UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] Quarter Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Period Ended June 30, 1997
[ ] 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)
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 such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (No par value), of which 42,289,506 shares were outstanding as of
August 1, 1997.
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
June 30, 1997 and December 31, 1996
(Unaudited)
Consolidated Statements of Income 4
Six and Three Months Ended June 30, 1997
and 1996
(Unaudited)
Consolidated Statements of Cash Flows
Six and Three Months Ended June 30, 1997
and 1996 5
(Unaudited)
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 7-16
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 17
SIGNATURES 18
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Assets
Cash and due from banks................................$ 250,510 $ 196,995
Federal funds sold...................................... 51,000 82,450
Investment securities held to maturity, fair value of
$193,802 and $257,213 in 1997 and 1996, respectively... 192,092 255,277
Investment securities available for sale............... 1,005,416 989,698
Loans, net of unearned income.......................... 3,510,174 3,471,248
Less: Allowances for possible loan losses............. (45,473) (46,022)
Loans, net............................................. 3,464,701 3,425,226
Premises and equipment, net............................ 73,638 71,244
Due from customers on acceptances outstanding.......... 580 940
Accrued interest receivable............................ 29,356 29,808
Other assets........................................... 62,636 63,909
Total assets..................................$5,129,929 $5,115,547
Liabilities
Deposits:
Non-interest bearing deposits................ $ 738,811 $ 715,563
Interest bearing:
Savings.............................. 1,910,624 1,835,476
Time ............................ 1,873,940 2,016,026
Total deposits.............. 4,523,375 4,567,065
Federal funds purchased and securities sold under
repurchase agreements......................... 33,225 23,339
Treasury tax and loan account and other short-term
borrowings....................................... 45,322 17,202
Other borrowings....................................... 31,042 35,071
Bank acceptances outstanding........................... 580 940
Accrued expenses and other liabilities................. 45,744 41,546
Total liabilities............................. 4,679,288 4,685,163
Shareholders' Equity
Common stock, no par value, authorized 78,750,000 shares,
issued 42,475,559 shares in 1997 and
40,449,671 in 1996, .......................... 23,301 22,321
Surplus ............................ 293,582 238,540
Retained earnings...................................... 139,596 176,853
Unrealized gain (loss) on investment securities available
for sale, net of tax.......................... (456) 259
456,023 437,973
Treasury stock, at cost (195,909 shares in 1997 and
272,093 shares in 1996)...................... (5,382) (7,589)
Total shareholders' equity................... 450,641 430,384
Total liabilities and shareholders' equity...$5,129,929 $5,115,547
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in thousands, except for per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans..............$ 143,945 $ 129,567 $72,493 $ 65,104
Interest and dividends on
investment securities:
Taxable........................ 30,895 35,834 15,633 17,785
Tax-exempt..................... 5,487 6,702 2,669 3,332
Dividends...................... 781 375 363 175
Interest on federal funds sold and
other short term investments... 2,170 2,102 626 649
Total Interest Income.......... 183,278 174,580 91,784 87,045
Interest Expense
Interest on deposits:
Savings........................ 21,505 21,295 11,050 10,916
Time ...................... 53,731 52,519 26,118 25,953
Interest on federal funds purchased
and securities sold under
repurchase agreements.......... 563 538 303 254
Interest on other short-term
borrowings..................... 640 308 402 148
Interest on other borrowings............ 962 1,208 476 636
Total Interest Expense......... 77,401 75,868 38,349 37,907
Net interest income..................... 105,877 98,712 53,435 49,138
Provision for possible loan losses...... 3,100 1,860 1,900 1,080
Net interest income after provision
for possible loan losses....... 102,777 96,852 51,535 48,058
Non-Interest Income
Trust income............................ 501 515 243 255
Service charges on deposit accounts..... 5,849 5,518 2,940 2,757
Gains on securities transactions,
