-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UP420NoVYZmoo+AaysTSJci452gK/yUvSWX4PrK5U2LvyFO6zTVmly7NKuUb931A NcWD2DkT8sg2yIvZIyZM8A== 0000950110-99-000282.txt : 19990305 0000950110-99-000282.hdr.sgml : 19990305 ACCESSION NUMBER: 0000950110-99-000282 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALLEY NATIONAL BANCORP CENTRAL INDEX KEY: 0000714310 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222477875 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11277 FILM NUMBER: 99556723 BUSINESS ADDRESS: STREET 1: 1455 VALLEY RD CITY: WAYNE STATE: NJ ZIP: 07470 BUSINESS PHONE: 9733053380 MAIL ADDRESS: STREET 1: 1455 VALLEY RD CITY: WAYNE STATE: NJ ZIP: 07470 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K ---------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] 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 0-11179 ---------- VALLEY NATIONAL BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW JERSEY 22-2477875 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 1455 VALLEY ROAD WAYNE, NEW JERSEY 07474 - --------------------------------------- ---------- (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: ----------------------------------------------------------- NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Title of each class Name of each exchange on which registered - -------------------------- ----------------------------------------- COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $1.4 billion on December 31, 1998. There were 55,277,593 shares of Common Stock outstanding at February 1, 1999. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's Definitive Proxy Statement (the "1999 Proxy Statement") for the 1999 Annual Meeting of shareholders to be held April 7, 1999 will be incorporated by reference in Part III. ================================================================================ TABLE OF CONTENTS Page ---- PART I Item 1. Business ....................................................... 3 Item 2. Properties ..................................................... 6 Item 3. Legal Proceedings .............................................. 7 Item 4. Submission of Matters to a Vote of Security Holders ............ 7 Item 4A. Executive Officers of the Registrant ........................... 7 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ........................................... 8 Item 6. Selected Financial Data ........................................ 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 10 Item 8. Financial Statements and Supplementary Data: Valley National Bancorp and Subsidiaries: Consolidated Statements of Income ............................ 30 Consolidated Statements of Financial Condition ............... 31 Consolidated Statements of Changes in Shareholders' Equity ... 32 Consolidated Statements of Cash Flows ........................ 33 Notes to Consolidated Financial Statements ................... 34 Independent Auditors' Report ................................. 57 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................... 58 PART III Item 10. Directors and Executive Officers of the Registrant ............. 58 Item 11. Executive Compensation ......................................... 58 Item 12. Security Ownership of Certain Beneficial Owners and Management ................................................ 58 Item 13. Certain Relationships and Related Transactions ................. 58 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................................... 58 Signatures .............................................................. 61 2 PART I ITEM 1. BUSINESS Valley National Bancorp ("Valley") is a New Jersey corporation incorporated as a bank holding company under the Bank Holding Company Act of 1956, as amended ("Holding Company Act"). At December 31, 1998, Valley had consolidated total assets of $5.5 billion, total deposits of $4.7 billion, and total shareholders' equity of $555.8 million. Its principal subsidiary is Valley National Bank ("VNB"). VNB is a national banking association chartered in 1927 under the laws of the United States. VNB provides a full range of commercial and retail banking services through 105 branch offices located in northern New Jersey. These services include the following: the acceptance of demand, savings and time deposits; extension of consumer, real estate, Small Business Administration ("SBA") and other commercial credits; and full personal and corporate trust services, as well as pension and fiduciary services. VNB has several wholly-owned subsidiaries which include a mortgage servicing company, an investment company which holds, maintains and manages investment assets for VNB, a subsidiary which owns and services auto loans and an Edge Act Corporation which is the holding company for a wholly-owned finance company located in Toronto, Canada. The mortgage servicing company services loans for others as well as VNB. Early in 1999, VNB completed the liquidation of its subsidiary which owned and managed residential mortgage loans, and the remaining assets were transferred as a final dividend to VNB. RECENT DEVELOPMENTS On December 17, 1998 Valley signed a definitive merger agreement with Ramapo Financial Corporation ("Ramapo"), parent of The Ramapo Bank, an 8 branch bank headquartered in Wayne, New Jersey. At December 31, 1998 Ramapo had total assets of $337.8 million and deposits of $295.5 million. The transaction is expected to close in the second quarter of 1999 and will be accounted for using the pooling of interests method of accounting. There were approximately 8.1 million shares of Ramapo common stock outstanding at December 31, 1998. The merger agreement provides that 0.425 shares of Valley common stock will be exchanged for each share of Ramapo common stock. On October 16, 1998, Valley consummated its previously announced merger with Wayne Bancorp, Inc. ("Wayne"), parent of Wayne Savings Bank, F.S.B. ("Wayne Savings"), headquartered in Wayne, New Jersey. At the date of acquisition, Wayne had total assets of $272.0 million and deposits of $206.0 million, with 6 branch offices. The transaction was accounted for using the pooling of interests method of accounting and resulted in the issuance of approximately 2.4 million shares of Valley common stock. Each share of common stock of Wayne was exchanged for 1.1 shares of Valley common stock. All financial information in this Form 10-K has been restated for prior years to include Wayne with the exception of share data for the years 1996 and prior which have not been restated for the acquisition of Wayne as the issuance of capital stock in connection with the conversion from the mutual to stock form of Wayne Savings occurred on June 27, 1996. COMPETITION The market for banking and bank-related services is highly competitive. Valley and its subsidiary 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, and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressure. Competition is expected to intensify as a consequence of interstate banking laws now in effect or that may be in effect in the future. Valley and its subsidiary compete by offering quality products and convenient services at competitive prices. In order to maintain and enhance its competitive position, Valley regularly reviews its products, locations and various acquisition prospects and periodically engages in discussions regarding such possible acquisitions. EMPLOYEES At December 31, 1998, VNB and its subsidiaries employed 1,752 full-time equivalent persons. Management considers relations with 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 3 discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the bank. It is intended only to briefly summarize some material provisions. BANK HOLDING COMPANY REGULATION Valley is a bank holding company within the meaning of the Holding Company Act. As a bank holding company, Valley is supervised by the Board of Governors of the Federal Reserve System ("FRB") and is required to file reports with the FRB and provide such additional information as the FRB may require. The Holding Company Act prohibits Valley, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking "as to be a proper incident thereto." The Holding Company Act requires prior approval by the FRB of the acquisition by Valley of more than five percent of the voting stock of any additional bank. Satisfactory capital ratios and Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. Acquisitions through Valley National Bank require approval of the Comptroller of the Currency of the United States ("OCC"). Statewide branching is permitted in New Jersey. The Holding Company Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act") enabled 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 authorized banks to merge across state lines, thereby creating interstate branches. Under such 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 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. Proposals to change the laws and regulations governing the banking 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. 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 such subsidiary bank in circumstances in which it might not do so absent such policy. REGULATION OF BANK SUBSIDIARY VNB is subject to the supervision of, and to regular examination by, the OCC. Various laws and the regulations thereunder applicable to Valley and its bank subsidiary impose restrictions and requirements in many areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of loans and investments, consumer protection, employment practices and entry into new types of business. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, 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) or take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions. DIVIDEND LIMITATIONS Valley is a legal entity separate and distinct from its subsidiaries. Valley's revenues (on a parent company only basis) result in substantial part from dividends paid to Valley by VNB. Payment of dividends to Valley by its 4 subsidiary bank, without prior regulatory approval, is subject to regulatory limitations. Under the National Bank Act, dividends may be declared only if, after payment thereof, capital would be unimpaired and remaining surplus would equal 100 percent of capital. Moreover, a national bank may declare, in any one year, dividends only in an amount aggregating not more than the sum of its net profits for such year and its retained net profits for the preceding two years. Under this limitation, VNB could declare dividends in 1999 to Valley without prior approval of the OCC of up to $46.5 million plus an amount equal to VNB's net profits for 1999 to the date of such dividend declaration. In addition, the bank regulatory agencies have the authority to prohibit a bank subsidiary from paying dividends or otherwise supplying funds to Valley if the supervising agency determines that such payment would constitute an unsafe or unsound banking practice. LOANS TO RELATED PARTIES VNB's authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of the National Bank Act and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital. In addition, extensions of credit in excess of certain limits must be approved by the bank's board of directors. COMMUNITY REINVESTMENT Under the Community Reinvestment Act ("CRA"), as implemented by OCC regulations, a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a national bank, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. VNB received a "Satisfactory" CRA rating in its most recent examination. RESTRICTIONS ON ACTIVITIES OUTSIDE THE UNITED STATES Valley's activities in Canada are conducted through VNB and in the United States are subject to Section 25 and 25A of the Federal Reserve Act, certain regulations under the National Bank Act and, primarily, Regulation K promulgated by the FRB. Under these provisions, VNB may invest no more than 10% of its capital in foreign banking operations. In addition to investments, VNB may extend credit or guarantee loans for these entities and such loans or guarantees are generally not subject to the loans to one person limitation, although they are subject to prudent banking limitations. The foreign banking operations of VNB are subject to supervision by the FRB, as well as the OCC. In Canada, VNB's activities also are subject to the laws and regulations of Canada and to regulation by Canadian banking authorities. Regulation K generally restricts activities by United States banks outside of the United States to activities that are permitted for banks within the United States. As a consequence, activities by VNB through its subsidiaries outside of the United States would generally be limited to banking and activities closely related to banking with certain significant exceptions. FIRREA Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the 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. 5 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 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. In addition, pursuant to 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. The OCC's regulations implementing these provisions of FDICIA provide that an institution will be classified as "well capitalized" if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, and (iv) meets certain other requirements. An institution will be classified as "adequately capitalized" if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0 percent, (iii) has Tier 1 leverage ratio of (a) at least 4.0 percent or (b) at least 3.0 percent if the institution was rated 1 in its most recent examination, and (iv) does not meet the definition of "well capitalized." An institution will be classified as "undercapitalized" if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1 leverage ratio of (a) less than 4.0 percent or (b) less than 3.0 percent if the institution was rated 1 in its most recent examination. An institution will be classified as "significantly undercapitalized" if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as "critically undercapitalized" if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination. 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. BIF PREMIUMS AND RECAPITALIZATION OF SAIF VNB is a member of the Bank Insurance Fund ("BIF") of the FDIC. The FDIC also maintains another insurance fund, the Savings Association Insurance Fund ("SAIF"), which primarily covers savings and loan association deposits but also covers deposits that are acquired by a BIF-insured institution from a savings and loan association ("Oakar deposits"). VNB had approximately $1.4 billion of deposits at December 31, 1998, with respect to which VNB pays SAIF insurance premiums. The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act") signed into law on September 30, 1996, included the Deposit Insurance Funds Act of 1996 (the "Funds Act") under which the FDIC was required to impose a special assessment on SAIF-assessable deposits to recapitalize the SAIF. Under the Funds Act, the FDIC also will charge assessments for SAIF and BIF deposits in a 5 to 1 ratio to pay Financing Corp. ("FICO") bonds until January 1, 2000, at which time the assessment will be equal. A FICO rate of approximately 1.29 basis points will be charged on BIF deposits, and approximately 6.44 basis points will be charged on SAIF deposits. Oaker deposits will be treated as SAIF deposits for purposes of the FICO bond assessment. After the 1996 Act, SAIF deposit assessments were lowered to the BIF assessment level, except for the FICO bond assessment. The 1996 Act instituted a number of other regulatory relief provisions. ITEM 2. PROPERTIES VNB's corporate headquarters consist of three office buildings located adjacent to each other in Wayne, New Jersey. These headquarters encompass commercial, mortgage and consumer lending, the operations and data 6 processing center, and the executive offices of both Valley and VNB. Two of the three buildings are owned by VNB, the other building is leased. VNB provides banking services at 105 locations of which 45 locations are owned and 60 locations are leased. ITEM 3. LEGAL PROCEEDINGS There were no material pending legal proceedings to which Valley or any of its direct or indirect subsidiaries were a party, or to which their property was subject, other than ordinary routine litigations incidental to business and which had no material effect on the presentation of the financial statements contained in this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Age at Officer Names December 31, 1998 Since Office ----- ----------------- ------- ------ Gerald H. Lipkin .......... 57 1975 Chairman of the Board, President and Chief Executive Officer of Valley and VNB Peter Southway ............ 64 1965 Vice Chairman of Valley and VNB Peter Crocitto ............ 41 1991 Executive Vice President of Valley and VNB Robert M. Meyer ........... 52 1997 Executive Vice President of Valley and VNB Peter John Southway ....... 38 1989 Executive Vice President of Valley and VNB Alan D. Eskow ............. 50 1993 Corporate Secretary, Senior Vice President and Controller of Valley and VNB Albert L. Engel ........... 50 1998 First Senior Vice President of VNB Robert J. Farnon .......... 60 1998 First Senior Vice President of VNB Robert E. Farrell ......... 52 1990 First Senior Vice President of VNB Richard P. Garber ......... 55 1992 First Senior Vice President of VNB Alan D. Lipsky ............ 54 1994 First Senior Vice President of VNB Robert Mulligan ........... 51 1991 First Senior Vice President of VNB John H. Prol .............. 61 1992 First Senior Vice President of VNB Jack M. Blackin ........... 56 1993 Senior Vice President of Valley and VNB
All officers serve at the pleasure of the Board of Directors. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Valley's common stock trades on the New York Stock Exchange ("NYSE") under the symbol VLY. The following table sets forth for each quarter period indicated the high and low sales prices for the common stock of Valley, as reported by the NYSE, and the dividends paid per share for each quarter. The amounts shown in the table below have been adjusted for all stock dividends.
Year 1998 Year 1997 ---------------------------------- --------------------------------- High Low Dividend High Low Dividend -------- --------- -------- --------- --------- -------- First Quarter ........... $34 $28-13/64 $0.22 $21-15/64 $19-21/64 $0.19 Second Quarter .......... 34-3/32 28-13/16 0.25 22-1/2 20-3/16 0.22 Third Quarter ........... 36 25-3/4 0.25 25-13/32 21-21/32 0.22 Fourth Quarter .......... 30 23-3/4 0.25 32-19/64 24-19/64 0.22
Federal laws and regulations contain restrictions on the ability of Valley and VNB to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, "Business--Dividend Limitations" and Part II, Item 8, "Financial Statements and Supplementary Data--Note 15 of the Notes to Consolidated Financial Statements". There were 7,454 registered shareholders of record as of December 31, 1998. 8 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with Valley's Consolidated Financial Statements and the accompanying notes presented elsewhere herein.
Years Ended December 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (in thousands, except per share data) SUMMARY OF OPERATIONS: Interest income (taxable equivalent) .......... $ 394,420 $ 393,362 $ 376,295 $ 367,019 $ 338,801 Interest expense .............................. 160,104 165,885 162,791 160,276 130,002 ----------- ----------- ----------- ----------- ----------- Net interest income (taxable equivalent) ...... 234,316 227,477 213,504 206,743 208,799 Less: tax equivalent adjustment ............... 4,764 6,278 7,669 8,535 8,885 ----------- ----------- ----------- ----------- ----------- Net interest income .......................... 229,552 221,199 205,835 198,208 199,914 Provision for possible loan losses ............ 12,370 12,650 3,556 3,321 6,300 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for possible loan losses .................... 217,182 208,549 202,279 194,887 193,614 Gains on securities transactions, net ......... 1,418 2,150 781 1,109 6,219 Non-interest income ........................... 41,655 40,862 29,455 23,612 21,447 Non-interest expense .......................... 134,757 129,218 124,532 109,674 109,513 ----------- ----------- ----------- ----------- ----------- Income before income taxes .................... 125,498 122,343 107,983 109,934 111,767 Income tax expense ............................ 28,150 35,397 36,479 42,030 41,804 ----------- ----------- ----------- ----------- ----------- Net income ................................ $ 97,348 $ 86,946 $ 71,504 $ 67,904 $ 69,963 =========== =========== =========== =========== =========== PER COMMON SHARE (1)(2): Earnings per share: Basic ........................................ $ 1.77 $ 1.58 $ 1.33 $ 1.24 $ 1.27 Diluted ...................................... 1.75 1.57 1.33 1.24 1.26 Dividends ..................................... 0.97 0.85 0.76 0.72 0.69 Book value .................................... 10.06 9.23 8.16 7.94 7.05 Weighted average shares outstanding: Basic ........................................ 54,987,473 54,906,154 53,074,424 54,051,473 53,651,151 Diluted ...................................... 55,607,255 55,294,894 53,459,884 54,202,909 54,289,690 RATIOS: Return on average assets ...................... 1.82% 1.63% 1.37% 1.34% 1.42% Return on average shareholders' equity ........ 18.47 17.93 15.74 15.99 17.96 Average shareholders' equity to average assets ............................... 9.86 9.07 8.71 8.40 7.91 Dividend payout ............................... 53.47 52.16 53.92 55.43 50.11 Risk-based capital: Tier 1 capital ............................... 13.29 13.34 12.60 14.12 13.96 Total capital ................................ 14.51 14.44 13.88 15.32 15.21 Leverage capital .............................. 10.12 9.34 8.51 8.40 8.23 FINANCIAL CONDITION AT YEAR-END: Assets ........................................ $ 5,541,207 $ 5,360,698 $ 5,359,628 $ 5,217,900 $ 4,996,980 Loans, net of allowance ....................... 3,927,982 3,754,892 3,570,651 3,119,837 2,902,003 Deposits ...................................... 4,674,689 4,602,321 4,746,012 4,645,955 4,409,250 Shareholders' equity .......................... 555,787 509,303 467,295 449,737 395,154
- ---------- (1) All per share amounts have been restated to reflect the 5 for 4 stock split issued May 18, 1998, and all prior stock dividends. (2) Share and earnings per share data for the years 1996 and prior have not been restated for the acquisition of Wayne Bancorp, Inc. as the issuance of capital stock in connection with the conversion from the mutual to stock form of Wayne Savings Bank occurred on June 27, 1996. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this analysis is to provide the reader with information relevant to understanding and assessing Valley's results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis the reader is encouraged to review the consolidated financial statements and statistical data presented in this document. CAUTIONARY STATEMENT CONCERNING FORWARD- LOOKING STATEMENTS This Form 10-K, both in the MD & A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities, technology and market conditions. These statements may be identified by an "asterisk" (*) or such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to, the direction of interest rates, continued levels of loan quality and origination volume, continued relationships with major customers including sources for loans, successful completion of the implementation of Year 2000 technology changes, as well as the effects of economic conditions and legal and regulatory barriers and structure. Actual results may differ materially from such forward-looking statements. Valley assumes no obligation for updating any such forward-looking statement at any time. RECENT DEVELOPMENTS On December 17, 1998 Valley signed a definitive merger agreement with Ramapo Financial Corporation ("Ramapo"), parent of The Ramapo Bank, an 8 branch bank headquartered in Wayne, New Jersey. At December 31, 1998, Ramapo had total assets of $337.8 million and deposits of $295.5 million. The transaction is expected to close in the second quarter of 1999 and will be accounted for using the pooling of interests method of accounting. There were approximately 8.1 million shares of Ramapo common stock outstanding at December 31, 1998. The merger agreement provides that 0.425 shares of Valley common stock will be exchanged for each share of Ramapo common stock. On October 16, 1998, Valley consummated its previously announced merger with Wayne Bancorp, Inc. ("Wayne"), parent of Wayne Savings Bank, F.S.B. ("Wayne Savings"), headquartered in Wayne, New Jersey. At the date of acquisition, Wayne had total assets of $272.0 million and deposits of $206.0 million, with 6 branch offices located in Bergen, Essex and Passaic County, New Jersey. The transaction was accounted for using the pooling of interests method of accounting and resulted in the issuance of approximately 2.4 million shares of Valley common stock. Each share of common stock of Wayne was exchanged for 1.1 shares of Valley common stock. EARNINGS SUMMARY Net income was $97.3 million, or $1.75 diluted earnings per share, in 1998 compared with $86.9 million, or $1.57 diluted earnings per share, in 1997 (all financial information has been restated for the Wayne acquisition and per share amounts have been restated to give effect to a 5 for 4 stock split issued in May 1998). Return on average assets increased in 1998 to 1.82% from 1.63% in 1997, while the return on average equity also increased to 18.47% in 1998 from 17.93% in 1997. The increase in net income for the year ended December 31, 1998, can be primarily attributed to an increase in net interest income of $8.4 million and a reduction in income tax expense, offset by merger-related charges of $3.2 million, net of tax, recorded in connection with the Wayne merger. NET INTEREST INCOME Net interest income is the largest source of Valley's operating income. Net interest income on a tax equivalent basis increased to $234.3 million for 1998 as compared to $227.5 million for 1997. The increase in net interest income is due to a widening spread between the yield earned on interest-earning assets and funding costs, a modest increase in interest earning assets and the movement of earning assets out of the investment portfolio and into higher yielding loans. The net interest margin increased to 4.60% for 1998 compared to 4.49% for 1997. Average interest earning assets increased $27.6 million in 1998, or 0.5% over the 1997 amount. This increase was mainly the result of increased volume of automobile loans and commercial mortgage loans. Average loans 10 increased by $192.5 million or 5.3% over the 1997 amount. Interest income on loans for 1998 increased by $13.1 million over 1997 primarily as a result of an increase in average loans. Offsetting this increase was a decline of $207.2 million in average investment securities or 15.4% from the amount in the portfolio during 1997. Valley purchased approximately $111.8 million of trust preferred investment securities, funded by borrowings from the Federal Home Loan Bank, during the latter part of the fourth quarter of 1998, as part of a leveraging strategy to increase interest earning assets and net interest income. There was minimal effect on average interest earning assets and net interest income for 1998, but the strategy is expected to impact the financial results for 1999. This strategy is expected to expand in 1999 as Valley continues to leverage its strong capital position to grow its balance sheet in a strategy expected to also increase its net income and earnings per share.* Average interest-bearing liabilities for 1998 declined $80.1 million from 1997. Average demand deposits continued to grow and increased by $51.5 million or 7.2% over 1997 balances. Average savings deposits decreased by $13.1 million or 0.7%, and average time deposits, mostly rate sensitive municipal deposits, decreased by $129.0 million or 6.1%. Average other borrowings increased $54.5 million for 1998 in comparison to 1997 as Valley increased its borrowings from the Federal Home Loan Bank. The following table reflects the components of net interest income for each of the three years ended December 31, 1998, 1997 and 1996. 11 ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST EARNINGS ON A TAX EQUIVALENT BASIS
1998 1997 1996 --------------------------------- --------------------------------- --------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------- -------- ------- ---------- -------- ------- ---------- -------- ---- (in thousands) ASSETS Interest earning assets Loans (1)(2) .............. $3,844,174 $317,020 8.25% $3,651,648 $303,888 8.32% $3,334,825 $277,543 8.32% Taxable investments (3) ... 963,450 58,951 6.12 1,113,204 69,633 6.26 1,213,657 74,967 6.18 Tax-exempt investments(1)(3) ........ 173,740 12,131 6.98 231,191 15,917 6.88 288,522 19,626 6.80 Federal funds sold and other short-term investments .............. 116,993 6,318 5.40 74,725 3,924 5.25 78,934 4,159 5.27 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest earning assets ................... 5,098,357 $394,420 7.74 5,070,768 $393,362 7.76 4,915,938 $376,295 7.65 -------- ---- -------- ---- -------- ---- Allowance for possible loan losses .............. (49,539) (47,285) (47,600) Cash and due from banks .................... 132,687 151,979 170,019 Other assets .............. 157,709 170,462 181,712 Unrealized gain (loss) on securities available for sale ................. 7,777 (290) (4,732) ---------- ---------- ---------- Total assets .............. $5,346,991 $5,345,634 $5,215,337 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities Savings deposits .......... $1,850,646 $ 43,372 2.34% $1,863,764 $ 44,529 2.39% $1,887,878 $ 45,143 2.39% Time deposits ............. 1,976,293 105,395 5.33 2,105,307 113,582 5.40 2,095,152 112,795 5.38 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest bearing deposits ................. 3,826,939 148,767 3.89 3,969,071 158,111 3.98 3,983,030 157,938 3.97 Federal funds purchased and other short-term borrowings ............... 53,629 2,531 4.72 46,090 2,303 5.00 38,438 1,776 4.62 Other borrowings .......... 142,087 8,806 6.20 87,611 5,471 6.24 52,825 3,077 5.82 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest bearing liabilities .............. 4,022,655 160,104 3.98 4,102,772 165,885 4.04 4,074,293 162,791 4.00 -------- ---- -------- ---- -------- ---- Demand deposits ........... 763,559 712,090 640,399 Other liabilities ......... 33,692 45,844 46,281 Shareholders' equity ...... 527,085 484,928 454,364 ---------- ---------- ---------- Total liabilities and shareholders' equity ..... $5,346,991 $5,345,634 $5,215,337 ========== ========== ========== Net interest income (tax equivalent basis) ... 234,316 227,477 213,504 Tax equivalent adjustment . (4,764) (6,278) (7,669) -------- -------- -------- Net interest income ....... $229,552 $221,199 $205,835 ======== ======== ======== Net interest rate differential ............. 3.76% 3.72% 3.65% ---- ---- ---- Net interest margin (4) ... 4.60% 4.49% 4.34% ==== ==== ==== - ---------------- (1) Interest income is presented on a tax equivalent basis using a 35% 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 earning assets.
12 The following table demonstrates the relative impact on net interest income of changes in volume of earning assets and interest bearing liabilities and changes in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS 1998 Compared to 1997 1997 Compared to 1996 Increase(decrease)(2) Increase(decrease)(2) -------------------------------------- ---------------------------------- Interest Volume Rate Interest Volume Rate -------- -------- -------- -------- ------- ----- (in thousands) Interest income: Loans (1) ............................. $13,132 $15,898 $(2,766) $26,345 $26,177 $ 168 Taxable investments ................... (10,682) (9,192) (1,490) (5,334) (6,095) 761 Tax-exempt investments(1) ............. (3,786) (4,008) 222 (3,709) (3,944) 235 Federal funds sold and other short-term investments ......... 2,394 2,280 114 (235) (204) (31) ------- ------- ------- ------- ------- ------ 1,058 4,978 (3,920) 17,067 15,934 1,133 ------- ------- ------- ------- ------- ------ Interest expense: Savings deposits ...................... (1,157) (312) (845) (614) (587) (27) Time deposits ......................... (8,187) (6,893) (1,294) 787 574 213 Federal funds purchased and other short-term borrowings .......... 228 361 (133) 527 374 153 Other borrowings ....................... 3,335 3,377 (42) 2,394 2,207 187 ------- ------- ------- ------- ------- ------ (5,781) (3,467) (2,314) 3,094 2,568 526 ------- ------- ------- ------- ------- ------ Net interest income (tax equivalent basis) ................ $ 6,839 $ 8,445 $(1,606) $13,973 $13,366 $ 607 ======= ======= ======= ======= ======= ======
- ---------- (1) Interest income is adjusted to a tax equivalent basis using a 35% 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. 13 Non-Interest Income The following table presents the components of non-interest income for the years ended December 31, 1998, 1997 and 1996.
NON-INTEREST INCOME Years Ended December 31, ------------------------------------------ 1998 1997 1996 ------- ------- ------- (in thousands) Trust income ....................................... $ 1,375 $ 1,162 $ 1,080 Service charges on deposit accounts ................ 12,674 12,063 11,268 Gains on securities transactions, net .............. 1,418 2,150 781 Fees from loan servicing ........................... 7,382 5,576 4,835 Credit card fee income ............................. 10,153 12,643 5,549 Gains on sales of loans, net ....................... 4,863 3,634 1,839 Other .............................................. 5,208 5,784 4,884 ------- ------- ------- Total ............................................ $43,073 $43,012 $30,236 ======= ======= =======
Fees from loan servicing increased by 32.4% from $5.6 million in 1997 to $7.4 million in 1998. Included in these fees are gross servicing fees and related ancillary fees for servicing mortgage portfolios owned by VNB Mortgage Services, Inc. ("MSI"), VNB's mortgage servicing subsidiary. MSI serviced loans for other investors of $1.6 billion and $1.2 billion as of December 31, 1998 and 1997, respectively. The increase in the servicing portfolio was due to the acquisition of several portfolios totaling approximately $734.0 million, the origination of new loans by VNB and their subsequent sale with servicing retained, offset by principal paydowns and prepayments. Also included in fees from loan servicing are fees for servicing SBA loans. VNB serviced a total of $78.1 million and $69.7 million of SBA loans as of December 31, 1998 and 1997, respectively, for third-party investors. The increase in the serviced portfolio was due to the origination of new loans by VNB, which were sold to third-party investors. Credit card fee income declined by $2.5 million or 19.7%. The decrease was the result of the loss of fee income from the sale of the merchant processing operation during 1997 and the reduced volume of co-branded credit card transactions. Gains on the sales of loans were $4.9 million for 1998 compared to $3.6 million for 1997. Gains are recorded primarily from mortgage banking activity related to residential mortgage loans and the sale of SBA loans in the secondary market. The significant component of other non-interest income is safe deposit rentals. Other non-interest income decreased $576 thousand to $5.2 million for the year ended December 31, 1998 in comparison to the same period in 1997. The decrease in other non-interest income was due to a one-time gain of $1.6 million recorded on the sale of VNB's merchant credit card business during 1997. Safe deposit rental income remained relatively unchanged and totaled $952 thousand for 1998. 14 Non-Interest Expense The following table presents the components of non-interest expense for the years ended December 31, 1998, 1997 and 1996.
NON-INTEREST EXPENSE Years Ended December 31, ------------------------------------------- 1998 1997 1996 -------- -------- -------- (in thousands) Salary expense ........................... $ 51,792 $ 46,738 $ 46,201 Employee benefit expense ................. 12,327 11,596 10,813 FDIC insurance premiums .................. 1,270 1,205 10,083 Net occupancy expense .................... 12,877 11,653 11,832 Furniture and equipment expense .......... 8,338 8,036 7,665 Credit card expense ...................... 9,066 17,520 7,518 Amortization of intangible assets ........ 5,546 3,441 3,009 Merger-related charges ................... 4,539 -- -- Other .................................... 29,002 29,029 27,411 -------- -------- -------- Total .................................. $134,757 $129,218 $124,532 ======== ======== ========
Non-interest expense totaled $134.8 million for 1998, an increase of 4.3% from the 1997 level. The largest components of non-interest expense are salaries and employee benefit expense which totaled $64.1 million in 1998 compared to $58.3 million in 1997. At December 31, 1998, full-time equivalent staff was 1,752, compared to 1,699 at the end of 1997. The efficiency ratio measures a bank's gross operating expense as a percentage of fully-taxable equivalent net interest income and other non-interest income without taking into account security gains and losses and other non-recurring items. Valley's efficiency ratio for the year ended December 31, 1998 was 46.7%, one of the lowest in the industry, compared with an efficiency ratio for 1997 of 47.7%. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders. Credit card expense includes cardmember rebates, processing expenses and fraud losses. The decrease in credit card expenses is directly attributable to an amendment made to the co-branded credit card program during the fourth quarter of 1997, which reduced the amount of cardmember rebates paid by Valley. Amortization of intangible assets increased to $5.5 million in 1998 from $3.4 million in 1997, representing an increase of $2.1 million or 61.2%. The majority of this increase resulted from the amortization of loan servicing rights totaling $4.8 million during 1998, compared with $2.6 million for 1997. Declining interest rates are responsible for a large amount of prepayments on mortgage loans, resulting in an increase in amortization expense to reduce the unamortized balance of servicing rights in line with the portfolio balance and the expected future cash flows. An impairment analysis is completed quarterly to determine the adequacy of the mortgage servicing asset valuation allowance. During 1998, Valley recorded merger-related charges of $4.5 million related to the acquisition of Wayne. The major components of merger-related charges are for real estate dispositions, professional fees, personnel expenses and other expenses totaling $1.5 million, $1.4 million, $1.0 million and $600 thousand, respectively. The significant components of other non-interest expense include advertising, data processing, professional fees, postage, telephone and stationery expense which total approximately $18.0 million for 1998. Income Taxes Income tax expense as a percentage of pre-tax income was 22.4% for the year ended December 31, 1998 compared to 28.9% in 1997. The reduction in the effective tax rate since 1996 and through 1998 is attributable to a realignment of corporate entities and a lower effective tax rate for state taxes. Because of a change in federal tax law and the completion of the liquidation of its subsidiary which owned and managed residential mortgage loans, the 15 effective tax rate is expected to increase to a normal level during the fiscal year beginning January 1999 over the effective tax rate for 1998 and 1997. However, Valley is evaluating its current and future tax strategies to minimize the increase in its effective tax rate in 1999 and future periods.* Year 2000 Most computer programs have historically been written using two digits rather than four to define the applicable year. These programs were written without considering the impact of the upcoming change in the century and the programs may experience problems handling dates beyond the year 1999. This could cause computer applications to fail or to create erroneous results unless corrective measures are taken. Incomplete or untimely resolution of the Year 2000 ("Y2K") issue could have a material adverse impact on Valley's business, operations and financial condition in the future. Valley has assessed the Y2K issue as it impacts its internal Information Technology ("IT") systems (computer hardware and software systems) and its non-IT systems (facilities, equipment and vendors) and has developed its plan to address the Y2K issue. Valley operates its deposit, loan and general ledger systems on one software system licensed to Valley through a third party ("primary software vendor"). Valley received the software from its primary software vendor and began testing during September 1998 to verify the vendor's representation that the software is Y2K compliant. The testing for the deposit, loan and general ledger systems, which are the primary functions of this software, has been completed as of the end of 1998. Additional Y2K software systems have been purchased from other vendors and Valley has substantially completed testing those systems for Y2K compliance. Valley believes it has identified equipment which needs to be upgraded and is in the process of remediation.* Valley currently believes its Y2K compliance plan with respect to its internal hardware and software systems will not have a material adverse effect on Valley's financial condition or results of operations.* However, no assurance can be given that the ultimate costs to address the Y2K issue or the impact of any failure to timely achieve substantial Y2K compliance will not have a material adverse effect on Valley's financial condition or results.* Valley will utilize both internal and external sources to execute its Y2K plan. Valley's main software system is licensed through its primary software vendor for which Valley pays a normal annual licensing fee. As noted above, the vendor has represented that this software system is Y2K compliant, and Valley has substantially completed testing this system for Y2K compliance. As a result, Valley has been able to maintain a low level of expenditures to date. Since implementing the assessment of Y2K issues, Valley's costs to external sources have been approximately $130 thousand. Based on current information, Valley estimates that expenditures related to the execution of its Y2K plan will be approximately $1.0 million.* These estimates of expenditures are based on Valley's presently available information and may be updated as information becomes available. The remaining amount to be spent is for additional hardware and software systems. Valley has also communicated with its significant suppliers, vendors and borrowing customers to determine the extent to which the company is vulnerable to the failure of these third parties to remedy any Y2K issues. Valley can give no assurance that failure to address Y2K issues by third parties on whom Valley's systems, business processes or loan payments rely would not have a material adverse effect on Valley's operations or financial condition.* Valley has implemented a customer awareness program on its website, in brochures in each of its branches and in messages on customer statements to keep customers informed about Y2K as it relates to Valley. Valley has established a contingency plan for the applications critical to its operations. This plan includes trigger dates in which a contingency vendor would be contacted. The testing phase is almost complete, and Valley does not foresee converting any of these applications to a contingency vendor at this time.* Business Segments VNB has three major business segments it monitors and reports on to manage its business operations. These segments are commercial lending, consumer lending and investment management. 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 to each of the three business segments. The financial reporting for each segment contains allocations and reporting in line with VNB's operations, which may not necessarily be compared to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. For financial data on the three business segments see Part II, Item 8. "Financial Statements and Supplementary Data--Note 19 of the Notes to Consolidated Financial Statements." 16 CONSUMER LENDING SEGMENT The consumer lending segment had a return on average interest-earning assets before taxes of 2.35% for 1998 compared to 2.32% for 1997. The increase in average interest-earning assets of $116.7 million was mostly attributable to increased automobile loans, net of a reduction of $26.4 million in credit card loans during the year. Residential loans did not increase substantially as a large portion of the loans originated in 1998 were sold into the secondary market. The increase in volume offset by a decrease in interest rates caused interest income to rise between 1998 and 1997 by $7.2 million. Interest expense, allocated to segments based upon average interest-earning assets, is a function of the overall interest cost, of the bank, which declined during 1998 as compared to 1997. Non-interest income declined by $3.4 million mainly as a result of decreased fees in 1998 on the merchant processing business sold during 1997. Non-interest expense decreased by $9.6 million during 1998 largely as a result of an amendment to the cobranded credit card program during 1997 which reduced cardmember rebates paid by Valley. The increase in the internal transfer expense is proportionate to the increase in volume and portfolio size. COMMERCIAL LENDING SEGMENT The return on average interest-earning assets before taxes for the commercial lending segment declined 24 basis points to 3.80%. Average interest-earning assets increased by $78.3 million during 1998 as a result of increased volume of loans and lower interest rates. Interest rates on these assets declined, largely due to changes in the average lending rate, from 8.88% in 1997 to 8.68% in 1998. Net interest income increased by $3.8 million or 5.0% from 1997 to 1998. During 1998 the provision for loan losses increased to $1.7 million, non-interest income remained unchanged and non-interest expense increased by $1.0 million or 11.6% resulting from higher staffing levels and increased other expenses. INVESTMENT MANAGEMENT SEGMENT The return on average interest-earning assets before taxes for the investment segment decreased from 2.13% in 1997 to 1.92% in 1998. The decline in average investments was the result of the investment of proceeds from maturing investments into higher yielding loans during most of 1998. During the latter portion of the fourth quarter of 1998 approximately $111.8 million of trust preferred securities were added to the portfolio as part of a leveraging strategy to increase net interest income and earnings per share for 1999 and future years.* CORPORATE SEGMENT The corporate segment represents assets and income and expense items not directly attributable to a specific segment. The decline in net interest income is related to the decline in average interest-earning assets. Non-interest income, non-interest expense and the internal expense transfer represent the net allocation of income and expenses to each of the interest earning segments. These generally increased, on a net basis, between 1998 and 1997 as cost accounting now identifies various income and expense items previously included in total overhead. 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. 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 speeds of certain assets and liabilities. According to the model, over a twelve month period, an interest rate increase of 100 basis points resulted in an increase in net interest income of approximately $905.0 thousand while an interest rate decrease of 100 basis points resulted in a decrease in net interest income of approximately $2.8 million. Management cannot provide any assurance about the actual effect of changes in interest rates on Valley's net interest income. 17 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, 1998. Market risk sensitive instruments are generally defined as on-and-off balance sheet financial instruments.
