UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1999
[ ] 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)
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 55,245,901 shares were outstanding as of
May 3, 1999.
TABLE OF CONTENTS
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
PART I
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
March 31, December 31,
1999 1998
Assets
Cash and due from banks $154,338 $175,794
Federal funds sold 85,000 102,000
Investment securities held to maturity, fair value
of $332,381 and $238,421 in 1999 and 1998,
respectively 339,724 237,410
Investment securities available for sale 950,509 927,481
Trading account securities 1,472 1,592
Loans 4,040,209 3,954,395
Loans held for sale 10,364 23,455
Less: Allowance for possible loan losses (50,075) (49,868)
Net, loans 4,000,498 3,927,982
Premises and equipment 79,771 79,774
Accrued interest receivable 31,964 29,711
Other assets 63,076 59,463
Total assets $5,706,352 $5,541,207
Liabilities
Deposits:
Non-interest bearing deposits $803,424 $854,594
Interest bearing:
Savings 1,934,315 1,982,973
Time 1,943,955 1,837,122
Total deposits 4,681,694 4,674,689
Federal funds purchased and securities sold under
repurchase agreements 30,552 30,414
Treasury tax and loan account and other short-term
borrowings 25,965 22,667
Other borrowings 343,933 212,949
Accrued expenses and other liabilities 58,473 44,701
Total liabilities 5,140,617 4,985,420
Shareholders' Equity
Common stock, no par value, authorized 98,437,500
shares, issued 55,486,522 shares in 1999 and
55,503,060 in 1998 24,432 24,424
Surplus 312,018 311,611
Retained earnings 234,104 223,185
Unallocated common stock held by the ESOP (1,332) (1,331)
Accumulated other comprehensive income 1,737 4,084
570,959 561,973
Treasury stock, at cost (191,988 shares in 1999
and 236,735 shares in 1998) (5,224) (6,186)
Total shareholders' equity 565,735 555,787
Total liabilities and shareholders' equity $5,706,352 $5,541,207
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
1999 1998
Interest Income
Interest and fees on loans $78,409 $78,264
Interest and dividends on investment securities:
Taxable 16,332 15,288
Tax-exempt 1,606 2,193
Dividends 594 501
Interest on federal funds sold and other short-term
investments 807 1,088
Total interest income 97,748 97,334
Interest Expense
Interest on deposits:
Savings deposits 9,125 10,836
Time deposits 23,974 26,896
Interest on federal funds purchased and securities
sold under repurchase agreements 224 189
Interest on other short-term borrowings 327 324
Interest on other borrowings 4,060 2,254
Total interest expense 37,710 40,499
Net Interest Income 60,038 56,835
Provision for possible loan losses 2,000 2,570
Net Interest Income after Provision for Possible
Loan Losses 58,038 54,265
Non-Interest Income
Trust income 412 340
Service charges on deposit accounts 3,225 2,885
Gains on securities transactions, net 1,974 917
Fees from loan servicing 1,932 1,575
Credit card fee income 1,990 2,523
Gains on sales of loans, net 664 1,064
Other 1,764 1,096
Total non-interest income 11,961 10,400
Non-Interest Expense
Salary expense 13,079 12,551
Employee benefit expense 2,915 2,824
FDIC insurance premiums 305 320
Occupancy and equipment expense 4,337 4,727
Credit card expense 1,314 3,145
Amortization of intangible assets 1,308 950
Other 6,397 6,610
Total non-interest expense 29,655 31,127
Income Before Income Taxes 40,344 33,538
Income tax expense 14,996 9,859
Net Income $25,348 $23,679
Earnings Per Share:
Basic $ 0.44 $ 0.41
Diluted $ 0.43 $ 0.41
Weighted Average Number of Shares Outstanding:
Basic 57,852,897 57,775,586
Diluted 58,403,062 58,423,064
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net income $25,348 $23,679
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,825 2,697
Amortization of compensation costs pursuant to long
term stock incentive plan 225 200
Provision for possible loan losses 2,000 2,570
Net amortization of premiums and accretion of discounts 1,135 548
Net gains on securities transactions (1,974) (917)
Proceeds from sales of loans 17,513 25,738
Gain on sales of loans (664) (1,064)
Proceeds from recoveries on previously charged-off loans 840 516
Net increase in accrued interest receivable and
other assets (6,522) (5,616)
Net increase in accrued expenses and other liabilities 15,302 8,352
Net cash provided by operating activities 56,028 56,703
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity 11,189 11,356
Purchases of investment securities held to maturity (113,735) (3,835)
Proceeds from sales of investment securities
available for sale 4,116 24,367
Proceeds from maturing investment securities
available for sale 131,980 118,082
Purchases of investment securities available for sale (140,311) (61,811)
Purchases of mortgage servicing rights (509) (5,068)
Net decrease (increase) in federal funds sold and
other short-term investments 17,000 (34,000)
Net increase in loans made to customers (113,805) (73,683)
Purchases of premises and equipment, net of sales (1,514) (3,050)
Net cash used in investing activities (205,589) (27,642)
Cash flows from financing activities:
Net increase (decrease) in deposits 7,005 (6,466)
