UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarter Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Period Ended June 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________ to __________.
Commission File Number 0-11179
VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
(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) (Zip Code)
(201)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 for 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 XXX 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 36,374,522 shares were
outstanding as of August 1, 1996.
VALLEY NATIONAL BANCORP
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
June 30, 1996 and December 31, 1995
(Unaudited)
Consolidated Statements of Income 4
Six and Three Months Ended June 30, 1996 and 1995
(Unaudited)
Consolidated Statements of Cash Flows 5
Six Months Ended June 30, 1996 and 1995
(Unaudited)
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 7 - 15
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
2
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Unaudited)
($ in thousands)
June 30, December 31,
1996 1995
Cash and due from banks ................................... $ 138,824 $ 167,349
Federal funds sold ........................................ 55,000 108,500
Investment securities held to maturity, fair value of
$250,956 and $270,622 in 1996 and 1995, respectively .... 249,872 266,354
Investment securities available for sale .................. 1,067,967 1,146,285
Loans, net of unearned income ............................. 2,942,215 2,793,175
Less: Allowances for possible loan losses ................ (41,417) (39,670)
----------- -----------
Loans, net ................................................ 2,900,798 2,753,505
----------- -----------
Premises and equipment, net ............................... 61,361 58,053
Due from customers on acceptances outstanding ............. 668 838
Accrued interest receivable ............................... 30,513 30,450
Other assets .............................................. 58,132 54,477
----------- -----------
Total assets ............................................ $ 4,563,135 $ 4,585,811
----------- -----------
Liabilities
Deposits:
Non-interest bearing deposits ........................... $ 525,784 $ 542,229
Interest bearing:
Savings ............................................... 1,707,667 1,699,871
Time .................................................. 1,808,403 1,841,773
----------- -----------
Total deposits ...................................... 4,041,854 4,083,873
----------- -----------
Federal funds purchased and securities sold under
repurchase agreements ................................... 39,748 26,921
Treasury tax and loan account ............................. 27,632 10,524
Other borrowings .......................................... 40,674 28,679
Bank acceptances outstanding .............................. 668 838
Accrued expenses and other liabilities .................... 35,305 34,739
----------- -----------
Total liabilities ....................................... 4,185,881 4,185,574
----------- -----------
Shareholders' Equity
Common stock, no par value, authorized 75,000,000 shares,
issued 36,679,280 shares in 1996 and 35,889,721 in 1995 . 20,433 20,025
Surplus ................................................... 238,775 216,377
Retained earnings ......................................... 131,423 162,012
Unrealized gain(loss) on investment securities available
for sale, net of tax .................................... (6,412) 3,733
Translation adjustment .................................... 6 --
----------- -----------
384,225 402,147
Treasury stock, at cost (241,706 common shares in
1996 and 107,413 shares in 1995) ........................ (6,971) (1,910)
----------- -----------
Total shareholders' equity .............................. 377,254 400,237
----------- -----------
Total liabilities and shareholders' equity ............ $ 4,563,135 $ 4,585,811
=========== ===========
See accompanying notes to consolidated financial statements
3
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
($ in thousands, except for per share data)
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- -------
Interest Income
Interest and fees on loans.......$ 117,828 $ 110,907 $ 59,204 $ 56,182
Interest and dividends on
investment securities:
Taxable........................ 33,437 39,111 16,579 19,404
Tax-exempt..................... 6,636 7,118 3,300 3,478
Dividends...................... 352 343 166 169
Interest on federal funds sold
and other short term
investments.................... 1,847 880 578 478
---------- ---------- ---------- ----------
Total Interest Income.......... 160,100 158,359 79,827 79,711
---------- ---------- ---------- ----------
Interest Expense
Interest on deposits:
Savings........................ 19,682 24,207 10,137 12,113
Time........................... 49,575 44,321 24,525 23,455
Interest on federal funds
purchased and securities sold
under repurchase agreements.... 535 1,757 251 837
Interest on other short-term
borrowings..................... 308 369 148 177
Interest on other borrowings..... 1,191 992 627 474
---------- ---------- ---------- ----------
Total Interest Expense......... 71,291 71,646 35,688 37,056
---------- ---------- ---------- ----------
Net interest income.............. 88,809 86,713 44,139 42,655
Provision for possible loan
