UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
-----------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-11277
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VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
(State or other Jurisdiction of
incorporation or organization)
22-2477875
(I.R.S. Employer Identification No.)
1455 Valley Road, Wayne, New Jersey 07474-0558
(Address of principal executive offices)
973-305-8800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common Stock (no par value),
of which 92,669,807 shares were outstanding as of August 12, 2002.
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TABLE OF CONTENTS
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Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Income
Six and Three Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
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PART I
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands, except for share data)
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<caption>
June 30, December 31,
2002 2001
Assets
Cash and due from banks $ 195,697 $311,850
Investment securities held to maturity, fair value of $500,393
and $476,872 in 2002 and 2001, respectively 511,237 503,061
Investment securities available for sale 2,258,258 2,171,695
Loans 5,461,605 5,275,582
Loans held for sale 28,258 56,225
Total loans 5,489,863 5,331,807
Less: Allowance for loan losses
(64,299) (63,803)
Net loans 5,425,564 5,268,004
Premises and equipment, net 105,381 94,178
Accrued interest receivable 45,110 42,184
Bank owned life insurance 155,342 102,120
Other assets 86,128 90,673
Total assets $ 8,782,717 $ 8,583,765
Liabilities
Deposits:
Non-interest bearing $ 1,464,336 $1,446,021
Interest bearing:
Savings 2,697,104 2,448,335
Time 2,429,997 2,412,618
Total deposits 6,591,437 6,306,974
Short-term borrowings 282,583 304,262
Long-term debt 923,686 975,728
Accrued expenses and other liabilities 111,891 118,426
Total liabilities 7,909,597 7,705,390
Company - obligated mandatorily redeemable preferred capital securities
of a subsidiary trust holding solely junior subordinated debentures of
the Company
200,000 200,000
Shareholders' Equity
Preferred stock, no par value, authorized 30,000,000 shares;
none issued -- --
Common stock, no par value, authorized 142,442,138
shares; issued 94,307,019 shares in 2002 and
97,753,698 shares in 2001 33,347 33,310
Surplus 318,851 406,608
Retained earnings 304,919 270,730
Unallocated common stock held by employee benefit plan (519) (602)
Accumulated other comprehensive income 38,206 19,638
694,804 729,684
Treasury stock, at cost (792,407 shares in 2002 and
2,169,121 shares in 2001) (21,684) (51,309)
Total shareholders' equity 673,120 678,375
Total liabilities and shareholders' equity $ 8,782,717 $ 8,583,765
See accompanying notes to consolidated financial statements.
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VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data)
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<caption>
Six Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
Interest Income
Interest and fees on loans $ 182,788 $ 204,423 $ 91,902 $ 100,090
Interest and dividends on investment securities:
Taxable 69,154 69,189 35,724 34,540
Tax-exempt 5,083 5,252 2,579 2,633
Dividends 1,525 2,383 825 1,421
Interest on federal funds sold and other short-term investments 964 3,362 327 1,723
Total interest income 259,514 284,609 131,357 140,407
Interest Expense
Interest on deposits:
Savings deposits 16,720 26,493 8,632 12,688
Time deposits 36,585 64,007 18,019 30,159
Interest on short-term borrowings 1,445 8,007 619 2,246
Interest on long-term debt 25,537 22,448 12,640 12,685
Total interest expense 80,287 120,955 39,910 57,778
Net Interest Income 179,227 163,654 91,447 82,629
Provision for loan losses 7,679 4,935 3,974 2,835
Net Interest Income after Provision for Loan Losses 171,548 158,719 87,473 79,794
Non-Interest Income
Trust and investment services 2,370 2,408 1,192 1,197
Service charges on deposit accounts 9,712 9,250 4,827 4,702
Gains on securities transactions, net 2,964 979 2,609 816
Fees from loan servicing 4,913 5,506 2,415 2,821
Credit card fee income 1,456 1,929 784 932
Gain on sales of loans, net 3,342 7,523 1,562 1,886
Bank owned life insurance 3,222 -- 1,806 --
Other 10,486 6,830 5,226 3,388
Total non-interest income 38,465 34,425 20,421 15,742
Non-Interest Expense
Salary expense 41,963 38,996 20,882 19,548
Employee benefit expense 9,547 9,544 4,701 4,686
FDIC insurance premiums 549 584 274 292
Occupancy and equipment expense 13,995 15,381 7,118 7,544
Credit card expense 612 905 304 279
Amortization of intangible assets 4,903 3,942 2,714 2,124
Advertising 3,773 2,308 2,335 1,513
Distributions on capital securities 7,865 -- 3,932 --
Merger-related charges -- 9,017 -- --
Other 16,660 14,976 8,301 7,712
Total non-interest expense 99,867 95,653 50,561 43,698
Income Before Income Taxes 110,146 97,491 57,333 51,838
Income tax expense 31,650 34,369 17,437 17,279
Net Income $ 78,496 $ 63,122 $ 39,896 $ 34,559
Weighted Average Number of Shares Outstanding:
Basic 94,437,285 97,483,709 94,009,085 97,547,706
Diluted 95,027,174 98,016,774 94,613,873 98,070,091
Earnings Per Share:
Basic $0.83 $0.65 $0.42 $0.35
Diluted 0.83 0.64 0.42 0.35
Cash Dividends Declared Per Common Share 0.44 0.41 0.225 0.21
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net income $ 78,496 $ 63,122
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,442 9,320
Amortization of compensation costs pursuant to
long-term stock incentive plan 1,290 1,061
Provision for loan losses 7,679 4,935
Net amortization of premiums and accretion of discounts 4,495 3,436
Net gains on securities transactions (2,964) (979)
Proceeds from sales of loans 141,932 92,119
Gain on sales of loans (3,342) (7,523)
Origination of loans held for sale (110,623) (99,793)
Net increase in bank owned life insurance (3,222) --
Net (increase) decrease in accrued interest receivable
and other assets (11) 26,977
Net decrease in accrued expenses and other liabilities (17,170) (11,461)
Net cash provided by operating activities 106,002 81,214
Cash flows from investing activities:
Purchase of bank owned life insurance (50,000) --
Proceeds from sales of investment securities available for sale 282,439 142,293
Proceeds from maturities, redemptions and prepayments of investment
securities available for sale 535,227 283,136
Purchases of investment securities available for sale (877,420) (653,977)
Purchases of investment securities held to maturity (23,013) (5,659)
Proceeds from maturities, redemptions and prepayments of investment
securities held to maturity 14,501 26,645
Net increase in federal funds sold and other
short-term investments -- (59,000)
Net increase in loans made to customers (195,189) (577)
Purchases of premises and equipment, net of sales (15,628) (4,893)
Net cash used in investing activities (329,083) (272,032)
Cash flows from financing activities:
Net increase in deposits 284,463 59,351
Net decrease in short-term borrowings (21,679) (233,503)
Advances of long-term debt -- 410,000
Repayments of long-term debt (52,042) (52,040)
Dividends paid to common shareholders (41,239) (34,938)
Purchase of common shares to treasury (65,805) --
Common stock issued, net of cancellations 3,230 1,020
Net cash provided by financing activities 106,928 149,890
Net decrease in cash and cash equivalents (116,153) (40,928)
Cash and cash equivalents at January 1 311,850 239,105
Cash and cash equivalents at June 30 $ 195,697 $198,177
Supplemental disclosure of cash flow information:
Cash paid during the period for interest on deposits and borrowings $ 82,878 $119,279
Cash paid during the period for federal and state income taxes 28,898 19,988
Transfer of securities from held to maturity to available for sale (1) -- 162,433
Transfer of securities from available for sale to held to maturity (1) -- 50,044
See accompanying notes to consolidated financial statements.
