Edgar Filing: VALLEY NATIONAL BANCORP

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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, 2011

¨	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):

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 170,205,324 shares were outstanding as of November 3, 2011.

TABLE OF CONTENTS


		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition as of September 30, 2011 and December 31, 2010		2
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010		3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010		4
	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		83

Item 4.	Controls and Procedures		83

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		83

Item 1A.	Risk Factors		83

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		84

Item 6.	Exhibits		84

SIGNATURES			86

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, 2011			December 31, 2010
Assets
Cash and due from banks	$	354,625		$	302,629
Interest bearing deposits with banks		40,603			63,657
Investment securities:
Held to maturity, fair value of $2,100,562 at September 30, 2011 and $1,898,872 at December 31, 2010		2,084,446			1,923,993
Available for sale		770,142			1,035,282
Trading securities		21,446			31,894

Total investment securities		2,876,034			2,991,169

Loans held for sale, at fair value		34,350			58,958
Non-covered loans		9,317,691			9,009,140
Covered loans		282,396			356,655
Less: Allowance for loan losses		(135,362	)		(124,704	)

Net loans		9,464,725			9,241,091

Premises and equipment, net		265,294			265,570
Bank owned life insurance		305,142			304,956
Accrued interest receivable		62,516			59,126
Due from customers on acceptances outstanding		6,916			6,028
FDIC loss-share receivable		78,602			89,359
Goodwill		317,962			317,891
Other intangible assets, net		21,888			25,650
Other assets		402,498			417,742

Total Assets	$	14,231,155		$	14,143,826

Liabilities
Deposits:
Non-interest bearing	$	2,613,128		$	2,524,299
Interest bearing:
Savings, NOW and money market		4,312,605			4,106,464
Time		2,694,606			2,732,851

Total deposits		9,620,339			9,363,614

Short-term borrowings		222,574			192,318
Long-term borrowings		2,727,290			2,933,858
Junior subordinated debentures issued to capital trusts (includes fair value of $159,147 at September 30, 2011 and $161,734 at December 31, 2010 for VNB Capital Trust I)		184,283			186,922
Bank acceptances outstanding		6,916			6,028
Accrued expenses and other liabilities		162,651			165,881

Total Liabilities		12,924,053			12,848,621

Shareholders’ Equity*
Preferred stock, no par value, authorized 30,000,000 shares; none issued		—			—
Common stock, no par value, authorized 220,974,508 shares; issued 170,146,143 shares at September 30, 2011 and 170,131,085 shares at December 31, 2010		59,919			57,041
Surplus		1,177,701			1,178,325
Retained earnings		96,101			79,803
Accumulated other comprehensive loss		(23,802	)		(5,719	)
Treasury stock, at cost (120,779 common shares at September 30, 2011 and 597,459 common shares at December 31, 2010)		(2,817	)		(14,245	)

Total Shareholders’ Equity		1,307,102			1,295,205

Total Liabilities and Shareholders’ Equity	$	14,231,155		$	14,143,826

*	Share data reflects the five percent common stock dividend issued on May 20, 2011.

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,
	2011			2010			2011			2010
Interest Income
Interest and fees on loans	$	140,303		$	137,742		$	409,010		$	409,531
Interest and dividends on investment securities:
Taxable		26,552			28,361			84,734			88,861
Tax-exempt		3,109			2,743			8,043			7,886
Dividends		1,565			1,679			5,212			5,153
Interest on federal funds sold and other short-term investments		110			61			253			291

Total interest income		171,639			170,586			507,252			511,722

Interest Expense
Interest on deposits:
Savings, NOW, and money market		4,961			4,711			14,722			14,384
Time		12,424			13,233			37,206			43,551
Interest on short-term borrowings		293			334			910			995
Interest on long-term borrowings and junior subordinated debentures		32,026			34,574			97,917			103,181

Total interest expense		49,704			52,852			150,755			162,111

Net Interest Income		121,935			117,734			356,497			349,611
Provision for credit losses		7,783			9,308			37,971			34,357

Net Interest Income After Provision for Credit Losses		114,152			108,426			318,526			315,254

Non-Interest Income
Trust and investment services		1,769			1,930			5,744			5,752
Insurance commissions		3,416			2,561			11,496			8,417
Service charges on deposit accounts		5,616			6,562			16,908			19,487
Gains on securities transactions, net		863			112			20,034			4,631
Other-than-temporary impairment losses on securities		—			—			—			(1,393	)
Portion recognized in other comprehensive income (before taxes)		—			—			(825	)		(3,249	)

Net impairment losses on securities recognized in earnings		—			—			(825	)		(4,642	)
Trading gains (losses), net		776			(2,627	)		3,110			(4,819	)
Fees from loan servicing		989			1,187			3,356			3,634
Gains on sales of loans, net		2,890			1,548			8,060			5,087
Gains on sales of assets, net		179			78			382			382
Bank owned life insurance		1,989			1,697			5,575			5,008
Change in FDIC loss-share receivable		(1,577	)		—			11,989			—
Other		3,293			4,280			12,696			12,544

Total non-interest income		20,203			17,328			98,525			55,481

Non-Interest Expense
Salary and employee benefits expense		45,125			43,566			133,359			130,774
Net occupancy and equipment expense		15,656			15,241			48,309			47,270
FDIC insurance assessment		2,993			3,497			9,624			10,473
Amortization of other intangible assets		3,351			2,602			7,109			6,747
Professional and legal fees		3,666			2,460			10,459			7,192
Advertising		2,185			826			6,370			2,849
Other		12,326			10,755			36,981			31,969

Total non-interest expense		85,302			78,947			252,211			237,274

Income Before Income Taxes		49,053			46,807			164,840			133,461
Income tax expense		13,696			14,168			56,004			40,449

Net Income	$	35,357		$	32,639		$	108,836		$	93,012

*Earnings Per Common Share:**
Basic		0.21			0.19			0.64			0.55
Diluted		0.21			0.19			0.64			0.55
Cash Dividends Declared per Common Share*		0.17			0.17			0.52			0.52
*Weighted Average Number of Common Shares Outstanding:**
Basic		170,007,399			169,177,275			169,841,859			169,007,369
Diluted		170,007,983			169,178,469			169,846,010			169,008,779

*	Share data reflects the five percent common stock dividend issued on May 20, 2011.

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	108,836		$	93,012
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,067			11,823
Stock-based compensation		2,535			2,697
Provision for credit losses		37,971			34,357
Net amortization of premiums and accretion of discounts on securities and borrowings		7,636			9,275
Amortization of other intangible assets		7,109			6,747
Gains on securities transactions, net		(20,034	)		(4,631	)
Net impairment losses on securities recognized in earnings		825			4,642
Proceeds from sales of loans held for sale		274,032			190,899
Gains on sales of loans, net		(8,060	)		(5,087	)
Originations of loans held for sale		(241,364	)		(185,613	)
Gains on sales of assets, net		(382	)		(382	)
Change in FDIC loss-share receivable (excluding reimbursements)		(11,989	)		—
Net change in:
Trading securities		10,448			862
Fair value of borrowings carried at fair value		(2,587	)		3,957
Cash surrender value of bank owned life insurance		(5,575	)		(5,008	)
Accrued interest receivable		(3,390	)		2,610
Other assets		12,217			3,816
Accrued expenses and other liabilities		(173	)		(20,684	)

Net cash provided by operating activities		180,122			143,292

Cash flows from investing activities:
Net loan (originations) repayments		(261,066	)		245,245
Investment securities held to maturity:
Purchases		(592,138	)		(616,986	)
Maturities, calls and principal repayments		427,307			416,827
Investment securities available for sale:
Purchases		(463,655	)		(275,884	)
Sales		517,244			373,766
Maturities, calls and principal repayments		200,588			256,536
Death benefit proceeds from bank owned life insurance		5,389			1,330
Proceeds from sales of real estate property and equipment		4,495			221
Purchases of real estate property and equipment		(11,946	)		(10,799	)
Reimbursements from the FDIC		22,746			—
Cash and cash equivalents acquired in acquisitions		—			47,528

Net cash (used in) provided by investing activities		(151,036	)		437,784

Cash flows from financing activities:
Net change in deposits		256,725			(932,782	)
Net change in short-term borrowings		30,256			102,613
Repayments of long-term borrowings		(206,000	)		(71,742	)
Dividends paid to common shareholders		(87,450	)		(86,188	)
Common stock issued, net		6,325			6,557

Net cash used in financing activities		(144	)		(981,542	)

Net change in cash and cash equivalents		28,942			(400,466	)
Cash and cash equivalents at beginning of year		366,286			661,337

Cash and cash equivalents at end of period	$	395,228		$	260,871

See accompanying notes to consolidated financial statements.

