Edgar Filing: VALLEY NATIONAL BANCORP

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

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 Incorporation or Organization)		(I.R.S. Employer 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:


Title of each class		Name of exchange on which registered
Common Stock, no par value		New York Stock Exchange

VNB Capital Trust I 7.75% Trust Originated Securities (and the Guarantee by Valley National Bancorp with respect thereto)		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No þ

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. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large Accelerated Filer þ Accelerated Filer ¨ Non-accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ¨ No þ

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2.3 billion on June 30, 2005.

There were 111,248,817 shares of Common Stock outstanding at February 17, 2006.

Documents incorporated by reference:

Certain portions of the registrant’s Definitive Proxy Statement (the “2006 Proxy Statement”) for the 2006 Annual Meeting of Shareholders to be held April 5, 2006 will be incorporated by reference in Part III.

TABLE OF CONTENTS


PART I		Page
Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	11
Item 4.	Submission of Matters to a Vote of Security Holders	12
Item 4A.	Executive Officers of the Registrant	12

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 8.	Financial Statements and Supplementary Data:
	Valley National Bancorp and Subsidiaries:
	Consolidated Statements of Financial Condition	43
	Consolidated Statements of Income	44
	Consolidated Statements of Changes in Shareholders’ Equity	45
	Consolidated Statements of Cash Flows	46
	Notes to Consolidated Financial Statements	47
	Independent Auditor’s Report	82
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	83
Item 9A.	Controls and Procedures	83
Item 9B.	Other Information	83

PART III
Item 10.	Directors and Executive Officers of the Registrant	87
Item 11.	Executive Compensation	87
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	87
Item 13.	Certain Relationships and Related Transactions	87
Item 14.	Principal Accountant Fees and Services	87

PART IV
Item 15.	Exhibits, Financial Statements and Schedules	88
	Signatures	91

PART I

Item 1. Business

The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Cautionary Statement Concerning Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.

Valley National Bancorp (“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, 2005, Valley had consolidated total assets of $12.4 billion, total deposits of $8.6 billion and total shareholders’ equity of $931.9 million. In addition to its principal subsidiary, Valley National Bank (“VNB”), Valley owns 100 percent of the voting shares of VNB Capital Trust I, through which it issued trust preferred securities. VNB Capital Trust I is not a consolidated subsidiary. See Note 12 of the consolidated financial statements.

VNB is a national banking association chartered in 1927 under the laws of the United States. At December 31, 2005, VNB maintained 163 branch offices located in New Jersey and Manhattan. VNB provides a full range of commercial and retail banking services. These services include the following: the acceptance of demand, savings and time deposits; extension of consumer, real estate, Small Business Administration (“SBA”) loans and other commercial credits; equipment leasing; and personal and corporate trust, as well as pension and fiduciary services.

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

VNB has four business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. For financial data on the four business segments see Part II, Item 8, “Financial Statements and Supplementary Data—Note 20 of the consolidated financial statements.”

SEC Reports and Corporate Governance

Valley makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website at www.valleynationalbank.com without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Also available on the website are Valley’s corporate code of ethics that applies to all of Valley’s employees including principal officers and directors, Valley’s Audit Committee Charter, Compensation and Human Resources Committee Charter, Nominating and Corporate Governance Committee Charter as well as a copy of Valley’s Corporate Governance Guidelines.

Valley filed the certifications of the Chief Executive Officer and Chief Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 with respect to Valley’s Annual Report on Form 10-K as

exhibits to this Report. Valley’s CEO submitted the required annual CEO’s Certification regarding the NYSE’s corporate governance listing standards, Section 12(a) CEO Certification to the NYSE within the required timeframe after the 2005 annual shareholders’ meeting.

Additionally, Valley will provide without charge, a copy of its Annual Report on Form 10-K to any shareholder by mail. Requests should be sent to Valley National Bancorp, Attention: Shareholder Relations, 1455 Valley Road, Wayne, NJ 07470.

Competition

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

Employees

At December 31, 2005, VNB and its subsidiaries employed 2,433 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 Valley or 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 other bank. Satisfactory capital ratios and Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy. Acquisitions through VNB require approval of the Office of the Comptroller of the Currency of the United States (“OCC”). The Holding Company Act does not place territorial

restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows Valley to expand into insurance, securities, merchant banking activities, and other activities that are financial in nature.

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

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

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, bank acquisitions and entry into new types of business. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.

Dividend Limitations

Valley is a legal entity separate and distinct from its subsidiaries. Valley’s revenues (on a parent company only basis) are substantially from dividends paid by VNB. VNB dividend payments, without prior regulatory approval, are 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 VNB 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 and executive officers, as well as to entities controlled by such persons, is currently governed by the requirements of the National Bank Act, Sarbanes-Oxley Act and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to 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.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting.

The Sarbanes-Oxley Act of 2002 provides for, among other things:

•

a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Regulation O);

•

independence requirements for audit committee members;

•

independence requirements for company outside auditors;

•

certification of financial statements within the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q by the chief executive officer and the chief financial officer;

•

the forfeiture by the chief executive officer and the chief financial officer of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by such officers in the twelve month period following initial publication of any financial statements that later require restatement due to corporate misconduct;

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disclosure of off-balance sheet transactions;

•

two-business day filing requirements for insiders filing on Form 4;

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disclosure of a code of ethics for financial officers and filing a Current Report on Form 8-K for a change in or waiver of such code;

•

the reporting of securities violations “up the ladder” by both in-house and outside attorneys;

•

restrictions on the use of financial measures determined by methods other than Generally Accepted Accounting Principles in press releases and SEC filings;

•

the creation of the Public Accounting Oversight Board (“PCAOB”);

•

various increased criminal penalties for violations of securities laws;

•

an assertion by management with respect to the effectiveness of internal control over financial reporting; and

•

a report by the company’s external auditor on management’s assertion and the effectiveness of internal control over financial reporting.

Each of the national stock exchanges, including the New York Stock Exchange (“NYSE”) where Valley’s securities are listed, have implemented corporate governance listing standards, including rules strengthening director independence requirements for boards, and requiring the adoption of charters for the nominating, corporate governance and audit committees. These rules require Valley to certify to the NYSE that there are no violations of any corporate listing standards. Valley has provided the NYSE with the certification required by the NYSE Rule.

USA PATRIOT Act

As part of the USA PATRIOT Act, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Anti Money Laundering Act”). The Anti Money Laundering Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Anti Money Laundering Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Anti Money Laundering Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.

Regulations implementing the due diligence requirements, require minimum standards to verify customer identity and maintain accurate records, encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibit the anonymous use of “concentration accounts,” and requires all covered financial institutions to have in place an anti-money laundering compliance program. The OCC, along with other banking agencies, have strictly enforced various anti-money laundering and suspicious activity reporting requirements using formal and informal enforcement tools to cause banks to comply with these provisions.

The Anti Money Laundering Act amended the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of any financial institution involved in a proposed merger transaction in combating money laundering activities when reviewing an application under these acts.

Regulatory Relief Law

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

Gramm-Leach-Bliley Act

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

•

allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than was previously permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies;

•

allows insurers and other financial services companies to acquire banks;

•

removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and

•

establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

If a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals. Valley has not elected to become a financial holding company.

The OCC adopted rules to allow national banks to form subsidiaries to engage in financial activities allowed for financial holding companies. Electing national banks must meet the same management and capital standards as financial holding companies but may not engage in insurance underwriting, real estate development or merchant banking. Sections 23A and 23B of the Federal Reserve Act apply to financial subsidiaries and the capital invested by a bank in its financial subsidiaries will be eliminated from the bank’s capital in measuring all capital ratios. VNB wholly owns one financial subsidiary—Glen Rauch Securities, Inc. (“Glen Rauch”).

The Gramm-Leach-Bliley Act modified other financial laws, including laws related to financial privacy and community reinvestment.

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

FIRREA

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

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

FDICIA

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

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

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

Item 1A. Risk Factors

The material risks and uncertainties that management believes affect Valley are described below. The risks and uncertainties described below are not the only ones facing Valley. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair Valley’s business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, Valley’s financial condition and results of operations could be materially and adversely affected.

Changes in Interest Rates Can Have an Adverse Effect on Profitability

Valley’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest earning assets such as loans and investment securities and interest expense paid on interest bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond Valley’s control, including general economic conditions, competition, and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest Valley receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) Valley’s ability to originate loans and obtain deposits, (ii) the fair value of Valley’s financial assets and liabilities, and (iii) the average duration of Valley’s assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, Valley’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on Valley’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on Valley’s financial condition and results of operations. See “Net Interest Income” and “Interest Rate Sensitivity” sections in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this report for further discussion related to Valley’s management of interest rate risk.

Competition in the Financial Services Industry

Valley faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Valley competes 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. If Valley is unable to compete effectively, it will lose market share and income generated from loans, deposits, and other financial products will decline.

Changes in Primary Market Areas Could Adversely Impact Results of Operations and Financial Condition

Much of Valley’s lending is in New Jersey and Manhattan. As a result of this geographic concentration, a significant broad based deterioration in economic conditions in New Jersey and the New York City metropolitan area could have a material adverse impact on the quality of Valley’s loan portfolio, and accordingly, Valley’s results of operations. Such a decline in economic conditions could restrict borrowers ability to pay outstanding principal and interest on loans when due, and, consequently, adversely affect the cash flows of Valley’s business.

Valley’s loan portfolio is largely secured by real estate collateral. A substantial portion of the real and personal property securing the loans in Valley’s portfolio is located in New Jersey and Manhattan. Conditions in the real estate markets in which the collateral for Valley’s loans are located strongly influence the level of Valley’s nonperforming loans and results of operations. A decline in the New Jersey and New York City metropolitan area real estate markets, as well as the other external factors, could adversely affect the performance of Valley’s loan portfolio.

Allowance For Loan Losses May Be Insufficient

Valley maintains an allowance for loan losses based on, among other things, national and regional economic conditions, historical loss experience and delinquency trends. However, Valley cannot predict loan losses with certainty, and Valley cannot assure you that charge-offs in future periods will not exceed the allowance for loan losses. If charge-offs exceed Valley’s allowance, its earnings would decrease. In addition, regulatory agencies review Valley’s allowance for loan losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination. An increase in Valley’s allowance for loan losses could reduce its earnings.

Acquisitions and Implementation of Growth Strategies

In 2005, Valley acquired Shrewsbury State Bank (“Shrewsbury”) and NorCrown Bank (“NorCrown”), which added over $1 billion in assets and 27 branch offices. Although Valley expects both acquisitions to be accretive to earnings within one year, Valley cannot assure you that the acquisitions will achieve Valley’s targeted results of them. Factors that may adversely affect Valley’s targeted results include the ability to retain the customers of these entities, the ability to successfully integrate both entities and their personnel and the ability to achieve certain cost savings. Valley’s future success will depend on the ability of its officers and key employees to continue to implement and improve Valley’s operational, financial and management controls and processes and reporting systems and procedures, and to manage a growing number of client relationships. Thus, Valley cannot assure you that its growth strategy will not place a strain on Valley’s administrative and operational infrastructure.

Extensive Regulation and Supervision

Valley, primarily through its principal subsidiary VNB and certain non-bank subsidiaries, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect Valley’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Valley is also subject to a number of federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect Valley in substantial and unpredictable ways. Such changes could subject Valley to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on Valley’s business, financial condition and results of operations. Valley’s compliance with certain of these laws will be considered by banking regulators when reviewing bank merger and bank holding company acquisitions. While Valley has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the “Supervision and Regulation” section in Item 1, “Business” and Note 16 to consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”, which are located elsewhere in this report.

Claims and Litigation Pertaining to Fiduciary Responsibility

From time to time, customers make claims and take legal action pertaining to Valley’s performance of its fiduciary responsibilities. If such claims and legal actions are not resolved in a manner favorable to Valley they may result in financial liability and/or adversely affect the market perception of Valley and its products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on Valley’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

Inability to Hire and Retain Qualified Employees

Valley’s performance is largely dependent on the talents and efforts of highly skilled individuals. There is intense competition in the financial services industry for qualified employees. In addition, Valley faces increasing competition with businesses outside the financial services industry for the most highly skilled individuals. Valley’s business could be adversely affected if it were unable to attract new employees and retain and motivate its existing employees.

Item 1B. Unresolved Staff Comments

None.

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, operations and the executive offices of both Valley and VNB. Two of the three buildings are owned by a subsidiary of VNB and leased to VNB, the other building is leased by VNB from an independent third party.

VNB owns two other office buildings located in Wayne, New Jersey, one of which is occupied by VNB departments and subsidiaries providing trust and investment management services; the other office building is utilized primarily for VNB’s mortgage lending and mortgage operations. A subsidiary of VNB also owns an office building and a condominium office in Manhattan, which are leased to VNB and house a portion of its New York lending and operations. In addition, a subsidiary of VNB owns a building in Chestnut Ridge, New York, primarily occupied by Masters Coverage Corp., also a subsidiary of VNB.