(1) In connection with the Merchants acquisition in January 2001.
VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
The Consolidated Statements of Financial Condition as of June 30, 2002 and
December 31, 2001, the Consolidated Statements of Income for the six and three
month periods ended June 30, 2002 and 2001 and the Consolidated Statements of
Cash Flows for the six month periods ended June 30, 2002 and 2001 have been
prepared by Valley National Bancorp ("Valley") without audit. In the opinion of
management, all adjustments (which included only normal recurring adjustments)
necessary to present fairly Valley's financial position, results of operations
and cash flows at June 30, 2002 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted. These consolidated financial
statements are to be read in conjunction with the consolidated financial
statements and notes thereto included in Valley's December 31, 2001 report on
Form 10-K. Certain prior period amounts have been restated to conform to 2002
financial presentations.
2. Earnings Per Share
Earnings per share ("EPS") amounts and weighted average shares outstanding
reflect the 5 for 4 stock split declared April 10, 2002 to shareholders of
record on May 3, 2002 and issued May 17, 2002.
For Valley, the numerator of both the Basic and Diluted EPS is equivalent
to net income. The weighted average number of shares outstanding used in the
denominator for Diluted EPS is increased over the denominator used for Basic EPS
by the effect of potentially dilutive common stock equivalents utilizing the
treasury stock method. For Valley, common stock equivalents are common stock
options outstanding.
The following table shows the calculation of both Basic and Diluted
earnings per share for the six and three months ended June 30, 2002 and 2001.
Six Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
Net income (in thousands) $ 78,496 $ 63,122 $ 39,896 $ 34,559
Basic weighted-average number of
shares outstanding 94,437,285 97,483,709 94,009,085 97,547,706
Plus: Common stock equivalents 589,889 533,065 604,788 522,385
Diluted weighted-average number
of shares outstanding 95,027,174 98,016,774 94,613,873 98,070,091
Earnings per share:
Basic $0.83 $0.65 $0.42 $0.35
Diluted 0.83 0.64 0.42 0.35
Common stock equivalents for both the six and three months ended June 30,
2002 exclude approximately 2 thousand common stock options, because the exercise
prices exceeded the average market value. For the six and three months ended
June 30, 2001, approximately 378 thousand common stock options were excluded
from common stock equivalents because the exercise prices exceeded the average
market value. Inclusion of these common stock equivalents would be
anti-dilutive to the earnings per share calculation.
3. Recent Developments
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. The Act increases federal regulation of corporate governance and
accounting, creates new federal crimes in connection with corporate activity and
expands criminal penalties for existing federal crimes.
On July 25, 2002, Valley National Bank (VNB), the wholly-owned subsidiary
of Valley, announced the signing of a purchase agreement to acquire Glen Rauch
Securities, Inc., a Wall Street brokerage firm specializing in municipal
securities with more than $1 billion in assets in its customer accounts. The
purchase of Glen Rauch Securities, Inc., will be a cash acquisition with
subsequent earn-out payments. Under the terms of the agreement, it is
anticipated that management and employees will remain with the firm to assure
continuity.* Completion of the transaction is subject to regulatory approval,
including approval by the Comptroller of the Currency and the National
Association of Securities Dealers and is expected to take place during the third
quarter of 2002. Upon completion of the transaction, Glen Rauch Securities will
become part of Valley's Financial Services Division.*
On July 17, 2002, Valley announced that it will expense the cost of all
stock options the company grants beginning with options granted and earnings
reported for the calendar year 2002. While the impact of expensing stock options
will not be material to Valley's financial statements for 2002, the impact on
Valley's net income is expected to increase over time as options vest and new
options are granted.* Based on Valley's historical levels of earnings and stock
options issuance, the effect of expensing options is expected to amount to
approximately $0.02 per diluted share annually when it makes its full impact on
earnings at the end of five years.* A recently announced review of accounting
principles by the Financial Accounting Standards Board regarding stock options
could affect the phase-in of this amount.
During the quarter ended June 30, 2002, a two-year Federal investigation
culminated in the arrest of an officer of the International Private Banking
Department of Merchants Bank and the seizure of 39 accounts that the officer
managed. The officer was charged with money laundering in furtherance of
narcotic trafficking activity, tax evasion, and unlicensed money transmitting.
Valley became aware of the investigation by Federal Law Enforcement Officials
during the course of its own due diligence investigation, prior to the
acquisition of Merchants Bank. Valley representatives met with the office of the
U.S. Attorney and continued the ongoing cooperation with the investigation into
the International Private Banking Department. Throughout the course of the
investigation, there was never any adverse impact upon Valley, its funds, its
customers or its operations. Valley will continue its policy of full and
complete cooperation with State and Federal Law Enforcement Authorities in the
investigation of criminal conduct that in any way affects the integrity of
Valley National Bank and its customers' accounts.
On June 18, 2002, Valley announced that it had entered into a Purchase
Agreement to acquire the assets of Masters Coverage Corp. ("Masters"), an
independent insurance agency. Masters is an all-line insurance agency offering
property and casualty, life and health insurance. The purchase of Masters will
be a cash acquisition with subsequent earn-out payments. Under the terms of the
agreement, Masters' operation will continue as a wholly-owned subsidiary of
Valley National Bank and their entire management team and staff are expected to
remain with the firm to assure continuity.* The transaction is subject to the
satisfaction of certain conditions and is expected to close during the third
quarter of this year.* Upon completion of the transaction, Masters will become
part of Valley's Financial Services Division.*
On May 1, 2002, Valley completed the sale of its subsidiary VNB Financial
Services, a Canadian finance company, to State Farm Mutual Automobile Insurance
Company for a purchase price equal to Valley's equity in the subsidiary plus a
premium of approximately $1.6 million. The subsidiary primarily originated fixed
rate auto loans in Canada through a marketing program with State Farm.
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4. Comprehensive Income
Valley's comprehensive income consists of foreign currency translation
adjustments and unrealized gains (losses) on securities available for sale. The
following table shows each component of comprehensive income for the six and
three months ended June 30, 2002 and 2001.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
(in thousands)
Net income $ 78,496 $ 63,122
Other comprehensive income, net of tax:
Foreign currency:
Translation adjustment $ 118 $ (72)
Reclassification adjustment for loss realized on sale
of Canadian subsidiary 995 --
Net foreign currency 1,113 (72)
Unrealized gains on securities:
Unrealized holding gains arising during period 19,381 14,496
Reclassification adjustment for gains realized in
net income (1,926) (671)
Net unrealized gains 17,455 13,825
Other comprehensive income 18,568 13,753
Comprehensive income $ 97,064 $ 76,875
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
(in thousands)
Net income $ 39,896 $ 34,559
Other comprehensive income, net of tax:
Foreign currency:
Translation adjustment $ 126 $ 273
Reclassification adjustment for loss realized on sale
of Canadian subsidiary 995 --
Net foreign currency 1,121 273
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 20,252 (710)
Reclassification adjustment for gains realized in
net income (1,926) (567)
Net unrealized gains (losses) 18,326 (1,277)
Other comprehensive income (loss) 19,447 (1,004)
Comprehensive income $ 59,343 $ 33,555
5. Statement of Financial Accounting Standards No. 142, "Goodwill and
Intangible Assets"
Valley adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Intangible Assets" (SFAS No. 142), effective January 1, 2002. SFAS
No. 142 eliminates the amortization of existing goodwill and requires evaluating
goodwill for impairment on an annual basis whenever circumstances occur that
would reduce the fair value. SFAS No. 142 also requires allocation of goodwill
to reporting segments defined by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". As of June 30, 2002, management identified
and evaluated the segments to which goodwill applies and an impairment allowance
was not required to be recorded. Management will continue to evaluate the need
for an impairment allowance on a quarterly basis.
