Valley National Bancorp
Annual Report 2004

Plain-text annual report

1455 Valley Road Wayne, NJ 07470 973-305-3380 www.valleynationalbank.com 2 0 0 4 2 0 0 4 V A L L E Y L O C A T I O N S N E W J E R S E Y Bergen Bogota 325 Palisade Avenue Edgewater 46 Promenade, City Place Elmwood Park 80 Broadway Englewood 41-43 Palisade Avenue 80 West Street Fair Lawn 139 Lincoln Avenue 20-24 Fair Lawn Avenue 31-00 Broadway Fort Lee 1372 Palisade Avenue 2160 Lemoine Avenue 2180 Lemoine Avenue Hackensack 3 University Plaza Hillsdale 24 Broadway Ho-Ho-Kus 18 Sycamore Avenue Lodi 147 Main Street Lyndhurst 456 Valley Brook Avenue Midland Park 207 Franklin Avenue Montvale 24 South Kinderkamack Road Moonachie 199 Moonachie Road Moonachie Road & East Joseph Street New Milford 243 Main Street North Arlington 629 Ridge Road Northvale 151 Paris Avenue Oakland 350 Ramapo Valley Road Oradell 350 Kinderkamack Road Paramus 80 East Ridgewood Avenue East 58 Midland Avenue Route 4 & Forest Avenue Ramsey 10 South Franklin Turnpike Ridgefield 868 Broad Avenue Ridgewood 103 Franklin Avenue 44 Godwin Avenue Rochelle Park 405 Rochelle Avenue Tenafly 85 County Road Waldwick 67 Franklin Turnpike Wyckoff 356 Franklin Avenue Essex Belleville 22 Bloomfi eld Avenue 237 Washington Avenue 381 Franklin Avenue Bloomfield 1422 Broad Street 548 Broad Street Caldwell 15 Roseland Avenue Cedar Grove 491 Pompton Avenue Fairfield 167 Fairfi eld Road One Passaic Avenue Livingston 531 South Livingston Avenue 73 South Livingston Avenue Maplewood 142 Maplewood Avenue 740 Irvington Avenue Newark 167 Bloomfi eld Avenue 289 Ferry Street 784 Mount Prospect Avenue Nutley 171 River Road 371 Franklin Avenue South Orange 115 Valley Street (1/05) West Caldwell 1059 Bloomfi eld Avenue Hudson Bayonne 522 Broadway East Newark 710 North 4th Street at Bridge Harrison 433 Harrison Avenue Hoboken 305 River Street Jersey City 46 Essex Street Kearny 256 Kearny Avenue 72-80 Midland Avenue North Bergen 8901 Kennedy Boulevard Secaucus 40 Meadowlands Parkway 54 Mill Creek Mall South Kearny 100 Central Avenue Union City 4405 Bergenline Avenue West New York 5712 Bergenline Avenue Middlesex South Plainfield 100 Durham Avenue Morris Budd Lake 202 Route 46 & Mount Olive Road 342 Route 46 West Butler Meadtown Shopping Center Chatham 375 Main Street Chester Chester Springs Mall, 151 Route 206 Dover 100 East Blackwell Street East Hanover Route 10 West & Murray Road Jefferson Township 715 Route 15 South Landing 115 Center Street Mine Hill 271-273 Route 46 Morris Plains 51 Gibraltar Drive Morristown 10 Madison Avenue Parsippany 120 Baldwin Avenue Arlington Plaza, 800 Route 46 Succasunna 250 Route 10 Passaic Clifton 1006 Route 46 505 Allwood Road 6 Main Avenue 925 Allwood Road Little Falls 171 Browertown Road North Haledon 475 High Mountain Road 5 Sicomac Road Passaic 128 Market Street 211 Main Avenue 506 Van Houten Avenue 545 Paulison Avenue 615 Main Avenue Pompton Lakes 516 Wanaque Avenue Wayne 1200 Preakness Avenue 1345 Willowbrook Mall, Main Mall Entrance 1400 Valley Road 1445 Route 23 South 1445 Valley Road 1501 Hamburg Turnpike 1504 Route 23 North 200 Black Oak Ridge Road Wayne (continued) 64 Mountain View Boulevard Somerset Bound Brook 466 West Union Avenue Green Brook 302-306 Route 22 West North Plainfield 1334 Route 22 672-6 Somerset Street Sussex Branchville Branchville Square Franklin 288 Route 23 Fredon 410 Route 94 at Willows Road Sparta 7 Woodport Road Tranquility Route 517 at Kennedy Road Vernon Vernon Plaza, 538 Route 515 Union Clark 76 Central Avenue Mountainside 882 Mountain Avenue Roselle Park 1 West Westfi eld Avenue Scotch Plains 1922 Westfi eld Avenue Union 2784 Morris Avenue Westfield 801 Central Avenue Warren Belvidere Route 46 at Route 519 Blairstown 128 Route 94 Hackettstown 105 Mill Street N E W Y O R K Manhattan 1040 Sixth Avenue 145 Fifth Avenue 275 Madison Avenue 295 Fifth Avenue 434 Broadway 62 West 47th Street 776 Avenue of the Americas 93 Canal Street V A L L E Y N A T I O N A L B A N C O R P I S A R E G I O N A L B A N K H O L D I N G C O M P A N Y W I T H $ 10.8 B I L L I O N I N A S S E T S A S O F D E C E M B E R 31, 2004. V A L L E Y N A T I O N A L B A N K, I T S P R I N C I P A L S U B S I D I A R Y , I S A S U P E R C O M M U N I T Y B A N K T H A T O P E R A T E S 133 B R A N C H O F F I C E S I N 86 C O M M U N I T I E S T H R O U G H - O U T 11 C O U N T I E S I N N O R T H E R N N E W J E R S E Y A N D M A N H A T T A N . © 2005 Valley National Bancorp H I S T O R I C A L F I N A N C I A L D A T A H I S T O R I C A L F I N A N C I A L D ATA ( 1 9 8 4 – 2 0 0 4 ) * (Dollars in millions, except for share data) Year End 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 Total Assets Net Income Diluted Earnings Per Share (7) Assets Return on Average Return on Average Equity Dividends Per Share Stock Splits and Dividends $10,763 $154.4 $1.56 1.51% 22.77% $0.89 5/04 - 5% Stock Dividend 9,873 9,148 8,590 6,426 6,360 5,541 5,091 4,687 153.4 154.6 (1) 135.2 (2) 106.8 1.55 1.50 1.26 1.22 106.3 (3) 1.14 97.3 (4) 85.0 1.10 1.00 67.5 (5) 0.88 4,586 62.6 (6) 0.80 3,744 3,605 3,357 3,055 2,149 1,975 1,835 1,663 1,615 1,471 1,355 59.0 56.4 43.4 31.7 28.6 36.0 34.2 32.1 29.6 24.2 17.5 0.89 0.86 0.67 0.49 0.46 0.56 0.52 0.50 0.47 0.38 0.31 1.63 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 24.21 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 0.85 5/03 - 5% Stock Dividend 0.81 5/02 - 5:4 Stock Split 0.75 0.70 0.67 0.62 0.52 0.48 0.46 0.44 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 0.34 4/93 - 5:4 Stock Split 4/92 - 3:2 Stock Split 7/88 - 3:2 Stock Split 5/86 - 3:2 Stock Split 2/85 - 2:1 Stock Split 0.30 0.29 0.29 0.28 0.25 0.24 0.20 0.16 0.10 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. V A L L E Y N AT I O N A L B A N C O R P 1 T O O U R S H A R E H O L D E R S 2004 marked another successful year for Valley. We increased our earnings per share for the ninth consecutive year. For the year ended December 31, 2004, Valley reported net income of $1.56 per diluted share or $154.4 million, compared to $1.55 per diluted share or $153.4 million for the year ended December 31, 2003. We achieved a return on average shareholders’ equity of 22.77 percent, a return on average assets of 1.51 percent and an efficiency ratio of 48.2 percent that ranks as one of the best in the banking industry. We had a very successful year in commercial lending resulting in our loan portfolio growing approximately 12.3 percent. This increase is partially attributable to our new business development staff whose expense we absorbed starting early in 2004 and from whom we began to see positive results as the year progressed. Overall, deposits increased almost 5 percent for the full year, while our non-interest bearing and low-cost savings deposits showed the greatest growth. Municipal deposits continued to increase throughout the year as our government banking team expanded its footprint. S T R AT E G I C G R O W T H In a challenging interest rate, regulatory and competitive environment, Valley earned record net income and earnings per share, expanded its customer service ini- tiatives, announced the acquisition of two commercial banks and most importantly continued to be managed for the long run. Valley expects to open 7 to 10 new branches in 2005, four of which will be located in Manhattan. The first of these new branches is scheduled to open on January 3, 2005 in South Orange, New Jersey. Valley’s announced acquisitions of NorCrown Bank and Shrewsbury Bancorp, anticipated to close during the first quarter of 2005, are both expected to be accretive within one year. These acquisitions will also expand our market presence and increase 2 V A L L E Y N AT I O N A L B A N C O R P our franchise value. Since beginning our 24/7 customer service hours and Sunday branch banking initiative in November 2003, Valley has seen an increase in customer lobby traffic, an increase in accounts per household and a significant decrease in deposit account turnover, as evidenced by approximately a 50 percent decrease in checking account closings during 2004. E N H A N C I N G S H A R E H O L D E R V A L U E On May 17, 2004, the Board of Directors issued a 5 percent stock dividend. This marked the 35th time in the last 36 years that Valley increased its cash dividend. Valley’s Board of Directors has never reduced the regular cash dividend in the bank’s 77-year history and strongly believes that cash dividends are an important component to shareholder value. A V I S I O N F O R T H E F U T U R E In an increasingly competitive financial marketplace, we believe that Valley’s continued profitability and growth is ensured by our ability to adhere to strict lending standards and performance measures, while delivering the highest quality products and customer service in a cost-efficient manner. We continue to seek strategic acquisi- tions to grow the franchise, as well as opportunities to expand our branch network by opening new offices where we see potential to add value. We also look for opportuni- ties to forge new banking relationships with our personal hands-on approach even as the financial community continues to endure the trend of consolidation through mega-mergers. 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 V A L L E Y N AT I O N A L B A N C O R P 3 B O A R D O F D I R E C T O R S Left to Right 1st Row Richard S. Miller, Esq. Managing Partner Williams, Caliri, Miller, Otley & Stern Gerald H. Lipkin Chairman of the Board, President & CEO Mary J. Steele Guilfoile Chairman, MG Advisors, Inc. Leonard J. Vorcheimer Principal, LJV Enterprises 2nd Row Pamela Bronander Vice President KMC Mechanical, Inc. Barnett Rukin Chief Executive Offi cer SLX Capital Management Spencer B. Witty Emeritus Eric P. Edelstein Private Investor Gerald Korde President Birch Lumber Co., Inc. Wilma Falduto Assistant Secretary Joseph Coccia, Jr. Private Investor 4 V A L L E Y N A T I O N A L B A N C O R P 3rd Row Robert E. McEntee Management Consultant Andrew B. Abramson President and Chief Executive Offi cer The Value Group, Inc. Graham O. Jones, Esq. Partner, Jones & Jones, Esqs. H. Dale Hemmerdinger President, The Hemmerdinger Corporation Robinson Markel, Esq. KMZ Rosenman Peter Southway Retired Michael L. LaRusso Consultant Walter H. Jones, III, Esq. Retired V A L L E Y N AT I O N A L B A N C O R P 5 C O M M E R C I A L L E N D I N G 6 V A L L E Y N A T I O N A L B A N C O R P The Commercial Lending Group played a vital role in Valley’s success in 2004. Our business strategy to grow our Commercial Loan, Commercial Mortgage and Business Resource Center products through time-tested lending basics continued to serve us well. As always, Valley remains committed to the New York and New Jersey marketplace and continues to believe that it remains the most vibrant middle market business economy in the entire nation. Once again, Valley’s Commercial Lending Group produced increased loan growth of 14 percent from $2.95 billion to $3.36 billion by aggressively marketing our product lines through carefully targeted marketing campaigns. Our dedicated business development officers and commercial lenders are actively communicating our understanding of local markets and Valley’s ability to manage and service the needs of commercial loan customers. Valley believes that commercial businesses want their relationship managed by local bankers who can provide an exceptional level of convenience, value and extensive knowledge of the communities we serve. In 2004, our Business Resource Center initiated a 24-hour turnaround on our popu- lar small business E-Z line product for commercial loans and lines of credit customers. This product received an unprecedent- ed welcome from the market in 2004 enabling Valley to increase its number of small business clients 134% over 2003. Our Business Resource Center expects continued growth in 2005 with the recent introduction of our government guaranteed SBA Express loan product. Valley’s HealthCare Group and Professionals Group also supported Valley’s growth this year by offering market-competitive and in- novative products to the medical, legal and accounting communities. The low-interest rate environ- L to R – Christopher J. Coiley, First Vice President; Alfred Sorrentino, Jr., Senior Vice President. ment in 2004 created a strong demand in commercial real estate. Valley seized this opportunity by supplying real estate professionals with a full range of financing solutions for investment and owner-occupied properties, as well as by continuing our market strategy of communicating Valley’s local decision-making capability and customer familiarity. Valley is a true financial partner in the local community, committed to providing innovative and individualized solutions. Our success in 2004 can be attributed to the skill and dedication of Valley’s commercial lending officers who anticipate the ever-changing needs of the business community. In 2005, Valley will continue to earn the loyalty and trust of local businesses that appreciate the personalized attention we consistently deliver. Center – Robert M. Meyer, Executive Vice President. Front – L to R – John H. Prol, First Senior Vice President; James G. Lawrence, Executive Vice President. Back – L to R – Richard P. Garber, First Senior Vice President; Robert E. Farrell, First Senior Vice President. V A L L E Y N AT I O N A L B A N C O R P 7 C O N S U M E R L E N D I N G 8 V A L L E Y N A T I O N A L B A N C O R P Residential Real Estate Lending continued to be an engine for growth in 2004 with Mortgage and Home Equity portfolios providing a high volume of home fi nancing opportunities for Valley. Continued low interest rates, strong demand for home ownership and limited land available for development in our trade area combined to increase property values, adding a sense of urgency to home buyers and those refi nancing their fi rst mortgages. Valley’s bi-weekly mortgage product offers a very attractive alternative to monthly mortgage payments, providing accelerated cash fl ows to Valley and dramatically reducing interest expense to the borrower. Our affi liation with Valley National Title Services (VNTS) has allowed us to develop a packaged closing product to remove closing cost uncertainties. Working closely with VNTS, Valley is able to better infl uence the levels of customer service which otherwise would lie with third-party providers outside our control. Automobile Lending had its challenges in a year when auto manufacturers’ captive fi nancing affi liates continued to offer zero-rate fi nancing and additional incentives. Valley is well positioned to capture indirect business from its auto dealer network as a result of increasing its sales team and signing up a signifi cant number of ad- ditional dealer sales points. A change of focus on the fi nancing of previously owned vehicles and the introduction of medium duty truck fi nancing are expected to improve vehicle fi nance volumes and yields in 2005. Valley’s continued attention to credit quality has produced excellent loan performance, thereby allowing Valley to offer its borrowers the most competitive rates, terms and service. Our Customer Service Call Center, located in Wayne, New Jersey, completed its fi rst year of service providing 24/7 telephone support for Valley customers. In December 2004, the friendly and knowledgeable Valley representatives in the Call Center responded to 78,633 calls (over 2,500 calls per day). This personalized service is in addition to Valley’s Automated Telephone Response System and V-BankWorks (Valley’s Internet Banking and Electronic Bill Paying Solution). Valley provides its customers with multiple banking channels to improve access to their account information. Wesley B. Livesey, Jr., Vice President. Valley’s full range of consumer loans and mortgages is designed to help our customers fulfi ll their dreams. By providing friendly, personalized customer service and innovative products when and how the customer wants them, we can achieve this goal everyday. V A L L E Y N AT I O N A L B A N C O R P 9 Center – Albert L. Engel, Executive Vice President; L to R – Elizabeth E. De Laney, Senior Vice President; Thomas Sparkes, Senior Vice President. R E T A I L B A N K I N G 1 0 V A L L E Y N AT I O N A L B A N C O R P Retail Banking’s primary goal is to develop personal banking relationships based on respect, trust and loyalty by providing a comprehensive array of products and services in the most friendly and convenient way possible to our customers. In 2004, we continued to enhance our customer service by extending hours at most branch locations, offering Sunday hours at over 45 branches and operating our Customer Service Call Center 24 hours a day, seven days a week. Valley continued to grow brand awareness throughout its New Jersey and Manhat- tan marketplace in 2004 by opening new branches in Edgewater, Moonachie, Caldwell, Jersey City and Bound Brook, bringing its total to 133 full-service branch offices at year end. We continue to remodel and update our older branches by implementing our new interior design scheme that emphasizes modern banking services in a customer-friendly environment. Valley also expanded the functionality of its ATM’s and on-line banking to include a Spanish language option. The ongoing threat of identity theft led Valley to develop informational brochures and provide a free new service called Valley VerifySM, a photo and signature verification program designed to simplify and secure our customers’ banking transactions. Our popular Kids First Savings ClubSM Accounts grew to over 52,000 accounts, and we continued to reach out to students and parents with our Student Rewards Checking Account. Valley knows that 2005 looks to be an exciting year. Two strategic acquisitions are pending in New Jersey. The acquisition of NorCrown Bank’s 16 branch offices will help reinforce Valley’s brand identity throughout Essex, Morris and Union counties, while the merger with Shrewsbury State Bank will add 12 branches, expanding Valley’s presence south into Monmouth County. Our expansion plans for 2005 also include new New Jersey branch sites in South Orange, River Vale, Hillsborough, Cranford and Woodbridge. Additionally, a new full service branch is being constructed in Chester, New Jersey to replace an existing store front facility in that community. Valley also plans to open four new branches in Manhattan. Karen Hackes, First Vice President & Director of Training, Educational Resources. With the assistance of the Human Resources Department, we are endeavoring to foster our growth with a professional staff of highly qualified individuals who are trained to deliver friendly, high-quality service in all areas of Valley. Valley’s commitment, regardless of how it expands and grows, is to remain a community bank where quality of service and customer satisfaction are paramount. V A L L E Y N AT I O N A L B A N C O R P 1 1 Center – Peter Crocitto, Executive Vice President. Front – L to R – Carol B. Diesner, Senior Vice President; Andrea T. Onorato, Senior Vice President. Back – L to R – Bernadette M. Mueller, Senior Vice President; Barbara Mohrbutter, Senior Vice President. W E A L T H M A N A G E M E N T & I N S U R A N C E S E R V I C E S 1 2 V A L L E Y N AT I O N A L B A N C O R P Valley’s Wealth Management & Insurance Services prospered in 2004 by providing alternative fi nancial solutions to our customers’ non-traditional banking needs. Valley’s seasoned wealth managers deliver superior asset management, fi xed income brokerage, fi nancial planning and trust services with each customer’s individual goals serving as our primary focus. Valley’s insurance subsidiaries are directed by experts who offer not only general insurance products but title insurance as well. During 2004, Valley successfully developed a 401K consulting service for its small business clientele. We implemented the service with several clients this past year and are now preparing for an extensive roll-out in 2005. Both Hallmark Capital Management, Inc. and New Century Asset Management, Inc. continue to grow by adding assets and new client relationships. Glen Rauch Securities, Inc., Valley’s fi xed income investment subsidiary, continues to respond to the challenges presented by the historically low interest rate environment by creating laddered portfolios of both taxable and tax free bonds for their growing client base. Valley National Title Services continues to expand its operations through partnering efforts with Valley’s Professionals Group and loan departments. Offering title services has created additional value for Valley mortgage customers and law fi rms while generating greater income opportunities for Valley. Valley’s insurance subsidiary, Masters Coverage Corporation, continues to provide commercial and personal insurance services in a highly effi cient automated manner, with most transactions virtually paperless. This allows for a more cost-effective way to deliver new and existing products, including insurance coverage that could be diffi cult for some customers to obtain from other providers. Jill Holly, Vice President. Valley continues to be focused on its mission of providing high quality alternative fi nancial products and services to its consumer and corporate customers, thereby strength- ening the Valley relationship and contributing to Valley’s earnings. V A L L E Y N AT I O N A L B A N C O R P 1 3 Center – Robert J. Mulligan, President, Wealth Management & Insurance Services. Front – L to