Edgar Filing: VALLEY NATIONAL BANCORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2009

¨	Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-11277

VALLEY NATIONAL BANCORP

(Exact name of registrant as specified in its charter)


New Jersey		22-2477875
(State or other jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

1455 Valley Road Wayne, NJ		07470
(Address of principal executive office)		(Zip code)

973-305-8800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock (no par value), of which 147,840,438 shares were outstanding as of November 5, 2009.

TABLE OF CONTENTS


		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition September 30, 2009 and December 31, 2008	3
	Consolidated Statements of Income Three and Nine Months Ended September 30, 2009 and 2008	4
	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2009 and 2008	5
	Notes to Consolidated Financial Statements – September 30, 2009	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67

Item 4.	Controls and Procedures	67

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	68

Item 1A.	Risk Factors	68

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69

Item 6.	Exhibits	70

SIGNATURES		71

PART 1 – FINANCIAL INFORMATION

Item 1.

Financial Statements

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(in thousands, except for share data)


	September 30, 2009			December 31, 2008
Assets
Cash and due from banks	$	244,447		$	237,497
Interest bearing deposits with banks		287,471			343,010
Investment securities:
Held to maturity, fair value of $1,542,765 at September 30, 2009 and $1,069,245 at December 31, 2008		1,578,746			1,154,737
Available for sale		1,345,864			1,435,442
Trading securities		32,173			34,236

Total investment securities		2,956,783			2,624,415

Loans held for sale, at fair value		14,218			4,542

Loans		9,511,413			10,143,690
Less: Allowance for loan losses		(103,446	)		(93,244	)

Net loans		9,407,967			10,050,446


Premises and equipment, net		268,319			256,343
Bank owned life insurance		302,520			300,058
Accrued interest receivable		60,530			57,717
Due from customers on acceptances outstanding		5,046			9,410
Goodwill		295,698			295,146
Other intangible assets, net		24,365			25,954
Other assets		364,506			513,591

Total Assets	$	14,231,870		$	14,718,129


Liabilities
Deposits:
Non-interest bearing	$	2,225,626		$	2,118,249
Interest bearing:
Savings, NOW and money market		4,025,047			3,493,415
Time		3,191,798			3,621,259

Total deposits		9,442,471			9,232,923


Short-term borrowings		199,392			640,304
Long-term borrowings		2,964,398			3,008,753
Junior subordinated debentures issued to capital trusts (includes fair value of $153,569 at September 30, 2009 and $140,065 at December 31, 2008 for VNB Capital Trust I)		178,843			165,390
Bank acceptances outstanding		5,046			9,410
Accrued expenses and other liabilities		157,618			297,740

Total Liabilities		12,947,768			13,354,520


Shareholders’ Equity*
Preferred stock, no par value, authorized 30,000,000 shares; issued 100,000 shares at September 30, 2009 and 300,000 shares at December 31, 2008		97,625			291,539
Common stock, no par value, authorized 200,430,392 shares; issued 149,393,107 shares at September 30, 2009 and 143,722,114 shares at December 31, 2008		52,611			48,228
Surplus		1,117,240			1,047,085
Retained earnings		76,851			85,234
Accumulated other comprehensive loss		(18,279	)		(60,931	)
Treasury stock, at cost (1,723,027 common shares at September 30, 2009 and 1,946,882 common shares at December 31, 2008)		(41,946	)		(47,546	)

Total Shareholders’ Equity		1,284,102			1,363,609

Total Liabilities and Shareholders’ Equity	$	14,231,870		$	14,718,129

*	Share data reflects the five percent common stock dividend issued on May 22, 2009.

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except for share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Interest Income
Interest and fees on loans	$	139,506		$	151,871		$	424,719		$	422,113
Interest and dividends on investment securities:
Taxable		32,670			34,270			102,162			104,477
Tax-exempt		2,414			2,507			7,175			7,642
Dividends		2,493			2,222			6,475			6,819
Interest on federal funds sold and other short-term investments		198			130			646			2,032

Total interest income		177,281			191,000			541,177			543,083

Interest Expense
Interest on deposits:
Savings, NOW, and money market		6,638			12,080			18,321			37,300
Time		19,833			27,902			76,118			85,552
Interest on short-term borrowings		487			2,122			3,617			6,641
Interest on long-term borrowings and junior subordinated debentures		35,255			33,664			105,376			100,198

Total interest expense		62,213			75,768			203,432			229,691

Net Interest Income		115,068			115,232			337,745			313,392
Provision for credit losses		12,722			6,850			35,767			16,650

Net Interest Income after Provision for Credit Losses		102,346			108,382			301,978			296,742

Non-Interest Income
Trust and investment services		1,811			1,774			5,048			5,286
Insurance commissions		2,504			2,351			8,074			7,987
Service charges on deposit accounts		6,871			7,480			20,071			21,102
(Losses) gains on securities transactions, net		(5	)		(1,907	)		246			(983	)
Other-than-temporary impairment losses on securities		—			(65,549	)		(5,905	)		(67,286	)
Portion recognized in other comprehensive income (before taxes)		(743	)		—			557			—

Net impairment losses on securities recognized in earnings		(743	)		(65,549	)		(5,348	)		(67,286	)
Trading (losses) gains, net		(3,474	)		14,747			(8,886	)		11,255
Fees from loan servicing		1,216			1,243			3,585			3,690
Gains on sales of loans, net		2,699			282			7,275			1,006
Gains on sales of assets, net		128			171			477			256
Bank owned life insurance		1,421			2,659			4,189			8,804
Other		4,650			4,645			12,943			13,960

Total non-interest income (loss)		17,078			(32,104	)		47,674			5,077

Non-Interest Expense
Salary expense		32,205			33,147			96,049			93,448
Employee benefit expense		8,285			8,363			25,493			24,215
Net occupancy and equipment expense		14,452			14,032			44,347			40,288
FDIC insurance assessment		3,355			412			16,786			887
Amortization of other intangible assets		1,710			1,959			5,537			5,107
Professional and legal fees		2,056			1,852			6,295			6,038
Advertising		701			965			1,868			1,682
Other		11,128			13,112			32,569			33,614

Total non-interest expense		73,892			73,842			228,944			205,279

Income Before Income Taxes		45,532			2,436			120,708			96,540
Income tax expense (benefit)		13,950			(1,159	)		36,745			19,879

Net Income		31,582			3,595			83,963			76,661
Dividends on preferred stock and accretion		5,983			—			15,996			—

Net Income Available to Common Stockholders	$	25,599		$	3,595		$	67,967		$	76,661

Earnings Per Common Share:*
Basic	$	0.18		$	0.03		$	0.48		$	0.57
Diluted		0.18			0.03			0.48			0.57
Cash Dividends Declared per Common Share*		0.19			0.19			0.57			0.57
Weighted Average Number of Common Shares Outstanding:*
Basic		145,052,655			141,568,980			142,889,382			135,358,526
Diluted		145,053,020			141,717,842			142,889,911			135,437,231

*	Share data reflects the five percent common stock dividend issued on May 22, 2009.

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net income	$	83,963		$	76,661
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,044			10,957
Stock-based compensation		3,118			4,552
Provision for credit losses		35,767			16,650
Net amortization of premiums and accretion of discounts on securities		5,819			(279	)
Amortization of other intangible assets		5,537			5,107
(Gains) losses on securities transactions, net		(246	)		983
Net impairment losses on securities recognized in earnings		5,348			67,286
Proceeds from sales of loans held for sale		286,864			46,446
Gains on loans held for sale, net		(7,275	)		(1,006	)
Origination of loans held for sale		(289,265	)		(44,823	)
Net change in trading securities		2,063			661,194
Gains on sales of assets, net		(477	)		(256	)
Change in fair value of borrowings carried at fair value		13,504			(19,922	)
Net change in cash surrender value of bank owned life insurance		(4,189	)		(8,804	)
Net decrease in accrued interest receivable and other assets		114,708			62,528
Net decrease in accrued expenses and other liabilities		(161,298	)		(17,049	)

Net cash provided by operating activities		103,985			860,225


Cash flows from investing activities:
Proceeds from sales of investment securities available for sale		185,043			89,610
Proceeds from maturities and prepayments of investment securities available for sale		280,164			423,666
Purchases of investment securities available for sale		(283,842	)		(692,591	)
Purchases of investment securities held to maturity		(774,440	)		(200,785	)
Proceeds from maturities and prepayments of investment securities held to maturity		344,161			102,810
Net decrease (increase) in loans		606,826			(761,805	)
Proceeds from bank owned life insurance		1,727			—
Proceeds from sales of premises and equipment		3,713			744
Purchases of premises and equipment		(23,461	)		(22,928	)
Cash and cash equivalents acquired in acquisition		—			35,376

Net cash provided by (used in) investing activities		339,891			(1,025,903	)


Cash flows from financing activities:
Net increase in deposits		209,548			257,460
Net (decrease) increase in short-term borrowings		(440,912	)		178,100
Advances of long-term borrowings		—			390,000
Repayments of long-term borrowings		(43,001	)		(316,751	)
Redemption of junior subordinated debentures		—			(7,925	)
Redemption of preferred stock		(200,000	)		—
Dividends paid to preferred shareholder		(11,202	)		—
Dividends paid to common shareholders		(80,948	)		(75,548	)
Common stock issued, net of cancellations		74,050			1,798

Net cash (used in) provided by financing activities		(492,465	)		427,134

Net (decrease) increase in cash and cash equivalents		(48,589	)		261,456
Cash and cash equivalents at beginning of period		580,507			237,465

Cash and cash equivalents at end of period	$	531,918		$	498,921

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)


	Nine Months Ended September 30,
	2009		2008
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings	$	228,196	$	231,175
Federal and state income taxes		43,921		43,786

Acquisition:
Non-cash assets acquired:
Investment securities available for sale	$	—	$	67,411
Loans		—		812,489
Allowance for loan losses		—		(11,410	)
Premises and equipment, net		—		15,266
Bank owned life insurance		—		16,284
Accrued interest receivable		—		3,834
Goodwill		—		114,160
Other intangible assets, net		—		7,476
Other assets		—		11,475

Total non-cash assets acquired		—		1,036,985

Liabilities assumed:
Deposits	$	—	$	714,942
Short-term borrowings		—		15,415
Long-term borrowings		—		133,574
Junior subordinated debentures issued to capital trusts		—		25,359
Accrued expenses and other liabilities		—		15,275

Total liabilities assumed		—		904,565

Net non-cash assets acquired	$	—	$	132,420

Cash and cash equivalents acquired	$	—	$	35,376

Common stock issued in acquisition	$	—	$	167,796

See accompanying notes to consolidated financial statements.

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 (“GAAP”) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities. See Note 13 below for more detail. 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 and cash flows at September 30, 2009 and for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year. Valley has evaluated subsequent events for potential recognition and/or disclosure through November 6, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

In preparing the unaudited consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change are the allowance for loan losses, income taxes, security valuations and the review of goodwill, loan servicing rights and investment securities for impairment. The current economic environment has increased the degree of uncertainty inherent in these material estimates.

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. On that date, the FASB’s ASC became the official source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with U.S. GAAP. The ASC supersedes all existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the ASC carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the ASC is superseded and deemed non-authoritative. While the conversion to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies, it does not change U.S. GAAP. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Certain information and footnote disclosure 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 December 31, 2008 audited financial statements filed on Form 10-K.

On May 22, 2009, Valley issued a five percent common stock dividend to shareholders of record on May 8, 2009. All common share and per common share data presented in the consolidated financial statements and the accompanying notes below were adjusted to reflect the dividend.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 2. Earnings Per Common Share

For Valley, the numerator of both the basic and diluted earnings per common share is net income available to common stockholders (which is equal to net income less dividends on preferred stock and related discount accretion). The weighted average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common stock equivalents utilizing the treasury stock method. For Valley, common stock equivalents are common stock options and warrants (to purchase Valley’s common shares) outstanding.

The following table shows the calculation of both basic and diluted earnings per common share for the three and nine months ended September 30, 2009 and 2008:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
	(in thousands, except for share data)

Net income	$	31,582	$	3,595	$	83,963	$	76,661
Dividends on preferred stock and accretion		5,983		—		15,996		—

Net income available to common stockholders	$	25,599	$	3,595	$	67,967	$	76,661


Basic weighted-average number of common shares outstanding		145,052,655		141,568,980		142,889,382		135,358,526
Plus: Common stock equivalents		365		148,862		529		78,705

Diluted weighted-average number of common shares outstanding		145,053,020		141,717,842		142,889,911		135,437,231


Earnings per share:
Basic	$	0.18	$	0.03	$	0.48	$	0.57
Diluted		0.18		0.03		0.48		0.57

Common stock equivalents, in the table above, exclude common stock options and warrants with exercise prices that exceed the average market price of Valley’s common stock during the periods presented. Inclusion of these common stock options and warrants would be anti-dilutive to the diluted earnings per common share calculation. Anti-dilutive common stock options totaled 6.7 million and 3.1 million for the three months ended September 30, 2009 and 2008, respectively, and 6.6 million and 3.2 million for the nine months ended September 30, 2009 and 2008, respectively.

