UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] Quarter Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Period Ended September 30, 1997
[ ] 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)
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 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 42,291,206 shares were outstanding as of
November 3, 1997.
2
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
September 30, 1997 and December 31, 1996
(Unaudited)
Consolidated Statements of Income
Nine and Three Months Ended September 30, 1997
and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 5
(Unaudited)
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 7-17
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
3
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
($ in thousands)
September 30, December 31,
1997 1996
Assets
Cash and due from banks..............................$ 153,226 $ 196,995
Federal funds sold................................... 102,000 82,450
Investment securities held to maturity, fair value of
$178,275 and $257,213 in 1997 and 1996, respectively. 175,697 255,277
Investment securities available for sale............. 1,077,024 989,698
Loans, net of unearned income........................ 3,547,366 3,471,248
Less: Allowances for possible loan losses........... (42,341) (46,022)
----------- -----------
Loans, net........................................... 3,505,025 3,425,226
----------- ----------
Premises and equipment, net.......................... 72,939 71,244
Due from customers on acceptances outstanding........ 287 940
Accrued interest receivable.......................... 29,767 29,808
Other assets......................................... 59,560 63,909
----------- ----------
Total assets................................$5,175,525 $5,115,547
=========== ==========
Liabilities
Deposits:
Non-interest bearing deposits...............$ 738,512 $ 715,563
Interest bearing:
Savings............................ 1,850,502 1,835,476
Time .......................... 1,922,586 2,016,026
----------- ----------
Total deposits............ 4,511,600 4,567,065
----------- ----------
Federal funds purchased and securities sold under
repurchase agreements....................... 21,014 23,339
Other short-term borrowings.......................... 43,594 17,202
Long-term debt .......................... 90,528 35,071
Bank acceptances outstanding......................... 287 940
Accrued expenses and other liabilities............... 44,410 41,546
----------- ----------
Total liabilities........................... 4,711,433 4,685,163
----------- ----------
Shareholders' Equity
Common stock, no par value, authorized 78,750,000 shares,
issued 42,464,847 shares in 1997 and
40,449,671 in 1996, ........................ 23,303 22,321
Surplus .......................... 293,482 238,540
Retained earnings.................................... 149,519 176,853
Unrealized gain on investment securities available
for sale, net of tax........................ 2,572 259
-------- -------
468,876 437,973
Treasury stock, at cost (175,363 shares in 1997 and
272,093 shares in 1996)..................... (4,784) (7,589)
--------- ---------
Total shareholders' equity.................. 464,092 430,384
--------- ---------
Total liabilities and shareholders' equity..$5,175,525 $5,115,547
=========== ==========
See accompanying notes to consolidated financial statements.
4
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in thousands, except for per share data)
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- --------
Interest Income
Interest and fees on loans............$ 217,101 $ 198,030 $ 73,156 $ 68,463
Interest and dividends on
investment securities:
Taxable....................... 46,459 52,892 15,564 17,058
Tax-exempt.................... 8,020 9,823 2,533 3,121
Dividends..................... 1,161 634 380 259
Interest on federal funds sold and
other short term investments.. 3,272 2,907 1,102 805
--------- --------- --------- -------
Total Interest Income......... 276,013 264,286 92,735 89,706
--------- --------- --------- -------
Interest Expense
Interest on deposits:
Savings....................... 32,197 32,458 10,692 11,163
Time ..................... 80,941 79,525 27,211 27,005
Interest on federal funds purchased
and securities sold under
repurchase agreements......... 840 828 277 291
Interest on other short-term
borrowings.................... 928 510 287 202
Interest on long-term debt............. 1,600 1,754 638 546
--------- -------- -------- --------
Total Interest Expense........ 116,506 115,075 39,105 39,207
--------- -------- -------- --------
Net interest income.................... 159,507 149,211 53,630 50,499
Provision for possible loan losses..... 5,250 2,285 2,150 425
--------- --------- -------- --------
Net interest income after provision
for possible loan losses...... 154,257 146,926 51,480 50,074
--------- --------- -------- --------
Non-Interest Income
Trust income........................... 825 770 324 255
Service charges on deposit accounts.... 8,804 8,376 2,955 2,858
Gains on securities transactions,
net ..................... 2,169 834 - 262
Fees from mortgage servicing........... 3,398 2,942 1,169 974
Credit card income..................... 9,211 2,819 3,411 1,802
Gains on sales of loans................ 2,873 1,334 1,678 358
Other ..................... 4,375 3,360 1,927 1,035
---------- --------- --------- --------
Total Non-Interest Income..... 31,655 20,435 11,464 7,544
---------- --------- --------- --------
Non-Interest Expense
Salary expense......................... 33,580 32,380 11,202 11,093
Employee benefit expense............... 8,468 8,228 2,680 2,544
FDIC insurance premiums................ 799 8,634 291 7,120
Occupancy and equipment expense........ 13,560 13,955 4,610 4,616
Credit card expense.................... 13,158 3,429 4,682 2,273
Amortization of intangible assets...... 2,556 2,291 856 748
Other ..................... 18,233 18,674 5,764 6,220
--------- --------- --------- --------
Total Non-Interest Expense.... 90,354 87,591 30,085 34,614
--------- --------- --------- --------
Income before income taxes........... 95,558 79,770 32,859 23,004
Income tax expense................... 32,326 26,861 11,003 7,463
Net Income........................... $ 63,232 $ 52,909 $ 21,856 $ 15,541
Net income per share................. $ 1.50 $ 1.24 $ 0.52 $ 0.37
Weighted average shares outstanding..42,263,032 42,562,013 42,287,785 42,119,481
See accompanying notes to consolidated financial statements.