INTEREST RATE SENSITIVITY ANALYSIS Total Fair Rate 1999 2000 2001 2002 2003 Thereafter Balance Value ---- ---------- --------- --------- -------- ------- ---------- ---------- ---------- (in thousands) INTEREST SENSITIVE ASSETS: Federal funds sold ............. 5.08% $ 102,000 $ -- $ -- $ -- $ -- $ -- $ 102,000 $ 102,000 Investment securities held to maturity .............. 7.45 33,300 17,722 13,628 8,492 8,400 155,868 237,410 238,421 Investment securities available for sale ............ 6.29 520,000 407,481 -- -- -- -- 927,481 927,481 Trading account securities ..... -- 1,592 -- -- -- -- -- 1,592 1,592 Loans, net of unearned income Commercial .................... 8.48 271,915 10,077 9,516 62,296 43,404 66,401 463,609 465,620 Mortgage ...................... 7.78 549,943 106,654 86,125 357,873 265,975 725,180 2,091,750 2,103,331 Consumer ...................... 8.09 210,516 268,463 191,561 379,418 250,682 121,851 1,422,491 1,448,138 ---- ---------- --------- --------- -------- -------- ---------- ---------- ---------- Total interest sensitive assets . 7.59% $1,689,266 $(810,397 $ 300,830 $808,079 $568,461 $1,069,300 $5,246,333 $5,286,583 ---- ---------- --------- --------- -------- -------- ---------- ---------- ---------- INTEREST SENSITIVE LIABILITIES: Deposits: Savings ........................ 2.19% $ 660,991 $(660,991 $(660,991 $ -- $ -- $ -- $1,982,973 $1,982,973 Time ........................... 5.23 1,446,617 290,404 35,305 39,596 23,864 1,336 1,837,122 1,847,385 Short-term borrowings ........... 3.70 53,081 -- -- -- -- -- 53,081 53,081 Other borrowings ................ 5.89 50,068 28,074 2,080 17,086 82,060 33,581 212,949 214,958 ---- ---------- --------- --------- -------- -------- ---------- ---------- ---------- Total interest sensitive liabilities .................... 3.77% $2,210,757 $(979,469 $ 698,376 $ 56,682 $105,924 $ 34,917 $4,086,125 $4,098,397 ---- ---------- --------- --------- -------- -------- ---------- ---------- ---------- Interest sensitivity gap ........ $ (521,491) $(169,072) $(397,546) $751,397 $462,537 $1,034,383 $1,160,208 $1,188,186 ---------- --------- --------- -------- -------- ---------- ---------- ---------- Ratio of interest sensitive assets to interest sensitive liabilities .......... (0.76:1) (0.83:1) (0.43:1) 14.26:1 5.37:1 30.62:1 1.28:1 1.29:1 ---------- --------- --------- -------- -------- ---------- ---------- ----------
Expected maturities are contractual maturities adjusted for prepayments of principal without taking into consideration contractual cash flows from normal payments. Valley uses certain assumptions to estimate fair values and expected maturities. For investment securities held to maturity and loans, expected maturities are based upon contractual maturity, projected repayments and prepayments of principal. The prepayment experience reflected herein is based on historical experience. Investment securities available for sale are categorized shorter than their expected maturity because they can be sold at any time to meet estimated liquidity needs. For deposit liabilities, in accordance with standard industry practice and Valley's own historical experience, "decay factors," used to estimate deposit runoff of 33% were used for savings. The actual maturities of these instruments could vary substantially if future prepayments differ from historical experience. Off-balance sheet items are not considered material. The total negative gap repricing within 1 year as of December 31, 1998 is $521.5 million, representing a ratio of interest sensitive assets to interest sensitive liabilities of (0.76:1). Management does not view this amount as presenting an unusually high risk potential, although no assurances can be given that Valley is not at risk from interest rate increases or decreases. 18 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 $1.3 billion at both December 31, 1998 and 1997. This represents 23.9% and 25.9% of earning assets, and 22.6% and 24.6% of total assets at December 31, 1998 and 1997, 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 $3.4 billion for both years ended December 31, 1998 and 1997, representing 66.8% and 67.3% of average earning assets. Short-term borrowings through Federal funds lines, Federal Home Loan Bank ("FHLB") advances and large dollar certificates of deposit, generally those over $100 thousand, are used as supplemental funding sources. During the fourth quarter of 1998, Valley borrowed $100.0 million from the FHLB as part of a leveraging strategy to increase earning assets and net interest income. This strategy is expected to expand in 1999.* As of December 31, 1998, Valley had outstanding advances of $212.5 million with the FHLB. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. In 1998 proceeds from the sales of investment securities available for sale were $93.1 million, and proceeds of $459.4 million were generated from investment maturities. Purchases of investment securities in 1998 were $462.7 million. Short term borrowings and certificates of deposit over $100 thousand amounted to $474.4 million and $603.7 million, on average, for the years ended December 31, 1998 and 1997, respectively. During 1998 a substantial amount of loan growth was funded from maturities and normal payments of the investment portfolio. Valley anticipates using funds from the investment portfolio as well as deposit inflows to fund loan growth during 1999.* The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31, 1998. These certificates of deposit are generated primarily from core deposit customers and are not brokered funds. (in thousands) Less than three months ........... $286,289 Three to six months .............. 37,980 Six to twelve months ............. 46,583 More than twelve months .......... 37,450 -------- $408,302 ======== Valley's cash requirements consist primarily of dividends to shareholders. This cash need is routinely satisfied by dividends collected from its subsidiary bank. 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. 19 Investment Securities The amortized cost of securities held to maturity at December 31, 1998, 1997 and 1996 were as follows:
INVESTMENT SECURITIES HELD TO MATURITY 1998 1997 1996 -------- -------- -------- (in thousands) U.S. Treasury securities and other government agencies and corporations .................................................. $ -- $ -- $ 25,608 Obligations of states and political subdivisions ................... 39,220 58,111 83,908 Mortgage-backed securities ......................................... 62,088 84,129 129,845 Other debt securities .............................................. 111,922 195 1,978 -------- -------- -------- Total debt securities ........................................... 213,230 142,435 241,339 FRB & FHLB stock ................................................... 24,180 24,180 18,735 -------- -------- -------- Total investment securities held to maturity .................... $237,410 $166,615 $260,074 ======== ======== ======== The fair value of securities available for sale at December 31, 1998, 1997 and 1996 were as follows: INVESTMENT SECURITIES AVAILABLE FOR SALE 1998 1997 1996 -------- -------- -------- (in thousands) U.S. Treasury securities and other government agencies and corporations .................................................. $ 84,998 $ 181,154 $ 183,634 Obligations of states and political subdivisions ................... 111,781 142,457 177,505 Mortgage-backed securities ......................................... 699,624 756,342 698,633 -------- -------- -------- Total debt securities ........................................... 896,403 1,079,953 1,059,772 Equity securities .................................................. 31,078 10,685 10,793 -------- -------- -------- Total investment securities available for sale .................. $927,481 $1,090,638 $1,070,565 ======== ========== ==========
20
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES HELD TO MATURITY AT DECEMBER 31, 1998 Obligations of Mortgage- States and Political Backed Other Debt Subdivisions Securities Securities Total (4) ------------------ ----------------- ------------------- ------------------ Amortized Yield Amortized Yield Amortized Yield Amortized Yield Cost (1) (2)(3) Cost (1) (2) Cost (1) (2) Cost (1) (2) -------- ------ --------- ----- -------- ----- -------- ----- (in thousands) 0-1 years .............. $22,429 5.54% $ 295 8.45% $ -- -- % $ 22,724 5.58% 1-5 years .............. 13,411 8.01 61,793 7.41 35 8.46 75,239 7.52 5-10 years ............. 254 7.69 -- -- 50 7.30 304 7.63 Over 10 years .......... 3,126 7.30 -- -- 111,837 7.19 114,963 7.19 ------- ---- ------- ---- -------- ---- -------- ---- Total securities ..... $39,220 6.54% $62,088 7.41% $111,922 7.19% $213,230 7.14% ======= ==== ======= ==== ======== ==== ======== ==== MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 1998 US Treasury Securities and Other Government Obligations of Mortgage- Agencies States and Political Backed and Corporations Subdivisions Securities Total (4) ------------------ ----------------- ------------------- ------------------ Amortized Yield Amortized Yield Amortized Yield Amortized Yield Cost (1) (2) Cost (1) (2)(3) Cost (1) (2) Cost (1) (2) -------- ------ --------- ------ -------- ----- --------- ----- (IN THOUSANDS) 0-1 years .............. $55,586 4.56% $ 37,364 6.79% $138,853 5.23% $231,803 5.32% 1-5 years .............. 4,000 6.10 56,599 7.93 529,185 6.13 589,784 6.30 5-10 years ............. 25,000 7.78 12,178 5.95 30,339 6.36 67,517 6.81 Over 10 years .......... -- -- 3,724 9.74 395 6.12 4,119 9.39 ------- ---- ------- ---- -------- ---- -------- ---- Total securities ..... $84,586 5.58% $109,865 7.38% $698,772 5.96% $893,223 6.10% ======= ==== ======== ==== ======== ==== ======== ====
- ---------- (1) Maturities 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%. (4) Excludes equity securities which have indefinite maturities. 21 Valley's investment portfolio is comprised of U.S. government and federal agency securities, tax-exempt issues of states and political subdivisions, mortgage-backed securities, equity and other securities. There were no securities in the name of any one issuer exceeding 10% of shareholders' equity, except for securities issued by the United States and its political subdivisions and agencies. The portfolio generates substantial cash flow. The decision to purchase or sell securities is based upon the current assessment of long and short term economic and financial conditions, including the interest rate environment and other statement of financial condition components. At December 31, 1998, Valley had $62.1 million of mortgaged-backed securities classified as held to maturity and $699.6 million of mortgage-backed securities classified as available for sale. Substantially all the mortgage-backed securities held by Valley are issued or backed by Federal agencies. The mortgage-backed securities portfolio is a source of significant liquidity to Valley through the monthly cash flow of principal and interest. Mortgage-backed securities, like all securities, are sensitive to changes in the interest rate environment, increasing and decreasing in value as interest rates fall and rise. As interest rates fall, the increase in prepayments can reduce the yield on the mortgage-backed securities portfolio, and reinvestment of the proceeds will be at lower interest rates. Included in the mortgage-backed securities portfolio at December 31, 1998 were $191.1 million of collateralized mortgage obligations ("CMO") of which $2.3 million were privately issued. CMO's had a yield of 5.67% and an unrealized gain of $549 thousand at December 31, 1998. Substantially all of the CMO portfolio was classified as available for sale. As of December 31, 1998, Valley had $927.5 million of securities available for sale compared with $1.1 billion at December 31, 1997. Those securities are recorded at their fair value on an aggregate basis. As of December 31, 1998, the investment securities available for sale had an unrealized gain of $4.9 million, net of deferred taxes, compared to an unrealized gain of $4.0 million, net of deferred taxes, at December 31, 1997. This change was primarily due to an increase in prices resulting from a decreasing interest rate environment. These securities are not considered trading account securities, which may be sold on a continuous basis, but rather are securities which may be sold to meet the various liquidity and interest rate requirements of Valley. In connection with the Wayne acquisition, Valley reassessed the classification of securities held in the Wayne portfolio and transferred $1.6 million of securities held to maturity to securities available for sale to conform with Valley's investment objectives. In 1997, in connection with the Midland acquisition, Valley reassessed the classification of securities held in the Midland portfolio and transferred $39.8 million of securities held to maturity to securities available for sale to conform with Valley's investment objectives. During the fourth quarter of 1998, Valley purchased approximately $111.8 million of trust preferred securities as part of a leveraging strategy to increase interest earning assets and net interest income. 22 Loan Portfolio As of December 31, 1998, total loans were $4.0 billion, compared to $3.8 billion at December 31, 1997, an increase of 4.6%. The following table reflects the composition of the loan portfolio for the five years endedDecember 31, 1998.
LOAN PORTFOLIO 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (in thousands) Commercial .......................... $ 463,609 $ 455,732 $ 467,224 $ 413,796 $ 363,313 ---------- ---------- ---------- ---------- ---------- Total commercial loans ............ 463,609 455,732 467,224 413,796 363,313 ---------- ---------- ---------- ---------- ---------- Construction ........................ 101,200 83,609 87,486 75,920 70,251 Residential mortgage ................ 1,036,110 1,034,066 1,038,468 1,008,208 1,015,439 Commercial mortgage ................. 954,440 866,348 794,170 707,228 649,906 ---------- ---------- ---------- ---------- ---------- Total mortgage loans .............. 2,091,750 1,984,023 1,920,124 1,791,356 1,735,596 ---------- ---------- ---------- ---------- ---------- Home equity ......................... 201,175 196,777 198,928 201,583 181,988 Credit card ......................... 107,595 145,485 149,494 22,380 23,298 Automobile .......................... 1,032,783 930,372 811,852 672,589 579,049 Other consumer ...................... 80,938 91,101 71,396 65,003 68,538 ---------- ---------- ---------- ---------- ---------- Total consumer loans .............. 1,422,491 1,363,735 1,231,670 961,555 852,873 ---------- ---------- ---------- ---------- ---------- Less: unearned income ............... -- (56) (556) (1,290) (2,331) ---------- ---------- ---------- ---------- ---------- Loans, net of unearned income ............................. $3,977,850 $3,803,434 $3,618,462 $3,165,417 $2,949,451 ========== ========== ========== ========== ========== As a percent of total loans: Commercial loans ................... 11.7% 12.0% 12.9% 13.0% 12.3% Mortgage loans ..................... 52.6 52.2 53.1 56.6 58.8 Consumer loans ..................... 35.7 35.8 34.0 30.4 28.9 ----- ----- ----- ----- ----- Total loans ....................... 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
The major portion of the increase in loans for 1998 was divided between commercial mortgage and automobile loans. It is not known if the trend of increased lending in these loan types will continue. The commercial mortgage loan portfolio has continued its steady increase. Valley targets small-to-medium size businesses within the market area of the bank for this type of lending. During 1996, Valley issued a co-branded credit card. Of the $107.6 million of credit card loans outstanding at December 31, 1998, approximately $91.2 million were the result of this co-branded credit card program. The decrease in the credit card portfolio is directly attributable to an amendment made to the co-branded credit card program during the fourth quarter of 1997, which reduced the amount of cardmember rebates paid by Valley. Automobile loans comprised 26.0% of total loans at December 31, 1998. Automobile loans increased 11.0% during 1998 as a result of increased loan demand and market penetration. Approximately 67.6% of the automobile loan portfolio and 17.6% of the total loan portfolio at December 31, 1998 represented loans originated by VNB through a program with a major insurance company. These loans are subject to Valley's underwriting criteria. During the fourth quarter of 1997, Valley began closing loans in Florida under this program. Valley began an identical program in the State of Pennsylvania in January 1998. The addition of Florida and Pennsylvania resulted in a greater than 60% increase in the number of agents under this program. This expanded Valley's over 40 year relationship with the company to 11 states from Maine to Florida, as well as Canada. VNB extended this program during the first quarter of 1996 by establishing a finance company in Toronto, Canada to make auto loans. This Canadian subsidiary had interest income of approximately $1.4 million for the year 23 ended December 31, 1998, and auto loans of $19.0 million at December 31, 1998. These loans are funded by a capital investment by VNB of $7.4 million, with additional funding requirements satisfied by lines of credit in Canadian funds. Any foreign exchange risk is limited to the capital investment by VNB. Much of Valley's lending is in northern New Jersey, with the exception of the out-of-state auto lending program. However, efforts are made to maintain a diversified portfolio as to type of borrower and loan to guard against a downward turn in any one economic sector. The following table reflects the contractual maturity distribution of the commercial and construction loan portfolios as of December 31, 1998:
1 Yr. or Less Over 1 to 5 Yrs. Over 5 Yrs. Total ------------- ---------------- ----------- -------- (in thousands) Commercial--fixed rate ................................. $ 9,034 $ 84,723 $24,028 $117,785 Commercial--adjustable rate ............................ 262,351 37,605 45,868 345,824 Real estate construction--fixed rate ................... 6,710 3,244 -- 9,954 Real estate construction--adjustable rate .............. 37,006 54,240 -- 91,246 -------- -------- ------- -------- $315,101 $179,812 $69,896 $564,809 ======== ======== ======= ========
Prior to maturity of each loan with a balloon payment and if the borrower requests an extension, Valley generally conducts a review which normally includes an analysis of the borrower's financial condition and, if applicable, a review of the adequacy of collateral. A rollover of the loan at maturity may require a principal paydown. VNB is a preferred U. S. Small Business Administration ("SBA") lender with authority to make loans without the prior approval of the SBA. VNB currently has approval to make SBA loans in New Jersey, Pennsylvania, New York, Delaware, Maryland, the District of Columbia and sections of Virginia. Between 75% and 80% of each loan is guaranteed by the SBA and may be sold into the secondary market, with the balance retained in VNB's portfolio. VNB intends to continue expanding this area of lending because it provides a solid source of fee income and loans with floating interest rates tied to the prime lending rate. During 1998, VNB originated approximately $25.8 million of SBA loans and sold $22.1 million. Stronger competition and lower conventional lending rates led to a lower volume of new loans during 1998 as compared to 1997. At December 31, 1998, $31.4 million of SBA loans were held in VNB's portfolio and VNB serviced approximately $78.1 million of SBA loans. 24 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 continued to decrease, and totaled $9.4 million at December 31, 1998, compared with $11.9 million at December 31, 1997, a decrease of $2.5 million or 20.9%. Non-performing assets at December 31, 1998 and 1997, respectively, amounted to 0.24% and 0.31% of loans and OREO. Loans 90 days or more past due and not included in the non-performing category totaled $7.4 million at December 31, 1998, compared to $16.4 million at December 31, 1997. 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 $175 thousand and $2.0 million at December 31, 1998 and 1997, respectively. 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 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (in thousands) Loans past due in excess of 90 days and still accruing ............... $ 7,359 $16,351 $10,166 $ 8,125 $ 8,712 ------- ------- ------- ------- ------- Non-accrual loans ......................... $ 7,063 $ 9,635 $15,258 $16,627 $27,490 ------- ------- ------- ------- ------- Other real estate owned ................... 2,341 2,258 3,866 7,612 9,097 ------- ------- ------- ------- ------- Total non-performing assets ............... $ 9,404 $11,893 $19,124 $24,239 $36,587 ------- ------- ------- ------- ------- Troubled debt restructured loans .......... $ 5,127 $ 5,248 $ 5,576 $ 5,209 $ -- ------- ------- ------- ------- ------- Non-performing loans as a % of loans ...... 0.18% 0.25% 0.42% 0.53% 0.93% ------- ------- ------- ------- ------- Non-performing assets as a % of loans plus other real estate owed ........ 0.24% 0.31% 0.53% 0.76% 1.24% ------- ------- ------- ------- ------- Allowance as a % of loans ................. 1.25% 1.28% 1.32% 1.44% 1.61% ------- ------- ------- ------- -------
During 1998, lost interest on non-accrual loans amounted to $972 thousand, compared with lost interest of $1.2 million in 1997. Although substantially all risk elements at December 31, 1998 have been disclosed in the categories presented above, management believes that for a variety of reasons, including economic conditions, certain borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial loans. As part of the analysis of the loan portfolio by management, it has been determined that there are approximately $2.7 million in potential problem loans at December 31, 1998, which have not been classified as non-accrual, past due or restructured. Potential problem loans are defined as performing loans for which management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in a non-performing loan. Approximately $607 thousand has been provided for in the allowance for loan losses for these potential problem loans. There can be no assurance that Valley has identified all of its problem loans. At December 31, 1997, Valley had identified approximately $3.6 million of potential problem loans which were not classified as non-accrual, past due or restructured. Asset Quality and Risk Elements Lending is one of the most important functions performed by Valley and, by its very nature, lending is also the most complicated, risky and profitable part of Valley's business. For commercial loans, construction loans and 25 commercial mortgage loans, a separate credit department is responsible for risk assessment, credit file maintenance and periodically evaluating overall creditworthiness of a borrower. Additionally, efforts are made to limit concentrations of credit so as to minimize the impact of a downturn in any one economic sector. These loans are diversified as to type of borrower and loan. However, most of these loans are in northern New Jersey, presenting a geographical and credit risk if there was a significant downturn of the economy within the region. Residential mortgage loans are secured primarily by 1-4 family properties located mainly within northern New Jersey. Conservative underwriting policies are adhered to and loan to value ratios are generally less than 80 percent. Consumer loans are comprised of home equity loans, credit card loans and automobile loans. Home equity and automobile loans are secured loans and are made based on an evaluation of the collateral and the borrower's creditworthiness. The majority of automobile loans are originated through a program with a major insurance company, whose customer base generally has a good credit profile and generally result in lower delinquencies and charge-offs than that typically experienced from traditional sources. These automobile loans are from 11 states, including New Jersey. All loans are subject to Valley's underwriting criteria; therefore, each loan or group of loans presents a geographical risk and credit risk based upon the economy of the region. The co-branded credit card portfolio was substantially generated through a pre-approved mailing during 1996 utilizing automated credit scoring techniques and additional underwriting standards. Management realizes that some degree of risk must be expected in the normal course of lending activities. Reserves are maintained to absorb such potential loan and off-balance sheet credit losses. The allowance for loan losses and related provision are an expression of management's evaluation of the credit portfolio and economic climate. 26 The following table sets forth the relationship among loans, loans charged-off and loan recoveries, the provision for possible loan losses and the allowance for loan losses for the past five years
Years Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (in thousands) Average loans outstanding .............. $3,844,174 $3,651,648 $3,334,825 $3,086,871 $2,762,080 ========== ========== ========== ========== ========== Beginning balance--Allowance for possible loan losses .............. $ 48,542 $ 47,811 $ 45,580 $ 47,448 $ 45,792 ---------- ---------- ---------- ---------- ---------- Loans charged-off: Commercial ............................ 216 4,647 471 1,217 1,805 Construction .......................... -- -- -- 2,498 835 Mortgage-Commercial ................... 980 475 593 646 1,359 Mortgage-Residential .................. 1,208 496 858 731 288 ---------- ---------- ---------- ---------- ---------- Consumer .............................. 11,284 8,287 3,996 2,875 2,790 ---------- ---------- ---------- ---------- ---------- 13,688 13,905 5,918 7,967 7,077 ---------- ---------- ---------- ---------- ---------- Charged-off loans recovered: Commercial ............................ 460 522 2,585 1,321 603 Construction .......................... 222 89 -- -- 603 Mortgage-Commercial ................... 119 214 920 83 61 Mortgage-Residential .................. 198 121 124 56 23 Consumer .............................. 1,645 1,040 964 1,318 1,143 ---------- ---------- ---------- ---------- ---------- 2,644 1,986 4,593 2,778 2,433 ---------- ---------- ---------- ---------- ---------- Net charge-offs ........................ 11,044 11,919 1,325 5,189 4,644 Provision charged to operations ........ 12,370 12,650 3,556 3,321 6,300 ---------- ---------- ---------- ---------- ---------- Ending balance--Allowance for possible loan losses .............. $ 49,868 $ 48,542 $ 47,811 $ 45,580 $ 47,448 ========== ========== ========== ========== ========== Ratio of net charge-offs during the period to average loans outstanding during the period ..................... 0.29% 0.33% 0.04% 0.17% 0.17%
The allowance for possible loan losses is maintained at an estimated level necessary to absorb the potential loan losses and other credit risk related charge-offs. It is the result of an analysis which relates outstanding balances to expected reserve levels required to absorb future credit losses. Current economic problems are addressed through management's assessment of anticipated changes in the regional economic climate, changes in composition and volume of the loan portfolio and variances in levels of classified loans, non-performing assets and other past due amounts. Additional factors include consideration of exposure to loss including size of credit, existence and nature of collateral, credit record, profitability and general economic conditions. The underwriting, growth and delinquency experience in the credit card portfolio will substantially influence the level of the allowance needed to absorb future credit losses. Although credit card loans are generally considered more risky than other types of lending, a higher interest rate is charged to compensate for this increased risk. VNB will continue to closely monitor the need for additions to the allowance. During 1998, continued emphasis was placed on the current economic climate and the condition of the real estate market in the northern New Jersey area. Management addressed these economic conditions and applied that information to changes in the composition of the loan portfolio. The provision charged to operation was $12.4 million in 1998 compared to $12.7 million in 1997. 27 The following table summarizes the allocation of the allowance for possible loan losses to specific loan categories for the past five years:
Years Ended December 31, -------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------- -------------------- -------------------- -------------------- --------------------- Percent Percent Percent Percent Percent of Loan of Loan of Loan of Loan of Loan Category Category Category Category Category Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- (in thousands) Loan category: Commercial ........ $14,247 11.7% $13,250 12.0% $18,850 12.9% $15,658 13.0% $13,532 12.3% Mortgage .......... 12,484 52.6 14,736 52.2 11,823 53.1 10,759 56.6 12,412 58.8 Consumer .......... 11,934 35.7 11,078 35.8 7,135 34.0 7,363 30.4 7,788 28.9 Unallocated ....... 11,203 N/A 9,478 N/A 10,003 N/A 11,800 N/A 13,716 N/A ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- $49,868 100.0% $48,542 100.0% $47,811 100.0% $45,580 100.0% $47,448 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
At December 31, 1998 the allowance for possible loan losses amounted to $49.9 million or 1.25% of loans, net of unearned income, as compared to $48.5 million or 1.28% at year-end 1997. The allowance is adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $11.0 million for the year ended December 31, 1998 compared with $11.9 million for the year ended December 31, 1997. The ratio of net charge-offs to average loans decreased to 0.29% for 1998 compared with 0.33% for 1997. While consumer loan charge-offs increased during 1998, they were at a level less than the level reported throughout the industry on a national basis. Non-performing loans and loans past due 90 days and still accruing in 1998 were less than during 1997. The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific and general allocations to the allowance for possible loan losses totaled $16.5 million and $6.9 million, respectively, at December 31, 1998 and $21.9 million and $8.5 million, respectively, at December 31, 1997. The average balance of impaired loans during 1998 and 1997 was approximately $18.7 million and $25.1 million, respectively. The amount of cash basis interest income that was recognized on impaired loans during both 1998 and 1997 was $1.4 million and $1.6 million, respectively. Capital Adequacy A significant measure of the strength of a financial institution is its shareholders' equity, which should expand in close proportion to asset growth. At December 31, 1998, shareholders' equity totaled $555.8 million or 10.0% of total assets, compared with $509.3 million or 9.5% at year-end 1997. Valley has achieved steady internal capital generation and an excess of percentage asset growth throughout the past five years. On May 26, 1998 Valley's Board of Directors rescinded its previously announced stock repurchase program after 220,125 shares of Valley common stock had been repurchased. Rescinding the remaining authorization was necessary to comply with certain accounting rules in connection with Valley's acquisition of Wayne. Included in shareholders' equity as components of accumulated other comprehensive income at December 31, 1998 was a $4.9 million unrealized gain on investment securities available for sale, net of tax, and a translation adjustment of $852 thousand related to the Canadian subsidiary of VNB, compared to an unrealized gain of $4.0 million and a $343 thousand translation adjustment at December 31, 1997. Risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common shareholders' equity less disallowed intangibles, while Total risk-based capital consists of Tier 1 capital and the allowance for possible loan losses up to 1.25% 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. Valley's capital position at December 31, 1998 under risk-based capital guidelines was $546.1 million, or 13.3% of risk-weighted assets, for Tier 1 capital and $595.9 million, or 14.5% for Total risked-based capital. The comparable ratios at December 31, 1997 were 13.3.% for Tier 1 capital and 14.4% for Total risk-based capital. At December 31, 1998 and 1997, Valley was in compliance with the leverage requirement having Tier 1 leverage ratios of 10.1% and 28 9.3%, respectively. Valley's ratios at December 31, 1998 were above the "well capitalized" requirements, which require Tier 1 capital of at least 6% , total risk-based capital of 10% and a minimum leverage ratio of 5%. Book value per share amounted to $10.06 at December 31, 1998 compared with $9.23 per share at December 31, 1997. 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 46.5% at December 31, 1998, compared to 47.8% at December 31, 1997. Cash dividends declared amounted to $0.97 per share, equivalent to a dividend payout ratio of 53.5% for 1998, compared to 52.2% for the year 1997. The current quarterly dividend rate of $0.25 per share provides for an annual rate of $1.00 per share. Valley's Board of Directors continues to believe that cash dividends are an important component of shareholder value and that, at its current level of performance and capital, Valley expects to continue its current dividend policy of a quarterly distribution of earnings to its shareholders. Results of Operations--1997 Compared to 1996 Valley reported net income for 1997 of $86.9 million or $1.57 diluted earnings per share, compared to the $71.5 million, or $1.33 diluted earnings per share earned in 1996 (all amounts have been restated for the Midland and Wayne acquisitions and the per share amounts have been restated to give effect to a 5 for 4 stock split issued in 1998 and a 5% stock dividend issued in 1997). Net interest income on a tax equivalent basis increased $14.0 million, or 6.5%, to $227.5 million in 1997. The increase in 1997 was due primarily to an increase in the average balance and average rate on interest bearing assets. This was partially offset by a slight increase in the average balance and average rate on interest bearing liabilities. The provision for possible loan loss increased to $12.7 million for the year ended December 31, 1997 as compared to $3.6 million for the year ended December 31, 1996. The increase was recorded as a result of higher net charge-offs totaling $11.9 million in 1997. Non-interest income in 1997 amounted to $43.0 million, an increase of $12.8 million or 42.3% compared with 1996. Non-interest expense totaled $129.2 million in 1997, an increase of $4.7 million. These increases were largely the result of additional credit card income and expense. VNB began a co-branded credit card program during 1996. Gains on the sales of loans were $3.6 million for 1997 compared to $1.8 million for 1996. The gains recorded are primarily from the sale of the guaranteed portion of SBA loans. The increase reflected the growth in VNB's origination of SBA loans. Included in non-interest expense for 1996 is a one time FDIC assessment of $7.4 million. Excluding this one time payment, insurance premiums decreased by $1.5 million for the year ended December 31, 1997 in comparison to the same period in 1996. Income tax expense as a percentage of pre-tax income was 28.9% for the year ended December 31, 1997 compared to 33.8% in 1996. The reduction in the effective tax rate from 1996 to 1997 is attributable to a realignment of corporate entities and a lower effective tax rate for state taxes. The reduction in the effective tax rate continued in 1998. The effective tax rate is expected to increase to a normal level during the fiscal year beginning 1999 over the effective tax rate for 1998 and 1997. 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, ------------------------------------------- 1998 1997 1996 -------- -------- -------- (in thousands, except for share data) INTEREST INCOME Interest and fees on loans (Note 5) .............................. $316,502 $303,181 $276,743 Interest and dividends on investment securities: Taxable ........................................................ 57,005 67,944 73,858 Tax-exempt ..................................................... 7,885 10,346 12,757 Dividends ...................................................... 1,946 1,689 1,109 Interest on federal funds sold and other short-term investments .. 6,318 3,924 4,159 -------- -------- -------- Total interest income ........................................ 389,656 387,084 368,626 -------- -------- -------- INTEREST EXPENSE Interest on deposits: Savings deposits ............................................... 43,372 44,529 45,143 Time deposits (Note 10) ........................................ 105,395 113,582 112,795 Interest on federal funds purchased and securities sold under repurchase agreements ..................................... 906 1,171 1,128 Interest on other short-term borrowings .......................... 1,625 1,132 648 Interest on other borrowings (Note 11) ........................... 8,806 5,471 3,077 -------- -------- -------- Total interest expense ....................................... 160,104 165,885 162,791 -------- -------- -------- NET INTEREST INCOME .............................................. 229,552 221,199 205,835 Provision for possible loan losses (Note 6) ...................... 12,370 12,650 3,556 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES ..... 217,182 208,549 202,279 -------- -------- -------- NON-INTEREST INCOME Trust income ..................................................... 1,375 1,162 1,080 Service charges on deposit accounts .............................. 12,674 12,063 11,268 Gains on securities transactions, net (Note 4) ................... 1,418 2,150 781 Fees from loan servicing (Note 7) ................................ 7,382 5,576 4,835 Credit card fee income ........................................... 10,153 12,643 5,549 Gains on sales of loans, net ..................................... 4,863 3,634 1,839 Other ............................................................ 5,208 5,784 4,884 -------- -------- -------- Total non-interest income .................................... 43,073 43,012 30,236 -------- -------- -------- NON-INTEREST EXPENSE Salary expense (Note 12) ......................................... 51,792 46,738 46,201 Employee benefit expense (Note 12) ............................... 12,327 11,596 10,813 FDIC insurance premiums .......................................... 1,270 1,205 10,083 Net occupancy expense (Notes 8 and 14) ........................... 12,877 11,653 11,832 Furniture and equipment expense (Note 8) ......................... 8,338 8,036 7,665 Credit card expense .............................................. 9,066 17,520 7,518 Amortization of intangible assets (Note 7) ....................... 5,546 3,441 3,009 Merger-related charges (Note 2) .................................. 4,539 -- -- Other ............................................................ 29,002 29,029 27,411 -------- -------- -------- Total non-interest expense ................................... 134,757 129,218 124,532 -------- -------- -------- INCOME BEFORE INCOME TAXES ....................................... 125,498 122,343 107,983 Income tax expense (Note 13) ..................................... 28,150 35,397 36,479 -------- -------- -------- NET INCOME ....................................................... $ 97,348 $ 86,946 $ 71,504 ======== ======== ======== EARNINGS PER SHARE: Basic .......................................................... $1.77 $1.58 $1.33 Diluted ........................................................ 1.75 1.57 1.33 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic .......................................................... 54,987,473 54,906,154 53,074,424 Diluted ........................................................ 55,607,255 55,294,894 53,459,884
See accompanying notes to consolidated financial statements. 30
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, ------------------------------------ 1998 1997 ---------- ---------- (in thousands, except for share data) ASSETS Cash and due from banks ................................................... $ 175,794 $ 151,620 Federal funds sold ........................................................ 102,000 33,400 Investment securities held to maturity, fair value of $238,421 and $168,476 in 1998 and 1997, respectively (Note 3) ......................... 237,410 166,615 Investment securities available for sale (Note 4) ......................... 927,481 1,090,638 Trading account securities (Note 4) ....................................... 1,592 -- Loans (Note 5) ............................................................ 3,954,395 3,786,783 Loans held for sale (Note 5) .............................................. 23,455 16,651 Less: Allowance for possible loans losses (Note 6) ...................... (49,868) (48,542 ---------- ---------- Net loans ............................................................... 3,927,982 3,754,892 ---------- ---------- Premises and equipment (Note 8) ........................................... 79,774 77,871 Accrued interest receivable ............................................... 29,711 31,210 ---------- --------- Other assets (Notes 7, 9 and 13) .......................................... 59,463 54,452 ---------- ---------- Total assets .......................................................... $5,541,207 $5,360,698 ========== ========== LIABILITIES Deposits: Non-interest bearing .................................................... $ 854,594 $ 781,239 Interest bearing: Savings ................................................................ 1,982,973 1,918,762 Time (Note 10) ......................................................... 1,837,122 1,902,320 ---------- ---------- Total deposits ........................................................ 4,674,689 4,602,321 ---------- ---------- Federal funds purchased and securities sold under repurchase agreements (Note 3) ...................................................... 30,414 32,882 Treasury tax and loan account and other short-term borrowings (Note 3) .... 22,667 24,056 Other borrowings (Note 11) ................................................ 212,949 146,012 Accrued expenses and other liabilities (Note 12) .......................... 44,701 46,124 ---------- ---------- Total liabilities ..................................................... 4,985,420 4,851,395 ---------- ---------- Commitments and Contingencies (Note 14) SHAREHOLDERS' EQUITY (Notes 2, 12 and 15) Common stock, no par value, authorized 98,437,500 shares; issued 55,503,060 shares in 1998 and 55,520,694 shares in 1997 ................................................ 24,424 24,345 Surplus ................................................................... 311,611 310,904 Retained earnings ......................................................... 223,185 178,739 Unallocated common stock held by the ESOP ................................. (1,331) (1,604) Accumulated other comprehensive income .................................... 4,084 3,614 ---------- ---------- 561,973 515,998 Treasury stock, at cost (236,735 shares in 1998 and 356,082 shares in 1997) ................................................................. (6,186) (6,695) ---------- ---------- Total shareholders' equity ............................................ 555,787 509,303 ---------- ---------- Total liabilities and shareholders' equity ............................ $5,541,207 $5,360,698 ========== ==========