net ...................... 2,169 573 1,053 241
Fees from mortgage servicing............ 2,228 1,968 1,103 953
Credit card income...................... 5,818 1,017 3,280 543
Gains on sales of loans................. 1,195 975 818 314
Other ...................... 2,430 2,325 848 833
Total Non-Interest Income...... 20,190 12,891 10,285 5,896
Non-Interest Expense
Salary expense........................ 22,378 21,288 11,109 10,761
Employee benefit expense.............. 5,788 5,684 2,877 2,662
FDIC insurance premiums............... 508 1,514 301 797
Occupancy and equipment expense....... 8,950 9,338 4,488 4,733
Credit card expense................... 8,476 1,156 4,400 660
Amortization of intangible assets..... 1,699 1,543 850 780
Other .................... 12,470 12,454 6,845 6,949
Total Non-Interest Expense... 60,269 52,977 30,870 27,342
Income before income taxes............ 62,698 56,766 30,950 26,612
Income tax expense.................... 21,323 19,398 10,475 8,663
Net Income...........................$ 41,375 $ 37,368 $ 20,475 $ 17,949
Net income per share.................$ 0.98 $ 0.87 $ 0.48 $ 0.42
Weighted average shares outstanding..42,250,450 42,785,712 42,265,174 42,402,426
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income..........................................$ 41,375 $ 37,368
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
intangible assets 5,464 5,436
Amortization of compensation costs pursuant to
long term stock incentive plan..... 273 221
Provision for possible loan losses.......... 3,100 1,860
Net amortization of premiums and discounts.. 460 2,815
Net gains on securities transactions........ (2,169) (573)
Proceeds from sale of loans....................... 19,296 20,925
Gains on sales of loans..................... (1,195) (975)
Proceeds from recoveries on charged-off loans 975 2,586
Net decrease in accrued interest
receivable and other assets........ 1,215 1,598
Net increase (decrease) in accrued expenses and
other liabilities ................. 2,135 (723)
Net cash provided by operating activities: 70,929 70,538
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity................................. 34,979 27,776
Purchases of investment securities held to maturity (11,858) (9,973)
Proceeds from sales of investment securities
available for sale.......................... 95,193 58,057
Proceeds from maturing investment securities
available for sale.......................... 105,729 149,423
Purchases of investment securities available for sale(176,224)(144,997)
Purchases of mortgage servicing rights............... (880) (523)
Net decrease in federal funds sold and other
short term investments...................... 31,450 81,050
Net increase in loans made to customers.............. (61,651)(185,472)
Purchases of premises and equipment, net of sales.... (6,159) (7,316)
Net decrease in due from customers on
acceptances outstanding..................... 360 170
Net cash used in investing activities: 10,939 (31,805)
Cash flows from financing activities:
Net decrease in deposits . .......................... (43,690) (61,007)
Net increase in federal funds purchased
and other short term borrowings............. 38,006 29,575
Advances of other borrowings......................... -- 20,000
Repayments of other borrowings....................... (4,029) (8,027)
Net decrease in bank acceptances outstanding......... (360) (170)
Dividends paid to common shareholders................ (19,158) (18,363)
Addition of common shares to treasury................ -- (30,453)
Common stock issued, net of cancellations............ 878 51
Net cash used in financing activities: (28,353) (68,394)
Net increase (decrease) in cash and due from banks............ 53,515 (29,661)
Cash and due from banks at January 1.......................... 196,995 198,857
Cash and due from banks at June 30............................$250,510 169,196
Supplemental cash flow disclosure:
Cash paid for interest on deposits and other
borrowings $ 76,554 75,620
Cash paid for federal and state income taxes.........$ 14,938 18,678
Transfer of securities held to maturity acquired in
acquisition of Midland to securities available
for sale......................................$ 39,833 --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
The Consolidated Statements of Financial Condition as of June 30, 1997
and December 31, 1996, the Consolidated Statements of Income for the
six and three month periods ended June 30, 1997 and 1996 and the
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1997 and 1996 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 June 30, 1997 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, 1996 Annual Report
to Shareholders.
