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
September 30, 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 60,427,069 shares were outstanding as of
November 9, 1999.
TABLE OF CONTENTS
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income (Unaudited)
Nine and Three Months Ended September 30, 1999 and
1998 4
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 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 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
PART I
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
September 30, December 31,
1999 1998
Assets
Cash and due from banks $ 161,686 $ 185,921
Federal funds sold -- 108,100
Investment securities held to maturity,
fair value of $327,967 and $288,312 in 1999
and 1998, respectively 354,610 286,890
Investment securities available for sale 1,050,549 1,023,188
Trading account securities -- 1,592
Loans 4,387,267 4,124,194
Loans held for sale 9,141 23,455
Less: Allowance for possible loan losses (54,746) (54,641)
Net loans 4,341,662 4,093,008
Premises and equipment 82,381 82,808
Accrued interest receivable 36,829 32,197
Other assets 82,081 65,265
Total assets $ 6,109,798 $ 5,878,969
Liabilities
Deposits:
Non-interest bearing deposits $ 921,497 $ 924,217
Interest bearing:
Savings 1,977,994 2,037,200
Time 2,062,116 2,008,732
Total deposits 4,961,607 4,970,149
Federal funds purchased and securities sold under
repurchase agreements 69,313 34,950
Treasury tax and loan account and other short-term
borrowings 46,345 22,667
Other borrowings 414,899 212,949
Accrued expenses and other liabilities 49,351 48,445
Total liabilities 5,541,515 5,289,160
Shareholders' Equity
Common stock, no par value, authorized 103,359,375
shares, issued 60,624,940 shares in 1999 and
58,951,595 in 1998 25,959 26,079
Surplus 326,061 331,337
Retained earnings 233,478 235,879
Unallocated common stock held by Employee
Benefit Plan (1,097) (1,331)
Accumulated other comprehensive (loss) income (10,475) 4,031
573,926 595,995
Treasury stock, at cost (200,700 shares in 1999
and 236,735 shares in 1998) (5,643) (6,186)
Total shareholders' equity 568,283 589,809
Total liabilities and shareholders' equity $ 6,109,798 $ 5,878,969
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
Interest Income
Interest and fees on loans $ 250,977 $ 248,143 $ 85,839 $ 83,561
Interest and dividends on investment
securities:
Taxable 55,626 47,984 18,903 15,306
Tax-exempt 5,506 6,440 1,920 2,003
Dividends 1,782 1,462 608 478
Interest on federal funds sold and other
short-term investments 2,954 4,883 636 2,323
Total interest income 316,845 308,912 107,906 103,671
Interest Expense
Interest on deposits:
Savings deposits 30,401 35,252 10,298 11,842
Time deposits 75,864 82,473 25,410 27,438
Interest on federal funds purchased and
securities sold under repurchase
agreement 867 900 337 339
Interest on other short-term borrowings 1,140 1,221 424 442
Interest on other borrowings 15,260 6,609 5,965 2,158
Total interest expense 123,532 126,455 42,434 42,219
Net Interest Income 193,313 182,457 65,472 61,452
Provision for possible loan losses 6,095 9,250 2,320 3,145
Net Interest Income after Provision for
Possible Loan Losses 187,218 173,207 63,152 58,307
Non-Interest Income
Trust income 1,632 1,364 535 424
Service charges on deposit accounts 10,691 10,330 3,599 3,608
Gains on securities transactions, net 2,570 1,154 140 114
Fees from loan servicing 5,990 5,540 2,137 1,964
Credit card fee income 6,497 7,762 2,299 2,564
Gains on sales of loans, net 1,890 3,935 442 1,293
Other 6,583 3,873 2,179 1,398
Total non-interest income 35,853 33,958 11,331 11,365
Non-Interest Expense
Salary expense 43,186 41,825 14,721 14,256
Employee benefit expense 9,978 9,433 3,667 3,349
FDIC insurance premiums 927 950 303 309
Occupancy and equipment expense 14,937 16,617 5,141 5,928
Credit card expense 3,932 7,317 1,286 1,804
Amortization of intangible assets 3,647 4,443 1,505 2,193
Merger-related charges 3,005 -- -- --
Other 21,812 23,085 7,300 8,360
Total non-interest expense 101,424 103,670 33,923 36,199
Income Before Income Taxes 121,647 103,495 40,560 33,473
Income tax expense 42,482 27,249 13,281 7,578
Net Income $ 79,165 $ 76,246 $ 27,279 $ 25,895
Earnings Per Share:
Basic $ 1.30 $ 1.24 $ 0.45 $ 0.42
Diluted $ 1.29 $ 1.23 $ 0.45 $ 0.42
Weighted Average Number of Shares Outstanding:
Basic 60,862,712 61,365,056 60,229,700 61,353,791
Diluted 61,480,737 62,212,398 60,864,460 62,179,568
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 79,165 $ 76,246
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,217 10,476
Amortization of compensation costs pursuant to long
term stock incentive plan 654 1,236
Provision for possible loan losses 6,095 9,250
Net amortization of premiums and accretion of discounts 3,307 2,481
Net gains on securities transactions (2,570) (1,154)
Proceeds from sales of loans 67,489 78,669
Gain on sales of loans (1,890) (3,935)
Proceeds from recoveries on previously charged-off loans 2,800 2,014
Net increase in accrued interest receivable and other
assets (16,414) (1,436)
Net increase in accrued expenses and other liabilities 10,696 175
Net cash provided by operating activities 158,549 174,022