R – Glen R. Rauch, President, Glen Rauch Securities, Inc.; Michael Daniels, President, Masters Coverage Corporation Back – L to R – Robert C. Kleiber, President & CEO, New Century Asset Management, Inc.; Peter S. Hagerman, President & CEO, Hallmark Capital Management, Inc. C O R P O R A T E & G O V E R N M E N T S E R V I C E S 1 4 V A L L E Y N AT I O N A L B A N C O R P Valley’s Corporate & Government Services Department enables commercial, not-for-profit and government banking clients to utilize a comprehensive array of Cash Management products and services to effectively manage cash flow. Product offerings include VNB Connect PlusSM online treasury workstation, Lockbox and Remittance Processing, Controlled Disbursements, ACH Funds Concentration, Corporate Payment Notification (EDI Translation) and Account Reconcilement Services. As a full-service government depository, Valley offers public entities a customized suite of specialty services replete with benefits. Our government banking clients conveniently maximize investment income and can disburse funds using Valley’s Government Interest Checking Accounts. Valley’s broad range of Cash Management, Municipal Leasing, and Public Finance Services, as well as the friendly customer service provided by its Government Banking Relationship Managers, completes the package. In 2004, Government Services realized record deposit growth as Valley’s brand and reputation continued to gain momentum in the public sector. Valley is now one of the larger depositories of public funds in New Jersey. Business customers will continue to recognize Valley as a leader of innovative services for all segments of the business commu- nity. VNB ConnectSM, a new online business banking solution expressly designed for Valley’s small-to-mid- sized business customers, provides a direct “real-time” link to Valley, with time and cost saving features such as instant Cash Position reports, online Wire Transfer Origination and online Business Bill Payment. In 2005, Valley’s comprehensive Cash Manage- ment product line will continue to expand with vastly improved escrow account management services through our new product offering, VNB Escrow PlusSM. Easy-to-read account summary and detail statements are standard in this exciting new product, and escrow agents will find record keeping simplified with online access to all escrow master and subordinate accounts. L to R – John Gresh, Vice President; John Montgomery, Vice President. VNB Connect PlusSM users will see online Check Image Retrieval, E-Statements, and “real time” access to balance and statement information added to the product’s extensive list of features. These additional features are designed to make online banking even easier and more convenient for Valley’s Cash Management customers in 2005. Center – Lorraine Basey, Vice President. L to R – James A. Fitzgerald, Vice President; Frank T. Cosentino, First Vice President. V A L L E Y N AT I O N A L B A N C O R P 1 5 C O M M U N I T Y D E V E L O P M E N T 1 6 V A L L E Y N AT I O N A L B A N C O R P Total commitment to the communities we serve continued to be a high priority for Valley National Bank during 2004. In addition to providing traditional banking products and services to the citizens and businesses of these communities, Valley continued its long-established and recognized tradition of providing loans, investments and services that are essential for community revitalization, redevelopment and rebuilding. Valley’s 2004 commitment included a $10.2 million construction loan as part of a revitalization plan to build 45 homes to stabilize Newark neighborhoods. By empowering communities where Valley has a presence and where its employees live and work, Valley fulfi lls its mandate to serve the needs of the entire community including low and moder- ate-income households, as well as empowering small and minority-owned businesses and women-owned businesses. We encourage our employees to identify service opportunities and to actively participate both professionally and personally. Whether it is providing community services for low and moderate-income individuals, or promoting affordable housing opportunities, Valley’s employees are consistently at the forefront of these initiatives. In 2004, our ongoing efforts in promoting fi nancial literacy have taken us to over 30 different school districts, reaching in excess of 2,300 students, with a lesson on developing good fi nancial habits. Valley employees have also provided fi nancial training to young people who are detainees at a New Jersey detention facility. Valley employees generously of- fer their fi nancial expertise by serving on many boards and committees of nonprofi t organizations that provide affordable housing and essential community services. Our employees assisted more than 300 non-profi t organizations in 2004. Valley volunteers generously donate ‘sweat equity’ to local organizations like Paterson Habitat for Humanity. Valley is also a generous provider of community-relations support for local organizations and neighborhood activities. During 2004, we partnered with over 2,800 organizations and helped strengthen the fi ber of our communities while directly benefi t- ting a substantial number of individuals and families. Center – Garret G. Nieuwenhuis, First Senior Vice President. L to R – Stephen P. Davey, Senior Vice President; Michael A. Fields, Vice President. V A L L E Y N AT I O N A L B A N C O R P 1 7 F I N A N C I A L & I N V E S T M E N T M A N A G E M E N T 1 8 V A L L E Y N AT I O N A L B A N C O R P Valley’s Financial & Investment Management activities are designed to provide liquidity and an attractive yield to support Valley’s fi nancial needs. When acquiring securities, emphasis is placed on current income, cash fl ow, interest sensitivity and providing support for Valley’s local communities. It is Valley’s policy to make investments that refl ect a mix of geographic diversifi cation consistent with safe and sound banking practices. Through sophisticated fi nancial modeling, our investment offi cers seek fi xed income instruments that will provide optimal yields in a multitude of different interest rate scenarios. This ensures that Valley has the cash fl ow and the fi nancial fl exibility to achieve a high-performance portfolio throughout many economic cycles. Within the guidelines listed above, the Financial Investment & Management Department prepares investment strategies on a quarterly basis which are approved by the Investment Committee of the Board of Directors. Valley’s investment portfolio is comprised predominantly of mortgage-backed securities that generate signifi cant cash fl ow over the course of the year. Cash fl ows from investments, as well as from loans, provide funds for new interest earning assets and help Valley achieve its asset/liability management goals. PERFORMANCE GRAPH Edward J. Lipkus, First Vice President, Controller. The graph above compares the cumulative total return on a hypothetical $100 investment made on January 1, 2000 in: (a) Valley’s common stock; (b) the Standard and Poor’s (“S&P”) 500 Stock Index; and (c) the Keefe, Bruyette & Woods’ KBW50 Bank Index. The graph is calculated assuming that all dividends are reinvested during the relevant periods. The graph shows how a $100 invest- ment would increase or decrease in value over time based on dividends (stock or cash) and increases or decreases in the market price of the stock. Valley KBW 50 S&P 500 1/00 100.0 100.0 100.0 12/00 129.70 120.10 90.90 12/01 139.60 115.10 80.10 12/02 144.30 107.00 62.40 12/03 173.40 143.40 80.30 12/04 178.30 157.80 89.00 V A L L E Y N AT I O N A L B A N C O R P 1 9 Center – Alan D. Eskow, Executive Vice President, Chief Financial Officer. Front – L to R – Ira Robbins, First Vice President; Linda M. Bucey, First Vice President. Back – L to R – Eric W. Gould, First Senior Vice President; Jack M. Blackin, Senior Vice President. O F F I C E R S A N D D I R E C T O R S VALLEY NATIONAL BANCORP Gerald H. Lipkin Chairman of the Board, President & Chief Executive Offi cer Peter Crocitto Executive Vice President Alan D. Eskow Executive Vice President & Chief Financial Offi cer Albert L. Engel Executive Vice President James G. Lawrence Executive Vice President Robert M. Meyer Executive Vice President Jack M. Blackin Senior Vice President & Assistant Secretary Wilma Falduto Assistant Secretary BOARD OF DIRECTORS Andrew B. Abramson 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 Michael L. LaRusso Gerald H. Lipkin Robinson Markel, Esq. Robert E. McEntee Richard S. Miller, Esq. Barnett Rukin Peter Southway Leonard J. Vorcheimer Spencer B. Witty, Emeritus 20 V A L L E Y N AT I O N A L B A N C O R P VALLEY NATIONAL BANK 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 Alan D. Eskow President, Wealth Management & Insurance Services 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 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 Jeffrey S. Kramer Leonard S. Levine Barbara Mohrbutter Bernadette M. Mueller John J. Murphy Kenneth W. Nickel Andrea T. Onorato Marianne Potito Harry A. Rosen Richard M. Seguine Sandra L. Seville Alfred Sorrentino, Jr. Thomas Sparkes Senior Vice President & General Counsel Lucinda P. Long Senior Vice President & Trust Officer Peter V. Moehle 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 Offi cer MASTERS COVERAGE CORP. Michael Daniels, President Saul J. Friedland, Executive Vice President Arthur A. Schwartz, Executive Vice President MERCHANTS NEW YORK COMMERCIAL CORP. Irwin Schwartz, President NEW CENTURY ASSET MANAGEMENT, INC. Robert C. Kleiber, President & Chief Executive Offi cer VALLEY COMMERCIAL CAPITAL, LLC Walter M. Horsting, President VALLEY NATIONAL TITLE SERVICES INC. Joseph A. Perconti, President & Chief Executive Offi cer B R A N C H L O C A T I O N S Middlesex Current Locations New 2005 NorCrown Acquisition (pending) Shrewsbury Acquisition (pending) see complete branch listing on inside back cover 2 1 V A L L E Y N AT I O N A L B A N C O R P V A L L E Y N AT I O N A L B A N C O R P 2 1 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 Valley National Bancorp & Subsidiaries (in thousands, except for share data) Assets Cash and due from banks Investment securities held to maturity, fair value of $1,306,074 and $1,252,765 in 2004 and 2003, 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 157,042,457 shares; issued 98,883,032 shares in 2004 and 98,912,481 shares in 2003 Surplus Retained earnings Unallocated common stock held by employee benefit plan Accumulated other comprehensive income Treasury stock, at cost (27,496 shares in 2004 and 306,490 shares in 2003) Total shareholders’ equity Total Liabilities and Shareholders’ Equity December 31, 2004 2003 $ 163,371 $ 218,166 1,292,338 1,883,729 2,514 2,157 6,932,158 (65,699) 6,866,459 161,473 46,737 170,602 174,011 $ 10,763,391 1,232,239 1,805,680 4,252 5,720 6,166,689 (64,650) 6,102,039 128,606 40,445 164,404 171,784 9,873,335 $ $ 1,768,352 $ 1,676,764 3,591,986 2,158,401 7,518,739 510,291 1,890,170 136,593 10,055,793 — 34,930 437,659 232,431 3,355 708,287 (689) 707,598 $ 10,763,391 3,283,716 2,202,488 7,162,968 377,306 1,547,221 133,051 9,220,546 — 33,304 318,599 288,313 (259) 20,531 660,488 (7,699) 652,789 9,873,335 $ (88) See the consolidated financial statements and accompanying notes presented in Item 8 of the Company’s SEC Form 10-K. 22 V A L L E Y N A T I O N A L B A N C O R P 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) 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 transactions, 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 Other Total non-interest expense Income Before Income Taxes Income tax expense Net Income Earnings Per Share: Basic Diluted Cash Dividends Declared per Common Share Weighted Average Number of Shares Outstanding: Basic Diluted Years ended December 31, 2004 2003 2002 $ 370,921 $ 364,091 $ 368,402 134,274 11,587 1,848 296 518,926 23,115 46,832 5,258 71,402 146,607 372,319 8,003 364,316 6,023 13,982 20,242 6,475 2,409 8,010 3,039 6,199 17,949 84,328 99,325 24,465 22,983 13,391 8,964 7,974 42,947 220,049 228,595 74,197 118,816 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 $ 154,398 $ 153,415 $ 154,616 $ 1.56 1.56 0.89 $ 1.55 1.55 0.85 $ 1.51 1.50 0.81 98,671,265 99,178,698 98,695,082 99,223,550 102,672,022 103,274,932 See the consolidated financial statements and accompanying notes presented in Item 8 of the Company’s SEC Form 10-K. V A L L E Y N A T I O N A L B A N C O R P 2 3 A D V I S O R Y B O A R D S Robert X. Robertazzi Liberty Lincoln-Mercury, Inc. Lester F. Herrschaft Albert A. Stier, 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. C E N T R A L R E G I O N A L A D V I S O R Y B O A R D 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. Charles Infusino Little Falls Shop-Rite, Inc. Sanford Kalb Private Investor 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 Lester 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 Frank Misischia FLM Graphics Jeffrey Moll PBI Regional Medical Center A U T O D E A L E R A D V I S O R Y B O A R D 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 Eugene C. Meyers Hawthorne Auto Sales Co. Fred J. Meyers Preakness Chevrolet, Inc. David Nappa Wayne Auto Sales, Inc. Dennis C. Oberle Mahwah Sales & Service, Inc. David Oostdyk Royal Pontiac & Oldsmobile, Inc. 24 V A L L E Y N AT I O N A L B A N C O R P Patrick Mucci, Jr. Group Advisory, Inc. George Poydinecz Developer Joshua Rabinowitz The ADI Group Vincent Riviello Atlantic Coast Fibers, LLC Gerd Rohmert Mayer Textiles Machine Corp. E A S T E R N R E G I O N A L A D V I S O R Y B O A R D JoAnn Andriola Book Chevrolet Buick, Inc. Gary D. Bennett, Esq. Koch, Koch & Bennett Gilbert Buchalter Pharmaceutical Innovations, Inc. John Coffey, Esq. Attorney-at-Law Francis Costenbader, Esq. Attorney-at-Law 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. Robert Kuhl J. Kuhl Metals, Inc. 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 Pasquale P. Tremonte Fulton Building Co., Inc. Richard Tully Kearny Shop Rite William Van Ness Van Ness Plastic Molding Co. 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 Consultant Sara L. Mayes Gemini Shippers Group Alan Mirken Aaron Publishing Group Mitchell Nelson, Esq. Salans J. Scott Wright Graphic Management, Inc. Joel I. Picket Gotham Organization, Inc. N E W Y O R K R E G I O N A L A D V I S O R Y B O A R D Joseph Abergel Jomark Textiles, Inc. Peter Baum Baum Bros. Imports Inc. Stanley Blum Blum & Fink, Inc. Edward Blumenfeld Blumenfeld Development Group, Ltd. Leonard Boxer, Esq. Stroock Stroock & Lavan, LLP Arthur Fefferman AFC Realty Capital, Inc. Jack Forgash Tri-Realty Management Corp. Mark Rachesky MHR Management Company Harvey Ravner Private Investor 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. V A L L E Y N AT I O N A L B A N C O R P 2 5 A D V I S O R Y B O A R D S N O R T H E R N R E G I O N A L A D V I S O R Y B O A R D 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. 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 Hal Parnes The Parnes Company Richard Pearson Fleet Equipment Co. 26 V A L L E Y N AT I O N A L B A N C O R P 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. Gersen, Blakeman & Ackert S O U T H E R N R E G I O N A L A D V I S O R Y B O A R D Alan Braunstein Worldwide Wholesale Floor Coverings, Inc. Bernard Burkhoff The Real Estate Investment Group Frederick L. Cohen Cohen, Friedman, Dorman & Co. William Cohen Hillside Candy, LLC 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. Barry Segal Bradco Supply Corp. Marvin H. Strauss Newark Chapter Service Corps of Retired Executives Sanford C. Vogel Vogel & Gast W E S T E R N R E G I O N A L A D V I S O R Y B O A R D Albert Burlando Almetek Industries, Inc. Steven Dickman Dickman Business Brokers George Dominguez Sunrise House Foundation, Inc. Gerhardt Drechsel Eagle American Realty, Inc. Paul Dunajchuk Roxbury Water Co. Thomas D. Farkas Herbert L. Farkas Company Gene Feyl Consultant Alan Goldstein, Esq. Nussbaum, Stein, Goldstein & Bronstein John Grabovitz Roxbury Enterprises, Inc. George Hagemeister Consultant 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 Jackie Harrison Center for Humanistic Change Jan Kokes The Kokes Organization Willard Hedden Consultant 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. Roy Solondz Roxbury Mortgage Co., Inc. Stella Visaggio Hackettstown Community Hospital W E S T E S S E X R E G I O N A L A D V I S O R Y B O A R D 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 Sanford Levine Sanford Levine & Sons Packaging Corp. Saul Lupin Smolin, Lupin & Company, PA Richard Mandelbaum Mandelbaum & Mandelbaum Investors Solomon Masters ERA Masters Realty Charles Moss, Jr. Bow-Tie Building Times Square Steven Nussbaum PF Pasbjerg Development Co. Jonathan Perelman Friedman, LLP 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 C R A A D V I S O R Y C O M M I T T E E Eric Breit Nonprofit Finance Fund Barbara Dunn Paterson Habitat for Humanity The Reverend Dr. Elizabeth S. Hall Homeless Solutions, Inc. Christopher Kui Asian Americans for Equality Beverly M. Riddick Homes of Montclair Ecumenical Corp (HOMECorp) Victoria E. Taylor Martin Luther King, Jr. Senior Center Georjean W. Trinkle Northwest New Jersey Community Action Program, Inc. (NORWESCAP) V A L L E Y N A T I O N A L B A N C O R P 2 7 S H A R E H O L D E R R E L A T I O N S C O R P O R AT E A D D R E S S Valley National Bancorp 1455 Valley Road Wayne, New Jersey 07470 (973) 305-8800 A N N U A L M E E T I N G April 6, 2005 2:00 PM Prime Hotel & Suites 690 Route 46 East Fairfield, NJ 07004 F O R M 1 0 - K Persons may obtain a copy of Valley National Bancorp’s 2004 Annual Report or Form 10-K by submitting a request in writing or calling: Dianne M. Grenz Senior Vice President Shareholder & Public Relations Dept. Valley National Bancorp 1455 Valley Road Wayne, New Jersey 07470 (973) 305-3380 dgrenz@valleynationalbank.com News Media representatives and others seeking general corporate information should contact Dianne M. Grenz. F I N A N C I A L I N F O R M AT I O N 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 S H A R E H O L D E R I N Q U I R I E S , D I V I D E N D R E I N V E S T M E N T P L A N , A N D R E G I S- T R A R A N D T R A N S F E R A G E N T 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 Company 59 Maiden Lane New York, New York 10038 Attn: Shareholder Relations Dept. (800) 937-5449 Dividend Reinvestment Plan (800) 278-4353 Valley National Bancorp Attn: Shareholder Relations Dept. (800) 522-4100, ext. 3380 (973) 305-3380 The 2004 Annual Report and Form 10-K are available on our website at www.valleynationalbank.com S T O C K L I S T I N G Valley National Bancorp common stock is traded on the New York Stock Exchange under the symbol VLY. Dianne M. Grenz, Senior Vice President, Director of Shareholder & Public Relations 2 8 V A L L E Y N AT I O N A L B A N C O R P 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, 2004 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 $2.3 billion on June 30, 2004. There were 98,877,262 shares of Common Stock outstanding at February 18, 2005. Documents incorporated by reference: Certain portions of the Registrant’s Definitive Proxy Statement (the “2005 Proxy Statement”) for the 2005 Annual Meeting of Shareholders to be held April 6, 2005 will be incorporated by reference in Part III. PART I TABLE OF CONTENTS 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 Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Auditor’s Report 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 Statements and Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3 8 9 9 9 10 11 12 35 36 37 38 39 40 73 74 74 78 78 78 78 78 79 82 2 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, 2004, Valley had consolidated total assets of $10.8 billion, total deposits of $7.5 billion and total shareholders’ equity of $707.6 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 trust 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, 2004, VNB maintained 133 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 individuals, 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 segments are consumer lending, commercial investment management, and corporate and other 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 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 3 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, 2004, VNB and its subsidiaries employed 2,345 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. 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. 4 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 extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries. Under federal to certain limited 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. Recent Legislation The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting. 5 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; various increased criminal penalties for violations of securities laws; an assertion by management with respect to the effectiveness of internal control over financial reporting; and a report by the Company’s external auditor on management’s assertion and the effectiveness of internal control over financial reporting. • • • • • • • • • • • • • • 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. USA PATRIOT Act 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. 