2 0 0 3 A n n u a l R e p o r t
H i s t o r i c a l F i n a n c i a l Da t a
Valley National Bancorp is a regional bank holding company
with $9.9 billion in assets as of December 31, 2003.
Valley National Bank, its principal subsidiary, is a super com-
munity bank that operates 129 branch offices in 83 communities
throughout 10 counties in northern New Jersey and Manhattan.
Historical Financial Data (1983–2003)*
(Dollars in millions, except for share data)
Year
End
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
Total
Assets
Net
Income
Diluted
Earnings
Per Share (7) Assets
Return on
Average
Return on
Average
Equity
Dividends
Per Share
Stock Splits
and Dividends
$9,881
$153.4
$1.62
1.63%
24.21%
$0.89
5/03 - 5%
Stock Dividend
9,148
8,590
6,426
6,360
5,541
5,091
4,687
154.6 (1)
135.2 (2)
106.8
1.57
1.32
1.28
106.3 (3)
1.20
97.3 (4)
85.0
1.15
1.05
67.5 (5)
0.92
4,586
62.6 (6)
0.84
3,744
3,605
3,357
3,055
2,149
1,975
1,835
1,663
1,615
1,471
1,355
933
59.0
56.4
43.4
31.7
28.6
36.0
34.2
32.1
29.6
24.2
17.5
14.8
0.93
0.90
0.70
0.51
0.48
0.59
0.55
0.52
0.49
0.40
0.33
0.30
1.78
1.68
1.72
1.75
1.82
1.67
1.47
1.40
1.60
1.62
1.36
1.29
1.44
1.92
2.00
2.02
1.99
1.73
1.64
1.82
23.59
19.70
20.28
18.35
18.47
18.88
17.23
16.60
20.03
21.42
19.17
15.40
14.54
19.93
20.96
22.95
24.90
23.76
24.84
27.49
0.85
5/02 - 5:4
Stock Split
0.79
0.74
0.70
0.65
0.55
0.50
0.48
0.46
5/01 - 5%
Stock Dividend
5/00 - 5%
Stock Dividend
5/99 - 5%
Stock Dividend
5/98 - 5:4
Stock Split
5/97 - 5%
Stock Dividend
5/96 - 5%
Stock Dividend
5/95 - 5%
Stock Dividend
5/94 - 10%
Stock Dividend
0.36
4/93 - 5:4
Stock Split
0.32
0.30
0.30
0.29
0.26
0.25
0.21
0.17
0.11
0.09
4/92 - 3:2
Stock Split
7/88 - 3:2
Stock Split
5/86 - 3:2
Stock Split
2/85 - 2:1
Stock Split
5/83 - 2:1
Stock Split
All per share amounts have been adjusted retroactively for stock splits and stock dividends during the periods presented.
(1) Includes a tax benefi t of $8.75 million due to the restructuring of a subsidiary into a REIT.
(2) Includes a charge of $7.0 million, net of tax, recorded in connection with the Merchants New York Bancorp, Inc. merger.
(3) Includes a charge of $2.2 million, net of tax, recorded in connection with the Ramapo Financial Corp. merger.
(4) Includes a charge of $3.2 million, net of tax, recorded in connection with the Wayne Bancorp, Inc. merger.
(5) Includes a $3.8 million FDIC SAIF assessment, net of tax.
(6) Includes a charge of $5.4 million, net of tax, recorded in connection with the Lakeland First Financial Group, Inc. merger.
(7) Beginning in 1997, earnings per share is presented on a diluted basis.
*Data for years prior to 2001 exclude Merchants New York Bancorp, Inc.; for years prior to 1999 exclude
Ramapo Financial Corp.; for years prior to 1998 exclude Wayne Bancorp, Inc.; for years prior to 1997 exclude
Midland Bancorp, Inc.; and for years prior to 1995 exclude Lakeland First Financial Group, Inc.
Valley National Bancorp 1
To O u r S h a r e h o l d e r s
2003 was another successful year
for Valley. For the year ended
December 31, 2003, Valley
reported net income per diluted share of
$1.62 or $153.4 million. We were able to
take advantage of opportunities to increase
earnings per share, despite declining
interest rates, a higher corporate tax rate
and uncertain economic conditions. We
achieved a return on average shareholder’s
equity of 24.21 percent and a return on
average assets of 1.63 percent. Our
efficiency ratio of 47.4 percent continues
to rank us as one of the best commercial
banks in the country.
An increase in loan volume helped to
minimize the margin compression we faced
as a result of the decline in interest rates
in 2003. Total loans increased 7.1 percent
to $6.2 billion from $5.8 billion in 2002.
Inclusive of loans we chose to sell, loans
increased 14.8 percent for the year. Our
residential mortgage department reached
a momentous milestone during 2003 by
closing over $1.3 billion in mortgage loans.
Valley’s deposit base experienced
significant growth as total deposits increased
by 7.2 percent to $7.2 billion. Dedication
and service to local communities elevated
our municipal account relationships 32.2
percent during 2003 to $572 million.
Valley’s cost of average total deposits for
the year was 1.02 percent, down from
1.56 percent in the prior year.
Maintaining Asset Quality
Throughout the year, we faced intense
competition from bank and non-bank
lenders. Nevertheless, Valley maintained
its traditional underwriting standards while
increasing loan origination volume. At
year-end, total non-performing assets
totaled 0.37 percent of loans, among the
best of our peer group.
Strategic Growth
Valley remains committed to its expansion
strategy of highly-focused growth within
approximately 50 miles of our headquar-
ters in Wayne, New Jersey. This proximity
enables Valley to expand its franchise by
capitalizing on the excellent demographics
and high population density of our New
Jersey and New York service territory,
while maintaining our super-community
banking model.
We continued to expand our
franchise in Manhattan with the opening
of our eighth New York City location. Our
market share in the northern New Jersey
marketplace also increased in 2003 with
the opening of our Union City location.
Expansion plans in New Jersey for 2004
include branches in Moonachie, Bound
Brook, Caldwell, Chester, Cranford,
Edgewater, Hillsborough, Jersey City,
Rivervale and two additional locations
in Manhattan. We continued to incorporate
our new branding scheme through renova-
tions that upgraded our exterior signage
and offices to be more visible and to create
a customer-friendly atmosphere.
To help service the changing financial
needs of our customers, Valley continued to
grow its specialized non-traditional banking
services. We merged our two title insurance
agencies under the name “Valley National
Title Services” and established a presence
in New York by opening a New York title
service agency in 2003.
Exceeding Customer Expectations
Valley continues to maintain its
commitment to exceeding customer
expectations every day, by delivering the
highest quality service with innovative
technologies, traditional banking products
and a personal, friendly and approachable
atmosphere.
We recognize the importance of
convenience and continue to enhance our
customers’ banking experience by offering
Sunday hours at 22 locations throughout
our branch network. Our customer service
center is now available 24 hours a day,
seven days a week. We’ve expanded our
Internet presence at www.valleynationalbank.
com and introduced our Kids First Savings
ClubSM website at www.vnbkids.com, an
interactive site designed to educate children
about money and banking.
We also introduced an exciting
new customer service product called the
Our efficiency ratio of
47.4 percent continues
to rank us as one of the
best commercial banks
in the country.
We recognize the
importance of customer
convenience by offering
Sunday hours at 22
locations throughout
our branch network.
We continued to apply
our new branding scheme
by upgrading our exterior
signage to be more visible
while creating customer-
friendly interiors.
Perfect SwitchSM, a program developed to
seamlessly transition new customers when
moving their banking relationship to
Valley from another financial institution.
Throughout 2003, we continued our
role as a concerned corporate citizen with
extensive and long-standing ties to the
community. As a bank with deep roots
in the community, we are dedicated
to improving the quality of life in the
neighborhoods where we do business.
We support and work closely with local
civic, charitable, cultural and other non-
profit groups. Valley understands that its
success is directly tied to the prosperity
of the residents and local businesses in
our communities.
Enhancing Shareholder Value
On May 16, 2003, the Board of Directors
issued a 5 percent stock dividend while
maintaining our cash dividend at $.90
per share. This marked the 34th time in
the last 35 years that Valley increased
its dividend payout. Valley’s Board of
Directors has never reduced the regular
cash dividend in the bank’s 76-year
history and strongly believes that cash
dividends are an important component
of shareholder value.
A Vision for the Future
Valley’s highly focused strategy is based on
increasing our ability to serve the financial
needs of our marketplace effectively. Our
strategic growth reinforces Valley’s brand
identity at a time of ongoing mega-mergers
and acquisitions in the banking community.
This consolidation trend offers Valley an
opportunity and a competitive advantage
in developing new banking relationships
with a customer base that appreciates local
stability and the hands-on approach offered
by Valley’s senior management staff. Valley
remains steadfast in its traditional approach
of promoting personal banking relationships
with each of our customers. It’s this funda-
mental concept of “accessibility” which
differentiates Valley from many of our
competitors and helps us succeed in a very
competitive environment.
On behalf of our directors, the Valley
management team and our valued employees,
thank you for your continued support.
Gerald H. Lipkin
Chairman of the Board,
President & CEO
2 Valley National Bancorp
Valley National Bancorp 3
Ex ecutive Management
Our Mission at Valley
is to provide superior
banking services in a
prompt, accurate and
courteous manner.
Peter Crocitto
Executive Vice President
Alan D. Eskow
Executive Vice President & CFO
Albert L. Engel
Executive Vice President
James G. Lawrence
Executive Vice President
Valley celebrated its 10th year on
the New York Stock Exchange and
welcomed three new board members.
Robert M. Meyer
Executive Vice President
Robert J. Mulligan
President, Financial Services
4 Valley National Bancorp
left to right...
Eric P. Edelstein
Private Investor
H. Dale Hemmerdinger, President
The Hemmerdinger Corporation
Mary J. Steele Guilfoile, Chairman
MG Advisors, Inc.
Boa rd of Di r ec tors
left to right...
Walter H. Jones, III, Esq.
Retired
Barnett Rukin
Chief Executive Officer
SLX Capital Management
Wilma Falduto
Assistant Secretary
Richard S. Miller, Esq.
Managing Partner
Williams, Caliri, Miller,
Otley & Stern
Pamela Bronander
Vice President
KMC Mechanical Inc.
Peter Southway
Retired
Spencer B. Witty
Director Emeritus
Richard F. Tice
Retired
Gerald H. Lipkin
Chairman of the Board,
President & CEO
Andrew B. Abramson
President and Chief
Executive Officer
The Value Group, Inc.
Leonard J. Vorcheimer
Principal
LJV Enterprises
Robert Rachesky
Private Investor
Robert E. McEntee
Management Consultant
Charles J. Baum
President
Baum Bros. Imports, Inc.
Gerald Korde
President
Birch Lumber Company, Inc.
Joseph Coccia, Jr.
Private Investor
Robinson Markel, Esq.
KMZ Rosenman
Graham O. Jones, Esq.
Partner
Jones & Jones
Valley National Bancorp 5
To enhance our standard
commercial lending
services, Valley’s new
Professionals Group
was formed to offer
personalized banking
services to legal and
accounting professionals.
C o m m e r c i a l L e n d i n g
As a result of the growth of our
loan portfolio, we have expanded our
staff of experienced loan officers and
support personnel to maintain the same
high level of customer service and timely
loan response our customers have learned
to expect.
In 2004, we will continue to
expand our commercial lending activi-
ties by broadening our relationships with
legal, accounting and other professional
service firms who are in a position to
recommend a strong, customer-focused
lending institution to their clients.
In 2003, Valley continued to be
a leading provider of commercial
loans to small and middle market
borrowers. Valley offers a full array of
business credit products including com-
mercial loans, lines of credit, asset based
loans, commercial mortgages, commercial
construction loans, tract financing, letters
of credit and Small Business Administra-
tion and EDA government guaranteed
loans. In addition, our Valley Commercial
Capital, LLC subsidiary provides for
general aviation debt financing and
commercial equipment leasing.
Our emphasis on personalized,
one-on-one banking, along with provid-
ing a quick turnaround on loan requests,
has continued to serve us well during this
period. Businesses know we are available
to meet their legitimate needs for funds
throughout the economic cycle. They also
know they have direct access to everyone
at Valley, from account officers to the
Chairman.
Valley provides financial services to
companies across the industrial spectrum.
From the small business community to
major industries, Valley offers specialized
services and dynamic products, making us
a true business partner our customers can
count on for their financial needs.
left to right... Richard P. Garber, First Senior
Vice President, Commercial Mortgages and
Robert E. Farrell, First Senior Vice President,
Commercial Lending
6 Valley National Bancorp
left to right... Alfred Sorrentino, Jr., First Vice President
and Christopher J. Coiley, First Vice President
Walter M. Horsting
First Senior Vice President
Kermit R. Dyke
First Senior Vice President
John H. Prol
First Senior Vice President
Valley National Bancorp 7
C o n s u m e r L e n d i n g
competing against aggressive factory
financing plans for quality loans has been
a difficult challenge, Valley’s auto lending
team successfully increased volume while
achieving the highest credit standards.
We remain dedicated to meeting
the borrowing needs of our customers in
the most convenient and efficient manner
possible. This means adapting to the
ever changing lifestyle of the consumer
including extending banking hours
throughout our branches and providing
a 24/7 Customer Service Support Center.
Valley customers always have access to
retail lending products, rates and services
by accessing www.valleynationalbank.
com. All of these opportunities offer the
customer the choice of a “click, dial or
smile” when deciding how to bank
with Valley.
The continued strength of the
residential mortgage market
in 2003 provided Valley with a
high volume of home financing opportu-
nities in our service area. Historically low
interest rates, coupled with the volume
of real estate sales activity, offered us a
competitive opportunity to assist many
consumers in their need for financing.
Valley’s role in supporting the home
financing needs of our market included a
wide array of coordinated retail banking
efforts. We offered a variety of opportu-
nities for the customer to initiate their
financing requests through branch office
contact, the Internet or our 24-Hour
Telephone Banking Service.
Highly automated centralized
processing, decision making and funding
of loans allowed Valley to maximize
operational efficiencies in handling a
record volume of loans.
Through the efforts of Valley’s
title services company, we were able to
provide a strategic advantage to our
borrowers, assuring accurate and timely
funding of their loans. Fulfilling customer
loan requests quickly and efficiently
resulted in a positive experience for our
customers and a high number of new
customer referrals.
Automobile lending has always
been a vital component of Valley’s
consumer products. Our focus on loan
originations directly from the region’s
automobile dealers paid off in record
loan production during 2003. Although
We found new opportuni-
ties to cross-sell our title
services while handling a
record number of home
mortgage applications.
left to right... Thomas Sparkes, Senior
Vice President, Consumer Lending and
Elizabeth De Laney, Senior Vice President,
Residential Mortgage
left to right... Caryn Lebowitz, Assistant Vice President
with Wesley B. Livesey, Jr., Vice President and Thomas
J. Moreland, Assistant Vice President
Valley’s direct auto dealer
relationships paid off with
record loan production
despite aggressive factory
financing offers.
8 Valley National Bancorp
Valley National Bancorp 9
R e t a i l B a n k i n g
Valley continued to expand its
basic banking product and
service lines to meet the ever-
changing needs of our dynamic market.
While we remained dedicated to providing
traditional, highly personalized banking
services throughout our branch network,
we also enhanced the wide array of
financial resources and information
available on our Internet site.
In 2003, we opened our new Union
City branch on Bergenline Avenue and
44th Street, and our eighth Manhattan
branch at the corner of 6th Avenue and
26th Street. Valley continues to focus on
the expansion of our traditional branch
network, as well as the upgrading of the
interior design and exterior signage of our
existing branch network by incorporating
our new branding look and logo. During
2004, we have plans to open eleven
additional branches throughout our
primary service area.
To provide a more convenient
banking experience, branch hours were
extended and 22 offices in our network
now offer Sunday branch banking hours.
Furthermore, our Customer Service Call
Center is now available 24 hours a day,
seven days a week.
In an effort to provide more efficient
customer service, Valley initiated a major
Customer Relationship Management
computer system throughout our branch
network in 2003. This new system has
already improved our daily operating
efficiency while increasing sales and
productivity at the branch level.
We continued to introduce innova-
tive products and services in 2003 such
as Perfect CheckingSM, our free checking
account offered to new Valley customers,
and the Valley Student RewardsSM Checking
Account which offers young adults the
opportunity to manage their own account
for the first time.
We also introduced The Perfect
SwitchSM, a high level of customer service
that ensures a seamless experience for
new or current account holders. The
Perfect Switch facilitates the transition
of funds, automatic bill pay and direct
deposits when customers move their
banking relationship to Valley from
another financial institution.
As part of our commitment to
financial literacy, we launched the
innovative Kids First Savings ClubSM
website, www.vnbkids.com, which
focuses on our popular Kids First
Savings Club account. This website is
an educational tool for children to learn
about money through interactive games
and even includes a virtual tour of a
bank branch.
We continue to believe that our
“high touch, high service” approach
gives Valley a competitive edge over
banks many times our size.
With an emphasis on
providing a positive
customer experience,
we rebranded our branch
offices in Manhattan. The
new look is serving as a
brand model for remod-
eling existing branches
and designing de novo
branches.
One of our most significant
deposit products to date,
Valley’s Kids First Savings
ClubSM Accounts have
totaled almost 45,000
accounts by year end.
left to right... Javier Carrera, Branch Manager
at Valley’s Manhattan office located at 1040
6th Avenue and Barbara Mohrbutter, Senior
Vice President, Retail Banking
left to right... Edna Rios, Branch Manager, Union City
and Gala Silnitsky, Management Associate with Kids
First spokeskids, Val and Lee, join in opening day
festivities at Valley’s Union City office
Bernadette M. Mueller
Senior Vice President
Andrea T. Onorato
Senior Vice President
10 Valley National Bancorp
Valley National Bancorp 11
Our asset management
companies, New Century
Asset Management Corpo-
ration and Hallmark Capital
Management, Inc., achieved
growth in profits and assets
under management.
F i n a n c i a l S e r v i c e s
The insurance professionals of
Masters Coverage Corp., acquired in
2002, offer bank customers a wide array
of insurance services with expertise in
property and casualty, auto, life and
health products.
In January of 2003, Glen Rauch
Securities, Inc. joined the Valley family.
For our customers interested in fixed
income and tax free securities, they offer
retail sales and municipal underwriting
for public entities.
All of the companies in this division
are wholly owned subsidiaries of Valley
National Bank and are led by well-
respected specialists in their respective
industries. They provide a valuable source
of fee based income for the Bank and
expert financial services for our customers.
During 2003, we continued
to focus on the growth of our
Financial Services Division
through an acquisition of specialized
non-traditional banking services. This
adds another dimension to everyday
banking for our customers, offering
them yet another avenue to meet their
financial service needs while maintaining
a relationship with the bank they’ve come
to trust over the years.
2003 was an exciting and success-
ful year for all the companies in our
Financial Services Division. Our asset
management companies, New Century
Asset Management Corporation and
Hallmark Capital Management, Inc.,
achieved growth in profits and assets
under management as the stock market
helped increase stock valuations.
We merged our two title insurance
agencies under the name “Valley National
Title Services, Inc.”. This new brand
identity, coupled with the mortgage
refinancing boom, helped grow our
agency to become one of the largest in
New Jersey. In April, we opened a New
York agency to further enhance our
position as a premier provider of title
services in New York and New Jersey.
left to right... Peter S. Hagerman, President
& CEO, Hallmark Capital Management, Inc.
and Robert C. Kleiber, President & CEO, New
Century Asset Management Corporation
12 Valley National Bancorp
Glen R. Rauch, President & CEO,
Glen Rauch Securities, Inc.
Joel J. Reinfeld
President
Valley National Title Division
Saul J. Friedland
Executive Vice President
Masters Coverage Corp.
Arthur A. Schwartz
Executive Vice President
Masters Coverage Corp.
Michael Daniels
President
Masters Coverage Corp.
Valley National Bancorp 13
2003 brought about the
aggressive expansion of
Corporate and Government
Services with a record
number of new
relationships formed.
Corporate & Govern me nt Se rv i c es
Reporting and On-line Stop Payments.
Clients employing this service can
securely manage their cash position
from the office or from home 24 hours
a day, 7 days a week.
In 2004, Corporate and Government
Services will further expand Valley’s com-
prehensive Cash Management product
line with the addition of Positive Pay,
improved Escrow Account Management
Services and enhancements to VNB
Connect PlusSM. Small business customers
will find banking at Valley is easier and
more convenient than ever before with
the introduction of VNB ConnectSM,
a new online business banking package
expressly designed for Valley’s small-
to-mid-sized business customers.
The Corporate and Government
Services Department enables
our commercial, not-for-profit
and government banking clients to utilize
the most up-to-date tools to effectively
manage cash flow. Product offerings
include Lockbox and Remittance
Processing, Sweep Accounts, Controlled
Disbursements, Payroll Direct Deposit
and Account Reconcilement Services.
2003 brought about the aggressive
expansion of Corporate and Government
Services with exciting new developments
in both Government Banking and Cash
Management.
Our public sector clients enjoyed
the convenience and ease of our new
Government Interest Checking Accounts,
as well as the expansion of Valley’s
Government Services to include
Municipal Leasing and full-service
Public Finance. Government clients
were quick to respond to these
developments, with Valley realizing
unprecedented public funds deposit
growth in 2003.
Corporate and Government Services
introduced VNB Connect PlusSM, a new
Internet-based, state-of-the-art treasury
workstation. The service offers a wide
range of functions including Wire Transfer
Origination, Automated Clearing House
(ACH) Transfers, On-line Balance
left to right... Lorraine Basey, Vice President,
Government Services and James A. Fitzgerald,
Vice President, Government Services
14 Valley National Bancorp
Valley National Bancorp 15
Corporate and Government Services introduced
VNB Connect PlusSM, a new Internet-based,
state-of-the-art treasury workstation
Frank T. Cosentino
First Vice President
Corporate & Government Services
C o m m u n i t y D e v e l o p m e n t
Valley’s community development
and community relations com-
mitment is a natural outgrowth
of relationships between the bank and
individuals, organizations, and institutions
in our local communities working to
address economic, social, civic, cultural,
and quality of life concerns.
Our goal in 2003 was to recommit
ourselves to finding even better solutions
to the ever expanding community needs,
thereby helping to create communities
that not only survive, but even thrive.
Valley’s spirit of local support con-
tinues to enable organizations to provide
vital and essential community services.
Record numbers of employees both in
New York and New Jersey participated
in events during 2003, providing support
and volunteer services where they were
needed. This selfless service, together
with the continued significant financial
support provided by the bank, created a
comprehensive approach to community
development at Valley.
During 2003, we particularly
focused on activities to educate our
community and promote financial literacy
by expanding the Kids First Saving ClubSM
website, www.vnbkids.com, to encour-
age money management and promote
financial awareness. The bank sponsored
a financial literacy curriculum in the
Bayonne, Dover, Newark, Passaic and
Paterson School Districts as well as having
bank employees participate in classroom
financial literacy presentations in local
elementary and high schools. Valley also
facilitated several financial literacy and
homebuyer education workshops and
funded organizations providing these
services.
Recognizing that needs and circum-
stances vary, Valley frequently combines
the special credit and deposit programs
it offers to lower income citizens with
community-based organizations,
including regular participation in first
time homebuyer education courses,
entrepreneurial and small business
seminars, and financial education
programs. We have also provided
economic development grants to non-
profit groups that promote affordable
housing and job creation, as well as
to organizations that provide training
to build knowledge and increase the
capacity for future economic growth.
Valley is more than just a bank in
a community. It is also a community bank
that recognizes its responsibility to address
the community development, credit and
financial needs of all of the residents
within every community it serves.
Valley employees
continued to provide
valuable community
service including the
annual Paterson Habitat
for Humanity Corporate
Challenge.
Michael A. Fields, Vice President,
Community Development
16 Valley National Bancorp
Valley National Bancorp 17
Valley sponsored a series of financial literacy
programs in the Bayonne, Dover, Newark,
Passaic and Paterson School Districts
Garret G. Nieuwenhuis
First Senior Vice President
Stephen P. Davey
Senior Vice President
B r a n c h L o c a t i o n s
I n v e s t m e n t s
Sussex
Passaic
Warren
I-80
Bergen
Valley’s investment
portfolio continues
to grow through
diversification consistent
with safe and sound
banking practices.
Morris
I-287
Essex
I-78
Somerset
Hudson
Union
Manhattan
Valley’s investment activities are
designed to provide liquidity and
an attractive yield to support the
bank’s needs. When acquiring securities,
emphasis is placed on current income,
cash flow, interest sensitivity and providing
support for Valley’s local communities.
It is the policy of Valley National
Bank to make investments that present
the bank with a mix of geographic
diversification consistent with safe
and sound banking practices.
Through sophisticated financial
modeling, our investment officers seek
fixed income instruments that will
provide optimal yields in a multitude
of different interest rate scenarios. This
ensures that Valley has the cash flow
and the flexibility to achieve a high-
performance portfolio throughout many
economic cycles. Within the guidelines
listed above, the Investment Department
prepares investment strategies on a
quarterly basis which are approved
by the Investment Committee.
Jack M. Blackin
Senior Vice President
left to right... Eric W. Gould, First Senior Vice President
and Linda M. Bucey, First Vice President
Hunterdon
Existing Offices
Under Development
& Targeted Sites
NEW JERSEY
Mercer
BERGEN COUNTY
Bogota
Elmwood Park
Englewood (2)
Fair Lawn (3)
Fort Lee (3)
Hackensack
Hillsdale
Ho-Ho-Kus
Lodi
Lyndhurst
Midland Park
Montvale
Moonachie (2)
New Milford
North Arlington
Northvale
Oakland
Oradell
Paramus (3)
Ramsey
Ridgefield
Ridgewood (2)
Rochelle Park
Tenafly
Waldwick
Wyckoff
N J Turn pike
ESSEX COUNTY
Belleville (3)
Bloomfield (2)
Cedar Grove
Fairfield (2)
Livingston (2)
Maplewood (2)
Newark (3)
Nutley (2)
West Caldwell
Middlesex
HUDSON COUNTY
Bayonne
East Newark
Harrison
Hoboken
Kearny (3)
North Bergen
Secaucus (2)
Union City
West New York
I-195
MIDDLESEX COUNTY
South Plainfield
MORRIS COUNTY
Budd Lake (2)
Butler
Chatham
Chester
Dover
G
e
a
r
d
East Hanover
Jefferson Township
Landing
n S
Mine Hill
t
a
t
Morris Plains
e P
a
Morristown
r
k
Parsippany (2)
Succasunna
y
a
w
PASSAIC COUNTY
Clifton (4)
Little Falls
North Haledon (2)
Monmouth
Passaic (5)
Pompton Lakes
Wayne (9)
SOMERSET COUNTY
Green Brook
North Plainfield (2)
SUSSEX COUNTY
Branchville
Franklin
Fredon
Sparta
Tranquility
Vernon
Ocean
UNION COUNTY
Clark
Mountainside
Roselle Park
Scotch Plains
Union
Westfield
WARREN COUNTY
Belvidere
Blairstown
Hackettstown
NEW YORK
MANHATTAN
5th Avenue
6th Avenue
Chelsea (2)
Madison
Midtown
Downtown
Broadway
Canal
Telephone
Banking Center
1-800-522-4100
Website Addresses
valleynationalbank.com
vnbkids.com
18 Valley National Bancorp
Burlington
Valley National Bancorp 19
H u m a n R e s o u r c e s & Tr a i n i n g
O f f i c e r s & D i r e c t o r s
At Valley, we believe
that the performance
of each person impacts
overall service quality.
At Valley, we recognize that
quality employees are key to
the continued success of our
to train employees on new technologies
that will result in enhanced customer
support.
organization. Human Resources
aggressively seeks to recruit, train
and retain a professional staff of
highly qualified individuals to deliver
premium quality service, especially in
all customer contact areas.
Human Resources and Educational
Resources continue to be impacted by
new legislation and as a result, hiring
practices have been strengthened. A
company-wide employee training initia-
tive was undertaken to ensure Valley’s
compliance with these stringent new
laws. Another initiative was undertaken
In addition, Human Resources and
Educational Resources have partnered on
a series of seminars to promote awareness
and understanding of Valley’s generous
employee benefits and other employee
programs. These seminars continue to
strengthen the loyalty between Valley
and our employees as they gain a further
understanding of their benefits and the
commitment Valley makes to them.
left to right... Carol B. Diesner, Senior Vice
President, Human Resources and Karen Hackes,
First Vice President & Director of Training,
Educational Resources
VALLEY
NATIONAL
BANCORP
VALLEY
NATIONAL
BANK
Gerald H. Lipkin, Chairman
of the Board, President &
Chief Executive Officer
Peter Crocitto
Executive Vice President
Alan D. Eskow, Executive
Vice President, Chief Financial
Officer & Secretary
Albert L. Engel
Executive Vice President
James G. Lawrence
Executive Vice President
Robert M. Meyer
Executive Vice President
Christine T. Baldyga
Senior Vice President &
Chief Audit Executive
Jack M. Blackin
Senior Vice President
& Assistant Secretary
Wilma Falduto
Assistant Secretary
Board of Directors
Andrew B. Abramson
Charles J. Baum
Pamela R. Bronander
Joseph Coccia, Jr.
Eric P. Edelstein
Mary J. Steele Guilfoile
H. Dale Hemmerdinger
Graham O. Jones, Esq.
Walter H. Jones, III, Esq.
Gerald Korde
Gerald H. Lipkin
Robinson Markel, Esq.
Robert E. McEntee
Richard S. Miller, Esq.