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity 46,271 56,749
Purchases of investment securities held to maturity (157,123) (28,244)
Proceeds from sales of investment securities available
for sale 26,774 79,528
Proceeds from maturing investment securities available
for sale 360,067 312,661
Purchases of investment securities available for sale (396,211) (294,890)
Proceeds from sales of trading account securities 1,415 --
Purchases of mortgage servicing rights (8,005) (9,339)
Net decrease (increase) in federal funds sold and
other short-term investments 108,100 (19,875)
Net increase in loans made to customers (323,148) (200,027)
Purchases of premises and equipment, net of sales (5,117) (7,767)
Net cash used in investing activities (346,977) (111,204)
Cash flows from financing activities:
Net decrease in deposits (8,542) (17,157)
Net increase in federal funds purchased and other
short-term borrowings 58,041 12,153
Advances of other borrowings 283,000 --
Repayments of other borrowings (81,050) (33,046)
Dividends paid to common shareholders (44,301) (37,564)
Purchase of treasury stock (46,036) (6,926)
Common stock issued, net of cancellations 3,081 440
Net cash provided by (used in) financing activities 164,193 (82,100)
Net decrease in cash and due from banks (24,235) (19,282)
Cash and due from banks at January 1 185,921 161,170
Cash and due from banks at September 30 $161,686 $141,888
Supplemental cash flow disclosures:
Cash paid for interest on deposits and other borrowings $121,888 $127,394
Cash paid for federal and state income taxes 40,329 24,341
Transfer of Ramapo securities from held to maturity
to available for sale 42,387 --
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,
1999 and December 31, 1998, the Consolidated Statements of Income for the nine
and three month periods ended September 30, 1999 and 1998 and the Consolidated
Statements of Cash Flows for the nine month periods ended September 30, 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 September 30, 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. The
consolidated financial statements of Valley have been restated to include Ramapo
Financial Corporation ("Ramapo")for all periods presented.
2. Earnings Per Share
For Valley, the numerator of both the Basic and Diluted EPS is equivalent to
net income. The weighted average number of shares outstanding used in the
denominator for Diluted EPS is increased over the denominator used for Basic EPS
by the effect of common stock options outstanding utilizing the treasury stock
method.
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 issued May 18, 1999.
3. Recent Developments
On June 11, 1999, Valley acquired Ramapo Financial Corporation
("Ramapo"), parent of The Ramapo Bank headquartered in Wayne, New Jersey. At the
date of acquisition, Ramapo had total assets of $344.0 million and deposits of
$299.5 million, with 8 branch offices. The transaction was accounted for using
the pooling of interests method of accounting and resulted in the issuance of
approximately 4.0 million shares of Valley common stock. Each share of common
stock of Ramapo was exchanged for 0.44625 shares of Valley common stock. The
consolidated financial statements of Valley have been restated to include Ramapo
for all periods presented.
During the second quarter of 1999, Valley recorded merger-related
charges of $3.0 million related to the acquisition of Ramapo. On an after tax
basis, these charges totaled $2.2 million or $0.04 per diluted share. These
charges include only identified direct and incremental costs associated with
this acquisition. Items included in these charges include the following:
personnel expenses which include severance payments and benefits for terminated
employees, principally, senior executives of Ramapo; real estate expenses
related to the closing of a duplicate branch; professional fees which include
investment banking, accounting and legal fees; and other expenses which include
data processing and the write-off of supplies and other assets not considered
useful in the operation of the combined entity. The major components of
merger-related charges, consisting of real estate dispositions, professional
fees, personnel expenses and other expenses totaled $300 thousand, $1.1 million,
$1.1 million and $500 thousand, respectively. Of the total merger-related
charges $2.6 million, or 89.6 percent were paid through September 30, 1999. It
is expected that the remaining liability will be fully utilized in 1999.
During the second quarter of 1999, Valley National Bank received approval and a
license from the New Jersey Department of Banking and Insurance to sell title
insurance through a separate subsidiary, known as Wayne Title, Inc. After the
close of the second quarter, Valley acquired the assets of an agency office of
Commonwealth Land Title Insurance Company and began to sell both commercial and
residential title insurance policies.
On July 30, 1999, Valley acquired New Century Asset Management Company
("New Century"), a NJ-based money manager with $120 million of assets under
management. New Century was purchased on an earn-out basis and will continue its
operation as a wholly owned subsidiary of Valley National Bank.
