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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM _____________ TO _____________

COMMISSION FILE NUMBER 0-11179

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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)

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973-305-8800
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Title of each class Name of each exchange on which registered
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COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE, INC.

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 $1,519,813,000 on December 31, 1997.

There were 42,368,104 shares of Common Stock outstanding at January 30,
1998.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the Registrant's Definitive Proxy Statement (the "1998
Proxy Statement") for the 1998 Annual Meeting of shareholders to be held April
9, 1998 will be incorporated by reference in Part III.
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TABLE OF CONTENTS

PAGE
----
PART I

Item 1. Business ..................................................... 3

Item 2. Properties ................................................... 7

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 ........................ 29
Consolidated Statements of Financial Condition ........... 30
Consolidated Statements of Changes in Shareholders'
Equity ................................................. 31
Consolidated Statements of Cash Flows .................... 32
Notes to Consolidated Financial Statements ............... 33
Independent Auditors' Report ............................. 56

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................ 57

PART III

Item 10. Directors and Executive Officers of the Registrant .......... 57

Item 11. Executive Compensation ...................................... 57

Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................ 57

Item 13. Certain Relationships and Related Transactions .............. 57

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ............................................... 57

Signatures ............................................................ 59

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, 1997, Valley had consolidated total
assets of $5.1 billion, total deposits of $4.4 billion, and total shareholders'
equity of $475.4 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 97 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 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 manages residential
mortgage loans, 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.

RECENT ACQUISITION

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 3,964,000 shares of Valley common stock. Each share of common
stock of Midland was exchanged for 30 shares of Valley common stock. All
financial information has been restated for prior years to include Midland.

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 year-end 1997, VNB and its subsidiaries employed 1,636 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 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") passed by Congress and signed into
law on September 29, 1994, significantly changed interstate banking rules.
Pursuant to the Interstate Banking and Branching Act, bank holding companies
were able to acquire banks in states other than its home state effective
September 29, 1995, regardless of applicable state law.

The Interstate Banking and Branching Act also authorized banks to merge
across state lines, thereby creating interstate branches, beginning June 1,
1997. Under such legislation, each state had the opportunity either to "opt out"
of this provision, thereby prohibiting interstate branching in such states, or
to "opt in" at an earlier time, thereby allowing interstate branching within
that state prior to June 1, 1997. 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.

On April 17, 1996, New Jersey enacted legislation to "opt-in with" respect
to earlier 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 other matters. 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
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 1998 without prior approval of the OCC of up to
$35,643,000 plus an amount equal to VNB's net profits for 1998 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.

TRANSACTIONS WITH 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 12 U.S.C. 375 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.

In April 1995, the OCC and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that rates an institution based on its actual performance in
meeting community needs. In particular, the proposed system focuses on three
tests: (i) a lending test, to evaluate the institution's record of making loans
in its service areas; (ii) an investment test, to evaluate the institution's
record of investing in community development projects, affordable housing and
programs benefiting low or moderate income individuals and businesses; and (iii)
a service test, to evaluate the institution's delivery of services through its
branches, ATMs and other offices. The amended CRA regulations also clarify how
an institution's CRA performance would be considered in the application process.

RESTRICTIONS ON ACTIVITIES OUTSIDE THE UNITED STATES

Valley's activities in Canada are conducted through VNB and 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. 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.

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 draft 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 $1.2 billion of
deposits at December 31, 1996, with respect to which VNB paid SAIF insurance
premiums.

For the first three quarters of 1995, both SAIF-member institutions and
BIF-member institutions paid deposit insurance premiums based on a schedule from
$0.23 to $0.31 per $100 of deposits. In August, 1995, the FDIC, in anticipation
of the BIF's imminent achievement of a required 1.25% reserve ratio, reduced the
deposit insurance premium rates paid by BIF-insured banks from a range of $0.23
to $0.31 per $100 of deposits to a range of $0.04 to $0.31 per $100 of deposits.
The new rate schedule for the BIF was made effective June 1, 1995. On November
14, 1995, the FDIC voted to reduce annual assessments for the semi-annual period
beginning January 1, 1996, to the legal minimum of $2,000 for BIF insured
institutions, except for institutions that are not well capitalized and are
assigned to the higher supervisory risk categories. That rate continues for BIF
deposits.

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. As a result of the Funds Act, Valley paid a special assessment of $6.4
million for its SAIF deposits which it accrued in the third quarter of 1996.
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 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 97 locations of which 46 locations are
owned and 51 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, 1997 SINCE OFFICE
----- ----------------- --------- ------
Gerald H. Lipkin ..... 56 1975 Chairman of the Board,
President and Chief
Executive Officer of
Valley and VNB

Peter Southway ....... 63 1965 Vice Chairman of Valley
and VNB

Peter Crocitto ....... 40 1991 Executive Vice President
of Valley and VNB

Robert M. Meyer ...... 51 1997 Executive Vice President
of Valley and VNB

Peter John Southway .. 37 1989 Executive Vice President
of Valley and VNB

Robert E. Farrell .... 51 1990 First Senior Vice
President of VNB

Richard P. Garber .... 54 1992 First Senior Vice
President of VNB

Alan D. Lipsky ....... 53 1994 First Senior Vice
President of VNB

Robert Mulligan ...... 50 1991 First Senior Vice
President of VNB

John H. Prol ......... 60 1992 First Senior Vice
President of VNB

Jack M. Blackin ...... 55 1993 Senior Vice President
of Valley and VNB

Alan D. Eskow ........ 49 1993 Senior Vice President
of Valley and VNB

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

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 1997 YEAR 1996
------------------------------ ----------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- --- -------- ---- --- --------
First Quarter .... $26 7/16 $24 3/16 $0.240 $25 1/8 $21 9/16 $0.23
Second Quarter ... $28 $25 7/16 $0.275 $28 3/16 $24 5/16 $0.24
Third Quarter .... $31 11/16 $27 3/8 $0.275 $26 9/16 $23 3/16 $0.24
Fourth Quarter ... $40 1/4 $31 5/16 $0.275 $25 15/16 $23 9/16 $0.24

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 6,467 registered shareholders of record as of December 31, 1997.

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,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS:

Interest income (taxable equivalent) ....... $ 374,596 $ 360,837 $ 353,883 $ 326,968 $ 313,261
Interest expense ........................... 155,977 154,833 153,326 124,830 122,525
------------ ------------ ------------ ------------ ------------
Net interest income (taxable equivalent).... 218,619 206,004 200,557 202,138 190,736
Less: tax equivalent adjustment ........... 6,278 7,669 8,535 8,885 7,948
------------ ------------ ------------ ------------ ------------
Net interest income ...................... 212,341 198,335 192,022 193,253 182,788
Provision for possible loan losses ......... 12,250 3,356 3,169 5,984 9,002
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for possible loan losses ............... 200,091 194,979 188,853 187,269 173,786
Gains on securities transactions ........... 2,152 781 1,472 5,949 7,749
Non-interest income ........................ 40,163 28,870 22,974 20,997 23,620
Non-interest expense ....................... 123,228 117,716 104,723 105,081 100,173
------------ ------------ ------------ ------------ ------------
Income before income taxes and
cumulative effect of accounting change.... 119,178 106,914 108,576 109,134 104,982
Income tax expense ......................... 34,186 36,076 41,543 40,860 36,894
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
accounting change ........................ 84,992 70,838 67,033 68,274 68,088
Cumulative effect of accounting
change, net of tax (1) ................... -- -- -- -- (251)
------------ ------------ ------------ ------------ ------------
Net income ............................ $ 84,992 $ 70,838 $ 67,033 $ 68,274 $ 67,837
============ ============ ============ ============ ============

PER COMMON SHARE (2):
Earnings per share:
Basic .................................... $ 2.01 $ 1.67$ 1.55 $ 1.59 $ 1.60
Diluted .................................. 2.00 1.66 1.55 1.57 1.58
Dividends .................................. 1.06 0.95 0.90 0.86 0.67
Book value ................................. 11.22 10.20 9.93 8.81 8.57
Weighted average shares
outstanding:
Basic .................................. 42,276,390 42,459,539 43,241,178 42,920,921 42,297,996
Diluted ................................ 42,568,469 42,767,907 43,362,327 43,431,752 42,959,516
RATIOS:
Return on average assets ................... 1.67% 1.42% 1.38% 1.44% 1.51%
Return on average shareholders' equity ..... 18.88 16.64 16.44 18.26 20.11
Average shareholders' equity to
average assets ........................... 8.85 8.52 8.37 7.89 7.52
Dividend payout ............................ 52.90 54.43 55.15 51.35 38.40
Risk-based capital:
Tier 1 capital ........................... 12.87 12.20 13.89 13.96 14.55
Total capital ............................ 14.12 13.45 15.14 15.21 15.80
Leverage capital ........................... 9.18 8.35 8.41 8.23 7.70
FINANCIAL CONDITION AT YEAR-END:
Assets ..................................... $ 5,090,655 $ 5,115,547 $ 5,009,903 $ 4,820,316 $ 4,665,700
Loans, net of allowance .................... 3,575,960 3,425,226 3,007,849 2,788,912 2,445,448
Deposits ................................... 4,402,954 4,567,065 4,472,133 4,250,237 4,147,531
Shareholders' equity ....................... 475,359 430,384 432,609 378,895 361,160

- ----------
(1) Represents cumulative effect of adopting SFAS 109 "Accounting for Income
Taxes."

(2) All per share amounts have been restated for stock dividends.

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 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.

Acquisition

Earnings Summary

Net income was $85.0 million, or $2.00 diluted earnings per share, in 1997
compared with $70.8 million, or $1.66 diluted earnings per share, in 1996 (per
share amounts have been restated to give effect to a 5% stock dividend issued in
May 1997). Return on average assets increased in 1997 to 1.67% from 1.42% in
1996, while the return on average equity also increased to 18.88% in 1997 from
16.64% in 1996.

The increase in net income for the year ended December 31, 1997, after
adjusting for one-time non-recurring income and expenses for each year, can be
primarily attributed to an increase in net interest income of $14.0 million and
a reduction in income tax expense, offset by an increase of $8.9 million in the
provision for possible loan losses.

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 $218.6 million for 1997
as compared to $206.0 million for 1996. 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 4.54% for 1997 compared to 4.38% for 1996.

Average interest earning assets increased $113.9 million in 1997, or 2.4%
over the 1996 amount. This increase was mainly the result of increased volume of
credit card loans, automobile loans and commercial mortgage loans. Average loans
increased by $277.3 million or 8.6% over the 1996 amount. The average rate on
loans remained unchanged from 1996. The increase in average loan volume caused
interest income on loans for 1997 to increase by $23.5 million over 1996.
Offsetting this increase was a decline of $166.7 million in average investment
securities or 11.7% from the amount in the portfolio during 1996.

Average interest-bearing liabilities for 1997 remained relatively unchanged
from 1996. Deposits decreased slightly due to competitive factors and
alternative investment opportunities for consumers. Average demand deposits
continued to grow and increased by $67.5 million or 10.6% over 1996 balances.
Average savings deposits decreased by $25.6 million or 1.4%, while average time
deposits remained relatively unchanged.

The following table reflects the components of net interest income for each
of the three years ended December 31, 1997, 1996 and 1995.

ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST EARNINGS ON A TAX EQUIVALENT BASIS

1997 1996 1995
-------------------------------- --------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- ------- -------- ------- ------- -------- -------
(IN THOUSANDS)

ASSETS

Interest Earning Assets

Loans(1)(2) ............. $3,482,862 $290,952 8.35% $3,205,592 $267,485 8.34% $2,972,468 $248,926 8.37%
Taxable investments(3) .. 1,033,081 63,873 6.18 1,142,498 70,169 6.14 1,293,317 80,777 6.25
Tax-exempt
investments(1)(3) ..... 231,191 15,917 6.88 288,522 19,626 6.80 314,487 21,757 6.92
Federal funds sold and
other short-term
investments ........... 70,781 3,854 5.44 67,398 3,558 5.28 45,614 2,423 5.31
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest earning
assets ................ 4,817,915 $374,596 7.78% 4,704,010 $360,838 7.67% 4,625,886 $353,883 7.65%
-------- ---- -------- ---- -------- ----
Allowance for possible
loan losses ........... (45,269) (45,915) (45,673)
Cash and due from
banks ................. 150,806 169,262 178,038
Other assets ............ 164,251 175,312 112,207
Unrealized gain (loss)
on securities available
for sale .............. 88 (4,023) (1,208)
---------- ---------- ----------
Total assets ............ $5,087,791 $4,998,646 $4,869,250
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY

Interest bearing
liabilities

Savings deposits ........ $1,789,348 $ 42,627 2.38% $1,814,972 $ 43,261 2.38% $1,870,642 $ 49,474 2.64%
Time deposits ........... 2,002,000 107,857 5.39 1,999,397 107,529 5.38 1,863,987 98,487 5.28
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest
bearing deposits ...... 3,791,348 150,484 3.97 3,814,369 150,790 3.95 3,734,629 147,961 3.96
Federal funds
purchased and other
short-term borrowings . 46,090 2,303 5.00 38,438 1,776 4.62 65,153 3,548 5.45
Other borrowings ........ 52,835 3,190 6.04 40,408 2,267 5.61 38,036 1,817 4.77
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest bearing
liabilities ........... 3,890,273 155,977 4.01 3,893,215 154,833 3.98 3,837,818 153,326 4.00
-------- ---- -------- ---- -------- ----
Demand deposits ......... 703,091 635,562 578,696
Other liabilities ....... 44,188 44,122 44,973
Shareholders' equity .... 450,239 425,747 407,763
---------- ---------- ----------
Total liabilities and
shareholders' equity .. $5,087,791 $4,998,646 $4,869,250
========== ========== ==========
Net interest income
(tax equivalent basis) . 218,619 206,005 200,557

Tax equivalent
adjustment ............ (6,278) (7,670) (8,535)
-------- -------- --------
Net interest income ..... $212,341 $198,335 $192,022
======== ======== ========
Net interest rate
differential ........... 3.77% 3.69% 3.65%
---- ---- ----
Net interest margin(4) .. 4.54% 4.38% 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.

