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, 1998
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-11179
----------------------
VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
(State or other Jurisdiction of
incorporation or organization)
22-2477875
(I.R.S. Employer Identification No.)
1455 Valley Road, Wayne, New Jersey 07474-0558
(Address of principal executive offices)
973-305-8800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (No par value), of which 52,789,345 shares were outstanding as of
August 3, 1998.
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION .................................Page Number
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited)...
June 30, 1998 and December 31, 1997........................3
Consolidated Statements of Income (Unaudited)
Six and Three Months Ended June 30, 1998 and 1997..........4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 (Unaudited).......5
Notes to Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of...................
Financial Condition and Results of Operations..............8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... ......20
SIGNATURES ......... .................21
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Assets
Cash and due from banks $ 147,181 $ 148,175
Federal funds sold 66,000 30,000
Securities held to maturity, fair value of $152,680
and $163,444 in 1998 and 1997, respectively 150,788 161,552
Trading account securities 1,444 --
Securities available for sale 932,802 1,017,225
Loans 3,660,509 3,605,681
Loans held for sale 19,685 16,651
Less: Allowance for possible loan losses (46,600) (46,372)
Loans, net 3,633,594 3,575,960
Premises and equipment 75,393 74,553
Due from customers on acceptances outstanding 685 304
Accrued interest receivable 27,982 29,313
Other assets 61,273 53,573
Total assets $5,097,142 $5,090,655
Liabilities
Deposits:
Non-interest bearing deposits $ 768,424 $ 769,887
Interest bearing:
Savings 1,861,385 1,841,039
Time 1,746,894 1,792,028
Total deposits 4,376,703 4,402,954
Federal funds purchased and securities sold under
repurchase agreements 23,553 32,882
Treasury tax and loan account and other short-term
borrowings 50,570 24,056
Other borrowings 107,982 114,012
Bank acceptances outstanding 685 304
Accrued expenses and other liabilities 45,195 41,088
Total liabilities 4,604,688 4,615,296
Shareholders' Equity
Common stock, no par value, authorized 98,437,500
shares, issued 53,052,614 shares in 1998
and 53,066,174 in 1997 23,283 23,282
Surplus 291,494 291,943
Retained earnings 181,645 159,116
Accumulated other comprehensive income 3,505 3,296
499,927 477,637
Treasury stock, at cost (267,909 shares in 1998
and 116,766 shares in 1997) (7,473) (2,278)
Total shareholders' equity 492,454 475,359
Total liabilities and shareholders' equity $5,097,142 $5,090,655
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in thousands, except for per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $150,311 $143,510 $ 75,562 $ 72,267
Interest and dividends on investment
securities:
Taxable 27,399 30,895 13,361 15,633
Tax-exempt 4,264 5,487 2,072 2,669
Dividends 902 781 441 363
Interest on federal funds sold and other
short term investments 2,164 2,170 1,096 627
Total interest income 185,040 182,843 92,532 91,559
Interest Expense
Interest on deposits:
Savings 20,769 21,505 10,444 11,050
Time 50,081 53,731 24,717 26,118
Interest on federal funds purchased and
securities sold under repurchase
agreements 451 563 262 303
Interest on other short-term borrowings 779 640 455 402
Interest on other borrowings 3,385 962 1,671 476
Total interest expense 75,465 77,401 37,549 38,349
Net interest income 109,575 105,442 54,983 53,210
Provision for possible loan losses 5,825 3,100 3,325 1,900
Net interest income after provision
for possible loan losses 103,750 102,342 51,658 51,310
Non-Interest Income
Trust income 710 501 370 243
Service charges on deposit accounts 5,884 5,849 3,065 2,940
Gains on securities transactions, net 965 2,169 48 1,053
Fees from loan servicing 3,576 2,663 2,001 1,328