4. Other Comprehensive (Loss) Income
Valley's other comprehensive (loss) income consists of foreign currency
translation adjustments and unrealized gains (losses)gains on
securities. The following table shows the related tax effects on each component
of other comprehensive income for the nine and three months ended
September 30, 1999 and 1998.
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
(in thousands)
Net income $79,165 $76,246
Other comprehensive
(loss) income, net of tax:
Foreign currency translation adjustments 285 (476)
Unrealized (losses)gains on securities:
Unrealized holding losses arising
during period $(16,422) $ 1,365
Less: reclassification adjustment for
gains realized in net income 1,631 657
Net unrealized (losses) gains (14,791) 2,022
Other comprehensive (loss) income (14,506) 1,546
Total comprehensive income $ 64,659 $77,792
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
(in thousands)
Net income $27,279 $25,895
Other comprehensive (loss)
income, net of tax:
Foreign currency translation adjustments (63) (293)
Unrealized (losses)gains on securities:
Unrealized holding (losses)gains
arising during period $(7,690) $ 1,253
Less: reclassification adjustment
for gains realized in net income 87 33
Net unrealized (losses) gains (7,603) 1,286
Other comprehensive (loss) income (7,666) 993
Total comprehensive income $19,613 $26,888
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 nine months ended September 30, 1999 was $79.2 million, or
$1.29 per diluted share including a merger related charge of $2.2 million, net
of tax or $0.04 per diluted share. These results compare to net income of $76.2
million, or $1.23 per diluted share for the same period in 1998 (all data has
been restated for the Ramapo merger and earnings per share amounts have been
restated to give effect to a 5 percent stock dividend issued May 18, 1999). The
annualized return on average assets decreased to 1.76 percent from 1.80 percent,
while the annualized return on average equity decreased to 18.14 percent from
18.19 percent, for the nine months ended September 30, 1999 and 1998,
respectively. The decreases were due to the merger-related charges that were
incurred.
Net income was $27.3 million or $0.45 per diluted share for the three month
period ended September 30, 1999, compared with $25.9 million or $0.42 per
diluted share for the same period in 1998. The annualized return on average
assets decreased to 1.80 percent from 1.82 percent, while the annualized return
on average equity increased to 19.25 percent from 18.33 percent, for the three
months ended September 30, 1999 and 1998, respectively.
Net income for both the nine and three month periods ended September 30, 1999
reflect higher net interest income, a lower provision for possible loan losses
and lower non-interest expenses, offset by a higher provision for income taxes.
Net income for the nine months ended September 30, 1999 also includes merger-
related charges.
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 $196.6 million from
$186.3 million for the nine months ended September 30, 1999 as compared to the
nine months ended September 30, 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 4.56 percent for the nine months ended
September 30, 1999 compared with 4.63 percent for the same period in 1998.
Average interest earning assets increased $377.0 million, or 7.0 percent for the
first nine months of 1999 over the comparable 1998 amount. This was mainly the
result of the increase in average balance of loans of $238.8 million or 6.0
percent and the increase in average balance of taxable investments of $200.4
million, or 18.7 percent. Included in taxable investments is Valley's portfolio
of trust preferred securities of $249.9 million, at September 30, 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. These securities are funded by borrowings from the Federal Home
Loan Bank ("FHLB") which are included in other borrowings.
Average interest-bearing liabilities for the first nine months of 1999
increased $286.4 million or 6.8 percent from the same period in 1998. Average
demand deposits increased by $66.4 million or 8.2 percent over the comparable
1998 amount. Average savings deposits increased $58.5 million or 3.0 percent and
average time deposits, mostly municipal deposits, remained relatively unchanged
from 1998. Average other borrowings, which include primarily Federal Home Loans
Bank advances, increased $210.6 million, or 148.6 percent.
Average interest rates, in all categories of interest earning assets, declined
during the nine months ended September 30, 1999 compared to the same period in
1998. The average interest rate for loans, declined 38 basis points to 7.93
percent. Average interest rates on total interest earning assets declined 34
basis points to 7.43 percent. Average interest rates also declined on total
interest bearing liabilities by 34 basis points to 3.65 percent from 3.99
percent. Average interest rates on deposits declined by 44 basis points to 3.46
percent. Overall, the decline in average interest rates coupled with the growth
in interest earning assets, as compared to 1998, caused the net interest margin
to decline to 4.56 percent from 4.63 percent.
Net interest income on a tax equivalent basis increased to $66.6 million from
$62.7 million for the three months ended September 30, 1999 as compared with the
same period in 1998. This can be attributed to a $404.6 million increase in
average interest earning assets offset by an increase in average interest
bearing liabilities of $334.1 million. The net interest margin decreased to 4.58
percent for the three months ended September 30, 1999 compared with 4.62 percent
for the same period in 1998 as a result of increased average earning assets in
conjunction with the decline in average interest rates.
