LOANS (Note 5)

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


	2011		2010
	(in thousands)
Non-covered loans:
Commercial and industrial	$	1,878,387	$	1,825,066
Commercial real estate:
Commercial real estate		3,574,089		3,378,252
Construction		411,003		428,232

Total commercial real estate loans		3,985,092		3,806,484

Residential mortgage		2,285,590		1,925,430
Consumer:
Home equity		469,604		512,745
Automobile		772,490		850,801
Other consumer		136,634		88,614

Total consumer loans		1,378,728		1,452,160

Total non-covered loans		9,527,797		9,009,140

Covered loans:
Commercial and industrial	$	83,742	$	121,151
Commercial real estate		160,651		195,646
Construction		6,974		16,153
Residential mortgage		15,546		17,026
Consumer		4,931		6,679

Total covered loans		271,844		356,655

Total loans	$	9,799,641	$	9,365,795

Total non-covered loans are net of unearned discount and deferred loan fees totaling $7.5 million and $9.3 million at December 31, 2011 and 2010, respectively. Covered loans had outstanding contractual principal balances totaling approximately $398.2 million and $497.0 million at December 31, 2011 and 2010, respectively.

Valley purchased approximately $33 million of loans almost entirely consisting of automobile loans during the year ended December 31, 2011. There were no sales of loans, other than from the held for sale loan portfolio, or transfers from loans held for investment to loans held for sale during the year ended December 31, 2011.

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), and aggregated and accounted for as pools of loans based on common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of 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. See the "Loans Acquired Through Transfer (Including Covered Loans)" section of Note 1 for further details regarding accounting policies for covered loans.

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 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 the 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 cash flows 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 year ended December 31, 2011 and 2010:


	2011			2010
	(in thousands)
Balance, beginning of period	$	101,052		$	—
Acquisitions		—			69,659
Accretion		(40,345	)		(20,547	)
Net reclassification from non-accretable difference		6,017			51,940

Balance, end of period	$	66,724		$	101,052

Valley reclassified $6.0 million and $51.9 million during 2011 and 2010, respectively, from the non-accretable difference for covered loans due to increases in expected cash flows for certain pools of covered loans. 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 FDIC loss-share receivable for the years ended December 31, 2011 and 2010 were as follows:


	2011			2010
	(in thousands)
Balance, beginning of the period	$	89,359		$	—
Acquisitions		—			108,000
Discount accretion of the present value at the acquisition dates		582			1,166
Effect of additional cash flows on covered loans (prospective recognition)		(10,592	)		—
Increase due to impairment on covered loans		19,520			5,102
Other reimbursable expenses		3,893			2,561
Reimbursements from the FDIC		(28,372	)		(27,470	)

Balance, end of the period	$	74,390		$	89,359

Valley recognized approximately $13.4 million and $6.3 million in non-interest income for the years ended December 31, 2011 and 2010, respectively, related to discount accretion and the post-acquisition adjustments to the FDIC loss-share receivable included in the table above.

Related Party Loans

In the ordinary course of business, Valley has granted loans to certain directors, executive officers and their affiliates (collectively referred to as "related parties"). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability.

The following table summarizes the changes in the total amounts of loans and advances to the related parties during the year ended December 31, 2011:


	2011
	(in thousands)
Outstanding at beginning of year	$	198,750
New loans and advances		18,012
Repayments		(23,190	)
Sales		(230	)

Outstanding at end of year	$	193,342

All loans to related parties are performing as of December 31, 2011.

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. Unsecured commercial and industrial loans totaled $337.7 million and $451.7 million at December 31, 2011 and 2010, respectively.

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, the 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 December 31, 2011. Unsecured consumer loans totaled approximately $66.5 million and $30.7 million including $9.1 million and $9.7 million of credit card loans at December 31, 2011 and 2010, respectively.

Credit Quality

The following tables present past due, non-accrual and current non-covered loans by loan portfolio class at December 31, 2011 and 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)
December 31, 2011
Commercial and industrial	$	4,347	$	657	$	26,648	$	31,652	$	1,846,735	$	1,878,387
Commercial real estate:
Commercial real estate		13,115		422		42,186		55,723		3,518,366		3,574,089
Construction		2,652		1,823		19,874		24,349		386,654		411,003

Total commercial real estate loans		15,767		2,245		62,060		80,072		3,905,020		3,985,092

Residential mortgage		8,496		763		31,646		40,905		2,244,685		2,285,590
Consumer loans:
Home equity		989		13		2,700		3,702		465,902		469,604
Automobile		7,794		303		461		8,558		763,932		772,490
Other consumer		192		35		749		976		135,658		136,634

Total consumer loans		8,975		351		3,910		13,236		1,365,492		1,378,728

Total	$	37,585	$	4,016	$	124,264	$	165,865	$	9,361,932	$	9,527,797

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 FDIC-assisted transactions. These loans are accounted for on a pooled basis.

