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, 2006

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. þ

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 File 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 $2.8 billion on June 30, 2006.

There were 115,200,394 shares of Common Stock outstanding at February 22, 2007.

Documents incorporated by reference:

Certain portions of the registrant’s Definitive Proxy Statement (the “2007 Proxy Statement”) for the 2007 Annual Meeting of Shareholders to be held April 11, 2007 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	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	13

PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 8.	Financial Statements and Supplementary Data:
	Valley National Bancorp and Subsidiaries:
	Consolidated Statements of Financial Condition	46
	Consolidated Statements of Income	47
	Consolidated Statements of Changes in Shareholders’ Equity	48
	Consolidated Statements of Cash Flows	50
	Notes to Consolidated Financial Statements	51
	Independent Auditor’s Report	88
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	89
Item 9A.	Controls and Procedures	89
Item 9B.	Other Information	93

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	93
Item 11.	Executive Compensation	93
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	93
Item 13.	Certain Relationships and Related Transactions, and Director Independence	93
Item 14.	Principal Accountant Fees and Services	93

PART IV
Item 15.	Exhibits and Financial Statement Schedules	94
	Signatures	97

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, 2006, Valley had consolidated total assets of $12.4 billion, total loans of $8.3 billion, total deposits of $8.5 billion and total shareholders’ equity of $949.6 million. In addition to its principal subsidiary, Valley National Bank (“VNB”), Valley owns 100 percent of the voting shares of VNB Capital Trust I, through which it issued trust preferred securities. VNB Capital Trust I is not a consolidated subsidiary. See Note 12 of the consolidated financial statements.

VNB is a national banking association chartered in 1927 under the laws of the United States. At December 31, 2006, VNB maintained 169 branch offices located in New Jersey and New York City. 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 the REIT subsidiaries in which VNB is the majority shareholder. 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 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 & Risk 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 New York Stock Exchange’s corporate governance listing standards, Section 12(a) CEO Certification to the New York Stock Exchange within the required timeframe after the 2006 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, 2006, VNB and its subsidiaries employed 2,489 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) result in substantial part 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, executive officers and 10 percent stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of the National Bank Act, Sarbanes-Oxley Act and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of VNB’s capital. In addition, extensions of credit

in excess of certain limits must be approved by VNB’s Board of Directors. Under the Sarbanes-Oxley Act, Valley and its subsidiaries, other than VNB, may not extend or arrange for any personal loans to its directors and executive officers.

Community Reinvestment

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

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);

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independence requirements for audit committee members;

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independence requirements for company outside auditors;

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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;

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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;

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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;

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

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restrictions on the use of non-GAAP financial measures in press releases and SEC filings;

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

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various increased criminal penalties for violations of securities laws;

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

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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:

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

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allows insurers and other financial services companies to acquire banks;

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

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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.

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

An investment in Valley’s common stock is subject to risks inherent to Valley’s business. The material risks and uncertainties that management believes affect Valley are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing Valley. Additional risks and uncertainties that management is not aware of or that management currently 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. If this were to happen, the value of Valley’s common stock could decline significantly, and you could lose all or part of your investment.

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 FRB. 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 mortgage-backed securities portfolio. This also includes the risk that interest earning assets may be more responsive to changes in interest rates than interest bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest earning assets and interest bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest earning asset and interest bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment.

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 and Liquidity Risk

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.

Liquidity risk is the potential that Valley will be unable to meet its obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.

Liquidity is required to fund credit obligations to borrowers, mortgage originations pending delivery to the secondary market, withdrawals by depositors, repayment of debt when due or called, dividends to shareholders, operating expenses and capital expenditures, among other things.

Liquidity is derived primarily from bank-issued deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations and access to other funding sources.

Valley’s liquidity can be affected by a variety of factors, including general economic conditions, market disruption, operational problems affecting third parties or Valley, unfavorable pricing, competition, Valley’s credit rating and regulatory restrictions.

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

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

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

Potential Acquisitions May Disrupt Valley’s Business and Dilute Stockholder Value

Valley regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions

involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of Valley’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on Valley’s financial condition and results of operations.

Valley seeks merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:

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Potential exposure to unknown or contingent liabilities of the target company

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Exposure to potential asset quality issues of the target company

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Difficulty and expense of integrating the operations and personnel of the target company

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Potential disruption to Valley’s business

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Potential diversion of Valley’s management’s time and attention

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The possible loss of key employees and customers of the target company

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Potential changes in banking or tax laws or regulations that may affect the target company

Implementation of Growth Strategies

Valley has executed a strategic branch expansion initiative to fill in and expand its presence in neighboring counties within New Jersey, including Somerset, Middlesex, and Monmouth Counties, as well as enter new market areas located in Kings and Queens Counties, New York. Valley’s ability to successfully execute the initiative depends upon a variety of factors, including its ability to attract and retain experienced personnel, the continued availability of desirable business opportunities and locations, the competitive responses from other financial institutions in Valley’s new market areas, and the ability to manage growth. The initiative could cause Valley’s expenses to increase faster than revenues.

There are considerable initial and on-going costs involved in opening branches, growing loans in new markets, and attracting new deposit relationships that can negatively impact earnings. For example, it takes time for new branches and relationships to achieve profitability. Expenses could be further increased if there are delays in the opening of new branches or if attraction strategies are more costly than expected. Delays in opening new branches can be caused by a number of factors such as the inability to find suitable locations, zoning and construction delays, and success in attracting qualified personnel to staff the new branch. In addition, there is no assurance that a new branch will be successful even after it has been established.

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.

Encountering Continuous Technological Change

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Valley’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in Valley’s operations. Many of Valley’s competitors have substantially greater resources to invest in technological improvements. Valley may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on Valley’s business and, in turn, Valley’s financial condition and results of operations.

Claims and Litigation Pertaining to Fiduciary Responsibility

From time to time as part of Valley’s normal course of business, customers make claims and take legal action against Valley based on actions or inactions of Valley employees. Recently, three such lawsuits pertain to Valley’s performance of its fiduciary responsibilities (see “Item 3” that follows below for further information). If such claims and legal actions are not resolved in a manner favorable to Valley they may result in financial liability and/or adversely affect the market perception of Valley and its products and services. This may also impact customer demand for Valley’s products and services. Any financial liability or reputation damage could have a material adverse effect on Valley’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

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, commercial mortgage, consumer lending, deposit and computer 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 operations, as well as commercial lending 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, as well as retail branch offices. In addition, a subsidiary of VNB owns a building in Chestnut Ridge, New York, primarily occupied by Masters Coverage Corp. and VNB Loan Services, Inc., also subsidiaries of VNB.

As of December 31, 2006, VNB provides banking services at 169 locations of which 78 locations are owned by VNB or a subsidiary of VNB and leased to VNB, and 91 locations are leased from independent third parties. Additionally, VNB had 12 other properties located in New Jersey and New York City that were either owned or under contract to purchase or lease as of December 31, 2006. VNB intends to develop these other properties into new branch locations.

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 should not be materially affected by the outcome of such legal proceedings and claims.

Three lawsuits against Valley were filed by United Bank and Trust Company, American Express Travel Related Services Company, and Discover Financial Services in the United States District Court, Southern District of New York. Each plaintiff alleges, among other claims, that Valley breached its contractual and fiduciary duties to it 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 these actions and has recently been granted summary judgment dismissing one of the lawsuits. However, such dismissal is subject to appeal and Valley cannot provide any assurances that it will prevail in any of these litigations or be able to settle such litigations for an immaterial amount. In connection with these litigations, 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 these litigations are 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.

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 2006						Year 2005
	High		Low		Dividend		High		Low		Dividend
First Quarter	$	24.40	$	21.99	$	0.210	$	25.54	$	22.65	$	0.204
Second Quarter		25.80		23.67		0.215		24.09		21.71		0.210
Third Quarter		27.05		24.72		0.215		23.44		21.18		0.210
Fourth Quarter		26.68		25.05		0.215		23.95		20.80		0.210

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 9,084 shareholders of record as of December 31, 2006.

Performance Graph

The following graph compares the cumulative total return on a hypothetical $100 investment made on December 31, 2001 in: (a) Valley’s common stock; (b) the Standard and Poor’s (“S&P”) 500 Stock Index; and (c) the Keefe, Bruyette & Woods’ KBW50 Bank Index. The graph is calculated assuming that all dividends are reinvested during the relevant periods. The graph shows how a $100 investment would increase or decrease in value over time based on dividends (stock or cash) and increases or decreases in the market price of the stock.


	12/01		12/02		12/03		12/04		12/05		12/06
Valley	$	100.00	$	103.40	$	123.89	$	127.14	$	120.58	$	143.75
KBW 50		100.00		103.57		133.01		156.92		157.71		166.57
S&P 500		100.00		78.03		100.16		110.92		116.28		134.43

Issuer Repurchase of Equity Securities

The following table sets forth information for the three months ended December 31, 2006 with respect to repurchases of Valley’s outstanding common shares:


	Issuer Purchases of Equity Securities (1)
	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans (2)	Maximum Number of Shares that May Yet Be Purchased Under the Plans (2)
Period	Total Number of Shares Purchased	Average Price Paid Per Share
10/01/2006 – 10/31/2006	1,053,408	$	25.73	1,053,408	1,282,094
11/01/2006 – 11/30/2006	238,200		25.63	1,291,608	1,043,894
12/01/2006 – 12/31/2006	—		—	1,291,608	1,043,894

	1,291,608	$	25.71	1,291,608	1,043,894

(1)	Share data reflects a five percent stock dividend issued on May 22, 2006.

(2)

On May 14, 2003, Valley publicly announced its Board of Directors authorized the repurchase of up to 2,894,063 outstanding common shares in the open market or in privately negotiated transactions. The repurchase plan has no stated expiration date. No repurchase plans or programs expired or terminated during the three months ended December 31, 2006.

