================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K ----------------- (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission File Number 1-11277 VALLEY NATIONAL BANCORP (Exact name of registrant as specified in its charter) New Jersey 22-2477875 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 1455 Valley Road Wayne, NJ 07470 (Address of principal executive office) (Zip Code) 973-305-8800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of exchange on which Title of each class registered ------------------- ---------- Common Stock, no par value New York Stock Exchange VNB Capital Trust I New York Stock Exchange 7.75% Trust Originated Securities (and the Guarantee by Valley National Bancorp with respect thereto) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] 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. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $2.3 billion on December 31, 2001. There were 75,934,989 shares of Common Stock outstanding at February 8, 2002. Documents incorporated by reference: Certain portions of the Registrant's Definitive Proxy Statement (the "2002 Proxy Statement") for the 2002 Annual Meeting of Shareholders to be held April 10, 2002 will be incorporated by reference in Part III. ================================================================================
TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <C> <S> <C> PART I Item 1. Business............................................................................. 3 Item 2. Properties........................................................................... 8 Item 3. Legal Proceedings.................................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders.................................. 8 Item 4A. Executive Officers of the Registrant................................................. 9 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters................. 10 Item 6. Selected Financial Data.............................................................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 32 Item 8. Financial Statements and Supplementary Data: Valley National Bancorp and Subsidiaries: Consolidated Statements of Financial Condition.................................... 33 Consolidated Statements of Income................................................. 34 Consolidated Statements of Changes in Shareholders' Equity........................ 35 Consolidated Statements of Cash Flows............................................. 36 Notes to Consolidated Financial Statements........................................ 37 Independent Auditors' Report...................................................... 66 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 67 PART III Item 10. Directors and Executive Officers of the Registrant................................... 67 Item 11. Executive Compensation............................................................... 67 Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 67 Item 13. Certain Relationships and Related Transactions....................................... 67 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 67 Signatures........................................................................... 71 </TABLE> 2
PART I Item 1. Business Valley National Bancorp ("Valley") is a New Jersey corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("Holding Company Act"). At December 31, 2001, Valley had consolidated total assets of $8.6 billion, total deposits of $6.3 billion and total shareholders' equity of $678.4 million. In addition to its principal subsidiary, Valley National Bank ("VNB"), Valley formed a subsidiary during 2001, VNB Capital Trust I, through which it issued trust preferred securities. VNB is a national banking association chartered in 1927 under the laws of the United States. VNB provides a full range of commercial and retail banking services. At December 31, 2001, VNB maintained 126 branch offices located in northern New Jersey and Manhattan. These services include the following: the acceptance of demand, savings and time deposits; extension of consumer, real estate, Small Business Administration ("SBA") and other commercial credits; equipment leasing; and personal and corporate trust, as well as pension and fiduciary services. VNB also provides through wholly-owned subsidiaries the services of a title insurance agency and Securities and Exchange Commission ("SEC")-registered investment advisors. VNB has several subsidiaries which are included in the consolidated financial statements of Valley. The subsidiaries include a mortgage servicing company, a company which holds, maintains and manages investment assets for VNB, a subsidiary which owns and services auto loans, a title insurance agency, asset management advisors which are SEC-registered investment advisors, an Edge Act Corporation which is the holding company for a wholly-owned finance company located in Toronto, Canada, a subsidiary which specializes in asset-based lending, a real estate investment trust subsidiary which owns real estate related investments, a subsidiary which owns some of the real estate utilized by VNB and real estate related investments, and a subsidiary which offers both commercial equipment leases and financing for general aviation aircraft. These subsidiaries are wholly-owned by VNB, except Valley owns less than 1% of a holding company for the real estate investment trust and the real estate subsidiary and except the real estate investment trust subsidiary, which must have 100 or more shareholders to qualify as a real estate investment trust, has issued an immaterial amount of preferred stock to outside shareholders, many of whom are Valley employees. VNB has four business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, investment portfolio, and corporate and other adjustments. For financial data on the four business segments see Part II, Item 8, "Financial Statements and Supplementary Data--Note 20 of the Notes to Consolidated Financial Statements." Recent Developments Valley restructured an existing subsidiary during December of 2001, by contributing to it some of Valley's existing real estate owned properties and some of its real estate related securities. Valley anticipates that it will contribute additional real estate owned properties to the subsidiary during 2002*. The restructuring will provide substantial tax benefits during 2002.* Beginning in 2003, there will be a smaller amount of recurring annual tax benefits from this restructuring*. The benefits will reduce Valley's effective tax rate below its historical rate of approximately 34 percent. On November 7, 2001, Valley completed a $175.0 million public offering of 7.75 percent trust preferred securities. Valley issued the trust preferred securities through its subsidiary VNB Capital Trust I, a Delaware business trust. An additional $25.0 million in trust preferred securities was sold by Valley on November 15, 2001 upon the exercise of the underwriters' overallotment option. These trust preferred securities are traded on the New York Stock Exchange preferred stock listing. Valley intends to use the net proceeds for general corporate purposes, which include the repurchase of our common stock and the repayment of debt, and may include investments in or advances to our existing or future subsidiaries. In late June 2001 Valley began operations of Valley Commercial Capital, LLC, a new leasing company, which offers both commercial equipment leases and financing for general aviation aircraft. This transaction involved the purchase of approximately $44.0 million of small aircraft loans. 3
On January 19, 2001 Valley completed its merger with Merchants New York Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York headquartered in Manhattan. Under the terms of the merger agreement, each outstanding share of Merchants common stock was exchanged for 0.7634 shares of Valley common stock. As a result, a total of approximately 14 million shares of Valley common stock were exchanged (the exchange rate and number of shares exchanged have not been restated for the 5 percent stock dividend issued May 18, 2001). This merger added seven branches in Manhattan. The transaction was accounted for utilizing the pooling-of-interests method of accounting. The consolidated financial statements of Valley have been restated to include Merchants for all periods presented. Competition The market for banking and bank-related services is highly competitive. Valley and VNB compete with other providers of financial services such as other bank holding companies, commercial and savings banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, title agencies, asset managers and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressure. Competition is expected to intensify as a consequence of the Gramm-Leach-Bliley Act (discussed below) and interstate banking laws now in effect or that may be in effect in the future. Valley and VNB compete by offering quality products and convenient services at competitive prices. In order to maintain and enhance its competitive position, Valley regularly reviews its products, locations, alternative delivery channels and various acquisition prospects and periodically engages in discussions regarding possible acquisitions. Employees At December 31, 2001, VNB and its subsidiaries employed 2,129 full-time equivalent persons. Management considers relations with its employees to be satisfactory. SUPERVISION AND REGULATION The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company's cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the 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 additional bank. Satisfactory capital ratios and Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy. Acquisitions through VNB require approval of the office of the 4
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. As of the date hereof, Valley and VNB have not utilized such powers. 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 branches. 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. Recent Legislation As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "Act"). The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. Treasury regulations implementing the due diligence requirements must be issued no later than April 24, 2002. Whether or not regulations are adopted, the law becomes effective July 23, 2002. Additional regulations are to be adopted during 2002 to implement minimum standards to verify customer identity, to encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, to prohibit the anonymous use of "concentration accounts," and to require all covered financial institutions to have in place a Bank Secrecy Act compliance program. The Act also amends the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing an application under these acts. In late 2000, the American Home Ownership and Economic Act of 2000 instituted a number of regulatory relief provisions applicable to national banks, such as permitting national banks to have classified directors and to merge their business subsidiaries into the bank. The Gramm-Leach-Bliley Financial Modernization Act of 1999 became effective in early 2000. The Modernization Act: . allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than was previously permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies; 5
. allows insurers and other financial services companies to acquire banks; . removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and . establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. If a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals. The OCC has adopted rules to allow national banks to form subsidiaries to engage in financial activities allowed for financial holding companies. Electing national banks must meet the same management and capital standards as financial holding companies but may not engage in insurance underwriting, real estate development or merchant banking. Sections 23A and 23B of the Federal Reserve Act apply to financial subsidiaries and the capital invested by a bank in its financial subsidiaries will be eliminated from the bank's capital in measuring all capital ratios. The Modernization Act modified other financial laws, including laws related to financial privacy and community reinvestment. Additional proposals to change the laws and regulations governing the banking and financial services industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on Valley cannot be determined at this time. Regulation of Bank Subsidiary VNB is subject to the supervision of, and to regular examination by, the OCC. Various laws and the regulations thereunder applicable to Valley and its bank subsidiary impose restrictions and requirements in many areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of loans and investments, consumer protection, employment practices and entry into new types of business. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the 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 to Valley by VNB. Payment of dividends to Valley by its subsidiary bank, without prior regulatory approval, is subject to regulatory limitations. Under the National Bank Act, dividends may be declared only if, after payment thereof, capital would be unimpaired and remaining surplus would equal 100 percent of capital. Moreover, a national bank may declare, in any one year, dividends only in an amount aggregating not more than the sum of its net profits for such year and its retained net profits for the preceding two years. In addition, the bank regulatory agencies have the authority to prohibit a bank subsidiary from paying dividends or otherwise supplying funds to Valley if the supervising agency determines that such payment would constitute an unsafe or unsound banking practice. Loans to Related Parties VNB's authority to extend credit to its directors, executive officers and 10 percent stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of the National Bank Act and 6
Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital. In addition, extensions of credit in excess of certain limits must be approved by the bank's board of directors. Community Reinvestment Under the Community Reinvestment Act ("CRA"), as implemented by OCC regulations, a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a national bank, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. VNB received a "satisfactory" CRA rating in its most recent examination. Restrictions on Activities Outside the United States Valley's activities in Canada are conducted through VNB and in the United States are subject to Sections 25 and 25A of the Federal Reserve Act, certain regulations under the National Bank Act and, primarily, Regulation K promulgated by the FRB. Under these provisions, VNB may invest no more than 10 percent of its capital in foreign banking operations. In addition to investments, VNB may extend credit or guarantee loans for these entities and such loans or guarantees are generally not subject to the loans to one person limitation, although they are subject to prudent banking limitations. The foreign banking operations of VNB are subject to supervision by the FRB, as well as the OCC. In Canada, VNB's activities also are subject to the laws and regulations of Canada and to regulation by Canadian banking authorities. Regulation K generally restricts activities by United States banks outside of the United States to activities that are permitted for banks within the United States. As a consequence, activities by VNB through its subsidiaries outside of the United States would generally be limited to banking and activities closely related to banking with certain significant exceptions. FIRREA Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the Federal Depository Insurance Corporation ("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. 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 7
capital level of the institution. To qualify to engage in financial activities under the Modernization Act, all depository institutions must be "well capitalized". The financial holding company of a national bank will be put under directives to raise its capital levels or divest its activities if the depository institution falls from that level. The OCC's regulations implementing these provisions of FDICIA provide that an institution will be classified as "well capitalized" if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, and (iv) meets certain other requirements. An institution will be classified as "adequately capitalized" if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0 percent, (iii) has 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. In addition, significant provisions of FDICIA required federal banking regulators to impose standards in a number of other important areas to assure bank safety and soundness, including internal controls, information systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation and interest rate exposure. Item 2. Properties VNB's corporate headquarters consist of three office buildings located adjacent to each other in Wayne, New Jersey. These headquarters encompass commercial, mortgage and consumer lending, the operations and data processing center, and the executive offices of both Valley and VNB. Two of the three buildings are owned by a subsidiary of VNB and leased to VNB, the other building is leased by VNB from an independent third party. VNB owns another office building in Wayne, New Jersey which is occupied by those departments and subsidiaries providing trust and investment management services. A subsidiary of VNB also owns an office building and condominium office in Manhattan, which are leased to VNB and which house a portion of its New York lending and operations. VNB provides banking services at 126 locations of which 54 locations are owned by VNB or a subsidiary of VNB and leased to VNB, and 72 locations are leased from independent third parties. Item 3. Legal Proceedings There were no material pending legal proceedings to which Valley or any of its direct or indirect subsidiaries were a party, or to which their property was subject, other than ordinary routine litigations incidental to business and which are not expected to have any material effect on the business or financial condition of Valley. Item 4. Submission of Matters to a Vote of Security Holders None. 8
Item 4A. Executive Officers of the Registrant <TABLE> <CAPTION> Age at Executive December 31, Officer Names 2001 Since Office ----- ------------ --------- ------ <S> <C> <C> <C> Gerald H. Lipkin..... 60 1975 Chairman of the Board, President and Chief Executive Officer of Valley and VNB Spencer B. Witty..... 87 2001 Vice Chairman of Valley and VNB Peter Crocitto....... 44 1991 Executive Vice President of Valley and VNB Alan D. Eskow........ 53 1993 Executive Vice President and Chief Financial Officer of Valley and VNB James G. Lawrence.... 58 2001 Executive Vice President of Valley and VNB Robert M. Meyer...... 55 1997 Executive Vice President of Valley and VNB Peter John Southway.. 41 1989 Executive Vice President of Valley and VNB William J. Cardew.... 75 2001 First Senior Vice President of VNB Kermit R. Dyke....... 54 2001 First Senior Vice President of VNB Albert L. Engel...... 53 1998 First Senior Vice President of VNB Robert J. Farnon..... 63 1998 First Senior Vice President of VNB Robert E. Farrell.... 55 1990 First Senior Vice President of VNB Richard P. Garber.... 58 1992 First Senior Vice President of VNB Eric W. Gould........ 33 2001 First Senior Vice President of VNB Robert J. Mulligan... 54 1991 First Senior Vice President of VNB Garret G. Nieuwenhuis 61 2001 First Senior Vice President of VNB John H. Prol......... 64 1992 First Senior Vice President of VNB Jack M. Blackin...... 59 1993 Senior Vice President of Valley and VNB </TABLE> All officers serve at the pleasure of the Board of Directors. 9
PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters Valley's common stock trades on the New York Stock Exchange ("NYSE") under the symbol VLY. The following table sets forth for each quarter period indicated the high and low sales prices for the common stock of Valley, as reported by the NYSE, and the cash dividends paid per share for each quarter. The amounts shown in the table below have been adjusted for all stock dividends. <TABLE> <CAPTION> Year 2001 Year 2000 ---------------------- ---------------------- High Low Dividend High Low Dividend ------ ------ -------- ------ ------ -------- <S> <C> <C> <C> <C> <C> <C> First Quarter. $31.67 $23.86 $0.248 $25.41 $19.22 $0.236 Second Quarter 28.35 25.71 0.265 25.73 22.68 0.248 Third Quarter. 29.80 25.60 0.265 26.31 22.38 0.248 Fourth Quarter 32.95 28.00 0.265 32.03 24.65 0.248 </TABLE> Federal laws and regulations contain restrictions on the ability of Valley and VNB to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, "Business--Dividend Limitations" and Part II, Item 8, "Financial Statements and Supplementary Data--Note 16 of the Notes to Consolidated Financial Statements." There were 9,359 shareholders of record as of December 31, 2001. In 2000, Valley issued 60,507 shares of its common stock to the shareholders of Hallmark Capital Management, Inc. pursuant to a merger of Hallmark into a subsidiary of Valley, and in 2001 issued 26,329 shares of Valley common stock pursuant to subsequent earn-out payments. These shares were exempt from registration under the Securities Act of 1933 because they were issued in a Private Placement under Section 4(2) of the Act and Regulation D thereunder. These shares have been subsequently registered for resale on Form S-3 under the Securities Act. 10
Item 6. Selected Financial Data The following selected financial data should be read in conjunction with Valley's Consolidated Financial Statements and the accompanying notes presented elsewhere herein. <TABLE> <CAPTION> Years ended December 31, --------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- (in thousands, except for share data) <S> <C> <C> <C> <C> <C> Summary of Operations: Interest income (taxable equivalent). $ 559,557 $ 575,003 $ 524,758 $ 505,096 $ 498,424 Interest expense..................... 218,653 252,648 208,792 208,531 212,436 ----------- ----------- ----------- ----------- ----------- Net interest income (taxable equivalent)........................ 340,904 322,355 315,966 296,565 285,988 Less: tax equivalent adjustment...... 6,071 6,797 6,940 7,535 8,785 ----------- ----------- ----------- ----------- ----------- Net interest income................. 334,833 315,558 309,026 289,030 277,203 Provision for loan losses............ 15,706 10,755 11,035 14,070 14,830 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses................... 319,127 304,803 297,991 274,960 262,373 Gains on securities transactions, net 3,564 355 2,625 1,480 2,158 Non-interest income.................. 64,912 58,745 51,178 49,342 48,219 Non-interest expense................. 188,248 171,139 164,719 170,097 163,579 ----------- ----------- ----------- ----------- ----------- Income before income taxes........... 199,355 192,764 187,075 155,685 149,171 Income tax expense................... 64,151 66,027 61,734 38,512 44,458 ----------- ----------- ----------- ----------- ----------- Net income.......................... $ 135,204 $ 126,737 $ 125,341 $ 117,173 $ 104,713 =========== =========== =========== =========== =========== Per Common Share (1): Earnings per share: Basic............................. $ 1.74 $ 1.61 $ 1.52 $ 1.41 $ 1.26 Diluted........................... 1.73 1.60 1.51 1.39 1.24 Dividends............................ 1.04 0.98 0.93 0.85 0.73 Book value........................... 8.87 8.41 8.04 8.41 7.75 Weighted average shares outstanding: Basic............................. 77,626,780 78,612,928 82,383,289 83,218,702 83,246,901 Diluted........................... 78,038,664 79,235,570 83,162,607 84,361,995 84,111,102 Ratios: Return on average assets............. 1.68% 1.66% 1.70% 1.70% 1.54% Return on average shareholders' equity............................. 19.70 20.24 18.30 17.72 16.88 Average shareholders' equity to average assets..................... 8.53 8.22 9.31 9.58 9.12 Dividend payout...................... 56.40 56.59 53.30 50.33 51.16 Risk-based capital: Tier 1 capital.................... 14.09 11.26 12.03 13.82 14.03 Total capital..................... 15.15 12.33 13.17 15.05 15.15 Leverage capital..................... 10.26 8.48 8.81 9.71 9.15 Financial Condition at Year-End: Assets............................... $ 8,583,765 $ 7,901,260 $ 7,755,707 $ 7,168,540 $ 6,882,167 Loans, net of allowance.............. 5,268,004 5,127,115 4,927,621 4,446,806 4,245,011 Deposits............................. 6,306,974 6,136,828 6,010,233 5,904,473 5,756,168 Shareholders' equity................. 678,375 655,982 652,708 702,787 646,794 </TABLE> - -------- (1) All per share amounts have been restated to reflect the 5 percent stock dividend issued May 18, 2001, and all prior stock splits and dividends. 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this analysis is to provide the reader with information relevant to understanding and assessing Valley's results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis the reader is encouraged to review the consolidated financial statements and statistical data presented in this document. Cautionary Statement Concerning Forward-Looking Statements This Form 10-K, both in the MD & A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities, taxation, technology and market conditions. These statements may be identified by an "asterisk" (*) or such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to, the direction of interest rates, loan prepayment assumptions, cash flows, deposit growth, the direction of the economy in New Jersey and New York especially as it has been affected by recent developments, continued levels of loan quality and origination volume, continued relationships with major customers including sources for loans, as well as the effects of general economic conditions and legal and regulatory barriers and structure. Actual results may differ materially from such forward-looking statements. Valley assumes no obligation for updating any such forward-looking statement at any time. Recent Developments Valley restructured an existing subsidiary during December of 2001, by contributing to it some of Valley's existing real estate owned properties and some of its real estate related securities. Valley anticipates that it will contribute additional real estate owned properties to the subsidiary during 2002*. The restructuring will provide substantial tax benefits during 2002.* Beginning in 2003, there will be a smaller amount of recurring annual tax benefits from this restructuring.* The benefits will reduce Valley's effective tax rate below its historical rate of approximately 34 percent. On November 7, 2001, Valley completed a $175.0 million public offering of 7.75 percent trust preferred securities. Valley issued the trust preferred securities through its subsidiary VNB Capital Trust I, a Delaware business trust. An additional $25.0 million in trust preferred securities was sold by Valley on November 15, 2001 upon the exercise of the underwriters' overallotment option. These trust preferred securities are traded on the New York Stock Exchange preferred stock listing. Valley intends to use the net proceeds for general corporate purposes, which include the repurchase of our common stock and the repayment of debt, and may include investments in or advances to our existing or future subsidiaries. In late June 2001 Valley began operations of Valley Commercial Capital, LLC, a new leasing company, which offers both commercial equipment leases and financing for general aviation aircraft. This transaction involved the purchase of approximately $44.0 million of small aircraft loans. On January 19, 2001 Valley completed its merger with Merchants New York Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York headquartered in Manhattan. Under the terms of the merger agreement, each outstanding share of Merchants common stock was exchanged for 0.7634 shares of Valley common stock. As a result, a total of approximately 14 million shares of Valley common stock were exchanged (the exchange rate and number of shares exchanged have not been restated for the 5 percent stock dividend issued May 18, 2001). This merger added seven branches in Manhattan. The transaction was accounted for utilizing the pooling-of-interest method of accounting. The consolidated financial statements of Valley have been restated to include Merchants for all periods presented. Earnings Summary Net income was $135.2 million, or $1.73 per diluted share in 2001 compared with $126.7 million, or $1.60 per diluted share, in 2000 (2000 earnings per share amounts have been restated to give effect to the 5 percent 12