Note 3. Stock–Based Compensation

Valley currently has one active employee stock option plan, the 2009 Long-Term Stock Incentive Plan (the “2009 LTSIP”), originally adopted by Valley’s Board of Directors on November 17, 2008 which was approved by its shareholders on April 14, 2009. The 2009 LTSIP replaced the 1999 Long-Term Stock Incentive Plan which expired on January 19, 2009, with approximately 1.7 million unissued shares remaining. The 2009 LTSIP is administered by the Compensation and Human Resources Committee (the “Committee”) appointed by Valley’s Board of Directors. The Committee can grant awards to officers and key employees of Valley. The purpose of the 2009 LTSIP is to provide additional incentive to officers and key employees of Valley and its subsidiaries whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.

Under the 2009 LTSIP, Valley may award shares to its employees for up to 6.4 million shares of common stock in the form of incentive stock options, non-qualified stock options, stock appreciation rights and restricted stock awards. 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 on the last date preceding such date on which a sale was reported. Valley granted stock options totaling 1 thousand and 8 thousand shares during the three and nine months ended September 30, 2009, respectively. All stock options granted during 2009 were to non-executive officers and employees. An incentive stock option’s maximum term to exercise is 10 years from the date of grant and is subject to a vesting schedule. Valley awarded restricted stock totaling 6 thousand and 21 thousand shares to executive officers and employees during the three and nine months ended September 30, 2009, respectively.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Valley recorded stock-based employee compensation expense for incentive stock options and restricted stock awards of $951 thousand and $1.2 million for the three months ended September 30, 2009 and 2008, respectively, and $3.0 million and $4.4 million for the nine months ended September 30, 2009 and 2008, respectively. The $4.4 million expense for the nine months ended September 30, 2008 includes $856 thousand which was immediately recognized for stock awards granted to retirement eligible employees. There were no stock awards granted to retirement eligible employees during the nine months ended September 30, 2009, therefore, no immediate expense was recognized during the period. The fair values of all other stock awards are expensed over the vesting period. As of September 30, 2009, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $7.1 million and will be recognized over an average remaining vesting period of approximately 2.5 years.

The fair value of each option granted on the date of grant is estimated using a binomial option pricing model. The results are based on assumptions for dividend yield based on the annual dividend rate; stock volatility, based on Valley’s historical and implied stock price volatility; risk free interest rates, based on the U.S. Treasury constant maturity bonds, in effect on the actual grant dates, with a remaining term approximating the expected term of the options; and expected exercise term calculated based on Valley’s historical exercise experience.

Stock-based employee compensation cost under the fair value method was measured using the following weighted-average assumptions for stock options granted during the nine months ended September 30, 2009 and 2008:


	Nine Months Ended September 30,
	2009		2008

Risk-free interest rate	1.1 - 4.0	%	3.4 - 5.1	%
Dividend yield	4.5	%	4.3	%
Volatility	24.0	%	21.0	%
Expected term (in years)	6.7		7.3

In 2005, Valley’s shareholders approved the 2004 Director Restricted Stock Plan. The plan provides the non-employee members of the Board of Directors with the opportunity to forego a portion or all of their annual cash retainer and certain meeting fees in exchange for shares of Valley restricted stock. The restricted shares under the plan vest 100 percent at the end of a five year vesting period, but the Board of Directors retains the right to accelerate the vesting of the restricted shares, at its discretion. Valley granted approximately 20 thousand shares and 23 thousand shares under the 2004 Director Restricted Stock Plan during the nine months ended September 30, 2009 and 2008, respectively. There were approximately 103 thousand restricted shares outstanding under this plan as of September 30, 2009.

Note 4. Comprehensive Income (Loss)

Valley’s components of other comprehensive income (loss), net of deferred tax, include unrealized gains (losses) on securities available for sale (including the non-credit portion of any other-than-temporary impairment charges relating to these securities effective January 1, 2009), unrealized gains (losses) on derivatives used in cash flow hedging relationships, and the unfunded portion of its various employee, officer and director pension plans.

The following table shows changes in each component of comprehensive income (loss) for the three and nine months ended September 30, 2009 and 2008.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)

Net income	$	31,582		$	3,595		$	83,963		$	76,661

Other comprehensive income (loss), net of tax:
Net change in unrealized gains and losses on securities available for sale		14,566			(46,295	)		47,151			(71,671	)
Net change in non-credit impairment losses on securities		390			—			(75	)		—
Net pension benefits adjustment		196			133			633			397
Net change in unrealized gains and losses on derivatives used in cash flow hedging relationships		(652	)		(2,386	)		1,733			(2,217	)
Less reclassification adjustment for gains and losses included in net income		412			39,099			1,815			39,589

Total other comprehensive income (loss), net of tax:		14,912			(9,449	)		51,257			(33,902	)

Total comprehensive income (loss)	$	46,494		$	(5,854	)	$	135,220		$	42,759

Note 5. Business Combinations and Dispositions

Acquisition

On July 1, 2008, Valley acquired Greater Community Bancorp (“Greater Community”), the holding company of Greater Community Bank, a commercial bank with approximately $1.0 billion in assets and 16 full-service branches in northern New Jersey. The purchase price of $167.8 million was paid through a combination of Valley’s common stock (approximately 9.1 million shares) and warrants (described below). The transaction generated approximately $115.8 million in goodwill and $7.5 million in core deposit intangibles subject to amortization beginning July 1, 2008. Greater Community Bank was merged into Valley National Bank as of the acquisition date.

Valley issued approximately 964 thousand warrants to purchase Valley’s common stock at $18.10 per share which are exercisable beginning July 1, 2010 and expire on June 30, 2015. The Valley warrants, which have been determined to qualify as permanent equity, are publicly traded and listed on the NASDAQ Capital Market under the ticker symbol “VLYWW.”

Pro forma results of operations including Greater Community for the nine months ended September 30, 2008 have not been presented, as the acquisition did not have a material impact on Valley’s operating results.

Disposition

On March 31, 2008, Valley sold its wholly-owned broker-dealer subsidiary, Glen Rauch Securities, Inc., for $1.9 million, consisting of cash and a note receivable. During the fourth quarter of 2007, Valley recorded a $2.3 million ($1.5 million after-taxes) goodwill impairment loss due to its decision to sell the broker-dealer subsidiary. The subsidiary’s operations and the disposition did not materially impact Valley’s consolidated financial position or results of operations during the nine months ended September 30, 2008, and therefore have not been presented as discontinued operations in Valley’s consolidated financial statements.

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(Unaudited)

Note 6. Recent Accounting Pronouncements

As discussed in Note 1, on July 1, 2009, the ASC became the FASB’s officially recognized source of authoritative U.S. GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the ASC carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the ASC is superseded and deemed non-authoritative.

In December 2007, the FASB issued new authoritative accounting guidance under ASC Topic 805, “Business Combinations.” The new business combination guidance applies to all transactions and other events in which one entity obtains control over one or more other businesses. The new guidance requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process previously required whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. The new guidance requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case. Under U.S. GAAP, the requirements of ASC Topic 420, “Exit or Disposal Cost Obligation,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of contingencies. The new guidance is effective for all business combinations closing after January 1, 2009 and could have a significant impact on Valley’s accounting for business combinations on or after such date.

In December 2007, the FASB issued new authoritative accounting guidance under ASC Topic 810, “Consolidation,” to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The new guidance clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the new guidance requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. Valley’s adoption of the new consolidation guidance under ASC Topic 810 on January 1, 2009 did not have a significant impact on Valley’s statement of condition or results of operations.

In March 2008, the FASB issued new authoritative accounting guidance under ASC Topic 815, “Derivatives and Hedging,” to establish enhanced disclosure requirements about (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under ASC Topic 815; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Valley adopted the new guidance under ASC Topic 815 on January 1, 2009 and has included the applicable financial statement disclosures in Note 14 below.

In December 2008, the FASB issued new authoritative accounting guidance under ASC Topic 715, “Compensation – Retirement Benefits,” to provide guidance on employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. The new guidance requires employers of public and nonpublic entities to disclose (a) more information about how investment allocation decisions are made; (b) provide more information about major categories of plan assets, including concentrations of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets. These new disclosure requirements under ASC Topic 715 will be included in Valley’s financial statements beginning with the financial statements for the year ended December 31, 2009.

Effective January 1, 2009, Valley early adopted the new authoritative accounting guidance under ASC Topic 820, “Fair Value Measurements and Disclosures,” for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly.

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The new provision provides additional guidance for estimating fair value and includes additional factors for identifying circumstances that indicate a transaction is not in an orderly market. The model includes (a) evaluating the significance and relevance of the factors to determine whether, based on the weight of the evidence, there has been a significant decrease in the volume and level of activity for the asset or liability; (b) if the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the transaction or the quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. The new guidance also requires an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the new provisions and to quantify its effects. See Note 7 for discussion of the impact on valuation of certain investment securities due to the adoption of the new guidance under ASC Topic 820 and the impact to the consolidated financial statements.

Effective January 1, 2009, Valley early adopted the new authoritative accounting guidance under ASC Topic 320, “Investments – Debt and Equity Securities,” to require that (a) an entity separately present, in the financial statement where the components of accumulated other comprehensive income are reported, amounts recognized in accumulated other comprehensive income related to held-to-maturity and available-for-sale debt securities for which an other-than-temporary impairment has been recognized and (b) only the portion of the impairment related to a credit loss is recognized in earnings. This new guidance also changes the guidance to state that management must assert (a) it does not have the intent to sell the security, and (b) if the entity does not intend to sell the security, it is not more likely than not it will be required to sell the security before recovery of its amortized cost basis. This new guidance requires that an entity recognize non-credit losses on held-to-maturity debt securities in other comprehensive income and amortize that amount over the remaining life of the security in a prospective manner by increasing the carrying value of the asset unless the security is subsequently sold and there are additional credit losses. Valley’s adoption of the new guidance under ASC Topic 320 resulted in an $8.6 million cumulative-effect adjustment, net of taxes to increase retained earnings with an offset to accumulated other comprehensive loss as of January 1, 2009 for the non-credit component of losses on debt securities for which other-than-temporary impairment was previously recognized.

On March 31, 2009, Valley early adopted the new authoritative accounting guidance under ASC Topic 825, “Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This new guidance also amends previously issued U.S. GAAP to require those disclosures in summarized financial information at interim reporting periods. Under this new guidance, a public company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim periods. In addition, an entity shall disclose in the body of the accompanying notes of its summarized financial information for interim periods and in its financial statements for annual reporting periods, the fair value of all its financial instruments for which it is practical to estimate fair value. Valley has included the applicable fair value disclosures in Note 7 below.

On April 1, 2009, FASB issued new authoritative accounting guidance under ASC Topic 805, “Business Combinations,” to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, “Contingencies.” This new guidance removes subsequent accounting guidance for assets and liabilities arising from contingencies and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. The new guidance eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only the disclosures required under ASC Topic 450. The new guidance also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value. The new guidance is effective for assets or liabilities arising from contingencies in business combinations after January 1, 2009.

In May 2009, the FASB issued new authoritative accounting guidance under ASC Topic 855, “Subsequent Events,” to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. These new guidelines define (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events

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(Unaudited)

or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new guidance under ASC Topic 855 became effective for financial statements issued for periods ending after June 15, 2009 and did not have a significant impact on Valley’s financial statements.

In June 2009, the FASB issued new authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing,” to (i) enhance reporting about transfers of financial assets, including securitizations, where companies have continuing exposure to the risks related to transferred financial assets, (ii) eliminate the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets, and (iii) require additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new guidance under ASC Topic 860 is effective on January 1, 2010 and is not expected to have a significant impact on Valley’s financial statements.

In June 2009, the FASB issued new authoritative accounting guidance under ASC Topic 810, “Consolidation.” This new guidance amends previously issued U.S. GAAP for consolidation of variable interest entities to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements. The new guidance under ASC Topic 810 is effective on January 1, 2010 and is not expected to have a significant impact on Valley’s financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 under ASC Topic 820 to provide clarification for circumstances in which a quoted price in an active market for the identical liability is not available. In such circumstances, a reporting entity is required to measure fair value using one or more of the following techniques: (i) a valuation technique that uses: (a) the quoted price of the identical liability when traded as an asset; or (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (ii) another valuation technique that is consistent with the principles of ASC Topic 820, such as an income approach or a market approach. The update clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate adjustment relating to the existence of a restriction that prevents the transfer of the liability. The new authoritative accounting guidance also clarifies that the quoted price for an identical liability traded as an asset in an active market would also be a Level 1 measurement, provided that the quoted price does not need to be adjusted to reflect factors specific to the asset that do no apply to the fair value measurement of the liability. Effective September 30, 2009, Valley early adopted the new guidance and it did not have a significant impact on Valley’s consolidated financial statements. However, under the new guidance, the fair value measurement of Valley’s junior subordinated debentures carried at fair value now qualifies as a Level 1 measurement. See Notes 7 and 13 below for further information regarding the valuation technique used for the debentures carried at fair value.

