Valley Bank - 10-K annual report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

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)

973-305-8800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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  þ            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.  þ

Indicate by check mark whether the Registration is an accelerated filer (as defined in Exchange Act Rule 12b-2)

Yes  þ            No  ¨

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $2.2 billion on December 31, 2002.

There were 90,223,880 shares of Common Stock outstanding at February 7, 2003.

Documents incorporated by reference:

Certain portions of the Registrant’s Definitive Proxy Statement (the “2003 Proxy Statement”) for the 2003 Annual Meeting of Shareholders to be held April 9, 2003 will be incorporated by reference in Part III.

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TABLE OF CONTENTS

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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, 2002, Valley had consolidated total assets of $9.1 billion, total deposits of $6.7 billion and total shareholders’ equity of $631.7 million. In addition to its principal subsidiary, Valley National Bank (“VNB”), Valley formed a wholly-owned 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, 2002, VNB maintained 128 branch offices located in northern New Jersey and Manhattan. These services include the following: the acceptance of demand, savings and time deposits; extension of consumer, real estate, Small Business Administration (“SBA”) and other commercial credits; equipment leasing; and personal and corporate trust, as well as pension and fiduciary services. VNB also provides through wholly-owned subsidiaries the services of an all-line insurance agency, title insurance agencies, Securities and Exchange Commission (“SEC”) registered investment advisors and beginning January 1, 2003, a registered securities broker dealer.

VNB’s subsidiaries are all included in the consolidated financial statements of Valley. These subsidiaries include a mortgage servicing company; title insurance agencies; asset management advisors which are SEC registered investment advisors; an all-line insurance agency offering property and casualty, life and health insurance; a subsidiary which holds, maintains and manages investment assets for VNB; a subsidiary which owns and services auto loans; a subsidiary which specializes in asset-based lending; a subsidiary which offers both commercial equipment leases and financing for general aviation aircraft; and as of January 1, 2003, a subsidiary which is a registered broker-dealer. VNB’s subsidiaries also include a real estate investment trust subsidiary (“REIT”) which owns real estate related investments and a REIT subsidiary which owns some of the real estate utilized by VNB and related real estate investments. All subsidiaries mentioned above are wholly-owned by VNB, except Valley owns less than 1 percent of the holding company for the REIT subsidiary which owns some of the real estate utilized by VNB and related real estate investments. Each REIT must have 100 or more shareholders to qualify as a REIT, and therefore, both have issued less than 20 percent of their outstanding non-voting preferred stock to outside shareholders, most of whom are non-senior management VNB employees.

VNB has four business segments it monitors and reports on to manage its business operations. These 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.”

Valley makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website at www.valleynationalbank.com without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Additionally, Valley will also provide without charge, a copy of its Form 10-K to any shareholder by mail. Requests should be sent to Valley National Bancorp, Attention: Shareholder Relations 1455 Valley Road, Wayne, NJ 07470.

Recent Developments

On January 1, 2003, VNB completed its acquisition of Glen Rauch Securities, Inc. (“Glen Rauch”), a Wall Street brokerage firm specializing in municipal securities with more than $1 billion in assets in its customer accounts. The purchase of Glen Rauch was a cash acquisition with subsequent earn-out payments. For 2002, Glen Rauch’s annual revenues were approximately $5.0 million. Glen Rauch, an SEC registered broker-dealer subsidiary, has become part of Valley’s Financial Services Division.

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On October 31, 2002, VNB acquired NIA/Lawyers Title Agency, LLC (“NIA/Lawyers”), a title insurance agency based in Paramus, NJ. For 2001, NIA/Lawyers’ annual revenues were approximately $5.0 million. NIA/Lawyers, a subsidiary, has become part of Valley’s Financial Services Division.

In August 2002, Valley completed its acquisition of Masters Coverage Corp. (“Masters”), an independent insurance agency. Masters is an all-line insurance agency offering property and casualty, life and health insurance. The purchase of Masters was a cash acquisition with subsequent earn-out payments. For 2001, Masters’ annual revenues were approximately $5.6 million. Masters, a subsidiary, has become part of Valley’s Financial Services Division.

In July 2002, Valley announced that it will expense the cost of all stock options the company grants beginning with options granted and earnings reported for the calendar year 2002. While the impact of expensing stock options was not material to Valley’s financial statements for 2002, the impact on Valley’s net income is expected to increase over time as options vest and new options are granted. Based on Valley’s historical levels of earnings and stock options issued, the effect of expensing options is expected to amount to approximately $0.02 per diluted share annually when it makes its full impact on earnings at the end of the phase-in period.