As of December 31, 2005, VNB provides banking services at 163 locations of which 72 locations are owned by VNB or a subsidiary of VNB and leased to VNB, and 91 locations are leased from independent third parties.

Item 3. Legal Proceedings

In the normal course of business, Valley may be a party to various outstanding legal proceedings and claims. In the opinion of management, except for the lawsuit noted below, the consolidated statements of financial condition or results of operations of Valley will not be materially affected by the outcome of such legal proceedings and claims.

A lawsuit against Valley was filed by United Bank and Trust Company in the United States District Court, Southern District of New York. The plaintiff alleges, among other claims, that Valley breached its contractual and fiduciary duties to United Bank and Trust Company in connection with Valley’s activities as a depository for Southeast Airlines, a now defunct charter airline carrier. Valley believes it has meritorious defenses to this action, although Valley cannot provide any assurances that it will prevail in the litigation or be able to settle the litigation for an immaterial amount. In connection with this litigation, Valley has brought a separate declaratory judgment action in the United States District Court for the District of New Jersey against one of its insurance carriers in which Valley seeks an order from the court that the litigation is covered by Valley’s insurance policy with that carrier.

The anti-money laundering (“AML”) and bank secrecy (“BSA”) laws have imposed far-reaching and substantial requirements on financial institutions. The enforcement policy of the OCC with respect to AML/BSA compliance recently has been vigorously applied throughout the industry, with regulatory action taking various forms.

Valley believes that its policies and procedures with respect to combating money laundering are effective and that Valley’s AML/BSA policies and procedures are reasonably designed to comply with applicable standards. Due to uncertainties in the requirements for and enforcement of AML/BSA laws and regulations, Valley cannot provide assurance that in the future it will not face a regulatory action, adversely affecting its ability to acquire banks and thrifts, or open new branches. However, Valley is not prohibited from acquiring banks, thrifts or opening branches based upon its most recently completed regulatory examination.

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

None.

Item 4A. Executive Officers of the Registrant


Names	Age at December 31, 2005	Executive Officer Since	Office
Gerald H. Lipkin	64	1975	Chairman of the Board, President and Chief Executive Officer of Valley and VNB
Peter Crocitto	48	1991	Executive Vice President of Valley and VNB
Albert L. Engel	57	1998	Executive Vice President of Valley and VNB
Alan D. Eskow	57	1993	Executive Vice President, Chief Financial Officer and Secretary of Valley and VNB
James G. Lawrence	62	2001	Executive Vice President of Valley and VNB
Robert M. Meyer	59	1997	Executive Vice President of Valley and VNB
Kermit R. Dyke	58	2001	First Senior Vice President of VNB
Robert E. Farrell	59	1990	First Senior Vice President of VNB
Richard P. Garber	62	1992	First Senior Vice President of VNB
Eric W. Gould	37	2001	First Senior Vice President of VNB
Walter M. Horsting	48	2003	First Senior Vice President of VNB
Robert J. Mulligan	58	1991	First Senior Vice President of VNB
Garret G. Nieuwenhuis	65	2001	First Senior Vice President of VNB
John H. Prol	68	1992	First Senior Vice President of VNB
Jack M. Blackin	63	1993	Senior Vice President and Assistant Secretary of Valley and VNB
Stephen P. Davey	50	2002	Senior Vice President and Risk Manager of VNB
Elizabeth E. De Laney	41	2001	Senior Vice President of VNB

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

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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


	Year 2005						Year 2004
	High		Low		Dividend		High		Low		Dividend
First Quarter	$	26.82	$	23.78	$	0.214	$	26.80	$	24.37	$	0.204
Second Quarter		25.30		22.80		0.220		26.30		22.98		0.214
Third Quarter		24.61		22.24		0.220		25.01		23.07		0.214
Fourth Quarter		25.15		21.84		0.220		27.10		24.49		0.214

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

There were 9,307 shareholders of record as of December 31, 2005.

Unregistered Sales of Equity Securities and Use of Proceeds

On June 3, 2005, Valley issued 2,948,255 common shares to NorCrown Bank shareholders, pursuant to the merger of NorCrown into VNB. 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. The shares were subsequently registered for resale on Form S-3 under the Securities Act.

Pursuant to an existing contractual agreement, Valley issued 5,513 shares of its common stock with a value of $132,450 on October 22, 2003, to Michael Guilfoile, President of MG Advisors, Inc., for his consulting services in connection with Valley’s acquisition of NIA/Lawyers Title Agency, LLC and Glen Rauch Securities, Inc. 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.

In 2000, Valley issued 87,556 shares of its common stock to the shareholders of Hallmark Capital Management, Inc. pursuant to the merger of Hallmark Capital Management, Inc. into VNB. In 2003, 2002 and 2001, Valley issued an additional 51,014, 52,385 and 38,099 shares or $1.3 million, $1.2 million and $728 thousand, respectively, of its common stock pursuant to subsequent earn-out payments. No additional earn-out payments are required pursuant to this merger. All shares reflect all stock dividends and prior splits. 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. The shares were subsequently registered for resale on Form S-3 under the Securities Act.

The following table sets forth information for the three months ended December 31, 2005 with respect to repurchases of Valley’s outstanding common shares:


Issuer Purchases on Equity Securities (1)
Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans (2)	Maximum Number of Shares that May Yet Be Purchased Under the Plans (2)
10/01/2005 – 10/31/2005	30,000	$	22.22	11,548,859	2,783,641
11/01/2005 – 11/30/2005	—		—	11,548,859	2,783,641
12/01/2005 – 12/31/2005	6,010		24.43	11,554,869	2,777,631

	36,010	$	22.59	11,554,869	2,777,631

(1)

Share data reflects the 5 percent stock dividend issued on May 20, 2005.

(2)

On May 14, 2003 and August 21, 2001, Valley publicly announced its intention to repurchase 2,756,250 and 11,576,250 outstanding common shares, respectively, in the open market or in privately negotiated transactions. Both repurchase plans expire when all shares have been repurchased. No other repurchase plans or programs expired or terminated during the three months ended December 31, 2005.

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with Valley’s consolidated financial statements and the accompanying notes thereto presented herein in response to Item 8.


	As of or for the Years Ended December 31,
	2005			2004			2003			2002			2001
	(in thousands, except for share data)
Summary of Operations:
Interest income—tax equivalent basis (1)	$	631,893		$	525,315		$	503,621		$	523,135		$	559,557
Interest expense		226,659			146,607			148,922			173,453			220,935

Net interest income—tax equivalent basis (1)		405,234			378,708			354,699			349,682			338,622
Less: tax equivalent adjustment		6,809			6,389			6,123			5,716			6,071

Net interest income		398,425			372,319			348,576			343,966			332,551
Provision for loan losses		4,340			8,003			7,345			13,644			15,706

Net interest income after provision for loan losses		394,085			364,316			341,231			330,322			316,845
Non-interest income		73,708			84,328			108,197			81,238			68,476
Non-interest expense		237,566			220,049			216,278			192,264			185,966

Income before income taxes		230,227			228,595			233,150			219,296			199,355
Income tax expense		66,778			74,197			79,735			64,680			64,151

Net income	$	163,449		$	154,398		$	153,415		$	154,616		$	135,204

Per Common Share (2):
Earnings per share:
Basic	$	1.50		$	1.49		$	1.48		$	1.43		$	1.20
Diluted		1.49			1.48			1.47			1.43			1.20
Dividends declared		0.87			0.85			0.81			0.77			0.72
Book value		8.37			6.82			6.30			6.03			6.13
Tangible book value (3)		6.42			6.37			5.80			5.65			5.81
Weighted average shares outstanding:
Basic		108,948,978			103,604,828			103,629,836			107,805,623			112,328,376
Diluted		109,351,675			104,137,633			104,184,728			108,438,679			112,924,386

Ratios:
Return on average assets		1.39	%		1.51	%		1.63	%		1.78	%		1.68	%
Return on average shareholders’ equity		19.17			22.77			24.21			23.59			19.70
Return on average tangible shareholders’ equity (4)		23.61			24.54			26.09			25.02			20.84
Average shareholders’ equity to average assets		7.25			6.62			6.74			7.56			8.53
Dividend payout		58.00			57.05			54.60			53.80			59.40
Risked-based capital:
Tier 1 capital		10.28			11.12			11.25			11.42			14.08
Total capital		12.16			11.95			12.15			12.48			15.14
Leverage capital		7.82			8.28			8.35			8.67			10.25

Financial Condition:
Assets	$	12,436,102		$	10,763,391		$	9,873,335		$	9,148,456		$	8,589,951
Net loans		8,055,269			6,866,459			6,102,039			5,656,072			5,226,593
Deposits		8,570,001			7,518,739			7,162,968			6,683,387			6,306,974
Shareholders’ equity		931,910			707,598			652,789			631,738			678,375

The 10-K contains supplemental financial information, described in the notes on the following page, which has been determined by methods other than Generally Accepted Accounting Principles (“GAAP”) that management uses in its analysis of Valley’s performance. Valley’s management believes these non-GAAP financial measures provide information useful to investors in understanding the underlying operational performance of Valley, its business and performance trends and facilitates comparisons with the performance of others in the financial services industry.

Notes to Selected Financial Data

(1)

In this report a number of amounts related to net interest income and net interest margin are presented on a tax equivalent basis using a 35 percent federal tax rate. Valley believes that this presentation provides comparability of net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice and SEC rules.

(2)

All per common share amounts reflect the 5 percent stock dividend issued May 20, 2005, and all prior stock splits and dividends.

(3)

Tangible book value, which is a non-GAAP measure, is computed by dividing shareholders’ equity less goodwill and other intangible assets by common shares outstanding, as follows:


	At Years Ended December 31,
	2005			2004			2003			2002			2001
	($ in thousands)
Common shares outstanding		111,326,717			103,798,313			103,536,291			104,792,111			110,651,096

Shareholders’ equity	$	931,910		$	707,598		$	652,789		$	631,738		$	678,375
Less: Goodwill and other intangible assets.		(217,354	)		(45,888	)		(52,050	)		(39,381	)		(35,544	)

Tangible shareholders’ equity	$	714,556		$	661,710		$	600,739		$	592,357		$	642,831

Tangible book value	$	6.42		$	6.37		$	5.80		$	5.65		$	5.81

(4)

Return on average tangible shareholders’ equity, which is a non-GAAP measure, is computed by dividing net income by average shareholders’ equity less average goodwill and average other intangible assets, as follows:


	As of or for the Years Ended December 31,
	2005			2004			2003			2002			2001
	($ in thousands)
Net income	$	163,449		$	154,398		$	153,415		$	154,616		$	135,204

Average shareholders’ equity		852,834			678,068			633,744			655,447			686,159
Less: Average goodwill and other intangible assets.		(160,607	)		(48,805	)		(45,716	)		(37,463	)		(37,317	)

Average tangible shareholders’ equity	$	692,227		$	629,263		$	588,028		$	617,984		$	648,842

Return on average tangible shareholders’ equity		23.61	%		24.54	%		26.09	%		25.02	%		20.84	%

Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing Valley’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.

Cautionary Statement Concerning Forward-Looking Statements

This Annual Report on Form 10-K, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by an (*) or such forward-looking terminology as “expect,” “anticipate,” “look,” “view,” “opportunities,” “allow,” “continues,” “reflects,” “believe,” “may,” “should,” “will,” “estimates” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from such forward-looking statements. Valley assumes no obligation for updating any such forward-looking statement at any time. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to:

•

unanticipated changes in the direction of interest rates;

•

competition from banks and other financial institutions;

•

changes in loan, investment and mortgage prepayment assumptions;

•

insufficient allowance for loan losses;

•

relationships with major customers;

•

changes in effective income tax rates;

•

higher or lower cash flow levels than anticipated;

•

inability to hire and retain qualified employees;

•

slowdown in levels of deposit growth;

•

a decline in the economy in New Jersey and New York;

•

a decrease in loan origination volume;

•

a change in legal and regulatory barriers including issues related to AML/BSA compliance;

•

the development of new tax strategies or the disallowance of prior tax strategies;

•

unanticipated litigation pertaining to fiduciary responsibility; and

•

retention of loans, deposits, customers and staff from Valley’s acquisition of Shrewsbury and NorCrown during 2005.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by Valley conform, in all material respects, to accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.

Valley’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The most significant accounting policies followed by Valley are presented in Note 1 of the consolidated financial statements. Valley has identified its policies on the allowance for loan losses and income taxes to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies can be found in Note 1 of the consolidated financial statements. Management has reviewed the application of these policies with the Audit Committee of Valley’s Board of Directors.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the statement of consolidated financial condition. Note 1 of the consolidated financial statements describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in this MD&A.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in Valley’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact Valley’s consolidated financial condition or results of operations. Notes 1 and 14 of the consolidated financial statements include additional discussion on the accounting for income taxes.