6 The Department of Treasury issued regulations implementing the due diligence requirements. These regulations require minimum standards to verify customer identity and maintain accurate records, encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibit the anonymous use of “concentration accounts,” and requires all covered financial institutions to have in place an anti-money laundering compliance program. Significantly, the Act amended the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of any financial institution involved in a proposed merger transaction in combating money laundering activities when reviewing an application under these acts. Regulatory Relief Law 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. Gramm-Leach-Bliley Act 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 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 one financial subsidiary—Glen Rauch Securities, Inc. (“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. 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 reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled 7 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 two other office buildings in Wayne, New Jersey, one of which is occupied by those departments and subsidiaries providing trust and investment management services; the other is a newly purchased office building to be utilized for additional office space. It is anticipated that occupancy will begin during the second quarter of 2005. 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, Valley 747 Acquisition LLC, a subsidiary of VNB, owns a building in Chestnut Ridge, NY, primarily occupied by Masters Coverage Corp., also a subsidiary of VNB. 8 VNB provides banking services at 133 locations of which 62 locations are owned by VNB or a subsidiary of VNB and leased to VNB, and 71 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. The anti-money laundering (“AML”) and bank secrecy (“BSA”) laws have imposed far-reaching and substantial requirements on financial institutions. The Office of the Comptroller of the Currency (“OCC”) stated during the third quarter of 2004, that because of the legislative response to the OCC’s enforcement action and lapses with respect to AML/BSA compliance will be more forcefully applied. the OCC’s enforcement policy with respect to Riggs National Bank, Valley National Bank’s AML/BSA compliance program has been subject to a recent regulatory examination by the OCC, the results of which have not yet been finalized. While Valley believes that its policies and procedures with respect to combating money laundering were effective and that Valley’s AML/BSA policies and procedures were reasonably designed to comply with applicable standards, it cannot provide assurance that at some point in the future it will not face a regulatory action resulting from such regulatory examination, adversely affecting its ability to acquire banks and thrifts, or open new branches. 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, 2004 Executive Officer Since 63 47 56 56 61 58 57 58 61 36 47 57 64 67 62 49 40 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. 9 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 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 2004 Year 2003 High Low Dividend High Low Dividend First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $28.14 27.62 26.26 28.46 $25.59 24.13 24.22 25.71 $0.214 0.225 0.225 0.225 $25.08 26.08 27.63 28.56 $21.65 22.49 25.11 26.52 $0.204 0.214 0.214 0.214 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 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 9,184 shareholders of record as of December 31, 2004. In 2000, Valley issued 83,387 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 48,585, 49,890 and 36,285 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 2004 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 5,250 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. 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. Unregistered Sales of Equity Securities and Use of Proceeds Purchases of equity securities by the issuer and affiliated purchasers Period ISSUER PURCHASES OF EQUITY SECURITIES (1) Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans (2) Maximum Number of Shares that May Yet Be Purchased Under the Plans (2) 10/1/2004 – 10/31/2004 . . . . . . . . . . . . . . . . . 11/1/2004 – 11/30/2004 . . . . . . . . . . . . . . . . . 12/1/2004 – 12/31/2004 . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 0 0 0 0 0 10,751,485 10,751,485 10,751,485 10,751,485 2,898,515 2,898,515 2,898,515 2,898,515 (1) Share data reflects the 5 percent stock dividend issued on May 17, 2004. (2) Publicly announced on May 14, 2003 to repurchase 2,625,000 shares. Publicly announced on August 21, 2001 to repurchase 11,025,000 shares. 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: tax equivalent adjustment Net interest income . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . Net interest income after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2004 2003 2002 2001 2000 (in thousands, except for share data) $ 525,315 146,607 $ 503,621 148,922 $ 523,135 173,453 $ 559,557 220,935 $ 575,003 252,648 378,708 6,389 372,319 8,003 364,316 84,328 220,049 228,595 74,197 354,699 6,123 348,576 7,345 341,231 108,197 216,278 233,150 79,735 349,682 5,716 343,966 13,644 330,322 81,238 192,264 219,296 64,680 338,622 6,071 332,551 15,706 316,845 68,476 185,966 199,355 64,151 322,355 6,797 315,558 10,755 304,803 59,100 171,139 192,764 66,027 Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,398 $ 153,415 $ 154,616 $ 135,204 $ 126,737 Per Common Share (2): Earnings per share (“EPS”): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares outstanding: $ $ 1.56 1.56 0.89 7.16 $ 1.55 1.55 0.85 6.62 $ 1.51 1.50 0.81 6.33 $ 1.26 1.26 0.75 6.44 1.17 1.16 0.70 6.10 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,671,265 99,178,698 98,695,082 99,223,550 102,672,022 103,274,932 106,979,406 107,547,034 108,338,441 109,196,520 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net of allowance . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . 1.51% 22.77 1.63% 24.21 1.78% 23.59 1.68% 19.70 1.66% 20.24 6.62 57.05 11.12 11.95 8.28 6.74 54.60 11.25 12.15 8.35 7.56 53.80 11.42 12.48 8.67 8.53 59.40 14.08 15.14 10.25 8.22 60.16 11.26 12.33 8.48 $10,763,391 6,868,616 7,518,739 707,598 $ 9,873,335 6,107,759 7,162,968 652,789 $ 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 (1) In this report a number of amounts related to net interest income and net interest margin are presented on a tax equivalent basis using a 35 percent federal tax rate. Valley believes that this presentation provides comparability of net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice and SEC rules. (2) All per share amounts reflect the 5 percent stock dividend issued May 17, 2004, and all prior stock splits and dividends. 11 Item 7. Management’s Discussion and Analysis (“MD&A”) 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,” “should,” “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. 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, relationships with major customers, 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 including compliance issues related to AML/BSA compliance, the development of new tax strategies or the disallowance of prior tax strategies, consummation of the acquisitions of NorCrown and Shrewsbury including the receipt of regulatory approval for NorCrown and the ability of Valley to successfully integrate NorCrown and Shrewsbury without the loss of significant loan and deposit business. Valley assumes no obligation for updating any such forward-looking statement at any time. 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 Financial 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. 12 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. 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 In a challenging interest rate, regulatory and competitive environment, Valley earned record earnings per share, expanded customer service initiatives and announced the acquisition of two commercial banks. Net income was $154.4 million or $1.56 per diluted share, return on average assets was 1.51 percent and return on average equity was 22.77 percent for 2004. This compares with net income of $153.4 million or $1.55 per diluted share, return on average assets of 1.63 percent and return on average equity of 24.21 percent in 2003. The loan portfolio grew year over year by approximately 12.3 percent, deposits increased almost 5 percent while non-interest bearing and low cost savings deposits showed the greatest growth. The positive increases in income than traditionally the balance sheet during the year translated into smaller gains in net experienced by Valley due to a lower net interest margin. The margin contracted as a result of compression in interest rates between short-term rates and long-term rates during the second half of 2004. The Federal Reserve began increasing short-term interest rates in the second half of 2004 paving the way for raising the interest rates on loans tied to the prime rate. This was not enough to offset the low level of long-term interest rates earned on the balance of Valley’s loans and investments. This flattening of the yield curve is making it more difficult to earn the traditional spreads that Valley is accustomed to earning, in addition to diminishing the positive effect of Valley’s interest sensitive balance sheet. However, Valley’s balance sheet does continue to remain asset sensitive and Valley anticipates it will react positively, should the yield curve become steeper.* interest The announced acquisitions in 2004 of Shrewsbury State Bank and NorCrown Bank, anticipated to close during the late first quarter or second quarter of 2005, respectively, are both expected to be accretive within one year, expand Valley’s market presence and accordingly increase Valley’s franchise value. Since beginning Valley’s 24/7 customer service hours and Sunday branch banking initiative in November 2003, Valley has seen an increase in customer lobby traffic, an increase in accounts per household and a significant decrease in deposit account turnover as evidenced by approximately a 50 percent decrease in checking account closings. Earnings for 2004 were impacted by the decreases in non-interest income of gains on sales of securities, gains on sales of loans and fee income from service charges and Valley’s wealth management and insurance services operations. These decreases were partially offset by the benefit of a lower effective income tax rate and management’s control over the increase in operating expenses. Net Interest Income Net interest income represents the largest component of Valley’s operating income and as a result, is the area that management focuses most of its efforts. Net interest income on a tax equivalent basis increased to $378.7 million for 2004 compared with $354.7 million for 2003. Higher average balances in loans and investments increased interest income during 2004 compared with 2003 and was partly offset by lower average interest rates for these interest earning assets. For 2004, total average interest bearing liabilities increased while total interest expense declined as a result of lower interest rates. Average loans increased $485.6 million or 8.0 percent, for the twelve months of 2004, while average taxable investments increased $332.3 million or 13.8 percent over the same period in 2003. Interest on loans increased $6.8 million for the twelve months of 2004 compared with the same period in 2003, due to the increased volume of loans. Interest on taxable investments increased $14.3 million for the twelve months in 2004 over the same period in 2003, mainly due to higher average balances and lower amortization expense offset by lower interest rates. 13 Average interest bearing liabilities for 2004 increased $649.7 million or 9.1 percent from 2003. Average savings deposits increased $319.2 million or 10.2 percent and continue to provide a low cost source of funding. This increase was attributed to the addition of new branches, the growth in municipal deposits, the continued increases in customer activity as well as advertising and promotional efforts. Average time deposits decreased $54.3 million or 2.4 percent from 2003, due to Valley’s strategy to fund with lower cost deposits and borrowings. The decline in interest rates on deposits in conjunction with the decline in time deposits caused a net decrease in interest expense on deposits by $1.0 million. Average short-term borrowings increased $52.4 million or 15.0 percent over 2003 balances. Average long-term debt increased $332.5 million, or 23.7 percent and includes mostly Federal Home Loan Bank (FHLB) advances and repurchase agreements. The increase in borrowings is used as an alternative to deposits and is evaluated based upon need, cost and term. The net interest margin on a tax equivalent basis was 3.94 percent for the twelve months ended December 31, 2004 compared with 4.04 percent for the same period in 2003. The change was mainly attributable to interest rates declining to historic low levels during 2004. Average interest rates on loans and investments declined 28 basis points while average interest rates on interest bearing liabilities declined 20 basis points causing a compression in the net interest margin for Valley and the banking industry. Increased loan and investment volume partially mitigated the negative impact of low interest rates. During the second half of 2004, the Federal Reserve (“Fed”) increased short-term interest rates five times. Valley’s prime rate moved in conjunction with each interest rate increase which resulted in higher net interest income during the second half of the year. While this helped the interest on loans which adjust with the prime rate, it also increased Valley’s cost of funding. Long-term interest rates did not increase in conjunction with the five federal funds rate increases, in fact it declined from the prior year and therefore, had no positive impact on interest rates for new fixed rate long-term loans and investments. This flattening of the yield curve is making it more difficult to earn the traditional spreads that Valley is accustomed to earning in addition to diminishing the positive effect of Valley’s asset sensitive balance sheet position. If short-term interest rates continue an upward movement and long-term rates remain the same, it is anticipated that Valley’s cost of deposits and borrowings will increase, negatively affecting net interest income during 2005.* However, Valley’s balance sheet does continue to remain asset sensitive and Valley anticipates it will react positively, should the yield curve become steeper.* The average interest rate for loans decreased 35 basis points to 5.67 percent and the average interest rate for taxable investments decreased 9 basis points to 4.96. Average interest rates on total interest earning assets of $9.6 billion decreased 28 basis points to 5.46 percent. Average interest rates also decreased on total interest bearing liabilities of $7.8 billion by 20 basis points to 1.89 percent from 2.09 percent. The average interest rate for deposits decreased by 8 basis points to 1.24 percent during 2004 compared to 2003. Valley entered into cash flow hedges on July 28, 2004, which increased net interest income by $1.6 million and the net interest margin by 2 basis points during the year. While the cash flow hedges are expected to have a positive effect on net interest income and the net interest margin during the first half of 2005, Valley anticipates that the interest benefit received will be less than that received in 2004 as a result of increases in the prime rate. This benefit will become negative during the second half of 2005 until it expires in July of 2006, if the prime rate continues to increase.* 14 The following table reflects the components of net interest income for each of the three years ended December 31, 2004, 2003 and 2002. ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS 2004 2003 2002 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate (in thousands) $ 6,541,993 2,742,161 $371,071 136,122 5.67% $6,056,439 2,409,851 4.96 $364,295 121,794 6.02% $5,489,344 2,285,445 5.05 $368,682 137,137 6.72% 6.00 Assets Interest earning assets Loans (1)(2) . . . . . . . . . . . . . . Taxable investments (3) . . . . Tax-exempt investments (1)(3) . . . . . . . . . . . . . . . . . 313,673 17,826 5.68 253,002 16,910 6.68 227,267 15,529 6.83 Federal funds sold and other short-term investments . . . 18,343 296 1.61 52,468 622 1.19 108,209 1,787 1.65 Total interest earning assets . . . . . . . . . . . . . . . . . 9,616,170 $525,315 5.46 8,771,760 $503,621 5.74 8,110,265 $523,135 6.45 Allowance for loan losses . . . Cash and due from banks . . . Other assets . . . . . . . . . . . . . . Unrealized gain on securities available for sale . . . . . . . . (68,941) 207,326 472,678 15,446 Total assets . . . . . . . . . . . . . . $10,242,679 (67,536) 200,852 444,515 50,142 $9,399,733 (66,152) 184,973 386,209 51,248 $8,666,543 Liabilities and Shareholders’ Equity Interest bearing liabilities . . . Savings deposits . . . . . . . . . . Time deposits . . . . . . . . . . . . Total interest bearing deposits . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . Long-term debt Total interest bearing $ 3,452,862 2,181,678 $ 23,115 46,832 0.67% $3,133,705 2,236,018 2.15 $ 22,871 48,095 0.73% $2,719,107 2,361,527 2.15 $ 33,092 68,858 1.22% 2.92 5,634,540 401,564 1,734,321 69,947 5,258 71,402 1.24 1.31 4.12 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 liabilities . . . . . . . . . . . . . . 7,770,425 146,607 1.89 7,120,683 148,922 2.09 6,476,890 173,453 2.68 Demand deposits . . . . . . . . . . Other liabilities . . . . . . . . . . . Shareholders’ equity . . . . . . . 1,739,452 54,734 678,068 Total liabilities and 1,577,817 67,489 633,744 1,446,296 87,910 655,447 shareholders’ equity . . . . . $10,242,679 $9,399,733 $8,666,543 Net interest income (tax equivalent basis) Tax equivalent adjustment . . Net interest income . . . . . . . . Net interest rate differential . . . . . . . . . . . . . Net interest margin (4) . . . . . 378,708 (6,389) $372,319 354,699 (6,123) $348,576 349,682 (5,716) $343,966 3.57% 3.94% 3.65% 4.04% 3.77% 4.31% 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 2004 Compared to 2003 Increase (Decrease)(1) 2003 Compared to 2002 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 $ 6,776 14,328 916 $28,233 16,530 3,681 $(21,457) $ (4,387) $36,110 7,163 1,726 (15,343) 1,381 (2,202) (2,765) $(40,497) (22,506) (345) investments . . . . . . . . . . . . . . . . . . . . . . (326) (498) 172 (1,165) (753) (412) 21,694 47,946 (26,252) (19,514) 44,246 (63,760) Interest expense: Savings deposits . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt 244 (1,263) 1,504 (2,800) 2,223 (1,167) 613 15,582 (1,979) (96) 891 (18,382) (10,221) (20,763) 1,184 5,269 4,489 (3,498) 1,865 10,337 (14,710) (17,265) (681) (5,068) Net interest income (tax equivalent basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,009 $30,695 $ (6,686) $ 5,017 $31,053 $(26,036) (2,315) 17,251 (19,566) (24,531) 13,193 (37,724) (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, 2004, 2003 and 2002. NON-INTEREST INCOME Years ended December 31, 2004 2003 2002 (in thousands) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,023 13,982 20,242 6,475 2,409 8,010 3,039 6,199 17,949 $ 5,726 17,558 21,590 15,606 2,836 9,359 12,966 6,188 16,368 $ 4,493 6,793 19,640 7,092 — 9,457 6,934 6,712 20,117 Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $84,328 $108,197 $81,238 16 Non-interest income represented 14.0 percent and 17.9 percent of total interest income plus non-interest income for 2004 and 2003, respectively. For the twelve months ended December 31, 2004, non-interest income decreased $23.9 million or 22.1 percent, compared with the same period in 2003. Insurance premiums decreased $3.6 million or 20.4 percent in 2004 as compared with 2003, as a result of an industry wide reduction in mortgage refinancing activity and corresponding lower title insurance premiums. Service charges on deposit accounts decreased $1.3 million or 6.2 percent in 2004 compared with 2003, mainly due to a lower volume of uncollected funds and overdraft activity. In addition, during 2004 there were several deposit account promotional campaigns held bank-wide to promote deposit growth. Such accounts were often service charge free for the first year. Gains on securities transactions, net, decreased $9.1 million to $6.5 million for the year ended December 31, 2004 as compared to $15.6 million for the year ended December 31, 2003. The majority of security gains during 2004 were generated from mortgage-backed securities. The decline in securities gains is attributable to reduced sales activity in equity and mortgage-backed securities during 2004 as compared with 2003, when Valley took advantage of the bond market’s strength and took gains on amortizable securities which were paying down rapidly. Last year, many of the 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 the gains. The opportunities that existed during 2003 regarding mortgage-backed securities sales and prepayments were not available at the same rate during 2004. 