During the quarter ended June 30, 2002, a two-year Federal investigation culminated in the arrest of an officer of the International Private Banking Department of the Merchants Bank Division and the seizure of 39 accounts that the officer managed. The officer was charged with money laundering in furtherance of narcotic trafficking activity, tax evasion, and unlicensed money transmitting. Valley became aware of the investigation by Federal Law Enforcement Officials during the course of its own due diligence investigation, prior to the acquisition of Merchants Bank. Valley representatives met with the office of the U.S. Attorney and continued the ongoing cooperation with the investigation into the International Private Banking Department. Throughout the course of the investigation, there was never any adverse impact upon Valley, its funds, its legitimate customers or its operations. Valley is continuing its policy of full and complete cooperation with State and Federal Law Enforcement Authorities in the investigation of criminal conduct that in any way affects the integrity of Valley National Bank and its customers’ accounts.

On May 1, 2002, Valley completed the sale of its subsidiary VNB Financial Services, Inc., a Canadian finance company, to State Farm Mutual Automobile Insurance Company (“State Farm”) for a purchase price equal to Valley’s equity in the subsidiary plus a premium of approximately $1.6 million. The subsidiary primarily originated fixed rate auto loans in Canada through a marketing program with State Farm.

Competition

The market for banking and bank-related services is highly competitive. Valley and VNB compete with other providers of financial services such as other bank holding companies, commercial and savings banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, title agencies, asset managers, insurance companies and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressure. Competition intensified as a consequence of the Gramm-Leach-Bliley Act (discussed below) and interstate banking laws now in effect. Valley and VNB compete by offering quality products and convenient services at competitive prices. In order to maintain and enhance its competitive position, Valley regularly reviews its products, locations, alternative delivery channels and various acquisition prospects and periodically engages in discussions regarding possible acquisitions.

Employees

At December 31, 2002, VNB and its subsidiaries employed 2,257 full-time equivalent persons. Management considers relations with its employees to be satisfactory.

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SUPERVISION AND REGULATION

The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on VNB. It is intended only to briefly summarize some material provisions.

Bank Holding Company Regulation

Valley is a bank holding company within the meaning of the Holding Company Act. As a bank holding company, Valley is supervised by the Board of Governors of the Federal Reserve System (“FRB”) and is required to file reports with the FRB and provide such additional information as the FRB may require.

The Holding Company Act prohibits Valley, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The Holding Company Act requires prior approval by the FRB of the acquisition by Valley of more than five percent of the voting stock of any additional bank. Satisfactory capital ratios and Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy. Acquisitions through VNB require approval of the office of the Comptroller of the Currency of the United States (“OCC”). The Holding Company Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows Valley to expand into insurance, securities, merchant banking activities, and other activities that are financial in nature.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Banking and Branching Act”) enables bank holding companies to acquire banks in states other than its home state, regardless of applicable state law. The Interstate Banking and Branching Act also authorizes banks to merge across state lines, thereby creating interstate banks, with branches in more than one state. Under the legislation, each state had the opportunity to “opt-out” of this provision. Furthermore, a state may “opt-in” with respect to de novo branching, thereby permitting a bank to open new branches in a state in which the bank does not already have a branch. Without de novo branching, an out-of-state commercial bank can enter the state only by acquiring an existing bank or branch. The vast majority of states have allowed interstate banking by merger but have not authorized de novobranching.

New Jersey enacted legislation to authorize interstate banking and branching and the entry into New Jersey of foreign country banks. New Jersey did not authorize de novo branching into the state. However, under federal law, federal savings banks which meet certain conditions may branch de novo into a state, regardless of state law.

Recent Legislation

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30, 2002, added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting.

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The Sarbanes-Oxley Act provides for, among other things:

The Sarbanes-Oxley Act contains provisions which became effective upon enactment on July 30, 2002 and provisions which will become effective from within 30 days to one year from enactment. The SEC has been delegated the task of enacting rules to implement various provisions. In addition, each of the national stock exchanges has proposed new corporate governance rules, including rules strengthening director independence requirements for boards, the adoption of corporate governance codes and charters for the nominating, corporate governance and audit committees.

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 were issued in 2002. These regulations required minimum standards to verify customer identity, encouraged cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibited the anonymous use of “concentration accounts,” and required all covered financial institutions to have in place an anti-money laundering compliance program.

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The Act also amended the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts.

In late 2000, the American Home Ownership and Economic Act of 2000 instituted a number of regulatory relief provisions applicable to national banks, such as permitting national banks to have classified directors and to merge their business subsidiaries into the bank.

The Gramm-Leach-Bliley Financial Modernization Act of 1999 (“Modernization Act”) became effective in early 2000. The Modernization Act:

If a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals.

The OCC has adopted rules to allow national banks to form subsidiaries to engage in financial activities allowed for financial holding companies. Electing national banks must meet the same management and capital standards as financial holding companies but may not engage in insurance underwriting, real estate development or merchant banking. Sections 23A and 23B of the Federal Reserve Act apply to financial subsidiaries and the capital invested by a bank in its financial subsidiaries will be eliminated from the bank’s capital in measuring all capital ratios. VNB owns three financial subsidiaries - Masters, NIA/Lawyers and Glen Rauch. Valley has not elected to become a financial holding company.

