145,177 | 108,394 | 55,300 | ||||||||
Time | 166,693 | 81,959 | 42,546 | ||||||||
Interest on short-term borrowings | 47,862 | 45,930 | 18,034 | ||||||||
Interest on long-term borrowings and junior subordinated debentures | 63,220 | 65,762 | 58,227 | ||||||||
Total interest expense | 422,952 | 302,045 | 174,107 | ||||||||
Net Interest Income | 898,048 | 857,203 | 660,047 | ||||||||
Provision for credit losses | 24,218 | 32,501 | 9,942 | ||||||||
Net Interest Income After Provision for Credit Losses | 873,830 | 824,702 | 650,105 | ||||||||
Non-Interest Income | |||||||||||
Trust and investment services | 12,646 | 12,633 | 11,538 | ||||||||
Insurance commissions | 10,409 | 15,213 | 18,156 | ||||||||
Service charges on deposit accounts | 23,636 | 26,817 | 21,529 | ||||||||
Losses on securities transactions, net | (150 | ) | (2,342 | ) | (20 | ) | |||||
Other-than-temporary impairment losses on securities | (2,928 | ) | — | — | |||||||
Portion recognized in other comprehensive income (before taxes) | — | — | — | ||||||||
Net impairment losses on securities recognized in earnings | (2,928 | ) | — | — | |||||||
Fees from loan servicing | 9,794 | 9,319 | 7,384 | ||||||||
Gains on sales of loans, net | 18,914 | 20,515 | 20,814 | ||||||||
Gains (losses) on sales of assets, net | 78,333 | (2,401 | ) | (95 | ) | ||||||
Bank owned life insurance | 8,232 | 8,691 | 7,338 | ||||||||
Other | 55,634 | 45,607 | 25,062 | ||||||||
Total non-interest income | 214,520 | 134,052 | 111,706 | ||||||||
Non-Interest Expense | |||||||||||
Salary and employee benefits expense | 327,431 | 333,816 | 263,337 | ||||||||
Net occupancy and equipment expense | 118,191 | 108,763 | 92,243 | ||||||||
FDIC insurance assessment | 21,710 | 28,266 | 19,821 | ||||||||
Amortization of other intangible assets | 18,080 | 18,416 | 10,016 | ||||||||
Professional and legal fees | 20,810 | 34,141 | 25,834 | ||||||||
Loss on extinguishment of debt | 31,995 | — | — | ||||||||
Amortization of tax credit investments | 20,392 | 24,200 | 41,747 | ||||||||
Telecommunication expenses | 9,883 | 12,102 | 9,921 | ||||||||
Other | 63,063 | 69,357 | 46,154 | ||||||||
Total non-interest expense | 631,555 | 629,061 | 509,073 | ||||||||
Income Before Income Taxes | 456,795 | 329,693 | 252,738 | ||||||||
Income tax expense | 147,002 | 68,265 | 90,831 | ||||||||
Net Income | 309,793 | 261,428 | 161,907 | ||||||||
Dividends on preferred stock | 12,688 | 12,688 | 9,449 | ||||||||
Net Income Available to Common Shareholders | $ | 297,105 | $ | 248,740 | $ | 152,458 | |||||
2019 Form 10-K | 68 |
CONSOLIDATED STATEMENTS OF INCOME—(Continued) | |||||||||||
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands, except for share data) | |||||||||||
Earnings Per Common Share: | |||||||||||
Basic | $ | 0.88 | $ | 0.75 | $ | 0.58 | |||||
Diluted | 0.87 | 0.75 | 0.58 | ||||||||
Cash Dividends Declared Per Common Share | 0.44 | 0.44 | 0.44 | ||||||||
Weighted Average Number of Common Shares Outstanding: | |||||||||||
Basic | 337,792,270 | 331,258,964 | 264,038,123 | ||||||||
Diluted | 340,117,808 | 332,693,718 | 264,889,007 |
See accompanying notes to consolidated financial statements.
69 | 2019 Form 10-K |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Net income | $ | 309,793 | $ | 261,428 | $ | 161,907 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||
Unrealized gains and losses on debt securities available for sale | |||||||||||
Net gains (losses) arising during the period | 39,262 | (22,932 | ) | 850 | |||||||
Less reclassification adjustment for net losses (gains) included in net income | 119 | 2,237 | (156 | ) | |||||||
Total | 39,381 | (20,695 | ) | 694 | |||||||
Unrealized gains and losses on derivatives (cash flow hedges) | |||||||||||
Net (losses) gains on derivatives arising during the period | (989 | ) | 1,874 | 576 | |||||||
Less reclassification adjustment for net losses included in net income | 1,291 | 2,494 | 5,028 | ||||||||
Total | 302 | 4,368 | 5,604 | ||||||||
Defined benefit pension plan | |||||||||||
Net losses arising during the period | (2,561 | ) | (7,151 | ) | (2,722 | ) | |||||
Amortization of prior service (credit) cost | (93 | ) | 146 | 191 | |||||||
Amortization of net loss | 188 | 447 | 248 | ||||||||
Total | (2,466 | ) | (6,558 | ) | (2,283 | ) | |||||
Total other comprehensive income (loss) | 37,217 | (22,885 | ) | 4,015 | |||||||
Total comprehensive income | $ | 347,010 | $ | 238,543 | $ | 165,922 |
See accompanying notes to consolidated financial statements.
2019 Form 10-K | 70 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock | Accumulated | |||||||||||||||||||||||||||||
Preferred Stock | Shares | Amount | Surplus | Retained Earnings | Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||
Balance - December 31, 2016 | $ | 111,590 | 263,639 | $ | 92,353 | $ | 2,044,401 | $ | 172,754 | $ | (42,093 | ) | $ | (1,849 | ) | $ | 2,377,156 | |||||||||||||
Reclassification due to the adoption of ASU No. 2018-02 | — | — | — | — | 7,927 | (7,927 | ) | — | — | |||||||||||||||||||||
Balance - January 1, 2017 | 111,590 | 263,639 | 92,353 | 2,044,401 | 180,681 | (50,020 | ) | (1,849 | ) | 2,377,156 | ||||||||||||||||||||
Net income | — | — | — | — | 161,907 | — | — | 161,907 | ||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 4,015 | — | 4,015 | ||||||||||||||||||||||
Preferred Stock Issued | 98,101 | — | — | — | — | — | — | 98,101 | ||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||
Preferred stock, Series A, $1.56 per share | — | — | — | — | (7,188 | ) | — | — | (7,188 | ) | ||||||||||||||||||||
Preferred stock, Series B, $0.57 per share | — | — | — | — | (2,261 | ) | — | — | (2,261 | ) | ||||||||||||||||||||
Common Stock, $0.44 per share | — | — | — | — | (116,332 | ) | — | — | (116,332 | ) | ||||||||||||||||||||
Effect of stock incentive plan, net | — | 117 | 229 | 11,297 | (18 | ) | — | (1,948 | ) | 9,560 | ||||||||||||||||||||
Common stock issued | — | 713 | 145 | 4,658 | (56 | ) | — | 3,460 | 8,207 | |||||||||||||||||||||
Balance - December 31, 2017 | 209,691 | 264,469 | 92,727 | 2,060,356 | 216,733 | (46,005 | ) | (337 | ) | 2,533,165 | ||||||||||||||||||||
Reclassification due to the adoption of ASU No. 2016-01 | — | — | — | — | 480 | (480 | ) | — | — | |||||||||||||||||||||
Reclassification due to the adoption of ASU No. 2017-12 | — | — | — | — | 61 | (61 | ) | — | — | |||||||||||||||||||||
Adjustment due to the adoption of ASU No. 2016-16 | — | — | — | — | (17,611 | ) | — | — | (17,611 | ) | ||||||||||||||||||||
Balance - January 1, 2018 | 209,691 | 264,469 | 92,727 | 2,060,356 | 199,663 | (46,546 | ) | (337 | ) | 2,515,554 | ||||||||||||||||||||
Net income | — | — | — | — | 261,428 | — | — | 261,428 | ||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | (22,885 | ) | — | (22,885 | ) | ||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||
Preferred stock, Series A, $1.56 per share | — | — | — | — | (7,188 | ) | — | — | (7,188 | ) | ||||||||||||||||||||
Preferred stock, Series B, $1.38 per share | — | — | — | — | (5,500 | ) | — | — | (5,500 | ) | ||||||||||||||||||||
Common Stock, $0.44 per share | — | — | — | — | (146,346 | ) | — | — | (146,346 | ) | ||||||||||||||||||||
Effect of stock incentive plan, net | — | 1,955 | 771 | 21,022 | (2,415 | ) | — | (2,198 | ) | 17,180 | ||||||||||||||||||||
Common stock issued | — | 65,007 | 22,742 | 715,121 | — | — | 348 | 738,211 | ||||||||||||||||||||||
Balance - December 31, 2018 | $ | 209,691 | 331,431 | $ | 116,240 | $ | 2,796,499 | $ | 299,642 | $ | (69,431 | ) | $ | (2,187 | ) | $ | 3,350,454 | |||||||||||||
71 | 2019 Form 10-K |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued) | ||||||||||||||||||||||||||||||
Common Stock | Accumulated | |||||||||||||||||||||||||||||
Preferred Stock | Shares | Amount | Surplus | Retained Earnings | Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||||||
Balance - December 31, 2018 | $ | 209,691 | 331,431 | $ | 116,240 | $ | 2,796,499 | $ | 299,642 | $ | (69,431 | ) | $ | (2,187 | ) | $ | 3,350,454 | |||||||||||||
Adjustment due to the adoption of ASU No. 2016-02 | — | — | — | — | 4,414 | — | — | 4,414 | ||||||||||||||||||||||
Adjustment due to the adoption of ASU No. 2017-08 | — | — | — | — | (1,446 | ) | — | — | (1,446 | ) | ||||||||||||||||||||
Balance - January 1, 2019 | 209,691 | 331,431 | 116,240 | 2,796,499 | 302,610 | (69,431 | ) | (2,187 | ) | 3,353,422 | ||||||||||||||||||||
Net income | — | — | — | — | 309,793 | — | — | 309,793 | ||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 37,217 | — | 37,217 | ||||||||||||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||||||||
Preferred stock, Series A, $1.56 per share | — | — | — | — | (7,188 | ) | — | — | (7,188 | ) | ||||||||||||||||||||
Preferred stock, Series B, $1.38 per share | — | — | — | — | (5,500 | ) | — | — | (5,500 | ) | ||||||||||||||||||||
Common Stock, $0.44 per share | — | — | — | — | (154,689 | ) | — | — | (154,689 | ) | ||||||||||||||||||||
Effect of stock incentive plan, net | — | 726 | 291 | 15,346 | (1,467 | ) | — | 1,708 | 15,878 | |||||||||||||||||||||
Common stock issued | — | 71,121 | 24,892 | 810,363 | — | — | — | 835,255 | ||||||||||||||||||||||
Balance - December 31, 2019 | $ | 209,691 | 403,278 | $ | 141,423 | $ | 3,622,208 | $ | 443,559 | $ | (32,214 | ) | $ | (479 | ) | $ | 4,384,188 |
See accompanying notes to consolidated financial statements.
2019 Form 10-K | 72 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 309,793 | $ | 261,428 | $ | 161,907 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 53,317 | 27,554 | 24,845 | ||||||||
Stock-based compensation | 14,726 | 19,472 | 12,204 | ||||||||
Provision for credit losses | 24,218 | 32,501 | 9,942 | ||||||||
Net amortization of premiums and accretion of discounts on securities and borrowings | 29,512 | 38,454 | 46,346 | ||||||||
Amortization of other intangible assets | 18,080 | 18,416 | 10,016 | ||||||||
Losses on securities transactions, net | 150 | 2,342 | 20 | ||||||||
Proceeds from sales of loans held for sale | 1,743,470 | 687,983 | 813,855 | ||||||||
Gains on sales of loans, net | (18,914 | ) | (20,515 | ) | (20,814 | ) | |||||
Net impairment losses on securities recognized in earnings | 2,928 | — | — | ||||||||
Originations of loans held for sale | (537,985 | ) | (406,087 | ) | (444,290 | ) | |||||
(Gains) losses on sales of assets, net | (78,333 | ) | 2,402 | 95 | |||||||
Net deferred income tax (benefit) expense | 15,228 | (11,780 | ) | 76,848 | |||||||
Net change in: | |||||||||||
Cash surrender value of bank owned life insurance | (8,232 | ) | (8,691 | ) | (7,338 | ) | |||||
Accrued interest receivable | 1,440 | (9,183 | ) | (7,174 | ) | ||||||
Other assets | (163,330 | ) | (33,145 | ) | (57,353 | ) | |||||
Accrued expenses and other liabilities | 57,882 | (7,562 | ) | 121 | |||||||
Net cash provided by operating activities | 1,463,950 | 593,589 | 619,230 | ||||||||
Cash flows from investing activities: | |||||||||||
Net loan originations and purchases | (2,538,909 | ) | (3,257,939 | ) | (1,418,073 | ) | |||||
Equity securities: | |||||||||||
Purchases | (14,776 | ) | — | — | |||||||
Sales | 24,748 | — | — | ||||||||
Held to maturity debt securities: | |||||||||||
Purchases | (701,879 | ) | (264,721 | ) | (220,356 | ) | |||||
Maturities, calls and principal repayments | 424,475 | 241,077 | 290,929 | ||||||||
Available for sale debt securities: | |||||||||||
Purchases | (30,392 | ) | (289,554 | ) | (411,788 | ) | |||||
Sales | 271,901 | 44,377 | 2,727 | ||||||||
Maturities, calls and principal repayments | 316,024 | 255,031 | 204,684 | ||||||||
Death benefit proceeds from bank owned life insurance | 9,560 | 4,220 | 13,089 | ||||||||
Proceeds from sales of real estate property and equipment | 109,043 | 7,786 | 9,357 | ||||||||
Purchases of real estate property and equipment | (23,375 | ) | (26,440 | ) | (18,117 | ) | |||||
Cash and cash equivalents acquired in acquisitions | 22,239 | 156,612 | — | ||||||||
Net cash used in investing activities | $ | (2,131,341 | ) | $ | (3,129,551 | ) | $ | (1,547,548 | ) | ||
73 | 2019 Form 10-K |
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued) | |||||||||||
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Cash flows from financing activities: | |||||||||||
Net change in deposits | $ | 1,808,148 | $ | 2,734,669 | $ | 422,754 | |||||
Net change in short-term borrowings | (1,036,134 | ) | 720,307 | (332,332 | ) | ||||||
Proceeds from issuance of long-term borrowings, net | 950,000 | — | 1,065,000 | ||||||||
Repayments of long-term borrowings | (890,000 | ) | (750,682 | ) | (185,000 | ) | |||||
Proceeds from issuance of preferred stock, net | — | — | 98,101 | ||||||||
Cash dividends paid to preferred shareholders | (12,688 | ) | (15,859 | ) | (6,277 | ) | |||||
Cash dividends paid to common shareholders | (146,537 | ) | (138,857 | ) | (115,881 | ) | |||||
Purchase of common shares to treasury | (1,805 | ) | (3,801 | ) | (2,645 | ) | |||||
Common stock issued, net | 2,957 | 2,704 | 8,207 | ||||||||
Other, net | (492 | ) | — | — | |||||||
Net cash provided by financing activities | 673,449 | 2,548,481 | 951,927 | ||||||||
Net change in cash and cash equivalents | 6,058 | 12,519 | 23,609 | ||||||||
Cash and cash equivalents at beginning of year | 428,629 | 416,110 | 392,501 | ||||||||
Cash and cash equivalents at end of year | $ | 434,687 | $ | 428,629 | $ | 416,110 | |||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash payments for: | |||||||||||
Interest on deposits and borrowings | $ | 415,649 | $ | 290,444 | $ | 170,614 | |||||
Federal and state income taxes | 106,336 | 53,587 | 29,013 | ||||||||
Supplemental schedule of non-cash investing activities: | |||||||||||
Transfer of loans to other real estate owned | $ | 5,100 | $ | 743 | $ | 7,301 | |||||
Loans transferred to loans held for sale | 1,234,022 | 289,633 | 313,201 | ||||||||
Lease right of use assets obtained in exchange for operating lease liabilities | 312,143 | — | — | ||||||||
Acquisition: | |||||||||||
Non-cash assets acquired: | |||||||||||
Equity securities | $ | 51,382 | $ | — | $ | — | |||||
Investment securities available for sale | 335,894 | 308,385 | — | ||||||||
Investment securities held to maturity | 4,877 | 214,217 | — | ||||||||
Loans | 3,380,841 | 3,736,984 | — | ||||||||
Premises and equipment | 23,585 | 62,066 | — | ||||||||
Bank owned life insurance | 101,896 | 49,052 | — | ||||||||
Accrued interest receivable | 11,781 | 12,123 | — | ||||||||
Goodwill | 288,960 | 394,028 | — | ||||||||
Other intangible assets | 20,690 | 45,906 | — | ||||||||
Other assets | 50,174 | 100,059 | — | ||||||||
Total non-cash assets acquired | $ | 4,270,080 | $ | 4,922,820 | $ | — | |||||
Liabilities assumed: | |||||||||||
Deposits | $ | 2,924,716 | $ | 3,564,843 | $ | — | |||||
Short-term borrowings | 10,500 | 649,979 | — | ||||||||
Long-term borrowings | 430,130 | 87,283 | — | ||||||||
Junior subordinated debentures issued to capital trusts | — | 13,249 | — | ||||||||
Accrued expenses and other liabilities | 91,718 | 26,848 | — | ||||||||
Total liabilities assumed | $ | 3,457,064 | $ | 4,342,202 | $ | — | |||||
Net non-cash assets acquired | $ | 813,016 | $ | 580,618 | $ | — | |||||
Net cash and cash equivalents acquired in acquisition | $ | 22,239 | $ | 156,612 | $ | — | |||||
Common stock issued in acquisition | $ | 835,255 | $ | 737,230 | $ | — |
See accompanying notes to consolidated financial statements.
2019 Form 10-K | 74 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1)
Business
Valley National Bancorp, a New Jersey Corporation (Valley), is a bank holding company whose principal wholly-owned subsidiary is Valley National Bank (the “Bank”), a national banking association providing a full range of commercial, retail and trust and investment services largely through its offices and ATM network throughout northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn and Queens, Long Island, Florida and Alabama. The Bank is subject to intense competition from other financial services companies and is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by certain regulatory authorities.
Valley National Bank’s subsidiaries are all included in the consolidated financial statements of Valley. These subsidiaries include, but are not limited to:
• | an insurance agency offering property and casualty, life and health insurance; |
• | an asset management adviser that is a registered investment adviser with the Securities and Exchange Commission (SEC); |
• | a title insurance agency in New York, which also provides services in New Jersey; |
• | subsidiaries which hold, maintain and manage investment assets for the Bank; |
• | a subsidiary which specializes in health care equipment lending and other commercial equipment leases; and |
• | a subsidiary which owns and services New York commercial loans. |
The Bank’s subsidiaries also include real estate investment trust subsidiaries (the “REIT” subsidiaries) which own real estate related investments and a REIT subsidiary which owns some of the real estate utilized by the Bank and related real estate investments. Except for Valley’s REIT subsidiaries, all subsidiaries mentioned above are directly or indirectly wholly-owned by the Bank. Because each REIT subsidiary must have 100 or more shareholders to qualify as a REIT, each REIT subsidiary has issued less than 20 percent of its outstanding non-voting preferred stock to individuals, most of whom are non-senior management Bank employees. The Bank owns the remaining preferred stock and all the common stock of the REITs.
Basis of Presentation
The consolidated financial statements of Valley include the accounts of its commercial bank subsidiary, Valley National 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. See Note 12 for more details. Certain prior period amounts have been reclassified to conform to the current presentation.
In preparing the 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, purchased credit-impaired loans, the evaluation of goodwill and other intangible assets for impairment, and income taxes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits in other banks (including the Federal Reserve Bank of New York) and, from time to time, overnight federal funds sold. The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits. These reserve balances totaled $114.4 million and $120.7 million at December 31, 2019 and 2018, respectively.
Investment Securities
Debt securities are classified at the time of purchase based on management’s intention, as securities available-for-sale or securities held-to-maturity. Investment securities classified as held-to-maturity are those that management has the positive intent and ability to hold until maturity. Investment securities held-to-maturity are carried at amortized cost, adjusted for amortization
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of premiums and accretion of discounts using the level-yield method over the contractual term of the securities, adjusted for actual prepayments, or to call date if the security was purchased at premium. Investment securities classified as available-for-sale are carried at fair value with unrealized holding gains and losses reported as a component of other comprehensive income or loss, net of tax. Realized gains or losses on the available-for-sale securities are recognized by the specific identification method and are included in net gains and losses on securities transactions. Equity securities are stated at fair value with any unrealized and realized gains and losses reported in non-interest income. Investments in Federal Home Loan Bank and Federal Reserve Bank stock, which have limited marketability, are carried at cost in other assets. Security transactions are recorded on a trade-date basis.
Quarterly, Valley evaluates its investment securities classified as held to maturity and available for sale for other-than-temporary impairment. Valley's evaluation of other-than-temporary impairment considers factors that include, among others, the causes of the decline in fair value, such as credit problems, interest rate fluctuations, or market volatility; and the severity and duration of the decline. For debt securities, the primary consideration in determining whether impairment is other-than-temporary is whether or not it is probable that current and/or future contractual cash flows have been or may be impaired. Valley also assesses the intent and ability to hold the securities (as well as the likelihood of a near-term recovery), and the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis. In assessing the level of other-than-temporary impairment attributable to credit loss, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security. If a determination is made that a debt security is other-than-temporarily impaired, Valley will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as an other-than-temporary impairment charge in non-interest income. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income (loss), net of tax. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss. See the “Other-Than-Temporary Impairment Analysis” section of Note 4 for further discussion.
Interest income on investments includes amortization of purchase premiums and discounts. Valley discontinues the recognition of interest on debt securities if the securities meet both of the following criteria: (i) regularly scheduled interest payments have not been paid or have been deferred by the issuer, and (ii) full collection of all contractual principal and interest payments is not deemed to be the most likely outcome, resulting in the recognition of other-than-temporary impairment of the security.
Loans Held for Sale
Loans held for sale generally consist of residential mortgage loans originated and intended for sale in the secondary market and are carried at their estimated fair value on an instrument-by-instrument basis as permitted by the fair value option election under U.S. GAAP. Changes in fair value are recognized in non-interest income in the accompanying consolidated statements of income as a component of net gains on sales of loans. Origination fees and costs related to loans originated for sale (and carried at fair value) are recognized as earned and as incurred. Loans held for sale are generally sold with loan servicing rights retained by Valley. Gains recognized on loan sales include the value assigned to the rights to service the loan. See the “Loan Servicing Rights” section below.
Loans and Loan Fees
Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans and premium or discounts on purchased loans, except for purchased credit-impaired loans. Loan origination and commitment fees, net of related costs are deferred and amortized as an adjustment of loan yield over the estimated life of the loans approximating the effective interest method.
Loans are deemed to be past due when the contractually required principal and interest payments have not been received as they become due. Loans are placed on non-accrual status generally, when they become 90 days past due and the full and timely collection of principal and interest becomes uncertain. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are generally applied against principal. A loan in which the borrowers’ obligation has not been released in bankruptcy courts may be restored to an accruing basis when it becomes well secured and is in the process of collection, or all past due amounts become current under the loan agreement and collectability is no longer doubtful.
Purchased Credit-Impaired Loans
Purchased credit-impaired (PCI) loans are loans acquired at a discount (that is due, in part, to credit quality). Valley's PCI loan portfolio primarily consists of loans acquired in business combinations subsequent to 2011. The PCI loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. Interest income on PCI loans has been accounted for based on the acquired loans’ expected cash flows. The PCI loans may be aggregated and
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accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow.
The difference between the undiscounted cash flows expected at acquisition and the investment in the 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 “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or an allowance for loan losses. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received). Valley had no allowance reserves related to PCI loans at December 31, 2019 and 2018.
On a quarterly or more frequent basis, the Bank evaluates the remaining contractual required payments due and estimates of cash flows expected to be collected for the underlying loans of each PCI loan pool. These evaluations require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. For the pools with better than expected cash flows, the forecasted increase is recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans. See Note 5 for additional information.
PCI loans that may have been classified as non-performing loans by an acquired bank are no longer classified as non-performing because these loans are accounted for on a pooled basis. Management’s judgment is required in classifying loans in pools as performing loans, and is dependent on having a reasonable expectation about the timing and amount of the pool cash flows to be collected, even if certain loans within the pool are contractually past due.
Allowance for Credit Losses
The allowance for credit losses (the “allowance”) is increased through provisions charged against current earnings and additionally by crediting amounts of recoveries received, if any, on previously charged-off loans. The allowance is reduced by charge-offs on loans or unfunded letters of credit which are determined to be a loss, in accordance with established policies, when all efforts of collection have been exhausted.
The allowance is maintained at a level estimated to absorb probable credit losses inherent in the loan portfolio as well as other credit risk related charge-offs. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the non-PCI loan portfolio and off-balance sheet unfunded letters of credit, as well as reserves for impairment of PCI loans subsequent to their acquisition date. As discussed under the “Purchased Credit-Impaired Loans” section above, Valley had no allowance reserves related to PCI loans at December 31, 2019 and 2018. The Bank’s methodology for evaluating the appropriateness of the allowance includes grouping the loan portfolio into loan segments based on common risk characteristics, tracking the historical levels of classified loans and delinquencies, estimating the appropriate loss look-back and loss emergence periods related to historical losses for each loan segment, providing specific reserves on impaired loans, and assigning incremental reserves where necessary based upon qualitative and economic outlook factors including numerous variables, such as the nature and trends of recent loan charge-offs. Additionally, 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.
The allowance for loan losses consists of four elements: (i) specific reserves for individually impaired credits, (ii) reserves for adversely classified, or higher risk rated, loans that are not impaired, (iii) reserves for other loans based on historical loss factors (using the appropriate loss look-back and loss emergence periods) adjusted for both internal and external qualitative risk factors to Valley, including the aforementioned factors, as well as changes in both organic and purchased loan portfolio volumes, the composition and concentrations of credit, new market initiatives, and the impact of competition on loan structuring and pricing, and (iv) an allowance for PCI loan pools impaired subsequent to the acquisition date, if applicable.
The Credit Risk Management Department individually evaluates non-accrual (non-homogeneous) commercial and industrial loans and commercial real estate loans over $250 thousand and all troubled debt restructured loans. The value of an impaired loan is measured based upon the underlying anticipated method of payment consisting of either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent, and its payment is expected solely based on the underlying collateral. If the value of an impaired loan is less than its carrying amount, impairment is recognized through a provision to the allowance for loan losses. Collateral dependent impaired loan balances are written down to the estimated current fair value (less estimated selling costs) of each loan’s underlying collateral resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s
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collection process. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as a specific valuation allowance in the allowance for loan losses. Accrual of interest is discontinued on an impaired loan when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that collection of all principal and interest is doubtful. Cash collections from non-accrual loans are generally credited to the loan balance, and no interest income is recognized on these loans until the principal balance has been determined to be fully collectible. Residential mortgage loans and consumer loans usually consist of smaller balance homogeneous loans that are collectively evaluated for impairment, and are specifically excluded from the impaired loan portfolio, except where the loan is classified as a troubled debt restructured loan.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of the loans. Loans are evaluated based on an internal credit risk rating system for the commercial and industrial loan and commercial real estate loan portfolio segments and non-performing loan status for the residential and consumer loan portfolio segments. Loans are risk-rated based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial and industrial loans and commercial real estate loans, and evaluated by the Loan Review Department on a test basis. Loans with a grade that is below “Pass” grade are adversely classified. See Note 5 for details. Any change in the credit risk grade of adversely classified performing and/or non-performing loans affects the amount of the related allowance. Once a loan is adversely classified, the assigned relationship manager and/or a special assets officer in conjunction with the Credit Risk Management Department analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically assign a valuation allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. Loans identified as losses by management are charged-off. Commercial loans are generally assessed for full or partial charge-off to the net realizable value for collateral dependent loans when a loan is between 90 or 120 days past due or sooner if it is probable that a loan may not be fully collectable. Residential loans and home equity loans are generally charged-off to net realizable value when the loan is 120 days past due (or sooner when the borrowers’ obligation has been released in bankruptcy). Automobile loans are fully charged-off when the loan is 120 days past due or partially charged-off to the net realizable value of collateral, if the collateral is recovered prior to such time. Unsecured consumer loans are generally fully charged-off when the loan is 150 days past due.
