SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported) - October 1, 2001
VALLEY NATIONAL BANCORP
(Exact Name of Registrant as Specified in Charter)
NEW JERSEY
(State or Other Jurisdiction of Incorporation)
1-11277 22-2477875
(Commission File Number) (IRS Employer Identification No.)
1455 Valley Road, Wayne, New Jersey 07470
(Address of Principal Executive Offices)
(973) 305-8800
(Registrant's Telephone Number)
Item 5 - Other Events
On January 19, 2001, Valley National Bancorp ("Valley") completed its
acquisition of Merchants New York Bancorp, Inc. ("Merchants"). This Current
Report on From 8-K is being filed to restate Valley's audited consolidated
financial statements and notes thereto for the years ended December 31,
2000, 1999 and 1998 to reflect Valley's acquisition of Merchants, which
was accounted for as a pooling-of-interests. The pooling-of-interests
method of accounting requires the restatement of all periods presented
as if Merchants and Valley had always been operated as a combined entity
during such periods. This Current Report also includes Valley's Restated
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three years ended December 31, 2000, and Valley's Restated
Selected Financial Data for the five years ended December 31, 2000.
Item 7 - Financial Statements and Exhibits
23.1 Consent of KPMG LLP.
99.1 Restated Selected Financial Data for the five years ended
December 31, 2000.
99.2 Restated Audited Consolidated Financial Statements and notes
thereto for the three years ended December 31, 2000.
99.3 Restated Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three years
ended December 31, 2000.
SIGNATURES
Pursuant to the requirements 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
Dated: October 1, 2001 By: /s/ Alan D. Eskow__________
Alan D. Eskow
Principal Financial Officer
And Corporate Secretary
EXHIBIT INDEX
23.1 Consent of KPMG LLP.
99.1 Restated Selected Financial Data for the five years ended
December 31, 2000.
99.2 Restated Audited Consolidated Financial Statements and
notes thereto for the three years ended December 31, 2000.
99.3 Restated Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three years
ended December 31, 2000.
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Valley National Bancorp:
We consent to incorporation by reference in the Registration Statements
No.33-52809, No. 33-56933, No. 333-25419, No. 333-65993, No.333-75889,
No. 333-77673 and No. 333-80507 on Form S-8 and Registration Statement
No. 333-42958 on Form S-3 of Valley National Bancorp of our report dated
September 14, 2001 relating to the restated consolidated statements of
financial condition of Valley National Bancorp and subsidiaries as of
December 31, 2000 and 1999 and the related restated consolidated statements
of income, changes in shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2000, which report
appears in the October 1, 2001 Current Report on Form 8-K of Valley National
Bancorp.
KPMG LLP
Short Hills, New Jersey
September 28, 2001
Exhibit 99.1
Selected Financial Data
The following selected financial data should be read in conjunction with
Valley's Restated Consolidated Financial Statements and the accompanying
notes presented elsewhere herein.
Years ended December 31,
2000 1999 1998 1997 1996
(in thousands, except for share data)
Summary of Operations:
Interest income (taxable equivalent) $ 575,003 $ 524,758 $ 505,096 $ 498,424 $ 470,037
Interest expense 252,648 208,792 208,531 212,436 202,050
Net interest income (taxable
equivalent) 322,355 315,966 296,565 285,988 267,987
Less: tax equivalent adjustment 6,797 6,940 7,535 8,785 10,098
Net interest income 315,558 309,026 289,030 277,203 257,889
Provision for loan losses 10,755 11,035 14,070 14,830 6,536
Net interest income after provision
for loan losses 304,803 297,991 274,960 262,373 251,353
Gains on securities transactions, net 355 2,625 1,480 2,158 1,137
Non-interest income 58,745 51,178 49,342 48,219 36,759
Non-interest expense 171,139 164,719 170,097 163,579 156,851
Income before income taxes 192,764 187,075 155,685 149,171 132,398
Income tax expense 66,027 61,734 38,512 44,458 45,167
Net income $ 126,737 $ 125,341 $ 117,173 $ 104,713 $ 87,231
Years ended December 31,
2000 1999 1998 1997 1996
(in thousands, except for share data)
Per Common Share (1)(2):
Earnings per share:
Basic $ 1.61 $ 1.52 $ 1.41 $ 1.26 $ 1.07
Diluted 1.60 1.51 1.39 1.24 1.06
Dividends 0.98 0.93 0.85 0.73 0.66
Book value 8.41 8.04 8.41 7.75 7.13
Weighted average shares
outstanding:
Basic 78,612,928 82,383,289 83,218,702 83,246,901 81,393,649
Diluted 79,235,570 83,162,607 84,361,995 84,111,102 82,052,900
Ratios:
Return on average assets 1.66 % 1.70 % 1.70 % 1.54 % 1.34 %
Return on average shareholders'
equity 20.24 18.30 17.72 16.88 14.96
Average shareholders'
equity to average assets 8.22 9.31 9.58 9.12 8.92
Dividend payout 56.34 53.30 50.33 51.16 51.93
Risk-based capital:
Tier 1 capital 11.26 12.03 13.82 14.03 13.53
Total capital 12.33 13.17 15.05 15.15 14.81
Leverage capital 8.48 8.81 9.71 9.15 8.62
Financial Condition at
Year-End:
Assets $7,901,260 $7,755,707 $7,168,540 6,882,167 6,768,951
Loans, net of allowance 5,127,115 4,927,621 4,446,806 4,245,011 4,022,070
Deposits 6,136,828 6,010,233 5,904,473 5,756,168 5,861,594
Shareholders' equity 655,982 652,708 702,787 646,794 599,867
(1) All per share amounts have been restated to reflect the 5 percent
stock dividend issued May 18, 2001, and all prior stock splits and
dividends.
(2) Share and earnings per share data for the year 1996 has not been
restated for the acquisition of Wayne Bancorp, Inc. ("Wayne") as the
issuance of capital stock in connection with the conversion from the
mutual to stock form of Wayne Savings Bank occurred on June 27, 1996.
Exhibit 99.2
Financial Statements and Supplementary Data
RESTATED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2000 1999
(in thousands, except for share data)
Assets
Cash and due from banks $239,105 $194,502
Federal funds sold 85,000 173,000
Investment securities held to maturity, fair value of $543,034 and
$524,682 in 2000 and 1999, respectively (Notes 3 and 11) 577,450 560,673
Investment securities available for sale (Notes 4 and 11) 1,626,086 1,644,167
Loans (Notes 5 and 11) 5,171,183 4,979,664
Loans held for sale (Note 5) 17,927 12,185
Total loans 5,189,110 4,991,849
Less: Allowance for loan losses (Note 6) (61,995) (64,228)
Net loans 5,127,115 4,927,621
Premises and equipment, net (Note 8) 91,215 90,783
Accrued interest receivable 49,870 43,773
Other assets (Notes 7, 9 and 13) 105,419 121,188
Total assets $7,901,260 $7,755,707
Liabilities
Deposits:
Non-interest bearing $1,344,802 $1,243,317
Interest bearing:
Savings 2,287,793 2,290,582
Time (Note 10) 2,504,233 2,476,334
Total deposits 6,136,828 6,010,233
Short-term borrowings (Note 11) 426,014 439,113
Long-term debt (Note 11) 591,808 564,881
Accrued expenses and other liabilities (Note 12) 90,628 88,772
Total liabilities 7,245,278 7,102,999
Commitments and contingencies (Note 14)
Shareholders' Equity (Notes 2, 12 and 15)
Preferred stock, no par value, authorized 30,000,000 shares;
none issued -- --
Common stock, no par value, authorized 113,953,711 shares;
Issued 74,792,815 shares in 2000 and 75,219,160 shares in
1999 32,015 32,220
Surplus 321,970 330,198
Retained earnings 317,855 339,617
Unallocated common stock held by employee benefit plan (775) (965)
Accumulated other comprehensive loss (2,307) (23,865)
668,758 677,205
Treasury stock, at cost (502,471 shares in 2000 and 927,750
shares in 1999) (12,776) (24,497)
Total shareholders' equity 655,982 652,708
Total liabilities and shareholders' equity $ 7,901,260 $7,755,707
See accompanying notes to restated consolidated financial statements.
statements.
RESTATED CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
2000 1999 1998
(in thousands, except for share data)
Interest Income
Interest and fees on loans (Note 5) $ 419,952 $ 374,321 $ 362,468
Interest and dividends on investment securities:
Taxable 126,988 122,523 111,195
Tax-exempt 11,602 11,922 12,928
Dividends 5,412 4,351 3,094
Interest on federal funds sold and other short-term investments 4,252 4,701 7,876
Total interest income 568,206 517,818 497,561
Interest Expense
Interest on deposits:
Savings deposits 57,470 49,170 53,515
Time deposits (Note 10) 133,156 120,531 131,156
Interest on short-term borrowings (Note 11) 26,598 16,394 15,054
Interest on long-term debt (Note 11) 35,424 22,697 8,806
Total interest expense 252,648 208,792 208,531
Net Interest Income 315,558 309,026 289,030
Provision for loan losses (Note 6) 10,755 11,035 14,070
Net Interest Income after Provision for Loan Losses 304,803 297,991 274,960
Non-Interest Income
Trust and investment services 3,563 2,414 1,813
Service charges on deposit accounts 18,180 15,864 15,297
Gains on securities transactions, net (Note 4) 355 2,625 1,480
Fees from loan servicing (Note 7) 10,902 8,387 7,382
Credit card fee income 8,403 8,655 10,153
Gains on sales of loans, net 2,227 2,491 4,863
Other 15,470 13,367 9,834
Total non-interest income 59,100 53,803 50,822
Non-Interest Expense
Salary expense (Note 12) 76,116 70,596 68,076
Employee benefit expense (Note 12) 18,037 17,406 16,267
FDIC insurance premiums 1,239 1,350 1,404
Net occupancy expense (Notes 8 and 14) 15,469 14,641 16,344
Furniture and equipment expense (Note 8) 10,731 9,299 9,943
Credit card expense 5,032 5,070 9,066
Amortization of intangible assets (Note 7) 7,725 5,369 5,780
Advertising 4,682 5,336 4,813
Merger-related charges (Note 2) -- 3,005 4,539
Other 32,108 32,647 33,865
Total non-interest expense 171,139 164,719 170,097
Income Before Income Taxes 192,764 187,075 155,685
Income tax expense (Note 13) 66,027 61,734 38,512
Net Income $ 126,737 $ 125,341 $ 117,173
Earnings Per Share:
Basic $ 1.61 $ 1.52 $ 1.41
Diluted 1.60 1.51 1.39
Weighted Average Number of Shares
Outstanding:
Basic 78,612,928 82,383,289 83,218,702
Diluted 79,235,570 83,162,607 84,361,995
See accompanying notes to restated consolidated financial
statements.
RESTATED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unallocated
Common Accumulated
Stock Held Other Total
Preferred Common Retained by Comprehensive Treasury Shareholders'
Employee
Stock Stock Surplus Earnings Benefit (Loss)Income Stock Equity
Plan
(in thousands)
Balance-December 31, 1997 $ -- $ 32,276 $ 341,214 $269,095 $ (1,604) $ 12,508 $ (6,695) $ 646,794
Comprehensive income:
Net income -- -- -- 117,173 -- -- -- 117,173
Other comprehensive income, net of
tax:
Unrealized gains on securities
available for sale, net of tax -- -- -- -- -- 2,040 --
of $1,232
Less reclassification adjustment
for gains included in net income,
net of tax of $(548) -- -- -- -- -- (932) --
Foreign currency translation
adjustment -- -- -- -- -- (509) --
Other comprehensive income -- -- -- -- -- 599 -- 599
Total comprehensive income -- -- -- -- -- -- -- 117,772
Cash dividends -- -- -- (61,056) -- -- -- (61,056)
Effect of stock incentive plan, net -- 56 (392) (850) -- -- 3,713 2,527
Common stock repurchased and retired -- (65) -- (349) -- -- -- (414)
Allocation of employee benefit plan
shares -- -- 381 -- 273 -- -- 654
Issuance of shares from treasury -- 89 1,455 (1,830) -- -- 6,520 6,234
Purchase of treasury stock -- -- -- -- -- -- (9,724) (9,724)
Balance-December 31, 1998 -- 32,356 342,658 322,183 (1,331) 13,107 (6,186) 702,787
Comprehensive income:
Net income -- -- -- 125,341 -- -- -- 125,341
Other comprehensive loss, net of tax:
Unrealized losses on securities
available for sale, net of tax of
$(24,122) -- -- -- -- -- (35,739) --
Less reclassification adjustment
for gains
included in net income, net of
tax of $(958) -- -- -- -- -- (1,667) --
Foreign currency translation
adjustment -- -- -- -- -- 434 --
Other comprehensive loss -- -- -- -- -- (36,972) -- (36,972)
Total comprehensive income -- -- -- -- -- -- -- 88,369
Cash dividends -- -- -- (68,694) -- -- -- (68,694)
Effect of stock incentive plan, net -- (8) (151) (1,522) -- -- 4,067 2,386
Stock dividend -- (128) (7,164) (36,057) -- -- 44,207 858
Allocation of employee benefit plan
shares -- -- 1,125 -- 366 -- 370 1,861
Issuance of shares from treasury -- -- (6,270) (1,634) -- -- 8,541 637
Purchase of treasury stock -- -- -- -- -- -- (75,496) (75,496)
Balance-December 31, 1999 -- 32,220 330,198 339,617 (965) (23,865) (24,497) 652,708
Comprehensive income:
Net income -- -- -- 126,737 -- -- -- 126,737
Other comprehensive income, net of
tax:
Unrealized gains on securities
available for sale, net of tax
of $15,396 -- -- -- -- -- 22,045 --
Less reclassification adjustment
for gains
included in net income, net of
tax of $(129) -- -- -- -- -- (226) --
Foreign currency translation
adjustment -- -- -- -- -- (261) --
Other comprehensive income -- -- -- -- -- 21,558 -- 21,558
Total comprehensive income -- -- -- -- -- -- -- 148,295
Cash dividends -- -- -- (71,407) -- -- -- (71,407)
Effect of stock incentive plan, net -- (205) (1,768) (2,969) -- -- 8,175 3,233
Stock dividend -- -- -- (73,008) -- -- 73,008 --
Allocation of employee benefit plan
shares -- -- 921 -- 190 -- 573 1,684
Issuance of shares from treasury -- -- (7,381) (1,115) -- -- 9,126 630
Purchase of treasury stock -- -- -- -- -- -- (79,161) (79,161)
Balance-December 31, 2000 -- $ 32,015 $321,970 $ 317,855 $ (775) $ (2,307) $ (12,776) $655,982
See accompanying notes to restated consolidated financial statements.
