UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarter Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
__________.
Commission File Number 0-11179
VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
(State or other Jurisdiction of
incorporation or organization)
22-2477875
(I.R.S. Employer Identification No.)
1455 Valley Road, Wayne, New Jersey 07474-0558
(Address of principal executive offices) (Zip Code)
(201)305-8800
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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 XXX NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (No par value), of which 36,367,214, shares were outstanding as of
November 1, 1996.
VALLEY NATIONAL BANCORP
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
September 30, 1996 and December 31, 1995
(Unaudited)
Consolidated Statements of Income 4
Nine and Three Months Ended September 30, 1996
and 1995 (Unaudited)
Consolidated Statements of Cash Flows 5
Nine Months Ended September 30, 1996 and 1995
(Unaudited)
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 7-14
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 15
SIGNATURES 16
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
September 30, December 3l,
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 135,589 $ 167,349
Federal funds sold -- 108,500
Investment securities held to maturity,
fair value of $221,957 and $270,622 in 1996
and 1995, respectively 222,005 266,354
Investment securities available for sale 1,049,069 1,146,285
Loans, net of unearned income 3,085,213 2,793,175
Less: Allowance for possible loan losses (41,798) (39,670)
------------ -------------
Loans, net 3,043,415 2,753,505
---------- -----------
Premises and equipment, net 61,601 58,053
Due from customers on acceptances outstanding 546 838
Accrued interest receivable 27,306 30,450
Other assets 65,520 54,477
------------- -------------
Total assets $4,605,051 $4,585,811
========== ==========
Liabilities
Deposits:
Non-interest bearing deposits $ 555,791 $ 542,229
Interest bearing:
Savings 1,674,693 1,699,871
Time 1,840,137 1,841,773
------------ ----------
Total deposits 4,070,621 4,083,873
------------ ----------
Federal funds purchased and securities sold under
repurchase agreements 29,580 26,921
Treasury tax and loan account 37,895 10,524
Other borrowings 36,671 28,679
Bank acceptances outstanding 546 838
Accrued expenses and other liabilities 47,321 34,739
-------------- ------------
Total liabilities 4,222,634 4,185,574
------------ ----------
Shareholders' Equity
Common stock, no par value, authorized
75,000,000 shares, issued 36,678,753
shares in 1996 and 35,889,721 in 1995 20,440 20,025
Surplus 238,870 216,377
Retained earnings 136,599 162,012
Unrealized gain(loss) on investment
securities available for sale, net of tax (4,739) 3,733
Translation adjustment 8 --
---------- --------
391,178 402,147
Treasury stock, at cost (312,004 common
shares in 1996 and 107,413 shares in 1995) (8,761) (1,910)
---------- -----------
Total shareholders' equity 382,417 400,237
---------- -----------
Total liabilities and shareholders' equity $4,605,051 $4,585,811
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in thousands, except for per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 181,741 $ 167,797 $ 63,913 $ 56,890
Interest and dividends on
investment securities:
Taxable 49,302 57,345 15,865 18,235
Tax-exempt 9,727 10,491 3,091 3,373
Dividends 595 484 243 140
Interest on federal funds sold
and other short term investments 2,578 1,446 731 566
------------- -------------- ------------- ----------------
Total Interest Income 243,943 237,563 83,843 79,204
------------ ------------ ----------- --------------
Interest Expense
Interest on deposits:
Savings 29,961 34,973 10,279 10,766
Time 74,985 68,202 25,409 23,880
Interest on federal funds purchased
and securities sold under repurchase
agreements 820 2,337 285 581
Interest on other short-term borrowings 509 575 202 205
Interest on other borrowings 1,825 1,404 634 412
-------------- -------------- -------------- -----------------
Total Interest Expense 108,100 107,491 36,809 35,844
------------ -------- ------------ ---------------
Net interest income 135,843 130,072 47,034 43,360
Provision for possible loan losses 2,095 2,069 345 600
------------- ------------- -------------- -----------------
Net interest income after
provision for possible loan losses 133,748 128,003 46,689 42,760
----------- ------------- --------- --------------
Non-Interest Income
Trust income 770 660 255 220
Service charges on deposit accounts 6,004 5,949 2,019 1,970
Gains on securities transactions, net 834 1,471 262 920
Fees from mortgage servicing 2,942 2,802 974 1,116
