Note 7. Loans

Purchased Credit-Impaired (“PCI”) loans, which include loans acquired in FDIC-assisted transactions (“covered loans”) subject to loss-sharing agreements, are loans acquired at a discount that is due, in part, to credit quality. The detail of the loan portfolio as of September 30, 2012 and December 31, 2011 was as follows:


	September 30, 2012						December 31, 2011
	Non-PCI Loans		PCI Loans		Total		Non-PCI Loans		PCI Loans		Total
	(in thousands)
Non-covered loans:
Commercial and industrial	$	1,847,650	$	271,220	$	2,118,870	$	1,878,387	$	-	$	1,878,387
Commercial real estate:
Commercial real estate		3,752,963		692,375		4,445,338		3,574,089		-		3,574,089
Construction		397,292		38,647		435,939		411,003		-		411,003

Total commercial real estate loans		4,150,255		731,022		4,881,277		3,985,092		-		3,985,092

Residential mortgage		2,482,363		17,191		2,499,554		2,285,590		-		2,285,590
Consumer:
Home equity		445,402		46,936		492,338		469,604		-		469,604
Automobile		789,248		-		789,248		772,490		-		772,490
Other consumer		159,667		451		160,118		136,634		-		136,634

Total consumer loans		1,394,317		47,387		1,441,704		1,378,728		-		1,378,728

Total non-covered loans	$	9,874,585	$	1,066,820	$	10,941,405	$	9,527,797	$	-	$	9,527,797

Covered loans:
Commercial and industrial	$	-	$	51,706	$	51,706	$	-	$	83,742	$	83,742
Commercial real estate		-		136,304		136,304		-		160,651		160,651
Construction		-		4,751		4,751		-		6,974		6,974
Residential mortgage		-		11,760		11,760		-		15,546		15,546
Consumer		-		3,012		3,012		-		4,931		4,931

Total covered loans		-		207,533		207,533		-		271,844		271,844

Total loans	$	9,874,585	$	1,274,353	$	11,148,938	$	9,527,797	$	271,844	$	9,799,641

Total non-covered loans are net of unearned discount and deferred loan fees totaling $3.8 million and $7.5 million at September 30, 2012 and December 31, 2011, respectively. The outstanding balances for non-covered PCI loans and covered loans totaled $1.1 billion and $344.9 million at September 30, 2012, respectively, and $399.6 million for covered loans at December 31, 2011.

Valley transferred $123.1 million of residential mortgage loans from loans held for investment to loans held for sale during the three months ended September 30, 2012. There were no sales of loans, other than from the held for sale loan portfolio during the three and nine months ended September 30, 2012 and 2011.

Purchased Credit-Impaired Loans (Including Covered Loans)

PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are 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. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools.

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the PCI loans acquired in the State Bancorp (see Note 3) acquisition as of January 1, 2012 and PCI loans purchased from another financial institution as of March 28, 2012:


	January 1, 2012			March 28, 2012
	(in thousands)
Contractually required principal and interest	$	1,333,686		$	144,357
Contractual cash flows not expected to be collected (non-accretable difference)		(66,467	)		(9,111	)

Expected cash flows to be collected		1,267,219			135,246
Interest component of expected cash flows (accretable yield)		(168,271	)		(17,991	)

Fair value of acquired loans	$	1,098,948		$	117,255

The following table presents changes in the accretable yield for PCI loans during the three and nine months ended September 30, 2012 and 2011:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
				(in thousands)
Balance, beginning of period	$	209,417		$	101,517		$	66,724		$	101,052
Acquisitions		-			-			186,262			-
Accretion		(21,284	)		(12,122	)		(64,853	)		(28,640	)
Net reclassification from non-accretable difference		-			-			-			16,983

Balance, end of period	$	188,133		$	89,395		$	188,133		$	89,395

The net reclassification from the non-accretable difference in the table above is due to increases in expected cash flows for certain pools of covered loans and is recognized prospectively as an adjustment to the 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 three and nine months ended September 30, 2012 and 2011 were as follows:


	Three Months ended September 30,						Nine Months ended September 30,
	2012			2011			2012			2011
	(in thousands)
Balance, beginning of the period	$	59,741		$	80,179		$	74,390		$	89,359
Discount accretion of the present value at the acquisition dates		82			146			244			437
Effect of additional cash flows on covered loans (prospective recognition)		(2,091	)		(2,889	)		(5,959	)		(8,167	)
Increase due to impairment on covered loans		-			-			-			16,932
Other reimbursable expenses		1,619			1,166			4,173			2,787
Reimbursements from the FDIC		(7,413	)		-			(14,950	)		(22,746	)
Other		-			-			(5,960	)		-

Balance, end of the period	$	51,938		$	78,602		$	51,938		$	78,602

The aggregate effect of changes in the FDIC loss-share receivable was a reduction in non-interest income of $390 thousand and $1.6 million for the three months ended September 30, 2012 and 2011, respectively, and a $7.5 million reduction and a $12.0 million increase to non-interest income for the nine months ended September 30, 2012 and 2011, respectively. The nine months of 2012 reductions in non-interest income included $6.0 million related to the FDIC’s portion of the estimated losses on unused lines of credit assumed in the FDIC-assisted transactions, which have expired. Other non-interest income for the nine months ended September 30, 2012 included $7.4 million for the reversal of the estimated losses on the expired lines of credit.