On January 17, 2007, Valley publicly announced its Board of Directors authorized the repurchase of up to 3.5 million outstanding common shares in the open market or in privately negotiated transactions generally at prices not exceeding prevailing market rates. The repurchase plan has no stated expiration date. Valley intends to first complete the repurchase of common shares available under the May 14, 2003 repurchase plan before utilizing this new repurchase plan.

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,
	2006			2005			2004			2003			2002
	(in thousands, except for share data)
Summary of Operations:
Interest income—tax equivalent basis (1)	$	713,930		$	631,893		$	525,315		$	503,621		$	523,135
Interest expense		316,250			226,659			146,607			148,922			173,453

Net interest income—tax equivalent basis (1)		397,680			405,234			378,708			354,699			349,682
Less: tax equivalent adjustment		6,559			6,809			6,389			6,123			5,716

Net interest income		391,121			398,425			372,319			348,576			343,966
Provision for loan losses		9,270			4,340			8,003			7,345			13,644

Net interest income after provisions for loan losses		381,851			394,085			364,316			341,231			330,322
Non-interest income		72,064			73,733			84,322			108,214			82,229
Non-interest expense		250,340			237,591			220,043			216,295			193,255

Income before income taxes		203,575			230,227			228,595			233,150			219,296
Income tax expense		39,884			66,778			74,197			79,735			64,680

Net income	$	163,691		$	163,449		$	154,398		$	153,415		$	154,616

Per Common Share (2):
Earnings per share:
Basic	$	1.40		$	1.43		$	1.42		$	1.41		$	1.37
Diluted		1.40			1.42			1.41			1.40			1.36
Dividends declared		0.85			0.83			0.81			0.77			0.73
Book value		8.23			7.97			6.49			6.00			5.74
Tangible book value (3)		6.40			6.11			6.07			5.53			5.38
Weighted average shares outstanding:
Basic		116,542,296			114,396,427			108,785,069			108,811,328			113,195,904
Diluted		117,017,758			114,819,259			109,344,515			109,393,964			113,860,613

Ratios:
Return on average assets		1.33	%		1.39	%		1.51	%		1.63	%		1.78	%
Return on average shareholders’ equity		17.24			19.17			22.77			24.21			23.59
Return on average tangible shareholders’ equity (4)		22.26			23.61			24.54			26.09			25.02
Average shareholders’ equity to average assets		7.72			7.25			6.62			6.74			7.56
Dividend payout		60.71			58.00			57.05			54.60			53.80
Risked-based capital:
Tier 1 capital		10.56	%		10.28	%		11.12	%		11.25	%		11.42	%
Total capital		12.44			12.16			11.95			12.15			12.48
Leverage capital		8.10			7.82			8.28			8.35			8.67

Financial Condition:
Assets	$	12,395,027		$	12,436,102		$	10,763,391		$	9,873,335		$	9,148,456
Net loans		8,256,967			8,055,269			6,866,459			6,102,039			5,656,072
Deposits		8,487,651			8,570,001			7,518,739			7,162,968			6,683,387
Shareholders’ equity		949,590			931,910			707,598			652,789			631,738

See Notes to the Selected Financial Data that follows.

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 a five percent stock dividend issued May 22, 2006, and all prior stock splits and dividends.

(3)

This Annual Report on Form 10-K contains supplemental financial information 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. 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,
	2006		2005		2004		2003		2002
	($ in thousands)
Common shares outstanding		115,357,268		116,893,053		108,988,229		108,713,106		110,031,717

Shareholders’ equity	$	949,590	$	931,910	$	707,598	$	652,789	$	631,738
Less: Goodwill and other intangible assets		211,355		217,354		45,888		52,050		39,381

Tangible shareholders’ equity	$	738,235	$	714,556	$	661,710	$	600,739	$	592,357

Tangible book value	$	6.40	$	6.11	$	6.07	$	5.53	$	5.38

(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,
	2006			2005			2004			2003			2002
	($ in thousands)
Net income	$	163,691		$	163,449		$	154,398		$	153,415		$	154,616

Average shareholders’ equity		949,613			852,834			678,068			633,744			655,447
Less: Average goodwill and other intangible assets		214,338			160,607			48,805			45,716			37,463

Average tangible shareholders’ equity	$	735,275		$	692,227		$	629,263		$	588,028		$	617,984

Return on average tangible shareholders’ equity		22.26	%		23.61	%		24.54	%		26.09	%		25.02	%

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; and

•

unanticipated litigation pertaining to fiduciary responsibility.

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 to the consolidated financial statements. Valley has identified its policies on the allowance for loan losses, goodwill and other intangible assets, and income taxes to be critical because management has to

make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Management has reviewed the application of these policies with the Audit & Risk Committee of Valley’s Board of Directors.

Allowance for Loan Losses. 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 allowance for loan losses consists of four elements: (1) specific reserves for individually impaired credits, (2) reserves for classified, or higher risk rated, loans, (3) reserves for non-classified loans based on historical loss factors, and (4) an unallocated allowance based on general economic conditions, the size of the loan portfolio and certain risk factors in Valley’s loan portfolio and markets.

Valley considers it difficult to quantify the impact of changes in forecast on its allowance for loan losses. However, management believes the following discussion may enable investors to better understand the variables that drive the allowance for loan losses.

For impaired credits, if the fair value of the loans were ten percent higher or lower, the allowance would have increased or decreased by approximately $511 thousand, respectively, at December 31, 2006.

If classified loan balances were ten percent higher or lower, the allowance would have increased or decreased by approximately $1.3 million, respectively, at December 31, 2006.

The credit rating assigned to each non-classified credit is a significant variable in determining the allowance. If each non-classified credit were rated one grade worse, the allowance would have increased by $4.3 million, while if each non-classified credit were rated one grade better there would be no change in the level of the allowance as of December 31, 2006. Additionally, if the historical loss factors used to calculate the reserve for non-classified loans were ten percent higher or lower, the allowance would have increased or decreased by $4.9 million, respectively, at December 31, 2006.

A key variable in determining the allowance is management’s judgment in determining the size of the unallocated allowance. At December 31, 2006, the unallocated allowance was 9.0 percent of the total allowance. If the unallocated allowance were ten percent higher or lower, the allowance would have increased or decreased by $670 thousand, respectively, at December 31, 2006.

Goodwill and Other Intangible Assets. Valley records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value as required by SFAS No. 141. Goodwill totaling $181.5 million at December 31, 2006 is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate it may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount. The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets.

The goodwill impairment test is performed in two phases. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

Other intangible assets totaling $29.9 million at December 31, 2006 are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. Fair value may be determined using: market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other determinants. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions.

Other key judgments in accounting for intangibles include useful life and classification between goodwill and other intangible assets which require amortization. See Note 9 to consolidated financial statements for additional information regarding goodwill and other intangible assets.

To assist in assessing the impact of a goodwill or other intangible asset impairment charge, at December 31, 2006, the Company had $211.4 million of goodwill and other intangible assets. The impact of a five percent impairment charge would result in a reduction in pre-tax income of approximately $10.6 million.

Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in 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.

In connection with determining its income tax provision under Statement of Financial Accounting Standards (“SFAS”) No. 109, Valley maintains a reserve related to certain tax positions and strategies that management believes contain an element of uncertainty. Periodically, Valley evaluates each of its tax positions and strategies to determine whether the reserve continues to be appropriate. Notes 1 and 14 to consolidated financial statements and the “Income Taxes” section below include additional discussion on the accounting for income taxes.

Executive Summary

The year ended December 31, 2006 was very challenging for Valley and for most of the banking industry. Valley faced a continued decline in its net interest margin as a result of a highly competitive loan and deposit environment and a flat or inverted yield curve throughout 2006. The net interest income of Valley was also negatively impacted by both the margin contraction of 23 basis points and slower growth in its loan portfolio, which grew $201.2 million, or 2.5 percent during 2006, as well as the contraction of the investment portfolio by $388.8 million, or 11.9 percent. Despite the margin contraction and slower loan growth, Valley earned $1.40 per diluted share or $163.7 million for 2006 compared to $1.42 per diluted share or $163.4 million in 2005.

Total loans grew at a much slower pace during 2006 due to substantial competition for new loans within Valley’s principal markets which also lead to some customer prepayments of existing loans during the period. Additionally, Valley encouraged approximately $50.0 million in various types of performing, but potentially marginal loan relationships to move to other financial institutions during the third quarter of 2006 because these credits might cause future loan losses in a changing economy.

During 2007, Valley intends to place more emphasis on non-interest income derived from our substantial automobile lending operations.* Valley currently approves approximately half of the loan applications received through its network of automobile dealers. Working in connection with third parties, in 2007 Valley expects to originate and sell, without recourse, some of the loan applications it historically has not approved and closed as loans.* Valley expects that the anticipated gains on sale and loan servicing income from this activity will help increase non-interest income.*

Additionally, Valley plans to originate for sale residential mortgage and home equity loans with a broader customer risk profile to increase our gains on sales of loans in the secondary market in 2007.* Lastly, Valley will

offer a no-frills, low interest rate credit card to Valley’s existing automobile and mortgage loan customers in 2007. This initiative is expected to produce additional credit card balances and interest income while minimizing the risks normally associated with new card markets.*

Management also decided that the investment portfolio would be allowed to shrink during the year, mostly through normal principal paydowns. This decision was mainly due to the low level of long-term interest rates caused by the inverted yield curve during 2006, as well as the potential duration risk associated with certain investment securities.

In addition to the net interest margin compression discussed above, 2006 earnings were negatively impacted by a higher provision for loan losses mainly due to higher net charge-offs; a decrease in non-interest income primarily from net losses totaling $5.5 million mainly due to the sale of approximately $132.0 million low yielding securities and $2.1 million in losses generated from the early redemption of other investment securities; and increased operating expenses due to new branch openings and the prior year acquisitions; partially offset by a pre-tax gain of approximately $3.8 million on the sale of an office building, originally purchased for construction of a new branch, located in Manhattan and lower effective federal and state income tax rates during 2006.