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)


	Nine Months Ended September 30,
	2011		2010
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings	$	150,640	$	164,658
Federal and state income taxes		28,741		48,311
Supplemental schedule of non-cash investing activities:
Loans transferred to loans held for sale		—		83,162

Acquisitions:
Non-cash assets acquired:
Investment securities available for sale		—		73,743
Loans		—		412,331
Premises and equipment, net		—		123
Accrued interest receivable		—		2,787
FDIC loss-share receivable		—		108,000
Goodwill		—		19,497
Other intangible assets, net		—		1,560
Other assets		—		22,559

Total non-cash assets acquired		—		640,600

Liabilities assumed:
Deposits		—		654,200
Short-term borrowings		—		12,688
Long-term borrowings		—		10,559
Accrued expenses and other liabilities		—		10,681

Total liabilities assumed		—		688,128

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

Cash and cash equivalents acquired in acquisitions	$	—	$	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 (“U.S. GAAP”) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities.

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, 2011 and for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2011 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; and income taxes. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.

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, 2010.

On May 20, 2011, Valley paid a five percent common stock dividend to shareholders of record on May 6, 2011. 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.

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, 2011 and 2010:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(in thousands, except for share data)
Net income	$	35,357	$	32,639	$	108,836	$	93,012

Basic weighted-average number of common shares outstanding		170,007,399		169,177,275		169,841,859		169,007,369
Plus: Common stock equivalents		584		1,194		4,151		1,410

Diluted weighted-average number of common shares outstanding		170,007,983		169,178,469		169,846,010		169,008,779

Earnings per common share:
Basic	$	0.21	$	0.19	$	0.64	$	0.55
Diluted		0.21		0.19		0.64		0.55

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 6.9 million and 6.8 million shares for the three and nine months ended September 30, 2011, respectively, as compared to 7.2 million shares for both the three and nine months ended September 30, 2010.

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, 2011 and 2010:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Net income	$	35,357		$	32,639		$	108,836		$	93,012

Other comprehensive (loss) income, net of tax:
Net change in unrealized gains and losses on securities available for sale		(4,102	)		2,125			3,784			10,454
Net change in non-credit impairment losses on securities		(312	)		878			281			1,537
Net pension benefits adjustment		293			253			876			759
Net change in unrealized gains and losses on derivatives used in cash flow hedging relationships		(9,185	)		(577	)		(12,145	)		(3,337	)
Less reclassification adjustment for gains and losses included in net income		(208	)		205			(10,879	)		560

Total other comprehensive (loss) income, net of tax		(13,514	)		2,884			(18,083	)		9,973

Total comprehensive income	$	21,843		$	35,523		$	90,753		$	102,985

Note 4. Business Combinations

Acquisitions

On April 28, 2011, Valley entered into a merger agreement to acquire State Bancorp, Inc. (Nasdaq:STBC) (“State Bancorp”). State Bancorp is the holding company for State Bank of Long Island, a commercial bank with approximately $1.6 billion in assets, $1.1 billion in loans, and $1.4 billion in deposits and 17 branches in Nassau, Suffolk, Queens, and Manhattan at September 30, 2011. The shareholders of State Bancorp will receive a fixed one- for- one exchange ratio for Valley National Bancorp common stock. This fixed exchange ratio was determined after consideration of Valley’s five percent stock dividend, paid on May 20, 2011. The total consideration for the acquisition is estimated to be $222 million, resulting in an estimated $131 million of intangible assets which are dependent on the fair value of State Bancorp’s assets and liabilities and Valley’s stock price on the closing date of the merger. Valley has received approval from both the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve Bank of New York (“the FRB”) to complete the merger. Valley anticipates the closing of the merger to occur after the close of business on December 30, 2011 with an effective date of January 1, 2012, contingent upon receiving approval of State Bancorp shareholders, the purchase of State Bancorp’s Series A Preferred Stock from the Treasury Department and other customary closing conditions.

On December 14, 2010, Masters Coverage Corp., an all-line insurance agency that is a wholly-owned subsidiary of the Bank, acquired certain assets of S&M Klein Co. Inc., an independent insurance agency located in Queens, New York. The purchase price totaled $5.3 million, consisting of $3.3 million in cash and earn-out payments totaling $2.0 million that are payable over a four year period, subject to certain customer retention and earnings performance. The transaction generated goodwill and other intangible assets totaling $1.9 million and $3.3 million, respectively. Other intangible assets consisted of a customer list, covenants not to compete, and a trade name with a weighted average amortization period of 16 years.

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, and 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.

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. 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.

Note 5. New Authoritative Accounting Guidance

Accounting Standards Update (“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 measurements 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 became effective for Valley on January 1, 2011. The other disclosure requirements and clarifications made by ASU No. 2010-06 became effective for Valley on January 1, 2010. All of the applicable new disclosures have been included in Note 6.

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 should 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 became effective for Valley’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period generally became effective for Valley’s financial statements beginning on January 1, 2011. The effective date for disclosures related to troubled debt restructurings was deferred to coincide with the July 1, 2011 effective date of the ASU No. 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which is further discussed below. Since the provisions of ASU No. 2010-20 are only disclosure related, Valley’s adoption of this guidance changed its disclosures but did not have a significant impact on its consolidated financial statements. See Notes 8 and 9 for the related disclosures.

ASU No. 2010-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations,” relates to disclosure of pro forma information for business combinations that have occurred in the current reporting period. It requires that an entity presenting comparative financial statements include revenue and earnings of the combined entity as though the combination had occurred as of the beginning of the comparable prior annual period only. This guidance was effective prospectively for business combinations for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this guidance did not have an impact on Valley’s consolidated financial statements.

ASU No. 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” provides clarifying guidance intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU No. 2011-02, that both of the following exist: (i) the restructuring constitutes a concession to the debtor; and (ii) the debtor is experiencing financial difficulties. ASU No. 2011-02 applies retrospectively to restructurings occurring on or after January 1, 2011

and was effective for Valley on July 1, 2011. The adoption of ASU No. 2011-02 did not have a significant impact on Valley’s consolidated financial statements.

ASU No. 2011-04, “Fair Value Measurements (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” was issued as a result of the effort to develop common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). While ASU No. 2011-04 is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands the existing disclosure requirements for fair value measurements and clarifies the existing guidance or wording changes to align with IFRS No. 13. Many of the requirements for the amendments in ASU No. 2001-04 do not result in a change in the application of the requirements in Topic 820. ASU No. 2011-04 will be effective for Valley for all interim and annual periods beginning after December 15, 2011. Valley’s adoption of ASU No. 2011-04 is not expected to have a significant impact on its consolidated financial statements.

ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income,” requires an entity to present components of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. ASU No. 2011-05 must be applied retrospectively and is effective for Valley for all interim and annual periods beginning on or after December 15, 2011. Valley’s adoption of ASU No. 2011-05 is not expected to have a significant impact on its consolidated financial statements.

ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment,” provides the option of performing a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount, before applying the current two-step goodwill impairment test. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would be required to conduct the current two-step goodwill impairment test. Otherwise, the entity would not need to apply the two-step test. ASU No. 2011-28 will be effective for Valley for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. Valley’s adoption of ASU No. 2011-05 is not expected to have a significant impact on its consolidated financial statements.