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2000 1999 1998
Cash flows from operating activities: (in thousands)
Net income $ 126,737 $ 125,341 $ 117,173
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 17,248 14,079 16,067
Amortization of compensation costs pursuant to
long-term stock incentive plan 1,532 1,091 1,036
Provision for loan losses 10,755 11,035 14,070
Net amortization of premiums and accretion of discounts 4,023 8,939 10,884
Net deferred income tax benefit (561) (341) (2,578)
Net gains on securities transactions (355) (2,625) (1,480)
Proceeds from sales of loans 40,758 76,113 181,020
Gain on sales of loans (2,227) (2,491) (4,863)
Originations of loans held for sale (44,273) (62,352) (182,961)
Proceeds from sale of premises and equipment 626 -- --
Gain on sale of premises and equipment (474) -- --
Net (increase)decrease in accrued interest receivable
and other assets (421) (18,581) 4,203
Net (decrease)increase in accrued expenses and other liabilities (472) 26,052 (2,514)
Net cash provided by operating activities 152,896 176,260 150,057
Cash flows from investing activities:
Purchases and originations of mortgage servicing rights (2,696) (20,419) (11,986)
Proceeds from sales of investment securities available for sale 10,761 50,332 132,524
Proceeds from maturing investment securities available for sale 328,544 576,423 595,446
Purchases of investment securities available for sale (294,605) (640,430) (766,705)
Purchases of investment securities held to maturity (93,995) (195,958) (162,139)
Proceeds from maturing investment securities held to maturity 76,259 104,370 125,683
Proceeds from sales of trading account securities -- 1,415 --
Net decrease(increase) in federal funds sold and other
short-term investments 88,000 (59,900) (1,975)
Net increase in loans made to customers (203,658) (503,131) (208,583)
Purchases of premises and equipment, net of sales (10,222) (9,834) (11,526)
Net cash used in investing activities (101,612) (697,132) (309,261)
Cash flows from financing activities:
Net increase in deposits 126,595 105,761 148,305
Net (decrease)increase in short-term borrowings (13,099) 172,213 16,105
Advances of long-term debt 80,000 402,000 120,000
Repayments of long-term debt (53,073) (50,068) (53,063)
Dividends paid to common shareholders (71,723) (66,801) (58,974)
Addition of common shares to treasury (79,161) (75,496) (9,724)
Common stock issued, net of cancellations 3,780 3,408 8,532
Net cash (used in) provided by financing activities (6,681) 491,017 171,181
Net increase(decrease) in cash and cash equivalents 44,603 (29,855) 11,977
Cash and cash equivalents at beginning of year 194,502 224,357 212,380
Cash and cash equivalents at end of year $ 239,105 $ 194,502 $ 224,357
Supplemental disclosure of cash flow information:
Cash paid during the year for interest on deposits
and borrowings $ 246,614 $ 208,904 $ 210,152
Cash paid during the year for federal and state income taxes 64,539 64,347 40,912
Transfer of securities from held to maturity to available for
sale -- 42,387 1,592
See accompanying notes to restated consolidated financial statements.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1)
Business
Valley National Bancorp ("Valley") is a bank holding company whose principal
wholly-owned subsidiary is Valley National Bank ("VNB"), a national banking
association providing a full range of commercial, retail and trust and
investment services through its branch and ATM network throughout northern
New Jersey and Manhattan. VNB also lends, through its consumer division
and SBA program, to borrowers covering territories outside of its branch
network. VNB is subject to intense competition from other financial services
companies and is subject to the regulation of certain federal and state
agencies and undergoes periodic examinations by certain regulatory authorities.
VNB has several wholly-owned subsidiaries which include a mortgage
servicing company, a company which holds, maintains and manages
investment assets for VNB, a subsidiary which owns and services auto loans,
a subsidiary which owns and services commercial mortgage loans, a title
insurance agency, asset management advisers which are SEC registered
investment advisors, an Edge Act Corporation which is the holding company for
a wholly-owned finance company located in Toronto, Canada, a subsidiary which
specializes in asset-based lending, and a real estate investment trust which
owns real estate related investments. Many of these subsidiaries transact
business with VNB as well as third parties.
Basis of Presentation
The restated consolidated financial statements of Valley include the
accounts of its principal commercial bank subsidiary, VNB and its wholly-
owned subsidiaries. All intercompany transactions and balances have
been eliminated. The restated consolidated financial statements give
retroactive effect to the merger of Valley National Bancorp and
Merchants New York Bancorp, Inc. Certain reclassifications have been
made in the restated consolidated financial statements for 1999 and 1998 to
conform to the classifications presented for 2000.
In preparing the restated consolidated financial statements, management
has made estimates and assumptions that effect the reported amounts of
assets and liabilities as of the date of the statements of condition and
results of operations for the periods indicated. Actual results could
differ significantly from those estimates.
Investment Securities
Investments are classified into three categories: held to maturity;
available for sale; and trading. Valley's investment portfolio consists of
each of these three categories.
Investment securities held to maturity, except for equity securities, are
carried at cost and adjusted for amortization of premiums and
accretion of discounts by using the interest method over the term of the
investment.
Management has identified those investment securities which may be sold prior
to maturity. These investment securities are classified as available for
sale in the accompanying consolidated statements of financial condition
and are recorded at fair value on an aggregate basis. Unrealized holding
gains and losses on such securities are excluded from earnings, but are
included as a component of accumulated other comprehensive income which is
included in shareholders' equity, net of deferred tax. Realized gains or
losses on the sale of investment securities available for sale are
recognized by the specific identification method and shown as a separate
component of non-interest income.
Trading securities are recorded at market value. Market value adjustments
resulting from unrealized gains (losses) on such securities are included in
non-interest income.
Loans and Loan Fees
Loan origination and commitment fees, net of related costs, are deferred
and amortized as an adjustment of loan yield over the estimated life of the
loans approximating the effective interest method.
Loans held for sale consist of residential mortgage loans and SBA loans,
and are carried at the lower of cost or estimated fair market value using the
aggregate method.
Interest income is not accrued on loans where interest or principal is 90
days or more past due or if in management's judgement the ultimate
collectibility of the interest is doubtful. Exceptions may be made if the loan
is sufficiently collateralized and in the process of collection. When a loan
is placed on non-accrual status, interest 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 becomes well secured and in the
process of collection and all past due amounts have been collected.
The value of an impaired loan is measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate,
or the fair value of the collateral if the loan is collateral dependent.
Smaller balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and installment loans, are
specifically excluded from the impaired loan portfolio. Valley has defined
the population of impaired loans to be all non-accrual loans and other loans
considered to be impaired as to principal and interest, consisting primarily
of commercial real estate loans. The impaired loan portfolio is primarily
collateral dependent. Impaired loans are individually assessed to determine
that each loan's carrying value is not in excess of the fair value of the
related collateral or the present value of the expected future cash flows.
Valley originates loans guaranteed by the SBA. The principal amount of
these loans is guaranteed between 75 percent and 80 percent, 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.
Valley's lending is primarily in northern New Jersey and Manhattan, with the
exception of an out-of-state auto lending program.
Allowance for Loan Losses
The allowance for 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 for loan losses is maintained at a level estimated to absorb
loan losses inherent in the loan portfolio as well as other credit risk
related charge-offs. The allowance is based on ongoing evaluations of the
probable estimated losses inherent in the loan portfolio. VNB's methodology
for evaluating the appropriateness of the allowance consists of several
significant elements, which include the allocated allowance, specific
allowances for identified problem loans and portfolio segments and the
unallocated allowance. The allowance also incorporates the results of
measuring impaired loans as called for in Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," and
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures."
VNB's allocated allowance is calculated by applying loss factors to
outstanding loans. The formula is based on the internal risk grade of
loans or pools of loans. Any change in the risk grade of performing and/or
non-performing loans affects the amount of the related allowance. Loss
factors are based on VNB's historical loss experience and may be adjusted
for significant circumstances that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date.
Management establishes an unallocated portion of the allowance to cover
inherent losses incurred within a given loan category which have not been
otherwise identified or measured on an individual basis. Such unallocated
allowance includes management's evaluation of local and national economic
and business conditions, portfolio concentrations, information risk,
operational risk, credit quality and delinquency trends. The unallocated
portion of the allowance reflects management's attempt to ensure that the
overall allowance reflects a margin for imprecision and the uncertainty that is
inherent in estimates of expected credit losses.
Premises and Equipment, Net
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 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
recorded prior to 1987 is being amortized on a straight-line basis over 25
years. Goodwill recorded in 2000 and 1999 is being amortized on a
straight-line basis over 10 years. Core deposit intangibles are amortized on
accelerated methods over the estimated lives of the assets. Goodwill and core
deposit intangibles are included in other assets.
Loan Servicing Rights
Loan servicing rights are generally recorded when purchased or originated
loans are sold, with servicing rights retained. The cost of each loan is
allocated between the servicing right and the loan (without the servicing
right) based on their relative fair values. Loan servicing rights, which
are classified in other assets, are amortized over the estimated net
servicing life and are evaluated on a quarterly basis for impairment based
on their fair value. The fair value is estimated using the present value of
expected future cash flows along with numerous assumptions including
servicing income, cost of servicing, discount rates, prepayment speeds,
and default rates. Impairment adjustments, if any, are recognized through the
use of a valuation allowance.
Stock-Based Compensation
Valley accounts for its stock option plan in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25"). In accordance with APB 25, no compensation expense is recognized
for stock options issued to employees since the options have an exercise
price equal to the market value of the common stock on the day of the grant.
Valley provides the fair market disclosure required by Statement of Financial
Accounting Standards ("SFAS") No. 123 "Accounting for Stock-based Compensation."
Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" established standards for
the reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. Valley's components of other comprehensive income
include unrealized gains (losses) on securities available for sale, net of
tax, and the foreign currency translation adjustment. Valley provides the
required disclosure in the Consolidated Statements of Changes in Shareholders'
Equity.
Earnings Per Share
For Valley, the numerator of both the Basic and Diluted EPS is equivalent
to net income. The weighted average number of shares outstanding used in
the denominator for Diluted EPS is increased over the denominator used for
Basic EPS by the effect of potentially dilutive common stock equivalents
utilizing the treasury stock method. For Valley, common stock equivalents
are common stock options outstanding.
All share and per share amounts have been restated to reflect the 5 percent
stock dividend issued May 18, 2001, and all prior stock dividends and splits.
The following table shows the calculation of both Basic and Diluted earnings
per share for the years ended December 31, 2000, 1999 and 1998.
Years ended December 31,
2000 1999 1998
(in thousands, except for share data)
Net Income $126,737 $125,341 $117,173
Basic weighted-average number of
shares outstanding 78,612,928 82,383,289 83,218,702
Plus: Common stock equivalents 622,642 779,318 1,143,293
Diluted weighted-average number of
shares outstanding 79,235,570 83,162,607 84,361,995
Earnings per share:
Basic $ 1.61 $ 1.52 $ 1.41
Diluted 1.60 1.51 1.39
At December 31, 2000 and 1999 there were 69 thousand and 286 thousand stock
options not included as common stock equivalents because the exercise prices
exceeded the average market value.
Treasury Stock
Treasury stock is recorded using the cost method and accordingly is presented
as an unallocated reduction of shareholders' equity.
Impact of Future Accounting Changes
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued by
the FASB in June 1998. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial condition at fair value.
Valley would have had to adopt SFAS No. 133 by January 1, 2000. However,
SFAS No. 137 extended the adoption of SFAS No. 133 to periods beginning after
June 15, 2000. In June of 2000, the FASB issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an Amendment of FASB Statement No. 133
and 137," which amends the accounting and reporting standards of SFAS
No. 133 for derivative instruments. Upon adoption, the provisions
of SFAS No. 133 must be applied prospectively. The adoption of SFAS
No. 133, SFAS No. 137 and SFAS No. 138 effective on January 1, 2001
did not have a material impact on the financial statements.
The FASB has issued Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 replaces
SFAS No. 125. SFAS No. 140 resolves certain implementation issues, but it
carries forward most of SFAS No. 125's provisions without change. SFAS No.
140 is effective for transfers occuring after March 31, 2001 and for
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Valley anticipates that the
adoption of SFAS No. 140 will not have a material impact on the financial
statements.
ACQUISITIONS (Note 2)
On January 19, 2001 Valley completed its merger with Merchants New York
Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New
York headquartered in Manhattan. Under the terms of the merger agreement,
each outstanding share of Merchants common stock was exchanged for 0.7634
shares of Valley common stock. As a result, a total of approximately 14
million shares of Valley common stock were exchanged (the exchange rate and
number of shares exchanged have not been restated for the 5 percent stock
dividend issued May 18, 2001). This merger added seven branches in Manhattan.
The transaction was accounted for utilizing the pooling-of-interests method
of accounting. The consolidated financial statements of Valley have been
restated to include Merchants for all periods presented. Separate results
of the combining companies for the years ended December 31, 2000, 1999 and 1998
are as follows:
Years ended December 31,
2000 1999 1998
(in thousands)
Net interest income after provision for possible loan losses:
Valley $ 251,967 $ 249,238 $ 230,990
Merchants 52,836 48,753 43,970
$ 304,803 $ 297,991 $ 274,960
Net Income:
Valley $ 106,773 $ 106,324 $ 101,271
Merchants 19,964 19,017 15,902
$ 126,737 $ 125,341 $ 117,173
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc.
("Hallmark"), a Fairfield, NJ based investment management firm
with $195 million of assets under management. Hallmark's purchase was a
stock merger with subsequent earn out payments. Hallmark's operations
will continue as a wholly-owned subsidiary of VNB. The transaction was
accounted for as a purchase and resulted in goodwill of approximately $1.2
million, as of December 31, 2000, which is being amortized over a 10 year
period.
On June 11, 1999, Valley acquired Ramapo Financial Corporation ("Ramapo"),
parent of The Ramapo Bank headquartered in Wayne, New Jersey. At the date of
acquisition, Ramapo had total assets of $344.0 million and deposits of $299.5
million, with eight branch offices. The transaction was accounted for using
the pooling-of-interests method of accounting and resulted in the issuance
of approximately 4.0 million shares of Valley common stock. Each share of
common stock of Ramapo was exchanged for 0.44625 shares of Valley common stock
(the exchange rate and number of shares exchanged have not been restated for
subsequent stock dividends). The consolidated financial statements of Valley
have been restated to include Ramapo for all periods presented.
During the second quarter of 1999, Valley recorded a merger-related charge
of $3.0 million related to the acquisition of Ramapo. On an after tax basis,
the charge totaled $2.2 million or $0.03 per diluted share. The charge
includes only identified direct and incremental costs associated with this
acquisition. Items included in the charge include the following: personnel
expenses which include severance payments and benefits for terminated
employees, principally, two senior executives of Ramapo; real estate
expenses related to the closing of a duplicate branch; professional fees
which include investment banking, accounting and legal fees; and other
expenses which include termination of data processing service contracts
and the write-off of supplies and other assets not considered useful in the
operation of the combined entity. The major components of the
merger-related charge, consisting of real estate dispositions, professional
fees, personnel expenses and other expenses, totaled $300 thousand, $1.1
million, $1.1 million and $500 thousand, respectively.
During the second quarter of 1999, Valley National Bank received approval and
a license from the New Jersey Department of Banking and Insurance to sell
title insurance through a separate subsidiary, known as Wayne Title, Inc.
After the close of the second quarter, Valley acquired the assets of an
agency office of Commonwealth Land Title Insurance Company for $784 thousand
and began to sell, as agent, both commercial and residential title insurance
policies. The transaction was accounted for as a purchase, at which time
goodwill of $728 thousand was recorded.
On July 30, 1999, Valley acquired New Century Asset Management, Inc., a
registered investment advisor and NJ-based money manager with approximately
$120 million of assets under management. At closing, Valley paid an initial
consideration of $640 thousand. The balance due will be paid on an earn-out
basis over a five-year period, based upon a pre-determined formula. New
Century will continue its operations as a wholly-owned subsidiary of Valley
National Bank. The transaction was accounted for as a purchase, at which time
goodwill of $1.3 million was recorded.
On October 16, 1998, Valley acquired Wayne Bancorp, Inc. ("Wayne"), parent of
Wayne Savings Bank, F.S.B., headquartered in Wayne, New Jersey. At the date
of acquisition, Wayne had total assets of $272.0 million and deposits of
$206.0 million, with six branch offices. The transaction was accounted for
using the pooling-of-interests method of accounting and resulted in the
issuance of approximately 2.4 million shares of Valley common stock. Each
share of common stock of Wayne was exchanged for 1.1 shares of Valley common
stock (the exchange rate and number of shares exchanged have not been restated
for subsequent stock dividends). The consolidated financial statements of
Valley have been restated to include Wayne for all periods presented.
During 1998, Valley recorded a merger-related charge of $4.5 million,
related to the acquisition of Wayne. On an after tax basis, the charge
totaled $3.2 million or $0.05 per diluted share. The charge includes only
identified direct and incremental costs associated with this acquisition.
Items included in the charge include the following: personnel expenses which
include severance payments and benefits for terminated employees, principally,
ten senior executives and directors at Wayne; real estate expenses related to
the closing of duplicate facilities, professional fees which include
investment banking, accounting and legal fees; and other expenses which
include termination of data processing service contracts and the write-off
of supplies and other assets not considered useful in the operation of the
combined entity. The major components of the merger-related charge are for
real estate dispositions, professional fees, personnel expenses and other
expenses total $1.5 million, $1.4 million, $1.0 million and $600 thousand,
respectively.