Net increase (decrease) in federal funds purchased
and other short-term borrowings 3,436 (9,634)
Advances of other borrowings 131,000 --
Repayments of other borrowings (16) (15)
Dividends paid to common shareholders (13,858) (11,747)
Addition of common shares to treasury -- (6,674)
Common stock issued, net of cancellations 538 298
Net cash provided by (used in) financing activities 128,105 (34,238)
Net decrease in cash and due from banks (21,456) (5,177)
Cash and due from banks at January 1 175,794 155,020
Cash and due from banks at March 31 $154,338 $149,843
Supplemental cash flow disclosures:
Cash paid for interest on deposits and other
borrowings $ 36,957 $ 39,778
Cash paid for federal and state income taxes 86 720
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 March 31,
1999 and December 31, 1998, the Consolidated Statements of Income for the three
month periods ended March 31, 1999 and 1998 and the Consolidated Statements
of Cash Flows for the three month periods ended March 31, 1999 and 1998 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 March 31, 1999 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, 1998 Annual Report to Shareholders. Certain
prior period amounts have been reclassified to conform to 1999 financial
presentations.
2. Earnings Per Share
Earnings per share amounts and weighted average shares outstanding
have been restated to reflect the 5 percent stock dividend declared April 7,
1999 to Shareholders of record on May 7, 1999 and to be issued May 18, 1999.
3. Recent Developments
On December 17, 1998 Valley signed a definitive merger agreement with
Ramapo Financial Corporation ("Ramapo"), parent of The Ramapo Bank, an 8
branch bank headquartered in Wayne, New Jersey. At March 31, 1999 Ramapo
had total assets of $334.9 million and deposits of $293.7 million. All
regulatory and shareholder approvals have been received and the transaction
is expected to close in the second quarter of 1999 and to be accounted for using
the pooling of interests method of accounting. There were approximately 8.2
million shares of Ramapo common stock outstanding at March 31, 1999. The merger
agreement provides that 0.44625 shares (as adjusted for the 5 percent stock
dividend to be issued May 18, 1999) of Valley common stock will be exchanged for
each share of Ramapo common stock.
4. Accumulated Other Comprehensive Income
Valley's accumulated other comprehensive income consists of foreign currency
translation adjustments and unrealized gains (losses) on securities. The
following table shows the related tax effects on each component of
accumulated other comprehensive income for the three months ended March 31,
1999 and 1998.
Three Months Ended
March 31, 1999
Net income $25,348 $23,679
Accumulated other comprehensive income, net of tax:
Foreign currency translation adjustments 143 51
Unrealized gains(losses) on securities:
Unrealized holding gains (losses) arising
during period $(3,545) $1,840
Less: reclassification adjustment for gains
realized in net income 1,055 583
Net unrealized gains (losses) (2,490) 1,257
Other comprehensive income (loss) (2,347) 1,308
Comprehensive income $23,001 $24,987
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-Q, both in the MD & A and elsewhere, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are not historical facts and include expressions
about management's confidence and strategies and management's expectations
about new and existing programs and products, 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.
Earnings Summary
Net income for the three months ended March 31, 1999 was $25.3 million, or
$0.43 per diluted share. These results compare to net income of $23.7
million, or $0.41 per diluted share for the same period in 1998 (1998 amounts
have been restated for the Wayne Bancorp, Inc. merger and earnings per share
amounts have been restated to give effect to a 5 percent stock dividend to be
issued May 18, 1999). The annualized return on average assets increased to
1.82 percent from 1.79 percent, while the annualized return on average equity
decreased to 18.09 percent from 18.51 percent, for the three months ended
March 31, 1999 and 1998, respectively.
The increase in net income for the three month period ended March 31, 1999 can
be primarily attributed to an increase in net interest income and securities
gains, and decreased credit card expenses, offset by higher income tax expense.
Net Interest Income
Net interest income is the largest source of Valley's operating income. Net
interest on a tax equivalent basis increased to $61.0 million from $58.2
million for the three months ended March 31, 1999 as compared to the three
months ended March 31, 1998. The increase in net interest income is due to
higher average balances of total interest earning assets, primarily loans
and taxable investments, partially offset by lower average interest rates
for these interest earning assets. Also contributing to the increase was a
decline in average interest rates on average balances of total interest
bearing liabilities. The net interest margin was 4.60 percent for the three
months ended March 31, 1999, unchanged from the same period in 1998.
