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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
[x] OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________ to_____________
Commission File Number 0-11179
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VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
New Jersey 22-2477875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1455 Valley Road 07470
Wayne, New Jersey (Zip code)
(Address of principal executive office)
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973-305-8800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
- -------------------------- -----------------------------------------
Common Stock, no par value New York Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $1.6 billion on December 31, 1999.
There were 59,331,278 shares of Common Stock outstanding at February 1,
2000.
Documents incorporated by reference:
Certain portions of the Registrant's Definitive Proxy Statement (the "2000
Proxy Statement") for the 2000 Annual Meeting of shareholders to be held April
6, 2000 will be incorporated by reference in Part III.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business ....................................................... 3
Item 2. Properties ..................................................... 8
Item 3. Legal Proceedings .............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders ............ 8
Item 4A. Executive Officers of the Registrant ........................... 8
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
Item 6. Matters ........................................................ 9
Item 7. Selected Financial Data ........................................ 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 31
Item 8. Financial Statements and Supplementary Data:
Valley National Bancorp and Subsidiaries:
Consolidated Statements of Income .............................. 32
Consolidated Statements of Financial Condition ................. 33
Consolidated Statements of Changes in Shareholders' Equity ..... 34
Consolidated Statements of Cash Flows .......................... 35
Notes to Consolidated Financial Statements ..................... 36
Independent Auditors' Report ................................... 63
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................... 64
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 64
Item 11. Executive Compensation ......................................... 64
Item 12. Security Ownership of Certain Beneficial Owners and Management . 64
Item 13. Certain Relationships and Related Transactions ................. 64
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 65
Signatures ................................................................ 67
2
PART I
Item 1. Business
Valley National Bancorp ("Valley") is a New Jersey corporation registered
as a bank holding company under the Bank Holding Company Act of 1956, as amended
("Holding Company Act"). At December 31, 1999, Valley had consolidated total
assets of $6.4 billion, total deposits of $5.1 billion, and total shareholders'
equity of $553.5 million. Its principal subsidiary is Valley National Bank
("VNB").
VNB is a national banking association chartered in 1927 under the laws of
the United States. VNB provides a full range of commercial and retail banking
services through 117 branch offices located in northern New Jersey. These
services include the following: the acceptance of demand, savings and time
deposits; extension of consumer, real estate, Small Business Administration
("SBA") and other commercial credits; title insurance; investment services; and
full personal and corporate trust, as well as pension and fiduciary services.
VNB has several wholly-owned subsidiaries which include a mortgage
servicing company, a company which holds, maintains and manages investment
assets for VNB, a subsidiary which owns and services auto loans, a subsidiary
which owns and services commercial mortgage loans, a title insurance company, an
asset management company which is an SEC registered investment company and an
Edge Act Corporation which is the holding company for a wholly-owned finance
company located in Toronto, Canada. The mortgage servicing company services
loans for others as well as VNB.
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 eight 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 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. ("Wayne Title"). After
the close of the second quarter, Valley acquired the assets of an agency office
of Commonwealth Land Title Insurance Company for $784 thousand and began to sell
both commercial and residential title insurance policies. The transaction was
accounted for as a purchase and resulted in goodwill of $728 thousand.
On July 30, 1999, Valley acquired New Century Asset Management, Inc. ("New
Century"), a registered investment advisor and NJ-based money manager with
approximately $120 million of assets under management. At closing, Valley paid
an initial consideration of $640 thousand. The balance due will be paid on an
earn-out basis over a five-year period, based upon a pre-determined formula. New
Century will continue its operation as a wholly-owned subsidiary of VNB. The
transaction was accounted for as a purchase and resulted in goodwill of $1.3
million.
Competition
The market for banking and bank-related services is highly competitive.
Valley and its subsidiary compete with other providers of financial services
such as other bank holding companies, commercial and savings banks, savings and
loan associations, credit unions, money market and mutual funds, mortgage
companies, title agencies, asset managers and a growing list of other local,
regional and national institutions which offer financial services. Mergers
between financial institutions within New Jersey and in neighboring states have
added competitive pressure. Competition is expected to intensify as a
consequence of the Gramm-Leach-Bliley Act (discussed below) and interstate
banking laws now in effect or that may be in effect in the future. Valley and
its subsidiary compete by offering quality products and convenient services at
competitive prices. In order to maintain and enhance its competitive position,
Valley regularly reviews its products,
3
locations and various acquisition prospects and periodically engages in
discussions regarding such possible acquisitions.
Employees
At December 31, 1999, VNB and its subsidiaries employed 1,863 full-time
equivalent persons. Management considers relations with employees to be
satisfactory.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory controls
increase a bank holding company's cost of doing business and limit the options
of its management to deploy assets and maximize income. The following discussion
is not intended to be a complete list of all the activities regulated by the
banking laws or of the impact of such laws and regulations on the bank. It is
intended only to briefly summarize some material provisions.
Bank Holding Company Regulation
Valley is a bank holding company within the meaning of the Holding Company
Act. As a bank holding company, Valley is supervised by the Board of Governors
of the Federal Reserve System ("FRB") and is required to file reports with the
FRB and provide such additional information as the FRB may require.
The Holding Company Act prohibits Valley, with certain exceptions, from
acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any company which is not a bank and from engaging in any
business other than that of banking, managing and controlling banks or
furnishing services to subsidiary banks, except that it may, upon application,
engage in, and may own shares of companies engaged in, certain businesses found
by the FRB to be so closely related to banking "as to be a proper incident
thereto." The Holding Company Act requires prior approval by the FRB of the
acquisition by Valley of more than five percent of the voting stock of any
additional bank. Satisfactory capital ratios and Community Reinvestment Act
ratings are generally prerequisites to obtaining federal regulatory approval to
make acquisitions. The policy of the FRB provides that a bank holding company is
expected to act as a source of financial strength to its subsidiary bank and to
commit resources to support the subsidiary bank in circumstances in which it
might not do so absent that policy. Acquisitions through VNB require approval of
the Comptroller of the Currency of the United States ("OCC"). The Holding
Company Act does not place territorial restrictions on the activities of
non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act,
discussed below, allows Valley to expand into insurance, securities, merchant
banking activities, and other activities that are financial in nature.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking and Branching Act") enables bank holding companies to
acquire banks in states other than its home state, regardless of applicable
state law. The Interstate Banking and Branching Act also authorizes banks to
merge across state lines, thereby creating interstate branches. Under the
legislation, each state had the opportunity to "opt out" of this provision.
Furthermore, a state may "opt-in" with respect to de novo branching, thereby
permitting a bank to open new branches in a state in which the bank does not
already have a branch. Without de novo branching, an out-of-state commercial
bank can enter the state only by acquiring an existing bank or branch. The vast
majority of states have allowed interstate banking by merger but have not
authorized de novo branching.
New Jersey enacted legislation to authorize interstate banking and
branching and the entry into New Jersey of foreign country banks. New Jersey did
not authorize de novo branching into the state. However, under federal law,
federal savings banks which meet certain conditions may branch de novo into a
state, regardless of state law.
Recent Legislation
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will:
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o allow bank holding companies meeting management, capital and Community
Reinvestment Act standards to engage in a substantially broader range
of nonbanking activities than currently is permissible, including
insurance underwriting and making merchant banking investments in
commercial and financial companies; if a bank holding company elects
to become a financial holding company, it files a certification,
effective in 30 days, and thereafter may engage in certain financial
activities without further approvals;
o allow insurers and other financial services companies to acquire
banks;
o remove various restrictions that currently apply to bank holding
company ownership of securities firms and mutual fund advisory
companies; and
o establish the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
This part of the Modernization Act will become effective on March 13, 2000.
On January 19, 2000, the FRB adopted an interim rule allowing bank holding
companies to submit certifications by February 15 to become financial holding
companies on March 13, 2000. The FRB also provided regulations on procedures
which would be used against financial holding companies which have depository
institutions which fall out of compliance with the management or capital
criteria. Only financial holding companies can own insurance companies and
engage in merchant banking.
On January 14, 2000, the OCC proposed rules to allow national banks to form
subsidiaries to engage in financial activities allowed for financial holding
companies. Electing national banks must meet the same management and capital
standards as financial holding companies but may not engage in insurance
underwriting, real estate development or merchant banking. Sections 23A and 23B
of the Federal Reserve Act will apply to financial subsidiaries and the capital
invested by a bank in its financial subsidiaries will be eliminated from the
bank's capital in measuring all capital ratios. These rules may be used by
national banks effective March 13, 2000.
The Modernization Act also modifies other current financial laws, including
laws related to financial privacy and community reinvestment.
Additional proposals to change the laws and regulations governing the
banking and financial services industry are frequently introduced in Congress,
in the state legislatures and before the various bank regulatory agencies. The
likelihood and timing of any such changes and the impact such changes might have
on Valley cannot be determined at this time.
Regulation of Bank Subsidiary
VNB is subject to the supervision of, and to regular examination by, the
OCC.
Various laws and the regulations thereunder applicable to Valley and its
bank subsidiary impose restrictions and requirements in many areas, including
capital requirements, the maintenance of reserves, establishment of new offices,
the making of loans and investments, consumer protection, employment practices
and entry into new types of business. There are various legal limitations,
including Sections 23A and 23B of the Federal Reserve Act, which govern the
extent to which a bank subsidiary may finance or otherwise supply funds to its
holding company or its holding company's non-bank subsidiaries. Under federal
law, no bank subsidiary may, subject to certain limited exceptions, make loans
or extensions of credit to, or investments in the securities of, its parent or
the non-bank subsidiaries of its parent (other than direct subsidiaries of such
bank which are not financial subsidiaries) or take their securities as
collateral for loans to any borrower. Each bank subsidiary is also subject to
collateral security requirements for any loans or extensions of credit permitted
by such exceptions.
Dividend Limitations
Valley is a legal entity separate and distinct from its subsidiaries.
Valley's revenues (on a parent company only basis) result in substantial part
from dividends paid to Valley by VNB. Payment of dividends to Valley by its
subsidiary bank, without prior regulatory approval, is subject to regulatory
limitations. Under the National Bank Act, dividends may be declared only if,
after payment thereof, capital would be
5
unimpaired and remaining surplus would equal 100 percent of capital. Moreover, a
national bank may declare, in any one year, dividends only in an amount
aggregating not more than the sum of its net profits for such year and its
retained net profits for the preceding two years. Under this limitation, VNB
could declare dividends in 2000 to Valley without prior approval of the OCC of
up to $13.3 million plus an amount equal to VNB's net profits for 2000 to the
date of such dividend declaration. In addition, the bank regulatory agencies
have the authority to prohibit a bank subsidiary from paying dividends or
otherwise supplying funds to Valley if the supervising agency determines that
such payment would constitute an unsafe or unsound banking practice.
Loans to Related Parties
VNB's authority to extend credit to its directors, executive officers and
10 percent stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of the National Bank Act and Regulation O
of the FRB thereunder. Among other things, these provisions require that
extensions of credit to insiders (i) be made on terms that are substantially the
same as, and follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with unaffiliated persons and
that do not involve more than the normal risk of repayment or present other
unfavorable features and (ii) not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the bank's capital. In addition, extensions
of credit in excess of certain limits must be approved by the bank's board of
directors.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OCC
regulations, a national bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OCC, in connection with
its examination of a national bank, to assess the association's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings. VNB
received a "satisfactory" CRA rating in its most recent examination.
Restrictions on Activities Outside the United States
Valley's activities in Canada are conducted through VNB and in the United
States are subject to Section 25 and 25A of the Federal Reserve Act, certain
regulations under the National Bank Act and, primarily, Regulation K promulgated
by the FRB. Under these provisions, VNB may invest no more than 10 percent of
its capital in foreign banking operations. In addition to investments, VNB may
extend credit or guarantee loans for these entities and such loans or guarantees
are generally not subject to the loans to one person limitation, although they
are subject to prudent banking limitations. The foreign banking operations of
VNB are subject to supervision by the FRB, as well as the OCC. In Canada, VNB's
activities also are subject to the laws and regulations of Canada and to
regulation by Canadian banking authorities. Regulation K generally restricts
activities by United States banks outside of the United States to activities
that are permitted for banks within the United States. As a consequence,
activities by VNB through its subsidiaries outside of the United States would
generally be limited to banking and activities closely related to banking with
certain significant exceptions.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default. These provisions have
commonly been referred to as FIRREA's "cross guarantee" provisions. Further,
under FIRREA the failure to meet capital guidelines could subject a bank to a
variety of enforcement remedies available to federal regulatory authorities.
6
FIRREA also imposes certain independent appraisal requirements upon a
bank's real estate lending activities and further imposes certain loan-to-value
restrictions on a bank's real estate lending activities. The bank regulators
have promulgated regulations in these areas.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each federal banking agency to revise its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of non-traditional activities.
In addition, pursuant to FDICIA, each federal banking agency has promulgated
regulations, specifying the levels at which a financial institution would be
considered "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," and to take
certain mandatory and discretionary supervisory actions based on the capital
level of the institution. To quality to engage in financial activities, all
depository institutions must be well capitalized and the financial holding
company of a national bank will be put under directives to raise its capital
levels or divest its activities if the depository institution falls from that
level.
The OCC's regulations implementing these provisions of FDICIA provide that
an institution will be classified as "well capitalized" if it (i) has a total
risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based
capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at
least 5.0 percent, and (iv) meets certain other requirements. An institution
will be classified as "adequately capitalized" if it (i) has a total risk-based
capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital
ratio of at least 4.0 percent, (iii) has Tier 1 leverage ratio of (a) at least
4.0 percent or (b) at least 3.0 percent if the institution was rated 1 in its
most recent examination, and (iv) does not meet the definition of "well
capitalized." An institution will be classified as "undercapitalized" if it (i)
has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1
risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1
leverage ratio of (a) less than 4.0 percent or (b) less than 3.0 percent if the
institution was rated 1 in its most recent examination. An institution will be
classified as "significantly undercapitalized" if it (i) has a total risk-based
capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital
ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less
than 3.0 percent. An institution will be classified as "critically
undercapitalized" if it has a tangible equity to total assets ratio that is
equal to or less than 2.0 percent. An insured depository institution may be
deemed to be in a lower capitalization category if it receives an unsatisfactory
examination.
In addition, significant provisions of FDICIA required federal banking
regulators to impose standards in a number of other important areas to assure
bank safety and soundness, including internal controls, information systems and
internal audit systems, credit underwriting, asset growth, compensation, loan
documentation and interest rate exposure.
BIF Premiums and Recapitalization of SAIF
VNB is a member of the Bank Insurance Fund ("BIF") of the FDIC. The FDIC
also maintains another insurance fund, the Savings Association Insurance Fund
("SAIF"), which primarily covers savings and loan association deposits but also
covers deposits that are acquired by a BIF-insured institution from a savings
and loan association ("Oakar deposits"). VNB had approximately $1.4 billion of
deposits at December 31, 1999, with respect to which VNB pays SAIF insurance
premiums.
The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act")
signed into law on September 30, 1996, included the Deposit Insurance Funds Act
of 1996 (the "Funds Act") under which the FDIC was required to impose a special
assessment on SAIF-assessable deposits to recapitalize the SAIF. Under the Funds
Act, the FDIC charged assessments for SAIF and BIF deposits in a 5 to 1 ratio to
pay Financing Corp. ("FICO") bonds until January 1, 2000, at which time the
assessment became equal. During 1999 a FICO rate of approximately 1.19 basis
points was charged on BIF deposits, and approximately 5.93 basis points was
charged on SAIF deposits. Oaker deposits are treated as SAIF deposits for
purposes of the FICO bond assessment. After the 1996 Act, SAIF deposit
assessments were lowered to the BIF assessment level, except for the FICO bond
assessment. The 1996 Act instituted a number of other regulatory relief
provisions.
7
Item 2. Properties
VNB's corporate headquarters consist of three office buildings located
adjacent to each other in Wayne, New Jersey. These headquarters encompass
commercial, mortgage and consumer lending, the operations and data processing
center, and the executive offices of both Valley and VNB. Two of the three
buildings are owned by VNB, the other building is leased.
VNB provides banking services at 117 locations of which 51 locations are
owned and 66 locations are leased.
Item 3. Legal Proceedings
There were no material pending legal proceedings to which Valley or any of
its direct or indirect subsidiaries were a party, or to which their property was
subject, other than ordinary routine litigations incidental to business and
which had no material effect on the presentation of the financial statements
contained in this report.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 4A. Executive Officers of the Registrant
Age at Executive
December 31, Officer
Names 1999 Since Office
----- ---- ----- ------
Gerald H. Lipkin ..... 58 1975 Chairman of the Board, President
and Chief Executive Officer of
Valley and VNB
Peter Southway ....... 65 1965 Vice Chairman of Valley and VNB
Peter Crocitto ....... 42 1991 Executive Vice President of
Valley and VNB
Robert M. Meyer ...... 53 1997 Executive Vice President of
Valley and VNB
Peter John Southway .. 39 1989 Executive Vice President of
Valley and VNB
Alan D. Eskow ........ 51 1993 Corporate Secretary, Senior Vice
President and Controller of
Valley and VNB
Albert L. Engel ...... 51 1998 First Senior Vice President of VNB
Robert J. Farnon ..... 61 1998 First Senior Vice President of VNB
Robert E. Farrell .... 53 1990 First Senior Vice President of VNB
Richard P. Garber .... 56 1992 First Senior Vice President of VNB
D. Franklin Larsen ... 65 1999 First Senior Vice President of VNB
Alan D. Lipsky ....... 55 1994 First Senior Vice President of VNB
Robert Mulligan ...... 52 1991 First Senior Vice President of VNB
John H. Prol ......... 62 1992 First Senior Vice President of VNB
Jack M. Blackin ...... 57 1993 Senior Vice President of Valley
and VNB
All officers serve at the pleasure of the Board of Directors.
8
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Valley's common stock trades on the New York Stock Exchange ("NYSE") under
the symbol VLY. The following table sets forth for each quarter period indicated
the high and low sales prices for the common stock of Valley, as reported by the
NYSE, and the dividends paid per share for each quarter. The amounts shown in
the table below have been adjusted for all stock dividends and stock splits.
Year 1999 Year 1998
------------------------------ ------------------------------
High Low Dividend High Low Dividend
--------- --------- --------- --------- --------- --------
First Quarter .. $28 3/32 $23 21/64 $0.24 $32 3/8 $26 55/64 $0.21
Second Quarter . 29 3/8 23 29/64 0.26 32 15/32 27 7/16 0.24
Third Quarter .. 29 1/2 24 5/16 0.26 34 9/32 24 17/32 0.24
Fourth Quarter . 28 23 15/16 0.26 28 37/64 22 5/8 0.24
Federal laws and regulations contain restrictions on the ability of Valley
and VNB to pay dividends. For information regarding restrictions on dividends,
see Part I, Item 1, "Business -- Dividend Limitations" and Part II, Item 8,
"Financial Statements and Supplementary Data -- Note 15 of the Notes to
Consolidated Financial Statements."
There were 8,460 shareholders of record as of December 31, 1999.
9
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
Valley's Consolidated Financial Statements and the accompanying notes presented
elsewhere herein.
