Valley National Bancorp
Annual Report 2018

Plain-text annual report

Annual Report 2018 Valley National Bancorp Form 10-K & Proxy Statement 1455 Valley Road • Wayne, NJ 07470 Our Mission To give people and businesses the power to succeed. Ira Robbins President & CEO Letter to Our Shareholders Dear shareholders, customers, and employees: 2018 marked the 91st year in Valley’s proud history. Last year we laid out several important themes that revolved around improving our relevance. This focus was designed to improve upon the rich traditions of the Bank, while enhancing the future trajectory of shareholder returns. We have made great strides towards improving efficiency, growth, and core profitability, all while sculpting a culture that enhances accountability and empowers our customers and employees. We are proud to share our progress with you and tell you about how we continue to shape a great future for all stakeholders. Valley has always maintained a reputation for strong ethics, conservative lending practices and superior customer service. However, our company is much more than that. We are community members and business leaders driven to help people and businesses be successful. In 2018, we defined a new mission statement around this purpose—to give people and businesses the power to succeed. 03 On January 1, 2018, we closed the largest merger in Valley’s history, acquiring USAmeriBank, expanding our footprint in Florida and, for the first time, into Alabama. We advanced numerous projects within our technology roadmap, creating more intuitive customer experiences and enhancing the ability of our associates to serve our customers. We also launched a branch transformation initiative that will redefine the retail banking experience, while unveiling our new branding, designed to reflect our progress and direction forward. We’ve been busy, but we’re just getting started. Diluted Earnings Per Share Reported 21% CAGR* $0.75 $0.63 $0.58 2016 2017 2018 Return on Average Assets Reported 0.86% 0.76% 0.69% 2016 2017 2018 Efficiency Ratio Reported 66.00% 65.96% 63.46% 1.00% 0.95% 0.90% 0.85% 0.80% 0.75% 0.70% 0.65% 0.60% 0.55% 0.50% 1.00% 0.95% 0.90% 0.85% 0.80% 0.75% 0.70% 0.65% 0.60% 0.55% 0.50% 70.0% 68.0% 66.0% 64.0% 62.0% 60.0% 58.0% 56.0% 54.0% 2016 2017 2018 *Compounded annual growth rate based on diluted earnings per share Financial achievements For the full year 2018, we reported net income of $261.4 million and $0.75 per diluted share as compared to $161.9 million and $0.58, respectively, in 2017. We made solid progress toward achieving our strategic goals over the past year. The actions we have taken are expected to provide shareholder value over the long-term and we are already seeing the results. In 2018, we achieved year-over-year reported diluted earnings per share growth of 29%. We reported record loan growth of 13.4% for the full year—far outpacing the industry and our stated goals of 8 to 10%, net of loan sales. This growth was achieved via the same stringent credit standards that have long been a hallmark of Valley. Product expansion, strong organic growth from newly acquired markets, and additions to our lending staff drove the impressive results. The return on average assets increased to 0.86% up from 0.69% in the prior year. Driving our returns higher remains a top priority and is achievable through a combination of higher operating leverage and smarter expense allocation. This coincides with our focus on improving efficiency across the entire company. In 2018, our reported efficiency ratio declined to 63.46%, down 2.50% from the prior year. Many of these metrics are even more impressive when we take into consideration several infrequent items highlighted in our Form 10-K and the reinvestment for the future that occurred over the course of 2018. 2018 Taking technology to the next level We spent a lot of time over the past few years examining the typical customer experience and how technology can help redefine interaction with our customers. We built an enterprise-wide data hub that is allowing us to harness analytics in a meaningful way and empower our associates to deliver the customized solutions our customers need. To complement these efforts, we’ve made significant upgrades to our digital loan application platforms and streamlined credit approval processes so our customers can get the funding they need sooner to grow their business, purchase a home or plan for their future. In January, we launched the new Valley.com. Our new website has an intuitive design that reflects our commitment to innovation and allows our customers to easily access their accounts, find relevant content and insight, and conduct banking on their terms. In tandem with our new website, we introduced new mobile banking capabilities (including biometric authorization and mobile wallet), migrated to a new commercial treasury solutions platform and launched a new online residential mortgage platform—all to provide a simpler and more convenient omni-channel experience. Redefining the traditional branch experience In 2018, we embarked on Branch Transformation—a strategy to overhaul our retail network and be responsive to the evolving demands of customer behavior. This multi-year effort is focused on improving the sales and advisory expertise within our retail branch network, combined with improving aesthetics, function, and performance of the branches. Through Branch Transformation, we’ve identified many branches within New Jersey and New York that did not meet certain internal performance measures. While some of the identified branches have or will be consolidated as a result, the majority have been given customized strategies to improve performance and will be monitored for progress. In addition to creating efficiencies, Branch Transformation is about improving the service and experience we provide to our customers. One of the major changes we’re making is the transition from traditional tellers and platform roles to Universal Bankers—elite banking professionals who can serve a wide array of customer needs. Finally, along with sculpting the footprint of branches, improving performance, and elevating staff expertise, comes aesthetic changes. Over the coming months and years, there will be many physical upgrades to Valley branches, reflective of our vision for creating an enhanced customer experience. Branch Transformation is essential to our long-term relevancy by providing an enhanced digital and in-branch banking experience while simultaneously improving productivity and operating efficiencies. New branding. New exchange. New era. As customer preferences and industry trends continue to revolutionize the business of banking, we felt a need to refresh our brand to show that we’re committed to staying ahead of the curve while still honoring our 91-year legacy. Our new logo signifies our commitment to innovation and forward-thinking solutions, while paying homage to our heritage of authenticity, high ethics, and dedication to our customers and communities. 2018 marked another noteworthy change, moving Valley’s common stock listing to the Nasdaq Global Select Market from the New York Stock Exchange. The Nasdaq trading platform and marketing initiatives offer Valley the most cost-effective listing option and are aligned with our goals to enhance operating efficiencies. Furthermore, the Nasdaq brand is one that evokes energy and innovation, much like the culture we’re fostering at Valley today. 05 Building a diverse, talented and unified corporate culture Valley’s transformation truly comes from within our culture. We’re moving to become “one Valley” — a collaborative organization focused on living up to our mission. As such, we’re making all the necessary changes to drive a culture that puts the customer and our local communities first. The vision for our organization is to be a local bank that’s committed to the success of every person, business and community we serve. That last component is so important —community success. We believe that if our communities don’t succeed, we don’t either. Through our Corporate Social Responsibility initiatives and our Community Impact work, we’re engaging and supporting causes important to our associates. We’re also giving our associates the power to do more by instilling a Volunteer Time Off policy and encouraging them to get more involved in their communities. When our associates know that their company is supporting them and united around a common purpose of helping our communities succeed, it creates a more proactive and productive workforce. s r e d l o h e r a h S r u O o t r e t t e L We’re cultivating a culture that encourages performance and accountability throughout the organization. Accordingly, in 2018, we materially increased the component of compensation tied to relative stock performance for every single executive. We also tied greater levels of incentive to performance for all lending and deposit-gathering employees and continue to make VLY shares a greater portion of overall compensation. We believe driving increased ownership across a greater employee base is in the best interest for every Valley stakeholder over the long term. The greater good of community banks Community banks serve a vital role as contributors to the nation’s economic resilience. Their strength and stability have an incalculable impact on millions of lives. For us, being a community bank is about more than just business opportunities and opening branches on every Main Street. It’s about embracing our role as an advocate for our communities’ success. Our vision is to make a lasting and sustainable impact on our communities. We are proud of developing stronger relationships with organizations like Habitat for Humanity, Big Brothers Big Sisters, the Boys & Girls Club, and many others in 2018. Helping business owners grow their businesses is another way that we support the growth of stronger communities. Small businesses are the backbone of our economy and the key drivers of community growth. And while we continue to serve larger business customers, we’re remaining committed to providing more opportunities to small businesses throughout our footprint by expanding our SBA program into New York and New Jersey in 2019. Being socially responsible isn’t just a “check the box” exercise for us, it’s about deepening our relationships with the communities we serve. We do this by knowing our communities and their needs, and being responsible, reliable and supportive. Ultimately, prosperity within the markets we serve translates to greater success for our Company. A new vision for our future We’re excited about our organization and the direction we’re headed. Improving on the foundation of our company will position the Bank to be more successful for years to come. As we move forward, we’re focused on acquiring new customers and deepening core deposit relationships. We’ll do this by engaging our customers and providing high-touch, personal service to fulfill the entire spectrum of their financial needs. This approach to relationship banking will strengthen loyalty by improving the customer experience and providing a wide range of convenient and innovative services. As we look ahead, we believe Valley will operate more efficiently and continue to enhance earnings. We believe Valley will represent a better experience for all our customers. And we believe Valley will continue to be a driving force that helps our customers and communities succeed. Your investment in Valley has enabled us to thrive for more than 90 years. Thank you for your continued trust and support. Ira Robbins President & CEO 07 Our Executive Management Team Joseph V. Chillura Executive Vice President Regional President of Commercial Banking for Florida & Alabama Kevin Chittenden Executive Vice President Chief Residential Lending Officer Mark Fernandez Executive Vice President Chief Marketing Officer 09 Bernadette M. Mueller Executive Vice President Corporate Social Responsibility - CRA Mark Saeger Executive Vice President Chief Credit Officer Melissa F. Scofield Executive Vice President Chief Risk Officer Yvonne Surowiec Executive Vice President Chief Human Resources Officer Alan D. Eskow Senior Executive Vice President Chief Financial Officer & Secretary Dianne M. Grenz Senior Executive Vice President Chief Consumer Banking Officer Thomas A. Iadanza Senior Executive Vice President Chief Banking Officer Ronald H. Janis Senior Executive Vice President General Counsel Robert J. Bardusch Senior Executive Vice President Chief Operating Officer Morris Habitat for Humanity Blitz Build We were honored to be the lead sponsor of Morris Habitat for Humanity’s 10-day Blitz in Mine Hill, New Jersey. Our donation covered the complete construction of one of three homes. Over 125 Valley associates and interns worked at the build site over the 10-day period to help three deserving families realize their dream of homeownership. in community development loans in community development investments participated in community development services, volunteer activities & board roles community development events in total charitable giving Our Commitment to Community Our dedication to the communities we serve remains at the forefront of everything we do. At Valley, we embrace our role as an advocate for our communities’ success. We do this by knowing the local communities and being responsible, reliable and supportive. We’re proud of the progress we made in 2018, and we continue to build a brighter future by investing our time, contributing resources and sharing our passion for making a positive impact on society. $384MILLION$187MILLION2,616EMPLOYEES3,880$2.3MILLIONCOMMUNITY FOODBANK OF NJ Valley Gives Thanks Valley Gives Thanks was a bank-wide employee volunteer campaign throughout the month of November. Employees gave back to our local communities by volunteering at local food banks and soup kitchens. We logged over 300+ hours of volunteerism across our footprint at numerous organizations. Community FoodBank of New Jersey We supported the Community FoodBank of New Jersey, the state’s largest anti-hunger and anti-poverty organization, serving 16 counties throughout the state. Our donation will help fund the FoodBank’s Food Service Training Academy, a free, 15-week culinary, life-skills and internship program that provides low-income individuals marketable job skills that can lead to a living wage. VALLEY GIVES THANKS MENTAL HEALTH CLINIC OF PASSAIC BOYS AND GIRLS CLUB PROSPECT PARK SCHOOL BOYS AND GIRLS CLUBS OF CLIFTON, PATERSON AND PASSAIC CORNERSTONE SCHOOLS BIRMINGHAM ST. PETER CLAVER TAMPA BOYS AND GIRLS CLUB PROSPECT PARK SCHOOL Pop Up Moments We reinforced our commitment to the community by hosting Pop Up Moments—events designed to randomly surprise individuals and groups who make a positive difference in the local community. 15 ST. JOSEPH’S HOSPITAL PEDIATRIC ONCOLOGY ST. JOSEPH’S HOSPITAL PEDIATRIC ONCOLOGY VALLEY FOR VETERANS Valley Goes Pink In honor of breast cancer awareness month, we hosted our 10th annual Valley Goes Pink! Cancer Walk on Saturday, October 13th in Wayne, New Jersey. 100% of the donations raised benefited the Cure Breast Cancer Foundation (CBCF) to support Dr. Larry Norton and colleagues at the world-renowned Memorial Sloan-Kettering Cancer Center and other national and international research facilities. Over the last 10 years, we’ve raised nearly $1 million to help CBCF get closer to achieving its mission of finding a cure for breast cancer. Valley for Veterans We partnered with the University of South Florida’s (USF) football program to deliver scholarships to first-generation USF students who are also U.S. military veterans. Scholarship funds from the “Valley for Veterans” program were matched two-to-one by the state of Florida and the USF Foundation’s First-Generation Matching Grant program. VALLEY GOES PINK! Shareholder Relations Corporate Headquarters Valley National Bancorp 1455 Valley Road Wayne, New Jersey 07470 (973) 305-8800 Form 10-K You may obtain a copy of Valley National Bancorp’s 2018 Annual Report on Form 10-K by submitting a request in writing to: Tina Zarkadas Assistant Vice President Shareholder Relations Specialist Valley National Bank 1455 Valley Road Wayne, New Jersey 07470 tzarkadas@valley.com Shareholder Inquiries, Dividend Reinvestment Plan, and Registrar and Transfer Agent For information regarding shareholder accounts of common stock or Valley’s Dividend Reinvestment Plan, please contact the Registrar and Transfer Agent or Valley National Bancorp: American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, New York 11219 Attn: Shareholder Relations Dept. (877) 681-8028 Dividend Reinvestment Plan (800) 278-4353 Valley National Bancorp Shareholder Relations Dept. Attn: Tina Zarkadas (800) 522-4100, extension 3380 (973) 305-3380 Financial Information Stock Listing Investors, security analysts and others seeking financial information should submit a request in writing to: Valley National Bancorp common stock is traded on the Nasdaq under the symbol VLY. Rick Kraemer First Senior Vice President, Investor Relations Officer Valley National Bancorp 1455 Valley Road Wayne, New Jersey 07470 rkraemer@valley.com Annual Meeting April 17, 2019 9:00 am Valley National Bancorp 100 Furler Street Totowa, New Jersey 07512 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, 2018 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 (State or other jurisdiction of Incorporation or Organization) 1455 Valley Road Wayne, NJ (Address of principal executive office) 22-2477875 (I.R.S. Employer Identification Number) 07470 (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 Common Stock, no par value Non-Cumulative Perpetual Preferred Stock, Series A, no par value Non-Cumulative Perpetual Preferred Stock, Series B, no par value Name of exchange on which registered The Nasdaq Stock Market LLC The Nasdaq Stock Market LLC 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Non-accelerated filer Accelerated filer Smaller reporting company 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 $3.9 billion on June 30, 2018. There were 331,983,842 shares of Common Stock outstanding at February 26, 2019. Documents incorporated by reference: Certain portions of the registrant’s Definitive Proxy Statement (the “2019 Proxy Statement”) for the 2019 Annual Meeting of Shareholders to be held April 17, 2019 will be incorporated by reference in Part III. The 2019 Proxy Statement will be filed within 120 days of December 31, 2018. PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. TABLE OF CONTENTS Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data: Valley National Bancorp and Subsidiaries: 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 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Item 9B. Controls and Procedures Other Information PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Form 10-K Summary Signatures Page 3 17 25 26 26 27 29 31 68 69 69 70 71 72 73 75 140 141 141 144 144 144 144 144 144 144 148 149 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, 2018, Valley had consolidated total assets of $31.9 billion, total net loans of $24.9 billion, total deposits of $24.5 billion and total shareholders’ equity of $3.4 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, 2018 through which trust preferred securities were issued. These trusts are not consolidated subsidiaries. See Note 11 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 220 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 commercial, retail, insurance and wealth management financial services products. The Bank also 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. 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 Securities and Exchange Commission (SEC); title insurance agencies in New York with 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. 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 own. 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. 3 2018 Form 10-K 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. 1st United Bancorp, Inc. On November 1, 2014, Valley acquired 1st United Bancorp, Inc. (1st United) and its wholly- owned subsidiary, 1st United Bank, a commercial bank with approximately $1.7 billion in assets, $1.2 billion in loans, and $1.4 billion in deposits, after purchase accounting adjustments. The 1st United acquisition gave Valley its first Florida branch network consisting of 20 branch offices covering some of the most attractive urban banking markets in Florida, including locations throughout southeast Florida, the Treasure Coast, central Florida and central Gulf Coast regions. The common shareholders of 1st United received 0.89 of a share of Valley common stock for each 1st United share they owned prior to the merger. The total consideration for the acquisition was approximately $300 million, consisting of 30.7 million shares of Valley common stock and $8.9 million of cash consideration paid to 1st United stock option holders. In connection with the 1st United acquisition, we acquired loans and other real estate owned subject to Federal Deposit Insurance Corporation (FDIC) loss-share agreements (referred to as “covered loans” and “covered OREO”, together “covered assets”). The FDIC loss-share agreements relate to three previous FDIC-assisted acquisitions completed by 1st United from 2009 to 2011. The Bank shares losses on covered assets in accordance with provisions of each loss-share agreement. The vast majority of Valley's covered loans totaling $27.6 million, or 0.1 percent of total loans, at December 31, 2018 are covered by residential mortgage related loan loss sharing agreements acquired from 1st United that will expire between 2019 and 2021. 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 22 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 $4.3 billion and represented 17.3 percent of the total loan portfolio at December 31, 2018. We make commercial loans to small and middle market businesses most often located in the New Jersey and New York area, as well as Florida. Loans originated from Florida accounted for approximately 28 percent of total commercial and industrial loans at December 31, 2018 as compared to 14 percent of such loans at December 31, 2017. 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 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. 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 $580.5 million at December 31, 2018. In addition, we provide financing to the medical equipment leasing market through our leasing subsidiary, Highland Capital Corp. The commercial portfolio also includes approximately $121.8 million and $8.4 million of New York City and Chicago taxi medallion loans at December 31, 2018, respectively, which we continue to closely monitor due to the weakness exhibited in the 2018 Form 10-K 4 taxi industry caused by strong competition from alternative ride-sharing services. At December 31, 2018, the medallion portfolio included impaired loans totaling $73.7 million with related reserves of $27.9 million within the allowance for loan losses. While most of the taxi medallion loans within the portfolio at December 31, 2018 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 $13.9 billion and represented 55.5 percent of the total loan portfolio at December 31, 2018. We originate commercial real estate loans that are largely secured by multi-unit residential property and non-owner occupied commercial, industrial, and retail property within New Jersey, New York, Pennsylvania and Florida. Loans originated from Florida lending represented 28 percent of the total commercial real estate loans at December 31, 2018 as compared to 13 percent of such loans at December 31, 2017. 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 $1.5 billion at December 31, 2018 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. Consumer Lending Segment Residential mortgage loans. Residential mortgage loans totaled $4.1 billion and represented 16.4 percent of the total loan portfolio at December 31, 2018. 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 $898 million and $218 million at December 31, 2018 and 2017, 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 $75.4 million (or 1.8 percent of the total residential mortgage loan portfolio) at December 31, 2018. The 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. 5 2018 Form 10-K Other consumer loans. Other consumer loans totaled $2.7 billion and represented 10.8 percent of the total loan portfolio at December 31, 2018. 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 $154 million and $106 million of auto loans in 2018 and 2017, respectively, while the auto loans originated from Alabama were not material 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 $58.1 million, including $10.4 million of credit card loans, at December 31, 2018. Wealth Management. Our Wealth Management and Insurance Services Division provides coordinated and integrated delivery of investment management advisory, 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, 2018, our total investment securities and interest bearing deposits with banks were $3.8 billion and $177.1 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, 2018 and 2017, approximately 74 percent of Valley’s gross loans totaling $25.0 billion and $18.3 billion, respectively, consisted of commercial real estate (including construction loans), residential mortgage, and home equity loans. The remaining 26 percent at both December 31, 2018 and 2017 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 recent 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 our MD&A in this report for further discussion of our loan composition and concentration risks. 2018 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, 2018. New Jersey New York Florida Pennsylvania California Connecticut Other Total Percentage of Loan Portfolio Segment: Commercial and Industrial Commercial Real Estate Residential Consumer % of Total Loans 32% 27 28 1 1 1 10 100% 31% 34 28 1 1 * 5 100% 44% 24 19 2 6 1 4 100% 37% 29 15 9 1 2 7 100% 34% 31 25 2 2 1 5 100% * 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 effective 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 regularly briefed on information and cyber security matters, preparedness and any incidents requiring a response. 7 2018 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. 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, 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 or the physical aspects of the property which may negatively impact the collectability of our loan. In general, the period of time 2018 Form 10-K 8 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’s historic and current policy 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, as well as other asset/ liability management strategies. 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. Purchased commercial loans (including commercial and industrial and commercial real estate loans), and residential mortgage loans totaled approximately $1.5 billion and $1.1 billion, respectively, at December 31, 2018 representing 8.74 percent, and 25.74 percent of our total commercial and residential mortgage loans, respectively. At December 31, 2018, the commercial real estate loans originated by third parties had loans past due 30 days or more totaling 1.37 percent as compared to 0.20 percent for our total commercial real estate portfolio, including all delinquencies. 9 2018 Form 10-K Residential mortgage loans originated by third parties had loans past due 30 days or more totaling 1.64 percent of these loans at December 31, 2018 as compared to 0.49 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 Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 18th in competitive ranking and market share based on the deposits reported by 201 FDIC-insured financial institutions in the New York, Northern New Jersey and Long Island deposit markets as of June 30, 2018. The FDIC also ranked Valley 7th, 39th, 23rd, and 15th in the states of New Jersey, New York, Florida, and Alabama, respectively, based on deposit market share as of June 30, 2018. 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. 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 220 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, 2018, Valley National Bank and its subsidiaries employed 3,192 full-time equivalent persons. Management considers relations with its employees to be satisfactory. 2018 Form 10-K 10 Executive Officers Name Ira Robbins Alan D. Eskow Dianne M. Grenz Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch Kevin Chittenden Bernadette M. Mueller Melissa F. Scofield Yvonne M. Surowiec Mark Saeger Eugene M. Fernandez Mitchell L. Crandell Age at December 31, 2018 44 Executive Officer Since 2009 70 56 60 70 53 54 60 59 58 54 55 48 1993 2014 2015 2017 2016 2016 2009 2015 2017 2018 2018 2007 Office President and Chief Executive Officer of Valley and Valley National Bank Senior Executive Vice President, Chief Financial Officer and Corporate Secretary of Valley and Valley National Bank Senior Executive Vice President of Valley and Chief Consumer Banking Officer of Valley National Bank Senior Executive Vice President of Valley and Chief Lending Officer of Valley National Bank Senior Executive Vice President and General Counsel of Valley and Valley National Bank Senior Executive Vice President of Valley and Chief Operating Officer of Valley National Bank Executive Vice President of Valley and Chief Residential Lending Officer of Valley National Bank Executive Vice President of Valley and Community Reinvestment Act Officer of Valley National Bank Executive Vice President of Valley and Chief Risk Officer of Valley National Bank Executive Vice President of Valley and Chief Human Resources Officer of Valley National Bank Executive Vice President of Valley and Chief Credit Officer of Valley National Bank Executive Vice President of Valley and Chief Marketing Officer of Valley National Bank First Senior Vice President, Chief Accounting Officer of Valley and Valley National Bank All officers serve at the pleasure of the Board of Directors. Available Information 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 the 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. 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 11 2018 Form 10-K 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 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. To qualify to engage in financial activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.” The financial holding company of a national bank will be put under directives to raise its capital levels or divest its activities if the depository institution falls from that level. In July 2013, the FRB and the OCC published final rules establishing a new comprehensive capital framework for U.S. banking organizations, referred to herein 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 maintain a 2.5 percent “capital conservation buffer”, composed entirely of CET1, 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. As of January 1, 2019, we and the Bank maintained the required capital conservation buffer of 2.5 percent. Basel III provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in common equity issued by nonconsolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10 percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1. The deductions and other adjustments to CET1 were previously scheduled to be phased in incrementally between January 1, 2015 and January 1, 2018. In November 2017, banking regulators announced that the phase in of certain of these adjustments for non-advanced approaches banking organizations such as Valley was frozen. 2018 Form 10-K 12 Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including Valley and Valley National Bank, were permitted to make a one-time permanent election to continue to exclude these items effective as of January 1, 2015. We made this one-time election in the applicable bank regulatory reports as of March 31, 2015. Basel III, with respect to us, required that our trust preferred securities be eliminated from Tier 1 capital by January 1, 2016. Accordingly, none of Valley’s trust preferred securities were included in Tier 1 capital during 2018 and 2017. With respect to Valley National Bank, Basel III also revised the “prompt corrective action” regulations pursuant to Section 38 of the FDICIA, by (i) introducing a CET1 ratio requirement at each capital quality level (other than critically undercapitalized); (ii) increasing the 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. Basel III prescribes a standardized approach for calculating risk-weighted assets. 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, 2018 under the “prompt corrective action” regulations in effect as of such date. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 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 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 Federal Reserve 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 Federal Reserve. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product. As 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) subject to certain limited exceptions. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading and prohibits the use of some hedging strategies. We identified no investments held as of December 31, 2018 that meet the definition of Covered Funds. Regulators are currently considering modifying certain aspects of the Volcker Rule. 13 2018 Form 10-K 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. The Federal Reserve will review, 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. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. 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 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. 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 “satisfactory” CRA rating in its most recent examination. The OCC approvals of the most recent acquisitions of USAB and CNL in January 2018 and December 2015, respectively, were unconditional, however, the OCC will continue to monitor the Bank's progress with the CRA plan, and any necessary enhancements based upon new markets or otherwise, through its normal supervisory reviews. Valley National Bank's CRA plan is available for review on its website at www.valley.com. A bank which does not have a CRA program that is deemed satisfactory by its regulator will be prevented from making acquisitions. 2018 Form 10-K 14 Corporate Governance The Sarbanes-Oxley Act of 2002 added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting, to increase corporate responsibility and to protect investors. Among other things, the Sarbanes- Oxley Act of 2002: • • • • • required our management to evaluate our disclosure controls and procedures and our internal control over financial reporting, and required our auditors to issue a report on our internal control over financial reporting; imposed on our chief executive officer and chief financial officer additional responsibilities with respect to our external financial statements, including certification of financial statements within the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q by the chief executive officer and the chief financial officer; established independence requirements for audit committee members and outside auditors; created the Public Company Accounting Oversight Board which oversees public accounting firms; and increased various criminal penalties for violations of securities laws. NASDAQ, where Valley common stock is listed, has corporate governance listing standards, including rules strengthening director independence requirements for boards, as well as the audit committee and the compensation committee, and requiring the adoption of charters for the compensation and audit committees. 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. 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 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 15 2018 Form 10-K 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. 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 few years. Although the full impact of a transition, including the potential or actual discontinuance of LIBOR publication, remains unclear, 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 may also require 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 and some residential loans are based upon LIBOR. The Bank is working on replacement language where necessary. 2018 Form 10-K 16 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. 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 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 at 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. While the economy and real estate market conditions have significantly improved in recent years, a return to a recessionary economy could result in financial stress on our borrowers that would adversely affect our financial condition and results of operations. Financial institutions can be affected by changing conditions in the real estate and financial markets. 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 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 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. Due diligence review is performed both prior to the initial investment and on an ongoing 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 managed by DC Solar and its affiliates (DC Solar). For reasons that were not known to us, DC Solar had its assets frozen in December 2018. DC Solar filed for Chapter 11 bankruptcy protection in February 2019. In February 2019, an affidavit from a Federal Bureau of Investigation (FBI) special agent stated that DC Solar was operating a fraudulent "Ponzi-like scheme" and that the majority of mobile solar generators sold to investors and managed by DC Solar and the majority of the related lease revenues claimed to have been received by DC Solar may not have existed. Certain investors in DC Solar, including us, received tax credits for making these renewable resource investments. As a result of the information provided in the FBI special agent's affidavit filed in the U.S. District Court for the Eastern District of California, we believe that, in 2019, we may be required to record an uncertain tax position liability under 17 2018 Form 10-K Accounting Standards Codification 740, Income Taxes for a significant portion of the tax credit benefits we received in the past. We will continue to evaluate our existing tax positions, as well as new positions as they arise. However, if we are required to recognize an uncertain tax position liability in our 2019 consolidated financial statements, the uncertain tax position liability and charge-offs may have an adverse impact on our income tax liabilities, results of operations and financial condition. 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 2018 and will in subsequent years, 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 Bank's FDIC insurance assessment totaling $28.3 million for the year ended December 31, 2018 was partially non-tax deductible based upon the asset size of the Bank. The Tax Act also imposes higher limitations 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 ultimate impact of the Tax Act on our business and our customers is uncertain and 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 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. During 2018, Valley settled litigation matters (including one settlement subsequently approved by the courts in February 2019) resulting in a total charge of $12.2 million within professional and legal fees. See the "Litigation" section under Note 15 to the consolidated financial statements for information regarding significant pending lawsuits. 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. 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. 2018 Form 10-K 18  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, 2018, approximately 74 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 15 percent and 19 percent of our non-interest income for the years ended December 31, 2018 and 2017, 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. Higher charge-offs and weak credit conditions could require us to increase our allowance for credit losses through a provision charge to earnings. We maintain an allowance for credit losses based on our assessment of credit losses inherent in our loan portfolio (including unfunded credit commitments). The process for determining the amount of the allowance 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 loan losses may not be sufficient to cover losses inherent in our loan portfolio. 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 loan 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 classification on certain of our loans, which may require us to increase our provision for loan 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 loan losses. Any increase in our allowance for loan 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. 19 2018 Form 10-K 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 0.35 percent of total loans at December 31, 2018 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 loan loans. Additionally, a downturn in economic or real estate market conditions could result in increased charge-offs to our allowance for loan 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 $98.6 million at December 31, 2018. 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. We may be required to increase our allowance for credit losses as a result of changes to an accounting standard. In 2016, the FASB released a new standard for determining the amount of the allowance for credit losses. The new standard will be effective for Valley for reporting periods beginning January 1, 2020. The new credit loss model will be a significant change from the standard in place today, as it requires the allowance for credit losses to be calculated based on current expected credit losses (commonly referred to as the "CECL model") rather than losses inherent in the portfolio as of a point in time. When adopted, the CECL model will likely increase our allowance for credit losses, which could materially affect our financial condition and future results of operations. The extent of the increase and its impact to our financial condition is under evaluation but will ultimately depend upon the nature and characteristics of Valley's portfolio at the adoption date, and the macroeconomic conditions and forecasts at that date; therefore, the potential financial impact is currently unknown. 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 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 2018 Form 10-K 20 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. As disclosed in “Item 9A - Controls and Procedures,” a material weakness was identified in our internal control over financial reporting as of December 31, 2017 resulting from Valley not assigning the appropriate levels of responsibility and authority to its Ethics and Compliance group to identify and evaluate the severity and financial reporting implications of allegations of non- compliance with laws and regulations, Company policies and procedures and other complaints. Additionally, Valley did not establish controls over required communications of such matters to senior management or others within the organization and to those charged with governance to enable them to conduct or monitor the investigation and resolution of such matters on a timely basis. Based on this material weakness, management concluded that our disclosure controls and procedures were not effective as of December 31, 2017. During the first quarter of 2018, Valley initiated remediation efforts. Management reviewed the design and operation of the controls and made enhancements to the proper identification and escalation of allegations of non-compliance with laws and regulations, Company policies and procedures and other complaints that require the attention of senior management and those charged with governance. During the third quarter of 2018, management completed the implementation of such enhancements and the new controls and procedures were placed in operation. Management evaluated these new controls and procedures and determined that the Company’s internal control over financial reporting was effective as of December 31, 2018. 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 2018 and 2017 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. If the fair values of the four reporting units were less than their book value of the total common shareholders’ equity for an extended period of time, Valley would consider this and other factors, including the anticipated cash flows of each of the reporting units, to determine whether goodwill is impaired. 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, 2018, our goodwill totaled $1.1 billion. See Note 8 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 make dividends and 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 21 2018 Form 10-K 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 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 December 2016, Valley issued 9.24 million shares of common stock and used the proceeds for growth in the Bank’s loan portfolio, as well as other general corporate purposes. 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 18 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 2018 Form 10-K 22 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. 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. 23 2018 Form 10-K 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 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. Severe weather, acts of terrorism and other external events 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 2018 Form 10-K 24 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. 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. 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 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 $3.2 billion and $2.8 billion at December 31, 2018 and 2017, 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 five and two loan repurchases in 2018 and 2017, respectively). None of the loan repurchases resulted in material loss. As of December 31, 2018, 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. Possible 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 Federal Reserve Board. Other financial services regulators and industry groups are evaluating the possible 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 potential impact of the possible replacement of the LIBOR benchmark interest rate, but are not able to predict whether LIBOR will cease to be available after 2021, whether the alternative rates the Federal Reserve Board proposes 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. Item 1B. Unresolved Staff Comments None. 25 2018 Form 10-K Item 2. Properties We conduct our business at 220 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 120 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 Central Total New Jersey New York Manhattan Long Island Brooklyn Queens Total New York Florida Alabama Total 99 25 124 12 12 9 5 38 43 15 220 45.0 11.4 56.4 5.5 5.5 4.1 2.3 17.3 19.5 6.8 100.0% Our principal business office is located at 1455 Valley Road, Wayne, New Jersey. Including our principal business office, we own five office buildings in Wayne, New Jersey and one building in Chestnut Ridge, New York, which are used for various operations of Valley National Bank and its subsidiaries. Our New York City corporate headquarters are located at One Penn Plaza in Manhattan and 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 January 1, 2018, the acquisition of USAB added 14 banking centers in Florida, mostly in the Tampa Bay area, and 15 banking centers in the Birmingham, Montgomery and Tallapoosa areas of Alabama. During the second half of 2018, Valley embarked on a new strategy to overhaul its retail network. The Bank is striving to create a branch infrastructure that is more reflective of current and future activity within our target markets. During 2018, we identified several branches within New Jersey and New York that did not meet certain internal performance measures. Of those identified, we closed 7 branches in 2018 and closed or will close 13 additional branches during the first quarter of 2019. The total net book value of our premises and equipment (including land, buildings, leasehold improvements and furniture and equipment) was $341.6 million at December 31, 2018. 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. During February 2019, we entered into an agreement for the sale-leaseback of 29 of our currently owned properties. The transaction is expected to close in the first or second quarter of 2019, and is subject to change or termination due to buyer due diligence on the identified properties. See the "Recent Event" section of the MD&A and Note 23 to the consolidated financial statements for more information. 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. See Note 15 to the consolidated financial statements for further details. 2018 Form 10-K 26 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 under the ticker symbol “VLY”. There were 7,330 shareholders of record as of December 31, 2018. Performance Graph The following graph compares the cumulative total return on a hypothetical $100 investment made on December 31, 2013 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. Valley KBW Regional Banking Index (KRX) S&P 500 $ 100.00 $ 100.00 100.00 100.30 $ 102.43 113.68 106.44 $ 108.56 115.24 131.50 $ 151.04 129.02 131.61 $ 153.77 157.17 108.20 126.88 150.27 12/13 12/14 12/15 12/16 12/17 12/18 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, 2018: Period October 1, 2018 to October 31, 2018 November 1, 2018 to November 30, 2018 December 1, 2018 to December 31, 2018 Total Total Number of Shares Purchased (1) 1,821 41,478 62,839 106,138 Average Price Paid Per Share $ 10.56 10.02 9.32 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) 4,112,465 4,112,465 4,112,465 (1) Represents repurchases made in connection with the vesting of employee stock awards. 27 2018 Form 10-K (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, 2018. Equity Compensation Plan Information The information set forth in Item 12 of Part III of this Annual Report under the heading “Equity Compensation Plan Information” is incorporated by reference herein. 2018 Form 10-K 28 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. Summary of Operations: Interest income—tax equivalent basis (1) Interest expense Net interest income—tax equivalent basis (1) Less: tax equivalent adjustment Net interest income Provision for credit losses Net interest income after provisions for credit losses Non-interest income: (Losses) gains on securities transactions, net Gains on sales of loans, net (Losses) gains on sales of assets, net Other non-interest income Total non-interest income Non-interest expense: Loss on extinguishment of debt Amortization of tax credit investments Other non-interest expense Total non-interest expense Income before income taxes Income tax expense Net income Dividends on preferred stock Net income available to common shareholders Per Common Share: Earnings per share: Basic Diluted Dividends declared Book value Tangible book value (2) Weighted average shares outstanding: Basic Diluted Ratios: Return on average assets Return on average shareholders’ equity Return on average tangible shareholders’ equity (3) Average shareholders’ equity to average assets (4) Tangible common equity to tangible assets Efficiency ratio (5) Dividend payout Tier 1 leverage capital (6) Common equity Tier 1 capital (6) Tier 1 risk-based capital (6) Total risk-based capital (6) Financial Condition: Assets Net loans Deposits Shareholders’ equity 2018 As of or for the Years Ended December 31, 2015 2016 2017 ($ in thousands, except for share data) 2014 $ 1,164,967 $ 842,457 $ 770,270 $ 705,879 $ 642,334 302,045 862,922 5,719 857,203 32,501 824,702 (2,342) 20,515 (2,402) 118,281 134,052 — 24,200 604,861 629,061 329,693 68,265 261,428 12,688 174,107 668,350 8,303 660,047 9,942 650,105 (20) 20,814 (95) 91,007 111,706 — 41,747 467,326 509,073 252,738 90,831 161,907 9,449 148,774 621,496 8,382 613,114 11,869 601,245 777 22,030 1,358 84,095 108,260 315 34,744 441,066 476,125 233,380 65,234 168,146 7,188 156,754 549,125 7,866 541,259 8,101 533,158 2,487 4,245 2,776 83,304 92,812 51,129 27,312 420,634 499,075 126,895 23,938 102,957 3,813 161,846 480,488 7,933 472,555 1,884 470,671 745 1,731 18,087 59,255 79,818 10,132 24,196 368,927 403,255 147,234 31,062 116,172 — 248,740 $ 152,458 $ 160,958 $ 99,144 $ 116,172 $ 0.75 0.75 0.44 9.48 5.97 $ 0.58 0.58 0.44 8.79 6.01 $ 0.63 0.63 0.44 8.59 5.80 0.42 0.42 0.44 8.26 5.36 $ $ 0.56 0.56 0.44 8.03 5.38 331,258,964 264,038,123 254,841,571 234,405,909 205,716,293 332,693,718 264,889,007 255,268,336 234,437,000 205,716,293 0.86% 0.69% 0.76% 0.53% 0.69% 7.91 12.21 10.93 6.45 63.46 58.67 7.57 8.43 9.30 11.34 6.55 9.32 10.53 6.83 65.96 75.86 8.03 9.22 10.41 12.61 7.46 11.07 10.08 6.91 66.00 69.80 7.74 9.27 9.90 12.15 5.26 7.66 10.08 6.52 78.71 105.00 7.90 9.01 9.72 12.02 7.18 10.26 9.62 6.87 73.00 78.40 7.46 N/A 9.73 11.42 $ $ $ 31,863,088 $ 24,002,306 $ 22,864,439 $ 21,612,616 $ 18,792,491 24,883,610 24,452,974 3,350,454 18,210,724 18,153,462 2,533,165 17,121,684 17,730,708 2,377,156 15,936,929 16,253,551 2,207,091 13,371,560 14,034,116 1,863,017 See Notes to the Selected Financial Data that follow. 29 2018 Form 10-K Notes to Selected Financial Data (1) (2) 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 2018 and 35 percent for 2017, 2016, 2015 and 2014. 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. 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: 2018 2017 At December 31, 2016 ($ in thousands, except for share data) 2015 2014 Common shares outstanding Shareholders’ equity Less: Preferred stock Less: Goodwill and other intangible assets Tangible common shareholders’ equity Tangible book value per common share 331,431,217 264,468,851 263,638,830 253,787,561 232,110,975 $ 3,350,454 $ 2,533,165 $ 2,377,156 $ 2,207,091 $ 1,863,017 209,691 1,161,655 1,979,108 5.97 $ $ 209,691 733,144 1,590,330 6.01 $ $ 111,590 736,121 1,529,445 5.80 $ $ 111,590 735,221 1,360,280 5.36 $ $ — 614,667 1,248,350 5.38 $ $ (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: Net income Average shareholders’ equity Less: Average goodwill and other intangible assets Average tangible shareholders’ equity 2018 2017 Years Ended December 31, 2016 ($ in thousands) 2015 2014 $ $ 261,428 3,304,531 $ $ 161,907 2,471,751 $ $ 168,146 2,253,570 $ $ 102,957 1,958,757 $ $ 116,172 1,618,965 1,163,397 734,200 734,520 614,084 486,769 $ 2,141,134 $ 1,737,551 $ 1,519,050 $ 1,344,673 $ 1,132,196 Return on average tangible shareholders’ equity 12.21% 9.32% 11.07% 7.66% 10.26% (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: 2018 2017 At December 31, 2016 ($ in thousands) 2015 2014 Tangible common shareholders’ equity $ 1,979,108 $ 1,590,330 $ 1,529,445 $ 1,360,280 $ 1,248,350 Total assets $ 31,863,088 $ 24,002,306 $ 22,864,439 $ 21,612,616 $ 18,792,491 Less: Goodwill and other intangible assets 1,161,655 733,144 736,121 735,221 614,667 Tangible assets $ 30,701,433 $ 23,269,162 $ 22,128,318 $ 20,877,395 $ 18,177,824 Tangible common shareholders’ equity to tangible assets 6.45% 6.83% 6.91% 6.52% 6.87% (5) The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. (6) Capital positions and ratios as of December 31, 2018, 2017, 2016 and 2015 were calculated under Basel III rules which became effective January 1, 2015. 2018 Form 10-K 30 Item 7. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations The purpose of this analysis is to provide the reader with information relevant to understanding and assessing Valley’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document. 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: • 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 retain USAB’s customers and key employees; the inability to grow customer deposits to keep pace with loan growth; an increase in our allowance for credit losses due to higher than expected loan losses within one or more segments of our loan portfolio; less than expected cost reductions and revenue enhancement from Valley's cost reduction plans, including its earnings enhancement program called "LIFT" and branch transformation strategy; 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; the effect of the partial U.S. Government shutdown on levels of economic activity in the markets in which we operate and on levels of end market demand in the economy in general; 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 breach of fiduciary responsibility, negligence, fraud, contractual claims, environmental laws, patent or trade mark infringement, employment related claims, and other matters; changes in accounting policies or accounting standards, including the new authoritative accounting guidance (known as the current expected credit loss (CECL) model) which may increase the required level of our allowance for credit losses after adoption on January 1, 2020; higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from the impact of the Tax Cuts and Jobs Act and other changes in tax laws, regulations and case law; our inability or determination not to pay dividends at current levels, or at all, because of inadequate 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. • • • • • • • • • • • • • • • • 31 2018 Form 10-K 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 cab 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 2018 Form 10-K 32 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, 2018 and 2017. 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. 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 $151.9 million at December 31, 2018. For impaired credits, if the present value of expected cash flows were 10 percent higher or lower, the allowance would have decreased $3.3 million or increased $4.8 million, respectively, at December 31, 2018. If the fair value of the collateral (for collateral dependent loans) was 10 percent higher or lower, the allowance would have decreased $4.3 million or increased $4.7 million, respectively, at December 31, 2018. 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 $24.9 million as of December 31, 2018. 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 $11.0 million, respectively, at December 31, 2018. Moreover, if the expected loss rate applied to classified loans were to increase or decrease by 10 percent, the allowance would have been $930 thousand higher or lower, respectively, at December 31, 2018. 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 $4.2 billion at December 31, 2018 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 basis, the Bank periodically 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. See Notes 1 and 5 to the consolidated financial statements, and "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 2018 and 2017. 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 $1.1 billion at December 31, 2018 is not amortized but is subject to annual tests for impairment or more often, if events or circumstances indicate 33 2018 Form 10-K it may be impaired. Other intangible assets totaling $77.0 million at December 31, 2018 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. Currently, the goodwill impairment analysis is generally a two-step test. During 2018, 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 the two-step 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. Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash flow analysis 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, 2018, the impact of a five percent impairment charge on these intangible assets would result in a reduction in pre-tax income of approximately $58.1 million. See Note 8 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 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. As of December 31, 2018 and 2017, management determined it is more likely than not that Valley will realize its net deferred tax assets, except for a valuation allowance of $733 thousand established at December 31, 2018. However, in the fourth quarter of 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. During 2018, we recognized a $2.3 million tax benefit related to the adjustment of the Tax Act provisional amounts in our final 2017 tax returns completed in the fourth quarter of 2018. During 2017, we also reduced our state deferred tax assets by $4.5 million to reflect the effect of our organic and acquisition-based expansion primarily in Florida on our existing state deferred tax assets. During 2018 and 2017, the charge to our income tax expense related to the reduction of such deferred tax assets was immaterial. The $2.3 million and $19.9 million in total adjustments were reflected as credits and charges, respectively, to our income tax expense for 2018 and 2017, respectively. Historically, we maintained 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 the fourth quarter of 2018, income tax expense included a net tax benefit of $3.3 million related 2018 Form 10-K 34 to the elimination of our remaining reserve for unrecognized tax benefits caused by the expiration of the statute of limitations for certain tax positions. See Notes 1 and 13 to the consolidated financial statements and the “Income Taxes” section 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, 2018, Valley had consolidated total assets of $31.9 billion, total net loans of $24.9 billion, total deposits of $24.5 billion and total shareholders’ equity of $3.4 billion. Our commercial bank operations after the acquisition of USAmeriBancorp, Inc (see below) 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 220 branch network, 56 percent, 17 percent, 20 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. 