Average interest earning assets increased $243.0 million, or 4.8 percent for
the three months ended March 31, 1999 over the comparable 1998 amount. This
was mainly the result of the increase in average balance of loans of $195.7
million or 5.2 percent and the increase in average balance of taxable
investments of $111.9 million, or 11.1 percent. Included in taxable
investments is Valley's portfolio of trust preferred securities of $220.3
million, at March 31, 1999. Valley began purchasing these securities in the
latter part of the fourth quarter of 1998 as part of a leverage strategy to
increase interest-earning assets and net interest income. This portfolio is
funded by borrowings from the Federal Home loan Bank which are included in
other borrowings.
Average interest-bearing liabilities for the three months ended March 31, 1999
increased $140.6 million or 3.5 percent from the same period in 1998. Average
demand deposits increased by $65.2 million or 8.9 percent over the comparable
1998 balance. Average savings deposits increased $53.9 million or 3.0 percent
and average time deposits, mostly rate sensitive muncipal deposits, decreased
by $64.6 million or 3.2 percent. Average other borrowings increased $140.0
million.
Average interest rates, in all categories of interest earning assets,
declined during the quarter ended March 31, 1999 compared to the quarter ended
March 31, 1998. The largest decline in average rates was for loans, which
decreased by 40 basis points to 7.91 percent. Average interest rates on total
earning assets declined 35 basis points to 7.45 percent. Average interest
rates also declined on all interest bearing liabilities by 40 basis points
to 3.62 percent from 4.02 percent. Average interest rates on deposits
declined by 47 basis points to 3.46 percent and also declined on all
borrowings by 43 basis points. Overall, the decline in average interest
rates coupled with the growth in interest earning assets, as compared to
1998, kept the net interest margin stable at 4.60 percent.
The following table reflects the components of net interest income for each
of the three months ended March 31, 1999 and 1998.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST EARNINGS ON A TAX EQUIVALENT BASIS
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
Assets
Interest
earning assets
Lonas (1)(2) $3,970,740 $ 78,517 7.91% $3,775,030 $78,405 8.31%
Taxable
investments(3) 1,118,053 16,926 6.06 1,006,197 15,789 6.28
Tax-exempt
investments(1)(3) 143,543 2,471 6.89 192,956 3,374 6.99
Federal funds sold
and other short-
term investments 68,432 807 4.72 83,617 1,088 5.20
Total interest
earning assets 5,300,768 $98,721 7.45 5,057,800 $98,656 7.80
Allowance for
possible loan
losses (50,657) (49,028)
Cash and due
from banks 138,679 132,167
Other assets 165,991 156,975
Unrealized gain
on securities
available for
sale 5,960 7,472
Total assets $5,560,741 $5,305,386
Liabilities and
Shareholders'
Equity
Interest bearing
liabilities
Savings deposits$1,880,450 9,125 1.94% $1,826,540 $10,836 2.37%
Time deposits 1,944,900 23,974 4.93 2,009,471 26,896 5.35
Total interest
bearing
deposits 3,825,350 33,099 3.46 3,836,011 37,732 3.93
Federal funds
purchased and
other short-term
borrowings 54,153 551 4.07 42,886 513 4.78
Other borrowings 286,444 4,060 5.67 146,430 2,254 6.16
Total interest
bearing
liabilities 4,165,947 37,710 3.62 4,025,327 40,499 4.02
Demand deposits 794,122 728,891
Other liabilities 40,136 39,439
Shareholders'
equity 560,536 511,729
Total liabilities
and Shareholders'
equity $5,560,741 $5,305,386
Net interest
income (tax
(equivalent basis) 61,011 58,157
Tax equivalent adjustment (973) (1,322)
Net interest income $60,038 $56,835
Net interest rate
differential 3.83% 3.78%
Net interest margin (4) 4.60% 4.60%
(1) Interest income is presented on a tax equivalent basis using a 35 percent
tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is
based on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of earning
assets.
The following table demonstrates the relative impact on net interest income
of changes in volume of interest earning assets and interest bearing
liabilities and changes in rates earned and paid by Valley on such assets and
liabilities.
CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
Three Months Ended March 31,
1999 Compared to 1998
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
Interest income:
Loans (1) $ 112 $ 3,964 $ (3,852)
Taxable investments 1,137 1,708 (571)
Tax-exempt investments (1) (903) (851) (52)
Federal funds sold and
other short-term investments (281) (185) (96)
(4,571)
65 4,636 (4,571)
Interest Expense:
Savings deposits (1,711) 312 (2,023)
Time deposits (2,922) (845) (2,077)
Federal funds purchased and
other short-term borrowings 38 122 (84)
Other borrowings 1,806 1,998 (192)
(2,789) 1,587 (4,376)
Net interest income $ 2,854 $ 3,049 $ (195)
(tax equivalent basis)
(1) Interest income is adjusted to a tax equivalent basis using a 35 percent
tax rate.