INVESTMENT SECURITIES HELD TO MATURITY (Note 3)
The amortized cost, gross unrealized gains and losses and fair value of
securities held to maturity at December 31, 2000 and 1999 were as follows:
December 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Obligations of states and political subdivisions $ 78,062 $ 1,611 $ (1) $ 79,672
Mortgage-backed securities 209,836 3,557 (369) 213,024
Other debt securities 249,414 -- (39,214) 210,200
Total debt securities 537,312 5,168 (39,584) 502,896
FRB & FHLB stock 40,138 -- -- 40,138
Total investment securities held to maturity $ 577,450 $ 5,168 $ (39,584) $ 543,034
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Obligations of states and political subdivisions $ 88,220 $ 665 $ (1,544) $ 87,341
Mortgage-backed securities 184,746 1,793 (3,722) 182,817
Other debt securities 250,286 -- (33,183) 217,103
Total debt securities 523,252 2,458 (38,449) 487,261
FRB & FHLB stock 37,421 -- -- 37,421
Total investment securities held to maturity $ 560,673 $ 2,458 $ (38,449) $ 524,682
The contractual maturities of investments in debt securities held to maturity
at December 31, 2000, are set forth in the following table:
December 31, 2000
Amortized Fair
Cost Value
(in thousands)
Due in one year $ 24,297 $ 24,442
Due after one year through five years 8,296 8,519
Due after five years through ten years 21,605 22,191
Due after ten years 273,278 234,720
327,476 289,872
Mortgage-backed securities 209,836 213,024
Total debt securities held to maturity $ 537,312 $ 502,896
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.
The weighted-average remaining life for mortgage-backed securities held to
maturity was 2.9 years at December 31, 2000, and 3.0 years at December 31, 1999.
In June 1999, in connection with the Ramapo acquisition, Valley reassessed
the classification of securities held in the Ramapo investment portfolio and
transferred $42.4 million of securities held to maturity to securities
available for sale to conform to Valley's investment objectives. In 1998, in
connection with the Wayne acquisition, Valley reassessed the
classification of securities held in the Wayne portfolio and transferred
$1.6 million of securities held to maturity to securities available for
sale to conform with Valley's investment objectives.
INVESTMENT SECURITIES AVAILABLE FOR SALE (Note 4)
The amortized cost, gross unrealized gains and losses and fair value of
securities available for sale at December 31, 2000 and 1999 were as follows:
December 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
U.S. Treasury securities and other government
agencies and corporations $ 151,535 $ 453 $ (1,367) $ 150,621
Obligations of states and political subdivisions 143,454 885 (395) 143,944
Mortgage-backed securities 1,283,741 10,790 (9,136) 1,285,395
Total debt securities 1,578,730 12,128 (10,898) 1,579,960
Equity securities 50,478 1,899 (6,251) 46,126
Total investment securities available for sale $1,629,208 $ 14,027 $ (17,149) $1,626,086
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
U.S. Treasury securities and other government
agencies and corporations $ 120,862 $ 2 $ (3,653) $ 117,211
Obligations of states and political subdivisions 163,388 670 (3,778) 160,280
Mortgage-backed securities 1,310,089 5,304 (33,654) 1,281,739
Other debt securities 39,885 -- -- 39,885
Total debt securities 1,634,224 5,976 (41,085) 1,599,115
Equity securities 50,151 1,252 (6,351) 45,052
Total investment securities available for sale $1,684,375 $ 7,228 $ (47,436) $1,644,167
The contractual maturities of investments in debt securities available
for sale at December 31, 2000, are set forth in the following table:
December 31, 2000
Amortized Fair
Cost Value
(in thousands)
Due in one year $ 53,915 $ 53,866
Due after one year through five years 152,117 151,323
Due after five years through ten years 68,698 69,035
Due after ten years 20,259 20,341
294,989 294,565
Mortgage-backed securities 1,283,741 1,285,395
Total debt securities available for sale $ 1,578,730 $ 1,579,960
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.
The weighted-average remaining life for mortgage-backed securities available
for sale at December 31, 2000 and 1999 was 5.2 years and 5.0 years,
respectively.
Gross gains (losses) realized on sales, maturities and other securities
transactions, related to securities available for sale, and (losses) gains on
trading account securities included in earnings for the years ended
December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
(in thousands)
Sales transactions:
Gross gains $ 355 $ 2,963 $ 785
Gross losses -- (138) (21)
355 2,825 764
Maturities and other securities transactions:
Gross gains -- -- 124
Gross losses -- (23) --
-- (23) 124
(Losses)gains on trading account securities -- (177) 592
Gains on securities transactions, net $ 355 $ 2,625 $ 1,480
Cash proceeds from sales transactions were $10.8 million, $51.7 million and
$132.5 million for the years ended 2000, 1999 and 1998, respectively. For
1999 cash proceeds include $1.4 million from sales of trading account
securities.
LOANS (Note 5)
The detail of the loan portfolio as of December 31, 2000 and 1999 was as
follows:
2000 1999
(in thousands)
Commercial $ 1,026,793 $ 929,673
Total commercial loans 1,026,793 929,673
Construction 160,932 123,531
Residential mortgage 1,301,851 1,250,551
Commercial mortgage 1,258,549 1,178,734
Total mortgage loans 2,721,332 2,552,816
Home equity 306,038 276,261
Credit card 94,293 92,097
Automobile 976,177 1,054,542
Other consumer 64,477 86,460
Total consumer loans 1,440,985 1,509,360
Total loans $ 5,189,110 $ 4,991,849
Included in the table above are loans held for sale in the amount of $17.9
million and $12.2 million at December 31, 2000 and 1999, respectively.
VNB grants loans in the ordinary course of business to its directors, executive
officers and their affiliates, on the same terms and under the same risk
conditions as those prevailing for comparable transactions with outside
borrowers.
The following table summarizes the change in the total amounts of loans and
advances to directors, executive officers, and their affiliates during the
year 2000:
2000
(in thousands)
Outstanding at beginning of year $ 33,856
New loans and advances 22,819
Repayments (20,091)
Outstanding at end of year $ 36,584
The outstanding balances of loans which are 90 days or more past due as to
principal or interest payments and still accruing, non-performing assets,
and troubled debt restructured loans at December 31, 2000 and 1999 were as
follows:
2000 1999
(in thousands)
Loans past due in excess of 90 days and still accruing $ 14,952 $ 12,194
Non-accrual loans $ 3,883 $ 3,910
Other real estate owned 129 2,256
Total non-performing assets $ 4,012 $ 6,166
Troubled debt restructured loans $ 949 $ 4,852
The amount of interest income that would have been recorded on non-accrual
loans in 2000, 1999 and 1998 had payments remained in accordance with the
original contractual terms approximated $458 thousand, $676 thousand and
$1.4 million, respectively, while the actual amount of interest income
recorded on these types of assets in 2000, 1999 and 1998 totaled $584
thousand, $1.3 million and $378 thousand, respectively, resulting in
(recovered) lost interest income of ($126) thousand and ($624) thousand and
$1.0 million, respectively.
At December 31, 2000, there were no commitments to lend additional funds to
borrowers whose loans were non-accrual, classified as troubled debt
restructured loans, or contractually past due in excess of 90 days and still
accruing interest.
The impaired loan portfolio is primarily collateral dependent. Impaired
loans and their related specific and general allocations to the allowance for
loan losses totaled $3.4 million and $949 thousand, respectively, at
December 31, 2000 and $13.9 million and $2.0 million, respectively, at
December 31, 1999. The average balance of impaired loans during 2000 and
1999 was approximately $11.8 million and $13.7 million, respectively. The
amount of cash basis interest income that was recognized on impaired loans
during 2000, 1999 and 1998 was $160 thousand, $616 thousand and $1.1 million,
respectively.
ALLOWANCE FOR LOAN LOSSES (Note 6)
Transactions recorded in the allowance for loan losses during 2000, 1999 and
1998 were as follows:
2000 1999 1998
(in thousands)
Balance at beginning of year $ 64,228 $ 62,606 $ 59,337
Provision charged to operating expense 10,755 11,035 14,070
74,983 73,641 73,407
Less net loan charge-offs:
Loans charged-off (16,893) (13,355) (15,195)
Less recoveries on loan charge-offs 3,905 3,942 4,394
Net loan charge-offs (12,988) (9,413) (10,801)
Balance at end of year $ 61,995 $ 64,228 $ 62,606
LOAN SERVICING (Note 7)
VNB Mortgage Services, Inc. ("MSI"), a subsidiary of VNB, is a servicer of
residential mortgage loan portfolios. MSI is compensated for loan
administrative services performed for mortgage servicing rights purchased
in the secondary market and originated by VNB. The aggregate principal
balances of mortgage loans serviced by MSI for others approximated $2.5
billion, $2.2 billion and $1.6 billion at December 31, 2000, 1999 and 1998,
respectively. The outstanding balance of loans serviced for others is not
included in the consolidated statements of financial condition.
VNB is a servicer of SBA loans, and is compensated for loan administrative
services performed for SBA loans originated and sold by VNB. VNB serviced a
total of $92.2 million, $89.0 million and $78.1 million of SBA loans at
December 31, 2000, 1999 and 1998, respectively, for third-party investors.
The unamortized costs associated with acquiring loan servicing rights are
included in other assets in the consolidated financial statements and are
being amortized over the estimated life of net servicing income.
The following table summarizes the change in loan servicing rights during the
years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
(in thousands)
Balance at beginning of year $ 36,809 $ 20,765 $ 13,514
Purchase and origination of loan
Servicing rights 2,696 20,419 11,986
Amortization expense (6,776) (4,375) (4,735)
Balance at end of year $ 32,729 $ 36,809 $ 20,765
Amortization expense is included in amortization of intangible assets.
PREMISES AND EQUIPMENT, NET (Note 8)
At December 31, 2000 and 1999, premises and equipment, net consisted of:
2000 1999
(in thousands)
Land $ 21,079 $ 20,204
Buildings 61,600 59,963
Leasehold improvements 22,201 21,593
Furniture and equipment 83,030 78,724
187,910 180,484
Less: Accumulated depreciation
and amortization (96,695) (89,701)
Total premises and equipment, net $ 91,215 $ 90,783
Depreciation and amortization included in non-interest expense for the
years ended December 31, 2000, 1999 and 1998 amounted to approximately $9.6
million, $8.7 million and $10.3 million, respectively.
OTHER ASSETS (Note 9)
At December 31, 2000 and 1999, other assets consisted of the following:
2000 1999
(in thousands)
Loan servicing rights $ 32,729 $ 36,809
Goodwill 5,249 4,393
Core deposit intangible 1,113 1,485
Other real estate owned 129 2,256
Deferred tax asset 22,984 37,697
Due from customers on acceptances outstanding 16,807 12,508
Other 26,408 26,040
Total other assets $ 105,419 $ 121,188
DEPOSITS (Note 10)
Included in time deposits at December 31, 2000 and 1999 are certificates of
deposit over $100 thousand of $1.0 billion and $928.1 million, respectively.
Interest expense on time deposits of $100 thousand or more totaled
approximately $60.2 million, $39.7 million and $32.1 million in 2000, 1999
and 1998, respectively.
The scheduled maturities of time deposits as of December 31, 2000 are as
follows:
(in thousands)
2001 $ 2,210,665
2002 159,987
2003 69,412
2004 8,890
2005 47,899
Thereafter 7,380
$ 2,504,233
BORROWED FUNDS (Note 11)
Short-term borrowings at December 31, 2000 and 1999 consisted of the following:
2000 1999
(in thousands)
Federal funds purchased $ -- $ 9,990
U.S. Treasury demand notes 7,992 20,000
Securities sold under agreement to repurchase 312,310 244,436
Treasury tax and loan 21,231 40,000
Bankers acceptances 24,481 19,639
FHLB advances 50,000 105,000
Line of credit 10,000 --
Other -- 48
Total short-term borrowings $ 426,014 $ 439,113
At December 31, 2000 and 1999, long-term debt consisted of the following:
2000 1999
(in thousands)
FHLB advances $ 461,500 $ 464,500
Securities sold under agreements to repurchase 130,000 100,000
Other 308 381
Total long-term borrowings $ 591,808 $ 564,881
The Federal Home Loan Bank (FHLB) advances had a weighted average interest
rate of 6.07 percent at December 31, 2000 and 6.00 percent at December 31,
1999. 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)
2001 $ 177,000
2002 17,000
2003 82,000
2004 102,000
2005 23,000
Thereafter 110,500
$ 511,500
Interest expense of $32.0 million, $25.5 million and $10.8 million was
recorded on FHLB advances during the years ended December 31, 2000, 1999, and
1998, respectively.
The securities sold under agreements to repurchase included in long-term
debt had a weighted average interest rate of 6.43 percent and 6.22 percent at
December 31, 2000 and 1999, respectively. $100 million of securities sold
under agreements to repurchase are due November, 2002 and $30 million are due
March, 2005. Interest expense of $8.0 million and $942 thousand was
recorded on this debt during the years ended December 31, 2000 and 1999,
respectively. There was no interest expense recorded during 1998.
At December 31, 2000, Valley maintained a floating rate revolving line
of credit in the amount of $35.0 million of which $10.0 million was
outstanding. Interest expense of $1.4 million was recorded on this debt
during the year ended December 31, 2000. This line is available for general
corporate purposes and expires June 15, 2001. Borrowings under this facility
are collateralized by investment securities of no less than 120 percent of
the loan balance.
The amortized cost of securities pledged to secure public deposits, treasury
tax and loan deposits, repurchase agreements, lines of credit, FHLB
advances and for other purposes required by law approximated $884.0 million
and $673.7 million at December 31, 2000 and 1999, respectively.
BENEFIT PLANS (Note 12)
Pension Plan
VNB has a non-contributory benefit plan covering substantially all of its
employees. The benefits are based upon years of credited service, primary
social security benefits and the employee's highest average compensation as
defined. It is VNB's funding policy to contribute annually the maximum amount
that can be deducted for federal income tax purposes. In addition, VNB has
a supplemental non-qualified, non-funded retirement plan which is designed to
supplement the pension plan for key officers.
The following table sets forth change in projected benefit obligation, change
in fair value of plan assets, funded status and amounts recognized in Valley's
financial statements for the pension plans at December 31, 2000 and 1999:
2000 1999
(in thousands)
Change in projected benefit obligation
Projected benefit obligation at beginning of year $ 30,847 $ 31,021
Service cost 1,850 2,018
Interest cost 2,293 2,148
Actuarial loss(gain) 900 (2,776)
Benefits paid (1,306) (1,564)
Projected benefit obligation at end of year $ 34,584 $ 30,847
Change in fair value of plan assets
Fair value of plan assets at beginning of year $ 35,315 $ 34,092
Actual return on plan assets 4,359 1,769
Employer contributions 1,171 1,018
Benefits paid (1,306) (1,564)
Fair value of plan assets at end of year $ 39,539 $ 35,315
Funded status $ 4,955 $ 4,468
Unrecognized net asset (1,258) (1,404)
Unrecognized prior service cost 151 240
Unrecognized net actuarial gain (6,473) (6,718)
Accrued benefit cost $ (2,625) $ (3,414)
Net periodic pension expense for 2000, 1999 and 1998 included the following
components:
2000 1999 1998
(in thousands)
Service cost $ 1,850 $ 2,018 $ 1,797
Interest cost 2,293 2,148 1,964
Expected return on plan assets (3,057) (2,838) (2,449)
Net amortization and deferral (146) (103) (147)
Recognized prior service cost 89 36 103
Recognized net gains (634) (590) (131)
Total net periodic pension expense $ 395 $ 671 $ 1,137
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 7.40 percent and 4.50 percent, respectively, for 2000 and
7.75 percent and 4.50 percent, respectively, for 1999. The expected
long-term rate of return on assets was 9.00 percent for 2000 and 9.50 percent
for 1999 and the weighted average discount rate used in computing pension cost
was 7.75 percent and 6.75 percent for 2000 and 1999, respectively. The
pension plan held 57,696 shares of Valley National Bancorp stock at both
December 31, 2000 and 1999.