Gains on sales of loans 1,334 636 358 85
Other 5,368 4,258 1,818 1,624
-------------- --------------- -------------- ---------------
Total Non-Interest Income 17,252 15,776 5,686 5,935
------------- -------------- -------------- --------------
Non-Interest Expense
Salaries expense 27,581 25,436 9,493 8,391
Employee benefit expense 6,627 6,715 2,031 1,991
FDIC insurance premiums 8,633 4,917 7,121 530
Occupancy and equipment expense 11,251 10,264 3,727 3,542
Amortization of intangible assets 2,290 2,007 748 804
Other 20,324 18,506 8,177 5,640
------------- ------------- -------------- -------------
Total Non-Interest Expense 76,706 67,845 31,297 20,898
------------- ------------- ------------- ------------
Income before income taxes 74,294 75,934 21,078 27,797
Income tax expense 24,747 29,877 6,706 9,687
------------- ------------- -------------- --------------
Net Income $ 49,547 $ 46,057 $ 14,372 $ 18,110
============ ============ ============ ============
Net Income per share $ 1.35 $ 1.23 $ 0.40 $ 0.48
============== ============== ============== ===============
Weighted average shares outstanding 36,792,418 37,363,889 36,377,502 37,525,375
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 49,547 $ 46,057
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of intangible assets 5,343 5,854
Amortization of compensation costs pursuant to
long term stock incentive plan 335 240
Provision for possible loan losses 2,095 2,069
Net amortization of premiums 3,066 3,784
Net gains on securities transactions (834) (1,471)
Gains on sales of loans (1,334) (636)
Proceeds from recoveries on charged-off loans 3,874 2,059
Net increase in accrued interest receivable and
other assets (3,601) (7,664)
Net increase in accrued expenses and other
liabilities 12,409 2,291
Net increase in shareholders' equity due to
acquisition of American Union Bank -- 4,425
Adjustment for the pooling of a company with a
different fiscal year end -- (741)
Net cash provided by operating activities: 70,900 56,267
--------- --------
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity 62,103 115,512
Purchases of investment securities held to maturity (25,066) (48,535)
Proceeds from sales of investment securities
available for sale 72,113 74,376
Proceeds from maturing investment securities
available for sale 190,820 58,628
Purchases of investment securities available for sale (175,017) (63,547)
Purchases of mortgage servicing rights (655) (3,902)
Net decrease(increase) in federal funds sold and
other short term investments 108,500 (10,000)
Net increase in loans made to customers (294,548) (113,834)
Purchases of premises and equipment, net of sales (6,614) (10,875)
Net decrease in due from customers on acceptances
outstanding 292 870
---------- ---------
Net cash used in investing activities: (68,072) (1,307)
--------- ---------
Cash flows from financing activities:
Net increase(decrease) in deposits (13,252) 13,867
Net increase(decrease) in federal funds purchased
and other short term borrowings 30,030 (50,675)
Advances of other borrowings 20,000 --
Repayments of other borrowings (12,008) (4,038)
Net decrease in bank acceptances outstanding (292) (870)
Dividends paid to common shareholders (26,891) (22,161)
Addition of common shares to treasury (32,267) (4,005)
Common stock issued, net of cancellations 92 2,679
---------- ----------
Net cash used in financing activities: (34,588) (65,203)
--------- ----------
Net decrease in cash and due from banks (31,760) (10,243)
Cash and due from banks at beginning of period 167,349 168,071
--------- ----------
Cash and due from banks at end of period $135,589 $ 157,828
-------- ---------
Cash paid during the period for:
Interest on deposits and other borrowings $109,124 $ 103,465
Federal and state income taxes $ 25,986 $ 38,214
</TABLE>
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
The Consolidated Statements of Financial Condition as of September 30,
1996 and December 31, 1995, the Consolidated Statements of Income for
the nine and three month periods ended September 30, 1996 and 1995 and
the Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1996 and 1995 have been prepared by Valley National
Bancorp ("Valley"), without audit. In the opinion of management, all
adjustments (which included only normal recurring adjustments)
necessary to present fairly Valley's financial position, results of
operations, and cash flows at September 30, 1996 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These consolidated financial
statements are to be read in conjunction with the financial statements
and notes thereto included in Valley's December 31, 1995 Annual Report
to Shareholders.
