UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549 ----------------- FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2002 [ ] 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 (State or other Jurisdiction of incorporation or organization) 22-2477875 (I.R.S. Employer Identification No.) 1455 Valley Road, Wayne, New Jersey 07474-0558 (Address of principal executive offices) 973-305-8800 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock (no par value), of which 94,211,588 shares were outstanding as of May 8, 2002. <page> TABLE OF CONTENTS <table> <S> <C> <C> Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition (Unaudited) March 31, 2002 and December 31, 2001 3 Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2002 and 2001 4 Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2002 and 2001 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II OTHER INFORMATION Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 </table> PART I Item 1. Financial Statements VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (in thousands, except for share data) <table> <S> <C> <C> March 31, December 31, 2002 2001 Assets Cash and due from banks $ 168,309 $ 311,850 Investment securities held to maturity, fair value of $476,558 and $476,872 in 2002 and 2001, respectively 504,317 503,061 Investment securities available for sale 2,255,904 2,171,695 Loans 5,295,019 5,275,582 Loans held for sale 42,340 56,225 Total loans 5,337,359 5,331,807 Less: Allowance for loan losses (64,223) (63,803) Net loans 5,273,136 5,268,004 Premises and equipment, net 97,613 94,178 Accrued interest receivable 44,788 42,184 Bank owned life insurance 153,536 102,120 Other assets 83,056 90,673 Total assets $ 8,580,659 $8,583,765 Liabilities Deposits: Non-interest bearing $ 1,378,315 $1,446,021 Interest bearing: Savings 2,635,143 2,448,335 Time 2,396,097 2,412,618 Total deposits 6,409,555 6,306,974 Short-term borrowings 279,855 304,262 Long-term debt 923,707 975,728 Accrued expenses and other liabilities 112,462 118,426 Total liabilities 7,725,579 7,705,390 Company-obligated mandatorily redeemable preferred capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company 200,000 200,000 Shareholders' Equity Preferred stock, no par value, authorized 30,000,000 shares; none issued -- -- Common stock, no par value, authorized 142,442,139 shares; issued 97,733,045 shares in 2002 and 97,753,698 shares in 2001 33,306 33,310 Surplus 406,408 406,608 Retained earnings 286,797 270,730 Unallocated common stock held by employee benefit plan (561) (602) Accumulated other comprehensive income 18,759 19,638 744,709 729,684 Treasury stock, at cost ( 3,548,483 shares in 2002 and 2,169,121 shares in 2001) (89,629) (51,309) Total shareholders' equity 655,080 678,375 Total liabilities and shareholders' equity $8,580,659 $ 8,583,765 See accompanying notes to consolidated financial statements. </table> VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except for share data) <table> <S> <C> <C> Three Months Ended March 31, 2002 2001 Interest Income Interest and fees on loans $ 90,886 $ 104,333 Interest and dividends on investment securities: Taxable 33,431 34,649 Tax-exempt 2,505 2,619 Dividends 699 962 Interest on federal funds sold and other short-term investments 637 1,639 Total interest income 128,158 144,202 Interest Expense Interest on deposits: Savings deposits 8,088 13,805 Time deposits 18,566 33,849 Interest on short-term borrowings 827 5,761 Interest on long-term debt 12,898 9,762 Total interest expense 40,379 63,177 Net Interest Income 87,779 81,025 Provision for loan losses 3,705 2,100 Net Interest Income after Provision for Loan Losses 84,074 78,925 Non-Interest Income Trust and investment services 1,178 1,211 Service charges on deposit accounts 4,885 4,548 Gains on securities transactions, net 355 163 Fees from loan servicing 2,498 2,685 Credit card fee income 672 997 Gain on sales of loans, net 1,780 5,638 Bank owned life insurance 1,416 -- Other 5,260 3,442 Total non-interest income 18,044 18,684 Non-Interest Expense Salary expense 21,081 19,448 Employee benefit expense 4,845 4,859 FDIC insurance premiums 276 291 Occupancy and equipment expense 6,877 7,838 Credit card expense 307 626 Amortization of intangible assets 2,189 1,818 Advertising 1,436 795 Distribution on capital securities 3,932 -- Merger-related charges -- 9,017 Other 8,362 7,264 Total non-interest expense 49,305 51,956 Income Before Income Taxes 52,813 45,653 Income tax expense 14,213 17,090 Net Income $ 38,600 $ 28,563 Earnings Per Share: Basic $ 0.41 $ 0.29 Diluted 0.40 0.29 Weighted Average Number of Shares Outstanding: Basic 94,870,244 97,419,000 Diluted 95,541,484 98,304,614 </table> See accompanying notes to consolidated financial statements. <Page> VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) <table> <S> <C> <C> Three Months Ended March 31, 2002 2001 Cash flows from operating activities: Net income $38,600 $28,563 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,380 4,433 Amortization of compensation costs pursuant to long-term stock incentive plan 652 488 Provision for loan losses 3,705 2,100 Net amortization of premiums and accretion of discounts 2,811 1,078 Net gains on securities transactions (163) (355) Proceeds from sales of loans 68,837 90,189 Gain on sales of loans (1,780) (5,638) Origination of loans held for sale (53,172) (63,519) Income on bank owned life insurance (1,416) -- Net decrease in accrued interest receivable and other assets 4,059 16,902 Net decrease in accrued expenses and other liabilities (5,339) (1,243) Net cash provided by operating activities 60,982 73,190 Cash flows from investing activities: Purchases and originations of loan servicing rights (1,101) (2,843) Purchase of bank owned life insurance (50,000) -- Proceeds from sales of investment securities available for sale 249,599 55,346 Proceeds from maturing investment securities available for sale 228,972 128,357 Purchases of investment securities available for sale (566,767) (380,753) Purchases of investment securities held to maturity (9,402) (4,035) Proceeds from maturing investment securities held to maturity 7,913 24,752 Net increase in federal funds sold and other short term investments -- (57,000) Net (increase) decrease in loans made to customers (22,722) 52,124 Purchases of premises and equipment, net of sales (5,569) (1,971) Net cash used in investing activities (169,077) (186,023) Cash flows from financing activities: Net increase (decrease) in deposits 102,581 (24,278) Net decrease in short-term borrowings (24,407) (123,544) Advances of long-term debt -- 320,000 Repayments of long-term debt (52,021) (92,020) Dividends paid to common shareholders (20,077) (15,593) Purchase of common shares to treasury (43,457) -- Common stock issued, net of cancellations 1,935 644 Net cash (used in) provided by financing activities (35,446) 65,209 Net decrease in cash and cash equivalents (143,541) (47,624) Cash and cash