Edgar Filing: VALLEY NATIONAL BANCORP

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, 2010

¨	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 x 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):


Large accelerated filer x		Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

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 161,285,668 shares were outstanding as of November 4, 2010.

TABLE OF CONTENTS


		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009		3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009		4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009		5

	Notes to Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		67

Item 4.	Controls and Procedures		68

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		70

Item 6.	Exhibits		71

SIGNATURES			72

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(in thousands, except for share data)


	September 30, 2010			December 31, 2009
Assets
Cash and due from banks	$	256,194		$	305,678
Interest bearing deposits with banks		4,677			355,659
Investment securities:
Held to maturity, fair value of $1,766,179 at September 30, 2010 and $1,548,006 at December 31, 2009		1,776,856			1,584,388
Available for sale		1,089,603			1,352,481
Trading securities		32,088			32,950

Total investment securities		2,898,547			2,969,819


Loans held for sale (includes fair value of $25,293 at September 30, 2010 and $25,492 at December 31, 2009 for loans originated for sale)		108,455			25,492

Non-covered loans		9,054,661			9,370,071
Less: Allowance for loan losses		(113,786	)		(101,990	)
Covered loans		377,036			—

Net loans		9,317,911			9,268,081


Premises and equipment, net		265,661			266,401
Bank owned life insurance		307,709			304,031
Accrued interest receivable		61,643			56,245
Due from customers on acceptances outstanding		6,023			6,985
FDIC loss-share receivable		109,682			—
Goodwill		315,975			296,424
Other intangible assets, net		21,456			24,305
Other assets		413,678			405,033

Total Assets	$	14,087,611		$	14,284,153


Liabilities
Deposits:
Non-interest bearing	$	2,461,532		$	2,420,006
Interest bearing:
Savings, NOW and money market		4,131,273			4,044,912
Time		2,675,898			3,082,367

Total deposits		9,268,703			9,547,285


Short-term borrowings		331,265			216,147
Long-term borrowings		2,884,547			2,946,320
Junior subordinated debentures issued to capital trusts (includes fair value of $159,850 at September 30, 2010 and $155,893 at December 31, 2009 for VNB Capital Trust I)		185,055			181,150
Bank acceptances outstanding		6,023			6,985
Accrued expenses and other liabilities		133,999			133,412

Total Liabilities		12,809,592			13,031,299



Shareholders’ Equity*
Preferred stock, no par value, authorized 30,000,000 shares; none issued		—			—
Common stock, no par value, authorized 210,451,912 shares; issued 162,058,055 shares at September 30, 2010 and 162,042,502 shares at December 31, 2009		57,067			54,293
Surplus		1,178,720			1,178,992
Retained earnings		74,733			73,592
Accumulated other comprehensive loss		(9,843	)		(19,816	)
Treasury stock, at cost (934,651 common shares at September 30, 2010 and 1,405,204 common shares at December 31, 2009)		(22,658	)		(34,207	)

Total Shareholders’ Equity		1,278,019			1,252,854

Total Liabilities and Shareholders’ Equity	$	14,087,611		$	14,284,153

*	Share data reflects the five percent common stock dividend issued on May 21, 2010.

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,
	2010			2009			2010			2009
Interest Income
Interest and fees on loans	$	137,742		$	139,506		$	409,531		$	424,719
Interest and dividends on investment securities:
Taxable		28,361			32,670			88,861			102,162
Tax-exempt		2,743			2,414			7,886			7,175
Dividends		1,679			2,493			5,153			6,475
Interest on federal funds sold and other short-term investments		61			198			291			646

Total interest income		170,586			177,281			511,722			541,177

Interest Expense
Interest on deposits:
Savings, NOW, and money market		4,711			6,638			14,384			18,321
Time		13,233			19,833			43,551			76,118
Interest on short-term borrowings		334			487			995			3,617
Interest on long-term borrowings and junior subordinated debentures		34,574			35,255			103,181			105,376

Total interest expense		52,852			62,213			162,111			203,432

Net Interest Income		117,734			115,068			349,611			337,745
Provision for credit losses		9,308			12,722			34,357			35,767

Net Interest Income After Provision for Credit Losses		108,426			102,346			315,254			301,978

Non-Interest Income
Trust and investment services		1,930			1,811			5,752			5,048
Insurance commissions		2,561			2,504			8,417			8,074
Service charges on deposit accounts		6,562			6,871			19,487			20,071
Gains (losses) on securities transactions, net		112			(5	)		4,631			246
Other-than-temporary impairment losses on securities		—			—			(1,393	)		(5,905	)
Portion recognized in other comprehensive income (pre-tax)		—			(743	)		(3,249	)		557

Net impairment losses on securities recognized in earnings		—			(743	)		(4,642	)		(5,348	)
Trading losses, net		(2,627	)		(3,474	)		(4,819	)		(8,886	)
Fees from loan servicing		1,187			1,216			3,634			3,585
Gains on sales of loans, net		1,548			2,699			5,087			7,275
Gains on sales of assets, net		78			128			382			477
Bank owned life insurance		1,697			1,421			5,008			4,189
Other		4,280			4,650			12,544			12,943

Total non-interest income		17,328			17,078			55,481			47,674

Non-Interest Expense
Salary and employee benefits expense		43,566			40,490			130,774			121,542
Net occupancy and equipment expense		15,241			14,452			47,270			44,347
FDIC insurance assessment		3,497			3,355			10,473			16,786
Amortization of other intangible assets		2,602			1,710			6,747			5,537
Professional and legal fees		2,460			2,056			7,192			6,295
Advertising		826			701			2,849			1,868
Other		10,755			11,128			31,969			32,569

Total non-interest expense		78,947			73,892			237,274			228,944

Income Before Income Taxes		46,807			45,532			133,461			120,708
Income tax expense		14,168			13,950			40,449			36,745

Net Income		32,639			31,582			93,012			83,963
Dividends on preferred stock and accretion		—			5,983			—			15,996

Net Income Available to Common Stockholders	$	32,639		$	25,599		$	93,012		$	67,967

*Earnings Per Common Share:**
Basic	$	0.20		$	0.17		$	0.58		$	0.45
Diluted		0.20			0.17			0.58			0.45
Cash Dividends Declared per Common Share*		0.18			0.18			0.54			0.54
*Weighted Average Number of Common Shares Outstanding:**
Basic		161,121,214			152,305,288			160,959,399			150,033,851
Diluted		161,122,351			152,305,671			160,960,742			150,034,407

*	Share data reflects the five percent common stock dividend issued on May 21, 2010.

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	93,012		$	83,963
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,823			10,044
Stock-based compensation		2,697			3,118
Provision for credit losses		34,357			35,767
Net amortization of premiums and accretion of discounts on securities and borrowings		9,275			5,819
Amortization of other intangible assets		6,747			5,537
Gains on securities transactions, net		(4,631	)		(246	)
Net impairment losses on securities recognized in earnings		4,642			5,348
Proceeds from sales of loans held for sale		190,899			286,864
Gains on loans held for sale, net		(5,087	)		(7,275	)
Originations of loans held for sale		(185,613	)		(289,265	)
Gains on sales of assets, net		(382	)		(477	)
Net change in:
Trading securities		862			2,063
Fair value of borrowings carried at fair value		3,957			13,504
Cash surrender value of bank owned life insurance		(5,008	)		(4,189	)
Accrued interest receivable		2,610			(2,813	)
Other assets		3,816			117,521
Accrued expenses and other liabilities		(20,684	)		(161,298	)

Net cash provided by operating activities		143,292			103,985


Cash flows from investing activities:
Net change in loans		245,245			606,826
Investment securities held to maturity:
Purchases		(616,986	)		(774,440	)
Maturities, calls and principal repayments		416,827			344,161
Investment securities available for sale:
Purchases		(275,884	)		(283,842	)
Sales		373,766			185,043
Maturities, calls and principal repayments		256,536			280,164
Death benefit proceeds received on bank owned life insurance		1,330			1,727
Proceeds from sales of real estate property and equipment		221			3,713
Purchases of real estate property and equipment		(10,799	)		(23,461	)
Cash and cash equivalents received in FDIC-assisted transactions		47,528			—

Net cash provided by investing activities		437,784			339,891


Cash flows from financing activities:
Net change in deposits		(932,782	)		209,548
Net change in short-term borrowings		102,613			(440,912	)
Repayments of long-term borrowings		(71,742	)		(43,001	)
Redemption of preferred stock		—			(200,000	)
Dividends paid to preferred shareholder		—			(11,202	)
Dividends paid to common shareholders		(86,188	)		(80,948	)
Common stock issued, net		6,557			74,050

Net cash used in financing activities		(981,542	)		(492,465	)

Net change in cash and cash equivalents		(400,466	)		(48,589	)
Cash and cash equivalents at beginning of period		661,337			580,507

Cash and cash equivalents at end of period	$	260,871		$	531,918

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)


	Nine Months Ended September 30,
	2010			2009
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings	$	164,658		$	228,196
Federal and state income taxes		48,311			43,921
Loans transferred to loans held for sale		83,162			—

Supplemental schedule of non-cash investing activities:
Acquisitions:
Non-cash assets acquired:
Investment securities available for sale		73,743			—
Covered loans		412,331			—
Premises and equipment		123			—
Accrued interest receivable		2,788			—
Goodwill		19,497			—
Other intangible assets		1,560			—
FDIC loss-share receivable		108,000			—
Other assets		22,558			—

Total non-cash assets acquired		640,600			—

Liabilities assumed:
Deposits
Non-interest bearing		176,124			—
Savings, NOW and money market		2,934			—
Time		475,142			—

Total deposits		654,200			—

Short-term borrowings		12,505			—
Long-term borrowings		10,742			—
Accrued expenses and other liabilities		10,681			—

Total liabilities assumed		688,128			—

Net non-cash assets acquired	$	(47,528	)	$	—

Cash and cash equivalents received in FDIC-assisted transactions	$	47,528		$	—

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 for more details.