Note 6. Fair Value Measurement of Assets and Liabilities

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

Level 1 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, 2011 and

December 31, 2010. 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, 2011		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	$	40,048	$	40,048	$	—	$	—
U.S. government agency securities		83,712		—		83,712		—
Obligations of states and political subdivisions		22,835		—		22,835		—
Residential mortgage-backed securities		495,449		—		451,006		44,443
Trust preferred securities		41,049		19,544		17,784		3,721
Corporate and other debt securities		41,684		30,851		10,833		—
Equity securities		45,365		26,368		18,997		—
Total available for sale		770,142		116,811		605,167		48,164
Trading securities		21,446		—		21,446		—
Loans held for sale ⁽¹⁾		34,350		—		34,350		—
Other assets ⁽²⁾		5,246		—		5,246		—

Total assets	$	831,184	$	116,811	$	666,209	$	48,164

Liabilities:
Junior subordinated debentures issued to
VNB Capital Trust I ⁽³⁾	$	159,147	$	159,147	$	—	$	—
Other liabilities ⁽²⁾		18,995		—		18,995		—

Total liabilities	$	178,142	$	159,147	$	18,995	$	—


			Fair Value Measurements at Reporting Date Using:
	December 31, 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	$	163,810	$	163,810	$	—	$	—
U.S. government agency securities		88,800		—		88,800		—
Obligations of states and political subdivisions		29,462		—		29,462		—
Residential mortgage-backed securities		610,358		—		514,711		95,647
Trust preferred securities		41,083		20,343		—		20,740
Corporate and other debt securities		53,961		41,046		—		12,915
Equity securities		47,808		28,227		10,228		9,353

Total available for sale		1,035,282		253,426		643,201		138,655
Trading securities		31,894		9,991		—		21,903
Loans held for sale ⁽¹⁾		58,958		—		58,958		—
Other assets ⁽²⁾		8,414		—		8,414		—

Total assets	$	1,134,548	$	263,417	$	710,573	$	160,558

Liabilities:
Junior subordinated debentures issued to
VNB Capital Trust I ⁽³⁾	$	161,734	$	161,734	$	—	$	—
Other liabilities ⁽²⁾		1,379		—		1,379		—

Total liabilities	$	163,113	$	161,734	$	1,379	$	—

(1)	Loans held for sale (which consists of residential mortgages) are carried at fair value and had contractual unpaid principal balances totaling approximately $32.9 million and $58.4 million at September 30, 2011 and December 31, 2010, respectively.

(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, 2011 and December 31, 2010.

The changes in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2011 and 2010 are summarized below:


	Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
	Trading Securities		Available For Sale Securities			Trading Securities			Available For Sale Securities
	(in thousands)
Balance, beginning of the period	$	—	$	51,218		$	21,903		$	138,655
Transfers out of Level 3 ⁽¹⁾		—		—			(21,903	)		(84,435	)
Total net (losses) gains for the period included in:
Net income		—		—			—			(825	)
Other comprehensive income		—		(489	)		—			1,723
Settlements		—		(2,565	)		—			(6,954	)

Balance, end of the period	$	—	$	48,164		$	—		$	48,164

Net unrealized losses included in net income for the period relating to assets held at September 30 ⁽²⁾	$	—	$	—		$	—		$	(825	)⁽⁴⁾


	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		—			3,517			—			3,517
Settlements		—			(6,185	)		—			(19,587	)

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

Net unrealized gains (losses) included in net income for the period relating to assets held at September 30 ⁽²⁾	$	849	⁽³⁾	$	—		$	(418	)⁽³⁾	$	(4,642	)⁽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 third quarter of 2011, there were no transfers of assets into or out of Level 3. During the nine months ended September 30, 2011, 19 trust preferred securities (including one pooled trust preferred security), 12 private label mortgage-backed securities, 4 corporate bonds, and 3 equity securities classified as available-for-sale with fair values totaling $17.3 million, $44.8 million, $12.9 million and $9.4 million at January 1, 2011, respectively, were transferred out of Level 3 assets to Level 2 assets. Within the trading securities portfolio, 3 trust preferred securities with a combined fair value of $21.9 million at January 1, 2011 were transferred out of Level 3 assets to Level 2 assets during the nine months ended September 30, 2011. All of the transfers were made in response to an increase in the availability of observable market data used in the securities’ pricing obtained through independent pricing services or dealer market participants.

During the three and nine months ended September 30, 2011 there were no transfers of assets between Level 1 and Level 2. One trust preferred security (classified as a trading security), was called for early redemption and removed from Level 1 assets during the nine months ended September 30, 2011.

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 certain trust preferred securities) are reported at fair values utilizing Level 1 inputs. 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 an 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 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 the available for sale securities under Level 3 at September 30, 2011, Valley prepared present value cash flow models for two 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. Valuation techniques that were used for measuring the fair value of certain available for sale and trading securities, consisting of trust preferred securities, utilizing Level 3 inputs at December 31, 2010 are fully described in Valley’s Annual Report on Form 10-K for the year ended December 31, 2010.

For the two available for sale pooled trust preferred 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 fair value calculations for both securities are received from an independent valuation advisor.

For certain 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 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, 2011 and December 31, 2010 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 to the Trust have identical financial terms 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, 2011 and December 31, 2010.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair value of Valley’s derivatives are determined using third party prices that are based on discounted cash flow analyses using observed market interest rate curves and volatilities. 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, 2011 and December 31, 2010.

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 an impairment loss is recognized). 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, 2011
Collateral dependent impaired loans⁽¹⁾	$	54,542	$	—	$	—	$	54,542
Loan servicing rights		9,084		—		—		9,084
Foreclosed assets		13,254		—		—		13,254
As of December 31, 2010
Collateral dependent impaired loans⁽¹⁾	$	53,330	$	—	$	—	$	53,330
Loan servicing rights		11,328		—		—		11,328
Foreclosed assets		19,986		—		—		19,986

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

Impaired loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values are estimated using Level 3 inputs, consisting of individual appraisals that are significantly adjusted based on customized discounting criteria. During the nine months ended September 30, 2011, collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. The direct collateral dependent loan charge-offs to the allowance for loan losses totaled $2.6 million and $7.2 million for the three and nine months ended September 30, 2011, respectively. At September 30, 2011, collateral dependent impaired loans (mainly consisting of commercial and construction loans) with a carrying value of $58.1 million were reduced by specific valuation allowance allocations totaling $3.6 million to a reported fair value of $54.5 million.

Loan servicing rights. Fair values for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third party vendor that requires inputs that are both significant to the fair value measurement and unobservable (Level 3). The fair value model is based on various assumptions, including but not limited to, 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. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. During the three and nine months ended September 30, 2011, Valley recognized net impairment charges totaling $1.6 million and $1.5 million, respectively, on loan servicing rights. The loan servicing rights had a $10.4 million carrying value, net of a $2.6 million valuation allowance, at September 30, 2011. Of the $10.4 million total loan servicing rights, $9.1 million relates to impaired loan servicing rights that were recorded at their estimated fair values as of September 30, 2011.

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, 2011, foreclosed assets measured at fair value upon initial recognition and subsequent re-measurement totaled $13.3 million and are included in the foreclosed assets balance at September 30, 2011. In connection with the measurement and initial recognition of the aforementioned foreclosed assets, Valley recognized charge-offs to the allowance for loan losses totaling $584 thousand and $2.8 million for the three and nine months ended September 30, 2011, respectively. The re-measurement of repossessed asset at fair value subsequent to initial recognition resulted in a loss of $1.3 million during the second quarter of 2011, and is included in non-interest expense for the nine months ended September 30, 2011.

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, 2011 and 2010:


		Gains (Losses) on Change in Fair Value
Reported in	Reported in	Three Months Ended					Nine Months Ended
Consolidated Statements	Consolidated Statements	September 30,					September 30,
of Financial Condition	of Income	2011		2010			2011			2010
		(in thousands)
Assets:
Available for sale securities	Net impairment losses on securities	$	—	$	—		$	(825	)	$	(4,642	)
Trading securities	Trading gains (losses), net		136		(517	)		523			(862	)
Loans held for sale	Gains on sales of loans, net		2,890		1,548			8,060			5,087
Liabilities:
Junior subordinated debentures issued to capital trusts	Trading gains (losses), net		640		(2,110	)		2,587			(3,957	)

		$	3,666	$	(1,079	)	$	10,345		$	(4,374	)

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

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

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

The carrying amounts and estimated fair values of financial instruments were as follows at September 30, 2011 and December 31, 2010:


	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial assets:
Cash and due from banks	$	354,625	$	354,625	$	302,629	$	302,629
Interest bearing deposits with banks		40,603		40,603		63,657		63,657
Investment securities held to maturity		2,084,446		2,100,562		1,923,993		1,898,872
Investment securities available for sale		770,142		770,142		1,035,282		1,035,282
Trading securities		21,446		21,446		31,894		31,894
Loans held for sale, at fair value		34,350		34,350		58,958		58,958
Net loans		9,464,725		9,395,902		9,241,091		9,035,066
Accrued interest receivable		62,516		62,516		59,126		59,126
Federal Reserve Bank and Federal Home Loan Bank stock⁽¹⁾		129,714		129,714		139,778		139,778
Derivatives⁽¹⁾		5,246		5,246		8,414		8,414
Financial liabilities:
Deposits without stated maturities		6,925,733		6,925,733		6,630,763		6,630,763
Deposits with stated maturities		2,694,606		2,750,547		2,732,851		2,783,680
Short-term borrowings		222,574		225,083		192,318		195,360
Long-term borrowings		2,727,290		3,148,441		2,933,858		3,201,090
Junior subordinated debentures issued to capital trusts (carrying amount includes fair value of $159,147 at September 30, 2011 and $161,734 at December 31, 2010 for VNB Capital Trust I)		184,283		184,568		186,922		187,480
Accrued interest payable⁽²⁾		4,466		4,466		4,344		4,344
Derivatives⁽²⁾		18,995		18,995		1,379		1,379

(1)	Included in other assets.