The allowance allocations for other loans (i.e., risk rated loans that are not adversely classified and loans that are not risk rated) are calculated by applying historical loss factors for each loan portfolio segment to the applicable outstanding loan portfolio balances. Loss factors are calculated using statistical analysis supplemented by management judgment. The statistical analysis considers historical default rates, historical loss severity in the event of default, and the average loss emergence period for each loan portfolio segment. The management analysis includes an evaluation of loan portfolio volumes, the composition and concentrations of credit, credit quality and current delinquency trends.
See Notes 5 and 6 for Valley’s loan credit quality and additional allowance disclosures.
Leases
Lessor Arrangements. Valley's lessor arrangements primarily consist of direct financing and sales-type leases for equipment included in the commercial and industrial loan portfolio. Lease agreements may include options to renew and for the lessee to purchase the leased equipment at the end of the lease term.
Lessee Arrangements. Valley's lessee arrangements predominantly consist of operating and finance leases for premises and equipment. The majority of the operating leases include one or more options to renew that can significantly extend the lease terms. Valley’s leases have a wide range of lease expirations through the year 2062.
Operating and finance leases are recognized as right of use (ROU) assets and lease liabilities in the consolidated statements of financial position. The ROU assets represent the right to use underlying assets for the lease terms and lease liabilities represent Valley’s obligations to make lease payments arising from the lease. The ROU assets include any prepaid lease payments and initial direct costs, less any lease incentives. At the commencement dates of leases, ROU assets and lease liabilities are initially recognized based on their net present values with the lease terms including options to extend or terminate the lease when Valley is reasonably certain that the options will be exercised to extend. ROU assets are amortized into net occupancy and equipment expense over the expected lives of the leases.
Lease liabilities are discounted to their net present values on the balance sheet based on incremental borrowing rates as determined at the lease commencement dates using quoted interest rates for readily available borrowings, such as fixed rate FHLB advances, with similar terms as the lease obligations. Lease liabilities are reduced by actual lease payments.
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See Note 7 for additional information on Valley's lease related assets and obligations.
Premises and Equipment, Net
Premises and equipment are stated at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives range from 3 years for capitalized software to up to 40 years for buildings. Leasehold improvements are amortized over the term of the lease or estimated useful life of the asset, whichever is shorter. Major improvements are capitalized, while repairs and maintenance costs are charged to operations as incurred. Upon retirement or disposition, any gain or loss is credited or charged to operations. See Note 8 for further details.
Bank Owned Life Insurance
Valley owns bank owned life insurance (BOLI) to help offset the cost of employee benefits. BOLI is recorded at its cash surrender value. Valley’s BOLI is invested primarily in U.S. Treasury securities and residential mortgage-backed securities issued by government sponsored enterprises and Ginnie Mae. The majority of the underlying investment portfolio is managed by one independent investment firm. The change in the cash surrender value is included as a component of non-interest income and is exempt from federal and state income taxes as long as the policies are held until the death of the insured individuals.
Other Real Estate Owned
Valley acquires other real estate owned (OREO) through foreclosure on loans secured by real estate. OREO is reported at the lower of cost or fair value, as established by a current appraisal (less estimated costs to sell), and is included in other assets. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses incurred to maintain these properties, unrealized losses resulting from valuation write-downs after the date of foreclosure, and realized gains and losses upon sale of the properties are included in other non-interest expense. OREO totaled $9.4 million and $9.5 million at December 31, 2019 and 2018, respectively. OREO included foreclosed residential real estate properties totaling $2.1 million and $852 thousand at December 31, 2019 and 2018, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.8 million and $1.8 million at December 31, 2019 and 2018, respectively.
Goodwill
Intangible assets resulting from acquisitions under the acquisition method of accounting consist of goodwill and other intangible assets (see “Other Intangible Assets” below). Goodwill is not amortized and is subject to an annual assessment for impairment. Currently, the goodwill impairment analysis is generally a two-step test. However, Valley may choose to perform an optional qualitative assessment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test for one or more units in future periods. During 2019 and 2018, Valley elected to perform step one of the two-step goodwill impairment test for all of its reporting units.
Goodwill is allocated to Valley’s reporting unit, which is a business segment or one level below, at the date goodwill is actually recorded. If the carrying value of a reporting unit exceeds its estimated fair value, a second step in the analysis is performed to determine the amount of impairment, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying value of a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded equal to the excess amount in the current period earnings. Valley reviews goodwill annually or more frequently if a triggering event indicates impairment may have occurred, to determine potential impairment by determining if the fair value of the reporting unit has fallen below the carrying value.
Other Intangible Assets
Other intangible assets primarily consist of loan servicing rights (largely generated from loan servicing retained by the Bank on residential mortgage loan originations sold in the secondary market to government sponsored enterprises), core deposits (the portion of an acquisition purchase price which represents value assigned to the existing deposit base) and customer lists obtained through acquisitions. Other intangible assets are amortized using various methods over their estimated lives and are periodically evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impairment is deemed to exist, an adjustment is recorded to earnings in the current period for the difference between the fair value of the asset and its carrying amount. See further details regarding loan servicing rights below.
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Loan Servicing Rights
Loan servicing rights are recorded when originated mortgage loans are sold with servicing rights retained, or when servicing rights are purchased. Valley initially records the loan servicing rights at fair value. Subsequently, the loan servicing rights are carried at the lower of unamortized cost or market (i.e., fair value). The fair values of the loan servicing rights for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third party vendor that 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.
The unamortized costs associated with acquiring loan servicing rights, net of any valuation allowances, are included in other intangible assets in the consolidated statements of financial condition and are accounted for using the amortization 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. A valuation allowance is established through an impairment charge to earnings to the extent the unamortized cost of a stratified group of loan servicing rights exceeds its estimated fair value. Increases in the fair value of impaired loan servicing rights are recognized as a reduction of the valuation allowance, but not in excess of such allowance. The amortization of loan servicing rights is recorded in non-interest income.
Stock-Based Compensation
Compensation expense for restricted stock units, restricted stock and stock option awards (i.e., non-vested stock awards) is based on the fair value of the award on the date of the grant and is recognized ratably over the service period of the award. Beginning in 2019, Valley's long-term incentive compensation plan was amended for award grantees that are eligible for retirement to include a service period requirement, in which an award will vest at one-twelve per month after the grant date. Compensation expense for these awards is amortized monthly over a one year period after the grant date. Prior to 2019, award grantees that were eligible for retirement did not have a service period requirement. Compensation expense for these awards is recognized immediately in earnings. The service period for non-retirement eligible employees is the shorter of the stated vesting period of the award or the period until the employee’s retirement eligibility date. The fair value of each option granted is estimated using a binomial option pricing model. The fair value of restricted stock awards is based upon the last sale price reported for Valley’s common stock on the date of grant or the last sale price reported preceding such date, except for performance-based stock awards with a market condition. The grant date fair value of a performance-based stock award that vests based on a market condition is determined by a third party specialist using a Monte Carlo valuation model. See Note 13 for additional information.
Fair Value Measurements
In general, fair values of financial instruments are based upon quoted market prices, where available. When observable market prices and parameters are not fully available, management uses valuation techniques based upon internal and third party models requiring more management judgment to estimate the appropriate fair value measurements. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, including adjustments based on internal cash flow model projections that utilize assumptions similar to those incorporated by market participants. Other adjustments may include amounts to reflect counterparty credit quality and Valley’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. See Note 3 for additional information.
Revenue Recognition
On January 1, 2018, Valley adopted Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related updates that modify the guidance used to recognize revenue from contracts with customers for transfers of goods and services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. The adoption did not materially change Valley's recognition of revenues within the scope of Topic 606. Valley's revenue contracts generally have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable, or distinct from other obligations within the contracts. Valley does not have a material amount of long-term customer agreements that include multiple performance obligations requiring price allocation and differences in the timing of revenue recognition. Valley has no customer contracts with variable fee agreements based upon performance. Valley's revenue within the scope of ASC Topic 606 includes: (i) trust and investment services income from investment management, investment advisory, trust, custody and other products; (ii) service charges on deposit accounts from checking accounts, savings accounts, overdrafts, insufficient funds, ATM transactions and other activities; and (iii) other income from fee income related to derivative interest rate swaps executed with commercial loan customers, and fees from interchange, wire transfers, credit cards, safe deposit box, ACH, lockbox and various other products and services-related income.
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Income Taxes
Valley uses the asset and liability method to provide income taxes on all transactions recorded in the consolidated financial statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the enacted tax rates that will be in effect when the underlying items of income and expense are expected to be realized.
Valley’s expense for income taxes includes the current and deferred portions of that expense. Deferred tax assets are recognized if, in management's judgment, their realizability is determined to be more likely than not. A valuation allowance is established to reduce deferred tax assets to the amount we expect to realize. Deferred income tax expense or benefit results from differences between assets and liabilities measured for financial reporting versus income-tax return purposes. The effect on deferred taxes of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. See Note 14 for details regarding the impact of the Tax Act enacted by the U.S. government on December 22, 2017.
Valley maintains a reserve related to certain tax positions that management believes contain an element of uncertainty. An uncertain tax position is measured based on the largest amount of benefit that management believes is more likely than not to be realized. Periodically, Valley evaluates each of its tax positions and strategies to determine whether the reserve continues to be appropriate.
Comprehensive Income
Comprehensive income or loss is defined as the change in equity of a business entity during a period due to transactions and other events and circumstances, excluding those resulting from investments by and distributions to shareholders. Comprehensive income consists of net income and other comprehensive income or loss. Valley’s components of other comprehensive income or loss, net of deferred tax, include: (i) unrealized gains and losses on securities available for sale; (ii) unrealized gains and losses on derivatives used in cash flow hedging relationships; and (iii) the pension benefit adjustment for the unfunded portion of its various employee, officer, and director pension plans. Income tax effects are released from accumulated other comprehensive income on an individual unit of account basis. Valley presents comprehensive income and its components in the consolidated statements of comprehensive income for all periods presented. See Note 20 for additional disclosures.
Earnings Per Common Share
In Valley's computation of the earnings per common share, the numerator of both the basic and diluted earnings per common share is net income available to common shareholders (which is equal to net income less dividends on preferred stock). The weighted average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common stock equivalents utilizing the treasury stock method.
The following table shows the calculation of both basic and diluted earnings per common share for the years ended December 31, 2019, 2018 and 2017:
2019 | 2018 | 2017 | |||||||||
(in thousands, except for share data) | |||||||||||
Net income available to common shareholders | $ | 297,105 | $ | 248,740 | $ | 152,458 | |||||
Basic weighted-average number of common shares outstanding | 337,792,270 | 331,258,964 | 264,038,123 | ||||||||
Plus: Common stock equivalents | 2,325,538 | 1,434,754 | 850,884 | ||||||||
Diluted weighted-average number of common shares outstanding | 340,117,808 | 332,693,718 | 264,889,007 | ||||||||
Earnings per common share: | |||||||||||
Basic | $ | 0.88 | $ | 0.75 | $ | 0.58 | |||||
Diluted | 0.87 | 0.75 | 0.58 |
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 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. Average outstanding anti-dilutive warrants and, to a lesser extent, common stock
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options equaled approximately 288 thousand, 2.1 million, and 3.1 million of common shares for the years ended December 31, 2019, 2018 and 2017, respectively. All of the outstanding warrants expired unexercised in the fourth quarter 2018.
Preferred and Common Stock Dividends
Valley issued 4.6 million shares and 4.0 million shares of non-cumulative perpetual preferred stock in June 2015 and August 2017, respectively, which were initially recorded at fair value. See Note 19 for additional details on the preferred stock issuances. The preferred shares are senior to Valley common stock, whereas the current year dividends must be paid before Valley can pay dividends to its common stockholders. Preferred dividends declared are deducted from net income for computing income available to common stockholders and earnings per common share computations.
Cash dividends to both preferred and common stockholders are payable and accrued when declared by Valley's Board of Directors.
Treasury Stock
Treasury stock is recorded using the cost method and accordingly is presented as a reduction of shareholders’ equity.
Derivative Instruments and Hedging Activities
As part of its asset/liability management strategies and to accommodate commercial borrowers, Valley has used interest rate swaps and caps to hedge variability in cash flows or fair values caused by changes in interest rates. Valley also uses derivatives not designated as hedges for non-speculative purposes to (1) manage its exposure to interest rate movements related to a service for commercial lending customers, (2) share the risk of default on the interest rate swaps related to certain purchased or sold loan participations through the use of risk participation agreements and (3) manage the interest rate risk of mortgage banking activities with customer interest rate lock commitments and forward contracts to sell residential mortgage loans. Valley also has hybrid instruments, consisting of market linked certificates of deposit with an embedded swap contract. Valley records all derivatives as assets or liabilities at fair value on the consolidated statements of financial condition.
Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income or loss and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. On a quarterly basis, Valley assesses the effectiveness of each hedging relationship by comparing the changes in cash flows or fair value of the derivative hedging instrument with the changes in cash flows or fair value of the designated hedged item or transaction. If a hedging relationship is terminated due to ineffectiveness, and the derivative instrument is not re-designated to a new hedging relationship, the subsequent change in fair value of such instrument is charged directly to earnings. Derivatives not designated as hedges do not meet the hedge accounting requirements under U.S. GAAP. Changes in fair value of derivatives not designated in hedging relationships are recorded directly in earnings. Valley calculates the credit valuation adjustments to the fair value of derivatives designated as fair value hedges on a net basis by counterparty portfolio, as an accounting policy election under the provisions of ASU No. 2011-04.
New Authoritative Accounting Guidance
New Accounting Guidance Adopted in 2019
Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)” and subsequent related updates require lessees to recognize leases on balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model that requires lessees to recognize a ROU asset and related lease liability for all leases with a term longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Leases continue to be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
Effective January 1, 2019, Valley adopted ASU No. 2016-02 (and subsequent related updates) and recorded ROU assets of approximately $216 million (net of the reversal of the deferred rent liability at such date) and lease obligations of approximately $241 million. Valley elected the "package of practical expedients," as permitted under the transition guidance within Topic 842. The practical expedients enable Valley to carry forward lease classifications under the prior accounting guidance (Topic 840). Additionally, the expedients enable the use of hindsight, through which Valley reassessed the likelihood of extending leases under
2019 Form 10-K | 82 |
extension clauses available to Valley. This shortened the expected lives of certain leases. As a result, Valley recorded a $4.4 million (net of tax) credit adjustment to the opening balance of retained earnings as of January 1, 2019. Valley also made accounting policy elections to (i) separate non-lease components from its lease obligations with the non-lease components being charged to earnings when incurred and to (ii) exclude short-term leases of 12 months or less from the balance sheet. The comparative periods prior to the adoption date of Topic 842 will continue to be presented in the financial statements in accordance with prior GAAP (Topic 840). See Note 7 for the additional required disclosures.
ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities" shortens the amortization period for certain callable debt securities held at a premium. ASU No. 2017-08 requires the premium to be amortized to the earliest call date. The accounting for securities held at a discount does not change and the discount continues to be amortized as an adjustment to yield over the contractual life (to maturity) of the instrument. ASU No. 2017-08 was effective for Valley on January 1, 2019 and was applied using the modified retrospective method, resulting in a cumulative-effect adjustment to the opening balance of retained earnings totaling $1.4 million (net of tax) as of January 1, 2019. ASU No. 2017-08 did not have a significant impact on Valley's consolidated financial statements.
ASU No. 2019-01, "Leases (Topic 842): Codification Improvements" reinstates the fair value exception in ASC 840, in which lessors will measure fair value, at lease commencement, as cost, reflecting any applicable volume or trade discounts. ASU No. 2019-01 also requires lessors that are depository or lending institutions in the scope of Topic 842 to classify the principal portion of lease payments received under sales-type and direct financing leases as cash flows from investing activities. The interest portion of those and all lease payments received under operating leases are classified as cash flows from operating activities. Effective January 1, 2019, Valley early adopted ASU No. 2019-01 concurrent with its adoption of Topic 842. The adoption of ASU No. 2019-01 did not have a material impact on Valley's consolidated financial statements.
New Accounting Guidance Adopted in the First Quarter 2020
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 FASB issued an amendment to replace today's incurred loss impairment methodology with a new current credit loss (CECL) model. Under the new guidance, Valley will be required to measure expected credit losses by utilizing forward-looking information to assess its allowance for credit losses. The guidance also requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Valley anticipates utilizing a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, held to maturity investments and purchased financial assets with credit deterioration (PCD) assets. It also applies to certain off-balance sheet credit exposures. In November 2019, the FASB issued ASU No. 2019-11, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses", which clarifies that expected recoveries of amounts previously written off or expected to be written off should be included in the estimate of allowance for credit losses for purchased financial assets with credit deterioration, provides certain transition relief for TDR accounting when the discounted cash flow method is used to estimate credit losses, allows entities to elect to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements, and clarifies that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing financial assets when electing a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of the financial asset and the fair value of collateral securing the financial asset as of the reporting date.
Valley will adopt the new CECL accounting guidance effective January 1, 2020 using the modified retrospective approach for all financial assets measured at amortized cost (except for PCD loans) and off-balance sheet credit exposures. Valley has established a governance structure to implement the CECL accounting guidance and has developed a methodology and set of models to be used upon adoption. At December 31, 2019, Valley’s loan portfolio totaled $29.7 billion with a corresponding allowance for loan losses ("ALL") of $161.8 million under current GAAP. Based on Valley's current CECL model results that it has performed alongside the current ALL process, Valley estimates that the adoption of the new guidance will result in an increase to the allowance for credit losses, including the reserve for off-balance sheet credit exposures (included within other liabilities), of $30 million to $40 million, excluding PCD loans. Valley elected the prospective transition approach for PCD loans that were previously classified as purchased-credit impaired (PCI) loans. Under this guidance, Valley is not required to reassess whether PCI loans met the PCD loans criteria as of the date of the date of adoption. For PCD loans, the allowance for credit losses recorded is recognized through a gross-up that increases the amortized cost basis of loans with a corresponding allowance for credit losses, and therefore results in no expected impact to the cumulative effect adjustment to retained earnings. The anticipated increase to
83 | 2019 Form 10-K |
the allowance for credit losses related to PCD loans is $60 million to $65 million. The remaining non-credit discount will be accreted into interest income over the life of the loans at the effective interest rate effective January 1, 2020.
For other assets within the scope of the new CECL accounting guidance, such as debt securities held-to-maturity, trade and other receivables, management expects the impact from the adoption to be inconsequential.
Valley is reviewing the performance of its most recent model run, including certain qualitative adjustments and certain assumptions related to the reserve for off-balance sheet credit exposures. As Valley finalizes the implementation of the new guidance in the first quarter of 2020, final decisions by management will result in the specific January 1, 2020 allowance for credit losses impact being established and the related impact to the financial statements and disclosures.
Valley does not expect the adoption of the new CECL accounting guidance to have a significant impact on Valley’s regulatory capital ratios.
ASU No. 2019-11, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses" amends or clarifies the guidance in ASC 326 on credit losses. ASU No. 2019-11: (i) permits entities to record a negative allowance when measuring the expected credit losses for a PCD financial asset, not to exceed the total amount of the amortized cost basis previously written off and expected to be written off, (ii) provides transition relief for troubled debt restructurings, (iii) provides disclosure relief for accrued interest receivable and (iv) offers a practical expedient for financial assets secured by collateral maintenance provisions (e.g., the borrower is contractually required to adjust the amount of the collateral securing the financial asset). Valley adopted ASU No. 2019-11 on January 1, 2020. The adoption of this ASU is not expected to have a significant impact on the presentation of Valley's consolidated financial statements.
ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement. The most significant provisions of the ASU relate to how companies will estimate expected credit losses under Topic 326 by incorporating (1) expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) clarifying that contractual extensions or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. Valley adopted ASU No. 2019-04 on January 1, 2020. See more details regarding our adoption of Topic 326 and ASU No. 2016-13 above.
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 and interim, if applicable, goodwill impairment tests in fiscal years beginning January 1, 2020.
BUSINESS COMBINATIONS (Note 2)
Oritani Financial Corp.
On December 1, 2019, Valley completed its acquisition of Oritani Financial Corp. ("Oritani") and its wholly-owned subsidiary, Oritani Bank. Oritani had approximately $4.3 billion in assets, $3.4 billion in net loans and $2.9 billion in deposits, after purchase accounting adjustments, and a branch network of 26 locations. The acquisition represents a significant addition to Valley's New Jersey franchise, and meaningfully enhanced its presence in the Bergen County market. The common shareholders of Oritani received 1.60 shares of Valley common stock for each Oritani share that they owned prior to merger. The total consideration for the acquisition was approximately $835.3 million, consisting of 71.1 million shares of Valley common stock and the outstanding Oritani stock-based awards.
Merger expenses totaled $16.6 million for the year ended December 31, 2019, which primarily related to salary and employee benefits and other expenses are included in non-interest expense on the consolidated statements of income.
2019 Form 10-K | 84 |
The following table sets forth assets acquired, and liabilities assumed in the Oritani acquisition, at their estimated fair values as of the closing date of the transaction:
December 1, 2019 | |||
(in thousands) | |||
Assets acquired: | |||
Cash and cash equivalents | $ | 22,239 | |
Equity securities | 51,382 | ||
Investment securities available for sale | 335,894 | ||
Investment securities held to maturity | 4,877 | ||
Loans | 3,380,841 | ||
Premises and equipment | 23,585 | ||
Bank owned life insurance | 101,896 | ||
Accrued interest receivable | 11,781 | ||
Goodwill | 288,960 | ||
Other intangible assets | 20,690 | ||
Other assets: | |||
Deferred tax assets | 24,707 | ||
FHLB and FRB stock | 23,479 | ||
Other assets | 1,988 | ||
Total other assets | 50,174 | ||
Total assets acquired | $ | 4,292,319 | |
Liabilities assumed: | |||
Deposits: | |||
Non-interest bearing | $ | 142,630 | |
Savings, NOW and money market | 1,596,690 | ||
Time | 1,185,396 | ||
Total deposits | 2,924,716 | ||
Short-term borrowings | 10,500 | ||
Long-term borrowings | 430,130 | ||
Accrued expense and other liabilities | 91,718 | ||
Total liabilities assumed | $ | 3,457,064 | |
Common stock issued in acquisition | $ | 835,255 |
The determination of the fair value of the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information (existing at the date of closing) relative to closing date fair values becomes available.
Fair Value Measurement of Assets Acquired and Liabilities Assumed
Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the Oritani acquisition.
Cash and cash equivalents. The estimated fair values of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term maturities.
Investment securities. The estimated fair values of the investment securities were calculated utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service when available, or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. The prices are derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market
85 | 2019 Form 10-K |
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviewed the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.
Loans. The acquired loan portfolio was segregated into categories for valuation purposes primarily based on loan type (commercial, commercial real estate, multifamily, residential, and consumer) and credit risk rating. The estimated fair values were computed by discounting the expected cash flows from the respective portfolios to present value based on estimated market rates. Management estimated the cash flows expected to be collected at the acquisition date by using valuation models that incorporated loan contractual characteristics (such as payment type, amortization type, and term to maturity) as well as estimates of key valuation assumptions (such as prepayment speeds, default rates, and loss severity rates). Prepayment assumptions were developed by reference to recent or historical prepayment speeds observed for loans with similar underlying characteristics. Prepayment assumptions were influenced by many factors, including, but not limited to, forward interest rates, loan and collateral types, vintage, coupon band, and payment status. Default and loss severity rates were developed by reference to recent or historical default and loss rates observed for loans with similar underlying characteristics. Default and loss severity assumptions were influenced by many factors, including, but not limited to, underwriting processes and documentation, vintages, collateral types, collateral locations, estimated collateral values, loan-to-value ratios, and debt-to-income ratios.
The expected cash flows from the acquired loan portfolios were discounted to present value based on estimated market rates. The market rates were estimated using a buildup approach based on the following components: funding cost, servicing cost, and consideration of liquidity premium. In addition, coupon rates for recently originated loans and available market data regarding origination rates were also considered in the analysis. The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.
The difference between the fair value and the expected cash flows from the acquired loans will be accreted to interest income over the remaining term of the loans in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” See Note 5 for further details.
Other intangible assets. Other intangible assets mostly consisting of core deposit intangibles (CDI) are measures of the value of non-maturity checking, savings, NOW and money market deposits that are acquired in a business combination. The fair value of the CDI is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding. The CDI is amortized over an estimated useful life of 10 years to approximate the existing deposit relationships acquired.
Deposits. The fair values of deposit liabilities with no stated maturity (i.e., non-interest bearing accounts and savings, NOW and money market accounts) are equal to the carrying amounts payable on demand. The fair values of certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered on deposits with similar characteristics and remaining maturities.
Short-term borrowings. The short-term borrowings consist of FHLB advances. The carrying amounts approximate their fair values because they frequently re-price to a market rate.
Long-term borrowings. The fair values of long-term borrowings consisting of FHLB advances were estimated by discounting the estimated future cash flows using market discount rates for borrowings with similar characteristics, terms and remaining maturities. See Note 11 for further details.
2019 Form 10-K | 86 |
Had the acquisition of Oritani taken place on the beginning of the annual periods presented, Valley’s revenues (defined as the sum of net interest income and non-interest income), net income, basic earnings per share, and diluted earnings per share would have equaled the amounts indicated in the following table for the years ended December 31, 2019 and 2018:
December 31, | |||||||
2019 | 2018 | ||||||
(in thousands, except per share data) | Unaudited | ||||||
Revenues | $ | 1,219,887 | $ | 1,106,012 | |||
Net income | 361,079 | 313,977 | |||||
Basic earnings per share | 0.86 | 0.75 | |||||
Diluted earnings per share | 0.85 | 0.75 |
USAmeriBancorp, Inc.
On January 1, 2018, Valley completed its acquisition of USAmeriBancorp, Inc. (USAB) headquartered in Clearwater, Florida. USAB, largely through its wholly-owned subsidiary, USAmeriBank, had approximately $5.1 billion in assets, $3.7 billion in net loans and $3.6 billion in deposits, after purchase accounting adjustments, and maintained a branch network of 29 offices at December 31, 2018. The acquisition represented a significant addition to Valley’s Florida presence, primarily in the Tampa Bay market. The acquisition also brought Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where USAB maintained 15 of its branches. The common shareholders of USAB received 6.1 shares of Valley common stock for each USAB share they owned prior to merger. The total consideration for the acquisition was approximately $737 million, consisting of 64.9 million shares of Valley common stock and the outstanding USAB stock-based awards.
Merger expenses totaled $17.4 million for the year ended December 31, 2018, which primarily related to salary and employee benefits and other expenses are included in non-interest expense on the consolidated statements of income.