The Consolidated Statements of Income for the six and three month
periods ended June 30, 1996 and the Consolidated Statement of Cash
Flows for the six month period ended June 30, 1996 have been restated
to include Midland Bancorporation, Inc. which was acquired on the close
of business February 28, 1997 in a transaction accounted for as
a pooling of interest.
2. Earnings Per Share
Earnings per share amounts and weighted average shares outstanding have
been restated to reflect the 5% stock dividend declared April 2, 1997
to Shareholders of record on April 30, 1997 and issued on May 15, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Recent Development
Effective as of the close of business on February 28, 1997, Valley consummated
its previously announced merger agreement with Midland Bancorporation, Inc.
("Midland"), parent of The Midland Bank and Trust Company ("Midland Bank"),
headquartered in Paramus, New Jersey. On December 31, 1996 Midland had total
assets of $438.9 million and deposits of $401.6 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 3,775,000 shares of Valley common stock. Each share of common
stock of Midland was exchanged for 30 shares of Valley common stock.
Earnings Summary
Net income for the six months ended June 30, 1997 was $41.4 million, or $0.98
per share. These results compare to net income of $37.4 million, or $0.87 per
share for the same period in 1996. The annualized return on average assets
increased to 1.63% from 1.51%, while the annualized return on average equity
also increased to 18.93% from 17.61%, for the six months ended June 30, 1997
and 1996, respectively.
Net income was $20.5 million, or $0.48 per share for the three month period
ended June 30, 1997 compared with $17.9 million or $0.42 per share for the three
month period ended June 30, 1996. This increase in net income is largely
attributable to an increase in net interest income, which was offset by an
increase in the provision for loan losses and expenses of the Shop-Rite credit
card program, which were partially offset by increased fee income.
Net Interest Income
Net interest income is the largest source of Valley's operating income. Net
interest income on a tax equivalent basis increased to $109.2 million from
$102.7 million for the six months ended June 30, 1997 as compared to the six
months ended June 30, 1996. The increase in net interest income is due
primarily to the movement of earning assets out of the investment portfolio and
into higher yielding loans, resulting in an increase in the net interest margin
to 4.55% for the six months ended June 30, 1997 compared to 4.42% for the same
period in 1996.
Average interest earning assets for the six month period increased $146.1
million in 1997, or 3.1% over the same period in 1996. This increase was mainly
the result of increased volume of credit card loans, automobile loans and
commercial mortgages. Average loans increased by $368.6 million or 12.0% over
the 1996 amount. The average rate on loans was negatively impacted by the
introductory below market interest rates offered on co-branded credit cards.
The increase in average loan volume caused interest income on loans for 1997
to increase by $14.3 million over 1996. Offsetting this increase, was a decline
in average taxable and tax exempt investment securities of $225.9 million or
15.1% from the amount in the portfolio during 1996.
Average interest-bearing liabilities grew 1.5% or $57.4 million. Total deposit
growth, similar to the past few years, was held to a small increase due to
competitive factors and alternative investment opportunities for consumers.
Average demand deposits continued to grow and increased by $68.1 million or
11.1% over 1996 balances. Average savings deposits decreased by $3.4 million
or 0.2%, while average time deposits increased $59.7 million or 3.0%.
