FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES (Note 3)

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 December 31, 2011 and 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:
	December 31, 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. government agency securities	$	90,748	$	—	$	90,748	$	—
Obligations of states and political subdivisions		20,214		—		20,214		—
Residential mortgage-backed securities		310,137		—		259,977		50,160
Trust preferred securities		63,858		19,576		17,131		27,151
Corporate and other debt securities		39,610		30,603		9,007		—
Equity securities		41,953		23,506		18,447		—

Total available for sale		566,520		73,685		415,524		77,311
Trading securities		21,938		—		21,938		—
Loans held for sale ⁽¹⁾		25,169		—		25,169		—
Other assets ⁽²⁾		5,211		—		5,211		—

Total assets	$	618,838	$	73,685	$	467,842	$	77,311

Liabilities
Junior subordinated debentures issued to
VNB Capital Trust I ⁽³⁾	$	160,478	$	160,478	$	—	$	—
Other liabilities ⁽²⁾		21,854		—		21,854		—

Total liabilities	$	182,332	$	160,478	$	21,854	$	—


	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 $24.3 million and $58.4 million at December 31, 2011 and 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 December 31, 2011 and 2010.

The changes in Level 3 assets measured at fair value on a recurring basis for the years ended December 31, 2011 and 2010 are summarized below:


	2011						2010
	Trading Securities			Available For Sale Securities			Trading Securities			Available For Sale Securities
	(in thousands)
Balance, beginning of the period	$	21,903		$	138,655		$	32,950		$	156,612
Transfers into Level 3:
Residential mortgage-backed securities		—			8,798			—			—
Transfers out of Level 3:
Residential mortgage-backed securities		—			(44,771	)		—			—
Trust preferred securities		(21,903	)		(17,397	)		(10,567	)		(532	)
Corporate and other debt securities		—			(12,914	)		—			(852	)
Equity securities		—			(9,353	)		—			—
Transfers from held-to-maturity⁽¹⁾		—			23,452			—			—
Total net (losses) gains for the period included in:
Net income		—			(1,654	)		(480	)		—
Other comprehensive income		—			765			—			9,626
Purchases		—			—			—			3,517
Settlements		—			(8,270	)		—			(29,716	)

Balance, end of the period	$	—		$	77,311		$	21,903		$	138,655

Net losses included in net income for the
period relating to assets held at year end ⁽²⁾	$	—		$	(19,968	)⁽⁴⁾	$	(480	)⁽³⁾	$	(4,642	)⁽⁴⁾

⁽¹⁾	Represents impaired trust preferred securities issued by one bank holding company transferred at fair value from held-to-maturity to available-for-sale at December 31, 2011.

⁽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, including $18.3 million related to trust preferred securities transferred from held-to-maturity at December 31, 2011.

Transfers into and out of Level 3 assets are generally made in response to a decrease or an increase, respectively, in the availability of observable market data used in the securities' pricing obtained primarily through independent pricing services or dealer market participants. See further details regarding the valuation techniques used for the fair value measurement of the financial instruments below.

During 2011, there were no transfers of assets between Level 1 and Level 2.

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 accruing investment securities in which Valley has not previously recognized an other-than-temporary impairment charges are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. For certain securities, the inputs used by either dealer market participants or an independent pricing service, may be derived from unobservable market information (Level 3 inputs). In these instances, Valley evaluates the appropriateness and quality of the assumption and the resulting price. In addition, Valley reviews the volume and level of activity for all available for sale and trading securities and attempts 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 utilizes 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 utilizes 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, Valley prepared present value cash flow models for trust preferred securities, and certain private label mortgage-backed securities. 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. 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.

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. In validating the fair value calculation from an independent valuation advisor, Valley reviews accuracy of the inputs and the appropriateness of the unobservable inputs utilized in the valuation to ensure the fair value calculation is reasonable from a market participant perspective.

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.

The fair value of corporate debt securities under Level 3 at December 31, 2010 was calculated based on the estimated future cash flows discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred. The discount rate for each security was applied using a pricing matrix based on credit, security type and maturity characteristics to determine the fair value. The quoted prices received from either market participants or independent pricing services were weighted with the internal price estimate to determine the fair value of each instrument.

For the fair value of certain trading securities, consisting of trust preferred securities, under Level 3 at December 31, 2010, Valley prepared present value cash flow models incorporating the contractual cash flow of each security adjusted, if necessary, for potential changes in the amount or timing of cash flows due to the underlying credit worthiness of each issuer. The resulting estimated future cash flows were discounted at a yield determined by reference to similarly structured securities for which observable orderly transactions occurred.