Credit card fee income 5,198 5,800 2,675 2,904
Gains on sales of loans, net 2,642 1,195 1,578 818
Other 2,001 2,448 1,014 1,224
Total non-interest income 20,976 20,625 10,751 10,510
Non-Interest Expense
Salary expense 24,060 22,378 12,079 11,109
Employee benefit expense 5,091 5,788 2,545 2,877
FDIC insurance premiums 566 508 276 301
Occupancy and equipment expense 9,569 8,950 5,010 4,488
Credit card expense 5,514 8,476 2,369 4,400
Amortization of intangible assets 2,185 1,699 1,235 850
Other 12,047 12,470 6,090 6,845
Total non-interest expense 59,032 60,269 29,604 30,870
Income before income taxes 65,694 62,698 32,805 30,950
Income tax expense 17,978 21,323 8,375 10,475
Net income $47,716 $41,375 $24,430 $20,475
Earnings per share:
Basic $ 0.90 $ 0.78 $ 0.46 $ 0.39
Diluted $ 0.89 $ 0.78 $ 0.46 $ 0.38
Weighted average number of shares
outstanding:
Basic 52,812,130 52,813,063 52,782,903 52,831,467
Diluted 53,350,825 53,174,423 53,330,102 53,211,604
</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,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 47,716 $ 41,375
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,188 5,464
Amortization of compensation costs pursuant to
long term stock incentive plan 402 273
Provision for possible loan losses 5,825 3,100
Net amortization of premiums and discounts 1,311 460
Net gains on securities transactions (965) (2,169)
Proceeds from sale of loans 78,669 19,296
Gain on sales of loans (2,642) (1,195)
Proceeds from recoveries on previously
charged-off loans 1,392 975
Net decrease in accrued interest receivable and
other assets 828 1,215
Net increase in accrued expenses and
other liabilities 2,410 2,135
Net cash provided by operating activities 141,134 70,929
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity 19,834 34,979
Purchases of investment securities held to
maturity (9,236) (11,858)
Proceeds from sales of investment securities
available for sale 34,354 95,193
Proceeds from maturing investment securities
available for sale 193,084 105,729
Purchases of investment securities
available for sale (144,102) (176,224)
Purchases of mortgage servicing rights (9,564) (880)
Net (increase) decrease in federal funds sold and
other short term investments (36,000) 31,450
Net increase in loans made to customers (140,878) (61,651)
Purchases of premises and equipment, net of sales (4,843) (6,159)
Net decrease (increase) in due from customers
on acceptances outstanding (381) 360
Net cash (used in)provided by investing
activities (97,732) 10,939
Cash flows from financing activities:
Net decrease in deposits (26,251) (43,690)
Net increase in federal funds purchased and
other short term borrowings 17,185 38,006
Repayments of other borrowings (6,030) (4,029)
Net increase (decrease) in bank acceptances
outstanding 381 (360)
Dividends paid to common shareholders (23,255) (19,158)
Addition of common shares to treasury (6,658) --
Common stock issued, net of cancellations 232 878
Net cash used in financing activities (44,396) (28,353)
Net decrease in cash and due from banks (994) (53,515)
Cash and due from banks at January 1 148,175 196,995
Cash and due from banks at June 30 $ 147,181 $ 250,510
Supplemental cash flow disclosure:
Cash paid for interest on deposits and
other borrowings $ 76,196 $ 76,554
Cash paid for federal and state income taxes 14,480 14,938
Transfer of Midland securities held to maturity
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,
1998 and December 31, 1997, the Consolidated Statements of Income for the six
and three month periods ended June 30, 1998 and 1997 and the Consolidated
Statements of Cash Flows for the six month periods ended June 30, 1998
and 1997 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, 1998
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, 1997 Annual Report to Shareholders.
2. Earnings Per Share
Earnings per share amounts and weighted average shares outstanding
for 1997 have been restated to reflect the 5 for 4 stock split declared
April 9, 1998 to Shareholders of record on May 1, 1998 and issued May 18, 1998.