losses......................... 1,750 1,476 1,050 650
---------- ---------- ---------- ----------
Net interest income after
provision for possible
loan losses.................... 87,059 85,237 43,089 42,005
---------- ---------- ---------- ----------
Non-Interest Income
Trust income..................... 515 440 255 220
Service charges on deposit
accounts....................... 3,985 3,979 2,009 2,009
Gains on securities transactions
net............................ 573 551 241 14
Fees from mortgage servicing..... 1,968 1,686 953 879
Gains on sales of loans.......... 975 551 314 170
Other............................ 3,550 2,633 1,442 1,445
---------- ---------- ---------- ----------
Total Non-Interest Income...... 11,566 9,840 5,214 4,737
---------- ---------- ---------- ----------
Non-Interest Expense
Salaries expense................. 18,088 17,045 9,162 8,393
Employee benefit expense......... 4,596 4,725 2,134 2,274
FDIC insurance premiums.......... 1,513 4,386 796 2,193
Occupancy and equipment expense.. 7,523 6,722 3,846 3,312
Amortization of intangible
assets......................... 1,543 1,204 780 598
Other............................ 12,147 12,859 6,820 7,932
---------- ---------- ---------- ----------
Total Non-Interest Expense..... 45,410 46,941 23,538 24,702
---------- ---------- ---------- ----------
Income before income taxes....... 53,215 48,136 24,765 22,040
Income tax expense............... 18,041 20,190 7,959 11,459
---------- ---------- ---------- ----------
Net Income.......................$ 35,174 $ 27,946 $ 16,806 $ 10,581
========== ========== ========== ==========
Net income per share.............$ 0.95 $ 0.75 $ 0.46 $ 0.28
========== ========== ========== ==========
Weighted average shares
outstanding....................37,002,156 37,281,808 36,639,990 37,558,752
See accompanying notes to consolidated financial statements.
4
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
($ in thousands)
Six Months Ended
June 30,
1996 1995
---------- -------
Cash flows from operating activities:
Net income............................................... $ 35,174 $ 27,946
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of intangible assets..... 4,861 3,489
Amortization of compensation costs pursuant to
long term stock incentive plan....................... 221 159
Provision for possible loan losses..................... 1,750 1,476
Net amortization of premiums........................... 2,446 2,446
Net gains on securities transactions................... (573) (551)
Gains on sales of loans................................ (975) (551)
Proceeds from recoveries on charged-off loans.......... 2,527 1,608
Other.................................................. -- (1,378)
Net decrease(increase) in accrued interest receivable
and other assets..................................... 2,261 (3,252)
Net increase in accrued expenses and other liabilities. 464 4,838
Net increase in shareholders' equity due to
acquisition of American Union Bank................... -- 4,425
---------- ----------
Net cash provided by operating activities: 48,156 40,655
---------- ----------
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity............................................ 25,000 70,907
Purchases of investment securities held to maturity...... (9,973) (13,257)
Proceeds from sales of investment securities
available for sale..................................... 58,057 19,218
Proceeds from maturing investment securities
available for sale..................................... 147,693 14,380
Purchases of investment securities available for sale.... (144,997) (26,590)
Purchases of mortgage servicing rights................... (523) (3,867)
Net decrease in federal funds sold and other
short term investments................................. 53,500 --
Net increase in loans made to customers.................. (150,595) (99,412)
Purchases of premises and equipment, net of sales........ (6,625) (7,019)
Net decrease(increase) in due from customers on
acceptances outstanding................................ 170 (605)
---------- ----------
Net cash used in investing activities: (28,293) (46,245)
---------- ----------
Cash flows from financing activities:
Net increase(decrease) in deposits....................... (42,019) 28,295
Net increase(decrease) in federal funds purchased
and other short term borrowings........................ 29,935 (19,996)
Advances of other borrowings............................. 20,000 --
Repayments of other borrowings........................... (8,005) (2,384)
Net increase(decrease) in bank acceptances outstanding... (170) 605
Dividends paid to common shareholders.................... (17,862) (14,491)
Addition of common shares to treasury.................... (30,318) (1,332)
Common stock issued, net of cancellations................ 51 2,167
---------- ----------
Net cash used in financing activities: (48,388) (7,136)
---------- ----------
Net decrease in cash and due from banks.................... (28,525) (12,726)
Cash and due from banks at beginning of period............. 167,349 168,071
---------- ----------
Cash and due from banks at end of period................... $ 138,824 $ 155,345
---------- ----------
Cash paid during the period for:
Interest on deposits and other borrowings................ $ 70,999 $ 71,001
Federal and state income taxes........................... $ 17,056 $ 22,278
See accompanying notes to consolidated financial statements.