5
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in thousands)
Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities:
Net income.........................................$ 63,232 $ 52,909
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of intangible
assets.................................. 8,318 7,539
Amortization of compensation costs pursuant to
long term stock incentive plan. 474 335
Provision for possible loan losses.......... 5,250 2,285
Net amortization of premiums and discounts.. 886 3,572
Net gains on securities transactions........ (2,169) (834)
Proceeds from sale of loans....................... 30,608 27,573
Gains on sales of loans..................... (2,873) (1,334)
Proceeds from recoveries on charged-off loans 1,507 3,874
Net decrease (increase) in accrued interest
receivable and other assets........ 1,617 (3,606)
Net increase in accrued expenses and
other liabilities ................. 340 12,093
--------- ---------
Net cash provided by operating activities: 107,190 104,406
--------- ---------
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity................................. 54,387 76,001
Purchases of investment securities held to maturity (14,944) (31,525)
Proceeds from sales of investment securities
available for sale.......................... 95,193 72,113
Proceeds from maturing investment securities
available for sale..........................165,504 202,995
Purchases of investment securities available
for sale...................................(302,855) (187,783)
Purchases of mortgage servicing rights.............. (1,020) (655)
Net (increase) decrease in federal funds sold and other
short term investments..................... (19,550) 136,050
Net increase in loans made to customers.............(114,291) (353,238)
Purchases of premises and equipment, net of sales... (7,458) (8,709)
Net decrease in due from customers on
acceptances outstanding.................... 653 292
----------- ---------
Net cash used in investing activities: (144,381) (94,459)
----------- ---------
Cash flows from financing activities:
Net decrease in deposits . ........................ (55,465) (12,561)
Net increase in federal funds purchased
and other short term borrowings........... 24,067 30,030
Advances of long-term debt......................... 62,500 20,000
Repayments of long-term debt....................... (7,043) (12,041)
Net decrease in bank acceptances outstanding....... (653) (292)
Dividends paid to common shareholders.............. (30,784) (28,332)
Addition of common shares to treasury.............. -- (32,411)
Common stock issued, net of cancellations.......... 800 92
---------- ---------
Net cash used in financing activities:.... (6,578) (35,515)
---------- ---------
Net decrease in cash and due from banks..................... (43,769) (25,568)
Cash and due from banks at January 1........................ 196,995 198,857
---------- ---------
Cash and due from banks at September 30.....................$ 153,226 173,289
---------- ---------
Supplemental cash flow disclosure:
Cash paid for interest on deposits and other
borrowings..................................$ 116,765 116,146
Cash paid for federal and state income taxes.......$ 24,418 28,289
Transfer of securities held to maturity acquired in
acquisition of Midland to securities available
for sale....................................$ 39,833 --
See accompanying notes to consolidated financial statements.
6
VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
The Consolidated Statements of Financial Condition as of September 30,
1997 and December 31, 1996, the Consolidated Statements of Income for
the nine and three month periods ended September 30, 1997 and 1996 and
the Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1997 and 1996 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 September 30, 1997 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, 1996 Annual Report
to Shareholders.