Executive Summary

The full year of 2005 was extremely challenging for the banking industry and Valley. Short-term interest rates increased as a result of increases by the Federal Reserve, while market driven longer term interest rates remained mostly unchanged at historically low levels causing a flat yield curve. This resulted in net interest margin compression causing Valley’s main source of income to come under pressure. Should the yield curve remain flat or inverted, Valley expects this net interest margin compression to continue into 2006 and likely to hinder the growth of net interest income and net income.* Additionally, as a result of the yield curve Valley does not expect its earning assets to grow at the same pace in 2006 as during 2005.* Valley expects to use the proceeds of maturing investments to fund new loan growth or repay borrowings.*

Despite the interest rate compression, Valley earned record earnings per common share in 2005. Net income was $163.4 million or $1.49 per diluted share, compared with net income of $154.4 million or $1.48 per diluted share in 2004.

During the year, Valley completed the acquisition of two commercial banks adding 27 new branches and expanding into many new communities in New Jersey. The Shrewsbury and NorCrown acquisitions during the first and second quarters of 2005, respectively, expanded Valley’s market presence in New Jersey and accordingly should increase Valley’s franchise value.*

The loan portfolio grew year over year by approximately $1.2 billion or 17.3 percent and deposits increased by over $1.0 billion, or almost 14.0 percent. During 2005, Valley acquired $688 million of loans and $894 million of deposits from Shrewsbury and NorCrown.

Earnings for 2005, besides the interest rate compression and effect of the acquisitions, were impacted by the decreases in non-interest income, primarily from a decrease in gains on sales of securities, lower fees from title insurance services and other fee income. These decreases were partially offset by an increase in service charges on deposit accounts. Non-interest expense increased largely due to the Shrewsbury and NorCrown acquisitions. A lower effective income tax rate contributed to earnings for 2005. The decreased tax rate resulted from state income tax reductions, increased housing tax credits, tax planning benefits and the reassessment of required tax accruals.

For the year ended December 31, 2005, Valley achieved a return on average shareholders’ equity (“ROE”) of 19.17 percent and a return on average assets (“ROA”) of 1.39 percent which include intangible assets arising from the Shrewsbury and NorCrown acquisitions during the period. Valley’s return on average tangible shareholders’ equity (“ROATE”) was 23.61 percent for 2005. The comparable ratios for the year ended December 31, 2004, were ROE of 22.77 percent, ROA of 1.51 percent, and ROATE of 24.54 percent. See discussion and reconciliation of ROATE, which is non-GAAP measure, under Item 6, “Selected Financial Data.”

Net Interest Income

Net interest income consists of interest income and dividends earned on interest earning assets less interest expense paid on interest bearing liabilities and represents the main source of income of Valley. The net interest margin is calculated by dividing tax equivalent net interest income by average interest earning assets and is a key measurement used in the banking industry to measure income from earning assets. The net interest margin declined each quarter during 2005 and during the last three years. This declining trend may continue in 2006 if the yield curve remains flat or assumes and maintains an inverted shape. During early 2006, Valley adjusted some of its variable rate deposits in an attempt to stabilize the net interest margin. However, management cannot guarantee that this adjustment will stop the net interest margin decline or the resulting decline in net interest income.

Net interest income on a tax equivalent basis increased to $405.2 million for 2005 compared with $378.7 million for 2004. Higher average balances in loans and investments and higher interest rates increased interest income during 2005. For 2005, total average interest bearing liabilities and interest rates paid on these liabilities increased over 2004, resulting in higher interest expense.

During the fourth quarter of 2005, net interest income declined when compared with the third quarter of 2005. As mentioned above, management has taken steps to prevent this decline from continuing into the first quarter of 2006, but the flattened yield curve, increasing short-term interest rates, competitive pricing of deposits and the effect of declining investment security balances may continue to negatively impact net interest income.*

Average loans increased $1.1 billion or 16.8 percent, for the year ended December 31, 2005, while average taxable investments increased $259.1 million or 9.4 percent over the same period in 2004. Interest income on loans increased $90.5 million for the year ended December 31, 2005 compared with the same period in 2004 due to an increase in average interest rates on loans to 6.04 percent in 2005 from 5.67 percent in 2004 and the increase in average loans. Interest on taxable investments increased $13.9 million for the twelve months in 2005 over the same period in 2004, mainly due to the increase in interest rates of 4 basis points to 5.00 percent in 2005, but also from an increase in average investments.

Average interest bearing liabilities for 2005 increased $1.2 billion or 15.2 percent from 2004. Average savings, NOW and money market deposits increased $576.2 million or 16.7 percent and continue to provide a low cost source of funding even though the average interest rate increased to 1.38 percent in 2005 from 0.67 percent in 2004. The increase in deposits was attributed to the Shrewsbury and NorCrown acquisitions during the year, an increase in municipal deposits and an increase in money market deposits. Average time deposits increased $142.5 million during 2005 or 6.5 percent from 2004. Average short-term borrowings increased $164.9 million or 41.1 percent over 2004 balances. Average long-term borrowings increased $295.6 million or 17.0 percent and include mostly Federal Home Loan Bank (“FHLB”) advances and securities sold under agreements to repurchase. The increase in short-term and long-term borrowings is used as an alternative to deposits and is evaluated based upon need, cost and term. During 2005, deposits lagged loan and investment growth also causing the need for alternative funding sources. Competitive pricing of deposits and the lack of industry deposit growth may cause short-term and long-term borrowings to further escalate in 2006.

The net interest margin on a tax equivalent basis was 3.69 percent for the year ended December 31, 2005 compared with 3.94 percent for the same period in 2004. The change was mainly attributable to increases in interest rates earned on interest earning assets offset by larger increases in interest rates paid on interest bearing liabilities. Average interest rates earned on interest earning assets increased 29 basis points while average interest rates paid on interest bearing liabilities increased 64 basis points causing a compression in the net interest margin for Valley.

During 2005, the Federal Reserve increased short-term interest rates eight times. Valley’s prime rate moved in conjunction with each interest rate increase, which resulted in higher interest income during the year. While this helped the interest on loans which adjust with the prime rate, it also increased Valley’s cost of funding. Market driven long-term interest rates did not increase in conjunction with the federal funds rate increases and therefore, had no positive impact on interest rates for new and repricing fixed rate long-term loans and

investments. If short-term interest rates continue an upward movement and long-term rates remain relatively unchanged, it is anticipated that Valley’s cost of deposits and borrowings will continue to rise, negatively affecting net interest income during 2006.*

The average interest rate for loans increased 37 basis points to 6.04 percent and the average interest rate for taxable investments increased 4 basis points to 5.00 percent. Average interest rates on total interest earning assets of $11.0 billion increased 29 basis points to 5.75 percent. Average interest rates also increased on total interest bearing liabilities of $8.9 billion by 64 basis points to 2.53 percent from 1.89 percent. The average interest rate for interest bearing deposits increased by 70 basis points to 1.94 percent during 2005 compared to 2004.

In 2004, Valley entered into interest rate swap transactions which effectively converted $300 million of its prime-based floating rate loans to a fixed rate. Valley’s objective in using derivatives is to add stability to net interest income and to manage its exposure to interest rate movements. As anticipated, this interest rate swap no longer represents a benefit to net interest income and is expected to have a negative effect on net interest income until it expires in July 2006.*

The following table reflects the components of net interest income for each of the three years ended December 31, 2005, 2004 and 2003:

ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND

NET INTEREST INCOME ON A TAX EQUIVALENT BASIS


	2005								2004								2003
	Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
	(in thousands)
Assets
Interest earning assets
Loans (1)(2)	$	7,637,973		$	461,612		6.04	%	$	6,541,993		$	371,071		5.67	%	$	6,056,439		$	364,295		6.02	%
Taxable investments (3)		3,001,241			150,066		5.00			2,742,161			136,122		4.96			2,409,851			121,794		5.05
Tax-exempt investments (1)(3)		315,807			18,971		6.01			313,673			17,826		5.68			253,002			16,910		6.68
Federal funds sold and other interest bearing deposits		34,361			1,244		3.62			18,343			296		1.61			52,468			622		1.19

Total interest earning assets		10,989,382			631,893		5.75			9,616,170			525,315		5.46			8,771,760			503,621		5.74

Allowance for loan losses		(72,552	)							(68,941	)							(67,536	)
Cash and due from banks		217,458								207,326								200,852
Other assets		639,690								472,678								444,515
Unrealized (loss) gain on securities available for sale		(15,888	)							15,446								50,142

Total assets	$	11,758,090							$	10,242,679							$	9,399,733

Liabilities and Shareholders’ Equity
Interest bearing liabilities
Savings, NOW and money market deposits	$	4,029,093		$	55,456		1.38	%	$	3,452,862		$	23,115		0.67	%	$	3,133,705		$	22,871		0.73	%
Time deposits		2,324,192			67,601		2.91			2,181,678			46,832		2.15			2,236,018			48,095		2.15

Total interest bearing deposits		6,353,285			123,057		1.94			5,634,540			69,947		1.24			5,369,723			70,966		1.32
Short-term borrowings		566,433			16,516		2.92			401,564			5,258		1.31			349,160			3,754		1.08
Long-term borrowings		2,029,965			87,086		4.29			1,734,321			71,402		4.12			1,401,800			74,202		5.29

Total interest bearing liabilities		8,949,683			226,659		2.53			7,770,425			146,607		1.89			7,120,683			148,922		2.09

Demand deposits		1,905,103								1,739,452								1,577,817
Other liabilities		50,470								54,734								67,489
Shareholders’ equity		852,834								678,068								633,744

Total liabilities and shareholders’ equity	$	11,758,090							$	10,242,679							$	9,399,733

Net interest income (tax equivalent basis)					405,234								378,708								354,699
Tax equivalent adjustment					(6,809	)							(6,389	)							(6,123	)

Net interest income				$	398,425							$	372,319							$	348,576

Net interest rate differential							3.22	%							3.57	%							3.65	%

Net interest margin (4)							3.69	%							3.94	%							4.04	%

(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.

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


	2005 Compared to 2004 Increase (Decrease)(1)							2004 Compared to 2003 Increase (Decrease)(1)
	Interest		Volume			Rate		Interest			Volume			Rate
	(in thousands)
Interest income:
Loans (2)	$	90,541	$	25,448		$	65,093	$	6,776		$	28,233		$	(21,457	)
Taxable investments		13,944		996			12,948		14,328			16,530			(2,202	)
Tax-exempt investments (2)		1,145		1,023			122		916			3,681			(2,765	)
Federal funds sold and other interest bearing deposits		948		557			391		(326	)		(498	)		172

		106,578		28,024			78,554		21,694			47,946			(26,252	)

Interest expense:
Savings, NOW and money market deposits		32,341		27,928			4,413		244			2,223			(1,979	)
Time deposits		20,769		17,541			3,228		(1,263	)		(1,167	)		(96	)
Short-term borrowings		11,258		8,435			2,823		1,504			613			891
Long-term borrowings		15,684		3,102			12,582		(2,800	)		15,582			(18,382	)

		80,052		57,006			23,046		(2,315	)		17,251			(19,566	)

Net interest income (tax equivalent basis)	$	26,526	$	(28,982	)	$	55,508	$	24,009		$	30,695		$	(6,686	)

(1)

Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category.

(2)

Interest income is presented on a fully tax equivalent basis assuming a 35 percent tax rate.

Non-Interest Income

The following table presents the components of non-interest income for the years ended December 31, 2005, 2004 and 2003:

NON-INTEREST INCOME


	Years ended December 31,
	2005			2004		2003
	(in thousands)
Trust and investment services	$	6,487		$	6,023	$	5,726
Insurance premiums		11,719			13,982		17,558
Service charges on deposit accounts		22,382			20,242		21,590
(Losses) gains on securities transactions, net		(461	)		6,475		15,606
Gains on trading securities, net		1,717			2,409		2,836
Fees from loan servicing		7,011			8,010		9,359
Gains on sales of loans, net		2,108			3,039		12,966
Bank owned life insurance (“BOLI”)		7,053			6,199		6,188
Other		15,692			17,949		16,368

Total non-interest income	$	73,708		$	84,328	$	108,197

Non-interest income represented 10.5 percent and 14.0 percent of total interest income plus non-interest income for 2005 and 2004, respectively. For the year ended December 31, 2005, non-interest income decreased $10.6 million or 12.6 percent, compared with the same period in 2004.

Trust and investment services increased $464 thousand or 7.7 percent in 2005 as compared with 2004, as a result of increased activity and assets under management.

Insurance premiums decreased $2.3 million or 16.2 percent in 2005 as compared with 2004, as a result of a reduction in mortgage activity and corresponding lower title insurance premiums.

Service charges on deposit accounts increased $2.1 million or 10.6 percent in 2005 compared with 2004, due to the additional income derived from Valley’s recent acquisitions, increased uncollected funds and overdraft activity and additional income earned from higher ATM activity.

Losses/gains on securities transactions, net, decreased $6.9 million to a net loss of $461 thousand for the year ended December 31, 2005 as compared to a net gain of $6.5 million for the year ended December 31, 2004. The majority of security gains during 2005 were generated from mortgage-backed securities, offset by realized losses in collateralized mortgage obligations and an other-than-temporary impairment charge on equity securities.