Had the acquisition of USAB taken place on January 1, 2017 Valley’s revenues (defined as the sum of net interest income and non-interest income), net income, basic earnings per share, and diluted earnings per share would have equaled the amounts indicated in the following table for the year ended December 31, 2017:
December 31, | |||
2017 | |||
(in thousands, except per share data) | Unaudited | ||
Revenues | $ | 931,255 | |
Net income | 196,921 | ||
Basic earnings per share | 0.57 | ||
Diluted earnings per share | 0.57 |
FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES (Note 3)
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). |
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Assets and Liabilities Measured at Fair Value on a Recurring Basis and Non-Recurring Basis
The following tables present the assets and liabilities that are measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at December 31, 2019 and 2018. The assets presented under “non-recurring 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).
Fair Value Measurements at Reporting Date Using: | |||||||||||||||
December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(in thousands) | |||||||||||||||
Recurring fair value measurements: | |||||||||||||||
Assets | |||||||||||||||
Investment securities: | |||||||||||||||
Equity securities | $ | 41,410 | $ | 41,410 | $ | — | $ | — | |||||||
Available for sale debt securities: | |||||||||||||||
U.S. Treasury securities | 50,943 | 50,943 | — | — | |||||||||||
U.S. government agency securities | 29,243 | — | 29,243 | — | |||||||||||
Obligations of states and political subdivisions | 170,051 | — | 170,051 | — | |||||||||||
Residential mortgage-backed securities | 1,254,786 | — | 1,254,786 | — | |||||||||||
Corporate and other debt securities | 61,778 | — | 61,098 | 680 | |||||||||||
Total available for sale debt securities | 1,566,801 | 50,943 | 1,515,178 | 680 | |||||||||||
Loans held for sale (1) | 76,113 | — | 76,113 | — | |||||||||||
Other assets (2) | 158,532 | — | 158,532 | — | |||||||||||
Total assets | $ | 1,842,856 | $ | 92,353 | $ | 1,749,823 | $ | 680 | |||||||
Liabilities | |||||||||||||||
Other liabilities (2) | $ | 43,926 | $ | — | $ | 43,926 | $ | — | |||||||
Total liabilities | $ | 43,926 | $ | — | $ | 43,926 | $ | — | |||||||
Non-recurring fair value measurements: | |||||||||||||||
Collateral dependent impaired loans (3) | $ | 39,075 | $ | — | $ | — | $ | 39,075 | |||||||
Loan servicing rights | 1,591 | — | — | 1,591 | |||||||||||
Foreclosed assets | 10,807 | — | — | 10,807 | |||||||||||
Total | $ | 51,473 | $ | — | $ | — | $ | 51,473 |
2019 Form 10-K | 88 |
Fair Value Measurements at Reporting Date Using: | |||||||||||||||
December 31, 2018 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(in thousands) | |||||||||||||||
Recurring fair value measurements: | |||||||||||||||
Assets | |||||||||||||||
Investment securities: | |||||||||||||||
Available for sale: | |||||||||||||||
U.S. Treasury securities | $ | 49,306 | $ | 49,306 | $ | — | $ | — | |||||||
U.S. government agency securities | 36,277 | — | 36,277 | — | |||||||||||
Obligations of states and political subdivisions | 197,092 | — | 197,092 | — | |||||||||||
Residential mortgage-backed securities | 1,429,782 | — | 1,429,782 | — | |||||||||||
Corporate and other debt securities | 37,087 | — | 37,087 | — | |||||||||||
Total available for sale | 1,749,544 | 49,306 | 1,700,238 | — | |||||||||||
Loans held for sale (1) | 35,155 | — | 35,155 | — | |||||||||||
Other assets (2) | 48,979 | — | 48,979 | — | |||||||||||
Total assets | $ | 1,833,678 | $ | 49,306 | $ | 1,784,372 | $ | — | |||||||
Liabilities | |||||||||||||||
Other liabilities (2) | $ | 23,681 | $ | — | $ | 23,681 | $ | — | |||||||
Total liabilities | $ | 23,681 | $ | — | $ | 23,681 | $ | — | |||||||
Non-recurring fair value measurements: | |||||||||||||||
Collateral dependent impaired loans (3) | $ | 45,245 | $ | — | $ | — | $ | 45,245 | |||||||
Loan servicing rights | 273 | — | — | 273 | |||||||||||
Foreclosed assets | 5,673 | — | — | 5,673 | |||||||||||
Total | $ | 51,191 | $ | — | $ | — | $ | 51,191 |
(1) | Represents residential mortgage loans held for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $74.5 million and $34.6 million at December 31, 2019 and 2018, respectively. |
(2) | Derivative financial instruments are included in this category. |
(3) | Excludes PCI loans. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following valuation techniques were used for financial instruments measured at fair value on a recurring basis. All of 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.
Equity Securities. Fair values of equity securities, consisting of one publicly traded mutual fund, are derived from quoted market prices in active markets.
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. In addition, Valley reviews the volume and level of activity for all available for sale securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume.
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In calculating the fair value of one impaired special revenue bond (within obligations of states and political subdivisions in the table above) under Level 3, Valley prepared its best estimate of the present value of the cash flows to determine an internal price estimate. In determining the internal price, Valley utilized recent financial information and developments provided by the issuer, as well as other unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing of the defaulted security. A quoted price received from an independent pricing service was weighted with the internal price estimate to determine the fair value of the instrument at December 31, 2019. See Note 4 for additional information regarding this impaired security.
Loans held for sale. 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. 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. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at December 31, 2019 and 2018 based on the short duration these assets were held and the 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 analyses using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves. The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at December 31, 2019 and 2018), is determined based on the current market prices for similar instruments. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at December 31, 2019 and 2018.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The following valuation techniques were used for certain non-financial assets measured at fair value on a non-recurring 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 customized discounting criteria. At December 31, 2019, certain appraisals may be discounted based on specific market data by location and property type. During 2019 and 2018, collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. The collateral dependent loan charge-offs to the allowance for loan losses totaled $2.1 million and $638 thousand for the years ended December 31, 2019 and 2018, respectively. These collateral dependent impaired loans with a total recorded investment of $74.6 million and $73.7 million at December 31, 2019 and 2018, respectively, were reduced by specific valuation allowance allocations totaling $35.5 million and $28.5 million to a reported total net carrying amount of $39.1 million and $45.2 million at December 31, 2019 and 2018, respectively.
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 December 31, 2019, the fair value model used a blended prepayment speed (stated as constant prepayment rates) of 11.6 percent and a discount rate of 9.6 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. At December 31, 2019, certain loan servicing rights were re-measured at fair value totaling $1.6 million. Valley recorded net recoveries of impairment charges on its loan servicing rights totaling $36 thousand, $388 thousand and $429 thousand for the years ended December 31, 2019, 2018 and 2017, respectively.
Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is adjusted based on customized discounting criteria, similar to the criteria used for impaired loans described above. There were no adjustments to the appraisals of foreclosed assets at December 31, 2019. During the years ended December 31, 2019 and 2018, foreclosed assets measured at fair value upon initial
2019 Form 10-K | 90 |
recognition or subsequent re-measurement totaled $10.8 million and $5.7 million, respectively. The charge-offs of foreclosed assets to the allowance for loan losses totaled $3.0 million and $2.0 million for the years ended December 31, 2019 and 2018, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in losses of $896 thousand, $390 thousand and $361 thousand included in non-interest expense for the years ended December 31, 2019, 2018 and 2017, respectively.
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.
91 | 2019 Form 10-K |
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 December 31, 2019 and 2018 were as follows:
December 31, | |||||||||||||||||
2019 | 2018 | ||||||||||||||||
Fair Value Hierarchy | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
(in thousands) | |||||||||||||||||
Financial assets | |||||||||||||||||
Cash and due from banks | Level 1 | $ | 256,264 | $ | 256,264 | $ | 251,541 | $ | 251,541 | ||||||||
Interest bearing deposits with banks | Level 1 | 178,423 | 178,423 | 177,088 | 177,088 | ||||||||||||
Held to maturity debt securities: | |||||||||||||||||
U.S. Treasury securities | Level 1 | 138,352 | 144,113 | 138,517 | 142,049 | ||||||||||||
U.S. government agency securities | Level 2 | 7,345 | 7,362 | 8,721 | 8,641 | ||||||||||||
Obligations of states and political subdivisions | Level 2 | 500,705 | 513,607 | 585,656 | 586,033 | ||||||||||||
Residential mortgage-backed securities | Level 2 | 1,620,119 | 1,629,572 | 1,266,770 | 1,235,605 | ||||||||||||
Trust preferred securities | Level 2 | 37,324 | 31,382 | 37,332 | 31,486 | ||||||||||||
Corporate and other debt securities | Level 2 | 32,250 | 32,684 | 31,250 | 31,129 | ||||||||||||
Total investment securities held to maturity | 2,336,095 | 2,358,720 | 2,068,246 | 2,034,943 | |||||||||||||
Net loans | Level 3 | 29,537,449 | 28,964,396 | 24,883,610 | 24,068,755 | ||||||||||||
Accrued interest receivable | Level 1 | 105,637 | 105,637 | 95,296 | 95,296 | ||||||||||||
Federal Reserve Bank and Federal Home Loan Bank stock (1) | Level 1 | 214,421 | 214,421 | 232,080 | 232,080 | ||||||||||||
Financial liabilities | |||||||||||||||||
Deposits without stated maturities | Level 1 | 19,467,892 | 19,467,892 | 17,388,990 | 17,388,990 | ||||||||||||
Deposits with stated maturities | Level 2 | 9,717,945 | 9,747,867 | 7,063,984 | 7,005,573 | ||||||||||||
Short-term borrowings | Level 1 | 1,093,280 | 1,081,879 | 2,118,914 | 2,091,892 | ||||||||||||
Long-term borrowings | Level 2 | 2,122,426 | 2,181,401 | 1,654,268 | 1,751,194 | ||||||||||||
Junior subordinated debentures issued to capital trusts | Level 2 | 55,718 | 53,889 | 55,370 | 55,692 | ||||||||||||
Accrued interest payable (2) | Level 1 | 33,066 | 33,066 | 25,762 | 25,762 |
(1) | Included in other assets. |
(2) | Included in accrued expenses and other liabilities. |
2019 Form 10-K | 92 |
INVESTMENT SECURITIES (Note 4)
Equity Securities
Equity securities carried at fair value totaled $41.4 million at December 31, 2019. Valley's equity securities consist of one publicly traded money market mutual fund held in trust to secure Valley's assumed obligations under certain former Oritani non-qualified director and employee benefit plans. See Note 13 for further details.
Available for Sale Debt Securities
The amortized cost, gross unrealized gains and losses and fair value of investment securities available for sale at December 31, 2019 and 2018 were as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(in thousands) | |||||||||||||||
December 31, 2019 | |||||||||||||||
U.S. Treasury securities | $ | 50,952 | $ | 12 | $ | (21 | ) | $ | 50,943 | ||||||
U.S. government agency securities | 28,982 | 280 | (19 | ) | 29,243 | ||||||||||
Obligations of states and political subdivisions: | |||||||||||||||
Obligations of states and state agencies | 78,116 | 540 | (83 | ) | 78,573 | ||||||||||
Municipal bonds | 90,662 | 902 | (86 | ) | 91,478 | ||||||||||
Total obligations of states and political subdivisions | 168,778 | 1,442 | (169 | ) | 170,051 | ||||||||||
Residential mortgage-backed securities | 1,248,814 | 11,234 | (5,262 | ) | 1,254,786 | ||||||||||
Corporate and other debt securities | 61,261 | 628 | (111 | ) | 61,778 | ||||||||||
Total investment securities available for sale | $ | 1,558,787 | $ | 13,596 | $ | (5,582 | ) | $ | 1,566,801 | ||||||
December 31, 2018 | |||||||||||||||
U.S. Treasury securities | $ | 50,975 | $ | — | $ | (1,669 | ) | $ | 49,306 | ||||||
U.S. government agency securities | 36,844 | 71 | (638 | ) | 36,277 | ||||||||||
Obligations of states and political subdivisions: | |||||||||||||||
Obligations of states and state agencies | 100,777 | 18 | (3,682 | ) | 97,113 | ||||||||||
Municipal bonds | 101,207 | 209 | (1,437 | ) | 99,979 | ||||||||||
Total obligations of states and political subdivisions | 201,984 | 227 | (5,119 | ) | 197,092 | ||||||||||
Residential mortgage-backed securities | 1,469,059 | 1,484 | (40,761 | ) | 1,429,782 | ||||||||||
Corporate and other debt securities | 37,542 | 213 | (668 | ) | 37,087 | ||||||||||
Total investment securities available for sale | $ | 1,796,404 | $ | 1,995 | $ | (48,855 | ) | $ | 1,749,544 |
93 | 2019 Form 10-K |
The age of unrealized losses and fair value of related securities available for sale at December 31, 2019 and 2018 were as follows:
Less than Twelve Months | More than Twelve Months | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||
U.S. Treasury securities | $ | 25,019 | $ | (21 | ) | $ | — | $ | — | $ | 25,019 | $ | (21 | ) | |||||||||
U.S. government agency securities | — | — | 1,783 | (19 | ) | 1,783 | (19 | ) | |||||||||||||||
Obligations of states and political subdivisions: | |||||||||||||||||||||||
Obligations of states and state agencies | 18,540 | (21 | ) | 8,755 | (62 | ) | 27,295 | (83 | ) | ||||||||||||||
Municipal bonds | — | — | 13,177 | (86 | ) | 13,177 | (86 | ) | |||||||||||||||
Total obligations of states and political subdivisions | 18,540 | (21 | ) | 21,932 | (148 | ) | 40,472 | (169 | ) | ||||||||||||||
Residential mortgage-backed securities | 240,412 | (1,194 | ) | 282,798 | (4,068 | ) | 523,210 | (5,262 | ) | ||||||||||||||
Corporate and other debt securities | 5,139 | (111 | ) | — | — | 5,139 | (111 | ) | |||||||||||||||
Total | $ | 289,110 | $ | (1,347 | ) | $ | 306,513 | $ | (4,235 | ) | $ | 595,623 | $ | (5,582 | ) | ||||||||
December 31, 2018 | |||||||||||||||||||||||
U.S. Treasury securities | $ | — | $ | — | $ | 49,306 | $ | (1,669 | ) | $ | 49,306 | $ | (1,669 | ) | |||||||||
U.S. government agency securities | 2,120 | (20 | ) | 26,775 | (618 | ) | 28,895 | (638 | ) | ||||||||||||||
Obligations of states and political subdivisions: | |||||||||||||||||||||||
Obligations of states and state agencies | 17,560 | (95 | ) | 75,718 | (3,587 | ) | 93,278 | (3,682 | ) | ||||||||||||||
Municipal bonds | 5,018 | (106 | ) | 70,286 | (1,331 | ) | 75,304 | (1,437 | ) | ||||||||||||||
Total obligations of states and political subdivisions | 22,578 | (201 | ) | 146,004 | (4,918 | ) | 168,582 | (5,119 | ) | ||||||||||||||
Residential mortgage-backed securities | 119,645 | (668 | ) | 1,221,942 | (40,093 | ) | 1,341,587 | (40,761 | ) | ||||||||||||||
Corporate and other debt securities | 12,339 | (161 | ) | 12,397 | (507 | ) | 24,736 | (668 | ) | ||||||||||||||
Total | $ | 156,682 | $ | (1,050 | ) | $ | 1,456,424 | $ | (47,805 | ) | $ | 1,613,106 | $ | (48,855 | ) |
The unrealized losses on investment debt 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 December 31, 2019 was 182 as compared to 545 at December 31, 2018.
The unrealized losses existing for more than twelve months for the residential mortgage-backed securities category of the available for sale portfolio at December 31, 2019 were largely related to several investment grade securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac.
As of December 31, 2019, the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $1.0 billion.
2019 Form 10-K | 94 |
The contractual maturities of investment debt securities available for sale at December 31, 2019 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
December 31, 2019 | |||||||
Amortized Cost | Fair Value | ||||||
(in thousands) | |||||||
Due in one year | $ | 19,554 | $ | 19,611 | |||
Due after one year through five years | 110,337 | 110,801 | |||||
Due after five years through ten years | 90,297 | 91,232 | |||||
Due after ten years | 89,785 | 90,371 | |||||
Residential mortgage-backed securities | 1,248,814 | 1,254,786 | |||||
Total investment securities available for sale | $ | 1,558,787 | $ | 1,566,801 |
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 5.7 years at December 31, 2019.
95 | 2019 Form 10-K |
Held to Maturity Debt Securities
The amortized cost, gross unrealized gains and losses and fair value of investment debt securities held to maturity at December 31, 2019 and 2018 were as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(in thousands) | |||||||||||||||
December 31, 2019 | |||||||||||||||
U.S. Treasury securities | $ | 138,352 | $ | 5,761 | $ | — | $ | 144,113 | |||||||
U.S. government agency securities | 7,345 | 58 | (41 | ) | 7,362 | ||||||||||
Obligations of states and political subdivisions: | |||||||||||||||
Obligations of states and state agencies | 297,454 | 7,745 | (529 | ) | 304,670 | ||||||||||
Municipal bonds | 203,251 | 5,696 | (10 | ) | 208,937 | ||||||||||
Total obligations of states and political subdivisions | 500,705 | 13,441 | (539 | ) | 513,607 | ||||||||||
Residential mortgage-backed securities | 1,620,119 | 14,803 | (5,350 | ) | 1,629,572 | ||||||||||
Trust preferred securities | 37,324 | 39 | (5,981 | ) | 31,382 | ||||||||||
Corporate and other debt securities | 32,250 | 454 | (20 | ) | 32,684 | ||||||||||
Total investment securities held to maturity | $ | 2,336,095 | $ | 34,556 | $ | (11,931 | ) | $ | 2,358,720 | ||||||
December 31, 2018 | |||||||||||||||
U.S. Treasury securities | $ | 138,517 | $ | 3,532 | $ | — | $ | 142,049 | |||||||
U.S. government agency securities | 8,721 | 55 | (135 | ) | 8,641 | ||||||||||
Obligations of states and political subdivisions: | |||||||||||||||
Obligations of states and state agencies | 341,702 | 4,332 | (5,735 | ) | 340,299 | ||||||||||
Municipal bonds | 243,954 | 3,141 | (1,361 | ) | 245,734 | ||||||||||
Total obligations of states and political subdivisions | 585,656 | 7,473 | (7,096 | ) | 586,033 | ||||||||||
Residential mortgage-backed securities | 1,266,770 | 3,203 | (34,368 | ) | 1,235,605 | ||||||||||
Trust preferred securities | 37,332 | 77 | (5,923 | ) | 31,486 | ||||||||||
Corporate and other debt securities | 31,250 | 96 | (217 | ) | 31,129 | ||||||||||
Total investment securities held to maturity | $ | 2,068,246 | $ | 14,436 | $ | (47,739 | ) | $ | 2,034,943 |
2019 Form 10-K | 96 |
The age of unrealized losses and fair value of related securities held to maturity at December 31, 2019 and 2018 were as follows:
Less than Twelve Months | More than Twelve Months | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||
U.S. government agency securities | $ | 5,183 | $ | (41 | ) | $ | — | $ | — | $ | 5,183 | $ | (41 | ) | |||||||||
Obligations of states and political subdivisions: | |||||||||||||||||||||||
Obligations of states and state agencies | 11,178 | (55 | ) | 32,397 | (474 | ) | 43,575 | (529 | ) | ||||||||||||||
Municipal bonds | — | — | 798 | (10 | ) | 798 | (10 | ) | |||||||||||||||
Total obligations of states and political subdivisions | 11,178 | (55 | ) | 33,195 | (484 | ) | 44,373 | (539 | ) | ||||||||||||||
Residential mortgage-backed securities | 307,885 | (1,387 | ) | 254,915 | (3,963 | ) | 562,800 | (5,350 | ) | ||||||||||||||
Trust preferred securities | — | — | 29,990 | (5,981 | ) | 29,990 | (5,981 | ) | |||||||||||||||
Corporate and other debt securities | — | — | 4,980 | (20 | ) | 4,980 | (20 | ) | |||||||||||||||
Total | $ | 324,246 | $ | (1,483 | ) | $ | 323,080 | $ | (10,448 | ) | $ | 647,326 | $ | (11,931 | ) | ||||||||
December 31, 2018 | |||||||||||||||||||||||
U.S. government agency securities | — | — | 6,074 | (135 | ) | 6,074 | (135 | ) | |||||||||||||||
Obligations of states and political subdivisions: | |||||||||||||||||||||||
Obligations of states and state agencies | $ | 16,098 | $ | (266 | ) | $ | 138,437 | $ | (5,469 | ) | $ | 154,535 | $ | (5,735 | ) | ||||||||
Municipal bonds | 3,335 | (37 | ) | 60,078 | (1,324 | ) | 63,413 | (1,361 | ) | ||||||||||||||
Total obligations of states and political subdivisions | 19,433 | (303 | ) | 198,515 | (6,793 | ) | 217,948 | (7,096 | ) | ||||||||||||||
Residential mortgage-backed securities | 72,240 | (852 | ) | 846,671 | (33,516 | ) | 918,911 | (34,368 | ) | ||||||||||||||
Trust preferred securities | — | — | 30,055 | (5,923 | ) | 30,055 | (5,923 | ) | |||||||||||||||
Corporate and other debt securities | 9,948 | (52 | ) | 4,835 | (165 | ) | 14,783 | (217 | ) | ||||||||||||||
Total | $ | 101,621 | $ | (1,207 | ) | $ | 1,086,150 | $ | (46,532 | ) | $ | 1,187,771 | $ | (47,739 | ) |
The unrealized losses on investment debt 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 held to maturity portfolio in an unrealized loss position at December 31, 2019 was 82 as compared to 378 at December 31, 2018.
The unrealized losses existing for more than twelve months within the residential mortgage-backed securities category of the held to maturity portfolio at December 31, 2019 were largely related to investment grade securities issued by Ginnie Mae and Fannie Mae.
The unrealized losses existing for more than twelve months for trust preferred securities at December 31, 2019 primarily related to four non-rated single-issuer 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 December 31, 2019.
As of December 31, 2019, the fair value of debt securities held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law was $1.4 billion.
The contractual maturities of investments in debt securities held to maturity at December 31, 2019 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages
97 | 2019 Form 10-K |
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.
December 31, 2019 | |||||||
Amortized Cost | Fair Value | ||||||
(in thousands) | |||||||
Due in one year | $ | 96,230 | $ | 97,223 | |||
Due after one year through five years | 170,615 | 176,005 | |||||
Due after five years through ten years | 216,437 | 226,086 | |||||
Due after ten years | 232,694 | 229,834 | |||||
Residential mortgage-backed securities | 1,620,119 | 1,629,572 | |||||
Total investment securities held to maturity | $ | 2,336,095 | $ | 2,358,720 |
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 5.2 years at December 31, 2019.
Other-Than-Temporary Impairment Analysis
Valley records impairment charges on its investment debt securities when the decline in fair value is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities; decline in the creditworthiness of the issuer; absence of reliable pricing information for investment securities; adverse changes in business climate; adverse actions by regulators; or unanticipated changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. Among other securities, Valley's investments in trust preferred securities, bank issued corporate bonds and special revenue bonds may pose a higher risk of future impairment charges to Valley as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers.
For the single-issuer trust preferred, corporate, and other debt securities, Valley reviews each portfolio to determine if all the securities are paying in accordance with their terms and have no deferrals of interest or defaults. A deferral event by a bank holding company for which Valley holds trust preferred securities may require the recognition of an other-than-temporary impairment charge if Valley determines that it is more likely than not that all contractual interest and principal cash flows may not be collected. Among other factors, the probability of the collection of all interest and principal determined by Valley in its impairment analysis declines if there is an increase in the estimated deferral period of the issuer. Additionally, a FDIC receivership for any single-issuer would result in an impairment and significant loss. Including the other factors outlined above, Valley analyzes the performance of the issuers on a quarterly basis, including a review of performance data from the issuers’ most recent bank regulatory report, if applicable, to assess their credit risk and the probability of impairment of the contractual cash flows of the applicable security. All of the issuers had capital ratios at December 31, 2019 that were at or above the minimum amounts to be considered a “well-capitalized” financial institution, if applicable, and/or have maintained performance levels adequate to support the contractual cash flows of the trust preferred securities.
During 2019, Valley recognized a $2.9 million other-than-temporary credit impairment charge on one special revenue bond classified as available for sale (within the obligations of states and state agencies in the tables above). The credit impairment was due to severe credit deterioration disclosed by the issuer in the second quarter 2019, as well as the issuer's default on its contractual payment. At December 31, 2019, the impaired security had an adjusted amortized cost and fair value of $680 thousand. Comparatively, there were no other-than-temporary impairment losses on securities recognized in earnings for the years ended December 31, 2018 and 2017. The impaired special revenue bond was not accruing interest as of December 31, 2019.
At December 31, 2019, approximately 41.5 percent of the $670.8 million carrying value of obligations of states and political subdivisions were issued by the states of (or municipalities within) New Jersey, Utah, Texas, and Idaho. The obligations of states and political subdivisions mainly consist of general obligation bonds and, to lesser extent, special revenue bonds with amortized cost and fair value totaling $294.9 million and $299.0 million, respectively, at December 31, 2019. Special revenue bonds were largely issued by the Utah, Idaho, Florida and other state housing authorities, as well Port Authority of New York and New Jersey. As part of Valley’s pre-purchase analysis and on-going quarterly assessment of impairment of the obligations of states and political subdivisions, Valley's Credit Risk Management Department conducts a financial analysis and risk rating assessment of each security issuer based on the issuer’s most recently issued financial statements and other publicly available information. Exclusive of the impaired security, these investments are a mix of bonds with investment grade ratings or not rated paying in accordance with their
2019 Form 10-K | 98 |
contractual terms. The vast majority of the bonds not rated by the rating agencies are state housing finance agency revenue bonds secured by Ginnie Mae securities that are commonly referred to as Tax Exempt Mortgage Securities (TEMS). Valley will continue to closely monitor the special revenue bond portfolio as part of its quarterly impairment analysis.
Management does not believe that any individual unrealized loss as of December 31, 2019 included in the investment portfolio tables above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates and market volatility, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities, except for the impaired special revenue bond discussed above.
Realized Gains and Losses
Gross gains and losses realized on sales, maturities and other securities transactions included in earnings for the years ended December 31, 2019, 2018 and 2017 were as follows:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Sales transactions: | |||||||||||
Gross gains | $ | — | $ | 1,769 | $ | — | |||||
Gross losses | — | (3,881 | ) | (25 | ) | ||||||
$ | — | $ | (2,112 | ) | $ | (25 | ) | ||||
Maturities and other securities transactions: | |||||||||||
Gross gains | $ | 67 | $ | 42 | $ | 43 | |||||
Gross losses | (217 | ) | (272 | ) | (38 | ) | |||||
$ | (150 | ) | $ | (230 | ) | $ | 5 | ||||
Net losses on securities transactions | $ | (150 | ) | $ | (2,342 | ) | $ | (20 | ) |
Net losses on sales transactions in 2018 (as presented in the table above) primarily related to the sales of equity securities previously classified as available for sale, certain municipal securities acquired from USAB and all of Valley's private label mortgage-backed securities classified as available for sale, including securities that were previously impaired.