The Modernization Act modified other financial laws, including laws related to financial privacy and community reinvestment.

Additional proposals to change the laws and regulations governing the banking and financial services industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on Valley cannot be determined at this time.

Regulation of Bank Subsidiary

VNB is subject to the supervision of, and to regular examination by, the OCC. Various laws and the regulations thereunder applicable to Valley and its bank subsidiary impose restrictions and requirements in many areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of loans and investments, consumer protection, employment practices and entry into new types of business. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the 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.

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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 Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of VNB’s capital. In addition, extensions of credit in excess of certain limits must be approved by VNB’s board of directors. Under the Sarbanes-Oxley Act, Valley and its subsidiaries, other than VNB, may not extend or arrange for any personal loans to its directors and executive officers.

Community Reinvestment

Under the Community Reinvestment Act (“CRA”), as implemented by OCC regulations, a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a national bank, to assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. VNB received a “satisfactory” CRA rating in its most recent examination.

Restrictions on Activities Outside the United States

Until May of 2002, when the activities in Canada ceased, Valley’s activities in Canada were conducted through VNB and in the United States were subject to Sections 25 and 25A of the Federal Reserve Act, certain regulations under the National Bank Act and, primarily, Regulation K promulgated by the FRB. 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. Valley and VNB currently have no operations outside the United States.

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FIRREA

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a depository institution insured by the Federal Deposit Insurance Corp (“FDIC”) can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. These provisions have commonly been referred to as FIRREA’s “cross guarantee” provisions. Further, under FIRREA the failure to meet capital guidelines could subject a bank to a variety of enforcement remedies available to federal regulatory authorities.

FIRREA also imposes certain independent appraisal requirements upon a bank’s real estate lending activities and further imposes certain loan-to-value restrictions on a bank’s real estate lending activities. The bank regulators have promulgated regulations in these areas.

FDICIA

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial activities under the Modernization Act, all depository institutions must be “well capitalized”. The financial holding company of a national bank will be put under directives to raise its capital levels or divest its activities if the depository institution falls from that level.

The OCC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, and (iv) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0 percent, (iii) has Tier 1 leverage ratio of (a) at least 4.0 percent or (b) at least 3.0 percent if the institution was rated 1 in its most recent examination, and (iv) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1 leverage ratio of (a) less than 4.0 percent or (b) less than 3.0 percent if the institution was rated 1 in its most recent examination. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating. Similar categories apply to bank holding companies.

In addition, significant provisions of FDICIA required federal banking regulators to impose standards in a number of other important areas to assure bank safety and soundness, including internal controls, information systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation and interest rate exposure.

Item 2.    Properties

VNB’s corporate headquarters consist of three office buildings located adjacent to each other in Wayne, New Jersey. These headquarters encompass commercial, mortgage and consumer lending, the operations and data processing center, and the executive offices of both Valley and VNB. Two of the three buildings are owned by a subsidiary of VNB and leased to VNB, the other building is leased by VNB from an independent third party.

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VNB owns another office building in Wayne, New Jersey which is occupied by those departments and subsidiaries providing trust and investment management services. A subsidiary of VNB also owns an office building and a condominium office in Manhattan, which are leased to VNB and which house a portion of its New York lending and operations.

VNB provides banking services at 128 locations of which 55 locations are owned by VNB or a subsidiary of VNB and leased to VNB, and 73 locations are leased from independent third parties.

Item 3.    Legal Proceedings

There were no material pending legal proceedings to which Valley or any of its direct or indirect subsidiaries were a party, or to which their property was subject, other than ordinary routine litigations incidental to business and which are not expected to have any material effect on the business or financial condition of Valley.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

Item 4A.    Executive Officers of the Registrant

All officers serve at the pleasure of the Board of Directors.

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PART II

Item 5.    Market for Registrant’s Common Stock and Related Shareholder Matters

Valley’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol VLY. The following table sets forth for each quarter period indicated the high and low sales prices for the common stock of Valley, as reported by the NYSE, and the cash dividends declared per share for each quarter. The amounts shown in the table below have been adjusted for all stock dividends.

Federal laws and regulations contain restrictions on the ability of Valley and VNB to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, “Business—Dividend Limitations” and Part II, Item 8, “Financial Statements and Supplementary Data—Note 16 of the Notes to Consolidated Financial Statements.” In addition, under the terms of Valley’s trust preferred securities, Valley could not pay dividends on its common stock if it deferred payments on the junior subordinated debentures which provide the cash flow for the payments on the trust preferred securities.