equivalents at January 1 311,850 239,105 Cash and cash equivalents at March 31 $168,309 $191,481 Supplemental disclosure of cash flow information: Cash paid during the period for interest on deposits and borrowings $ 42,463 $ 59,754 Cash paid during the period for federal and state income taxes 543 -- Transfer of securities from held to maturity to available for sale -- 162,433 Transfer of securities from available for sale to held to maturity -- 50,044 </table> See accompanying notes to consolidated financial statements. VALLEY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Consolidated Financial Statements The Consolidated Statements of Financial Condition as of March 31, 2002 and December 31, 2001, the Consolidated Statements of Income for the three month periods ended March 31, 2002 and 2001 and the Consolidated Statements of Cash Flows for the three month periods ended March 31, 2002 and 2001 have been prepared by Valley National Bancorp ("Valley") without audit. In the opinion of management, all adjustments (which included only normal recurring adjustments) necessary to present fairly Valley's financial position, results of operations and cash flows at March 31, 2002 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements are to be read in conjunction with the consolidated financial statements and notes thereto included in Valley's December 31, 2001 report on Form 10-K. Certain prior period amounts have been reclassified to conform to 2002 financial presentations. 2. Earnings Per Share Earnings per share ("EPS") amounts and weighted average shares outstanding has been restated to reflect the 5 for 4 stock split declared April 10, 2002 to shareholders of record on May 3, 2002 and to be issued May 17, 2002. For Valley, the numerator of both the Basic and Diluted EPS is equivalent to net income. The weighted average number of shares outstanding used in the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect of potentially dilutive common stock equivalents utilizing the treasury stock method. For Valley, common stock equivalents are common stock options outstanding. The following table shows the calculation of both Basic and Diluted earnings per share for the three months ended March 31, 2002 and 2001: <table> <S> <C> <C> Three Months Ended March 31, 2002 2001 Net income (in thousands) $ 38,600 $ 28,563 Basic weighted-average number of shares outstanding 94,870,244 97,419,000 Plus: Common stock equivalents 671,240 885,614 Diluted weighted-average number of shares outstanding 95,541,484 98,304,614 Earnings per share: Basic $ 0.41 $ 0.29 Diluted 0.40 0.29 </table> At March 31, 2002 and 2001, there were 2 thousand and 134 thousand common stock options, respectively, not included as common stock equivalents because the exercise prices exceeded the average market prices during the quarters. 3. Comprehensive Income Valley's comprehensive income consists of foreign currency translation adjustments and unrealized gains (losses) on available for sale securities. The following table shows the related tax effects on each component of comprehensive income for the three months ended March 31, 2002 and 2001. <table> <S> <C> <C> Three Months Ended March 31, 2002 2001 (in thousands) Net income $28,563 $38,600 Other comprehensive income, net of tax: Foreign currency translation adjustments (8) (345) Unrealized (losses) gains on securities: Unrealized holding (losses) gains arising during period ($647) $ 15,206 Less: reclassification adjustment for gains realized in net income (224) (104) Net unrealized (losses) gains (871) 15,102 Other comprehensive (loss) income (879) 14,757 Comprehensive income $37,721 $ 43,320 </table> <page> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Concerning Forward-Looking Statements This Form 10-Q, both in the MD & A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities, taxation, technology and market conditions. These statements may be identified by an (*) or such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to: the direction of interest rates; loan prepayment assumptions; cash flows; deposit growth; the direction of the economy in New Jersey and New York especially as it has been affected by recent developments; continued availability of and effective utilization of tax strategies and effective tax rates; continued levels of loan quality and origination volume; continued relationships with major customers including sources for loans; as well as the effects of general economic conditions and legal and regulatory barriers and structure. Actual results may differ materially from such forward-looking statements. Valley assumes no obligation for updating any such forward-looking statement at any time. Earnings Summary1 Net income for the three months ended March 31, 2002 was $38.6 million or $0.40 per diluted share. These results compare with net income of $28.6 million, or $0.29 per diluted share for the same period in 2001. Annualized return on average shareholders' equity increased to 23.19 percent from 17.19 percent, and the annualized return on average assets also increased to 1.84 percent from 1.46 percent, for the three months ended March 31, 2002 and 2001, respectively. The increase in net income for the three month period ended March 31, 2002 can be attributed mainly to an increase in net interest income and a reduction in income tax expense resulting from the restructure of an existing subsidiary into a REIT. In the same period of 2001, net income included a one-time merger expense associated with the merger with Merchants New York Bancorp, Inc. and the gain on the sale of the ShopRite credit card portfolio. Core earnings were $35.7 million, or $0.37 per diluted share for the three months ended March 31, 2002 and $32.6 million or $0.33 per diluted share the same period in 2001. Core earnings produced an annualized return on average shareholders' equity of 21.46 percent for the period ended March 31, 2002 compared to 19.63 percent in the same period in 2001 and annualized return on average assets of 1.70 percent for the period ended March 31, 2002 compared to 1.67 percent for the same period in 2001. Core earnings for 2002 excludes: a reduction in income tax expense of approximately $3.5 million or $0.03 per diluted share, which was recorded during the first quarter of 2002 resulting from the restructure of an existing subsidiary into a REIT; the one-time net non-recurring expense items of $630 thousand, net of tax, for the write-off of certain prepaid costs related to the termination of the State Farm Automobile Loan Program; a net gain of $480 thousand from the settlement of a law suit and fees for establishment of the REIT. Core earnings for the first quarter of 2001 exclude a net after tax merger related charge of $7.0 million, or $0.07 per diluted share, recorded in conjunction with the January 2001 merger with Merchants New York Bancorp, Inc. It also excludes the after tax gain of $2.9 million on the sale of the