UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
[ ] 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
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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 54,982,054 shares were outstanding as of
November 2, 1998.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income (Unaudited)
Nine and Three Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
($ in thousands)
September 30, December 31,
1998 1997
Assets
Cash and due from banks $121,656 $148,175
Federal funds sold 40,000 30,000
Securities held to maturity, fair value of
$141,072 and $163,444 in 1998 and 1997,
respectively 139,041 161,552
Trading account securities 1,409 --
Securities available for sale 891,161 1,017,225
Loans 3,711,950 3,605,681
Loans held for sale 20,906 16,651
Less: Allowance for possible loan losses (47,308) (46,372)
Loans, net 3,685,548 3,575,960
Premises and equipment 75,292 74,553
Accrued interest receivable 27,876 29,313
Other assets 60,997 53,877
Total assets $5,042,980 $5,090,655
Liabilities
Deposits:
Non-interest bearing deposits $ 729,464 769,887
Interest bearing:
Savings 1,838,136 1,841,039
Time 1,777,121 1,792,028
Total deposits 4,344,721 4,402,954
Federal funds purchased and securities sold
under repurchase agreements 20,509 32,882
Treasury tax and loan account and other
short-term borrowings 43,162 24,056
Other borrowings 82,966 114,012
Accrued expenses and other liabilities 47,219 41,392
Total liabilities 4,538,577 4,615,296
Shareholders' Equity
Common stock, no par value, authorized
98,437,500 shares, issued 53,050,424
shares in 1998 and 53,066,174 in 1997 23,287 23,282
Surplus 291,657 291,943
Retained earnings 192,508 159,116
Accumulated other comprehensive income 4,148 3,296
511,600 477,637
Treasury stock, at cost (257,928 shares in 1998
and 116,766 shares in 1997) (7,197) (2,278)
Total shareholders' equity 504,403 475,359
Total liabilities and shareholders'equity $5,042,980 $5,090,655
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in thousands, except for per share data)
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
Interest Income
Interest and fees on loans $ 226,597 $ 216,414 $ 76,286 $ 72,904
Interest and dividends on investment
securities:
Taxable 39,919 46,459 12,520 15,564
Tax-exempt 6,164 8,020 1,900 2,533
Dividends 1,338 1,161 437 380
Interest on federal funds sold and other
short-term investments 4,191 3,272 2,027 1,102
Total interest income 278,209 275,326 93,170 92,483
Interest Expense
Interest on deposits:
Savings 31,153 32,197 10,385 10,692
Time 74,960 80,941 24,878 27,211
Interest on federal funds purchased and
securities sold under repurchase
agreements 690 840 239 277
Interest on other short-term borrowings 1,221 928 442 287
Interest on other borrowings 5,026 1,600 1,641 638
Total interest expense 113,050 116,506 37,585 39,105
Net interest income 165,159 158,820 55,585 53,378
Provision for possible loan losses 8,825 5,250 3,000 2,150
Net interest income after provision for
possible loan losses 156,334 153,570 52,585 51,228
Non-Interest Income
Trust income 1,030 825 320 324
Service charges on deposit accounts 9,070 8,804 3,186 2,955
Gains on securities transactions, net 1,023 2,169 58 --
Fees from loan servicing 5,540 4,085 1,964 1,421
Credit card fee income 7,762 9,211 2,564 3,411
Gains on sales of loans, net 3,935 2,873 1,293 1,678
Other 3,145 4,375 1,143 1,927
Total non-interest income 31,505 32,342 10,528 11,716
Non-Interest Expense
Salary expense 36,690 33,580 12,630 11,202
Employee benefit expense 7,935 8,468 2,844 2,680
FDIC insurance premiums 836 799 271 291
Occupancy and equipment expense 14,899 13,560 5,330 4,610
Credit card expense 7,318 13,158 1,804 4,682
Amortization of intangible assets 4,339 2,556 2,154 856
Other 19,263 18,233 7,216 5,764
Total non-interest expense 91,280 90,354 32,249 30,085
Income before income taxes 96,559 95,558 30,864 32,859
Income tax expense 24,605 32,326 6,627 11,003
Net income $63,232 $63,232 $24,237 $21,856
Earnings per share:
Basic $ 1.36 $ 1.20 $ 0.46 $ 0.41
Diluted $ 1.35 $ 1.19 $ 0.45 $ 0.41
Weighted average number of shares outstanding:
Basic 2,804,692 52,828,790 52,790,058 52,859,731
Diluted 53,332,726 53,198,184 53,311,737 53,268,835
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in thousands)
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net income $ 71,954 $ 63,232
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,760 8,318
Amortization of compensation costs pursuant to
long-term stock incentive plan 605 474
Provision for possible loan losses 8,825 5,250
Net amortization of premiums and discounts 2,286 886
Net gains on securities transactions (1,023) (2,169)
Proceeds from sale of loans 78,669 30,608
Gain on sales of loans (3,935) (2,873)
Proceeds from recoveries on previously charged-off
loans 2,014 1,507
Net (increase)decrease in accrued interest receivable
and other assets (410) 2,270
Net increase(decrease)in accrued expenses and
other liabilities 3,455 (313)
Net cash provided by operating activities 172,200 107,190
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity 34,948 54,387
Purchases of investment securities held to maturity (12,680) (14,944)