6. Business Segments
The information under the caption "Business Segments" in Management's
Discussion and Analysis is incorporated herein by reference.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-Q, both in the MD & A and elsewhere, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about
management's confidence and strategies and management's expectations about new
and existing programs and products, acquisitions, relationships, opportunities,
taxation, technology and market conditions. These statements may be identified
by an (*) or such forward-looking terminology as "expect", "anticipate", "view",
"opportunity", "allow", "continues", "reflects", or similar statements or
variations of such terms. Actual results may differ materially from such
forward-looking statements. Factors that may cause actual results to differ from
those contained in such forward-looking statements include, among others, the
following: unanticipated changes in the direction of interest rates, effective
income tax rates, loan prepayment assumptions, levels of loan quality and
origination volume, relationships with major customers including sources of
loans, as well as the effects of economic conditions and legal and regulatory
barriers and structure. Valley assumes no obligation for updating any such
forward-looking statement at any time.
Earnings Summary(2)
Net income for the six months ended June 30, 2002 was $78.5 million or
$0.83 per diluted share compared with $63.1 million or $0.64 per diluted share
for the same period in 2001, an increase of 24.4 percent in net income and 29.7
percent in net income per diluted share. For the six months ended June 30, 2002,
the annualized return on average shareholders' equity increased to 23.67 percent
from 18.64 percent for the same period in 2001 and the annualized return on
average assets increased to 1.85 percent for the six months ended June 30, 2002
from 1.59 percent, for the same period in 2001.
For the three months ended June 30, 2002, net income was $39.9 million or
$0.42 per diluted share compared with $34.6 million or $0.35 per diluted share
for the same period in 2001, an increase of 15.4 percent in net income and a
20.0 percent increase in net income per diluted share. For the three months
ended June 30, 2002, the annualized return on average shareholders' equity
increased to 24.16 percent from 20.04 percent and the annualized return on
average assets increased to 1.87 percent for the three months ended
June 30, 2002 from 1.72 percent for the same period in 2001.
Valley also presents core earnings data that exclude items that relate to
one time non-recurring events.(3) Core earnings for the six months ended June
30, 2002 were $73.3 million or $0.77 per diluted share compared with $67.2
million or $0.69 per diluted share for the same period in 2001, an increase of
9.0 percent in core earnings and an 11.6 percent increase in core earnings per
diluted share. Core earnings for the three month period ended June 30, 2002 were
$37.8 million or $0.40 per diluted share compared with $34.6 million, or $0.35
per diluted share for the same period in 2001, an increase of 9.5 percent in
core earnings and a 14.3 percent increase in core earnings per diluted share.
(2) Earnings per share data reflects the 5 for 4 stock split issued on May 17,
2002.
(3) Core earnings include gains from sales of investment securities and gains
from sales of loans which are considered recurring and part of normal
operations.
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The following table summarizes the significant non-recurring items, net of
tax, excluded in core earnings:
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
(in thousands)
Net income $ 78,496 $ 63,122 $ 39,896 $ 34,559
Non-recurring items, net of tax:
Net one-time non-recurring items 14 -- (316) --
Merger (Merchants New York Bancorp)
related charge -- 7,000 -- --
Gain on sale of credit card portfolio -- (2,940) -- --
Income tax expense reduction ** (5,250) -- (1,750) --
Core Earnings $ 73,260 $ 67,182 $ 37,830 $ 34,559
** Due to the restructuring of an existing subsidiary into a Real Estate
Investment Trust (REIT).
Net Interest Income
Net interest income continues to be the largest source of Valley's
operating income. For the six month period ended June 30, 2002, net interest
income on a tax equivalent basis increased to $182.1 million or 9.2 percent,
compared with $166.7 million for the six months ended June 30, 2001. The
increase in net interest income is mainly attributed to higher average balances
of total interest earning assets, primarily loans and taxable investments in
addition to overall lower average interest rates for the period. Net interest
margin on a tax equivalent basis increased to 4.55 percent for the six months
ended June 30, 2002 compared with 4.39 percent for the six month period ended
June 30, 2001. This increase is mainly attributed to Valley's interest bearing
liabilities repricing at a faster pace than interest bearing assets in a
declining interest rate environment. During 2001, the Federal Reserve decreased
short-term interest rates 475 basis points due to general weakness in the
economy. The Federal Reserve has not changed interest rates in 2002. There can
be no assurances of how and when interest rates will move in the future and the
related effect these changes may have on net interest income.*
Average total interest earning assets increased $398.0 million or 5.2
percent for the six months ended June 30, 2002 over the same period in 2001.
This was mainly the result of increases in average loan balances of $235.6
million or 4.6 percent and investment securities of $188.8 million or 8.1
percent, partly offset by a decrease in average federal funds sold and other
short-term investments of $26.4 million or 19.1 percent.
Average interest bearing liabilities increased $188.9 million or 3.2
percent for the six months ended June 30, 2002 over the same period in 2001.
Average savings deposits increased $255.1 million or 10.8 percent and average
time deposits decreased $80.8 million or 3.2 percent. Average short-term
borrowings decreased $126.4 million or 40.6 percent and long-term debt, which
includes primarily FHLB advances, increased $141.0 million, or 17.6 percent.
Average demand deposits increased $163.3 million or 13.0 percent. During 2001,
in conjunction with declining interest rates, Valley began to extend maturities
of its short-term borrowings by converting to longer term Federal Home Loan Bank
advances. The extension of maturities is part of an effort to more closely match
a portion of Valley's funding sources with its mortgage portfolio and reduce
future interest rate risk.*
The average interest rate on total interest earning assets was 6.56 percent
for the six months ended June 30, 2002 compared with 7.57 percent for the six
months ended June 30, 2001. The average interest rate for loans decreased 117
basis points to 6.83 percent; the average interest rate for taxable investment
securities decreased 61 basis points to 6.14 percent; and the average interest
rate for federal funds sold and other short-term investments decreased 314 basis
points to 1.73 percent. The average interest rate on total interest
bearing liabilities was 2.61 percent for the six months ended June 30, 2002
compared with 4.06 percent for the six months ended June 30, 2001. Average
interest rates on interest-bearing deposits decreased 162 basis points to 2.12
percent, the average interest rate for short-term borrowings decreased 359 basis
points to 1.56 percent and the average interest rate for long-term debt
decreased 19 basis points to 5.43 percent.
For the three month period ended June 30, 2002, net interest income on a
tax equivalent basis increased to $92.9 million or 10.4 percent, compared with
$84.2 million for the three months ended June 30, 2001. This can be attributed
to an increase of $343.1 million in average interest earning assets, primarily
loans and investments, partly offset with a decrease of 77 basis points in the
average interest rate earned. These changes were further offset by an increase
of $172.2 million in average interest bearing liabilities and a decrease of 126
basis points in the average interest rate paid. The net interest margin on a tax
equivalent basis increased to 4.62 percent for the three months ended June 30,
2002 compared with 4.37 percent for the same period in 2001.