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(Unaudited)

Note 7. Fair Value Measurement of Assets and Liabilities

Valley uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securities classified as available for sale, trading securities, residential mortgage loans held for sale, junior subordinated debentures issued to VNB Capital Trust I, and derivatives are recorded at fair value on a recurring basis.

On January 1, 2007, Valley elected to measure residential mortgage loans held for sale and the junior subordinated debentures issued to VNB Capital Trust I at fair value as part of its on-going asset/liability management strategy. Valley believes the fair value elections reduce certain timing differences and better match changes in the value of these instruments with current actions by management to manage the balance sheet and interest rate risk.

U.S. GAAP 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:

Basis of Fair Value Measurement


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).

The following tables present the assets and liabilities that are measured at fair value on a recurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at September 30, 2009 and December 31, 2008. As required by U.S. GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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(Unaudited)


			Fair Value Measurements at Reporting Date Using:
	September 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Investment securities:
Available for sale:
U.S. Treasury securities	$	75,003	$	75,003	$	—	$	—
Obligations of states and political subdivisions		36,248		—		36,248		—
Residential mortgage-backed securities		1,053,059		—		926,162		126,897
Trust preferred securities		34,919		—		16,184		18,735
Corporate and other debt securities		97,255		—		96,203		1,052
Equity securities		49,380		30,146		10,292		8,942

Total available for sale		1,345,864		105,149		1,085,089		155,626

Trading securities		32,173		—		—		32,173
Loans held for sale (1)		14,218		—		14,218		—
Other assets (2)		6,613		—		6,613		—

Total assets	$	1,398,868	$	105,149	$	1,105,920	$	187,799


Liabilities:
Junior subordinated debentures issued to
VNB Capital Trust I (3)	$	153,569	$	153,569	$	—	$	—
Other liabilities (2)		1,325		—		1,325		—

Total liabilities	$	154,894	$	153,569	$	1,325	$	—

(1)	The loans held for sale had contractual unpaid principal balances totaling approximately $13.9 million at September 30, 2009.

(2)	Derivative financial instruments are included in this category.

(3)	The junior subordinated debentures had contractual unpaid principal obligations totaling $157.0 million at September 30, 2009.


			Fair Value Measurements at Reporting Date Using:
	December 31, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Investment securities:
Available for sale	$	1,435,442	$	13,483	$	1,421,959	$	—
Trading securities		34,236		—		34,236		—
Loans held for sale (1)		4,542		—		4,542		—
Other assets (2)		3,334		—		3,334		—

Total assets	$	1,477,554	$	13,483	$	1,464,071	$	—


Liabilities:
Junior subordinated debentures issued to
VNB Capital Trust I (3)	$	140,065	$	—	$	140,065	$	—
Other liabilities (2)		2,008		—		2,008		—

Total liabilities	$	142,073	$	—	$	142,073	$	—

(1)	The loans held for sale had contractual unpaid principal balances totaling approximately $4.47 million at December 31, 2008.

(2)	Derivative financial instruments are included in this category.

(3)	The junior subordinated debentures had contractual unpaid principal obligations totaling $157.0 million at December 31, 2008.

The following valuation techniques were used to measure the fair value of financial instruments in the table above on a recurring basis during the nine months ended September 30, 2009 and the year ended December 31,

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(Unaudited)

2008 unless otherwise noted. All the valuation techniques described below are based upon the unpaid principal balance only for each item selected to be carried at fair value and excludes any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.

Available for sale and trading securities. Certain common and preferred equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). The majority of the 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 providers to ensure the highest level of significant inputs are derived from market observable data. For certain securities, the inputs used by either dealer market participants or independent pricing service, may be derived from unobservable market information. In these instances, Valley evaluated the appropriateness and quality of each price. In accordance with Valley’s early adoption of the new authoritative guidance under ASC Topic 820, “Fair Value Measurements and Disclosures,” on January 1, 2009, Valley reviewed the volume and level of activity for all available for sale and trading securities and attempted to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value and this results in fair values based on Level 3 inputs. In determining fair value, Valley utilized unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing each security. In developing its assertion of market participant assumptions, Valley utilized the best information that is both reasonable and available without undue cost and effort.

In calculating the fair value for certain trading securities, consisting of trust preferred securities, under Level 3, Valley prepared present value cash flow models incorporating the contractual cash flow of each security adjusted, if necessary, for potential changes in the amount or timing of cash flows due to the underlying credit worthiness of each issuer. The resulting estimated prospective cash flows were discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. For a majority of the securities valued under Level 3, the discount rate actually utilized reflected orderly transactions of similar issued securities by the same obligor. If applicable, the discount rate is further adjusted to reflect a market premium which incorporates, among other variables, illiquidity premiums and variances in the instruments structure. If available, the quoted prices received from either market participants or independent pricing services are weighted with the internal price estimate to determine the fair value of each instrument.

In calculating the fair value for the available for sale securities under Level 3, Valley prepared present value cash flow models for certain trust preferred securities, corporate debt securities, and private label mortgage-backed securities. The cash flows for the mortgage-backed securities incorporated the expected cash flow of each security adjusted for default rates, loss severities and prepayments of the individual loans collateralizing the security. The cash flows for trust preferred securities and corporate debt securities reflected the contractual cash flow, adjusted if necessary for potential changes in the amount or timing of cash flows due to the underlying credit worthiness of each issuer.

For available for sale trust preferred securities and corporate debt securities, the resulting estimated prospective cash flows were discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. The discount rate for each security was applied using a pricing matrix based on credit, security type and maturity characteristics to determine the fair value. If available, the quoted prices received from either market participants or independent pricing services are weighted with the internal price estimate to determine the fair value of each instrument.

For available for sale private label mortgage-backed securities, cash flow assumptions incorporated independent third party market participant data based on vintage year for each security. The discount rate utilized in

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(Unaudited)

determining the present value of cash flows for the mortgage-backed securities was arrived at by combining the yield on orderly transactions for similar maturity government sponsored mortgage-backed securities with (a) the historical average risk premium of similar structured private label securities, (b) a risk premium reflecting current market conditions, including liquidity risk and (c) if applicable, a forecasted loss premium derived from the expected cash flows of each security. The estimated cash flows for each private label mortgage-backed security were then discounted at the aforementioned effective rate to determine the fair value. If available, the quoted prices received from either market participants or independent pricing services are weighted with the internal price estimate to determine the fair value of each instrument.

Loans held for sale. These conforming residential mortgage loans are reported at fair value using Level 2 (significant other observable) inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. To determine these fair values, the mortgages held for sale are put into multiple tranches, or pools, based on the coupon rate of each mortgage. If the mortgages held for sale are material, the market prices for each tranche are obtained from both Fannie Mae and Freddie Mac. The market prices represent a delivery price which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. The market prices received from Fannie Mae and Freddie Mac are then averaged and interpolated or extrapolated, where required, to calculate the fair value of each tranche. Depending upon the time elapsed since the origination of each loan held for sale, non-performance risk and changes therein were addressed in the estimate of fair value based upon the delinquency data provided to both Fannie Mae and Freddie Mac for market pricing and changes in market credit spreads. Non-performance risk was deemed immaterial to the gains recognized for changes in fair value of mortgage loans held for sale during the three and nine months ended September 30, 2009 and 2008 based on the short duration these assets were held, and the high credit quality of these loans.

Junior subordinated debentures issued to VNB Capital Trust I. Beginning September 30, 2009, the junior subordinated debentures issued to VNB Capital Trust I are reported at fair value using Level 1 inputs, as clarified by the FASB’s Accounting Standards Update described in Note 6. The fair value was estimated using the quoted price in active markets for the VNB Capital Trust I preferred stock traded under ticker symbol “VLYPRA” on the New York Stock Exchange. Prior to Valley’s adoption of the new authoritative accounting guidance, this valuation technique was considered to have Level 2 inputs based on pre-existing guidance under U.S. GAAP. The preferred stock and Valley’s junior subordinated debentures issued to the Trust have identical financial terms (see details at Note 13) and therefore, the preferred stock’s quoted prices move in a similar manner to the estimated fair value and current settlement price of the junior subordinated debentures. The preferred stock’s quoted price includes market considerations for Valley’s credit and non-performance risk and is deemed to represent the transfer price that would be used if the junior subordinated debenture were assumed by a third party. Valley’s potential credit risk and changes in such risk did not materially impact the fair value measurement of the junior subordinated debentures during the three and nine months ended September 30, 2009 and 2008.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair value of Valley’s interest rate caps and interest rate swap are determined using prices obtained from a third party advisor. The fair value measurement of the interest rate caps is calculated by discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves. The fair values 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 September 30, 2009 and December 31, 2008.

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(Unaudited)

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:


	Three Months Ended September 30, 2009						Nine Months Ended September 30, 2009
	Trading Securities			Available For Sale Securities			Trading Securities			Available For Sale Securities
	(in thousands)
Balance, beginning of period	$	32,821		$	122,540		$	—		$	—
Transfers into Level 3⁽¹⁾		—			34,329			34,236			149,672
Total net gains (losses) for the period included in:
Net income		(648	)		—			3,637			—
Other comprehensive income		—			3,677			—			22,170
Sales and settlements		—			(4,920	)		(5,700	)		(16,216	)

Balance, end of period	$	32,173		$	155,626		$	32,173		$	155,626


Net unrealized (losses) gains included in net income for the period relating to assets held at September 30, 2009 ⁽²⁾	$	(648	)⁽³⁾	$	(743	) ⁽⁴⁾	$	3,615	⁽³⁾	$	(5,348	)⁽⁴⁾

(1)

The amounts presented as transfers into Level 3 represents the fair value as of the beginning of the periods presented. Amounts represent transfers from Level 2 of single-issuer trust preferred securities and private label mortgage-backed securities for which significant inputs to the valuation became unobservable, largely due to reduced levels of market liquidity. Related gains and losses for the period are included in the above table.

(2)	Represents net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value.

(3)	Included in trading (losses) gains, net within the non-interest income category on the consolidated statements of income.

(4)	Represents the net impairment losses on securities recognized in earnings for the period.

Valley’s significant accounting policies presented in Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2008 require certain assets, including goodwill, loan servicing rights, core deposits, other intangible assets, certain impaired loans and other long-lived assets, such as other real estate owned, to be written down to their fair value on a nonrecurring basis through recognition of an impairment charge to the consolidated statements of income. The following nonrecurring items were adjusted by such fair value measurements during the periods noted.

Loan servicing rights. For the third quarter of 2009, Valley recognized a $32 thousand recovery of previously recognized impairment charges on loan servicing rights through a valuation allowance. Impairment charges are recognized on loan servicing rights when the book value of certain stratums of the loan servicing rights portfolio exceed the stratum’s estimated fair value. Fair values for each stratum 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, servicing cost, prepayment speed, internal rate of return, ancillary income, float rate, tax rate, and inflation. 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. Valley’s loan servicing rights had a carrying value of $10.5 million (net of a $1.0 million valuation allowance) at September 30, 2009. See Note 10 for further information.

Impaired Loans. Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are typically estimated using Level 3 inputs, consisting of individual appraisals that are significantly adjusted based on customized discounting criteria. During the nine months ended September 30, 2009, certain impaired loans were individually remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based on the fair value of the underlying collateral. Impaired loans with a carrying value of $17.7 million were reduced by specific valuation allowance allocations during the nine months ended September 30, 2009 totaling $8.0 million to a reported fair value of $9.7 million based on collateral values utilizing Level 3 valuation inputs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

There were no other material impairment charges incurred for financial instruments carried at fair value on a nonrecurring basis during the three or nine months ended September 30, 2009 and 2008.