ShopRite credit card portfolio. <page> The following table summarizes the significant non-recurring items, net of tax, included in core earnings: <table> <S> <C> <C> Three Months Ended March 31, 2002 2001 (in thousands) Net income, GAAP $ 38,600 $ 28,563 Non-recurring items, net of tax: Income tax expense reduction (3,500) -- One-time non-recurring expense items, net 630 -- Merger related charge -- 7,000 Gain on sale of credit card portfolio -- (2,940) Core Earnings $ 35,730 $32,623 </table> Net Interest Income Net interest income continues to be the largest source of Valley's operating income. Net interest income on a tax equivalent basis increased to $89.2 million for the three months ended March 31, 2002, as compared with $82.6 million for the three months ended March 31, 2001. The increase in net interest income is primarily due to the higher average balances of total interest earning assets, primarily loans and taxable investments, partially offset by lower average interest rates for the period ended March 31, 2002, as compared to the same period in 2001. Average interest bearing liabilities increased while total interest expense decreased, due to a continuing decline in rates for the period ended March 31, 2002, compared to the same period in 2001. The net interest margin for the three months ended March 31, 2002 and 2001 was 4.49 percent and 4.40 percent, respectively. Beginning January 2001 and throughout the year 2001, the Federal Reserve decreased interest rates eleven times amounting to 475 basis points. As the prime rate declined, Valley was able to reduce liability costs contributing to an increase in its net interest margin and net interest income. There can be no assurances how future changes in interest rates will affect net interest income. Average interest earning assets increased $453.5 million or 6.0 percent for the period ended March 31, 2002 over the same period in 2001. This was mainly the result of the increases in average balances of loans of $204.3 million or 4.0 percent and taxable investments of $211.7 million or 10.3 percent. Average interest bearing liabilities for the period ended March 31, 2002 increased $205.7 million or 3.5 percent from the same period in 2001. Average savings deposits increased $249.4 million or 10.9 percent and average long-term debt, consisting primarily of FHLB advances, increased $293.5 million, or 44.3 percent. Average time deposits decreased $106.9 million or 4.3 percent and average short-term borrowings decreased $230.2 million or 54.0 percent. During 2001, in conjunction with declining interest rates, Valley extended the maturities on its short-term borrowings by converting to longer term Federal Home Loan Bank advances. The extension of maturities is part of an effort to more closely match a portion of Valley's funding sources with its loan and investments portfolio and reduce future interest rate risk.* <page> The following table reflects the components of net interest income for each of the three months ended March 31, 2002 and 2001. ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS <table> <S> <C> <C> <C> <C> <C> <C> Three Months Ended March 31, 2002 Three Months Ended March 31, 2001 Average Average Average Average Balance Interest Rate Balance Interest Rate Assets ($ in thousands) Interest earning assets Loans (1)(2) $5,320,959 $90,959 6.84% $ 5,116,640 $104,463 8.17% Taxable investments (3) 2,261,095 34,130 6.04 2,049,425 35,610 6.95 Tax-exempt investments(1)(3) 221,839 3,854 6.95 218,199 4,031 7.39 Federal funds sold and other short-term investments 149,920 637 1.70 116,038 1,639 5.65 Total interest earning assets 7,953,813 129,580 6.52 7,500,302 145,743 7.77 Allowance for loan losses (65,774) (63,398) Cash and due from banks 185,464 187,222 Other assets 302,688 197,662 Unrealized gain (loss) on securities available for sale 31,169 7,446 Total assets $8,407,360 $7,829,234 Liabilities and Shareholders' Equity Interest bearing liabilities Savings deposits $2,546,034 $ 8,088 1.27% $2,296,661 $13,805 2.40% Time deposits 2,393,362 18,566 3.10 2,500,286 33,849 5.42 Total interest bearing deposits 4,939,396 26,654 2.16 4,796,947 47,654 3.97 Short-term borrowings 195,713 827 1.69 425,911 5,761 5.41 Long-term debt 956,034 12,898 5.40 662,556 9,762 5.89 Total interest bearing liabilities 6,091,143 40,379 2.65 5,885,414 63,177 4.29 Demand deposits 1,410,534 1,251,264 Other liabilities 39,761 27,805 Capital securities 200,000 -- Shareholders' equity 664,751 665,922 Total liabilities and shareholders' equity $8,407,360 $ 7,829,234 Net interest income (tax equivalent basis) 89,201 82,566 Tax equivalent adjustment (1,422) (1,541) Net interest income $ 87,779 $81,025 Net interest rate differential 3.87% 3.48% Net interest margin (4) 4.49% 4.40% </table> (1 ) Interest income is presented on a tax equivalent basis using a 35 percent tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Net interest income on a tax equivalent basis as a percentage of total average interest earning assets. <page> The following table demonstrates the relative impact on net interest income of changes in volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by Valley on such assets and liabilities. CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS <table> <S> <C> <C> <C> Three Months Ended March 31, 2002 Compared with 2001 Increase (Decrease) (2) Interest Volume Rate (in thousands) Interest income: Loans (1) $(13,503) $ 4,038 $ (17,541) Taxable investments (1,481) 3,465 (4,946) Tax-exempt investments(1) (177) 66 (243) Federal funds sold and other short-term investments 380 (1,382) (1,002) (16,163) 7,949 (24,112) Interest expense: Savings deposits (5,717) 1,367 (7,084) Time deposits (15,283) (1,391) (13,892) Short-term borrowings (4,934) (2,171) (2,763) Long-term debt 3,136 4,018 (882) (22,798) 1,823 (24,621) Net interest income (tax equivalent basis) $ 6,635 $ 6,126 $ 509 </table> (1) Interest income is adjusted to a tax equivalent basis using a 35 percent tax rate. (2) Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category. Non-interest Income The following table presents the components of non-interest income for the three months ended March 31, 2002 and 2001. NON-INTEREST INCOME <table> <S> <C> <C> Three Months Ended March 31, 2002 2001 (in thousands) Trust and investment services $ 1,178 $ 1,211 Service charges on deposit accounts 4,885 4,548 Gains on securities transactions, net 355 163 Fees from loan servicing 2,498 2,685 Credit card fee income 672 997 Gains on sales of loans, net 1,780 5,638 Bank owned life insurance 1,416 -- Other 5,260 3,442 Total non-interest income $ 18,044 $18,684 </table> Non-interest income continues to represent a considerable source of income for Valley. For the first quarter of 2002 non-interest income was $18.0 million compared to $18.7 million for the first quarter of 2001. The first quarter of 2002 includes a gain of $800 thousand from the settlement of a lawsuit included in other