(2) Variances resulting from a combination of changes in volume and rates are
allocated to the categories in proportion to the absolute dollar amounts of
the change in each category.
Non-Interest Income
The following table presents the components of non-interest income for the three
months ended March 31, 1999 and 1998.
NON-INTEREST INCOME
Three Months ended March 31,
1999 1998
(in thousands)
Trust income $ 412 $ 340
Service charges on deposit accounts 3,225 2,885
Gains on securities transactions, net 1,974 917
Fees from loan servicing 1,932 1,575
Credit card fee income 1,990 2,523
Gains on sales of loans, net 664 1,064
Other 1,764 1,096
Total $11,961 $10,400
Non-interest income continues to represent a considerable source of income
for Valley. Excluding gains on securities transactions, total non-interest
income amounted to $10.0 million for the three months ended March 31, 1999
compared with $9.5 million for the three months ended March 31, 1998.
Service charges on deposit accounts increased $340 thousand or 11.8 percent
from $2.9 million for the quarter ended March 31, 1998 to $3.2 million for the
same period in 1999. A majority of this increase is due to the implementation
of new service fees and emphasis placed on collection efforts.
Included in fees from loan servicing are fees for servicing residential
mortgage loans and SBA loans. Fees from loan servicing increased by 22.7
percent from $1.6 million for the three months ended March 31, 1998 to $1.9
million for the three months ended March 31, 1999 due to an increase in
the servicing portfolio. The increase in the servicing portfolio was due
to the acquisition of several portfolios, the origination of new loans by VNB
and their subsequent sale with servicing retained, offset by principal paydowns
and prepayments.
Credit card fee income declined by $533 thousand or 21.1 percent. The
decrease can be attributed to a change in the co-branded credit card program
during the fourth quarter of 1997 which reduced cardmember rebates, resulting
in a decline in outstanding credit card balances. The decline in balances
and usage of the card caused a reduction in the volume of co-branded credit card
transactions.
Gains on the sales of loans were $664 thousand for the three months ended
March 31, 1999 compared to $1.1 million for the comparable period in 1998.
Gains are recorded primarily from mortgage banking activity related to
residential mortgage loans and the sale of SBA loans in the secondary market.
The decrease of $400 thousand resulted from a decline in the
volume of residential mortgage loans being sold by Valley into the secondary
market.
The largest component of other non-interest income is safe deposit rental
income. Other non-interest income increased $668 thousand to $1.8 million
for the three months ended March 31, 1999 in comparison to the same period
in 1998. Approximately $375 thousand of the increase can be attributed to
the gain on sale of REO property and $175 thousand of the increase is
commissions earned on a new program which began in the third quarter of 1998.
Non-Interest Expense
The following table presents the components of non-interest expense for the
three months ended March 31, 1999 and 1998.
NON-INTEREST EXPENSE
Three Months ended March 31,
1999 1998
(in thousands)
Salary expense $ 13,079 $12,551
Employee benefit expense 2,915 2,824
FDIC insurance premiums 305 320
Occupancy and equipment expense 4,337 4,727
Credit card expense 1,314 3,145
Amortization of intangible assets 1,308 950
Other 6,397 6,610
Total $ 29,655 $31,127
Non-interest expense totaled $29.7 million for the three months ended
March 31, 1999, a decrease of 4.7 percent from the 1998 level. The largest
components of non-interest expense are salaries and employee benefit expense
which totaled $16.0 million for the three months ended March 31, 1999 compared
to $15.4 million in the comparable period of 1998. At March 31, 1999,
full-time equivalent staff was 1,719, compared to 1,724 at March 31, 1998.
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 three months ended
March 31, 1999 was 41.8 percent, one of the lowest in the industry, compared
with an efficiency ratio of 46.7 percent for the year ended December 31, 1998
and 45.1 percent for the quarter ended March 31, 1998. 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 of $1.8 million or 58.2
percent 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 $1.3 million for the three
months ended March 31, 1999 from $1.0 million in 1998, representing an increase
of $358 thousand or 37.7 percent. The increase is from the amortization
of loan servicing rights, resulting from the acquisition of loan servicing
rights in 1998. An impairment analysis is completed quarterly to determine
the adequacy of the mortgage servicing asset valuation allowance. Based
on this analysis, amortization expense may be adjusted so that the unamortized
balance of servicing rights is in line with the portfolio balance and the
expected future cash flows.