3. Comprehensive Income
On January 1, 1998, Valley adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS 130 established 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 (1) 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 was effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 130 did not have
a material effect on Valley's financial position or results of operation.
<PAGE>
The related tax effects to each component of comprehensive income for the
six and three months June 30, 1998 and 1997 are as follows:
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
(in thousands)
Net income $ 47,716 $ 41,375
Other comprehensive income, net of tax
Foreign currency translation adjustments (184) (58)
Unrealized gains(losses) on securities:
Unrealized holding gains(losses)
arising during period $ (219) $(1,393)
Less:reclassification adjustment
for gains realized in net income 612 668
Net unrealized gains(losses) 393 (725)
Other comprehensive income (loss) 209 (783)
Comprehensive income $ 47,925 $ 40,592
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
(in thousands)
Net income $ 24,430 $ 20,475
Other comprehensive income, net of tax
Foreign currency translation adjustments (234) 16
Unrealized gains(losses) on securities:
Unrealized holding gains(losses)
arising during period $ (885) $(6,288)
Less: reclassification adjustment
for gains realized in
net income 30 708
Net unrealized gains(losses) (855) (5,580)
Other comprehensive income (loss) (1,089) (5,564)
Comprehensive income $ 23,341 $ 14,911
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-Q 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 such forward-looking terminology
as "expect", "look", "believe", "anticipate", "may", "will" or similar
statements or variations of such terms. Such forward-looking statements involve
certain risks and uncertainties. These include, but are not limited to,
the direction of interest rates, continued levels of loan quality and
origination volume, continued relationships with major customers including
sources for loans, successful completion of the implementation of Year 2000
technology changes, as well as the effects of economic conditions and legal
and regulatory barriers and structure. Actual results may differ materially
from such forward-looking statements. Valley assumes no obligation for updating
any such forward-looking statement at any time.
Recent Development
On May 29, 1998 Valley signed a definitive merger agreement with Wayne Bancorp,
Inc. ("Wayne"), parent of Wayne Savings Bank, F.S.B., a six-branch federally-
chartered savings bank headquartered in Wayne, New Jersey. At June 30, 1998
Wayne had total assets of $275.3 million and deposits of $207.8 million. The
transaction is scheduled to close early in the fourth quarter of 1998 and
will be accounted for using the pooling of interests method of accounting.
Wayne is expected to reissue approximately 175,000 shares of Wayne Common Stock
currently held by Wayne as treasury stock (the "Wayne Treasury Stock") prior to
consummation of the Merger in order that the Merger will not fail to qualify for
pooling-of-interests accounting treatment by virtue of the number of shares of
Wayne Treasury Stock. It is currently expected that the offering of the shares
of Wayne Treasury Stock will occur on or about the closing of the Merger. There
were approximately 2.0 million shares of Wayne common stock outstanding at
June 30, 1998. The merger agreement provides that 1.1 shares of Valley
common stock will be exchanged for each share of Wayne common stock.
Consummation of the Merger is subject, among other things, to prior receipt
of all necessary regulatory approvals. An application for approval was filed
with the OCC. Valley received a waiver of the requirement for approval of the
Merger from the Federal Reserve Board.
Valley expects to open approximately three de novo branches during the next
six months. Locations include Morristown, West New York and Secaucus. Valley
anticipates opening 25-30 de novo branches during the next five years.
Earnings Summary
Net income for the six months ended June 30, 1998 was $47.7 million, or $0.89
per diluted share. These results compare to net income of $41.4 million, or
$0.78 per diluted share for the same period in 1997. The annualized return on
average assets increased to 1.89% from 1.63%, while the annualized return on
average equity also increased to 19.80% from 18.93%, for the six months ended
June 30, 1998 and 1997, respectively.
Net income was $24.4 million, or $0.46 per diluted share for the three month
period ended June 30, 1998, compared with $20.5 million, or $0.38 per diluted
share for the same period in 1997.