non-interest income, while the first quarter of 2001 includes a gain of $4.9 million from the sale of the ShopRite credit card portfolio. Service charges on deposit accounts increased $337 thousand or 7.4 percent from $4.5 million for the three months ended March 31, 2001 to $4.9 million for the same period in 2002, due to increases in service fees charged. Gains on the sales of loans were $1.8 million for the three months ended March 31, 2002 compared with $5.6 for the three months ended March 31, 2001, a decrease of $3.9 million. The decrease was the result of the January 2001 sale of the ShopRite credit card portfolio, which generated a $4.9 million gain. This was partially offset by increases in the gain recorded on both residential mortgages and SBA loans resulting from an increase in the volume of loans sold and changes in interest rates. During the quarter ended March 31, 2002, Valley invested an additional $50.0 million in Bank Owned Life Insurance ("BOLI") to help offset the rising cost of employee benefits. This was in addition to the $100.0 million invested during the third quarter of 2001. The investment portfolio was reduced by a like amount and the income of $1.4 million from the BOLI is included in non-interest income for the three months ended March 31, 2002. Non-interest Expense The following table presents the components of non-interest expense for the and three months ended March 31, 2002 and 2001. NON-INTEREST EXPENSE <table> <S> <C> <C> Three Months Ended March 31, 2002 2001 (in thousands) Salary expense $ 21,081 $ 19,448 Employee benefit expense 4,845 4,859 FDIC insurance premiums 276 291 Occupancy and equipment expense 6,877 7,838 Credit card expense 307 626 Amortization of intangible assets 2,189 1,818 Advertising 1,436 795 Distribution on capital securities 3,932 -- Merger-related charges -- 9,017 Other 8,362 7,264 Total non-interest expense $49,305 $51,956 </table> Non-interest expense for the three months ended March 31, 2002 decreased by 5.1 percent to $49.3 million compared to $52.0 million for the three months ended March 31, 2001. The efficiency ratio measures a bank's gross operating expense as a percentage of fully-taxable equivalent net interest income and other non-interest income without taking into account security gains and losses and other non-recurring items. Valley's efficiency ratio for the three months ended March 31, 2002 was 45.43 percent, one of the lowest in the industry, compared with an efficiency ratio of 44.64 percent for the same period in 2001. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders. The largest components of non-interest expense are salaries and employee benefit expense, which totaled $25.9 million for the three months ended March 31, 2002 compared with $24.3 million for the same period in 2001. Salaries and employee benefit expenses increased $1.6 million or 6.7 percent, for the three months ended March 31, 2002. This increase was primarily due to business expansion including new branches and commercial leasing activities. At March 31, 2002, full-time equivalent staff was 2,101 compared with 2,063 at March 31, 2001. Occupancy and equipment expense decreased $961 thousand, or 12.3 percent to $6.9 million from $7.8 million for the three months ended March 31, 2002 and 2001, respectively. The decrease can be attributed to lower maintenance, repairs, utility costs and depreciation expense, partially offset by an increase in real estate tax expense. Credit card expense decreased $319 thousand or 51.0 percent to $307 thousand, for the three months ended March 31, 2002 compared with $626 thousand for the three months ended March 31, 2001. The decrease was the result of the sale of the credit card loans from the ShopRite credit card portfolio in January 2001. Amortization of intangible assets increased to $2.2 million for the three months ended March 31, 2002, an increase of $371 thousand or 20.4 percent compared to $1.8 million for the same period in 2001. The majority of the increase can be attributed to the reserve for impairment on residential mortgage servicing rights, recorded as a result of the high volume of prepayments on high interest rate mortgages. An impairment analysis is completed quarterly to determine the adequacy of the mortgage servicing asset impairment reserve. The increase was offset by the elimination of goodwill amortization effective January 1, 2002. Under the new accounting rules, annual amortization of goodwill ceased. Instead, Valley will periodically review the goodwill asset for impairment, and record an impairment reserve for any decline in value. Distributions on capital securities consist primarily of amounts required to be paid or accrued on the $200 million of 7.75 percent trust preferred securities issued in November of 2001. The cost for the three months ended March 31, 2002 was $3.9 million. During the first quarter of 2001, Valley recorded merger-related charges of $9.0 million related to the acquisition of Merchants. On an after tax basis, these charges totaled $7.0 million or $0.07 per diluted share. These charges include only identified direct and incremental costs associated with this acquisition. Items included in these charges include the following: personnel expenses which include severance payments for terminated directors at Merchants; professional fees which include investment banking, accounting and legal fees; and other expenses which include the disposal of data processing equipment and the write-off of supplies and other assets not considered useful in the operation of the combined entities. The major components of the merger-related charge, consisting of professional fees, personnel and the disposal of data processing equipment, totaled $4.4 million, $3.2 million and $486 thousand, respectively. Of the total merger-related charge $6.1 million or 67.1 percent was paid through March 31, 2002. It is expected that the remaining liability will be paid based on existing contractual arrangements.* The significant components of other non-interest expense include data processing, professional fees, postage, telephone and stationery expense which totaled approximately $4.4 million and $3.4 million for the three months ended March 31, 2002 and 2001, respectively. Income Taxes Income tax expense as a percentage of pre-tax income was 26.9 percent and 37.4 percent for the three months ended March 31, 2002 and 2001, respectively. The decrease in the effective rate was based upon a reduction in income tax expense as a result of the restructuring of an existing subsidiary into a REIT and non-taxable income from the $154 million investment in BOLI. The effective tax rate is expected to continue at this level or lower for the remainder of 2002.* Beginning in 2003, there is expected to be a significantly lesser amount of recurring annual benefits from the restructuring.