Years ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands, except for share data)
Summary of Operations:
Interest income (taxable equivalent) .............. $ 431,945 $ 416,261 $ 413,206 $ 394,554 $ 385,397
Interest expense .................................. 169,177 167,658 172,182 168,595 166,382
----------- ----------- ----------- ----------- -----------
Net interest income (taxable equivalent) .......... 262,768 248,603 241,024 225,959 219,015
Less: tax equivalent adjustment ................... 4,410 4,968 6,388 7,710 8,570
----------- ----------- ----------- ----------- -----------
Net interest income ............................... 258,358 243,635 234,636 218,249 210,445
Provision for loan losses ......................... 9,120 12,645 13,130 3,956 3,821
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 249,238 230,990 221,506 214,293 206,624
Gains on securities transactions, net ............. 2,532 1,419 2,136 765 1,142
Non-interest income ............................... 44,720 43,955 43,058 31,845 26,026
Non-interest expense .............................. 137,946 144,713 139,246 134,586 121,822
----------- ----------- ----------- ----------- -----------
Income before income taxes ........................ 158,544 131,651 127,454 112,317 111,970
Income tax expense ................................ 52,220 30,380 37,303 37,757 37,818
----------- ----------- ----------- ----------- -----------
Net income ....................................... $ 106,324 $ 101,271 $ 90,151 $ 74,560 $ 74,152
=========== =========== =========== =========== ===========
Per Common Share(1)(2):
Earnings per share:
Basic ............................................ $ 1.75 $ 1.65 $ 1.47 $ 1.26 $ 1.23
Diluted .......................................... 1.73 1.63 1.46 1.25 1.22
Dividends ......................................... 1.02 0.93 0.81 0.72 0.69
Book value ........................................ 9.27 9.57 8.78 7.79 7.94
Weighted average shares outstanding:
Basic ............................................ 60,697,186 61,360,325 61,266,111 59,341,414 60,367,087
Diluted .......................................... 61,305,673 62,185,100 61,812,546 59,791,261 60,561,514
Ratios:
Return on average assets .......................... 1.75% 1.79% 1.60% 1.36% 1.40%
Return on average shareholders' equity ............ 18.35 18.10 17.51 15.47 16.58
Average shareholders' equity to average assets .... 9.56 9.89 9.16 8.82 8.43
Dividend payout ................................... 56.45 52.60 50.30 51.83 50.92
Risk-based capital:
Tier 1 capital ................................... 11.62 13.39 13.43 12.68 14.08
Total capital .................................... 12.75 14.61 14.54 13.96 15.28
Leverage capital ................................. 9.11 10.12 9.40 8.60 8.48
Financial Condition at Year-End:
Assets ............................................ $ 6,360,394 $ 5,878,969 $ 5,646,425 $ 5,631,152 $ 5,464,416
Loans, net of allowance ........................... 4,499,632 4,093,008 3,919,370 3,730,606 3,275,564
Deposits .......................................... 5,051,255 4,970,149 4,852,081 4,985,901 4,863,017
Shareholders' equity .............................. 553,500 589,809 540,600 496,331 476,986
- -------------
(1) All per share amounts have been restated to reflect the 5 percent stock
dividend issued May 18, 1999, and all prior stock splits and dividends.
(2) Share and earnings per share data for the years 1996 and prior have not
been restated for the acquisition of Wayne Bancorp, Inc. as the issuance of
capital stock in connection with the conversion from the mutual to stock
form of Wayne Savings Bank occurred on June 27, 1996.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The purpose of this analysis is to provide the reader with information
relevant to understanding and assessing Valley's results of operations for each
of the past three years and financial condition for each of the past two years.
In order to fully appreciate this analysis the reader is encouraged to review
the consolidated financial statements and statistical data presented in this
document.
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-K, 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, as well as the effects of economic
conditions and legal and regulatory barriers and structure. Actual results may
differ materially from such forward-looking statements. Valley assumes no
obligation for updating any such forward-looking statement at any time.
Recent Developments
On June 11, 1999, Valley acquired Ramapo Financial Corporation, 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
eight 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 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. The transaction was accounted for as a purchase.
On July 30, 1999, Valley acquired New Century Asset Management, Inc., a
registered investment advisor and 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
VNB. The transaction was accounted for as a purchase.
Earnings Summary
Net income was $106.3 million, or $1.73 per diluted share, in 1999 compared
with $101.3 million, or $1.63 per diluted share, in 1998. Return on average
assets for 1999 was 1.75 percent compared with 1.79 percent in 1998, while the
return on average equity rose to 18.35 percent in 1999 compared with 18.10
percent in 1998.
The increase in net income for the year ended December 31, 1999, can be
primarily attributed to an increase in net interest income of $14.7 million, a
reduction in the provision for loan losses, and a decrease in credit card
expense, offset by an increase in income tax expense.
Net Interest Income
Net interest income continues to be the largest source of Valley's
operating income. Net interest income on a tax equivalent basis increased to
$262.8 million for 1999 as compared to $248.6 million for 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
11
and an increase in the average balances of total interest bearing liabilities.
Also contributing to the increase was a decline in average interest rates on
average balances of total interest bearing liabilities. The net interest margin
decreased to 4.53% for 1999 compared to 4.61% for 1998.
Average interest earning assets increased $402.4 million or 7.5 percent in
1999 over the 1998 amount. This was mainly the result of the increase in average
balance of loans of $270.8 million or 6.8 percent and the increase in average
balance of taxable investments of $196.9 million or 18.3 percent. Included in
taxable investments is Valley's portfolio of trust preferred securities of
$249.7 million, at December 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. These securities
are funded by borrowings from the Federal Home Loan Bank ("FHLB") which are
included in long-term debt.
Average interest bearing liabilities for 1999 increased $316.7 million or
7.5 percent from 1998. Average demand deposits increased by $68.4 million or 8.3
percent over 1998 balances. Average savings deposits increased $40.7 million or
2.0 percent and average time deposits remained relatively unchanged from 1998.
Average long-term debt, which includes primarily FHLB advances, increased $245.5
million, or 172.8 percent.
Average interest rates, in all categories of interest earning assets,
declined during 1999 compared to 1998. The average interest rate for loans
declined 32 basis points to 7.94 percent. Average interest rates on total
interest earning assets declined 27 basis points to 7.45 percent. Average
interest rates also declined on total interest bearing liabilities by 24 basis
points to 3.72 percent from 3.96 percent. Average interest rates on deposits
declined by 37 basis points to 3.50 percent. The decline in the net interest
margin from 4.61 percent in 1998 to 4.53 percent in 1999 resulted from a smaller
increase in net interest income in relationship to the growth in average
interest earning assets.
12
The following table reflects the components of net interest income for each
of the three years ended December 31, 1999, 1998 and 1997.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
1999 1998 1997
--------------------------------- --------------------------------- -------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------- ----------- ------- ----------- ----------- ------- ----------- ----------- ------
(in thousands)
Assets
Interest earning assets
Loans(1)(2) ................ $ 4,280,426 $ 339,882 7.94% $ 4,009,604 $ 331,219 8.26% $ 3,817,092 $ 318,305 8.34%
Taxable investments(3) ..... 1,270,737 76,784 6.04 1,073,794 65,376 6.09 1,188,334 74,178 6.24
Tax-exempt
investments (1)(3) ....... 166,963 11,330 6.79 182,686 12,731 6.97 235,615 16,241 6.89
Federal funds sold and
other short-term
investments .............. 78,661 3,949 5.02 128,329 6,935 5.40 84,770 4,482 5.29
----------- ----------- ------- ----------- ----------- ------- ----------- ----------- ------
Total interest earning
assets .................... 5,796,787 $ 431,945 7.45 5,394,413 $ 416,261 7.72 5,325,811 $ 413,206 7.76
----------- ------- ----------- ------- ----------- ------
Allowance for loan losses .. (55,154) (53,909) (52,169)
Cash and due from bank ..... 152,770 143,489 163,491
Other assets ............... 172,123 169,446 182,662
Unrealized (loss)gain on
securities available for
sale ..................... (6,886) 7,789 (381)
----------- ----------- -----------
Total assets ............... $ 6,059,640 $ 5,661,228 $ 5,619,414
=========== =========== ===========
Liabilities and
Shareholders' Equity
Interest bearing liabilities
Savings deposits ........... $ 2,026,367 $ 41,358 2.04% $ 1,985,675 $ 46,833 2.36% $ 1,977,238 $ 47,328 2.39%
Time deposits .............. 2,070,416 102,154 4.93 2,050,383 109,228 5.33 2,174,057 117,051 5.38
----------- ----------- ------- ----------- ----------- ------- ----------- ----------- ------
Total interest bearing
deposits ................. 4,096,783 143,512 3.50 4,036,058 156,061 3.87 4,151,295 164,379 3.96
Short-term borrowings ...... 69,317 2,968 4.28 58,831 2,791 4.74 46,718 2,332 4.99
Long-term debt ............. 387,571 22,697 5.86 142,087 8,806 6.20 87,611 5,471 6.24
----------- ----------- ------- ----------- ----------- ------- ----------- ----------- ------
Total interest bearing
liabilities .............. 4,553,671 169,177 3.72 4,236,976 167,658 3.96 4,285,624 172,182 4.02
----------- ------- ----------- ------- ----------- ------
Demand deposits ............ 896,911 828,555 770,125
Other liabilities .......... 29,588 36,080 48,685
Shareholders' equity ....... 579,470 559,617 514,980
----------- ----------- -----------
Total liabilities and
shareholders' equity ..... $ 6,059,640 $ 5,661,228 $ 5,619,414
=========== =========== ===========
Net interest income (tax
equivalent basis) ........ 262,768 248,603 241,024
Tax equivalent adjustment .. (4,410) (4,968) (6,388)
----------- ----------- -----------
Net interest income ........ $ 258,358 $ 243,635 $ 234,636
=========== =========== ===========
Net interest rate
differential ............. 3.73% 3.76% 3.74%
======= ======= ======
Net interest margin(4) ..... 4.53% 4.61% 4.53%
======= ======= ======
- ---------------
(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.
13
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 NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease)(2) Increase (Decrease)(2)
-------------------------------- --------------------------------
Interest Volume Rate Interest Volume Rate
-------- -------- -------- -------- -------- --------
(in thousands)
Interest income:
Loans(1) ................... $ 8,663 $ 21,821 $(13,158) $ 12,914 $ 15,897 $ (2,983)
Taxable investments ........ 11,408 11,904 (496) (8,802) (7,126) (1,676)
Tax-exempt investments(1) .. (1,401) (1,074) (327) (3,510) (3,702) 192
Federal funds sold and other
short-term investments ... (2,986) (2,523) (463) 2,453 2,373 80
-------- -------- -------- -------- -------- --------
15,684 30,128 (14,444) 3,055 7,442 (4,387)
-------- -------- -------- -------- -------- --------
Interest expense:
Savings deposits ........... (5,475) 943 (6,418) (495) 186 (681)
Time deposits .............. (7,074) 1,058 (8,132) (7,823) (6,600) (1,223)
Short-term borrowings ...... 177 466 (289) 459 537 (78)
Long-term debt ............. 13,891 14,402 (511) 3,335 3,377 (42)
-------- -------- -------- -------- -------- --------
1,519 16,869 (15,350) (4,524) (2,500) (2,024)
-------- -------- -------- -------- -------- --------
Net interest income
(tax equivalent basis) ..... $ 14,165 $ 13,259 $ 906 $ 7,579 $ 9,942 $ (2,363)
======== ======== ======== ======== ======== ========
- -------------
(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
years ended December 31, 1999, 1998 and 1997.
NON-INTEREST INCOME
Years ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
Trust and investment services .............. $ 2,414 $ 1,813 $ 1,538
Service charges on deposit accounts ........ 14,468 14,019 13,431
Gains on securities transactions, net ...... 2,532 1,419 2,136
Fees from loan servicing ................... 8,387 7,382 5,576
Credit card fee income ..................... 8,655 10,153 12,643
Gains on sales of loans, net ............... 2,491 4,863 3,634
Other ...................................... 8,305 5,725 6,236
------- ------- -------
Total non-interest income ................. $47,252 $45,374 $45,194
======= ======= =======
14
Non-interest income continues to represent a considerable source of income
for Valley. Excluding gains on securities transactions, total non-interest
income amounted to $44.7 million for 1999 compared with $44.0 million for 1998.
Trust and investment services includes income from trust operations,
brokerage commissions, and asset management fees. On July 30, 1999, VNB acquired
New Century Asset Management, Inc. ("New Century"), a NJ-based money manager
with approximately $120 million of assets under management. At closing, Valley
paid an initial consideration of $640 thousand. The balance due will be paid on
an earn-out basis over a five-year period, based upon a pre-determined formula.
New Century will continue its operation as a wholly owned subsidiary of VNB. The
transaction was accounted for as a purchase and resulted in goodwill of $1.3
million. New Century contributed additional fee income to the operations of
Valley of $326 thousand in 1999 which is included in trust and investment
services.
Included in fees from loan servicing are fees for servicing residential
mortgage loans and SBA loans. Fees from loan servicing increased by 13.6 percent
from $7.4 million for 1998 to $8.4 million for 1999 due to an increase in the
size of the servicing portfolio. The increase in the servicing portfolio was due
to the acquisition of servicing of several residential mortgage portfolios, the
origination of new loans by VNB and their subsequent sale with servicing
retained, offset by principal paydowns and prepayments. Residential mortgage
servicing portfolios, with an unpaid principal balance of approximately $668.2
million, were acquired at the end of 1999 which are expected to increase loan
servicing revenue during 2000.*
Credit card fee income declined by $1.5 million or 14.8 percent in 1999
compared with 1998. The decrease can be attributed to a change in the co-branded
credit card program 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. The decline in cardmember rebates is mainly responsible for the
decline in credit card expense, included in non-interest expense.
Gains on the sales of loans were $2.5 million in 1999 compared to $4.9
million in 1998. Gains are recorded primarily from the sale of residential
mortgage loans and SBA loans into the secondary market. The decrease of $2.4
million resulted from a decline in the volume of residential mortgage loans
being sold by Valley into the secondary market during 1999.
Other non-interest income increased $2.6 million to $8.3 million in 1999 as
compared to 1998. This increase is primarily attributed to the gain on the sale
of one OREO property and the earnings resulting from an agreement during the
fourth quarter of 1998 with a third party vendor whereby all the processing
related to official checks and money orders were outsourced. This increase is
also the result of $946 thousand of commission revenues from the sale of title
insurance policies from a new title insurance business acquired by VNB in the
second quarter of 1999. VNB 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,
VNB acquired the assets of an agency office of Commonwealth Land Title Insurance
Company and began to sell both commercial and residential title insurance
policies. The transaction was accounted for as a purchase and resulted in
goodwill of $728 thousand.
15
(in thousands)
Non-Interest Expense
The following table presents the components of non-interest expense for the
years ended December 31, 1999, 1998 and 1997.
NON-INTEREST EXPENSE
Years ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Salary expense .......................... $ 58,339 $ 56,717 $ 51,441
Employee benefit expense ................ 13,645 13,143 12,306
FDIC insurance premiums ................. 1,239 1,301 1,234
Net occupancy expense ................... 11,943 13,740 12,536
Furniture and equipment expense ......... 8,370 9,037 8,723
Credit card expense ..................... 5,070 9,066 17,520
Amortization of intangible assets ....... 5,255 5,666 3,699
Advertising ............................. 5,178 4,677 5,374
Merger-related charges .................. 3,005 4,539 --
Other ................................... 25,902 26,827 26,413
-------- -------- --------
Total non-interest expense ............. $137,946 $144,713 $139,246
======== ======== ========
Excluding merger-related charges, non-interest expense totaled $134.9
million for 1999, a decrease of $5.2 million or 3.7 percent from the 1998 level.
The largest components of non-interest expense are salaries and employee benefit
expense which totaled $72.0 million in 1999 compared to $69.9 million in 1998.
At December 31, 1999, full-time equivalent staff was 1,863 compared to 1,867 at
the end of 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 year ended December
31, 1999 was 43.9 percent, one of the lowest in the industry, compared with an
efficiency ratio for 1998 of 46.7 percent. Valley strives to control its
efficiency ratio and expenses as a means of producing increased earnings for its
shareholders.
Both net occupancy expense and furniture and equipment expense decreased
during 1999 in comparison to 1998. The reduction in these expenses can be
attributed to cost savings resulting from restructuring activities conducted in
connection with recent mergers.
Credit card expense includes cardmember rebates, processing expenses and
fraud losses. The decrease in credit card expenses is directly attributable to
an amendment made to the co-branded credit card program during the fourth
quarter of 1997, which has continued to reduce the amount of cardmember rebates
paid by Valley.
Amortization of intangible assets decreased to $5.3 million in 1999 from
$5.7 million in 1998, representing a decrease of $411 thousand or 7.3 percent.
The majority of this expense resulted from the amortization of residential
mortgage servicing rights totaling $3.6 million during 1999, compared with $4.2
million for 1998. An increase in interest rates is responsible for the decrease
in amortization expense to maintain the unamortized balance of servicing rights
in line with the portfolio balance and the expected future cash flows. An
impairment analysis is completed quarterly to determine the adequacy of the
mortgage servicing asset valuation allowance.
During 1999, Valley recorded merger-related charges of $3.0 million related
to the acquisition of Ramapo. The major components of merger-related charges,
consisting of real estate dispositions, professional fees, personnel expenses
and other expenses totaling $300 thousand, $1.1 million, $1.1 million and $500
thousand, respectively. During 1998, Valley recorded merger-related charges of
$4.5 million related to the acquisition of Wayne Bancorp, Inc. The major
components of merger-related charges were for real
16
estate dispositions, professional fees, personnel expenses and other expenses
that totaled $1.5 million, $1.4 million, $1.0 million and $600 thousand,
respectively. All amounts expensed as merger-related charges were paid with the
exception of contracts which will be paid over their remaining terms.
The significant components of other non-interest expense include data
processing, professional fees, postage, telephone and stationery expense which
totaled approximately $13.6 million for 1999.
Income Taxes
Income tax expense as a percentage of pre-tax income was 32.9 percent for
the year ended December 31, 1999 compared to 23.1 percent in 1998. The reduction
in the effective tax rate from 1996 through 1999 is attributable to tax benefits
realized that are no longer available after 1999. Valley implemented a tax
strategy during the second quarter of 1999 to minimize tax expense. The
effective tax rate for 2000 is expected to approximate 34 percent.*
Year 2000
VNB has completed its Year 2000 ("Y2K") upgrade for compliance with
computer hardware and software systems, which has resulted in a smooth
transition for its computer systems. Since implementing the assessment of Y2K
issues, Valley's costs to external sources have been approximately $146
thousand.
Business Segments
VNB has four business segments it monitors and reports on to manage its
business operations. These segments are commercial lending, consumer lending,
investment management and corporate and other adjustments. 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 from
the corporate and other adjustments segment to each of the other 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. For financial data on the four business segments see Part
II, Item 8, "Financial Statements and Supplementary Data -- Note 19 of the Notes
to Consolidated Financial Statements."
The consumer lending segment had a return on average interest-earning
assets before taxes of 2.54 percent for the year ended December 31, 1999
compared to 2.37 percent for the year ended December 31, 1998. Average
interest-earning assets increased $252.7 million, which is attributable to an
increase in home equity and residential mortgage lending. Interest rates on
consumer loans declined by 49 basis points. This decrease was mitigated by a
decrease in the cost of funds by 19 basis points. Income before income taxes
increased $10.6 million primarily as a result of an increase in average
interest-earning assets. Also contributing to the increase in income before
taxes was a $2.8 million decrease in the provision for loan losses due to a
decrease in net charge-offs and a decline in non-interest expense due to the
change in credit card rebates.
The return on average interest-earning assets before taxes for the
commercial lending segment, increased 16 basis points to 3.81 percent for the
year ended December 31, 1999. Average interest-earning assets increased $123.2
million as a result of an increased volume of loans. Interest rates on
commercial loans declined by 16 basis points, offset by a decrease in cost of
funds by 19 basis points. Income before income taxes increased $7.2 million
primarily as a result of an increase in average interest-earning assets, offset
by a decline in fee income during the period.
The investment management segment had a return on average interest-earning
assets, before taxes, of 2.07 percent for the year ended December 31, 1999, 15
basis points greater than the year ended December 31, 1998. Average
interest-earning assets increased by $34.5 million. The yield on interest
earning assets decreased by 26 basis points to 6.29 percent, and was offset by a
smaller decrease of 19 basis points in the cost of funds. Income before income
taxes increased 10.6 percent to $29.1 million principally reflecting lower
internal expense transfer amounts.
17
The corporate segment represents assets and 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 $6.3 million for the year
ended December 31, 1999, mainly due to more non-interest income.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Valley's success is largely dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of Valley's net
interest income to the movement in interest rates. Valley does not currently use
derivatives to manage market and interest rate risks. Valley's interest rate
risk management is the responsibility of the Asset/Liability Management
Committee ("ALCO"), which reports to the Board of Directors. ALCO establishes
policies that monitor and coordinate Valley's sources, uses and pricing of
funds.