The Consolidated Statement of Financial Condition as of December 31,
1996 and the Consolidated Statements of Income for the nine and three
month periods ended September 30, 1996 and the Consolidated Statement
of Cash Flows for the nine month period ended September 30, 1996 have
been restated to include Midland Bancorporation, Inc. which was
acquired on the close of business February 28, 1997 in a transaction
accounted for as a pooling of interest.
2. Earnings Per Share
Earnings per share amounts and weighted average shares outstanding have
been restated to reflect the 5% stock dividend declared April 2, 1997
to Shareholders of record on April 30, 1997 and issued on May 15, 1997.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Merger
On February 28, 1997, Valley acquired Midland Bancorporation, Inc. ("Midland"),
parent of The Midland Bank and Trust Company ("Midland Bank"), headquartered in
Paramus, New Jersey. On December 31, 1996 Midland had total assets of $438.9
million and deposits of $401.6 million, with 13 branches located in Bergen
County, New Jersey. The transaction was accounted for using the pooling of
interests method of accounting and resulted in the issuance of approximately
3,775,000 shares of Valley common stock. Each share of common stock of Midland
was exchanged for 30 shares of Valley common stock.
Earnings Summary
Net income for the nine months ended September 30, 1997 was $63.2 million, or
$1.50 per share. These results compare to net income of $52.9 million, or $1.24
per share for the same period in 1996. The annualized return on average assets
increased to 1.66% from 1.42%, while the annualized return on average equity
increased to 18.79% from 16.76%, for the nine months ended September 30, 1997
and 1996, respectively.
Net income was $21.9 million, or $0.52 per share for the three month period
ended September 30, 1997 compared with $15.5 million or $0.37 per share for the
three month period ended September 30, 1996.
The increase in earnings for both the nine month and three month periods ended
September 30, 1997 in comparison to the corresponding periods of 1996 was due
partly to a substantial increase in net interest income. Also contributing to
the rise in earnings is the one-time SAIF assessment charge of $3.7 million or
$0.09 per share, net of tax, which was included in the 1996 results for both the
quarter and nine months. Partially offsetting these developments was an increase
in the provision for loan loss and an increase in net credit card expenses in
1997.
Net Interest Income
Net interest income is the largest source of Valley's operating income. Net
interest income on a tax equivalent basis increased to $164.4 million from
$155.1 million for the nine months ended September 30, 1997 as compared to the
nine months ended September 30, 1996. The increase in net interest income is due
to a widening spread between the yield earned on interest-earning assets and
funding costs, a modest increase in interest earning assets and the movement of
earning assets out of the investment portfolio and into higher yielding loans,
resulting in an increase in the net interest margin to 4.56% for the nine months
ended September 30, 1997 compared to 4.42% for the same period in 1996.
Average interest earning assets for the nine month period increased $127.4
million in 1997, or 2.8% over the same period in 1996. This increase was mainly
the result of increased volume of credit card loans, automobile loans and
commercial mortgages. Average loans increased by $319.8 million or 10.2% over
the 1996 amount. The increase in average loan volume caused interest income on
loans for 1997 to increase by $19.0 million over 1996. Offsetting this increase,
was a decline in average taxable and tax exempt investment securities of $200.9
million or 13.7% from the amount in the portfolio during 1996.
Average interest-bearing liabilities increased 0.8% or $29.9 million for the
nine month period ended September 30, 1997 compared to the same period in 1996.
Total deposit growth, similar to the past few years, was held to a small
increase due to competitive factors and alternative investment opportunities for
consumers. Average demand deposits continued to grow and increased by $72.7
million or 11.7% over 1996 balances. Average savings deposits decreased by $3.9
million or 0.2%, while average time deposits increased $32.5 million or 1.6%.
