2008 ANNUAL REPORT
194 Branch Locations as of March 1, 2009
HISTORICAL FINANCIAL DATA 1988 - 2008
NEW JERSEY
Sussex
Passaic
NEW YORK
Warren
Bergen
n
a
t
t
a
h
n
a
M
Morris
Queens
Essex
Hudson
Union
Hunterdon
Somerset
Brooklyn
Middlesex
Mercer
Monmouth
CURRENT LOCATIONS
COMING SOON
See the complete branch
listing on inside back cover.
Year
End
Total
Assets
Net
Income
Diluted Earnings
Per Common
Share (1)
Return on
Average
Assets
Return on
Average
Equity
Dividends
Per Common
Share
Common Stock
Splits and
Dividends
2008 $14,718
$93.6 (2) $0.70
0.69%
8.74%
$0.80
5/08 - 5%
Stock Dividend
Dollars in millions, except for share data.
2007
12,749
153.2 (2)
1.21
2006
12,395
163.7 (2)
1.27
2005
12,436
163.4
2004
10,763
154.4
2003
9,873
153.4
2002
9,148
154.6
2001
8,590
135.2
2000
6,426
106.8
1999
6,360
106.3
1998
5,541
97.3
1997
5,091
85.0
1996
4,687
67.5
1995
4,586
62.6
1994
3,744
1993
3,605
1992
3,357
1991
3,055
1990
2,149
1989
1,975
1988
1,835
59.0
56.4
43.4
31.7
28.6
36.0
34.2
1.29
1.28
1.27
1.23
1.03
0.99
0.94
0.90
0.82
0.72
0.66
0.73
0.71
0.55
0.41
0.37
0.46
0.44
1.25
1.33
1.39
1.51
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
16.43
17.24
19.17
22.77
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
0.80
0.78
0.76
0.73
0.70
0.66
0.62
0.58
0.55
0.50
0.43
0.39
0.37
0.36
0.29
0.25
0.24
0.24
0.23
0.20
5/07 - 5%
Stock Dividend
5/06 - 5%
Stock Dividend
5/05 - 5%
Stock Dividend
5/04 - 5%
Stock Dividend
5/03 - 5%
Stock Dividend
5/02 - 5:4%
Stock Split
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
4/93 - 5:4%
Stock Split
4/92 - 3:2%
Stock Split
7/88 - 3:2%
Stock Split
All per share amounts have been adjusted retroactively for stock splits and stock dividends during the periods presented.
Data for the years prior to 2001 in the table above exclude certain prior year results for merger transactions accounted for
using the pooling-of-interests method.
(1) Beginning in 1997, earnings per common share is presented on a diluted basis.
(2) Net income includes other-than-temporary impairment charges on investment securities totaling $49.9 million,
$10.4 million and $3.0 million, net of tax benefi t, for 2008, 2007, and 2006, respectively.
Ocean
VALLEY NATIONAL BANCORP 1
LETTER TO OUR SHAREHOLDERS
This year marked one of the most challenging and diffi cult
economic climates for banks and fi nancial service companies in
recent memory. Years of unrestrained growth in subprime lending,
lax oversight by regulatory agencies, extraordinary leverage on
Wall Street, untamed use of credit default swaps and subsequent
illiquid markets creating security valuation issues have largely
frozen today’s fi nancial system and indirectly caused security
valuation issues for many investments once rated high quality
securities with a relatively low risk of default. Unfortunately, the
majority of traditional and conservative lenders, like Valley, were
not immune to the effects of this unprecedented fi nancial crisis.
During 2008, Valley’s earnings suffered a signifi cant decline
as the U.S. Government placed Freddie Mac and Fannie Mae
into conservatorship, thereby forcing impairment losses for
Valley and many other banks owning their preferred stock and
suspending their preferred dividends. Our management team
was very disappointed with the Government’s decision. However,
we as management are ultimately responsible for the quality
and performance of the assets residing on our balance sheet.
In addition, fair value and other than temporary impairment
accounting rules required us, on a few of our held to maturity
investment securities, to record other non-cash, or “paper”
losses, most of which we may recover over the remaining
lives of these securities.
Our commitment to our shareholders remains strong
and therefore we have held ourselves accountable for our
disappointing 2008 performance. All of Valley’s executive and
senior offi cers have forgone salary increases for 2009 and the
total compensation for me and my fi ve most senior offi cers will
be reduced between 25 and 40 percent from the prior year
levels. We have also explored other alternatives to reduce
costs as we continue to endure the effects of a prolonged
economic downturn.
Profitability and Balance Sheet Management
Valley recorded net income of $93.6 million for the year ended
December 31, 2008, despite 2008 being an unprofi table year for
many in the banking industry. Net interest income, the primary
driver of Valley’s earnings, grew to $420.8 million, a 10 percent
increase from the prior year. The majority of this increase came
from solid, organic, loan growth spurred on by opportunities to
solicit quality customers away from weaker competitors unable
to meet their credit needs throughout the year, as well as over
$800 million in loans acquired in the Greater Community Bancorp
(Greater Community) merger on July 1, 2008.
Interest rates declined dramatically during the second half of
the year as the Federal Reserve attempted to ease credit and
alleviate the effect of the broadening fi nancial crisis in as many
ways as possible. The drop in interest rates, along with various
other liquidity strategies, caused our fourth quarter net interest
income and margin to decline. As the prime rate has become
an administered rate to carry out the Government’s intention to
provide economic stimulus, it has lost its relevance to the cost of
credit. Accordingly, Valley has found it appropriate in many of our
loans to replace Wall Street Prime with Valley Prime Rate and
place interest rate
fl oors on many loans
indexed to Prime.
Our commercial and
consumer lending
remain robust even
in this environment.
However, we will not
compromise credit
quality for volume.
We expect to continue
lending in all areas
during 2009 as we
work through the
current fi nancial storm.
Deposits are constantly being sought as the funding vehicle of
choice. However, during much of 2008, the cost of competing
for high priced deposits offered by troubled fi nancial institutions,
short on liquidity, caused deposit costs to be high compared
to declining rates on loans and investments. We anticipate a
competitive market for deposits to continue and we expect to
focus on raising deposits to fund our lending needs at interest
rates that provide an appropriate spread on our loans.
In November 2008, Valley completed its $300 million, nonvoting,
senior preferred stock issuance to the U.S. Treasury under its
TARP Capital Purchase Program. The issuance brought additional
strength to Valley’s already well-capitalized position. Although
Valley did not need additional capital, we elected to participate
in the program as a hedge against a prolonged downturn in the
U.S. economy and as a way to better position us for potential
acquisition opportunities resulting from further disruption in
the marketplace.
During 2008, Valley originated over $2 billion of new loans,
over $400 million of which were in the fourth quarter of 2008
alone. Since receiving the TARP proceeds, Valley has supported
local businesses and consumers with direct loans as well as
investments in mortgage backed securities totaling over $450
million. Our lenders are pursuing new banking relationships and
are eager to provide fi nancing to creditworthy borrowers under
our traditional credit policies. Valley has the capital and liquidity
to grow in a responsible manner.
As part of our marketing efforts, Valley has made every effort
to remind customers that aside from keeping their deposits
with a well-capitalized institution, their money is FDIC insured.
In the fourth quarter of 2008 under the Federal Deposit
Insurance Corporation (FDIC) Transaction Account Guarantee
Program, Valley began offering its business and individual
customers unlimited insurance coverage on all non-interest
bearing transaction deposit accounts and NOW accounts earning
interest of 0.5 percent or less. This deposit protection will remain
in place through December 31, 2009. This coverage is in addition
to the increase in the basic FDIC deposit insurance coverage
limit from $100 thousand to $250 thousand through the
same time period.
Maintaining Credit Quality
Valley has avoided many of our competitors’ problems in large
part because we did not follow the industry’s general disregard
for conservative underwriting. Engaging in subprime and other
“creative” fi nancing initiatives was, and is today, inconsistent with
our philosophy. All the members of Valley’s senior management are
shareholders. So in essence, we lend as if it is our own money. This
philosophy, coupled with a conservative credit culture, has resulted
in a loan portfolio with outstanding credit quality and solid returns.
Valley’s delinquency levels remained relatively low with loans
past due in excess of 30 days totaling 1.06 percent of our $10.1
billion loan portfolio for the year ended December 31, 2008
compared to 1.00 percent of total loans for the year ended
December 31, 2007. These numbers continue to demonstrate
the strong performance of our loan portfolio and management’s
dedication to conservative loan underwriting standards. Over 99
percent of our home mortgage borrowers are “current” on their
mortgage. More than 98 percent of over 110,000 auto loans are
currently performing “as agreed.” In addition, our commercial loan
and commercial mortgage portfolios are performing very well with
over 99 percent of our borrowers current.
Building Relationships
Valley continues to fund residential mortgages, home equity loans,
auto loans and a variety of other types of consumer credit, thereby
supporting the fi nancial needs of our customers.
Despite a weak economy, Valley’s strong capital position allows
our experienced commercial lending offi cers to offer a variety of
credit needs to business customers. Our commercial loan portfolio
grew organically by about 10 percent, with a diversifi ed mix of
commercial, construction and commercial real estate loans.
Our lending teams have established new relationships and
expanded current ones throughout our footprint. We have seen
signifi cant growth as a result of our Brooklyn and Queens initiative.
Our Healthcare Lending Division has been particularly successful
in 2008 and prospects for 2009 look optimistic as well. We also
continue to see positive results from our wholly owned subsidiary,
Valley Commercial Capital, LLC, which offers equipment leasing
as well as aviation fi nancing.
Customers can fulfi ll all their traditional banking needs at Valley
and can also rely on Valley to provide them with non-traditional
banking services such as trust services, investment services,
asset management and insurance products through our Wealth
Management Division. Valley’s Wealth Management Division
continues to strengthen our customers’ banking relationships
by offering a suite of investment and insurance services. Every
day more and more Valley customers save money by switching
their auto and homeowners policies to Valley’s insurance
agency, Masters Coverage Corporation. Our experienced Asset
Management specialists continue to outperform most fi nancial
indexes while our full-service title agency, Valley National Title
Services, provides fast, reliable service.
equally as important to our success. In 2008, Valley opened 10
new offi ces, including Valley’s fi rst two locations in Queens and its
fourth and fi fth branch offi ces in Brooklyn.
As a result of this expansion, Valley now operates 196 branches
in 130 communities serving 14 counties located in northern and
central New Jersey, Manhattan, Brooklyn and Queens. In 2009 our
footprint will increase, particularly in Brooklyn and Queens.
As Valley’s branch and ATM network continues to grow, our
customers have the ability to bank down the street from where
they live, work and shop. By creating convenience and brand
awareness, this strategic growth helps solidify customer banking
relationship with Valley.
I also continue to do my part in representing Valley and its brand
in the media and in fi nancial news articles regarding the Bank’s
performance in the current economic climate. Many within the
fi nancial media consider Valley and its management to be respected
leaders in traditional banking and rightfully so. Valley has avoided
the careless, undisciplined lending practices of some of our more
publicized competitors. We are proud of our history of conservative
lending. As a result of our credit quality and straight-forward lending
practices, Valley has positioned itself as a bank that customers can
trust and rely on, even in turbulent times such as these.
A Vision for the Future
In the face of a prolonged economic downturn, where do we gather
strength as an industry leader among community banks? We
believe it starts with our most valuable asset -- the Valley employee.
Valley National Bank employees strive every day to exceed the
expectations of our customers. Whether it’s the entrepreneur
looking to expand his small business or the young parents looking
to save for their child’s future, the relationships we build with our
customers motivate us to make their goals a priority.
Valley enters 2009 as a strong and stable fi nancial entity. While
we all eagerly anticipate the stabilization of the economy, we
understand that the outlook is uncertain. We plan to continue to
improve the quality and effi ciency of our operations, maintain a
strong balance sheet, strengthen our brand and develop our sales
efforts throughout next year.
Customers’ demands and expectations will become more complex
as they seek to establish a banking relationship with a safe and
reliable fi nancial institution. For this reason alone, we remain
committed to the same core banking principles we have employed
since 1927. We are prepared to meet the challenges awaiting us
in 2009 and we will endeavor to convert these challenges into
opportunities for growth and profi tability.
On behalf of our Directors, the Valley management team and our
dedicated employees, we thank you for your valued support.
Strategies for Growth
While the acquisition of Greater Community added assets, loans
and deposits to our balance sheet, our organic growth has been
Gerald H. Lipkin
Chairman, President & CEO
2
VALLEY NATIONAL BANCORP
VALLEY NATIONAL BANCORP 3
BOARD OF DIRECTORS
BOARD OF DIRECTORS
Sitting left to right: Mary J. Steele Guilfoile, Chairman, MG Advisors Inc.; Gerald H. Lipkin, Chairman of the Board,
President & CEO; Eric P. Edelstein, Executive Vice President & CFO, Griffon Corporation.
Sitting left to right: Barnett Rukin, CEO, SLX Capital Management; Pamela R. Bronander, Vice President, KMC
Mechanical Inc.; Marc J. Lenner, CEO & CFO, Lester M. Entin Associates.
Standing left to right: Michael L. LaRusso, Financial Consultant; Gerald Korde, President, Birch Lumber Company;
Andrew B. Abramson, President/CEO, The Value Group, Inc.; H. Dale Hemmerdinger, President, ATCO Properties &
Management Inc.; Robinson Markel, KMZ Rosenman.
Standing left to right: Wilma Falduto, Secretary; Robert Soldoveri, Owner, Solan Management Company;
Jack Kay, Emeritus; Suresh L. Sani, Vice President, First Pioneer Properties, Inc.; Walter H. Jones, III, Former
Chairman, Hoke, Inc.; Richard S. Miller, Williams, Caliri, Miller & Otley, P.C.; Graham O. Jones, Partner,
Jones & Jones, Esqs.
4
VALLEY NATIONAL BANCORP
VALLEY NATIONAL BANCORP 5
EXECUTIVE MANAGEMENT
FIRST SENIOR VICE PRESIDENTS
Pictured left to right: Elizabeth De Laney, Anthony M. Bruno, Jr., John H. Noonan, Peter T. Jackey, Sheila M. Leary,
Kermit R. Dyke, Carol B. Diesner, and Wayne Fritsch.
Sitting left to right: Albert L. Engel, Executive Vice President & Chief Retail Lending Offi cer; Alan D. Eskow,
Executive Vice President & Chief Financial Offi cer; Robert M. Meyer, Executive Vice President & Chief Commercial
Lending Offi cer.
Standing left to right: James G. Lawrence, Executive Vice President; Robert E. Farrell, First Senior Vice President
& Chief Credit Offi cer; Peter Crocitto, Executive Vice President & Chief Operating Offi cer; Robert J. Mulligan,
First Senior Vice President & Chief Administrative Offi cer.
6
VALLEY NATIONAL BANCORP
VALLEY NATIONAL BANCORP 7
Pictured left to right: Thomas Sparkes, Bernadette M. Mueller, Russell C. Murawski, Dianne M. Grenz, Eric W. Gould,
Andrea T. Onorato, Richard P. Garber, and Barbara Mohrbutter.
CONSOLIDATED STATEMENTS
Financial Condition
Valley National Bancorp & Subsidiaries
(in thousands, except for share data)
Assets
Cash and due from banks
Interest bearing deposits with banks
Federal funds sold
Investment securities:
Held to maturity, fair value of $1,069,245 at December 31, 2008 and
$548,353 at December 31, 2007
Available for sale
Trading securities
Total investment securities
Loans held for sale, at fair value
Loans
Less: Allowance for loan losses
Net loans
Premises and equipment, net
Bank owned life insurance
Accrued interest receivable
Due from customers on acceptances outstanding
Goodwill
Other intangible assets, net
Other assets
Total Assets
Liabilities
Deposits:
Non-interest bearing
Interest bearing:
Savings, NOW and money market
Time
Total deposits
Short-term borrowings
Long-term borrowings (includes fair value of $41,359 for a
December 31,
$
2008
237,497
343,010
---
$
2007
218,896
9,569
9,000
1,154,737
1,435,442
34,236
2,624,415
4,542
10,143,690
(93,244)
10,050,446
256,343
300,058
57,717
9,410
295,146
25,954
513,591
$ 14,718,129
556,113
1,606,410
722,577
2,885,100
2,984
8,496,221
(72,664)
8,423,557
227,553
273,613
56,578
8,875
179,835
24,712
428,687
$ 12,748,959
$ 2,118,249
$ 1,929,555
3,493,415
3,621,259
9,232,923
640,304
3,382,474
2,778,975
8,091,004
605,154
Federal Home Loan Bank advance at December 31, 2007)
3,008,753
2,801,195
Junior subordinated debentures issued to capital trusts (includes fair value of $140,065
at December 31, 2008 and $163,233 at December 31, 2007 for VNB Capital Trust I)
Bank acceptances outstanding
Accrued expenses and other liabilities
Total Liabilities
Shareholders' Equity
Preferred stock, no par value, authorized 30,000,000 shares; issued 300,000
shares at December 31, 2008
Common stock, no par value, authorized 190,886,088 shares; issued 136,970,912
shares at December 31, 2008 and 128,503,294 shares at December 31, 2007
Surplus
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost (1,946,882 common shares at December 31, 2008 and
2,659,220 common shares at December 31, 2007)
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
165,390
9,410
297,740
13,354,520
291,539
48,228
1,047,085
85,234
(60,931)
163,233
8,875
130,438
11,799,899
---
43,185
879,892
104,225
(12,982)
(47,546)
1,363,609
$ 14,718,129
(65,260)
949,060
$ 12,748,959
Income
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, NOW and money market
Time
Interest on short-term borrowings
Interest on long-term borrowings and junior subordinated debentures
Total interest expense
Net Interest Income
Provision for credit losses
Net Interest Income After Provision for Credit Losses
Non-Interest Income
Trust and investment services
Insurance premiums
Service charges on deposit accounts
Losses on securities transactions, net
Trading gains, net
Fees from loan servicing
Gains on sales of loans, net
Gains on sales of assets, net
Bank owned life insurance
Other
Total non-interest income
Non-Interest Expense
Salary expense
Employee benefi t expense
Net occupancy and equipment expense
Amortization of other intangible assets
Goodwill impairment
Professional and legal fees
Advertising
Other
Total non-interest expense
Years ended December 31,
2008
2007
2006
$ 572,918
$ 560,066
$
544,440
137,763
10,089
6,734
2,190
729,694
45,961
117,152
10,163
135,619
308,895
420,799
28,282
392,517
7,161
10,053
28,274
(79,815)
3,166
5,236
1,274
518
10,167
17,222
3,256
126,210
31,666
54,042
7,224
---
8,241
2,697
55,168
285,248
134,969
11,268
8,002
10,702
725,007
75,695
134,674
17,645
115,308
343,322
381,685
11,875
369,810
7,381
10,711
26,803
(15,810)
7,399
5,494
4,785
16,051
11,545
14,669
89,028
116,389
29,261
49,570
7,491
2,310
5,110
2,917
40,864
253,912
140,979
11,886
5,896
4,170
707,371
75,822
112,654
18,211
109,563
316,250
391,121
9,270
381,851
7,108
11,074
23,242
(5,464)
1,208
5,970
1,516
3,849
8,171
15,390
72,064
109,775
28,592
46,078
8,687
---
8,878
8,469
39,861
250,340
Income Before Income Taxes
110,525
Income tax expense
16,934
Net Income $ 93,591
2,090
Dividends on preferred stock and accretion
Net Income Available to Common Stockholders
91,501
Earnings Per Common Share:
$
204,926
51,698
$ 153,228
---
$ 153,228
203,575
39,884
$ 163,691
---
$ 163,691
Basic
Diluted
Cash Dividends Declared Per Common Share
Weighted Average Number of Common Shares Outstanding:
Basic
Diluted
$ 0.70 $
0.70
0.80
$
1.21
1.21
0.80
1.27
1.27
0.78
130,435,853
130,507,649
126,272,915
126,646,859
128,487,882
129,012,078
See the consolidated fi nancial statements and accompanying notes presented in Item 8 of the Company’s SEC Form 10-K.
See the consolidated fi nancial statements and accompanying notes presented in Item 8 of the Company’s SEC Form 10-K.
8
VALLEY NATIONAL BANCORP
VALLEY NATIONAL BANCORP 9
VNB ADVISORY BOARD
Joseph Abergel
Jomark/Satex
Bernie Adler
Adler Development
Robert D’Alessandro
Welco CGI Gas Tech, LLC
Patrick D’Angola
PMD Consultants, Inc.
Peter A. Goodman
Goodman Sales Co., Inc.
Donald Gottheimer
Cosmetics Plus
Steven Katz
Sterling Properties Group
Carolyn Kessler
Kessler Industries, Inc.
Rand Agins
Lasser Hochman, LLC
Terry Daverio
Lincroft Inn, Inc.
Stanley Lee Gottlieb
The Diamond Agency
Frank Kobola
Koburn Investments
JoAnn Andriola
Book Chevrolet Buick, Inc.
George E. Davey, Esq.
Attorney-at-Law
Fredric H. Gould
Gould Investors
Donald Aronson
Donald Aronson Consulting Group
James Demetrakis, Esq.
Attorney-at-Law
John Grabovitz
Roxbury Enterprises LLC
Frederick C. Ayers
Ayers Chevrolet & Oldsmobile, Inc.
Robert Devino
B. Devino Construction Co.
Gerald B. Green
Consultant
Jan Kokes
The Kokes Organization
Perry J. Koplik
Joseph Kubert
Joe Kubert School of Cartoon &
Graphic Art, Inc.
Carl Bachstadt
Bachstadt Tavern
Morris Diamond
The Diamond Agency
Judith Greenberg
Heritage Management Co.
Peter Baum
Baum Bros. Imports, Inc.
Steven Dickman
Dickman Business Brokers
Steven R. Gross
Metro Insurance Services, Inc.
Robert Kuhl
J. Kuhl Metals, Inc.
Michael Kurzer
The Kurzer Group
George Bean
The George Bean Co.
Donald N. Dinallo
Terminal Construction Corporation
Arthur S. Gurtman
Consultant
Alan Lambiase
River Terminal Development Co.
Jeffrey Birnberg
Tappan Zee Capital Corp.
George Dominguez
Sunrise House Foundation, Inc.
Joseph Guttilla
Chopper Express
Robin Blair
Kellenyi Johnson Wagner, Architects
Bernard Dorfman, Esq.
Attorney-at-Law
George A. Blair
Retired/Shrewsbury State Bank
Douglas H. Douty
Lusty Lobster, Inc.
Joseph R. Haftek
J. R. Haftek Co., Inc.
Leonard Haiken
Prestige Imports, Inc.
Stanley Blum
Blum & Fink, Inc.
Gerhardt Drechsel
Eagle American Realty, Inc.
Jackie Harrison
Center for Humanistic Change
Edward Blumenfeld
Blumenfeld Development
Group, Ltd.
Leonard Boxer
Strook & Strook & Lavan, LLP
Linda R. Brenner
Ricciardi Family, LLC
Milton Brown
Accountant
Peter D. Brown
Falcon Management
Gilbert Buchalter
Pharmaceutical Innovations, Inc.
Bernard Burkhoff
The Real Estate Investment Group
Albert Burlando
Almetek Industries, Inc.
John F. Coffey, II, Esq.
Attorney-at-Law
Melvin Cohen
Handi-Hut, Inc.
William Cohen
Go-lightly Candy Company
M. Scott Coleman
Contemporary
Motor Cars, Inc.
John Conti
Shore Haven Mobile
Home Park
Anthony Coppola
Alliance Title Agency
David M. Corry
Bruno, DiBello & Co., LLC
Francis J. Costenbader, Esq.
Attorney-at-Law
Paul Dunajchuk
Roxbury Water Co.
Kenneth Elkin
Summit Stainless Steel, LLC
Willard Hedden
Consultant
Jacob Helfrich
R. Helfrich & Son
Ben Epstein
TJBFB Realty, LLC
Arthur Fefferman
AFC Realty Capital, Inc.
Jack Felicio
Rhombus Software, Inc.
William T. Ferguson
Retired
Gene Feyl
Andrew Fiore, Jr.
AWF Leasing Corporation
George J. Fiore
Real Estate
Jack Forgash
Tri-Realty Management
Corporation
Guy T. Hembling
Charles B. Hembling & Sons, Inc.
Mitchell Herman
Service Fabrics, Inc.
Rudolf H. Hertz
Consultant
Charles Hockey
Pat Keelen & Sons, Inc.
Lee M. Horner
Wyman Ford, Inc.
Charles B. Hummel
Hummel Machine & Tool Co.
Charles Infusino
Little Falls Shop-Rite, Inc.
Terry Ingram
Consultant
Phil Forte
Sandy Hill Building Supply Co.
Robert Israel
Kentshire Galleries, Ltd.
John E.Garippa, Esq.
Garippa, Lotz & Giannuario
Peter Jakobson, Jr.
Jakobson Properties, LLC
Theodore E. Gast
Gast & Nash, LLP
George G. Gellert
Atalanta Corp.
Kenneth Gensinger
Gensinger Motors
Jay Gerish
J. Gerish, Inc.
Alan Golub
Modern Electric Co.
Kenneth Jayson
Jayson Oil Company
Sanford Kalb
Private Investor
Edna Kanter
Passaic-Clifton Driv-Ur-Self
System, Inc.
Richard Kanter
Miller Construction
Jack Kaplowitz
Birch Lumber Company
Robert W. Landzettel
Lazon Paint & Wallpaper Co.
Joseph LaScala
Bell Mill Construction Co., Inc.
Stuart Lasser
Saturn of Denville,
Livingston & Mt. Olive
Herbert Lefkowitz
Consolidated Simon
Distributors, Inc.
Steven U. Leitner
Attorney-at-Law
Marc J. Lenner
Lester M. Entin Associates
Burton Lerner
Tenavision, Inc.
William Lerner
Imperial Parking Systems, Inc.
Donald Lesser
Pine Lesser & Sons
Larry Levy, Esq.
Marcus & Levy
Stewart C. Libes
Consultant
Robert Lieberman
All-Ways Advertising Company
Seymour Litwin
Prudential New Jersey Properties
Joseph A. Lobosco
Lobosco Insurance Group, LLC
Nathan Lubow
Consultant
Frank Luccarelli
Dearborn Farms, Inc.
Gerald A. Lustig
Acura of Denville
Samuel A. Magarino
Magarino Ford, Lincoln-
Mercury LLC
Richard Mandelbaum
Mandelbaum &
Mandelbaum Investors
Anthony F. Marangi
Marangi Waste
Anthony J. Marino
Century 21 Construction
Corporation
John J. Martello
John J. Martello Inc.
Stefano A. Masi
Masi, Boyle Associates
Lawrence J. Massaro
Lordina Builders, Inc.
Solomon Masters
Real Estate Consultant
Sara L. Mayes
Gemini Shippers Group
Anthony J. Mazzone
Innovation Data Processing, Inc.
Renee P. Mc.Guire
Mc Guire Auto Group, LLC
John V. McGrane
McGrane Mortgage Company
Dennis R. McKenna
Home Mark Homes, Inc.
Warren McManus
Boynton Benefi ts Corp.
William H. McNear
McNear Excavating, Inc.
Joseph Melone
San Carlo Restaurant
Roy G. Meyer
Consultant
Eugene Meyers
Hawthorne Chevrolet, Inc.
Fred J. Meyers
Preakness Chevrolet, Inc.
Alan Mirken
Aaron Publishing Group
Frank Misischia
FLM Graphics Corporation
Jeffrey Moll
Community Healthcare
Associates LLC.
Michael Moskowitz
Catanio Moskowitz &
Gutwetter, PC
Charles B. Moss, Jr.
Bow-Tie Building Times Square
Patrick Mucci, Jr.
Group Advisory, Inc.
John Nakashian
H. H. Nakashian & Sons
David Nappa
Wayne Ford, Inc./Dayton Toyota
Mitchell Nelson
Flag Luxury Properties
David Newton
Newrent, Inc.
Eric Nielsen
Dover Chrysler Plymount, Inc.
Barry G. Novin
Barry Novin Associates
Peter Nussbaum, M.D.
Associates in Ophthalmology
VNB ADVISORY BOARD
Steven Nussbaum
PF Pasbjerg
Development Company
Dennis C. Oberle
Mahwah Sales & Service, Inc.
Barry Segal
Bradco Supply Corp.
Robert A. Senior
Three County
Volkswagen Corporation
David Oostdyk
Royal Pontiac &
Oldsmobile, Inc.
Larry Pantirer
BNE Associates
Spiro Pappas
Comfort Inn
Hal Parnes
The Parnes Company
Ben Sher
Consultant
Ralph W Sifford
Grand Prize Motors
Charles I. Silberman
S. Parker Hardware
Manufacturing Corp.
Maria Silva
European Travel Agency
Kaiser Pathan
New Horizon Management Co.
Lee Silva
Silva & Silva, Inc.
Richard Pearson
Fleet Equipment Corporation
Albert Skoglund
Hiller & Skoglund, Inc.
Ronald Petillo
Petillo Enterprises, Inc.
Joseph Petito
Sunset Deli & Liquors
Joel I. Picket
Gotham Organization, Inc.
James R. Poole
Northmarq Capital
George Poydinecz
Developer
Audrey Rabinowitz
Plaza Research
David Rabinowitz
Plaza Research
Allan Sockol
Contemporary Motor Cars, Inc.
Roy Solondz
Roxbury Mortgage Co., Inc.
Arnold Speert
William Paterson University
Peter A. Spina
Wayne Motors, Inc.
Martin Statfeld
Brown & Brown Insurance
David Stavola
Stavola Companies
Marcia Toledano
990 AvAmericas Associates
Joshua Rabinowitz
American Dyestuff Corporation
Pasquale P. Tremonte
Fulton Building Co., Inc.
Mark Rachesky
MHR Fund Management
Company
Vincent Raine
Rubin & Raine, II, Inc.
Lawrence Rappaport, Esq.
Attorney-at-Law
Harvey Ravner
Private Investor
Robert Ringley
Ber Plastics, Inc.
Vincent Riviello
Atlantic Coast Fibers, LLC
Robert X. Robertazzi
Liberty Lincoln-Mercury, Inc.
Edward J. Rossi
Rossi Chevrolet Pontiac
Oldsmobile Buick GMC, Inc.
Stacey Rudbart
J.B. Hanauer
Vincent Russo
Vincent J. Russo Realty Co.
Anthony Sa
Sa & Sons Construction Co., Inc.
Mort Salkind
Fox Development
Leonard Schlussel
Welbilt Equipment Corporation
Richard Tully
Kearny Shop-Rite
Richard Ullman
Benecard, LLC
John Usdan
Midwood Management
Corporation
Salvatore Valente
Bildisco Door
Manufacturing Co., Inc.
Marvin Van Dyk
Van Dyk Health Care, Inc.
William Van Ness
Van Ness Plastic Molding Co.
Stella Visaggio
Hackettstown Regional
Medical Hospital
Sanford C. Vogel
Retired
J. Robert Warncke
Bob Warncke Associates
Warren Waters
River Development, LLC
Arthur M. Weis
Capintec, Inc.
John V. Werner
Werners Automotive, Inc.
Michael Wildstein
Apache Mills
Stephen Wildstein
Apache Mills
Eric Witmondt
Woodmont Properties, LLC
Rudolf F. Wobito
Wobito Construction
James Wolff
Chiropractor
Brett Woodward
Woodward Construction Co.
J. Scott Wright
Graphic Management, Inc.
Professional Group
Advisory Council
(PGAC)
Rand M. Agins, Esq.
Lasser Hochman, L.L.C.
Edward J. Albowicz, Esq.
Wilentz, Goldman & Spitzer, PA
Thomas J. Angell, CPA
Rothstein, Kass & Company, P.C.
Fredric F. Azrak, Esq.
Azrak & Associates, LLC
Spiros Backos, CPA
Backos & Associates, PC
Khoren M. Bandazian, Esq.
Carella, Byrne, Bain, Gilfi llan,
Cecchi, Stewart & Olstein
Joseph L. Basralian, Esq.
Winne, Banta, Hetherington,
Basralian & Kahn, P.C.
Michael R. Belfer, CPA
Anchin, Block & Anchin LLP
Thomas J. Benedetti, Esq.
Azzolini & Benedetti, LLC
Michael V. Benedetto, Esq.
Ansell, Zaro, Grimm & Aaron, PC
Gary D. Bennett, Esq.
Koch Koch & Bennett
Saul G. Berkowitz, CPA
RSM McGladrey, Inc.
Robert J. Blackwell, CPA
Levine Jacobs & Company, L.L.C.
Joseph W. Boyle, CPA
Meisel, Tuteur & Lewis, P.C.
Milton Brown, PA
Robert Burney, Esq.
Lindabury, McCormick,
Estabrook,& Cooper, PC
Frank A. Carlet, Esq.
Carlet, Garrison, Klein &
Zaretsky, L.L.P.
Terri A. Coffel, CPA
Citrin Cooperman and
Company, LLP
Barry A. Cohen, Esq.
Gelman Gelman Wiskow &
McCarthy, LLC
Frederick L. Cohen, CPA
Weiser, LLP
Robert C. Masessa, Esq.
Masessa & Cluff
Jonathan T. K. Cohen, Esq.
Law Offi ces of Jonathan T.K.
Cohen, PC
Donna M. Conroy, Esq.
Frieri Conroy & Lombardo, LLC
Ralph A. Contini, CPA
Ralph A. Contini, CPA, LLC
Nino A. Coviello, Esq.
Saiber LLC
Robert J. Crigler, CPA
WithumSmith+Brown PC
Roger J. Desiderio, Esq.
Bendit Weinstock, P.A.
Howard P. Dorman, CPA
Weiser, LLP
Carol O. Egan, CPA
Cowan, Gunteski & Co., PA
John D. Fanburg, Esq.
WolfBlock
Gary R. Feitlin, Esq.
Feitlin, Youngman, Karas &
Youngman, LLC
Ted M. Felix, CPA
Lazar Levine & Felix LLP
W. Raymond Felton, Esq.
Greenbaum, Rowe, Smith &
Davis, LLP
Robert A. Fodera, CPA
Beard Miller Company LLP
Paul A. Fried, CPA
Smolin, Lupin & Co., PA
Michael A. Gallo, Esq.
Schenck, Price, Smith & King, LLP
John A. Giunco, Esq.
Giordano, Halleran & Ciesla, P.C.
Ralph Heiman, CPA
Sax Macy Fromm & Co., PC
Milton E. Kahn, CPA
Amper, Politziner & Mattia, P.A.
Lynne Z. Karinja, CPA
Lynne Karinja & Associates, LLC
Timothy J. King, CPA
Bederson & Company LLP
Herbert C. Klein, Esq.
Nowell Amoroso Klein Bierman, PC
Michael LaForge, CPA
Sobel & Company, LLC
Diane M. Lavenda, Esq.
Sills, Cummis & Gross PC
Michael McLafferty, CPA
Amper, Politziner & Mattia, P.A.
William C. McNamara, CPA
Cowan, Gunteski & Co., PA
Steven M. Merdinger, CPA
Konigsberg, Wolf &
Company, P.C.
Alan Merker, CPA
Morris Merker & Co., L.L.C.
Sheila Mints, Esq.
Coughlin Duffy, LLP
Bruce Nadler, CPA
M.S. Ackerman & Co,. LLP
Michael L. Ostrowsky, Esq.
Bressler, Amery & Ross, P.C.
Dilip S. Patel, CPA
Dilip Patel & Company, LLP
Jonathan Perelman, CPA
Friedman LLP
Stephen A. Ploscowe, Esq.
Fox Rothschild LLP
Wayne J. Positan, Esq.
Lum, Drasco & Positan, LLC
Patrick J. Power, CPA
WithumSmith+Brown, PC
Richard Puzo, CPA
J.H. Cohn, LLP
Mark S. Rattner, Esq.
Riker Danzig, LLP
Kenneth Lowell Rose, Esq.
Donald J. Saltzman, CPA
Leaf, Saltzman, Manganelli,
Pfeil & Tendler, LLP
Nicholas San Filippo, IV, Esq.
Lowenstein Sandler, PC
Theodore E. Schiller, Esq.
Schiller & Pittenger, P.C.
Mark W. Schlussel, Esq.
Zeichner Ellman & Krause LLP
Barry D. Shapiro, CPA
WithumSmith+Brown, PC
Allan Starr, Esq.
Starr Associates LLP
David A. Sussman, Esq.
Day Pitney LLP
William S. Taylor, Esq.
Richard C. Tobin, CPA
Tobin & Collins, C.P.A., PA
Bruce Levinson, CPA
Hertz, Herson & Company LLP
Jeffrey D. Urbach, CPA
Urbach & Avraham, CPAs, LLP
Tom Loikith, Esq.
Harwood Lloyd, LLC
Douglas W. Lubic, Esq.
Wilentz, Goldman & Spitzer P.A.
Saul Lupin, CPA
Smolin, Lupin & Co., P.A.
Barry R. Mandelbaum, Esq.
Mandelbaum, Salsburg, Gold,
Lazris, Discenza & Steinberg, P.C.
Richard H. Weisinger, Esq.
Roberta S. Weisinger, Esq.
Peter R. Yarem, Esq.
Genova, Burns & Vernoia
Leo J. Zatta, CPA
Wiss & Company, LLP
10 VALLEY NATIONAL BANCORP
VALLEY NATIONAL BANCORP 11
VALLEY NATIONAL BANCORP 11
SHAREHOLDER RELATIONS
Corporate Address
Valley National Bancorp
1455 Valley Road
Wayne, New Jersey 07470
(973) 305-8800
Form 10-K
Persons may obtain a copy of
Valley National Bancorp’s 2007
Annual Report or Form 10-K by
submitting a request in writing to:
Dianne M. Grenz
First Senior Vice President
Director of Marketing
Shareholder & Public Relations Dept.
Valley National Bancorp
1455 Valley Road
Wayne, New Jersey 07470
dgrenz@valleynationalbank.com
Financial Information
Investors, security analysts and
others seeking fi nancial information
should submit a request in writing to:
Alan D. Eskow, CPA
Executive Vice President,
Chief Financial Offi cer &
Corporate Secretary
Valley National Bancorp
1455 Valley Road
Wayne, New Jersey 07470
aeskow@valleynationalbank.com
Mitchell L. Crandell, CPA
Senior Vice President, & Controller
Principal Accounting Offi cer
Valley National Bancorp
1455 Valley Road
Wayne, New Jersey 07470
mcrandell@valleynationalbank.com
Dianne M. Grenz
First Senior Vice President
Mitchell L. Crandell, CPA
Senior Vice President
Shareholder Inquiries, Dividend
Reinvestment Plan, and
Registrar and Transfer Agent
For information regarding share
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
Stock Listing
Valley National Bancorp common
stock is traded on the New York Stock
Exchange under the symbol VLY.
Annual Meeting
April 14, 2009
10:00 AM
Crowne Plaza Fairfi eld
(formerly Prime Hotel & Suites)
690 Route 46 East
Fairfi eld, NJ 07004
12 VALLEY NATIONAL BANCORP
UNITED STATES
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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
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
Common Stock, no par value
VNB Capital Trust I
7.75% Trust Originated Securities
(and the Guarantee by Valley National Bancorp with
respect thereto)
Warrants to purchase Common Stock
Name of exchange on which registered
New York Stock Exchange
New York Stock Exchange
NASDAQ Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes Í
No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ‘
No Í
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 registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act (check one):
Large accelerated filer Í
Accelerated filer ‘
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Smaller reporting company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ‘
No Í
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1.8 billion on June 30,
2008.
There were 135,024,030 shares of Common Stock outstanding at February 24, 2009.
Documents incorporated by reference:
Certain portions of the registrant’s Definitive Proxy Statement (the “2009 Proxy Statement”) for the 2009 Annual Meeting of
Shareholders to be held April 14, 2009 will be incorporated by reference in Part III. The 2009 proxy statement will be filed within 120
days of December 31, 2008.
Page
3
12
19
19
19
19
20
22
24
63
64
64
65
66
68
70
123
125
125
128
128
128
128
128
128
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Market for Registrant’s Common Equity, Related Stockholder 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Reports of Independent Registered Public Accounting Firms
Item 9.
Item 9A.
Item 9B.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129
133
2
Item 1. Business
PART I
The disclosures set forth in this item are qualified by Item 1A—Risk Factors and the section captioned
“Cautionary Statement Concerning Forward-Looking Statements” in Item 7—Management’s Discussion and
Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set
forth elsewhere in this report.
Valley National Bancorp, headquartered in Wayne, New Jersey, is a New Jersey corporation organized in
1983 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended
(“Holding Company Act”). The words “Valley,” “the Company,” “we,” “our” and “us” refer to Valley National
Bancorp and its wholly owned subsidiaries, unless we indicate otherwise. At December 31, 2008, Valley had
consolidated total assets of $14.7 billion, total loans of $10.1 billion, total deposits of $9.2 billion and total
shareholders’ equity of $1.4 billion. In addition to its principal subsidiary, Valley National Bank (commonly
referred to as the “Bank” in this report), Valley owns all of the voting and common shares of VNB Capital Trust
I and GCB Capital Trust III, through which trust preferred securities were issued. VNB Capital Trust I and GCB
Capital Trust III are not consolidated subsidiaries. See Note 12 of the consolidated financial statements.
Valley National Bank is a national banking association chartered in 1927 under the laws of the United
States. Currently, the Bank has 195 full-service banking offices located throughout northern and central New
Jersey and New York City. The Bank provides a full range of commercial and retail banking services. These
services include the following: the acceptance of demand, savings and time deposits; extension of consumer, real
estate, commercial loans; equipment leasing; personal and corporate trust, and pension and fiduciary services.
Valley National Bank’s wholly-owned subsidiaries are all included in the consolidated financial statements
of Valley (See Exhibit 21 at Part IV, Item 15 for a complete list of subsidiaries). These subsidiaries include a
mortgage servicing company; a title insurance agency; asset management advisors which are Securities and
Exchange Commission (“SEC”) registered investment advisors; an all-line insurance agency offering property
and casualty, life and health insurance; subsidiaries which hold, maintain and manage investment assets for the
Bank; 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 specializes in health care equipment and other commercial equipment leases. The Bank’s
subsidiaries also include real estate investment trust subsidiaries (the “REIT” subsidiaries) which own real estate
related investments and a REIT subsidiary which owns some of the real estate utilized by the Bank and related
real estate investments. Except for Valley’s REIT subsidiaries, all subsidiaries mentioned above are directly or
indirectly wholly-owned by the Bank. Because each REIT must have 100 or more shareholders to qualify as a
REIT, each REIT has issued less than 20 percent of their outstanding non-voting preferred stock to individuals,
most of whom are non-senior management Bank employees. The Bank owns the remaining preferred stock and
all the common stock of the REITs.
Valley National Bank has four business segments it monitors and reports on to manage its business
operations. These segments are consumer lending, commercial lending, investment management, and corporate
and other adjustments. Valley’s Wealth Management Division comprised of trust, asset management and
insurance services, is included in the consumer lending segment. For financial data on the four business segments
see Note 19 of the consolidated financial statements.
SEC Reports and Corporate Governance
We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K and amendments thereto available on our 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 Code
of Conduct and Ethics that applies to all of our employees including our executive officers and directors,
Valley’s Audit and Risk Committee Charter, Valley’s Compensation and Human Resources Committee Charter,
Valley’s Nominating and Corporate Governance Committee Charter as well as Valley’s Corporate Governance
Guidelines.
3
We filed the certifications of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 with respect to our Annual Report on Form
10-K as exhibits to this Report. Our CEO submitted the required annual CEO’s Certification regarding the New
York Stock Exchange’s corporate governance listing standards within the required timeframe after the 2008
annual shareholders’ meeting.
Additionally, we will provide without charge, a copy of our Annual Report on Form 10-K or the Code of
Conduct and Ethics 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 and we face substantial competition
in all phases of our operations. We compete with other providers of financial services such as other bank holding
companies, commercial banks, savings institutions, credit unions, 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. De novo branching by several national financial institutions and mergers between
financial institutions within New Jersey and New York, as well as other neighboring states have heightened the
competitive pressure in our primary markets. We compete by offering quality products and convenient services at
competitive prices (including interest rates paid on deposits, interest rates charged on loans and fees charged for
other non-interest related services). We continually review our products, locations, alternative delivery channels
and various acquisition prospects and periodically engage in discussions regarding possible acquisitions to
maintain and enhance our competitive position.
Employees
At December 31, 2008, Valley National Bank and its subsidiaries employed 2,783 full-time equivalent
persons. Management considers relations with its employees to be satisfactory.
4
Executive Officers
Names
Gerald H. Lipkin . . . . . . . .
Peter Crocitto . . . . . . . . . .
Albert L. Engel . . . . . . . . .
Alan D. Eskow . . . . . . . . .
James G. Lawrence . . . . . .
Robert M. Meyer . . . . . . . .
Elizabeth E. De Laney . . .
Kermit R. Dyke . . . . . . . . .
Robert E. Farrell . . . . . . . .
Richard P. Garber . . . . . . .
Eric W. Gould . . . . . . . . . .
Robert J. Mulligan . . . . . .
Russell C. Murawski . . . . .
John H. Noonan . . . . . . . .
Stephen P. Davey . . . . . . .
Robert A. Ewing . . . . . . . .
Age at
December 31,
2008
Executive
Officer
Since
Office
67
51
60
60
65
62
44
61
62
65
40
61
59
62
53
54
1975
Chairman of the Board, President and Chief Executive
Officer of Valley and Valley National Bank
1991
Executive Vice President, Chief Operating Officer of Valley
and Valley National Bank
1998
Executive Vice President of Valley and Valley National
Bank
1993
Executive Vice President, Chief Financial Officer and
Corporate Secretary of Valley and Valley National Bank
2001
Executive Vice President of Valley and Valley National
Bank
1997
Executive Vice President of Valley and Valley National
Bank
2007
2001
1990
1992
2001
1991
2007
2006
2002
2007
First Senior Vice President of Valley National Bank
First Senior Vice President of Valley National Bank
First Senior Vice President of Valley National Bank
First Senior Vice President of Valley National Bank
First Senior Vice President of Valley National Bank
First Senior Vice President of Valley National Bank
First Senior Vice President of Valley National Bank
First Senior Vice President of Valley National Bank
Senior Vice President of Valley National Bank
Senior Vice President of Valley National Bank
All officers serve at the pleasure of the Board of Directors.
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 Valley or Valley National Bank. 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 other 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
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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 the Bank 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.
Troubled Asset Relief Program Capital Purchase Program
In response to the financial crises affecting the banking system and financial markets and going concern
threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic
Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury was given
the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and
certain other financial instruments from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets.