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, and maintained a branch network of 29 offices as of December 31, 2018. The acquisition represents a significant addition to Valley’s Florida franchise, and meaningfully enhanced its presence in the Tampa Bay market, which is Florida’s second largest metropolitan area by population. The acquisition also brought Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where Valley now operates 15 branch office locations. The common shareholders of USAB received 6.1 shares of Valley common stock for each USAB share they own. The total consideration for the acquisition was approximately $737.2 million, and the transaction resulted in $394.0 million of goodwill and $45.9 million of core deposit intangible assets subject to amortization. Full systems integration was completed in the second quarter of 2018 with minimal disruption to our customers. Re-Branding. During October 2018, Valley National Bank announced a new look and feel for its brand and, in many instances, will start referring to itself with a simpler name: “Valley.” The Bank’s brand refresh includes a new logo, visual changes to its web and mobile platforms, and a plan for transforming branches with new signage and a sleek, modern look. In conjunction with the re-branding effort, the listing for Valley's common stock, preferred stock and warrants switched from the New York Stock Exchange to NASDAQ. Valley’s common stock symbol remained VLY. Branch Transformation. During the second half of 2018, Valley embarked on a new strategy to overhaul its retail network. The Bank is striving to create a branch infrastructure that is more reflective of current and future activity within our target markets. We intend to place greater emphasis on service, sales, and efficiency. We are in the process of upgrading many staff and training components placing greater importance on mobile and digital implementation, as well as customer education and promotion of those products. Valley's branch transformation will also include the repositioning, re-branding, functionality, aesthetics, and in many cases, reducing the square footage of our branches. During 2018, we identified several branches within New Jersey and New York that did not meet certain internal performance measures. Of those identified, we closed 7 branches in 2018 and closed or will close 13 additional branches during the first quarter of 2019. The estimated annual operating expense savings from the 20 branch closures is expected to be approximately $9 million. We recognized severance costs and branch asset impairment charges of $2.7 million and $1.8 million, respectively, related to the branch closures and branch staff reductions in 2018. 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. While we expect the repositioning, renovations and consolidation to be mostly complete by the end of 2020, it is important to recognize the evolving retail banking landscape combined with our expectation regarding profitability will make this activity a permanent component of Valley's overall strategy. Earnings Enhancement Program. In December 2016, Valley announced a company-wide earnings enhancement initiative called LIFT. The LIFT program is a review of our business practices with goals of improving our overall efficiency, targeting resources to more value-added activities and delivering on the financial banking experience expected by our customers. In July 2017, we completed the idea generation and approval phase of the LIFT program. As a result of these efforts, we currently expect 35 2018 Form 10-K to achieve approximately $22 million in total cost reductions and revenue enhancements on an annualized pre-tax run-rate after fully phased-in by June 30, 2019. As of December 31, 2018, Valley had completed LIFT enhancements that will result in cost reductions greater than 83 percent of the $22 million annual goal. We remain on track to fully implement the LIFT program generated enhancements and realize the total cost reduction goal by June 30, 2019, although we can provide no assurance that all of the program generated enhancements and cost reductions will ultimately be realized. Tax Cuts and Jobs Act. During the fourth quarter of 2017, we incurred a $18.5 million charge due to the impact of the Tax Cuts and Jobs Act (Tax Act) signed into law by the President on December 22, 2017. Of the $18.5 million charge, $15.4 million relates to the estimated tax expense from the re-measurement of net deferred tax assets and the remaining $3.1 million is after- tax losses from adjustments to low income housing and tax-advantaged renewable energy investments included in non-interest expense. Effective January 1, 2018, our Federal income tax rate decreased from 35 percent to 21 percent under the Tax Act. See the "Non-Interest Expense" and "Income Taxes" sections below for more details. Recent Event. During February 2019, we announced that the Bank entered into an agreement for the sale-leaseback of 29 of its currently owned properties. The properties, consisting of 1 corporate location and 28 branches, are expected to be sold for an aggregate cash purchase price of approximately $107 million. Valley expects to realize a pre-tax gain of approximately $81 million net of transaction related expenses. The transaction is expected to close in the first or second quarter of 2019 and is subject to change or termination due to current buyer due diligence on the identified properties. In addition, Valley announced its plan to eliminate approximately 60 corporate positions as a part of continuous efforts to improve operating efficiencies. The annualized salary and benefit expense associated with these eliminations is expected to be in excess of $5 million, excluding severance charges. Valley expects to implement the majority of cost saves by the end of the second quarter of 2019. Other Matters. We have previously invested in mobile solar generators sold and managed by DC Solar, which were included in other assets on the balance sheet and separately disclosed in Note 14 of the consolidated financial statements. For reasons that were not known to us, DC Solar had its assets frozen in December 2018. DC Solar filed for Chapter 11 bankruptcy protection in February 2019. In February 2019, an affidavit from an FBI special agent stated that DC Solar was operating a fraudulent "Ponzi- like scheme" and that the majority of mobile solar generators sold to investors and managed by DC Solar and the majority of the related lease revenues claimed to have been received by DC Solar may not have existed. Certain investors in DC Solar, including us, received tax credits for making these renewable resource investments. We claimed tax credit benefits of approximately $22.8 million in our consolidated financial statements between 2013 through 2015. If the allegations set forth in the declaration filed by the FBI are proven to be accurate, up to the entire amount of the tax credits claimed by us could potentially be disallowed. Based on the information known as of the date of this Annual Report on the Form 10-K, we believe that this has not met the more-likely- than-not criterion to record an uncertain tax position liability. As a result of the information in the FBI declaration, we are evaluating whether or not an unrecognized tax liability exists under ASC 740 for an uncertain tax position in 2019 for at least part, if not potentially all, of the tax credit benefits that we claimed. If we are required to recognize an uncertain tax position liability in our 2019 consolidated financial statements, the uncertain tax position liability and charge-offs may have an adverse impact on our income tax liabilities, results of operations and financial condition. For additional information on the risks of our investments in tax-advantaged investments, see Item 1A. Risk Factors. Annual Results. Net income totaled $261.4 million, or $0.75 per diluted common share, for the year ended December 31, 2018 compared to $161.9 million in 2017, or $0.58 per diluted common share. The increase in net income was largely due to: (i) a $197.2 million, or 29.9 percent, increase in our net interest income driven by a $5.5 billion increase in average loan balances, partially offset by interest expense related to higher short-term interest rates and a $4.9 billion increase in average interest bearing liabilities as compared to 2017, (ii) a $22.3 million increase in non-interest income partly due to higher service charges on deposit accounts and other income related to our USAB acquisition and a $6.5 million gain on the sale of Visa Class B shares in 2018, (iii) a $22.6 million decrease in income tax expense largely due to the net impact of the Tax Act, partially offset by (iv) a $120.0 million, or 23.6 percent, increase in total non-interest expense largely due to increased operational size from the USAB acquisition, as well as an increase of $14.8 million in USAB merger expenses, $12.2 million in legal expense related to litigation reserves, higher costs related to Branch Transformation, re-branding and technology, and (v) a $22.6 million increase in our provision for credit losses. See the “Net Interest Income,” “Non-Interest Income,” “Non-Interest Expense,” and “Income Taxes” sections below for more details on the items above impacting our 2018 annual results. Operating Environment. U.S. economic growth accelerated, and labor market conditions strengthened in 2018. Real gross domestic product expanded 3.0 percent for 2018, compared to 2.2 and 1.6 percent in 2017 and 2016, respectively. During 2018, the Federal Reserve gradually increased the target range for the federal funds rate four times throughout the year. As a result, the target range increased from 1.25 percent to 1.50 percent as of January 1, 2018 to 2.25 percent to 2.50 percent 2018 Form 10-K 36 at December 31, 2018. The Federal Open Market Committee left the target range for the federal funds rate unchanged at their January 2019 meeting and noted it would be patient and look at incoming data to determine if additional interest rate increases would be appropriate in the future. The 10-year U.S. Treasury note yield ended the fourth quarter of 2018 at 2.69 percent, 29 basis points higher compared with December 31, 2017. However, the spread between the 2-year and 10-year U.S. Treasury note yields ended the fourth quarter of 2018 at 0.15 percent, 8 basis points lower than September 30, 2018 and 41 basis points lower compared with December 31, 2017. For all commercial banks in the U.S., loan growth accelerated in 2018 to 5.2 percent compared to 4.1 percent in 2017. Alternatively, deposit growth decelerated from 4.2 percent in 2017 to 4.1 percent in 2018. Core deposit growth continues to be challenged by traditional rate driven market competition, attractive investment options due to a strong economy, as well as the rapid adoption of non-traditional digital banking platforms by more consumers. See further discussion of our loans, deposits and the impact of the current economic and interest rate environments as highlighted throughout the remaining MD&A discussion below. Loans. Total loans increased by $6.7 billion to $25.0 billion at December 31, 2018 from December 31, 2017, net of residential mortgage loans sold during 2018. Adjusted for $3.7 billion of loans acquired from USAB on January 1, 2018, total loans grew by 13.4 percent in 2018 due to strong demand in most loan categories. For 2019, we have established a goal to grow our overall loan portfolio 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, 2018, our PCI loan portfolio totaled $4.2 billion, or 16.7 percent of our total loan portfolio, and includes all of the loans acquired from USAB on January 1, 2018. 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 0.62 percent and 0.70 percent at December 31, 2018 and 2017, respectively. Total accruing past due loans decreased to $67.7 million at December 31, 2018 from $80.5 million at December 31, 2017 mostly due to normal period-end fluctuations in early stage delinquencies and a few large matured performing commercial real estate and construction loans in the normal process of renewal reported at December 31, 2017. Non-accrual loans totaled $88.4 million, or 0.35 percent of our entire loan portfolio of $25.0 billion, at December 31, 2018 as compared to $47.2 million, or 0.26 percent of total loans, at December 31, 2017. The increase in non-accruals was largely due to a $49.2 million increase in the commercial and industrial loan category caused by taxi cab medallion loans internally downgraded to doubtful, partially offset by a $9.0 million decline in commercial real estate loans. Overall, our non-performing assets increased by 71.6 percent to $98.6 million at December 31, 2018 as compared to $57.5 million at December 31, 2017 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 overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the unpredictable future strength of the U.S. economy and the housing and labor markets, management cannot provide assurance that our non-performing assets will remain at, or increase from, the levels reported as of December 31, 2018. See the “Non- performing Assets” section below for further analysis of our asset quality. Investments. During the year ended December 31, 2018, we recognized net losses on securities transactions of $2.3 million as compared to net losses totaling $20 thousand in 2017 and net gains of $777 thousand in 2016. 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 2018 as compared to 2017 largely due to the greater use of brokered time deposits in the second half of 2018. Non-interest bearing deposits represented approximately 28 percent of total average deposits for the year ended December 31, 2018, while savings, NOW and money market accounts were 49 percent and time deposits were 23 percent. Average non-interest bearing deposits increased $1.0 billion to approximately $6.2 billion for the year ended December 31, 2018 as compared to 2017 due, in large part, to $887.1 million of deposits assumed from USAB and our continuous efforts to encourage new and existing loan borrowers to maintain deposit accounts at Valley. Average savings, NOW and money market account balances increased $2.2 billion to $11.1 billion in 2018 largely due to $1.7 billion of deposits assumed from USAB and several retail and business account initiatives. Average time deposits also increased $1.8 billion to $5.1 billion in 2018 due to (i) $999.6 million of deposits assumed from USAB, (ii) increased use of brokered CDs as an alternative to more costly FHLB borrowings with shorter or similar maturities and (iii) successful retail 37 2018 Form 10-K deposit gathering efforts. Ending balances of brokered money market deposit accounts and brokered time deposits totaled $1.1 billion and $2.1 billion, respectively, at December 31, 2018 as compared to $1.4 billion and $71.1 million, respectively, at December 31, 2017. Average short-term borrowings increased $702.0 million to $2.2 billion for 2018 as compared to 2017 largely due to new FHLB advances used for funding of loan growth and balancing the appropriate mix of short- and long-term funding in the current interest rate environment. Valley also assumed $650.0 million of very short duration borrowings from USAB on January 1, 2018. Average long-term borrowings increased $226.3 million to approximately $2.1 billion for 2018 as compared to 2017 largely due to an increase in average FHLB advances to fund loan growth during 2018, and to a lesser extent $100.5 million of borrowings assumed from USAB. 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. During 2018, Valley elected to reclassify fee income related to derivative interest rate swaps executed with commercial loan customers totaling $16.4 million from interest and fees on loans to other non-interest income within the presentation of its net interest margin below and the consolidated financial statements. The applicable prior period amounts have also been reclassified to conform to this current presentation. See further discussion of the swap fees in the "Non-Interest Income" section below. Annual Period 2018. Net interest income on a tax equivalent basis increased by $194.6 million to $862.9 million for 2018 as compared to 2017. The increase was mainly driven by a $5.5 billion increase in average loan balances and a 31 basis point increase in loan yield, partially offset by interest expense related to a $4.9 billion increase in average interest bearing liabilities and a 36 basis point increase in the cost of such liabilities as compared to 2017. 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 3.11 percent for the year ended December 31, 2018 and remained unchanged as compared to 2017. However, the yield on average interest earning assets increased 29 basis points mainly attributable to the increased yield on average loans. The yield on average loans increased 31 basis points to 4.43 percent for 2018 as compared to 4.12 percent in 2017 largely due to new and renewed loan volumes and higher market interest rates in 2018. Our average non- taxable investment portfolio yield decreased 45 basis points during 2018 as compared to one year ago due to a lower tax equivalent yield caused by the Tax Act, partially offset by higher market rates on securities acquired and purchased in 2018. Offsetting the increase in the yield on average interest earning assets, the cost of average interest bearing liabilities increased 36 basis points to 1.47 percent for 2018. The increase in the overall cost as compared to 2017 was mainly driven by increases of 36, 89 and 32 basis points in our cost of average savings, NOW and money market deposit accounts; short-term borrowings; and time deposits, respectively, in 2018. The increases were largely due to a gradual increase in short-term market interest rates during 2018 that were influenced by five individual increases of 0.25 percent in the federal funds target rate from mid-December 2017 to mid- December 2018 by the FOMC, as well as strong market competition for customer deposits. The annual average of the daily effective federal funds rate increased 83 basis points to 1.83 percent for 2018 from 1.00 percent in 2017. Our earning asset portfolio is comprised of both fixed-rate and adjustable-rate loans and investments. Many of our earning assets are priced based upon the prevailing treasury rates, the Valley prime rate (set by Valley management based on various internal and external factors) or on the U.S. prime interest rate as published in The Wall Street Journal. On average, the 10-year treasury rate increased from 2.33 percent in 2017 to 2.91 percent in 2018, positively impacting our yield on average loans as new and renewed fixed-rate loans originated in 2018. Additionally, the U.S. prime rate increased to 5.50 percent from 5.25 percent in mid-December 2017 and has increased five times since mid-December 2017 in conjunction with the increase in the targeted federal funds rate. The higher U.S. prime rate, and our increase in the Valley prime rate to 6.375 percent from 6.125 percent during December 2018, will have an immediate positive impact on the yield of our U.S. and Valley prime rate based loan portfolios for 2019 as compared to 2018. Should the treasury rates remain at or increase above current levels, this will also have a positive, but more gradual, effect on our interest income based on our ability to originate new and renewed fixed rate loans. Average interest earning assets totaling $27.7 billion for the year ended December 31, 2018 increased $6.2 billion, or 28.9 percent, as compared to 2017. Average loan balances increased $5.5 billion to $23.3 billion in 2018 and drove the majority of the $299.5 million increase in the interest income on a tax equivalent basis for loans as compared to 2017. The growth in average loans during 2018 was due to $3.7 billion of loans acquired from USAB on January 1, 2018, strong loan demand in all commercial loan categories and greater retention of residential mortgage loan production. Much of the new loan production in the commercial area came from additional business with current customer relationships, including opportunities to expand the former USAB 2018 Form 10-K 38 lending limits with customers in our new Tampa Bay market. Average investment securities increased $663.8 million to approximately $4.1 billion in 2018 due to $522.6 million of securities acquired from USAB, as well as a moderate expansion of residential mortgage-backed securities held in the taxable portfolio. Average federal funds sold and other interest bearing deposits increased $29.3 million to $218.9 million for the year ended December 31, 2018 as compared to 2017 mostly due to slightly higher levels of overnight liquidity held primarily caused by fluctuations in the timing of new loan originations. Average interest bearing liabilities increased $4.9 billion to $20.5 billion for the year ended December 31, 2018 from the same period in 2017 due to increases in all of our funding categories. Average savings, NOW and money market accounts increased $2.2 billion mostly due to $1.7 billion of such deposits assumed from USAB and retail money market account gathering initiatives during 2018, partially offset by slightly lower utilization of brokered money market account balances in our loan growth funding strategy and other liquidity needs in 2018. Average time deposits increased $1.8 billion to $5.1 billion for 2018 as compared to 2017 mainly due to $999.6 million of CDs assumed from USAB, retail CDs strategies executed in 2018 and increased use of brokered CDs in the second half of 2018. Average short-term and long-term borrowings increased $702.0 million and $226.3 million in 2018, respectively, as compared to 2017 due, in part, to a higher level of FHLB borrowings used to fund new loan and investment activities, and, to a lesser extent, $650.0 million and $100.5 million, respectively, of such borrowings assumed from USAB. See the "Fourth Quarter of 2018" section below for more information regarding changes in our interest bearing liabilities during 2018. Fourth Quarter of 2018. Net interest income on a tax equivalent basis totaling $223.4 million for the fourth quarter of 2018 increased $52.0 million and $5.3 million as compared to the fourth quarter of 2017 and third quarter of 2018, respectively. The increase as compared to the fourth quarter of 2017 was largely due to the acquisition of USAB on January 1, 2018 and loan growth during 2018. Interest income on a tax equivalent basis increased $17.6 million to $316.0 million for the fourth quarter of 2018 as compared to the third quarter of 2018, largely due to an increase of $871.7 million in average loans and a 11 basis point increase in the yield on average loans. Interest expense of $92.5 million for the three months ended December 31, 2018 increased $12.3 million from the third quarter of 2018 largely due to higher interest rates on many of our interest bearing deposit products and FHLB borrowings, and a $756.9 million 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, partially offset by lower short-term and long-term FHLB borrowings. The net interest margin on a tax equivalent basis of 3.10 percent for the fourth quarter of 2018 decreased 3 basis points and 2 basis points from 3.13 percent and 3.12 percent for the fourth quarter of 2017 and third quarter of 2018, respectively. The yield on average interest earning assets increased by 12 basis points on a linked quarter basis due to the higher yields on average loans and investment securities. The yield on average loans increased to 4.61 percent for the fourth quarter of 2018 from 4.50 percent for the third quarter of 2018, mostly due to the high volume of new loan originations at current market rates. The increased yield on average investment securities was partly caused by a decrease in premium amortization on residential mortgage-backed securities, due to lower prepayments on such financial instruments. The cost of average interest bearing liabilities increased by 17 basis points to 1.72 percent for the fourth quarter of 2018 as compared to the linked third quarter of 2018. The increase was due to a 23 basis point increase in both the cost of average interest bearing deposits and short-term borrowings, largely driven by higher market interest rates. The cost of average long-term borrowings also increased 21 basis points as compared to the third quarter of 2018 largely due to the change in the composition of such borrowings caused by the maturity and repayment of lower cost borrowings in the second half of 2018. Our cost of total average deposits was 1.07 percent for the fourth quarter of 2018 as compared to 0.88 percent for the three months ended September 30, 2018. Looking forward, we expect moderate compression pressure on our net interest margin for the first quarter of 2019 due to the potential narrowing of the spread between short and long-term interest rates and two less days during the quarter. For the full year of 2019, we anticipate net interest income growth of approximately 5 to 7 percent. However, our net interest margin and net interest income could both experience an unexpected material decline as compared to the fourth quarter of 2018 due to a multitude of other conditional and sometimes unpredictable factors. 39 2018 Form 10-K The following table reflects the components of net interest income for each of the three years ended December 31, 2018, 2017 and 2016: ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS 2018 2017 2016 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) $ 23,340,330 $1,033,996 4.43% $ 17,819,003 $ 734,485 4.12% $ 16,400,745 $ 680,892 4.15% 3,409,687 100,515 733,956 27,220 218,938 3,236 2.95 3.71 1.48 4.21 2,910,390 82,488 569,469 23,691 189,636 1,793 21,488,498 842,457 2.83 4.16 0.95 3.92 2,536,197 64,349 604,188 23,903 288,182 1,126 19,829,312 770,270 2.54 3.96 0.39 3.88 Assets Interest earning assets: (1)(2) Loans Taxable investments (3) Tax-exempt investments (1)(3) Interest bearing deposits with banks Total interest earning assets 27,702,911 1,164,967 Allowance for loan losses Cash and due from banks Other assets Unrealized losses on securities available for sale, net Total assets Liabilities and Shareholders’ Equity Interest bearing liabilities: Savings, NOW and money market deposits (136,775) 278,181 2,431,537 (46,578) $ 30,229,276 (117,529) 236,297 1,886,035 (14,503) $ 23,478,798 (109,084) 291,021 2,032,704 921 $ 22,044,874 $ 11,093,136 $ 108,394 0.98% $ 8,934,335 $ 55,300 0.62% $ 8,563,208 $ 39,787 0.46% Time deposits 5,131,167 81,959 Total interest bearing deposits 16,224,303 190,353 Short-term borrowings Long-term borrowings (4) 2,187,998 2,116,619 45,930 65,762 Total interest bearing liabilities 20,528,920 302,045 1.60 1.17 2.10 3.11 1.47 3,329,693 12,264,028 1,486,001 42,546 97,846 18,034 1,890,288 58,227 15,640,317 174,107 1.28 0.80 1.21 3.08 1.11 3,104,307 11,667,515 1,246,790 37,775 77,562 12,022 1,610,576 59,190 14,524,881 148,774 1.22 0.66 0.96 3.68 1.02 Non-interest bearing deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Net interest income/interest rate spread (5) Tax equivalent adjustment Net interest income, as reported Net interest margin (6) Tax equivalent effect Net interest margin on a fully tax equivalent basis (6) 6,193,839 201,986 3,304,531 5,192,087 174,643 2,471,751 5,067,124 199,299 2,253,570 $ 30,229,276 $ 23,478,798 $ 22,044,874 862,922 2.74% 668,350 2.81% 621,496 2.86% (5,719) $ 857,203 (8,303) $ 660,047 (8,382) $ 613,114 3.09% 0.02 3.11% 3.07% 0.04 3.11% 3.09% 0.04% 3.13% (1) Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate for 2018, and a 35 percent federal tax rate for both 2017 and 2016, respectively. (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) (5) Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition. 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. 2018 Form 10-K 40 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, 2018 Compared to 2017 Change Due to Rate Change Due to Volume Total Change 2017 Compared to 2016 Change Due to Rate Change Due to Volume Total Change (in thousands) Interest income: Loans* Taxable investments Tax-exempt investments* Federal funds sold and other interest bearing deposits Total increase in interest income Interest expense: Savings, NOW and money market deposits Time deposits Short-term borrowings Long-term borrowings and junior subordinated debentures Total increase in interest expense $ 241,292 $ 58,219 $ 299,511 $ 59,125 $ (2,302) $ 14,611 6,303 311 262,517 15,640 26,955 10,962 7,028 60,585 3,416 (2,774) 1,132 59,993 37,454 12,458 16,934 507 67,353 18,027 3,529 1,443 322,510 53,094 39,413 27,896 7,535 127,938 10,114 (1,411) (491) 67,337 1,790 2,824 2,561 9,418 16,593 8,025 1,199 1,158 8,080 13,723 1,947 3,451 (10,381) 8,740 Increase (decrease) in net interest income $ 201,932 $ (7,360) $ 194,572 $ 50,744 $ (660) $ 56,823 18,139 (212) 667 75,417 15,513 4,771 6,012 (963) 25,333 50,084 * Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate for 2018, and a 35 percent federal tax rate for both 2017 and 2016, respectively. Non-Interest Income Non-interest income represented 10.4 percent and 11.8 percent of total interest income plus non-interest income for 2018 and 2017, respectively. For the year ended December 31, 2018, non-interest income increased $22.3 million as compared to the year ended December 31, 2017. The following table presents the components of non-interest income for the years ended December 31, 2018, 2017, and 2016: Trust and investment services Insurance commissions Service charges on deposit accounts (Losses) gains on securities transactions, net Fees from loan servicing Gains on sales of loans, net Bank owned life insurance Other Total non-interest income 2018 Years Ended December 31, 2017 (in thousands) 2016 $ $ 12,633 15,213 26,817 (2,342) 9,319 20,515 8,691 43,206 134,052 $ $ 11,538 18,156 21,529 (20) 7,384 20,814 7,338 24,967 111,706 $ $ 10,345 19,106 20,879 777 6,441 22,030 6,694 21,988 108,260 41 2018 Form 10-K Trusts and investment services income increased $1.1 million for the year ended December 31, 2018 as compared to 2017 mainly due to higher investment and advisory fees resulting from increased assets under management during 2018. The increase in assets under management was largely due to higher market valuations and asset appreciation during 2018. Insurance commissions decreased $2.9 million for the year ended December 31, 2018 from $18.2 million in 2017 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary. Service charges on deposit accounts increased $5.3 million for the year ended December 31, 2018 as compared to 2017 mostly driven by the acquisition of USAB on January 1, 2018. Net losses on securities transactions increased $2.3 million for the year ended December 31, 2018 as compared to 2017. The higher level of net losses 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 of 2018, as well as the sale of equity securities previously classified as available for sale and certain municipal securities acquired from USAB. Fees from loan servicing increased $1.9 million for the year ended December 31, 2018 from $18.2 million in 2017 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 $300 million to $3.2 billion, at December 31, 2018 from $2.8 billion at December 31, 2017. Net gains on sales of loans remained relatively unchanged for the year ended December 31, 2018 as compared to 2017 despite a lower volume of loans sold during 2018, mainly due to higher spreads (margins) on individual loan sales as compared to 2017. During 2018, we sold $675.9 million of residential mortgages originated for sale as compared to $800.9 million of residential mortgage loans sold during 2017. Residential mortgage loan originations (including both new and refinanced loans) increased 82.4 percent to $1.7 billion for the year ended December 31, 2018 as compared to $955.7 million in 2017. 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 $211 thousand and $782 thousand in 2018 and 2017, 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. Other non-interest income increased $18.2 million for the year ended December 31, 2018 from 2017 partly due to (i) a $8.1 million increase in fee income related to derivative interest rate swaps executed with commercial lending customers, (ii) a $6.5 million gain realized on the sale of our Visa Class B shares during the fourth quarter of 2018 and (iii) additional other income generated from the USAB acquisition. Swap fee income totaled $16.4 million and $8.3 million for the years ended December 31, 2018 and 2017, respectively. Partially offsetting these items, we also recognized branch asset impairment charges of $1.8 million related to branch closures during the third quarter of 2018. Non-Interest Expense Non-interest expense increased $120.0 million to $629.1 million for the year ended December 31, 2018 as compared to 2017. The following table presents the components of non-interest expense for the years ended December 31, 2018, 2017 and 2016: Salary and employee benefits expense Net occupancy and equipment expense FDIC insurance assessment Amortization of other intangible assets Professional and legal fees Amortization of tax credit investments Telecommunication expense Other Total non-interest expense 2018 Years Ended December 31, 2017 (in thousands) 2016 333,816 108,763 28,266 18,416 34,141 24,200 12,102 69,357 629,061 $ $ 263,337 92,243 19,821 10,016 25,834 41,747 9,921 46,154 509,073 $ $ 243,222 87,140 20,100 11,327 17,755 34,744 10,021 51,816 476,125 $ $ Salary and employee benefits expense increased by $70.5 million for the year ended December 31, 2018 as compared to 2017 largely due to (i) normal increases in annual compensation and incentives (including additional staffing related to the USAB 2018 Form 10-K 42 acquisition), (ii) expansion of our technology and home mortgage consultant teams, (iii) $9.8 million of change in control, severance and retention expenses related to the USAB acquisition, and (iv) $2.7 million of severance costs related to our Branch Transformation strategy during the fourth quarter of 2018. Stock-based compensation expense increased $7.0 million to $18.8 million for the year ended December 31, 2018 as compared to 2017. Net occupancy and equipment expenses increased $16.5 million for the year ended December 31, 2018 as compared to 2017 largely due to costs related to the 29-branch network acquired from USAB and higher technology equipment related expense. Repair and maintenance, and depreciation expense increased $11.0 million and $2.7 million for the year ended December 31, 2018, respectively, as compared to 2017. USAB merger related expenses within the category totaled $856 thousand for the year ended December 31, 2018. The FDIC insurance assessment increased $8.4 million for the year ended December 31, 2018 from the year ended December 31, 2017 mainly due to the USAB acquisition and the organic growth of our balance sheet over the last 12-month period. Amortization of other intangible assets increased $8.4 million for the year ended December 31, 2018 as compared to 2017 mainly due to an increase of $7.5 million in amortization expense of core deposit intangibles (CDI) during 2018. The increase in the amortization of CDI was driven by the recognition of $45.9 million of CDI in the USAB acquisition (see Note 8 to the consolidated financial statements for more details). Higher amortization expense of loan servicing rights, caused by additional loan servicing rights recorded over the last twelve-month period, also contributed to the increase in 2018. Professional and legal fees increased $8.3 million for the year ended December 31, 2018 as compared to 2017, largely due to litigation reserve charges of $12.2 million and merger related expenses of $837 thousand during 2018. These increases were partially offset by lower consulting and advisory fees for the year ended December 31, 2018 as compared to 2017, which included additional fees related to the LIFT Project and USAB acquisition. Amortization of tax credit investments decreased $17.5 million for the year ended December 31, 2018 as compared to 2017 mostly due to normal differences in the timing and amount of such investments and recognition of the related tax credits, as well as a $4.3 million charge during the fourth quarter of 2017 related to the impairment of tax credit investments caused by the Tax Act. 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 14 to the consolidated financial statements for additional information. Other non-interest expense increased $23.2 million for the year ended December 31, 2018 as compared to 2017 partly due to increases of $5.9 million and $5.6 million in data processing fees and USAB merger related expense during 2018, respectively. During 2018, we also experienced moderate increases in several other significant components of other expense, such as travel and entertainment, debit card and ATM expense, postage, and stationary and print expenses. These additional expenses were largely driven by our growth both organically and through the acquisition of USAB. Advertising expense included in this category increased $3.8 million to $5.7 million for the year ended December 31, 2018 as compared to 2017 mostly due to focused campaigns in the new Florida markets, as well as the more recent Valley re-branding efforts. 43 2018 Form 10-K Efficiency Ratio. The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted mostly by the amortization of tax credit investments, merger related expenses, litigation expenses, severance costs, and gains and losses on securities transactions. See table below for more details. The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for such items during the years ended December 31, 2018, 2017 and 2016: Total non-interest expense, as reported Less: Amortization of tax credit investments (pre-tax) Less: LIFT program expenses (pre-tax) (1) Less: Merger related expenses (pre-tax) (2) Less: Severance expense (branch transformation only, pre-tax) Less: Legal expenses (litigation reserve impact only, pre-tax) Total non-interest expense, as adjusted Net interest income Total non-interest income, as reported Add: Branch related asset impairment (pre-tax) (3) Add: Losses (gains) on securities transactions, net (pre-tax) Less: Gain on the sale of Visa Class B shares (pre-tax) Total non-interest income, as adjusted Gross operating income, as adjusted Efficiency ratio Efficiency ratio, adjusted Years Ended December 31, 2018 2017 2016 ($ in thousands) $ 629,061 $ 509,073 $ 476,125 24,200 — 17,445 2,662 12,184 41,747 9,875 2,620 — — 34,744 — — — — $ 572,570 $ 454,831 857,203 134,052 1,821 2,342 660,047 111,706 — 20 6,530 $ 131,685 $ 988,888 — $ 111,726 $ 771,773 $ 441,381 613,114 108,260 — (777) — $ 107,483 $ 720,597 63.46% 57.90% 65.96% 58.93% 66.00% 61.25% (1) LIFT program expenses are primarily within professional and legal fees and salary and employee benefits expense. (2) Merger related expenses are primarily within salary and employee benefits and other expense. (3) Branch related asset impairment is included in net losses on sale of assets within non-interest income. See the “Results of Operations—2017 Compared to 2016” section later in this MD&A for the discussion and analysis of changes in our non-interest expense from 2016 to 2017. 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 $68.3 million for the year ended December 31, 2018, reflecting an effective tax rate of 20.7 percent, as compared to $90.8 million for the year ended 2017, reflecting an effective tax rate of 35.9 percent. The decrease in both income tax expense and the effective tax rate in 2018 as compared to 2017 was primarily caused by the lower 2018 federal tax rate and a $15.4 million charge recognized in the fourth quarter of 2017 resulting from the re-measurement of Valley's estimated net deferred tax asset as of December 31, 2017 under the Tax Act. The income tax expense and effective tax rate for 2018 also 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. On July 1, 2018, The State of New Jersey enacted new legislation that created a temporary surtax effective for tax years 2018 through 2021 and will require companies to file combined tax returns beginning in 2019. The surtax did not have a material impact on our reported income tax expense for the year ended December 31, 2018. The New Jersey surtax equals 2.5 percent for the years 2018 and 2019 and decreases to 1.5 percent for 2020 and 2021. 2018 Form 10-K 44 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 22 percent to 24 percent for 2019, primarily reflecting the estimated impacts of the changes in federal and state tax laws (including the New Jersey surtax effective July 1, 2018), tax-exempt income, tax-advantaged investments and general business credits. See additional information regarding our income taxes under our “Critical Accounting Policies and Estimates” section above, as well as Note 13 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 22 to the consolidated financial statements for the segments’ financial data. Consumer lending. The consumer lending segment is mainly comprised of residential mortgage loans, automobile loans, secured personal lines of credit and home equity loans and represented in the aggregate 27.2 percent of the total loan portfolio at December 31, 2018. The duration of the residential mortgage loan portfolio (which represented 16.4 percent of our total loan portfolio at December 31, 2018) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 5.3 percent of total loans at December 31, 2018) 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, insurance services, and asset-based lending support services. Average interest earning assets in this segment increased $1.0 billion to $6.2 billion for the year ended December 31, 2018 as compared to 2017. The increase was mainly attributable to organic residential mortgage loan growth driven by our home mortgage consulting team, as well as $365.9 million and $109.8 million of residential mortgage loans and home equity loans, respectively, acquired from USAB on January 1, 2018. Automobile loans and other consumer loans (mainly consisting of secured personal lines) also grew by 9.2 percent and 18.3 percent, respectively, over the last 12 months. Income before income taxes generated by the consumer lending segment decreased $6.2 million to $57.3 million for the year ended December 31, 2018 as compared to $63.5 million for the year ended December 31, 2017. The decrease was largely attributable to increases in non-interest expense and internal transfer expense, partially offset by an increase in net interest income. Non-interest expense increased $20.3 million as compared to 2017 due, in part, to higher salary and employee benefits expense related to the USAB acquisition and additional compensation related to our growing home mortgage consultant team. The internal transfer expense increased $9.2 million, as compared to 2017. The negative impact of these items was partially offset by an increase of $27.7 million in net interest income, mostly due to higher average loans and yields on new loan volumes, partially offset by higher funding costs. The net interest margin on the consumer lending portfolio was 2.77 percent for the years ended December 31, 2017 and December 31, 2018. The 2018 margin remained unchanged from 2017 due to a 27 basis point increase in the yield on average loans that was fully offset by a 27 basis point increase in the costs associated with our funding sources. The increased loan yield was due to higher market interest rates on new loan volumes. The increased cost of funds was primarily due to increased short- term interest rates resulting from the Federal Reserve's gradual increase in short-term market interest rates during 2018 and intense 45 2018 Form 10-K competition for deposits mainly in our New Jersey and New York markets. 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 0.92 percent for 2018 compared to 1.23 percent for 2017. Commercial lending. The commercial lending segment is mainly comprised of floating rate and adjustable rate commercial and industrial 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 $4.3 billion and represented 17.3 percent of the total loan portfolio at December 31, 2018. Commercial real estate loans and construction loans totaled $13.9 billion and represented 55.5 percent of the total loan portfolio at December 31, 2018. Average interest earning assets in this segment increased $4.5 billion to $17.1 billion for the year ended December 31, 2018 as compared to 2017. The increase was primarily attributable to approximately $3.2 billion of commercial PCI loans acquired from USAB and strong loan growth during the last 12 months. For the year ended December 31, 2018, income before income taxes for the commercial lending segment increased $85.1 million to $308.5 million as compared to 2017. Net interest income increased $165.0 million to $621.7 million for the year ended December 31, 2018 as compared to 2017 largely due to the aforementioned increase in average loan balances, as well as an increase in yield on new loan originations. Non-interest income increased $10.9 million for the year ended December 31, 2018 as compared to 2017 mainly due to fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $16.4 million for the year ended December 31, 2018 as compared to $8.3 million in 2017. The positive impact of these items was partially offset by an increase in the internal transfer expense, non-interest expense and the provision for credit losses. The provision for credit losses increased $20.2 million to $27.0 million for the year ended December 31, 2018 as compared to 2017 (See details in the "Allowance for Credit Losses" section of this MD&A). The internal transfer expense and non-interest expense increased $46.6 million and $24.0 million, respectively, for the year ended December 31, 2018 as compared to 2017, due, in part, to the USAB acquisition. The net interest margin for this segment increased 2 basis points to 3.63 percent during 2018 as a result of a 29 basis point increase in the yield on average loans, partially offset by a 27 basis point increase in the cost of our funding sources as compared to 2017. The return on average interest earning assets before income taxes for this segment was 1.80 percent for 2018 compared to 1.77 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, interest-bearing deposits with banks (primarily the FRB 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 increased $693.1 million to $4.4 billion for the year ended December 31, 2018 as compared to 2017 mostly due to investment securities acquired from USAB and some additional investment in residential mortgage-backed securities. Average other interest bearing deposits also increased $29.3 million to $218.9 million for the year ended December 31, 2018 as compared to 2017. For the year ended December 31, 2018, income before income taxes for the investment management segment increased $529 thousand to $38.9 million as compared to 2017 primarily due to a $5.6 million increase in net interest income and a $946 thousand increase in non-interest income, partially offset by a $6.0 million increase in the internal transfer expense. The increase in net interest income was mainly driven by higher average investment balances during the year ended December 31, 2018 as compared to 2017. The net interest margin for this segment decreased 21 basis points to 1.97 percent during the year ended December 31, 2018 as compared to 2017 as a result of a 27 basis point increase in costs associated with our funding sources, partially offset by a 6 basis point increase in the yield on average investments. The increase in the yield on average investments was partly due to purchases of higher yielding securities and the positive impact of increased market interest rates on the variable rate portion of our securities portfolio. 2018 Form 10-K 46 The return on average interest earning assets before income taxes for this segment was 0.89 percent for 2018 compared to 1.05 percent for 2017. Corporate and other adjustments. The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net securities gains and losses not reported in the investment management segment above, interest expense related to subordinated notes, as well as income and expense from derivative financial instruments. The pre-tax net loss for the corporate segment increased $2.5 million for the year ended December 31, 2018 to $75.0 million as compared to $72.5 million in 2017. The higher net loss during 2018 for this segment was mainly due to an increase in non- interest expense, partially offset by an increase in internal transfer income. The non-interest expense increased $75.7 million to $440.2 million for the year ended December 31, 2018 as compared to 2017 largely due to higher salaries and employee benefits expenses related to the USAB acquisition, USAB merger expense and professional and legal fees related to litigation reserves. See further details in the "Non-Interest Expense" section in this MD&A. Internal transfer income increased $61.7 million to $344.9 million for the year ended December 31, 2018 as compared to the prior year. Interest Rate Sensitivity ASSET/LIABILITY MANAGEMENT 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, 2018. 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, 2018. 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, 2018. Although the size of Valley’s balance sheet is forecasted to remain static as of December 31, 2018, in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during 2018. The model utilizes an immediate parallel shift in the market interest rates at December 31, 2018. 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 47 2018 Form 10-K 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. Changes in Interest Rates (in basis points) +200 +100 - 100 - 200 Estimated Change in Future Net Interest Income Dollar Change Percentage Change ($ in thousands) 16,547 9,410 (4,473) (27,716) 1.82% 1.04 (0.49) (3.06) $ As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to moderately increase net interest income over the next 12 months by 1.04 percent. The Bank’s asset sensitivity to changes in market rates increased as compared to December 31, 2017 (which projected a decrease of 0.35 percent in net interest income over a 12-month period). The change in the sensitivity of our balance sheet since December 31, 2017 was primarily due to the impact of the interest earning assets and interest bearing liabilities acquired from USAB in the first quarter of 2018. However, the net asset sensitivity of the acquired financial instruments was partially mitigated by a significant increase in short-term borrowings used for funding loan growth during 2018. Future changes including, but not limited to, deposit and borrowings strategies, the slope of the yield curve and projected cash flows will affect our net interest income results and may increase or decrease the level of net interest income sensitivity. 2018 Form 10-K 48 The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding at December 31, 2018 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 2019 2020 2021 2022 2023 Thereafter Total Balance Fair Value ($ in thousands) Interest sensitive assets: Interest bearing deposits with banks Investment securities held to maturity Investment securities available for sale Loans held for sale, at fair value Loans Total interest sensitive assets Interest sensitive liabilities: Deposits: Savings, NOW and money market Time Short-term borrowings Long-term borrowings Junior subordinated debentures Total interest sensitive liabilities Interest sensitivity gap Ratio of interest sensitive assets to interest sensitive liabilities 2.35% $ 177,088 $ — $ — $ — $ — $ — $ 177,088 $ 177,088 3.52 2.85 4.65 4.49 437,470 274,955 262,828 215,431 188,457 689,105 2,068,246 2,034,943 135,166 285,461 234,334 258,821 148,426 687,336 1,749,544 1,749,544 35,155 — — — — — 35,155 35,155 10,559,163 3,056,634 2,703,476 2,312,576 2,106,710 4,296,910 25,035,469 24,068,755 4.31% $ 11,344,042 $ 3,617,050 $ 3,200,638 $ 2,786,828 $ 2,443,593 $ 5,673,351 $ 29,065,502 $ 28,065,485 0.78% $ 11,213,495 $ — $ — $ — $ — $ — $ 11,213,495 $ 11,213,495 2.10 2.45 3.30 5.10 4,987,313 1,551,066 163,059 176,727 143,287 42,532 7,063,984 7,005,573 2,118,914 — — — — — 2,118,914 2,091,892 244,666 25,000 840,000 250,000 194,602 100,000 1,654,268 1,751,194 55,370 — — — — — 55,370 55,692 1.56% $ 18,619,758 $ 1,576,066 $ 1,003,059 $ 426,727 $ 337,889 $ 142,532 $ 22,106,031 $ 22,117,846 $ (7,275,716) $ 2,040,984 $ 2,197,579 $ 2,360,101 $ 2,105,704 $ 5,530,819 $ 6,959,471 $ 5,947,639 0.61:1 2.29:1 3.19:1 6.53:1 7.23:1 39.80:1 1.31:1 1.27:1 The above table provides an approximation of the projected re-pricing of assets and liabilities at December 31, 2018 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 2018 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, 2018 was a negative $7.3 billion, representing a ratio of interest sensitive assets to interest sensitive liabilities of 0.61:1. 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, 2018. 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, 2018 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. 49 2018 Form 10-K Liquidity Bank Liquidity. Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is monitored by our Asset/Liability Management Committee and the Investment Committee of the Board of Directors of Valley National Bank, which review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements. The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in excess of 125 percent or reliance on wholesale funding greater than 30 percent of total funding. The Bank was in compliance with the foregoing policies at December 31, 2018. On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available for sale, loans held for sale, and, from time to time, federal funds sold and receivables related to unsettled securities transactions. These liquid assets totaled approximately $2.3 billion, representing 8.0 percent of earning assets, at December 31, 2018 and $2.0 billion, representing 9.3 percent of earning assets, at December 31, 2017. Of the $2.3 billion of liquid assets at December 31, 2018, approximately $1.1 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $747 million in principal from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities. Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at December 31, 2018) are projected to be approximately $5.9 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. Core deposits averaged approximately $18.1 billion and $15.4 billion for the years ended December 31, 2018 and 2017, respectively, representing 65.3 percent and 71.8 percent of average earning assets at December 31, 2018 and 2017, 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, 2018: Less than three months Three to six months Six to twelve months More than twelve months Total 2018 (in thousands) 268,842 249,448 288,064 303,048 1,109,402 $ $ 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 $512 million for a short time from these banks on a collective basis. The Bank is also a member of the Federal Home Loan Bank of New York and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. Furthermore, we are able to obtain overnight borrowings from the Federal Reserve Bank via the discount window as a contingency for additional liquidity. At December 31, 2018, our borrowing capacity under the Federal Reserve Bank's discount window was approximately $1.2 billion. We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to 2018 Form 10-K 50 time, federal funds purchased) increased $1.4 billion to $2.1 billion at December 31, 2018 as compared to $748.6 million at December 31, 2017 mostly due to new FHLB advances used for normal loan funding activity and liquidity purposes. The change in short-term borrowings is generally driven by the levels of loan originations both for investment and sale, repayments of long- term borrowings, and our use of time deposits, fully insured brokered deposits and other short-term funding in our current liquidity/ funding strategies. Average short-term FHLB advances exceeded 30 percent of total shareholders' equity at December 31, 2018 and 2017, respectively. The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the years ended December 31, 2018 and 2017: FHLB advances: Average balance outstanding Maximum outstanding at any month-end during the period Balance outstanding at end of period Weighted average interest rate during the period Weighted average interest rate at the end of the period 2018 2017 ($ in thousands) $ $ 1,828,751 2,607,000 1,732,000 1,196,507 1,907,000 427,000 1.00% 2.44 1.07% 1.34 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, 2018, our investment portfolio was comprised of 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, Fannie Mae and Freddie Mac. 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 and corporate bonds (including some issued by banks) 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. 51 2018 Form 10-K Investment securities at December 31, 2018, 2017 and 2016 were as follows: Held to maturity U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Total investment securities held to maturity (amortized cost) Available for sale U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Total debt securities Equity securities Total investment securities available for sale (fair value) Total investment securities $ $ $ $ $ 2018 2017 (in thousands) 2016 138,517 8,721 $ 138,676 9,859 $ 138,830 11,329 341,702 243,954 585,656 1,266,770 37,332 31,250 2,068,246 49,306 36,277 97,113 99,979 197,092 1,429,782 — 37,087 1,749,544 — 1,749,544 3,817,790 $ $ $ $ 244,272 221,606 465,878 1,131,945 49,824 46,509 1,842,691 49,642 42,505 38,219 74,665 112,884 1,223,295 3,214 51,164 1,482,704 11,201 1,493,905 3,336,596 $ $ $ $ 252,185 314,405 566,590 1,112,460 59,804 36,559 1,925,572 49,591 23,041 40,342 79,425 119,767 1,015,542 8,009 60,565 1,276,515 20,858 1,297,373 3,222,945 As of December 31, 2018, total investments increased $481.2 million or 14.4 percent as compared to 2017 largely due to an increase in residential mortgage-backed securities classified as held for maturity and available for sale totaling a combined $341.3 million, and a $204.0 million combined increase in obligations of states and state agencies classified as held to maturity and available for sale. These increases were mainly driven by investment securities acquired from USAB. See Note 2 to the consolidated financial statements for additional information. At December 31, 2018, we had $1.3 billion and $1.4 billion of residential mortgage-backed securities classified as held to maturity and available for sale, respectively. Approximately 71 percent and 69 percent of these residential mortgage-backed securities, respectively, were issued and guaranteed by Ginnie Mae. The remainder of our outstanding residential mortgage-backed security balances at December 31, 2018 were issued by either Freddie Mac or Fannie Mae. 2018 Form 10-K 52 The following table presents the remaining contractual maturities (unadjusted for any expected prepayments) with the corresponding weighted-average yields of held to maturity and available for sale debt securities at December 31, 2018: 0-1 year 1-5 years 5-10 years Over 10 years Total Amount (1) Yield (2) Amount (1) Yield (2) Amount (1) Yield (2) Amount (1) Yield (2) Amount (1) Yield (2) ($ in thousands) $ — — —% $ 108,966 2.90% $ 29,551 3.06% $ — —% $ 138,517 2.93% — — — — — 8,721 2.53 8,721 2.53 8,125 11,293 1.59 4.16 48,680 105,492 5.07 4.03 135,071 76,861 4.64 3.92 149,826 50,308 3.60 6.12 341,702 243,954 4.17 4.43 19,418 3.08 154,172 4.36 211,932 4.38 200,134 4.23 585,656 4.28 Held to maturity U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: (3) Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities (4) Trust preferred securities Corporate and other debt securities 2,000 2.37 11,250 — — — — 5,197 — 3.19 — 2.77 23,047 1,353 18,000 3.03 8.23 4.64 1,238,526 35,979 — 2.92 4.86 — 1,266,770 37,332 31,250 2.92 4.98 3.82 Total Available for sale U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: (3) Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities (4) Corporate and other debt securities $ 21,418 3.02% $ 279,585 3.70% $ 283,883 4.17% $1,483,360 3.14% $ 2,068,246 3.36% $ — — —% $ 49,306 1.60% $ — 2,850 1.64 — — —% $ — —% $ 49,306 1.60% — 33,427 3.18 36,277 3.06 2,002 2,640 2.28 2.71 18,484 37,502 3.36 2.69 24,091 30,372 4.39 4.49 52,536 29,465 4.24 4.80 97,113 99,979 4.07 3.86 4,642 2.52 55,986 2.91 54,463 4.45 82,001 4.44 197,092 3.96 15 — 5.08 — 9,039 14,910 2.38 2.92 80,570 22,177 2.74 4.55 1,340,158 — 2.84 — 1,429,782 37,087 2.83 3.89 Total $ 4,657 2.53% $ 132,091 2.36% $ 157,210 3.59% $1,455,586 2.94% $ 1,749,544 2.95% (1) Held to maturity 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. 53 2018 Form 10-K The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the date of our purchase of the securities. For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio. The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at December 31, 2018. Held to maturity investment grades:* AAA Rated AA Rated A Rated BBB Rated Non-investment grade Not rated Total investment securities held to maturity Available for sale investment grades:* AAA Rated AA Rated A Rated BBB Rated Non-investment grade Not rated $ $ $ Total investment securities available for sale $ Amortized Cost December 31, 2018 Gross Unrealized Gains Gross Unrealized Losses (in thousands) Fair Value 1,628,611 285,607 36,606 3,000 — 114,422 2,068,246 1,616,252 88,204 21,227 17,982 10,436 42,303 1,796,404 $ $ $ $ 9,684 4,113 366 60 — 213 14,436 1,725 42 27 127 — 74 1,995 $ $ $ $ (36,504) $ (1,698) (353) — — (9,184) (47,739) $ (43,851) $ (1,705) (412) (367) (1,267) (1,253) (48,855) $ 1,601,791 288,022 36,619 3,060 — 105,451 2,034,943 1,574,126 86,541 20,842 17,742 9,169 41,124 1,749,544 * Rated using external rating agencies (primarily S&P and Moody’s). 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 (in the above table) in both held to maturity and available for sale investment securities are mainly related to residential mortgage-backed securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac. The held to maturity portfolio includes $114.4 million in investments not rated by the rating agencies with aggregate unrealized losses of $9.2 million at December 31, 2018. The unrealized losses for this category included $5.9 million of unrealized losses related to 4 single-issuer bank trust preferred issuances with a combined amortized cost of $36 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, 2018, all of the issuers appear to meet the regulatory capital minimum requirements to be considered a “well- capitalized” financial institution and/or have maintained performance levels adequate to support the contractual cash flows of the security. There was no other-than-temporary impairment recognized in earnings as a result of Valley's impairment analysis of its securities during the years ended December 31, 2018, 2017 and 2016 as the collateral supporting much of the investment securities has improved or performed as expected. During the fourth quarter of 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. 