The significant components of other non-interest expense include advertising,
data processing, professional fees, postage, telephone and stationery
expense which totaled approximately $3.5 million for the three months ended
March 31, 1999 and $3.6 million for the same period in 1998.
Income Taxes
Income tax expense as a percentage of pre-tax income was 37.2 percent for the
three months ended March 31, 1999 compared to 29.4 percent for the same period
in 1998. The increase in the effective tax rate is attributable to a
change in federal tax law and the completion of the liquidation of its
subsidiary which owned and managed residential mortgage loans. The effective
tax rate is expected to be at more normal levels for 1999, compared to the
effective tax rate for
1998. Valley implemented a tax strategy to minimize state tax expense,
and anticipates an effective tax rate of approximately 35 percent for the
remainder of 1999.*
Business Segments
VNB has three major business segments it monitors and reports on to manage its
business operations. These segments are commercial lending, consumer lending
and investment management. Lines of business and actual structure of
operations determine each segment. Each is reviewed routinely for its asset
growth, contribution to pretax net income and return on assets. Expenses
related to the branch network, all other components of retail banking, along
with the back office departments of the bank are allocated to each of the three
business segments. The financial reporting for each segment contains
allocations and reporting in line with VNB's operations, which may not
necessarily be compared to any other financial institution. The accounting
for each segment includes internal accounting policies designed to measure
consistent and reasonable financial reporting.
The following table represents the financial data for the three business
segments for the three months ended March 31, 1999 and 1998. No material
change has been made to the basis of segmentation or in the basis of
measurement of segment profit or loss.
Three Months Ended March 31, 1999
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Management Adjustments Total
Average interest-
earning assets $2,490,459 $1,510,329 $1,299,980 $ -- $5,300,768
Income before
income taxes $ 17,703 $ 14,414 $ 7,055 $ 1,172 $ 40,344
Return on average
interest-earning
assets (pre-tax) 1.84% 3.82% 2.17% --% 3.04%
Three Months Ended March 31, 1998
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Management Adjustments Total
Average interest-
earning assets $ 2,358,033 $ 1,426,342 $ 1,273,425 $ -- $ 5,057,800
--
Income before
income taxes $ 15,084 14,417 7,171 (3,134) 33,538
Return on average
interest-earning
assets (pre-tax) 2.56% 4.04% 2.25% --% 2.65%
Consumer Lending
The consumer lending segment had a return on average interest-earning assets
before taxes of 2.84 percent for the three months ended March 31, 1999 compared
to 2.56 percent for the three months ended March 31, 1998. Average interest-
earning assets increased $132.4 million, which is attributable to an
increase in home equity and automobile lending. Interest rates on consumer
loans declined by 35 basis points. This decrease was offset by a decrease in
cost of funds by 37 basis points. Income before income taxes increased
$2.6 million primarily as a result of an increase in average interest-
earning assets.
Commercial Lending
The return on average interest-earning assets before taxes declined 22 basis
points to 3.82 percent for the three months ended March 31, 1999. Average
interest-earning assets increased $84.0 million as a result of increased
volume of loans. Interest rates on commercial loans declined by 59 basis
points. This decrease was partially offset by a decrease in cost of funds by
37 basis points. Income before income taxes remained relatively
unchanged as a result of an increase in average interest-earning assets, offset
by the decline in the interest spread.
Investment Management
The return on average interest earning assets before taxes decreased to
2.17 percent for the three months ended March 31, 1999 compared to 2.25 percent
for the three months ended March 31, 1998. The yield on interest earning assets
decreased by 22 basis points to 6.35 percent, offset by a larger decrease in the
cost of funds. Average interest-earning assets increased by $26.6 million and
income before income taxes remained relatively unchanged.
Corporate Segment
The corporate segment represents assets and income and expense items not
directly attributable to a specific segment. The increase in income before
taxes of $4.3 million, to $1.2 million for the three months ended March 31,
1999 is due to increased gains on securities transactions, net, REO income,
other income and service charges on deposit accounts.
