VALLEY NATIONAL BANCORP 10-Q

Item 1. Financial Statements VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except for share data) June 30, 2020 December 31, 2019 Assets (Unaudited) Cash and due from banks $ 388,753 $ 256,264 Interest bearing deposits with banks 1,521,572 178,423 Investment securities: Equity securities 54,379 41,410 Available for sale debt securities 1,689,388 1,566,801 Held to maturity debt securities (net of allowance for credit losses of $1,593 at June 30, 2020) 2,131,834 2,336,095 Total investment securities 3,875,601 3,944,306 Loans held for sale, at fair value 120,599 76,113 Loans 32,314,611 29,699,208 Less: Allowance for loan losses ( 309,614 ) ( 161,759 ) Net loans 32,004,997 29,537,449 Premises and equipment, net 329,889 334,533 Lease right of use assets 273,811 285,129 Bank owned life insurance 535,383 540,169 Accrued interest receivable 122,807 105,637 Goodwill 1,375,409 1,373,625 Other intangible assets, net 77,921 86,772 Other assets 1,090,523 717,600 Total Assets $ 41,717,265 $ 37,436,020 Liabilities Deposits: Non-interest bearing $ 8,989,818 $ 6,710,408 Interest bearing: Savings, NOW and money market 14,165,415 12,757,484 Time 8,272,772 9,717,945 Total deposits 31,428,005 29,185,837 Short-term borrowings 2,082,880 1,093,280 Long-term borrowings 2,907,535 2,122,426 Junior subordinated debentures issued to capital trusts 55,891 55,718 Lease liabilities 299,260 309,849 Accrued expenses and other liabilities 469,206 284,722 Total Liabilities 37,242,777 33,051,832 Shareholders’ Equity Preferred stock, no par value; 50,000,000 authorized shares: Series A (4,600,000 shares issued at June 30, 2020 and December 31, 2019) 111,590 111,590 Series B (4,000,000 shares issued at June 30, 2020 and December 31, 2019) 98,101 98,101 Common stock (no par value, authorized 650,000,000 shares; issued 403,823,728 shares at June 30, 2020 and 403,322,773 shares at December 31, 2019) 141,667 141,423 Surplus 3,628,792 3,622,208 Retained earnings 499,511 443,559 Accumulated other comprehensive loss ( 4,938 ) ( 32,214 ) Treasury stock, at cost (28,029 common shares at June 30, 2020 and 44,383 common shares at December 31, 2019) ( 235 ) ( 479 ) Total Shareholders’ Equity 4,474,488 4,384,188 Total Liabilities and Shareholders’ Equity $ 41,717,265 $ 37,436,020 See accompanying notes to consolidated financial statements. 2 VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except for share data) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Interest Income Interest and fees on loans $ 321,883 $ 296,934 $ 654,951 $ 585,211 Interest and dividends on investment securities: Taxable 19,447 22,489 41,380 45,365 Tax-exempt 3,692 4,356 7,618 9,160 Dividends 3,092 2,795 6,493 5,969 Interest on federal funds sold and other short-term investments 411 1,168 1,876 2,261 Total interest income 348,525 327,742 712,318 647,966 Interest Expense Interest on deposits: Savings, NOW and money market 16,627 38,020 51,140 74,303 Time 29,857 40,331 72,671 78,502 Interest on short-term borrowings 1,980 14,860 6,687 27,409 Interest on long-term borrowings and junior subordinated debentures 17,502 14,297 33,922 28,870 Total interest expense 65,966 107,508 164,420 209,084 Net Interest Income 282,559 220,234 547,898 438,882 Provision for credit losses for held to maturity securities 41 — 800 — Provision for credit losses for loans 41,115 2,100 75,039 10,100 Net Interest Income After Provision for Credit Losses 241,403 218,134 472,059 428,782 Non-Interest Income Trust and investment services 2,826 3,096 6,239 6,000 Insurance commissions 1,659 2,649 3,610 5,174 Service charges on deposit accounts 3,557 5,827 9,237 11,730 (Losses) gains on securities transactions, net ( 41 ) 11 ( 81 ) ( 21 ) Other-than-temporary impairment losses on securities — ( 2,928 ) — ( 2,928 ) Portion recognized in other comprehensive income (before taxes) — — — — Net impairment losses on securities recognized in earnings — ( 2,928 ) — ( 2,928 ) Fees from loan servicing 2,227 2,367 4,975 4,797 Gains on sales of loans, net 8,337 3,930 12,887 8,506 (Losses) gains on sales of assets, net ( 299 ) ( 564 ) ( 178 ) 77,156 Bank owned life insurance 5,823 2,205 8,965 4,092 Other 20,741 11,010 40,573 20,770 Total non-interest income 44,830 27,603 86,227 135,276 Non-Interest Expense Salary and employee benefits expense 78,532 76,183 164,260 159,288 Net occupancy and equipment expense 33,217 29,700 65,658 57,586 FDIC insurance assessment 6,135 4,931 10,011 11,052 Amortization of other intangible assets 6,681 4,170 12,151 8,481 Professional and legal fees 7,797 4,145 13,884 9,416 Amortization of tax credit investments 3,416 4,863 6,644 12,036 Telecommunication expense 2,866 2,351 5,153 4,619 Other 18,522 15,394 35,061 27,054 Total non-interest expense 157,166 141,737 312,822 289,532 Income Before Income Taxes 129,067 104,000 245,464 274,526 Income tax expense 33,466 27,532 62,595 84,728 Net Income 95,601 76,468 182,869 189,798 Dividends on preferred stock 3,172 3,172 6,344 6,344 Net Income Available to Common Shareholders $ 92,429 $ 73,296 $ 176,525 $ 183,454 3 VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (continued) (in thousands, except for share data) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Earnings Per Common Share: Basic $ 0.23 $ 0.22 $ 0.44 $ 0.55 Diluted 0.23 0.22 0.44 0.55 Cash Dividends Declared per Common Share 0.11 0.11 0.22 0.22 Weighted Average Number of Common Shares Outstanding: Basic 403,790,242 331,748,552 403,654,665 331,675,313 Diluted 404,631,845 332,959,802 405,043,183 332,929,359 See accompanying notes to consolidated financial statements. 4 VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income $ 95,601 $ 76,468 $ 182,869 $ 189,798 Other comprehensive income, net of tax: Unrealized gains and losses on available for sale securities Net gains arising during the period 3,013 18,488 29,081 34,755 Less reclassification adjustment for net losses (gains) included in net income 31 ( 8 ) 58 18 Total 3,044 18,480 29,139 34,773 Unrealized gains and losses on derivatives (cash flow hedges) Net losses on derivatives arising during the period ( 1,280 ) ( 683 ) ( 2,337 ) ( 1,065 ) Less reclassification adjustment for net (gains) losses included in net income ( 308 ) 274 130 482 Total ( 1,588 ) ( 409 ) ( 2,207 ) ( 583 ) Defined benefit pension plan Amortization of actuarial net loss 172 55 344 110 Total other comprehensive income 1,628 18,126 27,276 34,300 Total comprehensive income $ 97,229 $ 94,594 $ 210,145 $ 224,098 See accompanying notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) For the Six Months Ended June 30, 2020 Common Stock Accumulated Preferred Stock Shares Amount Surplus Retained Earnings Other Comprehensive Loss Treasury Stock Total Shareholders’ Equity (in thousands) Balance - December 31, 2019 $ 209,691 403,278 $ 141,423 $ 3,622,208 $ 443,559 $ ( 32,214 ) $ ( 479 ) $ 4,384,188 Adjustment due to the adoption of ASU No. 2016-13 — — — — ( 28,187 ) — — ( 28,187 ) Balance - January 1, 2020 209,691 403,278 141,423 3,622,208 415,372 ( 32,214 ) ( 479 ) 4,356,001 Net income — — — — 87,268 — — 87,268 Other comprehensive income, net of tax — — — — — 25,648 — 25,648 Cash dividends declared: Preferred stock, Series A, $0.39 per share — — — — ( 1,797 ) — — ( 1,797 ) Preferred stock, Series B, $0.34 per share — — — — ( 1,375 ) — — ( 1,375 ) Common stock, $0.11 per share — — — — ( 44,979 ) — — ( 44,979 ) Effect of stock incentive plan, net — 466 190 1,828 ( 2,065 ) — 279 232 Balance - March 31, 2020 209,691 403,744 141,613 3,624,036 452,424 ( 6,566 ) ( 200 ) 4,420,998 Net income — — — — 95,601 — — 95,601 Other comprehensive income, net of tax — — — — — 1,628 — 1,628 Cash dividends declared: Preferred stock, Series A, $0.39 per share — — — — ( 1,797 ) — — ( 1,797 ) Preferred stock, Series B, $0.34 per share — — — — ( 1,375 ) — — ( 1,375 ) Common stock, $0.11 per share — — — — ( 44,750 ) — — ( 44,750 ) Effect of stock incentive plan, net — 52 54 4,756 ( 592 ) — ( 35 ) 4,183 Balance - June 30, 2020 $ 209,691 403,796 $ 141,667 $ 3,628,792 $ 499,511 $ ( 4,938 ) $ ( 235 ) $ 4,474,488 6 For the Six Months Ended June 30, 2019 Common Stock Accumulated Preferred Stock Shares Amount Surplus Retained Earnings Other Comprehensive Loss Treasury Stock Total Shareholders’ Equity (in thousands) Balance - December 31, 2018 $ 209,691 331,431 $ 116,240 $ 2,796,499 $ 299,642 $ ( 69,431 ) $ ( 2,187 ) $ 3,350,454 Adjustment due to the adoption of ASU No. 2016-02 — — — — 4,414 — — 4,414 Adjustment due to the adoption of ASU No. 2017-08 — — — — ( 1,446 ) — — ( 1,446 ) Balance - January 1, 2019 209,691 331,431 116,240 2,796,499 302,610 ( 69,431 ) ( 2,187 ) 3,353,422 Net income — — — — 113,330 — — 113,330 Other comprehensive income, net of tax — — — — — 16,174 — 16,174 Cash dividends declared: Preferred stock, Series A, $0.39 per share — — — — ( 1,797 ) — — ( 1,797 ) Preferred stock, Series B, $0.34 per share — — — — ( 1,375 ) — — ( 1,375 ) Common stock, $0.11 per share — — — — ( 36,686 ) — — ( 36,686 ) Effect of stock incentive plan, net — 302 226 2,935 ( 99 ) — ( 1,251 ) 1,811 Balance - March 31, 2019 209,691 331,733 116,466 2,799,434 375,983 ( 53,257 ) ( 3,438 ) 3,444,879 Net income — — — — 76,468 — — 76,468 Other comprehensive income, net of tax — — — — — 18,126 — 18,126 Cash dividends declared: Preferred stock, Series A, $0.39 per share — — — — ( 1,797 ) — — ( 1,797 ) Preferred stock, Series B, $0.34 per share — — — — ( 1,375 ) — — ( 1,375 ) Common stock, $0.11 per share — — — — ( 36,712 ) — — ( 36,712 ) Effect of stock incentive plan, net — 55 105 4,625 ( 377 ) — 176 4,529 Balance - June 30, 2019 $ 209,691 331,788 $ 116,571 $ 2,804,059 $ 412,190 $ ( 35,131 ) $ ( 3,262 ) $ 3,504,118 See accompanying notes to consolidated financial statements. 7 VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 2020 2019 Cash flows from operating activities: Net income $ 182,869 $ 189,798 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 29,608 25,240 Stock-based compensation 8,199 8,282 Provision for credit losses 75,839 10,100 Net amortization of premiums and accretion of discounts on securities and borrowings 15,305 14,287 Amortization of other intangible assets 12,151 8,481 Losses on securities transactions, net 81 21 Proceeds from sales of loans held for sale 408,785 205,429 Gains on sales of loans, net ( 12,887 ) ( 8,506 ) Net impairment losses on securities, recognized in earnings — 2,928 Originations of loans held for sale ( 443,684 ) ( 200,877 ) Losses (gains) on sales of assets, net 178 ( 77,156 ) Net change in: Cash surrender value of bank owned life insurance ( 8,965 ) ( 4,092 ) Accrued interest receivable ( 17,170 ) ( 3,769 ) Other assets ( 426,776 ) ( 186,674 ) Accrued expenses and other liabilities 166,490 65,970 Net cash (used in) provided by operating activities ( 9,977 ) 49,462 Cash flows from investing activities: Net loan originations and purchases ( 2,568,893 ) ( 992,236 ) Equity securities: Purchases ( 5,365 ) — Held to maturity debt securities: Purchases ( 107,136 ) ( 261,446 ) Maturities, calls and principal repayments 301,004 155,002 Available for sale debt securities: Purchases ( 302,071 ) — Maturities, calls and principal repayments 213,348 109,045 Death benefit proceeds from bank owned life insurance 13,751 1,350 Proceeds from sales of real estate property and equipment 8,202 102,500 Proceeds from sales of loans held for investment 30,020 216,301 Purchases of real estate property and equipment ( 14,469 ) ( 9,336 ) Net cash used in investing activities ( 2,431,609 ) ( 678,820 ) 8 VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 2020 2019 Cash flows from financing activities: Net change in deposits 2,242,168 320,955 Net change in short-term borrowings 989,600 268,870 Proceeds from issuance of long-term borrowings, net 838,388 400,000 Repayments of long-term borrowings ( 53,418 ) ( 255,000 ) Cash dividends paid to preferred shareholders ( 6,344 ) ( 3,172 ) Cash dividends paid to common shareholders ( 89,122 ) ( 73,546 ) Purchase of common shares to treasury ( 4,924 ) ( 1,462 ) Common stock issued, net 1,140 ( 480 ) Other, net ( 264 ) ( 240 ) Net cash provided by financing activities 3,917,224 655,925 Net change in cash and cash equivalents 1,475,638 26,567 Cash and cash equivalents at beginning of year 434,687 428,629 Cash and cash equivalents at end of period $ 1,910,325 $ 455,196 Supplemental disclosures of cash flow information: Cash payments for: Interest on deposits and borrowings $ 178,337 $ 198,815 Federal and state income taxes 14,731 80,116 Supplemental schedule of non-cash investing activities: Transfer of loans to other real estate owned $ 2,750 $ 1,016 Transfer of loans to loans held for sale 30,020 216,301 Lease right of use assets obtained in exchange for operating lease liabilities 6,407 296,064 See accompanying notes to consolidated financial statements. 