Note 6. Investment Securities

As of June 30, 2013, Valley had approximately $1.8 billion, $958.7 million, and $14.2 million in held to maturity, available for sale, and trading investment securities, respectively. Valley records impairment charges on its investment securities when the decline in fair value is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities; decline in the creditworthiness of the issuer; absence of reliable pricing information for investment securities; adverse changes in business climate; adverse actions by regulators; prolonged decline in value of equity investments; or unanticipated changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. Valley’s investment portfolios include private label mortgage-backed securities, trust preferred securities principally issued by bank holding companies (including three pooled trust preferred securities), corporate bonds primarily issued by banks, and perpetual preferred and common equity securities issued by banks. These investments may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S. economy and its potential negative effect on the future performance of the security issuers and, if applicable, the underlying mortgage loan collateral of the security. See the “Other-Than-Temporary Impairment Analysis” section below for further discussion.

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at June 30, 2013 and December 31, 2012 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
June 30, 2013
U.S. Treasury securities	$	99,792	$	8,942	$	—		$	108,734
Obligations of states and political subdivisions		542,154		10,120		(9,660	)		542,614
Residential mortgage-backed securities		969,341		13,459		(19,225	)		963,575
Trust preferred securities		103,453		377		(12,482	)		91,348
Corporate and other debt securities		52,207		5,704		(1	)		57,910

Total investment securities held to maturity	$	1,766,947	$	38,602	$	(41,368	)	$	1,764,181


December 31, 2012
U.S. Treasury securities	$	99,869	$	15,460	$	—		$	115,329
Obligations of states and political subdivisions		506,473		25,690		(197	)		531,966
Residential mortgage-backed securities		813,647		24,824		(355	)		838,116
Trust preferred securities		127,505		930		(14,778	)		113,657
Corporate and other debt securities		52,213		6,669		—			58,882

Total investment securities held to maturity	$	1,599,707	$	73,573	$	(15,330	)	$	1,657,950

The age of unrealized losses and fair value of related securities held to maturity at June 30, 2013 and December 31, 2012 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, 2013
Obligations of states and political subdivisions	$	130,784	$	(9,564	)	$	1,345	$	(96	)	$	132,129	$	(9,660	)
Residential mortgage-backed securities		520,005		(19,225	)		—		—			520,005		(19,225	)
Trust preferred securities		15,916		(259	)		51,159		(12,223	)		67,075		(12,482	)
Corporate and other debt securities		49		(1	)		—		—			49		(1	)

Total	$	666,754	$	(29,049	)	$	52,504	$	(12,319	)	$	719,258	$	(41,368	)


December 31, 2012
Obligations of states and political subdivisions	$	15,518	$	(197	)	$	—	$	—		$	15,518	$	(197	)
Residential mortgage-backed securities		80,152		(355	)		—		—			80,152		(355	)
Trust preferred securities		28,690		(208	)		48,802		(14,570	)		77,492		(14,778	)

Total	$	124,360	$	(760	)	$	48,802	$	(14,570	)	$	173,162	$	(15,330	)

The unrealized losses on investment securities held to maturity are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. The total number of security positions in the securities held to maturity portfolio in an unrealized loss position at June 30, 2013 was 127 as compared to 34 at December 31, 2012. The recent increase in long-term market interest rates materially decreased the fair value of lower yielding obligations of states and political subdivisions (“municipal bonds”) and residential mortgage-backed securities classified as held to maturity. The municipal bonds are all investment grade with no bankruptcies or defaults.

The unrealized losses for the residential mortgage-backed securities category of the held to maturity portfolio at June 30, 2013 are all within the less than twelve months category and all relate to investment grade mortgage-backed securities issued or guaranteed by Ginnie Mae and government sponsored enterprises.

The unrealized losses for trust preferred securities at June 30, 2013 primarily related to 4 non-rated single-issuer securities, issued by bank holding companies. All single-issuer trust preferred securities classified as held to maturity are paying in accordance with their terms, have no deferrals of interest or defaults and, if applicable, the issuers meet the regulatory capital requirements to be considered “well-capitalized institutions” at June 30, 2013.