Valley uses a simulation model to analyze net interest income sensitivity
to movements in interest rates. The simulation model projects net interest
income based on various interest rate scenarios over a twelve and twenty-four
month period. The model is based on the actual maturity and repricing
characteristics of rate sensitive assets and liabilities. The model incorporates
assumptions regarding the impact of changing interest rates on the prepayment
rates of certain assets and liabilities. 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 $289.3 thousand while an
interest rate decrease of 100 basis points resulted in a decrease in net
interest income of approximately $287.6 thousand. Management cannot provide any
assurance about the actual effect of changes in interest rates on Valley's net
interest income.
18
The following table shows the financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments' fair value at December 31, 1999. Market risk sensitive instruments
are generally defined as on-and-off balance sheet financial instruments.
INTEREST RATE SENSITIVITY ANALYSIS
Total
Rate 2000 2001 2002 2003 2004 Thereafter Balance
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Interest sensitive assets:
Federal funds sold ............ 4.63% $ 123,000 $ -- $ -- $ -- $ -- $ -- $ 123,000
Investment securities held
to maturity ................. 7.89 33,687 12,784 6,318 5,300 4,475 288,937 351,501
Investment securities
available for sale .......... 6.44 454,134 112,863 77,160 83,342 68,233 209,687 1,005,419
Loans:
Commercial ................... 8.51 362,967 11,936 7,907 39,836 26,557 62,961 512,164
Mortgage ..................... 7.66 553,728 187,253 124,835 439,895 293,263 936,343 2,535,317
Consumer ..................... 7.93 567,469 202,075 134,403 290,424 193,616 119,284 1,507,271
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive
assets........................ 7.55% $2,094,985 $ 526,911 $ 350,623 $ 858,797 $ 586,144 $1,617,212 $6,034,672
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest sensitive liabilities:
Deposits:
Savings ...................... 2.18% $ 390,448 $ 814,040 $ 496,340 $ 105,892 $ 105,892 $ 105,918 $2,018,530
Time ......................... 5.03 1,628,209 314,370 86,353 30,074 9,255 33,448 2,101,709
Short-term borrowings ......... 3.75 129,065 -- -- -- -- -- 129,065
Long-term debt ................ 5.98 103,074 27,080 117,086 82,060 102,016 133,565 564,881
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest
sensitive liabilities ......... 3.91% $2,250,796 $1,155,490 $ 699,779 $ 218,026 $ 217,163 $ 272,931 $4,814,185
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest sensitivity gap ...... $ (155,811) $ (628,579) $ (349,156) $ 640,771 $ 368,981 $1,344,281 $1,220,487
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ratio of interes sensitive
assets to interest sensitive
liabilities ................... (0.93:1) (0.46:1) (0.50:1) 3.94:1 2.70:1 5.93:1 1.25:1
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fair
Value
----------
(in thousands)
Interest sensitive assets:
Federal funds sold ............ $ 123,000
Investment securities held
to maturity ................. 318,329
Investment securities
available for sale .......... 1,005,419
Loans:
Commercial ................... 508,648
Mortgage ..................... 2,484,101
Consumer ..................... 1,505,298
----------
Total interest sensitive
assets........................ $5,944,795
----------
Interest sensitive liabilities:
Deposits:
Savings ...................... $2,018,530
Time ......................... 2,102,149
Short-term borrowings ......... 129,065
Long-term debt ................ 548,043
----------
Total interest
sensitive liabilities ......... $4,797,787
----------
Interest sensitivity gap ...... $1,147,008
----------
Ratio of interes sensitive
assets to interest sensitive
liabilities ................... 1.24:1
----------
Expected maturities are contractual maturities adjusted for all payments of
principal. Valley uses certain assumptions to estimate fair values and expected
maturities. For investment securities and loans, expected maturities are based
upon contractual maturity, projected repayments and prepayments of principal.
The prepayment experience reflected herein is based on historical experience.
The actual maturities of these instruments could vary substantially if future
prepayments differ from historical experience. For deposit liabilities, in
accordance with standard industry practice and Valley's own historical
experience, "decay factors" were used to estimate deposit runoff for savings.
Off-balance sheet items are not considered material.
The total negative gap repricing within 1 year as of December 31, 1999 was
$155.8 million, representing a ratio of interest sensitive assets to interest
sensitive liabilities of (0.93:1). 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 interest rate increases or decreases.*
Liquidity
Liquidity measures the ability to satisfy current and future cash flow
needs as they become due. Maintaining a level of liquid funds through
asset/liability management seeks to ensure that these needs are met at a
reasonable cost. On the asset side, liquid funds are maintained in the form of
cash and due from banks, federal funds sold, investments securities held to
maturity maturing within one year, securities available for sale and loans held
for sale. Liquid assets amounted to $1.3 billion at both December 31, 1999 and
1998. This represents 22.0 percent and 24.2 percent of earning assets, and 20.9
percent and 22.9 percent of total assets at December 31, 1999 and 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
$3.5 billion for the year ended December 31, 1999 and $3.6 billion for the year
ended December 31, 1998, representing 60.9 percent and 66.8 percent of average
earning assets. Short-term and
19
long-term borrowings through Federal funds lines, repurchase agreements, Federal
Home Loan Bank ("FHLB") advances and large dollar certificates of deposit,
generally those over $100 thousand, are used as supplemental funding sources.
Valley borrowed from the FHLB as part of a leverage strategy and matched funding
to increase earning assets and net interest income. Continued growth in this
strategy is under review to determine if it will be expanded in 2000.* As of
December 31, 1999, Valley had outstanding advances of $464.5 million with the
FHLB and repurchase agreements of $159.4 million. Additional liquidity is
derived from scheduled loan and investment payments of principal and interest,
as well as prepayments received. In 1999 proceeds from the sales of investment
securities available for sale were $28.3 million, and proceeds of $466.3 million
were generated from investment maturities. Purchases of investment securities in
1999 were $578.3 million. Short-term borrowings and certificates of deposit over
$100 thousand amounted to $637.1 million and $503.6 million, on average, for the
years ended December 31, 1999 and 1998, respectively.
During 1999 a substantial amount of loan growth was funded from a
combination of deposit growth, maturities and normal payments of the investment
portfolio, normal loan payments and prepayments, and borrowings. Valley
anticipates using funds from all of the above sources to fund loan growth during
2000.*
The following table lists, by maturity, all certificates of deposit of $100
thousand and over at December 31, 1999. These certificates of deposit are
generated primarily from core deposit customers and are not brokered funds.
(in thousands)
Less than three months ................................... $515,791
Three to six months ...................................... 49,993
Six to twelve months ..................................... 21,998
More than twelve months .................................. 59,494
--------
$647,276
========
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.
20
Investment Securities
The amortized cost of securities held to maturity at December 31, 1999,
1998 and 1997 were as follows:
INVESTMENT SECURITIES HELD TO MATURITY
1999 1998 1997
-------- -------- --------
(in thousands)
U.S. Treasury securities and other government agencies and
corporations ............................................. $ -- $ 34,451 $ 28,265
Obligations of states and political subdivisions ......... 28,729 45,550 62,832
Mortgage-backed securities ............................... 46,599 67,561 91,581
Other debt securities .................................... 249,936 115,148 195
-------- -------- --------
Total debt securities .................................... 325,264 262,710 182,873
FRB & FHLB stock ......................................... 26,237 24,180 24,180
-------- -------- --------
Total investment securities held to maturity ............. $351,501 $286,890 $207,053
======== ======== ========
The fair value of securities available for sale at December 31, 1999, 1998
and 1997 were as follows:
INVESTMENT SECURITIES AVAILABLE FOR SALE
1999 1998 1997
---------- ---------- ----------
(in thousands)
U.S. Treasury securities and other government agencies and
corporations ............................................. $ 112,650 $ 154,025 $ 224,647
Obligations of states and political subdivisions ......... 133,564 118,295 144,333
Mortgage-backed securities ............................... 730,131 719,790 759,529
---------- ---------- ----------
Total debt securities .................................... 976,345 992,110 1,128,509
Equity securities ........................................ 29,074 31,078 10,685
---------- ---------- ----------
Total investment securities available for sale ........... $1,005,419 $1,023,188 $1,139,194
========== ========== ==========
21
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES HELD TO MATURITY
AT DECEMBER 31, 1999
Obligations of States and Mortgage-Backed Other Debt Securities Total(4)
Political Subdivisions Securities
--------------------- ---------------------- ------------------- ------------------
Amortized Yield Amortized Amortized Amortized
Cost(1) (2)(3) Cost(1) Yield(2) Cost(1) Yield(2) Cost(1) Yield(2)
-------- -------- -------- -------- -------- -------- -------- -------
(in thousands)
0-1 years ...................... $ 23,270 5.09% $ 1,784 5.81% $ 110 7.72% $ 25,164 5.15%
1-5 years ...................... 4,829 8.54 44,304 7.53 60 7.23 49,193 7.63
5-10 years ..................... -- -- 511 7.46 50 7.30 561 7.45
Over 10 years .................. 630 9.49 -- -- 249,716 7.47 250,346 7.48
-------- ---- -------- ---- -------- ---- -------- ----
Total securities ............... $ 28,729 5.77% $ 46,599 7.46% $249,936 7.47% $325,264 7.32%
======== ==== ======== ==== ======== ==== ======== ====
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1999
US Treasury Securities
and Other Government Obligations of States
Agencies and and Political Mortgage-Backed
Corporations Subdivisions Securities Total(4)
--------------------- ---------------------- ------------------- ------------------
Amortized Amortized Yield Amortized Amortized
Cost(1) Yield(2) Cost(1) (2)(3) Cost(1) Yield(2) Cost(1) Yield(2)
-------- -------- -------- -------- -------- -------- -------- -------
(in thousands)
0-1 years ...................... $ 14,327 5.81% $ 25,229 6.74% $ 325,124 7.23% $ 364,680 7.14%
1-5 years ...................... 101,423 5.61 45,238 6.70 269,738 6.18 416,399 6.10
5-10 years ..................... -- -- 29,563 6.22 119,364 6.61 148,927 6.53
Over 10 years .................. -- -- 35,629 7.58 37,036 6.53 72,665 7.04
---------- ---- ---------- ---- ---------- ---- ---------- ----
Total securities ............... $ 115,750 5.63% $ 135,659 6.83% $ 751,262 6.72% $1,002,671 6.61%
========== ==== ========== ==== ========== ==== ========== ====
- ----------
(1) Maturities are stated at cost less principal reductions, if any, and
adjusted for accretion of discounts and amortization of premiums.
(2) Average yields are calculated on a yield-to-maturity basis.
(3) Average yields on obligations of states and political subdivisions are
generally tax-exempt and calculated on a tax-equivalent basis using a
statutory federal income tax rate of 35 percent.
(4) Excludes equity securities which have indefinite maturities.
22
Valley's investment portfolio is comprised of U.S. government and federal
agency securities, tax-exempt issues of states and political subdivisions,
mortgage-backed securities, equity and other securities. There were no
securities in the name of any one issuer exceeding 10 percent of shareholders'
equity, except for securities issued by the United States and its political
subdivisions and agencies. The portfolio generates substantial cash flow. The
decision to purchase or sell securities is based upon the current assessment of
long and short term economic and financial conditions, including the interest
rate environment and other statement of financial condition components.
At December 31, 1999, Valley had $46.6 million of mortgaged-backed
securities classified as held to maturity and $730.1 million of mortgage-backed
securities classified as available for sale. Substantially all the
mortgage-backed securities held by Valley are issued or backed by Federal
agencies. The mortgage-backed securities portfolio is a source of significant
liquidity to Valley through the monthly cash flow of principal and interest.
Mortgage-backed securities, like all securities, are sensitive to changes in the
interest rate environment, increasing and decreasing in value as interest rates
fall and rise. As interest rates fall, the increase in prepayments can reduce
the yield on the mortgage-backed securities portfolio, and reinvestment of the
proceeds will be at lower interest rates.
Included in the mortgage-backed securities portfolio at December 31, 1999
were $206.9 million of collateralized mortgage obligations ("CMO") of which
$19.5 million were privately issued. CMO's had a yield of 6.53 percent and an
unrealized loss of $8.7 million at December 31, 1999. Substantially all of the
CMO portfolio was classified as available for sale.
As of December 31, 1999, Valley had $1.0 billion of securities available
for sale, unchanged from December 31, 1998. Those securities are recorded at
their fair value. As of December 31, 1999, the investment securities available
for sale had an unrealized loss of $16.3 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 an decrease in prices
resulting from an increasing interest rate environment. These securities are not
considered trading account securities, which may be sold on a continuous basis,
but rather are securities which may be sold to meet the various liquidity and
interest rate requirements of Valley. In connection with the Ramapo acquisition,
Valley reassessed the classification of securities held in the Ramapo portfolio
and transferred $42.4 million of securities held to maturity to securities
available for sale to conform with Valley's investment objectives. In 1998, in
connection with the Wayne acquisition, Valley reassessed the classification of
securities held in the Wayne portfolio and transferred $1.6 million of
securities held to maturity to securities available for sale to conform with
Valley's investment objectives. In 1997, in connection with the Midland
acquisition, Valley reassessed the classification of securities held in the
Midland investment portfolio and transferred $39.8 million of securities held to
maturity to securities available for sale to conform to Valley's investment
objectives.
During 1999 and 1998, Valley purchased approximately $138.6 million and
$111.8 million, respectively, of trust preferred securities, as part of a
leveraging strategy to increase interest earning assets and net interest income.
Loan Portfolio
As of December 31, 1999, total loans were $4.6 billion, compared to $4.1
billion at December 31, 1998, an increase of 9.8 percent. The following table
reflects the composition of the loan portfolio for the five years ended December
31, 1999.
23
LOAN PORTFOLIO
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands)
Commercial ................. $ 512,164 $ 477,231 $ 468,947 $ 480,240 $ 426,887
----------- ----------- ----------- ----------- -----------
Total commercial loans ... 512,164 477,231 468,947 480,240 426,887
----------- ----------- ----------- ----------- -----------
Construction ............... 123,531 112,819 94,162 98,435 91,097
Residential mortgage ....... 1,247,721 1,055,278 1,056,436 1,060,526 1,029,551
Commercial mortgage ........ 1,164,065 1,050,420 955,052 877,617 780,099
----------- ----------- ----------- ----------- -----------
Total mortgage loans ..... 2,535,317 2,218,517 2,105,650 2,036,578 1,900,747
----------- ----------- ----------- ----------- -----------
Home equity ................ 276,261 226,231 225,899 230,265 235,742
Credit card ................ 92,097 108,180 146,151 150,233 23,098
Automobile ................. 1,053,457 1,033,938 931,579 813,058 673,597
Other consumer ............. 85,456 83,552 94,370 73,714 67,216
----------- ----------- ----------- ----------- -----------
Total consumer loans ..... 1,507,271 1,451,901 1,397,999 1,267,270 999,653
----------- ----------- ----------- ----------- -----------
Less: unearned income ...... -- -- (56) (556) (1,290)
----------- ----------- ----------- ----------- -----------
Total loans ................ $ 4,554,752 $ 4,147,649 $ 3,972,540 $ 3,783,532 $ 3,325,997
=========== =========== =========== =========== ===========
As a percent of total loans:
Commercial loans .......... 11.2% 11.5% 11.8% 12.7% 12.8%
Mortgage loans ............ 55.7 53.5 53.0 53.8 57.1
Consumer loans ............ 33.1 35.0 35.2 33.5 30.1
----------- ----------- ----------- ----------- -----------
Total loans .............. 100.0% 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== =========== ===========
The majority of the increase in loans for 1999 was divided between
residential and commercial mortgage loans. It is not known if the trend of
increased lending in these loan types will continue, especially if interest
rates continue to increase.
The commercial mortgage loan portfolio has continued its steady increase.
Valley targets small-to-medium size businesses within the market area of the
bank for this type of lending.
During 1996, Valley issued a co-branded credit card. Of the $92.1 million
of credit card loans outstanding at December 31, 1999, approximately $77.1
million were the result of this co-branded credit card program. The decrease in
the credit card portfolio is primarily attributable to an amendment made to the
co-branded credit card program during the fourth quarter of 1997, which also
reduced the amount of cardmember rebates paid by Valley. It is expected that the
decline in the co-branded credit card loans will continue.*
Automobile loans comprised 23.1 percent of total loans at December 31,
1999. Approximately 66.2 percent of the automobile loan portfolio and 15.3
percent of the total loan portfolio at December 31, 1999 represented loans
originated by VNB through a program with a major insurance company. These loans
are subject to Valley's normal underwriting criteria. During the fourth quarter
of 1997, Valley began closing loans in Florida under this program. Valley began
an identical program in the State of Pennsylvania in January 1998. The addition
of Florida and Pennsylvania resulted in a greater than 60 percent increase in
the number of agents under this program. This expanded Valley's over 40 year
relationship with the company to 11 states from Maine to Florida, as well as
Canada. Valley expects to begin lending in Connecticut during early 2000 under
this program with the insurance company.*
VNB extended this program during the first quarter of 1996 by establishing
a finance company in Toronto, Canada to make auto loans. This Canadian
subsidiary had interest income of approximately $2.0 million for the year ended
December 31, 1999, and auto loans of $26.8 million at December 31, 1999. These
loans are funded by a capital investment by VNB of $7.4 million, with additional
funding requirements
24
satisfied by lines of credit in Canadian funds. Any foreign exchange risk is
limited to the capital investment by VNB.
Much of Valley's lending is in northern New Jersey, with the exception of
the out-of-state auto lending program. However, efforts are made to maintain a
diversified portfolio as to type of borrower and loan to guard against a
downward turn in any one economic sector.*
The following table reflects the contractual maturity distribution of the
commercial and construction loan portfolios as of December 31, 1999:
1 Yr. Over 1 Over
or less to 5 Yrs. 5 Yrs. Total
-------- -------- -------- --------
(in thousands)
Commercial--fixed rate ............. $ 8,435 $ 89,971 $ 51,083 $149,489
Commercial--adjustable rate ........ 276,938 41,182 44,555 362,675
Construction--fixed rate ........... 16,927 6,429 -- 23,356
Construction--adjustable rate ...... 55,035 45,140 -- 100,175
-------- -------- -------- --------
$357,335 $182,722 $ 95,638 $635,695
======== ======== ======== ========
Prior to maturity of each loan with a balloon payment and if the borrower
requests an extension, Valley generally conducts a review which normally
includes an analysis of the borrower's financial condition and, if applicable, a
review of the adequacy of collateral. A rollover of the loan at maturity may
require a principal paydown.
VNB is a preferred U.S. Small Business Administration ("SBA") lender with
authority to make loans without the prior approval of the SBA. VNB currently has
approval to make SBA loans in New Jersey, Pennsylvania, New York, Delaware,
Maryland, the District of Columbia and sections of Virginia. Between 75 percent
and 80 percent of each loan is guaranteed by the SBA and may be sold into the
secondary market, with the balance retained in VNB's portfolio. VNB intends to
continue expanding this area of lending because it provides a good source of fee
income and loans with floating interest rates tied to the prime lending rate.*
During 1999 and 1998, VNB originated approximately $34.8 million and $25.8
million of SBA loans, respectively and sold $24.8 million and $22.1 million,
respectively. At December 31, 1999 and 1998, $37.5 million and $31.4 million,
respectively, of SBA loans were held in VNB's portfolio and VNB serviced for
others approximately $89.0 million and $78.1 million, respectively, of SBA
loans.
Non-performing Assets
Non-performing assets include non-accrual loans and other real estate owned
("OREO"). Loans are generally placed on a non-accrual status when they become
past due in excess of 90 days as to payment of principal or interest. Exceptions
to the non-accrual policy may be permitted if the loan is sufficiently
collateralized and in the process of collection. OREO is acquired through
foreclosure on loans secured by land or real estate. OREO is reported at the
lower of cost or fair value at the time of acquisition and at the lower of fair
value, less estimated costs to sell, or cost thereafter.