Gains on trading securities, net, decreased $692 thousand or 28.7 percent for the year ended December 31, 2005 compared with the same period in 2004, due to the historically lower interest rates contributing to a decline in the spread earned and volume of municipal and corporate bond sales in VNB’s broker-dealer subsidiary.

Fees from loan servicing include fees for servicing residential mortgage loans and SBA loans. For the year ended December 31, 2005, fees from servicing residential mortgage loans totaled $5.6 million and fees from servicing SBA loans totaled $1.4 million, as compared with $6.5 million and $1.5 million, respectively, for the year ended December 31, 2004. The aggregate principal balances of mortgage loans serviced by VNB’s subsidiary VNB Mortgage Services, Inc. (“MSI”) for others approximated $1.4 billion, $1.6 billion and $2.0 billion at December 31, 2005, 2004 and 2003, respectively. Fees from loan servicing decreased $1.0 million or 12.5 percent as a result of smaller balances of loans serviced due to refinancing and payoff activity and Valley’s decision not to acquire additional loan servicing portfolios in the current interest rate environment.

Gains on sales of loans, net, decreased $931 thousand to $2.1 million for the year ended December 31, 2005 compared to $3.0 million for the prior year. This decrease was primarily attributed to lower loan sales of $4.8 million in residential mortgage loans in 2005 compared with $35.1 million during 2004. Valley originated approximately $383.0 million in residential mortgage loans during 2005. During 2005, approximately $16 thousand of gains from the sale of residential mortgage loans and $1.4 million of gains from the sale of SBA loans were recorded by VNB for sale into the secondary market.

Valley uses BOLI to help offset the rising cost of employee benefits. BOLI income was $7.1 million and $6.2 million for the years ended December 31, 2005 and 2004, respectively. BOLI income is exempt from federal and state income taxes. The BOLI is invested primarily in mortgage-backed securities, treasuries and high grade corporate securities and the underlying portfolio is managed by two independent investment firms. Valley acquired $5.1 million of BOLI from the Shrewsbury merger in March of 2005.

Other non-interest income decreased $2.3 million to $15.7 million in 2005 as compared with 2004. This decrease was mainly because call options on investment securities were not written during 2005 compared with $2.1 million earned in call options during 2004. The significant components of other non-interest income include fees generated from letters of credit and acceptances, credit cards, safe deposit box rentals and wire transfers.

Non-Interest Expense

The following table presents the components of non-interest expense for the years ended December 31, 2005, 2004 and 2003:

NON-INTEREST EXPENSE


	Years ended December 31,
	2005		2004		2003
	(in thousands)
Salary expense	$	105,988	$	99,325	$	97,197
Employee benefit expense		26,163		24,465		22,162
Net occupancy expense		26,766		22,983		21,782
Furniture and equipment expense		14,903		13,391		12,452
Amortization of other intangible assets		8,797		8,964		12,480
Advertising		7,535		7,974		7,409
Other		47,414		42,947		42,796

Total non-interest expense	$	237,566	$	220,049	$	216,278

Non-interest expense totaled $237.6 million for the year ended December 31, 2005, an increase of $17.5 million or 8.0 percent from 2004, mainly due to increases in salary expense, employee benefit expense, occupancy expense, telephone, stationery, professional fees and other services. Valley incurred additional expenses due to the recent acquisitions of Shrewsbury and NorCrown and de novo branching. The largest components of non-interest expense were salary and employee benefit expense which totaled $132.2 million in 2005 compared with $123.8 million in 2004, an increase of $8.4 million or 6.8 percent.

The efficiency ratio measures a bank’s total non-interest expense as a percentage of net interest income plus non-interest income. Valley’s efficiency ratio for the year ended December 31, 2005 was 50.3 percent compared to 48.2 percent for 2004. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders. The efficiency ratio increased as higher non-interest expense attributable to additional expenses from the Shrewsbury and NorCrown acquisitions outpaced growth in net interest income and non-interest income.

Salary expense increased $6.7 million or 6.7 percent for the year ended December 31, 2005, compared with the same period in 2004. At December 31, 2005, full-time equivalent staff was 2,433 compared to 2,345 at the end of 2004. During 2005, Valley incurred additional expense mainly due to the acquisitions of Shrewsbury and NorCrown and de novo branching.

Employee benefit expense increased by $1.7 million or 6.9 percent for the twelve months ended December 31, 2005 compared with the same period in the prior year, mainly due to increased pension plan and stock incentive costs. Employee benefit expense included $1.2 million and $964 thousand of stock option expense for the years ended December 31, 2005 and December 31, 2004, respectively.

Net occupancy expense and furniture and equipment expense, collectively, increased $5.3 million or 14.6 percent during 2005 in comparison to 2004. This increase was largely due to the Shrewsbury and NorCrown acquisitions, business expansion such as new and refurbished branches and increased depreciation charges in connection with investments in technology and facilities. Depreciation expense increased by approximately $1.9 million or 14.3 percent during 2005 compared with the prior year. Rent expense increased $1.6 million or 17.1 percent in 2005 compared with the prior year.

Amortization of other intangible assets, consisting primarily of amortization of loan servicing rights, decreased $167 thousand or 1.9 percent to $8.8 million for the year ended December 31, 2005 compared with the same period in 2004. An impairment analysis is performed periodically to determine the appropriateness of the value of Valley’s loan servicing rights, for which impairment expense of $108 thousand was recorded during 2005 compared with $1.1 million in 2004. Amortization expense on loan servicing rights decreased as a result of lower levels of prepayments, partially offset by additional amortization from core deposits recorded in connection with the Shrewsbury and NorCrown acquisitions in 2005.

Other non-interest expense increased $4.5 million or 10.4 percent for the year ended December 31, 2005 compared with the same period in 2004, mainly due to additional outside professional and service fees (legal, examination and consulting). The significant components of other non-interest expense include credit card fees, data processing, professional fees, postage, telephone, stationery, insurance, title search fees and service fees.

Income Taxes

Income tax expense as a percentage of pre-tax income was 29.0 percent for the year ended December 31, 2005 compared with 32.5 percent in 2004. The decrease was mainly due to an increase in low income housing tax credits, increased investment in tax exempt investments, decreased state income tax expense and reassessment of required tax accruals.

The effective tax rate for 2006 is currently expected to be similar to the full year of 2005.* This rate is projected based upon tax planning implemented during the latter half of 2005 and is anticipated to continue through 2006 unless there are changes in levels of non-taxable income, changes in tax planning strategies or unexpected changes in federal or state income tax laws.*

Business Segments

Valley has four business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. 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 VNB, and cash flow hedges are allocated from the corporate and other adjustments segment to each of the other three business segments. Valley’s Wealth Management and Insurance Services Division, comprised of trust, investment and insurance services, are included in the consumer lending segment. The financial reporting for each segment contains allocations and reporting in line with VNB’s operations, which may not necessarily be compared to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. For financial data on the four business segments see Part II, Item 8, “Financial Statements and Supplementary Data-Note 20 of the consolidated financial statements.”

The consumer lending segment had a return on average interest earning assets before income taxes of 2.00 percent for the year ended December 31, 2005 compared with 2.31 percent for the year ended December 31, 2004. Average interest earning assets increased $384.9 million, mainly attributable to volume gains in automobile loans and residential mortgage loans, which include loans acquired in the Shrewsbury and NorCrown acquisitions. The increase in automobile loans was achieved primarily as a result of the manufacturers “employee discount” sales promotion combined with the expanded market presence of Valley’s indirect dealer program. The increase in residential mortgage loans was driven by favorable interest rates, in conjunction with loans acquired from Shrewsbury and NorCrown. Average interest rates on consumer loans increased by 11 basis points and the expenses associated with funding sources increased by 54 basis points. The majority of the rates on these loans are fixed and do not adjust immediately with changes in short-term interest rates. Income before income taxes decreased $2.7 million due to lower gains on the sale of loans, decreased loan fees and lower title insurance fees and an increase in allocated internal transfer expense, offset by a decrease in the provision for loan losses and decreases in operating expenses.

The return on average interest earning assets before income taxes for the commercial lending segment increased to 2.83 percent in 2005 compared with 2.66 percent for the year ended December 31, 2004. Average interest earning assets increased $708.9 million, attributed to volume gains in loans and loans acquired from Shrewsbury and NorCrown. Interest rates on commercial lending increased by 65 basis points, largely due to increases in the prime lending rate, while the expenses associated with funding sources increased by 54 basis points. Income before income taxes increased $25.4 million primarily as a result of increased net interest income and a decrease in the provision for loan losses offset by an increase in allocated internal transfer expense.

The investment management segment had a return on average interest earning assets before income taxes of 2.25 percent for the year ended December 31, 2005, 73 basis points less than the year ended December 31, 2004. Average interest earning assets increased by $279.4 million, due to higher investment volume and investments acquired from Shrewsbury and NorCrown. The yield on interest earning assets, which includes federal funds sold, increased by 9 basis points to 5.25 percent for the year ended December 31, 2005. The investment portfolio is comprised predominantly of mortgage-backed securities that during the first half of 2005 generated cash flows that were re-invested at current prevailing rates. Principal paydowns on these securities have moderated as intermediate to long-term rates have currently stabilized, which may continue during 2006.* Income before income taxes decreased 17.7 percent to $75.5 million, primarily due to the effect of a narrowing net interest margin outweighing the increase in volume, lower non-interest income due to reduced call options and lower net gains on sales of securities and an increase in allocated internal transfer expense.

The corporate and other adjustments segment represents income and expense items not directly attributable to a specific segment including gains on securities transactions not classified in the investment management segment above, interest expense related to the junior subordinated debentures issued to VNB Capital Trust I, interest expense related to VNB’s issuance of $100 million in subordinated notes during 2005, as well as income and expense from derivative financial instruments and service charges on deposit accounts. The loss before income taxes for the corporate segment increased by $4.9 million for the year ended December 31, 2005 compared with December 31, 2004, and was primarily due to a decrease in net interest income as a result of the issuance of $100 million in subordinated notes and the negative effect of certain cash flow hedge derivatives.

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

Valley’s success is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of Valley’s interest rate sensitive assets and liabilities to the movement in interest rates. Valley’s interest rate risk management is the responsibility of the Asset/Liability Management Committee (“ALCO”). ALCO establishes policies that monitor and coordinate Valley’s sources, uses and pricing of funds.

Valley uses a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twelve and twenty-four month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of December 31, 2005. The model assumes changes in the levels of interest rates without any proactive change in the balance sheet by management. In the model, the forecasted shape of the yield curve remains static as of December 31, 2005. According to the model run for year end 2005, over a twelve month period, an immediate interest rate increase of 100 basis points resulted in a decrease in net interest income of 0.28 percent or approximately $1.1 million, while an immediate interest rate decrease of 100 basis points resulted in a decrease in net interest income of 0.66 percent or approximately $2.6 million. Potential movements in the convexity of the bond and loan portfolio may have a positive or negative impact to Valley’s net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected above in the immediate 100 basis point increase or decrease. Management cannot provide any assurance about the actual effect of changes in interest rates on Valley’s net interest income.

Valley’s net interest margin is affected by changes in interest rates and cash flows from its loan and investment portfolios. In a low interest rate environment, greater cash flow is received from mortgage loans and mortgage-backed securities due to greater prepayment activity. These larger cash flows are then reinvested into various investments at lower interest rates causing net interest margin pressure. Valley actively manages these cash flows in conjunction with its liability mix, duration and rates to optimize the net interest margin, while prudently structuring the balance sheet to manage changes in interest rates. In the current interest rate environment, short-term rates have escalated while long-term rates have stayed low causing a flat yield curve.

During 2004, Valley entered into interest rate swap transactions which effectively converted $300 million of its prime-based floating rate loans to a fixed rate. Valley’s objective in using derivatives is to add stability to net interest income and to manage its exposure to interest rate movements. As anticipated, this swap no longer represents a benefit to net interest income and is expected to have a negative effect on net interest income until it expires in July 2006.*

The following table shows certain interest earning assets and interest bearing liabilities that are sensitive to changes in interest rates, categorized by expected maturity and the instruments’ fair value at December 31, 2005. 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, 2005.