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 $367.6 million and $337.7 million at September 30, 2012 and December 31, 2011, 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 generally comply with Fannie Mae and/or Freddie Mac requirements. Appraisals and valuations of real estate collateral are contracted directly with independent appraisers or from valuation services 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 75 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, 2012. Unsecured consumer loans totaled approximately $78.8 million and $66.5 million, including $8.5 million and $9.1 million of credit card loans, at September 30, 2012 and December 31, 2011, respectively.

Credit Quality

The following tables present past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis) by loan portfolio class at September 30, 2012 and December 31, 2011:


	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-PCI Loans		Total Non-PCI Loans
					(in thousands)
September 30, 2012

Commercial and industrial	$	17,459	$	-	$	12,296	$	29,755	$	1,817,895	$	1,847,650
Commercial real estate:
Commercial real estate		6,236		221		58,541		64,998		3,687,965		3,752,963
Construction		-		1,024		15,139		16,163		381,129		397,292

Total commercial real estate loans		6,236		1,245		73,680		81,161		4,069,094		4,150,255

Residential mortgage		16,961		1,051		31,564		49,576		2,432,787		2,482,363
Consumer loans:
Home equity		466		-		2,828		3,294		442,108		445,402
Automobile		5,760		180		344		6,284		782,964		789,248
Other consumer		237		17		659		913		158,754		159,667

Total consumer loans		6,463		197		3,831		10,491		1,383,826		1,394,317

Total	$	47,119	$	2,493	$	121,371	$	170,983	$	9,703,602	$	9,874,585


	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-PCI Loans		Total Non-PCI 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

Impaired loans. Impaired loans, consisting of non-accrual commercial and industrial loans and commercial real estate loans over $250 thousand and all loans which were modified in troubled debt restructurings, are individually evaluated for impairment. PCI loans are not classified as impaired loans because they are accounted for on a pool basis. The following tables present the information about impaired loans by loan portfolio class at September 30, 2012 and December 31, 2011:


	Recorded Investment With No Related Allowance		Recorded Investment With Related Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
			(in thousands)
September 30, 2012
Commercial and industrial	$	3,474	$	39,514	$	42,988	$	48,081	$	9,051
Commercial real estate:
Commercial real estate		25,267		83,522		108,789		123,785		11,067
Construction		7,483		12,822		20,305		23,934		708

Total commercial real estate loans		32,750		96,344		129,094		147,719		11,775

Residential mortgage		7,855		18,420		26,275		28,158		3,090
Consumer loans:
Home equity		1,642		264		1,906		2,269		15

Total consumer loans		1,642		264		1,906		2,269		15

Total	$	45,721	$	154,542	$	200,263	$	226,227	$	23,931


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

The following tables present, by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2012 and 2011:


	Three Months Ended September 30,
	2012				2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
			(in thousands)
Commercial and industrial	$	43,184	$	347	$	37,648	$	393
Commercial real estate:
Commercial real estate		108,561		993		81,638		739
Construction		21,920		97		31,741		845

Total commercial real estate loans		130,481		1,090		113,379		1,584

Residential mortgage		26,325		225		18,149		188
Consumer loans:
Home equity		1,908		2		28		-

Total consumer loans		1,908		2		28		-

Total	$	201,898	$	1,664	$	169,204	$	2,165


	Nine Months Ended September 30,
	2012				2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
			(in thousands)

Commercial and industrial	$	49,272	$	1,095	$	37,986	$	1,132
Commercial real estate:
Commercial real estate		99,939		1,984		71,968		2,095
Construction		21,882		183		33,435		1,107

Total commercial real estate loans		121,821		2,167		105,403		3,202

Residential mortgage		22,804		599		18,251		569
Consumer loans:
Home equity		829		9		28		1

Total consumer loans		829		9		28		1

Total	$	194,726	$	3,870	$	161,668	$	4,904

Interest income recognized on a cash basis, included in the table above was immaterial for the three and nine months ended September 30, 2012 and 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 may be 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”). Valley’s PCI loans are excluded from the TDR disclosures below because they are evaluated for impairment on a pool by pool basis. When an individual PCI loan within a pool is modified as a TDR, it is not removed from its pool. All TDRs are classified as impaired loans and are included in the impaired loan disclosures above.

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.

Performing TDRs (not reported as non-accrual loans) totaled $109.3 million and $101.0 million as of September 30, 2012 and December 31, 2011, respectively. Non-performing TDRs totaled $34.6 million and $15.5 million as of September 30, 2012 and December 31, 2011, respectively. During the third quarter of 2012, Valley classified 26 and 18 residential mortgage and home equity loans, respectively, totaling $7.4 million as non-performing TDRs because the borrower’s obligation has been discharged in bankruptcy and the borrower has not re-affirmed the debt. Of the $7.4 million in loans, approximately $3.0 million of the loans were performing in accordance with contractual loan terms at September 30, 2012. All of these loans were deemed TDRs and collateral dependent impaired loans due to the implementation of newly issued Office of the Comptroller of the Currency (OCC) guidance. To the extent that the recorded principal remains collectible, interest on such loans may be recognized on a cash basis.