<PAGE>
The following tables reflect the components of net interest income for the six
and three months ended June 30, 1997 and 1996.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET
INTEREST EARNINGS ON A TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
Average Avg Average Avg
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans (1) (2)...... $3,447,777 $ 144,309 8.37% $3,079,153 $ 129,987 8.44%
Taxable investments (3) 1,021,903 31,676 6.20 1,190,025 36,209 6.09
Tax-exempt
investments (1) (3) 246,396 8,442 6.85 304,133 10,311 6.78
Federal funds sold and
other short-term
investments (1)..... 82,293 2,170 5.27 79,004 2,102
Interest earning
assets..............$4,798,369 $ 186,597 7.78% $4,652,315 $ 178,609 7.68%
Allowance for possible
loan losses......... (46,125) (44,729)
Unrealized loss on
securities available
for sale............ 165,871 (3,986)
Cash and due from banks 161,600 173,223
Other assets............. (3,236) 163,601
Total assets........$5,076,479 $4,940,424
Liabilities and Shareholders' Equity
Interest bearing liabilities
Savings deposits... $1,808,438 $ 21,505 2.38% $1,811,797 $ 21,295 2.35%
Time deposits...... 2,025,087 53,731 5.31 1,965,396 52,519 5.34
Total interest
bearing deposits 3,833,525 75,236 3.93 3,777,193 73,814 3.91
Federal funds purchased
and other short-term
borrowings .......... 49,715 1,203 4.84 37,126 846 4.56
Other borrowings.......... 33,153 962 5.80 44,633 1,208 5.41
Total interest bearing
liabilities..........3,916,393 77,401 3.95 3,858,952 75,868 3.93
Demand deposits.......... 680,793 612,672
Other liabilities........ 42,074 44,428
Shareholders' equity 437,219 424,372
Total liabilities and
shareholders' equity$5,076,479 $4,940,424
Net interest income (tax
equivalent basis).... 109,196 102,741
Tax equivalent adjustment (3,319) (4,029)
Net interest income....... $ 105,877 $ 98,712
Net interest rate differential 3.83% 3.75%
Net interest margin (4) 4.55% 4.42%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
Average Avg Average Avg
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans (1) (2)...........$3,455,788 $ 72,675 8.41% $3,118,137 $ 65,307 8.38%
Taxable investments (3) 1,023,975 15,996 6.25 1,182,095 17,960 6.08
Tax-exempt investments(1) (3) 239,726 4,106 6.85 303,508 5,126 6.76
Federal funds sold and other
short-term investments (1) 44,650 627 5.62 45,773 649 5.67
Total interest earning assets$4,764,139 $ 93,404 7.84% $4,649,513 $ 89,042 7.66%
Allowance for possible loan
losses.................. (46,012) (44,097)
Unrealized loss on securities
available for sale (5,041) (8,977)
Cash and due from banks 164,865 168,920
Other assets................ 163,927 168,863
Total assets........... $5,041,878 $4,934,222
Liabilities and Shareholders' Equity
Interest bearing liabilities
Savings deposits....... $1,824,388 $ 11,050 2.42% 1,816,631 $ 10,916 2.40%
Time deposits.......... 1,953,306 26,118 5.35 1,955,582 25,953 5.31
Total interest
bearing deposits 3,777,694 37,168 3.94 3,772,213 36,869 3.91
Federal funds purchased and
other short-term
borrowings 56,329 705 5.01 36,641 402 4.39
Other borrowings............ 32,589 476 5.84 46,355 636 5.48
Total interest bearing
liabilities............ 3,866,612 38,349 3.97 3,855,209 37,907 3.93
Demand deposits............. 691,619 621,240
Other liabilities........... 44,438 41,856
Shareholders' equity 439,209 415,917
Total liabilities and
shareholders' equity $5,041,878 $4,934,222
Net interest income (tax
equivalent basis)...... 55,055 51,135
Tax equivalent adjustment (1,619) (1,997)
Net interest income......... $ 53,436 $ 49,138
Net interest rate differential 3.87% 3.73%
Net interest margin (4) 4.62% 4.40%
</TABLE>
(1) Interest income is presented on a tax equivalent basis using a 35% tax
rate.
(2) Loans are stated net of unearned income, and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is
based on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of earning
assets.