See accompanying notes to consolidated financial statements. 31
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Unallocated Accumulated Common Other Stock Comprehensive Total Common Retained Held by Income Treasury Shareholders' Stock Surplus Earnings the ESOP (loss) Stock Equity ------- -------- -------- -------- ------- -------- -------- (in thousands) BALANCE-DECEMBER 31, 1995 ...................... $21,900 $216,045 $210,242 $ -- $ 3,460 $ (1,910) $449,737 Comprehensive income: .......................... -- Net income ..................................... -- -- 71,504 -- -- -- 71,504 Other comprehensive income (loss), net of tax: Unrealized losses on securities available for sale, net of tax of $1,744 .................... -- -- -- -- (3,100) -- Reclassification adjustment for gains included in net income, net of tax of $(290) .. -- -- -- -- (491) -- Foreign currency translation adjustment ........ -- -- -- -- (36) -- ------- Total other comprehensive loss ................. -- -- -- -- (3,627) -- (3,627) ------- -------- Total comprehensive income ..................... -- -- -- -- -- -- 67,877 Dividends declared ............................. -- -- (38,556) -- -- -- (38,556) Effect of stock incentive plan, net ............ 11 (264) (1,104) -- -- 2,743 1,386 Net proceeds from stock offering, net of expenses of $1,272 ..................... 1,063 19,963 -- -- -- -- 21,026 Unallocated common stock acquired by the ESOP .. -- -- -- (1,785) -- -- (1,785) Stock dividend ................................. 409 22,796 (47,173) -- -- 23,845 (123) Purchase of treasury stock ..................... -- -- -- -- -- (32,267) (32,267) ------- -------- -------- ------- ------- -------- -------- BALANCE-DECEMBER 31, 1996 ...................... 23,383 258,540 194,913 (1,785) (167) (7,589) 467,295 Comprehensive income: Net income ..................................... -- -- 86,946 -- -- -- 86,946 Other comprehensive income (loss), net of tax: Unrealized gains on securities available for sale, net of tax of $3,079 ...... -- -- -- -- 5,457 -- Reclassification adjustment for gains included in net income, net of tax of $(781) .. -- -- -- -- (1,369) -- Foreign currency translation adjustment ........ -- -- -- -- (307) -- ------- Total other comprehensive income ............... -- -- -- -- 3,781 -- 3,781 ------- -------- Total comprehensive income ..................... -- -- -- -- -- -- 90,727 Dividends declared ............................. -- -- (45,350) -- -- -- (45,350) Effect of stock incentive plan, net ............ (2) (1,733) (1,684) -- -- 5,311 1,892 Stock dividend ................................. 964 55,041 (56,086) -- -- -- (81) Tax benefit from exercise of stock options ..... -- 329 -- -- -- -- 329 Allocation of ESOP stock ....................... -- 177 -- 181 -- -- 358 Common stock acquired for stock incentive plan . -- (1,450) -- -- -- -- (1,450) Purchase of treasury stock ..................... -- -- -- -- -- (4,417) (4,417) ------- -------- -------- ------- ------- -------- -------- BALANCE-DECEMBER 31, 1997 ...................... 24,345 310,904 178,739 (1,604) 3,614 (6,695) 509,303 Comprehensive income: Net income ..................................... -- -- 97,348 -- -- -- 97,348 Other comprehensive income (loss), net of tax: Unrealized gains on securities available for sale, net of tax of $1,055 ...... -- -- -- -- 1,874 -- Reclassification adjustment for gains included in net income, net of tax of $(523) .. -- -- -- -- (895) -- Foreign currency translation adjustment ........ -- -- -- -- (509) -- ------- Total other comprehensive income ............... -- -- -- -- 470 -- 470 ------- -------- Total comprehensive income ..................... -- -- -- -- -- -- 97,818 Dividends declared ............................. -- -- (52,052) -- -- -- (52,052) Effect of stock incentive plan, net ............ (10) (764) (850) -- -- 3,713 2,089 Allocation of ESOP stock ....................... -- 381 -- 273 -- -- 654 Issuance of stock from treasury ................ 89 1,090 -- -- -- 3,454 4,633 Purchase of treasury stock ..................... -- -- -- -- -- (6,658) (6,658) ------- -------- -------- ------- ------- -------- -------- BALANCE-DECEMBER 31, 1998 ...................... $24,424 $311,611 $223,185 $(1,331) $ 4,084 $ (6,186) $555,787 ======= ======== ======== ======= ======= ======== ========
See accompanying notes to consolidated financial statements. 32
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, -------------------------------------------- 1998 1997 1996 --------- --------- --------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................................ $ 97,348 $ 86,946 $ 71,504 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................. 14,380 12,205 10,481 Amortization of compensation costs pursuant to long term stock incentive plan ........................................... 1,036 898 448 Provision for possible loan losses ........................................ 12,370 12,650 3,556 Net amortization of premiums and accretion of discounts ................... 3,312 1,105 4,376 Net deferred income tax (benefit) expense ................................. (2,418) 2,355 (961) Net gains on securities transactions ...................................... (1,418) (2,150) (781) Proceeds from sales of loans .............................................. 181,020 49,972 34,950 Gain on sales of loans .................................................... (4,863) (3,634) (1,839) Proceeds from recoveries of previously charged-off loans .................. 2,644 1,986 4,593 Net decrease in accrued interest receivable and other assets .............. 4,846 9,174 2,716 Net decrease in accrued expenses and other liabilities .................... (4,005) (969) (10,174) --------- --------- --------- Net cash provided by operating activities ................................. 304,252 170,538 118,869 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases and originations of mortgage servicing rights ................... (12,101) (3,905) (6,167) Proceeds from sales of investment securities available for sale ........... 93,093 175,311 143,605 Proceeds from maturing investment securities available for sale ........... 407,638 231,998 253,112 Purchases of investment securities available for sale ..................... (338,141) (379,596) (233,006) Purchases of investment securities held to maturity ....................... (124,513) (17,905) (30,640) Proceeds from maturing investment securities held to maturity ............. 51,784 71,098 100,764 Net (increase) decrease in federal funds sold and other short-term investments ................................................... (68,600) 54,300 15,600 Net increase in loans made to customers ................................... (364,261) (245,003) (491,829) Purchases of premises and equipment, net of sales ......................... (10,622) (12,195) (12,928) --------- --------- --------- Net cash used in investing activities ..................................... (365,723) (125,897) (261,489 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits ....................................... 72,368 (144,531) 110,937 Net (decrease) increase in federal funds purchased and other short-term borrowings .............................................. (3,857) 16,397 2,312 Advances of other borrowings .............................................. 120,000 92,500 45,000 Repayments of other borrowings ............................................ (53,063) (8,559) (14,054) Dividends paid to common shareholders ..................................... (50,052) (42,805) (38,373) Addition of common shares to treasury ..................................... (6,658) (4,417) (32,267) Purchase of shares by ESOP ................................................ -- -- (1,785) Purchase of shares for stock incentive plan ............................... -- (1,450) -- Common stock issued, net of cancellations ................................. 6,907 1,156 21,669 --------- --------- --------- Net cash provided by (used in) financing activities ....................... 85,645 (91,709) 93,439 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ...................... 24,174 (47,068) (49,181) Cash and cash equivalents at beginning of year ............................ 151,620 198,688 247,86 --------- --------- --------- Cash and cash equivalents at end of year .................................. $ 175,794 $ 151,620 $ 198,68 ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest on deposits and borrowings ......... $ 161,538 $ 166,876 $ 162,789 Cash paid during the year for federal and state income taxes .............. 30,640 28,615 38,278 Transfer of securities from held to maturity to available for sale ........ 1,592 39,833 --
See accompanying notes to consolidated financial statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1) BUSINESS Valley National Bancorp ("Valley") is a bank holding company whose principal wholly-owned subsidiary is Valley National Bank ("VNB"), a national banking association providing a full range of commercial, retail and trust services through its branch and ATM network throughout northern New Jersey. VNB also lends through its consumer division and SBA program to borrowers covering territories outside of its branch network and New Jersey. VNB is subject to intense competition from other financial services companies and is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by certain regulatory authorities. BASIS OF PRESENTATION The consolidated financial statements of Valley include the accounts of its principal commercial bank subsidiary, VNB and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. The financial statements of prior years have been restated to include Wayne Bancorp, Inc., which was acquired on October 16, 1998, in a transaction accounted for as a pooling of interests. Certain reclassifications have been made in the consolidated financial statements for 1997 and 1996 to conform to the classifications presented for 1998. In preparing the consolidated financial statements, management has made estimates and assumptions that effect the reported amounts of assets and liabilities as of the date of the statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates. INVESTMENT SECURITIES Investments are classified into three categories: held to maturity; available for sale; and trading. Valley's investment portfolio consists of each of these three categories. Investment securities held to maturity, except for equity securities, are carried at cost and adjusted for amortization of premiums and accretion of discounts by using the interest method over the term of the investment. Management has identified those investment securities which may be sold prior to maturity. These investment securities are classified as available for sale in the accompanying consolidated statements of financial condition and are recorded at fair value on an aggregate basis. Unrealized holding gains and losses on such securities are excluded from earnings, but are included as a component of accumulated other comprehensive income which is included in shareholders' equity, net of deferred tax. Realized gains or losses on the sale of investment securities available for sale are recognized by the specific identification method and shown as a separate component of non-interest income. Trading securities are recorded at market value. Included in non-interest income are unrealized gains resulting from market value adjustments. In October, 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement was adopted by Valley and did not materially affect the financial statements. LOANS AND LOAN FEES Loan origination and commitment fees, net of related costs, are deferred and amortized as an adjustment of loan yield over the estimated lives of the loans approximating the effective interest method. Loans held for sale consist of residential mortgage loans and SBA loans, and are carried at the lower of cost or estimated fair market value using the aggregate method. Interest income is not accrued on loans where interest or principal is 90 days or more past due or if in management's judgement the ultimate collectibility of the interest is doubtful. Exceptions may be made if the loan is sufficiently collateralized and in the process of collection. When a loan is placed on non-accrual status, interest 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection and all past due amounts have been collected. The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. Valley has defined the population of impaired loans to be all non-accrual loans and other loans considered to be impaired as to principal and interest, consisting primarily of commercial real estate loans. The impaired loan portfolio is primarily collateral dependent. Impaired loans are individually assessed to determine that each loan's carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. Valley originates loans guaranteed by the SBA. The principal amount of these loans is guaranteed between 75% and 80%, subject to certain dollar limitations. Valley generally sells the guaranteed portions of these loans and retains the unguaranteed portions as well as the rights to service the loans. Gains are recorded on loan sales based on the cash proceeds in excess of the assigned value of the loan, as well as the value assigned to the rights to service the loan. Credit card loans primarily represent revolving MasterCard credit card loans. Interest on credit card loans is recognized based on the balances outstanding according to the related cardmember agreements. Direct origination costs are deferred and amortized over 24 months, the term of the cardmember agreement, on a straight-line basis. Net direct origination costs include costs associated with credit card originations that are incurred in transactions with independent third parties and certain costs relating to loan origination programs and the preparation and processing of loan documents, net of fees received. Ineligible direct origination costs are expensed as incurred. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses ("allowance") is increased through provisions charged against current earnings and additionally by crediting amounts of recoveries received, if any, on previously charged-off loans. The allowance is reduced by charge-offs on loans which are determined to be a loss, in accordance with established policies, when all efforts of collection have been exhausted. The allowance is maintained at a level estimated necessary to absorb potential loan losses and other credit risk related charge-offs. The level of the allowance is based upon management's evaluation of potential losses in the loan portfolio. Current and economic problems are addressed through management's assessment of anticipated changes in the regional economic climate, changes in composition and volume of the loan portfolio and variances in levels of classified loans, non-performing loans and other past due amounts. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are stated at cost less accumulated amortization computed on a straight-line basis over the term of the lease or estimated useful life of the asset, whichever is shorter. Major improvements are capitalized, while repairs and maintenance costs are charged to operations as incurred. Upon retirement or disposition, any gain or loss is credited or charged to operations. OTHER REAL ESTATE OWNED Other real estate owned ("OREO"), acquired through foreclosure on loans secured by real estate, is reported at the lower of cost or fair value, as established by a current appraisal, less estimated costs to sell, and is included in other assets. Any write-downs at the date of foreclosure are charged to the allowance for possible loan losses. An allowance for OREO has been established to record subsequent declines in estimated net realizable value. Expenses incurred to maintain these properties and realized gains and losses upon sale of the properties are included in other non-interest expense and other non-interest income, as appropriate. INTANGIBLE ASSETS Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill and core deposit intangibles. Goodwill, which was recorded prior to 1987, is being amortized on a straight-line basis over 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 25 years. Core deposit intangibles are amortized on accelerated methods over the estimated lives of the assets. Goodwill and core deposit intangibles are included in other assets. LOAN SERVICING RIGHTS Loan servicing rights are generally recorded when purchased or originated loans are sold, with servicing rights retained. The cost of each loan is allocated between the servicing right and the loan (without the servicing right) based on their relative fair values. Loan servicing rights, which are classified in other assets, are amortized over the estimated net servicing life and are evaluated on a quarterly basis for impairment based on their fair value. The fair value is estimated using the present value of expected future cash flows along with numerous assumptions including servicing income, cost of servicing, discount rates, prepayment speeds, and default rates. Impairment adjustments, if any, are recognized through the use of a valuation allowance. STOCK-BASED COMPENSATION Valley accounts for its stock option plan in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no compensation expense is recognized for stock options issued to employees since the options have an exercise price equal to the market value of the common stock on the day of the grant. Valley provides the fair market disclosure required by SFAS No. 123 "Accounting for Stock-based Compensation." INCOME TAXES Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. COMPREHENSIVE INCOME On January 1, 1998, Valley adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and surplus in the equity section of a statement of financial condition. This statement was effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 did not have a material effect on Valley's financial position or results of operations. EARNINGS PER SHARE For Valley, the numerator of both the Basic and Diluted EPS is equivalent to net income. The weighted average number of shares outstanding used in the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect of common stock options outstanding utilizing the treasury stock method. All share and per share amounts have been restated to reflect the 5 for 4 stock split issued May 18, 1998, and all prior stock dividends. Earnings per share for the years 1996 and prior have not been restated for the acquisition of Wayne Bancorp, Inc. as the issuance of capital stock in connection with the conversion from the mutual to stock form of Wayne Savings Bank occurred on June 27, 1996. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) TREASURY STOCK Treasury stock is recorded using the cost method and accordingly is presented as an unallocated reduction of shareholders' equity. IMPACT OF FUTURE ACCOUNTING CHANGES Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued by the FASB in June 1998. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. Valley must adopt SFAS No. 133 by January 1, 2000; however, early adoption is permitted. Upon adoption, the provisions of SFAS No. 133 must be applied prospectively. Valley anticipates that the adoption of SFAS No. 133 will not have a material impact in the financial statements. ACQUISITIONS (Note 2) On December 17, 1998, Valley signed a definitive merger agreement with Ramapo Financial Corporation ("Ramapo"), parent of The Ramapo Bank, an 8 branch bank headquartered in Wayne, New Jersey. At December 31, 1998 Ramapo had total assets of $337.8 million and deposits of $295.5 million. The transaction is expected to close in the second quarter of 1999 and will be accounted for using the pooling of interests method of accounting. There were approximately 8.1 million shares of Ramapo common stock outstanding at December 31, 1998. The merger agreement provides that 0.425 shares of Valley common stock will be exchanged for each share of Ramapo common stock. On October 16, 1998, Valley acquired Wayne Bancorp, Inc. ("Wayne"), parent of Wayne Savings Bank, F.S.B., headquartered in Wayne, New Jersey. At the date of acquisition, Wayne had total assets of $272.0 million and deposits of $206.0 million, with 6 branch offices. The transaction was accounted for using the pooling of interests method of accounting and resulted in the issuance of approximately 2.4 million shares of Valley common stock. Each share of common stock of Wayne was exchanged for 1.1 shares of Valley common stock. The consolidated financial statements of Valley have been restated to include Wayne for all periods presented. Separate results of the combining companies for the years ended December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- (in thousands) Net interest income after provision for possible loan losses: Valley ................................. $200,091 $194,979 Wayne .................................. 8,458 7,300 -------- -------- $208,549 $202,279 ======== ======== Net income: Valley ................................. $ 84,992 $ 70,838 Wayne .................................. 1,954 666 -------- -------- $ 86,946 $ 71,504 ======== ======== During 1998, Valley recorded merger-related charges of $4.5 million related to the acquisition of Wayne. On an after tax basis, these charges totaled $3.2 million or $0.06 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 and benefits for terminated employees, principally, senior executives at Wayne; real estate expenses related to the closing of duplicate facilities, mainly two branches and the Wayne headquarters which is currently not in service; professional fees which include investment banking, accounting and legal fees; and other expenses which include data processing and the write-off of supplies and other assets not considered useful in the operation of the combined entity. The major components of merger-related charges are for real estate dispositions, professional fees, personnel expenses and other expenses totaled $1.5 million, $1.4 million, $1.0 million and $600 thousand, respectively. Of the total merger-related charges $2.0 million, or 44.9% were paid through December 31, 1998. It is expected that the remaining liability will be fully utilized in 1999. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On February 28, 1997, Valley acquired Midland Bancorporation, Inc. ("Midland"), parent of The Midland Bank and Trust Company ("Midland Bank"), headquartered in Paramus, New Jersey. On February 28, 1997, Midland had total assets of $418.6 million and deposits of $380.6 million, with 13 branches located in Bergen County, New Jersey. The transaction was accounted for using the pooling of interests method of accounting and resulted in the issuance of approximately 5.0 million shares of Valley common stock. Each share of common stock of Midland was exchanged for 37.5 shares of Valley common stock. The consolidated financial statements of Valley have been restated to include Midland for all periods presented. INVESTMENT SECURITIES HELD TO MATURITY (Note 3) The amortized cost, fair value and gross unrealized gains and losses of securities held to maturity at December 31, 1998 and 1997 were as follows:
December 31, 1998 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ------- ------- -------- (in thousands) Obligations of states and political subdivisions ...... $ 39,220 $ 558 $ (15) $ 39,763 Mortgage-backed securities ............................ 62,088 1,274 (40) 63,322 Other debt securities ................................. 111,922 39 (805) 111,156 -------- ------ ----- -------- Total debt securities ............................... 213,230 1,871 (860) 214,241 FRB & FHLB stock ...................................... 24,180 -- -- 24,180 -------- ------ ----- -------- Total investment securities held to maturity ........ $237,410 $1,871 $(860) $238,421 ======== ====== ===== ======== December 31, 1997 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ------- ------- -------- (in thousands) Obligations of states and political subdivisions ...... $ 58,111 $ 455 $(161) $ 58,405 Mortgage-backed securities ............................ 84,129 1,743 (176) 85,696 Other debt securities ................................. 195 -- -- 195 -------- ------ ----- -------- Total debt securities ............................... 142,435 2,198 (337) 144,296 FRB & FHLB stock ...................................... 24,180 -- -- 24,180 -------- ------ ----- -------- Total investment securities held to maturity ........ $166,615 $2,198 $(337) $168,476 ======== ====== ===== ========
The contractual maturities of investments in debt securities held to maturity at December 31, 1998, are set forth in the following table: December 31, 1998 ------------------------- Amortized Fair Cost Value -------- --------- (in thousands) Due in one year ................................. $ 22,429 $ 22,505 Due after one year through five years ........... 13,446 13,866 Due after five years through ten years .......... 304 309 Due after ten years ............................. 114,963 114,239 -------- -------- 151,142 150,919 Mortgage-backed securities ...................... 62,088 63,322 -------- -------- Total debt securities ......................... 213,230 214,241 FRB & FHLB stock ................................ 24,180 24,180 -------- -------- Total investment securities held to maturity .. $237,410 $238,421 ======== ======== 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty. FRB and FHLB stock do not have contractual maturities. The weighted-average remaining life for mortgage-backed securities held to maturity was 2.2 years at December 31, 1998, and 4.1 years at December 31, 1997. The amortized cost of securities pledged to secure public deposits, treasury tax and loan deposits, repurchase agreements and for other purposes required by law approximated $119.4 million and $129.0 million at December 31, 1998 and 1997, respectively. In connection with the Wayne acquisition, Valley reassessed the classification of securities held in the Wayne portfolio and transferred $1.6 million of securities held to maturity to securities available for sale to conform with Valley's investment objectives. In 1997, in connection with the Midland acquisition, Valley reassessed the classification of securities held in the Midland investment portfolio and transferred $39.8 million of securities held to maturity to securities available for sale to conform to Valley's investment objectives. INVESTMENT SECURITIES AVAILABLE FOR SALE (Note 4) The amortized cost, fair value and gross unrealized gains and losses of securities available for sale at December 31, 1998 and 1997 were as follows:
December 31, 1998 ---------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ------- ------- -------- (in thousands) U.S. Treasury securities and other government agencies and corporations ........................... $ 84,586 $ 412 $ -- $ 84,998 Obligations of states and political subdivisions ..... 109,865 1,923 (7) 111,781 Mortgage-backed securities ........................... 698,772 4,138 (3,286) 699,624 -------- ------- ------- -------- Total debt securities .............................. 893,223 6,473 (3,293) 896,403 Equity securities .................................... 26,284 4,976 (182) 31,078 -------- ------- ------- -------- Total investment securities available for sale ..... $919,507 $11,449 $(3,475) $927,481 ======== ======= ======= ======== December 31, 1997 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ------- ------- ---------- (in thousands) U.S. Treasury securities and other government agencies and corporations ........................... $ 180,703 $ 688 $ (237) $ 181,154 Obligations of states and political subdivisions ..... 141,409 1,302 (254) 142,457 Mortgage-backed securities ........................... 753,955 5,421 (3,034) 756,342 ---------- ------- ------- ---------- Total debt securities .............................. 1,076,067 7,411 (3,525) 1,079,953 Equity securities .................................... 8,106 2,652 (73) 10,685 ---------- ------- ------- ---------- Total investment securities available for sale ..... $1,084,173 $10,063 $(3,598) $1,090,638 ========== ======= ======= ==========
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The contractual maturities of investments in debt securities available for sale at December 31, 1998, are set forth in the following table: December 31, 1998 ---------------------- Amortized Fair Cost Value -------- -------- (in thousands) Due in one year ..................................... $ 92,950 $ 93,287 Due after one year through five years ............... 60,599 61,794 Due after five years through ten years .............. 37,178 37,577 Due after ten years ................................. 3,724 4,121 194,451 196,779 -------- -------- Mortgage-backed securities .......................... 698,772 699,624 -------- -------- Total debt securities ............................. 893,223 896,403 Equity securities ................................... 26,284 31,078 -------- -------- Total investment securities available for sale .... $919,507 $927,481 ======== ======== Actual maturities on debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty. Equity securities do not have contractual maturities. The weighted-average remaining life for mortgage-backed securities available for sale at December 31, 1998 and 1997 was 2.3 years and 4.1 years, respectively. Gross gains (losses) realized on sales, maturities and other securities transactions, related to securities available for sale, and unrealized holding gains on trading account securities included in earnings for the years ended December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996 ------ ------ ------ (in thousands) Sales transactions: Gross gains ........................................... $ 703 $2,374 $1,214 Gross losses .......................................... (1) (209) (522) ------ ------ ------ . 702 2,165 692 ------ ------ ------ Maturities and other securities transactions: Gross gains ........................................... 124 10 89 Gross losses .......................................... -- (25) -- ------ ------ ------ 124 (15) 89 ------ ------ ------ Unrealized holding gains on trading account securities: Unrealized holding gains .............................. 592 -- -- ------ ------ ------ Gains on securities transactions, net ................. $1,418 $2,150 $ 781 ====== ====== ======
Cash proceeds from sales transactions were $93.1 million, $175.3 million and $143.6 million for the years ended 1998, 1997 and 1996, respectively. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) LOANS (Note 5) The detail of the loan portfolio as of December 31, 1998 and 1997 was as follows: 1998 1997 ---------- ---------- (in thousands) Commercial ........................ $ 463,609 $ 455,732 ---------- ---------- Total commercial loans .......... 463,609 455,732 ---------- ---------- Construction ...................... 101,200 83,609 Residential mortgage .............. 1,036,110 1,034,066 Commercial mortgage ............... 954,440 866,348 ---------- ---------- Total mortgage loans ............ 2,091,750 1,984,023 ---------- ---------- Home equity ....................... 201,175 196,777 Credit card ....................... 107,595 145,485 Automobile ........................ 1,032,783 930,372 Other consumer .................... 80,938 91,101 ---------- ---------- Total consumer loans ............ 1,422,491 1,363,735 ---------- ---------- Less: unearned income ............. -- (56) ---------- ---------- Loans, net of unearned income ..... $3,977,850 $3,803,434 ========== ========== Included in the table above are loans held for sale in the amount of $23.5 million and $16.7 million at December 31, 1998 and 1997, respectively. VNB grants loans in the ordinary course of business to its directors, executive officers and their affiliates, on the same terms and under the same risk conditions as those prevailing for comparable transactions with outside borrowers. The following table summarizes the change in the total amounts of loans and advances to directors, executive officers, and their affiliates during the year 1998: 1998 -------------- (in thousands) Outstanding at beginning of year ........... $25,450 New loans and advances ..................... 11,582 Repayments ................................. (12,128) ------- Outstanding at end of year ................. $24,904 ======= The outstanding balances of loans which are 90 days or more past due as to principal or interest payments and still accruing and non-performing assets at December 31, 1998 and 1997 were as follows: 1998 1997 ------ ------- (in thousands) Loans past due in excess of 90 days and still accruing .. $7,359 $16,351 ====== ======= Non-accrual loans ....................................... $7,063 $ 9,635 Other real estate owned ................................. 2,341 2,258 ------ ------- Total non-performing assets ............................ $9,404 $11,893 ====== ======= Troubled debt restructured loans ........................ $5,127 $ 5,248 ====== ======= The amount of interest income that would have been recorded on non-accrual loans in 1998, 1997 and 1996 had payments remained in accordance with the original contractual terms approximated $1.2 million, $1.5 million and $1.6 million, while the actual amount of interest income recorded on these types of assets in 1998, 1997 and 1996 totaled $244 thousand, $336 thousand and $1.8 million, resulting in lost (recovered) interest income of $972 thousand, $1.2 million, and $(159) thousand, respectively. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1998, there were no commitments to lend additional funds to borrowers whose loans were non-accrual or contractually past due in excess of 90 days and still accruing interest. The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific and general allocations to the allowance for loan losses totaled $16.5 million and $6.9 million, respectively, at December 31, 1998 and $21.9 million and $8.5 million, respectively, at December 31, 1997. The average balance of impaired loans during 1998 and 1997 was approximately $18.7 million and $25.1 million, respectively. The amount of cash basis interest income that was recognized on impaired loans during 1998 and 1997 was $1.4 million and $1.6 million, respectively. ALLOWANCE FOR POSSIBLE LOAN LOSSES (Note 6) Transactions in the allowance for possible loan losses during 1998, 1997 and 1996 were as follows: 1998 1997 1996 ------- ------- ------- (in thousands) Balance at beginning of year .............. $48,542 $47,811 $45,580 Provision charged to operating expense .... 12,370 12,650 3,556 ------- ------- ------- 60,912 60,461 49,136 ------- ------- ------- Less net loan charge-offs: Loans charged-off ........................ (13,688) (13,905) (5,918) Less recoveries on loan charge-offs ...... 2,644 1,986 4,593 ------- ------- ------- Net loan charge-offs ...................... (11,044) (11,919) (1,325) ------- ------- ------- Balance at end of year .................... $49,868 $48,542 $47,811 ======= ======= ======= LOAN SERVICING (Note 7) VNB Mortgage Services, Inc. ("MSI"), a subsidiary of VNB, is a servicer of residential mortgage loan portfolios. MSI is compensated for loan administrative services performed for mortgage servicing rights purchased in the secondary market and originated by VNB. The aggregate principal balances of mortgage loans serviced by MSI for others approximated $1.6 billion, $1.2 billion and $1.1 billion at December 31, 1998, 1997 and 1996, respectively. The outstanding balance of loans serviced for others is not included in the consolidated statements of financial condition. VNB is a servicer of SBA loans, and is compensated for loan administrative services performed for SBA loans originated and sold by VNB. VNB serviced a total of $78.1 million and $69.7 million of SBA loans as of December 31, 1998 and 1997, respectively, for third-party investors. The costs associated with acquiring loan servicing rights are included in other assets in the consolidated financial statements and are being amortized over the estimated net servicing income. The following table summarizes the change in loan servicing rights during the years ended December 31, 1998, 1997 and 1996: 1998 1997 1996 ------- ------- ------- (in thousands) Balance at beginning of year ........ $13,471 $12,187 $ 8,094 Purchase and origination of loan servicing rights ................... 11,986 3,905 6,167 Amortization expense ................ (4,692) (2,621) (2,074) ------- ------- ------- Balance at end of year .............. $20,765 $13,471 $12,187 ======= ======= ======= Amortization expense is included in amortization of intangible assets. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PREMISES AND EQUIPMENT (Note 8) At December 31, 1998 and 1997, premises and equipment consisted of: 1998 1997 -------- -------- (in thousands) Land ............................................. $ 18,297 $ 17,795 Buildings ........................................ 51,461 48,093 Leasehold improvements ........................... 14,584 12,311 Furniture and equipment .......................... 64,413 59,934 -------- -------- 148,755 138,133 Less: Accumulated depreciation and amortization .. (68,981) (60,262) -------- -------- Premises and equipment ........................... $ 79,774 $ 77,871 ======== ======== Depreciation and amortization included in non-interest expense for the years ended December 31, 1998, 1997 and 1996 amounted to approximately $8.4 million, $8.9 million and $7.5 million, respectively. OTHER ASSETS (Note 9) At December 31, 1998 and 1997, other assets consisted of the following: 1998 1997 -------- -------- (in thousands) Loan servicing rights ................ $20,765 $13,471 Goodwill ............................. 2,673 2,922 Core deposit intangible .............. 1,210 1,816 Other real estate owned, net ......... 2,341 2,258 Deferred tax asset ................... 14,806 12,920 Other ................................ 17,668 21,065 ------ ------ Total other assets .................. $59,463 $54,452 ======= ======= DEPOSITS (Note 10) Included in time deposits at December 31, 1998 and 1997 are certificates of deposit over $100 thousand of $408.3 million and $483.6 million, respectively. Interest expense on time deposits of $100 thousand or more totaled approximately $19.7 million, $26.9 million and $24.5 million in 1998, 1997 and 1996, respectively. The scheduled maturities of time deposits as of December 31, 1998 are as follows: (in thousands) 1999 ............................... $1,446,617 2000 ............................... 290,404 2001 ............................... 35,305 2002 ............................... 39,596 2003 ............................... 23,864 Thereafter ......................... 1,336 ---------- $1,837,122 ========== 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) OTHER BORROWINGS (NOTE 11) At December 31, 1998 and 1997, other borrowings consisted of the following: 1998 1997 -------- -------- (in thousands) FHLB advances .................... $212,500 $145,500 Other ............................ 449 512 -------- -------- Total other borrowings .......... $212,949 $146,012 ======== ======== The Federal Home Loan Bank (FHLB) advances have a weighted average interest rate of 5.89% at December 31, 1998 and 6.25% at December 31, 1997. These advances are secured by pledges of FHLB stock, mortgage-backed securities and a blanket assignment of qualifying mortgage loans. The advances are scheduled for repayment as follows: (in thousands) 1999 ................................... $ 50,000 2000 ................................... 28,000 2001 ................................... 2,000 2002 ................................... 17,000 2003 ................................... 82,000 Thereafter ............................. 33,500 -------- $212,500 ======== Interest expense of $8.8 million, $5.4 million and $3.0 million was recorded on FHLB advances during the years ended December 31, 1998, 1997 and 1996, respectively. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) BENEFIT PLANS (Note 12) PENSION PLAN VNB has a non-contributory benefit plan covering substantially all of its employees. The benefits are based upon years of credited service, primary social security benefits and the employee's highest average compensation as defined. It is VNB's funding policy to contribute annually the maximum amount that can be deducted for federal income tax purposes. In addition, VNB has a supplemental non-qualified, non-funded retirement plan which is designed to supplement the pension plan for key officers. In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits. This statement is effective for fiscal years beginning after December 15, 1997. The adoption did not materially effect the financial statements. In connection with the adoption of this Statement, all prior period data presented has been restated to conform with SFAS No. 132. The following table sets forth change in projected benefit obligation, change in fair value of plan assets, funded status and amounts recognized in Valley's financial statements for the pension plans at December 31, 1998 and 1997: 1998 1997 ------- ------- (in thousands) Change in Projected Benefit Obligation Projected benefit obligation at beginning of year ..... $18,236 $16,217 Service cost ......................................... 1,346 1,095 Interest cost ........................................ 1,212 1,191 Actuarial loss ....................................... 145 400 Benefits paid ........................................ (966) (667) ------- ------- Projected benefit obligation at end of year ........... $19,973 $18,236 ======= ======= Change in Fair Value of Plan Assets Fair value of plan assets at beginning of year ........ $21,638 $16,776 Actual return on plan assets ......................... 2,758 4,818 Employer contributions ............................... -- 711 Benefits paid ........................................ (966) (667) ------- ------- Fair value of plan assets at end of year .............. $23,430 $21,638 ======= ======= Funded status ......................................... $ 3,457 $ 3,402 Unrecognized net asset ................................ (365) (420) Unrecognized prior service cost ....................... 367 471 Unrecognized net actuarial gain ....................... (7,677) (6,942) Intangible asset ...................................... (79) (107) ------- ------- Accrued benefit cost .................................. $(4,297) $(3,596) ======= ======= Net periodic pension expense for 1998, 1997 and 1996 included the following components: 1998 1997 1996 ------ ------ ------ (in thousands) Service cost ............................... $1,346 $1,095 $1,317 Interest cost .............................. 1,212 1,191 1,119 Expected return on plan assets ............. (1,673) (1,320) (2,096) Net amortization and deferral .............. (56) 71 962 Recognized prior service cost .............. 105 118 -- Recognized net gains ....................... (191) (33) -- ------ ------ ------ Total net periodic pension expense ......... $ 743 $1,122 $1,302 ====== ====== ====== 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of benefit obligations for the plan were 6.75% and 5.00%, respectively, for 1998 and 7.00% and 5.00% for 1997. The expected long term rate of return on assets was 9.00% for both 1998 and 1997 and the weighted average discount rate used in computing pension cost was 7.00% and 7.25% for 1998 and 1997, respectively. The pension plan held 49,841 shares of Valley National Bancorp stock at both December 31, 1998 and 1997. BONUS PLAN VNB and its subsidiaries award incentive and merit bonuses to its officers and employees based upon a percentage of the covered employees' compensation and determined by the achievement of certain performance objectives. Amounts charged to salaries expense during 1998, 1997 and 1996 were $2.6 million, $2.2 million and $1.8 million, respectively. SAVINGS PLAN VNB maintains a 401K Savings and Investment Plan. This plan covers eligible employees of VNB and its subsidiaries. The 401K plan allows employees to contribute from 1% to 15% of their salary with VNB matching a certain percentage out of its current years earnings with the distribution of VNB's contributions subject to a vesting schedule. VNB's 401K contributions, net of forfeitures, for 1998, 1997 and 1996 amounted to $772 thousand, $887 thousand and $1.2 million, respectively. ESOP PLAN VNB maintains an Employee Stock Ownership Plan ("ESOP") as a result of the merger with Wayne. In 1998 and 1997, 24,217 shares and 19,863 shares, respectively, were allocated to participants. ESOP expense for 1998 and 1997, was $607 thousand and $357 thousand, respectively. The amount of the loan from Valley to the ESOP was $1.3 million at December 31, 1998, and has a remaining term of eight years at an interest rate of 8.25%. At December 31, 1998 and 1997 unallocated shares in the ESOP were 152,282 and 176,499, respectively. STOCK OPTION PLAN At December 31, 1998, Valley has a stock option plan which is described below. Valley applies APB Opinion No. 25 and related Interpretations in accounting for its plan. Had compensation cost for the plan been determined consistent with FASB Statement No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 ---- ---- ---- (in thousands, except for share data) Net income As Reported .................. $97,348 $86,946 $71,504 Pro forma .................... 96,517 86,471 70,734 Earnings per share As Reported: Basic ....................... $1.77 $1.58 $1.33 Diluted ..................... 1.75 1.57 1.33 Pro forma: Basic ....................... $1.76 $1.57 $1.33 Diluted ..................... 1.74 1.56 1.32 Under the Employee Stock Option Plan, Valley may grant options to its employees for up to 2.5 million shares of common stock in the form of stock options, stock appreciation rights and restricted stock awards. The exercise price of options equal 100 percent of the market price of Valley's stock on the date of grant, and an option's maximum term is ten years. The options granted under this plan are exercisable not earlier than one year after the date of grant, expire not more than ten years after the date of the grant, and are subject to a vesting schedule. Non-qualified options granted by Midland and assumed by Valley have no vesting period and a maximum term of fifteen years. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: dividend yield of 3.50 percent for 1998 and 1997 and 4.36 percent for 1996; weighted-average risk-free interest rate of 5.0 percent for 1998, 5.75 percent for 1997 and 6.5 percent for 1996, and expected volatility of 18.5 percent for 1998, 23.9 percent for 1997 and 24.3 percent for 1996. The effects of applying SFAS No. 123 on the pro forma net income may not be representative of the effects on pro forma net income for future years. A summary of the status of qualified and non-qualified stock options as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below:
1998 1997 1996 ------------------- -------------------- ------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Stock Options Shares Price Shares Price Shares Price ------------- --------- ------- --------- -------- -------- -------- Outstanding at Beginning of year ............ 1,383,907 $16 1,141,818 $13 718,820 $14 Granted ..................................... 244,851 27 466,857 21 520,044 11 Exercised ................................... (94,828) 14 (205,029) 11 (75,724) 9 Forfeited ................................... (15,998) 22 (19,739) 18 (21,322) 15 --------- --------- --------- Outstanding at end of year .................. 1,517,932 18 1,383,907 16 1,141,818 13 ========= ========= ========= Options exercisable at year-end ............. 747,434 13 643,432 12 691,235 10 ========= ========= ========= Weighted-average fair value of options granted during the year .................... $6.08 $5.60 $5.60
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------------------- Weighted- Average Range of Remaining Weighted- Weighted- Exercise Number Contractual Average Number Average Prices Outstanding Life Exercise Price Exercisable Exercise Price -------- ----------- ----------- -------------- ----------- -------------- $ 5-13 322,200 10.6 years $ 7 322,200 $ 7 13-19 562,826 6.4 16 327,382 16 19-25 359,760 8.5 23 90,353 22 25-32 273,146 9.6 27 7,499 26 --------- ------- 5-32 1,517,932 8.4 18 747,434 13 ========= =======
During 1998, 1997 and 1996, stock appreciation rights granted in tandem with stock options were 10,375, 10,894 and 13,771, respectively. There were 45,858, 35,483 and 38,159 stock appreciation rights outstanding as of December 31, 1998, 1997 and 1996, respectively. Restricted stock is awarded to key employees providing for the immediate award of Valley's common stock subject to certain vesting and restrictions. The awards are recorded at fair market value and amortized into salary expense over the vesting period. The following table sets forth the changes in restricted stock awards outstanding for the years ended December 31, 1998, 1997 and 1996. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Restricted Stock Awards 1998 1997 1996 ------------ ------- ------- ------- Outstanding at beginning of year ......... 189,978 103,948 92,537 Granted .................................. 51,841 123,904 41,524 Vested ................................... (48,766) (31,600) (26,836) Forfeited ................................ (1,987) (6,274) (3,277) ------- ------- ------- Outstanding at end of year ............... 191,066 189,978 103,948 ======= ======= ======= The amount of compensation costs related to restricted stock awards included in salary expense in 1998, 1997 and 1996 amounted to $1.0 million, $717 thousand and $448 thousand, respectively. INCOME TAXES (Note 13) Income tax expense included in the financial statements consisted of the following: 1998 1997 1996 ------- ------- ------- (in thousands) Income tax from operations: Current: Federal ................................. $27,494 $31,412 $34,145 State ................................... 3,074 1,630 3,295 ------- ------- ------- 30,568 33,042 37,440 Deferred: Federal and State ....................... (2,418) 2,355 (961) ------- ------- ------- Total income tax expense .............. $28,150 $35,397 $36,479 ======= ======= ======= The tax effects of temporary differences that gave rise to deferred tax assets and liabilities as of December 31, 1998 and 1997 are as follows: 1998 1997 ------- ------- (in thousands) Deferred tax assets: Allowance for possible loan losses ............... $20,061 $19,144 State privilege year taxes ....................... 472 311 Non-accrual loan interest ........................ 475 477 Other ............................................ 5,363 3,567 ------- ------- Total deferred tax assets 26,371 23,499 ------- ------- Deferred tax liabilities: Tax over book depreciation ....................... 3,171 3,470 Purchase accounting adjustments .................. 496 552 Unearned discount on investments ................. 502 836 Investment securities available for sale ......... 3,038 2,506 Other ............................................ 4,358 3,215 ------- ------- Total deferred tax liabilities .................. 11,565 10,579 ------- ------- Net deferred tax assets ........................... $14,806 $12,920 ======= ======= 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A reconciliation between the reported income tax expense and the amount computed by multiplying income before taxes by the statutory federal income tax rate is as follows:
1998 1997 1996 ------- ------- ------- (in thousands) Tax at statutory federal income tax rate ....... $43,924 $42,820 $37,794 Increases (decreases) resulted from: Tax-exempt interest, net of interest incurred to carry tax-exempts ................ (2,777) (3,652) (4,531) State income tax, net of federal tax benefit .. 1,652 1,416 2,557 Realignment of corporate entities ............. (15,406) (6,215) -- Other, net .................................... 757 1,028 659 ------- ------- ------- Income tax expense ............................ $28,150 $35,397 $36,479 ======= ======= =======
COMMITMENTS AND CONTINGENCIES (Note 14) LEASE COMMITMENTS Certain bank facilities are occupied under non-cancelable long term operating leases which expire at various dates through 2047. Certain lease agreements provide for renewal options and increases in rental payments based upon increases in the consumer price index or the lessor's cost of operating the facility. Minimum aggregate lease payments for the remainder of the lease terms are as follows: (in thousands) -------------- 1999 ............................. $ 4,237 2000 ............................. 3,968 2001 ............................. 3,632 2002 ............................. 3,065 2003 ............................. 2,861 Thereafter ....................... 8,825 ------- Total lease commitments ......... $26,588 ======= Net occupancy expense for 1998, 1997 and 1996 included approximately $2.9 million, $2.5 million and $2.9 million, respectively, of rental expenses for leased bank facilities. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the ordinary course of business of meeting the financial needs of its customers, Valley, through its subsidiary VNB, is a party to various financial instruments which are properly not reflected in the consolidated financial statements. These financial instruments include standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these instruments is an indicator of VNB's level of involvement in each type of instrument as well as the exposure to credit loss in the event of non-performance by the other party to the financial instrument. VNB seeks to limit any exposure of credit loss by applying the same credit underwriting standards, including credit review, interest rates and collateral requirements or personal guarantees, as for on-balance sheet lending facilities. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 1998 and 1997:
1998 1997 ---------- ---------- (in thousands) Standby and commercial letters of credit ................. $ 65,384 $ 49,959 Commitments under unused lines of credit-credit card ..... 808,760 1,074,810 Commitments under unused lines of credit-other ........... 485,808 524,302 Outstanding loan commitments ............................. 328,583 215,281 ---------- ---------- Total financial instruments with off-balance sheet risk .............................................. $1,688,535 $1,864,352 ========== ==========
Standby letters of credit represent the guarantee by VNB of the obligations or performance of a customer in the event the customer is unable to meet or perform its obligations to a third party. Obligations to advance funds under commitments to extend credit, including commitments under unused lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have specified expiration dates, which may be extended upon request, or other termination clauses and generally require payment of a fee. At December 31, 1998, VNB had commitments to sell residential mortgage loans and SBA loans totaling $4.6 million. The amounts set forth above do not necessarily represent future cash requirements as it is anticipated that many of these commitments will expire without being fully drawn upon. Most of VNB's lending activity is to customers within the state of New Jersey, except for automobile loans, which are to customers from 11 states, including New Jersey, and Canada. LITIGATION In the normal course of business, Valley may be a party to various outstanding legal proceedings and claims. In the opinion of management, the consolidated financial position or results of operations of Valley will not be materially affected by the outcome of such legal proceedings and claims. SHAREHOLDERS' EQUITY (Note 15) CAPITAL REQUIREMENTS Valley is subject to the regulatory capital requirements administered by the Federal Reserve Bank. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Valley's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Valley must meet specific capital guidelines that involve quantitative measures of Valley's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Valley to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as defined in the regulations. As of December 31, 1998, Valley exceeded all capital adequacy requirements to which it was subject. The most recent notification received from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized Valley must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Valley's actual capital amounts and ratios as of December 31, 1998 and 1997 are presented in the following table:
To be Well Capitalized Under Prompt Minimum Capital Corrective Action Actual Requirements Provisions ------------------- -------------------- ------------------ Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (in thousands) As of December 31, 1998 Total Risk-based Capital ........... $595,921 14.5% $328,670 8.0% $410,837 10.0% Tier I Risk-based Capital .......... 546,053 13.3 164,335 4.0 246,502 6.0 Tier I Leverage Capital ............ 546,053 10.1 215,865 4.0 269,831 5.0 As of December 31, 1997 Total Risk-based Capital ........... 542,003 14.4 300,368 8.0 375,460 10.0 Tier I Risk-based Capital .......... 501,002 13.3 150,184 4.0 225,276 6.0 Tier I Leverage Capital ............ 501,002 9.3 214,464 4.0 268,080 5.0
DIVIDEND RESTRICTIONS VNB, a national banking association, is subject to a limitation in the amount of dividends it may pay to Valley, VNB's only shareholder. Prior approval by the Comptroller of the Currency ("OCC") is required to the extent that the total of all dividends to be declared by VNB in any calendar year exceeds net profits, as defined, for that year combined with its retained net profits from the preceding two calendar years, less any transfers to capital surplus. Under this limitation, VNB could declare dividends in 1999 without prior approval of the OCC of up to $46.5 million plus an amount equal to VNB's net profits for 1999 to the date of such dividend declaration. SHARES OF COMMON STOCK The following table summarizes the share transactions for the three years ended December 31, 1998: Shares in Shares Issued Treasury ------------- ---------- Balance, December 31, 1995 ..................... 49,550,214 (138,613) Stock dividend (5%) ........................... 1,002,025 1,178,743 Effect of stock incentive plan, net ........... 26,688 126,595 Issuance of stock ............................. 2,454,521 -- Purchase of treasury stock .................... (16,838) (1,510,186) ---------- -------- Balance, December 31, 1996 ..................... 53,016,610 (343,461) Stock dividend (5%) ........................... 2,511,465 -- Effect of stock incentive plan, net ........... (7,381) 226,695 Purchase of treasury stock .................... -- (239,316) ---------- -------- Balance, December 31, 1997 ..................... 55,520,694 (356,082) Effect of stock incentive plan, net ........... (17,634) 152,472 Purchase of treasury stock .................... -- (220,125) Issuance of stock from treasury ............... -- 187,000 ---------- -------- Balance, December 31, 1998 ..................... 55,503,060 (236,735) ========== ======== TREASURY STOCK On May 26, 1998 Valley's Board of Directors rescinded its previously announced stock repurchase program after 220,125 shares of Valley common stock had been repurchased. Rescinding the remaining authorization was undertaken in connection with Valley's acquisition of Wayne. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 16)
Quarters Ended 1998 ---------------------------------------------------- March 31 June 30 Sept 30 Dec 31 -------- ------- ------- ------- (in thousands, except for share data) Interest income ........................................ $97,334 $97,449 $98,055 $96,818 Interest expense ....................................... 40,499 40,185 40,210 39,210 Net interest income .................................... 56,835 57,264 57,845 57,608 Provision for possible loan losses ..................... 2,570 3,385 3,070 3,345 Non-interest income .................................... 10,400 11,037 10,813 10,823 Non-interest expense ................................... 31,127 31,173 33,710 38,747 Income before income taxes ............................. 33,538 33,743 31,878 26,339 Income tax expense ..................................... 9,859 8,760 7,020 2,511 Net income ............................................. 23,679 24,983 24,858 23,828 Earnings per share: Basic ................................................. 0.43 0.45 0.45 0.43 Diluted ............................................... 0.43 0.45 0.45 0.43 Cash dividends per share ............................... 0.22 0.25 0.25 0.25 Average shares outstanding: Basic .............................................. 55,024,368 54,962,274 54,974,545 54,988,705 Diluted ............................................ 55,641,013 55,630,639 55,610,876 55,546,491 Quarters Ended 1997 ---------------------------------------------------- March 31 June 30 Sept 30 Dec 31 -------- ------- ------- ------- (in thousands, except for share data) Interest income ........................................ $95,717 $96,178 $97,333 $97,856 Interest expense ....................................... 41,306 40,751 41,711 42,117 Net interest income .................................... 54,411 55,427 55,622 55,739 Provision for possible loan losses ..................... 1,325 1,975 2,275 7,075 Non-interest income .................................... 10,298 10,655 11,911 10,148 Non-interest expense ................................... 30,790 32,339 31,628 34,461 Income before income taxes ............................. 32,594 31,768 33,630 24,351 Income tax expense ..................................... 11,190 10,768 11,291 2,148 Net income ............................................. 21,404 21,000 22,339 22,203 Earnings per share: Basic ................................................. 0.39 0.38 0.41 0.40 Diluted ............................................... 0.39 0.38 0.40 0.40 Cash dividends per share ............................... 0.19 0.22 0.22 0.22 Average shares outstanding: Basic .............................................. 54,988,277 54,903,132 54,883,028 54,850,180 Diluted ............................................ 55,301,744 55,248,595 55,257,535 55,371,704
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PARENT COMPANY INFORMATION (Note 17) CONDENSED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------ 1998 1997 1996 ------- ------- ------- (in thousands) Income Dividends from subsidiary ............................................. $85,101 $49,500 $70,269 Interest from subsidiary .............................................. 959 550 798 Gains on securities transactions, net ................................. 743 1,849 219 Other interest and dividends .......................................... 683 1,475 598 ------- ------- ------- 87,486 53,374 71,884 Expenses ............................................................... 3,440 2,555 2,529 ------- ------- ------- Income before income taxes and equity in undistributed earnings in subsidiary .................................. 84,046 50,819 69,355 Income tax expense (benefit) ........................................... 187 295 (47) ------- ------- ------- Income before equity in undistributed earnings of subsidiary ........... 83,859 50,524 69,402 Equity in undistributed earnings of subsidiary ......................... 13,489 36,422 2,102 ------- ------- ------- Net income ............................................................. $97,348 $86,946 $71,504 ======= ======= =======
CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31, ---------------------- 1998 1997 -------- -------- (in thousands) ASSETS Cash ................................................. $ 1,086 $ 478 Interest bearing deposits with banks ................. 16,147 20,200 Investment securities available for sale ............. 71,174 29,605 Trading account securities ........................... 1,592 -- Investment in subsidiary ............................. 476,419 462,768 Advance to subsidiary ................................ -- 3,409 Loan to subsidiary bank ESOP ......................... 1,250 1,428 Other assets ......................................... 3,910 4,270 -------- -------- Total assets ....................................... $571,578 $522,158 ======== ======== LIABILITIES Dividends payable to shareholders .................... $13,749 $11,747 Other liabilities .................................... 2,042 1,10 -------- -------- Total liabilities .................................. 15,791 12,855 -------- -------- SHAREHOLDERS' EQUITY Common stock ......................................... 24,424 24,345 Surplus .............................................. 311,611 310,904 Retained earnings .................................... 223,185 178,739 Unallocated common stock held by the ESOP ............ (1,331) (1,604) Accumulated other comprehensive income ............... 4,084 3,614 -------- -------- 561,973 515,998 Treasury stock, at cost .............................. (6,186) (6,695) -------- -------- Total shareholders' equity ......................... 555,787 509,303 -------- -------- Total liabilities and shareholders' equity ......... $571,578 $522,158 ======== ======== 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, -------- ---------------------------- 1998 1997 1996 -------- -------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 97,348 $ 86,946 $ 71,504 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary ..................... (13,489) (36,422) (2,102) Depreciation and amortization ...................................... 465 570 434 Amortization of compensation costs on non-qualified stock options and restricted stock awards ............................... 1,036 898 448 Net deferred income tax (benefit) expense .......................... (15) 89 482 Net accretion of discounts ......................................... (360) (838) -- Net gains on securities transactions ............................... (743) (1,849) (219) Net (increase) decrease in other assets ............................ (106) 274 (10,770) Net decrease in other liabilities .................................. (1,474) (1,460) (295) -------- -------- -------- Net cash provided by operating activities ........................ 82,662 48,208 59,482 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale .... 16,918 6,050 715 Proceeds from maturing investment securities available for sale .... 15,000 -- -- Purchases of investment securities available for sale .............. (71,809) (22,264) (2,242) Net decrease(increase) in short-term investments ................... 4,053 7,300 (1,000) Decrease (increase) in advance to subsidiary ....................... 3,409 5,204 (8,727) ESOP loan to subsidiary ............................................ -- -- (1,785) Payment of ESOP loan ............................................... 178 181 -- -------- -------- -------- Net cash used in investing activities ............................ (32,251) (3,529) (13,039) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of common shares added to treasury ....................... (6,658) (4,417) (32,267) Dividends paid to common shareholders .............................. (50,052) (42,805) (38,373) Common stock issued, net of cancellations .......................... 6,907 1,156 21,669 -------- -------- -------- Net cash used in financing activities ............................ (49,803) (46,066) (48,971) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ................ 608 (1,387) (2,528) Cash and cash equivalents at beginning of year ...................... 478 1,865 4,393 -------- -------- -------- Cash and cash equivalents at end of year ............................ $ 1,086 $ 478 $ 1,865 ======== ======== ========
FAIR VALUES OF FINANCIAL INSTRUMENTS (Note 18) Limitations: The fair value estimates made at December 31, 1998 and 1997 were based on pertinent market data and relevant information on the financial instruments at that time. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portfolio of financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation and trust department) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of each class of financial instruments and mortgage servicing rights: Cash and short-term investments: For such short-term investments, the carrying amount is considered to be a reasonable estimate of fair value. Investment securities held to maturity, investment securities available for sale and trading account securities: Fair values are based on quoted market prices. Loans: Fair values are estimated by obtaining quoted market prices, when available. The fair value of other loans is estimated by discounting the future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loan. Deposit liabilities: Current carrying amounts approximate estimated fair value of demand deposits and savings accounts. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for deposits of similar remaining maturity. Short-term borrowings: Current carrying amounts approximate estimated fair value. Other borrowings: The fair value is estimated by discounting future cash flows based on rates currently available for debt with similar terms and remaining maturity. The carrying amounts and estimated fair values of financial instruments were as follows at December 31, 1998 and 1997:
1998 1997 ------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- (in thousands) Financial assets: Cash and due from banks ......................... $ 175,794 $ 175,794 $ 151,620 $ 151,620 Federal funds sold .............................. 102,000 102,000 33,400 33,400 Investment securities held to maturity .......... 237,410 238,421 166,615 168,476 Investment securities available for sale ........ 927,481 927,481 1,090,638 1,090,638 Trading account securities ...................... 1,592 1,592 -- -- Net loans ....................................... 3,927,982 3,967,221 3,754,892 3,798,176 Financial liabilities: Deposits with no stated maturity ................ 2,837,567 2,837,567 2,700,001 2,700,001 Deposits with stated maturities ................. 1,837,122 1,847,385 1,902,320 1,910,164 Short-term borrowings ........................... 53,081 53,081 56,938 56,938 Other borrowings ................................ 212,949 214,958 146,012 146,166
The estimated fair value of financial instruments with off-balance sheet risk, consisting of unamortized fee income at December 31, 1998 and 1997 is not material. BUSINESS SEGMENTS (Note 19) VNB has three major business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, and investment management. 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 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) with the back office departments of the bank are allocated to each of the three business segments. The financial reporting for each segment contains allocations and reporting in line with VNB's operations, which may not necessarily be compared to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. Consumer lending delivers loan and banking products and services mainly to individuals and small businesses through its branches, ATM machines, PC banking and sales, service and collection force within each lending department. The products and services include residential mortgages, home equity loans, automobile loans, credit card loans, trust services and mortgage servicing for investors. Automobile lending is generally available throughout New Jersey, but is also currently available in eleven states and Canada as part of a referral program with a major insurance company. The commercial lending division provides loan products and services to small and medium commercial establishments throughout northern New Jersey. These include lines of credit, term loans, letters of credit, asset-based lending, construction, development and permanent real estate financing for owner occupied and leased properties and Small Business Administration ("SBA") loans. The SBA loans are offered through a sales force covering New Jersey and a number of surrounding states and territories. The commercial lending division serves numerous businesses through departments organized into product or specific geographic divisions. The investment function handles the management of the investment portfolio, asset-liability management and government banking for VNB. The objectives of this department are production of income and liquidity through the investment of VNB's funds. The bank purchases and holds a mix of bonds, notes, U.S. and other governmental securities and other investments. The corporate segment represents assets and income and expense items not directly attributable to a specific segment. The following table represents the financial data for the three business segments for the years 1998 and 1997. It is not practical to show information for 1996.
Consumer Lending Commercial Lending Investment Management ----------------------- ----------------------- ----------------------- 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- ---------- ---------- ---------- (in thousands) Average interest-earning assets ....................... $2,404,902 $2,288,225 $1,454,928 $1,376,607 $1,230,493 $1,376,218 ========== ========== ========== ========== ========== ========== Interest income ............... $ 190,017 $ 182,831 $ 126,245 $ 121,742 $ 79,592 $ 89,719 Interest expense .............. 75,521 74,855 45,689 45,033 38,641 45,021 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income ........... 114,496 107,976 80,556 76,709 40,951 44,698 Provision for possible loan losses ....................... 10,550 11,100 1,700 1,275 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for possible loan losses .................. 103,946 96,876 78,856 75,434 40,951 44,698 Non-interest income ........... 16,310 19,737 6,040 6,092 20 -- Non-interest expense .......... 29,973 39,588 9,208 8,248 111 -- Internal expense transfer ..... 33,655 23,880 20,361 17,667 17,221 15,435 ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes .... $ 56,628 $ 53,145 $ 55,327 $ 55,611 $ 23,639 $ 29,263 ========== ========== ========== ========== ========== ========== Return on average interest-earning assets (pre-tax) .................... 2.35% 2.32% 3.80% 4.04% 1.92% 2.13% Corporate and Other Adjustments Total ----------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Average interest-earning assets ....................... $ 8,034 $ 29,718 $5,098,357 $5,070,768 ========== ========== ========== ========== Interest income ............... $ (6,198) $ (7,208) $ 389,656 $ 387,084 Interest expense .............. 253 976 160,104 165,885 ---------- ---------- ---------- ---------- Net interest income ........... (6,451) (8,184) 229,552 221,199 Provision for possible loan losses ....................... 120 275 12,370 12,650 ---------- ---------- ---------- ---------- Net interest income after provision for possible loan losses .................. (6,571) (8,459) 217,182 208,549 Non-interest income ........... 20,703 17,183 43,073 43,012 Non-interest expense .......... 95,465 81,382 134,757 129,218 Internal expense transfer ..... (71,237) (56,982) -- -- Income before income taxes .... $ (10,096) $ (15,676) $ 125,498 $ 122,343 ========== ========== ========== ========== Return on average interest-earning assets (pre-tax) .................... -- -- 2.46% 2.41%
56 [KPMG LOGO] INDEPENDENT AUDITORS' REPORT KPMG LLP Certified Public Accountants New Jersey Headquarters 150 John F. Kennedy Parkway Short Hills, NJ 07078 THE BOARD OF DIRECTORS AND SHAREHOLDERS VALLEY NATIONAL BANCORP: We have audited the accompanying consolidated statements of financial condition of Valley National Bancorp and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valley National Bancorp and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP January 20, 1999 57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information which will be set forth under the caption "Director Information" in the 1999 Proxy Statement is incorporated herein by reference. Certain information on Executive Officers of the registrant is included in Part I, Item 4A of this report, which is also incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information which will be set forth under the caption "Executive Compensation" in the 1999 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information which will be set forth under the caption "Stock Ownership of Management and Principal Shareholders" in the 1999 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information which will be set forth under the captions "Certain Transactions with Management" and "Personnel and Compensation Committee Interlocks and Insider Participation" in the 1999 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules: The financial statements listed on the index of this Annual Report on Form 10-K are filed as part of this Annual Report. All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (b) Current Reports on Form 8-K during the quarter ended December 31, 1998: On October 12, 1998 to report financial results for the third quarter of 1998. On October 16, 1998 to report the merger of Wayne Bancorp, Inc. into Valley National Bancorp effective as of the close of business on October 16, 1998. On December 22, 1998 to report the signing of the Agreement and Plan of Merger, dated December 17, 1998 among Valley National Bancorp, Valley National Bank, Ramapo Financial Corporation and The Ramapo Bank. (c) Exhibits (numbered in accordance with Item 601 of Regulation S-K): 58 (3) Articles of Incorporation and By-laws: A. Restated Certificate of Incorporation of the Registrant as in effect on February 12, 1997 is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996. B. Amendment to the Certificate of Incorporation dated April 30, 1997 is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. C. Amendment to the Certificate of Incorporation dated May 1, 1998 is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. D. By-laws of the Registrant adopted as of March 14, 1989 and amended March 19, 1991. (10) Material Contracts: A. Restated and amended "Change in Control Agreements" dated January 1, 1999 between Valley, VNB and Gerald H. Lipkin, Peter Southway, Peter John Southway, Robert Meyer, and Peter Crocitto. B. "Change in Control Agreements" dated January 1, 1995 between Valley, VNB and Robert Farrell, Richard Garber and Robert Mulligan are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1994. C. "Change in Control Agreement" dated February 1, 1996 between Valley, VNB and Jack Blackin is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996. D. "Change in Control Agreement" dated April 15, 1996 between Valley, VNB and John Prol is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996. E. "The Valley National Bancorp Long-term Stock Incentive Plan" dated January 19, 1999 is incorporated herein by reference to the Registrant's Notice of Annual Meeting of Shareholders and Proxy dated March 1, 1999. F. "Severance Agreements" dated August 17, 1994 between Valley, VNB and Gerald H. Lipkin and Peter Southway are incorporated by reference to Registrant's Registration Statement on Form S-4 (No. 33-55765) filed with the Securities and Exchange Commission on October 4, 1994. G. "Stock Option Agreement" dated April 1, 1992 between Valley and Michael Guilfoile is incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. H. "Split-Dollar Agreement" dated July 7, 1995 between Valley, VNB, and Gerald H. Lipkin is incorporated by reference to Registrant's Report on Form 10-K Annual Report for the year ended December 31, 1995. I. "Employment Arrangement" dated June 6, 1996 between Valley, VNB and Peter Southway is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996. J. "Severance Agreements" as of January 1, 1998 between Valley, VNB and Peter Crocitto, Robert M. Meyer and Peter John Southway are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1997. K. "Change in Control Agreement" dated January 1, 1998 between Valley, VNB and Alan Lipsky is incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. L. "Change in Control Agreements" dated January 1, 1999 between Valley, VNB and Alan D. Eskow and Robert J. Farnon. 59 (21) List of Subsidiaries: (a) Subsidiary of Valley:
Jurisdiction of Percentage of Voting Name Incorporation Securities Owned by the Parent ---- ------------- ------------------------------ Valley National Bank (VNB) United States 100% (b) Subsidiaries of VNB: VNB Mortgage Services, Inc. New Jersey 100% BNV Realty Incorporated (BNV) New Jersey 100% VN Investment, Inc. New Jersey 100% VNB Financial Advisors, Inc. New Jersey 100% VNB Loan Services, Inc. New York 100% VNB RSI, Inc. New Jersey 100% Wayne Ventures, Inc. New Jersey 100% Wayne Title Company, Inc. New Jersey 100% VNB International Services, Inc. (ISI) New Jersey 100% (c) Subsidiary of ISI: VNB Financial Services, Inc. Canada 100% (d) Subsidiaries of BNV SAR I, Inc. New Jersey 100% SAR II, Inc. New Jersey 100%
(23) Consents of Experts and Counsel Consent of KPMG LLP. (24) Power of Attorney of Certain Directors and Officers of Valley (27) Financial Data Schedule 60 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALLEY NATIONAL BANCORP By /s/ GERARD H. LIPKIN ---------------------------------------- GERARD H. LIPKIN, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Dated: February 26, 1999 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GERALD H. LIPKIN Chairman, President and Chief February 26, 199 - --------------------------------------- Executive Officer and Director GERALD H. LIPKIN /s/ PETER SOUTHWAY Vice Chairman (Principal Financial February 26, 1999 - --------------------------------------- Officer) and Director PETER SOUTHWAY /s/ ALAN D. ESKOW Corporate Secretary, Senior Vice February 26, 1999 - --------------------------------------- President and Controller ALAN D. ESKOW (Principal Accounting Officer) ANDREW B. ABRAMSON* Director February 26, 1999 - --------------------------------------- ANDREW B. ABRAMSON PAMELA BRONANDER* Director February 26, 1999 - --------------------------------------- PAMELA BRONANDER JOSEPH COCCIA, JR.* Director February 26, 1999 - --------------------------------------- JOSEPH COCCIA, JR. HAROLD P. COOK, III* Director February 26, 1999 - --------------------------------------- HAROLD P. COOK, III AUSTIN C. DRUKKER* Director February 26, 1999 - --------------------------------------- AUSTIN C. DRUKKER WILLARD L. HEDDEN* Director February 26, 1999 - --------------------------------------- WILLARD L. HEDDEN GRAHAM O. JONES* Director February 26, 1999 - --------------------------------------- GRAHAM O. JONES WALTER H. JONES, III* Director February 26, 1999 - --------------------------------------- WALTER H. JONES, III GERALD KORDE* Director February 26, 1999 - --------------------------------------- GERALD KORDE JOLEEN J. MARTIN* Director February 26, 1999 - --------------------------------------- JOLEEN J. MARTIN
61
SIGNATURE TITLE DATE --------- ----- ---- ROBERT E. MCENTEE* Director February 26, 1999 - --------------------------------------- ROBERT E. MCENTEE SAM P. PINYUH* Director February 26, 1999 - --------------------------------------- SAM P. PINYUH ROBERT RACHESKY* Director February 26, 1999 - --------------------------------------- ROBERT RACHESKY BARNETT RUKIN* Director February 26, 1999 - --------------------------------------- BARNETT RUKIN RICHARD F. TICE* Director February 26, 1999 - --------------------------------------- RICHARD F. TICE LEONARD J. VORCHEIMER* Director February 26, 1999 - --------------------------------------- LEONARD J. VORCHEIMER JOSEPH L. VOZZA* Director February 26, 1999 - --------------------------------------- JOSEPH L. VOZZA *By Gerald H. Lipkin, as attorney-in-fact.