For the year ended December 31, 2006, Valley achieved a return on average shareholders’ equity (“ROE”) of 17.24 percent and a return on average assets (“ROA”) of 1.33 percent which include goodwill and other intangible assets. Valley’s return on average tangible shareholders’ equity (“ROATE”) was 22.26 percent for 2006. The comparable ratios for the year ended December 31, 2005, were ROE of 19.17 percent, ROA of 1.39 percent, and ROATE of 23.61 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 for 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 2006 and during the last four years. This declining trend may continue in 2007 if the yield curve maintains an inverted or flat shape.* Valley adjusted some of its variable rate deposits and moved away from funding through higher cost municipal deposits and short-term borrowings in an attempt to stabilize the net interest margin in 2006 and 2007. 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 decreased to $397.7 million for 2006 compared with $405.2 million for 2005. During 2006, total average interest bearing liabilities and interest rates paid on these liabilities increased over 2005, resulting in higher interest expense. The interest rates on interest bearing deposits continued to rise during 2006 as the Federal Reserve increased short-term interest rates four more times during the first half of 2006 and deposit pricing became increasingly competitive in the Northeast. Partially offsetting the increase in overall funding costs, higher average loan balances and a 55 basis point increase in yield on average loan balances helped drive total interest income on a tax equivalent basis $82.0 million higher than 2005.

Valley’s earning asset portfolio is comprised of both fixed rate and adjustable rate loans and investments. Many of Valley’s earning assets are priced based on the prevailing treasury rates and prime rate. As noted above, the Federal Reserve increased interest rates four times during 2006 raising the target federal funds rate from 4.25 percent to 5.25 percent. In each instance, Valley’s prime rate moved accordingly during the year, and was 8.25 percent at December 31, 2006. On average, the 10-year treasury rate increased from 4.28 percent in 2005 to 4.78 percent in 2006, only half of the total increase in the federal funds rate. The increase in both the prime rate and treasury rate led to an increase in the yield on Valley’s average earning assets from 5.75 percent in 2005 to 6.21 percent for 2006. In conjunction with the increase in interest rates, the growth in average earning assets of $503.4 million also contributed to the increase in interest income of $82.0 million.

Average loans increased $624.8 million, or 8.2 percent for the year ended December 31, 2006, while average investment securities declined $166.3 million, or 5.0 percent as compared to the same period in 2005. Interest income on loans increased $83.0 million for the year ended December 31, 2006 compared with the same period in 2005 due to an increase in average interest rates on loans to 6.59 percent in 2006 from 6.04 percent in 2005 and the increase in average loans. Interest on investment securities decreased $3.9 million for the twelve months in 2006 compared to the same period in 2005 mainly due to normal principal paydowns and reallocation of these funds to higher yielding loans and federal funds sold.

Valley’s costs of interest bearing liabilities are closely tied to market movements in treasury rates, which increased during 2006. Valley’s cost of interest bearing liabilities increased from 2.53 percent in 2005 to 3.37 percent in 2006, reflecting an 84 basis point increase. As a result of the higher cost of funds and increased average interest bearing liabilities, interest expense increased $89.6 million from 2005.

Average interest bearing liabilities for 2006 increased $443.4 million, or 5.0 percent from 2005. Average time deposits increased $440.5 million, or 19.0 percent due to some movement of lower yielding deposit accounts to time deposits as the yield on average time deposits increased 116 basis points from 2005, as well as new time deposit accounts from the nine de novo branches opened in 2006 as well as from existing branches. Average long-term borrowings increased $404.8 million, or 19.9 percent as management increased borrowings in long-term Federal Home Loan Bank (“FHLB”) advances or repurchase agreements due to higher short-term interest rates in 2006 and reduced short-term FHLB advances, repurchase agreements and federal funds purchased. Average savings, NOW, and money market deposits decreased $270.0 million, or 6.7 percent for 2006 as compared to 2005 mainly due to a very competitive marketplace, as well as customer movement to higher yielding alternatives, such as certificates of deposit. During 2006, slow loan growth and natural attrition of the investment portfolio lessened the need for deposit growth or alternative funding sources. However, continued competitive pricing of deposits and the lack of industry deposit growth may cause short-term and long-term borrowings to further escalate in 2007.*

The net interest margin on a tax equivalent basis was 3.46 percent for the year ended December 31, 2006 compared with 3.69 percent for the same period in 2005. 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 46 basis points while average interest rates paid on interest bearing liabilities increased 84 basis points causing a compression in the net interest margin for Valley.

During the fourth quarter of 2006, net interest income on a tax equivalent basis declined $879 thousand when compared with the third quarter of 2006. Management anticipates continued pressure on the margin during the first half of 2007 due to the competitive deposit pricing within Valley’s markets and a decline in yield on new loans seen in the fourth quarter of 2006 as compared to the third quarter of 2006. Management’s move from higher cost funding may help reduce further declines in the margin, however, the inverted yield curve and competitive pricing of deposits is expected to negatively impact net interest income during the first half of 2007.*

The following table reflects the components of net interest income for each of the three years ended December 31, 2006, 2005 and 2004:

ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND

NET INTEREST INCOME ON A TAX EQUIVALENT BASIS


	2006								2005								2004
	Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
	($ in thousands)
Assets
Interest earning assets Loans (1)(2)	$	8,262,739		$	544,598		6.59	%	$	7,637,973		$	461,612		6.04	%	$	6,541,993		$	371,071		5.67	%
Taxable investments (3)		2,861,562			146,875		5.13			3,001,241			150,066		5.00			2,742,161			136,122		4.96
Tax-exempt investments (1)(3)		289,194			18,287		6.32			315,807			18,971		6.01			313,673			17,826		5.68
Federal funds sold and other interest bearing deposits		79,295			4,170		5.26			34,361			1,244		3.62			18,343			296		1.61

Total interest earning assets		11,492,790			713,930		6.21			10,989,382			631,893		5.75			9,616,170			525,315		5.46

Allowance for loan losses		(75,848	)							(72,552	)							(68,941	)
Cash and due from banks		205,695								217,458								207,326
Other assets		724,869								639,690								472,678
Unrealized (loss) gain on securities available for sale		(48,225	)							(15,888	)							15,446

Total assets	$	12,299,281							$	11,758,090							$	10,242,679

Liabilities and Shareholders’ Equity
Interest bearing liabilities
Savings, NOW and money market deposits	$	3,759,058		$	75,822		2.02	%	$	4,029,093		$	55,456		1.38	%	$	3,452,862		$	23,115		0.67	%
Time deposits		2,764,696			112,654		4.07			2,324,192			67,601		2.91			2,181,678			46,832		2.15

Total interest bearing deposits		6,523,754			188,476		2.89			6,353,285			123,057		1.94			5,634,540			69,947		1.24
Short-term borrowings		434,579			18,211		4.19			566,433			16,516		2.92			401,564			5,258		1.31
Long-term borrowings		2,434,778			109,563		4.50			2,029,965			87,086		4.29			1,734,321			71,402		4.12

Total interest bearing liabilities		9,393,111			316,250		3.37			8,949,683			226,659		2.53			7,770,425			146,607		1.89

Demand deposits		1,938,439								1,905,103								1,739,452
Other liabilities		18,118								50,470								54,734
Shareholders’ equity		949,613								852,834								678,068

Total liabilities and shareholders’ equity	$	12,299,281							$	11,758,090							$	10,242,679

Net interest income/interest rate spread (4)					397,680		2.84	%					405,234		3.22	%					378,708		3.57	%
Tax equivalent adjustment					(6,559	)							(6,809	)							(6,389	)

Net interest income, as reported				$	391,121							$	398,425							$	372,319

Net interest margin (5)							3.40	%							3.63	%							3.87	%
Tax equivalent adjustment							0.06								0.06								0.07

Net interest margin on a fully tax equivalent basis (5)							3.46	%							3.69	%							3.94	%

(1)	Interest income is presented on a tax equivalent basis using a 35 percent federal 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)	Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.

(5)	Net interest income as a percentage of total average interest earning assets.

The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by Valley on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category.

CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS


	Year Ended December 31,
	2006 Compared to 2005									2005 Compared to 2004
	Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate		Total Change
	(in thousands)
Interest income:
Loans (1)	$	39,382		$	43,604		$	82,986		$	25,448		$	65,093	$	90,541
Taxable investments		(7,102	)		3,911			(3,191	)		996			12,948		13,944
Tax-exempt investments (1)		(1,650	)		966			(684	)		1,023			122		1,145
Federal funds sold and other interest bearing deposits		2,174			752			2,926			557			391		948

		32,804			49,233			82,037			28,024			78,554		106,578

Interest expense:
Savings, NOW and money market deposits		(3,934	)		24,300			20,366			27,928			4,413		32,341
Time deposits		14,461			30,592			45,053			17,541			3,228		20,769
Short-term borrowings		(4,429	)		6,124			1,695			8,435			2,823		11,258
Long-term borrowings		18,049			4,428			22,477			3,102			12,582		15,684

		24,147			65,444			89,591			57,006			23,046		80,052

Net interest income (tax equivalent basis)	$	8,657		$	(16,211	)	$	(7,554	)	$	(28,982	)	$	55,508	$	26,526

(1)	Interest income is presented on a fully tax equivalent basis using a 35 percent federal tax rate.

Non-Interest Income

The following table presents the components of non-interest income for the years ended December 31, 2006, 2005 and 2004:

NON-INTEREST INCOME


	Years ended December 31,
	2006			2005			2004
	(in thousands)
Trust and investment services	$	7,108		$	6,487		$	6,023
Insurance premiums		11,074			11,719			13,982
Service charges on deposit accounts		23,242			22,382			20,242
(Losses) gains on securities transactions, net		(5,464	)		(461	)		6,475
Gains on trading securities, net		1,208			1,717			2,409
Fees from loan servicing		5,970			7,011			8,010
Gains on sales of loans, net		1,516			2,108			3,039
Bank owned life insurance (“BOLI”)		8,171			7,053			6,199
Other		19,239			15,717			17,943

Total non-interest income	$	72,064		$	73,733		$	84,322

Non-interest income represented 9.2 percent and 10.6 percent of total interest income plus non-interest income for 2006 and 2005, respectively. For the year ended December 31, 2006, non-interest income decreased $1.7 million or 2.3 percent, compared with the same period in 2005.