INTEREST RATE SENSITIVITY ANALYSIS


	Rate		2006		2007			2008			2009		2010		Thereafter		Total Balance		Fair Value
			(in thousands)
Interest sensitive assets:
Investment securities held to maturity	5.93	%	$	281,367	$	63,332		$	49,113		$	46,332	$	66,073	$	722,973	$	1,229,190	$	1,218,081
Investment securities available for sale	4.72			433,999		248,433			224,759			180,672		173,724		777,307		2,038,894		2,038,894
Trading securities	—			4,208		—			—			—		—		—		4,208		4,208
Loans held for sale	—			3,497		—			—			—		—		—		3,497		3,497
Loans:
Commercial	7.15			1,150,339		115,919			93,312			34,908		28,784		26,657		1,449,919		1,458,632
Mortgage	6.04			1,358,802		668,612			673,108			565,822		369,898		1,153,272		4,789,514		4,661,698
Consumer	6.09			1,126,940		344,759			201,062			104,738		47,799		65,726		1,891,024		2,012,032

Total interest sensitive assets	5.94		$	4,359,152	$	1,441,055		$	1,241,354		$	932,472	$	686,278	$	2,745,935	$	11,406,246	$	11,397,042

Interest sensitive liabilities:
Deposits:
Savings, NOW and money market	1.85		$	979,577	$	974,537		$	974,537		$	365,866	$	182,933	$	548,799	$	4,026,249	$	4,026,249
Time	3.45			1,716,922		294,444			262,436			120,696		30,332		70,704		2,495,534		2,510,032
Short-term borrowings	3.36			582,575		—			—			—		—		—		582,575		575,626
Long-term borrowings	4.39			748,413		569,762			129,761			69,450		152,607		575,577		2,245,570		2,219,339

Total interest sensitive liabilities	2.98		$	4,027,487	$	1,838,743		$	1,366,734		$	556,012	$	365,872	$	1,195,080	$	9,349,928	$	9,331,246
Interest sensitivity gap			$	331,665	$	(397,688	)	$	(125,380	)	$	376,460	$	320,406	$	1,550,855	$	2,056,318	$	2,065,796

Ratio of interest sensitive assets to interest sensitive liabilities				1.08:1		0.78:1			0.91:1			1.68:1		1.88:1		2.30:1		1.22:1		1.22:1

The projected maturity of assets and liabilities with contractual maturity dates are based on the actual maturity date of each financial instrument adjusted for all projected payments of principal. For investment securities, loans and long-term borrowings, expected maturities are based upon contractual maturity or call dates, projected repayments and prepayments of principal. The prepayment experience reflected herein is based on historical experience combined with market consensus expectations derived from independent external sources. The actual maturities of these instruments could vary substantially if future prepayments differ from

historical experience. For non-maturity deposit liabilities, in accordance with standard industry practice and Valley’s own historical experience, “decay factors” were used to estimate deposit runoff. Valley uses various assumptions to estimate fair values. See Note 19 of the consolidated financial statements for further discussion of fair values.

The interest sensitivity gap re-pricing within one year as of December 31, 2005 was positive $331.7 million, representing a ratio of interest sensitive assets to interest sensitive liabilities of 1.08:1. 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. Valley maintains a level of liquid funds through asset/liability management to ensure that liquidity needs are met at a reasonable cost. On the asset side, liquid funds are maintained in the form of cash and due from banks, interest bearing deposits with 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 totaled $2.3 billion and $2.1 billion at December 31, 2005 and at December 31, 2004, respectively, representing 20.6 percent and 21.2 percent of earning assets, and 18.9 percent and 19.9 percent of total assets at December 31, 2005 and 2004, respectively.

On the liability side, the primary source of funds available to meet liquidity needs is Valley’s core deposit base, which generally excludes certificates of deposit over $100 thousand as well as brokered certificates of deposit. Core deposits averaged approximately $7.3 billion for the year ended December 31, 2005 and $6.4 billion for the year ended December 31, 2004, representing 66.6 percent and 66.5 percent of average earning assets. The increase is primarily a result of the acquisitions during 2005. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by Valley’s need for funds and the need to balance its net interest margin. Brokered certificates of deposit totaled $63.1 million at December 31, 2005 and $63.6 million at December 31, 2004. Borrowings through federal funds lines, repurchase agreements, FHLB advances and large dollar certificates of deposit, generally those over $100 thousand, are also used as funding sources.

Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. In 2005, proceeds from the sales of investment securities available for sale amounted to $71.5 million and proceeds of $667.9 million were generated from maturities, redemptions and prepayments of investments. Additional liquidity could be derived from residential mortgages, commercial mortgages, auto and home equity loans, as these are all marketable portfolios. Purchases of investment securities in 2005 were $792.2 million.

During 2005, a substantial amount of loan growth was funded from a combination of deposit growth, normal loan payments and prepayments, and borrowings. During the fourth quarter of 2005, Valley allowed the investment portfolio to decline through both normal attrition and the sale of $58 million of low yielding securities. The flat yield curve makes it less desirable to hold investments and therefore, Valley has decided to allow the investment portfolio to continue to decline through attrition as long as the yield curve remains flat. The cash flow generated from the portfolio paydowns are anticipated to be approximately $400 million, which will provide additional liquidity to fund loan growth or to pay down borrowings during 2006.*

The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31, 2005. These certificates of deposit are generated primarily from core deposit customers.


	(in thousands)
Less than three months	$	580,965
Three to six months		168,956
Six to twelve months		149,953
More than twelve months		211,200

	$	1,111,074

Valley has access to a variety of borrowing sources and uses both short-term and long-term borrowings to support its asset base. Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase (“repos”), treasury tax and loan accounts, and FHLB advances. Short-term borrowings increased by $72.3 million to $582.6 million at December 31, 2005 compared to $510.3 million at December 31, 2004 primarily due to an increase in repos due in one year or less and federal funds purchased. A substantial portion of the repos include customer balances being swept into this vehicle every night.

The following table sets forth information regarding Valley’s short-term repos at the dates and for the periods indicated:


	Years Ended December 31,
	2005			2004			2003
	($ in thousands)
Securities sold under agreements to repurchase:
Average balance outstanding	$	256,963		$	207,842		$	231,058
Maximum outstanding at any month-end during the period		291,427			264,067			203,148
Balance outstanding at end of period		289,970			227,654			174,577
Weighted average interest rate during the period		2.34	%		1.04	%		0.95	%
Weighted average interest rate at the end of the period		2.07	%		0.95	%		1.26	%

Valley’s recurring cash requirements consist primarily of dividends to shareholders and interest expense on junior subordinated debentures issued to VNB Capital Trust I. These cash needs are routinely satisfied by dividends collected from VNB along with cash and earnings on investments owned. Projected cash flows from these sources are expected to be adequate to pay dividends and interest expense payable to VNB Capital Trust I, given the current capital levels and current profitable operations of VNB. In addition, Valley may, as approved by the Board of Directors, repurchase shares of its outstanding common stock.* The cash required for these purchases of shares have previously been met by using its own funds, dividends received from VNB as well as borrowed funds.

Investment Securities

The amortized cost of securities held to maturity at December 31, 2005, 2004 and 2003 were as follows:

INVESTMENT SECURITIES HELD TO MATURITY


	2005		2004		2003
	(in thousands)
U.S. Treasury securities and other government agencies and corporations	$	38,405	$	38,406	$	—
Obligations of states and political subdivisions		229,474		250,149		172,707
Mortgage-backed securities		399,521		492,416		629,237
Other debt securities		463,526		437,708		375,317

Total debt securities held to maturity		1,130,926		1,218,679		1,177,261
FRB & FHLB stock		98,264		73,659		54,978

Total investment securities held to maturity	$	1,229,190	$	1,292,338	$	1,232,239

The fair value of securities available for sale at December 31, 2005, 2004 and 2003 were as follows:

INVESTMENT SECURITIES AVAILABLE FOR SALE


	2005		2004		2003
	(in thousands)
U.S. Treasury securities and other government agencies and corporations	$	395,799	$	312,881	$	374,911
Obligations of states and political subdivisions		73,133		87,789		106,211
Mortgage-backed securities		1,534,992		1,456,552		1,305,200

Total debt securities available for sale		2,003,924		1,857,222		1,786,322
Equity securities		34,970		26,507		19,358

Total investment securities available for sale	$	2,038,894	$	1,883,729	$	1,805,680

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES

HELD TO MATURITY AT DECEMBER 31, 2005


	U.S. Treasury Securities and Other Government Agencies and Corporations				Obligations of States and Political Subdivisions				Mortgage- Backed Securities(5)				Other Debt Securities				Total(4)
	Amortized Cost(1)		Yield (2)		Amortized Cost(1)		Yield (2)(3)		Amortized Cost(1)		Yield (2)		Amortized Cost(1)		Yield (2)		Amortized Cost(1)		Yield (2)
	(in thousands)
0-1 year	$	—	—	%	$	38,152	4.50	%	$	3	7.37	%	$	100	6.20	%	$	38,255	4.50	%
1-5 years		20,020	2.55			27,837	6.57			2,597	7.52			—	—			50,454	5.02
5-10 years		18,385	5.30			90,005	6.36			229	8.29			75	5.65			108,694	6.18
Over 10 years		—	—			73,480	6.49			396,692	4.50			463,351	7.27			933,523	6.03

Total securities	$	38,405	3.87	%	$	229,474	6.12	%	$	399,521	4.52	%	$	463,526	7.27	%	$	1,130,926	5.95	%

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES

AVAILABLE FOR SALE AT DECEMBER 31, 2005


	U.S. Treasury Securities and Other Government Agencies and Corporations				Obligations of States and Political Subdivisions				Mortgage- Backed Securities (5)				Total(4)
	Fair Value		Yield (2)		Fair Value		Yield (2)(3)		Fair Value		Yield (2)		Fair Value		Yield (2)
	(in thousands)
0-1 year	$	14,127	3.54	%	$	8,270	6.00	%	$	681	7.25	%	$	23,078	4.52	%
1-5 years		140,692	3.58			31,410	7.36			21,493	7.46			193,595	4.58
5-10 years		135,240	4.34			29,002	7.13			50,647	5.79			214,889	5.04
Over 10 years		105,740	4.94			4,451	6.99			1,462,171	4.69			1,572,362	4.71

Total securities	$	395,799	4.20	%	$	73,133	7.09	%	$	1,534,992	4.77	%	$	2,003,924	4.73	%

(1)

Amortized costs are stated at cost less principal reductions, if any, and adjusted for accretion of discounts and amortization of premiums.

(2)

Average yields are calculated on a yield-to-maturity basis.

(3)

Average yields on obligations of states and political subdivisions are generally tax-exempt and calculated on a tax-equivalent basis using a statutory federal income tax rate of 35 percent.

(4)

Excludes equity securities which have indefinite maturities.

(5)

Mortgage-backed securities are shown using stated final maturity.

Valley’s investment portfolio is comprised of U.S. government and federal agency securities, tax-exempt issues of states and political subdivisions, mortgage-backed securities, equity and other securities. There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for securities issued by United States government agencies, which includes the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). The decision to purchase or sell securities is based upon the current assessment of long and short-term economic and financial conditions, including the interest rate environment and other statement of financial condition components.

At December 31, 2005, Valley had $399.5 million of mortgage-backed securities classified as held to maturity and $1.5 billion of mortgage-backed securities classified as available for sale. Substantially all the mortgage-backed securities held by Valley are issued or backed by federal agencies. The mortgage-backed securities portfolio is a source of significant liquidity to Valley through the monthly cash flow of principal and interest. Mortgage-backed securities, like all securities, are sensitive to change in the interest rate environment, increasing and decreasing in value as interest rates fall and rise. As interest rates fall, the increase in prepayments can reduce the yield on the mortgage-backed securities portfolio, and reinvestment of the proceeds will be at lower yields. Conversely, rising interest rates will reduce cash flows from prepayments and extend anticipated duration of these assets. Valley monitors the changes in interest rates, cash flows and duration, in accordance with its investment policies. Management continues to seek out securities with an attractive spread over Valley’s cost of funds while limiting the extension risk of its assets. See “Liquidity” section included in this MD&A for discussion of 2006 investment portfolio growth.

The mortgage-backed securities portfolio included $358.8 million of collateralized mortgage obligations (“CMO’s”), of which $31.6 million were privately issued, at December 31, 2005. CMO’s had a yield of 4.74 percent and an unrealized loss of $8.8 million at December 31, 2005.

As of December 31, 2005, Valley had $2.0 billion of securities available for sale, an increase of $155.2 million from December 31, 2004. As of December 31, 2005, the investment securities available for sale had a net unrealized loss of $22.3 million, net of deferred taxes, compared to a net unrealized gain of $3.7 million, net of deferred taxes, at December 31, 2004. This change was primarily due to a decrease in prices resulting from an increase in short-term interest rates. These securities are not considered trading account securities, which may be sold on a continuous basis, but rather are securities which may be sold to meet the various liquidity and interest rate requirements of Valley. As of December 31, 2005 and 2004, Valley had a total of $4.2 million and $2.5 million, respectively, in trading account securities, which were utilized to facilitate purchases for customers of VNB’s broker-dealer subsidiary.