Management does not believe that any individual unrealized loss as of June 30, 2013 included in the table above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates, widening credit spreads, and lack of liquidity in the market place, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.

As of June 30, 2013, the fair value of investments held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $759.5 million.

The contractual maturities of investments in debt securities held to maturity at June 30, 2013 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, 2013
	Amortized Cost		Fair Value
	(in thousands)

Due in one year	$	147,705	$	148,150
Due after one year through five years		41,978		46,652
Due after five years through ten years		238,461		250,285
Due after ten years		369,462		355,519
Residential mortgage-backed securities		969,341		963,575

Total investment securities held to maturity	$	1,766,947	$	1,764,181

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.

The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 5.0 years at June 30, 2013.

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at June 30, 2013 and December 31, 2012 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
June 30, 2013
U.S. Treasury securities	$	99,839	$	—	$	(10,053	)	$	89,786
U.S. government agency securities		54,917		1,504		(613	)		55,808
Obligations of states and political subdivisions		40,608		791		(2,165	)		39,234
Residential mortgage-backed securities		590,225		4,414		(20,812	)		573,827
Trust preferred securities*		67,973		6,088		(5,648	)		68,413
Corporate and other debt securities		84,523		2,008		(2,285	)		84,246
Equity securities		48,020		1,220		(1,898	)		47,342

Total investment securities available for sale	$	986,105	$	16,025	$	(43,474	)	$	958,656


December 31, 2012
U.S. Treasury securities	$	99,843	$	—	$	(2,218	)	$	97,625
U.S. government agency securities		44,215		1,547		—			45,762
Obligations of states and political subdivisions		16,210		417		—			16,627
Residential mortgage-backed securities		506,695		6,818		(3,359	)		510,154
Trust preferred securities*		68,931		240		(11,739	)		57,432
Corporate and other debt securities		28,274		2,728		(294	)		30,708
Equity securities		49,306		2,071		(1,869	)		49,508

Total investment securities available for sale	$	813,474	$	13,821	$	(19,479	)	$	807,816

*	Includes three pooled trust preferred securities, principally collateralized by securities issued by banks and insurance companies.

The age of unrealized losses and fair value of related securities available for sale at June 30, 2013 and December 31, 2012 were as follows:


	Less than					More than
	Twelve Months					Twelve Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)

June 30, 2013

U.S. Treasury securities	$	89,786	$	(10,053	)	$	—	$	—		$	89,786	$	(10,053	)
U.S. government agency securities		28,188		(613	)		—		—			28,188		(613	)
Obligations of states and political subdivisions		24,204		(2,165	)		—		—			24,204		(2,165	)
Residential mortgage-backed securities		442,850		(18,946	)		13,566		(1,866	)		456,416		(20,812	)
Trust preferred securities		446		(10	)		32,969		(5,638	)		33,415		(5,648	)
Corporate and other debt securities		54,149		(2,192	)		2,407		(93	)		56,556		(2,285	)
Equity securities		1,144		(41	)		12,601		(1,857	)		13,745		(1,898	)

Total	$	640,767	$	(34,020	)	$	61,543	$	(9,454	)	$	702,310	$	(43,474	)


December 31, 2012
U.S. Treasury securities	$	97,625	$	(2,218	)	$	—	$	—		$	97,625	$	(2,218	)
Residential mortgage-backed securities		269,895		(1,256	)		21,089		(2,103	)		290,984		(3,359	)
Trust preferred securities		760		(511	)		27,865		(11,228	)		28,625		(11,739	)
Corporate and other debt securities		5,394		(58	)		2,264		(236	)		7,658		(294	)
Equity securities		969		(75	)		12,664		(1,794	)		13,633		(1,869	)

Total	$	374,643	$	(4,118	)	$	63,882	$	(15,361	)	$	438,525	$	(19,479	)

The unrealized losses on investment securities available for sale are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace. The total number of security positions in the securities available for sale portfolio in an unrealized loss position at June 30, 2013 was 108 as compared to 74 at December 31, 2012. The recent increase in long-term market interest rates materially decreased the fair value of lower yielding obligations of states and political subdivisions (“municipal bonds”) and residential mortgage-backed securities classified as available for sale. The municipal bonds are all investment grade with no bankruptcies or defaults.