The following tables present non-PCI loans, by loan portfolio class that were modified as TDRs during the three and nine months ended September 30, 2012 and 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 post modification carrying amounts at September 30, 2012 and 2011, respectively.


	Three Months Ended September 30, 2012						Three Months Ended September 30, 2011
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	($ in thousands)
Commercial and industrial⁽¹⁾		3	$	11,512	$	11,503		1	$	12,952	$	12,952
Commercial real estate:
Commercial real estate		3		3,971		3,968		3		2,887		2,882
Construction		1		493		293		1		2,000		2,000

Total commercial real estate		4		4,464		4,261		4		4,887		4,882
Residential mortgage⁽²⁾		28		6,566		6,463		1		75		75
Consumer⁽²⁾		18		1,641		1,641		-		-		-

Total		53	$	24,183	$	23,868		6	$	17,914	$	17,909


	Nine Months Ended September 30, 2012						Nine Months Ended September 30, 2011
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	($ in thousands)
Commercial and industrial⁽¹⁾		16	$	31,212	$	27,828		17	$	19,145	$	18,999
Commercial real estate:
Commercial real estate		17		39,697		39,256		6		11,927		11,856
Construction		5		7,204		3,935		2		3,350		3,314

Total commercial real estate		22		46,901		43,191		8		15,277		15,170
Residential mortgage⁽²⁾		41		10,344		8,817		4		514		506
Consumer⁽²⁾		20		1,710		1,706		-		-		-

Total		99	$	90,167	$	81,542		29	$	34,936	$	34,675

⁽¹⁾	Includes 8 finance leases with pre and post-modification outstanding recorded investments totaling $335 thousand and $285 thousand, respectively, for the nine months ended September 30, 2011. There were no material modifications to finance leases during 2012.

⁽²⁾	Includes 26 residential mortgage and 18 home equity loans with the outstanding recorded investment (both pre and post-modification) of $5.8 million and $1.6 million respectively, that were classified as TDRs due to the OCC guidance issued in the third quarter of 2012.

The majority of the TDR concessions within the commercial and industrial and commercial real estate loan portfolios made during the three and nine months ended September 30, 2012, and 2011 involved an extension of the loan term and/or an interest rate reduction, and personal bankruptcies (defined as legal concessions in OCC guidance released in the third quarter of 2012) within the residential mortgage and consumer loan portfolios. The TDRs presented in the table above had allocated specific reserves for loan losses totaling $3.3 million and $5.4 million at September 30, 2012 and 2011, respectively. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 8. Charge-offs resulting from loans modified as TDRs during the three and nine months ended September 30, 2012 and 2011 were immaterial.

The following table presents non-PCI loans modified as TDRs within the previous 12 months from, and for which there was a payment default (90 days or more past due) during the three and nine months ended September 30, 2012:


Troubled Debt Restructurings Subsequently Defaulted	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts	Recorded Investment
			($ in thousands)
Commercial and industrial		1	$	979	2	$	1,616
Commercial real estate		-		-	1		1,093
Residential mortgage		-		-	1		58

Total		1	$	979	4	$	2,767

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 (excluding PCI loans) by class of loans based on the most recent analysis performed at September 30, 2012 and December 31, 2011.


Credit exposure - by internally assigned risk rating	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
September 30, 2012
Commercial and industrial	$	1,672,602	$	64,492	$	110,332	$	224	$	1,847,650
Commercial real estate		3,549,638		49,531		153,794		-		3,752,963
Construction		336,396		34,928		25,968		-		397,292

Total	$	5,558,636	$	148,951	$	290,094	$	224	$	5,997,905


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

For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), 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, 2012 and December 31, 2011:


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total Loans
	(in thousands)
September 30, 2012
Residential mortgage	$	2,450,799	$	31,564	$	2,482,363
Home equity		442,574		2,828		445,402
Automobile		788,904		344		789,248
Other consumer		159,008		659		159,667

Total	$	3,841,285	$	35,395	$	3,876,680


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

Valley evaluates the credit quality of its PCI loan pools based on the expectation of the underlying cash flows of each pool, derived from the aging status and by payment activity of individual loans within the pool. The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of September 30, 2012 and December 31, 2011.


Credit exposure - by payment activity	Performing Loans		Non-Performing Loans		Total PCI Loans
	(in thousands)
September 30, 2012
Commercial and industrial	$	318,415	$	4,511	$	322,926
Commercial real estate		770,914		57,765		828,679
Construction		32,927		10,471		43,398
Residential mortgage		24,473		4,478		28,951
Consumer		48,974		1,425		50,399

Total	$	1,195,703	$	78,650	$	1,274,353


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