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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 1. Business
PART I
Valley National Bancorp (“Valley”) is a New Jersey corporation registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended (“Holding Company Act”). At December 31, 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.
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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:
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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
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