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

1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE(DECREASE)(2) INCREASE(DECREASE)(2)
-------------------------------- ------------------------------------
INTEREST VOLUME RATE INTEREST VOLUME RATE
-------- ------- ------ -------- -------- --------
(IN THOUSANDS)

Interest income:
Loans(1) ......................... $23,467 $23,162 $ 305 $ 18,559 $19,456 $ (897)
Taxable investments .............. (6,296) (6,762) 466 (10,608) (9,282) (1,326)
Tax-exempt investments(1) ........ (3,709) (3,944) 235 (2,131) (1,771) (360)
Federal funds sold and other
short term investments ......... 296 182 114 1,135 1,150 (15)
------- ------- ------ -------- ------- -------
13,758 12,638 1,120 6,955 9,553 (2,598)
------- ------- ------ -------- ------- -------
Interest expense:
Savings deposits ................. (634) (610) (24) (6,213) (1,439) (4,774)
Time deposits .................... 328 140 188 9,042 7,257 1,785
Federal funds purchased and other
short-term borrowings .......... 527 374 153 (1,772) (1,073) (699)
Other borrowings ................... 923 740 183 450 955 (505)
------- ------- ------ -------- ------- -------
1,144 644 500 1,507 5,700 (4,193)
------- ------- ------ -------- ------- -------
Net interest income ................ $12,614 $11,994 $ 620 $ 5,448 $ 3,853 $ 1,595
======= ======= ====== ======== ======= =======

- ----------
(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.

Non-Interest Income

The following table presents the components of non-interest income for the
years ended December 31, 1997, 1996 and 1995.

NON-INTEREST INCOME

YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)

Trust income ............................ $ 1,162 $ 1,080 $ 950
Service charges on deposit accounts ..... 11,823 11,087 11,066
Gains on securities transactions, net ... 2,152 781 1,472
Fees from loan servicing ................ 5,576 4,835 4,320
Credit card fee income .................. 12,643 5,549 1,753
Gains on sales of loans, net ............ 3,634 1,839 846
Other ................................... 5,325 4,480 4,039
------- ------- -------
Total ................................. $42,315 $29,651 $24,446
======= ======= =======

Non-interest income continues to represent a considerable source of income
for Valley. Excluding gains on securities transactions, total non-interest
income amounted to $40.2 million in 1997 compared with $28.9 million in 1996.

Gains on securities transactions totaled $2.2 million in 1997, compared
with $781 thousand in 1996. These gains resulted primarily from the sale of
equity securities by Valley National Bancorp during 1997.

Fees from loan servicing increased by 15.3% from $4.8 million in 1996 to
$5.6 million in 1997. Included in these fees are gross servicing fees and
related ancillary fees for servicing mortgage portfolios earned by VNB Mortgage
Services, Inc. ("MSI"), VNB's mortgage servicing subsidiary. MSI serviced a
total of $2.02 billion and $1.92 billion of loans as of December 31, 1997 and
1996, respectively, of which $863.6 million and $813.9 million, respectively,
are serviced for VNB and its subsidiary. The increase in the servicing portfolio
was due to the acquisition of several portfolios totaling approximately $174.6
million, the new origination of loans by VNB of $198.0 million, fewer principal
paydowns and prepayments totaling $274.1 million. Amortization expense on
mortgage servicing rights increased during 1997 to $2.5 million from $2.1
million in 1996, reflecting the increase in the size of the serviced portfolio.
An analysis is completed quarterly to determine amortization expense, based on
all expected future cash flows.

Also included in fees from loan servicing are fees for servicing SBA loans.
VNB serviced a total of $69.7 million and $54.2 million of SBA loans as of
December 31, 1997 and 1996, respectively, for third-party investors. The
increase in the serviced portfolio was due to the origination of new loans,
which were sold to third-party investors.

Included in credit card income are primarily net interchange fees. The
increase in credit card income is the result of a co-branded credit card program
that began during the second quarter of 1996, while 1997 included a full year of
credit card income.

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 increased volume of
SBA loans which resulted in increased sales of the guaranteed portion of SBA
loans.

The significant components of other non-interest income include safe
deposit rentals and gain on the sale of REO property. Other non-interest income
increased $845 thousand to $5.3 million for the year ended December 31, 1997 in
comparison to the same period in 1996. The increase 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. Safe deposit rental income remained relatively
unchanged and totaled $929 thousand for 1997. Gains recorded on the sale of REO
property during 1997 approximated $741 thousand compared to $1.1 million in
1996.

Non-Interest Expense

The following table presents the components of non-interest expense for the
years ended December 31, 1997, 1996 and 1995.

NON-INTEREST EXPENSE

YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)

Salary expense ..................... $ 45,069 $ 43,883 $ 41,262
Employee benefit expense ........... 10,598 10,252 10,115
FDIC insurance premiums ............ 1,113 8,659 6,298
Net occupancy expense .............. 11,220 11,456 9,945
Furniture and equipment expense .... 7,838 7,483 7,463
Credit card expense ................ 17,520 7,518 1,948
Amortization of intangible assets .. 3,441 3,009 2,812
Other .............................. 26,429 25,456 24,880
-------- -------- --------
Total ............................ $123,228 $117,716 $104,723
======== ======== ========

Non-interest expense totaled $123.2 million for 1997, an increase of 4.7%
from the 1996 level. The largest components of non-interest expense are salaries
and employee benefit expense which totaled $55.7 million in 1997 compared to
$54.1 million in 1996. At December 31, 1997, full-time equivalent staff was
1,636, compared to 1,581 at the end of 1996.

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 as of December 31, 1997 was
47.7%, one of the lowest in the industry, compared with an efficiency ratio for
1996 of 46.7%. The efficiency ratio has been impacted by the acquisition of
Midland and net expenses incurred from the credit card program. Valley strives
to control its efficiency ratio and expenses as a means of producing increased
earnings for its shareholders.

The Savings Association Insurance Fund ("SAIF") was recapitalized in the
third quarter of 1996 pursuant to the Funds Act. Congress mandated a one-time
special assessment on SAIF-assessable deposits. Included in the 1996 FDIC
insurance premiums is a $6.4 million one-time required payment. VNB had about
$1.2 billion of Oakar deposits at December 31, 1996, which are treated as SAIF
deposits. Under the Funds Act, the SAIF was recapitalized and SAIF rates have
been reduced. However, under the Funds Act the FDIC will collect premiums to pay
interest on FICO bonds from both SAIF and BIF deposits in a relationship of 5 to
1. VNB previously paid the FICO assessment only on its Oakar deposits. See
"Supervision and Regulation--BIF Premiums and Recapitalization of SAIF."

Credit card expense includes cardmember rebates, processing expenses and
fraud losses. The increase in credit card expenses is directly attributable to a
larger volume of cards, transactions and outstanding balances of the co-branded
credit card that VNB began issuing during the second quarter of 1996, while 1997
includes a full year of credit card expense. During the fourth quarter of 1997,
Valley amended its credit card program. Based upon the volume of purchases
incurred during 1997, these amendments are expected to reduce the amount of
cardmember rebates paid by Valley during 1998 and thereafter.

Amortization of intangible assets increased to $3.4 million in 1997 from
$3.0 million in 1996, representing an increase of $432 thousand or 14.4%. The
majority of this increase resulted from the amortization of purchased and
originated loan servicing rights totaling $2.6 million during 1997, compared
with $2.1 million for 1996.

The significant components of other non-interest expense include
advertising, professional fees, postage, telephone expense and REO expense which
total approximately $14.6 million for 1997.

On January 1, 1997, Valley adopted SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are based
on consistent application of

a financial components approach that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 125 provides consistent standards for distinguishing
between transfers of financial assets that are sales from transfers that are
secured borrowings. SFAS No. 125 was effective for transfers that occured after
December 31, 1996, and was applied prospectively. The adoption of SFAS No. 125
did not have a material effect on Valley's financial position or results of
operation.

Income Taxes

Income tax expense as a percentage of pre-tax income was 28.7% for the year
ended December 31, 1997 compared to 33.7% 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 is limited in duration, but may have an impact on some
future periods.

Year 2000

During 1997 Valley established an overall plan to address system-related
Year 2000 issues. The plan calls for either system modification to, or
replacement of, existing business systems applications. The cost of this Year
2000 compliance program related to system modifications is not expected to be
material to Valley's earnings in 1998 or thereafter. Such costs will be charged
to expense as incurred. Valley currently anticipates that substantially all of
the remaining work under this program, including the testing of critical
systems, which will be initially completed by the end of 1998, with further
testing to be performed during 1999.

Valley continues to bear some risk related to the Year 2000 issue and could
be adversely affected, if other entities (i.e., vendors) not affiliated with
Valley do not appropriately address their own Year 2000 compliance issues.

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. Because Valley has no trading
portfolio, there is no exposure to market risk from trading activities, and
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
rates of certain assets and liabilities. Management cannot provide any assurance
about the actual effect of changes in interest rates on Valley's net interest
income.

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, 1997. Market risk sensitive instruments
are generally defined as on-and-off balance sheet financial instruments.

INTEREST RATE SENSITIVITY ANALYSIS

AVERAGE
INTEREST
RATE 1998 1999 2000 2001
-------- ---------- ----------- --------- --------
(IN THOUSANDS)

INTEREST SENSITIVE ASSETS

Federal funds sold ........... 6.25% $ 30,000 $ -- $ -- $ --

Investment securities
held to maturity ............ 6.58 24,358 19,592 21,302 54,835

Investment securities
available for sale .......... 6.23 520,000 497,225 -- --

Loans, net of unearned
income

Commercial ................. 9.24 292,040 16,729 13,247 50,725
Mortgage ................... 8.15 540,175 191,847 135,665 245,774
Consumer ................... 8.25 219,514 247,842 177,319 360,015
---- ----------- ----------- --------- --------
Total interest sensitive
Assets ...................... 7.87% $ 1,626,087 $ 973,235 $ 347,533 $711,349
---- ----------- ----------- --------- --------
INTEREST SENSITIVE LIABILITIES
Deposits:
Savings ..................... 2.60% $ 613,680 $ 613,680 $ 613,679 $ --

Time ........................ 5.46 1,087,293 445,515 173,055 13,369
Short-term borrowings ........ 4.87 56,938 -- -- --

Other borrowings ............. 6.09 31,064 25,069 28,074 2,081
---- ----------- ---------- -------- -------
Total interest sensitive
liabilities ................. 4.09% $ 1,788,975 $ 1,084,264 $ 814,808 $ 15,450
---- ----------- ----------- --------- --------
Interest sensitivity gap ..... $ (162,888) $ (111,029) $(467,275) $695,899
----------- ----------- --------- --------
Ratio of interest sensitive
assets to interest
sensitive liabilities ....... (0.91:1) (0.90:1) (0.43:1) 46.04:1
---------- ----------- --------- --------

TOTAL FAIR
2002 THEREAFTER BALANCE VALUE
-------- ---------- ---------- ----------
(IN THOUSANDS)
INTEREST SENSITIVE ASSETS
Federal funds sold ........... $ -- $ -- $ 30,000 $ 30,000

Investment securities
held to maturity ............ 14,220 27,245 161,552 163,444

Investment securities
available for sale .......... -- -- 1,017,225 1,017,225

Loans, net of unearned
income

Commercial ................. 33,963 25,583 432,287 430,983
Mortgage ................... 185,540 557,499 1,856,500 1,867,936
Consumer ................... 236,726 92,129 1,333,545 1,364,002
-------- -------- ---------- ----------
Total interest sensitive
Assets ...................... $470,449 $702,456 $4,831,109 $4,873,590
-------- -------- ---------- ----------
INTEREST SENSITIVE LIABILITIES
Deposits:
Savings ..................... $ -- $ -- $1,841,039 $1,841,039
Time ........................ 40,029 32,767 1,792,028 1,800,059
Short-term borrowings ........ -- -- 56,938 56,938

Other borrowings ............. 12,087 15,637 114,012 113,790
-------- -------- ---------- ----------
Total interest sensitive
liabilities ................. $ 52,116 $ 48,404 $3,804,017 $3,811,826
-------- -------- ---------- ----------
Interest sensitivity gap ..... $418,333 $654,052 $1,027,092 $1,061,764
-------- -------- ---------- ----------
Ratio of interest sensitive
assets to interest
sensitive liabilities ....... 9.03:1 14.51:1 1.27:1 1.28:1
-------- -------- ---------- ----------

Expected maturities are contractual maturities adjusted for prepayments of
principal. 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% 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, 1997 is
$162.9 million or (0.91:1). 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 rate increases or decreases.