On October 14, 2008, the Secretary of the U.S. Department of the Treasury announced that the Treasury will
purchase equity stakes in a wide variety of banks and thrifts. Under the program, known as the Troubled Asset
Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), from the $700 billion
authorized by the EESA, the Treasury made $250 billion of capital available to U.S. financial institutions in the
form of preferred stock. In conjunction with the purchase of preferred stock, the Treasury received, from
participating financial institutions, warrants to purchase common stock with an aggregate market price equal to
15% of the preferred investment. Participating financial institutions were required to adopt the Treasury’s
standards for executive compensation and corporate governance for the period during which the Treasury holds
equity issued under the TARP Capital Purchase Program.
At the invitation of the United States Treasury, we decided in November 2008 to enter into a Securities
Purchase Agreement with the Treasury that provides for our participation in the TARP Capital Purchase
Program. On November 14, 2008, Valley issued and sold to the Treasury 300,000 shares of Valley Fixed Rate
Cumulative Perpetual Preferred Stock, with a liquidation preference of $1 thousand per share, and a ten-year
warrant to purchase up to 2.3 million shares of Valley’s common stock at an exercise price of $19.59 per share.
Under the terms of the TARP program, the Treasury’s consent will be required for any increase in our dividends
paid to common stockholders (above a quarterly dividend of $0.20 per common share) or Valley’s redemption,
purchase or acquisition of Valley common stock or any trust preferred securities issued by Valley capital trusts
until the third anniversary of the Valley senior preferred share issuance to the Treasury unless prior to such third
anniversary the senior preferred shares are redeemed in whole or the Treasury has transferred all of these shares
to third parties.
Participants in the TARP Capital Purchase Program were required to accept several compensation-related
limitations associated with this Program. Each of our senior executive officers in November 2008 agreed in
6
writing to accept the compensation standards in existence at that time under the program and thereby cap or
eliminate some of their contractual or legal rights. The provisions agreed to were as follows:
•
•
•
•
No golden parachute payments.
“Golden parachute payment” under the TARP Capital Purchase Program
means a severance payment resulting from involuntary termination of employment, or from bankruptcy of
the employer, that exceeds three times the terminated employee’s average annual base salary over the five
years prior to termination. Our senior executive officers have agreed to forego all golden parachute
payments for as long as two conditions remain true: They remain “senior executive officers” (CEO, CFO
and the next three highest-paid executive officers), and the Treasury continues to hold our equity or debt
securities we issued to it under the TARP Capital Purchase Program (the period during which the Treasury
holds those securities is the “TARP Capital Purchase Program Covered Period.”).
Recovery of EIP Awards and Incentive Compensation if Based on Certain Material Inaccuracies. Our
senior executive officers have also agreed to a “clawback provision,” which means that we can recover
incentive compensation paid during the TARP Capital Purchase Program Covered Period that is later found
to have been based on materially inaccurate financial statements or other materially inaccurate
measurements of performance.
No Compensation Arrangements That Encourage Excessive Risks. During the TARP Capital Purchase
Program Covered Period, we are not allowed to enter into compensation arrangements that encourage senior
executive officers to take “unnecessary and excessive risks that threaten the value” of our company. To
make sure this does not happen, Valley’s Compensation Committee is required to meet at least once a year
with our senior risk officers to review our executive compensation arrangements in the light of our risk
management policies and practices. Our senior executive officers’ written agreements include their
obligation to execute whatever documents we may require in order to make any changes in compensation
arrangements resulting from the Compensation Committee’s review.
Limit on Federal Income Tax Deductions. During the TARP Capital Purchase Program Covered Period,
we are not allowed to take federal income tax deductions for compensation paid to senior executive officers
in excess of $500,000 per year, with certain exceptions that do not apply to our senior executive officers.
See “Tax and Accounting Considerations” below.
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the
“Stimulus Act”) into law. The Stimulus Act modified the compensation-related limitations contained in the
TARP Capital Purchase Program, created additional compensation-related limitations and directed the Secretary
of the Treasury to establish standards for executive compensation applicable to participants in TARP, regardless
of when participation commenced. Thus, the newly enacted compensation-related limitations are applicable to
Valley and to the extent the Treasury may implement these restrictions unilaterally Valley will apply these
provisions. The provisions may be retroactive. In their November 2008 agreements our executives did not waive
their contract or legal rights with respect to these new and retroactive provisions; other officers now covered by
these provisions were not asked and did not agree to waive their contract or legal rights. The compensation-
related limitations applicable to Valley which have been added or modified by the Stimulus Act are as follows,
which provisions must be included in standards established by the Treasury:
•
•
No severance payments. Under the Stimulus Act “golden parachutes” were redefined as any severance
payment resulting from involuntary termination of employment, or from bankruptcy of the employer, except
for payments for services performed or benefits accrued. Consequently under the Stimulus Act Valley is
prohibited from making any severance payment to our “senior executive officers” (defined in the Stimulus
Act as the five highest paid senior executive officers) and our next five most highly compensated employees
during the TARP Capital Purchase Program Covered Period.
Recovery of Incentive Compensation if Based on Certain Material Inaccuracies.
The Stimulus Act also
contains the “clawback provision” discussed above but extends its application to any bonus awards and
other incentive compensation paid to any of our senior executive officers or next 20 most highly
compensated employees during the TARP Capital Purchase Program Covered Period that is later found to
have been based on materially inaccurate financial statements or other materially inaccurate measurements
of performance.
7
•
•
•
•
•
•
No Compensation Arrangements That Encourage Earnings Manipulation. Under the Stimulus Act, during
the TARP Capital Purchase Program Covered Period, we are not allowed to enter into compensation
arrangements that encourage manipulation of the reported earnings of Valley to enhance the compensation
of any of our employees.
Limit on Incentive Compensation.
The Stimulus Act contains a provision that prohibits the payment or
accrual of any bonus, retention award or incentive compensation to any of our senior executive officers and
our next 10 most highly compensated employees during the TARP Capital Purchase Program Covered
Period other than awards of long-term restricted stock that (i) do not fully vest during the TARP Capital
Purchase Program Covered Period, (ii) have a value not greater than one-third of the total annual
compensation of the awardee and (iii) are subject to such other restrictions as determined by the Secretary of
the Treasury. We do not know whether the award of incentive stock options are covered by this prohibition.
The prohibition on bonus, incentive compensation and retention awards does not preclude payments
required under written employment contracts entered into on or prior to February 11, 2009.
Compensation and Human Resources Committee Functions.
The Stimulus Act requires that our
Compensation and Human Resources Committee be comprised solely of independent directors and that it
meet at least semiannually to discuss and evaluate our employee compensation plans in light of an
assessment of any risk posed to us from such compensation plans.
Compliance Certifications.
The Stimulus Act also requires a written certification by our Chief Executive
Officer and Chief Financial Officer of our compliance with the provisions of the Stimulus Act. These
certifications must be contained in Valley’s Annual Report on Form 10-K [and are contained in this year’s
Form 10-K].
Treasury Review Excessive Bonuses Previously Paid.
The Stimulus Act directs the Secretary of the
Treasury to review all compensation paid to our senior executive officers and our next 20 most highly
compensated employees to determine whether any such payments were inconsistent with the purposes of the
Stimulus Act or were otherwise contrary to the public interest. If the Secretary of the Treasury makes such a
finding, the Secretary of the Treasury is directed to negotiate with the TARP Capital Purchase Program
recipient and the subject employee for appropriate reimbursements to the federal government with respect to
the compensation and bonuses.
Say on Pay. Under the Stimulus Act the SEC is required to promulgate rules requiring a non-binding say
on pay vote by the shareholders on executive compensation at the annual meeting during the TARP Capital
Purchase Program Covered Period.
Regulation of Bank Subsidiary
Valley National Bank 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, bank acquisitions 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 law, no bank subsidiary may,
subject 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.
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 by the Bank. The Bank’s dividend payments, without
prior regulatory approval, are subject to regulatory limitations. Under the National Bank Act, dividends may be
8
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 the Bank 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. See other dividend limitations to common stockholders under
the “Troubled Asset Relief Program Capital Purchase Program” section above.
Loans to Related Parties
Valley National Bank’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
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 the Bank’s capital. In
addition, extensions of credit in excess of certain limits must be approved by the Bank’s Board of Directors.
Under the Sarbanes-Oxley Act, Valley and its subsidiaries, other than the Bank, may not extend or arrange for
any personal loans to its directors and executive officers.
less stringent
than,
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. Valley National Bank received a “satisfactory” CRA rating in its most recent
examination.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 added new legal requirements for public companies affecting corporate
governance, accounting and corporate reporting.
The Sarbanes-Oxley Act of 2002 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 outside auditors;
certification of financial statements within the Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q 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;
9
•
•
•
•
•
•
•
•
•
disclosure of off-balance sheet transactions;
two-business day filing requirements for insiders filing on Form 4;
disclosure of a code of ethics for financial officers and filing a Current Report on 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 creation of the Public Company Accounting Oversight Board (“PCAOB”);
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 the effectiveness of internal control over financial
reporting.
Each of the national stock exchanges, including the New York Stock Exchange (“NYSE”) where Valley
common securities are listed and the NASDAQ Capital Market, where certain Valley warrants are listed, have
implemented 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 the NYSE Rule.
USA PATRIOT Act
As part of the USA PATRIOT Act, Congress adopted the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 (the “Anti Money Laundering Act”). The Anti Money Laundering 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 Anti Money Laundering 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 Anti Money Laundering 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.
Regulations implementing the due diligence requirements, 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. The OCC, along with other banking agencies, have strictly enforced
various anti-money laundering and suspicious activity reporting requirements using formal and informal
enforcement tools to cause banks to comply with these provisions.
The Anti Money Laundering 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.
10
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 (“Gramm-Leach-Bliley Act”) became
effective in early 2000. The Gramm-Leach-Bliley Act provides for the following:
•
•
•
•
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,
in
commercial and financial companies;
including insurance underwriting and making merchant banking investments
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. Valley has not
elected to become a financial holding company.
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. Valley National Bank sold its one wholly owned financial subsidiary, Glen Rauch Securities, Inc,
on March 31, 2008.
The Gramm-Leach-Bliley 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
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.
11
Temporary Liquidity Guarantee Program
On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary
Liquidity Guarantee Program (“TLG Program”). The TLG Program was announced by the FDIC on October 14,
2008, preceded by the determination of systemic risk by the Secretary of the U.S. Department of the Treasury
(after consultation with the President), as an initiative to counter the system-wide crisis in the nation’s financial
sector. Under the TLG Program the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012,
certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and
before June 30, 2009 and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction
deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum
and Interest on Lawyers Trust Accounts held at participating FDIC- insured institutions through December 31,
2009. Coverage under the TLG Program was available for the first 30 days without charge. The fee assessment
for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on
the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter
on amounts in covered accounts exceeding $250,000. During the first week of December 2008, we elected to
participate in both guarantee programs.
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 Gramm-Leach-Bliley 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. Valley National Bank’s capital ratios were all above the minimum levels required for it to be
considered a “well capitalized” financial institution at December 31, 2008.
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 1A. Risk Factors
An investment
in our securities is subject to risks inherent in our business. The material risks and
uncertainties that management believes affect Valley are described below. Before making an investment
decision, you should carefully consider the risks and uncertainties described below together with all of the other
12
information included or incorporated by reference in this report. The risks and uncertainties described below are
not the only ones facing Valley. Additional risks and uncertainties that management is not aware of or that
management currently believes are immaterial may also impair Valley’s business operations. The value or
market price of our securities could decline due to any of these identified or other risks, and you could lose all or
part of your investment. This report is qualified in its entirety by these risk factors.
Recent Negative Developments in the Financial Services Industry and U.S. and Global Credit Markets May
Adversely Impact Our Operations and Results.
Negative developments in the latter half of 2007 throughout 2008 and 2009 to date in the capital markets
have resulted in uncertainty in the financial markets in general with the expectation of the general economic
downturn for the remainder of 2009 and possibly beyond. Loan portfolio performances have deteriorated at many
institutions resulting from, amongst other factors, a weak economy and a decline in the value of the collateral
supporting their loans. The competition for our deposits has increased significantly due to liquidity concerns at
many of these same institutions. Stock prices of bank holding companies, like ours, have been negatively
affected by the current condition of the financial markets, as has our ability, if needed, to raise capital or borrow
in the debt markets compared to recent years. As a result, there is a potential for new federal or state laws and
regulations regarding lending and funding practices and liquidity standards, and financial institution regulatory
agencies are expected to be very aggressive in responding to concerns and trends identified in examinations,
including the expected issuance of many formal enforcement actions. Negative developments in the financial
services industry and the impact of new legislation in response to those developments could negatively impact
our operations by restricting our business operations, including our ability to originate or sell loans, and
adversely impact our financial performance.
Declines in Value May Adversely Impact the Investment Portfolio.
As of December 31, 2008, we had approximately $1.4 billion and $1.2 billion in available for sale and held
to maturity investment securities, respectively. We may be required to record impairment charges (or mark-to-
market adjustments) on our investment securities if they suffer a decline in value that is considered other-than-
temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of
reliable pricing information for investment securities, adverse changes in business climate, adverse actions by
regulators, or unanticipated changes in the competitive environment could have a negative effect on our
investment portfolio in future periods. If an impairment charge is significant enough it could affect the ability of
our Bank to upstream dividends to us, which could have a material adverse effect on our liquidity and our ability
to pay dividends to shareholders and could also negatively impact our regulatory capital ratios and result in our
Bank not being classified as “well-capitalized” for regulatory purposes.
Changes in Interest Rates Can Have an Adverse Effect on Profitability.
Valley’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is
the difference between interest income earned on interest-earning assets, such as loans and investment securities,
and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are
sensitive to many factors that are beyond Valley’s control, including general economic conditions, competition,
and policies of various governmental and regulatory agencies and, in particular, the policies of the Board of
Governors of the Federal Reserve. Changes in monetary policy, including changes in interest rates, could
influence not only the interest Valley receives on loans and investment securities and the amount of interest it
pays on deposits and borrowings, but such changes could also affect (i) Valley’s ability to originate loans and
obtain deposits, (ii) the fair value of Valley’s financial assets and liabilities, including the held to maturity,
available for sale, and trading securities portfolios, and (iii) the average duration of Valley’s interest-earning
assets. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates
than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate
indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same
degree over a given time period (basis risk), and the risk of changing interest rate relationships across the
spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk),
including a
prolonged flat or inverted yield curve environment.
13
Although management believes it has implemented effective asset and liability management strategies to
reduce the potential effects of changes in interest rates on Valley’s results of operations, any substantial,
unexpected, prolonged change in market interest rates could have a material adverse effect on Valley’s financial
condition and results of operations.
The Price of Our Common Stock May Fluctuate.
The price of our common stock on the NYSE constantly changes and recently, given the uncertainty in the
financial markets, has fluctuated widely. We expect that the market price of our common stock will continue to
fluctuate. Holders of our common stock will be subject to the risk of volatility and changes in prices.
Our common stock price can fluctuate as a result of a variety of factors, many of which are beyond our
control. These factors include:
•
•
•
•
•
•
•
•
•
quarterly fluctuations in our operating and financial results;
operating results that vary from the expectations of management, securities analysts and investors;
changes in expectations as to our future financial performance, including financial estimates by
securities analysts and investors;
events negatively impacting the financial services industry which result in a general decline in the
market valuation of our common stock;
announcements of material developments affecting our operations or our dividend policy;
future sales of our equity securities;
new laws or regulations or new interpretations of existing laws or regulations applicable to our
business;
changes in accounting standards, policies, guidance, interpretations or principles; and
general domestic economic and market conditions.
In addition, recently the stock market generally has experienced extreme price and volume fluctuations, and
industry factors and general economic and political conditions and events, such as economic slowdowns or
recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of
our operating results.
Liquidity Risk.
Liquidity risk is the potential that Valley will be unable to meet its obligations as they come due, capitalize
on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or
obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.
Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and
other loan originations, withdrawals by depositors, repayment of borrowings, dividends to shareholders,
operating expenses and capital expenditures.
Liquidity is derived primarily from retail deposit growth and retention; principal and interest payments on
loans; principal and interest payments on investment securities; sale, maturity and prepayment of investment
securities; net cash provided from operations and access to other funding sources.
Our access to funding sources in amounts adequate to finance our activities could be impaired by factors
that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our
access to liquidity sources include a decrease in the level of our business activity due to a market downturn or
adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific
to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects
for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic
and worldwide credit markets deteriorates.
14
We May be Adversely Affected by the Soundness of Other Financial Institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other
relationships. We have exposure to many different
industries and counterparties, and routinely execute
transactions with counterparties in the financial services industry, including the Federal Home Loan Bank of
New York, commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of
these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our
credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not
sufficient to recover the full amount due to us. Any such losses could have a material adverse effect on our
financial condition and results of operations.
Competition in the Financial Services Industry.
Valley faces substantial competition in all areas of its operations from a variety of different competitors,
many of which are larger and may have more financial resources than Valley. Valley competes with other
providers of financial services such as commercial and savings banks, savings and loan associations, credit
unions, money market and mutual funds, mortgage companies,
insurance
companies and a large list of other local, regional and national institutions which offer financial services.
Mergers between financial institutions within New Jersey and in neighboring states have added competitive
pressure. If Valley is unable to compete effectively, it will lose market share and its income generated from
loans, deposits, and other financial products will decline.
title agencies, asset managers,
Our Preferred Shares Impact Net Income Available to Our Common Stockholders and Our Earnings Per
Share.
As long as there are senior preferred shares outstanding, no dividends may be paid on our common stock
unless all dividends on the senior preferred shares have been paid in full. The dividends declared on our fixed
rate preferred shares will reduce the net income available to common shareholders and our earnings per common
share. Additionally, warrants to purchase Valley common stock issued to the Treasury Department,
in
conjunction with the preferred shares, may be dilutive to our earnings per share. The senior preferred shares will
also receive preferential treatment in the event of liquidation, dissolution or winding up of Valley.
Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by
our board of directors. Although we have historically declared cash dividends on our common stock, we are not
required to do so and our board of directors may reduce or eliminate our common stock dividend in the future.
This could adversely affect the market price of our common stock.
Future Offerings of Debt or Other Securities May Adversely Affect the Market Price of Our Stock.
In the future, we may attempt to increase our capital resources or, if our or Valley National Bank’s capital
ratios fall below the required minimums, we or Valley National Bank could be forced to raise additional capital
by making additional offerings of debt or preferred equity securities, including medium-term notes, trust
preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders of our debt
securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of
our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings
of our existing shareholders or reduce the market price of our common stock, or both. Holders of our common
stock are not entitled to preemptive rights or other protections against dilution.
Allowance For Loan Losses May Be Insufficient.
Valley maintains an allowance for loan losses based on, among other things, national and regional economic
conditions, historical loss experience and delinquency trends. However, Valley cannot predict loan losses with
certainty, and Valley cannot provide assurance that charge-offs in future periods will not exceed the allowance
for loan losses. If net charge-offs exceed Valley’s allowance, its earnings would decrease. In addition, regulatory
15
agencies review Valley’s allowance for loan losses and may require additions to the allowance based on their
judgment about information available to them at the time of their examination. Valley’s management could also
decide that the allowance for loan losses should be increased. An increase in Valley’s allowance for loan losses
could reduce its earnings.
Loss of Lower-Cost Funding Sources.
Checking and savings, NOW, and money market deposit account balances and other forms of customer
deposits can decrease when customers perceive alternative investments, such as the stock market, as providing a
better risk/return tradeoff. If customers move money out of bank deposits and into other investments, Valley
could lose a relatively low cost source of funds, increasing its funding costs and reducing Valley’s net interest
income and net income.
Changes in Primary Market Areas Could Adversely Impact Results of Operations and Financial Condition.
Much of Valley’s lending is in northern and central New Jersey and New York City. As a result of this
geographic concentration, a significant broad-based deterioration in economic conditions in New Jersey and the
New York City metropolitan area could have a material adverse impact on the quality of Valley’s loan portfolio,
and accordingly, Valley’s results of operations. Such a decline in economic conditions could restrict borrowers’
ability to pay outstanding principal and interest on loans when due, and, consequently, adversely affect the cash
flows of Valley’s business.
Valley’s loan portfolio is largely secured by real estate collateral. A substantial portion of the real and
personal property securing the loans in Valley’s portfolio is located in New Jersey and New York City.
Conditions in the real estate markets in which the collateral for Valley’s loans are located strongly influence the
level of Valley’s non-performing loans and results of operations. A decline in the New Jersey and New York City
metropolitan area real estate markets, as well as other external factors, could adversely affect Valley’s loan
portfolio.
Potential Acquisitions May Disrupt Valley’s Business and Dilute Shareholder Value.
Valley regularly evaluates merger and acquisition opportunities and conducts due diligence activities related
to possible transactions with other financial institutions and financial services companies. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions
involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a
premium over book and market values, and, therefore, some dilution of Valley’s tangible book value and net
income per common share may occur in connection with any future transaction. Furthermore, failure to realize
the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected
benefits from an acquisition could have a material adverse effect on Valley’s financial condition and results of
operations.
Implementation of Growth Strategies.
Valley has a strategic branch expansion initiative to expand its physical presence in New York City,
including Kings and Queens counties, New York, and fill in its markets within New Jersey. Additionally, in
2007, Valley expanded the geographic presence of its auto loan dealer network into Connecticut, which network
already includes Pennsylvania, New York, New Jersey, and Florida (the Florida dealer network was an
insignificant portion of our overall auto loan production in 2008 and 2007 and Valley stopped loan origination
activity in this state during February 2009). Valley can provide no assurances that it will successfully implement
or continue these initiatives.
Valley’s ability to successfully execute these initiatives depends upon a variety of factors, including its
ability to attract and retain experienced personnel, the continued availability of desirable business opportunities
and locations, the competitive responses from other financial institutions in Valley’s new market areas, and the
ability to manage growth. These initiatives could cause Valley’s expenses to increase faster than revenues.
16
There are considerable initial and on-going costs involved in opening branches, growing loans in new
markets, and attracting new deposit relationships. These expenses could negatively impact future earnings. For
example, it takes time for new branches and relationships to achieve profitability. Expenses could be further
increased if there are delays in the opening of new branches or if attraction strategies are more costly than
expected. Delays in opening new branches can be caused by a number of factors such as the inability to find
suitable locations, zoning and construction delays, and the inability to attract qualified personnel to staff the new
branch. In addition, there is no assurance that a new branch will be successful even after it has been established.
From time to time, Valley may implement new lines of business or offer new products and services within
existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly
in instances where the markets are not fully developed. Valley may invest significant time and resources to
develop and market new lines of business and/or products and services. Initial timetables for the introduction and
development of new lines of business and/or new products or services may not be achieved and price and
profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive
alternatives, and shifting customer preferences, may also impact the successful implementation of a new line of
business or a new product or service. Additionally, any new line of business and/or new product or service could
have a significant impact on the effectiveness of Valley’s system of internal controls. Failure to successfully
manage these risks could have a material adverse effect on Valley’s business, results of operations and financial
condition.
Changes in Accounting Policies or Accounting Standards.
Valley’s accounting policies are fundamental to understanding its financial results and condition. Some of
these policies require use of estimates and assumptions that may affect the value of Valley’s assets or liabilities
and financial results. Valley identified its accounting policies regarding the allowance for loan losses, security
valuations, goodwill and other intangible assets, and income taxes to be critical because they require
management to make difficult, subjective and complex judgments about matters that are inherently uncertain.
Under each of these policies, it is possible that materially different amounts would be reported under different
conditions, using different assumptions, or as new information becomes available.
From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change the financial
accounting and reporting standards that govern the form and content of Valley’s external financial statements. In
addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, SEC,
banking regulators and Valley’s outside auditors) may change or even reverse their previous interpretations or
positions on how these standards should be applied. Changes in financial accounting and reporting standards and
changes in current interpretations may be beyond Valley’s control, can be hard to predict and could materially
impact how Valley reports its financial results and condition. In certain cases, Valley could be required to apply a
new or revised standard retroactively or apply an existing standard differently (also retroactively) which may
result in Valley restating prior period financial statements in material amounts.
Extensive Regulation and Supervision.
Valley, primarily through its principal subsidiary, Valley National Bank, and certain non-bank subsidiaries,
is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to
protect depositors’ funds, federal deposit insurance funds and the banking system as a whole. Such laws are not
designed to protect Valley shareholders. These regulations affect Valley’s lending practices, capital structure,
investment practices, dividend policy and growth, among other things. Valley is also subject to a number of
federal laws, which, among other things, require it to lend to various sectors of the economy and population, and
establish and maintain comprehensive programs relating to anti-money laundering and customer identification.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible
changes, especially for the TARP Capital Purchase Program (which Valley is a participant). Changes to statutes,
regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations
or policies, could affect Valley in substantial and unpredictable ways. Such changes could subject Valley to
additional costs, limit the types of financial services and products it may offer and/or increase the ability of
17
non-banks to offer competing financial services and products, among other things. Failure to comply with laws,
regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation
damage, which could have a material adverse effect on Valley’s business, financial condition and results of
operations. Valley’s compliance with certain of these laws will be considered by banking regulators when
reviewing bank merger and bank holding company acquisitions. While Valley has policies and procedures
designed to prevent any such violations, there can be no assurance that such violations will not occur.
In particular, the documents that we executed with the Treasury when they purchased the senior preferred
stock allow the Treasury to unilaterally change the terms of the senior preferred stock or impose additional
requirements on Valley and/or the Bank if there is a change in law. These changes or additional requirements
could restrict Valley’s ability to conduct its business, could subject Valley to additional cost and expense or
could change the terms of the senior preferred stock agreement
to the detriment of Valley’s common
shareholders. While it may be possible for Valley to redeem the senior preferred stock in the event the Treasury
imposes any changes or additional requirements that Valley believes are detrimental, there can be no assurances
that Valley’s federal regulator will approve such redemption (as is required by law) or that Valley will have the
ability to implement such redemption.
Encountering Continuous Technological Change.
The financial services industry is continually undergoing rapid technological change with frequent
introductions of new technology-driven products and services. The effective use of technology increases
efficiency and enables financial institutions to better serve customers and to reduce costs. Valley’s future success
depends, in part, upon its ability to address the needs of its customers by using technology to provide products
and services that will satisfy customer demands, as well as to create additional efficiencies in Valley’s
operations. Many of Valley’s competitors have substantially greater resources to invest
in technological
improvements. Valley may not be able to effectively implement new technology-driven products and services or
be successful in marketing these products and services to its customers. Failure to successfully keep pace with
technological change affecting the financial services industry could have a material adverse impact on Valley’s
business and, in turn, Valley’s financial condition and results of operations.
Operational Risk.
Valley faces the risk that the design of its controls and procedures, including those to mitigate the risk of
fraud by employees or outsiders, may prove to be inadequate or are circumvented, thereby causing delays in
detection of errors or inaccuracies in data and information. Management regularly reviews and updates Valley’s
internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on certain assumptions and can provide
only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention
of Valley’s controls and procedures or failure to comply with regulations related to controls and procedures could
have a material adverse effect on Valley’s business, results of operations and financial condition.
Valley may also be subject to disruptions of its systems arising from events that are wholly or partially
beyond its control (including, for example, computer viruses or electrical or telecommunications outages), which
may give rise to losses in service to customers and to financial loss or liability. Valley is further exposed to the
risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same
risk of fraud or operational errors by their respective employees as is Valley) and to the risk that Valley’s (or its
vendors’) business continuity and data security systems prove to be inadequate.
Valley’s performance is largely dependent on the talents and efforts of highly skilled individuals. There is
intense competition in the financial services industry for qualified employees. In addition, Valley faces
increasing competition with businesses outside the financial services industry for the most highly skilled
individuals. Valley’s business operations could be adversely affected if it were unable to attract new employees
and retain and motivate its existing employees.
18
Claims and Litigation Pertaining to Fiduciary Responsibility.
From time to time as part of Valley’s normal course of business, customers make claims and take legal
action against Valley based on actions or inactions of Valley. If such claims and legal actions are not resolved in
a manner favorable to Valley, they may result in financial liability and/or adversely affect the market perception
of Valley and its products and services. This may also impact customer demand for Valley’s products and
services. Any financial liability or reputation damage could have a material adverse effect on Valley’s business,
which, in turn, could have a material adverse effect on its financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We conduct our business at 195 retail banking center locations, with 173 in northern and central New Jersey
and 22 in the New York City metropolitan area. We own 91 of our banking center facilities. The other facilities
are leased for various terms. Additionally, we have 12 other properties located in New Jersey and New York City
that were either owned or under contract to purchase or lease as of December 31, 2008. We intend to develop
these properties into new retail branch locations during 2009 and 2010.
Our principal business office is located at 1455 Valley Road, Wayne, New Jersey. Including our principal
business office, we own five office buildings in Wayne, New Jersey and one building in Chestnut Ridge, New
York which are used for various operations of Valley National Bank and its subsidiaries.
The total net book value of our premises and equipment (including land, buildings, leasehold improvements
and furniture and equipment) was $256.3 million at December 31, 2008. We believe that all of our properties and
equipment are well maintained, in good condition and adequate for all of our present and anticipated needs.
Item 3. Legal Proceedings
In the normal course of business, we may be a party to various outstanding legal proceedings and claims. In
the opinion of management, except for the lawsuits noted below, our consolidated statements of financial
condition or results of operations should not be materially affected by the outcome of such legal proceedings and
claims.
American Express Travel Related Services Company (“American Express”) filed a lawsuit against us in the
United States District Court, Southern District of New York alleging, among other claims, that we breached our
contractual and fiduciary duties to American Express in connection with our activities as a depository for
Southeast Airlines, a now defunct charter airline carrier. Two other parties brought similar claims related to the
same incident, and such claims were either dismissed by the court or settled for an immaterial amount. American
Express withdrew its lawsuit without prejudice in October of 2007. We believe Valley has meritorious defenses
to the action, if reinstated, but we cannot ensure that we will prevail in such potential future litigation or be able
to settle such litigation for an immaterial amount.
Item 4. Submission of Matters to a Vote of Security Holders
None.
19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded on the NYSE under the ticker symbol “VLY”. The following table sets forth
for each quarter period indicated the high and low sales prices for our common stock, as reported by the NYSE,
and the cash dividends declared per common share for each quarter. The amounts shown in the table below have
been adjusted for all stock dividends and stock splits.
Year 2008
Year 2007
High
Low
Dividend
High
Low
Dividend
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .
$19.70
19.57
24.75
23.90
$15.77
15.58
13.63
14.00
$0.20
0.20
0.20
0.20
$24.27
23.98
22.77
22.34
$21.90
21.18
19.70
16.50
$0.20
0.20
0.20
0.20
There were 8,843 shareholders of record as of December 31, 2008.
Restrictions on Dividends and Repurchases of Common Stock and Other Securities
The timing and amount of cash dividends paid depend on our earnings, capital requirements, financial
condition and other relevant factors. The primary source for dividends paid to our common stockholders is
dividends paid to us from Valley National Bank. Federal laws and regulations contain restrictions on the ability
of national banks, like Valley National Bank, to pay dividends. For information regarding these restrictions on
the Bank’s dividends, see “Item 1. Business—Supervision and Regulation—Dividend Limitations” above and
Note 16 to the consolidated financial statements contained in Item 8 of this report. In addition, under the terms of
the trust preferred securities issued by VNB Capital Trust I and GCB Capital Trust III, we could not pay
dividends on our common stock if we deferred payments on the junior subordinated debentures which provide
the cash flow for the payments on the trust preferred securities.
In November 2008, we issued 300,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
(commonly referred to as “senior preferred shares”) to the U.S. Department of the Treasury (the “Treasury”).
Until the earlier of the third anniversary of the issuance date or the date the Treasury no longer owns any of these
senior preferred shares, the consent of the Treasury is required for:
•
•
•
any increase in dividends paid on our common stock above a quarterly dividend of $0.20 per common
share;
the repurchase of common stock in any way; or
the repurchase or redemption of any trust preferred securities issued by us.
There are a few exceptions to the above, including:
•
•
•
an acquisition of common stock in connection with an employee benefit plan in the ordinary course of
business and consistent with past practice;
an acquisition by us or our subsidiaries of record ownership of common stock for the beneficial
ownership of any other person, including as trustees or custodians; and
an exchange of either common stock for other securities ranking junior to the senior preferred shares or
trust preferred securities for other securities ranking junior to, or on parity with, the senior preferred
shares, solely to the extent required by binding agreements existing as of November 14, 2008 or any
subsequent agreement calling for the accelerated exchange of such securities for common stock.
Notwithstanding these exceptions, in the event that Valley has not paid the required dividends on the senior
preferred shares, (i) Valley may not pay any dividends on its common stock or on any stock ranking junior to or
on parity with the senior preferred shares; and (ii) Valley may not repurchase or redeem its common stock or on
any stock ranking junior to or on parity with the senior preferred shares.
20
Performance Graph
The following graph compares the cumulative total return on a hypothetical $100 investment made on
December 31, 2003 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 investment 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.
Index of Total Returns
Valley
KBW 50
S&P 500
s
r
a
l
l
o
D
180
160
140
120
100
80
60
12/03
12/04
12/05
12/06
12/07
12/08
12/03
12/04
12/05
12/06
12/07
12/08
Valley . . . . . . . . . . . . . . . . . .
KBW 50 . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . .
$100.00
100.00
100.00
$102.84
117.98
110.87
$ 97.57
118.57
116.31
$116.51
125.23
134.66
$ 91.38
94.64
142.05
$106.40
74.14
89.51
Issuer Repurchase of Equity Securities
There were no purchases of equity securities by the issuer or affiliated purchasers during the three months
ended December 31, 2008.
Equity Compensation Plan Information
The information set forth in Item 12 of Part III of this Annual Report under the heading “Equity
Compensation Plan Information” is incorporated by reference herein.
21
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 thereto presented herein in response to Item 8.
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 credit losses . . . . . . . . . . . . . . . .
Net interest income after provisions for
credit losses . . . . . . . . . . . . . . . . . . . . .
Non-interest income:
Other-than-temporary impairment on
securities (2) . . . . . . . . . . . . . . . . . . . . .
Gains on sale of assets, net
. . . . . . . . . . .
Other non-interest income . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . .
Non-interest expense:
Goodwill impairment . . . . . . . . . . . . . . . .
Other non-interest expense . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock and accretion . .
Net income available to common
As of or for the Years Ended December 31,
2008
2007
2006
2005
2004
(in thousands, except for share data)
735,153
308,895
$
731,188
343,322
$
713,930
316,250
$
631,893
226,659
$
525,315
146,607
426,258
5,459
420,799
28,282
387,866
6,181
381,685
11,875
397,680
6,559
391,121
9,270
405,234
6,809
398,425
4,340
378,708
6,389
372,319
8,003
392,517
369,810
381,851
394,085
364,316
(84,835)
518
87,573
3,256
—
285,248
285,248
110,525
16,934
93,591
2,090
(17,949)
16,051
90,926
89,028
2,310
251,602
253,912
204,926
51,698
153,228
—
(4,722)
3,849
72,937
72,064
—
250,340
250,340
203,575
39,884
163,691
—
(835)
25
74,543
73,733
—
237,591
237,591
230,227
66,778
163,449
—
(140)
5
84,457
84,322
—
220,043
220,043
228,595
74,197
154,398
—
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . $
91,501
$
153,228
$
163,691
$
163,449
$
154,398
Per Common Share (3):
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared . . . . . . . . . . . . . . . . . . . . . .
Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible book value (4) . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding:
$
0.70
0.70
0.80
7.94
5.56
$
1.21
1.21
0.80
7.54
5.92
$
1.27
1.27
0.78
7.47
5.80
$
1.30
1.29
0.76
7.23
5.54
1.29
1.28
0.73
5.89
5.51
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
130,435,853
130,507,649
126,272,915
126,646,859
128,487,882
129,012,078
126,122,061
126,588,233
119,935,539
120,552,328
Ratios:
Return on average assets . . . . . . . . . . . . . . . . .
Return on average shareholders’ equity . . . . .
Return on average tangible shareholders’
equity (5) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity to average
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout . . . . . . . . . . . . . . . . . . . . . . . .
Risked-based capital:
Tier 1 capital
. . . . . . . . . . . . . . . . . . . . . .
Total capital . . . . . . . . . . . . . . . . . . . . . . .
Leverage capital . . . . . . . . . . . . . . . . . . . . . . . .
0.69%
8.74
11.57
7.94
114.29
11.44%
13.18
9.10
1.25%
16.43
21.17
7.58
65.35
9.55%
11.35
7.62
1.33%
17.24
22.26
7.72
60.71
10.56%
12.44
8.10
1.39%
19.17
23.61
7.25
58.00
10.28%
12.16
7.82
1.51%
22.77
24.54
6.62
57.05
11.12%
11.95
8.28
Financial Condition:
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,718,129
10,050,446
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,232,923
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,363,609
Shareholders’ equity . . . . . . . . . . . . . . . . . . . .
$ 12,748,959
8,423,557
8,091,004
949,060
$ 12,395,027
8,256,967
8,487,651
949,590
$ 12,436,102
8,055,269
8,570,001
931,910
$ 10,763,391
6,866,459
7,518,739
707,598
See Notes to the Selected Financial Data that follows.
22
Notes to Selected Financial Data
(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) Other-than-temporary impairment on securities is presented within the losses on securities transactions, net
category of total non-interest income on the consolidated statements of income.
(3) All per common share amounts reflect a five percent common stock dividend issued May 23, 2008, and all
prior stock splits and dividends.
(4) This Annual Report on Form 10-K contains supplemental financial information which has been determined
by methods other than U.S. generally accepted accounting principles (“GAAP”) that management uses in its
analysis of our performance. Management believes these non-GAAP financial measures provide
information useful to investors in understanding our underlying operational performance, our business and
performance trends, and facilitates comparisons with the performance of others in the financial services
industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or
superior to financial measures calculated in accordance with GAAP.
Tangible book value per common share, which is a non-GAAP measure,
shareholders’ equity less goodwill and other intangible assets by common shares outstanding as follows:
is computed by dividing
At Years Ended December 31,
2008
2007
2006
2005
2004
Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . .
135,024,030
125,844,074
($ in thousands)
127,181,388
128,874,591
120,159,522
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Goodwill and other intangible assets . . . . . . . . . . . .
Tangible shareholders’ equity . . . . . . . . . . . . . . . . . . . . . .
Tangible book value per common share . . . . . . . . . . . . . .
$
$
$
1,363,609
291,539
321,100
750,970
5.56
$
$
$
949,060
—
204,547
744,513
5.92
$
$
$
949,590
—
211,355
738,235
5.80
$
$
$
931,910
—
217,354
714,556
5.54
$
$
$
707,598
—
45,888
661,710
5.51
(5) Return on average tangible shareholders’ equity, which is a non-GAAP measure, is computed by dividing
net income by average shareholders’ equity less average goodwill and average other intangible assets, as
follows:
At Years Ended December 31,
2008
2007
2006
2005
2004
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
93,591
$153,228
($ in thousands)
$163,691
$163,449
$154,398
Average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . .
Less: Average goodwill and other intangible assets . . . . .
1,071,358
262,613
932,637
208,797
949,613
214,338
852,834
160,607
678,068
48,805
Average tangible shareholders’ equity . . . . . . . . . . . . . . . .
$ 808,745
$723,840
$735,275
$692,227
$629,263
Return on average tangible shareholders’ equity . . . . . . . .
11.57%
21.17%
22.26%
23.61%
24.54%
23
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 accompanying notes thereto appearing under Item 8 of this report, and statistical data
presented in this document.
Cautionary Statement Concerning Forward-Looking Statements
This Annual Report on 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 such forward-looking
terminology as “expect,” “anticipate,” “look,” “view,” “opportunities,” “allow,” “continues,” “reflects,”
“believe,” “may,” “should,” “will,” “estimates” or similar statements or variations of such terms. Such forward-
looking statements involve certain risks and uncertainties. Actual results may differ materially from such
forward-looking statements. Valley assumes no obligation for updating any such forward-looking statement at
any time. Factors that may cause actual results to differ materially from those contemplated by such forward-
looking statements include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
unanticipated changes in the financial markets and the resulting unanticipated effects on financial
instruments in our investment portfolio;
volatility in earnings due to certain financial assets and liabilities held at fair value;
the occurrence of an other-than-temporary impairment to investment securities classified as available for
sale or held to maturity;
unanticipated changes in the direction of interest rates;
stronger than anticipated competition from banks, other financial institutions and other companies;
changes in loan, investment and mortgage prepayment assumptions;
insufficient allowance for credit losses;
a higher level of net loan charge-offs and delinquencies than anticipated;
the inability to realize expected cost savings and synergies from recent acquisitions in the amounts and
timeframe anticipated;
material adverse changes in our operations or earnings;
the inability to retain customers or employees acquired in recent acquisitions;
a decline in the economy in our primary market areas, mainly in New Jersey and New York;
changes in relationships with major customers;
changes in income tax rates;
higher or lower cash flow levels than anticipated;
inability to hire or retain qualified employees;
a decline in the levels of deposits or loss of alternate funding sources;
a decrease in loan origination volume;
a change in legal and regulatory barriers including issues related to compliance with anti-money laundering
and bank secrecy act laws;
24
•
•
•
•
•
adoption, interpretation and implementation of new or pre-existing accounting pronouncements;
the development of new tax strategies or the disallowance of prior tax strategies;
passage by Congress of a law which unilaterally amends the terms of the U.S. Treasury’s investment in
Valley in a way that adversely affects Valley;
operational risks,
pertaining to Valley’s fiduciary responsibility; and
including the risk of fraud by employees or outsiders and unanticipated litigation
the inability to successfully implement new lines of business or new products and services.
Any public statements or disclosures by Valley following this report that modify or impact any of the
forward-looking statements contained in or accompanying this report will be deemed to modify or supercede
such forward-looking statements in or accompanying this report.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform, in all material respects, to GAAP. 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 its
financial condition and results of operations. Our significant accounting policies are presented in Note 1 to the
consolidated financial statements. We identified our policies on the allowance for loan losses, security
valuations, goodwill and other intangible assets, and income taxes 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. Management has reviewed the application of these policies with
the Audit and Risk Committee of Valley’s Board of Directors.
Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of probable
loan losses inherent in the loan portfolio and is the largest component of the allowance for credit losses which
also includes management’s estimated reserve for unfunded commercial letters of credit. 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 statement of financial condition. Note 1 of the
consolidated financial statements describes the methodology used to determine the allowance for loan losses and
a discussion of the factors driving changes in the amount of the allowance for loan losses is included in this
MD&A.
The allowance for loan losses consists of four elements: (1) specific reserves for individually impaired
credits, (2) reserves for classified, or higher risk rated, loans, (3) reserves for non-classified loans based on
historical loss factors, and (4) reserves based on general economic conditions and other qualitative risk factors
the composition and
both internal and external
concentrations of credit, new market initiatives, and the impact of competition on loan structuring and pricing.
including changes in loan portfolio volume,
to Valley,
Valley considers it difficult to quantify the impact of changes in forecast on its allowance for loan losses.
However, management believes the following discussion may enable investors to better understand the variables
that drive the allowance for loan losses.
For impaired credits, if the fair value of the loans were ten percent higher or lower, the allowance would
have increased or decreased by approximately $210 thousand, respectively, at December 31, 2008.
If classified loan balances were ten percent higher or lower, the allowance would have increased or
decreased by approximately $2.1 million, respectively, at December 31, 2008.
25
The credit rating assigned to each non-classified credit
is a significant variable in determining the
allowance. If each non-classified credit were rated one grade worse, the allowance would have increased by $6.8
million, while if each non-classified credit were rated one grade better there would be no change in the level of
the allowance as of December 31, 2008. Additionally, if the historical loss factors used to calculate the reserve
for non-classified loans were ten percent higher or lower, the allowance would have increased or decreased by
$6.3 million, respectively, at December 31, 2008.
A key variable in determining the allowance is management’s judgment in determining the size of the
reserves based on general economic conditions and other qualitative risk factors. At December 31, 2008, these
reserves were 6.2 percent of the total allowance. If the reserves were ten percent higher or lower, the allowance
would have increased or decreased by $590 thousand, respectively, at December 31, 2008.
Security Valuations. Management utilizes various inputs to determine the fair value of its investment
portfolio. To the extent they exist, unadjusted quoted market prices in active markets (level 1) or quoted prices on
similar assets (level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence
of quoted prices, valuation techniques would be used to determine fair value of any investments that require
inputs that are both significant to the fair value measurement and unobservable (level 3). Valuation techniques
are based on various assumptions, including, but not limited to cash flows, discount rates, rate of return,
adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is
involved in valuing investments using level 3 inputs. The use of different assumptions could have a positive or
negative effect on consolidated financial condition or results of operations.
Management must periodically evaluate if unrealized losses (as determined based on the securities valuation
methodologies discussed above) on individual securities classified as held to maturity or available for sale in the
investment portfolio are considered to be other-than-temporary. The analysis of other-than-temporary impairment
requires the use of various assumptions, including, but not limited to, the length of time an investment’s book
value is greater than fair value, the severity of the investment’s decline, as well as any credit deterioration of the
investment. If the decline in value of an investment is deemed to be other-than-temporary, the investment is
written down to fair value and a non-cash impairment charge is recognized in the period of such evaluation. We
recognized other-than-temporary impairment on securities of $84.8 million, $17.9 million, and $4.7 million in
2008, 2007, and 2006, respectively, within the losses on security transactions, net category of total non-interest
income on the consolidated statements of income. The other-than-temporary impairment charges recognized in
2008 and 2007 primarily relate to perpetual preferred securities issued by Fannie Mae and Freddie Mac. See the
“Investment Securities” section below and Note 4 to the consolidated financial statements for additional
information.
Goodwill and Other Intangible Assets. We record all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangible assets, at fair value as required by SFAS No. 141. Goodwill
totaling $295.1 million at December 31, 2008 is not amortized but is subject to annual tests for impairment or
more often if events or circumstances indicate it may be impaired. Other intangible assets are amortized over
their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible
inability to realize the carrying amount. The initial recording of goodwill and other intangible assets requires
subjective judgments concerning estimates of the fair value of the acquired assets.
The goodwill impairment test is performed in two phases. The first step compares the fair value of the
reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of
the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure
compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An
impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.
Other intangible assets totaling $26.0 million at December 31, 2008 are evaluated for impairment if events
and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on
undiscounted cash flow projections.