2. Earnings Per Share
All 1995 share and per share amounts have been restated to reflect the
5% stock dividend declared April 2, 1996 to shareholders of record on
April 26, 1996 and issued May 17, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On September 13, 1996 Valley signed a definitive merger agreement with Midland
Bancorporation, Inc. ("Midland"), parent of The Midland Bank and Trust Company
("Midland Bank"), headquartered in Paramus. Midland Bank has total assets of
$426.2 million and deposits of $389.0 million, with 13 branches located in
Bergen County, New Jersey. The transaction is scheduled to close by the end of
the first quarter of 1997 and will be accounted for using the pooling of
interests method of accounting. The merger agreement provides that 30 shares of
Valley common stock will be exchanged for each share of Midland common stock.
There were 125,258 shares of Midland common stock outstanding as of September
30, 1996. Valley and Midland also entered into a separate stock option agreement
which gives Valley the option to purchase 35,000 shares of common stock of
Midland, which can be exercised under certain circumstances, if the transaction
does not close.
Earnings Summary
Net income for the nine months ended September 30, 1996 was $49.5 million, or
$1.35 per share after a one-time FDIC assessment of $3.8 million or $0.10 per
share after tax, to recapitalize the Savings Association Insurance Fund (SAIF),
as mandated by Congress. These results compare to net income of $46.1 million,
or $1.23 per share for the same period in 1995 after non-recurring merger
expenses of approximately $5.3 million or $0.14 per share after tax. Net income
before these one-time non-recurring expenses were $53.3 million or $1.45 per
share for the nine month period ended September 30, 1996, an increase of $1.9
million or 3.7% compared to the same period in 1995.
The increase in net income for the nine months ended September 30, 1996, after
adjusting for the one-time non-recurring expenses for each year, can be
attributed to an increase in net interest income of $5.8 million, an increase in
other non-interest income of $1.1 million and a decrease in FDIC insurance
expense of $2.7 million, offset by a $2.1 million increase in salary expense,
a $1.0 million increase in occupancy expense, and a $4.1 million increase in
other non-interest expense.
Net income for the three months ended September 30, 1996 was $14.4 million or
$0.40 per share after the one-time FDIC assessment of $3.8 million or $0.10 per
share after tax. These results compare to net income of $18.1 million, or $0.48
per share for the same period in 1995.
Net income for the three months ended September 30, 1996 before the one-time
FDIC assessment was $18.1 million, or $0.50 per share. These results compare to
net income of $18.1 million or $0.48 per share for the same three month period
in 1995. Net income for the quarter ended September 30, 1996 was negatively
impacted by the costs of initiating the Shop-Rite co-branded credit card
program.
Net Interest Income
Net interest income on a tax equivalent basis increased to $141.7 million from
$136.4 million for the nine months ended September 30, 1996 as compared to the
same period in 1995, and also increased to $48.9 million from $45.4 million for
the three months ended September 30, 1996 as compared to the same three month
period of 1995. The net interest margin increased to 4.39% and 4.51% for the
nine month period and quarter ended September 30, 1996 compared to 4.33% and
4.35% for the same periods in 1995. This increase includes the effect of loan
recovery income during the first and third quarters of 1996.
Average interest earning assets increased $100.9 million during the nine months
ended September 30, 1996. This increase was mainly the result of increased
automobile, credit card and commercial mortgage loan volume. The average rate on
loans remained relatively unchanged at 8.46%, however, the increase in average
loans of $214.3 million caused interest income on loans to increase by $13.9
million for the first nine months of 1996 as compared to the same period in
1995. The average balance of investment securities for the nine months ended
September 30, 1996 decreased $149.9 million from the amount in the portfolio for
the same period in 1995, causing income on investments to decline $9.1 million.
The average balance of interest-bearing liabilities increased $42.6 million
while the average rate decreased 2 basis points to 3.99% for the nine months
ended September 30, 1996 in comparison to the same period in 1995.
For the three month period ended September 30, 1996 as compared to the same
period in 1995, interest earning assets increased $162.7 million with the
average rate on interest earning assets increasing by 11 basis points. The
average balance of interest bearing liabilities increased $119.2 million.