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
as determined by the achievement of certain performance objectives. Amounts
charged to salaries expense during 2000, 1999 and 1998 were $5.3 million, $4.8
million and $4.2 million, respectively.
Savings Plan
Effective May 1, 1999, VNB's 401(k) Plan was amended to merge the Employee
Stock Ownership Plan ("ESOP") from the acquisition of Wayne into the VNB
401(k) Plan, creating a KSOP (a 401(k) plan with an employee stock ownership
feature). This plan covers eligible employees of VNB and its subsidiaries and
allows employees to contribute 1 percent to 15 percent of their salary, with
VNB matching a certain percentage of the employee contribution. Beginning
in May 1999, the VNB match is in shares of Valley stock. In 2000, VNB
matched employee contributions with 51,403 shares, of which 24,218 shares
were allocated from the former Wayne ESOP Plan and 28,055 shares were issued
from Treasury stock. In 1999, VNB matched employee contributions with 32,259
shares, of which 16,860 shares were allocated from the former Wayne ESOP Plan
and 15,399 shares were issued from treasury stock. VNB charged expense for
contributions to the plan, net of forfeitures, for 2000, 1999 and 1998
amounting to $1.2 million, $944 thousand and $746 thousand, respectively.
At December 31, 2000 the KSOP had 98,800 unallocated shares.
In 1999 and 1998, 33,723 shares and 26,699 shares, respectively, were
allocated to participants of the former Wayne ESOP Plan. ESOP expense for 1999
and 1998 was $865 thousand and $607 thousand, respectively. No shares were
allocated in 2000 to participants of the former Wayne ESOP Plan.
Stock Option Plan
At December 31, 2000, Valley had 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:
2000 1999 1998
(in thousands,
except for share data)
Net income
As reported $ 126,737 $ 125,341 $ 117,173
Proforma 125,488 124,296 116,148
Earnings per share
As reported:
Basic $ 1.61 $ 1.52 $ 1.41
Diluted 1.60 1.51 1.39
Proforma:
Basic $ 1.60 $ 1.51 $ 1.40
Diluted 1.58 1.49 1.38
Under the Employee Stock Option Plan, Valley may grant options to its
employees for up to 2.9 million shares of common stock in the form of stock
options, stock appreciation rights and restricted stock awards. The exercise
price of options equal 100 percent of the market price of Valley's stock on the
date of grant, and an option's maximum term is ten years. The options
granted under this plan are exercisable not earlier than one year after the
date of grant, expire not more than ten years after the date of the grant,
and are subject to a vesting schedule. Non-qualified options granted by
Midland Bancorporation, Inc. ("Midland") and assumed by Valley in its
acquisition of Midland 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 2000, 1999 and 1998: dividend yield of 3.12
percent for 2000, 3.71 percent for 1999 and 3.50 percent for 1998; weighted-
average risk-free interest rate of 5.11 percent for 2000, 6.44 percent for
1999 and 5.00 percent for 1998; and expected volatility of 24.5 percent for
2000, 21.8 percent for 1999 and 18.5 percent for 1998. The effects of applying
SFAS No. 123 on the proforma net income may not be representative of the
effects on proforma net income for future years.
A summary of the status of qualified and non-qualified stock options as of
December 31, 2000, 1999 and 1998 and changes during the years ended on
those dates is presented below:
1999
2000 1998
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
Outstanding at
beginning of year 2,150,769 $ 17 2,489,642 $ 13 2,580,125 $ 11
Granted 282,172 26 278,120 25 336,705 24
Exercised (305,669) 11 (593,217) 9 (403,502) 8
Forfeited (61,641) 23 (23,776) 22 (23,686) 19
Outstanding at
end of year 2,065,631 18 2,150,769 14 2,489,642 11
Options exercisable
at year-end 1,200,147 15 1,250,597 12 1,479,333 10
Weighted-average
fair value of
options granted
during the year $ 6.77 $ 5.81 $ 4.85
The following table summarizes information about stock options
outstanding at December 31, 2000:
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
$ 4-12 344,170 8.8 years $ 6 344,170 $ 6
12-19 681,004 5.0 15 531,115 15
19-24 537,778 7.5 23 265,602 23
24-29 502,679 9.1 26 59,260 25
4-29 2,065,631 7.3 18 1,200,147 15
During 1998, stock appreciation rights granted in tandem with stock options
were 12,010. There were 29,985, 53,087 and 53,087 stock
appreciation rights outstanding as of December 31, 2000, 1999 and 1998,
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, 2000, 1999 and 1998.
Restricted Stock Awards
2000 1999 1998
Outstanding at beginning of year 228,309 228,855 224,184
Granted 67,406 64,471 64,275
Vested (70,023) (61,506) (57,305)
Forfeited (7,812) (3,511) (2,299)
Outstanding at end of year 217,880 228,309 228,855
The amount of compensation costs related to restricted stock awards
included in salary expense in 2000, 1999 and 1998 amounted to $1.3 million,
$1.1 million and $1.0 million, respectively.
INCOME TAXES (Note 13)
Income tax expense (benefit) included in the financial statements consisted of
the following:
2000 1999 1998
(in thousands)
Income tax from operations:
Current:
Federal $ 64,669 $ 59,719 $ 37,060
State 1,919 2,356 4,030
66,588 62,075 41,090
Deferred:
Federal and State (561) (341) (2,578)
Total income tax expense $ 66,027 $ 61,734 $ 38,512
The tax effects of temporary differences that gave rise to deferred tax
assets and liabilities as of December 31, 2000 and 1999 are as follows:
2000 1999
(in thousands)
Deferred tax assets:
Allowance for loan losses $ 21,715 $ 22,270
Investment securities available for sale 1,400 16,667
State privilege year taxes -- 277
Non-accrual loan interest 182 317
Other 7,717 7,344
Total deferred tax assets 31,014 46,875
Deferred tax liabilities:
Tax over book depreciation 2,476 2,969
Purchase accounting adjustments 212 443
Unearned discount on investments 188 428
State privilege year taxes 34 --
Other 5,120 5,338
Total deferred tax liabilities 8,030 9,178
Net deferred tax assets $ 22,984 $ 37,697
A reconciliation between the reported income tax expense and the amount
computed by multiplying income before taxes by the statutory federal income
tax rate is as follows:
2000 1999 1998
(in thousands)
Tax at statutory federal income tax rate $ 67,467 $ 65,476 $ 54,490
Increases (decreases) resulted from:
Tax-exempt interest, net of interest
incurred to carry tax-exempts (4,183) (4,164) (4,413)
State income tax, net of federal tax benefit 1,690 2,190 2,368
Realignment of corporate entities -- (2,615) (15,406)
Other, net 1,053 847 1,473
Income tax expense $ 66,027 $ 61,734 $ 38,512
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)
2001 $ 7,337
2002 6,921
2003 6,566
2004 5,924
2005 4,575
Thereafter 38,057
Total lease commitments $ 69,380
Net occupancy expense for 2000, 1999 and 1998 included approximately $4.6
million, $3.8 million and $4.5 million, respectively, of rental expenses for
leased bank facilities.
Financial Instruments With Off-balance Sheet Risk
In the ordinary course of business of meeting the financial needs of its
customers, Valley, through its subsidiary VNB, is a party to various
financial instruments which are properly not reflected in the consolidated
financial statements. These financial instruments include standby and
commercial letters of credit, unused portions of lines of credit and
commitments to extend various types of credit. These instruments involve,
to varying degrees, elements of credit risk in excess of the amounts
recognized in the consolidated financial statements. The commitment or
contract amount of these instruments is an indicator of VNB's level of
involvement in each type of instrument as well as the exposure to credit
loss in the event of non-performance by the other party to the financial
instrument. VNB seeks to limit any exposure of credit loss by applying
the same credit underwriting standards, including credit review, interest
rates and collateral requirements or personal guarantees, as for
on-balance sheet lending facilities.
The following table provides a summary of financial instruments with
off-balance sheet risk at December 31, 2000 and 1999:
2000 1999
(in thousands)
Standby and commercial letters of credit $ 159,353 $ 150,631
Commitments under unused lines of credit-credit card 832,613 867,230
Commitments under unused lines of credit-other 587,804 549,405
Outstanding loan commitments 436,618 476,534
Foreign exchange contracts 2,137 570
Total financial instruments with off-balance
sheet risk $ 2,018,525 $ 2,044,370
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, 2000, VNB had commitments to sell residential mortgage loans
and SBA loans totaling $7.5 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 and Manhattan, except for automobile
loans, which are to customers from 12 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, 2000, Valley exceeded all
capital adequacy requirements to which it was subject.
The most recent notification received from the Federal Reserve Bank
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized Valley must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
Valley's actual capital amounts and ratios as of December 31, 2000 and 1999 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, 2000
Total Risk-based Capital $712,324 12.3% $462,041 8.0% $577,551 10.0%
Tier I Risk-based Capital 650,330 11.3 231,034 4.0 346,551 6.0
Tier I Leverage Capital 650,330 8.5 230,130 3.0 383,551 5.0
As of December 31, 1999
Total Risk-based Capital 733,184 13.2 445,327 8.0 556,659 10.0
Tier I Risk-based Capital 669,331 12.0 228,968 4.0 333,796 6.0
Tier I Leverage Capital 669,331 8.8 227,968 3.0 379,947 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
2001 without prior approval from the OCC equal to VNB's net profits for 2001 to
the date of such dividend declaration less $7.3 million of excess dividends
paid in the preceding two calendar years. In addition to dividends received
from its subsidiary bank, Valley can satisfy its cash requirements by
utilizing its own funds, cash and investments, as well as borrowed funds.
Preferred Stock
On February 12, 2000, the Board of Directors unanimously approved an
amendment to Valley's Certificate of Incorporation to authorize 30,000,000
shares of a new class of "blank check" preferred stock. The primary
purpose of the preferred stock is to maximize Valley's ability to expand
its capital base. The amendment was approved by the Valley shareholders on
April 6, 2000. At December 31, 2000, there were no shares of preferred stock
issued.
Shares of Common Stock
The following table summarizes the share transactions for the three years
ended December 31, 2000:
Shares in
Shares Issued Treasury
Balance, December 31, 1997 73,733,078 (356,082)
Effect of stock incentive plan, net 231,338 152,472
Purchase of treasury stock -- (220,125)
Retirement of treasury stock (128,317) --
Issuance of stock from treasury -- 187,000
Balance, December 31, 1998 73,836,099 (236,735)
Stock dividend (5 percent) 1,236,450 1,537,876
Effect of stock incentive plan, net 526,937 168,366
Purchase of treasury stock -- (2,397,257)
Retirement of treasury stock (380,326) --
Balance, December 31, 1999 75,219,160 (927,750)
Stock dividend (5 percent) -- 2,884,669
Effect of stock incentive plan, net (9,376) 311,380
Purchase of treasury stock -- (2,770,770)
Retirement of treasury stock (416,969) --
Balance, December 31, 2000 74,792,815 (502,471)
Treasury Stock
On May 23, 2000 Valley's Board of Directors authorized the repurchase of
up to 3,000,000 shares of the Company's outstanding common stock. As of
September 19, 2000 Valley had repurchased 571,070 shares of its common stock
under this repurchase program, which was rescinded in connection with the
signing of the definitive merger agreement with Merchants. This is in
addition to the 3,000,000 shares purchased pursuant to an authorization by
the Board of Directors in December 1999, the majority of which were used for
the stock dividend issued on May 16, 2000. Reacquired shares are held in
treasury and are expected to be used for employee benefit programs, stock
dividends and other corporate purposes.
On June 10, 1999 Valley's Board of Directors rescinded the stock repurchase
program it had announced on April 28, 1999 after 1.6 million shares of Valley
common stock had been repurchased. Approximately 1.5 million treasury
shares were issued in conjunction with the 5 percent dividend issued May 18,
1999. Rescinding the remaining authorization was undertaken in connection
with Valley's acquisition of Ramapo.
On May 26, 1998 Valley's Board of Directors rescinded its previously
announced stock repurchase program after 220,125 shares of Valley common
stock had been repurchased. Rescinding the remaining authorization was
undertaken in connection with Valley's acquisition of Wayne.
In addition, under an authorization by the Merchants Board to repurchase its
common stock, 416,969 shares were purchased during 2000 and 380,329 shares
were purchased in 1999.
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 16)
Quarters ended 2000
March 31 June 30 Sept 30 Dec 31
(in thousands, except for share data)
Interest income $ 137,688 $ 140,884 $ 144,116 $ 145,518
Interest expense 59,195 62,480 65,156 65,817
Net interest income 78,493 78,404 78,960 79,701
Provision for loan losses 2,450 2,875 2,580 2,850
Non-interest income 13,406 15,134 14,437 16,123
Non-interest expense 40,848 41,698 41,448 47,145
Income before income taxes 48,601 48,965 49,369 45,829
Income tax expense 16,607 16,348 16,601 16,471
Net income 31,994 32,617 32,768 29,358
Earnings per share:
Basic 0.40 0.42 0.42 0.38
Diluted 0.40 0.41 0.42 0.37
Cash dividends per share 0.24 0.25 0.25 0.25
Average shares outstanding:
Basic 80,159,333 78,535,472 77,950,692 77,788,652
Diluted 80,782,279 79,233,181 78,616,344 78,533,942
Quarters ended 1999
March 31 June 30 Sept 30 Dec 31
(in thousands, except for share data)
Interest income $124,200 $127,420 $131,001 $135,197
Interest expense 48,883 50,579 52,465 56,865
Net interest income 75,317 76,841 78,536 78,332
Provision for loan losses 2,200 2,175 2,935 3,725
Non-interest income 14,198 13,357 13,066 13,182
Non-interest expense 38,873 41,492 40,143 44,211
Income before income taxes 48,442 46,531 48,524 43,578
Income tax expense 17,743 16,171 15,744 12,076
Net income 30,699 30,360 32,780 31,502
Earnings per share:
Basic 0.37 0.37 0.40 0.39
Diluted 0.36 0.36 0.40 0.38
Cash dividends per share 0.22 0.24 0.24 0.24
Average shares outstanding:
Basic 83,350,791 82,591,796 81,832,107 81,747,094
Diluted 84,355,631 83,454,481 82,618,043 82,479,594
PARENT COMPANY INFORMATION (Note 17)
Condensed Statements of Financial Condition
December 31,
2000 1999
(in thousands)
Assets
Cash $ 2,641 $ 3,250
Interest bearing deposits with banks 22,125 36,127
Investment securities available for sale 44,752 55,909
Investment in subsidiary 606,136 574,387
Loan to subsidiary bank employee benefit plan 893 1,071
Other assets 5,523 4,195
Total assets $ 682,070 $ 674,939
Liabilities
Dividends payable to shareholders $ 15,605 $ 15,724
Short-term borrowings 10,000 --
Other liabilities 483 6,507
Total liabilities 26,088 22,231
Shareholders' Equity
Preferred stock -- --
Common stock 32,015 32,220
Surplus 321,970 330,198
Retained earnings 317,855 339,617
Unallocated common stock held by employee
benefit plan (775) (965)
Accumulated other comprehensive loss (2,307) (23,865)
668,758 677,205
Treasury stock, at cost (12,776) (24,497)
Total shareholders' equity 655,982 652,708
Total liabilities and shareholders' equity $ 682,070 $ 674,939
Condensed Statements of Income
Years ended December 31,
---------------------------------------------------------
2000 1999 1998
(in thousands)
Income
Dividends from subsidiary $ 116,893 $ 136,251 $ 98,304
Income from subsidiary 1,868 2,106 1,799
Gains on securities transactions, net 249 2,591 743
Other interest and dividends 2,432 2,741 683
121,442 143,689 101,529
Expenses 4,332 4,064 4,484
Income before income taxes and equity in
undistributed earnings of subsidiary 117,110 139,625 97,045
Income tax (benefit) expense (44) 1,580 118
Income before equity in undistributed
earnings of subsidiary 117,154 138,045 96,927
Equity in undistributed earnings of
subsidiary (excess dividends) 9,583 (12,704) 20,246
Net income $ 126,737 $ 125,341 $ 117,173
Condensed Statements of Cash Flows
Years ended December 31,
2000 1999 1998
Cash flows from operating activities: (in thousands)
Net income $ 126,737 $ 125,341 $ 117,173
Adjustments to reconcile net income to net cash provided by
operating activities:
Excess dividends of (equity in undistributed earnings) subsidiary (9,583) 12,704 (20,246)
Depreciation and amortization 380 365 479
Amortization of compensation costs pursuant to long-term
stock incentive plan 1,037 1,091 1,036
Net accretion of discounts (8) (49) (360)
Net gains on securities transactions (249) (2,591) (743)
Net (increase)decrease in other assets (1,707) 317 (342)
Net (decrease)increase in other liabilities (6,085) 5,200 (1,148)
Net cash provided by operating activities 110,522 142,378 95,849
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 24,413 8,735 16,918
Proceeds from maturing investment securities available for sale 3,197 81,146 15,000
Purchases of investment securities available for sale (15,817) (78,666) (71,809)
Proceeds from sales of trading account securities -- 1,415 --
Net decrease(increase) in short-term investments 14,002 (14,445) 1,422
Decrease in advance to subsidiary -- -- 3,409
Payment of employee benefit plan loan 178 179 178
Purchases of premises and equipment -- -- (141)
Net cash provided by (used in) investing activities 25,973 (1,636) (35,023)
Cash flows from financing activities:
Net increase in other borrowings 10,000 -- --
Purchases of common shares added to treasury (79,161) (75,496) (9,724)
Dividends paid to common shareholders (71,723) (66,801) (58,974)
Common stock issued, net of cancellations 3,780 3,408 8,531
Net cash used in financing activities (137,104) (138,889) (60,167)
Net (decrease)increase in cash and cash equivalents (609) 1,853 659
Cash and cash equivalents at beginning of year 3,250 1,397 738
Cash and cash equivalents at end of year $ 2,641 $ 3,250 $ 1,397
FAIR VALUES OF FINANCIAL INSTRUMENTS (Note 18)
Limitations: The fair value estimates made at December 31, 2000 and 1999
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 and
investment department) that were not considered in these estimates since
these activities are not financial instruments. In addition, the tax
implications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments and mortgage servicing rights:
Cash and short-term investments: For such short-term investments, the
carrying amount is considered to be a reasonable estimate of fair value.