Proceeds from sales of investment securities
available for sale 70,356 95,193
Proceeds from maturing investment securities
available for sale 293,706 165,504
Purchases of investment securities
available for sale (238,285) (302,855)
Purchases of mortgage servicing rights (9,339) (1,020)
Net increase in federal funds sold and other
short-term investments (10,000) (19,550)
Net increase in loans made to customers (195,161) (114,291)
Purchases of premises and equipment, net of sales (6,910) (7,458)
Net cash used in investing activities (73,365) (145,034)
Cash flows from financing activities:
Net decrease in deposits (58,233) (55,465)
Net increase in federal funds purchased and
other short-term borrowings 6,733 24,067
Advances of long-term debt -- 62,500
Repayments of other borrowings (31,046) (7,043)
Dividends paid to common shareholders (36,449) (30,784)
Addition of common shares to treasury (6,658) --
Common stock issued, net of cancellations 299 800
Net cash used in financing activities (125,354) (5,925)
Net decrease in cash and due from banks (26,519) (43,769)
Cash and due from banks at January 1 148,175 196,995
Cash and due from banks at September 30 $ 121,656 $ 153,226
Supplemental cash flow disclosure:
Cash paid for interest on deposits and other
borrowings $ 113,984 $ 116,765
Cash paid for federal and state income taxes 22,177 24,418
Transfer of Midland securities held to maturity
to securities available for sale -- 39,833
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
The Consolidated Statements of Financial Condition as of September 30,
1998 and December 31, 1997, the Consolidated Statements of Income for
the nine and three month periods ended September 30, 1998 and 1997
and the Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1998 and 1997 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, 1998 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, 1997 Annual Report to Shareholders. Certain
prior period amounts have been reclassified to conform to 1998 financial
presentations.
2. Earnings Per Share
Earnings per share amounts and weighted average shares outstanding
for 1997 have been restated to reflect the 5 for 4 stock split declared
April 9, 1998 to Shareholders of record on May 1, 1998 and issued May 18, 1998.
3. Recent Acquisition
Effective as of the close of business on October 16, 1998, Valley
consummated its previously announced merger agreement with Wayne Bancorp, Inc.
("Wayne"), parent of Wayne Savings Bank, F.S.B., headquartered in Wayne,
New Jersey. At the date of acquisition, Wayne had total assets of $272 million
and deposits of $206 million, with 6 branch offices. The transaction was
accounted for using the pooling of interests method of accounting and resulted
in the issuance of approximately 2,400,000 shares of Valley common stock. Each
share of common stock of Wayne was exchanged for 1.1 shares of Valley common
stock. The consolidated financial statements do not reflect the recent
acquisition of Wayne, which was merged into Valley, after the close of the
quarter, on October 16, 1998. The combined results would not be material to
Valley's net income or earnings per diluted share for the quarter or nine
months ended September 30, 1998.
4. Comprehensive Income
On January 1, 1998, Valley adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS 130 established standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 does not require a specific format for that financial
statement but requires that an enterprise display an amount representing
total comprehensive income for the period in that financial statement.
SFAS 130 requires that an enterprise (1) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This statement was effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 130 did not have
a material effect on Valley's financial position or results of operation.
The following shows each component of comprehensive income for the
nine and three months September 30, 1998 and 1997:
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
(in thousands)
Net income $71,954 $ 63,232
Other comprehensive income, net of tax
Foreign currency translation adjustments (477) (60)
Unrealized gains on securities:
Unrealized holding gains arising
during period $ 699 $ 937
Less: reclassification adjustment
for gains realized in net income 630 1,376
Net unrealized gains 1,329 2,313
Other comprehensive income 852 2,253
Comprehensive income $72,806 $ 65,485
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
(in thousands)
Net income $ 24,237 $ 21,856
Other comprehensive income, net of tax
Foreign currency translation adjustments (293) (3)
Unrealized gains on securities:
Unrealized holding gains arising during
period $ 919 $ 3,028
Less: reclassification adjustment for
gains realized in net income 17 --
Net unrealized gains 936 3,028
Other comprehensive income 643 3,025
Comprehensive income $ 24,880 $ 24,881
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about management's confidence and
strategies and management's expectations about new and existing programs and
products, relationships, opportunities, technology and market conditions.