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, 2010 and for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year.

In preparing the unaudited consolidated financial statements in conformity with U.S. GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that are particularly susceptible to change are: the allowance for loan losses; the evaluation of goodwill and other intangible assets, and investment securities for impairment; fair value measurements of assets and liabilities (including the estimated fair values recorded for acquired assets and assumed liabilities in FDIC-assisted transactions – see Note 4); and income taxes. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed to be necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.

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 Annual Report on Form 10-K for the year ended December 31, 2009.

In March 2010, the Bank assumed all of the deposits, excluding brokered deposits, and acquired loans, other real estate owned (“covered loans” and “covered OREO”, together “covered assets”) and certain other assets of The Park Avenue Bank and LibertyPointe Bank, from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver (the “FDIC-assisted transactions”). See Note 4 for further details.

On May 21, 2010, Valley issued a five percent common stock dividend to shareholders of record on May 7, 2010. 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

The following table shows the calculation of both basic and diluted earnings per common share for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(in thousands, except for share data)

Net income	$	32,639	$	31,582	$	93,012	$	83,963
Dividends on preferred stock and accretion		—		5,983		—		15,996

Net income available to common stockholders	$	32,639	$	25,599	$	93,012	$	67,967


Basic weighted-average number of common shares outstanding		161,121,214		152,305,288		160,959,399		150,033,851
Plus: Common stock equivalents		1,137		383		1,343		556

Diluted weighted-average number of common shares outstanding		161,122,351		152,305,671		160,960,742		150,034,407


Earnings per common share:
Basic	$	0.20	$	0.17	$	0.58	$	0.45
Diluted		0.20		0.17		0.58		0.45

Common stock equivalents, in the table above, represent the effect of outstanding common stock options and warrants to purchase Valley’s common shares, excluding those with exercise prices that exceed the average market price of Valley’s common stock during the periods presented and therefore, would have an anti-dilutive effect on the diluted earnings per common share calculation. Anti-dilutive common stock options and warrants totaled approximately 6.8 million shares for both the three and nine months ended September 30, 2010, compared to 7.0 million shares for both the three and nine months ended September 30, 2009.

Note 3. Comprehensive Income

Valley’s components of other comprehensive income, 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 certain securities during the period); 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 for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Net income	$	32,639		$	31,582		$	93,012		$	83,963

Other comprehensive income, net of tax:
Net change in unrealized gains and losses on securities available for sale		2,125			14,566			10,454			47,151
Net change in non-credit impairment losses on securities		878			390			1,537			(75	)
Net pension benefits adjustment		253			196			759			633
Net change in unrealized gains and losses on derivatives used in cash flow hedging relationships		(577	)		(652	)		(3,337	)		1,733
Less reclassification adjustment for gains and losses included in net income		205			412			560			1,815

Total other comprehensive income, net of tax		2,884			14,912			9,973			51,257

Total comprehensive income	$	35,523		$	46,494		$	102,985		$	135,220

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 4. Business Combinations

FDIC-Assisted Transactions

On March 11, 2010, the Bank assumed all of the deposits and acquired certain assets of LibertyPointe Bank, a New York State chartered bank in an FDIC-assisted transaction. The Bank assumed $198.3 million in customer deposits and acquired $207.7 million in assets, including $140.6 million in loans. The loans acquired by the Bank principally consist of commercial real estate loans. This transaction resulted in $11.6 million of goodwill and generated $370 thousand in core deposit intangibles.

On March 12, 2010, the Bank assumed all of the deposits, excluding brokered deposits, borrowings, and acquired certain assets of The Park Avenue Bank, a New York State chartered bank in an FDIC-assisted transaction. The Bank assumed $455.9 million in customer deposits and acquired $480.5 million in assets, including $271.8 million in loans. The loans acquired by the Bank principally consist of commercial and industrial loans, and commercial real estate loans. This transaction resulted in $7.9 million of goodwill and generated $1.2 million in core deposit intangibles.

The Bank and the FDIC will share in the losses on loans and real estate owned as a part of the loss-sharing agreements entered into by the Bank with the FDIC for both transactions. Under the terms of the loss-sharing agreement for the LibertyPointe Bank transaction, the FDIC is obligated to reimburse the Bank for 80 percent of any future losses on covered assets up to $55.0 million, after the Bank absorbs such losses up to the first loss tranche of $11.7 million, and 95 percent of losses in excess of $55.0 million. Under the terms of the loss-sharing agreement for The Park Avenue Bank transaction, the FDIC is obligated to reimburse the Bank for 80 percent of any future losses on covered assets of up to $66.0 million and 95 percent of losses in excess of $66.0 million. The Bank will reimburse the FDIC for 80 percent of recoveries with respect to losses for which the FDIC paid the Bank 80 percent reimbursement under the loss-sharing agreements, and for 95 percent of recoveries with respect to losses for which the FDIC paid the Bank 95 percent reimbursement under the loss-sharing agreements.

The asset arising from the loss-sharing agreements (referred to as the “FDIC loss-share receivable” on our statements of financial condition) are measured separately from the covered loan portfolios because the agreements are not contractually embedded in the covered loans and are not transferable should the Bank choose to dispose of the covered loans. The FDIC loss-share receivable will be reduced as losses are realized on covered loans and other real estate owned, and as the loss sharing payments are received from the FDIC. Realized losses in excess of the acquisition date estimates will result in an increase in the FDIC loss-share receivable. Conversely, the FDIC loss-share receivable will be reduced if realized losses are less than our estimates at acquisition. The amount ultimately collected for the FDIC loss-share receivable is dependent upon the performance of the underlying covered assets, the passage of time, and claims submitted to the FDIC. See “Fair Value Measurement of Assets Acquired and Liabilities Assumed” section below for details regarding the fair value measurement of the FDIC loss-share receivable.

In the event the losses under the loss-sharing agreements fail to reach expected levels, the Bank has agreed to pay to the FDIC, on approximately the tenth anniversary following the transactions’ closings, a cash payment pursuant to each loss-sharing agreement.

In addition, as part of the consideration for The Park Avenue Bank FDIC-assisted transaction, the Bank agreed to issue a cash-settled equity appreciation instrument to the FDIC. Under the terms of the instrument, the FDIC had the opportunity to obtain a cash payment equal to the product of (i) the number of units with respect to which the FDIC exercises its right under the equity appreciation instrument and (ii) the amount by which the average of the volume weighted average price of Valley’s common stock for each of the five New York Stock Exchange trading days immediately prior to the exercise of the equity appreciation instrument exceeds $14.372 (unadjusted for the five percent stock dividend issued on May 21, 2010). The equity appreciation instrument was initially recorded as a liability in the first quarter of 2010 and was settled in cash after the FDIC exercised the instrument on April 1, 2010. The valuation and settlement of the equity appreciation instrument did not significantly impact Valley’s consolidated financial statements.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table sets forth assets acquired and liabilities assumed in the FDIC-assisted transactions, at their estimated fair values as of the closing dates of each transaction:


	March 11, 2010		March 12, 2010
	LibertyPointe Bank		Park Avenue Bank
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	18,269	$	29,259
Investment securities available for sale		5,014		68,729
Covered loans		140,570		271,761
Premises and equipment		—		123
Accrued interest receivable		525		2,263
Goodwill		11,625		7,872
Other intangible assets		370		1,190
FDIC loss-share receivable		29,000		79,000
Other assets		2,284		20,274

Total assets acquired	$	207,657	$	480,471

Liabilities assumed:
Deposits:
Non-interest bearing	$	34,349	$	141,775
Savings, NOW and money market		592		2,342
Time		163,362		311,780

Total deposits		198,303		455,897

Short-term borrowings		—		12,505
Long-term borrowings		—		10,742
Accrued expenses and other liabilities		9,354		1,327

Total liabilities assumed	$	207,657	$	480,471

The determination of the fair value of the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. During the second and third quarters of 2010, the estimated fair values of the acquired assets and liabilities as of the acquisition dates were adjusted as a result of additional information obtained related to the fair value of the loans and unfunded loan commitments acquired and, on a combined basis, resulted in increases in goodwill, the FDIC loss-share receivable and other liabilities, and a decrease in covered loans. The fair value estimates are subject to change for up to one year after the closing dates of the transactions as additional information relative to fair values as of the acquisition date becomes available.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the FDIC-assisted transactions.

Cash and cash equivalents. The estimated fair values of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term maturities.

Investment securities available for sale. The estimated fair values of the investment securities available for sale were calculated utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service and are derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviewed the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

Covered loans. The acquired loan portfolios were segregated into categories for valuation purposes primarily based on loan type (commercial, mortgage, or consumer) and payment status (performing or non-performing). The estimated fair

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values were computed by discounting the expected cash flows from the respective portfolios. Management estimated the cash flows expected to be collected at the acquisition date by using valuation models that incorporated estimates of current key assumptions, such as prepayment speeds, default rates, and loss severity rates. Prepayment assumptions were developed by reference to recent or historical prepayment speeds observed for loans with similar underlying characteristics. Prepayment assumptions were influenced by many factors including, but not limited to, forward interest rates, loan and collateral types, payment status, and current loan-to-value ratios. Default and loss severity rates were developed by reference to recent or historical default and loss rates observed for loans with similar underlying characteristics. Default and loss severity assumptions were influenced by many factors including, but not limited to, underwriting processes and documentation, vintages, collateral types, collateral locations, estimated collateral values, loan-to-value ratios, and debt-to-income ratios.