stock dividend issued May 18, 2001). Net income includes a net, after tax charge of $7.0 million, or $0.09 per diluted share, recorded in connection with the first quarter acquisition of Merchants. Excluding the merger charge, net income for the year ended December 31, 2001 was $142.2 million, or $1.82 diluted share. Return on average assets for 2001 rose to 1.68 percent compared with 1.66 percent in 2000, while the return on average equity was 19.70 percent in 2001 compared with 20.24 percent in 2000. Excluding the merger charge, the return on average assets and the return on average equity would have been 1.77 percent and 20.73 percent, respectively, for the year ended December 31, 2001. Although interest rates declined throughout 2001, Valley's net interest income increased $19.3 million, contributing to increased earnings per share. An increase in loan volume helped offset the decline in interest rates. Earnings for 2001 were also impacted by the pre-tax $4.9 million gain recorded relating to the sale of the cobranded ShopRite MasterCard credit card portfolio offset by the pre-tax merger-related charge of $9.0 million from the acquisition of Merchants and $2.3 million of distributions on the recently issued trust preferred securities. Net Interest Income Net interest income continues to be the largest source of Valley's operating income. Net interest income on a tax equivalent basis increased to $340.9 million for 2001 compared with $322.4 million for 2000. Higher average balances of total interest earning assets, primarily loans and taxable investments, were offset partially by lower average interest rates for these interest earning assets during 2001. For 2001 total interest bearing liabilities increased causing interest expense to increase, but was more than offset by declining rates associated with the liabilities compared to 2000. The net interest margin increased to 4.45 percent for 2001 compared with 4.40 percent for 2000. Beginning in January 2001 the Federal Reserve decreased short-term interest rates eleven times during the year amounting to 475 basis points due to the general weakness in the economy. As the prime rate declined, Valley was able to reduce liability costs contributing to an increase in its net interest margin and net interest income. There can be no assurances how future changes in interest rates will affect net interest income. Average interest earning assets increased $349.5 million or 4.8 percent in 2001 over the 2000 amount. This was mainly the result of the increase in average balance of loans of $134.1 million or 2.6 percent and the increase in average balance of taxable investments of $197.3 million or 10.2 percent. Average interest bearing liabilities for 2001 increased $289.9 million or 5.1 percent from 2000. Average savings deposits increased $128.8 million or 5.7 percent and average time deposits increased $35.1 million or 1.4 percent from 2000. Average short-term borrowings decreased $169.4 million or 39.1 percent over 2000 balances. Average long-term debt, which includes primarily Federal Home Loan Bank ("FHLB") advances, increased $295.4 million, or 50.7 percent. During 2001, in conjunction with declining interest rates, Valley began to extend maturities on its short-term borrowings by converting to longer term FHLB advances resulting in a large increase in long-term debt and decrease in short-term borrowings. The extension of maturities is part of an effort to more closely match Valley's funding sources with its loan portfolio and reduce future interest rate risk.* Average interest rates, in all categories of interest earning assets and interest bearing liabilities, decreased during 2001 compared to 2000. The average interest rate for loans decreased 62 basis points to 7.68 percent and the average interest rate for taxable investments decreased 30 basis points to 6.53 percent. Average interest rates on total interest earning assets decreased 56 basis points to 7.30 percent. Average interest rates also decreased on total interest bearing liabilities by 78 basis points to 3.65 percent from 4.43 percent. Average interest rates on deposits decreased by 81 basis points to 3.26 percent. The increase in the net interest margin from 4.40 percent in 2000 to 4.45 percent in 2001 resulted from a larger increase in net interest income in relationship to the growth in average interest earning assets and from reduced liability costs in conjunction with reduced yields in a declining interest rate environment. Valley will generally be able to increase the net interest margin in a declining rate environment, as there are a greater amount of liabilities tied to short-term rates than assets.* Conversely, in a rising interest rate environment, Valley may have some reduction in net interest income.* For further information, see the caption Interest Rate Sensitivity discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations. 13
The following table reflects the components of net interest income for each of the three years ended December 31, 2001, 2000 and 1999. ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS <TABLE> <CAPTION> 2001 2000 1999 ---------------------------- ---------------------------- ---------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Assets Interest earning assets Loans (1)(2)....................... $5,199,999 $399,330 7.68% $5,065,852 $420,500 8.30% $4,682,882 $374,829 8.00% Taxable investments (3)............ 2,136,459 139,511 6.53 1,939,191 132,400 6.83 2,000,861 126,858 6.34 Tax-exempt investments(1)(3)....... 221,752 16,100 7.26 244,833 17,851 7.29 252,632 18,370 7.27 Federal funds sold and other short-term investments............ 109,768 4,616 4.21 68,615 4,252 6.20 93,856 4,701 5.01 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest earning assets...... 7,667,978 $559,557 7.30 7,318,491 $575,003 7.86 7,030,231 $524,758 7.46 -------- ---- -------- ---- -------- ---- Allowance for loan losses.......... (63,564) (65,706) (63,505) Cash and due from banks............ 182,955 187,625 194,104 Other assets....................... 229,067 217,160 201,110 Unrealized gain(loss) on securities available for sale..... 25,962 (36,774) (2,614) ---------- ---------- ---------- Total assets....................... $8,042,398 $7,620,796 $7,359,326 ========== ========== ========== Liabilities and Shareholders' Equity Interest bearing liabilities Savings deposits................... $2,389,179 $ 45,742 1.91% $2,260,379 $ 57,470 2.54% $2,276,031 $ 49,170 2.16% Time deposits...................... 2,458,168 112,417 4.57 2,423,099 133,156 5.50 2,456,289 120,531 4.91 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest bearing deposits.... 4,847,347 158,159 3.26 4,683,478 190,626 4.07 4,732,320 169,701 3.59 Short-term borrowings.............. 263,497 11,424 4.34 432,849 26,598 6.14 321,144 16,394 5.10 Long-term debt..................... 878,364 49,070 5.59 582,980 35,424 6.08 387,571 22,697 5.86 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest bearing liabilities. 5,989,208 218,653 3.65 5,699,307 252,648 4.43 5,441,035 208,792 3.84 -------- ---- -------- ---- -------- ---- Demand deposits.................... 1,301,231 1,254,103 1,174,621 Other liabilities.................. 36,114 41,190 58,657 Capital securities................. 29,686 -- -- Shareholders' equity............... 686,159 626,196 685,013 ---------- ---------- ---------- Total liabilities and shareholders' equity............................ $8,042,398 $7,620,796 $7,359,326 ========== ========== ========== Net interest income (tax equivalent basis)................. 340,904 322,355 315,966 Tax equivalent adjustment.......... (6,071) (6,797) (6,940) -------- -------- -------- Net interest income................ $334,833 $315,558 $309,026 ======== ======== ======== Net interest rate differential..... 3.65% 3.43% 3.62% ==== ==== ==== Net interest margin (4)............ 4.45% 4.40% 4.49% ==== ==== ==== </TABLE> - -------- (1) Interest income is presented on a tax equivalent basis using a 35 percent tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Net interest income on a tax equivalent basis as a percentage of total average interest earning assets. 14
The following table demonstrates the relative impact on net interest income of changes in volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by Valley on such assets and liabilities. CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS <TABLE> <CAPTION> 2001 Compared to 2000 2000 Compared to 1999 Increase(Decrease)(2) Increase(Decrease)(2) --------------------------- ------------------------- Interest Volume Rate Interest Volume Rate -------- ------- -------- -------- ------- ------- (in thousands) <S> <C> <C> <C> <C> <C> <C> Interest income: Loans (1)...................... $(21,172) $10,917 $(32,089) $45,671 $31,435 $14,236 Taxable investments............ 7,113 13,058 (5,945) 5,542 (3,996) 9,538 Tax-exempt investments(1)...... (1,751) (1,676) (75) (519) (569) 50 Federal funds sold and other short-term investments. 364 2,017 (1,653) (449) (1,424) 975 -------- ------- -------- ------- ------- ------- (15,446) 24,316 (39,762) 50,245 25,446 24,799 -------- ------- -------- ------- ------- ------- Interest expense: Savings deposits............... (11,728) 3,123 (14,851) 8,300 (340) 8,640 Time deposits.................. (20,739) 1,901 (22,640) 12,625 (1,648) 14,273 Short-term borrowings.......... (15,174) (8,658) (6,516) 10,204 6,435 3,769 Long-term debt................. 13,646 16,700 (3,054) 12,727 11,844 883 -------- ------- -------- ------- ------- ------- (33,995) 13,066 (47,061) 43,856 16,291 27,565 -------- ------- -------- ------- ------- ------- Net interest income (tax equivalent basis)....... $ 18,549 $11,250 $ 7,299 $ 6,389 $ 9,155 $(2,766) ======== ======= ======== ======= ======= ======= </TABLE> - -------- (1) Interest income is adjusted to a tax equivalent basis using a 35 percent tax rate. (2) 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. 15
Non-Interest Income The following table presents the components of non-interest income for the years ended December 31, 2001, 2000 and 1999. NON-INTEREST INCOME <TABLE> <CAPTION> Years ended December 31, ------------------------ 2001 2000 1999 ------- ------- ------- (in thousands) <S> <C> <C> <C> Trust and investment services........ $ 4,404 $ 3,563 $ 2,414 Service charges on deposit accounts.. 19,171 18,180 15,864 Gains on securities transactions, net 3,564 355 2,625 Fees from loan servicing............. 10,818 10,902 8,387 Credit card fee income............... 3,535 8,403 8,655 Gains on sales of loans, net......... 10,601 2,227 2,491 Bank owned life insurance............ 2,120 -- -- Other................................ 14,263 15,470 13,367 ------- ------- ------- Total non-interest income......... $68,476 $59,100 $53,803 ======= ======= ======= </TABLE> Non-interest income continues to represent a considerable source of income for Valley. Excluding gains on securities transactions, total non-interest income amounted to $64.9 million for 2001 compared with $58.7 million for 2000. Trust and investment services includes income from trust operations, brokerage commissions, and asset management fees. Additional fee income to Valley during 2000 and 2001 resulted primarily from the July 6, 2000 acquisition of Hallmark Capital Management, Inc. ("Hallmark"), a New Jersey based investment management firm. The acquisition was accounted for as a purchase accounting transaction. Fee income from asset management and brokerage commissions were negatively impacted by the equity market decline during 2001. Service charges on deposit accounts increased $991 thousand or 5.5 percent from $18.2 million for the year ended December 31, 2000 to $19.2 million in 2001. A majority of this increase was due to an increase in service fees charged. Gains on securities transactions, net increased $3.2 million to $3.6 million for the year ended December 31, 2001 as compared to $355 thousand for the year ended December 31, 2000. The majority of securities sold during 2001 were mortgage backed securities, which, in the current economic environment of heavy refinancing activity, were experiencing above normal prepayments. Additional sales may take place with changes in interest rates to adjust for portfolio yields and duration.* Included in fees from loan servicing are fees for servicing residential mortgage loans and SBA loans. For the year ended December 31, 2001, fees from servicing residential mortgage loans totaled $9.5 million and fees from servicing SBA loans totaled $1.3 million, relatively unchanged from the prior year. The aggregate principal balances of mortgage loans serviced by VNB's subsidiary VNB Mortgage Services, Inc. ("MSI") for others approximated $2.4 billion, $2.5 billion and $2.2 billion at December 31, 2001, 2000 and 1999, respectively. The heavy prepayment activity resulted in less fee income from the serviced mortgage loan portfolio. If long-term interest rates remain low, then this level of prepayments and reduced fee income may continue.* Credit card fee income decreased $4.9 million for the year ended December 31, 2001 as compared to the prior year due to the sale of the $66.6 million co-branded ShopRite MasterCard credit card portfolio in January 2001. Valley will continue to maintain its own credit card portfolio, due to customer relationships, which had a balance of $12.7 million at December 31, 2001. 16
Gains on sales of loans were $10.6 million for the year 2001 compared to $2.2 million for the prior year. A $4.9 million gain was recorded in January 2001 on the ShopRite Mastercard credit card portfolio sale described above. Also included in the gain on sale of loans for 2001 is a $3.7 million gain on the sale of newly originated low interest rate, 15 and 30 year fixed rate residential mortgages, as well as some mortgages with higher interest rates and with a greater likelihood of prepayment in a declining interest rate environment. Management sells most new long-term fixed rate loans with low interest rates to reduce future interest rate risk.* Approximately $2.0 million of gain was recorded on the sale of SBA loans by VNB into the secondary market in 2001. The comparable gain amounts for the year ended December 31, 2000 for the sale of residential mortgage loans and SBA loans were $244 thousand and $2.0 million, respectively. The increase in the gain on sale of residential mortgage loans was due to the increase in the volume of loans sold and changes in interest rates. During the third quarter of 2001, Valley invested $100.0 million in Bank Owned Life Insurance (BOLI) and added another $50.0 million during the first quarter of 2002 to help offset the rising cost of employee benefits. The investment portfolio was reduced by the like amount, causing net interest income to decline. Income of $2.1 million was recorded from the BOLI during the year ended December 31, 2001 and was reported as other income. BOLI income is exempt from federal and state taxes. The BOLI is invested in investment securities similar to Valley's investment portfolio and is managed by two investment firms. Other non-interest income decreased $1.2 million to $14.3 million in 2001 as compared to 2000. This decrease is primarily attributed to the gain recorded on two bank buildings sold by Valley during 2000 acquired in previous acquisitions. Non-Interest Expense The following table presents the components of non-interest expense for the years ended December 31, 2001, 2000 and 1999. NON-INTEREST EXPENSE <TABLE> <CAPTION> Years ended December 31, -------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) <S> <C> <C> <C> Salary expense.................... $ 79,826 $ 76,116 $ 70,596 Employee benefit expense.......... 18,200 18,037 17,406 FDIC insurance premiums........... 1,151 1,239 1,350 Net occupancy expense............. 17,775 15,469 14,641 Furniture and equipment expense... 10,700 10,731 9,299 Credit card expense............... 1,538 5,032 5,070 Amortization of intangible assets. 10,170 7,725 5,369 Advertising....................... 6,392 4,682 5,336 Merger-related charges............ 9,017 -- 3,005 Distribution on capital securities 2,282 -- -- Other............................. 31,197 32,108 32,647 -------- -------- -------- Total non-interest expense..... $188,248 $171,139 $164,719 ======== ======== ======== </TABLE> Excluding merger-related charges, non-interest expense totaled $179.2 million for 2001, an increase of $8.1 million or 4.7 percent from the 2000 level. The largest components of non-interest expense were salaries and employee benefit expense which totaled $98.0 million in 2001 compared to $94.2 million in 2000, an increase of 4.1 percent. At December 31, 2001, full-time equivalent staff was 2,129 compared to 2,087 at the end of 2000. The increase in salary expense includes Valley's new leasing subsidiary, new branches, and other expanded operations. The efficiency ratio measures a bank's gross operating expense as a percentage of fully-taxable equivalent net interest income and other non-interest income without taking into account security gains and losses and other non-recurring items. Valley's efficiency ratio for the year ended December 31, 2001 was 44.4 percent, one of the lowest in the industry, compared with an efficiency ratio for 2000 of 45.2 percent. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders.* 17
Net occupancy expense increased $2.3 million or 14.9 percent during 2001 in comparison to 2000. The increase in this expense can be attributed to an overall increase in the cost of operating bank facilities and from new branch locations. Credit card expense includes processing expenses and fraud losses for both the co-branded ShopRite credit card portfolio and Valley's own credit card portfolio, and cardmember rebates for the co-branded ShopRite credit card portfolio. The decrease in credit card expense was the result of the sale of the ShopRite credit card portfolio in January 2001. Amortization of intangible assets, consisting primarily of amortization of loan servicing rights, increased $2.4 million or 31.7 percent to $10.2 million. An analysis is completed quarterly to determine the adequacy of the mortgage servicing asset. A valuation of $2.0 million was recorded in the third and fourth quarters of 2001 as a result of a large volume of prepayments on higher interest rate mortgages. Additional increases to the reserve may be recorded during 2002 should high levels of prepayments continue.* Also included in amortization of intangible assets is $650 thousand of goodwill amortization recorded during 2001. Under the new accounting rules, annual amortization of goodwill will cease. Instead, Valley will periodically review the goodwill asset for impairment, and record an impairment reserve for any decline in value. During the first quarter of 2001, Valley recorded merger-related charges of $9.0 million related to the acquisition of Merchants. On an after tax basis, these charges totaled $7.0 million or $0.09 per diluted share. These charges include only identified direct and incremental costs associated with this acquisition. Items included in these charges were the following: personnel expenses which include severance payments for terminated directors of Merchants; professional fees which include investment banking, accounting and legal fees; and other expenses which include the disposal of data processing equipment and the write-off of supplies and other assets not considered useful in the operation of the combined entities. The major components of the merger-related charge, consisting of professional fees, personnel and the disposal of data processing equipment, totaled $4.4 million, $3.2 million and $486 thousand, respectively. Of the total merger-related charge, $5.9 million or 65.5 percent was paid or charged to the reserve through December 31, 2001. The remaining balance of $3.1 million is expected to be paid based on existing contractual arrangements.* Distributions on capital securities consist primarily of amounts required to be paid or accrued on the $200 million of 7.75 percent trust preferred securities issued in November of 2001. The interest cost for the full year 2002 will approximate $15.5 million. The significant components of other non-interest expense include data processing, professional fees, postage, telephone and stationery expense which totaled approximately $14.9 million for 2001, compared to $15.7 million for 2000. Income Taxes Income tax expense as a percentage of pre-tax income was 32.2 percent for the year ended December 31, 2001 compared to 34.3 percent in 2000. The effective tax rate was impacted by the effect of nondeductible merger expenses, tax benefits associated with loan charge-offs, additional state tax benefits and non taxable income from a $100.0 million investment in BOLI. After adjusting for these items, the effective tax rate for the year 2001 would have been approximately 33.6 percent. Valley restructured an existing subsidiary during December of 2001, by contributing to it some of Valley's existing real estate owned properties and some of its real estate related securities. Valley anticipates that it will contribute additional real estate owned properties to the subsidiary during 2002.* The restructuring will provide substantial tax benefits during 2002.* Beginning in 2003, there will be a smaller amount of recurring annual benefits from this restructuring.* The benefits will reduce Valley's effective tax rate below its historical rate of approximately 34 percent.* 18
Business Segments VNB has four business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, investment portfolio and corporate and other adjustments. Lines of business and actual structure of operations determine each segment. Each is reviewed routinely for its asset growth, contribution to pre-tax net income and return on average interest-earning assets. Expenses related to the branch network, all other components of retail banking, along with the back office departments of the bank are allocated from the corporate and other adjustments segment to each of the other three business segments. The financial reporting for each segment contains allocations and reporting in line with VNB's operations, which may not necessarily be compared to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. For financial data on the four business segments see Part II, Item 8, "Financial Statements and Supplementary Data--Note 20 of the Notes to Consolidated Financial Statements." The consumer lending segment had a return on average interest earning assets before taxes of 3.12 percent for the year ended December 31, 2001 compared to 2.54 percent for the year ended December 31, 2000. Average interest earning assets decreased $129.7 million, which is attributable to a decrease in automobile lending offset partially by an increase in home equity and residential mortgage lending. Average interest rates on consumer loans decreased by 18 basis points, while the cost of funds decreased by 60 basis points. The majority of the rates on these loans are fixed and do not adjust with changes in short term interest rates. Normal cash flow, high prepayment volume and new loans at lower rates caused the decline in yield. Income before income taxes increased $12.2 million primarily as a result of increased non-interest income of $3.7 million associated with the sale of residential mortgage loans. In addition, the sale of $66.6 million of credit card receivables during the first quarter of 2001 reduced non-interest expense by $4.6 million compared to the prior year. The return on average interest earning assets before taxes for the commercial lending segment decreased 64 basis points to 2.85 percent for the year ended December 31, 2001. Average interest earning assets increased $246.7 million as a result of an increased volume of loans and the purchase of approximately $44.0 million in small aircraft loans. Interest rates on commercial loans decreased by 112 basis points due to a decline in interest rates on a large number of adjustable rate loans, while the cost of funds decreased by 60 basis points. Income before income taxes decreased $7.8 million primarily as a result of a decline in the yield on loans offset by an increase in average interest earning assets. The investment portfolio segment had a return on average interest earning assets, before taxes, of 2.46 percent for the year ended December 31, 2001, 35 basis points more than the year ended December 31, 2000. Average interest earning assets increased by $232.5 million. The yield on interest earning assets decreased by 34 basis points to 6.46 percent. Cash flows from investments, specifically mortgage backed securities, prepaid at a faster pace during 2001 due to lower long term interest rates on mortgage loans, and these funds were reinvested in lower rate alternatives causing the decline in yield. This can be expected to continue during 2002 if long-term interest rates remain low.* Income before income taxes increased 28.5 percent to $60.2 million. The corporate segment represents income and expense items not directly attributable to a specific segment including merger-related charges, non-recurring gains on sales of loans, and service charges on deposit accounts. The loss before taxes for the corporate segment increased to $16.8 million for the year ended December 31, 2001 and was due primarily to the pre-tax merger related charges of $9.0 million incurred during 2001. ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity Valley's success is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of Valley's net interest income to the movement in interest rates. Valley does not currently use derivatives to manage market and interest rate risks. Valley's interest rate risk management is the responsibility of the Asset/Liability Management Committee ("ALCO"), which reports to the Board of Directors. ALCO establishes policies that monitor and coordinate Valley's sources, uses and pricing of funds. 19