* Business Segments VNB has four business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, investment portfolio and corporate and other adjustments. Lines of business and actual structure of operations determine each segment. Each is reviewed routinely for its asset growth, contribution to pretax net income and return on assets. Expenses related to the branch network, all other components of retail banking, along with the back office departments of the bank are allocated from the corporate and other adjustments segment to each of the other three business segments through an internal expense transfer. The financial reporting for each segment contains allocations and reporting in line with VNB's operations, which may not necessarily be compared to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. The following table represents the financial data for the three months ended March 31, 2002 and 2001. <table> <S> <C> <C> <C> <C> <C> Three Months Ended March 31, 2002 (in thousands) Corporate Consumer Commercial Investment and Other Lending Lending Portfolio Adjustments Total Average interest-earning assets $ 2,662,319 $ 2,694,740 $ 2,596,754 $ -- $ 7,953,813 Income (loss) before income taxes $ 20,132 $ 19,098 $ 16,761 $ (3,178) $ 52,813 Return on average interest-earning assets (pre-tax) 3.02% 2.83% 2.58% --% 2.66% Three Months Ended March 31, 2001 (in thousands) Corporate Consumer Commercial Investment and Other Lending Lending Portfolio Adjustments Total Average interest-earning assets $ 2,728,858 $ 2,423,831 $ 2,347,613 $ -- $7,500,302 Income (loss) before income taxes $ 17,494 $ 20,748 $ 13,988 $ (6,577) $ 45,653 Return on average interest-earning assets (pre-tax) 2.56% 3.42% 2.38% --% 2.43% </table> Consumer Lending The consumer lending segment had a return on average interest earning assets before taxes of 3.02 percent for the three months ended March 31, 2002 compared with 2.56 percent for the three months ended March 31, 2001. Average interest earning assets decreased $66.5 million, attributable primarily to the decreases in automobile lending and credit card portfolio. Average interest rates on consumer loans decreased by 74 basis points and the cost of funds decreased by 134 basis points. Income before income taxes increased $2.6 million to $20.1 million primarily as a result of the increased net interest margin. Commercial Lending The return on average interest earning assets before taxes decreased 59 basis points to 2.83 percent for the three months ended March 31, 2002. Average interest earning assets increased $270.9 million as a result of an increased volume of loans. Interest rates on commercial loans decreased by 179 basis points as substantial amount of loans are adjusted based upon the movement of the prime rate, and the cost of funds decreased by 134 basis points. Income before income taxes decreased by $1.7 million as a result of increases in operating expenses and larger allocation of the internal expense transfer resulting from increased average volume. Investment Portfolio The return on average interest earning assets before taxes increased to 2.58 percent for the three months ended March 31, 2002 compared with 2.38 percent for the three months ended March 31, 2001. The yield on interest earning assets decreased by 124 basis points to 5.76 percent as a result of larger prepayments and lower yields on new investments, and the cost of funds decreased 134 basis points. Average interest earning assets increased by $249.1 million and income before income taxes increased $2.8 million as a result of higher outstanding average earning assets and the decrease in the cost of funds in excess of the decrease in interest yield. Corporate Segment The corporate segment represents income and expense items not directly attributable to a specific segment which may include non-recurring items such as; merger-related charges, non-recurring gains on sales of loans and service charges on deposit accounts. The loss before taxes for the corporate segment was $3.2 million for the three months ended March 31, 2002 consisting primarily of the $3.9 million distribution on capital securities, compared with a loss of $6.6 million for the three months ended March 31, 2001, consisting primarily of the pre-tax merger-related charges of $9.0 million. ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity Valley's success is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of Valley's net interest income to the movement in interest rates. Valley does not currently use derivatives to manage market and interest rate risks. Valley's interest rate risk management is the responsibility of the Asset/Liability Management Committee ("ALCO"), which reports to the Board of Directors. ALCO establishes policies that monitor and coordinate Valley's sources, uses and pricing of funds as well as interest earning asset pricing and volume. 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 repricing characteristics of rate sensitive assets and liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rates of certain assets and liabilities. There was no material change in the results of the model at March 31, 2002 as compared to December 31, 2001. Liquidity Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost. On the asset side, liquid funds are maintained in the form of cash and due from banks, federal funds sold, investments securities held to maturity maturing within one year, securities available for sale and loans held for sale. Liquid assets amounted to $2.5 billion at both March 31, 2002 and December 31, 2001. This represents 30.5 percent and 31.7 percent of earning assets, and 28.8 percent 29.6 percent of total assets at March 31, 2002 and December 31, 2001, respectively. On the liability side, the primary source of funds available to meet liquidity needs is Valley's core deposit base, which generally excludes certificates of deposit over $100 thousand. Core deposits averaged approximately $5.3 billion for three months ended March 31, 2002 and $5.1 billion for the year ended December 31, 2001, representing 66.2 percent and 66.8 percent, respectively of average earning assets. Short-term and long-term borrowings through federal funds lines, repurchase agreements, Federal Home Loan Bank ("FHLB") advances, lines of credit and large dollar certificates of deposit, generally those over $100 thousand, are used as supplemental funding sources. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. For the three months ended March 31, 2002 there were $249.6 million of proceeds from the sales of investment securities available for sale, and proceeds of $229.0 million were generated from investment maturities. Purchases of investment securities for the three months ended March 31, 2002 were $576.2 million. Short-term borrowings and certificates of deposit over $100 thousand amounted to $1.3 billion on average, for the periods ended March 31, 2002 and December 31, 2001. Cash requirements for Valley's parent company consist primarily of dividends to shareholders and payments of interest for trust preferred securities. This cash need is routinely satisfied by dividends collected from its subsidiary bank along with cash and investments owned. Projected cash flows from this source are expected to be adequate to pay dividends, given the current capital levels and current profitable operations of its subsidiary.