Average savings deposits decreased by $19.6 million, while average time deposits
increased by $144.5 million. The average rate on interest bearing liabilities
decreased by 2 basis points. Average demand deposits continued to grow and
increased by $56.1 million.
The increase in the net interest margin is due mainly to the movement of earning
assets out of the investment portfolio and into higher yielding loans.
Non-Interest Income
The following table presents the components of non-interest income for the nine
and three months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
------ -------- -------- -------
Trust income $ 770 $ 660 $ 255 $ 220
Service charges on deposit accounts 6,004 5,949 2,019 1,970
Gains on securities transactions, net 834 1,471 262 920
Fees from mortgage servicing 2,942 2,802 974 1,116
Gains on sales of loans 1,334 636 358 85
Other 5,368 4,258 1,818 1,624
---------- --------- -------- -------
Total $17,252 $15,776 $ 5,686 $ 5,935
======= ======== ========= ========
</TABLE>
Non-interest income continues to represent a considerable source of income for
Valley. Excluding gains on securities transactions, total non-interest income
amounted to $16.4 million and $5.4 million for the nine months and quarter ended
September 30, 1996 compared with $14.3 million and $5.0 million for the same
periods in 1995.
Gains on the sales of loans were $1.3 million for the first nine months of 1996
compared to $636 thousand for the first nine months of 1995. The gains recorded
are primarily from the sale of SBA loans.
Other non-interest income increased $1.1 million to $5.4 million for the nine
months ended September 30, 1996. VNB recorded gains on the sale of REO property
during 1996 of approximately $855 thousand compared to $133 thousand in 1995. In
addition, credit card fees increased approximately $291 thousand during the nine
months ended September 30, 1996 in comparison to the same period in 1995.
Non-Interest Expense
The following table presents the components of non-interest expense for the nine
and three months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
---------- -------- --------- --------
Salary expense $ 27,581 $ 25,436 $ 9,493 $ 8,391
Employee benefit expense 6,627 6,715 2,031 1,991
FDIC insurance premiums **8,633 4,917 **7,121 530
Occupancy and equipment expense 11,251 10,264 3,727 3,542
Amortization of intangible assets 2,290 2,007 748 804
Other 20,324 *18,506 8,177 5,640
-------- --------- --------- --------
Total $ 76,706 $ 67,845 $ 31,297 $ 20,898
======== ======== ======== ========
</TABLE>
*Includes $2.4 million of one-time merger expenses.
**Includes $6.4 million of one-time FDIC assessment.
Non-interest expense for the nine months ended September 30, 1996 totalled $76.7
million, which includes approximately $2.6 million of expenses associated with a
new co-branded credit card program (see discussion of this program on page 12
under the caption of Loan Portfolio) and a $6.4 million one-time FDIC
assessment. Non-interest expense for the nine months ended September 30, 1995
includes $2.4 million of one-time merger expenses associated with the
acquisition of Lakeland First Financial Group, Inc. ("Lakeland") on June 30,
1995. Excluding the expenses associated with the co-branded credit card program
and one-time FDIC assessment total non-interest expense was $67.7 million for
the nine months ended September 30, 1996 compared to $65.5 million before
one-time merger expenses for the same period in 1995, an increase of 3.5%.
The largest component of non-interest expense is salary and employee benefit
expense which totalled $34.2 million and $11.5 million for the nine and three
months ended September 30, 1996, which increased 6.4% and 11.0%, respectively,
in comparison to the same periods in 1995. Included in salary and benefit
expense for the nine and three months ended September 30, 1996 is approximately
$510 thousand and $220 thousand of expense associated with the new co-branded
credit card program. The increase in salary and benefit expense can also be
attributed to the expansion of products and services offered by VNB. At
September 30, 1996, full-time equivalent staff was 1,352 compared to 1,251 at
September 30, 1995.
The Savings Association Insurance Fund ("SAIF") was recapitalized in the third
quarter of 1996. Congress mandated a one-time special assessment. Included in
the third quarter results is a $6.4 million one-time required payment. The
anticipated future reduction in SAIF deposit premiums is based upon the
legislative process over which Valley has no control. There can be no assurance
that there will be a premium reduction. However, Valley does expect that its
FDIC insurance premiums in 1997 will be less than recorded in 1996 before the
one-time SAIF assessment. Excluding this one time payment, insurance premiums
decreased by $2.7 million for the nine months ended September 30, 1996 in
comparison to the same period in 1995. This reflects the reduction in insurance
rates charged on Bank Insurance Fund ("BIF") deposits by the FDIC which began
June 1, 1995.