The unrealized losses within the residential mortgage-backed securities category of the available for sale portfolio totaled $20.8 million of at June 30, 2013 and primarily related to $18.4 million in unrealized losses on 25 investment grade residential mortgage-backed securities mainly issued by Ginnie Mae, and a $1.6 million unrealized loss on one non-investment grade private label mortgage-backed security.

The unrealized losses for trust preferred securities at June 30, 2013 in the table above relate to 3 pooled trust preferred and 9 single-issuer bank issued trust preferred securities. The unrealized losses include $4.3 million attributable to 3 pooled trust preferred securities with an amortized cost of $16.5 million and a fair value of $12.2 million and $469 thousand attributable to trust preferred securities of one issuance by one deferring bank holding company with an amortized cost of $16.5 million and a fair value of $16.0 million. The three pooled trust preferred securities included one security with an unrealized loss of $2.6 million and an investment grade rating at June 30, 2013. The other two pooled trust preferred securities had non-investment grade ratings and were initially other-than-temporarily impaired in 2008 with additional estimated credit losses recognized during the period 2009 through 2011. The trust preferred issuances by one deferring holding company were initially other-than-temporarily impaired in 2011 with additional estimated credit impairments recognized during 2012. See “Other-Than-Temporarily Impaired Analysis” section below for more details. All of the remaining single-issuer trust preferred securities are all paying in accordance with their terms and have no deferrals of interest or defaults and, if applicable, meet the regulatory capital requirements to be considered “well-capitalized institutions” at June 30, 2013.

The unrealized losses existing for more than twelve months for equity securities are mostly related to two perpetual preferred security positions with a combined $10.0 million amortized cost and a $1.6 million unrealized loss. At June 30, 2013, these perpetual preferred securities had investment grade ratings and are currently performing and paying quarterly dividends.

Management does not believe that any individual unrealized loss as of June 30, 2013 represents an other-than-temporary impairment, as management mainly attributes the declines in value to changes in interest rates and recent market volatility and wider credit spreads, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley has no intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or, if necessary, maturity.

As of June 30, 2013, the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $421.9 million.

The contractual maturities of investment securities available for sale at June 30, 2013 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, 2013
	Amortized Cost		Fair Value
	(in thousands)

Due in one year	$	720	$	724
Due after one year through five years		44,295		43,520
Due after five years through ten years		120,195		117,815
Due after ten years		182,650		175,428
Residential mortgage-backed securities		590,225		573,827
Equity securities		48,020		47,342

Total investment securities available for sale	$	986,105	$	958,656

The weighted average remaining expected life for residential mortgage-backed securities available for sale at June 30, 2013 was 3.2 years.

Other-Than-Temporary Impairment Analysis

To determine whether a security’s impairment is other-than-temporary, Valley considers several factors that include, but are not limited to the following:

•

The severity and duration of the decline, including the causes of the decline in fair value, such as an issuer’s credit problems, interest rate fluctuations, or market volatility;

•

Adverse conditions specifically related to the issuer of the security, an industry, or geographic area;

•

Failure of the issuer of the security to make scheduled interest or principal payments;

•

Any changes to the rating of the security by a rating agency or, if applicable, any regulatory actions impacting the security issuer;

•

Recoveries or additional declines in fair value after the balance sheet date;

•

Our ability and intent to hold equity security investments until they recover in value, as well as the likelihood of such a recovery in the near term; and

•

Our intent to sell debt security investments, or if it is more likely than not that we will be required to sell such securities before recovery of their individual amortized cost basis.