The expected cash flows from the acquired loan portfolios were discounted at estimated market rates. The market rates were estimated using a buildup approach which included assumptions with respect to funding cost and funding mix, estimated servicing cost, liquidity premium, and additional spreads, if warranted, to compensate for the uncertainty inherent in the acquired loans. The methods used to estimate the Level 3 fair values of the covered loans are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

See Note 7 for further discussion regarding covered loans and Valley’s accretion of the loan discount resulting from acquisition date fair value adjustments.

FDIC loss-share receivable. The fair value of the FDIC loss-share receivable represents the present value of the estimated loss share reimbursements expected to be received from the FDIC for future losses on covered assets, based on the credit assumptions estimated for covered assets, loss sharing percentages, and the first loss tranche amount, if applicable. These loss share reimbursements were then discounted using the U.S. Treasury strip curve plus a premium to reflect the uncertainty of the timing and receipt of the loss sharing reimbursements from the FDIC. The amounts ultimately collected for this asset are dependent upon the performance of the underlying covered assets, the passage of time, and claims submitted to the FDIC.

Other intangible assets. Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-maturity checking, savings, NOW and money market deposits that are acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding. The CDI related to the FDIC-assisted transactions is being amortized over an estimated useful life of five years to approximate the existing deposit relationships acquired. Valley evaluates such identifiable intangibles for impairment when an indication of impairment exists.

Deposits. The fair values of deposit liabilities with no stated maturity (i.e., savings, NOW and money market accounts, savings accounts, and non-interest-bearing accounts) are equal to the carrying amounts payable on demand. The fair values of certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered on deposits with similar characteristics and remaining maturities.

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

Note 5. New Authoritative Accounting Guidance

Accounting Standards Update (“ASU”) No. 2009-16, “Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets,” (i) enhances reporting about transfers of financial assets, including securitizations, where companies have continuing exposure to the risks related to transferred financial assets, (ii) eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets, and (iii) requires additional disclosures about all continuing involvements with transferred financial assets including information about

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gains and losses resulting from transfers during the period. The new guidance under Accounting Standards Codification (“ASC”) Topic 860 was effective on January 1, 2010. The adoption of this guidance did not have a material impact on Valley’s consolidated financial statements.

ASU No. 2009-17, “Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” amends prior guidance 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. ASU No. 2009-17 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 provisions of ASU No. 2009-17 became effective on January 1, 2010 and did not have a material impact on Valley’s consolidated financial statements.

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures About Fair Value Measurements,” requires new disclosures and clarifies certain existing disclosure requirements about fair value measurement. Specifically, the update requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for such transfers. A reporting entity is required to present separately information about purchases, sales, issuances, and settlements in the reconciliation of fair value measurements using Level 3 inputs. In addition, the update clarifies the following requirements of the existing disclosures: (i) for the purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets; and (ii) a reporting entity is required to include disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for Valley beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU No. 2010-06 became effective for Valley on January 1, 2010. The applicable new disclosures have been included in Note 6.

ASU No. 2010-18, “Receivables (Topic 310)—Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset,” codifies the consensus reached by the EITF that modifications of loans that are accounted for within a pool under ASC Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity must continue to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU No. 2010-18 became effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 beginning in the third quarter of 2010. The new guidance did not have a material impact on Valley’s consolidated financial statements. See Note 7 for more information regarding Valley’s covered loans accounted for in accordance with ASC Subtopic 310-30.

ASU No. 2010-20, “Receivables (Topic 310)—Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”, requires significant new disclosures about the credit quality of financing receivables and the allowance for credit losses. The objective of these disclosures is to improve financial statement users’ understanding of (i) the nature of an entity’s credit risk associated with its financing receivables and (ii) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU No. 2010-20 disclosures related to period-end information (e.g., credit-quality

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information and the ending financing receivables balance segregated by impairment method) will be required in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period (e.g., modifications and the rollforward of the allowance for credit losses by portfolio segment) will be required in interim or annual periods beginning on or after December 15, 2010. Comparative disclosures for reporting periods ending after initial adoption are required. Since the provisions of ASU 2010-20 are only disclosure related, our adoption of this guidance will not have an impact on our consolidated financial statements.

Note 6. Fair Value Measurement of Assets and Liabilities

ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:


Level 1		Unadjusted exchange quoted prices in active markets for identical assets or liabilities, or identical liabilities traded as assets that the reporting entity has the ability to access at the measurement date.

Level 2		Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly (i.e., quoted prices on similar assets), for substantially the full term of the asset or liability.

Level 3		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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, 2010 and December 31, 2009. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


			Fair Value Measurements at Reporting Date Using:
	September 30, 2010		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	$	164,465	$	164,465	$	—	$	—
U.S. government agency securities		37,473		—		37,473		—
Obligations of states and political subdivisions		33,157		—		33,157		—
Residential mortgage-backed securities		713,536		—		610,160		103,376
Trust preferred securities		40,529		19,880		509		20,140
Corporate and other debt securities		54,035		42,505		—		11,530
Equity securities		46,408		27,789		10,327		8,292

Total available for sale		1,089,603		254,639		691,626		143,338

Trading securities		32,088		—		10,123		21,965
Loans held for sale ⁽¹⁾		25,293		—		25,293		—
Other assets ⁽²⁾		1,135		—		1,135		—

Total assets	$	1,148,119	$	254,639	$	728,177	$	165,303


Liabilities:
Junior subordinated debentures issued to VNB Capital Trust I ⁽³⁾	$	159,850	$	159,850	$	—	$	—
Other liabilities ⁽²⁾		1,937		—		1,937		—

Total liabilities	$	161,787	$	159,850	$	1,937	$	—

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			Fair Value Measurements at Reporting Date Using:
	December 31, 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	$	276,285	$	276,285	$	—	$	—
Obligations of states and political subdivisions		33,411		—		33,411		—
Residential mortgage-backed securities		940,505		—		820,652		119,853
Trust preferred securities		36,412		16,320		—		20,092
Corporate and other debt securities		19,042		—		10,868		8,174
Equity securities		46,826		28,098		10,235		8,493

Total available for sale		1,352,481		320,703		875,166		156,612

Trading securities		32,950		—		—		32,950
Loans held for sale ⁽¹⁾		25,492		—		25,492		—
Other assets ⁽²⁾		7,124		—		7,124		—

Total assets	$	1,418,047	$	320,703	$	907,782	$	189,562


Liabilities:
Junior subordinated debentures issued to VNB Capital Trust I ⁽³⁾	$	155,893	$	155,893	$	—	$	—
Other liabilities ⁽²⁾		1,018		—		1,018		—

Total liabilities	$	156,911	$	155,893	$	1,018	$	—

(1)

Loans held for sale that are carried at fair value consist of residential mortgages with contractual unpaid principal balances totaling approximately $24.4 million and $25.3 million at September 30, 2010 and December 31, 2009, respectively. These loans are classified as held for sale at the time of origination.

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

(3)	The junior subordinated debentures had contractual unpaid principal obligations totaling $157.0 million at both September 30, 2010 and December 31, 2009.

The changes in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2010 and 2009 are summarized below:


	Three Months Ended September 30, 2010						Nine Months Ended September 30, 2010
	Trading Securities			Available For Sale Securities			Trading Securities			Available For Sale Securities
	(in thousands)

Balance, beginning of the period	$	22,814		$	142,745		$	32,950		$	156,612
Transfers out of Level 3 ⁽¹⁾		—			—			(10,567	)		(1,384	)
Total net (losses) gains for the period included in:
Net income		(849	)		—			(418	)		—
Other comprehensive income		—			3,261			—			4,180
Purchases, sales and settlements		—			(2,668	)		—			(16,070	)


Balance, end of the period	$	21,965		$	143,338		$	21,965		$	143,338

Net unrealized losses included in net income for the period relating to assets held at September 30, 2010 ⁽²⁾	$	(849	)⁽³⁾	$	—	⁽⁴⁾	$	(418	)⁽³⁾	$	(4,642	)⁽⁴⁾

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	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 the period	$	32,821		$	122,540		$	—		$	—
Transfers into Level 3 ⁽¹⁾		—			34,329			34,236			149,672
Total net (losses) gains 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 the 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⁾	All transfers into/or out of Level 3 are assumed to occur at the beginning of the reporting period.

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

⁽³⁾	Included in trading gains (losses), 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.

During the second quarter of 2010, two trust preferred securities totaling $12.0 million with the same issuer, one classified as trading and one classified as available for sale, were transferred out of Level 3 assets to Level 1 assets due to newly available exchange quoted prices in active markets for these securities. During the third quarter of 2010, the same two securities were transferred out of Level 1 to Level 2 due to lower trading volumes and no exchange quoted prices at September 30, 2010.

Five corporate debt securities with a combined fair value of $32.7 million at September 30, 2010 were transferred from Level 2 to Level 1 assets during the nine months ended September 30, 2010 due to newly available exchange quoted prices in active markets for these securities.