Fair value may be determined using: market prices, comparison to similar assets, market multiples,
discounted cash flow analysis and other determinants. Estimated cash flows may extend far into the future and,
by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the
26
estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth
trends, cost structures and technology, and changes in discount rates and specific industry or market sector
conditions.
Other key judgments in accounting for intangibles include useful life and classification between goodwill
and other intangible assets which require amortization. See Note 9 to consolidated financial statements for
additional information regarding goodwill and other intangible assets.
To assist in assessing the impact of potential goodwill or other intangible asset impairment charges at
December 31, 2008, the impact of a five percent impairment charge would result in a reduction in pre-tax income
of approximately $16.1 million. During the fourth quarter of 2007, Valley recognized a $2.3 million goodwill
impairment charge due to its decision to sell its unprofitable broker-dealer subsidiary. See Note 3 to the
consolidated financial statements for details regarding the fair value measurement which resulted in the
impairment of goodwill at December 31, 2007. No impairment was recognized on goodwill or other intangible
assets during the year ended December 31, 2008.
Income Taxes. 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 our consolidated financial
statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our
consolidated financial condition or results of operations.
In connection with determining its income tax provision under SFAS No. 109, “Accounting for Income
Taxes” and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of
FASB Statement No. 109,” we maintain a reserve related to certain tax positions and strategies that management
believes contain an element of uncertainty. Periodically, we evaluate each of our tax positions and strategies to
determine whether the reserve continues to be appropriate. Notes 1 and 14 to the consolidated financial
statements and the “Income Taxes” section below include additional discussion on the accounting for income
taxes.
Recent Accounting Pronouncements. See Note 1 of the consolidated financial statements for a
description of recent accounting pronouncements including the dates of adoption and the effect on the results of
operations and financial condition.
Executive Summary
Net income for the year ended December 31, 2008 was $93.6 million compared to $153.2 million for the
year ended December 31, 2007. The decrease was largely due to (i) net losses on securities transactions totaling
$79.8 million (which includes other-than-temporary impairment charges) for the year ended December 31, 2008
compared to $15.8 million in net losses for the year ended December 31, 2007, (ii) a $16.4 million increase in the
provision for credit losses due to loan growth, higher net charge-offs and deterioration in economic conditions,
and (iii) a $15.5 million decrease in net gains on sales of assets due to a $16.4 million immediate gain on the sale
of a Manhattan branch location in the comparable 2007 period. Fully diluted earnings per common share was
$0.70 for the year ended December 31, 2008 compared to $1.21 per common share for the year ended
December 31, 2007. All common share data is adjusted to reflect a five percent common stock dividend issued
on May 23, 2008.
In 2008, the steep decline in short-term interest rates during the second half of the year and the illiquid
financial markets proved challenging to navigate for Valley and many other financial institutions. However, net
interest income, the primary driver of our earnings, grew to $420.8 million, a 10 percent increase from the prior
year. The majority of this increase came from solid organic loan growth spurred on by opportunities to solicit
quality customers away from competitors unable to meet the credit needs of their customers throughout the year,
as well as over $800 million in loans acquired in the Greater Community Bancorp (“Greater Community”)
27
merger completed on July 1, 2008. The increase in loans allowed us to more than mitigate a 68 basis point
decline in the yield on average loans as compared to 2007. See the “Net Interest Income” section below for more
details.
However, our 2008 annual earnings results were substantially impacted by impairment charges of $69.8
million and realized losses of $5.4 million on Fannie Mae and Freddie Mac perpetual preferred stocks whose
market values drastically declined subsequent to the U.S. Government’s decision to place these companies into
conservatorship and suspend their preferred stock dividends in the third quarter of 2008. We also recorded
additional impairment charges totaling $15.0 million primarily on two pooled trust preferred securities and one
private label mortgage backed security during 2008. See the “Investment Securities” section below and Note 4 to
the consolidated financial statements for further analysis of our investment portfolio.
Our credit quality ratios continued to reflect our conservative underwriting approach during 2008. The loan
portfolio’s performance remained at acceptable levels given the state of the U.S. economy and the low levels of
our loan delinquencies and losses relative to our peers. Total loans past due in excess of 30 days were 1.06
percent of our total loan portfolio of $10.1 billion as of December 31, 2008, an increase of only 0.06 percent
from one year ago. Net loan charge-offs were $19.9 million for the year ended December 31, 2008 compared to
$11.7 million for the same period in 2007 mainly due to higher automobile loan charge-offs caused by the
economic crisis. Management strives to maintain superior credit quality through our conservative loan
underwriting policy; however, due to the current credit market conditions and the potential for further
recessionary pressure in 2009, management cannot predict that our loan portfolio will continue to perform at
levels experienced during 2008. See the “Non-performing Assets” section below for further analysis of Valley’s
credit quality.
On July 1, 2008, we completed the acquisition of Greater Community, a commercial bank holding company
with approximately $1.0 billion in total assets. The addition of Greater Community’s 16 full-service branches in
northern New Jersey expanded our branch network and strengthened our position within this very competitive
and desirable market. We have seen much of the projected cost savings and synergies expected from this
in-market acquisition during the fourth quarter of 2008 and management expects these benefits to gradually
increase into the first quarter of 2009 and thereafter. However, the addition of Greater Community’s 16 branch
locations coupled with 10 new branches opened during the year negatively impacted most expense categories
within our non-interest expense for the year ended December 31, 2008.
On November 14, 2008, Valley completed its $300 million nonvoting senior preferred stock issuance to the
U.S. Treasury under its TARP Capital Purchase Program. The issuance brought additional strength to Valley’s
already well-capitalized position (See “Capital Adequacy” section below). Although, it was not necessary for us
to raise additional capital, Valley elected to participate in the program as an insurance policy against a prolonged
downturn in the U.S. economy and a chance to better position us for acquisition opportunities that may result
from further disruption in the financial markets. During the fourth quarter of 2008, we utilized a portion of the
TARP funds in our lending operations. Total loans grew by $86.4 million during the fourth quarter, despite a
$110.0 million decline in automobile loans during the same period caused by lower consumer demand and higher
credit standards for such loan products. Furthermore, Valley had total new and renewed loan originations of
$426.8 million during the fourth quarter of 2008.
In our Quarterly Report on Form 10-Q for the period ended September 30, 2008, we disclosed that
management was reviewing certain owned branch and office real estate properties for potential sale-leaseback
transactions. No sale-leaseback transaction has occurred to date; however, we continue to evaluate the projected
benefits of such a transaction based on current market data. Sale-leaseback transactions allow the monetization of
the appreciated market value of such properties and provide cash for future company growth, including
additional growth in our loan portfolio. Furthermore, such transactions may result in the recognition of material
immediate and deferred gains for financial statement purposes and allow the company to retain management of
the properties over the lease term. There can be no assurance that we will complete such a transaction in the
future.
28
Net Interest Income
Net interest income consists of interest income and dividends earned on interest earning assets less interest
expense paid on interest bearing liabilities and represents the main source of income for Valley. The net interest
margin on a fully tax equivalent basis is calculated by dividing tax equivalent net interest income by average
interest earning assets and is a key measurement used in the banking industry to measure income from earning
assets. The net interest margin was 3.44 percent for the year ended December 31, 2008, an increase of 1 basis
point compared to the same period of 2007. After declines in each of the six preceding years, the interest margin
increased during 2008 largely due to management’s continuing efforts to contain our cost of funds while
conservatively growing our loan portfolio. However, interest rates declined dramatically during the second half
of 2008 as the Federal Reserve cut the target federal funds rate nearly 200 basis points to an unprecedented low
range of zero to 0.25 percent at December 31, 2008 in an attempt to ease credit and support the financial crisis in
as many ways as possible. The immediate drop in interest rates combined with various other short-term liquidity
strategies (including the use of additional short-term Federal Home Loan Bank advances) deployed by
management caused our fourth quarter net interest income and interest margin to decline significantly from the
third quarter of 2008. During the fourth quarter, we implemented interest rate floors within the loan terms of
many of our new or renewed prime based loans and utilized a “Valley” prime lending rate (set by Valley
management based on various internal and external factors) versus the New York prime lending rate to help
stabilize our net interest income should market rates decline further in 2009. However, management cannot
guarantee that this action and other asset/liability management strategies will prevent future declines in the net
interest margin or net interest income.
Net interest income on a tax equivalent basis increased $38.4 million to $426.3 million for 2008 compared
with $387.9 million for 2007. During 2008, a 69 basis point decline in interest rates paid on average interest
bearing liabilities and higher average loan balances positively impacted our net interest income, but were
partially offset by a 68 basis point decline in the yield on average loans and higher average interest bearing
liabilities as compared to 2007. Market interest rates on interest bearing deposits were lower in 2008 as the
average target federal funds rate decreased approximately 297 basis points as compared to 2007. Much of the
decline in short-term interest rates came in the fourth quarter of 2008 and is expected to have a gradually positive
impact on our cost of funds and net interest margin in 2009 as higher costing time deposits mature and
potentially reprice at lower interest rates.
Our earning asset portfolio is comprised of both fixed rate and adjustable rate loans and investments. Many
of our earning assets are priced based on the prevailing treasury rates, the Valley prime rate, or the New York
prime rate. As noted above, the average federal funds rate decreased 297 basis points in 2008 partially due to
three Federal Reserve cuts totaling approximately 200 basis points in the fourth quarter of 2008 to help loosen
the credit markets and assist the ailing economy. As a result, Valley’s prime rate has moved from 7.25 percent at
December 31, 2007 to 4.50 percent at December 31, 2008, while the New York prime rate dropped even further
to 3.25 percent at the end of 2008. On average, the 10-year treasury rate decreased from 4.63 percent in 2007 to
3.64 percent in 2008 and continued to decline in the first quarter of 2009, averaging 2.42 percent in January
2009, with the recent Federal Reserve actions. The decrease in both prime rates and the downward movement in
the treasury rates will have a downward effect on the yield on our average earning assets in 2009.
Average loans totaling $9.4 billion for the year ended December 31, 2008 increased $1.1 million as
compared to the same period for 2007 due almost equally to organic loan growth and loans acquired in the
Greater Community merger. Average investment securities declined $31.1 million, or 1.1 percent in 2008 as
compared to the year ended December 31, 2007. Due to the higher loan volumes, interest income on a tax
equivalent basis for loans increased $12.8 million for the year ended December 31, 2008 compared with the same
period in 2007, despite a 68 basis point decrease in the yield on average loans. Interest income on a tax
equivalent basis for investment securities decreased $287 thousand mainly due to the decrease in average
investment securities and a 31 basis point decline in yield on non-taxable securities for the twelve months in
2008 compared to the same period in 2007, partially mitigated by better yields on taxable securities. The
decrease in average investment securities was mainly due to a portion of the investment cash flows reallocated to
new loans as the illiquid and volatile financial markets made it increasingly difficult to identify and reinvest in
investment securities with acceptable risk profiles and yields. The loss of dividends on Fannie Mae and Freddie
29
Mac preferred securities and the reduction in dividends from the Federal Home Loan Bank of New York also
contributed to the decrease in interest income on investment securities from 2007. The 402 basis point decline in
the yield on average federal funds sold and other interest bearing deposits combined with lower average balances
within the category resulted in a decrease of $8.5 million in interest income on such investments in 2008
compared to the same period twelve month period in 2007.
in part,
Average interest bearing liabilities totaled $10.4 billion for the year ended December 31, 2008 increasing
$1.0 billion from the same period in 2007 primarily due to higher long-term borrowings (mainly comprised of
Federal Home Loan Bank advances), $714.9 million in deposits assumed in the acquisition of Greater
Community, and new deposit initiatives at ten de novo branches and our other existing branches. The cost of
savings, NOW, and money market accounts, time deposits, short-term borrowings, and long-term borrowings
decreased 88, 87, 227, and 23 basis points, respectively, from 2007 due to the sharp decline in short-term interest
rates. Average long-term borrowings increased $599.3 million from 2007 as we increased our long-term
positions in Federal Home Loan Bank (“FHLB”) advances mainly during the fourth quarter of 2007 and carried
the higher position for all of 2008. Average time deposits increased $216.1 million due to deposit initiatives
implemented,
to offset fluctuations in money market and non-interest bearing account balances
experienced in the fourth quarter of 2008, and time deposits totaling $216.2 million assumed in the acquisition of
Greater Community on July 1, 2008. Average short-term borrowings increased $124.9 million partially due to
$400 million in additional borrowings initiated near the end of the third quarter of 2008 to provide additional
liquidity during a turbulent market period. These short-term borrowings, consisting of FHLB advances, were
reduced to $300 million as of December 31, 2008 and have maturity dates between February and April 2009.
Average savings, NOW, and money market deposits increased $62.1 million as compared to 2007 mainly due to
$332.4 million in such deposits assumed from Greater Community, partially offset by some customer movement
to Treasury securities during the financial crisis. We anticipate that the Federal Reserve’s decision to lower the
target federal funds rate from 1.00 percent to a range of zero to 0.25 percent in December 2008 will positively
impact our cost of deposits in 2009. However, continued competitive pricing of deposits, some depositors’
preference for the safety of Treasury securities due to the unpredictable financial markets and the lack of industry
deposit growth may cause our short-term and long-term borrowings to further escalate in 2009.
The net interest margin on a tax equivalent basis was 3.44 percent for the year ended December 31, 2008
compared with 3.43 percent for the year ended December 31, 2007. The change was mainly attributable to the
increase in average loans and a decrease in interest rates paid on all interest bearing liabilities, partially offset by
a lower yield on average loans and higher average balances for all categories of interest bearing liabilities.
Average interest rates earned on interest earning assets decreased 53 basis points while average interest rates paid
on interest bearing liabilities decreased 69 basis points causing a 1 basis point increase in the net interest margin
for Valley as compared to the year ended December 31, 2007.
During the fourth quarter of 2008, net interest income on a tax equivalent basis decreased $7.9 million and
the net interest margin declined 34 basis points when compared with the third quarter of 2008. The linked quarter
decreases were primarily due to a 30 basis point decline in the yield on interest earning assets during the fourth
quarter of 2008 and additional interest expense related mainly to higher average interest-bearing liabilities.
During the fourth quarter of 2008, the yield on interest earning assets declined due to several factors, including
the U.S. Government’s elimination of dividends on Freddie Mac and Fannie Mae preferred securities held in our
available for sale investment portfolio, a substantial reduction in cash dividends on FHLB stock, lower yields on
prime based loans, and a decrease of 98 basis points in the average target Federal funds rate which negatively
affected Valley’s increased cash position as compared to the third quarter of 2008. Valley continues to actively
manage the interest earning assets and liabilities to maximize net interest margin and create shareholder value.
Management believes that its move to require interest rate floors on most new and renewed adjusted rate loans
and maintain its own Valley prime rate for such loans combined with the maturity and repricing of higher cost
time deposits should help reduce the possibility of further declines in the margin. However, competitive pricing
of deposits, further declines in market rates for loans and investments (including market pressures to adjust the
Valley prime rate downward), and deterioration in the creditworthiness of prospective customers within our
primary northern New Jersey and New York City markets could negatively impact net interest income during
2009.
30
The following table reflects the components of net interest income for each of the three years ended
December 31, 2008, 2007 and 2006:
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2008
2007
2006
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
($ in thousands)
Assets
Interest earning assets
Loans (1)(2)
Taxable investments (3) . . . . . . . . .
Tax-exempt investments (1)(3) . . . .
Federal funds sold and other
. . . . . . . . . . . . . . . . . . $ 9,386,987 $572,944
144,497
15,522
2,561,299
253,560
6.10% $ 8,261,111 $560,180
142,971
2,576,336
5.64
17,335
269,631
6.12
6.78% $ 8,262,739 $544,598
146,875
2,861,562
5.55
18,287
289,194
6.43
6.59%
5.13
6.32
interest bearing deposits . . . . . . .
182,779
2,190
Total interest earning assets . . . . . .
12,384,625
735,153
1.20
5.94
205,175
10,702
11,312,253
731,188
5.22
6.46
79,295
4,170
11,492,790
713,930
5.26
6.21
Allowance for loan losses . . . . . . . .
Cash and due from banks . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . .
Unrealized losses on securities
(80,436)
228,216
988,040
available for sale, net
. . . . . . . . .
(31,982)
(73,546)
209,939
868,575
(12,407)
(75,848)
205,695
724,869
(48,225)
Total assets . . . . . . . . . . . . . . . . . . . $13,488,463
$12,304,814
$12,299,281
Liabilities and
Shareholders’ Equity
Interest bearing liabilities
Savings, NOW and money market
deposits . . . . . . . . . . . . . . . . . . . . $ 3,536,655 $ 45,961
117,152
Time deposits . . . . . . . . . . . . . . . . .
3,171,057
1.30% $ 3,474,558 $ 75,695
134,674
2,954,930
3.69
2.18% $ 3,759,058 $ 75,822
112,654
2,764,696
4.56
2.02%
4.07
Total interest bearing deposits . . . .
Short-term borrowings . . . . . . . . . .
. . . . . . .
Long-term borrowings (4)
6,707,712
555,524
3,092,524
163,113
10,163
135,619
Total interest bearing liabilities . . .
10,355,760
308,895
2.43
1.83
4.39
2.98
6,429,488
430,580
2,493,228
210,369
17,645
115,308
9,353,296
343,322
3.27
4.10
4.62
3.67
6,523,754
434,579
2,434,778
188,476
18,211
109,563
9,393,111
316,250
2.89
4.19
4.50
3.37
Non-interest bearing deposits . . . . .
Other liabilities . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . .
1,981,744
79,601
1,071,358
Total liabilities and shareholders’
1,923,785
95,096
932,637
1,938,439
18,118
949,613
equity . . . . . . . . . . . . . . . . . . . . . $13,488,463
$12,304,814
$12,299,281
Net interest income/interest rate
spread (5)
. . . . . . . . . . . . . . . . . .
426,258
2.96%
387,866
2.79%
397,680
2.84%
Tax equivalent adjustment
. . . . . . .
(5,459)
Net interest income, as
reported . . . . . . . . . . . . . . . . . . . .
$420,799
(6,181)
$381,685
(6,559)
$391,121
Net interest margin (6) . . . . . . . . . .
. . . . . . .
Tax equivalent adjustment
Net interest margin on a fully tax
equivalent basis (6) . . . . . . . . . . .
3.40%
0.04
3.44%
3.37%
0.06
3.43%
3.40%
0.06
3.46%
Interest income is presented on a tax equivalent basis using a 35 percent federal 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)
Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statement of
condition.
Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing
liabilities and is presented on a fully tax equivalent basis.
(5)
(6) Net interest income as a percentage of total average interest earning assets.
31
The following table demonstrates the relative impact on net interest income of changes in the volume of
interest earning assets and interest bearing liabilities and changes in rates earned and paid by Valley on such
assets and liabilities. 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.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Years Ended December 31,
2008 Compared to 2007
2007 Compared to 2006
Change
Due to
Volume
Change
Due to
Rate
Total
Change
Change
Due to
Volume
Change
Due to
Rate
Total
Change
(in thousands)
$71,944
(838)
(1,006)
$(59,180) $ 12,764
1,526
(1,813)
2,364
(807)
$
(15,768)
(1,222)
(107) $15,689
11,864
270
$15,582
(3,904)
(952)
Interest income:
Loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable investments . . . . . . . . . . . . . . . . .
Tax-exempt investments* . . . . . . . . . . . . .
Federal funds sold and other
interest bearing deposits . . . . . . . . . . . .
(1,056)
(7,456)
(8,512)
6,566
(34)
6,532
Total increase (decrease) in interest
income . . . . . . . . . . . . . . . . . . . . . . . . . .
69,044
(65,079)
3,965
(10,531)
27,789
17,258
Interest expense:
Savings, NOW and money market
deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . .
Long-term borrowings and junior
1,330
9,330
4,145
(31,064)
(26,852)
(11,627)
(29,734)
(17,522)
(7,482)
(5,962)
8,089
(166)
5,835
13,931
(400)
(127)
22,020
(566)
subordinated debentures . . . . . . . . . . . .
26,536
(6,225)
20,311
2,664
3,081
5,745
Total increase (decrease) in interest
expense . . . . . . . . . . . . . . . . . . . . . . . . .
41,341
(75,768)
(34,427)
4,625
22,447
27,072
Increase (decrease) in net interest
income . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,703
$ 10,689
$ 38,392
$(15,156) $ 5,342
$ (9,814)
*
Interest income is presented on a fully tax equivalent basis using a 35 percent federal tax rate.
Non-Interest Income
The following table presents the components of non-interest income for the years ended December 31, 2008,
2007 and 2006:
NON-INTEREST INCOME
Trust and investment services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses on securities transactions, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading gains, net
Fees from loan servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2008
2007
2006
(in thousands)
$ 7,161
10,053
28,274
(79,815)
3,166
5,236
1,274
518
10,167
17,222
$ 7,381 $ 7,108
11,074
23,242
(5,464)
1,208
5,970
1,516
3,849
8,171
15,390
10,711
26,803
(15,810)
7,399
5,494
4,785
16,051
11,545
14,669
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,256
$ 89,028 $72,064
32
Non-interest income represented 0.4 percent and 10.9 percent of total interest income plus non-interest
income for 2008 and 2007, respectively. For the year ended December 31, 2008, non-interest income decreased
$85.8 million or 96.3 percent, compared with the same period in 2007, mainly due to an increase in net losses on
securities transactions and decreases in both net gains on sales of loans and net gains on sales of assets.
Service charges on deposit accounts increased $1.5 million, or 5.5 percent in 2008 compared with 2007
mainly due to an increase in checking fees and overdraft fees partially caused by additional deposits assumed in
the acquisition of Greater Community on July 1, 2008.
Losses on securities transactions, net, increased $64.0 million to a net loss of $79.8 million for the year
ended December 31, 2008. The increase was mainly due to the other-than-temporary impairment charges and
realized losses of $75.2 million on Fannie Mae and Freddie Mac perpetual preferred stock, $6.4 million on one
private label mortgage backed security and $7.8 million on two pooled trust preferred securities, net of gains on
the sale of certain available for sale securities during 2008. During the fourth quarter of 2007, we recognized
impairment charges of $17.9 million on the same Fannie Mae and Freddie Mac perpetual preferred securities.
See the “Investment Securities” section below and Note 4 to the consolidated financial statements for further
analysis of our investment portfolio.
Net trading gains decreased $4.2 million to $3.2 million for the year ended December 31, 2008 compared to
$7.4 million in the same period in 2007. The decrease was primarily due to a $15.5 million decrease in mark to
market adjustments on our trading portfolio from a $4.7 million net gain recorded during 2007 compared to a
$10.8 million net loss recorded for 2008. Partially offsetting the decrease, the change in fair value of our junior
subordinated debentures carried at fair value increased $11.1 million to a gain of $15.2 million for the year ended
December 31, 2008 compared to $4.1 million gain in the same period of 2007. Losses on FHLB advances carried
at fair value decreased $165 thousand to $1.2 million for 2008. The $1.2 million loss was realized on one fixed
Federal Home Loan Bank advance carried at fair value, which was redeemed prior to its contractual maturity date
during the second quarter of 2008. See Note 3 to the consolidated financial statements for further analysis of our
financial instruments carried at fair value.
Net gains on sales of loans decreased $3.5 million to $1.3 million for the year ended December 31, 2008
compared to $4.8 million for the prior year. This decrease was primarily due to the gains realized on the sale of
approximately $240 million of residential mortgage loans held for sale during 2007 that Valley elected to carry at
fair value effective as of January 1, 2007.
Net gains on sales of assets decreased $15.5 million to $518 thousand for the year ended December 31, 2008
compared to approximately $16.1 million for the same period in 2007 mainly due to a $16.4 million immediate
gain recognized on the sale of a Manhattan office building in the first quarter of 2007. Valley sold a nine-story
building for approximately $37.5 million while simultaneously entering into a long-term lease for its branch
office located on the first floor of the same building. The transaction resulted in a $32.3 million pre-tax gain, of
which $16.4 million was immediately recognized in earnings in 2007 pursuant to the sale-leaseback accounting
rules. The remaining deferred gain of $15.9 million is being amortized into earnings over the 20 year term of the
lease, of which $650 thousand and $594 thousand was amortized to net gains on sales of assets during 2008 and
2007, respectively.
BOLI income decreased $1.4 million, or 11.9 percent for the year ended December 31, 2008 compared with
the same period of 2007 primarily due to the current financial market’s losses which had a negative impact on the
performance of the underlying securities of the BOLI asset. BOLI income is exempt from federal and state
income taxes. The BOLI asset is invested primarily in U.S. agency mortgage-backed securities and U.S.
Treasuries, and the majority of the underlying portfolio is managed by one independent investment firm.
Other non-interest income increased $2.6 million or 17.4 percent for the year ended December 31, 2008
compared with the same period in 2007 mainly due to a $1.6 million gain resulting from the mandatory
redemption of a portion of Valley’s Class B Visa (member bank) common stock as part of Visa’s initial public
offering in March of 2008 and a $417 thousand gain on the redemption of a portion of Valley’s junior
33
subordinated debentures issued to VNB Capital Trust I during the third quarter of 2008 (See Note 12 to the
consolidated financial statements for details regarding this redemption). The remaining increase was mainly due
to general increases in other income associated with the Greater Community acquisition.
Non-Interest Expense
The following table presents the components of non-interest expense for the years ended December 31,
2008, 2007 and 2006:
NON-INTEREST EXPENSE
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment expense . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and legal fees . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2008
2007
2006
$126,210
31,666
54,042
7,224
—
8,241
2,697
55,168
(in thousands)
$116,389
29,261
49,570
7,491
2,310
5,110
2,917
40,864
$109,775
28,592
46,078
8,687
—
8,878
8,469
39,861
Total non-interest expense . . . . . . . . . . . . . . . . . . . . .
$285,248
$253,912
$250,340
Non-interest expense increased $31.3 million to $285.2 million for the year ended December 31, 2008 from
$253.9 million for the same period in 2007. Increases in salary expense, employee benefit expense, net
occupancy and equipment expense, professional and legal fees, and other non-interest expense were partially
offset by a decrease in goodwill impairment. We incurred additional expenses due to de novo expansion efforts
in 2008 and 2007 in our target expansion areas of northern and central New Jersey, New York City, Brooklyn
and Queens. De novo expansion efforts will negatively impact non-interest expense until these new branches
become profitable or breakeven, typically over a period of three years. Additionally, we experienced increases in
most categories of non-interest expense due to our acquisition of Greater Community on July 1, 2008. The largest
component of non-interest expense is salary and employee benefit expense which totaled $157.9 million in 2008
compared with $145.7 million in 2007.
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, 2008 was 67.27 percent compared
to 53.94 percent for the same period of 2007. The increase in the efficiency ratio is primarily due to a decrease in
non-interest income caused, in part, by a $64.0 million increase in net losses on securities transactions during the
year ended December 31, 2008. We strive to maintain a low efficiency ratio through diligent management of our
operating expenses and balance sheet. However, even exclusive of net losses on securities transactions, our
current and past de novo branch expansion efforts may continue to negatively impact the ratio until these new
branches become profitable operations.
Salary and employee benefit expense increased a combined $12.2 million, or 8.4 percent for the year ended
December 31, 2008 compared with the same period in 2007. The increase from 2007 was mainly due to our
organizational growth through the acquisition of Greater Community and the addition of ten de novo branches to
our branch network over the last twelve month period. At December 31, 2008, full-time equivalent staff was
2,783 compared to 2,562 at December 31, 2007.
Net occupancy and equipment expense increased $4.5 million, or 9.0 percent during 2008 in comparison to
2007. This increase was also largely due to our de novo branching efforts and 16 full-service branch offices
acquired from Greater Community, which caused us to incur, among other things, additional rents, utilities, real
34
estate taxes, and equipment maintenance charges in connection with investments in technology and facilities.
Rent, utilities, and equipment maintenance expenses increased by approximately $2.9 million, $739 thousand,
and $661 thousand, respectively, during 2008 compared with the prior year.
Goodwill impairment of $2.3 million was recorded during the fourth quarter of 2007 due to Valley’s
decision to sell its wholly owned broker-dealer subsidiary, Glen Rauch Securities, Inc. See Notes 2 and 9 to the
consolidated financial statements for further discussion.
Professional and legal fees increased $3.1 million, or 61.3 percent for the year ended December 31, 2008
compared to the same period one year ago. The increase was partially due to a $1.7 million reduction in litigation
contingencies during the fourth quarter of 2007 and an increase in advisory fees caused by organizational growth
during 2008.
Other non-interest expense increased $14.3 million, or 35.0 percent for the year ended December 31, 2008
compared with the same period in 2007 partly due to a $4.6 million loss recorded in the fourth quarter of 2008 on
the discovery of a check fraud scheme perpetrated by a long-time commercial customer of Valley National Bank.
Additionally, other non-interest expense includes a $3.1 million expense which was accelerated from future
periods to the current year due to a hedging relationship terminated in November 2008 for two interest rate cap
hedging relationships based on the effective federal funds rate, a $1.2 million prepayment penalty on $25.0
million in Federal Home Loan Bank advances redeemed in the third quarter of 2008 and a $1.3 million increase
in other real estate owned expense during 2008. The remaining increase in other non-interest expense was
primarily due to several general increases caused by de novo branching and the Greater Community acquisition.
Significant components of other non-interest expense include data processing, telephone, service fees, debit card
fees, postage, stationery, insurance, and title search fees.
Income Taxes
Income tax expense was $16.9 million for the year ended December 31, 2008, reflecting an effective tax rate
of 15.3 percent, compared with $51.7 million for year ended December 31, 2007, reflecting an effective tax rate
of 25.2 percent. The reduction in taxes compared to 2007 was due to the lower income for the 2008 period and
the reversal of the $6.5 million valuation allowance attributable to the capital loss carryforward of the prior year.
Management expects that Valley’s adherence to FIN 48 will continue to result in increased volatility in
Valley’s future quarterly and annual effective income tax rates because FIN 48 requires that any change in
judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete
event in the period in which it occurs. Factors that could impact management’s judgment include changes in
income, tax laws and regulations, and tax planning strategies. For 2009, Valley anticipates an effective tax rate of
31.0 percent, compared to 15.3 percent for 2008.
Business Segments
lending,
We have four business segments that we monitor and report on to manage our 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 income before income taxes and return on average interest earning
assets and impairment. 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. Interest expense and internal transfer expense (for general corporate
expenses) are allocated to each business segment utilizing a “pool funding” methodology, whereas each segment
is allocated a uniform funding cost based on each segments’ average earning assets outstanding for the period.
The Wealth Management Division, comprised of trust, asset management, insurance services, and broker-dealer
(our broker-dealer subsidiary was sold on March 31, 2008) is included in the consumer lending segment. The
financial reporting for each segment contains allocations and reporting in line with our operations, which may
not necessarily be comparable to any other financial institution. The accounting for each segment includes
35
internal accounting policies designed to measure consistent and reasonable financial reporting, and may not
necessarily conform to GAAP. For financial data on the four business segments see Note 19 to the consolidated
financial statements.
Consumer lending. The consumer lending segment is mainly comprised of residential mortgages, home
equity loans and automobile loans. The duration of the loan portfolio is subject to movements in the market level
of interest rates and forecasted residential mortgage prepayment speeds. The average weighted life of the
automobile loans within the portfolio is relatively unaffected by movements in the market level of interest rates.
However, the average life may be impacted by the availability of credit within the automobile marketplace.
Income before income taxes increased $12.9 million to $72.0 million for the year ended December 31, 2008
as compared with the same period in 2007. The return on average interest earning assets before income taxes
increased to 1.71 percent compared with 1.53 percent for the comparable 2007 period. The increase resulted from
an increase in net interest income, partially offset by an increase in the provision for loan losses and internal
transfer expense. Net interest income increased $25.4 million to $151.1 million when compared to $125.7 million
for the same period last year, primarily as a result of a $345.0 million increase in average consumer lending
balances and a decrease in funding costs, partially offset by a decrease in the yield on average loans. The interest
yield on loans decreased 17 basis points to 5.94 percent for the year ended December 31, 2008 from 6.11 percent
for the prior year period, while the interest expense associated with funding sources decreased 51 basis points to
2.35 percent for the year ended December 31, 2008 from 2.86 percent for the prior year period.
Commercial
lending. The commercial
is mainly comprised of floating rate and
adjustable rate commercial loans, as well as fixed rate owner occupied and commercial mortgage loans. Due to
the portfolio’s interest rate characteristics, commercial lending is Valley’s most sensitive business segment to
movements in market interest rates.
lending segment
During 2008, the Federal Reserve incrementally decreased the target federal funds rate six times from 5.25
percent at the beginning of the year to approximately zero percent on December 16, 2008. Many of our earning
assets in the commercial lending segment are priced based on the Valley prime rate or the New York prime rate.
As a result of the Federal Reserve rate cuts, Valley’s prime rate has moved from 7.25 percent at December 31,
2007 to 4.50 percent at December 31, 2008, while the New York prime rate dropped even further to 3.25 percent
at the end of 2008. During the fourth quarter of 2008, we implemented interest rate floors within the loan terms
of many of our new and renewed prime based loans to help stabilize our net interest income should the market
rates decline further in 2009. The decline in both prime rates may potentially lower interest income in future
periods depending on our ability to grow the commercial lending portfolio, or other loan portfolios and our
ability to mitigate such decreases in interest rates.
For the year ended December 31, 2008, income before income taxes decreased $19.5 million to $85.3
million compared with the year ended December 31, 2007, primarily due to increases in the provision for loans
losses, non-interest expense, and internal transfer expense, partially offset by an increase in net interest income.
The return on average interest earning assets before income taxes was 1.65 percent compared with 2.39 percent
for the prior year period. The increase in net interest income was primarily due to average interest earning assets
increasing $780.9 million to $5.2 billion as we acquired loans from Greater Community in the third quarter of
2008 and experienced solid organic loan growth since the 2007 period. Partially offsetting the increase was a 74
basis points decrease in yield on average loans mainly caused by the Federal Reserve’s cut of short-term rates.
The costs associated with our funding sources decreased 51 basis points to 2.35 percent for the year ended
December 31, 2008.
Investment management. The investment management segment
is mainly comprised of fixed rate
investments, trading securities and, depending on our liquid cash position, federal funds sold. The fixed rate
investments are one of Valley’s least sensitive assets to changes in market interest rates. Net gains and losses on
the change in fair value of trading securities and other-than-temporary impairment charges of investment
securities are reflected in the corporate and other adjustments segment.
36
For the year ended December 31, 2008, income before income taxes increased $6.8 million to $69.2 million
compared with the year ended December 31, 2007 primarily due to an increase in net interest income, partially
offset by a decrease in non-interest income. The return on average interest earning assets before income taxes
increased to 2.31 percent compared with 2.04 percent for the prior year period. The increase was a result of
decrease in funding costs of 51 basis points to 2.35 percent, partially offset by a decrease in yield on average
investments of 21 basis points to 5.67 percent. Average investments decreased $53.5 million from $3.1 billion in
the 2007 period mainly caused by a decline in short-term trading securities held due to current market conditions
and solid loan growth.
Corporate segment. The corporate and other adjustments segment represents income and expense items
not directly attributable to a specific segment, including trading and securities gains (losses) not classified in the
investment management segment above, interest expense related to the junior subordinated debentures issued to
capital trusts, interest expense related to $100 million in subordinated notes issued in July 2005, as well as
income and expense from derivative financial instruments.
The loss before income taxes for the corporate segment was $116.0 million for the year ended December 31,
2008 compared with a $21.3 million loss for the year ended December 31, 2007. The loss increased primarily due
to other-than-temporary impairment charges on investment securities totaling $84.8 million in 2008 as compared
to $17.9 million in 2007, as well as, a decrease in other non-interest income. Non-interest expense increased
$25.9 million mainly due to increases in general expenses related to de novo branching and was partially offset
by an increase of $14.5 million in internal transfer income.
Interest Rate Sensitivity
ASSET/LIABILITY MANAGEMENT
Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be
defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates.
Valley’s Asset/Liability Management Committee is responsible for managing such risks and establishing policies
that monitor and coordinate our sources, uses and pricing of funds. Asset/Liability management is a continuous
process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels
for us, management weighs the potential benefit of each risk management activity within the desired parameters
of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions
undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic
benefits for financial assets and their related funding sources. We have predominately focused on managing our
interest rate risk by attempting to match the inherent risk of financial assets and liabilities. Specifically,
management employs multiple risk management activities such as divestures, change in product pricing levels,
change in desired maturity levels for new originations, change in balance sheet composition levels as well as
several other risk management activities. With the adoption of SFAS No. 159, management has the fair value
measurement option available for new financial assets, financial liabilities, and derivative transactions potentially
entered into as part of its on-going interest rate risk management activities.
We use 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, 2008. The model assumes changes in interest rates without any proactive change in the
composition of the balance sheet by management. In the model, the forecasted shape of the yield curve remains
static as of December 31, 2008. The impact of interest rate derivatives, such as interest rate swaps and caps, is
also included in the model.
Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of
December 31, 2008. New interest earning assets and interest bearing liability originations and rate spreads are
estimated utilizing our actual originations during the fourth quarter of 2008. The model utilizes an immediate
parallel shift in the market interest rates at December 31, 2008.
37
The following table reflects management’s expectations of the change in our net interest income over a
one-year period in light of the aforementioned assumptions:
Immediate Changes
in Levels of
Interest Rates
+3.00%
+2.00
+1.00
(1.00)
Change in Net Interest Income Over
One Year Horizon
At December 31, 2008
($ in thousands)
Dollar
Change
$ 23,795
17,324
7,070
(10,884)
Percentage
Change
5.33%
3.88
1.58
(2.44)
Valley’s ratio of sensitive assets to sensitive liabilities increased to 1.32 over a 12-month period, largely as a
result of the Greater Community acquisition, changes in market prepayment speeds and balance sheet
management strategies implemented throughout 2008. As a result, the forecasted change in net interest income
over a one year time horizon is more sensitive to rising interest rates than the results reported one-year ago. As of
December 31, 2008, Valley’s 12-month forecasted repricing and maturing assets totaled $6.4 billion, an increase
of approximately $2.0 billion from the year ago period. Forecasted 12-month repricing/maturing forecasted cash
flow in the loan portfolio increased $1.5 billion to $4.6 billion, mainly due to the assets acquired in conjunction
with the Greater Community merger. Expected repricing/maturing cash flow in the Investment portfolio
(including interest bearing cash and Federal Funds), increased approximately $550 million, attributable to an
increase in market prepayment speeds, coupled with a decline in the duration on newly originated investments in
2008. Partially mitigating the $2.0 billion increase in asset sensitivity was an expansion of approximately $240
million in forecasted repricing/maturing cash flow associated with Valley’s funding sources. Valley’s time
deposit portfolio increased $842.2 million from December 31, 2007. Nearly 90 percent of the net increase in time
deposits, reflect originations with stated maturities less than one year. Conversely, the expected repricing/
maturing cash flow associated with Valley’s borrowing portfolio decreased by approximately $500 million. As a
result of the above indicated changes in Valley’s anticipated repricing/maturing cash flow, as of December 31,
2008, Valley’s balance sheet asset sensitivity has expanded from the forecast one year ago.
In addition to the overall growth in our asset sensitivity level, the severity of the expected change under
immediate changes in levels of interest rates increased as well, in part due to the implementation of floors on
many of our prime based loans, combined with utilizing a Valley prime lending rate (set
internally by
management) versus the New York prime lending rate. Additionally, we entered into $200 million notional value
of interest rate caps, which protect us from upward increases in interest rates. These actions have expanded the
expected net interest income benefits in rising interest rate environments, while simultaneously decreasing the
expected severity of lost interest income in declining interest rate environments.
As noted in the table above, we are slightly more susceptible to a decrease in interest rates under a scenario
with an immediate parallel change in the level of market interest rates than an increase in interest rates under the
same assumptions. However, the likelihood of a 100 basis point decrease in interest rates as of December 31,
2008 was considered to be unlikely given current interest rate levels. Other factors, including, but not limited to,
slope of the yield curve and projected cash flows will impact our net interest income results and may increase or
decrease the level of asset sensitivity of our balance sheet.
Our interest rate caps designated as cash flow hedging relationships, which are the majority of the derivative
financial instruments entered into by the Company, are designed to protect us from upward movements in
interest rates based on the prime and federal funds rates. Due to the current low level of interest rates and the
strike rate of these instruments, they are expected to have little impact over the next twelve month period on our
net interest income under the scenarios outlined above. As of December 31, 2008, the effect of a 300 basis point
increase in interest rates on our derivative holdings would result in an annual $883 thousand positive variance in
net interest income. The effect of a 100 basis point decrease in interest rates on our derivative holdings would
result in an annual $478 thousand negative variance in net interest income. See Note 15—Commitments and
Contingencies for further information on our derivative transactions.
38
Our net interest income is affected by changes in interest rates and cash flows from our loan and investment
portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and rates to
optimize the net interest income, while prudently structuring the balance sheet to manage changes in interest
rates. Additionally, our net interest income is impacted by the level of competition within our marketplace.
Competition can increase the cost of deposits and impact the level of interest rates attainable on loans, which
may result in downward pressure on our net interest margin in future periods.
Convexity is a measure of how the duration of a bond changes as market interest rates change. Potential
movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan
portfolio may have a positive or negative impact to our net interest income in varying interest rate environments.
As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the
results reflected in the table above. Management cannot provide any assurance about the actual effect of changes
in interest rates on our net interest income.
The following table sets forth the amounts of interest earning assets and bearing liabilities, outstanding on
December 31, 2008 and their associated fair values. The expected cash flows are categorized based on each
financial instruments anticipated maturity or interest rate reset date. The amount of assets and liabilities shown,
which reprice or mature during a particular period, were determined based on the earlier of the term to repricing
or the term to repayment, inclusive of the impact of market level prepayment speeds.
INTEREST RATE SENSITIVITY ANALYSIS
Rate
2009
2010
2011
2012
2013
Thereafter
Total
Balance
Fair Value
($ in thousands)
Interest sensitive assets:
Interest bearing deposits with
banks . . . . . . . . . . . . . . . . . .
0.30% $ 343,010 $
— $
— $ — $ — $
— $
343,010 $
343,010
Investment securities held to
6.06
600,822
172,970
81,639
54,645
24,591
220,070
1,154,737
1,069,245
maturity . . . . . . . . . . . . . . . .
Investment securities available
for sale . . . . . . . . . . . . . . . . .
5.59
Trading securities . . . . . . . . . . 10.13
Loans held for sale . . . . . . . . .
5.90
Loans:
794,100
—
4,542
Commercial . . . . . . . . . . . . .
Mortgage . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
Consumer
5.52
5.84
5.66
1,445,980
2,037,589
1,137,301
Total interest sensitive
280,417
—
—
205,535
956,645
407,477
128,454
—
—
65,995
—
—
33,713
—
—
156,639
859,161
240,755
56,400
668,991
130,631
51,007
669,706
61,696
132,763
34,236
—
49,811
912,444
95,922
1,435,442
34,236
4,542
1,435,442
34,236
4,542
1,965,372
6,104,536
2,073,782
1,955,662
6,060,693
2,246,187
assets . . . . . . . . . . . . . . . . . .
5.62% $6,363,344 $2,023,044 $1,466,648 $976,662 $840,713 $ 1,445,246 $13,115,657 $13,149,017
Interest sensitive liabilities:
Deposits:
Savings, NOW and money
market . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . .
Long-term borrowings . . . . . .
Junior subordinated
0.64% $1,071,105 $ 707,072 $ 707,072 $336,055 $168,028 $
3.53
1.99
4.24
3,072,986
640,304
58,160
66,063
—
1,003
—
148,407
—
207,569
—
62,171
163,927
130,286
106,958
504,083 $ 3,493,415 $ 3,493,415
3,681,279
3,621,259
81,039
635,767
640,304
—
3,455,381
3,008,753
2,531,443
debentures . . . . . . . . . . . . . .
7.64
—
—
—
—
—
165,390
165,390
162,936
Total interest sensitive
liabilities . . . . . . . . . . . . . . .
2.78% $4,842,555 $ 899,529 $1,078,568 $591,420 $235,094 $ 3,281,955 $10,929,121 $11,428,778
Interest sensitivity gap . . . . . . .
$1,520,789 $1,123,515 $ 388,080 $385,242 $605,619 $(1,836,709) $ 2,186,536 $ 1,720,239
Ratio of interest sensitive
assets to interest sensitive
liabilities . . . . . . . . . . . . . . .
1.31:1
2.25:1
1.36:1
1.65:1
3.58:1
0.44:1
1.20:1
1.15:1
39
Expected maturities are contractual maturities adjusted for all projected payments of principal. For
investment securities, loans, long-term borrowings and junior subordinated debentures, 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 or current market expectations. Repricing
data for each instrument reflects the contractual interest rate/reset date. For non-maturity deposit liabilities, in
accordance with standard industry practice and our historical experience, “decay factors” were used to estimate
deposit runoff. Our cash flow derivatives are designed to protect us from upward movement in interest rates. The
interest rate sensitivity table reflects the sensitivity at current interest rates. As a result, the notional amount of
our derivatives is not included in the table. We use various assumptions to estimate fair values. See Note 3 of the
consolidated financial statements for further discussion of fair value measurements.
The total gap re-pricing within one year as of December 31, 2008 was a positive $1.5 billion, representing a
ratio of interest sensitive assets to interest sensitive liabilities of 1.31:1. The acquisition of Greater Community,
coupled with changes in market prepayment speeds and balance sheet management strategies implemented
throughout 2008, increased our asset sensitivity from December 31, 2007. The total gap re-pricing position, as
reported in the table above, reflects the projected interest rate sensitivity of our principal cash flows based on
market conditions as of December 31, 2008. As the market level of interest rates and associated prepayment
speeds move, the total gap re-pricing position will change accordingly, but not likely in a linear relationship.
Management does not view our one year gap position as of December 31, 2008 as presenting an unusually high
risk potential, although no assurances can be given that we are not at risk from interest rate increases or
decreases.
Fair Value Measurement
Effective January 1, 2007, Valley elected early adoption of SFAS Nos. 159 and 157. SFAS No. 159 issued
on February 15, 2007, generally permits the measurement of selected eligible financial instruments at fair value
at specified election dates.