* In addition, Valley repurchased shares of its outstanding common stock. The cash required for these purchases of shares has been met by using its own funds, dividends received from its subsidiary bank as well as borrowed funds. and the proceeds from the issuance of $200 million trust preferred securities. At March 31, 2002 Valley maintained a floating rate line of credit with a third party in the amount of $35 million, of which none was drawn. This line is available for general corporate purposes and expires June 14, 2002. Borrowings under this facility are collateralized by equity securities of no less than 120 percent of the loan balance. As of March 31, 2002, Valley had $2.3 billion of securities available for sale recorded at their fair value, compared with $2.2 billion at December 31, 2001. As of March 31, 2002, the investment securities available for sale had an unrealized gain of $19.9 million, net of deferred taxes, compared to $20.8 million, net of deferred taxes, at December 31, 2001. These securities are not considered trading account securities, which may be sold on a continuous basis, but rather are securities which may be sold to meet the various liquidity and interest rate requirements of Valley. <page> Loan Portfolio Total loans remained at $5.3 billion for the period ended March 31, 2002 as compared to December 31, 2001. The following table reflects the composition of the loan portfolio as of March 31, 2002 and December 31, 2001. <table> <S> <C> <C> LOAN PORTFOLIO March 31, December 31, 2002 2001 (in thousands) Commercial $ 1,070,531 $ 1,080,852 Total 1,070,531 1,080,852 commercial loans Construction 206,789 204,028 Residential 1,323,877 mortgage 1,317,346 Commercial 1,365,344 mortgage 1,391,889 Total 2,896,010 mortgage loans 2,913,263 Home equity 398,102 415,576 Credit card 12,740 11,431 Automobile 842,247 825,444 Other consumer 101,856 101,114 Total 1,354,945 consumer loans 1,353,565 Total loans $5,331,807 $5,337,359 As a percent of total loans: Commercial 20.0 % 20.3 % loans Mortgage loans 54.6 54.3 Consumer loans 25.4 25.4 Total % 100.0 % 100.0 </table> Commercial mortgage loans increased by $26.5 million and home equity loans increased by $17.5 million over the year-end December 31, 2001 balances, offset by decreases in commercial, residential mortgage and automobile loans. Residential mortgage loans declined slightly as prepayments, due to lower interest rates, exceeded new loans. Additionally, newly originated residential mortgage loans with low long-term fixed rates are being sold into the secondary market which will also limit and may reduce the residential mortgage portfolio.* The decrease in automobile loans can be attributed to the termination of the State Farm Program, and decreased lending as manufacturers offered very competitive financing,. Valley has increased its automobile lending through other sources including originations through the American Automobile Association, increased dealer activity and other insurance companies. On March 15, 2002, Valley entered into an agreement to sell its subsidiary, a Canadian finance company, VNB Financial Services, to State Farm Mutual Automobile Insurance Company for a purchase price equal to Valley's equity in the subsidiary plus a premium of approximately $2.7 million. The subsidiary primarily originates fixed rate auto loans in Canada through a marketing program with State Farm. On May 1, 2002, Valley completed the sale of this subsidiary with assets of $25.7 million, which included the loan portfolio of $24.1 million, and short-term debt of $18.3 million. Valley anticipates reporting a pretax profit of approximately $2.7 million in the second quarter of 2002 on this transaction.* Non-performing Assets Non-performing assets include non-accrual loans and other real estate owned ("OREO"). Loans are generally placed on a non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO is reported at the lower of cost or fair value at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter. Non-performing assets totaled $15.1 million at March 31, 2002, compared with $18.8 million at December 31, 2001, a decrease of $3.7 million. Non-performing assets at March 31, 2002 and December 31, 2001, amounted to 0.28 percent and 0.35 percent of loans and OREO, respectively. Loans 90 days or more past due and not included in the non-performing category totaled $9.0 million at March 31, 2002, compared with $10.5 million at December 31, 2001. These loans are primarily residential mortgage loans, commercial mortgage loans and commercial loans which are generally well-secured and in the process of collection. Also included are matured commercial mortgage loans in the process of being renewed, which totaled $2.9 million at March 31, 2002 and $3.8 million at December 31, 2001, respectively. Total loans past due in excess of 30 days were 1.05 percent of all loans at March 31, 2002 compared to 1.30 percent at December 31, 2001. The following table sets forth non-performing assets and accruing loans which were 90 days or more past due as to principal or interest payments on the dates indicated, in conjunction with asset quality ratios for Valley. LOAN QUALITY <table> <S> <C> <C> March 31, December 31, 2002 2001 (in thousands) Loans past due in excess of 90 days and still accruing $ 8,992 $10,456 Non-accrual loans $ 15,089 $18,483 Other real estate owned -- 329 Total non-performing assets $ 15,089 $18,812 Troubled debt restructured loans $ 879 $ 891 Non-accrual loans as a % of loans 0.28% 0.35% Non-performing assets as a % of loans plus other real estate owned 0.28% 0.35% Allowance as a % of loans 1.20% 1.20% </table> At March 31, 2002 the allowance for loan losses amounted to $64.2 million, compared with $63.8 million at December 31, 2001. The allowance is adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $3.3 million and $1.5 million for the three months ended March 31, 2002 and 2001, respectively. The allowance for loan losses is maintained at a level estimated to absorb loan losses inherent in the loan portfolio.