The following valuation techniques were used for financial instruments measured at fair value on a recurring basis. All the valuation techniques described below apply to the unpaid principal balance excluding any accrued interest or dividends at the measurement date. Interest income and expense 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. All U.S. Treasury securities, certain corporate and other debt securities, and certain common and preferred equity securities (including trust preferred securities) are reported at fair values 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 addition, 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

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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 future 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. The discount rate is further adjusted to reflect a market premium which incorporates, among other variables, illiquidity premiums and variances in the instruments’ structure. 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 (including three pooled trust preferred securities), and certain private label mortgage-backed securities. The cash flows for the residential 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 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 future 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. 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 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 (i) the historical average risk premium of similar structured private label securities, (ii) a risk premium reflecting current market conditions, including liquidity risk and (iii) 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. 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. The conforming residential mortgage loans originated for sale 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 did not materially impact the fair value of mortgage loans held for sale at September 30, 2010 and December 31, 2009 based on the short duration these assets were held, and the high credit quality of these loans.

Junior subordinated debentures issued to capital trusts. The junior subordinated debentures issued to VNB Capital Trust I are reported at fair value using Level 1 inputs. The fair value was estimated using quoted prices in active markets for similar assets, specifically the quoted price of the VNB Capital Trust I preferred stock traded under ticker symbol “VLYPRA” on the New York Stock Exchange. The preferred stock and Valley’s junior subordinated debentures issued

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to the Trust have identical financial terms (see Note 13 for details) and therefore, the preferred stock’s quoted price moves 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 at September 30, 2010 and December 31, 2009.

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 third party prices that are based on discounted cash flow analyses. The fair value measurement of the interest 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, 2010 and December 31, 2009.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Certain non-financial assets and non-financial liabilities are measured at fair value on a nonrecurring basis, including other real estate owned and other repossessed assets (upon initial recognition or subsequent impairment), goodwill measured at fair value in the second step of a goodwill impairment test, and loan servicing rights, core deposits, other intangible assets, and other long-lived assets measured at fair value for impairment assessment.

The following table summarizes assets measured at fair value on a non-recurring basis as of the dates indicated:


			Fair Value Measurements at Reporting Date Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)

As of September 30, 2010
Collateral dependent impaired loans⁽¹⁾	$	56,084	$	—	$	—	$	56,084
Loan servicing rights		9,526		—		—		9,526
Foreclosed assets⁽²⁾		19,081		—		—		19,081

As of December 31, 2009
Collateral dependent impaired loans	$	22,484	$	—	$	—	$	22,484
Loan servicing rights		11,110		—		—		11,110
Foreclosed assets		6,434		—		—		6,434

⁽¹⁾	Excludes pooled covered loans acquired in the FDIC-assisted transactions.

⁽²⁾	Includes other real estate owned totaling $12.5 million related to the FDIC-assisted transactions, which is subject to loss-sharing agreements with the FDIC.

Impaired loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values are 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, 2010, collateral dependent

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impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. The direct loan charge-offs to the allowance for loan losses totaled $1.5 million and $7.3 million for the three and nine months ended September 30, 2010, respectively. At September 30, 2010, collateral dependent impaired loans (mainly consisting of commercial and construction loans) with a carrying value of $59.1 million were reduced by specific valuation allowance allocations totaling $3.0 million to a reported fair value of $56.1 million.

Loan servicing rights. Fair values for each risk-stratified group 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. During the nine months ended September 30, 2010, net impairment charges of $1.5 million were recognized on loan servicing rights when the book value of a risk-stratified group of loan servicing rights exceeds the estimated fair value. The loan servicing rights had a $9.5 million carrying value, net of a $2.1 million valuation allowance at September 30, 2010.

Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is significantly adjusted based on customized discounting criteria. During the nine months ended September 30, 2010, foreclosed assets measured at fair value upon initial recognition totaled $9.3 million. In connection with the measurement and initial recognition of the aforementioned foreclosed assets, Valley recognized charge-offs to the allowance for loan losses totaling $1.8 million and $5.5 million for the three and nine months ended September 30, 2010, respectively.

Other Fair Value Disclosures

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, 2010 and 2009:


		Gains (Losses) on Change in Fair Value
Reported in Consolidated Statements of Financial Condition	Reported in Consolidated Statements of Income	Three Months Ended September 30,						Nine Months Ended September 30,
	Reported in Consolidated Statements of Income	2010			2009			2010			2009
		(in thousands)

Assets:
Available for sale securities	Net impairment losses on securities	$	—		$	(743	)	$	(4,642	)	$	(5,348	)
Trading securities	Trading losses, net		(517	)		(648	)		(862	)		4,618
Loans held for sale	Gains on sales of loans, net		1,548			2,699			5,087			7,275

Liabilities:
Junior subordinated debentures issued to capital trusts	Trading losses, net		(2,110	)		(2,826	)		(3,957	)		(13,504	)

		$	(1,079	)	$	(1,518	)	$	(4,374	)	$	(6,959	)

ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or a non-recurring basis.

The fair value estimates presented in the following table were based on pertinent market data and relevant information on the financial instruments available as of the valuation date. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portfolio of financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of

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significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation, trust and investment management departments) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

The carrying amounts and estimated fair values of financial instruments were as follows at September 30, 2010 and December 31, 2009:


	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)

Financial assets:
Cash and due from banks	$	256,194	$	256,194	$	305,678	$	305,678
Interest bearing deposits with banks		4,677		4,677		355,659		355,659
Investment securities held to maturity		1,776,856		1,766,179		1,584,388		1,548,006
Investment securities available for sale		1,089,603		1,089,603		1,352,481		1,352,481
Trading securities		32,088		32,088		32,950		32,950
Loans held for sale (carrying amount includes fair value of $25,293 at September 30, 2010 and $25,492 at December 31, 2009 for loans originated for sale)		108,455		110,950		25,492		25,492
Net loans		9,317,911		9,168,310		9,268,081		9,233,493
Accrued interest receivable		61,643		61,643		56,245		56,245
Federal Reserve Bank and Federal Home Loan Bank stock		142,073		142,073		139,911		139,911
Other assets*		1,135		1,135		7,124		7,124

Financial liabilities:
Deposits without stated maturities		6,592,805		6,592,805		6,464,918		6,464,918
Deposits with stated maturities		2,675,898		2,730,204		3,082,367		3,135,611
Short-term borrowings		331,265		332,615		216,147		206,296
Long-term borrowings		2,884,547		3,384,044		2,946,320		3,115,285
Junior subordinated debentures issued to capital trusts (carrying amount includes fair value of $159,850 at September 30, 2010 and $155,893 at December 31, 2009 for VNB Capital Trust I)		185,055		185,518		181,150		180,639
Accrued interest payable		4,836		4,836		7,081		7,081
Other liabilities*		1,937		1,937		1,018		1,018

*	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, 2010 and December 31, 2009.

The following methods and assumptions were used to estimate the fair value of other financial assets and financial liabilities not measured and reported at fair value on a recurring basis or a non-recurring basis:

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 of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair

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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. Additionally, 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 of loans and loans transferred to loans held for sale 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. See Note 4 for details regarding the fair value measurement of covered 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. When these quoted prices are unavailable, the fair value of 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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Note 7. Loans

The details of the loan portfolio as of September 30, 2010 and December 31, 2009 were as follows:


	September 30, 2010		December 31, 2009
	(in thousands)

Non-covered loans:
Commercial and industrial	$	1,824,014	$	1,801,251


Mortgage:
Construction		440,929		440,046
Residential mortgage		1,890,439		1,943,249
Commercial real estate		3,406,089		3,500,419

Total mortgage loans		5,737,457		5,883,714


Consumer:
Home equity		531,168		566,303
Credit card		9,462		10,025
Automobile		877,298		1,029,958
Other consumer		75,262		78,820

Total consumer loans		1,493,190		1,685,106

Total non-covered loans		9,054,661		9,370,071

Covered loans:
Commercial and industrial		46,953		—
Mortgage		330,013		—
Consumer		70		—

Total covered loans		377,036		—

Total loans	$	9,431,697	$	9,370,071

FDIC loss-share receivable related to covered loans and foreclosed assets	$	109,682	$	—

Total non-covered loans are net of unearned discount and deferred loan fees totaling $9.0 million and $8.7 million at September 30, 2010 and December 31, 2009, respectively. At September 30, 2010, covered loans had outstanding contractual principal balances totaling approximately $473.7 million.

Covered loans acquired through the FDIC-assisted transactions are accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” since all of these loans were acquired at a discount attributable, at least in part, to credit quality and are not subsequently accounted for at fair value. Covered loans were initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses). Under ASC Subtopic 310-30, loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the investment in the covered loans, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loans in each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Such increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life, while decreases in expected cash flows are recognized as impairment through the allowance for loan losses. There were no material increases or decreases in the expected cash flows of covered loans in each of the pools during the nine months ended September 30, 2010.

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(Unaudited)

The following table presents information regarding the combined preliminary estimates of the contractually required payments receivable, the cash flows expected to be collected, and the estimated fair value of the covered loans acquired in the LibertyPointe Bank and The Park Avenue Bank transactions, as of the closing dates for those transactions:


	(in thousands)
Contractually required principal and interest	$	625,978
Contractual cash flows not expected to be collected (non-accretable difference)		(143,988	)

Expected cash flows to be collected		481,990
Interest component of expected cash flows (accretable yield)		(69,659	)

Fair value of covered loans	$	412,331

Changes in the accretable yield for covered loans were as follows for the nine months ended September 30, 2010:


	Nine Months Ended September 30, 2010
	(in thousands)
Balance, at acquisition date	$	69,659
Accretion		(15,437	)

Balance, end of the period	$	54,222

Asset Quality

The covered loans acquired from the FDIC were aggregated into pools based on common risk characteristics in accordance with ASC Subtopic 310-30. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The covered loans that may have been classified as non-performing loans by the acquired banks are no longer classified as non-performing. Management’s judgment is required in reclassifying loans subject to ASC Subtopic 310-30 as performing loans, and is dependent on having a reasonable expectation about the timing and amount of the cash flows to be collected, even if the loan is contractually past due.