9 VALLEY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey corporation (Valley), include the accounts of its commercial bank subsidiary, Valley National Bank (the Bank), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities. Certain prior period amounts have been reclassified to conform to the current presentation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations, changes in shareholders' equity and cash flows at June 30, 2020 and for all periods presented have been made. The results of operations for the three and six months ended on June 30, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year or any subsequent interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP and industry practice have been condensed or omitted pursuant to rules and regulations of the SEC. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 . Significant Estimates. In preparing the unaudited consolidated financial statements in conformity with U.S. GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that require application of management’s most difficult, subjective or complex judgment and are particularly susceptible to change include: the allowance for credit losses, 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. Actual amounts as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. Impact of COVID-19. During the first half of 2020, economies throughout the world were severely disrupted by the effects of quarantines, business closures, and the reluctance of individuals to leave their homes as a result of the outbreak of the novel coronavirus (COVID-19). Our primary market areas within New Jersey, New York, Florida and Alabama have all experienced significant outbreaks and disruptions during the COVID-19 pandemic. The full impact of COVID-19 is unknown and still evolving. The outbreak and any preventative or protective actions that Valley or its customers have taken or may take in respect of this virus have resulted and may continue to result in extended periods of disruption to Valley, its customers, service providers, and third parties. Any future financial impact cannot be reasonably estimated at this time but may materially affect the business and Valley’s financial condition and results of operations. The extent to which COVID-19 impacts Valley’s results will depend on future developments, which are highly uncertain and cannot be predicted. Banking and financial services have been designated essential businesses; therefore, Valley’s operations are continuing, subject to certain modifications to business practices imposed to safeguard the health and wellness of Valley’s customers and employees, and to comply with applicable government directives. 10 Note 2. Business Combinations On December 1, 2019, Valley completed its acquisition of Oritani Financial Corp. (Oritani) and its wholly-owned subsidiary, Oritani Bank. Oritani had approximately $ 4.3 billion in assets, $ 3.4 billion in net loans and $ 2.9 billion in deposits, after purchase accounting adjustments, and a branch network of 26 locations. The acquisition represents a significant addition to Valley's New Jersey franchise, and meaningfully enhanced its presence in the Bergen County market. The common shareholders of Oritani received 1.60 shares of Valley common stock for each Oritani share that they owned prior to the merger. The total consideration for the acquisition was approximately $ 835.3 million , consisting of 71.1 million shares of Valley common stock and the outstanding Oritani stock-based awards. Merger expenses totaled $ 366 thousand and $ 1.7 million for the three and six months ended June 30, 2020 , respectively, which primarily related to professional and legal expenses and other expenses included in non-interest expense on the consolidated statements of income. During the first quarter 2020, Valley revised the estimated fair values of the acquired assets as of the Oritani acquisition date due to additional information obtained that existed as of December 1, 2019. The adjustments mostly related to the fair value of certain loans and deferred tax assets as of the acquisition date and resulted in a $ 1.8 million increase in goodwill (see Note 9 for amount of goodwill as allocated to Valley's business segments). If additional information (that existed as of the acquisition date) becomes available, the fair value estimates for acquired assets and assumed liabilities are subject to change for up to one year after the acquisition date. Note 3. Earnings Per Common Share The following table shows the calculation of both basic and diluted earnings per common share for the three and six months ended June 30, 2020 and 2019 : Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands, except for share data) Net income available to common shareholders $ 92,429 $ 73,296 $ 176,525 $ 183,454 Basic weighted average number of common shares outstanding 403,790,242 331,748,552 403,654,665 331,675,313 Plus: Common stock equivalents 841,603 1,211,250 1,388,518 1,254,046 Diluted weighted average number of common shares outstanding 404,631,845 332,959,802 405,043,183 332,929,359 Earnings per common share: Basic $ 0.23 $ 0.22 $ 0.44 $ 0.55 Diluted 0.23 0.22 0.44 0.55 Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of restricted stock units and common stock options to purchase Valley’s common shares. Common stock options with exercise prices that exceed the average market price per share of Valley’s common stock during the periods presented have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation. Anti-dilutive common stock options equaled approximately 2.7 million shares and 2.3 million shares for the three and six months ended June 30, 2020 , respectively, and 482 thousand shares and 494 thousand shares for the three and six months ended June 30, 2019 , respectively. 11 Note 4. Accumulated Other Comprehensive Loss The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three and six months ended June 30, 2020 : Components of Accumulated Other Comprehensive Loss Total Accumulated Other Comprehensive Loss Unrealized Gains and Losses on Available for Sale (AFS) Securities Unrealized Gains and Losses on Derivatives Defined Benefit Pension Plan (in thousands) Balance at March 31, 2020 $ 31,917 $ ( 4,348 ) $ ( 34,135 ) $ ( 6,566 ) Other comprehensive income (loss) before reclassification 3,013 ( 1,280 ) — 1,733 Amounts reclassified from other comprehensive income 31 ( 308 ) 172 ( 105 ) Other comprehensive income (loss), net 3,044 ( 1,588 ) 172 1,628 Balance at June 30, 2020 $ 34,961 $ ( 5,936 ) $ ( 33,963 ) $ ( 4,938 ) Components of Accumulated Other Comprehensive Loss Total Accumulated Other Comprehensive Loss Unrealized Gains and Losses on Available for Sale (AFS) Securities Unrealized Gains and Losses on Derivatives Defined Benefit Pension Plan (in thousands) Balance at December 31, 2019 $ 5,822 $ ( 3,729 ) $ ( 34,307 ) $ ( 32,214 ) Other comprehensive income (loss) before reclassification 29,081 ( 2,337 ) — 26,744 Amounts reclassified from other comprehensive income 58 130 344 532 Other comprehensive income (loss), net 29,139 ( 2,207 ) 344 27,276 Balance at June 30, 2020 $ 34,961 $ ( 5,936 ) $ ( 33,963 ) $ ( 4,938 ) The following table presents amounts reclassified from each component of accumulated other comprehensive loss on a gross and net of tax basis for the three and six months ended June 30, 2020 and 2019 : Amounts Reclassified from Accumulated Other Comprehensive Loss Three Months Ended June 30, Six Months Ended June 30, Components of Accumulated Other Comprehensive Loss 2020 2019 2020 2019 Income Statement Line Item (in thousands) Unrealized (losses) gains on AFS securities before tax $ ( 41 ) $ 11 $ ( 81 ) $ ( 21 ) (Losses) gains on securities transactions, net Tax effect 10 ( 3 ) 23 3 Total net of tax ( 31 ) 8 ( 58 ) ( 18 ) Unrealized gains (losses) on derivatives (cash flow hedges) before tax 438 ( 383 ) ( 177 ) ( 673 ) Interest expense Tax effect ( 130 ) 109 47 191 Total net of tax 308 ( 274 ) ( 130 ) ( 482 ) Defined benefit pension plan: Amortization of actuarial net loss ( 229 ) ( 78 ) ( 465 ) ( 156 ) * Tax effect 57 23 121 46 Total net of tax ( 172 ) ( 55 ) ( 344 ) ( 110 ) Total reclassifications, net of tax $ 105 $ ( 321 ) $ ( 532 ) $ ( 610 ) * Amortization of net loss is included in the computation of net periodic pension cost recognized within other non-interest expense. 12 Note 5. New Authoritative Accounting Guidance New Accounting Guidance Adopted in 2020 Accounting Standards Update (ASU) No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments. The FASB issued an amendment to replace the incurred loss impairment methodology under prior accounting guidance with a new current expected credit loss (CECL) model. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, held to maturity investments and purchased financial assets with credit deterioration (PCD) assets. It also applies to certain off-balance sheet credit exposures. Valley adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective approach for all financial assets measured at amortized cost (except for PCD loans) and off-balance sheet credit exposures. Valley has established a governance structure to implement the CECL accounting guidance and has developed a methodology and set of models to be used. At adoption, Valley recorded a $ 100.4 million increase to its allowance for credit losses, including reserves of $ 92.5 million , $ 7.1 million and $ 793 thousand related to loans, unfunded credit commitments and held to maturity debt securities, respectively. Of the $ 92.5 million in loan reserves, $ 61.6 million represents PCD loan related reserves which were recognized through a gross-up that increases the amortized cost basis of loans with a corresponding increase to the allowance for credit losses, and therefore results in no impact to shareholders' equity. The remaining non-credit discount of $ 97.7 million related to PCD loans is accreted into interest income over the life of the loans at the effective interest rate effective January 1, 2020. The non-PCD loan related increase to the allowance for credit losses of $ 38.8 million , including the reserves for unfunded loan commitments and held to maturity debt securities, was offset in shareholders' equity and deferred tax assets. For regulatory capital purposes, in connection with the Federal Reserve Board’s final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $ 28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) net of taxes will be phased in over the same time frame. 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 was effective for Valley on January 1, 2020 and Valley applied this new guidance in its annual goodwill impairment test performed during the second quarter 2020. New Accounting Guidance issued in 2020 ASU No. 2020-04, "Reference Rate Reform (Topic 848)" provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform 13 as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU No. 2020-04 became effective for all entities as of March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022. Note 6. Fair Value Measurement of Assets and Liabilities ASC Topic 820, “Fair Value Measurements” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: • Level 1 - Unadjusted exchange quoted prices in active markets for identical assets or liabilities, or identical liabilities traded as assets that the reporting entity has the ability to access at the measurement date. • Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly (i.e., quoted prices on similar assets) for substantially the full term of the asset or liability. • Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). 