2018 Form 10-K 54 Loan Portfolio The following table reflects the composition of the loan portfolio for the years indicated. Commercial and industrial Commercial real estate: Commercial real estate Construction Total commercial real estate Residential mortgage Consumer: Home equity Automobile Other consumer Total consumer loans Total loans * As a percent of total loans: Commercial and industrial Commercial real estate Residential mortgage Consumer loans Total 2018 2017 $ 4,331,032 $ 2,741,425 At December 31, 2016 ($ in thousands) 2,638,195 $ 2015 2014 $ 2,540,491 $ 2,251,111 12,407,275 1,488,132 13,895,407 4,111,400 9,496,777 851,105 10,347,882 2,859,035 8,719,667 824,946 9,544,613 2,867,918 7,424,636 754,947 8,179,583 3,130,541 6,160,881 533,134 6,694,015 2,576,372 517,089 1,319,571 860,970 2,697,630 $ 25,035,469 446,280 1,208,902 728,056 2,383,238 $ 18,331,580 469,009 1,139,227 577,141 2,185,377 $ 17,236,103 511,203 1,239,313 441,976 2,192,492 $ 16,043,107 497,247 1,144,831 310,337 1,952,415 $ 13,473,913 17.3% 55.5 16.4 10.8 100% 15.0% 56.4 15.6 13.0 100% 15.3% 55.4 16.6 12.7 100% 15.8% 51.0 19.5 13.7 100% 16.7% 49.7 19.1 14.5 100% * Total loans are net of unearned premiums and deferred loan costs of $21.5 million, $22.2 million, $15.3 million and $3.5 million at December 31, 2018, 2017, 2016 and 2015, respectively, as compared to unearned discounts and deferred loan fees of $9.0 million at December 31, 2014. Total loans increased by $6.7 billion to $25.0 billion at December 31, 2018 from December 31, 2017, net of residential mortgage loans sold during 2018. Adjusted for $3.7 billion of loans acquired from USAB on January 1, 2018, total loans grew by 13.4 percent in 2018 due to strong demand in most loan categories discussed further below. During 2018, Valley also originated $406.1 million of residential mortgage loans for sale rather than investment. Loans held for sale totaled $35.2 million and $15.1 million at December 31, 2018 and 2017, 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, 2018, our PCI loan portfolio increased $2.8 billion to $4.2 billion as compared to December 31, 2017 primarily due to the PCI loan classification of all the loans acquired from USAB on January 1, 2018. Commercial and industrial loans totaled $4.3 billion at December 31, 2018 and increased by $1.6 billion from December 31, 2017 mainly due to a $1.0 billion increase from December 31, 2017 in the non-PCI loan portfolio, and $583 million of PCI loans acquired from USAB. The increase in non-PCI loans was due to strong organic growth mostly driven by new small to middle market lending relationships within our regions established by focused calling efforts by our experienced lending teams. We have enhanced the commercial teams through targeted hires over the last 12 to 18 months. The growth is also partly due to our lending teams in the new Florida markets, and, to a lesser extent, increased new business investment by pre-existing Valley relationships. While we are optimistic about the first quarter of 2019 and current loan pipeline, we do expect some leveling off of loan growth as compared to 2018 due to a number of factors, including a competitive marketplace for strong borrowers, lower business investment, a decline in the initial expansion opportunities with existing customers in the Tampa, Florida market, as well as normal PCI and other loan repayments. Commercial real estate loans (excluding construction loans) increased $2.9 billion to $12.4 billion at December 31, 2018 from December 31, 2017 mainly due to $1.7 billion of PCI loans acquired from USAB and a $1.4 billion increase in non-PCI loan portfolio from December 31, 2017, 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 pre-exiting relationships in our Florida market area where we have taken full advantage of Valley's higher lending 55 2018 Form 10-K capacity with former USAB customers, as well as targeted growth in New Jersey and New York. Construction loans totaled $1.5 billion at December 31, 2018 and increased $637.0 million from December 31, 2017 partly due to $338 million of PCI loans acquired from USAB. The remaining net increase was mainly driven by organic growth in the new Florida markets, as well as advances on existing construction projects. Residential mortgage loans totaled $4.1 billion at December 31, 2018 and increased by $1.3 billion from December 31, 2017 due to strong production from our home mortgage consultant team over the past 12 months. Our new and refinanced residential mortgage loan originations increased 82.4 percent to $1.7 billion for the year ended December 31, 2018 as compared to $955.7 million in 2017. Of the $1.7 billion in total originations, $262 million represented Florida residential mortgage loans. During 2018, Valley sold $676 million of residential mortgages originated for sale as compared to approximately $801 million of mortgages sold during the year ended December 31, 2017. 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 (FHA). During 2018, Valley purchased approximately $105 million of 1-4 family loans, qualifying for CRA purposes. Our residential mortgage production declined approximately 12 percent in the fourth quarter of 2018 as compared to the linked third quarter of 2018. However, we have seen good loan application volumes in the early stages of the first quarter of 2019 and the current economy and market interest rates for residential mortgages have remained favorable for consumer demand. Consumer loans totaled $2.7 billion at December 31, 2018 and increased $314.4 million from December 31, 2017 mainly due to growth in automobile and secured personal lines of credit. Automobile loans increased $110.7 million to $1.3 billion at December 31, 2018 from December 31, 2017 primarily due to higher indirect auto application activity during the second half of 2018. Additionally, our Florida dealership network contributed over $155 million in auto loan originations, representing approximately 24 percent of Valley's total new auto loan production for 2018 as compared to $106 million, or 19 percent, of total originations in 2017. While we're optimistic that this positive trend in new loan production will continue into the first quarter of 2019, we can provide no assurance that our auto loans will not decline in future periods. Other consumer loans increased $132.9 million to $861.0 million at December 31, 2018 as compared to 2017 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 increased only $70.8 million in 2018 from $446.3 million at December 31, 2017 mainly due to $91.2 million loans acquired from USAB, partially offset by normal repayment activity. The non-PCI loans slightly declined year over year, as new home equity loan volumes and customer usage of existing home equity lines of credit continued to be weak in 2018. We believe this trend may continue for the first quarter of 2019 due to many factors, including the Tax Act changes that limit the deductibility of mortgage interest expense for homeowners. Despite the overall strong organic loan growth experienced in 2018, we expect this trend to moderately slowdown in both commercial and consumer lending activities in 2019. However, we will continue to focus on new niche commercial loan programs to increase the overall yield of our loan portfolio and provide supplemental growth opportunities. For 2019, 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, 2018 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. Geographically, we may make further inroads into our primary lending markets through bank acquisitions, such as our recent acquisition of USAB, as well as select de novo branch efforts or adding lending staff. 2018 Form 10-K 56 The following table reflects the contractual maturity distribution of the commercial and industrial and construction loans within our loan portfolio as of December 31, 2018: Commercial and industrial—fixed-rate Commercial and industrial—adjustable-rate Construction—fixed-rate Construction—adjustable-rate One Year or Less One to Five Years Over Five Years Total $ $ 570,642 517,618 228,724 719,553 2,036,537 $ $ (in thousands) 747,242 677,808 89,687 282,150 1,796,887 $ $ 953,144 864,578 40,526 127,492 1,985,740 $ $ 2,271,028 2,060,004 358,937 1,129,195 5,819,164 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. Purchased Credit-Impaired Loans (Including Covered Loans) PCI loans increased $2.8 billion to $4.2 billion at December 31, 2018 from $1.4 billion at December 31, 2017 mainly due to $3.7 billion of PCI loans acquired from USAB on January 1, 2018, partially offset by normal repayment activity. Our PCI loans include loans acquired in business combinations subsequent to 2011 and, to a much lesser extent, covered loans in which the Bank will share losses with the FDIC under loss-sharing agreements. Our covered loans, consisting of residential mortgage and other consumer loans totaled $27.6 million at December 31, 2018. 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 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. 57 2018 Form 10-K 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, 2018 and 2017. Balance, beginning of the period Acquisition Accretion Payments received Net increase in expected cash flows Transfers to other real estate owned Balance, end of the period 2018 2017 Carrying Amount Accretable Yield Carrying Amount Accretable Yield $ $ 1,387,215 3,736,984 235,741 (1,169,661) — (193) 4,190,086 $ $ (in thousands) 282,009 559,907 (235,741) — 269,783 — 875,958 $ $ 1,771,502 — 89,770 (470,523) — (3,534) 1,387,215 $ $ 294,514 — (89,770) — 77,265 — 282,009 The net increase in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools. The net increase in the expected cash flows totaling approximately $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 of 2018. The net increase in the expected cash flows totaling $77.3 million for the year ended December 31, 2017 was largely due to a decrease in the expected losses for certain PCI loan pools during the fourth quarter of 2017. Non-performing Assets Non-performing assets (NPAs), which exclude non-performing PCI loans, include non-accrual loans, other real estate owned (OREO) and other repossessed assets (which consist of automobiles) at December 31, 2018. 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 $98.6 million at December 31, 2018 increased 71.6 percent over the last 12-month period (as shown in the table below) primarily due to higher non-accrual commercial and industrial loans, which included $58.4 million of non- accrual taxi medallion loans at December 31, 2018 as compared to $14.2 million of such loans at December 31, 2017. NPAs as a percentage of total loans and NPAs totaled 0.39 percent and 0.31 percent at December 31, 2018 and 2017, respectively. Despite the year over year increase largely driven by the taxi medallion loan portfolio, we believe the total NPAs has remained relatively low as a percentage of the total loan portfolio and NPAs 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. 2018 Form 10-K 58 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: Accruing past due loans (1) 30 to 59 days past due Commercial and industrial Commercial real estate Construction Residential mortgage Total Consumer Total 30 to 59 days past due 60 to 89 days past due Commercial and industrial Commercial real estate Construction Residential mortgage Total Consumer Total 60 to 89 days past due 90 or more days past due Commercial and industrial Commercial real estate Construction Residential mortgage Total Consumer Total 90 or more days past due Total accruing past due loans Non-accrual loans (1) Commercial and industrial Commercial real estate Construction Residential mortgage Total Consumer Total non-accrual loans Non-performing loans held for sale Other real estate owned (OREO) (2) Other repossessed assets Non-accrual debt securities Total non-performing assets Performing troubled debt restructured loans Total non-accrual loans as a % of loans Total NPAs as a % of loans and NPAs Total accruing past due and non-accrual loans as a % of loans Allowance for loan losses as a % of non-accrual loans 2018 2017 At December 31, 2016 ($ in thousands) 2015 2014 $ $ $ $ $ 13,085 9,521 2,829 16,576 9,740 51,751 3,768 530 — 2,458 1,386 8,142 6,156 27 — 1,288 341 7,812 67,705 70,096 2,372 356 12,917 2,655 88,396 — 9,491 744 — 98,631 $ $ $ 3,650 11,223 12,949 12,669 8,409 48,900 544 — 18,845 7,903 1,199 28,491 — 27 — 2,779 284 3,090 80,481 20,890 11,328 732 12,405 1,870 47,225 — 9,795 441 — $ 57,461 77,216 $ 117,176 $ $ $ $ $ 6,705 5,894 6,077 12,005 4,197 34,878 5,010 8,642 — 3,564 1,147 18,363 142 474 1,106 1,541 209 3,472 56,713 8,465 15,079 715 12,075 1,174 37,508 — 9,612 384 1,935 49,439 85,166 $ $ $ $ $ 3,920 2,684 1,876 6,681 3,348 18,509 524 — 2,799 1,626 626 5,575 213 131 — 1,504 208 2,056 26,140 10,913 24,888 6,163 17,930 2,206 62,100 — 13,563 437 2,142 78,242 77,627 $ $ $ $ $ 1,630 8,938 448 6,200 2,982 20,198 1,102 113 — 3,575 764 5,554 226 49 3,988 1,063 152 5,478 31,230 8,467 22,098 5,223 17,760 2,209 55,757 7,130 14,249 1,232 4,729 83,097 97,743 0.35% 0.39 0.26% 0.31 0.22% 0.29 0.39% 0.49 0.41% 0.61 0.62 0.70 0.55 0.55 0.65 171.79 255.92 305.05 170.98 183.57 59 2018 Form 10-K (1) Past due loans and non-accrual loans exclude PCI loans that are accounted for on a pool basis. (2) This table excludes covered OREO properties subject to loss-sharing agreements with the FDIC totaling $558 thousand, $5.0 million and $9.2 million at December 31, 2016, 2015, and 2014, respectively. There were no covered OREO properties at December 31, 2018 and 2017. Loans past due 30 to 59 days increased $2.9 million to $51.8 million at December 31, 2018 as compared to $48.9 million at December 31, 2017, mostly due to an increase in commercial and industrial loan delinquencies, partially offset by decreases in construction loan and commercial real estate loan delinquencies. Commercial and industrial loan delinquencies increased $9.4 million as compared to December 31, 2017 partly due to two loan relationships in the normal process of renewal totaling $6.0 million at December 31, 2018. Construction loans within this delinquency category decreased $10.1 million to $2.8 million at December 31, 2018 as compared to one year ago mainly due to two loan relationships reported at December 31, 2017 of which both were subsequently brought current to their contractual terms. Loans past due 60 to 89 days decreased $20.3 million to $8.1 million at December 31, 2018 as compared to December 31, 2017 largely due to an $18.8 million decrease in construction loan delinquencies. This decrease was mainly due to four loan relationships in the normal process of renewal or collection that were included in this loan category at December 31, 2017. Loans 90 days or more past due and still accruing increased $4.7 million to $7.8 million at December 31, 2018 as compared to December 31, 2017. Commercial and industrial loan delinquencies increased $6.2 million 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 $41.2 million to $88.4 million at December 31, 2018 as compared to December 31, 2017 mainly due to an increase in taxi medallion loans within the commercial and industrial loan category. Non-accrual taxi medallion loans increased $44.3 million to $58.5 million at December 31, 2018 as compared to $14.2 million at December 31, 2017 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, 2018 and 2017. 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, 2018, 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 $156.6 million at December 31, 2018 and had $33.0 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 $3.6 million, $2.5 million and $2.1 million for the years ended December 31, 2018, 2017 and 2016, respectively; none of these amounts were included in interest income during these periods. During 2018, we continued to closely monitor the performance of our New York City (NYC) and Chicago taxi medallion loans totaling $121.8 million and $8.4 million, respectively, within the commercial and industrial loan portfolio at December 31, 2018. 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, 2018, the medallion portfolio included impaired loans totaling $73.7 million with related reserves of $27.9 million within the allowance for loan losses as compared to impaired loans totaling $63.9 million with related reserves of $9.1 million at December 31, 2017. At December 31, 2018, the impaired medallion loans largely consisted of $58.5 million of non-accrual taxi cab medallion loans classified as doubtful, as well as performing troubled debt restructured (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, 2018 (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 $10.6 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at December 31, 2018. Additionally, Valley currently has $22.5 million of performing non-impaired taxi medallion loans which are scheduled to mature in 2019, and $18.3 million that mature between 2023 and 2027. If the loans with 2019 maturities were renewed and became TDRs, an additional reserve of $8.6 million would be required based on the allowance methodology at December 31, 2018. 2018 Form 10-K 60 OREO (which consists of 52 commercial and residential properties) decreased $304 thousand to $9.5 million at December 31, 2018 as compared to $9.8 million at December 31, 2017. See additional information regarding OREO and other repossessed assets, including our foreclosed asset activity, in Notes 1 and 3 to the consolidated financial statements. Troubled debt restructured loans (TDRs) represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) decreased $40.0 million to $77.2 million at December 31, 2018 as compared to $117.2 million at December 31, 2017 mainly due to the taxi medallion loans migrating to non-accrual loan status during 2018. Performing TDRs consisted of 119 loans and 141 loans (primarily in the commercial and industrial loan and commercial real estate portfolios) at December 31, 2018 and 2017, respectively. On an aggregate basis, the $77.2 million in performing TDRs at December 31, 2018 had a modified weighted average interest rate of approximately 5.37 percent as compared to a pre-modification weighted average interest rate of 4.70 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 current market interest rates, but with extended loan terms. Potential Problem Loans Although we believe that substantially all risk elements at December 31, 2018 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 $142.8 million and $146.0 million in potential problem loans (consisting mostly of commercial and industrial loans) at December 31, 2018 and 2017, 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, 2018, 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, 2018. 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 $3.4 billion of PCI loans, represent approximately 74 percent of total loans at December 31, 2018. 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 2018 was 70 percent while FICO® (independent objective criteria measuring the creditworthiness of a borrower) scores averaged 748. 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. 61 2018 Form 10-K 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, 2018, a $33.0 million specific valuation allowance was included in the allowance for credit losses related to $156.6 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. 2018 Form 10-K 62 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: Average loans outstanding $ 23,340,330 $17,819,003 $16,400,745 $ 14,447,020 $12,081,683 2018 Years Ended December 31, 2016 2017 2015 2014 ($ in thousands) Beginning balance—Allowance for credit losses Loans charged-off: Commercial and industrial Commercial real estate Construction Residential mortgage Total Consumer Total loan charge-offs Charged-off loans recovered: Commercial and industrial Commercial real estate Construction Residential mortgage Total Consumer Total loan recoveries Net charge-offs Provision charged for credit losses Ending balance—Allowance for credit losses Components of allowance for credit losses: Allowance for loan losses Allowance for unfunded letters of credit Allowance for credit losses Components of provision for credit losses: Provision for loan losses * Provision for unfunded letters of credit Provision for credit losses Ratio of net charge-offs during the period to average loans outstanding Allowance for credit losses as a % of non- PCI loans Allowance for credit losses as a % of total loans $ 124,452 $ 116,604 $ 108,367 $ 104,287 $ 117,112 (2,515) (348) — (223) (4,977) (8,063) 4,623 417 — 272 2,093 7,405 (658) 32,501 (5,421) (559) — (530) (4,564) (11,074) 4,736 552 873 1,016 1,803 8,980 (2,094) 9,942 (5,990) (650) — (866) (3,463) (10,969) 2,852 2,047 10 774 1,654 7,337 (3,632) 11,869 (7,928) (1,864) (926) (813) (3,441) (14,972) 7,233 846 913 421 1,538 10,951 (4,021) 8,101 (12,722) (4,894) (4,576) (1,004) (3,702) (26,898) 6,874 2,198 912 248 1,957 12,189 (14,709) 1,884 $ 156,295 $ 124,452 $ 116,604 $ 108,367 $ 104,287 $ 151,859 $ 120,856 $ 114,419 $ 106,178 $ 102,353 4,436 156,295 31,661 840 32,501 $ $ $ 3,596 124,452 8,531 1,411 9,942 $ $ $ 2,185 116,604 11,873 (4) 11,869 $ $ $ $ $ $ 2,189 108,367 7,846 255 8,101 1,934 104,287 3,445 (1,561) 1,884 $ $ $ 0.00% 0.01% 0.02% 0.03% 0.12% 0.75 0.62 0.73 0.68 0.75 0.68 0.79 0.68 0.89 0.77 * Includes a negative (credit) provision for covered loans totaling $5.9 million for 2014. There was no provision for covered loans in 2018, 2017, 2016, and 2015. Our net loan charge-offs decreased $1.4 million to $658 thousand in 2018 as compared to $2.1 million in 2017. The improvement in net loan charge-offs as compared to the year ended December 31, 2017 was due, in part, to lower commercial and industrial loan gross charge-offs during 2018. Net charge-offs have steadily declined over the last four years and have remained relatively low over the last five years as compared to many of our peers. During this five-year period, our net charge-offs were at a high of 0.12 percent of average loans 63 2018 Form 10-K during 2014 and a low of 0.00 percent of average loans during 2018. The lower level of our net loan charge-offs during 2018 was largely as a result of the continued solid performance of our loan portfolio, strong collections and a favorable economic environment. While we have a positive outlook for the future performance of the loan portfolio and the economy, there can be no assurance that our levels of net charge-offs will not deteriorate in 2019, especially given the relatively modest levels realized in the past five years. Despite the low level of net loan charge-offs, the provision for credit losses increased $22.6 million to $32.5 million in 2018 as compared to 2017 largely due to strong loan growth and higher allocated reserves for impaired loans (mostly related to taxi medallion loans within commercial and industrial loans). The following table summarizes the allocation of the allowance for credit losses to specific loan portfolio categories for the past five years: 2018 2017 2016 2015 2014 Percent of Loan Category to total loans Allowance Allocation Allowance Allocation Percent of Loan Category to total loans Percent of Loan Category to total loans Allowance Allocation ($ in thousands) Percent of Loan Category to total loans Allowance Allocation Percent of Loan Category to total loans Allowance Allocation Loan Category: Commercial and industrial* Commercial real estate: Commercial real estate Construction Residential mortgage Total Consumer Unallocated Total allowance for credit losses $ 95,392 17.3% $ 60,828 15.0% $ 53,005 15.3% $ 50,956 15.8 % $ 45,610 16.7% 26,482 23,168 5,041 6,212 — 49.6 5.9 16.4 10.8 — 36,293 18,661 3,605 5,065 — 51.8 4.6 15.6 13.0 — 36,405 19,446 3,702 4,046 — 50.6 4.8 16.6 12.7 32,037 15,969 4,625 4,780 — 46.3 4.7 19.5 13.7 — 27,426 15,414 5,093 5,179 5,565 45.7 4.0 19.1 14.5 — $ 156,295 100% $ 124,452 100% $ 116,604 100% $ 108,367 100 % $ 104,287 100% * 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 0.62 percent at December 31, 2018 and 0.68 percent at December 31, 2017. Our allowance allocations for losses at December 31, 2018 increased across most loan categories mainly due strong organic loan growth. The increased allowance allocation for the commercial and industrial loans category (see table above) at December 31, 2018 was also partly due to higher specific reserves for impaired taxi medallion loans. At December 31, 2018, the allowance allocation for commercial real estate loans declined to $26.5 million from $36.3 million at December 31, 2017 mainly due to a continued decline in historical loss rates over the prolonged current economic cycle. Additionally, our estimate of the allowance for credit losses at December 31, 2018 was impacted by the level of net charge-offs and internally classified loans, assumptions based on the current economic environment, as well as other qualitative factors. Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately $4.2 billion) was 0.75 percent at December 31, 2018 as compared to 0.73 percent at December 31, 2017. 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, 2018 and 2017. See Notes 1 and 6 to the consolidated financial statements for additional information regarding our allowance for loan losses. Prior to December 31, 2015, the allowance also contained reserves identified as the unallocated portion in the table above to cover inherent losses within a given loan category which have not been otherwise reviewed or measured on an individual basis. Such reserves represented management’s attempt to ensure that the overall allowance reflected a margin for imprecision and the uncertainty that is inherent in estimates of probable credit losses. During 2015, Valley refined and enhanced its assessment of the adequacy of the allowance for loan losses. As a result, Valley no longer has an “unallocated” segment in its allowance for credit losses, as the risks and uncertainties meant to be captured by the unallocated allowance have been included in the qualitative framework for the respective portfolios at December 31, 2018, 2017, 2016 and 2015. As such, the unallocated allowance has in essence been reallocated to the certain portfolios based on the risks and uncertainties it was meant to capture. 2018 Form 10-K 64 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 and 2014 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 $676 million and $801 million for 2018 and 2017, 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, 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 five loan repurchases in 2018 and two loan repurchase in 2017). 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, 2018 and 2017. 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, 2018 and 2017, shareholders’ equity totaled approximately $3.4 billion and $2.5 billion, or 10.5 percent and 10.6 percent of total assets, respectively. During 2018, total shareholders’ equity increased by $817.3 million primarily due to (i) the additional capital of $737.2 million issued in the USAB acquisition, (ii) net income of $261.4 million, (iii) a $17.2 million increase attributable to the effect of our stock incentive plan, and (iv) net proceeds of $1.0 million from the reissuance of treasury stock and issuance of authorized common shares issued under our dividend reinvestment plan totaling 87 thousand shares. The positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $159.0 million, (ii) $23.4 million of other comprehensive losses, and (iii) a $17.1 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2018. Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations. Effective January 1, 2015, Valley implemented the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Basel III final rules require a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent. The rule changes included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer was subject to a three-year phase-in period that started on January 1, 2016, at 0.625 percent of risk-weighted assets and increases each subsequent year by 0.625 percent until reaching its final level of 2.5 percent, which was fully phased-in on January 1, 2019. As of December 31, 2018 and 2017, Valley and Valley National Bank exceeded all capital adequacy requirements with the capital conservation buffer under the Basel III Capital Rules. See Note 17 for Valley’s and Valley National Bank’s regulatory capital positions and capital ratios at December 31, 2018 and 2017. 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 41.3 percent and 24.1 percent for the years ended December 31, 2018 and 2017, respectively. Our retention ratio increased from the year ended December 31, 2017, however it was negatively impacted by infrequent charges, including legal expenses related to litigation reserves, USAB merger expense, branch asset impairment and severance costs related to our Branch Transformation strategy. Our retention ratio is expected to improve in 2019 due to, among other factors, higher earnings from continued loan growth and further implementation of our LIFT and Branch Transformation initiatives. Cash dividends declared amounted to $0.44 per common share for both years ended December 31, 2018 and 2017. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow in light of 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. 65 2018 Form 10-K 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 18 to the consolidated financial statements for additional information on Valley’s stock issuances. 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, 2018. 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. Contractual obligations: Time deposits Long-term borrowings (1) Junior subordinated debentures issued to capital trusts (1) Operating leases Capital expenditures Other purchase obligations (2) Total Other commitments: Commitments to extend credit Standby letters of credit Commitments to sell loans Total Note to Financial Statements Note 9 Note 10 Note 11 Note 15 One Year or Less One to Three Years Three to Five Years Over Five Years Total (in thousands) $ 4,987,313 $ 1,714,126 $ 320,014 $ 42,531 $ 7,063,984 255,000 865,000 375,000 160,000 1,655,000 — 29,093 51,526 44,357 — 58,304 — 1,488 $ 5,367,289 $ 2,638,918 Note 15 Note 15 Note 15 $ 3,709,389 $ 1,623,627 210,685 58,897 41,803 — — 52,626 — 44 747,684 508,858 37,377 — $ $ 60,827 262,200 — — 60,827 402,223 51,526 45,889 525,558 $ 9,279,449 805,257 $ 6,647,131 27,076 — 316,941 58,897 $ $ $ 3,978,971 $ 1,665,430 $ 546,235 $ 832,333 $ 7,022,969 (1) Amounts presented consist of the contractual principal balances. Carrying values and call dates are set forth in Notes 10 and 11 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 benefit plans, not included in the above table, as further described in Note 12 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 2018 Form 10-K 66 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. 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, 2018. See Note 11 of the consolidated financial statements for additional information on our statutory trusts and the related junior subordinated debentures and trust preferred securities. Results of Operations—2017 Compared to 2016 Net interest income on a tax equivalent basis increased by $50.1 million to $676.6 million for 2017 compared with $626.5 million for 2016. The increase was mainly driven by a $1.4 billion increase in average loan balances, partially offset by interest expense related to a $1.1 billion increase in average interest bearing liabilities as compared to 2016. Average interest earning assets totaling $21.5 billion for the year ended December 31, 2017 increased $1.7 billion, or 8.4 percent, as compared to 2016. Average loan balances increased $1.4 billion to $17.8 billion in 2017 and drove the $56.8 million increase in the interest income on a tax equivalent basis for loans as compared to 2016. The growth in average loans during 2017 was fueled mostly by solid demand for commercial real estate loans and secured personal lines of credit throughout the year, supplemented by $411 million of purchased loans primarily consisting of participations in multi-family loans and whole 1-4 family loans that were a mix of qualifying and non-qualifying CRA loans. Average investment securities increased $339.5 million to approximately $3.5 billion in 2017 due to moderate expansion of the taxable portfolio mostly within the residential mortgage- backed securities classified as available for sale category. Average federal funds sold and other interest bearing deposits decreased $98.5 million to $189.6 million for the year ended December 31, 2017 as compared to 2016 mostly due to lower levels of overnight liquidity held primarily by fluctuations in the timing of new loan originations and loan purchases. Average interest bearing liabilities increased $1.1 billion to $15.6 billion for the year ended December 31, 2017 from the same period in 2016 due to increases in several funding categories. Average savings, NOW and money market accounts increased $371.1 million mostly due to retail money market account gathering initiatives during the second half of 2017 partially offset by slightly lower utilization of brokered money market account balances in our loan growth funding strategy and other liquidity needs in 2017. Average time deposits increased $225.4 million to $3.3 billion for 2017 as compared to 2016 mainly due to similar retail certificate of deposit strategies executed in the second half of 2017. Average short-term and long-term borrowings increased $239.2 million and $279.7 million in 2017, respectively, as compared to 2016 due, in part, to a higher level of FHLB borrowings used to fund new loan and investment activities, partially offset by declines in both short and long-term securities sold under agreements to repurchase. Non-interest income represented 10.9 percent and 11.9 percent of total interest income plus non-interest income for 2017 and 2016, respectively. For the year ended December 31, 2017, non-interest income increased $216 thousand as compared to 2016 mainly due to increases in net gains on sales of loans, trust and investment services income, and fees from loans servicing, partially offset by lower insurance commissions. Net gains on sales of loans decreased $1.2 million for the year ended December 31, 2017 as compared to 2016 largely due to lower spreads (or margins) on individual loan sales despite a higher volume of residential mortgage loans sold during 2017. Trusts and investment services income increased $1.2 million for the year ended December 31, 2017 as compared to 2016 mainly due to higher investment and advisory fees resulting from increased assets under management during 2017. The increase in assets under management was largely due to higher market valuations and asset appreciation during 2017. Fees from loan servicing increased $943 thousand for the year ended December 31, 2017 as compared to $6.4 million in 2016 mainly due to the high volume of loans originated for sale and significantly higher sales volumes during 2017. Valley retains loan servicing on the majority of its loans originated and sold in the secondary market. 67 2018 Form 10-K The increases in non-interest income were partially offset by a decrease in insurance commissions totaling $950 thousand for the year ended December 31, 2017 from $19.1 million in 2016 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary. Non-interest expense increased $32.9 million to $509.1 million for the year ended December 31, 2017 as compared to 2016. The increase was mainly attributable to increases in salaries and employee benefits, professional and legal fees, amortization of tax credit investments, and net occupancy and equipment expenses. Salary and employee benefits expense increased by $18.7 million for the year ended December 31, 2017 due to increased salaries and cash incentive compensation (both paid and accrued) for the year ended December 31, 2017. The increases were largely due to normal increases in annual compensation and incentives, expansion of our technology and home mortgage consultant teams, stock-based compensation expense as well as severance costs totaling $3.8 million related to our LIFT initiative recognized during the third quarter of 2017. Professional and legal fees also increased $8.1 million for the year ended December 31, 2017 as compared to 2016 largely due to advisory and legal fees related to our LIFT program and the acquisition of USAB during 2017. In addition, amortization of tax credit investments increased $7.0 million for the year ended December 31, 2017 as compared to 2016 mostly due to a $4.3 million charge related to the impairment of tax credit investments caused by the Tax Act, as well as normal differences in the timing and amount of such investments and recognition of the related tax credits. Lastly, net occupancy and equipment expenses increased $5.1 million for the year ended December 31, 2017 as compared to 2016 largely due to higher technology equipment related expense. Income tax expense was $90.8 million for the year ended December 31, 2017, reflecting an effective tax rate of 35.9 percent, as compared to $65.2 million for the year ended 2016, reflecting an effective tax rate of 28.0 percent. The increase in both income tax expense and the effective tax rate in 2017 was primarily caused by the estimated impact of the Tax Act, consisting of an $15.4 million charge resulting from the re-measurement of Valley's estimated net deferred tax asset as of December 31, 2017. Item 7A. Quantitative and Qualitative Disclosures About Market Risk For information regarding Quantitative and Qualitative Disclosures About Market Risk, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity.” 2018 Form 10-K 68 Item 8. Financial Statements and Supplementary Data CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Assets Cash and due from banks Interest bearing deposits with banks Investment securities: Held to maturity (fair value of $2,034,943 at December 31, 2018 and $1,837,620 at December 31, 2017) Available for sale Total investment securities Loans held for sale, at fair value Loans Less: Allowance for loan losses Net loans Premises and equipment, net Bank owned life insurance Accrued interest receivable Goodwill Other intangible assets, net Other assets Total Assets Liabilities Deposits: Non-interest bearing Interest bearing: Savings, NOW and money market Time Total deposits Short-term borrowings Long-term borrowings Junior subordinated debentures issued to capital trusts Accrued expenses and other liabilities Total Liabilities Shareholders’ Equity Preferred stock, no par value; authorized 50,000,000 shares: Series A (4,600,000 shares issued at December 31, 2018 and December 31, 2017) Series B (4,000,000 shares issued at December 31, 2018 and December 31, 2017) Common stock (no par value, authorized 450,000,000 shares; issued 331,634,951 shares at December 31, 2018 and 264,498,643 shares at December 31, 2017) Surplus Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (203,734 shares at December 31, 2018 and 29,792 shares at December 31, 2017) Total Shareholders’ Equity December 31, 2018 2017 (in thousands except for share data) $ 251,541 177,088 $ 243,310 172,800 2,068,246 1,749,544 3,817,790 35,155 25,035,469 (151,859) 24,883,610 341,630 439,602 95,296 1,084,665 76,990 659,721 31,863,088 $ 1,842,691 1,493,905 3,336,596 15,119 18,331,580 (120,856) 18,210,724 287,705 386,079 73,990 690,637 42,507 542,839 24,002,306 6,175,495 $ 5,224,928 $ $ 11,213,495 7,063,984 24,452,974 2,118,914 1,654,268 55,370 231,108 28,512,634 111,590 98,101 116,240 2,796,499 299,642 (69,431) (2,187) 3,350,454 9,365,013 3,563,521 18,153,462 748,628 2,315,819 41,774 209,458 21,469,141 111,590 98,101 92,727 2,060,356 216,733 (46,005) (337) 2,533,165 Total Liabilities and Shareholders’ Equity $ 31,863,088 $ 24,002,306 See accompanying notes to consolidated financial statements. 69 2018 Form 10-K CONSOLIDATED STATEMENTS OF INCOME 2018 Years Ended December 31, 2017 (in thousands, except for share data) 2016 Interest Income Interest and fees on loans Interest and dividends on investment securities: Taxable Tax-exempt Dividends Interest on other short-term investments Total interest income Interest Expense Interest on deposits: Savings, NOW and money market Time Interest on short-term borrowings Interest on long-term borrowings and junior subordinated debentures Total interest expense Net Interest Income Provision for credit losses Net Interest Income After Provision for Credit Losses Non-Interest Income Trust and investment services Insurance commissions Service charges on deposit accounts (Losses) gains on securities transactions, net Fees from loan servicing Gains on sales of loans, net Bank owned life insurance Other Total non-interest income Non-Interest Expense Salary and employee benefits expense Net occupancy and equipment expense FDIC insurance assessment Amortization of other intangible assets Professional and legal fees Amortization of tax credit investments Telecommunication expenses Other Total non-interest expense Income Before Income Taxes Income tax expense Net Income Dividends on preferred stock Net Income Available to Common Shareholders Earnings Per Common Share: Basic Diluted Cash Dividends Declared Per Common Share Weighted Average Number of Common Shares Outstanding: Basic Diluted $ 1,033,993 $ 734,474 $ 680,876 87,306 21,504 13,209 3,236 1,159,248 108,394 81,959 45,930 65,762 302,045 857,203 32,501 824,702 12,633 15,213 26,817 (2,342) 9,319 20,515 8,691 43,206 134,052 333,816 108,763 28,266 18,416 34,141 24,200 12,102 69,357 629,061 329,693 68,265 261,428 12,688 248,740 0.75 0.75 0.44 $ $ $ $ 72,676 15,399 9,812 1,793 834,154 55,300 42,546 18,034 58,227 174,107 660,047 9,942 650,105 11,538 18,156 21,529 (20) 7,384 20,814 7,338 24,967 111,706 263,337 92,243 19,821 10,016 25,834 41,747 9,921 46,154 509,073 252,738 90,831 161,907 9,449 152,458 0.58 0.58 0.44 $ $ 58,143 15,537 6,206 1,126 761,888 39,787 37,775 12,022 59,190 148,774 613,114 11,869 601,245 10,345 19,106 20,879 777 6,441 22,030 6,694 21,988 108,260 243,222 87,140 20,100 11,327 17,755 34,744 10,021 51,816 476,125 233,380 65,234 168,146 7,188 160,958 0.63 0.63 0.44 331,258,964 332,693,718 264,038,123 264,889,007 254,841,571 255,268,336 See accompanying notes to consolidated financial statements. 2018 Form 10-K 70 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net income $ 261,428 $ 161,907 $ 168,146 2018 Years Ended December 31, 2017 (in thousands) 2016 Other comprehensive (loss) income, net of tax: Unrealized gains and losses on securities available for sale Net (losses) gains arising during the period Less reclassification adjustment for net losses (gains) included in net income Total Non-credit impairment losses on available for sale and held to maturity securities Net change in non-credit impairment losses on securities Less reclassification adjustment for accretion of credit impairment losses included in net income Total Unrealized gains and losses on derivatives (cash flow hedges) Net gains (losses) on derivatives arising during the period Less reclassification adjustment for net losses included in net income Total Defined benefit pension plan Net (losses) gains arising during the period Amortization of prior service cost Amortization of net loss Total Total other comprehensive (loss) income Total comprehensive income $ (22,932) 1,857 (21,075) — 380 380 1,874 2,494 4,368 (7,151) 146 447 (6,558) (22,885) 238,543 352 11 363 498 (167) 331 576 5,028 5,604 (2,722) 191 248 (2,283) 4,015 (4,293) (465) (4,758) 417 (539) (122) (2,461) 7,641 5,180 3,298 (181) 185 3,302 3,602 $ 165,922 $ 171,748 See accompanying notes to consolidated financial statements. 71 2018 Form 10-K CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Common Stock Preferred Stock Shares Amount Surplus Accumulated Other Comprehensive Loss Retained Earnings Treasury Stock Total Shareholders’ Equity ($ in thousands) Balance - December 31, 2015 $ 111,590 253,788 $ 88,626 $1,927,399 $125,171 $ (45,695) $ — $ 2,207,091 Net income Other comprehensive income, net of tax Cash dividends declared on preferred stock Cash dividends declared on common stock Effect of stock incentive plan, net Common stock issued Balance - December 31, 2016 Reclassification due to the adoption of ASU No. 2018-02 Net income Other comprehensive income, net of tax Preferred stock issued Cash dividends declared on preferred stock Cash dividends declared on common stock Effect of stock incentive plan, net Common stock issued Balance - December 31, 2017 Reclassification due to the adoption of ASU No. 2016-01 Reclassification due to the adoption of ASU No. 2017-12 Adjustment due to the adoption of ASU No. 2016-16 Balance - January 1, 2018 Net income Other comprehensive loss, net of tax Cash dividends declared on preferred stock Cash dividends declared on common stock Effect of stock incentive plan, net Common stock issued — — — — — — — — — — 57 — — — — 365 9,794 3,362 — 168,146 — — — (7,188) — (113,212) 10,737 106,265 (143) (20) — 3,602 — — — — — — — (3,894) — 2,045 168,146 3,602 (7,188) (113,212) 7,065 111,652 111,590 263,639 92,353 2,044,401 172,754 (42,093) (1,849) 2,377,156 — — — 98,101 — — — — — — — — — — 117 713 — — — — — — 229 145 — 7,927 — 161,907 — — — — — (9,449) — (116,332) 11,297 4,658 (18) (56) (7,927) — 4,015 — — — — — — — — — — (1,948) — 3,460 — 161,907 4,015 98,101 (9,449) (116,332) 9,560 8,207 209,691 264,469 92,727 2,060,356 216,733 (46,005) (337) 2,533,165 — — — — — — — — — — — 480 61 — (17,611) (480) (61) — — — — — — (17,611) 209,691 264,469 92,727 2,060,356 199,663 (46,546) (337) 2,305,863 — 261,428 — — — (22,885) — — — — — — — — — — — — — 1,955 65,007 — (12,688) — 771 22,742 — (146,346) 21,022 715,121 (2,415) — — — — — — — — (2,198) — 348 261,428 (22,885) (12,688) (146,346) 17,180 738,211 Balance - December 31, 2018 $ 209,691 331,431 $116,240 $2,796,499 $299,642 $ (69,431) $ (2,187) $ 3,350,454 See accompanying notes to consolidated financial statements. 2018 Form 10-K 72 CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Provision for credit losses Net amortization of premiums and accretion of discounts on securities and borrowings Amortization of other intangible assets Losses (gains) on securities transactions, net Proceeds from sales of loans held for sale Gains on sales of loans, net Originations of loans held for sale Losses (gains) on sales of assets, net Net deferred income tax (benefit) expense Net change in: Fair value of borrowings hedged by derivative transactions Cash surrender value of bank owned life insurance Accrued interest receivable Other assets Accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities: Net loan originations and purchases Investment securities held to maturity: Purchases Maturities, calls and principal repayments Investment securities available for sale: Purchases Sales Maturities, calls and principal repayments Death benefit proceeds from bank owned life insurance Proceeds from sales of real estate property and equipment Purchases of real estate property and equipment Cash and cash equivalents acquired in acquisitions Net cash used in investing activities $ Years Ended December 31, 2018 2017 2016 (in thousands) $ 261,428 $ 161,907 $ 168,146 27,554 19,472 32,501 38,454 18,416 2,342 687,983 (20,515) (406,087) 2,402 (11,780) — (8,691) (9,183) (33,145) (7,562) 593,589 24,845 12,204 9,942 46,346 10,016 20 813,855 (20,814) (444,290) 95 76,848 — (7,338) (7,174) (57,353) 121 619,230 24,431 10,032 11,869 24,310 11,327 (777) 572,439 (22,030) (425,713) (1,358) 27,154 6,158 (6,694) (3,262) 47,458 (24,313) 419,177 (3,257,939) (1,418,073) (1,379,431) (264,721) 241,077 (289,554) 44,377 255,031 4,220 7,786 (26,440) 156,612 (3,129,551) $ (220,356) 290,929 (411,788) 2,727 204,684 13,089 9,357 (18,117) — (1,547,548) $ (669,157) 325,766 (679,530) 4,782 867,998 2,406 20,560 (20,707) — (1,527,313) 73 2018 Form 10-K CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued) Years Ended December 31, 2018 2017 2016 (in thousands) Cash flows from financing activities: Net change in deposits Net change in short-term borrowings Proceeds from issuance of long-term borrowings, net Repayments of long-term borrowings Proceeds from issuance of preferred stock, net Cash dividends paid to preferred shareholders Cash dividends paid to common shareholders Purchase of common shares to treasury Common stock issued, net Net cash provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of cash flow information: Cash payments for: Interest on deposits and borrowings Federal and state income taxes Supplemental schedule of non-cash investing activities: Transfer of loans to other real estate owned Loans transferred to loans held for sale Acquisition: Non-cash assets acquired: Investment securities held to maturity Investment securities available for sale Loans Premises and equipment Bank owned life insurance Accrued interest receivable Goodwill Other intangible assets Other assets Total non-cash assets acquired Liabilities assumed: Deposits Short-term borrowings Long-term borrowings Junior subordinated debentures issued to capital trusts Accrued expenses and other liabilities Total liabilities assumed Net non-cash assets acquired Net cash and cash equivalents acquired in acquisition Common stock issued in acquisition $ $ $ $ $ $ $ $ $ $ $ 2,734,669 720,307 — (750,682) — (15,859) (138,857) (3,801) 2,704 2,548,481 12,519 416,110 428,629 290,444 53,587 743 289,633 214,217 308,385 3,736,984 62,066 49,052 12,123 394,028 45,906 100,059 4,922,820 3,564,843 649,979 87,283 13,249 26,848 4,342,202 580,618 156,612 737,230 $ $ $ $ $ $ $ $ $ $ $ 422,754 (332,332) 1,065,000 (185,000) 98,101 (6,277) (115,881) (2,645) 8,207 951,927 23,609 392,501 416,110 170,614 29,013 7,301 313,201 $ $ $ $ 1,477,157 3,969 385,000 (769,182) — (7,188) (111,813) (3,191) 112,085 1,086,837 (21,299) 413,800 392,501 151,209 26,564 8,089 174,501 — $ — — — — — — — — — $ — $ — — — — — $ — $ — $ — $ — — — — — — — — — — — — — — — — — — — See accompanying notes to consolidated financial statements. 2018 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 Securities and Exchange Commission (SEC); title insurance agencies in New York with 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 11 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. Effective January 1, 2018, Valley acquired USAmeriBancorp, Inc. and its wholly-owned subsidiary, USAmeriBank. See Note 2 for further details regarding this acquisition. 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 $120.7 million and $122.0 million at December 31, 2018 and 2017, respectively. 75 2018 Form 10-K Investment Securities Investment securities are classified at the time of purchase based on management’s intention, as securities held-to-maturity or securities available-for-sale. 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 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 on securities transactions. Security transactions are recorded on a trade-date basis. Investments in Federal Home Loan Bank and Federal Reserve Bank stock, which have limited marketability, are carried at cost in other assets. 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. There was no other-than-temporary impairment recognized in earnings as a result of Valley's impairment analysis of its securities during 2018, 2017 and 2016. 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 “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. 2018 Form 10-K 76 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 and $27.6 million of mainly residential mortgage loans subject to loss sharing agreements (referred to as "covered loans") with the FDIC. 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 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, 2018 and 2017. On a quarterly basis, the Bank periodically 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 and the FDIC loss-share receivable, if applicable, is prospectively reduced by the guaranteed portion of the additional cash flows expected to be received, with a corresponding reduction to non-interest income. 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, 2018 and 2017. The Bank’s methodology for evaluating the appropriateness of the allowance includes grouping the non-covered 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. 77 2018 Form 10-K 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 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. 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 7 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 2018 Form 10-K 78 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 $9.5 million and $9.8 million at December 31, 2018 and 2017, respectively. OREO included foreclosed residential real estate properties totaling $852 thousand and $7.3 million at December 31, 2018 and 2017, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1.8 million and $3.8 million at December 31, 2018 and 2017, 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 2018 and 2017, 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. 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 are determined using a method which utilizes servicing income, discount rates, prepayment speeds and default rates specifically relative to Valley’s portfolio for originated mortgage servicing rights. 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. Under this method, Valley amortizes the loan servicing assets in proportion to and over the period of estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. 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. 79 2018 Form 10-K Stock-Based Compensation Compensation expense for stock options and restricted stock 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. Under Valley’s long-term incentive compensation plans, award grantees that are eligible for retirement do 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 restricted stock and restricted stock unit awards with a market condition. The grant date fair value of a performance-based restricted stock or restricted stock unit award that vests based on a market condition is determined by a third party specialist using a Monte Carlo valuation model. See Note 12 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 Accounting Standards Codification (ASC) 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. The following revenues, reported separately within total non-interest income on the consolidated statements of income, are within the scope of ASC Topic 606: Trust and investment services. Trust and investments services include fees from investment management, investment advisory, trust, custody and other products. Trust and investment management fee income is primarily from client assets under management (AUM) for which the fees are determined based upon a tiered scale relative to the market value of the AUM. The revenue from trust and investment services is typically earned over the service period specified in the contract. Service charges on deposit accounts. Service charges on deposit accounts include fees from checking accounts, savings accounts, overdrafts, insufficient funds, ATM transactions and other activities. The revenues for most deposit related fees are recognized immediately upon performance of the service due to the short-term nature of the contractual terms. Other income. Other income within the scope of ASC Topic 606 within this revenue category includes fee income related to derivative interest rate swaps executed with commercial loan customers, and fees from interchange, wire transfers, credit cards, safe deposit box, ACH, lockbox and various other products and services-related income. These fees are either recognized immediately at the related transaction date or over the period in which the related service is provided. Other income also consists of items which are outside the scope of ASC Topic 606, including letters of credit fees, net gains and losses on sales of assets and income or expense related to certain changes in FDIC loss-share receivables. 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. 2018 Form 10-K 80 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 13 for details regarding the impact of the Tax Cuts and Jobs 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 (including the non-credit portion of other-than-temporary impairment charges relating to these securities); (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 19 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, 2018, 2017 and 2016: Net income available to common shareholders Basic weighted-average number of common shares outstanding Plus: Common stock equivalents Diluted weighted-average number of common shares outstanding Earnings per common share: Basic Diluted 2018 2017 (in thousands, except for share data) 2016 248,740 $ 152,458 $ 160,958 331,258,964 1,434,754 264,038,123 254,841,571 850,884 426,765 332,693,718 264,889,007 255,268,336 $ 0.75 0.75 $ 0.58 0.58 0.63 0.63 $ $ 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 options equaled approximately 2.1 million, 3.1 million, and 4.0 million of common shares for the years ended December 31, 2018, 2017 and 2016, respectively. All of the outstanding warrants expired unexercised in the fourth quarter of 2018. See Note 18 for details. 81 2018 Form 10-K 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 18 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 manage its exposure to interest rate movements related to a service for commercial lending customers, risk participation agreements sharing the risk of default on the interest rate swaps for certain purchased or sold loan participations, mortgage banking activities consisting of customer interest rate lock commitments and forward contracts to sell residential mortgage loans, and hybrid instruments, consisting of market linked certificates of deposit with an embedded swap contract. 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. Valley records all derivatives as assets or liabilities at fair value on the consolidated statements of financial condition. 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 2018 ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" eliminates, amends and adds disclosure requirements for fair value measurements. In addition, the amendments eliminate the term "at a minimum" from the disclosure requirements under Topic 820 to promote an appropriate exercise of discretion to consider materiality when evaluating required disclosures. ASU No. 2018-13, issued in August 2018, is effective for all entities for reporting periods beginning January 1, 2020 with early adoption permitted. Early adoption is allowed for any period for which the financial statements have not been issued yet or have not been made available for issuance. As a result, Valley elected to early adopt ASU No. 2018-13 during the third quarter of 2018. The adoption resulted in the removal of the Level 3 assets roll-forward and qualitative and quantitative disclosures regarding valuation techniques and unobservable inputs used to measure the fair value of Level 3 assets previously presented in Note 3 due to the immaterial amount of such assets (which were also subsequently sold during the fourth quarter of 2018). ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" amends the hedge accounting recognition and presentation requirements to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU No. 2017-12 is effective for the annual and interim reporting periods beginning January 1, 2019 with early adoption permitted. Valley elected to early adopt ASU No. 2017-12 for annual and 2018 Form 10-K 82 interim reporting periods beginning January 1, 2018. The adoption of ASU No. 2017-12 required a modified retrospective method to be used by Valley and resulted in an immaterial cumulative-effect adjustment to retained earnings as of January 1, 2018 to eliminate the separate measurement of ineffectiveness from accumulated comprehensive income (see Note 19). ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" requires service cost to be reported in the same financial statement line item(s) as other current employee compensation costs. All other components of expense must be presented separately from service cost, and outside any subtotal of income from operations. Only the service cost component of expense is eligible to be capitalized. ASU No. 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement, and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. ASU No. 2017-07 was effective for Valley for its annual and interim reporting periods beginning January 1, 2018. ASU No. 2017-07 did not have a significant impact on the presentation of Valley's consolidated financial statements. ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory”. Under previous U.S. GAAP, the tax effects of intercompany sales were deferred until the transferred asset is sold to a third party or otherwise recovered through amortization. This was an exception to the accounting for income taxes that generally requires recognition of current and deferred income taxes. Effective January 1, 2018, ASU No. 2016-16 eliminated the exception for intercompany sales of assets. ASU No. 2016-16 was applied using the modified retrospective method, and, as a result, Valley recorded a $17.6 million cumulative effect adjustment that reduced retained earnings effective January 1, 2018 to record net deferred tax liabilities related to pre-existing transactions. ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" clarifies how certain cash receipts and cash payments should be classified and presented in the statement of cash flows. ASU No. 2016-15 includes guidance on eight specific cash flow issues with the objective of reducing the existing diversity of practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 was effective for Valley for annual and interim reporting periods beginning January 1, 2018 and it was applied using a retrospective transition method to each period presented. ASU No. 2016-15 did not have a significant impact on the presentation of Valley's consolidated statements of cash flows. ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” requires that: (i) equity investments with readily determinable fair values must be measured at fair value with changes in fair value recognized in net income, (ii) equity investments without readily determinable fair values must be measured at either fair value or at cost adjusted for changes in observable prices minus impairment with changes in value under either of these methods recognized in net income, (iii) entities that record financial liabilities at fair value due to a fair value option election must recognize changes in fair value caused by a change in instrument-specific credit risk in other comprehensive income, (iv) entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities, and (v) entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU No. 2016-01 also eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet (see Note 3). ASU No. 2016-01 was effective for Valley for reporting periods beginning January 1, 2018 and did not have a material effect on Valley’s consolidated financial statements. ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related updates modify the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. The updates also require new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP. Valley adopted the guidance on January 1, 2018 using the modified retrospective method, however, Valley did not record a cumulative- effect adjustment to opening retained earnings at the adoption date because it found no material changes related to the timing or amount of revenue recognition. Consequently, the new revenue recognition standard did not have a material impact on Valley’s consolidated financial statements. Valley has also concluded that additional disaggregation of revenue categories that are within the scope of the new guidance is not necessary. See the "Revenue Recognition" section of Note 1 above for additional information. ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” requires implementation costs incurred in cloud computing arrangements which do not include a software license to be deferred and expensed over the term of the hosting arrangement. The implementation costs should be deferred using the Topic 350-40 “Internal-Use Software” model to 83 2018 Form 10-K determine which implementation costs are eligible to be capitalized based on the project stage and nature of the cost. The expense should be presented in the same income statement line item as the fees associated with the cloud computing arrangement. ASU No. 2018-15 will be effective for public entities' annual and interim reporting periods beginning January 1, 2020 with early adoption permitted. ASU No. 2018-15 should be applied either retrospectively or prospectively. However, prospective transition would be applied to any eligible costs incurred on or after the adoption date related to arrangements entered into before and after the adoption date. During the fourth quarter of 2018, Valley adopted ASU No. 2018-15 on a prospective basis. The adoption of ASU No. 2018-15 did not have a significant impact on Valley's consolidated financial statements. New Accounting Guidance to be Adopted in the First Quarter of 2019 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 right of use (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 will continue to be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Topic 842 became effective for Valley for reporting periods after January 1, 2019 and it had a material effect on our financial statements related to the recognition of new ROU assets and lease liabilities and significant new disclosures about leasing activities. The new standard also provides several optional practical expedients in transition and accounting policy elections. Valley elected the "package of practical expedients," the practical expedient to not separate lease and non-lease components, and the short-term lease recognition exemption accounting policy election. Valley initially applied Topic 842 at the adoption date and recognized a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019 under the new optional transition method provided by ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements". Upon adoption, Valley recorded a right of use asset of approximately $216 million (net of the reversal of the current deferred rent liability) and lease obligation of approximately $241 million as of January 1, 2019. The recognized right of use asset is expected to negatively impact total risk-based capital by approximately 10 to 12 basis points and tier 1 capital by approximately 7 to 9 basis points during the first quarter of 2019. Valley applied the hindsight practical expedient and concluded that several lease terms should be reduced. As a result, Valley will adjust the initial recognition of the carrying amount of ROU asset and lease obligation and record an adjustment to the opening balance of retained earnings as of January 1, 2019 totaling $6.2 million. The comparative prior periods reported in the financial statements in the period of adoption will continue to be presented in accordance with current GAAP in Topic 840. ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities" shortens the amortization period for certain callable debt securities held at a premium. ASU No. 2017-08 requires the premium to be amortized to the earliest call date. The accounting for securities held at a discount does not change and the discount continues to be amortized as an adjustment to yield over the contractual life (to maturity) of the instrument. ASU No. 2017-08 is effective for Valley for the annual and interim reporting periods beginning January 1, 2019 with early adoption permitted, and is to be applied using the modified retrospective method. Additionally, in the period of adoption, entities should provide disclosures about a change in accounting principle. ASU No. 2017-08 will not have a significant impact on Valley's consolidated financial statements. New Accounting Guidance Not Yet Adopted ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test guidance) to measure a goodwill impairment charge. Instead, an entity will be required to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1 of the current guidance). In addition, ASU No. 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. However, an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for Valley for its annual or any interim goodwill impairment tests in fiscal years beginning January 1, 2020 and is not expected to have a significant impact on the presentation of Valley's consolidated financial statements. Early adoption is permitted for annual and interim goodwill impairment testing dates. ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments. ASU No. 2016-13 adds to U.S. GAAP 2018 Form 10-K 84 an impairment model (known as the current expected credit loss (CECL) model) that is based on all expected losses over the lives of the assets rather than incurred losses. Under the new guidance, an entity is required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 is effective for Valley for reporting periods beginning January 1, 2020. Management is currently evaluating the impact of the ASU on Valley’s consolidated financial statements. Valley’s implementation effort is managed through several cross-functional working groups. These groups continue to evaluate the requirements of the new standard, assess its impact on current operational processes, and develop loss models that accurately project lifetime expected loss estimates. Valley expects that the adoption of ASU No. 2016-13 will result in an increase in its allowance for credit losses due to several factors, including: (i) the allowance related to Valley loans will increase to include credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions, (ii) the nonaccretable difference (as defined in Note 8) on PCI loans will be recognized as an allowance, offset by an increase in the carrying value of the related loans, and (iii) an allowance will be established for estimated credit losses on investment securities classified as held to maturity. The extent of the increase is under evaluation, but will depend upon the nature and characteristics of Valley's loan and investment portfolios at the adoption date, and the economic conditions and forecasts at that date. BUSINESS COMBINATIONS (Note 2) 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 own. 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. 85 2018 Form 10-K The following table sets forth assets acquired, and liabilities assumed in the USAB acquisition, at their estimated fair values as of the closing date of the transaction: Assets acquired: Cash and cash equivalents Investment securities held to maturity Investment securities available for sale Loans Premises and equipment Bank owned life insurance Accrued interest receivable Goodwill Other intangible assets Other assets: Deferred taxes Other real estate owned FHLB and FRB stock Tax credit investments Other Total other assets Total assets acquired Liabilities assumed: Deposits: Non-interest bearing Savings, NOW and money market Time Total deposits Short-term borrowings Long-term borrowings Junior subordinated debentures issued to capital trusts Accrued expenses and other liabilities Total liabilities assumed Common stock issued in acquisition January 1, 2018 (in thousands) 156,612 214,217 308,385 3,736,984 62,066 49,052 12,123 394,028 45,906 10,623 4,073 38,809 20,138 26,416 100,059 5,079,432 887,083 1,678,115 999,645 3,564,843 649,979 87,283 13,249 26,848 4,342,202 737,230 $ $ $ $ $ The determination of the fair value of the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information (existing at the date of closing) relative to closing date fair values becomes available. Valley revised the estimated fair values of the acquired assets as of the acquisition date due to additional acquisition date information obtained during the second half of 2018. The adjustments related to the fair value of certain purchased credit-impaired (PCI) loans and deferred tax assets which, on a combined basis, resulted in a $5.8 million net increase in goodwill (see Note 8 for amount of goodwill as allocated to Valley's business segments). 2018 Form 10-K 86 Fair Value Measurement of Assets Acquired and Liabilities Assumed Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the USAB acquisition. Cash and cash equivalents. The estimated fair values of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term maturities. Investment securities. The estimated fair values of the investment securities were calculated utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service when available, or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. The prices are derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviewed the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. Loans. The acquired loan portfolio was segregated into categories for valuation purposes primarily based on loan type (commercial, commercial real estate, residential and consumer) and credit risk rating. The estimated fair values were computed by discounting the expected cash flows from the respective portfolios. Management estimated the contractual cash flows expected to be collected at the acquisition date by using valuation models that incorporated estimates of current key assumptions, such as prepayment speeds, default rates, and loss severity rates. Prepayment assumptions were developed by reference to recent or historical prepayment speeds observed for loans with similar underlying characteristics. Prepayment assumptions were influenced by many factors, including, but not limited to, forward interest rates, loan and collateral types, payment status, and current loan- to-value ratios. Default and loss severity rates were developed by reference to recent or historical default and loss rates observed for loans with similar underlying characteristics. Default and loss severity assumptions were influenced by many factors, including, but not limited to, underwriting processes and documentation, vintages, collateral types, collateral locations, estimated collateral values, loan-to-value ratios, and debt-to-income ratios. The expected cash flows from the acquired loan portfolios were discounted to present value based on the estimated market rates. The market rates were estimated using a buildup approach based on the following components: funding cost, servicing cost and consideration of liquidity premium. The funding cost estimated for the loans was based on a mix of wholesale borrowing and equity funding. The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets. The difference between the fair value and the expected cash flows from the acquired loans will be accreted to interest income over the remaining term of the loans in accordance with 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 securities sold under agreements to repurchase and FHLB advances. The carrying amounts approximate their fair values because they frequently re-price to a market rate. Long-term borrowings. The fair values of long-term borrowings consisting of subordinated notes and FHLB advances were estimated by discounting the estimated future cash flows using market discount rates for borrowings with similar characteristics, terms and remaining maturities. See Note 10 for further details. 87 2018 Form 10-K Junior subordinated debentures issued to capital trusts. There is no active market for the trust preferred securities issued by Aliant Statutory Trust II; therefore, the fair value of junior subordinated debentures was estimated utilizing the income approach. Valuation methods under the income approach include those methods that provide for the direct capitalization of earnings estimates, as well as valuation methods calling for the forecasting of future benefits (earnings or cash flows) and then discounting those benefits to the present at an appropriate discount rate. Under the income approach, the expected cash flows over the remaining estimated life were discounted to the present at an appropriate discount rate. See Note 11 for further details. 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 Level 2 Level 3 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. 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. 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). 2018 Form 10-K 88 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, 2018 and 2017. 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). December 31, 2018 Fair Value Measurements at Reporting Date Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) Recurring fair value measurements: Assets Investment securities: Available for sale: U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions Residential mortgage-backed securities Corporate and other debt securities Total available for sale Loans held for sale (1) Other assets (2) Total assets Liabilities Other liabilities (2) Total liabilities Non-recurring fair value measurements: Collateral dependent impaired loans (3) Loan servicing rights Foreclosed assets Total $ $ $ $ $ $ $ 49,306 36,277 $ 49,306 — — $ 36,277 197,092 1,429,782 37,087 1,749,544 35,155 48,979 1,833,678 23,681 23,681 45,245 273 5,673 51,191 $ $ $ $ $ — — — 49,306 — — 49,306 $ — $ — $ — $ — — — $ — — — — — — — — — — — 197,092 1,429,782 37,087 1,700,238 35,155 48,979 1,784,372 23,681 23,681 $ $ $ — $ — — — $ 45,245 273 5,673 51,191 89 2018 Form 10-K Fair Value Measurements at Reporting Date Using: December 31, 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) $ 49,642 42,505 $ 49,642 — — $ 42,505 Recurring fair value measurements: Assets Investment securities: Available for sale: U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Equity securities Total available for sale Loans held for sale (1) Other assets (2) Total assets Liabilities Other liabilities (2) Total liabilities Non-recurring fair value measurements: Collateral dependent impaired loans (3) Loan servicing rights Foreclosed assets Total $ $ $ $ $ $ 112,884 1,223,295 3,214 51,164 11,201 1,493,905 15,119 26,417 1,535,441 24,330 24,330 48,373 5,350 3,472 57,195 $ $ $ $ $ — — — 7,360 — — — 7,360 — — 7,360 — — — — — 7,783 1,382 58,807 — — 112,884 1,215,935 3,214 43,381 9,819 1,427,738 15,119 26,417 58,807 $ 1,469,274 $ $ $ 24,330 24,330 — $ — $ — $ — — — $ — $ — — — $ 48,373 5,350 3,472 57,195 (1) Represents residential mortgage loans held for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $34.6 million and $14.8 million at December 31, 2018 and 2017, 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. 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. 2018 Form 10-K 90 For certain private mortgage-backed securities reported at December 31, 2017, Valley prepared present value cash flow models derived from unobservable market information (Level 3 inputs). During the fourth quarter of 2018, Valley sold all of the its Level 3 available for sale securities, including 4 private label mortgage-backed securities. 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, 2018 and 2017 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, 2018 and 2017), 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, 2018 and 2017. 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, 2018, certain appraisals may be discounted based on specific market data by location and property type. During 2018 and 2017, collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. The collateral dependent loan charge-offs to the allowance for loan losses totaled $638 thousand and $2.1 million for the years ended December 31, 2018 and 2017, respectively. These collateral dependent impaired loans with a total recorded investment of $73.7 million and $57.5 million at December 31, 2018 and 2017, respectively, were reduced by specific valuation allowance allocations totaling $28.5 million and $9.1 million to a reported total net carrying amount of $45.2 million and $48.4 million at December 31, 2018 and 2017, 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, 2018, the fair value model used prepayment speeds (stated as constant prepayment rates) from 0 percent up to 24 percent and a discount rate of 8 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. Valley recorded net recoveries of impairment charges on its loan servicing rights totaling $388 thousand and $429 thousand the years ended December 31, 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, 2018. During the years ended December 31, 2018 and 2017, foreclosed assets measured at fair value upon initial recognition or subsequent re-measurement totaled $5.7 million and $3.5 million, respectively. The charge-offs of foreclosed assets to the allowance for loan losses totaled $2.0 million and $1.9 million for the years ended December 31, 2018 and 2017, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in losses of $390 thousand, $361 thousand and $1.0 million included in non-interest expense for the years ended December 31, 2018, 2017 and 2016, respectively. 91 2018 Form 10-K Other Fair Value Disclosures ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The fair value estimates presented in the following table were based on pertinent market data and relevant information on the financial instruments available as of the valuation date. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portfolio of financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation, trust and investment management departments) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at December 31, 2018 and 2017 were as follows: December 31, 2018 2017 Fair Value Hierarchy Carrying Amount Fair Value Carrying Amount Fair Value (in thousands) Financial assets Cash and due from banks Interest bearing deposits with banks Investment securities held to maturity: U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Total investment securities held to maturity Net loans Accrued interest receivable Federal Reserve Bank and Federal Home Loan Bank stock (1) Financial liabilities Deposits without stated maturities Deposits with stated maturities Short-term borrowings Long-term borrowings Junior subordinated debentures issued to capital trusts Accrued interest payable (2) Level 1 $ 251,541 $ 251,541 $ 234,310 $ Level 1 177,088 177,088 172,800 234,310 172,800 145,257 9,981 477,479 1,118,044 40,088 46,771 1,837,620 17,562,153 Level 1 Level 2 Level 2 Level 2 Level 2 Level 2 Level 3 Level 1 138,517 8,721 142,049 8,641 138,676 9,859 585,656 1,266,770 37,332 31,250 2,068,246 24,883,610 586,033 1,235,605 31,486 31,129 2,034,943 24,068,755 465,878 1,131,945 49,824 46,509 1,842,691 18,210,724 95,296 95,296 73,990 73,990 Level 1 232,080 232,080 178,668 178,668 Level 1 Level 2 Level 1 Level 2 Level 2 Level 1 17,388,990 17,388,990 14,589,941 14,589,941 7,063,984 2,118,914 1,654,268 55,370 25,762 7,005,573 2,091,892 1,751,194 55,692 25,762 3,563,521 3,465,373 748,628 679,316 2,315,819 2,453,797 41,774 14,161 37,289 14,161 (1) (2) Included in other assets. Included in accrued expenses and other liabilities. 2018 Form 10-K 92 INVESTMENT SECURITIES (Note 4) Held to Maturity The amortized cost, gross unrealized gains and losses and fair value of investment securities held to maturity at December 31, 2018 and 2017 were as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (in thousands) Fair Value December 31, 2018 U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Total investment securities held to maturity December 31, 2017 U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies $ $ Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities $ 138,517 $ 3,532 $ 8,721 341,702 243,954 585,656 1,266,770 37,332 31,250 2,068,246 138,676 9,859 244,272 221,606 465,878 1,131,945 49,824 46,509 $ $ 55 4,332 3,141 7,473 3,203 77 96 14,436 6,581 122 7,083 6,199 13,282 4,842 60 532 $ $ Total investment securities held to maturity $ 1,842,691 $ 25,419 $ — $ (135) (5,735) (1,361) (7,096) (34,368) (5,923) (217) (47,739) $ — $ — (1,653) (28) (1,681) (18,743) (9,796) (270) (30,490) $ 142,049 8,641 340,299 245,734 586,033 1,235,605 31,486 31,129 2,034,943 145,257 9,981 249,702 227,777 477,479 1,118,044 40,088 46,771 1,837,620 93 2018 Form 10-K The age of unrealized losses and fair value of related securities held to maturity at December 31, 2018 and 2017 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) $ — $ — $ 6,074 $ (135) $ 6,074 $ (135) 16,098 3,335 (266) (37) 138,437 60,078 (5,469) (1,324) 154,535 63,413 (5,735) (1,361) 19,433 (303) 198,515 (6,793) 217,948 (7,096) 72,240 — 9,948 (852) — (52) 846,671 30,055 4,835 (33,516) (5,923) (165) 918,911 30,055 14,783 (34,368) (5,923) (217) $ 101,621 $ (1,207) $ 1,086,150 $ (46,532) $ 1,187,771 $ (47,739) $ 6,342 $ 4,644 (50) $ (25) 53,034 $ 561 (1,603) $ (3) 59,376 $ 5,205 (1,653) (28) 10,986 (75) 53,595 (1,606) 64,581 (1,681) December 31, 2018 U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Total December 31, 2017 Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Total $ 365,182 $ 344,216 — 9,980 (2,357) — (270) (2,702) $ 570,969 38,674 — 663,238 $ (16,386) (9,796) — 9,980 (27,788) $ 1,028,420 915,185 38,674 (18,743) (9,796) (270) (30,490) $ The unrealized losses on investment securities available for sale are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads), and in some cases, lack of liquidity in the marketplace. The total number of security positions in the securities held to maturity portfolio in an unrealized loss position at December 31, 2018 was 378 as compared to 152 at December 31, 2017. 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, 2018 mostly related to investment grade securities issued by Ginnie Mae and Fannie Mae. The unrealized losses existing for more than twelve months for trust preferred securities at December 31, 2018 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, 2018. As of December 31, 2018, the fair value of investments held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law was $1.3 billion. The contractual maturities of investments in debt securities held to maturity at December 31, 2018 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages 2018 Form 10-K 94 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. Due in one year Due after one year through five years Due after five years through ten years Due after ten years Residential mortgage-backed securities Total investment securities held to maturity December 31, 2018 Amortized Cost Fair Value (in thousands) $ $ 21,418 274,389 260,835 244,834 1,266,770 2,068,246 $ $ 21,459 278,051 267,813 232,015 1,235,605 2,034,943 Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty. The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 7.7 years at December 31, 2018. Available for Sale The amortized cost, gross unrealized gains and losses and fair value of investment securities available for sale at December 31, 2018 and 2017 were as follows: $ $ $ December 31, 2018 U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Corporate and other debt securities Total investment securities available for sale December 31, 2017 U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Equity securities Total investment securities available for sale $ Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (in thousands) Fair Value $ 50,975 36,844 — $ 71 (1,669) $ (638) 49,306 36,277 100,777 101,207 201,984 1,469,059 37,542 1,796,404 50,997 42,384 38,435 74,752 113,187 1,239,534 3,726 50,701 10,505 1,511,034 $ $ $ 18 209 227 1,484 213 1,995 $ (3,682) (1,437) (5,119) (40,761) (668) (48,855) $ 97,113 99,979 197,092 1,429,782 37,087 1,749,544 — $ 158 (1,355) $ (37) 49,642 42,505 158 477 635 2,423 — 623 1,190 5,029 $ (374) (564) (938) (18,662) (512) (160) (494) (22,158) $ 38,219 74,665 112,884 1,223,295 3,214 51,164 11,201 1,493,905 95 2018 Form 10-K The age of unrealized losses and fair value of related securities available for sale at December 31, 2018 and 2017 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) $ — $ 2,120 — $ (20) $ 49,306 26,775 (1,669) $ (618) $ 49,306 28,895 (1,669) (638) 17,560 5,018 22,578 119,645 12,339 156,682 916 31,177 13,337 31,669 45,006 406,940 — 5,855 — 489,894 $ $ $ $ $ $ (95) (106) 75,718 70,286 (3,587) (1,331) 93,278 75,304 (3,682) (1,437) (201) 146,004 (4,918) 168,582 (5,119) (668) (161) 1,221,942 12,397 (1,050) $ 1,456,424 (2) $ (37) 48,726 — (131) (256) (387) (2,461) — (45) — (2,932) $ 7,792 12,133 19,925 599,167 3,214 15,115 5,150 691,297 $ $ $ (40,093) (507) 1,341,587 24,736 (47,805) $ 1,613,106 (1,353) $ — 49,642 31,177 (243) (308) (551) 21,129 43,802 64,931 1,006,107 3,214 (16,201) (512) (115) (494) 20,970 5,150 (19,226) $ 1,181,191 (40,761) (668) (48,855) (1,355) (37) (374) (564) (938) (18,662) (512) (160) (494) (22,158) $ $ $ December 31, 2018 U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Corporate and other debt securities Total December 31, 2017 U.S. Treasury securities U.S. government agency securities Obligations of states and political subdivisions: Obligations of states and state agencies Municipal bonds Total obligations of states and political subdivisions Residential mortgage-backed securities Trust preferred securities Corporate and other debt securities Equity securities Total The unrealized losses on investment securities available for sale are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. The total number of security positions in the securities available for sale portfolio in an unrealized loss position at December 31, 2018 was 545 as compared to 327 at December 31, 2017. The unrealized losses more than twelve months for the residential mortgage-backed securities category of the available for sale portfolio at December 31, 2018 largely related to several investment grade securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac. As of December 31, 2018, 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 $1.1 billion. 2018 Form 10-K 96 The contractual maturities of investments securities available for sale at December 31, 2018 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, 2018 Amortized Cost Fair Value Due in one year Due after one year through five years Due after five years through ten years Due after ten years Residential mortgage-backed securities Total investment securities available for sale $ $ $ (in thousands) 4,666 125,825 78,305 118,549 1,469,059 1,796,404 $ 4,643 123,051 76,640 115,428 1,429,782 1,749,544 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 7.8 years at December 31, 2018. Other-Than-Temporary Impairment Analysis Valley records impairment charges on its investment securities when the decline in fair value is considered other-than- temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities; decline in the creditworthiness of the issuer; absence of reliable pricing information for investment securities; adverse changes in business climate; adverse actions by regulators; or unanticipated changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. Valley's investment portfolios include trust preferred securities and corporate bonds (including some issued by banks). These investments may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S. economy and its potential negative effect on the future performance of the security issuers. For the single-issuer trust preferred securities and 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, 2018 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. At December 31, 2018, approximately 40.6 percent of the $782.7 million carrying value of obligations of states and political subdivisions were issued by the states of (or municipalities within) New Jersey, Utah, Texas, and Maryland. The obligations of states and political subdivisions mainly consist of general obligation bonds and, to lesser extent, special revenue bonds which had an aggregated amortized cost and fair value of $198.8 million and $193.1 million, respectively, at December 31, 2018. Special revenue bonds were largely issued by the Utah and Minnesota 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, our Credit Risk Management Department conducts a financial analysis and risk rating assessment of each security issuer based on the issuer’s most recently issued financial statements and other publicly available information. Substantially all of these investments are investment grade. As of December 31, 2018, these securities are expected to perform in accordance with their contractual terms and, as a result, Valley expects to recover the entire amortized cost basis of these securities. There were no other-than-temporary impairment losses on securities recognized in earnings for the years ended December 31, 2018 and 2017. Management does not believe that any individual unrealized loss as of December 31, 2018 included in the investment portfolio tables above represents other-than-temporary impairment as management mainly attributes the declines in fair value to 97 2018 Form 10-K 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. 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, 2018, 2017 and 2016 were as follows: Sales transactions: Gross gains Gross losses Maturities and other securities transactions: Gross gains Gross losses (Losses) gains on securities transactions, net 2018 2017 (in thousands) 2016 $ $ $ $ $ $ 1,769 (3,881) (2,112) $ $ 42 (272) (230) $ (2,342) $ — $ (25) (25) $ $ 43 (38) 5 $ (20) $ 271 (58) 213 615 (51) 564 777 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. LOANS (Note 5) The detail of the loan portfolio as of December 31, 2018 and 2017 was as follows: December 31, 2018 December 31, 2017 Non-PCI Loans PCI Loans* Total Non-PCI Loans PCI Loans* Total (in thousands) $ 3,590,375 $ 740,657 $ 4,331,032 $ 2,549,065 $ 192,360 $ 2,741,425 9,912,309 1,122,348 2,494,966 12,407,275 8,561,851 365,784 1,488,132 809,964 11,034,657 3,682,984 2,860,750 13,895,407 428,416 4,111,400 9,371,815 2,717,744 934,926 41,141 976,067 141,291 9,496,777 851,105 10,347,882 2,859,035 371,340 1,319,206 846,821 2,537,367 145,749 517,089 373,631 72,649 446,280 365 1,319,571 1,208,804 98 1,208,902 14,149 160,263 860,970 723,306 2,697,630 2,305,741 4,750 77,497 728,056 2,383,238 $ 20,845,383 $ 4,190,086 $ 25,035,469 $ 16,944,365 $ 1,387,215 $ 18,331,580 Loans: Commercial and industrial Commercial real estate: Commercial real estate Construction Total commercial real estate loans Residential mortgage Consumer: Home equity Automobile Other consumer Total consumer loans Total loans * PCI loans include covered loans (mostly consisting of residential mortgage loans) totaling $27.6 million and $38.7 million at December 31, 2018 and 2017, respectively. Total loans (excluding PCI covered loans) include net of unearned premiums and deferred loan costs totaling $21.5 million and $22.2 million at December 31, 2018 and 2017, respectively. The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $4.4 billion and $1.5 billion at December 31, 2018 and 2017, respectively. 2018 Form 10-K 98  Valley transferred $289.6 million and $313.2 million of residential mortgage loans from the loan portfolio to loans held for sale in 2018 and 2017, respectively. Exclusive of such transfers, there were no other sales or transfers of loans from the held for investment portfolio during 2018 and 2017. 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 USAB acquisition as of January 1, 2018 (See Note 2 for more details): Contractually required principal and interest Contractual cash flows not expected to be collected (non-accretable difference) Expected cash flows to be collected Interest component of expected cash flows (accretable yield) Fair value of acquired loans January 1, 2018 (in thousands) 4,398,687 (101,796) 4,296,891 (559,907) 3,736,984 $ $ The following table presents changes in the accretable yield for PCI loans for the years ended December 31, 2018 and 2017: Balance, beginning of period Acquisition Accretion Net increase in expected cash flows Balance, end of period 2018 2017 (in thousands) $ $ 282,009 559,907 (235,741) 269,783 875,958 $ $ 294,514 — (89,770) 77,265 282,009 The net increase in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools. The net increase in the expected cash flows totaling approximately $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 of 2018. The net increase in the expected cash flows totaling approximately $77.3 million for the year ended December 31, 2017 was largely due to a decrease in the expected losses for certain PCI loan pools during the fourth quarter of 2017. 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, 2018. 99 2018 Form 10-K The following table summarizes the changes in the total amounts of loans and advances to the related parties during the year ended December 31, 2018: Outstanding at beginning of year New loans and advances Repayments Outstanding at end of year 2018 (in thousands) 151,265 86,837 (23,994) 214,108 $ $ 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. 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, 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 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, 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 $580.5 million and $401.8 million at December 31, 2018 and 2017, respectively. The commercial portfolio also includes taxi medallion loans, most of which consist of loans to fleet owners of New City medallions. At December 31, 2018, the taxi medallion loans totaled $130.2 million and were classified as either substandard or doubtful loans. While most of the taxi medallion loans within the portfolio at December 31, 2018 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. 2018 Form 10-K 100 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 $58.1 million and $18.1 million, including $10.4 million and $8.2 million of credit card loans, at December 31, 2018 and 2017, respectively. Valley believes the aggregate risk exposure to unsecured loans and lines of credit was not significant at December 31, 2018. 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, 2018 and 2017: 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 $ Commercial real estate: Commercial real estate Construction Total commercial real estate loans Residential mortgage Consumer loans: Home equity Automobile Other consumer Total consumer loans 13,085 $ 3,768 $ 6,156 $ 70,096 $ 93,105 $ 3,497,270 $ 3,590,375 9,521 2,829 12,350 16,576 872 7,973 895 9,740 530 — 530 2,458 40 1,299 47 1,386 27 — 27 1,288 — 308 33 341 2,372 356 2,728 12,917 2,156 80 419 12,450 3,185 15,635 33,239 3,068 9,660 1,394 9,899,859 1,119,163 9,912,309 1,122,348 11,019,022 11,034,657 3,649,745 3,682,984 368,272 371,340 1,309,546 1,319,206 845,427 846,821 2,655 14,122 2,523,245 2,537,367 Total $ 51,751 $ 8,142 $ 7,812 $ 88,396 $ 156,101 $ 20,689,282 $ 20,845,383 101 2018 Form 10-K 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) 3,650 $ 544 $ — $ 20,890 $ 25,084 $ 2,523,981 $ 2,549,065 11,223 12,949 24,172 12,669 1,009 5,707 1,693 — 18,845 18,845 7,903 94 987 118 27 — 27 2,779 — 271 13 11,328 732 12,060 12,405 1,777 73 20 22,578 32,526 55,104 35,756 2,880 7,038 1,844 11,762 $ 127,706 8,539,273 8,561,851 777,438 809,964 9,316,711 2,681,988 9,371,815 2,717,744 370,751 1,201,766 721,462 2,293,979 373,631 1,208,804 723,306 2,305,741 $ 16,816,659 $ 16,944,365 December 31, 2017 Commercial and industrial $ Commercial real estate: Commercial real estate Construction Total commercial real estate loans Residential mortgage Consumer loans: Home equity Automobile Other consumer Total consumer loans Total 8,409 48,900 $ 1,199 28,491 $ $ 284 3,090 1,870 $ 47,225 If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $3.6 million, $2.5 million, and $2.1 million for the years ended December 31, 2018, 2017 and 2016, respectively; none of these amounts were included in interest income during these periods. 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. 2018 Form 10-K 102 The following table presents information about impaired loans by loan portfolio class at December 31, 2018 and 2017: Recorded Investment With No Related Allowance Recorded Investment With Related Allowance Total Recorded Investment (in thousands) Unpaid Contractual Principal Balance Related Allowance $ 8,339 $ 89,513 $ 97,852 $ 104,007 $ 29,684 16,732 803 17,535 7,826 125 125 33,825 9,946 28,709 1,904 30,613 5,654 3,096 3,096 49,309 $ $ $ 25,606 457 26,063 6,078 1,146 1,146 122,800 75,553 29,771 467 30,238 8,402 $ $ 42,338 1,260 43,598 13,904 1,271 1,271 156,625 85,499 58,480 2,371 60,851 14,056 $ $ 44,337 1,260 45,597 14,948 1,366 1,366 165,918 90,269 62,286 2,394 64,680 15,332 $ $ 664 664 114,857 $ 3,760 3,760 164,166 $ 4,917 4,917 175,198 $ 2,615 13 2,628 600 113 113 33,025 11,044 2,718 17 2,735 718 64 64 14,561 $ $ $ December 31, 2018 Commercial and industrial Commercial real estate: Commercial real estate Construction Total commercial real estate loans Residential mortgage Consumer loans: Home equity Total consumer loans Total December 31, 2017 Commercial and industrial Commercial real estate: Commercial real estate Construction Total commercial real estate loans Residential mortgage Consumer loans: Home equity Total consumer loans Total Interest income recognized on a cash basis for impaired loans classified as non-accrual was not material for the years ended December 31, 2018, 2017 and 2016. 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, 2018, 2017 and 2016: 2018 2017 2016 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (in thousands) $ 108,071 $ 1,822 $ 80,974 $ 1,459 $ 36,552 $ 1,045 44,838 1,517 46,355 15,384 865 865 2,289 69 2,358 506 21 21 54,799 3,258 58,057 15,451 4,295 4,295 1,908 86 1,994 760 160 160 59,633 5,790 65,423 21,340 2,626 2,626 2,122 182 2,304 874 68 68 $ 170,675 $ 4,707 $ 158,777 $ 4,373 $ 125,941 $ 4,291 Commercial and industrial Commercial real estate: Commercial real estate Construction Total commercial real estate loans Residential mortgage Consumer loans: Home equity Total consumer loans Total 103 2018 Form 10-K 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 $77.2 million and $117.2 million as of December 31, 2018 and 2017, respectively. Non-performing TDRs totaled $55.0 million and $27.0 million as of December 31, 2018 and 2017, respectively. The following table presents non-PCI loans by loan class modified as TDRs during the years ended December 31, 2018 and 2017. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at December 31, 2018 and 2017, respectively. Troubled Debt Restructurings December 31, 2018 Commercial and industrial Commercial real estate: Commercial real estate Construction Total commercial real estate Residential mortgage Consumer Total December 31, 2017 Commercial and industrial Commercial real estate: Commercial real estate Construction Total commercial real estate Residential mortgage Total Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment ($ in thousands) 25 $ 16,251 $ 8 1 9 8 2 44 90 6 3 9 7 106 $ $ $ 5,643 532 6,175 1,500 99 24,025 75,894 23,781 1,188 24,969 1,769 102,632 $ $ $ 15,105 6,600 356 6,956 1,461 101 23,623 69,020 23,548 932 24,480 1,727 95,227 The total TDRs presented in the table above had allocated specific reserves for loan losses that totaled $6.5 million and $8.7 million at December 31, 2018 and 2017, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 6. There were no loan charge-offs related to loans modified as TDRs during 2018 and 2017. At December 31, 2018, 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. 2018 Form 10-K 104 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, 2018 and 2017 were as follows: Troubled Debt Restructurings Subsequently Defaulted Number of Contracts Recorded Investment Number of Contracts Recorded Investment Years Ended December 31, 2018 2017 Commercial and industrial Commercial real estate Residential mortgage Total 10 — 3 13 $ $ ($ in thousands) 8,829 — 490 9,319 7 1 5 13 $ $ 5,841 165 1,125 7,131 Credit quality indicators. Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes. Under Valley’s internal risk rating system, loan relationships could be classified as “Pass,” “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Substandard loans include loans that exhibit well-defined weakness and are characterized by the distinct possibility that Valley will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged-off immediately to the allowance for loan losses, and, therefore, not presented in the table below. Loans that do not currently pose a sufficient risk to warrant classification in one of the aforementioned categories but pose weaknesses that deserve management’s close attention are deemed Special Mention. Loans rated as Pass do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants. The following table presents the credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) based on the most recent analysis performed at December 31, 2018 and 2017. Credit exposure— by internally assigned risk rating Pass Special Mention Substandard (in thousands) Doubtful Total Non-PCI Loans December 31, 2018 Commercial and industrial Commercial real estate Construction Total December 31, 2017 Commercial and industrial Commercial real estate Construction Total $ 3,399,426 9,828,744 1,121,321 $ 14,349,491 $ 2,375,689 8,447,865 808,091 $ 11,631,645 $ $ $ $ 31,996 30,892 215 63,103 62,071 48,009 360 110,440 $ $ $ $ 92,320 51,710 812 144,842 96,555 65,977 1,513 164,045 $ $ $ $ 66,633 963 — 67,596 14,750 — — 14,750 $ 3,590,375 9,912,309 1,122,348 $ 14,625,032 $ 2,549,065 8,561,851 809,964 $ 11,920,880 At December 31, 2018, the commercial and industrial loans rated substandard and doubtful in the above table included performing TDR taxi medallion loans and non-accrual taxi medallion loans, respectively. 105 2018 Form 10-K 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, 2018 and 2017: Credit exposure— by payment activity December 31, 2018 Residential mortgage Home equity Automobile Other consumer Total December 31, 2017 Residential mortgage Home equity Automobile Other consumer Total Performing Loans Non-Performing Loans (in thousands) Total Non-PCI Loans $ $ $ $ 3,670,067 369,184 1,319,126 846,402 6,204,779 2,705,339 371,854 1,208,731 723,286 5,009,210 $ $ $ $ 12,917 2,156 80 419 15,572 12,405 1,777 73 20 14,275 $ $ $ $ 3,682,984 371,340 1,319,206 846,821 6,220,351 2,717,744 373,631 1,208,804 723,306 5,023,485 Valley evaluates the credit quality of its PCI loan pools based on the expectation of the underlying cash flows of each pool, derived from the aging status and by payment activity of individual loans within the pool. The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of December 31, 2018 and 2017: Credit exposure— by payment activity December 31, 2018 Commercial and industrial Commercial real estate Construction Residential mortgage Consumer Total December 31, 2017 Commercial and industrial Commercial real estate Construction Residential mortgage Consumer Total Performing Loans Non-Performing Loans (in thousands) Total PCI Loans $ $ $ $ 710,045 2,478,990 364,815 421,609 158,502 4,133,961 172,105 924,574 39,802 135,745 76,901 1,349,127 $ $ $ $ 30,612 15,976 969 6,807 1,761 56,125 20,255 10,352 1,339 5,546 596 38,088 $ $ $ $ 740,657 2,494,966 365,784 428,416 160,263 4,190,086 192,360 934,926 41,141 141,291 77,497 1,387,215 2018 Form 10-K 106 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, 2018 and 2017. The following table summarizes the allowance for credit losses at December 31, 2018 and 2017: Components of allowance for credit losses: Allowance for loan losses Allowance for unfunded letters of credit Total allowance for credit losses December 31, 2018 2017 (in thousands) $ $ 151,859 4,436 156,295 $ $ 120,856 3,596 124,452 The following table summarizes the provision for credit losses for the years ended December 31, 2018, 2017 and 2016: Components of provision for credit losses: Provision for loan losses Provision for unfunded letters of credit Total provision for credit losses 2018 2017 (in thousands) 2016 $ $ 31,661 840 32,501 $ $ 8,531 1,411 9,942 $ $ 11,873 (4) 11,869 The following table details the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2018 and 2017: December 31, 2018 Allowance for loan losses: Beginning balance Loans charged-off Charged-off loans recovered Net (charge-offs) recoveries Provision for loan losses Ending balance December 31, 2017 Allowance for loan losses: Beginning balance Loans charged-off Charged-off loans recovered Net (charge-offs) recoveries Provision for loan losses Ending balance $ 57,232 $ Commercial and Industrial Commercial Real Estate Residential Mortgage Consumer Total (in thousands) $ 57,232 $ 54,954 $ 3,605 $ 5,065 $ 120,856 (2,515) 4,623 2,108 31,616 90,956 $ (348) 417 69 (5,373) 49,650 (223) 272 49 1,387 5,041 $ $ (4,977) 2,093 (2,884) 4,031 6,212 (8,063) 7,405 (658) 31,661 $ 151,859 50,820 $ 55,851 $ 3,702 $ 4,046 $ 114,419 $ $ (5,421) 4,736 (685) 7,097 (559) 1,425 866 (1,763) 54,954 $ (530) 1,016 486 (583) 3,605 (4,564) 1,803 (2,761) 3,780 (11,074) 8,980 (2,094) 8,531 $ 5,065 $ 120,856 107 2018 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, 2018 and 2017. 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 (in thousands) Commercial Real Estate Residential Mortgage Consumer Total December 31, 2018 Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Total Loans: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with discounts related to credit quality Total December 31, 2017 Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Total Loans: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with discounts related to credit quality Total $ $ $ $ $ $ $ $ 29,684 61,272 90,956 97,852 $ $ $ 2,628 47,022 49,650 43,598 $ $ $ 600 4,441 5,041 13,904 $ $ $ 113 6,099 6,212 1,271 $ $ $ 33,025 118,834 151,859 156,625 3,492,523 10,991,059 3,669,080 2,536,096 20,688,758 740,657 4,331,032 2,860,750 $13,895,407 428,416 $ 4,111,400 160,263 $ 2,697,630 4,190,086 $ 25,035,469 11,044 46,188 57,232 85,499 $ $ $ 2,735 52,219 54,954 60,851 $ $ $ 718 2,887 3,605 14,056 $ $ $ 64 5,001 5,065 3,760 $ $ $ 14,561 106,295 120,856 164,166 2,463,566 9,310,964 2,703,688 2,301,981 16,780,199 192,360 2,741,425 976,067 $10,347,882 141,291 $ 2,859,035 77,497 $ 2,383,238 1,387,215 $ 18,331,580 PREMISES AND EQUIPMENT, NET (Note 7) At December 31, 2018 and 2017, premises and equipment, net consisted of: Land Buildings Leasehold improvements Furniture and equipment Total premises and equipment Accumulated depreciation and amortization Total premises and equipment, net 2018 2017 (in thousands) $ $ 93,600 250,510 77,425 263,604 685,139 (343,509) 341,630 $ $ 77,235 210,335 79,217 255,189 621,976 (334,271) 287,705 Depreciation and amortization of premises and equipment included in non-interest expense for the years ended December 31, 2018, 2017 and 2016 was approximately $27.6 million, $24.8 million, and $24.4 million, respectively. 2018 Form 10-K 108 GOODWILL AND OTHER INTANGIBLE ASSETS (Note 8) 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 (in thousands) Investment Management Total Balance at December 31, 2016 Balance at December 31, 2017 Goodwill from business combinations Balance at December 31, 2018 $ $ $ 21,218 21,218 — 21,218 $ $ $ 200,103 200,103 86,922 287,025 $ $ $ 316,258 316,258 241,592 557,850 $ $ $ 153,058 153,058 65,514 218,572 $ $ $ 690,637 690,637 394,028 1,084,665 * 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. The goodwill from business combinations during 2018 set forth in the table above relates to the USAB acquisition. During 2018, Valley adjusted the fair value of certain PCI loans and deferred tax assets which, on a combined basis, resulted in a $5.8 million net increase in goodwill. See Note 2 for further details related to the USAB acquisition. There was no impairment of goodwill during the years ended December 31, 2018, 2017 and 2016. The following tables summarize other intangible assets as of December 31, 2018 and 2017: December 31, 2018 Loan servicing rights Core deposits Other Total other intangible assets December 31, 2017 Loan servicing rights Core deposits Other Total other intangible assets Gross Intangible Assets Accumulated Amortization Valuation Allowance (in thousands) Net Intangible Assets $ $ $ $ 87,354 80,470 3,945 171,769 79,138 43,396 4,087 126,621 $ $ $ $ (63,161) $ (29,136) (2,399) (94,696) $ (57,054) $ (24,297) (2,292) (83,643) $ (83) $ — — (83) $ (471) $ — — (471) $ 24,110 51,334 1,546 76,990 21,613 19,099 1,795 42,507 Core deposits are amortized using an accelerated method and have a weighted average amortization period of 8 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 approximately $44.6 million and $1.4 million of core deposit intangibles and loan servicing rights, respectively, resulting from the USAB acquisition. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the years ended December 31, 2018, 2017 and 2016. 109 2018 Form 10-K The following table summarizes the change in loan servicing rights during the years ended December 31, 2018, 2017 and 2016: Loan servicing rights: Balance at beginning of year Origination of loan servicing rights Amortization expense Balance at end of year Valuation allowance: Balance at beginning of year Impairment adjustment Balance at end of year Balance at end of year, net of valuation allowance 2018 2017 (in thousands) 2016 $ $ $ $ $ 22,084 8,216 (6,107) 24,193 $ $ (471) $ 388 (83) $ $ 24,110 20,368 7,039 (5,323) 22,084 $ $ (900) $ 429 (471) $ $ 21,613 16,681 8,479 (4,792) 20,368 (289) (611) (900) 19,468 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 $3.2 billion, $2.8 billion and $2.5 billion at December 31, 2018, 2017 and 2016, 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 recoveries and net impairment charges on loan servicing rights (reflected in the table above), of $18.4 million, $10.0 million and $11.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. The following table presents the estimated amortization expense of other intangible assets over the next five-year period: Year 2019 2020 2021 2022 2023 DEPOSITS (Note 9) Loan Servicing Rights Core Deposits (in thousands) Other $ $ 5,574 4,590 3,614 2,872 2,286 $ 10,961 9,607 8,252 6,898 5,544 235 220 206 191 131 Included in time deposits are certificates of deposit over $250 thousand totaling $1.1 billion and $647.3 million at December 31, 2018 and 2017, respectively. Interest expense on time deposits of $250 thousand or more totaled approximately $6.6 million, $1.3 million, and $1.1 million in 2018, 2017 and 2016, respectively. The scheduled maturities of time deposits as of December 31, 2018 are as follows: Year 2019 2020 2021 2022 2023 Thereafter Total time deposits 2018 Form 10-K 110 Amount (in thousands) 4,987,313 1,551,067 163,059 176,727 143,287 42,531 7,063,984 $ $ Deposits from certain directors, executive officers and their affiliates totaled $66.8 million and $77.7 million at December 31, 2018 and 2017, respectively. BORROWED FUNDS (Note 10) Short-Term Borrowings Short-term borrowings at December 31, 2018 and 2017 consisted of the following: FHLB advances Securities sold under agreements to repurchase Federal funds purchased Total short-term borrowings 2018 2017 (in thousands) $ $ 1,732,000 261,914 125,000 2,118,914 $ $ 427,000 321,628 — 748,628 The weighted average interest rate for short-term borrowings was 2.45 percent and 1.05 percent at December 31, 2018 and 2017, respectively. Long-Term Borrowings Long-term borrowings at December 31, 2018 and 2017 consisted of the following: FHLB advances, net (1) Subordinated debt, net (2) Securities sold under agreements to repurchase Total long-term borrowings 2018 2017 (in thousands) $ $ $ 1,309,666 294,602 50,000 1,654,268 $ 1,980,666 235,153 100,000 2,315,819 (1) (2) FHLB advances are presented net of unamortized prepayment penalties and other purchase accounting adjustments totaling $10.3 million and $14.3 million at December 31, 2018 and 2017, respectively. Subordinated debt is presented net of unamortized debt issuance costs totaling $1.4 million and $1.7 million at December 31, 2018 and 2017, respectively. In 2016, Valley prepaid $355 million and $50 million of the long-term FHLB advances and securities sold under agreements to repurchase, respectively. These prepaid borrowings, which had contractual maturity dates in 2018 and a total average interest rate of 3.69 percent, were funded with a new fixed-rate FHLB advance totaling $405.0 million (maturing in August 2021). The transaction was accounted for as a debt modification under U.S. GAAP. As a result, the new advance has an adjusted annual interest rate of 2.51 percent, after amortization of prepayment penalties totaling $20.0 million paid to the FHLB. In 2016, Valley also prepaid $87 million of FHLB advances assumed in the acquisition of CNL. The prepayment was entirely funded by cash balances that were held as collateral at the FHLB of Atlanta and resulted in the recognition of a $315 thousand loss on extinguishment of debt reported within other non-interest expense for the year ended December 31, 2016. FHLB Advances. The long-term FHLB advances had a weighted average interest rate of 3.13 percent and 2.52 percent at December 31, 2018 and 2017, 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. 111 2018 Form 10-K The long-term FHLB advances at December 31, 2018 are scheduled for contractual balance repayments as follows: Year 2019 2020 2021 2022 Total long-term FHLB advances Amount (in thousands) 255,000 25,000 840,000 200,000 1,320,000 $ $ There are no FHLB advances which are callable for early redemption by the FHLB in the table above. 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 $99.3 million and $99.2 million at December 31, 2018 and 2017, 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 $134.2 million and $135.2 million at December 31, 2018 and 2017, respectively. 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 $61.1 million at December 31, 2018. Long-term securities sold under agreements. The long-term securities sold under agreements had a weighted average interest rate of 3.70 percent and 3.37 percent at December 31, 2018 and 2017, respectively. The long-term repos at December 31, 2018 are scheduled for contractual balance repayments as follows: Year 2022 Total long-term securities sold under agreements to repurchase Amount (in thousands) $ $ 50,000 50,000 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 $2.4 billion and $1.9 billion for December 31, 2018 and 2017, respectively. JUNIOR SUBORDINATED DEBENTURES ISSUED TO CAPITAL TRUSTS (Note 11) All of the statutory trusts presented in the table below were acquired in past bank acquisitions, including the Aliant Statutory Trust II acquired from USAB on January 1, 2018. These trusts were established for the sole purpose of issuing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trust to purchase an equivalent amount of junior subordinated debentures issued by the acquired bank, and now assumed by Valley. The junior subordinated debentures, the sole assets of the trusts, are unsecured obligations of Valley, and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of Valley. Valley does not consolidate its capital trusts based on U.S. GAAP but wholly owns all of the common securities of each trust. 2018 Form 10-K 112 The table below summarizes the outstanding junior subordinated debentures and the related trust preferred securities issued by each trust as of December 31, 2018 and 2017: GCB Capital Trust III State Bancorp Capital Trust I State Bancorp Capital Trust II Aliant Statutory Trust II ($ in thousands) Junior Subordinated Debentures: December 31, 2018 Carrying value (1) Contractual principal balance December 31, 2017 Carrying value (1) Contractual principal balance Annual interest rate (2) Stated maturity date Initial call date Trust Preferred Securities: December 31, 2018 and 2017 Face value Annual distribution rate (2) Issuance date Distribution dates (3) $ $ $ 24,743 $ 24,743 $ 24,743 24,743 8,924 $ 10,310 8,824 $ 10,310 8,337 $ 10,310 8,207 10,310 13,366 15,464 NA NA 3-mo. LIBOR+1.4% 3-mo. LIBOR+3.45% 3-mo. LIBOR+2.85% 3-mo. LIBOR+1.8% July 30, 2037 November 7, 2032 January 23, 2034 December 15, 2036 July 30, 2017 November 7, 2007 January 23, 2009 December 15, 2011 24,000 $ 10,000 $ 10,000 $ 15,000 3-mo. LIBOR+1.4% 3-mo. LIBOR+3.45% 3-mo. LIBOR+2.85% 3-mo. LIBOR+1.8% July 2, 2007 October 29, 2002 December 19, 2003 December 14, 2006 Quarterly Quarterly Quarterly Quarterly (1) The carrying values include unamortized purchase accounting adjustments at December 31, 2018 and 2017. (2) Interest on GCB Capital Trust III was fixed at an annual rate of 6.96 percent until July 30, 2017, thereafter, it resets quarterly to 3-month LIBOR plus 1.4 percent. The annual interest rate for all of the junior subordinated debentures and related trust preferred securities excludes the effect of the purchase accounting adjustments. (3) All cash distributions are cumulative. 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, 2018 and 2017. BENEFIT PLANS (Note 12) 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. 113 2018 Form 10-K 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, 2018 and 2017: Change in projected benefit obligation: Projected benefit obligation at beginning of year Interest cost Actuarial (gain) loss Benefits paid Projected benefit obligation at end of year Change in fair value of plan assets: Fair value of plan assets at beginning of year Actual (loss) return on plan assets Employer contributions Benefits paid Fair value of plan assets at end of year* Funded status of the plan Asset recognized Accumulated benefit obligation 2018 2017 (in thousands) $ $ $ $ $ 170,566 5,542 (11,540) (7,204) 157,364 222,124 (5,545) 1,133 (7,204) 210,508 53,144 157,364 $ $ $ $ $ 161,306 5,713 10,148 (6,601) 170,566 206,639 21,468 618 (6,601) 222,124 51,558 170,566 * Includes accrued interest receivable of $660 thousand and $993 thousand as of December 31, 2018 and 2017, respectively. 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 $309 thousand of the net actuarial loss reported in the following table as of December 31, 2018 as a component of net periodic pension expense during 2019. Net actuarial loss Deferred tax benefit Total 2018 2017 (in thousands) $ $ 42,893 (12,205) 30,688 $ $ 33,602 (14,044) 19,558 The non-qualified plans had a projected benefit obligation, accumulated benefit obligation, and fair value of plan assets as follows: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets 2018 2017 (in thousands) $ $ 18,708 18,708 — 20,175 20,175 — 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 4.30 percent and 3.69 percent as of December 31, 2018 and 2017, respectively. 2018 Form 10-K 114 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, 2018, 2017 and 2016: Interest cost Expected return on plan assets Amortization of net loss Total net periodic pension income 2018 2017 (in thousands) 2016 $ $ $ 5,542 (15,912) 625 (9,745) $ $ 5,713 (15,163) 381 (9,069) $ 6,681 (14,539) 294 (7,564) At the end of 2016, Valley changed the method utilized to estimate the interest cost component of net periodic pension costs for our qualified and non-qualified plans. Historically, Valley estimated the interest cost component (and the service cost component when it was applicable) using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. At December 31, 2016, Valley elected to use a spot rate approach for the plans in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows. Valley believes this provides a better estimate of service and interest costs. Valley accounted for this change in estimate prospectively starting in 2017. This change does not affect the measurement of the total benefit obligation. For 2017, the change in estimate when compared to the prior approach accounted for a large portion of the decline in interest cost from 2016 to 2017 as shown in the table above. 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, 2018 and 2017 were as follows: 2018 2017 Net loss Amortization of prior service cost Amortization of actuarial loss Total recognized in other comprehensive income Total recognized in net periodic pension income and other comprehensive income/loss (before tax) $ $ $ $ (in thousands) 9,917 (35) (625) 9,257 $ 3,843 (35) (381) 3,427 (453) $ (5,607) The benefit payments, which reflect expected future service, as appropriate, expected to be paid in future years are presented in the following table: Year 2019 2020 2021 2022 2023 Thereafter $ Amount (in thousands) 8,213 8,491 8,764 8,938 9,182 47,835 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, 2018, 2017 and 2016 were as follows: Discount rate Expected long-term return on plan assets Rate of compensation increase 2018 2017 2016 3.69% 7.50% N/A 4.12% 7.50% N/A 4.33% 7.50% 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. 115 2018 Form 10-K 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. 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. % of Total Investments December 31, 2018 Fair Value Measurements at Reporting Date Using: Significant Quoted Prices Unobservable in Active Markets Inputs for Identical (Level 3) Assets (Level 1) Significant Other Observable Inputs (Level 2) ($ in thousands) 28% $ 24 17 24 4 3 100% $ 59,447 50,889 36,293 50,838 7,429 4,952 209,848 $ $ 59,447 — 36,293 50,838 7,429 — 154,007 $ $ — $ 50,889 — — — 4,952 55,841 $ — — — — — — — % of Total Investments December 31, 2017 Fair Value Measurements at Reporting Date Using: Significant Quoted Prices Unobservable in Active Markets Inputs for Identical (Level 3) Assets (Level 1) Significant Other Observable Inputs (Level 2) ($ in thousands) 38% $ 22 23 13 4 * 100% $ 84,791 47,471 48,814 28,671 9,522 1,862 221,131 $ $ 84,791 — 48,814 28,671 9,522 — 171,798 $ $ — $ 47,471 — — — 1,862 49,333 $ — — — — — — — Assets: Investments: Equity securities Corporate bonds Mutual funds U.S. Treasury securities Cash and money market funds U.S. government agency securities Total investments Assets: Investments: Equity securities Corporate bonds Mutual funds U.S. Treasury securities Cash and money market funds U.S. government agency securities Total investments * Represents less than one percent of total investments. 