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, 2004, fees from servicing residential mortgage loans totaled $6.5 million and fees from servicing SBA loans totaled $1.5 million, as compared to $7.9 million and $1.5 million for the year ended December 31, 2003. The aggregate principal balances of mortgage loans serviced by VNB’s subsidiary VNB Mortgage Services, Inc. (“MSI”) for others approximated $1.6 billion, $2.0 billion and $1.8 billion at December 31, 2004, 2003 and 2002, respectively. The continuing refinancing and payoff activity resulted in less fee income during 2004 from the serviced mortgage loan portfolio as borrowers continued to take advantage of lower interest rates. Gains on sales of loans, net, decreased $9.9 million to $3.0 million for the year 2004 compared to $13.0 million for the prior year. This decrease was primarily attributed to lower loan sales of $35.1 million in residential mortgage loans in 2004 compared with $421.6 million during 2003. Valley originated approximately $609 million in residential mortgage loans during 2004 and chose to sell some of the lower rate 30-year fixed rate loans, thereby reducing interest risk on those loans should rates continue to rise in future periods.* Valley believes this strategy will help future net income should rates rise and Valley may continue, even at these lower volumes, to sell some of its newly originated conforming residential mortgage loans with low long-term fixed rates into the secondary market loan growth strategy and interest rate sensitivity.* During 2004, approximately $244 thousand of gains from the sale of residential mortgage loans and $1.5 million of gains from the sale of SBA loans were recorded by VNB for sale into the secondary market. to balance its overall asset mix, Valley originally 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, 2004 and 2003. 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 increased $1.6 million to $17.9 million in 2004 as compared to 2003. This increase was mainly due to higher income generated from call options (additional information on call options can be found in the Investment Securities section in this MD&A). The significant components of other non-interest income include fees generated from letters of credit and acceptances, credit cards, safe deposit box rentals and call options totaling, in the aggregate of approximately $13.5 million. 17 Non-Interest Expense The following table presents the components of non-interest expense for the years ended December 31, 2004, 2003 and 2002. NON-INTEREST EXPENSE Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2004 2003 2002 $ 99,325 24,465 22,983 13,391 8,964 7,974 42,947 (in thousands) $ 97,197 22,162 21,782 12,452 12,480 7,409 42,796 $ 86,522 19,364 18,417 11,189 11,411 8,074 37,287 Total non-interest expense . . . . . . . . . . . . . . . . . . . . . $220,049 $216,278 $192,264 Non-interest expense totaled $220.0 million for 2004, an increase of $3.8 million or 1.74 percent from 2003, mainly due to increases in salary expense, employee benefit expense and higher depreciation expense partly offset by lower amortization expense. The largest components of non-interest expense were salaries and employee benefit expense which totaled $123.8 million in 2004 compared with $119.4 million in 2003, an increase of $4.4 million or 3.71 percent. 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, 2004 was 48.2 percent compared to 47.4 percent for 2003. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders.* The efficiency ratio has increased in recent years as a result of interest expense from the issuance of trust preferred securities in November 2001, included in the calculation, the higher efficiency ratios of Valley’s recently acquired subsidiaries, lower growth in net interest income and a decline in 2004 in non-interest income. Salary expense increased $2.1 million or 2.2 percent for the twelve months ended December 31, 2004, compared with the same period in the prior year. At December 31, 2004, full-time equivalent staff was 2,345 compared to 2,264 at the end of 2003. During 2004, Valley incurred additional expense to support expanded branch and call center hours of operations as well as incurred costs related to new business development and the implementation of regulatory compliance programs. These costs were partly offset by reductions in the mortgage origination area. Part-time employees are being utilized to a greater degree, especially in branch operations helping to control costs. Valley significantly increased spending in connection with efforts to comply with the AML and BSA laws by adding additional compliance staff and hiring outside professionals to create a more robust compliance function required by the current regulatory environment. These laws have imposed far-reaching and substantial requirements on financial institutions. Valley’s increasing level of expense arises, in part, in response to a recent regulatory examination by the OCC of Valley National Bank, the results of which have not yet been finalized. See Part I, Item 3. Legal Proceedings. Employee benefit expense increased by $2.3 million or 10.4 percent for the twelve months ended December 31, 2004 compared with the same period in the prior year, mainly due to increased medical group insurance and pension plan accruals. Included in employee benefit expense was $627 thousand and $346 thousand, net of tax, of stock option expense recorded for the twelve months ended December 31, 2004 and December 31, 2003, respectively. 18 Net occupancy expense and furniture and equipment expense, collectively, increased $2.1 million or 6.3 percent during 2004 in comparison to 2003. This increase was largely due to business expansion such as new and refurbished branches and increased depreciation charges in connection with investments in technology and facilities to better serve Valley’s customers. Depreciation expense increased by approximately $1.7 million during 2004 compared with the prior year. Amortization of intangible assets, consisting primarily of amortization of loan servicing rights decreased $3.5 million or 28.2 percent to $9.0 million for the twelve months ended December 31, 2004 compared with the same period in 2003, as a result of lower levels of prepayments. An impairment analysis is completed to determine the appropriateness of the value of Valley’s mortgage servicing asset. A total impairment expense of $1.1 million was recorded during 2004 compared with $4.1 million in 2003. Other non-interest expense remained approximately the same for the twelve months of 2004 compared with the same period in 2003. The significant components of other non-interest expense include data processing, title search fees and service fees totaling professional approximately $34.6 million for 2004, compared with $33.6 million for 2003. telephone, stationery, fees, postage, insurance, Income Taxes Income tax expense as a percentage of pre-tax income was 32.5 percent for the year ended December 31, 2004 compared with 34.2 percent in 2003. This decrease was due to adjustments related to reconciliations of book expense to income tax returns and the level of tax accruals. Income tax expense is expected to approximate 34 percent for 2005 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, and cash flow hedges are allocated from the corporate and other adjustments segment to each of the other three business segments. Valley’s wealth management and insurance 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 2.31 percent for the year ended December 31, 2004 compared with 2.98 percent for the year ended December 31, 2003. Average interest earning assets increased $200.9 million, which is attributable mainly to gains in home equity, residential mortgage 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, refinance and strong home purchase activity and continuing stable economic 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. 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. Average interest rates on consumer loans decreased by 45 basis points and the expenses associated with funding sources decreased by 16 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 1.5 years is relatively short, and therefore, the portfolio yield fluctuates in conjunction with lower interest rates. Additionally, interest rates on home equity 19 lines of credit have adjusted upward during the second half of 2004 with increases in the prime lending rate. Normal cash flow, prepayment volume and new loans at lower interest rates caused the decline in yield. Income before income taxes decreased $16.2 million due to the decline in non-interest income (mainly from lower gains on the sale of loans, decreased loan fees and lower title insurance fees), and an increase in the provision for loan losses, offset by decreases 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 decreased to 2.66 percent compared with 2.76 percent for the year ended December 31, 2004 and 2003, respectively. Average interest earning assets increased $262.1 million, attributed to volume gains in commercial loans and commercial mortgages. Interest rates on commercial lending decreased by 22 basis points due to continued low 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 16 basis points. Income before income taxes increased $4.0 million primarily as a result of increased net interest income including prepayment penalties, offset by 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 2.98 percent for the year ended December 31, 2004, 16 basis points less than the year ended December 31, 2003. Average interest earning assets increased by $381.4 million. The yield on interest earning assets decreased by 18 basis points to 5.16 percent for the year ended December 31, 2004. 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 low long-term interest rates on mortgage loans, and these funds were reinvested in lower rate alternatives, causing the decline in yield. This may continue during 2005 if long-term interest rates remain low.* Income before income taxes increased 8.33 percent to $91.7 million, primarily due to increased balances and net interest income, partly offset by a higher allocation of the internal transfer expense. 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, as well as income from derivative financial instruments and service charges on deposit accounts. The loss before taxes for the corporate segment decreased by $547 thousand for the year ended December 31, 2004 compared with December 31, 2003, and was primarily due to decreases in non-interest income and internal transfer expense offset by 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 regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of December 31, 2004. 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 2004, over a twelve month period, an immediate interest rate increase of 100 basis points resulted in an increase in net interest income of 0.79 percent or 20 approximately $3.1 million, while an immediate interest rate decrease of 100 basis points resulted in a decrease in net interest income of 3.93 percent or approximately $15.3 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 prepayment 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 potential increases in interest rates. In the current interest rate environment, short-term rates have escalated while long-term rates have stayed low causing a flattening of the yield curve. During the third quarter of 2004, Valley entered into interest rate swap transactions which effectively converted $300 million of its prime-based floating rate loans to a fixed rate. During the next twelve months, Valley estimates that an additional $314 thousand will be reclassified out of other comprehensive income into interest income.* However, based on current indications of future short-term rates, it is possible that Valley may incur interest expense related to this transaction. Valley’s objective in using derivatives is to add stability to net interest income and to manage its exposure to interest rate movements. For additional discussion on derivatives, see Note 1 of the Notes to Consolidated Financial Statements. 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, 2004. 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, 2004. INTEREST RATE SENSITIVITY ANALYSIS Rate 2005 2006 2007 2008 2009 Thereafter Total Balance Fair Value Interest sensitive assets: Investment securities (in thousands) held to maturity . . . . . . 5.64% $ 237,348 $ 96,087 $ 85,569 $ 53,067 $ 46,276 $ 773,991 $ 1,292,338 $ 1,306,074 Investment securities available for sale . . . . . 4.77 Trading securities . . . . . . — Loans: Commercial . . . . . . . . Mortgage . . . . . . . . . . . Consumer . . . . . . . . . . 5.52 5.30 5.47 Total interest sensitive 428,820 2,514 926,924 687,629 986,953 282,196 — 122,006 554,264 323,773 241,144 — 186,948 — 143,739 — 600,882 — 1,883,729 2,514 1,883,729 2,514 96,310 448,793 202,084 45,097 327,813 110,219 21,286 287,621 46,245 50,232 1,660,864 36,202 1,261,854 3,966,983 1,705,478 1,251,115 3,904,081 1,805,234 assets . . . . . . . . . . . . . . 5.30 $3,270,188 $1,378,326 $1,073,900 $723,144 $545,167 $3,122,171 $10,112,896 $10,152,747 Interest sensitive liabilities: Deposits: Savings . . . . . . . . . . . . Time . . . . . . . . . . . . . . Short-term borrowings . . Long-term debt . . . . . . . . 0.88 2.43 1.63 3.95 $ 797,997 1,362,142 510,291 529,265 $ 845,891 301,416 — 302,934 $ 845,891 115,889 — 541,887 $367,402 239,188 — 79,216 $183,701 125,099 — 64,417 $ 551,104 14,667 — 372,451 $ 3,591,986 2,158,401 510,291 1,890,170 $ 3,591,986 2,168,962 503,706 1,915,926 Total interest sensitive liabilities . . . . . . . . . . . 2.05 $3,199,695 $1,450,241 $1,503,667 $685,806 $373,217 $ 938,222 $ 8,150,848 $ 8,180,580 Interest sensitivity gap . . $ 70,493 $ (71,915) $ (429,767) $ 37,338 $171,950 $2,183,949 $ 1,962,048 $ 1,972,167 Ratio of interest sensitive assets to interest sensitive liabilities . . . 1.02:1 0.95:1 0.71:1 1.05:1 1.46:1 3.33:1 1.24:1 1.24:1 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 of fair values. The total gap re-pricing within 1 year as of December 31, 2004 was $70.5 million, representing a ratio of interest sensitive assets to interest sensitive liabilities of 1.02:1. 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 liquidity 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 totaled $2.1 billion at December 31, 2004 and at December 31, 2003, representing 21.2 percent and 22.6 percent of earning assets, and 19.9 percent and 21.1 percent of total assets at December 31, 2004 and 2003, respectively. 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 $6.4 billion for the year ended December 31, 2004 and $6.0 billion for the year ended December 31, 2003, representing 66.5 percent and 68.2 percent of average earning assets. 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. Brokered certificates of deposit totaled $63.6 million at December 31, 2004 and $66.9 million at December 31, 2003. 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 2004, proceeds from the sales of investment securities available for sale amounted to $470.2 million and proceeds of $1.1 billion were generated from maturities, redemptions and prepayments of investments. 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 2004 were $1.7 billion. During 2004, 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 2005.* The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31, 2004. 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) $588,187 69,030 81,566 258,348 $997,131 22 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 may, as approved by the Board of Directors, repurchase shares of its outstanding common stock.* The cash required for these purchases of shares have previously been met by using its own funds, dividends received from its subsidiary bank as well as borrowed funds. Investment Securities The amortized cost of securities held to maturity at December 31, 2004, 2003 and 2002 were as follows: INVESTMENT SECURITIES HELD TO MATURITY 2004 2003 2002 (in thousands) U.S. Treasury securities and other government agencies and corporations . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,406 250,149 492,416 437,708 $ — $ — 128,839 17,336 379,347 172,707 629,237 375,317 Total debt securities . . . . . . . . . . . . . . . . . . . . . . . FRB & FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,218,679 73,659 1,177,261 54,978 525,522 65,370 Total investment securities held to maturity . . . . $1,292,338 $1,232,239 $590,892 The fair value of securities available for sale at December 31, 2004, 2003 and 2002 were as follows: INVESTMENT SECURITIES AVAILABLE FOR SALE 2004 2003 2002 (in thousands) U.S. Treasury securities and other government agencies and corporations . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . $ 312,881 87,789 1,456,552 $ 374,911 106,211 1,305,200 $ 224,021 110,965 1,772,801 Total debt securities . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,857,222 26,507 1,786,322 19,358 2,107,787 32,579 Total investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,883,729 $1,805,680 $2,140,366 23 MATURITY DISTRIBUTION OF INVESTMENT SECURITIES HELD TO MATURITY AT DECEMBER 31, 2004 U.S. Treasury Securities and Other Government Agencies and Corporations Obligations of States and Political Subdivisions Mortgage- Backed Securities(5) Other Debt Securities Total(4) Amortized Cost(1) Yield (2) 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 year 1-5 years . . . . . . . . . . . . . 5-10 years . . . . . . . . . . . . Over 10 years . . . . . . . . . 20,030 18,376 — — % $ 94,457 31,275 4.45 81,464 5.30 42,953 — 2.64% $ — 5.96 6.45 6.91 5,070 306 487,040 — % $ 7.44 7.73 4.49 100 6.20 25 6.55 437,533 7.20 50 7.30% $ 94,507 2.64% 56,475 5.56 100,171 6.24 967,526 5.82 Total securities . . . . $38,406 4.86% $250,149 5.03% $492,416 4.52% $437,708 7.20% $1,218,679 5.60% MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 2004 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 year . . . . . . . . . . . . . . . 1-5 years . . . . . . . . . . . . . . 5-10 years . . . . . . . . . . . . . Over 10 years . . . . . . . . . . $ 50 96,001 128,343 90,868 7.33% $14,031 10,875 3.07 58,790 4.27 500 4.84 6.02% $ 6.59 7.31 11.23 382 21,106 58,700 1,375,150 8.00% $ 7.59 7.24 4.67 14,463 127,982 245,833 1,466,518 6.07% 4.11 5.71 4.68 Total securities . . . . . $315,262 4.07% $84,196 7.02% $1,455,338 4.82% $1,854,796 4.79% (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, 2004, Valley had $492.4 million of mortgage-backed securities classified as held to maturity and $1.5 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 2004, prepayments on mortgage-backed securities had stabilized, when compared to the high volumes received in 2003, due to slightly higher rates and slower refinancing activity. Management continues to seek out securities with an attractive spread over Valley’s cost of funds while limiting the extension risk of its assets. Included in the mortgage-backed securities portfolio at December 31, 2004 were $401.7 million of collateralized mortgage obligations (“CMO’s”) of which $38.2 million were privately issued. CMO’s had a yield of 4.54 percent and an unrealized loss of $2.0 million at December 31, 2004. As of December 31, 2004, Valley had $1.9 billion of securities available for sale, an increase of $78.0 million from December 31, 2003. As of December 31, 2004, the investment securities available for sale had a net unrealized gain of $3.7 million, net of deferred taxes, compared to a net unrealized gain of $20.5 million, net of deferred taxes, at December 31, 2003. This change was primarily due to a decrease in prices resulting from an increase in interest rates. 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. As of December 31, 2004 and 2003, Valley had a total of $2.5 million and $4.3 million, respectively, in trading account securities, which were utilized to facilitate purchases for customers of Valley’s broker-dealer subsidiary. Since late 2003, the Board of Directors authorized the writing of call options on certain positions in the available for sale portfolio as part of VNB’s ongoing management of its investment portfolio. VNB wrote call options on selected bonds that gave a counterparty the right, but not the obligation, to purchase those bonds at a future date at a specified price. During 2004, VNB wrote call options on $335 million notional value of assorted securities and received $2.1 million in call premiums. At December 31, 2004 and 2003, VNB held no active call options. Included in available for sale securities at December 31, 2003, were $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. In recent months, due to a decline in volatility in the bond market, call premiums are not pricing in as good a value as they had based on Valley’s past experience. Management may decide to reduce its activity in this area until a more profitable environment presents itself.* 25 Loan Portfolio As of December 31, 2004, total loans were $6.9 billion, compared to $6.2 billion at December 31, 2003, an increase of $761.9 million or 12.3 percent. The following table reflects the composition of the loan portfolio for the five years ended December 31, 2004. LOAN PORTFOLIO 2004 2003 2002 2001 2000 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . $1,261,854 $1,184,652 (in thousands) $1,115,784 $1,080,852 $1,026,793 Total commercial loans . . . . . . . . . . . . . 1,261,854 1,184,652 1,115,784 1,080,852 1,026,793 Construction . . . . . . . . . . . . . . . . . . . . . . . . . Residential mortgage . . . . . . . . . . . . . . . . . . . Commercial mortgage . . . . . . . . . . . . . . . . . . 