14 Assets and Liabilities Measured at Fair Value on a Recurring and Non-Recurring Basis The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at June 30, 2020 and December 31, 2019 . The assets presented under “nonrecurring fair value measurements” in the tables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized). June 30, 2020 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: Equity securities (1) $ 54,379 $ 46,897 $ — $ — Available for sale: U.S. Treasury securities 52,621 52,621 — — U.S. government agency securities 27,924 — 27,924 — Obligations of states and political subdivisions 147,505 — 146,140 1,365 Residential mortgage-backed securities 1,382,726 — 1,382,726 — Corporate and other debt securities 78,612 — 78,612 — Total available for sale debt securities 1,689,388 52,621 1,635,402 1,365 Loans held for sale (2) 120,599 — 120,599 — Other assets (3) 468,275 — 468,275 — Total assets $ 2,332,641 $ 99,518 $ 2,224,276 $ 1,365 Liabilities Other liabilities (3) $ 170,273 $ — $ 170,273 $ — Total liabilities $ 170,273 $ — $ 170,273 $ — Non-recurring fair value measurements: Collateral dependent loans $ 42,807 $ — $ — $ 42,807 Loan servicing rights 14,373 — — 14,373 Foreclosed assets 6,679 — — 6,679 Total $ 63,859 $ — $ — $ 63,859 15 Fair Value Measurements at Reporting Date Using: December 31, 2019 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) Recurring fair value measurements: Assets Investment securities: Equity securities at fair value $ 41,410 $ 41,410 $ — $ — Available for sale: U.S. Treasury securities 50,943 50,943 — — U.S. government agency securities 29,243 — 29,243 — Obligations of states and political subdivisions 170,051 — 169,371 680 Residential mortgage-backed securities 1,254,786 — 1,254,786 — Corporate and other debt securities 61,778 — 61,778 — Total available for sale 1,566,801 50,943 1,515,178 680 Loans held for sale (2) 76,113 — 76,113 — Other assets (3) 158,532 — 158,532 — Total assets $ 1,842,856 $ 92,353 $ 1,749,823 $ 680 Liabilities Other liabilities (3) $ 43,926 $ — $ 43,926 $ — Total liabilities $ 43,926 $ — $ 43,926 $ — Non-recurring fair value measurements: Collateral dependent impaired loans $ 39,075 $ — $ — $ 39,075 Loan servicing rights 1,591 — — 1,591 Foreclosed assets 10,807 — — 10,807 Total $ 51,473 $ — $ — $ 51,473 (1) Includes equity securities measured at net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy totaling $ 7.5 million at June 30, 2020 . (2) Represents residential mortgage loans originated for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $ 115.0 million and $ 74.5 million at June 30, 2020 and December 31, 2019 , respectively. (3) Derivative financial instruments are included in this category. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following valuation techniques were used for financial instruments measured at fair value on a recurring basis. All the valuation techniques described below apply to the unpaid principal balance, excluding any accrued interest or dividends at the measurement date. Interest income and expense are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium. Equity securities. The fair value of equity securities, primarily consists of one publicly traded mutual fund, is derived from quoted market prices in active markets. Equity securities also include Community Reinvestment Act (CRA) investment funds carried at quoted market prices if publicly traded, and at NAV if privately held. 16 Available for sale securities. U.S. Treasury 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 securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume. In calculating the fair value of one impaired special revenue bond (within obligations of states and political subdivisions in the table above) under Level 3, Valley prepared its best estimate of the present value of the cash flows to determine an internal price estimate. In determining the internal price, Valley utilized recent financial information and developments provided by the issuer, as well as other unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing of the defaulted security. A quoted price received from an independent pricing service was weighted with the internal price estimate to determine the fair value of the instrument at June 30, 2020 and December 31, 2019 . 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 June 30, 2020 and December 31, 2019 based on the short duration these assets were held, and the high credit quality of these loans. Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair values of Valley’s derivatives are determined using third-party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves. The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at June 30, 2020 and December 31, 2019 ), 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 June 30, 2020 and December 31, 2019 . Assets and Liabilities Measured at Fair Value on a Non-recurring Basis The following valuation techniques were used for certain non-financial assets measured at fair value on a nonrecurring basis, including impaired loans reported at the fair value of the underlying collateral, loan servicing rights and foreclosed assets, which are reported at fair value upon initial recognition or subsequent impairment as described below. Collateral Dependent Loans . Collateral dependent loans are loans when foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and substantially all of the repayment is expected from the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral. Collateral values are estimated using Level 3 inputs, consisting of individual third-party appraisals that may be adjusted based on certain discounting criteria. Certain real estate appraisals may be discounted based on specific market data by location and property type. At June 30, 2020 , collateral dependent loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for credit loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. At June 30, 2020 , collateral dependent 17 loans, primarily consisting of taxi medallion loans, with a total amortized cost of $ 110.9 million were reduced by specific valuation allowance allocations totaling $ 68.1 million to a reported total net carrying amount of $ 42.8 million . Loan servicing rights. Fair values for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third-party vendor that requires inputs that are both significant to the fair value measurement and unobservable (Level 3). The fair value model is based on various assumptions, including but not limited to, prepayment speeds, internal rate of return (discount rate), servicing cost, ancillary income, float rate, tax rate, and inflation. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At June 30, 2020 , the fair value model used a blended prepayment speed (stated as constant prepayment rates) of 17.0 percent and a discount rate of 9.6 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. At June 30, 2020 , certain loan servicing rights were re-measured at fair value totaling $ 14.4 million . See Note 9 for additional information. 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 using Level 3 inputs, consisting of a third-party appraisal adjusted to the lower of cost or estimated fair value, less estimated cost to sell. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If further declines in the estimated fair value of the asset occur, an asset is re-measured and reported at fair value through a write-down recorded in non-interest expense. There were no discount adjustments of the appraisals of foreclosed assets at June 30, 2020 . Other Fair Value Disclosures ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The fair value estimates presented in the following table were based on pertinent market data and relevant information on the financial instruments available as of the valuation date. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portfolio of financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation, trust and investment management departments) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. 18 The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at June 30, 2020 and December 31, 2019 were as follows: Fair Value Hierarchy June 30, 2020 December 31, 2019 Carrying Amount Fair Value Carrying Amount Fair Value (in thousands) Financial assets Cash and due from banks Level 1 $ 388,753 $ 388,753 $ 256,264 $ 256,264 Interest bearing deposits with banks Level 1 1,521,572 1,521,572 178,423 178,423 Investment securities held to maturity: U.S. Treasury securities Level 1 138,268 147,415 138,352 144,113 U.S. government agency securities Level 2 6,657 6,921 7,345 7,362 Obligations of states and political subdivisions Level 2 466,836 481,736 500,705 513,607 Residential mortgage-backed securities Level 2 1,451,581 1,495,599 1,620,119 1,629,572 Trust preferred securities Level 2 37,335 29,900 37,324 31,382 Corporate and other debt securities Level 2 32,750 33,305 32,250 32,684 Total investment securities held to maturity (1) 2,133,427 2,194,876 2,336,095 2,358,720 Net loans Level 3 32,004,997 31,815,938 29,537,449 28,964,396 Accrued interest receivable Level 1 122,807 122,807 105,637 105,637 Federal Reserve Bank and Federal Home Loan Bank stock (2) Level 2 282,755 282,755 214,421 214,421 Financial liabilities Deposits without stated maturities Level 1 23,155,233 23,155,233 19,467,892 19,467,892 Deposits with stated maturities Level 2 8,272,772 8,335,442 9,717,945 9,747,867 Short-term borrowings Level 2 2,082,880 2,083,500 1,093,280 1,081,879 Long-term borrowings Level 2 2,907,535 3,023,213 2,122,426 2,181,401 Junior subordinated debentures issued to capital trusts Level 2 55,891 44,231 55,718 53,889 Accrued interest payable (3) Level 1 19,148 19,148 33,066 33,066 (1) The carrying amount is presented gross without the allowance for credit losses. (2) Included in other assets. (3) Included in accrued expenses and other liabilities. 19 Note 7. Investment Securities Equity Securities Equity securities carried at fair value totaled $ 54.4 million and $ 41.4 million at June 30, 2020 and December 31, 2019 , respectively. Valley's equity securities consist mainly of one publicly traded money market mutual fund totaling $ 41.8 million and $ 41.4 million at June 30, 2020 and December 31, 2019 , respectively. The remainder of the balance at June 30, 2020 represents investments made for CRA purposes. Available for Sale Debt Securities The amortized cost, gross unrealized gains and losses and fair value of available for sale debt securities at June 30, 2020 and December 31, 2019 were as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) June 30, 2020 U.S. Treasury securities $ 50,940 $ 1,681 $ — $ 52,621 U.S. government agency securities 26,778 1,174 ( 28 ) 27,924 Obligations of states and political subdivisions: Obligations of states and state agencies 65,620 1,477 ( 54 ) 67,043 Municipal bonds 79,100 1,363 ( 1 ) 80,462 Total obligations of states and political subdivisions 144,720 2,840 ( 55 ) 147,505 Residential mortgage-backed securities 1,340,614 43,039 ( 927 ) 1,382,726 Corporate and other debt securities 78,225 1,251 ( 864 ) 78,612 Total investment securities available for sale $ 1,641,277 $ 49,985 $ ( 1,874 ) $ 1,689,388 December 31, 2019 U.S. Treasury securities $ 50,952 $ 12 $ ( 21 ) $ 50,943 U.S. government agency securities 28,982 280 ( 19 ) 29,243 Obligations of states and political subdivisions: Obligations of states and state agencies 78,116 540 ( 83 ) 78,573 Municipal bonds 90,662 902 ( 86 ) 91,478 Total obligations of states and political subdivisions 168,778 1,442 ( 169 ) 170,051 Residential mortgage-backed securities 1,248,814 11,234 ( 5,262 ) 1,254,786 Corporate and other debt securities 61,261 628 ( 111 ) 61,778 Total investment securities available for sale $ 1,558,787 $ 13,596 $ ( 5,582 ) $ 1,566,801 20 The age of unrealized losses and fair value of related securities available for sale at June 30, 2020 and December 31, 2019 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) June 30, 2020 U.S. government agency securities $ — $ — $ 1,627 $ ( 28 ) $ 1,627 $ ( 28 ) Obligations of states and political subdivisions: Obligations of states and state agencies 24,913 ( 37 ) 1,036 ( 17 ) 25,949 ( 54 ) Municipal bonds 210 ( 1 ) — — 210 ( 1 ) Total obligations of states and political subdivisions 25,123 ( 38 ) 1,036 ( 17 ) 26,159 ( 55 ) Residential mortgage-backed securities 101,162 ( 458 ) 49,368 ( 469 ) 150,530 ( 927 ) Corporate and other debt securities 27,194 ( 864 ) — — 27,194 ( 864 ) Total $ 153,479 $ ( 1,360 ) $ 52,031 $ ( 514 ) $ 205,510 $ ( 1,874 ) December 31, 2019 U.S. Treasury securities $ 25,019 $ ( 21 ) $ — $ — $ 25,019 $ ( 21 ) U.S. government agency securities — — 1,783 ( 19 ) 1,783 ( 19 ) Obligations of states and political subdivisions: Obligations of states and state agencies 18,540 ( 21 ) 8,755 ( 62 ) 27,295 ( 83 ) Municipal bonds — — 13,177 ( 86 ) 13,177 ( 86 ) Total obligations of states and political subdivisions 18,540 ( 21 ) 21,932 ( 148 ) 40,472 ( 169 ) Residential mortgage-backed securities 240,412 ( 1,194 ) 282,798 ( 4,068 ) 523,210 ( 5,262 ) Corporate and other debt securities 5,139 ( 111 ) — — 5,139 ( 111 ) Total $ 289,110 $ ( 1,347 ) $ 306,513 $ ( 4,235 ) $ 595,623 $ ( 5,582 ) Within the available for sale debt securities portfolio, the total number of security positions in an unrealized loss position was 95 and 182 at June 30, 2020 and December 31, 2019 , respectively. As of June 30, 2020 , the fair value of available for sale debt securities that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $ 1.1 billion . 