Investment securities held to maturity 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.
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.
Long-term debt: 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, 2000 and 1999:
2000 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands)
Financial assets:
Cash and due from banks $ 239,105 $ 239,105 $ 194,502 $ 194,502
Federal funds sold 85,000 85,000 173,000 173,000
Investment securities held to maturity 577,450 543,034 560,673 524,682
Investment securities available for sale 1,626,086 1,626,086 1,644,167 1,644,167
Net loans 5,127,115 5,112,824 4,927,621 4,870,916
Financial liabilities:
Deposits with no stated maturity 3,632,595 3,632,595 3,533,899 3,533,899
Deposits with stated maturities 2,504,233 2,506,712 2,476,334 2,476,900
Short-term borrowings 426,014 426,014 439,113 439,113
Long-term debt 591,808 593,939 564,881 548,043
The estimated fair value of financial instruments with off-balance sheet
risk, consisting of unamortized fee income at December 31, 2000 and 1999 is
not material.
BUSINESS SEGMENTS (Note 19)
VNB has four major business segments it monitors and reports on to manage its
business operations. These segments are consumer lending, commercial
lending, investment portfolio and corporate and other adjustments. Lines of
business and actual structure of operations determine each segment. Each is
reviewed routinely for its asset growth, contribution to pretax net income
and return on assets. Expenses related to the branch network, all other
components of retail banking, along with the back office departments
of the bank are allocated from the corporate and other adjustments segment
to each of the other three business segments. The financial reporting for
each segment contains allocations and reporting in line with VNB's operations,
which may not necessarily be compared to any other financial institution. The
accounting for each segment includes internal accounting policies designed to
measure consistent and reasonable financial reporting.
Consumer lending delivers loan and banking products and services mainly to
individuals and small businesses through its branches, ATM machines, PC
banking and sales, service and collection force within each lending
department. The products and services include residential mortgages, home
equity loans, automobile loans, credit card loans, trust and investment
services and mortgage servicing for investors. Automobile lending is
generally available throughout New Jersey, but is also currently available
in twelve states and Canada as part of a referral program with State Farm
Insurance Company which will phase out by the end of 2001.
The commercial lending division provides loan products and services to
small and medium commercial establishments throughout northern New Jersey
and Manhattan. These include lines of credit, term loans, letters of
credit, asset-based lending, construction, development and permanent real
estate financing for owner occupied and leased properties and Small
Business Administration ("SBA") loans. The SBA loans are offered through a
sales force covering New Jersey and a number of surrounding states and
territories. The commercial lending division serves numerous businesses
through departments organized into product or specific geographic divisions.
The investment portfolio segment handles the management of the investment
portfolio, asset/liability management and government banking for VNB. The
objectives of this department are production of income and liquidity through
the investment of VNB's funds. The bank purchases and holds a mix of bonds,
notes, U.S. and other governmental securities and other investments.
The corporate and other adjustments segment represents assets and income and
expense items not directly attributable to a specific segment.
The following table represents the financial data for the four business
segments for the years ended 2000, 1999 and 1998.
Year ended December 31, 2000
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Portfolio Adjustments Total
(in thousands)
Average interest-earning assets $ 2,786,273 $ 2,314,357 $ 2,217,861 $ -- $ 7,318,491
Interest income $ 216,502 $ 206,539 $ 150,767 $ (5,602) $ 568,206
Interest expense 96,187 79,896 76,565 -- 252,648
Net interest income (loss) 120,315 126,643 74,202 (5,602) 315,558
Provision for loan losses 4,481 6,274 -- -- 10,755
Net interest income (loss) after
provision for loan losses 115,834 120,369 74,202 (5,602) 304,803
Non-interest income 13,704 7,510 562 37,324 59,100
Non-interest expense 24,201 18,271 347 128,320 171,139
Internal expense transfer 34,643 28,776 27,576 (90,995) --
Income (loss)before income taxes $ 70,694 $ 80,832 $ 46,841 $ (5,603) $ 192,764
Return on average interest-
bearing assets (pre-tax) 2.54% 3.49% 2.11% -- 2.63%
Year ended December 31, 1999
(in thousands)
Corporate
Consumer Commercial Investment And other
Lending Lending Portfolio Adjustments Total
Average interest-earning assets $ 2,696,100 $ 2,099,038 $ 2,235,093 $ -- $ 7,030,231
Interest income $ 199,484 $ 177,672 $ 146,182 $ (5,520) $ 517,818
Interest expense 80,072 62,340 66,380 -- 208,792
Net interest income (loss) 119,412 115,332 79,802 (5,520) 309,026
Provision for loan losses 7,826 3,209 -- -- 11,035
Net interest income (loss) after
provision for loan losses 111,586 112,123 79,802 (5,520) 297,991
Non-interest income 13,992 6,821 121 32,869 53,803
Non-interest expense 27,019 17,176 328 120,196 164,719
Internal expense transfer 33,490 26,073 27,764 (87,327) --
Income (loss)before income taxes $ 65,069 $ 75,695 $ 51,831 $ (5,520) $ 187,075
Return on average interest-
bearing assets (pre-tax) 2.41% 3.61% 2.32% -- 2.66%
Year ended December 31, 1998
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Portfolio Adjustments Total
Average interest-earning assets $ 2,443,388 $ 1,923,623 $ 2,183,738 $ 8,034 $ 6,558,783
Interest income $ 192,830 $ 166,730 $ 146,765 $ (8,764) $ 497,561
Interest expense 77,686 61,160 69,430 255 208,531
Net interest income (loss) 115,144 105,570 77,335 (9,019) 289,030
Provision for loan losses 10,586 3,364 -- 120 14,070
Net interest income (loss) after
provision for loan losses 104,558 102,206 77,335 (9,139) 274,960
Non-interest income 16,310 7,761 81 26,670 50,822
Non-interest expense 29,973 16,315 316 123,493 170,097
Internal expense transfer 36,070 28,397 32,237 (96,704) --
Income (loss)before income taxes $ 54,825 $ 65,255 $ 44,863 $ (9,258) $ 155,685
Return on average interest-
bearing assets (pre-tax) 2.24% 3.39% 2.05% -- 2.37%
INDEPENDENT AUDITORS REPORT
KPMG LLP
Certified Public Accountants
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
The Board of Directors and Shareholders
Valley National Bancorp:
We have audited the accompanying restated consolidated statements of financial
condition of Valley National Bancorp and subsidiaries as of December 31,
2000 and 1999, and the related restated consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2000. These restated consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these restated consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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.
The restated consolidated financial statements give retroactive effect to
the merger of Valley National Bancorp and Merchants New York Bancorp, Inc. on
January 19, 2001, which has been accounted for as a pooling of interests as
described in Note 2 to the restated consolidated financial statements.
Accounting principles generally accepted in the United States of America
proscribe giving effect to a consummated business combination accounted for
by the pooling-of-interests method in financial statements that do not
include the date of consummation. These restated financial statements do
not extend through the date of consummation.
In our opinion, the restated 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, 2000 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
September 14, 2001
Exhibit 99.3
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 restated consolidated financial statements and statistical data
presented in this document.
Cautionary Statement Concerning Forward-Looking Statements
This Form 8-K, both in the MD & A and elsewhere, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are not historical facts and include expressions
about management's confidence and strategies and management's expectations
about new and existing programs and products, relationships, opportunities,
technology and market conditions. These statements may be identified by an
"asterisk" (*) or such forward-looking terminology as "expect," "look,"
"believe," "anticipate," "may," "will," or similar statements or variations of
such terms. Such forward-looking statements involve certain risks and
uncertainties. These include, but are not limited to the direction of the
economy in New Jersey and New York especially as it has been affected by recent
developments, the direction of interest rates, continued levels of loan
quality and origination volume, continued relationships with major
customers including sources for loans, as well as the effects of general
economic conditions and legal and regulatory barriers and structure.
Actual results may differ materially from such forward-looking statements.
Valley assumes no obligation for updating any such forward-looking statement
at any time.
Recent Developments
On January 19, 2001 Valley completed its merger with Merchants New York
Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York
headquartered in Manhattan. Under the terms of the merger agreement, each
outstanding share of Merchants common stock was exchanged for 0.7634 shares of
Valley common stock. As a result, a total of approximately 14 million
shares of Valley common stock were exchanged (the exchange rate and number
of shares exchanged have not been restated for the 5 percent stock dividend
issued May 18, 2001). This merger added seven branches in Manhattan.
The transaction was accounted for utilizing the pooling-of-interest
method of accounting. The consolidated financial statements of Valley have
been restated to include Merchants for all periods presented.
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc.
("Hallmark"), a Fairfield, NJ-based investment management firm with $195
million of assets under management. Hallmark's purchase was a stock
merger with subsequent earn-out payments. Hallmark's operations are
continuing as a wholly-owned subsidiary at VNB. The transaction was
accounted for as a purchase and resulted in goodwill of approximately $1.2
million at December 31, 2000 which is being amortized over a 10 year period.
During August 2000, Valley entered into a contract to sell its ShopRite
credit card portfolio to American Express. The transaction closed and
was recorded during the first quarter of 2001, with a balance of
approximately $65.4 million of credit card receivables sold. This
transaction will reduce both credit card fee income and related credit card
expense during 2001.*
For many years, Valley National Bank has maintained an automobile loan
program with the State Farm Insurance Company. While the loans generated by
this program have been important to Valley, recent changes in market
conditions for automobile lending have reduced the volume and profitability
of the program relative to other loans and investments available to the bank.
As a result of the expansion of State Farm's banking activities, Valley
expects to phase out the origination of new loans under this program
during 2001.* All loans originated by Valley during the program will remain
under the bank's ownership, and Valley expects the portfolio to amortize in
its normal course.* As of December 31, 2000, this portfolio represented 7.9
percent of Valley's interest earning assets and the amount of the portfolio
had decreased by 12.3 percent during the last twelve-month period.
The gross yield of the portfolio for the year 2000 was 8.2 percent,
prior to marketing payments to an affiliate of the insurance company,
loan losses and all costs associated with originating and
maintaining the portfolio. Management anticipates that the phasing out of
this program should not have a material
adverse effect on future net income.*
Earnings Summary
Net income was $126.7 million, or $1.60 per diluted share in 2000 compared
with $125.3 million, or $1.51 per diluted share, in 1999 (2000 earnings
per share amounts have been restated to give effect to the 5 percent stock
dividend issued May 18, 2001). Return on average assets for 2000 was 1.66
percent compared with 1.70 percent in 1999, while the return on average
equity rose to 20.24 percent in 2000 compared with 18.30 percent in 1999.
Net income for 2000 was negatively impacted as a result of increased interest
rates, which contributed to higher funding costs and narrower margins. In
addition, a stock repurchase plan throughout the fourth quarter of 1999 and
much of 2000 utilized approximately $112.0 million of cash to acquire
Valley common stock. Net interest income and net income would have been
higher if these funds were invested in interest earning assets.
Net Interest Income
Net interest income continues to be the largest source of Valley's
operating income. Net interest income on a tax equivalent basis was $322.4
million for 2000 compared with $316.0 million for 1999. Higher average
balances of total interest earning assets, primarily loans, combined with
higher average interest rates for these interest earning assets were recorded
during 2000. For 2000 total interest bearing liabilities increased as well
as the interest rates associated with these liabilities compared to 1999.
Net interest income was also negatively impacted by the increase in the
average balance and the rate associated with short-term borrowings and
long-term debt and the use of funds for the repurchase of Valley common stock.
The net interest margin decreased to 4.40 percent for 2000 compared with 4.49
percent for 1999. While loans have been growing, competition for loans has
caused rates on new loans and total interest earning assets to increase
at a slower pace than rates on interest bearing liabilities.
Average interest earning assets increased $288.3 million or 4.1 percent in
2000 over the 1999 amount. This was mainly the result of the increase in
average balance of loans of $383.0 million or 8.2 percent offset by the
decrease in average balance of taxable investments of $61.7 million or 3.1
percent. Included in taxable investments is Valley's portfolio of trust
preferred securities of $249.0 million, at December 31, 2000. Valley
purchased these securities in the latter part of the fourth quarter of 1998
through early second quarter of 1999 as part of a leverage strategy to
increase interest earning assets and net interest income. These securities
were funded by borrowings from the Federal Home Loan Bank ("FHLB") which are
included in long-term debt.
Average interest bearing liabilities for 2000 increased $258.3 million
or 4.8 percent from 1999. Average demand deposits increased by $79.5
million or 6.8 percent over 1999 balances. Average savings deposits
decreased $15.7 million or 0.7 percent and average time deposits decreased
$33.2 million or 1.4 percent from 1999. Average short-term borrowings
increased $111.7 million or 34.8 percent over 1999 balances. Average
long-term debt, which includes primarily FHLB advances, increased $195.4
million, or 50.4 percent. The increase in long-term debt can be attributed to
the leverage strategy discussed above.
Average interest rates, in all categories of interest earning assets, increased
during 2000 compared to 1999. The average interest rate for loans increased 30
basis points to 8.30 percent. Average interest rates on total interest earning
assets increased 40 basis points to 7.86 percent. Average interest rates also
increased on total interest bearing liabilities by 59 basis points to 4.43
percent from 3.84 percent. Average interest rates on deposits increased by 48
basis points to 4.07 percent. The decline in the net interest margin from
4.49 percent in 1999 to 4.40 percent in 2000 resulted from a smaller increase
in net interest income in relationship to the growth in average interest
earning assets.