368,120 1,853,708 1,745,155 222,748 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 Total mortgage loans . . . . . . . . . . . . . . . 3,966,983 3,372,644 3,143,706 2,896,010 2,721,332 Home equity . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . 517,325 9,691 1,079,050 99,412 476,149 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 Total consumer loans . . . . . . . . . . . . . . 1,705,478 1,615,113 1,502,998 1,354,945 1,440,985 Total loans . . . . . . . . . . . . . . . . . . . . . . . $6,934,315 $6,172,409 $5,762,488 $5,331,807 $5,189,110 As a percent of total loans: Commercial loans . . . . . . . . . . . . . . . . . . . . . Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . Consumer loans . . . . . . . . . . . . . . . . . . . . . . . 18.2% 57.2 24.6 19.2% 54.6 26.2 19.4% 54.5 26.1 20.3% 54.3 25.4 19.8% 52.4 27.8 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% The largest increase in loans for 2004 was from mortgage loans comprised of construction, residential and commercial mortgage loans. Construction mortgage loans increased $145.4 million or 65.3 percent in 2004 over last year, mainly due to a greater volume of drawdowns on existing lines and newly originated construction loans. Residential mortgage loans increased $256.8 million or 16.1 percent in 2004 over last year, primarily due to a continuing favorable interest rate environment and a loan origination function producing substantially more loans than those paying off. Valley sells portions of its newly originated conforming residential mortgage loans with low long-term fixed rates into the secondary market, as part of its interest rate risk analysis, but may retain amounts necessary to balance Valley’s asset mix. During 2004, Valley elected to sell approximately $35.1 million of the $609 million in originated residential mortgage loans. The commercial loan and commercial mortgage loan portfolios have continued their steady increase. Commercial loans increased $77.2 million or 6.5 percent, partly due to increased commercial line drawdowns and new commercial loans and lines. Commercial mortgage loans increased $192.1 million or 12.4 percent during 2004. This increase represents a large volume of new loans, net of a substantial amount of payoffs on commercial mortgage loans during 2004 as a result of low interest rates and a competitive lending environment. The home equity loan portfolio, primarily lines of credit, increased $41.2 million or 8.6 percent during 2004, resulting primarily from the decrease in interest rates and Valley’s increased marketing efforts to its customer base. 26 Automobile loans during 2004 increased by $65.1 million or 6.4 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. The fourth quarter showed a decline in auto loan growth as a result of competition and slowing auto sales. Valley may not achieve the same performance in future periods due to levels of automobile sales and these manufacturers’ based incentives.* 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 potential 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, 2004: 1 year or less Over 1 to 5 years Over 5 years Total (in thousands) Commercial—fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction—fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction—adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 233,956 692,968 506 140,650 $ 71,858 212,840 9,199 217,765 $12,678 37,554 — — $ 318,492 943,362 9,705 358,415 $1,068,080 $511,662 $50,232 $1,629,974 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 2004 and 2003, VNB originated approximately $27.0 million and $33.4 million of SBA loans, respectively, and sold $19.7 million and $19.2 million, respectively. At December 31, 2004 and 2003, $55.7 million and $58.1 million, respectively, of SBA loans were held in VNB’s portfolio and VNB serviced for others approximately $99.9 million and $99.4 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. Levels of non-performing assets remain relatively low as a percentage of the total loan portfolio and OREO as shown in the table below. 27 Non-accrual loans have increased from $3.9 million to $30.3 million over the last five years. Valley’s experience indicates that the amount of non-accrual loans is historically low and there is no guarantee that this low level will continue. While non-accrual loans have increased since 2000, non-accrual loans as a percentage of loans had not significantly increased between 2001 and 2003. The increase in 2004 was primarily the addition of two large credits. Loans 90 days or more past due and still accruing, which were not included in the non-performing category, are presented in the following table. These loans have remained within a range of $2.8 million to $15.0 million for the last five years. Valley cannot predict that this current low level of past dues will continue. These loans represent most loan types and are generally well secured and in the process of collection. Also included at December 31, 2003, are matured commercial mortgage loans in the process of being renewed, which totaled $707 thousand. There were no matured commercial mortgage loans in the process of being renewed at December 31, 2004. Total loans past due in excess of 30 days were 0.90 percent of all loans at December 31, 2004 compared to 0.92 percent at December 31, 2003. 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 2004 2003 2002 2001 2000 Loans past due in excess of 90 days and still accruing . . . . . $ 2,870 $ 2,792 (in thousands) $ 4,931 $10,456 $14,952 Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,274 480 $22,338 797 $21,524 43 $18,483 329 $ 3,883 129 Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . $30,754 $23,135 $21,567 $18,812 $ 4,012 Troubled debt restructured loans . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ 891 $ 949 Non-performing loans as a % of loans . . . . . . . . . . . . . . . . . . 0.44% 0.36% 0.37% 0.35% 0.07% Non-performing assets as a % of loans plus other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.44% 0.37% Allowance as a % of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.95 % 1.05 % 0.37% 1.11% 0.35% 1.20% 0.08% 1.19% During 2004, lost interest on non-accrual loans, net, after date of transfer to non-accrual, amounted to $295 thousand, compared with $708 thousand in 2003. Although substantially all risk elements at December 31, 2004 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 $4.7 million in potential problem loans at December 31, 2004 and as of January 31, 2005, 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, $300 thousand 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, 2003, Valley identified approximately $4.4 million of potential problem loans which were not classified as non-accrual, past due or restructured. 28 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, these loans are collateralized by real estate, representing approximately 57 percent of total loans. 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. 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 2004 was 58 percent while FICO® (independent objective criteria measuring the credit worthiness of a borrower) scores averaged 740. 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. 29 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. 2004 2003 2002 2001 2000 Years ended December 31, Average loans outstanding . . . . . . . . . . . . . . $6,541,993 $6,056,439 (in thousands) $5,489,344 $5,199,999 $5,065,852 Beginning balance— Allowance for loan losses . . . . . . . . . . . . . $ 64,650 $ 64,087 $ 63,803 $ 61,995 $ 64,228 Loans charged-off: Commercial . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . Mortgage—Commercial . . . . . . . . . . . . . . Mortgage—Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer 6,551 — 212 117 6,258 4,905 — 409 244 6,089 Charged-off loans recovered: Commercial . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . Mortgage—Commercial . . . . . . . . . . . . . . Mortgage—Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . Provision charged to operations . . . . . . . . . . Ending balance—Allowance for loan 13,138 11,647 3,394 — 237 51 2,502 6,184 6,954 8,003 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 losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,699 $ 64,650 $ 64,087 $ 63,803 $ 61,995 Ratio of net charge-offs during the period to average loans outstanding during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.11% 0.11% 0.24% 0.27% 0.26% 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 specific allowances for identified impaired loans, an allocated allowance for each portfolio segment and the unallocated allowance. 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. 30 During 2004, 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 $8.0 million in 2004 compared to $7.3 million in 2003. The following table summarizes the allocation of the allowance for loan losses to specific loan categories for the past five years. 2004 2003 Years ended December 31, 2002 (in thousands) 2001 2000 Percent of Loan Category to Total Loans Percent of Loan Category to Total Loans Allowance Allocation Percent of Loan Category to Total Loans Percent of Loan Category to Total Loans Allowance Allocation Allowance Allocation Percent of Loan Category to Total Loans Allowance Allocation Allowance Allocation Loan category: Commercial . . . Mortgage . . . . . Consumer . . . . Unallocated . . . $31,810 17,136 13,208 3,545 18.2% $29,914 16,657 57.2 5,884 24.6 12,195 N/A 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% 52.4 27.8 N/A $65,699 100.0% $64,650 100.0% $64,087 100.0% $63,803 100.0% $61,995 100.0% At December 31, 2004, the allowance for loan losses amounted to $65.7 million or 0.95 percent of loans, as compared to $64.7 million or 1.05 percent at December 31, 2003. The allowance was adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $7.0 million for the year ended December 31, 2004 compared with $6.8 million for the year ended December 31, 2003. The ratio of net charge-offs to average loans was 0.11 percent for 2004 and 2003. The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific and general allocations to the allowance for loan losses totaled $25.0 million and $13.1 million, respectively, at December 31, 2004 and $16.1 million and $1.8 million, respectively, at December 31, 2003. Management believes that the lower unallocated allowance is appropriate given the improved economic climate and present delinquency trends.* The average balance of impaired loans during 2004, 2003 and 2002 was approximately $14.6 million, $17.8 million and $8.7 million, respectively. The amount of interest that would have been recorded under the original terms for impaired loans was $479 thousand for 2004, $972 thousand for 2003 and $1.2 million for 2002. No interest was collected on these impaired loans during these periods. Capital Adequacy A significant measure of the strength of a financial institution is its shareholders’ equity. At December 31, 2004, shareholders’ equity totaled $707.6 million compared with $652.8 million at year-end 2003, representing 6.6 percent of total assets for both years. The increase in total shareholders’ equity for 2004 was the result of net income of $154.4 million, offset by dividends paid and a decrease in accumulated other comprehensive income. Included in shareholders’ equity as a component of accumulated other comprehensive income at December 31, 2004 was a $3.7 million unrealized gain on investment securities available for sale, net of deferred tax, compared with an unrealized gain of $20.5 million, net of deferred tax at December 31, 2003. Also included as a component of accumulated other comprehensive income at December 31, 2004 was a $341 thousand unrealized loss on derivatives, net of deferred tax related to cash flow hedging relationships. On May 14, 2003, Valley’s Board of Directors authorized the repurchase of up to 2.6 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. Reacquired shares were held 31 in treasury and were used for general corporate purposes. Valley’s Board of Directors had previously authorized the repurchase of up to 11.0 million shares of Valley’s outstanding common stock on August 21, 2001. As of December 31, 2004, Valley had repurchased approximately 10.8 million shares of its common stock under the existing repurchase program at an average cost of $23.34 per share. Valley expects to continue its existing repurchase program until all 11.0 million shares are purchased before the newly authorized program becomes effective. However, Valley does not currently intend to use its authorized program to aggressively repurchase shares.* 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 trust 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, 2004 under risk-based capital guidelines was $879.5 million, or 11.1 percent of risk-weighted assets for Tier 1 capital and $945.2 million, or 12.0 percent for Total risk-based capital. The comparable ratios at December 31, 2003 were 11.3 percent for Tier 1 capital and 12.2 percent for Total risk- based capital. At December 31, 2004 and 2003, Valley was in compliance with the leverage requirement having Tier 1 leverage ratios of 8.3 percent and 8.4 percent, respectively. Valley’s ratios at December 31, 2004 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 VNB Capital Trust I. In May 2004, the Federal Reserve Board proposed a rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the proposal, after a three-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25 percent of Tier I capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the proposed rule, Valley expects to include all of its $200 million in trust preferred securities in Tier I capital.* However, the provisions of the final rule could significantly differ from those proposed and there can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier I capital for regulatory capital purposes. See Note 12 of the Notes to Consolidated Financial Statements for additional information. Book value per share amounted to $7.16 at December 31, 2004 compared with $6.62 per share at December 31, 2003. 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 43.0 percent at December 31, 2004, compared to 45.40 percent at December 31, 2003. Cash dividends declared amounted to $0.89 per share, equivalent to a dividend payout ratio of 57.0 percent for 2004, compared to 54.60 percent for the year 2003. 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. 32 The following table presents, as of December 31, 2004, 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 . . . . . . . . . . . . . . . . . . . . . . . . $5,360,338 1,387,478 516,976 54,499 9,001 $ — $ — $ — $5,360,338 2,210,421 516,976 2,126,673 59,090 378,749 — 248,108 11,989 15,163 — 741,639 21,720 429,031 — 1,082,427 16,380 (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 rate for the remaining term of the debt. Valley also has commitments 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, 2004. Further discussion of 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 under commercial loans and lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . $1,067,304 $135,341 $24,701 $64,575 $1,291,921 Home equity and other revolving lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572,341 — — Outstanding commercial mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . 190,725 194,494 6,318 Commitments under unused lines of credit-card . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,820 18,659 — Outstanding residential mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit . . . . . . . . . . . . . . . . . . . Commercial letters of credit . . . . . . . . . . . . . . . . Commitments to sell loans . . . . . . . . . . . . . . . . . Commitments to fund investments . . . . . . . . . . . Commitments to fund civic and community investments . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,235 96,696 20,431 2,157 24,512 7,473 5,950 — 67,296 — — — 4,851 5,968 — 20,156 — — — — 114 — — — — — — — — — — 572,341 391,537 40,479 118,235 184,148 20,431 2,157 24,512 12,324 12,032 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 $3.6 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 accordance with predetermined profitability targets. The balance of the other category represents approximate amounts for contractual communication and technology costs. 33 Results of Operations—2003 Compared to 2002 Net income was $153.4 million, or $1.55 per diluted share in 2003 compared with $154.6 million or $1.50 per diluted share in 2002. Net income for 2002 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 declined in 2003 from 2002, Valley’s net interest income increased $4.6 million. 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, increased 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 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 interest 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 were recorded as long-term debt and costs related to these junior subordinated debentures were included in interest expense. 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. Non-interest income continued 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 includes 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. 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 Valley National Title Services (a title insurance agency) and Masters Coverage Corp. (an all-line insurance agency). 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. 34 Valley took advantage of the bond market’s strength in early 2003 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. 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 represented gains on positions Valley had 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 includes 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 and $1.8 billion at December 31, 2003 and 2002, 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 which caused balances to decline. 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. 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. 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 newly acquired subsidiaries and business expansion. 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. The effective tax rate was also positively affected by the non-taxable income of $6.2 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.” 35 Item 8. Financial Statements and Supplementary Data CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2004 2003 (in thousands, except for share data) Assets Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities held to maturity, fair value of $1,306,074 and $1,252,765 in 2004 and 2003, 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 163,371 $ 218,166 1,292,338 1,883,729 2,514 2,157 6,932,158 (65,699) 1,232,239 1,805,680 4,252 5,720 6,166,689 (64,650) Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,866,459 6,102,039 Premises and equipment, net (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets (Notes 2, 7, 9 and 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,473 46,737 170,602 174,011 128,606 40,445 164,404 171,784 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,763,391 $9,873,335 Liabilities Deposits: Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing: $ 1,768,352 $1,676,764 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,591,986 2,158,401 3,283,716 2,202,488 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,518,739 7,162,968 Short-term borrowings (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt (Notes 11 and 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities (Notes 13 and 14) . . . . . . . . . . . . . . . . . . . . . . 510,291 1,890,170 136,593 377,306 1,547,221 133,051 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,055,793 9,220,546 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 157,042,457 shares; issued 98,883,032 shares in 2004 and 98,912,481 shares in 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unallocated common stock held by employee benefit plan . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, at cost (27,496 shares in 2004 and 306,490 shares in 2003) . . . . . . . . — — 34,930 437,659 232,431 (88) 3,355 708,287 (689) 33,304 318,599 288,313 (259) 20,531 660,488 (7,699) Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707,598 652,789 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . $10,763,391 $9,873,335 See accompanying notes to consolidated financial statements. 36 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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, 2004 2003 2002 (in thousands, except for share data) $ 370,921 $ 364,091 $ 368,402 134,274 11,587 1,848 296 518,926 23,115 46,832 5,258 71,402 146,607 372,319 8,003 364,316 6,023 13,982 20,242 6,475 2,409 8,010 3,039 6,199 17,949 84,328 99,325 24,465 22,983 13,391 8,964 7,974 42,947 220,049 228,595 74,197 154,398 1.56 1.56 0.89 $ $ 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 1.55 1.55 0.85 $ $ $ $ 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 1.51 1.50 0.81 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,671,265 99,178,698 98,695,082 99,223,550 102,672,022 103,274,932 See accompanying notes to consolidated financial statements. 37 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Preferred Stock Common Stock Surplus Retained Earnings 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 . . . . . . . . . . . . . . . 