The following table reflects the components of net interest income for each of
the nine months ended September 30, 1999 and 1998.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST EARNINGS ON A TAX EQUIVALENT BASIS
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
Assets
Interest earning assets
Loans (1)(2) $4,224,704 $ 251,337 7.93% $ 3,985,923 $248,544 8.31%
Taxable
investments (3) 1,275,208 57,408 6.00 1,074,761 49,446 6.13
Tax-exempt
investments(1)(3) 166,374 8,471 6.79 188,747 9,908 7.00
Federal funds sold
and other short-term
investments 80,392 2,954 4.90 120,222 4,883 5.42
Total interest earning
assets 5,746,678 $ 320,170 7.43 5,369,653 $312,781 7.77
Allowance for possible
loan losses (55,068) (53,636)
Cash and due from banks 148,100 141,529
Other assets 171,848 175,220
Unrealized gain on
securities available
for sale (1,774) 7,499
Total assets $ 6,009,784 $5,640,265
Liabilities and
Shareholders' Equity
Interest bearing liabilities
Savings deposits $ 2,035,833 $ 30,401 1.99% $ 1,977,303 $ 35,252 2.38%
Time deposits 2,062,319 75,864 4.90 2,050,750 82,473 5.36
Total interest
bearing deposits 4,098,152 106,265 3.46 4,028,053 117,725 3.90
Federal funds
purchased and other
short-term borrowings 64,185 2,007 4.17 58,484 2,121 4.84
Other borrowings 352,345 15,260 5.77 141,754 6,609 6.22
Total interest bearing
liabilities 4,514,682 123,532 3.65 4,228,291 126,455 3.99
Demand deposits 879,576 813,189
Other liabilities 33,624 39,938
Shareholders' equity 581,902 558,847
Total liabilities and
shareholders'
equity $ 6,009,784 $5,640,265
Net interest income
(tax equivalent basis) 196,638 186,326
Tax equivalent adjustment (3,325) (3,869)
Net interest income $ 193,313 $182,457
Net interest rate differential 3.78% 3.78%
Net interest margin (4) 4.56% 4.63%
(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 reflects the components of net interest income for each of
the three months ended September 30, 1999 and 1998.
Three Months Ended September 30, 1999 Three Months Ended September 30,1999
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
Assets
Interest earning assets
Loans (1)(2) $4,307,991 $ 85,980 7.98% $4,028,204 $ 83,686 8.31%
Taxable
investments (3) 1,287,618 19,511 6.06 1,049,591 15,784 6.02
Tax-exempt
investments(1)(3) 173,840 2,953 6.79 175,981 3,080 7.00
Federal funds sold and
other short-term
investments 54,963 636 4.63 166,009 2,323 5.60
Total interest
earning assets 5,824,412 $109,080 7.49 5,419,785 $104,873 7.74
Allowance for possible
loan losses (55,343) (53,985)
Cash and due from banks 146,913 141,911
Other assets 167,278 166,722
Unrealized (loss)gain
on securities
available for sale (10,360) 7,835
Total assets $ 6,072,900 $5,682,268
Liabilities and
Shareholders' Equity
Interest bearing liabilities
Savings deposits $ 2,042,929 $ 10,298 2.02% $2,007,684 $ 11,842 2.36%
Time deposits 2,070,230 25,410 4.91 2,044,830 27,438 5.37
Total interest
bearing deposits 4,113,159 35,708 3.47 4,052,514 39,280 3.88
Federal funds
purchased and other
short-term borrowings 71,041 761 4.28 63,480 781 4.92
Other borrowings 402,876 5,965 5.92 137,025 2,158 6.30
Total interest
bearing liabilities 4,587,076 42,434 3.70 4,253,019 42,219 3.97
Demand deposits 899,247 829,954
Other liabilities 19,695 34,133
Shareholders' equity 566,882 565,162
Total liabilities and
shareholders' equity $6,072,900 $5,682,268
Net interest income
(tax equivalent basis) 66,646 62,654
Tax equivalent adjustment (1,174) (1,202)
Net interest income $ 65,472 $ 61,452
Net interest rate differential 3.79% 3.77%
Net interest margin (4) 4.58% 4.62%
(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 tables demonstrate 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
Nine Months Ended September 30,
1999 Compared to 1998
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
Interest income:
Loans (1) $ 2,793 $ 14,502 $ (11,709)
Taxable investments 7,962 9,044 (1,082)
Tax-exempt investments (1) (1,437) (1,146) (291)
Federal funds sold and
other short-term investments (1,929) (1,498) (431)
7,389 20,902 (13,513)
Interest expense:
Savings deposits (4,851) 1,017 (5,868)
Time deposits (6,609) 463 (7,072)
Federal funds purchased and
other short-term borrowings (114) 195 (309)
Other borrowings 8,651 9,153 (502)
(2,923) 10,828 (13,751)
Net interest income
(tax equivalent basis) $10,312 $ 10,074 $ 238
(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.