Robert Rachesky
Barnett Rukin
Peter Southway
Richard F. Tice
Leonard J. Vorcheimer
Spencer B. Witty, Emeritus
OFFICERS
Chairman of the Board,
President & Chief
Executive Officer
Gerald H. Lipkin
Executive Vice Presidents
Peter Crocitto
Albert L. Engel
James G. Lawrence
Robert M. Meyer
Executive Vice President,
Chief Financial Officer
& Secretary
Alan D. Eskow
President, Financial
Services Division
Robert J. Mulligan
First Senior Vice
Presidents
Kermit R. Dyke
Robert E. Farrell
Richard P. Garber
Eric W. Gould
Walter M. Horsting
Garret G. Nieuwenhuis
John H. Prol
Senior Vice Presidents
Michael D. Altman
Gerald H. Attanasio
Jack M. Blackin
Franklin Bollhorst
Rosemarie A. Calabro
Stephen P. Davey
Elizabeth E. De Laney
Carol B. Diesner
Lawrence E. Flack
Wayne Fritsch
Dianne M. Grenz
Peter T. Jackey
Dorothy J. Kahlau
Leonard S. Levine
Barbara Mohrbutter
James K. Moore
Bernadette M. Mueller
John J. Murphy
Kenneth W. Nickel
Andrea T. Onorato
Marianne Potito
Harry A. Rosen
Richard M. Seguine
Sandra L. Seville
Thomas Sparkes
Senior Vice President
& General Counsel
Lucinda P. Long
Senior Vice President
& Trust Officer
Peter V. Moehle
Senior Vice President &
Chief Audit Executive
Christine T. Baldyga
First Vice President
& Controller
Edward J. Lipkus
Glen Rauch
Securities, Inc.
Glen R. Rauch
President
Hallmark Capital
Management, Inc.
Peter S. Hagerman, President
& Chief Executive Officer
Masters Coverage Corp.
Michael Daniels
President
Saul J. Friedland
Executive Vice President
Arthur A. Schwartz
Executive Vice President
Merchants New York
Commercial Corporation
Irwin Schwartz
President
New Century
Asset Management
Corporation
Robert C. Kleiber, President
& Chief Executive Officer
Valley Commercial
Capital, LLC
Walter M. Horsting
President
Valley National
Title Services, Inc.
Joseph A. Perconti
President
20 Valley National Bancorp
Valley National Bancorp 21
C o n s o l i d a t e d S t a t e m e n t s
o f F i n a n c i a l C o n d i t i o n
C o n s o l i d a t e d S t a t e m e n t s
o f I n c o m e
Valley National Bancorp & Subsidiaries
(in thousands, except for share data)
Assets
Cash and due from banks
Investment securities held to maturity, fair value of $1,252,765
and $597,480 in 2003 and 2002, respectively
Investment securities available for sale
Trading securities
Loans held for sale
Loans
Less: Allowance for loan losses
Net loans
Premises and equipment, net
Accrued interest receivable
Bank owned life insurance
Other assets
Total Assets
Liabilities
Deposits:
Non-interest bearing
Interest bearing:
Savings
Time
Total deposits
Short-term borrowings
Long-term debt
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies
Shareholders’ Equity
Preferred stock, no par value, authorized 30,000,000 shares; none issued
Common stock, no par value, authorized 149,564,245 shares;
issued 94,202,363 shares in 2003 and 99,007,032 shares in 2002
Surplus
Retained earnings
Unallocated common stock held by employee benefit plan
Accumulated other comprehensive income
Treasury stock, at cost (291,895 shares in 2003 and 3,957,498 shares in 2002)
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
December 31,
2003
2002
$
218,166
$
243,923
1,232,239
1,805,680
4,252
5,720
6,166,689
(64,650)
6,102,039
128,606
40,445
164,404
179,189
$ 9,880,740
590,892
2,140,366
—
42,329
5,720,159
(64,087)
5,656,072
113,755
41,591
158,832
160,696
9,148,456
$
$ 1,676,764
$
1,569,921
3,283,716
2,202,488
7,162,968
377,306
1,547,221
140,456
9,227,951
—
33,304
318,599
288,313
(259)
20,531
660,488
(7,699)
652,789
$ 9,880,740
$
2,942,763
2,170,703
6,683,387
378,433
1,325,828
129,070
8,516,718
—
33,332
318,964
338,770
(435)
41,319
731,950
(100,212)
631,738
9,148,456
Valley National Bancorp & Subsidiaries
(in thousands, except for share data)
Interest Income
Interest and fees on loans
Interest and dividends on investment securities:
Taxable
Tax-exempt
Dividends
Interest on federal funds sold and other short-term investments
Total interest income
Interest Expense
Interest on deposits:
Savings deposits
Time deposits
Interest on short-term borrowings
Interest on long-term debt
Total interest expense
Net Interest Income
Provision for loan losses
Net Interest Income after Provision for Loan Losses
Non-Interest Income
Trust and investment services
Insurance premiums
Service charges on deposit accounts
Gains on securities, net
Gains on trading securities, net
Fees from loan servicing
Gains on sales of loans, net
Bank owned life insurance
Other
Total non-interest income
Non-Interest Expense
Salary expense
Employee benefit expense
Net occupancy expense
Furniture and equipment expense
Amortization of intangible assets
Advertising
Merger-related charges
Other
Total non-interest expense
Income Before Income Taxes
Income tax expense
Net Income
Earnings Per Share:
Basic
Diluted
See the consolidated financial statements and accompanying notes presented in Item 8 of the Company’s SEC Form 10-K.
Cash Dividends Declared per Common Share
Weighted Average Number of Shares Outstanding:
Basic
Diluted
Years ended December 31,
2003
2002
2001
$ 364,091
$ 368,402
$ 398,893
118,816
10,991
2,978
622
497,498
22,871
48,095
3,754
74,202
148,922
348,576
7,345
341,231
5,726
17,558
21,590
15,606
2,836
9,359
12,966
6,188
16,368
108,197
97,197
22,162
21,782
12,452
12,480
7,409
—
42,796
216,278
233,150
79,735
133,982
10,093
3,155
1,787
517,419
33,092
68,858
2,570
68,933
173,453
343,966
13,644
330,322
4,493
6,793
19,640
7,092
—
9,457
6,934
6,712
20,117
81,238
86,522
19,364
18,417
11,189
11,411
8,074
—
37,287
192,264
219,296
64,680
135,354
10,466
4,157
4,616
553,486
45,742
112,417
11,424
51,352
220,935
332,551
15,706
316,845
4,404
2,746
19,171
3,564
—
10,818
10,601
2,120
15,052
68,476
79,826
18,200
17,775
10,700
10,170
6,392
9,017
33,886
185,966
199,355
64,151
$ 153,415
$ 154,616
$ 135,204
$ 1.63
1.62
0.89
$ 1.58
1.57
0.85
$ 1.33
1.32
0.79
93,995,316
94,498,619
97,782,878
98,357,078
101,885,149
102,425,747
22 Valley National Bancorp
Valley National Bancorp 23
See the consolidated financial statements and accompanying notes presented in Item 8 of the Company’s SEC Form 10-K.
A d v i s o r y B o a r d s
A d v i s o r y B o a r d s
Auto Dealer
Advisory Board
P. Russell Bodrato
All Brands Auto Sales, Inc.
Rudolph M. Chiorazzo
South Shore Ford, Inc.
Steven K. Cooper
Jack Trebour Ford Suzuki
Sanford Dorf
D & C Chevrolet Company
Lawrence T. Fette
Fette Imports, Inc.
Kenneth Gensinger
Gensinger Motors
Leonard Haiken
Prestige Imports, Inc.
Lee M. Horner
Wyman Ford, Inc.
Stuart Lasser
Saturn of Denville,
Morristown & Livingston
Gerald A. Lustig
Acura of Denville
Samuel A. Magarino
Magarino Ford-Mercury
Fred J. Meyers
Preakness Chevrolet, Inc.
Eugene C. Meyers
Hawthorne Auto Sales Co.
David Nappa
Wayne Auto Sales, Inc.
Dennis C. Oberle
Mahwah Sales &
Service, Inc.
David Oostdyk
Royal Pontiac &
Oldsmobile, Inc.
James A. Salerno
Jim Salerno Pontiac,
Buick, GMC
Craig A. Schultz
Schultz Ford, Inc.
Robert A. Senior
Three County
Volkswagen Corp.
Peter A. Spina
Wayne Motors, Inc.
Gary M. Tursi
Gearhart Chevrolet, Inc.
Central Regional
Advisory Board
George Bean
The George Bean Co.
Milton Brown
Accountant
Melvin Cohen
Handi-Hut, Inc.
Robert D’Alessandro
Welco CGI Gas Tech, LLC
Morris Diamond
The Diamond Agency
Phil Forte
Sandy Hill Building
Supply Co.
Stanley Lee Gottlieb
The Diamond Agency
Arthur S. Gurtman
Consultant
Joseph Guttilla
Chopper Express
Mitchell Herman
Service Fabrics, Inc.
Lester F. Herrschaft
Albert A. Stier, Inc.
Sanford Kalb
Edna Kanter
Passaic-Clifton
Driv-Ur-Self System, Inc.
Jack Kaplowitz
Birch Lumber Company
Carolyn Kessler
Kessler Industries, Inc.
Seymour Kulick
Garden State Lumber
Marc J. Lenner
Lentin M. Entin Associates
Donald Lesser
Pine Lesser & Sons
Robert Lieberman
All-Ways Advertising
Company
Martin Lucibello
Colonial Concrete
Anthony J. Marino
Century 21
Construction Corp.
Anthony J. Mazzone
Innovation Data
Processing, Inc.
John V. McGrane
McGrane Mortgage
Company
Roy G. Meyer
Consultant
Frank Misischia
FLM Graphics
Jeffrey Moll
PBI Regional Medical Center
Patrick Mucci, Jr.
Group Advisory, Inc.
George Poydinecz
Developer
Robert X. Robertazzi
Liberty Lincoln-Mercury, Inc.
Charles Infusino
Little Falls Shop-Rite, Inc.
Joshua Rabinowitz
The ADI Group
Vincent Riviello
Atlantic Coast Fibers, LLC
Robert Kuhl
J. Kuhl Metals, Inc.
Peter Baum
Baum Bros. Imports Inc.
Gerd Rohmert
Mayer Textiles
Machine Corp.
Neal Shuman
Arthur Schuman, Inc.
Elliott Taradash
Chelton Realty, Inc.
Eastern Regional
Advisory Board
Carmen B. Alecci
Saint Barnabas Health
Care System
JoAnn Andriola
Book Chevrolet Buick, Inc.
Gary D. Bennett, Esq.
Koch, Koch & Bennett
Gilbert Buchalter
Pharmaceutical
Innovations, Inc.
Thomas Cifelli
Cifelli Associates
John Coffey, Esq.
Attorney-at-Law
Alan Lambiase
River Terminal
Development Co.
Joseph LaScala
Bell Mill Construction
Co., Inc
Thomas J. Lazur
National Building
Supply Corporation
John J. Martello
John J. Martello Inc.
Thomas Martin
CP Test Services, Inc.
Joseph Melone
San Carlo Restaurant
David Newton
Newrent, Inc.
Joseph Petito
Sunset Deli & Liquors
Licinio Silva
Silva & Silva, Inc.
Maria Silva
European Travel Agency
Francis Costenbader, Esq.
Attorney-at-Law
Pasquale P. Tremonte
Fulton Building Co., Inc.
Richard Tully
Kearny Shop Rite
William Van Ness
Van Ness Plastic
Molding Co.
J. Scott Wright
Graphic Management, Inc.
New York Regional
Advisory Board
Charles Cumella
Fedco Steel Corporation
Andrew Fiore, Jr.
AWF Leasing Corporation
John E. Garippa, Esq.
Attorney-at-Law
Alan Golub
Modern Electric Co.
Peter A. Goodman
Goodman Sales Co., Inc.
Charles B. Hummel
Hummel Machine
& Tool Co.
Stanley Blum
Blum & Fink, Inc.
Edward Blumenfeld
Blumenfeld Development
Group, Ltd.
Leonard Boxer, Esq.
Stroock Stroock &
Lavan, LLP
Jack Forgash
Tri-Realty
Management Corp.
Fredric H. Gould
Gould Investors
Sidney Gould
Bruckner Plumbing &
Heating Corporation
Rudolf H. Hertz
Consultant
Robert Israel
Kentshire Galleries, Ltd.
Peter Jakobson, Jr.
Jakobson Properties, LLC
Steven U. Leitner, Esq.
Attorney-at-Law
William Lerner
Imperial Parking
Systems, Inc.
Nathan Lubow
Sara L. Mayes
Gemini Shippers Group
Alan Mirken
Aaron Publishing Group
Mitchell Nelson, Esq.
Salans, Hertzfeld, Heilbrunn,
Christy & Wiener
Joseph Abergel
Jomark Textiles, Inc.
Joel I. Picket
Gotham Organization, Inc.
24 Valley National Bancorp
Valley National Bancorp 25
A d v i s o r y B o a r d s
A d v i s o r y B o a r d s
Robert W. Landzettel
Lazon Paint &
Wallpaper Co.
Burton Lerner
Tenavision, Inc.
Lawrence Levy, Esq.
Marcus & Levy
Stewart C. Libes
Consultant
Anthony F. Marangi
CDM 400 Enterprises
John Nakashian
H. H. Nakashian & Sons
Kenneth Olsen
Glatt Air Techniques, Inc.
Hal Parnes
The Parnes Company
Richard Pearson
Fleet Equipment Co.
James R. Poole
Poole & Company
Audrey Rabinowitz
Plaza Research
David Rabinowitz
Plaza Research
Robert J. Shannon, Jr.
Township of Wyckoff
Albert Skoglund
Hiller & Skoglund, Inc.
Marvin Van Dyk
Van Dyk Health Care, Inc.
Arthur M. Weis
Capintec, Inc.
Richard H. Weisinger, Esq.
Fischer, Weisinger,
Caliguire, Porter
New York Regional
Advisory Board (continued)
Mark Rachesky
MHR Management
Company
Harvey Ravner
Suresh L. Sani
First Pioneer Properties
Leonard Schlussel
Welbilt Equipment
Corporation
Charles I. Silberman
S. Parker Hardware
Manufacturing Corp.
Marcia Toledano
990 AvAmericas Associates
John Usdan
Midwood
Management Corp.
Northern Regional
Advisory Board
Donald Aronson
Donald Aronson
Consulting Group
Spiros Backos
Backos & Zimmerman, LLC
Stanley Berenzweig
Rag Shops, Inc.
Peter Damon Brown
Heather Hill Sportswear
Ralph A. Contini, CPA
Donald N. Dinallo
Terminal Construction Corp.
Bernard Dorfman, Esq.
Attorney-at-Law
Judith Greenberg
Heritage Management Co.
Arthur Joseph
Krass-Joseph, Inc.
Southern Regional
Advisory Board
Alan Braunstein
Worldwide Wholesale
Floor Coverings, Inc.
Bernard Burkhoff
The Real Estate
Investment Group
William Cohen
Hillside Candy, LLC
Frederick L. Cohen
Cohen, Friedman,
Dorman & Co.
Anthony Costa
Restauranteur
Jack Felicio
Rhombus Software, Inc.
Gerald B. Green
Consultant
Steven R. Gross
Tyser Metro & Company
Kenneth Jayson
Jayson Oil Company
Herbert Lefkowitz
Consolidated Simon
Distributors, Inc.
Seymour Litwin
Prudential Pioneer
Real Estate
Lawrence J. Massaro
Lordina Builders, Inc.
Tino Rosa
Rosa Agency, Inc.
Anthony Sa
Sa & Sons Construction
Co., Inc.
Theodore Schiller, Esq.
Schiller & Pittenger, P.C.
Marvin H. Strauss
Newark Chapter Service
Corps of Retired Executives
Sanford C. Vogel
Vogel & Gast
Roy Solondz
Roxbury Mortgage Co., Inc.
Solomon Masters
ERA Masters Realty
Western Regional
Advisory Board
Albert Burlando
Almetek Industries, Inc.
Steven Dickman
Dickman Business Brokers
Paul Dunajchuk
Roxbury Water Co.
Thomas D. Farkas
Herbert L. Farkas Company
Gene Feyl
Consultant
Alan Goldstein, Esq.
Nussbaum, Stein,
Goldstein & Bronstein
George Hagemeister
Consultant
Jackie Harrison
Center for Humanistic Change
Willard Hedden
Consultant
Robert A. Hopler
Stroud-Hopler, Inc.
Joel A. Kobert, Esq.
Courter, Kobert,
Laufer & Cohen
Joseph Kubert
Joe Kubert School of
Cartoon & Graphic Art, Inc.
William H. McNear
McNear Excavating, Inc.
Kathleen Medore
National Fruit &
Essences, Inc.
Ronald Petillo
Petillo Enterprises, Inc.
Stella Visaggio
Hackettstown Community
Hospital
West Essex Regional
Advisory Board
Charles Moss, Jr.
Bow-Tie Building
Times Square
Steven Nussbaum
PF Pasbjerg
Development Co.
Bernie Adler
Adler Development
Jeffrey Birnberg
J. Birnberg &
Associates, LLC
Patrick D’Angola
ARCS Fabricators, Inc.
Joseph J. DeLuccia, Esq.
Attorney-at-Law
James Demetrakis, Esq.
Attorney-at-Law
Kenneth Elkin
KG Specialty Steel, Inc.
Mark Fisch
Continental Properties
Jay Gerish
J. Gerish, Inc.
Donald Gottheimer
D & B Wholesale
Cosmetics, Inc.
Frank Kobola
Koburn Investments
Jan Kokes
The Kokes Organization
Sanford Levine
Sanford Levine & Sons
Packaging Corp.
Saul Lupin
Smolin, Lupin &
Company, PA
Richard Mandelbaum
Mandelbaum &
Mandelbaum Investors
Lawrence Rappaport, Esq.
Attorney-at-Law
Robert Ringley
Ber Plastics, Inc.
Stacey Rudbart
Morgan Stanley Dean Witter
Mort Salkind
Fox Development
Ben Sher
Sher Distributing Co., Inc.
Arnold Speert
William Paterson University
Richard Ullman
National Vision
Administrators
Salvatore Valente
Bildisco Manufacturing
Co., Inc.
Eric Witmondt
Woodmont Properties, LLC
CRA Advisory Committee
Barbara Dunn
Paterson Habitat
for Humanity
Christopher Kui
Asian Americans
for Equality
Victoria E. Taylor
Martin Luther King, Jr.
Senior Center
26 Valley National Bancorp
Valley National Bancorp 27
S h a r e h o l d e r R e l a t i o n s
Corporate Address
Valley National Bancorp
1455 Valley Road
Wayne, New Jersey 07470
(973) 305-8800
Stock Listing
Valley National Bancorp common stock
is traded on the New York Stock Exchange
under the symbol VLY.
Annual Meeting
April 7, 2004, 2:00 PM
Prime Hotel & Suites
(formerly Radisson Hotel)
690 Route 46 East
Fairfield, NJ 07004
Shareholder Inquiries, Dividend
Reinvestment Plan, and Registrar
and Transfer Agent
For information regarding shareholder
accounts of common stock or Valley’s
Dividend Reinvestment Plan, please
contact the Registrar and Transfer
Agent or Valley National Bancorp:
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, New York 10038
Attn: Shareholder Relations
(800) 937-5449
Dividend Reinvestment Plan
(800) 278-4353
Financial Information
Investors, security analysts and others
seeking financial information should
submit a request in writing to:
Alan D. Eskow
Executive Vice President &
Chief Financial Officer
Valley National Bancorp
1455 Valley Road
Wayne, New Jersey 07470
Form 10-K
Persons may obtain a copy of
Valley National Bancorp’s 2003
Annual Report on Form 10-K by
submitting a request in writing to:
Dianne M. Grenz
Senior Vice President
Director of Shareholder
& Public Relations
Valley National Bancorp
1455 Valley Road
Wayne, New Jersey 07470
dgrenz@valleynationalbank.com
(800) 522-4100, ext. 3380
(973) 305-3380
The 2003 Annual Report on Form 10-K
is available on our website at
www.valleynationalbank.com
Dianne M. Grenz, Senior Vice President,
Director of Shareholder & Public Relations
28 Valley National Bancorp
Valley National Bancorp 29
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Í
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
‘
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
(State or other jurisdiction of
Incorporation or Organization)
1455 Valley Road
Wayne, NJ
(Address of principal executive office)
22-2477875
(I.R.S. Employer
Identification Number)
07470
(Zip code)
973-305-8800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of exchange on which registered
Common Stock, no par value
VNB Capital Trust I
7.75% Trust Originated Securities
(and the Guarantee by Valley National Bancorp with
respect thereto)
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 Í
No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ‘
Indicate by check mark whether the Registration is an accelerated filer (as defined in Exchange Act Rule
12b-2)
Yes Í
No ‘
The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately
$2.2 billion on June 30, 2003.
There were 93,960,497 shares of Common Stock outstanding at February 13, 2004.
Documents incorporated by reference:
Certain portions of the Registrant’s Definitive Proxy Statement (the “2004 Proxy Statement”) for the 2004
Annual Meeting of Shareholders to be held April 7, 2004 will be incorporated by reference in Part III.
TABLE OF CONTENTS
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Market for Registrant’s Common Stock and Related Shareholder Matters . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data:
Valley National Bancorp and Subsidiaries:
Consolidated Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Shareholders’ Equity . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Auditors’ Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Item 9A.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 1. Business
PART I
Valley National Bancorp (“Valley”) is a New Jersey corporation registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended (“Holding Company Act”). At December 31, 2003,
Valley had consolidated total assets of $9.9 billion, total deposits of $7.2 billion and total shareholders’ equity of
$652.8 million. In addition to its principal subsidiary, Valley National Bank (“VNB”), Valley owns 100 percent
of the voting shares of VNB Capital Trust I, through which it issued preferred securities. VNB Capital Trust I is
not a consolidated subsidiary. See Note 12 of the Notes to Consolidated Financial Statements.
VNB is a national banking association chartered in 1927 under the laws of the United States. VNB provides
a full range of commercial and retail banking services. At December 31, 2003, VNB maintained 129 branch
offices located in northern New Jersey and Manhattan. These services include the following: the acceptance of
demand, savings and time deposits; extension of consumer, real estate, Small Business Administration (“SBA”)
and other commercial credits; equipment leasing; and personal and corporate trust, as well as pension and
fiduciary services. VNB also provides through wholly-owned subsidiaries the services of an all-line insurance
agency, a title insurance agency, Securities and Exchange Commission (“SEC”) registered investment advisors
and a registered securities broker dealer.
VNB’s subsidiaries are all included in the consolidated financial statements of Valley. These subsidiaries
include a mortgage servicing company; a title insurance agency; asset management advisors which are SEC
registered investment advisors; an all-line insurance agency offering property and casualty, life and health
insurance; a subsidiary which holds, maintains and manages investment assets for VNB; a subsidiary which owns
and services auto loans; a subsidiary which specializes in asset-based lending; a subsidiary which offers both
commercial equipment leases and financing for general aviation aircraft; and a subsidiary which is a registered
broker-dealer. VNB’s subsidiaries also include a real estate investment trust subsidiary (“REIT”) which owns
real estate related investments and a REIT subsidiary which owns some of the real estate utilized by VNB and
related real estate investments. All subsidiaries mentioned above are wholly-owned by VNB, except Valley owns
less than 1 percent of the holding company for the REIT subsidiary which owns some of the real estate utilized
by VNB and related real estate investments. Each REIT must have 100 or more shareholders to qualify as a
REIT, and therefore, both have issued less than 20 percent of their outstanding non-voting preferred stock to
outside shareholders, most of whom are non-senior management VNB employees.
VNB has four business segments it monitors and reports on to manage its business operations. These
investment management, and corporate and other
segments are consumer lending, commercial
adjustments. For financial data on the four business segments see Part II, Item 8, “Financial Statements and
Supplementary Data—Note 20 of the Notes to Consolidated Financial Statements.”
lending,
Valley makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K and amendments thereto available on its website at www.valleynationalbank.com without charge as
soon as reasonably practicable after filing or furnishing them to the SEC. Also available on the website are
Valley’s Corporate Code of Ethics that applies to all of Valley’s employees including principal officers and
directors, Valley’s Audit Committee Charter, Compensation and Human Resources Committee Charter,
Nominating and Corporate Governance Committee Charter as well as a copy of Valley’s Corporate Governance
Guidelines. Additionally, Valley will provide without charge, a copy of its Form 10-K to any shareholder by
mail. Requests should be sent to Valley National Bancorp, Attention: Shareholder Relations, 1455 Valley Road,
Wayne, NJ 07470.
Competition
The market for banking and bank-related services is highly competitive. Valley and VNB compete with
other providers of financial services such as other bank holding companies, commercial and savings banks,
savings and loan associations, credit unions, money market and mutual funds, mortgage companies, title
3
agencies, asset managers, insurance companies and a growing list of other local, regional and national institutions
which offer financial services. Mergers between financial institutions within New Jersey and in neighboring
states have added competitive pressure. Competition intensified as a consequence of the Gramm-Leach-Bliley
Act (discussed below) and interstate banking laws now in effect. Valley and VNB compete by offering quality
products and convenient services at competitive prices. In order to maintain and enhance its competitive position,
Valley regularly reviews its products, locations, alternative delivery channels and various acquisition prospects
and periodically engages in discussions regarding possible acquisitions.
Employees
At December 31, 2003, VNB and its subsidiaries employed 2,264 full-time equivalent persons. Management
considers relations with its employees to be satisfactory.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding
company’s cost of doing business and limit the options of its management to deploy assets and maximize
income. The following discussion is not intended to be a complete list of all the activities regulated by the
banking laws or of the impact of such laws and regulations on VNB. It is intended only to briefly summarize
some material provisions.
Bank Holding Company Regulation
Valley is a bank holding company within the meaning of the Holding Company Act. As a bank holding
company, Valley is supervised by the Board of Governors of the Federal Reserve System (“FRB”) and is
required to file reports with the FRB and provide such additional information as the FRB may require.
The Holding Company Act prohibits Valley, with certain exceptions, from acquiring direct or indirect
ownership or control of more than five percent of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and controlling banks or furnishing services to
subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in,
certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The
Holding Company Act requires prior approval by the FRB of the acquisition by Valley of more than five percent
of the voting stock of any additional bank. Satisfactory capital ratios and Community Reinvestment Act ratings
and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make
acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of
financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances
in which it might not do so absent that policy. Acquisitions through VNB require approval of the office of the
Comptroller of the Currency of the United States (“OCC”). The Holding Company Act does not place territorial
restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act,
discussed below, allows Valley to expand into insurance, securities, merchant banking activities, and other
activities that are financial in nature.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Banking and
Branching Act”) enables bank holding companies to acquire banks in states other than its home state, regardless
of applicable state law. The Interstate Banking and Branching Act also authorizes banks to merge across state
lines, thereby creating interstate banks with branches in more than one state. Under the legislation, each state had
the opportunity to “opt-out” of this provision. Furthermore, a state may “opt-in” with respect to de novo
branching, thereby permitting a bank to open new branches in a state in which the bank does not already have a
branch. Without de novo branching, an out-of-state commercial bank can enter the state only by acquiring an
existing bank or branch. The vast majority of states have allowed interstate banking by merger but have not
authorized de novo branching.
4
New Jersey enacted legislation to authorize interstate banking and branching and the entry into New Jersey
of foreign country banks. New Jersey did not authorize de novo branching into the state. However, under federal
law, federal savings banks which meet certain conditions may branch de novo into a state, regardless of state law.
Recent Legislation
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30, 2002, added new
legal requirements for public companies affecting corporate governance, accounting and corporate reporting.
The Sarbanes-Oxley Act provides for, among other things:
a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except
for loans made by a bank subject to Regulation O);
independence requirements for audit committee members;
independence requirements for company auditors;
certification of financial statements on Forms 10-K and 10-Q reports by the chief executive officer and the
chief financial officer;
the forfeiture by the chief executive officer and the chief financial officer of bonuses or other incentive-
based compensation and profits from the sale of an issuer’s securities by such officers in the twelve month
period following initial publication of any financial statements that later require restatement due to corporate
misconduct;
disclosure of off-balance sheet transactions;
two-business day filing requirements for insiders filing Form 4s;
disclosure of a code of ethics for financial officers and filing a Form 8-K for a change in or waiver of such
code;
the reporting of securities violations “up the ladder” by both in-house and outside attorneys;
restrictions on the use of non-GAAP financial measures in press releases and SEC filings;
the formation of a public accounting oversight board; and
various increased criminal penalties for violations of securities laws.
•
•
•
•
•
•
•
•
•
•
•
•
Each of the national stock exchanges, including the New York Stock Exchange (NYSE) where Valley’s
securities are listed, have implemented new corporate governance listing standards, including rules strengthening
director independence requirements for boards, and requiring the adoption of charters for the nominating,
corporate governance and audit committees. These rules require Valley to certify to the NYSE that there are no
violations of any corporate listing standards. Valley has provided the NYSE with the certification required by
NYSE Rule 303A(12). Valley’s Chief Executive Officer and Chief Financial Officer have also filed certifications
regarding the quality of Valley’s public disclosure with the Securities and Exchange Commission.
As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International
Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Act”). The Act authorizes the
Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures
applicable to financial
institutions such as banks, bank holding companies, broker-dealers and insurance
companies. Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money
laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed
to detect and report instances of money laundering in United States private banking accounts and correspondent
accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing,
maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign
shell bank that does not have a physical presence in any country. In addition, the Act expands the circumstances
under which funds in a bank account may be forfeited and requires covered financial institutions to respond under
certain circumstances to requests for information from federal banking agencies within 120 hours.