Valley’s adoption of SFAS No. 159 reflects management’s desire to mitigate the impact of changing interest
rate and other market risks related to certain financial instruments that may have a greater propensity to those
changes than other financial instruments on Valley’s balance sheet. Management’s efforts to reduce price and
market risk of financial instruments with the highest potential future earnings volatility (the dispersion of net
income under various market conditions and levels of interest rates, which may include the potential fluctuation
in the yield and expected total return of each financial instrument) and prepayment risk are consistent with
Valley’s risk management activities. Management believes that the fair value option for select financial assets
and liabilities will enable it to achieve this objective by providing enhanced flexibility, including the ability to
utilize derivative transactions without applying the complex hedge accounting provisions of SFAS No. 133.
Upon adoption on January 1, 2007, Valley elected to record the following pre-existing financial assets and
financial liabilities at fair value:
•
Investment securities with a carrying value totaling $1.3 billion, a weighted average yield of 5.15
percent and an estimated duration greater than 3 years. Approximately $498.9 million of the $1.3
billion in investment securities were previously categorized as held to maturity securities. This entire
portfolio was transferred to trading securities.
• Residential mortgage loans with a carrying value totaling $254.4 million, a weighted average yield of
4.96 percent and an estimated duration greater than 3 years. This entire portfolio was transferred to
loans held for sale.
•
•
Federal Home Loan Bank advances with a carrying value totaling $40 million, a fixed weighted
average cost of 6.96 percent and an estimated duration of approximately 2.6 years.
Junior subordinated debentures issued to VNB Capital Trust I with a carrying value totaling $206.2
million, a fixed coupon rate of 7.75 percent and an estimated duration greater than 10 years.
40
During the first quarter of 2007, management worked closely with its advisor in the derivatives market, at a
considerable cost, to construct a hedging strategy for the trading securities portfolio. As a result of this extensive
evaluation process, Valley executed a series of interest rate derivative transactions with notional amounts totaling
approximately $1.0 billion in April 2007. The purpose of the derivative transactions was to offset volatility in
changes in the market value of over $800 million in trading securities consisting primarily of mortgage-backed
securities transferred from the available for sale portfolio at January 1, 2007 by transforming these fixed rate
assets into floating rates in anticipation of a steepening yield curve. However, the derivative transactions did not
offset the volatility in the trading securities to the extent expected due to several factors, including the financial
market’s forward expectations of interest rate movements and the unusual expansion of credit spreads in the
marketplace. To that end, Valley terminated the derivatives’ entire notional amounts and sold the corresponding
trading securities through several transactions over a number of weeks during the second quarter of 2007. The
ineffectiveness and ultimately, the termination of the derivatives and hedged securities sold resulted in a $2.0
million net loss recorded in net trading gains during the second quarter of 2007. The hedged securities were part
of approximately $1.0 billion in mortgage-backed securities issued by Fannie Mae, Freddie Mac and private
institutions that were sold during the second quarter of 2007. The investment proceeds were primarily reinvested
in short-term U.S. treasury securities, short-term other government agencies and short-term corporate debt
classified as trading securities under SFAS No. 115, with the remainder of the proceeds used to fund loan growth
and to offset a reduction in funding due to the redemption of the $20.6 million in junior subordinated debentures
issued to VNB Capital Trust I during the second quarter of 2007. Many of the short-term instruments within
trading securities portfolio matured in 2008 and the proceeds were reallocated to loans or provided for other
liquidity needs during the year.
At adoption, some of Valley’s specific asset/liability management goals included shortening the duration of
the investment portfolio, limiting the risk that the duration for certain assets would extend beyond expected
levels, increasing the asset sensitivity of the balance sheet, increasing the stability of returns on certain financial
instruments and modifying some of its interest bearing liabilities with the expectation of a future steepening of
the yield curve. As early as April 2007, but worsening significantly in the second half of 2007 and throughout
2008, many changes occurred within the economy and financial markets, which directly impacted these strategies
employed by Valley, specifically, widening credit spreads and limited liquidity for mortgage related products
(including both loans and investments). Additionally, as a result of the market volatility, many of the variables
relied upon within Valley’s initial rationale for adopting fair value on an instrument level basis witnessed
dramatic changes. While Valley did not invest in subprime mortgages, CDO’s, SIV’s and other forms of exotic
high risk financial instruments, the industry wide turmoil, caused by such instruments, directly impacted the
pricing and availability of various financial instruments, including those which Valley holds and may effect
trades in. Specifically, Valley’s purchase decisions for investment securities, as well as the balance sheet
classification election for each security purchased, were greatly impacted by these changes in the financial
markets. As a result of the changes in market variables during the second half of 2007, including a steepening of
the yield curve, Valley engaged in a leverage strategy involving the purchase of certain mortgage-backed
securities classified as available for sale matched with additional fixed rate Federal Home Loan Bank advances
during the fourth quarter of 2007 which effected the composition of the investment portfolio as well as the
interest bearing liabilities as of December 31, 2007 and throughout the year ended December 31, 2008.
41
The following table presents the assets and liabilities measured at fair value on a recurring basis as reported
on the consolidated statements of financial condition at December 31, 2008 and 2007:
December 31,
2008
2007
(in thousands)
Assets:
Investment securities:
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,435,442
34,236
4,542
3,334
$1,606,410
722,577
2,984
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,477,554
$2,331,971
Liabilities:
Long-term Federal Home Loan Bank advance . . . . . . . . . . . . . . . .
Junior subordinated debentures issued to VNB Capital Trust I . . .
Other liabilities* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
140,065
2,008
41,359
163,233
424
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 142,073
$ 205,016
* Derivative financial instruments are included in this category.
During the year ended December 31, 2008, our available for sale and trading balances continued to decline
as a result of severe turbulence in the financial markets that limited the asset/liability strategies management
could deploy at acceptable risk tolerances, as well as the need to fund strong loan growth during the same period.
SFAS No. 159 prohibits the election of the fair value option for deposit liabilities which are withdrawable
on demand. These types of deposits are a material component of Valley’s balance sheet and risk management
activities and accordingly, set certain limitations on the number and amount of financial instruments management
ultimately selected for fair value measurement at January 1, 2007 and during the years ended December 31, 2008
and 2007.
See additional discussion and analysis of the adoption of SFAS Nos. 159 and 157 at Notes 1, 3, 4 and 12 to
the consolidated financial statements.
Liquidity
Bank Liquidity. Liquidity measures the ability to satisfy current and future cash flow needs as they
become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in
deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is
monitored by management’s Asset/Liability Management Committee and the Investment Committee of the
Board of Directors of Valley National Bank, which review historical funding requirements, current liquidity
position, sources and stability of funding, marketability of assets, options for attracting additional funds, and
anticipated future funding needs, including the level of unfunded commitments.
Valley National Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an
internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in excess
of 120 percent and non-core funding (which generally includes certificates of deposits $100 thousand and over,
federal funds purchased, repurchase agreements and Federal Home Loan Bank advances) greater than 50 percent
of total assets. At December 31, 2008, we were in compliance with the foregoing policies.
On the asset side of the balance sheet, we have numerous sources of liquid funds in the form of cash and due
from banks, interest bearing deposits with banks, federal funds sold, investment securities held to maturity
maturing within one year, investment securities available for sale, trading securities and loans held for sale.
42
These liquid assets totaled approximately $2.1 billion and $2.6 billion at December 31, 2008 and 2007,
respectively, representing 16.4 percent and 23.0 percent of earning assets, and 14.2 percent and 20.6 percent of
total assets at December 31, 2008 and 2007, respectively. Of the $2.1 billion of liquid assets at December 31,
2008, approximately $1.4 billion of various investment securities were pledged to counter parties to support our
earning asset funding strategies.
Additional
liquidity is derived from scheduled loan payments of principal and interest, as well as
prepayments received. Loan principal payments are projected to be approximately $4.6 billion over the next
twelve months. As a contingency plan for significant funding needs, liquidity could also be derived from the sale
of residential mortgages, commercial mortgages, and home equity loans, as these are all marketable portfolios, or
from the temporary curtailment of lending activities.
On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs. Our
core deposit base, which generally excludes certificates of deposit over $100 thousand as well as brokered
certificates of deposit, represents the largest of these sources. Core deposits averaged approximately $7.4 billion
and $7.1 billion for the years ended December 31, 2008 and 2007, representing 59.7 percent and 62.9 percent of
average earning assets at December 31, 2008 and 2007, respectively. The level of interest bearing deposits is
affected by interest rates offered, which is often influenced by our need for funds and the need to match the
maturities of assets and liabilities. Brokered certificates of deposit totaled $2.9 million at December 31, 2008 and
2007.
In the event
that additional short-term liquidity is needed, Valley National Bank has established
relationships with several correspondent banks to provide short-term borrowings in the form of federal funds
purchased. While, at December 31, 2008, there were no firm lending commitments in place, management
believes that we could borrow approximately $1.0 billion for a short time from these banks on a collective basis.
Valley National Bank is also a member of the Federal Home Loan Bank of New York and has the ability to
borrow from them in the form of FHLB advances secured by pledges of mortgage-backed securities and a
blanket assignment of qualifying residential mortgage loans. Additionally, funds could be borrowed overnight
from the Federal Reserve Bank via the discount window as a contingency for additional liquidity.
The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31,
2008 (in thousands):
Less than three months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three to six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Six to twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
More than twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 560,432
438,817
527,174
204,726
$1,731,149
We have access to a variety of short-term and long-term borrowing sources to support our asset base. Short-
term borrowings include federal funds purchased, securities sold under agreements to repurchase (“repos”),
treasury tax and loan accounts, and FHLB advances. Short-term borrowings increased by $35.1 million to $640.3
million at December 31, 2008 compared to $605.2 million at December 31, 2007 primarily due to an additional
$200.0 million short-term FHLB advances, partly offset by declines in federal funds purchased, short-term repos,
and treasury tax and loan accounts of $80.0 million, $59.0 million, and $25.9 million, respectively. At
December 31, 2008, nearly all short-term repos represent customer deposit balances being swept into this vehicle
overnight.
43
The following table sets forth information regarding Valley’s short-term repos at the dates and for the
periods indicated:
Years Ended December 31,
2008
2007
2006
($ in thousands)
Securities sold under agreements to repurchase:
Average balance outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum outstanding at any month-end during the period . . .
Balance outstanding at end of period . . . . . . . . . . . . . . . . . . . . .
Weighted average interest rate during the period . . . . . . . . . . .
Weighted average interest rate at the end of the period . . . . . . .
$418,518
437,272
335,510
$412,035
449,595
394,512
$337,819
386,897
355,823
1.51%
0.81%
4.08%
2.92%
4.12%
4.29%
Corporation Liquidity. Valley’s recurring cash requirements primarily consist of dividends to preferred
and common shareholders and interest expense on junior subordinated debentures issued to VNB Capital Trust I
and GCB Capital Trust III. These cash needs are routinely satisfied by dividends collected from Valley National
Bank, along with cash flows from investment securities held at
the holding company. See Note 16 –
Shareholders’ Equity in the accompanying notes to the consolidated financial statements included elsewhere in
this report regarding restrictions to such subsidiary bank dividends. Projected cash flows from these sources are
expected to be adequate to pay preferred and common dividends and interest expense payable to capital trusts,
given the current capital levels and current profitable operations of its subsidiary.
Historically, Valley also used cash to repurchase shares of its outstanding common stock, from time to time,
under its share repurchase program, purchase preferred securities issued by VNB Capital Trust I (and extinguish
the corresponding junior subordinated debentures), or call for early redemption part of its junior subordinated
debentures issued to VNB Capital Trust I at their stated par value. The cash required for these activities was met
by using Valley’s own funds and dividends received from Valley National Bank. On November 14, 2008, Valley
issued $300 million in nonvoting senior preferred shares to the Treasury under its TARP Capital Purchase
Program mainly to support growth in our lending operations and better position Valley for a potentially extended
downturn in the U.S. economy. Under the terms of the program, the Treasury’s consent will be required for any
increase in our dividends paid to common stockholders (above a quarterly dividend of $0.20 per common share)
or our redemption, purchase or acquisition of Valley common stock or any trust preferred securities issued by our
capital trusts until the third anniversary of the Valley senior preferred share issuance to the Treasury unless prior
to such third anniversary the senior preferred shares are redeemed in whole or the Treasury has transferred all of
these shares to third parties.
Investment Securities Portfolio
Securities are classified as held to maturity and carried at amortized cost when Valley has the positive intent
and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before
maturity, and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive
income, net of tax. Securities classified as trading are held primarily for sale in the short term or as part of our
balance sheet management strategies and are carried at fair value, with unrealized gains and losses included
immediately in other income. Valley determines the appropriate classification of securities at the time of
purchase. Securities with limited marketability and/or restrictions, such as Federal Home Loan Bank and Federal
Reserve Bank stocks, are carried at cost in other assets.
44
Investment securities at December 31, 2008, 2007 and 2006 were as follows:
2008
2007
2006
(in thousands)
Held to maturity:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
24,958
201,858
593,275
334,646
— $
—
230,201
52,073
273,839
10,009
—
233,592
342,798
423,016
Total investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . .
$1,154,737
$ 556,113
$1,009,415
Available for sale:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
102,564
48,191
1,215,386
34,504
1,400,645
34,797
5,133
326,086
43,828
1,049,596
85,288
1,509,931
96,479
$
9,851
390,930
47,852
1,256,637
26,968
1,732,238
37,743
Total investment securities available for sale . . . . . . . . . . . . . . . . . . . . . .
$1,435,442
$1,606,410
$1,769,981
Trading*:
U.S. government agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $ 224,945
2,803
—
28,959
—
465,870
34,236
Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
34,236
$ 722,577
$
—
4,655
—
—
4,655
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,624,415
$2,885,100
$2,784,051
*
See discussion at Notes 3 and 4 of the consolidated financial statements of Valley’s early adoption of SFAS Nos. 159 and 157 on
January 1, 2007.
The following table presents the maturity distribution schedule with its corresponding weighted-average
yields of held to maturity and available for sale securities at December 31, 2008:
U.S.
Government
Agency
Securities
Obligations of
States and
Political
Subdivisions
Mortgage-Backed
Securities (5)
Corporate and
Other Debt
Securities
Total (4)
Amount
(1)
Yield
(2)
Amount
(1)
Yield
(2) (3)
Amount
(1)
Yield
(2)
Amount
(1)
Yield
(2)
Amount
(1)
Yield
(2)
($ in thousands)
Held to maturity:
0-1 year . . . . . . . . . . . . . . . . . . . . . . .
1-5 years . . . . . . . . . . . . . . . . . . . . . .
5-10 years . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . .
$ —
—
—
24,958
— % $ 36,617
58,124
—
58,656
—
48,461
5.71
4.06% $
5.94
6.38
6.21
9
2
28,179
565,085
7.19% $ —
648
7.92
43,192
4.76
290,806
5.60
— % $
5.62
6.79
7.21
36,626
58,774
130,027
929,310
4.06%
5.94
6.16
6.14
Total securities . . . . . . . . . . . . . . .
$ 24,958
5.71% $201,858
5.79% $ 593,275
5.56% $334,646
7.15% $1,154,737
6.06%
Available for sale:
0-1 year . . . . . . . . . . . . . . . . . . . . . . .
1-5 years . . . . . . . . . . . . . . . . . . . . . .
5-10 years . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . .
$
1,016
1,004
—
100,544
5.13% $
5.10
—
5.36
2,050
36,537
3,128
6,476
6.17% $
6.99
7.75
6.82
1,168
9,056
37,770
1,167,392
5.00% $ —
968
7.31
688
5.30
32,848
5.51
— % $
5.17
7.21
7.08
4,234
47,565
41,586
1,307,260
5.59%
6.98
5.51
5.55
Total securities . . . . . . . . . . . . . . .
$102,564
5.35% $ 48,191
6.98% $1,215,386
5.52% $ 34,504
7.03% $1,400,645
5.59%
(1) Held to maturity amounts are presented at amortized costs, stated at cost less principal reductions, if any, and adjusted for accretion of
discounts and amortization of premiums. Available for sale amounts are presented at fair value.
(2) Average yields are calculated on a yield-to-maturity basis.
45
(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.
Our investment portfolio is mainly comprised of U.S. government and federal agency securities, tax-exempt
issues of states and political subdivisions, mortgage-backed securities, single-issuer trust preferred securities,
corporate bonds, and equity securities. There were no securities in the name of any one issuer exceeding 10
percent of shareholders’ equity, except for securities issued by U.S. government agencies, which includes the
Fannie Mae and the Freddie Mac. 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, 2008, we had $593.3 million and $1.2 billion of mortgage-backed securities classified as
held to maturity and available for sale securities, respectively. The majority of these mortgage-backed securities
held by Valley are issued or backed by federal agencies. Approximately $13.3 million and $130.6 million of the
mortgage-backed securities classified as held to maturity and available for sale securities, respectively, were
private label mortgage-backed securities. The mortgage-backed securities portfolio is a significant source of our
liquidity through the monthly cash flow of principal and interest. Mortgage-backed securities, like all securities,
are sensitive to change 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 lower yields. Conversely, rising interest rates will
reduce cash flows from prepayments and extend anticipated duration of these assets. We monitor the changes in
interest rates, cash flows and duration, in accordance with our investment policies. Management seeks out
investment securities with an attractive spread over our cost of funds.
As of December 31, 2008, we had $1.4 billion of securities classified available for sale, a decrease of $171.0
million from December 31, 2007. As of December 31, 2008, the available for sale securities had a net unrealized
loss of $32.7 million, net of deferred taxes, compared to a net unrealized loss of $778 thousand, net of deferred
taxes, at December 31, 2007. Available for sale securities are not considered trading account securities, but rather
are securities which may be sold on a non-routine basis.
As of December 31, 2008 and 2007, we had a total of $34.2 million and $722.6 million, respectively, in
trading account securities. The decrease was mainly due to the maturity and sale of short-term U.S. government
agencies, mortgage-backed securities, and short-term corporate debt classified as trading and the reallocation of
such proceeds to new loan originations during 2008. As of December 31, 2008, the entire trading portfolio
consisted of $34.2 million in trust preferred securities originally transferred to trading securities upon the
adoption of SFAS No. 159 on January 1, 2007.
Other-Than-Temporary Impairment Analysis
Management evaluates the held to maturity and available for sale investment securities portfolios quarterly for
other-than-temporary impairment. Other-than-temporary impairment means we believe the security’s impairment is
due to factors that could include its inability to pay interest or dividends, its potential for default, and/or other factors.
When a held to maturity or available for sale security becomes other-than-temporarily impaired, we have to record the
amount of its impairment as a realized securities loss in our income statement and permanently reduce stockholders’
equity and earnings by the amount of the loss. When a held to maturity security becomes other-than-temporarily
impaired, its value at the time of impairment becomes its new amortized cost basis.
To determine whether a security’s impairment is other-than-temporary, we consider factors that include:
• The causes of the decline in fair value, such as credit problems, interest rate fluctuations, or market
volatility.
• The severity and duration of the decline.
• Our ability and intent to hold these investments until they recover in value, mature, or are called.
46
For debt securities, the primary consideration in determining whether impairment is other-than-temporary is
whether or not it is probable that current or future contractual cash flows have or may be impaired.
The investment grades in the table below reflect multiple third parties independent analysis of each security.
For many securities, the rating agencies may not have performed an independent analysis of the tranches owned
by us, but rather an analysis of the entire investment pool. For this and other reasons, from our perspective, the
assigned investment grades may not reflect the actual credit quality of each investment.
The following table presents the held to maturity and available for sale investment securities portfolios by
investment grades at December 31, 2008:
Amortized
Cost
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Held to maturity:
Investment grades* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AAA Rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA Rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A Rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB Rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 652,820
123,318
195,209
44,899
138,491
$ 7,655
1,366
2,985
192
147
$
(870) $ 659,605
121,259
169,833
32,797
85,751
(3,425)
(28,361)
(12,294)
(52,887)
Total investment securities held to maturity . . .
$1,154,737
$12,345
$(97,837) $1,069,245
Available for sale:
Investment grades* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AAA Rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA Rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A Rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB Rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities available for
$1,345,344
70,698
38,661
8,979
10,675
14,972
$22,689
450
122
125
11
66
$(46,152) $1,321,881
53,650
(17,498)
25,657
(13,126)
8,996
(108)
10,686
—
14,572
(466)
sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,489,329
$23,463
$(77,350) $1,435,442
*
Rated using external rating agencies (primarily S&P and Moody’s). Ratings categories include entire range. For example, “A rated”
includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels.
The held to maturity portfolio includes $138.5 million in investments not rated by the rating agencies with
aggregate unrealized losses of $52.9 million at December 31, 2008. The unrealized losses for this category relate
primarily to 10 single-issuer bank trust preferred securities. These securities are all paying in accordance with
their terms and have no deferrals of interest or defaults. Additionally, we analyze the performance of the issuers
on a quarterly basis, including a review of the issuer’s most recent bank regulatory report to assess the
company’s credit risk and the probability of impairment of the contractual cash flows of the applicable security.
Based upon our fourth quarter review, all 10 issuers appear to meet the regulatory minimum requirements to be
considered “well-capitalized” financial institution at December 31, 2008.
Subsequent Downgrades to Securities Ratings
Corporate and other debt securities within the available for sale portfolio includes the one pooled trust
preferred security, which is collateralized by trust preferred securities principally issued by banks, with an
amortized cost of $17.8 million and a fair value of $7.2 million at December 31, 2008. At December 31, 2008,
this pooled security had an investment grade rating of AAA and a $10.6 million unrealized loss reported for
AAA rated available for sale securities in the table above. In late January 2009, S&P downgraded the security’s
47
rating to BBB-. The security is performing in accordance with its contractual terms and we have the ability and
intent to hold the security until market price recovery, which could be maturity. The overall issuance of $192
million includes one bank which is currently deferring interest payments and one default, the two issuers
represent a combined 4.5 percent of the overall security. As part of our impairment analysis, we reviewed the
underlying banks’ current financial performance, as well as their participation in the Treasury’s TARP program
to assist us in applying the appropriate constant default rate to our cash flow projections for the security. At
December 31, 2008, no other-than-temporary impairment was recorded for the security, as our super senior
tranche of this security had projected cash flows not less than their future contractual principal and interest
payments. The downgrade to the security’s rating in January 2009 did not change management’s assessment that
the security is temporarily impaired.
In late January 2009, three AAA rated private label mortgage-backed securities classified as available for
sale were downgraded by Moody’s to non-investment grade securities. These securities had a combined fair
value of $38.6 million and an unrealized loss of $11.0 million at December 31, 2008. As a result, management
updated its fourth quarter review of the tranches of these security issuances. To determine the range and
likelihood of potential principal and interest
losses on these tranches, management prepared cash flow
projections encompassing multiple market assumptions, including constant default rates well above the securities
actual loss experience. Based upon these cash flow projections, management projected that all future contractual
principal and interest payments will be received and no other-than-temporary impairment existed as of
December 31, 2008.
Other-than-Temporarily Impaired Securities
For the year ended December 31, 2008, we recognized other-than-temporary impairment charges of $84.8
million ($49.9 million after taxes) on securities classified as available for sale and held to maturity. The
impairment charges primarily relate to Fannie Mae and Freddie Mac perpetual preferred stocks classified as
available for sale with a combined adjusted book value of $1.3 million after write downs totaling $69.8 million
recorded primarily in the third and fourth quarters of 2008. During the third and fourth quarters of 2008, the
market values of these securities significantly declined after the U.S. Government placed Fannie Mae and
Freddie Mac into conservatorship and suspended their preferred stock dividends. Valley recognized a $17.9
million ($10.4 million after taxes) impairment charge on the same Freddie Mac and Fannie Mae perpetual
preferred securities during the fourth quarter of 2007. The valuation of these securities could increase over the
course of future market cycles if these institutions become viable institutions and are able to pay dividends on
these securities.
During September of 2008, prior to the recognition of the 2008 impairment charges discussed above, we
sold 50 percent of our position in one of the Fannie Mae perpetual preferred stocks classified as available for sale
and realized a loss of $5.4 million. This security had a total book value of $9.2 million prior to the date of sale.
During the fourth quarter of 2008, we recorded $14.2 million of other-than-temporary impairment on two of
the three pooled trust preferred securities owned by Valley, principally collateralized by securities issued by
banks, included in corporate and other debt securities within the investment securities held to maturity portfolio
and one private label mortgage-backed security classified as available for sale. The other-than-temporary
impairment was recorded for these securities, as each of our tranches in the three securities had projected cash
flows below their future contractual principal and interest payments. After the write down, the mortgage-backed
security had an adjusted carrying value of $9.4 million at December 31, 2008. The two pooled trust preferred
securities had a total adjusted carrying value of $1.1 million and were transferred from held to maturity to the
available for sale portfolio subsequent to the recognition of the other-than-temporary impairment. After the
analysis, management no longer had a positive intent to hold the pooled securities to their maturity dates due to
the significant deterioration in both issuers’ creditworthiness. As a result, we were required to transfer such
securities, under the provisions of SFAS No. 115, out of the held to maturity classification at December 31, 2008.
Other-than-temporary impairment is a non-cash charge and not necessarily an indicator of a permanent
decline in value. Security valuations require significant estimates, judgments and assumptions by management
and are considered a critical accounting policy of Valley. See the “Critical Accounting Policies and Estimates”
section above for further discussion of this policy.
48
Loan Portfolio
The following table reflects the composition of the loan portfolio for the five years ended December 31,
2008:
LOAN PORTFOLIO
2008
2007
2006
2005
2004
At December 31,
Commercial . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,965,372
$1,563,150
($ in thousands)
$1,466,862
$1,449,919
$1,259,997
Total commercial loans . . . . . . . . . . . .
1,965,372
1,563,150
1,466,862
1,449,919
1,259,997
Construction . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage . . . . . . . . . . . . . . . . . .
Commercial mortgage . . . . . . . . . . . . . . . . .
510,519
2,269,935
3,324,082
402,806
2,063,242
2,370,345
526,318
2,106,306
2,309,217
471,560
2,083,004
2,234,950
368,120
1,853,408
1,745,155
Total mortgage loans . . . . . . . . . . . . . .
6,104,536
4,836,393
4,941,841
4,789,514
3,966,683
Home equity . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . .
607,700
9,916
1,364,343
91,823
554,830
10,077
1,447,838
83,933
571,138
8,764
1,238,145
104,935
565,960
9,044
1,221,525
94,495
517,325
9,691
1,079,050
99,412
Total consumer loans . . . . . . . . . . . . .
2,073,782
2,096,678
1,922,982
1,891,024
1,705,478
Total loans* . . . . . . . . . . . . . . . . . . . . .
$10,143,690
$8,496,221
$8,331,685
$8,130,457
$6,932,158
As a percent of total loans:
Commercial loans . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . .
19. 4%
60.2
20.4
18.4%
56.9
24.7
17.6%
59.3
23.1
17.8%
58.9
23.3
18.2%
57.2
24.6
Total
. . . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
100.0%
100.0%
100.0%
100.0%
*
Total loans are net of unearned discount and deferred loan fees totaling $4.8 million, $3.5 million, $5.1 million, $6.3 million and $6.6
million at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.
During 2008, loans increased $1.6 billion, or 19.4 percent, to $10.1 billion at December 31, 2008 from $8.5
billion at December 31. 2007. The increase is mainly due to $812.5 million in loans acquired from Greater
Community and solid organic loan growth which was primarily comprised of increases in the commercial
mortgage and commercial loans, partially offset by a decrease in automobile loans. Our lending opportunities to
new quality borrowers expanded during 2008 due, in part, to our larger lending branch presence, through the
acquisition of 16 full-service branches from Greater Community and de novo branching, as well as less
competition from other financial institutions negatively impacted by capital constraints, and the market’s credit
and liquidity crisis.
Commercial loans increased $402.2 million or 25.7 percent to approximately $2.0 billion in 2008, partly due
to loans acquired from Greater Community of $130.8 million, and solid organic loan growth, which included the
continued benefits of a larger commercial lending team in 2008 and expanded lending opportunities with new
quality customers unable to find financing at other financial institutions with less available lending resources
being negatively impacted by the current market credit and liquidity crisis.
Mortgage loans, comprised of construction, residential and commercial mortgage loans, increased $1.3
billion, or 26.2 percent during 2008 to $6.1 billion at December 31, 2008 mainly due to $629.3 million in
mortgage loans acquired from Greater Community and organic commercial mortgage loan growth. Excluding
$493.0 million and $44.5 million, respectively, in loans acquired through the Greater Community acquisition,
commercial mortgage and construction loans grew organically by $460.8 million or 19.4 percent and $63.2
49
million or 15.7 percent, respectively. The organic growth seen in our commercial mortgage loan portfolio is
primarily attributable to the expansion of our lending teams throughout our growing branch network and our
continued ability to benefit from the dislocation in the credit markets. Construction loans increased mainly due to
one $60.0 million loan to acquire a residential building (which the customer intends to convert to condominiums)
in New York City in the fourth quarter of 2008. Residential mortgages increased $206.7 million to $2.3 billion at
December 31, 2008 as compared to December 31, 2007, partly due to $91.8 million in mortgage loans acquired
through the Greater Community acquisition. Excluding these acquired loans, residential mortgage loans
increased $114.9 million during 2008; however, mortgage loan originations declined during the second half of
the year due to a decline in home sales and refinancing activity, a drop in housing prices, and a downturn in the
U.S. economy. We may experience further declines in residential mortgage loan volumes during 2009 if the
economy continues to weaken. Additionally, based on our desired interest rate sensitivity position, we may
increase the amount of residential mortgages sold in the secondary market.
Consumer loans decreased $22.9 million to approximately $2.1 billion at December 31, 2008 compared to
the same period in 2007, primarily due to a decline in automobile loans, partly offset by the Greater Community
acquisition which added $52.4 million in loans (primarily home equity loans) to our consumer portfolio at July 1,
2008. Our automobile loan portfolio declined $83.5 million during 2008 mainly as a result of deterioration in
consumer demand for such products during the current economic downturn and tightening of our already
conservative auto loan credit standards for potential customers during the second half of the year.
Much of our lending is in northern and central New Jersey and New York City, with the exception of the
out-of-state auto loan portfolio, Small Business Administration (“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 our lending, this
could present a geographic and credit risk if there was a significant broad based downturn of the economy within
the region. At this point in the U.S. economic downturn, our primary lending markets have performed better than
the national average and other regions of the U.S. However, we can provide no assurance that our markets will
not deteriorate beyond their current levels in the future and cause an increase in the credit risk of our loan
portfolio.
The following table reflects the contractual maturity distribution of the commercial and construction loan
portfolios as of December 31, 2008:
One Year
or Less
One to
Five Years
Over
Five
Years
Total
(in thousands)
Commercial—fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial—adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction—fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Construction—adjustable rate.
$ 622,010
823,970
19,503
322,895
$201,997
267,584
19,934
148,187
$21,428
28,383
—
—
$ 845,435
1,119,937
39,437
471,082
$1,788,378
$637,702
$49,811
$2,475,891
Prior to maturity of each loan with a balloon payment and if the borrower requests an extension, we
generally conduct a review which normally includes an analysis of the borrower’s financial condition and, if
applicable, a review of the adequacy of collateral. A rollover of the loan at maturity may require a principal
paydown.
50
Non-performing Assets
Non-performing assets include non-accrual loans, other real estate owned (“OREO”), and other repossessed
assets which consists of one aircraft and automobiles at December 31, 2008. Loans are generally placed on a
non-accrual status when they become past due in excess of 90 days as to payment of principal or interest.
Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process
of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other
repossessed assets are reported at the lower of cost or fair value at the time of acquisition and at the lower of fair
value, less estimated costs to sell, or cost thereafter. The level of non-performing assets remained relatively low
as a percentage of the total loan portfolio as shown in the table below.
The following table sets forth non-performing assets and accruing loans which were 90 days or more past
due as to principal or interest payments on the dates indicated in conjunction with asset quality ratios for Valley:
LOAN QUALITY
At December 31,
2008
2007
2006
2005
2004
($ in thousands)
Loans past due in excess of 90 days and still accruing . . . . . . . $15,557 $ 8,462 $ 3,775 $ 4,442 $ 2,870
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,073
8,278
4,317
30,623
609
1,466
27,244
779
844
25,794
2,023
608
30,274
480
861
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . $45,668 $32,698 $28,867 $28,425 $31,615
Troubled debt restructured loans . . . . . . . . . . . . . . . . . . . . . . . . $ 7,628 $ 8,363 $
Total non-performing loans as a % of loans . . . . . . . . . . . . . . .
Total non-performing assets as a % of loans . . . . . . . . . . . . . . .
Allowance for loan losses as a % of non-performing loans . . . .
713 $
0.33% 0.36% 0.33% 0.32% 0.44%
0.45% 0.38% 0.35% 0.35% 0.46%
281.93% 237.29% 274.25% 291.49% 217.01%
821 $
104
Non-accrual loans have ranged from a low of $25.8 million to a high of $33.1 million over the last five
years. Our non-accrual experience as a percentage of total loans indicates that the amount of non-accrual loans is
historically low and there is no guarantee that this low level will continue. If interest on non-accrual loans had
been accrued in accordance with the original contractual terms, such interest income would have amounted to
approximately $2.7 million, $2.8 million and $2.1 million for the years ended December 31, 2008, 2007, and
2006, respectively; none of these amounts were included in interest income during these periods. Interest income
recognized on loans once classified as non-accrual loans totaled $9 thousand, $45 thousand and $498 thousand
for the years ended December 31, 2008, 2007, and 2006, respectively. No mortgage loans classified as loans held
for sale and carried at fair value were on non-accrual status at December 31, 2008.
OREO increased $7.7 million to $8.3 million at December 31, 2008 as compared to $609 thousand at
December 31, 2007. The increase was mainly comprised of two commercial loan properties and one commercial
mortgage loan property. Other repossessed assets increased approximately $2.8 million to $4.3 million at
December 31, 2008 from $1.5 million at December 31, 2007, mainly due to one $2.3 million commercial loan
collateralized by an aircraft that was repossessed and transferred to other repossessed assets during the second
quarter of 2008.
Loans 90 days or more past due and still accruing, which were not included in the non-performing category,
are presented in the above table. These loans ranged from 0.04 percent to 0.15 percent of total loans for the last
five years and increased $7.1 million to $15.6 million, or 0.15 percent of total loans at December 31, 2008
compared to $8.5 million or 0.10 percent at December 31, 2007. Loans past due 90 days or more and still
accruing include matured performing loans in the normal process of renewal which totaled approximately $4.0
million and $2.2 million December 31, 2008 and 2007, respectively. Loans past due 90 days or more and still
51
accruing represent most
loan types and are generally well secured and in the process of collection. At
December 31, 2008, no mortgage loans classified loans held for sale were 90 days or more past due and still
accruing interest.
Troubled debt restructured loans, with modified terms and not reported as loans 90 days or more past due
and still accruing or non-accrual, are presented in the table above. These restructured loans totaled $7.6 million
and $8.4 million at December 31, 2008 and 2007, respectively. Restructured loans consist of 3 commercial loans
and 15 commercial lease relationships at December 31, 2008. Of the 15 lease relationships, 13 had outstanding
balances of less than $50 thousand at December 31, 2008. One of the commercial loan relationships had an
unused line of credit and an unfunded construction loan commitment totaling $2.1 million at December 31, 2008.
Total loans past due in excess of 30 days were 1.06 percent of all loans at December 31, 2008 compared
with 1.0 percent at December 31, 2007 and include matured loans in the normal process of renewal totaling
approximately $6.9 million and $7.5 million at December 31, 2008 and 2007, respectively. We strive to keep the
loans past due in excess of 30 days at these current low levels, however, there is no guarantee that these low
levels will continue.
Although we believe that substantially all risk elements at December 31, 2008 have been disclosed in the
categories presented above, it is possible 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, management determined that there were approximately $26.8
million and $7.2 million in potential problem loans at December 31, 2008 and 2007, respectively, which were not
classified as non-accrual loans in the non-performing asset table above. 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. Our decision to include
performing loans in potential problem loans does not necessarily mean that management expects losses to occur,
but that management recognizes potential problem loans carry a higher probability of default. Of the $26.8
million in potential problem loans as of December 31, 2008, approximately $7.0 million is considered at risk
after collateral values and guarantees are taken into consideration. At December 31, 2008, the potential problem
loans consist of various types of credits, including commercial mortgages, revolving commercial lines of credit
and commercial leases.
In our Quarterly Reports on Form 10-Q for the period ended June 30, 2008 and September 30, 2008,
management reported that one performing commercial mortgage loan totaling approximately $25.7 million was a
potential problem loan. During the fourth quarter of 2008, the commercial buildings securing the loan were sold
to a third party that assumed the debt with modified terms and conditions. After a cash down payment by the new
borrower and settlement of certain escrow balances, the debt (i.e., the loan’s principal balance) was $20.7 million
at December 31, 2008. The loan remains a criticized loan under Valley’s internal loan review process as of
December 31, 2008 and, as a result, is closely monitored by management. Although, management feels the loan
(secured by two office buildings totaling 286,000 square feet located in New York City) is well-collateralized,
and is performing, there can be no assurance that the loan will not become a potential problem loan or that Valley
will not incur a loss related to the loan in the future.
There can be no assurance that Valley has identified all of its potential problem loans at December 31, 2008.
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 our business. For commercial loans, construction loans and
is responsible for risk assessment, credit file
commercial mortgage loans, a separate credit department
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. Our loan
portfolio is diversified as to type of borrower and loan. However, loans collateralized by real estate represent
approximately 60 percent of total loans at December 31, 2008. Most of the loans collateralized by real estate are
in northern and central New Jersey and New York City, presenting a geographical and credit risk if there was a
significant downturn of the economy within the region.
52
Residential mortgage loans are secured by 1-4 family properties generally located in counties where we
have branch presence and counties contiguous thereto (including Pennsylvania). We do provide mortgage loans
secured by homes beyond this primary geographic area, however, lending outside this primary area is generally
made in support of existing customer relationships. Underwriting policies that are based on Fannie Mae and
Freddie Mac guidelines 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 2008 was 59 percent while
FICO® (independent objective criteria measuring the creditworthiness of a borrower) scores averaged 746.
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. In addition to New Jersey, automobile loans are primarily
originated in several other states. Due to the level of our underwriting standards applied to all loans, management
believes the out of the state loans generally present no more risk than those made within New Jersey. However,
each loan or group of loans made outside of our primary markets poses some additional geographic risk based
upon the economy of that particular 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 credit losses
and related provision are an expression of management’s evaluation of the credit portfolio and economic climate.
53
The following table summarizes the relationship among loans, loans charged-off, loan recoveries, the
provision for credit losses and the allowance for credit losses on the years indicated:
2008
2007
2006
2005
2004
Years ended December 31,
Average loans outstanding . . . . . . . . . . . . . .
$9,386,987
$8,261,111
($ in thousands)
$8,262,739
$7,637,973
$6,541,993
Beginning balance—Allowance for credit
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
74,935
$
74,718
$
75,188
$
65,699
$
64,650
Loans charged-off:
Commercial . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . .
Mortgage—Commercial . . . . . . . . . . . .
Mortgage—Residential . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Consumer
Charged-off loans recovered:
Commercial . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . .
Mortgage—Commercial . . . . . . . . . . . .
Mortgage—Residential . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Consumer
(6,760)
—
(500)
(501)
(14,902)
(22,663)
627
—
6
—
2,141
2,774
(5,808)
—
(1,596)
(103)
(7,628)
(6,078)
—
(448)
(644)
(4,918)
(15,135)
(12,088)
1,427
—
254
17
1,779
3,477
528
—
181
54
1,585
2,348
(9,740)
9,270
—
(1,921)
—
(307)
(108)
(5,265)
(7,601)
1,474
—
129
130
1,765
3,498
(4,103)
4,340
9,252
(6,551)
—
(212)
(117)
(6,258)
(13,138)
3,394
—
237
51
2,502
6,184
(6,954)
8,003
—
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . .
Provision charged for credit losses . . . . . . . .
Additions from acquisitions . . . . . . . . . . . . .
(19,889)
28,282
11,410
(11,658)
11,875
—
Ending balance—Allowance for credit
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of allowance for credit losses:
Allowance for loan losses . . . . . . . . . . .
Reserve for unfunded letters of
credit* . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . .
Components of provision for credit losses:
Provision for loan losses . . . . . . . . . . . .
Provision for unfunded letters of
$
$
$
$
94,738
$
74,935
$
74,718
93,244
$
72,664
$
74,718
1,494
2,271
—
94,738
$
74,935
$
74,718
29,059
$
12,751
$
9,270
$
$
$
$
75,188
$
65,699
75,188
$
65,699
—
—
75,188
$
65,699
4,340
$
8,003
credit* . . . . . . . . . . . . . . . . . . . . . . . .
(777)
(876)
—
—
—
Provision for credit losses . . . . . . . . . . .
$
28,282
$
11,875
$
9,270
$
4,340
$
8,003
Ratio of net charge-offs during the period to
average loans outstanding during the
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses as a % of loans . .
Allowance for credit losses as a % of
0.21%
0.92%
0.14%
0.86%
0.12%
0.90%
0.05%
0.92%
0.11%
0.95%
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.93%
0.88%
0.90%
0.92%
0.95%
*
Effective January 1, 2007, Valley transferred $3.1 million of the allowance for loan losses related to commercial lending letters of credit
to other liabilities.
54
Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of
the loan portfolio and unfunded letter of credit commitments. The allowance is based on ongoing evaluations of
the probable estimated losses inherent in the loan portfolio. Our methodology for evaluating the appropriateness
of the allowance includes segmentation of the loan portfolio into its various components, tracking the historical
levels of criticized loans and delinquencies, and assessing the nature and trend of loan charge-offs. Additionally,
the volume of non-performing loans, concentration risks by size, type, and geography, new markets, collateral
adequacy, credit policies and procedures, staffing, underwriting consistency, and economic conditions are taken
into consideration.
The Bank’s allocated allowance is calculated by applying loss factors to outstanding loans and unfunded
commitments. 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 the Bank’s historical loss experience and may be adjusted for significant changes in the current loan
portfolio quality that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation
date.
The allowance contains reserves identified as the unallocated portion in the table below to cover inherent
losses within a given loan category which have not been otherwise reviewed or measured on an individual basis.
Such reserves include management’s evaluation of the national and local economy, loan portfolio volumes, the
composition and concentrations of credit, credit quality and delinquency trends. These reserves reflect
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. Net charge-off levels have remained relatively low in the
last five years, but have increased to a high of 0.21 percent of average loans in 2008 from a low of 0.05 percent
in 2005. The 2008 increase in net charge-offs was mainly due to higher automobile loan charge-offs caused by
the financial crisis. During the second half of the year, we tightened our credit standards on automobile loans and
the demand for such products also declined substantially during the same period reducing our auto portfolio
balance. Despite these efforts, there can be no guarantee that our net charge-off levels for automobile loans and
our other generally well secured loan categories will not continue to rise during 2009 given the current downturn
in the U.S. economy and its potential effect on the future performance of our loan portfolio.
The provision for credit losses was $28.3 million in 2008 compared to $11.9 million in 2007. The $16.4
million increase reflects the increase in the loan portfolio (excluding the $812.5 million in loans acquired from
Greater Community), the increased level of net loan charge-offs and delinquencies, and the deterioration in
economic conditions during the year ended December 31, 2008.
The following table summarizes the allocation of the allowance for credit losses to specific loan categories
for the past five years:
Years ended December 31,
2008
2007
2006
2005
2004
Percent
of Loan
Category
to Total
Loans
Allowance
Allocation
Allowance
Allocation
Percent
of Loan
Category
to Total
Loans
($ in thousands)
Percent
of Loan
Category
to Total
Loans
Allowance
Allocation
Percent
of Loan
Category
to Total
Loans
Allowance
Allocation
Percent
of Loan
Category
to Total
Loans
Allowance
Allocation
Loan category:
Commercial* . . . . .
Mortgage . . . . . . . .
. . . . . . .
Consumer
Unallocated . . . . . .
$44,163
30,354
14,318
5,903
19.4% $31,638
23,660
60.2
10,815
20.4
8,822
N/A
18.4% $31,888
27,942
56.9
8,189
24.7
6,699
N/A
17.6% $34,828
28,200
59.3
8,174
23.1
3,986
N/A
17.8% $29,166
23,033
58.9
7,884
23.3
5,616
N/A
18.2%
57.2
24.6
N/A
$94,738
100.0% $74,935
100.0% $74,718
100.0% $75,188
100.0% $65,699
100.0%
*
Includes the reserve for unfunded letters of credit totaling $1.5 million and $2.3 million at December 31, 2008 and 2007, respectively.
55
At December 31, 2008, the allowance for credit losses amounted to $94.7 million or 0.93 percent of loans,
as compared to $74.9 million or 0.88 percent at December 31, 2007. The allowance was adjusted by provisions
charged against income, charge-offs, net of recoveries, as well as an additional amount recorded in connection
with the Greater Community acquisition. The five basis point increase in the allowance for credit losses as a
percentage of total loans from 2007 was mainly due to loan growth, including non-acquisition related expansion
in commercial mortgage and commercial loan categories, additional reserves of $11.4 million assumed in the
Greater Community acquisition (which totaled 1.4 percent of the $812.5 million loans acquired on July 1, 2008)
and higher loss factors for automobile loans. Allocations of the allowance for impaired loans decreased $500
thousand from 2007 mainly due to the relative value of the assets collateralizing the majority of these impaired
loans. See Note 5 to the consolidated financial statements for further analysis of the impaired loan portfolio.
Increases in non-performing loans at December 31, 2008, as noted in the “Non-performing Asset” section above,
had a relatively minor impact on the level of the allowance for credit losses primarily due to the generally well
secured nature of these credits. Loans past due in excess of 90 days and still accruing were up by 0.05 percent to
0.15 percent of total loans at December 31, 2008 as compared to December 31, 2007, driven primarily by a
number of well collateralized commercial and residential mortgage credits. These factors had a relatively minor
impact on the level of the allowance for credit losses at December 31, 2008.
Management believes that the unallocated allowance is appropriate given the current weakened economic
climate, the size of the loan portfolio and delinquency trends at December 31, 2008.
The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific
allocations to the allowance for loan losses totaled $22.4 million and $2.1 million, respectively, at December 31,
2008 and $28.9 million and $2.6 million, respectively, at December 31, 2007. The average balance of impaired
loans during 2008, 2007 and 2006 was approximately $25.3 million, $23.8 million and $20.7 million,
respectively. The amount of interest that would have been recorded under the original terms for impaired loans
was $984 thousand for 2008, $1.3 million for 2007, and $1.2 million for 2006. Interest was not 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,
2008 and December 31, 2007, shareholders’ equity totaled $1.4 billion and $949.1 million, respectively, or 9.3
percent and 7.4 percent of total assets, respectively. The increase in total shareholders’ equity during the year
ended December 31, 2008 was mainly the result of the issuance of $300.0 million in nonvoting senior preferred
shares, the additional capital issued in the Greater Community acquisition totaling $167.8 million, net income of
$93.6 million, and treasury stock issued for stock-based compensation, including stock option swap exercises,
partially offset by cash dividends declared to common shareholders of $104.4 million, dividends and accretion on
preferred stock of $2.1 million, and an increase in accumulated other comprehensive loss.