Three Months Ended September 30,
1999 Compared to 1998
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
Interest income:
Loans (1) $ 2,294 $ 5,667 $ (3,373)
Taxable investments 3,727 3,606 121
Tax-exempt investments (1) (127) (37) (90)
Federal funds sold and
other short-term investments (1,687) (1,340) (347)
4,207 7,896 (3,689)
Interest expense:
Savings deposits (1,544) 205 (1,749)
Time deposits (2,028) 337 (2,365)
Federal funds purchased and
other short-term borrowings (20) 87 (107)
Other borrowings 3,807 3,944 (137)
215 4,573 (4,358)
Net interest income
(tax equivalent basis) $ 3,992 $ 3,323 $ 669
(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 nine
and three months ended September 30, 1999 and 1998.
NON-INTEREST INCOME
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
(in thousands)
Trust income $ 1,632 $ 1,364 $ 535 $ 424
Service charges on deposit accounts 10,691 10,330 3,599 3,608
Gains on securities transactions, net 2,570 1,154 140 114
Fees from loan servicing 5,990 5,540 2,137 1,964
Credit card fee income 6,497 7,762 2,299 2,564
Gains on sales of loans, net 1,890 3,935 442 1,293
Other 6,583 3,873 2,179 1,398
Total non-interest income $35,853 $33,958 $11,331 $11,365
Non-interest income continues to represent a considerable source of income for
Valley. Excluding gains on securities transactions, total non-interest income
amounted to $33.3 million for the nine months ended September 30, 1999 compared
with $32.8 million for the nine months ended September 30, 1998. For the quarter
ended September 30, 1999 total non- interest income, excluding security gains
transactions, was $11.2 million compared with $11.3 million for the quarter
ended September 30, 1998.
Service charges on deposit accounts increased $361 thousand or 3.5 percent from
$10.3 million for the nine months ended September 30, 1998 to $10.7 million for
the same period in 1999. A majority of this increase is due to the
implementation of increased service fees through September 30, 1999 and
increased 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 8.1 percent from $5.5
million for the nine months ended September 30, 1998 to $6.0 million for the
nine months ended September 30, 1999 and increased by 8.8 percent from $2.0
million for the quarter ended September 30, 1998 to $2.1 million for the quarter
ended September 30, 1999 due to an increase in the servicing portfolio. The
increase in the servicing portfolio was due to the acquisition of servicing on a
residential mortgage portfolio, 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 $265 thousand or 10.3 percent and by $1.3
million or 16.3 percent for the three month and nine month periods ended
September 30, 1999, respectively, compared with the same periods in 1998. 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 and continues
to result 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 $442 thousand and $1.9 million for the
three and nine months ended September 30, 1999 compared to $1.3 million and $3.9
million for the comparable periods 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 $2.0 million and $851
thousand for the nine and three months ended September 30, 1999, respectively,
resulted from a decline in the volume of residential mortgage loans being sold
by Valley into the secondary market.
Other non-interest income increased $2.7 million to $6.6 million for the
nine months ended September 30, 1999 as compared to the same period in 1998.
This increase can be primarily attributed to the gain on sale of OREO property,
and the earnings resulting from entering into an agreement with a third party
vendor whereby all the processing related to official checks and money orders
has been outsourced. This outsourcing began in the fourth quarter of 1998. Other
non-interest income increased $781 thousand to $2.2 million for the three months
ended September 30, 1999 as compared to the same period in 1998. This increase
is primarily the result of earnings from two new businesses started by Valley in
the second and third quarter of 1999.
During the second quarter of 1999 , Valley National Bank received approval
and a license from the New Jersey Department of Banking and Insurance to sell
title insurance through a separate subsidiary, known as Wayne Title, Inc. After
the close of the second quarter, Valley acquired the assets of an agency office
of Commonwealth Land Title Insurance Company and began to sell both commercial
and residential title insurance policies. Included in other income for the
quarter and nine months ended September 30, 1999 was $452 thousand of commission
revenues from the sale of insurance policies.
On July 30, 1999, Valley acquired New Century Asset Management Company ("New
Century"), a NJ-based money manager with approximately $120 million of assets
under management. New Century was purchased on an earn-out basis and will
continue its operation as a wholly owned subsidiary of Valley National Bank. New
Century contributed additional fee income to the operations of Valley of $137
thousand in the third quarter of 1999 which is included in other income.
Non-Interest Expense
The following table presents the components of non-interest expense for the nine
and three months ended September 30, 1999 and 1998.