These statements may be identified by an "asterisk" (*) or such forward-
looking terminology as "expect", "look", "believe", "anticipate", "may", "will"
or similar statements or variations of such terms. Such forward-looking
statements involve certain risks and uncertainties. These include, but are
not limited to, the direction of interest rates, continued levels of loan
quality and origination volume, continued relationships with major customers
including sources for loans, successful completion of the implementation
of Year 2000 technology changes, as well as the effects of economic
conditions and legal and regulatory barriers and structure. Actual results
may differ materially from such forward-looking statements. Valley assumes no
obligation for updating any such forward-looking statement at any time.
Recent Developments
Effective as of the close of business on October 16, 1998, Valley consummated
its previously announced merger agreement with Wayne Bancorp, Inc.("Wayne"),
parent of Wayne Savings Bank, F.S.B., headquartered in Wayne, New Jersey. At
the date of acquisition, Wayne had total assets of $272 million and deposits of
$206 million, with 6 branch offices. The transaction was accounted for
using the pooling of interests method of accounting and resulted in the
issuance of approximately 2,400,000 shares of Valley common stock. Each share
of common stock of Wayne was exchanged for 1.1 shares of Valley common stock.
During the third quarter of 1998 Valley opened a branch in Morristown and
anticipates opening two additional branches in Secaucus and West New York
during the fourth quarter of 1998.
Earnings Summary
Net income for the nine months ended September 30, 1998 was $72.0 million, or
$1.35 per diluted share. These results compare to net income of $63.2
million, or $1.19 per diluted share for the same period in 1997. The annualized
return on average assets increased to 1.90% from 1.66%, while the annualized
return on average equity also increased to 19.52% from 18.79%, for the nine
months ended September 30, 1998 and 1997, respectively.
Net income was $24.2 million, or $0.45 per diluted share for the three month
period ended September 30, 1998, compared with $21.9 million, or $0.41 per
diluted share for the same period in 1997.
The increase in net income for both the nine and three month periods ended
September 30, 1998 can be primarily attributed to an increase in net interest
income and a reduction in income tax expense, offset by an increase in
non-interest expense and in the provision for possible loan losses.
Net Interest Income
Net interest income is the largest source of Valley's operating income.
Net interest income on a tax equivalent basis increased to $168.9 million
from $163.7 million for the nine months ended September 30, 1998 as compared
to the nine months ended September 30, 1997. The increase in net interest
income is due to a widening spread between the yield earned on
interest-earning assets and funding costs, resulting from the movement of
earning assets out of the investment portfolio and into higher yielding loans.
The net interest margin increased to 4.68% for the nine months ended
September 30, 1998 compared to 4.54% for the same period in 1997.
Average interest earning assets increased slightly for the first nine months
of 1998 over the 1997 amount. Average loans increased by $168.9 million or 4.9%
over the 1997 amount. The average rate on loans remained relatively
unchanged. The increase in average loan volume caused interest income on
loans for 1998 to increase by $10.0 million over 1997. Offsetting this
increase was a decline of $178.7 million in average investment securities or
14.2% from the amount in the portfolio during 1997.
Average interest-bearing liabilities for the first nine months of 1998
decreased $106.8 million or 2.7% from 1997. Average savings deposits
decreased by $40.7 million or 2.3%, and average time deposits, mostly rate
sensitive municipal deposits, decreased by $146.7 million or 7.3%. Average
demand deposits continued to grow and increased by $47.8 million or 6.9% over
1997 balances. Average other borrowings increased $74.1 million for the nine
months ended September 30, 1998 in comparison to the same period of 1997 as
Valley increased its borrowings from the Federal Home Loan Bank.
Net interest income on a tax equivalent basis increased to $56.7 million
from $54.9 million for the three months ended September 30, 1998 as compared
to the same period in 1997. This can be attributed to a $41.2 million
increase in interest earning assets and a $61.8 million decrease in interest
bearing liabilities. The net interest margin increased to 4.68% for the three
months ended September 30, 1998 compared to 4.57% for the same period in 1997.