5
The Department of Treasury has issued regulations implementing the due diligence requirements. These
regulations require minimum standards to verify customer identity and maintain accurate records, encourages
cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding
possible money laundering or terrorist activities, prohibits the anonymous use of “concentration accounts,” and
requires all covered financial institutions to have in place an anti-money laundering compliance program.
The Act also amends the Bank Holding Company Act and the Bank Merger Act to require the federal
banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when
reviewing an application under these acts.
In late 2000, the American Home Ownership and Economic Act of 2000 instituted a number of regulatory
relief provisions applicable to national banks, such as permitting national banks to have classified directors and
to merge their business subsidiaries into the bank.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 (“Modernization Act”) became effective in
early 2000. The Modernization Act:
•
•
•
•
allows bank holding companies meeting management, capital and Community Reinvestment Act standards
to engage in a substantially broader range of non-banking activities than was previously permissible,
including insurance underwriting and making merchant banking investments in commercial and financial
companies;
allows insurers and other financial services companies to acquire banks;
removes various restrictions that previously applied to bank holding company ownership of securities firms
and mutual fund advisory companies; and
establishes the overall regulatory structure applicable to bank holding companies that also engage in
insurance and securities operations.
If a bank holding company elects to become a financial holding company, it files a certification, effective in
30 days, and thereafter may engage in certain financial activities without further approvals.
The OCC has adopted rules to allow national banks to form subsidiaries to engage in financial activities
allowed for financial holding companies. Electing national banks must meet the same management and capital
standards as financial holding companies but may not engage in insurance underwriting, real estate development
or merchant banking. Sections 23A and 23B of the Federal Reserve Act apply to financial subsidiaries and the
capital invested by a bank in its financial subsidiaries will be eliminated from the bank’s capital in measuring all
capital ratios. VNB owns three financial subsidiaries—Masters, Valley National Title Services and Glen Rauch.
Valley has not elected to become a financial holding company.
The Modernization Act modified other financial laws, including laws related to financial privacy and
community reinvestment.
Additional proposals to change the laws and regulations governing the banking and financial services
industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any such changes and the impact such changes might have on Valley
cannot be determined at this time.
Regulation of Bank Subsidiary
VNB is subject to the supervision of, and to regular examination by, the OCC. Various laws and the
regulations thereunder applicable to Valley and its bank subsidiary impose restrictions and requirements in many
areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of
loans and investments, consumer protection, employment practices and entry into new types of business. There
are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the
6
extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding
to certain limited
company’s non-bank subsidiaries. Under federal
exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or the non-bank
subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or take
their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security
requirements for any loans or extensions of credit permitted by such exceptions.
law, no bank subsidiary may, subject
Dividend Limitations
Valley is a legal entity separate and distinct from its subsidiaries. Valley’s revenues (on a parent company
only basis) result in substantial part from dividends paid to Valley by VNB. Payment of dividends to Valley by
its subsidiary bank, without prior regulatory approval, is subject to regulatory limitations. Under the National
Bank Act, dividends may be declared only if, after payment thereof, capital would be unimpaired and remaining
surplus would equal 100 percent of capital. Moreover, a national bank may declare, in any one year, dividends
only in an amount aggregating not more than the sum of its net profits for such year and its retained net profits
for the preceding two years. In addition, the bank regulatory agencies have the authority to prohibit a bank
subsidiary from paying dividends or otherwise supplying funds to Valley if the supervising agency determines
that such payment would constitute an unsafe or unsound banking practice.
Loans to Related Parties
VNB’s authority to extend credit to its directors, executive officers and 10 percent stockholders, as well as
to entities controlled by such persons, is currently governed by the requirements of the National Bank Act,
Sarbanes-Oxley Act and Regulation O of the FRB thereunder. Among other things, these provisions require that
extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable
features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of VNB’s capital. In addition, extensions of credit
in excess of certain limits must be approved by VNB’s Board of Directors. Under the Sarbanes-Oxley Act,
Valley and its subsidiaries, other than VNB, may not extend or arrange for any personal loans to its directors and
executive officers.
Community Reinvestment
Under the Community Reinvestment Act (“CRA”), as implemented by OCC regulations, a national bank
has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate-income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to
develop the types of products and services that it believes are best suited to its particular community, consistent
with the CRA. The CRA requires the OCC, in connection with its examination of a national bank, to assess the
association’s record of meeting the credit needs of its community and to take such record into account in its
evaluation of certain applications by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. VNB received a “satisfactory” CRA rating in its most recent examination.
Restrictions on Activities Outside the United States
Until May of 2002, when the activities in Canada ceased, Valley’s activities in Canada were conducted
through VNB and in the United States were subject to Sections 25 and 25A of the Federal Reserve Act, certain
regulations under the National Bank Act and, primarily, Regulation K promulgated by the FRB. Valley and VNB
currently do not have operations outside the United States.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a depository
institution insured by the Federal Deposit Insurance Corp (“FDIC”) can be held liable for any loss incurred by, or
7
reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-
insured depository institution in danger of default. These provisions have commonly been referred to as
FIRREA’s “cross guarantee” provisions. Further, under FIRREA, the failure to meet capital guidelines could
subject a bank to a variety of enforcement remedies available to federal regulatory authorities.
FIRREA also imposes certain independent appraisal requirements upon a bank’s real estate lending
activities and further imposes certain loan-to-value restrictions on a bank’s real estate lending activities. The
bank regulators have promulgated regulations in these areas.
FDICIA
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal
banking agency has promulgated regulations, specifying the levels at which a financial institution would be
considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or
“critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the
capital level of the institution. To qualify to engage in financial activities under the Modernization Act, all
depository institutions must be “well capitalized”. The financial holding company of a national bank will be put
under directives to raise its capital levels or divest its activities if the depository institution falls from that level.
The OCC’s regulations implementing these provisions of FDICIA provide that an institution will be
classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1
risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, and (iv)
meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total
risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0 percent, (iii)
has a Tier 1 leverage ratio of (a) at least 4.0 percent or (b) at least 3.0 percent if the institution was rated 1 in its
most recent examination, and (iv) does not meet the definition of “well capitalized.” An institution will be
classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1
risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1 leverage ratio of (a) less than 4.0 percent or
(b) less than 3.0 percent if the institution was rated 1 in its most recent examination. An institution will be
classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent,
(ii) has a Tier 1 risk-based capital ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less than 3.0
percent. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets
ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower
capitalization category if it receives an unsatisfactory examination rating. Similar categories apply to bank
holding companies.
In addition, significant provisions of FDICIA required federal banking regulators to impose standards in a
number of other important areas to assure bank safety and soundness, including internal controls, information
systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation and
interest rate exposure.
Item 2. Properties
VNB’s corporate headquarters consist of three office buildings located adjacent to each other in Wayne,
New Jersey. These headquarters encompass commercial, mortgage and consumer lending, the operations and
data processing center, and the executive offices of both Valley and VNB. Two of the three buildings are owned
by a subsidiary of VNB and leased to VNB, the other building is leased by VNB from an independent third party.
VNB owns another office building in Wayne, New Jersey which is occupied by those departments and
subsidiaries providing trust and investment management services. A subsidiary of VNB also owns an office
building and a condominium office in Manhattan, which are leased to VNB and which house a portion of its New
York lending and operations. In addition, on August 16, 2003, Valley 747 LLC, a subsidiary of VNB, purchased
a building in Chestnut Ridge, NY, primarily occupied by Masters Coverage Corp., also a subsidiary of VNB.
8
VNB provides banking services at 129 locations of which 59 locations are owned by VNB or a subsidiary of
VNB and leased to VNB, and 70 locations are leased from independent third parties.
Item 3. Legal Proceedings
There were no material pending legal proceedings to which Valley or any of its direct or indirect
subsidiaries were a party, or to which their property was subject, other than ordinary routine litigations incidental
to business and which are not expected to have any material effect on the business or financial condition of
Valley.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4A. Executive Officers of the Registrant
Names
Gerald H. Lipkin . . . . . . . . . . . . . . . . . . .
Peter Crocitto . . . . . . . . . . . . . . . . . . . . .
Albert L. Engel . . . . . . . . . . . . . . . . . . . .
Alan D. Eskow . . . . . . . . . . . . . . . . . . . .
James G. Lawrence . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Robert M. Meyer
Kermit R. Dyke . . . . . . . . . . . . . . . . . . .
Robert E. Farrell . . . . . . . . . . . . . . . . . . .
Richard P. Garber . . . . . . . . . . . . . . . . . .
Eric W. Gould . . . . . . . . . . . . . . . . . . . . .
Walter M. Horsting . . . . . . . . . . . . . . . . .
Robert J. Mulligan . . . . . . . . . . . . . . . . .
Garret G. Nieuwenhuis . . . . . . . . . . . . . .
John H. Prol
. . . . . . . . . . . . . . . . . . . . . .
Jack M. Blackin . . . . . . . . . . . . . . . . . . .
Stephen P. Davey . . . . . . . . . . . . . . . . . .
Elizabeth E. De Laney . . . . . . . . . . . . . .
Age at
December 31,
2003
Executive
Officer
Since
62
46
55
55
60
57
56
57
60
35
46
56
63
66
61
48
39
1975
1991
1998
1993
2001
1997
2001
1990
1992
2001
2003
1991
2001
1992
1993
2002
2001
All officers serve at the pleasure of the Board of Directors.
Office
Chairman of the Board, President and Chief
Executive Officer of Valley and VNB
Executive Vice President of Valley and VNB
Executive Vice President of Valley and VNB
Executive Vice President, Chief Financial
Officer and Secretary of Valley and VNB
Executive Vice President of Valley and VNB
Executive Vice President of Valley and VNB
First Senior Vice President of VNB
First Senior Vice President of VNB
First Senior Vice President of VNB
First Senior Vice President of VNB
First Senior Vice President of VNB
First Senior Vice President of VNB
First Senior Vice President of VNB
First Senior Vice President of VNB
Senior Vice President and Assistant
Secretary of Valley and VNB
Senior Vice President of VNB
Senior Vice President of VNB
9
PART II
Item 5. Market for Registrant’s Common Stock and Related Shareholder Matters
Valley’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol VLY. The
following table sets forth for each quarter period indicated the high and low sales prices for the common stock of
Valley, as reported by the NYSE, and the cash dividends declared per share for each quarter. The amounts shown
in the table below have been adjusted for all stock dividends and stock splits.
Year 2003
Year 2002
High
Low
Dividend
High
Low
Dividend
First Quarter . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . .
$26.33
27.38
29.01
29.99
$22.73
23.61
26.37
27.85
$0.210
0.225
0.225
0.225
$27.06
27.66
27.40
27.07
$24.58
24.81
23.09
23.28
$0.20
0.21
0.21
0.21
Federal laws and regulations contain restrictions on the ability of Valley and VNB to pay dividends. For
information regarding restrictions on dividends, see Part I, Item 1, “Business—Dividend Limitations” and Part II,
Item 8, “Financial Statements and Supplementary Data—Note 16 of the Notes to Consolidated Financial
Statements.” In addition, under the terms of the trust preferred securities issued by VNB Capital Trust I, Valley
could not pay dividends on its common stock if it deferred payments on the junior subordinated debentures which
provide the cash flow for the payments on the trust preferred securities.
There were 9,293 shareholders of record as of December 31, 2003.
In 2000, Valley issued 79,416 shares of its common stock to the shareholders of Hallmark Capital
Management, Inc. (“Hallmark”) pursuant to a merger of Hallmark into a subsidiary of Valley. In 2003, 2002 and
2001, Valley issued an additional 46,271, 47,514 and 34,557 shares, or $1.3 million, $1.2 million and $728
thousand, respectively, of its common stock pursuant to subsequent earn-out payments. No additional earn-out
payments are required pursuant to this merger. All shares reflect the 5 percent stock dividend issued in May 2003
and all prior splits and dividends. These shares were exempt from registration under the Securities Act of 1933
because they were issued in a Private Placement under Section 4(2) of the Act and Regulation D thereunder.
These shares have been subsequently registered for resale on Form S-3 under the Securities Act.
Pursuant to an existing contractual agreement, Valley issued 5,000 shares of its common stock with a value
of $132,450 on October 22, 2003, to Michael Guilfoile, president of MG Advisors, Inc., for his consulting
services in connection with Valley’s acquisition of NIA/Lawyers Title Agency, LLC (“NIA/Lawyers”) and Glen
Rauch Securities, Inc. (“Glen Rauch”). These shares were exempt from registration under the Securities Act of
1933 because they were issued in a Private Placement under Section 4(2) of the Act and Regulation D
thereunder.
10
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with Valley’s Consolidated Financial
Statements and the accompanying notes presented elsewhere herein.
Summary of Operations:
Interest income—tax equivalent
basis (1) . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . .
Net interest income—tax equivalent
basis (1) . . . . . . . . . . . . . . . . . . . .
. . .
Net interest income . . . . . . . . . . .
Provision for loan losses . . . . . . . . .
Less: tax equivalent adjustment
Net interest income after
provision for loan losses . . . . .
Non-interest income . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . .
Income before income taxes . . . . . .
Income tax expense . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . $
Per Common Share (2):
Earnings per share (“EPS”):
Basic . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . .
Dividends declared . . . . . . . . . . . . .
Book value . . . . . . . . . . . . . . . . . . . .
Weighted average shares
Years ended December 31,
2003
2002
2001
2000
1999
(in thousands, except for share data)
503,621
148,922
$
523,135
173,453
$
559,557
220,935
$
575,003
252,648
$
524,758
208,792
354,699
6,123
348,576
7,345
341,231
108,197
216,278
233,150
79,735
153,415
1.63
1.62
0.89
6.95
$
$
349,682
5,716
343,966
13,644
330,322
81,238
192,264
219,296
64,680
154,616
1.58
1.57
0.85
6.65
$
$
338,622
6,071
332,551
15,706
316,845
68,476
185,966
199,355
64,151
135,204
1.33
1.32
0.79
6.76
$
$
322,355
6,797
315,558
10,755
304,803
59,100
171,139
192,764
66,027
126,737
1.23
1.22
0.74
6.41
$
$
315,966
6,940
309,026
11,035
297,991
53,803
164,719
187,075
61,734
125,341
1.16
1.15
0.70
6.12
outstanding:
Basic . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . .
Ratios:
Return on average assets . . . . . . . . .
Return on average shareholders’
equity . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity to
average assets . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Dividend payout
Risk-based capital:
Tier 1 capital . . . . . . . . . . . . . .
Total capital . . . . . . . . . . . . . . .
Leverage capital
. . . . . . . . . . . . . . .
Financial Condition at Year-End:
Assets . . . . . . . . . . . . . . . . . . . . . . . $ 9,880,740
6,107,759
Loans, net of allowance . . . . . . . . . .
7,162,968
Deposits . . . . . . . . . . . . . . . . . . . . . .
652,789
Shareholders’ equity . . . . . . . . . . . .
11.24
12.14
8.35
93,995,316
94,498,619
97,782,878
98,357,078
101,885,149
102,425,747
103,179,468
103,996,686
108,128,067
109,150,922
1.63%
1.78%
1.68%
1.66%
1.70%
24.21
6.74
54.60
23.59
7.56
53.80
11.42
12.48
8.67
19.70
8.53
59.40
14.08
15.14
10.25
20.24
8.22
60.16
11.26
12.33
8.48
18.30
9.31
61.21
12.03
13.17
8.81
9,148,456
5,698,401
6,683,387
631,738
8,589,951
5,268,004
6,306,974
678,375
7,901,260
5,127,115
6,136,828
655,982
7,755,707
4,927,621
6,010,233
652,708
(1)
In this report a number of amounts related to net interest income are presented on a “tax equivalent basis.”
Valley believes that this presentation provides comparability of net interest income arising from both
taxable and tax-exempt sources and is consistent with industry practice. Although Valley believes that this
non-GAAP financial measure enhances investors’ understanding of Valley’s business and performance,
these non-GAAP measures should not be considered an alternative to GAAP.
(2) All per share amounts reflect the 5 percent stock dividend issued May 16, 2003, and all prior stock splits and
dividends.
11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this analysis is to provide the reader with information relevant to understanding and
assessing Valley’s results of operations for each of the past three years and financial condition for each of the
past two years. In order to fully appreciate this analysis the reader is encouraged to review the consolidated
financial statements and statistical data presented in this document.
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-K, both in the MD&A and elsewhere, contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and
include expressions about management’s confidence and strategies and management’s expectations about new
and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market
conditions and economic expectations. These statements may be identified by an (*) or such forward-looking
terminology as “expect,” “anticipate,” “look,” “view,” “opportunities,” “allow,” “continues,” “reflects,”
“believe,” “may,” “will” or similar statements or variations of such terms. Such forward-looking statements
involve certain risks and uncertainties. Actual results may differ materially from such forward-looking
statements. Valley assumes no obligation for updating any such forward-looking statement at any time. Factors
that may cause actual results to differ materially from those contemplated by such forward-looking statements
include, but are not limited to, unanticipated changes in the direction of interest rates, changes in loan,
investment and mortgage prepayment assumptions, changes in effective income tax rates, higher or lower cash
flow levels than anticipated, slowdown in levels of deposit growth, a decline in the economy in New Jersey and
New York, a decrease in loan origination volume, as well as a change in legal and regulatory barriers and the
development of new tax strategies or the disallowance of prior tax strategies.
Critical Accounting Policies and Estimates
The accounting and reporting policies followed by Valley conform, in all material respects, to accounting
principles generally accepted in the United States of America. In preparing the consolidated financial statements,
management has made estimates, judgments and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of condition and results of operations for the periods
indicated. Actual results could differ significantly from those estimates.
Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of
financial condition and results of operations. The most significant accounting policies followed by Valley are
presented in Note 1 of the Notes to Consolidated Financial Statements. Valley has identified its policies on the
allowance for loan losses and income tax liabilities to be critical because management has to make subjective
and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as
new information becomes available. Additional information on these policies can be found in Note 1 of the Notes
to Consolidated Financial Statements.
The allowance for loan losses represents management’s estimate of probable credit losses inherent in the
loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting
estimate because it requires significant judgment and the use of estimates related to the amount and timing of
expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The loan portfolio also represents the largest asset type on the Consolidated
Statements of Condition. Note 1 of the Notes to Consolidated Financial Statements describes the methodology
used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of
the allowance for loan losses is included in this MD&A.
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in Valley’s consolidated financial statements or tax returns.
12
Fluctuations in the actual outcome of these future tax consequences could impact Valley’s consolidated financial
condition or results of operations.* Notes 1 and 14 of the Notes to Consolidated Financial Statements include
additional discussion on the accounting for income taxes.
Executive Summary
Net income was $153.4 million, or $1.62 per diluted share in 2003 compared with $154.6 million or $1.57
per diluted share in 2002. 2002 net income includes an $8.75 million tax benefit associated with the restructuring
of a Valley subsidiary into a REIT. Return on average assets for 2003 decreased to 1.63 percent compared with
1.78 percent in 2002, while the return on average equity increased to 24.21 percent in 2003 compared with 23.59
percent in 2002.
Although interest rates continued to decline in 2003 from 2002, Valley’s net interest income increased $4.6
million, contributing to increased earnings per share. An increase in average loan and investment volume helped
to offset the decline in interest rates, as well as decreased interest rates paid on deposits, short-term borrowings
and long-term debt. Earnings for 2003 were also impacted by a lower provision for loan losses, increases in non-
interest income such as the gains on sales of securities, fee income from Valley’s acquisitions in 2002 and
January 2003 as well as gains on sales of loans. These increases were partly offset by prepayment penalties
associated with refinancing $76 million of Valley’s higher cost borrowings, decreased dividends from the
Federal Home Loan Bank (“FHLB”), reduced interest income from funds used to repurchase Valley’s common
stock and higher salaries and employee benefit expenses.
Net Interest Income
Net interest income continues to be the largest source of Valley’s operating income. Net interest income on
a tax equivalent basis increased to $354.7 million for 2003 compared with $349.7 million for 2002. Higher
average balances of loans and investments were more than offset by lower average interest rates for these interest
earning assets during 2003 compared with 2002. Lower average interest rates on investments were also the result
of increased amortization of premiums due to higher levels of prepayments. Also, for 2003, total average interest
bearing liabilities increased causing interest expense to increase, but was totally mitigated by declining interest
rates associated with these liabilities compared to 2002.
The net interest margin on a tax equivalent basis was 4.04 percent for the twelve months ended December
31, 2003 compared with 4.31 percent for the same period in 2002. The change was mainly attributable to interest
rates declining to historic low levels during 2003 compressing the net interest margin for Valley and the banking
industry. Additionally, prepayment penalties associated with refinancing $76 million of Valley’s higher cost
borrowings, decreased dividends from the FHLB and reduced income from funds used to repurchase Valley’s
common stock negatively impacted net
income. Increased loan and investment volume partially
mitigated the negative impact of lower interest rates. The net interest margin and net interest income were
affected by the adoption of Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”) which
required Valley to de-consolidate VNB Capital Trust I, which issued $200 million of preferred securities. As a
result of this de-consolidation, junior subordinated debentures issued by VNB Capital Trust I are now recorded as
long-term debt and costs related to these junior subordinated debentures are included in interest expense. Prior
periods have been restated to reflect this change.
interest
As a result of the net interest margin compression discussed above, management enacted borrowing and
funding strategies in the third and fourth quarters of 2003, which, combined with increased loan and investment
volume and a decrease in investment premium amortization provided the catalyst which increased 2003 fourth
quarter net interest income to $88.8 million and the net interest margin on a tax equivalent basis to 4.00 percent.
That compares with net interest income of $81.7 million for the third quarter of 2003 with a net interest margin
on a tax equivalent basis of 3.76 percent.
Average interest earning assets increased $661.5 million or 8.2 percent in 2003 over the 2002 amount. This
was mainly the result of the increase in average balance of loans of $567.1 million or 10.3 percent and the
increase in average balance of taxable investments of $124.4 million or 5.4 percent.
13
Average interest bearing liabilities for 2003 increased $643.8 million or 9.9 percent from 2002. Average
savings deposits increased $414.6 million or 15.2 percent and continue to provide a low cost source of funding.
This increase was attributed to the addition of new branches, increased customer activity and relatively new
deposit products as well as advertising and promotional efforts. Average time deposits decreased $125.5 million
or 5.3 percent from 2002, due to Valley’s strategy to fund with lower cost deposits and borrowings. The decline
in interest rates on deposits caused a net decrease in interest expense on deposits by $31.0 million. Average
short-term borrowings increased $163.9 million or 88.4 percent over 2002 balances. A portion of this increase
was the result of borrowing at a lower cost in advance of other borrowings maturing in the first quarter of 2004.
Average long-term debt, which includes FHLB advances, increased $190.8 million, or 15.8 percent. During
2003, Valley repositioned some of its borrowings to take advantage of low long-term interest rates. It is
anticipated that this strategy will enable Valley to better match its lower yielding fixed rate loans should interest
rates rise.*
Average interest rates, in all categories of interest earning assets and interest bearing liabilities, decreased
during 2003 compared to 2002. The average interest rate for loans decreased 70 basis points to 6.02 percent and
the average interest rate for taxable investments decreased 95 basis points to 5.05. Average interest rates on total
interest earning assets decreased 71 basis points to 5.74 percent. Average interest rates also decreased on total
interest bearing liabilities by 59 basis points to 2.09 percent from 2.68 percent. Average interest rates on deposits
decreased by 69 basis points to 1.32 percent.
14
The following table reflects the components of net interest income for each of the three years ended
December 31, 2003, 2002 and 2001.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2003
2002
2001
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
(in thousands)
$6,056,439
2,409,851
$364,295
121,794
6.02% $5,489,344
2,285,445
5.05
$368,682
137,137
6.72% $5,199,999
2,136,459
6.00
$399,330
139,511
7.68%
6.53
Assets
Interest earning assets
Loans (1)(2) . . . . . . . . . . . . . . .
Taxable investments (3)
. . . . .
Tax-exempt investments
(1)(3) . . . . . . . . . . . . . . . . . .
253,002
16,910
6.68
227,267
15,529
6.83
221,752
16,100
7.26
Federal funds sold and other
short-term investments . . . .
52,468
622
Total interest earning assets . .
8,771,760
$503,621
1.19
5.74
108,209
1,787
8,110,265
$523,135
1.65
6.45
109,768
4,616
7,667,978
$559,557
4.21
7.30
Allowance for loan losses . . . .
Cash and due from banks . . . .
Other assets . . . . . . . . . . . . . . .
Unrealized gain on securities
(67,536)
200,852
444,515
available for sale . . . . . . . . .
50,142
Total assets . . . . . . . . . . . . . . .
$9,399,733
(66,152)
184,973
386,209
51,248
$8,666,543
(63,564)
182,955
229,985
25,962
$8,043,316
Liabilities and Shareholders’
Equity
Interest bearing liabilities
Savings deposits . . . . . . . . . . .
Time deposits . . . . . . . . . . . . .
Total interest bearing
$3,133,705
2,236,018
$ 22,871
48,095
0.73% $2,719,107
2,361,527
2.15
$ 33,092
68,858
1.22% $2,389,179
2,458,168
2.92
$ 45,742
112,417
1.91%
4.57
deposits . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . .
. . . . . . . . . . . .
Long-term debt
5,369,723
349,160
1,401,800
70,966
3,754
74,202
1.32
1.08
5.29
5,080,634
185,305
1,210,951
101,950
2,570
68,933
2.01
1.39
5.69
4,847,347
263,497
908,968
158,159
11,424
51,352
3.26
4.34
5.65
Total interest bearing
liabilities . . . . . . . . . . . . . . .
7,120,683
148,922
2.09
6,476,890
173,453
2.68
6,019,812
220,935
3.67
Demand deposits . . . . . . . . . . .
Other liabilities . . . . . . . . . . . .
Shareholders’ equity . . . . . . . .
1,577,817
67,489
633,744
Total liabilities and
1,446,296
87,910
655,447
1,301,231
36,114
686,159
shareholders’ equity . . . . . .
$9,399,733
$8,666,543
$8,043,316
Net interest income (tax
equivalent basis) . . . . . . . . .
. . .
Tax equivalent adjustment
Net interest income . . . . . . . . .
Net interest rate differential . . .
Net interest margin (4)
. . . . . .
354,699
(6,123)
$348,576
349,682
(5,716)
$343,966
338,622
(6,071)
$332,551
3.65%
4.04%
3.77%
4.31%
3.63%
4.42%
Interest income is presented on a tax equivalent basis using a 35 percent tax rate.
(1)
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is based on the average historical amortized
cost.
(4) Net interest income on a tax equivalent basis as a percentage of total average interest earning assets.
15
The following table demonstrates the relative impact on net interest income of changes in volume of interest
earning assets and interest bearing liabilities and changes in rates earned and paid by Valley on such assets and
liabilities.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2003 Compared to 2002
Increase (Decrease)(1)
2002 Compared to 2001
Increase (Decrease)(1)
Interest
Volume
Rate
Interest
Volume
Rate
(in thousands)
Interest income:
Loans (2) . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable investments . . . . . . . . . . . . . . . .
. . . . . . . . . .
Tax-exempt investments (2)
Federal funds sold and other short-term
$ (4,387) $36,110
7,163
(15,343)
1,726
1,381
$(40,497) $(30,648) $21,364
9,364
393
(22,506)
(345)
(2,374)
(571)
$(52,012)
(11,738)
(964)
investments . . . . . . . . . . . . . . . . . . . . .
(1,165)
(753)
(412)
(2,829)
(65)
(2,764)
(19,514)
44,246
(63,760)
(36,422)
31,056
(67,478)
Interest expense:
Savings deposits . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . .
(10,221)
(20,763)
1,184
5,269
4,489
(3,498)
1,865
10,337
(14,710)
(17,265)
(681)
(5,068)
(12,650)
(43,559)
(8,854)
17,581
5,684
(4,263)
(2,690)
17,187
(18,334)
(39,296)
(6,164)
394
(24,531)
13,193
(37,724)
(47,482)
15,918
(63,400)
Net interest income
(tax equivalent basis) . . . . . . . . . . . . . .
$ 5,017
$31,053
$(26,036) $ 11,060
$15,138
$ (4,078)
(1) Variances resulting from a combination of changes in volume and rates are allocated to the categories in
proportion to the absolute dollar amounts of the change in each category.
Interest income is adjusted to a tax equivalent basis using a 35 percent tax rate.
(2)
Non-Interest Income
The following table presents the components of non-interest income for the years ended December 31, 2003,
2002 and 2001.
NON-INTEREST INCOME
Trust and investment services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on securities transactions, net
. . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on trading securities, net
Fees from loan servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of loans, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance (“BOLI”) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Years ended December 31,
2003
2002
2001
(in thousands)
$ 4,493
6,793
19,640
7,092
—
9,457
6,934
6,712
20,117
5,726
17,558
21,590
15,606
2,836
9,359
12,966
6,188
16,368
$ 4,404
2,746
19,171
3,564
—
10,818
10,601
2,120
15,052
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$108,197
$81,238
$68,476
16
Non-interest income continues to represent a considerable source of income for Valley, representing 17.9
percent and 13.6 percent of total interest income plus non-interest income for 2003 and 2002, respectively.
Trust and investment services include income from trust operations, brokerage commissions, and asset
management fees. The increase of $1.2 million in 2003 as compared with 2002 was primarily due to additional
brokerage commissions from the acquisition of Glen Rauch in January 2003. Note 2 of the Notes to Consolidated
Financial Statements includes additional discussion on acquisitions made by VNB.