The following table reflects the components of net interest income for each
of the six months ended June 30, 2002 and 2001.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Six Months Ended June 30, 2002 Six Months Ended June 30,
2001
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
Assets
Interest earning assets
Loans (1)(2) $5,355,424 $182,933 6.83% $ 5,119,820 $ 204,671 8.00%
Taxable investments (3) 2,303,560 70,679 6.14 2,119,939 71,572 6.75
Tax-exempt
investments(1)(3) 226,426 7,821 6.91 221,222 8,081 7.31
Federal funds sold and
other short-term
investments 111,555 964 1.73 3,362 4.87
137,970
Total interest earning
assets 7,996,965 $262,397 6.56 7,598,951 $ 287,686 7.57
Allowance for loan
losses (65,849) (63,259)
Cash and due from
banks 181,803 184,688
Other assets 324,263 203,672
Unrealized gain
on securities available
for sale 38,245 13,210
Total assets $8,475,427 $7,937,262
Liabilities and
Shareholders' Equity
Interest bearing liabilities
Savings deposits $2,610,759 $16,720 1.28% $2,355,687 $26,493 2.25%
Time deposits 2,408,553 36,585 3.04 2,489,329 64,007 5.14
Total interest
bearing deposits 5,019,312 53,305 2.12 4,845,016 90,500 3.74
Short-term borrowings 184,717 1,445 1.56 311,138 8,007 5.15
Long-term debt 940,121 25,537 5.43 799,100 22,448 5.62
Total interest bearing
liabilities 6,144,150 80,287 2.61 5,955,254 120,955 4.06
Demand deposits 1,421,508 1,258,189
Other liabilities 46,550 46,442
Capital securities 200,000 --
Shareholders' equity 663,219 677,377
Total liabilities and
shareholders' equity $8,475,427 $ 7,937,262
Net interest income
(tax equivalent basis) 182,110 166,731
Tax equivalent
adjustment (2,883) (3,077)
Net interest income $ 179,227 $163,654
Net interest rate
Differential 3.95% 3.51%
Net interest margin (4) 4.55% 4.39%
(1) Interest income is presented on a tax equivalent basis using a 35 percent
federal tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is
based on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of total
average interest earning assets.
The following table reflects the components of net interest income for each
of the three months ended June 30, 2002 and 2001.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Three Months Ended June 30, 2002 Three Months Ended June 30, 2001
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
Assets
Interest earning assets
Loans (1)(2) $5,389,510 $ 91,974 6.83% $ 5,122,966 $100,208 7.82%
Taxable investments (3) 2,345,559 36,549 6.23 2,189,678 35,961 6.57
Tax-exempt
investments(1)(3) 230,963 3,967 6.87 224,212 4,051 7.23
Federal funds sold and
other short-term
investments 1.78 159,661 1,723 4.32
73,611 327
Total interest earning
assets 8,039,643 $132,817 6.61 7,696,517 $ 141,943 7.38
Allowance for loan
losses (65,923) (63,122)
Cash and due from
banks 178,182 182,181
Other assets 345,601 209,617
Unrealized gain on
securities available
for sale 45,244 18,911
Total assets $8,542,747 $8,044,104
Liabilities and
Shareholders' Equity
Interest bearing liabilities
Savings deposits $2,674,772 $ 8,632 1.29% $2,414,064 $12,688 2.10%
Time deposits 2,423,577 18,019 2.97 2,478,493 30,159 4.87
Total interest
bearing deposits 5,098,349 26,651 2.09 4,892,557 42,847 3.50
Short-term borrowings 173,841 619 1.42 197,627 2,246 4.55
Long-term debt 924,383 12,640 5.47 934,143 12,685 5.43
Total interest bearing
liabilities 6,196,573 39,910 2.58 6,024,327 57,778 3.84
Demand deposits 1,432,362 1,265,039
Other liabilities 53,266 64,873
Capital securities 200,000 --
Shareholders' equity 660,546 689,865
Total liabilities and
shareholders' equity $8,542,747 $ 8,044,104
Net interest income
(tax equivalent basis) 92,907 84,165
Tax equivalent
adjustment (1,460) (1,536)
Net interest income $ 91,447 $ 82,629
Net interest rate
differential 4.03% 3.54%
Net interest margin (4) 4.62% 4.37%
(1) Interest income is presented on a tax equivalent basis using a 35 percent
federal tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is
based on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of total
average interest 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
Six Months Ended June 30, Three Months Ended June 30,
2002 Compared with 2001 2002 Compared with 2001
Increase (Decrease) (2) Increase (Decrease) (2)
Interest Volume Rate Interest Volume Rate
(in thousands)
Interest income:
Loans (1) $ (21,738) $9,089 $ (30,827) $ (8,234) $ 5,021 $ (13,255)
Taxable investments (893) 5,924 (6,817) 588 2,484 (1,896)
Tax-exempt investments(1) (260) 187 (447) (84) 120 (204)
Federal funds sold and
other short-term
investments (2,398) (549) (1,849) (1,396) (667) (729)
(25,289) 14,651 (39,940) (9,126) 6,958 (16,084)
Interest expense:
Savings deposits (9,773) 2,620 (12,393) (4,056) 1,255 (5,311)
Time deposits (27,422) (2,015) (25,407) (12,140) (654) (11,486)
Short-term borrowings (6,562) (2,419) (4,143) (1,627) (243) (1,384)
Long-term debt 3,089 3,851 (762) (45) (133) 88
(40,668) 2,037 (42,705) (17,868) 225 (18,093)
Net interest income
(tax equivalent basis) $15,379 $12,614 $ 2,765 $ 8,742 $ 6,733 $ 2,009
(1) Interest income is adjusted to a tax equivalent basis using a 35 percent
federal 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
six and three months ended June 30, 2002 and 2001.
NON-INTEREST INCOME
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
(in thousands)
Trust and investment services $ 2,370 $ 2,408 $ 1,192 $ 1,197
Service charges on deposit accounts 9,712 9,250 4,827 4,702
Gains on securities transactions, net 2,964 979 2,609 816
Fees from loan servicing 4,913 5,506 2,415 2,821
Credit card fee income 1,456 1,929 784 932
Gains on sales of loans, net 3,342 7,523 1,562 1,886
Bank owned life insurance 3,222 -- 1,806 --
Other 10,486 6,830 5,226 3,388
Total non-interest income $ 38,465 $ 34,425 $ 20,421 $ 15,742
Non-interest income continues to represent a considerable source of income
for Valley, representing 12.9 percent of gross income for the six months ended
June 30, 2002. Excluding gains on securities transactions, net, total
non-interest income increased to $35.5 million for the six months ended June 30,
2002, a 6.1 percent increase compared with the $33.4 million recorded for the
six months ended June 30, 2001. For the quarter ended June 30, 2002, total
non-interest income excluding gains on securities transactions, net, was $17.8
million or 19.3 percent higher than the $14.9 million recorded for the quarter
ended June 30, 2001.
For the six and three month periods ended June 30, 2002, service charges on
deposit accounts increased $462 thousand or 5.0 percent and $125 thousand or 2.7
percent respectively, compared with the same periods in 2001, due to increases
in service fees charged.
Gains on securities transactions, net, increased $2.0 million or 202.8
percent to $3.0 million for the six months ended June 30, 2002 compared with
$1.0 million for the same period in 2001 and increased $1.8 million for the
quarter ended June 30, 2002 compared with the same period in 2001. The majority
of the gains were on appreciated equity securities sold in the quarter ended
June 30, 2002.