The following table demonstrates the relative impact on net interest income of
changes in volume of earning assets and interest bearing liabilities and changes
in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
1997 Compared to 1996 1997 Compared to 1996
Increase (Decrease) (2) Increase (Decrease) (2)
Interest Volume Rate Interest Volume Rate
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1) $ 14,322 $ 15,438 $(1,116) $ 7,368 $ 7,100 $268
Taxable investments.. (4,533) (5,200) 667 (1,964) (2,458) 494
Tax-exempt
investments (1)... (1,869) (1,977) 108 (1,020) (1,092) 72
Federal funds sold and
other short term
investments..... 68 87 (19) (22) (16) (6)
7,988 8,348 (360) 4,362 3,534 828
Interest expense:
Savings deposits.... 210 (40) 250 134 47 87
Time deposits........ 1,212 1,586 (374) 165 (30) 195
Federal funds purchased
and securities sold
under repurchase
agreements....... 357 302 55 303 240 63
Other borrowings..... (246) (328) 82 (160) (199) 39
1,533 1,520 13 442 58 384
Net interest income.....$ 6,455 $ 6,828 $ (373) $ 3,920 $ 3,476 $ 444
</TABLE>
(1) Interest income is adjusted to a tax equivalent basis using a 35% tax
rate.
(2) Variances resulting from a combination of changes in volume and rates
are allocated to the categories in proportion to the absolute dollar
amounts of the change in each category.
Non-Interest Income
The following table presents the components of non-interest income for the six
and three months ended June 30, 1997 and 1996.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1997 1996 1997 1996
(in thousands)
<S> <C> <C> <C> <C>
Trust income..........................$ 501 $ 515 $ 243 $ 255
Service charges on deposit accounts 5,849 5,518 2,940 2,757
Gains on securities transactions, net 2,169 573 1,053 241
Fees from mortgage servicing 2,228 1,968 1,103 953
Credit card income.................... 5,818 1,017 3,280 543
Gains on sales of loans............... 1,195 975 818 314
Other. . . ........................... 2,430 2,325 848 833
Total..................$20,190 $12,891 $10,285 $ 5,896
</TABLE>
<PAGE>
Non-interest income continues to represent a considerable source of income for
Valley. Excluding gains on securities transactions, total non-interest income
amounted to $18.0 million and $9.2 million for the six months and quarter ended
June 30, 1997 compared with $12.3 million and $5.7 million for the six months
and quarter ended June 30, 1996.
Fees from mortgage servicing increased by 13.2% for the six months ended
June 30, 1997 and 15.7% for the quarter ended June 30, 1997. This reflects the
increase in the size of the serviced portfolio.
Included in credit card income is merchant discount income and net interchange
fees. The increase in credit card income is the result of a co-branded credit
card program that began during the second quarter of 1996.
Gains on the sales of loans were $1.2 million and $818 thousanbd for the first
six months and three months of 1997 compared to $975 thousand and $314 thousand
for the same periods of 1996. The increase of gains recorded are primarily
from the increased SBA activity resulting in the sale of the guaranteed portion
of SBA loans.
Securities gains were $1.1 million for the three months ended June 30, 1997
compared to $241 thousand for the same period in 1996. These gains were the
result of equity securities sold by Valley National Bancorp.
Non-Interest Expense
The following table presents the components of non-interest expense for the
six and three months ended June 30, 1997 and 1996.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
(in thousands)
<S> <C> <C> <C> <C>
Salary expense........................ $ 22,378 $ 21,288 $ 11,109 $ 10,761
Employee benefit expense.............. 5,788 5,684 2,877 2,662
FDIC insurance premiums............... 508 1,514 301 797
Occupancy and equipment expense....... 8,950 9,338 4,488 4,733
Credit card expense................... 8,476 1,156 4,400 660
Amortization of intangible assets..... 1,699 1,543 850 780
Other................................. 12,470 12,454 6,845 6,949
Total........................... $ 60,269 $ 52,977 $ 30,870 $ 27,342
</TABLE>
Non-interest expense totalled $60.3 million for the six month period ended
June 30, 1997, an increase of 13.8% from the 1996 level. The largest component
of non-interest expense is salary and employee benefit expense which totalled
$28.2 million in 1997 compared to $27.0 million in 1996. At June 30, 1997,
full-time equivalent staff was 1,558, compared to 1,542 at June 30, 1996.