5
VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
The Consolidated Statements of Financial Condition as of June 30, 1996
and December 31, 1995, the Consolidated Statements of Income for the
six and three month periods ended June 30, 1996 and 1995 and the
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1996 and 1995 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, 1996 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These consolidated financial
statements are to be read in conjunction with the financial statements
and notes thereto included in Valley's December 31, 1995 Annual Report
to Shareholders.
2. Earnings Per Share
All 1995 share and per share amounts have been restated to reflect the
5% stock dividend declared April 2, 1996 to shareholders of record on
April 26, 1996 and issued May 17, 1996.
6
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Earnings Summary
Net income for the six months ended June 30, 1996 was $35.2 million, or $0.95
per share. These results compare to net income of $27.9 million, or $0.75 per
share for the same period in 1995 after non-recurring merger expenses of
approximately $5.3 million. Net income for the six months ended June 30, 1995
before non-recurring merger expense was $33.3 million, or $0.89 per share. This
reflects an increase in net income of $1.9 million or 5.8% for the six months
ended June 30, 1996 in comparison to the same period in 1995. The annualized
return on average assets (ROA) and annualized return on average shareholder's
equity (ROE) were 1.55% and 17.99%, respectively, for the six months ended June
30, 1996. This compares to an ROA and ROE of 1.49% and 18.08% before
non-recurring merger expenses for the same period in 1995.
The increase in net income for the six months ended June 30, 1996, after
adjusting for the non-recurring merger expenses, can be attributed to an
increase in net interest income of $2.1 million, an increase in other
non-interest income of $917 thousand and a decrease in FDIC insurance expense of
$2.9 million, offset by an increase in the loan loss provision of $274 thousand,
a $1.0 million increase in salaries expense, an $801 thousand increase in
occupancy expense, a $1.6 million increase in other non-interest expense, and a
$851 thousand increase in income tax expense.
Net income for the three months ended June 30, 1996 was $16.8 million, or $0.46
per share. These results compare to net income of $10.6 million or $0.28 per
share for the same three month period in 1995 after non-recurring merger
expenses. Net income for the three months ended June 30, 1995 before
non-recurring merger expenses was $15.9 million, or $0.42 per share. This
reflects an increase in net income of $900 thousand or 5.3% for the three months
ended June 30, 1996 in comparison to the same period in 1995.
The increase in net income for the three months ended June 30, 1996, after
adjusting for non-recurring merger expenses, resulted from an increase in net
interest income of $1.5 million, a decrease in FDIC insurance expense of $1.4
million, and a reduction in income tax expense of $500 thousand, offset by an
increase in the loan loss provision of $400 thousand, an increase in salaries
expense of $769 thousand and an increase of $1.2 million in non-interest
expense.
Net Interest Income
Net interest income on a tax equivalent basis increased to $88.8 million from
$86.7 million for the six months ended June 30, 1996 as compared to the same
period in 1995, and also increased to $44.1 million from $42.7 million for the
three months ended June 30, 1996 as compared to the same three month period of
1995. The net interest margin increased to 4.33% and 4.31% for the six month
period and quarter ended June 30, 1996 compared to 4.31% and 4.24% for the same
periods in 1995.
Average interest earning assets increased $68.9 million during the six months
ended June 30, 1996. This increase was mainly the result of increased automobile
loan and commercial mortgage loan volume. The average rate on loans remained
relatively unchanged at 8.39%, however, the increase in average loans of $169.3
million caused interest income on loans to increase by $6.9 million for the
first six months of 1996 as compared to the same period in 1995. The average
balance of investment securities for the six months ended June 30, 1996
decreased $146.8 million from the amount in the portfolio for the same period in
1995, causing income on investments to decline $6.4 million.
7
The average balance and average rate of interest-bearing liabilities remained
relatively unchanged for the six months ended June 30, 1996 in comparison to the
same period in 1995.