The following tables reflect the components of net interest income for each of
the nine and three months ended September 30, 1998 and 1997.
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, 1998 September 30, 1997
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
Assets
Interest earning assets
Loans (1) (2) $3,630,662 $226,997 8.34% $3,461,811 $216,954 8.36%
Taxable investments (3) 902,644 41,257 6.09 1,023,124 47,620 6.21
Tax-exempt
investments(1)(3) 180,571 9,484 7.00 238,742 12,339 6.89
Federal funds sold and other
short-term investments 99,885 4,191 5.59 80,880 3,272 5.39
Total interest earnings
assets 4,813,762 $281,929 7.81% 4,804,557 $280,185 7.78%
Allowance for possible
loan losses (47,011) (45,998)
Cash and due from banks 129,348 160,982
Other assets 156,333 167,106
Unrealized gain (loss) on
securities available
for sale 7,129 (1,381)
Total assets $5,059,561 $5,085,266
Liabilities and Shareholders'
Equity
Interest bearing liabilities
Savings deposits $1,763,041 $ 31,153 2.36% $1,803,781 $ 32,197 2.38%
Time deposits 1,866,634 74,960 5.35 2,013,305 80,941 5.36
Total interest bearing
deposits 3,629,675 106,113 3.90 3,817,086 113,138 3.95
Federal funds purchased
and other short-term
borrowings 53,064 1,911 4.80 46,590 1,768 5.06
Other borrowings 109,914 5,026 6.10 35,826 1,600 5.95
Total interest bearing
liabilities 3,792,653 113,050 3.97 3,899,502 116,506 3.98
Demand deposits 740,011 692,201
Other liabilities 35,289 44,842
Shareholders' equity 491,608 448,721
Total liabilities and
Shareholders' equity $5,059,561 $5,085,266
Net interest income
(tax equivalent basis) 168,879 163,679
Tax equivalent adjustment (3,720) (4,859)
Net interest income $165,159 $158,820
Net interest rate differential 3.84% 3.80%
Net interest margin (4) 4.68% 4.54%
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
Assets
Interest earning assets
Loans (1) (2) $3,671,947 $ 76,410 8.32% $3,488,637 $73,080 8.38%
Taxable investments (3) 869,751 12,957 5.96 1,017,512 15,944 6.27
Tax-exempt investments (1)(3) 166,772 2,923 7.01 223,538 3,898 6.98
Federal funds sold and other
short-term investments 140,427 2,027 5.77 78,054 1,102 5.65
Total interest earnings
assets 4,848,897 $ 94,317 7.78% 4,807,741 $94,024 7.82%
Allowance for possible loan
losses (47,462) (44,654)
Cash and due from banks 129,468 151,204
Other assets 147,654 162,992
Unrealized gain (loss) on
securities available
for sale 7,293 1,634
Total assets $5,085,850 $5,078,917
Liabilities and Shareholders'
Equity
Interest bearing liabilities
Savings deposits $1,783,172 $ 10,385 2.33% $1,794,464 $10,692 2.38%
Time deposits 1,858,420 24,878 5.35 1,982,983 27,211 5.49
Total interest bearing
deposits 3,641,592 35,263 3.87 3,777,447 37,903 4.01
Federal funds purchased and
other short-term
borrowings 55,973 681 4.87 46,362 564 4.87
Other borrowings 106,031 1,641 6.19 41,588 638 6.14
Total interest bearing
liabilities 3,803,596 37,585 3.95 3,865,397 39,105 4.05
Demand deposits 756,269 715,027
Other liabilities 29,529 43,508
Shareholders' equity 496,456 454,985
Total liabilities and
shareholders' equity $5,085,850 $5,078,917
Net interest income
(tax equivalent basis) 56,732 54,919
Tax equivalent adjustment (1,147) (1,541)
Net interest income $ 55,585 $53,378
Net interest rate differential 3.83% 3.77%
Net interest margin (4) 4.68% 4.57%
(1) Interest income is presented on a tax equivalent basis using a 35% tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is based
on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of earning
assets.