Loan Portfolio

As of December 31, 2005, total loans were $8.1 billion, compared to $6.9 billion at December 31, 2004, an increase of $1.2 billion or 17.3 percent. The following table reflects the composition of the loan portfolio for the five years ended December 31, 2005:

LOAN PORTFOLIO


	2005			2004			2003			2002			2001
	(in thousands)
Commercial	$	1,449,919		$	1,259,997		$	1,181,399		$	1,113,962		$	1,079,222

Total commercial loans		1,449,919			1,259,997			1,181,399			1,113,962			1,079,222

Construction		471,560			368,120			222,748			200,896			206,789
Residential mortgage		2,083,004			1,853,408			1,594,392			1,387,208			1,283,809
Commercial mortgage		2,234,950			1,745,155			1,553,037			1,515,095			1,365,344

Total mortgage loans		4,789,514			3,966,683			3,370,177			3,103,199			2,855,942

Home equity		565,960			517,325			476,149			451,543			398,102
Credit card		9,044			9,691			10,722			11,544			12,740
Automobile		1,221,525			1,079,050			1,013,938			932,672			842,247
Other consumer		94,495			99,412			114,304			107,239			101,856

Total consumer loans		1,891,024			1,705,478			1,615,113			1,502,998			1,354,945

Total loans (1)	$	8,130,457		$	6,932,158		$	6,166,689		$	5,720,159		$	5,290,109

As a percent of total loans:
Commercial loans		17.8	%		18.2	%		19.2	%		19.5	%		20.4	%
Mortgage loans		58.9			57.2			54.6			54.2			54.0
Consumer loans		23.3			24.6			26.2			26.3			25.6

Total		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%

(1)

Total loans are net of unearned discount and deferred loan fees totaling $6.3 million, $6.6 million, $5.9 million, $6.4 million and $2.6 million at December 31, 2005, 2004, 2003, 2002 and 2001, respectively.

The largest increase in loans for 2005 was from mortgage loans comprised of construction, residential and commercial mortgage loans, partially as a result of additional loans acquired from Shrewsbury and NorCrown.

Construction mortgage loans increased $103.4 million or 28.1 percent in 2005 over last year, due to additional loans from the acquisitions and a greater volume of draw downs on existing lines and newly originated construction loans. Residential mortgage loans increased $229.6 million or 12.4 percent in 2005 over last year, primarily due to loans from recent acquisitions, a continuing favorable interest rate environment and a loan origination function producing more loans than those paying off.

The commercial loan and commercial mortgage loan portfolios have continued their steady increase. Commercial loans increased $189.9 million or 15.1 percent in 2005, partly due to additional loans acquired from Shrewsbury and NorCrown, increases in draw downs on new and existing commercial lines of credit and new commercial loans. Commercial mortgage loans increased $489.8 million or 28.1 percent during 2005, mainly due to the additional loans acquired from the recent acquisitions. The increase also represents a large volume of new loans, net of a substantial amount of payoffs during 2005 as a result of low interest rates and a competitive lending environment.

The home equity loan portfolio, primarily lines of credit, increased $48.6 million or 9.4 percent during 2005, resulting primarily from acquired loans from Shrewsbury and NorCrown, low interest rates and Valley’s increased marketing efforts to its customer base.

Automobile loans during 2005 increased by $142.5 million or 13.2 percent. The large increase during 2005 is the direct result of the manufacturers “employee discount” sales programs during the second half of 2005, combined with the expanded market presence of Valley’s indirect dealer program. The fourth quarter showed a decline in auto loan growth as a result of competition and slowing auto sales. Valley may not achieve the same performance in future periods due to levels of automobile sales, competition and the reduction of manufacturers’ based incentives.

Much of Valley’s lending is in northern and central New Jersey and Manhattan, with the exception of the out-of-state auto loan portfolio, SBA loans and a small amount of out-of-state residential mortgage loans. However, efforts are made to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector.* As a result of Valley’s lending, this could present a geographic and credit risk if there was a significant broad based downturn of the economy within the region.

The following table reflects the contractual maturity distribution of the commercial and construction loan portfolios as of December 31, 2005:


	One Year or Less		One to Five Years		Over Five Years		Total
	(in thousands)
Commercial—fixed rate	$	349,566	$	82,937	$	8,100	$	440,603
Commercial—adjustable rate		800,773		189,986		18,557		1,009,316
Construction—fixed rate		22,997		33,874		—		56,871
Construction—adjustable rate		183,457		231,232		—		414,689

	$	1,356,793	$	538,029	$	26,657	$	1,921,479

Prior to maturity of each loan with a balloon payment and if the borrower requests an extension, Valley generally conducts a review which normally includes an analysis of the borrower’s financial condition and, if applicable, a review of the adequacy of collateral. A rollover of the loan at maturity may require a principal paydown.

VNB is a preferred U. S. Small Business Administration (“SBA”) lender with authority to make loans without the prior approval of the SBA. VNB currently has approval to make SBA loans in New Jersey, Pennsylvania, New York, Maryland, North and South Carolina, Virginia, Connecticut and the District of Columbia. Generally, between 75 percent and 85 percent of each loan is guaranteed by the SBA and is typically sold into the secondary market, with the balance retained in VNB’s portfolio. VNB intends to continue expanding this area of lending because it provides a good source of fee income and loans with floating interest rates tied to the prime lending rate.* This program can expand or contract based upon guidelines and availability of lending established by the SBA.

During 2005 and 2004, VNB originated approximately $36.9 million and $27.0 million of SBA loans, respectively, and sold $17.2 million and $19.7 million, respectively. At December 31, 2005 and 2004, $55.2 million and $55.7 million, respectively, of SBA loans were held in VNB’s portfolio and VNB serviced for others approximately $87.7 million and $99.9 million, respectively, of SBA loans.

Non-performing Assets

Non-performing assets include non-accrual loans and other real estate owned (“OREO”). Loans are generally placed on a non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO is reported at the lower of cost or fair value at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter. Levels of non-performing assets remain relatively low as a percentage of the total loan portfolio and OREO as shown in the table below.

The following table sets forth non-performing assets and accruing loans which were 90 days or more past due as to principal or interest payments on the dates indicated, in conjunction with asset quality ratios for Valley:

LOAN QUALITY


	At December 31,
	2005			2004			2003			2002			2001
	(in thousands)
Loans past due in excess of 90 days and still accruing	$	4,442		$	2,870		$	2,792		$	4,931		$	10,456

Non-accrual loans		25,794			30,274			22,338			21,524			18,483
Other real estate owned		2,023			480			797			43			329

Total non-performing assets	$	27,817		$	30,754		$	23,135		$	21,567		$	18,812

Troubled debt restructured loans	$	—		$	—		$	—		$	—		$	891

Total non-performing loans as a % of loans		0.32	%		0.44	%		0.36	%		0.38	%		0.35	%
Total non-performing assets as a % of loans		0.34	%		0.44	%		0.38	%		0.38	%		0.36	%
Allowance for loan losses as a % of non-performing loans		291.49	%		217.01	%		289.42	%		297.75	%		345.20	%

Non-accrual loans have ranged from a low of $18.5 million to $30.3 million over the last five years. Valley’s non-accrual experience as a percentage of total loans indicates that the amount of non-accrual loans is historically low and there is no guarantee that this low level will continue. The non-accrual increase in 2004 was primarily due to the addition of two large credits. If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $1.9 million, $1.5 million and $1.8 million for the years ended December 31, 2005, 2004, and 2003, respectively; none of these amounts were included in interest income during these periods. Interest income recognized on loans once classified as non-accrual loans totaled $21 thousand, $844 thousand and $671 thousand for the years ended December 31, 2005, 2004, and 2003, respectively.

Loans 90 days or more past due and still accruing, which were not included in the non-performing category, are presented in the above table. These loans ranged from $2.8 million to $10.5 million for the last five years. Valley cannot predict that this current low level of past dues will continue. These loans represent most loan types and are generally well secured and in the process of collection.

Total loans past due in excess of 30 days were 0.89 percent of all loans at December 31, 2005 compared to 0.90 percent at December 31, 2004. Valley cannot guarantee that this current low level of past due loans in excess of 30 days will continue.

Other real estate owned increased $1.5 million to $2.0 million in 2005 compared with 2004 primarily due to three additional SBA loans which were foreclosed upon.

Although substantially all risk elements at December 31, 2005 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, management determined that there were approximately $8.1 million and $4.7 million in potential problem loans at December 31, 2005 and 2004, respectively, which were not classified as non-accrual loans in the non-performing asset table above. Potential problem loans are defined as performing loans for which management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in a non-performing loan. Valley’s decision to include performing loans in potential problem loans does not necessarily mean that management expects losses to occur, but that management recognizes potential problem loans carry a higher probability of default. Of the $8.1 million in potential problem loans as of December 31, 2005, approximately $1.2 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.

Asset Quality and Risk Elements

Lending is one of the most important functions performed by Valley and, by its very nature, lending is also the most complicated, risky and profitable part of Valley’s business. For commercial loans, construction loans and commercial mortgage loans, a separate credit department is responsible for risk assessment, credit file maintenance and periodically evaluating overall creditworthiness of a borrower. Additionally, efforts are made to limit concentrations of credit so as to minimize the impact of a downturn in any one economic sector. These loans are diversified as to type of borrower and loan. However, these loans are collateralized by real estate representing approximately 59 percent of total loans. Most of these loans are in northern and central New Jersey and Manhattan, presenting a geographical and credit risk if there was a significant downturn of the economy within the region.

Residential mortgage loans are secured by 1-4 family properties generally located in counties where Valley has a branch presence and counties contiguous thereto (including Pennsylvania). Valley does entertain loan requests for mortgage loans secured by homes beyond this primary geographic definition, however, lending outside this primary area is generally made only in support of customer relationships. Underwriting policies that are based on FNMA and FHLMC guidance are adhered to for loan requests of conforming and non-conforming amounts. The weighted average loan-to-value ratio of all residential mortgage originations in 2005 was 59.8 percent while FICO^® (independent objective criteria measuring the creditworthiness of a borrower) scores averaged 746.

Consumer loans are comprised of home equity loans, credit card loans, automobile loans and other consumer loans. Home equity and automobile loans are secured loans and are made based on an evaluation of the collateral and the borrower’s creditworthiness. The automobile loans are from New Jersey and out of state and management believes these out of the state loans generally present no more risk than those made within New Jersey.* All loans are subject to Valley’s underwriting criteria. Therefore, each loan or group of loans presents a geographic risk based upon the economy of the region.

Management realizes that some degree of risk must be expected in the normal course of lending activities. Allowances are maintained to absorb such loan losses inherent in the portfolio. The allowance for loan losses and related provision are an expression of management’s evaluation of the credit portfolio and economic climate.

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:


	Years ended December 31,
	2005			2004			2003			2002			2001
	(in thousands)
Average loans outstanding	$	7,637,973		$	6,541,993		$	6,056,439		$	5,489,344		$	5,199,999

Beginning balance—Allowance for loan losses	$	65,699		$	64,650		$	64,087		$	63,803		$	61,995

Loans charged-off:
Commercial		1,921			6,551			4,905			10,570			10,841
Construction		—			—			—			504			—
Mortgage—Commercial		307			212			409			525			710
Mortgage—Residential		108			117			244			233			39
Consumer		5,265			6,258			6,089			6,682			6,414

		7,601			13,138			11,647			18,514			18,004

Charged-off loans recovered:
Commercial		1,474			3,394			2,012			1,905			1,465
Construction		—			—			—			—			—
Mortgage—Commercial		129			237			379			1,014			184
Mortgage—Residential		130			51			135			43			42
Consumer		1,765			2,502			2,339			2,192			2,415

		3,498			6,184			4,865			5,154			4,106

Net charge-offs		4,103			6,954			6,782			13,360			13,898
Provision for loan losses		4,340			8,003			7,345			13,644			15,706
Additions from acquisitions		9,252			—			—			—			—

Ending balance—Allowance for loan losses	$	75,188		$	65,699		$	64,650		$	64,087		$	63,803

Ratio of net charge-offs during the period to average loans outstanding during the period		0.05	%		0.11	%		0.11	%		0.24	%		0.27	%
Allowance for loan losses as a % of loans		0.92	%		0.95	%		1.05	%		1.12	%		1.21	%

The allowance for loan losses is maintained at a level estimated to absorb probable loan losses of the loan portfolio. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. VNB’s methodology for evaluating the appropriateness of the allowance consists of several significant elements, which include specific allowances for identified impaired loans, an allocated allowance for each portfolio segment and the unallocated allowance.

VNB’s allocated allowance is calculated by applying loss factors to outstanding loans. The formula is based on the internal risk grade of loans or pools of loans. Any change in the risk grade of performing and/or non-performing loans affects the amount of the related allowance. Loss factors are based on VNB’s historical loss experience and may be adjusted for significant circumstances that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.

The allowance contains an unallocated portion to cover inherent losses within a given loan category which have not been otherwise reviewed or measured on an individual basis. Such unallocated allowance includes management’s evaluation of local and national economic and business conditions, portfolio concentrations, credit quality and delinquency trends. The unallocated portion of the allowance reflects management’s attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of probable credit losses. Net charge-off levels have declined annually since 2001 from 0.27 percent to 0.05 percent in 2005. The current low net charge-off levels represent the current credit cycle seen in the region and country. However, there can be no guarantee that these low levels will continue into future periods.