2018 Form 10-K 116 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. Other Non-Qualified Plans Valley maintains other non-qualified plans for former directors of banks acquired, as well as a non-qualified plan for former senior management of Merchants Bank of New York acquired in January of 2001. Valley did not merge these plans into its existing non-qualified plans. Collectively, at December 31, 2018 and 2017, the remaining obligations under these plans were $1.7 million and $2.1 million, respectively, of which $512 thousand and $682 thousand, respectively, were funded by Valley. As of December 31, 2018 and 2017, all of the obligations were included in other liabilities and $872 thousand (net of a $345 thousand tax benefit) and $994 thousand (net of a $400 thousand tax benefit), respectively, were recorded in accumulated other comprehensive loss. The $816 thousand 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. 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 $18.8 million, $10.8 million and $10.5 million during 2018, 2017 and 2016, 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 $8.5 million, $7.1 million and $6.7 million in expense for contributions to the plan for the years ended December 31, 2018, 2017 and 2016, respectively. Stock-Based Compensation Valley currently has one active employee stock incentive 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 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. As of December 31, 2018, 5.5 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 117 2018 Form 10-K 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. The maximum term to exercise an incentive stock option is ten years from the date of grant and is subject to a vesting schedule. Valley recorded total stock-based compensation expense, primarily for restricted stock awards, totaling $19.5 million, $12.2 million and $10.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. The stock-based compensation expense for 2018, 2017 and 2016 included $4.3 million, $4.3 million and $3.5 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, 2018, the unrecognized amortization expense for all stock- based compensation totaled approximately $16.6 million and will be recognized over an average remaining vesting period of approximately 2.1 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, 2018, 2017 and 2016: Outstanding at beginning of year Granted Vested Forfeited Outstanding at end of year Restricted Stock Awards Outstanding 2017 2016 2018 1,771,702 1,263,144 (1,128,521) (185,357) 1,720,968 2,100,816 608,786 (736,575) (201,325) 1,771,702 2,755,138 544,307 (1,050,293) (148,336) 2,100,816 The RSAs granted in 2018 have vesting periods ranging from one to five years. The average grant date fair value of RSAs granted during the year ended December 31, 2018 was $11.85 per share. 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. During 2014, 240 thousand shares of performance-based RSAs were granted to executive officers and vested based on the same performance measures for the RSU grants discussed below. During 2017 and 2016, 85 thousand and 53 thousand restricted shares, respectively, vested related to the performance-based RSAs. The total remaining unvested performance-based RSAs were forfeited during 2017 due to failure to meet the performance and market conditions at the final year of vesting. Restricted Stock Units (RSUs). The RSUs vest based on (i) growth in tangible book value per share plus dividends (75 percent of performance shares) and (ii) total shareholder return as compared to our peer group (25 percent of performance shares). The RSUs "cliff" vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common share) over the applicable performance period. Dividend equivalents, per the terms of the agreements, are accumulated and paid to the grantee at the vesting date, or forfeited if the performance conditions are not met. The grant date fair value of the RSUs was $12.36, $11.05 and $8.32 per share for the years ended December 31, 2018, 2017, and 2016, respectively. Compensation costs related to RSUs totaled $5.5 million, $3.8 million and $2.8 million, and were included in total stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016, respectively. 2018 Form 10-K 118 The following table sets forth the changes in RSUs outstanding for the years ended December 31, 2018, 2017 and 2016: Outstanding at beginning of year Acquired from USAB Granted Vested Forfeited Outstanding at end of year Restricted Stock Units Outstanding 2017 2016 2018 1,114,962 336,379 509,725 (503,879) (78,301) 1,378,886 744,281 — 370,681 — — 1,114,962 313,212 — 431,069 — — 744,281 In connection with the USAB acquisition on January 1, 2018, Valley assumed 336 thousand time-based RSUs (of which 179 thousand remained unvested and outstanding as of December 31, 2018). The stock plan under which the stock awards were issued is no longer active. Stock-based compensation expense related to the USAB RSUs totaled $1.6 million for the year ended December 31, 2018. 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, 2018, 2017 and 2016 and changes during the years ended on those dates: 2018 2017 2016 Stock Options Outstanding at beginning of year Acquired from USAB Exercised Forfeited or expired Outstanding at end of year Exercisable at year-end $ Shares 446,980 1,803,165 (975,325) (223,033) 1,051,787 604,003 Weighted Average Exercise Price 13 5 5 14 7 7 Weighted Average Exercise Price 14 — — 16 13 13 $ Shares 732,489 — — (285,509) 446,980 446,980 Weighted Average Exercise Price 16 — — 18 14 14 $ Shares 1,383,365 — — (650,876) 732,489 632,489 In connection with the USAB acquisition on January 1, 2018, Valley assumed stock option awards totaling 1.8 million shares of Valley common stock (of which options for 813 thousand shares remained outstanding as of December 31, 2018) at a weighted average exercise price of $5.47. The following table summarizes information about stock options outstanding and exercisable at December 31, 2018: Range of Exercise Prices $2-$4 4-6 6-10 10-18 Options Outstanding and Exercisable Number of Options Weighted Average Remaining Contractual Life in Years Weighted Average Exercise Price 40,870 284,912 42,094 236,127 604,003 $ 2.9 5.1 7.6 1.9 3.9 3 5 7 12 7 119 2018 Form 10-K 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. The following table sets forth the changes in director’s restricted stock awards outstanding for the years ended December 31, 2018, 2017 and 2016: Outstanding at beginning of year Vested Outstanding at end of year INCOME TAXES (Note 13) Restricted Stock Awards Outstanding 2017 2016 2018 17,885 (17,885) — 55,510 (37,625) 17,885 80,117 (24,607) 55,510 The U.S. Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017 and introduces 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 of 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, 2018, 2017 and 2016 consisted of the following: Current expense: Federal State Deferred (benefit) expense: Federal State Total income tax expense 2018 2017 (in thousands) 2016 $ $ 51,147 28,898 80,045 (17,463) 5,683 (11,780) 68,265 $ $ 8,483 5,500 13,983 49,169 27,679 76,848 90,831 $ $ 25,176 12,904 38,080 10,658 16,496 27,154 65,234 2018 Form 10-K 120 The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows: Deferred tax assets: Allowance for loan losses Depreciation Employee benefits Investment securities, including other-than-temporary impairment losses Net operating loss carryforwards Purchase accounting Capital loss carryforward Other Total deferred tax assets Deferred tax liabilities: Pension plans Other investments Deferred income Core deposit intangibles Other Total deferred tax liabilities Valuation Allowance Net deferred tax asset (included in other assets) 2018 2017 (in thousands) 42,882 19,111 13,301 13,222 21,570 33,629 830 21,274 165,819 18,786 17,758 — 14,223 8,858 59,625 733 105,461 $ $ 34,885 8,336 10,596 5,021 30,658 18,819 — 21,930 130,245 18,912 13,234 37,952 5,182 7,469 82,749 — 47,496 $ $ Valley's federal net operating loss carryforwards totaled approximately $80.2 million at December 31, 2018 and expire during the period from 2029 through 2034. Valley's capital loss carryforwards totaled $3.1 million at December 31, 2018 and expire at December 31, 2023. State net operating loss carryforwards totaled approximately $104 million at December 31, 2018 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 year ended December 31, 2018, and 35 percent for the years ended December 31, 2017 and 2016 were as follows: 2018 2017 (in thousands) 2016 Federal income tax at expected statutory rate $ 69,235 $ 88,458 $ 81,683 Increase (decrease) due to: State income tax expense, net of federal tax effect 23,851 21,046 19,197 Tax-exempt interest, net of interest incurred to carry tax- exempt securities Bank owned life insurance Tax credits from securities and other investments FDIC insurance premium Impact of the Tax Act Other, net Income tax expense (3,974) (1,734) (20,798) 3,318 (2,274) 641 (5,245) (2,568) (27,037) — 15,441 736 $ 68,265 $ 90,831 $ (5,308) (2,343) (25,954) — — (2,041) 65,234 121 2018 Form 10-K A reconciliation of Valley’s gross unrecognized tax benefits for 2018, 2017 and 2016 are presented in the table below: Beginning balance Additions based on tax positions related to prior years Settlements with taxing authorities Reductions due to expiration of statute of limitations Ending balance 2018 2017 (in thousands) 2016 $ $ $ 4,238 — — (4,238) — $ 16,144 1,121 (13,027) — 4,238 $ $ 19,892 3,958 (4,820) (2,886) 16,144 The entire balance of unrecognized tax benefits, if recognized, would favorably affect our effective income tax rate. Valley’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Valley accrued approximately $1.8 million and $4.6 million of interest associated with Valley’s uncertain tax positions at December 31, 2017 and 2016, respectively. Valley believes no provisions for income tax uncertainties consistent with ASC 740 should be recorded as of December 31, 2018. Valley is evaluating the possibility of recording an uncertain tax position liability in 2019 with regards to its investments in mobile solar generators sold and managed by DC Solar and its affiliates (DC Solar). For further information, see Note 23 - Subsequent Events. 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 2013. Valley is under examination by the IRS and also currently 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, 2018. TAX CREDIT INVESTMENTS (Note 14) 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. An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value. The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at December 31, 2018 and 2017: Other Assets: Affordable housing tax credit investments, net Other tax credit investments, net Total tax credit investments, net Other Liabilities: Unfunded affordable housing tax credit commitments Unfunded other tax credit commitments Total unfunded tax credit commitments 2018 Form 10-K 122 December 31, 2018 2017 (in thousands) $ $ $ $ 36,961 68,052 105,013 4,520 8,756 13,276 $ $ $ $ 22,135 42,015 64,150 3,690 15,020 18,710 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, 2018, 2017 and 2016: Components of Income Tax Expense: Affordable housing tax credits and other tax benefits Other tax credit investment credits and tax benefits Total reduction in income tax expense Amortization of Tax Credit Investments: Affordable housing tax credit investment losses Affordable housing tax credit investment impairment losses* Other tax credit investment losses Other tax credit investment impairment losses* Total amortization of tax credit investments recorded in non-interest expense $ $ $ $ 2018 2017 2016 (in thousands) $ $ $ 6,713 21,351 28,064 1,880 2,544 1,970 17,806 $ $ $ 7,383 35,530 42,913 2,748 4,684 2,866 31,449 24,200 $ 41,747 $ 5,013 33,294 38,307 2,077 450 790 31,427 34,744 * As a result of the Tax Act, Valley incurred additional impairment of $2.2 million and $2.1 million related to affordable housing tax credit investments and other tax credit investments, respectively, during the fourth quarter of 2017. COMMITMENTS AND CONTINGENCIES (Note 15) Lease Commitments Certain bank facilities are occupied under non-cancelable long-term operating leases, which expire at various dates through 2058. Certain lease agreements provide for renewal options and increases in rental payments based upon increases in the consumer price index or the lessors’ cost of operating the facility. Minimum aggregate lease payments for the remainder of the lease terms are as follows: Year 2019 2020 2021 2022 2023 Thereafter Total lease commitments Gross Rents Sublease Rents (in thousands) Net Rents $ $ 29,093 29,379 28,925 27,562 25,064 262,200 402,223 $ $ 2,382 2,290 2,160 2,002 1,938 8,558 19,330 $ $ 26,711 27,089 26,765 25,560 23,126 253,642 382,893 Net occupancy expense for years ended December 31, 2018, 2017, and 2016 included rental expense of $29.0 million, $27.7 million, and $27.7 million, respectively, net of rental income of $3.5 million, $3.9 million, and $4.0 million, respectively, for leased bank facilities. 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. 123 2018 Form 10-K The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 2018 and 2017: Commitments under commercial loans and lines of credit Home equity and other revolving lines of credit Standby letters of credit Outstanding residential mortgage loan commitments Commitments under unused lines of credit—credit card Commitments to sell loans Commercial letters of credit $ 2018 2017 (in thousands) $ 5,164,186 1,178,306 316,941 235,310 66,229 58,897 3,100 3,401,653 1,006,329 250,536 192,685 54,906 57,405 2,115 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. Litigation In the normal course of business, Valley is a party to various outstanding legal proceedings and claims. In the opinion of management, the financial condition, results of operations and liquidity of Valley should not be materially affected by the outcome of such legal proceedings and claims. However, in the event of an adverse outcome or settlement in one or more of our legal proceedings, operating results for a particular period may be negatively impacted. Disclosure is required when a risk of material loss in a litigation or claim is more than remote. Disclosure is also required of the estimate of the reasonably possible loss or range of loss, unless an estimate cannot be made. Although there can be no assurance as to the ultimate outcome, Valley has generally denied, or believes it has a meritorious defense and will deny liability in litigation pending against Valley and claims made, including the matter described below. Valley intends to defend vigorously each case against it. Liabilities are established for legal claims when payments associated with the claims become probable and the possible losses related to the matter can be reasonably estimated. Based upon information currently available and advice of counsel, Valley believes that the eventual outcome of such claims will not have a material adverse effect on Valley’s consolidated financial position. Maritza Gaston and George Gallart v. Valley National Bancorp and Valley National Bank. In April 2017, Valley was served with a Class and Collective Action Complaint, filed in the Eastern District of New York, alleging that Valley had violated both Federal and State wage and hour laws and the Fair Labor Standards Act and seeking to recover overtime compensation on behalf of a class of Valley employees. While Branch Service Managers are classified by Valley as “exempt” employees and do not receive overtime pay, plaintiff’s counsel claims that Branch Service Managers perform non-exempt duties, should therefore be classified as non-exempt hourly employees and should have been paid overtime for any time worked in excess of 40 hours per week. The Federal Magistrate granted conditional certification for the class and collective action in late 2017. In October 2018, following mediation, Valley and Plaintiffs agreed to a settlement in principal for a total payment by Valley of $1.5 million. The settlement was subsequently approved by the court in February 2019. 2018 Form 10-K 124 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. At December 31, 2018, Valley had the following cash flow hedge derivatives: • Two forward starting interest rate swaps, each 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 swaps required Valley to pay fixed-rate amounts of approximately 2.72 percent and 2.97 percent, in exchange for the receipt of variable- rate payments at the three-month LIBOR rate. The two swaps have expiration dates of November 2019 and November 2020. • Four forward starting interest rate swaps with a total notional amount of $182 million to hedge the changes in cash flows associated with borrowed funds. Starting in March and April 2016, the interest rate swaps required Valley to pay fixed- rate amounts ranging from approximately 2.51 percent to 2.88 percent, in exchange for the receipt of variable-rate payments at the three-month LIBOR rate. The four swaps have expiration dates ranging from March 2019 to September 2020. Valley terminated an interest rate cap with a notional amount of $125 million in May 2018. The terminated swap, originally maturing in September 2023, was used to hedge the change in cash flows associated with prime rate indexed deposits, consisting of consumer and commercial money market accounts, which variable rates are indexed to the prime rate. One interest rate swap with an amount of $150 million used to hedge the changes in cash flows associated with certain brokered money market deposits, matured in November 2018. 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, 2018, Valley had one interest rate swap with a notional amount of approximately $7.5 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 125 2018 Form 10-K 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, 2018, Valley had 18 credit swaps with an aggregate notional amount of $109.4 million related to risk participation agreements. At December 31, 2018, 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. 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, 2018 December 31, 2017 Fair Value Fair Value Other Assets Other Liabilities Notional Amount Other Assets Other Liabilities Notional Amount (in thousands) Derivatives designated as hedging instruments: Cash flow hedge interest rate caps and swaps Fair value hedge interest rate swaps Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments: Interest rate swaps, and embedded and credit derivatives Mortgage banking derivatives Total derivatives not designated as hedging instruments $ $ $ — $ — 27 347 $ 332,000 7,536 $ $ 650 — 81 637 $ 607,000 7,775 — $ 374 $ 339,536 $ 650 $ 718 $ 614,775 $ 48,642 337 22,533 774 $ 3,390,578 105,247 $ $ 25,696 71 23,494 118 $ 1,687,005 113,233 $ 48,979 $ 23,307 $ 3,495,825 $ 25,767 $ 23,612 $ 1,800,238 The Chicago Mercantile Exchange (CME) and London Clearing House (LCH) have enacted rulebook changes that re- characterize variation margin as settlements of the outstanding derivative instead of cash collateral. The CME and LCH variation margins are classified as a single-unit of account with the fair value of certain cash flow and non-designated derivative instruments on a prospective basis effective January 1, 2017 for derivatives outstanding with the CME and January 1, 2018 for derivatives outstanding with the LCH. 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, 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: Amount of loss reclassified from accumulated other comprehensive loss to interest expense Amount of gain (loss) recognized in other comprehensive income $ (3,493) $ 2,651 (8,579) $ 1,005 (13,034) (4,035) 2018 2017 (in thousands) 2016 2018 Form 10-K 126 The net gains or losses related to cash flow hedge ineffectiveness were immaterial during the years ended December 31, 2018, 2017 and 2016. The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $4.0 million and $8.3 million at December 31, 2018 and 2017, respectively. Amounts reported in accumulated other comprehensive loss related to cash flow interest rate derivatives are reclassified to interest expense as interest payments are made on the hedged variable interest rate liabilities. Valley estimates that $1.3 million will be reclassified as an increase to interest expense in 2019. Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows: Derivative—interest rate swaps: Interest income Interest expense Hedged item—loans, deposits and long-term borrowings: Interest income Interest expense 2018 2017 (in thousands) 2016 $ $ $ 290 — (290) $ — $ 348 — (348) $ — 320 6,670 (320) (6,645) Fee income related to derivative interest rate swaps executed with commercial loan customers totaled $16.4 million, $8.3 million and $5.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. 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, 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 Loans $ 7,882 $ 8,412 $ 346 $ 637 Net (losses) gains included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows: 2018 2017 2018 2017 (in thousands) 2018 2017 (in thousands) 2016 Non-designated hedge interest rate and credit derivatives Other non-interest expense $ (792) $ (744) $ 690 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, 2018, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of December 31, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2.2 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. 127 2018 Form 10-K BALANCE SHEET OFFSETTING (Note 16) Certain financial instruments, including derivatives (consisting of interest rate caps and swaps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default. The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of December 31, 2018 and 2017. Gross Amounts Recognized Gross Amounts Offset Net Amounts Presented Financial Instruments Cash Collateral Net Amount (in thousands) Gross Amounts Not Offset December 31, 2018 Assets: Interest rate caps and swaps $ 48,642 Liabilities: Interest rate caps and swaps $ Repurchase agreements Total $ 22,907 150,000 172,907 December 31, 2017 Assets: Interest rate caps and swaps $ 26,346 Liabilities: Interest rate caps and swaps $ Repurchase agreements Total $ 24,212 200,000 224,212 $ $ $ $ $ $ — $ 48,642 — $ — — $ 22,907 150,000 172,907 — $ 26,346 — $ — — $ 24,212 200,000 224,212 $ $ $ $ $ $ (1,214) $ — (1,214) $ — (1,852) (150,000) * (1,214) $ (151,852) (5,376) $ — (5,376) $ — (8,141) (200,000) * (5,376) $ (208,141) $ $ $ $ $ $ 47,428 19,841 — 19,841 20,970 10,695 — 10,695 * Represents the fair value of non-cash pledged investment securities. REGULATORY AND CAPITAL REQUIREMENTS (Note 17) 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. Effective January 1, 2015, Valley implemented the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Basel III final rules require a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent. The new rule includes a capital conservation buffer that is added 2018 Form 10-K 128 to the minimum requirements for capital adequacy purposes. The capital conservation buffer was subject to a three-year phase- in period that started on January 1, 2016, at 0.625 percent of risk-weighted assets and increased each subsequent year by 0.625 percent until reaching its final level of 2.5 percent when fully phased-in on January 1, 2019. As of December 31, 2018 and 2017, Valley and Valley National Bank exceeded all capital adequacy requirements with the capital conservation buffer required to be phased in at these dates under the Basel III Capital Rules (see table below). 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, 2018 and 2017: Actual Minimum Capital Requirements To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio Amount Ratio Amount Ratio ($ in thousands) $ 2,786,971 2,698,654 11.34% $ 2,426,975 2,424,059 10.99 9.875% 9.875 N/A $ 2,454,743 N/A 10.00% 2,071,871 2,442,359 2,286,676 2,442,359 2,286,676 2,442,359 8.43 9.95 9.30 9.95 7.57 8.09 1,566,781 1,564,899 1,935,435 1,933,110 1,208,882 1,207,039 6.375 6.375 7.875 7.875 4.00 4.00 N/A 1,595,583 N/A 1,963,794 N/A 1,508,798 N/A 6.50 N/A 8.00 N/A 5.00 $ 2,258,044 2,185,967 12.61% $ 1,656,575 1,653,088 12.23 9.250% 9.250 N/A $ 1,787,122 N/A 10.00% 1,651,849 1,961,316 1,864,279 1,961,316 1,864,279 1,961,316 9.22 10.97 10.41 10.97 8.03 8.47 1,029,763 1,027,595 1,298,397 1,295,663 928,484 926,459 5.750 5.750 7.250 7.250 4.00 4.00 N/A 1,161,629 N/A 1,429,698 N/A 1,158,074 N/A 6.50 N/A 8.00 N/A 5.00 As of December 31, 2018 Total Risk-based Capital Valley Valley National Bank Common Equity Tier 1 Capital Valley Valley National Bank Tier 1 Risk-based Capital Valley Valley National Bank Tier 1 Leverage Capital Valley Valley National Bank As of December 31, 2017 Total Risk-based Capital Valley Valley National Bank Common Equity Tier 1 Capital Valley Valley National Bank Tier 1 Risk-based Capital Valley Valley National Bank Tier 1 Leverage Capital Valley Valley National Bank COMMON AND PREFERRED STOCK (Note 18) Common Stock Common Stock Issuance. In December 2016, Valley issued and sold 9.24 million shares of its common stock in a registered public offering. The net proceeds of the offering totaled $106.4 million and were used to, among other things, support loan growth at the Bank during 2017. Valley also issues shares in business combinations and shares related to stock awards under the 2016 Plan. See Notes 2 and 12 for further details. Dividend Reinvestment Plan. As part of Valley's dividend reinvestment plan (DRIP), Valley may issue authorized and previously unissued or treasury shares of Valley common stock for purchases. Under the DRIP, a shareholder may choose to have future cash dividends automatically invested in Valley common stock and make voluntary optional cash payments of up to $100 thousand per quarter to purchase shares of Valley common stock. Shares purchased under this plan were issued directly from Valley. During 2018, 2017 and 2016, 87 thousand, 713 thousand, and 554 thousand common shares, respectively, were reissued 129 2018 Form 10-K from treasury stock or issued from authorized common shares under the DRIP for net proceeds totaling $1.0 million, $8.2 million and $5.2 million, respectively. The aspect of the DRIP allowing Valley to issue shares was terminated effective February 12, 2018. Valley's transfer agent maintains a DRIP with shares purchased in the open market. Common Stock Warrants. On January 1, 2012, Valley assumed in the acquisition of State Bancorp, Inc. a warrant issued (in connection with State Bancorp's redeemed preferred stock issuance) to the U.S. Treasury in December 2008. The ten-year warrant to purchase up to 489 thousand of Valley common shares has an exercise price of $11.30 per share and is exercisable on a net exercise basis. During May 2015, the U.S. Treasury sold the warrant shares individually through a public action, in which Valley did not receive any of the proceeds. All of the warrants expired unexercised on December 5, 2018. In connection with the issuance of senior preferred shares in 2008 under the TARP program, Valley issued to the U.S. Treasury a ten-year warrant to purchase up to approximately 2.5 million of Valley common shares. During 2010, the U.S. Treasury sold the warrant shares individually through a public auction, in which Valley did not receive any of the proceeds. Each warrant entitled the holder to purchase approximately 1.103 Valley common shares at $16.12 per share. All of the warrants expired unexercised on November 14, 2018. 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, 2018, 2017 and 2016. Other Stock Repurchases. Valley also 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, 2018, 2017 and 2016, Valley purchased approximately 441 thousand, 218 thousand and 328 thousand shares, respectively, of its outstanding common stock at an average price of $11.83, $12.12 and $9.73, respectively, for such purpose. 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, 2018 and 2017. 2018 Form 10-K 130 OTHER COMPREHENSIVE INCOME (Note 19) The following table presents the tax effects allocated to each component of other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016. Components of other comprehensive income (loss) include changes in net unrealized gains and losses on 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. Before Tax 2018 Tax Effect After Tax Before Tax 2017 Tax Effect (in thousands) After Tax Before Tax 2016 Tax Effect After Tax Unrealized gains and losses on available for sale (AFS) securities Net (losses) gains arising during the period Less reclassification adjustment for net losses (gains) included in net income (1) Net change Non-credit impairment losses on securities available for sale and held to maturity Net change in non-credit impairment losses on securities Less reclassification adjustment for accretion of credit impairment losses included in net income (2) Net change Unrealized gains and losses on derivatives (cash flow hedges) Net gains (losses) arising during the period Less reclassification adjustment for net losses included in net income (3) Net change Defined benefit pension plan Net (losses) gains arising during the period Amortization of prior service credit (cost)(4) Amortization of net loss (4) Net change Total other comprehensive (loss) income $ (32,123) $ 9,191 $ (22,932) $ 636 $ (284) $ 352 $ (7,294) $ 3,001 $ (4,293) 2,342 (485) 1,857 (29,781) 8,706 (21,075) 20 656 (9) (293) 11 363 (777) 312 (465) (8,071) 3,313 (4,758) — — — 849 (351) 498 719 (302) 417 531 531 (151) (151) 380 380 (284) 565 117 (234) (167) 331 (921) (202) 382 80 (539) (122) 2,651 (777) 1,874 1,005 (429) 576 (4,035) 1,574 (2,461) 3,493 6,144 (999) (1,776) 2,494 4,368 8,579 9,584 (3,551) (3,980) 5,028 5,604 13,034 8,999 (5,393) (3,819) 7,641 5,180 (9,916) 2,765 (7,151) (3,843) 1,121 (2,722) 5,837 (2,539) 3,298 212 625 (66) (178) 146 447 268 381 (9,079) 2,521 (6,558) (3,194) (77) (133) 911 191 248 (300) 294 119 (109) (181) 185 (2,283) 5,831 (2,529) 3,302 $ (32,185) $ 9,300 $ (22,885) $ 7,611 $ (3,596) $ 4,015 $ 6,557 $ (2,955) $ 3,602 (1) Included in (losses) gains on securities transactions, net. (2) Included in interest and dividends on investment securities (taxable). (3) Included in interest expense. (4) Included in the computation of net periodic pension cost. See Note 12 for details. 131 2018 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, 2018, 2017 and 2016: Components of Accumulated Other Comprehensive Loss Unrealized Gains and Losses on AFS Securities Non-credit Impairment Losses on Securities Unrealized Gains and Losses on Derivatives Defined Benefit Pension Plan Total Accumulated Other Comprehensive Loss Balance-December 31, 2015 $ (5,336) $ (520) $ (in thousands) (17,644) $ (22,195) $ (45,695) Other comprehensive (loss) income before reclassifications Amounts reclassified from other comprehensive (loss) income Other comprehensive (loss) income, net Balance-December 31, 2016 Other comprehensive income (loss) before reclassifications Amounts reclassified from other comprehensive income (loss) Other comprehensive income (loss), net Reclassification due to the adoption of ASU No. 2018-02 Balance-December 31, 2017 Reclassification due to the adoption of ASU No. 2016-01 Reclassification due to the adoption of ASU No. 2017-12 Balance-January 1, 2018 Other comprehensive (loss) income before reclassifications Amounts reclassified from other comprehensive (loss) income Other comprehensive (loss) income, net (4,293) 417 (2,461) 3,298 (3,039) (465) (4,758) (10,094) 352 11 363 (2,273) (12,004) (480) — (12,484) (22,932) 1,857 (21,075) (539) (122) (642) 498 (167) 331 (69) (380) — — (380) — 380 380 7,641 5,180 (12,464) 576 5,028 5,604 (1,478) (8,338) 4 3,302 (18,893) (2,722) 439 (2,283) (4,107) (25,283) 6,641 3,602 (42,093) (1,296) 5,311 4,015 (7,927) (46,005) — — (480) — (25,283) (61) (46,546) (7,151) (28,209) (61) (8,399) 1,874 2,494 593 4,368 (4,031) $ (6,558) (31,841) $ 5,324 (22,885) (69,431) Balance-December 31, 2018 $ (33,559) $ — $ 2018 Form 10-K 132 QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 20) Interest income Interest expense Net interest income Provision for credit losses Non-interest income: Gains on sales of loans, net Other non-interest income Non-interest expense: Amortization of tax credit investments Other non-interest expense Income before income taxes Income tax expense Net income Dividend on preferred stock Net income available to common shareholders Earnings per common share: Basic Diluted Cash dividends declared per common share Weighted average number of common shares outstanding: Quarters Ended 2018 March 31 June 30 September 30 December 31 (in thousands, except for share data) $ 267,495 $ 280,118 $ 297,041 $ 314,594 59,897 207,598 10,948 6,753 25,498 5,274 168,478 55,149 13,184 41,965 3,172 38,793 69,366 210,752 7,142 7,642 30,427 4,470 145,446 91,763 18,961 72,802 3,172 69,630 80,241 216,800 6,552 3,748 25,290 5,412 146,269 87,605 18,046 69,559 3,172 66,387 $ $ 0.12 0.12 0.11 $ 0.21 0.21 0.11 $ 0.20 0.20 0.11 92,541 222,053 7,859 2,372 32,322 9,044 144,668 95,176 18,074 77,102 3,172 73,930 0.22 0.22 0.11 Basic Diluted 330,727,416 331,318,381 331,486,500 331,492,648 332,465,527 332,895,483 333,000,242 332,856,385 133 2018 Form 10-K Interest income Interest expense Net interest income Provision for credit losses Non-interest income: Gains on sales of loans, net Other non-interest income Non-interest expense: Amortization of tax credit investments Other non-interest expense Income before income taxes Income tax expense Net income Dividend on preferred stock Net income available to common shareholders Earnings per common share: Basic Diluted Cash dividends declared per common share Weighted average number of common shares outstanding: Quarters Ended 2017 March 31 June 30 September 30 December 31 (in thousands, except for share data) $ 198,455 $ 207,007 $ 210,741 $ 217,951 36,587 161,868 2,470 4,128 21,592 5,324 115,628 64,166 18,071 46,095 1,797 44,298 42,187 164,820 3,632 4,791 24,039 7,732 111,507 70,779 20,714 50,065 1,797 48,268 46,796 163,945 1,640 5,520 21,477 8,389 124,176 56,737 17,088 39,649 2,683 36,966 $ $ 0.17 0.17 0.11 $ 0.18 0.18 0.11 $ 0.14 0.14 0.11 48,537 169,414 2,200 6,375 23,784 20,302 116,015 61,056 34,958 26,098 3,172 22,926 0.09 0.09 0.11 Basic Diluted 263,797,024 263,958,292 264,058,174 264,332,895 264,546,266 264,778,242 264,936,220 265,288,067 2018 Form 10-K 134 PARENT COMPANY INFORMATION (Note 21) Condensed Statements of Financial Condition Assets Cash Investment securities available for sale Investments in and receivables due from subsidiaries Other assets Total Assets Liabilities and Shareholders’ Equity Dividends payable to shareholders Long-term borrowings Junior subordinated debentures issued to capital trusts Accrued expenses and other liabilities Shareholders’ equity December 31, 2018 2017 (in thousands) $ $ $ 109,839 $ — 3,609,836 32,721 3,752,396 37,644 294,602 55,370 14,326 3,350,454 $ $ 90,807 254 2,738,700 36,277 2,866,038 33,100 235,153 41,774 22,846 2,533,165 2,866,038 Total Liabilities and Shareholders’ Equity $ 3,752,396 $ Condensed Statements of Income Income Dividends from subsidiary Income from subsidiary Gains on securities transactions, net Losses on sales of assets, net Other interest and income Total Income Total Expenses Income before income tax and equity in undistributed earnings of subsidiary Income tax benefit Income before equity in undistributed earnings of subsidiary Equity in undistributed earnings of subsidiary Net Income Dividends on preferred stock Net Income Available to Common Shareholders Years Ended December 31, 2017 2016 2018 (in thousands) $ 155,000 $ 122,000 $ 4,550 3 (147) 39 159,445 32,269 127,176 (20,547) 147,723 113,705 261,428 12,688 4,550 — — 135 126,685 39,621 87,064 (30,179) 117,243 44,664 161,907 9,449 $ 248,740 $ 152,458 $ 90,000 4,550 239 — 34 94,823 33,604 61,219 (23,349) 84,568 83,578 168,146 7,188 160,958 135 2018 Form 10-K Condensed Statements of Cash Flows Cash flows from operating activities: Net Income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary Stock-based compensation Net amortization of premiums and accretion of discounts on borrowings Gains on securities transactions, net Losses on sales of assets, net Net change in: Other assets Accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities: Investment securities available for sale: Sales Cash and cash equivalents acquired in acquisitions Capital contributions to subsidiary Net cash provided by (used in) investing activities Cash flows from financing activities: Proceeds from issuance of preferred stock, net Dividends paid to preferred shareholders Dividends paid to common shareholders Purchase of common shares to treasury Common stock issued, net Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year BUSINESS SEGMENTS (Note 22) Years Ended December 31, 2017 2016 2018 (in thousands) $ 261,428 $ 161,907 $ 168,146 (113,705) 19,472 (44,664) 12,204 63 (3) 147 9,928 (10,657) 166,673 257 7,915 — 8,172 — (15,859) (138,857) (3,801) 2,704 (155,813) 19,032 90,807 197 — — (89) 8,737 138,292 — — (98,000) (98,000) 98,101 (6,277) (115,881) (2,644) 8,207 (18,494) 21,798 69,009 $ 109,839 $ 90,807 $ (83,578) 10,032 163 (239) — 8,007 18,381 120,912 739 — (106,000) (105,261) — (7,188) (111,813) (3,191) 112,085 (10,107) 5,544 63,465 69,009 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. 2018 Form 10-K 136 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 not reported in the investment management segment above, interest expense related to subordinated notes, as well as income and expense from derivative financial instruments. The following tables represent the financial data for Valley’s four business segments for the years ended December 31, 2018, 2017 and 2016: Year Ended December 31, 2018 Average interest earning assets (unaudited) Interest income Interest expense Net interest income (loss) Provision for credit losses Net interest income (loss) after provision for credit losses Non-interest income Non-interest expense Internal expense transfer Income (loss) before income taxes $ Return on average interest earning assets (pre-tax) (unaudited) Consumer Lending Commercial Lending Investment Management ($ in thousands) $ 6,197,161 $ 17,143,169 $ 4,362,581 $ 235,264 $ 798,974 $ 130,971 64,083 171,181 5,550 165,631 61,280 92,462 77,164 57,285 177,273 621,701 26,951 594,750 22,275 95,171 213,399 $ 308,455 $ 45,112 85,859 — 85,859 8,691 1,251 54,353 38,946 Corporate and Other Adjustments Total — $ 27,702,911 (5,961) $ 1,159,248 15,577 302,045 (21,538) — 857,203 32,501 (21,538) 41,806 440,177 (344,916) (74,993) $ 824,702 134,052 629,061 — 329,693 $ $ $ 0.92% 1.80% 0.89% N/A 1.19% 137 2018 Form 10-K Year Ended December 31, 2017 Consumer Lending Commercial Lending Investment Management ($ in thousands) $ 5,166,171 $ 12,652,832 $ 3,669,495 $ 182,508 $ 552,297 $ 107,972 39,018 143,490 3,197 140,293 63,375 72,207 68,007 63,454 95,562 456,735 6,745 449,990 11,414 71,216 166,847 $ 223,341 $ 27,714 80,258 — 80,258 7,745 1,193 48,393 38,417 Corporate and Other Adjustments Total $ $ $ — $ 21,488,498 (8,623) $ 11,813 (20,436) — (20,436) 29,172 364,457 (283,247) (72,474) $ 834,154 174,107 660,047 9,942 650,105 111,706 509,073 — 252,738 1.23% 1.77% 1.05% N/A 1.18% Year Ended December 31, 2016 Consumer Lending Commercial Lending Investment Management ($ in thousands) $ 5,081,798 $ 11,318,947 $ 3,428,567 $ 176,929 $ 504,341 $ 35,175 141,754 905 140,849 63,443 62,721 71,578 69,993 78,347 425,994 10,964 415,030 8,327 70,145 160,198 $ 193,014 $ 89,378 23,732 65,646 — 65,646 6,694 1,281 48,475 22,584 Corporate and Other Adjustments Total $ $ $ — $ 19,829,312 (8,760) $ 11,520 (20,280) — (20,280) 29,796 341,978 (280,251) (52,211) $ 761,888 148,774 613,114 11,869 601,245 108,260 476,125 — 233,380 1.38% 1.71% 0.66% N/A 1.18% Average interest earning assets (unaudited) Interest income Interest expense Net interest income (loss) Provision for credit losses Net interest income (loss) after provision for credit losses Non-interest income Non-interest expense Internal expense transfer Income (loss) before income taxes $ Return on average interest earning assets (pre-tax) (unaudited) Average interest earning assets (unaudited) Interest income Interest expense Net interest income (loss) Provision for credit losses Net interest income (loss) after provision for credit losses Non-interest income Non-interest expense Internal expense transfer Income (loss) before income taxes $ Return on average interest earning assets (pre-tax) (unaudited) SUBSEQUENT EVENTS (Note 23) During February 2019, Valley announced that the Bank entered into an agreement for the sale-leaseback of 29 of its currently owned properties. The properties, consist of 1 corporate location and 28 branches. Valley expects to realize a material pre-tax gain net of transaction related expenses. The transaction is expected to close in the first or second quarter of 2019 and is subject to change or termination due to buyer due diligence on the identified properties. Valley has previously invested in mobile solar generators sold and managed by DC Solar, which were included in other assets on the balance sheet and the tax credit investments in Note 14. For reasons that were not known to Valley, DC Solar had its assets frozen in December 2018. DC Solar filed for Chapter 11 bankruptcy protection in February 2019. In February 2019, an affidavit from a Federal Bureau of Investigation (FBI) special agent stated that DC Solar was operating a fraudulent "Ponzi-like scheme" and that the majority of mobile solar generators sold to investors and managed by DC Solar and the majority of the related lease revenues claimed to have been received by DC Solar may not have existed. Certain investors in DC Solar, including Valley, 2018 Form 10-K 138 received tax credits for making these renewable resource investments. Valley has claimed tax credit benefits of approximately $22.8 million in the consolidated financial statements between 2013 through 2015. If the allegations set forth in the declaration filed by the FBI are proven to be accurate, up to the entire amount of the tax credits claimed by Valley could potentially be disallowed. Based on the information known as of the date of this Annual Report on the Form 10-K, Valley believes that this has not met the more-likely-than-not criterion to record an uncertain tax position liability. As a result of the information in the FBI declaration, Valley is evaluating whether or not an unrecognized tax liability exists under ASC 740 for an uncertain tax position in 2019 for at least part, if not potentially all, of the tax credit benefits Valley has claimed. 139 2018 Form 10-K Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Valley National Bancorp: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of financial condition of Valley National Bancorp (the Company) as of December 31, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2018, 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, 2018, 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 February 28, 2019 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. /s/ KPMG LLP We have served as the Company’s auditor since 2008. Short Hills, New Jersey February 28, 2019 2018 Form 10-K 140 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, 2018 (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, 2018, 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, 2018, Valley’s internal control over financial 141 2018 Form 10-K 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, 2018 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, 2018. The report is included in this item under the heading “Report of Independent Registered Public Accounting Firm.” Remediation of Material Weakness As previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2017, management identified the following material weakness in internal controls as of December 31, 2017: Valley did not assign appropriate levels of responsibility and authority to its Ethics and Compliance group to identify and evaluate the severity and financial reporting implications of allegations of non-compliance with laws and regulations, Company policies and procedures and other complaints. Additionally, Valley did not establish controls over required communications of such matters to senior management or others within the organization and to those charged with governance to enable them to conduct or monitor the investigation and resolution of such matters on a timely basis. During the first quarter of 2018, Valley initiated remediation efforts. Management reviewed the design and operation of the controls and made enhancements to the proper identification and escalation of allegations of non-compliance with laws and regulations, Company policies and procedures and other complaints that require the attention of senior management and those charged with governance. During the third quarter of 2018, management completed the implementation of such enhancements and the new controls and procedures were placed in operation. Management evaluated the new controls and procedures designed to remediate the material weakness and determined that the Company’s internal control over financial reporting was effective as of December 31, 2018. Changes in Internal Control over Financial Reporting Except as noted above relative to the remediation of the prior year material weakness, there were no changes in Valley’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2018 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting. 2018 Form 10-K 142 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Valley National Bancorp: Opinion on Internal Control Over Financial Reporting We have audited Valley National Bancorp’s (the Company) internal control over financial reporting as of December 31, 2018, 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, 2018, 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, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2019 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 and 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 February 28, 2019 143 2018 Form 10-K 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 “Executive Officers” in Item 1 of this Annual Report on Form 10-K. The information set forth under the captions “Director Information”, “Corporate Governance”, and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2019 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 2019 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 2019 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 2019 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 2019 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: 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 Page 69 70 71 72 73 75 140 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. 2018 Form 10-K 144 (b) Exhibits (numbered in accordance with Item 601 of Regulation S-K): (3) Articles of Incorporation and By-laws: A. B. Restated Certificate of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 10-Q Quarterly Report filed on November 7, 2017. By-laws of the Registrant, as amended and restated, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K Current Report filed on October 23, 2018. (4) Instruments Defining the Rights of Security Holders: A. B. C. D. Indenture, dated as of September 27, 2013, by and between Valley and The Bank of New York Mellon Trust Company, N.A., as Trustee, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K Current Report filed on September 27, 2013. (Valley 5.125% sub debt due September 27, 2023). First Supplemental Indenture, dated as of September 27, 2013, by and between Valley and The Bank of New York Mellon Trust Company, N.A., as Trustee, including the form of the Notes attached as Exhibit A thereto, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 8-K Current Report filed on September 27, 2013 (Valley 5.125% sub debt due September 27, 2023). Indenture, dated as of June 19, 2015, by and between Valley and The Bank of New York Mellon Trust Company, N.A., as Trustee, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8- K Current Report filed on June 19, 2015. (Valley 4.55% sub debt due July 30, 2025). First Supplemental Indenture, dated as of June 19, 2015, by and between Valley and The Bank of New York Mellon Trust Company, N.A., as Trustee, including the form of the Notes attached as Exhibit A thereto, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 8-K Current Report filed on June 19, 2015 (Valley 4.55% sub debt due July 30, 2025). E. Agreement to provide SEC with Indentures not filed. (Item 601(b)(4)(iii)(A)), incorporated herein by reference to Exhibit 4G to the Registrant's Form 10-K Annual Report filed on February 28, 2017. (10) Material Contracts: A. B. C. D. E. F. G. Amended and Restated Change in Control Agreements among Valley National Bank, Valley Alan D. Eskow, dated June 22, 2011, incorporated herein by reference to Exhibits 10.A and 10.C to the Registrant’s Form 10-Q Quarterly Report filed on August 9, 2011 (No. 001-11277).+ Severance Agreement dated January 24, 2017 between Valley, Valley National Bank and Gerald H. Lipkin, which replaced in full all predecessor severance and guaranteed retirement agreements, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K Current Report filed on January 26, 2017 (applicable only to Gerald H. Lipkin guaranteed retirement agreement) + Severance Agreement dated January 22, 2008 between Valley, Valley National Bank and Alan D. Eskow, incorporated herein by reference to Exhibit 10.7 to the Registrant’s Form 8-K Current Report filed on January 28, 2008 (No. 001-11277).+ Form of Amended and Restated Change in Control Agreement applicable to Executive Vice Presidents of Valley National Bank and Valley, incorporated herein by reference to Exhibit 10.E to the Registrant’s Form 10-Q Quarterly Report filed on August 9, 2011 (No. 001-11277). Continues until December 31,2022 for Melissa F. Scofield and Bernadette M. Mueller. + The Valley National Bancorp Benefit Equalization Plan, as Amended and Restated, incorporated herein by reference to Exhibit 10 to the Registrant’s Form 10-Q Quarterly Report filed on November 6, 2015.+ Form of Participant Agreement for the Benefit Equalization Plan, incorporated herein by reference to Exhibit 10.J to the Registrant's Form 10-K Annual Report for the year ended December 31, 2011 (No. 001-11277).+ Valley National Bancorp 2009 Long-Term Stock Incentive Plan, as amended, incorporated herein by reference to Exhibit 10.P to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2014.+ 145 2018 Form 10-K H. I. J. K. L. M. N. O. P. Q. R. S. T. U. V. Form of Valley National Bancorp Incentive Stock Option Agreement used in connection with Valley National Bancorp 2009 Long-Term Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K Current Report filed on May 27, 2009 (No. 001-11277).+ Form of Valley National Bancorp Non-Qualified Stock Option Agreement used in connection with Valley National Bancorp 2009 Long-Term Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 8-K Current Report filed on May 27, 2009 (No. 001-11277).+ Form of Valley National Bancorp Restricted Stock Award Agreement used in connection with Valley National Bancorp 2009 Long-Term Stock Incentive Plan, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 8-K Current Report filed on May 27, 2009 (No. 001-11277).+ Form of Valley National Bancorp Escrow Agreement for Restricted Stock Award used in connection with Valley National Bancorp 2009 Long-Term Stock Incentive Plan, incorporated herein by reference to Exhibit 10.4 to the Registrant’s Form 8-K Current Report filed on May 27, 2009 (No. 001-11277)+ Form of Valley National Bancorp Agreement for Performance Based Restricted Stock Unit Award used in connection with Valley National Bancorp 2009 Long-Term Stock Incentive Plan, incorporated herein by reference to Exhibit 10.V to the Registrant's Form 10-K Annual Report for the year ended December 31, 2014.+ Form of Valley National Bancorp Agreement for Performance Based Restricted Stock Unit Award, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 8-K Current Report filed on May 2, 2016 (in use prior to 2019).+ Form of Valley National Bancorp Restricted Stock Award Agreement, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 10-Q Quarterly Report filed on May 8, 2017 (in use prior to 2019).+ Form of Valley National Bancorp Director Restricted Stock Award Agreement, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 10-Q Quarterly Report filed on May 8, 2017 (in use prior to 2019).+ Valley National Bancorp Deferred Compensation Plan, dated as of January 1, 2017, incorporated herein by reference to Exhibit 10.S to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2016.+ 2016 Change in Control Severance Plan applicable to First Senior Vice Presidents and Senior Vice Presidents (applicable until January 1, 2020), Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Form 10-Q Quarterly Report filed on August 8, 2016.+ Severance Letter Agreement, dated as of September 21, 2016, between Valley National Bank, Valley and Ira Robbins, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K Current Report filed on September 27, 2016.+ Amended and Restated Change in Control Agreement, dated as of September 21, 2016, among Valley National Bank, Valley and Ira Robbins, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 8-K Current Report filed on September 27, 2016 (applicable until December 31, 2022).+ Severance Letter Agreement, dated as of September 21, 2016, between Valley National Bank, Valley and Thomas A. Iadanza, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 8-K Current Report filed on September 27, 2016.+ Amended and Restated Change in Control Agreement, dated as of September 21, 2016, among Valley National Bank, Valley and Thomas A. Iadanza, incorporated herein by reference to Exhibit 10.4 to the Registrant’s Form 8-K Current Report filed on September 27, 2016 (applicable until December 31, 2022). + Severance Letter Agreement, dated as of January 3, 2017, between Valley, Valley National Bank and Ronald H. Janis, incorporated herein by reference to Exhibit 10.DD to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2016.+ 2018 Form 10-K 146 W. X. Y. Z. AA. BB. CC. DD. EE. FF. GG. HH. II. JJ. KK. LL. Change in Control Agreement, dated as of January 3, 2017, between Valley, Valley National Bank and Ronald H. Janis, incorporated herein by reference to Exhibit 10.EE to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2016 (applicable until December 31, 2022).+ Amended and Restated Change in Control Agreement dated June 28, 2017 between Valley, Valley National Bank and Diane M. Grenz, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 10-Q Quarterly Report filed on August 7, 2017 (applicable until December 31, 2022). + Severance Agreement dated June 28, 2017 between Valley, Valley National Bank and Diane M. Grenz, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 10-Q Quarterly Report filed on August 7, 2017.+ USAmeriBancorp, Inc. 2006 Stock Option and Restricted Stock Plan, as amended, incorporated herein by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement filed on December 29, 2017.+ USAmeriBancorp, Inc. 2015 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 99.2 to the Registrant’s Form S-8 Registration Statement filed on December 29, 2017.+ Form of Valley National Bancorp 2018 Performance Restricted Stock Unit Award Agreement used in connection with Valley National Bancorp 2009 Long-Term Stock Incentive Plan, incorporated herein by reference to Exhibit LL to the Registrant's Form 10-K filed on March 1, 2018 (in use prior to 2019). + Form of Change in Control Agreement for Executive Vice President, dated January 16, 2019 (covering Yvonne M. Surowiec, Mark Saeger and Eugene M. Fernandez). +* Form of Change in Control Agreement for Senior Executive Vice President, dated January 16, 2019 (covering Robert J. Bardusch). +* Form of Agreement to Reduce Change in Control Severance, effective January 1, 2023 (applicable to Ira Robbins, Thomas A. Iadanza, Ronald H. Janis, Dianne M. Grenz, Bernadette M. Mueller and Melissa Scofield). +* Form of Change in Control Agreement for President and Chief Executive Officer, dated January 16, 2019 and effective January 1, 2023 (applicable to Ira Robbins). +* Amendment to 2016 Change in Central Severance Plan for First Senior Vice Presidents and Senior Vice Presidents (applicable after January 1, 2020).+* 2019 Change in Control Severance Plan applicable to First Senior Vice Presidents and Senior Vice Presidents. +* Form of Change in Control Agreement for Senior Executive Vice President, effective January 1, 2023 (covering Thomas A. Iadanza, Ronald H. Janis and Dianne M. Grenz). +* Form of Change in Control Agreement for Senior Executive Vice President, effective January 1, 2023 (covering Thomas A. Iadanza, Ronald H. Janis and Dianne M. Grenz). +* Valley National Bancorp 2016 Long-Term Stock Incentive Plan, as amended, adopted on January 30, 2019 for use in 2019 and after.+* Form of Valley National Bancorp Agreement for Performance Based Restricted Stock Unit Award, in connection with Valley National Bancorp 2016 Long-Term Stock Incentive Plan, (for use in 2019 and thereafter).+* MM. Form of Valley National Bancorp Restricted Stock Unit Award Agreement, in connection with Valley National Bancorp 2016 Long-Term Stock Incentive Plan, (for use in 2019 and thereafter).+* NN. Form of Valley National Bancorp Director Restricted Stock Unit Award Agreement, in connection with Valley National Bancorp 2016 Long-Term Stock Incentive Plan, (for use in 2019 and thereafter).+* 147 2018 Form 10-K OO. Agreement for the purchase and sale of real property and Form of Lease Agreement incorporated herein by reference to Exhibits 10.1 and 10.2, respectively, to the Registrant’s Form 8-K Current Report filed on February 13, 2019. (21) List of Subsidiaries as of December 31, 2018: (a) Name Subsidiaries of Valley: Valley National Bank Aliant Statutory Trust II GCB Capital Trust III State Bancorp Capital Trust I State Bancorp Capital Trust II (b) Subsidiaries of Valley National Bank: Hallmark Capital Management, Inc. Highland Capital Corp. Masters Coverage Corp. New York Metro Title Agency, Inc. Valley Commercial Capital, LLC Valley National Title Services, Inc. Valley Securities Holdings, LLC VNB Loan Services, Inc. VNB New York, LLC VNB Route 23 Realty LLC (c) Subsidiaries of Masters Coverage Corp.: Life Line Planning, Inc. RISC One, Inc. Subsidiaries of Valley Securities Holdings, LLC: SAR II, Inc. Shrewsbury Capital Corporation Valley Investments, Inc. Subsidiary of SAR II, Inc.: VNB Realty, Inc. Subsidiary of Shrewsbury Capital Corporation: GCB Realty, LLC Subsidiary of VNB Realty, Inc.: VNB Capital Corp. (d) (e) (f) (g) Jurisdiction of Incorporation Percentage of Voting Securities Owned by the Parent Directly or Indirectly United States Delaware Delaware Delaware Delaware New Jersey New Jersey New York New York New Jersey New Jersey New Jersey New York New York New Jersey New York New York New Jersey New Jersey New Jersey New Jersey New Jersey New York 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% (23) (24) (31.1) Certification of Ira Robbins, President and Chief Executive Officer of the Company, pursuant to Securities Consent of KPMG LLP.* Power of Attorney of Certain Directors and Officers of Valley.* Exchange Rule 13a-14(a).* (31.2) Certification of Alan D. Eskow, Senior Executive Vice President and Chief Financial Officer of the Company, (32) (101) pursuant to Securities Exchange Rule 13a-14(a).* Certification, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Ira Robbins, President and Chief Executive Officer of the Company and Alan D. Eskow, Senior Executive Vice President and Chief Financial Officer of the Company.* Interactive Data File. * * + Filed herewith. Management contract and compensatory plan or arrangement. Item 16. Form 10-K Summary Not applicable. 