There were 9,375 shareholders of record as of December 31, 2002.

In 2000, Valley issued 75,634 shares of its common stock to the shareholders of Hallmark Capital Management, Inc. (“Hallmark”) pursuant to a merger of Hallmark into a subsidiary of Valley. In 2002 and 2001, Valley issued an additional 45,251 and 32,911 shares, respectively, of its common stock pursuant to subsequent earn-out payments. All shares reflect the 5 for 4 stock split issued in May 2002. 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.

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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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing Valley’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis the reader is encouraged to review the consolidated financial statements and statistical data presented in this document.

Cautionary Statement Concerning Forward-Looking Statements

This Form 10-K, both in the MD & A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology and market conditions. These statements may be identified by an “asterisk” (*) or such forward-looking terminology as “expect,” “look,” “view,” “opportunities,” “allow,” “continues,” “reflects,” “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, unanticipated changes in the direction of interest rates, effective income tax rates, loan prepayment assumptions, cash flows, deposit growth, the direction of the economy in New Jersey and New York, continued levels of loan quality and origination volume, continued relationships with major customers, as well as the effects of general economic conditions and legal and regulatory barriers and the development of new tax strategies or the disallowance of prior tax strategies. 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

On January 1, 2003, VNB completed its acquisition of Glen Rauch, a Wall Street brokerage firm specializing in municipal securities with more than $1 billion in assets in its customer accounts. The purchase of Glen Rauch was a cash acquisition with subsequent earn-out payments. For 2002, Glen Rauch’s annual revenues were approximately $5.0 million. Glen Rauch has become a subsidiary under Valley’s Financial Services Division.

On October 31, 2002, VNB acquired NIA/Lawyers, a title insurance agency based in Paramus, NJ. For 2001, NIA/Lawyers’ annual revenues were approximately $5.0 million. NIA/Lawyers has become a subsidiary under Valley’s Financial Services Division.

In August 2002, Valley completed its acquisition of Masters, an independent insurance agency. Masters is an all-line insurance agency offering property and casualty, life and health insurance. The purchase of Masters was a cash acquisition with subsequent earn-out payments. For 2001, Masters’ annual revenues were approximately $5.6 million. The Masters operation is now a wholly-owned subsidiary of VNB and is part of Valley’s Financial Services Division.

In July 2002, Valley announced that it will expense the cost of all stock options the company grants beginning with options granted and earnings reported for the calendar year 2002. While the impact of expensing stock options was not material to Valley’s financial statements for 2002, the impact on Valley’s net income is expected to increase over time as options vest and new options are granted*. Based on Valley’s historical levels of earnings and stock options issued, the effect of expensing options is expected to amount to approximately $0.02 per diluted share annually when it makes its full impact on earnings at the end of the phase-in period.*

During the quarter ended June 30, 2002, a two-year Federal investigation culminated in the arrest of an officer of the International Private Banking Department of the Merchants Bank Division and the seizure of 39 accounts that the officer managed. The officer was charged with money laundering in furtherance of narcotic trafficking activity, tax evasion, and unlicensed money transmitting. Valley became aware of the investigation by Federal Law Enforcement Officials during the course of its own due diligence investigation, prior to the acquisition of Merchants Bank. Valley representatives met with the office of the U.S. Attorney and continued the ongoing cooperation with the investigation into the International Private Banking Department. Throughout the course of the investigation, there was never any adverse impact upon Valley, its funds, its legitimate customers or

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its operations. Valley is continuing its policy of full and complete cooperation with State and Federal Law Enforcement Authorities in the investigation of criminal conduct that in any way affects the integrity of Valley National Bank and its customers’ accounts.

On May 1, 2002, Valley completed the sale of its subsidiary VNB Financial Services, Inc., a Canadian finance company, to State Farm Mutual Automobile Insurance Company for a purchase price equal to Valley’s equity in the subsidiary plus a premium of approximately $1.6 million. The subsidiary primarily originated fixed rate auto loans in Canada through a marketing program with State Farm.

Earnings Summary

Net income was $154.6 million, or $1.65 per diluted share in 2002 compared with $135.2 million, or $1.39 per diluted share, in 2001 (2001 earnings per share amounts reflect the 5 for 4 stock split issued May 17, 2002). 2001 net income includes a net, after tax charge of $7.0 million, or $0.07 per diluted share, recorded in connection with the first quarter acquisition of Merchants New York Bancorp (“Merchants”). Return on average assets for 2002 rose to 1.79 percent compared with 1.68 percent in 2001, while the return on average equity increased to 23.59 percent in 2002 compared with 19.70 percent in 2001.