99 | 2019 Form 10-K |
LOANS (Note 5)
The detail of the loan portfolio as of December 31, 2019 and 2018 was as follows:
December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
Non-PCI Loans | PCI Loans | Total | Non-PCI Loans | PCI Loans | Total | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Loans: | |||||||||||||||||||||||
Commercial and industrial | $ | 4,143,983 | $ | 682,014 | $ | 4,825,997 | $ | 3,590,375 | $ | 740,657 | $ | 4,331,032 | |||||||||||
Commercial real estate: | |||||||||||||||||||||||
Commercial real estate | 10,902,893 | 5,093,848 | 15,996,741 | 9,912,309 | 2,494,966 | 12,407,275 | |||||||||||||||||
Construction | 1,495,717 | 151,301 | 1,647,018 | 1,122,348 | 365,784 | 1,488,132 | |||||||||||||||||
Total commercial real estate loans | 12,398,610 | 5,245,149 | 17,643,759 | 11,034,657 | 2,860,750 | 13,895,407 | |||||||||||||||||
Residential mortgage | 3,796,942 | 580,169 | 4,377,111 | 3,682,984 | 428,416 | 4,111,400 | |||||||||||||||||
Consumer: | |||||||||||||||||||||||
Home equity | 376,020 | 111,252 | 487,272 | 371,340 | 145,749 | 517,089 | |||||||||||||||||
Automobile | 1,451,352 | 271 | 1,451,623 | 1,319,206 | 365 | 1,319,571 | |||||||||||||||||
Other consumer | 902,702 | 10,744 | 913,446 | 846,821 | 14,149 | 860,970 | |||||||||||||||||
Total consumer loans | 2,730,074 | 122,267 | 2,852,341 | 2,537,367 | 160,263 | 2,697,630 | |||||||||||||||||
Total loans | $ | 23,069,609 | $ | 6,629,599 | $ | 29,699,208 | $ | 20,845,383 | $ | 4,190,086 | $ | 25,035,469 |
Total loans include net unearned premiums and deferred loan costs totaling $12.6 million and $21.5 million at December 31, 2019 and 2018, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $6.8 billion and $4.4 billion at December 31, 2019 and 2018, respectively.
Valley transferred $436.5 million and $289.6 million of residential mortgage loans from the loan portfolio to loans held for sale in 2019 and 2018, respectively. Valley transferred $798 million of commercial real estate loans from the loan portfolio to loans held for sale in 2019. Excluding the loan transfers, there were no other sales or transfers of loans from the held for investment portfolio during 2019 and 2018.
Purchased Credit-Impaired Loans
PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses), and aggregated and accounted for as pools of loans based on common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools. See Note 1 for additional information.
The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the PCI loans acquired in the Oritani acquisition as of December 1, 2019 (See Note 2 for more details):
December 1, 2019 | ||||
(in thousands) | ||||
Contractually required principal and interest | $ | 4,017,103 | ||
Contractual cash flows not expected to be collected (non-accretable difference) | (36,084 | ) | ||
Expected cash flows to be collected | 3,981,019 | |||
Interest component of expected cash flows (accretable yield) | (600,178 | ) | ||
Fair value of acquired loans | $ | 3,380,841 |
2019 Form 10-K | 100 |
The following table presents changes in the accretable yield for PCI loans for the years ended December 31, 2019 and 2018:
2019 | 2018 | ||||||
(in thousands) | |||||||
Balance, beginning of period | $ | 875,958 | $ | 282,009 | |||
Acquisition | 600,178 | 559,907 | |||||
Accretion | (214,415 | ) | (235,741 | ) | |||
Net (decrease) increase in expected cash flows | (10,995 | ) | 269,783 | ||||
Balance, end of period | $ | 1,250,726 | $ | 875,958 |
The net (decrease) increase in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools. The net decrease in the expected cash flows totaling approximately $11.0 million for the year ended December 31, 2019 was largely due to the high volume of contractual principal prepayments caused by the low level of market interest rates. The net increase in the expected cash flows totaling $269.8 million for the year ended December 31, 2018 was largely due to higher interest rates and increased construction loan balances (mainly acquired from USAB) captured in the cash flow reforecast in the fourth quarter 2018.
Related Party Loans
In the ordinary course of business, Valley has granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. All loans to related parties are performing as of December 31, 2019.
The following table summarizes the changes in the total amounts of loans and advances to the related parties during the year ended December 31, 2019:
2019 | |||
(in thousands) | |||
Outstanding at beginning of year | $ | 214,108 | |
New loans and advances | 13,172 | ||
Repayments | (33,999 | ) | |
Outstanding at end of year | $ | 193,281 |
Loan Portfolio Risk Elements and Credit Risk Management
Credit risk management. For all of its loan types discussed below, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk appetite. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. 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.
Commercial and industrial loans. A significant portion of Valley’s commercial and industrial loan portfolio is granted to long standing customers of proven ability, strong repayment performance, and high character. Underwriting standards are designed to assess the borrower’s ability to generate recurring cash flow sufficient to meet the debt service requirements of loans granted. While such recurring cash flow serves as the primary source of repayment, a significant number of the loans are collateralized by borrower assets intended to serve as a secondary source of repayment should the need arise. Anticipated cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value, or in the case of loans secured by accounts receivable, the ability of the borrower to collect all amounts due from its customers. Short-term loans may be made on an unsecured basis based on a borrower’s financial strength and past performance. Whenever possible, Valley will obtain the personal guarantee of the borrower’s principals to mitigate the risk. Unsecured loans, when made, are generally granted to the Bank’s most credit worthy borrowers. Unsecured commercial and industrial loans totaled $606.1 million and $580.5 million at December 31, 2019 and 2018, respectively.
The commercial portfolio also includes taxi medallion loans, most of which consist of loans to fleet owners of New York City medallions. At December 31, 2019, the taxi medallion loans totaled $114.8 million and were classified as either substandard
101 | 2019 Form 10-K |
or doubtful loans. While most of the taxi medallion loans within the portfolio at December 31, 2019 are currently performing to their contractual terms, negative trends in the market valuations of the underlying taxi medallion collateral and a decline in borrower cash flows, among other factors, could impact the future performance of this portfolio.
Commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans but generally they involve larger principal balances and longer repayment periods as compared to commercial and industrial loans. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real property. Repayment of most loans is dependent upon the cash flow generated from the property securing the loan or the business that occupies the property. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy and accordingly, conservative loan to value ratios are required at origination, as well as stress tested to evaluate the impact of market changes relating to key underwriting elements. The properties securing the commercial real estate portfolio represent diverse types, with most properties located within Valley’s primary markets.
Construction loans. With respect to loans to developers and builders, Valley originates and manages construction loans structured on either a revolving or non-revolving basis, depending on the nature of the underlying development project. These loans are generally secured by the real estate to be developed and may also be secured by additional real estate to mitigate the risk. Non-revolving construction loans often involve the disbursement of substantially all committed funds with repayment substantially dependent on the successful completion and sale, or lease, of the project. Sources of repayment for these types of loans may be from pre-committed permanent loans from other lenders, sales of developed property, or an interim loan commitment from Valley until permanent financing is obtained elsewhere. Revolving construction loans (generally relating to single-family residential construction) are controlled with loan advances dependent upon the presale of housing units financed. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Residential mortgages. Valley originates residential, first mortgage loans based on underwriting standards that generally comply with Fannie Mae and/or Freddie Mac requirements. Appraisals and valuations of real estate collateral are contracted directly with independent appraisers or from valuation services and not through appraisal management companies. The Bank’s appraisal management policy and procedure is in accordance with regulatory requirements and guidance issued by the Bank’s primary regulator. Credit scoring, using FICO® and other proprietary credit scoring models are employed in the ultimate, judgmental credit decision by Valley’s underwriting staff. Valley does not use third party contract underwriting services. Residential mortgage loans include fixed and variable interest rate loans secured by one to four family homes mostly located in northern and central New Jersey, the New York City metropolitan area, and Florida. Valley’s ability to be repaid on such loans is closely linked to the economic and real estate market conditions in these regions. In deciding whether to originate each residential mortgage, Valley considers the qualifications of the borrower as well as the value of the underlying property.
Home equity loans. Home equity lending consists of both fixed and variable interest rate products. Valley mainly provides home equity loans to its residential mortgage customers within the footprint of its primary lending territory. Valley generally will not exceed a combined (i.e., first and second mortgage) loan-to-value ratio of 80 percent when originating a home equity loan.
Automobile loans. Valley uses both judgmental and scoring systems in the credit decision process for automobile loans. Automobile originations (including light truck and sport utility vehicles) are largely produced via indirect channels, originated through approved automobile dealers. Automotive collateral is generally a depreciating asset and there are times in the life of an automobile loan where the amount owed on a vehicle may exceed its collateral value. Additionally, automobile charge-offs will vary based on the strength or weakness of the used vehicle market, original advance rate, when in the life cycle of a loan a default occurs and the condition of the collateral being liquidated. Where permitted by law, and subject to the limitations of the bankruptcy code, deficiency judgments are sought and acted upon to ultimately collect all money owed, even when a default resulted in a loss at collateral liquidation. Valley uses a third party to actively track collision and comprehensive risk insurance required of the borrower on the automobile and this third party provides coverage to Valley in the event of an uninsured collateral loss.
Other consumer loans. Valley’s other consumer loan portfolio includes direct consumer term loans, both secured and unsecured. The other consumer loan portfolio includes exposures in personal lines of credit (mainly those secured by cash surrender value of life insurance), credit card loans and personal loans. Unsecured consumer loans totaled approximately $53.9 million and $58.1 million, including $8.2 million and $10.4 million of credit card loans, at December 31, 2019 and 2018, respectively. Valley believes the aggregate risk exposure to unsecured loans and lines of credit was not significant at December 31, 2019.
2019 Form 10-K | 102 |
Credit Quality
The following tables present past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis) by loan portfolio class at December 31, 2019 and 2018:
Past Due and Non-Accrual Loans | |||||||||||||||||||||||||||
30-59 Days Past Due Loans | 60-89 Days Past Due Loans | Accruing Loans 90 Days Or More Past Due | Non-Accrual Loans | Total Past Due Loans | Current Non-PCI Loans | Total Non-PCI Loans | |||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||||||
Commercial and industrial | $ | 11,700 | $ | 2,227 | $ | 3,986 | $ | 68,636 | $ | 86,549 | $ | 4,057,434 | $ | 4,143,983 | |||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||
Commercial real estate | 2,560 | 4,026 | 579 | 9,004 | 16,169 | 10,886,724 | 10,902,893 | ||||||||||||||||||||
Construction | 1,486 | 1,343 | — | 356 | 3,185 | 1,492,532 | 1,495,717 | ||||||||||||||||||||
Total commercial real estate loans | 4,046 | 5,369 | 579 | 9,360 | 19,354 | 12,379,256 | 12,398,610 | ||||||||||||||||||||
Residential mortgage | 17,143 | 4,192 | 2,042 | 12,858 | 36,235 | 3,760,707 | 3,796,942 | ||||||||||||||||||||
Consumer loans: | |||||||||||||||||||||||||||
Home equity | 1,051 | 80 | — | 1,646 | 2,777 | 373,243 | 376,020 | ||||||||||||||||||||
Automobile | 11,482 | 1,581 | 681 | 334 | 14,078 | 1,437,274 | 1,451,352 | ||||||||||||||||||||
Other consumer | 1,171 | 866 | 30 | 224 | 2,291 | 900,411 | 902,702 | ||||||||||||||||||||
Total consumer loans | 13,704 | 2,527 | 711 | 2,204 | 19,146 | 2,710,928 | 2,730,074 | ||||||||||||||||||||
Total | $ | 46,593 | $ | 14,315 | $ | 7,318 | $ | 93,058 | $ | 161,284 | $ | 22,908,325 | $ | 23,069,609 |
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) | |||||||||||||||||||||||||||
December 31, 2018 | |||||||||||||||||||||||||||
Commercial and industrial | $ | 13,085 | $ | 3,768 | $ | 6,156 | $ | 70,096 | $ | 93,105 | $ | 3,497,270 | $ | 3,590,375 | |||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||
Commercial real estate | 9,521 | 530 | 27 | 2,372 | 12,450 | 9,899,859 | 9,912,309 | ||||||||||||||||||||
Construction | 2,829 | — | — | 356 | 3,185 | 1,119,163 | 1,122,348 | ||||||||||||||||||||
Total commercial real estate loans | 12,350 | 530 | 27 | 2,728 | 15,635 | 11,019,022 | 11,034,657 | ||||||||||||||||||||
Residential mortgage | 16,576 | 2,458 | 1,288 | 12,917 | 33,239 | 3,649,745 | 3,682,984 | ||||||||||||||||||||
Consumer loans: | |||||||||||||||||||||||||||
Home equity | 872 | 40 | — | 2,156 | 3,068 | 368,272 | 371,340 | ||||||||||||||||||||
Automobile | 7,973 | 1,299 | 308 | 80 | 9,660 | 1,309,546 | 1,319,206 | ||||||||||||||||||||
Other consumer | 895 | 47 | 33 | 419 | 1,394 | 845,427 | 846,821 | ||||||||||||||||||||
Total consumer loans | 9,740 | 1,386 | 341 | 2,655 | 14,122 | 2,523,245 | 2,537,367 | ||||||||||||||||||||
Total | $ | 51,751 | $ | 8,142 | $ | 7,812 | $ | 88,396 | $ | 156,101 | $ | 20,689,282 | $ | 20,845,383 |
If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $2.5 million, $3.6 million, and $2.5 million for the years ended December 31, 2019, 2018 and 2017, respectively; none of these amounts were included in interest income during these periods.
103 | 2019 Form 10-K |
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 restructurings, are individually evaluated for impairment. PCI loans are not classified as impaired loans because they are accounted for on a pool basis.
The following table presents information about impaired loans by loan portfolio class at December 31, 2019 and 2018:
Recorded Investment With No Related Allowance | Recorded Investment With Related Allowance | Total Recorded Investment | Unpaid Contractual Principal Balance | Related Allowance | |||||||||||||||
(in thousands) | |||||||||||||||||||
December 31, 2019 | |||||||||||||||||||
Commercial and industrial | $ | 14,617 | $ | 86,243 | $ | 100,860 | $ | 114,875 | $ | 36,662 | |||||||||
Commercial real estate: | |||||||||||||||||||
Commercial real estate | 26,046 | 24,842 | 50,888 | 51,258 | 1,338 | ||||||||||||||
Construction | 354 | — | 354 | 354 | — | ||||||||||||||
Total commercial real estate loans | 26,400 | 24,842 | 51,242 | 51,612 | 1,338 | ||||||||||||||
Residential mortgage | 5,836 | 4,853 | 10,689 | 11,800 | 518 | ||||||||||||||
Consumer loans: | |||||||||||||||||||
Home equity | 366 | 487 | 853 | 956 | 58 | ||||||||||||||
Total consumer loans | 366 | 487 | 853 | 956 | 58 | ||||||||||||||
Total | $ | 47,219 | $ | 116,425 | $ | 163,644 | $ | 179,243 | $ | 38,576 | |||||||||
December 31, 2018 | |||||||||||||||||||
Commercial and industrial | $ | 8,339 | $ | 89,513 | $ | 97,852 | $ | 104,007 | $ | 29,684 | |||||||||
Commercial real estate: | |||||||||||||||||||
Commercial real estate | 16,732 | 25,606 | 42,338 | 44,337 | 2,615 | ||||||||||||||
Construction | 803 | 457 | 1,260 | 1,260 | 13 | ||||||||||||||
Total commercial real estate loans | 17,535 | 26,063 | 43,598 | 45,597 | 2,628 | ||||||||||||||
Residential mortgage | 7,826 | 6,078 | 13,904 | 14,948 | 600 | ||||||||||||||
Consumer loans: | |||||||||||||||||||
Home equity | 125 | 1,146 | 1,271 | 1,366 | 113 | ||||||||||||||
Total consumer loans | 125 | 1,146 | 1,271 | 1,366 | 113 | ||||||||||||||
Total | $ | 33,825 | $ | 122,800 | $ | 156,625 | $ | 165,918 | $ | 33,025 |
Interest income recognized on a cash basis for impaired loans classified as non-accrual was not material for the years ended December 31, 2019, 2018 and 2017.
2019 Form 10-K | 104 |
The following table presents, by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2019, 2018 and 2017:
2019 | 2018 | 2017 | |||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Commercial and industrial | $ | 120,376 | $ | 1,849 | $ | 108,071 | $ | 1,822 | $ | 80,974 | $ | 1,459 | |||||||||||
Commercial real estate: | |||||||||||||||||||||||
Commercial real estate | 52,191 | 2,246 | 44,838 | 2,289 | 54,799 | 1,908 | |||||||||||||||||
Construction | 354 | — | 1,517 | 69 | 3,258 | 86 | |||||||||||||||||
Total commercial real estate loans | 52,545 | 2,246 | 46,355 | 2,358 | 58,057 | 1,994 | |||||||||||||||||
Residential mortgage | 12,081 | 390 | 15,384 | 506 | 15,451 | 760 | |||||||||||||||||
Consumer loans: | |||||||||||||||||||||||
Home equity | 576 | 11 | 865 | 21 | 4,295 | 160 | |||||||||||||||||
Total consumer loans | 576 | 11 | 865 | 21 | 4,295 | 160 | |||||||||||||||||
Total | $ | 185,578 | $ | 4,496 | $ | 170,675 | $ | 4,707 | $ | 158,777 | $ | 4,373 |
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 $73.0 million and $77.2 million as of December 31, 2019 and 2018, respectively. Non-performing TDRs totaled $65.1 million and $55.0 million as of December 31, 2019 and 2018, respectively.
105 | 2019 Form 10-K |
The following table presents non-PCI loans by loan class modified as TDRs during the years ended December 31, 2019 and 2018. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at December 31, 2019 and 2018, respectively.
Troubled Debt Restructurings | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||
($ in thousands) | |||||||||||
December 31, 2019 | |||||||||||
Commercial and industrial | 111 | $ | 77,781 | $ | 73,503 | ||||||
Commercial real estate: | |||||||||||
Commercial real estate | 2 | 3,143 | 3,098 | ||||||||
Total commercial real estate | 2 | 3,143 | 3,098 | ||||||||
Residential mortgage | 2 | 376 | 374 | ||||||||
Consumer | 2 | 215 | 207 | ||||||||
Total | 117 | $ | 81,515 | $ | 77,182 | ||||||
December 31, 2018 | |||||||||||
Commercial and industrial | 25 | $ | 16,251 | $ | 15,105 | ||||||
Commercial real estate: | |||||||||||
Commercial real estate | 8 | 5,643 | 6,600 | ||||||||
Construction | 1 | 532 | 356 | ||||||||
Total commercial real estate | 9 | 6,175 | 6,956 | ||||||||
Residential mortgage | 8 | 1,500 | 1,461 | ||||||||
Consumer | 2 | 99 | 101 | ||||||||
Total | 44 | $ | 24,025 | $ | 23,623 |
The total TDRs presented in the table above had allocated specific reserves for loan losses that totaled $36.0 million and $6.5 million at December 31, 2019 and 2018, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 6. There were $4.9 million in loan charge-offs related to loans modified as TDRs for the year ended December 31, 2019. However, there were no loan charge-offs related to loans modified as TDRs during 2018. At December 31, 2019, the commercial and industrial loan category in the above table largely consisted of non-performing and performing TDR taxi cab medallion loans classified as substandard and non-accrual doubtful loans.
The non-PCI loans modified as TDRs within the previous 12 months and for which there was a payment default (90 or more days past due) for the years ended December 31, 2019 and 2018 were as follows:
Years Ended December 31, | |||||||||||||
2019 | 2018 | ||||||||||||
Troubled Debt Restructurings Subsequently Defaulted | Number of Contracts | Recorded Investment | Number of Contracts | Recorded Investment | |||||||||
($ in thousands) | |||||||||||||
Commercial and industrial | 43 | $ | 31,782 | 10 | $ | 8,829 | |||||||
Residential mortgage | 1 | 154 | 3 | 490 | |||||||||
Total | 44 | $ | 31,936 | 13 | $ | 9,319 |
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
2019 Form 10-K | 106 |
pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants.
The following table presents the credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) based on the most recent analysis performed at December 31, 2019 and 2018.
Credit exposure— by internally assigned risk rating | Special | Total Non-PCI | ||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Loans | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||
Commercial and industrial | $ | 3,982,453 | $ | 33,718 | $ | 66,511 | $ | 61,301 | $ | 4,143,983 | ||||||||||
Commercial real estate | 10,781,587 | 77,884 | 42,560 | 862 | 10,902,893 | |||||||||||||||
Construction | 1,487,877 | 7,486 | 354 | — | 1,495,717 | |||||||||||||||
Total | $ | 16,251,917 | $ | 119,088 | $ | 109,425 | $ | 62,163 | $ | 16,542,593 | ||||||||||
December 31, 2018 | ||||||||||||||||||||
Commercial and industrial | $ | 3,399,426 | $ | 31,996 | $ | 92,320 | $ | 66,633 | $ | 3,590,375 | ||||||||||
Commercial real estate | 9,828,744 | 30,892 | 51,710 | 963 | 9,912,309 | |||||||||||||||
Construction | 1,121,321 | 215 | 812 | — | 1,122,348 | |||||||||||||||
Total | $ | 14,349,491 | $ | 63,103 | $ | 144,842 | $ | 67,596 | $ | 14,625,032 |
At December 31, 2019, the commercial and industrial loans rated substandard and doubtful in the above table were mainly comprised of performing TDR taxi medallion loans and non-accrual taxi medallion loans, respectively.
For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2019 and 2018:
Credit exposure— by payment activity | Performing Loans | Non-Performing Loans | Total Non-PCI Loans | |||||||||
(in thousands) | ||||||||||||
December 31, 2019 | ||||||||||||
Residential mortgage | $ | 3,784,084 | $ | 12,858 | $ | 3,796,942 | ||||||
Home equity | 374,374 | 1,646 | 376,020 | |||||||||
Automobile | 1,451,018 | 334 | 1,451,352 | |||||||||
Other consumer | 902,478 | 224 | 902,702 | |||||||||
Total | $ | 6,511,954 | $ | 15,062 | $ | 6,527,016 | ||||||
December 31, 2018 | ||||||||||||
Residential mortgage | $ | 3,670,067 | $ | 12,917 | $ | 3,682,984 | ||||||
Home equity | 369,184 | 2,156 | 371,340 | |||||||||
Automobile | 1,319,126 | 80 | 1,319,206 | |||||||||
Other consumer | 846,402 | 419 | 846,821 | |||||||||
Total | $ | 6,204,779 | $ | 15,572 | $ | 6,220,351 |
107 | 2019 Form 10-K |
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 December 31, 2019 and 2018:
Credit exposure— | Performing | Non-Performing | Total | |||||||||
by payment activity | Loans | Loans | PCI Loans | |||||||||
(in thousands) | ||||||||||||
December 31, 2019 | ||||||||||||
Commercial and industrial | $ | 653,997 | $ | 28,017 | $ | 682,014 | ||||||
Commercial real estate | 5,065,388 | 28,460 | 5,093,848 | |||||||||
Construction | 148,692 | 2,609 | 151,301 | |||||||||
Residential mortgage | 571,006 | 9,163 | 580,169 | |||||||||
Consumer | 120,356 | 1,911 | 122,267 | |||||||||
Total | $ | 6,559,439 | $ | 70,160 | $ | 6,629,599 | ||||||
December 31, 2018 | ||||||||||||
Commercial and industrial | $ | 710,045 | $ | 30,612 | $ | 740,657 | ||||||
Commercial real estate | 2,478,990 | 15,976 | 2,494,966 | |||||||||
Construction | 364,815 | 969 | 365,784 | |||||||||
Residential mortgage | 421,609 | 6,807 | 428,416 | |||||||||
Consumer | 158,502 | 1,761 | 160,263 | |||||||||
Total | $ | 4,133,961 | $ | 56,125 | $ | 4,190,086 |
ALLOWANCE FOR CREDIT LOSSES (Note 6)
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 December 31, 2019 and 2018.
The following table summarizes the allowance for credit losses at December 31, 2019 and 2018:
December 31, | |||||||
2019 | 2018 | ||||||
(in thousands) | |||||||
Components of allowance for credit losses: | |||||||
Allowance for loan losses | $ | 161,759 | $ | 151,859 | |||
Allowance for unfunded letters of credit | 2,845 | 4,436 | |||||
Total allowance for credit losses | $ | 164,604 | $ | 156,295 |
The following table summarizes the provision for credit losses for the years ended December 31, 2019, 2018 and 2017:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Components of provision for credit losses: | |||||||||||
Provision for loan losses | $ | 25,809 | $ | 31,661 | $ | 8,531 | |||||
Provision for unfunded letters of credit | (1,591 | ) | 840 | 1,411 | |||||||
Total provision for credit losses | $ | 24,218 | $ | 32,501 | $ | 9,942 |
2019 Form 10-K | 108 |
The following table details the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2019 and 2018:
Commercial and Industrial | Commercial Real Estate | Residential Mortgage | Consumer | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||
December 31, 2019 | |||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||
Beginning balance | $ | 90,956 | $ | 49,650 | $ | 5,041 | $ | 6,212 | $ | 151,859 | |||||||||
Loans charged-off | (13,260 | ) | (158 | ) | (126 | ) | (8,671 | ) | (22,215 | ) | |||||||||
Charged-off loans recovered | 2,397 | 1,237 | 66 | 2,606 | 6,306 | ||||||||||||||
Net (charge-offs) recoveries | (10,863 | ) | 1,079 | (60 | ) | (6,065 | ) | (15,909 | ) | ||||||||||
Provision for loan losses | 23,966 | (5,056 | ) | 79 | 6,820 | 25,809 | |||||||||||||
Ending balance | $ | 104,059 | $ | 45,673 | $ | 5,060 | $ | 6,967 | $ | 161,759 | |||||||||
December 31, 2018 | |||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||
Beginning balance | $ | 57,232 | $ | 54,954 | $ | 3,605 | $ | 5,065 | $ | 120,856 | |||||||||
Loans charged-off | (2,515 | ) | (348 | ) | (223 | ) | (4,977 | ) | (8,063 | ) | |||||||||
Charged-off loans recovered | 4,623 | 417 | 272 | 2,093 | 7,405 | ||||||||||||||
Net recoveries (charge-offs) | 2,108 | 69 | 49 | (2,884 | ) | (658 | ) | ||||||||||||
Provision for loan losses | 31,616 | (5,373 | ) | 1,387 | 4,031 | 31,661 | |||||||||||||
Ending balance | $ | 90,956 | $ | 49,650 | $ | 5,041 | $ | 6,212 | $ | 151,859 |
109 | 2019 Form 10-K |
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 for the years ended December 31, 2019 and 2018. Loans individually evaluated for impairment represent Valley’s impaired loans. Loans acquired with discounts related to credit quality represent Valley’s PCI loans.