For the three month period ended June 30, 1996, interest earning assets
increased $60.6 million with the average rate on interest earning assets
decreasing by 11 basis points. The average balance of interest bearing
liabilities remained relatively unchanged. Average savings deposits decreased by
$52.8 million, while average time deposits increased by $86.7 million. The
average rate on interest bearing liabilities decreased by 17 basis points.
Average demand deposits continued to grow and increased by $47.0 million.
The increase in the net interest margin is due to the decline in interest rates
on interest bearing liabilities combined with the movement of earning assets out
of the investment portfolio and into higher yielding loans.
Non-Interest Income
The following table presents the components of non-interest income for the six
and three months ended June 30, 1996 and 1995.
Six months ended Three months ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- ------
Trust income........................... $ 515 $ 440 $ 255 $ 220
Service charges on deposit accounts.... 3,985 3,979 2,009 2,009
Gains on securities transactions, net.. 573 551 241 14
Fees from mortgage servicing........... 1,968 1,686 953 879
Gains on sales of loans................ 975 551 314 170
Other.................................. 3,550 2,633 1,442 1,445
-------- -------- -------- --------
Total............................. $ 11,566 $ 9,840 $ 5,214 $ 4,737
======== ======== ======== ========
Non-interest income continues to represent a considerable source of income for
Valley. Excluding gains on securities transactions, total non-interest income
amounted to $11.0 million and $5.0 million for the six months and quarter ended
June 30, 1996 compared with $9.3 million and $4.7 million for the same periods
in 1995.
Fees from mortgage servicing increased by 16.7% for the six months ended June
30, 1996 and 8.4% for the three months ended June 30, 1996 in comparison to the
same periods in 1995. This reflects the increase in the size of the serviced
portfolio.
Gains on the sales of loans were $975 thousand for the first six months of 1996
compared to $551 thousand for the first six months of 1995. The gains recorded
are primarily from the sale of SBA loans. In addition, Valley has begun selling
its newly originated 30 year fixed-rate residential mortgage loans, with the
exception of its bi-weekly fixed rate mortgages.
Other non-interest income increased $917 thousand to $3.6 million for the six
months ended June 30, 1996. VNB recorded gains on the sale of REO property
during 1996 of approximately $700 thousand compared to $300 thousand in 1995. In
addition, fees on mortgage applications increased approximately $161 thousand
during the six months ended June 30, 1996 in comparison to the same period in
1995.
8
Non-Interest Expense
The following table presents the components of non-interest expense for the six
and three months ended June 30, 1996 and 1995.
Six months ended Three months ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- ------
Salary expense......................... $ 18,088 $ 17,045 $ 9,162 $ 8,393
Employee benefit expense............... 4,596 4,725 2,134 2,274
FDIC insurance premiums................ 1,513 4,386 796 2,193
Occupancy and equipment expense........ 7,523 6,722 3,846 3,312
Amortization of intangible assets...... 1,543 1,204 780 598
Other.................................. 12,147 *12,859 6,820 *7,932
-------- -------- -------- --------
Total............................. $ 45,410 $ 46,941 $ 23,538 $ 24,702
======== ======== ======== ========
*Includes $2.4 million of one-time merger expenses.
Non-interest expense for the six months ended June 30, 1996 totalled $45.4
million, which includes approximately $600 thousand of expenses associated with
a new co-branded credit card program (see discussion of this program on page 12
under the caption of Loan Portfolio). Non-interest expense for the six months
ended June 30, 1995 includes $2.3 million of one-time merger expenses associated
with the acquisition of Lakeland First Financial Group, Inc. ("Lakeland") on
June 30, 1995. Excluding the expenses associated with the co-branded credit card
program total non-interest expense was $44.8 million for the six months ended
June 30, 1996 compared to $44.5 million before one-time merger expenses for the
same period in 1995.
The largest component of non-interest expense is salary and employee benefit
expense which totalled $22.7 million for the six months ended June 30, 1996
compared to $21.8 million for the same period of 1995. Included in salary and
benefit expense for the six months ended June 30, 1996 is approximately $290
thousand of expense associated with the new co-branded credit card program. At
June 30, 1996, full-time equivalent staff was 1,342, compared to 1,244 at June
30, 1995.