* The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. VNB's methodology for evaluating the appropriateness of the allowance consists of several significant elements, which include the allocated allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. The allowance also incorporates the results of measuring impaired loans as required for in Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Historically Valley has made provisions based on net charge-off levels. In the current economic environment Valley has increased the provision to provide adequate levels in the allowance for loan losses. The provisions charged to operations for the three months ended March 31, 2002 were $3.7 million and $2.1 million for the same period in 2001. Capital Adequacy A significant measure of the strength of a financial institution is its shareholders' equity. At March 31, 2002, shareholders' equity totaled $655.1 million or 7.6 percent of total assets, compared with $678.4 million or 7.9 percent at year-end 2001. On April 10, 2002, Valley's Board of Directors declared a five for four stock split to shareholders of record on May 3, 2002, to be issued May 17, 2002. The Board also approved an increase of the annual dividend rate to $0.90 per share, compared to $0.85 per share, on an after split basis. The cash dividend will be payable quarterly beginning on July 1, 2002. On August 21, 2001 Valley's Board of Directors authorized the repurchase of up to 10,000,000 shares of the Company's outstanding common stock. Purchases may be made from time to time in the open market or in privately negotiated transactions generally not exceeding prevailing market prices. Reacquired shares are held in treasury and are expected to be used for general corporate purposes. As of March 31, 2002 Valley had repurchased 4,350,930 shares of its common stock. Included in shareholders' equity as components of accumulated other comprehensive income at March 31, 2002 were $19.9 million unrealized gain on investment securities available for sale, net of tax, and a translation adjustment loss of $1.1 million related to the Canadian subsidiary of VNB, as compared with an unrealized gain of $20.7 million and a $1.1 million translation adjustment loss at December 31, 2001. Risk-based guidelines define a two-tier capital framework. Tier I capital consists of common shareholders' equity and trust preferred securities, less disallowed intangibles and adjusted to exclude unrealized gains and losses, net of tax. Total risk-based capital consists of Tier I capital and the allowance for loan losses up to 1.25 percent of risk-adjusted assets. Risk-adjusted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. In November 2001, Valley sold $200.0 million of trust preferred securities, which qualify as Tier I capital, within regulatory limitations. Including these securities, at March 31, 2002, Valley's capital position under risk-based capital guidelines was $826.1 million, or 13.4 percent of risk-weighted assets, for Tier 1 capital and $890.3 million, or 14.5 percent for Total risk-based capital. The comparable ratios at December 31, 2001 were 14.1 percent for Tier 1 capital and 15.2 percent for Total risk-based capital. At March 31, 2002 and December 31, 2001, Valley was in compliance with the leverage requirement having leverage ratios of 9.8 percent and 10.3 percent, respectively. Valley's ratios at March 31, 2002 were above the "well capitalized" requirements, which require Tier I capital to risk-adjusted assets of at least 6 percent, Total risk-based capital to risk-adjusted assets of 10 percent and a minimum leverage ratio of 5 percent. Book value per share amounted to $6.96 at March 31, 2002 compared with $7.10 per share at December 31, 2001. The primary source of capital growth is through retention of earnings. Valley's rate of earnings retention, derived by dividing undistributed earnings by net income, was 46.7 percent for the three months ended March 31, 2002, compared with 45.4 percent for the three months ended March 31, 2001. Cash dividends declared amounted to $0.21 per share, for the three months ended March 31, 2002, equivalent to a dividend payout ratio of 53.3 percent, compared with 54.6 percent for the same period in 2001. 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 cash distribution of earnings to its shareholders.* Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" (SFAS No. 142), was issued by the Financial Accounting Standards Board on June 27, 2001. SFAS No. 142 eliminates the amortization of existing goodwill and requires evaluating goodwill for impairment on an annual basis whenever circumstances occur that would reduce the fair value. SFAS No. 142 also requires allocation of goodwill to reporting segments defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 did not have a material impact on the financial statements and related disclosures. Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", (SFAS No. 144), was issued by the Financial Accounting Standards Board on October 3, 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that Statement. The Statement is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk See page 15 for a discussion of interest rate sensitivity. <page> PART II Item 5. Other Information a) The Board of Directors approved a five for four stock split on April 10, 2002. The new stock will be issued May 17, 2002 to shareholders of record as of May 3, 2002. Item 6. Exhibits and Reports on Form 8-K a) Exhibits (3) Articles of Incorporation and By-laws (A) Certificate of Incorporation of the Registrant restated to show all changes through May 3, 2002. b) Reports on Form 8-K (1) Filed March 18, 2002 to report the announcement that Valley had entered into an agreement to sell its subsidiary, a Canadian finance company, to State Farm Mutual Automobile Insurance Company. (2) Filed March 29, 2002 to report the correction of the Performance Graph on page 19, of Valley's 2002 Proxy Statement filed on March 6, 2002. (3) Filed April 11, 2002 to report the announcement of the five for four stock split and increase in annual cash dividend declared by Valley's Board of Directors on April 10, 2002. (4) Filed April 23, 2002 to report the change in Valley's Certifying Accountants. (5) Filed April 29, 2002 (8-K/A) to amend Valley's Form 8-K filed on April 23, 2002. To clarify the reason for which the former accountant is no longer engaged by Valley and to renumber the Exhibit, which contains the letter from our former accountant. <page> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VALLEY NATIONAL BANCORP (Registrant) Date: May 13, 2002 /s/ Alan D. Eskow ALAN D. ESKOW EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Principal Financial Officer) Date: May 13, 2002 /s/ Christine K. Mozer-Baldyga CHRISTINE K. MOZER-BALDYGA FIRST VICE PRESIDENT AND CONTROLLER (Principal Accounting Officer) <page> EXHIBIT (3) A RESTATED CERTIFICATE OF INCORPORATION OF VALLEY NATIONAL BANCORP The Board of Directors of Valley National Bancorp pursuant to the provisions of Section 14A:95-5(2) has adopted this Restated Certificate of Incorporation to restate and integrate in a single certificate the provisions of its certificate of incorporation as heretofore amended. Valley National Bancorp does hereby certify as follows: ARTICLE I CORPORATE NAME The name of the Corporation is Valley National Bancorp (hereinafter the "Corporation"). ARTICLE II CURRENT REGISTERED OFFICE AND CURRENT REGISTERED AGENT The address of the Corporation's current registered office is 1455 Valley