Insurance premiums increased $10.8 million or 158.5 percent in 2003 as compared with 2002, due to
increased revenue from Valley’s acquisitions of NIA/Lawyers (a title insurance agency) and Masters (an all-line
insurance agency). Note 2 of the Notes to Consolidated Financial Statements includes additional discussion on
acquisitions made by Valley.
Service charges on deposit accounts increased $2.0 million or 9.9 percent from $19.6 million for the year
ended December 31, 2002 to $21.6 million for the year ended December 21, 2003 mainly due to increases in
account maintenance fees and a higher volume of accounts assessed with service charges.
Gains on securities transactions, net, increased $8.5 million to $15.6 million for the year ended December
31, 2003 as compared to $7.1 million for the year ended December 31, 2002. During 2003, sales of equity
securities and mortgage-backed securities resulted in gains of approximately $7.6 million and $8.0 million,
respectively. Valley took advantage of the bond market’s strength earlier this year providing gains on mortgage-
backed securities which were paying down rapidly. Many of these mortgage-backed securities had substantial
unrealized gains, low give-up yields and if not sold, had a strong likelihood of paying off at par within a very
short time. Management made the decision to sell selected positions to realize these gains and will continue to
monitor its inventory for more opportunities as part of its program of providing total returns and active portfolio
management. The gains on mortgage-backed securities had the effect of reducing interest income during some
portion of 2003, but overall increasing net income. Gains on equity securities represent gains on positions Valley
may take from time to time in institutions it may be interested in acquiring.
Gains on trading securities, net, are realized gains or losses on the sale of trading securities, primarily
municipal and corporate bonds which are held by Glen Rauch Securities.
Fees from loan servicing include fees for servicing residential mortgage loans and SBA loans. For the year
ended December 31, 2003, fees from servicing residential mortgage loans totaled $7.9 million and fees from
servicing SBA loans totaled $1.5 million, as compared to $8.1 million and $1.4 million for the year ended
December 31, 2002. The aggregate principal balances of mortgage loans serviced by VNB’s subsidiary VNB
Mortgage Services, Inc. (“MSI”) for others approximated $2.0 billion, $1.8 billion and $2.4 billion at December
31, 2003, 2002 and 2001, respectively. The increase for 2003 includes a $14.1 million purchase of loan servicing
rights on a $980.1 million newly originated low coupon mortgage portfolio. The continuing heavy refinancing
and payoff activity resulted in less fee income during 2003 from the serviced mortgage loan portfolio as
borrowers took advantage of lower interest rates causing balances to decline. Interest rates decreased in the
fourth quarter of 2003 and into early 2004. Unlike the significant increase in application volume and prepayment
activity in early 2003, when interest rates were at similar levels, Valley has not experienced a corresponding
increase in early 2004. Accordingly, prepayment activity declined in the fourth quarter of 2003 which continued
into early 2004, suggesting that refinancing activity may have reached a saturation point in Valley’s market
area.* If long-term interest rates decrease further during 2004, then the level of prepayment activity may
accelerate once again and possibly reduce fee income.*
Gains on sales of loans, net, increased to $13.0 million for the year 2003 compared to $6.9 million for the
prior year. The increase in gains was primarily attributed to the sale of $421.6 million in residential mortgage
loans compared with $216.5 million sold for the same period in 2002. Valley originated over $1.3 billion in
residential mortgage loans during 2003 and chose to sell the majority of the lower rate 30-year fixed rate loans,
thereby reducing interest risk on those loans should rates rise in future periods. Valley believes this strategy will
help future net income should rates rise.* During 2003, approximately $10.9 million of gains from the sale of
residential mortgage loans and $2.1 million of gains from the sale of SBA loans were recorded by VNB for sale
into the secondary market.
17
During 2002 and 2001, Valley invested a total of $150.0 million in BOLI to help offset the rising cost of
employee benefits. Income of $6.2 million was recorded from the BOLI during the year ended December 31,
2003, a decrease of $524 thousand over the prior year as a result of lower yields on BOLI investments. BOLI
income is exempt from federal and state income taxes. The BOLI is invested in investment securities including
mortgage-backed, treasuries and high grade corporate securities and is managed by two independent investment
firms.
Other non-interest income decreased $3.7 million to $16.4 million in 2003 as compared to 2002. This
decrease was mainly due to a $1.0 million gain on sale of an office building during the third quarter of 2002, a
$1.6 million gain from the sale of a Canadian subsidiary during the second quarter of 2002 and a settlement of a
lawsuit which resulted in a gain of approximately $1.0 million recorded during the first quarter of 2002. The
significant components of other non-interest
income include fees generated from letters of credit and
acceptances, credit cards and safe deposit box rentals totaling approximately $8.8 million.
Non-Interest Expense
The following table presents the components of non-interest expense for the years ended December 31,
2003, 2002 and 2001.
NON-INTEREST EXPENSE
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment expense . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2003
2002
2001
$ 97,197
22,162
21,782
12,452
12,480
7,409
—
42,796
(in thousands)
$ 86,522
19,364
18,417
11,189
11,411
8,074
—
37,287
$ 79,826
18,200
17,775
10,700
10,170
6,392
9,017
33,886
Total non-interest expense . . . . . . . . . . . . . . . . . . . . .
$216,278
$192,264
$185,966
Non-interest expense totaled $216.3 million for 2003, an increase of $24.0 million or 12.5 percent from
2002. The largest components of non-interest expense were salaries and employee benefit expense which totaled
$119.4 million in 2003 compared with $105.9 million in 2002, an increase of $13.5 million or 12.7 percent. At
December 31, 2003, full-time equivalent staff was 2,264 compared to 2,257 at the end of 2002. The increases in
salary and employee benefit expense were due largely to the recently acquired subsidiaries and business
expansion.
The efficiency ratio measures a bank’s total non-interest expense as a percentage of net interest income plus
non-interest income. Valley’s efficiency ratio for the year ended December 31, 2003 was 47.4 percent compared
to 45.2 percent for 2002. Valley’s acquisition of fee-based subsidiaries has negatively affected the efficiency
ratio as these businesses traditionally operate at higher efficiency ratios.
Net occupancy expense and furniture and equipment expense, collectively, increased $4.6 million or 15.6
percent during 2003 in comparison to 2002. This increase can be attributed to the recently acquired subsidiaries,
new and refurbished branch locations and an overall increase in the cost of operating bank facilities, mainly,
maintenance, depreciation and rent expense. Depreciation expense increased by approximately $1.8 million
during 2003, primarily due to major computer hardware and software purchases and upgrades to better serve
Valley’s customers.
18
Amortization of intangible assets, consisting primarily of amortization of loan servicing rights increased
to $12.5 million. An impairment analysis is completed to determine the
$1.1 million or 9.4 percent
appropriateness of the value of Valley’s mortgage servicing asset. A total impairment expense of $4.1 million
was recorded during 2003 compared with $4.4 million in 2002 as a result of increased refinancing activity and a
large volume of prepayments on higher rate mortgages during the first half of the year. Long-term interest rates
increased during the third quarter of 2003, then decreased during the fourth quarter of 2003 and into January
2004. This caused a slowdown in prepayment activity. Valley anticipates that the prepayment slowdown that
began during the latter part of the year may continue during 2004 and correspondingly, amortization expense for
loan servicing rights may be lower in future periods.*
Other non-interest expense increased $5.5 million or 14.8 percent in 2003 compared with 2002. The
significant components of other non-interest expense include data processing, professional fees, postage,
telephone, stationery, insurance, title search fees and service fees totaling approximately $33.6 million for 2003,
compared to $30.1 million for 2002.
During the first quarter of 2001, Valley recorded merger-related charges of $9.0 million related to the
acquisition of Merchants. On an after tax basis, these charges totaled $7.0 million. These charges included only
identified direct and incremental costs associated with this acquisition. Items included in these charges were the
following: personnel expenses which included severance payments for terminated directors of Merchants;
professional fees which included investment banking, accounting and legal fees; and other expenses which
included the disposal of data processing equipment and the write-off of supplies and other assets not considered
useful in the operation of the combined entities. The major components of the merger-related charges, consisting
of professional fees, personnel and the disposal of data processing equipment, totaled $4.4 million, $3.2 million
and $486 thousand, respectively. See Note 2 of the Notes to Consolidated Financial Statements.
Income Taxes
Income tax expense as a percentage of pre-tax income was 34.2 percent for the year ended December 31,
2003 compared with 29.5 percent in 2002, when Valley recorded an $8.75 million tax benefit associated with the
restructuring of a subsidiary into a REIT. Income tax expense should approximate 34 to 35 percent for 2004
unless there are changes in levels of non-taxable income, tax planning strategies or unexpected changes in state
or federal income tax laws.*
Business Segments
lending,
VNB has four business segments it monitors and reports on to manage its business operations. These
segments are consumer lending, commercial
investment management, and corporate and other
adjustments. Lines of business and actual structure of operations determine each segment. Each is reviewed
routinely for its asset growth, contribution to pre-tax net income and return on average interest earning assets.
Expenses related to the branch network, all other components of retail banking, along with the back office
departments of the bank are allocated from the corporate and other adjustments segment to each of the other three
business segments. Valley’s Financial Services Division, comprised of trust, investment and insurance services,
are included in the consumer lending segment. The financial reporting for each segment contains allocations and
reporting in line with VNB’s operations, which may not necessarily be compared to any other financial
institution. The accounting for each segment includes internal accounting policies designed to measure consistent
and reasonable financial reporting. For financial data on the four business segments see Part II, Item 8, “Financial
Statements and Supplementary Data-Note 20 of the Notes to Consolidated Financial Statements.”
The consumer lending segment had a return on average interest earning assets before income taxes of 3.15
percent for the year ended December 31, 2003 compared to 3.14 percent for the year ended December 31, 2002.
Average interest earning assets increased $338.2 million, which is attributable mainly to gains in home equity,
residential loans and automobile loans. Increases in home equity loans were driven by favorable interest rates and
marketing efforts. The increases in residential mortgage loans were also due to a favorable interest rate
environment, the lowest in decades, refinance and strong home purchase activity and continuing stable economic
19
conditions in Valley’s lending area. Increases in automobile loans were achieved primarily through increased
indirect auto lending through continued expansion of Valley’s auto loan dealer base. Average interest rates on
consumer loans decreased by 92 basis points, while the expenses associated with funding sources decreased by
42 basis points. The majority of the rates on these loans are fixed and do not adjust with changes in short-term
interest rates. While the rates of the automobile loan portfolio are fixed, the duration of 1.7 years is relatively
short, and therefore, the portfolio yield fluctuates in conjunction with lower interest rates. Additionally, interest
rates on home equity lines of credit have adjusted downward in connection with the reductions in the prime
lending rate. Normal cash flow, high prepayment volume and new loans at lower interest rates caused the decline
in yield. Income before income taxes increased $10.8 million as a result of additional fee income from Masters,
NIA Lawyers and Glen Rauch, a decrease in the provision for loan losses, offset by increases in operating
expenses and a larger allocation of the internal transfer expense due to increased average interest earning assets.
The return on average interest earning assets before income taxes for the commercial lending segment
remained the same at 2.76 percent for the year ended December 31, 2003 and 2002. Average interest earning
assets increased $219.7 million, attributed to volume gains in commercial loans and commercial mortgages, net
of prepayments. Interest rates on commercial lending decreased by 63 basis points due to a decline in interest
rates mainly affecting a large number of adjustable rate loans tied to the prime index and the refinance of loans at
lower rates, while the expenses associated with funding sources decreased by 42 basis points. Income before
income taxes increased $6.1 million primarily as a result of increased net interest income including prepayment
penalties and a lower provision for loan losses, offset by increases in operating expenses and a larger allocation
of the internal transfer expense resulting from increased average interest earning assets.
The investment management segment had a return on average interest earning assets before income taxes of
3.14 percent for the year ended December 31, 2003, 21 basis points higher than the year ended December 31,
2002. Average interest earning assets increased by $103.6 million. The yield on interest earning assets decreased
by 59 basis points to 5.35 percent. The investment portfolio is comprised predominantly of mortgage-backed
securities that have generated significant cash flows over the course of the year. Cash flows from investments,
specifically mortgage-backed securities, prepaid at a faster pace due to lower long-term interest rates on
mortgage loans, and these funds were reinvested in lower rate, shorter term duration alternatives causing the
decline in yield. This may continue during 2004 if long-term interest rates remain low.* Income before income
taxes increased 11.7 percent to $84.6 million, primarily due to increases in securities gains and investment
volume partly offset by lower interest rates.
The corporate and other adjustments segment represents income and expense items not directly attributable
to a specific segment including gains on securities transactions not classified in the investment management
segment above, interest expense related to the long-term debt payable to VNB Capital Trust I and service charges
on deposit accounts. The loss before taxes for the corporate segment increased by $11.9 million for the year
ended December 31, 2003 and was primarily due to increased expenses for occupancy, furniture and equipment,
data processing, professional fees, postage, telephone and stationery.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Valley’s success is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be
defined as the exposure of Valley’s interest rate sensitive assets and liabilities to the movement in interest rates.
Valley’s interest rate risk management is the responsibility of the Asset/Liability Management Committee
(“ALCO”). ALCO establishes policies that monitor and coordinate Valley’s sources, uses and pricing of funds.
Valley uses a simulation model to analyze net interest income sensitivity to movements in interest rates. The
simulation model projects net interest income based on various interest rate scenarios over a twelve and twenty-
four month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive
assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable
20
regarding the impact of changing interest rates on the prepayment assumptions of certain assets and liabilities as
of December 31, 2003. The model assumes changes in interest rates without any proactive change in the balance
sheet by management. According to the model run for year end 2003, over a twelve month period, an immediate
interest rate increase of 100 basis points resulted in an increase in net interest income of 2.22 percent or
approximately $8.2 million, while an immediate interest rate decrease of 100 basis points resulted in a decrease
in net interest income of 1.99 percent or approximately $7.4 million.* Management cannot provide any assurance
about the actual effect of changes in interest rates on Valley’s net interest income.*
Valley’s net interest margin is affected by changes in interest rates and cash flows from its loan and
investment portfolios. In a low interest rate environment, greater cash flow is received from mortgage loans and
mortgage-backed securities due to greater refinancing activity. These larger cash flows are then reinvested into
various investments at lower interest rates causing net interest margin pressure. Valley actively manages these
cash flows in conjunction with its liability mix, duration and rates to optimize the net interest margin, while
prudently structuring the balance sheet to manage for a potential increase in interest rates. Valley took advantage
of lower rate short-term and intermediate-term financing in 2003. At the start of the third quarter of 2003, Valley
repositioned some of its borrowings to take advantage of low long-term interest rates. During the third quarter,
Valley prepaid approximately $76 million of higher cost FHLB borrowings resulting in a $3.6 million
prepayment penalty which decreased net interest income and the net interest margin. Valley took advantage of
the low interest rates available for borrowing and secured, on average, five year funding and also converted
approximately $224 million of short-term borrowings to longer-term borrowings, all at an average rate of 2.82
percent. It is anticipated that this strategy will enable Valley to better match its lower yielding fixed rate loans
should interest rates rise.* Valley anticipates that if interest rates move higher, the net interest margin will
increase in future years as a result of this repositioning.*
The following table shows the financial
instruments that are sensitive to changes in interest rates,
categorized by expected maturity and the instruments’ fair value at December 31, 2003. Forecasted maturities
and prepayments for rate sensitive assets and liabilities were calculated using actual interest rates in conjunction
with market interest rates and prepayment assumptions as of December 31, 2003.
INTEREST RATE SENSITIVITY ANALYSIS
Interest sensitive assets:
Investment securities held to
maturity . . . . . . . . . . . . . . . . . . .
Investment securities available for
sale . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . .
Loans:
Commercial . . . . . . . . . . . . . . . .
Mortgage . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Consumer
2004
2005
2006
2007
2008
Thereafter
Total
Balance
Fair
Value
(in thousands)
$ 153,484
$ 125,757
$
97,469
$ 71,363
$ 56,583
$ 727,583
$1,232,239
$1,252,765
524,385
4,252
900,549
711,992
839,886
271,157
—
118,572
616,945
298,738
210,211
—
176,349
—
141,962
—
481,616
—
1,805,680
4,252
1,805,680
4,252
74,051
422,636
226,522
37,794
306,914
148,384
18,777
247,715
68,395
34,909
1,066,442
33,188
1,184,652
3,372,644
1,615,113
1,178,263
3,423,224
1,706,594
Total interest sensitive assets . . . .
$3,134,548
$1,431,169
$1,030,889
$ 740,804
$533,432
$2,343,738
$9,214,580
$9,370,778
Interest sensitive liabilities:
Deposits:
Savings . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . .
. . . . . . . . . . . . . . .
Long-term debt
$ 724,727
1,501,057
377,306
368,245
$ 726,540
261,015
—
143,485
$ 726,540
108,103
—
173,587
$ 368,636
68,514
—
403,866
$184,318
189,327
—
66,224
$ 552,955
74,472
—
391,814
$3,283,716
2,202,488
377,306
1,547,221
$3,283,716
2,227,720
373,795
1,561,605
Total interest sensitive
liabilities . . . . . . . . . . . . . . . . . .
$2,971,335
$1,131,040
$1,008,230
$ 841,016
$439,869
$1,019,241
$7,410,731
$7,446,836
Interest sensitivity gap . . . . . . . . . .
$ 163,213
$ 300,129
$
22,659
$(100,212) $ 93,563
$1,324,497
$1,803,849
$1,923,942
Ratio of interest sensitive assets to
interest sensitive liabilities . . . .
1.05:1
1.27:1
1.02:1
0.88:1
1.21:1
2.30:1
1.24:1
1.26:1
21
Expected maturities are contractual maturities adjusted for all projected payments of principal. For
investment securities, loans and long-term debt, expected maturities are based upon contractual maturity or call
dates, projected repayments and prepayments of principal. The prepayment experience reflected herein is based
on historical experience combined with market consensus expectations derived from independent external
sources. The actual maturities of these instruments could vary substantially if future prepayments differ from
historical experience. For non-maturity deposit liabilities, in accordance with standard industry practice and
Valley’s own historical experience, “decay factors” were used to estimate deposit runoff. Valley uses various
assumptions to estimate fair values. See Note 19 of the Notes to Consolidated Financial Statements for further
discussion on these assumptions.
The total gap re-pricing within 1 year as of December 31, 2003 was $159.0 million, representing a ratio of
interest sensitive assets to interest sensitive liabilities of 1.05:1. Management does not view this amount as
presenting an unusually high risk potential, although no assurances can be given that Valley is not at risk from
interest rate increases or decreases.*
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Maintaining
a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable
cost. On the asset side, liquid funds are maintained in the form of cash and due from banks, federal funds sold,
investment securities held to maturity maturing within one year, securities available for sale and loans held for
sale. Liquid assets decreased to $2.1 billion at December 31, 2003 compared to $2.5 billion at December 31,
2002, representing 22.6 percent and 29.1 percent of earning assets and 21.1 percent and 27.2 percent of total
assets at December 31, 2003 and 2002, respectively. Management believes there is adequate cash flow in the
remaining available for sale portfolio to meet its liquidity needs.*
On the liability side, the primary source of funds available to meet liquidity needs is Valley’s core deposit
base, which generally excludes certificates of deposit over $100 thousand as well as brokered certificates of
deposit. Core deposits averaged approximately $6.0 billion for the year ended December 31, 2003 and $5.5
billion for the year ended December 31, 2002, representing 68.2 percent and 67.2 percent of average earning
assets. Demand and low cost savings deposits have continued to increase as an alternative to certificates of
deposit, mainly as a result of increased branch offices, promotional efforts and the consumer’s desire to invest in
more liquid products. The level of time deposits is affected by interest rates offered, which is often influenced by
Valley’s need for funds and the need to balance its net interest margin. Valley raised over $100 million of five-
year certificates of deposit through its branch network as a special rate offering during the third quarter of 2003.
At December 31, 2003, brokered certificates of deposit totaled $66.9 million and totaled $38.9 million at
December 31, 2002. Short-term and long-term borrowings through federal funds lines, repurchase agreements,
FHLB advances and large dollar certificates of deposit, generally those over $100 thousand are also used as
funding sources.
Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as
well as prepayments received. In 2003, proceeds from the sales of investment securities available for sale
amounted to $785.2 million and proceeds of $1.4 billion were generated from maturities, redemptions and
prepayments of investments. This increase was mainly due to heavy prepayment activity on mortgage loans and
mortgage-backed securities. Additional liquidity could be derived from residential mortgages, commercial
mortgages, auto and home equity loans, as these are all marketable portfolios. Purchases of investment securities
in 2003 were $2.5 billion. Short-term borrowings and certificates of deposit over $100 thousand amounted to
$1.3 billion, on average, for the years ended December 31, 2003 and 2002.
During 2003, a substantial amount of loan growth was funded from a combination of deposit growth,
normal loan payments and prepayments, and borrowings. Valley anticipates using funds from all of the above
sources to fund loan growth during 2004.*
22
The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31,
2003. These certificates of deposit are generated primarily from core deposit customers.
Less than three months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three to six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Six to twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
More than twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
$534,240
139,152
117,984
187,888
$979,264
Valley’s recurring cash requirements consist primarily of dividends to shareholders and interest expense on
long-term debt payable to VNB Capital Trust I . These cash needs are routinely satisfied by dividends collected
from its subsidiary bank along with cash and earnings on investments owned. Projected cash flows from these
sources are expected to be adequate to pay dividends and interest expense payable to VNB Capital Trust I, given
the current capital levels and current profitable operations of its subsidiary.* In addition, Valley has, as approved
by the Board of Directors, repurchased shares of its outstanding common stock. The cash required for these
purchases of shares has been met by using its own funds, dividends received from its subsidiary bank as well as
borrowings from VNB Capital Trust I.
Investment Securities
The amortized cost of securities held to maturity at December 31, 2003, 2002 and 2001 were as follows:
INVESTMENT SECURITIES HELD TO MATURITY
2003
2002
2001
Obligations of states and political subdivisions . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 172,707
629,237
375,317
(in thousands)
$128,839
17,336
379,347
$ 99,757
25,912
324,918
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . .
FRB & FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,177,261
54,978
525,522
65,370
450,587
52,474
Total investment securities held to maturity . . . . . .
$1,232,239
$590,892
$503,061
The fair value of securities available for sale at December 31, 2003, 2002 and 2001 were as follows:
INVESTMENT SECURITIES AVAILABLE FOR SALE
2003
2002
2001
(in thousands)
U.S. Treasury securities and other government
agencies and corporations . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
$ 374,911
106,211
1,305,200
$ 224,021
110,965
1,772,801
$ 195,608
121,242
1,812,888
Total debt securities . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,786,322
19,358
2,107,787
32,579
2,129,738
41,957
Total investment securities available for
sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,805,680
$2,140,366
$2,171,695
23
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
HELD TO MATURITY AT DECEMBER 31, 2003
Obligations of
States and
Political
Subdivisions
Mortgage-
Backed
Securities(5)
Other Debt
Securities
Total(4)
Amortized
Cost(1)
Yield
(2)(3)
Amortized
Cost(1)
Yield
(2)
Amortized
Cost(1)
Yield
(2)
Amortized
Cost(1)
Yield
(2)
(in thousands)
0-1 years . . . . . . . . . . . . . . . . . . . $ 44,253
19,261
1-5 years . . . . . . . . . . . . . . . . . . .
53,823
5-10 years . . . . . . . . . . . . . . . . . .
55,370
Over 10 years . . . . . . . . . . . . . . .
1.30% $ — — % $ — — % $
4.80
4.55
4.49
150 6.57
25 6.55
375,142 7.40
6,585 7.50
2,406 7.54
620,246 4.56
44,253 1.30%
25,996 5.49
56,254 4.67
1,050,758 5.57
Total securities . . . . . . . . . . $172,707
3.72% $629,237 4.60% $375,317 7.40% $1,177,261 5.36%
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
AVAILABLE FOR SALE AT DECEMBER 31, 2003
U.S. Treasury
Securities and
Other Government
Agencies and
Corporations
Obligations of
States and Political
Subdivisions
Mortgage-
Backed Securities(5)
Total(4)
Amortized
Cost(1)
Yield
(2)
Amortized
Cost(1)
Yield
(2)(3)
Amortized
Cost(1)
Yield
(2)
Amortized
Cost(1)
Yield
(2)
(in thousands)
0-1 years . . . . . . . . . . . . . . . . . $164,999 1.21% $
1-5 years . . . . . . . . . . . . . . . . .
5-10 years . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . .
81,077 3.62
103,429 4.22
26,050 4.59
1,235
27,288
67,442
4,829
5.74% $
6.17
7.21
9.85
676 6.75% $ 166,910 1.26%
23,022 7.34
80,042 7.94
1,178,067 4.83
131,387 4.80
250,913 6.21
1,208,946 4.84
Total securities . . . . . . . . $375,555 2.79% $100,794
7.04% $1,281,807 5.07% $1,758,156 4.70%
(1) Amortized costs are stated at cost less principal reductions, if any, and adjusted for accretion of discounts
and amortization of premiums.
(2) Average yields are calculated on a yield-to-maturity basis.
(3) Average yields on obligations of states and political subdivisions are generally tax-exempt and calculated on
a tax-equivalent basis using a statutory federal income tax rate of 35 percent.
(4) Excludes equity securities which have indefinite maturities.
(5) Mortgage-backed securities are shown using stated final maturity.
Valley’s investment portfolio is comprised of U.S. government and federal agency securities, tax-exempt
issues of states and political subdivisions, mortgage-backed securities, equity and other securities. There were no
securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for securities issued
by United States government agencies, which includes the Federal National Mortgage Association (“FNMA”)
and the Federal Home Loan Mortgage Corporation (“FHLMC”). The decision to purchase or sell securities is
based upon the current assessment of long and short-term economic and financial conditions, including the
interest rate environment and other statement of financial condition components.
At December 31, 2003, Valley had $629.2 million of mortgage-backed securities classified as held to
maturity and $1.3 billion of mortgage-backed securities classified as available for sale. Substantially all the
mortgage-backed securities held by Valley are issued or backed by federal agencies. The mortgage-backed
securities portfolio is a source of significant liquidity to Valley through the monthly cash flow of principal and
interest. Mortgage-backed securities, like all securities, are sensitive to changes in the interest rate environment,
increasing and decreasing in value as interest rates fall and rise. As interest rates fall, the increase in prepayments
can reduce the yield on the mortgage-backed securities portfolio, and reinvestment of the proceeds will be at
24
lower yields. Conversely, rising interest rates will reduce cash flows from prepayments and extend anticipated
duration of these assets. Valley monitors the changes in interest rates, cash flows and duration, in accordance
with its investment policies. During 2003, substantial prepayments were received and reinvested at lower yields
and of shorter duration and maturity. This has negatively impacted the yield on the investment portfolio.
Continued low interest rates during 2004 will likely have similar results.* During 2003, Valley sold some of its
lower yielding and/or longer duration securities. This decision was based upon a repositioning of assets as well as
Valley availing itself of gains available at that time which would likely disappear as prepayments occurred.
Included in the mortgage-backed securities portfolio at December 31, 2003 were $217.3 million of
collateralized mortgage obligations (“CMO’s”) of which $13.2 million were privately issued. CMO’s had a yield
of 4.64 percent and an unrealized loss of $512 thousand at December 31, 2003.
As of December 31, 2003, Valley had $1.8 billion of securities available for sale, a decrease of $334.7
million from December 31, 2002. Valley classified approximately $555 million of securities which were
purchased during the third quarter of 2003 as held to maturity in an effort to prepare for any adverse movement
in prices should interest rates rise.* Available for sale securities are recorded at their fair value. As of December
31, 2003, the investment securities available for sale had a net unrealized gain of $20.5 million, net of deferred
taxes, compared to a net unrealized gain of $41.3 million, net of deferred taxes, at December 31, 2002. This
change was primarily due to a decrease in prices resulting from an increase in interest rates for these investments.
These securities are not considered trading account securities, which may be sold on a continuous basis, but
rather are securities which may be sold to meet the various liquidity and interest rate requirements of Valley. In
2001, in connection with the Merchants acquisition, Valley reassessed the classification of securities held in the
Merchants portfolio and transferred $162.4 million of securities from held to maturity to available for sale and
transferred $50.0 million of securities from available for sale to held to maturity to conform with Valley’s
investment objectives.
As part of VNB’s ongoing management of its investment portfolio, the Board of Directors authorized the
writing of call options on certain positions in the available for sale portfolio. In certain cases VNB may write call
options on selected bonds that would give a counterparty the right, but not the obligation, to purchase those
bonds at a future date at a premium price. This is a way to leverage the positions VNB currently owns, which
may or may not result in actually disposing of these positions depending on interest rates. Management has
modeled various future interest rate scenarios and has concluded that by utilizing this strategy in a limited way,
VNB can generate additional non-interest income without exposing itself to increased interest rate risk.* At
December 31, 2003, VNB held no active call options. Included in available for sale securities are $40 million of
mortgage-backed securities which were delivered in January 2004 to a counterparty as a result of a covered call
option exercised in December 2003. VNB recorded interest income on these securities through the time of
delivery.
25
Loan Portfolio
As of December 31, 2003, total loans were $6.2 billion, compared to $5.8 billion at December 31, 2002, an
increase of $409.9 million or 7.1 percent. The following table reflects the composition of the loan portfolio for
the five years ended December 31, 2003.
LOAN PORTFOLIO
2003
2002
2001
2000
1999
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,184,652
$1,115,784
(in thousands)
$1,080,852
$1,026,793
$ 929,673
Total commercial loans . . . . . . . . . . . . .