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 speeds of certain assets and liabilities. According to the model,
over a twelve month period, an interest rate increase of 100 basis points
resulted in an increase in net interest income of approximately $905.0
thousand while an interest rate decrease of 100 basis points resulted in a
decrease in net interest income of approximately $2.8 million.* 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 March 31, 1999 was $705.2
million, representing a ratio of interest sensitive assets to interest
sensitive liabilities of (0.70:1). 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. Liquid assets amounted to $1.2
billion and $1.3 billion at March 31, 1999 and December 31, 1998,
respectively. This represents 22.8 percent and 23.9 percent of interest
earning assets, and 21.7 percent and 22.6 percent of total assets at
March 31, 1999 and December 31, 1998, 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 $3.3
billion and $3.4 billion for the three months ended March 31, 1999 and the year
ended December 31, 1998, respectively, representing 63.0 percent and 66.8
percent of average interest earning assets. Short-term borrowings through
Federal funds lines and Federal Home Loan Bank ("FHLB") advances and large
dollar certificates of deposit, generally those over $100 thousand, are used
as supplemental funding sources. During the fourth quarter of 1998, Valley
began borrowing from the FHLB as part of a leveraging strategy to increase
interest earning assets and net interest income. This strategy has continued
to expand in 1999 and as of March 31, 1999, Valley had outstanding FHLB advances
of $343.5 million. Additional liquidity is derived from scheduled loan and
investment payments of principal and interest, as well as prepayments
received. For the three months ended March 31, 1999 proceeds from the sales
of investment securities available for sale were $4.1 million, and proceeds
of $143.2 million were generated from investment maturities. Purchases of
investment securities for the three months ended March 31, 1999 were $275.6
million. Short-term borrowings and certificates of deposit over $100
thousand amounted to $538.4 million and $474.4 million, on average, for the
three months ended March 31, 1999 and the year ended December 31, 1998
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 March 31, 1999, Valley had $950.5 million of securities available for
sale compared with $927.5 million at December 31, 1998. Those securities are
recorded at their fair value on an aggregate basis. As of March 31, 1999, the
investment securities available for sale had an unrealized gain of $2.4
million, net of deferred taxes, compared to an unrealized gain of $4.9
million, net of deferred taxes, at December 31, 1998. This change was
primarily due to a decrease in prices resulting from an increase in interest
rates. 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 March 31, 1999, total loans were $4.1 billion, compared to $4.0 billion
at December 31, 1998, an increase of 1.8 percent. The following table reflects
the composition of the loan portfolio as of March 31, 1999 and December 31,
1998.
LOAN PORTFOLIO
March 31, December 31,
1999 1998
(in thousands)
Commercial $ 465,116 $ 463,609
Total commercial loans 465,116 463,609
Construction 110,990 101,200
Residential mortgage 1,062,288 1,036,110
Commercial mortgage 954,440
997,634
Total mortgage loans 2,170,912 2,091,750
Home equity 203,728 201,175
Credit card 91,796 107,595
Automobile 1,040,896 1,032,783
Other consumer
78,125 80,938
Total consumer loans 1,414,545 1,422,491
Total loans $ 4,050,573 $ 3,977,850
As a percent of total loans:
Commercial loans 11.5% 11.7%
Mortgage loans 53.6 52.6
Consumer loans
34.9 35.7
Total
100.0% 100.0%
Non-Performing Assets
Non-performing assets include non-accrual loans and other real estate owned
(OREO).
Non-performing assets totaled $8.6 million at March 31, 1999 compared with
$9.4 million at December 31, 1998, a decrease of $816 thousand or 8.7
percent. Non-performing assets at March 31, 1999 and December 31, 1998,
respectively, amounted to 0.21 percent and 0.24 percent of loans and OREO.
Loans past due in excess of 90 days and still accruing, and not included in
the non-performing category, totaled $13.1 million at March 31, 1999,
compared to $7.4 million at December 31, 1998. These loans are primarily
residential mortgage loans and commercial mortgage 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 $1.2
million at March 31, 1999.
The following table sets forth non-performing assets and accruing loans which
were 90 days or more past due as to principal or interest payments on the dates
indicated, in conjunction with asset quality ratios for Valley.
LOAN QUALITY
March 31, December 31,
1999 1998
(in thousands)
Loans past due in excess of
90 days and still accruing $ 13,079 $ 7,359
Non-accrual loans $ 6,641 $ 7,063
Other real estate owned 1,947 2,341
Total non-performing assets $ 8,588 $ 9,404
Troubled debt restructured loans $ 5,096 $ 5,127
Non-performing loans as a % of
Loans 0.16% 0.18%
Non-performing assets as a % of
loans plus other real estate owed 0.21% 0.24%
Allowance as a % of loans 1.24% 1.25%
At March 31, 1999 the allowance for possible loan losses amounted to $50.1
million or 1.24 percent of loans, as compared to $49.9 million or 1.25 percent
at year-end 1998.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $1.8 million for
the period ended March 31,1999 compared with $2.9 million for the three
months ended March 31, 1998.
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 March 31, 1999, shareholders' equity totaled $565.7 million or
9.9 percent of total assets, compared with $555.8 million or 10.0 percent at
December 31, 1998. Valley has achieved steady internal capital generation in
excess of asset growth throughout the past five years.
Included in shareholders' equity as components of accumulated other
comprehensive income at March 31, 1999 was a $2.4 million unrealized gain on
investment securities available for sale, net of tax, and a negative
translation adjustment of $709 thousand related to the Canadian subsidiary of
VNB, compared to an unrealized gain of $4.9 million, net of tax, and an $852
thousand negative translation adjustment at December 31, 1998.