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 six months ended June 30, 1997 is
47.2%, one of the lowest in the industry, compared with an efficiency ratio for
1996 of 44.7%. The increase in the efficiency ratio is the result of the
acquisition of Midland and net expenses incurred for the credit card program.
Valley strives to control its efficiency ratio and expenses as a means of
producing increased earnings for its shareholders.
<PAGE>
Valley's deposit base consists of both BIF and SAIF deposits. BIF deposits,
which represent approximately 70% of the insurable deposit base, were exempt
from premiums in 1996. As a result of the Funds Act enacted in 1996, Valley is
paying insurance premiums on both its BIF and SAIF deposits beginning in 1997,
however, the revised rate structure resulted in a decline in the overall premium
expense.
Credit card expense includes cardmember rebates, processing expenses, and fraud
losses. The increase in credit card expenses is directly attributable to the
co-branded credit card that VNB began issuing during the second quarter of 1996.
The significant components of other non-interest expense include advertising,
professional fees, stationery and postage, telephone expense and REO expense
which total approximately $7.2 million for the six months ended June 30, 1997.
Income Taxes
Income tax expense as a percentage of pre-tax income was 34.0% for the six
months ended June 30, 1997 compared to 34.2% for the same period in 1996.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
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
nterest income associated with various changes in interest rates. According to
the model, an interest rate increase or decrease of 100 basis points resulted
in an impact on net interest income over the next twelve months of less than 2%,
while an increase in interest rates of 300 basis points would impact net
interest income by about 2-1/2%.
These amounts are consistent with the target levels contained in Valley's
Asset/Liability Policy, which is a maximum impact in a rising or falling
interest rate scenario of plus or minus 5% of net interest income. Management
cannot provide any assurance about the actual effect of changes in interest
rates on Valley's net interest income.
At June 30, 1997, rate sensitive assets exceeded rate sensitive liabilities at
the 0-3 month interval and resulted in a positive gap of $223 million or a
ratio of 1.14:1. The total negative gap repricing within 1 year as of
June 30, 1997 is $130.9 million or .93:1. Management does not view these
amounts as presenting an unusually high risk potential, although no assurances
can be given that Valley is not at risk from rate increases or decreases.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs
as they become due. Maintaining a level of liquid funds through
asset-liability management seeks to ensure that these needs are met at a
reasonable cost. On the asset side, liquid funds are maintained in the form
of cash and due from banks, federal funds sold, investments securities held to
maturity maturing within one year, securities available for sale and loans
held for sale. At June 30, 1997, liquid assets amounted to $1.3 billion,
as compared to $1.2 billion at December 31, 1996. This represents 27.7% and
27.2% of earning assets, and 25.7% and 25.5% of total assets at June 30,
1997 and year-end 1996, 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 $3.34 billion
and $3.23 billion for the six months ended June 30, 1997 and year ended
December 31, 1996, respectively, representing 69.6% and 67.2% of average earning
assets. Short term borrowings through Federal funds lines and Federal Home
Loan Bank advances and large dollar certificates of deposit, generally those
over $100 thousand, are used as supplemental funding sources. As of
June 30, 1997, Valley had outstanding advances of $30.5 million with the FHLB.
Additional liquidity is derived from scheduled loan and investment payments
of principal and interest, as well as prepayments received. Proceeds from
the sales of investment securities available for sale were $95.2 million,
and proceeds of $140.7 million were generated from investment maturities.
Purchases of investment securities were $188.1 million. Short term borrowings
and certificates of deposit over $100 thousand amounted to $541.7 million and
$628.3 million, on average, for the six months ended June 30, 1997 and year
ending December 31, 1996, respectively.
Valley's cash requirements consist primarily of dividends to shareholders. This
cash need is routinely satisfied by dividends collected from its subsidiary
bank. Projected cash flows from this source are expected to be adequate to pay
dividends, given the current capital levels and current profitable operations
of its subsidiary.