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets and liabilities carried at fair value for the three and nine months ended September 30, 2009 and 2008:


Reported in Consolidated Statements of Condition at:		Gains (Losses) on Change in Fair Value
	Reported in Consolidated Statements of Income at:	Three Months Ended September 30,						Nine Months Ended September 30,
	Reported in Consolidated Statements of Income at:	2009			2008			2009			2008
		(in thousands)

Assets:
Available for sale securities	Net impairment losses on securities	$	(743	)	$	(65,549	)	$	(5,348	)	$	(67,286	)
Trading securities	Trading (losses) gains, net		(648	)		(6,105	)		4,618			(8,667	)
Loans held for sale	Gains on sales of loans, net		2,699			282			7,275			1,006

Liabilities:
Long-term borrowings *	Trading (losses) gains, net		—			—			—			(1,194	)
Junior subordinated debentures issued to capital trusts	Trading (losses) gains, net		(2,826	)		20,852			(13,504	)		21,116

		$	(1,518	)	$	(50,520	)	$	(6,959	)	$	(55,025	)

*	During the second quarter of 2008, Valley prepaid one fixed rate Federal Home Loan Bank advance elected to be carried at fair value which had a $40.0 million contractual principal obligation. No long-term borrowings were carried at fair value at September 30, 2009.

The preparation of financial statements in accordance with U.S. GAAP 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 methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. Below is management’s estimate of the fair value of financial instruments which were carried on the consolidated statements of financial condition at cost or amortized cost.

The fair value estimates below made at September 30, 2009 and December 31, 2008 were based on pertinent market data and relevant information on the financial instruments at that time. 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 many of the estimates.

The following methods and assumptions were used to estimate the fair value of other financial assets and financial liabilities not already discussed above:

Cash and due from banks and interest bearing deposits with banks: The carrying amount is considered to be a reasonable estimate of fair value.

Investment securities held to maturity: Fair values are based on prices obtained through an independent pricing service or dealer market participants which Valley has historically transacted both purchases and sales

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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. For certain securities, for which the inputs used by either dealer market participants or independent pricing service were derived from unobservable market information, Valley evaluated the appropriateness and quality of each price. In accordance with Valley’s early adoption of the new authoritative accounting guidance under ASC Topic 820, Valley reviewed the volume and level of activity for all classes of held to maturity securities and attempted to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value (fair values based on Level 3 inputs). If applicable, the adjustment to fair value was derived based on present value cash flow model projections prepared by Valley utilizing assumptions similar to those incorporated by market participants.

Loans: Fair values are estimated by discounting the projected future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loan. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair value.

Federal Reserve Bank and Federal Home Loan Bank stock: The redeemable carrying amount of these securities with limited marketability approximates their fair value. These securities are recorded in other assets on the consolidated statements of financial condition.

Deposits: Current carrying amounts approximate estimated fair value of demand deposits and savings accounts. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.

Short-term and long-term borrowings: The fair value is estimated by obtaining quoted market prices of the identical or similar financial instruments when available. The fair value of other long-term borrowings is estimated by discounting the estimated future cash flows using market discount rates of financial instruments with similar characteristics, terms and remaining maturity.

Junior subordinated debentures issued to GCB Capital Trust III: There is no active market for the trust preferred securities issued by GCB Capital Trust III. Therefore, the fair value is estimated utilizing the income approach, whereby the expected cash flows, over the remaining estimated life of the security, are discounted using Valley’s credit spread over the current yield on a similar maturity U.S. Treasury security. Valley’s credit spread was calculated based on Valley’s trust preferred securities issued by VNB Capital Trust I, which are publicly traded in an active market.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The carrying amounts and estimated fair values of financial instruments were as follows at September 30, 2009 and December 31, 2008:


	September 30, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)

Financial assets:
Cash and due from banks	$	244,447	$	244,447	$	237,497	$	237,497
Interest bearing deposit with banks		287,471		287,471		343,010		343,010
Investment securities held to maturity		1,578,746		1,542,765		1,154,737		1,069,245
Investment securities available for sale		1,345,864		1,345,864		1,435,442		1,435,442
Trading securities		32,173		32,173		34,236		34,236
Loans held for sale, at fair value		14,218		14,218		4,542		4,542
Net loans		9,407,967		9,408,897		10,050,446		10,169,298
Accrued interest receivable		60,530		60,530		57,717		57,717
Federal Reserve Bank and Federal Home Loan Bank stock		140,631		140,631		150,476		150,476
Other assets*		6,613		6,613		3,334		3,334

Financial liabilities:
Deposits without stated maturities		6,250,673		6,250,673		5,611,664		5,611,664
Deposits with stated maturities		3,191,798		3,240,699		3,621,259		3,681,279
Short-term borrowings		199,392		194,068		640,304		635,767
Long-term borrowings		2,964,398		3,209,421		3,008,753		3,455,381
Junior subordinated debentures issued to capital trusts (carrying amount includes fair value of $153,569 at September 30, 2009 and $140,065 at December 31, 2008for VNB Capital Trust I)		178,843		178,199		165,390		162,936
Accrued interest payable		8,439		8,439		32,802		32,802
Other liabilities*		1,325		1,325		2,008		2,008

*	Derivative financial instruments are included in this category.

Financial instruments with off-balance sheet risk, consisting of loan commitments and standby letters of credit had immaterial estimated fair values at September 30, 2009 and December 31, 2008.

Note 8. Loans

The details of the loan portfolio as of September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009		December 31, 2008
	(in thousands)

Commercial and industrial loans	$	1,804,822	$	1,965,372


Mortgage:
Construction		446,662		510,519
Residential mortgage		2,011,532		2,269,935
Commercial real estate		3,473,628		3,324,082

Total mortgage loans		5,931,822		6,104,536


Consumer:
Home equity		575,332		607,700
Credit card		9,916		9,916
Automobile		1,114,070		1,364,343
Other consumer		75,451		91,823

Total consumer loans		1,774,769		2,073,782

Total loans	$	9,511,413	$	10,143,690

Total loans are net of unearned discount and deferred loan fees totaling $7.8 million and $4.8 million at September 30, 2009 and December 31, 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The outstanding balances of loans that are 90 days or more past due as to principal or interest payments and still accruing, non-performing assets, and troubled debt restructured loans at September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009		December 31, 2008
	(in thousands)
Loans past due in excess of 90 days and still accruing	$	23,094	$	15,557

Non-accrual loans	$	74,045	$	33,073
Other real estate owned		3,816		8,278
Other repossessed assets		4,931		4,317

Total non-performing assets	$	82,792	$	45,668

Troubled debt restructured loans	$	19,406	$	7,628

Information about impaired loans as of September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009		December 31, 2008
	(in thousands)
Impaired loans for which there were specific related allowance for loan losses	$	30,965	$	10,491
Other impaired loans		33,568		11,882

Total impaired loans	$	64,533	$	22,373


Related allowance for loan losses	$	9,388	$	2,104

The following table summarizes the allowance for credit losses for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)

Beginning balance - Allowance for credit losses	$	102,317		$	75,949		$	94,738		$	74,935

Loans charged-off		(10,811	)		(5,197	)		(28,054	)		(15,246	)
Charged-off loans recovered		826			749			2,603			2,012

Net charge-offs		(9,985	)		(4,448	)		(25,451	)		(13,234	)
Additions from acquisitions		—			11,410			—			11,410
Provision charged for credit losses		12,722			6,850			35,767			16,650

Ending balance - Allowance for credit losses	$	105,054		$	89,761		$	105,054		$	89,761


Components of allowance for credit losses:
Allowance for loan losses	$	103,446		$	88,158		$	103,446		$	88,158
Reserve for unfunded letters of credit		1,608			1,603			1,608			1,603

Allowance for credit losses	$	105,054		$	89,761		$	105,054		$	89,761

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 9. Investment Securities

As of September 30, 2009, Valley had approximately $1.6 billion and $1.3 billion in held to maturity and available for sale investment securities, respectively. Valley may be required to record impairment charges on its investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on 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 (“bank issuers”) (including three pooled securities), perpetual preferred securities issued by banks, equity securities, and bank issued corporate bonds. These investments may pose a higher risk of future impairment charges by Valley as a result of the current downturn in the U.S. economy and its potential negative effect on the future performance of these bank issuers and/or the underlying mortgage loan collateral. In addition, the majority of the bank issuers of trust preferred securities within Valley’s investment portfolio are participants in the U.S. Treasury’s TARP Capital Purchase Program. For TARP participants, dividend payments to trust preferred security holders are currently senior to and payable before dividends can be paid on the preferred stock issued under the Capital Purchase Program. Some bank trust preferred issuers may elect to defer future payments of interest on such securities either based upon recommendations by the U.S. Government and the banking regulators or management decisions driven by potential liquidity needs. Such elections by issuers of securities within Valley’s investment portfolio could adversely affect securities valuations and result in future impairment charges. Approximately $10.1 million and $141.4 million of the residential mortgage-backed securities classified as held to maturity and available for sale securities, respectively, were private label mortgage-backed securities at September 30, 2009, while the remainder of the residential mortgage-backed securities were issued by U.S. government sponsored agencies. The private label mortgage-backed securities classified as held to maturity and available for sale securities had gross unrealized losses of $32 thousand and $10.2 million, respectively, at September 30, 2009.

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009									December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)

U.S. government agency securities	$	—	$	—	$	—		$	—	$	24,958	$	65	$	—		$	25,023
Obligations of states and political subdivisions		250,091		6,502		(22	)		256,571		201,858		2,428		(701	)		203,585
Residential mortgage-backed securities		994,011		23,465		(32	)		1,017,444		593,275		7,076		(785	)		599,566
Trust preferred securities		281,832		2,097		(67,041	)		216,888		281,824		229		(91,151	)		190,902
Corporate and other debt securities		52,812		1,280		(2,230	)		51,862		52,822		2,547		(5,200	)		50,169

Total investment securities held to maturity	$	1,578,746	$	33,344	$	(69,325	)	$	1,542,765	$	1,154,737	$	12,345	$	(97,837	)	$	1,069,245

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The age of unrealized losses and fair value of related securities held to maturity at September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009
	Less than Twelve Months					More than Twelve Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)

Obligations of states and political subdivisions	$	843	$	(5	)	$	1,507	$	(17	)	$	2,350	$	(22	)
Residential mortgage-backed securities		—		—			2,855		(32	)		2,855		(32	)
Trust preferred securities		923		(77	)		149,928		(66,964	)		150,851		(67,041	)
Corporate and other debt securities		6,975		(50	)		17,773		(2,180	)		24,748		(2,230	)

Total	$	8,741	$	(132	)	$	172,063	$	(69,193	)	$	180,804	$	(69,325	)


	December 31, 2008
	Less than Twelve Months					More than Twelve Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)

Obligations of states and political subdivisions	$	27,346	$	(661	)	$	3,853	$	(40	)	$	31,199	$	(701	)
Residential mortgage-backed securities		36,985		(785	)		—		—			36,985		(785	)
Trust preferred securities		89,816		(24,111	)		88,642		(67,040	)		178,458		(91,151	)
Corporate and other debt securities		29,389		(4,677	)		3,000		(523	)		32,389		(5,200	)

Total	$	183,536	$	(30,234	)	$	95,495	$	(67,603	)	$	279,031	$	(97,837	)

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 lack of liquidity in the market place. The total number of security positions in the securities held to maturity portfolio in an unrealized loss position at September 30, 2009 was 42 compared to 87 at December 31, 2008.

At September 30, 2009, the unrealized losses reported for trust preferred securities relate to 29 single-issuer securities, mainly issued by bank holding companies. Of the 29 trust preferred securities, 17 are investment grade, 1 was non-investment grade, and 11 are not rated as of September 30, 2009. Additionally, $36.0 million of the $67.0 million in unrealized losses at September 30, 2009 relate to securities issued by one bank holding company with a combined amortized cost of $55.0 million. Valley privately negotiated the purchase of the $55.0 million in trust preferred securities from the bank issuer and holds all of the securities of the two issuances. Typical of most trust preferred issuances, the bank issuer may defer interest payments for up to five years with interest payable on the deferred balance. During August and October of 2009, the bank issuer elected to defer its scheduled interest payments on both of the security issuances. The bank issuer is currently operating under an agreement with its bank regulators which requires, among other things, the issuer to receive permission from the regulators prior to resuming its regularly scheduled payments on both security issuances. However, the issuer’s principal subsidiary bank reported, in its most recent regulatory filing, that it meets the regulatory minimum requirements to be considered a “well-capitalized institution” as of September 30, 2009. Based on this information, management believes that Valley will receive all principal and interest contractually due on both security issuances. Valley will continue to closely monitor the credit risk of this issuer and may be required to recognize other-than-temporary impairment charges on such securities in future periods. All other single-issuer bank trust preferred securities classified as held to maturity are paying in accordance with their terms and have no deferrals of interest or defaults.

Unrealized losses reported for corporate and other debt securities as of September 30, 2009 relate mainly to one investment grade rated, bank-issued corporate bond with a $9.0 million amortized cost and a $2.0 million unrealized loss. The security is paying in accordance with its terms. Additionally, management analyzes the performance

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

of the corporate and other debt issuers on a quarterly basis, including a review of the issuer’s most recent bank regulatory filings, if applicable, to assess credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon management’s quarterly review, all of the issuers have maintained performance levels adequate to support the contractual cash flows of the securities and, if applicable, appear to meet the regulatory minimum requirements to be considered a “well-capitalized” financial institution. Due to an illiquid and inactive market, Valley used Level 3 fair value measurements for 27 and 6 individual trust preferred securities and corporate bonds, respectively, out of a total of 40 and 12 of such instruments, respectively, classified as held to maturity at September 30, 2009.