For debt securities, the primary consideration in determining whether impairment is other-than-temporary is whether or not we expect to collect all contractual cash flows.

In assessing the level of other-than-temporary impairment attributable to credit loss for debt securities, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings, while the amount related to other factors is recognized in other comprehensive income or loss. The total other-than-temporary impairment loss is presented in the consolidated statements of income, less the portion recognized in other comprehensive income or loss. Subsequent assessments may result in additional estimated credit losses on previously impaired securities. These additional estimated credit losses are recorded as reclassifications from the portion of other-than-temporary impairment previously recognized in other comprehensive income or loss to earnings in the period of such assessments. The amortized cost basis of an impaired debt security is reduced by the portion of the total impairment related to credit loss.

For residential mortgage-backed securities, Valley estimates loss projections for each security by stressing the cash flows from the individual loans collateralizing the security using expected default rates, loss severities, and prepayment speeds, in conjunction with the underlying credit enhancement (if applicable) for each security. Based on collateral and origination vintage specific assumptions, a range of possible cash flows is identified to determine whether other-than-temporary impairment exists. No other-than-temporary impairment losses were recognized as a result of our impairment analysis of these securities at June 30, 2013.

For the single-issuer trust preferred securities and corporate and other debt securities, Valley reviews each portfolio to determine if all the securities are paying in accordance with their terms and have no deferrals of interest or defaults. Over the past several years, an increasing number of banking institutions have been required to defer trust preferred payments and various banking institutions have been put in receivership by the FDIC. A deferral event by a bank holding company for which Valley holds trust preferred securities may require the recognition of an other-than-temporary impairment charge if Valley determines that it is more likely than not that all contractual interest and principal cash flows may not be collected. Among other factors, the probability of the collection of all interest and principal determined by Valley in its impairment analysis declines if there is an increase in the estimated deferral period of the issuer. Additionally, a FDIC receivership for any single-issuer would result in an impairment and significant loss. Including the other factors outlined above, Valley analyzes the performance of the issuers on a quarterly basis, including a review of performance data from the issuers’ most recent bank regulatory report, if applicable, to assess their credit risk and the probability of impairment of the contractual cash flows of the applicable security. All of the issuers had capital ratios at June 30, 2013 that were at or above the minimum amounts to be considered a “well-capitalized” financial institution, if applicable, and/or have maintained performance levels adequate to support the contractual cash flows of the trust preferred securities.

Within the available for sale portfolio, Valley has other-than-temporarily impaired trust preferred securities issued by one deferring bank holding company with a combined amortized cost and fair value of $41.8 million and $47.3 million, respectively, after credit impairment charges prior to June 30, 2013. The issuer of the trust preferred securities has deferred interest payments on these securities since late 2009 as required by an operating agreement with its bank regulators. In assessing whether a credit loss exists for the securities of the deferring issuer, Valley considers numerous other factors, including but not limited to, such factors highlighted in the bullet points above. From the dates of deferral up to and including the bank holding company’s most recent regulatory filing, the bank issuer continued to accrue and capitalize the interest owed, but has not remitted the interest to its trust preferred security holders. Additionally, the bank subsidiary of the issuer continued to report capital ratios that were above the minimum amounts to be considered a “well-capitalized” financial institution in its most recent regulatory filing. During the fourth quarter of 2011, Valley estimated a decline in the expected cash flows from the securities as it lengthened the estimate of the timeframe over which it could reasonably anticipate receiving such cash flows, and during the third quarter of 2012, Valley estimated an additional decline in cash flows under one of three weighted alternative scenarios utilized to assess impairment of the securities. The declines in estimated cash flows, after careful assessment of all other available factors, resulted in credit impairment charges of $18.3 million and $4.5 million during the fourth quarter of 2011 and third quarter of 2012, respectively. Valley no longer accrued interest on the securities after the initial impairment in 2011. No additional impairment was recognized as a result of our impairment analysis of these securities at June 30, 2013. See Note 5 for information regarding the Level 3 valuation technique used to measure the fair value of these trust preferred securities at June 30, 2013.