Valley uses a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twelve and twenty-four month period. The model is based on the maturity and repricing 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, the prepayment assumptions of certain assets and liability retention. According to the model run for year end 2001, over a twelve month period, an interest rate increase of 100 basis points resulted in a decrease in net interest income of approximately $2.9 million while an interest rate decrease of 100 basis points resulted in an increase in net interest income of approximately $5.0 million. Management cannot provide any assurance about the actual effect of changes in interest rates on Valley's net interest income.* The model assumes changes in interest rates without any proactive change in the balance sheet by managment. Valley's net interest margin is affected by changes in interest rates and cash flow from its loan and investment portfolio. In a low interest rate environment, greater cash flow is received from mortgage loans and investments due to greater refinancing activity. These larger cash flows are then reinvested into alternative investments at lower interest rates causing net interest margin pressure. Valley actively manages these cash flows in conjunction with its liability rates to maximize net interest margin. The following table shows the financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair value at December 31, 2001. Market risk sensitive instruments are generally defined as on-and-off balance sheet financial instruments. INTEREST RATE SENSITIVITY ANALYSIS <TABLE> <CAPTION> Total Fair 2002 2003 2004 2005 2006 Thereafter Balance Value ---------- ---------- -------- -------- -------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest sensitive assets: Investment securities held to maturity........ $ 14,450 $ 1,572 $ 9,873 $ 8,542 $ 7,752 $ 450,872 $ 503,061 $ 476,872 Investment securities available for sale...... 855,902 349,939 231,054 137,937 82,682 514,181 2,171,695 2,171,695 Loans: Commercial................................... 792,492 92,148 67,241 38,776 20,986 69,209 1,080,852 1,073,347 Mortgage..................................... 595,857 434,609 321,685 235,117 203,887 1,104,855 2,896,010 2,862,473 Consumer..................................... 680,126 305,084 198,794 100,971 39,211 30,759 1,354,945 1,460,358 ---------- ---------- -------- -------- -------- ---------- ---------- ---------- Total interest sensitive assets............... $2,938,827 $1,193,352 $828,647 $521,343 $354,518 $2,169,876 $8,006,563 $8,044,745 ---------- ---------- -------- -------- -------- ---------- ---------- ---------- Interest sensitive liabilities: Deposits: Savings...................................... $ 478,457 $ 535,031 $535,031 $299,939 $149,969 $ 449,908 $2,448,335 $2,448,335 Time......................................... 1,983,952 268,440 79,002 51,257 23,646 6,321 2,412,618 2,437,233 Short-term borrowings......................... 304,262 -- -- -- -- -- 304,262 304,262 Long-term debt................................ 167,039 127,030 142,033 53,012 154,036 332,578 975,728 971,567 ---------- ---------- -------- -------- -------- ---------- ---------- ---------- Total interest sensitive liabilities.......... $2,933,710 $ 930,501 $756,066 $404,208 $327,651 $ 788,807 $6,140,943 $6,161,397 ---------- ---------- -------- -------- -------- ---------- ---------- ---------- Interest sensitivity gap...................... $ 5,117 $ 262,851 $ 72,581 $117,135 $ 26,867 $1,381,069 $1,865,620 $1,883,348 ---------- ---------- -------- -------- -------- ---------- ---------- ---------- Ratio of interest sensitive assets to interest sensitive liabilities........................ 1.00:1 1.28:1 1.10:1 1.29:1 1.08:1 2.75:1 1.30:1 1.31:1 ---------- ---------- -------- -------- -------- ---------- ---------- ---------- </TABLE> Expected maturities are contractual maturities adjusted for all payments of principal. Valley uses certain assumptions to estimate fair values. For investment securities and loans, expected maturities are based upon contractual maturity, projected repayments and prepayments of principal. The prepayment experience reflected herein is based on historical experience. The actual maturities of these instruments could vary substantially if future prepayments differ from historical experience. For non maturity deposit liabilities, in accordance with standard industry practice and Valley's own historical experience, "decay factors" were used to estimate deposit runoff. The total positive gap repricing within 1 year as of December 31, 2001 was $5.1 million, representing a ratio of interest sensitive assets to interest sensitive liabilities of 1.00:1. Management does not view this amount as presenting an unusually high risk potential, although no assurances can be given that Valley is not at risk from interest rate increases or decreases.* 20
Liquidity Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost. On the asset side, liquid funds are maintained in the form of cash and due from banks, federal funds sold, investments securities held to maturity maturing within one year, securities available for sale and loans held for sale. Liquid assets amounted to $2.5 billion and $2.0 billion at December 31, 2001 and 2000, respectively. This represents 31.7 percent and 26.7 percent of earning assets, and 29.6 percent and 25.5 percent of total assets at December 31, 2001 and 2000, respectively. On the liability side, the primary source of funds available to meet liquidity needs is Valley's core deposit base, which generally excludes certificates of deposit over $100 thousand. Core deposits averaged approximately $5.1 billion for the year ended December 31, 2001 and $5.0 billion for the year ended December 31, 2000, representing 66.8 percent and 68.5 percent of average earning assets. Demand deposits have continued to increase, while savings deposits have shown recent increases as a result of low interest rates on other deposits and the effects of a declining equity market. The level of time deposits is affected by interest rates offered, which is often influenced by Valley's need for funds. During 2001, Valley utilized the brokered certificate of deposit ("CD") market in an attempt to attract longer term deposits and will continue to utilize this source as needed. At December 31, 2001, brokered CD's totaled $68.9 million. Short-term and long-term borrowings through Federal funds lines, repurchase agreements, Federal Home Loan Bank ("FHLB") advances and large dollar certificates of deposit, generally those over $100 thousand, are used as funding sources. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. In 2001, proceeds from the sales of investment securities available for sale were $357.1 million, and proceeds of $1.2 billion were generated from investment maturities. Purchases of investment securities in 2001 were $2.0 billion. Short-term borrowings and certificates of deposit over $100 thousand amounted to $1.3 billion and $1.4 billion, on average, for the years ended December 31, 2001 and 2000, respectively. During 2001, a substantial amount of loan growth was funded from a combination of deposit growth, normal loan payments and prepayments, and borrowings. Valley anticipates using funds from all of the above sources to fund loan growth during 2002.* The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31, 2001. These certificates of deposit are generated primarily from core deposit customers. <TABLE> <CAPTION> (in thousands) <S> <C> Less than three months. $ 888,580 Three to six months.... 76,894 Six to twelve months... 122,541 More than twelve months 11,281 ---------- $1,099,296 ========== </TABLE> Valley's recurring cash requirements consist primarily of dividends to shareholders and distributions on trust preferred securities. This cash need is routinely satisfied by dividends collected from its subsidiary bank along with cash and investments owned. Projected cash flows from this source are expected to be adequate to pay dividends and distributions on trust preferred securities, given the current capital levels and current profitable operations of its subsidiary.* In addition, Valley has, as approved by the Board of Directors, repurchased shares of its outstanding common stock. The cash required for these purchases of shares has been met by using its own funds, dividends received from its subsidiary bank as well as borrowed funds and the proceeds from the issuance of $200 million capital securities. At December 31, 2001 Valley maintained a floating rate line with a third party in the amount of $35 million of which $4.0 million was outstanding. This line is available for general corporate purposes and expires June 14, 2002. Borrowings under this facility are collateralized by investment securities of no less than 120 percent of the loan balance. In addition, Valley has available a 120 day unsecured line in the amount of $20 million which matures January 25, 2002, of which none was drawn as of December 31, 2001. 21
Investment Securities The amortized cost of securities held to maturity at December 31, 2001, 2000 and 1999 were as follows: INVESTMENT SECURITIES HELD TO MATURITY <TABLE> <CAPTION> 2001 2000 1999 -------- -------- -------- (in thousands) <S> <C> <C> <C> Obligations of states and political subdivisions $ 99,757 $ 78,062 $ 88,220 Mortgage-backed securities...................... 25,912 209,836 184,746 Other debt securities........................... 324,918 249,414 250,286 -------- -------- -------- Total debt securities........................ 450,587 537,312 523,252 FRB & FHLB stock................................ 52,474 40,138 37,421 -------- -------- -------- Total investment securities held to maturity. $503,061 $577,450 $560,673 ======== ======== ======== </TABLE> The fair value of securities available for sale at December 31, 2001, 2000 and 1999 were as follows: INVESTMENT SECURITIES AVAILABLE FOR SALE <TABLE> <CAPTION> 2001 2000 1999 ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> U.S. Treasury securities and other government agencies and corporations....................... $ 195,608 $ 150,621 $ 117,211 Obligations of states and political subdivisions.. 121,242 143,944 160,280 Mortgage-backed securities........................ 1,812,888 1,285,395 1,281,739 Other debt securities............................. -- -- 39,885 ---------- ---------- ---------- Total debt securities.......................... 2,129,738 1,579,960 1,599,115 Equity securities................................. 41,957 46,126 45,052 ---------- ---------- ---------- Total investment securities available for sale. $2,171,695 $1,626,086 $1,644,167 ========== ========== ========== </TABLE> 22
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES HELD TO MATURITY AT DECEMBER 31, 2001 <TABLE> <CAPTION> Obligations of Mortgage- States and Political Backed Other Debt Subdivisions Securities(5) Securities Total(4) ------------------- -------------- -------------- -------------- Amortized Yield Amortized Yield Amortized Yield Amortized Yield Cost(1) (2)(3) Cost(1) (2) Cost(1) (2) Cost(1) (2) --------- ------ --------- ----- --------- ----- --------- ----- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> 0-1 years........... $ 4,516 6.62% $ -- -- % $ 525 3.75% $ 5,041 6.32% 1-5 years........... 16,139 7.69 8,004 7.35 10,611 7.65 34,754 7.60 5-10 years.......... 42,357 7.48 17,568 7.34 15,719 7.73 75,644 7.50 Over 10 years....... 36,745 6.78 340 7.98 298,063 7.32 335,148 7.26 ------- ---- ------- ---- -------- ---- -------- ---- Total securities. $99,757 7.22% $25,912 7.35% $324,918 7.34% $450,587 7.31% ======= ==== ======= ==== ======== ==== ======== ==== </TABLE> MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 2001 <TABLE> <CAPTION> US Treasury Securities and Other Government Obligations of Agencies and States and Political Mortgage- Corporations Subdivisions Backed Securities(5) Total(4) --------------- ------------------- ------------------- --------------- Amortized Yield Amortized Yield Amortized Yield Amortized Yield Cost(1) (2) Cost(1) (2)(3) Cost(1) (2) Cost(1) (2) --------- ----- --------- ------ ---------- ----- ---------- ----- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> 0-1 years........... $187,907 1.67% $ 13,469 6.80% $ 182,664 4.94% $ 384,040 3.41% 1-5 years........... 4,542 5.39 30,505 6.00 29,942 8.51 64,989 7.11 5-10 years.......... -- -- 67,890 7.22 196,532 6.36 264,422 6.58 Over 10 years....... 3,105 6.78 7,890 8.49 1,381,848 6.20 1,392,843 6.21 -------- ---- -------- ---- ---------- ---- ---------- ---- Total securities. $195,554 1.84% $119,754 6.95% $1,790,986 6.13% $2,106,294 5.77% ======== ==== ======== ==== ========== ==== ========== ==== </TABLE> - -------- (1) Amortized costs are stated at cost less principal reductions, if any, and adjusted for accretion of discounts and amortization of premiums. (2) Average yields are calculated on a yield-to-maturity basis. (3) Average yields on obligations of states and political subdivisions are generally tax-exempt and calculated on a tax-equivalent basis using a statutory federal income tax rate of 35 percent. (4) Excludes equity securities which have indefinite maturities. (5) Mortgage-backed securities are shown using stated final maturity. 23
Valley's investment portfolio is comprised of U.S. government and federal agency securities, tax-exempt issues of states and political subdivisions, mortgage-backed securities, equity and other securities. There were no securities in the name of any one issuer exceeding 10 percent of shareholders' equity, except for securities issued by the United States and its political subdivisions and agencies. 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, 2001, Valley had $25.9 million of mortgaged-backed securities classified as held to maturity and $1.8 billion of mortgage-backed securities classified as available for sale. Substantially all the mortgage-backed securities held by Valley are issued or backed by federal agencies. The mortgage-backed securities portfolio is a source of significant liquidity to Valley through the monthly cash flow of principal and interest. Mortgage-backed securities, like all securities, are sensitive to changes in the interest rate environment, increasing and decreasing in value as interest rates fall and rise. As interest rates fall, the increase in prepayments can reduce the yield on the mortgage-backed securities portfolio, and reinvestment of the proceeds will be at lower yields. Conversely, rising interest rates will reduce cash flows from prepayments and extend anticipated duration of these assets. Valley monitors the changes in interest rates, cash flows and duration, to determine its investment policies. Included in the mortgage-backed securities portfolio at December 31, 2001 were $495.8 million of collateralized mortgage obligations ("CMO's") of which $143.9 million were privately issued. CMO's had a yield of 5.65 percent and an unrealized gain of $791 thousand at December 31, 2001. Substantially all of the CMO portfolio was classified as available for sale. As of December 31, 2001, Valley had $2.2 billion of securities available for sale, an increase of $546 thousand from December 31, 2000. These securities are recorded at their fair value. As of December 31, 2001, the investment securities available for sale had an unrealized gain of $20.8 million, net of deferred taxes, compared to an unrealized loss of $1.7 million, net of deferred taxes, at December 31, 2000. This change was primarily due to an increase in prices resulting from a decreasing interest rate environment for these investments. These securities are not considered trading account securities, which may be sold on a continuous basis, but rather are securities which may be sold to meet the various liquidity and interest rate requirements of Valley. In 2001, in connection with the Merchants acquisition, Valley reassessed the classification of securities held in the Merchants portfolio and transferred $162.4 million of securities from held to maturity to available for sale and transferred $50.0 million of securities from available for sale to held to maturity to conform with Valley's investment objectives. In 1999, in connection with the Ramapo acquisition, Valley reassessed the classification of securities held in the Ramapo portfolio and transferred $42.4 million of securities held to maturity to securities available for sale to conform with Valley's investment objectives. 24
Loan Portfolio As of December 31, 2001, total loans were $5.3 billion, compared to $5.2 billion at December 31, 2000, an increase of 2.7 percent. The following table reflects the composition of the loan portfolio for the five years ended December 31, 2001. LOAN PORTFOLIO <TABLE> <CAPTION> 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> Commercial.................. $1,080,852 $1,026,793 $ 929,673 $ 817,213 $ 781,914 ---------- ---------- ---------- ---------- ---------- Total commercial loans... 1,080,852 1,026,793 929,673 817,213 781,914 ---------- ---------- ---------- ---------- ---------- Construction................ 206,789 160,932 123,531 112,819 94,162 Residential mortgage........ 1,323,877 1,301,851 1,250,551 1,055,232 1,056,286 Commercial mortgage......... 1,365,344 1,258,549 1,178,734 1,069,727 970,775 ---------- ---------- ---------- ---------- ---------- Total mortgage loans..... 2,896,010 2,721,332 2,552,816 2,237,778 2,121,223 ---------- ---------- ---------- ---------- ---------- Home equity................. 398,102 306,038 276,261 226,231 225,899 Credit card................. 12,740 83,894 92,097 108,180 146,151 Automobile.................. 842,247 976,177 1,054,542 1,033,938 931,579 Other consumer.............. 101,856 74,876 86,460 86,072 97,582 ---------- ---------- ---------- ---------- ---------- Total consumer loans..... 1,354,945 1,440,985 1,509,360 1,454,421 1,401,211 ---------- ---------- ---------- ---------- ---------- Total loans.............. $5,331,807 $5,189,110 $4,991,849 $4,509,412 $4,304,348 ========== ========== ========== ========== ========== As a percent of total loans: Commercial loans............ 20.3% 19.8% 18.6% 18.1% 18.2% Mortgage loans.............. 54.3 52.4 51.2 49.6 49.3 Consumer loans.............. 25.4 27.8 30.2 32.3 32.5 --- --- --- --- --- Total.................... 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== </TABLE> The majority of the increase in loans for 2001 was divided among commercial loans, commercial mortgage loans and home equity loans. It is not known if the trend of increased lending in these loan types will continue.* The commercial loan and commercial mortgage loan portfolio has continued its steady increase. Valley targets small-to-medium size businesses within the market area of the bank for this type of lending. The increase in the commercial mortgage loan portfolio resulted primarily from new growth opportunities in the Manhattan market area, resulting from the Merchants acquisition. The home equity loan portfolio increased $92.1 million or 30.1 percent during 2001 resulting primarily from the decrease in interest rates and increased marketing efforts by Valley of its customer base. The decrease in credit card loans resulted from the sale of the $66.6 million cobranded ShopRite MasterCard credit card portfolio in January 2001. Valley will continue to maintain its own credit card portfolio. For many years, VNB had maintained an automobile loan program with State Farm Insurance Company. While the loans generated by this program have been important to Valley, recent changes in market conditions for automobile lending have reduced the volume and profitablility of the program relative to other loans and investments available to the bank. Combined with the expansion of State Farm's banking activities, Valley has decided to phase out the origination of loans under this program during 2001, resulting in a decrease in outstanding automobile loans. Valley has increased its automobile lending through other sources including originations through the American Automobile Association, increased dealer activity and other insurance companies. 25
All loans originated by Valley through the State Farm program will remain under the bank's ownership, and Valley expects the portfolio to amortize in its normal course. As of December 31, 2001, this portfolio represented 6.3 percent of Valley's earning assets and the amount of the portfolio had decreased by 24.6 percent during the last twelve-month period. The gross yield of the portfolio for the year 2001 was 8.6 percent, prior to marketing payments to an affiliate of the insurance company, loan losses and all costs associated with originating and maintaining the portfolio. Management anticipates that the phasing out of this program should not have a material adverse effect on future net income.* VNB has a finance company in Toronto, Canada which makes auto loans referred through State Farm Insurance Company. This Canadian subsidiary had interest income of approximately $2.8 million for the year ended December 31, 2001, and auto loans of $28.9 million at December 31, 2001. These loans are partially funded by a capital investment by VNB of $7.4 million, with additional funding requirements satisfied by lines of credit in Canadian funds. Any foreign exchange risk is limited to the capital investment by VNB. Valley is reviewing its options with respect to this company in light of its phasing out of the State Farm program. Much of Valley's lending is in northern New Jersey and Manhattan, with the exception of the out-of-state auto loan portfolio. However, efforts are made to maintain a diversified portfolio as to type of borrower and loan to guard against a downward turn in any one economic sector.* These loans are diversified as to type of borrower and loan. As a result of Valley's lending, this could present a geographical and credit risk if there was a significant broad based downturn of the economy within the region. The following table reflects the contractual maturity distribution of the commercial and construction loan portfolios as of December 31, 2001: <TABLE> <CAPTION> 1 Yr. or less Over 1 to 5 Yrs. Over 5 Yrs. Total ------------- ---------------- ----------- ---------- (in thousands) <S> <C> <C> <C> <C> Commercial--fixed rate....... $185,760 $ 51,369 $16,223 $ 253,352 Commercial--adjustable rate.. 606,731 167,782 52,987 827,500 Construction--fixed rate..... 19,961 8,745 -- 28,706 Construction--adjustable rate 82,240 95,843 -- 178,083 -------- -------- ------- ---------- $894,692 $323,739 $69,210 $1,287,641 ======== ======== ======= ========== </TABLE> Prior to maturity of each loan with a balloon payment and if the borrower requests an extension, Valley generally conducts a review which normally includes an analysis of the borrower's financial condition and, if applicable, a review of the adequacy of collateral. A rollover of the loan at maturity may require a principal paydown. VNB is a preferred U. S. Small Business Administration ("SBA") lender with authority to make loans without the prior approval of the SBA. VNB currently has approval to make SBA loans in New Jersey, Pennsylvania, New York, Delaware, Maryland, North and South Carolina, Virginia, Connecticut and the District of Columbia. Between 75 percent and 80 percent of each loan is guaranteed by the SBA and is generally sold into the secondary market, with the balance retained in VNB's portfolio. VNB intends to continue expanding this area of lending because it provides a good source of fee income and loans with floating interest rates tied to the prime lending rate.* During 2001 and 2000, VNB originated approximately $31.1 million and $30.6 million of SBA loans, respectively, and sold $20.9 million and $21.9 million, respectively. At December 31, 2001 and 2000, $47.5 million and $42.6 million, respectively, of SBA loans were held in VNB's portfolio and VNB serviced for others approximately $91.8 million and $92.2 million, respectively, of SBA loans. Non-performing Assets Non-performing assets include non-accrual loans and other real estate owned ("OREO"). Loans are generally placed on a non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently 26
collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO is reported at the lower of cost or fair value at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter. Non-performing assets totaled $18.8 million at December 31, 2001, compared with $4.0 million at December 31, 2000, an increase of $14.8 million. Non-performing assets at December 31, 2001 and 2000, respectively, amounted to 0.35 percent and 0.08 percent of loans and OREO. Non-performing assets have increased during the current economic downturn, mostly from commercial lines of credit, of which approximately half are from the Merchants portfolio of loans. The state of the economy may result in higher non-accrual loans.* This is contrary to the previous four years during which non-performing assets steadily declined. Valley cannot predict whether this increase will continue.* Loans 90 days or more past due and still accruing which were not included in the non-performing category totaled $10.5 million at December 31, 2001, compared to $15.0 million at December 31, 2000. These loans are primarily residential mortgage loans, commercial mortgage loans and commercial loans which are generally well-secured and in the process of collection. Also included are matured commercial mortgage loans in the process of being renewed, which totaled $3.8 million and $2.8 million at December 31, 2001 and 2000, respectively. Loans 90 days or more past due and still accruing have remained at relatively stable levels during the past three years. It is not known if this trend will continue.* Total loans past due in excess of 30 days were 1.30 percent of all loans at December 31, 2001 compared to 1.58 percent at December 31, 2000. The allowance for loan losses as a percent of loans has been in a declining trend since 1997 and increased slightly in 2001. Valley provides additions to the allowance generally based upon net charge-offs and changes in the composition of the loan portfolio. During the fourth quarter of 2001, Valley increased the provision to $8.1 million as a result of $8.9 million in net charge-offs incurred during the quarter, an increase in non-performing assets and the current economic environment. The provision charged to operations was $15.7 million in 2001 compared to $10.8 million in 2000, and net charge-offs were $13.9 million and $13.0 million during those same periods. 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 <TABLE> <CAPTION> 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (in thousands) <S> <C> <C> <C> <C> <C> Loans past due in excess of 90 days and still accruing...... $10,456 $14,952 $12,194 $ 7,769 $16,667 ------- ------- ------- ------- ------- Non-accrual loans........................................... $18,483 $ 3,883 $ 3,910 $ 7,653 $10,539 Other real estate owned..................................... 329 129 2,256 4,261 4,450 ------- ------- ------- ------- ------- Total non-performing assets.............................. $18,812 $ 4,012 $ 6,166 $11,914 $14,989 ------- ------- ------- ------- ------- Troubled debt restructured loans............................ $ 891 $ 949 $ 4,852 $ 6,387 $ 6,723 ------- ------- ------- ------- ------- Non-performing loans as a % of loans........................ 0.35% 0.07% 0.08% 0.17% 0.24% ------- ------- ------- ------- ------- Non-performing assets as a % of loans plus other real estate owned..................................................... 0.35% 0.08% 0.12% 0.26% 0.35% ------- ------- ------- ------- ------- Allowance as a % of loans................................... 1.20% 1.19% 1.29% 1.39% 1.38% ------- ------- ------- ------- ------- </TABLE> During 2001, lost interest on non-accrual loans amounted to $463 thousand, compared with recovered interest of $126 thousand in 2000. 27