Non-performing assets continued to decrease, and totaled $5.7 million at
December 31, 1999, compared with $11.8 million at December 31, 1998, a decrease
of $6.0 million or 51.2 percent. Non-performing assets at December 31, 1999 and
1998, respectively, amounted to 0.13 percent and 0.28 percent of loans and OREO.
Non-performing assets have declined steadily over the past five years. Valley
cannot predict whether or for how long that this trend will continue.*
Loans 90 days or more past due and not included in the non-performing
category totaled $11.7 million at December 31, 1999, compared to $7.4 million at
December 31, 1998. These loans are primarily residential mortgage loans,
commercial mortgage loans and commercial loans which are generally well-secured
and in the process of collection. Also included are matured commercial mortgage
loans in the process of being renewed, which totaled $1.5 million and $175
thousand at December 31, 1999 and 1998, respectively.
25
The allowance for loan losses as a percent of loans has declined since
1995. Valley provides additions to the allowance based upon net charge-offs.
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
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in thousands)
Loans past due in excess of 90 days
and still accruing ............... $11,698 $ 7,418 $16,463 $10,318 $ 8,266
------- ------- ------- ------- -------
Non-accrual loans .................. $ 3,482 $ 7,507 $10,380 $16,311 $20,817
Other real estate owned ............ 2,256 4,261 4,450 6,077 12,020
------- ------- ------- ------- -------
Total non-performing assets ........ $ 5,738 $11,768 $14,830 $22,388 $32,837
------- ------- ------- ------- -------
Troubled debt restructured loans ... $ 4,852 $ 6,387 $ 6,723 $ 7,116 $ 6,911
------- ------- ------- ------- -------
Non-performing loans as a % of loans 0.08% 0.18% 0.26% 0.43% 0.63%
------- ------- ------- ------- -------
Non-performing assets as a % of
loans plus other real estate owned 0.13% 0.28% 0.37% 0.59% 0.98%
------- ------- ------- ------- -------
Allowance as a % of loans .......... 1.21% 1.32% 1.34% 1.40% 1.52%
------- ------- ------- ------- -------
During 1999, recovered interest on non-accrual loans amounted to $720
thousand, compared with lost interest of $1.0 million in 1998.
Although substantially all risk elements at December 31, 1999 have been
disclosed in the categories presented above, management believes that for a
variety of reasons, including economic conditions, certain borrowers may be
unable to comply with the contractual repayment terms on certain real estate and
commercial loans. As part of the analysis of the loan portfolio by management,
it has been determined that there are approximately $2.0 million in potential
problem loans at December 31, 1999, which have not been classified as
non-accrual, past due or restructured.* Potential problem loans are defined as
performing loans for which management has serious doubts as to the ability of
such borrowers to comply with the present loan repayment terms and which may
result in a non-performing loan. Approximately $585 thousand has been provided
for in the allowance for loan losses for these potential problem loans. There
can be no assurance that Valley has identified all of its problem loans. At
December 31, 1998, Valley had identified approximately $2.7 million of potential
problem loans which were not classified as non-accrual, past due or
restructured.
Asset Quality and Risk Elements
Lending is one of the most important functions performed by Valley and, by
its very nature, lending is also the most complicated, risky and profitable part
of Valley's business. For commercial loans, construction loans and commercial
mortgage loans, a separate credit department is responsible for risk assessment,
credit file maintenance and periodically evaluating overall creditworthiness of
a borrower. Additionally, efforts are made to limit concentrations of credit so
as to minimize the impact of a downturn in any one economic sector. These loans
are diversified as to type of borrower and loan. However, most of these loans
are in northern New Jersey, presenting a geographical and credit risk if there
was a significant downturn of the economy within the region.
Residential mortgage loans are secured primarily by 1-4 family properties
located mainly within northern New Jersey. Conservative underwriting policies
are adhered to and loan to value ratios are generally less than 80 percent.
26
Consumer loans are comprised of home equity loans, credit card loans and
automobile loans. Home equity and automobile loans are secured loans and are
made based on an evaluation of the collateral and the borrower's
creditworthiness. The majority of automobile loans are originated through a
program with a major insurance company, whose customer base generally has a good
credit profile and generally result in delinquencies and charge-offs equal to
that typically experienced from traditional sources. These automobile loans are
from 11 states, including New Jersey and generally present no more risk than
those made within New Jersey. All loans are subject to Valley's underwriting
criteria; therefore, each loan or group of loans presents a geographical risk
and credit risk based upon the economy of the region.
The co-branded credit card portfolio was substantially generated through a
pre-approved mailing during 1996 utilizing automated credit scoring techniques
and additional underwriting standards.
Management realizes that some degree of risk must be expected in the normal
course of lending activities. Reserves are maintained to absorb such loan and
off-balance sheet credit losses inherent in the portfolio. The allowance for
loan losses and related provision are an expression of management's evaluation
of the credit portfolio and economic climate.
27
The following table sets forth the relationship among loans, loans
charged-off and loan recoveries, the provision for loan losses and the allowance
for loan losses for the past five years:
Years ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in thousands)
Average loans outstanding ............................ $4,280,426 $4,009,604 $3,817,092 $3,494,950 $3,244,586
========== ========== ========== ========== ==========
Beginning balance--Allowance for
loan losses .......................................... $ 54,641 $ 53,170 $ 52,926 $ 50,433 $ 53,949
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Commercial .......................................... 337 216 4,650 493 1,346
Construction ........................................ -- -- -- 110 3,092
Mortgage-Commercial ................................. 983 2,166 1,440 1,214 2,976
Mortgage-Residential ................................ 761 1,274 522 932 1,255
Consumer ............................................ 10,050 11,307 8,394 4,110 2,992
---------- ---------- ---------- ---------- ----------
12,131 14,963 15,006 6,859 11,661
---------- ---------- ---------- ---------- ----------
Charged-off loans recovered:
Commercial .......................................... 702 484 562 2,669 1,534
Construction ........................................ 218 222 89 58 --
Mortgage-Commercial ................................. 268 1,074 227 1,462 1,303
Mortgage-Residential ................................ 133 329 167 222 87
Consumer ............................................ 2,169 1,680 1,075 985 1,400
---------- ---------- ---------- ---------- ----------
3,490 3,789 2,120 5,396 4,324
---------- ---------- ---------- ---------- ----------
Net charge-offs ...................................... 8,641 11,174 12,886 1,463 7,337
Provision charged to operations ...................... 9,120 12,645 13,130 3,956 3,821
---------- ---------- ---------- ---------- ----------
Ending balance--Allowance for loan losses ............ $ 55,120 $ 54,641 $ 53,170 $ 52,926 $ 50,433
========== ========== ========== ========== ==========
Ratio of net charge-offs during the
period to average loans outstanding during the period 0.20% 0.28% 0.34% 0.04% 0.23%
The allowance for loan losses is maintained at a level estimated to absorb
loan losses inherent in the loan portfolio as well as other credit risk related
charge-offs. The allowance is based on ongoing evaluations of the probable
estimated losses inherent in the loan portfolio and unused commitments to
provide financing. VNB's methodology for evaluating the appropriateness of the
allowance consists of several significant elements, which include the allocated
allowance, specific allowances for identified problem loans and portfolio
segments and the unallocated allowance. The allowance also incorporates the
results of measuring impaired loans as called for in Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan."
VNB's allocated allowance is calculated by applying loss factors to
outstanding loans as well as certain unused commitments. The formula is based on
the internal risk grade of loans, pools of loans, or commitments. Any change in
the risk grade of performing and/or non-performing loans affects the amount of
the related allowance. Loss factors are based on VNB's historical loss
experience and may be adjusted for significant circumstances that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
Management determines the unallocated portion of the allowance based on
factors that cannot be associated with a specific credit or loan category. These
factors include management's evaluation of local and national economic and
business conditions, changes in portfolio composition, portfolio concentrations,
credit quality and delinquency trends. The unallocated portion of the allowance
reflects management's
28
attempt to ensure that the overall allowance reflects a margin for the
uncertainty that is inherent in estimates of expected credit losses.
The underwriting, growth and delinquency experience in the credit card
portfolio will substantially influence the level of the allowance needed to
absorb credit losses inherent in the portfolio. Although credit card loans are
generally considered more risky than other types of lending, a higher interest
rate is charged to compensate for this increased risk. VNB continues to monitor
the need for additions to the allowance.
During 1999, continued emphasis was placed on the current economic climate
and the condition of the real estate market in the northern New Jersey area.
Management addressed these economic conditions and applied that information to
changes in the composition of the loan portfolio and net charge-off levels. The
provision charged to operations was $9.1 million in 1999 compared to $12.6
million in 1998.
The following table summarizes the allocation of the allowance for loan
losses to specific loan categories for the past five years:
Years ended December 31,
--------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- ------------------------
Percent of Percent of Percent of
Loan Loan Loan
Category Category Category
Allowance to Total Allowance to Total Allowance to Total
Allocation Loans Allocation Loans Allocation Loans
---------- --------- ---------- ---------- ---------- ----------
(in thousands)
Loan category:
Commercial .................... $15,501 11.2% $14,491 11.5% $13,525 11.8%
Mortgage ...................... 13,282 55.7 14,363 53.5 16,861 53.0
Consumer ...................... 12,813 33.1 12,417 35.0 11,625 35.2
Unallocated ................... 13,524 N/A 13,370 N/A 11,159 N/A
---------- --------- ---------- ---------- ---------- ----------
$55,120 100.0% $54,641 100.0% $53,170 100.0%
========== ========= ========== ========== ========== ==========
Years ended December 31,
----------------------------------------------------
1996 1995
------------------------ -------------------------
Percent of Percent of
Loan Loan
Category Category
Allowance to Total Allowance to Total
Allocation Loans Allocation Loans
---------- ---------- ---------- ---------
(in thousands)
Loan category:
Commercial .................... $19,097 12.7% $16,006 12.8%
Mortgage ...................... 13,743 53.8 13,428 57.1
Consumer ...................... 7,667 33.5 7,893 30.1
Unallocated ................... 12,419 N/A 13,106 N/A
---------- ---------- ---------- ---------
$52,926 100.0% $50,433 100.0%
========== ========== ========== =========
At December 31, 1999 the allowance for loan losses amounted to $55.1
million or 1.21 percent of loans, as compared to $54.6 million or 1.32 percent
at December 31, 1998.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $8.6 million for the
year ended December 31, 1999 compared with $11.2 million for the year ended
December 31, 1998. The ratio of net charge-offs to average loans decreased to
0.20 percent for 1999 compared with 0.28 percent for 1998. While consumer loan
charge-offs decreased during 1999, they were at a level less than the level
reported throughout the industry on a national basis. Non-accrual loans
decreased in 1999 in comparison to 1998, while loans past due 90 days and still
accruing in 1999 were higher than during 1998.
The impaired loan portfolio is primarily collateral dependent. Impaired
loans and their related specific and general allocations to the allowance for
loan losses totaled $13.4 million and $1.8 million, respectively, at December
31, 1999 and $13.4 million and $4.6 million, respectively, at December 31, 1998.
The average balance of impaired loans during 1999 and 1998 was approximately
$13.2 million and $15.1 million, respectively. The amount of cash basis interest
income that was recognized on impaired loans during both 1999 and 1998 was $559
thousand and $1.1 million, respectively.
Capital Adequacy
A significant measure of the strength of a financial institution is its
shareholders' equity. At December 31, 1999, shareholders' equity totaled $553.5
million or 8.7 percent of total assets, compared with $589.8 million or 10.0
percent at year-end 1998.
On December 14, 1999 Valley's Board of Directors authorized the repurchase
of up to 3,000,000 shares of the company's outstanding common stock. As of
December 31, 1999 Valley had repurchased 800,300 shares of its stock under this
plan. Reacquired shares are held in treasury and are expected to be used for
employee benefit programs, stock dividends and other corporate purposes.
29
On June 10, 1999 Valley's Board of Directors rescinded the stock repurchase
program it had announced on April 28, 1999 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. Rescinding the remaining authorization was undertaken in connection with
Valley's acquisition of Ramapo.
On May 26, 1998 Valley's Board of Directors rescinded its previously
announced stock repurchase program after 220,125 shares of Valley common stock
had been repurchased. Rescinding the remaining authorization was necessary to
comply with certain accounting rules in connection with Valley's acquisition of
Wayne.
Included in shareholders' equity as components of accumulated other
comprehensive income at December 31, 1999 was a $16.3 million unrealized loss on
investment securities available for sale, net of tax, and a translation
adjustment loss of $418 thousand related to the Canadian subsidiary of VNB,
compared to an unrealized gain of $4.9 million and an $852 thousand translation
adjustment loss at December 31, 1998.
Risk-based guidelines define a two-tier capital framework. Tier 1 capital
consists of common shareholders' equity less disallowed intangibles, while Total
risk-based capital consists of Tier 1 capital and the allowance for loan losses
up to 1.25 percent of risk-adjusted assets. Risk-adjusted assets are determined
by assigning various levels of risk to different categories of assets and
off-balance sheet activities.
Valley's capital position at December 31, 1999 under risk-based capital
guidelines was $565.4 million, or 11.6 percent of risk-weighted assets, for Tier
1 capital and $620.5 million, or 12.8 percent for Total risk-based capital. The
comparable ratios at December 31, 1998 were 13.4 percent for Tier 1 capital and
14.6 percent for Total risk-based capital. At December 31, 1999 and 1998, Valley
was in compliance with the leverage requirement having Tier 1 leverage ratios of
9.1 percent and 10.1 percent, respectively. Valley's ratios at December 31, 1999
were above the "well capitalized" requirements, which require Tier I capital to
risk-adjusted assets of at least 6 percent, Total risk-based capital to
risk-adjusted assets of 10 percent and a minimum leverage ratio of 5 percent.
Book value per share amounted to $9.27 at December 31, 1999 compared with
$9.57 per share at December 31, 1998.
The primary source of capital growth is through retention of earnings.
Valley's rate of earnings retention, derived by dividing undistributed earnings
by net income, was 43.6 percent at December 31, 1999, compared to 47.4 percent
at December 31, 1998. Cash dividends declared amounted to $1.02 per share,
equivalent to a dividend payout ratio of 56.4 percent for 1999, compared to 52.6
percent for the year 1998. The current quarterly dividend rate of $0.26 per
share provides for an annual rate of $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.*
Results of Operations--1998 Compared to 1997
Valley reported net income for 1998 of $101.3 million or $1.63 earnings per
diluted share, compared to the $90.2 million, or $1.46 earnings per diluted
share earned in 1997.
Net interest income on a tax equivalent basis increased $7.6 million, or
3.1%, to $248.6 million in 1998. The increase in 1998 was due primarily to a
small increase in the average balance of interest bearing assets and a slight
decrease in the average balance of interest bearing liabilities. Average rates
on interest earning assets and interest bearing liabilities decreased 4 basis
points and 6 basis points, respectively.
Non-interest income in 1998 amounted to $45.4 million, relatively unchanged
compared with 1997. Fees from loan servicing, which includes both servicing fees
from residential mortgage loans and SBA loans, increased $1.8 million or 32.4
percent. This increase can be attributed to the acquisition of several
residential mortgage portfolios, and the origination of both SBA and residential
mortgage loans by VNB which were sold to third-party investors with servicing
retained. Credit card income declined by $2.5 million due to a change in the
rebate program decreasing card usage and related fee income.
30
Non-interest expense totaled $144.7 million in 1998, an increase of $5.5
million. Non-interest expense for 1998 includes a $4.5 million merger-related
charge from the acquisition of Wayne. Salary and benefit expense for 1998
increased $6.1 million or 9.6 percent and amortization of intangibles increased
$2.0 million or 53.2 percent resulting from increased amortization of loan
servicing rights due to a larger portfolio of loans being serviced and a
declining rate environment. These increases were offset by a decrease in credit
card expense of $8.5 million, directly attributable to an amendment made to
Valley's co- branded credit card program during the fourth quarter of 1997,
which reduced the amount of cardmember rebates paid by Valley.
Income tax expense as a percentage of pre-tax income was 23.1 percent for
the year ended December 31, 1998 compared to 29.3 percent in 1997. The reduced
effective tax rate during 1997 and 1998 is attributable to tax benefits realized
from a realignment of corporate entities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For information regarding Quantitative and Qualitative Disclosures About
Market Risk, see Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest Rate Sensitivity."
31
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands, except for share data)
Interest Income
Interest and fees on loans (Note 5) ............... $ 339,438 $ 330,701 $ 317,598
Interest and dividends on investment securities:
Taxable .......................................... 74,381 63,430 72,489
Tax-exempt ....................................... 7,364 8,281 10,560
Dividends ........................................ 2,403 1,946 1,689
Interest on federal funds sold and other
short-term investments ........................... 3,949 6,935 4,482
----------- ----------- -----------
Total interest income ........................... 427,535 411,293 406,818
----------- ----------- -----------
Interest Expense
Interest on deposits:
Savings deposits ................................. 41,358 46,833 47,328
Time deposits (Note 10) .......................... 102,154 109,228 117,051
Interest on short-term borrowings ................. 2,968 2,791 2,332
Interest on long-term debt (Note 11) .............. 22,697 8,806 5,471
----------- ----------- -----------
Total interest expense ........................... 169,177 167,658 172,182
----------- ----------- -----------
Net Interest Income ............................... 258,358 243,635 234,636
Provision for loan losses (Note 6) ................ 9,120 12,645 13,130
----------- ----------- -----------
Net Interest Income after Provision for Loan Losses 249,238 230,990 221,506
----------- ----------- -----------
Non-Interest Income
Trust and investment services ..................... 2,414 1,813 1,538
Service charges on deposit accounts ............... 14,468 14,019 13,431
Gains on securities transactions, net (Note 4) .... 2,532 1,419 2,136
Fees from loan servicing (Note 7) ................. 8,387 7,382 5,576
Credit card fee income ............................ 8,655 10,153 12,643
Gains on sales of loans, net ...................... 2,491 4,863 3,634
Other ............................................. 8,305 5,725 6,236
----------- ----------- -----------
Total non-interest income ........................ 47,252 45,374 45,194
----------- ----------- -----------
Non-Interest Expense
Salary expense (Note 12) .......................... 58,339 56,717 51,441
Employee benefit expense (Note 12) ................ 13,645 13,143 12,306
FDIC insurance premiums ........................... 1,239 1,301 1,234
Net occupancy expense (Notes 8 and 14) ............ 11,943 13,740 12,536
Furniture and equipment expense (Note 8) .......... 8,370 9,037 8,723
Credit card expense ............................... 5,070 9,066 17,520
Amortization of intangible assets (Note 7) ........ 5,255 5,666 3,699
Advertising ....................................... 5,178 4,677 5,374
Merger-related charges (Note 2) ................... 3,005 4,539 --
Other ............................................. 25,902 26,827 26,413
----------- ----------- -----------
Total non-interest expense ........................ 137,946 144,713 139,246
----------- ----------- -----------
Income Before Income Taxes ........................ 158,544 131,651 127,454
Income tax expense (Note 13) ...................... 52,220 30,380 37,303
----------- ----------- -----------
Net Income ........................................ $ 106,324 $ 101,271 $ 90,151
=========== =========== ===========
Earnings Per Share:
Basic ............................................ $ 1.75 $ 1.65 $ 1.47
Diluted .......................................... 1.73 1.63 1.46
Weighted Average Number of Shares Outstanding:
Basic ............................................ 60,697,186 61,360,325 61,266,111
Diluted .......................................... 61,305,673 62,185,100 61,812,546
See accompanying notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
--------------------------------
1999 1998
----------- -----------
(in thousands, except for share data)
Assets
Cash and due from banks .............................................................. $ 161,561 $ 185,921
Federal funds sold ................................................................... 123,000 108,100
Investment securities held to maturity,
fair value of $318,329 and $288,312 in
1999 and 1998, respectively (Notes 3 and 11) ........................................ 351,501 286,890
Investment securities available for sale (Notes 4 and 11) ............................ 1,005,419 1,023,188
Trading account securities (Note 4) .................................................. -- 1,592
Loans (Notes 5 and 11) ............................................................... 4,542,567 4,124,194
Loans held for sale (Note 5) ......................................................... 12,185 23,455
----------- -----------
Total loans .......................................................................... 4,554,752 4,147,649
Less: Allowance for loan losses (Note 6) ........................................... (55,120) (54,641)
----------- -----------
Net loans .......................................................................... 4,499,632 4,093,008
----------- -----------
Premises and equipment, net (Note 8) ................................................. 84,790 82,808
Accrued interest receivable .......................................................... 35,504 32,197
Other assets (Notes 7, 9 and 13) ..................................................... 98,987 65,265
----------- -----------
Total assets ...................................................................... $ 6,360,394 $ 5,878,969
=========== ===========
Liabilities
Deposits:
Non-interest bearing ............................................................... $ 931,016 $ 924,217
Interest bearing:
Savings ........................................................................... 2,018,530 2,037,200
Time (Note 10) .................................................................... 2,101,709 2,008,732
----------- -----------
Total deposits ................................................................... 5,051,255 4,970,149
----------- -----------
Short-term borrowings (Notes 3 and 11) ............................................... 129,065 57,617
Long-term debt (Note 11) ............................................................. 564,881 212,949
Accrued expenses and other liabilities (Note 12) ..................................... 61,693 48,445
----------- -----------
Total liabilities ................................................................ 5,806,894 5,289,160
----------- -----------
Commitments and contingencies (Note 14)
Shareholders' Equity (Notes 2, 12 and 15)
Common stock, no par value, authorized 103,359,375 shares; ........................... 25,943 26,079
issued 60,621,040 shares in 1999 and 58,951,593 shares in 1998
Surplus .............................................................................. 325,147 331,337
Retained earnings .................................................................... 244,605 235,879
Unallocated common stock held by employee benefit plan ............................... (965) (1,331)
Accumulated other comprehensive (loss) income ........................................ (16,733) 4,031
----------- -----------
577,997 595,995
Treasury stock, at cost (927,750 shares in 1999 and 236,735 shares in 1998) .......... (24,497) (6,186)
----------- -----------
Total shareholders' equity ......................................................... 553,500 589,809
----------- -----------
Total liabilities and shareholders' equity ....................................... $ 6,360,394 $ 5,878,969
=========== ===========
See accompanying notes to consolidated financial statements.