8
The following tables reflect the components of net interest income for the nine
and three months ended September 30, 1997 and 1996.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET
INTEREST EARNINGS ON A TAX EQUIVALENT BASIS
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
--------------------- --------------------
Average Avg Average Avg
Balance Interest Rate Balance Interest Rate
Assets
Interest earning assets
Loans (1) (2).........$3,461,811 $ 217,642 8.38% $3,142,023 $ 198,644 8.43%
Taxable investments (3) 1,023,124 47,620 6.21 1,166,001 53,526 6.12
Tax-exempt
investments (1) (3) 238,742 12,339 6.89 296,758 15,111 6.79
Federal funds sold and
other short-term
investments (1)....... 80,880 3,272 5.39 72,395 2,907 5.35
--------- -------- ---- ---------- -------- ----
Total interest earning
assets................$4,804,557 $ 280,873 7.79% $4,677,177 $ 270,188 7.70%
Allowance for possible
loan losses........... (45,998) (45,908)
Unrealized loss on
securities available
for sale.............. (1,381) (5,116)
Cash and due from banks 160,982 168,448
Other assets............... 167,106 160,210
---------- ---------
Total assets..........$5,085,266 $4,954,811
========== ==========
Liabilities and Shareholders' Equity
Interest bearing liabilities
Savings deposits......$1,803,781 $ 32,197 2.38% $1,807,653 $ 32,458 2.39%
Time deposits......... 2,013,305 80,941 5.36 1,980,761 79,525 5.35
--------- --------- ---- --------- --------- ----
Total interest
bearing deposits 3,817,086 113,138 3.95 3,788,414 111,983 3.94
Federal funds purchased
and other short-term
borrowings ........... 46,590 1,768 5.06 38,817 1,338 4.60
Long-term debt............. 35,826 1,600 5.95 42,337 1,754 5.52
--------- -------- ---- --------- -------- ----
Total interest bearing
liabilities........... 3,899,502 116,506 3.98 3,869,568 115,075 3.97
-------- ---- -------- ----
Demand deposits............ 692,201 619,493
Other liabilities.......... 44,842 44,815
Shareholders' equity 448,721 420,935
---------- ----------
Total liabilities and
shareholders' equity $5,085,266 $4,954,811
========== ==========
Net interest income (tax
equivalent basis)..... 164,367 155,113
Tax equivalent adjustment (4,860) (5,902)
----------- ----------
Net interest income........ $ 159,507 $ 149,211
---------- ----------
Net interest rate differential 3.81% 3.73%
----- -----
Net interest margin (4) 4.56% 4.42%
----- -----
9
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
---------------------- -----------------------
Average Avg Average Avg
Balance Interest Rate Balance Interest Rate
Assets
Interest earning assets
Loans (1) (2)........ $3,488,637 $ 73,333 8.41% $3,265,798 $ 68,658 8.41%
Taxable investments (3) 1,017,512 15,944 6.27 1,118,957 17,317 6.19
Tax-exempt investments(1)(3) 223,538 3,898 6.98 282,176 4,801 6.81
Federal funds sold and other
short-term investments (1) 78,054 1,102 5.65 59,146 805 5.44
---------- -------- ----- ---------- ------- ----
Total interest earning
assets.............. $4,807,741 $ 94,277 7.84% $4,726,077 $ 91,581 7.75%
Allowance for possible loan
losses............... (44,654) (46,300)
Unrealized loss on securities
available for sale 1,634 (8,722)
Cash and due from banks 151,204 158,898
Other assets.............. 162,992 186,560
---------- ----------
Total assets......... $5,078,917 $5,016,513
========== ==========
Liabilities and Shareholders' Equity
Interest bearing liabilities
Savings deposits..... $1,794,464 $ 10,692 2.38% $1,831,402 $ 11,163 2.44%
Time deposits........ 1,982,983 27,211 5.49 2,010,154 27,005 5.37
---------- -------- ---- ---------- -------- ----
Total interest
bearing deposits 3,777,447 37,903 4.01 3,841,556 38,168 3.97
Federal funds purchased and
other short-term
borrowings........... 46,362 564 4.87 41,704 493 4.73
Long-term debt............ 41,588 638 6.14 38,210 546 5.72
---------- -------- ---- --------- ------- ----
Total interest bearing
liabilities.......... 3,865,397 39,105 4.05 3,921,470 39,207 4.00
-------- ---- ------- ----
Demand deposits........... 715,027 639,965
Other liabilities......... 43,508 40,494
Shareholders' equity 454,985 414,584
---------- ----------
Total liabilities and
shareholders' equity $5,078,917 $5,016,513
========== ==========
Net interest income (tax
equivalent basis).............. 55,172 52,374
Tax equivalent adjustment (1,541) (1,875)
--------- --------
Net interest income................. $ 53,631 $ 50,499
--------- --------
Net interest rate differential 3.79% 3.75%
----- -----
Net interest margin (4) 4.59% 4.43%
----- -----
(1) Interest income is presented on a tax equivalent basis using a 35% tax
rate.
(2) Loans are stated net of unearned income, and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is based
on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of earning
assets.