For the three pooled trust preferred securities, Valley evaluates the projected cash flows from each of its tranches in the three securities to determine if they are adequate to support their future contractual principal and interest payments. Valley assesses the credit risk and probability of impairment of the contractual cash flows by projecting the default rates over the life of the security. Higher projected default rates will decrease the expected future cash flows from each security. If the projected decrease in cash flows affects the cash flows projected for the tranche held by Valley, the security would be considered to be other-than-temporarily impaired. Two of the pooled trust preferred securities were initially impaired in 2008 with additional estimated credit losses recognized during 2009 and 2011, and are not accruing interest.

The perpetual preferred securities, reported in equity securities, are hybrid investments that are assessed for impairment by Valley as if they were debt securities. Therefore, Valley assessed the creditworthiness of each security issuer, as well as any potential change in the anticipated cash flows of the securities as of June 30, 2013. Based on this analysis, management believes the declines in fair value of these securities are attributable to a lack of liquidity in the marketplace and are not reflective of any deterioration in the creditworthiness of the issuers.

Other-Than-Temporarily Impaired Securities

There were no other-than-temporary impairment losses on securities recognized in earnings for the three and six months ended June 30, 2013. For the three and six months ended June 30, 2012, Valley recognized net impairment losses on securities in earnings totaling $550 thousand due to additional estimated credit losses on 1 of 5 previously impaired private label mortgage-backed securities. At June 30, 2013, the 5 impaired private label mortgage-backed securities had a combined amortized cost of $27.7 million and fair value of $28.3 million.

Realized Gains and Losses

Gross gains (losses) realized on sales, maturities and other securities transactions related to investment securities included in earnings for the three and six months ended June 30, 2013 and 2012 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Sales transactions:
Gross gains	$	1		$	1,234		$	3,381		$	1,374
Gross losses		—			—			—			(298	)

	$	1		$	1,234		$	3,381		$	1,076

Maturities and other securities transactions:
Gross gains	$	41		$	6		$	649		$	19
Gross losses		(1	)		(36	)		(31	)		(48	)

	$	40		$	(30	)	$	618		$	(29	)

Total gains on securities transactions, net	$	41		$	1,204		$	3,999		$	1,047

Valley recognized gross gains from sales transactions totaling $3.4 million for the six months ended June 30, 2013 primarily due to the sales of zero percent yielding Freddie Mac and Fannie Mae perpetual preferred stock with amortized cost totaling $941 thousand during the first quarter of 2013.

The following table presents the changes in the credit loss component of cumulative other-than-temporary impairment losses on debt securities classified as either held to maturity or available for sale that Valley has recognized in earnings, for which a portion of the impairment loss (non-credit factors) was recognized in other comprehensive income for the three and six months ended June 30, 2013 and 2012:


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)

Balance, beginning of period	$	33,177		$	28,767		$	33,290		$	29,070
Additions:
Subsequent credit impairments		—			550			—			550
Reductions:
Accretion of credit loss impairment due to an increase in expected cash flows		(75	)		(66	)		(188	)		(369	)

Balance, end of period	$	33,102		$	29,251		$	33,102		$	29,251

The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to each period presented. Other-than-temporary impairments recognized in earnings for credit impaired debt securities are presented as additions in two components based upon whether the current period is the first time the debt security was credit impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairment). The credit loss component is reduced if Valley sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) Valley receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures or (iii) the security is fully written down.

Trading Securities

The fair value of trading securities (consisting of 2 single-issuer bank trust preferred securities) was $14.2 million at June 30, 2013 and $22.2 million (consisting of 3 single-issuer bank trust preferred securities) at December 31, 2012. Interest income on trading securities totaled $413 thousand and $462 thousand for the three months ended June 30, 2013 and 2012, respectively, and $855 thousand and $884 thousand for the six months ended June 30, 2013 and 2012, respectively.