33
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unallocated Accumulated
Common Other
Stock Held Comprehensive Total
Common Retained by Employee (Loss) Treasury Shareholders'
Stock Surplus Earnings Benefit Plan Income Stock Stock
--------- --------- --------- ------------ --------- --------- -----------
(in thousands)
Balance-December 31, 1996 ....................... $ 25,091 $ 278,096 $ 203,018 $ (1,785) $ (206) $ (7,883) $ 496,331
Comprehensive income:
Net income ....................................... -- -- 90,151 -- -- -- 90,151
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale,
net of tax of $3,081 ........................... -- -- -- -- 5,446 --
Less reclassification adjustment for gains
included in net income, net of tax of $(767) ... -- -- -- -- (1,369) --
Foreign currency translation adjustment .......... -- -- -- -- (307) --
---------
Other comprehensive income ....................... -- -- -- -- 3,770 -- 3,770
--------- ---------
Total comprehensive income ....................... -- -- -- -- -- -- 93,921
Cash dividends ................................... -- -- (45,350) -- -- -- (45,350)
Effect of stock incentive plan, net .............. 8 (1,705) (2,655) -- -- 5,311 959
Stock dividend ................................... 964 55,041 (56,086) -- -- -- (81)
Tax benefit from exercise of stock options ....... -- 329 -- -- -- -- 329
Allocation of employee benefit plan .............. -- 177 -- 181 -- -- 358
Retirement of treasury stock ..................... (64) (230) -- -- -- 294
Common stock acquired for stock incentive plan ... -- (1,450) -- -- -- -- (1,450)
Purchase of treasury stock ....................... -- -- -- -- -- (4,417) (4,417)
--------- --------- --------- --------- --------- --------- ---------
Balance-December 31, 1997 ....................... 25,999 330,258 189,078 (1,604) 3,564 (6,695) 540,600
Comprehensive income:
Net income ....................................... -- -- 101,271 -- -- -- 101,271
Other comprehensive income, net of tax:
Unrealized gains on securities
available for sale, net of tax of $1,052 ....... -- -- -- -- 1,871 --
Less reclassification adjustment for gains
included in net income, net of tax of $(524) ... -- -- -- -- (895) --
Foreign currency translation adjustment .......... -- -- -- -- (509) --
---------
Other comprehensive income ....................... -- -- -- -- 467 -- 467
--------- ---------
Total comprehensive income ....................... -- -- -- -- -- -- 101,738
Cash dividends ................................... -- -- (53,271) -- -- -- (53,271)
Effect of stock incentive plan, net .............. 56 (392) (850) -- -- 3,713 2,527
Common stock repurchased and retired ............. (65) -- (349) -- -- -- (414)
Allocation of employee benefit plan shares ....... -- 381 -- 273 -- -- 654
Issuance of shares from treasury ................. 89 1,090 -- -- -- 3,454 4,633
Purchase of treasury stock ....................... -- -- -- -- -- (6,658) (6,658)
--------- --------- --------- --------- --------- --------- ---------
Balance-December 31, 1998 ....................... 26,079 331,337 235,879 (1,331) 4,031 (6,186) 589,809
Comprehensive income:
Net income ....................................... -- -- 106,324 -- -- -- 106,324
Other comprehensive loss, net of tax:
Unrealized (losses) on securities
available for sale, net of tax of $(13,095) .... -- -- -- -- (19,591) --
Less reclassification adjustment for gains
included in net income, net of tax of $(925) ... -- -- -- -- (1,607) --
Foreign currency translation adjustment .......... -- -- -- -- 434 --
---------
Other comprehensive loss ......................... -- -- -- -- (20,764) -- (20,764)
--------- ---------
Total comprehensive income ....................... -- -- -- -- -- -- 85,560
Cash dividends ................................... -- -- (60,019) -- -- -- (60,019)
Effect of stock incentive plan, net .............. (8) (151) (1,522) -- -- 4,067 2,386
Stock dividend ................................... (128) (7,164) (36,057) -- -- 44,207 858
Allocation of employee benefit plan shares ....... -- 1,125 -- 366 -- 370 1,861
Purchase of treasury stock ....................... -- -- -- -- -- (66,955) (66,955)
--------- --------- --------- --------- --------- --------- ---------
Balance-December 31, 1999 ....................... $ 25,943 $ 325,147 $ 244,605 $ (965) $ (16,733) $ (24,497) $ 553,500
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net income ........................................................................ $ 106,324 $ 101,271 $ 90,151
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................................... 12,877 14,897 12,934
Amortization of compensation costs pursuant to long-term
stock incentive plan ............................................................ 1,091 1,036 898
Provision for loan losses ......................................................... 9,120 12,645 13,130
Net amortization of premiums and accretion of discounts ........................... 4,187 3,312 1,105
Net deferred income tax (benefit) expense ......................................... (255) (2,540) 3,238
Net gains on securities transactions .............................................. (2,532) (1,419) (2,136)
Proceeds from sales of loans ...................................................... 76,113 181,020 49,972
Gain on sales of loans ............................................................ (2,491) (4,863) (3,634)
Proceeds from recoveries of previously charged-off loans .......................... 3,490 3,789 2,120
Net (increase)decrease in accrued interest receivable and other assets ............ (19,960) 4,864 8,754
Net increase(decrease) in accrued expenses and other liabilities .................. 25,475 (3,334) (496)
--------- --------- ---------
Net cash provided by operating activities ......................................... 213,439 310,678 176,036
--------- --------- ---------
Cash flows from investing activities:
Purchases and originations of mortgage servicing rights ........................... (20,419) (12,101) (3,905)
Proceeds from sales of investment securities available for sale ................... 28,317 113,597 186,383
Proceeds from maturing investment securities available for sale ................... 412,335 418,068 236,888
Purchases of investment securities available for sale ............................. (416,297) (416,359) (401,394)
Purchases of investment securities held to maturity ............................... (161,986) (153,486) (39,402)
Proceeds from maturing investment securities held to maturity ..................... 53,993 71,734 78,549
Proceeds from sales of trading account securities ................................. 1,415 -- --
Net (increase) decrease in federal funds sold and other short- term
investments ...................................................................... (14,900) (63,975) 61,255
Net increase in loans made to customers ........................................... (492,856) (365,798) (250,239)
Purchases of premises and equipment, net of sales ................................. (9,577) (10,698) (12,753)
--------- --------- ---------
Net cash used in investing activities ............................................. (619,975) (419,018) (144,618)
--------- --------- ---------
Cash flows from financing activities:
Net increase(decrease) in deposits ................................................ 81,106 118,068 (134,660)
Net increase(decrease) in short-term borrowings ................................... 71,448 (998) 18,074
Advances of long-term debt ........................................................ 402,000 120,000 92,500
Repayments of long-term debt ...................................................... (50,068) (53,063) (8,559)
Dividends paid to common shareholders ............................................. (58,126) (51,189) (43,696)
Addition of common shares to treasury ............................................. (66,955) (6,658) (4,417)
Purchase of shares for stock incentive plan ....................................... -- -- (1,450)
Common stock issued, net of cancellations ......................................... 2,771 6,931 1,194
--------- --------- ---------
Net cash provided by (used in) financing activities ............................... 382,176 133,091 (81,014)
--------- --------- ---------
Net (decrease)increase in cash and cash equivalents ............................... (24,360) 24,751 (49,596)
Cash and cash equivalents at beginning of year .................................... 185,921 161,170 210,766
--------- --------- ---------
Cash and cash equivalents at end of year .......................................... $ 161,561 $ 185,921 $ 161,170
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest on deposits and borrowings $ 168,146 $ 169,081 $ 173,197
Cash paid during the year for federal and state income taxes 55,047 32,516 30,094
Transfer of securities from held to maturity to available for sale 42,387 1,592 39,833
See accompanying notes to consolidated financial statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1)
Business
Valley National Bancorp ("Valley") is a bank holding company whose
principal wholly-owned subsidiary is Valley National Bank ("VNB"), a national
banking association providing a full range of commercial, retail and trust and
investment services through its branch and ATM network throughout northern New
Jersey. VNB also lends through its consumer division and SBA program to
borrowers covering territories outside of its branch network and New Jersey. VNB
is subject to intense competition from other financial services companies and is
subject to the regulation of certain federal and state agencies and undergoes
periodic examinations by certain regulatory authorities.
VNB has several wholly-owned subsidiaries which include a mortgage
servicing company, a company which holds, maintains and manages investment
assets for VNB, a subsidiary which owns and services auto loans, a subsidiary
which owns and services commercial mortgage loans, a title insurance company, an
asset management company which is an SEC registered investment advisor and an
Edge Act Corporation which is the holding company for a wholly-owned finance
company located in Toronto, Canada. The mortgage servicing company services
loans for others as well as VNB.
Basis of Presentation
The consolidated financial statements of Valley include the accounts of its
principal commercial bank subsidiary, VNB and its wholly-owned subsidiaries. All
material intercompany transactions and balances have been eliminated. The
financial statements of prior years have been restated to include Ramapo
Financial Corporation, which was acquired on June 11, 1999, in a transaction
accounted for as a pooling of interests. Certain reclassifications have been
made in the consolidated financial statements for 1998 and 1997 to conform to
the classifications presented for 1999.
In preparing the consolidated financial statements, management has made
estimates and assumptions that effect the reported amounts of assets and
liabilities as of the date of the statements of condition and results of
operations for the periods indicated. Actual results could differ significantly
from those estimates.
Investment Securities
Investments are classified into three categories: held to maturity;
available for sale; and trading. Valley's investment portfolio consists of each
of these three categories.
Investment securities held to maturity, except for equity securities, are
carried at cost and adjusted for amortization of premiums and accretion of
discounts by using the interest method over the term of the investment.
Management has identified those investment securities which may be sold
prior to maturity. These investment securities are classified as available for
sale in the accompanying consolidated statements of financial condition and are
recorded at fair value on an aggregate basis. Unrealized holding gains and
losses on such securities are excluded from earnings, but are included as a
component of accumulated other comprehensive income which is included in
shareholders' equity, net of deferred tax. Realized gains or losses on the sale
of investment securities available for sale are recognized by the specific
identification method and shown as a separate component of non-interest income.
Trading securities are recorded at market value. Included in non-interest
income are unrealized gains (losses) resulting from market value adjustments.
Loans and Loan Fees
Loan origination and commitment fees, net of related costs, are deferred
and amortized as an adjustment of loan yield over the estimated life of the
loans approximating the effective interest method.
Loans held for sale consist of residential mortgage loans and SBA loans,
and are carried at the lower of cost or estimated fair market value using the
aggregate method.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest income is not accrued on loans where interest or principal is 90
days or more past due or if in management's judgement the ultimate
collectibility of the interest is doubtful. Exceptions may be made if the loan
is sufficiently collateralized and in the process of collection. When a loan is
placed on non-accrual status, interest accruals cease and uncollected accrued
interest is reversed and charged against current income. Payments received on
non-accrual loans are applied against principal. A loan may only be restored to
an accruing basis when it becomes well secured and in the process of collection
and all past due amounts have been collected.
The value of an impaired loan is measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral if the loan is collateral dependent. Smaller
balance homogeneous loans that are collectively evaluated for impairment, such
as residential mortgage loans and installment loans, are specifically excluded
from the impaired loan portfolio. Valley has defined the population of impaired
loans to be all non-accrual loans and other loans considered to be impaired as
to principal and interest, consisting primarily of commercial real estate loans.
The impaired loan portfolio is primarily collateral dependent. Impaired loans
are individually assessed to determine that each loan's carrying value is not in
excess of the fair value of the related collateral or the present value of the
expected future cash flows.
Valley originates loans guaranteed by the SBA. The principal amount of
these loans is guaranteed between 75 percent and 80 percent, subject to certain
dollar limitations. Valley generally sells the guaranteed portions of these
loans and retains the unguaranteed portions as well as the rights to service the
loans. Gains are recorded on loan sales based on the cash proceeds in excess of
the assigned value of the loan, as well as the value assigned to the rights to
service the loan.
Credit card loans primarily represent revolving MasterCard credit card
loans. Interest on credit card loans is recognized based on the balances
outstanding according to the related card member agreements. Direct origination
costs are deferred and amortized over 24 months, the term of the card member
agreement, on a straight-line basis. Net direct origination costs include costs
associated with credit card originations that are incurred in transactions with
independent third parties and certain costs relating to loan origination
programs and the preparation and processing of loan documents, net of fees
received. Ineligible direct origination costs are expensed as incurred.
Valley's lending is primarily in northern New Jersey, with the exception of
an out-of-state auto lending program.
Allowance for Loan Losses
The allowance for loan losses ("allowance") is increased through provisions
charged against current earnings and additionally by crediting amounts of
recoveries received, if any, on previously charged-off loans. The allowance is
reduced by charge-offs on loans which are determined to be a loss, in accordance
with established policies, when all efforts of collection have been exhausted.
The allowance for loan losses is maintained at a level estimated to absorb
loan losses inherent in the loan portfolio as well as other credit risk related
charge-offs. The allowance is based on ongoing evaluations of the probable
estimated losses inherent in the loan portfolio and unused commitments to
provide financing. VNB's methodology for evaluating the appropriateness of the
allowance consists of several significant elements, which include the allocated
allowance, specific allowances for identified problem loans and portfolio
segments and the unallocated allowance. The allowance also incorporates the
results of measuring impaired loans as called for in Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan."
VNB's allocated allowance is calculated by applying loss factors to
outstanding loans as well as certain unused commitments. The formula is based on
the internal risk grade of loans, pools of loans, or commitments. Any change in
the risk grade of performing and/or non-performing loans affects the amount of
the related allowance. Loss factors are based on VNB's historical loss
experience and may be adjusted for
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
significant circumstances that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date.
Management determines the unallocated portion of the allowance based on
factors that cannot be associated with a specific credit or loan category. These
factors include management's evaluation of local and national economic and
business conditions, changes in portfolio composition, portfolio concentrations,
credit quality and delinquency trends. The unallocated portion of the allowance
reflects management's attempt to ensure that the overall allowance reflects a
margin for the uncertainty that is inherent in estimates of expected credit
losses.
Premises and Equipment, Net
Premises and equipment are stated at cost less accumulated depreciation
computed using the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are stated at cost less accumulated
amortization computed on a straight-line basis over the term of the lease or
estimated useful life of the asset, whichever is shorter. Major improvements are
capitalized, while repairs and maintenance costs are charged to operations as
incurred. Upon retirement or disposition, any gain or loss is credited or
charged to operations.
Other Real Estate Owned
Other real estate owned ("OREO"), acquired through foreclosure on loans
secured by real estate, is reported at the lower of cost or fair value, as
established by a current appraisal, less estimated costs to sell, and is
included in other assets. Any write-downs at the date of foreclosure are charged
to the allowance for loan losses.
An allowance for OREO has been established to record subsequent declines in
estimated net realizable value. Expenses incurred to maintain these properties
and realized gains and losses upon sale of the properties are included in other
non-interest expense and other non-interest income, as appropriate.
Intangible Assets
Intangible assets resulting from acquisitions under the purchase method of
accounting consist of goodwill and core deposit intangibles. Goodwill recorded
prior to 1987 is being amortized on a straight-line basis over 25 years.
Goodwill recorded in 1999 is being amortized on a straight-line basis over 10
years. Core deposit intangibles are amortized on accelerated methods over the
estimated lives of the assets. Goodwill and core deposit intangibles are
included in other assets.
Loan Servicing Rights
Loan servicing rights are generally recorded when purchased or originated
loans are sold, with servicing rights retained. The cost of each loan is
allocated between the servicing right and the loan (without the servicing right)
based on their relative fair values. Loan servicing rights, which are classified
in other assets, are amortized over the estimated net servicing life and are
evaluated on a quarterly basis for impairment based on their fair value. The
fair value is estimated using the present value of expected future cash flows
along with numerous assumptions including servicing income, cost of servicing,
discount rates, prepayment speeds, and default rates. Impairment adjustments, if
any, are recognized through the use of a valuation allowance.
Stock-Based Compensation
Valley accounts for its stock option plan in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25"). In accordance with APB 25, no compensation expense is recognized for stock
options issued to employees since the options have an exercise price equal to
the market value of the common stock on the day of the grant. Valley provides
the fair market disclosure required by Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock-based Compensation."
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" established standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Valley's components of other comprehensive income include unrealized
gains (losses) on securities available for sale, net of tax, and foreign
currency translation adjustment. Valley provides the required disclosure in the
Consolidated Statements of Changes in Shareholders' Equity.
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 potentially dilutive common stock equivalents utilizing the
treasury stock method. For Valley, common stock equivalents are common stock
options outstanding.
All share and per share amounts have been restated to reflect the 5 percent
stock dividend issued May 18, 1999, and all prior stock dividends and splits.
The following table shows the calculation of both Basic and Diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997.
Years ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands, except for share data)
Net income .......................................... $ 106,324 $ 101,271 $ 90,151
=========== =========== ===========
Basic weighted-average number of shares outstanding . 60,697,186 61,360,325 61,266,111
Plus: Common stock equivalents ...................... 608,487 824,775 546,435
----------- ----------- -----------
Diluted weighted-average number of shares outstanding 61,305,673 62,185,100 61,812,546
=========== =========== ===========
Earnings per share:
Basic .............................................. $ 1.75 $ 1.65 $ 1.47
Diluted ............................................ 1.73 1.63 1.46
At December 31, 1999 there were 259 thousand stock options not included as
common stock equivalents because the exercise prices exceeded the average market
value.
Treasury Stock
Treasury stock is recorded using the cost method and accordingly is
presented as an unallocated reduction of shareholders' equity.
Impact of Future Accounting Changes
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued by
the 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 condition at fair value. Valley would
have had to adopt SFAS No. 133 by January 1, 2000.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
However, SFAS No. 137 extended the adoption of SFAS No. 133 to periods beginning
after June 15, 2000. Upon 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.