Commercial and Industrial | Commercial Real Estate | Residential Mortgage | Consumer | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||
December 31, 2019 | |||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||
Individually evaluated for impairment | $ | 36,662 | $ | 1,338 | $ | 518 | $ | 58 | $ | 38,576 | |||||||||
Collectively evaluated for impairment | 67,397 | 44,335 | 4,542 | 6,909 | 123,183 | ||||||||||||||
Total | $ | 104,059 | $ | 45,673 | $ | 5,060 | $ | 6,967 | $ | 161,759 | |||||||||
Loans: | |||||||||||||||||||
Individually evaluated for impairment | $ | 100,860 | $ | 51,242 | $ | 10,689 | $ | 853 | $ | 163,644 | |||||||||
Collectively evaluated for impairment | 4,043,123 | 12,347,368 | 3,786,253 | 2,729,221 | 22,905,965 | ||||||||||||||
Loans acquired with discounts related to credit quality | 682,014 | 5,245,149 | 580,169 | 122,267 | 6,629,599 | ||||||||||||||
Total | $ | 4,825,997 | $ | 17,643,759 | $ | 4,377,111 | $ | 2,852,341 | $ | 29,699,208 | |||||||||
December 31, 2018 | |||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||
Individually evaluated for impairment | $ | 29,684 | $ | 2,628 | $ | 600 | $ | 113 | $ | 33,025 | |||||||||
Collectively evaluated for impairment | 61,272 | 47,022 | 4,441 | 6,099 | 118,834 | ||||||||||||||
Total | $ | 90,956 | $ | 49,650 | $ | 5,041 | $ | 6,212 | $ | 151,859 | |||||||||
Loans: | |||||||||||||||||||
Individually evaluated for impairment | $ | 97,852 | $ | 43,598 | $ | 13,904 | $ | 1,271 | $ | 156,625 | |||||||||
Collectively evaluated for impairment | 3,492,523 | 10,991,059 | 3,669,080 | 2,536,096 | 20,688,758 | ||||||||||||||
Loans acquired with discounts related to credit quality | 740,657 | 2,860,750 | 428,416 | 160,263 | 4,190,086 | ||||||||||||||
Total | $ | 4,331,032 | $ | 13,895,407 | $ | 4,111,400 | $ | 2,697,630 | $ | 25,035,469 |
LEASES (Note 7)
The following table presents the components of the right of use (ROU) assets and lease liabilities in the consolidated statements of position by lease type at December 31, 2019.
2019 | |||
(in thousands) | |||
ROU assets: | |||
Operating leases | $ | 284,255 | |
Finance leases | 874 | ||
Total | $ | 285,129 | |
Lease liabilities: | |||
Operating leases | $ | 308,060 | |
Finance leases | 1,789 | ||
Total | $ | 309,849 |
In March 2019, Valley closed a sale-leaseback transaction for 26 properties, consisting of 25 branches and 1 corporate office, for an aggregate sales price of $100.5 million. As a result, Valley recorded a pre-tax net gain totaling $78.5 million during the first quarter 2019. Additionally, Valley recorded ROU assets and lease obligations totaling $78.4 million, respectively, for the lease of the 26 properties with an expected term of 12.0 years. The lease was determined to be an operating lease and Valley expects to record lease costs of approximately $7.9 million within occupancy and equipment expense on a straight-line basis annually over the term of the lease.
2019 Form 10-K | 110 |
The following table presents the components by lease type, of total lease cost recognized in the consolidated statements of income for the year ended December 31, 2019:
2019 | |||
(in thousands) | |||
Finance lease cost: | |||
Amortization of ROU assets | $ | 291 | |
Interest on lease liabilities | 191 | ||
Operating lease cost | 34,175 | ||
Short-term lease cost | 410 | ||
Variable lease cost | 3,573 | ||
Sublease income | (3,422 | ) | |
Total lease cost (included in net occupancy and equipment expense) | $ | 35,218 |
The following table presents supplemental cash flow information related to leases for the year ended December 31, 2019:
2019 | |||
(in thousands) | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | 34,380 | |
Operating cash flows from finance leases | 192 | ||
Financing cash flows from finance leases | 492 |
The following table presents supplemental information related to leases at December 31, 2019:
2019 | ||
Weighted-average remaining lease term | ||
Operating leases | 12.8 years | |
Finance leases | 3.00 years | |
Weighted-average discount rate | ||
Operating leases | 3.68 | % |
Finance leases | 8.25 | % |
The following table presents a maturity analysis of lessor and lessee arrangements outstanding as of December 31, 2019:
Lessor | Lessee | ||||||||||
Direct Financing and Sales-Type Leases | Operating Leases | Finance Leases | |||||||||
(in thousands) | |||||||||||
2020 | $ | 146,397 | $ | 36,022 | $ | 684 | |||||
2021 | 126,196 | 35,393 | 684 | ||||||||
2022 | 102,873 | 33,918 | 684 | ||||||||
2023 | 77,953 | 30,745 | — | ||||||||
2024 | 44,651 | 29,142 | — | ||||||||
Thereafter | 25,103 | 228,644 | — | ||||||||
Total lease payments | 523,173 | 393,864 | 2,052 | ||||||||
Less: present value discount | (44,345 | ) | (85,804 | ) | (263 | ) | |||||
Total | $ | 478,828 | $ | 308,060 | $ | 1,789 |
The total net investment in direct financing and sales-type leases was $478.8 million and $327.3 million at December 31, 2019 and 2018, respectively, comprised of $477.1 million and $326.2 million in lease receivables and $1.7 million and
111 | 2019 Form 10-K |
$1.1 million in unguaranteed residuals, respectively. Total lease income was $19.4 million, $14.7 million and $13.6 million for the years ended December 31, 2019, 2018, and 2017, respectively.
The following table presents minimum aggregate lease payments in accordance with ASC Topic 840 at December 31, 2018:
Gross Rents | Sublease Income | Net Rents | |||||||||
(in thousands) | |||||||||||
2019 | $ | 29,093 | $ | 2,382 | $ | 26,711 | |||||
2020 | 29,379 | 2,290 | 27,089 | ||||||||
2021 | 28,925 | 2,160 | 26,765 | ||||||||
2022 | 27,562 | 2,002 | 25,560 | ||||||||
2023 | 25,064 | 1,938 | 23,126 | ||||||||
Thereafter | 262,200 | 8,558 | 253,642 | ||||||||
Total lease payments | $ | 402,223 | $ | 19,330 | $ | 382,893 |
Net occupancy and equipment expense included lease cost of $29.0 million and $27.7 million, net of sublease income of $3.5 million and $3.9 million, for the years ended December 31, 2018 and 2017, respectively.
PREMISES AND EQUIPMENT, NET (Note 8)
At December 31, 2019 and 2018, premises and equipment, net consisted of:
2019 | 2018 | ||||||
(in thousands) | |||||||
Land | $ | 93,594 | $ | 93,600 | |||
Buildings | 220,140 | 250,510 | |||||
Leasehold improvements | 85,042 | 77,425 | |||||
Furniture and equipment | 274,715 | 263,604 | |||||
Total premises and equipment | 673,491 | 685,139 | |||||
Accumulated depreciation and amortization | (338,958 | ) | (343,509 | ) | |||
Total premises and equipment, net | $ | 334,533 | $ | 341,630 |
Depreciation and amortization of premises and equipment included in non-interest expense for the years ended December 31, 2019, 2018 and 2017 was approximately $29.4 million, $27.6 million, and $24.8 million, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS (Note 9)
The changes in the carrying amount of goodwill as allocated to our business segments, or reporting units thereof, for goodwill impairment analysis were:
Business Segment / Reporting Unit* | |||||||||||||||||||
Wealth Management | Consumer Lending | Commercial Lending | Investment Management | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||
Balance at December 31, 2017 | $ | 21,218 | $ | 200,103 | $ | 316,258 | $ | 153,058 | $ | 690,637 | |||||||||
Goodwill from business combinations | — | 86,922 | 241,592 | 65,514 | 394,028 | ||||||||||||||
Balance at December 31, 2018 | $ | 21,218 | $ | 287,025 | $ | 557,850 | $ | 218,572 | $ | 1,084,665 | |||||||||
Goodwill from business combinations | — | 19,547 | 267,917 | 1,496 | 288,960 | ||||||||||||||
Balance at December 31, 2019 | $ | 21,218 | $ | 306,572 | $ | 825,767 | $ | 220,068 | $ | 1,373,625 |
* | Valley’s Wealth Management Division is comprised of trust, asset management and insurance services. This reporting unit is included in the Consumer Lending segment for financial reporting purposes. |
112 | 2019 Form 10-K |
The goodwill from business combinations during 2019 and 2018 set forth in the table above relates to the Oritani and USAB acquisitions, respectively. See Note 2 for further details.
There was no impairment of goodwill during the years ended December 31, 2019, 2018 and 2017.
The following tables summarize other intangible assets as of December 31, 2019 and 2018:
Gross Intangible Assets | Accumulated Amortization | Valuation Allowance | Net Intangible Assets | ||||||||||||
(in thousands) | |||||||||||||||
December 31, 2019 | |||||||||||||||
Loan servicing rights | $ | 94,827 | $ | (70,095 | ) | $ | (47 | ) | $ | 24,685 | |||||
Core deposits | 101,160 | (40,384 | ) | — | 60,776 | ||||||||||
Other | 3,945 | (2,634 | ) | — | 1,311 | ||||||||||
Total other intangible assets | $ | 199,932 | $ | (113,113 | ) | $ | (47 | ) | $ | 86,772 | |||||
December 31, 2018 | |||||||||||||||
Loan servicing rights | $ | 87,354 | $ | (63,161 | ) | $ | (83 | ) | $ | 24,110 | |||||
Core deposits | 80,470 | (29,136 | ) | — | 51,334 | ||||||||||
Other | 3,945 | (2,399 | ) | — | 1,546 | ||||||||||
Total other intangible assets | $ | 171,769 | $ | (94,696 | ) | $ | (83 | ) | $ | 76,990 |
Core deposits are amortized using an accelerated method and have a weighted average amortization period of 8.9 years. The line item labeled “Other” included in the table above primarily consists of customer lists which are amortized over their expected lives generally using a straight-line method and have a weighted average amortization period of 7.6 years. Valley recorded $20.7 million of core deposit intangibles resulting from the Oritani acquisition. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the years ended December 31, 2019, 2018 and 2017.
The following table summarizes the change in loan servicing rights during the years ended December 31, 2019, 2018 and 2017:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Loan servicing rights: | |||||||||||
Balance at beginning of year | $ | 24,193 | $ | 22,084 | $ | 20,368 | |||||
Origination of loan servicing rights | 7,473 | 8,216 | 7,039 | ||||||||
Amortization expense | (6,934 | ) | (6,107 | ) | (5,323 | ) | |||||
Balance at end of year | $ | 24,732 | $ | 24,193 | $ | 22,084 | |||||
Valuation allowance: | |||||||||||
Balance at beginning of year | $ | (83 | ) | $ | (471 | ) | $ | (900 | ) | ||
Impairment adjustment | 36 | 388 | 429 | ||||||||
Balance at end of year | $ | (47 | ) | $ | (83 | ) | $ | (471 | ) | ||
Balance at end of year, net of valuation allowance | $ | 24,685 | $ | 24,110 | $ | 21,613 |
Loan servicing rights are accounted for using the amortization method. See Note 1 for more details.
The Bank is a servicer of residential mortgage loan portfolios, and it is compensated for loan administrative services performed for mortgage servicing rights of loans originated and sold by the Bank, and to a lesser extent, purchased mortgage servicing rights. The aggregate principal balances of residential mortgage loans serviced by the Bank for others approximated $3.4 billion, $3.2 billion and $2.8 billion at December 31, 2019, 2018 and 2017, respectively. The outstanding balance of loans serviced for others is not included in the consolidated statements of financial condition.
Valley recognized amortization expense on other intangible assets, including net recoveries of impairment charges on loan servicing rights (reflected in the table above), of $18.1 million, $18.4 million and $10.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
113 | 2019 Form 10-K |
The following table presents the estimated amortization expense of other intangible assets over the next five-year period:
Year | Loan Servicing Rights | Core Deposits | Other | |||||||||
(in thousands) | ||||||||||||
2020 | $ | 4,263 | $ | 13,363 | $ | 220 | ||||||
2021 | 3,532 | 11,607 | 206 | |||||||||
2022 | 2,929 | 9,876 | 191 | |||||||||
2023 | 2,429 | 8,146 | 131 | |||||||||
2024 | 2,016 | 6,537 | 117 |
DEPOSITS (Note 10)
Included in time deposits are certificates of deposit over $250 thousand totaling $1.7 billion and $1.1 billion at December 31, 2019 and 2018, respectively. Interest expense on time deposits of $250 thousand or more totaled approximately $5.8 million, $6.6 million and $1.3 million in 2019, 2018 and 2017, respectively.
The scheduled maturities of time deposits as of December 31, 2019 are as follows:
Year | Amount | |||
(in thousands) | ||||
2020 | $ | 8,507,854 | ||
2021 | 657,366 | |||
2022 | 343,224 | |||
2023 | 134,800 | |||
2024 | 56,775 | |||
Thereafter | 17,926 | |||
Total time deposits | $ | 9,717,945 |
Deposits from certain directors, executive officers and their affiliates totaled $67.1 million and $66.8 million at December 31, 2019 and 2018, respectively.
BORROWED FUNDS (Note 11)
Short-Term Borrowings
Short-term borrowings at December 31, 2019 and 2018 consisted of the following:
2019 | 2018 | ||||||
(in thousands) | |||||||
FHLB advances | $ | 940,000 | $ | 1,732,000 | |||
Securities sold under agreements to repurchase | 153,280 | 261,914 | |||||
Federal funds purchased | — | 125,000 | |||||
Total short-term borrowings | $ | 1,093,280 | $ | 2,118,914 |
The weighted average interest rate for short-term borrowings was 1.68 percent and 2.45 percent at December 31, 2019 and 2018, respectively.
2019 Form 10-K | 114 |
Long-Term Borrowings
Long-term borrowings at December 31, 2019 and 2018 consisted of the following:
2019 | 2018 | ||||||
(in thousands) | |||||||
FHLB advances, net (1) | $ | 1,480,012 | $ | 1,309,666 | |||
Securities sold under agreements to repurchase | 350,000 | 50,000 | |||||
Subordinated debt, net (2) | 292,414 | 294,602 | |||||
Total long-term borrowings | $ | 2,122,426 | $ | 1,654,268 |
(1) | FHLB advances are presented net of unamortized prepayment penalties and other purchase accounting adjustments totaling $2.8 million and $10.3 million at December 31, 2019 and 2018, respectively. |
(2) | Subordinated debt is presented net of unamortized debt issuance costs totaling $1.2 million and $1.4 million at December 31, 2019 and 2018, respectively. |
In 2019, Valley prepaid $635.0 million of the long-term FHLB advances. These prepaid borrowings had contractual maturity dates in 2021 and 2022 and a total average interest rate of 3.93 percent. The debt prepayment was funded by cash proceeds from the sale of commercial real estate loans and overnight borrowings. The transaction was accounted for as an early debt extinguishment resulting in a loss of $32.0 million, reported within non-interest expense, for the year ended December 31, 2019.
FHLB Advances. The long-term FHLB advances had a weighted average interest rate of 2.23 percent and 3.13 percent at December 31, 2019 and 2018, respectively. These FHLB advances are 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.
Valley assumed $430.1 million of FHLB advances in connection with the Oritani acquisition on December 1, 2019.
The long-term FHLB advances at December 31, 2019 are scheduled for contractual balance repayments as follows:
Year | Amount | |||
(in thousands) | ||||
2020 | $ | 83,418 | ||
2021 | 994,768 | |||
2022 | 121,419 | |||
2023 | 78,164 | |||
2024 | 200,000 | |||
Thereafter | 5,000 | |||
Total long-term FHLB advances | $ | 1,482,769 |
There are no FHLB advances with scheduled repayments in years 2020 and thereafter, reported in the table above, which are callable for early redemption by the FHLB during 2020.
Subordinated Debt. In June 2015, Valley issued $100 million of 4.55 percent subordinated debentures (notes) due July 30, 2025 with no call dates or prepayments allowed unless certain conditions exist. Interest on the subordinated notes is payable semi-annually in arrears on June 30 and December 30 of each year. The subordinated notes had a net carrying value of $99.4 million and $99.3 million at December 31, 2019 and 2018, respectively.
In September 2013, Valley issued $125 million of its 5.125 percent subordinated notes due September 27, 2023 with no call dates or prepayments allowed, unless certain conditions exist. Interest on the subordinated debentures is payable semi-annually in arrears on March 27 and September 27 of each year. In conjunction with the issuance, Valley entered into an interest rate swap transaction used to hedge the change in the fair value of the subordinated notes. In August 2016, the fair value interest rate swap with a notional amount of $125 million was terminated resulting in an adjusted fixed annual interest rate of 3.32 percent on the subordinated notes, after amortization of the derivative valuation adjustment recorded at the termination date. The subordinated notes had a net carrying value of $132.4 million and $134.2 million at December 31, 2019 and 2018, respectively.
115 | 2019 Form 10-K |
On January 1, 2018, Valley assumed $60 million of 6.25 percent subordinated notes, in connection with the acquisition of USAB. The notes are due April 1, 2026 callable beginning April 2021. Interest on the subordinated debentures is payable semi-annually in arrears on April 1 and October 1 of each year. After purchase accounting adjustments, the subordinated notes had a net carrying value of $60.6 million and $61.1 million at December 31, 2019 and 2018, respectively.
Long-term securities sold under agreements to repurchase (repos). The long-term repos had a weighted average interest rate of 1.94 percent and 3.70 percent at December 31, 2019 and 2018, respectively.
The long-term repos at December 31, 2019 are scheduled for contractual balance repayments as follows:
Year | Amount | |||
(in thousands) | ||||
2021 | $ | 300,000 | ||
2022 | 50,000 | |||
Total long-term securities sold under agreements to repurchase | $ | 350,000 |
Pledged Securities. The fair value of securities pledged to secure public deposits, repurchase agreements, lines of credit, FHLB advances and for other purposes required by law approximated $2.3 billion and $2.4 billion for December 31, 2019 and 2018, respectively.
JUNIOR SUBORDINATED DEBENTURES ISSUED TO CAPITAL TRUSTS (Note 12)
All of the statutory trusts presented in the table below were acquired in past bank acquisitions, including the Aliant Statutory Trust II acquired from USAB on January 1, 2018. These trusts were established for the sole purpose of issuing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trust to purchase an equivalent amount of junior subordinated debentures issued by the acquired bank, and now assumed by Valley. The junior subordinated debentures, the sole assets of the trusts, are unsecured obligations of Valley, and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of Valley. Valley does not consolidate its capital trusts based on U.S. GAAP but wholly owns all of the common securities of each trust.
The table below summarizes the outstanding junior subordinated debentures and the related trust preferred securities issued by each trust as of December 31, 2019 and 2018:
GCB Capital Trust III | State Bancorp Capital Trust I | State Bancorp Capital Trust II | Aliant Statutory Trust II | ||||||||||||
($ in thousands) | |||||||||||||||
Junior Subordinated Debentures: | |||||||||||||||
December 31, 2019 | |||||||||||||||
Carrying value (1) | $ | 24,743 | $ | 9,025 | $ | 8,468 | $ | 13,482 | |||||||
Contractual principal balance | 24,743 | 10,310 | 10,310 | 15,464 | |||||||||||
December 31, 2018 | |||||||||||||||
Carrying value (1) | $ | 24,743 | $ | 8,924 | $ | 8,337 | $ | 13,366 | |||||||
Contractual principal balance | 24,743 | 10,310 | 10,310 | 15,464 | |||||||||||
Annual interest rate | 3-mo. LIBOR+1.4% | 3-mo. LIBOR+3.45% | 3-mo. LIBOR+2.85% | 3-mo. LIBOR+1.8% | |||||||||||
Stated maturity date | July 30, 2037 | November 7, 2032 | January 23, 2034 | December 15, 2036 | |||||||||||
Initial call date | July 30, 2017 | November 7, 2007 | January 23, 2009 | December 15, 2011 | |||||||||||
Trust Preferred Securities: | |||||||||||||||
December 31, 2019 and 2018 | |||||||||||||||
Face value | $ | 24,000 | $ | 10,000 | $ | 10,000 | $ | 15,000 | |||||||
Annual distribution rate | 3-mo. LIBOR+1.4% | 3-mo. LIBOR+3.45% | 3-mo. LIBOR+2.85% | 3-mo. LIBOR+1.8% | |||||||||||
Issuance date | July 2, 2007 | October 29, 2002 | December 19, 2003 | December 14, 2006 | |||||||||||
Distribution dates (2) | Quarterly | Quarterly | Quarterly | Quarterly |
(1) | The carrying values include unamortized purchase accounting adjustments at December 31, 2019 and 2018. |
(2) | All cash distributions are cumulative. |
2019 Form 10-K | 116 |
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at the stated maturity date or upon early redemption. The trusts’ ability to pay amounts due on the trust preferred securities is solely dependent upon Valley making payments on the related junior subordinated debentures. Valley’s obligation under the junior subordinated debentures and other relevant trust agreements, in aggregate, constitutes a full and unconditional guarantee by Valley of the trusts’ obligations under the trust preferred securities issued. Under the junior subordinated debenture agreements, Valley has the right to defer payment of interest on the debentures and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity dates in the table above. Currently, Valley has no intention to exercise its right to defer interest payments on the debentures.
The trust preferred securities are included in Valley’s total risk-based capital (as Tier 2 capital) for regulatory purposes at December 31, 2019 and 2018.
BENEFIT PLANS (Note 13)
Pension Plan
The Bank has a non-contributory defined benefit plan (qualified plan) covering most of its employees. The qualified plan benefits are based upon years of credited service and the employee’s highest average compensation as defined. Additionally, the Bank has a supplemental non-qualified, non-funded retirement plan, which is designed to supplement the pension plan for key officers, and Valley has a non-qualified, non-funded directors’ retirement plan (both of these plans are referred to as the “non-qualified plans” below).
Effective December 31, 2013, the benefits earned under the qualified and non-qualified plans were frozen. As a result, Valley re-measured the projected benefit obligation of the affected plans and the funded status of each plan at June 30, 2013. Consequently, participants in each plan will not accrue further benefits and their pension benefits will be determined based on their compensation and service as of December 31, 2013. Plan benefits will not increase for any compensation or service earned after such date. All participants were immediately vested in their frozen accrued benefits if they were employed by the Bank as of December 31, 2013.
The following table sets forth the change in the projected benefit obligation, the change in fair value of plan assets and the funded status and amounts recognized in Valley’s consolidated financial statements for the qualified and non-qualified plans at December 31, 2019 and 2018:
2019 | 2018 | ||||||
(in thousands) | |||||||
Change in projected benefit obligation: | |||||||
Projected benefit obligation at beginning of year | $ | 157,364 | $ | 170,566 | |||
Interest cost | 6,113 | 5,542 | |||||
Actuarial loss (gain) | 20,001 | (11,540 | ) | ||||
Benefits paid | (8,073 | ) | (7,204 | ) | |||
Projected benefit obligation at end of year | $ | 175,405 | $ | 157,364 | |||
Change in fair value of plan assets: | |||||||
Fair value of plan assets at beginning of year | $ | 210,508 | $ | 222,124 | |||
Actual return (loss) on plan assets | 32,835 | (5,545 | ) | ||||
Employer contributions | 1,351 | 1,133 | |||||
Benefits paid | (8,073 | ) | (7,204 | ) | |||
Fair value of plan assets at end of year* | $ | 236,621 | $ | 210,508 | |||
Funded status of the plan | |||||||
Asset recognized | $ | 61,216 | $ | 53,144 | |||
Accumulated benefit obligation | 175,405 | 157,364 |
* Includes accrued interest receivable of $641 thousand and $660 thousand as of December 31, 2019 and 2018, respectively.
117 | 2019 Form 10-K |
Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not been recognized as a component of the net periodic pension expense for Valley’s qualified and non-qualified plans are presented in the following table. Valley expects to recognize approximately $952 thousand of the net actuarial loss reported in the following table as of December 31, 2019 as a component of net periodic pension expense during 2020.
2019 | 2018 | ||||||
(in thousands) | |||||||
Net actuarial loss | $ | 46,248 | $ | 42,893 | |||
Prior service cost | 357 | 392 | |||||
Deferred tax benefit | (13,168 | ) | (12,205 | ) | |||
Total | $ | 33,437 | $ | 31,080 |
The non-qualified plans had a projected benefit obligation, accumulated benefit obligation, and fair value of plan assets as follows:
2019 | 2018 | ||||||
(in thousands) | |||||||
Projected benefit obligation | $ | 20,081 | $ | 18,708 | |||
Accumulated benefit obligation | 20,081 | 18,708 | |||||
Fair value of plan assets | — | — |
In determining discount rate assumptions, management looks to current rates on fixed-income corporate debt securities that receive a rating of AA or higher from either Moody’s or S&P with durations equal to the expected benefit payments streams required of each plan. The weighted average discount rate used in determining the actuarial present value of benefit obligations for the qualified and non-qualified plans was 3.32 percent and 4.30 percent as of December 31, 2019 and 2018, respectively.
The net periodic pension income for the qualified and non-qualified plans reported within other non-interest expense (due to the adoption of ASU No. 2017-07) included the following components for the years ended December 31, 2019, 2018 and 2017:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Interest cost | $ | 6,113 | $ | 5,542 | $ | 5,713 | |||||
Expected return on plan assets | (16,453 | ) | (15,912 | ) | (15,163 | ) | |||||
Amortization of net loss | 264 | 625 | 381 | ||||||||
Total net periodic pension income | $ | (10,076 | ) | $ | (9,745 | ) | $ | (9,069 | ) |
Valley estimated the interest cost component of net periodic pension income (as shown in the table above) using a spot rate approach for the plans by applying the specific spot rates along the yield curve to the relevant projected cash flows. Valley believes this provides a better estimate of interest costs than a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the applicable period.
Other changes in the qualified and non-qualified plan assets and benefit obligations recognized in other comprehensive income/loss for the years ended December 31, 2019 and 2018 were as follows:
2019 | 2018 | ||||||
(in thousands) | |||||||
Net loss | $ | 3,619 | $ | 9,917 | |||
Amortization of prior service cost | (35 | ) | (35 | ) | |||
Amortization of actuarial loss | (264 | ) | (625 | ) | |||
Total recognized in other comprehensive income | $ | 3,320 | $ | 9,257 | |||
Total recognized in net periodic pension income and other comprehensive income/loss (before tax) | $ | (6,721 | ) | $ | (453 | ) |
2019 Form 10-K | 118 |
The benefit payments, which reflect expected future service, as appropriate, expected to be paid in future years are presented in the following table:
Year | Amount | |||
(in thousands) | ||||
2020 | $ | 8,533 | ||
2021 | 8,815 | |||
2022 | 9,002 | |||
2023 | 9,238 | |||
2024 | 9,367 | |||
Thereafter | 48,374 |
The weighted average discount rate, expected long-term rate of return on assets and rate of compensation increase used in determining Valley’s pension expense for the years ended December 31, 2019, 2018 and 2017 were as follows:
2019 | 2018 | 2017 | ||||||
Discount rate - projected benefit obligation | 4.30 | % | 3.69 | % | 4.12 | % | ||
Discount rate - interest cost | 3.99 | % | 3.31 | % | 3.61 | % | ||
Expected long-term return on plan assets | 7.50 | % | 7.50 | % | 7.50 | % | ||
Rate of compensation increase | N/A | N/A | N/A |
The expected rate of return on plan assets assumption is based on the concept that it is a long-term assumption independent of the current economic environment and changes would be made in the expected return only when long-term inflation expectations change, asset allocations change materially or when asset class returns are expected to change for the long-term.
In accordance with Section 402 (c) of ERISA, the qualified plan’s investment managers are granted full discretion to buy, sell, invest and reinvest the portions of the portfolio assigned to them consistent with the Bank’s Pension Committee’s policy and guidelines. The target asset allocation set for the qualified plan is an approximate equal weighting of 50 percent fixed income securities and 50 percent equity securities. The absolute investment objective for the equity portion is to earn at least 7 percent cumulative annualized real return, after adjustment by the Consumer Price Index (CPI), over rolling five-year periods, while the relative objective is to earn returns above the S&P 500 Index over rolling three-year periods. For the fixed income portion, the absolute objective is to earn at least a 3 percent cumulative annual real return, after adjustment by the CPI over rolling five-year periods with a relative objective of earning returns above the Merrill Lynch Intermediate Government/Corporate Index over rolling three-year periods. Cash equivalents will be invested in money market funds or in other high quality instruments approved by the Trustees of the qualified plan.