Although interest rates declined in 2002 and 2001, Valley’s net interest income increased $24.9 million, contributing to increased earnings per share. An increase in average loan and investment volume helped offset the decline in interest rates, as well as decreased interest rates paid on deposits and short-term borrowings. Earnings for 2002 were also impacted by non-interest income such as: the gains on sales of securities, gain from the sale of an office building, increased income from additional investments in the Bank Owned Life Insurance (“BOLI”) and a gain from the sale of Valley’s Canadian subsidiary, as well as a tax benefit realized as a result of the restructuring of an existing subsidiary into a REIT. These increases were partly offset by the loss of income due to the stock buyback program and higher salaries and employee benefit expenses, amortization of mortgage servicing rights, as well as distributions on capital 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 $365.4 million for 2002 compared with $340.9 million for 2001. Higher average balances of total interest earning assets, primarily loans and taxable investments, were offset by lower average interest rates for these interest earning assets during 2002 compared with 2001. Also, for 2002, total average interest bearing liabilities increased causing interest expense to increase, but was substantially offset by declining rates associated with these liabilities compared to 2001. The net interest margin on a tax equivalent basis increased to 4.51 percent for 2002 compared with 4.45 percent for 2001. In an effort to stimulate the economy, the Federal Reserve decreased short-term interest rates 50 basis points in November 2002 and in 2001 decreased short-term interest rates eleven times for a total of 475 basis points. As a result, the prime rate declined and Valley was able to reduce liability costs contributing to an increase in its net interest margin and net interest income. In the latter part of 2002, Valley’s net interest income and net interest margin were negatively affected by lower interest rates in conjunction with shorter duration investments, substantial investment and mortgage prepayments and the stock repurchase program. The net interest margin and net interest income may continue to be negatively impacted in 2003 by a sluggish economy, continued low interest rates coupled with high loan and investment refinancing and prepayment.* There can be no assurances of how future changes in interest rates will affect net interest income.*

Average interest earning assets increased $442.3 million or 5.8 percent in 2002 over the 2001 amount. This was mainly the result of the increase in average balance of loans of $289.3 million or 5.6 percent and the increase in average balance of taxable investments of $149.0 million or 7.0 percent.

Average interest bearing liabilities for 2002 increased $281.5 million or 4.7 percent from 2001. Average savings deposits increased $329.9 million or 13.8 percent while average time deposits decreased $96.6 million or 3.9 percent from 2001. Average short-term borrowings decreased $78.2 million or 29.7 percent over 2001 balances. Average long-term debt, which includes primarily Federal Home Loan Bank (“FHLB”) advances,

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increased $126.4 million, or 14.4 percent. In conjunction with declining interest rates, Valley re-financed maturities on higher rate borrowings by converting to longer term FHLB advances resulting in a large increase in long-term debt and a decrease in short-term borrowings. The extension of maturities was 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 2002 compared to 2001. The average interest rate for loans decreased 96 basis points to 6.72 percent and the average interest rate for taxable investments decreased 53 basis points to 6.0 percent. Average interest rates on total interest earning assets decreased 85 basis points to 6.45 percent. Average interest rates also decreased on total interest bearing liabilities by 113 basis points to 2.52 percent from 3.65 percent. Average interest rates on deposits decreased by 125 basis points to 2.01 percent. The increase in the net interest margin from 4.45 percent in 2001 to 4.51 percent in 2002 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 generally has been able to increase the net interest margin in a declining rate environment, as there were a greater amount of liabilities tied to short-term rates than assets.* However, since the November 2002 reduction in short-term interest rates by the Federal Reserve Bank, Valley has experienced a margin compression, as rates on some deposit products have reached a floor. Conversely, in a rising interest rate environment, Valley may experience some increase in its net interest margin.* For further information, see the caption “Interest Rate Sensitivity” discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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The following table reflects the components of net interest income for each of the three years ended December 31, 2002, 2001 and 2000.

ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND

NET INTEREST INCOME ON A TAX EQUIVALENT BASIS

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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

Non-Interest Income

The following table presents the components of non-interest income for the years ended December 31, 2002, 2001 and 2000.

NON-INTEREST INCOME

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Non-interest income continues to represent a considerable source of income for Valley. Excluding gains on securities transactions, total non-interest income amounted to $74.1 million for 2002 compared with $64.9 million for 2001.

Trust and investment services includes income from trust operations, brokerage commissions, and asset management fees. Fee income from asset management and brokerage commissions were negatively impacted by the weak equity market during 2002 and 2001.

Service charges on deposit accounts increased $469 thousand or 2.4 percent from $19.2 million for the year ended December 31, 2001 to $19.6 million for the year ended December 21, 2002. A majority of this increase was due to an increase in service fees charged.