Insurance premiums assessed by the Federal Deposit Insurance Corporation
("FDIC") decreased by $2.9 million, or 65.5% to $1.5 million for the six months
ended June 30, 1996. This reflects the reduction in insurance rates charged on
Bank Insurance Fund ("BIF") deposits by the FDIC which began June 1, 1995. For
deposits insured by the Savings Association Insurance Fund ("SAIF") rates did
not drop. It is expected that the SAIF will be recapitalized during 1996 and
that Valley will be required to pay a one-time special assessment. After this
payment, it is anticipated that future premiums on these deposits will also be
reduced from $0.23 to the legal minimum of $2,000. The one-time payment to the
FDIC and the anticipated future reduction in premiums are based upon the
legislative process over which Valley has no control. There can be no assurance
that there will be a one-time assessment or premium reduction.
Occupancy and equipment expense increased 11.9% during the first six months of
1996 as compared to the same period in 1995. This increase is the result of
costs related to a building purchased by VNB and from costs incurred for new
equipment required to expand computer applications and improve customer service.
Amortization of intangibles increased 28% for the six months ended June 30,
1996. This increase represents additional amortization of purchased mortgage
servicing rights due to growth in the serviced portfolio.
9
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, 1996 is
43.8%, one of the lowest in the industry, compared with an efficiency ratio of
43.6% for the year ended December 31, 1995. Valley strives to control its
efficiency ratio and expenses as a means of producing increased earnings for its
shareholders.
Income Taxes
Income tax expense as a percentage of pre-tax income was 33.9% for the six
months ended June 30, 1996. During the second quarter of 1995 VNB recorded a
one-time tax expense of approximately $3.0 million for the recapture of the bad
debt deduction upon the merger with Lakeland. Excluding this one-time tax
expense, income tax expense as a percentage of pre-tax income was 35.7% for the
six months ended June 30, 1995. The decreased percentage from 1995 to 1996 is
attributable to a reduction in state income taxes due to business strategies
employed.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
At June 30, 1996, rate sensitive assets exceeded rate sensitive liabilities at
the 90 day interval and resulted in a positive gap of $636.5 million or a ratio
of 1.36:1. Rate sensitive liabilities exceeded rate sensitive assets at the 91
to 365 day interval by $542.3 million or a ratio of .18:1 and resulted in a
negative gap. The total positive gap repricing within 365 days as of June 30,
1996 is $94.3 million or 1.04:1. Management does not view these amounts as
presenting an unusually high risk potential, although no assurances can be give
that Valley is not at risk from rate increases or decreases.
The above gap results take into account repricing and maturities of assets and
liabilities, but fail to consider the interest rate sensitivities of those asset
and liability accounts. Management has prepared for its use an income simulation
model to project future net interest income streams in light of the current gap
position. Management has also prepared for its use alternative scenarios to
measure levels of net interest income associated with various changes in
interest rates. According to this computer model, an interest rate increase of
300 basis points and a decrease of 100 basis points resulted in an impact on
future net interest income which is consistent with target levels contained in
Valley's Asset/Liability Policy. Management cannot provide any assurance about
the actual effect of changes in interest rates on Valley's net interest income.
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 fund sold, investment securities held to maturity maturing within one
year, securities available for sale and loans held for sale. At June 30, 1996,
liquid assets amounted to $1.3 billion, as compared to $1.5 billion at December
31, 1995. This represents 30.3% and 34.1% of earning assets, and 28.6% and 32.1%
of total assets at June 30, 1996 and year-end 1995, respectively.
10
On the liability side, the primary source of funds available to meet liquidity
needs is Valley's core deposit base, which generally excludes certificates of
deposit over $100 thousand. Core deposits averaged approximately $3.07 billion
at June 30, 1996 and year-end 1995, respectively, representing 71.2% and 70.6%
of average earning assets. Short term borrowings and large dollar certificates
of deposit, generally those over $100 thousand, are used as supplemental funding
sources during periods when growth in the core deposit base does not keep pace
with that of earning assets. Additional liquidity is derived from scheduled loan
and investment payments of principal and interest, as well as prepayments
received. For the six month period ending June 30, 1996, proceeds from the sales
of investment securities available for sale were $58.1 million, and proceeds of
$172.7 million were generated from investment maturities. Purchases of
investment securities for the same period were $155.0 million. Short term
borrowings and certificates of deposit over $100 thousand amounted to $482.6
million and $465.8 million, on average, for the six months ended June 30, 1996
and year ending December 31, 1995, respectively.