Included in shareholders’ equity as a component of accumulated other comprehensive loss at December 31,
2008 was a $32.7 million net unrealized loss on investment securities available for sale, net of deferred tax
compared to a $778 thousand net unrealized loss, net of deferred tax at December 31, 2007. Also, included as a
component of accumulated other comprehensive loss at December 31, 2008 was $23.2 million, representing the
unfunded portion of Valley’s various pension obligations, due to the adoption of SFAS No. 158 on December 31,
2006 and a $5.0 million unrealized loss on derivatives, net of deferred tax used in cash flow hedging
relationships.
On January 17, 2007, Valley’s Board of Directors approved the repurchase of up to 3.9 million common
shares. Purchases may be made from time to time in the open market or in privately negotiated transactions
generally not exceeding prevailing market prices. Repurchased shares are held in treasury and are expected to be
used for general corporate purposes. Valley made no purchases of its outstanding shares during the year ended
December 31, 2008. Valley purchased approximately 475 thousand shares during 2007 pursuant to this plan at an
average cost of $19.49 per share. Valley’s Board of Directors previously authorized the repurchase of up to
3.2 million shares of Valley’s outstanding common stock on May 14, 2003. During 2007, Valley repurchased the
56
remaining 1.2 million shares of its common stock under the 2003 publicly announced program at an average cost
of $22.78 per share. No further repurchases will be made under the terms of the nonvoting senior preferred shares
sold to the Treasury while such shares are owned by the Treasury.
On November 14, 2008, Valley issued $300 million in nonvoting senior preferred shares to the Treasury
under its TARP Capital Purchase Program mainly to support growth in our lending operations and better position
Valley for a potentially extended downturn in the U.S. economy. Our senior preferred shares will pay a
cumulative dividend rate of five percent per annum for the first five years and will reset to a rate of nine percent
per annum after year five. Under the terms of the program, the Treasury’s consent will be required for any
increase in our dividends paid to common stockholders (above a quarterly dividend of $0.20 per common share)
or our redemption, purchase or acquisition of Valley common stock or any trust preferred securities issued by our
capital trusts until the third anniversary of the Valley senior preferred share issuance to the Treasury unless prior
to such third anniversary the senior preferred shares are redeemed in whole or the Treasury has transferred all of
these shares to third parties. The senior preferred shares are 100 percent allowable in Tier I Capital for
Regulatory purposes.
In conjunction with the purchase of our senior preferred shares, the Treasury received a ten year warrant to
purchase up to approximately 2.3 million of Valley common shares with an aggregate market price equal to $45
million or 15 percent of the senior preferred investment. The warrant has several unique features, including our
right to reduce the number of shares of Valley common stock underlying the warrant by 50 percent if before
December 31, 2009 we issue $300 million of equity capital, and the fact that the warrant is exercisable on a net
exercise basis. Our common stock underlying the warrant represents approximately 1.7 percent of our
outstanding common shares at December 31, 2008. The warrant’s exercise price of $19.59 per share was
calculated based on the average of closing prices of Valley’s common stock on the 20 trading days ending on the
last trading day prior to the date of the Treasury’s approval of our application under the program.
Valley may redeem the senior preferred shares three years after the date of the Treasury’s investment, or
earlier if it raises in an equity offering net proceeds equal to the amount of the senior preferred shares to be
redeemed. It must raise proceeds equal to at least 25% of the issue price of the senior preferred shares to redeem
any senior preferred shares prior to the end of the third year. The redemption price is equal to the sum of the
liquidation amount per share and any accrued and unpaid dividends on the senior preferred shares up to, but
excluding, the date fixed for redemption. Notwithstanding the foregoing limitations, under the Recovery Act the
Treasury may, after consultation with Valley’s federal regulator, permit Valley at any time to redeem the senior
preferred shares. Upon such redemption, the Treasury will liquidate at the current market price the warrant that
Valley issued to the Treasury.
Our senior preferred shares and the warrant issued under the TARP program qualify and are accounted for
as permanent equity on our balance sheet. Of the $300 million in issuance proceeds, $291.4 million and $8.6
million were allocated to the senior preferred shares and the warrant, respectively, based upon their estimated
relative fair values as of November 14, 2008. The discount of $8.6 million recorded for the senior preferred
shares is being amortized to retained earnings over a five year estimated life of the securities based on the
likelihood of their redemption by us within that timeframe.
Risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common shareholders’
equity and eligible long-term borrowing related to VNB Capital Trust I and GCB Capital Trust III, less
disallowed intangibles and adjusted to exclude unrealized gains and losses, net of deferred tax. Total risk-based
capital consists of Tier 1 capital, Valley National Bank’s subordinated borrowings and the allowance for credit
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.
Valley’s regulatory capital position included $176.3 million and $160.0 million of its outstanding trust
preferred securities issued by capital trusts as of December 31, 2008 and 2007, respectively. Including these
securities and our senior preferred shares, Valley’s capital position under risk-based capital guidelines was $1.3
billion, or 11.4 percent of risk-weighted assets for Tier 1 capital and $1.5 billion or 13.2 percent for total risk-
57
based capital at December 31, 2008. The comparable ratios at December 31, 2007 were 9.6 percent for Tier 1
capital and 11.4 percent for total risk-based capital. At December 31, 2008 and 2007, Valley was in compliance
with the leverage requirement having Tier 1 leverage ratios of 9.1 percent and 7.6 percent, respectively. The
Bank’s ratios at December 31, 2008 were all above the minimum levels required for Valley to be considered
“well capitalized”, 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.
In March 2005, the Federal Reserve Board issued a final rule that would continue to allow the inclusion of
trust preferred securities in Tier I capital, but with stricter quantitative limits. The new quantitative limits will
become effective on March 31, 2009. 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 total capital, subject to
restrictions. Based on the final rule issued in March 2005, Valley included all of its outstanding trust preferred
securities in Tier I capital at December 31, 2008 and 2007. See Note 12 of the consolidated financial statements
for additional information.
Book value per common share amounted to $7.94 at December 31, 2008 compared with $7.54 per common
share at December 31, 2007.
The primary source of capital growth is through retention of earnings. Our rate of earnings retention is
derived by dividing undistributed earnings per common share by net income available to common stockholders
per common share. Primarily due to the other-than-temporary impairment charges and realized losses on
investment securities held in the available for sale and held to maturity portfolios, our cash dividend pay-out per
common share for the year ended December 31, 2008 was greater than our earnings for the same period, thereby
causing the earnings retention rate to be zero for the same period. Our annual rate of earnings retention is
expected to increase in 2009, unless we were to experience adverse effects, such as incurring additional
impairment charges within our investment securities portfolio or due to the occurrence of one or more of the risk
factors inherent to our business disclosed in Part I, Item 1A of this report. The retention ratio for the comparable
year ended December 31, 2007 was 34.5 percent. Cash dividends declared amounted to $0.80 per common share
for the years ended December 31, 2008 and 2007. Valley’s Board of Directors continues to believe that cash
dividends are an important component of shareholder value and at its current level of performance and capital,
we expect to continue our current dividend policy of a quarterly cash distribution of earnings to our shareholders
within the restrictions of the Treasury’s TARP program relating to our senior preferred shares described above.
Off-Balance Sheet Arrangements
Contractual Obligations.
In the ordinary course of operations, Valley enters into 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 consolidated financial statements.
The following table presents significant fixed and determinable contractual obligations to third parties by
payment date as of December 31, 2008:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures issued to
capital trusts* . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . .
One Year
or Less
One to
Three Years
Three to
Five Years
Over Five
Years
Total
$3,072,986
59,494
$294,213
270,305
(in thousands)
$173,021
29,729
$
81,039
2,649,225
$3,621,259
3,008,753
—
13,051
10,425
—
24,902
—
—
23,962
—
181,767
145,568
—
181,767
207,483
10,425
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,154,410
$593,061
$225,325
$3,056,891
$7,029,687
*
Amounts presented are the contractual principal balances. The junior subordinated debentures issued to VNB Capital Trust I are carried
at fair value of $140.1 million on the consolidated statement of condition at December 31, 2008.
58
Valley also has obligations under its pension benefit plans, not included in the above table, as further
described in Note 13 of the consolidated financial statements.
Commitments. As a financial services provider, we routinely enter into commitments to extend credit,
including loan commitments, standby and commercial letters of credit. While these contractual obligations
represent our future cash requirements, a significant portion of commitments to extend credit may expire without
being drawn on based upon our historical experience. Such commitments are subject to the same credit policies
and approval process accorded to loans made by the Bank. For additional information, see Note 15 of the
consolidated financial statements.
The following table shows the amounts and expected maturities of significant commitments as of
December 31, 2008:
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,680,951
$170,721
$17,404
$155,549
$2,024,625
Home equity and other revolving lines of
credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
646,482
—
—
—
646,482
Outstanding commercial mortgage loan
commitments . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Standby letters of credit
Outstanding residential mortgage loan
170,647
142,490
153,314
6,969
1,000
11,200
—
15,942
324,961
176,601
commitments . . . . . . . . . . . . . . . . . . . . . . . . . .
34,703
—
Commitments under unused lines of credit—
credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial letters of credit . . . . . . . . . . . . . . . . .
Commitments to sell loans . . . . . . . . . . . . . . . . . .
Commitments to fund civic and community
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,766
9,918
15,750
1,081
10,787
37,721
—
—
608
3,102
—
—
—
—
—
629
—
—
—
—
—
—
34,703
82,487
9,918
15,750
1,689
14,518
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,757,575
$372,435
$30,233
$171,491
$3,331,734
Included in the other commitments are projected earn-outs of $507 thousand that are scheduled to be paid
over the next three year period in conjunction with our acquisition of an insurance agency (which was merged
with Masters Coverage Corp., a wholly-owned subsidiary of Valley National Bank) in 2006. 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.
Derivative Financial Instruments. Use of derivative financial instruments is one of several ways in
which Valley can manage its interest rate risk. In general, the assets and liabilities generated through the ordinary
course of business activities do not naturally create offsetting positions with respect to repricing, basis or
maturity characteristics. Valley has used certain derivative instruments, principally interest rate swaps and caps,
as part of its asset/liability management practices to adjust the interest rate sensitivity of its loan portfolio,
deposits and the overall balance sheet.
Fair Value Hedge—Interest Rate Swap
In 2005, Valley entered into a $9.7 million amortizing notional interest rate swap to hedge changes in the
fair value of a fixed rate loan that it made to a commercial borrower. Valley has designated the interest rate swap
as a fair value hedge according to SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” The changes in the fair value of the interest rate swap are recorded through earnings and are offset by
the changes in fair value of the hedged fixed rate loan. As of December 31, 2008 and December 31, 2007, the
59
interest rate swap had a fair value of $2.0 million and $424 thousand, respectively, included in other liabilities on
the consolidated statements of financial condition. No material hedge ineffectiveness existed on the interest rate
swap during the years ended December 31, 2008, 2007 and 2006.
Cash Flow Hedge—Interest Rate Swap
In 2004, Valley entered into interest rate swap transactions designated as cash flow hedges which effectively
converted $300 million of its prime-based floating rate commercial loans to a fixed rate. The cash flow hedges
involved 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. The cash flow hedges expired on August 1, 2006.
Prior to the cash flow hedge expiration in 2006, unrealized losses, net of tax benefits, reported in
accumulated other comprehensive income related to cash flow hedges were reclassified to interest income as
interest payments were received on the applicable variable rate loans. For the year ended December 31, 2006,
unrealized losses of $3.2 million were reclassified out of other comprehensive income as the hedged forecasted
transactions occurred and recognized as a component of interest income. No material hedge ineffectiveness
existed on the interest rate swap during the years ended December 31, 2006.
Cash Flow Hedge—Interest Rate Caps
In the second quarter of 2008, Valley purchased two interest rate caps designated as cash flow hedges to
protect against movements in interest rates above the caps’ strike rate based on the effective federal funds rate.
The interest rate caps have an aggregate notional amount of $100.0 million, strike rates of 2.50 percent and 2.75
percent, and a maturity date of May 1, 2013. Through November of 2008, the caps were used to hedge the
variable cash flows associated with customer repurchase agreements (included in short-term borrowings) and
money market deposit accounts that had variable interest rates based on an effective federal funds rate less 25
basis points. During November, the hedging relationship was terminated since the rates paid on the customer
repurchase agreements and money market deposit accounts did not trend with the effective federal funds rate
(this was caused by historically unprecedented low level of the effective federal funds rate thereby causing
Valley to modify the benchmark used to pay interest on these accounts). As a result, from the termination date of
the hedging relationship in November of 2008 through December 31, 2008, a $2.4 million change in fair value of
these derivatives not designated as hedges was included in other expense for the year ended December 31, 2008.
As of December 31, 2008, the two interest rate caps were not redesignated in a new hedging relationship and are
subject to future changes in their fair value which will be charged to our earnings.
In the third quarter of 2008, Valley purchased two interest rate caps designated as cash flow hedges, to
reduce its exposure to movements in interest rates above the caps’ strike rate based on the prime interest rate (as
published in The Wall Street Journal). The interest rate caps have an aggregate notional amount of $100.0
million, strike rates of 6.00 percent and 6.25 percent, and a maturity date of July 15, 2015. The caps are used to
hedge the total change in cash flows associated with prime-rate-indexed deposits, consisting of consumer and
commercial money market deposit accounts, which have variable interest rates of 2.75 percent below the prime
rate.
At December 31, 2008, the federal funds and prime based interest rate caps had a combined fair value of
$3.3 million included in other assets. For the year ended December 31, 2008, other comprehensive loss includes
$5.0 million for changes in net unrealized losses on the cash flow hedges, net of taxes. Amounts reported in
accumulated other comprehensive income related to the interest rate caps are reclassified to interest expense as
interest payments are made on the hedged variable interest rate liabilities. For the year ended December 31, 2008,
the change in net unrealized losses on the cash flow hedges reflect a reclassification of approximately $747
thousand from accumulated other comprehensive income to interest expense. Of this amount, $642 thousand was
due to our acceleration of amounts related to the total forecasted changes in cash flows that are not probable to
occur. We estimate an unrealized loss of $318 thousand, net of tax, will be reclassified out of other
comprehensive loss and realized as an addition to interest expense during 2009.
60
For the year ended December 31, 2008, Valley recognized a loss of $21 thousand in other expense for hedge
ineffectiveness on the federal funds based interest rate caps. There was no ineffectiveness recognized on the
prime based interest rate caps during 2008.
Other Derivative Transactions
During the second quarter of 2007, Valley executed and subsequently terminated a series of interest rate
derivative transactions with a notional amount of approximately $1.0 billion. The intended purpose of the
derivative transactions was to offset volatility in changes in the market value of over $800 million in trading
securities consisting primarily of mortgage-backed securities transferred from the available for sale portfolio at
January 1, 2007. These hedged securities were sold during the second quarter of 2007 in conjunction with the
termination of the derivative transactions. See further discussion of these transactions at Note 3 to the
consolidated financial statements.
Trust Preferred Securities.
In addition to the commitments and derivative financial instruments of the
types described above, our off balance sheet arrangements include a $5.5 million ownership interest in the
common securities of our statutory trusts to issue trust preferred securities. See “Capital Adequacy” section
above in this Item 7 and Note 12 of the consolidated financial statements.
Results of Operations—2007 Compared to 2006
Net income was $153.2 million or $1.21 per diluted share, return on average assets was 1.25 percent and
return on average shareholders’ equity was 16.43 percent for 2007. This compares with net income of $163.7
million or $1.27 per diluted share in 2006, return on average assets of 1.33 percent and return on average
shareholders’ equity of 17.24 percent in 2006.
Net interest income on a tax equivalent basis decreased to $387.9 million for 2007 compared with $397.7
million for 2006. During 2007, the yield on average interest earning assets increased over 2006, but was more
than offset by an increase in the interest rates paid on average interest bearing liabilities and higher average
balances in time deposits and long-term borrowings.
The net interest margin on a tax equivalent basis was 3.43 percent for the year ended December 31, 2007
compared with 3.46 percent for the same period in 2006. The change was mainly attributable to the increase in
interest paid on time deposits and long-term borrowings and an increase in the average balance of such interest
bearing liabilities, partially offset by a higher yield on average loans and investments. Average interest rates
earned on interest earning assets increased 25 basis points while average interest rates paid on interest bearing
liabilities increased 30 basis points causing a compression in the net interest margin in 2007 for Valley as
compared to the year ended December 31, 2006.
Average loans totaling $8.3 billion for the year ended December 31, 2007 remained flat as compared to the
same period in 2006. Average investments securities declined $304.8 million, or 9.7 percent in 2007 as compared
to the year ended December 31, 2006. Despite the flat loan volumes, interest income on a tax equivalent basis for
loans increased $15.6 million for the year ended December 31, 2007 compared with the same period in 2006 due
to a 19 basis point increase in the yield on average loans. Interest income on a tax equivalent basis for investment
securities decreased $4.9 million or 2.9 percent mainly due to the decrease in average investment securities for
the twelve months in 2007 compared to the same period in 2006. The decrease in average investment securities
was mainly due to investment cash flows reallocation to federal funds sold, held through most of the third quarter
of 2007, as well as $75.0 million allocated to an additional investment in bank owned life insurance during the
second quarter of 2007.
Average interest bearing liabilities totaling $9.4 billion for the year ended December 31, 2007 remained
relatively unchanged from the same period in 2006. Average time deposits increased $190.2 million, or 6.9
percent due to some movement of lower yielding deposit accounts to time deposits as the yield on average time
deposits increased 49 basis points from 2006, as well as new time deposit accounts from the six de novo branches
61
opened in 2007 and other existing branches. Average long-term borrowings increased $58.5 million from 2006 as
Valley increased its long-term positions in lower cost Federal Home Loan Bank advances during the fourth
quarter of 2007. Average savings, NOW, and money market deposits decreased $284.5 million, or 7.6 percent for
2007 as compared to 2006 mainly due to aggressive pricing by our competitors in the marketplace, as well as
customer movement from lower yielding deposit accounts to higher yielding alternatives, such as certificates of
deposit.
Non-interest income represented 10.9 percent and 9.2 percent of total interest income plus non-interest
income for 2007 and 2006, respectively. For the year ended December 31, 2007, non-interest income increased
$17.0 million or 23.5 percent, compared with the same period in 2006.
Service charges on deposit accounts increased $3.6 million, or 15.3 percent in 2007 compared with 2006
mainly due to stronger overdraft fee collection initiatives implemented by management throughout Valley’s
branch network operations during 2007.
Losses on securities transactions, net, increased $10.3 million to a net loss of $15.8 million for the year
ended December 31, 2007. The increase was mainly due to an other-than-temporary impairment charge totaling
$17.9 million ($10.4 million after-taxes) with regard to Fannie Mae and Freddie Mac perpetual preferred
securities during the fourth quarter of 2007. During 2006, Valley recognized a net loss of $5.5 million mainly due
to a $4.7 million impairment charge recognized on certain mortgage-backed and equity securities classified as
available for sale and a $2.1 million loss on trust preferred securities called for redemption prior to their
scheduled maturity date, partially offset by various gains on securities transactions throughout 2006.
Net gains on trading securities increased $6.2 million for the year ended December 31, 2007 compared with
the same period in 2006 mainly due to $2.7 million in net unrealized gains on Valley’s Junior subordinated
debentures issued to VNB Capital Trust I and one Federal Home Loan Bank held at fair value and increased
trading activity in 2007 resulting from Valley’s early adoption of SFAS Nos. 157 and 159. Valley elected to fair
value investment securities with a total carrying amount of approximately $1.3 billion at January 1, 2007. During
the second quarter of 2007, Valley executed a series of interest rate derivative transactions designed to hedge the
market risk inherent in the trading securities. The derivative transactions did not offset the volatility in the
trading securities to the extent expected and as a result Valley sold approximately $1.0 billion of these securities
and simultaneously terminated the derivative transactions. The majority of these securities sold during the second
quarter of 2007 were replaced with shorter duration investments held in trading securities as of December 31,
2007.
Gains on sales of loans, net, increased $3.3 million to $4.8 million for the year ended December 31, 2007
compared to $1.5 million for the prior year. This increase was primarily due to the gains realized on the sale of
approximately $240 million of residential mortgage loans held for sale during 2007 that Valley elected to carry at
fair value effective as of January 1, 2007.
Gains on sales of assets, net increased $12.2 million, to $16.1 million for the year-ended December 31, 2007
compared to $3.8 million for the same period in 2006 mainly due to a $16.4 million immediate gain recognized
on the sale of a Manhattan office building in the first quarter of 2007. Valley sold the nine-story building for
approximately $37.5 million while simultaneously entering into a long-term lease for its branch office located on
the first floor of the same building. The transaction resulted in a $32.3 million pre-tax gain, of which $16.4
million was immediately recognized in earnings in 2007 and $15.9 million was deferred and amortized into
earnings over the 20 year term of the lease pursuant to the sale-leaseback accounting rules. Approximately $594
thousand of the initial deferred gain was amortized to net gains on sales of assets during 2007. During 2006,
Valley sold an office building located in Manhattan that was originally intended for construction of a new
branch, however, Valley ultimately decided to sell the property and not pursue the project. The transaction
resulted in $3.8 million gain recognized in the fourth quarter of 2006.
BOLI income increased $3.4 million, or 41.3 percent for year-ended December 31, 2007 compared with the
same period of 2006 due to income generated from an additional BOLI investment of $75.0 million during the
second quarter of 2007 which was invested to offset rising employee benefit costs.
62
Non-interest expense increased $3.6 million thousand to $253.9 million for the year-ended December 31,
2007 from $250.3 million for the same period in 2006. Increases in salary expense, employee benefit expense,
goodwill
impairment, and net occupancy and equipment expense were partially offset with decreases in
amortization of other intangible assets, professional and legal fees, and advertising. Valley incurred additional
expenses due to de novo expansion efforts in 2007 and 2006 in its target expansion areas of northern and central
New Jersey, New York City, Brooklyn and Queens. These expansion efforts will negatively impact non-interest
expense until these new branches become profitable or breakeven, typically over a period of three years. The
largest component of non-interest expense is salary and employee benefit expense which totaled $145.7 million
in 2007 compared with $138.4 million in 2006.
Income tax expense was $51.7 million for the year ended December 31, 2007, reflecting an effective tax rate
of 25.2 percent, compared with $39.9 million for the year ended December 31, 2006, reflecting an effective tax
rate of 19.6 percent. The increase in 2007 income tax expense reflects a $13.5 million tax benefit recognized
during the comparable 2006 period due to management’s reassessment of required tax accruals.
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.”
63
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities:
Held to maturity, fair value of $1,069,245 at December 31, 2008 and $548,353 at
December 31,
2008
2007
(in thousands except for
share data)
$
$
237,497
343,010
—
218,896
9,569
9,000
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,154,737
1,435,442
34,236
556,113
1,606,410
722,577
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,624,415
2,885,100
Loans held for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,542
10,143,690
(93,244)
2,984
8,496,221
(72,664)
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,050,446
8,423,557
Premises and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from customers on acceptances outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
256,343
300,058
57,717
9,410
295,146
25,954
513,591
227,553
273,613
56,578
8,875
179,835
24,712
428,687
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,718,129
$12,748,959
Liabilities
Deposits:
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing:
$ 2,118,249
$ 1,929,555
Savings, NOW and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,493,415
3,621,259
3,382,474
2,778,975
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,232,923
8,091,004
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings (includes fair value of $41,359 for a Federal Home Loan Bank advance
640,304
605,154
at December 31, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,008,753
2,801,195
Junior subordinated debentures issued to capital trusts (includes fair value of $140,065 at
December 31, 2008 and $163,233 at December 31, 2007 for VNB Capital Trust I) . . . . . . . . .
Bank acceptances outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
165,390
9,410
297,740
163,233
8,875
130,438
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,354,520
11,799,899
Shareholders’ Equity
Preferred stock, no par value, authorized 30,000,000 shares; issued 300,000 shares at
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,539
—
Common stock, no par value, authorized 190,886,088 shares; issued 136,970,912 shares at
December 31, 2008 and 128,503,294 shares at December 31, 2007 . . . . . . . . . . . . . . . . . . . . .
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (1,946,882 common shares at December 31, 2008 and 2,659,220
48,228
1,047,085
85,234
(60,931)
common shares at December 31, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(47,546)
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,363,609
43,185
879,892
104,225
(12,982)
(65,260)
949,060
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,718,129
$12,748,959
See accompanying notes to consolidated financial statements.
64
CONSOLIDATED STATEMENTS OF INCOME
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, NOW and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on long-term borrowings and junior subordinated debentures . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income After Provision for Credit Losses . . . . . . . . . . . . . . .
Non-Interest Income
Trust and investment services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses on securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees from loan servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of loans, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Interest Expense
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income Available to Common Stockholders . . . . . . . . . . . . . . . . . . . . .
Earnings Per Common Share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Dividends Declared Per Common Share . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Number of Common Shares Outstanding:
Years ended December 31,
2008
2007
2006
(in thousands, except for share data)
$
572,918
$
560,066
$
544,440
137,763
10,089
6,734
2,190
729,694
45,961
117,152
10,163
135,619
308,895
420,799
28,282
392,517
7,161
10,053
28,274
(79,815)
3,166
5,236
1,274
518
10,167
17,222
3,256
126,210
31,666
54,042
7,224
—
8,241
2,697
55,168
285,248
110,525
16,934
93,591
2,090
91,501
0.70
0.70
0.80
$
$
134,969
11,268
8,002
10,702
725,007
75,695
134,674
17,645
115,308
343,322
381,685
11,875
369,810
7,381
10,711
26,803
(15,810)
7,399
5,494
4,785
16,051
11,545
14,669
89,028
116,389
29,261
49,570
7,491
2,310
5,110
2,917
40,864
253,912
204,926
51,698
153,228
—
153,228
1.21
1.21
0.80
$
$
140,979
11,886
5,896
4,170
707,371
75,822
112,654
18,211
109,563
316,250
391,121
9,270
381,851
7,108
11,074
23,242
(5,464)
1,208
5,970
1,516
3,849
8,171
15,390
72,064
109,775
28,592
46,078
8,687
—
8,878
8,469
39,861
250,340
203,575
39,884
163,691
—
163,691
1.27
1.27
0.78
$
$
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
130,435,853
130,507,649
126,272,915
126,646,859
128,487,882
129,012,078
See accompanying notes to consolidated financial statements.
65
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Number
of Common
Shares
Preferred
Stock
Common
Stock
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Total
Shareholders’
Equity
(in thousands)
$39,302 $ 741,456 $ 177,332
$(24,036)
$ (2,144) $ 931,910
— 163,691
—
—
163,691
Balance—December 31, 2005 . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive gains, net of tax:
128,875
$—
—
—
Net change in unrealized gains and
losses on securities available for
sale, net of tax benefit of $457 . .
Less: reclassification adjustment for
losses included in net income, net
of tax of $1,983 . . . . . . . . . . . . . .
Net change in unrealized gains and
losses on derivatives, net of tax
of $214 . . . . . . . . . . . . . . . . . . . .
Plus reclassification adjustment for
losses included in net income, net
of tax benefit of $1,010 . . . . . . . .
Other comprehensive gains . . . . . . . . . . .
Adoption of SFAS No. 158 . . . . . . . . . . .
Total comprehensive income . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . .
Effect of stock incentive plan, net . . . . . .
Stock dividend . . . . . . . . . . . . . . . . . . . . .
Fair value of stock options granted . . . . .
Tax benefit from exercise of stock
options . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . .
Balance—December 31, 2006 . . . . . . . .
Cumulative effect from adoption of
SFAS No. 159 . . . . . . . . . . . . . . . . . . .
Cumulative effect from adoption of
EITF Issue No. 06-5 . . . . . . . . . . . . . .
Balance—January 1, 2007 . . . . . . . . . .
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 benefit of
$5,043 . . . . . . . . . . . . . . . . . . . . .
Less reclassification adjustment for
losses included in net income, net
of tax benefit of $6,731 . . . . . . . .
Change in net actuarial loss, net of
tax benefit of $573 . . . . . . . . . . .
Change in prior service cost, net of
tax of $340 . . . . . . . . . . . . . . . . .
Other comprehensive gains . . . . . . . . . . .
Total comprehensive income . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . .
Effect of stock incentive plan, net . . . . . .
Stock dividend declared . . . . . . . . . . . . .
Stock dividend paid . . . . . . . . . . . . . . . . .
Fair value of stock options granted . . . . .
Tax benefit from exercise of stock
options . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . .
—
—
—
—
—
—
—
—
365
—
—
—
(2,059)
127,181
—
—
127,181
—
—
—
—
—
—
—
—
245
—
—
—
—
(1,582)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(37)
1,947
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (99,560)
(1,833)
139,829 (141,991)
(2,444)
2,154
27
—
—
—
—
(225)
3,481
310
1,463
5,029
(11,866)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,503
—
—
—
(47,769)
(39,410)
—
—
—
—
—
—
5,029
(11,866)
156,854
(99,560)
6,189
(215)
2,154
27
(47,769)
949,590
(42,940)
(319)
41,212
881,022
97,639
(30,873)
—
—
— (42,940)
—
(319)
—
—
41,212
881,022
54,380
(30,873)
(39,410)
906,331
—
— 153,228
—
—
153,228
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (100,325)
—
(3,058)
(30)
(687)
—
— (140,837)
—
138,634
—
1,637
2,003
—
—
—
123
—
—
—
9,150
9,079
474
(812)
17,891
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,628
—
—
—
—
—
—
—
17,891
171,119
(100,325)
5,853
(140,837)
140,637
1,637
—
(35,478)
123
(35,478)
Balance—December 31, 2007 . . . . . . . .
125,844
$—
$43,185 $ 879,892 $ 104,225
$(12,982)
$(65,260) $ 949,060
See Notes to the Selected Financial Data that follows.
66
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
Number
of
Common
Shares
Preferred
Stock
Common
Stock
Surplus
Retained
Earnings
—
—
—
—
—
93,591
(in thousands)
Balance—December 31, 2007 . . . . . . . 125,844 $ — $43,185 $ 879,892 $ 104,225
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 benefit of
$53,603 . . . . . . . . . . . . . . . . . . . .
Less reclassification adjustment for
losses included in net income,
net of tax benefit of $33,084 . . .
Net change in unrealized gains and
losses on derivatives, net of tax
of $3,928 . . . . . . . . . . . . . . . . . . .
Less reclassification adjustment for
losses included in net income,
net of tax benefit of $313 . . . . . .
Pension benefits adjustment, net of
tax benefit of $7,946 . . . . . . . . . .
Other comprehensive losses . . . . . . . . . .
Total comprehensive income . . . . . . . . .
Proceeds from issuance of preferred
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
stock and a warrant . . . . . . . . . . . . . . .
— 291,365
Accretion of discount on preferred
stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared on common
stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends accrued on preferred
stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock incentive plan, net
. . . . .
Stock dividend declared . . . . . . . . . . . . .
Stock dividend paid . . . . . . . . . . . . . . . .
Common stock and warrants issued in
acquisition . . . . . . . . . . . . . . . . . . . . . .
Fair value of stock options granted . . . .
Tax benefit from exercise of stock
—
—
—
477
—
—
8,703
—
174
—
—
—
—
—
—
—
—
—
—
8,635
—
—
(174)
— (104,352)
—
(106)
—
2,097
3,052
—
—
(5,296)
(108,124)
105,869
165,018
985
(1,916)
(6,140)
—
—
—
—
options . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Balance—December 31, 2008 . . . . . . . 135,024 $291,539 $48,228 $1,047,085 $ 85,234
106
—
—
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Total
Shareholders’
Equity
$(12,982)
$(65,260) $ 949,060
—
—
93,591
(78,678)
46,731
(5,434)
434
(11,002)
(47,949)
—
—
—
—
—
—
—
—
—
—
—
$(60,931)
—
—
—
—
—
—
—
—
—
—
—
17,991
—
—
—
—
—
—
—
(47,949)
45,642
300,000
—
(104,352)
(1,916)
6,449
(108,124)
107,966
(277)
—
167,793
985
—
106
$(47,546) $1,363,609
See accompanying notes to consolidated financial statements.
67
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2008
2007
2006
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
$
93,591
$
153,228
$ 163,691
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of compensation costs pursuant to long-term stock
incentive plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net accretion of discounts and amortization of premiums on securities . .
Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses on securities transactions, net
Proceeds from sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on loans held for sale, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of junior subordinated debentures and Federal Home
Loan Bank advance carried at fair value . . . . . . . . . . . . . . . . . . . . . . . . .
Net change 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 . . . . . . . .
14,628
15,287
16,407
5,531
28,282
(248)
7,224
(33,956)
79,815
55,598
(1,274)
(55,882)
688,341
(518)
(14,049)
(10,167)
82,339
(1,155)
5,138
11,875
389
7,491
(20,338)
15,810
286,299
(4,785)
(34,152)
583,402
(16,051)
(2,748)
(11,545)
(36,384)
28,350
5,628
9,270
3,976
8,687
(17,873)
5,464
31,503
(1,516)
(31,164)
(447)
(3,849)
—
(8,171)
24,714
24,305
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
938,100
981,266
230,625
Cash flows from investing activities:
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 maturities, redemptions and prepayments of investment
securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans made to customers . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of real estate property and equipment
. . . . . . . . . . . .
Purchases of real estate property and equipment
. . . . . . . . . . . . . . . . . . . .
Purchases of bank owned life insurance, net of benefits received . . . . . . .
Cash and cash equivalents acquired in acquisitions . . . . . . . . . . . . . . . . . .
262,796
9,959
129,839
456,871
(722,640)
(574,991)
221,732
(1,006,987)
(167,372)
333,848
(196,762)
(82,278)
118,673
(854,870)
2,209
(29,877)
—
35,376
113,810
(435,166)
41,091
(58,482)
(73,231)
—
198,960
(211,675)
6,100
(45,090)
1,803
1,217
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . .
(1,306,453)
(1,354,646)
135,962
Cash flows from financing activities:
Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . .
Advances of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of junior subordinated debentures . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of preferred stock and a warrant . . . . . . . . . . . . . .
Cash dividends paid to common shareholders . . . . . . . . . . . . . . . . . . . . . .
Purchases of common shares to treasury . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued, net of cancellations . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . .
426,977
19,735
391,001
(318,211)
(7,689)
300,000
(102,517)
—
106
1,993
711,395
343,042
237,465
(396,647)
242,539
1,185,000
(666,036)
(40,000)
—
(99,956)
(35,478)
123
2,151
(82,350)
(219,960)
884,735
(645,391)
—
—
(99,251)
(47,769)
27
2,476
191,696
(207,483)
(181,684)
419,149
159,104
260,045
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
$
580,507
$
237,465
$ 419,149
See Notes to the Selected Financial Data that follows.
68
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
Years ended December 31,
2008
2007
2006
(in thousands)
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 305,216 $347,964 $304,099
64,358
Federal and state income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,208
46,971
Supplemental schedule of non-cash investing activities:
Transfer of investment securities held to maturity to available for sale (1) . . .
Transfer of investment securities available for sale to trading securities (2)
. .
Transfer of investment securities held to maturity to trading securities (2) . . .
Transfer of loans to loans held for sale (2) . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition:
Non-cash assets acquired:
1,059
—
— 820,532
— 498,949
— 254,356
Investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,411
812,489
(11,410)
15,266
16,284
3,834
115,318
7,476
9,969
Total non-cash assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . .
1,036,637
Liabilities assumed:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures issued to capital trusts . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . .
714,942
15,415
133,574
25,359
14,927
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
904,217
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Net non-cash assets acquired . . . . . . . . . . . . . . . . . . . . . . . $ 132,420 $ — $ —
35,376 $ — $ —
Common stock issued in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 167,796 $ — $ —
Cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . $
(1) Management changed its intent to hold two pooled trust preferred securities to maturity after significant deterioration in the issuers’
creditworthiness resulting in other-than-temporary impairment charges of $7.8 million for the year ended December 31, 2008.
(2) Classification of items changed due to Valley's election of the fair value option upon adoption of SFAS No. 159 at January 1, 2007.
See accompanying notes to consolidated financial statements.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1)
Business
Valley National Bancorp, a New Jersey Corporation (“Valley”), is a bank holding company whose principal
wholly-owned subsidiary is Valley National Bank (the “Bank”), a national banking association providing a full
range of commercial, retail and trust and investment services through its branch and ATM network throughout
northern and central New Jersey and New York City. The Bank also lends to borrowers outside its branch
network. The Bank 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.
Valley National Bank’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 Securities and Exchange Commission (“SEC”) registered investment advisors; an all-line insurance
agency offering property and casualty, life and health insurance; subsidiaries which hold, maintain and manage
investment assets for the Bank; 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 specializes in health care equipment and other commercial equipment
leases. The Bank’s subsidiaries also include real estate investment trust (“REIT”) subsidiaries which own real
estate related investments and a REIT subsidiary which owns some of the real estate utilized by the bank and
related real estate investments. All subsidiaries mentioned above are directly or indirectly wholly-owned by the
Bank, except the REIT subsidiaries in which the Bank is the majority shareholder. Each REIT must have 100 or
more shareholders to qualify as a REIT, and therefore, have issued less than 20 percent of their outstanding
non-voting preferred stock to individuals, most of whom are non-senior management employees of Valley
National Bank.
Basis of Presentation
The consolidated financial statements of Valley include the accounts of its commercial bank subsidiary,
Valley National Bank and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company
transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S.
generally accepted accounting principles (“GAAP”) and general practices within the financial services industry.
In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for
the sole purpose of issuing trust preferred securities and related trust common securities. See Note 12 below for
more detail. Certain prior period amounts have been reclassified to conform to the current presentation.
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.
Material estimates that are particularly susceptible to change are the allowance for loan losses and the review of
goodwill and investment securities for impairment. The current economic environment has increased the degree
of uncertainty inherent in these material estimates.
On March 31, 2008, the Bank sold its registered broker-dealer subsidiary. The divesture was not accounted
for in the accompanying audited financial statements as discontinued operations due to the immaterial nature of
this subsidiary’s financial position and results of operations for the periods presented in this report. See Note 2
below for additional disclosures of this transaction.
Valley issued a five percent common stock dividend on May 23, 2008. All common share and per common
share data presented in the consolidated financial statements and the accompanying notes below were adjusted to
reflect the dividend.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, interest bearing deposits in other banks, and overnight federal funds sold.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank
based on a percentage of deposits. The total of those reserve balances was approximately $30.6 million and $30.4
million at December 31, 2008 and 2007, respectively.
Investment Securities
At the time of purchase, management elects to classify investment securities into one of three categories:
held to maturity, available for sale or trading.
Investment securities classified as held to maturity are debt securities which Valley has the positive intent
and ability to hold to maturity. These securities are carried at cost and adjusted for amortization of premiums and
accretion of discounts by using the effective interest method over the term of the investment.
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. Unrealized holding gains and losses on such securities are excluded from
earnings, but are included as a component of accumulated other comprehensive income (loss) 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
income as a component of gains (losses) on securities
identification method and shown in non-interest
transactions, net.
Trading securities are held at the Bank as part of management’s asset/liability management strategies and
may be sold and reinvested over short durations as management adjusts its strategies for current market
conditions. These investment securities are classified as trading securities in the accompanying consolidated
statements of financial condition and are recorded at fair value. Interest on trading account securities is recorded
in interest income. Unrealized holding gains and losses on such securities are included in non-interest income in
the accompanying consolidated statements of income as a component of trading gains, net. Realized gains or
losses on the sale of trading securities are recognized by the specific identification method and are included in
trading gains, net.
Investments in Federal Home Loan Bank and Federal Reserve Bank stock, which have limited
marketability, are carried at cost in other assets on the consolidated statements of financial condition. At
December 31, 2008 and 2007, these securities totaled $150.5 million and $125.4 million, respectively.
Valley periodically evaluates whether any of its investment securities classified as held to maturity or
available for sale 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 issuer, including
factors such as industry and sector performance, changes in technology, projected operational and financial cash
flows, underlying collateral values (if applicable), the investment’s ability to recover in the near term if it has no
stated maturity date and management’s intent and ability to hold the security until the value recovers. Other-than-
temporary impairment charges are shown in non-interest income as a component of gains (losses) on securities
transactions, net. For an other-than-temporarily impaired debt security, a discount or reduction in premium
resulting from an impairment charge on such security is accreted into income prospectively over the remaining
life of the debt security based on the amount and timing of future estimated cash flows.
Loans Held for Sale
Loans held for sale consist of residential mortgage loans and Small Business Administration (“SBA”) loans
originated and intended for sale in the secondary market and are carried at their estimated fair market value on an
instrument by instrument basis under the provisions of Statement of Financial Accounting Standards (“SFAS”)
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Nos. 159 and 157. Changes in fair market value are recognized currently in earnings. Origination fees and costs
related to loans held for sale are recognized as earned and as incurred. Loans held for sale are generally sold with
loan servicing rights retained by Valley. Gains recognized on loan sales include the value assigned to the rights
to service the loan. See “Loan Servicing Rights” section below.
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.
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 non-accrual loans and other loans considered to be impaired as to principal
and interest, consisting primarily of commercial and commercial mortgage loans, with principal amounts
outstanding over a specific dollar amount. 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’s lending is primarily in northern and central New Jersey and New York City with the exception of
out-of-state auto lending. Valley may also lend outside its primary lending area to accommodate existing
customers.
Allowance for Credit Losses
The allowance for credit losses (the “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 or unfunded letters of credit which are determined to be a loss,
in accordance with established policies, when all efforts of collection have been exhausted.
The allowance is maintained at a level estimated to absorb credit 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 and off balance sheet unfunded letters of credits. The Bank’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 reserves
based on general economic conditions and other qualitative risk factors.
The Bank’s allocated allowance is calculated by applying loss factors to outstanding loans and unfunded
letters of credit. 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 or unfunded letter of credits affects the amount of the related
allowance. Loss factors are based on the Bank’s historical loss experience and may be adjusted for significant
changes in current loan portfolio quality that, in management’s judgment, affect the collectibility of the portfolio
as of the evaluation date.
The allowance also contains amounts to cover inherent losses within a given loan category which have not
been otherwise reviewed or measured on an individual basis. Such reserves include management’s evaluation of
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
national and local economic and business conditions, loan portfolio volumes, the composition and concentrations
of credit, credit quality and delinquency trends. These reserves reflect 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
Valley owns bank owned life insurance (“BOLI”) to help offset the cost of employee benefits. BOLI is
recorded at its cash surrender value. Valley’s BOLI is invested in U.S. Treasury securities and U.S. agency
mortgage-backed securities and the majority of the underlying investment portfolio is managed by two
independent investment firms. The change in the cash surrender value is included in non-interest income and is
exempt from federal and state income taxes as long as the policies are held until the death of the insured
individuals.
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. Expenses
incurred to maintain these properties, unrealized losses resulting from write-downs after the date of foreclosure,
and realized gains and losses upon sale of the properties are included in other non-interest expense and other
non-interest income, as appropriate.
Goodwill
Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill
and other intangible assets (see “Other Intangible Assets” section below). Goodwill is not amortized and is
subject to an annual assessment for impairment by applying a fair value based test. Valley reviews goodwill
annually, or more frequently if a triggering event indicates impairment may have occurred, to determine potential
impairment by determining if the fair value of the reporting unit has fallen below the carrying value. If
impairment is deemed to exist, an adjustment is posted to earnings in the current period for the difference
between the fair value and the carrying amount. Additional fair value assessments of goodwill are required if
certain indicators of potential impairment arise after the annual test date.
Other Intangible Assets
Other intangible assets consist of loan servicing rights, core deposits, customer lists and covenants not to
compete obtained through acquisitions. Other intangible assets are amortized using various methods over their
estimated lives and are periodically evaluated for impairment, if indicators of impairment are present. If
impairment is deemed to exist, an adjustment is recorded to earnings in the current period for the difference
between the fair value and the carrying amount.
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
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
servicing right) based on their relative fair values. 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.
The unamortized costs associated with acquiring loan servicing rights are included in other intangible assets
in the consolidated statements of financial condition and are being amortized using the amortization method
permitted under SFAS No. 140, as amended by the provisions of SFAS No. 156. Under this method, Valley
amortizes the loan servicing assets in proportion to and over the period of estimated net servicing revenues. On a
quarterly basis, Valley assesses the loan servicing asset for impairment based on its fair value at each reporting
date. At each reporting date, if the book value of an individual loan servicing asset exceeds fair value, an
impairment charge is charged to earnings for the amount of the book value over fair value.
Stock-Based Compensation
Effective January 1, 2006, Valley adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
No. 123R”), which amends SFAS No. 123, “Accounting for Stock-Based Compensation” and supercedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” Valley adopted SFAS No. 123R using the
modified prospective method, as required for companies that previously adopted the fair-value based method
under SFAS No. 123. The modified prospective method requires that compensation cost be recognized beginning
with the effective date 1) based on the requirements of SFAS No. 123R for all new stock-based awards granted
after the effective date and 2) based on the requirements of SFAS No. 123R for the portion of stock-based awards
for which the requisite service has not been rendered that are outstanding as of the effective date.
For incentive stock options granted prior to November 1, 2005, Valley estimated the fair value of each
option granted on the date of grant using the Black-Scholes option-pricing model based on certain assumptions
including dividend yield, stock volatility, risk free rate of return and the expected term. The fair value of each
option is expensed over the service period which is usually equal to the vesting period. For options granted on or
after November 1, 2005, the fair value of each option granted on the date of grant is estimated using a binomial
option pricing model. The results are based on assumptions for dividend yield, stock volatility, risk free interest
rates, contractual term, employee turnover and expected exercise rates. The fair value of each option is expensed
over its vesting period.
Fair Value Measurements
On January 1, 2007, Valley adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for
financial assets and financial liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosure about fair value measurements.
See Note 3 – Fair Value Measurement of Assets and Liabilities.
In general, fair values of financial instruments are based upon quoted market prices, where available. If such
quoted market prices are not available, fair value is based upon third party models that primarily use as inputs,
observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are
recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and Valley’s
creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are
applied consistently over time.
Income Taxes
Valley accounts for income taxes by recognizing 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.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 tax expense in the period that includes the enactment date.