Gains on securities transactions, net increased $3.5 million to $7.1 million for the year ended December 31, 2002 as compared to $3.6 million for the year ended December 31, 2001. As a result of the sale of equity securities during 2002, gains of approximately $5.1 million were recorded including a $4.2 million gain on the sale of Vista Bancorp common stock. The remaining securities gains of $2.0 million represented sales of mortgage-backed securities. In the current economic environment of heavy refinancing activity, mortgage-backed securities were experiencing above normal prepayments. Additional sales may take place with changes in interest rates to adjust for portfolio yields, duration and total return.*

Included in fees from loan servicing are fees for servicing residential mortgage loans and SBA loans. For the year ended December 31, 2002, fees from servicing residential mortgage loans totaled $8.1 million and fees from servicing SBA loans totaled $1.4 million, as compared to $9.5 million and $1.3 million for the year ended December 31, 2001. The aggregate principal balances of mortgage loans serviced by VNB’s subsidiary VNB Mortgage Services, Inc. (“MSI”) for others approximated $1.8 billion, $2.4 billion and $2.5 billion at December 31, 2002, 2001 and 2000, respectively. The heavy prepayment activity resulted in less fee income during 2002 from the serviced mortgage loan portfolio, in spite of increased origination volume by VNB. If long-term interest rates remain low during 2003, then this level of prepayment activity and reduced fee income may continue.*

Gains on sales of loans decreased to $6.9 million for the year 2002 compared to $10.6 million for the prior year. The decrease in gains was primarily attributed to the $4.9 million pre-tax gain recorded in January 2001 on the sale of the $66.6 million co-branded ShopRite Mastercard credit card portfolio, partially mitigated by increased secondary market activity for residential mortgages and SBA lending. During 2002, approximately $4.1 million of gains from the sale of residential mortgage loans and $2.8 million of gains from the sale of SBA loans were recorded by VNB for sale into the secondary market.

During the first quarter of 2002, Valley invested $50.0 million in BOLI in addition to $100.0 million invested in 2001 to help offset the rising cost of employee benefits. Income of $6.7 million was recorded from the BOLI during the year ended December 31, 2002, an increase of $4.6 million over the prior year. However, with lower yields on BOLI investments, the income from BOLI has declined during 2002, and could continue to decline during 2003, potentially resulting in lower income on the BOLI in 2003.* BOLI income is exempt from federal and state income taxes. The BOLI is invested in investment securities including mortgage-backed, treasuries or high grade corporate securities and is managed by two investment firms.

Other non-interest income increased $9.5 million to $23.7 million in 2002 as compared to 2001. This increase includes a $1.0 million gain recorded in the third quarter of 2002 from the sale of an office building acquired in an acquisition, $2.6 million of insurance commission income from the Masters acquisition in August 2002, $1.0 million premium income from the NIA/Lawyers acquisition in November 2002, a $1.6 million gain from the sale of a Canadian subsidiary during the second quarter of 2002 and a net gain of approximately $1.0 million from the settlement of a lawsuit.

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Non-Interest Expense

The following table presents the components of non-interest expense for the years ended December 31, 2002, 2001 and 2000.

NON-INTEREST EXPENSE

Non-interest expense totaled $208.0 million for 2002, an increase of $19.7 million or 10.5 percent from 2001. Total non-interest expense for 2001 included merger-related charges of $9.0 million. The largest components of non-interest expense were salaries and employee benefit expense which totaled $105.9 million in 2002 compared to $98.0 million in 2001, an increase of $7.9 million or 8.0 percent. At December 31, 2002, full-time equivalent staff was 2,257 compared to 2,129 at the end of 2001. The increase in salary and employee benefit expense mainly includes Valley’s new acquisitions of NIA/Lawyers and Masters and new branches, as well as 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, 2002 was 47.3 percent, one of the better ratios in the U.S. banking industry, compared with an efficiency ratio for 2001 of 44.4 percent. Valley’s efficiency ratio includes distributions on capital securities which negatively impacted the ratio by approximately 3.6 percent. The funds from the trust preferred securities did not benefit net income as they were utilized to repurchase common stock. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders.*

Net occupancy expense and furniture and equipment expense, collectively, increased $1.1 million or 4.0 percent during 2002 in comparison to 2001. This increase can be attributed to the new acquisitions, new branch locations and an overall increase in the cost of operating bank facilities, mainly, maintenance, depreciation and rent expense. Occupancy expense primarily depreciation expense is expected to increase during 2003 for major computer hardware and software purchases and upgrades to better serve Valley’s customers.*

Amortization of intangible assets, consisting primarily of amortization of loan servicing rights, increased $1.2 million or 12.2 percent to $11.4 million. An impairment analysis is completed monthly to determine the appropriateness of the value of the mortgage servicing asset. A total impairment expense of $4.4 million was recorded during 2002 compared with $2.0 million during 2001, as a result of a large volume of prepayments on higher interest rate mortgages and increased refinancing. This was partly offset by the elimination of goodwill amortization. Under new accounting rules effective January 1, 2002, amortization of goodwill ceased. Instead,

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Valley reviews the goodwill asset for impairment annually. Management evaluated the goodwill in each segment and determined that an impairment expense was not required to be recorded.