The following table demonstrates the relative impact on net interest income of
changes in volume of earning assets and interest bearing liabilities and
changes in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
Nine Months Ended September 30,
1998 Compared to 1997
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
Interest income:
Loans (1) $ 10,043 10,558 (515)
Taxable investments (6,363) (5,520) (843)
Tax-exempt investments(1) (2,855) (3,052) 197
Federal funds sold and other short-term
investments 919 794 125
1,744 2,780 (1,036)
Interest expense:
Savings deposits (1,044) (722) (322)
Time deposits (5,981) (5,890) (91)
Federal funds purchased and other
short-term borrowings 143 237 (94)
Other borrowings 3,426 3,387 39
(3,456) (2,988) (468)
Net interest income (tax equivalent basis) $ 5,200 $ 5,768 $ (568)
Three Months Ended September 30,
1998 Compared to 1997
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
Interest income:
Loans (1) $ 3,330 $ 3,817 $ (487)
Taxable investments (2,987) (2,230) (757)
Tax-exempt investments(1) (975) (995) 20
Federal funds sold and other short-term
investments 925 900 25
293 1,492 (1,199)
Interest expense:
Savings deposits (307) (67) (240)
Time deposits (2,333) (1,679) (654)
Federal funds purchased and other
short-term borrowings 117 117 0
Other borrowings 1,003 997 6
(1,520) (632) (888)
Net interest income (tax equivalent basis) $ 1,813 $ 2,124 $ (311)
(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 nine and
three months ended September 30, 1998 and 1997.
NON-INTEREST INCOME
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
(in thousands)
Trust income $ 1,030 $ 825 $ 320 $ 324
Service charges on deposit accounts 9,070 8,804 3,186 2,955
Gains on securities transactions, net 1,023 2,169 58 --
Fees from loan servicing 5,540 4,085 1,964 1,421
Credit card fee income 7,762 9,211 2,564 3,411
Gains on sales of loans, net 3,935 2,873 1,293 1,678
Other 3,145 4,375 1,143 1,927
Total $31,505 $32,342 $10,528 $11,716
Non-interest income continues to represent a considerable source of income
for Valley. Excluding gains on securities transactions, total non-interest
income amounted to $30.5 million for the nine months ended September 30, 1998
compared with $30.2 million for the nine months ended September 30, 1997.
Included in fees from loan servicing are fees for servicing residential mortgage
loans and SBA loans, which increased by 35.6% from $4.1 million for the nine
months ended September 30, 1997 to $5.5 million for the nine months ended
September 30, 1998. This reflects the increase in the size of the servicing
portfolios, including the purchases of mortgage servicing rights during
the first nine months of 1998, approximately $583.0 million of mortgage loans.
Credit card fee income declined during the quarter by $1.4 million or 15.7%.
The decrease was the result of the sale of the merchant processing operation
during 1997 and the reduced volume of co-branded credit card transactions.
Gains on the sales of loans were $3.9 million for the nine months ended
September 30, 1998 compared to $2.9 million for the nine months ended
September 30, 1997. The increase in gains recorded are primarily from mortgage
banking activity related to residential mortgage loans.
Other non-interest income decreased $1.2 million to $3.1 million for the
nine months ended September 30, 1998 in comparison to the same period in 1997.
The decrease resulted from the gain on the sale of REO property and gain on
sale of Valley's credit card merchant business which occurred during the nine
months ended September 30, 1997.
Non-Interest Expense
The following table presents the components of non-interest expense for the nine
and three months ended September 30, 1998 and 1997.
NON-INTEREST EXPENSE
Nine Months Ended Three Months Ended
September 30 September 30,
1998 1997 1998 1997
(in thousands)
Salary expense $ 36,690 $ 33,580 $ 12,630 $ 11,202
Employee benefit expense 7,935 8,468 2,844 2,680
FDIC insurance premiums 836 799 271 291
Occupancy and equipment expense 14,899 13,560 5,330 4,610
Credit card expense 7,318 13,158 1,804 4,682
Amortization of intangible assets 4,339 2,556 2,154 856
Other 19,263 18,233 7,216 5,764
$ 91,280 $ 90,354 $ 32,249 $ 30,085
Non-interest expense totaled $91.3 million for the nine month period ended
September 30, 1998, relatively unchanged from the 1997 level. The largest
components of non-interest expense are salaries and employee benefit expense
which totaled $44.6 million in 1998 compared to $42.0 million in 1997. At
September 30, 1998, full-time equivalent staff was 1,646 compared to 1,575
at September 30, 1997.
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, 1998 was 45.4%, one of the lowest in the
industry, compared with an efficiency ratio of 47.7% for the year ended
December 31, 1997 and 46.7% for the nine months ended September 30, 1997. The
efficiency ratio during 1997 had been impacted by the acquisition of Midland
and net expenses incurred from the credit card program that began during 1996.
Valley strives to control its efficiency ratio and expenses as a means of
producing increased earnings for its shareholders.