NON-INTEREST EXPENSE
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
(in thousands)
Salary expense $ 43,186 $ 41,825 $ 14,721 $ 14,256
Employee benefit expense 9,978 9,433 3,667 3,349
FDIC insurance premiums 927 950 303 309
Occupancy and equipment expense 14,937 16,617 5,141 5,928
Credit card expense 3,932 7,317 1,286 1,804
Amortization of intangible assets 3,647 4,443 1,505 2,193
Merger-related charges 3,005 -- -- --
Other 21,812 23,085 7,300 8,360
Total non-interest expense $ 101,424 $ 103,670 $ 33,923 $ 36,199
Non-interest expense totaled $33.9 million and $101.4 million for the three and
nine months ended September 30, 1999. Excluding the merger-related charges taken
in conjunction with the Ramapo merger, non-interest expense totaled $98.4
million for the nine months ended September 30, 1999, a decrease of $5.3 million
for the comparable nine months ended September 30, 1998. Non-interest expense
totaled $33.9 million for the three months ended September 30, 1999, a decrease
of $2.3 million, from the comparable period in 1998. The reduction in these
expenses can be attributed to cost savings from recent mergers.
The largest components of non-interest expense are salaries and employee benefit
expense which totaled $18.4 million and $53.2 million for the three and nine
months ended September 30, 1999 compared to $17.6 million and $51.3 million in
the comparable periods of 1998. At September 30, 1999, full-time equivalent
staff was 1,800, compared to 1,818 at September 30, 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 merger-related charges, security gains and losses
and other non-recurring items. Valley's efficiency ratio for the nine months
ended September 30, 1999 was 42.9 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 45.7 percent for the nine months ended September 30, 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 $518 thousand or 28.7 percent
and $3.4 million or 46.3 percent for the three months and nine months ended
September 30, 1999 respectively, 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 decreased $688 thousand and $796 thousand for
the three and nine months ended September 30, 1999 to $1.5 million and $3.6
million. The decreases are from reduced loan servicing amortization expense. An
impairment analysis of loan servicing rights is completed quarterly to determine
the adequacy of the mortgage servicing asset valuation allowance.
Both occupancy and equipment expense and other non-interest expense decreased in
the nine and three month periods of 1999 in comparison to 1998. The significant
components of other non-interest expense include advertising, data processing,
professional fees, postage, telephone and stationery expense which totaled
approximately $4.1 million and $12.1 million for the three and nine months ended
September 30, 1999.
The reduction in these expenses can be attributed to cost savings from recent
mergers.
Income Taxes
Income tax expense as a percentage of pre-tax income was 32.7 percent and
34.9 percent for the three and nine months ended September 30, 1999,
respectively, compared to 22.6 percent and 26.3 percent for the same periods in
1998. The increase in the effective tax rate is attributable to tax benefits
realized in 1998 that were no longer available in 1999. Valley implemented
another tax strategy during the second quarter of 1999 to minimize tax expense.
The effective tax rate for 1999 is expected to remain higher than the effective
tax rate for 1998.
Business Segments
Valley 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 through an internal transfer
expenses to each of the three business segments. The financial reporting for
each segment contains allocations and reporting in line with Valley'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 nine months ended September 30, 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.
Nine Months Ended September 30, 1999
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Management Adjustments Total
Average interest-
earning assets $ 2,576,943 $ 1,689,029 $ 1,480,706 $ -- $5,746,678
Income before
income taxes $ 52,960 $ 48,856 $ 21,998 $ (2,167) $ 121,647
Return on average
interest-earning
assets (pre-tax) 2.74% 3.86% 1.98% --% 2.82%
Nine Months Ended September 30, 1998
(in thousands)
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
Average interest-
earning assets $ 2,428,446 $ 1,565,735 $ 1,375,472 $ -- $5,369,653
Income before
income taxes $ 45,477 $ 46,198 $ 21,477 $ (9,657)$ 103,495
Return on average
interest-earning
assets (pre-tax) 2.50% 3.93% 2.08% --% 2.57%
Consumer Lending
The consumer lending segment had a return on average interest-earning assets
before taxes of 2.74 percent for the nine months ended September 30, 1999
compared to 2.50 percent for the nine months ended September 30, 1998. Average
interest-earning assets increased $148.5 million, which is attributable to an
increase in home equity and automobile lending. Interest rates on consumer loans
declined by 27 basis points. This decrease was offset by a decrease in the cost
of funds by 28 basis points. Income before income taxes increased $7.5 million
primarily as a result of an increase in average interest-earning assets. Also
contributing to the increase in income before taxes was a $2.9 million decrease
in the provision for loan losses and a decline in non-interest expense due to
the change in credit card rebates.
Commercial Lending
The return on average interest-earning assets before taxes declined 7 basis
points to 3.86 percent for the nine months ended September 30, 1999. Average
interest-earning assets increased $123.3 million as a result of increased volume
of loans. Interest rates on commercial loans declined by 29 basis points. This
decrease was partially offset by a decrease in cost of funds by 28 basis points.
Income before income taxes increased $2.7 million as a result of an increase in
average interest-earning assets, offset by a decline in fee income during the
period.