The provision for loan losses was $4.3 million in 2005 compared to $8.0 million in 2004. The $3.7 million decline was based upon the results of management’s quarterly analyses of the loan portfolio and a decrease in impaired loans during 2005.

The following table summarizes the allocation of the allowance for loan losses to specific loan categories for the past five years:


	Years ended December 31,
	2005				2004				2003				2002				2001
	(in thousands)
	Allowance Allocation		Percent of Loan Category to Total Loans		Allowance Allocation		Percent of Loan Category to Total Loans		Allowance Allocation		Percent of Loan Category to Total Loans		Allowance Allocation		Percent of Loan Category to Total Loans		Allowance Allocation		Percent of Loan Category to Total Loans
Loan category:
Commercial	$	48,410	17.8	%	$	39,931	18.2	%	$	33,904	19.2	%	$	26,586	19.5	%	$	24,886	20.4	%
Mortgage		16,288	58.9			13,478	57.2			12,166	54.6			11,382	54.2			10,839	54.0
Consumer		6,504	23.3			6,674	24.6			8,037	26.2			7,885	26.3			7,959	25.6
Unallocated		3,986	N/A			5,616	N/A			10,543	N/A			18,234	N/A			20,119	N/A

	$	75,188	100.0	%	$	65,699	100.0	%	$	64,650	100.0	%	$	64,087	100.0	%	$	63,803	100.0	%

At December 31, 2005, the allowance for loan losses amounted to $75.2 million or 0.92 percent of loans, as compared to $65.7 million or 0.95 percent at December 31, 2004. The allowance was adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $4.1 million for the year ended December 31, 2005 compared with $7.0 million for the year ended December 31, 2004. The ratio of net charge-offs to average loans was 0.05 percent and 0.11 percent for 2005 and 2004.

The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific allocations to the allowance for loan losses totaled $16.8 million and $9.0 million, respectively, at December 31, 2005 and $25.0 million and $13.1 million, respectively, at December 31, 2004. Management believes that the lower unallocated allowance is appropriate given the improved economic climate and present delinquency trends.* The average balance of impaired loans during 2005, 2004 and 2003 was approximately $20.1 million, $14.6 million and $17.8 million, respectively. The amount of interest that would have been recorded under the original terms for impaired loans was $1.4 million for 2005, $479 thousand for 2004, and $972 thousand for 2003. No interest was collected on these impaired loans during these periods.

Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At December 31, 2005, shareholders’ equity totaled $931.9 million compared with $707.6 million at year-end 2004, representing 7.5 percent and 6.6 percent of total assets, respectively. The increase in total shareholders’ equity for 2005 was the result of net income of $163.4 million and additional capital issued in the Shrewsbury and NorCrown acquisitions of approximately $183.0 million, offset by dividends paid to shareholders and a decrease in accumulated other comprehensive income.

Included in shareholders’ equity as a component of accumulated other comprehensive income at December 31, 2005 was a $22.3 million unrealized loss on investment securities available for sale, net of deferred tax, compared with an unrealized gain of $3.7 million, net of deferred tax at December 31, 2004. Also included as a component of accumulated other comprehensive income at December 31, 2005 was a $1.8 million unrealized loss on derivatives, net of deferred tax related to cash flow hedging relationships.

On May 14, 2003, Valley’s Board of Directors authorized the repurchase of up to approximately 2.8 million shares of Valley’s outstanding common stock. Purchases may be made from time to time in the open market or in privately negotiated transactions generally not exceeding prevailing market prices. Repurchased shares are held in treasury and are expected to be used for general corporate purposes.* Valley’s Board of Directors had

previously authorized the repurchase of up to approximately 11.6 million shares of Valley’s outstanding common stock on August 21, 2001 (“2001 Program”). Valley repurchased 266 thousand shares during 2005 substantially completing the purchase of shares available under the 2001 program.

Risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common shareholders’ equity and eligible long-term borrowing related to VNB Capital Trust I, less disallowed intangibles and adjusted to exclude unrealized gains and losses, net of deferred tax. Total risk-based capital consists of Tier 1 capital, VNB’s subordinated borrowing (see Note 11 of the consolidated financial statements for additional information) and the allowance for loan losses up to 1.25 percent of risk-adjusted assets. Risk-adjusted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities.

In November 2001, Valley sold $200.0 million of trust preferred securities through VNB Capital Trust I, of which 100 percent qualifies as Tier 1 capital, within regulatory limitations. Including these securities, Valley’s capital position at December 31, 2005 under risk-based capital guidelines was $955.2 million, or 10.3 percent of risk-weighted assets for Tier 1 capital and $1.1 billion or 12.2 percent for Total risk-based capital. The comparable ratios at December 31, 2004 were 11.1 percent for Tier 1 capital and 12.0 percent for Total risk-based capital. At December 31, 2005 and 2004, Valley was in compliance with the leverage requirement having Tier 1 leverage ratios of 7.8 percent and 8.3 percent, respectively. VNB’s ratios at December 31, 2005 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.

As of December 31, 2003, Valley adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities, as revised in December 2003” and as a result, de-consolidated VNB Capital Trust I. In March 2005, the Federal Reserve Board issued a final rule allowing bank holding companies to continue to include qualifying trust preferred capital securities in their Tier 1 capital for regulatory capital purposes, subject to stricter quantitative limits of 25% to all core (Tier I) capital elements, net of goodwill less any associated deferred tax liability. The new quantitative limits will become effective on March 31, 2009. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Total capital, subject to restrictions. As of December 31, 2005, 100 percent of the trust preferred securities qualified as Tier I capital under the final rule adopted in March 2005. See Note 12 of the consolidated financial statements for additional information.

Book value per common share amounted to $8.37 at December 31, 2005 compared with $6.82 per common share at December 31, 2004.

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 42.0 percent at December 31, 2005, compared to approximately 43.0 percent at December 31, 2004. Cash dividends declared amounted to $0.87 per common share, equivalent to a dividend payout ratio of 58.0 percent for 2005, compared to approximately 57.0 percent for 2004. The current quarterly dividend rate of $0.22 per common share provides for an annual rate of $0.88 per common 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.*

Management has estimated that the fair value of the 72 properties owned by Valley exceeds book value by approximately $200 million and could potentially represent a source of capital.

Off-Balance Sheet Arrangements

Contractual Obligations. In the ordinary course of operations, Valley enters into various financial obligations, including contractual obligations that may require future cash payments. Further discussion of the nature of each obligation is included in Notes 10, 11, 12 and 15 of the consolidated financial statements.

The following table presents significant fixed and determinable contractual obligations to third parties by payment date as of December 31, 2005:


	One Year or Less		One to Three Years		Three to Five Years		Over Five Years		Total
	(in thousands)
Time deposit	$	1,716,922	$	556,880	$	151,028	$	70,704	$	2,495,534
Long-term borrowings		439,328		618,829		143,473		1,043,940		2,245,570
Operating leases		8,442		15,365		12,069		18,842		54,718
Capital expenditures		18,959		—		—		—		18,959

Total	$	2,183,651	$	1,191,074	$	306,570	$	1,133,486	$	4,814,781

Valley also has commitments under its pension benefit plans, not included in the above table, as further described in Note 13 of the consolidated financial statements.

Commitments. As a financial services provider, Valley routinely enters into commitments to extend credit, including loan commitments, standby and commercial letters of credit. While these contractual obligations represent Valley’s future cash requirements, a significant portion of commitments to extend credit may expire without being drawn on based upon Valley’s historical experience. Such commitments are subject to the same credit policies and approval process accorded to loans made by Valley. For additional information, see Note 15 of the consolidated financial statements.

The following table shows the amounts and expected maturities of significant commitments as of December 31, 2005. Further discussion of these commitments is included in Note 15 of the consolidated financial statements.


	One Year or Less		One to Three Years		Three to Five Years		Over Five Years		Total
	(in thousands)
Commitments under commercial loans and lines of credit	$	1,240,063	$	180,685	$	24,334	$	143,893	$	1,588,975
Home equity and other revolving lines of credit		654,225		—		—		—		654,225
Outstanding commercial mortgage loan commitments		136,852		244,634		6,131		—		387,617
Standby letters of credit		52,064		47,748		36,775		79,300		215,887
Outstanding residential mortgage loan commitments		127,934		—		—		—		127,934
Commitments under unused lines of credit-credit card		16,326		21,198		—		—		37,524
Commercial letters of credit		24,427		636		—		—		25,063
Commitments to sell loans		1,769		—		—		—		1,769
Commitments to fund civic and community investments		3,946		905		—		—		4,851
Other		6,936		3,439		—		—		10,375

Total	$	2,264,542	$	499,245	$	67,240	$	223,193	$	3,054,220

Included in the other commitments are projected earn-outs of $2.3 million that are scheduled to be paid over the next three years in conjunction with various acquisitions made by Valley.* These earn-outs are paid in accordance with predetermined profitability targets. The balance of the other category represents approximate amounts for contractual communication and technology costs.

Derivative Financial Instruments. Derivatives have become one of several components of Valley’s asset/liability management activities to manage interest rate risk. In general, the assets and liabilities generated through the ordinary course of business activities do not naturally create offsetting positions with respect to repricing,

basis or maturity characteristics. Using derivative instruments, principally interest rate swaps, some of Valley’s interest rate sensitivity can be adjusted to maintain desired interest rate risk profiles.

As noted in the “Net Interest Income” and “Interest Rate Sensitivity” sections above, Valley entered into interest rate swap transactions which effectively converted $300 million of its prime-based floating rate loans to a fixed rate during 2004. This interest rate swap, which is designated as a cash flow hedge, no longer represents a benefit to net interest income and is expected to have a negative effect on net interest income until it expires in July 2006.* During 2005, Valley also entered into a $9.7 million amortizing notional interest rate swap to hedge changes in the fair value of a fixed rate loan that it made to a commercial borrower. The changes in the fair value of this interest rate swap are recorded through earnings and are offset by the changes in the fair value of the hedged fixed rate loan.

At December 31, 2005 and 2004, derivatives designated as cash flow or fair value hedges had an aggregate fair value of $3.0 million and $576 thousand, respectively, and were included in other liabilities. Unrealized losses of $1.8 million and $341 thousand as of December 31, 2005 and 2004, respectively, for derivatives designated as cash flow hedges are included in the statement of comprehensive income, net of related income taxes of $1.2 million and $235 thousand, respectively. No material hedge ineffectiveness existed on cash flow hedges during the years ended December 31, 2005 and 2004. See Note 1 and Note 15 to the consolidated financial statements for further analysis.

Trust Preferred Securities. In addition to the commitments and derivative financial instruments of the types described above, Valley’s off balance sheet arrangements include a $6.2 million ownership interest in the common securities of a statutory trust Valley established to issue trust preferred securities. See “Capital Adequacy” section above in this Item 7 and Note 12 of the consolidated financial statements.

Results of Operations—2004 Compared to 2003

Net income was $154.4 million or $1.48 per diluted share, return on average assets was 1.51 percent and return on average equity was 22.77 percent for 2004. This compares with net income of $153.4 million or $1.47 per diluted share in 2003, return on average assets of 1.63 percent and return on average equity of 24.21 percent in 2003.

The loan portfolio grew year over year by approximately 12.4 percent, deposits increased almost 5.0 percent while non-interest bearing and low cost savings deposits showed the greatest growth. The positive increases in the balance sheet during the year translated into smaller gains in net interest income than traditionally experienced by Valley due to a lower net interest margin. The net interest margin contracted as a result of compression in interest rates between short-term rates and long-term rates during the second half of 2004. The Federal Reserve began increasing short-term interest rates in the second half of 2004 paving the way for raising the interest rates on loans tied to the prime rate. This was not enough to offset the low level of long-term interest rates earned on the balance of Valley’s loans and investments.

Earnings for 2004 were impacted by lower gains on sales of securities and gains on sales of loans, as well as a decrease in insurance premiums. These decreases were partially offset by the benefit of a lower effective income tax rate and management’s control of operating expenses.

Net interest income on a tax equivalent basis increased to $378.7 million for 2004 compared with $354.7 million for 2003. Higher average balances in loans and investments increased interest income during 2004 compared with 2003 and was partly offset by lower average interest rates for these interest earning assets. For 2004, total average interest bearing liabilities increased while total interest expense declined as a result of lower interest rates.

Average loans increased $485.6 million or 8.0 percent, for the twelve months of 2004, while average taxable investments increased $332.3 million or 13.8 percent over the same period in 2003. Tax equivalent interest income on loans increased $6.8 million for the twelve months of 2004 compared with the same period in 2003,

due to the increased volume of loans. Interest on taxable investments increased $14.3 million for the twelve months in 2004 over the same period in 2003, mainly due to higher average balances and lower amortization expense offset by lower interest rates.