The following table reflects the components of net interest income for
each of the three years ended December 31, 2000, 1999 and 1998.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2000 1999 1998
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(in thousands)
Assets
Interest earning assets
Loans (1)(2) $ 5,065,852 $ 420,500 8.30% $ 4,682,882 $374,829 8.00% $ 4,359,876 $363,050 8.33%
Taxable investments (3) 1,939,191 132,400 6.83 2,000,861 126,858 6.34 1,786,008 114,289 6.40
Tax-exempt
investments(1)(3) 244,833 17,851 7.29 252,632 18,370 7.27 266,838 19,881 7.45
Federal funds sold and
other short-term
investments 68,615 4,252 6.20 93,856 4,701 5.01 146,061 7,876 5.39
Total interest earning
assets $ 7,318,491 $ 575,003 7.86 7,030,231 $524,758 7.46 6,558,783 $505,096 7.70
Allowance for
loan losses (65,706) (63,505) (60,863)
Cash and due from
banks 187,625 194,104 186,349
Other assets 217,160 201,110 196,667
Unrealized (loss) gain
on securities available
for sale (36,774) (2,614) 17,190
Total assets $ 7,620,796 $ 7,359,326 $ 6,898,126
Liabilities and
Shareholders' Equity
Interest bearing
liabilities
Savings deposits $ 2,260,379 $ 57,470 2.54% $ 2,276,031 $49,170 2.16% $ 2,201,420 $ 53,515 2.43%
Time deposits 2,423,099 133,156 5.50 2,456,289 120,531 4.91 2,466,669 131,156 5.32
Total interest
bearing deposits 4,683,478 190,626 4.07 4,732,320 169,701 3.59 4,668,089 184,671 3.96
Short-term borrowing 432,849 26,598 6.14 321,144 16,394 5.10 275,580 15,054 5.46
Long-term debt 582,980 35,424 6.08 387,571 22,697 5.86 142,087 8,806 6.20
Total interest bearing
liabilities 5,699,307 $252,648 4.43 5,441,035 $208,792 3.84 5,085,756 $ 208,531 4.10
Demand deposits 1,254,103 1,174,621 1,083,794
Other liabilities 41,190 58,657 67,500
Shareholders' equity 626,196 685,013 661,076
Total liabilities and
shareholders' equity $7,620,796 $ 7,359,326 $ 6,898,126
Net interest income
(tax equivalent basis) 322,355 315,966 296,565
Tax equivalent
adjustment (6,797) (6,940) (7,535)
Net interest income $ 315,558 $309,026 $289,030
Net interest rate
differential 3.43% 3.62% 3.60%
Net interest margin (4) 4.40% 4.49% 4.52%
(1 ) Interest income is presented on a tax equivalent basis using a 35 percent
tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is
based on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of earning
assets.
The following table demonstrates the relative impact on net interest income of
changes in volume of interest earning assets and interest bearing liabilities
and changes in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2000 Compared to 1999 1999 Compared to 1998
Increase(Decrease)(2) Increase(Decrease)(2)
Interest Volume Rate Interest Volume Rate
(in thousands)
Interest income:
Loans (1) $ 45,671 $ 31,435 $ 14,236 $ 11,779 $ 26,212 $ (14,433)
Taxable investments 5,542 (3,996) 9,538 12,569 13,631 (1,062)
Tax-exempt investments(1) (519) (569) 50 (1,511) (1,041) (470)
Federal funds sold and
other short-term
investments (449) (1,424) 975 (3,175) (2,648) (527)
50,245 25,446 24,799 19,662 36,154 (16,492)
Interest expense:
Savings deposits 8,300 (340) 8,640 (4,345) 1,767 (6,112)
Time deposits 12,625 (1,648) 14,273 (10,625) (550) (10,075)
Short-term borrowings 10,204 6,435 3,769 1,340 2,372 (1,032)
Long-term debt 12,727 11,844 883 13,891 14,402 (511)
43,856 16,291 27,565 261 17,991 (17,730)
Net interest income $ 6,389 $ 9,155 $ (2,766) $ 19,401 $ 18,163 $ 1,238
(tax equivalent basis)
(1) Interest income is adjusted to a tax equivalent basis using a 35 percent
tax rate.
(2) Variances resulting from a combination of changes in volume and rates
are allocated to the categories in proportion to the absolute dollar
amounts of the change in each category.
Non-Interest Income
The following table presents the components of non-interest income for the
years ended December 31, 2000, 1999 and 1998.
NON-INTEREST INCOME
Years ended December 31,
2000 1999 1998
(in thousands)
Trust and investment services $ 3,563 $ 2,414 $ 1,813
Service charges on deposit accounts 18,180 15,864 15,297
Gains on securities transactions, net 355 2,625 1,480
Fees from loan servicing 10,902 8,387 7,382
Credit card fee income 8,403 8,655 10,153
Gains on sales of loans, net 2,227 2,491 4,863
Other 15,470 13,367 9,834
Total non-interest income $ 59,100 $ 53,803 $ 50,822
Non-interest income continues to represent a considerable source of
income for Valley. Excluding gains on securities transactions, total
non-interest income amounted to $58.7 million for 2000 compared with $51.2
million for 1999.
Trust and investment services includes income from trust operations,
brokerage commissions, and asset management fees. On July 6, 2000, Valley
acquired Hallmark Capital Management, Inc. ("Hallmark"), a
Fairfield, NJ-based investment management firm with $195 million of assets
under management. Hallmark's purchase was a stock acquisition with subsequent
earn-out payments over three years. Hallmark's operations are continuing as a
wholly-owned subsidiary of VNB. The transaction was accounted for as a
purchase and resulted in goodwill of approximately $1.2 million at December
31, 2000. Hallmark contributed additional fee income to the operations of
Valley of $717 thousand in 2000 which is included in trust and investment
services.
On July 30, 1999, VNB acquired New Century Asset Management, Inc.
("New Century"), a NJ-based money manager with approximately $120 million of
assets under management. At closing, Valley paid an initial consideration of
$640 thousand. The balance due will be paid on an earn-out basis over a
five-year period, based upon a pre-determined formula. New Century is
continuing its operation as a wholly owned subsidiary of VNB. The
transaction was accounted for as a purchase and resulted in goodwill of $1.3
million. New Century contributed additional fee income to the operations of
Valley of $881 thousand in 2000 and $326 thousand in 1999 which is included in
trust and investment services.
Service charges on deposit accounts increased $2.3 million or 14.6 percent
from $15.9 million for the year ended December 31, 1999 to $18.2 million in
2000. A majority of this increase is due to the implementation of new
service fees and increased emphasis placed on collection efforts.
Included in fees from loan servicing are fees for servicing residential
mortgage loans and SBA loans. Fees from loan servicing increased by 30.0
percent from $8.4 million for 1999 to $10.9 million for 2000 due to an
increase in the size of the servicing portfolio. The increase in the
servicing portfolio was due to the acquisition of servicing of several
residential mortgage portfolios at the end of 1999 with an unpaid principal
balance of approximately $668.2 million, the origination of new loans by
VNB and their subsequent sale with servicing retained, offset by principal
paydowns and prepayments. The aggregate principal balances of mortgage loans
serviced by VNB Mortgage Services, Inc. ("MSI") for others approximated $2.5
billion, $2.2 billion and $1.6 billion at December 31, 2000, 1999 and 1998,
respectively.
Included in credit card fee income is fee income from both the co-branded
ShopRite credit card portfolio and Valley's own credit card portfolio.
During August 2000, Valley entered into a contract to sell its co-branded
ShopRite credit card portfolio to American Express. The transaction
closed and was recorded during the first quarter of 2001. This transaction
is expected to reduce both credit card fee income and related credit card
expense during 2001.*
Gains on the sales of loans were $2.2 million in 2000 compared to $2.5
million in 1999. Gains are recorded primarily from the sale of SBA loans
into the secondary market. The decrease of $264 thousand resulted from a
decline in the volume of SBA loans being sold by Valley into the secondary
market during 2000.
Other non-interest income increased $2.1 million to $15.5 million in 2000
as compared to 1999. This increase is primarily attributed to an increase
of commission revenues from the sale of title insurance policies from a title
insurance business agency acquired by VNB in the second quarter of 1999. VNB
received approval and a license from the New Jersey Department of Banking and
Insurance to sell title insurance through a separate subsidiary, known as
Wayne Title, Inc. The increase is also attributed to the gain recorded on the
sale of two bank buildings owned by Valley.
Non-Interest Expense
The following table presents the components of non-interest expense for the
years ended December 31, 2000, 1999 and 1998.
NON-INTEREST EXPENSE
Years ended December 31,
---------------------------------------------------------
2000 1999 1998
(in thousands)
Salary expense $ 76,116 $ 70,596 $ 68,076
Employee benefit expense 18,037 17,406 16,267
FDIC insurance premiums 1,239 1,350 1,404
Net occupancy expense 15,469 14,641 16,344
Furniture and equipment expense 10,731 9,299 9,943
Credit card expense 5,032 5,070 9,066
Amortization of intangible assets 7,725 5,369 5,780
Advertising 4,682 5,336 4,813
Merger-related charges -- 3,005 4,539
Other 32,108 32,647 33,865
Total non-interest expense $ 171,139 $ 164,719 $ 170,097
Non-interest expense totaled $171.1 million for 2000, an increase of $9.4
million or 5.8 percent from the 1999 level, excluding merger-related charges.
The largest components of non-interest expense are salaries and employee
benefit expense which totaled $94.2 million in 2000 compared to $88.0
million in 1999. At December 31, 2000, full-time equivalent staff was 2,087
compared to 2,101 at the end of 1999. The acquisition of three companies,
increases in sales-related incentives, and a tight labor market
resulted in a higher salary expense in 2000 over 1999.
The efficiency ratio measures a bank's gross operating expense as a percentage
of fully-taxable equivalent net interest income and other non-interest income
without taking into account security gains and losses and other non-recurring
items. Valley's efficiency ratio for the year ended December 31, 2000 was
45.2 percent, one of the lowest in the industry, compared with an efficiency
ratio for 1999 of 43.9 percent. Valley strives to control its efficiency
ratio and expenses as a means of producing increased earnings for its
shareholders.
Both net occupancy expense and furniture and equipment expense increased
during 2000 in comparison to 1999. The increase in these expenses can be
attributed to an overall increase in the cost of operating bank facilities.
Credit card expense includes cardmember rebates, processing expenses and
fraud losses for both the co-branded ShopRite credit card portfolio and
Valley's own credit card portfolio. During August 2000, Valley entered into
a contract to sell its ShopRite credit card portfolio to American Express.
The transaction closed and was recorded during the first quarter of 2001. This
transaction is expected to reduce both credit card fee income and related
credit card expense.*
Amortization of intangible assets was $7.7 million in 2000 compared with
$5.4 million in 1999, representing an increase of $2.4 million or 43.9
percent. The majority of this expense resulted from the amortization of
residential mortgage servicing rights totaling $5.9 million during 2000,
compared with $3.6 million for 1999. The increased amortization is mainly
the result of portfolio acquisitions during the latter part of 1999. An
impairment analysis is completed quarterly to determine the adequacy of
the mortgage servicing asset valuation allowance.
During 1999, Valley recorded merger-related charges of $3.0 million related
to the acquisition of Ramapo Financial Corporation ("Ramapo"). The major
components of merger-related charges, consisting of real estate dispositions,
professional fees, personnel expenses and other expenses totalled $300
thousand, $1.1 million, $1.1 million and $500 thousand, respectively. All
amounts expensed as merger-related charges were paid during 1999 with the
exception of contracts which will be paid over their remaining
terms.
The significant components of other non-interest expense include data
processing, professional fees, postage, telephone and stationery expense
which totaled approximately $15.7 million for 2000, compared to $16.6 million
for 1999.
Income Taxes
Income tax expense as a percentage of pre-tax income was 34.3 percent for
the year ended December 31, 2000 compared to 33.0 percent in 1999. The
effective tax rate for 2001 is expected to approximate 34 percent.*
Business Segments
VNB has four business segments it monitors and reports on to manage its
business operations. These segments are consumer lending, commercial lending,
investment portfolio and corporate and other adjustments. Lines of business
and actual structure of operations determine each segment. Each is reviewed
routinely for its asset growth, contribution to pretax net income and return
on assets. Expenses related to the branch network, all other components of
retail banking, along with the back office departments of the bank are
allocated from the corporate and other adjustments segment to each of the
other three business segments. The financial reporting for each segment
contains allocations and reporting in line with VNB's operations, which may
not necessarily be compared to any other financial institution. The
accounting for each segment includes internal accounting policies designed
to measure consistent and reasonable financial reporting. For financial
data on the four business segments see "Note 19 of the Notes to
Restated Consolidated Financial Statements."
The consumer lending segment had a return on average interest-earning
assets before taxes of 2.54 percent for the year ended December 31, 2000
compared to 2.41 percent for the year ended December 31, 1999. Average
interest-earning assets increased $90.2 million, which is attributable to
an increase in home equity and residential mortgage lending. Interest rates
on consumer loans increased by 37 basis points. This increase was mitigated
by an increase in the cost of funds by 48 basis points. Income before
income taxes increased $5.6 million primarily as a result of a decrease in
the provision for loan losses due to a decrease in net charge-offs and a
decline in non-interest expense due to decreased usage of credit cards.
The return on average interest-earning assets before taxes for the commercial
lending segment decreased 12 basis points to 3.49 percent for the year
ended December 31, 2000. Average interest-earning assets increased
$215.3 million as a result of an increased volume of loans. Interest rates
on commercial loans increased by 46 basis points, offset by an increase
in cost of funds by 48 basis points. Interest funding costs during most of
2000 rose faster than rates earned. Income before income taxes increased
$5.1 million primarily as a result of an increase in average interest-earning
assets, offset by a decline in fee income during the period.
The investment portfolio segment had a return on average interest-earning
assets, before taxes, of 2.11 percent for the year ended December 31, 2000, 21
basis points less than the year ended December 31, 1999. Average
interest-earning assets decreased by $17.2 million. The yield on interest
earning assets increased by 26 basis points to 6.8 percent, and was offset
by an increase of 48 basis points in the cost of funds. Income before income
taxes decreased 9.6 percent to $46.8 million, principally reflecting
higher interest funding costs.
The corporate segment represents income and expense items not directly
attributable to a specific segment including merger-related charges, gains on
sales of securities, service charges on deposit accounts, and certain revenues
and expenses recorded by acquired banks that could not be allocated to a line
of business. The loss before taxes for the corporate segment increased
to $5.6 million for the year ended December 31, 2000.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Valley's success is largely dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of Valley's net
interest income to the movement in interest rates. Valley does not currently
use derivatives to manage market and interest rate risks. Valley's interest
rate risk management is the responsibility of the Asset/Liability Management
Committee ("ALCO"), which reports to the Board of Directors. ALCO
establishes policies that monitor and coordinate Valley's
sources, uses and pricing of funds.
Valley uses a simulation model to analyze net interest income sensitivity to
movements in interest rates. The simulation model projects net interest
income based on various interest rate scenarios over a twelve and
twenty-four month period. The model is based on the actual maturity and
repricing characteristics of rate sensitive assets and liabilities. The
model incorporates assumptions regarding the impact of changing interest
rates on the prepayment rates of certain assets and liabilities. According
to the model run for year end 2000, over a twelve month period, an interest
rate increase of 100 basis points resulted in a decrease in net interest
income of approximately $10.0 million while an interest rate decrease of 100
basis points resulted in an increase in net interest income of approximately
$11.0 million. Management cannot provide any assurance about the actual effect
of changes in interest rates on Valley's net interest income. In a continued
declining interest rate environment, Valley's net interest income is not
expected to change materially.*
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, 2000. Market risk sensitive
instruments are generally defined as on-and-off balance sheet financial
instruments.