Investment Management
The return on average interest earning assets before taxes was 1.98 percent for
the nine months ended September 30, 1999 10 basis points less than the nine
months ended September 30, 1998. The yield on interest earning assets decreased
by 49 basis points to 5.99 percent, and was offset by a smaller decrease of 28
basis points in the cost of funds. Average interest-earning assets increased by
$105.2 million and income before income taxes remained relatively unchanged.
Corporate Segment
The corporate segment represents income and expense items not directly
attributable to a specific segment including merger-related charges, gains on
sales of securities, service charges on deposit accounts, and certain revenues
and expenses recorded by acquired banks that could not be allocated to a line of
business. The loss before taxes decreased to $2.2 million for the nine months
ended September 30, 1999, mainly due to more non-interest income.
The following table represents the financial data for the three months ended
September 30, 1999 and 1998.
Three Months Ended September 30, 1999
(in thousands)
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
Average interest-
earning assets $ 2,611,801 $ 1,711,876 $ 1,500,735 $ -- $ 5,824,412
Income before
income taxes $ 16,977 $ 16,664 $ 7,286 $ (367) $ 40,560
Return on average
interest-earning
assets (pre-tax) 2.60% 3.89% 1.94% -- % 2.79%
Three Months Ended September 30, 1998
(in thousands)
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
Average interest-
earning assets $ 2,451,119 $1,580,352 $1,388,314 $ -- $5,419,785
Income before
income taxes $ 15,089 $ 14,868 $ 7,247 $ (3,731) $ 33,473
Return on average
interest-earning
assets (pre-tax) 2.46% 3.76% 2.09% -- % 2.47%
Consumer Lending
The consumer lending segment had a return on average interest-earning assets
before taxes of 2.60 percent for the three months ended September 30, 1999
compared to 2.46 percent for the three months ended September 30, 1998. Average
interest-earning assets increased $160.7 million, attributable to an increase in
home equity and automobile lending. Interest rates on consumer loans declined by
23 basis points. This decrease was offset by a decrease in cost of funds by 23
basis points. Income before income taxes increased $1.9 million primarily as a
result of an increase in average interest-earning assets, a decrease in the
provision, offset by an increase in the internal transfer expense representing
a refined method of allocating interest and expense items between the business
segments and the branch network, retail banking and back office departments.
Commercial Lending
The return on average interest-earning assets before taxes increased 13 basis
points to 3.89 percent for the three months ended September 30, 1999. Average
interest-earning assets increased $131.5 million as a result of increased volume
of loans. Interest rates on commercial loans declined by 5 basis points. This
decrease was offset by a decrease in cost of funds by 18 basis points. Income
before income taxes increased by $1.8 million as a result of an increase in
average interest-earning assets and increased interest spread, offset by an
increase in internal transfer expense representing a refined method of
allocating interest and expense items between the business segments and the
branch network, retail banking and back office departments.
Investment Management
The return on average interest earning assets before taxes decreased to 1.94
percent for the three months ended September 30, 1999 compared to 2.09 percent
for the three months ended September 30, 1998. The yield on interest earning
assets decreased by 28 basis points to 5.97 percent, offset by a decrease in the
cost of funds. Average interest-earning assets increased by $112.4 million and
income before income taxes was unchanged.
Corporate Segment
The corporate segment represents income and expense items not directly
attributable to a specific segment, including merger-related charges, gains on
sales of securities, service charges on deposit accounts, and certain revenues
and expenses recorded by acquired banks that could not be allocated to a line of
business. The loss before taxes was $367 thousand for the three months ended
September 30, 1999. This was less than the three months ended September 30, 1998
as there were merger-related charges incurred during 1998.
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 $382 thousand while an interest rate
decrease of 100 basis points resulted in a decrease in net interest income of
approximately $1.9 million.* Management cannot provide any assurance about the
actual effect of changes in interest rates on Valley's net interest income.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs as
they become due. Maintaining a level of liquid funds through asset-liability
management seeks to ensure that these needs are met at a reasonable cost. On the
asset side, liquid funds are maintained in the form of cash and due from banks,
federal 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 September
30, 1999 and December 31, 1998, respectively. This represents 21.4 percent and
24.2 percent of interest earning assets, and 20.3 percent and 22.9 percent of
total assets at September 30, 1999 and December 31, 1998, respectively. The
bank has developed a plan addressing possible liquidity issues that may arise in
conjunction with the Year 2000.
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 $3.6 billion
for both the nine months ended September 30, 1999 and the year ended December
31, 1998, respectively, representing 61.8 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
September 30, 1999, Valley had outstanding FHLB advances of $414.5 million.