Trust and investment services increased $621 thousand, or 9.6 percent in 2006 as compared with 2005, as a result of higher managed account fees primarily from one new account relationship in 2006.

Insurance premiums decreased $645 thousand, or 5.5 percent in 2006 as compared with 2005 due to lower title insurance revenues as a result of less mortgage refinancing activity, as seen industry-wide.

Service charges on deposit accounts increased $860 thousand, or 3.8 percent in 2006 compared with 2005 due to deposit accounts acquired from the two mergers in 2005 and the nine de novo branches opened in 2006, as well as additional income earned from higher ATM activity.

Losses on securities transactions, net, increased $5.0 million to a net loss of $5.5 million for the year ended December 31, 2006. The net loss was mainly due to a $4.7 million impairment loss recognized on certain mortgage-backed and equity securities held available for sale in the third quarter of 2006 and a $2.1 million loss on trust preferred securities called for redemption prior to their scheduled maturity date in the fourth quarter of 2006, partially offset by various gains on securities transactions throughout 2006.

Gains on trading securities, net, decreased $509 thousand, or 29.6 percent for the year ended December 31, 2006 compared with the same period in 2005 due 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, 2006, fees from servicing residential mortgage loans totaled $4.8 million and fees from servicing SBA loans totaled $1.2 million as compared with $5.6 million and $1.4 million, respectively, for the year ended December 31, 2005. The aggregate principal balances of mortgage loans serviced by VNB’s subsidiary VNB Mortgage Services, Inc. for others approximated $1.2 billion, $1.4 billion and $1.6 billion at December 31, 2006, 2005 and 2004, respectively. Fees from loan servicing decreased $1.0 million or 14.8 percent as a result of smaller balances of loans serviced resulting from refinance and payoff activity. Valley has not acquired additional loan servicing portfolios to offset the decline in servicing assets due to the interest rate environment and the risks associated with prepayment and refinancing.

Gains on sales of loans, net, decreased $592 thousand to $1.5 million for the year ended December 31, 2006 compared to $2.1 million for the prior year. This decrease was primarily attributed to lower loan sales of $9.9 million in SBA loans in 2006 compared with $17.2 million during 2005.

Valley uses BOLI to help offset the rising cost of employee benefits. Valley acquired $5.1 million of BOLI from Shrewsbury State Bank in March of 2005. BOLI income was $8.2 million and $7.1 million for the years ended December 31, 2006 and 2005, respectively. BOLI income is exempt from federal and state income taxes. The BOLI is invested primarily in mortgage-backed securities, U.S. Treasuries and high grade corporate securities, and the underlying portfolio is managed by two independent investment firms.

Other non-interest income increased $3.5 million to $19.2 million in 2006 as compared with 2005. The increase was due to a $3.8 million gain on the sale of an office building located in Manhattan. The building, the sale of which closed in November 2006, was intended for construction of a new branch, however, Valley ultimately decided to sell the property and not pursue the project. Other 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, 2006, 2005 and 2004:

NON-INTEREST EXPENSE


	Years ended December 31,
	2006		2005		2004
	(in thousands)
Salary expense	$	109,775	$	105,988	$	99,325
Employee benefit expense		28,592		26,163		24,465
Net occupancy and equipment expense		46,078		41,694		36,368
Amortization of other intangible assets		8,687		8,797		8,964
Professional and legal fees		8,878		9,378		6,388
Advertising		8,469		7,535		7,974
Other		39,861		38,036		36,559

Total non-interest expense	$	250,340	$	237,591	$	220,043

Non-interest expense totaled $250.3 million for the year ended December 31, 2006, an increase of $12.7 million, or 5.4 percent from 2005, mainly due to increases in salary expense, employee benefit expense, net occupancy and equipment expense, and advertising. Valley incurred additional expenses due to nine de novo branches opened in 2006, and the additional branch operations and personnel from the Shrewsbury Bancorp and NorCrown Bank acquisitions during the first and second quarters of 2005, respectively. The largest component of non-interest expense is salary and employee benefit expense which totaled $138.4 million in 2006 compared with $132.2 million in 2005, an increase of $6.2 million or 4.7 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, 2006 was 54.0 percent compared to 50.3 percent for the same period of 2005. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders. The efficiency ratio has increased as higher non-interest expense attributable to additional expenses from the de novo branches and two acquisitions outpaced growth in net interest income and non-interest income.

Salary expense increased $3.8 million, or 3.6 percent for the year ended December 31, 2006 compared with the same period in 2005. The increase from 2005 was mainly due to the nine de novo branches and the acquisitions of Shrewsbury Bancorp and NorCrown Bank during the first and second quarters of 2005. At December 31, 2006, full-time equivalent staff was 2,489 compared to 2,433 at December 31, 2005.

Employee benefit expense increased by $2.4 million, or 9.3 percent for the year ended December 31, 2006 compared with the same period one year ago mainly due to increased stock incentive compensation and pension expense. Employee benefit expense included approximately $5.5 million and $3.9 million of stock incentive compensation for the years ended December 31, 2006 and 2005, respectively.

Net occupancy and equipment expense increased $4.4 million, or 10.5 percent during 2006 in comparison to 2005. This increase was largely due to Valley’s branch expansion and the two acquisitions in 2005, which includes, among other things, additional rents, utilities, real estate taxes, and depreciation charges in connection with investments in technology and facilities. Depreciation expense increased by approximately $1.4 million, or 9.1 percent during 2006 compared with the prior year. Rent expense increased $1.2 million, or 10.8 percent in 2006 compared with the prior year.

Amortization of other intangible assets, consisting primarily of amortization of loan servicing rights, decreased $110 thousand, or 1.3 percent to $8.7 million for the year ended December 31, 2006 compared with

the same period in 2005. An impairment analysis is performed periodically to determine the appropriateness of the value of Valley’s loan servicing rights, for which impairment expense of $24 thousand was recorded during 2006 compared with $108 thousand in 2005.

Professional and legal fees declined $500 thousand, or 5.3 percent for the year ended December 31, 2006 compared to the same period one year ago due to less litigation activity and management’s reassessment of required legal reserves in 2006.

Advertising expense increased $934 thousand, or 12.4 percent in 2006 compared to 2005 due to additional promotional campaigns in 2006 for Valley name branding, as well as specific financial products and services.

Other non-interest expense increased $1.8 million, or 4.8 percent for the year ended December 31, 2006 compared with the same period in 2005 mainly due to a rise in data processing, telephone, debit card and services fees mainly caused by the branch expansion and acquisitions. Other significant components of other non-interest expense include postage, stationery, insurance, and title search fees.

Income Taxes

Income tax expense was $39.9 million for the year ended December 31, 2006, reflecting an effective tax rate of 19.6 percent, compared with $66.8 million for the year ended December 31, 2005, reflecting an effective tax rate of 29.0 percent. The lower 2006 income tax expense reflects a decline in state income tax expense, increased low income housing tax credits and a $13.5 million tax benefit recognized due to management’s reassessment of required tax accruals. The reassessment was based on the resolution of income tax audits covering tax years 2003 and 2004, and the expiration of the income tax statute of limitations for 2002.

For 2007, Valley anticipates an effective tax rate of 29.0 percent, compared to 19.6 percent for 2006.* This rate is projected based upon management’s judgment regarding future results and could vary due to changes in income, tax planning strategies and 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 income before income taxes 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 are allocated from the corporate and other adjustments segment to each of the other three business segments. Valley’s Wealth Management Division, comprised of trust, broker/dealer, asset management and insurance services, is included in the consumer lending segment. The financial reporting for each segment contains allocations and reporting in line with Valley’s operations, which may not necessarily be comparable to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. 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 1.57 percent for the year ended December 31, 2006 compared with 2.00 percent for the year ended December 31, 2005, while income before taxes decreased $12.7 million for the 2006 period as compared to 2005. The decrease was primarily due to higher internal transfer expense, non-interest expense and provision for loan losses, as well as a decline in net interest income. Average interest earning assets increased $185.3 million mainly attributable to growth in both residential mortgage and automobile loans during 2006. The $23.3 million increase in interest income resulting from an increase in average interest rates on loans and higher average interest earnings assets during 2006 were more than offset by an increase in interest expense due to higher funding costs. Average interest rates on loans increased 34 basis points to 5.82 percent, while the interest expense associated with funding sources increased 67 basis points to 2.57 percent.

The return on average interest earning assets before income taxes for the commercial lending segment decreased to 2.75 percent in 2006 compared with 2.83 percent for the year ended December 31, 2005, and income before income taxes increased $9.1 million for 2006 as compared to 2005. The increase in income before income taxes was primarily as a result of higher net interest income, partially offset by an increase in the provision for loan losses and allocated internal transfer expense. Average interest earning assets increased $441.2 million attributed to new loan originations and draw downs on new and existing commercial lines of credit. Interest rates on commercial lending increased by 71 basis points, largely due to increases in the prime lending rate, while the expenses associated with funding sources increased by 67 basis points.

The investment management segment had a return on average interest earning assets before income taxes of 1.59 percent for the year ended December 31, 2006 compared with 2.25 for the year ended December 31, 2005, and income before income taxes declined $24.0 million in 2006 as compared to the same period in 2005. The decreases are primarily due to a decline in net interest income. Non-interest income also decreased due to a $5.0 million increase in net losses on securities transactions during 2006. Average interest earning assets decreased by $123.1 million due to normal principal paydowns, and sales and prepayments of some investment securities. The yield on interest earning assets, which includes federal funds sold, increased by 25 basis points to 5.50 percent for the year ended December 31, 2006.

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 July 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 decreased by $933 thousand for the year ended December 31, 2006 compared with December 31, 2005 primarily due to higher internal transfer income and non-interest income, partially offset by additional interest expense resulting from the issuance of $100 million in subordinated notes in July 2005, the negative effect of certain cash flow hedge derivatives that expired in August 2006, and increased non-interest expense.