Distributions on capital securities consist primarily of amounts 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 was $15.7 million. Proceeds from the trust preferred securities were used to fund a stock repurchase program during the latter part of 2001 and during 2002. In 2003, the Financial Accounting Standards Board is expected to issue a final statement requiring that Valley report its Mandatorily Redeemable Preferred Capital Securities as long-term debt and related distributions on these securities as interest expense.

Other non-interest expense increased $3.7 million or 11.9 percent in 2002 compared with 2001. The significant components of other non-interest expense include data processing, professional fees, postage, telephone, stationery, title search fees, insurance, service fees, credit and appraisal fees which totaled approximately $25.6 million for 2002, compared to $21.0 million for 2001.

During the first quarter of 2001, Valley recorded merger-related charges of $9.0 million related to the acquisition of Merchants. On an after tax basis, these charges totaled $7.0 million or $0.07 per diluted share. These charges included only identified direct and incremental costs associated with this acquisition. Items included in these charges were the following: personnel expenses which included severance payments for terminated directors of Merchants; professional fees which included investment banking, accounting and legal fees; and other expenses which included the disposal of data processing equipment and the write-off of supplies and other assets not considered useful in the operation of the combined entities. The major components of the merger-related charges, consisting of professional fees, personnel and the disposal of data processing equipment, totaled $4.4 million, $3.2 million and $486 thousand, respectively. The remaining balance is being paid based on existing contractual arrangements.

Income Taxes

Income tax expense as a percentage of pre-tax income was 29.5 percent for the year ended December 31, 2002 compared to 32.2 percent in 2001. The decrease in the effective tax rate was attributable to the effect of the restructuring of an existing subsidiary into a REIT. The effective tax rate was also positively affected by the non-taxable income of $6.7 million from the investment in BOLI. These benefits have reduced Valley’s effective tax rate below its historical rate of approximately 34 percent.* The decrease in tax expense was partially offset by additional tax expense being recorded due to the changes in New Jersey’s Corporate Business Tax, effective retroactively to January 1, 2002. The effect of these State tax law changes is approximately $1.5 million of additional state tax expense per year, which is deductible for federal purposes. For 2003, Valley’s effective tax rate is expected to approximate 34 percent.*

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. Valley’s consumer lending segment currently is inclusive of the Financial Services Division. 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.”

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The consumer lending segment had a return on average interest earning assets before taxes of 2.87 percent for the year ended December 31, 2002 compared to 3.12 percent for the year ended December 31, 2001. Average interest earning assets increased $98.2 million, which is attributable mainly to gains in home equity, residential loans and automobile loans. Increases in home equity loans were driven by favorable interest rates and marketing efforts. Increases in residential mortgage loans were also due to a favorable interest rate environment, the lowest in decades, strong home purchase activity and continuing stable economic conditions in Valley’s lending area. Increases in automobile loans were achieved primarily through strategic repositioning and expansion of Valley’s auto loan dealer base. Average interest rates on consumer loans decreased by 85 basis points, while the expenses associated with funding sources decreased by 91 basis points. The majority of the rates on these loans are fixed and do not adjust with changes in short-term interest rates. While the rates of the automobile loan portfolio are fixed, the duration is relatively short, and therefore, the portfolio yield declines in conjunction with lower interest rates. Additionally, interest rates on home equity lines of credit have adjusted downward in connection with the prime lending rate. Normal cash flow, high prepayment volume and new loans at lower rates caused the decline in yield. Income before income taxes decreased $3.7 million as a result of increases in the provision for loan losses and decreases in non-interest income partly offset by increased net interest income.

The return on average interest earning assets before taxes for the commercial lending segment decreased 9 basis points to 2.76 percent for the year ended December 31, 2002. Average interest earning assets increased $205.7 million as a result of an increased volume of loans. Interest rates on commercial lending decreased by 116 basis points due to a decline in interest rates on a large number of adjustable rate loans tied to the prime index and the refinance of loans at lower rates, while the expenses associated with funding sources decreased by 91 basis points. Income before income taxes increased $3.3 million primarily as a result of increased loan volume, net interest income, and lower provision for loan losses, offset by increases in operating expenses and a larger allocation of the internal expense transfer resulting from increased average interest earning assets.

The investment portfolio segment had a net return on average interest earning assets, before income taxes, of 2.93 percent for the year ended December 31, 2002, 47 basis points more than the year ended December 31, 2001. Average interest earning assets increased by $138.4 million. The yield on interest earning assets decreased by 52 basis points to 5.94 percent. The investment portfolio is comprised predominantly of mortgage-backed securities that have generated significant cash flows over the course of the year. Cash flows from investments, specifically mortgage-backed securities, prepaid at a faster pace due to lower long-term interest rates on mortgage loans, and these funds were reinvested in lower rate, shorter term and duration alternatives causing the decline in yield. This can be expected to continue during 2003 if long-term interest rates remain low.* Income before income taxes increased 25.9 percent to $75.8 million.