Although substantially all risk elements at December 31, 2001 have been disclosed in the categories presented above, management believes that for a variety of reasons, including economic conditions, certain borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial loans. As part of the analysis of the loan portfolio by management, it has been determined that there are approximately $11.9 million in potential problem loans at December 31, 2001, which have not been classified as non-accrual, past due or restructured.* Potential problem loans are defined as performing loans for which management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in a non-performing loan. Of these potential problem loans, $4.9 million is considered at risk after collateral values and guarantees are taken into consideration.* There can be no assurance that Valley has identified all of its potential problem loans. At December 31, 2000, Valley had identified approximately $29.4 million of potential problem loans which were not classified as non-accrual, past due or restructured. Asset Quality and Risk Elements Lending is one of the most important functions performed by Valley and, by its very nature, lending is also the most complicated, risky and profitable part of Valley's business. For commercial loans, construction loans and commercial mortgage loans, a separate credit department is responsible for risk assessment, credit file maintenance and periodically evaluating overall creditworthiness of a borrower. Additionally, efforts are made to limit concentrations of credit so as to minimize the impact of a downturn in any one economic sector.* These loans are diversified as to type of borrower and loan. However, most of these loans are in northern New Jersey and Manhattan, presenting a geographical and credit risk if there was a significant downturn of the economy within the region. Residential mortgage loans are secured primarily by 1-4 family properties located mainly within northern New Jersey. Conservative underwriting policies are adhered to and loan to value ratios are generally less than 80 percent. Consumer loans are comprised of home equity loans, credit card loans and automobile loans. Home equity and automobile loans are secured loans and are made based on an evaluation of the collateral and the borrower's creditworthiness. The majority of automobile loans have been originated through a program with State Farm Insurance Company, whose customer base generally has a good credit profile and generally have resulted in delinquencies and charge-offs equal to that typically experienced from traditional sources. These automobile loans are from 12 states, including New Jersey, as well as Canada, and management believes they generally present no more risk than those made within New Jersey.* All loans are subject to Valley's underwriting criteria. Therefore, each loan or group of loans presents a geographical risk and credit risk based upon the economy of the region. As discussed earlier, Valley phased out the origination of loans under this program during 2001. Management realizes that some degree of risk must be expected in the normal course of lending activities. Allowances are maintained to absorb such loan and off-balance sheet credit losses inherent in the portfolio. The allowance for loan losses and related provision are an expression of management's evaluation of the credit portfolio and economic climate. 28
The following table sets forth the relationship among loans, loans charged-off and loan recoveries, the provision for loan losses and the allowance for loan losses for the past five years: <TABLE> <CAPTION> Years ended December 31, ---------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> Average loans outstanding.................... $5,199,999 $5,065,852 $4,682,882 $4,359,876 $4,142,390 ========== ========== ========== ========== ========== Beginning balance-- Allowance for loan losses................... $ 61,995 $ 64,228 $ 62,606 $ 59,337 $ 58,543 ---------- ---------- ---------- ---------- ---------- Loans charged-off: Commercial.................................. 10,841 7,162 1,560 424 6,110 Construction................................ -- -- -- -- -- Mortgage--Commercial........................ 710 490 983 2,166 1,440 Mortgage--Residential....................... 39 249 761 1,274 522 Consumer.................................... 6,414 8,992 10,051 11,331 8,403 ---------- ---------- ---------- ---------- ---------- 18,004 16,893 13,355 15,195 16,475 ---------- ---------- ---------- ---------- ---------- Charged-off loans recovered: Commercial.................................. 1,465 947 1,148 1,073 876 Construction................................ -- -- 218 222 89 Mortgage--Commercial........................ 184 372 268 1,074 227 Mortgage--Residential....................... 42 49 133 329 167 Consumer.................................... 2,415 2,537 2,175 1,696 1,080 ---------- ---------- ---------- ---------- ---------- 4,106 3,905 3,942 4,394 2,439 ---------- ---------- ---------- ---------- ---------- Net charge-offs.............................. 13,898 12,988 9,413 10,801 14,036 Provision charged to operations.............. 15,706 10,755 11,035 14,070 14,830 ---------- ---------- ---------- ---------- ---------- Ending balance--Allowance for loan losses.... $ 63,803 $ 61,995 $ 64,228 $ 62,606 $ 59,337 ========== ========== ========== ========== ========== Ratio of net charge-offs during the period to average loans outstanding during the period................................. 0.27% 0.26% 0.20% 0.25% 0.34% </TABLE> The allowance for loan losses is maintained at a level estimated to absorb probable loan losses of the loan portfolio.* The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. VNB's methodology for evaluating the appropriateness of the allowance consists of several significant elements, which include the allocated allowance, specific allowances for identified problem loans, portfolio segments and the unallocated allowance. The allowance also incorporates the results of measuring impaired loans as called for in Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." VNB's allocated allowance is calculated by applying loss factors to outstanding loans. The formula is based on the internal risk grade of loans or pools of loans. Any change in the risk grade of performing and/or non-performing loans affects the amount of the related allowance. Loss factors are based on VNB's historical loss experience and may be adjusted for significant circumstances that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Management has established an unallocated portion of the allowance to cover any losses within a given loan category which have not been otherwise reviewed or measured on an individual basis. Such unallocated allowance includes management's evaluation of local and national economic and business conditions, portfolio concentrations, information risk, operational risk, credit quality and delinquency trends. The unallocated portion of the allowance reflects management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of expected credit losses. 29
During 2001, continued emphasis was placed on the current economic climate and the condition of the real estate market in the northern New Jersey area and Manhattan. Management addressed these economic conditions and applied that information to changes in the composition of the loan portfolio and net charge-off levels. The provision charged to operations was $15.7 million in 2001 compared to $10.8 million in 2000. The provision for loan losses was affected in 2001 as a result of Valley's increase in non-performing loans during the year, increase in net charge-offs, loan growth in higher risk loan categories and current economic conditions. The sale of the ShopRite credit card portfolio in 2001 eliminated the need for the provision the bank was maintaining for that portfolio. The following table summarizes the allocation of the allowance for loan losses to specific loan categories for the past five years: <TABLE> <CAPTION> Years ended December 31, -------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------ ------------------ ------------------ ------------------ ------------------ (in thousands) Percent Percent Percent Percent Percent of Loan of Loan of Loan of Loan of Loan Category Category Category Category Category Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Loan category: Commercial.. $26,180 20.3% $24,234 19.8% $24,609 18.6% $22,456 18.1% $19,692 18.2% Mortgage.... 14,148 54.3 11,827 52.4 13,282 51.2 14,363 49.6 16,861 49.3 Consumer.... 9,248 25.4 12,559 27.8 12,813 30.2 12,417 32.3 11,625 32.5 Unallocated. 14,227 N/A 13,375 N/A 13,524 N/A 13,370 N/A 11,159 N/A ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- $63,803 100.0% $61,995 100.0% $64,228 100.0% $62,606 100.0% $59,337 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== </TABLE> 30
At December 31, 2001 the allowance for loan losses amounted to $63.8 million or 1.20 percent of loans, as compared to $62.0 million or 1.19 percent at December 31, 2000. The allowance was adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $13.9 million for the year ended December 31, 2001 compared with $13.0 million for the year ended December 31, 2000. The ratio of net charge-offs to average loans increased to 0.27 percent for 2001 compared with 0.26 percent for 2000. Non-accrual loans increased in 2001 in comparison to 2000. Loans past due 90 days and still accruing at December 31, 2001 were lower than at December 31, 2000. The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific and general allocations to the allowance for loan losses totaled $11.0 million and $2.5 million, respectively, at December 31, 2001 and $3.4 million and $949 thousand, respectively, at December 31, 2000. The average balance of impaired loans during 2001 and 2000 was approximately $6.1 million and $11.8 million, respectively. The amount of cash basis interest income that was recognized on impaired loans during 2001, 2000 and 1999 was $828 thousand, $160 thousand and $616 thousand, respectively. Capital Adequacy A significant measure of the strength of a financial institution is its shareholders' equity. At December 31, 2001, shareholders' equity totaled $678.4 million or 7.9 percent of total assets, compared with $656.0 million or 8.3 percent at year-end 2000. On August 21, 2001 Valley's Board of Directors authorized the repurchase of up to 8,000,000 shares of the Company's outstanding common stock. Purchases may be made from time to time in the open market or in privately negotiated transactions generally not exceeding prevailing market prices. Reacquired shares are held in treasury and are expected to be used for general corporate purposes. As of December 31, 2001 Valley had repurchased 2.2 million shares of its common stock. On May 23, 2000 Valley's Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company's outstanding common stock. As of September 19, 2000 Valley had repurchased 571,070 shares of its common stock under this repurchase program, which was rescinded in connection with the signing of the definitive merger agreement with Merchants. This is in addition to the 3,000,000 shares purchased pursuant to an authorization by the Board of Directors in December 1999, the majority of which were used for the stock dividend issued on May 16, 2000. On February 12, 2000, the Board of Directors unanimously approved an amendment to Valley's Certificate of Incorporation to authorize 30,000,000 shares of a new class of "blank check" preferred stock. The primary purpose of the preferred stock is to maximize Valley's ability to expand its capital base. The amendment was approved by the Valley shareholders on April 6, 2000. At December 31, 2001 and 2000, there were no shares of preferred stock issued. Included in shareholders' equity as components of accumulated other comprehensive income at December 31, 2001 was a $20.7 million unrealized gain on investment securities available for sale, net of tax, and a currency translation adjustment loss of $1.1 million related to the Canadian subsidiary of VNB, compared to an unrealized loss of $1.7 million on investment securities available for sale, net of tax and a $678 thousand currency translation adjustment loss at December 31, 2000. Risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common shareholders' equity and trust preferred securities, less disallowed intangibles, and adjusted to exclude unrealized gains and losses, net of tax. Total risk-based capital consists of Tier 1 capital and the allowance for loan losses up to 1.25 percent of risk-adjusted assets. Risk-adjusted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. In November 2001, Valley sold $200.0 million of trust preferred securities, which qualify as Tier 1 capital, within regulatory limitations. Including these securities, Valley's capital position at December 31, 2001 under 31
risk-based capital guidelines was $847.7 million, or 14.1 percent of risk-weighted assets, for Tier 1 capital and $911.5 million, or 15.2 percent, for Total risk-based capital. The comparable ratios at December 31, 2000 were 11.3 percent for Tier 1 capital and 12.3 percent for Total risk-based capital. At December 31, 2001 and 2000, Valley was in compliance with the leverage requirement having Tier 1 leverage ratios of 10.3 percent and 8.5 percent, respectively. Valley's ratios at December 31, 2001 were all above the "well capitalized" requirements, which require Tier I capital to risk-adjusted assets of at least 6 percent, Total risk-based capital to risk-adjusted assets of 10 percent and a minimum leverage ratio of 5 percent. Book value per share amounted to $8.87 at December 31, 2001 compared with $8.41 per share at December 31, 2000. The primary source of capital growth is through retention of earnings. Valley's rate of earnings retention, derived by dividing undistributed earnings by net income, was 43.60 percent at December 31, 2001, compared to 43.41 percent at December 31, 2000. Cash dividends declared amounted to $1.04 per share, equivalent to a dividend payout ratio of 56.40 percent for 2001, compared to 56.59 percent for the year 2000. The current quarterly dividend rate of $0.265 per share provides for an annual rate of $1.06 per share. Valley's Board of Directors continues to believe that cash dividends are an important component of shareholder value and that, at its current level of performance and capital, Valley expects to continue its current dividend policy of a quarterly distribution of earnings to its shareholders.* Results of Operations--2000 Compared to 1999 Valley reported net income for 2000 of $126.7 million or $1.60 earnings per diluted share, compared to the $125.3 million, or $1.51 earnings per diluted share earned in 1999. Included in net income for 1999 is a merger-related charge of $2.2 million, net of tax, or $0.03 per diluted share. Net interest income on a tax equivalent basis increased $6.4 million, or 2.0 percent, to $322.4 million in 2000. The increase in 2000 was due primarily to a $288.3 million increase in the average balance of interest bearing assets offset slightly by a $258.3 million increase in the average balance of interest bearing liabilities. Average rates on interest earning assets and interest bearing liabilities increased 40 basis points and 59 basis points, respectively. Non-interest income, excluding security gains, amounted to $58.7 million in 2000, compared with $51.2 million in 1999. Income from trust and investment services increased $1.1 million or 47.6 percent due primarily to additional fee income contributed by the acquisition of two investment management companies during July 1999 and July 2000. Fees from loan servicing, which includes both servicing fees from residential mortgage loans and SBA loans, increased $2.5 million or 30.0 percent. This increase can be attributed to the acquisition of several residential mortgage portfolios, and the origination of both SBA and residential mortgage loans by VNB which were sold to third-party investors with servicing retained. Other non-interest income increased $2.1 million or 15.7 percent, attributed primarily to the gain on the sale of two bank buildings owned by VNB. Non-interest expense totaled $171.1 million in 2000, an increase of $6.4 million. Non-interest expense for 1999 includes a $3.0 million merger-related charge from the acquisition of Ramapo. Salary and benefit expense for 2000 increased $6.2 million or 7.0 percent resulting from the acquisition of three companies, increases in sales, related incentives, and a tight labor market. Both net occupancy expense and furniture and equipment expense increased in 2000 which is attributable to an overall increase in operating bank facilities. Amortization of intangible assets increased $2.4 million due to increased amortization of residential mortgage servicing rights. Income tax expense as a percentage of pre-tax income was 34.3 percent for the year ended December 31, 2000 compared to 33.0 percent in 1999. 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." 32
Item 8. Financial Statements and Supplementary Data CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION <TABLE> <CAPTION> December 31, ------------------------ 2001 2000 ---------- ---------- (in thousands, except fo share data) <S> <C> <C> Assets Cash and due from banks............................................................ $ 311,850 $ 239,105 Federal funds sold................................................................. -- 85,000 Investment securities held to maturity, fair value of $476,872 and $543,034 in 2001 and 2000, respectively (Notes 3 and 11).......................................... 503,061 577,450 Investment securities available for sale (Notes 4 and 11).......................... 2,171,695 1,626,086 Loans (Notes 5 and 11)............................................................. 5,275,582 5,171,183 Loans held for sale (Note 5)....................................................... 56,225 17,927 ---------- ---------- Total loans........................................................................ 5,331,807 5,189,110 Less: Allowance for loan losses (Note 6)........................................ (63,803) (61,995) ---------- ---------- Net loans....................................................................... 5,268,004 5,127,115 ---------- ---------- Premises and equipment, net (Note 8)............................................... 94,178 91,215 Accrued interest receivable........................................................ 42,184 49,870 Bank owned life insurance (Note 13)................................................ 102,120 -- Other assets (Notes 7, 9 and 14)................................................... 90,673 105,419 ---------- ---------- Total assets............................................................. $8,583,765 $7,901,260 ========== ========== Liabilities Deposits: Non-interest bearing............................................................ $1,446,021 $1,344,802 Interest bearing:............................................................... Savings..................................................................... 2,448,335 2,287,793 Time (Note 10).............................................................. 2,412,618 2,504,233 ---------- ---------- Total deposits........................................................... 6,306,974 6,136,828 ---------- ---------- Short-term borrowings (Note 11).................................................... 304,262 426,014 Long-term debt (Note 11)........................................................... 975,728 591,808 Accrued expenses and other liabilities (Notes 13 and 14)........................... 118,426 90,628 ---------- ---------- Total liabilities........................................................ 7,705,390 7,245,278 ---------- ---------- Company-obligated mandatorily redeemable preferred capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company (Note 12)........................................................................ 200,000 -- Commitments and contingencies (Note 15) Shareholders' Equity (Notes 2, 13, 14 and 16) Preferred stock, no par value, authorized 30,000,000 shares; none issued........... -- -- Common stock, no par value, authorized 113,953,711 shares; issued 78,202,958 shares in 2001 and 74,792,815 shares in 2000..................................... 33,310 32,015 Surplus............................................................................ 406,608 321,970 Retained earnings.................................................................. 270,730 317,855 Unallocated common stock held by employee benefit plan............................. (602) (775) Accumulated other comprehensive income (loss)...................................... 19,638 (2,307) ---------- ---------- 729,684 668,758 Treasury stock, at cost (1,735,297 shares in 2001 and 502,471 shares in 2000)...... (51,309) (12,776) ---------- ---------- Total shareholders' equity............................................... 678,375 655,982 ---------- ---------- Total liabilities and shareholders' equity............................... $8,583,765 $7,901,260 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 33
CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Years ended December 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- (in thousands, except for share data) <S> <C> <C> <C> Interest Income Interest and fees on loans (Note 5)............................ $ 398,893 $ 419,952 $ 374,321 Interest and dividends on investment securities: Taxable..................................................... 135,354 126,988 122,523 Tax-exempt.................................................. 10,466 11,602 11,922 Dividends................................................... 4,157 5,412 4,351 Interest on federal funds sold and other short-term investments 4,616 4,252 4,701 ----------- ----------- ----------- Total interest income....................................... 553,486 568,206 517,818 ----------- ----------- ----------- Interest Expense Interest on deposits: Savings deposits............................................ 45,742 57,470 49,170 Time deposits (Note 10)..................................... 112,417 133,156 120,531 Interest on short-term borrowings (Note 11).................... 11,424 26,598 16,394 Interest on long-term debt (Note 11)........................... 49,070 35,424 22,697 ----------- ----------- ----------- Total interest expense...................................... 218,653 252,648 208,792 ----------- ----------- ----------- Net Interest Income............................................ 334,833 315,558 309,026 Provision for loan losses (Note 6)............................. 15,706 10,755 11,035 ----------- ----------- ----------- Net Interest Income after Provision for Loan Losses............ 319,127 304,803 297,991 ----------- ----------- ----------- Non-Interest Income Trust and investment services.................................. 4,404 3,563 2,414 Service charges on deposit accounts............................ 19,171 18,180 15,864 Gains on securities transactions, net (Note 4)................. 3,564 355 2,625 Fees from loan servicing (Note 7).............................. 10,818 10,902 8,387 Credit card fee income......................................... 3,535 8,403 8,655 Gains on sales of loans, net................................... 10,601 2,227 2,491 Bank owned life insurance (Note 13)............................ 2,120 -- -- Other.......................................................... 14,263 15,470 13,367 ----------- ----------- ----------- Total non-interest income................................... 68,476 59,100 53,803 ----------- ----------- ----------- Non-Interest Expense Salary expense (Note 13)....................................... 79,826 76,116 70,596 Employee benefit expense (Note 13)............................. 18,200 18,037 17,406 FDIC insurance premiums........................................ 1,151 1,239 1,350 Net occupancy expense (Notes 8 and 15)......................... 17,775 15,469 14,641 Furniture and equipment expense (Note 8)....................... 10,700 10,731 9,299 Credit card expense............................................ 1,538 5,032 5,070 Amortization of intangible assets (Note 7)..................... 10,170 7,725 5,369 Advertising.................................................... 6,392 4,682 5,336 Merger-related charges (Note 2)................................ 9,017 -- 3,005 Distributions on capital securities (Note 12).................. 2,282 -- -- Other.......................................................... 31,197 32,108 32,647 ----------- ----------- ----------- Total non-interest expense.................................. 188,248 171,139 164,719 ----------- ----------- ----------- Income Before Income Taxes..................................... 199,355 192,764 187,075 Income tax expense (Note 14)................................... 64,151 66,027 61,734 ----------- ----------- ----------- Net Income..................................................... $ 135,204 $ 126,737 $ 125,341 =========== =========== =========== Earnings Per Share: Basic....................................................... $ 1.74 $ 1.61 $ 1.52 Diluted..................................................... 1.73 1.60 1.51 Weighted Average Number of Shares Outstanding: Basic....................................................... 77,626,780 78,612,928 82,383,289 Diluted..................................................... 