Liquidity

Liquidity measures the ability to satisfy current and future cash flow
needs as they become due. Maintaining a level of liquid funds through
asset-liability management seeks to ensure that these needs are met at a
reasonable cost. On the asset side, liquid funds are maintained in the form of
cash and due from banks, federal funds sold, investments securities held to
maturity maturing within one year, securities available for sale and loans held
for sale. At December 31, 1997, liquid assets amounted to $1.2 billion,
unchanged from December 31, 1996. This represents 25.6% and 27.2% of earning
assets, and 24.3% and 25.5% of total assets at December 31, 1997 and 1996,
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
$3.25 billion and $3.23 billion for the year ended December 31, 1997 and 1996,
respectively, representing 67.4% and 67.2% of average earning assets. Short term
borrowings through Federal funds lines and Federal Home Loan Bank advances and
large dollar certificates of deposit, generally those over $100 thousand, are
used as supplemental funding sources. As of December 31, 1997, Valley had
outstanding advances of $113.5 million with the FHLB. Additional liquidity is
derived from scheduled loan and investment payments of principal and interest,
as well as prepayments received. In 1997 proceeds from the sales of investment
securities available for sale were $171.2 million, and proceeds of $293.7
million were generated from investment maturities. Purchases of investment
securities in 1997 were $392.2 million. Short term borrowings and certificates
of deposit over $100 thousand amounted to $592.0 million and $628.3 million, on
average, for the year ending December 31, 1997 and 1996, respectively.

During 1997 a substantial amount of loan growth was funded from maturities
and normal payments of the investment portfolio. Deposit growth other than large
certificates of deposit lagged behind loan growth. Valley anticipates using
funds from the investment portfolio as well as deposit inflows to fund loan
growth during 1998.

The following table lists, by maturity, all certificates of deposit of
$100,000 and over at December 31, 1997. These certificates of deposit are
generated primarily from core deposit customers and are not brokered funds.

(IN THOUSANDS)

Less than three months ............................ $346,856
Three to six months ............................... 37,645
Six to twelve months .............................. 31,007
More than twelve months ........................... 56,361
--------
$471,869
========

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.

Investment Securities

The amortized cost of securities held to maturity at December 31, 1997,
1996 and 1995 were as follows:

INVESTMENT SECURITIES HELD TO MATURITY

1997 1996 1995
-------- -------- ---------
(IN THOUSANDS)

U.S. Treasury securities and other government
agencies and corporations ................ $ -- $ 25,608 $ 45,073
Obligations of states and political
subdivisions ............................. 58,111 83,908 109,187
Mortgage-backed securities ................... 81,216 126,616 161,486
Other debt securities ........................ 195 1,246 1,090
-------- -------- ---------
Total debt securities ..................... 139,522 237,378 316,836
FRB & FHLB stock ............................. 22,030 17,167 7,647
Other securities ............................. -- 732 807
-------- -------- ---------
Total investment securities held to
maturity ................................. $161,552 $255,277 $ 325,290
======== ======== =========

The fair value of securities available for sale at December 31, 1997, 1996
and 1995 were as follows:

INVESTMENT SECURITIES AVAILABLE FOR SALE

1997 1996 1995
---------- -------- ----------
(IN THOUSANDS)

U.S. Treasury securities and other
government agencies and
corporations .......................... $ 143,264 $145,412 $ 205,536
Obligations of states and political
subdivisions .......................... 142,457 177,505 203,993
Mortgage-backed securities ................ 721,631 655,394 768,049
Other debt securities ..................... -- 594 11
---------- -------- ----------
Total debt securities .................. 1,007,352 978,905 1,177,589
Equity securities ......................... 9,873 10,793 7,796
---------- -------- ----------
Total investment securities available
for sale .............................. $1,017,225 $989,698 $1,185,385
========== ======== ==========

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
HELD TO MATURITY AT DECEMBER 31, 1997

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 ......... $24,248 6.03% $ -- -- % $110 8.46% $ 24,358 6.04%
1-5 years ......... 29,991 7.20 79,923 7.52 35 8.46 109,949 7.43
5-10 years ........ 258 5.75 1,293 6.46 50 7.30 1,601 6.37
Over 10 years ..... 3,614 6.47 -- -- -- -- 3,614 6.47
------- ---- ------- ---- --- ---- -------- ----
Total securities $58,111 6.66% $81,216 7.50% $195 8.16% $139,522 7.15%
======= ==== ======= ==== ==== ---- ======== ====

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
AVAILABLE FOR SALE AT DECEMBER 31, 1997

US TREASURY
SECURITIES AND
OTHER GOVERNMENT OBLIGATIONS OF MORTGAGE-
AND 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 ........ $127,837 5.26% $ 39,976 6.48% $ 12,211 7.49% $ 180,024 5.68%
1-5 years ........ 15,542 5.99 96,049 6.90 529,222 6.49 640,813 6.54
5-10 years ....... -- -- 1,106 11.78 157,338 6.60 158,444 6.64
Over 10 years .... -- -- 4,278 11.19 20,349 6.51 24,627 7.32
-------- ---- -------- ----- -------- ---- ---------- ----
Total securities $143,379 5.34% $141,409 6.95% $719,120 6.53% $1,003,908 6.42%
======== ==== ======== ===== ======== ==== ========== ====
- ----------

(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.

Valley's investment portfolio is comprised of U.S. government and federal
agency securities, tax-exempt issues of states and municipalities,
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, 1997, Valley had $81.2 million of mortgaged-backed
securities classified as held to maturity and $719.1 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, 1997
were $158.5 million of collateralized mortgage obligations ("CMO") of which $2.8
million were privately issued. CMO's had a yield of 6.92% and an unrealized gain
of $400 thousand at December 31, 1997. Substantially all of the CMO portfolio
was classified as available for sale.

As of December 31, 1997, Valley had $1.0 billion of securities available
for sale compared with $990 million at December 31, 1996. Those securities are
recorded at their fair value on an aggregate basis. As of December 31, 1997, the
investment securities available for sale had an unrealized gain of $3.6 million,
net of deferred taxes, compared to an unrealized gain of $259 thousand, net of
deferred taxes, at December 31, 1996. 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 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.

Loan Portfolio

As of December 31, 1997, total loans were $3.6 billion, compared to $3.5
billion at December 31, 1996, an increase of 4.4%. The following table reflects
the composition of the loan portfolio for the five years ended December 31,
1997.

LOAN PORTFOLIO

1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- -----------
(IN THOUSANDS)

Commercial ............ $ 432,287 $ 466,580 $ 413,796 $ 363,313 $ 311,573
---------- ----------- ----------- ----------- -----------
Total commercial loans 432,287 466,580 413,796 363,313 311,573
---------- ----------- ----------- ----------- -----------
Construction .......... 80,923 87,486 75,920 70,192 81,891
Residential mortgage .. 929,525 924,767 920,629 926,717 850,544
Commercial mortgage ... 846,052 786,916 703,397 646,289 530,435
---------- ----------- ----------- ----------- -----------
Total mortgage loans 1,856,500 1,799,169 1,699,946 1,643,198 1,462,870
---------- ----------- ----------- ----------- -----------
Home equity ........... 168,888 174,534 180,619 160,823 181,018
Credit card ........... 145,485 149,494 22,380 23,298 23,875
Automobile ............ 930,247 811,694 672,589 579,049 465,790
Other consumer ........ 88,925 70,297 63,787 67,408 47,503
---------- ----------- ----------- ----------- -----------
Total consumer loans 1,333,545 1,206,019 939,375 830,578 718,186
---------- ----------- ----------- ----------- -----------
Less: unearned income . -- (520) (1,277) (2,272) (2,626)
---------- ----------- ----------- ----------- -----------
Loans, net of
unearned income .... $3,622,332 $ 3,471,248 $ 3,051,840 $ 2,834,817 $ 2,490,003
========== =========== =========== =========== ===========
As a percent of total
loans:
Commercial loans ..... 11.9% 13.5% 13.5% 12.8% 12.5%
Mortgage loans ....... 51.3 51.8 55.7 57.9 58.7
Consumer loans ....... 36.8 34.7 30.8 29.3 28.8
----- ----- ----- ----- -----
Total loans ......... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====

The increase in loans for 1997 was diversified between mortgage and
consumer loans. It is not known if the trend of increased lending will continue.

The commercial mortgage loans 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 the second quarter of 1996, Valley announced and began issuing a
co-branded credit card, the ShopRite Mastercard. Of the $145.5 million of credit
card loans outstanding at December 31, 1997, approximately $126.9 million were
the result of this co-branded credit card program.

Automobile loans comprised 25.7% of total loans at December 31, 1997.
Automobile loans increased 14.6% during 1997 as a result of increased loan
demand and market penetration. Approximately 61.5% of the automobile loan
portfolio and 15.8% of the total loan portfolio at December 31, 1997 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 results in an increase of in excess of 60% of the
number of agents under this program. This will expand Valley's 41 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 $1.0 million for the year

ended December 31, 1997, and auto loans of $14.7 million at December 31, 1997.
These loans are funded by a capital investment by VNB of $7.5 million, with
additional funding requirements satisfied by bank lines of credit. Any foreign
exchange risk is limited to the capital investment by VNB since operations of
this subsidiary are in Canadian dollars.

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, 1997:

1 YR. OVER 1 OVER
OR LESS TO 5 YRS. 5 YRS. TOTAL
-------- --------- -------- --------
Commercial--fixed rate ........... $ 8,526 $68,902 $ 25,902 $103,330
Commercial--adjustable rate ...... 282,634 45,296 1,027 328,957
Real estate construction--
fixed rate ................... -- 3,272 -- 3,272
Real estate construction--
adjustable rate .............. 47,528 30,123 -- 77,651
------- ------- -------- --------
$338,688 $147,593 $ 26,929 $513,210
======== ======== ======== ========

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 and
Maryland. 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 1997, VNB originated approximately $37.2 million of SBA loans and
sold $23.2 million. At December 31, 1997, $32.9 million of SBA loans were held
in VNB's portfolio and VNB serviced approximately $69.7 million of SBA loans.

Non-Performing Assets

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

Non-performing assets continued to decrease, and totaled $9.5 million at
December 31, 1997, compared with $16.9 million at December 31, 1996, a decrease
of $7.4 million or 44.0%. Non-performing assets at December 31, 1997 and 1996,
respectively, amounted to 0.26% and 0.49% of loans and OREO.

Loans 90 days or more past due and not included in the non-performing
category totaled $16.4 million at December 31, 1997, compared to $10.2 million
at December 31, 1996. These loans are primarily residential mortgage loans,
commercial mortgage loans and commercial loans which are generally well-secured
and in the process of collection. Also included are matured commercial mortgage
loans in the process of being renewed, which totaled $2.0 million and $231
thousand at December 31, 1997 and December 31, 1996, 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

1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)

Loans past due in excess of
90 days and still accruing ........................ $16,351 $10,166 $ 8,125 $ 8,712 $ 8,914
------- ------- ------- ------- -------
Non-accrual loans .................................. $ 7,307 $13,182 $14,177 $23,845 $28,989
Other real estate owned ............................ 2,178 3,750 7,015 8,127 7,957
------- ------- ------- ------- -------
Total non-performing assets ........................ $ 9,485 $16,932 $21,192 $31,972 $36,946
------- ------- ------- ------- -------
Troubled debt restructured loans ................... $ 5,248 $ 5,576 $ 5,209 $ -- $ --
------- ------- ------- ------- -------
Non-performing loans as a % of loans ............... 0.20% 0.38% 0.47% 0.84% 1.16%
------- ------- ------- ------- -------
Non-performing assets as a % of
loans plus other real estate owed ................. 0.26% 0.49% 0.69% 1.13% 1.48%
------- ------- ------- ------- -------
Allowance as a % of loans .......................... 1.28% 1.33% 1.44% 1.62% 1.79%
------- ------- ------- ------- -------
Allowance as a % of non-performing assets .......... 489% 272% 208% 144% 121%
------- ------- ------- ------- -------

During 1997, lost interest on non-accrual loans amounted to $1.0 million,
compared with the net recovery of lost interest of $282 thousand in 1996.