VNB also utilizes borrowings from the Federal Home Loan Bank of New York
("FHLB") as a source of funds for its asset growth and asset/liability
management. These advances are collateralized by pledges of FHLB stock and
blanket assignment of qualifying mortgage loans. As of June 30, 1996, Valley had
outstanding advances of $40.5 million.
Valley's cash requirements consist primarily of dividends to shareholders. This
cash need is routinely satisfied by dividends collected from its subsidiary
bank. Projected cash flows from this source are expected to be adequate to pay
dividends, given the current capital levels and current profitable operations of
its subsidiary.
Investment Securities
The investment portfolio as of June 30, 1996 consisted of securities held to
maturity of $249.9 million and $1.1 billion of securities available for sale,
relatively unchanged from December 31, 1995. As of June 30, 1996 the investment
securities available for sale had an unrealized loss of $6.4 million, net of
deferred taxes, compared to an unrealized gain of $3.7 million, net of deferred
taxes, at December 31, 1995. This change was primarily due to a decrease in
prices, resulting from an increasing interest rate environment.
Loan Portfolio
The following table reflects the composition of the loan portfolio as of June
30, 1996 and December 31, 1995.
June 30, December 31,
1996 1995
Commercial...................... $ 375,416 $ 351,885
Construction.................... 76,331 73,664
Commercial mortgage............. 668,105 619,326
Residential mortgage............ 1,023,386 1,017,453
Installment..................... 799,227 731,772
----------- -----------
2,942,465 2,794,100
Less: unearned income........... (250) (925)
----------- -----------
Total loans................... $ 2,942,215 $ 2,793,175
=========== ===========
Residential mortgage loans represent 34.8% of the loan portfolio. Installment
loans, including predominantly automobile loans, represent 27.2% of the loan
portfolio.
11
Installment loans outstanding at year end include automobile loans referred to
VNB by a major insurance company, which are subject to Valley's underwriting
criteria. VNB has extended this program by establishing a finance company in
Toronto, Canada. The new finance company, which became operational in the first
quarter of 1996, makes consumer loans, primarily auto loans, in several
provinces in Canada.
During the second quarter of 1996, Valley announced the commencement of a co-
branded credit card, the ShopRite MasterCard, to be issued by VNB. Valley
anticipates that the ShopRite MasterCard, which is VNB's first co-branded credit
card, will significantly expand VNB's outstanding credit cards and significantly
increase its interest-bearing outstanding credit card balances.*
Valley anticipates that the ShopRite co-branded card program will have a
positive affect on earnings in 1997, but the introduction of the co-branded
program will have slight adverse affect on earnings over the remainder of 1996
since the substantial start-up expenses and charges will impact earnings in 1996
and 1997.* However, there can be no assurance that the co-branded card will have
in 1997 a positive impact on earnings or the extent of any positive impact or
that the adverse affect in 1996 will be slight.
Valley, commencing in 1995, began hiring employees for the program. As of June
1, 1996, VNB had hired approximately 40 persons for the program and VNB
anticipates hiring a total of approximately 80 persons by 1997.*
NOTE: * The statements concerning the impact of VNB's co-branded program on
Valley's earnings for 1996 and 1997, the estimated expenses and estimates of
employees to be hired, as well as the increase in VNB's outstanding credit cards
and interest bearing account balances, all are forward looking statements under
the Private Securities Litigation Reform Act of 1995. The correctness of the
estimates and forward looking statements depend upon a number of factors and the
actual results may differ materially from Valley's estimates. While Valley has
developed its estimates of the impact of the co-branded card program after
taking into account what it considers to be relevant factors, the actual
expenses and results may vary, depending upon a number of factors, including but
not limited to the following: Valley will incur substantial costs associated
with the generation of the new cards which will impact earnings in 1996 and
1997; that a significant percentage of the solicited customers will sign-up for
the ShopRite MasterCard; that Valley will generate an estimated $75 million of
interest-bearing receivables outstanding at the end of 1996 and $270 million of
interest-bearing receivables outstanding at year-end 1997; that a significant
portion of the new card holders will roll-over interest bearing balances from
other credit cards; that a majority of the cardholders will not pay their
outstanding balances in full each month; that the interest rate environment
during 1996 and 1997 generally will remain at present levels so that the
introductory rates will be profitable to VNB; that the co-branded agreement will
continue; that the cardholders will generally maintain their cards with VNB for
the anticipated life of the cards; that credit card losses and theft losses
associated with these cards will not exceed the industry norms as presently
experienced by VNB and similar card issuers, and other factors. Moreover, if VNB
enters into other co- branded programs, the affects associated with the ShopRite
MasterCard may be impacted by expenses and/or income from such other programs
and VNB's earnings and expenses from all its other non-card activities will have
more of an impact on Valley's total income and expenses than the co-branded
program.