Occupancy and equipment expense increased 9.6% during the first nine months of
1996 as compared to the same period in 1995. This increase is the result of
costs related to a building purchased by VNB and from costs incurred for new
equipment required to expand computer applications and improve customer service.
Amortization of intangibles increased 14% for the nine months ended September
30, 1996. This increase represents additional amortization of purchased mortgage
servicing rights due to growth in the serviced portfolio. The efficiency ratio
measures a bank's gross operating expense as a percentage of fully-taxable
equivalent net interest income and other non-interest income without taking into
account security gains and losses and other non-recurring items. Valley's
efficiency ratio for the nine months ended September 30, 1996 is 44.5%, one of
the lowest in the industry, compared with an efficiency ratio of 43.6% for the
year ended December 31, 1995. Valley strives to control its efficiency ratio and
expenses as a means of producing increased earnings for its shareholders.
Income Taxes
Income tax expense as a percentage of pre-tax income was 33.3% for the nine
months ended September 30, 1996. During the second quarter of 1995 VNB recorded
a one-time tax expense of approximately $3.0 million for the recapture of the
bad debt deduction upon the merger with Lakeland. Excluding this one-time tax
expense, income tax expense as a percentage of pre-tax income was 35.4% for the
nine months ended September 30, 1995. The decreased percentage from 1995 to 1996
is attributable to non-deductible merger expenses in 1995 as well as a reduction
in state income taxes due to business strategies employed.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
At September 30, 1996, rate sensitive assets exceeded rate sensitive liabilities
at the 90 day interval and resulted in a positive gap of $614.3 million or a
ratio of 1.36:1. Rate sensitive liabilities exceeded rate sensitive assets at
the 91 to 365 day interval by $477.6 million or a ratio of .33:1 and resulted in
a negative gap. The total positive gap repricing within 365 days as of September
30, 1996 is $136.7 million or 1.06:1. Management does not view these amounts as
presenting an unusually high risk potential, although no assurances can be give
that Valley is not at risk from rate increases or decreases.
The above gap results take into account repricing and maturities of assets and
liabilities, but fail to consider the interest rate sensitivities of those asset
and liability accounts. Management has prepared for its use an income simulation
model to project future net interest income streams in light of the current gap
position. Management has also prepared for its use alternative scenarios to
measure levels of net interest income associated with various changes in
interest rates. According to this computer model, an interest rate increase of
300 basis points and a decrease of 100 basis points resulted in a minimal impact
on future net interest income which is consistent with target levels contained
in Valley's Asset/Liability Policy. Management cannot provide any assurance
about the actual effect of changes in interest rates on Valley's net interest
income.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs as
they become due. Maintaining a level of liquid funds through asset-liability
management seeks to ensure that these needs are met at a reasonable cost. On the
asset side, liquid funds are maintained in the form of cash and due from banks,
federal fund sold, investment securities held to maturity maturing within one
year, securities available for sale and loans held for sale. At September 30,
1996, liquid assets amounted to $1.2 billion, as compared to $1.5 billion at
December 31, 1995. This represents 28.0% and 34.1% of earning assets, and 26.5%
and 32.1% of total assets at September 30, 1996 and year-end 1995, 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 $3.1 billion at
September 30, 1996 and year-end 1995, respectively, representing 70.0% and 70.6%
of average earning assets. Short term borrowings and large dollar certificates
of deposit, generally those over $100 thousand, are used as supplemental funding
sources during periods when growth in the core deposit base does not keep pace
with that of earning assets. Additional liquidity is derived from scheduled loan
and investment payments of principal and interest, as well as prepayments
received. For the nine month period ending September 30, 1996, proceeds from the
sales of investment securities available for sale were $72.1 million, and
proceeds of $252.9 million were generated from investment maturities. Purchases
of investment securities for the same period were $200.1 million. Short term
borrowings and certificates of deposit over $100 thousand amounted to $525.1
million and $465.8 million, on average, for the nine months ended September 30,
1996 and year ending December 31, 1995, respectively.