Effective January 1, 2007, Valley adopted the provisions of FASB Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.” FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a specified recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. See Note 14 for further analysis
of Valley’s adoption of this interpretation as of January 1, 2007.
Comprehensive Income (Loss)
Valley’s components of other comprehensive income, net of deferred tax, include unrealized gains (losses)
on securities available for sale; unrealized gains (losses) on derivatives used in cash flow hedging relationships,
net of deferred tax; and the unfunded portion of its various employee, officer and director pension plans. Valley
reports comprehensive income and its components in the consolidated statements of changes in shareholders’
equity.
Earnings Per Common Share
For Valley, the numerator of both the basic and diluted earnings per common share is net income available
to common stockholders (which is equal to net income less dividends on preferred stock and related discount
accretion). The weighted average number of common shares outstanding used in the denominator for basic
earnings per common share is increased to determine the denominator used for diluted earnings per common
share by the effect of potentially dilutive common stock equivalents utilizing the treasury stock method. For
Valley, common stock equivalents are common stock options and warrants (to purchase Valley’s common
shares) outstanding.
The following table shows the calculation of both basic and diluted earnings per common share for the years
ended December 31, 2008, 2007 and 2006:
Years ended December 31,
2008
2007
2006
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock and accretion . . . . . . . . . . . . . . . . .
Net income available to common stockholders . . . . . . . . . . . . . .
$
$
Basic weighted-average number of common shares
(in thousands, except for share data)
93,591
2,090
153,228
—
$
$
163,691
—
91,501
$
153,228
$
163,691
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Common stock equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
130,435,853
71,796
126,272,915
373,944
128,487,882
524,196
Diluted weighted-average number of common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
130,507,649
126,646,859
129,012,078
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.70
0.70
$
$
1.21
1.21
$
$
1.27
1.27
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Common stock equivalents, in the table above, exclude common stock options and warrants with exercise
prices that exceed the average market price of Valley’s common stock during the periods presented. Inclusion of
these common stock options and warrants would be anti-dilutive to the diluted earnings per common share
calculation. Anti-dilutive common stock options and warrants equaled approximately 5.3 million, 1.3 million,
and 1.2 million common shares for the years ended December 31, 2008, 2007, and 2006, respectively.
Preferred and Common Dividends
On November 14, 2008, Valley issued 300,000 shares of fixed rate cumulative perpetual preferred stock (the
“senior preferred shares”), with a liquidation preference of $1 thousand per share, to the U.S. Department of
Treasury. The senior preferred shares are senior to Valley common stock and pay cumulative dividends at a rate
of five percent per annum until the fifth anniversary of the date of the issuance, and thereafter at a rate of nine
percent per annum. Dividends are payable quarterly in arrears and all unpaid dividends are compounded (i.e.,
dividends are paid on the amount of unpaid dividends). Valley accrues the obligation for the preferred dividends
as earned over the period the senior preferred shares are outstanding. All dividends on the senior preferred shares
must be paid in full before Valley can pay dividends to its common stockholders.
Cash dividends to common stockholders are payable and accrued when declared by Valley’s Board of
Directors. As described above, the dividend rights of Valley common stockholders are qualified by and subject to
the terms of the senior preferred shares.
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
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” 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 No. 133,
Valley records all derivatives as assets or liabilities on the consolidated statement of financial condition at fair
value.
As part of its asset/liability management strategies and to accommodate commercial borrowers, Valley has
used interest rate swaps and caps to hedge variability in future fair values or cash flows caused by changes in
interest rates. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular
rate risk, are considered fair value
such as
hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges.
interest
risk,
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged
item related to the hedged risk are recognized in earnings. 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. On a
quarterly basis, 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. If a hedging relationship is terminated due to ineffectiveness, and the
derivative instrument is not redesignated to a new hedging relationship, the change in fair value of such
instrument is charged directly to earnings.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recent Accounting Pronouncements
In November 2007,
the SEC issued Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan
Commitments Recorded at Fair Value Through Earnings.” SAB No. 109 supersedes SAB No. 105, “Application
of Accounting Principles to Loan Commitments,” and indicates that the expected net future cash flows related to
the associated servicing of the loan should be included in the measurement of all written loan commitments that
are accounted for at fair value through earnings. The guidance in SAB No. 109 is applied on a prospective basis
to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007.
Valley’s adoption of SAB No. 109 on January 1, 2008 did not have a material impact on its financial statements.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (Revised
2007), “Business Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141, “Business Combinations,”
and applies to all transactions and other events in which one entity obtains control over one or more other
businesses. SFAS No. 141R requires an acquirer, upon initially obtaining control of another entity, to recognize
the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date.
Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather
than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This
fair value approach replaces the cost-allocation process required under SFAS No. 141 whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair
value. SFAS No. 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating
such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS No. 141. Under
SFAS No. 141R, the requirements of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities,” would have to be met
in order to accrue for a restructuring plan in purchase accounting.
Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is
not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that
contingency would be subject to the probable and estimable recognition criteria of SFAS No. 5, “Accounting for
Contingencies.” SFAS No. 141R is effective for all business combinations closing on or after January 1, 2009
and could have a significant impact on Valley’s accounting for business combinations on or after such date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB Statement No. 51.” This standard amends the guidance in Accounting
Research Bulletin (ARB) No. 51, “Consolidated Financial Statements.” The new standard establishes accounting
and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to
as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of
equity in the consolidated financial statements. Among other requirements, SFAS No. 160 requires consolidated
net
include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS No. 160
is effective on January 1, 2009 and is not expected to have a significant impact on Valley’s statement of
condition or results of operations.
income to be reported at amounts that
In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging
activities, an Amendment of FASB Statement No. 133.” The new standard establishes enhanced disclosure
requirements about (a) how and why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.
SFAS No. 161 is effective for Valley on January 1, 2009 and is not expected to have a significant impact on
Valley’s financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
principles to be used in the preparation of financial statements of nongovernmental entities that are presented in
conformity with GAAP in the United States (the GAAP hierarchy). The hierarchical guidance provided by
SFAS No. 162 did not have a significant impact on Valley's financial statements.
Effective January 1, 2008, Valley adopted the provisions of the Emerging Issues Task Force (“EITF”) Issue
No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11
states that a realized income tax benefit from dividends or dividend equivalents that are charged to retained
earnings and are paid to employees for equity classified unvested equity shares, unvested equity share units, and
outstanding equity share options should be recognized as an increase in additional paid-in capital. The amount
recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards
should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on
share-based payment awards. Valley’s adoption of EITF 06-11 did not have a material impact on its statement of
condition or results of operations.
Effective September 30, 2008, Valley adopted the provisions of the FASB Staff Position (“FSP”) No. 157-3,
“Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active.” FSP No. 157-3
clarifies the application of SFAS No. 157, “Fair Value Measurements,” in a market that is not active and provides
an example to illustrate key considerations in determining the fair value of a financial asset when the market for
that financial asset is not active. The FSP provides guidelines on (a) how the reporting entity’s own assumptions
should be considered when measuring fair value when relevant observable inputs do not exist; (b) how available
observable inputs in a market that is not active should be considered when measuring fair value; and (c) how the
use of market quotes should be considered when assessing the relevance of observable and unobservable inputs
available to measure fair value. Valley’s adoption of FSP No. 157-3 did not have a material impact on its
financial condition or results of operations.
In December 2008, the FASB issued FSP No. 132(R)-1, “Employers’ Disclosures about Postretirement
Benefit Plan Assets.” FSP No. 132(R)-1 amends SFAS No. 132(R), “Employers’ Disclosures about Pensions and
Other Postretirement Benefits,” to provide guidance on an employers’ disclosures about plan assets of a defined
benefit pension or other postretirement plan. FSP 132(R)-1 requires employers of public and nonpublic entities to
disclose (a) more information about how investment allocation decisions are made; (b) provide more information
about major categories of plan assets, including concentrations of risk and fair-value measurements, and the fair-
value techniques and inputs used to measure plan assets. The disclosure requirements of FSP 132(R)-1 will be
the year ended
included in Valley’s financial statements beginning with the financial statements for
December 31, 2009.
in Securitized Financial Assets.” The amendment specifically eliminates the requirement
In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF
Issue No. 99-20.” This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor
to
exclusively rely on market participant assumptions about future cash flows when determining the fair value of a
security during impairment
in assessing the
testing and now permits reasonable management
probability of collecting all amounts due. The FSP retains and emphasizes the objective of an other-than-
temporary impairment assessment and the related disclosure requirements in SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities,” and other related guidance. The FSP is effective for
reporting periods ending after December 15, 2008, and is applied prospectively. The FSP was utilized in Valley’s
fourth quarter of 2008 impairment assessment of two pooled trust preferred securities classified as held to
maturity. These securities were found to be other-than-temporarily impaired at December 31, 2008 and resulted
in impairment charges totaling $7.8 million. See Note 4 for additional information.
judgment
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ACQUISITIONS AND DISPOSITIONS (Note 2)
The following business combinations are accounted for under the purchase method of accounting as
prescribed by SFAS No. 141, “Business Combinations,” as amended. Accordingly, the results of operations of
the acquired companies have been included in Valley’s results of operations since the date of acquisition. Under
this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed
based on their estimated fair values, net of applicable income tax effects. The excess cost over fair value of net
assets acquired is recorded as goodwill.
Acquisitions
On July 1, 2008, Valley completed the acquisition of Greater Community Bancorp (“Greater Community”),
the holding company of Greater Community Bank, a commercial bank with approximately $1.0 billion in assets
and 16 full-service branches in northern New Jersey. The purchase price of $167.8 million was paid through a
combination of Valley’s common stock (8.7 million shares) and warrants (described below). The transaction
generated approximately $115.3 million in goodwill and $7.5 million in core deposit intangibles subject to
amortization beginning July 1, 2008. Greater Community Bank was merged into Valley National Bank as of the
acquisition date.
Valley issued approximately 918 thousand warrants to purchase Valley’s common stock at $19.01 per share
which are exercisable beginning July 1, 2010 and expire on June 30, 2015. The Valley warrants, which have been
determined to qualify as permanent equity, are publicly traded and listed on the NASDAQ Capital Market under
the ticker symbol “VLYWW.”
Pro forma results of operations including Greater Community for the years ended December 31, 2008, 2007,
and 2006 have not been presented, as the acquisition did not have a material impact on Valley’s operating results.
Disposition
On March 31, 2008, Valley sold its wholly-owned broker-dealer subsidiary, Glen Rauch Securities, Inc., for
$1.9 million, consisting of cash and a note receivable. During the fourth quarter of 2007, Valley recorded a $2.3
million ($1.5 million after-taxes) goodwill
the broker-dealer
subsidiary. The subsidiary’s operations and the disposition did not materially impact Valley’s consolidated
financial position or results of operations during 2008, 2007, and 2006, and therefore has not been presented as
discontinued operations in Valley’s consolidated financial statements.
loss due to its decision to sell
impairment
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES (Note 3)
Effective January 1, 2007, Valley elected early adoption of SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” and SFAS No. 157. SFAS No. 159, which was issued in February
2007, generally permits the measurement of selected eligible financial instruments at fair value at specified
election dates. The following table presents information about the eligible financial assets and liabilities for
which Valley elected the fair value measurement option and for which a cumulative effect adjustment was
recorded to retained earnings as of January 1, 2007:
Carrying
Value Prior
to Election
at
January 1,
2007
SFAS No.
159
Transition
Adjustment
to Retained
Earnings
(in thousands)
Carrying
Value at
Fair Value
After
Adoption at
January 1,
2007
Assets:
Investment securities:
Held to maturity (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale, cost of $842,229 (1)(2) . . . . . . . . . . . . . . . . . . . . .
$ 498,949
820,532
$ 18,157
21,697
$ 480,792
820,532
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,319,481
39,854
1,301,324
Loans (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
254,356
8,684
245,672
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,573,837
$ 48,538
$1,546,996
Liabilities:
Long-term borrowings (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures issued to VNB Capital Trust I (5) . . . . . .
$
40,000
206,186
$ 2,145
2,391
$
42,145
208,577
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 246,186
$ 4,536
$ 250,722
Pre-tax cummulative effect of adoption of SFAS No. 159 . . . . . . . . . . . . .
Net unamortized debt issuance costs and loan fees (3)(5) . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of adoption of SFAS No. 159 . . . . . . . . . . . . . . . . . . . .
$ 53,074
5,579
(15,713)
$ 42,940
(1) Selected held to maturity and available for sale securities transferred to the trading securities portfolio at January 1, 2007.
(2) The $21.7 million pre-tax charge to retained earnings was reclassified from unrealized losses on securities available for sale included in
accumulated other comprehensive loss, net of a $8.3 million tax benefit at December 31, 2006.
(3) Selected mortgage loans were transferred to loans held for sale, effectively, on January 1, 2007. The $8.7 million pre-tax charge to
retained earnings excludes $95 thousand in unamortized loan origination fees credited to retained earnings at January 1, 2007.
(4) Represents two fixed rate Federal Home Loan Bank advances redeemed on March 19, 2007.
(5) The $2.4 million pre-tax charge to retained earnings excludes $5.7 million in unamortized debt issuance costs charged to retained
earnings at January 1, 2007.
At January 1, 2007, Valley’s election of the fair value option for the financial assets and liabilities increased
Valley’s net deferred tax assets by approximately $7.4 million.
The following methods were used by management to identify and select existing financial assets and
liabilities at January 1, 2007 for the fair value option measurement under SFAS No. 159. The selection methods
include multiple criteria specific to each financial instrument. Certain financial assets and liabilities with the
same classifications as the individual instruments listed below were not selected for fair value measurement
because they did not qualify under the identification criteria used by management.
Investment securities. Management identified and elected to fair value 62 existing investment securities
categorized as held to maturity and 95 investment securities categorized as available for sale. At January 1, 2007,
the total securities selected had a net carrying value of $1.3 billion with a weighted average coupon of 5.15
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
percent and an estimated duration of over 3.0 years. In determining which investment securities would be
appropriate for the fair value option, management reviewed the unamortized premium or discount, interest rate,
expected duration, origination date, maturity date, call date and issuer for every held to maturity and available for
sale investment security in its investment portfolio at January 1, 2007. In management’s determination, the 157
individual financial instruments selected for fair value measurement have earnings volatility risk (the dispersion
of net income under various market conditions and levels of interest rates, which may include the potential
fluctuation in the yield and expected total return of each financial instrument), prepayment risk, extension risk
(the risk of a financial instrument’s duration lengthening due to the deceleration of prepayments), and market
value risk, which exceed the expected return of the investment. As a result of applying the criteria above, a
majority of the securities selected had unrealized losses, however,
this was not a criteria for selection.
Management believed that the adoption of the fair value measurement option would allow for better matching of
the economics of these instruments to potential asset/liability management strategies. Upon management’s fair
value election, these securities were immediately transferred to trading securities.
During the first quarter of 2007, management worked closely with a third party expert in the derivatives
market, at a considerable cost, to construct a hedging strategy for the trading securities portfolio. As a result of
this extensive evaluation process, Valley executed a series of interest rate derivative transactions with notional
amounts totaling approximately $1.0 billion in April 2007. The purpose of the derivative transactions was to
offset volatility in changes in the market value of over $800 million in trading securities consisting primarily of
mortgage-backed securities transferred from the available for sale portfolio at January 1, 2007. The derivative
transactions did not offset the volatility in the trading securities to the extent expected due to several factors,
including the inability to accurately forecast
the financial market’s forward expectations of interest rate
movements and the unusual expansion of credit spreads in the marketplace. To that end, Valley terminated the
derivatives’ entire notional amounts and sold the corresponding trading securities through several transactions
over a number of weeks during the second quarter of 2007. The termination of the derivatives and hedged
securities sold resulted in a $2.0 million net loss recorded in gains on trading securities, net during the second
quarter of 2007 and the year ended December 31, 2007. The hedged securities were part of approximately $1.0
billion in mortgage-backed securities sold during the second quarter of 2007. The investment proceeds were
primarily reinvested in short-term U.S. treasury securities, short-term other government agencies and short-term
corporate debt classified as trading securities under SFAS No. 115 during the second quarter of 2007.
As of December 31, 2008 and 2007, the trading securities portfolio totaled $34.2 million and $722.6 million
(see the trading securities table at Note 4). During 2008, significant deterioration in the financial markets,
including illiquid pricing of several types of investment securities historically traded in by Valley, limited
management’s use of this portfolio. Additionally, many of the short-term investments classified as trading
securities as of December 31, 2007 matured in 2008 and the proceeds were reallocated to loans or used for other
liquidity needs. Management could continue to invest future sale proceeds in other asset classifications not
carried at fair value, in whole or in part, due to the current illiquidity in the financial markets or other risk factors
inherent in Valley’s business.
Loans. Management identified 1,940 existing residential mortgage loans with a net carrying value of
$254.4 million, a weighted average coupon of 4.96 percent and an estimated duration over 3.0 years, which were
highly dependent on the movement of interest rates and prepayment speeds. In determining which residential
mortgages would be appropriate for the fair value option, management reviewed the entire fixed rate 15-year and
30-year residential loan portfolio. For every loan, management reviewed the prevailing interest rate, origination
date, maturity date and expected duration. In addition, management selected high credit quality loans to reduce
future changes in market value due to fluctuations in each loan’s non-performance risk. In making the final
determination as to which financial instruments met management’s objectives and intent for early adopting SFAS
No. 159, management compared the expected return of each residential loan within the aforementioned portfolio
versus the potential extension risk, market valuation risk, earnings volatility, and likely change in
non-performance risk. As a result of applying the criteria above, a majority of the mortgage loans selected had
unrealized losses, however, this was not a criteria for selection. In management’s determination, the 1,940
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
financial instruments selected for fair value have earnings volatility risk, extension risk, and market value risk
which exceed the expected long-term return on each loan. Upon management’s fair value election, these
mortgage loans were immediately transferred to loans held for sale.
Upon management’s fair value election for these mortgage loans, management engaged in discussions with
a third party advisor in the derivatives market (who also helped construct the hedging strategy for the trading
securities portfolio) to assess the opportunity to hedge the market value risk of these mortgage loans. After a
thorough analysis, in April 2007, management elected to sell the majority of these mortgage loans as it was
determined the unexpected earnings volatility from the expansion of credit spreads in the mortgage loan market,
partly related to sub-prime and Alt-A loan activity, would be difficult to hedge effectively through the use of
derivative financial instruments or other means. Subsequent to March 31, 2007, Valley elected the fair value
measurement option for all newly originated mortgage loans held for sale as part of its current asset/liability
management strategies. Management elects to carry its new residential mortgage originations, on an instrument
by instrument basis, at cost (in the loan portfolio) or at fair value (in loans held for sale) based upon, among other
factors, the current interest rate environment, matching of interest earning assets and interest bearing liabilities,
as well as managing the liquidity needs of Valley’s balance sheet. Management’s decision to adopt fair value and
sell the loans elected to be fair valued on January 1, 2007 increased net income by less than $3 million as
compared to the results had SFAS No. 159 not been elected for the loans sold.
Management continues to fair value and sell most of its 15-year fixed rate conforming loans as part of its
plan to manage interest rate risk. Valley’s originations of this type of residential mortgage product continued to
be limited throughout 2008 due to the downturn in housing prices and economic conditions. At December 31,
2008 and 2007, loans held for sale totaled $4.5 million and $3.0 million, respectively.
Long-term borrowings. Management identified two existing Federal Home Loan Bank advances with
total principal balances of $40.0 million, a weighted average cost of 6.96 percent and an estimated duration of 2.6
years. In determining which long-term borrowings would be appropriate for the fair value option, on an
instrument-by-instrument level basis, management reviewed the unamortized premium, interest rate, expected
duration, origination date, maturity date, call date and issuer for every obligation. Management then compared
the expected cost of each borrowing versus the potential call risk, price risk and market value risk. Management
selected these two long-term borrowings in Valley’s portfolio based on their significantly adverse interest rates
as compared to Valley’s average borrowing rates.
In March 2007, Valley prepaid the two Federal Home Loan Bank advances and recognized prepayment
gains totaling $276 thousand as a reduction to interest on long-term borrowings for the three months ended
March 31, 2007. Valley immediately replaced the advances sold with the issuance of one $40.0 million Federal
Home Loan Bank advance, elected to be held at fair value, with a fixed rate of 5.09 percent and an estimated
duration of 5.0 years. At December 31, 2007, the Federal Home Loan Bank advance had a fair value of
approximately $41.4 million. During the second quarter of 2008, Valley prepaid this Federal Home Loan Bank
advance and realized a $1.2 million loss for the change in its fair value through its redemption during the year
ended December 31, 2008. During the remainder of 2008, Valley had no asset/liability strategies in place to
utilize the fair value option for new Federal Home Loan Bank advances.
Junior subordinated debentures issued to capital trust. Management designated for fair value Valley’s
junior subordinated debentures issued to VNB Capital Trust I with a total principal balance of $206.2 million at
January 1, 2007 with an annual interest rate of 7.75 percent and an estimated remaining duration in excess of 10
years. In determining if the fair value measurement option was appropriate for the debentures, management
reviewed the unamortized premium, interest rate, expected duration, origination date, maturity date and call date.
Management then compared the expected cost of the debentures versus the earnings volatility risk of this
borrowing and, in part, the opportunity to economically hedge, for a period of time, the $254.4 million in
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
mortgage loans selected to be carried at fair value. In management’s determination, the debentures selected for
the fair value measurement option have significant earnings volatility, price and market value risks.
In June and October 2007, Valley redeemed a total of $41.2 million of the original $206.2 million
contractual principal balance of the junior subordinated debentures issued to capital trust. Additionally, Valley
purchased, in open market transactions, approximately 307 thousand trust preferred securities issued by VNB
Capital Trust I for $7.3 million at an average cost of $23.64 per share during the third quarter of 2008. These
307 thousand preferred securities and approximately 10 thousand of the trust’s common securities held by Valley
were surrendered to and cancelled by the trust
in exchange for the redemption of 317 thousand junior
subordinated debentures with a total contractual principal balance of $7.9 million. Management’s decision to
partially redeem the outstanding debentures during 2007 and 2008 was done, in part, to maintain Valley’s overall
cost of capital at acceptable levels, while partially offsetting some of the changes in earnings volatility risk
associated with financial assets held at fair value. See Note 12 for additional information on the junior
subordinated debentures issued to capital trust.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:
Basis of Fair Value Measurement
Level 1 Unadjusted exchange quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that are observable either directly or
indirectly (i.e., quoted prices on similar assets), for substantially the full term of the asset or
liability;
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no market activity).
The following table presents the assets and liabilities that are measured at fair value on a recurring basis by
level within the fair value hierarchy as reported on the consolidated statements of financial condition at
December 31, 2008. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value measurement.
Fair Value Measurements at Reporting Date Using:
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2008
(in thousands)
Assets:
Investment securities:
Available for sale . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . .
Loans held for sale (1) . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets (2)
$1,435,442
34,236
4,542
3,334
$13,483
—
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,477,554
$13,483
Liabilities:
Junior subordinated debentures issued to VNB
Capital Trust I (3) . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities (2) . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 140,065
2,008
$ 142,073
$ —
$ —
$1,421,959
34,236
4,542
3,334
$1,464,071
$ 140,065
2,008
$ 142,073
$—
—
—
$—
$—
$—
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) The loans held for sale had contractual unpaid principal balances totaling approximately $4.47 million at December 31, 2008.
(2) Derivative financial instruments are included in this category.
(3) The junior subordinated debentures had contractual unpaid principal obligations totaling $157.0 million at December 31, 2008.
The following valuation techniques were used to measure fair value of financial instruments in the table
above on a recurring basis during the years ended December 31, 2008 and 2007. All the valuation techniques
described below are based upon the unpaid principal balance only for each item selected to be carried at fair
value and excludes any accrued interest or dividends at the measurement date. Interest income and expense and
dividend income are recorded within the consolidated statements of income depending on the nature of the
instrument using the effective interest method based on acquired discount or premium.
Available for sale and trading securities. Certain common and preferred equity securities are reported at
fair value utilizing Level 1 inputs (exchange quoted prices). All other investment securities are reported at fair
value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing
service or dealer market participants with which Valley has historically transacted both purchases and sales of
investment securities. Prices obtained from these sources include market quotations and matrix pricing. The fair
value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the
U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit
information and the bond’s terms and conditions, among other things. Management reviews the data and
assumptions used in pricing the securities by its third party providers to ensure the lowest level of significant
input is market observable data.
Loans held for sale. These residential mortgage loans are reported at fair value using Level 2 (significant
other observable) inputs. The fair values were estimated utilizing quoted prices for similar assets in active
markets. To determine these fair values, the mortgages held for sale are put into multiple tranches, or pools,
based on the coupon rate of each mortgage. If the mortgages held for sale are material, the market prices for each
tranche are obtained from both Fannie Mae and Freddie Mac. The market prices represent a delivery price which
reflects the underlying price each institution would pay Valley for an immediate sale on an aggregate pool of
mortgages. The market prices received from Fannie Mae and Freddie Mac are then averaged and interpolated or
extrapolated, where required, to calculate the fair value of each tranche. Dependent upon the time elapsed since
the origination of each loan held for sale, non-performance risk and changes therein were addressed in the
estimate of fair value based upon the delinquency data provided to both Fannie Mae and Freddie Mac for market
pricing and changes in market credit spreads. Non-performance risk was deemed immaterial to the gains
recognized for changes in fair value of mortgage loans held for sale during the years ended December 31, 2008
and 2007 based on the short duration these assets were held, and the high credit quality of these loans.
Junior subordinated debentures issued to capital trusts. The junior subordinated debentures issued to
VNB Capital Trust I are reported at fair value using Level 2 inputs. The fair value was estimated using quoted
prices in active markets for similar assets, specifically the quoted price of the VNB Capital Trust I preferred
stock traded under ticker symbol “VLYPRA” on the New York Stock Exchange. The preferred stock and
Valley’s junior subordinated debentures issued to the Trust have identical terms (see details at Note 12) and
therefore, the preferred stock’s quoted prices move in a similar manner to the estimated fair value and current
settlement price of the junior subordinated debentures. The preferred stock’s quoted price includes market
considerations for Valley’s credit and non-performance risk and is deemed to represent the transfer price that
would be used if the junior subordinated debenture were assumed by a third party. Valley’s potential credit risk
and changes in such risk did not materially impact the fair value measurement of the junior subordinated
debentures during the years ended December 31, 2008 and 2007.
Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair value of Valley’s
interest rate caps and interest rate swap are determined using prices obtained from a third party advisor. The fair
value measurement of the interest caps is calculated by discounting the future expected cash receipts that would
occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
calculation of projected receipts on the caps are based on an expectation of future interest rates derived from
observed market interest rate curves and volatilities. The fair value measurement of the interest rate swap is
determined by netting the discounted future fixed cash payments and the discounted expected variable cash
receipts. The variable cash receipts are based the expectation of future interest rates derived from observed
market interest rate curves. The fair values of the derivatives incorporate credit valuation adjustments, which
consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of
Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of
Valley’s derivatives at December 31, 2008 and 2007.
Valley’s significant accounting policies presented in Note 1 require certain assets, including goodwill, loan
servicing rights, core deposits, other intangible assets and other long-lived assets, to be written down to their fair
market value on a nonrecurring basis through recognition of an impairment charge to the consolidated statements
of income.
Goodwill. In accordance with the provisions of SFAS No. 142, goodwill allocated to our Wealth
Management reporting unit with a carrying amount of $20.5 million was written down to its implied fair value of
$18.2 million, resulting in an impairment charge of $2.3 million, which was included in earnings for the year
ended December 31, 2007. The impairment was taken during the fourth quarter of 2007 due to Valley’s decision
to sell its unprofitable broker-dealer subsidiary, Glen Rauch Securities, Inc. The sale transaction closed on
March 31, 2008. Note 9 to this report should be read in conjunction with the following description of valuation
techniques used to measure the fair value of goodwill.
Management periodically measures the fair value of goodwill allocated to each of Valley’s business
segments, or reporting units (one level below the operating segment level) based on Level 3 inputs (significant
unobservable inputs). In determining the appropriate fair value methods to be utilized, Valley attempts to make
use of broad market-based valuation techniques consistently employed by market participants. Valley generally
employs two valuation techniques: (1) present value or income approach and (2) multiples of earnings or market
approach, as permitted under SFAS No. 142, as amended by SFAS No. 157. In performing its analyses,
management makes numerous assumptions with respect to industry performance, business, economic and market
conditions and various other matters, many of which cannot be predicted and are beyond the control of Valley.
Accordingly, the analysis and estimates are inherently subject to substantial uncertainty.
The present value or income approach fair value methodologies are time value adjustment techniques used
to ascertain the worth in today’s dollars of all future cash flows expected to be received. Valley utilized the
dividend discount model and discounted cash flow approaches to determine the fair value of goodwill allocated
to each reporting unit. These inputs to fair valuation are categorized as Level 3 inputs. The majority of inputs
reflect management’s assumptions about the estimates market participants would use in pricing the business
segment or reporting unit. The multiple of earnings or similar performance measure approaches utilize relevant
multiples of comparable entities within the industry and applies the average performance of each multiple to the
actual results of the reporting entity. These inputs to valuation are categorized as Level 2 inputs. The Level 2
variables are inputs other than observable quoted prices.
Management uses an equal weighting of each fair value method described above in determining the
estimated fair value of each business segment or reporting unit. Management believes it is prudent to incorporate
multiple techniques to ascertain a fair value as certain methods have inherent limitations in specific interest rate
and economic environments. With the exception of the $2.3 million goodwill impairment charge to the Wealth
Management reporting unit in 2007, there were no other material impairment charges incurred for these
nonrecurring items during the years ended December 31, 2008 and 2007.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents the amount of gains and losses from fair value changes included in income
before income taxes for financial assets and liabilities carried at fair value for the years ended December 31,
2008, 2007 and 2006:
—
—
Reported in
Consolidated Statements
of Condition at:
Assets:
Held to maturity securities
Available for sale securities
Trading securities
Loans held for sale
Liabilities:
Long-term borrowings (5)
Junior subordinated debentures
Reported in
Consolidated Statements
of Income at:
Gains (Losses) on Change in Fair Value
Years ended December 31,
2008
2007
2006
Non-Interest Income:
Losses on securities transactions, net (1) . . .
Losses on securities transactions, net (2) . . .
Trading gains, net (3) . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
Gains on sales of loans, net (4)
(in thousands)
$ (7,846) $ — $ —
(76,989)
(10,883)
1,274
(17,949)
4,651
4,378
(4,722)
1,208
—
Non-Interest Expense:
Trading gains, net (6) . . . . . . . . . . . . . . . . . .
(1,194)
(1,359)
issued to capital trusts
Trading gains, net . . . . . . . . . . . . . . . . . . . . .
15,243
4,107
$(80,395) $ (6,172) $(3,514)
(1) These losses represent other-than-temporary impairment charges on held to maturity securities which were recognized within the losses
on securities transactions, net category on the consolidated statements of income.
(2) These losses represent other-than-temporary impairment charges on available for sale securities which were recognized within the losses
on securities transactions, net category on the consolidated statements of income.
(3) For the year ended December 31, 2007, the gains on change in fair value of trading securities include $4.3 million in gains on the change
in fair value of interest rate derivative transactions entered into and terminated during the second quarter of 2007.
(4) For the year ended December 31, 2007, the gains on change in fair value of loans held for sale presented exclude net gains of $407
thousand on loans held for sale that were carried at their contractual principal balance during the first quarter of 2007 (i.e., loans
excluded from the adoption of SFAS No. 159). At December 31, 2008 and 2007, all loans held for sale were carried at fair value.
(5) During the second quarter of 2008, Valley prepaid one fixed rate Federal Home Loan Bank advance elected to be carried at fair value
under SFAS No. 159 which had a $40.0 million contractual principal obligation. No long-term borrowings were carried at fair value at
December 31, 2008.
(6) For the year ended December 31, 2007, the gains on change in fair value of long-term borrowings excludes $276 thousand in prepayment
gains for Valley’s early redemption of two fixed rate Federal Home Loan Bank advances carried at fair value during the first quarter of
2007. The prepayment gains were recognized as a reduction in interest on long-term borrowings for the year ended December 31, 2007.
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair
value of financial assets and financial liabilities, including those financial assets and financial liabilities that are
not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for
estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring
or non-recurring basis are discussed above. Below is management’s estimate of the fair value of financial
instruments which were carried on the consolidated financial statements at cost.
The fair value estimates below made at December 31, 2008 and 2007 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
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 other financial assets and
financial liabilities not already discussed above:
Cash and due from banks, interest bearing deposits with banks and fed funds sold: The carrying amount is
considered to be a reasonable estimate of fair value.
Investment securities held to maturity: Fair values are based on prices obtained through an independent
pricing service or dealer market participants which Valley has historically transacted both purchases and sales of
investment securities. The price for these instruments are obtained through an independent pricing service or
dealer market participants with which Valley has historically transacted both purchases and sales of investment
securities. Prices obtained from these sources include market quotations and matrix pricing. The fair value
measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S.
Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit
information and the bond’s terms and conditions, among other things.
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.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair
value.
Federal Reserve Bank and Federal Home Loan Bank stock: The redeemable carrying amount of these
securities with limited marketability approximates their fair value. These securities are recorded in other assets
on the consolidated statements of financial condition.
Deposits: 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 and long-term borrowings: The fair value is estimated by obtaining quoted market prices of the
identical or similar financial instruments when available. The fair value of other long-term borrowings is
estimated by discounting the estimated future cash flows using market discount rates of financial instruments
with similar characteristics, terms and remaining maturity.
Junior subordinated debentures issued to GCB Capital Trust III: The fair value is estimated utilizing the
income approach, where as the present value of expected cash flows, over the remaining life of the estimated life
of the security, are discounted using Valley’s credit spread over a similar maturity U.S. Treasury security.
Valley’s credit spread was calculated based on the Valley’s trust preferred securities issued by VNB Capital
Trust I which are publicly traded in an active market.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The carrying amounts and estimated fair values of financial instruments were as follows at December 31,
2008 and 2007:
Financial assets:
2008
2007
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(in thousands)
Cash and due from banks . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity . . . . . . . . . .
Investment securities available for sale . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale, at fair value . . . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . .
Federal Reserve Bank and Federal Home Loan
Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
237,497
343,010
—
1,154,737
1,435,442
34,236
4,542
10,050,446
57,717
$
237,497
343,010
—
1,069,245
1,435,442
34,236
4,542
10,169,298
57,717
$ 218,896
9,569
9,000
556,113
1,606,410
722,577
2,984
8,423,557
56,578
$ 218,896
9,569
9,000
548,353
1,606,410
722,577
2,984
8,516,959
56,578
150,476
3,334
150,476
3,334
125,435
—
125,435
—
Financial liabilities:
Deposits without stated maturities . . . . . . . . . . . . .
Deposits with stated maturities . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings (carrying amount includes
fair value of $41,359 for a Federal Home Loan
Bank advance at December 31, 2007) . . . . . . . . .
Junior subordinated debentures issued to capital
trusts (carrying amount includes fair value of
$140,065 at December 31, 2008 and $163,233 at
December 31, 2007 for VNB Capital Trust I) . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . .
Other liabilities* . . . . . . . . . . . . . . . . . . . . . . . . . . .
*
Derivative financial instruments are included in this category.
5,611,664
3,621,259
640,304
5,611,664
3,681,279
635,767
5,312,029
2,778,975
605,154
5,312,029
2,796,704
599,041
3,008,753
3,455,381
2,801,195
2,864,997
165,390
32,802
2,008
162,936
32,802
2,008
163,233
29,701
424
163,233
29,701
424
Financial instruments with off-balance sheet risk, consisting of loan commitments and standby letters of
credit, had immaterial estimated fair values at December 31, 2008 and 2007.
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
INVESTMENT SECURITIES (Note 4)
As of December 31, 2008, Valley had approximately $1.2 billion and $1.4 billion in held to maturity and
available for sale investment securities, respectively. Valley may be required to record impairment charges on its
investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors,
including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for
investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated
changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may
result in other-than-temporary impairment on certain investment securities in future periods. Valley’s investment
portfolios include private mortgage-backed securities, trust preferred securities principally issued by banks
(included three pooled securities), perpetual preferred securities issued by banks, and bank issued corporate
bonds. These investments may pose a higher risk of future impairment charges by Valley as a result of the
current downturn in the U.S. economy and its potential negative effect on the future performance of these bank
issuers and/or the underlying mortgage loan collateral. Approximately $13.3 million and $130.6 million of the
mortgage-backed securities classified as held to maturity and available for sale securities, respectively, were
private label mortgage-backed securities at December 31, 2008, while the remainder of the mortgage-backed
securities are issued by U.S. government sponsored agencies. The private mortgage-backed securities classified
as held to maturity and available for sale securities had gross unrealized losses of $686 thousand and $34.5
million, respectively, at December 31, 2008.
Held to Maturity
The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at
December 31, 2008 and 2007 were as follows:
Amortized
Cost
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
December 31, 2007
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Fair Value
(in thousands)
U.S. government agency
securities . . . . . . . . . . . . $
24,958 $
65 $ — $
25,023 $ — $ — $ — $ —
Obligations of states and
political subdivisions . .
201,858
2,428
(701)
203,585 230,201
2,159
(150) 232,210
Mortgage-backed
securities . . . . . . . . . . . .
593,275
7,076
(785)
599,566
52,073
14
(823)
51,264
Corporate and other debt
securities . . . . . . . . . . . .
334,646
2,776
(96,351)
241,071 273,839
2,124
(11,084) 264,879
Total investment
securities held to
maturity . . . . . . . . . $1,154,737 $12,345 $(97,837) $1,069,245 $556,113 $4,297 $(12,057) $548,353
The age of unrealized losses and fair value of related securities held to maturity at December 31, 2008 and
2007 were as follows:
Less than
Twelve Months
December 31, 2008
More than
Twelve Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Corporate and other debt securities . . . . . .
$ 27,346
36,985
119,205
$
(661) $ 3,853
(785)
(28,788)
—
91,642
$
(40) $ 31,199
36,985
—
210,847
(67,563)
$
(701)
(785)
(96,351)
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
$183,536
$(30,234) $95,495
$(67,603) $279,031
$(97,837)
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Less than
Twelve Months
December 31, 2007
More than
Twelve Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Corporate and other debt securities . . . . . .
$
2,818
10,991
102,676
$
(10)
(3)
(6,692)
$20,242
28,550
40,072
$ (140) $ 23,060
39,541
142,748
(820)
(4,392)
$
(150)
(823)
(11,084)
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
$116,485
$(6,705)
$88,864
$(5,352) $205,349
$(12,057)
The unrealized losses on investment securities held to maturity are primarily due to changes in interest rates
(including, in certain cases, changes in credit spreads). The total number of security positions in the securities
held to maturity portfolio in an unrealized loss position at December 31, 2008 was 87 compared to 67 at
December 31, 2007. The unrealized losses reported on obligations of states and political subdivisions all relate to
securities with investment grade ratings and are believed by management to have been caused not by credit risk,
but changes in interest rates. Unrealized losses reported for mortgage-backed securities relate primarily to one
AAA rated private label security with a book value of $9.5 million and an unrealized loss of $608 thousand at
December 31, 2008.
Unrealized losses reported in corporate and other debt securities relate to 36 single issuer bank trust
preferred securities and 6 investment grade corporate bonds issued by banks with no defaults. Of the 36 trust
preferred securities, 26 are investment grade and 10 are not rated as of December 31, 2008. These securities are
all paying in accordance with their terms and have no deferrals of interest or defaults. Additionally, management
analyzes the performance of the issuers on a quarterly basis, including a review of the issuer’s most recent bank
regulatory report to assess credit risk and the probability of impairment of the contractual cash flows of the
applicable security. Based upon management’s fourth quarter review, all of the issuers appear to meet the
regulatory minimum requirements to be considered a “well-capitalized” financial institution at December 31,
2008 and have maintained performance levels adequate to support the contractual cash flows of the securities.
Management does not believe that any individual unrealized loss as of December 31, 2008 included in the
table above represents an other-than-temporary impairment as management mainly attributes the declines in
value to changes in interest rates and lack of liquidity in the market place, not credit quality or other factors.
Management does not believe it is probable that Valley will not receive all principal and interest payments in
accordance with the contractual terms of these securities. Valley has the intent and ability to hold the securities
contained in the table above until maturity.
At December 31, 2008, Valley recorded $7.8 million of other-than-temporary impairment charges on two of
the three pooled trust preferred securities owned by Valley, principally collateralized by securities issued by
banks, included in corporate and other debt securities within the held to maturity portfolio. The other-than-
temporary impairment was recorded for the securities, as each of Valley’s tranches in the two securities had
projected cash flows below their future contractual principal and interest payments. After the write down, the two
pooled trust preferred securities had a total adjusted carrying value of $1.1 million. After the impairment
analysis, management no longer had a positive intent to hold these two securities to their maturity due to the
significant deterioration in credit rating of both issuers. As a result, and in accordance with SFAS No. 115,
management transferred the securities from held to maturity to the available for sale portfolio at December 31,
2008.
As of December 31, 2008, the fair value of investments held to maturity that were pledged to secure public
deposits, repurchase agreements, lines of credit, Federal Home Loan Bank (“FHLB”) advances and for other
purposes required by law, was $268 million.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The contractual maturities of investments in debt securities held to maturity at December 31, 2008, are set
forth in the table below. Maturities may differ from contractual maturities in mortgage-backed securities because
the mortgages underlying the securities may be prepaid without any penalties. Therefore, mortgage-backed
securities are not included in the maturity categories in the following summary.
December 31, 2008
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
36,617
58,772
101,848
364,225
593,275
$
36,670
59,889
102,381
270,739
599,566
Total investment securities held to maturity . . . . . . . . . . . . . .
$1,154,737
$1,069,245
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 expected life for mortgage-backed securities held to maturity was 16.6
years at December 31, 2008 and 6.7 years at December 31, 2007.
Available for Sale
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at
December 31, 2008 and 2007 were as follows:
Amortized
Cost
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Amortized
Cost
December 31, 2007
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
U.S. Treasury securities . . . . . $
U.S. government agency
— $ — $ — $
— $
4,989 $
144
$ — $
5,133
securities . . . . . . . . . . . . . . .
101,787
785
(8)
102,564
325,323
968
(205)
326,086
Obligations of state and
political subdivisions . . . . . .
47,371
Mortgage-backed securities . . 1,229,248
Corporate and other debt
securities . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . .
61,540
49,383
Total investment securities
930
21,692
(110)
42,840
48,191
(35,554) 1,215,386 1,049,012
25
31
(27,061)
(14,617)
34,504
34,797
88,266
97,401
992
7,711
1,009
554
(4)
43,828
(7,127) 1,049,596
(3,987)
(1,476)
85,288
96,479
available for sale . . . . . . . . . $1,489,329 $23,463
$(77,350) $1,435,442 $1,607,831 $11,378
$(12,799) $1,606,410
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The age of unrealized losses and fair value of related securities available for sale at December 31, 2008 and
2007 were as follows:
Less than
Twelve Months
December 31, 2008
More than
Twelve Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
1,004
$
(in thousands)
(8) $ — $ — $
1,004
$
(8)
3,515
191,002
19,990
19,815
(109)
(24,902)
(8,449)
(11,092)
856
55,948
12,448
8,802
(1)
(10,652)
(18,612)
(3,525)
4,371
246,950
32,438
28,617
(110)
(35,554)
(27,061)
(14,617)
U.S. government agency securities . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Corporate and other debt securities . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
$235,326
$(44,560) $78,054
$(32,790) $313,380
$(77,350)
Less than
Twelve Months
December 31, 2007
More than
Twelve Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$ — $ — $ 58,785
$ (205) $ 58,785
$
(205)
(in thousands)
—
146,811
49,204
12,090
—
(1,760)
(3,137)
(1,351)
856
181,872
9,075
5,290
(4)
(5,367)
(850)
(125)
856
328,683
58,279
17,380
(4)
(7,127)
(3,987)
(1,476)
U.S. government agency securities . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Corporate and other debt securities . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
$208,105
$(6,248) $255,878
$(6,551) $463,983
$(12,799)
The total number of security positions in the securities available for sale portfolio in an unrealized loss
position at December 31, 2008 was 190 compared to 168 at December 31, 2007. The unrealized losses for
mortgage-backed securities relate primarily to securities issued by Fannie Mae, Freddie Mac and private
institutions which all had AAA ratings at December 31, 2008. The unrealized losses for corporate and other debt
securities relate mainly to 18 single issuer bank trust preferred securities, 1 pooled trust preferred security, and 1
bank issued corporate bond which all had investment grade ratings at December 31, 2008. These securities are all
paying in accordance with their terms and have no deferrals of interest or defaults. Additionally, as previously
noted above, management analyzes the performance of the bank issuers on a quarterly basis, including a review
of the issuer’s most recent bank regulatory report to assess the company’s credit risk and the probability of
impairment of the contractual cash flows of the applicable security. Based upon management’s fourth quarter
review, all of the issuers appear to meet the regulatory minimum requirements to be considered a “well-
capitalized” financial institution at December 31, 2008 and have maintained performance levels adequate to
support the contractual cash flows of the securities. See discussion of subsequent downgrades to securities ratings
below.
The unrealized losses on equity securities, including those more than twelve months, are related primarily to
perpetual preferred securities. As allowed under the guidance issued by the Office of the Chief Accountant of the
SEC in October 2008, these hybrid investments are assessed for impairment by Valley as if they were debt
securities. Therefore, Valley assessed the creditworthiness of each security issuer, as well as any potential change
in the anticipated cash flows of the securities as of December 31, 2008. Based on this analysis, management
believes the decline in prices are attributable to a lack of liquidity in the marketplace and are not reflective of the
underlying value of these instruments. All of the perpetual preferred securities are currently performing and
paying quarterly dividends.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Management does not believe that any individual unrealized loss as of December 31, 2008 represents an
other-than-temporary impairment as management mainly attributes the declines in value to changes in interest
rates and recent market volatility, not credit quality or other factors. Management does not believe it is probable
that Valley will not receive all principal and interest payments in accordance with the contractual terms of these
securities. Valley has the intent and ability to hold these investment securities until market price recovery or, if
necessary, until maturity.