Management does not believe that any individual unrealized loss as of September 30, 2009 included in the table above represents an other-than-temporary impairment as management mainly attributes the declines in value to changes in interest rates 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 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 maturity.

As of September 30, 2009 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 $341.5 million.

The contractual maturities of investments in debt securities held to maturity at September 30, 2009 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, mortgage-backed securities are not included in the maturity categories in the following summary.


	September 30, 2009
	Amortized Cost		Fair Value
	(in thousands)

Due in one year	$	68,889	$	68,938
Due after one year through five years		69,197		70,834
Due after five years through ten years		80,487		83,149
Due after ten years		366,162		302,400
Residential mortgage-backed securities		994,011		1,017,444

Total investment securities held to maturity	$	1,578,746	$	1,542,765

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 1.7 years at September 30, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of investment securities available for sale at September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009									December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)

U.S. Treasury securities	$	74,917	$	86	$	—		$	75,003	$	—	$	—	$	—		$	—
U.S. government agency securities		—		—		—			—		101,787		785		(8	)		102,564
Obligations of states and political subdivisions		35,248		1,024		(24	)		36,248		47,371		930		(110	)		48,191
Residential mortgage-backed securities		1,020,260		43,032		(10,233	)		1,053,059		1,229,248		21,692		(35,554	)		1,215,386
Trust preferred securities*		56,858		81		(22,020	)		34,919		49,621		25		(20,299	)		29,347
Corporate and other debt securities		97,538		4,985		(5,268	)		97,255		11,919		—		(6,762	)		5,157
Equity securities		49,504		4,123		(4,247	)		49,380		49,383		31		(14,617	)		34,797

Total investment securities available for sale	$	1,334,325	$	53,331	$	(41,792	)	$	1,345,864	$	1,489,329	$	23,463	$	(77,350	)	$	1,435,442

*	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 investment securities available for sale at September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009
	Less than Twelve Months					More than Twelve Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)

Obligations of states and political subdivisions	$	—	$	—		$	1,993	$	(24	)	$	1,993	$	(24	)
Residential mortgage-backed securities		2,617		(49	)		131,670		(10,184	)		134,287		(10,233	)
Trust preferred securities		1,589		(337	)		31,773		(21,683	)		33,362		(22,020	)
Corporate and other debt securities		1,052		(3	)		4,708		(5,265	)		5,760		(5,268	)
Equity securities		788		(369	)		36,225		(3,878	)		37,013		(4,247	)

Total	$	6,046	$	(758	)	$	206,369	$	(41,034	)	$	212,415	$	(41,792	)


	December 31, 2008
	Less than Twelve Months					More than Twelve Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)

U.S. government agency securities	$	1,004	$	(8	)	$	—	$	—		$	1,004	$	(8	)
Obligations of states and political subdivisions		3,515		(109	)		856		(1	)		4,371		(110	)
Residential mortgage-backed securities		191,002		(24,902	)		55,948		(10,652	)		246,950		(35,554	)
Trust preferred securities		18,334		(8,159	)		8,948		(12,140	)		27,282		(20,299	)
Corporate and other debt securities		1,656		(290	)		3,500		(6,472	)		5,156		(6,762	)
Equity securities		19,815		(11,092	)		8,802		(3,525	)		28,617		(14,617	)

Total	$	235,326	$	(44,560	)	$	78,054	$	(32,790	)	$	313,380	$	(77,350	)

The total number of security positions in the available for sale portfolio in an unrealized loss position at September 30, 2009 was 78 compared to 190 at December 31, 2008. The unrealized losses for residential mortgage-backed securities relate primarily to 20 individual private label mortgage-backed securities with a combined amortized cost of $141.4 million and unrealized losses totaling $10.2 million. Of these securities, 12 securities had investment grade ratings and 8 had a non-investment grade rating at September 30, 2009. Three

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

of the six non-investment grade securities were previously found to be other-than-temporarily impaired and had additional estimated credit losses at September 30, 2009 based on management’s impairment analysis (described in the section below).

Within the residential mortgage-backed securities category of the available for sale portfolio, Valley owns 20 individual private label mortgage-backed securities. Management estimates the loss projections for each security by stressing the individual loans collateralizing the security and determining a range of 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 was identified to determine whether other-than-temporary impairment existed as of September 30, 2009. For the three and nine months ended September 30, 2009, Valley recognized net impairment losses on securities in earnings totaling $743 thousand and $5.3 million, respectively, due to estimated credit losses for other-than-temporarily impaired private label mortgage-backed securities. The net impairment losses recorded in the third quarter of 2009 relate to three private label mortgage-backed securities. Two of the three securities were originally found to be other-than-temporarily impaired at March 31, 2009 and one security was originally impaired at December 31, 2008. Due to Valley’s early adoption of the new authoritative accounting guidance included in ASC Topic 320, “Investments – Debt and Equity Securities,” on January 1, 2009, the amortized cost of the private label mortgage-backed security previously impaired at December 31, 2008 was increased by $6.2 million at January 1, 2009, representing the non-credit portion of the $6.4 million impairment charge taken during the fourth quarter of 2008. After all impairment charges, the three securities had a combined amortized cost and fair value of $29.3 million and $26.2 million, respectively, at September 30, 2009.

In evaluating the range of likely future cash flows for each of the three securities, Valley applied security as well as market specific assumptions, based on the credit characteristics of each security to multiple cash flow models. Multiple present value cash flow analyses were utilized in determining future expected cash flows, in part due to the vast array of assumptions prevalent in the current market and used by market participants in valuing similar type securities. Under certain stress scenarios estimated future losses may arise. For the three securities in which Valley recorded an other-than-temporary impairment, the average portfolio FICO score at origination ranged from 712 to 716 and the weighted average loan to value ratio was between 60 percent and 69 percent. Additional cash flow assumptions incorporated expected default rates ranging from 5.33 percent to 7.83 percent and loss severity expectations ranging from 52 percent to 58 percent. Each security’s cash flows were discounted at the security’s effective interest rate. Although we recognized other-than-temporary impairment charges on the securities, each security is currently performing in accordance with its contractual obligations.

At September 30, 2009, the unrealized losses for trust preferred securities in the tables above relate to 19 single-issuer bank trust preferred securities and 3 pooled trust preferred securities. All the single-issuer trust preferred securities classified as available for sale had investment grade ratings at September 30, 2009. These single-issuer securities are all paying in accordance with their terms and have no deferrals of interest or defaults. Additionally, as previously noted above, management analyzes the performance of the bank issuers on a quarterly basis, including a review of the issuer’s most recent bank regulatory report to assess their credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon management’s quarterly review, all of the issuers appear to meet the regulatory minimum requirements to be considered a “well-capitalized” financial institution and have maintained performance levels adequate to support the contractual cash flows of the securities.

Valley owns three pooled trust preferred securities, collateralized by securities principally issued by banks, with a combined amortized cost and fair value of $26.0 million and $10.2 million, respectively, at September 30, 2009. Two of the three securities were other-than-temporarily impaired at December 31, 2008 and resulted in an impairment charge of $7.8 million to earnings, as each of Valley’s tranches in the two securities had projected cash flows below their future contractual principal and interest payments. Due to Valley’s early adoption of the new authoritative accounting guidance included in ASC Topic 320 on January 1, 2009, the amortized cost amounts for these securities were increased by a total of $7.5 million at January 1, 2009 for the non-credit portion of the $7.8 million impairment charge taken during the fourth quarter of 2008. As of September 30, 2009, the total fair value for the two securities, based on a level 3 valuation method described in Note 7, was $925 thousand. Based upon management’s assessment, the total unrealized losses of $7.6 million on the two securities at September 30, 2009 is solely attributable to factors other than credit.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The one other pooled trust preferred security’s rating was downgraded from BBB- to BB- by S&P in March 2009 and from a rating equivalent of AA to A by Moody’s in August 2009 with a stable outlook. The security is performing in accordance with its contractual terms and management has no present intent to sell, nor is it more likely than not that Valley will be required to sell such security before market price recovery, which could be maturity. The overall issuance of approximately $183 million includes five banks that deferred interest payments and one bank in default of payment. These six issuers combined represent 13.1 percent of the overall security. As part of its impairment analysis, management reviewed the underlying banks’ current financial performance, as well as their participation in the U.S. Treasury’s TARP Capital Purchase Program to assist management in applying the appropriate constant default rate to its cash flow projections for the security. At September 30, 2009, no other-than-temporary impairment was recorded for the security, as Valley’s super senior tranche of this security had projected cash flows no less than their future contractual principal and interest payments. The S&P and Moody’s downgrades to the security’s ratings in March and August 2009, respectively, did not change management’s assessment that the security is temporarily impaired.

Unrealized losses reported for corporate and other debt securities relate mainly to one investment rated bank issued corporate bond with a $10.0 million amortized cost and a $5.3 million unrealized loss. The security is paying in accordance with its contractual terms. Additionally, management analyzes the performance of the corporate and other debt issuers on a quarterly basis, including a review of the issuer’s most recent bank regulatory filings, if applicable, to assess credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon management’s quarterly review, all of the issuers have maintained performance levels adequate to support the contractual cash flows of the securities and, if applicable, appear to meet the regulatory minimum requirements to be considered a “well-capitalized” financial institution.

The unrealized losses on equity securities, including those more than twelve months, are related primarily to perpetual preferred securities. As allowed under the guidance issued by the Office of the Chief Accountant of the SEC in October 2008, these hybrid investments 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 September 30, 2009. Based on this analysis, management believes the declines in fair value are attributable to a lack of liquidity in the marketplace and are not reflective of any deterioration in the creditworthiness of the issuers. All of the perpetual preferred securities with unrealized losses at September 30, 2009 have investment grade ratings and are currently performing and paying quarterly dividends.

Management does not believe that any individual unrealized loss as of September 30, 2009 represents an other-than-temporary impairment, except for the three private label mortgage-backed securities discussed above, as management mainly attributes the declines in value to changes in interest rates and recent 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 has concluded 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.

For the three and nine months ended September 30, 2008, Valley recognized other-than-temporary impairment charges of $65.5 million and $67.3 million, respectively, on investment securities classified as available for sale. The impairment charges primarily relate to Fannie Mae and Freddie Mac perpetual preferred stocks classified as available for sale. During the third of 2008, the market values of these securities significantly declined after the U.S. Government placed Fannie Mae and Freddie Mac into conservatorship and suspended their preferred stock dividends.

As of September 30, 2009, 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 $739.8 million.

The contractual maturities of investments in debt securities available for sale at September 30, 2009, 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, mortgage-backed securities are not included in the maturity categories in the following summary.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	September 30, 2009
	Amortized Cost		Fair Value
	(in thousands)

Due in one year	$	85,056	$	85,286
Due after one year through five years		38,553		40,102
Due after five years through ten years		70,429		74,614
Due after ten years		70,523		43,423
Residential mortgage-backed securities		1,020,260		1,053,059
Equity securities		49,504		49,380

Total investment securities available for sale	$	1,334,325	$	1,345,864

The weighted-average remaining expected life for residential mortgage-backed securities available for sale was 3.9 years at September 30, 2009.

Gross gains (losses) realized on sales, maturities and other securities transactions related to investment securities included in earnings for the three and nine months ended September 30, 2009 and 2008 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)

Sales transactions:
Gross gains	$	—		$	3,627		$	258		$	4,349
Gross losses		—			(5,569	)		(36	)		(5,600	)

		—			(1,942	)		222			(1,251	)


Maturities and other securities transactions:
Gross gains		7			37			58			274
Gross losses		(12	)		(2	)		(34	)		(6	)

		(5	)		35			24			268

(Losses) gains on securities transactions, net	$	(5	)	$	(1,907	)	$	246		$	(983	)

The following table presents the changes in the credit loss component of the amortized cost of debt securities classified as either held to maturity or available for sale that Valley has written down for such loss as an other-than-temporary impairment recognized in earnings. The credit loss component of the amortized cost 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 the period presented. Other-than-temporary impairment recognized in earnings in the three and nine month periods ended September 30, 2009, 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 impairments). 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 the 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.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Changes in the credit loss component of credit impaired debt securities were:


	Three Months Ended September 30, 2009			Nine Months Ended September 30, 2009
	(in thousands)

Balance, beginning of period	$	5,154		$	549

Additions:
Initial credit impairments		—			2,171
Subsequent credit impairments		743			3,177
Reductions:
Accretion of credit loss impairment due to an increase in expected cash flows		(295	)		(295	)

Balance, end of period	$	5,602		$	5,602

Trading Securities

The fair values of trading securities at September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009		December 31, 2008
	(in thousands)

Trust preferred securities	$	32,173	$	34,236

Total trading securities	$	32,173	$	34,236

Interest income on trading securities totaled $666 thousand and $1.0 million for the three months ended September 30, 2009 and 2008, respectively, and $3.2 million and $7.4 million for the nine months ended September 30, 2009 and 2008, respectively.