The exposure of the plan assets of the qualified plan to a concentration of credit risk is limited by the Bank’s Pension Committee’s diversification of the investments into various investment options with multiple asset managers. The Pension Committee engages an investment management advisory firm that regularly monitors the performance of the asset managers and ensures they are within compliance of the policies adopted by the Trustees. If the risk profile and overall return of assets managed are not in line with the risk objectives or expected return benchmarks for the qualified plan, the advisory firm may recommend the termination of an asset manager to the Pension Committee.
119 | 2019 Form 10-K |
In general, the plan assets of the qualified plan are investment securities that are well-diversified in terms of industry, capitalization and asset class. The following table presents the qualified plan weighted-average asset allocations by asset category that are measured at fair value on a recurring basis by level within the fair value hierarchy under ASC Topic 820. Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 3 for further details regarding the fair value hierarchy.
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||||
% of Total Investments | December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
($ in thousands) | ||||||||||||||||||
Assets: | ||||||||||||||||||
Investments: | ||||||||||||||||||
Equity securities | 32 | % | $ | 75,633 | $ | 75,633 | $ | — | $ | — | ||||||||
U.S. Treasury securities | 22 | 51,732 | 51,732 | — | — | |||||||||||||
Corporate bonds | 21 | 51,221 | — | 51,221 | — | |||||||||||||
Mutual funds | 18 | 42,119 | 42,119 | — | — | |||||||||||||
Cash and money market funds | 4 | 9,013 | 9,013 | — | — | |||||||||||||
U.S. government agency securities | 3 | 6,263 | — | 6,263 | — | |||||||||||||
Total investments | 100 | % | $ | 235,981 | $ | 178,497 | $ | 57,484 | $ | — |
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||||
% of Total Investments | December 31, 2018 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
($ in thousands) | ||||||||||||||||||
Assets: | ||||||||||||||||||
Investments: | ||||||||||||||||||
Equity securities | 28 | % | $ | 59,447 | $ | 59,447 | $ | — | $ | — | ||||||||
U.S. Treasury securities | 24 | 50,838 | 50,838 | — | — | |||||||||||||
Corporate bonds | 24 | 50,003 | — | 50,003 | — | |||||||||||||
Mutual funds | 18 | 37,178 | 37,178 | — | — | |||||||||||||
Cash and money market funds | 4 | 7,429 | 7,429 | — | — | |||||||||||||
U.S. government agency securities | 2 | 4,952 | — | 4,952 | — | |||||||||||||
Total investments | 100 | % | $ | 209,847 | $ | 154,892 | $ | 54,955 | $ | — |
The following is a description of the valuation methodologies used for assets measured at fair value:
Equity securities, U.S. Treasury securities and cash and money market funds are valued at fair value in the table above utilizing exchange quoted prices in active markets for identical instruments (Level 1 inputs). Mutual funds are measured at their respective net asset values, which represents fair values of the securities held in the funds based on exchange quoted prices available in active markets (Level 1 inputs).
Corporate bonds and U.S. government agency securities are reported at fair value utilizing Level 2 inputs. The prices for these investments are derived from market quotations and matrix pricing obtained through an independent pricing service. Such 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.
Based upon actuarial estimates, Valley does not expect to make any contributions to the qualified plan. Funding requirements for subsequent years are uncertain and will significantly depend on whether the plan’s actuary changes any assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes, Valley may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.
2019 Form 10-K | 120 |
Other Qualified Plan
On December 1, 2019, Valley assumed obligations under Oritani’s Pentegra Defined Benefit Plan for Financial Institutions (“Pentegra DB Plan”). The Pentegra DB Plan's Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan is a tax-qualified defined-benefit multiple-employer plan. Under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers. The Pentegra DB Plan was frozen as of December 31, 2008. At the acquisition date, Valley determined that it would withdraw from the Pentegra DB Plan and, as a result, recorded an estimated liability of $3.0 million. During 2020, plan participants are expected to receive annuities based on the actuarial estimates of the pension obligation.
Other Non-Qualified Plans
Valley maintains separate non-qualified plans for former directors and senior management of Merchants Bank of New York acquired in January of 2001. At December 31, 2019 and 2018, the remaining obligations under these plans were $1.6 million and $1.7 million, respectively, of which $451 thousand and $512 thousand, respectively, were funded by Valley. As of December 31, 2019 and 2018, all of the obligations were included in other liabilities and $803 thousand (net of a $314 thousand tax benefit) and $872 thousand (net of a $345 thousand tax benefit), respectively, were recorded in accumulated other comprehensive loss. The $1.1 million in accumulated other comprehensive loss will be reclassified to expense on a straight-line basis over the remaining benefit periods of these non-qualified plans.
Valley assumed, in the Oritani acquisition on December 1, 2019, certain obligations under non-qualified retirement plans described below:
• | Non-qualified benefit equalization plans (BEP) that provided supplemental benefits to certain eligible executives and officers The BEP plans were terminated on November 30, 2019 and the accrued benefits will be fully distributed to the participants on July 1, 2020. The funded obligation under the BEP plans totaled $26.8 million at December 31, 2019. |
• | An non-qualified benefit equalization pension plan that provided benefits to certain officers who were disallowed certain benefits under former Oritani’s qualified pension plan. This plan was terminated on November 30, 2019 and the accrued benefits will be distributed to plan participants over 5 years beginning on December 1, 2020. The funded obligation under this plan totaled $1.6 million at December 31, 2019. |
• | A Supplemental Executive Retirement Income Agreement (the SERP) for the former CEO of Oritani. The SERP is a retirement benefit with a minimum payment period of 20 years upon death, disability, normal retirement, early retirement or separation from service after a change in control. Distributions from the plan will begin on July 1, 2020. The funded obligation under the SERP totaled $13.0 million at December 31, 2019. |
The above Oritani non-qualified plans are secured by investments in money market mutual funds which are held in a trust and classified as equity securities on the consolidated statements of financial condition at December 31, 2019.
Valley also assumed an Executive Group Life Insurance Replacement (“Split-Dollar”) Plan from Oritani. The Split-Dollar plan provides life insurance benefits to certain eligible employees upon death while employed or following termination of employment due to disability, retirement or change in control. Participants in the Split-Dollar plan are entitled to up to two times their base annual salary, as defined by the plan. The remaining accrued liability for the Split-Dollar plan totaled $961 thousand at December 31, 2019.
Bonus Plan
Valley National Bank and its subsidiaries may award cash incentive and merit bonuses to its officers and employees based upon a percentage of the covered employees’ compensation as determined by the achievement of certain performance objectives. Amounts charged to salary expense were $19.1 million, $18.8 million and $10.8 million during 2019, 2018 and 2017, respectively.
Savings and Investment Plan
Valley National Bank maintains a KSOP, which is defined as a 401(k) plan with an employee stock ownership feature. This plan covers eligible employees of the Bank and its subsidiaries and allows employees to contribute a percentage of their salary, with the Bank matching a certain percentage of the employee contribution in cash invested in accordance with each participant’s investment elections. The Bank recorded $8.6 million, $8.5 million and $7.1 million in expense for contributions to the plan for the years ended December 31, 2019, 2018 and 2017, respectively.
121 | 2019 Form 10-K |
Stock-Based Compensation
Valley currently has one active employee stock plan, the 2016 Long-Term Stock Incentive Plan (the “2016 Stock Plan”), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016. The 2016 Stock Plan is administered by the Compensation and Human Resources Committee (the “Committee”) appointed by Valley’s Board of Directors. The Committee can grant awards to officers and key employees of Valley. The primary purpose of the 2016 Stock Plan is to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.
Under the 2016 Stock Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors (for acting in their roles as board members). As of December 31, 2019, 4.3 million shares of common stock were available for issuance under the 2016 Stock Plan. The essential features of each award are described in the award agreement relating to that award. The grant, exercise, vesting, settlement or payment of an award may be based upon the fair value of Valley’s common stock on the last sale price reported for Valley’s common stock on such date or the last sale price reported preceding such date, except for performance-based awards with a market condition. The grant date fair values of performance-based awards that vest based on a market condition are determined by a third party specialist using a Monte Carlo valuation model.
Valley recorded total stock-based compensation expense, primarily for restricted stock awards, totaling $15.0 million, $19.5 million and $12.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. The stock-based compensation expense for 2019, 2018 and 2017 included $2.1 million, $4.3 million and $4.3 million, respectively, related to stock awards granted to retirement eligible employees and was immediately recognized. The fair values of all other stock awards are expensed over the shorter of the vesting or required service period. As of December 31, 2019, the unrecognized amortization expense for all stock-based compensation totaled approximately $15.6 million and will be recognized over an average remaining vesting period of approximately 2.0 years.
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.
The following table sets forth the changes in restricted stock awards (RSAs) outstanding for the years ended December 31, 2019, 2018 and 2017:
Restricted Stock Awards Outstanding | ||||||||
2019 | 2018 | 2017 | ||||||
Outstanding at beginning of year | 1,720,968 | 1,771,702 | 2,100,816 | |||||
Granted | — | 1,263,144 | 608,786 | |||||
Vested | (547,653 | ) | (1,128,521 | ) | (736,575 | ) | ||
Forfeited | (114,634 | ) | (185,357 | ) | (201,325 | ) | ||
Outstanding at end of year | 1,058,681 | 1,720,968 | 1,771,702 |
Valley did not award shares of restricted stock during 2019. Included in the RSAs granted (in the table above) during 2018 and 2017, 60 thousand and 45 thousand shares, respectively, were issued to Valley directors. In 2018 and 2017, each non-management director received $60 thousand and $50 thousand, respectively, of RSAs as part of their annual retainer. The RSAs were granted on the date of the annual shareholders’ meeting with the number of RSAs determined using the closing market price on the date prior to grant. The RSAs vest on the earlier of the next annual shareholders’ meeting or the first anniversary of the grant date, with acceleration upon a change in control, death or disability, but not resignation from the Board of Directors.
On December 1, 2019, Valley completed the acquisition of Oritani, at which time each outstanding Oritani RSA became fully vested. The stock plan under which the Oritani stock awards were issued is no longer active.
Restricted Stock Units (RSUs). Restricted stock units are awarded as (1) performance-based RSUs and (2) time-based RSUs. Performance based RSUs vest based on (i) growth in tangible book value per share plus dividends and (ii) total shareholder return as compared to our peer group. The performance based RSUs "cliff" vest after three years based on the cumulative performance of Valley during that time period. Generally, time-based RSUs vest ratably one-third each year over a three-year vesting period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common share) over the applicable performance or service period. Dividend equivalents, per the terms of the agreements, are accumulated and paid to the grantee at the vesting date, or forfeited if the applicable performance or service conditions are not met. The grant date fair value of the RSUs was $10.43, $12.36 and $11.05 per share for the years ended December 31, 2019, 2018, and 2017, respectively. Compensation
2019 Form 10-K | 122 |
costs related to RSUs totaled $3.6 million, $5.5 million and $3.8 million, and were included in total stock-based compensation expense for the years ended December 31, 2019, 2018 and 2017, respectively.
The following table sets forth the changes in RSUs outstanding for the years ended December 31, 2019, 2018 and 2017:
Restricted Stock Units Outstanding | ||||||||
2019 | 2018 | 2017 | ||||||
Outstanding at beginning of year | 1,378,886 | 1,114,962 | 744,281 | |||||
Acquired in business combinations | — | 336,379 | — | |||||
Granted | 1,412,941 | 509,725 | 370,681 | |||||
Vested | (500,204 | ) | (503,879 | ) | — | |||
Forfeited | (133,368 | ) | (78,301 | ) | — | |||
Outstanding at end of year | 2,158,255 | 1,378,886 | 1,114,962 |
Stock Options. The fair value of each option granted on the date of grant is estimated using a binomial option pricing model. The fair values are estimated using assumptions for dividend yield based on the annual dividend rate; the stock volatility, based on Valley’s historical and implied stock price volatility; the risk-free interest rates, based on the U.S. Treasury constant maturity bonds, in effect on the actual grant dates, with a remaining term approximating the expected term of the options; and expected exercise term calculated based on Valley’s historical exercise experience.
The following table summarizes stock options activity as of December 31, 2019, 2018 and 2017 and changes during the years ended on those dates:
2019 | 2018 | 2017 | ||||||||||||||||||
Weighted Average Exercise | Weighted Average Exercise | Weighted Average Exercise | ||||||||||||||||||
Stock Options | Shares | Price | Shares | Price | Shares | Price | ||||||||||||||
Outstanding at beginning of year | 1,051,787 | $ | 7 | 446,980 | $ | 13 | 732,489 | $ | 14 | |||||||||||
Acquired in business combinations | 3,130,171 | 8 | 1,803,165 | 5 | — | — | ||||||||||||||
Exercised | (716,920 | ) | 7 | (975,325 | ) | 5 | — | — | ||||||||||||
Forfeited or expired | (11,522 | ) | 8 | (223,033 | ) | 14 | (285,509 | ) | 16 | |||||||||||
Outstanding at end of year | 3,453,516 | 8 | 1,051,787 | 7 | 446,980 | 13 | ||||||||||||||
Exercisable at year-end | 3,339,517 | 8 | 604,003 | 7 | 446,980 | 13 |
The following table summarizes information about stock options outstanding and exercisable at December 31, 2019:
Options Outstanding and Exercisable | |||||||||
Range of Exercise Prices | Number of Options | Weighted Average Remaining Contractual Life in Years | Weighted Average Exercise Price | ||||||
$2-$4 | 124,105 | 2.5 | $ | 3 | |||||
4-6 | 153,317 | 5.4 | 5 | ||||||
6-8 | 2,718,834 | 1.8 | 7 | ||||||
8-10 | 112,000 | 7.9 | 10 | ||||||
10-12 | 231,261 | 1.8 | 11 | ||||||
3,339,517 | 2.2 | 8 |
Director Restricted Stock Plan. The Director Restricted Stock Plan provides the non-employee members of the Board of Directors with the opportunity to forgo some or their entire annual cash retainer and meeting fees in exchange for shares of Valley restricted stock. On January 29, 2014, the Director Restricted Stock Plan was amended to provide that no additional fees may be exchanged for Valley’s restricted stock effective April 1, 2014. The Director Restricted Stock Plan terminated in April 2018 when the remaining restricted stock under the plan vested.
123 | 2019 Form 10-K |
The following table sets forth the changes in director’s restricted stock awards outstanding for the years ended December 31, 2018 and 2017:
Restricted Stock Awards Outstanding | |||||
2018 | 2017 | ||||
Outstanding at beginning of year | 17,885 | 55,510 | |||
Vested | (17,885 | ) | (37,625 | ) | |
Outstanding at end of year | — | 17,885 |
INCOME TAXES (Note 14)
The U.S. Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduced the U.S. statutory corporate tax rate from 35 percent to 21 percent.
In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a one-year measurement period for companies to complete the accounting. Valley reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent Valley’s accounting for certain income tax effects of the Tax Act is incomplete but it can determine a reasonable estimate, Valley recorded a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, Valley made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017. The accounting for the tax effects of the Tax Act was completed with the final 2017 tax returns in the fourth quarter 2018, resulting in a $2.3 million tax benefit for the year ended December 31, 2018.
Income tax expense for the years ended December 31, 2019, 2018 and 2017 consisted of the following:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Current expense: | |||||||||||
Federal | $ | 95,317 | $ | 51,147 | $ | 8,483 | |||||
State | 36,457 | 28,898 | 5,500 | ||||||||
131,774 | 80,045 | 13,983 | |||||||||
Deferred expense (benefit): | |||||||||||
Federal | 10,444 | (17,463 | ) | 49,169 | |||||||
State | 4,784 | 5,683 | 27,679 | ||||||||
15,228 | (11,780 | ) | 76,848 | ||||||||
Total income tax expense | $ | 147,002 | $ | 68,265 | $ | 90,831 |
2019 Form 10-K | 124 |
The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2019 and 2018 were as follows:
2019 | 2018 | ||||||
(in thousands) | |||||||
Deferred tax assets: | |||||||
Allowance for loan losses | $ | 44,486 | $ | 42,882 | |||
Depreciation | — | 19,111 | |||||
Employee benefits | 28,263 | 13,301 | |||||
Investment securities, including other-than-temporary impairment losses | — | 13,222 | |||||
Net operating loss carryforwards | 19,768 | 21,570 | |||||
Purchase accounting | 41,857 | 33,629 | |||||
Other | 19,904 | 22,104 | |||||
Total deferred tax assets | 154,278 | 165,819 | |||||
Deferred tax liabilities: | |||||||
Pension plans | 19,686 | 18,786 | |||||
Depreciation | 4,527 | — | |||||
Investment securities, including other-than-temporary impairment losses | 2,319 | — | |||||
Other investments | 7,731 | 17,758 | |||||
Core deposit intangibles | 16,620 | 14,223 | |||||
Other | 13,665 | 8,858 | |||||
Total deferred tax liabilities | 64,548 | 59,625 | |||||
Valuation Allowance | 916 | 733 | |||||
Net deferred tax asset (included in other assets) | $ | 88,814 | $ | 105,461 |
Valley's federal net operating loss carryforwards totaled approximately $72.1 million at December 31, 2019 and expire during the period from 2029 through 2034. Valley's capital loss carryforwards totaled $3.1 million at December 31, 2019 and expire at December 31, 2023. State net operating loss carryforwards totaled approximately $85.3 million at December 31, 2019 and expire during the period from 2029 through 2038.
Based upon taxes paid and projections of future taxable income over the periods in which the net deferred tax assets are deductible, management believes that it is more likely than not that Valley will realize the benefits, net of an immaterial valuation allowance, of these deductible differences and loss carryforwards.
Reconciliation between the reported income tax expense and the amount computed by multiplying consolidated income before taxes by the statutory federal income tax rate of 21 percent for the years ended December 31, 2019 and 2018, and 35 percent for the year ended December 31, 2017 were as follows:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Federal income tax at expected statutory rate | $ | 95,927 | $ | 69,235 | $ | 88,458 | |||||
Increase (decrease) due to: | |||||||||||
State income tax expense, net of federal tax effect | 32,581 | 23,851 | 21,046 | ||||||||
Tax-exempt interest, net of interest incurred to carry tax-exempt securities | (3,118 | ) | (3,974 | ) | (5,245 | ) | |||||
Bank owned life insurance | (1,637 | ) | (1,734 | ) | (2,568 | ) | |||||
Tax credits from securities and other investments | (11,636 | ) | (20,798 | ) | (27,037 | ) | |||||
FDIC insurance premium | 2,507 | 3,318 | — | ||||||||
Impact of the Tax Act | — | (2,274 | ) | 15,441 | |||||||
Addition to reserve for uncertainties | 31,123 | — | — | ||||||||
Other, net | 1,255 | 641 | 736 | ||||||||
Income tax expense | $ | 147,002 | $ | 68,265 | $ | 90,831 |
125 | 2019 Form 10-K |
The federal energy investment tax credit (FEITC) program encourages the use of renewable energy, including solar energy. The energy program reduces federal income taxes by offering a 30 percent tax credit to owners of energy property that meets established performance and quality standards. In addition, there are other returns from tax losses and cash flows generated by the investment. Typically, an owner and the tax credit investor, such as Valley, establish a limited partnership. The tax credit investor usually has a substantial, but passive, interest in the partnership and the owner of the solar energy property has a small interest. The ownership structure permits the tax benefits to pass through to the tax credit investor with an expected exit from ownership after five years.
The amount of the FEITC is calculated based on the total cost of a renewable energy property. From 2013 to 2015, Valley invested in three FEITC funds (Fund VI, Fund XII and Fund XIX) sponsored by DC Solar to purchase a total of 512 mobile solar generator units. The valuation of the unit price of the solar units was supported by an appraisal prepared by a well-recognized national appraisal firm. The total tax credits of $22.8 million were used to reduce Valley’s federal income taxes payable in its consolidated financial statements from 2013 to 2015.
The full value of the FEITC is earned immediately when a solar energy property is placed in service. However, the tax credit is subject to recapture for federal tax purposes for a five-year compliance period, if the property ceases to remain eligible for the tax credit. A property may become ineligible during the compliance period due to (i) a sale or disposal of the property, (ii) lease of the property to a tax exempt entity or (iii) its removal from service (i.e., no longer available for lease). During the first year after the property has been placed in service, the recapture rate is 100 percent of the tax credit. The rate declines by 20 percent each year thereafter until the end of the fifth year. The compliance period expires at the end of the fifth year after the property has been placed in service. All three funds leased the mobile solar generator units to DC Solar distributions, which stated its intention to sublease the units to third parties.
An entity shall initially recognize the financial statement effects of a tax position when it is more likely than not (or a likelihood of more than 50 percent), based on the technical merits, that the position will be sustained upon examination. The level of evidence that is necessary and appropriate to support an entity's assessment of the technical merits of a tax position is a matter of judgment that depends on all available information. At each of the investment dates, Valley obtained two tax opinions from national law firms that, based upon the facts recited, support the recognition of the tax credits in its tax returns. Based upon management's review of the tax opinions on the investment’s legal structure, Valley recognized and measured each tax position at 100 percent of the tax credit.
Valley's subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances, and information available at the latest quarterly reporting date. A change in judgment that results in subsequent derecognition or change in measurement of a tax position taken in a prior annual period (including any related interest and penalties) is recognized as a discrete item in the period in which the change occurs.
In late February 2019, Valley learned of Federal Bureau of Investigation allegations of fraudulent conduct by DC Solar, including information about asset seizures of DC Solar property and assets of its principals and ongoing federal investigations. Since learning of the allegations, Valley conducted an ongoing investigation coordinated with other DC Solar fund investors, investors' outside counsel and a third party specialist. The facts uncovered to date by the investor group impact each investor differently, affecting their likelihood of loss and the ultimate amount of tax benefit likely to be recaptured. To date, over 97 percent of the 512 solar generator units purchased by Valley's three funds have been positively identified by a third party specialist at several leasee and other locations throughout the United States. Valley also learned through its investigation that the IRS has challenged the valuation appraisals of similar solar generator units that were used to determine the federal renewable energy tax credits related to another DC Solar fund owned by an unrelated investor.
Given the circumstances that Valley was aware of during the first nine months of 2019, including the aforementioned IRS challenge of the appraisals of similar units used by an unrelated fund investor, and management's best judgments regarding the settlement of the tax positions that it would ultimately accept with the IRS, Valley expected a partial loss and tax benefit recapture. During the fourth quarter 2019, several of the co-conspirators pleaded guilty to fraud in the on-going federal investigation. Based upon this new information, Valley deemed that its tax positions related to the DC Solar funds did not meet the more likely than not recognition threshold (discussed above) in Valley's tax reserve assessment at December 31, 2019. As result of this assessment and a partial reserve recognized by Valley in the first quarter 2019, Valley's net income for the year ended December 31, 2019 includes an increase to Valley's provision for income taxes of $31.1 million reflecting the reserve for uncertain tax liability positions established in 2019 (shown in the table below). As of December 31, 2019, Valley believes it is fully reserved for the renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. However, Valley can provide no assurance that it will not recognize additional tax provisions related to this uncertain tax liability in the future.
2019 Form 10-K | 126 |
A reconciliation of Valley’s gross unrecognized tax benefits for 2019, 2018 and 2017 are presented in the table below:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Beginning balance | $ | — | $ | 4,238 | $ | 16,144 | |||||
Additions based on tax positions related to prior years | 31,918 | — | 1,121 | ||||||||
Settlements with taxing authorities | — | — | (13,027 | ) | |||||||
Reductions due to expiration of statute of limitations | — | (4,238 | ) | — | |||||||
Ending balance | $ | 31,918 | $ | — | $ | 4,238 |
The entire balance of unrecognized tax benefits, if recognized, would favorably affect Valley's effective income tax rate. Valley’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Valley accrued approximately $6.1 million and $1.8 million of interest expense associated with Valley’s uncertain tax positions at December 31, 2019 and 2017, respectively. There was no interest expense accrued for uncertain tax positions during the year ended December 31, 2018.
Valley monitors its tax positions for the underlying facts, circumstances, and information available including the federal investigation of DC Solar and changes in tax laws, case law and regulations that may necessitate subsequent de-recognition of previous tax benefits.
Valley files income tax returns in the U.S. federal and various state jurisdictions. With few exceptions, Valley is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2014. Valley is under routine examination by various state jurisdictions, and we expect the examinations to be completed within the next 12 months. Valley has considered, for all open audits, any potential adjustments in establishing our reserve for unrecognized tax benefits as of December 31, 2019.
TAX CREDIT INVESTMENTS (Note 15)
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. 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. After initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair values are increased to reflect Valley's share of income of the investee and are reduced to reflect its share of losses of the investee, dividends received and other-than-temporary impairments, if applicable. See the "Other-Than-Temporary Impairment Analysis" section below.
The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at December 31, 2019 and 2018:
December 31, | |||||||
2019 | 2018 | ||||||
(in thousands) | |||||||
Other Assets: | |||||||
Affordable housing tax credit investments, net | $ | 25,049 | $ | 36,961 | |||
Other tax credit investments, net | 59,081 | 68,052 | |||||
Total tax credit investments, net | $ | 84,130 | $ | 105,013 | |||
Other Liabilities: | |||||||
Unfunded affordable housing tax credit commitments | $ | 1,539 | $ | 4,520 | |||
Unfunded other tax credit commitments | 1,139 | 8,756 | |||||
Total unfunded tax credit commitments | $ | 2,678 | $ | 13,276 |
127 | 2019 Form 10-K |
The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the years ended December 31, 2019, 2018 and 2017:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Components of Income Tax Expense: | |||||||||||
Affordable housing tax credits and other tax benefits | $ | 6,757 | $ | 6,713 | $ | 7,383 | |||||
Other tax credit investment credits and tax benefits | 10,205 | 21,351 | 35,530 | ||||||||
Total reduction in income tax expense | $ | 16,962 | $ | 28,064 | $ | 42,913 | |||||
Amortization of Tax Credit Investments: | |||||||||||
Affordable housing tax credit investment losses | $ | 2,184 | $ | 1,880 | $ | 2,748 | |||||
Affordable housing tax credit investment impairment losses | 3,295 | 2,544 | 4,684 | ||||||||
Other tax credit investment losses | 5,668 | 1,970 | 2,866 | ||||||||
Other tax credit investment impairment losses | 9,245 | 17,806 | 31,449 | ||||||||
Total amortization of tax credit investments recorded in non-interest expense | $ | 20,392 | $ | 24,200 | $ | 41,747 |
Other-Than-Temporary Impairment Analysis
An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value. The determination of whether a decline in value of a tax credit investment is other-than-temporary requires significant judgment and is performed separately for each investment. The tax credit investments are reviewed for impairment quarterly, or whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. These circumstances can include, but are not limited to, the following factors:
• | Evidence that Valley does not have the ability to recover the carrying amount of the investment; |
• | The inability of the investee to sustain earnings; |
• | A current fair value of the investment based upon cash flow projections that is less than the carrying amount; and |
• | Change in the economic or technological environment that could adversely affect the investee’s operations |
On a quarterly basis, Valley obtains financial reporting on its underlying tax credit investment assets for each fund from the fund manager who is independent of Valley and the Fund Sponsor. The financial reporting is reviewed for deterioration in the financial condition of the fund, the level of cash flows and any significant losses or impairment charges. Valley also regularly reviews the condition and continuing prospects of the underlying operations of the investment with the fund manager, including any observations from site visits and communications with the Fund Sponsor, if available. Annually, Valley obtains the audited financial statements prepared by an independent accounting firm for each investment, as well as the annual tax returns. Generally, none of the aforementioned review factors are individually conclusive and the relative importance of each factor will vary based on facts and circumstances. However, the longer the expected period of recovery, the stronger and more objective the positive evidence needs to be in order to overcome the presumption that the impairment is other than temporary. If management determines that a decline in value is other than temporary per its quarterly and annual reviews, including current probable cash flow projections, the applicable tax credit investment is written down to its estimated fair value through an impairment charge to earnings, which establishes the new cost basis of the investment.