Although substantially all risk elements at December 31, 1997 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 $3.6 million in potential
problem loans at December 31, 1997, 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 nonperforming loan. Approximately $626 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, 1996, Valley had identified approximately $2.7 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

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. Those 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 and generally present no more risk than those made within
New Jersey. All loans are subject to Valley's underwriting criteria. And
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 to Shop-Rite's existing customer base 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.

The following table sets forth the relationship among loans, loans
charged-off and loan recoveries, the provision for loan losses and the allowance
for loan losses for the past five years:

YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)

Average loans
outstanding ...................... $3,482,862 $3,205,592 $2,972,468 $2,655,029 $2,315,025
---------- ---------- ---------- ---------- ----------
Beginning balance-
Allowance for loan
losses ........................... $ 46,022 $ 43,991 $ 45,905 $ 44,555 $ 37,755
---------- ---------- ---------- ---------- ----------
Balance from
acquisition ...................... -- -- -- -- 4,466
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Commercial ....................... 4,647 471 1,217 1,805 3,219
Construction ..................... -- -- 2,498 835 441
Mortgage-Commercial .............. 475 593 646 1,359 1,136
Mortgage-Residential ............. 496 858 625 278 551
Consumer ......................... 8,268 3,996 2,875 2,790 3,026
---------- ---------- ---------- ---------- ----------
13,886 5,918 7,861 7,067 8,373
---------- ---------- ---------- ---------- ----------
Charged-off loans
recovered
Commercial ....................... 522 2,585 1,321 603 494
Construction ..................... 89 -- -- 603 --
Mortgage-Commercial .............. 214 920 83 61 --
Mortgage-Residential ............. 121 124 56 23 115
Consumer ......................... 1,040 964 1,318 1,143 1,096
---------- ---------- ---------- ---------- ----------
1,986 4,593 2,778 2,433 1,705
---------- ---------- ---------- ---------- ----------
Net charge-offs ..................... 11,900 1,325 5,083 4,634 6,668
Provision charged to
operations ....................... 12,250 3,356 3,169 5,984 9,002
---------- ---------- ---------- ---------- ---------
Ending balance-
Allowance for
loan losses ...................... $ 46,372 $ 46,022 $ 43,991 $ 45,905 $ 44,555
========== ========== ========== ========== ==========
Ratio of net
charge-offs during
the period to average
loans outstanding
during the period ................ 0.34% 0.04% 0.17% 0.17% 0.29%

The allowance for possible loan losses is maintained at a level estimated
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 allowance needed to absorb
future 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 1997, 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 increase in net
charge-offs, among other things, was responsible for the decision to increase
the provision to $12.3 million in 1997 compared to $3.4 million in 1996.

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

YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
CATEGORY CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS
---------- -------- ---------- -------- ---------- --------
Loan category:
Commercial ....... $13,237 11.9% $18,847 13.4% $15,658 13.5%
Mortgage ......... 12,580 51.3 10,045 51.8 9,177 55.7
Consumer ......... 11,077 36.8 7,127 34.8 7,356 30.8
Unallocated ...... 9,478 N/A 10,003 N/A 11,800 N/A
------- ----- ------- ----- ------- -----
$46,372 100.0% $46,022 100.0% $43,991 100.0%
======= ===== ======= ===== ======= =====

YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1994 1993
------------------------- --------------------------
PERCENT PERCENT
OF LOAN OF LOAN
CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
ALLOCATION LOANS ALLOCATION LOANS
---------- -------- ---------- --------
Loan category:
Commercial ............ $13,532 12.8% $13,358 12.5%
Mortgage .............. 10,876 57.9 9,743 58.7
Consumer .............. 7,781 29.3 8,193 28.8
Unallocated ........... 13,716 N/A 13,261 N/A
------- ----- ------- -----
$45,905 100.0% $44,555 100.0%
======= ===== ======= =====

At December 31, 1997 the allowance for loan losses amounted to $46.4
million or 1.28% of loans, net of unearned income, as compared to $46.0 million
or 1.33% at year-end 1996.

The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $11.9 million for the
year ended December 31, 1997 compared with $1.3 million for the year ended
December 31, 1996. The ratio of net charge-offs to average loans increased to
0.34% for 1997 compared with 0.04% for 1996. Net charge-offs during 1997 were
higher than 1996 due to the charge-off of a large commercial credit, fewer
recoveries during 1997 than in 1996 and a greater amount of consumer loan
charge-offs, many resulting from a rise in consumer bankruptcies. While consumer
loan charge-offs increased during 1997, 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 1997 were greater than during 1996.

The impaired loan portfolio is primarily collateral dependent as defined
under SFAS 114. Impaired loans and their related specific and general
allocations to the allowance for loan losses totaled $21.9 million and $8.5
million, respectively, at December 31, 1997 and $23.7 million and $9.8 million,
respectively, at December 31, 1996. The average balance of impaired loans during
1997 and 1996 was approximately $25.1 million and $24.4 million, respectively.
The amount of cash basis interest income that was recognized on impaired loans
during both 1997 and 1996 was $1.6 million.

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, 1997, shareholders' equity totaled $475.4 million or 9.3% of
total assets, compared with $430.4 million or 8.4% at year-end 1996. Valley has
achieved steady internal capital generation throughout the past five years.

During 1996, Valley's Board of Directors rescinded its previously
announced repurchase program after 1,207,700 shares of Valley common stock were
repurchased in 1996 and 563,160 shares were repurchased in 1995. During the
three year period ended December 31, 1997, Valley had reissued 1,799,143 shares
for a 5% stock dividend issued May 17, 1996, an expired warrant program and its
employee benefit program.

In January 1998 Valley's Board of Directors announced it had authorized
the purchase of up to 1,000,000 shares of the company's outstanding common
stock. Purchases may be made from time to time in the open market or in
privately negotiated transactions at prices not exceeding prevailing market
rates. Reacquired shares are expected to be held in treasury to be used for
employee benefit programs.

Included in shareholders equity at December 31, 1997 was a $3.6 million
unrealized gain on investment securities available for sale, net of tax,
compared to an unrealized gain of $259 thousand at December 31, 1996.

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 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, 1997 under risk-based capital
guidelines was $467.4 million, or 12.9% of risk-weighted assets, for Tier 1
capital and $512.8 million, or 14.1% for Total risked-based capital. The
comparable ratios at December 31, 1996 were 12.2.% for Tier 1 capital and 13.5%
for Total risk-based capital. Valley's ratios at December 31, 1997 were above
the "well capitalized" requirements, which require Tier I capital of at least 6%
and Total risk-based capital of 10%. The Federal Reserve Board requires "well
capitalized" bank holding companies to maintain a minimum leverage ratio of
5.0%. At December 31, 1997 and 1996, Valley was in compliance with the leverage
requirement having Tier 1 leverage ratios of 9.2% and 8.4%, respectively.

Book value per share amounted to $11.22 at December 31, 1997 compared with
$10.20 per share at December 31, 1996.

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 47.1% at December 31, 1997, compared to 45.5% at December 31,
1996. Cash dividends declared amounted to $1.06 per share, equivalent to a
dividend payout ratio of 52.9% for 1997, compared to 54.5% for the year 1996.
The current quarterly dividend rate of $0.275 per share provides for an annual
rate of $1.10 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-1996 Compared to 1995

Valley reported net income for 1996 of $70.8 million or $1.66 diluted
earnings per share, compared to the $67.0 million, or $1.55 diluted earnings per
share earned in 1995 (all amounts have been restated for the Midland acquisition
and the per share amounts have been restated to give effect to a 5% stock
dividend issued in 1997 and 1996).

Net interest income on a tax equivalent basis increased $5.5 million, or
2.7%, to $206.0 million in 1996. The increase in 1996 was due primarily to a
slight increase in the average balance and average rate on interest bearing
assets along with a slight decrease in the average rate on interest bearing
liabilities. This was partially offset by a small increase in interest bearing
liabilities.

Non-interest income in 1996 amounted to $29.7 million, an increase of $5.2
million or 21.3% compared with 1995. Non-interest expense totaled $117.7 million
in 1996, an increase of $13.0 million. These increases were largely the result
of additional credit card income and expense. VNB began a co-branded credit card
program during the second quarter of 1996.

Gains on the sales of loans were $1.8 million for 1996 compared to $846
thousand for 1995. 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.

Also included in non-interest expense for 1996 is a one time FDIC
assessment of $6.4 million. Excluding this one time payment, insurance premiums
decreased by $4.0 million for the year ended December 31, 1996 in comparison to
the same period in 1995. This reflected the reduction in the insurance rates
charged on BIF deposits by the FDIC which began June 1, 1995.

Net occupancy expense increased $1.5 million to $11.5 million in 1996.
This resulted from the additional rent, utilities, tax and maintenance expense
on facilities utilized by Valley. During the first quarter of 1996, Valley
acquired an office building located across the street from its administrative
headquarters in Wayne, New Jersey.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

INTEREST INCOME
Interest and fees on loans (Note 5) .. $ 290,245 $ 266,684 $ 248,012
Interest and dividends on
investment securities:
Taxable ............................. 62,315 69,161 80,021
Tax-exempt .......................... 10,346 12,757 14,136
Dividends ........................... 1,558 1,008 756
Interest on federal funds sold and
other short-term investments ..... 3,854 3,558 2,423
----------- ----------- -----------
Total interest income ............. 368,318 353,168 345,348
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits:
Savings deposits ................... 42,627 43,261 49,474
Time deposits (Note 10) ............. 107,857 107,529 98,487
Interest on federal funds purchased
and securities sold under
repurchase agreements ............. 1,171 1,128 2,850
Interest on other short-term
borrowings ........................ 1,132 648 698
Interest on other borrowings (Note 11) 3,190 2,267 1,817
----------- ----------- -----------
Total interest expense ............ 155,977 154,833 153,326
----------- ----------- -----------
NET INTEREST INCOME .................. 212,341 198,335 192,022
Provision for possible loan losses
(Note 6) .......................... 12,250 3,356 3,169
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES .......... 200,091 194,979 188,853
----------- ----------- -----------
NON-INTEREST INCOME
Trust income ......................... 1,162 1,080 950
Service charges on deposit accounts .. 11,823 11,087 11,066
Gains on securities transactions,
net (Note 4) ...................... 2,152 781 1,472
Fees from loan servicing (Note 7) .... 5,576 4,835 4,320
Credit card fee income ............... 12,643 5,549 1,753
Gains on sales of loans, net ......... 3,634 1,839 846
Other ................................ 5,325 4,480 4,039
----------- ----------- -----------
Total non-interest income ......... 42,315 29,651 24,446
----------- ----------- -----------
NON-INTEREST EXPENSE
Salary expense (Note 12) ............. 45,069 43,883 41,262
Employee benefit expense (Note 12) ... 10,598 10,252 10,115
FDIC insurance premiums .............. 1,113 8,659 6,298
Net occupancy expense (Notes 8 and 14) 11,220 11,456 9,945
Furniture and equipment expense
(Note 8) .......................... 7,838 7,483 7,463
Credit card expense .................. 17,520 7,518 1,948
Amortization of intangible assets
(Note 7) .......................... 3,441 3,009 2,812
Other ................................ 26,429 25,456 24,880
----------- ----------- -----------
Total non-interest expense ........ 123,228 117,716 104,723
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ........... 119,178 106,914 108,576
Income tax expense (Note 13) ......... 34,186 36,076 41,543
----------- ----------- -----------
NET INCOME ........................... $ 84,992 $ 70,838 $ 67,033
=========== =========== ===========
EARNINGS PER SHARE:

Basic ............................... $ 2.01 $ 1.67 $ 1.55
Diluted ............................. $ 2.00 $ 1.66 $ 1.55
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic ............................... 42,276,390 42,459,539 43,241,178
Diluted ............................. 42,568,469 42,767,907 43,362,327

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31,
-------------------------
1997 1996
---------- ----------
(IN THOUSANDS,
EXCEPT FOR SHARE DATA)