VNB also utilizes borrowings from the Federal Home Loan Bank of New York
("FHLB") as a source of funds for its asset growth and asset/liability
management. These advances are collateralized by pledges of FHLB stock and a
blanket assignment of qualifying mortgage loans. As of September 30, 1996,
Valley had outstanding advances of $36.5 million.
Valley's cash requirements consist primarily of dividends to shareholders. This
cash need is routinely satisfied by dividends collected from its subsidiary
bank. Cash flows from this source are expected to be adequate to pay dividends,
given the current capital levels and current profitable operations of its
subsidiary.
Investment Securities
The investment portfolio as of September 30, 1996 consisted of securities held
to maturity of $222.0 million and $1.0 billion of securities available for sale,
down $141.6 million from December 31, 1995. As of September 30, 1996 the
investment securities available for sale had an unrealized loss of $4.7 million,
net of deferred taxes, compared to an unrealized gain of $3.7 million, net of
deferred taxes, at December 31, 1995. This change was primarily due to a
decrease in prices, resulting from an increasing interest rate environment.
Loan Portfolio
The following table reflects the composition of the loan portfolio as of
September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Commercial $ 381,593 $ 351,885
Construction 83,617 73,664
--------------- -------------
Total commercial loans $ 465,210 $ 425,549
Residential mortgage 862,026 854,715
Commercial mortgage 670,498 619,326
------------- ------------
Total mortgage loans $ 1,532,524 $ 1,474,041
Home equity 158,763 162,738
Credit card 115,505 21,617
Automobile 742,444 650,300
Other consumer 70,880 59,855
------------- -------------
Total consumer loans $ 1,087,592 $ 894,510
Less: unearned income (113) (925)
-------------- -------------
Total loans $ 3,085,213 $ 2,793,175
========== ==========
As a percent of total loans:
Commercial loans 15.1% 15.2%
Mortgage loans 49.7 52.8
Consumer loans 35.2 32.0
-------------- ------------
Total loans 100.0% 100.0%
============= ===========
</TABLE>
<PAGE>
During the second quarter of 1996, Valley announced the commencement of a
co-branded credit card, the ShopRite MasterCard, to be issued by VNB. Valley
anticipates that the ShopRite MasterCard, which is VNB's first co-branded credit
card, will significantly expand VNB's outstanding credit cards and significantly
increase its interest-bearing outstanding credit card balances.*
Valley anticipates that the ShopRite co-branded card program will have a
positive effect on earnings in 1997, but the introduction of the co-branded
program will have an adverse effect on earnings over the remainder of 1996 since
the substantial start-up expenses, along with fraud losses, lost and stolen
expenses and other charges will impact earnings in 1996 and 1997.* However,
there can be no assurance that the co-branded card will have a positive impact
on earnings in 1997 or the extent of any positive impact or the extent of any
adverse effect in 1996.
NOTE: * The statements concerning the impact of VNB's co-branded program on
Valley's earnings for 1996 and 1997 and the estimated expenses, as well as the
increase in VNB's outstanding credit cards and interest bearing account
balances, all are forward looking statements under the Private Securities
Litigation Reform Act of 1995. The correctness of the estimates and forward
looking statements depend upon a number of factors and the actual results may
differ from Valley's estimates. While Valley has developed its
estimates of the impact of the co-branded card program after considering
relevant factors, actual expenses and results may vary, including but not
limited to the following: Costs associated with the generation of the new cards
will impact earnings in 1996 and could impact earnings in 1997; a significant
percentage of the solicited customers will sign-up for the ShopRite MasterCard;
Valley will generate a significant amount of interest-bearing receivables
outstanding at the end of 1996 and 1997; a significant portion of the new card
holders will roll-over interest bearing balances from other
credit cards; a majority of the cardholders will not pay their outstanding
balances in full each month; the interest rate environment during 1996 and
1997 will remain at present levels so the introductory rates will meet VNB's
profit objectives; the co-branded agreement will continue; the cardholders will
maintain their cards with VNB for their anticipated life; credit card losses and
theft and fraud losses will not exceed the industry norms, and other factors
impacting credit card profits. Moreover, if VNB enters into other co-branded
programs, the effects associated with the ShopRite MasterCard
may be impacted by expenses and/or income from such other programs and VNB's
earnings and expenses from all its other non-card activities will have more of
an impact on Valley's total income and expenses than the co-branded program.