Fees from loan servicing decreased $593 thousand or 10.8 percent and $406
thousand or 14.4 percent for the six and three month periods ended June 30,
2002, as compared with the same periods in 2001. This decrease was mainly
attributed to a reduction in fee income on serviced mortgages due to heavy
refinancing activity as borrowers took advantage of lower interest rates.
Gains on the sales of loans,net for the six months ended June 30, 2002 were
$3.3 million, a decrease of $4.2 million or 55.6 percent compared with gains of
$7.5 million for the six months ended June 30, 2001. This decrease is primarily
attributed to the sale of the Shop Rite credit card portfolio resulting in a
$4.9 million gain recorded in January 2001.
For the quarter ended March 31, 2002, Valley invested an additional $50.0
million in Bank Owned Life Insurance ("BOLI") to help offset the rising cost of
employee benefits. This was in addition to the $100.0 million invested during
the third quarter of 2001. The investment portfolio was reduced by a like amount
during the respective periods to fund these insurance purchases. For the six and
three months ended June 30, 2002, income from BOLI of $3.2 million and $1.8
million, respectively, is included in non-interest income.
Other non-interest income increased $3.7 million or 53.5 percent to $10.5
million for the six months ended June 30, 2002 compared with $6.8 million for
the six months ended June 30, 2001. For the quarter ended June 30, 2002, other
non-interest income increased $1.8 million or 54.3 percent compared with the
same period in 2001. These increases include an $800 thousand settlement of a
lawsuit and a $1.6 million gain from the sale of a subsidiary to State Farm.
Non-Interest Expense
The following table presents the components of non-interest expense for the
six and three months ended June 30, 2002 and 2001.
NON-INTEREST EXPENSE
Six Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
(in thousands)
Salary expense $ 41,963 $ 38,996 $ 20,882 $ 19,548
Employee benefit expense 9,547 9,544 4,701 4,686
FDIC insurance premiums 549 584 274 292
Occupancy and equipment expense 13,995 15,381 7,118 7,544
Credit card expense 612 905 304 279
Amortization of intangible assets 4,903 3,942 2,714 2,124
Advertising 3,773 2,308 2,335 1,513
Distributions on capital securities 7,865 -- 3,932 --
Merger-related charges -- 9,017 -- --
Other 16,660 14,976 8,301 7,712
Total non-interest expense $ 99,867 $ 95,653 $ 50,561 $ 43,698
Non-interest expense totaled $99.9 million and $50.6 million, respectively,
for the six and three months ended June 30, 2002. This represents increases of
15.3 percent and 15.7 percent over the respective 2001 levels (exluding
merger-related charges).
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 six months ended
June 30, 2002 was 45.6 percent, one of the lowest in the industry, compared with
an efficiency ratio of 44.4 percent for the same period in 2001. Valley strives
to control its efficiency ratio and expenses as a means of producing increased
earnings for its shareholders.*
The largest components of non-interest expense are salaries and employee
benefit expense which totaled $51.5 million for the six months ended June 30,
2002 compared with $48.5 million for the same period in 2001, and $25.6 million
for the quarter ended June 30, 2002 compared with $24.2 million for the quarter
ended June 30, 2001. Valley's full-time equivalent staff remained at 2,126 as of
June 30, 2002 and 2001.
Salary expense increased $3.0 million or 7.6 percent and $1.3 million or
6.8 percent for the six and three month periods ended June 30, 2002 compared
with the same periods in the prior year. These increases are primarily due to
business expansion, including adding new branches, partially mitigated by a
decrease in back office staff.
Occupancy and equipment expense decreased $1.4 million or 9.0 percent to
$14.0 million for the six months ended June 30, 2002 and decreased $426 thousand
or 5.6 percent to $7.1 million for the three months ended June 30, 2002 compared
with the same periods in 2001. These decreases can be attributed to the overall
lower cost of repairs, utilities and depreciation expense.
Amortization of intangible assets increased $961 thousand or 24.4 percent
to $4.9 million for the six months ended June 30, 2002 and increased $590
thousand or 27.8 percent to $2.7 million for the three months ended June 30,
2002 compared with the same periods in 2001. These increases are primarily
attributed to higher reserves for the impairment of mortgage servicing rights as
a result of increased prepayments on higher interest rate mortgages, partly
offset by the elimination of goodwill amortization.
An impairment analysis is completed quarterly to determine the adequacy of
the mortgage servicing asset impairment reserve. Subsequent to June 30, 2002,
mortgage interest rates continued to decline resulting in an increase in
residential mortgage refinancing activities. Consequently, management
anticipates recording additional impairment reserves during the third quarter of
2002.*
Under new accounting rules effective January 1, 2002, amortization of
goodwill ceased. As of June 30, 2002, management identified and evaluated the
segments to which goodwill applies and an impairment allowance was not required
to be recorded. Management will continue to evaluate the need for an impairment
allowance on a quarterly basis.
Distributions on capital securities consist primarily of amounts required
to be paid or accrued on the $200 million of 7.75 percent trust preferred
securities issued in November of 2001. The cost for the six months and three
months ended June 30, 2002 was $7.9 million and $3.9 million, respectively.
During the first quarter of 2001, Valley recorded merger-related charges of
$9.0 million related to the acquisition of Merchants. On an after tax basis,
these charges totaled $7.0 million or $0.07 per diluted share. These charges
include only identified direct and incremental costs associated with this
acquisition such as: personnel expenses which include severance payments for
terminated directors at Merchants; professional fees which include investment
banking, accounting and legal fees; and other expenses which include the
disposal of data processing equipment and the write-off of supplies and other
assets not considered useful in the operation of the combined entities. The
major components of the merger-related charges, consisting of professional fees,
personnel and the disposal of data processing equipment, totaled $4.4 million,
$3.2 million and $486 thousand, respectively.
The significant components of other non-interest expense include data
processing, professional fees, postage, telephone and stationery expenses
totaling approximately $8.8 million and $7.3 million for the six months ended
June 30, 2002 and 2001, respectively. These expenses totaled $4.5 million and
$3.9 million for the three months ended June 30, 2002 and 2001, respectively.
Income Taxes
Income tax expense as a percentage of pre-tax income was 28.7 percent and
30.4 percent for the six and three months ended June 30, 2002, respectively,
compared with 35.3 percent and 33.3 percent for the same periods in 2001,
respectively. The decrease in the effective tax rate was primarily due to a
reduction in income tax expense as a result of the restructuring of an existing
subsidiary into a REIT. The effective tax rate for both the six and three months
ended June 30, 2002 were positively impacted by non-taxable income from the $155
million investment in BOLI. This decrease was partially offset by additional tax
expense being recorded due to the changes in New Jersey's Corporate Business
Tax, effective retroactively to January 1, 2002. The effect of these State tax
law changes is approximately $1.5 million of additional tax expense per year, or
a net income reduction of approximately $0.01 per diluted share. The effective
tax rate is expected to continue at approximately 30 percent for the remainder
of 2002.* Beginning in 2003, recurring annual benefits from the REIT
restructuring are expected to be significantly lower.*
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 management and corporate and other adjustments. Lines of business and
actual structure of operations determine each segment. Each is reviewed
routinely for its asset growth, contribution to 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
with any other financial institution. The accounting for each segment includes
internal accounting policies designed to measure consistent and reasonable
financial reporting.
The following table represents the financial data for the six months ended
June 30, 2002 and 2001.