ASSETS
Cash and due from banks ........................ $ 148,175 $ 196,995
Federal funds sold ............................. 30,000 82,450
Investment securities held to maturity,
fair value of $163,444 and $257,213
in 1997 and 1996, respectively (Note 3) ..... 161,552 255,277
Investment securities available for sale
(Note 4) .................................... 1,017,225 989,698
Loans, net of unearned income (Note 5) ......... 3,622,332 3,471,248
Less: Allowance for possible loans losses
(Note 6) .................................... (46,372) (46,022)
----------- -----------
Net loans ................................... 3,575,960 3,425,226
----------- -----------
Premises and equipment (Note 8) ................ 74,553 71,244
Due from customers on acceptances
outstanding ................................. 304 940
Accrued interest receivable .................... 29,313 29,808
Other assets (Notes 7, 9 and 13) ............... 53,573 63,909
----------- -----------
Total assets ............................... $ 5,090,655 $ 5,115,547
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing .......................... $ 769,887 $ 715,563
Interest bearing:
Savings .................................... 1,841,039 1,835,476
Time (Note 10) ............................ 1,792,028 2,016,026
----------- -----------
Total deposits ............................. 4,402,954 4,567,065
----------- -----------
Federal funds purchased and securities
sold under repurchase agreements
(Note 3) .................................... 32,882 23,339
Treasury tax and loan account and other
short-term borrowings (Note 3) .............. 24,056 17,202
Other borrowings (Note 11) ..................... 114,012 35,071
Bank acceptances outstanding ................... 304 940
Accrued expenses and other liabilities
(Note 12) ................................... 41,088 41,546
----------- -----------
Total liabilities .......................... 4,615,296 4,685,163
----------- -----------
Commitments and Contingencies (Note 14)
SHAREHOLDERS' EQUITY (Notes 2, 12 and 15)
Common stock, no par value, authorized
78,750,000 shares; issued 42,452,939
shares in 1997, and 40,449,671 shares
in 1996 ..................................... 23,282 22,320
Surplus ........................................ 291,600 238,541
Retained earnings .............................. 159,116 176,853
Unrealized gain on investment securities
available for sale, net of tax .............. 3,639 259
----------- -----------
477,637 437,973
Treasury stock, at cost (93,413 shares
in 1997 and 272,093 shares in 1996) ......... (2,278) (7,589)
----------- -----------
Total shareholders' equity ................. 475,359 430,384
----------- -----------
Total liabilities and shareholders'
equity ................................. $ 5,090,655 $ 5,115,547
=========== ===========

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

UNREALIZED
GAIN (LOSS)
ON INVESTMENT
SECURITIES TOTAL
COMMON RETAINED AVAILABLE TREASURY SHAREHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY
--------- --------- --------- --------- --------- ----------
(IN THOUSANDS)

BALANCE--DECEMBER 31, 1994 ............... $ 20,763 $ 172,322 $ 207,473 $ (19,634) $ (2,164) $ 378,760
Net income ............................... -- -- 67,033 -- -- 67,033
Cash dividends ........................... -- -- (36,966) -- -- (36,966)
Warrants exercised ....................... 33 771 (5,506) -- 11,944 7,242
Effect of stock incentive
plan, net ............................. 11 (6) (1,149) -- 1,980 836
Stock dividend ........................... 949 37,802 (38,831) -- -- (80)
Purchase of treasury stock ............... -- -- -- -- (13,670) (13,670)
Acquisition of American Union ............ 154 5,345 (1,076) -- -- 4,423
Tax benefit from exercise of
stock options ......................... -- 508 -- -- -- 508
Adjustment for pooling of a
company with a different
fiscal year end ....................... (10) (697) 1,870 -- -- 1,163
Net change in unrealized gain
(loss) on investment
securities available for
sale .................................. -- -- -- 23,189 -- 23,189
--------- --------- --------- --------- --------- ---------
BALANCE--DECEMBER 31, 1995 ............... 21,900 216,045 192,848 3,555 (1,910) 432,438
Net income ............................... -- -- 70,838 -- -- 70,838
Cash dividends ........................... -- -- (38,556) -- -- (38,556)
Effect of stock incentive
plan, net ............................. 11 (300) (1,104) -- 2,743 1,350
Stock dividend ........................... 409 22,796 (47,173) -- 23,845 (123)
Purchase of treasury stock ............... -- -- -- -- (32,267) (32,267)
Net change in unrealized
gain (loss) on investment
securities available for sale ......... -- -- -- (3,296) -- (3,296)
--------- --------- --------- --------- --------- ---------

BALANCE--DECEMBER 31, 1996 ............... 22,320 238,541 176,853 259 (7,589) 430,384
Net income ............................... -- -- 84,992 -- -- 84,992
Cash dividends ........................... -- -- (44,959) -- -- (44,959)
Effect of stock incentive plan,
net ................................... (2) (2,311) (1,684) -- 5,311 1,314
Stock dividend ........................... 964 55,041 (56,086) -- -- (81)
Tax benefit from exercise of
stock options ......................... -- 329 -- -- -- 329
Net change in unrealized gain
(loss) on investment
securities available for sale ......... -- -- -- 3,380 -- 3,380
--------- --------- --------- --------- --------- ---------
BALANCE--DECEMBER 31, 1997 ............... $ 23,282 $ 291,600 $ 159,116 $ 3,639 $ (2,278) $ 475,359
========= ========= ========= ========= ========= =========

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------

(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................. $ 84,992 $ 70,838 $ 67,033
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization .......... 11,997 10,314 9,108
Amortization of compensation costs
pursuant to long term stock
incentive plan ...................... 529 448 322
Provision for possible loan losses ..... 12,250 3,356 3,169
Net amortization of premiums and
discounts ........................... 1,050 4,250 5,917
Net deferred income tax expense
(benefit) ........................... 2,532 (905) 1,133
Net gains on securities transactions ... (2,152) (781) (1,472)
Proceeds from sales of loans ........... 49,972 34,950 6,954
Gain on sales of loans ................. (3,634) (1,839) (846)
Proceeds from recoveries on
previously charged-off loans ........ 1,986 4,594 2,778
Net decrease (increase) in accrued
interest receivables and other
assets .............................. 7,450 2,794 (3,579)
Net (decrease) increase in accrued
expenses and other liabilities ...... (5,318) 3,576 901
Net increase in shareholders' equity
due to acquisition of American
Union Bank .......................... -- -- 4,423
Adjustment for the pooling of a
company with a different fiscal
year end ............................ -- -- 1,163
--------- --------- ---------
Net cash provided by operating
activities .......................... 161,654 131,595 97,004
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage servicing
rights .............................. (2,452) (6,167) (3,902)
Proceeds from sales of investment
securities available for sale ....... 171,158 143,605 108,331
Proceeds from maturing investment
securities available for sale ....... 222,954 239,982 129,925
Purchases of investment securities
available for sale .................. (374,843) (196,568) (115,348)
Purchases of investment securities
held to maturity .................... (17,323) (30,640) (98,424)
Proceeds from maturing investment
securities held to maturity ......... 70,786 100,165 165,597
Net decrease (increase) in federal
funds sold and other short-term
investments ......................... 52,450 16,050 (108,500)
Net increase in loans made to
customers ........................... (211,308) (458,574) (230,992)
Purchases of premises and equipment,
net of sales ........................ (11,865) (12,836) (13,316)
Net decrease (increase) in
acceptances ......................... 636 (102) 660
--------- --------- ---------
Net cash used in investing activities .. (99,807) (205,085) (165,969)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits .... (164,111) 105,715 221,896
Net increase (decrease) in federal
funds purchased and other
short-term borrowings ............... 16,397 2,312 (80,908)
Advances of other borrowings ........... 87,500 20,000 --
Repayments of other borrowings ......... (8,559) (14,054) (6,929)
Net (decrease) increase in
acceptances ......................... (636) 102 (660)
Dividends paid to common
shareholders ........................ (42,414) (38,373) (34,885)
Addition of common shares to
treasury ............................ -- (32,401) (13,986)
Common stock issued, net of
cancellations ....................... 1,156 777 8,028
--------- --------- ---------
Net cash (used in) provided by
financing activities ................ (110,667) 44,078 92,556
--------- --------- ---------
Net (decrease) increase in cash
and cash equivalents ................ (48,820) (29,412) 23,591
Cash and cash equivalents at
beginning of year ................... 196,995 226,407 202,816
--------- --------- ---------
Cash and cash equivalents at end
of year ............................. $ 148,175 $ 196,995 $ 226,407
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for
interest on deposits and
borrowings .......................... $ 157,003 $ 154,976 $ 149,264
Cash paid during the year for
federal and state income taxes ...... 27,518 37,662 40,246
Transfer of securities held to
maturity to securities available
for sale ............................ 39,833 -- 516,854

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1)

BASIS OF PRESENTATION

The consolidated financial statements of Valley National Bancorp and its
wholly-owned subsidiary ("Valley") include the accounts of its principal
commercial bank subsidiary, Valley National Bank ("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 Midland Bancorporation, which was acquired on February 28, 1997, in a
transaction accounted for as a pooling of interests. Certain reclassifications
have been made in the consolidated financial statements for 1996 and 1995 to
conform to the classifications presented for 1997.

In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect 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. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for possible loan losses and the valuation of other real estate owned. In
connection with the determination of the allowance for other real estate owned,
management generally obtains independent appraisals.

STATEMENT OF CASH FLOWS

The consolidated statements of cash flows are presented using the indirect
method. Cash and cash equivalents are defined as cash and due from banks.

INVESTMENT SECURITIES

Investments are classified into three categories: held to maturity;
available for sale; and trading. Valley's investment portfolio consists of
investments held to maturity and investments available for sale.

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 on 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
separate component of 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.

LOANS AND LOAN FEES

Loans are stated net of unearned income. Unearned income on discounted
loans is recognized based upon methods which approximate a level yield. 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.

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, interest 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 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

Servicing fee income, representing reimbursement for loan administrative
services performed on contractually serviced loans, is credited to income as
earned.

Effective January 1, 1997, Valley adopted Statement of Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities". The statement provides standards for
distinguishing transfers of financial assets that are sales from those that are
secured borrowings, and provides guidance on the recognition and measurement of
asset servicing contracts and on debt extinguishments. As issued, SFAS No. 125
is effective for transactions occurring after December 31, 1996. However, as a
result of an amendment

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

to SFAS No. 125 issued by the FASB in December 1996, certain provisions of SFAS
No. 125 are deferred for an additional year. The impact of adopting the new
accounting standard was not material to Valley.

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. In October 1995,
the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", which
is effective for fiscal years beginning after December 15, 1995. Under SFAS No.
123, Valley may elect to recognize stock-based compensation expense based on the
fair value of the awards or continue to account for stock-based compensation
under APB 25 and disclose in the financial statements the effects of SFAS No.
123 as if the recognition provisions were adopted. Valley has evaluated its
alternatives available under the provisions of SFAS No. 123 and has determined
it will not adopt the recognition provisions of the statement, but has provided
the required footnote disclosure. Therefore, the adoption of SFAS No. 123 had no
impact on Valley's consolidated financial statements.

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.

EARNINGS PER SHARE

Valley adopted SFAS No. 128, "Earnings Per Share", which specifies the
computation, presentation, and disclosure requirements for earnings per share
("EPS"). SFAS No. 128 was issued to simplify the computation of EPS and to make
the U.S. standard more compatible with the EPS standards of other countries and
that of the International Accounting Standards Committee ("IASC"). It replaces
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively,
and it also requires dual presentation of Basic EPS and Diluted EPS on the face
of the income statement. Basic EPS, unlike Primary EPS, excludes all dilution
while Diluted EPS, like Fully Diluted EPS, reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. In connection with the
adoption of this statement, all prior period EPS data presented has been
restated to conform with SFAS 128. For Valley, the numerator of both the Basic
and Diluted EPS is equivalent to net income. The weighted average 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 five
percent stock dividend issued on May 17, 1997, and all prior stock dividends.

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

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS 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 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

SFAS 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 additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 requires public companies to
report information about business segments in their annual financial statements
and selected business segment information in quarterly reports issued to
shareholders. SFAS 131 requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. This statement supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise". SFAS 131 is
effective for fiscal years beginning after December 15, 1997.

ACQUISITIONS (Note 2)

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 3,964,000 shares of Valley common stock. Each share of common
stock of Midland was exchanged for 30 shares of Valley common stock. The
consolidated financial statements of Valley have been restated to include
Midland for all periods presented. Separate results of the combining companies
for the years ended December 31, 1996 and 1995 are as follows:

1996 1995
-------- --------
(IN THOUSANDS)

Net interest income after provision for
possible loan losses:
Valley .......................................... $175,596 $170,166
Midland ......................................... 19,383 18,687
-------- --------
$194,979 $188,853
======== ========
Net Income:
Valley .......................................... $ 67,495 $ 62,596
Midland ......................................... 3,343 4,437
-------- --------
$ 70,838 $ 67,033
======== ========

On June 30, 1995, Valley acquired by merger the $671 million asset
Lakeland First Financial Group, Inc. ("LFG"), based in Succasunna, New Jersey
and its sixteen branch subsidiary, Lakeland Savings Bank ("Lakeland"). Each
share of LFG common stock outstanding was converted into 1.286 shares of Valley
common stock, resulting in the issuance by Valley of approximately 5,663,000
shares of Valley common stock. The acquisition has been accounted for as a
pooling of interests. Prior to the merger, Lakeland's fiscal year ended on June
30th. In recording the pooling of interests combination, LFG's financial
statements as of June 30, 1995 were combined with Valley's financial statements.
LFG's financial statements for the year ended June 30, 1995 was combined with
Valley's financial statements for the year ended December 31, 1994. An
adjustment has been made to shareholders' equity to eliminate the effect of
including LFG's results of operations for the six months ended June 30, 1995, in
both the year ended December 31, 1995, and the year ended December 31, 1994. The
consolidated financial statements of Valley include the accounts of LFG for all
periods presented.