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 $(7,572) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less reclassification adjustment for gains included in net income, net of tax of $(2,428) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in unrealized gains and losses on derivatives, net of tax of $401 . . . . . . . . . . . . Less reclassification adjustment for gains included in net income, net of tax of $(636) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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, 2004 . . . . . . . . . . . . . . . $— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $— Unallocated Common Stock Held by Employee Benefit Plan (in thousands) $(602) — — — — — — — — — 167 — — — $33,310 $406,608 $270,730 — — — — — — — 22 — — — — — — 154,616 — — — — — — — — — — — (82,558) (4,018) (744) — (88,785) — 677 — 73 — 1,135 — — 33,332 318,964 338,770 (435) — — — — — — (28) — — — — — — 153,415 — — — — — — (1,764) — — — (83,621) (2,687) (189) (117,564) 719 525 344 — — — — — — — — — — — — — 176 — — — Accumulated Other Comprehensive Income Treasury Stock Total Shareholders’ Equity $19,638 $(51,309) $678,375 — — 154,616 25,108 (4,540) 1,113 21,681 — — — — — — — — 41,319 — (10,969) (9,819) (20,788) — — — — — — — — — — — — — — 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 — 154,398 — — — — — — — — — — — — — (87,805) (1,912) (902) 118,668 (120,563) — — — — — — — — (22) 1,648 — — — — — — — — $34,930 $437,659 $232,431 — 966 328 — — — — — — — — — — — 171 — — — $ (88) — — 154,398 (12,788) (4,047) 581 (922) (17,176) — — — — — — — — $ 3,355 — — — — — — — 7,991 49 — — — (1,030) (689) $ — — — — (17,176) 137,222 (87,805) 5,155 (198) 171 966 328 (1,030) $707,598 See accompanying notes to consolidated financial statements. 38 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, 2004 2003 2002 (in thousands) $ 154,398 $ 153,415 $ 154,616 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 decrease (increase) in accrued interest receivable and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in accrued expenses and other liabilities . . . . . . 22,167 23,960 21,102 3,247 8,003 5,205 (14,567) 328 (6,475) 56,790 (3,039) (50,188) (287,674) 289,412 — — (6,199) 11,986 (21,829) 3,149 7,345 11,031 (7,987) 344 (15,606) 448,754 (12,966) (399,179) (336,344) 332,092 — — (6,188) 6,434 14,975 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) Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . 161,565 223,229 113,825 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 increase in loans made to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of premises and equipment, net of sales . . . . . . . . . . . . . . . . . . . . . Purchases of loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 466,916 — 785,198 (50,000) 645,989 931,472 (1,479,316) (267,620) — 1,333,396 (1,811,375) (729,891) 1,630 1,157,709 (1,740,979) (115,167) — 206,414 (773,676) (45,841) — 86,037 (458,770) (26,141) (14,090) 26,792 (444,694) (29,954) — Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (961,651) (834,006) (550,304) Cash flows from financing activities: Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) 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 in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash 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 . . . . . . . . . . . . . . . . . 355,771 132,985 500,000 (157,051) (86,676) (1,030) 1,292 745,291 (54,795) 218,166 163,371 145,066 89,092 479,581 (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 $ $ $ $ $ $ See accompanying notes to consolidated financial statements. 39 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 individuals, 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 Valley’s wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. Certain reclassifications have been made in the consolidated financial statements for 2003 and 2002 to conform to the classifications presented for 2004. 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. On December 10, 2003, 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 adjusted 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. 40 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. Interest on trading accounts securities are recorded in interest income. 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, operational and financial cash flow and management’s intent and ability to hold the security until the value recovers. 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. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Valley’s lending is primarily in northern New Jersey and Manhattan with the exception of out-of-state auto lending and SBA loans. 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 as well as other credit risk related charge-offs. 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 specific allowances for identified impaired loans, an allocated allowance for each portfolio segment and the unallocated allowance. 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. 42 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, amortization of goodwill ceased. Instead, Valley reviews the goodwill asset for impairment annually and records impairment expense if required. Prior to the adoption of the new accounting rules, 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. Valley’s 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 Statement of Financial Accounting Standards (“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 options 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 2007, when the majority of its employee stock options reach their first full five-year vesting. The FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment”, (“SFAS 123R”) in December 2004. SFAS 123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. This Statement requires Valley to adopt by the fourth quarter of 2005. Valley does not expect the requirements of SFAS 123R to have a material impact on the consolidated financial statements.* Income Taxes Valley accounts for income tax expense as a percentage of pre-tax income 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 Valley’s financial statements or tax returns. 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. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Comprehensive Income Valley’s components of other comprehensive income include unrealized gains (losses) on securities available for sale, net of deferred tax, unrealized gains (losses) on derivatives used in cash flow hedging relationships, net of deferred tax and foreign currency translation adjustment. Valley reports comprehensive income and its components in the Consolidated Statements of Changes in Shareholders’ Equity. 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 17, 2004, 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, 2004, 2003 and 2002. Years ended December 31, 2004 2003 2002 Net income (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,398 $ 153,415 $ 154,616 Basic weighted-average number of shares outstanding . . . . . . . . . . Plus: Common stock equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,671,265 507,433 98,695,082 528,468 102,672,022 602,910 Diluted weighted-average number of shares outstanding . . . . . . . . . 99,178,698 99,223,550 103,274,932 Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1.56 1.56 $ 1.55 1.55 1.51 1.50 At December 31, 2004, 2003 and 2002 there were 741 thousand, 369 thousand and 7 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. Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, Valley records all derivatives on the balance sheet at fair value. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Valley assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) At December 31, 2004, derivatives designated as cash flow hedges with a fair value of $576 thousand were included in other liabilities. Valley had no derivatives designated as cash flow hedges outstanding at December 31, 2003. The unrealized loss of $341 thousand in 2004 for derivatives designated as cash flow hedges is separately disclosed with other comprehensive income in the Consolidated Statements of Changes in Shareholders’ Equity, net of related income tax. No significant hedge ineffectiveness existed on cash flow hedges for the period ended December 31, 2004. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received on Valley’s variable-rate loans. Since inception $1.6 million was reclassified out of other comprehensive income as the hedged forecasted transactions occurred. During the next twelve months, Valley estimates that an additional $314 thousand will be reclassified out of other comprehensive income into interest income. However, based on current indications of future short-term rates, it is possible that Valley may incur interest expense related to this transaction. Recent Accounting Pronouncements The Emerging Issues Task Force (“EITF”) Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. Valley began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. Valley incurred an impairment expense of $140 thousand on an Agency Preferred Stock instrument with a book value of $1.0 million, for the period ended December 31, 2004. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) to provide additional implementation guidance. The FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment”, (“SFAS 123R”) in December 2004. SFAS 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” This Statement eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Valley does not expect the requirements of SFAS 123R to have a material impact on the consolidated financial statements.* ACQUISITIONS AND DISPOSITIONS (Note 2) On December 1, 2004, Valley and Shrewsbury Bancorp announced that they had entered into a merger agreement by which Valley National Bancorp will merge with Shrewsbury Bancorp. Shrewsbury is the holding company for Shrewsbury State Bank, a commercial bank with approximately $425 million in assets and 12 branch offices located in 10 communities in Monmouth County. Pursuant to the merger agreement, Shrewsbury State Bank will be merged into Valley National Bank. Valley will pay approximately $136 million or $48.00 per share for Shrewsbury of which at least 60 percent will be in Valley common stock. Shareholders of Shrewsbury may elect to receive up to 40 percent of the consideration in cash. Valley has received regulatory approval and anticipates the closing of the Shrewsbury merger to occur March 31 2005, subject to approval by Shrewsbury’s shareholders at their scheduled meeting on March 29, 2005. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) On November 9, 2004, Valley announced that they had entered into a merger agreement by which Valley National Bancorp will acquire NorCrown Bank. NorCrown is a commercial bank with approximately $600 million in assets and 15 branch offices located in 12 affluent communities in Essex, Hudson and Morris Counties. Pursuant to the agreement, NorCrown Bank will be merged into Valley National Bank. Valley will pay $141 million for NorCrown of which 50 percent will be cash and 50 percent will be Valley common stock. Closing of the acquisition, which Valley anticipates will occur in the second quarter of 2005, is contingent on regulatory approvals and the satisfaction of certain closing conditions by NorCrown. The purchase price of $141 million may be reduced based on NorCrown’s shareholders equity at closing. 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, 2004 and 2003 were as follows: Amortized Cost December 31, 2004 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,406 250,149 492,416 437,708 Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FRB & FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,218,679 73,659 $ 131 5,614 3,939 12,116 21,800 — $ (423) $ (167) (5,097) (2,377) 38,114 255,596 491,258 447,447 (8,064) — 1,232,415 73,659 Total investment securities held to maturity . . . . . . . . . . . $1,292,338 $21,800 $(8,064) $1,306,074 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — 7,174 5,780 16,925 172,707 629,237 375,317 $ — $ (30) (6,323) (3,000) — 179,851 628,694 389,242 Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FRB & FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,177,261 54,978 29,879 — (9,353) — 1,197,787 54,978 Total investment securities held to maturity . . . . . . . . . . . $1,232,239 $29,879 $(9,353) $1,252,765 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The age of unrealized losses and fair value of related securities held to maturity at December 31, 2004 were as follows: Less than Twelve Months December 31, 2004 More than Twelve Months Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thousands) $ 28,120 $ (423) $ — $ — $ 28,120 $ (423) 17,098 44,007 120,732 (133) (239) (2,296) 2,664 201,090 2,570 (34) (4,858) (81) 19,762 245,097 123,302 (167) (5,097) (2,377) U.S. Treasury securities and other government agencies and corporations . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . Other debt securities . . . . . . . . . . . . . Total debt securities . . . . . . . . . . $209,957 $(3,091) $206,324 $(4,973) $416,281 $(8,064) Management does not believe that any individual unrealized loss as of December 31, 2004 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, 2004, the fair value of investments held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, FHLB advances and for other purposes required by law, was $449.1 million. The contractual maturities of investments in debt securities held to maturity at December 31, 2004, are set forth in the following table: December 31, 2004 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,507 51,405 99,865 480,486 726,263 492,416 $ 94,549 51,962 102,807 491,839 741,157 491,258 Total debt securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,218,679 $1,232,415 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 4.7 years at December 31, 2004 and 6.0 years at December 31, 2003. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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, 2004 and 2003 were as follows: Amortized Cost December 31, 2004 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315,262 84,196 1,455,338 Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,854,796 23,380 $ 368 3,593 10,619 14,580 3,484 $ (2,749) $ 312,881 87,789 1,456,552 — (9,405) (12,154) (357) 1,857,222 26,507 Total investment securities available for sale . . . . . . . . . . $1,878,176 $18,064 $(12,511) $1,883,729 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 Included in the December 31, 2003, 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. The age of unrealized losses and fair value of securities available for sale at December 31, 2004 were as follows: Less than Twelve Months December 31, 2004 More than Twelve Months Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thousands) $ 216,841 $ (2,496) $13,680 $ (253) $ 230,521 $ (2,749) U.S. Treasury securities and other government agencies and corporations . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . Total debt securities . . . . . . . . Equity securities . . . . . . . . . . . . . . 1,022,075 3,518 — 805,234 — (8,524) (11,020) (329) — 31,900 45,580 1,530 — (881) — 837,134 (1,134) (28) 1,067,655 5,048 — (9,405) (12,154) (357) Total . . . . . . . . . . . . . . . . . . . . $1,025,593 $(11,349) $47,110 $(1,162) $1,072,703 $(12,511) 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Management does not believe that any individual unrealized loss as of December 31, 2004 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 unamortized cost. As of December 31, 2004, the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, FHLB advances and for other purposes required by law, was $757.0 million. The contractual maturities of investments in debt securities available for sale at December 31, 2004, are set forth in the following table: December 31, 2004 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,081 106,876 187,133 91,368 $ 14,204 106,637 189,466 90,363 Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,458 1,455,338 400,670 1,456,552 Total debt securities available for sale . . . . . . . . . . . . . . . . . . $1,854,796 $1,857,222 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. The weighted-average remaining life for mortgage-backed securities available for sale at December 31, 2004 and 2003 was 4.7 years and 4.4 years, respectively. 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, 2004, 2003 and 2002 were as follows: Sales transactions: Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,581 $15,690 (9) (182) $7,361 (269) 2004 2003 2002 (in thousands) Maturities and other securities transactions: Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,399 15,681 7,092 153 (77) 76 — — (75) — (75) — Gains on securities transactions, net . . . . . . . . . . . . . . . . . . . . . . $6,475 $15,606 $7,092 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) LOANS (Note 5) The detail of the loan portfolio as of December 31, 2004 and 2003 was as follows: 2004 2003 (in thousands) Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,261,854 $1,184,652 Total commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261,854 1,184,652 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,120 1,853,708 1,745,155 222,748 1,596,859 1,553,037 Total mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,966,983 3,372,644 Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517,325 9,691 1,079,050 99,412 476,149 10,722 1,013,938 114,304 Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,705,478 1,615,113 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,934,315 $6,172,409 Included in the table above are loans held for sale in the amount of $2.2 million and $5.7 million at December 31, 2004 and 2003, 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 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 2004, adjusted for changes in directors, executive officers and their affiliates: Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 (in thousands) $59,512 22,309 (5,601) Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,220 All loans to related parties are performing. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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, 2004 and 2003 were as follows: Loans past due in excess of 90 days and still accruing . . . . . . . . . . . . . . . $ 2,870 $ 2,792 Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,274 480 $22,338 797 Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,754 $23,135 Troubled debt restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — 2004 2003 (in thousands) From the date placed on non-accrual, the amount of interest income that would have been recorded on non- accrual loans in 2004, 2003 and 2002 had payments remained in accordance with the original contractual terms approximated $1.1 million, $1.4 million and $1.1 million, respectively. The actual amount of interest income recorded on these types of assets in 2004, 2003 and 2002 totaled $844 thousand, $671 thousand and $768 thousand, respectively, resulting in lost interest income of $652 thousand, $1.1 million and $678 thousand, respectively. At December 31, 2004, 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 $25.0 million and $13.1 million, respectively, at December 31, 2004 and $16.1 million and $3.5 million, respectively, at December 31, 2003. The average balance of impaired loans during 2004, 2003 and 2002 was approximately $14.6 million, $17.8 million and $8.7 million, respectively. The amount of interest that would have been recorded under the original terms for impaired loans was $479 thousand for 2004, $972 thousand for 2003 and $1.2 million for 2002. No interest was collected on these impaired loans during these periods. ALLOWANCE FOR LOAN LOSSES (Note 6) Transactions recorded in the allowance for loan losses during 2004, 2003 and 2002 were as follows: 2004 2003 2002 Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . Provision charged to operating expense . . . . . . . . . . . . . . . . $ 64,650 8,003 (in thousands) $ 64,087 7,345 $ 63,803 13,644 Less net loan charge-offs: Loans charged-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less recoveries on loan charge-offs . . . . . . . . . . . . . . . . . (13,138) 6,184 (11,647) 4,865 (18,514) 5,154 Net loan charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,954) (6,782) (13,360) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,699 $ 64,650 $ 64,087 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 $1.6 billion, $2.0 billion and $1.8 billion at December 31, 2004, 2003 and 2002, respectively. The outstanding balance of loans serviced for others is 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 $99.9 million, $99.4 million and $100.4 million of SBA loans at December 31, 2004, 2003 and 2002, respectively, for third-party investors. The outstanding balance of SBA loans serviced for others is 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, 2004, 2003 and 2002: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . Purchase and origination of loan servicing rights . . . . . . . . . Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,619 1,254 (7,971) (in thousands) $ 21,596 19,548 (11,525) $ 29,205 3,380 (10,989) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,902 $ 29,619 $ 21,596 2004 2003 2002 Amortization expense in 2004, 2003 and 2002 includes $1.1 million, $4.1 million and $4.4 million, respectively, of impairment expense for loan servicing rights, and is classified in amortization of intangible assets in the consolidated statements of income. In 2004, the book balance of $22.9 million approximated fair value. Based on current market conditions, amortization expense related to the mortgage servicing asset at December 31, 2004 is expected to aggregate approximately $16.0 million through 2009. PREMISES AND EQUIPMENT, NET (Note 8) At December 31, 2004 and 2003, premises and equipment, net consisted of: 2004 2003 (in thousands) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,789 99,225 30,857 116,753 $ 25,505 77,368 27,703 107,698 Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . 282,624 (121,151) 238,274 (109,668) Total premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . $ 161,473 $ 128,606 Depreciation and amortization of premises and equipment included in non-interest expense for the years ended December 31, 2004, 2003 and 2002 amounted to approximately $13.0 million, $11.3 million and $9.5 million, respectively. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) OTHER ASSETS (Note 9) At December 31, 2004 and 2003, other assets consisted of the following: 2004 2003 (in thousands) Loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and other intangibles . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from customers on acceptances outstanding . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,902 22,986 480 50,532 11,294 65,817 $29,619 22,431 797 46,800 15,148 56,989 Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,011 $171,784 DEPOSITS (Note 10) Included in time deposits at December 31, 2004 and 2003 are certificates of deposit over $100 thousand of $997.1 million and $979.3 million, respectively. Interest expense on time deposits of $100 thousand or more totaled approximately $15.4 million, $14.6 million and $22.9 million in 2004, 2003 and 2002, respectively. The scheduled maturities of time deposits as of December 31, 2004 are as follows: 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) $1,375,368 295,080 114,547 238,124 124,670 10,612 Total time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,158,401 BORROWED FUNDS (Note 11) Short-term borrowings at December 31, 2004 and 2003 consisted of the following: Fed funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . Treasury tax and loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,000 227,654 16,637 255,000 — $160,000 174,577 27,729 — 15,000 Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $510,291 $377,306 2004 2003 The weighted average interest rate for short-term borrowings at December 31, 2004 and 2003 was 1.31 percent and 0.98 percent, respectively. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) At December 31, 2004 and 2003, long-term debt consisted of the following: 2004 2003 (in thousands) FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under agreements to repurchase . . . . . . . Note to VNB Capital Trust I (Note 12) . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,003,500 676,000 206,186 4,484 $ 875,500 461,000 206,186 4,535 Total long-term borrowings . . . . . . . . . . . . . . . . . . $1,890,170 $1,547,221 The FHLB advances included in long-term debt had a weighted average interest rate of 4.18 percent at December 31, 2004 and 4.36 percent at December 31, 2003. These advances are secured by pledges of FHLB stock, mortgage-backed securities and a blanket assignment of qualifying residential mortgage loans. Interest expense of $39.5 million, $45.9 million, and $36.0 million was recorded on FHLB advances during the years ended December 31, 2004, 2003 and 2002, respectively. The advances are scheduled for repayment as follows: 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) 23,000 $ 263,000 336,500 25,000 40,000 316,000 Total long-term FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . $1,003,500 The securities sold under repurchase agreements to other counterparties included in long-term debt totaled $676.0 million and $461.0 million at December 31, 2004 and 2003, respectively. The weighted average interest rate for this debt was 2.74 percent and 3.15 percent at December 31, 2004 and 2003, respectively. Interest expense of $15.9 million, $12.4 million, and $17.6 million was recorded during the years ended December 31, 2004, 2003 and 2002, respectively. The schedule for repayment is as follows: 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) $ 30,000 50,000 361,000 116,000 34,000 85,000 Total long-term securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $676,000 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 $1.2 billion and $896.2 million at December 31, 2004 and 2003, respectively. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 trust 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 trust 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 adjusted to reflect this change. In May 2004, the Federal Reserve Board proposed a rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the proposal, after a three-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25 percent of Tier I capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the proposed rule, Valley expects to include all of its $200 million in trust preferred securities in Tier I capital.* However, the provisions of the final rule could significantly differ from those proposed and there can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier I capital for regulatory capital purposes. 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. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 financial statements for the pension plans at December 31, 2004 and 2003: Pension Plans 2004 2003 (in thousands) Change in projected benefit obligation Projected benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,368 3,267 3,184 64 3,209 (2,237) $43,308 2,560 2,892 717 3,896 (2,005) Projected benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,855 $51,368 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,201 4,230 5,000 (2,132) $37,911 6,554 2,636 (1,900) Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,299 $45,201 Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost Unrecognized net actuarial loss/(gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,556) $ (6,167) (16) 1,173 4,822 — 1,090 7,532 Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,066 $ (188) Amounts recognized in the statements of financial condition for 2004 and 2003 consist of: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid benefit cost Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,372 (4,194) 888 — $ 2,842 (3,900) 870 — Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,066 $ (188) 2004 2003 (in thousands) Information for pension plans with an accumulated benefit obligation in excess of plan assets: Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,370 4,194 — $4,052 3,900 — 2004 2003 (in thousands) 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Net periodic pension expense for 2004, 2003 and 2002 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003 2002 $ 3,267 3,184 (3,768) (16) 147 35 (in thousands) $ 2,560 2,892 (3,542) (79) 89 (64) $ 2,254 2,691 (3,609) (79) 77 (128) Total net periodic pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,849 $ 1,856 $ 1,206 Expected benefit payments: 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 to 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 (in thousands) $ 2,254 2,615 2,716 2,909 3,268 20,985 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, 2004 and 2003, were: 2004 2003 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Future compensation increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.00% 6.25% 4.00 4.00 The weighted average discount rate and expected long-term rate of return on assets used in determining Valley’s pension expense for the years ended December 31, 2004 and 2003, were: 2004 2003 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.25% 6.75% 8.50 4.00 8.50 4.00 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, 2004 and 2003, by asset category were as follows: Asset Category Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003 55.5% 60.6% 34.4 10.1 32.7 6.7 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 57 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 of VNB Capital Trust I preferred securities at December 31, 2004 and 2003, respectively. These shares had fair market values of $2.1 million at December 31, 2004 and 2003. Dividends received for these shares were $152 thousand and $136 thousand for the years ended December 31, 2004 and 2003. Valley expects to contribute $3.6 million to the plan during 2005 based upon actuarial estimates. Valley maintains a non-qualified Directors’ retirement plan. The projected benefit obligation and discount rate used to compute the obligation was $1.6 million and 6.0 percent, respectively, at December 31, 2004, and $1.5 million and 6.25 percent, respectively, at December 31, 2003. An expense of $266 thousand, $299 thousand and $234 thousand has been recognized for the plan in the years ended December 31, 2004, 2003 and 2002, respectively. Valley also maintains non-qualified plans for former Directors and Senior Management of Merchants Bank of New York. Valley did not merge these plans into their existing non-qualified plans. At December 31, 2004, the Directors’ plan obligation was fixed at $3.7 million, of which $3.6 million was accrued. At December 31, 2004, the Senior Management’s plan obligation was fixed at $7.0 million, of which $4.9 million has been funded partly by insurance policies. The remaining obligation of $2.1 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 was $266 thousand, of which $237 thousand was accrued. The difference of $29 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 were $5.9 million during 2004 and 2003, and $5.5 million during 2002. 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 2004, VNB matched employee contributions with 45,564 shares, of which 29,496 were allocated from the KSOP and 14,363 shares were allocated from treasury stock. In 2003, VNB matched employee contributions with 52,844 shares, of which 30,517 shares were allocated from the KSOP and 18,338 shares were issued from treasury stock. In 2002, VNB matched employee contributions with 64,181 shares, of which 27,320 shares were allocated from the KSOP and 30,543 shares were issued from treasury stock. VNB charged expense for contributions to the plan, net of forfeitures, amounting to $966 thousand for 2004, while $1.3 million was recorded in 2003 and 2002. At December 31, 2004 the KSOP had 27,298 unallocated shares. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Stock-Based Compensation Valley adopted the fair value method provision 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 4.0 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. For 2004, 2003 and 2002 grants, Valley recorded stock-based employee compensation expense for incentive stock options of $627 thousand, $346 thousand and $47 thousand, respectively, net of tax and will continue to amortize the remaining cost of these grants of approximately $3.2 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 2004, 2003 and 2002, respectively: dividend yield of 3.31, 3.03 and 3.28 percent; risk-free interest rates of 4.25, 3.94 and 3.41 percent; expected volatility of 22.76, 19.97 and 24.10 percent and expected term of 7.75, 7.65 and 7.01 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 . . . . . . . . . . . . . . . . . . $154,398 (723) $153,415 (924) $154,616 (1,168) Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $153,675 $152,491 $153,448 2004 2003 2002 (in thousands, except for share data) Earnings per share As reported: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 1.56 1.56 1.56 1.55 $ $ 1.55 1.55 1.54 1.53 1.51 1.50 1.50 1.49 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of the status of qualified and non-qualified stock options as of December 31, 2004, 2003 and 2002 and changes during the years ended on those dates is presented below: 2004 2003 2002 Stock Options Outstanding at beginning of year . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited or expired . . . . . . . . . . . . . . . . . Shares 2,540,296 388,494 (180,261) (43,450) Outstanding at end of year . . . . . . . . . . . . 2,705,079 Options exercisable at year-end . . . . . . . . 1,562,647 Weighted-average fair value of options Weighted- Average Exercise Price $21 28 14 22 22 19 Weighted- Average Exercise Price $19 28 15 21 21 17 Shares 2,490,714 442,882 (287,509) (105,791) 2,540,296 1,296,166 Weighted- Average Exercise Price $16 24 10 20 19 16 Shares 2,627,338 410,514 (470,415) (76,723) 2,490,714 1,252,942 granted during the year . . . . . . . . . . . . . $ 5.97 $ 5.34 $ 4.63 The following table summarizes information about stock options outstanding at December 31, 2004: Options Outstanding Options Exercisable Range of Exercise Prices $ 3-17 17-20 20-25 25-28 3-29 Number Outstanding 305,884 553,616 1,099,954 745,625 2,705,079 Weighted- Average Remaining Contractual Life 2.9 years 4.4 7.0 9.4 6.7 Weighted- Average Exercise Price $14 18 22 28 22 Number Exercisable 298,445 540,282 649,443 74,477 1,562,647 Weighted- Average Exercise Price $14 18 22 28 19 As of December 31, 2004, 2003 and 2002, stock appreciation rights equivalent to 16,551 shares were outstanding. 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, 2004, 2003 and 2002. Restricted Stock Awards 2004 2003 2002 Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342,832 135,821 (145,251) (7,865) 348,543 110,784 (88,600) (27,895) 378,252 102,044 (110,110) (21,643) Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . 325,537 342,832 348,543 The amount of compensation costs related to restricted stock awards included in salary expense amounted to $2.2 million in 2004, $2.0 million in 2003 and $2.2 million in 2002. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Bank Owned Life Insurance Valley originally 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 for the years ended December 31, 2004 and 2003. 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: 2004 2003 2002 (in thousands) Income tax from operations: Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State, net of federal tax benefit $ 83,308 5,456 $81,512 6,210 $ 84,868 9,194 88,764 87,722 94,062 Deferred: Federal and State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,567) (7,987) (29,382) Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . $ 74,197 $79,735 $ 64,680 Included in other comprehensive income is income tax expense of $1.9 million, $11.8 million and $24.0 million attributable to net unrealized gains on securities available for sale for the years ended December 31, 2004, 2003 and 2002, 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, 2004 and 2003 are as follows: 2004 2003 (in thousands) Deferred tax assets: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,486 19,095 2,139 2,279 5,519 $26,072 20,716 5,249 2,090 7,998 Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,518 62,125 Deferred tax liabilities: Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . Unearned discount on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,821 171 2,994 4,986 11,542 150 3,633 15,325 Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,532 $46,800 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. 61 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 2004 2003 2002 $80,008 (in thousands) $81,603 $76,754 (4,055) (2,170) 3,546 — (3,132) (3,885) (2,166) 4,037 — 146 (3,692) (2,349) 2,721 (8,750) (4) Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $74,197 $79,735 $64,680 Included in stockholders’ equity are income tax benefits attributable to the exercise of non-qualified stock options of $328 thousand, $344 thousand and $1.1 million for the year ended December 31, 2004, 2003 and 2002, respectively. 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: 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,001 8,437 7,943 6,352 5,637 21,720 Total lease commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,090 (in thousands) Net occupancy expense for 2004, 2003 and 2002 included approximately $6.4 million, $6.5 million and $5.3 million, respectively, of rental expenses, net of rental income of $3.2 million, $2.9 million and $3.0 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 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 credit underwriting standards, including credit review, interest rates and collateral requirements or personal guarantees, as for on- balance sheet lending facilities. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 2004 and 2003: 2004 2003 (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 mortgage loan commitments . . . . . . . . . . . Commitments under unused lines of credit-credit card . . . . . . . . . Commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments to sell loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,291,921 572,341 391,537 184,148 118,235 40,479 20,431 2,157 $1,062,855 519,980 338,185 159,620 113,638 108,521 29,036 4,505 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,621,249 $2,336,340 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. Derivative Instruments and Hedging Activities During the third quarter of 2004, Valley entered into interest rate swap transactions which effectively converted $300 million of its prime-based floating rate loans to a fixed rate. This interest rate swap involves the receipt of fixed-rate amounts in exchange for variable-rate payments over the life of the agreements without exchange of the underlying principal amount. Valley’s objective in using derivatives is to add stability to net interest income and to manage its exposure to interest rate movements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received on Valley’s variable-rate loans. Since inception $1.6 million was reclassified out of other comprehensive income as the hedged forecasted transactions occurred. 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 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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, 2004, Valley exceeded all capital adequacy requirements to which it was subject. Valley’s ratios at December 31, 2004 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, 2004 and 2003 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) $945,235 879,536 879,536 12.0% $632,917 316,459 11.1 424,749 8.3 8.0% $791,147 474,688 4.0 530,937 4.0 10.0% 6.0 5.0 As of December 31, 2004 Total Risk-based Capital . . . . . . . . . . . . . . . . . . . . . Tier I Risk-based Capital . . . . . . . . . . . . . . . . . . . . . Tier I Leverage Capital . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2003 Total Risk-based Capital . . . . . . . . . . . . . . . . . . . . . Tier I Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier I Leverage Capital $871,514 806,865 806,865 12.2% $573,670 286,835 11.3 386,359 8.4 8.0% $717,087 430,252 4.0 482,948 4.0 10.0% 6.0 5.0 VNB’s actual capital amounts and ratios as of December 31, 2004 and 2003 are presented in the following table: As of December 31, 2004 Total Risk-based Capital . . . . . . . . . . . . . . . . . . . . . Tier I Risk-based Capital . . . . . . . . . . . . . . . . . . . . . Tier I Leverage Capital . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2003 Actual Minimum Capital Requirements To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (in thousands) $853,054 787,355 787,355 10.8% $630,461 315,230 10.0 423,311 7.4 8.0% $788,076 472,846 4.0 529,138 4.0 10.0% 6.0 5.0 Total Risk-based Capital . . . . . . . . . . . . . . . . . . . . . Tier I Risk-based Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier I Leverage Capital $736,114 671,464 671,464 10.3% $571,792 285,896 9.4 385,110 7.0 8.0% $714,740 428,844 4.0 481,388 4.0 10.0% 6.0 5.0 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 2005 without prior approval from the OCC of up to $128.4 million plus an amount equal to VNB’s net profits for 2005 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. Shares of Common Stock The following table summarizes the share transactions for the three years ended December 31, 2004: Shares Issued Shares in Treasury 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 . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . Effect of stock incentive plan, net . . . . . . . . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . 107,773,451 53,435 — (3,869,502) 103,957,384 (95,743) — (4,949,160) 98,912,481 (20,836) — (8,613) Balance, December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . 98,883,032 (2,391,456) 514,671 (6,148,090) 3,869,502 (4,155,373) 414,437 (1,514,714) 4,949,160 (306,490) 311,981 (41,600) 8,613 (27,496) Treasury Stock On May 14, 2003, Valley’s Board of Directors authorized the repurchase of up to 2.6 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 2004 under this repurchase plan. On August 21, 2001 Valley’s Board of Directors authorized the repurchase of up to 11.0 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 42 thousand shares during 2004 for a total of 10.8 million shares of its common stock since the inception of this program. Valley expects to continue its existing repurchase program until all 11.0 million shares are purchased before the newly authorized program becomes effective. However, Valley does not currently intend to use its authorized program to aggressively repurchase shares.