2018 Form 10-K 148 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. SIGNATURES VALLEY NATIONAL BANCORP By: By: /s/ IRA ROBBINS Ira Robbins, President and Chief Executive Officer /s/ ALAN D. ESKOW Alan D. Eskow, Senior Executive Vice President and Chief Financial Officer Dated: February 28, 2019 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 /S/ IRA ROBBINS Ira Robbins /S/ ALAN D. ESKOW Alan D. Eskow /S/ MITCHELL L. CRANDELL Mitchell L. Crandell GERALD H. LIPKIN* Gerald H. Lipkin ANDREW B. ABRAMSON* Andrew B. Abramson PETER J. BAUM* Peter J. Baum PAMELA R. BRONANDER* Pamela R. Bronander ERIC P. EDELSTEIN* Eric P. Edelstein GRAHAM O. JONES* Graham O. Jones GERALD KORDE* Gerald Korde MICHAEL L. LARUSSO* Michael L. LaRusso MARC J. LENNER* Marc J. Lenner Title Date President and Chief Executive Officer February 28, 2019 Senior Executive Vice President, Chief Financial Officer (Principal Financial Officer) and Corporate Secretary First Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) Chairman of the Board and Director Director Director Director Director Director Director Director Director February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 149 2018 Form 10-K Signature SURESH L. SANI* Suresh L. Sani MELISSA J. SCHULTZ* Melissa J. Schultz JENNIFER W. STEANS Jennifer W. Steans JEFFREY S. WILKS* Jeffrey S. Wilks Director Director Director Director * /S/ ALAN D. ESKOW Alan D. Eskow, attorney-in fact. Title Date February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 February 28, 2019 2018 Form 10-K 150 1455 VALLEY ROAD WAYNE, NEW JERSEY 07470 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD, WEDNESDAY, APRIL 17, 2019 To Our Shareholders: We invite you to the Annual Meeting of Shareholders of Valley National Bancorp ("Valley") to be held at 100 Furler Street, Totowa, NJ on Wednesday, April 17, 2019 at 9:00 a.m., local time to vote on the following matters: 1. Election of 12 directors; 2. Ratification of the appointment of KPMG LLP as Valley's independent registered public accounting firm for the fiscal year ending December 31, 2019; 3. An advisory vote on executive compensation; and 4. A shareholder proposal if properly presented at the Annual Meeting. We provide access to our proxy materials to certain of our shareholders via the Internet instead of mailing paper copies of the materials. This reduces both the amount of paper necessary to produce the materials and the costs associated with printing and mailing the materials to all shareholders. The Notice of Internet Availability of Proxy Materials ("E-Proxy Notice"), which contains instructions on how to access the notice of annual meeting, proxy statement and annual report on the Internet and how to execute your proxy, is first being mailed to holders of our common stock on or about March 8, 2019. This notice also contains instructions on how to request a paper copy of the proxy materials. Only shareholders of record at the close of business on Tuesday, February 19, 2019 are entitled to notice of, and to vote at the meeting. Your vote is very important. Whether or not you plan to attend the meeting, please vote in accordance with the instructions provided in the E-Proxy Notice. If you receive paper copies of the proxy materials, please execute and return the enclosed proxy card in the envelope provided or submit your proxy by telephone or the Internet as instructed on the enclosed proxy card. The prompt return of your proxy will save Valley the expense of further requests for proxies. Attendance at the meeting is limited to shareholders or their proxy holders and Valley guests. Only shareholders or their valid proxy holders may address the meeting. Please allow ample time for the admission process. See information on page 3 – "Annual Meeting Attendance." If you accessed this proxy statement through the Internet after receiving an E-Proxy Notice, you may cast your vote by telephone or over the Internet by following the instructions in that Notice. If you received this proxy statement by mail, you may cast your vote by mail, by telephone or over the Internet by following the instructions on the enclosed proxy card. We appreciate your participation and interest in Valley. Sincerely, Ira Robbins President and Chief Executive Officer Gerald H. Lipkin Chairman Wayne, New Jersey March 8, 2019 Important notice regarding the availability of proxy materials for the 2019 Annual Meeting of Shareholders: This Proxy Statement for the 2019 Annual Meeting of Shareholders, our 2018 Annual Report to Shareholders and the proxy card or voting instruction form are available on our website at: http:www.valley.com/filings.html. TABLE OF CONTENTS PAGE General Proxy Statement Information Item 1 – Election of Directors Item 2 – Ratification of the Appointment of Independent Registered Public Accounting Firm Report of Audit Committee Corporate Governance Tenure and Refreshment Board Leadership Structure and the Board’s Role in Risk Oversight Director Independence Executive Sessions of Non-Management Directors Shareholder and Interested Parties Communications with Directors Committees of the Board of Directors; Board of Directors Meetings Compensation Consultants Compensation as it Relates to Risk Management Availability of Committee Charters Nomination of Directors Code of Conduct and Ethics and Corporate Governance Guidelines Director Compensation Stock Ownership of Management and Principal Shareholders Executive Compensation Compensation Discussion and Analysis ("CD&A") Compensation Committee Report and Certification Equity Compensation Plan Information Summary Compensation Table Grants of Plan-Based Awards Outstanding Equity Awards at Fiscal Year-End 2018 Stock Vested 2018 Pension Benefits 2018 Nonqualified Deferred Compensation Other Potential Post-Employment Payments CEO Pay Ratio Item 3 – Advisory Vote on Executive Compensation Compensation Committee Interlocks and Insider Participation Certain Transactions with Management Policy and Procedures for Review, Approval or Ratification of Related Person Transactions Transactions Section 16(a) Beneficial Ownership Reporting Compliance Item 4 – Shareholder Proposal Shareholder Proposals Other Matters Appendix A 1 4 10 11 12 12 12 12 13 13 14 15 15 15 16 17 18 20 22 22 31 31 32 34 35 36 36 37 38 42 43 44 44 44 44 45 46 47 48 49 VALLEY NATIONAL BANCORP 1455 Valley Road Wayne, New Jersey 07470 PROXY STATEMENT GENERAL INFORMATION We are providing this proxy statement in connection with the solicitation of proxies by the Board of Directors of Valley National Bancorp ("Valley," the "Company," "we," "our" and "us") for use at Valley’s 2019 Annual Meeting of Shareholders (the "Annual Meeting") and at any adjournment or postponement of the meeting. You are cordially invited to attend the meeting, which will be held at 100 Furler Street, Totowa, NJ, on Wednesday, April 17, 2019 at 9:00 a.m., local time. This proxy statement is first being made available to shareholders on or about March 8, 2019. E-PROXY Pursuant to the rules of the Securities and Exchange Commission ("SEC"), we are furnishing our proxy materials to certain shareholders over the Internet. Most shareholders are receiving by mail a Notice of Internet Availability of Proxy Materials ("E-Proxy Notice"), which provides general information about the annual meeting, the matters to be voted on at the annual meeting, the website on which our proxy statement and annual report are available for review, printing and downloading, and instructions on how to submit proxy votes. The E-Proxy Notice also provides instructions on how to request a paper copy of the proxy materials and how to elect to receive a paper copy of the proxy materials or electronic copy of the proxy materials by e-mail for future meetings. Shareholders who are current employees of Valley or who have elected to receive proxy materials via electronic delivery will receive via e-mail the proxy statement, annual report and instructions on how to vote. Shareholders who elect to receive paper copies of the proxy materials will receive these materials by mail. The 2019 notice of annual meeting of shareholders, this proxy statement, the Company’s 2018 annual report to shareholders and the proxy card or voting instruction form are referred to as our "proxy materials", and are available electronically at the following website: http:www.valley.com/filings.html. SHAREHOLDERS ENTITLED TO VOTE The record date for the meeting is Tuesday, February 19, 2019. Only holders of common stock of record at the close of business on that date are entitled to vote at the meeting. On the record date there were 331,564,079 shares of common stock outstanding. Each share is entitled to one vote on each matter properly brought before the meeting. HOUSEHOLDING shareholders. Similarly, brokers When more than one holder of our common stock shares the same address, we may deliver only one E-Proxy Notice or set of proxy materials, as applicable, to that address unless we have received contrary instructions from one or more of those and other intermediaries holding shares of Valley common stock in "street name" for more than one beneficial owner with the same address may deliver only one E-Proxy Notice or set of proxy materials, as applicable, to that address if they have received consent from the beneficial owners of the stock. We will deliver promptly upon written or oral request a separate copy of the E-Proxy Notice or set of proxy materials, as applicable, to any shareholder of record at a shared address to which a single copy of those documents was delivered. To receive these additional copies, you may write or call Tina Zarkadas, Assistant Vice President, Shareholder Relations Specialist, Valley National Bancorp, at 1455 Valley Road, Wayne, NJ 07470, telephone (973) 305-3380 or e-mail her at tzarkadas@valley.com. If your shares are held in "street name", you should contact the broker or other intermediary who holds the shares on your behalf to request an additional copy of the E-Proxy Notice or set of proxy materials. If you are a shareholder of record and are either receiving multiple E-Proxy Notices or multiple paper copies of the proxy materials, as applicable, and wish to request future delivery of a single copy or are receiving a single E-Proxy Notice or copy of the proxy materials, as applicable, and wish to request future delivery of multiple copies, please contact Ms. Zarkadas at the address or telephone number above. If your shares are held in "street name", you should contact the broker or other intermediary who holds the shares on your behalf. PROXIES AND VOTING PROCEDURES Your vote is important and you are encouraged to vote your shares promptly. Each proxy submitted will be voted as directed. However, if a proxy solicited by the Board of Directors does not specify how it is to be voted, it will be voted as the Board recommends—that is: • Item 1 – FOR the election of each of the 12 nominees for director named in this proxy statement; 1 2019 Proxy Statement • • Item 2 – FOR the ratification of the appointment of KPMG LLP; Item 3 – FOR the approval, on an advisory basis, of the compensation of our named executive officers; and • Item 4 – AGAINST the shareholder proposal. We are offering you three alternative ways to vote your shares: BY INTERNET. If you wish to vote using the Internet, you can access the web page at www.voteproxy.com and follow the on-screen instructions or scan the QR code on your E- Proxy Notice or proxy card with your smartphone. Have your proxy card available when you access the web page. BY TELEPHONE. If you wish to vote by telephone, call toll-free 1-800-PROXIES (1-800-776-9437) in the United States or 1-718-921-8500 from foreign countries from any touch-tone telephone and follow instructions. Have your E- Proxy Notice or proxy card available when you call. BY MAIL. To vote your proxy by mail, please sign your name exactly as it appears on your proxy card, date, and mail your proxy card in the envelope provided as soon as possible. Regardless of the method that you use to vote, you will be able to vote in person or revoke your earlier proxy if you follow the instructions provided below in the sections entitled "Voting in Person" and "Revoking Your Proxy". If you are a participant in the Company’s Dividend Reinvestment Plan, the shares that are held in your dividend reinvestment account will be voted in the same manner as your other shares, whether you vote by mail, by telephone or by Internet. If you are an employee or former employee of the Company, and hold our shares in our Savings and Investment Plan (401(k) plan), you will receive a separate proxy card representing the total shares you own through this plan. The proxy card will serve as a voting instruction form for the plan trustee. The plan trustee will vote plan shares for which voting instructions are not received in the same proportion as the shares for which instructions were received under the plan. VOTING IN PERSON. The method by which you vote will not limit your right to vote at the meeting if you later decide to attend in person. If your shares are held in the name of a bank, broker or other holder of record, you must obtain a proxy executed in your favor from the holder of record to be able to vote at the meeting. If you submit a proxy and then wish to change your vote or vote in person at the meeting, you will need to revoke the proxy that you have submitted, as described below. 2019 Proxy Statement 2 REVOKING YOUR PROXY You can revoke your proxy at any time before it is exercised by: • Delivery of a properly executed, later-dated proxy; or • A written revocation of your proxy. A later-dated proxy or written revocation must be received before the meeting by the Corporate Secretary of the Company, Valley National Bancorp, at 1455 Valley Road, Wayne, NJ 07470, or it must be delivered to the Corporate Secretary at the meeting before proxies are voted. You may also revoke your proxy by submitting a new proxy via telephone or the Internet. You will be able to change your vote as many times as you wish prior to the Annual Meeting and the last vote received chronologically will supersede any prior votes. QUORUM REQUIRED TO HOLD THE ANNUAL MEETING The presence, in person or by proxy, of the holders of a majority of the shares entitled to vote generally for the election of directors is necessary to constitute a quorum at the meeting. Abstentions and broker "non-votes" are counted as present and entitled to vote for purposes of determining a quorum. A broker "non-vote" occurs when a broker holding shares for a beneficial owner does not vote on a particular proposal because the broker does not have discretionary power to vote with respect to that item and has not received voting instructions from the beneficial owner. Brokers do not have discretionary power to vote on the following items absent instructions from the beneficial owner: the election of directors, the advisory vote on executive compensation, or the shareholder proposal. REQUIRED VOTE voted • To be elected to a new term, directors must receive a majority of the votes cast (the number of shares voted "FOR" a nominee must exceed the number of shares nominee). "AGAINST" Abstentions and broker non-votes are not counted as votes cast and have no effect on the election of a director. If there is a contested election (which is not the case in 2019), directors would be elected by a plurality of votes cast at the Annual Meeting. the • The ratification of the appointment of KPMG LLP will be approved if a majority of the votes cast are voted FOR the proposal. Abstentions and broker non-votes are not counted as votes cast and will have no impact on the outcome. • The advisory vote on executive compensation will be approved if a majority of the votes cast are voted FOR the proposal. Abstentions and broker non- votes are not counted as votes cast and will have no effect on the outcome. • The shareholder proposal will be approved if a majority of the votes cast are voted FOR the proposal. Abstentions and broker non-votes are not counted as votes cast and will have no impact on the outcome. ANNUAL MEETING ATTENDANCE Only shareholders or their proxy holders and Valley guests may attend the Annual Meeting. For registered shareholders receiving paper copies or the proxy materials, an admission ticket is attached to your proxy card. Please detach and bring the admission ticket with you to the meeting. For other registered shareholders, please bring your E-Proxy Notice to be admitted to the meeting. If your shares are held in street name, you must bring to the meeting evidence of your stock ownership indicating that you beneficially owned the shares on the record date for voting and a valid form of photo identification to be allowed access. If you wish to vote at the meeting, you must bring a proxy executed in your favor from the holder of record. METHOD AND COST OF PROXY SOLICITATION This proxy solicitation is being made by our Board of Directors and we will pay the cost of soliciting proxies. Proxies may be solicited by officers, directors and employees of the Company in person, by mail, telephone, facsimile or other electronic means. We will not specially compensate those persons for their solicitation activities. In accordance with the regulations of the SEC and the NASDAQ, we will reimburse brokerage firms and other custodians, nominees and fiduciaries for their expense incurred in sending proxies and proxy materials to their customers who are beneficial owners of Valley common stock. We are paying Equiniti (US) Services LLC a fee of $7,000 plus out of pocket expenses to assist with solicitation of proxies. 3 2019 Proxy Statement Committee considered a skills matrix that represents certain of the skills that the Committee identified as particularly valuable to the effective oversight of the Company and execution of its business. The following matrix shows those skills and the number of directors having each skill, highlighting the diversity of skills on the Board. Director Experience Business/Market Knowledge CEO/Business Head Finance, Audit & Tax Financial Services Industry Banking or Bank Regulatory Risk Management Public Company Finance/Accounting Public Company Corporate Governance Capital Markets Director Tenure 2019 < 5 Years 5-10 Years 10-20 Years 20+ Years 12 10 6 5 4 2 2 2 1 3 2 4 3 ITEM 1 ELECTION OF DIRECTORS DIRECTOR INFORMATION Our Board is recommending 12 nominees for election as directors at our annual meeting. All nominees currently serve as directors on our Board. Other than Ms. Lisa Schultz, who was appointed to our Board in January 2019, all nominees were elected by you at our 2018 annual meeting of shareholders. If any nominee is unable to stand for election for any reason, the shares represented at our annual meeting may be voted for another candidate proposed by our Board, or our Board may choose to reduce its size. The Board has no reason to believe any nominee is not available or will not serve if elected. Each director is nominated to serve until our 2020 annual meeting or until a successor is duly elected and qualified. Mr. Lipkin, who has been on the Board since 1986, will not serve as Chairman after the Annual Meeting and will retire from the Board at the end of 2019. Gerald Korde, who joined the Board in 1989 and Pam Bronander who joined the Board in 1993, are retiring from the Board after the Annual Meeting. We thank them for their service and the expertise they shared with the Board. In selecting these nominees, our CEO, the Nominating and Corporate Governance Committee (Nominating Committee) and the Board refreshed its focus on aspects of corporate governance highlighted in the “Corporate Governance” section below. The biography of each nominee is set out below and contains information regarding the nominee’s tenure as a director, their age, business experience, other public company directorships held during the last five years, non-public directorships and the experiences, qualifications, attributes or skills that caused the Nominating Committee and the Board to determine that the person should be nominated to serve as a director. The Board considers certain personal characteristics including: • • • • • experience; integrity; judgment; a collaborative approach in working with other directors; and the time commitment available to the Company from the nominee. The Nominating Committee focused on a mix of characteristics and skills that it thought appropriate for the functioning of the Board in its oversight role. The Nominating 2019 Proxy Statement 4 Ira Robbins, 44 Andrew B. Abramson, 65 President and Chief Executive Officer of Valley National Bancorp and Valley National Bank. Director since: 2018 President and Chief Executive Officer, Value Companies, Inc. (a real estate development and property management firm). Director since: 1994 Mr. Robbins joined Valley in 1996 as part of the Bank's Management Associate Program and has held several key positions throughout the Bank for over 20 years. In 2009, he was awarded the title of First Senior Vice President and Treasurer and he was promoted to Executive Vice President in 2013. In 2016, Mr. Robbins was recognized for his invaluable contributions to the Bank’s growth with a promotion to Senior Executive Vice President. In 2017, he was appointed as President of Valley National Bank and assumed the role of President and CEO of the Company and Valley National Bank in 2018. Mr. Robbins serves as a board member for the Jewish Vocational Service of MetroWest NJ (JVS) and is also a member of the Morris Habitat for Humanity Leadership Council. He is an active supporter of several other philanthropic organizations throughout the community as well. Mr. Robbins received a Bachelor of from Science Degree Susquehanna University and received his Masters of Business Administration Degree in Finance from Pace University. He is also a graduate of the Stonier Graduate School of Banking. Mr. Robbins' education, his over 20 years of experience in banking in conjunction with his leadership ability make him a valuable member of our Board of Directors. in Finance and Economics Mr. Abramson is a licensed real estate broker in the States of New Jersey and New York. He graduated from Cornell University with a Bachelor’s Degree, and a Master’s Degree, both in Civil Engineering. With 39 years as a business owner, an investor and developer in real estate, he brings management, financial, and real estate market experience and expertise to Valley’s Board of Directors. Peter J. Baum, 63 Chief Financial Officer and Chief Operating Officer, Essex Manufacturing, Inc. (manufacturer, importer and distributor of consumer products). Director since: 2012 Mr. Baum joined Essex Manufacturing, Inc. in 1978 as an Asian sourcing manager. Essex Manufacturing, Inc. has been in business over 60 years and imports various consumer products from Asia. Essex distributes these products to large retail customers in the U.S. and globally. Mr. Baum graduated from The Wharton School at the University of Pennsylvania in 1978 with a B.S. in Economics. Mr. Baum brings over 40 years of business experience including as a business owner for 20 years. Mr. Baum also brings financial experience and expertise to Valley’s Board of Directors. Mr. Baum appears on CNBC (US & Asia) providing commentary on Asia developments. 5 2019 Proxy Statement Eric P. Edelstein, 69 President and Director for Adwildon Corporation (bank holding company). Mr. Jones received his Bachelor’s Degree from Brown University and his Juris Doctor Degree from the University of North Carolina School of Law. With his business and banking affiliations, including partnerships and directorships, as well as professional and civic affiliations, he brings a long history of banking law expertise and a variety of business experience and professional achievements to Valley’s Board of Directors. Consultant. Director since: 2003 Michael L. LaRusso, 73 Mr. Edelstein is a former Director of Aeroflex, Incorporated and Computer Horizon Corp.; former Executive Vice President and Chief Financial Officer of Griffon Corporation (a diversified manufacturing and holding company), and a former Managing Partner at Arthur Andersen LLP (an accounting firm). Mr. Edelstein was employed by Arthur Andersen LLP for 30 years and held various roles in the accounting and audit division, as well as the management consulting division. He received his Bachelor’s Degree in Business Administration and his Master’s Degree in Professional Accounting from Rutgers University. With 32 years of experience as a practicing CPA and as a management consultant, Mr. Edelstein brings in-depth knowledge of generally accepted accounting and auditing standards as well as a wide range of business expertise to our Board. He has worked with audit committees and boards of directors in the past and provides Valley’s Board of Directors with extensive in auditing and preparation of financial experience statements. Graham O. Jones, 74 Financial Consultant. Director since: 2004 Mr. LaRusso is a former Executive Vice President and a Director of Corporate Monitoring Group at Union Bank of California. He held various positions as a federal bank regulator with the Comptroller of the Currency for 23 years and assumed a senior bank executive role for 15 years in large regional and/or multinational banking companies (including Wachovia, Citicorp and Union Bank of California). He holds a Bachelor’s Degree in Finance from Seton Hall University and he is also a graduate of the Stonier School of Banking. Mr. LaRusso’s extensive management and leadership experience with these financial institutions positions him well to serve on Valley’s Board of Directors. Partner and Attorney, law firm of Jones & Jones. Director since: 1997 Mr. Jones has been practicing law since 1969, with an emphasis on banking law since 1980. He has been a Partner of Jones & Jones since 1982 and served as the former President and Director of Hoke, Inc., (manufacturer and distributor of fluid control products). He was a Director and General Counsel for 12 years at Midland Bancorporation, Inc. and Midland Bank & Trust Company. Mr. Jones was a partner at Norwood Associates II for 10 years and was a 2019 Proxy Statement 6 Marc J. Lenner, 53 Chief Executive Officer and Chief Financial Officer of Lester M. Entin Associates (a real estate development and management company). Director since: 2007 Mr. Lenner became the Chief Executive Officer and Chief Financial Officer at Lester M. Entin Associates in January 2000 after serving in various other executive positions within the company. He has experience in multiple areas of commercial real estate markets throughout the country (with a focus in the New York tri-state area), including management, acquisitions, financing, development and leasing. Mr. Lenner is the Co-Director of a charitable foundation where he manages a multi-million dollar equity and bond portfolio. Prior to Lester M. Entin Associates, he was employed by Hoberman Miller Goldstein and Lesser, P.C., an accounting firm. He attended Muhlenberg College where he earned a Bachelor’s Degree in both Business Administration and Accounting. With Mr. Lenner’s financial and professional background, he provides management, finance and real estate experience to Valley’s Board of Directors. Gerald H. Lipkin, 78 Chairman of the Board Director since: 1986 Other directorships: Federal Reserve Bank of New York (FRBNY); Federal Home Loan Bank of New York (FHLBNY) Mr. Lipkin began his career at Valley in 1975 as a Senior Vice President and lending officer, and has spent his entire business career directly in the banking industry. He became CEO and Chairman of Valley in 1989. Prior to joining Valley, he spent 13 years in various positions with the Comptroller of the Currency as a bank examiner and then Deputy Regional Administrator for the New York region. Mr. Lipkin was elected a Class A director to the Federal Reserve Bank of New York in 2013. He serves on the Federal Home Loan Bank of New York’s Board as a Member Director representing New Jersey for a four year term that commenced on January 1, 2018. Mr. Lipkin is a graduate of Rutgers University where he earned a Bachelor’s Degree in Economics. He received a Master’s Degree in Business Administration in Banking and Finance from New York University. He is also a graduate of the Stonier School of Banking. Mr. Lipkin’s education, his over 53 years of experience in conjunction with his leadership ability make him a valuable member of our Board of Directors. lending and commercial banking in Suresh L. Sani, 54 President, First Pioneer Properties, Inc. (a commercial real estate management company). Director since: 2007 Mr. Sani is a former associate at the law firm of Shea & Gould. As president of First Pioneer Properties, Inc., he is responsible for the acquisition, financing, developing, leasing and managing of real estate assets. He has over 27 years of experience in managing and owning commercial real estate in Valley’s lending market area. Mr. Sani received his Bachelor’s Degree from Harvard College and a Juris Doctor Degree from the New York University School of Law. He brings a legal background, small business network management and real estate expertise to Valley’s Board of Directors. 7 2019 Proxy Statement Melissa (Lisa) J. Schultz, 57 Jennifer W. Steans, 55 President and CEO, Financial Investments Corporation, ("FIC"), a private asset management firm. Director since: 2018 Other directorships: MB Financial, Inc.; USAmeriBancorp, Inc. Ms. Steans is the President and CEO of Financial Investments Corporation (“FIC”), a private asset management firm, where she oversees private equity investments and the Steans Family Office operations. Ms. Steans served as the Chairman of USAmeriBancorp, Inc., from its organization in 2006 until it was acquired by Valley on January 1, 2018. Ms. Steans also served as a director of MB Financial, Inc. (MBFI), a publicly traded regional bank holding company located in Chicago, from August 2014 until January 1, 2018 when she resigned to become a director of Valley. From 2008 until it was acquired by MB Financial in August 2014, Ms. Steans served as a director of Cole Taylor Bank and Taylor Capital. She is a director of a variety of privately held entities including Provest Holdings, LLC, Centerline Solutions International. In addition, she serves on the Advisory Board for Carlyle Asia Growth Partners III, LP, Laramar Multi- Family Value Fund, Resource Land Fund, and Siena Capital Partners. Ms. Steans also serves on a number of nonprofit entities, including the Chicago Foundation for Women, Kellogg Advisory Board, and RUSH University Medical Center. Ms. Steans received a BS from Davidson College and an MBA from The Kellogg School of Management at Northwestern University. Ms. Steans brings to the Board a strong financial background, experience and knowledge about banking strategy from serving on the boards of other bank holding companies and diverse business experience from her service as a director of private companies. and Catastrophe Solutions, Director since: 2019 Ms. Schultz retired as co-head of Capital Markets at Keefe, Bruyette & Woods, a Stifel Company, as of year-end 2018. She joined KBW as part of the merger between Stifel Financial and Keefe, Bruyette. She joined Stifel as part of the merger between Stifel and Ryan, Beck & Co, where she was the Director of Equity and Fixed Income Capital Markets. During her tenure, she has had primary responsibility for raising billions of dollars of capital for US depository institutions. She started her career at Drexel Burnham Lambert in 1983. She received her Bachelor’s Degree from Simmons College in 1983. With Ms. Schultz’s experience, she brings expertise in strategic positioning, investor perspective, capital alternatives and the financial services markets to the Board of Directors. 2019 Proxy Statement 8 Jeffrey S. Wilks, 59 Principal and Executive Vice President of Spiegel Associates (a real estate ownership and development company). Director since: 2012 Other directorships: State Bancorp, Inc. Mr. Wilks served as a director of State Bancorp, Inc. from 2001 to 2011 and was appointed to Valley’s Board of Directors in connection with Valley’s acquisition of State Bancorp, Inc., effective January 1, 2012. From 1992 to 1995 Mr. Wilks was an Associate Director of Sandler O’Neill, an investment bank specializing in the banking industry. Prior to that, Mr. Wilks was a Vice President of Corporate Finance at NatWest USA and Vice President of NatWest USA Capital Corp. and NatWest Equity Corp., each an investment affiliate of NatWest USA. Mr. Wilks serves on the board of directors of the New Cassell Business Association, is a member of the Board of Trustees of Central Synagogue, New York, is a member of the board of the Museum at Eldridge Street, and is a member of the Board of City Parks Foundation. Mr. Wilks served as Director of the Banking and Finance Committee of the UJA - Federation of New York from 1991 to 2001. Mr. Wilks earned his BSBA in Accounting and Finance from Boston University. Mr. Wilks brings experience in banking, finance and investments to Valley’s Board of Directors. RECOMMENDATION ON ITEM 1 THE VALLEY BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE NOMINATED SLATE OF DIRECTORS. 9 2019 Proxy Statement accordance with the pre-approval policy. At each subsequent Audit Committee meeting, the Audit Committee receives updates on the services actually provided by the independent registered public accountants, and management may also present additional services for pre-approval. All services rendered by KPMG are permissible under applicable laws and regulations, and the Audit Committee pre-approved all audit, audit-related and non-audit services performed by KPMG during fiscal 2018. Representatives of KPMG will be available at the annual meeting and will have the opportunity to make a statement and answer appropriate questions from shareholders. The Audit Committee believes that retaining KPMG in 2019 is in the best interests of the Company and our shareholders. Therefore, the Audit Committee requests that shareholders ratify the appointment. RECOMMENDATION ON ITEM 2 THE VALLEY BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF KPMG AS VALLEY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2019. ITEM 2 RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM In accordance with its charter, the Audit Committee of the Board is directly responsible for the appointment of the independent registered public accounting firm retained to audit the Company’s financial statements as well as monitoring and independence of that firm. The Audit Committee has appointed KPMG LLP (KPMG) as the independent registered public accounting firm for the Company in 2019. KPMG has served as the Company’s independent registered public accounting firm continuously since 2008. qualifications performance, the Before reappointing KPMG for 2019, the Audit Committee considered KPMG’s qualifications as an independent registered public accounting firm. This included a review of KPMG’s performance in prior years, its knowledge of the company and its operations, as well as its reputation for integrity and competence in the fields of accounting and auditing. The Audit Committee’s review also included matters required to be considered under rules of the SEC on auditor independence, including the nature and extent of non- audit services, to ensure that the provision of such services will not impair the independence of the auditors. In addition, the Audit Committee interviews and approves the selection of KPMG’s new lead engagement partner with each rotation. The fees billed for services rendered to us by KPMG for the years ended December 31, 2018 and 2017 were as follows: Audit fees Audit-related fees (1) Tax fees (2) All other fees (3) Total 2018 $ 1,625,000 491,000 15,722 0 2017 $ 1,352,750 330,000 15,724 0 $ 2,131,722 $ 1,698,474 __________ (1) Fees paid for benefit plan audits, business combination (2018), and a review of Form S-4 registration statements and related expert consents (2017). (2) Includes fees rendered in connection with tax services relating to state and local matters. (3) KPMG did not provide "other services" during 2018 and 2017. The Audit Committee maintains a formal policy concerning the pre-approval of audit and non-audit services to be provided by its independent registered public accountants to Valley. The policy requires that all services to be performed by KPMG, including audit services, audit-related services and permitted non-audit services, be pre-approved by the Audit Committee. Specific services being provided by the in independent accountants are reviewed regularly 2019 Proxy Statement 10 During the course of 2018, management regularly discussed the internal control review and assessment process with the Audit Committee, including the framework used to evaluate the effectiveness of such internal control, and at regular intervals updated the Audit Committee on the status of this process and actions taken by management to respond to issues identified during this process. The Audit Committee also this process with KPMG. Management’s discussed assessment report and the auditor’s attestation report are included as part of the 2018 Annual Report on Form 10-K. Eric P. Edelstein, Chairman Andrew B. Abramson Peter J. Baum Pamela R. Bronander Michael L. LaRusso Suresh L. Sani Jeffrey S. Wilks REPORT OF THE AUDIT COMMITTEE February 25, 2019 To the Board of Directors of Valley National Bancorp: Management is responsible for the preparation, presentation and integrity of the Company’s financial statements, accounting and financial reporting principles, internal controls, and procedures designed to ensure compliance with accounting standards, applicable laws and regulations. The Company’s independent registered public accounting firm, KPMG LLP ("KPMG"), performs an annual independent audit of the financial statements and expresses an opinion on the conformity of those financial statements with U.S. generally accepted accounting principles. The following is the report of the Audit Committee with respect to the audited financial statements for fiscal year 2018. With respect to fiscal year 2018, the Audit Committee has: • • • • • reviewed and discussed Valley’s audited financial statements with management and KPMG; discussed with KPMG the scope of its services, including its audit plan; reviewed Valley’s internal control procedures; discussed with KPMG the matters required to be discussed by Auditing Standard No. 1301, adopted by the Public Company Accounting Oversight Board; received the written disclosures and the letter from KPMG required by applicable requirements of the Public Company Accounting Oversight Board regarding KPMG’s communications with the Audit Committee and discussed with KPMG their independence from management and Valley; and independence, concerning • approved the audit and non-audit services provided during fiscal year 2018 by KPMG. Based on the foregoing review and discussions, the Audit Committee approved the audited financial statements to be included in our Annual Report on Form 10-K for fiscal year 2018. to Section 404 of the Sarbanes-Oxley Act, Pursuant management is required to prepare as part of the Company’s 2018 Annual Report on Form 10-K, a report by management on its assessment of the Company’s internal control over financial reporting, including management’s assessment of the effectiveness of such internal control. KPMG is also required by Section 404 to prepare and include as part of the Company’s 2018 Annual Report on Form 10-K, the auditors’ attestation report on management’s assessment. 11 2019 Proxy Statement CORPORATE GOVERNANCE Our business and affairs are managed under the direction of the Board of Directors. Members of the Board are kept informed of Valley’s business through discussions with the Chairman and our other officers, by reviewing materials provided to them and by participating in meetings of the Board and its committees. All members of the Board also serve as directors of the Bank. It is our policy that all directors attend the annual meeting absent a compelling reason, such as family or medical emergencies. In 2018, all directors attended our annual meeting. Our Board of Directors believes that the purpose of corporate governance is to ensure that we maximize shareholder value in a manner consistent with legal requirements and safe and sound banking principles. The Board has adopted corporate governance practices which the Board and senior management believe promote this purpose. Periodically, these governance practices, as well as the rules and listing standards of the NASDAQ and the regulations of the SEC, are reviewed by senior management, legal counsel and the Board. TENURE AND REFRESHMENT The Board believes its policies provide for refreshment and tenure limits. With respect to refreshment, Ms. Steans and Mr. Robbins were added in 2018, and Ms. Schultz was added in January 2019. With respect to tenure, two of our longest serving directors, Pamela Bronander and Gerald Korde are not standing for reelection this year. While Mr. Lipkin has been renominated as a director, he will not serve beyond the end of 2019. BOARD LEADERSHIP STRUCTURE AND THE BOARD’S ROLE IN RISK OVERSIGHT Independent Oversight Structure. Our Board believes that an independent oversight function is a foundation of corporate governance. Since 2014 we have utilized an independent Lead Director to assure that the Board had independent leadership. We realize that some companies utilize an independent chairperson and others an independent Lead Director or Presiding Director. We also believe the structure of independent leadership should be examined regularly. During 2018, our Board utilized an independent Lead Director. The Board expects to continue to evaluate the best structure. Risk Oversight. Our Board is currently comprised of 14 directors, of whom 11 are independent under NASDAQ guidelines. The Board has three standing independent committees with separate chairpersons - an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation and Human Resources Committee. We also have a Risk Committee with a separate chairman, which is responsible for overseeing risk management. In addition, our Audit Committee engages in oversight of financial statement 2019 Proxy Statement 12 risk exposures and our full Board regularly engages in discussions of risk management and receives reports on risk factors from our executive management, other Company officers and the chairman of the Risk Committee. Lead Director. The Board created the position of Lead Director in 2014 and each year has appointed Mr. Abramson as its Lead Director. In accordance with our corporate governance guidelines, our independent directors elect the Lead Director. Our non-management directors meet in executive session regularly and our independent directors meet in executive session at least twice a year. These meetings are chaired by Mr. Abramson in his role as Lead Director. Chairman/CEO Decision for 2018. For 2018, the Board determined to separate the Chairman and CEO positions. Considering the circumstances of the CEO succession that year and the duties and authority of the Lead Director, the Board also determined an independent Chairperson was unnecessary. The Board further believed that maintaining Mr. Lipkin’s continuing service as non-executive Chairman of the Board following his retirement as Chief Executive Officer provided an effective leadership model for our Board and our Company at that time. DIRECTOR INDEPENDENCE The Board has determined that 11 of our directors and all the Nominating and Corporate current members of Governance, Compensation and Human Resources, and Audit Committees are “independent” for purposes of the independence standards of the NASDAQ, and that all of the members of the Audit Committee are also “independent” for purposes of Section 10A(m)(3) of the Exchange Act. The Board based these determinations primarily on a review of the responses of the directors to questions regarding employment and transaction history, affiliations and family and other relationships and on discussions with the directors. Our independent directors are: Andrew B. Abramson, Peter J. Baum, Pamela R. Bronander, Eric P. Edelstein, Gerald Korde, Michael L. LaRusso, Marc J. Lenner, Suresh L. Sani, Lisa Schultz, Jennifer W. Steans and Jeffrey S. Wilks. To assist in making determinations of independence, the Board has concluded that the following relationships are immaterial and that a director whose only relationships with the Company falls within these categories is independent: • A loan made by the Bank to a director, his or her immediate family or an entity affiliated with a director or his or her immediate family, or a loan personally guaranteed by such persons if such loan (i) complies with federal regulations on insider loans, where applicable; and (ii) is not classified by the Bank’s credit risk department or independent loan review department, or by any bank regulatory agency which supervises the Bank; • A deposit, trust, insurance brokerage, investment advisory, or similar customer relationship between Valley or its subsidiaries and a director, his or her immediate family or an affiliate of his or her immediate family if such relationship is on customary and usual market terms and conditions; • The employment by Valley or its subsidiaries of any immediate family member of the director if the family member serves below the level of a senior vice president; • Annual contributions by Valley or its subsidiaries to any charity or non-profit corporation with which a director is affiliated if the contributions do not exceed an aggregate of $30,000 in any calendar year; • Purchases of goods or services by Valley or any of its subsidiaries from a business in which a director or his or her spouse or minor children is a partner,shareholder or officer, if the director, his or her spouse and minor children own five percent (5%) or less of the equity interests of that business and do not serve as an executive officer of the business; or • Purchases of goods or services by Valley, or any of its subsidiaries, from a director or a business in which the director or his or her spouse or minor children is a partner, shareholder or officer if the annual aggregate purchases of goods or services from the director, his or her spouse or minor children or such business in the last calendar year does not exceed the greater of $200,000 or five percent (5%) of the gross revenues of the business. The Board considered the following categories together with the information set forth under "Certain Transactions with Management", for each director it determined was independent: Name Loans* Trust Services/ Assets Under Management Banking Relationship with VNB Professional Services to Valley Andrew B. Abramson Commercial and Residential Mortgages, Personal and Commercial Line of Credit Trust Services Peter J. Baum Commercial Mortgage Pamela R. Bronander Eric P. Edelstein Gerald Korde Commercial and Personal Line of Credit, Home Equity Residential Mortgage Commercial, Commercial Mortgage and Personal Line of Credit Michael L. LaRusso Personal Line of Credit None None None None None Commercial Mortgage, Residential Mortgage, Personal Line of Credit and Home Equity Trust Services Commercial Mortgage None None Commercial Mortgage, Personal Line of Credit None None None None Marc J. Lenner Suresh L. Sani Lisa J. Schultz Jennifer W. Steans Jeffrey S. Wilks ____________ * In compliance with Regulation O. Checking, Savings, Certificate of Deposit Checking Checking, Savings, Certificate of Deposit Checking Checking, Money Market Checking, Money Market Checking, Money Market, Certificate of Deposit, IRA Checking, Money Market Checking, Money Market Money Market Checking None None None None None None None None None None None EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS management directors. In each instance the Lead Director is the presiding director for the session. Valley’s Corporate Governance Guidelines require the Board to hold separate executive sessions for both independent and non-management directors. The Board holds an executive session at least twice a year with only independent directors and regularly holds an executive session with only non- SHAREHOLDER AND INTERESTED PARTIES COMMUNICATIONS WITH DIRECTORS The Board of Directors has established the following party procedures shareholder interested for or 13 2019 Proxy Statement communications with the Board of Directors or with the Lead Director of the Board: • Shareholders or interested parties wishing to communicate with the Board of Directors, the non- management or independent directors, or with the Lead Director should send any communication to Valley National Bancorp, Corporate Secretary, at 1455 Valley Road, Wayne, NJ 07470. Any such communication should state the number of shares owned by the shareholder. • The Corporate Secretary will forward such communication to the Board of Directors or, as appropriate, to the particular committee chairman or to the Lead Director, unless the communication is a personal or similar grievance, a shareholder proposal or related communication, an abusive or inappropriate communication, or a communication not related to the duties or responsibilities of the Board of Directors in which case the Corporate Secretary has the authority to determine the appropriate disposition of the communication. All such communications will be kept confidential to the extent possible. • The Corporate Secretary will maintain a log and copies of all such communications for inspection and review by any Board member or by the Lead Director, and will regularly review all such communications with the Board or the appropriate committee chairman or with the Lead Director at the next meeting. COMMITTEES OF THE BOARD OF DIRECTORS; BOARD OF DIRECTORS MEETINGS In 2018, the Board of Directors maintained an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation and Human Resources Committee. Only independent directors serve on these committees. In addition to these committees, the Company and the Bank also maintain a number of committees to oversee other areas of Valley’s operations. These include a Community Reinvestment Act Committee, Investment Investment Trustees Committee, Pension/Savings & Committee, Risk Committee and a Trust Committee. Each director attended at least 96% or more of the meetings of the Board of Directors and of each committee on which he or she served for the year ended December 31, 2018. Our Board met 12 times during 2018. The following table presents 2018 membership information for each of our Audit, Nominating and Corporate Governance, and Compensation and Human Resources Committees. 2019 Proxy Statement 14 Nominating and Compensation and Human Corporate Resources Governance X X X X (Chair) X X 5 X X (Chair) X X X X 6 Name Audit Andrew B. Abramson Peter J. Baum Pamela R. Bronander X X X Eric P. Edelstein (Chair) Gerald Korde Michael L. LaRusso Marc J. Lenner Suresh L. Sani Jennifer W. Steans Jeffrey S. Wilks 2018 Number of Meetings* ____________ X X X 5 * Includes telephonic meetings. AUDIT COMMITTEE. The Audit Committee met 5 times during 2018. The Board of Directors has determined that each member of the Audit Committee is financially literate and that more than one member of the Audit Committee has the accounting or related financial management expertise required by the NASDAQ. The Board of Directors has also determined that Mr. Edelstein, Mr. LaRusso and Mr. Wilks meet the SEC criteria of an “Audit Committee Financial Expert.” The Committee charter gives the Audit Committee the authority and retention, compensation and oversight of our independent registered public accounting firm, including pre-approval of all audit and non-audit services to be performed by our independent registered public accounting firm. Other responsibilities of the Audit Committee pursuant to the charter include: the appointment, responsibility for • Reviewing the scope and results of the audit with Valley’s independent registered public accounting firm; • Reviewing with management and Valley’s independent registered public accounting firm Valley’s interim and year-end operating results including SEC periodic reports and press releases; • Considering the appropriateness of the internal accounting and auditing procedures of Valley; • Considering the independence of Valley’s independent registered public accounting firm; • Overseeing the internal audit function; • Reviewing the and significant recommended action plans prepared by the internal audit together with management’s response and follow-up; and function, findings • Reporting to the full Board on significant matters coming to the attention of the Audit Committee. NOMINATING AND CORPORATE GOVERNANCE COMMITTEE. The Nominating and Corporate Governance Committee met 5 times during 2018. This Committee reviews qualifications of and recommends to the Board candidates for election as director of Valley, considers the composition of the Board, and recommends committee assignments. The Nominating and Corporate Governance Committee also reviews and as appropriate approves all related party transactions in accordance with our Related Party Transaction Policy. The Nominating and Corporate Governance Committee is responsible for approving and recommending to the Board our corporate governance guidelines which include: For stock awards to employees other than executives, a block of shares is allocated by the Committee. The individual awards are then allocated by the CEO and his executive staff to these non-executive officers and employees. Under authority delegated by the Committee, during the year, the CEO is authorized, within certain numerical limits, to make stock awards in specific circumstances: special incentive awards for non-officers, retention awards, awards to new employees and grants on completion of advanced degrees. Stock awards not specifically approved in advance by the Committee, but awarded under the authority delegated, are reported to the Committee at its next meeting at which time the Committee ratifies the action taken. • Director qualifications and standards; COMPENSATION CONSULTANTS • Director responsibilities; • Director orientation and continuing education; • Limitations on Board members serving on other boards of directors; • Director access to management and records; • Criteria for the annual self-assessment of the Board, and its effectiveness; and • Responsibilities of the Lead Director. The Nominating and Corporate Governance Committee reviews recommendations from shareholders regarding corporate governance and director candidates. COMPENSATION AND HUMAN RESOURCES COMMITTEE. The Compensation and Human Resources Committee met 6 times during 2018 and early 2019. This Committee determines CEO compensation, recommends to the Board compensation levels for directors and sets compensation for named executive officers ("NEOs") and other executive officers. It also administers the 2016 Long- Term Stock Incentive Plan, and makes awards pursuant to the plan. that those relate (except In January 2018 and February 2019, in undertaking its responsibilities, the Committee received from the CEO recommendations to his compensation) for salary, cash bonus, and equity awards for NEOs and other executive officers. After considering the possible payments and discussing the recommendations with the CEO, the Committee approved the compensation of executive officers, other than the CEO. The Committee met in executive session with its compensation consultant and legal advisors without the CEO to decide on all elements of the CEO compensation, including salary, cash bonus and equity awards. In 2018, the Committee engaged Fredric W. Cook & Co. ("FW Cook") as its compensation consultant. FW Cook was engaged to review compensation and performance data of a peer group of comparable financial organizations that had been selected by the Committee upon the recommendation of FW Cook and in relation to this data, provide an overview and comments on Valley’s executive compensation and as well as director compensation. Also, FW Cook was requested to provide information relating to market trends in executive compensation matters. FW Cook has reviewed and provided comments on the compensation disclosures contained in this proxy statement. COMPENSATION AS IT RELATES TO RISK MANAGEMENT The Chief Risk Officer evaluated all incentive-based compensation for employees of the Company and reported to the Compensation and Human Resources Committee that none of our incentive-based awards individually, or taken together, was reasonably likely to have a material adverse effect on Valley. None of the compensation or incentives for Valley employees were considered as encouraging undue or unwarranted risk. The Compensation and Human Resources Committee accepted the Chief Risk Officer’s report. AVAILABILITY OF COMMITTEE CHARTERS The Audit Committee, Nominating and Corporate Governance Committee, and Compensation and Human Resources Committee each operate pursuant to a separate written charter adopted by the Board. Each committee reviews its charter at least annually. All of the committee charters can be viewed at our website www.valley.com/ charters. Each charter is also available in print to any shareholder who requests it. The information contained on the website is not incorporated by reference or otherwise considered a part of this document. 15 2019 Proxy Statement NOMINATION OF DIRECTORS Nominations of directors for election may be made at an annual meeting of shareholders, or at any special meeting of shareholders called for the purpose of electing directors by our Board of Directors, or, as described in more detail below, by a shareholder of the Company who meets the eligibility and notice requirements set forth in our By-laws. Shareholder Nominations Not for Inclusion in our Proxy Statement. Under our By-laws, to be eligible to submit a director nomination not for inclusion in our proxy materials but instead to be presented directly at the annual meeting, the shareholder must be a shareholder of record on both (i) the date the shareholder submits the notice of the director nomination to the Company and (ii) the record date for the annual meeting. The notice must be in proper written form and be timely received by the Company. To be in proper written form, the notice must meet all of the requirements specified in Article I, Section 3 of our By-laws, including specified information regarding the shareholder making the nomination and the proposed nominee. To be timely for our 2020 annual meeting, the notice must be received by our Secretary at our Wayne, New Jersey office no later than December 19, 2019 nor earlier than November 19, 2019. If the annual meeting is called for a date that is not within 30 days before or after the anniversary date of our 2019 annual meeting date, notice will be timely if it is received by the Secretary no later than the close of business on the 10th day following the date on which public announcement of the annual meeting is first made by the Company. Shareholder Nominations for Inclusion in our Proxy Statement. Our By-laws provide that if certain requirements are met, an eligible shareholder or group of eligible shareholders may include their director nominees in the Company’s annual meeting proxy materials. This is commonly referred to as proxy access. The proxy access provisions of our By-Laws provide, among other things, that a shareholder or group of up to twenty shareholders seeking to include director nominees in our proxy materials must own 3% or more of our outstanding common stock continuously for at least three years. The number of proxy access nominees appearing in any annual meeting proxy statement cannot exceed the greater of two or 20% of the number of directors then serving on the Board. If 20% is not a whole number, the maximum number of proxy access nominees would be the closest whole number below 20%. A nominee who is included in our proxy materials but withdraws from or becomes ineligible or unavailable for election at the annual meeting, or does not receive at least 25% of the votes cast for his or her election, will not be eligible for nomination by a shareholder for the next two annual meetings. The nominating shareholder or group of shareholders also must deliver the information required by our By-laws, and each nominee must meet the qualifications required by our By-laws. 2019 Proxy Statement 16 Requests to include director nominees in our proxy materials for our 2020 annual meeting must be received by our Secretary at our Wayne, New Jersey office no earlier than October 10, 2019 and no later than November 9, 2019. If the annual meeting is called for a date that is not within 30 days before or after the anniversary date of our 2019 annual meeting date, notice will be timely if it is received by the Secretary no later than the close of business on the 10th day following the date on which public announcement of the annual meeting is first made by the Company. Director Qualifications. The Board of Directors has established criteria for members of the Board. These include: • The maximum age for an individual to join the Board is age 65, except that such limitation is inapplicable to a person who, when elected or appointed, is a member of senior management, or who was serving as a member of the Board of Directors of another company at the time of its acquisition by Valley; • A director is eligible for reelection if the director has not attained age 76 before the time of the annual meeting of the Company’s shareholders. However, the Board in its discretion may extend this age limit for not more than one year at a time for any director, if the Board determines that the director’s service for an additional year will sufficiently benefit the Company; • Each Board member must demonstrate that he or she is able to contribute effectively regardless of age; • Each Board member must be a U.S. citizen and comply with all qualifications set forth in 12 USC §72; • A majority of the Board members must maintain their principal residences in the states in which the Bank has branch offices or within 100 miles from the Bank's principal office; • Each Board member must own a minimum of 20,000 shares of our common stock of which 5,000 shares must be in his or her own name (or jointly with the director’s spouse) and none of these 20,000 shares may be pledged or hypothecated; • Unless there are mitigating circumstances (such as medical or family emergencies), any Board member who attends less than 85% of the Board and assigned committee meetings for two consecutive years, will not be nominated for re-election; • Each Board member must prepare for meetings by reading information provided prior to the meeting. Each Board member should participate in meetings, for example, by asking questions and by inquiring about policies, procedures or practices of Valley; • Each Board member is expected to be above reproach in their personal and professional lives and their financial dealings with Valley, the Bank and the community; • If a Board member (a) has his or her integrity challenged by a governmental agency (indictment or conviction), (b) files for personal or business bankruptcy, (c) materially violates Valley’s Code of Conduct and Ethics, or (d) has a loan made to or guaranteed by the director classified as doubtful, the Board member shall resign upon the request of the Board. If a loan made to a director or guaranteed by a director is classified as substandard and not repaid within six months, the Board may ask the director to resign; • No Board member may serve on the board of any other bank or financial institution or on more than two boards of other public companies while a member of Valley’s Board without the approval of Valley’s Board of Directors; • Board members should understand basic financial principles and represent a variety of areas of expertise and diversity in personal and professional backgrounds and experiences; • Each Board member should be an advocate for the Bank within the community; and • To the extent it is convenient, it is expected that the Bank will be utilized by the Board member for his or her personal and business affiliations. the provide shareholder must The Nominating and Corporate Governance Committee has adopted a policy regarding director candidates recommended by shareholders. The Nominating and Corporate Governance Committee will consider nominations recommended by shareholders. In order for a shareholder to recommend a nomination, the recommendation along with the additional information and supporting materials to our Corporate Secretary no earlier than 180 days and no later than 150 days prior to the anniversary of the date of the preceding year’s mailing of the proxy statement for the annual meeting. The shareholder wishing to propose a candidate for consideration by the Nominating and Corporate Governance Committee must own at least 1% of Valley’s outstanding common stock. In addition, the Nominating and Corporate Governance Committee has the right to require any additional background or other information from any director candidate or the recommending shareholder as it may deem appropriate. For Valley’s annual meeting in 2020, we must receive this notice on or after September 10, 2019, and on or before October 10, 2019. The following factors, are considered by the Nominating and Corporate Governance Committee director candidates to the Board: • Appropriate mix of educational background, professional background and business experience to make a significant contribution to the overall composition of the Board; • Whether the candidate would be considered a financial expert or financially literate as described in SEC and NASDAQ rules; • Whether the candidate would be considered independent under NASDAQ rules; • Demonstrated character and reputation, both personal and professional, consistent with that required for a bank director; • Willingness to apply sound and independent business judgment; • Ability to work productively with the other members of the Board; • Availability for the substantial duties and responsibilities of a Valley director; and • Meets the additional criteria set forth above and in Valley’s Corporate Governance Guidelines. Diversity is one of the factors that the Nominating and Corporate Governance Committee considers in identifying nominees for director. The Nominating and Corporate Governance Committee has not adopted a formal diversity policy with regard to the selection of director nominees. CODE OF CONDUCT AND ETHICS AND CORPORATE GOVERNANCE GUIDELINES We have adopted a Code of Conduct and Ethics which applies to our chief executive officer, principal financial officer, principal accounting officer and to all of our other directors, officers and employees. The Code of Conduct and Ethics is available and can be viewed on our website at www.valley.com/charters. The Code of Conduct and Ethics is also available in print to any shareholder who requests it. We will disclose any substantive amendments to or waiver from provisions of the Code of Conduct and Ethics made with respect to the chief executive officer, principal financial officer or principal accounting officer or any other executive officer or a director on that website. We have also adopted Corporate Governance Guidelines, which are intended to provide guidelines for the governance by the Board and its committees. The Corporate Governance Guidelines are available on our website at www.valley.com/ charters. The Corporate Governance Guidelines are also available in print to any shareholder who requests them. 17 2019 Proxy Statement COMPENSATION OF DIRECTORS DIRECTOR COMPENSATION The total 2018 compensation of our non-employee directors is shown in the following table. Each of these compensation components is described in detail below. As explained below, in January 2019, the Board took steps to change director fees to reduce average director compensation. 