During March of 1996, VNB established a new subsidiary to which VNB contributed
a significant portion of its residential real estate mortgages. The subsidiary
owns and manages residential mortgage loans and securities. The utilization of
this operating subsidiary has provided tax expense savings to VNB.
12
Non-Performing Assets
Non-performing assets include non-accrual loans and other real estate owned
(OREO). Non-performing assets continued to decrease, and totalled $12.9 million
at June 30, 1996 compared with $18.8 million at December 31, 1995, a decrease of
$5.9 million or 31.4%. Non-performing assets at June 30, 1996 and December 31,
1995, respectively, amounted to 0.44% and .67% of loans and other real estate
owned.
Loans 90 days or more past due and not included in the non-performing category
totaled $9.2 million at June 30, 1996, compared to $8.1 million at December 31,
1995. These loans are primarily residential mortgage loans, commercial mortgage
loans and commercial loans which are generally well-secured and in the process
of collection.
The following table sets forth non-performing assets and accruing loans which
are 90 days or more past due as to principal or interest payments on the dates
indicated, in conjunction with asset quality ratios for Valley.
June 30, December 31,
1996 1995
Loans past due in excess of
90 days and still accruing...... $ 9,238 $ 8,117
-------- --------
Non-performing loans.............. $ 7,590 $ 11,795
Other real estate owned........... 5,307 7,015
-------- --------
Total non-performing assets..... $ 12,897 $ 18,810
-------- --------
Troubled debt restructured loans.. $ 5,418 $ 5,209
-------- --------
Non-performing loans as a
% of loans...................... 0.26% 0.42%
-------- --------
Non-performing assets as a %
of loans plus other real
estate owned.................... 0.44% 0.67%
-------- --------
Allowance as a % of loans......... 1.41% 1.42%
-------- --------
Allowance as a % of
non-performing assets........... 321.13% 210.90%
-------- --------
Asset Quality and Risk Elements
At June 30, 1996 the allowance for loan losses amounted to $41.4 million or
1.41% of loans, net of unearned income, as compared to $39.7 million or 1.42% at
year-end 1995.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $4 thousand for the
six months ended June 30, 1996 compared with net loan charge-offs of $1.1
million for the six months ended June 30, 1995.
Capital
A significant measure of the strength of a financial institution is its
shareholders' equity, which should expand in close proportion to asset growth.
At June 30, 1996, shareholders' equity totalled $377.3 million or 8.3% of total
assets, compared with $400.2 million or 8.7% at year-end 1995.
13
This decrease in shareholders' equity resulted from the repurchase of shares of
Valley common stock for treasury purposes. Valley repurchased approximately
563,000 shares during 1995 and 820,000 shares in 1996 of which approximately
943,000 shares were used for the five percent stock dividend issued on May 17,
1996. The shares held in treasury at June 30, 1996 will continue to be used for
employee benefit programs and other general corporate purposes.
Also contributing to this decrease in shareholder's equity was a change in the
market value of securities available for sale. Included in shareholders equity
at June 30, 1996 is a $6.4 million unrealized loss on investment securities
available for sale, net of tax, compared to an unrealized gain of $3.7 million
at December 31, 1995.
Valley's capital position at June 30, 1996 under risk-based capital guidelines
was $379.5 million, or 12.8% of risk weighted assets, for Tier 1 capital and
$416.4 million, or 14.1% for Total risk-based capital. The comparable ratios at
December 31, 1995 were 13.9% for Tier 1 capital and 15.1% for Total risk-based
capital. Valley's ratios at June 30, 1996 are above the "well capitalized"
requirements, which require Tier I capital of at least 6% and Total risk-based
capital of 10%. The Federal Reserve Board requires "well capitalized" bank
holding companies to maintain a minimum leverage ratio of 5.0%. At June 30, 1996
and December 31, 1995, Valley was in compliance with the leverage requirement
having a Tier I leverage ratio of 8.4% and 8.5%, respectively.