ACQUISITIONS (Note 2)
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 eight 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 period presented. Separate results of the combining companies for the
years ended December 31, 1998 and 1997 are as follows:
1998 1997
-------- --------
(in thousands)
Net interest income after provision for loan losses:
Valley ................................................ $217,182 $208,549
Ramapo ................................................ 13,808 12,957
-------- --------
$230,990 $221,506
======== ========
Net income:
Valley ................................................ $ 97,348 $ 86,946
Ramapo ................................................ 3,923 3,205
-------- --------
$101,271 $ 90,151
======== ========
During the second quarter of 1999, Valley recorded a merger-related charge
of $3.0 million related to the acquisition of Ramapo. On an after tax basis, the
charge totaled $2.2 million or $0.04 per diluted share. The charge includes only
identified direct and incremental costs associated with this acquisition. Items
included in the charge include the following: personnel expenses which include
severance payments and benefits for terminated employees, principally, two
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 termination of data processing
service contracts and the write-off of supplies and other assets not considered
useful in the operation of the combined entity. The major components of the
merger-related charge, 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 charge $2.6 million, or 89.6 percent was paid through December
31, 1999. The remaining liability represents contracts which will be paid over
their remaining terms.
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 for $784 thousand and began to sell
both commercial and residential title insurance policies. The transaction was
accounted for as a purchase and resulted in goodwill of $728 thousand.
On July 30, 1999, Valley acquired New Century Asset Management, Inc., a
registered investment advisor and NJ-based money manager with approximately $120
million of assets under management. At closing, Valley paid an initial
consideration of $640 thousand. The balance due will be paid on an earn-out
basis over a five-year period, based upon a pre-determined formula. New Century
will continue its operations as a wholly-owned subsidiary of Valley National
Bank. The transaction was accounted for as a purchase and resulted in goodwill
of $1.3 million.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On October 16, 1998, Valley acquired Wayne Bancorp, Inc. ("Wayne"), parent
of Wayne Savings Bank, F.S.B., headquartered in Wayne, New Jersey. At the date
of acquisition, Wayne had total assets of $272.0 million and deposits of $206.0
million, with six branch offices. The transaction was accounted for using the
pooling of interests method of accounting and resulted in the issuance of
approximately 2.4 million shares of Valley common stock. Each share of common
stock of Wayne was exchanged for 1.1 shares of Valley common stock. The
consolidated financial statements of Valley have been restated to include Wayne
for all periods presented.
During 1998, Valley recorded a merger-related charge of $4.5 million,
related to the acquisition of Wayne. On an after tax basis, the charge totaled
$3.2 million or $0.05 per diluted share. The charge includes only identified
direct and incremental costs associated with this acquisition. Items included in
the charge include the following: personnel expenses which include severance
payments and benefits for terminated employees, principally, ten senior
executives and directors at Wayne; real estate expenses related to the closing
of duplicate facilities, professional fees which include investment banking,
accounting and legal fees; and other expenses which include termination of data
processing service contracts and the write-off of supplies and other assets not
considered useful in the operation of the combined entity. The major components
of the merger-related charge are for real estate dispositions, professional
fees, personnel expenses and other expenses total $1.5 million, $1.4 million,
$1.0 million and $600 thousand, respectively. Of the total merger-related
charge, $3.8 million or 83.9 percent was paid through December 31, 1999. The
remaining liability represents contracts which will be paid over their remaining
terms.
On February 28, 1997, Valley acquired Midland Bancorporation, Inc.
("Midland"), parent of The Midland Bank and Trust Company ("Midland Bank"),
headquartered in Paramus, New Jersey. On February 28, 1997, Midland had total
assets of $418.6 million and deposits of $380.6 million, with 13 branches
located in Bergen County, New Jersey. The transaction was accounted for using
the pooling of interests method of accounting and resulted in the issuance of
approximately 5.0 million shares of Valley common stock. Each share of common
stock of Midland was exchanged for 37.5 shares of Valley common stock. The
consolidated financial statements of Valley have been restated to include
Midland for all periods presented.
INVESTMENT SECURITIES HELD TO MATURITY (Note 3)
The amortized cost, fair value and gross unrealized gains and losses of
securities held to maturity at December 31, 1999 and 1998 were as follows:
December 31, 1999
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(in thousands)
Obligations of states and political subdivisions $ 28,729 $ 141 $ (4) $ 28,866
Mortgage-backed securities ..................... 46,599 174 (300) 46,473
Other debt securities .......................... 249,936 -- (33,183) 216,753
-------- -------- -------- --------
Total debt securities ......................... 325,264 315 (33,487) 292,092
FRB & FHLB stock ............................... 26,237 -- -- 26,237
-------- -------- -------- --------
Total investment securities held to maturity .. $351,501 $ 315 $(33,487) $318,329
======== ======== ======== ========
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1998
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(in thousands)
U.S. Treasury securities and other government
agencies and corporations .................... $ 34,451 $ 281 $ (130) $ 34,602
Obligations of states and political subdivisions 45,550 641 (15) 46,176
Mortgage-backed securities ..................... 67,561 1,404 (40) 68,925
Other debt securities .......................... 115,148 86 (805) 114,429
-------- -------- -------- --------
Total debt securities ......................... 262,710 2,412 (990) 264,132
FRB & FHLB stock ............................... 24,180 -- -- 24,180
-------- --------
Total investment securities held to maturity .. $286,890 $ 2,412 $ (990) $288,312
======== ======== ======== ========
The contractual maturities of investments in debt securities held to
maturity at December 31, 1999, are set forth in the following table:
December 31, 1999
----------------------
Amortized Fair
Cost Value
-------- --------
(in thousands)
Due in one year ...................................... $ 23,380 $ 23,428
Due after one year through five years ................ 4,889 4,975
Due after five years through ten years ............... 50 50
Due after ten years .................................. 250,346 217,166
-------- --------
278,665 245,619
Mortgage-backed securities ........................... 46,599 46,473
-------- --------
Total debt securities .............................. 325,264 292,092
FRB & FHLB stock ..................................... 26,237 26,237
Total investment securities held to maturity ....... $351,501 $318,329
======== ========
Actual maturities of debt securities may differ from those presented above
since certain obligations provide the issuer the right to call or prepay the
obligation prior to scheduled maturity without penalty. FRB and FHLB stock do
not have contractual maturities.
The weighted-average remaining life for mortgage-backed securities held to
maturity was 3.0 years at December 31, 1999, and 2.2 years at December 31, 1998.
The amortized cost of securities pledged to secure public deposits,
treasury tax and loan deposits, repurchase agreements and for other purposes
required by law approximated $289.2 million and $133.0 million at December 31,
1999 and 1998, respectively.
In connection with the Ramapo acquisition, Valley reassessed the
classification of securities held in the Ramapo investment portfolio and
transferred $42.4 million of securities held to maturity to securities available
for sale to conform to Valley's investment objectives. In 1998, in connection
with the Wayne acquisition, Valley reassessed the classification of securities
held in the Wayne portfolio and transferred $1.6 million of securities held to
maturity to securities available for sale to conform with Valley's investment
objectives. In 1997, in connection with the Midland acquisition, Valley
reassessed the classification of securities held in the Midland investment
portfolio and transferred $39.8 million of securities held to maturity to
securities available for sale to conform to Valley's investment objectives.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
INVESTMENT SECURITIES AVAILABLE FOR SALE (Note 4)
The amortized cost, fair value and gross unrealized gains and losses of
securities available for sale at December 31, 1999 and 1998 were as follows:
December 31, 1999
------------------------
Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(in thousands)
U.S. Treasury securities and other government
agencies and corporations ...................... $ 115,750 $ 2 $ (3,102) $ 112,650
Obligations of states and political subdivisions 135,659 505 (2,600) 133,564
Mortgage-backed securities ..................... 751,262 227 (21,358) 730,131
---------- ---------- ---------- ----------
Total debt securities ........................ 1,002,671 734 (27,060) 976,345
Equity securities .............................. 30,172 1,252 (2,350) 29,074
---------- ---------- ---------- ----------
Total investment securities available for sale $1,032,843 $ 1,986 $ (29,410) $1,005,419
========== ========== ========== ==========
December 31, 1998
------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(in thousands)
U.S. Treasury securities and other government
agencies and corporations ...................... $ 153,767 $ 505 $ (247) $ 154,025
Obligations of states and political subdivisions 116,326 1,980 (11) 118,295
Mortgage-backed securities ..................... 718,926 4,242 (3,378) 719,790
---------- ---------- ---------- ----------
Total debt securities ........................ 989,019 6,727 (3,636) 992,110
Equity securities .............................. 26,284 4,976 (182) 31,078
---------- ---------- ---------- ----------
Total investment securities available for sale $1,015,303 $ 11,703 $ (3,818) $1,023,188
========== ========== ========== ==========
The contractual maturities of investments in debt securities available for
sale at December 31, 1999, are set forth in the following table:
December 31, 1999
------------------------
Amortized Fair
Cost Value
---------- ----------
(in thousands)
Due in one year .................................... $ 39,556 $ 39,509
Due after one year through five years .............. 146,661 143,600
Due after five years through ten years ............. 29,563 28,363
Due after ten years ................................ 35,629 34,742
---------- ----------
251,409 246,214
Mortgage-backed securities ......................... 751,262 730,131
---------- ----------
Total debt securities ............................ 1,002,671 976,345
Equity securities .................................. 30,172 29,074
---------- ----------
Total investment securities available for sale ... $1,032,843 $1,005,419
========== ==========
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Actual maturities on debt securities may differ from those presented above
since certain obligations provide the issuer the right to call or prepay the
obligation prior to scheduled maturity without penalty. Equity securities do not
have contractual maturities.
The weighted-average remaining life for mortgage-backed securities
available for sale at December 31, 1999 and 1998 was 5.7 years and 2.3 years,
respectively.
Gross gains (losses) realized on sales, maturities and other securities
transactions, related to securities available for sale, and (losses) gains on
trading account securities included in earnings for the years ended December 31,
1999, 1998 and 1997 were as follows:
1999 1998 1997
------- ------- -------
(in thousands)
Sales transactions:
Gross gains .................................. $ 2,870 $ 724 $ 2,375
Gross losses ................................. (138) (21) (224)
------- ------- -------
2,732 703 2,151
------- ------- -------
Maturities and other securities transactions:
Gross gains .................................. -- 124 10
Gross losses ................................. (23) -- (25)
------- ------- -------
(23) 124 (15)
------- ------- -------
(Losses)gains on trading account securities ... (177) 592 --
------- ------- -------
Gains on securities transactions, net ........ $ 2,532 $ 1,419 $ 2,136
======= ======= =======
Cash proceeds from sales transactions were $29.7 million, $113.6 million
and $186.4 million for the years ended 1999, 1998 and 1997, respectively. For
1999 cash proceeds include $1.4 million from sales of trading account
securities.
LOANS (Note 5)
The detail of the loan portfolio as of December 31, 1999 and 1998 was as
follows:
1999 1998
---------- ----------
(in thousands)
Commercial ............................... $ 512,164 $ 477,231
---------- ----------
Total commercial loans ................. 512,164 477,231
---------- ----------
Construction ............................. 123,531 112,819
Residential mortgage ..................... 1,247,721 1,055,278
Commercial mortgage ...................... 1,164,065 1,050,420
---------- ----------
Total mortgage loans ................... 2,535,317 2,218,517
---------- ----------
Home equity .............................. 276,261 226,231
Credit card .............................. 92,097 108,180
Automobile ............................... 1,053,457 1,033,938
Other consumer ........................... 85,456 83,552
---------- ----------
Total consumer loans ................... 1,507,271 1,451,901
---------- ----------
Total loans ............................. $4,554,752 $4,147,649
========== ==========
Included in the table above are loans held for sale in the amount of $12.2
million and $23.5 million at December 31, 1999 and 1998, respectively.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
VNB grants loans in the ordinary course of business to its directors,
executive officers and their affiliates, on the same terms and under the same
risk conditions as those prevailing for comparable transactions with outside
borrowers.
The following table summarizes the change in the total amounts of loans and
advances to directors, executive officers, and their affiliates during the year
1999:
1999
--------
(in thousands)
Outstanding at beginning of year ...................... $ 24,904
New loans and advances ................................ 11,329
Repayments ............................................ (10,440)
--------
Outstanding at end of year ............................ $ 25,793
========
The outstanding balances of loans which are 90 days or more past due as to
principal or interest payments and still accruing and non-performing assets at
December 31, 1999 and 1998 were as follows:
1999 1998
------- -------
(in thousands)
Loans past due in excess of 90 days and still accruing ... $11,968 $ 7,418
======= =======
Non-accrual loans ........................................ $ 3,482 $ 7,507
Other real estate owned .................................. 2,256 4,261
------- -------
Total non-performing assets ............................ $ 5,738 $11,768
======= =======
Troubled debt restructured loans ......................... $ 4,852 $ 6,387
======= =======
The amount of interest income that would have been recorded on non-accrual
loans in 1999, 1998 and 1997 had payments remained in accordance with the
original contractual terms approximated $619 thousand, $1.4 million and $2.0
million, while the actual amount of interest income recorded on these types of
assets in 1999, 1998 and 1997 totalled $1.3 million, $375 thousand and $454
thousand, resulting in (recovered) lost interest income of ($720) thousand, $1.0
million, and $1.6 million, respectively.
At December 31, 1999, there were no commitments to lend additional funds to
borrowers whose loans were non-accrual or contractually past due in excess of 90
days and still accruing interest.
The impaired loan portfolio is primarily collateral dependent. Impaired
loans and their related specific and general allocations to the allowance for
loan losses totalled $13.4 million and $1.8 million, respectively, at December
31, 1999 and $13.4 million and $4.6 million, respectively, at December 31, 1998.
The average balance of impaired loans during 1999 and 1998 was approximately
$13.2 million and $15.1 million, respectively. The amount of cash basis interest
income that was recognized on impaired loans during 1999 and 1998 was $559
thousand and $1.1 million, respectively.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
ALLOWANCE FOR LOAN LOSSES (Note 6)
Transactions in the allowance for loan losses during 1999, 1998 and 1997
were as follows:
1999 1998 1997
-------- -------- --------
(in thousands)
Balance at beginning of year ............... $ 54,641 $ 53,170 $ 52,926
Provision charged to operating expense ..... 9,120 12,645 13,130
-------- -------- --------
63,761 65,815 66,056
-------- -------- --------
Less net loan charge-offs:
Loans charged-off ......................... (12,131) (14,963) (15,006)
Less recoveries on loan charge-offs ....... 3,490 3,789 2,120
-------- -------- --------
Net loan charge-offs ....................... (8,641) (11,174) (12,886)
-------- -------- --------
Balance at end of year ..................... $ 55,120 $ 54,641 $ 53,170
======== ======== ========
LOAN SERVICING (Note 7)
VNB Mortgage Services, Inc. ("MSI"), a subsidiary of VNB, is a servicer of
residential mortgage loan portfolios. MSI is compensated for loan administrative
services performed for mortgage servicing rights purchased in the secondary
market and originated by VNB. The aggregate principal balances of mortgage loans
serviced by MSI for others approximated $2.2 billion, $1.6 billion and $1.2
billion at December 31, 1999, 1998 and 1997, respectively. The outstanding
balance of loans serviced for others is not included in the consolidated
statements of financial condition.
VNB is a servicer of SBA loans, and is compensated for loan administrative
services performed for SBA loans originated and sold by VNB. VNB serviced a
total of $89.0 million and $78.1 million of SBA loans as of December 31, 1999
and 1998, respectively, for third-party investors.
The costs associated with acquiring loan servicing rights are included in
other assets in the consolidated financial statements and are being amortized
over the estimated net servicing income.
The following table summarizes the change in loan servicing rights during
the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
-------- -------- --------
(in thousands)
Balance at beginning of year .................... $ 20,765 $ 13,514 $ 12,270
Purchase and origination of loan servicing rights 20,419 11,986 3,905
Amortization expense ............................ (4,375) (4,735) (2,661)
-------- -------- --------
Balance at end of year .......................... $ 36,809 $ 20,765 $ 13,514
======== ======== ========
Amortization expense is included in amortization of intangible assets. The
table above includes $9.6 million of servicing rights purchased at the end of
1999.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
PREMISES AND EQUIPMENT, NET (Note 8)
At December 31, 1999 and 1998, premises and equipment, net consisted of:
1999 1998
--------- ---------
(in thousands)
Land ............................................... $ 19,531 $ 18,583
Buildings .......................................... 56,147 54,273
Leasehold improvements ............................. 16,639 14,871
Furniture and equipment ............................ 72,770 66,714
--------- ---------
165,087 154,441
Less: Accumulated depreciation and amortization .... (80,297) (71,633)
--------- ---------
Premises and equipment, net ........................ $ 84,790 $ 82,808
========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation and amortization included in non-interest expense for the
years ended December 31, 1999, 1998 and 1997 amounted to approximately $7.6
million, $9.0 million and $9.5 million, respectively.
OTHER ASSETS (Note 9)
At December 31, 1999 and 1998, other assets consisted of the following:
1999 1998
------- -------
(in thousands)
Loan servicing rights ...................... $36,809 $20,765
Goodwill ................................... 4,393 2,673
Core deposit intangible .................... 1,142 1,711
Other real estate owned .................... 2,256 4,261
Deferred tax asset ......................... 31,757 17,482
Other ...................................... 22,630 18,373
------- -------
Total other assets ......................... $98,987 $65,265
======= =======
DEPOSITS (Note 10)
Included in time deposits at December 31, 1999 and 1998 are certificates of
deposit over $100 thousand of $647.3 million and $419.4 million, respectively.
Interest expense on time deposits of $100 thousand or more totalled
approximately $27.9 million, $20.2 million and $27.2 million in 1999, 1998 and
1997, respectively.
The scheduled maturities of time deposits as of December 31, 1999 are as
follows:
(in thousands)
2000 ............................................ $1,628,209
2001 ............................................ 314,370
2002 ............................................ 86,353
2003 ............................................ 30,074
2004 ............................................ 9,255
Thereafter ...................................... 33,448
----------
$2,101,709
==========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
BORROWED FUNDS (Note 11)
Short-term borrowings at December 31, 1999 and 1998 consisted of the
following:
1999 1998
-------- --------
(in thousands)
Federal funds purchased .............................. $ 9,990 $ --
Securities sold under agreements to repurchase ....... 59,436 34,950
Treasury tax and loan ................................ 40,000 9,990
Bankers acceptances .................................. 19,639 12,677
-------- --------
Total short-term borrowings ........................ $129,065 $ 57,617
======== ========
At December 31, 1999 and 1998, long-term debt consisted of the following:
1999 1998
-------- --------
(in thousands)
FHLB advances ........................................ $464,500 $212,500
Securities sold under agreements to repurchase ....... 100,000 --
Other ................................................ 381 449
-------- --------
Total long-term debt ............................... $564,881 $212,949
======== ========
The Federal Home Loan Bank (FHLB) advances had a weighted average interest
rate of 5.93 percent at December 31, 1999 and 5.89 percent at December 31, 1998.
These advances are secured by pledges of FHLB stock, mortgage-backed securities
and a blanket assignment of qualifying mortgage loans. The advances are
scheduled for repayment as follows:
(in thousands)
2000 ............................................ $103,000
2001 ............................................ 27,000
2002 ............................................ 17,000
2003 ............................................ 82,000
2004 ............................................ 102,000
Thereafter ...................................... 133,500
--------
$464,500
========
Interest expense of $21.7 million, $8.8 million and $5.4 million was
recorded on FHLB advances during the years ended December 31, 1999, 1998 and
1997, respectively.
The securities sold under agreements to repurchase included in long-term
debt had a weighted average interest rate of 6.22 percent at December 31, 1999
and are scheduled for repayment in 2002. Interest expense of $942 thousand was
recorded on this debt during the year ended December 31, 1999.