10
The following table demonstrates the relative impact on net interest income of
changes in volume of earning assets and interest bearing liabilities and changes
in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
1997 Compared to 1996 1997 Compared to 1996
Increase (Decrease) (2) Increase (Decrease) (2)
Interest Volume Rate Interest Volume Rate
(in thousands)
Interest income:
Loans (1) ..$ 18,998 $ 20,111 $(1,113) $ 4,675 $ 4,684 $ (9)
Taxable investments........ (5,906) (6,641) 735 (1,373) (1,587) 214
Tax-exempt investments(1)....(2,772) (2,995) 223 (903) (1,020) 117
Federal funds sold and other
short term investments. 365 343 22 297 266 31
-------- -------- ------ ------ ----- ---
10,685 10,818 (133) 2,696 2,343 353
Interest expense:
Savings deposits............. (261) (69) (192) (471) (223) (248)
Time deposits................ 1,416 1,308 108 206 (368) 574
Federal funds purchased and
securities sold under
repurchase agreements.. 430 286 144 71 56 15
Long-term debt................ (154) (284) 130 92 50 42
-------- -------- ------- ------ ------ ----
1,431 1,241 190 (102) (485) 383
-------- -------- ------- ------ ------ ----
Net interest income..........$ 9,254 $ 9,577 $ (323) $ 2,798 $ 2,828 $(30)
======== ======== ======= ======== ======= =====
(1) Interest income is adjusted to a tax equivalent basis using a 35% tax
rate.
(2) Variances resulting from a combination of changes in volume and rates
are allocated to the categories in proportion to the absolute dollar
amounts of the change in each category.
Non-Interest Income
The following table presents the components of non-interest income for the nine
and three months ended September 30, 1997 and 1996.
NON-INTEREST INCOME
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
(in thousands)
Trust income.......................... $ 825 $ 770 $ 324 $ 255
Service charges on deposit accounts 8,804 8,376 2,955 2,858
Gains on securities transactions, net 2,169 834 - 262
Fees from mortgage servicing 3,398 2,942 1,169 974
Credit card income.................... 9,211 2,819 3,411 1,802
Gains on sales of loans............... 2,873 1,334 1,678 358
Other. . . ........................... 4,375 3,360 1,927 1,035
-------- -------- ------- -------
Total.................. $31,655 $20,435 $11,464 $ 7,544
======== ======== ======= =======
11
Non-interest income continues to represent a considerable source of income for
Valley. Excluding gains on securities transactions, total non-interest income
amounted to $29.5 million and $11.5 million for the nine months and quarter
ended September 30, 1997 compared with $19.6 million and $7.3 million for the
nine months and quarter ended September 30, 1996.
Fees from mortgage servicing increased by 15.5% for the nine months ended
September 30, 1997 and 20.0% for the quarter ended September 30, 1997 as
compared to the same period in 1996. This reflects the increase in the size of
the serviced portfolio due to the acquisition of servicing rights during 1997.
Included in credit card income is primarily net interchange fees. The increase
in credit card income is the result of a co-branded credit card program that
began during the second quarter of 1996.
Gains on the sales of loans were $2.9 million and $1.7 million for the first
nine months and three months of 1997 compared to $1.3 million and $358 thousand
for the same periods of 1996. The increase of gains recorded are primarily from
the increased SBA lending activity which resulted in the increased sales
activity of the guaranteed portion of SBA loans.
For the nine months ended September 30, 1997, gains on securities transactions
totaled $2.2 million, compared with $834 thousand during the corresponding
period of 1996. There were no securities gains during the three months ended
September 30, 1997 compared to $262 thousand for the same period in 1996. These
gains were the result of equity securities sold by Valley National Bancorp
during 1997.
The increase in other non-interest income for both the nine month and three
month periods ended September 30, 1997 in comparison to the corresponding
periods of 1996 was due to the one-time gain recorded on the sale of Valley's
credit card merchant business.
Non-Interest Expense
The following table presents the components of non-interest expense for the nine
and three months ended September 30, 1997 and 1996.
NON-INTEREST EXPENSE
Nine months ended Three months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
(in thousands)
Salary expense........................ $ 33,580 $ 32,380 $ 11,202 $ 11,093
Employee benefit expense.............. 8,468 8,228 2,680 2,544
FDIC insurance premiums............... 799 8,634 291 7,120
Occupancy and equipment expense....... 13,560 13,955 4,610 4,616
Credit card expense................... 13,158 3,429 4,682 2,273
Amortization of intangible assets..... 2,556 2,291 856 748
Other................................. 18,233 18,674 5,764 6,220
-------- -------- -------- --------
Total........................... $ 90,354 $ 87,591 $ 30,085 $ 34,614
======== ========= ======== ========
12
Non-interest expense totalled $90.4 million for the nine month period ended
September 30, 1997, an increase of 3.2% from the 1996 level. The largest
component of non-interest expense is salary and employee benefit expense which
totalled $42.0 million in 1997 compared to $40.6 million in 1996. At September
30, 1997, full-time equivalent staff was 1,575, compared to 1,520 at September
30, 1996.