The tables below exclude covered loans that were acquired as part of the LibertyPointe Bank and The Park Avenue Bank transactions during the first quarter of 2010. These loans are accounted for on a pool basis, and the pools are considered to be performing.

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, 2010 and December 31, 2009 were as follows:

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(Unaudited)


	September 30, 2010		December 31, 2009
	(in thousands)

Loans past due in excess of 90 days and still accruing	$	4,367	$	5,125


Non-accrual loans	$	105,602	$	91,964
Other real estate owned*		4,698		3,869
Other repossessed assets		1,849		2,565

Total non-performing assets	$	112,149	$	98,398


Troubled debt restructured loans:
Commercial and industrial	$	16,077	$	18,973
Construction		10,386		—
Commercial real estate		6,976		—
Residential mortgage		14,735		—
Home equity		55		99

Total troubled debt restructured loans	$	48,229	$	19,072

*	At September 30, 2010, other real estate owned (“OREO”) excludes $12.5 million of OREO that is related to the FDIC-assisted transactions, which is subject to the loss-sharing agreements with the FDIC.

Information about impaired loans as of September 30, 2010 and December 31, 2009 follows:


	September 30, 2010		December 31, 2009
	(in thousands)

Impaired loans for which there was a specific related allowance for loan losses	$	77,152	$	45,986
Impaired loans without a specific related allowance for loan losses		38,160		28,554

Total impaired loans	$	115,312	$	74,540


Related allowance for loan losses	$	13,966	$	7,314

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Allowance for credit losses
Beginning balance	$	112,504		$	102,317		$	103,655		$	94,738

Loans charged-off		(6,864	)		(10,811	)		(27,913	)		(28,054	)
Charged-off loans recovered		767			826			5,616			2,603

Net charge-offs		(6,097	)		(9,985	)		(22,297	)		(25,451	)
Provision charged for credit losses		9,308			12,722			34,357			35,767

Ending balance	$	115,715		$	105,054		$	115,715		$	105,054


Components of allowance for credit losses:
Allowance for loan losses	$	113,786		$	103,446		$	113,786		$	103,446
Reserve for unfunded letters of credit		1,929			1,608			1,929			1,608

Allowance for credit losses	$	115,715		$	105,054		$	115,715		$	105,054

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 8. Investment Securities

As of September 30, 2010, Valley had approximately $1.8 billion, $1.1 billion, and $32.1 million in held to maturity, available for sale, and trading 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 (referred to below as “bank issuers”) (including three pooled trust preferred securities), corporate bonds primarily issued by banks, and perpetual preferred and common equity securities issued by banks. These investments may pose a higher risk of future impairment charges by Valley as a result of the 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. Additionally, 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 if collection of deferred and accrued interest (or principal upon maturity) is deemed unlikely by management. Although these securities may pose a greater risk of impairment charges, many of the bank issuers of trust preferred securities within our investment portfolio were allowed by their bank regulators to exit the U.S. Treasury’s TARP Capital Purchase Program, and their capital ratios are at or above the minimum amounts to be considered “well-capitalized” under current regulatory guidelines. For the small number of bank issuers within our portfolio that remain TARP participants, dividend payments to trust preferred security holders are senior to and payable before dividends can be paid on the preferred stock issued under the TARP Capital Purchase Program. See the “Other-Than-Temporary Impairment Analysis” section below for further details.

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at September 30, 2010 and December 31, 2009 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)

September 30, 2010
Obligations of states and political subdivisions	$	389,023	$	8,205	$	(3	)	$	397,225
Residential mortgage-backed securities		1,053,291		34,725		(148	)		1,087,868
Trust preferred securities		281,847		8,782		(63,734	)		226,895
Corporate and other debt securities		52,695		1,948		(452	)		54,191

Total investment securities held to maturity	$	1,776,856	$	53,660	$	(64,337	)	$	1,766,179


December 31, 2009
Obligations of states and political subdivisions	$	313,360	$	3,430	$	(227	)	$	316,563
Residential mortgage-backed securities		936,385		17,970		(413	)		953,942
Trust preferred securities		281,836		3,832		(59,516	)		226,152
Corporate and other debt securities		52,807		907		(2,365	)		51,349

Total investment securities held to maturity	$	1,584,388	$	26,139	$	(62,521	)	$	1,548,006

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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, 2010 and December 31, 2009 were as follows:


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

September 30, 2010
Obligations of states and political subdivisions	$	1,028	$	(2	)	$	105	$	(1	)	$	1,133	$	(3	)
Residential mortgage-backed securities		70,506		(148	)		—		—			70,506		(148	)
Trust preferred securities		1,730		(274	)		91,130		(63,460	)		92,860		(63,734	)
Corporate and other debt securities		—		—			8,521		(452	)		8,521		(452	)

Total	$	73,264	$	(424	)	$	99,756	$	(63,913	)	$	173,020	$	(64,337	)


December 31, 2009
Obligations of states and political subdivisions	$	42,507	$	(219	)	$	1,305	$	(8	)	$	43,812	$	(227	)
Residential mortgage-backed securities		120,101		(404	)		2,450		(9	)		122,551		(413	)
Trust preferred securities		10,702		(89	)		121,197		(59,427	)		131,899		(59,516	)
Corporate and other debt securities		7,206		(338	)		17,926		(2,027	)		25,132		(2,365	)

Total	$	180,516	$	(1,050	)	$	142,878	$	(61,471	)	$	323,394	$	(62,521	)

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 marketplace. The total number of security positions in the securities held to maturity portfolio in an unrealized loss position at September 30, 2010 was 28 as compared to 79 at December 31, 2009.

At September 30, 2010, the unrealized losses reported for trust preferred securities relate to 18 single-issuer securities, mainly issued by bank holding companies. Of the 18 trust preferred securities, 6 were investment grade, 1 was non-investment grade, and 11 were not rated. Additionally, $38.3 million of the $63.7 million in unrealized losses at September 30, 2010, 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. In August and October of 2009, the bank issuer elected to defer its scheduled interest payments on each respective security issuance. 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 capital minimum requirements to be considered a “well-capitalized institution” as of September 30, 2010. Based on this information, management believes that we 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 we 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, have no deferrals of interest or defaults and, if applicable, meet the regulatory requirements to be considered to be “well-capitalized institutions” at September 30, 2010.

Unrealized losses reported for corporate and other debt securities as of September 30, 2010 relate to one investment rated bank issued corporate bond with a $9.0 million amortized cost that is paying in accordance with its terms.

Management does not believe that any individual unrealized loss as of September 30, 2010 included in the table above represents 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 does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.

As of September 30, 2010, 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 $942 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The contractual maturities of investments in debt securities held to maturity at September 30, 2010 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.


	September 30, 2010
	Amortized Cost		Fair Value
	(in thousands)

Due in one year	$	185,101	$	185,183
Due after one year through five years		63,920		66,588
Due after five years through ten years		75,875		79,014
Due after ten years		398,669		347,526
Residential mortgage-backed securities		1,053,291		1,087,868

Total investment securities held to maturity	$	1,776,856	$	1,766,179

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 4.42 years at September 30, 2010.

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of investment securities available for sale at September 30, 2010 and December 31, 2009 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)

September 30, 2010
U.S. Treasury securities	$	162,519	$	1,946	$	—		$	164,465
U.S. government agency securities		37,609		38		(174	)		37,473
Obligations of states and political subdivisions		31,529		1,628		—			33,157
Residential mortgage-backed securities		680,105		38,120		(4,689	)		713,536
Trust preferred securities*		54,290		581		(14,342	)		40,529
Corporate and other debt securities		53,473		3,603		(3,041	)		54,035
Equity securities		48,097		1,012		(2,701	)		46,408

Total investment securities available for sale	$	1,067,622	$	46,928	$	(24,947	)	$	1,089,603


December 31, 2009
U.S. Treasury securities	$	277,429	$	—	$	(1,144	)	$	276,285
Obligations of states and political subdivisions		32,724		722		(35	)		33,411
Residential mortgage-backed securities		911,186		39,537		(10,218	)		940,505
Trust preferred securities*		56,636		117		(20,341	)		36,412
Corporate and other debt securities		22,578		198		(3,734	)		19,042
Equity securities		49,112		1,956		(4,242	)		46,826

Total investment securities available for sale	$	1,349,665	$	42,530	$	(39,714	)	$	1,352,481

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The age of unrealized losses and fair value of related investment securities available for sale at September 30, 2010 and December 31, 2009 were as follows:


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

September 30, 2010
U.S. government agency securities	$	19,642	$	(174	)	$	—	$	—		$	19,642	$	(174	)
Residential mortgage-backed securities		972		(3	)		68,610		(4,686	)		69,582		(4,689	)
Trust preferred securities		1,244		(171	)		34,543		(14,171	)		35,787		(14,342	)
Corporate and other debt securities		3,365		(31	)		6,964		(3,010	)		10,329		(3,041	)
Equity securities		435		(248	)		12,724		(2,453	)		13,159		(2,701	)

Total	$	25,658	$	(627	)	$	122,841	$	(24,320	)	$	148,499	$	(24,947	)


December 31, 2009
U.S. Treasury securities	$	276,285	$	(1,144	)	$	—	$	—		$	276,285	$	(1,144	)
Obligations of states and political subdivisions		395		(4	)		1,688		(31	)		2,083		(35	)
Residential mortgage-backed securities		11,318		(245	)		122,031		(9,973	)		133,349		(10,218	)
Trust preferred securities		—		—			34,622		(20,341	)		34,622		(20,341	)
Corporate and other debt securities		1,878		(57	)		6,296		(3,677	)		8,174		(3,734	)
Equity securities		—		—			35,901		(4,242	)		35,901		(4,242	)

Total	$	289,876	$	(1,450	)	$	200,538	$	(38,264	)	$	490,414	$	(39,714	)

The total number of security positions in the securities available for sale portfolio in an unrealized loss position at September 30, 2010 was 45 as compared to 82 at December 31, 2009.