Average interest bearing liabilities for 2004 increased $649.7 million or 9.1 percent from 2003. Average savings, NOW and money market deposits increased $319.2 million or 10.2 percent and continue to provide a low cost source of funding. This increase was attributed to the addition of new branches, the growth in municipal deposits, the continued increases in customer activity as well as advertising and promotional efforts. Average time deposits decreased $54.3 million or 2.4 percent from 2003, due to Valley’s strategy to fund with lower cost deposits and borrowings. The decline in interest rates on deposits in conjunction with the decline in time deposits caused a net decrease in interest expense on deposits by $1.0 million. Average short-term borrowings increased $52.4 million or 15.0 percent over 2003 average balances. Average long-term borrowings increased $332.5 million or 23.7 percent and includes mostly FHLB advances and repos. The increase in borrowings was used as an alternative to deposits and was evaluated based upon need, cost and term.

The net interest margin on a tax equivalent basis was 3.94 percent for the twelve months ended December 31, 2004 compared with 4.04 percent for the same period in 2003. The change was mainly attributable to interest rates declining to historic low levels during 2004.

Non-interest income represented 14.0 percent and 17.9 percent of total interest income plus non-interest income for 2004 and 2003, respectively. For the year ended December 31, 2004, non-interest income decreased $23.9 million or 22.1 percent, compared with the same period in 2003.

Insurance premiums decreased $3.6 million or 20.4 percent in 2004 as compared with 2003, as a result of an industry wide reduction in mortgage refinancing activity and corresponding lower title insurance premiums.

Service charges on deposit accounts decreased $1.3 million or 6.2 percent in 2004 compared with 2003, mainly due to a lower volume of uncollected funds and overdraft activity. In addition, during 2004 there were several deposit account promotional campaigns held bank-wide to promote deposit growth. Such accounts were often service charge free for the first year.

Gains on securities transactions, net, decreased $9.1 million to $6.5 million for the year ended December 31, 2004 as compared to $15.6 million for the year ended December 31, 2003. The majority of security gains during 2004 were generated from mortgage-backed securities. The decline in securities gains is attributable to reduced sales activity in equity and mortgage-backed securities during 2004 as compared with 2003, when Valley took advantage of the bond market’s strength and took gains on amortizable securities which were paying down rapidly.

Fees from loan servicing include fees for servicing residential mortgage loans and SBA loans. For the year ended December 31, 2004, fees from servicing residential mortgage loans totaled $6.5 million and fees from servicing SBA loans totaled $1.5 million, as compared to $7.9 million and $1.5 million for the year ended December 31, 2003. The aggregate principal balances of mortgage loans serviced by MSI for others approximated $1.6 billion and $2.0 billion at December 31, 2004 and 2003, respectively. The continuing refinancing and payoff activity resulted in less fee income during 2004 from the serviced mortgage loan portfolio as borrowers continued to take advantage of lower interest rates.

Gains on sales of loans, net, decreased $9.9 million to $3.0 million for the year 2004 compared to $13.0 million for the prior year. This decrease was primarily attributed to lower loan sales of $35.1 million in residential mortgage loans in 2004 compared with $421.6 million during 2003.

Other non-interest income increased $1.6 million to $17.9 million in 2004 as compared to 2003. This increase was mainly due to higher income generated from call options. The significant components of other non-interest income include fees generated from letters of credit and acceptances, credit cards, safe deposit box rentals and call options totaling, in the aggregate of approximately $13.5 million.

Non-interest expense totaled $220.0 million for 2004, an increase of $3.8 million or 1.74 percent from 2003, mainly due to increases in salary expense, employee benefit expense and higher depreciation expense partly

offset by lower amortization expense. The largest components of non-interest expense were salaries and employee benefit expense which totaled $123.8 million in 2004 compared with $119.4 million in 2003, an increase of $4.4 million or 3.71 percent. At December 31, 2004, full-time equivalent staff was 2,345 compared to 2,264 at the end of 2003. During 2004, Valley incurred additional expense to support expanded branch and call center hours of operations as well as incurred costs related to new business development and the implementation of regulatory compliance programs. These costs were partly offset by reductions in the mortgage origination area and greater use of part-time employees, especially in branch operations to help to control costs.

Income tax expense as a percentage of pre-tax income was 32.5 percent for the year ended December 31, 2004 compared with 34.2 percent in 2003. This decrease was due to adjustments related to reconciliations of book expense to income tax returns and the level of tax accruals.

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.”

Item 8. Financial Statements and Supplementary Data

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	December 31,
	2005			2004
	(in thousands except for share data)
Assets
Cash and due from banks	$	246,119		$	153,932
Interest bearing deposits with banks		13,926			9,439
Investment securities held to maturity, fair value of $1,218,081 and $1,306,074 in 2005 and 2004, respectively (Notes 3 and 11)		1,229,190			1,292,338
Investment securities available for sale (Notes 4 and 11)		2,038,894			1,883,729
Trading securities		4,208			2,514
Loans held for sale		3,497			2,157
Loans (Notes 5 and 11)		8,130,457			6,932,158
Less: Allowance for loan losses (Note 6)		(75,188	)		(65,699	)

Net loans		8,055,269			6,866,459

Premises and equipment, net (Note 7)		182,739			161,473
Bank owned life insurance		182,789			170,602
Accrued interest receivable		57,280			46,737
Due from customers on acceptances outstanding		11,314			11,294
Goodwill (Note 9)		179,898			18,732
Other intangible assets, net (Notes 8 and 9)		37,456			27,156
Other assets		193,523			116,829

Total assets	$	12,436,102		$	10,763,391

Liabilities
Deposits:
Non-interest bearing	$	2,048,218		$	1,768,352
Interest bearing:
Savings, NOW and money market		4,026,249			3,591,986
Time (Note 10)		2,495,534			2,158,401

Total deposits		8,570,001			7,518,739

Short-term borrowings (Note 11)		582,575			510,291
Long-term borrowings (Notes 11 and 12)		2,245,570			1,890,170
Bank acceptances outstanding		11,314			11,294
Accrued expenses and other liabilities (Notes 13 and 14)		94,732			125,299

Total liabilities		11,504,192			10,055,793

Commitments and contingencies (Note 15)

Shareholders’ Equity (Notes 1, 2, 13, 14, and 16)
Preferred stock, no par value, authorized 30,000,000 shares; none issued		—			—
Common stock, no par value, authorized 164,894,580 shares; issued 111,419,037 shares in 2005 and 103,827,183 shares in 2004		39,302			34,930
Surplus		741,456			437,659
Retained earnings		177,332			232,431
Unallocated common stock held by employee benefit plan		—			(88	)
Accumulated other comprehensive (loss) income		(24,036	)		3,355

		934,054			708,287
Treasury stock, at cost (92,320 common shares in 2005 and 28,871 common shares in 2004)		(2,144	)		(689	)

Total shareholders’ equity		931,910			707,598

Total liabilities and shareholders’ equity	$	12,436,102		$	10,763,391

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME


	Years ended December 31,
	2005			2004		2003
	(in thousands, except for share data)
Interest Income
Interest and fees on loans (Note 5)	$	461,443		$	370,921	$	364,091
Interest and dividends on investment securities:
Taxable		145,266			134,274		118,816
Tax-exempt		12,331			11,587		10,991
Dividends		4,800			1,848		2,978
Interest on federal funds sold and other short-term investments		1,244			296		622

Total interest income		625,084			518,926		497,498

Interest Expense
Interest on deposits:
Savings, NOW and money market		55,456			23,115		22,871
Time (Note 10)		67,601			46,832		48,095
Interest on short-term borrowings (Note 11)		16,516			5,258		3,754
Interest on long-term borrowings (Notes 11 and 12)		87,086			71,402		74,202

Total interest expense		226,659			146,607		148,922

Net Interest Income		398,425			372,319		348,576
Provision for loan losses (Note 6)		4,340			8,003		7,345

Net Interest Income after Provision for Loan Losses		394,085			364,316		341,231

Non-Interest Income
Trust and investment services		6,487			6,023		5,726
Insurance premiums		11,719			13,982		17,558
Service charges on deposit accounts		22,382			20,242		21,590
(Losses) gains on securities transactions, net (Note 4)		(461	)		6,475		15,606
Gains on trading securities, net		1,717			2,409		2,836
Fees from loan servicing (Note 7)		7,011			8,010		9,359
Gains on sales of loans, net		2,108			3,039		12,966
Bank owned life insurance		7,053			6,199		6,188
Other		15,692			17,949		16,368

Total non-interest income		73,708			84,328		108,197

Non-Interest Expense
Salary expense (Note 13)		105,988			99,325		97,197
Employee benefit expense (Note 13)		26,163			24,465		22,162
Net occupancy expense (Notes 7 and 15)		26,766			22,983		21,782
Furniture and equipment expense (Note 7)		14,903			13,391		12,452
Amortization of other intangible assets (Note 9)		8,797			8,964		12,480
Advertising		7,535			7,974		7,409
Other		47,414			42,947		42,796

Total non-interest expense		237,566			220,049		216,278

Income Before Income Taxes		230,227			228,595		233,150
Income tax expense (Note 14)		66,778			74,197		79,735

Net Income	$	163,449		$	154,398	$	153,415

Earnings Per Common Share:
Basic	$	1.50		$	1.49	$	1.48
Diluted		1.49			1.48		1.47
Cash Dividends Declared Per Common Share		0.87			0.85		0.81

Weighted Average Number of Common Shares Outstanding:
Basic		108,948,978			103,604,828		103,629,836
Diluted		109,351,675			104,137,633		104,184,728

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


	Preferred Stock	Common Stock			Surplus			Retained Earnings			Unallocated Common Stock Held by Employee Benefit Plan			Accumulated Other Comprehensive Income (Losses)			Treasury Stock			Total Shareholders’ Equity
	(in thousands)
Balance—December 31, 2002	—	$	33,332		$	318,964		$	338,770		$	(435	)	$	41,319		$	(100,212	)	$	631,738
Comprehensive income:
Net income	—		—			—			153,415			—			—			—			153,415
Other comprehensive losses, net of tax:
Net change in unrealized gains and losses on securities available for sale, net of tax benefit of $(6,343)	—		—			—			—			—			(10,969	)		—			—
Less reclassification adjustment for gains included in net income, net of tax of $5,787	—		—			—			—			—			(9,819	)		—			—

Other comprehensive losses	—		—			—			—			—			(20,788	)		—			(20,788	)

Total comprehensive income	—		—			—			—			—			—			—			132,627
Cash dividends declared	—		—			—			(83,621	)		—			—			—			(83,621	)
Effect of stock incentive plan, net	—		(28	)		(1,764	)		(2,687	)		—			—			9,848			5,369
Stock dividend	—		—			(189	)		(117,564	)		—			—			117,564			(189	)
Allocation of employee benefit plan shares	—		—			719			—			176			—			463			1,358
Fair value of stock options granted	—		—			525			—			—			—			—			525
Tax benefit from exercise of stock options	—		—			344			—			—			—			—			344
Purchase of treasury stock	—		—			—			—			—			—			(35,362	)		(35,362	)

Balance—December 31, 2003	—		33,304			318,599			288,313			(259	)		20,531			(7,699	)		652,789
Comprehensive income:
Net income	—		—			—			154,398			—			—			—			154,398
Other comprehensive losses, net of tax:
Net change in unrealized gains and losses on securities available for sale, net of tax benefit of $(7,572)	—		—			—			—			—			(12,788	)		—			—
Less reclassification adjustment for gains included in net income, net of tax of $2,428	—		—			—			—			—			(4,047	)		—			—
Net change in unrealized gains and losses on derivatives, net of tax of $401	—		—			—			—			—			581			—			—
Less reclassification adjustment for gains included in net income, net of tax of $636	—		—			—			—			—			(922	)		—			—

Other comprehensive losses	—		—			—			—			—			(17,176	)		—			(17,176	)

Total comprehensive income	—		—			—			—			—			—			—			137,222
Cash dividends declared	—		—			—			(87,805	)		—			—			—			(87,805	)
Effect of stock incentive plan, net	—		(22	)		(902	)		(1,912	)		—			—			7,991			5,155
Stock dividend	—		1,648			118,668			(120,563	)		—			—			49			(198	)
Allocation of employee benefit plan shares	—		—			—			—			171			—			—			171
Fair value of stock options granted	—		—			966			—			—			—			—			966
Tax benefit from exercise of stock options	—		—			328			—			—			—			—			328
Purchase of treasury stock	—		—			—			—			—			—			(1,030	)		(1,030	)

Balance—December 31, 2004	—		34,930			437,659			232,431			(88	)		3,355			(689	)		707,598
Comprehensive income:
Net income	—		—			—			163,449			—			—			—			163,449
Other comprehensive losses, net of tax:
Net change in unrealized gains and losses on securities available for sale, net of tax benefit of $(15,997)	—		—			—			—			—			(26,224	)		—			—
Plus reclassification adjustment for losses included in net income, net of tax of $196	—		—			—			—			—			265			—			—
Net change in unrealized gains and losses on derivatives net of tax benefit of $(1,913)	—		—			—			—			—			(2,769	)		—			—
Plus reclassification adjustment for losses included in net income, net of tax benefit of $923	—		—			—			—			—			1,337			—			—