Six Months Ended June 30, 2002
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
Average interest earning assets $ 2,680,149 $ 2,713,525 $ 2,603,291 $ -- $ 7,996,965
Income (loss) before income taxes $ 40,601 $ 36,558 $ 36,899 $ (3,912) $ 110,146
Return on average interest earning
assets (pre-tax) 3.03% 2.69% 2.83% --% 2.75%
Six Months Ended June 30, 2001
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
Average interest earning assets $ 2,683,360 $ 2,468,659 $ 2,446,932 $ -- $ 7,598,951
Income (loss) before income taxes $ 36,823 $ 40,137 $ 28,696 $ (8,165) $ 97,491
Return on average interest earning
assets (pre-tax) 2.74% 3.25% 2.35% --% 2.57%
Consumer Lending
The return on average interest earning assets before taxes increased 29
basis points to 3.03 percent for the six months ended June 30, 2002 compared
with 2.74 percent for the six months ended June 30, 2001. Average interest
earning assets remained unchanged at $2.7 billion. Average interest rates on
consumer loans decreased 75 basis points and the cost of funds decreased 117
basis points. Income before income taxes increased $3.8 million to $40.6 million
from $36.8 million, primarily as a result of the increase in net interest
margin, offset by an increase in operating expenses.
Commercial Lending
The return on average interest earning assets before taxes decreased 56
basis points to 2.69 percent for the six months ended June 30, 2002 compared
with 3.25 percent for the six months ended June 30, 2001. Average interest
earning assets increased $244.9 million as a result of an increased volume of
loans. Decreases in the prime lending rate resulted in a 158 basis point
reduction in commercial loan rates, primarily due to a portion of loans tied to
the prime rate index. The cost of funds also decreased by 117 basis points.
Income before income taxes decreased $3.6 million mainly as a result of a
decreased margin, a higher provision for loan losses and a larger allocation of
the internal expense transfer due to increased average volume.
Investment Management
The return on average interest earning assets before taxes increased to
2.83 percent for the six months ended June 30, 2002 compared with 2.35 percent
for the six months ended June 30, 2001. The yield on interest earning assets
decreased 71 basis points to 6.01 percent as a result of larger prepayments and
lower yields on new investments and the cost of funds decreased 117 basis points
to 2.01 percent. Average interest earning assets increased $156.4 million to
$2.6 billion. Income before income taxes increased $8.2 million as a result of
higher outstanding average earning assets and the decrease in the cost of funds
in excess of the decrease in interest yield.
Corporate and Segment
The corporate segment represents income and expense items not directly
attributable to a specific segment which may include non-recurring items such
as: merger-related charges, non-recurring gains on sales of loans and service
charges on deposit accounts. The loss before taxes for the corporate segment was
$3.9 million for the six months ended June 30, 2002, compared with a loss before
taxes of $8.2 million for the six months ended June 30, 2001. The decrease in
the loss before taxes is primarily due to the pre-tax merger related charges of
$9.0 million incurred in the six months ended June 30, 2001 partly offset by
$7.9 million distributions on capital securities.
The following table represents the financial data for the three months
ended June 30, 2002 and 2001.
Three Months Ended June 30, 2002
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
Average interest earning assets $ 2,697,783 $ 2,732,105 $ 2,609,755 $ -- $ 8,039,643
Income (loss) before income taxes $ 20,469 $ 17,460 $ 20,138 $ (734) $ 57,333
Return on average interest-earning
assets (pre-tax) 3.03% 2.56% 3.09% --% 2.85%
Three Months Ended June 30, 2001
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
Average interest earning assets $ 2,637,862 $ 2,513,487 $ 2,545,168 $ -- $7,696,517
Income (loss) before income taxes $ 19,253 $ 19,398 $ 14,775 $ (1,588) $ 51,838
Return on average interest earning
assets (pre-tax) 2.92% 3.09% 2.32% --% 2.69%
Consumer Lending
The consumer lending segment had a return on average interest earning
assets before taxes of 3.03 percent for the three months ended June 30, 2002
compared with 2.92 percent for the three months ended June 30, 2001. Average
interest earning assets increased $59.9 million, primarily from higher volume of
home equity and automobile loans. Average interest rates on consumer loans
decreased 74 basis points, while the cost of funds decreased 101 basis points.
Income before income taxes increased $1.2 million to $20.5 million primarily as
a result of the increase in net interest margin and increased volume.
Commercial Lending
The return on average interest earning assets before taxes decreased 53
basis points to 2.56 percent for the three months ended June 30, 2002, compared
with 3.09 percent for the three months ended June 30, 2001. Average interest
earning assets increased $218.6 million as a result of increased volume of
loans. Interest rates on commercial loans decreased by 138 basis points and the
cost of funds decreased by 101 basis points. Income before income taxes
decreased by $1.9 million, mainly as a result of the decreased margin, higher
provision for loan losses, from increases in operating expenses and a larger
allocation of the internal expense transfer resulting from increased average
volume.
Investment Management
The return on average interest earning assets before taxes increased 77
basis points to 3.09 percent for the three months ended June 30, 2002 compared
with 2.32 percent for the three months ended June 30, 2001. The yield on
interest earning assets decreased by 19 basis points to 6.27 percent, and the
cost of funds decreased 101 basis points. Average interest earning assets
increased by $64.6 million and income before income taxes increased $5.4 million
primarily as a result of a lower cost of funds and increased average balance of
investments.
Corporate Segment
The corporate segment represents income and expense items not directly
attributable to a specific segment which may include non-recurring items such
as: merger-related charges, gain on sales of loans and service charges on
deposit accounts. The loss before taxes for the corporate segment was $734
thousand for the three months ended June 30, 2002, compared with a loss of $1.6
million for the three months ended June 30, 2001.
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"). ALCO establishes policies that monitor and coordinate
Valley's sources, uses and pricing of funds as well as interest earning asset
pricing and volume.
Valley uses a simulation model to analyze net interest income sensitivity
to movements in interest rates. The simulation model projects net interest
income based on various interest rate scenarios over a twelve and twenty-four
month period. The model is based on the actual maturity and repricing
characteristics of rate sensitive assets and liabilities. The model incorporates
assumptions regarding the impact of changing interest rates on the prepayment
rates of certain assets and liabilities. There was no material change in the
results of the model at June 30, 2002, compared with December 31, 2001.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow
needs as they become due. Maintaining a level of liquid funds through
asset/liability management seeks to ensure that these needs are met at a
reasonable cost. On the asset side, liquid funds are maintained in the form of
cash and due from banks, federal funds sold, investment securities held to
maturity maturing within one year, securities available for sale and loans held
for sale. Liquid assets totaled $2.5 billion at June 30, 2002 and December 31,
2001. This represents 30.1 percent and 31.7 percent of earning assets and 28.3
percent and 29.6 percent of total assets at June 30, 2002 and December 31, 2001,
respectively.
On the liability side, the primary source of funds available to meet
liquidity needs is Valley's core deposit base, which generally excludes
certificates of deposit over $100 thousand. Core deposits averaged approximately
$5.3 billion for the six months ended June 30, 2002 and $5.1 billion for the
year ended December 31, 2001, representing 66.5 percent and 66.8 percent,
respectively, of average earning assets. Short-term and long-term borrowings
through federal funds lines, repurchase agreements, Federal Home
Loan Bank ("FHLB") advances, lines of credit and large dollar certificates
of deposit, generally those over $100 thousand, are used as supplemental funding
sources. Additional liquidity is derived from scheduled loan and investment
payments of principal and interest, as well as prepayments received. For the six
months ended June 30, 2002 there were $282.4 million of proceeds from the sales
of investment securities available for sale and proceeds of $549.7 million were
generated from investment maturities, redemptions and prepayments of principal.