Non-Performing Assets
Non-performing assets include non-accrual loans and other real estate owned
(OREO). Non-performing assets continued to decrease, and totalled $12.7 million
at September 30, 1996 compared with $18.8 million at December 31, 1995, a
decrease of $6.1 million or 32.4%. Non-performing assets at September 30, 1996
and December 31, 1995, respectively, amounted to 0.41% and .67% of loans and
other real estate owned.
Loans 90 days or more past due and not included in the non-performing asset
category increased to $9.7 million at September 30, 1996, compared to $8.1
million at December 31, 1995. These loans are primarily residential mortgage
loans, commercial mortgage loans and commercial loans which are generally
well-secured and in the process of collection.
The following table sets forth non-performing assets and accruing loans which
are 90 days or more past due as to principal or interest payments on the dates
indicated, in conjunction with asset quality ratios for Valley.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Loans past due in excess of
90 days and still accruing $ 9,707 $ 8,117
--------- ---------
Non-performing loans $ 7,609 $ 11,795
Other real estate owned 5,102 7,015
--------- --------
Total non-performing assets $ 12,711 $ 18,810
-------- --------
Troubled debt restructured loans $ 5,391 $ 5,209
--------- ---------
Non-performing loans as a % of loans 0.25% 0.42%
--------- -------
Non-performing assets as a % of loans
plus other real estate owned 0.41% 0.67%
---------- ---------
Allowance as a % of loans 1.35% 1.42%
---------- ---------
Allowance as a % of non-performing assets 328.83% 210.90%
------- ------
</TABLE>
Allowance for Loan Losses
At September 30, 1996 the allowance for loan losses amounted to $41.8 million or
1.35% of loans, net of unearned income, as compared to $39.7 million or 1.42% at
year-end 1995.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan recoveries were $33 thousand for the
nine months ended September 30, 1996 compared with net loan charge-offs of $4.0
million for the nine months ended September 30, 1995.
Capital
A significant measure of the strength of a financial institution is its
shareholders' equity, which should expand in close proportion to asset growth.
At September 30, 1996, shareholders' equity totalled $382.4 million or 8.3% of
total assets, compared with $400.2 million or 8.7% at year-end 1995.
This decrease in shareholders' equity resulted from the repurchase of shares of
Valley common stock for treasury purposes. Valley repurchased approximately
1,207,000 shares in 1996 of which approximately 943,000 shares were used for the
five percent stock dividend issued on May 17, 1996. The shares held in treasury
at September 30, 1996 will continue to be used for stock dividends, employee
benefit programs and other general corporate purposes.
Also contributing to this decrease in shareholder's equity was a change in the
market value of securities available for sale. Included in shareholders equity
at September 30, 1996 is a $4.7 million unrealized loss on investment securities
available for sale, net of tax, compared to an unrealized gain of $3.7 million
at December 31, 1995.
Valley's capital position at September 30, 1996 under risk-based capital
guidelines was $383.1 million, or 12.4% of risk weighted assets, for Tier 1
capital and $421.6 million, or 13.7% for Total risk-based capital. The
comparable ratios at December 31, 1995 were 13.9% for Tier 1 capital and 15.1%
for Total risk-based capital. Valley's ratios at September 30, 1996 are above
the "well capitalized" requirements, which require Tier I capital of at least 6%
and Total risk-based capital of 10%. The decrease in risk-based capital ratios
can be attributed to the shift in assets from lower risk weight investments to
higher risk weight loans.
The Federal Reserve Board requires "well capitalized" bank holding companies to
maintain a minimum leverage ratio of 5.0%. Valley was in compliance with the
leverage requirement having a Tier I leverage ratio of 8.4% at both September
30, 1996 and December 31, 1995.
Book value per share amounted to $10.52 at September 30, 1996 compared with
$10.66 per share at December 31, 1995.
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 45.4% for the nine months ended September 30, 1996, compared to
42.6% for the nine month period ended September 30, 1995. Cash dividends
declared for the first nine months of 1996 amounted to $.74 per share,
equivalent to a dividend payout ratio of 54.6%, compared to 57.3% for the same
period in 1995. 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 it current
dividend policy of a quarterly distribution of earnings to its shareholders.