The increase in net income for both the six and three month periods ended
June 30, 1998 can be primarily attributed to an increase in net interest
income and a reduction in both non-interest expense and income tax expense,
offset by an increase in the provision for possible loan losses.
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 $112.1 million from
$108.8 million for the six months ended June 30, 1998 as compared to the six
months ended June 30, 1997. The increase in net interest income is due to
a widening spread between the yield earned on interest-earning assets and
funding costs, and the movement of earning assets out of the investment
portfolio and into higher yielding loans. The net interest margin increased
to 4.67% for the six months ended June 30, 1998 compared to 4.53% for the same
period in 1997.
Average interest earning assets decreased slightly for the first six months
of 1998 over the 1997 amount. Average loans increased by $162.2 million or 4.7%
over the 1997 amount. The average rate on loans remained relatively
unchanged. The increase in average loan volume caused interest income on
loans for 1998 to increase by $6.7 million over 1997. Offsetting this
increase was a decline of $160.2 million in average investment securities or
12.6% from the amount in the portfolio during 1997.
Average interest-bearing liabilities for the first six months of 1998
decreased $126.6 million or 3.2% from 1997. Average savings deposits
decreased by $55.5 million or 3.1%, and average time deposits, mostly rate
sensitive municipal deposits, decreased by $151.7 million or 7.5%. Average
demand deposits continued to grow and increased by $51.2 million or 7.5% over
1997 balances. Average other borrowings increased $78.7 for the six months
ended June 30, 1998 in comparison to the same period of 1997.
Net interest income on a tax equivalent basis increased to $56.2 million
from $54.8 million for the three months ended June 30, 1998 as compared to the
same period in 1997. This can be attributed to a $33.4 million increase in
interest earning assets and a $89.4 million decrease in interest bearing
liabilities. The net interest margin increased to 4.69% for the three months
ended June 30, 1998 compared to 4.60% for the same period in 1997.
<PAGE>
The following table reflects the components of net interest income for each
of the six and three months ended June 30, 1998 and 1997.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET
INTEREST EARNINGS ON A TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
Six Months Six Months
Ended June 30, 1998 Ended June 30, 1997
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans (1) (2) $3,610,021 $150,587 8.34% $3,447,777 $143,874 8.35%
Taxable investments (3) 920,605 28,300 6.15 1,021,903 31,676 6.20
Tax-exempt investments (1)(3) 187,494 6,561 7.00 246,396 8,442 6.85
Federal funds sold and other
short-term investments 79,613 2,164 5.44 82,293 2,170 5.27
Total interest earnings
assets 4,797,733 $187,612 7.82% 4,798,369 $186,162 7.76%
Allowance for possible loan
losses (46,786) (46,125)
Cash and due from banks 129,288 165,871
Other assets 154,609 161,600
Unrealized gain (loss) on
Securities available
for sale 6,803 (3,236)
Total assets $5,041,647 $5,076,479
Liabilities and
Shareholders' Equity
Interest bearing liabilities
Savings deposits $1,752,974 $20,769 2.37% $1,808,438 $ 21,505 2.38%
Time deposits 1,873,384 50,081 5.35 2,025,087 53,731 5.31
Total interest bearing
deposits 3,626,358 70,850 3.91 3,833,525 75,236 3.93
Federal funds purchased and
other short-term borrowings 51,598 1,230 4.77 49,715 1,203 4.84
Other borrowings 111,867 3,385 6.05 33,153 962 5.80
Total interest bearing
liabilities 3,789,823 75,465 3.98 3,916,393 77,401 3.95
Demand deposits 731,972 680,793
Other liabilities 37,939 42,074
Shareholders' equity 481,913 437,219
Total liabilities and