If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $6.9 million, $7.9 million and $6.5 million for the years ended December 31, 2011, 2010, and 2009, respectively; none of these amounts were included in interest income during these periods. Interest income recognized on a cash basis for loans classified as non-accrual totaled $1.6 million (including $1.1 million of interest income on impaired loans) for the year ended December 31, 2011. Interest income recognized on cash basis was immaterial for the years ended December 31, 2010, and 2009.

Impaired loans. Impaired loans consisting of 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. See the "Allowance for Credit Losses" section of Note 1 for details regarding the accounting policy for impaired loans.

The following table presents the information about impaired loans by loan portfolio class at December 31, 2011 and 2010:


	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance



	(in thousands)
December 31, 2011
Commercial and industrial	$	6,193	$	48,665	$	54,858	$	71,111	$	11,105
Commercial real estate:
Commercial real estate		26,741		56,978		83,719		91,448		7,108
Construction		4,253		19,998		24,251		28,066		1,408

Total commercial real estate loans		30,994		76,976		107,970		119,514		8,516

Residential mortgage		998		20,007		21,005		22,032		3,577
Consumer loans:
Home equity		—		242		242		242		45

Total consumer loans		—		242		242		242		45

Total	$	38,185	$	145,890	$	184,075	$	212,899	$	23,243

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 year ended December 31, 2011:


	December 31, 2011
	Average Recorded Investment		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	43,095	$	1,457
Commercial real estate:
Commercial real estate		76,542		3,043
Construction		31,897		1,141

Total commercial real estate loans		108,439		4,184

Residential mortgage		19,015		706
Consumer loans:
Home equity		109		3

Total consumer loans		109		3

Total	$	170,658	$	6,350

The average balance of impaired loans was approximately $104.1 million and $49.8 million for the years ended December 31, 2010, and 2009, respectively. Interest income recognized on total impaired loans during the years ended December 31, 2010 and 2009 was immaterial.

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, consisting of 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. The concessions rarely result in the forgiveness of principal or accrued interest. In addition, Valley frequently obtains additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and Valley's 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 during the third quarter of 2011, Valley reassessed all loan restructurings that occurred on or after January 1, 2011 for potential identification as TDRs and concluded that the adoption 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.

Performing TDRs (not reported as non-accrual loans) totaled $101.0 million and $89.7 million as of December 31, 2011 and 2010, respectively. Non-performing TDRs totaled $15.5 million and $9.4 million as of December 31, 2011 and 2010, respectively. All TDRs are classified as impaired loans and are included in the impaired loans section above.

The following table presents non-covered loans by loan class modified as TDRs during the year ended December 31, 2011. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at December 31, 2011, respectively.


			December 31, 2011
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstading Recorded Investment
			($ in thousands)
Commercial and industrial*		27	$	29,142	$	28,866
Commercial real estate:
Commercial real estate		7		12,890		12,777
Construction		2		3,422		3,422

Total commercial real estate		9		16,312		16,199
Residential mortgage		5		1,237		1,223
Consumer		1		58		58

Total		42	$	46,749	$	46,346

*	Includes 9 finance leases with pre and post-modification outstanding recorded investments totaling $372 thousand and $294 thousand, respectively.

The majority of the TDR concessions made during the year ended December 31, 2011 involved an extension of the loan term and/or an interest rate reduction. The TDRs presented in the table above had allocated specific reserves for loan losses totaling $9.0 million at December 31, 2011. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 6. There were no charge-offs resulting from loans modified as TDRs during the year ended December 31, 2011.

Non-covered loans modified as TDRs within the 12 months previous to December 31, 2011, for which there was a subsequent default (90 days or more past due) consisted of one commercial loan and two residential mortgages with recorded investments of $1.9 million and $399 thousand at December 31, 2011, respectively.

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 weakness 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 as 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 December 31, 2011 and 2010.


Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
December 31, 2011
Commercial and industrial	$	1,669,943	$	95,726	$	112,186	$	532	$	1,878,387
Commercial real estate		3,350,475		82,612		141,002		—		3,574,089
Construction		329,848		42,845		38,114		196		411,003

Total	$	5,350,266	$	221,183	$	291,302	$	728	$	5,863,479

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 and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2011 and 2010:


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Loans
	(in thousands)
December 31, 2011
Residential mortgage	$	2,253,944	$	31,646	$	2,285,590
Home equity		466,904		2,700		469,604
Automobile		772,029		461		772,490
Other consumer		135,885		749		136,634

Total		3,628,762		35,556		3,664,318

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, derived from the aging status and by payment activity. The following table presents the recorded investment in covered loans by class based on individual loan payment activity as of December 31, 2011 and 2010.


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Loans
	(in thousands)
December 31, 2011
Commercial and industrial	$	67,424	$	16,318	$	83,742
Commercial real estate		112,047		48,604		160,651
Construction		623		6,351		6,974
Residential mortgage		10,118		5,428		15,546
Consumer		4,931		—		4,931

Total		195,143		76,701		271,844

December 31, 2010
Commercial and industrial	$	97,319	$	23,832	$	121,151
Commercial real estate		149,817		45,829		195,646
Construction		6,411		9,742		16,153
Residential mortgage		13,894		3,132		17,026
Consumer		6,679		—		6,679

Total	$	274,120	$	82,535	$	356,655