1,184,652
1,115,784
1,080,852
1,026,793
929,673
Construction . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage . . . . . . . . . . . . . . . . . . .
Commercial mortgage . . . . . . . . . . . . . . . . . .
222,748
1,596,859
1,553,037
200,896
1,427,715
1,515,095
206,789
1,323,877
1,365,344
160,932
1,301,851
1,258,549
123,531
1,250,551
1,178,734
Total mortgage loans . . . . . . . . . . . . . . .
3,372,644
3,143,706
2,896,010
2,721,332
2,552,816
Home equity . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . .
476,149
10,722
1,013,938
114,304
451,543
11,544
932,672
107,239
398,102
12,740
842,247
101,856
306,038
83,894
976,177
74,876
276,261
92,097
1,054,542
86,460
Total consumer loans . . . . . . . . . . . . . .
1,615,113
1,502,998
1,354,945
1,440,985
1,509,360
Total loans . . . . . . . . . . . . . . . . . . . . . . . $6,172,409
$5,762,488
$5,331,807
$5,189,110
$4,991,849
As a percent of total loans:
Commercial loans . . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . .
19.2%
54.6
26.2
19.4%
54.5
26.1
20.3%
54.3
25.4
19.8%
52.4
27.8
18.6%
51.2
30.2
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
100.0%
100.0%
100.0%
100.0%
The majority of the increase in loans for 2003 was divided among residential mortgage loans, commercial
loans and automobile loans. It is not known if the trend of increased lending in these loan types will continue.*
Residential mortgage loans increased $169.1 million or 11.9 percent in 2003 over last year, primarily due to
a favorable interest rate environment and a loan origination function producing substantially more loans than
those paying off. Valley often sells many of its newly originated conforming residential mortgage loans with low
long-term fixed rates into the secondary market, as part of interest rate risk analysis, but may retain amounts
necessary to balance Valley’s asset mix. During 2003, Valley elected to sell approximately $421.6 million of the
$1.3 billion in originated residential mortgage loans.
The commercial
loan and commercial mortgage loan portfolio has continued its steady increase.
Commercial loans increased $68.9 million or 6.2 percent, partly due to increased commercial line draw downs
and new commercial loans. Commercial mortgage loans increased $37.9 million or 2.5 percent during 2003. This
increase represents a large volume of new loans net of a substantial amount of payoffs of commercial mortgage
loans during 2003 as a result of low interest rates and a competitive lending environment.
The home equity loan portfolio, primarily lines of credit, increased $24.6 million or 5.4 percent during 2003
resulting primarily from the decrease in interest rates and Valley’s increased marketing efforts to its customer
base.
Automobile loans during 2003 increased by $81.3 million or 8.7 percent. This is the direct result of Valley
increasing its dealer network in additional markets within New Jersey, New York and Pennsylvania. This
expansion into new lending territories increased new loan volume offsetting the prepayments of existing loans
and loss of business due to manufacturers’ based incentives such as zero percent financing. Valley may not
achieve the same performance in future periods due to levels of automobile sales and these manufacturers’ based
incentives.*
26
Much of Valley’s lending is in northern New Jersey and Manhattan, with the exception of the out-of-state
auto loan portfolio, SBA loans and a small amount of out-of-state residential mortgage loans. However, efforts
are made to maintain a diversified portfolio as to type of borrower and loan to guard against a downward turn in
any one economic sector.* As a result of Valley’s lending, this could present a geographic and credit risk if there
was a significant broad based downturn of the economy within the region.*
The following table reflects the contractual maturity distribution of the commercial and construction loan
portfolios as of December 31, 2003:
1 year or
less
Over 1 to
5 years
Over 5
years
Total
Commercial—fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial—adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction—fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction—adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$212,349
688,200
1,803
61,417
(in thousands)
$ 58,760
190,434
7,486
152,041
$ 8,232
26,678
—
—
$ 279,341
905,312
9,289
213,458
$963,769
$408,721
$34,910
$1,407,400
Prior to maturity of each loan with a balloon payment and if the borrower requests an extension, Valley
generally conducts a review which normally includes an analysis of the borrower’s financial condition and, if
applicable, a review of the adequacy of collateral. A rollover of the loan at maturity may require a principal
paydown.
VNB is a preferred U. S. Small Business Administration (“SBA”) lender with authority to make loans
without the prior approval of the SBA. VNB currently has approval to make SBA loans in New Jersey,
Pennsylvania, New York, Maryland, North and South Carolina, Virginia, Connecticut and the District of
Columbia. Generally, between 75 percent and 85 percent of each loan is guaranteed by the SBA and is typically
sold into the secondary market, with the balance retained in VNB’s portfolio. VNB intends to continue
expanding this area of lending because it provides a good source of fee income and loans with floating interest
rates tied to the prime lending rate.* This program can expand or contract based upon guidelines and availability
of lending established by the SBA.*
During 2003 and 2002, VNB originated approximately $33.4 million and $44.5 million of SBA loans,
respectively, and sold $19.2 million and $27.6 million, respectively. At December 31, 2003 and 2002, $58.1
million and $55.1 million, respectively, of SBA loans were held in VNB’s portfolio and VNB serviced for others
approximately $99.4 million and $100.4 million, respectively, of SBA loans.
Non-performing Assets
Non-performing assets include non-accrual
loans and other real estate owned (“OREO”). Loans are
generally placed on a non-accrual status when they become past due in excess of 90 days as to payment of
principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently
collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or
real estate. OREO is reported at the lower of cost or fair value at the time of acquisition and at the lower of fair
value, less estimated costs to sell, or cost thereafter.
Non-performing assets totaled $23.1 million at December 31, 2003, compared with $21.6 million at
December 31, 2002, an increase of $1.5 million. Non-performing assets at December 31, 2003 and 2002,
amounted to 0.37 percent of loans and OREO, a level almost half of the median of medium to large U.S. banks.
The increase in non-performing assets was mainly attributed to the commercial loan portfolio.
Loans 90 days or more past due and still accruing which were not included in the non-performing category
totaled $2.8 million at December 31, 2003, compared to $4.9 million at December 31, 2002. These loans are
primarily residential mortgage loans, consumer credit and commercial loans which are generally well-secured
27
and in the process of collection. Also included are matured commercial mortgage loans in the process of being
renewed, which totaled $707 thousand and $1.7 million at December 31, 2003 and 2002, respectively. Loans 90
days or more past due and still accruing have decreased to its lowest level in the past five years. It is not known if
this trend or current level will continue.*
Total loans past due in excess of 30 days were 0.92 percent of all loans at December 31, 2003 compared to
1.20 percent at December 31, 2002.
The following table sets forth non-performing assets and accruing loans which were 90 days or more past
due as to principal or interest payments on the dates indicated, in conjunction with asset quality ratios for Valley.
LOAN QUALITY
2003
2002
2001
2000
1999
Loans past due in excess of 90 days and still accruing . . . . .
$ 2,792
$ 4,931
(in thousands)
$10,456
$14,952
$12,194
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22,338
797
$21,524
43
$18,483
329
$ 3,883
129
$ 3,910
2,256
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . .
$23,135
$21,567
$18,812
$ 4,012
$ 6,166
Troubled debt restructured loans . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $
891
$
949
$ 4,852
Non-performing loans as a % of loans . . . . . . . . . . . . . . . . . .
0.36%
0.37%
0.35%
0.07%
0.08%
Non-performing assets as a % of loans plus other real
estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance as a % of loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.37%
1.05%
0.37%
1.11%
0.35%
1.20%
0.08%
1.19%
0.12%
1.29%
During 2003, lost interest on non-accrual loans amounted to $708 thousand, compared with $355 thousand
in 2002.
Although substantially all risk elements at December 31, 2003 have been disclosed in the categories
presented above, management believes that for a variety of reasons, including economic conditions, certain
borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial
loans. As part of the analysis of the loan portfolio by management, it has been determined that there were
approximately $4.4 million in potential problem loans at December 31, 2003 and $4.0 million at January 31,
2004, which have not been classified as non-accrual, past due or restructured.* Potential problem loans are
defined as performing loans for which management has serious doubts as to the ability of such borrowers to
comply with the present loan repayment terms and which may result in a non-performing loan. Of these potential
problem loans, $1.5 million is considered at risk after collateral values and guarantees are taken into
consideration.* There can be no assurance that Valley has identified all of its potential problem loans. At
December 31, 2002, Valley identified approximately $4.0 million of potential problem loans which were not
classified as non-accrual, past due or restructured.
Asset Quality and Risk Elements
Lending is one of the most important functions performed by Valley and, by its very nature, lending is also
the most complicated, risky and profitable part of Valley’s business. For commercial loans, construction loans
and commercial mortgage loans, a separate credit department is responsible for risk assessment, credit file
maintenance and periodically evaluating overall creditworthiness of a borrower. Additionally, efforts are made to
limit concentrations of credit so as to minimize the impact of a downturn in any one economic sector.* These
loans are diversified as to type of borrower and loan. However, most of these loans are in northern New Jersey
and Manhattan, presenting a geographical and credit risk if there was a significant downturn of the economy
within the region.
28
Residential mortgage loans are secured by 1-4 family properties generally located in counties where Valley
has a branch presence and counties contiguous thereto (including Pennsylvania). Valley does entertain loan
requests for mortgage loans secured by homes beyond this primary geographic definition, however, lending
outside this primary area is generally made only in support of customer relationships. Underwriting policies that
are based on FNMA and FHLMC guidance are adhered to for loan requests of conforming and non-conforming
amounts. The weighted average loan-to-value ratio of all residential mortgage originations in 2003 was 54
percent while FICO® (independent objective criteria measuring the creditworthiness of a borrower) scores
averaged 742.
Consumer loans are comprised of home equity loans, credit card loans, automobile loans and other
consumer loans. Home equity and automobile loans are secured loans and are made based on an evaluation of the
collateral and the borrower’s creditworthiness. The automobile loans are from New Jersey and out of state and
management believes these out of the state loans generally present no more risk than those made within New
Jersey.* All loans are subject to Valley’s underwriting criteria. Therefore, each loan or group of loans presents a
geographic risk based upon the economy of the region.
Management realizes that some degree of risk must be expected in the normal course of lending activities.
Allowances are maintained to absorb such loan losses inherent in the portfolio. The allowance for loan losses and
related provision are an expression of management’s evaluation of the credit portfolio and economic climate.
The following table sets forth the relationship among loans, loans charged-off and loan recoveries, the
provision for loan losses and the allowance for loan losses for the past five years.
2003
2002
2001
2000
1999
Years ended December 31,
Average loans outstanding . . . . . . . . . . . . . .
$6,056,439
$5,489,344
(in thousands)
$5,199,999
$5,065,852
$4,682,882
Beginning balance—
Allowance for loan losses . . . . . . . . . . . . .
$
64,087
$
63,803
$
61,995
$
64,228
$
62,606
Loans charged-off:
Commercial . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Mortgage—Commercial . . . . . . . . . . . . . .
Mortgage—Residential . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
Charged-off loans recovered:
Commercial . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Mortgage—Commercial . . . . . . . . . . . . . .
Mortgage—Residential . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to operations . . . . . . . . . .
Ending balance—Allowance for loan
4,905
—
409
244
6,089
11,647
2,012
—
379
135
2,339
4,865
6,782
7,345
10,570
504
525
233
6,682
18,514
1,905
—
1,014
43
2,192
5,154
13,360
13,644
10,841
—
710
39
6,414
18,004
1,465
—
184
42
2,415
4,106
13,898
15,706
7,162
—
490
249
8,992
16,893
947
—
372
49
2,537
3,905
12,988
10,755
1,560
—
983
761
10,051
13,355
1,148
218
268
133
2,175
3,942
9,413
11,035
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
64,650
$
64,087
$
63,803
$
61,995
$
64,228
Ratio of net charge-offs during the period to
average loans outstanding during the
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.11%
0.24%
0.27%
0.26%
0.20%
29
The allowance for loan losses is maintained at a level estimated to absorb probable loan losses of the loan
portfolio. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan
portfolio. VNB’s methodology for evaluating the appropriateness of the allowance consists of several significant
elements, which include the allocated allowance, specific allowances for identified problem loans, portfolio
segments and the unallocated allowance. The allowance also incorporates the results of measuring impaired loans
as called for in Statement of Financial Accounting Standards (“SFAS”) No. 114 “Accounting by Creditors for
Impairment of a Loan” and SFAS No. 118 “Accounting by Creditors for Impairment of a Loan—Income
Recognition and Disclosures.”
VNB’s allocated allowance is calculated by applying loss factors to outstanding loans. The formula is based
on the internal risk grade of loans or pools of loans. Any change in the risk grade of performing and/or non-
performing loans affects the amount of the related allowance. Loss factors are based on VNB’s historical loss
experience and may be adjusted for significant circumstances that, in management’s judgment, affect the
collectibility of the portfolio as of the evaluation date.
The allowance contains an unallocated portion to cover inherent losses within a given loan category which
have not been otherwise reviewed or measured on an individual basis. Such unallocated allowance includes
management’s evaluation of local and national economic and business conditions, portfolio concentrations, credit
quality and delinquency trends. The unallocated portion of the allowance reflects management’s attempt to
ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in
estimates of expected credit losses.
During 2003, continued emphasis was placed on the current economic climate and the condition of the real
estate market in the northern New Jersey area and Manhattan. Management addressed these economic conditions
and applied that information to changes in the composition of the loan portfolio and net charge-off levels. The
provision charged to operations was $7.3 million in 2003 compared to $13.6 million in 2002.
The following table summarizes the allocation of the allowance for loan losses to specific loan categories
for the past five years.
2003
2002
Years ended December 31,
2001
(in thousands)
2000
1999
Percent
of Loan
Category
to Total
Loans
Percent
of Loan
Category
to Total
Loans
Allowance
Allocation
Percent
of Loan
Category
to Total
Loans
Allowance
Allocation
Percent
of Loan
Category
to Total
Loans
Allowance
Allocation
Percent
of Loan
Category
to Total
Loans
Allowance
Allocation
Allowance
Allocation
Loan category:
Commercial . . .
Mortgage . . . . .
. . . .
Consumer
Unallocated . . .
$29,914
16,657
5,884
12,195
19.2% $27,633
15,545
54.6
9,552
26.2
11,357
N/A
19.4% $26,180
14,148
54.5
9,248
26.1
14,227
N/A
20.3% $24,234
11,827
54.3
12,559
25.4
13,375
N/A
19.8% $24,609
13,282
52.4
12,813
27.8
13,524
N/A
18.6%
51.2
30.2
N/A
$64,650
100.0% $64,087
100.0% $63,803
100.0% $61,995
100.0% $64,228
100.0%
At December 31, 2003, the allowance for loan losses amounted to $64.7 million or 1.05 percent of loans, as
compared to $64.1 million or 1.11 percent at December 31, 2002.
The allowance was adjusted by provisions charged against income and loans charged-off, net of recoveries.
Net loan charge-offs were $6.8 million for the year ended December 31, 2003 compared with $13.4 million for
the year ended December 31, 2002. The ratio of net charge-offs to average loans decreased to 0.11 percent for
2003 compared with 0.24 percent for 2002. Non-accrual loans increased in 2003 in comparison to 2002. Loans
past due 90 days and still accruing at December 31, 2003 were lower than at December 31, 2002.
The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific and
general allocations to the allowance for loan losses totaled $16.1 million and $1.8 million, respectively, at
30
December 31, 2003 and $16.0 million and $3.4 million, respectively, at December 31, 2002. The average balance
of impaired loans during 2003, 2002 and 2001 was approximately $17.8 million, $8.7 million and $6.1 million,
respectively. The amount of cash basis interest income that was recognized on impaired loans during 2003, 2002
and 2001 was $789 thousand, $368 thousand and $828 thousand, respectively.
Capital Adequacy
A significant measure of the strength of a financial institution is its shareholders’ equity. At December 31,
2003, shareholders’ equity totaled $652.8 million or 6.6 percent of total assets, compared with $631.7 million or
6.9 percent at year-end 2002.
Included in shareholders’ equity as a component of accumulated other comprehensive income at December
31, 2003 was a $20.5 million unrealized gain on investment securities available for sale, net of tax, compared to
an unrealized gain of $41.3 million on investment securities available for sale, net of tax at December 31, 2002.
On May 14, 2003, Valley’s Board of Directors authorized the repurchase of up to 2.5 million shares of
Valley’s outstanding common stock. Purchases may be made from time to time in the open market or in privately
negotiated transactions generally at prices not exceeding prevailing market prices.
On August 21, 2001 Valley’s Board of Directors authorized the repurchase of up to 10.5 million shares of
Valley’s outstanding common stock. Purchases were made from time to time in the open market or in privately
negotiated transactions generally at prices not exceeding prevailing market prices. Reacquired shares were held
in treasury and were used for general corporate purposes. Valley had repurchased 1.4 million shares during 2003
for a total of 10.2 million shares of its common stock since the inception of this program. Valley expects to
continue its existing repurchase program until all 10.5 million shares are purchased before the newly authorized
program becomes effective.*
Risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common shareholders’
equity and eligible long-term debt related to VNB Capital Trust I, less disallowed intangibles and adjusted to
exclude unrealized gains and losses, net of tax. Total risk-based capital consists of Tier 1 capital and the
allowance for loan losses up to 1.25 percent of risk-adjusted assets. Risk-adjusted assets are determined by
assigning various levels of risk to different categories of assets and off-balance sheet activities.
In November 2001, Valley sold $200.0 million of preferred securities through VNB Capital Trust I, a
portion of which qualifies as Tier 1 capital within regulatory limitations. Including these securities, Valley’s
capital position at December 31, 2003 under risk-based capital guidelines was $806.9 million, or 11.2 percent of
risk-weighted assets for Tier 1 capital and $871.5 million, or 12.1 percent for Total risk-based capital. The
comparable ratios at December 31, 2002 were 11.4 percent for Tier 1 capital and 12.5 percent for Total risk-
based capital. At December 31, 2003 and 2002, Valley was in compliance with the leverage requirement having
Tier 1 leverage ratios of 8.4 percent and 8.7 percent, respectively. Valley’s ratios at December 31, 2003 were all
above the “well capitalized” requirements, which require Tier I capital to risk-adjusted assets of at least
6 percent, Total risk-based capital to risk-adjusted assets of 10 percent and a minimum leverage ratio of
5 percent. Upon adoption of FIN 46, Valley de-consolidated the VNB Capital Trust I Issuer Trust. The Federal
Reserve Board has issued interim guidance that continues to recognize trust preferred securities as a component
of Tier 1 capital, however, it is possible that a change may result in these securities qualifying for Tier 2 capital
rather than Tier 1 capital.* See Note 12 of the Notes to Consolidated Financial Statements. If Tier 2 capital
treatment had been required at December 31, 2003, Valley would remain “well capitalized” under the Federal
bank regulatory agencies definitions.
Book value per share amounted to $6.95 at December 31, 2003 compared with $6.65 per share at
December 31, 2002.
The primary source of capital growth is through retention of earnings. Valley’s rate of earnings retention,
derived by dividing undistributed earnings by net income, was 45.40 percent at December 31, 2003, compared to
46.20 percent at December 31, 2002. Cash dividends declared amounted to $0.89 per share, equivalent to a
31
dividend payout ratio of 54.60 percent for 2003, compared to 53.80 percent for the year 2002. The current
quarterly dividend rate of $0.225 per share provides for an annual rate of $0.90 per share. Valley’s Board of
Directors continues to believe that cash dividends are an important component of shareholder value and that, at
its current level of performance and capital, Valley expects to continue its current dividend policy of a quarterly
distribution of earnings to its shareholders.*
Contractual Obligations
Valley has various financial obligations, including contractual obligations that may require future cash
payments. Further discussion of the nature of each obligation is included in Notes 10, 11, 12 and 15 of the Notes
to Consolidated Financial Statements.
The following table presents, as of December 31, 2003, significant fixed and determinable contractual
obligations to third parties by payment date:
One Year
or Less
One to
Three Years
Three to Five
Years
Over Five
Years
Total
(in thousands)
Deposits without a stated maturity (1) . . . . . . .
Certificates of deposit (2) . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Short-term borrowings (3)
Long-term debt (4) . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . .
$4,960,480
1,522,672
381,381
206,197
8,200
$ —
379,232
—
202,463
14,607
$ — $ — $4,960,480
2,247,365
77,384
268,077
381,381
—
—
1,615,604
720,062
486,882
55,514
21,218
11,489
(1) Excludes interest.
(2)
(3)
(4)
Includes interest at the weighted average interest rate to be paid over the life of the certificates.
Includes interest at the weighted average interest rate of the borrowings.
Includes interest at the weighted average interest rate to be paid over the remaining term of the debt.
Valley also has obligations under its pension benefit plans, not included in the above table, as further
described in Note 13 of the Notes to Consolidated Financial Statements.
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
The following table shows the amounts and expected maturities of significant commitments as of
December 31, 2003. Further discussion on these commitments is included in Note 15 of the Notes to
Consolidated Financial Statements.
One Year
or Less
One to
Three Years
Three to Five
Years
Over Five
Years
Total
(in thousands)
Commitments to extend credit:
Commercial loans and lines of credit . . . . . . . . .
Home equity and other revolving lines . . . . . . .
Commercial mortgages . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . .
Commercial letters of credit . . . . . . . . . . . . . . . .
Commitments to sell loans . . . . . . . . . . . . . . . . .
Commitments to fund investments . . . . . . . . . . .
Commitments to fund civic and community
investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,062,855
519,980
184,224
108,521
113,638
59,592
29,036
4,505
84,658
$ —
—
146,790
—
—
99,684
—
—
—
1,486
5,827
6,352
6,912
$ —
—
5,000
—
—
269
—
—
—
—
3,841
$ — $1,062,855
519,980
338,185
108,521
113,638
159,620
29,036
4,505
84,658
—
2,171
—
—
75
—
—
—
655
—
8,493
16,580
Commitments to extend credit do not necessarily represent future cash requirements, as these commitments
may expire without being drawn on based upon Valley’s historical experience .*
Included in the other commitments are projected earn-outs of $7.9 million that are scheduled to be paid over
a five year period in conjunction with various acquisitions made by Valley.* These earn-outs are paid in
32
accordance with predetermined profitability targets. The balance of the other category represents approximate
amounts for communication and technology costs that will be incurred per contracts.
Results of Operations—2002 Compared to 2001
Valley reported net income for 2002 of $154.6 million, or $1.57 per diluted share compared with $135.2
million, or $1.32 per diluted share, in 2001. Return on average assets for 2002 rose to 1.78 percent compared
with 1.68 percent in 2001, while the return on average equity increased to 23.59 percent in 2002 compared with
19.70 percent in 2001.
Net interest income on a tax equivalent basis increased to $349.7 million for 2002 compared with $338.6
million for 2001. Higher average balances of total
interest earning assets, primarily loans and taxable
investments, were offset by lower average interest rates for these interest earning assets during 2002 compared
with 2001. Also, for 2002, total average interest bearing liabilities increased causing interest expense to increase,
but was substantially offset by declining rates associated with these liabilities compared to 2001. The net interest
margin on a tax equivalent basis decreased to 4.31 percent for 2002 compared with 4.42 percent for 2001. The
net interest margin and net interest income reflect the adoption of “FIN 46” which required Valley to de-
consolidate its investment in VNB Capital Trust I, which issued $200 million of preferred securities. As a result
of this de-consolidation, junior subordinated debentures issued by VNB Capital Trust I are now recorded as long-
term debt and costs related to these junior subordinated debentures are included in interest expense. Prior periods
have been restated to reflect this change.
Non-interest income amounted to $81.2 million in 2002, compared with $68.5 million in 2001. Gains on
securities transactions, net, increased $3.5 million to $7.1 million for the year ended December 31, 2002 as
compared to $3.6 million for the year ended December 31, 2001. Fees from servicing residential mortgage loans
totaled $8.1 million and fees from servicing SBA loans totaled $1.4 million, as compared to $9.5 million and
$1.3 million for the year ended December 31, 2001. The heavy loan prepayment activity resulted in less fee
income during 2002 from the serviced mortgage loan portfolio, in spite of increased origination volume by VNB.
Gains on sales of loans, net, decreased to $6.9 million for the year 2002 compared to $10.6 million for the prior
year. The decrease in gains was primarily attributed to the $4.9 million pre-tax gain recorded in January 2001 on
the sale of the $66.6 million co-branded ShopRite Mastercard credit card portfolio, partially mitigated by
increased secondary market activity for residential mortgages and SBA lending. Other non-interest income
increased $5.9 million to $20.1 million in 2002 as compared to 2001. This increase includes a $1.0 million gain
recorded in the third quarter of 2002 from the sale of an office building acquired in an acquisition, a $1.6 million
gain from the sale of a Canadian subsidiary during the second quarter of 2002 and a net gain of approximately
$1.0 million from the settlement of a lawsuit.
Non-interest expense totaled $192.3 million for 2002, an increase of $6.3 million or 3.39 percent from 2001.
Total non-interest expense for 2001 included merger-related charges of $9.0 million. The largest components of
non-interest expense were salaries and employee benefit expense which totaled $105.9 million in 2002 compared
to $98.0 million in 2001, an increase of $7.9 million or 8.0 percent. At December 31, 2002, full-time equivalent
staff was 2,257 compared to 2,129 at the end of 2001. The increase in salary and employee benefit expense
mainly included Valley’s acquisitions of NIA/Lawyers and Masters, new branches, and other expanded
operations. Other non-interest expense increased $3.4 million or 10.0 percent in 2002 compared with 2001. The
significant components of other non-interest expense include data processing, professional fees, postage,
telephone, stationery, title search fees, insurance and service fees which totaled approximately $25.6 million for
2002, compared to $21.0 million for 2001. During the first quarter of 2001, Valley recorded merger-related
charges of $9.0 million related to the acquisition of Merchants. On an after tax basis, these charges totaled $7.0
million. These charges included only identified direct and incremental costs associated with this acquisition.
Items included in these charges were the following: personnel expenses which included severance payments for
terminated directors of Merchants; professional fees which included investment banking, accounting and legal
fees; and other expenses which included the disposal of data processing equipment and the write-off of supplies
and other assets not considered useful in the operation of the combined entities. The major components of the
merger-related charges, consisting of professional fees, personnel and the disposal of data processing equipment,
totaled $4.4 million, $3.2 million and $486 thousand, respectively.
33
Income tax expense as a percentage of pre-tax income was 29.5 percent for the year ended December 31,
2002 compared to 32.2 percent in 2001. The decrease in the effective tax rate was attributable to the effect of the
restructuring of an existing subsidiary into a REIT during 2002. The effective tax rate was also positively
affected by the non-taxable income of $6.7 million from the investment in BOLI.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For information regarding Quantitative and Qualitative Disclosures About Market Risk, see Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate
Sensitivity.”
34
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity, fair value of $1,252,765 and $597,480 in 2003
and 2002, respectively (Notes 3 and 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale (Notes 4 and 11) . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans (Notes 5 and 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for loan losses (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2003
2002
(in thousands, except for
share data)
$ 218,166
$ 243,923
1,232,239
1,805,680
4,252
5,720
6,166,689
(64,650)
590,892
2,140,366
—
42,329
5,720,159
(64,087)
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,102,039
5,656,072
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net (Note 8)
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets (Notes 2, 7, 9 and 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128,606
40,445
164,404
179,189
113,755
41,591
158,832
160,696
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,880,740
$9,148,456
Liabilities
Deposits:
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing:
$1,676,764
$1,569,921
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,283,716
2,202,488
2,942,763
2,170,703
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,162,968
6,683,387
Short-term borrowings (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (Notes 11 and 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities (Notes 13 and 14) . . . . . . . . . . . . . . . . . . . . . . .
377,306
1,547,221
140,456
378,433
1,325,828
129,070
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,227,951
8,516,718
Commitments and contingencies (Note 15)
Shareholders’ Equity (Notes 2, 13, 14 and 16)
Preferred stock, no par value, authorized 30,000,000 shares; none issued . . . . . . . . . . .
Common stock, no par value, authorized 149,564,245 shares; issued 94,202,363
shares in 2003 and 99,007,032 shares in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated common stock held by employee benefit plan . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (291,895 shares in 2003 and 3,957,498 shares in 2002) . . . . . .
—
—
33,304
318,599
288,313
(259)
20,531
660,488
(7,699)
33,332
318,964
338,770
(435)
41,319
731,950
(100,212)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
652,789
631,738
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .
$9,880,740
$9,148,456
See accompanying notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF INCOME
Interest Income
Interest and fees on loans (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends on investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on federal funds sold and other short-term investments . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense
Interest on deposits:
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on short-term borrowings (Note 11)
. . . . . . . . . . . . . . . . . .
Interest on long-term debt (Notes 11 and 12) . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income after Provision for Loan Losses . . . . . . . . .
Non-Interest Income
Trust and investment services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on securities transactions, net (Note 4) . . . . . . . . . . . . . . . . . .
Gains on trading securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees from loan servicing (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance (Note 13) . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Interest Expense
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salary expense (Note 13)
. . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit expense (Note 13)
Net occupancy expense (Notes 8 and 15) . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment expense (Note 8) . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets (Note 7) . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger-related charges (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings Per Share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share . . . . . . . . . . . . . . . .