On February 28, 1995, Valley acquired American Union Bank ("American"),
headquartered in Union, New Jersey, with two branches and approximately $58
million in assets. The transaction resulted in the issuance of approximately
334,000 shares of Valley common stock and was accounted for using the pooling of
interests method of accounting. The financial statements for Valley have not
been restated as they would not have been materially different from those
presented. American's financial statements are included in Valley's consolidated
financial statements as of January 1, 1995. Each share of common stock of
American was exchanged for 0.50 shares of Valley common stock.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

INVESTMENT SECURITIES HELD TO MATURITY (Note 3)

The amortized cost, fair value and unrealized gains and losses of
securities held to maturity at December 31, 1997 and 1996 were as follows:

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 ........ 81,216 1,739 (141) 82,814
Other debt securities ............. 195 -- -- 195
-------- -------- -------- --------
Total debt securities ............ 139,522 2,194 (302) 141,414
FRB & FHLB stock .................. 22,030 -- -- 22,030
-------- -------- -------- --------
Total investment securities
held to maturity .............. $161,552 $ 2,194 $ (302) $163,444
======== ======== ======== ========

DECEMBER 31, 1996
------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
(IN THOUSANDS)

U.S. Treasury securities and
other government agencies
and corporations .............. $ 25,608 $ 12 $ (120) $ 25,500
Obligations of states and
political subdivisions ........ 83,908 1,034 (85) 84,857
Mortgage-backed securities ........ 126,616 1,551 (458) 127,709
Other debt securities ............. 1,246 2 -- 1,248
-------- -------- -------- --------
Total debt securities ............ 237,378 2,599 (663) 239,314
FRB & FHLB stock .................. 17,167 -- -- 17,167
Other securities .................. 732 -- -- 732
-------- -------- -------- --------
Total investment securities
held to maturity .............. $255,277 $ 2,599 $ (663) $257,213
======== ======== ======== ========

The contractual maturities of investments in debt securities held to
maturity at December 31, 1997, are set forth in the following table:

DECEMBER 31, 1997
---------------------
AMORTIZED FAIR
COST VALUE
-------- --------
(IN THOUSANDS)

Due in one year ...................................... $ 24,358 $ 24,424
Due after one year through five years ................ 30,026 30,248
Due after five years through ten years ............... 308 308
Due after ten years .................................. 3,614 3,620
-------- --------
58,306 58,600
Mortgage-backed securities ........................... 81,216 82,814
-------- --------
Total debt securities ............................... 139,522 141,414
FRB & FHLB stock ..................................... 22,030 22,030
-------- --------
Total investment securities held to maturity ........ $161,552 $163,444
======== ========

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 and
other securities do not have contractual maturities.

The weighted-average remaining life for mortgage-backed securities held to
maturity was 4.1 years at December 31, 1997, and 3.7 years at December 31, 1996.

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 $128,412,000 and $120,045,000 at December 31, 1997
and 1996, respectively.

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.

INVESTMENT SECURITIES AVAILABLE FOR SALE (Note 4)

The amortized cost, fair value and unrealized gains and losses of
securities available for sale at December 31, 1997 and 1996 were as follows:

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 ........... $ 143,379 $ 122 $ (237) $ 143,264
Obligations of states and
political subdivisions 141,409 1,302 (254) 142,457
Mortgage-backed securities 719,120 5,311 (2,800) 721,631
---------- ------ ------- ----------
Total debt securities ... 1,003,908 6,735 (3,291) 1,007,352
Equity securities ......... 7,353 2,593 (73) 9,873
---------- ------ ------- ----------
Total investment
securities
available for sale .... $1,011,261 $9,328 $(3,364) $1,017,225
========== ====== ======= ==========

DECEMBER 31, 1996
----------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)

U.S. Treasury securities
and other government
agencies and
corporations ........... $ 146,253 $ 76 $ (917) $ 145,412
Obligations of states
and political
subdivisions .......... 175,745 1,955 (195) 177,505
Mortgage-backed securities 658,469 4,179 (7,254) 655,394
Other debt securities .... 591 3 -- 594
---------- ------ ------- ----------
Total debt securities .. 981,058 6,213 (8,366) 978,905
Equity securities ........ 8,370 2,484 (61) 10,793
---------- ------ ------- ----------
Total investment
securities available
for sale ............ $ 989,428 $8,697 $(8,427) $ 989,698
========== ====== ======= ==========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The contractual maturities of investments in debt securities available for
sale at December 31, 1997, are set forth in the following table:

DECEMBER 31, 1997
-----------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)

Due in one year ............................... $ 167,813 $ 167,771
Due after one year through five years ......... 111,591 112,290
Due after five years through ten years ........ 1,106 1,199
Due after ten years ........................... 4,278 4,461
---------- ----------
284,788 285,721
Mortgage-backed securities .................... 719,120 721,631
---------- ----------
Total debt securities ........................ 1,003,908 1,007,352
Equity securities ............................. 7,353 9,873
---------- ----------
Total investment securities available for sale $1,011,261 $1,017,225
========== ==========

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, 1997 and 1996 was 4.1 years and 5.4 years,
respectively.

Gross gains (losses) realized on sales, maturities and other securities
transactions for the years ended December 31, 1997, 1996 and 1995 were as
follows:

1997 1996 1995
------- ------- -------
(IN THOUSANDS)

Sales transactions:
Gross gains ............ $ 2,360 $ 1,214 $ 1,676
Gross losses ........... (193) (522) (210)
------- ------- -------
2,167 692 1,466
------- ------- -------
Maturities and other
securities transactions:
Gross gains ............ 10 89 6
Gross losses ........... (25) -- --
------- ------- -------
(15) 89 6
------- ------- -------
Gains on securities
transactions, net ...... $ 2,152 $ 781 $ 1,472
======= ======= =======

Cash proceeds from sales transactions approximated $171,158,000,
$143,605,000 and $108,331,000 for the years ended 1997, 1996 and 1995,
respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

LOANS (Note 5)

The detail of the loan portfolio as of December 31, 1997 and 1996 was as
follows:

1997 1996
----------- -----------
(IN THOUSANDS)

Commercial ................... $ 432,287 $ 466,580
----------- -----------
Total commercial loans ..... 432,287 466,580
----------- -----------
Construction ................. 80,923 87,486
Residential mortgage ......... 929,525 924,767
Commercial mortgage .......... 846,052 786,916
----------- -----------
Total mortgage loans ....... 1,856,500 1,799,169
----------- -----------
Home equity .................. 168,888 174,534
Credit card .................. 145,485 149,494
Automobile ................... 930,247 811,694
Other consumer ............... 88,925 70,297
----------- -----------
Total consumer loans ....... 1,333,545 1,206,019
----------- -----------
Less: unearned income ........ -- (520)
----------- -----------
Loans, net of unearned income $ 3,622,332 $ 3,471,248
=========== ===========

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 1997:

1997
------------
(IN THOUSANDS)

Outstanding at beginning of year $ 26,326
New loans and advances ......... 10,819
Repayments ..................... (11,695)
--------
Outstanding at end of year ..... $ 25,450
========

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, 1997 and 1996 were as follows:

1997 1996
------- -------
(IN THOUSANDS)

Loans past due in excess of 90
days and still accruing ....... $16,351 $10,166
======= =======
------- -------
Non-accrual loans .............. $ 7,307 $13,182
Other real estate owned ........ 2,178 3,750
------- -------
Total non-performing assets ... $ 9,485 $16,932
======= =======
Troubled debt restructured loans $ 5,248 $ 5,576
======= =======

The amount of interest income that would have been recorded on non-accrual
loans in 1997, 1996 and 1995 had payments remained in accordance with the
original contractual terms approximated $1,270,000, $1,419,000 and $1,719,000,
while the actual amount of interest income recorded on these types of assets in
1997, 1996 and 1995 totaled $252,000, $1,701,000 and $787,000, resulting in
lost (recovered) interest income of $1,018,000, ($282,000), and $932,000,
respectively.

At December 31, 1997, 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

ALLOWANCE FOR POSSIBLE LOAN LOSSES (Note 6)

Transactions in the allowance for possible loan losses during 1997, 1996
and 1995 were as follows:

1997 1996 1995
-------- -------- --------
(IN THOUSANDS)

Balance at beginning of year . $ 46,022 $ 43,991 $ 45,905
Provision charged to operating
expense .................... 12,250 3,356 3,169
-------- -------- --------
58,272 47,347 49,074
-------- -------- --------
Less net loan charge-offs:
Loans charged-off ........... (13,886) (5,918) (7,861)
Less recoveries on loan
charge-offs ............... 1,986 4,593 2,778
-------- -------- --------
Net loan charge-offs ......... (11,900) (1,325) (5,083)
-------- -------- --------
Balance at end of year ....... $ 46,372 $ 46,022 $ 43,991
======== ======== ========

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 approximated $2,015,265,000, $1,916,796,000 and $1,690,080,000
at December 31, 1997, 1996 and 1995, respectively. These amounts included
$863,596,000, $813,858,000 and $816,513,000 as of December 31, 1997, 1996 and
1995, respectively, of loans serviced on behalf of VNB and its subsidiary. 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 $69.7 million and $54.2 million of SBA loans as of December 31, 1997
and 1996, 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, 1997, 1996 and 1995:

1997 1996 1995
-------- -------- --------
(IN THOUSANDS)

Balance at beginning of year ... $ 12,187 $ 8,094 $ 5,998
Purchase and origination of loan
servicing rights .............. 3,905 6,167 3,902
Amortization expense ........... (2,621) (2,074) (1,806)
-------- -------- --------
Balance at end of year ......... $ 13,471 $ 12,187 $ 8,094
======== ======== ========

Amortization expense is included in amortization of intangible assets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

PREMISES AND EQUIPMENT (Note 8)

At December 31, 1997 and 1996, premises and equipment consisted of:

1997 1996
--------- ---------
(IN THOUSANDS)

Land ......................... $ 17,298 $ 16,814
Buildings .................... 45,473 42,615
Leasehold improvements ....... 11,729 9,930
Furniture and equipment ...... 58,997 52,151
--------- ---------
133,497 121,510
Less: Accumulated depreciation
and amortization ............ (58,944) (50,266)
--------- ---------
Premises and equipment ...... $ 74,553 $ 71,244
========= =========

Depreciation and amortization included in non-interest expense for the
years ended December 31, 1997, 1996 and 1995 amounted to approximately
$8,695,000, $7,305,000 and $6,764,000, respectively.

OTHER ASSETS (Note 9)

At December 31, 1997 and 1996, other assets consisted of the following:

1997 1996
------- -------
(IN THOUSANDS)

Loan servicing rights ...... $13,471 $12,187
Goodwill ................... 2,922 3,171
Core deposits .............. 1,816 2,459
Other real estate owned, net 2,178 3,750
Deferred tax asset ......... 12,695 17,434
Other ...................... 20,491 24,908
======= ======
Total other assets ........ $53,573 $63,909
======= ======

DEPOSITS (Note 10)

Included in time deposits at December 31, 1997 and 1996 are certificates
of deposit over $100,000 of $471,869,000 and $587,821,000, respectively.

Interest expense on time deposits of $100,000 or more totaled
approximately $26,215,000, $24,115,000 and $21,067,000 in 1997, 1996 and 1995,
respectively.

The scheduled maturities of time deposits as of December 31, 1997 are as
follows:

(IN THOUSANDS)

1998 ........................................... $1,087,293
1999 ........................................... 445,515
2000 ........................................... 173,055
2001 ........................................... 13,369
2002 ........................................... 40,029
Thereafter ..................................... 32,767
----------
$1,792,028
==========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

OTHER BORROWINGS (Note 11)

At December 31, 1997 and 1996, other borrowings consisted of the
following:

1997 1996
-------- --------
(IN THOUSANDS)

FHLB advances ........ $113,500 $ 34,500
Other ................ 512 571
-------- --------
Total other borrowings $114,012 $ 35,071
======== ========

The Federal Home Loan Bank (FHLB) advances have a weighted average
interest rate of 6.09% at December 31, 1997 and 5.70% at December 31, 1996.
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)

1998 ............................................ $ 31,000
1999 ............................................ 25,000
2000 ............................................ 28,000
2001 ............................................ 2,000
2002 ............................................ 12,000
Thereafter ...................................... 15,500
--------
$113,500
========

Interest expense of $3,136,000, $2,220,000, and $1,735,000 was recorded on
FHLB advances during the years ended December 31, 1997, 1996 and 1995,
respectively.