Credit card expense includes cardmember rebates, processing expenses, and
fraud losses. The decrease in credit card expenses is directly attributable to
an amendment made to the co-branded credit card program during the fourth
quarter of 1997, which reduced the amount of cardmember rebates paid by Valley.
Amortization of intangible assets increased to $4.3 million for the nine
months ended September 30, 1998 from $2.6 million for the same period in 1997,
representing an increase of $1.8 million or 70.0%. The majority of this
increase resulted from the additional amortization of loan servicing rights.
Declining interest rates is responsible for a large amount of prepayments,
resulting in an increase in amortization expense to reduce the unamortized
balance of mortgage servicing rights in line with the portfolio balance and the
expected future cash flows.
The significant components of other non-interest expense include
advertising, professional fees, stationery and postage, and telephone expense
which total approximately $9.6 million for the first nine months of 1998,
relatively unchanged from the same period in 1997.
Income Taxes
Income tax expense as a percentage of pre-tax income was 25.5% for the nine
months ended September 30, 1998 compared to 33.8% for the same period in 1997.
The reduction in the effective tax rate is attributable to a realignment
of corporate entities and a lower effective tax rate for state taxes. It is
anticipated that the effective tax rate will increase during the fiscal year
beginning January 1999 over the current 25.5% effective tax rate. Valley is
evaluating its current and future tax strategies to minimize the effective tax
rate in future periods.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Valley's success is largely dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of Valley's net
interest income to the movement in interest rates. Valley does not currently
use derivatives to manage market and interest rate risks. Valley's
interest rate risk management is the responsibility of the Asset/Liability
Management Committee ("ALCO"), which reports to the Board of Directors. ALCO
establishes policies that monitor and coordinate Valley's sources, uses and
pricing of funds.
Valley uses a simulation model to analyze net interest income sensitivity
to movements in interest rates. The simulation model projects net interest
income based on various interest rate scenarios over a twelve and twenty-four
month period. The model is based on the actual maturity and repricing
characteristics of rate sensitive assets and liabilities. The model
incorporates assumptions regarding the impact of changing interest rates on
the prepayment rates of certain assets and liabilities. Management cannot
provide any assurance about the actual effect of changes in interest rates on
Valley's net interest income.
The total negative gap repricing within 1 year as of September 30, 1998 is
$(561.5) million, representing a ratio of interest sensitive assets to interest
sensitive liabilities of (0.74:1). Management does not view this amount as
presenting an unusually high risk potential, although no assurances can be
given that Valley is not at risk from rate increases or decreases.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs
as they become due. Maintaining a level of liquid funds through
asset-liability management seeks to ensure that these needs are met at a
reasonable cost. On the asset side, liquid funds are maintained in the form
of cash and due from banks, federal funds sold, investments securities held
to maturity maturing within one year, securities available for sale, trading
account securities and loans held for sale. At September 30, 1998, liquid
assets amounted to $1.1 billion, compared to $1.2 billion at December 31,
1997. This represents 23.0 % and 25.6% of earning assets, and 25.6%
and 21.9% of total assets at September 30, 1998 and year-end 1997, 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 $3.2 billion and $3.3 billion for the nine months ended
September 30, 1998 and year ended December 31, 1997, respectively, representing
66.7% and 67.4% of average earning assets. Short term borrowings through
Federal funds lines and Federal Home Loan Bank advances and large dollar
certificates of deposit, generally those over $100 thousand, are used as
supplemental funding sources. As of September 30, 1998, Valley had
outstanding advances of $82.5 million with the FHLB. Additional liquidity is
derived from scheduled loan and investment payments of principal and interest,
as well as prepayments received. During the nine months ended September 30,
1998 proceeds from the sales of investment securities available for sale
were $70.4 million, proceeds of $328.7 million were generated from
investment maturities, and purchases of investment securities were $251.0
million. Short term borrowings and certificates of deposit over $100 thousand
amounted to $473.8 million and $592.0 million, on average, for the nine
months ended September 30, 1998 and year ending December 31, 1997,
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.
As of September 30, 1998, Valley had $891 million of securities available
for sale compared with $1.0 billion at December 31, 1997. Those securities
are recorded at their fair value on an aggregate basis. As of September 30,
1998, the investment securities available for sale had an unrealized gain
of $5.0 million, net of deferred taxes, compared to an unrealized gain of
$3.6 million, net of deferred taxes, at December 31, 1997. 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 September 30, 1998, total loans were $3.7 billion, compared to $3.6
billion at December 31, 1997, an increase of 3.1%.
The following table reflects the composition of the loan portfolio as of
September 30, 1998 and December 31, 1997.