Weighted Average Number of Shares Outstanding:
Years ended December 31,
2003
2002
2001
(in thousands, except for share data)
$
364,091
$
368,402
$
398,893
118,816
10,991
2,978
622
497,498
22,871
48,095
3,754
74,202
148,922
348,576
7,345
341,231
5,726
17,558
21,590
15,606
2,836
9,359
12,966
6,188
16,368
108,197
97,197
22,162
21,782
12,452
12,480
7,409
—
42,796
216,278
233,150
79,735
153,415
1.63
1.62
0.89
$
$
133,982
10,093
3,155
1,787
517,419
33,092
68,858
2,570
68,933
173,453
343,966
13,644
330,322
4,493
6,793
19,640
7,092
—
9,457
6,934
6,712
20,117
81,238
86,522
19,364
18,417
11,189
11,411
8,074
—
37,287
192,264
219,296
64,680
154,616
1.58
1.57
0.85
$
$
$
$
135,354
10,466
4,157
4,616
553,486
45,742
112,417
11,424
51,352
220,935
332,551
15,706
316,845
4,404
2,746
19,171
3,564
—
10,818
10,601
2,120
15,052
68,476
79,826
18,200
17,775
10,700
10,170
6,392
9,017
33,886
185,966
199,355
64,151
135,204
1.33
1.32
0.79
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,995,316
94,498,619
97,782,878
98,357,078
101,885,149
102,425,747
See accompanying notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Preferred
Stock
Common
Stock
Surplus
Retained
Earnings
Unallocated
Common Stock
Held by
Employee
Benefit Plan
(in thousands)
$(775)
—
—
—
—
—
—
—
—
—
173
—
—
$32,015 $321,970 $ 317,855
—
—
—
—
—
— 135,204
—
—
—
—
—
—
—
—
—
—
(13)
1,308
—
—
—
—
—
(3,241)
83,657
901
3,321
—
—
(80,899)
(7,560)
(93,870)
—
—
—
33,310
406,608
270,730
(602)
—
—
—
—
—
—
—
22
—
—
—
—
—
— 154,616
—
—
—
—
—
—
—
—
—
—
(744)
(88,785)
677
73
1,135
—
—
(82,558)
(4,018)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
167
—
—
—
33,332
318,964
338,770
(435)
—
—
—
—
—
—
(28)
—
—
—
—
—
— 153,415
—
—
—
—
—
—
—
—
(1,764)
(189)
719
525
344
—
—
(83,621)
(2,687)
(117,564)
—
—
—
—
—
—
—
—
—
—
—
—
176
—
—
—
Balance—December 31, 2000 . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax:
Net change in unrealized gains and losses
on securities available for sale, net of tax
of $14,116 . . . . . . . . . . . . . . . . . . . . . . . . .
Less reclassification adjustment for gains
included in net income, net of tax of
$(1,322)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . .
Other comprehensive income . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . .
Effect of stock incentive plan, net
. . . . . . . . . .
Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of employee benefit plan shares . . .
Tax benefit from exercise of stock options . . .
Purchase of treasury stock . . . . . . . . . . . . . . . .
Balance—December 31, 2001 . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax:
Net change in unrealized gains and losses
on securities available for sale, net of tax
of $12,687 . . . . . . . . . . . . . . . . . . . . . . . . .
Less reclassification adjustment for gains
included in net income, net of tax of
$(2,552)
Foreign currency translation adjustment
. . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
Other comprehensive income . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . .
Effect of stock incentive plan, net
. . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . .
Allocation of employee benefit plan shares . . .
Fair value of stock options granted . . . . . . . . .
Tax benefit from exercise of stock options . . .
Purchase of treasury stock . . . . . . . . . . . . . . . .
Balance—December 31, 2002 . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive losses, net of tax:
Net change in unrealized gains and losses
on securities available for sale, net of tax
of $(6,343) . . . . . . . . . . . . . . . . . . . . . . . .
Less reclassification adjustment for gains
included in net income, net of tax of
$(5,787)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive losses . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . .
Effect of stock incentive plan, net
. . . . . . . . . .
Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of employee benefit plan shares . . .
Fair value of stock options granted . . . . . . . . .
Tax benefit from exercise of stock options . . .
Purchase of treasury stock . . . . . . . . . . . . . . . .
Balance—December 31, 2003 . . . . . . . . . . . .
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Shareholders’
Equity
$ (2,307)
$ (12,776)
$ 655,982
—
—
135,204
24,621
(2,242)
(434)
21,945
—
—
—
—
—
—
—
19,638
—
25,108
(4,540)
1,113
21,681
—
—
—
—
—
—
—
—
41,319
—
(10,969)
(9,819)
(20,788)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,066
8,884
529
—
(65,012)
(51,309)
—
—
—
21,945
157,149
(80,899)
6,252
(21)
1,603
3,321
(65,012)
678,375
—
154,616
—
—
—
—
—
—
11,308
88,643
774
—
—
(149,628)
(100,212)
—
—
—
21,681
176,297
(82,558)
6,568
(142)
1,618
73
1,135
(149,628)
631,738
—
153,415
—
—
—
—
—
9,848
117,564
463
—
—
(35,362)
—
—
(20,788)
132,627
(83,621)
5,369
(189)
1,358
525
344
(35,362)
$—
$33,304 $318,599 $ 288,313
$(259)
$ 20,531
$
(7,699)
$ 652,789
See accompanying notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provided by operating activities:
Years ended December 31,
2003
2002
2001
(in thousands)
$
153,415
$
154,616
$
135,204
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of compensation costs pursuant to long-term stock incentive plans . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization of premiums and accretion of discounts . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on securities transactions, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash surrender value of bank owned life insurance . . . . . . . . . . . . . . . .
Net (increase) decrease in accrued interest receivable and other assets . . . . . . . . . . . . .
Net increase (decrease) in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . .
23,960
3,149
7,345
11,031
(7,987)
344
(15,606)
448,754
(12,966)
(399,179)
(336,344)
332,092
—
—
(6,188)
(971)
22,380
21,102
2,599
13,644
9,501
(29,382)
1,135
(7,092)
248,130
(6,934)
(243,923)
—
—
1,910
(995)
(6,712)
(32,650)
(11,124)
18,935
2,304
15,706
5,877
(7,532)
3,321
(3,564)
226,625
(10,601)
(254,322)
—
—
—
—
(2,120)
22,399
10,304
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
223,229
113,825
162,536
Cash flows from investing activities:
Purchase of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities, redemptions and prepayments
of investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities, redemptions and prepayments
of investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in federal funds sold and other short-term investments . . . . . . . . . . . . . . . . . . .
Net increase in loans made to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment, net of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
785,198
(50,000)
645,989
(100,000)
357,105
1,333,396
(1,811,375)
(729,891)
1,630
1,157,709
(1,740,979)
(115,167)
—
1,154,002
(1,910,654)
(77,865)
—
86,037
—
(458,770)
(26,141)
(14,090)
26,792
—
(444,694)
(29,954)
—
39,052
85,000
(121,575)
(11,728)
(2,400)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(834,006)
(550,304)
(589,063)
Cash flows from financing activities:
Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of common shares to treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued, net of cancellations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of cash flow information:
Cash paid during the year for interest on deposits and borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the year for federal and state income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of securities from held to maturity to available for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of securities from available for sale to held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . .
479,581
(1,127)
447,461
(226,068)
(82,931)
(35,362)
3,466
585,020
(25,757)
243,923
218,166
149,704
68,903
—
—
376,413
74,171
311,000
(167,086)
(82,409)
(149,628)
6,091
368,552
(67,927)
311,850
243,923
179,343
92,484
—
—
170,146
(121,752)
706,000
(122,080)
(76,260)
(65,012)
8,230
499,272
72,745
239,105
311,850
222,121
32,676
162,433
50,044
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1)
Business
Valley National Bancorp (“Valley”) is a bank holding company whose principal wholly-owned subsidiary is
Valley National Bank (“VNB”), a national banking association providing a full range of commercial, retail and
trust and investment services through its branch and ATM network throughout northern New Jersey and
Manhattan. VNB also lends, through its consumer division and SBA program, to borrowers covering territories
outside and within its branch network. VNB is subject to intense competition from other financial services
companies and is subject
to the regulation of certain federal and state agencies and undergoes periodic
examinations by certain regulatory authorities.
VNB’s subsidiaries are all included in the consolidated financial statements of Valley. These subsidiaries
include a mortgage servicing company; a title insurance agency; asset management advisors which are SEC
registered investment advisors; an all-line insurance agency offering property and casualty, life and health
insurance; a subsidiary which holds, maintains and manages investment assets for VNB; a subsidiary which owns
and services auto loans; a subsidiary which specializes in asset-based lending; a subsidiary which offers both
commercial equipment leases and financing for general aviation aircraft; and a subsidiary which is a registered
broker-dealer. VNB’s subsidiaries also include a real estate investment trust subsidiary (“REIT”) which owns
real estate related investments and a REIT subsidiary which owns some of the real estate utilized by VNB and
related real estate investments. All subsidiaries mentioned above are wholly-owned by VNB, except Valley owns
less than 1 percent of the holding company for the REIT subsidiary which owns some of the real estate utilized
by VNB and related real estate investments. Each REIT must have 100 or more shareholders to qualify as a
REIT, and therefore, both have issued less than 20 percent of their outstanding non-voting preferred stock to
outside shareholders, most of whom are non-senior management VNB employees.
Basis of Presentation
The consolidated financial statements of Valley include the accounts of its commercial bank subsidiary,
VNB and all of its wholly-owned subsidiaries. All
inter-company transactions and balances have been
eliminated. Certain reclassifications have been made in the consolidated financial statements for 2002 and 2001
to conform to the classifications presented for 2003.
In preparing the consolidated financial statements, management has made estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and
results of operations for the periods indicated. Actual results could differ significantly from those estimates.
Valley adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (“FIN 46”) which
required Valley to de-consolidate VNB Capital Trust I, which issued $200 million of preferred securities. As a
result of this de-consolidation, junior subordinated debentures issued by VNB Capital Trust I are now recorded as
long-term debt and costs related to these junior subordinated debentures are included in interest expense. Prior
periods have been restated to reflect this change.
Cash Flow
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and
interest bearing deposits in other banks.
Investment Securities
At the time of purchase, investments are classified into one of three categories: held to maturity, available
for sale or trading.
Investment securities held to maturity are carried at cost and adjusted for amortization of premiums and
accretion of discounts by using the interest method over the term of the investment.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Management has identified those investment securities which may be sold prior to maturity. These
investment securities are classified as available for sale in the accompanying consolidated statements of financial
condition and are recorded at fair value on an aggregate basis. Unrealized holding gains and losses on such
securities are excluded from earnings, but are included as a component of accumulated other comprehensive
income which is included in shareholders’ equity, net of deferred taxes. Realized gains or losses on the sale of
investment securities available for sale are recognized by the specific identification method and shown as a
separate component of non-interest income.
Trading securities are held by Glen Rauch Securities, a subsidiary of VNB, and are primarily comprised of
municipal bonds, corporate bonds and government agencies purchased for resale to retail and institutional clients.
These investment securities are classified as trading securities in the accompanying consolidated statements of
financial condition and are recorded at fair value on an aggregate basis. Unrealized holding gains and losses on
such securities are included in earnings as a component of non-interest income in the accompanying consolidated
statements of income. Realized gains or losses on the sale of trading securities are recognized by the specific
identification method and shown as a separate component of non-interest income.
Valley periodically evaluates whether any of its investments are other-than-temporarily impaired. This
determination requires significant judgment. In making this judgment, Valley evaluates, among other factors, the
duration and extent to which the fair value of an investment is less than its cost; the financial health of and near-
term business outlook for the investee, including factors such as industry and sector performance, changes in
technology, and operational and financial cash flow.
Loans and Loan Fees
Loan origination and commitment fees, net of related costs, are deferred and amortized as an adjustment of
loan yield over the estimated life of the loans approximating the effective interest method.
Loans held for sale consist of residential mortgage loans and SBA loans, and are carried at the lower of cost
or estimated fair market value using the aggregate method.
Interest income is not accrued on loans where interest or principal is 90 days or more past due or if in
management’s judgment the ultimate collectibility of the interest is doubtful. Exceptions may be made if the loan
is well secured and in the process of collection. 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
non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it
becomes well secured and in the process of collection and all past due amounts have been collected.
The value of an impaired loan is measured based upon 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.
Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage
loans and installment loans, are specifically excluded from the impaired loan portfolio. Valley has defined the
population of impaired loans to be all non-accrual loans and other loans considered to be impaired as to principal
and interest, consisting primarily of commercial real estate loans. The impaired loan portfolio is primarily
collateral dependent. Impaired loans are individually assessed to determine that each loan’s carrying value is not
in excess of the fair value of the related collateral or the present value of the expected future cash flows.
Valley originates loans guaranteed by the SBA. The principal amount of these loans is guaranteed between
75 percent and 85 percent, subject to certain dollar limitations. Valley generally sells the guaranteed portions of
these loans and retains the unguaranteed portions as well as the right to service the loans. Gains are recorded on
loan sales based on the cash proceeds in excess of the assigned value of the loan, as well as the value assigned to
the rights to service the loan.
Valley’s lending is primarily in northern New Jersey and Manhattan with the exception of out-of-state auto
lending and SBA loans.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowance for Loan Losses
The allowance for loan losses (“allowance”) is increased through provisions charged against current
earnings and additionally by crediting amounts of recoveries received, if any, on previously charged-off loans.
The allowance is reduced by charge-offs on loans which are determined to be a loss, in accordance with
established policies, when all efforts of collection have been exhausted.
The allowance for loan losses is maintained at a level estimated to absorb loan losses inherent in the loan
portfolio. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan
portfolio. VNB’s methodology for evaluating the appropriateness of the allowance consists of several significant
elements, which include the allocated allowance, specific allowances for identified problem loans and portfolio
segments and the unallocated allowance. The allowance also incorporates a valuation allowance for impaired
loans.
VNB’s allocated allowance is calculated by applying loss factors to outstanding loans. The formula is based
on the internal risk grade of loans or pools of loans. Any change in the risk grade of performing and/or non-
performing loans affects the amount of the related allowance. Loss factors are based on VNB’s historical loss
experience and may be adjusted for significant circumstances that, in management’s judgment, affect the
collectibility of the portfolio as of the evaluation date.
The allowance contains an unallocated portion to cover inherent losses within a given loan category which
have not been otherwise reviewed or measured on an individual basis. Such unallocated allowance includes
management’s evaluation of local and national economic and business conditions, portfolio concentrations, credit
quality and delinquency trends. The unallocated portion of the allowance reflects management’s attempt to
ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in
estimates of probable credit losses.
Premises and Equipment, Net
Premises and equipment are stated at cost less accumulated depreciation computed using the straight-line
method over the estimated useful lives of the related assets. Generally, these useful lives range from three to forty
years. Leasehold improvements are stated at cost less accumulated amortization computed on a straight-line basis
over the term of the lease or estimated useful life of the asset, whichever is shorter. Generally, these useful lives
range from seven to forty years. Major improvements are capitalized, while repairs and maintenance costs are
charged to operations as incurred. Upon retirement or disposition, any gain or loss is credited or charged to
operations.
Bank Owned Life Insurance
Bank owned life insurance (“BOLI”) is recorded at its cash surrender value. The change in the cash
surrender value is included in non-interest income and is not considered taxable income under current Internal
Revenue Service guidelines.
Other Real Estate Owned
Other real estate owned (“OREO”), acquired through foreclosure on loans secured by real estate, is reported
at the lower of cost or fair value, as established by a current appraisal, less estimated costs to sell, and is included
in other assets. Any write-downs at the date of foreclosure are charged to the allowance for loan losses.
An allowance for OREO is utilized to record subsequent declines in estimated net realizable value.
Expenses incurred to maintain these properties and realized gains and losses upon sale of the properties are
included in other non-interest expense and other non-interest income, as appropriate.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible Assets
Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill,
core deposits, customer list intangibles and covenants not to compete. Effective January 1, 2002, under new
accounting rules (SFAS No. 142), amortization of goodwill ceased. Instead, Valley reviews the goodwill asset for
impairment annually by segments, and records an impairment expense for any decline in value. Amortization
expense for goodwill was $5.5 million for 2001. Prior to the adoption of SFAS 142, goodwill was amortized on a
straight-line basis over varying periods not exceeding 25 years. Intangible assets other than goodwill are
amortized using various methods over their estimated lives and are periodically evaluated for impairment. All
intangible assets are included in other assets.
Loan Servicing Rights
Loan servicing rights are recorded when purchased or when originated loans are sold, with servicing rights
retained. The cost of each originated loan is allocated between the servicing right and the loan (without the
servicing right) based on their relative fair values prevalent in the marketplace. The fair market value of the
purchased mortgage servicing rights (“PMSRs”) and internally originated mortgage servicing rights (“OMSRs”)
are determined using a method which utilizes servicing income, discount rates, prepayment speeds and default
rates specifically relative to Valley’s portfolio for OMSRs rather than national averages as used for PMSRs. This
method amortizes mortgage servicing rights in proportion to actual principal mortgage payments received to
accurately reflect actual portfolio conditions. Loan servicing rights, which are classified in other assets, are
periodically evaluated for impairment.
Stock-Based Compensation
Valley adopted on a prospective basis the fair value provisions of SFAS No. 123, “Accounting for Stock-
Based Compensation” (“SFAS No. 123”), effective January 1, 2002. Under SFAS No. 123, entities recognize
stock-based employee compensation costs under the fair value method for awards granted during the year. The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and
is based on certain assumptions including dividend yield, stock volatility, the risk free rate of return, expected
term and turnover rate. The fair value of each option is expensed over its vesting period.
Because Valley adopted the fair value provisions prospectively, compensation expense related to employee
stock options granted will not have a full impact until 2008, when the majority of its employee stock options
reach their first full five-year vesting. The adoption of SFAS No. 123 did not have a material impact on Valley’s
consolidated financial statements for the year ended December 31, 2003.
Prior to January 1, 2002, Valley accounted for its stock option plan in accordance with Accounting
Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”). In accordance with
APB No. 25, no compensation expense was recognized for stock options issued to employees since the options
had an exercise price equal to the market value of the common stock on the date of the grant. Valley has provided
the fair market disclosure required by SFAS No. 123 for awards granted prior to January 1, 2002, under “Notes
to Consolidated Financial Statements”—Benefit Plans (Note 13).
Income Taxes
Deferred income taxes are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the enactment date.
Comprehensive Income
Valley’s components of other comprehensive income include unrealized gains (losses) on securities
available for sale, net of tax, and the foreign currency translation adjustment. Valley reports comprehensive
income and its components in the Consolidated Statements of Changes in Shareholders’ Equity.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Earnings Per Share
For Valley, the numerator of both the Basic and Diluted EPS is equivalent to net income. The weighted
average number of shares outstanding used in the denominator for Diluted EPS is increased over the denominator
used for Basic EPS by the effect of potentially dilutive common stock equivalents utilizing the treasury stock
method. For Valley, common stock equivalents are common stock options outstanding.
All share and per share amounts have been restated to reflect the five percent stock dividend issued May 16,
2003, and all prior stock dividends and splits.
The following table shows the calculation of both Basic and Diluted earnings per share for the years ended
December 31, 2003, 2002 and 2001.
Years ended December 31,
2003
2002
2001
Net income (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
153,415
$
154,616
$
135,204
Basic weighted-average number of shares outstanding . . . . . . . . . .
Plus: Common stock equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,995,316
503,303
97,782,878
574,200
101,885,149
540,598
Diluted weighted-average number of shares outstanding . . . . . . . . .
94,498,619
98,357,078
102,425,747
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.63
1.62
$
1.58
1.57
1.33
1.32
At December 31, 2003, 2002 and 2001 there were 351 thousand, 7 thousand and 407 thousand stock options
not included as common stock equivalents because the exercise prices exceeded the average market value.
Inclusion of these common stock equivalents would be anti-dilutive to the diluted earnings per share calculation.
Treasury Stock
Treasury stock is recorded using the cost method and accordingly is presented as a reduction of
shareholders’ equity.
Recent Accounting Pronouncements
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” (“SFAS No. 150”). This Statement establishes standards for how
an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity as
well as their classification in the issuer’s statement of financial position. It requires that an issuer classify a
financial instrument that is within its scope as a liability when that instrument embodies an obligation of the
issuer. SFAS No. 150 did not have any impact on Valley’s Consolidated Financial Statements.
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities” (“SFAS No. 149”). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. With a number of exceptions, SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on Valley’s
consolidated financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45
requires disclosure of the nature of Valley’s commitments and contractual obligations including the maximum
potential amount of future payments that Valley could be required to make under the guarantees, and the current
amount of the liability, if any, for Valley’s obligations under the guarantees.
ACQUISITIONS AND DISPOSITIONS (Note 2)
On January 1, 2003, VNB acquired Glen Rauch Securities, Inc. (“Glen Rauch”), a brokerage firm
specializing in municipal securities. The purchase of Glen Rauch was a cash acquisition with subsequent earn-out
payments. Glen Rauch, an SEC registered broker-dealer subsidiary, has become part of Valley’s Financial
Services Division.
On October 31, 2002, VNB acquired NIA/Lawyers Title Agency, LLC (“NIA/Lawyers”), a title insurance
agency based in Paramus, NJ. NIA/Lawyers, a subsidiary, has become part of Valley’s Financial Services
Division. During 2003, NIA/Lawyers operations were merged with Wayne Title, Inc. to become Valley National
Title Services, Inc.
In August 2002, VNB completed its acquisition of Masters Coverage Corp. (“Masters”), an independent
insurance agency. Masters is an all-line insurance agency offering property and casualty, life and health
insurance. The purchase of Masters was a cash acquisition with subsequent earn-out payments. Masters, a
subsidiary, has become part of VNB’s Financial Services Division.
The aggregate purchase price of Glen Rauch, NIA/Lawyers and Masters was $14.5 million and after
allocating $6.2 million to the identifiable tangible and intangible assets, VNB recorded $8.3 million of goodwill.
Goodwill is classified in other assets in the consolidated statements of financial condition.
On May 1, 2002, Valley completed the sale of its subsidiary VNB Financial Services, Inc., a Canadian
finance company, to State Farm Mutual Automobile Insurance Company for a purchase price equal to Valley’s
equity in the subsidiary plus a premium of approximately $1.6 million. The subsidiary primarily originated fixed
rate auto loans in Canada through a marketing program with State Farm.
On January 19, 2001, Valley completed its merger with Merchants New York Bancorp, Inc. (“Merchants”),
parent of The Merchants Bank of New York headquartered in Manhattan. Under the terms of the merger
agreement, each outstanding share of Merchants common stock was exchanged for 0.7634 shares of Valley
common stock. As a result, a total of approximately 14 million shares of Valley common stock were exchanged
(the exchange rate and number of shares exchanged have not been restated for the 5 percent stock dividend
issued May 18, 2001, the 5 for 4 stock split issued May 17, 2002 and the 5 percent stock dividend issued May 16,
2003). This merger added seven branches in Manhattan. The transaction was accounted for utilizing the pooling-
of-interests method of accounting. The consolidated financial statements of Valley have been restated to include
Merchants for all periods presented.
During the first quarter of 2001, Valley recorded merger-related charges of $9.0 million related to the
acquisition of Merchants. On an after tax basis, these charges totaled $7.0 million. These charges included only
identified direct and incremental costs associated with this acquisition. Items included in these charges included
the following: personnel expenses which included severance payments for terminated directors of Merchants;
professional fees which included investment banking, accounting and legal fees; and other expenses which
included the disposal of data processing equipment and the write-off of supplies and other assets not considered
useful in the operation of the combined entities. The major components of the merger-related charges, consisting
of professional fees, personnel and the disposal of data processing equipment, totaled $4.4 million, $3.2 million
and $486 thousand, respectively.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
INVESTMENT SECURITIES HELD TO MATURITY (Note 3)
The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at
December 31, 2003 and 2002 were as follows:
Amortized
Cost
December 31, 2003
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Obligations of states and political subdivisions . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 172,707
629,237
375,317
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB & FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,177,261
54,978
$ 7,174
5,780
16,925
29,879
—
$
(30) $ 179,851
628,694
389,242
(6,323)
(3,000)
(9,353)
—
1,197,787
54,978
Total investment securities held to maturity . . . . . . . . . . .
$1,232,239
$29,879
$(9,353) $1,252,765
Amortized
Cost
December 31, 2002
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Obligations of states and political subdivisions . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 128,839
17,336
379,347
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB & FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
525,522
65,370
$ 6,103
997
6,938
14,038
—
$
(23) $ 134,919
18,333
—
378,858
(7,427)
(7,450)
—
532,110
65,370
Total investment securities held to maturity . . . . . . . . . . .
$ 590,892
$14,038
$(7,450) $ 597,480
The age of unrealized losses and fair value of related securities held to maturity at December 31, 2003 were
as follows:
Less than
Twelve Months
December 31, 2003
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 . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . .
$
3,778
352,596
18,592
$
(30)
(6,323)
(780)
$ —
—
36,882
$ — $
—
(2,220)
3,778
352,596
55,474
$
(30)
(6,323)
(3,000)
Total debt securities . . . . . . . . . . . . . .
$374,966
$(7,133)
$36,882
$(2,220) $411,848
$(9,353)
Management does not believe that any individual unrealized loss as of December 31, 2003 represents an
other-than-temporary impairment. The unrealized losses reported for mortgage-backed securities relate primarily
to securities issued by FNMA, FHLMC and private institutions, while losses reported in other debt securities
consists of trust preferred securities. These unrealized losses are primarily due to changes in interest rates.
As of December 31, 2003, the fair value of investments held to maturity that were pledged to secure public
deposits, repurchase agreements, lines of credit, and FHLB advances and for other purposes required by law, was
$495.4 million.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The contractual maturities of investments in debt securities held to maturity at December 31, 2003, are set
forth in the following table:
December 31, 2003
Amortized
Cost
Fair
Value
(in thousands)
Due in one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,253
19,411
53,848
430,512
548,024
629,237
$
44,305
20,746
57,150
446,892
569,093
628,694
Total debt securities held to maturity . . . . . . . . . . . . . . . . . . .
$1,177,261
$1,197,787
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 life for mortgage-backed securities held to maturity was 6.0 years at
December 31, 2003 and 1.9 years at December 31, 2002. The increase in weighted-average remaining life was
primarily due to Valley’s decision to classify approximately $555 million of securities which were purchased
during the third quarter of 2003 as held to maturity.
INVESTMENT SECURITIES AVAILABLE FOR SALE (Note 4)
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at
December 31, 2003 and 2002 were as follows:
Amortized
Cost
December 31, 2003
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
U.S. Treasury securities and other government agencies and
corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 375,555
100,794
1,281,807
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,758,156
15,137
$ 1,070
5,503
25,337
31,910
4,351
$(1,714) $ 374,911
106,211
1,305,200
(86)
(1,944)
(3,744)
(130)
1,786,322
19,358
Total investment securities available for sale . . . . . . . . . .
$1,773,293
$36,261
$(3,874) $1,805,680
Amortized
Cost
December 31, 2002
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
U.S. Treasury securities and other government agencies and
corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 222,853
105,699
1,719,470
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,048,022
27,037
$ 1,168
5,319
53,363
59,850
6,065
$ — $ 224,021
110,965
1,772,801
(53)
(32)
(85)
(523)
2,107,787
32,579
Total investment securities available for sale . . . . . . . . . .
$2,075,059
$65,915
$ (608) $2,140,366
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The age of unrealized losses and fair value of related securities available for sale at December 31, 2003 were
as follows:
Less than
Twelve Months
December 31, 2003
More than
Twelve Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
$101,635
$(1,714)
$—
$ —
$101,635
$(1,714)
2,853
194,389
298,877
1,040
(86)
(1,944)
(3,744)
(20)
—
—
—
880
—
—
—
(110)
2,853
194,389
298,877
1,920
(86)
(1,944)
(3,744)
(130)
U.S. Treasury securities and other
government agencies and
corporations . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
$299,917
$(3,764)
$880
$(110)
$300,797
$(3,874)
Management does not believe that any individual unrealized loss as of December 31, 2003 represents an
other-than-temporary impairment. The unrealized losses for the U.S. Treasury securities and other government
agencies and corporations are on notes issued by FNMA and FHLMC and the unrealized losses reported for
mortgage-backed securities relate primarily to securities issued by FNMA, FHLMC and private institutions.
These unrealized losses are due to changes in interest rates. Valley has the intent and ability to hold the securities
contained in the previous table for a time necessary to recover the amortized cost.
Included in available for sale securities are $40 million of mortgage-backed securities which were delivered
in January 2004 to a counterparty as a result of a covered call option that was exercised in December 2003.
Valley recorded interest income on these securities through the time of delivery.
As of December 31, 2003, the fair value of securities available for sale that were pledged to secure public
deposits, repurchase agreements, lines of credit, and FHLB advances and for other purposes required by law, was
$400.8 million.
The contractual maturities of investments in debt securities available for sale at December 31, 2003, are set
forth in the following table:
December 31, 2003
Amortized
Cost
Fair Value
(in thousands)
Due in one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 166,234
108,365
170,871
30,879
$ 166,708
109,440
174,065
30,909
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
476,349
1,281,807
481,122
1,305,200
Total debt securities available for sale . . . . . . . . . . . . . . . . . .
$1,758,156
$1,786,322
Actual maturities on 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.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted-average remaining life for mortgage-backed securities available for sale at December 31,
2003 and 2002 was 4.4 years and 5.8 years, respectively. The decrease in weighted-average remaining life was
mainly due to Valley’s decision to classify approximately $555 million of securities which were purchased
during the third quarter of 2003 as held to maturity.