Valley's capital position at March 31, 1999 under risk-based capital
guidelines was $559.6 million, or 12.9 percent of risk-weighted assets, for
Tier 1 capital and $609.7 million, or 14.1 percent for Total risked-based
capital. The comparable ratios at December 31, 1998 were 13.3 percent for
Tier 1 capital and 14.5 percent for Total risk-based capital. At March 31,
1999 and December 31, 1998, Valley was in compliance with the leverage
requirement having a Tier 1 leverage ratio of 10.1 percent. Valley's ratios at
March 31, 1999 were above the "well capitalized" requirements, which require
Tier 1 capital of at least 6 percent, total risk-based capital of 10 percent
and a minimum leverage ratio of 5 percent.
Book value per share amounted to $10.23 at March 31, 1999 compared with $10.06
per share at December 31, 1998.
The primary source of capital is through retention of earnings. Valley's
rate of earnings retention, derived by dividing undistributed earnings by
net income, was 45.5 percent for the three month period ended March 31, 1999,
compared to 50.4 percent for the three month period ended March 31, 1998. Cash
dividends declared amounted to $0.25 per share for the quarter ended March 31,
1999 equivalent to a dividend payout ratio of 54.5 percent, compared to 49.6
percent for the same quarter in 1998. Valley declared a five percent stock
dividend on April 7, 1999 to shareholders of record on May 7, 1999, to be
issued May 18, 1999. The annual dividend rate will be increased from $0.95
per share, on an after stock dividend basis, to $1.04 per share.* The cash
dividend increase will be payable quarterly beginning on July 1, 1999.
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 rathe
than four to define the applicable year. These programs were written without
considering the impact of the upcoming change in the century and the programs
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") issues 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 its internal Information
Technology ("IT") systems (computer hardware and software systems) and its
non-IT systems (facilities, equipment and vendors) and has developed its plan
to address the Y2K issue. Valley operates its deposit, loan and general ledger
systems on one software system licensed to Valley through a third party
("primary software vendor"). Valley received the software from its primary
software vendor and began testing during September 1998 to verify the
vendor's representation that the software is Y2K compliant. The
testing for the deposit, loan and general ledger systems has been completed
as of the end of 1998. Additional Y2K software systems have been purchased
from other vendors and Valley has substantially completed testing those
systems for Y2K compliance. 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 its primary
software vendor for which Valley pays a normal annual licensing fee. As noted
above, the vendor has represented that this software system is Y2K
compliant, and Valley has completed testing this system for Y2K compliance.
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 approximately $130 thousand. Based on current
information, Valley estimates all expenditures related to the execution of
its Y2K plan have been incurred totaling $130 thousand.* These estimates of
expenditures are based on Valley's presently available information and may
be updated as information becomes available.
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 assurances 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. However, Valley does not foresee converting any of
these applications to a contingency vendor at this time.*
Recent Accounting Pronouncement
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See page 13 for a discussion of interest rate sensitivity.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
a) On April 7, 1999 the Annual Meeting of Shareholders of Valley National
Bancorp was held. The Shareholders voted upon the election of 19
persons, named in the Proxy Statement, to serve as directors of the
Corporation for the ensuing year. All directors were elected and there
was no solicitation in opposition to management's nominees as listed in
the Proxy Statement. The following is a list of directors elected at
the Annual Meeting with the number of votes "For" and "Withheld". There
were no abstentions.
Name Number of Votes For Withheld
Andrew B. Abramson 45,119,579 479,191
Pamela Bronander 45,118,936 479,833
Joseph Coccia, Jr. 45,117,946 480,824
Harold P. Cook, III 45,118,123 480,646
Austin C. Drukker 45,116,155 482,614
Willard L. Hedden 45,110,659 488,112
Graham O. Jones 45,113,612 485,159
Walter H. Jones, III 45,110,711 488,060
Gerald Korde 45,119,486 479,283
Gerald H. Lipkin 45,114,851 483,917
Joleen Martin 45,119,286 479,483
Robert E. McEntee 45,119,586 479,183
Sam P. Pinyuh 45,107,782 490,987
Robert Rachesky 45,118,544 480,226
Barnett Rukin 45,119,046 479,724
Peter Southway 45,041,712 557,056
Richard F. Tice 45,117,017 481,753
Leonard Vorcheimer 45,119,786 478,983
Joseph L. Vozza 45,119,379 479,391
b) Shareholders also voted upon approval of the Valley National Bancorp 1999
Long-Term Stock Incentive Plan, which generally provides the Board of
Directors or a Committee comprised of two or more non-employee
directors of the Corporation with authority to issue or grant to
officers and key employees of the Corporation incentive stock options,
non-qualified stock options, restricted stock, and/or stock
appreciation rights for up to a maximum of 2,500,000 shares, with a
maximum of 250,000 shares or options to be issued to any one officer or
employee.