Investment Securities
As of June 30, 1997 Valley had $1.0 billion of securities available for sale
compared with $990 million at December 31, 1996. Those securities are recorded
at their fair value on an aggregate basis. As of June 30, 1997 the investment
securities available for sale had an unrealized loss of $456 thousand, net of
deferred taxes, compared to an unrealized gain of $259 thousand, net of
deferred taxes, at December 31, 1996. This change was primarily due to a
decrease in market values, resulting from increased interest rates. These
securities are not considered trading account securities, which may be sold on
a continuous basis, but rather securities which may be sold to meet the various
liquidity and interest rate requirements of Valley.
<PAGE>
Loan Portfolio
The following table reflects the composition of the loan portfolio as of
June 30, 1997 and December 31, 1996.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
($ in thousands)
<S> <C> <C>
Commercial $ 432,791 $ 466,580
Total commercial loans 432,791 466,580
Construction 76,113 87,486
Residential mortgage 915,044 924,764
Commercial mortgage 838,145 786,916
Total mortgage loans 1,829,302 1,799,166
Home equity 171,215 174,534
Credit card 143,064 149,494
Automobile 831,265 798,436
Other consumer 102,537 83,555
Total consumer loans 1,248,081 1,206,019
Less: unearned income -- (517)
Loans, net of unearned
income $3,510,174 $3,471,248
As a percent of total loans:
Commercial loans 12.3% 13.5%
Mortgage loans 52.1 51.8
Consumer loans 35.6 34.7
Total loans 100.0% 100.0%
</TABLE>
During the second quarter of 1996, Valley announced and began issuing a
co-branded credit card, the ShopRite Mastercard. Of the $143.1 million of
credit card loans outstanding at June 30, 1997, approximately $125.8 million
are the result of this co-branded credit card program.
Non-Performing Assets
Non-performing assets include non-accrual loans and other real estate owned
(OREO). Non-performing assets totalled $16.3 million at June 30, 1997 compared
with $16.9 million at December 31, 1996. Non-performing assets at June 30, 1997
and December 31, 1996, respectively, amounted to 0.46% and 0.49% of loans and
other real estate owned.
Loans 90 days or more past due and not included in the non-performing category
totaled $11.8 million at June 30, 1997, compared to $10.2 million at
December 31, 1996. 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.
<PAGE>
LOAN QUALITY
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(in thousands)
<S> <C> <C>
Loans past due in excess of
90 days and still accruing..... $ 11,825 $ 10,166
Non-performing loans............. $ 12,897 $ 13,182
Other real estate owned.......... 3,382 3,750
Total non-performing assets.... $ 16,279 $ 16,932
Troubled debt restructured loans. $ 5,306 $ 5,363
Non-performing loans as
a % of loans................... 0.37% 0.38%
Non-performing assets as a %
of loans plus other real
estate owned................... 0.46% 0.49%
Allowance as a % of loans........ 1.30% 1.33%
Allowance as a % of
non-performing assets.......... 279.34% 271.80%
</TABLE>
Asset Quality and Risk Elements
At June 30, 1997, the allowance for loan losses amounted to $45.5 million or
1.30% of loans, net of unearned income, as compared to $46.0 million or 1.33%
at year-end 1996.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $3.6 million for the
six months ended June 30, 1997 compared with net charge-offs of $299 thousand
for the six months ended June 30, 1996. Net charge-offs during the quarter
ended June 30, 1997 were mostly attributable to consumer credit and credit card
loans. During 1996 there were a substantial amount of recoveries in commercial
loans.
Capital Adequacy
A significant measure of the strength of a financial institution is its
shareholders' equity, which should expand in close proportion to asset growth.
At June 30, 1997, shareholders' equity totalled $450.6 million or 8.8% of total
assets, compared with $430.4 million or 8.4% at year-end 1996. Valley has
achieved steady internal capital generation throughout the past five years.
Included in shareholders equity at June 30, 1997 is a $456 thousand unrealized
loss on investment securities available for sale, net of tax, compared to an
unrealized gain of $259 thousand at December 31, 1996.