Gross gains (losses) realized on sales, maturities and other securities transactions related to securities
available for sale included in earnings for the years ended December 31, 2003, 2002 and 2001 were as follows:
Sales transactions:
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,690
(9)
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,361
(269)
$ 4,035
(1,464)
2003
2002
2001
(in thousands)
Maturities and other securities transactions:
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,681
7,092
2,571
—
—
(75) —
—
—
993
—
993
Gains on securities transactions, net . . . . . . . . . . . . . . . . . . . . . .
$15,606
$7,092
$ 3,564
LOANS (Note 5)
The detail of the loan portfolio as of December 31, 2003 and 2002 was as follows:
2003
2002
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,184,652
$1,115,784
Total commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,184,652
1,115,784
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
222,748
1,596,859
1,553,037
200,896
1,427,715
1,515,095
Total mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,372,644
3,143,706
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
476,149
10,722
1,013,938
114,304
451,543
11,544
932,672
107,239
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,615,113
1,502,998
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,172,409
$5,762,488
Included in the table above are loans held for sale in the amount of $5.7 million and $42.3 million at
December 31, 2003 and 2002, respectively.
Related Party Loans
VNB’s authority to extend credit to its directors, executive officers and 10 percent stockholders, as well as
to entities controlled by such persons, is currently governed by the requirements of the National Bank Act,
Sarbanes-Oxley Act and Regulation O of the FRB thereunder. Among other things, these provisions require that
extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
underwriting procedures that are not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable
features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of VNB’s capital. In addition, extensions of credit
in excess of certain limits must be approved by VNB’s Board of Directors. Under the Sarbanes-Oxley Act,
Valley and its subsidiaries, other than VNB, may not extend or arrange for any personal loans to its directors and
executive officers.
The following table summarizes the change in the total amounts of loans and advances to directors,
executive officers, and their affiliates during the year 2003, adjusted for changes in directors, executive officers
and their affiliates:
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003
(in thousands)
$24,031
29,502
(7,887)
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45,646
All loans to related parties are performing.
Asset Quality
The outstanding balances of loans that are 90 days or more past due as to principal or interest payments and
still accruing, non-performing assets, and troubled debt restructured loans at December 31, 2003 and 2002 were
as follows:
Loans past due in excess of 90 days and still accruing . . . . . . . . . . . . . . .
$ 2,792
$ 4,931
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22,338
797
$21,524
43
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,135
$21,567
Troubled debt restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ —
2003
2002
(in thousands)
The amount of interest income that would have been recorded on non-accrual loans in 2003, 2002 and 2001
had payments remained in accordance with the original contractual terms approximated $1.4 million, $1.1
million and $655 thousand, respectively. The actual amount of interest income recorded on these types of assets
in 2003, 2002 and 2001 totaled $671 thousand, $768 thousand and $192 thousand, respectively, resulting in lost
interest income of $708 thousand, $355 thousand and $463 thousand, respectively.
At December 31, 2003, there were no commitments to lend additional funds to borrowers whose loans were
non-accrual, classified as troubled debt restructured loans, or contractually past due in excess of 90 days and still
accruing interest.
The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific
allocations to the allowance for loan losses totaled $16.1 million and $1.8 million, respectively, at December 31,
2003 and $16.0 million and $3.4 million, respectively, at December 31, 2002. The average balance of impaired
loans during 2003, 2002 and 2001 was approximately $17.8 million, $8.7 million and $6.1 million, respectively.
The amount of cash basis interest income that was recognized on impaired loans during 2003, 2002 and 2001 was
$789 thousand, $368 thousand and $828 thousand, respectively.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ALLOWANCE FOR LOAN LOSSES (Note 6)
Transactions recorded in the allowance for loan losses during 2003, 2002 and 2001 were as follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to operating expense . . . . . . . . . . . . . . . .
$ 64,087
7,345
(in thousands)
$ 63,803
13,644
$ 61,995
15,706
2003
2002
2001
71,432
77,447
77,701
Less net loan charge-offs:
Loans charged-off
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less recoveries on loan charge-offs . . . . . . . . . . . . . . . . .
(11,647)
4,865
(18,514)
5,154
(18,004)
4,106
Net loan charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,782)
(13,360)
(13,898)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 64,650
$ 64,087
$ 63,803
LOAN SERVICING (Note 7)
VNB Mortgage Services, Inc. (“MSI”), a subsidiary of VNB, is a servicer of residential mortgage loan
portfolios. MSI is compensated for loan administrative services performed for mortgage servicing rights
purchased in the secondary market and loans originated and sold by VNB. The aggregate principal balances of
mortgage loans serviced by MSI for others approximated $2.0 billion, $1.8 billion and $2.4 billion at December
31, 2003, 2002 and 2001, respectively. The outstanding balance of loans serviced for others is properly not
included in the consolidated statements of financial condition.
VNB is a servicer of SBA loans, and is compensated for loan administrative services performed for SBA
loans originated and sold by VNB. VNB serviced a total of $99.4 million, $100.4 million and $91.8 million of
SBA loans at December 31, 2003, 2002 and 2001, respectively, for third-party investors. The outstanding balance
of SBA loans serviced for others is properly not included in the consolidated statements of financial condition.
The unamortized costs associated with acquiring loan servicing rights are included in other assets in the
consolidated statements of financial condition and are being amortized in proportion to actual principal mortgage
payments received to accurately reflect actual portfolio conditions.
The following table summarizes the change in loan servicing rights during the years ended December 31,
2003, 2002 and 2001:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and origination of loan servicing rights . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003
2002
2001
$ 21,596
19,548
(11,525)
(in thousands)
$ 29,205
3,380
(10,989)
$32,729
5,678
(9,202)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 29,619
$ 21,596
$29,205
Amortization expense in 2003, 2002 and 2001 includes $4.1 million, $4.4 million and $2.0 million,
respectively, of impairment expense for loan servicing rights, and is classified in amortization of intangible assets
in the consolidated statements of income. In 2003, the book balance of $29.6 million approximated fair value.
Based on current market conditions, amortization expense related to the mortgage servicing asset at December
31, 2003 is expected to be approximately $21.3 million through 2008.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PREMISES AND EQUIPMENT, NET (Note 8)
At December 31, 2003 and 2002, premises and equipment, net consisted of:
2003
2002
(in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment
$ 25,505
77,368
27,703
107,698
$ 22,940
64,839
22,572
101,146
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . .
238,274
(109,668)
211,497
(97,742)
Total premises and equipment, net
. . . . . . . . . . . . . . . . . . . . . . .
$ 128,606
$113,755
Depreciation and amortization of premises and equipment included in non-interest expense for the years
ended December 31, 2003, 2002 and 2001 amounted to approximately $11.3 million, $9.5 million and $8.8
million, respectively.
OTHER ASSETS (Note 9)
At December 31, 2003 and 2002, other assets consisted of the following:
2003
2002
(in thousands)
Loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangibles . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from customers on acceptances outstanding . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 29,619
22,431
797
54,205
15,148
56,989
$ 21,596
17,785
43
42,060
16,524
62,688
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$179,189
$160,696
DEPOSITS (Note 10)
Included in time deposits at December 31, 2003 and 2002 are certificates of deposit over $100 thousand of
$979.3 million and $940.5 million, respectively.
Interest expense on time deposits of $100 thousand or more totaled approximately $14.6 million, $22.9
million and $39.1 million in 2003, 2002 and 2001, respectively.
The scheduled maturities of time deposits as of December 31, 2003 are as follows:
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
$1,515,934
258,435
101,185
66,437
189,150
71,347
Total time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,202,488
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BORROWED FUNDS (Note 11)
Short-term borrowings at December 31, 2003 and 2002 consisted of the following:
2003
2002
2001
Fed funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . .
Treasury tax and loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$160,000
174,577
27,729
(in thousands)
$105,000
141,315
32,118
— 100,000
—
15,000
$ —
95,626
75,237
106,800
26,599
Total short-term borrowings . . . . . . . . . . . . . . . . . . .
$377,306
$378,433
$304,262
The weighted average interest rate for short-term borrowings at December 31, 2003, 2002 and 2001 was
0.98 percent, 1.27 percent and 2.8 percent, respectively.
At December 31, 2003 and 2002, long-term debt consisted of the following:
2003
2002
(in thousands)
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . .
Note to VNB Capital Trust I (Note 12) . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$875,500
461,000
206,186
4,535
$899,500
220,000
206,186
142
Total long-term borrowings . . . . . . . . . . . . . . . . . .
$1,547,221
$1,325,828
The Federal Home Loan Bank (“FHLB”) advances included in long-term debt had a weighted average
interest rate of 4.36 percent at December 31, 2003 and 4.77 percent at December 31, 2002. These advances are
secured by pledges of FHLB stock, mortgage-backed securities and a blanket assignment of qualifying residential
mortgage loans. Interest expense of $45.9 million, $36.0 million, and $23.4 million was recorded on FHLB
advances during the years ended December 31, 2003, 2002 and 2001, respectively. The advances are scheduled
for repayment as follows:
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
$72,000
23,000
88,000
336,500
—
356,000
Total long-term FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . .
$875,500
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The securities sold under repurchase agreements to other counterparties included in long-term debt totaled
$461.0 million and $220.0 million at December 31, 2003 and 2002, respectively. The weighted average interest
rate for this debt was 3.15 percent and 5.49 percent at December 31, 2003 and 2002, respectively. Interest
expense of $12.4 million, $17.6 million, and $21.2 million was recorded during the years ended December 31,
2003, 2002 and 2001, respectively. The schedule for repayment is as follows:
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
$ 10,000
30,000
50,000
186,000
66,000
119,000
Total long-term securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$461,000
The fair market value of securities pledged to secure public deposits, treasury tax and loan deposits,
repurchase agreements, lines of credit, FHLB advances and for other purposes required by law approximated
$896.2 million and $686.8 million at December 31, 2003 and 2002, respectively.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES
OF A SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY (Note 12)
In November 2001, Valley sold $200.0 million of 7.75 percent preferred securities through a statutory
business trust, VNB Capital Trust I (“Trust”). Valley owns all of the common securities of this Delaware trust.
The Trust has no independent assets or operations, and exists for the sole purpose of issuing preferred securities
and investing the proceeds thereof in an equivalent amount of junior subordinated debentures issued by Valley.
The junior subordinated debentures, which are the sole assets of the Trust, are unsecured obligations of Valley,
and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness
and certain other financial obligations of Valley.
A portion of the trust preferred securities qualifies as Tier I Capital, within regulatory limitations. The
principal amount of subordinated debentures held by the Trust equals the aggregate liquidation amount of its trust
preferred securities and its common securities. The subordinated debentures bear interest at the same rate, and
will mature on the same date, as the corresponding trust preferred securities. All of the trust preferred securities
may be prepaid at par at the option of the Trust, in whole or in part, on or after December 15, 2006. The trust
preferred securities contractually mature on December 15, 2031.
On December 10, 2003, the FASB issued FASB Interpretation No. 46R (“FIN 46R”), which replaced FIN
46. FIN 46R clarifies the application of Accounting Research Bulletin No. 51 “Consolidated Financial
Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support. FIN 46R required Valley to de-consolidate its investment in VNB Capital Trust I.
As a result of this de-consolidation, junior subordinated debentures issued by VNB Capital Trust I are now
recorded as long-term debt and costs related to these junior subordinated debentures are included in interest
expense. Prior periods have been restated to reflect this change.
The Federal Reserve Board has issued interim guidance that continues to recognize trust preferred securities
as a component of Tier 1 capital, however, it is possible that a change may result in these securities qualifying for
Tier 2 capital rather than Tier 1 capital. See Note 16 of the Notes to Consolidated Financial Statements. If Tier 2
capital treatment had been required at December 31, 2003, Valley would remain “well capitalized” under the
Federal bank regulatory agencies definitions.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BENEFIT PLANS (Note 13)
Pension Plan
VNB has a non-contributory benefit plan covering substantially all of its employees. The benefits are based
upon years of credited service and the employee’s highest average compensation as defined. It is VNB’s funding
policy to contribute annually an amount that can be deducted for federal income tax purposes. In addition, VNB
has a supplemental non-qualified, non-funded retirement plan which is designed to supplement the pension plan
for key officers.
The following table sets forth the change in projected benefit obligation, the change in fair value of plan
assets and the funded status and amounts recognized in Valley’s consolidated financial statements for the pension
plans at December 31, 2003 and 2002:
Change in projected benefit obligation
Projected benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension Plans
2003
2002
(in thousands)
$43,308
2,560
2,892
717
3,896
(2,005)
$38,585
2,254
2,691
489
1,140
(1,851)
Projected benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$51,368
$43,308
Change in fair value of plan assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37,911
6,554
2,636
(1,900)
$40,280
(3,222)
2,599
(1,746)
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45,201
$37,911
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net asset
Unrecognized prior service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial loss/(gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (6,167) $ (5,397)
(95)
545
3,874
(16)
1,173
4,822
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (188) $ (1,073)
Amounts recognized in the statement of financial statement of condition for 2003 and 2002 consist of:
2002
2003
Prepaid benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
$ 2,842
(3,900)
870
—
$ 1,851
(2,924)
—
—
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (188) $(1,073)
The accumulated benefit obligation for all pension plans was $44.7 million and $38.6 million at
December 31, 2003 and 2002, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
2003
2002
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,052
3,900
—
$2,986
2,873
—
(in thousands)
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net periodic pension expense for 2003, 2002 and 2001 included the following components:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization of transition asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net (gains)/loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003
2002
2001
$ 2,560
2,892
(3,542)
(79)
89
(64)
(in thousands)
$ 2,254
2,691
(3,609)
(79)
77
(128)
$ 2,097
2,502
(3,340)
(170)
36
(586)
Total net periodic pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,856
$ 1,206
$
539
Additional information:
Increase in minimum liability included in other comprehensive income . . . . . —
—
2003
2002
In determining rate assumptions, VNB looks to current rates on fixed-income debt securities that receive
one of the two highest ratings given by a recognized ratings agency such as a rating of AAA or AA from
Moody’s or such as rates based on U.S. Treasury securities.
The weighted average discount rate and rate of increase in future compensation levels used in determining
the actuarial present value of benefit obligations for the plan as of December 31, 2003 and 2002, was:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future compensation increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.25% 6.75%
4.00
4.00
2003
2002
The weighted average discount rate and expected long-term rate of return on assets used in determining
Valley’s pension expense for the year ended December 31, 2003 and 2002, was:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.75% 7.15%
8.50
4.00
9.00
4.50
2003
2002
The expected rate of return on plan assets assumption is based on the concept that it is a long-term
assumption independent of the current economic environment and changes would be made in the expected return
only when long-term inflation expectations change, asset allocations change or when asset class returns are
expected to change for the long-term.
Valley’s pension plan weighted-average asset allocations at December 31, 2003 and 2002, by asset category
were as follows:
Asset Category
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60.6% 54.3%
32.7
6.7
32.1
13.6
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100% 100%
2003
2002
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In accordance with Section 402 (c) of ERISA, the Plan’s investment managers are granted full discretion to
buy, sell, invest and reinvest the portions of the portfolio assigned to them consistent with Valley’s Pension
Committee’s policy and guidelines. The target asset allocation set for the Plan are in equity securities ranging
from 25 percent to 65 percent and fixed income securities ranging from 35 percent to 75 percent. The absolute
investment objective for the equity portion, is to earn at least 7 percent cumulative annual real return, after
adjustment by the Consumer Price Index (CPI), over rolling five-year periods, while the relative objective is to
be above the S&P 500 Index over rolling three-year periods. For the fixed income portion, the absolute objective
is to earn at least a 3 percent cumulative annual real return, after adjustment by the CPI over rolling five-year
periods with a relative objective of above the Merrill Lynch Intermediate Government/Corporate index over
rolling three-year periods. Cash equivalents will be invested in money market funds or in other high quality
instruments approved by the Trustees of the Plan. The ratings of commercial paper purchased individually shall
be A-1/P-1 or comparable as measured by a standard rating service.
The pension plan held 78,440 shares and 62,355 shares of VNB Capital Trust I preferred securities at
December 31, 2003 and 2002, respectively. These shares had fair market values of $2.1 million and $1.6 million
at December 31, 2003 and 2002, respectively. Dividends received for these shares were $139 thousand and $86
thousand for the years ended December 31, 2003 and 2002.
Valley expects to contribute $3.2 million to the plan during 2004 based upon actuarial estimates.
Merchants also maintained a non-contributing benefit plan which was merged into the Valley plan effective
December 31, 2001, and is included in the above tables.
Valley maintains a non-qualified Directors’ retirement plan. The projected benefit obligation and discount
rate used to compute the obligation was $1.5 million and 6.25 percent, respectively, at December 31, 2003, and
$1.4 million and 6.75 percent, respectively, at December 31, 2002. An expense of $299 thousand, $234 thousand
and $188 thousand has been recognized for the plan in the years ended December 31, 2003, 2002 and 2001,
respectively. Valley also maintains non-qualified plans for former Directors and Senior Management of
Merchants. Valley did not merge these plans into their existing non-qualified plans. At December 31, 2003, the
Directors’ plan obligation is fixed at $3.9 million, of which $3.8 million has been accrued. At December 31,
2003, the Senior Management’s plan obligation is fixed at $7.0 million, of which $4.7 million has been funded
partly by insurance policies. The remaining obligation of $2.3 million is being accrued on a straight-line basis
over the remaining benefit period. In addition to Merchants, Valley maintains non-qualified plans for Directors
of former banks acquired. Collectively, the plan obligation is $266 thousand, of which $186 thousand was
accrued. The difference of $80 thousand is being accrued over the remaining benefit period.
Bonus Plan
VNB and its subsidiaries award incentive and merit bonuses to its officers and employees based upon a
percentage of the covered employees’ compensation as determined by the achievement of certain performance
objectives. Amounts charged to salaries expense during 2003, 2002 and 2001 were $5.9 million, $5.5 million and
$5.9 million, respectively.
Savings Plan
VNB maintains a KSOP defined as a 401(k) plan with an employee stock ownership feature. This plan
covers eligible employees of VNB and its subsidiaries and allows employees to contribute a percentage of their
salary, with VNB matching a certain percentage of the employee contribution in shares of Valley stock. In 2003,
VNB matched employee contributions with 50,328 shares, of which 29,064 were allocated from the KSOP and
17,465 shares were allocated from treasury stock. In 2002, VNB matched employee contributions with 61,125
shares, of which 26,019 shares were allocated from the KSOP and 29,089 shares were issued from treasury stock.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In 2001, VNB matched employee contributions with 63,311 shares, of which 28,997 shares were allocated from
the KSOP and 34,314 shares were issued from treasury stock. VNB charged expense for contributions to the
plan, net of forfeitures, amounting to $1.3 million for 2003 and 2002 while $1.2 million was recorded in 2001. At
December 31, 2003 the KSOP had 56,794 unallocated shares.
Effective July 2001, Merchants 401(k) plan was merged into the VNB KSOP plan. The Merchants plan did
not match employee contributions.
Stock-Based Compensation
Valley adopted the fair value method provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), for options granted after January 1, 2002. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model and is based on certain
assumptions including dividend yield, stock volatility, risk free rate of return and the expected term.
Under the Employee Stock Option Plan, Valley may grant options to its employees for up to 3.8 million
shares of common stock in the form of stock options, stock appreciation rights and restricted stock awards. The
exercise price of options equals 100 percent of the market price of Valley’s stock on the date of grant, and an
option’s maximum term is ten years. The options granted under this plan are exercisable no earlier than one year
after the date of grant, expire no more than ten years after the date of the grant, and are subject to a vesting
schedule. Non-qualified options granted by Midland Bancorporation, Inc. (“Midland”) and assumed by Valley in
its acquisition of Midland have no vesting period and a maximum term of fifteen years.
For 2003 and 2002 grants, Valley recorded stock-based employee compensation expense for incentive stock
options of $346 thousand and $47 thousand, respectively, net of tax and will continue to amortize the remaining
cost of these grants of approximately $2.2 million, net of tax, over the vesting period of approximately five years.
Stock-based employee compensation cost under the fair value method was measured using the following
weighted-average assumptions for options granted in 2003, 2002 and 2001, respectively: dividend yield of 3.03,
3.28 and 3.22 percent; risk-free interest rates of 3.94, 3.41 and 5.05 percent; expected volatility of 19.97, 24.10
and 24.08 percent and expected term of 7.65, 7.01 and 7.74 years. Prior to January 1, 2002, Valley applied APB
Opinion No. 25 and related Interpretations in accounting for its stock options granted. Had compensation expense
for the options issued prior to January 1, 2002, been recorded consistent with the fair value provisions of SFAS
No. 123 for those periods, net income and earnings per share would have been reduced to the pro forma amounts
indicated below:
Net income
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation cost, net of tax . . . . . . . . . .
$153,415
(924)
$154,616
(1,168)
$135,204
(1,217)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $152,491
$153,448
$133,987
2003
2002
2001
(in thousands, except for share data)
Earnings per share
As reported:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1.63
1.62
1.62
1.61
$
$
1.58
1.57
1.57
1.56
1.33
1.32
1.32
1.31
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the status of qualified and non-qualified stock options as of December 31, 2003, 2002 and
2001 and changes during the years ended on those dates is presented below:
2003
2002
2001
Stock Options
Outstanding at beginning of year . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . .
Shares
2,372,109
421,792
(273,818)
(100,753)
Outstanding at end of year . . . . . . . . .
2,419,330
Options exercisable at year-end . . . . .
1,234,444
Weighted-average fair value of
Weighted-
Average
Exercise
Price
$20
29
16
22
22
18
Weighted-
Average
Exercise
Price
$17
25
11
21
20
17
Shares
2,502,227
390,966
(448,014)
(73,070)
2,372,109
1,193,278
Weighted-
Average
Exercise
Price
$13
23
8
17
17
14
Shares
2,711,141
555,340
(704,078)
(60,176)
2,502,227
1,249,169
options granted during the year
. . .
$
5.61
$
4.86
$
5.62
The following table summarizes information about stock options outstanding at December 31, 2003:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$ 3-18
18-20
20-23
23-29
3-29
Number
Outstanding
391,257
570,199
627,410
830,464
2,419,330
Weighted-
Average
Remaining
Contractual
Life
3.6 years
5.4
7.4
9.2
6.9
Weighted-
Average
Exercise
Price
$14
19
22
27
22
Number
Exercisable
379,147
478,731
271,490
105,076
1,234,444
Weighted-
Average
Exercise
Price
$14
19
22
25
18
As of December 31, 2003 and 2002, 15,763 shares of stock appreciation rights were outstanding and 29,451
shares of stock appreciation rights were outstanding as of December 31, 2001.
Restricted stock is awarded to key employees providing for the immediate award of Valley’s common stock
subject to certain vesting and restrictions. The awards are recorded at fair market value and amortized into salary
expense over the vesting period.
The following table sets forth the changes in restricted stock awards outstanding for the years ended
December 31, 2003, 2002 and 2001.
Restricted
Stock Awards
2003
2002
2001
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
331,946
105,509
(84,381)
(26,567)
360,240
97,185
(104,867)
(20,612)
285,967
184,722
(99,884)
(10,565)
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
326,507
331,946
360,240
The amount of compensation costs related to restricted stock awards included in salary expense amounted to
$2.0 million in 2003 and $2.2 million in both 2002 and 2001.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Bank Owned Life Insurance
During 2001 and 2002, Valley invested $150.0 million in BOLI to help offset the rising cost of employee
benefits. Income of $6.2 million and $6.7 was recorded from the BOLI for the years ended December 31, 2003
and 2002, respectively. BOLI income is exempt from federal and state income taxes. The BOLI is invested in
investment securities including mortgage-backed, treasuries or high grade corporate securities and is managed by
two independent investment firms.
INCOME TAXES (Note 14)
Income tax expense (benefit) included in the consolidated financial statements consisted of the following:
2003
2002
2001
(in thousands)
Income tax from operations:
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State, net of federal tax benefit . . . . . . . . . . . . . . . . . . . .
$81,512
6,210
$ 84,868
9,194
$69,213
2,470
Deferred:
Federal and State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,987)
(29,382)
(7,532)
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . .
$79,735
$ 64,680
$64,151
87,722
94,062
71,683
Included in other comprehensive income is income tax expense of $11.8 million, $24.0 million and $12.8
million attributable to net unrealized gains on securities available for sale for the years ended December 31,
2003, 2002 and 2001, respectively.
The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets
and liabilities as of December 31, 2003 and 2002 are as follows:
2003
2002
(in thousands)
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes (net)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-accrual loan interest
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,864
31,758
1,808
624
10,775
$25,798
31,097
1,465
583
10,673
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,829
69,616
Deferred tax liabilities:
Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . .
Purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned discount on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,798
65
158
6,603
23,936
67
231
3,322
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,624
27,556
Net deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$54,205
$42,060
Based upon taxes paid and projections of future taxable income, over the periods in which the deferred taxes
are deductible, management believes that it is more likely than not, that Valley will realize the benefits of these
deductible differences.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reconciliation between the reported income tax expense and the amount computed by multiplying income
before taxes by the statutory federal income tax rate follows:
Tax at statutory federal income tax rate . . . . . . . . . . . . . . . . . .
Increases (decreases) resulted from:
Tax-exempt interest, net of interest incurred to carry tax-
exempts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BOLI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax, net of federal tax benefit
. . . . . . . . . . . . .
Corporate restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
2003
2002
2001
$81,603
(in thousands)
$76,754
$69,774
(3,885)
(2,166)
4,037
—
146
(3,692)
(2,349)
2,721
(8,750)
(4)
(3,936)
(742)
811
—
(1,756)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$79,735
$64,680
$64,151
Included in stockholders’ equity are income tax benefits attributable to the exercise of non-qualified stock
options of $344 thousand for the year ended December 31, 2003 and $1.1 million for the year ended December
31, 2002.
COMMITMENTS AND CONTINGENCIES (Note 15)
Lease Commitments
Certain bank facilities are occupied under non-cancelable long-term operating leases which expire at various
dates through 2027. Certain lease agreements provide for renewal options and increases in rental payments based
upon increases in the consumer price index or the lessor’s cost of operating the facility. Minimum aggregate
lease payments for the remainder of the lease terms are as follows:
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
$ 8,200
7,707
6,900
6,460
5,029
21,218
Total lease commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$55,514
Net occupancy expense for 2003, 2002 and 2001 included approximately $6.5 million, $5.3 million and $4.6
million, respectively, of rental expenses, net of rental income of $2.9 million, $3.0 million and $3.2 million,
respectively, for leased bank facilities.
Financial Instruments With Off-balance Sheet Risk
In the ordinary course of business of meeting the financial needs of its customers, Valley, through its
subsidiary VNB, is a party to various financial instruments which are properly not reflected in the consolidated
financial statements. These financial instruments include standby and commercial letters of credit, unused
portions of lines of credit and commitments to extend various types of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial
statements. The commitment or contract amount of these instruments is an indicator of VNB’s level of
involvement in each type of instrument as well as the exposure to credit loss in the event of non-performance by
the other party to the financial instrument. VNB seeks to limit any exposure of credit loss by applying the same
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
credit underwriting standards, including credit review, interest rates and collateral requirements or personal
guarantees, as for on-balance sheet lending facilities.
The following table provides a summary of financial instruments with off-balance sheet risk at December
31, 2003 and 2002:
2003
2002
(in thousands)
Commitments under commercial loans and lines of credit . . . . . . .
Home equity and other revolving lines of credit . . . . . . . . . . . . . . .
Outstanding commercial mortgage loan commitments . . . . . . . . . .
Standby letters of credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding residential loan commitments . . . . . . . . . . . . . . . . . . .
Commitments under unused lines of credit-credit card . . . . . . . . .
Commercial letters of credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments to sell loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,062,855
519,980
338,185
159,620
113,638
108,521
29,036
4,505
$1,147,557
407,752
256,355
155,814
307,120
115,548
31,302
21,338
Total financial instruments with off-balance sheet risk . . . . . . .
$2,336,340
$2,442,786
Standby letters of credit represent the guarantee by VNB of the obligations or performance of a customer in
the event the customer is unable to meet or perform its obligations to a third party. Obligations to advance funds
under commitments to extend credit, including commitments under unused lines of credit, are agreements to lend
to a customer as long as there is no violation of any condition established in the contract. Commitments generally
have specified expiration dates, which may be extended upon request, or other termination clauses and generally
require payment of a fee. These commitments do not necessarily represent future cash requirements as it is
anticipated that many of these commitments will expire without being fully drawn upon. Most of VNB’s lending
activity for outstanding loan commitments is to customers within the states of New Jersey, New York and
Pennsylvania. Loan sale commitments represent contracts for the sale of residential mortgage loans and SBA
loans to third parties in the ordinary course of VNB’s business. These commitments require VNB to deliver loans
within a specific time frame to the third party. The risk to VNB is its non-delivery of loans required by the
commitment which could lead to financial penalties. VNB has not defaulted on its loan sale commitments.
Litigation
In the normal course of business, Valley may be a party to various outstanding legal proceedings and claims.
In the opinion of management, the consolidated statements of financial condition or results of operations of
Valley will not be materially affected by the outcome of such legal proceedings and claims.
SHAREHOLDERS’ EQUITY (Note 16)
Capital Requirements
Valley is subject to the regulatory capital requirements administered by the Federal Reserve Bank. Failure to
meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on Valley’s financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, Valley must meet
specific capital guidelines that involve quantitative measures of Valley’s assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Valley to maintain
minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average
assets, as defined in the regulations. As of December 31, 2003, Valley exceeded all capital adequacy
requirements to which it was subject.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Valley’s ratios at December 31, 2003 were all above the “well capitalized” requirements, which require
Tier I capital to risk adjusted assets of at least 6 percent, total risk based capital to risk adjusted assets of 10
percent and a minimum leverage ratio of 5 percent. To be categorized as well capitalized, Valley must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table.