The efficiency ratio measures a bank's gross operating expense as a percentage
of fully-taxable equivalent net interest income and other non-interest income
without taking into account security gains and losses and other non-recurring
items. Valley's efficiency ratio for the nine months ended September 30, 1997 is
46.7%, one of the lowest in the industry. This ratio remains unchanged from
1996, which has been restated to include Midland. The efficiency ratio has been
impacted by the acquisition of Midland and net expenses incurred from the credit
card program. Valley strives to control its efficiency ratio and expenses as a
means of producing increased earnings for its shareholders.
Included in the year-to-date and third quarter 1996 results is a $6.4 million
one-time required payment to recapitalize the Savings Association Insurance
Fund. Excluding this one time payment, insurance premiums decreased $1.5 million
and $463 thousand for the nine months and three months ended September 30, 1997,
respectively. This decline in premium expense resulted from a revised rate
structure enacted by the Funds Act which became effective January 1, 1997.
Credit card expense includes cardmember rebates, processing expenses, and fraud
losses. The increase in credit card expenses is directly attributable to the co-
branded credit card that VNB began issuing during the second quarter of 1996.
The significant components of other non-interest expense include advertising,
professional fees, stationery and postage, telephone expense and REO expense.
Valley established a "Year 2000 Team" which is responsible to ensure
implementation of the required change to the Date of Century format for all
software programs used by Valley.
Income Taxes
Income tax expense as a percentage of pre-tax income was 33.8% for the nine
months ended September 30, 1997 compared to 33.7% for the same period in 1996.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
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
the model, an interest rate increase or decrease of 100 basis points resulted in
an impact on net interest income over the next twelve months of less than 2%,
while an increase in interest rates of 300 basis points would impact net
interest income by about 1-1/2%. These amounts are consistent with the target
levels contained in Valley's Asset/Liability Policy, which is a maximum impact
in a rising or falling interest rate scenario of plus or minus 5% of net
interest income. Management cannot provide any assurance about the actual effect
of changes in interest rates on Valley's net interest income.
At September 30, 1997, rate sensitive assets exceeded rate sensitive liabilities
at the 0-3 month interval and resulted in a positive gap of $560.2 million or a
ratio of 1.58:1. The total positive gap repricing within 1 year as of September
30, 1997 is $525.7 million or about 1.33:1. Management does not view these
13
amounts as presenting an unusually high risk potential, although no assurances
can be given that Valley is not at risk from rate increases or decreases.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs as
they become due. Maintaining a level of liquid funds through asset-liability
management seeks to ensure that these needs are met at a reasonable cost. On the
asset side, liquid funds are maintained in the form of cash and due from banks,
federal funds sold, investments securities held to maturity maturing within one
year, securities available for sale and loans held for sale. At September 30,
1997, liquid assets amounted to $1.3 billion, as compared to $1.2 billion at
December 31, 1996. This represents 27.8% and 27.2% of earning assets, and 26.4%
and 25.5% of total assets at September 30, 1997 and year-end 1996, respectively.
On the liability side, the primary source of funds available to meet liquidity
needs is Valley's core deposit base, which generally excludes certificates of
deposit over $100 thousand. Core deposits averaged approximately $3.27 billion
and $3.23 billion for the nine months ended September 30, 1997 and year ended
December 31, 1996, respectively, representing 68.1% and 67.2% of average earning
assets. Borrowings through Federal funds lines and Federal Home Loan Bank
advances and large dollar certificates of deposit, generally those over $100
thousand, are used as supplemental funding sources. As of September 30, 1997,
Valley had outstanding advances of $90.0 million with the FHLB. Additional
liquidity is derived from scheduled loan and investment payments of principal
and interest, as well as prepayments received. Proceeds from the sales of
investment securities available for sale were $95.2 million, and proceeds of
$219.9 million were generated from investment maturities. Purchases of
investment securities were $317.8 million. Short term borrowings and
certificates of deposit over $100 thousand amounted to $591.4 million and $628.3
million, on average, for the nine months ended September 30, 1997 and year
ending December 31, 1996, respectively.