The corporate segment represents income and expense items not directly attributable to a specific segment including gain on investment sales not classified with investment management above, income from BOLI, distributions on capital securities, non-recurring items such as gains on sales of loans, service charges on deposit accounts and merger-related charges. The loss before taxes for the corporate segment decreased to $12.0 million for the year ended December 31, 2002 and was due primarily to the pre-tax merger related charges of $9.0 million incurred during 2001, offset by distributions on capital securities.

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 interest rate risks. Valley’s interest rate risk management is the responsibility of the Asset/Liability Management Committee (“ALCO”). ALCO establishes policies that monitor and coordinate Valley’s sources, uses and pricing of funds.

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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 re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates on the prepayment assumptions of certain assets and liabilities. According to the model run for year end 2002, over a twelve month period, an interest rate increase of 100 basis points resulted in an increase in net interest income of approximately $943 thousand and an interest rate decrease of 100 basis points resulted in an increase in net interest income of approximately $124 thousand.* 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 management.

Valley’s net interest margin is affected by changes in interest rates and cash flows from its loan and investment portfolio. In a low interest rate environment, greater cash flow is received from mortgage loans and mortgage-backed securities due to greater refinancing activity. These larger cash flows are then reinvested into 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 subject to market risk and are sensitive to changes in interest rates, categorized by expected maturity and the instruments’ fair value at December 31, 2002. Forecasted maturities and prepayments for rate sensitive assets and liabilities were calculated using actual interest rates in conjunction with market interest rates and prepayment assumptions as of December 31, 2002.

INTEREST RATE SENSITIVITY ANALYSIS

Expected maturities are contractual maturities adjusted for all payments of principal. Valley uses certain assumptions to estimate fair values. For investment securities, loans and long-term debt, expected maturities are  

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based upon contractual maturity or call dates, 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 gap re-pricing within 1 year as of December 31, 2002 was negative $54.8 million, representing a ratio of interest sensitive assets to interest sensitive liabilities of 0.98:1. Management does not view this amount as presenting an unusually high risk potential, although no assurances can be given that Valley is not at risk from interest rate increases or decreases.*

Liquidity

Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost. On the asset side, liquid funds are maintained in the form of cash and due from banks, federal funds sold, investment securities held to maturity maturing within one year, investment securities available for sale and loans held for sale. Liquid assets amounted to $2.5 billion at December 31, 2002 and 2001. This represents 29.1 percent and 31.7 percent of earning assets, and 27.2 percent and 29.6 percent of total assets at December 31, 2002 and 2001, 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 $5.5 billion for the year ended December 31, 2002 and $5.1 billion for the year ended December 31, 2001, representing 67.2 percent and 66.8 percent of average earning assets. Demand and savings deposits have continued to increase as an alternative to low interest rates on certificates of 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 and the need to balance its net interest margin. At December 31, 2002 brokered CD’s totaled $38.9 million. Short-term and long-term borrowings through Federal funds lines, repurchase agreements, Federal Home Loan Bank (“FHLB”) advances, lines of credit and large dollar certificates of deposit, generally those over $100 thousand are also used as funding sources. Valley borrowed $300 million in low rate intermediate term financing in the latter part of the year expecting to benefit future periods by more closely matching the duration of interest earning assets with interest bearing liabilities. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. In 2002, proceeds from the sales of investment securities available for sale were $646 million, and proceeds of $1.2 billion were generated from investment maturities, redemptions and prepayments. Purchases of investment securities in 2002 were $1.9 billion. Short-term borrowings and certificates of deposit over $100 thousand amounted to $1.3 billion, on average, for the years ended December 31, 2002 and 2001.

During 2002, 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 2003.*

The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31, 2002. These certificates of deposit are generated primarily from core deposit customers.

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Valley’s recurring cash requirements consist primarily of dividends to shareholders and distributions on trust preferred securities. These cash needs are routinely satisfied by dividends collected from its subsidiary bank along with cash and earnings on investments owned. Projected cash flows from these sources are expected to be adequate to pay dividends and 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 in trust preferred securities. At December 31, 2002 Valley maintained a floating rate line with a third party in the amount of $35 million of which none was drawn. This line is available for general corporate purposes and expires June 13, 2003. Borrowings under this facility, if any, are collateralized by investment securities of no less than 120 percent of the loan balance.

Investment Securities

The amortized cost of securities held to maturity at December 31, 2002, 2001 and 2000 were as follows:

INVESTMENT SECURITIES HELD TO MATURITY