(2)	Included in accrued expenses and other liabilities.

Financial instruments with off-balance sheet risk, consisting of loan commitments and standby letters of credit, had immaterial estimated fair values at September 30, 2011 and December 31, 2010.

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

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

Federal Reserve Bank and Federal Home Loan Bank stock. The redeemable carrying amount of these securities with limited marketability approximates their fair value.

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.

Note 7. Investment Securities

As of September 30, 2011, Valley had approximately $2.1 billion, $770.1 million, and $21.4 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 persistently weak U.S. economy and its potential negative effect on the future performance of these bank issuers and/or the underlying mortgage loan collateral.

Held to Maturity

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at September 30, 2011 and December 31, 2010 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
September 30, 2011
U.S. Treasury securities	$	100,054	$	13,107	$	—	$	113,161
Obligations of states and political subdivisions		476,650		13,050		(90)		489,610
Residential mortgage-backed securities		1,197,723		46,705		—		1,244,428
Trust preferred securities		257,317		3,622		(62,442)		198,497
Corporate and other debt securities		52,702		3,931		(1,767)		54,866

Total investment securities held to maturity	$	2,084,446	$	80,415	$	(64,299)	$	2,100,562

December 31, 2010
U.S. Treasury securities	$	100,161	$	251	$	(909)	$	99,503
Obligations of states and political subdivisions		387,280		2,146		(3,467)		385,959
Residential mortgage-backed securities		1,114,469		30,728		(3,081)		1,142,116
Trust preferred securities		269,368		5,891		(59,365)		215,894
Corporate and other debt securities		52,715		2,911		(226)		55,400

Total investment securities held to maturity	$	1,923,993	$	41,927	$	(67,048)	$	1,898,872

The age of unrealized losses and fair value of related securities held to maturity at September 30, 2011 and December 31, 2010 were as follows:


	September 30, 2011
	Less than Twelve Months				More than Twelve Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Obligations of states and political subdivisions	$	16,922	$	(89)	$	50	$	(1)	$	16,972	$	(90)
Trust preferred securities		34,132		(1,136)		71,439		(61,306)		105,571		(62,442)
Corporate and other debt securities		14,771		(173)		7,380		(1,594)		22,151		(1,767)

Total	$	65,825	$	(1,398)	$	78,869	$	(62,901)	$	144,694	$	(64,299)


	December 31, 2010
	Less than Twelve Months				More than Twelve Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
U.S. Treasury securities	$	57,027	$	(909)	$	—	$	—	$	57,027	$	(909)
Obligations of states and political subdivisions		123,399		(3,467)		50		—		123,449		(3,467)
Residential mortgage-backed securities		226,135		(3,081)		—		—		226,135		(3,081)
Trust preferred securities		14,152		(250)		75,477		(59,115)		89,629		(59,365)
Corporate and other debt securities		7,971		(13)		8,761		(213)		16,732		(226)

Total	$	428,684	$	(7,720)	$	84,288	$	(59,328)	$	512,972	$	(67,048)

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, 2011 was 33 as compared to 153 at December 31, 2010.

At September 30, 2011, the unrealized losses reported for trust preferred securities relate to 15 single-issuer securities, mainly issued by bank holding companies. Of the 15 trust preferred securities, 6 were investment grade, 1 was non-investment grade, and 8 were not rated. Additionally, $39.4 million of the $62.4 million in unrealized losses in the trust preferred securities portfolio at September 30, 2011, 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 was required to defer its scheduled interest payments on each respective security issuance based upon an operating agreement with its bank regulators. The operating agreement with its bank regulators requires, among other things, the issuer to receive permission from the regulators prior to resuming its regularly scheduled interest payments on both security issuances. From the dates of deferral up to and including the bank holding company’s most recent regulatory filing as of June 30, 2011, the bank issuer continued to accrue and capitalize the interest owed, but not remitted to its trust preferred security holders, and at the holding company level it reported cash and cash equivalents in excess of the cumulative amount of accrued but unpaid interest owed on all of its junior subordinated debentures related to trust preferred securities.

In assessing whether a credit loss exists for the securities of the deferring bank issuer, Valley considers numerous factors, including, but not limited to, such factors highlighted in the “Other-Than-Temporary Impairment Analysis” section below. Specific to these securities, Valley’s conclusions were derived based on a thorough review of the deferring bank issuer’s financial condition, coupled with an analysis of external conditions which may adversely impact the issuer’s future ability to repay all of the principal and interest owed to Valley. The bank issuer’s principal subsidiary bank reported, in its bank regulatory filings, that it meets the regulatory capital minimum requirements to be considered a “well-capitalized institution” as of September 30, 2011 and December 31, 2010. The issuer’s bank subsidiary has consistently met the minimum well-capitalized requirements each quarter since the date of the interest deferral on both issuances. The issuer’s bank subsidiary did, however, report a net loss for the third quarter of 2011 due, in part, to a higher loan loss provision, non-cash net impairment charges on investment securities and other non-cash mark to market charges on certain financial assets mainly caused by market fluctuations. After review of all the financial data available at September 30, 2011, the overall financial condition of the bank subsidiary appeared to be reasonably consistent with its financial condition in second quarter of 2011exclusive of the aforementioned non-cash charges. The third quarter loss is not expected to impact the bank issuer’s future ability to repay the contractual principal and interest related to its trust preferred securities. We will closely assess the impact of this net loss on the issuer’s consolidated financial condition once all the pertinent financial data is made available in the issuer’s bank holding company regulatory filing as of September 30, 2011, which has not been issued to date.

During the deferral period, the bank issuer reported that it raised new common capital and increased all of its bank regulatory risk ratios by over 20 percent at December 31, 2010 and nearly 40 percent at June 30, 2011. The bank issuer’s financial condition at June 30, 2011 and December 31, 2010 improved from the dates of deferral as the issuer has implemented many strategies to reduce credit exposure, such as deleveraging its balance sheet of higher risk assets and liquidating certain nonperforming assets. Reported net income at the deferring bank issuer was positive for the year ended December 31, 2010 and for the six months ended June 30, 2011. Additionally when determining whether a credit loss impairment exists, Valley assesses the bank issuer’s deferral of regularly scheduled interest and principal payments and the likely time period until the issuer will be allowed to resume such payments. Valley’s assessment includes, but is not limited to, a review of the bank issuer’s operating agreement with its bank regulators and the mandatory requirements outlined in such agreement. The bank issuer reported that it substantially complied with the terms of the agreement within the notes to its audited 2010 and 2009 financial statements issued in March 2011 and December 2010, respectively. Valley has also reviewed a plan presented by the bank issuer’s management to their shareholders and the issuer’s subsequent performance each quarter-end in relation to the milestones outlined in the plan. The bank issuer’s ability to stay on target in improving its financial performance, enhancing its capital and stabilizing the credit quality of its loans were additional factors Valley considered when assessing the bank issuer’s deferral of scheduled interest payments each quarter.

Another variable Valley assesses in determining other-than-temporary impairment is whether the fair value of the bank issuer’s security has been less than its amortized cost for an extended period of time. The estimated fair value of the trust preferred securities is, in part, negatively impacted by the bank regulators’ mandate for the bank issuer to defer

quarterly scheduled interest payments. In calculating the fair value of these instruments, Valley developed on the assumptions used in calculating the discount rate used to discount future expected cash flows. In Valley’s analysis, the discount rate is comprised of both a base rate and credit rate calculation. The base rate, which was obtained from independent third parties, is largely tied to market factors such as liquidity and market interest rate expectations. The credit rate calculation is primarily a function of the credit risk assessment resulting from Valley’s impairment analysis. The fair value of the trust preferred securities of the deferring bank issuer was $39.4 million less than their amortized cost at September 30, 2011 as compared to $36.0 million below their amortized cost at September 30, 2009 (the quarterly reporting date nearest to the two deferral dates). The volatility in fair value from the date the issuer deferred is in large part due to fluctuations in general market conditions which impacted the illiquidity premium and aggregate levels of interest rates. The credit spread assigned to the issuer in Valley’s fair value estimate for the trust preferred securities has remained consistent from the deferral dates. Additionally, the duration of time in which the estimated fair value of the instruments has been less than amortized cost is largely due to the deferral of scheduled interest payments and an increase in the credit rate assigned to the issuer from the date of the securities’ issuance, coupled with a decrease in liquidity. Valley assesses the duration in which the securities’ fair value has been less than amortized cost in estimating each security’s future cash flows each quarter. However, Valley believes a greater weighting towards the issuer’s financial condition within its OTTI analysis and estimation of future cash flows is warranted due to the expected duration of the issuer’s regulatory agreement and its impact on the length of time the trust preferred securities’ estimated fair value will be below their amortized cost.