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
As of September 30, 1997 Valley had $1.1 billion of securities available for
sale compared with $990 million at December 31, 1996. Those securities are
recorded at their fair value on an aggregate basis. As of September 30, 1997 the
investment securities available for sale had an unrealized gain of $2.6 million,
net of deferred taxes, compared to an unrealized gain of $259 thousand, net of
deferred taxes, at December 31, 1996. This change was primarily due to a
increase in market values, resulting from decreased interest rates. These
securities are not considered trading account securities, which may be sold on a
continuous basis, but rather securities which may be sold to meet the various
liquidity and interest rate requirements of Valley.
14
Loan Portfolio
The following table reflects the composition of the loan portfolio as of
September 30, 1997 and December 31, 1996.
LOAN PORTFOLIO
September 30, December 31,
1997 1996
($ in thousands)
Commercial $ 428,362 $ 466,580
---------- ----------
Total commercial loans 428,362 466,580
---------- ----------
Construction 71,603 87,486
Residential mortgage 924,567 924,764
Commercial mortgage 834,369 786,916
--------- ---------
Total mortgage loans 1,830,539 1,799,166
--------- ---------
Home equity 171,370 174,534
Credit card 144,259 149,494
Automobile 870,898 798,436
Other consumer 101,938 83,555
--------- ---------
Total consumer loans 1,288,465 1,206,019
--------- ---------
Less: unearned income -- (517)
--------- ----------
Loans, net of unearned
income $3,547,366 $3,471,248
========= ==========
As a percent of total loans:
Commercial loans 12.1% 13.5%
Mortgage loans 51.6 51.8
Consumer loans 36.3 34.7
------ -----
Total loans 100.0% 100.0%
====== =====
During the second quarter of 1996, Valley issued a co-branded credit card, the
ShopRite Mastercard. Of the $144.3 million of credit card loans outstanding at
September 30, 1997, approximately $126.6 million are the result of this
co-branded credit card program.
During the third quarter of 1997, Valley expanded its automobile loan program,
with a major insurance company, to Florida. Valley will begin an identical
program in Pennsylvania during the first quarter of 1998.
Non-Performing Assets
Non-performing assets include non-accrual loans and other real estate owned
(OREO). Non- performing assets totalled $10.6 million at September 30, 1997
compared with $16.9 million at December 31, 1996. Non-performing assets at
September 30, 1997 and December 31, 1996, respectively, amounted to 0.30% and
0.49% of loans and other real estate owned.
Loans 90 days or more past due and not included in the non-performing category
totaled $16.9 million at September 30, 1997, compared to $10.2 million at
December 31, 1996. These loans are primarily residential mortgage loans,
commercial mortgage loans and commercial loans which are generally well-secured
and in the process of collection. Also included are matured commercial mortgages
in the process of being renewed, which totaled $4.4 million and $231 thousand at
September 30, 1997 and December 31, 1996, respectively.
15
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.
LOAN QUALITY
September 30, December 31,
1997 1996
(in thousands)
Loans past due in excess of
90 days and still accruing..... $ 16,901 $ 10,166
-------- --------
Non-performing loans............. $ 7,806 $ 13,182
Other real estate owned.......... 2,822 3,750
-------- --------
Total non-performing assets.... $ 10,628 $ 16,932
-------- --------
Troubled debt restructured loans. $ 5,277 $ 5,363
-------- --------
Non-performing loans as
a % of loans................... 0.22% 0.38%
Non-performing assets as a %
of loans plus other real
estate owned................... 0.30% 0.49%
Allowance as a % of loans........ 1.19% 1.33%
Allowance as a % of
non-performing assets.......... 398.39% 271.80%
Asset Quality and Risk Elements
At September 30, 1997, the allowance for loan losses amounted to $42.3 million
or 1.19% of loans, net of unearned income, as compared to $46.0 million or 1.33%
at year-end 1996.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $8.9 million and $5.3
million for the nine months and three months ended September 30, 1997 compared
with net charge-offs of $270 thousand and net recoveries of $29 thousand for the
nine months and three months ended September 30, 1996. Net charge-offs during
the quarter ended September 30, 1997 was mostly attributable to the charge-off
of one commercial loan. During 1996 there was a substantial amount of recoveries
from previously charged-off commercial loans.
Capital Adequacy
A significant measure of the strength of a financial institution is its
shareholders' equity, which should expand in close proportion to asset growth.
At September 30, 1997, shareholders' equity totalled $464.1 million or 9.0% of
total assets, compared with $430.4 million or 8.4% at year-end 1996. Valley has
achieved steady internal capital generation throughout the past five years.