For the year ended December 31, 2008, Valley recognized other-than-temporary impairment charges of
$77.0 million on investment securities classified as available for sale. The impairment charges primarily relate to
Fannie Mae and Freddie Mac perpetual preferred stocks classified as available for sale with a combined adjusted
book value of $1.3 million after write downs totaling $69.8 million recorded primarily in the third and fourth
quarters of 2008. During the third and fourth quarters of 2008, the market values of these securities significantly
declined after the U.S. Government placed Fannie Mae and Freddie Mac into conservatorship and suspended
their preferred stock dividends. Valley recognized a $17.9 million impairment charge on the same Freddie Mac
and Fannie Mae perpetual preferred securities during the fourth quarter of 2007. The valuation of these securities
could increase over the course of future market cycles if these institutions become viable institutions and are able
to pay dividends on these securities.
During the fourth quarter of 2008, Valley recorded $6.4 million of other-than-temporary impairment on one
private label mortgage-backed security classified as available for sale that was downgraded to a non-investment
grade rating of CCC by S&P during the quarter. The other-than-temporary impairment was recorded for this
security, as Valley’s tranche in the issuance had projected cash flows below the future contractual principal and
interest payments. The security had an adjusted carrying value of $9.4 million at December 31, 2008. Valley also
recorded a total of $733 thousand in other-than-temporary impairment charges on three bank common equity
securities and one bank preferred security during the year ended December 31, 2008.
Corporate and other debt securities within the available for sale portfolio include one pooled trust preferred
security, which is collateralized by trust preferred securities principally issued by banks, with an amortized cost
of $17.8 million and a fair value of $7.2 million at December 31, 2008. At December 31, 2008, this pooled
security had an investment grade rating of AAA and a $10.6 million unrealized loss. In late January 2009, S&P
downgraded the security’s rating to BBB-. The security is performing in accordance with its contractual terms
and management has the ability and intent to hold the security until market price recovery, which could be
maturity. The overall issuance of $192 million includes one bank which is currently deferring interest payments
and one default, the two issuers represent a combined 4.5 percent of the overall security. As part of its
impairment analysis, management reviewed the underlying banks’ current financial performance, as well as their
participation in the Treasury’s TARP program to assist management in applying the appropriate constant default
rate to its cash flow projections for the security. At December 31, 2008, no other-than-temporary impairment was
recorded for the security, as Valley’s super senior tranche of this security had projected cash flows no less than
their future contractual principal and interest payments. The downgrade to the security’s rating in January 2009
did not change management’s assessment that the security is temporarily impaired.
In late January 2009, three AAA rated private label mortgage-backed securities classified as available for
sale were downgraded by Moody’s to non-investment grade securities. These securities had a combined fair
value of $38.6 million and an unrealized loss of $11.0 million at December 31, 2008. As a result, management
updated its fourth quarter review of the tranches of these security issuances. To determine the range and
likelihood of potential principal and interest
losses on these tranches, management prepared cash flow
projections encompassing multiple market assumptions, including constant default rates well above the securities
actual loss experience. Based upon these cash flow projections, management projected that all future contractual
principal and interest payments will be received and no other-than-temporary impairment existed as of
December 31, 2008.
As of December 31, 2008, 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
$1.1 billion.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The contractual maturities of investments in debt securities available for sale at December 31, 2008, are set
forth in the following table. Maturities may differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be prepaid without any penalties. Therefore, mortgage-
backed securities are not included in the maturity categories in the following summary.
December 31, 2008
Amortized
Cost
Fair Value
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(in thousands)
3,037
37,928
3,882
165,851
1,229,248
49,383
3,066
38,509
3,816
139,868
1,215,386
34,797
Total investment securities available for sale . . . . . . . . . . . . .
$1,489,329
$1,435,442
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 expected life for mortgage-backed securities available for sale at
December 31, 2008 and 2007 was 9.1 years and 9.0 years, respectively.
Gross gains (losses) realized on sales, maturities and other securities transactions related to investment
securities included in earnings for the years ended December 31, 2008, 2007 and 2006 were as follows:
2008
2007
2006
(in thousands)
Sales transactions:
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,326
(5,599)
$ 2,171
(123)
$ 1,604
—
$ 4,727
$ 2,048
$ 1,604
Maturities and impairments:
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment losses . . . . . . . . . . . .
$
317
(24)
(84,835)
$
91
—
(17,949)
260
$
(2,606)
(4,722)
Losses on securities transactions, net . . . . . . . . . . . . . . . . . . .
$(79,815) $(15,810) $(5,464)
$(84,542) $(17,858) $(7,068)
During September of 2008, prior to the recognition of the 2008 impairment charges on Fannie Mae and
Freddie Mac perpetual preferred securities (discussed above), Valley sold 50 percent of its position in one of the
Fannie Mae perpetual preferred stocks classified as available for sale and realized a gross loss of $5.4 million
included in the table above. This security had a total book value of $9.2 million prior to the date of sale.
In 2006, Valley recognized a $4.0 million impairment
loss primarily due to its decision to sell
approximately $132 million of investment securities classified as available for sale in the fourth quarter of 2006.
Management determined that the sale of such securities did not change its intent and ability to hold the remaining
investment securities classified as available for sale until recovery of their unamortized cost. Additionally,
impairment losses totaling $739 thousand in 2006 related to equity securities in which management believed
their market prices would not recover in the foreseeable future due to market conditions and other factors. See
discussions above included in this note regarding the other-than-temporary impairment charges on securities
during 2008 and 2007.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the year ended December 31, 2006, net losses on securities transactions includes gross gains and losses
totaling $155 thousand and $2.3 million, respectively, due to the redemption of certain trust preferred securities
in the held to maturity portfolio prior to their scheduled maturity date. These gross gains and losses on held to
maturity securities are included in the gross gains (losses) realized on maturities and other securities transactions
table above. There were no such gains and losses on trust preferred securities classified as held to maturity
securities during the years ended December 31, 2008 and 2007.
Trading Securities
The fair value of trading securities at December 31, 2008 and 2007 were as follows:
U.S. government agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
(in thousands)
$ — $224,945
2,803
28,959
465,870
—
—
34,236
Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$34,236
$722,577
Interest income on trading securities totaled $8.3 million, $52.8 million, and $163.0 thousand for years
ended December 31, 2008, 2007 and 2006, respectively.
LOANS (Note 5)
The detail of the loan portfolio as of December 31, 2008 and 2007 was as follows:
2008
2007
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,965,372
$1,563,150
Total commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,965,372
1,563,150
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
510,519
2,269,935
3,324,082
402,806
2,063,242
2,370,345
Total mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,104,536
4,836,393
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
607,700
9,916
1,364,343
91,823
554,830
10,077
1,447,838
83,933
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,073,782
2,096,678
.
$10,143,690
$8,496,221
Total loans are net of unearned discount and deferred loan fees totaling $4.8 million and $3.5 million at
December 31, 2008 and 2007, respectively.
Most of Valley’s lending activity occurs within the State of New Jersey and the New York City
metropolitan area. The majority of Valley’s loan portfolio consists of commercial, commercial mortgage, and
residential mortgage loans. A significant broad-based deterioration in economic conditions within these markets,
including a decline in real estate values, higher unemployment, and an increase in commercial property
vacancies, could have a material adverse impact on the quality of Valley’s loan portfolio.
Related Party Loans
The Bank’s authority to extend credit to its directors and executive officers, 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
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 the Bank’s capital. In addition, extensions of credit in excess of certain limits
must be approved by the Bank’s Board of Directors. Under the Sarbanes-Oxley Act, Valley and its subsidiaries,
other than the Bank, 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 ended December 31, 2008, adjusted for changes in
directors, executive officers and their affiliates:
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
(in thousands)
$ 64,736
41,757
(22,468)
Outstanding at end of year.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 84,025
All loans to related parties are performing as of December 31, 2008.
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, 2008 and 2007 were
as follows:
2008
2007
(in thousands)
Loans past due in excess of 90 days and still accruing . . . . . . . . . . . . . . .
$15,557
$ 8,462
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,073
8,278
4,317
$30,623
609
1,466
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45,668
$32,698
Troubled debt restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,628
$ 8,363
If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such
interest income would have amounted to approximately $2.7 million, $2.8 million and $2.1 million for the years
ended December 31, 2008, 2007, and 2006, respectively; none of these amounts were included in interest income
loans totaled
during these periods. Interest
$9 thousand, $45 thousand and $498 thousand for the years ended December 31, 2008, 2007, and 2006,
respectively.
income recognized on loans once classified as non-accrual
The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific
allocations to the allowance for loan losses totaled $22.4 million and $2.1 million, respectively, at December 31,
2008 and $28.9 million and $2.6 million, respectively, at December 31, 2007. The average balance of impaired
loans during 2008, 2007 and 2006 was approximately $25.3 million, $23.8 million and $20.7 million,
respectively. The amount of interest that would have been recorded under the original terms for impaired loans
was $984 thousand for 2008, $1.3 million for 2007, and $1.2 million for 2006. Interest was not collected on these
impaired loans during these periods.
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ALLOWANCE FOR CREDIT LOSSES (Note 6)
Transactions recorded in the allowance for credit losses during the years ended December 31, 2008, 2007
and 2006 were as follows:
2008
2007
2006
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 74,935
28,282
11,410
(in thousands)
$ 74,718
11,875
—
$ 75,188
9,270
—
Less net loan charge-offs:
Loans charged-off
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries on loan charge-offs . . . . . . . . . . . . . . . . . .
(22,663)
2,774
(15,135)
3,477
(12,088)
2,348
Net loan charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,889)
(11,658)
(9,740)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 94,738
$ 74,935
$ 74,718
Components of allowance for credit losses:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . .
Reserve for unfunded letters of credit* . . . . . . . . . . . .
93,244
1,494
72,664
2,271
74,718
—
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . .
$ 94,738
$ 74,935
$ 74,718
Components of provision for credit losses:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . .
Provision for unfunded letters of credit* . . . . . . . . . . .
29,059
(777)
12,751
(876)
9,270
—
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . .
$ 28,282
$ 11,875
$ 9,270
*
On January 1, 2007, Valley transferred the portion of the allowance for loan losses related to commercial lending letters of
credit to other liabilities.
PREMISES AND EQUIPMENT, NET (Note 7)
At December 31, 2008 and 2007, premises and equipment, net consisted of:
2008
2007
(in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 58,398
176,630
48,885
151,706
$ 51,481
157,058
41,514
143,309
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
435,619
(179,276)
393,362
(165,809)
Total premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 256,343
$ 227,553
Depreciation and amortization of premises and equipment included in non-interest expense for the years
ended December 31, 2008, 2007 and 2006 amounted to approximately $14.7 million, $15.3 million and $16.2
million, respectively.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
LOAN SERVICING (Note 8)
VNB Mortgage Services, Inc. (“MSI”), a subsidiary of the Bank, 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 the Bank. The aggregate principal balances
of mortgage loans serviced by MSI for others approximated $1.2 billion, $1.3 billion and $1.2 billion at
December 31, 2008, 2007 and 2006, respectively. The outstanding balance of loans serviced for others is not
included in the consolidated statements of financial condition.
The Bank is a servicer of SBA loans, and is compensated for loan administrative services performed for
SBA loans originated and sold by the Bank. The Bank serviced a total of $47.4 million, $52.6 million and $75.0
million of SBA loans at December 31, 2008, 2007 and 2006, 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 intangible 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. See Note 1 of the consolidated
financial statements for additional information.
The following table summarizes the change in loan servicing rights during the years ended December 31,
2008, 2007 and 2006:
Loan servicing rights
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . .
Purchase and origination of loan servicing rights . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,191
990
(3,357)
$13,810
2,345
(3,964)
$17,809
709
(4,708)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,824
$12,191
$13,810
2008
2007
2006
(in thousands)
Valuation allowance:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . .
Impairment adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $ —
—
(532)
—
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (532) $ — $ —
Balance at end of year net of valuation allowance . . . . . .
$ 9,292
$12,191
$13,810
Based on current market conditions, amortization expense related to the loan servicing rights at
December 31, 2008 is expected to aggregate approximately $7.9 million through 2013.
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
GOODWILL AND OTHER INTANGIBLE ASSETS (Note 9)
The changes in the carrying amount of goodwill as allocated to our business segments, or reporting units
thereof, for goodwill impairment analysis were:
Business Segment / Reporting Unit*:
Wealth
Management
Consumer
Lending
Commercial
Lending
Investment
Management
Total
Balance at December 31, 2006 . . . . . . . . . .
Goodwill from business combinations . . . .
. . . . . . . . . . . . . . . . .
Goodwill impairment
Balance at December 31, 2007 . . . . . . . . . .
Goodwill related to bank subsidiary sold . .
Goodwill from business combinations . . . .
$19,854
648
(2,310)
18,192
(100)
93
$54,537
—
—
54,537
—
39,103
($ in thousands)
$ 57,020
—
—
57,020
—
50,736
$50,086
—
—
50,086
—
25,479
$181,497
648
(2,310)
179,835
(100)
115,411
Balance at December 31, 2008 . . . . . . . . . .
$18,185
$93,640
$107,756
$75,565
$295,146
*
Valley’s Wealth Management Division is comprised of trust, asset management, and insurance services. This report unit is included in
the Consumer Lending segment for financial reporting purposes.
During the third quarter of 2008, we recorded $115.3 million in goodwill in connection with the acquisition
of Greater Community and $93 thousand in goodwill from an earn-out payment resulting from an acquisition by
Valley in 2006. The earn-out payment was based upon predetermined profitability targets in accordance with the
merger agreement.
During the fourth quarter of 2007, Valley recorded a $2.3 million goodwill impairment charge due to its
decision to sell its broker-dealer subsidiary, Glen Rauch Securities, Inc. On March 31, 2008, Valley sold the
broker-dealer subsidiary resulting in $100 thousand reduction in goodwill during the first quarter of 2008. See
Note 2 and 3 for further details on this transaction.
No impairment losses on goodwill or intangibles included in the other category of other intangible assets
were incurred in the years ended December 31, 2008 and 2006.
The following table summarizes other intangible assets as of December 31, 2008 and 2007:
Gross
Intangible
Assets
Accumulated
Amortization
Valuation
Allowance
(in thousands)
Net
Intangible
Assets
December 31, 2008
Loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$ 66,624
38,177
5,792
$(56,800)
(23,028)
(4,279)
$(532)
—
—
$ 9,292
15,149
1,513
Total other intangible assets . . . . . . . . . . . . . . . . .
$110,593
$(84,107)
$(532)
$25,954
December 31, 2007
Loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$ 68,827
30,701
6,395
$(56,636)
(19,977)
(4,598)
Total other intangible assets . . . . . . . . . . . . . . . . .
$105,923
$(81,211)
$ —
—
—
$ —
$12,191
10,724
1,797
$24,712
Loan servicing rights are amortized in proportion to actual principal mortgage payments received to reflect
actual portfolio conditions (See Notes 1 and 8 above). Core deposits are amortized using an accelerated method
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and have a weighted average amortization period of 10 years. The “Other” category consists of customer lists and
covenants not to compete. Customer lists and covenants not to compete are amortized over their expected life
using a straight line method and have a weighted average amortization period of 14 years. We recognized
amortization expense on other intangible assets of $7.2 million, $7.5 million, and $8.7 million for the years ended
December 31, 2008, 2007, and 2006, respectively.
The following presents the estimated amortization expense of other intangible assets over the next five year
period:
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan
Servicing
Rights
Core
Deposits Other
(in thousands)
$3,425
2,985
2,544
2,104
1,663
$2,633
1,986
1,503
1,026
780
$267
266
234
217
114
DEPOSITS (Note 10)
Included in time deposits at December 31, 2008 and 2007 are certificates of deposit over $100 thousand of
$1.7 billion and $1.1 billion, respectively. Interest expense on time deposits of $100 thousand or more totaled
approximately $37.8 million, $57.8 million and $54.8 million in 2008, 2007 and 2006, respectively.
The scheduled maturities of time deposits as of December 31, 2008 are as follows:
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
$3,072,986
130,286
163,927
106,958
66,063
81,039
Total time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,621,259
Deposits from certain directors, executive officers and their affiliates totaled $57.4 million and $71.3
million at December 31, 2008 and 2007, respectively.
BORROWED FUNDS (Note 11)
Short-term borrowings at December 31, 2008 and 2007 consisted of the following:
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury tax and loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$335,510
300,000
—
4,794
$394,512
100,000
80,000
30,642
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$640,304
$605,154
2008
2007
(in thousands)
The weighted average interest rate for short-term borrowings at December 31, 2008 and 2007 was 1.99
percent and 3.36 percent, respectively.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At December 31, 2008 and 2007, long-term borrowings consisted of the following:
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,214,784
689,000
100,000
4,969
$2,039,444
655,000
100,000
6,751
Total long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,008,753
$2,801,195
2008
2007
(in thousands)
The FHLB advances included in long-term debt had a weighted average interest rate of 4.21 percent at
December 31, 2008 and 4.31 percent at December 31, 2007. These advances are secured by pledges of FHLB
stock, mortgage-backed securities and a blanket assignment of qualifying residential mortgage loans. Interest
expense of $92.8 million, $69.9 million, and $64.4 million was recorded on FHLB advances during the years
ended December 31, 2008, 2007 and 2006, respectively.
The FHLB advances are scheduled for repayment as follows (in thousands):
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
$
25,426
62,693
122,475
28,320
1,102
1,974,768
Total long-term FHLB advances.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,214,784
The majority of the long-term FHLB advances are callable by the issuer for redemption prior to their
scheduled maturity date. Advances with scheduled maturities beyond 2013 reported in the table above include
$910 million in advances which are callable during 2009 and have interest rates ranging from 2.70 percent to
4.92 percent.
The securities sold under repurchase agreements to FHLB and other counterparties included in long-term
debt totaled $689.0 million and $655.0 million at December 31, 2008 and 2007, respectively. The weighted
average interest rate for this debt was 4.21 percent and 4.26 percent at December 31, 2008 and 2007,
respectively. Interest expense of $28.0 million, $26.6 million, and $26.3 million was recorded during the years
ended December 31, 2008, 2007 and 2006, respectively. The schedule for repayment is as follows (in thousands):
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 34,000
—
85,000
—
—
570,000
Total long-term securities sold under agreements to repurchase . . . . . . . . . . .
$689,000
On July 13, 2005, the Bank issued $100 million of 5.0 percent subordinated notes due July 15, 2015 with no
call dates or prepayments allowed. Interest on the subordinated notes is payable semi-annually in arrears at an
annual rate of 5.0 percent on January 15 and July 15 of each year.
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
$1.4 billion at both December 31, 2008 and 2007.
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNIOR SUBORDINATED DEBENTURES ISSUED TO CAPITAL TRUSTS (Note 12)
Valley established VNB Capital Trust I, a statutory trust, for the sole purpose of issuing trust preferred
securities and related trust common securities. The proceeds from such issuances were used by the trust to
purchase an equivalent amount of junior subordinated debentures of Valley. The junior subordinated debentures,
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. GCB Capital Trust III was established by Greater Community prior to Valley’s acquisition of Greater
Community, and the junior subordinated notes issued by Greater Community to GCB Capital Trust III were
assumed by Valley upon completion of the acquisition on July 1, 2008. Valley wholly owns all of the common
securities of each trust. The trust preferred securities, qualify, and are treated by Valley as Tier I regulatory
capital.
On January 1, 2007, Valley elected to measure the junior subordinated debentures issued to VNB Capital
Trust I at fair value under SFAS No. 159. For the years ended December 31, 2008 and 2007, net trading gains
included gains of $15.2 million and $4.1 million, respectively, for the changes in fair value of the junior
subordinated debentures issued to VNB Capital Trust I.
The table below summarizes the outstanding junior subordinated debentures and the related trust preferred
securities issued by each trust as of December 31, 2008:
December 31, 2008
VNB Capital Trust I
GCB Capital
Trust III
($ in thousands)
Junior Subordinated Debentures:
Carrying value (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual principal balance . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Annual interest rate (2)
Stated maturity date:
. . . . . . . . . . . . . . . . . . . . . . . . .
Initial call date: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
140,065
157,024
$
$
7.75%
25,325
24,743
6.96%
December 15, 2031
November 7, 2006
July 30, 2037
July 30, 2017
Trust Preferred Securities:
Face value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual distribution rate (2) . . . . . . . . . . . . . . . . . . . .
Issuance date: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Distribution dates (3):
$
152,313
$
7.75%
November 2001
Quarterly
24,000
6.96%
July 2007
Quarterly
(1) The carrying value for GCB Capital Trust III includes an unamortized purchase accounting premium of $582 thousand.
(2)
Interest on GCB Capital Trust III is fixed until July 30, 2017, then resets to 3-month LIBOR plus 1.4 percent. The annual interest rate
excludes the effect of the purchase accounting adjustments.
(3) All cash distributions are cumulative.
The junior subordinated debentures issued to VNB Capital Trust I had a total carrying value of $163.2
million and a total contractual principal balance of $164.9 million at December 31, 2007. The trust preferred
securities issued by VNB Capital Trust I had a total face value of $160.0 million at December 31, 2007.
The trusts’ ability to pay amounts due on the trust preferred securities is solely dependent upon Valley
the junior
making payments on the related junior subordinated debentures. Valley’s obligation under
subordinated debentures and other relevant trust agreements, in aggregate, constitutes a full and unconditional
guarantee by Valley of the trusts’ obligations under the trust preferred securities issued. Under the junior
subordinated debenture agreements, Valley has the right to defer payment of interest on the debentures and,
therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity
date in the table above. Currently, Valley has no intention to exercise its right to defer interest payments on the
debentures.
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of
the junior subordinated debentures at the stated maturity date or upon an earlier call date for redemption at par.
The junior subordinated notes issued to VNB Capital Trust I are currently callable by Valley. Valley’s Board of
Directors has granted management authorization to call, from time to time, all or part of the remaining junior
subordinated debentures issued to VNB Capital Trust I for redemption prior to their stated maturity date of
December 15, 2031.
During the third quarter of 2008, Valley purchased,
transactions, approximately
307 thousand trust preferred securities issued by VNB Capital Trust I for $7.3 million at an average cost of
$23.64 per share. These 307 thousand preferred securities and approximately 10 thousand of the trust’s common
securities held by Valley were surrendered to and cancelled by the trust in exchange for the redemption of
317 thousand junior subordinated debentures with a total par value of $7.9 million. As a result of the redemption,
Valley recognized a $417 thousand gain within the other non-interest income category of the consolidated
statements of income during the third quarter of 2008.
in open market
On both June 25, 2007 and October 29, 2007, Valley redeemed $20.6 million (a total of $41.2 million), of
the original $206.2 million contractual principal balance of the junior subordinated debentures and 800,000 of the
trust preferred securities and 24,742 of the common securities issued by VNB Capital Trust I.
Valley’s potential future purchases of the trust preferred securities issued by the trusts or redemption of its
junior subordinated debentures is not permitted for up to approximately three years, without prior consent, under
the terms of the U.S. Department of Treasury’s TARP Capital Purchase Program. Valley elected to participate in
and issue 300,000 nonvoting senior preferred shares under such program on November 14, 2008. See Note 16
below for further details.
The trust preferred securities described above are included in Valley’s consolidated Tier 1 capital and total
capital at December 31, 2008 and 2007. In March 2005, the Board of Governors of the Federal Reserve System
issued a final rule allowing bank holding companies to continue to include qualifying trust preferred capital
securities in their Tier 1 capital for regulatory capital purposes, subject to a 25 percent limitation to all core (Tier
1) capital elements, net of goodwill less any associated deferred tax liability. The amount of trust preferred
securities and certain other elements in excess of the limit could be included in total capital, subject to
restrictions. The final rule provides a five-year transition period, ending March 31, 2009, for application of the
aforementioned quantitative limitation. As of December 31, 2008 and 2007, 100 percent of the trust preferred
securities qualified as Tier I capital under the final rule adopted in March 2005.
BENEFIT PLANS (Note 13)
Pension Plan
Valley National Bank has a non-contributory defined benefit plan (“qualified 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 the Bank’s funding policy to contribute annually an amount that can be deducted
for federal income tax purposes. Additionally, the Bank has a supplemental non-qualified, non-funded retirement
plan (“non-qualified plan”) which is designed to supplement the pension plan for key officers.
On December 31, 2006, Valley adopted the provisions of SFAS No. 158, “Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans—An Amendment of SFAS No. 87, 88, 106, and 132R.”
This standard requires an employer to: (a) recognize in its statement of financial position an asset for a plan's
overfunded status or a liability for a plan's underfunded status; (b) measure a plan's assets and its obligations that
determine its funded status as of the end of the employer's fiscal year; and (c) recognize changes in the funded
status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be
reported in other comprehensive income (loss).
103
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 qualified and
non-qualified plans at December 31, 2008 and 2007:
Change in projected benefit obligation:
Projected benefit obligation at beginning of year . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
(in thousands)
$ 80,855
4,590
4,794
301
2,594
(2,705)
$ 74,476
4,393
4,383
—
56
(2,453)
Projected benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . .
$ 90,429
$ 80,855
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 69,676
(11,403)
5,105
(2,705)
$ 63,211
3,813
5,105
(2,453)
Fair value of plan assets at end of year* . . . . . . . . . . . . . . . . . . . . . . . . .
$ 60,673
$ 69,676
Funded Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(29,756) $(11,179)
Liability recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(29,756) $(11,179)
Accumulated benefit obligation at end of year . . . . . . . . . . . . . . . . . . . .
$ 79,731
$ 70,751
* The fair values of the investment securities held as plan assets are based on quoted prices in active markets for
identical assets (Level 1 under the fair value hierarchy of SFAS No. 157).
Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not
been recognized as a component of net periodic pension expense of Valley’s qualified and non-qualified plans
are presented in the following table. Valley expects to recognize approximately $908 thousand of the net
actuarial loss and $597 thousand of prior service cost reported in the following table as of December 31, 2008 as
a component of net periodic pension expense during 2009.
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32,608
3,399
(15,107)
$13,083
3,695
(7,039)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,900
$ 9,739
2008
2007
(in thousands)
The Bank’s non-qualified plan has an accumulated benefit obligation in excess of plan assets as follows:
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,739
9,396
—
$8,949
8,579
—
2008
2007
(in thousands)
In determining rate assumptions, management looks to current rates on fixed-income corporate debt
securities that receive a rating of Aa3 or higher from Moody’s. The weighted average discount rate and rate of
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
increase in future compensation levels used in determining the actuarial present value of benefit obligations for
the qualified and non-qualified plans as of December 31, 2008 and 2007 were:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future compensation increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.75% 6.00%
3.50
3.75
2008
2007
Components of net periodic pension expense for the years ended December 31, 2008, 2007, and 2006:
2008
2007
2006
(in thousands)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,590
4,794
(5,900)
597
371
$ 4,393 $ 4,281
3,943
(4,837)
445
369
4,383
(5,370)
546
268
Total net periodic pension expense . . . . . . . . . . . . . . . . . . . . . .
$ 4,452
$ 4,220
$ 4,201
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
2008
2007
(in thousands)
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost (credit)
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,897
301
(597)
(371)
$1,613
—
(546)
(268)
Total recognized in other comprehensive income . . . . . . . . . . . . . . . . . . .
$19,230
$ 799
Total recognized in net periodic benefit cost and other comprehensive
income (before tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,682
$5,019
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 to 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
(in thousands)
$ 3,936
4,035
4,452
4,831
5,053
31,180
The weighted average discount rate, expected long-term rate of return on assets and rate of compensation
increase used in determining Valley’s pension expense for the years ended December 31, 2008, 2007, and 2006
were:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.00% 6.00% 5.75%
8.50
8.50
3.75
3.75
8.50
3.75
2008
2007
2006
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 qualified plan weighted-average asset allocations at December 31, 2008 and 2007, by asset
category were as follows:
Asset Category
2008
2007
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57.0% 56.1%
38.5
4.5
37.9
6.0
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0%
In accordance with Section 402 (c) of ERISA, the qualified 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 qualified 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 qualified plan.
The qualified plan held 62,752 shares of VNB Capital Trust I preferred securities at December 31, 2008 and
2007. These shares had fair market values of $1.4 million and $1.6 million at December 31, 2008 and 2007,
respectively. During 2007, the qualified plan sold 15,688 shares of VNB Capital Trust I preferred securities.
Dividends received on Valley trust preferred shares were $122 thousand and $141 thousand for the years ended
December 31, 2008 and 2007, respectively.
Valley expects to contribute approximately $5.0 million to the qualified plan during 2009 based upon
actuarial estimates.
Director Plans
Valley maintains a non-qualified, non-funded directors’ retirement plan. The projected benefit obligation
and discount rate used to compute the obligation was $1.8 million and 5.75 percent, respectively, at
December 31, 2008, and $1.7 million and 6.00 percent, respectively, at December 31, 2007. As of December 31,
2008 and 2007, the entire obligation was included in other liabilities and $454 thousand (net of a $245 thousand
tax benefit) and $422 thousand (net of a $227 thousand tax benefit), respectively, were recorded in accumulated
other comprehensive loss. An expense of $225 thousand, $240 thousand and $260 thousand has been recognized
for the Directors’ retirement plan in the years ended December 31, 2008, 2007 and 2006, respectively.
Valley also maintains non-qualified plans for former directors of banks acquired, as well as a non-qualified
plan for former Senior Management of Merchants Bank of New York acquired in January of 2001. Valley did not
merge these plans into its existing non-qualified plans. Collectively, at December 31, 2008 and 2007, the
remaining obligations under these plans were $10.3 million and $8.9 million, respectively, of which $7.1 million
and $5.3 million, respectively, were funded. As of December 31, 2008 and 2007, the entire obligations were
included in other liabilities and $1.9 million (net of a $1.3 million tax benefit) and $2.0 million (net of a $1.5
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
million tax benefit), respectively, were recorded in accumulated other comprehensive loss. The $1.9 million in
accumulated other comprehensive loss will be reclassified to expense on a straight-line basis over the remaining
benefit periods of these non-qualified plans.
Bonus Plan
Valley National Bank 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 salary expense were $6.4 million, $6.3 million and $6.4 million
during 2008, 2007 and 2006, respectively.
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009. This
Act contains a provision that prohibits the payment or accrual of any bonus, retention award or incentive
compensation to any of Valley’s senior executive officers and its next 10 most highly compensated employees
during the TARP Capital Purchase Program Covered Period other than awards of long-term restricted stock that
(i) do not fully vest during the TARP Capital Purchase Program Covered Period, (ii) have a value not greater
than one-third of the total annual compensation of the awardee and (iii) are subject to such other restrictions as
determined by the Secretary of the Treasury. Valley does not know whether the award of incentive stock options
are covered by this prohibition. The prohibition on bonus, incentive compensation and retention awards does not
preclude payments required under written employment contracts entered into on or prior to February 11, 2009.
Savings Plan
Valley National Bank maintains a KSOP defined as a 401(k) plan with an employee stock ownership
feature. This plan covers eligible employees of the Bank and its subsidiaries and allows employees to contribute
a percentage of their salary, with the Bank matching a certain percentage of the employee contribution in shares
of Valley common stock until December 31, 2006. Effective January 1, 2007, the Bank’s matching contributions
were made in cash and invested in accordance with each participants’ investment elections. In 2006, the Bank
matched employee contributions with 54,448 common shares, of which 46,316 were allocated from treasury
stock and 8,132 shares issued from forfeitures and unissued shares. The Bank recorded $1.3 million in expense
for contributions to the plan for each of the years ended December 31, 2008, 2007 and 2006.
Stock-Based Compensation
Valley has one active employee stock option plan (the 1999 Long-Term Stock Incentive Plan), which is
shareholder approved, that was established to help Valley retain and motivate officers and key employees of
Valley and its subsidiaries. Under the 1999 Long-Term Stock Incentive Plan, Valley may award shares to its
employees for up to 6.9 million shares of common stock in the form of incentive stock options, stock
appreciation rights and restricted stock awards. The exercise price of each incentive stock option is equal to the
fair market value of Valley’s stock on the date of grant. An option’s maximum term is ten years and subject to a
vesting schedule. The 1999 Long-Term Stock Incentive Plan expires in 2009. A new proposed plan is expected to
be included in Valley’s 2009 Proxy Statement, subject to shareholder approval.
Effective January 1, 2006, Valley adopted SFAS No. 123R using the modified prospective method, as
required for companies that previously adopted the fair-value based method under SFAS No. 123. The modified
prospective method requires that compensation cost be recognized beginning with the effective date based on the
requirements of SFAS No. 123R for 1) all new stock-based awards granted after the effective date and 2) the
portion of stock-based awards for which the requisite service had not been rendered that are outstanding as of the
effective date. The fair value of each option is expensed over its vesting period.
Valley recorded stock-based employee compensation expense for incentive stock options and restricted
stock awards of $5.4 million, $5.0 million and $5.5 million for the years ended December 31, 2008, 2007 and
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2006, respectively. As of December 31, 2008, the remaining unrecognized amortization expense for all stock-
based employee compensation, which will be recognized over an average remaining vesting period of
approximately three years, totaled $10.2 million.
Stock Options
For stock options granted prior to November 1, 2005, Valley estimated the fair value of each option granted
on the date of grant using the Black-Scholes option-pricing model based on certain assumptions including
dividend yield, stock volatility, risk free rate of return and the expected term. The fair value of each option is
expensed over its vesting period. For options granted on or after November 1, 2005, the fair value of each option
granted on the date of grant is estimated using a binomial option pricing model. The results are based on
assumptions for dividend yield based on the annual dividend rate; stock volatility, based on Valley’s historical
and implied stock price volatility; risk free interest rates, based on the U.S. Treasury constant maturity bonds
with remaining term of approximately the same as the expected term of the options; and expected exercise term
calculated based on Valley’s historical exercise experience.
Stock-based employee compensation cost under the fair value method was measured using the following
weighted-average assumptions for stock options granted in 2008, 2007, and 2006:
2008
2007
2006
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1 – 4.0% 3.4 – 5.1% 4.5 – 5.2%
3.3%
20.0%
7.1
4.5%
24.0%
6.7
4.3%
21.0%
7.3
A summary of stock options activity as of December 31, 2008, 2007 and 2006 and changes during the years
ended on those dates is presented below:
2008
2007
2006
Stock Options
Outstanding at beginning of year . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . .
Shares
3,562,041
207,205
(474,895)
(100,727)
Outstanding at end of year . . . . . . . . . . .
3,193,624
Exercisable at year-end . . . . . . . . . . . . .
2,282,774
Weighted-average fair value of options
Weighted
Average
Exercise
Price
$20
18
15
19
20
20
Weighted
Average
Exercise
Price
$19
19
15
21
20
19
Weighted
Average
Exercise
Price
$19
23
14
21
19
18
Shares
3,566,434
447,366
(273,814)
(93,615)
3,646,371
2,316,373
Shares
3,646,371
261,529
(292,968)
(52,891)
3,562,041
2,448,033
granted during the year
. . . . . . . . . . .
$
2.76
$
3.04
$
4.21
The total intrinsic values of options exercised during the years ended December 31, 2008, 2007 and 2006
were $2.9 million, $2.1 million and $2.4 million, respectively. As of December 31, 2008, there was $2.3 million
of total unrecognized compensation cost related to nonvested stock options to be amortized over an average
remaining vesting period of approximately three years. Cash received from stock options exercised during the
years ended December 31, 2008, 2007 and 2006 was $7.3 million, $4.3 million and $3.9 million, respectively.
Treasury stock and available authorized common shares are issued for stock options exercised.
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes information about stock options outstanding at December 31, 2008:
Range of
Exercise Prices
Number
Outstanding
Options Outstanding
Weighted Average
Remaining
Contractual Life in
Years
Options Exercisable
Weighted
Average Exercise
Price
Number
Exercisable
Weighted
Average Exercise
Price
$12 - 15
15 - 18
18 - 20
20 - 23
23 - 25
12 - 25
129,617
481,709
892,789
895,996
793,513
3,193,624
0.9
5.0
4.7
5.9
6.9
5.5
$14
17
19
22
23
20
128,221
278,211
719,013
695,236
462,093
2,282,774
$14
16
19
22
23
20
As of December 31, 2008, the aggregate intrinsic value of options exercisable was $2.8 million, with a
weighted average remaining contractual term of 4.5 years. As of December 31, 2008, the aggregate intrinsic
value of options outstanding was $3.7 million, with a weighted average remaining contractual term of 5.5 years.
Restricted Stock
Restricted stock is awarded to key employees providing for the immediate award of our common stock
subject to certain vesting and restrictions under the 1999 Long-Term Stock Incentive Plan. Compensation
expense is measured based on the grant-date fair value of the shares and is amortized into salary expense on a
straight-line basis over the vesting period.
The following table sets forth the changes in restricted stock awards outstanding for the years ended
December 31, 2008, 2007 and 2006:
Restricted Stock Awards
Outstanding
2008
2007
2006
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
404,748
245,161
(145,685)
(12,073)
449,500
103,047
(140,236)
(7,563)
435,811
159,175
(126,704)
(18,782)
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
492,151
404,748
449,500
The amount of compensation costs related to restricted stock awards included in salary expense amounted to
$4.0 million, $3.1 million and $3.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.
As of December 31, 2008, there was $7.9 million of total unrecognized compensation cost related to nonvested
restricted shares to be amortized over the weighted average remaining vesting period of approximately three
years.
In 2005, Valley’s shareholders approved the 2004 Director Restricted Stock Plan. The plan provides the
non-employee members of the Board of Directors with the opportunity to forego some or all of their annual cash
retainer and meeting fees in exchange for shares of Valley restricted stock. There were 21,973 shares granted
during 2008 and there were 85,611 shares outstanding under this plan as of December 31, 2008.
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
INCOME TAXES (Note 14)
Income tax expense consists of the following for the years ended December 31, 2008, 2007, and 2006:
Current expense:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
(in thousands)
2006
$ 38,876
12,014
$ 63,445
8,591
$ 50,639
7,118
50,890
72,036
57,757
Deferred benefit:
Federal and State . . . . . . . . . . . . . . . . . . . . . . . . .
(33,956)
(20,338)
(17,873)
Total income tax expense . . . . . . . . . . . . . . . . . . .
$ 16,934
$ 51,698
$ 39,884
The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets
and liabilities as of December 31, 2008 and 2007 are as follows:
2008
2007
(in thousands)
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses and impairment write-downs on investment
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,070
5,455
11,560
7,606
$ 29,656
8,271
8,743
1,289
62,296
36,573
26,533
643
26,860
30,774
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189,093
—
106,236
(6,538)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189,093
99,698
Deferred tax liabilities:
Purchase accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
5,774
33,164
38,938
5,115
15,199
20,314
Net deferred tax asset (included in other assets) . . . . . . . . . . . . . . . . . .
$150,155
$ 79,384
Valley’s state net operating loss carryforwards totaled approximately $625 million at December 31, 2008
and expire during the period from 2010 through 2028. Valley’s capital loss carryforwards totaled approximately
$16 million at December 31, 2008 and expire during the period from 2009 through 2012.
The valuation allowance for deferred tax assets of $6.5 million at December 31, 2007 was reduced to zero
during the year ended December 31, 2008. The $6.5 million decrease in the valuation allowance during 2008
resulted from management’s identification of a qualifying tax-planning strategy allowing the use of Valley’s
capital loss carryforwards. The qualifying tax planning strategy identified by management is 1) prudent and
feasible, 2) a strategy that Valley has the intent and ability to implement, and 3) a strategy that would result in the
future realization of the capital loss carryforwards.
Based upon taxes paid and projections of future taxable income, both capital and ordinary, over the periods
in which the net deferred tax assets are deductible, management believes that it is more likely than not, that
Valley will realize the benefits of these deductible differences.
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reconciliation between the reported income tax expense and the amount computed by multiplying
consolidated income before taxes by the statutory federal income tax rate of 35 percent follows:
Federal income tax at expected statutory rate . . . . . . . . . . . . . . . . . .
(Decrease) increase due to:
Tax-exempt interest, net of interest incurred to carry
tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax benefit, net of federal tax effect
. . . . . . . . . .
Low-income housing tax credits . . . . . . . . . . . . . . . . . . . . . . . .
Reduction of valuation allowance . . . . . . . . . . . . . . . . . . . . . . .
Resolution of income tax audit . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
2006
$38,684
(in thousands)
$71,724
$ 71,251
(3,359)
(3,558)
(6,586)
(2,389)
(6,538)
—
680
(3,808)
(4,041)
(7,676)
(2,242)
—
—
(2,259)
(4,053)
(2,834)
(9,044)
(2,178)
—
(13,529)
271
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,934
$51,698
$ 39,884
Included in stockholders’ equity are income tax benefits attributable to the exercise of non-qualified stock
options of $106 thousand, $123 thousand and $27 thousand for the years ended December 31, 2008, 2007 and
2006, respectively.
On January 1, 2007, Valley adopted the provisions of FASB Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.” Implementation of FIN 48 did
not result in a cumulative effect adjustment to retained earnings.
Management expects that Valley’s adoption of FIN 48 will continue to result in increased volatility in
Valley’s future quarterly and annual effective income tax rates because FIN 48 requires that any change in
judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete
event in the period in which it occurs.
A reconciliation of Valley’s gross unrecognized tax benefits for 2008 and 2007 is presented in the table
below:
Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . .
Reductions due to expiration of statute of limitations . . . . . . . . . . . . .
$19,256
79
2,473
—
(547)
$19,042
2,605
536
(2,389)
(538)
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,261
$19,256
2008
2007
(In thousands)
The total amount of net unrecognized tax benefits that, if recognized, would affect the tax provision and the
effective income tax rate is $16 million for the years ended December 31, 2008 and 2007.
Valley’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax
expense. Valley has accrued approximately $958 thousand and $491 thousand of interest associated with
Valley’s uncertain tax positions at December 31, 2008 and 2007, respectively.
Valley files income tax returns in the U.S. federal and various state jurisdictions. With few exceptions,
Valley is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2004. In 2007, the Internal Revenue Service completed an examination of the 2002 and 2003 tax years and there
were no material adjustments. In addition, the statutes of limitations could expire for certain tax returns over the
next 12 months, which could result in decreases to Valley’s unrecognized tax benefits associated with uncertain
tax positions. Such adjustments are not expected to have a material impact on Valley’s effective tax rate.
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 2042. Certain lease agreements provide for renewal options and increases in rental payments based
upon increases in the consumer price index or the lessors’ cost of operating the facility. Minimum aggregate
lease payments for the remainder of the lease terms are as follows:
Year
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
Gross
Rents
Sublease
Rents
Net Rents
$ 14,213
14,109
12,744
12,383
12,574
146,899
(in thousands)
$1,162
1,100
851
546
449
1,331
$ 13,051
13,009
11,893
11,837
12,125
145,568
Total lease commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$212,922
$5,439
$207,483
During the first quarter of 2007, Valley sold a nine-story building for approximately $37.5 million while
simultaneously entering into a long-term lease for its branch office located on the first floor of the same building.
The transaction resulted in a $32.3 million pre-tax gain, of which $16.4 million was immediately recognized in
earnings in 2007 and $15.9 million was deferred and is being amortized into earnings over the 20 year term of the
lease pursuant to the sale-leaseback accounting rules. Approximately $650 thousand and $594 thousand were
amortized to net gains on sales of assets during 2008 and 2007, respectively. The remaining minimum lease
payments totaling $25.3 million for this lease are included in the table above.
Net occupancy expense for years ended December 31, 2008, 2007 and 2006 included net rental expense of
approximately $15.9 million, $12.1 million and $9.0 million, respectively, net of rental income of $2.0 million,
$2.5 million and $3.4 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 Valley National Bank, 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 the Bank’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. The Bank 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.
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides a summary of
financial
instruments with off-balance sheet
risk at
December 31, 2008 and 2007:
2008
2007
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,024,625
646,482
324,961
176,601
34,703
82,487
9,918
15,750
$1,900,646
625,511
368,152
204,721
106,722
59,330
12,783
3,805
Standby letters of credit represent the guarantee by the Bank 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. The Bank’s lending activity for outstanding loan commitments is primarily 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 the Bank’s business. These
commitments require the Bank to deliver loans within a specific time frame to the third party. The risk to the
Bank is its non-delivery of loans required by the commitment which could lead to financial penalties. The Bank
has not defaulted on its loan sale commitments.
Derivative Instruments and Hedging Activities
Fair Value Hedge—Interest Rate Swap.
In 2005, Valley entered into a $9.7 million amortizing notional
interest rate swap to hedge changes in the fair value of a fixed rate loan that it made to a commercial borrower.
Valley has designated the interest rate swap as a fair value hedge according to SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” The changes in the fair value of the interest rate swap are
recorded through earnings and are offset by the changes in fair value of the hedged fixed rate loan. As of
December 31, 2008 and December 31, 2007, the interest rate swap had a fair value of $2.0 million and $424
thousand, respectively, included in other liabilities on the consolidated statements of financial condition. No
material hedge ineffectiveness existed on the interest rate swap during the years ended December 31, 2008, 2007
and 2006.
Cash Flow Hedge—Interest Rate Swap.
In 2004, Valley entered into interest rate swap transactions
designated as cash flow hedges which effectively converted $300 million of its prime-based floating rate
commercial loans to a fixed rate. The cash flow hedges involved 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.
The cash flow hedges expired on August 1, 2006.
Prior to the cash flow hedge expiration in 2006, unrealized losses, net of tax benefits, reported in
accumulated other comprehensive income related to cash flow hedges were reclassified to interest income as
interest payments were received on the applicable variable rate loans. For the year ended December 31, 2006,
unrealized losses of $3.2 million were reclassified out of other comprehensive income as the hedged forecasted
transactions occurred and recognized as a component of interest income. No material hedge ineffectiveness
existed on the interest rate swap during the year ended December 31, 2006.
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash Flow Hedge—Interest Rate Caps.
In the second quarter of 2008, Valley purchased two interest
rate caps designated as cash flow hedges to protect against movements in interest rates above the caps’ strike rate
based on the effective federal funds rate. The interest rate caps have an aggregate notional amount of $100.0
million, strike rates of 2.50 percent and 2.75 percent, and a maturity date of May 1, 2013. Through November of
2008, the caps were used to hedge the variable cash flows associated with customer repurchase agreements
(included in short-term borrowings) and money market deposit accounts that had variable interest rates based on
an effective federal funds rate less 25 basis points. During November, the hedging relationship was terminated
since the rates paid on the customer repurchase agreements and money market deposit accounts did not trend
with the effective federal funds rate (this was caused by historically unprecedented low level of the effective
federal funds rate thereby causing Valley to modify the benchmark used to pay interest on these accounts). As a
result, from the termination date of the hedging relationship in November of 2008 through December 31, 2008, a
$2.4 million change in fair value of these derivatives not designated as hedges was included in other expense. As
of December 31, 2008, the two interest rate caps were not redesignated in a new hedging relationship and are
subject to future changes in their fair value being charged to earnings.