Note 10. 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, 2007	$	18,192		$	54,537	$	57,020	$	50,086	$	179,835
Goodwill related to bank subsidiary sold		(100	)		—		—		—		(100	)
Goodwill from business combinations		93			39,103		50,736		25,479		115,411

Balance at December 31, 2008		18,185			93,640		107,756		75,565		295,146
Goodwill from business combinations		67			165		213		107		552

Balance at September 30, 2009	$	18,252		$	93,805	$	107,969	$	75,672	$	295,698

*	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 third quarter of 2009, we recorded $67 thousand in goodwill from an earn-out payment resulting from an acquisition by Valley in 2006. The earn-out payment was based upon predetermined profitability targets in accordance with the merger agreement. During the second quarter of 2009, Valley recorded an additional $485 thousand in goodwill related to the valuation of certain deferred tax assets acquired from Greater Community on July 1, 2008.

No impairment losses on goodwill or intangibles, other than loan servicing rights, were incurred during the three and nine months ended September 30, 2009 and 2008.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes other intangible assets as of September 30, 2009 and December 31, 2008:


	Gross Intangible Assets		Accumulated Amortization			Valuation Allowance			Net Intangible Assets
	(in thousands)

September 30, 2009
Loan servicing rights	$	69,977	$	(58,443	)	$	(1,018	)	$	10,516
Core deposits		25,584		(13,047	)		—			12,537
Other		4,319		(3,007	)		—			1,312

Total other intangible assets	$	99,880	$	(74,497	)	$	(1,018	)	$	24,365


December 31, 2008
Loan servicing rights	$	66,624	$	(56,800	)	$	(532	)	$	9,292
Core deposits		38,177		(23,028	)		—			15,149
Other		5,792		(4,279	)		—			1,513

Total other intangible assets	$	110,593	$	(84,107	)	$	(532	)	$	25,954

Loan servicing rights are amortized using the amortization method. Under this method, Valley amortizes the loan servicing assets in proportion to and over the period of estimated net servicing revenues. On a quarterly basis, Valley assesses the loan servicing asset for impairment based on fair value at each reporting date. At each reporting date, if the book value of an individual loan servicing asset exceeds fair value, an impairment charge is charged to earnings for the amount of the book value over fair value. Valley recognized impairment charges, net of recoveries on its loan servicing rights totaling $32 thousand and $126 thousand for the three months ended September 30, 2009 and 2008, respectively, and $486 thousand and $252 thousand for the nine months ended September 30, 2009 and 2008, respectively.

Core deposits are amortized using an accelerated method and have a weighted average amortization period of 10 years. The column labeled “Other” included in the table below consists of customer lists and covenants not to compete, which are amortized over their expected life using a straight line method and have a weighted average amortization period of 14 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following presents the estimated future amortization expense of other intangible assets for the remainder of 2009 through 2013:


	Loan Servicing Rights		Core Deposits		Other
	(in thousands)

2009	$	737	$	812	$	67
2010		2,656		2,985		266
2011		2,076		2,544		234
2012		1,467		2,104		217
2013		1,121		1,663		114

Valley recognized amortization expense on other intangible assets, including net impairment charges on loan servicing rights, of $1.7 million and $2.0 million for the three months ended September 30, 2009 and 2008, respectively and $5.5 million and $5.1 million for the nine months ended September 30, 2009 and 2008, respectively.

Note 11. Pension Plan

Valley National Bank has a non-contributory defined benefit plan (“qualified plan”) covering substantially all of its employees. The benefits are based upon years of credited service and the employee’s highest average compensation as defined. It is the Bank’s funding policy to contribute annually an amount that can be deducted for federal income tax purposes. Additionally, the Bank has a supplemental non-qualified, non-funded retirement plan (“non-qualified plan”) which is designed to supplement the pension plan for key officers.

The following table sets forth the components of net periodic pension expense related to the pension plans for the three and nine months ended September 30, 2009 and 2008:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)

Service cost	$	1,347		$	1,143		$	3,955		$	3,584
Interest cost		1,248			1,189			3,796			3,563
Expected return on plan assets		(1,672	)		(1,475	)		(4,530	)		(4,423	)
Amortization of prior service cost		149			137			447			410
Amortization of actuarial loss		190			93			644			274

Total net periodic pension expense		1,262			1,087			4,312			3,408

Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Amortization of prior service cost		(149	)		(137	)		(447	)		(410	)
Amortization of acturial loss		(190	)		(93	)		(644	)		(274	)

		(339	)		(230	)		(1,091	)		(684	)


Total amount recognized in net periodic benefit cost and other comprehensive income (before tax)	$	923		$	857		$	3,221		$	2,724

The fair value of qualified plan assets increased approximately $11.7 million, or 19.3 percent to $72.4 million at September 30, 2009 from $60.7 million at December 31, 2008. Valley contributed $5.0 million to the qualified plan during the first quarter of 2009, based upon actuarial estimates. Valley does not expect to make any additional contributions during the remainder of 2009.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 12. Guarantees

Guarantees that have been entered into by Valley include standby letters of credit of $176.5 million as of September 30, 2009. Standby letters of credit represent the guarantee by Valley of the obligations or performance of a customer in the event the customer is unable to meet or perform its obligations to a third party. Of the total standby letters of credit, $98.4 million, or 55.8 percent are secured and, in the event of non performance by the customer, Valley has rights to the underlying collateral, which includes commercial real estate, business assets (physical plant or property, inventory or receivables), marketable securities and cash in the form of bank savings accounts and certificates of deposit. Valley had a $680 thousand liability recorded as of September 30, 2009 relating to the standby letters of credit.

Note 13. Junior Subordinated Debentures Issued To Capital Trusts

Valley established VNB Capital Trust I, a statutory trust, for the sole purpose of issuing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trust to purchase an equivalent amount of junior subordinated debentures of Valley. GCB Capital Trust III was established by Greater Community prior to Valley’s acquisition of Greater Community, and the junior subordinated notes issued by Greater Community to GCB Capital Trust III were assumed by Valley upon completion of the acquisition on July 1, 2008. The junior subordinated debentures, the sole assets of the trusts, are unsecured obligations of Valley, and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of Valley. Valley wholly owns all of the common securities of each trust. The trust preferred securities qualify, and are treated by Valley as Tier I regulatory capital.

Valley elected to measure the junior subordinated debentures issued to VNB Capital Trust I at fair value on January 1, 2007. For the three and nine months ended September 30, 2009, net trading gains (losses) include $2.8 million and $13.5 million in non-cash losses, respectively, for the change in the fair value of the junior subordinated debentures issued to VNB Capital Trust I. For the comparable three and nine months ended September 30, 2008, net trading gains (losses) include $20.9 million and $21.1 million of non-cash gains, respectively, for the change in the fair value of these debentures.

The table below summarizes the outstanding junior subordinated debentures and the related trust preferred securities issued by each trust as of September 30, 2009:


	September 30, 2009
	VNB Capital Trust I			GCB Capital Trust III
	($ in thousands)

Junior Subordinated Debentures:
Carrying value (1)	$	153,569		$	25,274
Contractual principal balance		157,024			24,743
Annual interest rate (2)		7.75	%		6.96	%
Stated maturity date		December 15, 2031			July 30, 2037
Initial call date		November 7, 2006			July 30, 2017

Trust Preferred Securities:
Face value	$	152,313		$	24,000
Annual distribution rate (2)		7.75	%		6.96	%
Issuance date		November 2001			July 2007
Distribution dates (3)		Quarterly			Quarterly

(1)	The carrying value for GCB Capital Trust III includes an unamortized purchase accounting premium of $530 thousand.

(2)	Interest on GCB Capital Trust III is fixed until July 30, 2017, then resets to 3-month LIBOR plus 1.4 percent. The annual interest rate excludes the effects of the purchase accounting adjustments.

(3)	All cash distributions are cumulative.

The trusts’ ability to pay amounts due on the trust preferred securities is solely dependent upon Valley making payments on the related junior subordinated debentures. Valley’s obligation under the junior subordinated debentures and other relevant trust agreements, in aggregate, constitutes a full and unconditional guarantee by

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Valley of the trusts’ obligations under the trust preferred securities issued. Under the junior subordinated debenture agreements, Valley has the right to defer payment of interest on the debentures and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in the table above. Currently, Valley has no intention to exercise its right to defer interest payments on the debentures.

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at the stated maturity date or upon an earlier call date for redemption at par. The junior subordinated debentures issued to VNB Capital Trust I are currently callable by Valley. Potential future purchases of the trust preferred securities issued by the trusts or redemption of its junior subordinated debentures is not permitted for up to approximately three years, without prior consent, under the terms of the U.S. Treasury’s TARP Capital Purchase Program which Valley elected to participate in on November 14, 2008. However, future purchases or redemptions of our debentures would be permitted if we redeemed all of our outstanding senior preferred stock held by the Treasury or the Treasury transferred these shares to third parties. See information under the caption “Capital Adequacy” in Management’s Discussion and Analysis section for further details.

The trust preferred securities described above are included in Valley’s consolidated Tier 1 capital and total capital at September 30, 2009 and December 31, 2008. In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding companies to continue to include qualifying trust preferred capital securities in their Tier 1 capital for regulatory capital purposes, subject to a 25 percent limitation to all core (Tier 1) capital elements, net of goodwill less any associated deferred tax liability. The amount of trust preferred securities and certain other elements in excess of the limit could be included in total capital, subject to restrictions. The final rule originally provided a five-year transition period, ending March 31, 2009, for application of the aforementioned quantitative limitation, however, in March 2009, the Board of Governors of the Federal Reserve Board voted to delay the effective date until March 2011. As of September 30, 2009 and December 31, 2008, 100 percent of the trust preferred securities qualified as Tier I capital under the final rule adopted in March 2005.

Note 14. Derivative Instruments and Hedging Activities

Valley is exposed to certain risks arising from both its business operations and economic conditions. Valley principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Valley manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and, from time to time, the use of derivative financial instruments. Specifically, Valley enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Valley’s derivative financial instruments are used to manage differences in the amount, timing, and duration of Valley’s known or expected cash receipts and its known or expected cash payments principally related to certain variable-rate borrowings and fixed-rate loan assets.

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 primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.

In the second quarter of 2008, Valley purchased two interest rate caps designated as cash flow hedges to protect against movements in interest rates above the caps’ strike rate based on the effective federal funds rate. The interest rate caps have an aggregate notional amount of $100.0 million, strike rates of 2.50 percent and 2.75 percent, and a maturity date of May 1, 2013. Through November of 2008, the caps were used to hedge the variable cash flows associated with customer repurchase agreements (included in short-term borrowings) and money market deposit accounts that had variable interest rates based on an effective federal funds rate less 25 basis points. During November of 2008, the hedging relationship was terminated since the rates paid on the customer repurchase agreements and money market deposit accounts did not trend with the effective federal funds rate (this was caused by historically unprecedented low level of the effective federal funds rate thereby causing Valley to modify the benchmark used to pay interest on these accounts). On February 20, 2009, Valley

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

re-designated the caps to hedge the variable cash flows associated with customer repurchase agreements and money market deposit accounts products that have variable interest rates based on the federal funds rate. The change in fair value of these derivatives while not designated as hedges (from January 1, 2009 through February 20, 2009) totaled a $369 thousand gain and is included in other income for the nine months ended September 30, 2009.

In the third quarter of 2008, Valley purchased two interest rate caps designated as cash flow hedges, to reduce its exposure to movements in interest rates above the caps’ strike rate based on the U.S. prime interest rate (as published in The Wall Street Journal). The interest rate caps have an aggregate notional amount of $100.0 million, strike rates of 6.00 percent and 6.25 percent, and a maturity date of July 15, 2015. The caps are used to hedge the total change in cash flows associated with prime-rate-indexed deposits, consisting of consumer and commercial money market deposit accounts, which have variable interest rates of 2.75 percent below the prime rate.

Fair Value Hedges of Interest Rate Risk. Valley is exposed to changes in the fair value of certain of its fixed rate assets due to changes in benchmark interest rates based on one month-LIBOR. From time to time, Valley uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional amount. As of September 30, 2009, Valley had one interest rate swap with a notional amount of $9.3 million.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting 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 line item as the offsetting loss or gain on the related derivatives.