21 The contractual maturities of available for sale debt securities at June 30, 2020 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. June 30, 2020 Amortized Cost Fair Value (in thousands) Due in one year $ 26,643 $ 26,742 Due after one year through five years 97,248 99,501 Due after five years through ten years 104,076 106,154 Due after ten years 72,696 74,265 Residential mortgage-backed securities 1,340,614 1,382,726 Total investment securities available for sale $ 1,641,277 $ 1,689,388 Actual maturities of available for sale 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 4.8 years at June 30, 2020 . Impairment Analysis of Available For Sale Debt Securities Valley's available for sale debt securities portfolio includes corporate bonds and special revenue bonds, among other securities, which 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, including due to the economic effects of COVID-19. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis. In performing an assessment of whether any decline in fair value is due to a credit loss, Valley considers the extent to which the fair value is less than the amortized cost, changes in credit ratings, any adverse economic conditions, as well as all relevant information at the individual security level such as credit deterioration of the issuer or collateral underlying the security. In assessing the impairment, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security. If it is determined that the decline in fair value was due to credit losses, an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. The non-credit related decrease in the fair value, such as a decline due to changes in market interest rates, is recorded in other comprehensive income, net of tax. Valley also assesses the intent to sell the securities (as well as the likelihood of a near-term recovery). If Valley intends to sell an available for sale debt security or it is more likely than not that Valley will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged to the debt security’s fair value at the reporting date with any incremental impairment reported in earnings. The obligations of states and political subdivisions classified as available for sale include special revenue bonds which had an aggregate amortized cost and fair value of $ 80.2 million and $ 81.8 million , respectively, at June 30, 2020 . There were $ 56 thousand in gross unrealized losses associated with the special revenue bonds as of June 30, 2020 . Approximately 54 percent of the special revenue bonds were issued by the states of (or municipalities within) Utah, Illinois, North Carolina and Florida. 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. These investments are a mix of municipal bonds with investment grade ratings or non-rated revenue bonds paying in accordance with their contractual terms. The vast majority of the bonds not rated by the rating agencies are state housing finance agency revenue bonds secured by Ginnie Mae securities 22 that are commonly referred to as Tax Exempt Mortgage Securities (TEMS). Valley continues to monitor the special revenue bond portfolio as part of its quarterly impairment analysis. Valley has evaluated available for sale debt securities that are in an unrealized loss position as of June 30, 2020 included in the table above and has determined that the declines in fair value are mainly attributable to 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 recognized no impairment during the three and six months ended June 30, 2020 and, as a result, there is no allowance for credit losses for available for sale debt securities at June 30, 2020 . During the three months ended June 30, 2019, Valley recognized a $ 2.9 million other-than-temporary credit impairment charge on one special revenue bond classified as available for sale (within the obligations of states and state agencies in the tables above). The credit impairment was due to severe credit deterioration disclosed by the issuer in the second quarter of 2019, as well as the issuer's default on its contractual payment. At June 30, 2020 , the impaired security had an adjusted amortized cost and fair value of $ 680 thousand and $ 1.4 million , respectively. 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. Held to Maturity Debt Securities The amortized cost, gross unrealized gains and losses and fair value of debt securities held to maturity at June 30, 2020 and December 31, 2019 were as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) June 30, 2020 U.S. Treasury securities $ 138,268 $ 9,147 $ — $ 147,415 U.S. government agency securities 6,657 264 — 6,921 Obligations of states and political subdivisions: Obligations of states and state agencies 280,187 8,569 ( 545 ) 288,211 Municipal bonds 186,649 6,876 — 193,525 Total obligations of states and political subdivisions 466,836 15,445 ( 545 ) 481,736 Residential mortgage-backed securities 1,451,581 44,327 ( 309 ) 1,495,599 Trust preferred securities 37,335 48 ( 7,483 ) 29,900 Corporate and other debt securities 32,750 556 ( 1 ) 33,305 Total investment securities held to maturity $ 2,133,427 $ 69,787 $ ( 8,338 ) $ 2,194,876 December 31, 2019 U.S. Treasury securities $ 138,352 $ 5,761 $ — $ 144,113 U.S. government agency securities 7,345 58 ( 41 ) 7,362 Obligations of states and political subdivisions: Obligations of states and state agencies 297,454 7,745 ( 529 ) 304,670 Municipal bonds 203,251 5,696 ( 10 ) 208,937 Total obligations of states and political subdivisions 500,705 13,441 ( 539 ) 513,607 Residential mortgage-backed securities 1,620,119 14,803 ( 5,350 ) 1,629,572 Trust preferred securities 37,324 39 ( 5,981 ) 31,382 Corporate and other debt securities 32,250 454 ( 20 ) 32,684 Total investment securities held to maturity $ 2,336,095 $ 34,556 $ ( 11,931 ) $ 2,358,720 23 The age of unrealized losses and fair value of related debt securities held to maturity at June 30, 2020 and December 31, 2019 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) June 30, 2020 Obligations of states and political subdivisions: Obligations of states and state agencies $ 10,544 $ ( 266 ) $ 20,022 $ ( 279 ) $ 30,566 $ ( 545 ) Total obligations of states and political subdivisions 10,544 ( 266 ) 20,022 ( 279 ) 30,566 ( 545 ) Residential mortgage-backed securities 37,394 ( 305 ) 2,710 ( 4 ) 40,104 ( 309 ) Trust preferred securities — — 28,499 ( 7,483 ) 28,499 ( 7,483 ) Corporate and other debt securities 17,749 ( 1 ) — — 17,749 ( 1 ) Total $ 65,687 $ ( 572 ) $ 51,231 $ ( 7,766 ) $ 116,918 $ ( 8,338 ) December 31, 2019 U.S. government agency securities $ 5,183 $ ( 41 ) $ — $ — $ 5,183 $ ( 41 ) Obligations of states and political subdivisions: Obligations of states and state agencies 11,178 ( 55 ) 32,397 ( 474 ) 43,575 ( 529 ) Municipal bonds — — 798 ( 10 ) 798 ( 10 ) Total obligations of states and political subdivisions 11,178 ( 55 ) 33,195 ( 484 ) 44,373 ( 539 ) Residential mortgage-backed securities 307,885 ( 1,387 ) 254,915 ( 3,963 ) 562,800 ( 5,350 ) Trust preferred securities — — 29,990 ( 5,981 ) 29,990 ( 5,981 ) Corporate and other debt securities — — 4,980 ( 20 ) 4,980 ( 20 ) Total $ 324,246 $ ( 1,483 ) $ 323,080 $ ( 10,448 ) $ 647,326 $ ( 11,931 ) Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 26 and 82 at June 30, 2020 and December 31, 2019 , respectively. As of June 30, 2020 , the fair value of debt securities held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $ 1.3 billion . 24 The contractual maturities of investments in debt securities held to maturity at June 30, 2020 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary. June 30, 2020 Amortized Cost Fair Value (in thousands) Due in one year $ 92,432 $ 93,313 Due after one year through five years 171,778 179,833 Due after five years through ten years 203,555 215,200 Due after ten years 214,081 210,931 Residential mortgage-backed securities 1,451,581 1,495,599 Total investment securities held to maturity $ 2,133,427 $ 2,194,876 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 3.9 years at June 30, 2020 . 25 Credit Quality Indicators Valley monitors the credit quality of the held to maturity debt securities through the use of the most current credit ratings from external rating agencies. The following table summarizes the amortized cost of held to maturity debt securities by external credit rating at June 30, 2020 and December 31, 2019 . AAA/AA/A Rated BBB rated Non-investment grade rated Non-rated Total (in thousands) June 30, 2020 U.S. Treasury securities $ 138,268 $ — $ — $ — $ 138,268 U.S. government agency securities 6,657 — — — 6,657 Obligations of states and political subdivisions: Obligations of states and state agencies 239,811 — 5,686 34,690 280,187 Municipal bonds 182,140 — — 4,509 186,649 Total obligations of states and political subdivisions 421,951 — 5,686 39,199 466,836 Residential mortgage-backed securities 1,451,581 — — — 1,451,581 Trust preferred securities — — — 37,335 37,335 Corporate and other debt securities — 5,000 — 27,750 32,750 Total investment securities held to maturity $ 2,018,457 $ 5,000 $ 5,686 $ 104,284 $ 2,133,427 December 31, 2019 U.S. Treasury securities $ 138,352 $ — $ — $ — $ 138,352 U.S. government agency securities 7,345 — — — 7,345 Obligations of states and political subdivisions: Obligations of states and state agencies 248,533 5,722 — 43,199 297,454 Municipal bonds 202,642 — — 609 203,251 Total obligations of states and political subdivisions 451,175 5,722 — 43,808 500,705 Residential mortgage-backed securities 1,620,119 — — — 1,620,119 Trust preferred securities — — — 37,324 37,324 Corporate and other debt securities — 5,000 — 27,250 32,250 Total investment securities held to maturity $ 2,216,991 $ 10,722 $ — $ 108,382 $ 2,336,095 Obligations of states and political subdivisions include municipal bonds and revenue bonds issued by various municipal corporations. At June 30, 2020 , most of the obligations of states and political subdivisions were rated investment grade and the "non-rated" category included mostly TEMS securities secured by Ginnie Mae securities. Trust preferred securities consist of non-rated single-issuer securities, issued by bank holding companies. Corporate bonds consist of debt primarily issued by banks. Allowance for Credit Losses for Held to Maturity Debt Securities Valley has a zero loss expectation for certain securities within the held to maturity portfolio, and therefore it is not required to estimate an allowance for credit losses related to these securities under the CECL standard. After an evaluation of qualitative factors, Valley identified the following securities types which it believes qualify for this exclusion: U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds called TEMS. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third-party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. The model is adjusted for a probability 26 weighted multi-scenario economic forecast to estimate future credit losses. Valley uses a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the investment security. The economic forecast methodology and governance for debt securities is aligned with Valley's economic forecast used for the loan portfolio discussed in more detail in Note 8. Accrued interest receivable is excluded from the estimate of credit losses. At June 30, 2020 , held to maturity debt securities were carried net of allowance for credit losses totaling $ 1.6 million . The provision was not material during three and six months ended June 30, 2020 , respectively, and there were no net charge-offs of debt securities in the respective periods. Note 8. Loans and Allowance for Credit Losses for Loans The detail of the loan portfolio as of June 30, 2020 and December 31, 2019 was as follows: June 30, 2020 December 31, 2019 (in thousands) Loans: Commercial and industrial * $ 6,884,689 $ 4,825,997 Commercial real estate: Commercial real estate 16,571,877 15,996,741 Construction 1,721,352 1,647,018 Total commercial real estate loans 18,293,229 17,643,759 Residential mortgage 4,405,147 4,377,111 Consumer: Home equity 471,115 487,272 Automobile 1,369,489 1,451,623 Other consumer 890,942 913,446 Total consumer loans 2,731,546 2,852,341 Total loans $ 32,314,611 $ 29,699,208 * Includes $ 2.2 billion of loans originated under the SBA Paycheck Protection Program (PPP), net of unearned fees totaling $ 62.1 million at June 30, 2020. Total loans includes net unearned discounts and deferred loan fees of $ 131.3 million at June 30, 2020 and net unearned premiums and deferred loan costs of $ 12.6 million at December 31, 2019 . Net unearned discounts and deferred loan fees at June 30, 2020 include the non-credit discount on PCD loans and net unearned fees related to SBA PPP loans. Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 104.2 million and $ 86.3 million at June 30, 2020 and December 31, 2019 , respectively, and is presented separately in the consolidated statements of financial condition . Valley transferred and sold approximately $ 30.0 million and $ 216.3 million of residential mortgage loans from the loan portfolio to loans held for sale during the six months ended June 30, 2020 and 2019 , respectively. Excluding the loan transfers, there were no sales of loans from the held for investment portfolio during the six months ended June 30, 2020 and 2019 . Credit Risk Management For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk appetite. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant 27 dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, internal loan classification, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through cyclical economic circumstances. See Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 for further details. Credit Quality 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. Cash collections from non-accrual loans are generally applied against principal, and no interest income is recognized on these loans until the principal balance has been determined to be fully collectible. 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. The following table presents past due, current and non-accrual loans without an allowance for credit losses by loan portfolio class (including PCD loans) at June 30, 2020 . Past Due and Non-Accrual Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Loans Non-Accrual Loans Total Past Due Loans Current Loans Total Loans Non-Accrual Loans Without Allowance for Credit Losses (in thousands) June 30, 2020 Commercial and industrial $ 6,206 $ 4,178 $ 5,220 $ 130,876 $ 146,480 $ 6,738,209 $ 6,884,689 $ 13,501 Commercial real estate: Commercial real estate 13,912 1,543 — 43,678 59,133 16,512,744 16,571,877 40,476 Construction — — — 3,308 3,308 1,718,044 1,721,352 2,830 Total commercial real estate loans 13,912 1,543 — 46,986 62,441 18,230,788 18,293,229 43,306 Residential mortgage 35,263 4,169 3,812 25,776 69,020 4,336,127 4,405,147 13,717 Consumer loans: Home equity 3,236 864 363 5,326 9,789 461,326 471,115 145 Automobile 8,254 2,171 1,173 1,621 13,219 1,356,270 1,369,489 — Other consumer 1,472 751 546 — 2,769 888,173 890,942 — Total consumer loans 12,962 3,786 2,082 6,947 25,777 2,705,769 2,731,546 145 Total $ 68,343 $ 13,676 $ 11,114 $ 210,585 $ 303,718 $ 32,010,893 $ 32,314,611 $ 70,669 28 The following table presents past due, non-accrual and current loans by loan portfolio class at December 31, 2019 . At December 31, 2019 , purchased credit-impaired (PCI) loans were excluded from past due and non-accrual loans reported because they continued to earn interest income from the accretable yield at the pool level. The PCI loan pools are accounted for as PCD loans (on a loan level basis with a related allowance for credit losses) under the CECL standard adopted at January 1, 2020 and reported in the past due loans and non-accrual loans in the tables above at June 30, 2020 . Past Due and Non-Accrual Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Loans Non-Accrual Loans Total Past Due Loans Current Non-PCI Loans PCI Loans (in thousands) December 31, 2019 Commercial and industrial $ 11,700 $ 2,227 $ 3,986 $ 68,636 $ 86,549 $ 4,057,434 $ 682,014 Commercial real estate: Commercial real estate 2,560 4,026 579 9,004 16,169 10,886,724 5,093,848 Construction 1,486 1,343 — 356 3,185 1,492,532 151,301 Total commercial real estate loans 4,046 5,369 579 9,360 19,354 12,379,256 5,245,149 Residential mortgage 17,143 4,192 2,042 12,858 36,235 3,760,707 580,169 Consumer loans: Home equity 1,051 80 — 1,646 2,777 373,243 111,252 Automobile 11,482 1,581 681 334 14,078 1,437,274 271 Other consumer 1,171 866 30 224 2,291 900,411 10,744 Total consumer loans 13,704 2,527 711 2,204 19,146 2,710,928 122,267 Total $ 46,593 $ 14,315 $ 7,318 $ 93,058 $ 161,284 $ 22,908,325 $ 6,629,599 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. 29 The following table presents the internal loan classification risk by loan portfolio class by origination year (including PCD loans) based on the most recent analysis performed at June 30, 2020 : Term Loans Amortized Cost Basis by Origination Year June 30, 2020 2020 2019 2018 2017 2016 Prior to 2016 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Total (in thousands) Commercial and industrial Risk Rating: Pass $ 2,680,515 $ 697,134 $ 644,080 $ 306,259 $ 169,439 $ 422,608 $ 1,705,273 $ 466 $ 6,625,774 Special Mention 77 9,522 1,408 10,669 11,138 15,595 45,635 88 94,132 Substandard 5,963 7,356 1,269 2,155 3,331 13,704 13,040 57 46,875 Doubtful — 1,340 — 17,577 — 97,769 1,222 — 117,908 Total commercial and industrial $ 2,686,555 $ 715,352 $ 646,757 $ 336,660 $ 183,908 $ 549,676 $ 1,765,170 $ 611 $ 6,884,689 Commercial real estate Risk Rating: Pass $ 1,589,407 $ 3,175,366 $ 2,480,315 $ 2,059,141 $ 1,957,684 $ 4,775,400 $ 198,836 $ 12,031 $ 16,248,180 Special Mention — 18,913 31,799 18,620 32,853 73,609 3,496 — 179,290 Substandard 4,783 100 10,855 18,186 5,636 102,424 — — 141,984 Doubtful — — — 811 — 1,612 — — 2,423 Total commercial real estate $ 1,594,190 $ 3,194,379 $ 2,522,969 $ 2,096,758 $ 1,996,173 $ 4,953,045 $ 202,332 $ 12,031 $ 16,571,877 Construction Risk Rating: Pass $ 43,118 $ 135,181 $ 160,452 $ 28,928 $ 49,000 $ 99,014 $ 1,186,010 $ — $ 1,701,703 Special Mention — — — — 9,774 435 6,114 — 16,323 Substandard — — — — 2,405 921 — — 3,326 Total construction $ 43,118 $ 135,181 $ 160,452 $ 28,928 $ 61,179 $ 100,370 $ 1,192,124 $ — $ 1,721,352 30 For residential mortgages, automobile, home equity and other consumer loan portfolio classes, 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 amortized cost in those loan classes (including PCD loans) based on payment activity by origination year as of June 30, 2020 . Term Loans Amortized Cost Basis by Origination Year June 30, 2020 2020 2019 2018 2017 2016 Prior to 2016 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Total (in thousands) Residential mortgage Performing $ 414,014 $ 827,300 $ 851,792 $ 701,366 $ 426,897 $ 1,097,287 $ 73,757 $ — $ 4,392,413 90 days or more past due — 1,316 2,973 3,880 4,565 — — — 12,734 Total residential mortgage $ 414,014 $ 828,616 $ 854,765 $ 705,246 $ 431,462 $ 1,097,287 $ 73,757 $ — $ 4,405,147 Consumer loans Home equity Performing $ 3,816 $ 12,678 $ 15,090 $ 11,387 $ 6,941 $ 18,823 $ 347,142 $ 53,086 $ 468,963 90 days or more past due — — — — 25 321 1,046 760 2,152 Total home equity 3,816 12,678 15,090 11,387 6,966 19,144 348,188 53,846 471,115 Automobile Performing 184,095 524,849 338,665 200,947 75,553 42,550 — — 1,366,659 90 days or more past due 49 921 824 620 197 219 — — 2,830 Total automobile 184,144 525,770 339,489 201,567 75,750 42,769 — — 1,369,489 Other Consumer Performing 910 6,286 13,232 1,306 1,723 12,179 854,340 408 890,384 90 days or more past due — 15 — — — 4 539 — 558 Total other consumer 910 6,301 13,232 1,306 1,723 12,183 854,879 408 890,942 Total Consumer $ 188,870 $ 544,749 $ 367,811 $ 214,260 $ 84,439 $ 74,096 $ 1,203,067 $ 54,254 $ 2,731,546 The following table presents the credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) based on the most recent analysis performed at December 31, 2019 : Credit exposure— by internally assigned risk rating Special Total Non-PCI Pass Mention Substandard Doubtful Loans (in thousands) December 31, 2019 Commercial and industrial $ 3,982,453 $ 33,718 $ 66,511 $ 61,301 $ 4,143,983 Commercial real estate 10,781,587 77,884 42,560 862 10,902,893 Construction 1,487,877 7,486 354 — 1,495,717 Total $ 16,251,917 $ 119,088 $ 109,425 $ 62,163 $ 16,542,593 31 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 is presented above, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2019 : Credit exposure— by payment activity Performing Loans Non-Performing Loans Total Non-PCI Loans (in thousands) December 31, 2019 Residential mortgage $ 3,784,084 $ 12,858 $ 3,796,942 Home equity 374,374 1,646 376,020 Automobile 1,451,018 334 1,451,352 Other consumer 902,478 224 902,702 Total $ 6,511,954 $ 15,062 $ 6,527,016 The following table summarizes information pertaining to loans that were identified as PCI loans by class based on individual loan payment activity as of December 31, 2019 : Credit exposure— by payment activity Performing Loans Non-Performing Loans Total Non-PCI Loans (in thousands) December 31, 2019 Commercial and industrial $ 653,997 $ 28,017 $ 682,014 Commercial real estate 5,065,388 28,460 5,093,848 Construction 148,692 2,609 151,301 Residential mortgage 571,006 9,163 580,169 Consumer 120,356 1,911 122,267 Total $ 6,559,439 $ 70,160 $ 6,629,599 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). At the adoption of ASU 2016-13, Valley was not required to reassess whether modifications to individual PCI loans prior to January 1, 2020 met the TDR loan criteria. 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 $ 53.9 million and $ 73.0 million as of June 30, 2020 and December 31, 2019 , respectively. Non-performing TDRs totaled $ 85.6 million and $ 65.1 million as of June 30, 2020 and December 31, 2019 , respectively. 32 The following table presents the pre- and post-modification amortized cost of loans by loan class modified as TDRs (excluding PCI loans prior to the adoption of ASU 2016-13) during the three and six months ended June 30, 2020 and 2019 . Post-modification amounts are presented as of June 30, 2020 and 2019 . Three Months Ended June 30, 2020 2019 Troubled Debt Restructurings Number of Contracts Pre-Modification Amortized Carrying Amount Post-Modification Amortized Carrying Amount Number of Contracts Pre-Modification Amortized Carrying Amount Post-Modification Amortized Carrying Amount ($ in thousands) Commercial and industrial 4 $ 9,052 $ 7,047 17 $ 14,663 $ 14,187 Commercial real estate: Commercial real estate 1 885 900 1 3,067 3,067 Construction 2 435 218 — — — Total commercial real estate 3 1,320 1,118 1 3,067 3,067 Residential mortgage — — — 1 155 155 Total 7 $ 10,372 $ 8,165 19 $ 17,885 $ 17,409 Six Months Ended June 30, 2020 2019 Troubled Debt Restructurings Number of Contracts Pre-Modification Amortized Carrying Amount Post-Modification Amortized Carrying Amount Number of Contracts Pre-Modification Amortized Carrying Amount Post-Modification Amortized Carrying Amount ($ in thousands) Commercial and industrial 20 $ 22,196 $ 19,674 53 $ 38,216 $ 37,248 Commercial real estate: Commercial real estate 2 4,748 4,762 2 4,665 4,665 Construction 2 435 218 — — — Total commercial real estate 4 5,183 4,980 2 4,665 4,665 Residential mortgage — — — 1 155 155 Total 24 $ 27,379 $ 24,654 56 $ 43,036 $ 42,068 The total TDRs presented in the above table had allocated reserves for loan losses of $ 8.4 million and $ 11.7 million at June 30, 2020 and 2019 , respectively. There were $ 2.9 million and $ 3.7 million of partial charge-offs related to TDRs for the three and six months ended June 30, 2020 , respectively. There were $ 1.1 million and $ 2.0 million of partial charge-offs related to TDRs for the three and six months ended June 30, 2019 , respectively. Valley did not extend any commitments to lend additional funds to borrowers whose loans have been modified as TDRs during the three and six months ended June 30, 2020 and 2019 . 