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 Asset/Liability Management Committee is responsible for managing such risks and establishing 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, 2006. The model assumes changes in 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, 2006.

Valley’s simulation model is based on market interest rates and prepayment speeds prevalent in the market as of December 31, 2006. New interest earning asset and interest bearing liability originations and rate spreads are estimated utilizing Valley’s actual originations during the fourth quarter of 2006. The model utilizes an immediate parallel change in the market interest rates at December 31, 2006. The following table reflects management’s expectations of the change in Valley’s net interest income over a one-year period in light of the aforementioned assumptions:


Immediate Changes in Levels of Interest Rates		Change in Net Interest Income Over One Year Horizon
		At December 31, 2006
		Dollar Change			Percentage Change
		($ in thousands)
+2.00	%	$	18,363		4.85	%
+1.00			9,481		2.50
(1.00	)		(12,412	)	(3.28	)
(2.00	)		(23,876	)	(6.30	)

Convexity is a measure of how the duration of a bond changes as the market interest rate changes. Potential movements in the convexity of bonds held in Valley’s investment portfolio, as well as the duration of the 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 in the table above. Management cannot provide any assurance about the actual effect of changes in interest rates on Valley’s net interest income.

Valley’s net interest income is affected by changes in interest rates and cash flows from its loan and investment portfolios. Valley actively manages these cash flows in conjunction with its liability mix, duration and rates to optimize the net interest income, 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 remained low causing an inverted or flat yield curve and net interest margin pressure as deposits and short-term borrowings reprice at higher interest rates faster than loans and investments.

The following table shows the financial instruments that are sensitive to changes in interest rates, categorized by expected maturity and the instruments’ fair value at December 31, 2006. 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, 2006.

INTEREST RATE SENSITIVITY ANALYSIS


	Rate		2007			2008		2009			2010		2011		Thereafter		Total Balance		Fair Value
			(in thousands)
Interest sensitive assets:
Interest bearing deposits	6.17	%	$	7,795		$	—	$	—		$	—	$	—	$	—	$	7,795	$	7,795
Federal funds sold	5.28			175,000			—		—			—		—		—		175,000		175,000
Investment securities held to maturity	5.47			118,504			51,510		48,776			64,553		48,966		776,576		1,108,885		1,090,883
Investment securities available for sale	4.87			306,702			235,353		186,759			163,396		165,346		712,425		1,769,981		1,769,981
Trading securities	—			4,655			—		—			—		—		—		4,655		4,655
Loans held for sale	—			4,674			—		—			—		—		—		4,674		4,674
Loans:
Commercial	7.73			1,033,979			154,925		116,237			62,725		28,096		70,900		1,466,862		1,469,652
Mortgage	5.80			1,079,965			790,574		549,407			435,681		371,889		1,714,325		4,941,841		4,764,744
Consumer	6.63			1,077,323			361,902		214,378			117,499		55,415		96,465		1,922,982		2,076,808

Total interest sensitive assets	5.91		$	3,808,597		$	1,594,264	$	1,115,557		$	843,854	$	669,712	$	3,370,691	$	11,402,675	$	11,364,192

Interest sensitive liabilities:
Deposits:
Savings, NOW and money market	2.16		$	1,164,473		$	700,956	$	700,956		$	331,807	$	165,904	$	497,711	$	3,561,807	$	3,561,807
Time	4.47			2,237,218			361,272		134,290			30,930		133,143		32,754		2,929,607		2,945,384
Short-term borrowings	4.27			362,615			—		—			—		—		—		362,615		352,904
Long-term borrowings	4.58			625,484			423,343		329,044			328,041		333,056		445,946		2,484,914		2,443,467

Total interest sensitive liabilities	3.61		$	4,389,790		$	1,485,571	$	1,164,290		$	690,778	$	632,103	$	976,411	$	9,338,943	$	9,303,562

Interest sensitivity gap			$	(581,193	)	$	108,693	$	(48,733	)	$	153,076	$	37,609	$	2,394,280	$	2,063,732	$	2,060,630

Ratio of interest sensitive assets to interest sensitive liabilities				0.87:1			1.07:1		0.96:1			1.22:1		1.06:1		3.45:1		1.22:1		1.22:1

Expected maturities are contractual maturities 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 total gap re-pricing within one year as of December 31, 2006 was negative $581.2 million, representing a ratio of interest sensitive assets to interest sensitive liabilities of 0.87:1, as compared to a positive gap of $331.7 million for the same period as of December 31, 2005, representing a ratio of interest sensitive assets to interest sensitive liabilities of 1.08:1. The primary reason for the change in Valley’s gap position over the last twelve months is a decrease in prepayment speeds for residential mortgage loans and investment securities coupled with a shift to short-term time deposits from higher costing municipal deposits during 2006.

Management does not view the negative one year gap position as of December 31, 2006 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 approximately $2.2 billion and $2.3 billion at December 31, 2006 and 2005, respectively, representing 19.5 percent and 20.6 percent of earning assets, and 18.0 percent and 18.9 percent of total assets at December 31, 2006 and 2005, respectively.

Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. Loan principal payments and prepayments are projected to be approximately $3.2 billion over the next twelve months.* In 2006, proceeds from the sales of investment securities available for sale totaled $129.8 million and proceeds of $532.8 million were generated from maturities, redemptions and prepayments of investments. Purchases of investment securities in 2006 were $279.0 million primarily to replace pledged securities that have matured in the year. Liquidity could also be derived from residential mortgages, commercial mortgages, auto and home equity loans, as these are all marketable portfolios.

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 years ended December 31, 2006 and 2005, representing 63.5 percent and 66.6 percent of average earning assets at December 31, 2006 and 2005, respectively. 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 $117.9 million at December 31, 2006 and $63.1 million at December 31, 2005. 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.

The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31, 2006. These certificates of deposit are generated primarily from core deposit customers.


	(in thousands)
Less than three months	$	854,507
Three to six months		134,105
Six to twelve months		95,354
More than twelve months		250,650

	$	1,334,616

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 decreased by $220.0 million to $362.6 million at December 31, 2006 compared to $582.6 million at December 31, 2005 primarily due to the payment of all FHLB advances due in one year or less coupled with no outstanding federal funds purchased (see Note 11 to the consolidated financial statements). At December 31, 2006, all short-term repos represent customer deposit 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,
	2006			2005			2004
	($ in thousands)
Securities sold under agreements to repurchase:
Average balance outstanding	$	337,819		$	256,963		$	207,842
Maximum outstanding at any month-end during the period		386,897			291,427			264,067
Balance outstanding at end of period		355,823			289,970			227,654
Weighted average interest rate during the period		4.12	%		2.34	%		1.04	%
Weighted average interest rate at the end of the period		4.29	%		2.07	%		0.95	%

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 repurchase its outstanding common stock as authorized by its Board of Directors under Valley’s two previously announced repurchase plans.* The cash required for these purchases of shares have previously been met by using Valley’s own funds, dividends received from VNB, as well as borrowed funds.

Investment Securities

The amortized cost of securities held to maturity at December 31, 2006, 2005 and 2004 were as follows:

INVESTMENT SECURITIES HELD TO MATURITY


	2006		2005		2004
	(in thousands)
U.S. Treasury securities and other government agencies.	$	10,009	$	10,019	$	10,030
Obligations of states and political subdivisions		233,592		229,474		250,149
Mortgage-backed securities		342,798		399,521		492,416
Corporate and other debt securities		423,016		491,912		466,084

Total debt securities		1,009,415		1,130,926		1,218,679
FRB & FHLB stock		99,470		98,264		73,659

Total investment securities held to maturity	$	1,108,885	$	1,229,190	$	1,292,338

The fair value of securities available for sale at December 31, 2006, 2005 and 2004 were as follows:

INVESTMENT SECURITIES AVAILABLE FOR SALE


	2006		2005		2004
	(in thousands)
U.S. Treasury securities and other government agencies	$	400,781	$	363,723	$	311,697
Obligations of states and political subdivisions		47,852		73,133		87,789
Mortgage-backed securities		1,256,637		1,534,992		1,456,552
Corporate and other debt securities		26,968		32,076		1,184

Total debt securities		1,732,238		2,003,924		1,857,222
Equity securities		37,743		34,970		26,507

Total investment securities available for sale	$	1,769,981	$	2,038,894	$	1,883,729

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES HELD TO MATURITY AT DECEMBER 31, 2006


	U.S. Treasury Securities and Other Government Agencies				Obligations of States and Political Subdivisions				Mortgage- Backed Securities (5)				Corporate and 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	$	10,009	2.89	%	$	45,586	3.76	%	$	87	7.05	%	$	10,000	—	%	$	65,682	3.06	%
1-5 years		—	—			31,219	3.99			889	7.65			537	6.23			32,645	4.13
5-10 years		—	—			85,896	4.17			196	8.48			17,981	5.28			104,073	4.37
Over 10 years		—	—			70,891	4.13			341,626	4.52			394,498	7.34			807,015	5.86

Total securities	$	10,009	2.89	%	$	233,592	4.05	%	$	342,798	4.53	%	$	423,016	7.08	%	$	1,009,415	5.47	%

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 2006


	U.S. Treasury Securities and Other Government Agencies				Obligations of States and Political Subdivisions				Mortgage- Backed Securities (5)				Corporate and Other Debt Securities				Total (4)
	Fair Value		Yield (2)		Fair Value		Yield (2) (3)		Fair Value		Yield (2)		Fair Value		Yield (2)		Fair Value		Yield (2)
	($ in thousands)
0-1 year	$	48,921	3.51	%	$	848	6.94	%	$	457	6.70	%	$	2,022	4.18	%	$	52,248	3.62	%
1-5 years		151,260	3.78			39,100	7.28			19,711	7.61			1,032	7.43			211,103	4.80
5-10 years		80,915	4.94			3,470	8.26			22,247	6.03			10,922	6.04			117,554	5.35
Over 10 years		119,685	5.08			4,434	6.85			1,214,222	4.85			12,992	6.46			1,351,333	4.89

Total securities	$	400,781	4.37	%	$	47,852	7.31	%	$	1,256,637	4.91	%	$	26,968	6.16	%	$	1,732,238	4.87	%

(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, corporate bonds, 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.