Shareholders' equity $5,041,647 $5,076,479
Net interest income
(tax equivalent basis) 112,147 108,761
Tax equivalent adjustment (2,572) (3,319)
Net interest income $109,575 $105,442
Net interest rate differential 3.84% 3.81%
Net interest margin (4) 4.67% 4.53%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans (1) (2) $3,629,476 $ 75,698 8.34% $3,455,788 $72,449 8.39%
Taxable investments (3) 908,145 13,802 6.08 1,023,975 15,996 6.25
Tax-exempt investments (1)(3) 181,875 3,188 7.01 239,726 4,106 6.85
Federal funds sold and other
short-term investments 80,011 1,096 5.48 44,650 627 5.62
Total interest earnings assets 4,799,507 $ 93,784 7.82% 4,764,139 $93,178 7.82%
Allowance for possible loan
Losses (46,764) (46,012)
Cash and due from banks 127,938 164,865
Other assets 158,220 163,927
Unrealized gain (loss) on
Securities available for sale 7,223 (5,041)
Total assets $5,046,124 $5,041,878
Liabilities and Shareholders'
Equity
Interest bearing liabilities
Savings deposits $1,758,328 $ 10,444 2.38% $1,824,388 $11,050 2.42%
Time deposits 1,848,913 24,717 5.35 1,953,306 26,118 5.35
Total interest bearing deposits 3,607,241 35,161 3.90 3,777,694 37,168 3.94
Federal funds purchased and
other short-term borrowings 59,547 717 4.82 56,329 705 5.01
Other borrowings 110,421 1,671 6.05 32,589 476 5.84
Total interest bearing
liabilities 3,777,209 37,549 3.98 3,866,612 38,349 3.97
Demand deposits 745,075 691,619
Other liabilities 37,160 44,438
Shareholders' equity 486,680 439,209
Total liabilities and
shareholders' equity $5,046,124 $5,041,878
Net interest income
(tax equivalent basis) 56,235 54,829
Tax equivalent adjustment (1,252) (1,619)
Net interest income $ 54,983 $ 53,210
Net interest rate differential 3.84% 3.85%
Net interest margin (4) 4.69% 4.60%
</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.
<PAGE>
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,
1998 Compared to 1997
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans (1) $ 6,713 $ 6,768 $ (55)
Taxable investments (3,376) (3,116) (260)
Tax-exempt investments(1) (1,881) (2,057) 176
Federal funds sold and other
short term investments (6) (72) 66
1,450 1,523 (73)
Interest expense:
Savings deposits (736) (657) (79)
Time deposits (3,650) (4,053) 403
Federal funds purchased and other
short-term borrowings 27 45 (18)
Other borrowings 2,423 2,380 43
(1,936) (2,285) 349
Net interest income (tax equivalent basis) $ 3,386 $ 3,808 $ (422)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 Compared to 1997
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans (1) $ 3,249 $ 3,624 $ (375)
Taxable investments (2,194) (1,770) (424)
Tax-exempt investments(1) (918) (1,012) 94
Federal funds sold and other
short term investments 469 485 (16)
606 1,327 (721)
Interest expense:
Savings deposits (606) (395) (211)
Time deposits (1,401) (1,396) (5)
Federal funds purchased and other
short-term borrowings 12 39 (27)
Other borrowings 1,195 1,177 18
(800) (575) (225)
Net interest income (tax equivalent basis) $ 1,406 $ 1,902 $ (496)
</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.
<PAGE>
Non-Interest Income
The following table presents the components of non-interest income for six and
three months ended June 30, 1998 and 1997.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
(in thousands)
Trust income $ 710 $ 501 $ 370 $ 243
Service charges on deposit accounts 5,884 5,849 3,065 2,940
Gains on securities transactions, net 965 2,169 48 1,053
Fees from loan servicing 3,576 2,663 2,001 1,328
Credit card fee income 5,198 5,800 2,675 2,904
Gains on sales of loans, net 2,642 1,195 1,578 818
Other 2,001 2,448 1,014 1,224
Total $20,976 $20,625 $10,751 $10,510
</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 $20.0 million for the six months ended June 30, 1998
compared with $18.5 million for the six months ended June 30, 1997.