Valley's capital position at June 30, 1997 under risk-based capital guidelines
was $445.9 million, or 12.6% of risk-weighted assets, for Tier 1 capital and
$490.2 million, or 13.8% for Total risked-based capital. The comparable ratios
at December 31, 1996 were 12.2% for Tier 1 capital and 13.5% for Total
risk-based capital. Valley's ratios at June 30, 1997 are above the
"well capitalized" requirements, which require Tier I capital of at least 6%
and Total risk-based capital of 10%. The Federal Reserve Board requires "well
capitalized" bank holding companies to maintain a minimum leverage ratio of
5.0%. At June 30, 1997 and December 31, 1996, Valley was in compliance with
the leverage requirement having a Tier 1 leverage ratio of 8.87% and 8.35%,
respectively.
<PAGE>
Book value per share amounted to $10.66 at June 30, 1997 compared with $10.18
per share at December 31, 1996.
The primary source of capital growth is through retention of earnings. Valley's
rate of earnings retention, derived by dividing undistributed earnings by net
income, was 47.6% for the six month period ended June 30, 1997, compared to
50.6% for the six month period ended June 30, 1996. Cash dividends declared
amounted to $0.51 per share for the six months ended June 30, 1997, equivalent
to a dividend payout ratio of 52.4%, compared to 49.4% for the same period 1996.
Valley declared a 5% common stock dividend on April 2, 1997 to shareholders of
record on April 30, 1997, which was issued May 15, 1997. Effective with the
July 1, 1997 dividend payment, the annual dividend rate was increased to
$1.10 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.
Recent Accounting Pronouncements
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement.
SFAS 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 requires public companies to
report information about business segments in their annual financial statements
and selected business segment information in quarterly reports issued to
shareholders. SFAS 131 requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. This statement supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise". SFAS 131 is
effective for fiscal years beginning after December 15, 1997.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10) Material Contracts
No material contracts entered into or becoming effective in the
Reporting Period.
(27) Financial Data Schedule
b) Reports on Form 8-K
None
<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
Date: August 13, 1997 PETER SOUTHWAY
VICE CHAIRMAN
/s/ Alan D. Eskow
Date: August 13, 1997 ALAN D. ESKOW
SENIOR VICE PRESIDENT
FINANCIAL ADMINISTRATION
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 250,510
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 51,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,005,416
<INVESTMENTS-CARRYING> 192,092
<INVESTMENTS-MARKET> 193,802
<LOANS> 3,510,174
<ALLOWANCE> 45,473
<TOTAL-ASSETS> 5,129,929
<DEPOSITS> 4,523,375
<SHORT-TERM> 78,547
<LIABILITIES-OTHER> 46,324
<LONG-TERM> 31,042
0
0
<COMMON> 23,301
<OTHER-SE> 427,340
<TOTAL-LIABILITIES-AND-EQUITY> 5,129,929
<INTEREST-LOAN> 143,945
<INTEREST-INVEST> 37,163
<INTEREST-OTHER> 2,170
<INTEREST-TOTAL> 183,278
<INTEREST-DEPOSIT> 75,236
<INTEREST-EXPENSE> 77,401
<INTEREST-INCOME-NET> 105,877
<LOAN-LOSSES> 3,100
<SECURITIES-GAINS> 2,169
<EXPENSE-OTHER> 60,269
<INCOME-PRETAX> 60,269
<INCOME-PRE-EXTRAORDINARY> 60,269
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,375
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 4.55
<LOANS-NON> 12,897
<LOANS-PAST> 11,825
<LOANS-TROUBLED> 5,306
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 46,022
<CHARGE-OFFS> 4,631
<RECOVERIES> 982
<ALLOWANCE-CLOSE> 45,473
<ALLOWANCE-DOMESTIC> 36,817
<ALLOWANCE-FOREIGN> 53
<ALLOWANCE-UNALLOCATED> 8,603
</TABLE>