As of December 31, 2006, Valley’s held to maturity investment portfolio included approximately $263.7 million in trust preferred securities issued by other financial institutions that are currently callable or contain call option provisions that begin during the first and second quarters of 2007. The call options are continuous after the call date and the likelihood of the issuer exercising the call option is dependent on a variety of factors. These factors include the issuers’ need for capital, the level of interest rates, the ability to obtain financing through new debt instruments available in the market, any premium that may be payable to the trust preferred security holders and the potential write-off of unamortized issuance costs. The majority of these trust preferred securities have call premiums equal to three to four percent of the outstanding balance. If all the trust preferred securities were

called during the six months ended June 30, 2007, Valley could incur losses on securities transactions, net of tax, totaling approximately $4.4 million in that period.* Valley cannot determine the likelihood of how many of these securities will be called before their stated maturity dates.

At December 31, 2006, Valley had $342.8 million of mortgage-backed securities classified as held to maturity and $1.3 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 seeks out investment 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 $301.7 million of collateralized mortgage obligations, of which $26.2 million were privately issued, at December 31, 2006. Collateralized mortgage obligation’s had a yield of 4.76 percent and an unrealized loss of $9.6 million at December 31, 2006.

As of December 31, 2006, Valley had $1.8 billion of securities available for sale, a decrease of $268.9 million from December 31, 2005. As of December 31, 2006, the investment securities available for sale had a net unrealized loss of $19.0 million, net of deferred taxes, compared to a net unrealized loss of $22.3 million, net of deferred taxes, at December 31, 2005. Available for sale securities are not considered trading account securities, but rather are securities which may be sold on a non-routine basis.

During the third quarter of 2006, management performed a comprehensive review of the securities available for sale portfolio. The specific goals of this review were to consider rebalancing the portfolio to position for a change in the economic cycle and to realign Valley’s securities duration target to minimize market price risk. As a result, management determined that approximately $132.0 million of low yielding mortgage-backed securities would be sold during the fourth quarter of 2006, which required Valley to recognize a $4.7 million impairment loss on these securities in the third quarter. The selection of securities to be sold was based upon their low yield, size, composition of the underlying pool assets, historical prepayment speeds, and duration profiles. Management feels that these securities were particularly susceptible to significant average life extension risk and that reinvestment of these funds in investment securities with higher coupon rates will help shorten the duration of Valley’s portfolio and provide a better total return in the future.

As of December 31, 2006 and 2005, Valley had a total of $4.7 million and $4.2 million, respectively, in trading account securities. The trading securities portfolio is utilized to facilitate purchases for customers of VNB’s broker-dealer subsidiary.

Loan Portfolio

As of December 31, 2006, total loans were $8.3 billion compared to $8.1 billion at December 31, 2005, an increase of $202 million or 2.5 percent. The following table reflects the composition of the loan portfolio for the five years ended December 31, 2006:

LOAN PORTFOLIO


	At December 31,
	2006			2005			2004			2003			2002
	($ in thousands)
Commercial	$	1,466,862		$	1,449,919		$	1,259,997		$	1,181,399		$	1,113,962

Total Commercial loans		1,466,862			1,449,919			1,259,997			1,181,399			1,113,962

Construction		526,318			471,560			368,120			222,748			200,896
Residential mortgage		2,106,306			2,083,004			1,853,408			1,594,392			1,387,208
Commercial mortgage		2,309,217			2,234,950			1,745,155			1,553,037			1,515,095

Total mortgage loans		4,941,841			4,789,514			3,966,683			3,370,177			3,103,199

Home Equity		571,138			565,960			517,325			476,149			451,543
Credit card		8,764			9,044			9,691			10,722			11,544
Automobile		1,238,145			1,221,525			1,079,050			1,013,938			932,672
Other consumer		104,935			94,495			99,412			114,304			107,239

Total consumer loans		1,922,982			1,891,024			1,705,478			1,615,113			1,502,998

Total loans (1)	$	8,331,685		$	8,130,457		$	6,932,158		$	6,166,689		$	5,720,159

As a percent of total loans:
Commercial loans		17.6	%		17.8	%		18.2	%		19.2	%		19.5	%
Mortgage Loans		59.3			58.9			57.2			54.6			54.2
Consumer loans		23.1			23.3			24.6			26.2			26.3

Total		100.00	%		100.0	%		100.00	%		100.00	%		100.00	%

(1)	Total loans are net unearned discount and deferred loan fees totaling $5.1 million, $6.3 million, $6.6 million, $5.9 million, and $6.4 million at December 31, 2006, 2005, 2004, 2003 and 2002 respectively.

Commercial loans increased $16.9 million or 1.2 percent in 2006 due to a combination of increases in draw downs on new and existing commercial lines of credit and new commercial loans, net of large payoff activity during the year. Also, Valley chose to allow $50 million in performing commercial credits to leave the bank during the third quarter. This decision was based upon the concern as to how these credits might perform in a weaker economy.

The largest increase in loans for 2006 was from the mortgage loans comprised of construction, residential and commercial mortgage loans. Construction mortgage loans increased $54.8 million, or 11.6 percent in 2006 over last year due to a greater volume of draw downs on existing construction lines and newly originated construction loans. Residential mortgage loans increased only $23.3 million in 2006 over last year partially due to a slow down in demand and an increasingly competitive marketplace. Valley continues to see more competition from non-traditional mortgage markets, such as high loan to value ratio and negative amortization loan products. Valley’s non-participation in this segment of the real estate market has and may continue to adversely impact its market share and portfolio growth, however management believes this strategy will help Valley avoid possible negative consequences of a stressed real estate market. Commercial mortgage loans increased $74.3 million, or 3.3 percent during 2006 mainly due to an increase in loans through new and existing business development, net of a large amount of payoffs.

Automobile loans during 2006 increased by $16.6 million or 1.4 percent. The increase during 2006 is primarily the result of Valley’s continued market presence through its indirect dealer program. Competition from

other lenders and the decline in automobile sales in conjunction with substantial normal pay down activity kept the volume of net new loans lower than it has historically been.

Much of Valley’s lending is in northern and central New Jersey and New York City, 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, 2006:


	One Year or Less		One to Five Years		Over Five Years		Total
	(in thousands)
Commercial—fixed rate	$	361,025	$	126,391	$	24,755	$	512,171
Commercial—adjustable rate		672,954		235,592		46,145		954,691
Construction—fixed rate		9,449		11,201		—		20,650
Construction—adjustable rate		298,331		207,337		—		505,668

	$	1,341,759	$	580,521	$	70,900	$	1,993,180

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 SBA lender with authority to make loans without the prior approval of the SBA. VNB currently has approval to make SBA loans nationwide, however, management focuses primarily on lending in New Jersey, New York and Pennsylvania. 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 is committed to 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 2006 and 2005, VNB originated approximately $14.9 million and $36.9 million of SBA loans, respectively, and sold $10.0 million and $17.2 million, respectively. At December 31, 2006 and 2005, $52.0 million and $55.2 million, respectively, of SBA loans were held in VNB’s portfolio and VNB serviced for others approximately $75.0 million and $87.7 million, respectively, of SBA loans.

Non-performing Assets

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

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,
	2006			2005			2004			2003			2002
	($ in thousands)
Loans past due in excess of 90 days and still accruing	$	3,775		$	4,442		$	2,870		$	2,792		$	4,931

Non-accrual loans		27,244			25,794			30,274			22,338			21,524
Other real estate owned		779			2,023			480			797			43
Other repossessed assets		844			608			861			828			749

Total non-performing assets	$	28,867		$	28,425		$	31,615		$	23,963		$	22,316

Troubled debt restructured loans	$	—		$	—		$	—		$	—		$	—
Total non-performing loans as a % of loans		0.33	%		0.32	%		0.44	%		0.36	%		0.38	%
Total non-performing assets as a % of loans		0.35	%		0.35	%		0.46	%		0.39	%		0.39	%
Allowance for loan losses as a % of non-performing loans		274.25	%		291.49	%		217.01	%		289.42	%		297.75	%

Non-accrual loans have ranged from a low of $21.5 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. If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $2.1 million, $1.9 million and $1.5 million for the years ended December 31, 2006, 2005, and 2004, 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 $498 thousand, $21 thousand and $844 thousand for the years ended December 31, 2006, 2005, and 2004, 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 $4.9 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 0.84 percent of all loans at December 31, 2006 compared to 0.89 percent at December 31, 2005. Valley cannot guarantee that this current low level of past due loans in excess of 30 days will continue.

Other real estate owned decreased $1.2 million to $779 thousand in 2006 compared with 2005 primarily due to the sale of four real estate properties during 2006.

Although substantially all risk elements at December 31, 2006 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 $7.3 million and $8.1 million in potential problem loans at December 31, 2006 and 2005, 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 $7.3 million in potential problem loans as of December 31, 2006, approximately $1.0 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. Valley’s loan portfolio is diversified as to type of borrower and loan. However, loans collateralized by real estate represent approximately 59 percent of total loans at December 31, 2006. Most of the loans collateralized by real estate are in northern and central New Jersey and New York City, presenting a geographical and credit risk if there was a significant downturn of the economy within the region.

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 provide mortgage loans secured by homes beyond this primary geographic area, however, lending outside this primary area is generally made in support of existing customer relationships. Underwriting policies that are based on 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 2006 was 61.21 percent while FICO^® (independent objective criteria measuring the creditworthiness of a borrower) scores averaged 743.