62 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT DESCRIPTION (3) D By-laws (10) A Change in control agreements - Gerald H. Lipkin, Peter Southway, Peter John Southway, Robert Meyer, Peter Crocitto (10) L Change in control agreements - Alan D. Eskow, Robert J. Farnon (23) Consent of KPMG LLP (24) Power of Attorney (27) Financial Data Schedule EX-3.(D) 2 BY-LAWS BY-LAWS OF VALLEY NATIONAL BANCORP ARTICLE I SHAREHOLDERS MEETINGS 1. Annual Meeting. The annual meeting of shareholders for the election of directors and such other business as may properly come before the meeting shall be held upon not less than 10 nor more than 60 days written notice of the date, time, place and purposes of the meeting. The annual meeting shall be held at 3:00 p.m. on the fourth Tuesday of March each year at the principal place of business of the Corporation, 505 Allwood Road, Clifton, New Jersey, or at such other time and place as shall be fixed by the Board of Directors. 2. Nominations for Director. Nominations for election to the Board of Directors may be made by the Board of Directors or upon 90 days advance written notice to the Board of Directors by any shareholder of any outstanding class of stock of the Corporation entitled to vote for the election of directors. 3. Special Meetings. A special meeting of shareholders may be called for any purpose by the Chairman, Chief Executive Officer, the President or a majority of the Board of Directors. A special meeting shall be held upon not less than 10 nor more than 60 days written notice of the time, place and purpose of the meeting. - 1 - 4. Quorum. The holders of a majority of the outstanding common stock represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. The majority of the shareholders at a meeting, though less than a quorum, may adjourn any meeting. The corporation shall not be required to give notice of an adjourned meeting if the time and place of the meeting are announced at the meeting from which an adjournment is taken and the business transacted at the adjourned meeting is limited to that which might have been transacted at the original meeting. 5. Shareholder Action. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by the New Jersey Business Corporation Act, by the certificate of incorporation or by these By -Laws. 6. Record Date. The Board of Directors shall fix a record date for each meeting of shareholders and for other corporate action for purposes of determining the shareholders of the corporation who are entitled to: (i) notice of or to vote at any meeting of shareholders; (ii) give a written consent to any action without a meeting; or (iii) receive payment of any dividend, distribution, or allotment of any right. The record date may not be more than 60 days nor less than 10 days prior to the shareholders meeting, or other corporate action or event to which it relates. - 2 - 7. Inspectors of Election. In advance of any shareholders' meeting, the Board of Directors may appoint one or more inspectors of election whose duty it shall be to determine the shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies. The inspectors shall receive and tabulate all votes, except voice votes, determine the results of all such votes, including the election of directors, and do such acts as are proper to conduct the election or vote, including hearing and determining all challenges and questions arising in connection with the right to vote. After any meeting, the inspectors shall file with the Secretary of the meeting a certificate under their hands, certifying the result oil any vote or election, and in the case of an election, the names of the directors elected. 8. Proxies. Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing. ARTICLE II DIRECTORS 1. Board of Directors. The Board of Directors (the "Board"), shall have power to manage and administer the business and affairs of the Corporation. Except as expressly limited by these By-Laws, all powers of the Corporation shall be vested in and may be exercised by the Board. 2. Number and Term of Office. The number of directors shall be not less than five and not more than 25. The exact number shall be - 3 - determined by the Board. Directors shall be elected by the shareholders at each annual meeting and shall hold office until the next annual meeting of shareholders and until their successors shall have been elected and qualified. The Board shall have the right to increase the number of directors between annual meetings and to fill vacancies so created and other vacancies occurring for any reason. 3. Directors Emeritus and Honorary Directors. The Board may grant the title of Director Emeritus or Honorary Director to such former directors or other worthy individuals as it determines who will receive any fees, entitlements, duties and powers as may be conferred by the Board in its discretion. 4. Regular Meetings. A regular meeting of the Board shall be held without notice immediately following and at the same place as the annual shareholders' meeting for the purpose of electing officers and conducting any other business as may come before the meeting. The Board shall hold a regular meeting on the second Tuesday of each month and, by resolution, may provide for different or additional regular meetings. All regular meetings shall be held in the Main Office of Valley National Bank, 615 Main Avenue, Passaic, New Jersey, unless otherwise provided by the Board. All regular meetings may be held without notice to any director, except that a director not present at the time of the adoption of a resolution setting forth different or additional regular meeting dates shall be entitled to notice of those meetings. - 4 - 5. Special Meetings. A special meeting of the Board may be called for any purpose at any time by the Chairman, Chief Executive Officer, the President or by a majority of the directors. The meeting shall be held upon not less than one days' notice if given by telegraph or orally (either by telephone or in person), or upon not less than three days notice if given by depositing the notice in the United States mails, postage prepaid. The notice shall specify the time and place of the meeting. 6. Action Without Meeting. The Board may act without a meeting if, prior or subsequent to the action, each member of the Board shall consent in writing to the action. The written consent or consents shall be filed in the minute book. 7. Quorum. A majority of the directors shall constitute a quorum at any meeting, except when otherwise provided by the New Jersey Business Corporation Act. However, a smaller number may adjourn any meeting and the meeting may be held, as adjourned, without further notice. The act of the majority present at a meeting at which a quorum is present shall be the act of the Board, unless otherwise provided by the New jersey Business Corporation Act, the certificate of incorporation or these By-Laws. 8. Vacancies in Board of Directors. Any vacancy in the Board, including a vacancy caused by an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors. - 5 - 9. Telephone Participation in Board Meetings. One or more directors may participate in a meeting of the Board, or of any committee thereof, by means of a speaker or conference telephone or similar communications equipment which permits all person participating in the meeting to hear each other. Any director who is unable to attend any meeting of the Board or any committee thereof shall have the right, upon prior written request, to participate in the meeting by such telephone hook-up if the means are reasonably available at the place where the meeting is to be held. ARTICLE III COMMITTEES OF THE BOARD 1. Executive Committee. The Board, by the vote of a majority of the entire Board, annually shall appoint an Executive Committee composed of at least five directors, among whom shall be the Chairman and the Chief Executive Officer of the Corporation. At least three members or a majority of the Committee shall not be employees of the Corporation or any of its subsidiaries. The Executive Committee shall have and may exercise all of the power of the Board except as otherwise provided in the New Jersey Business Corporation Act. As provided, in the New Jersey Business Corporation Act, the Executive Committee shall not (i) make, alter or repeal any of these By-Laws; (ii) elect or appoint any director, or remove any officer or director; (iii) submit to shareholders any action that requires shareholders' approval; and (iv) amend or repeal any - 6 - resolution theretofore adopted by the Board which by its terms is amendable or repealable only by the Board. The Executive Committee shall keep minutes of its meetings, and such minutes shall be submitted to the next regular or special meeting of the Board at which a quorum is present, and any action taken by the Board with respect thereto shall be entered in the minutes of the Board. A majority of the directors on the Executive Committee shall constitute a quorum for the transaction of business. The Chairman shall serve as chairman of the Executive Committee. 2. Nominating Committee. The Board, by the vote of a majority of the entire Board, annually shall appoint a Nominating Committee composed of at least five directors, one of the of whom shall be the Chief Executive Officer of the Corporation, and the balance of whose members shall not be employees of the Corporation or any of its subsidiaries. The Nominating Committee shall identify and select candidates for nomination to the Board and recommend those selected to the entire Board for its approval. 3. Audit and Examining Committee. The Board, by the vote of a majority of the entire Board, annually shall appoint an Audit and Examining Committee composed of not less than three directors who shall not be active officers or employees of the Corporation. This Committee shall review significant audit and accounting principles, policies and practices, meet with the internal auditors of Valley National Bank (the "Bank"), review the report of the annual directors' examination of the Bank - 7 - conducted by the outside auditors and review examination reports and other reports of federal regulatory agencies. 4. Compensation Committee. The Board, by the vote of a majority of the entire Board, annually shall appoint a Compensation Committee Composed of at least five directors, none of whom shall be an officer of the Corporation. The Compensation Committee shall approve the salaries of Senior Officers of the Corporation and the Corporation's Profit Sharing, Pension, Long Term Stock Incentive and other compensation plans. 5. Other Committees. The Board may appoint, from time to time, from its own members, ad hoc and other committees of one or more directors, for such purposes and with such powers as the Board may determine. ARTICLE IV WAIVERS OF NOTICE Any notice required by these By-Laws, by the certificate of incorporation, or by the New Jersey Business Corporation Act may be waived in writing by any person entitled to notice. The waiver, or waivers, may be executed either before or after the event with respect to which the notice is waived. Each director or shareholder attending a meeting without protesting, prior to its conclusion, the lack of proper notice shall be deemed conclusively to have waived notice of the meeting. - 8 - ARTICLE V OFFICERS 1. Election. At its regular meeting following the annual meeting of shareholders, the Board shall elect a Chief Executive Officer, a Chairman of the Board, a Vice Chairman, a President, a Vice President, a Treasurer, a Secretary, and such other officers as it shall deem necessary. One person may hold two or more offices. 2. Chief Executive Officer. The Board of Directors shall appoint one of its members to be Chief Executive Officer of the Corporation to serve at the pleasure of the Board. The Chief Executive Officer may also hold another office or offices in the Corporation. He shall have general authority over all the business and affairs of the Corporation. 3. Chairman of the Board. The Board shall appoint one of its members to be Chairman of the Board to serve at the pleasure of the Board. Such person shall preside at all meetings of the Board and of the shareholders, and shall also have and may exercise such further powers and duties as from time to time may be conferred or assigned by the Board or by the Chief Executive Officer. In the Chairman's absence, the Board will designate one of the senior officers who are members of the Board to serve as Chairman. 4. Vice Chairman. The Board of Directors shall appoint one or more of its members to be Vice Chairman to serve at the pleasure of the Board. Such person shall have such power and duties as may be - 9 - assigned by these By-Laws, by the Board of Directors or by the Chief Executive Officer. 5. President. The Board shall appoint one of its members to be President of the Corporation. The President shall have and may exercise any and all powers and duties pertaining by law, regulation, or practice to the office of president, or imposed by these By-Laws. The President shall also have and may exercise such further powers and duties as from time to time may be conferred or assigned by the Board or the Chief Executive Officer. 6. Vice President. The Board may appoint one or more Executive Vice Presidents, one or more Senior Vice Presidents, and one or more Vice Presidents. Each Vice President shall perform the duties and have the authority as from time to time may be delegated to him by the Chief Executive Officer, by the Board of Directors, or by these By-Laws. 7. Secretary. The Board shall appoint a Secretary who shall be Secretary for meetings of the Board and of the Corporation, and shall keep accurate minutes of those meetings. The Secretary shall attend to the giving of all notices required by these By-Laws and shall be custodian of the corporate seal, records, documents and papers of the Corporation. The Secretary also shall have and may exercise any and all other powers and duties pertaining by law or practice to the office of Secretary, and shall also perform such other duties as may be assigned from time to time by the Board. - 10 - 8. Treasurer. The Board shall appoint a Treasurer who shall have custody of the funds and securities of the Corporation and shall keep or cause to be kept regular books of the account for the Corporation. The Treasurer shall perform such other duties and possess such other powers as are incident to his office or as shall be assigned to him by the President or the Board. 9. Other Officers. The Board may appoint ore or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as from time to time may appear to the Board to be required or desirable o transact the business of the Corporation. Such officers shall respectively exercise such powers and perform such duties as pertain to their several offices, or as may be conferred upon or assigned to them by the Board, the Chief Executive Officer, or the President. 10. Tenure of Office. The Chairman, the Chief Executive Officer, any Vice Chairman, the President, the Secretary, the Treasurer and all other officers shall hold office for the current year for which the Board was elected, unless they shall resign, become disqualified, or be removed. Any vacancy occurring in the office of Chief Executive Officer, Chairman, Vice Chairman, President, Secretary or Treasurer shall be filled promptly by the Board. ARTICLE VI - 11 - STOCK AND STOCK CERTIFICATES 1. Transfers. Shares of stock shall be transferable on the books of the Corporation, and a transfer book shall be kept in which all transfers of stock shall be recorded. Every person becoming a shareholder by such transfer shall, in proportion to his shares, succeed to all rights of the prior holder of such shares. 2. Share Certificates. The shares of the corporation shall be represented by certificates signed by or in the name of the Corporation, by the Chief Executive Officer, or the President or a Vice President, and by the Secretary, Treasurer, Assistant Secretary or Assistant Treasurer of the Corporation, and may be sealed with the seal of the Corporation. Any signature and the seal may be reproduced by facsimile. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. ARTICLE VII AMENDMENTS TO AND EFFECT OF BY-LAWS; FISCAL YEAR 1. Force and Effect of By-Laws. These By-Laws are subject to the provisions of the New Jersey Business Act and the Corporation's certificate of incorporation, as it may be amended from time to time. If any provision in these By-Laws is inconsistent with a provision of the Act or - 12 - the certificate of incorporation, the provisions of the Act or the certificate of incorporation shall govern. 2. Amendments to By-Laws. These By-Laws may be altered, amended, or repealed by the shareholders or by the Board. Any By-Law adopted, amended, or repealed by the shareholders may be amended or repealed by the Board, unless the resolution of the shareholders adopting such By-Law expressly reserves to the shareholders the right to amend or repeal it. 3. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January each year. 4. Records. The certificate of incorporation, the By-Laws and the proceedings of all meetings of the shareholders, the Board, and standing committees of the Board shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as secretary of the meeting. 5. Inspection. A copy of the By-Laws, with all amendments thereto, shall at all times be kept in a convenient place at the principal place of business of the Corporation, and for a proper purpose shall be open for inspection to any shareholder during business hours. - 13 - ARTICLE VII CORPORATE SEAL The Chairman, any Vice Chairman, the Chief Executive Officer, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer and any Assistant Treasurer, shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. Such seal shall be substantially in the following form: ( Impression ) ( of ) ( Seal ) - 14 - April 9. 1991 Minutes of board of Directors Meeting (#2 of1991) Valley National Bancorp In order to provide sufficient time for the compilation, preparation and mailing to the members, of the high volume of monthly Board reports, management recommended that commencing July the day of regular Board Meetings be changed from the second Tuesday of each month to the third Tuesday of each month; and that Executive Committee Meetings be held on the second and fourth Tuesdays of each month. On motion made by Mr. Southway, seconded by Mr. McEntee, the members unanimously approved the recommendation, and the following Resolution: RESOLVED that Section 4 of Article II of the By-Laws of Valley NationalBancorp be amended to reflect the following change: .......The Board shall hold a regular meeting on the third Tuesday of each month and, by resolution, may provide for different or additional regular meetings ........ - 15 - EX-10.(A) 3 CHANGE IN CONTROL AGREEMENTS-EXECUTIVES AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT (GERALD H. LIPKIN) THIS AMENDED AND RESTATED CHANGE IN CONTROL EMPLOYMENT AGREEMENT (the "Agreement"), is made as of this 1st day of January, 1999, among VALLEY NATIONAL BANK ("Bank"), a national banking association with its principal office at 1445 Valley Road, Wayne, New Jersey, VALLEY NATIONAL BANCORP ("Valley"), a New Jersey Corporation which maintains its principal office at 1445 Valley Road, Wayne, New Jersey (Valley and the Bank collectively are the "Company") and GERALD H. LIPKIN (the "Executive"). BACKGROUND WHEREAS, the Executive has been employed by Valley and the Bank for many years; WHEREAS, the Executive throughout his tenure has worked diligently in his position in the business of the Bank and Valley; WHEREAS, the Board of Directors of the Bank and Valley believe that the future services of the Executive are of great value to the Bank and Valley and that it is important for the growth and development of the Bank that the Executive continue in his position; WHEREAS, if the Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, the Board of Directors of the Company (the "Board") believes it is imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that they be able to receive and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; WHEREAS, to achieve that goal, and to retain the Executive's services prior to any such activity, the Board of Directors and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control of the Company, as hereinafter defined; and WHEREAS, the Executive and the Company had entered into a Change in Control Agreement, dated January 1, 1995, and have agreed to amend and restate that agreement with this Agreement. NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of an acquisition or a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby, agree as follows: 1. Definitions a. Cause. For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean (i) willful and continued failure by the Executive to perform his duties for the Company under this Agreement after at least one warning in writing from the Boards of Directors of the Company identifying specifically any such failure; (ii) the willful engaging by the Executive in misconduct which causes material injury to the Company as specified in a written notice to the Executive from the Boards of Directors of the Company; or (iii) conviction of a crime (other than a traffic violation), habitual drunkenness, drug 2 abuse, or excessive absenteeism (other than for illness), after a warning (required with respect to drunkenness or absenteeism only) in writing from the Boards of Directors of the Company to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interests of the Company. b. Change in Control. "Change in Control" means any of the following events: (i) when Valley or a Subsidiary acquires actual knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of Valley or a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates, is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of Valley representing more than twenty-five percent (25%) of the combined voting power of Valley's then outstanding securities (a "Control Person"); (ii) upon the first purchase of Valley's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by Valley, a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates); (iii) the consummation of (A) a merger or consolidation of Valley with or into another corporation unless the definitive agreement provides that at least two-thirds of the directors of the surviving or resulting corporation immediately after the transaction are directors of Valley before the transaction commenced (a "Non-Control Transaction"), (B) a sale or disposition of all or substantially all of Valley's assets or (C) a plan of liquidation or dissolution of Valley; (iv) if during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof or, following a Non-Control Transaction, two-thirds of the board of directors of the surviving or resulting 3 corporation; provided that any individual whose election or nomination for election as a member of the Board (or, following a Non-Control Transaction, the board of directors of the surviving or resulting corporation) was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director; or (v) upon a sale of (A) common stock of the Bank if after such sale any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) other than Valley, an employee benefit plan established or maintained by Valley or a Subsidiary, or an affiliate of Valley or a Subsidiary, owns a majority of the Bank's common stock or (B) all or substantially all of the Bank's assets (other than in the ordinary course of business). c. Contract Period. "Contract Period" shall mean the period commencing the day immediately preceding a Change in Control and ending on the earlier of (i) the third anniversary of the Change in Control or (ii) the date the Executive would attain age 65 or (iii) the death of the Executive. For the purpose of this Agreement, a Change in Control shall be deemed to have occurred at the date specified in the definition of Change in Control. d. Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. e. Good Reason. When used with reference to a voluntary termination by Executive of his employment with the Company, "Good Reason" shall mean any of the following, if taken without Executive's express prior written consent: (1) The assignment to Executive of any duties inconsistent with, or the reduction of powers or functions associated with, Executive's position, title, duties, responsibilities and status with the Company immediately prior to a Change in Control; any removal of Executive from, or any failure to re-elect Executive to, any position(s) or office(s) Executive held immediately prior to such Change in Control. 4 (2) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control or the failure to award Executive annual increases in accordance herewith; (3) A failure by the Company to continue any bonus plan in which Executive participated immediately prior to the Change in Control (except that the Company may institute plans, programs or arrangements providing the Executive substantially similar benefits) or a failure by the Company to continue Executive as a participant in such plans on at least the same basis as Executive participated in such plan prior to the Change in Control; or a failure to pay the Executive the bonus provided for in Section 4.b hereof at the time and in the manner therein specified; (4) The Company's transfer of Executive to another geographic location outside of New Jersey or more than 25 miles from his present office location, except for required occasional travel on the Company's business to an extent consistent with Executive's business travel obligations immediately prior to such Change in Control; (5) The failure by the Company to continue in effect any employee benefit plan, program or arrangement (including, without limitation the Company's retirement plan, benefit equalization plan, split-dollar life insurance agreement for the Executive, health and accident plan, disability plan, deferred compensation plan or long term stock incentive plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements; the failure to continue, or the taking of any action which would deprive 5 Executive, of any material fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; (6) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive prior to any Change in Control; or (7) Any purported termination of Executive's employment by the Company during the term of this Agreement which is not effected pursuant to all of the requirements of this Agreement; and, for purposes of this Agreement, no such purported termination shall be effective. f. Subsidiary. "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with Valley, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, during the Contract Period upon the terms and conditions set forth herein. 3. Position. During the Contract Period the Executive shall be employed as Chairman and Chief Executive Officer of Valley and the Bank, or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with the same title and with the same duties and responsibilities as before the Change in Control. The Executive shall devote his full time and attention to the business of the Company, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall 6 not be construed as preventing the Executive from managing any investments of his which do not require any service on his part in the operation of such investments or from continuing to serve on any boards of directors or trustees which he served prior to the Change in Control or for which consent is provided by the Board after a Change in Control. 4. Cash Compensation. The Company shall pay to the Executive compensation for his services during the Contract Period as follows: a. Base Salary. A base annual salary equal to the annual salary in effect as of the Change in Control. The annual salary shall be payable in installments in accordance with the Company's usual payroll method. b. Annual Bonus. An annual cash bonus equal to at least the average of the bonuses paid to the Executive in the three years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control. c. Annual Review. The Board of Directors of the Company during the Contract Period shall review annually, or at more frequent intervals which the Board determines is appropriate, the Executive's compensation and shall award him additional compensation to reflect the Executive's performance, the performance of the Company and competitive compensation levels, all as determined in the discretion of the Board of Directors. 5. Expenses and Fringe Benefits. a. Expenses. During the Contract Period, the Executive shall be entitled to reimbursement for all business expenses incurred by him with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to him immediately prior to the Change in Control. 7 b. Benefit Equalization Plan. During the Contract Period, if the Executive was entitled to benefits under the Company's Benefit Equalization Plan ("BEP") prior to the Change in Control, the Executive shall be entitled to continued benefits under the BEP after the Change in Control and such BEP may not be modified or terminated to reduce or eliminate such benefits during the Contract Period. c. Club Membership and Automobile. If prior to the Change in Control, the Executive was entitled to membership in a country club and/or the use of an automobile, during the Contract Period he shall be entitled to the same membership and/or use of an automobile at least comparable to the automobile provided to him prior to the Change in Control. d. Other Benefits. During the Contract Period, the Executive also shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical (but not group life insurance) and any other benefits enjoyed, from time to time, by senior officers of the Company, all upon terms as favorable as those enjoyed by other senior officers of the Company. Notwithstanding anything in this paragraph 5(d) to the contrary, if the Company adopts any change in the benefits provided for senior officers of the Company, and such policy is uniformly applied to all officers of the Company (and any successor or acquiror of the Company, if any), including the chief executive officer of such entities, then no such change shall be deemed to be contrary to this paragraph. 6. Termination for Cause. During the Contract Period, the Company shall have the right to terminate the Executive for Cause, upon written notice to him of the termination which notice shall specify the reasons for the termination. In the event of termination for Cause the Executive shall not be entitled to any further compensation or benefits under this Agreement. 8 7. Disability. During the Contract Period if the Executive becomes permanently disabled, or is unable to perform his duties hereunder for 4 consecutive months, the Company may terminate the employment of the Executive. In such event, the Executive shall be paid within 10 days of termination a lump sum equal to one-twelfth of the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive the lump sum amount due him under this Section 7 or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 8. Death Benefits. During the Contract Period (defined without regard to his death), upon the Executive's death his estate shall be paid within 20 business days of his death a lump sum equal to one-twelfth of the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive's estate the lump sum amount due it under this Section or the payments under Section 12, the Executive's estate, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all 9 of its reasonable legal fees and expenses incurred in connection with its enforcement against the Company of the terms of this Agreement. The Executive's estate shall be denied payment of its legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 9. Termination Without Cause or Resignation for Good Reason. The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive providing four weeks notice. The Executive may resign for Good Reason during the Contract Period upon four weeks written notice to the Company specifying the facts and circumstances claimed to support the Good Reason. The Executive shall be entitled to give a Notice of Termination that his or her employment is being terminated for Good Reason at any time during the Contract Period, not later than twelve months after any occurrence of an event stated to constitute Good Reason. If during the Contract Period the Company terminates the Executive's employment without Cause or the Executive Resigns for Good Reason, then the Executive shall be entitled to the following: (i) (subject to the possible age related reduction in the next sentence) the Company shall within 20 business days of the termination of employment pay the Executive a lump sum severance payment in an amount equal to three times the highest annual compensation, consisting solely of salary (including any 401(k) plan deferral) and bonus, paid to (or in the case of bonus accrued for) the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control; (ii) the Company shall continue to provide the Executive for a period of three years after termination (but not beyond the date the Executive reaches age 65) with health, hospitalization and medical insurance, as well as life and disability insurance, as were provided at the time of the termination of his employment with the Company, at the Company's cost (subject to payment by the Executive of the same contribution amount and 10 deductibles as Executive previously paid); (iii) the Company shall credit Executive under the BEP immediately upon termination with additional years of credited service as if he had continued to work for the Company for three years after the date of termination (but not beyond the date the Executive reaches age 65), the benefit plans covered thereby had remained the same during such period, and the BEP was not changed or modified after the Change in Control or otherwise during such period. After the Executive has reached age 62, the "three" times referred to in clause (i) of the previous sentence shall be reduced to a number equal to the quotient (rounded to the nearest thousand) the numerator of which is the whole number of months left until the Executive reaches age 65 and the denominator of which is 12. The Executive shall not have a duty to mitigate the damages suffered by him in connection with the termination by the Company of his employment without Cause or a resignation for Good Reason during the Contract Period. If the Company fails to pay the Executive the lump sum amount due him hereunder or to provide him with the health, hospitalization and medical insurance, life disability or BEP benefits due under this section or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 10. Resignation Without Good Reason. The Executive shall be entitled to resign from the employment of the Company at any time during the Contract Period without Good Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which he ceases to be employed by the Company, and shall not be entitled to any of the 11 other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks' notice thereof. 11. Non-Disclosure of Confidential Information. a. Non-Disclosure of Confidential Information. Except in the course of his employment with the Company and in the pursuit of the business of the Company or any of its subsidiaries or affiliates, the Executive shall not, at any time during or following the Contract Period, disclose or use, any confidential information or proprietary data of the Company or any of its subsidiaries or affiliates. The Executive agrees that, among other things, all information concerning the identity of and the Company's relations with its customers is confidential information. b. Specific Performance. Executive agrees that the Company does not have an adequate remedy at law for the breach of this section and agrees that he shall be subject to injunctive relief and equitable remedies as a result of the breach of this section. The invalidity or unenforceability of any provision of this Agreement shall not affect the force and effect of the remaining valid portions. No alleged breach of this Section 11 shall give the Company the right to withhold or offset against any payments due the Executive under this Agreement. c. Survival. This section shall survive the termination of the Executive's employment hereunder and the expiration of this Agreement. 12. Gross Up for Taxes. a. Additional Payments. If, for any taxable year, Executive shall be liable for the payment of an excise tax under Section 4999 or other substitute or similar tax assessment (the "Excise Tax") of the Internal Revenue Code of 1986, as amended (the "Code"), including the corresponding provisions of any succeeding law, with respect to any payments or 12 benefits under Section 9 of this Agreement or Sections 7 or 8 or any other provision of this Agreement, including but not limited to this Section 12 or under any benefit plan of the Company applicable to Executive individually or generally to executives or employees of the Company, then, notwithstanding any other provisions of this Agreement, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the Excise Tax imposed on all such payments and benefits and of the federal, state and local income tax and Excise Tax imposed upon payments provided for in this Section 12, shall be equal to the payments and benefits due to the Executive hereunder and the payments and/or benefits due to the Executive under any benefit plan of the Company. Each Gross-Up Payment shall be made to Executive or as provided in Section 16 hereof, upon the later of (i) five (5) days after the date the Executive notifies the Company of its need to make such Gross-Up Payment, or (ii) the date of any payment causing the liability for such Excise Tax. The amount of any Gross-Up Payment under this section shall be computed by a nationally recognized certified public accounting firm designated jointly by the Company and the Executive. The cost of such services by the accounting firm shall be paid by the Company. If the Company and the Executive are unable to designate jointly the accounting firm, then the firm shall be the accounting firm used by the Company immediately prior to the Change in Control. b. IRS Disputed Claims. The Executive shall notify the company in writing of any claim by the Internal Revenue Service ("IRS") that, if successful, would require the payment by the Company of a Gross-Up Payment in addition to that payment previously paid by the Company pursuant to this section. Such notification shall be given an soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim, the date on which such claim is requested to 13 be paid, and attach a copy of the IRS notice. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Company any information reasonably requested by the Company relating to such claim; (ii) Take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) Cooperate with the Company in good faith in order effectively to contest such claim; and (iv) Permit the Company to participate in any proceedings relating to such claim; provided, however that the Company shall pay directly all costs and expenses (including legal and accounting fees, as well as other expenses and any additional interest and penalties) incurred by the Executive and the Company in connection with an IRS levy, contest or claim. c. This Section shall survive the termination of Executive's employment hereunder and the expiration of the Contract Period. 13. Term and Effect Prior to Change in Control. a. Term. This Agreement shall commence on the date hereof and shall remain in effect for a period of 3 years from the date hereof (the "Initial Term") or until the end of 14 the Contract Period, whichever is later. The Term shall be automatically extended for an additional one year period on the anniversary date hereof (so that the Initial Term on any anniversary date is always 3 years) unless the Board of Directors of Valley, by a majority vote by resolution of a majority of Directors then in office votes not to extend the Initial Term any further. Notwithstanding the foregoing, the Initial Term shall not extend beyond the date when the Executive reaches age 65. b. No Effect Prior to Change in Control. This Agreement shall not affect any rights of the Company or the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement or contract or plan with the Company. The rights, duties and benefits provided hereunder shall only become effective upon a Change in Control. If the employment of the Executive by the Company is ended for any reason prior to a Change in Control, this Agreement shall thereafter be of no further force and effect. 14. Severance Compensation and Benefits Not in Derogation of Other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of or agreements with the Company, except that if the Executive receives the lump severance payment due under paragraph 9 hereof, the Executive shall not be entitled to the lump sum severance payment due under paragraph 1 of the Severance Agreement (the "Severance Agreement"), dated August 17, 1994, between the Company and the Executive, or to severance payments under any other plan or program of the Company providing for severance pay, and shall not be entitled to health, hospital, medical and other benefits under Paragraph 5 of the Severance Agreement to the extent such post-employment benefits duplicate the benefits hereunder. 15 The compensation and benefits payable under paragraphs 2 (death) and 3 (disability) of the Severance Agreement shall not be effected by this Agreement, but shall be in addition to the benefits provided hereunder. The provisions of Paragraph 4 of the Severance Agreement (minimum retirement benefit) shall continue to apply. 15. Notice. During the Contract Period, any notice of termination of the employment of the Executive by the Company or by the Executive to the Company shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which shall (i) indicate the specific termination provision in this Agreement relied upon; (ii) set forth, if necessary, in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment of the Executive or from the Company under the provision so indicated; (iii) specify a date of termination, which shall be not less than two weeks nor more than six weeks after such Notice of Termination is given, except in the case of termination of employment by the Company of the Executive for Cause pursuant to Section 6 hereof, in which case the Notice of Termination may specify a date of termination as of the date such Notice of Termination is given; and (iv) be given by personal delivery or, if the individual is not personally available, by certified mail to the last known address of the individual. Upon the death of the Executive, no Notice of Termination need be given. 16. Payroll and Withholding Taxes. All payments to be made or benefits to be provided hereunder by the Company shall be subject to applicable federal and state payroll or withholding taxes. Any Gross-Up Payment to be made by the Company may be made in the form of withholding taxes, but shall be timely directed to the IRS (or any state division of taxation) on the Executive's behalf. 16 17. Miscellaneous. This Agreement is the joint and several obligation of the Bank and Valley. The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey. Except as set forth herein, this Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby, including expressly any prior agreement with the Company concerning Change in Control benefits. This Agreement expressly replaces the Change in Control Agreement, dated January 1, 1995. Except as expressly specified in Section 14 with regard to the Severance Agreement, this Agreement does not effect or reduce the benefits or obligations of the parties under the Split-Dollar Agreement, dated as of July 7, 1995 (and any supplement or amendment to, or replacement for that agreement) between the Company, the Executive and his spouse or the Severance Agreement (or any supplement or amendment to or replacement for that agreement). The amendment or termination of this Agreement may be made only in a writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such a writing. This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of his rights or duties hereunder but this Agreement shall be enforceable by the Executive's legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 17 IN WITNESS WHEREOF, Valley National Bank and Valley National Bancorp each have caused this Agreement to be signed by their duly authorized representatives pursuant to the authority of their Boards of Directors, and the Executive has personally executed this Agreement, all as of the day and year first written above. ATTEST: VALLEY NATIONAL BANCORP /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee ATTEST: VALLEY NATIONAL BANK /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee WITNESS: /s/ Peter Crocitto /s/ Gerald H. Lipkin - ------------------------------- ------------------------------------- Peter Crocitto Gerald H. Lipkin, Executive 18 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT (PETER SOUTHWAY) THIS AMENDED AND RESTATED CHANGE IN CONTROL EMPLOYMENT AGREEMENT (the "Agreement"), is made as of this 1st day of January, 1999, among VALLEY NATIONAL BANK ("Bank"), a national banking association with its principal office at 1445 Valley Road, Wayne, New Jersey, VALLEY NATIONAL BANCORP ("Valley"), a New Jersey Corporation which maintains its principal office at 1445 Valley Road, Wayne, New Jersey (Valley and the Bank collectively are the "Company") and PETER SOUTHWAY (the "Executive"). BACKGROUND WHEREAS, the Executive has been employed by Valley and the Bank for many years; WHEREAS, the Executive throughout his tenure has worked diligently in his position in the business of the Bank and Valley; WHEREAS, the Board of Directors of the Bank and Valley believe that the future services of the Executive are of great value to the Bank and Valley and that it is important for the growth and development of the Bank that the Executive continue in his position; WHEREAS, if the Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, the Board of Directors of the Company (the "Board") believes it is imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that they be able to receive and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; 19 WHEREAS, to achieve that goal, and to retain the Executive's services prior to any such activity, the Board of Directors and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control of the Company, as hereinafter defined; and WHEREAS, the Executive and the Company had entered into a Change in Control Agreement, dated January 1, 1995, and have agreed to amend and restate that agreement with this Agreement. NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of an acquisition or a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby, agree as follows: 12. Definitions a. Cause. For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean (i) willful and continued failure by the Executive to perform his duties for the Company under this Agreement after at least one warning in writing from the Boards of Directors of the Company identifying specifically any such failure; (ii) the willful engaging by the Executive in misconduct which causes material injury to the Company as specified in a written notice to the Executive from the Boards of Directors of the Company; or (iii) conviction of a crime (other than a traffic violation), habitual drunkenness, drug abuse, or excessive absenteeism (other than for illness), after a warning (required with respect to drunkenness or absenteeism only) in writing from the Boards of Directors of the Company to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interests of the Company. 20 b. Change in Control. "Change in Control" means any of the following events: (i) when Valley or a Subsidiary acquires actual knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of Valley or a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates, is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of Valley representing more than twenty-five percent (25%) of the combined voting power of Valley's then outstanding securities (a "Control Person"); (ii) upon the first purchase of Valley's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by Valley, a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates); (iii) the consummation of (A) a merger or consolidation of Valley with or into another corporation unless the definitive agreement provides that at least two-thirds of the directors of the surviving or resulting corporation immediately after the transaction are directors of Valley before the transaction commenced (a "Non-Control Transaction"), (B) a sale or disposition of all or substantially all of Valley's assets or (C) a plan of liquidation or dissolution of Valley; (iv) if during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof or, following a Non-Control Transaction, two-thirds of the board of directors of the surviving or resulting corporation; provided that any individual whose election or nomination for election as a member of the Board (or, following a Non-Control Transaction, the board of directors of the surviving or resulting corporation) was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director; or (v) upon a sale of (A) common stock of the Bank if after such sale any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) other than Valley, an employee benefit plan established or maintained by Valley or a Subsidiary, or an affiliate of Valley or a Subsidiary, owns a majority of the Bank's common stock or (B) all or substantially all of the Bank's assets (other than in the ordinary course of business). 21 c. Contract Period. "Contract Period" shall mean the period commencing the day immediately preceding a Change in Control and ending on the earlier of (i) the third anniversary of the Change in Control or (ii) the date the Executive would attain age 67 or (iii) the death of the Executive. For the purpose of this Agreement, a Change in Control shall be deemed to have occurred at the date specified in the definition of Change in Control. d. Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. e. Good Reason. When used with reference to a voluntary termination by Executive of his employment with the Company, "Good Reason" shall mean any of the following, if taken without Executive's express prior written consent: (1) The assignment to Executive of any duties inconsistent with, or the reduction of powers or functions associated with, Executive's position, title, duties, responsibilities and status with the Company immediately prior to a Change in Control; any removal of Executive from, or any failure to re-elect Executive to, any position(s) or office(s) Executive held immediately prior to such Change in Control; or any requirement that the Executive work more hours or on a different schedule than those he worked immediately prior to a Change in Control. (2) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control or the failure to award Executive annual increases in accordance herewith; (3) A failure by the Company to continue any bonus plan in which Executive participated immediately prior to the Change in Control (except that the Company may institute plans, programs or arrangements providing the Executive substantially similar benefits) or a failure by the Company to continue Executive as a participant in such plans on at least the same basis as Executive participated in such plan prior to the Change in Control; or a failure to pay the Executive the bonus provided for in Section 4.b hereof at the time and in the manner therein specified; 22 (4) The Company's transfer of Executive to another geographic location outside of New Jersey or more than 25 miles from his present office location, except for required occasional travel on the Company's business to an extent consistent with Executive's business travel obligations immediately prior to such Change in Control; (5) The failure by the Company to continue in effect any employee benefit plan, program or arrangement (including, without limitation the Company's retirement plan, benefit equalization plan, split-dollar life insurance agreement for the Executive, health and accident plan, disability plan, deferred compensation plan or long term stock incentive plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements; the failure to continue, or the taking of any action which would deprive Executive, of any material fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; (6) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive prior to any Change in Control; or (7) Any purported termination of Executive's employment by the Company during the term of this Agreement which is not effected pursuant to all of the requirements of this Agreement; and, for purposes of this Agreement, no such purported termination shall be effective. f. Subsidiary. "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with Valley, if each of the corporations other than the last corporation in the 23 unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 13. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, during the Contract Period upon the terms and conditions set forth herein. 14. Position. During the Contract Period the Executive shall be employed as Vice Chairman of Valley and the Bank, or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with the same title and with the same duties and responsibilities as before the Change in Control. The Executive shall devote his time and attention to the business of the Company in the same manner and to the same extent he did before the Change in Control, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall not be construed as requiring the full-time service of Executive or as preventing the Executive from managing any investments of his which do not require any service on his part in the operation of such investments or from continuing to serve on any boards of directors or trustees which he served prior to the Change in Control or for which consent is provided by the Board after a Change in Control. 15. Cash Compensation. The Company shall pay to the Executive compensation for his services during the Contract Period as follows: a. Base Salary. A base annual salary equal to the annual salary in effect as of the Change in Control. The annual salary shall be payable in installments in accordance with the Company's usual payroll method. b. Annual Bonus. An annual cash bonus equal to at least the average of the bonuses paid to the Executive in the three years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control. 24 c. Annual Review. The Board of Directors of the Company during the Contract Period shall review annually, or at more frequent intervals which the Board determines is appropriate, the Executive's compensation and shall award him additional compensation to reflect the Executive's performance, the performance of the Company and competitive compensation levels, all as determined in the discretion of the Board of Directors. 5. Expenses and Fringe Benefits. a. Expenses. During the Contract Period, the Executive shall be entitled to reimbursement for all business expenses incurred by him with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to him immediately prior to the Change in Control. b. Benefit Equalization Plan. During the Contract Period, if the Executive was entitled to benefits under the Company's Benefit Equalization Plan ("BEP") prior to the Change in Control, the Executive shall be entitled to continued benefits under the BEP after the Change in Control and such BEP may not be modified or terminated to reduce or eliminate such benefits during the Contract Period. c. Club Membership and Automobile. If prior to the Change in Control, the Executive was entitled to membership in a country club and/or the use of an automobile, during the Contract Period he shall be entitled to the same membership and/or use of an automobile at least comparable to the automobile provided to him prior to the Change in Control. d. Other Benefits. During the Contract Period, the Executive also shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical (but not group life insurance) and any other benefits enjoyed, from time to time, by senior officers of the Company, all upon terms as favorable as those enjoyed by other senior officers of the Company. Notwithstanding anything in this paragraph 5(d) to the 25 contrary, if the Company adopts any change in the benefits provided for senior officers of the Company, and such policy is uniformly applied to all officers of the Company (and any successor or acquiror of the Company, if any), including the chief executive officer of such entities, then no such change shall be deemed to be contrary to this paragraph. 17. Termination for Cause. During the Contract Period, the Company shall have the right to terminate the Executive for Cause, upon written notice to him of the termination which notice shall specify the reasons for the termination. In the event of termination for Cause the Executive shall not be entitled to any further compensation or benefits under this Agreement. 18. Disability. During the Contract Period if the Executive becomes permanently disabled, or is unable to perform his duties hereunder for 4 consecutive months, the Company may terminate the employment of the Executive. In such event, the Executive shall be paid within 10 days of termination a lump sum equal to one-twelfth of the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive the lump sum amount due him under this Section 7 or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 19. Death Benefits. During the Contract Period (defined without regard to his death), upon the Executive's death his estate shall be paid within 20 business days of his death a lump sum equal to one-twelfth of the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change 26 in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive's estate the lump sum amount due it under this Section or the payments under Section 12, the Executive's estate, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of its reasonable legal fees and expenses incurred in connection with its enforcement against the Company of the terms of this Agreement. The Executive's estate shall be denied payment of its legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 20. Termination Without Cause or Resignation for Good Reason. The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive providing four weeks notice. The Executive may resign for Good Reason during the Contract Period upon four weeks written notice to the Company specifying the facts and circumstances claimed to support the Good Reason. The Executive shall be entitled to give a Notice of Termination that his or her employment is being terminated for Good Reason at any time during the Contract Period, not later than twelve months after any occurrence of an event stated to constitute Good Reason. If during the Contract Period the Company terminates the Executive's employment without Cause or the Executive Resigns for Good Reason, then the Executive shall be entitled to the following: (i) (subject to the possible age related reduction in the next sentence) the Company shall within 20 business days of the termination of employment pay the Executive a lump sum severance payment in an amount equal to three times the sum of the highest salary (including any 401(k) plan deferral) and the highest bonus, paid to (or in the case of bonus accrued for) the Executive during any calendar year in each of the seven calendar years immediately prior to the Change in Control; (ii) the Company shall continue to provide the Executive and his spouse for a period of three years after termination (but not beyond the date Executive reaches age 67) with health, hospitalization, medical and dental insurance, as well as life and disability insurance, as were provided at the time of the termination of his employment with the Company, at the 27 Company's cost (subject to payment by the Executive of the same contribution amount and deductibles as Executive previously paid); (iii) the Company shall credit Executive under the BEP immediately upon termination with additional years of credited service as if he had continued to work for the Company for three years after the date of termination (but not beyond the date the Executive reaches age 67), the benefit plans covered thereby had remained the same during such period, and the BEP was not changed or modified after the Change in Control or otherwise during such period. After the Executive has reached age 64, the "three" times referred to in clause (i) of the previous sentence shall be reduced to a number equal to the quotient (rounded to the nearest thousand) the numerator of which is the whole number of months left until the Executive reaches age 67 and the denominator of which is 12. The Executive shall not have a duty to mitigate the damages suffered by him in connection with the termination by the Company of his employment without Cause or a resignation for Good Reason during the Contract Period. If the Company fails to pay the Executive the lump sum amount due him hereunder or to provide him with the health, hospitalization and medical insurance, life disability or BEP benefits due under this section or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 21. Resignation Without Good Reason. The Executive shall be entitled to resign from the employment of the Company at any time during the Contract Period without Good Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which he ceases to be employed by the Company, and shall not be entitled to any of the other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks' notice thereof. 28 22. Non-Disclosure of Confidential Information. a. Non-Disclosure of Confidential Information. Except in the course of his employment with the Company and in the pursuit of the business of the Company or any of its subsidiaries or affiliates, the Executive shall not, at any time during or following the Contract Period, disclose or use, any confidential information or proprietary data of the Company or any of its subsidiaries or affiliates. The Executive agrees that, among other things, all information concerning the identity of and the Company's relations with its customers is confidential information. b. Specific Performance. Executive agrees that the Company does not have an adequate remedy at law for the breach of this section and agrees that he shall be subject to injunctive relief and equitable remedies as a result of the breach of this section. The invalidity or unenforceability of any provision of this Agreement shall not affect the force and effect of the remaining valid portions. No alleged breach of this Section 11 shall give the Company the right to withhold or offset against any payments due the Executive under this Agreement. c. Survival. This section shall survive the termination of the Executive's employment hereunder and the expiration of this Agreement. 13. Gross Up for Taxes. a. Additional Payments. If, for any taxable year, Executive shall be liable for the payment of an excise tax under Section 4999 or other substitute or similar tax assessment (the "Excise Tax") of the Internal Revenue Code of 1986, as amended (the "Code"), including the corresponding provisions of any succeeding law, with respect to any payments or benefits under Section 9 of this Agreement or Sections 7 or 8 or any other provision of this Agreement, including but not limited to this Section 12 or under any benefit plan of the Company applicable to Executive individually or generally to executives or employees of the Company, then, notwithstanding any other provisions of this Agreement, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the Excise Tax 29 imposed on all such payments and benefits and of the federal, state and local income tax and Excise Tax imposed upon payments provided for in this Section 12, shall be equal to the payments and benefits due to the Executive hereunder and the payments and/or benefits due to the Executive under any benefit plan of the Company. Each Gross-Up Payment shall be made to Executive or as provided in Section 16 hereof, upon the later of (i) five (5) days after the date the Executive notifies the Company of its need to make such Gross-Up Payment, or (ii) the date of any payment causing the liability for such Excise Tax. The amount of any Gross-Up Payment under this section shall be computed by a nationally recognized certified public accounting firm designated jointly by the Company and the Executive. The cost of such services by the accounting firm shall be paid by the Company. If the Company and the Executive are unable to designate jointly the accounting firm, then the firm shall be the accounting firm used by the Company immediately prior to the Change in Control. b. IRS Disputed Claims. The Executive shall notify the company in writing of any claim by the Internal Revenue Service ("IRS") that, if successful, would require the payment by the Company of a Gross-Up Payment in addition to that payment previously paid by the Company pursuant to this section. Such notification shall be given an soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim, the date on which such claim is requested to be paid, and attach a copy of the IRS notice. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Company any information reasonably requested by the Company relating to such claim; 30 (ii) Take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) Cooperate with the Company in good faith in order effectively to contest such claim; and (iv) Permit the Company to participate in any proceedings relating to such claim; provided, however that the Company shall pay directly all costs and expenses (including legal and accounting fees, as well as other expenses and any additional interest and penalties) incurred by the Executive and the Company in connection with an IRS levy, contest or claim. c. This Section shall survive the termination of Executive's employment hereunder and the expiration of the Contract Period. 18. Term and Effect Prior to Change in Control. a. Term. This Agreement shall commence on the date hereof and shall remain in effect for a period of 3 years from the date hereof (the "Initial Term") or until the end of the Contract Period, whichever is later. The Term shall be automatically extended for an additional one year period on the anniversary date hereof (so that the Initial Term on any anniversary date is always 3 years) unless the Board of Directors of Valley, by a majority vote by resolution of a majority of Directors then in office votes not to extend the Initial Term any further. Notwithstanding the foregoing, the Initial Term shall not extend beyond the date when the Executive reaches age 67. b. No Effect Prior to Change in Control. This Agreement shall not affect any rights of the Company or the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement or contract or plan with the Company. The rights, duties and benefits provided hereunder shall only become effective upon a Change in Control. If the employment of the 31 Executive by the Company is ended for any reason prior to a Change in Control, this Agreement shall thereafter be of no further force and effect. 19. Severance Compensation and Benefits Not in Derogation of Other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of or agreements with the Company, except that if the Executive receives the lump severance payment due under paragraph 9 hereof, the Executive shall not be entitled to the lump sum severance payment due under paragraph 1 of the Severance Agreement (the "Severance Agreement"), dated August 17, 1994, between the Company and the Executive, or to severance payments under any other plan or program of the Company providing for severance pay and shall not be entitled to health, hospital, medical and other benefits under paragraph 2 of the Severance Agreement to the extent such post-employment benefits duplicate the benefits hereunder.. 20. Notice. During the Contract Period, any notice of termination of the employment of the Executive by the Company or by the Executive to the Company shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which shall (i) indicate the specific termination provision in this Agreement relied upon; (ii) set forth, if necessary, in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment of the Executive or from the Company under the provision so indicated; (iii) specify a date of termination, which shall be not less than two weeks nor more than six weeks after such Notice of Termination is given, except in the case of termination of employment by the Company of the Executive for Cause pursuant to Section 6 hereof, in which case the Notice of Termination may specify a date of termination as of the date such Notice of Termination is given; and (iv) be given by personal delivery or, if the individual is not 32 personally available, by certified mail to the last known address of the individual. Upon the death of the Executive, no Notice of Termination need be given. 21. Payroll and Withholding Taxes. All payments to be made or benefits to be provided hereunder by the Company shall be subject to applicable federal and state payroll or withholding taxes. Any Gross-Up Payment to be made by the Company may be made in the form of withholding taxes, but shall be timely directed to the IRS (or any state division of taxation) on the Executive's behalf. 22. Miscellaneous. This Agreement is the joint and several obligation of the Bank and Valley. The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey. Except as set forth herein, this Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby, including expressly any prior agreement with the Company concerning Change in Control benefits. This Agreement expressly replaces the Change in Control Agreement, dated January 1, 1995. Except as expressly specified in Section 14 with regard to the Severance Agreement, this Agreement does not effect or reduce the benefits or obligations of the parties under the Severance Agreement (or any supplement or amendment to or replacement for that agreement). The amendment or termination of this Agreement may be made only in a writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such a writing. This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of his rights or duties hereunder but this Agreement shall be enforceable by the Executive's legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 33 IN WITNESS WHEREOF, Valley National Bank and Valley National Bancorp each have caused this Agreement to be signed by their duly authorized representatives pursuant to the authority of their Boards of Directors, and the Executive has personally executed this Agreement, all as of the day and year first written above. ATTEST: VALLEY NATIONAL BANCORP /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee ATTEST: VALLEY NATIONAL BANK /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee WITNESS: /s/ Carol B. Diesner /s/ Peter Southway - ------------------------------- ------------------------------------- Carol B. Diesner Peter Southway, Executive 34 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT (PETER JOHN SOUTHWAY) THIS AMENDED AND RESTATED CHANGE IN CONTROL EMPLOYMENT AGREEMENT (the "Agreement"), is made as of this 1st day of January, 1999, among VALLEY NATIONAL BANK ("Bank"), a national banking association with its principal office at 1445 Valley Road, Wayne, New Jersey, VALLEY NATIONAL BANCORP ("Valley"), a New Jersey Corporation which maintains its principal office at 1445 Valley Road, Wayne, New Jersey (Valley and the Bank collectively are the "Company") and PETER JOHN SOUTHWAY (the "Executive"). BACKGROUND WHEREAS, the Executive has been employed by Valley and the Bank for many years; WHEREAS, the Executive throughout his tenure has worked diligently in his position in the business of the Bank and Valley; WHEREAS, the Board of Directors of the Bank and Valley believe that the future services of the Executive are of great value to the Bank and Valley and that it is important for the growth and development of the Bank that the Executive continue in his position; WHEREAS, if the Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, the Board of Directors of the Company (the "Board") believes it is imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that they be able to receive and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, 35 without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; WHEREAS, to achieve that goal, and to retain the Executive's services prior to any such activity, the Board of Directors and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control of the Company, as hereinafter defined; and WHEREAS, the Executive and the Company had entered into a Change in Control Agreement, dated as of January 1, 1998, and have agreed to amend and restate that agreement with this Agreement. NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of an acquisition or a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby, agree as follows: 23. Definitions a. Cause. For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean (i) willful and continued failure by the Executive to perform his duties for the Company under this Agreement after at least one warning in writing from the Boards of Directors of the Company identifying specifically any such failure; (ii) the willful engaging by the Executive in misconduct which causes material injury to the Company as specified in a written notice to the Executive from the Boards of Directors of the Company; or (iii) conviction of a crime (other than a traffic violation), habitual drunkenness, drug 36 abuse, or excessive absenteeism (other than for illness), after a warning (required with respect to drunkenness or absenteeism only) in writing from the Boards of Directors of the Company to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interests of the Company. b. Change in Control. "Change in Control" means any of the following events: (i) when Valley or a Subsidiary acquires actual knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of Valley or a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates, is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of Valley representing more than twenty-five percent (25%) of the combined voting power of Valley's then outstanding securities (a "Control Person"); (ii) upon the first purchase of Valley's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by Valley, a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates); (iii) the consummation of (A) a merger or consolidation of Valley with or into another corporation unless the definitive agreement provides that at least two-thirds of the directors of the surviving or resulting corporation immediately after the transaction are directors of Valley before the transaction commenced (a "Non-Control Transaction"), (B) a sale or disposition of all or substantially all of Valley's assets or (C) a plan of liquidation or dissolution of Valley; (iv) if during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof or, following a Non-Control Transaction, two-thirds of the board of directors of the surviving or resulting 37 corporation; provided that any individual whose election or nomination for election as a member of the Board (or, following a Non-Control Transaction, the board of directors of the surviving or resulting corporation) was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director; or (v) upon a sale of (A) common stock of the Bank if after such sale any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) other than Valley, an employee benefit plan established or maintained by Valley or a Subsidiary, or an affiliate of Valley or a Subsidiary, owns a majority of the Bank's common stock or (B) all or substantially all of the Bank's assets (other than in the ordinary course of business). c. Contract Period. "Contract Period" shall mean the period commencing the day immediately preceding a Change in Control and ending on the earlier of (i) the third anniversary of the Change in Control or (ii) the date the Executive would attain age 65 or (iii) the death of the Executive. For the purpose of this Agreement, a Change in Control shall be deemed to have occurred at the date specified in the definition of Change in Control. d. Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. e. Good Reason. When used with reference to a voluntary termination by Executive of his employment with the Company, "Good Reason" shall mean any of the following, if taken without Executive's express prior written consent: (1) The assignment to Executive of any duties inconsistent with, or the reduction of powers or functions associated with, Executive's position, title, duties, responsibilities and status with the Company immediately prior to a Change in Control; any removal of Executive from, or any failure to re-elect Executive to, any position(s) or office(s) Executive held immediately prior to such Change in Control. 38 (2) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control or the failure to award Executive annual increases in accordance herewith; (3) A failure by the Company to continue any bonus plan in which Executive participated immediately prior to the Change in Control (except that the Company may institute plans, programs or arrangements providing the Executive substantially similar benefits) or a failure by the Company to continue Executive as a participant in such plans on at least the same basis as Executive participated in such plan prior to the Change in Control; or a failure to pay the Executive the bonus provided for in Section 4.b hereof at the time and in the manner therein specified; (4) The Company's transfer of Executive to another geographic location outside of New Jersey or more than 25 miles from his present office location, except for required occasional travel on the Company's business to an extent consistent with Executive's business travel obligations immediately prior to such Change in Control; (5) The failure by the Company to continue in effect any employee benefit plan, program or arrangement (including, without limitation the Company's retirement plan, benefit equalization plan, life insurance plan, health and accident plan, disability plan, deferred compensation plan or long term stock incentive plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements; the failure to continue, or the taking of any action which would deprive Executive, of any material 39 fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; (6) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive prior to any Change in Control; or (7) Any purported termination of Executive's employment by the Company during the term of this Agreement which is not effected pursuant to all of the requirements of this Agreement; and, for purposes of this Agreement, no such purported termination shall be effective. f. Subsidiary. "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with Valley, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 24. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, during the Contract Period upon the terms and conditions set forth herein. 25. Position. During the Contract Period the Executive shall be employed as Executive Vice President of Valley and the Bank, or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with the same title and with the same duties and responsibilities as before the Change in Control. The Executive shall devote his full time and attention to the business of the Company, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall not be 40 construed as preventing the Executive from managing any investments of his which do not require any service on his part in the operation of such investments or from continuing to serve on any boards of directors or trustees which he served prior to the Change in Control or for which consent is provided by the Board after a Change in Control. 26. Cash Compensation. The Company shall pay to the Executive compensation for his services during the Contract Period as follows: a. Base Salary. A base annual salary equal to the annual salary in effect as of the Change in Control. The annual salary shall be payable in installments in accordance with the Company's usual payroll method. b. Annual Bonus. An annual cash bonus equal to at least the average of the bonuses paid to the Executive in the three years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control. c. Annual Review. The Board of Directors of the Company during the Contract Period shall review annually, or at more frequent intervals which the Board determines is appropriate, the Executive's compensation and shall award him additional compensation to reflect the Executive's performance, the performance of the Company and competitive compensation levels, all as determined in the discretion of the Board of Directors. 27. Expenses and Fringe Benefits. a. Expenses. During the Contract Period, the Executive shall be entitled to reimbursement for all business expenses incurred by him with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to him immediately prior to the Change in Control. 41 b. Benefit Equalization Plan. During the Contract Period, if the Executive was entitled to benefits under the Company's Benefit Equalization Plan ("BEP") prior to the Change in Control, the Executive shall be entitled to continued benefits under the BEP after the Change in Control and such BEP may not be modified or terminated to reduce or eliminate such benefits during the Contract Period. c. Club Membership and Automobile. If prior to the Change in Control, the Executive was entitled to membership in a country club and/or the use of an automobile, during the Contract Period he shall be entitled to the same membership and/or use of an automobile at least comparable to the automobile provided to him prior to the Change in Control. d. Other Benefits. During the Contract Period, the Executive also shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical and life insurance, and any other benefits enjoyed, from time to time, by senior officers of the Company, all upon terms as favorable as those enjoyed by other senior officers of the Company. Notwithstanding anything in this paragraph 5(d) to the contrary, if the Company adopts any change in the benefits provided for senior officers of the Company, and such policy is uniformly applied to all officers of the Company (and any successor or acquiror of the Company, if any), including the chief executive officer of such entities, then no such change shall be deemed to be contrary to this paragraph. 28. Termination for Cause. During the Contract Period, the Company shall have the right to terminate the Executive for Cause, upon written notice to him of the termination which notice shall specify the reasons for the termination. In the event of termination for Cause the Executive shall not be entitled to any further compensation or benefits under this Agreement. 42 29. Disability. During the Contract Period if the Executive becomes permanently disabled, or is unable to perform his duties hereunder for 4 consecutive months, the Company may terminate the employment of the Executive. In such event, the Executive shall be paid within 10 days of termination a lump sum equal to the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive the lump sum amount due him under this Section 7 or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 30. Death Benefits. During the Contract Period (defined without regard to his death), upon the Executive's death his estate shall be paid within 20 business days of his death a lump sum equal to the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive's estate the lump sum amount due him under this Section or the payments under Section 12, the Executive's estate, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all 43 of its reasonable legal fees and expenses incurred in connection with its enforcement against the Company of the terms of this Agreement. The Executive's estate shall be denied payment of its legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 31. Termination Without Cause or Resignation for Good Reason. The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive providing four weeks notice. The Executive may resign for Good Reason during the Contract Period upon four weeks written notice to the Company specifying the facts and circumstances claimed to support the Good Reason. The Executive shall be entitled to give a Notice of Termination that his or her employment is being terminated for Good Reason at any time during the Contract Period, not later than twelve months after any occurrence of an event stated to constitute Good Reason. If during the Contract Period the Company terminates the Executive's employment without Cause or the Executive Resigns for Good Reason, then the Executive shall be entitled to the following: (i) (subject to the possible age related reduction in the next sentence) the Company shall within 20 business days of the termination of employment pay the Executive a lump sum severance payment in an amount equal to three times the highest annual compensation, consisting solely of salary (including any 401(k) plan deferral) and bonus, paid to (or in the case of bonus accrued for) the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control; (ii) the Company shall continue to provide the Executive for a period of three years after termination (but not beyond the date the Executive reaches age 65) with health, hospitalization and medical insurance, as well as life and disability insurance, as were provided at the time of the termination of his employment with the Company, at the Company's cost (subject to payment by the Executive of the same contribution amount and 44 deductibles as Executive previously paid); (iii) the Company shall credit Executive under the BEP immediately upon termination with additional years of credited service as if he had continued to work for the Company for three years after the date of termination (but not beyond the date the Executive reaches age 65), the benefit plans covered thereby had remained the same during such period, and the BEP was not changed or modified after the Change in Control or otherwise during such period. After the Executive has reached age 62, the "three" times referred to in clause (i) of the previous sentence shall be reduced to a number equal to the quotient (rounded to the nearest thousand) the numerator of which is the whole number of months left until the Executive reaches age 65 and the denominator of which is 12. The Executive shall not have a duty to mitigate the damages suffered by him in connection with the termination by the Company of his employment without Cause or a resignation for Good Reason during the Contract Period. If the Company fails to pay the Executive the lump sum amount due him hereunder or to provide him with the health, hospitalization and medical insurance, life disability or BEP benefits due under this section or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 32. Resignation Without Good Reason. The Executive shall be entitled to resign from the employment of the Company at any time during the Contract Period without Good Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which he ceases to be employed by the Company, and shall not be entitled to any of the 45 other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks' notice thereof. 33. Non-Disclosure of Confidential Information. a. Non-Disclosure of Confidential Information. Except in the course of his employment with the Company and in the pursuit of the business of the Company or any of its subsidiaries or affiliates, the Executive shall not, at any time during or following the Contract Period, disclose or use, any confidential information or proprietary data of the Company or any of its subsidiaries or affiliates. The Executive agrees that, among other things, all information concerning the identity of and the Company's relations with its customers is confidential information. b. Specific Performance. Executive agrees that the Company does not have an adequate remedy at law for the breach of this section and agrees that he shall be subject to injunctive relief and equitable remedies as a result of the breach of this section. The invalidity or unenforceability of any provision of this Agreement shall not affect the force and effect of the remaining valid portions. No alleged breach of this Section 11 shall give the Company the right to withhold or offset against any payments due the Executive under this Agreement. c. Survival. This section shall survive the termination of the Executive's employment hereunder and the expiration of this Agreement. 14. Gross Up for Taxes. a. Additional Payments. If, for any taxable year, Executive shall be liable for the payment of an excise tax under Section 4999 or other substitute or similar tax assessment (the "Excise Tax") of the Internal Revenue Code of 1986, as amended (the "Code"), including the corresponding provisions of any succeeding law, with respect to any payments or 46 benefits under Section 9 of this Agreement or Sections 7 or 8 or any other provision of this Agreement, including but not limited to this Section 12 or under any benefit plan of the Company applicable to Executive individually or generally to executives or employees of the Company, then, notwithstanding any other provisions of this Agreement, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the Excise Tax imposed on all such payments and benefits and of the federal, state and local income tax and Excise Tax imposed upon payments provided for in this Section 12, shall be equal to the payments and benefits due to the Executive hereunder and the payments and/or benefits due to the Executive under any benefit plan of the Company. Each Gross-Up Payment shall be made to Executive or as provided in Section 16 hereof, upon the later of (i) five (5) days after the date the Executive notifies the Company of its need to make such Gross-Up Payment, or (ii) the date of any payment causing the liability for such Excise Tax. The amount of any Gross-Up Payment under this section shall be computed by a nationally recognized certified public accounting firm designated jointly by the Company and the Executive. The cost of such services by the accounting firm shall be paid by the Company. If the Company and the Executive are unable to designate jointly the accounting firm, then the firm shall be the accounting firm used by the Company immediately prior to the Change in Control. b. IRS Disputed Claims. The Executive shall notify the company in writing of any claim by the Internal Revenue Service ("IRS") that, if successful, would require the payment by the Company of a Gross-Up Payment in addition to that payment previously paid by the Company pursuant to this section. Such notification shall be given an soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim, the date on which such claim is requested to 47 be paid, and attach a copy of the IRS notice. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Company any information reasonably requested by the Company relating to such claim; (ii) Take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) Cooperate with the Company in good faith in order effectively to contest such claim; and (iv) Permit the Company to participate in any proceedings relating to such claim; provided, however that the Company shall pay directly all costs and expenses (including legal and accounting fees, as well as other expenses and any additional interest and penalties) incurred by the Executive and the Company in connection with an IRS levy, contest or claim. c. This Section shall survive the termination of Executive's employment hereunder and the expiration of the Contract Period. 23. Term and Effect Prior to Change in Control. a. Term. This Agreement shall commence on the date hereof and shall remain in effect for a period of 3 years from the date hereof (the "Initial Term") or until the end of 48 the Contract Period, whichever is later. The Initial Term shall be automatically extended for an additional one year period on the anniversary date hereof (so that the Initial Term on any anniversary date is always 3 years) unless prior to a Change in Control the Chief Executive Officer of the Bank notifies the Executive in writing at any time that the Contract is not so extended, in which case the Initial Term shall end upon the later of (i) 3 years after the date hereof, or (ii) 2 years after the date of such written notice. Notwithstanding anything to the contrary contained herein, the Initial Term shall cease when the Executive attains age 65. b. No Effect Prior to Change in Control. This Agreement shall not affect any rights of the Company or the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement or contract or plan with the Company. The rights, duties and benefits provided hereunder shall only become effective upon a Change in Control. If the full-time employment of the Executive by the Company is ended for any reason prior to a Change in Control, this Agreement shall thereafter be of no further force and effect. 24. Severance Compensation and Benefits Not in Derogation of Other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of or agreements with the Company, except that if the Executive receives the lump sum severance payment due under paragraph 9 hereof, the Executive shall not be entitled to the lump sum severance payment due under paragraph 1 of the Severance Agreement (the "Severance Agreement"), dated January 1, 1998, between the Company and the Executive, or to severance payments under any other plan or program of the Company providing for severance pay, and shall not be entitled to health, hospital and other benefits under paragraph 2 of the 49 Severance Agreement to the extent such post-employment benefits duplicate benefits provided hereunder. 25. Notice. During the Contract Period, any notice of termination of the employment of the Executive by the Company or by the Executive to the Company shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which shall (i) indicate the specific termination provision in this Agreement relied upon; (ii) set forth, if necessary, in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment of the Executive or from the Company under the provision so indicated; (iii) specify a date of termination, which shall be not less than two weeks nor more than six weeks after such Notice of Termination is given, except in the case of termination of employment by the Company of the Executive for Cause pursuant to Section 6 hereof, in which case the Notice of Termination may specify a date of termination as of the date such Notice of Termination is given; and (iv) be given by personal delivery or, if the individual is not personally available, by certified mail to the last known address of the individual. Upon the death of the Executive, no Notice of Termination need be given. 26. Payroll and Withholding Taxes. All payments to be made or benefits to be provided hereunder by the Company shall be subject to applicable federal and state payroll or withholding taxes. Any Gross-Up Payment to be made by the Company may be made in the form of withholding taxes, but shall be timely directed to the IRS (or any state division of taxation) on the Executive's behalf. 27. Miscellaneous. This Agreement is the joint and several obligation of the Bank and Valley. The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey. Except as set forth herein, this 50 Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby, including expressly any prior agreement with the Company concerning Change in Control benefits. The parties hereto expressly agree that the Change in Control Agreement among the Executive, the Bank and Valley, dated as of January 1, 1998, is hereby terminated, effective the date hereof. Except as expressly specified in Section 14 with regard to the Severance Agreement, this Agreement does not effect or reduce the benefits or obligations of the parties under the Severance Agreement (or any supplement or amendment to or replacement for that Agreement). The amendment or termination of this Agreement may be made only in a writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such a writing. This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of his rights or duties hereunder but this Agreement shall be enforceable by the Executive's legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 51 IN WITNESS WHEREOF, Valley National Bank and Valley National Bancorp each have caused this Agreement to be signed by their duly authorized representatives pursuant to the authority of their Boards of Directors, and the Executive has personally executed this Agreement, all as of the day and year first written above. ATTEST: VALLEY NATIONAL BANCORP /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee ATTEST: VALLEY NATIONAL BANK /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee WITNESS: /s/ Sheila Quick /s/ Peter John Southway - ------------------------------- ------------------------------------- Sheila Quick Peter John Southway, Executive 52 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT (ROBERT M. MEYER) THIS AMENDED AND RESTATED CHANGE IN CONTROL EMPLOYMENT AGREEMENT (the "Agreement"), is made as of this 1st day of January, 1999, among VALLEY NATIONAL BANK ("Bank"), a national banking association with its principal office at 1445 Valley Road, Wayne, New Jersey, VALLEY NATIONAL BANCORP ("Valley"), a New Jersey Corporation which maintains its principal office at 1445 Valley Road, Wayne, New Jersey (Valley and the Bank collectively are the "Company") and ROBERT M. MEYER (the "Executive"). BACKGROUND WHEREAS, the Executive has been employed by Valley and the Bank for many years; WHEREAS, the Executive throughout his tenure has worked diligently in his position in the business of the Bank and Valley; WHEREAS, the Board of Directors of the Bank and Valley believe that the future services of the Executive are of great value to the Bank and Valley and that it is important for the growth and development of the Bank that the Executive continue in his position; WHEREAS, if the Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, the Board of Directors of the Company (the "Board") believes it is imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that they be able to receive and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, 53 without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; WHEREAS, to achieve that goal, and to retain the Executive's services prior to any such activity, the Board of Directors and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control of the Company, as hereinafter defined; and WHEREAS, the Executive and the Company had entered into a Change in Control Agreement, dated as of January 1, 1998, and have agreed to amend and restate that agreement with this Agreement. NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of an acquisition or a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby, agree as follows: 34. Definitions a. Cause. For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean (i) willful and continued failure by the Executive to perform his duties for the Company under this Agreement after at least one warning in writing from the Boards of Directors of the Company identifying specifically any such failure; (ii) the willful engaging by the Executive in misconduct which causes material injury to the Company as specified in a written notice to the Executive from the Boards of Directors of the Company; or (iii) conviction of a crime (other than a traffic violation), habitual drunkenness, drug 54 abuse, or excessive absenteeism (other than for illness), after a warning (required with respect to drunkenness or absenteeism only) in writing from the Boards of Directors of the Company to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interests of the Company. b. Change in Control. "Change in Control" means any of the following events: (i) when Valley or a Subsidiary acquires actual knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of Valley or a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates, is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of Valley representing more than twenty-five percent (25%) of the combined voting power of Valley's then outstanding securities (a "Control Person"); (ii) upon the first purchase of Valley's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by Valley, a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates); (iii) the consummation of (A) a merger or consolidation of Valley with or into another corporation unless the definitive agreement provides that at least two-thirds of the directors of the surviving or resulting corporation immediately after the transaction are directors of Valley before the transaction commenced (a "Non-Control Transaction"), (B) a sale or disposition of all or substantially all of Valley's assets or (C) a plan of liquidation or dissolution of Valley; (iv) if during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof or, following a Non-Control Transaction, two-thirds of the board of directors of the surviving or resulting 55 corporation; provided that any individual whose election or nomination for election as a member of the Board (or, following a Non-Control Transaction, the board of directors of the surviving or resulting corporation) was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director; or (v) upon a sale of (A) common stock of the Bank if after such sale any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) other than Valley, an employee benefit plan established or maintained by Valley or a Subsidiary, or an affiliate of Valley or a Subsidiary, owns a majority of the Bank's common stock or (B) all or substantially all of the Bank's assets (other than in the ordinary course of business). c. Contract Period. "Contract Period" shall mean the period commencing the day immediately preceding a Change in Control and ending on the earlier of (i) the third anniversary of the Change in Control or (ii) the date the Executive would attain age 65 or (iii) the death of the Executive. For the purpose of this Agreement, a Change in Control shall be deemed to have occurred at the date specified in the definition of Change in Control. d. Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. e. Good Reason. When used with reference to a voluntary termination by Executive of his employment with the Company, "Good Reason" shall mean any of the following, if taken without Executive's express prior written consent: (1) The assignment to Executive of any duties inconsistent with, or the reduction of powers or functions associated with, Executive's position, title, duties, responsibilities and status with the Company immediately prior to a Change in Control; any removal of Executive from, or any failure to re-elect Executive to, any position(s) or office(s) Executive held immediately prior to such Change in Control. 56 (2) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control or the failure to award Executive annual increases in accordance herewith; (3) A failure by the Company to continue any bonus plan in which Executive participated immediately prior to the Change in Control (except that the Company may institute plans, programs or arrangements providing the Executive substantially similar benefits) or a failure by the Company to continue Executive as a participant in such plans on at least the same basis as Executive participated in such plan prior to the Change in Control; or a failure to pay the Executive the bonus provided for in Section 4.b hereof at the time and in the manner therein specified; (4) The Company's transfer of Executive to another geographic location outside of New Jersey or more than 25 miles from his present office location, except for required occasional travel on the Company's business to an extent consistent with Executive's business travel obligations immediately prior to such Change in Control; (5) The failure by the Company to continue in effect any employee benefit plan, program or arrangement (including, without limitation the Company's retirement plan, benefit equalization plan, life insurance plan, health and accident plan, disability plan, deferred compensation plan or long term stock incentive plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements; the failure to continue, or the taking of any action which would deprive Executive, of any material 57 fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; (6) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive prior to any Change in Control; or (7) Any purported termination of Executive's employment by the Company during the term of this Agreement which is not effected pursuant to all of the requirements of this Agreement; and, for purposes of this Agreement, no such purported termination shall be effective. f. Subsidiary. "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with Valley, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 35. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, during the Contract Period upon the terms and conditions set forth herein. 36. Position. During the Contract Period the Executive shall be employed as Executive Vice President of Valley and the Bank, or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with the same title and with the same duties and responsibilities as before the Change in Control. The Executive shall devote his full time and attention to the business of the Company, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall not be 58 construed as preventing the Executive from managing any investments of his which do not require any service on his part in the operation of such investments or from continuing to serve on any boards of directors or trustees which he served prior to the Change in Control or for which consent is provided by the Board after a Change in Control. 37. Cash Compensation. The Company shall pay to the Executive compensation for his services during the Contract Period as follows: a. Base Salary. A base annual salary equal to the annual salary in effect as of the Change in Control. The annual salary shall be payable in installments in accordance with the Company's usual payroll method. b. Annual Bonus. An annual cash bonus equal to at least the average of the bonuses paid to the Executive in the three years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control. c. Annual Review. The Board of Directors of the Company during the Contract Period shall review annually, or at more frequent intervals which the Board determines is appropriate, the Executive's compensation and shall award him additional compensation to reflect the Executive's performance, the performance of the Company and competitive compensation levels, all as determined in the discretion of the Board of Directors. 38. Expenses and Fringe Benefits. a. Expenses. During the Contract Period, the Executive shall be entitled to reimbursement for all business expenses incurred by him with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to him immediately prior to the Change in Control. 59 b. Benefit Equalization Plan. During the Contract Period, if the Executive was entitled to benefits under the Company's Benefit Equalization Plan ("BEP") prior to the Change in Control, the Executive shall be entitled to continued benefits under the BEP after the Change in Control and such BEP may not be modified or terminated to reduce or eliminate such benefits during the Contract Period. c. Club Membership and Automobile. If prior to the Change in Control, the Executive was entitled to membership in a country club and/or the use of an automobile, during the Contract Period he shall be entitled to the same membership and/or use of an automobile at least comparable to the automobile provided to him prior to the Change in Control. d. Other Benefits. During the Contract Period, the Executive also shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical and life insurance, and any other benefits enjoyed, from time to time, by senior officers of the Company, all upon terms as favorable as those enjoyed by other senior officers of the Company. Notwithstanding anything in this paragraph 5(d) to the contrary, if the Company adopts any change in the benefits provided for senior officers of the Company, and such policy is uniformly applied to all officers of the Company (and any successor or acquiror of the Company, if any), including the chief executive officer of such entities, then no such change shall be deemed to be contrary to this paragraph. 39. Termination for Cause. During the Contract Period, the Company shall have the right to terminate the Executive for Cause, upon written notice to him of the termination which notice shall specify the reasons for the termination. In the event of termination for Cause the Executive shall not be entitled to any further compensation or benefits under this Agreement. 60 40. Disability. During the Contract Period if the Executive becomes permanently disabled, or is unable to perform his duties hereunder for 4 consecutive months, the Company may terminate the employment of the Executive. In such event, the Executive shall be paid within 10 days of termination a lump sum equal to the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive the lump sum amount due him under this Section 7 or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 41. Death Benefits. During the Contract Period (defined without regard to his death), upon the Executive's death his estate shall be paid within 20 business days of his death a lump sum equal to the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive's estate the lump sum amount due him under this Section or the payments under Section 12, the Executive's estate, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all 61 of its reasonable legal fees and expenses incurred in connection with its enforcement against the Company of the terms of this Agreement. The Executive's estate shall be denied payment of its legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 42. Termination Without Cause or Resignation for Good Reason. The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive providing four weeks notice. The Executive may resign for Good Reason during the Contract Period upon four weeks written notice to the Company specifying the facts and circumstances claimed to support the Good Reason. The Executive shall be entitled to give a Notice of Termination that his or her employment is being terminated for Good Reason at any time during the Contract Period, not later than twelve months after any occurrence of an event stated to constitute Good Reason. If during the Contract Period the Company terminates the Executive's employment without Cause or the Executive Resigns for Good Reason, then the Executive shall be entitled to the following: (i) (subject to the possible age related reduction in the next sentence) the Company shall within 20 business days of the termination of employment pay the Executive a lump sum severance payment in an amount equal to three times the highest annual compensation, consisting solely of salary (including any 401(k) plan deferral) and bonus, paid to (or in the case of bonus accrued for) the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control; (ii) the Company shall continue to provide the Executive for a period of three years after termination (but not beyond the date the Executive reaches age 65) with health, hospitalization and medical insurance, as well as life and disability insurance, as were provided at the time of the termination of his employment with the Company, at the Company's cost (subject to payment by the Executive of the same contribution amount and 62 deductibles as Executive previously paid); (iii) the Company shall credit Executive under the BEP immediately upon termination with additional years of credited service as if he had continued to work for the Company for three years after the date of termination (but not beyond the date the Executive reaches age 65), the benefit plans covered thereby had remained the same during such period, and the BEP was not changed or modified after the Change in Control or otherwise during such period. After the Executive has reached age 62, the "three" times referred to in clause (i) of the previous sentence shall be reduced to a number equal to the quotient (rounded to the nearest thousand) the numerator of which is the whole number of months left until the Executive reaches age 65 and the denominator of which is 12. The Executive shall not have a duty to mitigate the damages suffered by him in connection with the termination by the Company of his employment without Cause or a resignation for Good Reason during the Contract Period. If the Company fails to pay the Executive the lump sum amount due him hereunder or to provide him with the health, hospitalization and medical insurance, life disability or BEP benefits due under this section or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 43. Resignation Without Good Reason. The Executive shall be entitled to resign from the employment of the Company at any time during the Contract Period without Good Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which he ceases to be employed by the Company, and shall not be entitled to any of the 63 other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks' notice thereof. 44. Non-Disclosure of Confidential Information. a. Non-Disclosure of Confidential Information. Except in the course of his employment with the Company and in the pursuit of the business of the Company or any of its subsidiaries or affiliates, the Executive shall not, at any time during or following the Contract Period, disclose or use, any confidential information or proprietary data of the Company or any of its subsidiaries or affiliates. The Executive agrees that, among other things, all information concerning the identity of and the Company's relations with its customers is confidential information. b. Specific Performance. Executive agrees that the Company does not have an adequate remedy at law for the breach of this section and agrees that he shall be subject to injunctive relief and equitable remedies as a result of the breach of this section. The invalidity or unenforceability of any provision of this Agreement shall not affect the force and effect of the remaining valid portions. No alleged breach of this Section 11 shall give the Company the right to withhold or offset against any payments due the Executive under this Agreement. c. Survival. This section shall survive the termination of the Executive's employment hereunder and the expiration of this Agreement. 15. Gross Up for Taxes. a. Additional Payments. If, for any taxable year, Executive shall be liable for the payment of an excise tax under Section 4999 or other substitute or similar tax assessment (the "Excise Tax") of the Internal Revenue Code of 1986, as amended (the "Code"), including the corresponding provisions of any succeeding law, with respect to any payments or 64 benefits under Section 9 of this Agreement or Sections 7 or 8 or any other provision of this Agreement, including but not limited to this Section 12 or under any benefit plan of the Company applicable to Executive individually or generally to executives or employees of the Company, then, notwithstanding any other provisions of this Agreement, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the Excise Tax imposed on all such payments and benefits and of the federal, state and local income tax and Excise Tax imposed upon payments provided for in this Section 12, shall be equal to the payments and benefits due to the Executive hereunder and the payments and/or benefits due to the Executive under any benefit plan of the Company. Each Gross-Up Payment shall be made to Executive or as provided in Section 16 hereof, upon the later of (i) five (5) days after the date the Executive notifies the Company of its need to make such Gross-Up Payment, or (ii) the date of any payment causing the liability for such Excise Tax. The amount of any Gross-Up Payment under this section shall be computed by a nationally recognized certified public accounting firm designated jointly by the Company and the Executive. The cost of such services by the accounting firm shall be paid by the Company. If the Company and the Executive are unable to designate jointly the accounting firm, then the firm shall be the accounting firm used by the Company immediately prior to the Change in Control. b. IRS Disputed Claims. The Executive shall notify the company in writing of any claim by the Internal Revenue Service ("IRS") that, if successful, would require the payment by the Company of a Gross-Up Payment in addition to that payment previously paid by the Company pursuant to this section. Such notification shall be given an soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim, the date on which such claim is requested to 65 be paid, and attach a copy of the IRS notice. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Company any information reasonably requested by the Company relating to such claim; (ii) Take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) Cooperate with the Company in good faith in order effectively to contest such claim; and (iv) Permit the Company to participate in any proceedings relating to such claim; provided, however that the Company shall pay directly all costs and expenses (including legal and accounting fees, as well as other expenses and any additional interest and penalties) incurred by the Executive and the Company in connection with an IRS levy, contest or claim. c. This Section shall survive the termination of Executive's employment hereunder and the expiration of the Contract Period. 28. Term and Effect Prior to Change in Control. a. Term. This Agreement shall commence on the date hereof and shall remain in effect for a period of 3 years from the date hereof (the "Initial Term") or until the end of 66 the Contract Period, whichever is later. The Initial Term shall be automatically extended for an additional one year period on the anniversary date hereof (so that the Initial Term on any anniversary date is always 3 years) unless prior to a Change in Control the Chief Executive Officer of the Bank notifies the Executive in writing at any time that the Contract is not so extended, in which case the Initial Term shall end upon the later of (i) 3 years after the date hereof, or (ii) 2 years after the date of such written notice. Notwithstanding anything to the contrary contained herein, the Initial Term shall cease when the Executive attains age 65. b. No Effect Prior to Change in Control. This Agreement shall not affect any rights of the Company or the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement or contract or plan with the Company. The rights, duties and benefits provided hereunder shall only become effective upon a Change in Control. If the full-time employment of the Executive by the Company is ended for any reason prior to a Change in Control, this Agreement shall thereafter be of no further force and effect. 29. Severance Compensation and Benefits Not in Derogation of Other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of or agreements with the Company, except that if the Executive receives the lump sum severance payment due under paragraph 9 hereof, the Executive shall not be entitled to the lump sum severance payment due under paragraph 1 of the Severance Agreement (the "Severance Agreement"), dated January 1, 1998, between the Company and the Executive, or to severance payments under any other plan or program of the Company providing for severance pay, and shall not be entitled to health, hospital and other benefits under paragraph 2 of the 67 Severance Agreement to the extent such post-employment benefits duplicate benefits provided hereunder. 30. Notice. During the Contract Period, any notice of termination of the employment of the Executive by the Company or by the Executive to the Company shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which shall (i) indicate the specific termination provision in this Agreement relied upon; (ii) set forth, if necessary, in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment of the Executive or from the Company under the provision so indicated; (iii) specify a date of termination, which shall be not less than two weeks nor more than six weeks after such Notice of Termination is given, except in the case of termination of employment by the Company of the Executive for Cause pursuant to Section 6 hereof, in which case the Notice of Termination may specify a date of termination as of the date such Notice of Termination is given; and (iv) be given by personal delivery or, if the individual is not personally available, by certified mail to the last known address of the individual. Upon the death of the Executive, no Notice of Termination need be given. 31. Payroll and Withholding Taxes. All payments to be made or benefits to be provided hereunder by the Company shall be subject to applicable federal and state payroll or withholding taxes. Any Gross-Up Payment to be made by the Company may be made in the form of withholding taxes, but shall be timely directed to the IRS (or any state division of taxation) on the Executive's behalf. 32. Miscellaneous. This Agreement is the joint and several obligation of the Bank and Valley. The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey. Except as set forth herein, this 68 Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby, including expressly any prior agreement with the Company concerning Change in Control benefits. The parties hereto expressly agree that the Change in Control Agreement among the Executive, the Bank and Valley, dated as of January 1, 1998, is hereby terminated, effective the date hereof. Except as expressly specified in Section 14 with regard to the Severance Agreement, this Agreement does not effect or reduce the benefits or obligations of the parties under the Severance Agreement (or any supplement or amendment to or replacement for that Agreement). The amendment or termination of this Agreement may be made only in a writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such a writing. This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of his rights or duties hereunder but this Agreement shall be enforceable by the Executive's legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 69 IN WITNESS WHEREOF, Valley National Bank and Valley National Bancorp each have caused this Agreement to be signed by their duly authorized representatives pursuant to the authority of their Boards of Directors, and the Executive has personally executed this Agreement, all as of the day and year first written above. ATTEST: VALLEY NATIONAL BANCORP /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee ATTEST: VALLEY NATIONAL BANK /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee WITNESS: /s/ Gerald H. Lipkin /s/ Robert M. Meyer - ------------------------------- ------------------------------------- Gerald H. Lipkin Robert M. Meyer, Executive 70 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT (PETER CROCITTO) THIS AMENDED AND RESTATED CHANGE IN CONTROL EMPLOYMENT AGREEMENT (the "Agreement"), is made as of this 1st day of January, 1999, among VALLEY NATIONAL BANK ("Bank"), a national banking association with its principal office at 1445 Valley Road, Wayne, New Jersey, VALLEY NATIONAL BANCORP ("Valley"), a New Jersey Corporation which maintains its principal office at 1445 Valley Road, Wayne, New Jersey (Valley and the Bank collectively are the "Company") and PETER CROCITTO (the "Executive"). BACKGROUND WHEREAS, the Executive has been employed by Valley and the Bank for many years; WHEREAS, the Executive throughout his tenure has worked diligently in his position in the business of the Bank and Valley; WHEREAS, the Board of Directors of the Bank and Valley believe that the future services of the Executive are of great value to the Bank and Valley and that it is important for the growth and development of the Bank that the Executive continue in his position; WHEREAS, if the Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, the Board of Directors of the Company (the "Board") believes it is imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that they be able to receive and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, 71 without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; WHEREAS, to achieve that goal, and to retain the Executive's services prior to any such activity, the Board of Directors and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control of the Company, as hereinafter defined; and WHEREAS, the Executive and the Company had entered into a Change in Control Agreement, dated as of January 1, 1998, and have agreed to amend and restate that agreement with this Agreement. NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of an acquisition or a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby, agree as follows: 45. Definitions a. Cause. For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean (i) willful and continued failure by the Executive to perform his duties for the Company under this Agreement after at least one warning in writing from the Boards of Directors of the Company identifying specifically any such failure; (ii) the willful engaging by the Executive in misconduct which causes material injury to the Company as specified in a written notice to the Executive from the Boards of Directors of the Company; or (iii) conviction of a crime (other than a traffic violation), habitual drunkenness, drug 72 abuse, or excessive absenteeism (other than for illness), after a warning (required with respect to drunkenness or absenteeism only) in writing from the Boards of Directors of the Company to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interests of the Company. b. Change in Control. "Change in Control" means any of the following events: (i) when Valley or a Subsidiary acquires actual knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of Valley or a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates, is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of Valley representing more than twenty-five percent (25%) of the combined voting power of Valley's then outstanding securities (a "Control Person"); (ii) upon the first purchase of Valley's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by Valley, a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates); (iii) the consummation of (A) a merger or consolidation of Valley with or into another corporation unless the definitive agreement provides that at least two-thirds of the directors of the surviving or resulting corporation immediately after the transaction are directors of Valley before the transaction commenced (a "Non-Control Transaction"), (B) a sale or disposition of all or substantially all of Valley's assets or (C) a plan of liquidation or dissolution of Valley; (iv) if during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof or, following a Non-Control Transaction, two-thirds of the board of directors of the surviving or resulting 73 corporation; provided that any individual whose election or nomination for election as a member of the Board (or, following a Non-Control Transaction, the board of directors of the surviving or resulting corporation) was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director; or (v) upon a sale of (A) common stock of the Bank if after such sale any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) other than Valley, an employee benefit plan established or maintained by Valley or a Subsidiary, or an affiliate of Valley or a Subsidiary, owns a majority of the Bank's common stock or (B) all or substantially all of the Bank's assets (other than in the ordinary course of business). c. Contract Period. "Contract Period" shall mean the period commencing the day immediately preceding a Change in Control and ending on the earlier of (i) the third anniversary of the Change in Control or (ii) the date the Executive would attain age 65 or (iii) the death of the Executive. For the purpose of this Agreement, a Change in Control shall be deemed to have occurred at the date specified in the definition of Change in Control. d. Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. e. Good Reason. When used with reference to a voluntary termination by Executive of his employment with the Company, "Good Reason" shall mean any of the following, if taken without Executive's express prior written consent: (1) The assignment to Executive of any duties inconsistent with, or the reduction of powers or functions associated with, Executive's position, title, duties, responsibilities and status with the Company immediately prior to a Change in Control; any removal of Executive from, or any failure to re-elect Executive to, any position(s) or office(s) Executive held immediately prior to such Change in Control. 74 (2) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control or the failure to award Executive annual increases in accordance herewith; (3) A failure by the Company to continue any bonus plan in which Executive participated immediately prior to the Change in Control (except that the Company may institute plans, programs or arrangements providing the Executive substantially similar benefits) or a failure by the Company to continue Executive as a participant in such plans on at least the same basis as Executive participated in such plan prior to the Change in Control; or a failure to pay the Executive the bonus provided for in Section 4.b hereof at the time and in the manner therein specified; (4) The Company's transfer of Executive to another geographic location outside of New Jersey or more than 25 miles from his present office location, except for required occasional travel on the Company's business to an extent consistent with Executive's business travel obligations immediately prior to such Change in Control; (5) The failure by the Company to continue in effect any employee benefit plan, program or arrangement (including, without limitation the Company's retirement plan, benefit equalization plan, life insurance plan, health and accident plan, disability plan, deferred compensation plan or long term stock incentive plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements; the failure to continue, or the taking of any action which would deprive Executive, of any material 75 fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; (6) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive prior to any Change in Control; or (7) Any purported termination of Executive's employment by the Company during the term of this Agreement which is not effected pursuant to all of the requirements of this Agreement; and, for purposes of this Agreement, no such purported termination shall be effective. f. Subsidiary. "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with Valley, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 46. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, during the Contract Period upon the terms and conditions set forth herein. 47. Position. During the Contract Period the Executive shall be employed as Executive Vice President of Valley and the Bank, or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with the same title and with the same duties and responsibilities as before the Change in Control. The Executive shall devote his full time and attention to the business of the Company, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall not be 76 construed as preventing the Executive from managing any investments of his which do not require any service on his part in the operation of such investments or from continuing to serve on any boards of directors or trustees which he served prior to the Change in Control or for which consent is provided by the Board after a Change in Control. 48. Cash Compensation. The Company shall pay to the Executive compensation for his services during the Contract Period as follows: a. Base Salary. A base annual salary equal to the annual salary in effect as of the Change in Control. The annual salary shall be payable in installments in accordance with the Company's usual payroll method. b. Annual Bonus. An annual cash bonus equal to at least the average of the bonuses paid to the Executive in the three years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control. c. Annual Review. The Board of Directors of the Company during the Contract Period shall review annually, or at more frequent intervals which the Board determines is appropriate, the Executive's compensation and shall award him additional compensation to reflect the Executive's performance, the performance of the Company and competitive compensation levels, all as determined in the discretion of the Board of Directors. 49. Expenses and Fringe Benefits. a. Expenses. During the Contract Period, the Executive shall be entitled to reimbursement for all business expenses incurred by him with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to him immediately prior to the Change in Control. 77 b. Benefit Equalization Plan. During the Contract Period, if the Executive was entitled to benefits under the Company's Benefit Equalization Plan ("BEP") prior to the Change in Control, the Executive shall be entitled to continued benefits under the BEP after the Change in Control and such BEP may not be modified or terminated to reduce or eliminate such benefits during the Contract Period. c. Club Membership and Automobile. If prior to the Change in Control, the Executive was entitled to membership in a country club and/or the use of an automobile, during the Contract Period he shall be entitled to the same membership and/or use of an automobile at least comparable to the automobile provided to him prior to the Change in Control. d. Other Benefits. During the Contract Period, the Executive also shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical and life insurance, and any other benefits enjoyed, from time to time, by senior officers of the Company, all upon terms as favorable as those enjoyed by other senior officers of the Company. Notwithstanding anything in this paragraph 5(d) to the contrary, if the Company adopts any change in the benefits provided for senior officers of the Company, and such policy is uniformly applied to all officers of the Company (and any successor or acquiror of the Company, if any), including the chief executive officer of such entities, then no such change shall be deemed to be contrary to this paragraph. 50. Termination for Cause. During the Contract Period, the Company shall have the right to terminate the Executive for Cause, upon written notice to him of the termination which notice shall specify the reasons for the termination. In the event of termination for Cause the Executive shall not be entitled to any further compensation or benefits under this Agreement. 78 51. Disability. During the Contract Period if the Executive becomes permanently disabled, or is unable to perform his duties hereunder for 4 consecutive months, the Company may terminate the employment of the Executive. In such event, the Executive shall be paid within 10 days of termination a lump sum equal to the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive the lump sum amount due him under this Section 7 or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 52. Death Benefits. During the Contract Period (defined without regard to his death), upon the Executive's death his estate shall be paid within 20 business days of his death a lump sum equal to the highest annual salary (including 401(k) plan deferral) paid to the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control, but shall not be entitled to any further compensation or benefits under this Agreement, except as provided in the next sentence and in Section 12. If the Company fails to pay the Executive's estate the lump sum amount due it under this Section or the payments under Section 12, the Executive's estate, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all 79 of its reasonable legal fees and expenses incurred in connection with its enforcement against the Company of the terms of this Agreement. The Executive's estate shall be denied payment of its legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 53. Termination Without Cause or Resignation for Good Reason. The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive providing four weeks notice. The Executive may resign for Good Reason during the Contract Period upon four weeks written notice to the Company specifying the facts and circumstances claimed to support the Good Reason. The Executive shall be entitled to give a Notice of Termination that his or her employment is being terminated for Good Reason at any time during the Contract Period, not later than twelve months after any occurrence of an event stated to constitute Good Reason. If during the Contract Period the Company terminates the Executive's employment without Cause or the Executive Resigns for Good Reason, then the Executive shall be entitled to the following: (i) (subject to the possible age related reduction in the next sentence) the Company shall within 20 business days of the termination of employment pay the Executive a lump sum severance payment in an amount equal to three times the highest annual compensation, consisting solely of salary (including any 401(k) plan deferral) and bonus, paid to (or in the case of bonus accrued for) the Executive during any calendar year in each of the three calendar years immediately prior to the Change in Control; (ii) the Company shall continue to provide the Executive for a period of three years after termination (but not beyond the date the Executive reaches age 65) with health, hospitalization and medical insurance, as well as life and disability insurance, as were provided at the time of the termination of his employment with the Company, at the Company's cost (subject to payment by the Executive of the same contribution amount and 80 deductibles as Executive previously paid); (iii) the Company shall credit Executive under the BEP immediately upon termination with additional years of credited service as if he had continued to work for the Company for three years after the date of termination (but not beyond the date the Executive reaches age 65), the benefit plans covered thereby had remained the same during such period, and the BEP was not changed or modified after the Change in Control or otherwise during such period. After the Executive has reached age 62, the "three" times referred to in clause (i) of the previous sentence shall be reduced to a number equal to the quotient (rounded to the nearest thousand) the numerator of which is the whole number of months left until the Executive reaches age 65 and the denominator of which is 12. The Executive shall not have a duty to mitigate the damages suffered by him in connection with the termination by the Company of his employment without Cause or a resignation for Good Reason during the Contract Period. If the Company fails to pay the Executive the lump sum amount due him hereunder or to provide him with the health, hospitalization and medical insurance, life disability or BEP benefits due under this section or the payments under Section 12, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company on a monthly basis as incurred all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause and not in good faith. 54. Resignation Without Good Reason. The Executive shall be entitled to resign from the employment of the Company at any time during the Contract Period without Good Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which he ceases to be employed by the Company, and shall not be entitled to any of the 81 other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks' notice thereof. 55. Non-Disclosure of Confidential Information. a. Non-Disclosure of Confidential Information. Except in the course of his employment with the Company and in the pursuit of the business of the Company or any of its subsidiaries or affiliates, the Executive shall not, at any time during or following the Contract Period, disclose or use, any confidential information or proprietary data of the Company or any of its subsidiaries or affiliates. The Executive agrees that, among other things, all information concerning the identity of and the Company's relations with its customers is confidential information. b. Specific Performance. Executive agrees that the Company does not have an adequate remedy at law for the breach of this section and agrees that he shall be subject to injunctive relief and equitable remedies as a result of the breach of this section. The invalidity or unenforceability of any provision of this Agreement shall not affect the force and effect of the remaining valid portions. No alleged breach of this Section 11 shall give the Company the right to withhold or offset against any payments due the Executive under this Agreement. c. Survival. This section shall survive the termination of the Executive's employment hereunder and the expiration of this Agreement. 16. Gross Up for Taxes. a. Additional Payments. If, for any taxable year, Executive shall be liable for the payment of an excise tax under Section 4999 or other substitute or similar tax assessment (the "Excise Tax") of the Internal Revenue Code of 1986, as amended (the "Code"), including the corresponding provisions of any succeeding law, with respect to any payments or 82 benefits under Section 9 of this Agreement or Sections 7 or 8 or any other provision of this Agreement, including but not limited to this Section 12 or under any benefit plan of the Company applicable to Executive individually or generally to executives or employees of the Company, then, notwithstanding any other provisions of this Agreement, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the Excise Tax imposed on all such payments and benefits and of the federal, state and local income tax and Excise Tax imposed upon payments provided for in this Section 12, shall be equal to the payments and benefits due to the Executive hereunder and the payments and/or benefits due to the Executive under any benefit plan of the Company. Each Gross-Up Payment shall be made to Executive or as provided in Section 16 hereof, upon the later of (i) five (5) days after the date the Executive notifies the Company of its need to make such Gross-Up Payment, or (ii) the date of any payment causing the liability for such Excise Tax. The amount of any Gross-Up Payment under this section shall be computed by a nationally recognized certified public accounting firm designated jointly by the Company and the Executive. The cost of such services by the accounting firm shall be paid by the Company. If the Company and the Executive are unable to designate jointly the accounting firm, then the firm shall be the accounting firm used by the Company immediately prior to the Change in Control. b. IRS Disputed Claims. The Executive shall notify the company in writing of any claim by the Internal Revenue Service ("IRS") that, if successful, would require the payment by the Company of a Gross-Up Payment in addition to that payment previously paid by the Company pursuant to this section. Such notification shall be given an soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim, the date on which such claim is requested to 83 be paid, and attach a copy of the IRS notice. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Company any information reasonably requested by the Company relating to such claim; (ii) Take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) Cooperate with the Company in good faith in order effectively to contest such claim; and (iv) Permit the Company to participate in any proceedings relating to such claim; provided, however that the Company shall pay directly all costs and expenses (including legal and accounting fees, as well as other expenses and any additional interest and penalties) incurred by the Executive and the Company in connection with an IRS levy, contest or claim. c. This Section shall survive the termination of Executive's employment hereunder and the expiration of the Contract Period. 33. Term and Effect Prior to Change in Control. a. Term. This Agreement shall commence on the date hereof and shall remain in effect for a period of 3 years from the date hereof (the "Initial Term") or until the end of 84 the Contract Period, whichever is later. The Initial Term shall be automatically extended for an additional one year period on the anniversary date hereof (so that the Initial Term on any anniversary date is always 3 years) unless prior to a Change in Control the Chief Executive Officer of the Bank notifies the Executive in writing at any time that the Contract is not so extended, in which case the Initial Term shall end upon the later of (i) 3 years after the date hereof, or (ii) 2 years after the date of such written notice. Notwithstanding anything to the contrary contained herein, the Initial Term shall cease when the Executive attains age 65. b. No Effect Prior to Change in Control. This Agreement shall not affect any rights of the Company or the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement or contract or plan with the Company. The rights, duties and benefits provided hereunder shall only become effective upon a Change in Control. If the full-time employment of the Executive by the Company is ended for any reason prior to a Change in Control, this Agreement shall thereafter be of no further force and effect. 34. Severance Compensation and Benefits Not in Derogation of Other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of or agreements with the Company, except that if the Executive receives the lump sum severance payment due under paragraph 9 hereof, the Executive shall not be entitled to the lump sum severance payment due under paragraph 1 of the Severance Agreement (the "Severance Agreement"), dated January 1, 1998, between the Company and the Executive, or to severance payments under any other plan or program of the Company providing for severance pay, and shall not be entitled to health, hospital and other benefits under paragraph 2 of the 85 Severance Agreement to the extent such post-employment benefits duplicate benefits provided hereunder. 35. Notice. During the Contract Period, any notice of termination of the employment of the Executive by the Company or by the Executive to the Company shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which shall (i) indicate the specific termination provision in this Agreement relied upon; (ii) set forth, if necessary, in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment of the Executive or from the Company under the provision so indicated; (iii) specify a date of termination, which shall be not less than two weeks nor more than six weeks after such Notice of Termination is given, except in the case of termination of employment by the Company of the Executive for Cause pursuant to Section 6 hereof, in which case the Notice of Termination may specify a date of termination as of the date such Notice of Termination is given; and (iv) be given by personal delivery or, if the individual is not personally available, by certified mail to the last known address of the individual. Upon the death of the Executive, no Notice of Termination need be given. 36. Payroll and Withholding Taxes. All payments to be made or benefits to be provided hereunder by the Company shall be subject to applicable federal and state payroll or withholding taxes. Any Gross-Up Payment to be made by the Company may be made in the form of withholding taxes, but shall be timely directed to the IRS (or any state division of taxation) on the Executive's behalf. 37. Miscellaneous. This Agreement is the joint and several obligation of the Bank and Valley. The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey. Except as set forth herein, this 86 Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby, including expressly any prior agreement with the Company concerning Change in Control benefits. The parties hereto expressly agree that the Change in Control Agreement among the Executive, the Bank and Valley, dated as of January 1, 1998, is hereby terminated, effective the date hereof. Except as expressly specified in Section 14 with regard to the Severance Agreement, this Agreement does not effect or reduce the benefits or obligations of the parties under the Severance Agreement (or any supplement or amendment to or replacement for that Agreement). The amendment or termination of this Agreement may be made only in a writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such a writing. This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of his rights or duties hereunder but this Agreement shall be enforceable by the Executive's legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 87 IN WITNESS WHEREOF, Valley National Bank and Valley National Bancorp each have caused this Agreement to be signed by their duly authorized representatives pursuant to the authority of their Boards of Directors, and the Executive has personally executed this Agreement, all as of the day and year first written above. ATTEST: VALLEY NATIONAL BANCORP /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee ATTEST: VALLEY NATIONAL BANK /s/ Alan D. Eskow By: /s/ Robert McEntee - ------------------------------- ------------------------------------- Alan D. Eskow, Secretary Robert McEntee, Chairman of the Compensation Committee WITNESS: /s/ Gerald H. Lipkin /s/ Peter Crocitto - ------------------------------- ------------------------------------- Gerald H. Lipkin Peter Crocitto, Executive 88 EX-10.