Purchases of investment securities for the six months ended June 30, 2002 were
$900.4 million. Short-term borrowings and certificates of deposit over $100
thousand amounted to $1.3 billion, on average, for the six months ended June 30,
2002 and the year ended December 31, 2001.
Valley's recurring cash requirements consist primarily of dividends to
shareholders and distributions on trust preferred securities. This cash need is
routinely satisfied by dividends collected from its subsidiary bank along with
cash and investments owned. Projected cash flows from these sources are expected
to be adequate to pay dividends, given the current capital levels and current
profitable operations of its subsidiary.* In addition, Valley may repurchase
shares of its outstanding common stock.* The cash required for these purchases
of shares has been met by using its own funds, dividends received from its
subsidiary bank as well as borrowed funds and the proceeds from the issuance of
$200 million trust preferred securities. At June 30, 2002, Valley maintained a
floating rate line of credit with a third party in the amount of $35 million, of
which none was drawn. This line is available for general corporate purposes and
expires June 13, 2003. Borrowings under this facility, if any, are
collateralized by equity securities of no less than 120 percent of the loan
balance.
As of June 30, 2002, Valley had $2.3 billion of securities available for
sale recorded at their fair value, compared with $2.2 billion at December 31,
2001. As of June 30, 2002, the investment securities available for sale had an
unrealized gain of $38.2 million, net of deferred taxes, compared with $20.8
million, net of deferred taxes, at December 31, 2001. This change was primarily
due to an increase in prices resulting from a decreasing interest rate
environment. These securities are not considered trading account securities,
which may be sold on a continuous basis, but rather, are securities which may be
sold to meet the various liquidity and interest rate requirements of Valley.
Loan Portfolio
As of June 30, 2002, total loans were $5.5 billion, compared with $5.3
billion at December 31, 2001. The following table reflects the composition of
the loan portfolio as of June 30, 2002 and December 31, 2001.
LOAN PORTFOLIO
June 30, December 31,
2002 2001
(in thousands)
Commercial $ 1,090,045 $ 1,080,852
Total commercial loans 1,090,045 1,080,852
Construction 201,341 206,789
Residential mortgage 1,310,485 1,323,877
Commercial mortgage 1,441,810 1,365,344
Total mortgage loans 2,953,636 2,896,010
Home equity 428,805 398,102
Credit card 11,220 12,740
Automobile 903,404 842,247
Other consumer 102,753 101,856
Total consumer loans 1,446,182 1,354,945
Total loans $5,489,863 $5,331,807
As a percent
of total loans:
Commercial loans 19.9% 20.3%
Mortgage loans 53.8 54.3
Consumer loans 26.3 25.4
Total 100.0 100.0%
The largest increases in the loan portfolio were in commercial mortgage
loans, home equity loans and automobile loans. Commercial mortgage loans
increased $76.5 million or 5.6 percent to $1.4 billion, home equity loans
increased $30.7 million or 7.7 percent to $428.8 million and automobile loans
increased $61.2 million or 7.3 percent to $903.4 million.
On May 1, 2002, Valley sold its Canadian finance subsidiary, VNB Financial
Services with automobile loans totaling $24.1 million, to State Farm Mutual
Automobile Insurance. Despite this sale, Valley has been able to expand its
automobile lending program through increased indirect activity. Automobile
lending increased 9.4% or $78.0 million in the second quarter of 2002 compared
to the first quarter. Excluding the sale to State Farm, automobile lending would
have increased 12.4% or $102.1 million in the second quarter 2002. Automobile
loan growth can be negatively impacted by manufacturing based incentives such as
zero percent financing and therefore, Valley cannot guarantee the same
performance in future periods.*
Newly originated conforming residential mortgage loans with low long-term
fixed rates are being sold into the secondary market. Excluding these sales of
approximately $127.7 million, residential mortgages would have increased 8.6
percent or $114.3 million.
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 real estate. OREO is reported at the lower of
cost or fair value at the time of acquisition and at the lower of fair value,
less estimated costs to sell, or cost thereafter.
Non-performing assets totaled $19.6 million at June 30, 2002, compared with
$18.8 million at December 31, 2001, an increase of $741 thousand. Non-performing
assets at June 30, 2002 and December 31, 2001, amounted to 0.36 percent and 0.35
percent of loans and OREO, respectively.
Loans 90 days or more past due and not included in the non-performing
category totaled $10.2 million at June 30, 2002, compared with $10.5 million at
December 31, 2001. These loans are primarily 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 $4.2 million at June 30, 2002 and $3.8 million
at December 31, 2001, respectively.
Total loans past due in excess of 30 days were 1.05 percent of all loans at
June 30, 2002 compared with 1.09 percent at June 30, 2001 and 1.30 percent at
December 31, 2001.
The following table sets forth non-performing assets and accruing loans
which were 90 days or more past due as to principal or interest payments on the
dates indicated, in conjunction with asset quality ratios for Valley.
LOAN QUALITY
June 30, December 31,
2002 2001
(in thousands)
Loans past due in excess of
90 days and still accruing $ 10,216 $10,456
Non-accrual loans $ 19,553 $18,483
Other real estate owned $ -- $ 329
Total non-performing assets $ 19,553 $18,812
Troubled debt restructured loans $ 866 $ 891
Non-performing loans as a % of loans 0.36% 0.35%
Non-performing assets as a % of
loans plus other real estate owned 0.36% 0.35%
Allowance as a % of loans 1.17% 1.20%
At June 30, 2002, the allowance for loan losses totaled $64.3 million,
relatively unchanged from $63.8 million at December 31, 2001. The allowance is
adjusted by provisions charged against income and loans charged-off, net of
recoveries. Net loan charge-offs were $7.2 million and $3.9 million for the six
and three months ended June 30, 2002 compared with $4.9 million and $3.4 million
for the six and three months ended June 30, 2001, respectively.
The allowance for loan losses is maintained at a level estimated to absorb
probable loan losses of the loan portfolio.* The allowance is based on ongoing
evaluations of the probable estimated losses inherent in the loan portfolio.
VNB's methodology for evaluating the appropriateness of the allowance 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 (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures."
Historically, Valley has made provisions based on net charge-off levels. In
the current economic conditions, that information is applied to the composition
of the loan portfolio to provide adequate levels in the allowance for loan
losses. The provisions charged to operations for the six and three months ended
June 30, 2002 were $7.7 million and $4.0 million, respectively, compared with
$4.9 million and $2.8 million for the same periods in 2001.
Capital Adequacy
A significant measure of the strength of a financial institution is its
shareholders' equity. At June 30, 2002, shareholders' equity totaled $673.1
million or 7.7 percent of total assets, compared with $678.4 million or 7.9
percent at year-end 2001.
On August 21, 2001 Valley's Board of Directors authorized the repurchase of
up to 10,000,000 shares of the Company's outstanding common stock. Purchases may
be made from time to time in the open market or in privately negotiated
transactions generally not exceeding prevailing market prices. Reacquired shares
are held in treasury and are expected to be used for general corporate purposes.
As of June 30, 2002, Valley had repurchased approximately 5.2 million shares of
its common stock at an average cost of $25.32 per share.