Based on the available deferring bank issuer information and Valley’s assessment of the expected duration of the deferral period, Valley believes that it will receive all principal and interest contractually due on both security issuances, and as such has concluded no credit impairment exists at September 30, 2011. Valley continues to closely monitor the credit risk of this issuer. Valley may be required to recognize other-than-temporary impairment charges on the trust preferred securities in future periods. On a go-forward basis, changes in several factors considered in Valley’s other-than-temporary impairment analysis, including adverse developments or trends regarding the bank issuer’s financial condition and quarterly operating results, or its agreement with the bank regulators, may require the recognition of credit impairment charges on these securities in earnings. Valley does not view each factor in isolation, but rather analyzes the collective impact of such factors on the bank issuer at the end of each reporting period. In Valley’s credit loss analysis, significance is placed on the issuer’s financial condition and capital position. Additionally, the terms and conditions of the issuer’s regulatory agreement, changes to the regulatory agreement and the issuer’s dialogue with the banking regulators are important variables used in Valley’s assessment of whether a credit loss exists. For example, a significant decline in the issuer’s capital position or a material adverse development in its agreement with the regulators would cause Valley to incur an impairment charge in such period. The impairment charge may be part or all of the combined amortized cost of the securities totaling $55.0 million and in any such event could also cause a reversal of interest accrued, but unpaid from the date of deferral on the securities. See the “Other-than-Temporary Impairment Analysis” section below for further details regarding the factors assessed in Valley’s impairment analysis.

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 capital requirements to be considered to be “well-capitalized institutions” at September 30, 2011.

Management does not believe that any individual unrealized loss as of September 30, 2011 included in the table above represents other-than-temporary impairment as management mainly attributes the declines in value to changes in interest rates, widening credit spreads, and lack of liquidity in the market place, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities. Valley does not have the intent to sell, nor is it more likely than not that Valley will be required to sell, the securities contained in the table above before the recovery of their amortized cost basis or maturity.

As of September 30, 2011, the fair value of investments held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $1.1 billion.

The contractual maturities of investments in debt securities held to maturity at September 30, 2011 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, 2011
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	163,529	$	163,711
Due after one year through five years		52,290		53,670
Due after five years through ten years		179,719		197,154
Due after ten years		491,185		441,599
Residential mortgage-backed securities		1,197,723		1,244,428

Total investment securities held to maturity	$	2,084,446	$	2,100,562

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 6.0 years at September 30, 2011.

Available for Sale

The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at September 30, 2011 and December 31, 2010 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
September 30, 2011
U.S. Treasury securities	$	40,023	$	25	$	—	$	40,048
U.S. government agency securities		82,880		1,053		(221)		83,712
Obligations of states and political subdivisions		21,296		1,539		—		22,835
Residential mortgage-backed securities		476,190		24,173		(4,914)		495,449
Trust preferred securities*		50,629		220		(9,800)		41,049
Corporate and other debt securities		42,688		2,776		(3,780)		41,684
Equity securities		47,977		1,995		(4,607)		45,365

Total investment securities available for sale	$	761,683	$	31,781	$	(23,322)	$	770,142

December 31, 2010
U.S. Treasury securities	$	162,404	$	1,406	$	—	$	163,810
U.S. government agency securities		88,926		26		(152)		88,800
Obligations of states and political subdivisions		28,231		1,234		(3)		29,462
Residential mortgage-backed securities		578,282		35,016		(2,940)		610,358
Trust preferred securities*		54,060		1,142		(14,119)		41,083
Corporate and other debt securities		53,379		2,612		(2,030)		53,961
Equity securities		48,724		812		(1,728)		47,808

Total investment securities available for sale	$	1,014,006	$	42,248	$	(20,972)	$	1,035,282

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

The age of unrealized losses and fair value of related securities available for sale at September 30, 2011 and December 31, 2010 were as follows:


	September 30, 2011
	Less than Twelve Months				More than Twelve Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
U.S. government agency securities	$	8,455	$	(221)	$	—	$	—	$	8,455	$	(221)
Residential mortgage-backed securities		44,452		(713)		24,198		(4,201)		68,650		(4,914)
Trust preferred securities		23,470		(902)		15,098		(8,898)		38,568		(9,800)
Corporate and other debt securities		3,208		(205)		6,400		(3,575)		9,608		(3,780)
Equity securities		22,670		(2,330)		13,088		(2,277)		35,758		(4,607)

Total	$	102,255	$	(4,371)	$	58,784	$	(18,951)	$	161,039	$	(23,322)


	December 31, 2010
	Less than Twelve Months				More than Twelve Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
U.S. government agency securities	$	66,157	$	(152)	$	—	$	—	$	66,157	$	(152)
Obligations of states and political subdivisions		1,146		(3)		—		—		1,146		(3)
Residential mortgage-backed securities		11,439		(350)		46,206		(2,590)		57,645		(2,940)
Trust preferred securities		1,262		(153)		33,831		(13,966)		35,093		(14,119)
Corporate and other debt securities		—		—		7,944		(2,030)		7,944		(2,030)
Equity securities		1,538		(243)		13,736		(1,485)		15,274		(1,728)

Total	$	81,542	$	(901)	$	101,717	$	(20,071)	$	183,259	$	(20,972)

The total number of security positions in the securities available for sale portfolio in an unrealized loss position at September 30, 2011 was 40 as compared to 43 at December 31, 2010.

Within the residential mortgage-backed securities category of the available for sale portfolio at September 30, 2011, substantially all of the $4.9 million of unrealized losses relate to 6 private label mortgage-backed securities. Of these 6 securities, 1 security had an investment grade rating, while 5 had a non-investment grade ratings at September 30, 2011. Four of the non-investment grade private label mortgage-backed securities with unrealized losses were other-than-temporarily impaired during 2009 and 2010. No additional estimated credit losses were recognized on these securities during the nine months ended September 30, 2011. See the “Other-Than-Temporary Impairment Analysis” section below.

At September 30, 2011, the unrealized losses for trust preferred securities in the table above relate to 3 pooled trust preferred securities and 12 single-issuer bank issued trust preferred securities. Most of the unrealized losses were attributable to the 3 pooled trust preferred securities and 4 single-issuer bank issued trust preferred securities with an aggregate amortized cost of $43.9 million and a fair value of $34.6 million. One of the three pooled trust preferred securities with an unrealized loss of $6.0 million had an investment grade rating at September 30, 2011. The other two pooled trust preferred securities were other-than-temporarily impaired in the first quarter of 2010, and additional estimated credit losses were recognized on one of these securities in the first quarter of 2011. See “Other-Than-Temporarily Impaired Securities” section below for more details. At September 30, 2011, 1 of the 4 single-issuer trust preferred securities classified as available for sale had an investment grade rating and the remaining 3 had non-investment grade ratings. These single-issuer trust preferred securities are all paying in accordance with their terms and have no deferrals of interest or defaults.

The unrealized losses more than twelve months totaling $3.6 million reported for corporate and other debt securities at September 30, 2011 relate to one bank issued corporate bond with a $10.0 million amortized cost that had an investment grade rating and has been paying in accordance with its contractual terms.

The unrealized losses on equity securities, including those more than twelve months, are related primarily to three perpetual preferred security positions with a combined $34.9 million amortized cost and a $4.5 million unrealized loss. At September 30, 2011, 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, 2011 represents any other-than-temporary impairment, except for the previously discussed impaired securities above as management mainly attributes the declines in fair 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, 2011, 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 $459 million.

The contractual maturities of investment securities available for sale at September 30, 2011, 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.