At December 31, 1999, Valley maintained a floating rate revolving line of
credit in the amount of $25 million, none of which was drawn. This line is
available for general corporate purposes and expires June 15, 2000. Borrowings
under this facility are collateralized by mortgage-backed securities of no less
than 120 percent of the loan balance.
BENEFIT PLANS (Note 12)
Pension Plan
VNB has a non-contributory benefit plan covering substantially all of its
employees. The benefits are based upon years of credited service, primary social
security benefits and the employee's highest average compensation as defined. It
is VNB's funding policy to contribute annually the maximum amount that can be
deducted for federal income tax purposes. In addition, VNB has a supplemental
non-qualified, non-funded retirement plan which is designed to supplement the
pension plan for key officers.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth change in projected benefit obligation,
change in fair value of plan assets, funded status and amounts recognized in
Valley's financial statements for the pension plans at December 31, 1999 and
1998:
1999 1998
-------- --------
(in thousands)
Change in projected benefit obligation
Projected benefit obligation at beginning of year .... $ 19,973 $ 18,236
Service cost ........................................ 1,590 1,346
Interest cost ....................................... 1,353 1,212
Actuarial (gain) loss ............................... (2,626) 145
Benefits paid ....................................... (1,083) (966)
-------- --------
Projected benefit obligation at end of year .......... $ 19,207 $ 19,973
======== ========
Change in fair value of plan assets
Fair value of plan assets at beginning of year ....... $ 23,430 $ 21,638
Actual return on plan assets ........................ 1,504 2,758
Employer contributions .............................. 468 --
Benefits paid ....................................... (1,083) (966)
-------- --------
Fair value of plan assets at end of year ............. $ 24,319 $ 23,430
======== ========
Funded status ........................................ $ 5,112 $ 3,457
Unrecognized net asset ............................... (308) (365)
Unrecognized prior service cost ...................... 262 367
Unrecognized net actuarial gain ...................... (9,158) (7,677)
Intangible asset ..................................... -- (79)
-------- --------
Accrued benefit cost ................................. $ (4,092) $ (4,297)
======== ========
Net periodic pension expense for 1999, 1998 and 1997 included the following
components:
1999 1998 1997
------- ------- -------
(in thousands)
Service cost ............................ $ 1,590 $ 1,346 $ 1,095
Interest cost ........................... 1,353 1,212 1,191
Expected return on plan assets .......... (1,982) (1,673) (1,320)
Net amortization and deferral ........... (12) (56) 71
Recognized prior service cost ........... 38 105 118
Recognized net gains .................... (631) (191) (33)
------- ------- -------
Total net periodic pension expense ...... $ 356 $ 743 $ 1,122
======= ======= =======
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of benefit
obligations for the plan were 7.75 percent and 4.50 percent, respectively, for
1999 and 6.75 percent and 5.00 percent for 1998. The expected long-term rate of
return on assets was 9.50 percent for 1999 and 9.00 percent for 1998 and the
weighted average discount rate used in computing pension cost was 6.75 percent
and 7.00 percent for 1999 and 1998, respectively. The pension plan held 52,333
shares of Valley National Bancorp stock at both December 31, 1999 and 1998.
Bonus Plan
VNB and its subsidiaries award incentive and merit bonuses to its officers
and employees based upon a percentage of the covered employees' compensation and
determined by the achievement of certain performance objectives. Amounts charged
to salaries expense during 1999, 1998 and 1997 were $3.1 million, $2.6 million
and $2.2 million, respectively.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Savings Plan
Effective May 1, 1999, VNB's 401(k) Plan was amended to merge the Employee
Stock Ownership Plan ("ESOP") from the acquisition of Wayne into the VNB 401(k)
Plan, creating a KSOP (a 401(k) plan with an employee stock ownership feature).
This plan covers eligible employees of VNB and its subsidiaries and allows
employees to contribute 1 percent to 15 percent of their salary, with VNB
matching a certain percentage of the employee contribution. Beginning in May
1999, the VNB match is in shares of Valley stock. In 1999, VNB matched employee
contributions with 29,260 shares, of which 15,292 shares were allocated from the
former Wayne ESOP Plan and 13,968 shares were issued from treasury stock. VNB
charged expense for contributions to the plan, net of forfeitures, for 1999,
1998 and 1997 amounting to $944 thousand, $746 thousand and $887 thousand,
respectively. At December 31, 1999 the KSOP had 112,488 unallocated shares.
In 1999, 1998 and 1997, 32,117 shares, 25,428 shares and 20,856 shares,
respectively, were allocated to participants of the former Wayne ESOP Plan. ESOP
expense for 1999, 1998 and 1997 was $865 thousand, $607 thousand and $357
thousand, respectively.
Stock Option Plan
At December 31, 1999, Valley had a stock option plan which is described
below. Valley applies APB Opinion No. 25 and related Interpretations in
accounting for its plan. Had compensation cost for the plan been determined
consistent with FASB Statement No. 123, net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
1999 1998 1997
----------- ----------- -----------
(in thousands except for share data)
Net income
As Reported ................. $ 106,324 $ 101,271 $ 90,151
Pro forma ................... 105,279 100,246 89,383
Earnings per share
As Reported:
Basic ...................... $ 1.75 $ 1.65 $ 1.47
Diluted .................... 1.73 1.63 1.46
Pro forma:
Basic ...................... $ 1.73 $ 1.63 $ 1.46
Diluted .................... 1.72 1.61 1.45
Under the Employee Stock Option Plan, Valley may grant options to its
employees for up to 2.6 million shares of common stock in the form of stock
options, stock appreciation rights and restricted stock awards. The exercise
price of options equal 100 percent of the market price of Valley's stock on the
date of grant, and an option's maximum term is ten years. The options granted
under this plan are exercisable not earlier than one year after the date of
grant, expire not more than ten years after the date of the grant, and are
subject to a vesting schedule. Non-qualified options granted by Midland and
assumed by Valley have no vesting period and a maximum term of fifteen years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: dividend yield of 3.71
percent for 1999 and 3.50 percent for 1998 and 1997; weighted-average risk-free
interest rate of 6.44 percent for 1999, 5.00 percent for 1998 and 5.75 percent
for 1997; and expected volatility of 21.8 percent for 1999, 18.5 percent for
1998 and 23.9 percent for 1997. The effects of applying SFAS No. 123 on the pro
forma net income may not be representative of the effects on pro forma net
income for future years.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the status of qualified and non-qualified stock options as of
December 31, 1999, 1998 and 1997 and changes during the years ended on those
dates is presented below:
1999 1998 1997
------------------------- ------------------------ ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
- ------------------------------- ---------- -------- ---------- -------- ---------- -----------
Outstanding at beginning of
year ....................... 2,021,597 $15 1,910,513 $14 1,541,421 $11
Granted ....................... 252,264 27 264,323 26 611,848 19
Exercised ..................... (448,599) 10 (131,755) 12 (219,687) 10
Forfeited ..................... (20,475) 24 (21,484) 21 (23,069) 17
---------- ---------- ----------
Outstanding at end of year .... 1,804,787 18 2,021,597 15 1,910,513 14
========== ========== ==========
Options exercisable at year-end 988,304 14 1,105,217 12 918,115 11
========== ========== ==========
Weighted-average fair value of
options granted during the
year ....................... $6.40 $5.34 $5.24
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ----------- -------------- ----------- --------------
$ 4-12 .................... 348,222 9.7 years $7 348,222 $7
12-19 .................... 701,927 5.8 16 487,902 16
19-24 .................... 225,836 7.8 23 86,742 23
24-29 .................... 528,802 9.2 26 65,438 26
--------- -------
4-29 .................... 1,804,787 7.8 18 988,304 14
========= =======
During 1998 and 1997, stock appreciation rights granted in tandem with
stock options were 10,894 and 11,439, respectively. There were 48,151, 48,151
and 37,257 stock appreciation rights outstanding as of December 31, 1999, 1998
and 1997, respectively.
Restricted stock is awarded to key employees providing for the immediate
award of Valley's common stock subject to certain vesting and restrictions. The
awards are recorded at fair market value and amortized into salary expense over
the vesting period. The following table sets forth the changes in restricted
stock awards outstanding for the years ended December 31, 1999, 1998 and 1997.
Restricted Stock Awards 1999 1998 1997
- -------------------------------------- -------- -------- --------
Outstanding at beginning of year ..... 207,578 203,342 109,145
Granted .............................. 58,477 58,299 133,965
Vested ............................... (55,788) (51,977) (33,180)
Forfeited ............................ (3,185) (2,086) (6,588)
-------- -------- --------
Outstanding at end of year ........... 207,082 207,578 203,342
======== ======== ========
The amount of compensation costs related to restricted stock awards
included in salary expense in 1999, 1998 and 1997 amounted to $1.1 million, $1.0
million and $717 thousand, respectively.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
INCOME TAXES (Note 13)
Income tax expense (benefit) included in the financial statements consisted
of the following:
1999 1998 1997
-------- -------- --------
(in thousands)
Income tax from operations:
Current:
Federal ........................... $ 50,434 $ 29,520 $ 32,292
State ............................ 2,041 3,400 1,773
-------- -------- --------
52,475 32,920 34,065
Deferred:
Federal and State ................. (255) (2,540) 3,238
-------- -------- --------
Total income tax expense ......... $ 52,220 $ 30,380 $ 37,303
======== ======== ========
The tax effects of temporary differences that gave rise to deferred tax
assets and liabilities as of December 31, 1999 and 1998 are as follows:
1999 1998
------- -------
(in thousands)
Deferred tax assets:
Allowance for loan losses .......................... $22,270 $21,970
Investment securities available for sale .......... 11,017 --
State privilege year taxes ........................ 277 472
Non-accrual loan interest ......................... 317 506
Other ............................................. 7,054 6,099
------- -------
Total deferred tax assets ........................ 40,935 29,047
------- -------
Deferred tax liabilities:
Tax over book depreciation ......................... 2,969 3,102
Purchase accounting adjustments ................... 443 496
Unearned discount on investments .................. 428 502
Investment securities available for sale .......... -- 3,003
Other ............................................. 5,338 4,462
------- -------
Total deferred tax liabilities ................... 9,178 11,565
------- -------
Net deferred tax assets .......................... $31,757 $17,482
======= =======
A reconciliation between the reported income tax expense and the amount
computed by multiplying income before taxes by the statutory federal income tax
rate is as follows:
1999 1998 1997
-------- -------- --------
(in thousands)
Tax at statutory federal income tax rate .... $ 55,490 $ 46,078 $ 44,609
Increases (decreases) resulted from:
Tax-exempt interest, net of interest
incurred to carry tax-exempts ............ (2,693) (2,903) (3,707)
State income tax, net of federal tax benefit 1,985 1,916 1,729
Realignment of corporate entities .......... (2,615) (15,406) (6,215)
Other, net ................................. 53 695 887
-------- -------- --------
Income tax expense .......................... $ 52,220 $ 30,380 $ 37,303
-------- -------- --------
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
COMMITMENTS AND CONTINGENCIES (Note 14)
Lease Commitments
Certain bank facilities are occupied under non-cancelable long-term
operating leases which expire at various dates through 2047. Certain lease
agreements provide for renewal options and increases in rental payments based
upon increases in the consumer price index or the lessor's cost of operating the
facility. Minimum aggregate lease payments for the remainder of the lease terms
are as follows:
(in thousands)
2000 .............................................. $ 5,418
2001 .............................................. 5,080
2002 .............................................. 4,592
2003 .............................................. 4,319
2004 .............................................. 3,695
Thereafter ........................................ 14,013
-------
Total lease commitments ........................... $37,117
=======
Net occupancy expense for 1999, 1998 and 1997 included approximately $2.3
million, $3.2 million and $2.7 million, respectively, of rental expenses for
leased bank facilities.
Financial Instruments With Off-balance Sheet Risk
In the ordinary course of business of meeting the financial needs of its
customers, Valley, through its subsidiary VNB, is a party to various financial
instruments which are properly not reflected in the consolidated financial
statements. These financial instruments include standby and commercial letters
of credit, unused portions of lines of credit and commitments to extend various
types of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amounts recognized in the consolidated financial
statements. The commitment or contract amount of these instruments is an
indicator of VNB's level of involvement in each type of instrument as well as
the exposure to credit loss in the event of non-performance by the other party
to the financial instrument. VNB seeks to limit any exposure of credit loss by
applying the same credit underwriting standards, including credit review,
interest rates and collateral requirements or personal guarantees, as for
on-balance sheet lending facilities.
The following table provides a summary of financial instruments with
off-balance sheet risk at December 31, 1999 and 1998:
1999 1998
---------- ----------
(in thousands)
Standby and commercial letters of credit ............... $ 85,430 $ 66,168
Commitments under unused lines of credit-credit card ... 867,230 808,760
Commitments under unused lines of credit-other ......... 549,405 501,931
Outstanding loan commitments ........................... 460,607 351,350
---------- ----------
Total financial instruments with off-balance sheet risk $1,962,672 $1,728,209
========== ==========
Standby letters of credit represent the guarantee by VNB of the obligations
or performance of a customer in the event the customer is unable to meet or
perform its obligations to a third party. Obligations to advance funds under
commitments to extend credit, including commitments under unused lines of
credit, are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have specified
expiration dates, which may be extended upon request, or other termination
clauses and generally require payment of a fee.
At December 31, 1999, VNB had commitments to sell residential mortgage
loans and SBA loans totaling $3.9 million.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The amounts set forth above do not necessarily represent future cash
requirements as it is anticipated that many of these commitments will expire
without being fully drawn upon. Most of VNB's lending activity is to customers
within the state of New Jersey, except for automobile loans, which are to
customers from 11 states, including New Jersey, and Canada.
Litigation
In the normal course of business, Valley may be a party to various
outstanding legal proceedings and claims. In the opinion of management, the
consolidated financial position or results of operations of Valley will not be
materially affected by the outcome of such legal proceedings and claims.
SHAREHOLDERS' EQUITY (Note 15)
Capital Requirements
Valley is subject to the regulatory capital requirements administered by
the Federal Reserve Bank. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on Valley's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Valley must meet specific capital
guidelines that involve quantitative measures of Valley's assets, liabilities
and certain off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Valley to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets, as
defined in the regulations. As of December 31, 1999, Valley exceeded all capital
adequacy requirements to which it was subject.
The most recent notification received from the Federal Reserve Bank
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized Valley must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
Valley's actual capital amounts and ratios as of December 31, 1999 and 1998
are presented in the following table:
To Be Well Capitalized
Under Prompt
Minimum Capital Corrective Action
Actual Requirements Provisions
---------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(in thousands)
As of December 31, 1999
Total Risk-based Capital ............... $620,514 12.7% $389,421 8.0% $486,776 10.0%
Tier I Risk-based Capital ............. 565,394 11.6 194,710 4.0 292,065 6.0
Tier I Leverage Capital ............... 565,394 9.1 248,126 4.0 310,158 5.0
As of December 31, 1998
Total Risk-based Capital ............... 632,278 14.6 346,297 8.0 432,872 10.0
Tier I Risk-based Capital ............. 579,627 13.4 173,170 4.0 259,755 6.0
Tier I Leverage Capital ............... 579,627 10.1 229,162 4.0 286,452 5.0
Dividend Restrictions
VNB, a national banking association, is subject to a limitation in the
amount of dividends it may pay to Valley, VNB's only shareholder. Prior approval
by the Comptroller of the Currency ("OCC") is required to the extent that the
total of all dividends to be declared by VNB in any calendar year exceeds net
profits, as defined, for that year combined with its retained net profits from
the preceding two calendar years, less any
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
transfers to capital surplus. Under this limitation, VNB could declare dividends
in 2000 to Valley without prior approval of the OCC of up to $13.3 million plus
an amount equal to VNB's net profits for 2000 to the date of such dividend
declaration.
Shares of Common Stock
The following table summarizes the share transactions for the three years
ended December 31, 1999:
Shares in
Shares Issued Treasury
------------- -----------
Balance, December 31, 1996 ................ 56,484,867 (343,461)
Stock dividend (5 percent) ................ 2,511,465 --
Effect of stock incentive plan, net ........ (30,132) 226,695
Purchase of treasury stock ................. -- (239,316)
----------- -----------
Balance, December 31, 1997 ................ 58,966,200 (356,082)
Effect of stock incentive plan, net ........ (14,607) 152,472
Purchase of treasury stock ................. -- (220,125)
Issuance of stock from treasury ............ -- 187,000
----------- -----------
Balance, December 31, 1998 ................ 58,951,593 (236,735)
Stock dividend (5 percent) ................ 1,236,450 1,537,876
Effect of stock incentive plan, net ........ 432,997 168,366
Purchase of treasury stock ................. -- (2,397,257)
----------- -----------
Balance, December 31, 1999 ................ 60,621,040 (927,750)
=========== ===========
Treasury Stock
On December 14, 1999 Valley's Board of Directors authorized the repurchase
of up to 3,000,000 shares of the company's outstanding common stock. Reacquired
shares are held in treasury and are expected to be used for employee benefit
programs, stock dividends and other corporate purposes.
On June 10, 1999 Valley's Board of Directors rescinded the stock repurchase
program it had announced on April 28, 1999 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 dividend issued May 18, 1999.
Rescinding the remaining authorization was undertaken in connection with
Valley's acquisition of Ramapo.