(L) 4 CHANGE IN CONTROL AGREEMENTS-SENIOR VICE PRESIDENT CHANGE-IN-CONTROL AGREEMENT (Senior Vice President) THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made as of this 4th day of January, 1999, among VALLEY NATIONAL BANK ("Bank"), a national banking association with its principal office at 615 Main Avenue, Passaic, New Jersey, VALLEY NATIONAL BANCORP ("Valley"), a New Jersey Corporation which maintains its principal office at 1445 Valley Road, Wayne, New Jersey (Valley and the Bank collectively are the "Company") and ALAN D. ESKOW (the "Executive"). BACKGROUND WHEREAS, the Executive has been continuously employed by the Bank for at least three full years; WHEREAS, the Executive throughout his tenure has worked diligently in his position in the business of the Bank and Valley; WHEREAS, the Board of Directors of the Bank and Valley believe that the future services of the Executive are of great value to the Bank and Valley and that it is important for the growth and development of the Bank that the Executive continue in his position; WHEREAS, if the Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, the Board of Directors of the Company (the "Board") believes it is imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that they be able to receive 1 and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; WHEREAS, to achieve that goal, and to retain the Executive's services prior to any such activity, the Board of Directors and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control of the Company, as hereinafter defined. NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby agree as follows: 1. Definitions a. Base Salary. "Base Salary", as used in Section 9 hereof, means the annual cash base salary (excluding any bonus and the value of any fringe benefits) paid to the Executive at the time of the termination of employment unless such amount has been reduced after a Change in Control, in which case such amount shall be the highest base salary in effect during the 18 months prior to the Change in Control. b. Cause. For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean (i) willful and continued 2 failure by the Executive to perform his duties for the Company under this Agreement after at least one warning in writing from the Company's Board of Directors identifying specifically any such failure; (ii) the willful engaging by the Executive in misconduct which causes material injury to the Company as specified in a written notice to the Executive from the Board of Directors; or (iii) conviction of a crime, other than a traffic violation, habitual drunkenness, drug abuse, or excessive absenteeism other than for illness, after a warning (with respect to drunkenness or absenteeism only) in writing from the Board of Directors to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Company. c. Change in Control. "Change in Control" means any of the following events: (i) when Valley or a Subsidiary acquires actual knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of Valley or a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates, is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of Valley representing more than twenty-five percent (25%) of the combined voting power of Valley's then outstanding securities (a "Control Person"), (ii) upon the first purchase of Valley's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by Valley, a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates), (iii) 3 upon the approval by Valley's stockholders of (A) a merger or consolidation of Valley with or into another corporation (other than a merger or consolidation which is approved by at least two-thirds of the Continuing Directors (as hereinafter defined) or the definitive agreement for which provides that at least two-thirds of the directors of the surviving or resulting corporation immediately after the transaction are Continuing Directors (in either case, a "Non-Control Transaction")), (B) a sale or disposition of all or substantially all of Valley's assets or (C) a plan of liquidation or dissolution of Valley, (iv) if during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof or, following a Non-Control Transaction, two-thirds of the board of directors of the surviving or resulting corporation; provided that any individual whose election or nomination for election as a member of the Board (or, following a Non-Control Transaction, the board of directors of the surviving or resulting corporation) was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director, or (v) upon a sale of (A) common stock of the Bank if after such sale any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) other than Valley, an employee benefit plan established or maintained by Valley or a Subsidiary, or an affiliate of Valley or a Subsidiary, owns a majority of the Bank's common stock or (B) all or substantially all of the Bank's assets (other than in the ordinary course of business). No person shall be considered a Control Person for purposes of clause (i) above if (A) such person is or becomes the beneficial owner, directly or indirectly, of more than ten percent (10%) but less than twenty-five percent (25%) of the combined voting power 4 of Valley's then outstanding securities if the acquisition of all voting securities in excess of ten percent (10%) was approved in advance by a majority of the Continuing Directors then in office or (B) such person acquires in excess of ten percent (10%) of the combined voting power of Valley's then outstanding voting securities in violation of law and by order of a court of competent jurisdiction, settlement or otherwise, disposes or is required to dispose of all securities acquired in violation of law. d. Continuously Employed. "Continuously employed", as used in Section 9, means continuously employed by the Bank but excludes any period of employment by a bank or financial institution acquired by or merged into the Bank and excludes any period of employment by the Bank if such period is separated from the current employment with the Bank by a break in service (other a break in service resulting solely from illness, disability or family leave). e. Contract Period. "Contract Period" shall mean the period commencing the day immediately preceding a Change in Control and ending on the earlier of (i) the first anniversary of the Change in Control or (ii) the date the Executive would attain age 65 or (iii) the death of the Executive. For the purpose of this Agreement, a Change in Control shall be deemed to have occurred at the date specified in the definition of Change-in-Control. f. Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. g. Good Reason. When used with reference to a voluntary termination by Executive of his employment with the Company, "Good Reason" shall mean any of the following, 5 if taken without Executive's express written consent: (1) The assignment to Executive of any duties inconsistent with, or the reduction of powers or functions associated with, Executive's position, duties, responsibilities and status with the Company immediately prior to a Change in Control. A change in title or positions resulting merely from a merger of the Company into or with another bank or company which does not downgrade in any way the Executive's powers, duties and responsibilities shall not meet the requirements of this paragraph; (2) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control or the failure to award Executive annual increases in accordance herewith; (3) A failure by the Company to continue any bonus plan in which Executive participated immediately prior to the Change in control or a failure by the Company to continue Executive as a participant in such plan on at least the same basis as Executive participated in such plan prior to the Change in Control; (4) The Company's transfer of Executive to another geographic location more than 35 miles from his present office location, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations immediately prior to such Change in Control; (5) The failure by the Company to continue in effect any employee benefit plan, program or arrangement (including, without limitation the Company's 6 retirement plan, benefit equalization plan, life insurance plan, health and accident plan, disability plan, deferred compensation plan or long term stock incentive plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements; the failure to continue, or the taking of any action which would deprive Executive, of any material fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; (6) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive prior to any Change in Control; or (7) Any purported termination of Executive's employment by the Company during the term of this Agreement which is not effected pursuant to all of the requirements of this Agreement; and, for purposes of this Agreement, no such purported termination shall be effective. h. Pro-rata Bonus Amount. "Pro-rata Bonus Amount", as used in Section 9, means an amount equal to a "portion" of the highest cash bonus paid to the Executive in the three calendar years immediately prior to the Change in Control. The "portion" of such cash bonus shall 7 be a fraction, the numerator of which is the number of calendar months or part thereof which the Executive has worked in the calendar year in which the termination occurs and the denominator of which is 12. i. Subsidiary. "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with Valley, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, during the Contract Period upon the terms and conditions set forth herein. 3. Position. During the Contract Period the Executive shall be employed by the bank as a Senior Officer, or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with substantially the same title and the same duties and responsibilities as before the Change in Control. The Executive shall devote his full time and attention to the business of the Company, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall not be construed as preventing the Executive from managing any investments of his which do not require any service on his part in the operation of such investments. 4. Cash Compensation. The Company shall pay to the Executive compensation for his services during the Contract Period as follows: 8 a. Base Salary. A base annual salary equal to the annual salary in effect as of the Change in Control. The annual salary shall be payable in installments in accordance with the Company's usual payroll method. b. Annual Bonus. An annual cash bonus equal to at least the average of the bonuses paid to the Executive in the three years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control. c. Annual Review. The Board of Directors of the Company during the Contract Period shall review annually, or at more frequent intervals which the Board determines is appropriate, the Executive's compensation and shall award him additional compensation to reflect the Executive's performance, the performance of the Company and competitive compensation levels, all as determined in the discretion of the Board of Directors. 5. Expenses and Fringe Benefits. a. Expenses. During the Contract Period, the Executive shall be entitled to reimbursement for all business expenses incurred by him with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to him immediately prior to the Change in Control. b. Benefit Equalization Plan. During the Contract Period, if the Executive was entitled to benefits under the Company's Benefit Equalization Plan ("BEP") prior to the Change in Control, the Executive shall be entitled to continued benefits under the BEP after the 9 Change in Control and such BEP may not be modified to reduce or eliminate such benefits during the Contract Period. c. Club Membership and Automobile. If prior to the Change in Control, the Executive was entitled to membership in a country club and/or the use of an automobile, he shall be entitled to the same membership and/or use of an automobile at least comparable to the automobile provided to him prior to the Change in Control. d. Other Benefits. The Executive also shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical and life insurance, and any other benefits enjoyed, from time to time, by senior officers of the Company, all upon terms as favorable as those enjoyed by other senior officers of the Company. Notwithstanding anything in this paragraph 5(d) to the contrary, if the Company adopts any change in the benefits provided for senior officers of the Company, and such policy is uniformly applied to all officers of the Company (and any successor or acquiror of the Company, if any), then no such change shall be deemed to be contrary to this paragraph. 6. Termination for Cause. The Company shall have the right to terminate the Executive for Cause, upon written notice to him of the termination which notice shall specify the reasons for the termination. In the event of termination for Cause the Executive shall not be entitled to any further benefits under this Agreement. 7. Disability. During the Contract Period if the Executive becomes 10 permanently disabled, or is unable to perform his duties hereunder for 4 consecutive months in any 12 month period, the Company may terminate the employment of the Executive. In such event, the Executive shall not be entitled to any further benefits under this Agreement. 8. Death Benefits. Upon the Executive's death during the Contract Period, his estate shall not be entitled to any further benefits under this Agreement. 9. Termination Without Cause or Resignation for Good Reason. The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive providing four weeks notice. The Executive may resign for Good Reason during the Contract Period upon four weeks' written notice to the Company specifying facts and circumstances claimed to support the Good Reason. The Executive shall be entitled to give a Notice of Termination that his or her employment is being terminated for Good Reason at any time during the Contract Period, not later than twelve months after any occurrence of an event stated to constitute Good Reason. If the Company terminates the Executive's employment during the Contract Period without Cause or if the Executive Resigns for Good Reason, the Company shall, subject to section 12 hereof: 11 a. Within 20 business days of the termination of employment pay the Executive a lump sum equal to: (i), if the Executive has been continuously employed by the Bank for 6 full years or more, two (2) years of Base Salary plus a Pro-rata Bonus Amount or (ii), if the Executive has been continuously employed by the Bank for less than 6 full years but more than three years, then one (1) year of Base Salary plus a Pro-rata Bonus Amount; and b. Continue to provide the Executive with medical, dental and life insurance for the period equal to the equivalent lump sum payment (e.g. 1 or 2 years) as were provided at the time of termination of his employment with the Company, at the Company's cost. Upon expiration of benefit coverages, full COBRA benefits (18 months) will be made available to Executive. The Executive shall not have a duty to mitigate the damages suffered by him in connection with the termination by the Company of his employment without Cause or a resignation for Good Reason during the Contract Period. If the Company fails to pay the Executive the lump sum amount due him hereunder or to provide him with the health, hospitalization and insurance benefits due under this section, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause. 10. Resignation Without Good Reason. The Executive shall be entitled to resign from the employment of the Company at any time during the Contact Period without Good 12 Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which he ceases to be employed by the Company, and shall not be entitled to any of the other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks' notice thereof. 11. Non-Disclosure of Confidential Information. a. Non-Disclosure of Confidential Information. Except in the course of his employment with the Company and in the pursuit of the business of the Company or any of its subsidiaries or affiliates, the Executive shall not, at any time during or following the Contract Period, disclose or use, any confidential information or proprietary data of the Company or any of its subsidiaries or affiliates. The Executive agrees that, among other things, all information concerning the identity of and the Company's relations with its customers is confidential information. b. Specific Performance. Executive agrees that the Company does not have an adequate remedy at law for the breach of this section and agrees that he shall be subject to injunctive relief and equitable remedies as a result of the breach of this section. The invalidity or unenforceability of any provision of this Agreement shall not affect the force and effect of the remaining valid portions. c. Survival. This section shall survive the termination of the Executive's employment hereunder and the expiration of this Agreement. 12. Certain Reduction of Payments by the Company. a. Anything in this Agreement to the contrary notwithstanding, prior to the 13 payment of any lump sum amount payable hereunder, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants) shall determine as promptly as practical and in any event within 20 business days following the termination of employment of Executive whether any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and if it is then the aggregate present value of amounts payable or distributable to or for the benefit of Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Agreement Payments") shall be reduced (but not below zero) to the reduced Amount. For purposes of this paragraph, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of said Section 280G of the Code. b. If under paragraph (a) of this section the Certified Public Accountants determine that any Payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give the Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount), and shall advise the Company in writing of his election 14 within 20 business days of his receipt of notice. If no such election is made by the Executive within such 20-day period, the Company may elect which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the Aggregate present Value of the Agreement Payments equals the Reduced Amount) and shall notify the Executive promptly of such election. For purposes of this paragraph, present Value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive shall be made within 20 business days of a termination of employment of Executive. With the consent of the Executive, the Company may suspend part or all of the lump sum payment due under Section 9 hereof and any other payments due to the Executive hereunder until the Certified Public Accountants finish the determination and the Executive (or the Company, as the case may be) elect how to reduce the Agreement Payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to or distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement and shall promptly pay to or distribute for the benefit of Executive in the future such amounts as become due to Executive under this Agreement. c. As a result of the uncertainty in the application of Section 280G of the Code, it is possible that Agreement Payments may have been made by the Company which should not have been made ("Overpayment") or that additional Agreement Payments which will have not been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Certified Public Accountants, based upon the assertion of a deficiency by the Internal Revenue Service against the 15 Company or Executive which said Certified Public Accountants believe has a high probability of success, determines that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to Executive which Executive shall repay to the Company together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that no amount shall be payable by Executive to the Company in and for the extent such payment would not reduce the amount which is subject to taxation under Section 4999 of the Code. In the event that the Certified Public Accountants, based upon controlling precedent, determine that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 13. Term and Effect Prior to Change in Control. a. Term. Except as otherwise provided for hereunder, this Agreement shall commence on the date hereof and shall remain in effect for a period of 3 years from the date hereof (the "Initial Term") or until the end of the Contract Period, whichever is later. The Initial Term shall be automatically extended for an additional one year period on the anniversary date hereof (so that the Initial Term is always 3 years) unless, prior to a Change in Control, the Personnel and Compensation Committee of the Bank notifies the Executive in writing at any time that the Contract is not so extended, in which case the Initial Term shall end upon the later of (i) 3 years after the date hereof, or (ii) twenty-four months after the date of such written notice. Notwithstanding anything to the contrary contained herein, the Initial Term shall cease when the Executive attains age 65. 16 b. No Effect Prior to Change in Control. This Agreement shall not effect any rights of the Company to terminate the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement or contract or plan with the Company. The rights, duties and benefits provided hereunder shall only become effective upon and after a Change in Control. If the full-time employment of the Executive by the Company is ended for any reason prior to a Change in Control, this Agreement shall thereafter be of no further force and effect. 14. Severance Compensation and Benefits Not in Derogation of Other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of or agreements with the Company, except that if the Executive received any payment hereunder, he shall not be entitled to any payment under the Company's severance policy for officers and directors. 15. Miscellaneous. This Agreement is the joint and several obligation of the Bank and Valley. The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey. This Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby, including expressly any prior agreement with the Company concerning change in control benefits. The amendment or termination of this Agreement may be made only in a writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such a writing. This Agreement shall be binding upon any successor (whether direct or 17 indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of his rights or duties hereunder but this Agreement shall be enforceable by the Executive's legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 18 IN WITNESS WHEREOF, Valley National Bank and Valley National Bancorp each have caused this Agreement to be signed by their duly authorized representatives pursuant to the authority of their Boards of Directors, and the Executive has personally executed this Agreement, all as of the day and year first written above. ATTEST: VALLEY NATIONAL BANCORP /s/ Jack Blackin By: /s/ Gerald H. Lipkin - -------------------------------- ----------------------------------- Jack Blackin, Asst. Secretary Gerald H. Lipkin, Chairman of the Board, President & CEO ATTEST: VALLEY NATIONAL BANK /s/ Jack Blackin By: /s/ Gerald H. Lipkin - -------------------------------- ----------------------------------- Jack Blackin, Asst. Secretary Gerald H. Lipkin, Chairman of the Board, President & CEO WITNESS: By: /s/ Alan D. Eskow ----------------------------------- Alan D. Eskow, Executive April 10, 1990 - -------------------------------- "Executive" Valley National Bank Service Date 19 CHANGE-IN-CONTROL AGREEMENT (FIRST SENIOR VICE PRESIDENT) THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made as of this 4th day of January, 1999, among VALLEY NATIONAL BANK ("Bank"), a national banking association with its principal office at 615 Main Avenue, Passaic, New Jersey, VALLEY NATIONAL BANCORP ("Valley"), a New Jersey Corporation which maintains its principal office at 1445 Valley Road, Wayne, New Jersey (Valley and the Bank collectively are the "Company") and ROBERT FARNON (the "Executive"). BACKGROUND WHEREAS, the Executive has been continuously employed by the Bank for at least three full years; WHEREAS, the Executive throughout his tenure has worked diligently in his position in the business of the Bank and Valley; WHEREAS, the Board of Directors of the Bank and Valley believe that the future services of the Executive are of great value to the Bank and Valley and that it is important for the growth and development of the Bank that the Executive continue in his position; WHEREAS, if the Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, the Board of Directors of the Company (the "Board") believes it is imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that they be able to receive 20 and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; WHEREAS, to achieve that goal, and to retain the Executive's services prior to any such activity, the Board of Directors and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control of the Company, as hereinafter defined. NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby agree as follows: 1. Definitions a. Base Salary. "Base Salary", as used in Section 9 hereof, means the annual cash base salary (excluding any bonus and the value of any fringe benefits) paid to the Executive at the time of the termination of employment unless such amount has been reduced after a Change in Control, in which case such amount shall be the highest base salary in effect during the 18 months prior to the Change in Control. b. Cause. For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean (i) willful and continued 21 failure by the Executive to perform his duties for the Company under this Agreement after at least one warning in writing from the Company's Board of Directors identifying specifically any such failure; (ii) the willful engaging by the Executive in misconduct which causes material injury to the Company as specified in a written notice to the Executive from the Board of Directors; or (iii) conviction of a crime, other than a traffic violation, habitual drunkenness, drug abuse, or excessive absenteeism other than for illness, after a warning (with respect to drunkenness or absenteeism only) in writing from the Board of Directors to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Company. c. Change in Control. "Change in Control" means any of the following events: (i) when Valley or a Subsidiary acquires actual knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of Valley or a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates, is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of Valley representing more than twenty-five percent (25%) of the combined voting power of Valley's then outstanding securities (a "Control Person"), (ii) upon the first purchase of Valley's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by Valley, a Subsidiary or an employee benefit plan established or maintained by Valley, a Subsidiary or any of their respective affiliates), (iii) 22 upon the approval by Valley's stockholders of (A) a merger or consolidation of Valley with or into another corporation (other than a merger or consolidation which is approved by at least two-thirds of the Continuing Directors (as hereinafter defined) or the definitive agreement for which provides that at least two-thirds of the directors of the surviving or resulting corporation immediately after the transaction are Continuing Directors (in either case, a "Non-Control Transaction")), (B) a sale or disposition of all or substantially all of Valley's assets or (C) a plan of liquidation or dissolution of Valley, (iv) if during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board (the "Continuing Directors") cease for any reason to constitute at least two-thirds thereof or, following a Non-Control Transaction, two-thirds of the board of directors of the surviving or resulting corporation; provided that any individual whose election or nomination for election as a member of the Board (or, following a Non-Control Transaction, the board of directors of the surviving or resulting corporation) was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director, or (v) upon a sale of (A) common stock of the Bank if after such sale any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) other than Valley, an employee benefit plan established or maintained by Valley or a Subsidiary, or an affiliate of Valley or a Subsidiary, owns a majority of the Bank's common stock or (B) all or substantially all of the Bank's assets (other than in the ordinary course of business). No person shall be considered a Control Person for purposes of clause (i) above if (A) such person is or becomes the beneficial owner, directly or indirectly, of more than ten percent (10%) but less than twenty-five percent (25%) of the combined voting power 23 of Valley's then outstanding securities if the acquisition of all voting securities in excess of ten percent (10%) was approved in advance by a majority of the Continuing Directors then in office or (B) such person acquires in excess of ten percent (10%) of the combined voting power of Valley's then outstanding voting securities in violation of law and by order of a court of competent jurisdiction, settlement or otherwise, disposes or is required to dispose of all securities acquired in violation of law. d. Continuously Employed. "Continuously employed", as used in Section 9, means continuously employed by the Bank but excludes any period of employment by a bank or financial institution acquired by or merged into the Bank and excludes any period of employment by the Bank if such period is separated from the current employment with the Bank by a break in service (other a break in service resulting solely from illness, disability or family leave). e. Contract Period. "Contract Period" shall mean the period commencing the day immediately preceding a Change in Control and ending on the earlier of (i) the first anniversary of the Change in Control or (ii) the date the Executive would attain age 65 or (iii) the death of the Executive. For the purpose of this Agreement, a Change in Control shall be deemed to have occurred at the date specified in the definition of Change-in-Control. f. Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. g. Good Reason. When used with reference to a voluntary termination by Executive of his employment with the Company, "Good Reason" shall mean any of the following, 24 if taken without Executive's express written consent: (1) The assignment to Executive of any duties inconsistent with, or the reduction of powers or functions associated with, Executive's position, duties, responsibilities and status with the Company immediately prior to a Change in Control. A change in title or positions resulting merely from a merger of the Company into or with another bank or company which does not downgrade in any way the Executive's powers, duties and responsibilities shall not meet the requirements of this paragraph; (2) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control or the failure to award Executive annual increases in accordance herewith; (3) A failure by the Company to continue any bonus plan in which Executive participated immediately prior to the Change in control or a failure by the Company to continue Executive as a participant in such plan on at least the same basis as Executive participated in such plan prior to the Change in Control; (4) The Company's transfer of Executive to another geographic location more than 35 miles from his present office location, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations immediately prior to such Change in Control; (5) The failure by the Company to continue in effect any employee benefit plan, program or arrangement (including, without limitation the Company's 25 retirement plan, benefit equalization plan, life insurance plan, health and accident plan, disability plan, deferred compensation plan or long term stock incentive plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements; the failure to continue, or the taking of any action which would deprive Executive, of any material fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; (6) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive prior to any Change in Control; or (7) Any purported termination of Executive's employment by the Company during the term of this Agreement which is not effected pursuant to all of the requirements of this Agreement; and, for purposes of this Agreement, no such purported termination shall be effective. h. Pro-rata Bonus Amount. "Pro-rata Bonus Amount", as used in Section 9, means an amount equal to a "portion" of the highest cash bonus paid to the Executive in the three calendar years immediately prior to the Change in Control. The "portion" of such cash bonus shall 26 be a fraction, the numerator of which is the number of calendar months or part thereof which the Executive has worked in the calendar year in which the termination occurs and the denominator of which is 12. i. Subsidiary. "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with Valley, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, during the Contract Period upon the terms and conditions set forth herein. 3. Position. During the Contract Period the Executive shall be employed by the bank as a Senior Officer, or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with substantially the same title and the same duties and responsibilities as before the Change in Control. The Executive shall devote his full time and attention to the business of the Company, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall not be construed as preventing the Executive from managing any investments of his which do not require any service on his part in the operation of such investments. 4. Cash Compensation. The Company shall pay to the Executive compensation for his services during the Contract Period as follows: 27 a. Base Salary. A base annual salary equal to the annual salary in effect as of the Change in Control. The annual salary shall be payable in installments in accordance with the Company's usual payroll method. b. Annual Bonus. An annual cash bonus equal to at least the average of the bonuses paid to the Executive in the three years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control. c. Annual Review. The Board of Directors of the Company during the Contract Period shall review annually, or at more frequent intervals which the Board determines is appropriate, the Executive's compensation and shall award him additional compensation to reflect the Executive's performance, the performance of the Company and competitive compensation levels, all as determined in the discretion of the Board of Directors. 5. Expenses and Fringe Benefits. a. Expenses. During the Contract Period, the Executive shall be entitled to reimbursement for all business expenses incurred by him with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to him immediately prior to the Change in Control. b. Benefit Equalization Plan. During the Contract Period, if the Executive was entitled to benefits under the Company's Benefit Equalization Plan ("BEP") prior to the Change in Control, the Executive shall be entitled to continued benefits under the BEP after the 28 Change in Control and such BEP may not be modified to reduce or eliminate such benefits during the Contract Period. c. Club Membership and Automobile. If prior to the Change in Control, the Executive was entitled to membership in a country club and/or the use of an automobile, he shall be entitled to the same membership and/or use of an automobile at least comparable to the automobile provided to him prior to the Change in Control. d. Other Benefits. The Executive also shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical and life insurance, and any other benefits enjoyed, from time to time, by senior officers of the Company, all upon terms as favorable as those enjoyed by other senior officers of the Company. Notwithstanding anything in this paragraph 5(d) to the contrary, if the Company adopts any change in the benefits provided for senior officers of the Company, and such policy is uniformly applied to all officers of the Company (and any successor or acquiror of the Company, if any), then no such change shall be deemed to be contrary to this paragraph. 6. Termination for Cause. The Company shall have the right to terminate the Executive for Cause, upon written notice to him of the termination which notice shall specify the reasons for the termination. In the event of termination for Cause the Executive shall not be entitled to any further benefits under this Agreement. 7. Disability. During the Contract Period if the Executive becomes 29 permanently disabled, or is unable to perform his duties hereunder for 4 consecutive months in any 12 month period, the Company may terminate the employment of the Executive. In such event, the Executive shall not be entitled to any further benefits under this Agreement. 8. Death Benefits. Upon the Executive's death during the Contract Period, his estate shall not be entitled to any further benefits under this Agreement. 9. Termination Without Cause or Resignation for Good Reason. The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive providing four weeks notice. The Executive may resign for Good Reason during the Contract Period upon four weeks' written notice to the Company specifying facts and circumstances claimed to support the Good Reason. The Executive shall be entitled to give a Notice of Termination that his or her employment is being terminated for Good Reason at any time during the Contract Period, not later than twelve months after any occurrence of an event stated to constitute Good Reason. If the Company terminates the Executive's employment during the Contract Period without Cause or if the Executive Resigns for Good Reason, the Company shall, subject to section 12 hereof: a. Within 20 business days of the termination of employment pay the Executive a lump sum equal to: (i), if the Executive has been continuously employed by the Bank for 6 full years or more, two (2) years of Base Salary plus a Pro-rata Bonus Amount or (ii), if the Executive has been continuously employed by the Bank for less than 6 full years but more than three years, then one (1) year of Base Salary plus a Pro-rata Bonus Amount; and 30 b. Continue to provide the Executive with medical, dental and life insurance for the period equal to the equivalent lump sum payment (e.g. 1 or 2 years) as were provided at the time of termination of his employment with the Company, at the Company's cost. Upon expiration of benefit coverages, full COBRA benefits (18 months) will be made available to Executive. The Executive shall not have a duty to mitigate the damages suffered by him in connection with the termination by the Company of his employment without Cause or a resignation for Good Reason during the Contract Period. If the Company fails to pay the Executive the lump sum amount due him hereunder or to provide him with the health, hospitalization and insurance benefits due under this section, the Executive, after giving 10 days' written notice to the Company identifying the Company's failure, shall be entitled to recover from the Company all of his reasonable legal fees and expenses incurred in connection with his enforcement against the Company of the terms of this Agreement. The Executive shall be denied payment of his legal fees and expenses only if a court finds that the Executive sought payment of such fees without reasonable cause. 10. Resignation Without Good Reason. The Executive shall be entitled to resign from the employment of the Company at any time during the Contact Period without Good Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which he ceases to be employed by the Company, and shall not be entitled to any of the other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks' notice thereof. 11. Non-Disclosure of Confidential Information. 31 a. Non-Disclosure of Confidential Information. Except in the course of his employment with the Company and in the pursuit of the business of the Company or any of its subsidiaries or affiliates, the Executive shall not, at any time during or following the Contract Period, disclose or use, any confidential information or proprietary data of the Company or any of its subsidiaries or affiliates. The Executive agrees that, among other things, all information concerning the identity of and the Company's relations with its customers is confidential information. b. Specific Performance. Executive agrees that the Company does not have an adequate remedy at law for the breach of this section and agrees that he shall be subject to injunctive relief and equitable remedies as a result of the breach of this section. The invalidity or unenforceability of any provision of this Agreement shall not affect the force and effect of the remaining valid portions. c. Survival. This section shall survive the termination of the Executive's employment hereunder and the expiration of this Agreement. 12. Certain Reduction of Payments by the Company. a. Anything in this Agreement to the contrary notwithstanding, prior to the payment of any lump sum amount payable hereunder, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants) shall determine as promptly as practical and in any event within 20 business days following the termination of employment of Executive whether any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant 32 to the terms of this Agreement or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and if it is then the aggregate present value of amounts payable or distributable to or for the benefit of Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Agreement Payments") shall be reduced (but not below zero) to the reduced Amount. For purposes of this paragraph, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of said Section 280G of the Code. b. If under paragraph (a) of this section the Certified Public Accountants determine that any Payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give the Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by the Executive within such 20-day period, the Company may elect which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the Aggregate present Value of the Agreement Payments equals the Reduced Amount) and shall notify the Executive promptly of such election. For purposes of this paragraph, present Value shall be determined in accordance with 33 Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive shall be made within 20 business days of a termination of employment of Executive. With the consent of the Executive, the Company may suspend part or all of the lump sum payment due under Section 9 hereof and any other payments due to the Executive hereunder until the Certified Public Accountants finish the determination and the Executive (or the Company, as the case may be) elect how to reduce the Agreement Payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to or distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement and shall promptly pay to or distribute for the benefit of Executive in the future such amounts as become due to Executive under this Agreement. c. As a result of the uncertainty in the application of Section 280G of the Code, it is possible that Agreement Payments may have been made by the Company which should not have been made ("Overpayment") or that additional Agreement Payments which will have not been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Certified Public Accountants, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or Executive which said Certified Public Accountants believe has a high probability of success, determines that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to Executive which Executive shall repay to the Company together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that no amount shall be payable by Executive to the Company in and for the extent such 34 payment would not reduce the amount which is subject to taxation under Section 4999 of the Code. In the event that the Certified Public Accountants, based upon controlling precedent, determine that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 13. Term and Effect Prior to Change in Control. a. Term. Except as otherwise provided for hereunder, this Agreement shall commence on the date hereof and shall remain in effect for a period of 3 years from the date hereof (the "Initial Term") or until the end of the Contract Period, whichever is later. The Initial Term shall be automatically extended for an additional one year period on the anniversary date hereof (so that the Initial Term is always 3 years) unless, prior to a Change in Control, the Personnel and Compensation Committee of the Bank notifies the Executive in writing at any time that the Contract is not so extended, in which case the Initial Term shall end upon the later of (i) 3 years after the date hereof, or (ii) twenty-four months after the date of such written notice. Notwithstanding anything to the contrary contained herein, the Initial Term shall cease when the Executive attains age 65. b. No Effect Prior to Change in Control. This Agreement shall not effect any rights of the Company to terminate the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement or contract or plan with the Company. The rights, duties and benefits provided hereunder shall only become effective upon and after a Change in Control. If the full-time employment of the Executive by the Company is ended for any reason 35 prior to a Change in Control, this Agreement shall thereafter be of no further force and effect. 14. Severance Compensation and Benefits Not in Derogation of Other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of or agreements with the Company, except that if the Executive received any payment hereunder, he shall not be entitled to any payment under the Company's severance policy for officers and directors. 15. Miscellaneous. This Agreement is the joint and several obligation of the Bank and Valley. The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey. This Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby, including expressly any prior agreement with the Company concerning change in control benefits. The amendment or termination of this Agreement may be made only in a writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such a writing. This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of his rights or duties hereunder but this Agreement shall be enforceable by the Executive's legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary 36 in making proof of this Agreement to produce or account for more than one such counterpart. IN WITNESS WHEREOF, Valley National Bank and Valley National Bancorp each have caused this Agreement to be signed by their duly authorized representatives pursuant to the authority of their Boards of Directors, and the Executive has personally executed this Agreement, all as of the day and year first written above. ATTEST: VALLEY NATIONAL BANCORP /s/ Alan D. Eskow By: /s/ Gerald H. Lipkin - -------------------------------- ---------------------------------------- Alan D. Eskow, Secretary Gerald H. Lipkin, Chairman of the Board, President & CEO ATTEST: VALLEY NATIONAL BANK /s/ Alan D. Eskow By: /s/ Gerald H. Lipkin - -------------------------------- ---------------------------------------- Alan D. Eskow, Secretary Gerald H. Lipkin, Chairman of the Board, President & CEO WITNESS: /s/ Sheila Quick /s/ Robert Farnon - -------------------------------- ---------------------------------------- Sheila Quick Robert Farnon, Executive April 20, 1992 - ----------------------- "Executive" Valley National Bank Service Date 37 EX-23 5 AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT The Board of Directors Valley National Bancorp: We consent to incorporation by reference in the Registration Statements No. 33-52809, No. 33-61547, No. 33-56933, No. 333-65993 and No. 333-25419 on Form S-8 of Valley National Bancorp of our report dated January 20, 1999 relating to the consolidated statements of financial condition of Valley National Bancorp and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 Annual Report on Form 10-K of Valley National Bancorp. /s/ KPMG LLP Short Hills, New Jersey February 26, 1999 EX-24 6 POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Gerald H. Lipkin and Peter Southway and each of them, his attorney-in-fact, each with power of substitution, for him in any and all capacities, to sign the Annual Report on Form 10-K of Valley National Bancorp for the fiscal year ended December 31, 1998 and any and all amendments, and to file the same, with exhibits thereto with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof. Signature Date /s/ GERALD H. LIPKIN February 16, 1999 - ---------------------------------------- Gerald H. Lipkin, Chairman, President, Chief Executive Officer and Director /s/ PETER SOUTHWAY February 16, 1999 - ---------------------------------------- Peter Southway, Vice Chairman and Director /s/ ALAN D. ESKOW February 16, 1999 - ---------------------------------------- Alan D. Eskow, Senior Vice President, Controller and Corporate Secretary /s/ ANDREW B. ABRAMSON February 16, 1999 - ---------------------------------------- Andrew A. Abramson, Director /s/ PAMELA BRONANDER February 16, 1999 - ---------------------------------------- Pamela Bronander, Director /s/ JOSEPH COCCIA, JR. February 16, 1999 - ---------------------------------------- Joseph Coccia, Jr., Director /s/ HAROLD P. COOK, III February 16, 1999 - ---------------------------------------- Harold P. Cook, III, Director /s/ AUSTIN C. DRUKKER February 16, 1999 - ---------------------------------------- Austin C. Drukker, Director /s/ WILLARD L. HEDDEN February 16, 1999 - ---------------------------------------- Willard L. Hedden, Director /s/ GRAHAM O. JONES February 16, 1999 - ---------------------------------------- Graham O. Jones, Director /s/ WALTER H. JONES, III February 16, 1999 - ---------------------------------------- Walter H. Jones, III, Director /s/ GERALD KORDE February 16, 1999 - ---------------------------------------- Gerald Korde, Director /s/ JOLEEN J. MARTIN February 16, 1999 - ---------------------------------------- Joleen J. Martin, Director /s/ ROBERT E. McENTEE February 16, 1999 - ---------------------------------------- Robert E. McEntee, Director /s/ SAM P. PINYUH February 16, 1999 - ---------------------------------------- Sam P. Pinyuh, Director /s/ ROBERT RACHESKY February 16, 1999 - ---------------------------------------- Robert Rachesky, Director /s/ BARNETT RUKIN February 16, 1999 - ---------------------------------------- Barnett Rukin, Director 2 /s/ RICHARD F. TICE February 16, 1999 - ---------------------------------------- Richard F. Tice, Director /s/ LEONARD J. VORCHEIMER February 16, 1999 - ---------------------------------------- Leonard J. Vorcheimer, Director /s/ JOSEPH L. VOZZA February 16, 1999 - ---------------------------------------- Joseph L. Vozza, Director 3 EX-27 7 FDS
9 12-MOS DEC-31-1998 DEC-31-1998 175,794 0 102,000 1,592 927,481 237,410 238,421 3,977,850 49,868 5,541,207 4,674,689 53,081 44,701 212,949 0 0 24,424 531,363 5,541,207 316,502 66,836 6,318 389,656 148,767 160,104 229,552 12,370 1,418 134,757 125,498 125,498 0 0 97,348 1.77 1.75 4.60 7,063 7,359 5,127 2,700 48,542 13,668 2,624 49,868 38,554 111 11,203
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