Non-designated Hedges. Valley does not use derivatives for speculative purposes. Derivatives not designated as hedges are used to manage Valley’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements under U.S. GAAP. During the first quarter of 2009, Valley entered into and terminated three interest rate swaps not designated as hedges to potentially offset the change in fair value of certain trading securities. During the fourth quarter of 2008, as previously mentioned above, two interest rate caps (due to mismatches in index) did not qualify for hedge accounting and were subsequently re-designated during February 2009. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of September 30, 2009, Valley had no outstanding derivatives that were not designated in hedging relationships.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows:


		Fair Value
	Balance Sheet Location	September 30, 2009		December 31, 2008
		(in thousands)

Asset Derivatives

Derivatives designated as hedging instruments:
Cash flow hedge interest rate caps on short-term borrowings and deposit accounts	Other Assets	$	6,613	$	2,090

Total derivatives designated as hedging instruments		$	6,613	$	2,090


Derivatives not designated as hedging instruments:
Interest rate caps	Other Assets	$	—	$	1,244

Total derivatives not designated as hedging instruments		$	—	$	1,244


Liability Derivatives

Derivatives designated as hedging instruments:
Fair value hedge commercial loan interest rate swap	Other Liabilities	$	1,325	$	2,008

Total derivatives designated as hedging instruments		$	1,325	$	2,008

Gains (losses) included in the consolidated statements of income and in other comprehensive income (loss), on a pre-tax basis, for the period related to interest rate derivatives designated as hedges of cash flows were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)

Interest rate caps on short-term borrowings and deposit accounts:
Amount of loss reclassified from accumulated other comprehensive income (loss) to interest on short-term borrowings	$	(133	)	$	(39	)	$	(261	)	$	(46	)
Amount of (loss) gain recognized in other comprehensive income (loss)		(1,126	)		(3,985	)		2,776			(3,820	)

For the three and nine months ended September 30, 2009, Valley recognized a net loss of $68 thousand and a net gain of $134 thousand, respectively, in other expense for hedge ineffectiveness on the cash flow hedge interest rate caps, as compared to a net loss of $22 thousand and $21 thousand, respectively, for the same three and nine month periods of 2008. The accumulated net after-tax loss related to effective cash flow hedges included in accumulated other comprehensive income (loss) totaled $3.1 million and $5.0 million at September 30, 2009 and December 31, 2008, 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. During the next twelve months, Valley estimates that $650 thousand will be reclassified as an increase to interest expense.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)
Derivative
Commercial loan interest rate swap:
Interest income - Interest and fees on loans	$	(214	)	$	(128	)	$	684		$	(141	)

Hedged item
Commercial loan:
Interest income - Interest and fees on loans		214			128			(684	)		141

Gains (losses) included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
	(in thousands)

Interest rate derivatives not designated as hedging instruments:
Other non-interest income	$	—	$	—	$	369	$	—
Trading gains (losses), net		—		—		1,984		—

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 that contain a provision where 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 obligations. As of September 30, 2009, Valley was in compliance with the provisions of its derivative counterparty agreements.

As of September 30, 2009, 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 approximately $1.5 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. At September 30, 2009, neither Valley nor its counterparties have exceeded such minimum thresholds and no collateral has been assigned or posted.

Note 15. Business Segments

The information under the caption “Business Segments” in Management’s Discussion and Analysis is incorporated herein by reference.

Item 2.

Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations

The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words “Valley,” “the Company,” “we,” “our” and “us” refer to Valley National Bancorp and its wholly owned subsidiaries, unless we indicate otherwise.

The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (“GAAP”) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitates comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP.

Cautionary Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “expect,” “anticipate,” “look,” “view,” “opportunities,” “allow,” “continues,” “reflects,” “believe,” “may,” “should,” “will,” “estimates” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to those risk factors disclosed in Valley’s Annual Report on Form 10-K for the year ended December 31, 2008 and Part II Item 1A of this report. We assume no obligation for updating any such forward-looking statement at any time.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform, in all material respects, to U.S. GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.

Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Our significant accounting policies are presented in Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2008. We identified our policies on the allowance for loan losses, security valuations, goodwill and other intangible assets, and income taxes to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Management has reviewed the application of these policies with the Audit and Risk Committee of Valley’s Board of Directors.

The judgments used by management in applying the critical accounting policies discussed below may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in our investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to further impairment losses.

Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio and is the largest component of the allowance for credit losses which also includes management’s estimated reserve for unfunded commercial letters of credit. Determining the

amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Various banking regulators, as an integral part of their examination process, also review the allowance for loan losses. Such regulators may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the allowance for loan losses when their credit evaluations differ from those of management. Additionally, the allowance for loan losses is determined, in part, by the composition and size of the loan portfolio which represents the largest asset type on the consolidated statement of financial condition.

The allowance for loan losses consists of four elements: (1) specific reserves for individually impaired credits, (2) reserves for classified, or higher risk rated loans, (3) reserves for non-classified loans based on historical loss factors, and (4) reserves based on general economic conditions and other qualitative risk factors both internal and external to Valley, including changes in loan portfolio volume, the composition and concentrations of credit, new market initiatives, and the impact of competition on loan structuring and pricing. Note 1 of the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2008 describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in this MD&A.

Security Valuations. Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (Level 1) or quoted prices on similar assets (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of quoted prices in active markets, valuation techniques are used to determine fair value of investments that require inputs that are both significant to the fair value measurement and unobservable (Level 3). Valuation techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on our consolidated financial condition or results of operations.

Management must periodically evaluate if unrealized losses (as determined based on the securities valuation methodologies discussed above) on individual securities classified as held to maturity or available for sale in the investment portfolio are considered to be other-than-temporary. The analysis of other-than-temporary impairment requires the use of various assumptions, including, but not limited to, the length of time an investment’s book value is greater than fair value, the severity of the investment’s decline, as well as any credit deterioration of the investment. If the decline in value of an equity investment security is deemed to be other-than-temporary, the investment is written down to fair value and a non-cash impairment charge is recognized in earnings in the period of such evaluation. For debt investment securities deemed to be other-than-temporarily impaired, the investment is written down by a charge to earnings for the impairment related to the estimated credit loss and the non-credit related impairment is recognized as a charge to other comprehensive income. See Notes 7 and 9 to the consolidated financial statements and the “Investment Securities Portfolio” section in this MD&A below for additional information.

Goodwill and Other Intangible Assets. Valley records all assets, liabilities, and non-controlling interests in the acquiree in purchase acquisitions, including goodwill and other intangible assets, at fair value as of the acquisition date as required by ASC Topic 805, “Business Combinations.” Goodwill totaling $295.7 million at September 30, 2009 is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate it may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount. The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets.

The goodwill impairment test is performed in two phases. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our consolidated financial condition or results of operations.

In connection with determining our income tax provision, we maintain a reserve related to certain tax positions and strategies that management believes contain an element of uncertainty. Periodically, we evaluate each of our tax positions and strategies to determine whether the reserve continues to be appropriate. Notes 1 and 14 to the consolidated financial statements in Valley’s Annual Report on Form 10-K for the year ended December 31, 2008, and the “Income Taxes” section below include additional discussion on the accounting for income taxes.

Executive Summary

Net income for the third quarter of 2009 was $31.6 million, or $0.18 per diluted common share, compared to $3.6 million, or $0.03 per diluted common share, for the same period of 2008. The increase in net income was largely due to (i) a $64.8 million decrease in net impairment losses on securities mainly due to a $65.5 million loss on Fannie Mae and Freddie Mac perpetual preferred securities during the third quarter of 2008 resulting from the government’s decision to place these issuers into conservatorship, partially offset by (ii) a $18.2 million increase in net trading losses which includes a $2.8 million non-cash charge related to the change in the fair value of our junior subordinated debentures carried at fair value in the third quarter of 2009 compared to a non-cash gain of $20.9 million on such debentures for the same period of 2008, (iii) a $5.9 million increase in the provision of credit losses due to higher net charge-offs and loan deterioration resulting from the economic recession, and (iv) a $15.1 million increase in income taxes mainly caused by the tax benefit realized for net impairment losses on perpetual preferred securities in the third quarter of 2008. Accrued preferred dividends and accretion of the discount on Valley’s preferred stock reduced diluted earnings per common share by $0.04 for the three months ended September 30, 2009.

Our credit quality performance ratios for the third quarter of 2009 deteriorated slightly as compared to the second quarter of 2009, reflecting the negative impact of the current economic recession. Mindful of the poor operating environment and the higher delinquency rates reported throughout the industry, management believes our loan portfolio’s performance remains good. Total loans past due in excess of 30 days increased 0.11 percent to 1.60 percent of our total loan portfolio of $9.5 billion as of September 30, 2009 compared to 1.49 percent of total loans at June 30, 2009. Our non-accrual loans increased $16.3 million to $74.0 million, or 0.78 percent of total loans at September 30, 2009 as compared to $57.7 million, or 0.60 percent of total loans at June 30, 2009. The increase in non-accrual loans was mainly due to three construction loans and two commercial real estate loans totaling $14.4 million and an increase in non-performing residential mortgage loans. In general, we believe most of our non-accrual loans are well secured and, ultimately, collectible. Our lending strategy is based on underwriting standards designed to maintain high credit quality; however, due to the potential for future credit deterioration caused by a prolonged recession, management cannot provide assurance that our loan portfolio will not continue to decline from the levels reported as of September 30, 2009. See “Non-performing Assets” section at page 61 for further analysis of our credit quality.

We loaned over $500 million in new credits during the third quarter of 2009 despite a decline of 4.5 percent on an annualized basis in our overall loan portfolio due, in part, to continued declines in our automobile portfolio caused by the lack of consumer demand and our strict underwriting standards, management’s decision to sell most refinanced and new residential mortgage loan originations in the secondary market, and declines in commercial and industrial loan demand and line of credit usage, partially offset by an increase in commercial real estate loans as we continue to find quality lending opportunities made available by the tight credit markets. Our deposits increased $122.0 million, or 5.2 percent on an annualized basis during the third quarter of 2009 as compared to the linked quarter as we experienced growth in savings, NOW, and money market accounts and time deposits generated from de novo branch locations. Our deposit mix remained unchanged from the second quarter of 2009 as non-interest bearing deposits and low cost savings, NOW, and money market accounts were approximately 66 percent of our total deposits at September 30, 2009. However, our cost of funds continued to benefit from maturing higher cost time deposits and lower interest rates on new and renewed time deposits. Management actively manages interest rate risk on the balance sheet for the long-term and used much of its

excess liquidity from the reduction in the loan portfolio to offset maturing high cost funding sources. Management may also allow the size of the balance sheet to contract based on, among other things, the current level of interest rates, the sale of residential mortgage loans and the decline in the automobile portfolio, as well as our ability to attract and maintain quality loan relationships in the current economic recession.

Management continues to assess the expected impact of the recession on our operations and our ability to maintain a well-capitalized position. Based on such an assessment, in September 2009, we repurchased 125,000 shares of our Series A Fixed Rate Cumulative Perpetual Preferred Stock from the U.S. Department of the Treasury for an aggregate purchase price of $125.7 million (including accrued and unpaid dividends). Including our repurchase of 75,000 shares in June 2009, we have repurchased $200 million of the $300 million in senior preferred share issued to the Treasury under the Capital Purchase Program during November 2008. The September 2009 repurchase resulted in an accelerated accretion charge of $3 million to retained earnings in the third quarter of 2009 based on the difference between the par value of $125 million and the carrying value of $122 million. The reduction in our preferred shares should increase net income available to common stockholders in future periods as preferred dividends payable will decline. Management will continue to assess the changes in the economic environment, our credit risk, capital position, and other factors prior to any future redemption requests.

During the third quarter of 2009, we completed our previously announced “at-the-market” common equity offering, consisting of the sale of 5.67 million shares of newly issued common stock for net proceeds totaling $71.6 million. All share transactions under the program occurred during the third quarter of 2009, except for 43 thousand shares totaling $401 thousand in net proceeds during the second quarter of 2009. Net proceeds raised from the shares issued under the offering may be used to redeem additional amounts of our preferred stock held by the Treasury.

On September 29, 2009, the FDIC proposed a rule that would require insured institutions to prepay their estimated quarterly assessments through December 31, 2012 to strengthen the cash position of the Federal Deposit Insurance Fund. Once final, the rule would require the cash prepayment on December 30, 2009. Management believes the estimated cash prepayment totaling approximately $48.5 million will not have a significant impact on our future cash position or operations. The prepaid assessment will be reduced by our actual assessments as a charge to expense over the applicable assessment periods until the prepaid assessment is exhausted. FDIC insurance assessment rates have increased substantially in 2009 and we may have to pay significantly higher assessments in the future and potentially prepay such assessments.