	September 30, 2011
	Amortized Cost		Fair Value
	(in thousands)
Due in one year	$	43,791	$	43,830
Due after one year through five years		2,408		2,479
Due after five years through ten years		87,222		90,284
Due after ten years		104,095		92,735
Residential mortgage-backed securities		476,190		495,449
Equity securities		47,977		45,365

Total investment securities available for sale	$	761,683	$	770,142

The weighted-average remaining expected life for residential mortgage-backed securities available for sale at September 30, 2011 was 5.3 years.

Other-Than-Temporary Impairment Analysis

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

In assessing the level of other-than-temporary impairment attributable to credit loss for debt securities, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings, while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the consolidated statements 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. The amortized cost basis of an impaired debt security is reduced by the portion of the total impairment related to credit loss.

For residential mortgage-backed securities, Valley estimates loss projections for each security by stressing the cash flows from the individual loans collateralizing the security using expected default rates, loss severities, and prepayment speeds, in conjunction with the underlying credit enhancement (if applicable) for each security. Based on collateral and origination vintage specific assumptions, a range of possible cash flows was identified to determine whether other-than-temporary impairment existed at September 30, 2011.

For the single-issuer trust preferred securities and corporate and other debt securities, Valley reviews each portfolio to determine if all the securities are paying in accordance with their terms and have no deferrals of interest or defaults. Over the past several years, many banking institutions have been required to defer trust preferred payments and a growing number of banking institutions have been put in receivership by the FDIC. A deferral event by a bank holding company for which we hold trust preferred securities may require us to recognize an other-than-temporary impairment charge if we determine that we no longer expect to collect all contractual interest and principal. A FDIC receivership for any single-issuer would result in an impairment and significant loss. Valley analyzes the performance of the issuers on a quarterly basis, including a review of performance data from the issuers’ most recent bank regulatory report, if applicable, to assess their credit risk and the probability of impairment of the contractual cash flows of the applicable security. 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 initially impaired in 2008 with additional estimated credit losses recognized during 2009 and the first quarter of 2010. One of the two pooled trust preferred securities had additional estimated credit losses recognized during the first quarter of 2011. See “Other-Than-Temporarily Impaired Securities” section below for further details.

The perpetual preferred securities, reported in equity securities, are hybrid investments that are assessed for impairment by Valley as if they were debt securities. Therefore, Valley assessed the creditworthiness of each security issuer, as well as any potential change in the anticipated cash flows of the securities as of September 30, 2011. Based on this analysis, management believes the declines in fair value of these securities are attributable to a lack of liquidity in the marketplace and are not reflective of any deterioration in the creditworthiness of the issuers.

Other-Than-Temporarily Impaired Securities

There were no impairment losses on securities recognized in earnings during the third quarters of 2011 and 2010. The following table provides information regarding our other-than-temporary impairment losses on securities recognized in earnings for the nine months ended September 30, 2011 and 2010.


	Nine Months Ended September 30,
	2011		2010
	(in thousands)
Available for sale:
Residential mortgage-backed securities	$	—	$	2,265
Trust preferred securities		825		2,377

Net impairment losses on securities recognized in earnings	$	825	$	4,642

For the nine months ended September 30, 2011, Valley recognized net impairment losses on securities in earnings totaling $825 thousand due to additional estimated credit losses on one of the two previously impaired pooled trust preferred securities. For the nine months ended September 30, 2010, Valley recognized net impairment charges totaling $4.6 million on a total of five individual private label mortgage-backed securities and two previously impaired pooled trust preferred securities.

At September 30, 2011, the five previously impaired private label mortgage-backed securities had a combined amortized cost of $44.5 million and fair value of $44.4 million, while the two previously impaired pooled trust preferred securities had a combined amortized cost and fair value of $5.4 million and $3.7 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, 2011 and 2010 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Sales transactions:
Gross gains	$	450		$	—		$	19,418		$	4,634
Gross losses		—			—			—			(96	)

	$	450		$	—		$	19,418		$	4,538

Maturities and other securities transactions:
Gross gains	$	414		$	120		$	622		$	172
Gross losses		(1	)		(8	)		(6	)		(79	)

	$	413		$	112		$	616		$	93

Total gains on securities transactions, net	$	863		$	112		$	20,034		$	4,631

During the nine months ended September 30, 2011, Valley recognized gross gains on sales transactions of $19.4 million, mainly due to the sale of $253.0 million in residential mortgage-backed securities issued by government sponsored agencies, perpetual preferred securities issued by Freddie Mac and Fannie Mae, and U.S Treasury securities that were classified as available for sale during the second quarter of 2011.

The following table presents the changes in the credit loss component of cumulative other-than-temporary impairment losses on debt securities classified as either held to maturity or available for sale that Valley has recognized in earnings, for which a portion of the impairment loss (non-credit factors) was recognized in other comprehensive income for the three and nine months ended September 30, 2011 and 2010:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Balance, beginning of period	$	11,076		$	10,660		$	10,500		$	6,119
Additions:
Initial credit impairments		—			—			—			124
Subsequent credit impairments		—			—			825			4,518
Reductions:
Accretion of credit loss impairment due to increase in expected cash flows		(109	)		(43	)		(358	)		(144	)

Balance, end of period	$	10,967		$	10,617		$	10,967		$	10,617

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 impairments recognized in earnings for credit impaired debt securities are presented as additions in two components based upon whether the current period is the first time the debt security was credit impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairment). The credit loss component is reduced if Valley sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) Valley receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures or (iii) the security is fully written down.

Trading Securities

The fair value of trading securities (consisting of 3 and 4 single-issuer bank trust preferred securities at September 30, 2011 and December 31, 2010, respectively) was $21.4 million and $31.9 million at September 30, 2011 and December 31, 2010, respectively. Interest income on trading securities totaled $500 thousand and $642 thousand for the three months ended September 30, 2011 and 2010, respectively, and $1.6 million and $1.9 million for the nine months ended September 30, 2011 and 2010, respectively.

Note 8. Loans

The detail of the loan portfolio as of September 30, 2011 and December 31, 2010 was as follows:


	September 30, 2011		December 31, 2010
	(in thousands)
Non-covered loans:
Commercial and industrial	$	1,833,211	$	1,825,066
Commercial real estate:
Commercial real estate		3,524,891		3,378,252
Construction		401,166		428,232

Total commercial real estate loans		3,926,057		3,806,484

Residential mortgage		2,172,601		1,925,430
Consumer:
Home equity		477,517		512,745
Automobile		785,443		850,801
Other consumer		122,862		88,614

Total consumer loans		1,385,822		1,452,160

Total non-covered loans		9,317,691		9,009,140

Covered loans:
Commercial and industrial	$	80,703	$	121,151
Commercial real estate		168,850		195,646
Construction		11,873		16,153
Residential mortgage		14,990		17,026
Consumer		5,980		6,679

Total covered loans		282,396		356,655

Total loans	$	9,600,087	$	9,365,795

FDIC loss-share receivable related to covered loans and foreclosed assets	$	78,602	$	89,359

Total non-covered loans are net of unearned discount and deferred loan fees totaling $7.9 million and $9.3 million at September 30, 2011 and December 31, 2010, respectively. Covered loans had outstanding contractual principal balances totaling approximately $418.7 million and $497.0 million at September 30, 2011 and December 31, 2010, respectively.

Covered Loans

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 utilizing the level-yield method over the life of each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through an adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Valuation allowances (recognized in the allowance for loan losses) on these impaired pools reflect only losses incurred after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received). The allowance for loan losses on covered loans (acquired through two FDIC-assisted transactions) is determined without consideration of the amounts recoverable through the FDIC loss-share agreements (see “FDIC loss-share receivable” below).

The Bank periodically evaluates the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. During the nine months ended September 30, 2011, on an aggregate basis the acquired pools of covered loans performed better than originally expected, and based on our current estimates, we expect to receive more future cash flows than originally modeled at the acquisition dates. For these pools with better than expected cash flows, the forecasted increase is recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans. Additionally, the FDIC loss-share receivable is prospectively reduced by the guaranteed portion of the additional amount expected to be received with a corresponding reduction to non-interest income.

Changes in the accretable yield for covered loans were as follows for the three and nine months ended September 30, 2011:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Balance at the beginning of the period	$	101,517		$	—		$	101,052		$	—
Accretable yield at the acquisition dates		—			61,356			—			69,659
Accretion		(12,122	)		(7,134	)		(28,640	)		(15,437	)
Net reclassification from non-accretable difference		—			—			16,983			—

Balance at the end of the period	$	89,395		$	54,222		$	89,395		$	54,222

Valley reclassified $17.0 million from the non-accretable difference for covered loans due to increases in expected cash flows for certain pools of covered loans during the nine months ended September 30, 2011. This amount is recognized prospectively as an adjustment to yield over the life of the individual pools.