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,
	2006			2005			2004			2003			2002
	($ in thousands)
Average loans outstanding	$	8,262,739		$	7,637,973		$	6,541,993		$	6,056,439		$	5,489,344

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

Loans charged-off:
Commercial		6,078			1,921			6,551			4,905			10,570
Construction		—			—			—			—			504
Mortgage—Commercial		448			307			212			409			525
Mortgage—Residential		644			108			117			244			233
Consumer		4,918			5,265			6,258			6,089			6,682

		12,088			7,601			13,138			11,647			18,514

Charged-off loans recovered:
Commercial		528			1,474			3,394			2,012			1,905
Construction		—			—			—			—			—
Mortgage—Commercial		181			129			237			379			1,014
Mortgage—Residential		54			130			51			135			43
Consumer		1,585			1,765			2,502			2,339			2,192

		2,348			3,498			6,184			4,865			5,154

Net charge-offs		9,740			4,103			6,954			6,782			13,360
Provision for loan losses		9,270			4,340			8,003			7,345			13,644
Additions from acquisitions		—			9,252			—			—			—

Ending balance—Allowance for loan losses	$	74,718		$	75,188		$	65,699		$	64,650		$	64,087

Ratio of net charge-offs during the period to average loans outstanding during the period		0.12	%		0.05	%		0.11	%		0.11	%		0.24
Allowance for loan losses as a % of loans		0.90	%		0.92	%		0.95	%		1.05	%		1.12

Management maintains the allowance for loan losses 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 includes segmentation of the loan portfolio into its various components, tracking the historical levels of criticized loans and delinquencies, and assessing the nature and trend of loan charge-offs. Additionally, the volume of non-performing loans, concentration risks, collateral adequacy, credit policies and procedures, staffing, underwriting consistency, and economic conditions are taken into consideration.

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 changes in the current loan portfolio quality that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.

The allowance contains 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 remained relatively low in the last five years, ranging from a high of 0.24 percent of average loans in 2002 to a low of 0.05 percent seen in 2005. There can be no guarantee that these low levels will continue into 2007 as credit cycles can vary from year to year base on the economic climate in Valley’s primary market areas.

The provision for loan losses was $9.3 million in 2006 compared to $4.3 million in 2005. The $4.9 million increase was based upon the results of management’s quarterly analyses of the allowance for loan losses, including allowance allocations resulting from a $201.2 million increase in total loans during 2006.

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,
	2006				2005				2004				2003				2002
	(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	$	31,888	17.6	%	$	34,828	17.8	%	$	29,166	18.2	%	$	27,462	19.2	%	$	20,859	19.5	%
Mortgage		27,942	59.3			28,200	58.9			23,033	57.2			16,748	54.6			15,657	54.2
Consumer		8,189	23.1			8,174	23.3			7,884	24.6			9,897	26.2			9,337	26.3
Unallocated		6,699	N/A			3,986	N/A			5,616	N/A			10,543	N/A			18,234	N/A

	$	74,718	100.0	%	$	75,188	100.0	%	$	65,699	100.0	%	$	64,650	100.0	%	$	64,087	100.0	%

At December 31, 2006, the allowance for loan losses amounted to $74.7 million or 0.90 percent of loans, as compared to $75.2 million or 0.92 percent at December 31, 2005. The allowance was adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $9.7 million for the year ended December 31, 2006 compared with $4.1 million for the year ended December 31, 2005. The ratio of net charge-offs to average loans was 0.12 percent and 0.05 percent for years ended December 31, 2006 and 2005, respectively.

Management believes that the unallocated allowance is appropriate given the economic climate, the size of the loan portfolio and delinquency trends at December 31, 2006.

The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific allocations to the allowance for loan losses totaled $20.1 million and $5.1 million, respectively, at December 31, 2006 and $16.8 million and $9.0 million, respectively, at December 31, 2005. The average balance of impaired loans during 2006, 2005 and 2004 was approximately $20.7 million, $20.1 million and $14.6 million, respectively. The amount of interest that would have been recorded under the original terms for impaired loans was $1.2 million for 2006, $1.4 million for 2005, and $479 thousand for 2004. 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, 2006, shareholders’ equity totaled $949.6 million compared with $931.9 million at year-end 2005, representing 7.7 percent and 7.5 percent of total assets, respectively. The increase in total shareholders’ equity for 2006 was the result of net income of $163.7 million, offset by dividends paid to shareholders and an increase in the accumulated other comprehensive loss.

Included in shareholders’ equity as a component of the accumulated other comprehensive loss at December 31, 2006 was a $19.0 million unrealized loss on investment securities available for sale, net of

deferred tax, compared with an unrealized loss of $22.3 million, net of deferred tax at December 31, 2005. Due to the adoption of Statement of Financial Accounting Standards No. 158 on December 31, 2006, the accumulated other comprehensive loss also includes an increase of $11.9 million representing the unfunded portion of Valley’s various pension obligations.

On January 17, 2007, Valley’s Board of Directors approved the repurchase of up to 3.5 million common shares. Purchases may be made from time to time in the open market or in privately negotiated transactions generally not exceeding prevailing market prices. Repurchased shares are held in treasury and are expected to be used for general corporate purposes.* Valley’s Board of Directors previously authorized the repurchase of up to 2.9 million shares of Valley’s outstanding common stock on May 14, 2003. As of December 31, 2006, Valley had repurchased approximately 1.9 million shares of its common stock under the 2003 publicly announced program at an average cost of $25.55 per share. Valley’s Board of Directors had also previously authorized the repurchase of up to approximately 12.2 million shares of Valley’s outstanding common stock on August 21, 2001. Valley repurchased the last 22 thousand shares available under the 2001 program during 2006.

Risk-based capital 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. These securities are callable for early redemption through their scheduled maturity date in 2031 and 100 percent qualify as Tier 1 capital, within regulatory limitations. Including these securities, Valley’s capital position at December 31, 2006 under risk-based capital guidelines was $982.1 million, or 10.6 percent of risk-weighted assets for Tier 1 capital and $1.2 billion or 12.4 percent for total risk-based capital. The comparable ratios at December 31, 2005 were 10.3 percent for Tier 1 capital and 12.2 percent for Total risk-based capital. At December 31, 2006 and 2005, Valley was in compliance with the leverage requirement having Tier 1 leverage ratios of 8.1 percent and 7.8 percent, respectively. VNB’s ratios at December 31, 2006 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. 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, 2006 and 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 $8.23 at December 31, 2006 compared with $7.97 per common share at December 31, 2005.

The primary source of capital growth is through retention of earnings. Valley’s rate of earnings retention, derived by dividing undistributed earnings per common share by net income per common share, was 39.3 percent at December 31, 2006, compared to approximately 42.0 percent at December 31, 2005. Cash dividends declared amounted to $0.85 per common share, equivalent to a dividend payout ratio of 60.7 percent for 2006, compared to approximately 58.0 percent for 2005. The current quarterly dividend rate of $0.215 per common share provides for an annual rate of $0.86 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.*

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, 2006:


	One Year or Less		One to Three Years		Three to Five Years		Over Five Years		Total
	(in thousands)
Time deposit	$	2,237,218	$	495,562	$	164,073	$	32,754	$	2,929,607
Long-term borrowings		523,500		170,613		259,000		1,531,801		2,484,914
Operating leases		10,096		18,032		14,749		33,019		75,896
Capital expenditures		25,120		—		—		—		25,120

Total	$	2,795,934	$	684,207	$	437,822	$	1,597,574	$	5,515,537

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

Commitments. As a financial services provider, 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, 2006:


	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	$	1,307,508	$	156,754	$	17,488	$	76,925	$	1,558,675
Home equity and other revolving lines of credit		623,017		—		—		—		623,017
Outstanding commercial mortgage loan commitments		200,798		154,163		4,255		—		359,216
Standby letters of credit		154,486		40,883		3,229		7,611		206,209
Outstanding residential mortgage loan commitments		79,581		—		—		—		79,581
Commitments under unused lines of credit—credit card		23,146		21,443		—		—		44,589
Commercial letters of credit		15,553		—		—		—		15,553
Commitments to sell loans		5,250		—		—		—		5,250
Commitments to fund civic and community investments		—		905		—		—		905
Other		8,221		2,315		174		—		10,710

Total	$	2,417,560	$	376,463	$	25,146	$	84,536	$	2,903,705

Included in the other commitments are projected earn-outs of $1.7 million that are scheduled to be paid over a five year period in conjunction with various acquisitions made by Valley.* These earn-outs are paid in accordance with predetermined profitability targets. The balance of the other category represents approximate amounts for contractual communication and technology costs.

Derivative Financial Instruments. Use of derivative financial instruments is one of several ways in which Valley can manage its interest rate risk. In general, the assets and liabilities generated through the ordinary course of business activities do not naturally create offsetting positions with respect to repricing, basis or maturity characteristics. Valley has used certain derivative instruments, principally interest rate swaps, as part of its asset/liability management practices to adjust the interest rate sensitivity of its loan portfolio and overall balance sheet.

During the fourth quarter of 2005, Valley entered into a $9.7 million amortizing notional interest rate swap to hedge changes in the fair value of a fixed rate loan that it made to a commercial borrower. Valley has designated the interest rate swap as a fair value hedge according to SFAS No. 133. The changes in the fair value of the interest rate swap are recorded through earnings and are offset by the changes in fair value of the hedged fixed rate loan. As of December 31, 2006 and 2005, the fair value hedge had a fair value of $22 thousand and $253 thousand, respectively, included in other liabilities on the consolidated statements of financial condition.

During the third quarter of 2004, Valley entered into interest rate swap transactions designated as cash flow hedges which effectively converted $300 million of its prime-based floating rate commercial loans to a fixed rate. The cash flow hedges involved the receipt of fixed-rate amounts in exchange for variable-rate payments over the life of the agreements without exchange of the underlying principal amount. The cash flow hedges expired on August 1, 2006. At December 31, 2005, the cash flow hedges had an aggregate fair value of $2.7 million included in other liabilities on the consolidated statements of financial condition.