In the third quarter of 2008, Valley purchased two interest rate caps designated as cash flow hedges, to
reduce its exposure to movements in interest rates above the caps’ strike rate based on the prime interest rate (as
published in The Wall Street Journal). The interest rate caps have an aggregate notional amount of $100.0
million, strike rates of 6.00 percent and 6.25 percent, and a maturity date of July 15, 2015. The caps are used to
hedge the total change in cash flows associated with prime-rate-indexed deposits, consisting of consumer and
commercial money market deposit accounts, which have variable interest rates of 2.75 percent below the prime
rate.
At December 31, 2008, the federal funds and prime based interest rate caps had a combined fair value of
$3.3 million included in other assets. For the year ended December 31, 2008, other comprehensive loss includes
$5.0 million for changes in net unrealized losses on the cash flow hedges, net of taxes. Amounts reported in
accumulated other comprehensive income (loss) related to the interest rate caps are reclassified to interest
expense as interest payments are made on the hedged variable interest rate liabilities. For the year ended
December 31, 2008, the change in net unrealized losses on the cash flow hedges reflect a reclassification of
approximately $747 thousand from accumulated other comprehensive income to interest expense. Of this
amount, $642 thousand was due to our acceleration of amounts related to the total forecasted changes in cash
flows that are not probable to occur. Valley estimates an unrealized loss of $263 thousand, net of tax, will be
reclassified out of other comprehensive loss and realized as an addition to interest expense during 2009.
For the year ended December 31, 2008, Valley recognized a loss of $21 thousand in other expense for hedge
ineffectiveness on the federal funds based interest rate caps. There was no ineffectiveness recognized on the
prime based interest rate caps during 2008.
Other Derivative Transactions. During the second quarter of 2007, Valley executed and subsequently
terminated a series of interest rate derivative transactions with a notional amount of approximately $1.0 billion.
The intended purpose of the derivative transactions was to offset volatility in changes in the market value of over
$800 million in trading securities consisting primarily of mortgage-backed securities transferred from the
available for sale portfolio at January 1, 2007. These hedged securities were sold during the second quarter of
2007 in conjunction with the termination of the derivative transactions. See further discussion of these
transactions at Note 3 to the consolidated financial statements.
Litigation
In the normal course of business, Valley may be a party to various outstanding legal proceedings and claims.
In the opinion of management, except for the lawsuits noted below, the consolidated statements of financial
condition or results of operations of Valley should not be materially affected by the outcome of such legal
proceedings and claims.
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
American Express Travel Related Services Company (“American Express”) filed a lawsuit against Valley in
the United States District Court, Southern District of New York alleging, among other claims, that Valley
breached its contractual and fiduciary duties to American Express in connection with Valley’s activities as a
depository for Southeast Airlines, a now defunct charter airline carrier. Two other parties brought similar claims
related to the same incident, and such claims were either dismissed by the court or settled for an immaterial
amount. American Express withdrew its lawsuit without prejudice in October of 2007. Management believes
Valley has meritorious defenses to the action, if reinstated, but Valley cannot ensure that it will prevail in such
potential future litigation or be able to settle such litigation for an immaterial amount.
SHAREHOLDERS’ EQUITY (Note 16)
Capital Requirements
Valley and Valley National Bank are subject to the regulatory capital requirements administered by the
Federal Reserve Bank and the OCC. Failure to meet minimum capital requirements can initiate certain
mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on Valley’s consolidated financial statements. Under capital adequacy guidelines Valley and
Valley National Bank 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 and Valley
National Bank 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, 2008, Valley exceeded all
capital adequacy requirements to which it was subject.
At December 31, 2008, all of Valley National Bank’s ratios were above the minimum levels required for
Valley to be considered “well capitalized”, 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 and Valley National Bank must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table below.
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Valley’s and Valley National Bank’s actual capital positions and ratios as of December 31, 2008 and 2007
are presented in the following table:
Actual
Minimum Capital
Requirements
Amount
Ratio
Amount
Ratio
($ in thousands)
To Be Well
Capitalized Under
Prompt Corrective
Action Provision
Amount
Ratio
As of December 31, 2008
Total Risk-based Capital
Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valley National Bank . . . . . . . . . . . . . . . . . . . . .
$1,475,776
1,190,129
13.2% $895,751
894,556
10.6
8.0% $
8.0
N/A N/A%
1,118,196
10.0
Tier I Risk-based Capital
Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valley National Bank . . . . . . . . . . . . . . . . . . . . .
1,281,038
995,391
11.4
8.9
447,876
447,278
Tier I Leverage Capital
Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valley National Bank . . . . . . . . . . . . . . . . . . . . .
1,281,038
995,391
9.1
7.1
563,256
562,346
4.0
4.0
4.0
4.0
N/A N/A
6.0
670,917
N/A N/A
5.0
702,932
As of December 31, 2007
Total Risk-based Capital
Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valley National Bank . . . . . . . . . . . . . . . . . . . . .
$1,103,971
1,075,279
11.4% $778,015
775,848
11.1
8.0% $
8.0
N/A N/A%
969,810
10.0
Tier I Risk-based Capital
Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valley National Bank . . . . . . . . . . . . . . . . . . . . .
Tier I Leverage Capital
Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valley National Bank . . . . . . . . . . . . . . . . . . . . .
929,036
900,344
929,036
900,344
9.6
9.3
7.6
7.4
389,008
387,924
487,479
486,128
4.0
4.0
4.0
4.0
N/A N/A
6.0
581,886
N/A N/A
5.0
607,660
N/A—not applicable
Dividend Restrictions
Valley National Bank, a national banking association, is subject to a limitation on the amount of dividends it
may pay to Valley, the Bank’s only shareholder. The prior approval of the OCC is required to the extent that the
total of all dividends to be declared by the Bank 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 the foregoing dividend restrictions, and without adversely affecting the Bank’s ability to maintain ratios
above the minimum levels for the Bank to be considered “well capitalized”, the Bank could pay aggregate
dividends of approximately $46.7 million to Valley, without obtaining affirmative governmental approvals, at
December 31, 2008. In addition to dividends received from the 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. In addition to the junior
subordinated debenture restrictions on common stock dividends,
the dividend rights of Valley common
stockholders are qualified by and subject to the terms of the senior preferred shares (see “Preferred Stock”
section below).
Treasury Stock
On January 17, 2007, Valley’s Board of Directors approved the repurchase of up to 3.9 million common
shares. Purchases may be made from time to time in the open market or in privately negotiated transactions
generally not exceeding prevailing market prices. Repurchased shares are held in treasury and are expected to be
used for general corporate purposes. Valley made no purchases of its outstanding shares during the year ended
December 31, 2008. Valley purchased approximately 475 thousand shares during 2007 pursuant to this plan at an
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
average cost of 19.49 per share. Valley’s Board of Directors previously authorized the repurchase of up to
3.2 million shares of Valley’s outstanding common stock on May 14, 2003. During 2007, Valley repurchased the
remaining 1.2 million shares of its common stock under the 2003 publicly announced program at an average cost
of $22.78 per share. See the “Preferred Stock” section below for the current restrictions on repurchases of
Valley’s common stock.
Preferred Stock
On November 14, 2008, Valley issued 300,000 senior preferred shares, with a liquidation preference of $1
thousand per share, to the U.S. Department of Treasury. Valley’s senior preferred shares will pay a cumulative
dividend rate of five percent per annum for the first five years and will reset to a rate of nine percent per annum
after year five. The shares are callable by Valley at par after three years and may be fully redeemed earlier if we
raise new equity capital of at least $300 million. Under the terms of the program, the Treasury’s consent will be
required for any increase in our dividends paid to common stockholders (above a quarterly dividend of $0.20 per
common share) or Valley’s redemption, purchase or acquisition of Valley common stock or any trust preferred
securities issued by Valley capital trusts until the third anniversary of the Valley senior preferred share issuance
to the Treasury unless prior to such third anniversary the senior preferred shares are redeemed in whole or the
Treasury has transferred all of these shares to third parties. Notwithstanding these exceptions, in the event that
Valley has not paid the required dividends on the senior preferred shares, (i) Valley may not pay any dividends
on its common stock or on any stock ranking junior to or on parity with the senior preferred shares; and
(ii) Valley may not repurchase or redeem its common stock or on any stock ranking junior to or on parity with
the senior preferred shares. In the event that Valley fails to make an aggregate of six dividend payments (whether
or not consecutive) on the senior preferred shares, the number of directors on Valley board will be increased by
two, and the Treasury will be permitted to appoint two additional members of Valley’s board. The senior
preferred shares are 100 percent allowable in Tier I Capital for Regulatory purposes.
In conjunction with the purchase of Valley’s senior preferred shares, the Treasury received a ten year
warrant to purchase up to approximately 2.3 million of Valley common shares with an aggregate market price
equal to $45 million or 15 percent of the senior preferred investment. The warrant has several unique features,
including Valley’s right to reduce the number of shares of Valley common stock underlying the warrant by 50
percent if before December 31, 2009 Valley issues $300 million of equity capital, and the fact that the warrant is
exercisable on a net exercise basis. Valley’s common stock underlying the warrant represents approximately 1.7
percent of its outstanding common shares at December 31, 2008. The warrant’s exercise price of $19.59 per
share was calculated based on the average of closing prices of Valley’s common stock on the 20 trading days
ending on the last trading day prior to the date of the Treasury’s approval of Valley’s application under the
program.
Valley may redeem the senior preferred shares three years after the date of the Treasury’s investment, or
earlier if it raises in an equity offering net proceeds equal to the amount of the senior preferred shares to be
redeemed. It must raise proceeds equal to at least 25 percent of the issue price of the senior preferred shares to
redeem any senior preferred shares prior to the end of the third year. The redemption price is equal to the sum of
the liquidation amount per share and any accrued and unpaid dividends on the senior preferred shares up to, but
excluding, the date fixed for redemption. Notwithstanding the foregoing limitations, under the Recovery Act the
Treasury may, after consultation with Valley’s federal regulator, permit Valley at any time to redeem the senior
preferred shares. Upon such redemption, the Treasury will liquidate at the current market price the warrant that
Valley issued to the Treasury.
Valley’s senior preferred shares and the warrant issued under the TARP program qualify and are accounted
for as permanent equity on Valley’s balance sheet. Of the $300 million in issuance proceeds, $291.4 million and
$8.6 million were allocated to the senior preferred shares and the warrant, respectively, based upon their
estimated relative fair values as of November 14, 2008. The resulting discount of $8.6 million recorded for the
senior preferred shares is being accreted by a charge to retained earnings over a five year estimated life of the
securities based on the likelihood of their redemption by Valley within that timeframe.
117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 17)
Quarters ended 2008
March 31
June 30
Sept 30
Dec 31
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income (loss):
. . . . . . . . . . . .
Gains (losses) on securities transactions, net
Trading (losses) gains, net
. . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock and accretion . . . . . . . . . . . . . . . . .
Net income available to common stockholders . . . . . . . . . . . . . .
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share . . . . . . . . . . . . . . . . .
Average common shares outstanding:
(in thousands, except for share data)
191,000 $
75,768
115,232
6,850
175,899 $
73,321
102,578
5,800
176,184 $
80,602
95,582
4,000
145
(3,191)
22,273
67,478
43,331
11,748
31,583
—
31,583
0.25
0.25
0.20
(958)
(301)
19,213
63,959
50,773
9,290
41,483
—
41,483
0.33
0.33
0.20
(67,456)
14,747
20,605
73,842
2,436
(1,159)
3,595
—
3,595
0.03
0.03
0.20
186,611
79,204
107,407
11,632
(11,546)
(8,089)
17,814
79,969
13,985
(2,945)
16,930
2,090
14,840
0.11
0.11
0.20
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125,891,171
126,021,920
125,954,880
126,068,172
134,827,600
134,969,373
134,971,655
135,032,047
Quarters ended 2007
March 31
June 30
Sept 30
Dec 31
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income:
. . . . . . . . . . . .
Gains (losses) on securities transactions, net
Trading gains (losses), net
. . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income available to common stockholders . . . . . . . . . . . . . .
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share . . . . . . . . . . . . . . . . .
Average common shares outstanding:
(in thousands, except for share data)
183,159 $
88,745
94,414
2,713
181,156 $
85,375
95,781
2,388
179,129 $
82,957
96,172
1,910
26
4,026
35,604
62,813
71,105
21,671
49,434
49,434
0.39
0.39
0.20
44
(121)
22,480
63,591
52,205
12,526
39,679
39,679
0.31
0.31
0.20
14
731
19,554
64,173
47,827
11,373
36,454
36,454
0.29
0.29
0.20
181,563
86,245
95,318
4,864
(15,894)
2,763
19,801
63,335
33,789
6,128
27,661
27,661
0.22
0.22
0.20
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
126,936,759
127,491,945
126,305,781
126,816,438
125,964,857
126,315,018
125,899,054
126,081,621
118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PARENT COMPANY INFORMATION (Note 18)
Condensed Statements of Financial Condition
December 31,
2008
2007
(in thousands)
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
32,002
260,133
—
6,568
1,255,369
10,371
$
5,504
27,132
425
15,266
1,080,600
11,519
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,564,443
$1,140,446
$
28,919
$
25,169
Liabilities
Dividends payable to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior Subordinated debentures issued to capital trusts (includes fair value of
$140,065 at December 31, 2008 and $163,233 at December 31, 2007 for VNB
Capital Trust I)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders' equity
165,390
6,525
200,834
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,539
48,228
1,047,085
85,234
(60,931)
(47,546)
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,363,609
163,233
2,984
191,386
—
43,185
879,892
104,225
(12,982)
(65,260)
949,060
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,564,443
$1,140,446
Condensed Statements of Income
Income
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Losses) gains on securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . .
Trading gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense (benefit) and equity in undistributed
(over distributed) earnings of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed earnings of subsidiary . . . . . . . . . . . .
Equity in undistributed (over distributed) earnings of subsidiary . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income Available to Common Stockholders . . . . . . . . . . . . . . . . . . . . . .
119
Years ended December 31,
2008
2007
2006
(in thousands)
$110,000
1,192
(757)
15,243
429
126,107
15,875
$120,000
1,405
115
4,107
275
125,902
16,902
$150,000
2,203
837
—
624
153,664
18,190
110,232
14
110,218
(16,627)
93,591
2,090
109,000
(3,951)
135,474
(5,170)
112,951
40,277
153,228
—
140,644
23,047
163,691
—
$ 91,501
$153,228
$163,691
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Condensed Statements of Cash Flows
Years ended December 31,
2008
2007
2006
(in thousands)
Cash flows from operating activities:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
$ 93,591
$ 153,228
$ 163,691
activities:
Equity in (undistributed) over distributed earnings of subsidiary . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of compensation costs pursuant to long-term stock
16,627
43
(40,277)
49
(23,047)
282
incentive plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,531
5,138
5,628
Change in fair value of junior subordinated debentures carried at fair
value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization of premiums and discounts on securities . . . . . . . . . .
Net losses (gains) on securities transactions . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,243)
(17)
757
1,554
4,560
(4,107)
4
(115)
(16)
1,164
—
6
(837)
1,518
138
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . .
107,403
115,068
147,379
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale . . . . . .
Purchases of investment securities available for sale . . . . . . . . . . . . . .
Net cash and cash equivalents acquired in acquisition . . . . . . . . . . . . .
Capital contributions to subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,756
(68)
1,621
(50,000)
Net cash (used in) provided by investing activities . . . . . . . . . . . . . .
(39,691)
Cash flows from financing activities:
Redemption of junior subordinated debentures . . . . . . . . . . . . . . . . . . .
Purchases of common shares to treasury . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to common shareholders . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of preferred stock and a warrant
. . . . . . . . . . .
Common stock issued, net of cancellations . . . . . . . . . . . . . . . . . . . . . .
(7,689)
—
(102,517)
300,000
1,993
2,543
(5,418)
—
—
(2,875)
(40,000)
(35,478)
(99,956)
—
2,151
3,681
(1,187)
—
—
2,494
—
(47,769)
(99,251)
—
2,476
Net cash provided by (used in) financing activities . . . . . . . . . . . . . .
191,787
(173,283)
(144,544)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . .
259,499
32,636
(61,090)
93,726
5,329
88,397
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . .
$ 292,135
$ 32,636
$ 93,726
BUSINESS SEGMENTS (Note 19)
lending,
We have four business segments that we monitor and report on to manage our business operations. These
investment management, and corporate and other
segments are consumer lending, commercial
adjustments. Lines of business and actual structure of operations determine each segment. Each is reviewed
routinely for its asset growth, contribution to income before income taxes and return on average interest earning
assets and impairment. 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. Interest expense and internal transfer expense (for general corporate
expenses) are allocated to each business segment utilizing a “pool funding” methodology, whereas each segment
is allocated a uniform funding cost based on each segments’ average earning assets outstanding for the period.
The Wealth Management Division, comprised of trust, asset management, insurance services, and broker-dealer
(our broker-dealer subsidiary was sold on March 31, 2008) is included in the consumer lending segment. The
financial reporting for each segment contains allocations and reporting in line with our operations, which may
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
not necessarily be comparable to any other financial institution. The accounting for each segment includes
internal accounting policies designed to measure consistent and reasonable financial reporting, and may not
necessarily conform to GAAP.
The consumer lending segment is mainly comprised of residential mortgages, home equity loans and
automobile loans. The duration of the loan portfolio is subject to movements in the market level of interest rates
and forecasted residential mortgage prepayment speeds. The average weighted life of the automobile loans
within the portfolio is relatively unaffected by movements in the market level of interest rates. However, the
average life may be impacted by the availability of credit within the automobile marketplace.
The commercial lending segment is mainly comprised of floating rate and adjustable rate commercial loans,
as well as fixed rate owner occupied and commercial mortgage loans. Due to the portfolio’s interest rate
characteristics, commercial lending is Valley’s most sensitive business segment to movements in market interest
rates.
The investment management segment is mainly comprised of fixed rate investments, trading securities and,
depending on our liquid cash position, federal funds sold. The fixed rate investments are one of Valley’s least
sensitive assets to changes in market interest rates. Net gains and losses on the change in fair value of trading
securities and other-than-temporary impairment charges of investment securities are reflected in the corporate
and other adjustments segment.
The corporate and other adjustments segment represents income and expense items not directly attributable
to a specific segment, including net trading gains (losses) and other-than-temporary impairment charges on
securities not classified in the investment management segment above, interest expense related to the junior
subordinated debentures issued to capital trusts, interest expense related to $100 million in subordinated notes
issued in July 2005, as well as income and expense from derivative financial instruments.
The following tables represent the financial data for Valley’s four business segments for the years ended
December 31, 2008, 2007 and 2006:
Year ended December 31, 2008
Consumer
Lending
Commercial
Lending
Investment
Management
Corporate
and Other
Adjustments
Total
Average interest earning assets . . . . . . . . . .
$4,213,524
$5,173,463
Interest income . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
Net interest income (loss)
. . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . .
Net interest income (loss) after provision
for credit losses . . . . . . . . . . . . . . . . . . . .
Non-interest income (loss) . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . .
Internal expense transfer . . . . . . . . . . . . . . .
250,108
99,017
151,091
15,156
135,935
39,122
45,538
57,472
315,194
121,575
193,619
8,061
185,558
7,818
38,074
70,008
($ in thousands)
$2,997,638
$
— $12,384,625
170,060
70,444
99,616
—
(5,668)
17,859
(23,527)
5,065
99,616
10,270
827
39,878
(28,592)
(53,954)
200,809
(167,358)
729,694
308,895
420,799
28,282
392,517
3,256
285,248
—
Income (loss) before income taxes . . . . . . .
$
72,047
$
85,294
$
69,181
$(115,997) $
110,525
Return on average interest earning assets
(pre-tax) . . . . . . . . . . . . . . . . . . . . . . . . . .
1.71%
1.65%
2.31%
0.89%
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Average interest earning assets . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income (loss) . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . .
Net interest income (loss) after provision for
credit losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . .
Internal expense transfer . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007
Consumer
Lending
Commercial
Lending
Investment
Management
Corporate
and Other
Adjustments
Total
($ in thousands)
$3,868,559 $4,392,552 $3,051,142 $
— $11,312,253
236,322
110,624
125,698
6,129
119,569
41,133
48,825
52,768
315,527
125,608
189,919
5,746
184,173
9,616
29,438
59,567
179,326
87,250
92,076
—
(6,168)
19,840
(26,008)
—
92,076
11,544
709
40,532
(26,008)
26,735
174,940
(152,867)
725,007
343,322
381,685
11,875
369,810
89,028
253,912
—
Income (loss) before income taxes . . . . . . . . . .
$
59,109 $ 104,784 $
62,379 $ (21,346) $
204,926
Return on average interest earning assets (pre-tax)
1.53%
2.39%
2.04%
1.81%
Average interest earning assets . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
Net interest income (loss) . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . .
Net interest income (loss) after provision for
credit losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . .
Internal expense transfer . . . . . . . . . . . . . . . . . .
Year ended December 31, 2006
Consumer
Lending
Commercial
Lending
Investment
Management
Corporate
and Other
Adjustments
Total
($ in thousands)
$3,864,063 $4,398,675 $3,230,052 $
— $11,492,790
224,981
99,359
125,622
3,688
121,934
40,623
47,944
53,929
314,592
113,105
201,487
5,582
195,905
11,468
25,111
61,208
177,531
83,056
94,475
—
(9,733)
20,730
(30,463)
—
94,475
1,877
763
44,106
(30,463)
18,096
176,522
(159,243)
707,371
316,250
391,121
9,270
381,851
72,064
250,340
—
Income (loss) before income taxes . . . . . . . . . .
$
60,684 $ 121,054 $
51,483 $ (29,646) $
203,575
Return on average interest earning assets (pre-tax)
1.57%
2.75%
1.59%
1.77%
122
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Valley National Bancorp:
We have audited the accompanying consolidated statement of financial condition of Valley National
Bancorp and subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Valley National Bancorp and subsidiaries as of December 31, 2008, and the results of
their operations and their cash flows for the year then ended, 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 Company’s internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 26, 2009 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
Short Hills, New Jersey
February 26, 2009
123
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, 2007, and the related consolidated statements of income,
changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31,
2007. 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, 2007, and the consolidated
results of their operations and their cash flows for each of the two years in the period ended December 31, 2007,
in conformity with U.S. generally accepted accounting principles.
New York, New York
February 26, 2008
124
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The information concerning changes in accountants required by this item is incorporated herein by reference
to Valley’s Current Report on Form 8-K reporting under Item 4.01 filed with the Securities and Exchange
Commission on March 7, 2008.
Item 9A. Controls and Procedures
Valley maintains “disclosure controls and procedures” which, consistent with Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended, is defined to mean controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that Valley files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is
accumulated and communicated to Valley’s management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Valley’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of Valley’s disclosure controls and procedures. Based on such evaluation, Valley’s
Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures
were effective as of December 31, 2008 (the end of the period covered by this Annual Report on Form 10-K).
Valley’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect
that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the
objectives of the control system are met. The design of a control system reflects resource constraints and the
benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if
any, within Valley have been or will be detected. These inherent limitations include the realities that judgments
in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls is based in part upon certain assumptions about the
likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals
under all future conditions; over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
There have been no changes in Valley’s internal control over financial reporting during the quarter ended
December 31, 2008, that have materially affected, or are reasonably likely to materially affect, Valley’s internal
control over financial reporting.
125
Management’s Report on Internal Control Over Financial Reporting
Valley’s management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Valley’s internal control over financial reporting is a process designed to provide reasonable
assurance to Valley’s management and Board of Directors regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. 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, 2008, 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 Valley’s internal
control over financial reporting and testing of the operating effectiveness of its internal control over financial
reporting. Management reviewed the results of its assessment with the Audit and Risk Committee.
Based on this assessment, management determined that, as of December 31, 2008, Valley’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 U.S. generally
accepted accounting principles.
KPMG LLP, the independent registered public accounting firm that audited Valley’s December 31, 2008
consolidated financial statements included in this Annual Report on Form 10-K, has issued an audit report on the
effectiveness of Valley’s internal control over financial reporting as of December 31, 2008. The report, which
expresses an opinion on the effectiveness of Valley’s internal control over financial reporting as of December 31,
2008, is included in this item under the heading “Report of Independent Registered Public Accounting Firm.”
126
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Valley National Bancorp:
We have audited Valley National Bancorp and subsidiaries’ (the Company) internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of
the Company is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on 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, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included 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 U.S. generally accepted accounting principles. 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, Valley National Bancorp and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated statement of financial condition of Valley National Bancorp and subsidiaries as
of December 31, 2008, and the related consolidated statements of income, changes in shareholders’ equity, and
cash flows for the year then ended, and our report dated February 26, 2009 expressed an unqualified opinion on
those consolidated financial statements.
Short Hills, New Jersey
February 26, 2009
127
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information set forth under the captions “Director Information”, “Corporate Governance” and “Section
16(a) Beneficial Ownership Reporting Compliance” in the 2009 Proxy Statement is incorporated herein by
reference.
Item 11. Executive Compensation
The information set forth under the caption “Executive Compensation” in the 2009 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 2009 Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set
the captions “Compensation Committee Interlocks and Insider
Participation”, “Certain Transactions with Management” and “Corporate Governance” in the 2009 Proxy
Statement is incorporated herein by reference.
forth under
Item 14. Principal Accountant Fees and Services
The information set forth under the caption “Independent Registered Public Accounting Firm” in the 2009
Proxy Statement is incorporated herein by reference.
128
Item 15. Exhibits and Financial Statement 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
Reports of Independent Registered Public Accounting Firms
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) Agreement and Plan of Merger, dated March 19, 2008, between Valley and Greater Community
Bancorp, incorporated herein by reference to Appendix A of the Registrant’s Form S-4/A Registration
Statement filed on May 20, 2008.
(3) Articles of Incorporation and By-laws:
A. Amended and Restated Certificate of Incorporation of the Registrant, incorporated herein by
reference to the Registrant’s Form S-3 Registration Statement filed on December 19, 2008.
B. By-laws of the Registrant, as amended.*
(4)
Instruments Defining the Rights of Security Holders:
A. First Supplemental Indenture, dated as of July 1, 2008, by and among Wilmington Trust
Company, as Trustee, Valley National Bancorp and Greater Community Bancorp, incorporated
herein by reference to the Registrant’s Form 8-K Current Report filed on July 1, 2008.
B. Warrant Agreement between Valley and American Stock Transfer & Trust Company, LLC,
incorporated herein by reference to Appendix B of the Registrant’s Form S-4/A Registration
Statement filed on May 20, 2008.
C. Form of Warrant Certificate for the purchase of Valley Common Stock, incorporated herein by
reference to the Registrant’s Form S-3 Registration Statement filed on July 2, 2008.
D. Warrant to purchase up to 2,297,090 shares of the Registrant’s Common Stock, incorporated
herein by reference to the Registrant’s Form 8-K Current Report filed on November 17, 2008.
E.
Junior Subordinated Indenture between Greater Community Bancorp and Wilmington Trust
Company, as Trustee, dated July 2, 2007, incorporated herein by reference to Exhibit 4.7 to
Greater Community Bancorp’s Form 10-Q Quarterly Report filed on August 9, 2007.
F. Amended and Restated Trust Agreement among Greater Community Bancorp, as Depositor,
Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware
Trustee, and the Administrative Trustees named therein, dated July 2, 2007, incorporated herein
by reference to Exhibit 4.8 to Greater Community Bancorp’s Form 10-Q Quarterly Report filed on
August 9, 2007.
G. Guarantee Agreement between Greater Community Bancorp, as Guarantor, and Wilmington Trust
Company, as Guarantee Trustee, dated July 2, 2007, incorporated herein by reference to Exhibit
4.9 to Greater Community Bancorp’s Form 10-Q Quarterly Report filed on August 9, 2007.
(10) Material Contracts:
A. Amended and Restated Change in Control Agreements among Valley National Bank, Valley and
Gerald H. Lipkin, Peter Crocitto, Albert L. Engel, Alan D. Eskow, Robert M. Meyer, dated
January 22, 2008, incorporated herein by reference to the Registrant’s Form 8-K Current Report
filed on January 28, 2008.+
129
B. Amended and Restated Change in Control Agreements among Valley National Bank, Valley and
Stephen P. Davey, Elizabeth E. DeLaney, Kermit R. Dyke, Robert A. Ewing, Robert E. Farrell,
Richard P. Garber, Eric W. Gould, Robert J. Mulligan, and Russell Murawski, dated February 11,
2008, incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the year
ended December 31, 2007.+
C.
D.
“The Valley National Bancorp 1999 Long-Term Stock Incentive Plan” dated January 19, 1999, as
amended, incorporated herein by reference to the Registrant’s Form 10-K Annual Report for the
year ended December 31, 2007.+
“Severance Agreement” dated January 22, 2008 between Valley, Valley National Bank and
Gerald H. Lipkin, Peter Crocitto, Albert L. Engel, Alan D. Eskow, Robert M. Meyer is
incorporated herein by reference to the Registrant’s Form 8-K Current Report filed on January 28,
2008.+
E. 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 Form 10-K Annual Report for the
year ended December 31, 2006.
F.
Indenture among VNB Capital Trust I, The Bank of New York as Debenture Trustee, and Valley,
dated November 7, 2001, is incorporated herein by reference to the Registrant’s Form 10-K
Annual Report for the year ended December 31, 2006.
G. Preferred Securities Guarantee Agreement among VNB Capital Trust I, The Bank of New York,
as Guarantee Trustee, and Valley, dated November 7, 2001, is incorporated herein by reference to
the Registrant’s Form 10-K Annual Report for the year ended December 31, 2006.
H. Directors Deferred Compensation Plan, dated June 1, 2004, is incorporated herein by reference to
the Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30, 2004.+
I.
J.
Fiscal and Paying Agency Agreement between Valley National Bank and Wilmington Trust
Company, as fiscal and paying agent, dated July 13, 2005 is incorporated herein by reference to
the Registrant’s Form 10-K Annual Report for the year ended December 31, 2005.
The Valley National Bancorp, Benefit Equalization Plan, as Amended and Restated, dated
January 1, 2009.*+
K. Participant Agreement for the Benefit Equalization Plan are incorporated herein by reference to
the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2006.+
L. The Valley National Bancorp 2004 Director Restricted Stock Plan, incorporated by reference to
Appendix A to the Registrant’s Proxy Statement filed on March 7, 2005.+
M. The Valley National Bancorp Executive Incentive Plan, incorporated by reference to Appendix B
to the Registrant’s Proxy Statement filed on March 7, 2005.+
N. Form of Restricted Stock Award Agreement used in connection with Valley National Bancorp
2004 Director Restricted Stock Plan is incorporated herein by reference to the Registrant’s Form
8-K Current Report on April 12, 2005.
O. Form of Incentive Stock Option Agreement; Form of Non-Qualified Stock Option Agreement;
Form of Restricted Stock Award Agreement; and Form of Restricted Stock Award Escrow
Agreement, is incorporated herein by reference to the Registrant’s Form 8-K Current Report on
December 2, 2004.
P. Amended and Restated Trust Agreement among Greater Community Bancorp, as Depositor,
Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware
Trustee, and the Administrative Trustees named therein, dated July 2, 2007, is incorporated herein
by reference to the Registrant’s Form 8-K Current Report filed on July 1, 2008.
Q. Guarantee Agreement between Greater Community Bancorp, as Guarantor, and Wilmington Trust
Company, as Guarantee Trustee, dated July 2, 2007, is incorporated herein by reference to the
Registrant’s Form 8-K Current Report filed on July 1, 2008.
R. Letter Agreement, dated November 14, 2008,
including Securities Purchase Agreement—
Standard Terms, between Valley National Bancorp and the United States Department of the
130
Treasury, incorporated herein by reference to the Registrant’s Form 8-K Current Report filed on
November 17, 2008.
S.
T.
Form of Waiver, executed by each of Messrs. Gerald H. Lipkin, Alan D. Eskow, Peter Crocitto,
Albert L. Engel, and Robert M. Meyer, incorporated herein by reference to the Registrant’s Form
8-K Current Report filed on November 17, 2008.
Form of Senior Executive Officer Agreement, executed by each of Messrs. Gerald H. Lipkin, Alan
D. Eskow, Peter Crocitto, Albert L. Engel, and Robert M. Meyer, incorporated herein by reference
to the Registrant’s Form 8-K Current Report filed on November 17, 2008.
U. Amendment No. 1 to the Valley National Bank Benefit Equalization Plan dated February 20,
2009, is incorporated herein by reference to Registrant’s Form 8-K Current Report filed on
February 26, 2009.+
V. Amendment to the Amended and Restated Change in Control Agreement between Valley, Valley
National bank and Peter Crocitto, dated February 20, 2008, is incorporated herein by reference to
the Registrant’s Form 8-K Current Report filed on February 26, 2009.+
(12) Computation of Consolidated Ratios of Earnings to Fixed Charges*
(16) Letter of Ernst & Young LLP regarding change in certifying accountant, dated March 7, 2008,
incorporated herein by reference to the Registrant’s Form 8-K Current Report filed on March 7, 2008.
(21) List of Subsidiaries:
Name
(a)
Subsidiaries of Valley:
Valley National Bank
VNB Capital Trust I
GCB Capital Trust III
(b)
Subsidiaries of Valley National Bank:
BNV Realty Incorporated (BNV)
Greater Community Redevelopment LLC
Hallmark Capital Management, Inc.
Highland Capital Corp.
Masters Coverage Corp.
Merchants New York Commercial Corp.
New Century Asset Management, Inc.
Shrewsbury State Investment Co., Inc.
Valley 747 Acquisition, LLC
Valley Commercial Capital, LLC
Valley National Title Services, Inc.
VN Investments, Inc. (VNI)
VNB Loan Services, Inc.
VNB Mortgage Services, Inc.
VNB Route 23 Realty, LLC
18th & 8th LLC
VNB New York Corp.
(c)
Subsidiaries of BNV:
SAR I, Inc.
SAR II, Inc.
(d)
Subsidiaries of Masters Coverage Corp.:
RISC One, Inc.
Life Line Planning, Inc.
(e)
Subsidiary of VNI:
VNB Realty, Inc.
131
Jurisdiction of
Incorporation
Percentage of Voting
Securities Owned by the Parent
Directly or Indirectly
United States
Delaware
Delaware
New Jersey
New Jersey
New Jersey
New Jersey
New York
Delaware
New Jersey
New Jersey
New York
New Jersey
New Jersey
New Jersey
New York
New Jersey
New Jersey
New York
New York
New Jersey
New Jersey
New York
New York
New Jersey
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Name
(f)
Subsidiary of VNB Realty, Inc.:
VNB Capital Corp.
(g)
Subsidiary of Shrewsbury State Investment Co., Inc.:
Shrewsbury Capital Corporation
(h)
Subsidiary of Greater Community Redevelopment LLC:
Thirteen Van Houten LLC
(i)
(j)
Subsidiary of Thirteen Van Houten LLC:
Congdon Mill Realty LLC
Subsidiary of Shrewsbury Capital Corporation
GCB Realty, LLC
(23.1) Consent of KPMG LLP*
(23.2) Consent of Ernst & Young LLP*
Jurisdiction of
Incorporation
Percentage of Voting
Securities Owned by the Parent
Directly or Indirectly
New York
New Jersey
New Jersey
New Jersey
100%
100%
80%
25%
New Jersey
100%
(24)
Power of Attorney of Certain Directors and Officers of Valley*
(31.1) Certification of Gerald H. Lipkin, Chairman, President and Chief Executive Officer of the Company,
pursuant to Securities Exchange Rule 13a-14(a)*
(31.2) Certification of Alan D. Eskow, Executive Vice President and Chief Financial Officer of the
Company, pursuant to Securities Exchange Rule 13a-14(a)*
(32)
Certification, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, signed by Gerald H. Lipkin, Chairman, President and Chief Executive
Officer of the Company and Alan D. Eskow, Executive Vice President and Chief Financial Officer
of the Company*
* Filed herewith
+ Management contract and compensatory plan or arrangement
132
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.
SIGNATURES
VALLEY NATIONAL BANCORP
By:
/s/ GERALD H. LIPKIN
Gerald H. Lipkin, Chairman of the Board,
President and Chief Executive Officer
By:
/s/ ALAN D. ESKOW
Alan D. Eskow,
Executive Vice President
and Chief Financial Officer
Dated: February 27, 2009
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
Gerald H. Lipkin
/s/ ALAN D. ESKOW
Alan D. Eskow
Chairman of the Board, President and
Chief Executive Officer and Director
February 27, 2009
Executive Vice President, Chief
Financial Officer (Principal Financial
Officer), and Corporate Secretary
February 27, 2009
/s/ MITCHELL L. CRANDELL
Mitchell L. Crandell
Senior Vice President and Controller
(Principal Accounting Officer)
February 27, 2009
ANDREW B. ABRAMSON*
Andrew B. Abramson
PAMELA R. BRONANDER*
Pamela R. Bronander
ERIC P. EDELSTEIN*
Eric P. Edelstein
MARY J. STEELE GUILFOILE*
Mary J. Steele Guilfoile
H. DALE HEMMERDINGER*
H. Dale Hemmerdinger
GRAHAM O. JONES*
Graham O. Jones
WALTER H. JONES, III*
Walter H. Jones, III
GERALD KORDE*
Gerald Korde
Director
Director
Director
Director
Director
Director
Director
Director
133
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
Signature
Title
Date
MICHAEL L. LARUSSO*
Michael L. LaRusso
MARC J. LENNER*
Marc J. Lenner
ROBINSON MARKEL*
Robinson Markel
RICHARD S. MILLER*
Richard S. Miller
BARNETT RUKIN*
Barnett Rukin
SURESH L. SANI*
Suresh L. Sani
ROBERT C. SOLDOVERI*
Robert C. Soldoveri
Director
Director
Director
Director
Director
Director
Director
* By Gerald H. Lipkin and Alan D. Eskow, as attorneys-in-fact.
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
February 27, 2009
134
Printed on Recycled Paper
for a quality environment.
BRANCH LIST
NEW JERSEY
BERGEN
Bogota, 325 Palisade Avenue
Edgewater, 46 Promenade, The City Place
Elmwood Park, 80 Broadway
Englewood, 145 South Dean Street
Englewood, 80 West Street
Englewood, 41-43 Palisade Avenue
Fair Lawn, 20-24 Fair Lawn Avenue
Fair Lawn, 139 Lincoln Avenue
Fair Lawn, 31-00 Broadway
Fort Lee, 1372 Palisade Avenue
Fort Lee, 2160 Lemoine Avenue
Glen Rock, 175 Rock Road
Hackensack, 20 Court Street
Hackensack, 111 Hackensack Avenue
Hasbrouck Heights, 284 Boulevard
Hillsdale, 24 Broadway
Ho-Ho-Kus, 18 Sycamore Avenue
Little Ferry, 100 Washington Avenue
Lodi, 147 Main Street
Lyndhurst, 456 Valley Brook Avenue
Midland Park, 207 Franklin Avenue
Montvale, 24 South Kinderkamack Road
Moonachie, 199 Moonachie Road
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
Paramus, Route 4 & Forest Avenue
Paramus, East 58 Midland Avenue
Ramsey, 10 South Franklin Turnpike
Ridgefi eld, 868 Broad Avenue
Ridgewood, 103 Franklin Avenue
River Vale, 670 Westwood Avenue
Rochelle Park, 405 Rochelle Avenue
Tenafl y, 85 County Road
Waldwick, 67 Franklin Turnpike
Wallington, 100 Midland Avenue
Wood Ridge, 271 Valley Boulevard
Wyckoff, 356 Franklin Avenue
ESSEX
Belleville, 22 Bloomfi eld Avenue
Belleville, 237 Washington Avenue
Belleville, 381 Franklin Avenue
Bloomfi eld, 548 Broad Street
Bloomfi eld, 1422 Broad Street
Caldwell, 15 Roseland Avenue
Cedar Grove, 491 Pompton Avenue
Fairfi eld, One Passaic Avenue
Fairfi eld, 167 Fairfi eld Road
Livingston, 66 West Mount Pleasant Avenue
Livingston, 73 South Livingston Avenue
Livingston, 270 South Livingston Avenue
Livingston, 531 South Livingston Avenue
Maplewood, 142 Maplewood Avenue
Maplewood, 740 Irvington Avenue
Millburn, 181 Millburn Avenue
Newark, 167 Bloomfi eld Avenue
Newark, 289 Ferry Street
Newark, 784 Mount Prospect Avenue
Nutley, 171 River Road
Nutley, 371 Franklin Avenue
South Orange, 115 Valley Street
Upper Montclair, 529 Valley Road
West Caldwell, 1059 Bloomfi eld Avenue
West Orange, 637 Eagle Rock 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
Jersey City, 311 Marin Boulevard
Kearny, 72-80 Midland Avenue
Kearny, 100 Central Avenue
Kearny, 256 Kearny Avenue
North Bergen, 8901 Kennedy Boulevard
Secaucus, 40 Meadowlands Parkway
Union City, 4405 Bergenline Avenue
West New York, 5712 Bergenline Avenue
MIDDLESEX
Edison, 2084 Route 27/Lincoln Highway
North Brunswick, 1100 Livingston Avenue
North Brunswick , 2818 Route 27*
Piscataway, 501 Stelton Road
South Plainfi eld, 100 Durham Avenue
Woodbridge, 540 Rahway Avenue
MONMOUTH
Atlantic Highlands, Route 36 & 1st Avenue
Freehold, 3495 Route 9*
Highlands, 301 Shore Drive
Holmdel, 2124 Highway 35 South
Keansburg, 201 Main Street
Keyport, 416 Main Street & Route 36 East
Little Silver, 140 Markham Place
Manalapan, 801 Tennent Road
Middletown, 760 Highway 35 & Twinbrooks Avenue
Oakhurst, 777 West Park Avenue
Red Bank, 74 Broad Street
Red Bank, 362 Broad Street
Sea Bright, 1173 Ocean Avenue
Shrewsbury, 465 Broad Street
MORRIS
Budd Lake, 202 Route 46 West & Mount Olive Road
Budd Lake, 342 Route 46 West
Butler, 1481 Route 23 South
Chatham, 375 Main Street
Chester, 2 Main Street
Denville, 6 Bloomfi eld Avenue
Dover, 100 East Blackwell Street
East Hanover, 240 Route 10 West & Murray Road
Florham Park, 30 Columbia Turnpike
Florham Park, 187 Columbia Turnpike
Jefferson Township, 715 Route 15 South
Landing, 115 Center Street
Lincoln Park, 31 Beaverbrook Road
Madison, 12 Main Street
Mine Hill, 271-273 Route 46 West
Morris Plains, 51 Gibraltar Drive
Morristown, 10 Madison Avenue
Parsippany, Arlington Plaza, 800 Route 46 West
Parsippany, 120 Baldwin Avenue
Parsippany, 320 New Road
Succasunna, 250 Route 10 West
Whippany, 54 Whippany Road
PASSAIC
Clifton, 6 Main Avenue
Clifton, 505 Allwood Road
Clifton, 925 Allwood Road
Clifton, 535 Getty Avenue
Clifton, 261 Clifton Avenue
Clifton, 1006 Route 46 West
Little Falls, 171 Browertown Road
Little Falls, 115 Main Street
Little Falls, 126 Newark Pompton Turnpike
North Haledon, 5 Sicomac Road
North Haledon, 475 High Mountain Road
Passaic, 128 Market Street
Passaic, 211 Main Avenue
Passaic, 506 Van Houten Avenue
Passaic, 545 Paulison Avenue
Passaic, 615 Main Avenue
Paterson, 490 Chamberlain Avenue
Pompton Lakes, 516 Wanaque Avenue
Totowa, 100 Furler Street
Totowa, 55 Union Boulevard
Wayne, 64 Mountain View Boulevard
Wayne, 200 Black Oak Ridge Road
Wayne, 1200 Preakness Avenue
Wayne, 1345 Willowbrook Mall - main entrance
Wayne, 1400 Valley Road
Wayne, 1445 Valley Road
Wayne, 1445 Route 23 South
Wayne, 1501 Hamburg Turnpike
Wayne, 1504 Route 23 North
SOMERSET
Bound Brook, 466 West Union Avenue
Green Brook, 302-306 Route 22 West
Hillsborough, 323 Route 206 North
North Plainfi eld, 1334 Route 22 East
North Plainfi eld, 672-6 Somerset Street
SUSSEX
Branchville, Branchville Square, 1 Wantage Avenue
Franklin, 288 Route 23 North
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
Cranford, 117 South Avenue West
Hillside, 1300 Liberty Avenue
Mountainside, 882 Mountain Avenue
Roselle Park, 1 West Westfi eld Avenue
Scotch Plains, 1922 Westfi eld Avenue
Springfi eld, 223 Mountain Avenue
Union, 1432 Morris Avenue
Union, 2784 Morris Avenue
Westfi eld, 801 Central Avenue
WARREN
Belvidere, 540 County Route 519
Blairstown, 152 Route 94 South
Hackettstown, 105 Mill Street
NEW YORK
BROOKLYN
207 Brighton Beach Avenue near Ocean Parkway*
1212 Avenue M between 12th & 13th Street
1505 Avenue J at East 15th Street
1633 Sheepshead Bay Road at Jerome Avenue
61-17 18th Avenue at 61st Street
4501 13th Avenue at 45th Street*
2902 Avenue U at East 29th Street, Homecrest*
7726 Third Avenue at 77th Street
MANHATTAN
62 West 47th Street between 5th & 6th Avenue
90 Franklin Street at Church Street
93 Canal Street between Christie & Eldridge
111 Fourth Avenue at 12th Street
159 Eighth Avenue at 18th Street
170 Hudson at Laight Street
275 Madison Avenue at 40th Street
295 Fifth Avenue at 30th Street
434 Broadway at Howard Street
776 Avenue of the Americas at 26th Street
924 Broadway between 21st & 22nd Street
1040 Sixth Avenue at 39th Street
1328 Second Avenue at 71st Street
1569 Third Avenue at 88th Street
QUEENS
63-09 Flushing Avenue at 64th Street*
64-01 Grand Avenue at 64th Street
69-20 80th Street, Middle Village*
76-09 Main Street, Flushing*
94-05 63rd Drive at Booth Street
107-01 Liberty Avenue at 107th Street, Ozone Park
*Coming Soon
1455 Valley Road
Wayne, NJ 07470
973-305-3380
www.valleynationalbank.com
© 2009 Valley National Bank. Member FDIC. Equal Opportunity Lender.