We participate in the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary Liquidity Guarantee Program, or TLG, for non-interest bearing transaction deposit accounts. Banks that participate in the TLG’s non-interest bearing transaction account guarantee are required to pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. To the extent that these TLG assessments are insufficient to cover any loss or expenses arising from the TLG program, the FDIC is authorized to impose an emergency special assessment on all FDIC-insured depository institutions. The FDIC has authority to impose charges for the TLG program upon the holding companies of such depository institutions as well. The TLG was scheduled to end December 31, 2009, but the FDIC extended the program to June 30, 2010. In announcing the extension, the FDIC indicated that it will charge a higher guarantee fee to banks that elect to participate in the extension to reflect each bank’s risk. Management expects to participate in the TLG program through the new June 30, 2010 expiration date and has estimated that the guarantee fee for this program will approximate $1 million in additional FDIC insurance assessments during the first half of 2010.

As previously disclosed in Part I, Items 1 and 1A of Valley’s Annual Report on Form 10-K for the year ended December 31, 2008, we are subject to regulation by several government agencies, including Comptroller of the Currency (“OCC”), the Federal Reserve and the FDIC, as well as legislative changes. Recently Congressman Barney Frank, working with President Obama’s administration has introduced legislation to deal with the resolution of institutions which fall within the category often known as too big to fail. While we do not fall within that category, the legislation seeks to impose the cost of such resolutions not only on such large institutions but on smaller institutions, such as ours, which have more than $10 billion in assets. We can provide no assurances as to whether or when this proposal will be enacted into legislation, and if adopted, what additional costs or assessments will be imposed on us, if any.

However, if enacted, this legislation could require us to change certain of our business practices, impose additional costs on us, and potentially put us at a competitive disadvantage to institutions which are smaller than we are.

For the three months ended September 30, 2009, we reported an annualized return on average shareholders’ equity (“ROE”) of 9.35 percent and an annualized return on average assets (“ROA”) of 0.89 percent which includes intangible assets. Our annualized return on average tangible shareholders’ equity (“ROATE”) was 12.25 percent for the third quarter of 2009. The comparable ratios for the third quarter of 2008 were an annualized ROE of 1.28 percent, an annualized ROA of 0.10 percent, and an annualized ROATE of 1.80 percent. All of the above ratios were impacted by the change in fair value of our junior subordinated debentures carried at fair value and net impairment losses on securities. Net income included a non-cash charge of $2.8 million ($1.8 million after-taxes) for the third quarter of 2009 compared to a non-cash gain of $20.9 million ($13.6 million after-taxes) for the same period of 2008 due to the change in fair value of the debentures. Net impairment losses on securities totaled $743 thousand ($465 thousand after-taxes) and $65.5 million ($44.1 million after-taxes) for the three months ended September 30, 2009 and 2008, respectively.

ROATE, which is a non-GAAP measure, is computed by dividing net income by average shareholders’ equity less average goodwill and average other intangible assets, as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	($ in thousands)

Net income	$	31,582		$	3,595		$	83,963		$	76,661


Average shareholders’ equity		1,351,745			1,120,011			1,359,440			1,013,113
Less: Average goodwill and other intangible assets		(320,284	)		(322,685	)		(319,720	)		(242,964	)

Average tangible shareholders’ equity	$	1,031,461		$	797,326		$	1,039,720		$	770,149


Annualized ROATE		12.25	%		1.80	%		10.77	%		13.27	%

Management believes the ROATE measure provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and the measure facilitates comparisons with the performance of others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP.

Net Interest Income

Net interest income on a tax equivalent basis was $116.4 million for the third quarter of 2009, relatively unchanged from the same quarter of 2008. For the third quarter of 2009, a $13.6 million, or 43 basis point decline in funding costs on average interest bearing liabilities and a $330.6 million decrease in average interest bearing liabilities as compared to the third quarter of 2008 was offset by a $13.8 million or 45 basis point decline in the yield on average interest earning assets. Both the declines in cost and yield resulted mainly from a decrease in short-term interest rates as the average target federal funds rate decreased approximately 200 basis points for the third quarter of 2009 compared to the same period in 2008.

For the third quarter of 2009, average federal funds sold and other interest bearing deposits and average investment securities increased $275.5 million and $187.1 million, respectively, while average loans decreased $407.4 million as compared to the third quarter of 2008. Compared to the second quarter of 2009, average loans decreased by $188.9 million primarily due to decreases in the automobile, residential mortgage, commercial and industrial, and construction loans, partially offset by an increase in the commercial real estate loans during the three months ended September 30, 2009. Our automobile loan portfolio has declined for five consecutive quarters mainly due to low consumer demand for new and used vehicles, as well as Valley’s move to further strengthen its auto loan underwriting standards in light of the weakened economy. The decline in the residential mortgage loan portfolio continued during the third quarter of 2009 as expected by management

based on our secondary market sales of most refinanced loans and new loan originations. The decline in commercial and industrial loans is mainly due to a slowdown in new commercial and industrial loan activity and a decrease in line of credit usage by customers caused by the economy. Construction loans decreased due to normal incremental paydowns on existing loans coupled with lower new loan volume due to the slowdown in the housing market. Commercial real estate loans continued to modestly increase quarter over quarter as we benefited from the dislocation in the credit markets for new loans with quality borrowers meeting our credit standards.

Average interest bearing liabilities for the quarter ended September 30, 2009 decreased $330.6 million, or 3.1 percent compared with the same quarter of 2008. Compared to the second quarter of 2009, average interest bearing liabilities decreased $88.9 million, or 0.8 percent for the three months ended September 30, 2009. Average total interest bearing deposits decreased $40.2 million, or 0.6 percent from the second quarter of 2009 mainly due to a decrease in higher cost average time deposits partially offset by an increase in lower cost average savings, NOW, and money market deposits. Average time deposits declined $300.4 million, or 8.8 percent during the third quarter of 2009 as compared to the second quarter of 2009 as management chose to be less competitive on interest rates to retain maturing certificates of deposit due to growth in the other deposit categories and less funding needs as loan volumes declined during the period. The increases in average non-interest bearing and average savings, NOW, and money market deposits were due, in part, to additional deposits generated from de novo branch locations put in service over the last twelve months.

Interest on loans, on a tax equivalent basis, decreased $1.9 million, or 1.3 percent for the third quarter of 2009 compared to the second quarter of 2009 due to the aforementioned decline in average loan balances, partially offset by a 3 basis point increase in the tax equivalent yield on average loans as compared to the linked quarter. Total interest from investments, on a tax equivalent basis, decreased $1.7 million for the three months ended September 30, 2009 compared to the quarter ended June 30, 2009 due to a 41 basis point decrease in the tax equivalent yield, partially offset by higher average balances. The decrease in yield was primarily due to the purchase of lower interest rate U.S government agency securities during the second and third quarter of 2009 and partial paydowns on higher yielding securities.

Interest expense for the three months ended September 30, 2009 decreased $5.5 million or 8.1 percent compared to the quarter ended June 30, 2009 resulting mainly from a decrease in average time deposits caused by maturing high cost certificates of deposit, partially offset by an increase in lower cost average savings, NOW, and money market deposits.

The net interest margin on a tax equivalent basis was 3.61 percent for the third quarter of 2009, an increase of 9 basis points from 3.52 percent for the linked quarter ended June 30, 2009 and a decrease of 3 basis points as compared to the third quarter of 2008. The increase from the linked quarter was largely the result of a continued decline in our cost of funds, partially offset by a decline in average interest earning assets and a lower yielding investment portfolio. The yield on average interest earning assets decreased by 6 basis points on a linked quarter basis mainly due to a 41 basis point decrease in yield on average taxable investments as compared to the three months ended June 30, 2009.

The following table reflects the components of net interest income for the three months ended September 30, 2009, June 30, 2009 and September 30, 2008:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and

Net Interest Income on a Tax Equivalent Basis


	Three Months Ended
	September 30, 2009								June 30, 2009								September 30, 2008
	Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
	($ in thousands)

Assets
Interest earning assets:
Loans (1)(2)	$	9,581,388		$	139,509		5.82	%	$	9,770,280		$	141,361		5.79	%	$	9,988,829		$	151,877		6.08	%
Taxable investments (3)		2,731,907			35,163		5.15			2,651,711			36,856		5.56			2,544,825			36,492		5.74
Tax-exempt investments (1)(3)		262,016			3,714		5.67			253,104			3,676		5.81			262,079			3,857		5.89
Federal funds sold and other interest bearing deposits		301,460			198		0.26			312,755			218		0.28			25,951			130		2.00

Total interest earning assets		12,876,771			178,584		5.55			12,987,850			182,111		5.61			12,821,684			192,356		6.00

Allowance for loan losses		(102,761	)							(97,883	)							(86,625	)
Cash and due from banks		248,159								240,571								252,787
Other assets		1,112,725								1,111,167								1,063,340
Unrealized losses on securities available for sale, net		(1,351	)							(27,520	)							(48,234	)

Total assets	$	14,133,543							$	14,214,185							$	14,002,952


Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits	$	3,961,327		$	6,638		0.67	%	$	3,701,125		$	5,796		0.63	%	$	3,766,357		$	12,080		1.28	%
Time deposits		3,111,150			19,833		2.55			3,411,551			26,106		3.06			3,228,453			27,902		3.46

Total interest bearing deposits		7,072,477			26,471		1.50			7,112,676			31,902		1.79			6,994,810			39,982		2.29
Short-term borrowings		198,459			487		0.98			218,281			579		1.06			530,408			2,122		1.60
Long-term borrowings (4)		3,142,504			35,255		4.49			3,171,422			35,227		4.44			3,218,820			33,664		4.18

Total interest bearing liabilities		10,413,440			62,213		2.39			10,502,379			67,708		2.58			10,744,038			75,768		2.82

Non-interest bearing deposits		2,269,289								2,256,954								2,058,190
Other liabilities		99,069								95,352								80,713
Shareholders’ equity		1,351,745								1,359,500								1,120,011

Total liabilities and shareholders’ equity	$	14,133,543							$	14,214,185							$	14,002,952


Net interest income/interest rate spread (5)				$	116,371		3.16	%				$	114,403		3.03	%				$	116,588		3.18	%

Tax equivalent adjustment					(1,303	)							(1,290	)							(1,356	)

Net interest income, as reported				$	115,068							$	113,113							$	115,232

Net interest margin (6)							3.57	%							3.48	%							3.59	%
Tax equivalent effect							0.04								0.04								0.05

Net interest margin on a fully tax equivalent basis (6)							3.61	%							3.52	%							3.64	%

(1)	Interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.

(2)	Loans are stated net of unearned income and include non-accrual loans.

(3)	The yield for securities that are classified as available for sale is based on the average historical amortized cost.

(4)	Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition.

(5)	Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.

(6)	Net interest income as a percentage of total average interest earning assets.

The following table reflects the components of net interest income for the nine months ended September 30, 2009 and 2008:

Analysis of Average Assets, Liabilities and Shareholders’ Equity and

Net Interest Income on a Tax Equivalent Basis


	Nine Months Ended
	September 30, 2009								September 30, 2008
	Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
	($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)	$	9,787,331		$	424,729		5.79	%	$	9,144,973		$	422,134		6.15	%
Taxable investments (3)		2,682,465			108,637		5.40			2,619,546			111,296		5.66
Tax-exempt investments (1)(3)		253,696			11,039		5.80			253,807			11,758		6.18
Federal funds sold and other interest bearing deposits		314,993			646		0.27			97,230			2,032		2.79

Total interest earning assets		13,038,485			545,051		5.57			12,115,556			547,220		6.02

Allowance for loan losses		(98,407	)							(77,586	)
Cash and due from banks		244,798								225,754
Other assets		1,113,045								944,731
Unrealized losses on securities available for sale, net		(26,162	)							(23,580	)

Total assets	$	14,271,759							$	13,184,875


Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits	$	3,744,115		$	18,321		0.65	%	$	3,544,803		$	37,300		1.40	%
Time deposits		3,390,055			76,118		2.99			3,043,441			85,552		3.75

Total interest bearing deposits		7,134,170			94,439		1.77			6,588,244			122,852		2.49
Short-term borrowings		289,566			3,617		1.67			497,764			6,641		1.78
Long-term borrowings (4)		3,159,934			105,376		4.45			3,068,651			100,198		4.35

Total interest bearing liabilities		10,583,670			203,432		2.56			10,154,659			229,691		3.02

Non-interest bearing deposits		2,229,186								1,943,122
Other liabilities		99,463								73,981
Shareholders’ equity		1,359,440								1,013,113

Total liabilities and shareholders’ equity	$	14,271,759							$	13,184,875


Net interest income/interest rate spread (5)				$	341,619		3.01	%				$	317,529		3.00	%

Tax equivalent adjustment					(3,874	)							(4,137	)