Within the residential mortgage-backed securities category of the available for sale portfolio, substantially all of the unrealized losses relate to 9 individual private label mortgage-backed securities. Of these 9 securities, 3 securities had an investment grade rating and 6 had a non-investment grade rating at September 30, 2010. Four of the private label mortgage-backed securities with unrealized losses were other-than-temporarily impaired in prior periods of 2009 and 2010 with no additional credit impairment charges recognized during the quarter ended September 30, 2010. See the “Other-Than-Temporary Impairment Analysis” section below.

At September 30, 2010, the unrealized losses for trust preferred securities in the table above relate to 11 single-issuer bank issued trust preferred securities and 3 pooled trust preferred securities. The majority of the unrealized loss was attributable to three pooled trust preferred securities with an amortized cost of $23.4 million and a fair value of $10.5 million. One of the three pooled trust preferred securities with an unrealized loss of $10.0 million had an investment grade rating at September 30, 2010. The two other pooled trust preferred securities were other-than-temporarily impaired in 2009 and the first quarter of 2010 with no additional credit impairment charges recognized during the quarter ended September 30, 2010. At September 30, 2010, 10 of the single-issuer trust preferred securities classified as available for sale had investment grade ratings and 1 had a non-investment grade rating. These single-issuer securities are all paying in accordance with their terms and have no deferrals of interest or defaults.

Unrealized losses reported for corporate and other debt securities at September 30, 2010, relate mainly to one investment rated bank issued corporate bond with a $10.0 million amortized cost and a $3.0 million unrealized loss that is paying in accordance with its contractual terms.

The unrealized losses on equity securities, including those more than twelve months, are related primarily to two perpetual preferred security positions from the same issuance with a combined $9.7 million amortized cost and a $2.3 million unrealized loss. At September 30, 2010, these perpetual preferred securities had investment grade ratings and are currently performing and paying quarterly dividends.

Management does not believe that any individual unrealized loss as of September 30, 2010 represents an other-than-temporary impairment, except for the previously impaired securities discussed above, as management mainly attributes

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(Unaudited)

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 believes there are no credit losses on these securities. Valley has no intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or, if necessary, maturity.

As of September 30, 2010, 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 $554 million.

The contractual maturities of investments in debt securities available for sale at September 30, 2010, are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.


	Amortized Cost		Fair Value
	(in thousands)

Due in one year	$	66,773	$	67,067
Due after one year through five years		120,621		123,419
Due after five years through ten years		43,223		45,894
Due after ten years		108,803		93,279
Residential mortgage-backed securities		680,105		713,536
Equity securities		48,097		46,408

Total investment securities available for sale	$	1,067,622	$	1,089,603

The weighted-average remaining expected life for residential mortgage-backed securities available for sale was 3.10 years at September 30, 2010.

Other-Than-Temporary Impairment Analysis

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

For residential mortgage-backed securities, Valley estimates 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 at September 30, 2010. Generally, the range of expected constant default rates (“CDR”), loss severity rates and constant prepayment rates (“CPR”) used in the modeling scenarios for the 20 private label mortgage-backed securities were as follows: a CDR of 0 percent to 15.8 percent, a loss severity rate of 23.9 percent to 57.2 percent, and a CPR of 7.4 percent to 34.4 percent.

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(Unaudited)

For the single-issuer trust preferred securities and corporate and other debt securities, Valley reviews each portfolio to determine if all the securities are paying in accordance with their terms and have no deferrals of interest or defaults. Additionally, Valley analyzes the performance of the issuers on a quarterly basis, including a review of performance data from the issuer’s most recent bank regulatory report, if applicable, to assess their credit risk and the probability of impairment of the contractual cash flows of the applicable security. Based upon management’s quarterly review, all of the issuers’ capital ratios are at or above the minimum amounts to be considered a “well-capitalized” financial institution, if applicable, and/or have maintained performance levels adequate to support the contractual cash flows.

For the three pooled trust preferred securities, Valley evaluates the projected cash flows from each of its tranches in the three securities to determine if they are adequate to support their future contractual principal and interest payments. Valley assesses the credit risk and probability of impairment of the contractual cash flows by projecting the default rates over the life of the security. Higher projected default rates will decrease the expected future cash flows from each security. If the projected decrease in cash flows in each tranche causes a change in contractual yield, the security would be considered to be other-than-temporarily impaired. Two of the pooled trust preferred securities were previously impaired, including additional estimated credit losses recognized in the first quarter of 2010. The expected cash flows from these securities did not result in additional estimated credit losses at September 30, 2010.

The perpetual preferred securities are hybrid investments that are assessed for impairment by Valley as if they were debt securities. Therefore, Valley assessed the creditworthiness of each security issuer, as well as any potential change in the anticipated cash flows of the securities as of September 30, 2010. Based on this analysis, management believes the declines in fair value of these securities are attributable to a lack of liquidity in the marketplace and are not reflective of any deterioration in the creditworthiness of the issuers.

Other-Than-Temporarily Impaired Securities

The following table provides information regarding our other-than-temporary impairment charges on securities recognized in earnings for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(in thousands)

Available for sale
Residential mortgage-backed securities	$	—	$	743	$	2,265	$	5,348
Trust preferred securities		—		—		2,377		—

Net impairment losses on securities recognized in earnings	$	—	$	743	$	4,642	$	5,348

For the nine months ended September 30, 2010, Valley recognized impairment charges on a total of five individual private label mortgage-backed securities and two pooled trust preferred securities. All of these securities, with the exception of one security, were found to be initially impaired in 2009. At September 30, 2010, the five private label mortgage-backed securities had a combined amortized cost of $54.4 million and fair value of $52.0 million, while the two impaired pooled trust preferred securities had a combined amortized cost and fair value of $6.2 million and $3.2 million, respectively, after recognition of all credit impairments.

Realized Gains and Losses

Gross gains (losses) realized on sales, maturities and other securities transactions related to investment securities included in earnings for the three and nine months ended September 30, 2010 and 2009 were as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Sales transactions:
Gross gains	$	—		$	—		$	4,634		$	258
Gross losses		—			—			(96	)		(36	)

		—			—			4,538			222


Maturities and other securities transactions:
Gross gains		120			7			172			58
Gross losses		(8	)		(12	)		(79	)		(34	)

		112			(5	)		93			24

Gains on securities transactions, net	$	112		$	(5	)	$	4,631		$	246

During the nine months ended September 30, 2010, Valley recognized net gains on securities transactions of $4.6 million mainly due to the sale of approximately $307 million of U.S. Treasury securities classified as available for sale during the first six months of 2010.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Balance, beginning of the period	$	10,660		$	5,154		$	6,119		$	549
Additions:
Initial credit impairments		—			—			124			2,171
Subsequent credit impairments		—			743			4,518			3,177
Reductions:
Accretion of credit loss impairment due to an increase in expected cash flows		(43	)		(295	)		(144	)		(295	)

Balance, end of the period	$	10,617		$	5,602		$	10,617		$	5,602

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

Trading Securities

The fair value of trading securities (consisting of 4 single-issuer bank trust preferred securities) was $32.1 million at September 30, 2010 and $33.0 million at December 31, 2009. Interest income on trading securities totaled $642 thousand and $666 thousand for the three months ended September 30, 2010 and 2009, respectively, and $1.9 million and $3.2 million for the nine months ended September 30, 2010 and 2009, respectively.

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(Unaudited)

Note 9. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill as allocated to our business segments, or reporting units thereof, for goodwill impairment analysis were:


	*Business Segment / Reporting Unit:**
	Wealth Management		Consumer Lending		Commercial Lending		Investment Management		Total
	(in thousands)
Balance at December 31, 2009	$	18,978	$	93,805	$	107,969	$	75,672	$	296,424
Goodwill from business combinations		54		5,194		9,218		5,085		19,551

Balance at September 30, 2010	$	19,032	$	98,999	$	117,187	$	80,757	$	315,975

*	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 2010, Valley recorded $19.5 million in goodwill resulting from the LibertyPointe Bank and The Park Avenue Bank FDIC-assisted transactions and $54 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. There was no impairment of goodwill during the three and nine months ended September 30, 2010 and 2009.

The following table summarizes other intangible assets as of September 30, 2010 and December 31, 2009:


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

September 30, 2010
Loan servicing rights	$	72,449	$	(60,815	)	$	(2,108	)	$	9,526
Core deposits		27,144		(16,454	)		—			10,690
Other		2,796		(1,556	)		—			1,240

Total other intangible assets	$	102,389	$	(78,825	)	$	(2,108	)	$	21,456


December 31, 2009
Loan servicing rights	$	70,885	$	(59,163	)	$	(612	)	$	11,110
Core deposits		25,584		(13,859	)		—			11,725
Other		4,057		(2,587	)		—			1,470

Total other intangible assets	$	100,526	$	(75,609	)	$	(612	)	$	24,305

Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets in proportion to, and over the period of estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. For the three and nine months ended September 30, 2010, Valley recognized impairment charges, net of recoveries on its loan servicing rights totaling $810 thousand and $1.5 million, respectively and $32 thousand and $486 thousand for the three and nine months ended September 30, 2009, respectively.