78,038,664 79,235,570 83,162,607 </TABLE> See accompanying notes to consolidated financial statements 34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY <TABLE> <CAPTION> Unallocated Common Stock Accumulated Held by Other Preferred Common Retained Employee Comprehensive Treasury Stock Stock Surplus Earnings Benefit Plan Income (Loss) Stock --------- ------- -------- -------- ------------ ------------- -------- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> Balance--December 31, 1998................... $ -- $32,356 $342,658 $322,183 $(1,331) $ 13,107 $ (6,186) Comprehensive income: Net income................................... -- -- -- 125,341 -- -- -- Other comprehensive loss, net of tax: Unrealized losses on securities available for sale, net of tax of $(24,122)......... -- -- -- -- -- (35,739) -- Less reclassification adjustment for gains included in net income, net of tax of $(958).................................... -- -- -- -- -- (1,667) -- Foreign currency translation adjustment.... -- -- -- -- -- 434 -- -------- Other comprehensive loss..................... -- -- -- -- -- (36,972) -- -------- Total comprehensive income................... -- -- -- -- -- -- -- Cash dividends declared...................... -- -- -- (68,694) -- -- -- Effect of stock incentive plan, net.......... -- (8) (151) (1,522) -- -- 4,067 Stock dividend............................... -- (128) (7,164) (36,057) -- -- 44,207 Allocation of employee benefit plan shares... -- -- 1,125 -- 366 -- 370 Issuance of shares from treasury............. -- -- (6,270) (1,634) -- -- 8,541 Purchase of treasury stock................... -- -- -- -- -- -- (75,496) ---- ------- -------- -------- ------- -------- -------- Balance--December 31, 1999................... -- 32,220 330,198 339,617 (965) (23,865) (24,497) Comprehensive income: Net income................................... -- -- -- 126,737 -- -- -- Other comprehensive income, net of tax: Unrealized gains on securities available for sale, net of tax of $15,396........... -- -- -- -- -- 22,045 -- Less reclassification adjustment for gains included in net income, net of tax of $(129).................................... -- -- -- -- -- (226) -- Foreign currency translation adjustment.... -- -- -- -- -- (261) -- -------- Other comprehensive income................... -- -- -- -- -- 21,558 -- -------- Total comprehensive income................... -- -- -- -- -- -- -- Cash dividends declared...................... -- -- -- (71,407) -- -- -- Effect of stock incentive plan, net.......... -- (205) (1,768) (2,969) -- -- 8,175 Stock dividend............................... -- -- -- (73,008) -- -- 73,008 Allocation of employee benefit plan shares... -- -- 921 -- 190 -- 573 Issuance of shares from treasury............. -- -- (7,381) (1,115) -- -- 9,126 Purchase of treasury stock................... -- -- -- -- -- -- (79,161) ---- ------- -------- -------- ------- -------- -------- Balance--December 31, 2000................... -- 32,015 321,970 317,855 (775) (2,307) (12,776) Comprehensive income: Net income................................... -- -- -- 135,204 -- -- -- Other comprehensive income, net of tax: Unrealized gains on securities available for sale, net of tax of $14,116........... -- -- -- -- -- 24,621 -- Less reclassification adjustment for gains included in net income, net of tax of $(1,322).................................. -- -- -- -- -- (2,242) -- Foreign currency translation adjustment.... -- -- -- -- -- (434) -- -------- Other comprehensive income................... -- -- -- -- -- 21,945 -- -------- Total comprehensive income................... -- -- -- -- -- -- -- Cash dividends declared...................... -- -- -- (80,899) -- -- -- Effect of stock incentive plan, net.......... -- (13) (3,241) (7,560) -- -- 17,066 Stock dividend............................... -- 1,308 83,657 (93,870) -- -- 8,884 Allocation of employee benefit plan shares... -- -- 901 -- 173 -- 529 Tax benefit from exercise of stock options... -- -- 3,321 -- -- -- -- Purchase of treasury stock................... -- -- -- -- -- -- (65,012) ---- ------- -------- -------- ------- -------- -------- Balance--December 31, 2001................... $ -- $33,310 $406,608 $270,730 $ (602) $ 19,638 $(51,309) ==== ======= ======== ======== ======= ======== ======== </TABLE> <TABLE> <CAPTION> Total Shareholders' Equity ------------- <S> <C> Balance--December 31, 1998................... $702,787 Comprehensive income: Net income................................... 125,341 Other comprehensive loss, net of tax: Unrealized losses on securities available for sale, net of tax of $(24,122)......... Less reclassification adjustment for gains included in net income, net of tax of $(958).................................... Foreign currency translation adjustment.... Other comprehensive loss..................... (36,972) -------- Total comprehensive income................... 88,369 Cash dividends declared...................... (68,694) Effect of stock incentive plan, net.......... 2,386 Stock dividend............................... 858 Allocation of employee benefit plan shares... 1,861 Issuance of shares from treasury............. 637 Purchase of treasury stock................... (75,496) -------- Balance--December 31, 1999................... 652,708 Comprehensive income: Net income................................... 126,737 Other comprehensive income, net of tax: Unrealized gains on securities available for sale, net of tax of $15,396........... Less reclassification adjustment for gains included in net income, net of tax of $(129).................................... Foreign currency translation adjustment.... Other comprehensive income................... 21,558 -------- Total comprehensive income................... 148,295 Cash dividends declared...................... (71,407) Effect of stock incentive plan, net.......... 3,233 Stock dividend............................... -- Allocation of employee benefit plan shares... 1,684 Issuance of shares from treasury............. 630 Purchase of treasury stock................... (79,161) -------- Balance--December 31, 2000................... 655,982 Comprehensive income: Net income................................... 135,204 Other comprehensive income, net of tax: Unrealized gains on securities available for sale, net of tax of $14,116........... -- Less reclassification adjustment for gains included in net income, net of tax of $(1,322).................................. -- Foreign currency translation adjustment.... -- Other comprehensive income................... 21,945 -------- Total comprehensive income................... 157,149 Cash dividends declared...................... (80,899) Effect of stock incentive plan, net.......... 6,252 Stock dividend............................... (21) Allocation of employee benefit plan shares... 1,603 Tax benefit from exercise of stock options... 3,321 Purchase of treasury stock................... (65,012) -------- Balance--December 31, 2001................... $678,375 ======== </TABLE> See accompanying notes to consolidated financial statements. 35
CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Years ended December 31, --------------------------------- 2001 2000 1999 ----------- --------- --------- (in thousands) <S> <C> <C> <C> Cash flows from operating activities: Net income........................................................................... $ 135,204 $ 126,737 $ 125,341 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization..................................................... 18,935 17,248 14,079 Amortization of compensation costs pursuant to long-term stock incentive plan..... 2,304 1,532 1,091 Provision for loan losses......................................................... 15,706 10,755 11,035 Net amortization of premiums and accretion of discounts........................... 5,877 4,023 8,939 Net deferred income tax benefit................................................... (7,532) (561) (341) Tax benefit from exercise of stock options........................................ 3,321 -- -- Net gains on securities transactions.............................................. (3,564) (355) (2,625) Proceeds from sales of loans...................................................... 226,625 40,758 76,113 Gain on sales of loans............................................................ (10,601) (2,227) (2,491) Originations of loans held for sale............................................... (254,322) (44,273) (62,352) Proceeds from sale of premises and equipment...................................... -- 626 -- Gain on sale of premises and equipment............................................ -- (474) -- Net increase in bank owned life insurance......................................... (2,120) -- -- Net decrease(increase) in accrued interest receivable and other assets............ 22,399 (421) (18,581) Net increase(decrease) in accrued expenses and other liabilities.................. 10,304 (472) 26,052 ----------- --------- --------- Net cash provided by operating activities......................................... 162,536 152,896 176,260 ----------- --------- --------- Cash flows from investing activities: Purchases and originations of loan servicing rights.................................. (5,678) (2,696) (20,419) Purchase of bank owned life insurance................................................ (100,000) -- -- Proceeds from sales of investment securities available for sale...................... 357,105 10,761 50,332 Proceeds from maturing investment securities available for sale...................... 1,154,002 328,544 576,423 Purchases of investment securities available for sale................................ (1,910,654) (294,605) (640,430) Purchases of investment securities held to maturity.................................. (77,865) (93,995) (195,958) Proceeds from maturing investment securities held to maturity........................ 39,052 76,259 104,370 Proceeds from sales of trading account securities.................................... -- -- 1,415 Net decrease(increase) in federal funds sold and other short-term investments........ 85,000 88,000 (59,900) Net increase in loans made to customers.............................................. (118,297) (203,658) (503,131) Purchases of premises and equipment, net of sales.................................... (11,728) (10,222) (9,834) ----------- --------- --------- Net cash used in investing activities................................................ (589,063) (101,612) (697,132) ----------- --------- --------- Cash flows from financing activities: Net increase in deposits............................................................. 170,146 126,595 105,761 Net (decrease)increase in short-term borrowings...................................... (121,752) (13,099) 172,213 Advances of long-term debt........................................................... 506,000 80,000 402,000 Repayments of long-term debt......................................................... (122,080) (53,073) (50,068) Proceeds from sale of capital securities............................................. 200,000 -- -- Dividends paid to common shareholders................................................ (76,260) (71,723) (66,801) Purchase of common shares to treasury................................................ (65,012) (79,161) (75,496) Common stock issued, net of cancellations............................................ 8,230 3,780 3,408 ----------- --------- --------- Net cash provided by (used in) financing activities.................................. 499,272 (6,681) 491,017 ----------- --------- --------- Net increase(decrease) in cash and cash equivalents.................................. 72,745 44,603 (29,855) Cash and cash equivalents at beginning of year....................................... 239,105 194,502 224,357 ----------- --------- --------- Cash and cash equivalents at end of year............................................. $ 311,850 $ 239,105 $ 194,502 =========== ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for interest on deposits and borrowings....................... $ 219,839 $ 246,614 $ 208,904 Cash paid during the year for federal and state income taxes............................ 32,676 64,539 64,347 Transfer of securities from held to maturity to available for sale...................... 162,433 -- 42,387 Transfer of securities from available for sale to held to maturity...................... 50,044 -- -- </TABLE> See accompanying notes to consolidated financial statements. 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1) Business Valley National Bancorp ("Valley") is a bank holding company whose principal wholly-owned subsidiary is Valley National Bank ("VNB"), a national banking association providing a full range of commercial, retail and trust and investment services through its branch and ATM network throughout northern New Jersey and Manhattan. VNB also lends, through its consumer division and SBA program, to borrowers covering territories outside of its branch network. VNB is subject to intense competition from other financial services companies and is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by certain regulatory authorities. VNB has several subsidiaries which are wholly-owned except as described below and which include a mortgage servicing company, a company which holds, maintains and manages investment assets for VNB, a subsidiary which owns and services auto loans, a title insurance agency, asset management advisors which are SEC registered investment advisors, an Edge Act Corporation which is the holding company for a wholly-owned finance company located in Toronto, Canada, a subsidiary which specializes in asset-based lending, a real estate investment trust which owns real estate related investments (and which has an immaterial amount of preferred stock issued to third parties) and a subsidiary which offers both commercial equipment leases and financing for general aviation aircraft. Many of these subsidiaries transact business with VNB as well as third parties. Basis of Presentation The consolidated financial statements of Valley include the accounts of its principal commercial bank subsidiary, VNB and all of its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. The consolidated financial statements give retroactive effect to the merger of Valley National Bancorp and Merchants New York Bancorp, Inc. Certain reclassifications have been made in the consolidated financial statements for 2000 and 1999 to conform to the classifications presented for 2001. In preparing the consolidated financial statements, management has made estimates and assumptions that effect the reported amounts of assets and liabilities as of the date of the statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates. Investment Securities At the time of purchase, investments are classified into one of three categories: held to maturity, available for sale or trading. Investment securities held to maturity, except for equity securities, are carried at cost and adjusted for amortization of premiums and accretion of discounts by using the interest method over the term of the investment. Management has identified those investment securities which may be sold prior to maturity. These investment securities are classified as available for sale in the accompanying consolidated statements of financial condition and are recorded at fair value on an aggregate basis. Unrealized holding gains and losses on such securities are excluded from earnings, but are included as a component of accumulated other comprehensive income which is included in shareholders' equity, net of deferred tax. Realized gains or losses on the sale of investment securities available for sale are recognized by the specific identification method and shown as a separate component of non-interest income. Trading securities are recorded at market value. Market value adjustments resulting from unrealized gains (losses) on such securities are included in non-interest income. 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Loans and Loan Fees Loan origination and commitment fees, net of related costs, are deferred and amortized as an adjustment of loan yield over the estimated life of the loans approximating the effective interest method. Loans held for sale consist of residential mortgage loans and SBA loans, and are carried at the lower of cost or estimated fair market value using the aggregate method. Interest income is not accrued on loans where interest or principal is 90 days or more past due or if in management's judgement the ultimate collectibility of the interest is doubtful. Exceptions may be made if the loan is well secured and in the process of collection. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it becomes well secured and in the process of collection and all past due amounts have been collected. The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. Valley has defined the population of impaired loans to be all non-accrual loans and other loans considered to be impaired as to principal and interest, consisting primarily of commercial real estate loans. The impaired loan portfolio is primarily collateral dependent. Impaired loans are individually assessed to determine that each loan's carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. Valley originates loans guaranteed by the SBA. The principal amount of these loans is guaranteed between 75 percent and 80 percent, subject to certain dollar limitations. Valley generally sells the guaranteed portions of these loans and retains the unguaranteed portions as well as the rights to service the loans. Gains are recorded on loan sales based on the cash proceeds in excess of the assigned value of the loan, as well as the value assigned to the rights to service the loan. Credit card loans primarily represent revolving MasterCard credit card loans. Interest on credit card loans is recognized based on the balances outstanding according to the related cardmember agreements. Direct origination costs are deferred and amortized over 24 months, the term of the cardmember agreement, on a straight-line basis. Net direct origination costs include costs associated with credit card originations that are incurred in transactions with independent third parties and certain costs relating to loan origination programs and the preparation and processing of loan documents, net of fees received. Ineligible direct origination costs are expensed as incurred. Valley's lending is primarily in northern New Jersey and Manhattan, with the exception of an out-of-state auto lending program. Valley phased out the origination of loans under this program during 2001. Allowance for Loan Losses The allowance for loan losses ("allowance") is increased through provisions charged against current earnings and additionally by crediting amounts of recoveries received, if any, on previously charged-off loans. The allowance is reduced by charge-offs on loans which are determined to be a loss, in accordance with established policies, when all efforts of collection have been exhausted. The allowance for loan losses is maintained at a level estimated to absorb loan losses inherent in the loan portfolio as well as other credit risk related charge-offs. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. VNB's methodology for evaluating the appropriateness of the allowance consists of several significant elements, which include the allocated allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. The allowance also incorporates the results of measuring impaired loans as called for in Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) VNB's allocated allowance is calculated by applying loss factors to outstanding loans. The formula is based on the internal risk grade of loans or pools of loans. Any change in the risk grade of performing and/or non-performing loans affects the amount of the related allowance. Loss factors are based on VNB's historical loss experience and may be adjusted for significant circumstances that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Management has established an unallocated portion of the allowance to cover inherent losses within a given loan category which have not been otherwise reviewed or measured on an individual basis. Such unallocated allowance includes management's evaluation of local and national economic and business conditions, portfolio concentrations, information risk, operational risk, credit quality and delinquency trends. The unallocated portion of the allowance reflects management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of expected credit losses. 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. 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. 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. Other Real Estate Owned Other real estate owned ("OREO"), acquired through foreclosure on loans secured by real estate, is reported at the lower of cost or fair value, as established by a current appraisal, less estimated costs to sell, and is included in other assets. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. An allowance for OREO has been established to record subsequent declines in estimated net realizable value. Expenses incurred to maintain these properties and realized gains and losses upon sale of the properties are included in other non-interest expense and other non-interest income, as appropriate. Intangible Assets Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill and core deposit intangibles. Goodwill recorded prior to 1987 was being amortized through December 31, 2001 on a straight-line basis over 25 years. Goodwill recorded in 2000 and 1999 was being amortized through December 31, 2001 on a straight-line basis over 10 years. Management periodically reviews the potential impairment of goodwill on a non-discounted cash flow basis to assess recoverability. If the estimated future cash flows are projected to be less than the carrying amount, an impairment write-down, representing the carrying amount of the goodwill which exceeds the present value of the estimated expected future cash flows, would be recorded as a period expense. Core deposit intangibles are amortized on accelerated methods over the estimated lives of the underlying deposits. Goodwill and core deposit intangibles are included in other assets. Loan Servicing Rights Loan servicing rights are generally recorded when purchased or originated loans are sold, with servicing rights retained. The cost of each loan is allocated between the servicing right and the loan (without the servicing right) based on their relative fair values. Loan servicing rights, which are classified in other assets, are amortized over the estimated net servicing life and are evaluated on a quarterly basis for impairment based on their fair value. The fair value is estimated using the present value of expected future cash flows along with numerous assumptions including servicing income, cost of servicing, discount rates, prepayment speeds, and default rates. Impairment adjustments, if any, are recognized through the use of a valuation allowance. 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation Valley accounts for its stock option plan in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no compensation expense is recognized for stock options issued to employees since the options have an exercise price equal to the market value of the common stock on the day of the grant. Valley provides the fair market disclosure required by Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-based Compensation." Income Taxes Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Comprehensive Income Valley's components of other comprehensive income include unrealized gains (losses) on securities available for sale, net of tax, and the foreign currency translation adjustment. Valley reports comprehensive income and its components in the Consolidated Statements of Changes in Shareholders' Equity. Earnings Per Share For Valley, the numerator of both the Basic and Diluted EPS is equivalent to net income. The weighted average number of shares outstanding used in the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect of potentially dilutive common stock equivalents utilizing the treasury stock method. For Valley, common stock equivalents are common stock options outstanding. All share and per share amounts have been restated to reflect the 5 percent stock dividend issued May 18, 2001, and all prior stock dividends and splits. The following table shows the calculation of both Basic and Diluted earnings per share for the years ended December 31, 2001, 2000 and 1999. <TABLE> <CAPTION> Years ended December 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- (in thousands, except for share data) <S> <C> <C> <C> Net Income........................................... $ 135,204 $ 126,737 $ 125,341 =========== =========== =========== Basic weighted-average number of shares outstanding.. 77,626,780 78,612,928 82,383,289 Plus: Common stock equivalents....................... 411,884 622,642 779,318 ----------- ----------- ----------- Diluted weighted-average number of shares outstanding 78,038,664 79,235,570 83,162,607 =========== =========== =========== Earnings per share: Basic............................................. $ 1.74 $ 1.61 $ 1.52 Diluted........................................... 1.73 1.60 1.51 </TABLE> At December 31, 2001, 2000 and 1999 there were 310 thousand, 69 thousand and 286 thousand stock options not included as common stock equivalents because the exercise prices exceeded the average market value. 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Treasury Stock Treasury stock is recorded using the cost method and accordingly is presented as an unallocated reduction of shareholders' equity. Recent Accounting Pronouncements Valley adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") on January 1, 2001. SFAS No. 133 was issued by the FASB in June 1998. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial condition at fair value. In June of 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133 and 137," which amends the accounting and reporting standards of SFAS No. 133 for derivative instruments. Upon adoption, the provisions of SFAS No. 133 must be applied prospectively. The adoption of SFAS No. 133 and SFAS No. 138 did not have a material impact on the consolidated financial statements. The FASB has issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 replaces SFAS No. 125. SFAS No. 140 resolves certain implementation issues, but it carries forward most of SFAS No. 125's provisions without change. SFAS No. 140 was effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a material impact on the consolidated financial statements. Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141), was issued by the Financial Accounting Standards Board (FASB) on June 27, 2001. SFAS No. 141 eliminated pooling of interests accounting for mergers. All transactions initiated after June 30, 2001 must use the purchase method of accounting. SFAS No. 141 also redefines intangible assets and requires separation of intangible assets from goodwill. The adoption of SFAS No. 141 did not have a material impact on the consolidated financial statements. Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" (SFAS No. 142), was issued by the Financial Accounting Standards Board on June 27, 2001. SFAS No. 142 requires that goodwill and any intangible asset determined to have an indefinite useful life acquired after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142. Valley is required to adopt SFAS No. 142 effective January 1, 2002. As of December 31, 2001, Valley has $5.5 million in unamortized goodwill with annual amortization of $650 thousand which will cease upon the adoption of SFAS No. 142. Valley is currently evaluating the transitional goodwill impairment criteria of SFAS No. 142 and is not able to estimate the impact, if any, that SFAS No. 142 may have on recorded goodwill. The impairment adjustment, if any, will have to be identified by June 30, 2002 and measured and recorded by Valley no later than December 31, 2002. The impairment adjustment, if any, will be recognized as a cumulative effect of a change in accounting principle and will be recorded in the first interim reporting period of 2002. The adoption of SFAS No. 142 did not significantly impact Valley's accounting for currently recorded intangible assets. Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143), was issued by the Financial Accounting Standards Board in August 2001. SFAS No. 143, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) assets and the associated asset retirement costs. SFAS No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. Valley is required to adopt the provisions of SFAS No. 143 for fiscal years beginning after June 15, 2002. Valley anticipates that the adoption of SFAS No. 143 will not have a material impact on the consolidated financial statements. Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", (SFAS No. 144), was issued by the Financial Accounting Standards Board on October 3, 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that Statement. The Statement is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the consolidated financial statements. ACQUISITIONS (Note 2) On January 19, 2001 Valley completed its merger with Merchants New York Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York headquartered in Manhattan. Under the terms of the merger agreement, each outstanding share of Merchants common stock was exchanged for 0.7634 shares of Valley common stock. As a result, a total of approximately 14 million shares of Valley common stock were exchanged (the exchange rate and number of shares exchanged have not been restated for the 5 percent stock dividend issued May 18, 2001). This merger added seven branches in Manhattan. The transaction was accounted for utilizing the pooling-of-interests method of accounting. The consolidated financial statements of Valley have been restated to include Merchants for all periods presented. Separate results of the combining companies for the years ended December 31, 2000 and 1999 are as follows: <TABLE> <CAPTION> Years ended December 31, ----------------- 2000 1999 -------- -------- <S> <C> <C> Net interest income after provision for possible loan losses: Valley.................................................... $251,967 $249,238 Merchants................................................. 52,836 48,753 -------- -------- $304,803 $297,991 ======== ======== Net income: Valley.................................................... $106,773 $106,324 Merchants................................................. 19,964 19,017 -------- -------- $126,737 $125,341 ======== ======== </TABLE> During the first quarter of 2001, Valley recorded merger-related charges of $9.0 million related to the acquisition of Merchants. On an after tax basis, these charges totaled $7.0 million or $0.09 per diluted share. These charges include only identified direct and incremental costs associated with this acquisition. Items included in these charges include the following: personnel expenses which include severance payments for terminated directors of Merchants; professional fees which include investment banking, accounting and legal fees; and other expenses which include the disposal of data processing equipment and the write-off of supplies and other assets not considered useful in the operation of the combined entities. The major components of the merger-related charge, consisting of professional fees, personnel and the disposal of data processing equipment, totaled $4.4 million, $3.2 million and $486 thousand, respectively. Of the total merger-related charge 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $5.9 million or 65.5 percent was paid or charged to the reserve through December 31, 2001. The remaining balance of $3.1 million is expected to be paid based on existing contractual arrangements. On July 6, 2000, Valley acquired Hallmark Capital Management, Inc. ("Hallmark"), a Fairfield, NJ based investment management firm with $195 million of assets under management. Hallmark's purchase was a stock merger with subsequent earn out payments. Hallmark's operations have continued as a wholly-owned subsidiary of VNB. The transaction was accounted for as a purchase accounting transaction. On June 11, 1999, Valley acquired Ramapo Financial Corporation ("Ramapo"), parent of The Ramapo Bank headquartered in Wayne, New Jersey. At the date of acquisition, Ramapo had total assets of $344.0 million and deposits of $299.5 million, with eight branch offices. The transaction was accounted for using the pooling-of-interests method of accounting and resulted in the issuance of approximately 4.0 million shares of Valley common stock. Each share of common stock of Ramapo was exchanged for 0.44625 shares of Valley common stock (the exchange rate and number of shares exchanged have not been restated for subsequent stock dividends). The consolidated financial statements of Valley have been restated to include Ramapo for all periods presented. During the second quarter of 1999, Valley recorded a merger-related charge of $3.0 million related to the acquisition of Ramapo. On an after tax basis, the charge totaled $2.2 million or $0.03 per diluted share. The charge includes only identified direct and incremental costs associated with this acquisition. Items included in the charge include the following: personnel expenses which include severance payments and benefits for terminated employees, principally, two senior executives of Ramapo; real estate expenses related to the closing of a duplicate branch; professional fees which include investment banking, accounting and legal fees; and other expenses which include termination of data processing service contracts and the write-off of supplies and other assets not considered useful in the operation of the combined entity. The major components of the merger-related charge, consisting of real estate dispositions, professional fees, personnel expenses and other expenses, totaled $300 thousand, $1.1 million, $1.1 million and $500 thousand, respectively. The merger-related charge of $3.0 million was paid or charged to the reserve through December 31, 2001. During the second quarter of 1999, Valley National Bank received approval and a license from the New Jersey Department of Banking and Insurance to sell title insurance through a separate subsidiary, known as Wayne Title, Inc. After the close of the second quarter, Valley acquired the assets of an agency office of Commonwealth Land Title Insurance Company for $784 thousand and began to sell, as agent, both commercial and residential title insurance policies. The transaction was accounted for as a purchase accounting transaction. On July 30, 1999, Valley acquired New Century Asset Management, Inc., a registered investment advisor and NJ-based money manager with approximately $120 million of assets under management. At closing, Valley paid an initial consideration of $640 thousand. The balance due will be paid on an earn-out basis over a five-year period, based upon a pre-determined formula. New Century continued its operations as a wholly-owned subsidiary of Valley National Bank. The transaction was accounted for as a purchase accounting transaction. 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) INVESTMENT SECURITIES HELD TO MATURITY (Note 3) The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at December 31, 2001 and 2000 were as follows: <TABLE> <CAPTION> December 31, 2001 ------------------------------------------ Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> Obligations of states and political subdivisions $ 99,757 $2,474 $ (373) $101,858 Mortgage-backed securities...................... 25,912 1,137 (11) 27,038 Other debt securities........................... 324,918 37 (29,453) 295,502 -------- ------ -------- -------- Total debt securities........................ 450,587 3,648 (29,837) 424,398 FRB & FHLB stock................................ 52,474 -- -- 52,474 -------- ------ -------- -------- Total investment securities held to maturity. $503,061 $3,648 $(29,837) $476,872 ======== ====== ======== ======== </TABLE> <TABLE> <CAPTION> December 31, 2000 ------------------------------------------ Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> Obligations of states and political subdivisions $ 78,062 $1,611 $ (1) $ 79,672 Mortgage-backed securities...................... 209,836 3,557 (369) 213,024 Other debt securities........................... 249,414 -- (39,214) 210,200 -------- ------ -------- -------- Total debt securities........................ 537,312 5,168 (39,584) 502,896 FRB & FHLB stock................................ 40,138 -- -- 40,138 -------- ------ -------- -------- Total investment securities held to maturity. $577,450 $5,168 $(39,584) $543,034 ======== ====== ======== ======== </TABLE> The contractual maturities of investments in debt securities held to maturity at December 31, 2001, are set forth in the following table: <TABLE> <CAPTION> December 31, 2001 ------------------ Amortized Fair Cost Value --------- -------- (in thousands) <S> <C> <C> Due in one year........................... $ 5,041 $ 4,925 Due after one year through five years..... 26,750 27,369 Due after five years through ten years.... 58,076 58,824 Due after ten years....................... 334,808 306,242 -------- -------- 424,675 397,360 Mortgage-backed securities................ 25,912 27,038 -------- -------- Total debt securities held to maturity. $450,587 $424,398 ======== ======== </TABLE> Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty. The weighted-average remaining life for mortgage-backed securities held to maturity was 2.8 years at December 31, 2001, and 2.9 years at December 31, 2000. In January 2001, in connection with the Merchants acquisition, Valley reassessed the classification of securities held in the Merchants portfolio and transferred $162.4 million of securities from held to maturity to available for sale and transferred $50.0 million of securities from available for sale to held to maturity to conform with Valley's investment objectives. 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June 1999, in connection with the Ramapo acquisition, Valley reassessed the classification of securities held in the Ramapo investment portfolio and transferred $42.4 million of securities held to maturity to securities available for sale to conform to Valley's investment objectives. INVESTMENT SECURITIES AVAILABLE FOR SALE (Note 4) The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at December 31, 2001 and 2000 were as follows: <TABLE> <CAPTION> December 31, 2001 ------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> U.S. Treasury securities and other government agencies and corporations............................................ $ 195,554 $ 104 $ (50) $ 195,608 Obligations of states and political subdivisions.......... 119,754 1,719 (231) 121,242 Mortgage-backed securities................................ 1,790,986 29,647 (7,745) 1,812,888 ---------- ------- ------- ---------- Total debt securities.................................. 2,106,294 31,470 (8,026) 2,129,738 Equity securities......................................... 33,350 9,303 (696) 41,957 ---------- ------- ------- ---------- Total investment securities available for sale......... $2,139,644 $40,773 $(8,722) $2,171,695 ========== ======= ======= ========== </TABLE> <TABLE> <CAPTION> December 31, 2000 ------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> U.S. Treasury securities and other government agencies and corporations............................................ $ 151,535 $ 453 $ (1,367) $ 150,621 Obligations of states and political subdivisions.......... 143,454 885 (395) 143,944 Mortgage-backed securities................................ 1,283,741 10,790 (9,136) 1,285,395 ---------- ------- -------- ---------- Total debt securities.................................. 1,578,730 12,128 (10,898) 1,579,960 Equity securities......................................... 50,478 1,899 (6,251) 46,126 ---------- ------- -------- ---------- Total investment securities available for sale......... $1,629,208 $14,027 $(17,149) $1,626,086 ========== ======= ======== ========== </TABLE> The contractual maturities of investments in debt securities available for sale at December 31, 2001, are set forth in the following table: <TABLE> <CAPTION> December 31, 2001 --------------------- Amortized Fair Cost Value ---------- ---------- (in thousands) <S> <C> <C> Due in one year.......................... $ 201,376 $ 201,587 Due after one year through five years.... 35,047 35,477 Due after five years through ten years... 67,890 68,628 Due after ten years...................... 10,995 11,158 ---------- ---------- 315,308 316,850 Mortgage-backed securities............... 1,790,986 1,812,888 ---------- ---------- Total debt securities available for sale $2,106,294 $2,129,738 ========== ========== </TABLE> Actual maturities on debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty. 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The weighted-average remaining life for mortgage-backed securities available for sale at December 31, 2001 and 2000 was 4.7 years and 5.2 years, respectively. Gross gains (losses) realized on sales, maturities and other securities transactions, related to securities available for sale, and (losses) gains on trading account securities included in earnings for the years ended December 31, 2001, 2000 and 1999 were as follows: <TABLE> <CAPTION> 2001 2000 1999 ------- ---- ------ (in thousands) <S> <C> <C> <C> Sales transactions: Gross gains................................. $ 4,035 $355 $2,963 Gross losses................................ (1,464) -- (138) ------- ---- ------ 2,571 355 2,825 ------- ---- ------ Maturities and other securities transactions: Gross gains................................. 993 -- -- Gross losses................................ -- -- (23) ------- ---- ------ 993 -- (23) ------- ---- ------ Losses on trading account securities......... -- -- (177) ------- ---- ------ Gains on securities transactions, net..... $ 3,564 $355 $2,625 ======= ==== ====== </TABLE> LOANS (Note 5) The detail of the loan portfolio as of December 31, 2001 and 2000 was as follows: <TABLE> <CAPTION> 2001 2000 ---------- ---------- (in thousands) <S> <C> <C> Commercial................ $1,080,852 $1,026,793 ---------- ---------- Total commercial loans. 1,080,852 1,026,793 ---------- ---------- Construction.............. 206,789 160,932 Residential mortgage...... 1,323,877 1,301,851 Commercial mortgage....... 1,365,344 1,258,549 ---------- ---------- Total mortgage loans... 2,896,010 2,721,332 ---------- ---------- Home equity............... 398,102 306,038 Credit card............... 12,740 83,894 Automobile................ 842,247 976,177 Other consumer............ 101,856 74,876 ---------- ---------- Total consumer loans... 1,354,945 1,440,985 ---------- ---------- Total loans............... $5,331,807 $5,189,110 ========== ========== </TABLE> Included in the table above are loans held for sale in the amount of $56.2 million and $17.9 million at December 31, 2001 and 2000, respectively. VNB grants loans in the ordinary course of business to its directors, executive officers and their affiliates, on the same terms and under the same risk conditions as those prevailing for comparable transactions with outside borrowers. 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes the change in the total amounts of loans and advances to directors, executive officers, and their affiliates during the year 2001: <TABLE> <CAPTION> 2001 -------------- (in thousands) <S> <C> Outstanding at beginning of year $ 36,584 New loans and advances.......... 18,703 Repayments...................... (17,216) --------- Outstanding at end of year...... $ 38,071 ========= </TABLE> The outstanding balances of loans which 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, 2001 and 2000 were as follows: <TABLE> <CAPTION> 2001 2000 ------- ------- (in thousands) <S> <C> <C> Loans past due in excess of 90 days and still accruing $10,456 $14,952 ======= ======= Non-accrual loans..................................... $18,483 $ 3,883 Other real estate owned............................... 329 129 ------- ------- Total non-performing assets........................... $18,812 $ 4,012 ======= ======= Troubled debt restructured loans...................... $ 891 $ 949 ======= ======= </TABLE> The amount of interest income that would have been recorded on non-accrual loans in 2001, 2000 and 1999 had payments remained in accordance with the original contractual terms approximated $655 thousand, $458 thousand and $676 thousand, respectively, while the actual amount of interest income recorded on these types of assets in 2001, 2000 and 1999 totaled $192 thousand, $584 thousand and $1.3 million, respectively, resulting in lost (recovered) interest income of $463 thousand and ($126) thousand and ($624) thousand, respectively. At December 31, 2001, there were no commitments to lend additional funds to borrowers whose loans were non-accrual, classified as troubled debt restructured loans, or contractually past due in excess of 90 days and still accruing interest. The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific and general allocations to the allowance for loan losses totaled $11.0 million and $2.5 million, respectively, at December 31, 2001 and $3.4 million and $949 thousand, respectively, at December 31, 2000. The average balance of impaired loans during 2001, 2000 and 1999 was approximately $6.1 million, $11.8 million and $13.7 million, respectively. The amount of cash basis interest income that was recognized on impaired loans during 2001, 2000 and 1999 was $828 thousand, $160 thousand and $616 thousand, respectively. 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ALLOWANCE FOR LOAN LOSSES (Note 6) Transactions recorded in the allowance for loan losses during 2001, 2000 and 1999 were as follows: <TABLE> <CAPTION> 2001 2000 1999 -------- -------- -------- (in thousands) <S> <C> <C> <C> Balance at beginning of year.......... $ 61,995 $ 64,228 $ 62,606 Provision charged to operating expense 15,706 10,755 11,035 -------- -------- -------- 77,701 74,983 73,641 -------- -------- -------- Less net loan charge-offs: Loans charged-off.................... (18,004) (16,893) (13,355) Less recoveries on loan charge-offs.. 4,106 3,905 3,942 -------- -------- -------- Net loan charge-offs.................. (13,898) (12,988) (9,413) -------- -------- -------- Balance at end of year................ $ 63,803 $ 61,995 $ 64,228 ======== ======== ======== </TABLE> LOAN SERVICING (Note 7) VNB Mortgage Services, Inc. ("MSI"), a subsidiary of VNB, is a servicer of residential mortgage loan portfolios. MSI is compensated for loan administrative services performed for mortgage servicing rights purchased in the secondary market and loans originated and sold by VNB. The aggregate principal balances of mortgage loans serviced by MSI for others approximated $2.4 billion, $2.5 billion and $2.2 billion at December 31, 2001, 2000 and 1999, respectively. The outstanding balance of loans serviced for others is properly not included in the consolidated statements of financial condition. VNB is a servicer of SBA loans, and is compensated for loan administrative services performed for SBA loans originated and sold by VNB. VNB serviced a total of $91.8 million, $92.2 million and $89.0 million of SBA loans at December 31, 2001, 2000 and 1999, respectively, for third-party investors. The outstanding balance of SBA loans serviced for others is properly not included in the consolidated statements of financial condition. The unamortized costs associated with acquiring loan servicing rights are included in other assets in the consolidated financial statements and are being amortized over the estimated life of net servicing income. The following table summarizes the change in loan servicing rights during the years ended December 31, 2001, 2000 and 1999: <TABLE> <CAPTION> 2001 2000 1999 ------- ------- ------- (in thousands) <S> <C> <C> <C> Balance at beginning of year..................... $32,729 $36,809 $20,765 Purchase and origination of loan servicing rights 5,678 2,696 20,419 Amortization expense............................. (9,202) (6,776) (4,375) ------- ------- ------- Balance at end of year........................... $29,205 $32,729 $36,809 ======= ======= ======= </TABLE> Amortization expense in 2001 includes $2.0 million of valuation reserve for loan servicing rights, and is classified in amortization of intangible assets. The estimated fair market value of loan servicing rights at December 31, 2001 was $29.6 million. 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) PREMISES AND EQUIPMENT, NET (Note 8) At December 31, 2001 and 2000, premises and equipment, net consisted of: <TABLE> <CAPTION> 2001 2000 -------- -------- (in thousands) <S> <C> <C> Land........................................... $ 21,390 $ 21,031 Buildings...................................... 63,560 60,233 Leasehold improvements......................... 21,638 20,432 Furniture and equipment........................ 76,992 70,833 -------- -------- 183,580 172,529 Less: Accumulated depreciation and amortization (89,402) (81,314) -------- -------- Total premises and equipment, net........... $ 94,178 $ 91,215 ======== ======== </TABLE> Depreciation and amortization of premises and equipment included in non-interest expense for the years ended December 31, 2001, 2000 and 1999 amounted to approximately $8.8 million, $9.6 million and $8.7 million, respectively. OTHER ASSETS (Note 9) At December 31, 2001 and 2000, other assets consisted of the following: <TABLE> <CAPTION> 2001 2000 ------- -------- (in thousands) <S> <C> <C> Loan servicing rights........................ $29,205 $ 32,729 Goodwill..................................... 5,545 5,249 Core deposit intangibles..................... 794 1,113 Other real estate owned...................... 329 129 Net deferred tax asset....................... 17,721 22,984 Due from customers on acceptances outstanding 19,869 16,807 Other........................................ 17,210 26,408 ------- -------- Total other assets........................ $90,673 $105,419 ======= ======== </TABLE> DEPOSITS (Note 10) Included in time deposits at December 31, 2001 and 2000 are certificates of deposit over $100 thousand of $1.1 billion and $1.0 billion, respectively. Interest expense on time deposits of $100 thousand or more totaled approximately $39.1 million, $60.2 million and $39.7 million in 2001, 2000 and 1999, respectively. The scheduled maturities of time deposits as of December 31, 2001 are as follows: <TABLE> <CAPTION> (in thousands) <S> <C> 2002......................... $1,989,065 2003......................... 274,950 2004......................... 69,195 2005......................... 49,376 2006......................... 23,565 Thereafter................... 6,467 ---------- Total time deposits..... $2,412,618 ========== </TABLE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) BORROWED FUNDS (Note 11) Short-term borrowings at December 31, 2001 and 2000 consisted of the following: <TABLE> <CAPTION> 2001 2000 -------- -------- (in thousands) <S> <C> <C> Securities sold under agreements to repurchase $ 95,626 $312,310 Treasury tax and loan......................... 75,237 29,223 Bankers acceptances........................... 22,599 24,481 FHLB advances................................. 106,800 50,000 Line of credit................................ 4,000 10,000 -------- -------- Total short-term borrowings................ $304,262 $426,014 ======== ======== </TABLE> At December 31, 2001 and 2000, long-term debt consisted of the following: <TABLE> <CAPTION> 2001 2000 -------- -------- (in thousands) <S> <C> <C> FHLB advances................................. $655,500 $461,500 Securities sold under agreements to repurchase 320,000 130,000 Other......................................... 228 308 -------- -------- Total long-term borrowings................. $975,728 $591,808 ======== ======== </TABLE> The Federal Home Loan Bank (FHLB) advances included in long-term debt had a weighted average interest rate of 5.34 percent at December 31, 2001 and 6.04 percent at December 31, 2000. These advances are secured by pledges of FHLB stock, mortgage-backed securities and a blanket assignment of qualifying mortgage loans. Interest expense of $23.4 million, $27.2 million, and $21.7 million was recorded on FHLB advances during the years ended December 31, 2001, 2000, and 1999, respectively. The advances are scheduled for repayment as follows: <TABLE> <CAPTION> (in thousands) <S> <C> 2002............................. $ 67,000 2003............................. 82,000 2004............................. 132,000 2005............................. 23,000 2006............................. 104,000 Thereafter....................... 247,500 -------- Total long-term FHLB advances. $655,500 ======== </TABLE> The securities sold under repurchase agreements to other counterparties included in long-term debt totaled $320.0 million at December 31, 2001 and $130.0 million in 2000. The weighted average interest rate for this debt was 5.72 percent and 6.43 percent at December 31, 2001 and 2000, respectively. Interest expense of $21.2 million, $8.0 million, and $942 thousand was recorded during the years ended December 31, 2001, 2000, and 1999, respectively. The schedule for repayment is as follows: <TABLE> <CAPTION> (in thousands) <S> <C> 2002................................................... $100,000 2003................................................... 45,000 2004................................................... 10,000 2005................................................... 30,000 2006................................................... 50,000 Thereafter............................................. 85,000 -------- Total long-term securities sold under agreements to repurchase........................................ $320,000 ======== </TABLE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Valley maintained a floating rate revolving line of credit with a third party in the amount of $35.0 million at the end of December 31, 2001, of which $4.0 million was outstanding. This line was available for general corporate purposes and expires on June 14, 2002. In addition, Valley has available a 120 day unsecured line in the amount of $20 million due January 25, 2002, of which none was drawn. Interest expense of $318 thousand and $1.4 million were recorded on these two lines during the years ended December 31, 2001 and 2000, respectively. The amortized cost 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 $659.4 million and $884.0 million at December 31, 2001 and 2000, respectively. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF A SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY (Note 12) In November 2001, Valley sold $200.0 million of 7.75 percent trust preferred securities through a statutory business trust, VNB Capital Trust I ("Trust"). Valley owns all of the common securities of this Delaware trust. The Trust has no independent assets or operations, and exists for the sole purpose of issuing trust preferred securities and investing the proceeds thereof in an equivalent amount of junior subordinated debentures issued by Valley. The junior subordinated debentures, which are the sole assets of the Trust, are unsecured obligations of Valley, and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of Valley. A portion of the trust preferred securities qualifies as Tier I Capital, within regulatory limitations. The principal amount of subordinated debentures held by the Trust equals the aggregate liquidation amount of its trust preferred securities and its common securities. The subordinated debentures bear interest at the same rate, and will mature on the same date, as the corresponding trust preferred securities. All of the trust preferred securities may be prepaid at par at the option of the Trust, in whole or in part, on or after December 15, 2006. The trust preferred securities effectively mature on December 15, 2031. BENEFIT PLANS (Note 13) Pension Plan VNB has a non-contributory benefit plan covering substantially all of its employees. The benefits are based upon years of credited service, primary social security benefits and the employee's highest average compensation as defined. It is VNB's funding policy to contribute annually the maximum amount that can be deducted for federal income tax purposes. In addition, VNB has a supplemental non-qualified, non-funded retirement plan which is designed to supplement the pension plan for key officers. 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth the change in projected benefit obligation, the change in fair value of plan assets, and the funded status and amounts recognized in Valley's financial statements for the pension plans at December 31, 2001 and 2000: <TABLE> <CAPTION> 2001 2000 ------- ------- (in thousands) <S> <C> <C> Change in projected benefit obligation Projected benefit obligation at beginning of year $34,584 $30,847 Service cost.................................... 2,097 1,850 Interest cost................................... 2,502 2,293 Actuarial loss.................................. 1,324 900 Benefits paid................................... (1,922) (1,306) ------- ------- Projected benefit obligation at end of year...... $38,585 $34,584 ======= ======= Change in fair value of plan assets Fair value of plan assets at beginning of year... $39,539 $35,315 Actual return on plan assets.................... 2,131 4,359 Employer contributions.......................... 532 1,171 Benefits paid................................... (1,922) (1,306) ------- ------- Fair value of plan assets at end of year......... $40,280 $39,539 ======= ======= Funded status.................................... $ 1,695 $ 4,955 Unrecognized net asset........................... (174) (1,258) Unrecognized prior service cost.................. 133 151 Unrecognized net actuarial gain.................. (4,224) (6,473) ------- ------- Accrued benefit cost............................. $(2,570) $(2,625) ======= ======= </TABLE> Net periodic pension expense for 2001, 2000 and 1999 included the following components: <TABLE> <CAPTION> 2001 2000 1999 ------- ------- ------- (in thousands) <S> <C> <C> <C> Service cost...................... $ 2,097 $ 1,850 $ 2,018 Interest cost..................... 2,502 2,293 2,148 Expected return on plan assets.... (3,340) (3,057) (2,838) Net amortization and deferral..... (170) (146) (103) Recognized prior service cost..... 36 89 36 Recognized net gains.............. (586) (634) (590) ------- ------- ------- Total net periodic pension expense $ 539 $ 395 $ 671 ======= ======= ======= </TABLE> The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of benefit obligations for the plan were 7.15 percent and 4.50 percent, respectively, for 2001 and 7.40 percent and 4.50 percent, respectively, for 2000. The expected long-term rate of return on assets was 9.00 percent for both 2001 and 2000 and the weighted average discount rate used in computing pension cost was 7.40 percent and 7.75 percent for 2001 and 2000, respectively. The pension plan held 56,155 shares of VNB Capital Trust I preferred securities at December 31, 2001, and 57,696 shares of Valley National Bancorp stock at December 31, 2000. Merchants also maintained a non-contributory benefit plan which was merged into the Valley plan effective December 31, 2001, and is included in the above tables. Valley maintains a non-qualified Directors' retirement plan. The projected benefit obligation and discount rate used to compute the obligation was $1.2 million and 7.15 percent at December 31, 2001, and $852 thousand and 7.40 percent at December 31, 2000. An expense of $188 thousand, $82 thousand and $104 thousand has been recognized for the plan in the years ended December 31, 2001, 2000 and 1999, respectively. 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Bonus Plan VNB and its subsidiaries award incentive and merit bonuses to its officers and employees based upon a percentage of the covered employees' compensation as determined by the achievement of certain performance objectives. Amounts charged to salaries expense during 2001, 2000 and 1999 were $5.9 million, $5.3 million and $4.8 million, respectively. Savings Plan Effective May 1, 1999, VNB's 401(k) Plan was amended to merge the Employee Stock Ownership Plan ("ESOP") from the acquisition of Wayne into the VNB 401(k) Plan, creating a KSOP (a 401(k) plan with an employee stock ownership feature). This plan covers eligible employees of VNB and its subsidiaries and allows employees to contribute 1 percent to 15 percent of their salary, with VNB matching a certain percentage of the employee contribution. Beginning in May 1999, the VNB match is in shares of Valley stock. In 2001, VNB matched employee contributions with 48,237 shares, of which 22,093 shares were allocated from the former Wayne ESOP Plan and 26,144 were issued from Treasury stock. In 2000, VNB matched employee contributions with 51,403 shares, of which 24,218 shares were allocated from the former Wayne ESOP Plan and 28,055 shares were issued from Treasury stock. In 1999, VNB matched employee contributions with 32,259 shares, of which 16,860 shares were allocated from the former Wayne ESOP Plan and 15,399 shares were issued from treasury stock. VNB charged expense for contributions to the plan, net of forfeitures, for both 2001 and 2000 amounting to $1.2 million and $944 thousand for 1999. At December 31, 2001 the KSOP had 77,707 unallocated shares. In 1999, 33,723 shares were allocated to participants of the former Wayne ESOP Plan. ESOP expense for 1999 was $865 thousand. No shares were allocated in 2001 or 2000 to participants of the former Wayne ESOP Plan. Effective July 2001, Merchants 401(k) plan was merged into the VNB 401(k) plan. The Merchants plan did not match employee contributions. Stock Option Plan At December 31, 2001, Valley had a stock option plan which is described below. Valley applies APB Opinion No. 25 and related Interpretations in accounting for its plan. Had compensation cost for the plan been determined consistent with FASB Statement No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> 2001 2000 1999 -------- -------- -------- (in thousands, except for share data) <S> <C> <C> <C> Net income As reported...... $135,204 $126,737 $125,341 Pro forma........ 133,367 125,488 124,296 Earnings per share As reported: Basic.......... $ 1.74 $ 1.61 $ 1.52 Diluted........ 1.73 1.60 1.51 Pro forma: Basic.......... $ 1.72 $ 1.60 $ 1.51 Diluted........ 1.71 1.58 1.49 </TABLE> Under the Employee Stock Option Plan, Valley may grant options to its employees for up to 3.0 million shares of common stock in the form of stock options, stock appreciation rights and restricted stock awards. The exercise price of options equal 100 percent of the market price of Valley's stock on the date of grant, and an option's maximum term is ten years. The options granted under this plan are exercisable not earlier than one year after the date of grant, expire not more than ten years after the date of the grant, and are subject to a vesting schedule. Non-qualified options granted by Midland Bancorporation, Inc. ("Midland") and assumed by Valley in its acquisition of Midland have no vesting period and a maximum term of fifteen years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2001, 2000 and 1999: dividend yield 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of 3.22 percent for 2001, 3.12 percent for 2000 and 3.71 percent for 1999; weighted-average risk-free interest rate of 5.05 percent for 2001, 5.11 percent for 2000 and 6.44 percent for 1999; and expected volatility of 24.1 percent for 2001, 24.5 percent for 2000 and 21.8 percent for 1999. A summary of the status of qualified and non-qualified stock options as of December 31, 2001, 2000 and 1999 and changes during the years ended on those dates is presented below: <TABLE> <CAPTION> 2001 2000 1999 -------------------- -------------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Stock Options Shares Price Shares Price Shares Price ------------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year...... 2,065,631 $18 2,150,769 $17 2,489,642 $13 Granted............................... 423,116 30 282,172 26 278,120 25 Exercised............................. (536,440) 10 (305,669) 11 (593,217) 9 Forfeited............................. (45,849) 23 (61,641) 23 (23,776) 22 --------- --------- --------- Outstanding at end of year............ 1,906,458 23 2,065,631 18 2,150,769 14 ========= ========= ========= Options exercisable at year-end....... 951,748 19 1,200,147 15 1,250,597 12 ========= ========= ========= Weighted-average fair value of options granted during the year............. $7.38 $6.77 $5.81 </TABLE> The following table summarizes information about stock options outstanding at December 31, 2001: <TABLE> <CAPTION> Options Outstanding Options Exercisable --------------------------------- --------------------- Weighted- Average Weighted- Weighted- Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ----------- --------- ----------- --------- <S> <C> <C> <C> <C> <C> $ 3-16 379,400 4.2 years $13 333,959 $13 16-25 807,901 6.6 22 527,216 22 25-28 409,357 8.5 27 90,373 26 28-31 309,800 9.9 31 200 29 --------- ------- 3-31 1,906,458 7.1 23 951,748 19 ========= ======= </TABLE> There were 22,439 and 29,985 and 53,087 stock appreciation rights outstanding as of December 31, 2001, 2000, and 1999, respectively. Restricted stock is awarded to key employees providing for the immediate award of Valley's common stock subject to certain vesting and restrictions. The awards are recorded at fair market value and amortized into salary expense over the vesting period. The following table sets forth the changes in restricted stock awards outstanding for the years ended December 31, 2001, 2000 and 1999. <TABLE> <CAPTION> Restricted Stock Awards 2001 2000 1999 ------------ ------- ------- ------- <S> <C> <C> <C> Outstanding at beginning of year 217,880 228,309 228,855 Granted......................... 140,741 67,406 64,471 Vested.......................... (76,102) (70,023) (61,506) Forfeited....................... (8,050) (7,812) (3,511) ------- ------- ------- Outstanding at end of year...... 274,469 217,880 228,309 ======= ======= ======= </TABLE> The amount of compensation costs related to restricted stock awards included in salary expense in 2001, 2000 and 1999 amounted to $2.2 million, $1.3 million and $1.1 million, respectively. 54
NOTES TO FINANCIAL CONSOLIDATED STATEMENTS--(Continued) Bank Owned Life Insurance During 2001, Valley invested $100.0 million in Bank Owned Life Insurance ("BOLI") to help offset the rising cost of employee benefits. Income of $2.1 million was recorded from the BOLI during the year ended December 31, 2001 and reported as other income. The BOLI is invested in investment securities similar to Valley's investment portfolio and is managed by two investment firms. INCOME TAXES (Note 14) Income tax expense (benefit) included in the financial statements consisted of the following: <TABLE> <CAPTION> 2001 2000 1999 ------- ------- ------- (in thousands) <S> <C> <C> <C> Income tax from operations: Current: Federal.................. $69,213 $64,669 $59,719 State.................... 2,470 1,919 2,356 ------- ------- ------- 71,683 66,588 62,075 Deferred: Federal and State........ (7,532) (561) (341) ------- ------- ------- Total income tax expense. $64,151 $66,027 $61,734 ======= ======= ======= </TABLE> Included in other comprehensive income is income tax expense (benefit) attributable to net unrealized gains (losses) on securities available for sale in the amount of $12.8 million, $15.3 million and ($25.1) million for the years ended December 31, 2001, 2000 and 1999, respectively. The tax effects of temporary differences that gave rise to deferred tax assets and liabilities as of December 31, 2001 and 2000 are as follows: <TABLE> <CAPTION> 2001 2000 ------- ------- (in thousands) <S> <C> <C> Deferred tax assets: Allowance for loan losses............... $25,619 $21,715 Investment securities available for sale -- 1,494 State privilege year taxes.............. 304 -- Non-accrual loan interest............... 282 182 Other................................... 7,213 7,623 ------- ------- Total deferred tax assets............. 33,418 31,014 ------- ------- Deferred tax liabilities: Tax over book depreciation.............. 286 2,476 Investment securities available for sale 11,300 -- Purchase accounting adjustments......... 133 212 Unearned discount on investments........ 255 188 State privilege year taxes.............. -- 34 Other................................... 3,723 5,121 ------- ------- Total deferred tax liabilities........ 15,697 8,031 ------- ------- Net deferred tax asset................... $17,721 $22,983 ======= ======= </TABLE> Based upon taxes paid and projections of future taxable income, management believes that it is more likely than not, that the net deferred tax asset will be realized. 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation between the reported income tax expense and the amount computed by multiplying income before taxes by the statutory federal income tax rate is as follows: <TABLE> <CAPTION> 2001 2000 1999 ------- ------- ------- (in thousands) <S> <C> <C> <C> Tax at statutory federal income tax rate............... $69,774 $67,467 $65,476 Increases (decreases) resulted from: Tax-exempt interest, net of interest incurred to carry tax-exempts......................................... (3,936) (4,183) (4,164) State income tax, net of federal tax benefit.......... 811 1,690 2,190 Realignment of corporate entities..................... -- -- (2,615) Other, net............................................ (2,498) 1,053 847 ------- ------- ------- Income tax expense.................................... $64,151 $66,027 $61,734 ======= ======= ======= </TABLE> Included in stockholders' equity are income tax benefits attributable to the exercise of non-qualified stock options of $3.3 million for the year ended December 31, 2001. 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 2047. Certain lease agreements provide for renewal options and increases in rental payments based upon increases in the consumer price index or the lessor's cost of operating the facility. Minimum aggregate lease payments for the remainder of the lease terms are as follows: <TABLE> <CAPTION> (in thousands) <S> <C> 2002.................... $ 7,756 2003.................... 7,332 2004.................... 6,574 2005.................... 6,104 2006.................... 5,530 Thereafter.............. 27,389 ------- Total lease commitments $60,685 ======= </TABLE> Net occupancy expense for 2001, 2000 and 1999 included approximately $4.6 million, $4.6 million and $3.8 million, respectively, of rental expenses, net of rental income, for leased bank facilities. Financial Instruments With Off-balance Sheet Risk In the ordinary course of business of meeting the financial needs of its customers, Valley, through its subsidiary VNB, is a party to various financial instruments which are properly not reflected in the consolidated financial statements. These financial instruments include standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these instruments is an indicator of VNB's level of involvement in each type of instrument as well as the exposure to credit loss in the event of non-performance by the other party to the financial instrument. VNB seeks to limit any exposure of credit loss by applying the same credit underwriting standards, including credit review, interest rates and collateral requirements or personal guarantees, as for on-balance sheet lending facilities. 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 2001 and 2000: <TABLE> <CAPTION> 2001 2000 ---------- ---------- (in thousands) <S> <C> <C> Standby and commercial letters of credit................ $ 187,528 $ 159,353 Commitments under unused lines of credit-credit card.... 71,593 832,613 Commitments under unused lines of credit-other.......... 1,227,376 587,804 Outstanding loan commitments............................ 891,813 436,618 Foreign exchange contracts.............................. -- 2,137 ---------- ---------- Total financial instruments with off-balance sheet risk $2,378,310 $2,018,525 ========== ========== </TABLE> Standby letters of credit represent the guarantee by VNB of the obligations or performance of a customer in the event the customer is unable to meet or perform its obligations to a third party. Obligations to advance funds under commitments to extend credit, including commitments under unused lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have specified expiration dates, which may be extended upon request, or other termination clauses and generally require payment of a fee. These commitments do not necessarily represent future cash requirements as it is anticipated that many of these commitments will expire without being fully drawn upon. Most of VNB's lending activity is to customers within the states of New Jersey and New York, except for automobile loans, which are to customers from 12 states, including New Jersey, and Canada as part of a referral program with State Farm Insurance Company which was phased out in 2001. At December 31, 2001, VNB had commitments to sell residential mortgage loans and SBA loans totaling $36.2 million. Litigation In the normal course of business, Valley may be a party to various outstanding legal proceedings and claims. In the opinion of management, the consolidated financial position or results of operations of Valley will not be materially affected by the outcome of such legal proceedings and claims. SHAREHOLDERS' EQUITY (Note 16) Capital Requirements Valley is subject to the regulatory capital requirements administered by the Federal Reserve Bank. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Valley's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Valley must meet specific capital guidelines that involve quantitative measures of Valley's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Valley to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as defined in the regulations. As of December 31, 2001, Valley exceeded all capital adequacy requirements to which it was subject. Valley's ratios at December 31, 2001 were all above the "well capitalized" requirements, which require Tier 1 capital to risk-adjusted assets of at least 6 percent. Total risk-based capital to risk-adjusted assets of 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10 percent and a minimum leverage ratio of 5 percent. To be categorized as well capitalized Valley must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. Valley's actual capital amounts and ratios as of December 31, 2001 and 2000 are presented in the following table: <TABLE> <CAPTION> To Be Well Capitalized Under Minimum Capital Prompt Corrective Actual Requirements Action Provisions ------------- -------------- ---------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (in thousands) <S> <C> <C> <C> <C> <C> <C> As of December 31, 2001 Total Risk-based Capital. $911,475 15.2% $481,226 8.0% $601,532 10.0% Tier I Risk-based Capital 847,672 14.1 240,613 4.0 360,919 6.0 Tier I Leverage Capital.. 847,672 10.3 330,413 4.0 413,016 5.0 As of December 31, 2000 Total Risk-based Capital. $712,325 12.3% $462,041 8.0% $577,551 10.0% Tier I Risk-based Capital 650,330 11.3 231,034 4.0 346,551 6.0 Tier I Leverage Capital.. 650,330 8.5 306,841 4.0 383,551 5.0 </TABLE> VNB's actual capital amounts and ratios as of December 31, 2001 and 2000 are presented in the following table: <TABLE> <CAPTION> To Be Well Capitalized Under Minimum Capital Prompt Corrective Actual Requirements Action Provisions ------------- -------------- ---------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (in thousands) <S> <C> <C> <C> <C> <C> <C> As of December 31, 2001 Total Risk-based Capital. $712,401 11.9% $478,219 8.0% $597,774 10.0% Tier I Risk-based Capital 648,598 10.9 239,110 4.0 358,664 6.0 Tier I Leverage Capital.. 648,598 7.9 327,452 4.0 409,315 5.0 As of December 31, 2000 Total Risk-based Capital. $663,864 11.6% $459,274 8.0% $574,093 10.0% Tier I Risk-based Capital 601,869 10.5 229,637 4.0 344,456 6.0 Tier I Leverage Capital.. 601,869 7.9 304,777 4.0 380,971 5.0 </TABLE> Dividend Restrictions VNB, a national banking association, is subject to a limitation in the amount of dividends it may pay to Valley, VNB's only shareholder. Prior approval by the office of the Comptroller of the Currency ("OCC") is required to the extent that the total of all dividends to be declared by VNB in any calendar year exceeds net profits, as defined, for that year combined with its retained net profits from the preceding two calendar years, less any transfers to capital surplus. Under this limitation, VNB could declare dividends in 2002 without prior approval from the OCC of up to $54.2 million plus an amount equal to VNB's net profits for 2002 to the date of such dividend declaration. In addition to dividends received from its subsidiary bank, Valley can satisfy its cash requirements by utilizing its own funds, cash and sale of investments, as well as borrowed funds. Preferred Stock On February 12, 2000, the Board of Directors unanimously approved an amendment to Valley's Certificate of Incorporation to authorize 30,000,000 shares of a new class of "blank check" preferred stock. The primary purpose of the preferred stock is to maximize Valley's ability to expand its capital base. The amendment was 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) approved by the Valley shareholders on April 6, 2000. At December 31, 2001 and 2000, there were no shares of preferred stock issued. Shares of Common Stock The following table summarizes the share transactions for the three years ended December 31, 2001: <TABLE> <CAPTION> Shares Shares in Issued Treasury - ---------- ---------- <S> <C> <C> Balance, December 31, 1998............. 73,836,099 (236,735) Stock dividend (5 percent)........... 1,236,450 1,537,876 Effect of stock incentive plan, net.. 526,937 168,366 Purchase of treasury stock........... -- (2,397,257) Retirement of treasury stock......... (380,326) -- ---------- ---------- Balance, December 31, 1999............. 75,219,160 (927,750) Stock dividend (5 percent)........... -- 2,884,669 Effect of stock incentive plan, net.. (9,376) 311,380 Purchase of treasury stock........... -- (2,770,770) Retirement of treasury stock......... (416,969) -- ---------- ---------- Balance, December 31, 2000............. 74,792,815 (502,471) Stock dividend (5 percent)........... 3,372,588 349,269 Effect of stock incentive plan, net.. 37,555 628,939 Purchase of treasury stock........... -- (2,211,034) ---------- ---------- Balance, December 31, 2001............. 78,202,958 (1,735,297) ========== ========== </TABLE> Treasury Stock On August 21, 2001 Valley's Board of Directors authorized the repurchase of up to 8,000,000 shares of the Company's outstanding common stock. Purchases may be made from time to time in the open market or in privately negotiated transactions generally not exceeding prevailing market prices. Reacquired shares are held in treasury and are expected to be used for general corporate purposes. As of December 31, 2001 Valley had repurchased 2.2 million shares of its common stock under this repurchase program. On May 23, 2000 Valley's Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company's outstanding common stock. As of September 19, 2000 Valley had repurchased 571,070 shares of its common stock under this repurchase program, which was rescinded in connection with the signing of the definitive merger agreement with Merchants. This is in addition to the 3,000,000 shares purchased pursuant to an authorization by the Board of Directors in December 1999, the majority of which were used for the stock dividend issued on May 16, 2000. On June 10, 1999 Valley's Board of Directors rescinded the stock repurchase program it had announced on April 28, 1999 after 1.6 million shares of Valley common stock had been repurchased. Approximately 1.5 million treasury shares were issued in conjunction with the 5 percent dividend issued May 18, 1999. Rescinding the remaining authorization was undertaken in connection with Valley's acquisition of Ramapo. 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 17) <TABLE> <CAPTION> Quarters ended 2001 ---------- --------------------- ---------- March 31 June 30 Sept 30 Dec 31 ---------- ---------- ---------- ---------- (in thousands, except for share data) <S> <C> <C> <C> <C> Interest income............ $144,202 $140,407 $136,889 $131,988 Interest expense........... 63,177 57,778 52,930 44,768 Net interest income........ 81,025 82,629 83,959 87,220 Provision for loan losses.. 2,100 2,835 2,700 8,071 Non-interest income........ 18,684 15,742 15,985 18,065 Non-interest expense....... 51,956 43,698 44,379 48,215 Income before income taxes. 45,653 51,838 52,865 48,999 Income tax expense......... 17,090 17,279 16,860 12,922 Net income................. 28,563 34,559 36,005 36,077 Earnings per share: Basic..................... 0.37 0.44 0.46 0.47 Diluted................... 0.36 0.44 0.46 0.47 Cash dividends per share... 0.25 0.265 0.265 0.265 Average shares outstanding: Basic..................... 77,935,200 78,038,165 77,933,382 76,611,582 Diluted................... 78,643,691 78,456,073 78,587,695 77,119,472 </TABLE> <TABLE> <CAPTION> Quarters ended 2000 ------------------------------------------- March 31 June 30 Sept 30 Dec 31 ---------- ---------- ---------- ---------- (in thousands, except for share data) <S> <C> <C> <C> <C> Interest income............ $137,688 $140,884 $144,116 $145,518 Interest expense........... 59,195 62,480 65,156 65,817 Net interest income........ 78,493 78,404 78,960 79,701 Provision for loan losses.. 2,450 2,875 2,580 2,850 Non-interest income........ 13,406 15,134 14,437 16,123 Non-interest expense....... 40,848 41,698 41,448 47,145 Income before income taxes. 48,601 48,965 49,369 45,829 Income tax expense......... 16,607 16,348 16,601 16,471 Net income................. 31,994 32,617 32,768 29,358 Earnings per share: Basic..................... 0.40 0.42 0.42 0.38 Diluted................... 0.40 0.41 0.42 0.37 Cash dividends per share... 0.24 0.25 0.25 0.25 Average shares outstanding: Basic..................... 80,159,333 78,535,472 77,950,692 77,788,652 Diluted................... 