LOAN PORTFOLIO
September 30, December 31,
1998 1997
(in thousands)
Commercial $ 450,800 $ 453,174
Total commercial loans 450,800 453,174
Construction 98,437 81,033
Residential mortgage 906,053 903,201
Commercial mortgage 906,125 850,234
Total mortgage loans 1,910,615 1,834,468
Home equity 160,189 168,888
Credit card 109,460 145,485
Automobile 1,023,426 930,247
Other consumer 78,366 90,070
Total consumer loans 1,371,441 1,334,690
Loans $ 3,732,856 $ 3,622,332
As a percent of total loans:
Commercial loans 12.1% 12.5%
Mortgage loans 51.2 50.6
Consumer loans 36.7 36.9
Total loans 100.0% 100.0%
While Valley continues to generate a record volume of residential mortgages,
a large portion of its 1998 long-term fixed rate production was sold into the
secondary market, to avoid future interest rate risk. Valley sold $108.4
million during the first nine months of 1998 and continues to retain the
servicing rights on all of the loans sold.
Non-Performing Assets
Non-performing assets include non-accrual loans and other real estate owned
(OREO). Non-performing assets continued to decrease, and totaled $8.8 million
at September 30, 1998, compared with $9.5 million at December 31, 1997, a
decrease of $659 thousand or 6.9%. Non-performing assets at September 30,
1998 and December 31, 1997, respectively, amounted to 0.24% and 0.26% of
loans and OREO.
Loans 90 days or more past due and not included in the non-performing category
totaled $10.0 million at September 30, 1998, compared to $16.4 million at
December 31, 1997. These loans are primarily residential mortgage loans,
commercial mortgage loans and commercial loans which are generally well-secured
and in the process of collection. Also included are matured commercial mortgage
loans in the process of being renewed, which totaled $1.0 million and $2.0
million at September 30, 1998 and December 31, 1997, respectively.
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,
1998 1997
(in thousands)
Loans past due in excess of 90 days
and still accruing $ 9,997 $ 16,351
Non-accrual loans 5,756 7,307
Other real estate owned 3,070 2,178
Total non-performing assets $ 8,826 $ 9,485
Troubled debt restructured loans $ 5,158 $ 5,248
Non-performing loans as a % of loans 0.15% 0.20%
Non-performing assets as a % of loans
plus other real estate owned 0.24% 0.26%
Allowance as a % of loans 1.27% 1.28%
Allowance as a % of non-performing assets 536% 489%
At September 30, 1998 the allowance for loan losses amounted to $47.3
million or 1.27% of loans, as compared to $46.4 million or 1.28% at year-end
1997.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $7.9 million for
the nine months ended September 30, 1998 compared with $8.9 million for the
nine months ended September 30, 1997.
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, 1998, shareholders' equity totaled $504.4 million or
10.0% of total assets, compared with $475.4 million or 9.3% at year-end 1997.
Valley has achieved steady internal capital generation throughout the past
five years.
On May 26, 1998 Valley's Board of Directors rescinded its previously announced
stock repurchase program after 220,125 shares of Valley common stock had been
repurchased. Rescinding the remaining authorization was undertaken in
connection with Valley's acquisition of Wayne, to comply with certain of
the pooling-of-interests accounting rules as recently interpreted by the
Securities and Exchange Commission.
Included in shareholders equity as a component of accumulated comprehensive
income at September 30, 1998 was a $5.0 million unrealized gain on investment
securities available for sale, net of tax, compared to an unrealized gain of
$3.6 million at December 31, 1997. Also included in shareholders equity as a
component of accumulated comprehensive income at September 30, 1998 is a
translation adjustment of ($820) thousand related to the Canadian subsidiary
of Valley National Bank.
Valley's capital position at September 30, 1998 under risk-based capital
guidelines was $494.5 million, or 13.1% of risk-weighted assets, for Tier 1
capital and $541.6 million, or 14.4% for Total risked-based capital. The
comparable ratios at December 31, 1997 were 12.9% for Tier 1 capital and 14.1%
for Total risk-based capital. Valley's ratios at September 30, 1998 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, 1998 and December 31, 1997, Valley
was in compliance with the leverage requirement having a Tier 1 leverage ratio
of 9.7% and 9.2%, respectively.
Book value per share amounted to $9.55 at September 30, 1998 compared with $8.98
per share at December 31, 1997.