At December 31, 2005, the statement of comprehensive income included unrealized losses of $1.8 million, net of related income taxes of $1.2 million for derivatives designated as cash flow hedges. Amounts reported in accumulated other comprehensive income related to cash flow hedges were reclassified to interest income as interest payments are received on the applicable variable rate loans. For the years ended December 31, 2006, 2005 and 2004, an unrealized loss of $3.2 million, an unrealized loss of $702 thousand and a unrealized gain of $1.6 million, respectively, were reclassified out of other comprehensive income as the hedged forecasted transactions occurred and recognized as a component of interest income.

No material hedge ineffectiveness existed on cash flow or fair value hedges during the years ended December 31, 2006, 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—2005 Compared to 2004

Net income was $163.4 million or $1.42 per diluted share, return on average assets was 1.39 percent and return on average shareholders’ equity was 19.17 percent for 2005. This compares with net income of $154.4 million or $1.41 per diluted share in 2004, return on average assets of 1.51 percent and return on average shareholders’ equity of 22.77 percent in 2004.

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

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.

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.

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 provided 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 Bancorp and NorCrown Bank 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 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.

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.

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. 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.

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 Bancorp and NorCrown Bank and to support expanded branch hours of operations as well as costs related to new business development and the implementation of regulatory compliance programs. 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. Net occupancy and equipment expense increased $5.3 million or 14.6 percent during 2005 in comparison to 2004 largely due to the Shrewsbury Bancorp and NorCrown Bank acquisitions, business expansion such as new and refurbished branches, increased depreciation charges in connection with investments in technology and facilities.

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.

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,
	2006			2005
	(in thousands except for share data)
Assets
Cash and due from banks	$	236,354		$	246,119
Interest bearing deposits with banks		7,795			13,926
Federal funds sold		175,000			—
Investment securities:
Held to maturity, fair value of $1,090,883 and $1,218,081 in 2006 and 2005, respectively (Notes 3 and 11)		1,108,885			1,229,190
Available for sale (Notes 4 and 11)		1,769,981			2,038,894
Trading securities		4,655			4,208

Total investment securities		2,883,521			3,272,292

Loans held for sale		4,674			3,497
Loans (Notes 5 and 11)		8,331,685			8,130,457
Less: Allowance for loan losses (Note 6)		(74,718	)		(75,188	)

Net loans		8,256,967			8,055,269

Premises and equipment, net (Note 7)		209,397			182,739
Bank owned life insurance		189,157			182,789
Accrued interest receivable		63,356			57,280
Due from customers on acceptances outstanding		9,798			11,314
Goodwill (Note 9)		181,497			179,898
Other intangible assets, net (Notes 8 and 9)		29,858			37,456
Other assets		147,653			193,523

Total assets	$	12,395,027		$	12,436,102

Liabilities
Deposits:
Non-interest bearing	$	1,996,237		$	2,048,218
Interest bearing:
Savings, NOW and money market		3,561,807			4,026,249
Time (Note 10)		2,929,607			2,495,534

Total deposits		8,487,651			8,570,001

Short-term borrowings (Note 11)		362,615			582,575
Long-term borrowings (Notes 11 and 12)		2,484,914			2,245,570
Bank acceptances outstanding		9,798			11,314
Accrued expenses and other liabilities (Notes 13 and 14)		100,459			94,732

Total liabilities		11,445,437			11,504,192

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 173,139,309 shares; issued 116,890,623 shares in 2006 and 116,985,373 shares in 2005		41,212			39,302
Surplus		881,022			741,456
Retained earnings		97,639			177,332
Accumulated other comprehensive loss		(30,873	)		(24,036	)
Treasury stock, at cost (1,533,355 common shares in 2006 and 92,320 common shares in 2005)		(39,410	)		(2,144	)

Total shareholders’ equity		949,590			931,910

Total liabilities and shareholders’ equity	$	12,395,027		$	12,436,102

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME


	Years ended December 31,
	2006			2005			2004
	(in thousands, except for share data)
Interest Income
Interest and fees on loans (Note 5)	$	544,440		$	461,443		$	370,921
Interest and dividends on investment securities:
Taxable		140,979			145,266			134,274
Tax-exempt		11,886			12,331			11,587
Dividends		5,896			4,800			1,848
Interest on federal funds sold and other short-term investments		4,170			1,244			296

Total interest income		707,371			625,084			518,926

Interest Expense
Interest on deposits:
Savings, NOW and money market		75,822			55,456			23,115
Time (Note 10)		112,654			67,601			46,832
Interest on short-term borrowings (Note 11)		18,211			16,516			5,258
Interest on long-term borrowings (Notes 11 and 12)		109,563			87,086			71,402

Total interest expense		316,250			226,659			146,607

Net Interest Income		391,121			398,425			372,319
Provision for loan losses (Note 6)		9,270			4,340			8,003

Net Interest Income after Provision for Loan Losses		381,851			394,085			364,316

Non-Interest Income
Trust and investment services		7,108			6,487			6,023
Insurance premiums		11,074			11,719			13,982
Service charges on deposit accounts		23,242			22,382			20,242
(Losses) gains on securities transactions, net (Note 4)		(5,464	)		(461	)		6,475
Gains on trading securities, net		1,208			1,717			2,409
Fees from loan servicing (Note 8)		5,970			7,011			8,010
Gains on sales of loans, net		1,516			2,108			3,039
Bank owned life insurance		8,171			7,053			6,199
Other		19,239			15,717			17,943

Total non-interest income		72,064			73,733			84,322

Non-Interest Expense
Salary expense (Note 13)		109,775			105,988			99,325
Employee benefit expense (Note 13)		28,592			26,163			24,465
Net occupancy and equipment expense (Notes 7 and 15)		46,078			41,694			36,368
Amortization of other intangible assets (Note 9)		8,687			8,797			8,964
Professional and legal fees		8,878			9,378			6,388
Advertising		8,469			7,535			7,974
Other		39,861			38,036			36,559

Total non-interest expense		250,340			237,591			220,043

Income Before Income Taxes		203,575			230,227			228,595
Income tax expense (Note 14)		39,884			66,778			74,197

Net Income	$	163,691		$	163,449		$	154,398

Earnings Per Common Share:
Basic	$	1.40		$	1.43		$	1.42
Diluted		1.40			1.42			1.41
Cash Dividends Declared Per Common Share		0.85			0.83			0.81
Weighted Average Number of Common Shares Outstanding:
Basic		116,542,296			114,396,427			108,785,069
Diluted		117,017,758			114,819,259			109,344,515

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


	Common Stock					Surplus			Retained Earnings			Unallocated Common Stock Held by Employee Benefit Plan			Accumulated Other Comprehensive Income (Losses)			Treasury Stock			Total Shareholders’ Equity
	Shares Outstanding		Amount			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, 2003	108,713		$	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 $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	321			(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	(46	)		—			—			—			—			—			(1,030	)		(1,030	)

Balance—December 31, 2004	108,988			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			—			—

Other comprehensive losses	—			—			—			—			—			(27,391	)		—			(27,391	)

Total comprehensive income	—			—			—			—			—			—			—			136,058
Cash dividends declared	—			—			—			(95,104	)		—			—			—			(95,104	)
Effect of stock incentive plan, net	275			7			1,074			(438	)		—			—			4,707			5,350
Stock dividend	—			1,806			121,037			(123,006	)		—			—			—			(163	)
Acquisitions	7,909			2,559			180,469			—			—			—			—			183,028
Allocation of employee benefit plan shares	—			—			—			—			88			—			—			88
Fair value of stock options granted	—			—			1,175			—			—			—			—			1,175
Tax benefit from exercise of stock options	—			—			42			—			—			—			—			42
Purchase of treasury stock	(279	)		—			—			—			—			—			(6,162	)		(6,162	)

Balance—December 31, 2005	116,893		$	39,302		$	741,456		$	177,332		$	—		$	(24,036	)	$	(2,144	)	$	931,910

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)


	Common Stock					Surplus			Retained Earnings			Unallocated Common Stock Held by Employee Benefit Plan		Accumulated Other Comprehensive Income (Losses)			Treasury Stock			Total Shareholders’ Equity
	Shares Outstanding		Amount			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, 2005	116,893		$	39,302		$	741,456		$	177,332		$	—	$	(24,036	)	$	(2,144	)	$	931,910
Comprehensive income:
Net income	—			—			—			163,691			—		—			—			163,691
Other comprehensive losses, net of tax:
Net actuarial loss, net of tax benefit of $5,042	—			—			—			—			—		(7,016	)		—			—
Prior service cost, net of tax benefit of $3,469	—			—			—			—			—		(4,850	)		—			—
Net change in unrealized gains and losses on securities available for sale, net of tax benefit of $457	—			—			—			—			—		(225	)		—			—
Less reclassification adjustment for losses included in net income, net of tax of $1,983	—			—			—			—			—		3,481			—			—
Net change in unrealized gains and losses on derivatives net of tax of $214	—			—			—			—			—		310			—			—
Plus reclassification adjustment for losses included in net income, net of tax benefit of $1,010	—			—			—			—			—		1,463			—			—

Other comprehensive losses	—			—			—			—			—		(6,837	)		—			(6,837	)

Total comprehensive income	—			—			—			—			—		—			—			156,854
Cash dividends declared	—			—			—			(99,560	)		—		—			—			(99,560	)
Effect of stock incentive plan, net	332			(37	)		(2,444	)		(1,833	)		—		—			10,503			6,189
Stock dividend	—			1,947			139,829			(141,991	)		—		—			—			(215	)
Fair value of stock options granted	—			—			2,154			—			—		—			—			2,154
Tax benefit from exercise of stock options	—			—			27			—			—		—			—			27
Purchase of treasury stock	(1,868	)		—			—			—			—		—			(47,769	)		(47,769	)

Balance—December 31, 2006	115,357		$	41,212		$	881,022		$	97,639		$	—	$	(30,873	)	$	(39,410	)	$	949,590

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years ended December 31,
	2006		2005		2004
	(in thousands)
Cash flows from operating activities:
Net income	$	163,691	$	163,449	$	154,398