FDIC Loss-Share Receivable

The receivable arising from the loss-sharing agreements (referred to as the “FDIC loss-share receivable” on our consolidated statements of financial condition) is measured separately from the covered loan portfolio because the agreements are not contractually part of the covered loans and are not transferable should the Bank choose to dispose of the covered loans.

Changes in the FDIC loss-share receivable for the nine months ended September 30, 2011 were as follows:


	Nine Months Ended September 30, 2011
	(in thousands)
Balance, beginning of the period	$	89,359
Discount accretion of the present value at the acquisition dates*		437
Prospective adjustment for additional cash flows*		(8,167	)
Increase due to impairment on covered loans*		16,932
Other reimbursable expenses*		2,787
Reimbursements from the FDIC		(22,746	)

Balance, end of the period	$	78,602

*	Valley recognized approximately $12.0 million in non-interest income for the nine months ended September 30, 2011 related to these items.

Loan Portfolio Risk Elements and Credit Risk Management

Credit risk management. For all of its loan types discussed below, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through cyclical economic circumstances.

Commercial and industrial loans. A significant proportion of Valley’s commercial and industrial loan portfolio is granted to long standing customers of proven ability, strong repayment performance, and high character. Underwriting standards are designed to assess the borrower’s ability to generate recurring cash flow sufficient to meet the debt service requirements of loans granted. While such recurring cash flow serves as the primary source of repayment, a significant number of the loans are collateralized by borrower assets intended to serve as a secondary source of repayment should the need arise. Anticipated cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value, or in the case of loans secured by accounts receivable, the ability of the borrower to collect all amounts due from its customers. Short-term loans may be made on an unsecured basis based on a borrower’s financial strength and past performance. Valley, in most cases, will obtain the personal guarantee of the borrower’s principals to mitigate the risk. Unsecured loans, when made, are generally granted to the Bank’s most credit worthy borrowers. At September 30, 2011, unsecured commercial and industrial loans totaled $343.7 million.

Commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real property. Loans generally involve larger principal balances and longer repayment periods as compared to commercial and industrial loans. Repayment of most loans is dependent upon the cash flow generated from the property securing the loan or the business that occupies the property. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy and accordingly conservative loan to value ratios are required at origination, as well as, stress tested to evaluate the impact of market changes relating to key underwriting elements. The properties securing the commercial real estate portfolio represent diverse types, with most properties located within Valley’s primary markets.

Construction loans. With respect to loans to developers and builders, Valley originates and manages construction loans structured on either a revolving or non-revolving basis, depending on the nature of the underlying development project. These loans are generally secured by the real estate to be developed and may also be secured by additional real estate to mitigate the risk. Non-revolving construction loans often involve the disbursement of substantially all committed funds with repayment substantially dependent on the successful completion and sale, or lease, of the project. Sources of repayment for these types of loans may be from pre-committed permanent loans from other lenders, sales of developed property, or an interim loan commitment from Valley until permanent financing is obtained elsewhere. Revolving construction loans (generally relating to single family residential construction) are controlled with loan advances dependent upon the presale of housing units financed. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential mortgages. Valley originates residential, first mortgage loans based on underwriting standards that comply with Fannie Mae and/or Freddie Mac requirements. Appraisals of real estate collateral are contracted directly with independent appraisers and not through appraisal management companies. The Bank’s appraisal management policy and procedure is in accordance with regulatory requirements and guidance issued by the Bank’s primary regulator. Credit scoring, using FICO^® and other proprietary, credit scoring models, is employed in the ultimate, judgmental credit decision by Valley’s underwriting staff. Valley does not use third party contract underwriting services. Residential mortgage loans include fixed and variable interest rate loans secured by one to four family homes generally located in northern and central New Jersey, New York City metropolitan area, and eastern Pennsylvania. Valley’s ability to be repaid on such loans is closely linked to the economic and real estate market conditions in this region. In deciding

whether to originate each residential mortgage, Valley considers the qualifications of the borrower as well as the value of the underlying property.

Home equity loans. Home equity lending consists of both fixed and variable interest rate products. Valley mainly provides home equity loans to its residential mortgage customers within the footprint of its primary lending territory. Valley generally will not exceed a combined (i.e., first and second mortgage) loan-to-value ratio of 70 percent when originating a home equity loan.

Automobile loans. Valley uses both judgmental and scoring systems in the credit decision process for automobile loans. Automobile originations (including light truck and sport utility vehicles) are largely produced via indirect channels, originated through approved automobile dealers. Automotive collateral is generally a depreciating asset and there are times in the life of an automobile loan where the amount owed on a vehicle may exceed its collateral value. Additionally, automobile charge-offs will vary based on strength or weakness in the used vehicle market, original advance rate, when in the life cycle of a loan a default occurs and the condition of the collateral being liquidated. Where permitted by law, and subject to the limitations of the bankruptcy code, deficiency judgments are sought and acted upon to ultimately collect all money owed, even when a default resulted in a loss at collateral liquidation. Valley uses a third party to actively track collision and comprehensive risk insurance required of the borrower on the automobile and this third party provides coverage to Valley in the event of an uninsured collateral loss.

Other consumer loans. Valley’s other consumer loan portfolio includes direct consumer term loans, both secured and unsecured. The other consumer loan portfolio includes minor exposures in credit card loans, personal lines of credit, personal loans and loans secured by cash surrender value of life insurance. Valley believes the aggregate risk exposure of these loans and lines of credit was not significant at September 30, 2011. At September 30, 2011, unsecured consumer loans totaled approximately $47.9 million, including $9.0 million of credit card loans.

Credit Quality

Past due and non-accrual loans. All loans are deemed to be past due when the contractually required principal and interest payments have not been received as they become due. Loans are placed on non-accrual status generally when they become 90 days past due and the full and timely collection of principal and interest becomes uncertain. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on nonaccrual loans are applied against principal. A loan may be restored to an accruing basis when it becomes well secured and is in the process of collection, or all past due amounts become current under the loan agreement and collectability is no longer doubtful.

The 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 because these loans are accounted for on a pooled basis. Management’s judgment is required in classifying loans in pools subject to ASC Subtopic 310-30 as performing loans, and is dependent on having a reasonable expectation about the timing and amount of the pool cash flows to be collected, even if certain loans within the pool are contractually past due.

The following table presents past due, non-accrual and current non-covered loans by loan portfolio class at September 30, 2011 and December 31, 2010:


	Past Due and Non-Accrual Loans*
	30-89 Days Past Due Loans		Accruing Loans 90 Days Or More Past Due		Non-Accrual Loans		Total Past Due Loans		Current Non-Covered Loans		Total Non-Covered Loans
					(in thousands)
September 30, 2011

Commercial and industrial	$	9,866	$	164	$	16,737	$	26,767	$	1,806,444	$	1,833,211
Commercial real estate:
Commercial real estate		22,220		268		41,453		63,941		3,460,950		3,524,891
Construction		—		2,216		14,449		16,665		384,501		401,166

Total commercial real estate loans		22,220		2,484		55,902		80,606		3,845,451		3,926,057

Residential mortgage		12,556		721		31,401		44,678		2,127,923		2,172,601
Consumer loans:
Home equity		530		—		2,379		2,909		474,608		477,517
Automobile		8,639		429		503		9,571		775,872		785,443
Other consumer		287		54		763		1,104		121,758		122,862

Total consumer loans		9,456		483		3,645		13,584		1,372,238		1,385,822

Total	$	54,098	$	3,852	$	107,685	$	165,635	$	9,152,056	$	9,317,691

December 31, 2010
Commercial and industrial	$	13,852	$	12	$	13,721	$	27,585	$	1,797,481	$	1,825,066
Commercial real estate:
Commercial real estate		14,563		—		32,981		47,544		3,330,708		3,378,252
Construction		2,804		196		27,312		30,312		397,920		428,232

Total commercial real estate loans		17,367		196		60,293		77,856		3,728,628		3,806,484

Residential mortgage		12,682		1,556		28,494		42,732		1,882,698		1,925,430
Consumer loans:
Home equity		1,045		—		1,955		3,000		509,745		512,745
Automobile		13,328		686		539		14,553		836,248		850,801
Other consumer		265		37		53		355		88,259		88,614

Total consumer loans		14,638		723		2,547		17,908		1,434,252		1,452,160

Total	$	58,539	$	2,487	$	105,055	$	166,081	$	8,843,059	$	9,009,140

*	Past due loans and non-accrual loans exclude loans that were acquired as part of the Liberty Pointe Bank and The Park Avenue Bank FDIC-assisted transactions. These loans are accounted for on a pooled basis.