The primary source of capital growth is through retention of earnings. Valley's
rate of earnings retention, derived by dividing undistributed earnings by net
income, was 47.1% for the nine month period ended September 30, 1998, compared
to 47.3% for the nine month period ended September 30, 1997. Cash dividends
declared amounted to $0.72 per share for the nine months ended September 30,
1998 equivalent to a dividend payout ratio of 52.9%, compared to 52.7% for the
same period in 1997. Valley declared a five for four stock split on April 9,
1998 to shareholders of record on May 1, 1998, which was issued May 18, 1998.
Effective with the July 1, 1997 dividend payment, the annual dividend rate was
increased to $1.00 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
Most computer programs have historically been written using two digits rather
than four to define the applicable year. These programs were written without
considering the impact of the upcoming change in the century and may experience
problems handling dates beyond the year 1999. This could cause computer
applications to fail or to create erroneous results unless corrective measures
are taken. Incomplete or untimely resolution of the Year 2000 ("Y2K") issue
could have a material adverse impact on Valley's business, operations and
financial condition in the future.
Valley has assessed the Y2K issue as it impacts internal IT systems (computer
hardware and software systems) and its non-IT systems (facilities, equipment
and vendors) and has been developing its plan to timely address the Y2K issue.
Valley operates its deposit, loan and general ledger systems on one software
system licensed to Valley through a third party. Valley received the Y2K
compliant software from the vendor and began testing during September 1998. It
is anticipated that the testing for the deposit, loan and general ledger systems
will be completed by the end of 1998. Additional Y2K software systems have
been received with testing substantially complete. Valley believes it has
identified equipment which needs to be upgraded and is in the process of
remediation.
Valley currently believes its Y2K compliance plan with respect to its internal
hardware and software systems will not have a material adverse effect on
Valley's financial condition or results of operations.* However, no assurance
can be given that the ultimate costs to address the Y2K issue or the impact of
any failure to timely achieve substantial Y2K compliance will not have a
material adverse effect on Valley's financial condition or results.*
Valley will utilize both internal and external sources to execute its Y2K plan.
Valley's main software system is licensed through a third party vendor for which
Valley pays a normal annual licensing fee. This third party vendor has provided
Valley with Y2K compliant software. As a result, Valley has been able to
maintain a low level of expenditures to date. Since implementing the
assessment of Y2K issues, Valley's costs to external sources have been less
than $100 thousand. Based on current information, Valley estimates that
expenditures related to the execution of its Y2K plan will be approximately
$1.0 million.* These estimates of expenditures are based on Valley's presently
available information and may be updated as information becomes available.
The remaining amount to be spent is for additional hardware and software
systems.
Valley has also communicated with its significant suppliers, vendors and
borrowing customers to determine the extent to which the company is vulnerable
to the failure of these third parties to remedy any Y2K issues. Valley can
give no assurance that failure to address Y2K issues by third parties on whom
Valley's systems, business processes or loan payments rely would not have a
material adverse effect on Valley's operations or financial condition.* Valley
has implemented a customer awareness program on its website, in brochures in
each of its branches and in messages on customer statements to keep customers
informed about Y2K as it relates to Valley.
Valley has established a contingency plan for the applications critical to its
operations. This plan includes trigger dates in which a contingency vendor
would be contacted. The testing phase is almost complete, and Valley does not
foresee converting any of these applications to a contingency vendor at this
time.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued
by the Financial Accounting Standards Board ("FASB") in June 1998. SFAS
No. 133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative instruments in the
statement of financial position at fair value. Valley must adopt SFAS No. 133
by January 1, 2000; however, early adoption is permitted. On adoption, the
provisions of SFAS No. 133 must be applied prospectively. Valley
anticipates that the adoption of SFAS No. 133 will not have a material
impact in the financial statements.
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits.
This statement is effective for fiscal years beginning after December 15,
1997. The adoption is not expected to materially affect the financial
statements. Restatement of disclosures for earlier periods provided for
comparative purposes is required unless the information is not readily
available.
In October, 1998, the FASB issued No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sales by
a Mortgage Banking Enterprise". This statement is effective for the first
fiscal quarter beginning after December 15, 1998. Early application is
permitted. Valley anticipates adopting SFAS No. 134 during the fourth quarter
of 1998. The adoption is not expected to materially affect the financial
statements.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(27) Financial Data Schedule
b) Reports on Form 8-K
None
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, 1998 /s/ Peter Southway
PETER SOUTHWAY
VICE CHAIRMAN
Date: November 13, 1998
/s/ Alan D. Eskow
ALAN D. ESKOW
SENIOR VICE PRESIDENT
FINANCIAL ADMINISTRATION