Number of Votes For Withheld Abstain
36,853,503 6,563,407 2,185,780
Item 5. Other Information
a) The Board of Directors approved a five percent stock dividend on
April 7, 1999. The new stock will be issued May 18, 1999 to shareholders
of record as of May 7, 1999.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(3) Articles of Incorporation and By-laws
A) Certificate of Incorporation of the Registrant restated to
show all changes through May 11, 1999.
B) By-laws as incorporated herein by reference to the Registrant's
Form 10-K Annual Report for the year ended December 31, 1998.
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: May 14, 1999 /s/ Peter Southway
PETER SOUTHWAY
VICE CHAIRMAN
Date: May 14, 1999
/s/ Alan D. Eskow
ALAN D. ESKOW
SENIOR VICE PRESIDENT AND
CONTROLLER FINANCIAL
ADMINISTRATION
Exhibit 3(A)
RESTATED
CERTIFICATE OF INCORPORATION
OF
VALLEY NATIONAL BANCORP
(as in effect on May 11, 1999)
The Board of Directors of Valley National Bancorp pursuant to the
provisions of Section 14A:95-5(2) has adopted this Restated Certificate of
Incorporation to restate and integrate in a single certificate the provisions of
its certificate of incorporation as heretofore amended. Valley National Bancorp
does hereby certify as follows:
ARTICLE I
CORPORATE NAME
The name of the Corporation is Valley National Bancorp (hereinafter the
"Corporation").
ARTICLE II
CURRENT REGISTERED OFFICE
AND CURRENT REGISTERED AGENT
The address of the Corporation's current registered office is 1455 Valley
Road, Wayne, New Jersey. The name of the current registered agent at that
address is Gerald H. Lipkin.
ARTICLE III
NUMBER OF DIRECTORS
The number of directors shall be governed by the by-laws of the Corporation.
ARTICLE IV
CORPORATE PURPOSE
The purpose for which the Corporation is organized is to engage in any
activities for which corporations may be organized under the New Jersey
Business Corporation Act, subject to any restrictions which may be imposed
from time to time by the laws of the United States or the State of New Jersey
with regard to the activities of a bank holding company.
ARTICLE V
CAPITAL STOCK
The Corporation is authorized to issue 103,359,375 shares of common stock
without nominal or par value.
ARTICLE VI
INDEMNIFICATION
The Corporation shall indemnify its officers, directors, employees and
agents and former officers, directors, employees and agents, and any other
persons serving at the request of the Corporation as an officer, director,
employee or agent of another corporation, association, partnership, joint
venture, trust, or other enterprise, against expenses (including attorney's
fees, judgments, fines, and amounts paid in settlement) incurred in connection
with any pending or threatened action, suit, or proceeding, whether civil,
criminal, administrative or investigative, with respect to which such
officer, director, employee, agent or other person is a party, or is
threatened to be made a party, to the full extent permitted by the
New Jersey Business Corporation Act. The indemnification provided herein
shall not be deemed exclusive of any other right to which any person
seeking indemnification may be entitled under any by-law, agreement, or vote
of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity, and shall
inure to the benefit of the heirs, executors, and the administrators of any
such person. The Corporation shall have the power to purchase and maintain
insurance on behalf of any persons enumerated above against any
liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provision of this Article.
ARTICLE VII
LIMITATION OF LIABILITY
A director or officer of the Corporation shall not be
personally liable to the Corporation or its shareholders for damages for
breach of any duty owed to the Corporation or its shareholders, except
that such provision shall not relieve a director or officer from liability
for any breach of duty based upon an act or omission (i) in breach of such
person's duty of loyalty to the Corporation or its shareholders, (ii) not
in good faith or involving a knowing violation of law, or (iii) resulting in
receipt by such person of an improper personal benefit. If the New Jersey
Business Corporation Act is amended after approval by the shareholders of
this provision to authorize corporate action further eliminating or
limiting the personal liability of directors or officers, then the liability
of a director and/or officer of the Corporation shall be eliminated or
limited to the fullest extent permitted by the New Jersey Business
Corporation Act as so amended.
Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation or otherwise shall not adversely affect any
right or protection of a director or officer of the Corporation existing at
the time of such repeal or modification.
IN WITNESS WHEREOF, Gerald H. Lipkin, Chairman, President and
Chief Executive Officer of the Valley National Bancorp, has executed this
Restated Certificate of Incorporation on behalf of Valley National Bancorp,
as restated.
/s/ Gerald H. Lipkin
---------------------------
Gerald H. Lipkin, Chairman