Core deposit intangibles are amortized using an accelerated method and have a weighted average amortization period of 9 years. The line item labeled “other” included in the table above consists of customer lists and covenants not to compete, which are amortized over their expected lives using a straight line method and have a weighted average amortization period of 14 years. Valley’s core deposits intangibles resulting from the two FDIC-assisted transactions had a carrying value of $1.2 million at September 30, 2010. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three and nine months ended September 30, 2010 and 2009.

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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 2010 through 2014:


	Loan Servicing Rights		Core Deposits		Other
	(in thousands)

2010	$	779	$	858	$	75
2011		2,354		3,051		268
2012		1,752		2,455		251
2013		1,350		1,858		148
2014		1,001		1,262		84

Valley recognized amortization expense on other intangible assets, and net impairment charges on loan servicing rights, totaling $2.6 million and $1.7 million for the three months ended September 30, 2010 and 2009, respectively and $6.7 million and $5.5 million for the nine months ended September 30, 2010 and 2009, respectively.

Note 10. Pension Plan

The 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 qualified and non-qualified plans for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Service cost	$	1,450		$	1,347		$	4,350		$	3,955
Interest cost		1,434			1,248			4,300			3,796
Expected return on plan assets		(1,582	)		(1,672	)		(4,745	)		(4,530	)
Amortization of prior service cost		160			149			480			447
Amortization of actuarial loss		276			190			827			644

Total net periodic pension expense		1,738			1,262			5,212			4,312


Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Amortization of prior service cost		(160	)		(149	)		(480	)		(447	)
Amortization of actuarial loss		(276	)		(190	)		(827	)		(644	)

		(436	)		(339	)		(1,307	)		(1,091	)


Total amount recognized in net periodic benefit cost and other comprehensive income, pre-tax	$	1,302		$	923		$	3,905		$	3,221

The fair value of qualified plan assets increased approximately $6.3 million, or 8.5 percent to $80.3 million at September 30, 2010 from $74.0 million at December 31, 2009. Valley contributed $5.0 million to the qualified plan during the second quarter of 2010. Valley does not expect to make any additional contributions during the remainder of 2010.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 11. Stock-Based Compensation

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

Under the Employee Stock Incentive Plan, Valley may award shares to its employees for up to 6.7 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 the last sale price reported preceding such date. An incentive stock option’s maximum term to exercise is ten years from the date of grant and is subject to a vesting schedule. There were no stock awards during the third quarter of 2010. For the nine months ended September 30, 2010, Valley awarded restricted stock totaling approximately one thousand shares. As of September 30, 2010, there were 6.6 million shares of common stock available for issuance under the 2009 Employee Stock Incentive Plan.

Valley recorded stock-based employee compensation expense for incentive stock options and restricted stock awards of $784 thousand and $951 thousand for the three months ended September 30, 2010 and 2009, respectively and $2.6 million and $3.0 million for the nine months ended September 30, 2010 and 2009, respectively. The fair value of stock awards are expensed over the vesting period. As of September 30, 2010, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $4.4 million and will be recognized over an average remaining vesting period of approximately 2.0 years.

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 some or all of their annual cash retainer and meeting fees in exchange for shares of Valley restricted stock. The restricted shares under the plan vest in full 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. During the three and nine months ended September 30, 2010, there were 17 thousand shares granted. There were approximately 95 thousand shares outstanding under this plan and 254 thousand shares available for issuance as of September 30, 2010.

Note 12. Guarantees

Guarantees that have been entered into by Valley include standby letters of credit of $224.7 million as of September 30, 2010. 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, $149.2 million, or 66% 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. As of September 30, 2010, Valley had an $818 thousand liability related 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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, with changes in fair value recognized as charges or credits to current earnings. Net trading losses included non-cash charges of $2.1 million and $4.0 million for the three and nine months ended September 30, 2010, respectively. For the comparable three and nine months ended September 30, 2009, net trading losses included non-cash charges of $2.8 million and $13.5 million, respectively, for the change in the fair value of the junior subordinated debentures issued to VNB Capital Trust I.

The table below summarizes the outstanding junior subordinated debentures and the related trust preferred securities issued by each trust as of September 30, 2010:


	September 30, 2010
	VNB Capital Trust I			GCB Capital Trust III
	($ in thousands)

Junior Subordinated Debentures
Carrying value (1)	$	159,850		$	25,205
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 $462 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 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. No debentures were called or redeemed during the three and nine months ended September 30, 2010.

The trust preferred securities described above are included in Valley’s consolidated Tier 1 capital and total capital at September 30, 2010 and December 31, 2009. 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

provided a five-year transition period, ending June 30, 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, 2010 and December 31, 2009, 100 percent of the trust preferred securities qualified as Tier I capital under the final rule adopted in March 2005.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, (“the Act”) was signed into law on July 21, 2010. Under the Act, Valley’s outstanding trust preferred securities will continue to count as Tier I capital but Valley will be unable to issue replacement or additional trust preferred securities which would count as Tier I capital.

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.

At September 30, 2010, Valley had two interest rate caps with an aggregate notional amount of $100 million, strike rates of 2.50 percent and 2.75 percent, and a maturity date of May 1, 2013. Hedge accounting was not applied to these interest rate caps from January 1, 2009 until February 20, 2009 due to the termination of the original hedging relationship in the fourth quarter of 2008. On February 20, 2009, Valley re-designated the interest rate caps to hedge the variable cash flows associated with customer repurchase agreements and money market deposit accounts products that have variable interest rate, based on the federal funds rate. The change in fair value of these derivatives, while they were not designated as hedges, was a $369 thousand gain, which is included in other non-interest income for the nine months ended September 30, 2009.

At September 30, 2010, Valley also had 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 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 indexed to the prime rate.

Fair Value Hedge of a Fixed Rate Asset. 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, 2010, Valley had one interest rate swap with a notional amount of $9.1 million.

For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Valley includes the gain or loss on the hedged items in the same line item as the loss or gain on the related derivatives.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Derivatives not Designated as 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 market 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) no longer qualified for hedge accounting but were subsequently re-designated as cash flow hedges during February 2009. Valley had no derivatives that were not designated in hedging relationships during the nine months ended September 30, 2010.

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, 2010		December 31, 2009
			(in thousands)

Asset Derivatives

Cash flow hedge interest rate caps on short-term borrowings and deposit accounts		Other Assets	$	1,135	$	7,124

Total derivatives designated as hedging instruments			$	1,135	$	7,124


Liability Derivatives

Fair value hedge commercial loan interest rate swap		Other Liabilities	$	1,937	$	1,018

Total derivatives designated as hedging instruments			$	1,937	$	1,018

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(in thousands)

Interest rate caps on short-term borrowings and deposit accounts:
Amount of loss reclassified from accumulated other comprehensive income to interest expense on short-term borrowings	$	(525	)	$	(133	)	$	(1,401	)	$	(261	)
Amount of (loss) gain recognized in other comprehensive income		(992	)		(1,126	)		(5,749	)		2,776

Valley recognized a net loss of $56 thousand and $240 thousand in other expense for hedge ineffectiveness on the cash flow hedge interest rate caps for the three and nine months ended September 30, 2010, respectively and a $68 thousand net loss in other expense and $134 thousand net gain in other income for the three and nine months ended September 30, 2009, respectively. The accumulated net after-tax loss related to effective cash flow hedges included in accumulated other comprehensive loss totaled $5.2 million and $2.7 million at September 30, 2010 and December 31, 2009, 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 $2.4 million 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,
	2010			2009			2010			2009
	(in thousands)

Derivative—commercial loan interest rate swap:
Interest income—Interest and fees on loans	$	(279	)	$	(214	)	$	(919	)	$	684

Hedged item—commercial loan:
Interest income—Interest and fees on loans	$	279		$	214		$	919		$	(684	)

Gains 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,
	2010		2009		2010		2009
	(in thousands)

Non-designated hedge interest rate derivatives
Trading gains, net	$	—	$	—	$	—	$	1,984
Other non-interest income		—		—		—		369

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, 2010, Valley was in compliance with the provisions of its derivative counterparty agreements.

As of September 30, 2010, 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 $2.0 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties. At September 30, 2010, 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.

Note 16. Subsequent Events

In October 2010, Valley sold approximately $83 million of conforming residential mortgage loans to Fannie Mae. These loans had fixed terms of 15 and 20 years and an aggregate weighted average interest rate of 5.22 percent. The loans were transferred from the loan portfolio to the loans held for sale during the third quarter of 2010. The sale generated a $3.9 million pre-tax gain, which will be recognized in the fourth quarter of 2010.

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In October 2010, Valley entered into two forward starting interest rate swaps to hedge the change in cash flows associated with certain prime-rate-indexed deposits, consisting of consumer and commercial money market deposit accounts, which have variable interest rates indexed to the prime rate. The cash flow hedge interest rate swaps, with a total notional amount of $200 million, will require the payment by Valley of fixed-rate amounts at approximately 4.73 percent in exchange for the receipt of variable-rate payments at the prime rate starting in October 2011 and expiring in October 2016.

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. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred as the “Bank” in this MD&A.