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. 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 December 31, 2011 and 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 (see Note 12 for details) and therefore, the preferred stock's quoted price moves in a similar manner to the estimated fair value and current settlement price of the junior subordinated debentures. The preferred stock's quoted price includes market considerations for Valley's credit and non-performance risk and is deemed to represent the transfer price that would be used if the junior subordinated debenture were assumed by a third party. Valley's potential credit risk and changes in such risk did not materially impact the fair value measurement of the junior subordinated debentures at December 31, 2011 and 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 December 31, 2011 and 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 in 2011 and 2010 that were still held in the balance sheet at each respective year end:


	Significant Unobservable Inputs (Level 3) As of December 31,
	2011		2010
	(in thousands)
Collateral dependent impaired loans*	$	66,854	$	53,330
Loan servicing rights		9,078		11,328
Foreclosed assets		15,874		19,986

*	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 years ended December 31, 2011 and 2010, 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 loan charge-offs to the allowance for loan losses totaled $16.9 million and $8.3 million for the years ended December 31, 2011 and 2010, respectively. At December 31, 2011, collateral dependent impaired loans (mainly consisting of commercial and industrial, commercial real estate, and construction loans) with a recorded investment of $74.3 million were reduced by specific valuation allowance allocations totaling $7.4 million to a reported net carrying amount of $66.9 million. At December 31, 2010, collateral dependent impaired loans with a recorded investment of $54.4 million were reduced by specific valuation allowance allocations totaling $1.1 million to a reported net carrying amount of $53.3 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. For the years ended December 31, 2011 and 2010, Valley recognized net impairment charges of $1.5 million and $551 thousand, respectively, on loan servicing rights.

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 adjusted based on customized discounting criteria. During the years ended December 31, 2011 and 2010, foreclosed assets measured at fair value upon initial recognition and subsequent re-measurement totaled $15.9 million and $20.0 million, respectively. In connection with the measurement and initial recognition of the aforementioned foreclosed assets, Valley recognized charge-offs to the allowance for loan losses totaling $3.9 million and $8.1 million during 2011 and 2010, respectively. During 2011, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $1.3 million included in non-interest expense.

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 years ended December 31, 2011, 2010 and 2009:


Reported in Consolidated Statements of Financial Condition	Reported in Consolidated Statements of Income	Gains (Losses) on Change in Fair Value
		2011
		2011			2010			2009
		(in thousands)
Assets:
Available for sale securities	Net impairment losses onsecurities	$	(19,968	)*	$	(4,642	)	$	(6,352	)
Trading securities	Trading gains (losses), net		1,015			(1,056	)		5,394
Loans held for sale	Gains on sales of loans, net		10,699			12,591			8,937
Liabilities:
Junior subordinated debentures issued to capital trusts	Trading gains (losses), net		1,256			(5,841	)		(15,828	)

		$	(6,998	)	$	1,052		$	(7,849	)

*	Includes $18.3 million related to impaired trust preferred securities transferred from held-to-maturity to available for sale at December 31, 2011.

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 December 31, 2011 and 2010:


	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial assets
Cash and due from banks	$	372,566	$	372,566	$	302,629	$	302,629
Interest bearing deposits with banks		6,483		6,483		63,657		63,657
Investment securities held to maturity		1,958,916		2,027,197		1,923,993		1,898,872
Investment securities available for sale		566,520		566,520		1,035,282		1,035,282
Trading securities		21,938		21,938		31,894		31,894
Loans held for sale		25,169		25,169		58,958		58,958
Net loans		9,665,839		9,645,517		9,241,091		9,035,066
Accrued interest receivable		52,527		52,527		59,126		59,126
Federal Reserve Bank and Federal Home Loan Bank stock⁽¹⁾		129,669		129,669		139,778		139,778
Derivatives⁽¹⁾		5,211		5,211		8,414		8,414
Financial liabilities
Deposits without stated maturities		7,171,718		7,171,718		6,630,763		6,630,763
Deposits with stated maturities		2,501,384		2,557,119		2,732,851		2,783,680
Short-term borrowings		212,849		215,179		192,318		195,360
Long-term borrowings		2,726,099		3,154,150		2,933,858		3,201,090
Junior subordinated debentures issued to capital trusts (carrying amount includes fair value of $160,478 at December 31, 2011 and $161,734 at December 31, 2010 for VNB Capital Trust I)		185,598		186,098		186,922		187,480
Accrued interest payable⁽²⁾		3,798		3,798		4,344		4,344
Derivatives⁽²⁾		21,854		21,854		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 December 31, 2011 and 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 because of the short maturity of these items.

Investment securities held to maturity. Fair values are based on prices obtained through an independent pricing service or dealer market participants with which Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair 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 evaluates the appropriateness and quality of each price. Additionally, Valley reviews the volume and level of activity for all classes of held to maturity securities and attempts 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 based on Level 3 inputs. If applicable, the adjustment to fair value is 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 the loan. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Accrued interest receivable and payable. The carrying amounts of accrued interest approximate their fair value due to the short-term nature of these items.

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.