Book value per share amounted to $10.35 at June 30, 1996 compared with $10.66
per share at December 31, 1995.
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 48.9% for the six months ended June 30, 1996, compared to 37.6% for
the six month period ended June 30, 1995. Cash dividends declared for the first
six months of 1996 amounted to $.49 per share, equivalent to a dividend payout
ratio of 51.1%, compared to 62.4% for the same period in 1995. 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 it current dividend policy of a quarterly
distribution of earnings to its shareholders.
Valley issued a 5% common stock dividend on May 17, 1996 to shareholders of
record on April 26, 1996.
Recent Accounting Pronouncements
In May 1995 the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." The Statement requires capitalization of the value of rights to service
mortgage loans for others, whether those rights were acquired through purchase
or origination. SFAS No. 122 also requires that capitalized mortgage servicing
rights be evaluated for impairment based on their fair value with any
adjustments recognized through a valuation allowance. Effective January 1, 1996,
SFAS No. 122 was adopted and capitalization of originated mortgage servicing
rights began. All capitalized mortgage servicing rights, both originated and
purchased, will be evaluated for impairment on a quarterly basis. The impact of
adopting SFAS No. 122 is not material.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement encourages use of a fair value based method of
accounting for stock-based compensation plans while allowing continued use of
the intrinsic value method of accounting prescribed by Accounting Principles
Board Opinion (APB) No. 25 method of accounting must make pro forma disclosures
of net income and earnings per shares as if the fair value based method of
accounting, as defined is SFAS No. 123, had been applied.
14
Valley adopted SFAS No. 123 effective January 1, 1996 and will continue
accounting for stock-based compensation under APB No. 25 and include the pro
forma disclosures required by SFAS No. 123 in annual financial statements
beginning in the year ended December 31, 1996.
15
PART II
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(3) Articles of Incorporation and By-Laws
Restated Certificate of Incorporation of the Registrant dated
April 2, 1996.
(10) Material Contracts
No material contracts entered into or becoming effective in
the Reporting Period.
(27) Financial Data Schedule
b) Reports on Form 8-K
1) Filed April 9, 1996 to report a five percent common stock dividend
issued May 17, 1996.
2) Filed June 12, 1996 to announce the commencement of a co-branded
credit card, the ShopRite MasterCard, to be issued by Valley National
Bank.
16
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)
/s/Peter Southway
- -----------------
PETER SOUTHWAY
VICE CHAIRMAN
/s/ Alan D. Eskow
- -----------------
ALAN D. ESKOW
SENIOR VICE PRESIDENT
FINANCIAL ADMINISTRATION
DATED: AUGUST 13, 1996
17
Exhibit (3)
AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
VALLEY NATIONAL BANCORP
Valley National Bancorp, a New Jersey corporation, pursuant to N.J.S.A.
14A:9-4, does hereby certify as follows:
(a) The name of the corporation is: Valley National Bancorp (the
"Corporation").
(b) The Corporation is hereby amending its certificate of incorporation
to increase to 75,000,000 the number of authorized shares of Common Stock. The
existing "Article V" is amended to read in its entirety as follows:
"The Corporation is authorized to issue 75,000,000 shares of common
stock without nominal or par value."
(c) The amendment was adopted and approved by the shareholders of the
Corporation at the annual meeting of shareholders held April 2, 1996.
(d) At the record date for such meeting, there were issued,
outstanding, and entitled to vote, 35,678,960 shares of Common Stock without par
value. At the meeting 26,676,557 shares of Common Stock were voted for the
amendment and 1,499,439 shares of Common Stock were voted against the amendment.
There were no other classes of shares authorized.
IN WITNESS WHEREOF, Gerald H. Lipkin, Chairman and Chief Executive Officer
of Valley National Bancorp, has executed this Certificate on behalf of Valley
National Bancorp on this 2nd day of April 1996.
VALLEY NATIONAL BANCORP
By: /s/ Gerald H. Lipkin
Gerald H. Lipkin, Chairman
and Chief Executive Officer