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 “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors disclosed in Valley’s Annual Report on Form 10-K for the year ended December 31, 2009 and Part II Item 1A of this report include, but are not limited to:

•

a continued or unexpected decline in the economy, in particular in New Jersey and the New York Metropolitan area;

•

higher than expected increases in our allowance for loan losses;

•

higher than expected increases in loan losses or in the level of nonperforming loans;

•

unexpected changes in interest rates;

•

a continued or unexpected decline in real estate values within our market areas;

•

declines in value in our investment portfolio;

•

charges against earnings related to the change in fair value of our junior subordinated debentures;

•

higher than expected FDIC insurance assessments;

•

the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships;

•

lack of liquidity to fund our various cash obligations;

•

unanticipated reduction in our deposit base;

•

potential acquisitions may disrupt our business;

•

legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations) subject us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model;

•

changes in accounting policies or accounting standards;

•

our inability to promptly adapt to technological changes;

•

our internal controls and procedures may not be adequate to prevent losses;

•

claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters;

•

the possibility that the expected benefits of the LibertyPointe Bank and The Park Avenue Bank acquisitions will not be fully realized;

•

expected cost synergies and other benefits from our acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters may arise; and

•

other unexpected material adverse changes in our operations or earnings.

We assume no obligation for updating such forward-looking statements 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 financial 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, 2009. We identified our policies on the allowance for loan losses, security valuations and impairments, 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 statements of financial condition.

The allowance for loan losses consists of the following: (i) specific reserves for individually impaired credits, (ii) reserves for classified, or higher risk rated, loans, and (iii) reserves for non-classified loans. The reserves on classified and non-classified loans also include reserves based on general economic conditions and other qualitative risk factors both internal and external to Valley, including changes in loan portfolio volume, the composition and concentrations of credit, new market initiatives, and the impact of competition on loan structuring and pricing. Note 1 to the consolidated financial statements included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2009 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 and Impairments. 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 and liquid markets, valuation techniques would be used to determine fair value of any 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. See Note 6 to the consolidated financial statements for more details on our security valuation techniques.

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, any credit deterioration of the investment, whether management intends to sell the security, and whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis. Debt investment securities deemed to be other-than-temporarily impaired are written down by the impairment related to the estimated credit loss and the non-credit related impairment is recognized in other comprehensive income. See the “Investment Securities Portfolio” section below and Notes 6 and 8 to the consolidated financial statements for additional information.

Goodwill and Other Intangible Assets. We record all assets, liabilities, and non-controlling interests in the acquiree in purchase acquisitions, including goodwill and other intangible assets, at fair value as of the acquisition date, and expense all acquisition related costs as incurred as required by ASC Topic 805, “Business Combinations.” Goodwill totaling $316.0 million at September 30, 2010 is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate it may be impaired. Other intangible assets totaling $21.5 million at September 30, 2010 are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount. Such evaluation of other intangible assets is based on undiscounted cash flow projections. The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities.

The goodwill impairment test is performed in two steps. 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 step must be performed. That additional step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

Fair value may be determined using: market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other determinants. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates, terminal values, and specific industry or market sector conditions.

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, 2009 and the “Income Taxes” section in this MD&A include additional discussion on the accounting for income taxes.

New Authoritative Accounting Guidance

See Note 5 to the consolidated financial statements for a description of new authoritative accounting guidance including the respective dates of adoption and effects on results of operations and financial condition.

Recent Legislative Developments

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law on July 21, 2010. Generally, the Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law. The Act, among other things:

•

Directs the Federal Reserve to issue rules which are expected to limit debit-card interchange fees;

•

After a three-year phase-in period which begins January 1, 2013, removes trust preferred securities as a permitted component of Tier 1 capital for bank holding companies with assets of $15 billion or more, however, bank holding companies with assets of less than $15 billion (including Valley) will be permitted to include trust preferred securities that were issued before May 19, 2010 as Tier 1 capital;

•

Provides for an increase in the FDIC assessment for depository institutions with assets of $10 billion or more, increases in the minimum reserve ratio for the deposit insurance fund from 1.15 percent to 1.35 percent and changes the basis for determining FDIC premiums from deposits to assets;

•

Creates a new consumer financial protection bureau that will have rulemaking authority for a wide range of consumer protection laws that would apply to all banks and would have broad powers to supervise and enforce consumer protection laws;

•

Provides for new disclosure and other requirements relating to executive compensation and corporate governance;

•

Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries;

•

Provides mortgage reform provisions regarding a customer’s ability to repay, requiring the ability to repay for variable-rate loans to be determined by using the maximum rate that will apply during the first five years of the loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions;

•

Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity;

•

Makes permanent the $250 thousand limit for federal deposit insurance and provides unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions; and

•

Repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts.

The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on our operating environment in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is likely to increase our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and markets areas. The nature and extent of future legislative and regulatory changes affecting financial institutions, including as a result of the Dodd-Frank Act, is very unpredictable at this time. Our management is actively reviewing the provisions of the Dodd-Frank Act, many of which are phased-in

over the next several months and years, and assessing its probable impact on our business, financial condition, and results of operations. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and us in particular, is uncertain at this time.

Executive Summary

Net income for the third quarter of 2010 was $32.6 million, or $0.20 per diluted common share, compared to $25.6 million, adjusted for preferred dividends and accretion of $6.0 million, or $0.17 per diluted common share for the third quarter of 2009. The increase in net income was largely due to: (i) a $3.4 million decline in the provision for credit losses as credit quality stabilized somewhat during the third quarter of 2010 and net loan charge-offs were $3.9 million less than the third quarter of 2009, (ii) a $2.7 million increase in net interest income mainly driven by a 34 basis point decline in the cost of average interest bearing liabilities and a reduction in high cost time deposit balances, partially offset by (iii) a $5.1 million increase in non-interest expense caused by increases in salary and employee benefits and net occupancy and equipment expense related to the FDIC-assisted acquisitions of LibertyPointe Bank and The Park Avenue Bank in March 2010, as well as from de novo branch openings over the twelve month period ended September 30, 2010.

Valley’s credit quality remains both stable and, we believe, more resilient than many of its competitors. Total loans past due in excess of 30 days decreased 0.01 percent to 1.70 percent of our total loan portfolio at September 30, 2010 as compared to 1.71 percent at June 30, 2010 as total loan delinquencies decreased by $891 thousand. However, non-accrual loans increased to $105.6 million at September 30, 2010 compared to $103.5 million at June 30, 2010 largely due to the migration of past due construction loans and residential mortgage loans into this delinquency category. Although the timing of collection is uncertain for non-accrual loans, management believes most of these loans are well secured and, largely collectible based, in part, on our quarterly review of impaired loans. Our lending strategy is based on underwriting standards designed to maintain high credit quality; however, due to the potential for future credit deterioration from a weak economy, management cannot provide assurance that our loan portfolio performance will not decline from the levels reported as of September 30, 2010. See “Non-performing Assets” section at page 61 for further analysis of our credit quality.

Our residential mortgage loan foreclosure activity remains low due to the nominal amount of individual loan delinquencies within this portfolio. We evaluated our foreclosure documentation procedures, given the recent announcements made by other financial institutions regarding their foreclosure activities. The results of our review indicate that our procedures for reviewing and validating the information in our documentation are sound and we believe our foreclosure affidavits are accurate.

Total loans remained unchanged at $9.4 billion at September 30, 2010 compared to June 30, 2010. In general, new loan demand remained persistently weak during the third quarter of 2010. We believe much of this weakness is due to apprehension among businesses primarily in our New Jersey markets regarding expansion of their operations or entering new ventures while the economy’s direction is uncertain. However, commercial and industrial loans increased $63.9 million, or 14.5 percent on an annualized basis during the third quarter of 2010 from the second quarter of 2010 mainly due to some new customer relationships and higher line of credit usage by our existing customers, both concentrated in our New York metropolitan markets.

Residential mortgage loan activity remained brisk as we originated over $280 million in new and refinanced residential mortgage loans during the three months ended September 30, 2010. Our residential originations increased as compared to the second quarter of 2010 due to the continued low level of interest rates and our successful one price refinancing program with total closing costs as low as $499 including title insurance fees. We transferred $83 million in conforming residential mortgage loans to loans held for sale during the third quarter of 2010 upon management’s decision to sell such loans to Fannie Mae. Management believes these loans with 15 and 20 year fixed terms and an aggregate weighted average interest rate of 5.22 percent are likely to refinance in the near term due to the current low interest rate environment. The sale closed in October 2010 and resulted in a pre-tax gain of approximately $3.9 million which will be recognized in the fourth quarter of 2010.

Total deposits decreased $151.7 million to approximately $9.3 billion at September 30, 2010 from June 30, 2010 as we continue to keep interest rates low on most interest bearing deposit products in response to the low level of loan demand caused by the economy. During the quarter ended September 30, 2010, time deposits declined $211.0 million due to run-off of higher cost maturing certificates of deposit. However, savings, NOW, and money market deposits increased $66.8 million as compared to June 30, 2010 largely due to higher municipal deposit balances.

Short-term borrowings increased $146.8 million to $331.3 million at September 30, 2010 from June 30, 2010 due to increases of $100 million and $50 million in overnight FHLB advances and Federal funds purchased, respectively, due to normal temporary liquidity needs caused by daily cash activity.

For the three months ended September 30, 2010, we reported an annualized return on average shareholders’ equity (“ROE”) of 10.24 percent and an annualized return on average assets (“ROA”) of 0.93 percent which includes intangible assets. Our annualized return on average tangible shareholders’ equity (“ROATE”) was 13.86 percent for the third quarter of 2010. The comparable ratios for the third quarter of 2009 were an annualized ROE of 9.35 percent, an annualized ROA of 0.89 percent, and an annualized ROATE of 12.25 percent. All of the above ratios were impacted by the change in fair value of our junior subordinated debentures carried at fair value. Net income included a non-cash charge of $2.1 million ($1.4 million, net of tax) for the third quarter of 2010, as compared to a non-cash charge of $2.8 million ($1.8 million, net of tax) for the same period of 2009 due to the change in fair value of the debentures.

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,

2010

2009