Additional liquidity is derived from scheduled loan and investment payments of
principal and interest, as well as prepayments received. For the nine months
ended September 30, 1999 proceeds from the sales of investment securities
available for sale were $26.8 million, and proceeds of $406.3 million were
generated from investment maturities. Purchases of investment securities for the
nine months ended September 30, 1999 were $553.3 million. Short-term borrowings
and certificates of deposit over $100 thousand amounted to $611.9 million and
$503.6 million, on average, for the nine months ended September 30, 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 September 30, 1999, Valley had $1.1 billion of securities available for
sale compared with $1.0 billion at December 31, 1998. Those securities are
recorded at their fair value on an aggregate basis. As of September 30, 1999,
the investment securities available for sale had an unrealized loss of $9.9
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 September 30, 1999, total loans were $4.4 billion, compared to $4.1
billion at December 31, 1998, an increase of 6.0 percent. The following table
reflects the composition of the loan portfolio as of September 30, 1999 and
December 31, 1998.
LOAN PORTFOLIO
September 30, December 31,
1999 1998
(in thousands)
Commercial $ 489,244 $ 477,231
Total commercial loans 489,244 477,231
Construction 121,759 112,819
Residential mortgage 1,156,936 1,055,278
Commercial mortgage 1,141,769 1,050,420
Total mortgage loans 2,420,464 2,218,517
Home equity 260,706 226,231
Credit card 88,968 108,180
Automobile 1,054,704 1,033,938
Other consumer 82,322 83,552
Total consumer loans 1,486,700 1,451,901
Total loans $4,396,408 $4,147,649
As a percent of total loans:
Commercial loans 11.1% 11.5%
Mortgage loans 55.1 53.5
Consumer loans 33.8 35.0
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 $7.0 million at September 30, 1999
compared with $11.8 million at December 31, 1998, a decrease of $4.8 million or
40.7 percent. Non-performing assets at September 30, 1999 and December 31, 1998,
respectively, amounted to 0.16 percent and 0.28 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 $11.7 million at September 30, 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.
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
September 30, December 31,
1999 1998
(in thousands)
Loans past due in excess of
90 days and still accruing $ 11,653 $ 7,418
Non-accrual loans $ 6,199 $ 7,507
Other real estate owned 795 4,261
Total non-performing assets $ 6,994 $ 11,768
Troubled debt restructured loans $ 6,195 $ 6,387
Non-performing loans as a % of loans 0.14% 0.18%
Non-performing assets as a % of
loans plus other real estate owned 0.16% 0.28%
Allowance as a % of loans 1.25% 1.32%
At September 30, 1999 the allowance for possible loan losses amounted to $54.7
million, relatively unchanged from the $54.6 million 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 $2.5 million and $6.0
million for the three and nine months ended September 30, 1999 compared with
$2.2 million and $8.4 million for the three and nine months ended September 30,
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 September 30, 1999, shareholders' equity totaled $568.3 million or 9.3
percent of total assets, compared with $589.8 million or 10.0 percent at
December 31, 1998.
Included in shareholders' equity as components of accumulated other
comprehensive income at September 30, 1999 was a $9.9 million unrealized loss on
investment securities available for sale, net of tax, and a negative translation
adjustment of $567 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.
On June 10, 1999 Valley's Board of Directors rescinded its previously announced
stock repurchase program after 1.6 million shares of Valley common stock had
been repurchased. Approximately 1.5 million treasury shares were issued in
conjunction with the 5 percent stock dividend issued May 18, 1999.
Valley's capital position at September 30, 1999 under risk-based capital
guidelines was $573.7 million, or 12.1 percent of risk-weighted assets, for Tier
1 capital and $628.4 million, or 13.2 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 September 30, 1999 and
December 31, 1998, Valley was in compliance with the leverage requirement having
a Tier 1 leverage ratio of 9.5 and 10.0 percent, respectively. Valley's ratios
at September 30, 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 $9.40 at September 30, 1999 compared with $9.57
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 44.4 percent for the nine month period ended September 30, 1999, compared to
50.7 percent for the nine month period ended September 30, 1998. Cash dividends
declared amounted to $0.76 per share for the nine months ended September 30,
1999 equivalent to a dividend payout ratio of 55.6 percent, compared to 49.3
percent for the same period in 1998. Valley declared a five percent stock
dividend on April 7, 1999 to shareholders of record on May 7, 1999, and issued
May 18, 1999. The annual dividend rate was increased from $0.95 per share, on an
after stock dividend basis, to $1.04 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 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. In June of
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" which amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See page 18 for a discussion of interest rate sensitivity.
PART II
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(27) Financial Data Schedule
b) Reports on Form 8-K
Filed October 21, 1999 to report corrected amount of loans past due 90 days or
more and still accruing at September 30, 1999 as $11.7 million. $9.2 million
was originally reported in Valley's third quarter earnings press release dated
October 13, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALLEY NATIONAL BANCORP
(Registrant)
Date: November 9, 1999 PETER SOUTHWAY
VICE CHAIRMAN
Date: November 9, 1999 ALAN D. ESKOW
SENIOR VICE PRESIDENT AND CONTROLLER
FINANCIAL ADMINISTRATION