2018 DIRECTOR COMPENSATION Fees Earned or Paid in Cash (2) Stock Awards (3) Change in Pension Value and Non- Qualified Deferred Compensation Earnings (4) All Other Compensation (5) Total $ 192,000 $ 60,000 $ 0 $ 1,639 $ 132,500 117,500 144,500 66,750 132,500 147,000 125,750 120,250 505,750 132,000 116,500 120,250 60,000 60,000 60,000 0 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 0 0 0 0 983 3,899 0 0 0 0 0 0 1,639 1,639 1,639 0 1,639 1,639 1,639 1,639 37,726 1,639 1,639 1,639 253,639 194,139 179,139 206,139 66,750 195,122 212,538 187,389 181,889 603,476 (6) 193,639 178,139 181,889 Name Andrew B. Abramson (1) Peter J. Baum Pamela R. Bronander Eric P. Edelstein (1) Mary Guilfoile Graham O. Jones Gerald Korde (1) Michael L. LaRusso Marc J. Lenner (1) Gerald H. Lipkin Suresh L. Sani Jennifer W. Steans Jeffrey S. Wilks ____________ (1) Lead Director or Bancorp Committee Chairman (see Committees of the Board on page 14 in this Proxy Statement). (2) Includes annual retainer, meeting fees and committee fees and fees for serving as lead director and chairing board committees earned and paid for 2018. (3) Valley National Bancorp's 2016 Long-Term Stock Incentive Plan (the “2016 Plan”) provides for non-employee directors to be eligible recipients of limited equity awards. Commencing with Valley's 2017 annual meeting, each non-employee director received a $50,000 restricted stock award (“RSAs”) as part of their annual retainer, granted on the date of the annual shareholders’ meeting. The number of RSAs were determined using the closing market price on the date prior to grant and 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. (4) Represents the change in the present value of pension benefits year to year under the Directors Retirement Plan for 2018 considering the age of each director, a present value factor, an interest discount factor and time remaining until retirement. As disclosed below, the Board of Directors pension plan was frozen for purposes of benefit accrual in 2013. The annual change in the present value of the accumulated benefits for Messrs. Abramson, Baum, Edelstein, LaRusso, Lenner, Sani, Wilks and Mmes. Bronander and Guilfoile was a net decrease of $10,843, $1,309, $3,312, $297, $4,950, $4,894, $1,472, $13,096, and $5,836 from the present value reported as of December 31, 2017, respectively; therefore the amount reported is zero. This decrease is attributable to the increase in the discount rate from 3.69% to 4.30%. (5) This column reflects the deferred cash dividends earned in 2018 on the restricted stock that is part of the director's annual retainer, granted on the date of the annual shareholders’ meeting and includes perquisites. For Mr. Lipkin, perquisites including automobile and driver ($12,103) and country club membership ($23,984). (6) Mr. Lipkin received certain additional director compensation in connection with the CEO succession process and that compensation does not extend beyond the 2019 Annual Meeting of Shareholders. 2019 Proxy Statement 18 ANNUAL BOARD RETAINER Non-employee directors received an annual cash retainer of $25,000 per year, paid quarterly, plus an equity award of $60,000 (see below). BOARD MEETING FEES Non-employee directors also receive a Board meeting fee of $4,250 for each meeting attended of the Bank and Bancorp combined attended in person, by video conference or conference call. Attendance fees are paid only for one telephonic attendance a year. BOARD COMMITTEE FEES AND COMMITTEE CHAIRMEN RETAINER The Chairman of the Audit Committee receives an annual retainer of $20,000. The Chairman of the Compensation and Human Resources Committee receives an annual retainer of $20,000. The Chairman of the Nominating and Corporate Governance Committee receives an annual retainer of $12,500. The Lead Director receives an annual retainer of $50,000. These retainers are to recognize the extensive time that is devoted to serve as Committee Chairman or Lead Director and to attend to committee matters, including meetings with management, auditors, attorneys and consultants and preparing committee agendas. All non-management directors are paid for attending each committee meeting of which they are a member as follows: $2,500 for Audit, $2,500 for Compensation and Human Resources, and $2,500 for Nominating and Corporate Governance. The Company and the Bank also have a number of committees in addition to the Audit, Compensation and Nominating. These additional committees generally deal with oversight of various operating matters. Valley’s Risk Committee Chairman receives a $20,000 retainer. All other committee chairmen receive a retainer of $7,500. There is an attendance fee of $2,500 for each committee meeting except Trust for which the attendance fee is $1,500. DIRECTOR EQUITY AWARDS Our 2016 Long-Term Stock Incentive Plan (the “2016 Plan”) provides for our non-employee directors to be eligible recipients of equity awards limited to not more than $300,000 annually per director. The 2016 Plan was approved by our shareholders. After our 2018 annual meeting, each non-management director received a $60,000 restricted stock award (“RSA”) 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. In 2019 the awards will be granted in restricted stock units and will accelerate upon retirement as well as upon a change in control, death or disability. REDUCTION IN AVERAGE DIRECTOR COMPENSATION COMMENCING IN APRIL 2019 January 2019, the Compensation Committee In recommended and the Board approved a change in director fees, with the expectation that the average director compensation would be reduced. The Compensation and Human Resources Committee recommended that for the 2019 Board year (April to April) that Board meeting fees be reduced from $4,250 to $2,000 and committee meeting fees be reduced from $2,500 to $1,500 for all committees except the trust committee for which the meeting fees will be reduced from $1,500 to $750, that the equity retainer remain at $60,000 but the cash retainer be increased from $25,000 to $50,000. Committee Chair retainers and the Lead Director fee would remain the same. As a result, FW Cook estimated that average director compensation would decline approximately 10% in 2019 compared to 2018. DIRECTORS RETIREMENT PLAN We maintain a retirement plan for non-employee directors which was frozen to new participants and for additional benefit accruals in 2013. The plan provides 10 years of annual benefits to participating directors with five or more years of service. The benefits commence after a director has retired from the Board and reached age 65. The annual benefit is equal to the director’s years of service through December 31, 2013, multiplied by 5%, multiplied by the final annual retainer paid to directors as of December 31, 2013 ($40,000). In the event of the death of the director prior to receipt of all benefits, the payments continue to the director’s beneficiary or estate. As a result of amendments to the plan adopted in 2013, participants no longer accrue further benefits. DIRECTOR COMPENSATION FOR MR. LIPKIN DURING TRANSITION In connection with the announcement in November 2017 of the CEO succession from Mr. Lipkin to Mr. Robbins, the Board determined that Mr. Lipkin should continue to serve as chairman until the 2019 Annual Meeting of Shareholders and, as a director, he also should be available to assist and consult with the new CEO and other senior staff at the CEO’s request. Mr. Lipkin was paid $150,000 at the time of his election in April 2018 as non-independent chairman. For his availability to assist and consult, Mr. Lipkin was paid $350,000 in quarterly installments commencing in April 2018. These transition arrangements and compensation will end at the 2019 Annual Meeting of Shareholders. 19 2019 Proxy Statement STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS. The following table contains information about the beneficial ownership of our common stock at February 1, 2019 by each director and by each of our Named Executive Officers ("NEOs") named in this proxy statement, and by directors and all executive officers as a group. The information is obtained partly from each director and by each NEO and partly from Valley. Number of Shares Beneficially Owned (1) Name of Beneficial Owner Directors and Named Executive Officers: Percent of Class (2) 0.08% — 0.02 0.01 0.01 0.10 0.02 0.01 0.27 0.70 0.01 0.07 0.17 0.03 0.02 0.01 1.23 0.13 260,977 (3) 12,343 52,755 (4) 43,330 (5) 37,443 319,189 (6) 76,377 45,189 (7) 896,722 (8) 2,330,202 (9) 46,692 (10) 228,749 (11) 559,615 (12) 105,921 (13) 67,406 (14) 20,000 4,074,964 (15) 429,563 (16) 9,913,776 (17) 2.99 Andrew B. Abramson Robert J. Bardusch Peter J. Baum Pamela R. Bronander Eric P. Edelstein Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Graham O. Jones Gerald Korde Michael L. LaRusso Marc J. Lenner Gerald H. Lipkin Ira Robbins Suresh L. Sani Lisa J. Schultz Jennifer W. Steans Jeffrey S. Wilks Directors and Executive Officers as a group (26 persons) ____________ (1) Beneficially owned shares include shares over which the named person exercises either sole or shared voting power or sole or shared investment power. It also includes shares owned (i) by a spouse, minor children or by relatives sharing the same home, (ii) by entities owned or controlled by the named person, and (iii) by the named person if he or she has the right to acquire such shares within 60 days by the exercise of any right or option. Unless otherwise noted, all shares are owned of record and beneficially by the named person. For executives and directors, the number of shares includes unvested restricted stock. held by that individual are also taken into account to the extent such options were exercisable within 60 days.* (3) This total includes 15,343 shares held by Mr. Abramson’s wife, 13,349 shares held by his wife in trust for his children, 9 shares held by a family trust of which Mr. Abramson is a trustee, 40,157 shares held by a family foundation, 10,401 shares held in self-directed IRA, and 2,636 shares in a self-directed IRA held by his wife. Mr. Abramson disclaims beneficial ownership of shares held by his wife and shares held for his children. (4) This total includes 6,150 shares held by a trust for the benefit of Mr. Baum’s children of which Mr. Baum is the trustee. (5) This total includes 5,992 shares held by Ms. Bronander’s children, and of this total, 972 shares are pledged as security by her adult son. (6) This total includes 51,796 shares held by Mr. Eskow’s wife, 5,779 shares held in Mr. Eskow’s 401(k) plan, 10,578 shares held in his Roth IRA, 1,584 shares held in his IRA, 13,871 shares held jointly with his wife, 1,544 shares in an IRA held by his wife, and 21,170* shares purchasable pursuant to stock options exercisable within 60 days. (7) This total includes 10,205 shares held by Mr. Janis wife. (8) This total includes 7,124 shares owned by trusts for the benefit of Mr. Jones’ children of which his wife is co-trustee. (9) This total includes 72,133 shares held jointly with Mr. Korde’s wife, 338,923 shares held in the name of Mr. Korde’s wife, 890,352 shares held by his wife as custodian for his children, 315,378 shares held by a trust of which Mr. Korde is a trustee, and 126,438 shares held in Mr. Korde’s self-directed IRA. (10) This total includes 18,760 shares held jointly with Mr. LaRusso’s wife. (11) This total includes 22,504 shares held in a retirement pension, 618 shares held by Mr. Lenner’s wife, 31,717 shares held by his children, shares held by a trust of which Mr. Lenner is 50% trustee (Mr. Lenner is an indirect beneficiary of only 25% of the trust and disclaims any pecuniary interest in the ownership of the other portion of the trust), 20,052 shares held by a charitable foundation. (12) This total includes 342,760 shares held in the name of Mr. Lipkin’s wife, 6,946 shares held in Mr. Lipkin’s wife’s Roth IRA, 154 shares held jointly with his wife, 889 shares held in a Roth IRA, 58 shares held in his 401(k) plan, and 44,819 shares held by a family charitable foundation of which Mr. Lipkin is a co-trustee. This total includes 44,016* shares purchasable pursuant to stock options exercisable within 60 days. (13) This total includes 2,000 shares held by Mr. Robbins' wife and 307 shares held in trusts for benefit of Mr. Robbins' nieces. (14) This total includes 5,705 shares held in Mr. Sani’s Keogh Plan, 5,705 shares held in trusts for benefit of his children, 44,390 shares held in pension trusts of which Mr. Sani is co-trustee. (15) This total includes 729,700 shares held by Ms. Steans' spouse, 211,468 shares held by her spouse in a trust, 868,890 shares held in a family trust of which Ms. Steans is a trustee, 651,374 shares held by a partnership of which Ms. Steans is one of three partners and shares held in custody for her child. Ms. Steans has 20,000 shares in her own name. The remaining 4,049,997 shares are pledged as security for loans. (2) For purposes of calculating these percentages, there were 331,484,485 shares of our common stock outstanding as of February 1, 2019. For purposes of calculating each individual’s percentage of the class owned, the number of shares underlying stock options (16) This total includes 74,026 shares held by Mr. Wilks’ wife, 10,058 shares held by his wife in trust for one of their children, 2,747 shares held jointly with his wife for a family foundation, 20,346 shares as trustee for the benefit of their children, 12,187 shares as trustee for 2019 Proxy Statement 20 the benefit of his wife, 266,804 shares held in estate created trusts for which Mr. Wilks and his wife are trustees and under which Mr. Wilks' wife is a beneficiary. Mr. Wilks disclaims beneficial ownership of shares held by the estate created trusts. PRINCIPAL SHAREHOLDERS. The following table contains information about the beneficial ownership at December 31, 2018 by persons or groups that beneficially own 5% or more of our common stock. (17) This total includes 306,339 shares owned by 8 executive officers who are not directors or named executive officers, which total includes 12,264 shares in 401(k) plans and/or IRAs, 149 indirect shares, and 6,602* shares purchasable pursuant to stock options exercisable within 60 days. The total does not include shares held by the Bank’s trust department in fiduciary capacity for third parties. __________ * See the Outstanding Equity Awards table below for each of the NEO’s outstanding awards and information on restricted stock which has not vested. As of the record date of February 19, 2019, exercisable options outstanding have exercise price that is higher than Valley’s market price. OUR HEDGING POLICY. We adopted a policy that prohibits hedging of Valley equity securities for directors, executives and officers with the title of First Senior Vice President or above. While there is no prohibition against employees who do not hold the title of First Senior Vice President or above hedging equity securities, these employees are not eligible for annual stock awards and are prohibited from trading Valley securities while in the position of material non-public information. The anti-hedging policies are set forth in full below. Name and Address of Beneficial Owner BlackRock, Inc.(2) 55 East 52nd Street, New York, NY 10055 The Vanguard Group(3) 100 Vanguard Blvd., Malvern, PA 19355 State Street Corporation(4) One Lincoln Street Boston, MA 02111 ____________ Number of Shares Beneficially Owned Percent of Class(1) 44,400,658 13.39% 30,568,804 9.22 16,642,732 5.02 (1) For purposes of calculating these percentages, there were 331,484,485 shares of our common stock outstanding as of February 1, 2019. (2) Based on a Schedule 13G/A Information Statement filed January 31, 2019 by BlackRock, Inc. The Schedule 13G/A discloses that BlackRock has sole voting power as to 43,624,080 shares and sole dispositive power as to 44,400,658 shares, and 0 shares as to shared voting power and shared dispositive power. Short Sales. Directors and officers at the level of First Senior Vice President and above may not engage in short sales of the Company’s securities (sales of securities that are not then owned), including a “sale against the box” (a sale with delayed delivery). (3) Based on a Schedule 13G/A Information Statement filed February 11, 2019 by The Vanguard Group. The Schedule 13G/A discloses that The Vanguard Group has sole voting power as to 318,539 shares, shared voting power as to 31,051 shares, sole dispositive power as to 30,249,870 shares, and shared dispositive power as to 318,934 shares. (4) Based on a Schedule 13G Information Statement filed February 14, 2019 by State Street Corporation. The Schedule 13G discloses that State Street Corporation has 0 shares as to sole voting power and sole dispositive power and; 15,649,438 as to shared voting power and 16,642,731 shares as to shared dispositive power. Publicly Traded Options. Directors and officers at the level of First Senior Vice President and above may not engage in transactions in publicly traded options in the Company’s securities, such as puts, calls and other derivative securities, on an exchange or in any other organized market. Directors and officers at the level of First Senior Vice President and above also may not engage in such transactions privately (excluding Company granted stock options or phantom stock options). Hedging Transactions. Directors and officers at the level of First Senior Vice President and above are prohibited from entering into hedging transactions or similar arrangements involving Company securities, such as equity swaps, collars, exchange funds and forward sale contracts. These hedging transactions allow an owner of securities to lock in much of the value of his or her stock holdings, often in exchange for all or part of the potential for upside appreciation in the stock. 21 2019 Proxy Statement EXECUTIVE COMPENSATION COMPENSATION DISCUSSION AND ANALYSIS ("CD&A") EXECUTIVE SUMMARY Say-on-Pay Vote At the 2018 Annual Meeting of Shareholders, approximately 90% of the votes cast were in favor of the advisory vote to approve executive compensation. We believe that our recent “say-on-pay” results reflect our commitment to providing our executives with compensation that is in alignment with our shareholders’ short and long term interests. The results also favorably reflected our continuing outreach program to our large institutional shareholders and the changes that we made to our compensation program as a result of those conversations. We continue to make additional changes to our compensation program, including putting an even greater emphasis on performance based compensation. In February 2019, the Compensation and Human Resources Committee (the “Committee”) made compensation decisions based on 2018 results considering the input we received from our shareholder engagement. In addition, the Committee reviewed the reports of major proxy advisory firms on the say on pay vote and again asked the Committee’s independent compensation consultant, Frederic W. Cook & Co., Inc. (“FW Cook”), to provide an analysis of the executive compensation program. Key Compensation Decisions and Actions As discussed below under “Our Company’s Performance” we believe that our management, under the leadership of our new President and CEO, continued to make meaningful strides in transitioning the Company into one that is able to more effectively capitalize on the opportunities in the markets we serve. We continue to significantly invest in technology which we believe will allow us to compete in the new digital environment. We also continue to look to cut costs and This was reflected in 2018 through the expenses. improvement in one of the two key metrics which we use to measure Company performance - Total Shareholder Return (“TSR”). Our one year 2018 relative TSR was in the 49th percentile compared to the KBW Regional Bank Index (the “KBW Index”) and was in the 60th percentile when measured against our self-selected peer group. Net income for the year ended December 31, 2018 was $261.4 million, or $0.75 per diluted common share, compared to 2017 earnings of $161.9 million, or $0.58 per diluted common share. Our 2017 results were adversely impacted by (i) $23.0 million of total charges from the impact of the Tax Cuts and Jobs Act and the writedown of State deferred tax assets, (ii) $9.9 million ($5.8 million after-tax) in charges related to the “LIFT” program, and (iii) and $2.6 million ($2.3 million after-tax) of expenses related to our acquisition of USAmeriBancorp, Inc. (“USAB”). The Committee viewed 2019 Proxy Statement 22 the Company’s overall financial performance in 2018 to be positive, while acknowledging that more work needs to be done to fully implement the Company’s strategic plan. The following is a summary of how we approached our 2019 compensation program based on 2018 results: • • • • Increased Mr. Robbins’ actual total direct compensation (salary, non-equity incentive award and equity awards) approximately 23% over 2017 levels and 12% over his target 2018 compensation in recognition of his 2018 promotion and accomplishments in the position of President and CEO; Increased Mr. Robbins’ non-equity incentive award by $210,000, or 47% from 2017, and by $65,000, or 11%, from 2018 target amounts; Increased Mr. Robbins’ equity compensation by $250,000, or 20%, from both his 2017 amount and his 2018 target amount; target Set Mr. Robbins’ 2019 total direct compensation at $3,300,000, compared to target direct compensation of $2,695,000 and actual direct compensation of $3,010,000 for 2018 to reflect the multi-year ramp up to median compensation levels (Mr. Robbins’ 2019 target total direct compensation remains below the peer median); • Modified the performance based nature of the compensation program to increase from 2/3 to 3/4 performance equity awards and to increase from 25% to 40% the relative TSR component of our performance equity awards to better align realized pay with shareholder value creation; • Continued to grant performance equity awards that cliff vest at the end of three years based on our growth in tangible book value and relative TSR; • Continued to limit the maximum payout on the relative TSR portion of the performance equity awards to target if the TSR is negative; • As a result of the 2017 Tax Act reducing the marginal corporate tax rate from 35% to 21%, the Committee, with respect to outstanding awards, deducted from the reported increase in Tangible Book Value an amount attributable to a reduction in the tax rate and increased target performance levels for new awards. The Company’s “TSR” refers to the Company’s share price performance (plus dividends); the result is ranked relative to the performance of the KBW Index during the relevant period. In reviewing compensation, the Committee did not take into consideration, and the preceding bullet points exclude the change, in the pension value and “all other compensation” which is included in the compensation for each named executive officer (“NEO”) as determined under SEC rules and set forth in the Summary Compensation Table on page 32. Our Company’s Performance Other highlights of 2018 include: • The continuing implementation of our “LIFT” earning enhancement program; • The implementation of our strategic plan to target technology resources to more value-added activities and deliver on the financial banking experience expected by our customers; • The integration of USAB, which acquisition was completed effective January 1, 2018, the largest acquisition ever undertaken by the Company; • A 61% increase in net income in 2018 compared to 2017 and a 30% increase in net interest income in 2018 compared to 2017; and • A one year TSR in 2018 which was in the 49th percentile of the KBW Index, and in the 60th percentile when measured against our self-selected peer group, even though it was negative. Hold-past termination. If an NEO terminates employment for any reason and such termination results in the acceleration of equity awards, 50% of the shares of common stock underlying the equity awards must be held for a period of 18 months following the date of termination. Stock ownership guidelines. We imposed significant revised and increased stock ownership requirements on our executives. OUR COMPENSATION PHILOSOPHY We believe that Valley’s executive compensation should be structured to balance the expectations of our shareholders, our regulators and our executives. We have adopted a compensation philosophy that seeks to achieve this balance by taking into consideration the following: Pay-for-Performance: Rewarding qualitative achievements by management which contribute to our operational and strategic performance; Benchmarking: Making compensation awards after considering the executive compensation programs and practices of our peer group; and Balanced Pay Mix: Providing a mixture of short-term and long-term financial rewards to our executives. The Committee uses a balanced approach in making compensation-related decisions. The important factors the Committee considered this year include: • Management’s focus on our earnings enhancement and expense reduction program; Key Governance Features • Our year over year increase in earnings; We have implemented the following governance features: Independent compensation consultant. FW Cook, our compensation consultant, reports directly to the Committee and provides no services to Valley or management. Risk management. We focus on risk management and design and monitor our plans to discourage unnecessary or excessive risk taking. No hedging or pledging. We do not allow hedging or pledging of Valley securities by executive officers. Clawback policy. We have a clawback policy that allows for the recovery of unvested equity and unpaid cash bonus awards in the event of a material financial restatement or material misconduct by an executive. The policy also provides for the recoupment of vested incentive awards of stock and cash in the event of intentional fraud or intentional misconduct by an executive. • Our increase in percentile rank in TSR relative to our peer companies and tangible book value growth; • Maintaining Valley’s strong commitment to credit quality; • Development of a long term strategic plan which supports Valley’s franchise growth; and • Recruiting, developing and engaging talent to deliver on Valley’s goals as well as plan for succession. OUR COMPENSATION PROCESS Our Committee sets the compensation of our CEO and all our NEOs, as well as all executive officers. We met 6 times during 2018 and early 2019 to discuss NEO compensation for 2018. At Committee meetings the Committee holds in- depth executive sessions at which our independent compensation consultant is present and provides advice. 23 2019 Proxy Statement Appendix A, on page 49, lists all financial institutions in the peer group. The peer group consists of companies with assets between $10.6 billion and $51.9 billion and market capitalization between $674 million and $5.7 billion. Valley ranked in the 72nd and 26th percentile in asset size and market capitalization, respectively, against the peer group. The Committee compares the salaries, equity compensation and non-equity incentive compensation we pay to our NEOs with the same compensation elements paid to executives of the peer group companies available from public data. The Committee refers to this peer group information when setting our CEO compensation and that of our other NEOs and generally targets CEO and NEO total compensation at levels that are at the median of our peer group. The Committee has the authority to directly retain the services of independent compensation consultants and other experts to assist in fulfilling its responsibilities. The Committee engaged the services of FW Cook, a national executive compensation consulting firm, to review and provide recommendations concerning all the components of the Company’s executive compensation program. FW Cook performs services solely on behalf of the Committee and has no relationship with the Company or management except as it may relate to performing such services. FW Cook assists the Committee in defining Valley’s peer companies for executive compensation and practices and in benchmarking our executive compensation program against the peer group. FW Cook also assists the Committee with all aspects of the design of our executive and director compensation programs. The Committee assessed the independence of FW Cook and concluded that no conflict of interest exists that prevents FW Cook from independently representing the Committee. A representative of FW Cook was present and provided advice at all our meetings, including executive sessions. Pre- meetings were held with the Chairman of the Committee to establish the agenda for each meeting. The compensation consultant attended the pre-meetings. Mr. Robbins, our CEO, and other NEOs attended portions of the meetings. Mr. Robbins presented and discussed with the Committee his recommendations for compensation for the NEOs and the executive team without the other NEOs present. Mr. Robbins neither made a recommendation to the Committee about his own compensation nor was he present when his compensation was discussed or set by the Committee. The Committee also sought input from external counsel. The Committee sets executive compensation with only Committee members, consultants, and external counsel present after presentations by the CEO. OUR PEER GROUP In setting compensation for our executives, we compared total compensation, each compensation element, and Valley’s financial performance to a peer group. For purposes of determining 2018 compensation, our peer group consisted of 20 bank holding companies, each with assets within a reasonable range above and below Valley’s asset size. Seven of these companies are in the NY/NJ/CT metropolitan area or Florida and the thirteen other bank holding companies are located throughout the country and have sizes and business models similar to Valley. The Committee believes that this peer group is an appropriate group for comparison with Valley for two primary reasons: • The companies in the peer group are located in our market areas or comparable locations; and • The companies in the peer group are, on average, similar in size and complexity to Valley. 2019 Proxy Statement 24 ELEMENTS OF PAY The following table summarizes the key components of our compensation program for our NEOs and the purpose of each component: Component Salary Non-Equity Incentive Awards Time Vested Equity Awards Performance Equity Awards Salary Key features Certain cash payment based on position, responsibilities and experience. Annual cash awards which are tied to achievement of both company and individual goals. Equity performance and vested over time. incentives earned based on Equity incentives earned based upon performance and vested based on meeting performance targets. Purpose Offers a stable source of income. Intended to motivate and reward executives for achievements of short- term (one year) company and individual goals. Intended to create alignment with shareholders and promote retention. Intended to focus on achievement of company performance objectives, relative TSR and growth in tangible book value (as defined below). Salaries are determined by an evaluation of individual NEO responsibilities, compensation history, as well as peer comparison. Non-Equity Incentive Awards We award non-equity incentive awards in February. A target award is established based on a percentage of the executive’s base salary and the actual award is determined based on each NEO’s performance against a scorecard of metrics established in the prior year. Time Vested Equity Awards We award time vested restricted stock unit awards in February which vest pro rata on an annual basis over a three-year period. Performance Equity Awards We award performance based awards. Consistent with prior years, awards granted in 2019 vest based on the Company’s adjusted Growth in Tangible Book Value and relative TSR performance against the KBW Index measured over a three- year performance period. However, unlike prior years, the percentage of performance based awards which vest based on relative TSR performance has been increased from 25% to 40%. OVERALL DESIGN AND MIX OF EQUITY GRANTS Consistent with 2017 and 2018 awards, the following table summarizes the overall design and mix of our annual long-term equity incentives granted for 2019: Form of Award Time Vested Award Growth in Tangible Book Value Performance Award TSR Performance Award Percentage of Total Target Equity Award Value 25% Purpose Encourages retention. Fosters shareholder mentality among the executive team. Performance Measured N/A Earned and Vesting Periods Vests on the first, second, and third anniversaries of the grant date. 45% 30% Encourages retention and ties executive compensation to our operational performance. Growth in Tangible Book Value (as defined) Earned and vests after three-year performance period based on Growth in Tangible Book Value. Encourages retention and ties executive compensation to our long-term market performance. Relative TSR Earned and vests after three-year performance period based on TSR against the KBW Index. The percentage mixes described in the chart above are based on the dollar value of the awards granted. In 2019, all equity awards were in the form of restricted stock units ("RSUs"). The dollar value is translated into a number of units using the closing price of our common stock the day before the effective date of the grant. 25 2019 Proxy Statement 2018 TIME VESTED AWARDS For Mr. Robbins and the other NEOs, 25% of the aggregate dollar value of their target annual equity awards granted for 2018 was in the form of time-based vesting restricted stock unit awards. Once granted, the awards vest based solely on continued service with the Company, with one third vesting on each February 1st thereafter. 2018 GROWTH IN TANGIBLE BOOK VALUE AWARDS Growth in Tangible Book Value, when used in this CD&A, means year over year growth in tangible book value, plus dividends on common stock declared during the year, excluding other comprehensive income (“OCI”) recorded during the year. The Committee chose Growth in Tangible Book Value over a three-year period because it believes that this metric is a good indicator of the performance and shareholder value creation of a commercial bank. The adjustment for dividends allows the Committee to compare our performance to our peers which pay different amounts of dividends. The exclusion of OCI avoids changes in tangible book value not viewed as related to financial performance. Consistent with the terms of the award agreements for the restricted stock units and the 2016 Stock Plan, the Committee has the authority to adjust the calculation of the Growth in Tangible Book Value for certain items that are one time in nature. The Committee uses this authority to avoid either penalizing or rewarding executives for decisions which may adversely or positively affect long term growth of the Company. For example, when it determined the amounts earned with respect to awards made in January 2016 which vested in January 2019, the Committee adjusted the calculation of the Growth in Tangible Book Value for 2018 and determined that a negative adjustment would be made to reflect the unanticipated positive impact arising from the new lower corporate tax rates. For Mr. Robbins and the other NEOs, 45% of the aggregate dollar value of their equity awards granted for 2018 were in the form of performance RSUs to be earned based upon Growth in Tangible Book Value (each, a Growth in Tangible Book Value Performance Award). The Growth in Tangible Book Value Performance Awards are earned based on average annual Growth in Tangible Book Value during the years 2019 through 2021. Earned Growth in Tangible Book Value Performance Awards vest on February 1 after the end of the 3-year following Committee period certification of performance results. The number of shares that can be earned may range from 0% to 175% of the target, depending on performance (with linear interpolation between performance levels) as follows: performance Average Annual Growth in Tangible Book Value 2019-2021 Percentage of Target Shares Earned Below 10.35% 10.35% (Threshold) 12.0% (Target) 14.75% or higher (Maximum) None 50% 100% 175% At its February 2019 meeting, the Committee made the determination to increase the Maximum performance level from 13.65% to 14.75% to further motivate outperformance and the creation of shareholder value, with a corresponding increase to the Maximum payout from 150% to 175% of the target number of shares. Growth in Tangible Book Value Performance Awards are settled in common stock with any dividend equivalents accrued during the performance period paid in cash. The increase in Maximum was determined by the Committee with the advice of the Compensation Consultant after reviewing the Company’s multi-year strategic plan as well as peer company practices, which most commonly have a Maximum payout equal to 200% of target. The table below shows the status of the performance based equity awards subject to vesting based on Growth in Tangible Book Value for awards granted in 2016 (for 2015 performance), in 2017 (for 2016 performance) and in 2018 (for 2017 performance). Prior to 2018, the Threshold was 9.5%, the Target was 11% and the Maximum was 12.5%. In 2018 increases were made due to the Tax Act and the Threshold was 10.35%, the Target was 12% and the Maximum was 13.65%. Note that the status reported in the below tables for other than 2016 awards is not necessarily indicative of what will ultimately be paid out to our NEOs as these awards are based on cumulative performance results for the respective full three-year performance periods. The 2016 awards vested in January 2019 at above Target performance (124% payout) due to the three-year Growth in Tangible Book Value of 11.73%. Growth in Tangible Book Value Grant Date Performance in 2016 Performance in 2017 Performance in 2018 1/30/2016 12.51% 1/28/2017 1/24/2018 N/A N/A ____________ 11.63% 11.63% N/A 11.06% 11.06% 12.36%* Cumulative Perfor- mance Measured to Year End 2018 11.73% 11.35% 12.36%* * Excludes a negative adjustment for the Tax Act but with higher Target (12%), Max (13.65%) and Threshold (10.35%) levels. 2019 Proxy Statement 26 2018 RELATIVE TSR PERFORMANCE AWARDS For Mr. Robbins and the other NEOs, 30% of the aggregate dollar value of their target annual equity awards granted for 2018 was in the form of RSUs to be earned based on the Company’s relative TSR for the 3-year performance period from January 2019 through December 2021 against the KBW Index (a TSR Performance Award). The KBW Index is used as a broad indicator of Valley’s relative market performance. Earned TSR Performance Awards vest at the end of the 3- year performance period and will be settled on February 1 following the end of the three-year performance period. The number of shares that may be earned ranges from 0% to 150% of the target, depending on performance (with linear interpolation between performance levels) as follows: TSR Below 25th percentile of peer group 25th percentile of peer group (Threshold) 50th percentile of peer group (Target) 75th percentile of peer group (Maximum) Percentage of Target Shares Earned None 50% 100% 150% If the Company has a negative TSR on an absolute basis at the end of the three-year performance period, then the maximum number of shares that could be earned, regardless of the Company’s TSR relative to its peer group, would be 100% of target. TSR Performance Awards are settled in common stock with any dividend equivalents accrued during the performance period paid in cash. The Company’s cumulative TSR was 5.01% for the three- year period ended December 31, 2018. The percentile rank against Valley’s peer group was 20.22% for that time period. Accordingly, none of 2016 TSR Performance Awards vested in 2019, which was also the case for the 2015 TSR Performance Awards. PAY DETERMINATIONS Summary increased Mr. Robbins’ The Committee total direct compensation by $560,000, or approximately 23%, from last year. More specifically, the Committee made the following compensation determinations with respect to Mr. Robbins: • • • Increased his base salary by $100,000; Increased his non-equity incentive award $660,000 for 2018 from $450,000 for 2017; and to Increased his total equity award to $1,500,000 from $1,250,000 for 2017. The Committee believes that, as President and CEO, Mr. Robbins’ compensation, more than any other NEO, should reflect the overall performance of the Company rather than individual achievements. The Committee believes that the compensation determination that it made reflects the Company’s financial performance in 2018. The large increase in Mr. Robbins’ compensation was due to (i) his appointment to the position of President and CEO effective January 1, 2018, (ii) Mr. Robbins’ performance against his individual goals as set forth in his scorecard, (iii) the positive transformation the Company made in 2018 and continues to make, and (iv) the improvement in financial results in 2018 compared to 2017, after adjusting for the Tax Act boost to earnings. Rationale for Compensation Decisions In making the compensation decisions described below, the Committee considered the performance of the Company as a whole against goals as well as each NEO’s scorecard performance against his 2018 goals. The chart below provides a brief synopsis of the 2018 scorecard of the Company as a whole. Goal Growth Efficiency Profitability Risk Management Customer Focus Community Employee Empowerment Integration of USAB Discussion Performance Relative to Goal Commercial and consumer loans grew substantially Core deposits and residential mortgages grew modestly Several technology initiatives were launched X Other efficiency projects were not fully implemented Two major initiatives were successfully completed Mixed results in implementing FinTech and profitability measurement tools Credit quality and risk profile levels are acceptable Successful implementation of several major customer initiatives Branch transformation continues NEO and senior management community engagement expanded Several employee engagement initiatives were launched Clients and key employees were successfully retained Assimilation of culture needs to be completed The Committee assigned significant weight to the Company’s scorecard above in assessing Mr. Robbins’ performance. Mr. Robbins was viewed as having materially exceeded his individual goals and materially contributed to the successful goals in the Company’s scorecard above. In particular, the Committee considered Mr. Robbins’ leadership and his efforts to fundamentally transform the Company into a more competitive institution and the Committee believed that the Company made strong progress in 2018 toward its long term goals. The Committee also weighted heavily the Company’s 27 2019 Proxy Statement While the Target Non-Equity award is measured against the salary set at the beginning of the year, Mr. Bardusch’s salary was increased during the year in connection with his appointment as Chief Operating Officer. Equity Incentive Awards. As with non-equity incentive awards, the Committee sets total target equity incentive awards for each NEO. As described in more detail below, the equity awards are granted in the form of time-based awards (25%) and performance based awards (75%). The Committee in February 2019 made equity awards based on the performance of each executive in 2018. The table below shows the total equity awards for each NEO relative to target as well as the amount of the actual awards relative to target awards. 2018 Target Equity Incentive Awards Actual Equity Incentive Awards for 2018 2018 Equity Incentive Awards as a % of Target NEO Ira Robbins $ 1,250,000 $ 1,500,000 120% Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch 750,000 750,000 700,000 500,000 700,000 800,000 700,000 550,000 93 107 100 110 NEO Ira Robbins Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch Time Based Restricted Shares Value of Shares at Grant Date $ 35,954 16,779 19,175 16,779 13,183 375,000 175,000 200,000 175,000 137,500 improved net income and net interest income in 2018. These factors resulted in the Committee increasing Mr. Robbins’ base salary and setting his equity and non-equity awards at above target. The Committee’s decision to issue Mr. Iadanza equity and non-equity awards at above target was primarily based on the strong loan growth of the Company in 2018 and his strong performance against his scorecard. The other executives’ awards were at target which reflected their strong efforts and positive individual scorecards. Salaries. Mr. Robbins’ base salary for 2019 increased to $900,000 from $850,000. Other than Mr. Bardusch, who received a $25,000 increase, none of the other NEOs received any increase in base salary. Non-Equity Incentive Awards. For each NEO, the Committee sets a target non-equity incentive award calculated as a percentage of such executive’s base salary. For 2018, these targets were 70% for Mr. Robbins, 40% for Messrs. Eskow, Iadanza and Janis, and 35% for Mr. Bardusch. The actual non-equity incentive award for Mr. Robbins was higher than last year’s award and his target 2018 award by $210,000 and $65,000, respectively. The actual non-equity incentive award for Mr. Iadanza was higher than last year’s award and his target 2018 award by $75,000 and $85,000, respectively. The other NEOs received non-equity incentive awards that were generally consistent with both 2017 awards and target 2018 awards. The following table shows the non-equity incentive awards for each NEO, as well as the amount of the actual awards relative to target awards. Non-Equity Incentive Awards 2018 Target Non- Equity Awards Amount Non- Equity Incentive 2018 Target Non- Equity Awards as % of Base Salary 2018 Non- Equity Incentive Awards as % of Target 2018 Base Salary NEO Ira Robbins $ 850,000 $ 595,000 $ 660,000 70% 111% Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch 575,000 230,000 230,000 600,000 240,000 325,000 515,000 206,000 206,000 450,000 148,750 150,000 40 40 40 35 100 135 100 101 2019 Proxy Statement 28 The following table shows the performance based equity awards issued to our NEOs and the grant date fair value of each award. Of these awards, 60% are subject to vesting based on the attainment of Growth in Tangible Book Value and the remaining 40% are based on relative TSR. Performance Based Stock Awards at Target Performance Based Stock Awards at Maximum Named Executive Officer Based on TSR Based on Growth in TBV Total Based on TSR Based on Growth in TBV Total Ira Robbins Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch Other Compensation $ 450,000 $ 675,000 $ 1,125,000 $ 675,000 $ 1,181,250 $ 1,856,250 210,000 240,000 210,000 165,000 315,000 360,000 315,000 247,500 525,000 600,000 525,000 412,500 315,000 360,000 315,000 247,500 551,250 630,000 551,250 433,125 866,250 990,000 866,250 680,625 As of January 1, 2017, we established a deferred compensation plan for our NEOs and other selected executives. The deferral plan is intended to provide a retirement savings program for earnings above the limits of the qualified 401(k) Plan. The deferral plan has a similar employer match to the 401(k) Plan. Under the deferral plan, if for the calendar year the executive contributes the maximum to the 401(k) Plan, he or she may elect to defer up to 5% of his or her salary and bonus above the 401(k) limits and the Company will match the executive’s deferral amount up to the 5% limit. The deferral plan is described in more detail in “2018 Nonqualified Deferred Compensation - Deferral Compensation Plan”. We also provide perquisites to senior officers. We offer them either a taxable monthly allowance or the use of a company- owned automobile. The automobile facilitates NEO travel between our offices, to business meetings with customers and vendors and to investor presentations. NEOs may use the automobile for personal transportation. Personal use of the automobile results in taxable income to the NEO, and we include this in the amounts of income we report to the NEO and the Internal Revenue Service. Commencing in 2017, the Committee determined that new executives will receive a taxable car stipend, not use of a company owned car, and this may be applied to existing executives as their cars come up for replacement. We also support and encourage our NEOs to hold a membership in a local country club for which we pay admission costs, dues and other business related expenses. We find that the club membership is an effective means of obtaining business as it allows NEOs to interact with present and prospective customers informal environment. We require that any personal use of the country club facilities be paid by the NEO. The club membership dues are in our Summary Compensation Table in accordance with SEC guidance. We also provide severance agreements and change in control included as perquisites relaxed, in a agreements to our NEOs. The severance agreements provide benefits to our NEOs in the form of lump sum cash payments if they are terminated by Valley without cause. The terms of these agreements are described more fully in this Proxy Statement under “Other Potential Post-Employment Payments.” The change in control agreements provide for “double trigger” cash payments in the event of a change of control of Valley. These benefits provide the NEOs with income protection in the event employment is terminated without cause following a change in control, support our executive retention goals and encourage their independence and objectivity in considering potential change in control transactions. Effective for 2019 and thereafter, the Committee, based upon a recommendation from FW Cook, adopted a new program for our executive officers, including our NEOs regarding change in control benefits. Under this new program, change in control benefits are as follows: • • For the CEO, three times the sum of salary plus highest cash bonus in the last three years; For the other NEOs, two times (reduced from three times) the sum of salary plus highest cash bonus in the last three years. In 2019 Messrs. Robbins, Iadanza and Janis entered into new agreements to reduce their change in control benefits under the new program. Due to the nature of their existing agreements, the new agreements do not go into effect until January 1, 2023. Mr. Bardusch entered into a new agreement which became effective as of January 1, 2019 because his benefits were increased under the new program. Mr. Eskow’s existing change in control agreement remains unchanged because his agreement was previously grandfathered. Also, in connection with the new program, commencing in 2019 all equity awards will provide for accelerated vesting 29 2019 Proxy Statement INCOME TAX CONSIDERATIONS Section 162(m) of the Internal Revenue Code ("Section 162(m)") generally disallows a tax deduction to a public corporation for compensation over $1,000,000 paid in any fiscal year to a company's chief executive officer or other named executive officers (excluding the company's principal financial officer, in the case of tax years commencing before 2018). However, in the case of tax years commencing before 2018, the statute exempted qualifying performance based compensation if certain requirements were met. The Company’s 2016 Long-Term Stock Incentive Plan (the “2016 Stock Plan”) includes provisions for performance awards which were intended to allow these awards to be deductible under Section 162(m). Previously, the Company also implemented an Executive Incentive Plan which was designed to allow both time-based restricted stock and cash awards to be deductible under Section 162(m). the deduction from limit Section 162(m) was amended in December 2017 by the Tax Cuts and Jobs Act to eliminate the exemption for performance-based compensation (other than with respect to to certain "grandfathered" payments made pursuant arrangements entered into prior to November 2, 2017) and to expand the group of current and former executive officers who may be covered by the deduction limit under Section the Company's shareholder approved 162(m). While incentive plans were previously structured to provide that certain awards could be made in a manner intended to qualify for the performance-based compensation exemption, that exemption will no longer be available for future tax years to certain "grandfathered" (other arrangements as noted above). than with respect The Compensation Committee expects in the future to authorize compensation in excess of $1,000,000 to named executive officers that will not be deductible under Section 162(m). only upon a “double trigger”; i.e., a change in control followed by a qualifying termination of employment. A more detailed explanation of these and other matters are set forth in this Proxy Statement under “2019 Action to Reduce Certain Change in Control and Retirement Benefits” on page 38. OTHER PROGRAM FEATURES Hold Past Termination: If an NEO terminates employment for any reason and such termination results in the acceleration of equity awards, 50% of the shares of common stock underlying those equity awards must be held for a period of 18 months following the date of termination. Clawback: Under our “clawback” policy, if there is a material restatement of our financial statements, or material misconduct by the executive which harms the Company financially, the Committee may “clawback” unvested equity awards and unpaid cash bonus awards and in the event of intentional fraud or misconduct by the executive, previously paid or vested awards, as well as unvested awards may be clawed back. Our equity grants to executive officers include another “clawback” provision that allows recapture of the award for certain reasons within specified time periods. No Hedging or Pledging: Valley adopted a policy prohibiting executive officers from entering into hedging and pledging transactions involving Valley’s common stock. The Board believes that such transactions, which have the effect of mitigating the risks and rewards of ownership, may result in the interests of management and shareholders of Valley being misaligned. Stock Ownership: To better align the interests of our NEOs with those of our common shareholders, we require each NEO to own a minimum number of shares of our common stock. Officers are given a five-year window to meet the requirements from the year of their appointment to the position. The Compensation Committee increased the ownership requirements this year. The table below shows the minimum holdings required of each NEO. Shares held by spouse and minor children are counted against the requirement, as well as unvested time vesting restricted stock units. NEO Minimum Stock Ownership Requirements Title CEO Senior EVP EVP Minimum Dollar Value of Required Common Stock Ownership 5 times base salary 3 times base salary 2 times base salary 2019 Proxy Statement 30 COMPENSATION COMMITTEE REPORT AND CERTIFICATION The Compensation and Human Resources Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on that review and those discussions, it has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement. Gerald Korde, Committee Chairman Andrew B. Abramson Eric P. Edelstein Michael L. LaRusso Marc J. Lenner Suresh L. Sani Jennifer W. Steans EQUITY COMPENSATION PLAN INFORMATION The following table provides information regarding our equity compensation plan as of December 31, 2018. Weighted average exercise price on out- standing options and rights Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in the first column) Number of shares to be issued upon exercise of outstanding options and rights* 2,852,300 $ 6.86 5,476,751 — 2,852,300 $ — 6.86 — 5,476,751 Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total ____________ * Amount includes 1,051,787 options outstanding with a weighted average exercise price of $6.86; 1,800,513 performance-based restricted stock units measured at maximum vesting at December 31, 2018. Amount does not include 1,720,968 outstanding restricted shares and 178,544 outstanding restricted stock units acquired from the merger with USAB on January 1, 2018. 31 2019 Proxy Statement SUMMARY COMPENSATION TABLE The following table summarizes all compensation in 2018, 2017 and 2016 earned by our chief executive officer, chief financial officer and the three most highly paid executive officers (NEOs) for services performed in all capacities for Valley and its subsidiaries. Name and Principal Position Year Salary Stock Awards(1) Change in Pension Value and Non- Qualified Deferred Compen- sation Earnings(3) Non-Equity Incentive Plan Compen- sation(2) All Other Compen- sation(4) Total Ira Robbins 2018 $ 850,000 $ 1,468,505 $ 0 $ 206,414 $ President and CEO Alan D. Eskow Senior EVP, CFO and Corporate Secretary Thomas A. Iadanza Senior EVP and Chief Banking Officer Ronald H. Janis Senior EVP and General Counsel 2017 2016 2018 2017 2016 2018 2018 2017 750,000 525,000 575,000 575,000 545,750 600,000 1,250,000 750,000 685,306 675,000 675,000 783,198 660,000 450,000 250,000 230,000 250,000 200,000 325,000 515,000 500,000 685,306 800,000 206,000 250,000 Robert J. Bardusch 2018 450,000 538,447 150,000 Senior EVP and COO ___________ 80,405 45,718 0 15,279 0 0 0 0 0 142,745 77,757 156,210 156,701 118,714 106,251 3,184,919 2,673,150 1,648,475 1,646,516 1,671,980 1,539,464 1,814,449 90,006 50,131 1,496,312 1,600,131 44,170 1,182,617 (1) Stock awards reported in 2018 reflect the grant date fair value of the restricted stock unit and performance based restricted stock unit awards under Accounting Standards Codification Topic No. 718, Compensation-Stock Compensation ("ASC Topic 718") granted by the Compensation Committee based on 2018 results. The grant date fair value of time based restricted stock unit awards reported in this column for each of our NEOs was as follows: Mr. Robbins, $375,000, Mr. Eskow, $175,000; Mr. Iadanza, $200,000; Mr. Janis, $175,000 and Mr. Bardusch $137,500. Restrictions on time based restricted stock unit awards lapse at the rate of 33% per year. The grant date fair value of performance based restricted stock units reported in this column for each of our NEOs is the target value. Restrictions on performance based awards lapse based on achievement of the performance goals set forth in the performance restricted stock unit award agreement. Any shares earned based on achievement of the specific performance goals vest on February 1st following the three-year performance period. The value on grant date of the performance based restricted stock unit awards based upon performance goal achievement at target and maximum would be as follows: Name Target Value at Grant Date FV Maximum Value at Grant Date Ira Robbins $ 1,093,505 $ Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch 510,306 583,198 510,306 400,947 1,809,015 844,215 964,797 844,215 663,297 (2) For 2018, represents the non-equity incentive award paid in cash in 2019 based on 2018 performance. Non-Equity awards earned for the years ending before 2018 were distributed as follows: 50% of the non-equity award was paid on award and the remaining balance was paid in eight equal quarterly cash installments. (3) Represents the change in the present value of pension benefits from year to year, taking into account the age of each NEO, a present value factor, and interest discount factor based on their remaining time until retirement. The annual increase in present value of Mr. Robbins and Mr. Eskow accumulated benefits as of December 31, 2018 was a net decrease of $62,532 and $202,373 from the present value reported as of December 31, 2017, respectively, therefore, the amount reported for 2018 is zero. The decrease is attributable to the increase in the discount rate from 3.69% to 4.30%. (4) All other compensation includes perquisites and other personal benefits paid in 2018 including automobile, accrued dividends on nonvested restricted stock and restricted stock units, 401(k) contribution payments, 401(k) SERP contribution payments by Valley (including interest earned) and group term life insurance and club dues (see table below). 