Included in shareholders equity at September 30, 1997 is a $2.6 million
unrealized gain on investment securities available for sale, net of tax,
compared to an unrealized gain of $259 thousand at December 31, 1996.
Valley's capital position at September 30, 1997 under risk-based capital
guidelines was $457.3 million, or 12.8% of risk-weighted assets, for Tier 1
capital and $499.7 million, or 14.0% for Total risked-based capital. The
comparable ratios at December 31, 1996 were 12.2% for Tier 1 capital and 13.5%
for Total risk-based capital.
16
Valley's ratios at September 30, 1997 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 September 30,
1997 and December 31, 1996, Valley was in compliance with the leverage
requirement having a Tier 1 leverage ratio of 9.01% and 8.35%, respectively.
Book value per share amounted to $10.97 at September 30, 1997 compared with
$10.18 per share at December 31, 1996.
The primary source of capital growth is through retention of earnings. Valley's
rate of earnings retention, derived by dividing undistributed earnings by net
income, was 47.3% for the nine month period ended September 30, 1997, compared
to 46.1% for the nine month period ended September 30, 1996. Cash dividends
declared amounted to $0.79 per share for the nine months ended September 30,
1997, equivalent to a dividend payout ratio of 52.7%, compared to 53.9% for the
same period 1996. Valley declared a 5% common stock dividend on April 2, 1997 to
shareholders of record on April 30, 1997, which was issued May 15, 1997.
Effective with the July 1, 1997 dividend payment, the annual dividend rate was
increased to $1.10 per share. Valley's Board of Directors continues to believe
that cash dividends are an important component of shareholder value and that at
its current level of performance and capital, Valley expects to continue its
current dividend policy of a quarterly distribution of earnings to its
shareholders.
Year 2000 Project
Valley established a "Year 2000 Team" which is responsible to ensure
implementation of the required change to the Date of Century format for all
software programs used by Valley. The management of Valley anticipates that the
Company will be Year 2000 compliant before the beginning of the new century.
Recent Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS). SFAS No. 128 was issued to
simplify the computation of EPS and to make the U.S. standard more compatible
with the EPS standards of other countries and that of the International
Accounting Standards Committee: (IASC). It replaces Primary EPS and Fully
Diluted EPS with Basic EPS and Diluted EPS, respectively. It also requires dual
presentation of Basic EPS and Diluted EPS on the face of the income statement
for all entities with the Basic EPS computation to the numerator and denominator
of the Diluted EPS computation. Basic EPS, unlike Primary EPS, excludes all
dilution while Diluted EPS, like Fully Diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. SFAS 128 is
effective for financial statements for both interim and annual periods after
December 15, 1997. Earlier application is not permitted. After adoption, all
prior period EPS data presented must be restated (including interim financial
statements, summaries of earnings and selected financial data) to confirm with
SFAS 128.
In accordance with SFAS No. 128, Basic EPS for the nine months ended September
30, 1997 and 1996 was $1.50 and $1.24, respectively, and $0.52 and $0.37,
respectively for the three months ended September 30, 1997 and 1996. Diluted EPS
was $1.49 and $1.23 for the nine months ended September 30, 1997 and 1996,
respectively, and $0.51 and $0.37 for the three months ended September 30, 1997
and 1996, respectively.
Forward-looking Statements
The foregoing 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 our confidence and strategies and
our expectations about new and existing programs and products, relationships,
opportunities, technology and market conditions. These statements may be
identified by an "asterisk" (*) or such forward-
17
looking terminology as "expect", "look", "believe", "anticipate", "may", "will",
or similar statements or variations of such terms. Such forward-looking
statements involve certain risks and uncertainties. These include, but are not
limited to, the direction of interest rates, continued levels of loan quality,
and origination volume, continued relationships with major customers and
referrals for sources of loans, successful completion of the implementation of
Year 2000 technology changes, as well as the effects of economic conditions and
legal and regulatory barriers and structures. Actual results may differ
materially from such forward-looking statements. The Company assumes no
obligation for updating any such forward-looking statement at any time.
18
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(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
None
19
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: November 13, 1997 /s/ PETER SOUTHWAY
------------------------
PETER SOUTHWAY
VICE CHAIRMAN
Date: November 13, 1997 /s/ ALAN D. ESKOW
------------------------
ALAN D. ESKOW
SENIOR VICE PRESIDENT
FINANCIAL ADMINISTRATION