Road, Wayne, New Jersey. The name of the current registered agent at that address is Gerald H. Lipkin. ARTICLE III NUMBER OF DIRECTORS The number of directors shall be governed by the by-laws of the Corporation. ARTICLE IV CORPORATE PURPOSE The purpose for which the Corporation is organized is to engage in any activities for which corporations may be organized under the New Jersey Business Corporation Act, subject to any restrictions which may be imposed from time to time by the laws of the United States or the State of New Jersey with regard to the activities of a bank holding company. ARTICLE V CAPITAL STOCK (A) The total authorized capital stock of the Corporation shall be 172,442,138 shares, consisting of 142,442,138 shares of Common Stock and 30,000,000 shares of Preferred Stock which may be issued in one or more classes or series. The shares of Common Stock shall constitute a single class and shall be without nominal or par value. The shares of Preferred Stock of each class or series shall be without nominal or par value, except that the amendment authorizing the initial issuance of any class or series, adopted by the Board of Directors as provided herein, may provide that shares of any class or series shall have a specified par value per share, in which event all of the shares of such class or series shall have the par value per share so specified. (B) The Board of Directors of the Corporation is expressly authorized from time to time to adopt and to cause to be executed and filed without further approval of the shareholders amendments to this Certificate of Incorporation authorizing the issuance of one or more classes or series of Preferred Stock for such consideration as the Board of Directors may fix. In an amendment authorizing any class or series of Preferred Stock, the Board of Directors is expressly authorized to determine: (a) The distinctive designation of the class or series and the number of shares which will constitute the class or series, which number may be increased or decreased (but not below the number of shares then outstanding in that class or above the total shares authorized herein) from time to time by action of the Board of Directors; (b) The dividend rate on the shares of the class or series, whether dividends will be cumulative, and, if so, from what date or dates; (c) The price or prices at which, and the terms and conditions on which, the shares of the class or series may be redeemed at the option of the Corporation; (d) Whether or not the shares of the class or series will be entitled to the benefit of a retirement or sinking fund to be applied to the purchase or redemption of such shares and, if so entitled, the amount of such fund and the terms and provisions relative to the operation thereof; (e) Whether or not the shares of the class or series will be convertible into, or exchangeable for, any other shares of stock of the Corporation or other securities, and if so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and any adjustments thereof, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (f) The rights of the shares of the class or series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (g) Whether or not the shares of the class or series will have priority over, parity with, or be junior to the shares of any other class or series in any respect, whether or not the shares of the class or series will be entitled to the benefit of limitations restricting the issuance of shares of any other class or series having priority over or on parity with the shares of such class or series and whether or not the shares of the class or series are entitled to restrictions on the payment of dividends on, the making of other distributions in respect of, and the purchase or redemption of shares of any other class or series of Preferred Stock or Common Stock ranking junior to the shares of the class or series; (h) Whether the class or series will have voting rights, in addition to any voting rights provided by law, and if so, the terms of such voting rights; and (i) Any other preferences, qualifications, privileges, options and other relative or special rights and limitations of that class or series. ARTICLE VI INDEMNIFICATION The Corporation shall indemnify its officers, directors, employees and agents and former officers, directors, employees and agents, and any other persons serving at the request of the Corporation as an officer, director, employee or agent of another corporation, association, partnership, joint venture, trust, or other enterprise, against expenses (including attorney's fees, judgments, fines, and amounts paid in settlement) incurred in connection with any pending or threatened action, suit, or proceeding, whether civil, criminal, administrative or investigative, with respect to which such officer, director, employee, agent or other person is a party, or is threatened to be made a party, to the full extent permitted by the New Jersey Business Corporation Act. The indemnification provided herein shall not be deemed exclusive of any other right to which any person seeking indemnification may be entitled under any by-law, agreement, or vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity, and shall inure to the benefit of the heirs, executors, and the administrators of any such person. The Corporation shall have the power to purchase and maintain insurance on behalf of any persons enumerated above against any liability asserted against him and incurred by him in any such capacity, arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provision of this Article. ARTICLE VII LIMITATION OF LIABILITY A director or officer of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for breach of any duty owed to the Corporation or its shareholders, except that such provision shall not relieve a director or officer from liability for any breach of duty based upon an act or omission (i) in breach of such person's duty of loyalty to the Corporation or its shareholders, (ii) not in good faith or involving a knowing violation of law, or (iii) resulting in receipt by such person of an improper personal benefit. If the New Jersey Business Corporation Act is amended after approval by the shareholders of this provision to authorize corporate action further eliminating or limiting the personal liability of directors or officers, then the liability of a director and/or officer of the Corporation shall be eliminated or limited to the fullest extent permitted by the New Jersey Business Corporation Act as so amended. Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation or otherwise shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. IN WITNESS WHEREOF, Gerald H. Lipkin, Chairman, President and Chief Executive Officer of the Valley National Bancorp, has executed this Restated Certificate of Incorporation on behalf of Valley National Bancorp, as restated. /s/ GERALD H. LIPKIN Gerald H. Lipkin, Chairman President & Chief Executive Officer