* 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 17) 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: $ Quarters ended 2004 March 31 June 30 Sept 30 Dec 31 (in thousands, except for share data) $ 123,515 33,298 90,217 1,848 22,999 53,081 58,287 19,855 38,432 0.39 0.39 0.214 $ 125,676 34,290 91,386 1,476 20,730 54,797 55,843 19,114 36,729 0.37 0.37 0.225 $ 132,431 37,660 94,771 1,475 19,411 54,877 57,830 18,444 39,386 0.40 0.40 0.225 137,304 41,359 95,945 3,204 21,188 57,294 56,635 16,784 39,851 0.40 0.40 0.225 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,599,746 99,146,875 98,660,022 99,116,527 98,676,093 99,116,193 98,748,300 99,297,513 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: $ Quarters ended 2003 March 31 June 30 Sept 30 Dec 31 (in thousands, except for share data) $ 126,431 37,207 89,224 3,255 25,642 54,139 57,472 19,490 37,982 0.38 0.38 0.204 $ 126,040 37,217 88,823 1,755 26,222 55,943 57,347 19,618 37,729 0.38 0.38 0.214 $ 120,840 39,141 81,699 1,085 33,325 54,128 59,811 20,475 39,336 0.40 0.40 0.214 124,187 35,357 88,830 1,250 23,008 52,068 58,520 20,152 38,368 0.39 0.39 0.214 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,391,525 99,853,936 98,488,665 99,029,249 98,400,484 99,015,258 98,512,548 99,160,181 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) PARENT COMPANY INFORMATION (Note 18) Condensed Statements of Financial Condition December 31, 2004 2003 (in thousands) Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to subsidiary bank employee benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,492 84,129 19,167 444 813,785 179 14,534 $ 4,919 — 152,032 450 714,996 357 10,207 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $938,730 $882,961 Liabilities Dividends payable to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,243 206,186 2,703 $ 21,120 206,186 2,866 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,132 230,172 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 34,930 437,659 232,431 (88) 3,355 708,287 (689) — 33,304 318,599 288,313 (259) 20,531 660,488 (7,699) Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707,598 652,789 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $938,730 $882,961 Condensed Statements of Income Income Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on securities transactions, net Other interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax benefit and equity in undistributed earnings of Years ended December 31, 2004 2003 2002 (in thousands) $ 50,000 572 725 1,833 53,130 18,306 $145,000 328 7,633 802 153,763 18,107 $144,000 1,253 5,106 1,154 151,513 17,867 subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit 34,824 (5,462) 135,656 (3,479) 133,646 (3,880) Income before equity in undistributed earnings of subsidiary . . . . . . . . . . . . Equity in undistributed earnings of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,286 114,112 139,135 14,280 137,526 17,090 $154,398 $153,415 $154,616 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Condensed Statements of Cash Flows Cash flows from operating activities: activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 (increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2004 2003 2002 (in thousands) $ 154,398 $ 153,415 $ 154,616 (114,112) 294 (14,280) 301 (17,090) 310 3,203 (25) (725) (658) (127) 3,046 (48) (7,633) 164 (174) 2,316 (91) (5,106) (226) (1,114) Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 42,248 134,791 133,615 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 . . . . . . . . . . . . . . . . . Payment of employee benefit plan loan . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,685 272,000 (276,118) 429,906 1,075 (449,396) — 178 — 179 435,418 135,000 (472,814) (459) 178 Net cash provided (used in) investing activities . . . . . . . . . . . . . . . . 128,745 (18,236) 97,323 Cash flows from financing activities: Net decrease in other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Addition of common shares to treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued, net of cancellations . . . . . . . . . . . . . . . . . . . . . . . . — (1,030) (86,676) 2,415 — (35,362) (82,931) 3,466 (4,000) (149,628) (82,409) 6,091 Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . (85,291) (114,827) (229,946) Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . 85,702 4,919 1,728 3,191 992 2,199 Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,621 $ 4,919 $ 3,191 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) FAIR VALUES OF FINANCIAL INSTRUMENTS (Note 19) Limitations: The fair value estimates made at December 31, 2004 and 2003 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 alternative funding sources 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 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. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The carrying amounts and estimated fair values of financial instruments were as follows at December 31, 2004 and 2003: Financial assets: 2004 2003 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 163,371 1,292,338 1,883,729 2,514 6,934,315 $ 163,371 1,306,074 1,883,729 2,514 6,960,430 $ 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 Financial liabilities: Deposits with no stated maturity . . . . . . . . . . . . . . . . . . . Deposits with stated maturities . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt 5,360,338 2,158,401 510,291 1,890,170 5,360,338 2,168,962 503,706 1,915,926 4,960,480 2,202,488 377,306 1,547,221 4,960,480 2,227,720 373,795 1,561,605 The estimated fair value of financial instruments with off-balance sheet risk, consisting of unamortized fee income at December 31, 2004 and 2003 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 segments are consumer 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. 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 wealth management and insurance services and mortgage services portfolios were directly assigned to the respective non-interest income and non-interest expense lines in the consumer lending segment. The year ended December 31, 2002 has been adjusted 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 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. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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, as well as income from derivative financial instruments and 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 2004, 2003 and 2002. Year ended December 31, 2004 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total Average interest-earning assets . . . . . . . . . . . $3,293,822 $3,248,587 (in thousands) $3,073,761 Interest income . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . $ 176,950 44,829 $ 188,094 44,214 $ 158,713 41,834 $ $ — $9,616,170 (4,831) $ 518,926 146,607 15,730 Net interest income (loss) . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . 132,121 4,526 143,880 3,477 116,879 — (20,561) — 372,319 8,003 Net interest income (loss) after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . Internal expense transfer . . . . . . . . . . . . . . . . 127,595 42,900 51,978 42,425 140,403 10,785 22,766 41,895 116,879 14,025 632 38,611 (20,561) 16,618 144,673 (122,931) 364,316 84,328 220,049 — Income (loss) before income taxes . . . . . . . . $ 76,092 $ 86,527 $ 91,661 $ (25,685) $ 228,595 Return on average interest-bearing assets (pre-tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.31% 2.66% 2.98% — 2.38% 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 59,870 59,074 38,205 130,310 11,445 22,355 36,890 103,105 14,137 626 32,003 (21,852) 22,745 134,223 (107,098) 341,231 108,197 216,278 — Income (loss) before income taxes . . . . . . . . $ 92,259 $ 82,510 $ 84,613 $ (26,232) $ 233,150 Return on average interest-bearing assets (pre-tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.98% 2.76% 3.14% — 2.66% 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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% 72 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Valley National Bancorp: We have audited the accompanying consolidated statements of financial condition of Valley National Bancorp and subsidiaries (“the Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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 subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Valley National Bancorp’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2005 expressed an unqualified opinion thereon. March 4, 2005 New York, New York 73 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 limitations in a cost-effective control system, with the policies or procedures. Because of the inherent misstatements due to error or fraud may occur and not be detected. Management’s Report on Internal Control Over Financial Reporting Valley’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance to financial statement preparation and presentation. Also, projections of any evaluation of with respect effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As of December 31, 2004, management assessed the effectiveness of Valley’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee. Based on this assessment, management determined that, as of December 31, 2004, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. 74 Ernst & Young LLP, the independent registered public accounting firm that audited Valley’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on management’s assessment of the effectiveness of Valley’s internal control over financial reporting as of December 31, 2004. The report, which expresses opinions on management’s assessment and on the effectiveness of Valley’s internal control over financial reporting as of December 31, 2004, is included in this item under the heading “Attestation Report of Independent Registered Public Accounting Firm.” 75 Attestation Report of Independent Registered Public Accounting Firm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Valley National Bancorp: We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Valley National Bancorp (“the Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Valley National Bancorp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because management’s assessment and our audit were conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of Valley National Bank’s internal control over financial reporting included controls over the preparation of financial statements in accordance with the instructions for the preparation of Consolidated Financial Statements for Bank Holding Companies (Form FRY- 9C). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Valley National Bancorp maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Valley National Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. 76 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of Valley National Bancorp as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 of Valley National Bancorp and our report dated March 4, 2005, expressed an unqualified opinion thereon. March 4, 2005 New York, New York 77 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 2005 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 2005 Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters The information set forth under the captions “Equity Compensation Plan Information” and “Stock Ownership of Management and Principal Shareholders” in the 2005 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 2005 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 2005 Proxy Statement is incorporated herein by reference. 78 Item 15. Exhibits, Financial Statements and Schedules (a) Financial Statements and Schedules: PART IV 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 Auditor’s 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) 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 December 4, 2004 among Valley, VNB, Shrewsbury Bancorp and Shrewsbury State Bank is incorporated herein by reference to the Registrant’s Form 8-K Current Report on December 2, 2004. B. Agreement and Plan of Merger dated November 9, 2004 among Valley, VNB and NorCrown Bank is incorporated herein by reference to the Registrant’s Form 8-K Current Report on November 11, 2004. (3) Articles of Incorporation and By-laws: A. Restated Certificate of Incorporation of the Registrant as amended on May 3, 2004 incorporated herein by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004. B. By-laws of the Registrant is incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2003. (10) Material Contracts: A. Amended and Restated “Change in Control Agreements” among Valley National Bank, Valley National Bancorp and Peter Crocitto, Stephen P. Davey, Elizabeth E. DeLaney, Kermit R. Dyke, Albert L. Engel, Alan D. Eskow, Robert E. Farrell, Richard P. Garber, Eric W. Gould, Walter M. Horsting, James G. Lawrence, Gerald H. Lipkin, Robert M. Meyer, Robert J. Mulligan and Garret G. Nieuwenhuis, dated November 30, 2004, incorporated herein by reference to the Registrant’s Form 8-K Current Report on December 2, 2004. B. C. D. E. F. “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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2004. “Severance Agreement” dated August 17, 1994 between Valley, VNB and Gerald H. Lipkin is filed herewith. “Split-Dollar Agreement Revocation” dated April 22, 2004, between Valley, VNB, and Gerald H. Lipkin is incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004. “Severance Agreements” as of January 1, 1998 between Valley, VNB and Peter Crocitto and Robert M. Meyer is incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2003. “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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2004. G. Amendment to the “Severance Agreement” dated November 28, 2000 between Valley, VNB and Gerald H. Lipkin is filed herewith. 79 H. “Employment Continuation and Non-Competition Agreement” dated September 5, 2000 between Valley, VNB and James G. Lawrence is incorporated herein by reference to the Registrant’s Form 8-K Current Report on December 2, 2004. I. Amended and Restated Declaration of Trust of VNB Capital Trust I, dated as of November 7, 2001 is incorporated herein by reference to the Registrant’s Report on Form 8-K filed on November 16, 2001. J. 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. K. 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. L. “Severance Agreement” as of June 18, 2002 between Valley, VNB and Alan D. Eskow, is incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2002. M. Directors Deferred Compensation Plan, dated June 1, 2004, is incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. N. Awards to executive officers under Registrant’s incentive compensation plan, incorporated herein by reference to the Registrant’s Report on Form 8-K filed on February 11, 2005. O. “Severance Agreement” dated February 11, 2004, between Valley, VNB and Albert L. Engel is incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004. (12) Computation of Consolidated Ratios of Earnings to Fixed Charges (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. 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 VNB Route 23 Realty, 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. 80 Jurisdiction of Incorporation Delaware United States New Jersey New Jersey New Jersey New York 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 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% (23) Consents of Experts and Counsel (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. 81 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: March 7, 2005 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 March 7, 2005 Gerald H. Lipkin Chief Executive Officer and Director /s/ ALAN D. ESKOW Executive Vice President and Chief March 7, 2005 Alan D. Eskow Financial Officer (Principal Financial Officer) /s/ EDWARD J. LIPKUS Edward J. Lipkus First Vice President and Controller (Principal Accounting Officer) March 7, 2005 /s/ ANDREW B. ABRAMSON* Director March 7, 2005 Andrew B. Abramson /s/ PAMELA BRONANDER* Director March 7, 2005 Pamela Bronander /s/ JOSEPH COCCIA, JR.* Joseph Coccia, Jr. Director March 7, 2005 /s/ ERIC P. EDELSTEIN* Director March 7, 2005 Eric P. Edelstein /s/ MARY J. STEELE GUILFOILE* Director March 7, 2005 Mary J. Steele Guilfoile /s/ H. DALE HEMMERDINGER* Director March 7, 2005 H. Dale Hemmerdinger /s/ GRAHAM O. JONES* Director March 7, 2005 Graham O. Jones 82 Signature Title Date /s/ WALTER H. JONES, III* Director March 7, 2005 Walter H. Jones, III /s/ GERALD KORDE* Director March 7, 2005 Gerald Korde /s/ MICHAEL LARUSSO* Director March 7, 2005 Michael LaRusso /s/ ROBINSON MARKEL* Director March 7, 2005 Robinson Markel /s/ ROBERT E. MCENTEE* Director March 7, 2005 Robert E. McEntee /s/ RICHARD S. MILLER* Director March 7, 2005 Richard S. Miller /s/ BARNETT RUKIN* Director March 7, 2005 Barnett Rukin /s/ PETER SOUTHWAY* Director March 7, 2005 Peter Southway /s/ LEONARD J. VORCHEIMER* Director March 7, 2005 Leonard J. Vorcheimer *By Gerald H. Lipkin and Alan D. Eskow, as attorneys-in-fact. 83 V A L L E Y L O C A T I O N S N E W J E R S E Y Bergen Bogota 325 Palisade Avenue Edgewater 46 Promenade, City Place Elmwood Park 80 Broadway Englewood 41-43 Palisade Avenue 80 West Street Fair Lawn 139 Lincoln Avenue 20-24 Fair Lawn Avenue 31-00 Broadway Fort Lee 1372 Palisade Avenue 2160 Lemoine Avenue 2180 Lemoine Avenue Hackensack 3 University Plaza Hillsdale 24 Broadway Ho-Ho-Kus 18 Sycamore Avenue Lodi 147 Main Street Lyndhurst 456 Valley Brook Avenue Midland Park 207 Franklin Avenue Montvale 24 South Kinderkamack Road Moonachie 199 Moonachie Road Moonachie Road & East Joseph Street New Milford 243 Main Street North Arlington 629 Ridge Road Northvale 151 Paris Avenue Oakland 350 Ramapo Valley Road Oradell 350 Kinderkamack Road Paramus 80 East Ridgewood Avenue East 58 Midland Avenue Route 4 & Forest Avenue Ramsey 10 South Franklin Turnpike Ridgefield 868 Broad Avenue Ridgewood 103 Franklin Avenue 44 Godwin Avenue Rochelle Park 405 Rochelle Avenue Tenafly 85 County Road Waldwick 67 Franklin Turnpike Wyckoff 356 Franklin Avenue Essex Belleville 22 Bloomfi eld Avenue 237 Washington Avenue 381 Franklin Avenue Bloomfield 1422 Broad Street 548 Broad Street Caldwell 15 Roseland Avenue Cedar Grove 491 Pompton Avenue Fairfield 167 Fairfi eld Road One Passaic Avenue Livingston 531 South Livingston Avenue 73 South Livingston Avenue Maplewood 142 Maplewood Avenue 740 Irvington Avenue Newark 167 Bloomfi eld Avenue 289 Ferry Street 784 Mount Prospect Avenue Nutley 171 River Road 371 Franklin Avenue South Orange 115 Valley Street (1/05) West Caldwell 1059 Bloomfi eld Avenue Hudson Bayonne 522 Broadway East Newark 710 North 4th Street at Bridge Harrison 433 Harrison Avenue Hoboken 305 River Street Jersey City 46 Essex Street Kearny 256 Kearny Avenue 72-80 Midland Avenue North Bergen 8901 Kennedy Boulevard Secaucus 40 Meadowlands Parkway 54 Mill Creek Mall South Kearny 100 Central Avenue Union City 4405 Bergenline Avenue West New York 5712 Bergenline Avenue Middlesex South Plainfield 100 Durham Avenue Morris Budd Lake 202 Route 46 & Mount Olive Road 342 Route 46 West Butler Meadtown Shopping Center Chatham 375 Main Street Chester Chester Springs Mall, 151 Route 206 Dover 100 East Blackwell Street East Hanover Route 10 West & Murray Road Jefferson Township 715 Route 15 South Landing 115 Center Street Mine Hill 271-273 Route 46 Morris Plains 51 Gibraltar Drive Morristown 10 Madison Avenue Parsippany 120 Baldwin Avenue Arlington Plaza, 800 Route 46 Succasunna 250 Route 10 Passaic Clifton 1006 Route 46 505 Allwood Road 6 Main Avenue 925 Allwood Road Little Falls 171 Browertown Road North Haledon 475 High Mountain Road 5 Sicomac Road Passaic 128 Market Street 211 Main Avenue 506 Van Houten Avenue 545 Paulison Avenue 615 Main Avenue Pompton Lakes 516 Wanaque Avenue Wayne 1200 Preakness Avenue 1345 Willowbrook Mall, Main Mall Entrance 1400 Valley Road 1445 Route 23 South 1445 Valley Road 1501 Hamburg Turnpike 1504 Route 23 North 200 Black Oak Ridge Road Wayne (continued) 64 Mountain View Boulevard Somerset Bound Brook 466 West Union Avenue Green Brook 302-306 Route 22 West North Plainfield 1334 Route 22 672-6 Somerset Street Sussex Branchville Branchville Square Franklin 288 Route 23 Fredon 410 Route 94 at Willows Road Sparta 7 Woodport Road Tranquility Route 517 at Kennedy Road Vernon Vernon Plaza, 538 Route 515 Union Clark 76 Central Avenue Mountainside 882 Mountain Avenue Roselle Park 1 West Westfi eld Avenue Scotch Plains 1922 Westfi eld Avenue Union 2784 Morris Avenue Westfield 801 Central Avenue Warren Belvidere Route 46 at Route 519 Blairstown 128 Route 94 Hackettstown 105 Mill Street N E W Y O R K Manhattan 1040 Sixth Avenue 145 Fifth Avenue 275 Madison Avenue 295 Fifth Avenue 434 Broadway 62 West 47th Street 776 Avenue of the Americas 93 Canal Street V A L L E Y N A T I O N A L B A N C O R P I S A R E G I O N A L B A N K H O L D I N G C O M P A N Y W I T H $ 10.8 B I L L I O N I N A S S E T S A S O F D E C E M B E R 31, 2004. V A L L E Y N A T I O N A L B A N K, I T S P R I N C I P A L S U B S I D I A R Y , I S A S U P E R C O M M U N I T Y B A N K T H A T O P E R A T E S 133 B R A N C H O F F I C E S I N 86 C O M M U N I T I E S T H R O U G H - O U T 11 C O U N T I E S I N N O R T H E R N N E W J E R S E Y A N D M A N H A T T A N . © 2005 Valley National Bancorp 1455 Valley Road Wayne, NJ 07470 973-305-3380 www.valleynationalbank.com 2 0 0 4 2 0 0 4 

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