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 1997, 1996 and 1995, contributions
totaling $711,000, $235,000 and $502,000 were made. In addition, VNB has a
supplemental non-qualified, non-funded retirement plan which is designed to
supplement the pension plan for key officers.

The following table sets forth the funded status of the plans and amounts
recognized in Valley's financial statements at December 31, 1997 and 1996:

1997 1996
-------- --------
(IN THOUSANDS)

Plan assets at fair value, primarily government
and corporate bonds, corporate stocks,
certificates of deposits and other
miscellaneous assets ........................ $ 21,638 $ 16,776
-------- --------
Actuarial present value of benefit obligations:
Accumulated benefit obligation for service
rendered to date, including vested benefits
of $14,353 in 1997 and $11,884 in 1996 ..... $ 15,517 $ 13,055
Additional future benefits based on estimated
salary levels ............................... 2,719 3,162
-------- --------
Projected benefit obligations ................. $ 18,236 $ 16,217
-------- --------
Excess of plan assets over projected benefit
obligations ................................. 3,402 559
Unrecognized net gain from past experience
different from that assumed and effects of
change in assumptions ....................... (6,942) (4,187)
Unrecognized net asset of January 1, being
recognized over an average of 15.4 years .... (420) (49)
Prior service cost not yet recognized in net
periodic pension cost ....................... 471 576
-------- --------
Accrued pension cost included in other
liabilities ................................. $ (3,489) $ (3,101)
======== ========

Net periodic pension expense for 1997, 1996 and 1995 included the
following components:

1997 1996 1995
------- ------- -------
(IN THOUSANDS)

Service cost-benefits earned ...... $ 1,095 $ 1,239 $ 1,221
Interest cost on projected benefit
obligations ..................... 1,191 1,070 1,048
Actual return on plan assets ...... (4,775) (2,065) (2,866)
Net amortization and deferral ..... 3,586 970 1,810
------- ------- -------
Total net periodic pension expense $ 1,097 $ 1,214 $ 1,213
======= ======= =======

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 7.00% and 5.00%, respectively, for 1997 and 7.25%
and 5.00% for 1996. The expected long term rate of return on assets was 9.00%
for both 1997 and 1996 and the weighted average discount rate used in computing
pension cost was 7.25% and 7.00% for 1997 and 1996, respectively.

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 1997, 1996 and 1995 were $2,152,000, $1,798,000 and
$1,588,000, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 12% 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. The 401K expense for 1997, 1996 and
1995 amounted to $853,000, $1,120,000 and $891,000, respectively.

STOCK OPTION PLAN

At December 31, 1997, 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:

1997 1996 1995
---- ---- ----
(IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)

Net income
As Reported ..... $84,992 $70,838 $67,033
Pro forma ....... 84,698 70,068 66,975
Earnings per share
As Reported:
Basic .......... $ 2.01 $ 1.67 $ 1.55
Diluted ........ 2.00 1.66 1.55
Pro forma:
Basic .......... $ 2.00 $ 1.65 $ 1.55
Diluted ........ 1.99 1.64 1.54

Under the Employee Stock Option Plan, Valley may grant options to its
employees for up to 2,008,689 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.

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 1997, 1996 and 1995, respectively: dividend yield
of 3.50 percent for 1997, 4.36 percent for 1996 and 4.23 percent for 1995;
weighted-average risk-free interest rate of 5.75 percent for 1997 and 6.5
percent for both 1996 and 1995, and expected volatility of 23.9 percent for 1997
and 24.3 percent for both 1996 and 1995. The effects of applying SFAS 123 on the
pro forma net income may not be representative of the effects on pro forma net
income for future years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

A summary of the status of the qualified stock options as of December 31,
1997, 1996 and 1995 and changes during the years ended on those dates is
presented below:

1997 1996 1995
---------------------- ----------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
QUALIFIED EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- -------- --------- --------- --------- --------- ---------

Outstanding at beginning
of year ............................. 586,578 $20 551,100 $17 563,747 $15
Granted ............................... 187,647 31 115,153 24 96,939 22
Exercised ............................. (104,405) 16 (66,278) 11 (92,877) 10
Forfeited ............................. (14,026) 22 (13,397) 20 (16,709) 19
-------- --------- ---------
Outstanding at end of year ............ 655,794 23 586,578 20 551,100 17
======== ========= =========
Options exercisable at year-end ....... 269,977 260,945 240,299
======== ========= =========
Weighted-average fair value of
options granted during the year ..... $ 8.34 $ 6.08 $ 5.21

The following table summarizes information about qualified stock options
outstanding at December 31, 1997:

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
- -------- ----------- ----------- -------------- ----------- --------------
$ 4-11 34,905 2.8 years $10 34,905 $10
12-20 164,238 4.8 19 140,509 18
21-33 456,651 8.0 26 94,563 22
------- -------
4-33 655,794 6.9 24 269,977 19
======= =======

During 1996 there were 1,100 stock appreciation rights granted in tandem
with qualified stock options.

At December 31, 1997 there were no stock appreciation rights outstanding,
and there were 7,721 stock appreciation rights outstanding as of December 31,
1996. These were granted in tandem with qualified stock options.

A summary of the status of the non-qualified stock options as of December
31, 1997, 1996 and 1995 and changes during the years ended on those dates is
presented below:

1997 1996 1995
--------------------- --------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NON-QUALIFIED EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
-------------- ------- -------- ------- -------- ------ --------

Outstanding at beginning
of year ............... 334,589 $11 34,717 $17 12,893 $ 9
Granted ................. 26,003 28 340,297 10 21,824 23
Exercised ............... (67,159) 9 (40,425) 9 -- --
Forfeited ............... (363) 22 -- -- -- --
------- ------- ------
Outstanding at end
of year ............... 293,070 13 334,589 11 34,717 17
======= ======= ======
Options exercisable at
year-end .............. 244,850 252,458 12,893
======= ======= ======
Weighted-average fair
value of options
granted during
the year .............. $8.49 $2.47 $4.95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about non-qualified stock
options outstanding at December 31, 1997:

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
- -------- ----------- ----------- -------------- ----------- --------------

$ 8-9 225,023 13.0 years $ 9 225,023 $ 9
23-34 68,047 8.3 24 19,557 23
------- -------
8-34 293,070 11.9 20 244,580 13
======= =======

During 1997 and 1996, respectively, 8,715 and 9,917 stock appreciation
rights were granted in tandem with non-qualified stock options. There were
28,386 and 22,806 stock appreciation rights outstanding as of December 31, 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, 1997, 1996 and 1995.

RESTRICTED
STOCK AWARDS 1997 1996 1995
------------ -------- ------ -------
Outstanding at beginning of year ........... 83,357 74,220 58,977
Granted .................................... 43,725 33,259 33,406
Vested ..................................... (24,592) (21,507) (17,057)
Forfeited .................................. (5,754) (2,615) (1,106)
------- ------- -------
Outstanding at end of year ................. 96,736 83,357 74,220
======= ======= ========

The amount of compensation costs related to restricted stock awards
included in salary expense in 1997, 1996 and 1995 amounted to $529,000, $448,000
and $322,000, respectively.

INCOME TAXES (Note 13)

Income tax expense(benefit) included in the financial statements consisted
of the following:

1997 1996 1995
------- ------- ------
(IN THOUSANDS)
Income tax from operations:
Current:
Federal .................................. $ 30,137 $ 33,724 $ 33,784
State .................................... 1,517 3,257 6,626
-------- -------- --------
31,654 36,981 40,410
Deferred:
Federal & State .......................... 2,532 (905) 1,133
-------- -------- --------
Total income tax from operations ....... $ 34,186 $ 36,076 $ 41,543
======== ======== ========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The tax effects of temporary differences that gave rise to deferred tax
assets and liabilities as of December 31, 1997 and 1996 are as follows:

1997 1996
------ -------
(IN THOUSANDS)
Deferred tax assets:
Allowance for possible loan losses ................ $18,716 $17,440
State privilege year taxes ........................ 311 1,011
Non-accrual loan interest ......................... 450 552
Other ............................................. 3,435 3,826
------- -------
Total deferred tax assets ........................ 22,912 22,829
------- -------
Deferred tax liabilities:
Tax over book depreciation ........................ 3,354 2,816
Purchase accounting adjustments ................... 552 633
Unearned discount on investments .................. 836 724
Investment securities available for sale .......... 2,324 117
Other ............................................. 3,151 1,105
------- -------
Total deferred tax liabilities ................... 10,217 5,395
------- -------
Net deferred tax assets ............................ $12,695 $17,434
======= =======

Included in shareholders' equity are income tax expense attributable to net
unrealized gains on investment securities available for sale in the amounts of
$2.3 million and $117 thousand for the years ended December 31, 1997 and 1996,
respectively.

A reconciliation between the reported income tax expense from operations
and the amount computed by multiplying income before taxes by the statutory
federal income tax rate is as follows:

1997 1996 1995
---- ---- -----
(IN THOUSANDS)

Tax at statutory federal income tax rate ..... $41,712 $37,365 $37,930
Increases (decreases) resulted from:
Tax-exempt interest, net of interest incurred
to carry tax-exempts ....................... (3,652) (4,531) (4,987)
State income tax, net of federal tax benefit 1,349 2,527 4,507
Provision for recapture of bad debt
deduction upon merger ...................... -- -- 3,115
Realignment of corporate entities ........... (6,215) -- --
Other, net .................................. 992 715 978
------- ------- -------
Income tax expense .......................... $34,186 $36,076 $41,543
======= ======= =======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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)

1998 ............................. $ 3,491
1999 ............................. 3,190
2000 ............................. 1,859
2001 ............................. 1,613
2002 ............................. 1,318
2003-2047 ........................ 5,915
Total lease commitments ....... $17,386

Net occupancy expense for 1997, 1996 and 1995 included approximately
$2,223,000, $2,670,000 and $2,909,000, 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table provides a summary of financial instruments with
off-balance sheet risk at December 31, 1997 and 1996:

1997 1996
---- ----
(IN THOUSANDS)

Standby and commercial letters of credit ........ $ 49,959 $ 37,758
Commitments under unused lines of
credit-credit card ............................ 1,074,810 961,562

Commitments under unused lines of credit-other .. 508,094 367,160

Outstanding loan commitments .................... 203,440 225,644
---------- ----------
Total financial instruments
with off-balance sheet risk ................. $1,836,303 $1,592,124
========== ==========

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, 1997, VNB had commitments to sell residential mortgage
loans and SBA loans totaling $9.2 million and MSI had commitments to purchase
mortgage servicing rights to service approximately $635.5 million of residential
mortgage loans for a purchase price of $9.6 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, 1997, Valley exceeded all capital
adequacy requirements to which it was subject.

As of December 31, 1997, the most recent notification 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Valley's actual capital amounts and ratios as of December 31, 1997 and
1996 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, 1997
Total Risk-based Capital ....... $512,761 14.1% $290,545 8.0% $363,182 10.0%
Tier I Risk-based Capital ...... 467,376 12.9 145,273 4.0 217,909 6.0
Tier I Leverage Capital ........ 467,376 9.2 203,749 4.0 254,686 5.0

As of December 31, 1996
Total Risk-based Capital ....... 469,253 13.5 279,019 8.0 348,774 10.0
Tier I Risk-based Capital ...... 425,626 12.2 139,510 4.0 209,265 6.0
Tier I Leverage Capital ........ 425,626 8.4 203,802 4.0 254,752 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 1998 without prior approval of
the OCC of up to $35,643,000 plus an amount equal to VNB's net profits for 1998
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, 1997:

SHARES IN
SHARES ISSUED TREASURY
------------- ---------
Balance, December 31, 1994 .................... 37,633,825 (121,696)
Warrants exercised ........................... 61,108 494,674
Effect of stock incentive plan, net .......... 11,848 82,769
Stock dividend (5%) .......................... 1,692,925 --
Purchase of treasury stock ................... (34,500) (563,160)
Acquisition of American Union Bank ........... 274,965 --
---------- ---------
Balance, December 31, 1995 .................... 39,640,171 (107,413)
Stock dividend (5%) .......................... 801,620 942,994
Effect of stock incentive plan, net .......... 21,350 100,026
Purchase of treasury stock ................... (13,470) (1,207,700)
---------- ---------
Balance, December 31, 1996 .................... 40,449,671 (272,093)
Stock dividend (5%) .......................... 2,009,172 --
Effect of stock incentive plan, net .......... (5,904) 178,680
---------- ---------
Balance, December 31, 1997 .................... 42,452,939 (93,413)
========== =========

TREASURY STOCK

During 1996, Valley's Board of Directors rescinded its repurchase program
after 1,207,700 shares of Valley common stock were repurchased in 1996 and
563,160 shares were repurchased in 1995. During the three year period ended
December 31, 1997, Valley had reissued approximately 1,799,143 shares for a 5%
stock dividend issued May 17, 1996, an expired warrant program and its employee
benefit program.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

privately negotiated transactions at prices not exceeding prevailing market
rates. Reacquired shares are expected to be held in treasury to be used for
employee benefit programs.

CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 16)

QUARTERS ENDED 1997
------------------------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
------------ ---------- ----------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

Interest income ..................... $91,284 $91,559 $92,483 $92,992
Interest expense .................... 39,052 38,349 39,105 39,471
Net interest income ................. 52,232 53,210 53,378 53,521
Provision for possible loan losses .. 1,200 1,900 2,150 7,000
Non-interest income ................. 10,115 10,510 11,716 9,974
Non-interest expense ................ 29,399 30,870 30,085 32,874
Income before income taxes .......... 31,748 30,950 32,859 23,621
Income tax expense .................. 10,848 10,475 11,003 1,860
Net income .......................... 20,900 20,475 21,856 21,761
Earnings per share:
Basic .............................. 0.50 0.48 0.52 0.51
Diluted ............................ 0.49 0.48 0.51 0.51
Cash dividends per share ............ 0.24 0.275 0.275 0.275
Average shares outstanding:
Basic .............................. 42,235,562 42,265,174 42,287,785 42,316,090
Diluted ............................ 42,528,864 42,569,283 42,615,068 42,710,600

QUARTERS ENDED 1996
-------------------------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
------------ ---------- ----------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

Interest income ..................... $87,383 $86,864 $89,520 $89,401
Interest expense .................... 37,961 37,907 39,207 39,758
Net interest income ................. 49,422 48,957 50,313 49,643
Provision for possible loan losses .. 780 1,080 425 1,071
Non-interest income ................. 7,147 6,077 7,730 8,697
Non-interest expense ................ 25,635 27,342 34,614 30,125
Income before income taxes .......... 30,154 26,612 23,004 27,144
Income tax expense .................. 10,735 8,663 7,463 9,215
Net income .......................... 19,419 17,949 15,541 17,929
Earnings per share:
Basic .............................. 0.45 0.42 0.37 0.43
Diluted ............................ 0.45 0.42 0.37 0.42
Cash dividends per share ............ 0.23 0.24 0.24 0.24
Average shares outstanding:
Basic .............................. 43,190,719 42,402,426 42,119,481 42,154,328
Diluted ............................ 43,512,424 42,797,127 42,457,369 42,460,472

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

PARENT COMPANY INFORMATION (Note 17)

CONDENSED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
INCOME
Dividends from subsidiary ........................ $49,500 $70,269 $37,783
Interest from subsidiary ......................... 550 798 1,398
Gains on securities transactions, net ............ 1,849 219 1,374
Other interest and dividends ..................... 999 261 153
------- ------- -------
52,898 71,547 40,708
Expenses ......................................... 2,034 2,426 2,378
------- ------- -------
Income before income taxes and equity
in undistributed earnings in subsidiary ......... 50,864 69,121 38,330
Income tax expense (benefit) ..................... 312 (141) 672
------- ------- -------
Income before equity in undistributed
earnings of subsidiary .......................... 50,552 69,262 37,658
Equity in undistributed earnings of subsidiary ... 34,440 1,576 29,375
------- ------- -------
Net income ....................................... $84,992 $70,838 $67,033
======= ======= =======

CONDENSED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31,
---------------------------
1997 1996
-------- --------
(IN THOUSANDS)
ASSETS
Cash .......................................... $ 157 $ 1,600
Interest bearing deposits with banks .......... 20,200 27,500
Investment securities available for sale ...... 28,793 10,793
Investment in subsidiary ...................... 434,678 396,880
Other assets .................................. 4,214 5,126
-------- --------
Total assets ................................. $488,042 $441,899
======== ========
LIABILITIES
Dividends payable to shareholders ............. $ 11,646 $ 9,101
Other liabilities ............................. 1,037 2,414
-------- --------
Total liabilities ............................ 12,683 11,515
-------- --------
SHAREHOLDERS' EQUITY
Common stock .................................. 23,282 22,320
Surplus ....................................... 291,600 238,541
Retained earnings ............................. 159,116 176,853
Unrealized gain on investment
securities available for
sale, net of tax ............................. 3,639 259
-------- --------
477,637 437,973
Treasury stock at cost ........................ (2,278) (7,589)
-------- --------
Total shareholders' equity ................... 475,359 430,384
-------- --------
Total liabilities and shareholders'
equity ...................................... $488,042 $441,899
======== ========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

CONDENSED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 84,992 $ 70,838 $ 67,033
Adjustments to reconcile net income
to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary (34,440) (1,576) (29,375)
Depreciation and amortization ................ 570 434 460
Amortization of compensation costs on
non-qualified stock
options and restricted stock awards ......... 529 448 322
Net deferred income tax benefit .............. 89 482 51
Net accretion of discounts ................... (838) -- --
Net gains on securities transactions ......... (1,849) (219) (1,374)
Net decrease (increase) in other assets ...... 435 (285) 65
Net (decrease) increase in other liabilities . (1,513) (391) 357
Other ........................................ -- -- 1,798
-------- -------- --------
Net cash provided by operating activities .... 47,975 69,731 39,337
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment
securities available for sale ................ 6,050 715 3,796
Purchases of investment securities available
for sale ..................................... (21,510) (2,242) (5,003)
Net decrease(increase) in short-term
investments .................................. 7,300 (1,000) 6,155
-------- -------- --------
Net cash (used in) provided by investing
activities ................................... (8,160) (2,527) 4,948
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of common shares added to treasury .. -- (32,401) (13,986)
Dividends paid to common shareholders ......... (42,414) (38,373) (34,885)
Common stock issued, net of cancellations ..... 1,156 777 8,028
-------- -------- --------
Net cash used in financing activities ......... (41,258) (69,997) (40,843)
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents .............................. (1,443) (2,793) 3,442
Cash and cash equivalents at beginning of year . 1,600 4,393 951
-------- -------- --------
Cash and cash equivalents at end of year ....... $ 157 $ 1,600 $ 4,393
======== ======== ========

FAIR VALUES OF FINANCIAL INSTRUMENTS (Note 18)

Limitations: The fair value estimates made at December 31, 1997 and 1996
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 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 and investment securities available
for sale: 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.

Loan servicing rights: The fair value of the rights is estimated using the
present value of future cash flows and assumptions regarding prepayment
estimates, cost of servicing, discount rates and loan terms. Quoted prepayment
speeds from brokers are utilized to estimate prepayment assumptions and any
impact on amortization. Any impairments to the value of the rights are
recognized as a direct effect to amortization.

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, 1997 and 1996:

1997 1996
----------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ---------- ---------- -----------
(IN THOUSANDS)

Financial assets:
Cash and due from banks ................ $ 148,175 $ 148,175 $ 196,995 $ 196,995
Federal funds sold ..................... 30,000 30,000 82,450 82,450
Investment securities held to maturity . 161,552 163,444 255,277 257,213
Investment securities available for sale 1,017,225 1,017,225 989,698 989,698
Net loans .............................. 3,575,960 3,616,549 3,425,226 3,423,998
Due from customers on acceptances
outstanding ........................... 304 304 940 940
Loan servicing rights .................. 13,471 15,656 12,187 14,270

Financial liabilities:
Deposits with no stated maturity ....... 2,610,926 2,610,926 2,551,039 2,551,039
Deposits with stated maturities ........ 1,792,028 1,800,059 2,016,026 2,027,242
Short-term borrowings .................. 56,938 56,938 40,541 40,541
Other borrowings ....................... 114,012 113,790 35,071 34,134
Bank acceptances outstanding ........... 304 304 940 940

The estimated fair value of financial instruments with off-balance sheet
risk, consisting of unamortized fee income at December 31, 1997 and 1996 is not
material.

[KPMG Peat Marwick LLP -- Logo]

INDEPENDENT AUDITORS' REPORT

KPMG Peat Marwick 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, 1997
and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.

/S/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP

January 21, 1998

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 1998 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 1998 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 1998 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 1998 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, 1997

None

(3) Articles of Incorporation and Bylaws:

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 fiscal period ending
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. By-Laws of the Registrant adopted as of March 14, 1989 and amended
March 19, 1991 is incorporated herein by reference to the Registrant's
Form 10-K Annual Report for the fiscal period ending December 31,
1993.

(10) Material Contracts:

A. "Change in Control Agreements" dated January 1, 1995 between Valley,
VNB and Gerald H. Lipkin, Peter Southway, Alan Eskow, Robert Farrell,
Richard Garber and Robert Mulligan are incorporated herein by
reference to the Registrant's Form 10-K Annual Report for the period
ending December 31, 1994.

B. "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 period ending December
31, 1996.

C. "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 period ending December 31, 1996.

D. "The Valley National Bancorp Long-term Stock Incentive Plan" dated
January 18, 1994 is incorporated herein by reference to the
Registrant's Notice of Annual Meeting of Shareholders and Proxy dated
March 1, 1994.

E. "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.

F. "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.

G. "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 for the year ended December 31, 1995.

H. "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 period ending December 31, 1996.

I. "Change in Control Agreements" and "Severance Agreements" as of
January 1, 1998 between Valley, VNB and Peter Crocitto, Robert M.
Meyer and Peter John Southway.

(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%
GAP Realty Delaware 100%
VNB Loan Services, Inc. New York 100%
VNB RSI, 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 Peat Marwick LLP.

(24) Power of Attorney of Certain Directors and Officers of Valley

(27) Financial Data Schedule

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 27, 1998

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 27, 1998
- -------------------------- Executive Officer and Director
GERALD H. LIPKIN

/s/ PETER SOUTHWAY Vice Chairman (Principal Financial February 27, 1998
- -------------------------- Officer) and Director
PETER SOUTHWAY

/s/ ALAN D. ESKOW Corporate Secretary and Senior Vice February 27, 1998
- -------------------------- President (Principal Accounting
ALAN D. ESKOW Officer)

ANDREW B. ABRAMSON* Director February 27, 1998
- --------------------------
ANDREW B. ABRAMSON

PAMELA BRONANDER* Director February 27, 1998
- --------------------------
PAMELA BRONANDER

JOSEPH COCCIA, JR.* Director February 27, 1998
- --------------------------
JOSEPH COCCIA, JR.

AUSTIN C. DRUKKER* Director February 27, 1998
- --------------------------
AUSTIN C. DRUKKER

WILLARD L. HEDDEN* Director February 27, 1998
- --------------------------
WILLARD L. HEDDEN

GRAHAM O. JONES* Director February 27, 1998
- --------------------------
GRAHAM O. JONES

WALTER H. JONES, III* Director February 27, 1998
- --------------------------
WALTER H. JONES, III

GERALD KORDE* Director February 27, 1998
- ---------------------------
GERALD KORDE*

JOLEEN J. MARTIN* Director February 27, 1998
- ---------------------------
JOLEEN J. MARTIN

SIGNATURE TITLE DATE
--------- ----- ----

ROBERT E. MCENTEE* Director February 27, 1998
- ---------------------------
ROBERT E. MCENTEE

WILLIAM H. MCNEAR* Director February 27, 1998
- ---------------------------
WILLIAM H. MCNEAR

SAM P. PINYUH* Director February 27, 1998
- ---------------------------
SAM P. PINYUH

ROBERT RACHESKY* Director February 27, 1998
- ---------------------------
ROBERT RACHESKY

BARNETT RUKIN* Director February 27, 1998
- ---------------------------
BARNETT RUKIN

RICHARD F. TICE* Director February 27, 1998
- ---------------------------
RICHARD F. TICE

LEONARD J. VORCHEIMER* Director February 27, 1998
- ---------------------------
LEONARD J. VORCHEIMER

JOSEPH L. VOZZA* Director February 27, 1998
- ---------------------------
JOSEPH l. VOZZA

* By Gerald H. Lipkin, as attorney-in-fact.

EXHIBIT INDEX

EXHIBIT NUMBER EXHIBIT DESCRIPTION
------- ------ -------------------

(10)I Change in control agreements
and severance agreements --
Peter Crocitto, Robert M. Meyer,
Peter John Southway.

(23) Consent of KPMG Peat Marwick,
LLP

(24) Power of Attorney

(27) Financial Data Schedule