The aggregate unamortized investment related to three federal renewable energy tax credit funds sponsored by DC Solar represented approximately $2.4 million (or approximately $800 thousand for each fund) of the $59.1 million of net other tax credit investments reported as of December 31, 2019. These funds are disclosed in detail in Note 14. During the first quarter 2019, Valley determined that future cash flows related to the remaining investments in all three funds were not probable based upon new information available, including the sponsor’s bankruptcy proceedings which were reclassified to Chapter 7 from Chapter 11 in late March 2019. As a result, Valley recognized an other-than-temporary impairment charge for the entire aggregate unamortized investment of $2.4 million during the first quarter 2019, which is included within amortization of tax credit investments for the year ended December 31, 2019.
As a result of the Tax Act, Valley incurred additional impairment of $2.2 million and $2.1 million related to certain affordable housing tax credit investments and other tax credit investments, respectively, during the fourth quarter 2017.
2019 Form 10-K | 128 |
COMMITMENTS AND CONTINGENCIES (Note 16)
Financial Instruments with Off-balance Sheet Risk
In the ordinary course of business in meeting the financial needs of its customers, Valley, through its subsidiary Valley National Bank, is a party to various financial instruments, which are not reflected in the consolidated financial statements. These financial instruments include standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these instruments is an indicator of the Bank’s level of involvement in each type of instrument as well as the exposure to credit loss in the event of non-performance by the other party to the financial instrument. The Bank seeks to limit any exposure of credit loss by applying the same credit policies in making commitments, as it does for on-balance sheet lending facilities.
The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 2019 and 2018:
2019 | 2018 | ||||||
(in thousands) | |||||||
Commitments under commercial loans and lines of credit | $ | 5,550,967 | $ | 5,164,186 | |||
Home equity and other revolving lines of credit | 1,379,581 | 1,178,306 | |||||
Standby letters of credit | 296,036 | 316,941 | |||||
Outstanding residential mortgage loan commitments | 233,291 | 235,310 | |||||
Commitments to sell loans | 68,492 | 58,897 | |||||
Commitments under unused lines of credit—credit card | 44,527 | 66,229 | |||||
Commercial letters of credit | 2,887 | 3,100 |
Obligations to advance funds under commitments to extend credit, including commitments under unused lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have specified expiration dates, which may be extended upon request, or other termination clauses and generally require payment of a fee. These commitments do not necessarily represent future cash requirements as it is anticipated that many of these commitments will expire without being fully drawn upon. The Bank’s lending activity for outstanding loan commitments is primarily to customers within the states of New Jersey, New York, and Florida.
Standby letters of credit represent the guarantee by the Bank of the obligations or performance of the bank customer in the event of the default of payment or nonperformance to a third party beneficiary.
Loan sale commitments represent contracts for the sale of residential mortgage loans to third parties in the ordinary course of the Bank’s business. These commitments require the Bank to deliver loans within a specific period to the third party. The risk to the Bank is its non-delivery of loans required by the commitment, which could lead to financial penalties. The Bank has not defaulted on its loan sale commitments.
Derivative Instruments and Hedging Activities
Valley is exposed to certain risks arising from both its business operations and economic conditions. Valley principally manages its exposure to a wide variety of business and operational risks through management of its core business activities. Valley manages economic risks, including interest rate and liquidity risks, primarily by managing the amount, sources, and duration of its assets and liabilities and, from time to time, the use of derivative financial instruments. Specifically, 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. Valley’s derivative financial instruments are used to manage differences in the amount, timing, and duration of Valley’s known or expected cash receipts and its known or expected cash payments related to assets and liabilities as outlined below.
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. 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.
129 | 2019 Form 10-K |
At December 31, 2019, Valley had the following cash flow hedge derivatives:
• | One forward starting interest rate swap, with a notional amount of $75 million, to hedge the changes in cash flows associated with certain brokered money market deposits. Starting in November 2015, the interest rate swap required Valley to pay fixed-rate amounts of approximately 2.97 percent, in exchange for the receipt of variable-rate payments at the three-month LIBOR rate. The swap has an expiration date of November 2020. |
• | Two forward starting interest rate swaps with a total notional amount of $50 million and $55 million, respectively, to hedge the changes in cash flows associated with borrowed funds. Starting in March 2016, the interest rate swaps required Valley to pay fixed-rate amounts of 2.87 percent and 2.88 percent, respectively, in exchange for the receipt of variable-rate payments at the three-month LIBOR rate. The two swaps have expiration dates in March 2020 and September 2020, respectively. |
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.
At December 31, 2019, Valley had one interest rate swap with a notional amount of approximately $7.3 million used to hedge the change in the fair value of a commercial loan.
Non-designated Hedges. Derivatives not designated as hedges may be used to manage Valley’s exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. Derivatives not designated as hedges are not entered into for speculative purposes. Under a program, Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
Valley sometimes enters into risk participation agreements with external lenders where the banks are sharing their risk of default on the interest rate swaps on participated loans. Valley either pays or receives a fee depending on the participation type. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. At December 31, 2019, Valley had 23 credit swaps with an aggregate notional amount of $152.9 million related to risk participation agreements.
At December 31, 2019, Valley had one "steepener" swap with a total current notional amount of $10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits. The rates paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in 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.
2019 Form 10-K | 130 |
Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows:
December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
Fair Value | Fair Value | ||||||||||||||||||||||
Other Assets | Other Liabilities | Notional Amount | Other Assets | Other Liabilities | Notional Amount | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Derivatives designated as hedging instruments: | |||||||||||||||||||||||
Cash flow hedge interest rate caps and swaps | $ | — | $ | 1,484 | $ | 180,000 | $ | — | $ | 27 | $ | 332,000 | |||||||||||
Fair value hedge interest rate swaps | — | 229 | 7,281 | — | 347 | 7,536 | |||||||||||||||||
Total derivatives designated as hedging instruments | $ | — | $ | 1,713 | $ | 187,281 | $ | — | $ | 374 | $ | 339,536 | |||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
Interest rate swaps, and embedded and credit derivatives | $ | 158,382 | $ | 42,020 | $ | 4,113,106 | $ | 48,642 | $ | 22,533 | $ | 3,390,578 | |||||||||||
Mortgage banking derivatives | 150 | 193 | 142,760 | 337 | 774 | 105,247 | |||||||||||||||||
Total derivatives not designated as hedging instruments | $ | 158,532 | $ | 42,213 | $ | 4,255,866 | $ | 48,979 | $ | 23,307 | $ | 3,495,825 |
The Chicago Mercantile Exchange and London Clearing House variation margins are classified 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 interest rate swaps assets and designated and non-designated interest rate swaps liabilities were offset by variation margins posted by (with) the applicable counterparties and reported in the table above on a net basis at December 31, 2019.and 2018.
Gains (losses) included in the consolidated statements of income and in other comprehensive income (loss), on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Amount of loss reclassified from accumulated other comprehensive loss to interest expense | $ | (1,808 | ) | $ | (3,493 | ) | $ | (8,579 | ) | ||
Amount of (loss) gain recognized in other comprehensive income | (1,380 | ) | 2,651 | 1,005 |
The net gains or losses related to cash flow hedge ineffectiveness were immaterial during the years ended December 31, 2019, 2018 and 2017. The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $3.7 million and $4.0 million at December 31, 2019 and 2018, respectively.
Amounts reported in accumulated other comprehensive loss related to cash flow interest rate derivatives are reclassified to interest expense as interest payments are made on the hedged variable interest rate liabilities. Valley estimates that $2.3 million will be reclassified as an increase to interest expense in 2020.
Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Derivative—interest rate swaps: | |||||||||||
Interest income | $ | 133 | $ | 290 | $ | 348 | |||||
Hedged item—loans, deposits and long-term borrowings: | |||||||||||
Interest income | $ | (133 | ) | $ | (290 | ) | $ | (348 | ) |
Fee income related to derivative interest rate swaps executed with commercial loan customers totaled $33.4 million, $16.4 million and $8.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
131 | 2019 Form 10-K |
The following table presents the hedged items related to interest rate derivatives designated as hedges of fair value and the cumulative basis fair value adjustment included in the net carrying amount of the hedged items at December 31, 2019 and 2018:
Line Item in the Statement of Financial Position in Which the Hedged Item is Included | Carrying Amount of the Hedged Asset | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(in thousands) | |||||||||||||||
Loans | $ | 7,510 | $ | 7,882 | $ | 229 | $ | 346 |
Net losses included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows:
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Non-designated hedge interest rate and credit derivatives | |||||||||||
Other non-interest expense | $ | 898 | $ | 792 | $ | 744 |
Collateral Requirements and Credit Risk Related Contingency Features. By using derivatives, Valley is exposed to credit risk if counterparties to the derivative contracts do not perform as expected. Management attempts to minimize counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral where appropriate. Credit risk exposure associated with derivative contracts is managed at Valley in conjunction with Valley’s consolidated counterparty risk management process. Valley’s counterparties and the risk limits monitored by management are periodically reviewed and approved by the Board of Directors.
Valley has agreements with its derivative counterparties providing that if Valley defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Valley could also be declared in default on its derivative counterparty agreements. Additionally, Valley has an agreement with several of its derivative counterparties that contains provisions that require Valley’s debt to maintain an investment grade credit rating from each of the major credit rating agencies from which it receives a credit rating. If Valley’s credit rating is reduced below investment grade, or such rating is withdrawn or suspended, then the counterparty could terminate the derivative positions and Valley would be required to settle its obligations under the agreements. As of December 31, 2019, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of December 31, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $17.2 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties.
2019 Form 10-K | 132 |
BALANCE SHEET OFFSETTING (Note 17)
Certain financial instruments, including derivatives (consisting of interest rate swaps and caps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default.
The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of December 31, 2019 and 2018.
Gross Amounts Not Offset | |||||||||||||||||||||||
Gross Amounts Recognized | Gross Amounts Offset | Net Amounts Presented | Financial Instruments | Cash Collateral | Net Amount | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Interest rate swaps | $ | 158,382 | $ | — | $ | 158,382 | $ | (118 | ) | $ | — | $ | 158,264 | ||||||||||
Liabilities: | |||||||||||||||||||||||
Interest rate swaps | $ | 43,733 | $ | — | $ | 43,733 | $ | (118 | ) | $ | (16,881 | ) | $ | 26,734 | |||||||||
Repurchase agreements | 350,000 | — | 350,000 | — | (350,000 | ) | * | — | |||||||||||||||
Total | $ | 393,733 | $ | — | $ | 393,733 | $ | (118 | ) | $ | (366,881 | ) | $ | 26,734 | |||||||||
December 31, 2018 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Interest rate swaps and caps | $ | 48,642 | $ | — | $ | 48,642 | $ | (1,214 | ) | $ | — | $ | 47,428 | ||||||||||
Liabilities: | |||||||||||||||||||||||
Interest rate swaps and caps | $ | 22,907 | $ | — | $ | 22,907 | $ | (1,214 | ) | $ | (1,852 | ) | $ | 19,841 | |||||||||
Repurchase agreements | 150,000 | — | 150,000 | — | (150,000 | ) | * | — | |||||||||||||||
Total | $ | 172,907 | $ | — | $ | 172,907 | $ | (1,214 | ) | $ | (151,852 | ) | $ | 19,841 |
* Represents the fair value of non-cash pledged investment securities.
REGULATORY AND CAPITAL REQUIREMENTS (Note 18)
Valley’s primary source of cash is dividends from the Bank. Valley National Bank, a national banking association, is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. In addition, the dividends declared cannot be in excess of the amount which would cause the subsidiary bank to fall below the minimum required for capital adequacy purposes.
Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct significant impact on Valley’s consolidated financial statements. Under capital adequacy guidelines Valley and Valley National Bank must meet specific capital guidelines that involve quantitative measures of Valley’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
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.
Valley is required to maintain a common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer. On January 1, 2019, the capital conversation buffer was fully phased-in. As of December 31, 2019 and 2018, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).
133 | 2019 Form 10-K |
The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under the Basel III risk-based capital guidelines at December 31, 2019 and 2018:
Actual | Minimum Capital Requirements | To Be Well Capitalized Under Prompt Corrective Action Provision | |||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||
($ in thousands) | |||||||||||||||||||||
As of December 31, 2019 | |||||||||||||||||||||
Total Risk-based Capital | |||||||||||||||||||||
Valley | $ | 3,427,134 | 11.72 | % | $ | 3,070,687 | 10.50 | % | N/A | N/A | |||||||||||
Valley National Bank | 3,416,674 | 11.69 | 3,069,894 | 10.50 | $ | 2,923,709 | 10.00 | % | |||||||||||||
Common Equity Tier 1 Capital | |||||||||||||||||||||
Valley | 2,754,524 | 9.42 | 2,047,125 | 7.00 | N/A | N/A | |||||||||||||||
Valley National Bank | 3,152,070 | 10.78 | 2,046,596 | 7.00 | 1,900,411 | 6.50 | |||||||||||||||
Tier 1 Risk-based Capital | |||||||||||||||||||||
Valley | 2,968,530 | 10.15 | 2,485,795 | 8.50 | N/A | N/A | |||||||||||||||
Valley National Bank | 3,152,070 | 10.78 | 2,485,153 | 8.50 | 2,338,967 | 8.00 | |||||||||||||||
Tier 1 Leverage Capital | |||||||||||||||||||||
Valley | 2,968,530 | 8.76 | 1,355,378 | 4.00 | N/A | N/A | |||||||||||||||
Valley National Bank | 3,152,070 | 9.31 | 1,354,693 | 4.00 | 1,693,366 | 5.00 | |||||||||||||||
As of December 31, 2018 | |||||||||||||||||||||
Total Risk-based Capital | |||||||||||||||||||||
Valley | $ | 2,786,971 | 11.34 | % | $ | 2,426,975 | 9.875 | % | N/A | N/A | |||||||||||
Valley National Bank | 2,698,654 | 10.99 | 2,424,059 | 9.875 | $ | 2,454,743 | 10.00 | % | |||||||||||||
Common Equity Tier 1 Capital | |||||||||||||||||||||
Valley | 2,071,871 | 8.43 | 1,566,781 | 6.375 | N/A | N/A | |||||||||||||||
Valley National Bank | 2,442,359 | 9.95 | 1,564,899 | 6.375 | 1,595,583 | 6.50 | |||||||||||||||
Tier 1 Risk-based Capital | |||||||||||||||||||||
Valley | 2,286,676 | 9.30 | 1,935,435 | 7.875 | N/A | N/A | |||||||||||||||
Valley National Bank | 2,442,359 | 9.95 | 1,933,110 | 7.875 | 1,963,794 | 8.00 | |||||||||||||||
Tier 1 Leverage Capital | |||||||||||||||||||||
Valley | 2,286,676 | 7.57 | 1,208,882 | 4.00 | N/A | N/A | |||||||||||||||
Valley National Bank | 2,442,359 | 8.09 | 1,207,039 | 4.00 | 1,508,798 | 5.00 |
COMMON AND PREFERRED STOCK (Note 19)
Dividend Reinvestment Plan. Valley's transfer agent maintains its dividend reinvestment plan (DRIP) with shares purchased in the open market. The ability to issue authorized and previously unissued common stock or reissue treasury stock as part of Valley's DRIP was terminated effective February 12, 2018. During 2018 and 2017, 87 thousand and 713 thousand common shares, respectively, were reissued from treasury stock or issued from authorized common shares under the DRIP for net proceeds totaling $1.0 million and $8.2 million, respectively.
Repurchase Plan. In 2007, Valley’s Board of Directors approved the repurchase of up to $4.7 million of common shares. Purchases of Valley’s common shares may be made from time to time in the open market or in privately negotiated transactions generally not exceeding prevailing market prices. Repurchased shares are held in treasury and are expected to be used for general corporate purposes. Under the repurchase plan, Valley made no purchases of its outstanding shares during the years ended December 31, 2019, 2018 and 2017 in the open market.
Other Stock Repurchases. Valley purchases shares directly from its employees in connection with employee elections to withhold taxes related to the vesting of stock awards. During the years ended December 31, 2019, 2018 and 2017, Valley purchased approximately 175 thousand, 441 thousand and 218 thousand shares, respectively, of its outstanding common stock at an average price of $10.45, $11.83 and $12.12, respectively, for such purpose.
2019 Form 10-K | 134 |
Preferred Stock
Series A Issuance. On June 19, 2015, Valley issued 4.6 million shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value per share, with a liquidation preference of $25 per share. Dividends on the preferred stock accrue and are payable quarterly in arrears, at a fixed rate per annum equal to 6.25 percent from the original issue date to, but excluding, June 30, 2025, and thereafter at a floating rate per annum equal to three-month LIBOR plus a spread of 3.85 percent. The net proceeds from the preferred stock offering totaled $111.6 million. Commencing June 30, 2025, Valley may redeem the preferred shares at the liquidation preference plus accrued and unpaid dividends, subject to certain conditions.
Series B Issuance. On August 3, 2017, Valley issued 4.0 million shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, no par value per share, with a liquidation preference of $25 per share. Dividends on the preferred stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to 5.50 percent from the original issuance date to, but excluding, September 30, 2022, and thereafter at a floating rate per annum equal to three-month LIBOR plus a spread of 3.578 percent. The net proceeds from the preferred stock offering totaled $98.1 million. Commencing September 30, 2022, Valley may redeem the preferred shares at the liquidation preference plus accrued and unpaid dividends, subject to certain conditions.
Preferred stock is included in Valley's (additional) Tier 1 capital and total risk-based capital at December 31, 2019 and 2018.
OTHER COMPREHENSIVE INCOME (Note 20)
The following table presents the tax effects allocated to each component of other comprehensive income (loss) for the years ended December 31, 2019, 2018 and 2017. Components of other comprehensive income (loss) include changes in net unrealized gains and losses on debt securities available for sale (including the non-credit portion of other-than-temporary impairment charges relating to certain securities during the period); unrealized gains and losses on derivatives used in cash flow hedging relationships; and the pension benefit adjustment for the unfunded portion of various employee, officer and director pension plans.
2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||
Before Tax | Tax Effect | After Tax | Before Tax | Tax Effect | After Tax | Before Tax | Tax Effect | After Tax | |||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||
Unrealized gains and losses on available for sale (AFS) debt securities | |||||||||||||||||||||||||||||||||||
Net gains (losses) arising during the period | $ | 54,723 | $ | (15,461 | ) | $ | 39,262 | $ | (32,123 | ) | $ | 9,191 | $ | (22,932 | ) | $ | 1,485 | $ | (635 | ) | $ | 850 | |||||||||||||
Less reclassification adjustment for net losses (gains) included in net income (1) | 150 | (31 | ) | 119 | 2,873 | (636 | ) | 2,237 | (264 | ) | 108 | (156 | ) | ||||||||||||||||||||||
Net change | 54,873 | (15,492 | ) | 39,381 | (29,250 | ) | 8,555 | (20,695 | ) | 1,221 | (527 | ) | 694 | ||||||||||||||||||||||
Unrealized gains and losses on derivatives (cash flow hedges) | |||||||||||||||||||||||||||||||||||
Net (losses) gains arising during the period | (1,380 | ) | 391 | (989 | ) | 2,651 | (777 | ) | 1,874 | 1,005 | (429 | ) | 576 | ||||||||||||||||||||||
Less reclassification adjustment for net losses included in net income (2) | 1,808 | (517 | ) | 1,291 | 3,493 | (999 | ) | 2,494 | 8,579 | (3,551 | ) | 5,028 | |||||||||||||||||||||||
Net change | 428 | (126 | ) | 302 | 6,144 | (1,776 | ) | 4,368 | 9,584 | (3,980 | ) | 5,604 | |||||||||||||||||||||||
Defined benefit pension plan | |||||||||||||||||||||||||||||||||||
Net (losses) gains arising during the period | (2,385 | ) | (176 | ) | (2,561 | ) | (9,916 | ) | 2,765 | (7,151 | ) | (3,843 | ) | 1,121 | (2,722 | ) | |||||||||||||||||||
Amortization of prior service (cost) credit(3) | (135 | ) | 42 | (93 | ) | 212 | (66 | ) | 146 | 268 | (77 | ) | 191 | ||||||||||||||||||||||
Amortization of net loss (3) | 264 | (76 | ) | 188 | 625 | (178 | ) | 447 | 381 | (133 | ) | 248 | |||||||||||||||||||||||
Net change | (2,256 | ) | (210 | ) | (2,466 | ) | (9,079 | ) | 2,521 | (6,558 | ) | (3,194 | ) | 911 | (2,283 | ) | |||||||||||||||||||
Total other comprehensive income (loss) | $ | 53,045 | $ | (15,828 | ) | $ | 37,217 | $ | (32,185 | ) | $ | 9,300 | $ | (22,885 | ) | $ | 7,611 | $ | (3,596 | ) | $ | 4,015 |
(1) | Included in losses on securities transactions, net. |
(2) | Included in interest expense. |
(3) | Included in the computation of net periodic pension cost. See Note 13 for details. |
135 | 2019 Form 10-K |
The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the years ended December 31, 2019, 2018 and 2017:
Components of Accumulated Other Comprehensive Loss | Total Accumulated Other Comprehensive Loss | ||||||||||||||
Unrealized Gains and Losses on AFS Securities | Unrealized Gains and Losses on Derivatives | Defined Benefit Pension Plan | |||||||||||||
(in thousands) | |||||||||||||||
Balance-December 31, 2016 | $ | (10,736 | ) | $ | (12,464 | ) | $ | (18,893 | ) | $ | (42,093 | ) | |||
Reclassification due to the adoption of ASU No. 2018-02 | (2,342 | ) | (1,478 | ) | (4,107 | ) | (7,927 | ) | |||||||
Balance-January 1, 2017 | (13,078 | ) | (13,942 | ) | (23,000 | ) | (50,020 | ) | |||||||
Other comprehensive income (loss) before reclassifications | 850 | 576 | (2,722 | ) | (1,296 | ) | |||||||||
Amounts reclassified from other comprehensive income (loss) | (156 | ) | 5,028 | 439 | 5,311 | ||||||||||
Other comprehensive income (loss), net | 694 | 5,604 | (2,283 | ) | 4,015 | ||||||||||
Balance-December 31, 2017 | (12,384 | ) | (8,338 | ) | (25,283 | ) | (46,005 | ) | |||||||
Reclassification due to the adoption of ASU No. 2016-01 | (480 | ) | — | — | (480 | ) | |||||||||
Reclassification due to the adoption of ASU No. 2017-12 | — | (61 | ) | — | (61 | ) | |||||||||
Balance-January 1, 2018 | (12,864 | ) | (8,399 | ) | (25,283 | ) | (46,546 | ) | |||||||
Other comprehensive income (loss) before reclassifications | (22,932 | ) | 1,874 | (7,151 | ) | (28,209 | ) | ||||||||
Amounts reclassified from other comprehensive income (loss) | 2,237 | 2,494 | 593 | 5,324 | |||||||||||
Other comprehensive income (loss), net | (20,695 | ) | 4,368 | (6,558 | ) | (22,885 | ) | ||||||||
Balance-December 31, 2018 | (33,559 | ) | (4,031 | ) | (31,841 | ) | (69,431 | ) | |||||||
Other comprehensive income (loss) before reclassifications | 39,262 | (989 | ) | (2,561 | ) | 35,712 | |||||||||
Amounts reclassified from other comprehensive income (loss) | 119 | 1,291 | 95 | 1,505 | |||||||||||
Other comprehensive income (loss), net | 39,381 | 302 | (2,466 | ) | 37,217 | ||||||||||
Balance-December 31, 2019 | $ | 5,822 | $ | (3,729 | ) | $ | (34,307 | ) | $ | (32,214 | ) |
2019 Form 10-K | 136 |
QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 21)
Quarters Ended 2019 | |||||||||||||||
March 31 | June 30 | September 30 | December 31 | ||||||||||||
(in thousands, except for share data) | |||||||||||||||
Interest income | $ | 320,224 | $ | 327,742 | $ | 329,261 | $ | 343,773 | |||||||
Interest expense | 101,576 | 107,508 | 108,636 | 105,232 | |||||||||||
Net interest income | 218,648 | 220,234 | 220,625 | 238,541 | |||||||||||
Provision for credit losses | 8,000 | 2,100 | 8,700 | 5,418 | |||||||||||
Non-interest income: | |||||||||||||||
Net impairment losses on securities recognized in earnings | — | (2,928 | ) | — | — | ||||||||||
Gains on sales of loans, net | 4,576 | 3,930 | 5,194 | 5,214 | |||||||||||
Gains (losses) on sales of assets, net | 77,720 | (564 | ) | (159 | ) | 1,336 | |||||||||
Other non-interest income | 25,377 | 27,165 | 36,115 | 31,544 | |||||||||||
Non-interest expense: | |||||||||||||||
Loss on extinguishment of debt | — | — | — | 31,995 | |||||||||||
Amortization of tax credit investments | 7,173 | 4,863 | 4,385 | 3,971 | |||||||||||
Other non-interest expense | 140,622 | 136,874 | 141,492 | 160,180 | |||||||||||
Income before income taxes | 170,526 | 104,000 | 107,198 | 75,071 | |||||||||||
Income tax expense | 57,196 | 27,532 | 25,307 | 36,967 | |||||||||||
Net income | 113,330 | 76,468 | 81,891 | 38,104 | |||||||||||
Dividend on preferred stock | 3,172 | 3,172 | 3,172 | 3,172 | |||||||||||
Net income available to common shareholders | 110,158 | 73,296 | 78,719 | 34,932 | |||||||||||
Earnings per common share: | |||||||||||||||
Basic | $ | 0.33 | $ | 0.22 | $ | 0.24 | $ | 0.10 | |||||||
Diluted | 0.33 | 0.22 | 0.24 | 0.10 | |||||||||||
Cash dividends declared per common share | 0.11 | 0.11 | 0.11 | 0.11 | |||||||||||
Weighted average number of common shares outstanding: | |||||||||||||||
Basic | 331,601,260 | 331,748,552 | 331,797,982 | 355,821,005 | |||||||||||
Diluted | 332,834,466 | 332,959,802 | 333,405,196 | 358,864,876 |
Quarters Ended 2018 | |||||||||||||||
March 31 | June 30 | September 30 | December 31 | ||||||||||||
(in thousands, except for share data) | |||||||||||||||
Interest income | $ | 267,495 | $ | 280,118 | $ | 297,041 | $ | 314,594 | |||||||
Interest expense | 59,897 | 69,366 | 80,241 | 92,541 | |||||||||||
Net interest income | 207,598 | 210,752 | 216,800 | 222,053 | |||||||||||
Provision for credit losses | 10,948 | 7,142 | 6,552 | 7,859 | |||||||||||
Non-interest income: | |||||||||||||||
Gains on sales of loans, net | 6,753 | 7,642 | 3,748 | 2,372 | |||||||||||
Losses on sales of assets | (97 | ) | (125 | ) | (1,899 | ) | (280 | ) | |||||||
Other non-interest income | 25,595 | 30,552 | 27,189 | 32,602 | |||||||||||
Non-interest expense: | |||||||||||||||
Amortization of tax credit investments | 5,274 | 4,470 | 5,412 | 9,044 | |||||||||||
Other non-interest expense | 168,478 | 145,446 | 146,269 | 144,668 | |||||||||||
Income before income taxes | 55,149 | 91,763 | 87,605 | 95,176 | |||||||||||
Income tax expense | 13,184 | 18,961 | 18,046 | 18,074 | |||||||||||
Net income | 41,965 | 72,802 | 69,559 | 77,102 | |||||||||||
Dividend on preferred stock | 3,172 | 3,172 | 3,172 | 3,172 | |||||||||||
Net income available to common shareholders | 38,793 | 69,630 | 66,387 | 73,930 | |||||||||||
Earnings per common share: | |||||||||||||||
Basic | $ | 0.12 | $ | 0.21 | $ | 0.20 | $ | 0.22 | |||||||
Diluted | 0.12 | 0.21 | 0.20 | 0.22 | |||||||||||
Cash dividends declared per common share | 0.11 | 0.11 | 0.11 | 0.11 | |||||||||||
Weighted average number of common shares outstanding: | |||||||||||||||
Basic | 330,727,416 | 331,318,381 | 331,486,500 | 331,492,648 | |||||||||||
Diluted | 332,465,527 | 332,895,483 | 333,000,242 | 332,856,385 |
137 | 2019 Form 10-K |
PARENT COMPANY INFORMATION (Note 22)
Condensed Statements of Financial Condition
December 31, | |||||||
2019 | 2018 | ||||||
(in thousands) | |||||||
Assets | |||||||
Cash | $ | 119,213 | $ | 109,839 | |||
Investments in and receivables due from subsidiaries | 4,671,578 | 3,609,836 | |||||
Other assets | 12,953 | 32,721 | |||||
Total Assets | $ | 4,803,744 | $ | 3,752,396 | |||
Liabilities and Shareholders’ Equity | |||||||
Dividends payable to shareholders | $ | 45,796 | $ | 37,644 | |||
Long-term borrowings | 292,414 | 294,602 | |||||
Junior subordinated debentures issued to capital trusts | 55,718 | 55,370 | |||||
Accrued expenses and other liabilities | 25,628 | 14,326 | |||||
Shareholders’ equity | 4,384,188 | 3,350,454 | |||||
Total Liabilities and Shareholders’ Equity | $ | 4,803,744 | $ | 3,752,396 |
Condensed Statements of Income
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Income | |||||||||||
Dividends from subsidiary | $ | 160,000 | $ | 155,000 | $ | 122,000 | |||||
Income from subsidiary | 4,550 | 4,550 | 4,550 | ||||||||
Gains on securities transactions, net | — | 3 | — | ||||||||
Losses on sales of assets, net | — | (147 | ) | — | |||||||
Other interest and income | 51 | 39 | 135 | ||||||||
Total Income | 164,601 | 159,445 | 126,685 | ||||||||
Total Expenses | 27,998 | 32,269 | 39,621 | ||||||||
Income before income tax and equity in undistributed earnings of subsidiary | 136,603 | 127,176 | 87,064 | ||||||||
Income tax expense (benefit) | 24,524 | (20,547 | ) | (30,179 | ) | ||||||
Income before equity in undistributed earnings of subsidiary | 112,079 | 147,723 | 117,243 | ||||||||
Equity in undistributed earnings of subsidiary | 197,714 | 113,705 | 44,664 | ||||||||
Net Income | 309,793 | 261,428 | 161,907 | ||||||||
Dividends on preferred stock | 12,688 | 12,688 | 9,449 | ||||||||
Net Income Available to Common Shareholders | $ | 297,105 | $ | 248,740 | $ | 152,458 |
2019 Form 10-K | 138 |
Condensed Statements of Cash Flows
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net Income | $ | 309,793 | $ | 261,428 | $ | 161,907 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Equity in undistributed earnings of subsidiary | (197,714 | ) | (113,705 | ) | (44,664 | ) | |||||
Stock-based compensation | 14,726 | 19,472 | 12,204 | ||||||||
Net amortization of premiums and accretion of discounts on borrowings | 124 | 63 | 197 | ||||||||
Gains on securities transactions, net | — | (3 | ) | — | |||||||
Losses on sales of assets, net | — | 147 | — | ||||||||
Net change in: | |||||||||||
Other assets | 19,768 | 9,928 | (89 | ) | |||||||
Accrued expenses and other liabilities | 8,803 | (10,657 | ) | 8,737 | |||||||
Net cash provided by operating activities | 155,500 | 166,673 | 138,292 | ||||||||
Cash flows from investing activities: | |||||||||||
Sales of investment securities available for sale | — | 257 | — | ||||||||
Cash and cash equivalents acquired in acquisitions | 11,947 | 7,915 | — | ||||||||
Capital contributions to subsidiary | — | — | (98,000 | ) | |||||||
Net cash provided by (used in) investing activities | 11,947 | 8,172 | (98,000 | ) | |||||||
Cash flows from financing activities: | |||||||||||
Proceeds from issuance of preferred stock, net | — | — | 98,101 | ||||||||
Dividends paid to preferred shareholders | (12,688 | ) | (15,859 | ) | (6,277 | ) | |||||
Dividends paid to common shareholders | (146,537 | ) | (138,857 | ) | (115,881 | ) | |||||
Purchase of common shares to treasury | (1,805 | ) | (3,801 | ) | (2,644 | ) | |||||
Common stock issued, net | 2,957 | 2,704 | 8,207 | ||||||||
Net cash used in financing activities | (158,073 | ) | (155,813 | ) | (18,494 | ) | |||||
Net change in cash and cash equivalents | 9,374 | 19,032 | 21,798 | ||||||||
Cash and cash equivalents at beginning of year | 109,839 | 90,807 | 69,009 | ||||||||
Cash and cash equivalents at end of year | $ | 119,213 | $ | 109,839 | $ | 90,807 |
BUSINESS SEGMENTS (Note 23)
Valley has four business segments that it monitors and reports on to manage Valley’s business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Valley’s reportable segments have been determined based upon its 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 Valley’s 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.