Valley’s actual capital amounts and ratios as of December 31, 2003 and 2002 are presented in the following
table:
Actual
Minimum Capital
Requirements
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(in thousands)
As of December 31, 2003
Total Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . .
Tier I Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . .
Tier I Leverage Capital
. . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2002
$871,514
806,865
806,865
12.1% $574,262
287,131
11.2
386,359
8.4
8.0% $717,827
430,696
4.0
482,948
4.0
Total Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . .
Tier I Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Tier I Leverage Capital
$836,479
765,490
765,490
12.5% $536,029
268,015
11.4
353,161
8.7
8.0% $670,037
402,022
4.0
441,452
4.0
10.0%
6.0
5.0
10.0%
6.0
5.0
VNB’s actual capital amounts and ratios as of December 31, 2003 and 2002 are presented in the following
table:
Actual
Minimum Capital
Requirements
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(in thousands)
As of December 31, 2003
Total Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . .
Tier I Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . .
Tier I Leverage Capital
. . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2002
$736,114
671,464
671,464
10.3% $572,384
286,192
9.4
385,110
7.0
8.0% $715,481
429,288
4.0
481,388
4.0
Total Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . .
Tier I Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Tier I Leverage Capital
$727,444
663,355
663,355
10.9% $532,846
266,423
10.0
351,211
7.6
8.0% $666,058
399,635
4.0
439,014
4.0
10.0%
6.0
5.0
10.0%
6.0
5.0
Dividend Restrictions
VNB, a national banking association, is subject to a limitation on the amount of dividends it may pay to
Valley, VNB’s only shareholder. Prior approval by the office of the Comptroller of the Currency (“OCC”) is
required to the extent that the total of all dividends to be declared by VNB in any calendar year exceeds net
profits, as defined, for that year combined with its retained net profits from the preceding two calendar years, less
any transfers to capital surplus. Under this limitation, VNB could declare dividends in 2004 without prior
approval from the OCC of up to $31.4 million plus an amount equal to VNB’s net profits for 2004 to the date of
such dividend declaration. In addition to dividends received from its subsidiary bank, Valley can satisfy its cash
requirements by utilizing its own funds, cash and sale of investments, as well as borrowed funds. If Valley were
to defer payments on the junior subordinated debentures used to fund payments on its trust preferred securities, it
would be unable to pay dividends on its common stock until the deferred payments were made.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Shares of Common Stock
The following table summarizes the share transactions for the three years ended December 31, 2003:
Shares Issued
Shares in Treasury
Balance, December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . .
Stock dividend (5 percent)
. . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock incentive plan, net . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock incentive plan, net . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock incentive plan, net . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . .
98,165,570
4,426,522
49,290
—
102,641,382
50,890
(3,685,240)
99,007,032
(91,183)
—
(4,713,486)
(659,493)
458,416
825,482
(2,901,982)
(2,277,577)
490,163
(5,855,324)
3,685,240
(3,957,498)
394,702
(1,442,585)
4,713,486
Balance, December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . .
94,202,363
(291,895)
Treasury Stock
On May 14, 2003, Valley’s Board of Directors authorized the repurchase of up to 2.5 million shares of
Valley’s outstanding common stock. Purchases may be made from time to time in the open market or in privately
negotiated transactions generally at prices not exceeding prevailing market prices. No purchases were made in
2003 under this repurchase plan.
On August 21, 2001 Valley’s Board of Directors authorized the repurchase of up to 10.5 million shares of
Valley’s outstanding common stock. Purchases may be made from time to time in the open market or in privately
negotiated transactions generally not exceeding prevailing market prices. Reacquired shares are held in treasury
and were used for general corporate purposes. Valley had repurchased 1.4 million shares during 2003 for a total
of 10.2 million shares of its common stock under this repurchase program. Valley expects to continue its existing
repurchase program until all 10.5 million shares are purchased before the newly authorized program becomes
effective.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 17)
Quarters ended 2003
March 31
June 30
Sept 30
Dec 31
$
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share . . . . . . . . . . . . . .
Average shares outstanding:
126,431
37,207
89,224
3,255
25,642
54,139
57,472
19,490
37,982
0.40
0.40
0.214
$
$
(in thousands, except for share data)
120,840
39,141
81,699
1,085
33,325
54,128
59,811
20,475
39,336
126,040
37,217
88,823
1,755
26,222
55,943
57,347
19,618
37,729
0.40
0.40
0.225
0.42
0.42
0.225
$
124,187
35,357
88,830
1,250
23,008
52,068
58,520
20,152
38,368
0.41
0.41
0.225
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,658,595
95,098,987
93,798,729
94,313,570
93,714,747
94,300,246
93,821,474
94,438,268
Quarters ended 2002
March 31
June 30
Sept 30
Dec 31
$
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share . . . . . . . . . . . . . .
Average shares outstanding:
128,158
44,311
83,847
3,705
18,044
45,373
52,813
14,213
38,600
0.39
0.38
0.205
$
$
(in thousands, except for share data)
131,253
44,150
87,103
3,299
20,755
48,804
55,755
16,799
38,956
131,357
43,842
87,515
3,974
20,421
46,629
57,333
17,437
39,896
0.40
0.40
0.214
0.40
0.40
0.214
$
126,651
41,150
85,501
2,666
22,018
51,458
53,395
16,231
37,164
0.39
0.39
0.214
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99,613,756
100,318,558
98,709,539
99,344,567
97,341,393
97,925,304
95,516,698
96,055,043
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PARENT COMPANY INFORMATION (Note 18)
Condensed Statements of Financial Condition
December 31,
2003
2002
(in thousands)
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan to subsidiary bank employee benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,919
152,032
450
714,996
357
10,207
$
3,191
127,496
456
719,234
536
10,672
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$882,961
$ 861,585
Liabilities
Dividends payable to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 21,120
206,186
2,866
$ 20,448
206,186
3,213
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
230,172
229,847
Shareholders’ Equity
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated common stock held by employee benefit plan . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
33,304
318,599
288,313
(259)
20,531
660,488
(7,699)
—
33,332
318,964
338,770
(435)
41,319
731,950
(100,212)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
652,789
631,738
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$882,961
$ 861,585
Condensed Statements of Income
Years ended December 31,
2003
2002
2001
(in thousands)
Income
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on securities transactions, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$145,000
328
7,633
802
$144,000
1,253
5,106
1,154
$ 93,000
721
156
1,531
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
153,763
18,107
151,513
17,867
95,408
6,070
Income before income tax benefit and equity in undistributed earnings of
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit
135,656
(3,479)
133,646
(3,880)
Income before equity in undistributed earnings of subsidiary . . . . . . . . . . . .
Equity in undistributed earnings of subsidiary . . . . . . . . . . . . . . . . . . . . . . . .
139,135
14,280
137,526
17,090
89,338
(1,223)
90,561
44,643
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$153,415
$154,616
$135,204
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Condensed Statements of Cash Flows
Years ended December 31,
2003
2002
2001
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
$ 153,415
$ 154,616
$ 135,204
activities:
Equity in undistributed earnings of subsidiary . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of compensation costs pursuant to long-term stock
incentive plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization of premiums and accretion of discounts . . . . . . . . . .
Net gains on securities transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,280)
301
(17,090)
310
(44,643)
347
3,046
(48)
(7,633)
164
(174)
2,316
(91)
(5,106)
(226)
(1,114)
2,020
(194)
(156)
(5,580)
(3,224)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . .
134,791
133,615
83,774
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale . . . . . . . .
Proceeds from maturing investment securities available for sale . . . . . . .
Purchases of investment securities available for sale . . . . . . . . . . . . . . . .
Purchases of investment securities held to maturity . . . . . . . . . . . . . . . . .
Purchase of common stock of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of employee benefit plan loan . . . . . . . . . . . . . . . . . . . . . . . . . . .
429,906
1,075
(449,396)
—
—
—
179
435,418
135,000
(472,814)
(459)
—
—
178
920
65,026
(233,424)
—
(6,185)
22,010
179
Net cash (used in) provided by investing activities . . . . . . . . . . . . . .
(18,236)
97,323
(151,474)
Cash flows from financing activities:
Net decrease in other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of common shares to treasury . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued, net of cancellations . . . . . . . . . . . . . . . . . . . . . . . .
—
—
(35,362)
(82,931)
3,466
(4,000)
—
(149,628)
(82,409)
6,091
(6,000)
206,185
(65,012)
(76,260)
8,230
Net cash (used in) provided by financing activities . . . . . . . . . . . . . .
(114,827)
(229,946)
67,143
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . .
1,728
3,191
992
2,199
(557)
2,756
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,919
$
3,191
$
2,199
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (Note 19)
Limitations: The fair value estimates made at December 31, 2003 and 2002 were based on pertinent market
data and relevant information on the financial instruments at that time. 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 many of the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments:
Cash and short-term investments: For such short-term investments, the carrying amount is considered to be
a reasonable estimate of fair value.
Investment securities held to maturity, investment securities available for sale and trading securities: Fair
values are based on quoted market prices.
Loans: Fair values 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.
Deposit liabilities: 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 deposits of similar remaining maturity.
Short-term borrowings and Long-term debt: The fair value is estimated by obtaining quoted market prices of
financial instruments when available. The fair value of other short-term and long-term debt is estimated by
discounting the estimated future cash flows using market discount rates of financial instruments with similar
characteristics, terms and remaining maturity.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The carrying amounts and estimated fair values of financial instruments were as follows at December 31,
2003 and 2002:
Financial assets:
2003
2002
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(in thousands)
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity . . . . . . . . . . . . . .
Investment securities available for sale . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 218,166
1,232,239
1,805,680
4,252
6,107,759
$ 218,166
1,252,765
1,805,680
4,252
6,308,081
$ 243,923
590,892
2,140,366
—
5,698,401
$ 243,923
597,480
2,140,366
—
5,823,729
Financial liabilities:
Deposits with no stated maturity . . . . . . . . . . . . . . . . . . .
Deposits with stated maturities . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
4,960,480
2,202,488
377,306
1,547,221
4,960,480
2,227,720
373,795
1,561,605
4,512,684
2,170,703
378,433
1,325,828
4,512,684
2,185,528
376,414
1,393,489
The estimated fair value of financial instruments with off-balance sheet risk, consisting of unamortized fee
income at December 31, 2003 and 2002 is not material.
BUSINESS SEGMENTS (Note 20)
lending,
lending, commercial
VNB has four major business segments it monitors and reports on to manage its business operations. These
investment management and corporate and other
segments are consumer
adjustments. Lines of business and actual structure of operations determine each segment. Each is reviewed
routinely for its asset growth, contribution to pre-tax net income and return on average interest-earning assets.
Expenses related to the branch network, all other components of retail banking, along with the back office
departments of the bank are allocated from the corporate and other adjustments segment to each of the other three
business segments. The financial reporting for each segment contains allocations and reporting in line with VNB’s
operations, which may not necessarily be compared to any other financial institution. The accounting for each
segment includes internal accounting policies designed to measure consistent and reasonable financial reporting.
During 2003, the allocation of income and expense generated from the financial services and mortgage services
portfolios were directly assigned to the respective non-interest income and non-interest expense lines in the
consumer lending segment. Prior years have been restated to reflect the new allocation policy adopted in 2003.
The consumer lending segment provides products and services that include residential mortgages, home
equity loans, automobile loans, credit card loans and other consumer lines of credit. In addition, this segment
reflects both non-interest income and non-interest expense generated through VNB’s trust and investment
services, insurance products and mortgage servicing for investors. Consumer lending is generally available
throughout New Jersey, New York and Pennsylvania.
The commercial lending division provides loan products and services to commercial establishments located
primarily in New Jersey and New York. These include lines of credit, term loans, letters of credit, asset-based
lending, construction, development and permanent real estate financing for owner occupied and leased
properties, leasing, aircraft lending and Small Business Administration (“SBA”) loans. The SBA loans are
offered through a sales force covering New Jersey and a number of surrounding states and territories. The
commercial lending division serves numerous businesses through departments organized into product or specific
geographic divisions.
The investment management segment handles the management of the investment portfolio, asset/liability
management and government banking for VNB. The objectives of this department are production of income and
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
liquidity through the investment of VNB’s funds. The bank purchases and holds a mix of bonds, notes, U.S. and
other governmental securities and other investments.
The corporate and other adjustments segment represents income and expense items not directly attributable
to a specific segment including gains on securities transactions not classified in the investment management
segment above, interest expense related to the long-term debt payable to VNB Capital Trust I, service charges on
deposit accounts and expenses for occupancy, furniture and equipment, data processing, professional fees,
postage, telephone and stationery.
The following tables represent the financial data for the four business segments for the years ended 2003,
2002 and 2001.
Year ended December 31, 2003
Consumer
Lending
Commercial
Lending
Investment
Management
Corporate
and Other
Adjustments
Total
Average interest-earning assets . . . . . . . . . . .
$3,092,919
$2,986,456
(in thousands)
$2,692,385
Interest income . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
$ 180,092
46,964
$ 179,542
45,347
$ 143,987
40,882
$
$
— $8,771,760
(6,123) $ 497,498
148,922
15,729
. . . . . . . . . . . . . . .
Net interest income (loss)
Provision for loan losses . . . . . . . . . . . . . . . .
133,128
3,460
134,195
3,885
103,105
—
(21,852)
—
348,576
7,345
Net interest income (loss) after provision for
loan losses . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . .
Internal expense transfer . . . . . . . . . . . . . . . .
129,668
50,972
45,087
38,205
130,310
11,445
22,355
36,890
103,105
14,137
626
32,003
(21,852)
31,643
148,210
(107,098)
341,231
108,197
216,278
—
Income (loss) before income taxes . . . . . . . .
$
97,348
$
82,510
$
84,613
$ (31,321) $ 233,150
Return on average interest-bearing assets
(pre-tax) . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.15%
2.76%
3.14%
—
2.66%
Year ended December 31, 2002
Consumer
Lending
Commercial
Lending
Investment
Management
Corporate
and Other
Adjustments
Total
Average interest-earning assets . . . . . . . . . . .
$2,754,744
$2,766,755
(in thousands)
$2,588,766
Interest income . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
$ 185,767
53,572
$ 183,682
53,806
$ 153,686
50,346
$
$
— $8,110,265
(5,716) $ 517,419
173,453
15,729
Net interest income (loss)
. . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . .
132,195
6,671
129,876
6,973
103,340
—
(21,445)
—
343,966
13,644
Net interest income (loss) after provision for
loan losses . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . .
Internal expense transfer . . . . . . . . . . . . . . . .
125,524
35,762
38,926
35,764
122,903
10,537
21,142
35,919
103,340
4,175
147
31,607
(21,445)
30,764
132,049
(103,290)
330,322
81,238
192,264
—
Income (loss) before income taxes . . . . . . . .
$
86,596
$
76,379
$
75,761
$ (19,440) $ 219,296
Return on average interest-bearing assets
(pre-tax) . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.14%
2.76%
2.93%
—
2.70%
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Year ended December 31, 2001
Consumer
Lending
Commercial
Lending
Investment
Management
Corporate
and Other
Adjustments
Total
Average interest-earning assets . . . . . . . . . . .
$2,656,593
$2,561,052
(in thousands)
$2,450,333
$ — $7,667,978
Interest income . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
$ 201,678
75,753
$ 199,690
73,029
$ 158,189
69,871
$ (6,071) $ 553,486
220,935
2,282
. . . . . . . . . . . . . . .
Net interest income (loss)
Provision for loan losses . . . . . . . . . . . . . . . .
125,925
4,699
126,661
11,007
Net interest income (loss) after provision for
loan losses . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . .
Internal expense transfer . . . . . . . . . . . . . . . .
121,226
36,630
40,173
34,793
115,654
8,485
17,909
33,158
88,318
—
88,318
2,448
824
29,750
(8,353)
—
332,551
15,706
(8,353)
20,913
127,060
(97,701)
316,845
68,476
185,966
—
Income (loss) before income taxes . . . . . . . .
$
82,890
$
73,072
$
60,192
$ (16,799) $ 199,355
Return on average interest-bearing assets
(pre-tax) . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.12%
2.85%
2.46%
—
2.60%
70
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Valley National Bancorp
We have audited the accompanying consolidated statements of financial condition of Valley National
Bancorp and its subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in shareholders’ equity, and cash flows for each of the two years in the period
ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Valley National Bancorp and its subsidiaries at December 31, 2003 and 2002,
and the consolidated results of its operations and its cash flows for each of the two years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted in the United States.
Ernst & Young, LLP
New York, New York
February 10, 2004
71
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Shareholders
Valley National Bancorp:
We have audited the accompanying consolidated statements of income, changes in shareholders’ equity, and
cash flows of Valley National Bancorp and subsidiaries for the year ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the results of operations and the cash flows of Valley National Bancorp and subsidiaries for the year ended
December 31, 2001, in conformity with accounting principles generally accepted in the United States of
America.
January 16, 2002
72
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On April 18, 2002, Valley ended its relationship with KPMG LLP (“KPMG”) as its independent
accountants, and appointed Ernst & Young LLP (“Ernst & Young”) as its new independent accountants. This
determination followed Valley’s decision to seek proposals from independent accountants to audit Valley’s
financial statements for the year ended December 31, 2002. The decision not to renew the engagement of KPMG
and to retain Ernst & Young was approved by Valley’s Audit Committee of the Board of Directors. The Audit
Committee decided that as a result of the increase in consulting work performed by KPMG, especially tax
consulting work, it would be appropriate to separate the audit engagement from the consulting work. As a result,
KPMG was dismissed and Ernst & Young was retained as auditors for the year ended December 31, 2002.
KPMG’s reports on Valley’s consolidated financial statements as of and for the years ended December 31,
2001 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
In connection with the audits of the fiscal year ended December 31, 2001 and through April 18, 2002, there
were no disagreements with KPMG on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG,
would have caused KPMG to make reference to the disagreements in connection with their report on Valley’s
consolidated financial statements for 2001; and there were no reportable events as defined in Item 304 (a) (1) (v)
of Regulation S-K.
The Company provided KPMG with a copy of the foregoing disclosures.
Ernst & Young LLP, independent public accountants, audited the books and records of Valley for the year
ended December 31, 2003 and 2002. Selection of Valley’s independent public accountants for the 2004 fiscal
year will be made by the Audit Committee of the Board subsequent to the annual meeting.
Item 9A. Controls and Procedures
Within 90 days prior to the date of this report, Valley carried out an evaluation, under the supervision and
with the participation of Valley’s management, including Valley’s President and Chief Executive Officer and
Valley’s Chief Financial Officer, of the effectiveness of the design and operation of Valley’s disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, they concluded that Valley’s
disclosure controls and procedures are effective in timely alerting them to material information relating to Valley
(including its consolidated subsidiaries) required to be included in this report. There have been no significant
changes in Valley’s internal controls or in other factors that could significantly affect
internal controls
subsequent to the date of the evaluation.
Valley’s management, including the CEO and CFO, does not expect that our disclosure controls and
procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well
conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are
met. The design of a control system reflects resource constraints and the benefits of controls must be considered
relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within Valley have been or will
be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and
that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of the control. The design of any
system of controls is based in part upon certain assumptions about the likelihood of future events. There can be
no assurance that any design will succeed in achieving its stated goals under all future conditions; over time,
controls may become inadequate because of changes in conditions or deterioration in the degree of compliance
with the policies or procedures. Because of the inherent
limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
73
Item 10. Directors and Executive Officers of the Registrant
PART III
The information set forth under the captions “Director Information”, “Corporate Governance” and “Section
16(a) Beneficial Ownership Reporting Compliance” in the 2004 Proxy Statement is incorporated herein by
reference. Certain information on Executive Officers of the registrant is included in Part I, Item 4A of this report,
which is also incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the caption “Executive Compensation” in the 2004 Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Equity Compensation Plan Information
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
Plan Category
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved
by security holders . . . . . . . . . . . . . . .
2,340,004*
—
Total
. . . . . . . . . . . . . . . . . . . . . . . .
2,340,004
$22.00
—
$22.00
1,155,915
—
1,155,915
*
Does not include 79,326 options issued under plans of companies acquired by Valley that are still outstanding. No further options may be
issued under these plans.
The information set forth under the caption “Stock Ownership of Management and Principal Shareholders”
in the 2004 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set
the captions “Compensation Committee Interlocks and Insider
Participation” and “Certain Transactions with Management” in the 2004 Proxy Statement is incorporated herein
by reference.
forth under
Item 14. Principal Accountant Fees and Services
The information set forth under the caption “Independent Public Accountants” in the 2004 Proxy Statement
is incorporated herein by reference.
74
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules:
The following Financial Statements and Supplementary Data are filed as part of this annual report:
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors’ Reports
All financial statement schedules are omitted because they are either inapplicable or not required, or because
the required information is included in the Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K:
(i) Filed October 16, 2003, to furnish under Item 12, Valley’s third quarter earnings,
(ii) Filed November 18, 2003, to report Valley’s implementation of FASB Staff Position 150-3.
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession:
A. Agreement and Plan of Merger dated September 5, 2000 among Valley, VNB, Merchants and
Merchants Bank of New York is incorporated herein by reference to Valley’s Report on Form 8-K filed
with the Commission on September 21, 2000.
(3) Articles of Incorporation and By-laws:
A. Restated Certificate of Incorporation of the Registrant as amended on May 3, 2003 incorporated herein
by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2003.
B. By-laws of the Registrant are filed herewith.
(10) Material Contracts:
A. Restated and amended “Change in Control Agreements” dated January 1, 1999 between Valley, VNB
and Gerald H. Lipkin, Robert Meyer, and Peter Crocitto are filed herewith.
B.
C.
D.
E.
F.
“Change in Control Agreements” dated January 1, 1995 between Valley, VNB and Robert Farrell,
Richard Garber and Robert Mulligan are incorporated herein by reference to the Registrant’s Form
10-K Annual Report for the year ended December 31, 1999.
“Change in Control Agreement” dated February 1, 1996 between Valley, VNB and Jack Blackin
incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year ended
December 31, 2002.
“Change in Control Agreement” dated April 15, 1996 between Valley, VNB and John Prol
incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year ended
December 31, 2002.
“The Valley National Bancorp Long-term Stock Incentive Plan” dated January 19, 1999 and as
amended is incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year
ended December 31, 2002.
“Severance Agreement” dated August 17, 1994 between Valley, VNB and Gerald H. Lipkin is
incorporated by reference to Registrant’s Registration Statement on Form S-4 (No. 33-55765) filed
with the Securities and Exchange Commission on October 4, 1999.
75
G.
H.
I.
J.
“Split-Dollar Agreement” dated July 7, 1995 between Valley, VNB, and Gerald H. Lipkin incorporated
herein by reference to the Registrant’s Form 10-K Annual Report for the year ended December 31,
2000 filed on March 1, 2001.
“Severance Agreements” as of January 1, 1998 between Valley, VNB and Peter Crocitto and Robert M.
Meyer are filed herewith.
“Change in Control Agreement” dated January 3, 2000 between Valley, VNB and Albert L. Engel is
incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year ended
December 31, 1999.
“The Valley National Bancorp Long-Term Stock Incentive Plan” dated January 10, 1989 and as
amended is incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year
ended December 31, 2002.
K. Amendment to the “Severance Agreement” dated November 28, 2000 between Valley, VNB and
Gerald H. Lipkin incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the
year ended December 31, 2000 filed on March 1, 2001.
L.
“Change in Control Agreement” dated April 4, 2001 between Valley, VNB and Alan D. Eskow
incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
M. “Employment Continuation and Non-Competition Agreements” dated September 5, 2000 between
Valley, VNB and James G. Lawrence and Eric W. Gould incorporated herein by reference to
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
N.
“Change in Control Agreement” dated September 5, 2000 between Valley, VNB and James G.
Lawrence incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001.
O. Amended and Restated Declaration of Trust of VNB Capital Trust I, dated as of November 7, 2001
incorporated herein by reference to the Registrant’s Report on Form 8-K filed on November 16, 2001.
P.
Indenture among VNB Capital Trust I, The Bank of New York as Debenture Trustee, and Valley, dated
November 7, 2001 incorporated herein by reference to the Registrant’s Report on Form 8-K filed on
November 16, 2001.
Q. Preferred Securities Guarantee Agreement among VNB Capital Trust I, The Bank of New York, as
Guarantee Trustee, and Valley, dated November 7, 2001 incorporated herein by reference to the
Registrant’s Report on Form 8-K filed on November 16, 2001.
R.
S.
“Change in Control Agreement” dated November 28, 2001 between Valley, VNB and Garret G.
Nieuwenhuis is incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the
year ended December 31, 2001.
“Severance Agreement” as of June 18, 2002 between Valley, VNB and Alan D. Eskow, incorporated
herein by reference to the Registrant’s Form 10-K Annual Report for the year ended December 31,
2002.
(12) Computation of Consolidated Ratios of Earnings to Fixed Charges
76
(21) List of Subsidiaries:
(a) Subsidiaries of Valley:
Name
VNB Capital Trust I
Valley National Bank (VNB)
(b) Subsidiaries of VNB:
VNB Mortgage Services, Inc.
BNV Realty Incorporated (BNV)
VN Investments, Inc. (VNI)
VNB Loan Services, Inc.
VNB RSI, Inc.
Wayne Ventures, Inc.
VNB International Services, Inc.
New Century Asset Management, Inc.
Hallmark Capital Management, Inc.
Merchants New York Commercial Corp.
Valley Commercial Capital, LLC
Valley National Title Services, Inc.
Masters Coverage Corp.
Glen Rauch Securities, Inc.
Valley 747 Acquisition, LLC
(c) Subsidiaries of BNV:
SAR I, Inc.
SAR II, Inc.
(d) Subsidiary of VNI:
VNB Realty, Inc.
(e) Subsidiary of VNB Realty, Inc.:
VNB Capital Corp.
(23) Consents of Experts and Counsel
Jurisdiction of
Incorporation
Delaware
United States
New Jersey
New Jersey
New Jersey
New York
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
Delaware
New Jersey
New Jersey
New York
New York
New York
New Jersey
New Jersey
New Jersey
New York
Percentage of Voting
Securities Owned by the Parent
Directly or Indirectly
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
(24) Power of Attorney of Certain Directors and Officers of Valley
(31.1) Certification of Gerald H. Lipkin, Chairman, President and Chief Executive Officer of the Company,
pursuant to Securities Exchange Rule 13a-14(a).
(31.2) Certification of Alan D. Eskow, Executive Vice President and Chief Financial Officer of the Company
pursuant to Securities Exchange Rule 13a-14(a).
(32)
Certification, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, signed by Gerald H. Lipkin, Chairman, President and Chief Executive Officer of the
Company and Alan D. Eskow, Executive Vice President and Chief Financial Officer of the Company.
77
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VALLEY NATIONAL BANCORP
By:
By:
/s/ GERALD H. LIPKIN
Gerald H. Lipkin, Chairman of the Board,
President and Chief Executive Officer
/s/ ALAN D. ESKOW
Alan D. Eskow,
Executive Vice President
and Chief Financial Officer
Dated: February 26, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated.
Signature
Title
Date
/s/ GERALD H. LIPKIN
Chairman of the Board, President and
February 26, 2004
Gerald H. Lipkin
Chief Executive Officer and
Director
/s/ ALAN D. ESKOW
Executive Vice President and Chief
February 26, 2004
Alan D. Eskow
Financial Officer (Principal
Financial Officer)
/s/ EDWARD J. LIPKUS
Edward J. Lipkus
First Vice President and Controller
(Principal Accounting Officer)
February 26, 2004
/s/ ANDREW B. ABRAMSON*
Director
February 26, 2004
Andrew B. Abramson
/s/ CHARLES J. BAUM*
Director
February 26, 2004
Charles J. Baum
/s/ PAMELA BRONANDER*
Director
February 26, 2004
Pamela Bronander
/s/
JOSEPH COCCIA, JR.*
Joseph Coccia, Jr.
Director
February 26, 2004
/s/ ERIC P. EDELSTEIN*
Director
February 26, 2004
Eric P. Edelstein
/s/ MARY J. STEELE GUILFOILE*
Director
February 26, 2004
Mary J. Steele Guilfoile
78
Signature
Title
Date
/s/ H. DALE HEMMERDINGER
Director
February 26, 2004
H. Dale Hemmerdinger
/s/ GRAHAM O. JONES*
Director
February 26, 2004
Graham O. Jones
/s/ WALTER H. JONES, III*
Director
February 26, 2004
Walter H. Jones, III
/s/ GERALD KORDE*
Director
February 26, 2004
Gerald Korde
/s/ ROBINSON MARKEL*
Director
February 26, 2004
Robinson Markel
/s/ ROBERT E. MCENTEE*
Director
February 26, 2004
Robert E. McEntee
/s/ RICHARD S. MILLER*
Director
February 26, 2004
Richard S. Miller
/s/ ROBERT RACHESKY*
Director
February 26, 2004
Robert Rachesky
/s/ BARNETT RUKIN*
Director
February 26, 2004
Barnett Rukin
/s/ PETER SOUTHWAY*
Director
February 26, 2004
Peter Southway
/s/ RICHARD F. TICE*
Director
February 26, 2004
Richard F. Tice
/s/ LEONARD J. VORCHEIMER*
Director
February 26, 2004
Leonard J. Vorcheimer
*By Gerald H. Lipkin and Alan D. Eskow, as attorneys-in-fact.
79
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