2019 Proxy Statement 32 Name Auto(1) Accrued Dividends Earned on Nonvested Stock Awards(2) 401(k)(3) DCP(4) GTL(5) Club Dues Other Total Ira Robbins $ 7,704 $ 94,626 $ 13,750 $ 56,424 $ 1,140 $ 28,924 $ 3,846 $ Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch ___________ 14,484 8,005 21,150 5,663 72,612 45,333 21,003 19,512 13,750 13,750 13,750 13,750 30,963 31,149 24,527 0 20,632 7,524 7,276 1,055 0 0 0 0 3,769 490 2,300 4,190 206,414 156,210 106,251 90,006 44,170 (1) Auto represents the cost to the Company of the portion of personal use of a company-owned vehicle by the NEO and, parking (if applicable), during 2018. (2) Accrued dividends on non-vested time and performance based restricted stock units until such time as the vesting takes place. Dividends on performance based units are accrued at target and are only paid to the extent the underlying award vests. (3) After one year of employment, the Company provides to all full time employees in the plan including our NEOs, up to 100% of the first 4% of pay contributed and 50% of the next 2% of pay contributed. An employee must save at least 6% to get the full match (5%) under the 401(k) Plan. (4) Effective January 1, 2017, Valley established the Valley National Bancorp Deferred Compensation Plan for the benefit of certain eligible employees, see Deferred Compensation Plan under the 2018 Nonqualified Deferred Compensation below. If the NEO utilizes the 401(k) to the maximum, for amounts over the maximum compensation amount allowed under the 401(k), the NEO may elect to defer 5% of the excess and the Company will match that deferral compensation. (5) GTL or Group Term Life Insurance represents the taxable amount for over $50,000 of life insurance for benefits equal to two times salary. This benefit is provided to all full time employees. 33 2019 Proxy Statement The following table represents the grants of awards to the NEOs in 2019 for 2018 performance made under the 2016 Stock Plan. GRANTS OF PLAN-BASED AWARDS Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) Estimated Possible Payouts Under Equity Incentive Plan Awards (#)(1) All Other Stock Awards: Number of Shares of Stock(1) Grant Date Fair Value of Stock Awards(2) Threshold Target Maximum Threshold Target Maximum $ 595,000 $ 1,190,000 53,931 107,862 177,973 $ 1,093,505 230,000 460,000 25,168 50,336 83,055 240,000 480,000 28,763 57,526 94,918 206,000 412,000 25,168 50,336 83,055 148,750 297,500 19,775 39,549 65,256 35,954 16,779 19,175 16,779 13,183 375,000 510,306 175,000 583,198 200,000 510,306 175,000 400,947 137,500 Name Ira Robbins Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch ___________ Grant Date 2/12/2019 2/12/2019 2/12/2019 2/12/2019 2/12/2019 2/12/2019 2/12/2019 2/12/2019 2/12/2019 2/12/2019 (1) The Compensation Committee set targets awards for 2018 as follows: Mr. Robbins as CEO 70% of salary; Messrs. Eskow, Iadanza and Janis 40% of salary; and Mr. Bardusch 35% of salary. Awards were paid based upon achievement of a scorecard of goals. See "Compensation Discussion and Analysis." The Compensation Committee awarded each NEO the cash amount reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table for 2018. The Compensation Committee also granted each NEO an award of time-based restricted stock units under the 2016 Stock Plan (reported above under “All Other Stock Awards: Number of Shares of Stock”). The Compensation Committee also made grants to the NEOs under the 2016 Stock Plan in the form of performance based restricted stock units (reported above under “Estimated Possible Payouts Under Equity Incentive Plan Awards”). The threshold amounts reported above for the performance based restricted stock unit awards represent the number of shares that would be earned based on achievement of threshold amounts under both the growth in tangible book value and relative TSR performance metrics measured over the cumulative three-year performance period. See our Compensation Discussion and Analysis for information regarding these time-based restricted stock units and performance based restricted stock unit awards. (2) See grant date fair value details under footnote (1) of the Summary Compensation Table above. Restrictions on performance based awards lapse based on achievement of the performance goals set forth in the performance restricted stock unit award agreement. Any shares earned based on achievement of the specific performance goals vest on February 1st following the completion of the three-year performance period. Restrictions on time based restricted stock unit awards lapse at the rate of 33% per year. Dividends are credited on restricted stock and restricted stock units at the same time and in the same amount as dividends paid to all other common shareholders. Credited dividends are accumulated and paid upon vesting, and are subject to the same time based and performance based restrictions as the underlying restricted stock and units. Upon a “change in control,” as defined in that plan, all restrictions on shares of time based restricted stock will lapse and restrictions on shares of performance based restricted stock units will lapse at target. However, changes were made to grants issued in 2019 to implement "double trigger" vesting. As a result, vesting is no longer automatic upon a change in control. See below "2019 Action to Reduce Certain Change in Control and Retirement Benefits." The per share grant date fair values under ASC Topic 718 of each share of time based restricted stock unit and performance based restricted stock units (with no market condition vesting requirement) was $10.43 per share awarded on 2/12/2019. Performance based restricted stock units with market condition vesting requirements (i.e., TSR) awarded on 2/12/2019 had a $9.70 per share grant date fair value. 2019 Proxy Statement 34 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table represents stock option, restricted stock and restricted stock unit awards outstanding for each NEO as of December 31, 2018 (including February 12, 2019 awards which were based on 2018 performance). All awards have been adjusted for stock dividends and stock splits, as applicable. Option Awards(1) Stock Awards(2) Number of Securities Underlying Unexercised Options Exercisable Number of Securities Underlying Unexercised Options Unexercisable Option Exercise Price Option Expiration Date Number of Shares or Units of Stock That Have Not Vested Market Value of Shares or Units of Stock That Have Not Vested(3) Name Grant Date Ira Robbins 2/12/2019 2/1/2018 1/24/2017 1/29/2016 1/27/2016 Total awards (#) 0 0 Equity Incentive Plan Awards: Number of Unearned Shares or Units That Have Not Vested Equity Incentive Plan Awards: Market Value of Unearned Shares or Units That Have Not Vested(3) 177,973 $ 1,580,400 99,642 66,431 77,115 884,821 589,907 684,781 421,161 $ 3,739,909 83,055 $ 53,700 59,787 79,319 737,528 476,856 530,909 704,353 35,954 $ 33,015 14,762 8,629 92,360 $ 16,779 $ 17,900 13,286 319,272 293,173 131,087 76,626 820,158 148,998 158,952 117,980 Alan D. Eskow 2/12/2019 2/1/2018 1/24/2017 1/29/2016 1/27/2016 11/15/2010 Total awards (#) Market value of in-the-money options ($) (3) Thomas A. Iadanza Total awards (#) Ronald H. Janis Total awards (#) 2/12/2019 2/1/2018 1/24/2017 1/29/2016 1/27/2016 2/12/2019 2/1/2018 Robert J. Bardusch 2/12/2019 2/1/2018 1/24/2017 Total awards (#) ____________ 21,170 21,170 0 0 0 0 0 $ 11.91 11/15/2020 8,876 78,819 0 0 0 0 0 56,841 $ 504,749 275,861 $ 2,449,646 19,175 $ 17,900 6,495 3,629 47,199 $ 16,779 $ 15,911 32,690 $ 170,274 158,952 57,676 32,226 419,128 148,998 141,290 290,288 94,918 $ 53,700 28,565 32,433 842,872 476,856 253,657 288,005 209,616 $ 1,861,390 83,055 $ 47,733 737,528 423,869 130,788 $ 1,161,397 13,183 $ 117,065 65,256 $ 9,547 3,838 84,777 34,081 29,832 16,608 26,568 $ 235,923 111,696 $ 579,473 264,908 147,479 991,860 (1) All stock option awards are currently exercisable, however, the exercise prices may be higher than Valley's market price. (2) Restrictions on time based restricted stock and restricted stock unit awards (reported above under “Number of Shares or Units of Stock That Have Not Vested”) lapse at the rate of 33% per year commencing with the first year after of the date of grant. Restrictions on performance based restricted stock unit awards (reported above under “Equity Incentive Plan Awards: Number of Unearned Shares or Units That Have Not Vested”) lapse based on achievement of the performance goals set forth in the award agreement. Dividends are credited on these awards at the same time and in the same amount as dividends paid to all other common shareholders. Credited dividends are accumulated and paid upon vesting, and are subject to the same time based or performance based restrictions as the underlying restricted stock unit. The award amount in the "Equity Incentive Plan Awards: Number of Unearned Shares or Units That Have Not Vested" column represents the number of shares that may be earned based on maximum performance achievement over the cumulative three-year performance period with respect to both the growth in tangible book value and total shareholder return performance metrics, for the 1/29/2016, 1/24/2017 award, 2/1/2018 award and 2/12/2019 award. (3) At per share closing market price of $8.88 as of December 31, 2018. 35 2019 Proxy Statement The following table shows the restricted stock and restricted stock units held by our NEOs that vested in 2018, as well as performance-based awards which vested in early 2019 based on the three-year performance period ended December 31, 2018, and the value realized upon vesting. None of our NEOs exercised any options in 2018. 2018 STOCK VESTED Name Ira Robbins Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch ____________ Stock Awards Number of Shares Acquired Upon Vesting (#) Value Realized on Vesting ($)(*) 67,592 $ 73,023 29,773 0 1,919 746,697 812,895 331,063 0 23,527 * The value realized on vesting of restricted stock represents the aggregate dollar amount realized upon vesting by multiplying the number of shares of restricted stock/units that vested by the fair market value of the underlying shares on the vesting date. Included above is the vesting of the final portion of the performance-based awards granted on 1/29/2016 for Mr. Robbins (47,938 shares), Mr. Eskow (49,308 shares), and Mr. Iadanza (20,163 shares). These shares vested based on achievement of the performance goals set forth in the award agreement based on the applicable growth in tangible book value conditions measured over the three-year performance period ending December 31, 2018. Dividends are credited on these awards at the same time and in the same amount as dividends paid to all other common shareholders. Credited dividends are accumulated and paid upon vesting, and are subject to the same time based or performance based restrictions as the underlying restricted stock. The performance based awards granted on 1/29/2016 subject to vesting based on relative TSR performance lapsed without any vesting. 2018 PENSION BENEFITS PENSION PLAN Valley maintains a non-contributory, defined benefit pension plan (the "Pension Plan") which was frozen effective January 1, 2014. The annual retirement benefit under the Pension Plan generally was (i) 0.85% of the employee’s average final compensation up to the employee’s average social security wage base plus (ii) 1.15% of the employee’s average final compensation in excess of the employee’s average social security wage base up to the annual compensation limit under the law, (iii) multiplied by the years of credited service (up to a maximum of 35 years). An employee’s “average final compensation” is the employee’s highest consecutive five- year average of the employee’s annual salary. Employees hired on or after July 1, 2011, including Mr. Iadanza, Mr. Janis and Mr. Bardusch, are not eligible to participate in the Pension Plan. As a result of amendments to the Pension Plan adopted in 2013, participants will not accrue further benefits and their pension benefits will be determined based on their compensation and service up to December 31, 2013. BENEFIT EQUALIZATION PLAN Valley maintains a Benefit Equalization Plan ("BEP") which provides retirement benefits in excess of the amounts payable from the Pension Plan for certain highly compensated executive officers, which was frozen effective January 1, 2014. Benefits are generally determined as follows: (i) the benefit calculated under Valley pension plan formula without regard to the limits on recognized compensation and maximum benefits payable from a qualified defined benefit plan, minus (ii) the individual’s pension plan benefit. Mr. Robbins and Mr. Eskow are participants in the BEP. Executives hired on or after July 1, 2011 including Mr. Iadanza, Mr. Janis and Mr. Bardusch, are not participants in the BEP. As a result of amendments to the BEP adopted in 2013, participants will not accrue further benefits and their benefits will be determined based on their compensation for service and years of service up to December 31, 2013. Benefits under the BEP will not increase for any pay or service earned after such date except participants may be granted up to three additional years of service if employment is terminated in the event of a change in control. The following table shows each pension plan that the NEO participates in, the number of years of credited service and the present value of accumulated benefits as of December 31, 2018. Name Ira Robbins Plan Name VNB Pension Plan VNB BEP Alan D. Eskow VNB Pension Plan VNB BEP # of Years Credited Service 16 16 22 22 Present Value of Accu- mulated Benefits ($) $ 389,386 159,796 705,739 1,474,123 Present values of the accumulated benefits under the BEP and Pension Plan were determined as of January 1, 2019 based upon the accrued benefits under each plan as of December 31, 2018 and valued in accordance with the following principal actuarial assumptions: (i) post- retirement mortality in accordance with the RP-2014 White Collar Tables, rolled back to 2006, projected generationally with Scale MP-2018, (ii) interest at an annual effective rate 2019 Proxy Statement 36 of 4.30% compounded annually, (iii) retirement at the earliest age (subject to a minimum age of 55 and a maximum age equal to the greater of 65 and the participant’s age on January 1, 2019) at which unreduced benefits would be payable assuming continuation of employment and (iv) for the BEP payment is based on an election by the participant and for the Pension Plan it is assumed that 50% of participants will elect a joint and two-thirds survivor annuity and 50% will elect a straight life annuity. EARLY RETIREMENT BENEFITS An NEO’s accrued benefits under the Pension Plan and BEP are payable at age 65, the individual’s normal retirement age. If an executive terminates employment after both attainment of age 55 and completion of 10 years of service, he is eligible for early retirement. Upon early retirement, an executive may elect to receive his accrued benefit unreduced at age 65 or, alternatively, to receive a reduced benefit commencing on the first day of any month following termination of employment and prior to age 65. The amount of reduction is 0.5% for each of the first 60 months and 0.25% for each of the next 60 months that benefits commence prior to the executive’s normal retirement date (resulting in a 45% reduction at age 55, the earliest retirement age under the plans). However, there is no reduction for early retirement prior to the normal retirement date if the sum of the executive’s age and years of vested service at the benefit commencement date equals or exceeds 80. LATE RETIREMENT BENEFITS Effective December 31, 2013, the BEP was amended to specify the manner in which actuarial increases would be applied to benefits for executives postponing retirement beyond April 1st of the year in which the executive reaches age 70 1/2. 401(k) PLAN Under the 401(k) Plan, Valley matches the first four percent (4%) of salary contributed by an employee each pay period, and 50% of the next 2% of salary contributed, for a maximum matching contribution of five percent (5%), with an annual limit of $13,750 in 2018. 2018 NONQUALIFIED DEFERRED COMPENSATION DEFERRED COMPENSATION PLAN Valley established the Valley National Bancorp Deferred Compensation Plan (the "Plan") for the benefit of certain eligible employees in 2017. The Plan is maintained for the purpose of providing deferred compensation for selected employees participating the 401(k) Plan whose in contributions are limited as a result of the limitations on the amount of compensation which can be taken into account under the 401(k) Plan. Each of our NEOs participates in the Plan. Participant Deferral Contributions. Each participant in the Plan is permitted to defer, for that calendar year, up to five percent (5%) of the portion of the participant’s salary and cash bonus above the limit in effect for that calendar year under the Company's 401(k) Plan. The Compensation Committee has the authority to change the deferral percentage, but any such change only applies to calendar the years beginning after such action Compensation Committee. No deferrals may be taken until a participant’s salary and bonus for such calendar year is in excess of the limit in effect under the Company's 401(k) Plan. taken by is Company Matching Contributions. Each calendar year, it is expected the Company will match 100% of a participant’s deferral contributions under the Plan that do not exceed five percent (5%) of the participant’s salary and bonus. A Participant vests in the Company Matching Contribution after two years of participation in the Plan. Earnings on Deferrals. Participants’ deferral contributions and company matching contributions will be adjusted at the end of each calendar year by an amount equal to the one- month LIBOR average for the applicable calendar year plus 200 basis points, multiplied by the balance in the participant’s notional account at the end of the calendar year. The Compensation Committee may adjust the earnings rate prospectively. Amount, Form and Time of Payment. The amount payable to the participant will equal the amount credited to the participant’s account as of his or her separation from service with Valley, net of all applicable employment and income tax withholdings. The benefit will be paid to the participant in a single lump sum within thirty days following the earlier of the participant’s separation from service with Valley or the date on which a change in control occurs, and will represent a complete discharge of any obligation under the Plan. 37 2019 Proxy Statement The following table shows each NEO's deferred compensation plan activity during 2018 and in aggregate: Name NEO Contribution in 2018 Valley's Contribution in 2018* Aggregate Earnings in 2018* Aggregate Withdrawals/ Distributions Aggregate Balance at 12/31/2018 Ira Robbins Alan D. Eskow Thomas A. Iadanza Ronald H. Janis Robert J. Bardusch _________ $ 50,481 $ 50,481 $ 27,500 27,981 21,884 0 27,500 27,981 21,884 0 5,943 3,463 3,168 2,643 0 0 $ 153,722 0 0 0 0 89,564 81,954 68,343 0 * Included in the Summary Compensation Table above, under "All Other Compensation" for 2018. OTHER POTENTIAL POST-EMPLOYMENT PAYMENTS EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS Valley and the Bank are parties to severance and change in control arrangements with Messrs. Robbins, Eskow, Iadanza, Janis and Bardusch. The following discussion describes the agreements currently in place with each of our named executive officers. 2019 ACTION TO REDUCE CERTAIN CHANGE IN CONTROL AND RETIREMENT BENEFITS Based upon a recommendation from FW Cook concerning current practices, the Compensation Committee endorsed a new program to bring consistency to change in control agreements for executives of the Company. The impact of the new program was to reduce potential benefits for many of the Company’s executives. Under the new program, change in control severance benefits for executives will be as follows: • Chief Executive Officer (CEO): Three times (3x) (i) salary, and (ii) highest cash bonus in the last three (3) years. • Senior Executive Vice Presidents (SEVP): Two times (2x) (i) salary, and (ii) highest cash bonus in the last three (3) years. • Executive Vice Presidents (EVP): Two times (2x) salary, plus a pro-rata bonus for year of termination. • Under all agreements the executive also receives a lump sum payment equal to the salary multiplier (3x or 2x) multiplied by his or her COBRA premium minus his or her required employee contribution. • Internal Revenue Code 280G imposes a 20% excise tax on an individual receiving “excess parachute payments” and disallows a deduction for the company paying excess parachute payments above a base level. To deal with tax issues, the change in 2019 Proxy Statement 38 control agreements provide for “net best” tax treatment. Under this treatment the executive’s severance benefits are cut back to eliminate any excess parachute payments unless the executive would end up with more after-tax income by paying the 20% excise tax. In the latter case, severance benefits are not cut back but the executive pays the 20% excise tax in addition to all federal and state income taxes. Previously, severance benefits under change in control agreements were inconsistent based upon title and included a life insurance benefit that has been eliminated. Under this new program, in 2019 Mr. Robbins, Mr. Iadanza and Mr. Janis entered into agreements to reduce their benefits by replacing existing change in control agreements with new agreements effective January 1, 2023. The delayed effective date for the reduced benefits was caused by the rolling three- year term in the existing agreements. Because his existing benefits were less than those provided for in the new program, Mr. Bardusch entered into a change in control agreement with increased benefits effective January 2019. Mr. Eskow's existing change in control agreement remains in effect. The change in control agreements contain the same terms as the Company’s prior change in control agreements except with the exception of the new program terms described above. As an additional part of the Compensation Committee’s new program, equity awards granted in 2019 and thereafter require a double trigger to vest upon a change in control. Currently, the vesting of equity awards accelerates upon a change in control. Under the new program, there will not be an acceleration of vesting upon a change in control; equity awards will accelerate only if within two years after a change in control, the employee dies or there is a qualifying termination. A qualifying termination is (i) a termination without cause or, (ii) or a resignation for good reason under a change in control agreement or the change in control severance plan. Furthermore, vesting of equity on a qualified retirement was reduced. Starting with awards granted in 2019, upon a qualified retirement, equity awards outstanding less than one year will vest pro rata based upon the number of full months that the award was outstanding divided by twelve. Awards outstanding more than one year will vest in full on retirement. Prior to 2019, awards vested in full on a qualified retirement. The description of benefits below describes the agreements that were in effect at December 31, 2018, as do the amounts set forth in the tables below. SEVERANCE AGREEMENT PROVISIONS In the event of termination of employment without cause, the severance agreement with Mr. Eskow provides for a lump sum payment equal to twelve months of base salary as in effect on the date of termination, plus a fraction of the NEO’s most recent annual cash bonus, which is equal to: (a) the number of months which have elapsed prior to termination in the current calendar year divided by (b) 12. The severance agreements of Messrs. Robbins, Iadanza, and Janis, provide, in the event of termination of employment without cause, a lump sum payment equal to twenty four months of base salary as in effect on the date of termination, plus the sum of one times his most recent annual cash bonus and a fraction of his most recent annual cash bonus calculated in the same manner referenced above. No severance payment is made under the severance agreements if the NEO receives severance under a change in control agreement (described below). Under Mr. Janis' severance agreement, his equity awards would also vest as if he retired. For the purpose of the severance agreements, “cause” means willful and continued failure to perform employment duties after written notice specifying the failure, willful misconduct causing material injury to us that continues after written notice specifying the misconduct, or a criminal conviction (other than a traffic violation), drug abuse or, after a written warning, alcohol abuse or excessive absence for reasons other than illness. Under the severance agreements with Messrs. Robbins, Eskow, Iadanza and Janis, we provide the NEOs with a lump sum cash payment in place of medical benefits. The payment is 125% of total monthly premium payments under COBRA reduced by the amount of the employee contribution normally made for the health-related benefits the NEO was receiving at termination of employment, multiplied by 36. COBRA provides temporary continuation of health coverage at group rates after termination of employment. Under the severance agreements with these NEOs, we also provide a lump sum life insurance benefit equal to 125% of our share of the premium for three years of coverage, based on the coverage and rates in effect on the date of termination. Under these agreements, each NEO is required to keep confidential all confidential information that he obtained in the course of his employment with us and is also restricted from competing with us in certain states during the term of his employment with us and for a period after termination of his employment. CHANGE IN CONTROL ("CIC") AGREEMENT PROVISIONS Each NEO is a party to a CIC Agreement. If one of these NEOs is terminated without cause or resigns for good reason following a CIC during the contract period (which is defined as the period beginning on the day prior to the CIC and ending on the earlier of (i) the third anniversary of the CIC or (ii) the NEO’s death), the NEO would receive three times the highest annual salary and non-equity incentive received in the three years prior to the CIC (one times for Mr. Bardusch). The NEOs would also receive payments for medical and life insurance identical to the benefits described above under “Severance Agreement Provisions.” Certain of the CIC Agreements also provide for a lump sum cash payment upon termination due to death or disability during the contract period equal to, for Mr. Eskow, the highest annual salary paid to him during any calendar year in the three years preceding the CIC, and for Mr. Robbins, Mr. Iadanza and Mr. Janis, one-twelfth of this amount. Payments under the CIC Agreements are triggered by the specified termination events following a “change in control.” The events defined in the agreements as a change in control are: • Outsider stock accumulation. We learn, or one of our subsidiaries learns, that a person or business entity has acquired 25% or more of Valley’s common stock, and that person or entity is neither our “affiliate” (meaning someone who is controlled by, or under common control with, Valley) nor one of our employee benefit plans; • Outsider tender/exchange offer. The first purchase of our common stock is made under a tender offer or exchange offer by a person or entity that is neither our “affiliate” nor one of our employee benefit plans; • Outsider subsidiary stock accumulation. The sale of our common stock to a person or entity that is neither our “affiliate” nor one of our employee benefit plans that results in the person or entity owning more than 50% of the Bank’s common stock; • Business combination transaction. We complete a merger or consolidation with another company, or we become another company’s subsidiary (meaning that the other company owns at least 50% of our common stock), unless, after the happening of either event, 60% or more of the directors of the merged company, or of our new parent company, are people 39 2019 Proxy Statement who were serving as our directors on the day before the first public announcement about the event; • Asset sale. We sell or otherwise dispose of all or substantially all of our assets or the Bank’s assets; • Dissolution/Liquidation. We adopt a plan of dissolution or liquidation; and changes • Board turnover. We experience a substantial and rapid turnover in the membership of our Board of in board Directors. This means membership occurring within any period of two consecutive years that result in 40% or more of our board members not being “continuing directors.” A “continuing director” is a board member who was serving as a director at the beginning of the two- year period, or one who was nominated or elected by the vote of at least 2/3 of the “continuing directors” who were serving at the time of his/her nomination or election. “Cause” for termination of an NEO’s employment under the CIC Agreements means his willful and continued failure to perform employment duties, willful misconduct in office causing material injury to the Company, a criminal conviction, drug or alcohol abuse or excessive absence. “Good reason” for a NEO’s voluntary termination of employment under the CIC Agreements means any of the following actions by us or our successor: • We change the NEO’s employment duties to include duties not in keeping with his position within Valley or the Bank prior to the change in control; • We demote the NEO or reduce his authority; PARACHUTE PAYMENT REIMBURSEMENT Mr. Eskow is entitled to receive a tax “gross-up” payment in the event that payments to him following a change in control of Valley exceed the limit provided under Section 280G of the Internal Revenue Code. Since the execution of the change in control agreement of Mr. Eskow, Valley adopted a policy prohibiting tax “gross-up” payments. The tax “gross-up” payment provision was in effect prior to adoption of such policy and thus remain in effect. Mr. Robbins, Mr. Iadanza, Mr. Janis and Mr. Bardusch are not entitled to receive tax gross-up payments under their agreements. Mr. Robbins and Mr. Iadanza have a net best provision in change in control agreement whereby they would be entitled to the greater after- tax benefit of either: (i) his full change in their control payment and benefits less any 280G excise tax, the payment of which would be his responsibility, or (ii) his change in control payment and benefits cut back to the amount that would not result in 280G excise tax. Mr. Janis and Mr. Bardusch have a cut back provision which would bring his total 280G parachute payment to the Section 280G limit. PENSION PLAN PAYMENTS The present value of the benefits to be paid to Messrs. Eskow and Robbins following termination of employment over his estimated lifetime is set forth in the table below. Each such NEO receives three years additional service under the BEP upon termination without cause or resignation for good reason occurring during their change in control contract period. Present values of the BEP and Pension Plan were determined as of January 1, 2019 based on RP-2014 White Collar Tables projected generationally with Scale MP-2015, and interest at an annual effective rate of 4.30% compounded annually for the pension plan and the BEP. • We reduce the NEO’s annual base compensation; EQUITY AWARD ACCELERATION • We terminate the NEO’s participation in any non- equity incentive plan in which the NEO participated before the change in control, or we terminate any employee benefit plan the NEO participated before the change in control without providing another plan that confers benefits similar to the terminated plan; in which • We relocate the NEO to a new employment location that is outside of New Jersey or more than 25 miles away from his former location, or in the case of Mr. Janis, outside of 10 miles of his New York office; • We fail to get the person or entity who took control of Valley to assume our obligations under the NEO’s CIC Agreement; and • We terminate the NEO’s employment before the end of the contract period, without complying with all the provisions in the NEO’s CIC Agreement. 2019 Proxy Statement 40 In the event of a change in control or termination of employment as a result of death, all restrictions on an NEO’s equity awards will immediately lapse (for performance based restricted stock units, all restrictions will lapse with respect to the target amount of shares). In the case of retirement (as defined), all restrictions will lapse on outstanding time based restricted stock and stock unit awards, and performance based restricted stock unit awards will remain outstanding and vest in accordance with the original vesting schedule based on actual performance. For awards made under the 2016 and 2009 Long-Term Stock Incentive Plan, a minimum of 50% of any accelerated equity award must be retained by the NEO for a period of 18 months or in some cases 24 months. Upon termination of employment for any other reason (other than termination due to disability which may be treated differently), NEOs will forfeit all shares whose restrictions have not lapsed unless otherwise provided. SEVERANCE BENEFITS TABLE The table set forth below illustrates the severance amounts and benefits that would be paid to each of the current NEOs, if he had terminated employment with the Bank on December 31, 2018, the last business day of the most recently completed fiscal year, under each of the following retirement or termination circumstances: (i) death; (ii) retirement or resignation; (iii) dismissal without cause; and (iv) dismissal without cause or resignation for good reason following a change in control of Valley on December 31, 2018. Upon dismissal for cause, the NEOs would receive only their salary through the date of termination and their vested BEP and pension benefits. These payments are considered estimates as of specific dates as they contain some assumptions regarding stock price, life expectancy, salary and non-incentive compensation amounts and income tax rates and laws. Executive Benefits and Payments Upon Termination Death Retirement or Resignation Dismissal Without Cause (3) Dismissal without Cause or Resignation for Good Reason (Following a Change in Control) Ira Robbins Amounts payable in full on indicated date of termination: Severance – Salary component Severance – Non-equity incentive Restricted stock awards Performance restricted stock unit awards (1) Deferred compensation Welfare benefits lump sum payment Automobile & club dues (2) “Parachute Penalty” tax gross-up Sub Total $ Present value of annuities commencing on indicated date of termination: Benefit equalization plan Pension plan $ $ Total Alan D. Eskow Amounts payable in full on indicated date of termination: Severance – Salary component Severance – Non-equity incentive Restricted stock awards Performance restricted stock unit awards (1) Deferred compensation Welfare benefits lump sum payment Automobile & club dues (2) “Parachute Penalty” tax gross-up Sub Total Present value of annuities commencing on indicated date of termination: Benefit equalization plan (3) Pension plan $ $ Total Thomas A. Iadanza Amounts payable in full on indicated date of termination: Severance – Salary component Severance – Non-equity incentive Restricted stock awards Performance restricted stock unit awards (1) Deferred compensation Welfare benefits lump sum payment Automobile & club dues (2) “Parachute Penalty” tax gross-up Sub Total Present value of annuities commencing on indicated date of termination: Benefit equalization plan Pension plan Total $ 0 $ 0 500,888 983,149 153,722 63,145 0 N/A 1,700,904 0 233,911 1,934,815 $ 0 $ 0 355,748 671,843 89,564 11,250 0 N/A 1,128,405 1,518,684 725,918 3,373,007 $ 0 $ 0 248,859 487,006 81,954 53,769 0 N/A 871,588 N/A N/A 871,588 $ 0 $ 0 0 0 153,722 0 0 N/A 153,722 0 233,911 387,633 $ 0 $ 0 355,748 671,843 89,564 0 0 N/A 1,117,155 1,518,684 725,918 3,361,757 $ 0 $ 0 0 0 81,954 0 0 N/A 81,954 N/A N/A 81,954 $ 1,700,000 $ 660,000 0 0 153,722 63,145 0 N/A 2,576,867 0 233,911 2,810,778 $ 575,000 $ 0 0 0 89,564 11,250 0 N/A 675,814 1,518,684 725,918 2,920,416 $ 1,200,000 $ 325,000 0 0 81,954 53,769 0 N/A 1,660,723 N/A N/A 1,660,723 $ 2,550,000 1,980,000 500,888 983,149 153,722 65,091 102,978 N/A 6,335,828 114,650 233,911 6,684,389 1,725,000 750,000 355,748 671,843 89,564 11,250 40,721 1,514,681 5,158,807 1,824,735 725,918 7,709,460 1,800,000 975,000 248,859 487,006 81,954 54,125 22,506 N/A 3,669,450 N/A N/A 3,669,450 41 2019 Proxy Statement Executive Benefits and Payments Upon Termination Death Retirement or Resignation Dismissal Without Cause (3) Dismissal without Cause or Resignation for Good Reason (Following a Change in Control) Ronald H. Janis Amounts payable in full on indicated date of termination: Severance – Salary component (4) Severance – Non-equity incentive Restricted stock awards Performance restricted stock unit awards (1) Deferred compensation (5) Welfare benefits lump sum payment Automobile & club dues (2) “Parachute Penalty” Tax gross-up Sub Total $ Present value of annuities commencing on indicated date of termination: Benefit equalization plan Pension plan $ $ Total Robert J. Bardusch Amounts payable in full on indicated date of termination: Severance – Salary component Severance – Non-equity incentive Restricted stock awards Performance restricted stock unit awards (1) Deferred compensation Welfare benefits lump sum payment (6) Automobile & club dues (2) “Parachute Penalty” tax gross-up Sub Total Present value of annuities commencing on indicated date of termination: Benefit equalization plan Pension plan Total $ ____________ N/A – Not applicable. 0 $ 0 141,290 282,579 34,171 48,144 0 N/A 506,184 N/A N/A 506,184 $ 0 $ 0 118,859 274,925 N/A 0 0 N/A 393,784 N/A N/A 393,784 $ 0 $ 0 0 0 34,171 0 0 N/A 34,171 N/A N/A 34,171 $ 0 $ 0 0 0 N/A 0 0 N/A 0 N/A N/A 0 $ 1,030,000 $ 206,000 0 0 34,171 48,144 0 N/A 1,318,315 N/A N/A 1,318,315 $ 69,231 $ 0 0 0 N/A 2,629 0 N/A 71,860 N/A N/A 71,860 $ 1,206,597 618,000 141,290 282,579 68,343 49,625 59,462 N/A 2,425,896 N/A N/A 2,425,896 450,000 175,000 118,859 274,925 N/A 22,288 10,786 N/A 1,051,858 N/A N/A 1,051,858 (1) Upon death, dismissal without cause upon a change-in-control, or resignation for good reason upon a change-in-control, unearned performance restricted stock awards immediately vest at the target amount. Upon retirement, performance restricted stock awards continue to vest according to the schedules set forth in their respective award agreements; therefore the same amount is shown in all columns assuming the target amount is earned. (2) Automobile and club dues include the present value of the continuation of the personal use of a company-owned vehicle by the NEO and driving services and parking (if applicable), and membership in a country club through the contract period following the change-in-control. (3) Upon dismissal for cause, Mr. Eskow would receive BEP benefits. (4) Mr. Janis's payments will be "cut back" in the event that his parachute payments exceed his 280G limit. In the table above, the "Severance - Salary Component" has been reduced by $338,403 to reduce Mr. Janis's parachute payments to his 280G limit. (5) In case of death, retirement or resignation, or dismissal w/o cause, Mr. Janis would only receive the contributions he made under the company's deferred compensation plan. In the event of a change-in-control, the company contributions would vest immediately. (6) In the event of dismissal without cause, Mr. Bardusch would receive benefits assistance for two months. CEO PAY RATIO Under SEC rules, we are required to disclose the pay ratio of our CEO to our median employee. The pay ratio disclosure below is a reasonable estimate calculated in a manner consistent with SEC rules and guidance. Under SEC rules we may continue to use the same median employee for three years if we reasonably believe no change occurred that would significantly impact the pay ratio. We reviewed the information we collected for the calculation of the 2017 pay ratio as well as information about our 2018 compensation. From that review, we determined that the median employee continued to be employed by us. After reviewing our 2018 workforce and changes occurring as a result of our 2018 acquisition of USAmeriBank, we determined that there were no changes in the employee base or compensation arrangements that would significantly change the pay ratio. Thus, for determining the 2018 pay ratio we used the same median employee. We identified the median employee for 2017 by examining the 2017 total W-2 compensation, including 401(k) deferrals, for all individuals, excluding our CEO, who were employed by us on October 13, 2017. We included all employees, whether employed on a full-time, part-time, temporary or seasonal basis as of that payroll date. We did not make any assumptions, adjustments or estimates with respect to such 2019 Proxy Statement 42 As an advisory vote, this proposal is not binding upon the Board of Directors or the Company. However, the Compensation and Human Resources Committee, which is responsible for designing and administering the Company’s executive compensation program, values the opinions expressed by shareholders in their vote on this proposal, and will consider the outcome of the vote when making future compensation decisions for named executive officers. In 2018, approximately 90% of the shares voted on the proposal voted in favor of the Company’s executive compensation program. RECOMMENDATION ON ITEM 3 THE VALLEY BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE NON- BINDING APPROVAL OF THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS DETERMINED BY THE COMPENSATION AND HUMAN RESOURCES COMMITTEE AS DISCLOSED PURSUANT TO THE SEC’S COMPENSATION DISCLOSURE RULES (INCLUDING THE COMPENSATION DISCUSSION AND ANALYSIS, COMPENSATION TABLES AND RELATED NARRATIVE DISCUSSION). total W-2 reported compensation. We did not annualize the compensation for any full or part time employees that were not employed by us for all of 2017. We believe the use of total W-2 compensation, including 401(k) deferrals, for all employees is a consistently applied compensation measure that reasonable reflects the annual compensation of employees. As in 2017, we calculated the annual total compensation for the employee using the same methodology we used for the CEO, as set forth in the Summary Compensation Table. The annual total compensation in 2018 for our median employee using this methodology was $52,936. The annual total compensation in 2018 for our CEO using this methodology is shown in the Summary Compensation Table and was $3,184,919. The ratio of the annual total compensation of our CEO to the annual total compensation of our median employee in 2018 was 60 to 1. ITEM 3 ADVISORY VOTE ON EXECUTIVE COMPENSATION (the Under the Dodd-Frank Wall Street Reform and Consumer “Dodd-Frank Act”), Valley’s Protection Act shareholders are entitled to vote at the Annual Meeting to approve the compensation of our named executive officers, as disclosed in this proxy statement, commonly referred to as a "say-on-pay vote." Pursuant to the Dodd-Frank Act, the shareholder vote on executive compensation is an advisory vote only and is not binding on Valley or the Board of Directors. We currently hold an annual say-on-pay vote. The Company’s goal for its executive compensation program is to reward executives who provide leadership for and contribute to our financial success. The Company seeks to accomplish this goal in a way that is aligned with the long- term interests of the Company’s shareholders. The Company believes that its executive compensation program satisfies this goal. The Compensation Discussion and Analysis section of this Proxy Statement describes the Company’s executive compensation program and the decisions made by the Compensation and Human Resources Committee in 2018 and early 2019. The Company requests shareholder approval of the compensation of the Company’s named executive officers as disclosed pursuant to the SEC’s compensation disclosure rules the Compensation Discussion and Analysis, the compensation tables and related narrative discussion). (which disclosure includes 43 2019 Proxy Statement COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION contractual rights. compliance with the related party transaction policy. The Audit Committee oversees The members of the Compensation and Human Resources Committee are Gerald Korde, Andrew B. Abramson, Eric P. Edelstein, Michael L. LaRusso, Marc J. Lenner, Suresh L. Sani and Jennifer W. Steans. None of the members of the Compensation and Human Resources Committee, or their affiliates have engaged in transactions or relationships required to be reported under the compensation committee interlock rules promulgated by the Securities and Exchange Commission with respect to members of our Compensation and Human Resources Committee. CERTAIN TRANSACTIONS WITH MANAGEMENT POLICY AND PROCEDURES FOR REVIEW, APPROVAL OR RATIFICATION OF RELATED PARTY TRANSACTIONS. Our related party transactions between Valley or any of its subsidiaries and an executive officer, director or an immediate family member and the companies such persons may own or control or have a substantial ownership interest in (collectively "insiders") are governed by our written related party transaction policy. Insiders may use Valley's services or may provide services to Valley. We require our directors and executive officers to complete a questionnaire, annually, to provide information specific to related party transactions. We expect our directors and officers to use the services of Valley National Bank. With respect to the use of the Bank’s services by insiders, loans to insiders by the Bank are governed by Regulation O. Regulation O requires that such loans: (i) be made on the same or substantially similar terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable loans to third parties, and (ii) not involve more than the normal risk of collectability. Regulation O also requires that such loans be approved by a majority of the directors with the director who is the borrower, or related to the borrower, not present or voting. With respect to other bank services provided to insiders, those services are provided on the same terms and conditions as provided to third parties, with no Board approval required. With respect to insiders providing products or services, these transactions are subject to the related party transaction policy. Under the related party transactions policy, transactions are referred for review and approval to the Nominating and Corporate Governance Committee. If the transaction presents a continuing relationship the activity is reviewed and, if appropriate, approved by the Committee. If the transaction is new, the Committee is charged with reviewing it and approving it if it is believed to be in the best interests of Valley. If a transaction is not approved, the services offered will not be used. If an ongoing transaction fails to be ratified it will, if possible, be cancelled in accordance with any 2019 Proxy Statement 44 TRANSACTIONS. The Bank has made loans to its directors and executive officers and their associates and, assuming continued compliance with generally applicable credit standards, it expects to continue to make such loans. All of these loans: (i) were made in the ordinary course of business, (ii) were made on the same terms, including interest rates and collateral, as those available to other persons not related to Valley, and (iii) did not involve more than the normal risk of collectability or present other unfavorable features. During 2018, Valley made payments for services to insider entities with which at least one director is affiliated; except as indicated, the payments were less than 5% of the entity’s gross revenue. Each of the following payments were approved, under our related party transaction policy. • During 2018, Valley and its borrowers made payments totaling approximately $308,404 for legal services to a law firm in which director Graham O. Jones is the sole equity partner. The fees represented 27% of the firm's gross revenues. • Of the fees paid by Valley and its borrowers to Jones & Jones, $203,106 were for loan review services and approximately $105,298 were for collection proceedings. With respect to loan closings, Valley sets the fees to be paid by a borrower when Jones & Jones acts as its review counsel in commercial real estate loan transactions which fees are subject to the acceptance by the borrower. In collection actions, the fee must be reasonable. Valley currently utilizes over 100 law firms for loan closings and collection efforts. Jones and Jones’ fees are comparable. In 2001, Valley National Bank purchased $150 million of bank-owned life insurance ("BOLI") from a nationally known life insurance company after a lengthy competitive selection process and substantial negotiations over policy costs and terms. The amount of the premiums and the terms of the policies are substantially the same as those prevailing for comparable policies with other insurance companies and brokers. During 2007, the Bank purchased $75 million of additional BOLI from the same life insurance company. This purchase was also completed after a competitive selection process with other vendors. The son-in- law of Mr. Lipkin is a licensed insurance broker who introduced Valley to the program offered by this nationally recognized life insurance company. Mr. Lipkin’s son-in-law was introduced to an insurance broker for the life insurance company sometime in 2000 or 2001 by a mutual friend. The son-in-law introduced the broker to Valley National Bank and provided assistance during the BOLI proposal and selection process. As is customary among brokers who introduce a client to another broker, Mr. Lipkin’s receives commissions (with a percentage dollar amount and time period for payment which are each typical for such referral services) for the life of the policy. son-in-law In 2018, Mr. Lipkin’s son-in-law received $22,736 in insurance commissions relating to the Bank’s BOLI purchases, pursuant to the arrangement he entered into with the insurance broker associated with the insurance company. The aggregate amount of commissions paid to date (from 2001 to 2018) to the son-in-law totaled approximately $841,644 and the anticipated aggregate amount of commissions he will receive over the next 15 years is approximately $300,000 (the compensation was structured as a declining revenue stream; for example, he would earn approximately $11,000 in year 2033). SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and any beneficial owners of more than 10% of our common stock to file reports relating to their ownership and changes in ownership of our common stock with the SEC by certain deadlines. During 2018, Gerald Korde filed a late Form 4 (reporting the sale of 3,000 shares held by his adult son's grantor trust of which his adult son is the sole beneficiary) due to legal questions related to whether the sale by his son should be reported. We believe all our other directors and executive officers complied with their Section 16(a) reporting requirements in 2018. • In 2011 Valley acquired State Bancorp, Inc. At the time of acquisition, State Bancorp leased a branch located in Westbury, New York. In connection with the acquisition of State Bancorp, the Boards of State Bancorp and Valley agreed that Mr. Wilks was to be elected to the Board of Valley National Bancorp. In connection with the merger of State Bancorp into Valley, effective January 1, 2012, Valley assumed the lease for the Westbury, New York branch. The lease provides for fixed rental payments of approximately $190,000 per year with no additional rent, such as real estate taxes, insurance and parking lot maintenance. The lease may be terminated at any time by the landlord upon not less than 130 days written notice. The landlord, Westbury Plaza Associates, L.P., is a limited partnership which is controlled by the Estate of Mr. Wilks’ father-in-law and beneficially owned by both the Estate and a trust for the benefit of Mr. Wilks’ spouse. Westbury Plaza Associates is a limited partnership which is part of a larger organization. Valley’s rental payments in 2018 represented approximately less than 1/2 of 1% of larger organization. the annual gross revenue of the EMPLOYMENT OF IMMEDIATE FAMILY MEMBERS. Valley has always welcomed as new employees qualified relatives of our current employees. Currently, a number of our employees have relatives who also work for Valley. Dianne Grenz is an executive officer of Valley. Valley employs her daughter, who in 2018 earned $139,061. The daughter and son-in-law of Rudy Schupp, a former executive officer of Valley, are employed by Valley and in 2018 and earned $123,000 and $161,147, respectively. 45 2019 Proxy Statement ITEM 4 SHAREHOLDER PROPOSAL Mr. Kenneth Steiner, 14 Stoner Ave., 2M, Great Neck, NY 11021, the beneficial owner of no less than 300 shares of Common Stock, has advised the Company that he intends to propose a resolution at the 2019 Annual Meeting. Mr. Steiner has appointed John Chevedden of 2215 Nelson Ave., No. 205 Redondo Beach, CA 90278, and/or his designee to act on his behalf in matters relating to the proposed resolution. In accordance with SEC rules, the text of the resolution and supporting statement appear below, printed verbatim from the submission. For the reasons set forth in the Statement in Opposition immediately following this shareholder proposal, our Board of Directors recommends that you vote AGAINST this proposal. Proposal 4 - Independent Board Chairman Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require henceforth that the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next Chief Executive Officer transition, implemented so it does not violate any existing agreement. If the Board determines that a Chairman, who was independent when selected is no longer independent, the Board shall select a new Chairman who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chairman. This proposal requests that all the necessary steps be taken to accomplish the above. This proposal topic won 50%-plus support at 5 major U.S. companies in 2013 including 73% support at Netflix. These 5 majority votes would have been a still higher majority if all shareholders had access to independent proxy voting advice. An independent Board Chairman is more important because Valley National seems to have a serious problem with board refreshment. Plus our stock was at $10 five-years ago and was still at a flat $10 at the time this proposal was submitted. The following directors had excessive tenure which erodes their independence: Gerald Lipkin Gerald Korde Pamela Bronander Andrew Abramson Graham Jones Eric Edelstein Michael LaRusso 32-years 29-years 25-years 24-years 21-years 15-years 14-years 2019 Proxy Statement 46 Plus these directors had an oversized influence on our most important board committees - holding 12 of the 21 positions. Plus Jeffrey Wilkes received 20% in negative votes. And then Andrew Abramson (Lead Director), Gerald Korde, Marc Lenner, Pamela Bronander each received more than 10% in negative votes. Also our insider Chairman, Gerald Lipkin, had 32-years long tenure and our Lead Director, Andrew Abramson, had long-tenure of 24-years. Long-tenure can impair the independence of a director -no matter how well qualified. Independence is a priceless attribute in a Chairman and a Lead Director. An independent Chairman is best positioned to build up the oversight capabilities of our directors while our CEO addresses the challenging day-to-day issues facing the company. Please vote yes: Independent Board Chairman - Proposal 4 Board of Directors Statement in Opposition to Shareholder Proposal 4 on Independent Board Chairman The Board recommends you vote AGAINST this proposal for the following reasons: The Board recognizes that an independent Board is critical to its role of management oversight and representing the interests of shareholders. The Board also recognizes the significance of board refreshment to effective corporate governance. The Board believes that its processes and results demonstrate a continuing commitment to independence and management oversight as well as Board refreshment. The proposal requests a specific means to achieve an independent Board - namely an independent chairperson. An independent chairperson means separating the CEO and chairperson position. The Board believes it is important to preserve flexibility in choosing the best leadership structure for the Company. The directors believe that maintaining a strong, independent board may take different forms. An independent Lead Director is crucial when the chairperson is not independent. For the last year, the CEO/Chair position has been separated but the chairperson was not independent. The Board anticipates that going forward it may combine the role of chairperson and CEO. The Board does not believe the combined Chair/CEO position weakens independent corporate governance or impedes its ability to provide SHAREHOLDER PROPOSALS New Jersey corporate law requires that the notice of shareholders’ meeting (for either a regular or special meeting) specify the purpose or purposes of the meeting. Thus, any substantive proposal, including shareholder proposals, must be referred to in our Notice of Annual Meeting of Shareholders in order for the proposal to be considered at a meeting of Valley's shareholders. An SEC rule requires certain shareholder proposals be included in the notice of meeting. Proposals of shareholders which are eligible under the SEC rule to be included in our 2020 proxy materials must be received by the Corporate Secretary of Valley National Bancorp no later than November 8, 2019. If we change our 2020 annual meeting date to a date more than 30 days from the anniversary of our 2019 annual meeting, then the deadline will be changed to a reasonable time before we begin to print and mail our proxy materials. If we change the date of our 2020 annual meeting by more than 30 days from the anniversary of this annual meeting, we will so state in first quarterly report on Form 10- Q we file with the SEC after the date change, or will notify our shareholders by another reasonable method. effective independent oversight. An independent chairperson is not a measure of independent board leadership. The Board currently believes that independent Board leadership is effectively provided by the election by the independent directors of an independent Lead Director. As provided in the Corporate Governance Guidelines, the Lead Director: • Has the responsibility to identify issues for Board consideration and assist in forming a consensus among directors; • Has the authority to call meetings of independent directors and/or non-management directors and preside at all executive sessions of independent and non-management directors; • Establishes the agenda for all meetings and executive sessions of the independent directors and/ or non-management directors, with input from other directors; • Has the authority to retain outside advisors who report directly to the Board, with the prior approval of the Board; • Serves as a liaison between the CEO and the other directors and assists the CEO and/or chairperson with establishing meeting agendas, meeting schedules and assuring sufficient for discussion of agenda items; and time • Leads the independent director evaluation of the effectiveness of the CEO and any non-independent Chairman. Separately, no prevailing empirical evidence supports the merits of independent chairs. RECOMMENDATION ON ITEM 4 THE VALLEY BOARD UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” THE SHAREHOLDER PROPOSAL. 47 2019 Proxy Statement OTHER MATTERS The Board of Directors is not aware of any other matters that may come before the annual meeting. However, in the event such other matters come before the meeting, it is the intention of the persons named in the proxy to vote on any such matters in accordance with the recommendation of the Board of Directors. Shareholders are urged to vote by Internet or telephone or sign the enclosed proxy and return it in the enclosed envelope. The proxy is solicited on behalf of the Board of Directors. By Order of the Board of Directors Wayne, New Jersey March 8, 2019 A copy of our Annual Report on Form 10-K (without exhibits) for the year ended December 31, 2018 filed with the Securities and Exchange Commission will be furnished to any shareholder upon written request addressed to Tina Zarkadas, Assistant Vice President, Shareholder Relations Specialist, Valley National Bancorp, 1455 Valley Road, Wayne, New Jersey 07470. Our Annual Report on Form 10-K (without exhibits) is also available on our website at the following link: http:www.valley.com/filings.html 2019 Proxy Statement 48 VALLEY NATIONAL BANCORP Valley Peer 20 2018 Size Comparisons Company Banc of California, Inc. BankUnited, Inc. Berkshire Hills Bancorp, Inc. Community Bank System, Inc. Cullen/Frost Bankers, Inc. F.N.B. Corporation Fulton Financial Corporation IBERIABANK Corp. Investors Bancorp, Inc. New York Community Bancorp, Inc. Old National Bancorp PacWest Bancorp People's United Financial, Inc. Prosperity Bancshares Signature Bank Sterling Bancorp Texas Capital Bancshares, Inc. Umpqua Holdings Corporation United Bankshares, Inc. Webster Financial Corporation Valley National Bancorp Ticker BANC BKU BHLB CBU CFR FNB FULT IBKC ISBC NYCB ONB PACW PBCT PB SBNY STL TCBI UMPQ UBSI WBS VLY Net Income (in thous.) Total Revenue (in thous.) Total Assets (in thous.) $ 45,472 $ 309,991 $ 10,630,067 $ 324,866 105,765 168,641 454,918 372,858 208,393 370,249 202,576 422,417 190,830 465,339 468,100 321,812 505,342 447,254 300,824 316,263 256,342 360,418 261,428 1,182,115 469,235 569,114 1,309,178 1,208,140 825,981 1,165,810 689,175 1,122,553 732,907 1,189,549 1,602,400 745,605 1,322,265 1,070,600 992,884 1,218,056 717,357 1,189,249 991,255 32,164,326 12,212,231 10,608,359 32,293,000 33,101,840 20,682,152 30,826,166 26,229,008 51,899,376 19,728,435 25,731,354 47,877,300 22,693,402 47,364,816 31,383,307 28,257,767 26,939,781 19,250,498 27,610,315 31,863,088 APPENDIX A Market Capitalization (in mil.) 674.0 2,968.0 1,225.0 2,988.0 5,539.0 3,191.0 2,634.0 3,522.0 2,977.0 4,456.0 2,697.0 4,100.0 5,444.0 4,351.0 5,659.0 3,570.0 2,565.0 3,502.0 3,183.0 4,547.0 2,943.0 49 2019 Proxy Statement [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] Valley.com 800.522.4100 1455 Valley Road • Wayne, NJ 07470 

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