80,782,279 79,233,181 78,616,344 78,533,942 </TABLE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) PARENT COMPANY INFORMATION (Note 18) Condensed Statements of Financial Condition <TABLE> <CAPTION> December 31, ------------------ 2001 2000 -------- -------- (in thousands) <S> <C> <C> Assets Cash.................................................. $ 2,084 $ 2,641 Interest bearing deposits with banks.................. 115 22,125 Investment securities available for sale.............. 223,030 44,752 Investment in subsidiaries............................ 676,494 606,136 Loan to subsidiary bank employee benefit plan......... 714 893 Other assets.......................................... 10,756 5,523 -------- -------- Total assets........................................ $913,193 $682,070 ======== ======== Liabilities Dividends payable to shareholders..................... $ 20,295 $ 15,605 Short-term borrowings................................. 4,000 10,000 Long-term debt........................................ 206,185 -- Other liabilities..................................... 4,338 483 -------- -------- Total liabilities................................... 234,818 26,088 -------- -------- Shareholders' Equity Preferred stock....................................... -- -- Common stock.......................................... 33,310 32,015 Surplus............................................... 406,608 321,970 Retained earnings..................................... 270,730 317,855 Unallocated common stock held by employee benefit plan (602) (775) Accumulated other comprehensive income (loss)......... 19,638 (2,307) -------- -------- 729,684 668,758 Treasury stock, at cost................................ (51,309) (12,776) -------- -------- Total shareholders' equity.......................... 678,375 655,982 -------- -------- Total liabilities and shareholders' equity.......... $913,193 $682,070 ======== ======== </TABLE> Condensed Statements of Income <TABLE> <CAPTION> Years ended December 31, - - ---------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) <S> <C> <C> <C> Income Dividends from subsidiary......................................... $ 93,000 $116,893 $136,251 Income from subsidiary............................................ 721 1,868 2,106 Gains on securities transactions, net............................. 156 249 2,591 Other interest and dividends...................................... 1,531 2,432 2,741 -------- -------- -------- 95,408 121,442 143,689 Expenses........................................................... 6,070 4,332 4,064 -------- -------- -------- Income before income taxes and equity in undistributed earnings of subsidiary...................................................... 89,338 117,110 139,625 Income tax (benefit) expense...................................... (1,223) (44) 1,580 -------- -------- -------- Income before equity in undistributed earnings of subsidiary...... 90,561 117,154 138,045 Equity in undistributed earnings of subsidiary (excess dividends). 44,643 9,583 (12,704) -------- -------- -------- Net income........................................................ $135,204 $126,737 $125,341 ======== ======== ======== </TABLE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed Statements of Cash Flows <TABLE> <CAPTION> Years ended December 31, ------------------------------- 2001 2000 1999 --------- --------- --------- (in thousands) <S> <C> <C> <C> Cash flows from operating activities: Net income.......................................................... $ 135,204 $ 126,737 $ 125,341 Adjustments to reconcile net income to net cash provided by operating activities: (Equity in undistributed earnings) excess dividends of subsidiary. (44,643) (9,583) 12,704 Depreciation and amortization..................................... 347 380 365 Amortization of compensation costs pursuant to long-term stock incentive plan.................................................. 2,020 1,037 1,091 Net accretion of discounts........................................ (194) (8) (49) Net gains on securities transactions.............................. (156) (249) (2,591) Net (increase)decrease in other assets............................ (5,580) (1,707) 317 Net (decrease)increase in other liabilities....................... (3,224) (6,085) 5,200 --------- --------- --------- Net cash provided by operating activities....................... 83,774 110,522 142,378 --------- --------- --------- Cash flows from investing activities: Proceeds from sales of investment securities available for sale..... 920 24,413 8,735 Proceeds from maturing investment securities available for sale..... 65,026 3,197 81,146 Purchases of investment securities available for sale............... (233,424) (15,817) (78,666) Proceeds from sales of trading account securities................... -- -- 1,415 Purchase of common stock of subsidiary.............................. (6,185) -- -- Net decrease(increase) in short-term investments.................... 22,010 14,002 (14,445) Payment of employee benefit plan loan............................... 179 178 179 --------- --------- --------- Net cash (used in) provided by investing activities............... (151,474) 25,973 (1,636) --------- --------- --------- Cash flows from financing activities: Net (decrease)increase in other borrowings.......................... (6,000) 10,000 -- Advances of long-term debt.......................................... 206,185 -- -- Purchase of common shares to treasury............................... (65,012) (79,161) (75,496) Dividends paid to common shareholders............................... (76,260) (71,723) (66,801) Common stock issued, net of cancellations........................... 8,230 3,780 3,408 --------- --------- --------- Net cash provided by (used in) financing activities............... 67,143 (137,104) (138,889) --------- --------- --------- Net (decrease)increase in cash and cash equivalents.................. (557) (609) 1,853 Cash and cash equivalents at beginning of year....................... 2,641 3,250 1,397 --------- --------- --------- Cash and cash equivalents at end of year............................. $ 2,084 $ 2,641 $ 3,250 ========= ========= ========= </TABLE> FAIR VALUES OF FINANCIAL INSTRUMENTS (Note 19) Limitations: The fair value estimates made at December 31, 2001 and 2000 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 on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation, trust and investment management departments) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following methods and assumptions were used to estimate the fair value of each class of financial instruments and mortgage servicing rights: Cash and short-term investments: For such short-term investments, the carrying amount is considered to be a reasonable estimate of fair value. Investment securities held to maturity and investment securities available for sale: Fair values are based on quoted market prices. Loans: Fair values are estimated by obtaining quoted market prices, when available. The fair value of other loans is estimated by discounting the future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loan. Deposit liabilities: Current carrying amounts approximate estimated fair value of demand deposits and savings accounts. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for deposits of similar remaining maturity. Short-term borrowings: Current carrying amounts approximate estimated fair value. Long-term debt: The fair value is estimated by obtaining quoted market prices of financial instruments with similar characteristics, terms and remaining maturity. Company-obligated mandatorily redeemable preferred capital securities of a subsidiary trust holding solely junior subordinated debentures of the company: The fair value is estimated by obtaining the quoted market price. The carrying amounts and estimated fair values of financial instruments were as follows at December 31, 2001 and 2000: <TABLE> <CAPTION> 2001 2000 --------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value <S> <C> <C> <C> <C> (in thousands) Financial assets: Cash and due from banks................. $ 311,850 $ 311,850 $ 239,105 $ 239,105 Federal funds sold...................... -- -- 85,000 85,000 Investment securities held to maturity.. 503,061 476,872 577,450 543,034 Investment securities available for sale 2,171,695 2,171,695 1,626,086 1,626,086 Net loans............................... 5,268,004 5,332,375 5,127,115 5,112,824 Financial liabilities: Deposits with no stated maturity........ 3,894,356 3,894,356 3,632,595 3,632,595 Deposits with stated maturities......... 2,412,618 2,437,233 2,504,233 2,506,712 Short-term borrowings................... 304,262 304,262 426,014 426,014 Long-term debt.......................... 975,728 971,567 591,808 593,939 Preferred capital securities............ 200,000 200,480 -- -- </TABLE> The estimated fair value of financial instruments with off-balance sheet risk, consisting of unamortized fee income at December 31, 2001 and 2000 is not material. BUSINESS SEGMENTS (Note 20) VNB has four major business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, investment portfolio and corporate and other adjustments. 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Lines of business and actual structure of operations determine each segment. Each is reviewed routinely for its asset growth, contribution to pre-tax net income and return on average interest-earning assets. Expenses related to the branch network, all other components of retail banking, along with the back office departments of the bank are allocated from the corporate and other adjustments segment to each of the other three business segments. The financial reporting for each segment contains allocations and reporting in line with VNB's operations, which may not necessarily be compared to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. Consumer lending delivers loan and banking products and services mainly to individuals and small businesses through its branches, ATM machines, PC banking and sales, service and collection force within each lending department. The products and services include residential mortgages, home equity loans, automobile loans, credit card loans, trust and investment services and mortgage servicing for investors. Automobile lending is generally available throughout New Jersey, but was also available in twelve states and Canada as part of a referral program with State Farm Insurance Company which was phased out in 2001. The commercial lending division provides loan products and services to small and medium commercial establishments throughout northern New Jersey and Manhattan. These include lines of credit, term loans, letters of credit, asset-based lending, construction, development and permanent real estate financing for owner occupied and leased properties and Small Business Administration ("SBA") loans. The SBA loans are offered through a sales force covering New Jersey and a number of surrounding states and territories. The commercial lending division serves numerous businesses through departments organized into product or specific geographic divisions. The investment portfolio segment handles the management of the investment portfolio, asset/liability management and government banking for VNB. The objectives of this department are production of income and liquidity through the investment of VNB's funds. The bank purchases and holds a mix of bonds, notes, U.S. and other governmental securities and other investments. The corporate and other adjustments segment represents assets and income and expense items not directly attributable to a specific segment. The following table represents the financial data for the four business segments for the years ended 2001, 2000 and 1999. <TABLE> <CAPTION> Year ended December 31, 2001 ---------------------------------------------------------- Corporate Consumer Commercial Investment and Other Lending Lending Portfolio Adjustments Total ---------- ---------- ---------- ----------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> Average interest-earning assets............... $2,656,593 $2,561,052 $2,450,333 $ -- $7,667,978 ========== ========== ========== ======== ========== Interest income............................... $ 201,678 $ 199,690 $ 158,189 $ (6,071) $ 553,486 Interest expense.............................. 75,753 73,029 69,871 -- 218,653 ---------- ---------- ---------- -------- ---------- Net interest income (loss).................... 125,925 126,661 88,318 (6,071) 334,833 Provision for loan losses..................... 4,699 11,007 -- -- 15,706 ---------- ---------- ---------- -------- ---------- Net interest income (loss) after provision for loan losses................................. 121,226 115,654 88,318 (6,071) 319,127 Non-interest income........................... 16,027 8,485 2,448 41,516 68,476 Non-interest expense.......................... 19,569 17,909 824 149,946 188,248 Internal expense transfer..................... 34,793 33,158 29,750 (97,701) -- ---------- ---------- ---------- -------- ---------- Income (loss) before income taxes............. $ 82,891 $ 73,072 $ 60,192 $(16,800) $ 199,355 ========== ========== ========== ======== ========== Return on average interest-bearing assets (pre-tax)................................... 3.12% 2.85% 2.46% -- 2.60% </TABLE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) <TABLE> <CAPTION> Year ended December 31, 2000 ---------------------------------------------------------- Corporate Consumer Commercial Investment and Other Lending Lending Portfolio Adjustments Total ---------- ---------- ---------- ----------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> Average interest-earning assets............... $2,786,273 $2,314,357 $2,217,861 $ -- $7,318,491 ========== ========== ========== ======== ========== Interest income............................... $ 216,502 $ 206,539 $ 150,767 $ (5,602) $ 568,206 Interest expense.............................. 96,187 79,896 76,565 -- 252,648 ---------- ---------- ---------- -------- ---------- Net interest income (loss).................... 120,315 126,643 74,202 (5,602) 315,558 Provision for loan losses..................... 4,481 6,274 -- -- 10,755 ---------- ---------- ---------- -------- ---------- Net interest income (loss) after provision for loan losses................................. 115,834 120,369 74,202 (5,602) 304,803 Non-interest income........................... 13,704 7,510 562 37,324 59,100 Non-interest expense.......................... 24,201 18,271 347 128,320 171,139 Internal expense transfer..................... 34,643 28,776 27,576 (90,995) -- ---------- ---------- ---------- -------- ---------- Income (loss) before income taxes............. $ 70,694 $ 80,832 $ 46,841 $ (5,603) $ 192,764 ========== ========== ========== ======== ========== Return on average interest-bearing assets (pre-tax)................................... 2.54% 3.49% 2.11% -- 2.63% </TABLE> <TABLE> <CAPTION> Year ended December 31, 1999 ---------------------------------------------------------- Corporate Consumer Commercial Investment and Other Lending Lending Portfolio Adjustments Total ---------- ---------- ---------- ----------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> Average interest-earning assets............... $2,696,100 $2,099,038 $2,235,093 $ -- $7,030,231 ========== ========== ========== ======== ========== Interest income............................... $ 199,484 $ 177,672 $ 146,182 $ (5,520) $ 517,818 Interest expense.............................. 80,072 62,340 66,380 -- 208,792 ---------- ---------- ---------- -------- ---------- Net interest income (loss).................... 119,412 115,332 79,802 (5,520) 309,026 Provision for loan losses..................... 7,826 3,209 -- -- 11,035 ---------- ---------- ---------- -------- ---------- Net interest income (loss) after provision for loan losses................................. 111,586 112,123 79,802 (5,520) 297,991 Non-interest income........................... 13,992 6,821 121 32,869 53,803 Non-interest expense.......................... 27,019 17,176 328 120,196 164,719 Internal expense transfer..................... 33,490 26,073 27,764 (87,327) -- ---------- ---------- ---------- -------- ---------- Income (loss) before income taxes............. $ 65,069 $ 75,695 $ 51,831 $ (5,520) $ 187,075 ========== ========== ========== ======== ========== Return on average interest-bearing assets (pre-tax)................................... 2.41% 3.61% 2.32% -- 2.66% </TABLE> 65
[LOGO] KPMG New Jersey Headquarters 150 John F. Kennedy Parkway Short Hills, NJ 07078 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Valley National Bancorp: We have audited the accompanying consolidated statements of financial condition of Valley National Bancorp and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP January 16, 2002 66
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The information set forth under the captions "Director Information" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2002 Proxy Statement is incorporated herein by reference. Certain information on Executive Officers of the registrant is included in Part I, Item 4A of this report, which is also incorporated herein by reference. Item 11. Executive Compensation The information set forth under the caption "Executive Compensation" in the 2002 Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth under the caption "Stock Ownership of Management and Principal Shareholders" in the 2002 Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information set forth under the captions "Human Resources and Compensation Committee Interlocks and Insider Participation" and "Certain Transactions with Management" in the 2002 Proxy Statement is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements and Schedules: The following Financial Statements and Supplementary Data are filed as part of this annual report: Consolidated Statements of Financial Condition Consolidated Statements of Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (b) Reports on Form 8-K: Filed October 1, 2001 to report the restatement of Valley's audited consolidated financial statements and notes thereto for the years ended December 31, 2000, 1999, and 1998 to reflect Valley's acquisition of Merchants New York Bancorp, which was accounted for as a pooling-of-interests. On October 19, 2001 to report earnings for the three and nine months ended September 30, 2001. On November 16, 2001 to announce the completion of a $200.0 million public offering of trust originated preferred securities. 67
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K): (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: A. Agreement and Plan of Merger dated December 17, 1998 among Valley, VNB, Ramapo Financial Corporation and The Ramapo Bank is incorporated herein by reference to Valley's Report on Form 8-K filed with the Commission on December 22, 1998. B. Agreement and Plan of Merger dated September 5, 2002 among Valley, VNB, Merchants and Merchants Bank of New York is incorporated herein by reference to Valley's Report on Form 8-K filed with the Commission on September 21, 2000. (3) Articles of Incorporation and By-laws: A. Restated Certificate of Incorporation of the Registrant as in effect on May 7, 2001 ( and is currently in effect) is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. B. By-laws of the Registrant adopted as of March 14, 1989 and amended March 19, 1991 are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1998. (10) Material Contracts: A. Restated and amended "Change in Control Agreements" dated January 1, 1999 between Valley, VNB and Gerald H. Lipkin, Peter John Southway, Robert Meyer, and Peter Crocitto are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1998. B. "Change in Control Agreements" dated January 1, 1995 between Valley, VNB and Robert Farrell, Richard Garber and Robert Mulligan are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1999. C. "Change in Control Agreement" dated February 1, 1996 between Valley, VNB and Jack Blackin is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996. D. "Change in Control Agreement" dated April 15, 1996 between Valley, VNB and John Prol is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996. E. "The Valley National Bancorp Long-term Stock Incentive Plan" dated January 19, 1999 and as amended through June 19, 2001. Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. F. "Severance Agreement" dated August 17, 1994 between Valley, VNB and Gerald H. Lipkin is incorporated by reference to Registrant's Registration Statement on Form S-4 (No. 33-55765) filed with the Securities and Exchange Commission on October 4, 1999. G. "Split-Dollar Agreement" dated July 7, 1995 between Valley, VNB, and Gerald H. Lipkin incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 2000 filed on March 1, 2001. H. "Severance Agreements" as of January 1, 1998 between Valley, VNB and Peter Crocitto, Robert M. Meyer and Peter John Southway are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1997. I. "Change in Control Agreement" dated January 1, 1999 between Valley, VNB and Robert J. Farnon is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1998. J. "Change in Control Agreement" dated January 3, 2000 between Valley, VNB and Albert L. Engel is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1999. 68
K. "The Valley National Bancorp Long-Term Stock Incentive Plan" dated January 10, 1989 and as amended through June 19, 2001. Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. L. Amendment to the "Severance Agreement" dated November 28, 2000 between Valley, VNB and Gerald H. Lipkin incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 2000 filed on March 1, 2001. M. "Change in Control Agreement" dated April 4, 2001 between Valley, VNB and Alan D. Eskow incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. N. "Employment Continuation and Non-Competition Agreements" dated September 5, 2000 between Valley, VNB and Spencer B. Witty, James G. Lawrence, William J. Cardew and Eric W. Gould incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. O. "Change in Control Agreement" dated September 5, 2000 between Valley, VNB and James G. Lawrence incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. P. Amended and Restated Declaration of Trust of VNB Capital Trust I, dated as of November 7, 2001 incorporated herein by reference to the Registrants Report on Form 8-K filed on November 16, 2001. Q. Indenture among VNB Capital Trust I, The Bank of New York as Debenture Trustee, and Valley, dated as of November 7, 2001 incorporated herein by reference to the Registrants Report on Form 8-K filed on November 16, 2001. R. Preferred Securities Guarantee Agreement among VNB Capital Trust I, The Bank of New York, as Guarantee Trustee, and Valley, dated as of November 7, 2001 incorporated herein by reference to the Registrants Report on Form 8-K filed on November 16, 2001. S. "Change in Control Agreement" dated November 28, 2001 between Valley, VNB and Garret G. Nieuwenhuis. (12) Computation of Consolidated Ratios of Earnings to Fixed Charges (21) List of Subsidiaries: (a) Subsidiaries of Valley: <TABLE> <CAPTION> Name Jurisdiction of Percentage of Voting ---- Incorporation Securities Owned by the Parent <S> <C> <C> VNB Capital Trust I Delaware 100% Valley National Bank (VNB) United States 100% (b) Subsidiaries of VNB: VNB Mortgage Services, Inc. New Jersey 100% BNV Realty Incorporated (BNV) New Jersey 100% VN Investments, Inc. (VNI) New Jersey 100% VNB Loan Services, Inc. New York 100% VNB RSI, Inc. New Jersey 100% Wayne Ventures, Inc. New Jersey 100% Wayne Title, Inc. New Jersey 100% VNB International Services, Inc. (ISI) New Jersey 100% New Century Asset Management, Inc. New Jersey 100% Hallmark Capital Management, Inc. New Jersey 100% Merchants New York Commercial Corp. Delaware 100% Valley Commercial Capital, LLC New Jersey 100% (c) Subsidiary of ISI: VNB Financial Services, Inc. Canada 100% </TABLE> 69
<TABLE> <CAPTION> Name Jurisdiction of Percentage of Voting ---- Incorporation Securities Owned by the Parent <S> <C> <C> (d) Subsidiaries of BNV SAR I, Inc. New Jersey 100% SAR II, Inc. New Jersey 100% (e) Subsidiary of VNI: VNB Realty, Inc. New Jersey 100% (f) Subsidiary of VNB Realty, Inc. VNB Capital Corp. New York 100% </TABLE> (23) Consents of Experts and Counsel Consent of KPMG LLP (24) Power of Attorney of Certain Directors and Officers of Valley. 70
SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALLEY NATIONAL BANCORP By: /S/ GERALD H. LIPKIN ----------------------------- Gerald H. Lipkin, Chairman of the Board President and Chief Executive Officer Dated: February 26, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated. Signature Title Date --------- ----- ---- /S/ GERALD H. LIPKIN Chairman of the Board, February 26, 2002 - ----------------------------- President and Chief Gerald H. Lipkin Executive Officer and Director /S/ SPENCER B. WITTY Vice Chairman and Director February 26, 2002 - ----------------------------- Spencer B. Witty /S/ ALAN D. ESKOW Executive Vice President and February 26, 2002 - ----------------------------- Chief Financial Officer Alan D. Eskow (Principal Financial Officer) /S/ CHRISTINE K. First Vice President and February 26, 2002 MOZER-BALDYGA Controller - ----------------------------- (Principal Accounting Christine K. Mozer-Baldyga Officer) /S/ ANDREW B. ABRAMSON* Director February 26, 2002 - ----------------------------- Andrew B. Abramson /S/ CHARLES J. BAUM* Director February 26, 2002 - ----------------------------- Charles J. Baum /S/ PAMELA BRONANDER* Director February 26, 2002 - ----------------------------- Pamela Bronander /S/ JOSEPH COCCIA, JR.* Director February 26, 2002 - ----------------------------- Joseph Coccia, Jr. /S/ HAROLD P. COOK, III* Director February 26, 2002 - ----------------------------- Harold P. Cook, III /S/ AUSTIN C. DRUKKER* Director February 26, 2002 - ----------------------------- Austin C. Drukker 71
Signature Title Date --------- ----- ---- /S/ GRAHAM O. JONES* Director February 26, 2002 - ----------------------------- Graham O. Jones /S/ WALTER H. JONES, III* Director February 26, 2002 - ----------------------------- Walter H. Jones, III /S/ GERALD KORDE* Director February 26, 2002 - ----------------------------- Gerald Korde /S/ ROBINSON MARKEL* Director February 26, 2002 - ----------------------------- Robinson Markel /S/ ROBERT E. MCENTEE* Director February 26, 2002 - ----------------------------- Robert E. McEntee /S/ RICHARD S. MILLER* Director February 26, 2002 - ----------------------------- Richard S. Miller /S/ ROBERT RACHESKY* Director February 26, 2002 - ----------------------------- Robert Rachesky /S/ BARNETT RUKIN* Director February 26, 2002 - ----------------------------- Barnett Rukin /S/ PETER SOUTHWAY* Director February 26, 2002 - ----------------------------- Peter Southway /S/ RICHARD F. TICE* Director February 26, 2002 - ----------------------------- Richard F. Tice /S/ LEONARD J. VORCHEIMER* Director February 26, 2002 - ----------------------------- Leonard J. Vorcheimer /S/ JOSEPH L. VOZZA* Director February 26, 2002 - ----------------------------- Joseph L. Vozza - -------- *By Gerald H. Lipkin, as attorney-in-fact. 72
EXHIBIT INDEX Exhibit Number Exhibit Desrciption - -------------- ------------------- (10)S Change in Control Agreement - Garret G. Nieuwenhuis (12) Computation of Consolidated Ratios of Earning to Fixed Charges (23) Consent of KPMG LLP (24) Power of Attorney