On May 26, 1998 Valley's Board of Directors rescinded its previously
announced stock repurchase program after 220,125 shares of Valley common stock
had been repurchased. Rescinding the remaining authorization was undertaken in
connection with Valley's acquisition of Wayne.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 16)
Quarters ended 1999
-----------------------------------------------------
March 31 June 30 Sept 30 Dec 31
----------- ----------- ----------- -----------
(in thousands, except for share data)
Interest income ........... $ 103,145 $ 105,794 $ 107,906 $ 110,690
Interest expense .......... 39,561 41,537 42,434 45,645
Net interest income ....... 63,584 64,257 65,472 65,045
Provision for loan losses . 2,000 1,775 2,320 3,025
Non-interest income ....... 12,723 11,799 11,331 11,399
Non-interest expense ...... 32,265 35,236 33,923 36,522
Income before income taxes 42,042 39,045 40,560 36,897
Income tax expense ........ 15,553 13,648 13,281 9,738
Net income ................ 26,489 25,397 27,279 27,159
Earnings per share:
Basic .................... 0.43 0.42 0.45 0.45
Diluted .................. 0.43 0.41 0.45 0.45
Cash dividends per share .. 0.24 0.26 0.26 0.26
Average shares outstanding:
Basic .................... 61,486,501 60,885,740 60,229,700 60,206,005
Diluted .................. 62,266,050 61,558,760 60,864,460 60,796,087
Quarters ended 1998
-----------------------------------------------------
March 31 June 30 Sept 30 Dec 31
----------- ----------- ----------- -----------
(in thousands, except for share data)
Interest income ........... $ 102,413 $ 102,828 $ 103,671 $ 102,381
Interest expense .......... 42,193 42,043 42,219 41,203
Net interest income ....... 60,220 60,785 61,452 61,178
Provision for loan losses . 2,645 3,460 3,145 3,395
Non-interest income ....... 10,974 11,619 11,365 11,416
Non-interest expense ...... 33,711 33,761 36,199 41,042
Income before income taxes 34,838 35,183 33,473 28,157
Income tax expense ........ 10,359 9,313 7,577 3,131
Net income ................ 24,479 25,870 25,896 25,026
Earnings per share:
Basic .................... 0.40 0.42 0.42 0.41
Diluted .................. 0.39 0.42 0.42 0.40
Cash dividends per share .. 0.21 0.24 0.24 0.24
Average shares outstanding:
Basic .................... 61,400,145 61,341,156 61,353,791 61,346,306
Diluted .................. 62,239,892 62,218,153 62,179,568 62,102,890
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
PARENT COMPANY INFORMATION (Note 17)
Condensed Statements of Income
Years ended December 31,
----------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
Income
Dividends from subsidiary ....................................... $ 120,326 $ 89,320 $ 50,471
Income from subsidiary ......................................... 1,313 1,291 854
Gains on securities transactions, net .......................... 2,591 743 1,849
Other interest and dividends ................................... 2,741 683 1,475
--------- --------- ---------
126,971 92,037 54,649
Expenses ........................................................ 3,271 3,976 3,135
--------- --------- ---------
Income before income taxes and equity in undistributed earnings
of subsidiary .................................................. 123,700 88,061 51,514
Income tax expense .............................................. 1,580 118 201
--------- --------- ---------
Income before equity in undistributed earnings of subsidiary .... 122,120 87,943 51,313
Equity in undistributed earnings of subsidiary (excess dividends) (15,796) 13,328 38,838
--------- --------- ---------
Net income ...................................................... $ 106,324 $ 101,271 $ 90,151
========= ========= =========
Condensed Statements of Financial Condition
December 31,
----------------------
1999 1998
--------- ---------
(in thousands)
Assets
Cash .................................................. $ 3,242 $ 1,359
Interest bearing deposits with banks ................. 36,127 21,682
Investment securities available for sale ............. 55,909 71,174
Trading account securities ........................... -- 1,592
Investment in subsidiary ............................. 474,462 505,110
Loan to subsidiary bank employee benefit plan ........ 1,071 1,250
Other assets ......................................... 4,195 4,930
--------- ---------
Total assets ........................................ $ 575,006 $ 607,097
========= =========
Liabilities
Dividends payable to shareholders ..................... $ 15,724 $ 13,831
Other liabilities .................................... 5,782 3,457
--------- ---------
Total liabilities ................................... 21,506 17,288
--------- ---------
Shareholders' Equity
Common stock .......................................... 25,943 26,079
Surplus .............................................. 325,147 331,337
Retained earnings .................................... 244,605 235,879
Unallocated common stock held by employee benefit plan (965) (1,331)
Accumulated other comprehensive (loss) income ........ (16,733) 4,031
--------- ---------
577,997 595,995
Treasury stock, at cost .............................. (24,497) (6,186)
--------- ---------
Total shareholders' equity .......................... 553,500 589,809
--------- ---------
Total liabilities and shareholders' equity .......... $ 575,006 $ 607,097
========= =========
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Statements of Cash Flows
Years ended December 31,
1999 1998 1997
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net income .................................................... $ 106,324 $ 101,271 $ 90,151
Adjustments to reconcile net income to net cash provided by
operating activities:
Excess dividends (equity in undistributed earnings) of
subsidiary ................................................... 15,796 (13,328) (38,838)
Depreciation and amortization ................................. 365 479 618
Amortization of compensation costs pursuant to long-term
stock incentive plan ........................................ 1,091 1,036 898
Net accretion of discounts .................................... (49) (360) (838)
Net gains on securities transactions .......................... (2,591) (743) (1,849)
Net decrease(increase) in other assets ........................ 317 (342) 490
Net increase(decrease) in other liabilities ................... 4,576 (1,250) (1,155)
--------- --------- ---------
Net cash provided by operating activities ..................... 125,829 86,763 49,477
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 8,735 16,918 6,050
Proceeds from maturing investment securities available for sale 81,146 15,000 --
Purchases of investment securities available for sale ......... (78,666) (71,809) (22,264)
Proceeds from sales of trading account securities ............. 1,415 -- --
Net (increase)decrease in short-term investments .............. (14,445) 1,422 6,865
Decrease in advance to subsidiary ............................. -- 3,409 5,204
Payment of employee benefit plan loan ......................... 179 178 181
Purchases of premises and equipment ........................... -- (141) --
--------- --------- ---------
Net cash used in investing activities ......................... (1,636) (35,023) (3,964)
--------- --------- ---------
Cash flows from financing activities:
Purchases of common shares added to treasury .................. (66,955) (6,658) (4,417)
Dividends paid to common shareholders ......................... (58,126) (51,189) (43,696)
Common stock issued, net of cancellations ..................... 2,771 6,931 1,194
--------- --------- ---------
Net cash used in financing activities ......................... (122,310) (50,916) (46,919)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .......... 1,883 824 (1,406)
Cash and cash equivalents at beginning of year ................ 1,359 535 1,941
--------- --------- ---------
Cash and cash equivalents at end of year ...................... $ 3,242 $ 1,359 $ 535
========= ========= =========
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Values of Financial Instruments (Note 18)
Limitations: The fair value estimates made at December 31, 1999 and 1998
were based on pertinent market data and relevant information on the financial
instruments at that time. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire portfolio of
financial instruments. Because no market exists for a portion of the financial
instruments, fair value estimates may be based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For instance, Valley has certain fee-generating business
lines (e.g., its mortgage servicing operation and trust and investment
department) that were not considered in these estimates since these activities
are not financial instruments. In addition, the tax implications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments and mortgage servicing rights:
Cash and short-term investments: For such short-term investments, the
carrying amount is considered to be a reasonable estimate of fair value.
Investment securities held to maturity, investment securities available for
sale, and trading account securities: Fair values are based on quoted market
prices.
Loans: Fair values are estimated by obtaining quoted market prices, when
available. The fair value of other loans is estimated by discounting the future
cash flows using market discount rates that reflect the credit and interest-rate
risk inherent in the loan.
Deposit liabilities: Current carrying amounts approximate estimated fair
value of demand deposits and savings accounts. The fair value of time deposits
is based on the discounted value of contractual cash flows using estimated rates
currently offered for deposits of similar remaining maturity.
Short-term borrowings: Current carrying amounts approximate estimated fair
value.
Long-term debt: The fair value is estimated by discounting future cash
flows based on rates currently available for debt with similar terms and
remaining maturity.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The carrying amounts and estimated fair values of financial instruments
were as follows at December 31, 1999 and 1998:
1999 1998
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(in thousands)
Financial assets:
Cash and due from banks ................ $ 161,561 $ 161,561 $ 185,921 $ 185,921
Federal funds sold ..................... 123,000 123,000 108,100 108,100
Investment securities held to maturity . 351,501 318,329 286,890 288,312
Investment securities available for sale 1,005,419 1,005,419 1,023,188 1,023,188
Trading account securities ............. -- -- 1,592 1,592
Net loans .............................. 4,499,632 4,442,927 4,093,008 4,135,216
Financial liabilities:
Deposits with no stated maturity ....... 2,949,546 2,949,546 2,961,417 2,961,417
Deposits with stated maturities ........ 2,101,709 2,102,149 2,008,732 2,019,371
Short-term borrowings .................. 129,065 129,065 57,617 57,617
Long-term debt ......................... 564,881 548,043 212,949 214,958
The estimated fair value of financial instruments with off-balance sheet
risk, consisting of unamortized fee income at December 31, 1999 and 1998 is not
material.
Business Segments (Note 19)
VNB has four major business segments it monitors and reports on to manage
its business operations. These segments are consumer lending, commercial
lending, investment management and corporate and other adjustments. 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 from the corporate and other adjustments segment to each of the other
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.
Consumer lending delivers loan and banking products and services mainly to
individuals and small businesses through its branches, ATM machines, PC banking
and sales, service and collection force within each lending department. The
products and services include residential mortgages, home equity loans,
automobile loans, credit card loans, trust and investment services and mortgage
servicing for investors. Automobile lending is generally available throughout
New Jersey, but is also currently available in eleven states and Canada as part
of a referral program with a major insurance company.
The commercial lending division provides loan products and services to
small and medium commercial establishments throughout northern New Jersey. These
include lines of credit, term loans, letters of credit, asset-based lending,
construction, development and permanent real estate financing for owner occupied
and leased properties and Small Business Administration ("SBA") loans. The SBA
loans are offered through a sales force covering New Jersey and a number of
surrounding states and territories. The commercial lending division serves
numerous businesses through departments organized into product or specific
geographic divisions.
The investment function handles the management of the investment portfolio,
asset/liability management and government banking for VNB. The objectives of
this department are production of income and liquidity through the investment of
VNB's funds. The bank purchases and holds a mix of bonds, notes, U.S. and other
governmental securities and other investments.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The corporate and other adjustments segment represents assets and income
and expense items not directly attributable to a specific segment.
The following table represents the financial data for the four business
segments for the years ended 1999, 1998 and 1997.
Year ended December 31, 1999
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
---------- ---------- ---------- ---------- ----------
(in thousands)
Average interest-earning assets .......................... $2,696,100 $1,696,582 $1,404,105 $-- $5,796,787
========== ========== ========== ========== ==========
Interest income .......................................... $ 199,484 $ 142,725 $ 88,316 $ (2,990) $ 427,535
Interest expense ......................................... 78,685 49,514 40,978 -- 169,177
---------- ---------- ---------- ---------- ----------
Net interest income (loss) ............................... 120,799 93,211 47,338 (2,990) 258,358
Provision for loan losses ................................ 7,826 1,294 -- -- 9,120
---------- ---------- ---------- ---------- ----------
Net interest income (loss) after provision for loan losses 112,973 91,917 47,338 (2,990) 249,238
Non-interest income ...................................... 13,992 4,751 28 28,481 47,252
Non-interest expense ..................................... 27,019 9,679 113 101,135 137,946
Internal expense transfer ................................ 31,360 22,300 18,176 (71,836) --
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ........................ $ 68,586 $ 64,689 $ 29,077 $ (3,808) $ 158,544
========== ========== ========== ========== ==========
Return on average interest-bearing assets (pre-tax) ...... 2.54% 3.81% 2.07% -- 2.74%
Year ended December 31, 1998
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
---------- ---------- ---------- ---------- ----------
(in thousands)
Average interest-earning assets .......................... $2,443,388 $1,573,351 $1,369,640 $ 8,034 $5,394,413
========== ========== ========== ========== ==========
Interest income .......................................... $ 192,830 $ 134,899 $ 89,761 $ (6,197) $ 411,293
Interest expense ......................................... 75,940 48,900 42,568 250 167,658
---------- ---------- ---------- ---------- ----------
Net interest income (loss) ............................... 116,890 85,999 47,193 (6,447) 243,635
Provision for loan losses ................................ 10,586 1,939 -- 120 12,645
---------- ---------- ---------- ---------- ----------
Net interest income (loss) after
provision for loan losses ............................... 106,304 84,060 47,193 (6,567) 230,990
Non-interest income ...................................... 16,310 6,040 20 23,004 45,374
Non-interest expense ..................................... 29,973 9,208 111 105,421 144,713
Internal expense transfer ................................ 34,650 23,424 20,820 (78,894) --
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ........................ $ 57,991 $ 57,468 $ 26,282 $ (10,090) $ 131,651
========== ========== ========== ========== ==========
Return on average interest-bearing
assets (pre-tax) ........................................ 2.37% 3.65% 1.92% -- 2.44%
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
---------- ---------- ---------- ---------- ----------
(in thousands)
Average interest-earning assets .......................... $2,321,381 $1,478,624 $1,496,088 $ 29,718 $5,325,811
========== ========== ========== ========== ==========
Interest income .......................................... $ 185,396 $ 129,636 $ 98,994 $ (7,208) $ 406,818
Interest expense ......................................... 75,050 47,804 48,368 960 172,182
---------- ---------- ---------- ---------- ----------
Net interest income (loss) ............................... 110,346 81,832 50,626 (8,168) 234,636
Provision for loan losses ................................ 11,162 1,693 -- 275 13,130
---------- ---------- ---------- ---------- ----------
Net interest income (loss) after provision for loan losses 99,184 80,139 50,626 (8,443) 221,506
Non-interest income ...................................... 19,737 6,092 -- 19,365 45,194
Non-interest expense ..................................... 39,588 8,248 -- 91,410 139,246
Internal expense transfer ................................ 24,900 20,805 19,122 (64,827) --
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ........................ $ 54,433 $ 57,178 $ 31,504 $ (15,661) $ 127,454
========== ========== ========== ========== ==========
Return on average interest-bearing assets (pre-tax) ...... 2.34% 3.87% 2.11% -- 2.39%
62
INDEPENDENT AUDITORS' REPORT
KPMG
KPMG LLP
Certified Public Accountants
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
The Board of Directors and Shareholders
Valley National Bancorp:
We have audited the accompanying consolidated statements of financial
condition of Valley National Bancorp and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
National Bancorp and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
January 19, 2000
63
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information which will be set forth under the caption "Director
Information" in the 2000 Proxy Statement is incorporated herein by reference.
Certain information on Executive Officers of the registrant is included in Part
I, Item 4A of this report, which is also incorporated herein by reference.
Item 11. Executive Compensation
The information which will be set forth under the caption "Executive
Compensation" in the 2000 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information which will be set forth under the caption "Stock Ownership
of Management and Principal Shareholders" in the 2000 Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information which will be set forth under the captions "Certain
Transactions with Management" and "Human Resource and Compensation Committee
Interlocks and Insider Participation" in the 2000 Proxy Statement is
incorporated herein by reference.
64
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules:
The financial statements listed on the index of this Annual Report on Form
10-K are filed as part of this Annual Report.
All financial statement schedules are omitted because they are either
inapplicable or not required, or because the required information is
included in the Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K:
On January 3, 2000 to report the authorization by the Board of Directors to
purchase up to 3,000,000 shares of outstanding common stock to be used for
employee benefit programs, stock dividends and other corporate purposes.
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
(3) Articles of Incorporation and By-laws:
A. Restated Certificate of Incorporation of the Registrant as in effect
on May 11, 1999 is incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
B. By-laws of the Registrant adopted as of March 14, 1989 and amended
March 19, 1991 is incorporated herein by reference to the Registrant's
Form 10-K Annual Report for the year ended December 31, 1998.
(10) Material Contracts:
A. Restated and amended "Change in Control Agreements" dated January 1,
1999 between Valley, VNB and Gerald H. Lipkin, Peter Southway, Peter
John Southway, Robert Meyer, and Peter Crocitto is incorporated herein
by reference to the Registrant's Form 10-K Annual Report for the year
ended December 31, 1998.
B. "Change in Control Agreements" dated January 1, 1995 between Valley,
VNB and Robert Farrell, Richard Garber and Robert Mulligan.
C. "Change in Control Agreement" dated February 1, 1996 between Valley,
VNB and Jack Blackin is incorporated herein by reference to the
Registrant's Form 10-K Annual Report for the year ended December 31,
1996.
D. "Change in Control Agreement" dated April 15, 1996 between Valley, VNB
and John Prol is incorporated herein by reference to the Registrant's
Form 10-K Annual Report for the year ended December 31, 1996.
E. "The Valley National Bancorp Long-term Stock Incentive Plan" dated
January 19, 1999.
F. "Severance Agreements" dated August 17, 1994 between Valley, VNB and
Gerald H. Lipkin and Peter Southway are incorporated by reference to
Registrant's Registration Statement on Form S-4 (No. 33-55765) filed
with the Securities and Exchange Commission on October 4, 1994.
G. "Stock Option Agreement" dated April 1, 1992 between Valley and
Michael Guilfoile.
H. "Split-Dollar Agreement" dated July 7, 1995 between Valley, VNB, and
Gerald H. Lipkin is incorporated by reference to Registrant's Report
on Form 10-K Annual Report for the year ended December 31, 1995.
I. "Employment Arrangement" dated June 6, 1996 between Valley, VNB and
Peter Southway is incorporated herein by reference to the Registrant's
Form 10-K Annual Report for the year ended December 31, 1996.
65
J. "Severance Agreements" as of January 1, 1998 between Valley, VNB and
Peter Crocitto, Robert M. Meyer and Peter John Southway are
incorporated herein by reference to the Registrant's Form 10-K Annual
Report for the year ended December 31, 1997.
K. "Change in Control Agreement" dated January 1, 1998 between Valley,
VNB and Alan Lipsky is incorporated herein by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
L. "Change in Control Agreements" dated January 1, 1999 between Valley,
VNB and Alan D. Eskow and Robert J. Farnon are incorporated herein by
reference to the Registrant's Form 10-K Annual Report for the year
ended December 31, 1998.
M. "Change in Control Agreement" dated January 3, 2000 between Valley,
VNB and Albert L. Engel.
(21) List of Subsidiaries:
(a) Subsidiary of Valley:
Percentage of Voting Securities
Name Jurisdiction of Incorporation Owned by the Parent
--------- -------------------------------- --------------------------------
Valley National Bank (VNB) United States 100%
(b) Subsidiaries of VNB:
VNB Mortgage Services, Inc. New Jersey 100%
BNV Realty Incorporated (BNV) New Jersey 100%
VNB Financial Advisors, Inc. New Jersey 100%
VNB Loan Services, Inc. New York 100%
VNB RSI, Inc. New Jersey 100%
Wayne Ventures, Inc. New Jersey 100%
Wayne Title, Inc. New Jersey 100%
VNB International Services, Inc. (ISI) New Jersey 100%
New Century Asset Management, Inc. New Jersey 100%
Valley CMC, Inc. (CMC) New Jersey 100%
(c) Subsidiary of ISI:
VNB Financial Services, Inc. Canada 100%
(d) Subsidiaries of BNV
SAR I, Inc. New Jersey 100%
SAR II, Inc. New Jersey 100%
(e) Subsidiary of CMC:
VN Investments, Inc. New Jersey 100%
(23) Consents of Experts and Counsel
Consent of KPMG LLP
(24) Power of Attorney of Certain Directors and Officers of Valley
(27) Financial Data Schedule
66
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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
By: /s/ GERALD H. LIPKIN
-----------------------------------------
Gerald H. Lipkin, Chairman of the Board,
President and Chief Executive Officer
Dated: February 25, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
Signature Title Date
--------- ----- ----
/s/ GERALD H. LIPKIN Chairman of the Board, President and
- ------------------------------- Chief Executive Officer and Director
Gerald H. Lipkin February 25, 2000
/s/ PETER SOUTHWAY Vice Chairman (Principal Financial February 25, 2000
- ------------------------------- Officer) and Director
Peter Southway
/s/ ALAN D. ESKOW Corporate Secretary, Senior Vice February 25, 2000
- ------------------------------- President and Controller
Alan D. Eskow (Principal Accounting Officer)
ANDREW B. ABRAMSON* Director February 25, 2000
- -------------------------------
Andrew B. Abramson
PAMELA BRONANDER* Director February 25, 2000
- -------------------------------
Pamela Bronander
JOSEPH COCCIA, JR.* Director February 25, 2000
- -------------------------------
Joseph Coccia, Jr.
HAROLD P. COOK, III* Director February 25, 2000
- -------------------------------
Harold P. Cook, III
AUSTIN C. DRUKKER* Director February 25, 2000
- -------------------------------
Austin C. Drukker
WILLARD L. HEDDEN* Director February 25, 2000
- -------------------------------
Willard L. Hedden
GRAHAM O. JONES* Director February 25, 2000
- -------------------------------
Graham O. Jones
WALTER H. JONES, III* Director February 25, 2000
- -------------------------------
Walter H. Jones, III
67
Signature Title Date
--------- ----- ----
GERALD KORDE* Director February 25, 2000
- -------------------------------
Gerald Korde
JOLEEN J. MARTIN* Director February 25, 2000
- -------------------------------
Joleen J. Martin
ROBERT E. MCENTEE* Director February 25, 2000
- -------------------------------
Robert E. McEntee
RICHARD S. MILLER* Director February 25, 2000
- -------------------------------
Richard S. Miller
SAM P. PINYUH* Director February 25, 2000
- -------------------------------
Sam P. Pinyuh
ROBERT RACHESKY* Director February 25, 2000
- -------------------------------
Robert Rachesky
BARNETT RUKIN* Director February 25, 2000
- -------------------------------
Barnett Rukin
RICHARD F. TICE* Director February 25, 2000
- -------------------------------
Richard F. Tice
LEONARD J. VORCHEIMER* Director February 25, 2000
- -------------------------------
Leonard J. Vorcheimer
JOSEPH L. VOZZA* Director February 25, 2000
- -------------------------------
Joseph L. Vozza
*By Gerald H. Lipkin, as attorney-in-fact.
68
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
(10)B Change in Control Agreements - Robert Farrell, Richard Garber, Robert
Mulligan
(10)E The Valley National Bancorp Long-term Stock Incentive Plan
(10)G Stock Option Agreement - Michael Guilfoile
(10)M Change in Control Agreement - Albert L. Engel
(23) Consent of KPMG LLP
(24) Power of Attorney
(27) Financial Data Schedule