33 Loans modified as TDRs (excluding PCI loan modifications prior to the adoption of ASU 2016-13) within the previous 12 months and for which there was a payment default ( 90 or more days past due) for the three and six months ended June 30, 2020 and 2019 were as follows: Three Months Ended June 30, 2020 2019 Troubled Debt Restructurings Subsequently Defaulted Number of Contracts Amortized Cost Number of Contracts Recorded Investment ($ in thousands) Commercial and industrial 20 $ 14,986 18 $ 12,322 Commercial real estate — — 1 383 Residential mortgage 1 220 — — Consumer 2 204 — — Total 23 $ 15,410 19 $ 12,705 Six Months Ended June 30, 2020 2019 Troubled Debt Restructurings Subsequently Defaulted Number of Contracts Amortized Cost Number of Contracts Recorded Investment ($ in thousands) Commercial and industrial 20 $ 14,986 18 $ 12,322 Commercial real estate — — 1 383 Residential mortgage 1 220 2 215 Consumer 2 204 1 18 Total 23 $ 15,410 22 $ 12,938 In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that were insignificant, when requested by customers. These modifications complied with the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. As of June 30, 2020 , Valley had approximately 7,000 loans totaling approximately $ 3.1 billion in their contractual deferred payment period in accordance with short-term modification terms. Under the applicable guidance, none of these loans were considered TDRs as of June 30, 2020 . Loans in Process of Foreclosure. Other real estate owned (OREO) totaled $ 8.3 million and $ 9.4 million at June 30, 2020 and December 31, 2019 , respectively. OREO included foreclosed residential real estate properties totaling $ 2.5 million and $ 2.1 million at June 30, 2020 and December 31, 2019 , 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 $ 2.8 million at June 30, 2020 and December 31, 2019 , respectively. 34 Allowance for Credit Losses for Loans The allowance for credit losses for loans under the new CECL standard adopted on January 1, 2020, consisted of: (1) the allowance for loan losses and (2) the allowance for unfunded credit commitments. Prior periods reflect the allowance for credit losses for loans under the incurred loss model. The following table summarizes the allowance for credit losses for loans at June 30, 2020 and December 31, 2019 : June 30, 2020 December 31, 2019 (in thousands) Components of allowance for credit losses for loans: Allowance for loan losses $ 309,614 $ 161,759 Allowance for unfunded credit commitments 10,109 2,845 Total allowance for credit losses for loans $ 319,723 $ 164,604 The following table summarizes the provision for credit losses for loans for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Components of provision for credit losses for loans: Provision for loan losses $ 41,025 $ 3,706 $ 74,876 $ 11,562 Provision for unfunded credit commitments 90 ( 1,606 ) 163 ( 1,462 ) Total provision for credit losses for loans $ 41,115 $ 2,100 $ 75,039 $ 10,100 Allowance for Loan Losses The allowance for loan losses is a valuation account that is deducted from loans' amortized cost basis to present the net amount expected to be collected on loans. Valley's methodology to establish the allowance for loan losses has two basic components: (1) a collective (pooled) reserve component for estimated lifetime expected credit losses for pools of loans that share similar risk characteristics and (2) an individual reserve component for loans that do not share common risk characteristics. Reserves for loans that share common risk characteristics. In estimating the component of the allowance on a collective basis, Valley uses a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool, and the severity of loss, based on the aggregate net lifetime losses incurred. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) lending policies and procedures, (ii) current business conditions and economic developments that affect the loan collectability, (iii) concentration risks by size, type, and geography, (iv) the potential volume and migration of loan forbearances to non-performing status, and (v) the effect of external factors such as legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses that is governed by a cross-functional committee. The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information. The model projects economic variables under each scenario based on detailed statistical analyses. Valley has identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index. 35 Reserves for loans that that do not share common risk characteristics. Valley measures specific reserves for individual loans that do not share common risk characteristics with other loans, consisting of collateral dependent, TDR, and expected TDR loans, based on the amount of lifetime expected credit losses calculated on those loans and charge-offs of those amounts determined to be uncollectible. Factors considered by Valley in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. 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 the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable . When Valley determines that foreclosure is probable, collateral dependent 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. Valley elected a practical expedient to use the estimated current fair value (less estimated selling costs) of the collateral to measure expected credit losses on collateral dependent loans when foreclosure is not probable. The following table presents collateral dependent loans by class as of June 30, 2020 : June 30, 2020 (in thousands) Commercial and industrial $ 124,323 Commercial real estate: Commercial real estate 51,386 Construction 2,830 Total commercial real estate loans 54,216 Residential mortgage 15,581 Home equity 276 Total $ 194,396 Commercial and industrial loans are primarily collateralized by taxi medallions in the table above. Commercial real estate loans are collateralized by real estate and construction loans are generally secured by the real estate to be developed and may also be secured by additional real estate to mitigate the risk. Residential and home equity loans are collateralized by residential real estate. Allowance for Unfunded Credit Commitments The allowance for unfunded credit commitments generally consists of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit valued using a similar methodology as used for loans. Management's estimate of expected losses inherent in these off-balance sheet credit exposures also incorporates estimated usage factors over the commitment's contractual period or an expected pull-through rate for new loan commitments. The allowance for unfunded credit commitments totaling $ 10.1 million at June 30, 2020 is included in accrued expenses and other liabilities on the consolidated statements of financial condition. 36 The following table details the activity in the allowance for loan losses by loan portfolio segment for three and six months ended June 30, 2020 and 2019 : Commercial and Industrial Commercial Real Estate Residential Mortgage Consumer Total (in thousands) Three Months Ended June 30, 2020 Allowance for loan losses: Beginning balance $ 127,437 $ 111,585 $ 29,456 $ 14,864 $ 283,342 Loans charged-off ( 14,024 ) ( 27 ) ( 5 ) ( 2,601 ) ( 16,657 ) Charged-off loans recovered 799 51 545 509 1,904 Net (charge-offs) recoveries ( 13,225 ) 24 540 ( 2,092 ) ( 14,753 ) Provision for loan losses 17,827 20,093 ( 366 ) 3,471 41,025 Ending balance $ 132,039 $ 131,702 $ 29,630 $ 16,243 $ 309,614 Three Months Ended June 30, 2019 Allowance for losses: Beginning balance $ 94,630 $ 47,762 $ 5,139 $ 6,850 $ 154,381 Loans charged-off ( 3,073 ) — — ( 1,752 ) ( 4,825 ) Charged-off loans recovered 1,195 22 9 617 1,843 Net (charge-offs) recoveries ( 1,878 ) 22 9 ( 1,135 ) ( 2,982 ) Provision for loan losses 1,632 1,194 71 809 3,706 Ending balance $ 94,384 $ 48,978 $ 5,219 $ 6,524 $ 155,105 Commercial and Industrial Commercial Real Estate Residential Mortgage Consumer Total (in thousands) Six Months Ended June 30, 2020 Allowance for loan losses: Beginning balance $ 104,059 $ 45,673 $ 5,060 $ 6,967 $ 161,759 Impact of ASU 2016-13 adoption* 15,169 49,797 20,575 6,990 92,531 Loans charged-off ( 17,384 ) ( 71 ) ( 341 ) ( 5,166 ) ( 22,962 ) Charged-off loans recovered 1,368 144 595 1,303 3,410 Net (charge-offs) recoveries ( 16,016 ) 73 254 ( 3,863 ) ( 19,552 ) Provision for loan losses 28,827 36,159 3,741 6,149 74,876 Ending balance $ 132,039 $ 131,702 $ 29,630 $ 16,243 $ 309,614 Six Months Ended June 30, 2019 Allowance for losses: Beginning balance $ 90,956 $ 49,650 $ 5,041 $ 6,212 $ 151,859 Loans charged-off ( 7,355 ) — ( 15 ) ( 3,780 ) ( 11,150 ) Charged-off loans recovered 1,678 43 10 1,103 2,834 Net (charge-offs) recoveries ( 5,677 ) 43 ( 5 ) ( 2,677 ) ( 8,316 ) Provision for loan losses 9,105 ( 715 ) 183 2,989 11,562 Ending balance $ 94,384 $ 48,978 $ 5,219 $ 6,524 $ 155,105 * Includes a $ 61.6 million reclassification adjustment representing the estimated expected credit losses for PCD loans. 37 The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the allowance measurement methodology at June 30, 2020 and December 31, 2019 . Commercial and Industrial Commercial Real Estate Residential Mortgage Consumer Total (in thousands) June 30, 2020 Allowance for loan losses: Individually evaluated for credit losses $ 69,333 $ 1,237 $ 430 $ 498 $ 71,498 Collectively evaluated for credit losses 62,706 130,465 29,200 15,745 238,116 Total $ 132,039 $ 131,702 $ 29,630 $ 16,243 $ 309,614 Loans: Individually evaluated for credit losses $ 138,120 $ 77,914 $ 22,148 $ 3,096 $ 241,278 Collectively evaluated for credit losses 6,746,569 18,215,315 4,382,999 2,728,450 32,073,333 Total $ 6,884,689 $ 18,293,229 $ 4,405,147 $ 2,731,546 $ 32,314,611 December 31, 2019 Allowance for loan losses: Individually evaluated for credit losses $ 36,662 $ 1,338 $ 518 $ 58 $ 38,576 Collectively evaluated for credit losses 67,397 44,335 4,542 6,909 123,183 Total $ 104,059 $ 45,673 $ 5,060 $ 6,967 $ 161,759 Loans: Individually evaluated for credit losses $ 100,860 $ 51,242 $ 10,689 $ 853 $ 163,644 Collectively evaluated for credit losses 4,043,123 12,347,368 3,786,253 2,729,221 22,905,965 Loans acquired with discounts related to credit quality 682,014 5,245,149 580,169 122,267 6,629,599 Total $ 4,825,997 $ 17,643,759 $ 4,377,111 $ 2,852,341 $ 29,699,208 Impaired loans . Impaired loans disclosures presented below as of December 31, 2019 represent requirements prior to the adoption of ASU No. 2016-13 on January 1, 2020. Impaired loans, consisting of non-accrual commercial and industrial loans, commercial real estate loans over $ 250 thousand and all loans which were modified in troubled debt restructurings, were individually evaluated for impairment. PCI loans were not classified as impaired loans because they are accounted for on a pool basis. 38 The following table presents information about impaired loans by loan portfolio class at December 31, 2019 : Recorded Investment With No Related Allowance Recorded Investment With Related Allowance Total Recorded Investment Unpaid Contractual Principal Balance Related Allowance (in thousands) December 31, 2019 Commercial and industrial $ 14,617 $ 86,243 $ 100,860 $ 114,875 $ 36,662 Commercial real estate: Commercial real estate 26,046 24,842 50,888 51,258 1,338 Construction 354 — 354 354 — Total commercial real estate loans 26,400 24,842 51,242 51,612 1,338 Residential mortgage 5,836 4,853 10,689 11,800 518 Consumer loans: Home equity 366 487 853 956 58 Total consumer loans 366 487 853 956 58 Total $ 47,219 $ 116,425 $ 163,644 $ 179,243 $ 38,576 Purchased Credit-Impaired Loans The table below includes disclosure requirements prior to the adoption of ASU No. 2016-13 on January 1, 2020, and presents the changes in the accretable yield for PCI loans during the three and six months ended June 30, 2019: Three Months Ended June 30, 2019 Six Months Ended June 30, 2019 (in thousands) Balance, beginning of period $ 890,771 $ 875,958 Accretion ( 55,014 ) ( 108,506 ) Net increase in expected cash flows 18,130 86,435 Balance, end of period $ 853,887 $ 853,887 Note 9. Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill as allocated to our business segments, or reporting units thereof, for goodwill impairment analysis were: Business Segment / Reporting Unit* Wealth Management Consumer Lending Commercial Lending Investment Management Total (in thousands) Balance at December 31, 2019 $ 21,218 $ 306,572 $ 825,767 $ 220,068 $ 1,373,625 Goodwill from business combinations — 121 1,654 9 1,784 Balance at June 30, 2020 $ 21,218 $ 306,693 $ 827,421 $ 220,077 $ 1,375,409 * 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. During the six months ended June 30, 2020 , Valley recorded additional goodwill as set forth in the table above related to the Oritani acquisition, reflecting the effect of the combined adjustments to the fair value of certain loans and deferred tax assets as of the acquisition date. Certain estimates for acquired assets and assumed liabilities are subject to change for up to one year after the acquisition date. See Note 2 for details. 39 During the second quarter 2020 , Valley performed the annual goodwill impairment test at its normal assessment date. As a result, there was no charge for impairment of goodwill during the three and six months ended June 30, 2020 and 2019 . The following table summarizes other intangible assets as of June 30, 2020 and December 31, 2019 : Gross Intangible Assets Accumulated Amortization Valuation Allowance Net Intangible Assets (in thousands) June 30, 2020 Loan servicing rights $ 98,127 $ ( 74,624 ) $ ( 825 ) $ 22,678 Core deposits 101,160 ( 47,118 ) — 54,042 Other 3,945 ( 2,744 ) — 1,201 Total other intangible assets $ 203,232 $ ( 124,486 ) $ ( 825 ) $ 77,921 December 31, 2019 Loan servicing rights $ 94,827 $ ( 70,095 ) $ ( 47 ) $ 24,685 Core deposits 101,160 ( 40,384 ) — 60,776 Other 3,945 ( 2,634 ) — 1,311 Total other intangible assets $ 199,932 $ ( 113,113 ) $ ( 47 ) $ 86,772 Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets over the period of the economic life of the assets arising from estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. Valley recorded net impairment charges on its loan servicing rights totaling $ 669 thousand and $ 778 thousand for the three and six months ended June 30, 2020 , respectively. Valley recorded net recoveries of impairment charges on its loan servicing rights totaling $ 107 thousand and $ 83 thousand for the three and six months ended June 30, 2019 , respectively. See the “Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis” section of Note 6 for additional information regarding the fair valuation. Core deposits are amortized using an accelerated method and have a weighted average amortization period of 8.9 years . The line item labeled “Other” included in the table above primarily consists of customer lists and covenants not to compete, which are amortized over their expected lives generally using a straight-line method and have a weighted average amortization period of approximately 7.6 years . Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three and six months ended June 30, 2020 and 2019 . The following table presents the estimated future amortization expense of other intangible assets for the remainder of 2020 through 2024 : Loan Servicing Rights Core Deposits Other (in thousands) 2020 $ 5,161 $ 6,629 $ 110 2021 4,179 11,607 206 2022 3,226 9,876 191 2023 2,483 8,146 131 2024 1,931 6,537 117 Valley recognized amortization expense on other intangible assets, including net impairment (or recovery of impairment) charges on loan servicing rights, totaling approximately $ 6.7 million and $ 4.2 million for the three 40 months ended June 30, 2020 and 2019 , respectively, and $ 12.2 million and $ 8.5 million for the six months ended June 30, 2020 and 2019 , respectively. Note 10. Borrowed Funds Short-Term Borrowings Short-term borrowings at June 30, 2020 and December 31, 2019 consisted of the following: June 30, 2020 December 31, 2019 (in thousands) FHLB advances $ 1,235,000 $ 940,000 Federal funds purchased 678,900 — Securities sold under agreements to repurchase 168,980 153,280 Total short-term borrowings $ 2,082,880 $ 1,093,280 The contractual weighted average interest rate for short-term borrowings was 0.37 percent and 1.68 percent at June 30, 2020 and December 31, 2019 , respectively. Short-term FHLB advances totaling $ 500 million were hedged with cash flow interest rate swaps during the six months ended June 30, 2020 . See Note 12 for additional details. Long-Term Borrowings Long-term borrowings at June 30, 2020 and December 31, 2019 consisted of the following: June 30, 2020 December 31, 2019 (in thousands) FHLB advances, net (1) $ 2,153,052 $ 1,480,012 Subordinated debt, net (2) 404,455 292,414 Securities sold under agreements to repurchase 350,000 350,000 Other 28 — Total long-term borrowings $ 2,907,535 $ 2,122,426 (1) FHLB advances are presented net of unamortized prepayment penalties and other purchase accounting adjustments totaling $1.2 million and $2.8 million at June 30, 2020 and December 31, 2019, respectively. (2) Subordinated debt is presented net of unamortized debt issuance costs totaling $2.9 million and $1.2 million at June 30, 2020 and December 31, 2019, respectively. FHLB advances. Long-term FHLB advances had a weighted average interest rate of 2.13 percent and 2.23 percent at June 30, 2020 and December 31, 2019 , respectively. 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. 41 The long-term FHLB advances at June 30, 2020 are scheduled for contractual balance repayments as follows: Year Amount (in thousands) 2020 $ 30,000 2021 994,769 2022 121,420 2023 428,164 2024 300,000 Thereafter 279,931 Total long-term FHLB advances $ 2,154,284 There are no FHLB advances with scheduled repayments in years 2020 and thereafter, reported in the table above, which are callable for early redemption by the FHLB during 2020. Securities sold under agreements to repurchase (repos). The long-term repos had a weighted average interest rate of 2.88 percent and 1.94 percent at June 30, 2020 and December 31, 2019 , respectively. The long-term repos at June 30, 2020 are scheduled for contractual balance repayments as follows: Year Amount (in thousands) 2021 $ 300,000 2022 50,000 Total long-term securities sold under agreements to repurchase $ 350,000 Subordinated debt. On June 5, 2020, Valley issued $ 115.0 million of 5.25 percent Fixed-to-Floating Rate subordinated notes due June 15, 2030. Interest on the subordinated notes during the initial five year term through June 15, 2025 is payable semi-annually on June 15 and December 15. Thereafter, interest is expected to be set based on Three-Month Term SOFR plus 514 basis points and paid quarterly through maturity of the notes. The subordinated notes had a carrying value of $ 113.1 million at June 30, 2020 , net of debt issuance costs. Valley also had the following subordinated debt outstanding at June 30, 2020 : • $ 100 million of 4.55 percent subordinated notes due July 30, 2025 with no call dates or prepayments allowed unless certain conditions exist; • $ 125 million of 5.125 percent subordinated notes due September 27, 2023 with no call dates or prepayments allowed, unless certain conditions exist; and • $ 60 million of 6.25 percent subordinated notes due April 1, 2026 and callable beginning April 1, 2021. See Note 11 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 for further details. Note 11. Stock–Based Compensation Valley currently has one active employee stock plan, the 2016 Long-Term Stock Incentive Plan (the 2016 Stock Plan), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016. The 2016 Stock Plan is administered by the Compensation and Human Resources Committee (the Committee) appointed by Valley's Board of Directors. The Committee can grant awards to officers and key employees of Valley. The primary purpose of the 2016 Stock Plan is to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business. 42 Under the 2016 Stock Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors (for acting in their roles as board members). As of June 30, 2020 , 2.5 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 condition. The grant date fair values of performance-based awards that vest based on a market condition are determined by a third-party specialist using a Monte Carlo valuation model. Restricted Stock Units (RSUs). Valley granted 142 thousand and 92 thousand of time-based RSUs during the three months ended June 30, 2020 and 2019 , respectively, and 1.2 million and 826 thousand during the six months ended June 30, 2020 and 2019 , respectively. Generally, time-based RSUs vest ratably one-third each year over a three-year vesting period. The average grant date fair value of the RSUs granted during the six months ended June 30, 2020 and 2019 was $ 10.48 per share and $ 10.40 per share, respectively. Valley granted 589 thousand and 532 thousand of performance-based RSUs to certain executive officers for the six months ended June 30, 2020 and 2019 , respectively. The performance-based RSU awards include RSUs with vesting conditions based upon certain levels of growth in Valley's tangible book value per share plus dividends and RSUs with vesting conditions based upon Valley's total shareholder return as compared to our peer group. The RSUs “cliff” vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents are accumulated and paid to the grantee at the vesting date or forfeited if the performance conditions are not met. The grant date fair value of the RSUs granted during the six months ended June 30, 2020 and 2019 was $ 10.82 per share and $ 10.43 per share, respectively. Valley recorded total stock-based compensation expense of $ 4.2 million for both the three months ended June 30, 2020 and 2019 , and $ 8.2 million and $ 8.3 million for the six months ended June 30, 2020 and 2019 , respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of June 30, 2020 , the unrecognized amortization expense for all stock-based employee compensation totaled approximately $ 25.4 million and will be recognized over an average remaining vesting period of 2.0 years . Note 12. Derivative Instruments and Hedging Activities Valley enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Cash Flow Hedges of Interest Rate Risk . Valley’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Valley uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively. During the six months ended June 30, 2020 , Valley entered into new interest rate swap agreements designated as cash flow hedges with a total notional amount of $ 900 million . The swaps are intended to hedge the changes in cash flows associated with certain FHLB advances and brokered deposits. Valley is required to pay fixed-rates of interest ranging from 0.46 percent to 0.67 percent and receives variable rates of interest that reset quarterly based on three-month LIBOR. Expiration dates for the swaps range from April 2021 to March 2022. 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 has used interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional 43 amount. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Valley includes the gain or loss on the hedged items in the same income statement line item as the loss or gain on the related derivatives. Non-designated Hedges. Derivatives not designated as hedges may be used to manage Valley’s exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. Derivatives not designated as hedges are not entered into for speculative purposes. Under a program, Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. Valley sometimes enters into risk participation agreements with external lenders where the banks are sharing their risk of default on the interest rate swaps on participated loans. Valley either pays or receives a fee depending on the participation type. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. At June 30, 2020 , Valley had 22 credit swaps with an aggregate notional amount of $ 166.4 million related to risk participation agreements. At June 30, 2020 , Valley had two “steepener” swaps, each with a current notional amount of $ 10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the rates paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in the three-month LIBOR rate and therefore provide an effective economic hedge. Valley regularly enters into mortgage banking derivatives which are non-designated hedges. These derivatives include interest rate lock commitments provided to customers to fund certain residential mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. Valley enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rate on Valley's commitments to fund the loans as well as on its portfolio of mortgage loans held for sale. 44 Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows: June 30, 2020 December 31, 2019 Fair Value Fair Value Other Assets Other Liabilities Notional Amount Other Assets Other Liabilities Notional Amount (in thousands) Derivatives designated as hedging instruments: Cash flow hedge interest rate swaps $ — $ 4,722 $ 1,030,000 $ — $ 1,484 $ 180,000 Fair value hedge interest rate swaps — 147 7,147 — 229 7,281 Total derivatives designated as hedging instruments $ — $ 4,869 $ 1,037,147 $ — $ 1,713 $ 187,281 Derivatives not designated as hedging instruments: Interest rate swaps and embedded derivatives $ 467,606 $ 161,997 $ 7,293,947 $ 158,382 $ 42,020 $ 4,113,106 Mortgage banking derivatives 669 3,407 558,379 150 193 142,760 Total derivatives not designated as hedging instruments $ 468,275 $ 165,404 $ 7,852,326 $ 158,532 $ 42,213 $ 4,255,866 The Chicago Mercantile Exchange and London Clearing House variation margins are classified as a single-unit of account with the fair value of certain cash flow and non-designated derivative instruments. As a result, the fair value of the designated cash flow interest rate swaps assets and designated and non-designated interest rate swaps liabilities were offset by variation margins posted by (with) the applicable counterparties and reported in the table above on a net basis at June 30, 2020 and December 31, 2019 . Gains (l osses) included in the consolidated statements of income and other comprehensive income, on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Amount of gain (loss) reclassified from accumulated other comprehensive loss to interest expense $ 438 $ ( 383 ) $ ( 177 ) $ ( 673 ) Amount of loss recognized in other comprehensive income ( 1,773 ) ( 962 ) ( 3,253 ) ( 1,512 ) The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $ 5.9 million and $ 3.7 million at June 30, 2020 and December 31, 2019 , 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 $ 4.5 million will be reclassified as an increase to interest expense over the next 12 months. 45 Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Derivative - interest rate swaps: Interest income $ 71 $ 49 $ 82 $ 73 Hedged item - loans: Interest income $ ( 71 ) $ ( 49 ) $ ( 82 ) $ ( 73 ) The following table presents the hedged items related to interest rate derivatives designated as hedges of fair value and the cumulative basis fair value adjustment included in the net carrying amount of the hedged items at June 30, 2020 and December 31, 2019 . Line Item in the Statement of Financial Condition 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 June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019 (in thousands) Loans $ 7,294 $ 7,510 $ 147 $ 229 The net losses (gains) included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Non-designated hedge interest rate swaps and credit derivatives Other non-interest expense $ 1,416 $ ( 347 ) $ 1,505 $ ( 757 ) Other non-interest income included fee income related to non-designated hedge derivative interest rate swaps (not designated as hedging instruments) executed with commercial loan customers totaling $ 14.7 million and $ 5.4 million for the three months ended June 30, 2020 and 2019 , respectively, and $ 28.9 million and $ 9.5 million for the six months ended June 30, 2020 and 2019 , respectively. Credit Risk Related Contingent Features. By using derivatives, Valley is exposed to credit risk if counterparties to the derivative contracts do not perform as expected. Management attempts to minimize counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral where appropriate. Credit risk exposure associated with derivative contracts is managed at Valley in conjunction with Valley’s consolidated counterparty risk management process. Valley’s counterparties and the risk limits monitored by management are periodically reviewed and approved by the Board of Directors. Valley has agreements with its derivative counterparties providing that if Valley defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Valley could also be declared in default on its derivative counterparty agreements. Additionally, Valley has an agreement with several of its derivative counterparties that contains provisions that require Valley’s debt to maintain an investment grade credit rating from each of the major credit rating agencies from which it receives a credit rating. If Valley’s 46 credit rating is reduced below investment grade, or such rating is withdrawn or suspended, then the counterparty could terminate the derivative positions and Valley would be required to settle its obligations under the agreements. As of June 30, 2020 , Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of June 30, 2020 , 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 $ 176.7 million . Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. Note 13. Balance Sheet Offsetting Certain financial instruments, including interest rate swap derivatives 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 (i.e., the threshold for posting collateral is reduced to zero, subject to certain minimum transfer amounts). Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default. The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of June 30, 2020 and December 31, 2019 . Gross Amounts Not Offset Gross Amounts Recognized Gross Amounts Offset Net Amounts Presented Financial Instruments Cash Collateral Net Amount (in thousands) June 30, 2020 Assets: Interest rate swaps $ 467,606 $ — $ 467,606 $ — $ — $ 467,606 Liabilities: Interest rate swaps $ 166,866 $ — $ 166,866 $ — $ ( 166,866 ) $ — Repurchase agreements 350,000 — 350,000 ( 350,000 ) * — — Total $ 516,866 $ — $ 516,866 $ ( 350,000 ) $ ( 166,866 ) $ — December 31, 2019 Assets: Interest rate swaps $ 158,382 $ — $ 158,382 $ ( 118 ) $ — $ 158,264 Liabilities: Interest rate swaps $ 43,733 $ — $ 43,733 $ ( 118 ) $ ( 16,881 ) $ 26,734 Repurchase agreements 350,000 — 350,000 ( 350,000 ) * — * — Total $ 393,733 $ — $ 393,733 $ ( 350,118 ) $ ( 16,881 ) $ 26,734 * Represents the fair value of non-cash pledged investment securities. Note 14. Tax Credit Investments Valley’s tax credit investments are primarily related to investments promoting qualified affordable housing projects, and other investments related to community development and renewable energy sources. Some of these tax-advantaged investments support Valley’s regulatory compliance with the Community Reinvestment Act (CRA). Valley’s investments in these entities generate a return primarily through the realization of federal income tax 47 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 in the consolidated statements of income using the equity method of accounting. After initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair values are increased to reflect Valley's share of income of the investee and are reduced to reflect its share of losses of the investee, dividends received and impairments, if applicable. The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at June 30, 2020 and December 31, 2019 : June 30, 2020 December 31, 2019 (in thousands) Other Assets: Affordable housing tax credit investments, net $ 22,874 $ 25,049 Other tax credit investments, net 51,569 59,081 Total tax credit investments, net $ 74,443 $ 84,130 Other Liabilities: Unfunded affordable housing tax credit commitments $ 1,402 $ 1,539 Unfunded other tax credit commitments 1,139 1,139 Total unfunded tax credit commitments $ 2,541 $ 2,678 The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the three and six months ended June 30, 2020 and 2019 : Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Components of Income Tax Expense: Affordable housing tax credits and other tax benefits $ 1,393 $ 1,708 $ 2,627 $ 3,421 Other tax credit investment credits and tax benefits 2,540 2,158 3,840 4,961 Total reduction in income tax expense $ 3,933 $ 3,866 $ 6,467 $ 8,382 Amortization of Tax Credit Investments: Affordable housing tax credit investment losses $ 537 $ 593 $ 1,091 $ 1,266 Affordable housing tax credit investment impairment losses 665 794 1,083 1,524 Other tax credit investment losses 679 2,509 1,223 3,496 Other tax credit investment impairment losses 1,535 967 3,247 5,750 Total amortization of tax credit investments recorded in non-interest expense $ 3,416 $ 4,863 $ 6,644 $ 12,036 48 Note 15. Business Segments 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 transfer pricing methodology, which involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities 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. The following tables represent the financial data for Valley’s four business segments for the three and six months ended June 30, 2020 and 2019 : Three Months Ended June 30, 2020 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,214,368 $ 24,826,832 $ 5,737,187 $ — $ 37,778,387 Interest income $ 66,807 $ 255,152 $ 27,623 $ ( 1,057 ) $ 348,525 Interest expense 11,469 40,640 9,728 4,129 65,966 Net interest income (loss) 55,338 214,512 17,895 ( 5,186 ) 282,559 Provision for credit losses 3,106 38,009 41 — 41,156 Net interest income (loss) after provision for credit losses 52,232 176,503 17,854 ( 5,186 ) 241,403 Non-interest income 17,175 16,172 5,823 5,660 44,830 Non-interest expense 20,440 23,250 642 112,834 157,166 Internal expense transfer 19,406 66,858 15,505 ( 101,769 ) — Income (loss) before income taxes $ 29,561 $ 102,567 $ 7,530 $ ( 10,591 ) $ 129,067 Return on average interest earning assets (pre-tax) 1.64 % 1.65 % 0.52 % N/A 1.37 % 49 Three Months Ended June 30, 2019 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 6,756,322 $ 18,796,093 $ 4,324,969 $ — $ 29,877,384 Interest income $ 67,617 $ 229,366 $ 31,966 $ ( 1,207 ) $ 327,742 Interest expense 23,428 65,141 14,994 3,945 107,508 Net interest income (loss) 44,189 164,225 16,972 ( 5,152 ) 220,234 Provision for credit losses 885 1,215 — — 2,100 Net interest income (loss) after provision for credit losses 43,304 163,010 16,972 ( 5,152 ) 218,134 Non-interest income 13,037 7,688 2,560 4,318 27,603 Non-interest expense 18,392 26,324 216 96,805 141,737 Internal expense transfer 19,291 53,722 12,399 ( 85,412 ) — Income (loss) before income taxes $ 18,658 $ 90,652 $ 6,917 $ ( 12,227 ) $ 104,000 Return on average interest earning assets (pre-tax) 1.10 % 1.93 % 0.64 % N/A 1.39 % Six Months Ended June 30, 2020 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,215,756 $ 23,804,558 $ 5,205,918 $ — $ 36,226,232 Interest income $ 135,062 $ 520,027 $ 59,392 $ ( 2,163 ) $ 712,318 Interest expense 31,169 102,826 22,488 7,937 164,420 Net interest income (loss) 103,893 417,201 36,904 ( 10,100 ) 547,898 Provision for credit losses 9,891 65,148 800 — 75,839 Net interest income (loss) after provision for credit losses 94,002 352,053 36,104 ( 10,100 ) 472,059 Non-interest income 31,852 31,771 8,965 13,639 86,227 Non-interest expense 40,311 47,408 1,029 224,074 312,822 Internal expense transfer 39,741 131,054 28,680 ( 199,475 ) — Income (loss) before income taxes $ 45,802 $ 205,362 $ 15,360 $ ( 21,060 ) $ 245,464 Return on average interest earning assets (pre-tax) 1.27 % 1.73 % 0.59 % N/A 1.36 % 50 Six Months Ended June 30, 2019 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 6,788,511 $ 18,615,885 $ 4,316,619 $ — $ 29,721,015 Interest income $ 135,644 $ 449,650 $ 65,190 $ ( 2,518 ) $ 647,966 Interest expense 45,952 126,012 29,220 7,900 209,084 Net interest income (loss) 89,692 323,638 35,970 ( 10,418 ) 438,882 Provision for credit losses 2,983 7,117 — — 10,100 Net interest income (loss) after provision for credit losses 86,709 316,521 35,970 ( 10,418 ) 428,782 Non-interest income 26,819 14,470 4,678 89,309 135,276 Non-interest expense 37,097 51,568 303 200,564 289,532 Internal expense transfer 38,718 106,259 24,686 ( 169,663 ) — Income (loss) before income taxes $ 37,713 $ 173,164 $ 15,659 $ 47,990 $ 274,526 Return on average interest earning assets (pre-tax) 1.11 % 1.86 % 0.73 % N/A 1.85 %