Impaired loans. Non-accrual commercial and industrial loans and commercial real estate loans over $250 thousand and all troubled debt restructured loans are individually evaluated for impairment. The value of an impaired loan is measured based upon the underlying anticipated method of payment consisting of either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent, and its payment is expected solely based on the underlying collateral. If the value of an impaired loan is less than its carrying amount, impairment is recognized through a provision to the allowance for loan losses. Collateral dependent impaired loan balances are written down to the current fair value of each loan’s underlying collateral resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s collection process. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as a specific valuation allowance in the allowance for credit losses. Accrual of interest is discontinued on an impaired loan when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that collection of interest is doubtful. Cash collections on impaired loans are generally credited to the loan balance, and no interest income is recognized on these loans until the principal balance has been determined to be fully collectible.

Residential mortgage loans and consumer loans generally consist of smaller balance homogeneous loans that are collectively evaluated for impairment, and are specifically excluded from the impaired loan portfolio, except where the loan is classified as a troubled debt restructured loan.

The following tables present the information about non-covered impaired loans by loan portfolio class at September 30, 2011 and December 31, 2010:


	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment*			Unpaid Contractual Principal Balance		Related Allowance
						(in thousands	)
September 30, 2011

Commercial and industrial	$	6,876	$	31,965	$	38,841		$	50,156	$	7,918
Commercial real estate:
Commercial real estate		29,230		52,584		81,814			89,734		5,727
Construction		7,860		20,847		28,707			29,371		3,249

Total commercial real estate loans		37,090		73,431		110,521			119,105		8,976

Residential mortgage		3,507		17,331		20,838			21,118		2,934
Consumer loans:
Home equity		127		28		155			155		4

Total consumer loans		127		28		155			155		4

Total	$	47,600	$	122,755	$	170,355		$	190,534	$	19,832


December 31, 2010

Commercial and industrial	$	3,707	$	28,590	$	32,297		$	42,940	$	6,397
Commercial real estate:
Commercial real estate		19,860		43,393		63,253			66,869		3,991
Construction		24,215		15,854		40,069			40,867		2,150

Total commercial real estate loans		44,075		59,247		103,322			107,736		6,141

Residential mortgage		788		17,797		18,585			18,864		2,683
Consumer loans:
Home equity		—		83		83			83		5

Total consumer loans		—		83		83			83		5

Total	$	48,570	$	105,717	$	154,287		$	169,623	$	15,226

The following table presents, by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2011:


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
			(in thousands)
Commercial and industrial	$	37,648	$	393	$	37,986	$	1,132
Commercial real estate:
Commercial real estate		81,638		739		71,968		2,095
Construction		31,741		845		33,435		1,107

Total commercial real estate loans		113,379		1,584		105,403		3,202

Residential mortgage		18,149		188		18,251		569
Consumer loans:
Home equity		28		—		28		1

Total consumer loans		28		—		28		1

Total	$	169,204	$	2,165	$	161,668	$	4,904

Interest income recognized on a cash basis, totaled $865 thousand for the three and nine months ended September 30, 2011.

Troubled Debt Restructured Loans

From time to time, Valley may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who maybe experiencing financial difficulties. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a troubled debt restructured loan (“TDR”). Purchased impaired loans, including Valley’s covered loans, are excluded from the TDR disclosures below because they are evaluated for impairment on a pool by pool basis. When a loan within the pool is modified as a TDR it is not removed from its pool.

The majority of the concessions made for TDRs involve lowering the monthly payments on loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. They rarely result in the forgiveness of principal or accrued interest. In addition, we frequently obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

As a result of the adoption of ASU 2011-02, Valley reassessed all loan restructurings that occurred on or after January 1, 2011 for potential identification as TDRs and has concluded that the adoption of ASU 2011-02 did not materially impact the number of TDRs identified by Valley, or the specific reserves for such loans included in our allowance for loan losses at September 30, 2011. Performing TDRs (not reported as non-accrual loans) totaled $103.7 million and $89.7 million as of September 30, 2011 and December 31, 2010, respectively. Non-performing TDRs totaled $6.4 million and $9.4 million as of September 30, 2011 and December 31, 2010, respectively. All TDRs are included in impaired loans presented in the section above.

The following tables present non-covered loans by loan class modified as TDRs during the three and nine months ended September 30, 2011. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below, represent carrying amounts immediately prior to the modification and at September 30, 2011, respectively.


	Three Months Ended September 30, 2011
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			($ in thousands)
Commercial and industrial		1	$	12,952	$	12,952
Commercial real estate:
Commercial real estate		3		2,887		2,882
Construction		1		2,000		2,000

Total commercial real estate		4		4,887		4,882
Residential mortgage		1		75		75

Total		6	$	17,914	$	17,909


	Nine Months Ended September 30, 2011
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			($ in thousands)
Commercial and industrial*		17	$	19,145	$	18,999
Commercial real estate:
Commercial real estate		6		11,927		11,856
Construction		2		3,350		3,314

Total commercial real estate		8		15,277		15,170
Residential mortgage		4		514		506

Total		29	$	34,936	$	34,675

*	Includes 8 finance leases with pre and post-modification outstanding recorded investments totaling $335 thousand and $285 thousand, respectively.

The majority of the TDR concessions made during the three and nine months ended September 30, 2011 involved an extension of the loan term and/or an interest rate reduction. The specific reserve for loan losses allocated to loans modified as TDRs during the three and nine months ended September 30, 2011 totaled $883 thousand and $5.4 million, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 9. There were no charge-offs resulting from loans modified as TDRs during the three and nine months ended September 30, 2011.

The following table presents non-covered loans modified as TDRs within the previous 12 months from September 30, 2011, and for which there was a payment default (90 days or more past due) during the three and nine months ended September 30, 2011:


Troubled Debt	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Restructurings Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
			($ in thousands)
Commercial and industrial		1	$	1,044		1	$	1,044
Commercial real estate:
Commercial real estate		—		—		2		1,757
Construction		—		—		—		—

Total commercial real estate		—		—		2		1,757

Residential mortgage		1		75		1		75

Total		2	$	1,119		4	$	2,876

Credit quality indicators. Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes. Under Valley’s internal risk rating system, loan relationships could be classified as “Special Mention”, “Substandard”, “Doubtful”, and “Loss.” Substandard loans include loans that exhibit well-defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged-off immediately to the allowance for loan losses. Loans that do not currently pose a sufficient risk to warrant classification in one of the aforementioned categories, but pose weaknesses that deserve management’s close attention are deemed to be Special Mention. Loans rated as “Pass” loans do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants.

The following table presents the risk category of loans by class of loans based on the most recent analysis performed at September 30, 2011 and December 31, 2010.


Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard			Doubtful		Total
						(in thousands	)

September 30, 2011
Commercial and industrial	$	1,628,920	$	99,993	$	103,997		$	301	$	1,833,211
Commercial real estate		3,311,710		67,586		145,595			—		3,524,891
Construction		316,060		39,723		45,186			197		401,166

Total	$	5,256,690	$	207,302	$	294,778		$	498	$	5,759,268


December 31, 2010
Commercial and industrial	$	1,638,939	$	92,131	$	93,920		$	76	$	1,825,066
Commercial real estate		3,175,333		77,186		125,733			—		3,378,252
Construction		324,292		48,442		55,498			—		428,232

Total	$	5,138,564	$	217,759	$	275,151		$	76	$	5,631,550

For residential mortgages, automobile, home equity, and other consumer loan portfolio classes, Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of September 30, 2011 and December 31, 2010:


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Loans
			(in thousands)

September 30, 2011
Residential mortgage	$	2,141,200	$	31,401	$	2,172,601
Home equity		475,138		2,379		477,517
Automobile		784,940		503		785,443
Other consumer		122,099		763		122,862

Total	$	3,523,377	$	35,046	$	3,558,423


December 31, 2010
Residential mortgage	$	1,896,936	$	28,494	$	1,925,430
Home equity		510,790		1,955		512,745
Automobile		850,262		539		850,801
Other consumer		88,561		53		88,614

Total	$	3,346,549	$	31,041	$	3,377,590

Valley evaluates the credit quality of its covered loan pools based on the expectation of the underlying cash flows. The balance of covered loan pools with an adverse change in the expected cash flows since the date of a

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