Included in shareholders' equity as components of accumulated other
comprehensive income at June 30, 2002 was a $38.2 million unrealized gain on
investment securities available for sale, net of tax, as compared with an
unrealized gain of $20.8 million at December 31, 2001.
Risk-based guidelines define a two-tier capital framework. Tier I capital
consists of common shareholders' equity and trust preferred securities, less
disallowed intangibles and adjusted to exclude unrealized gains and losses, net
of tax. Total risk-based capital consists of Tier I capital and the allowance
for loan losses up to 1.25 percent of risk-adjusted assets. Risk-adjusted assets
are determined by assigning various levels of risk to different categories of
assets and off-balance sheet activities.
In November 2001, Valley sold $200.0 million of trust preferred securities,
which qualify as Tier I capital, within regulatory limitations. Including these
securities, at June 30, 2002, Valley's capital position under risk-based capital
guidelines was $822.8 million or 13.0 percent of risk-weighted assets for Tier 1
capital and $887.1 million or 14.0 percent for Total risk-based capital. The
comparable ratios at December 31, 2001 were 14.1 percent for Tier 1 capital and
15.2 percent for Total risk-based capital. At June 30, 2002 and December 31,
2001, Valley was in compliance with the leverage requirement having Tier 1
leverage ratios of 9.7 percent and 10.3 percent, respectively. Valley's ratios
at June 30, 2002 were above the "well capitalized" requirements, which require
Tier I capital to risk-adjusted assets of at least 6 percent, Total risk-based
capital to risk-adjusted assets of 10 percent and a minimum leverage ratio of 5
percent.
Book value per share amounted to $7.20 at June 30, 2002 compared with $7.10
per share at December 31, 2001.
The primary source of capital growth is through retention of earnings.
Valley's rate of earnings retention, derived by dividing undistributed earnings
by net income, was 48.6 percent for the six months ended June 30, 2002, compared
with 44.6 percent for the six months ended June 30, 2001. Cash dividends
declared amounted to $0.44 per share, for the six months ended June 30, 2002,
equivalent to a dividend payout ratio of 51.4 percent, compared with 55.4
percent for the same period in 2001. Valley declared a five for four stock split
on April 10, 2002, to shareholders of record on May 3, 2002, issued May 17,
2002. The Board also approved an increase of the annual dividend rate to $0.90
per share, compared with $0.85 per share, on an after split basis. The increased
cash dividend, which is payable quarterly began on July 1, 2002. Valley's Board
of Directors continues to believe that cash dividends are an important component
of shareholder value and that, at its current level of performance and capital,
Valley expects to continue its current dividend policy of a quarterly cash
distribution of earnings to its shareholders.*
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 142, "Goodwill and
Intangible Assets" (SFAS No. 142), was issued by the Financial Accounting
Standards Board on June 27, 2001. SFAS No. 142 eliminates the amortization of
existing goodwill and requires evaluating goodwill for impairment on an annual
basis whenever circumstances occur that would reduce the fair value. SFAS No.
142 also requires allocation of goodwill to reporting segments defined by SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This Statement is effective for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 142 did not have a material impact on the consolidated
financial statements and related disclosures.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), was issued by the
Financial Accounting Standards Board on October 3, 2001. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it
retains many of the fundamental provisions of that Statement. The Statement is
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS No. 144 did not have a material impact on the consolidated financial
statements.
Statement of Financial Accounting Standards No. 145, "Rescission of SFAS:
No.'s 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections" was
issued by the FASB in April of 2002. The provisions of SFAS No. 145 related to
the rescission of SFAS No. 4 "Reporting Gains and Losses from Extinguishment of
Debt" and its amendment SFAS No. 64 "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements", are effective for fiscal years beginning after May
15, 2002. SFAS No. 145 also rescinds SFAS No. 44 "Accounting for Intangible
Assets of Motor Carriers", and amends SFAS No. 13 "Accounting for Leases" and
makes various "Technical Corrections" to existing accounting pronouncements.
Valley anticipates that the adoption of SFAS No. 145 will not have a material
impact on the consolidated financial statements.*
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). This Statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002. Valley anticipates that the adoption of SFAS No. 146 will not have a
material impact on the consolidated financial statements.*
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See page 22 for a discussion of interest rate sensitivity.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 10, 2002, the Annual Meeting of Shareholders of Valley
National Bancorp was held. The Shareholders voted upon the election
of 18 persons, named in the Proxy Statement, to serve as directors of
the Corporation for the ensuing year. All directors were elected and
there was no solicitation in opposition to management's nominees as
listed in the Proxy Statement. The following is a list of directors
elected at the Annual Meeting with the number of votes "For" and
"Withheld". There were no abstentions.
Name Number of Votes for Withheld
Andrew B. Abramson 64,741,696 841,608
Charles J. Baum 64,701,963 881,340
Pamela Bronander 64,935,830 647,473
Joseph Coccia, Jr 64,924,449 658,853
Harold P. Cook, III 64,913,603 669,699
Graham O. Jones 64,604,057 979,246
Walter H. Jones, III 64,727,253 856,050
Gerald Korde 64,936,869 646,434
Gerald H. Lipkin 64,739,562 843,741
Robinson Markel 64,607,365 975,939
Robert E. McEntee 64,729,418 853,885
Richard S. Miller 64,739,131 844,171
Robert Rachesky 64,703,235 880,066
Barnett Rukin 64,736,850 846,452
Peter Southway 64,822,861 760,442
Richard F. Tice 64,892,509 690,791
Leonard Vorcheimer 64,640,427 942,875
Spencer B. Witty 64,779,994 803,307
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Title
99.1 Certification of Chief Executive Officer
Pursuant to U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant
to U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Filed April 15, 2002, to report that the Company issued a
press release on April 10, 2002 announcing the declaration
of the Company's 5 for 4 stock split on the Company's
outstanding common stock payable on May 17, 2002.
2. Filed April 23, 2002, to report a change in the Company's
Certifying Accountants on April 18, 2002 from KPMG LLP to
Ernst & Young LLP.
3. Form 8-K/A filed April 29, 2002, to amend the Company's
Current Report on Form 8-K filed by the Company with the
Securities and Exchange Commission on April 23, 2002.
4. Filed June 18, 2002, to report that the Company issued a
press release on June 18, 2002 announcing that the Company
entered into an agreement for the acquisition of Masters
Coverage Corp.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY NATIONAL BANCORP
(Registrant)
Date: August 13, 2002 /s/
GERALD H. LIPKIN
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: August 13, 2002 /s/
ALAN D. ESKOW
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Exhibit 99.1
VALLEY NATIONAL BANCORP
AND CONSOLIDATED SUBSIDIARIES
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This Certification is to accompany the Quarterly Report of Valley National
Bancorp (the "Company") on Form 10-Q for the period ending June 30, 2002 as
filed with the Securities and Exchange Commission (the "Report").
I, Gerald H. Lipkin, Chairman, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) Information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/__________________________________
GERALD H. LIPKIN
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER,
VALLEY NATIONAL BANCORP
AUGUST 13, 2002
Exhibit 99.2
VALLEY NATIONAL BANCORP
AND CONSOLIDATED SUBSIDIARIES
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This Certification is to accompany the Quarterly Report of Valley National
Bancorp (the "Company") on Form 10-Q for the period ending June 30, 2002 as
filed with the Securities and Exchange Commission (the "Report").
I, Alan D. Eskow, Executive Vice President and Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) Information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/_______________________________
ALAN D. ESKOW
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER,
VALLEY NATIONAL BANCORP
AUGUST 13, 2002