INTEREST RATE SENSITIVITY ANALYSIS
Total Fair
Rate 2001 2002 2003 2004 2005 Thereafter Balance Value
(in thousands)
Interest sensitive
assets:
Federal funds sold 5.04% $ 85,000 $ -- $ -- $ -- $ -- $ -- $ 85,000 $ 85,000
Investment securities
held to maturity 6.80 65,925 8,182 6,783 6,820 6,551 483,189 577,450 543,034
Investment securities
available for sale 6.93 632,769 92,403 85,752 77,064 90,154 647,944 1,626,086 1,626,086
Loans:
Commercial 9.68 935,939 28,604 20,616 19,379 11,450 10,805 1,026,793 1,057,586
Mortgage 7.84 687,481 359,942 396,697 459,763 262,884 554,565 2,721,332 2,663,916
Consumer 8.35 718,878 301,010 204,687 110,823 42,837 62,750 1,440,985 1,453,317
Total interest
sensitive assets 7.89% $3,125,992 $ 790,141 $ 714,535 $ 673,849 $ 413,876 $1,759,253 $7,477,646 $7,428,939
Interest sensitive
Liabilities:
Deposits:
Savings 2.40% $ 701,807 $ 792,993 $ 485,708 $ 104,080 $ 104,080 $ 99,125 $2,287,793 $2,287,793
Time 5.70 2,210,882 159,980 69,253 8,887 47,854 7,377 2,504,233 2,506,712
Short-term
borrowings 5.76 426,014 -- -- -- -- -- 426,014 426,014
Long-term debt 6.13 127,079 117,086 82,060 102,016 53,018 110,549 591,808 593,939
Total interest
sensitive liabilities 4.45% $3,465,782 $1,070,059 $ 637,021 $ 214,983 $ 204,952 $ 217,051 $5,809,848 $5,814,458
Interest sensitivity
gap $ (339,790) $(279,918) $ 77,514 $ 458,866 $ 208,924 $1,542,202 $1,667,798 $1,614,481
Ratio of interest
sensitive assets to
interest sensitive
Liabilities (0.90:1) (0.74:1) 1.12:1 3.13:1 2.02:1 8.11:1 1.29:1 1.28:1
Expected maturities are contractual maturities adjusted for all payments of
principal. Valley uses certain assumptions to estimate fair values and
expected maturities. For investment securities 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. The actual maturities of these instruments
could vary substantially if future prepayments differ from historical
experience. For deposit liabilities, in accordance with standard industry
practice and Valley's own historical experience, "decay factors" were
used to estimate deposit runoff for savings. Off-balance sheet items are not
considered material.
The total negative gap repricing within 1 year as of December 31, 2000
was $339.8 million, representing a ratio of interest sensitive assets to
interest sensitive liabilities of (0.90:1). Management does not view this
amount as presenting an unusually high risk potential, although no assurances
can be given that Valley is not at risk from interest rate increases or
decreases.*
Liquidity
Liquidity measures the ability to satisfy current and future cash flow
needs as they become due. Maintaining a level of liquid funds through
asset/liability management seeks to ensure that these needs are met at a
reasonable cost. On the asset side, liquid funds are maintained in the form
of cash and due from banks, federal funds sold, investments securities held
to maturity maturing within one year, securities available for sale and
loans held for sale. Liquid assets amounted to $2.0 billion and $2.1 billion
at December 31, 2000 and 1999, respectively. This represents 26.7 percent
and 28.8 percent of earning assets, and 25.5 percent and 27.4 percent of
total assets at December 31, 2000 and 1999, respectively.
On the liability side, the primary source of funds available to meet liquidity
needs is Valley's core deposit base, which generally excludes certificates of
deposit over $100 thousand. Core deposits averaged approximately $5.0 billion
for the year ended December 31, 2000 and $5.1 billion for the year ended
December 31, 1999, representing 68.5 percent and 72.0 percent of average
earning assets. Demand deposits have continued to increase, while both savings
deposits and time deposits have been relatively unchanged during the last
three years. The level of time deposits is affected by interest rates
offered, which is often influenced by Valley's need for funds. Short-term
and long-term borrowings through Federal funds lines, repurchase agreements,
Federal Home Loan Bank ("FHLB") advances and large dollar certificates of
deposit, generally those over $100 thousand, are used as supplemental
funding sources. Valley previously borrowed from the FHLB as part of a
leverage strategy to increase earning assets and net interest income. As
of December 31, 2000, Valley had outstanding advances of $511.5 million with
the FHLB. In the future, Valley may, as part of its operations, purchase
earning assets and utilize borrowings to increase net interest income and
net income. Additional liquidity is derived from scheduled loan and
investment payments of principal and interest, as well as prepayments
received. In 2000 proceeds from the sales of investment securities available
for sale were $10.8 million, and proceeds of $404.8 million were generated
from investment maturities. Purchases of investment securities in 2000 were
$388.6 million. Short-term borrowings and certificates of deposit over
$100 thousand amounted to $1.4 billion and $1.2 billion, on average, for
the years ended December 31, 2000 and 1999, respectively.
During 2000, a substantial amount of loan growth was funded from a combination
of deposit growth, maturities and normal payments of the investment
portfolio, normal loan payments and prepayments, and borrowings. Valley
anticipates using funds from all of the above sources to fund loan growth
during 2001.*
The following table lists, by maturity, all certificates of deposit of
$100 thousand and over at December 31, 2000. These certificates of deposit
are generated primarily from core deposit customers and are not brokered funds.
(in thousands)
Less than three months $ 774,239
Three to six months 113,593
Six to twelve months 67,989
More than twelve months 71,192
$ 1,027,013
Valley's cash requirements consist primarily of dividends to shareholders.
This cash need is routinely satisfied by dividends collected from its
subsidiary bank along with cash and investments owned. Projected cash flows
from this source are expected to be adequate to pay dividends, given the
current capital levels and current profitable operations of its subsidiary.*
In addition, Valley has, as approved by the Board of Directors, repurchased
shares of its outstanding common stock. The cash required for these
purchases of shares has been met by using its own funds, dividends received
from its subsidiary bank as well as borrowed funds. At December 31, 2000
Valley maintained a floating rate line of credit in the amount of $35.0
million, of which $10.0 million was outstanding. This line is available for
general corporate purposes and expires June 14, 2002. Borrowings under this
facility are collateralized by investment securities of no less than 120
percent of the loan balance.
Investment Securities
The amortized cost of securities held to maturity at December 31, 2000, 1999
and 1998 were as follows:
INVESTMENT SECURITIES HELD TO MATURITY
2000 1999 1998
(in thousands)
U.S. Treasury securities and
other government agencies and
corporations $ -- $ -- $ 34,451
Obligations of states and
political subdivisions 78,062 88,220 105,363
Mortgage-backed securities 209,836 184,746 205,561
Other debt securities 249,414 250,286 115,498
Total debt securities 537,312 523,252 460,873
FRB & FHLB stock 40,138 37,421 34,379
Total investment securities
held to maturity $577,450 $ 560,673 $ 495,252
The fair value of securities available for sale at December 31, 2000, 1999 and
1998 were as follows:
INVESTMENT SECURITIES AVAILABLE FOR SALE
2000 1999 1998
(in thousands)
U.S. Treasury securities and other
government agencies and
corporations $ 150,621 $ 117,211 $ 180,252
Obligations of states and
political subdivisions 143,944 160,280 147,641
Mortgage-backed securities 1,285,395 1,281,739 1,301,877
Other debt securities -- 39,885 --
Total debt securities 1,579,960 1,599,115 1,629,770
Equity securities 46,126 45,052 43,245
Total investment securities
available for sale $1,626,086 $ 1,644,167 $ 1,673,015
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES HELD TO MATURITY
AT DECEMBER 31, 2000
Obligations of Mortgage-
States and Political Backed Other Debt
Subdivisions Securities(5) Securities Total (4)
(in thousands)
Amortized Yield Amortized Yield Amortized Yield Amortized Yield
Cost (1) (2)(3) Cost (1) (2) Cost (1) (2) Cost (1) (2)
0-1 years $ 24,237 7.00% $ 463 5.35% $ 60 7.19% $ 24,761 6.97%
1-5 years 7,921 5.10 35,004 7.52 375 6.80 43,300 7.07
5-10 years 21,580 5.14 44,656 8.43 25 7.50 66,261 7.36
Over 10 years 24,324 5.09 129,713 7.39 248,954 7.49 402,990 7.31
Total securities $ 78,062 5.70% $ 209,836 7.63% $ 249,414 7.49% $ 537,312 7.28%
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 2000
US Treasury
Securities and
Other Government Obligations of Mortgage-
Agencies States and Political Backed
And Corporations Total
Subdivisions Securities(5) (4)
(in thousands)
Amortized Yield Amortized Yield Amortized Yield Amortized Yield
Cost (1) (2) Cost (1) (2)(3) Cost (1) (2) Cost (1) (2)
0-1 years $ 27,498 5.25% $ 26,417 6.85% $ 8,479 5.86% $ 62,395 6.01%
1-5 years 113,940 6.18 38,177 6.24 404,146 6.23 556,263 6.22
5-10 years 6,986 6.82 61,712 6.92 366,164 7.12 434,862 7.08
Over 10 years 3,111 6.30 17,148 5.87 504,952 7.28 525,210 7.23
Total securities $151,535 6.04% $ 143,454 6.60% $1,283,741 6.90% $1,578,730 6.79%
(1) Amortized costs are stated at cost less principal reductions, if any,
and adjusted for accretion of discounts and amortization of premiums.
(2) Average yields are calculated on a yield-to-maturity basis.
(3) Average yields on obligations of states and political subdivisions are
generally tax-exempt and calculated on a tax-equivalent
basis using a statutory federal income tax rate of 35 percent.
(4) Excludes equity securities which have indefinite maturities.
(5) Mortgage-backed securities are shown using an estimated average remaining
life.
Valley's investment portfolio is comprised of U.S. government and federal
agency securities, tax-exempt issues of states and political subdivisions,
mortgage-backed securities, equity and other securities. There were no
securities in the name of any one issuer exceeding 10 percent of
shareholders' equity, except for securities issued by 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, 2000, Valley had $209.8 million of mortgaged-backed
securities classified as held to maturity and $1.3 billion of mortgage-backed
securities classified as available for sale. Substantially all the
mortgage-backed securities held by Valley are issued or backed by federal
agencies. The mortgage-backed securities portfolio is a source of
significant liquidity to Valley through the monthly cash flow of principal
and interest. Mortgage-backed securities, like all securities, are
sensitive to 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,
2000 were $308.3 million of collateralized mortgage obligations ("CMO's")
of which $75.0 million were privately issued. CMO's had a yield of 6.65
percent and an unrealized loss of $7.0 million at December 31, 2000.
Substantially all of the CMO portfolio was classified as available for sale.
As of December 31, 2000, Valley had $1.6 billion of securities available
for sale, unchanged from December 31, 1999. Those
securities are recorded at their fair value. As of December 31, 2000, the
investment securities available for sale had an unrealized loss of $1.6
million, net of deferred taxes, compared to an unrealized loss of $23.4
million, net of deferred taxes, at December 31, 1999. This change was
primarily due to an increase in prices resulting from a decreasing interest
rate environment for these investments. 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 1999, in connection with the
Ramapo acquisition, Valley reassessed the classification of securities
held in the Ramapo portfolio and transferred $42.4 million of securities
held to maturity to securities available for sale to conform with Valley's
investment objectives. In 1998, in connection with the Wayne acquisition,
Valley reassessed the classification of securities held in the Wayne
portfolio and transferred $1.6 million of securities held to maturity to
securities available for sale to conform with Valley's investment objectives.
Loan Portfolio
As of December 31, 2000, total loans were $5.2 billion, compared to $5.0
billion at December 31, 1999, an increase of 4.0 percent. The following
table reflects the composition of the loan portfolio for the five years ended
December 31, 2000.
LOAN PORTFOLIO
2000 1999 1998 1997 1996
(in thousands)
Commercial $ 1,026,793 $ 929,673 $ 817,213 $ 781,914 $ 763,581
Total commercial loans 1,026,793 929,673 817,213 781,914 763,581
Construction 160,932 123,531 112,819 94,162 98,435
Residential mortgage 1,301,851 1,250,551 1,055,278 1,056,436 1,060,526
Commercial mortgage 1,258,549 1,178,734 1,069,727 970,775 888,558
Total mortgage loans 2,721,332 2,552,816 2,237,824 2,121,373 2,047,519
Home equity 306,038 276,261 226,231 225,899 230,265
Credit card 94,293 92,097 108,180 146,151 150,233
Automobile 976,177 1,054,542 1,033,938 931,579 813,058
Other consumer 64,477 86,460 86,072 97,582 76,569
Total consumer loans 1,440,985 1,509,360 1,454,421 1,401,211 1,270,125
Less: unearned income -- -- (46) (150) (612)
Total loans $ 5,189,110 $ 4,991,849 $ 4,509,412 $ 4,304,348 $ 4,080,613
As a percent of total loans:
Commercial loans 19.8 % 18.6 % 18.1 % 18.2 % 18.7 %
Mortgage loans 52.4 51.2 49.6 49.2 50.2
Consumer loans 27.8 30.2 32.3 32.6 31.1
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
The majority of the increase in loans for 2000 was divided among commercial,
residential and commercial mortgage loans. It is not known if the trend of
increased lending in these loan types will continue.*
The commercial loan and commercial mortgage loan portfolio has continued its
steady increase. Valley targets small-to-medium size businesses within the
market area of the bank for this type of lending.
During 1996, Valley issued a co-branded credit card. Of the $94.3 million of
credit card loans outstanding at December 31, 2000, approximately $70.1
million were the result of this co-branded credit card program. The decrease
in the credit card portfolio is primarily attributable to a decrease in card
usage. During August 2000, Valley entered into a contract to sell its
co-branded credit card loans to American Express. The transaction closed
and was recorded during the first quarter of 2001. This transaction will
substantially reduce the total credit card portfolio.* For many years, Valley
National Bank has maintained an automobile loan program with State Farm
Insurance Company. While the loans generated by this program have been
important to Valley, recent changes in market conditions for automobile
lending have reduced the volume and profitablility of the program relative
to other loans and investments available to the bank. As a result of the
expansion of State Farm's banking activities, Valley expects to phase out
the origination of loans under this program during 2001.*
All loans originated by Valley during the program will remain under the
bank's ownership, and Valley expects the portfolio to amortize in its
normal course. As of December 31, 2000, this portfolio represented 7.9
percent of Valley's earning assets and the amount of the portfolio had
decreased by 12.0 percent during the last twelve-month period. The gross
yield of the portfolio for the year 2000 was 8.2 percent, prior to marketing
payments to an affiliate of the insurance company, loan losses and all
costs associated with originating and maintaining the portfolio.
Management anticipates that the phasing out of this program should not have a
material adverse effect on future net income.*
These automobile loans are subject to Valley's normal underwriting criteria.
This program was expanded during Valley's over 40 year relationship with the
company to 12 states from Maine to Florida, as well as Canada.
In 1996 VNB established a finance company in Toronto, Canada to make auto
loans. This Canadian subsidiary had interest income of approximately $2.7
million for the year ended December 31, 2000, and auto loans of $30.8
million at December 31, 2000. These loans are partially funded by a capital
investment by VNB of $7.4 million, with additional funding requirements
satisfied by lines of credit in Canadian funds. Any foreign exchange risk is
limited to the capital investment by VNB.
Much of Valley's lending is in northern New Jersey and Manhattan, 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.* These loans are
diversified as to type of borrower and loan. However, most of these loans
are in Northern New Jersey and Manhattan, presenting a geographical and
credit risk if there was a significant downturn of the economy within the
region.
The following table reflects the contractual maturity distribution of the
commercial and construction loan portfolios as of December 31, 2000:
1 Yr. or less Over 1 to 5 Yrs. Over 5 Yrs. Total
(in thousands)
Commercial - fixed rate $ 43,075 $ 109,956 $ 50,587 $ 203,618
Commercial - adjustable rate 627,648 61,229 134,298 823,175
Construction - fixed rate 19,378 7,867 -- 27,245
Construction - adjustable rate 64,320 69,367 -- 133,687
$ 754,421 $ 248,419 $184,885 $1,187,725
Prior to maturity of each loan with a balloon payment and if the borrower
requests an extension, Valley generally conducts a review which normally
includes an analysis of the borrower's financial condition and, if
applicable, a review of the adequacy of collateral. A rollover of the loan at
maturity may require a principal paydown.