Recent Accounting Pronouncements
In May 1995 the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." The Statement requires capitalization of the value of rights to service
mortgage loans for others, whether those rights were acquired through purchase
or origination. SFAS No. 122 also requires that capitalized mortgage servicing
rights be evaluated for impairment based on their fair value with any
adjustments recognized through a valuation allowance. Effective January 1, 1996,
SFAS No. 122 was adopted and capitalization of originated mortgage servicing
rights began. All capitalized mortgage servicing rights, both originated and
purchased, will be evaluated for impairment on a quarterly basis. The impact of
adopting SFAS No. 122 is not material.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement encourages use of a fair value based method of
accounting for stock-based compensation plans while allowing continued use of
the intrinsic value method of accounting prescribed by Accounting Principles
Board Opinion (APB) No. 25 method of accounting must make pro forma disclosures
of net income and earnings per shares as if the fair value based method of
accounting, as defined is SFAS No. 123, had been applied.
Valley adopted SFAS No. 123 effective January 1, 1996 and will continue
accounting for stock-based compensation under APB No. 25 and include the pro
forma disclosures required by SFAS No. 123 in annual financial statements
beginning in the year ended December 31, 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. These standards are
based on consistent application of a financial-components approach that
focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS No. 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 is effective for transfers that occur after December 31, 1996,
and will be applied prospectively. Valley does not expect the adoption of
SFAS No. 125 to have a material effect on its future financial position or
results of operations.
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10) Material Contracts Executed or Becoming Effective During
the Period
Agreement and Plan of Merger, dated as of September 13,
1996, by and among Valley National Bancorp,("Valley"),
Valley National Bank, Midland Bancorporation, Inc.
("Midland") and the Midland Bank & Trust Company
incorporated herein by reference to Registrant's Form 8-K
filed with the Securities and Exchange Commission on
September 20, 1996.
Stock Option Agreement, dated September 13, 1996, by and
between Valley and Midland, incorporated herein by
reference to Registrant's Form 8-K filed with the
Securities and Exchange Commission on September 20, 1996.
(27) Financial Data Schedule
b) Reports on Form 8-K
1) Filed September 20, 1996 to report the signing of the
Agreement and Plan of Merger dated September 13, 1996
between Valley National Bancorp and Midland
Bancorporation, Inc. and to report the rescinding of its
previously announced treasury stock repurchase program.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY NATIONAL BANCORP
(Registrant)
/s/ PETER SOUTHWAY
- -----------------------------------
PETER SOUTHWAY
VICE CHAIRMAN
/s/ ALAN D. ESKOW
- -----------------------------------
ALAN D. ESKOW
SENIOR VICE PRESIDENT
FINANCIAL ADMINISTRATION
DATE: NOVEMBER 13, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 135,589
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,049,069
<INVESTMENTS-CARRYING> 222,005
<INVESTMENTS-MARKET> 221,957
<LOANS> 3,085,213
<ALLOWANCE> 41,798
<TOTAL-ASSETS> 4,605,051
<DEPOSITS> 4,070,621
<SHORT-TERM> 67,475
<LIABILITIES-OTHER> 47,868
<LONG-TERM> 36,671
0
0
<COMMON> 20,440
<OTHER-SE> 361,977
<TOTAL-LIABILITIES-AND-EQUITY> 4,605,051
<INTEREST-LOAN> 181,741
<INTEREST-INVEST> 59,624
<INTEREST-OTHER> 2,578
<INTEREST-TOTAL> 243,943
<INTEREST-DEPOSIT> 104,946
<INTEREST-EXPENSE> 108,100
<INTEREST-INCOME-NET> 135,843
<LOAN-LOSSES> 2,095
<SECURITIES-GAINS> 834
<EXPENSE-OTHER> 76,706
<INCOME-PRETAX> 74,294
<INCOME-PRE-EXTRAORDINARY> 74,294
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,547
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 4.35
<LOANS-NON> 7,609
<LOANS-PAST> 9,707
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 39,670
<CHARGE-OFFS> 3,841
<RECOVERIES> 3,874
<ALLOWANCE-CLOSE> 41,798
<ALLOWANCE-DOMESTIC> 31,161
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10,637
</TABLE>