139 | 2019 Form 10-K |
The consumer lending segment is mainly comprised of residential mortgages and automobile loans, and to a lesser extent, secured personal lines of credit, home equity loans and other consumer loans. The duration of the residential mortgage loan portfolio is subject to movements in the market level of interest rates and forecasted prepayment speeds. The average weighted life of the automobile loans within the portfolio is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management Division, comprised of trust, asset management and insurance services.
The commercial lending segment is mainly 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.
The investment management segment generates a large portion of Valley’s 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 Valley's liquid cash position, interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York), as part of its asset/liability management strategies. The fixed rate investments are among Valley’s assets that are least sensitive 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 Valley’s balance sheet.
The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net gains and losses on securities and net impairment losses not reported in the investment management segment above, interest expense related to subordinated notes, amortization of tax credit investments, as well as infrequent items, such as the loss on extinguishment of debt, gain on sale leaseback transactions and merger expenses.
The following tables represent the financial data for Valley’s four business segments for the years ended December 31, 2019, 2018 and 2017:
Year Ended December 31, 2019 | |||||||||||||||||||
Consumer Lending | Commercial Lending | Investment Management | Corporate and Other Adjustments | Total | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Average interest earning assets (unaudited) | $ | 6,891,462 | $ | 19,343,791 | $ | 4,340,277 | $ | — | $ | 30,575,530 | |||||||||
Interest income | $ | 272,773 | $ | 926,328 | $ | 126,723 | $ | (4,824 | ) | $ | 1,321,000 | ||||||||
Interest expense | 91,798 | 257,670 | 57,815 | 15,669 | 422,952 | ||||||||||||||
Net interest income (loss) | 180,975 | 668,658 | 68,908 | (20,493 | ) | 898,048 | |||||||||||||
Provision for credit losses | 6,688 | 17,530 | — | — | 24,218 | ||||||||||||||
Net interest income (loss) after provision for credit losses | 174,287 | 651,128 | 68,908 | (20,493 | ) | 873,830 | |||||||||||||
Non-interest income | 57,981 | 41,157 | 8,818 | 106,564 | 214,520 | ||||||||||||||
Non-interest expense | 76,046 | 101,924 | 1,034 | 452,551 | 631,555 | ||||||||||||||
Internal expense transfer | 78,743 | 221,113 | 49,670 | (349,526 | ) | — | |||||||||||||
Income (loss) before income taxes | $ | 77,479 | $ | 369,248 | $ | 27,022 | $ | (16,954 | ) | $ | 456,795 | ||||||||
Return on average interest earning assets (pre-tax) (unaudited) | 1.12 | % | 1.91 | % | 0.62 | % | N/A | 1.49 | % |
2019 Form 10-K | 140 |
Year Ended December 31, 2018 | |||||||||||||||||||
Consumer Lending | Commercial Lending | Investment Management | Corporate and Other Adjustments | Total | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Average interest earning assets (unaudited) | $ | 6,197,161 | $ | 17,143,169 | $ | 4,362,581 | $ | — | $ | 27,702,911 | |||||||||
Interest income | $ | 235,264 | $ | 798,974 | $ | 130,971 | $ | (5,961 | ) | $ | 1,159,248 | ||||||||
Interest expense | 64,083 | 177,273 | 45,112 | 15,577 | 302,045 | ||||||||||||||
Net interest income (loss) | 171,181 | 621,701 | 85,859 | (21,538 | ) | 857,203 | |||||||||||||
Provision for credit losses | 5,550 | 26,951 | — | — | 32,501 | ||||||||||||||
Net interest income (loss) after provision for credit losses | 165,631 | 594,750 | 85,859 | (21,538 | ) | 824,702 | |||||||||||||
Non-interest income | 61,280 | 22,275 | 8,691 | 41,806 | 134,052 | ||||||||||||||
Non-interest expense | 92,462 | 95,171 | 1,251 | 440,177 | 629,061 | ||||||||||||||
Internal expense transfer | 77,164 | 213,399 | 54,353 | (344,916 | ) | — | |||||||||||||
Income (loss) before income taxes | $ | 57,285 | $ | 308,455 | $ | 38,946 | $ | (74,993 | ) | $ | 329,693 | ||||||||
Return on average interest earning assets (pre-tax) (unaudited) | 0.92 | % | 1.80 | % | 0.89 | % | N/A | 1.19 | % |
Year Ended December 31, 2017 | |||||||||||||||||||
Consumer Lending | Commercial Lending | Investment Management | Corporate and Other Adjustments | Total | |||||||||||||||
($ in thousands) | |||||||||||||||||||
Average interest earning assets (unaudited) | $ | 5,166,171 | $ | 12,652,832 | $ | 3,669,495 | $ | — | $ | 21,488,498 | |||||||||
Interest income | $ | 182,508 | $ | 552,297 | $ | 107,972 | $ | (8,623 | ) | $ | 834,154 | ||||||||
Interest expense | 39,018 | 95,562 | 27,714 | 11,813 | 174,107 | ||||||||||||||
Net interest income (loss) | 143,490 | 456,735 | 80,258 | (20,436 | ) | 660,047 | |||||||||||||
Provision for credit losses | 3,197 | 6,745 | — | — | 9,942 | ||||||||||||||
Net interest income (loss) after provision for credit losses | 140,293 | 449,990 | 80,258 | (20,436 | ) | 650,105 | |||||||||||||
Non-interest income | 63,375 | 11,414 | 7,745 | 29,172 | 111,706 | ||||||||||||||
Non-interest expense | 72,207 | 71,216 | 1,193 | 364,457 | 509,073 | ||||||||||||||
Internal expense transfer | 68,007 | 166,847 | 48,393 | (283,247 | ) | — | |||||||||||||
Income (loss) before income taxes | $ | 63,454 | $ | 223,341 | $ | 38,417 | $ | (72,474 | ) | $ | 252,738 | ||||||||
Return on average interest earning assets (pre-tax) (unaudited) | 1.23 | % | 1.77 | % | 1.05 | % | N/A | 1.18 | % |
141 | 2019 Form 10-K |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Valley National Bancorp:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Valley National Bancorp and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the allowance for loan losses related to non-PCI loans collectively evaluated for impairment
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for loan losses related to loans collectively evaluated for impairment (general reserve) was $123.2 million of a total allowance for loan losses of $161.8 million as of December 31, 2019. The Company estimates the general reserve by developing loss factors based on historical losses adjusted for qualitative factors, to better estimate incurred losses in the current portfolio.
We identified the assessment of the general reserve as a critical audit matter. The estimation of the general reserve involved significant measurement uncertainty and, as a result, our assessment of the general reserve required complex auditor judgments, and knowledge and experience in the industry in order to evaluate the methodologies, inputs, and assumptions used to estimate the reserve. Inputs and assumptions included (1) the loss factors developed from historical loss experience, and their key factors and assumptions, which included the pooling of loans with similar risk characteristics, the historical look-back period, the loss emergence periods, and credit risk ratings for commercial loans, and (2) the qualitative factor adjustments. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
2019 Form 10-K | 142 |
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the (1) development and approval of the general reserve methodology, (2) determination of key factors and assumptions used to estimate the historical loss factors, and (3) qualitative framework and related factors. We tested the relevance of sources of data and key assumptions related to the look-back period by evaluating (1) the loss data in the look-back period compared to the credit characteristics of the current portfolio and (2) the sufficiency of loss data within the look-back period. We assessed the loss emergence period assumptions by considering the Company’s credit risk policies and testing loss data. We involved credit risk professionals with industry knowledge and experience who assisted in:
• | evaluating the Company’s methodology to estimate the general reserve for compliance with U.S. generally accepted accounting principles, |
• | evaluating the methodology to calculate the loss factors, including key inputs and assumptions, |
• | evaluating the framework used to develop the resulting qualitative factors and the effect of those factors on the general reserve compared with relevant credit risk factors and credit trends, and |
• | testing individual loan risk ratings by evaluating the financial performance of the borrower, underlying collateral, and guarantor support. |
We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the Company’s general reserve.
Assessment of the remaining expected cash flows for purchase credit impaired loans
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company’s purchased credit impaired (PCI) loan portfolio had a carrying value of $6.6 billion at December 31, 2019, and consists primarily of loans acquired in business combinations subsequent to 2011. The PCI loans are aggregated into pools based on common risk characteristics, initially recorded at fair value based on the present value of expected future cash flows, and subsequently accounted for as pools of loans. The undiscounted cash flows expected to be collected (expected cash flows) are estimated by incorporating several key assumptions, including probability of default (PD), loss given default (LGD), and the actual prepayments after the acquisition date. The difference between the expected cash flows at acquisition and the initial carrying value or fair value of the PCI loans, or accretable yield, is recognized as interest income utilizing the level-yield method over the life of each pool. The non-accretable difference, which is neither accreted into income nor recorded on the consolidated balance sheet, reflects estimated future credit losses and uncollectable contractual interest expected to be incurred over the life of the loans.
We identified the assessment of the remaining expected cash flows and the impact to the accretable yield and the non-accretable difference related to PCI loans as a critical audit matter. The estimation of the expected cash flows involved significant measurement uncertainty, and as a result, our assessment required complex auditor judgment and knowledge and experience in the industry in order to evaluate the methodologies, inputs, and assumptions used to estimate the remaining expected cash flows. Inputs and assumptions included (1) the PD and LGD, which include the credit risk ratings for commercial loans, and (2) the prepayment assumptions which are used to estimate future prepayments which impact the overall timing of cash flows. The assessment also included an evaluation of the mathematical accuracy of the estimation of future cash flows and calculation of the accretable yield and non-accretable difference.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the (1) development of the methodology to estimate expected cash flows over the remaining life of the PCI loans, and (2) the determination of key factors and assumptions used to estimate the PD, LGD, and prepayment assumptions. We involved credit risk professionals with specialized industry knowledge and experience who assisted in testing individual credit risk ratings of a selection of commercial loan relationships. We involved valuation professionals with industry knowledge and experience who assisted in:
• | evaluating the Company’s methodology for compliance with U.S. generally accepted accounting principles, |
• | evaluating the key assumptions used by the Company in developing the estimate by comparing them to those used by similar market participants, |
• | recalculating the estimation of expected cash flows based on key inputs and assumptions used by the Company, and |
• | evaluating the Company’s ability to estimate future losses and prepayments by comparing prior period estimates to actual results. |
143 | 2019 Form 10-K |
Assessment of the fair value measurement of the acquired loans in the Oritani Financial Corp. business combination
As discussed in Note 2 to the consolidated financial statements, on December 1, 2019 the Company completed its acquisition of Oritani Financial Corp. (Oritani). The transaction was accounted for as a business combination using the acquisition method of accounting. Accordingly, assets acquired, liabilities assumed, and consideration paid for Oritani were recorded at their fair values at the acquisition date, including the fair value of acquired loans of $3.4 billion. The fair value of acquired loans was based on a discounted cash flow methodology that used a forecast of principal and interest payments based on certain key valuation assumptions including risk ratings on commercial loan relationships, probability of default, loss given default, discount rate, and prepayment rate. The difference between the fair value and the expected cash flows from the acquired loans will be accreted into income over the remaining terms of the loans.
We identified the assessment of the fair value measurement of the acquired loans in the Oritani business combination as a critical audit matter. The fair value estimate involved significant measurement uncertainty and required industry knowledge and experience to evaluate. Specifically, the assessment of the fair value measurement encompassed the evaluation of the fair value methodology and the development of key valuation assumptions. The assessment also included an evaluation of mathematical accuracy of the calculations. Additionally, there was auditor judgment involved in designing and performing audit procedures in order to test the key assumptions utilized to determine the estimate.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s fair value measurement process, including controls related to (1) the development of the methodology to calculate the fair value of the acquired loans, (2) the determination of key inputs and valuation assumptions used by considering their relevance and reliability in the acquired loan fair value estimate, and (3) the calculation of the fair value estimate. We involved credit risk professionals with industry knowledge and experience who assisted in testing individual loan risk ratings for a selection of commercial loan relationships. We involved valuation professionals with industry knowledge and experience who assisted in:
• | evaluating the valuation methodology for compliance with U.S. generally accepted accounting principles, and |
• | developing an independent estimate of the fair value of the acquired loan portfolio using key assumptions used by other market participants and comparing the results to the Company’s fair value estimate. |
Assessment of the carrying value of goodwill in the Investment Management reporting unit
As discussed in Notes 1 and 9 to the consolidated financial statements, the carrying value of the Company’s goodwill balance related to the Investment Management reporting unit is $220.1 million of a total goodwill balance of $1.4 billion as of December 31, 2019. The Company’s goodwill is not amortized but is subject to annual tests for impairment, or more often, if events or circumstances indicate it may be impaired. The impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is determined using market multiples and discounted cash flow analyses. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional step must be performed. The additional step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value and the loss establishes a new basis in the goodwill.
We identified the goodwill impairment assessment of the Investment Management reporting unit as a critical audit matter. The principal considerations for this determination was the degree of auditor judgment in performing procedures over the key assumptions, which include the discount rate and long term growth rate used in the discounted cash flow analyses. In addition, auditor judgment was required to evaluate the overall fair value of the Investment Management reporting unit which incorporated discounted cash flow analyses and a market multiples approach.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s goodwill impairment process, including controls related to the key assumptions used in the discounted cash flow analyses and the application of the market multiples approach. We involved valuation professionals with specialized skill and knowledge, who assisted in:
• | evaluating the Company’s fair value methodology for the Investment Management reporting unit, |
• | evaluating the Company’s long term growth rate and discount rate by comparing the inputs to the development of the assumptions to publicly available data, |
• | assessing the Company’s market multiples by comparing them to market multiples of comparable companies in the banking industry, |
• | reconciling the Company’s estimated fair value to its market capitalization as of the measurement date, and |
2019 Form 10-K | 144 |
• | assessing the results of the impairment analysis considering the discounted cash flow analyses and the market multiples approach. |
/s/ KPMG LLP
We have served as the Company’s auditor since 2008.
Short Hills, New Jersey
March 10, 2020
145 | 2019 Form 10-K |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Valley maintains disclosure controls and procedures which, consistent with Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, are defined to mean controls and other procedures that are designed to ensure that information required to be disclosed in the reports that Valley files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is accumulated and communicated to Valley’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Valley’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Valley’s disclosure controls and procedures. Based on such evaluation, Valley’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of December 31, 2019 (the end of the period covered by this Annual Report on Form 10-K).
Valley’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A system of internal control, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the system of internal control are met. The design of a system of internal control reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Valley have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of a simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of internal control is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over 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.
Management’s Report on Internal Control over Financial Reporting
Valley’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Valley’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2019, management assessed the effectiveness of Valley’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Management’s assessment included an evaluation of the design of Valley’s internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee.
Based on this assessment, management determined that, as of December 31, 2019, Valley’s internal control over financial
2019 Form 10-K | 146 |
reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
KPMG LLP, the independent registered public accounting firm that audited Valley’s December 31, 2019 consolidated financial statements included in this Annual Report on Form 10-K, has issued an audit report expressing an opinion on the effectiveness of Valley’s internal control over financial reporting as of December 31, 2019. The report is included in this item under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control over Financial Reporting
There have been no changes in Valley’s internal control over financial reporting during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting.
147 | 2019 Form 10-K |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board Directors
Valley National Bancorp:
Opinion on Internal Control Over Financial Reporting
We have audited Valley National Bancorp and subsidiaries (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 10, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws, the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Short Hills, New Jersey
March 10, 2020
2019 Form 10-K | 148 |
Item 9B. | Other Information |
Not applicable.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Certain information regarding executive officers is included under the section captioned “ Information about our Executive Officers” in Item 1 of this Annual Report on Form 10-K. The information set forth under the captions “Director Information” and “Corporate Governance” in the 2020 Proxy Statement is incorporated herein by reference.
Item 11. | Executive Compensation |
The information set forth under the captions “Director Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Executive Compensation” in the 2020 Proxy Statement is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
The information set forth under the captions “Equity Compensation Plan Information” and “Stock Ownership of Management and Principal Shareholders” in the 2020 Proxy Statement is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information set forth under the captions “Compensation Committee Interlocks and Insider Participation”, “Certain Transactions with Management” and “Corporate Governance” in the 2020 Proxy Statement is incorporated herein by reference.
Item 14. | Principal Accountant Fees and Services |
The information set forth under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in the 2020 Proxy Statement is incorporated herein by reference.
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a) | Financial Statements and Schedules: |
The following financial statements and supplementary data are filed as part of this annual report:
Page | |
Consolidated Statements of Financial Condition | |
Consolidated Statements of Income | |
Consolidated Statements of Comprehensive Income | |
Consolidated Statements of Changes in Shareholders’ Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm |
All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
149 | 2019 Form 10-K |
(b) | Exhibits (numbered in accordance with Item 601 of Regulation S-K): |
(3) | Articles of Incorporation and By-laws: |
(4) | Instruments Defining the Rights of Security Holders: |
(10) | Material Contracts: |
2019 Form 10-K | 150 |
151 | 2019 Form 10-K |
2019 Form 10-K | 152 |
(21) | List of Subsidiaries as of December 31, 2019: |
Name | Jurisdiction of Incorporation | Percentage of Voting Securities Owned by the Parent Directly or Indirectly | ||||
(a) | Subsidiaries of Valley: | |||||
Valley National Bank | United States | 100% | ||||
Aliant Statutory Trust II | Delaware | 100% | ||||
GCB Capital Trust III | Delaware | 100% | ||||
State Bancorp Capital Trust I | Delaware | 100% | ||||
State Bancorp Capital Trust II | Delaware | 100% | ||||
(b) | Subsidiaries of Valley National Bank: | |||||
Hallmark Capital Management, Inc. | New Jersey | 100% | ||||
Highland Capital Corp. | New Jersey | 100% | ||||
Masters Coverage Corp. | New York | 100% | ||||
Metro Title and Settlement Agency, Inc. | New York | 100% | ||||
Valley Commercial Capital, LLC | New Jersey | 100% | ||||
Valley Securities Holdings, LLC | New York | 100% | ||||
VNB New York, LLC | New York | 100% | ||||
(c) | Subsidiaries of Masters Coverage Corp.: | |||||
Life Line Planning, Inc. | New York | 100% | ||||
RISC One, Inc. | New York | 100% | ||||
(d) | Subsidiaries of Valley Securities Holdings, LLC: | |||||
SAR II, Inc. | New Jersey | 100% | ||||
Shrewsbury Capital Corporation | New Jersey | 100% | ||||
Valley Investments, Inc. | New Jersey | 100% | ||||
Oritani Investment Corp. | New Jersey | 100% | ||||
(e) | Subsidiary of Oritani Investment Corp.: | |||||
Oritani Asset Corp. | New Jersey | 100% | ||||
(f) | Subsidiary of SAR II, Inc.: | |||||
VNB Realty, Inc. | New Jersey | 100% | ||||
(g) | Subsidiary of VNB Realty, Inc.: | |||||
VNB Capital Corp. | New York | 100% |
(23) |
(24) |
(31.1) |
(31.2) |
(32) |
(101) | Interactive Data File (XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) * |
(104) | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
* | Filed herewith. |
+ | Management contract and compensatory plan or arrangement. |
153 | 2019 Form 10-K |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||
By: | /s/ IRA ROBBINS | |
Ira Robbins, Chairman of the Board, President and Chief Executive Officer | ||
By: | /s/ MICHAEL D. HAGEDORN | |
Michael D. Hagedorn, Senior Executive Vice President and Chief Financial Officer |
Dated: March 10, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated:
Signature | Title | Date | ||
/S/ IRA ROBBINS | Chairman of the Board, President and Chief Executive Officer and Director (Principal Executive Officer) | March 10, 2020 | ||
Ira Robbins | ||||
/S/ MICHAEL D. HAGEDORN | Senior Executive Vice President, Chief Financial Officer (Principal Financial Officer) | March 10, 2020 | ||
Michael D. Hagedorn | ||||
/S/ MITCHELL L. CRANDELL | Executive Vice President and Chief Accounting Officer (Principal Accounting Officer) | March 10, 2020 | ||
Mitchell L. Crandell | ||||
ANDREW B. ABRAMSON* | Director | March 10, 2020 | ||
Andrew B. Abramson | ||||
PETER J. BAUM* | Director | March 10, 2020 | ||
Peter J. Baum | ||||
ERIC P. EDELSTEIN* | Director | March 10, 2020 | ||
Eric P. Edelstein | ||||
GRAHAM O. JONES* | Director | March 10, 2020 | ||
Graham O. Jones | ||||
MICHAEL L. LARUSSO* | Director | March 10, 2020 | ||
Michael L. LaRusso | ||||
MARC J. LENNER* | Director | March 10, 2020 | ||
Marc J. Lenner | ||||
KEVIN J. LYNCH* | Director | March 10, 2020 | ||
Kevin J. Lynch | ||||
PETER V. MAIO* | Director | March 10, 2020 | ||
Peter V. Maio | ||||
SURESH L. SANI* | Director | March 10, 2020 | ||
Suresh L. Sani |
2019 Form 10-K | 154 |
Signature | Title | Date | ||
LISA J. SCHULTZ* | Director | March 10, 2020 | ||
Lisa J. Schultz | ||||
JENNIFER W. STEANS* | Director | March 10, 2020 | ||
Jennifer W. Steans | ||||
JEFFREY S. WILKS* | Director | March 10, 2020 | ||
Jeffrey S. Wilks |
* |
By: /s/ MICHAEL D. HAGEDORN | March 10, 2020 | |||
Michael D. Hagedorn, attorney-in fact |
155 | 2019 Form 10-K |