VNB is a preferred U. S. Small Business Administration ("SBA") lender with
authority to make loans without the prior approval of the SBA. VNB currently
has approval to make SBA loans in New Jersey, Pennsylvania, New York,
Delaware, Maryland, North and South Carolina, Virginia, Connecticut and
the District of Columbia. Between 75 percent and 80 percent 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 good source of fee income and loans
with floating interest rates tied to the prime lending rate.*
During 2000 and 1999, VNB originated approximately $30.6 million and
$35.2 million of SBA loans, respectively and sold $21.9 million and $24.8
million, respectively. At December 31, 2000 and 1999, $42.6 million and
$39.2 million, respectively, of SBA loans were held in VNB's portfolio and
VNB serviced for others approximately $92.2 million and $89.0 million,
respectively, of SBA loans.
Non-performing Assets
Non-performing assets include non-accrual loans and other real estate owned
("OREO"). Loans are generally placed on a non-accrual status when they become
past due in excess of 90 days as to payment of principal or interest.
Exceptions to the non-accrual policy may be permitted if the loan is
sufficiently collateralized and in the process of collection. OREO is
acquired through foreclosure on loans secured by land or real estate.
OREO is reported at the lower of cost or fair value at the time of
acquisition and at the lower of fair value, less estimated costs to sell, or
cost thereafter.
Non-performing assets continued to decrease, and totaled $4.0 million at
December 31, 2000, compared with $6.2 million at December
31, 1999, a decrease of $2.2 million or 34.9 percent. Non-performing assets at
December 31, 2000 and 1999, respectively, amounted to 0.08 percent and 0.12
percent of loans and OREO. Non-performing assets have declined steadily
over the past five years. Valley cannot predict whether or for how long this
trend will continue.* The decrease in troubled debt restructured loans was the
result of one loan which was paid off during the year.
Loans 90 days or more past due and still accruing which were not included in
the non-performing category totaled $15.0 million at December 31, 2000,
compared to $12.2 million at December 31, 1999. 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 $2.8 million and $1.5 million at December 31,
2000 and 1999, respectively. Loans 90 days or more past due and still
accruing have remained at relatively stable levels during the past two years.
It is not known if this trend will continue.*
The allowance for loan losses as a percent of loans has declined since 1996.
Valley provides additions to the allowance based upon net charge-offs and
changes in the composition of the loan portfolio.
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
2000 1999 1998 1997 1996
(in thousands)
Loans past due in excess of
90 days and still accruing $ 14,952 $ 12,194 $ 7,769 $ 16,667 $ 11,005
Non-accrual loans $ 3,883 $ 3,910 $ 7,653 $ 10,539 $ 17,420
Other real estate owned 129 2,256 4,261 4,450 6,077
Total non-performing assets $ 4,012 $ 6,166 $ 11,914 $ 14,989 $ 23,497
Troubled debt restructured loans $ 949 $ 4,852 $ 6,387 $ 6,723 $ 7,116
Non-performing loans as a % of
loans 0.07% 0.08% 0.17% 0.24% 0.43%
Non-performing assets as a % of
loans plus other real estate owned 0.08% 0.12% 0.26% 0.35% 0.57%
Allowance as a % of loans 1.19% 1.29% 1.39% 1.38% 1.43%
During 2000, recovered interest on non-accrual loans amounted to $126
thousand, compared with recovered interest of $624 thousand in 1999.
Although substantially all risk elements at December 31, 2000 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 $29.4 million
in potential problem loans at December 31, 2000, which have not been classified
as non-accrual, past due or restructured.* Potential problem loans are defined
as performing loans for which management has serious doubts as to the ability
of such borrowers to comply with the present loan repayment terms and which may
result in a non-performing loan. Of these potential problem loans, $7.7
million is considered at risk after collateral values and guarantees are
taken into consideration. There can be no assurance that Valley has
identified all of its potential problem loans. At December 31, 1999, Valley
had identified approximately $7.7 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 and
Manhattan, presenting a geographical and credit risk if there was a
significant downturn of the economy within the region.
Residential mortgage loans are secured primarily by 1-4 family properties
located mainly within northern New Jersey. Conservative underwriting policies
are adhered to and loan to value ratios are generally less than 80 percent.
Consumer loans are comprised of home equity loans, credit card loans and
automobile loans. Home equity and automobile loans are secured loans and
are made based on an evaluation of the collateral and the borrower's
creditworthiness. The majority of automobile loans have been originated
through a program with State Farm Insurance Company, whose customer base
generally has a good credit profile and generally have resulted in
delinquencies and charge-offs equal to that typically experienced from
traditional sources. These automobile loans are from 12 states, including
New Jersey, and management believes they generally present no more risk than
those made within New Jersey.* All loans are subject to Valley's
underwriting criteria. Therefore, each loan or group of loans presents a
geographical risk and credit risk based upon the economy of the region.
The co-branded credit card portfolio was substantially generated through a
pre-approved mailing during 1996 utilizing automated credit scoring
techniques and additional underwriting standards.
Management realizes that some degree of risk must be expected in the
normal course of lending activities. Allowances are maintained to absorb
such loan and off-balance sheet credit losses inherent in the portfolio.
The allowance for loan losses and related provision are an expression of
management's evaluation of the credit portfolio and economic climate.
The following table sets forth the relationship among loans, loans
charged-off and loan recoveries, the provision for loan losses and the
allowance for loan losses for the past five years:
Years ended December 31,
2000 1999 1998 1997 1996
(in thousands)
Average loans outstanding $5,065,852 $ 4,682,882 $4,359,876 $4,142,390 $3,775,311
Beginning balance -
Allowance for loan losses $ 64,228 $ 62,606 $ 59,337 $ 58,543 $ 56,917
Loans charged-off:
Commercial 7,162 1,560 424 6,110 4,838
Construction -- -- -- -- 110
Mortgage-Commercial 490 983 2,166 1,440 1,214
Mortgage-Residential 249 761 1,274 522 932
Consumer 8,992 10,051 11,331 8,403 4,170
16,893 13,355 15,195 16,475 11,264
Charged-off loans recovered:
Commercial 947 1,148 1,073 876 3,621
Construction -- 218 222 89 58
Mortgage-Commercial 372 268 1,074 227 1,462
Mortgage-Residential 49 133 329 167 222
Consumer 2,537 2,175 1,696 1,080 991
3,905 3,942 4,394 2,439 6,354
Net charge-offs 12,988 9,413 10,801 14,036 4,910
Provision charged to
operations 10,755 11,035 14,070 14,830 6,536
Ending balance-Allowance
for loan losses $ 61,995 $ 64,228 $ 62,606 $ 59,337 $ 58,543
Ratio of net charge-offs
during the period to
average loans outstanding
during the period 0.26% 0.20% 0.25% 0.34% 0.13%
The allowance for loan losses is maintained at a level estimated to
absorb loan losses of the loan portfolio as well as other credit risk related
charge-offs. The allowance is based on ongoing evaluations of the probable
estimated losses inherent in the loan portfolio. VNB's methodology for
evaluating the appropriateness of the allowance consists of several
significant elements, which include the allocated allowance, specific
allowances for identified problem loans, portfolio segments and the
unallocated allowance. The allowance also incorporates the results of
measuring impaired loans as called for in Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures."
VNB's allocated allowance is calculated by applying loss factors to
outstanding loans. The formula is based on the internal risk grade of loans
or pools of loans. Any change in the risk grade of performing and/or
non-performing loans affects the amount of the related allowance. Loss
factors are based on VNB's historical loss experience and may be
adjusted for significant circumstances that, in management's judgment, affect
the collectibility of the portfolio as of the evaluation date.
Management establishes an unallocated portion of the allowance to cover any
losses incurred within a given loan category which have not been otherwise
identified or measured on an individual basis. Such unallocated
allowance includes management's evaluation of local and national economic and
business conditions, portfolio concentrations, information risk,
operational risk, credit quality and delinquency trends. The unallocated
portion of the allowance reflects management's attempt to ensure that the
overall allowance reflects a margin for imprecision and the uncertainty that
is inherent in estimates of expected credit losses.
The underwriting, growth and delinquency experience in the credit card
portfolio will substantially influence the level of the allowance needed to
absorb credit losses in the portfolio. 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 continues to
monitor the need for additions to the allowance.
During 2000, 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 and net
charge-off levels. The provision charged to operations was $10.8 million
in 2000 compared to $11.0 million in 1999. The provision for loan losses was
reduced in 2000 as a result of Valley's declining trend in non-performing
loans during the year and due to the expected sale of the ShopRite credit card
portfolio in 2001, which eliminated the need for the additional provisioning
the bank was maintaining for that portfolio.
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,
2000 1999 1998
(in thousands)
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 $ 24,234 19.8 % $ 24,609 18.6 % $ 22,456 18.1 %
Mortgage 11,827 52.4 13,282 51.2 14,363 49.6
Consumer 12,559 27.8 12,813 30.2 12,417 32.3
Unallocated 13,375 N/A 13,524 N/A 13,370 N/A
$ 61,995 100.0% $ 64,228 100.0 % $ 62,606 100.0 %
Years ended December 31,
1997 1996
(in thousands)
Percent Percent
of Loan of Loan
Category Category
Allowance to Total Allowance to Total
Allocation Loans Allocation Loans
Loan category:
Commercial $19,692 18.2 % $ 24,714 18.7 %
Mortgage 16,861 49.2 13,743 50.2
Consumer 11,625 32.6 7,667 31.1
Unallocated 11,159 N/A 12,419 N/A
$59,337 100.0 % $ 58,543 100.0 %
At December 31, 2000 the allowance for loan losses amounted to $62.0
million or 1.19 percent of loans, as compared to $64.2 million or 1.29
percent at December 31, 1999.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $13.0 million for
the year ended December 31, 2000 compared with $9.4 million for the year
ended December 31, 1999. The ratio of net charge-offs to average loans
increased to 0.26 percent for 2000 compared with 0.20 percent for 1999.
Charge-offs for 2000 include one $5.4 million charge-off on a commercial loan.
While consumer loan charge-offs decreased during 2000, they were at a level
less than the level reported throughout the industry on a national basis.
Non-accrual loans remained relatively unchanged in 2000 in comparison to
1999, and was at its lowest level in five years, while loans past due
90 days and still accruing at December 31, 2000 were higher than at
December 31, 1999.
The impaired loan portfolio is primarily collateral dependent. Impaired
loans and their related specific and general allocations to the allowance for
loan losses totaled $3.4 million and $949 thousand, respectively, at
December 31, 2000 and $13.9 million and $2.0 million, respectively, at
December 31, 1999. The average balance of impaired loans during 2000 and
1999 was approximately $11.8 million and $13.7 million, respectively. The
amount of cash basis interest income that was recognized on impaired loans
during 2000, 1999 and 1998 was $160 thousand, $616 thousand and $1.1 million,
respectively.
Capital Adequacy
A significant measure of the strength of a financial institution is its
shareholders' equity. At December 31, 2000, shareholders' equity totaled
$656.0 million or 8.3 percent of total assets, compared with $652.7 million or
8.4 percent at year-end 1999.
On May 23, 2000 Valley's Board of Directors authorized the repurchase of
up to 3,000,000 shares of the Company's outstanding common stock. As of
September 19, 2000 Valley had repurchased 571,070 shares of its common stock
under this repurchase program, which was rescinded in connection with the
signing of the definitive merger agreement with Merchants. This is in
addition to the 3,000,000 shares purchased pursuant to an authorization by
the Board of Directors in December 1999, the majority of which were used for
the stock dividend issued on May 16, 2000. Reacquired shares are held in
treasury and are expected to be used for employee benefit programs, stock
dividends and other corporate purposes.
In addition, under an authorization by the Merchants Board to repurchase its
common stock, 416,969 shares were purchased during 2000 and 380,329 shares
were purchased in 1999.
On February 12, 2000, the Board of Directors unanimously approved an
amendment to Valley's Certificate of Incorporation to authorize 30,000,000
shares of a new class of "blank check" preferred stock. The primary purpose
of the preferred stock is to maximize Valley's ability to expand its capital
base. The amendment was approved by the Valley shareholders on April 6, 2000.
At December 31, 2000, there were no shares of preferred stock issued.
Included in shareholders' equity as components of accumulated other
comprehensive income at December 31, 2000 was a $1.6 million unrealized loss
on investment securities available for sale, net of tax, and a currency
translation adjustment loss of $678 thousand related to the Canadian
subsidiary of VNB, compared to an unrealized loss of $23.4 million and a $418
thousand currency translation adjustment loss at December 31, 1999.
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 percent of risk-adjusted assets. Risk-adjusted assets
are determined by assigning various levels of risk to different categories of
assets and off-balance sheet activities.
Valley's capital position at December 31, 2000 under risk-based capital
guidelines was $650.3 million, or 11.3 percent of risk-weighted assets,
for Tier 1 capital and $712.3 million, or 12.3 percent, for Total risk-based
capital. The comparable ratios at December 31, 1999 were 12.0 percent for
Tier 1 capital and 13.2 percent for Total risk-based capital. At December
31, 2000 and 1999, Valley was in compliance with the leverage requirement
having Tier 1 leverage ratios of 8.5 percent and 8.8 percent, respectively.
Valley's ratios at December 31, 2000 were all above the "well capitalized"
requirements, which require Tier I capital to risk-adjusted assets of at
least 6 percent, Total risk-based capital to risk-adjusted assets of 10
percent and a minimum leverage ratio of 5 percent.
Book value per share amounted to $8.41 at December 31, 2000 compared with $8.04
per share at December 31, 1999.
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 43.66 percent at December 31, 2000, compared
to 46.70 percent at December 31, 1999. Cash dividends declared amounted to
$0.98 per share, equivalent to a dividend payout ratio of 56.34 percent for
2000, compared to 53.30 percent for the year 1999. The current quarterly
dividend rate of $0.25 per share provides for an annual rate of $0.99 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 - 1999 Compared to 1998
Valley reported net income for 1999 of $125.3 million or $1.51 earnings per
diluted share, compared to the $117.2 million, or $1.39 earnings per
diluted share earned in 1998.
Net interest income on a tax equivalent basis increased $19.4 million, or 6.5
percent, to $316.0 million in 1999. The increase in 1999 was due primarily to
a $471.4 million increase in the average balance of interest bearing assets
offset slightly by a $355.3 million increase in the average balance of
interest bearing liabilities. Average rates on interest earning assets and
interest bearing liabilities decreased 24 basis points and 26 basis points,
respectively.
Non-interest income, excluding security gains, amounted to $51.2 million
in 1999, compared with $49.3 million in 1998. Income from trust and
investment services increased $601 thousand or 33.1 percent due primarily to
additional fee income contributed by the acquisition of an investment
management company during July 1999. Fees from loan servicing, which
includes both servicing fees from residential mortgage loans and SBA loans,
increased $1.0 million or 13.6 percent. This increase can be attributed to
the acquisition of several residential mortgage portfolios, and the
origination of both SBA and residential mortgage loans by VNB which were sold
to third-party investors with servicing retained. Credit card income
declined by $1.5 million due to a decrease in card usage. Other non-interest
income increased $3.5 million or 35.9 percent, attributed primarily to the
gain on the sale of one OREO property during 1999 and commission fees earned on
the outsourcing of check processing which began in the fourth quarter
of 1998.
Non-interest expense totaled $164.7 million in 1999, a decrease of $5.4
million. Non-interest expense for 1999 includes a $3.0 million
merger-related charge from the acquisition of Ramapo and for 1998 includes a
$4.5 million merger-related charge from the acquisition of Wayne. Salary
and benefit expense for 1999 increased $3.7 million or 4.3 percent. This
increase was offset by a decrease in credit card expense of $4.0 million,
attributable to a decreased usage of the card.
Income tax expense as a percentage of pre-tax income was 33.0 percent for
the year ended December 31, 1999 compared to 24.7 percent in 1998. The
increase in the effective tax rate is attributable to tax benefits realized
prior to 1999 that were not available during 1999.