Included in fees from loan servicing are fees for servicing residential
mortgage loans and SBA loans, which increased by 34.3% from $2.7 million for
the six months ended June 30, 1997 to $3.6 million for the six months ended
June 30, 1998. This reflects the increase in the size of the serviced
portfolios, including the purchases of mortgage servicing rights during the
first six months of 1998 to service approximately $583.0 million of mortgage
loans.
Credit card fee income declined during the quarter by $602 thousand or 10.4%.
The decrease was the result of the sale of the merchant processing operation
during 1997 and the reduced volume of co-branded credit card transactions.
Gains on the sales of loans were $2.6 million for the six months ended
June 30, 1998 compared to $1.2 million for the six months ended June 30, 1997.
The gains recorded are primarily from increased mortgage banking activity
and the increased sales volume of the guaranteed portion of SBA loans.
The significant components of other non-interest income include safe
deposit rentals which totaled $462 thousand and residential mortgage
application fees totaling $654 thousand for the first six months of 1998. Other
non-interest income decreased $447 thousand to $2.0 million for the six months
ended June 30, 1998 in comparison to the same period in 1997. The decrease
resulted from the gain on the sale of REO property which occurred during the
first quarter of 1997.
<PAGE>
Non-Interest Expense
The following table presents the components of non-interest expense for the six
and three months ended June 30, 1998 and 1997.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30,
1998 1997 1998 1997
(in thousands)
<S> <C> <C> <C> <C>
Salary expense $24,060 $22,378 $12,079 $11,109
Employee benefit expense 5,091 5,788 2,545 2,877
FDIC insurance premiums 566 508 276 301
Occupancy and equipment expense 9,569 8,950 5,010 4,488
Credit card expense 5,514 8,476 2,369 4,400
Amortization of intangible assets 2,185 1,699 1,235 850
Other 12,047 12,470 6,090 6,845
$59,032 $60,269 $29,604 $30,870
</TABLE>
Non-interest expense totaled $59.0 million for the six month period ended
June 30, 1998, relatively unchanged from the 1997 level. The largest
components of non-interest expense are salaries and employee benefit
expense which totaled $29.2 million in 1998 compared to $28.2 million in
1997. At June 30, 1998, full-time equivalent staff was 1,675 compared to
1,558 at June 30, 1997.
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 end June 30, 1998 was 44.65%, one of the lowest in the industry,
compared with an efficiency ratio of 47.7% for the year ended December 31,
1997 and 48.06% for the six months ended June 30, 1997. The efficiency
ratio during 1997 had been impacted by the acquisition of Midland and net
expenses incurred from the credit card program that began during 1996. Valley
strives to control its efficiency ratio and expenses as a means of producing
increased earnings for its shareholders.
Credit card expense includes cardmember rebates, processing expenses, and
fraud losses. The decrease in credit card expenses is directly attributable to
an amendment made to the co-branded credit card program during the fourth
quarter of 1997, which reduced the amount of cardmember rebates paid by Valley.
Amortization of intangible assets increased to $2.2 million for the six
months ended June 30, 1998 from $1.7 million for the same period in 1997,
representing an increase of $486 thousand or 28.6%. The majority of this
increase resulted from the additional amortization of purchased and originated
loan servicing rights, due to growth in the serviced portfolio.
The significant components of other non-interest expense include
advertising, professional fees, stationery and postage, and telephone expense
which total approximately $6.5 million for the first six months of 1998.
Income Taxes
Income tax expense as a percentage of pre-tax income was 27.4% for the six
months ended June 30, 1998 compared to 34.0% for the same period in 1997.
The reduction in the effective tax rate is attributable to a realignment
of corporate entities and a lower effective tax rate for state taxes. The
reduction in the effective tax rate is limited in duration, but may have a
continued impact on some future periods.
<PAGE>
Year 2000
Valley has established an overall plan to address system-related Year 2000
issues. The plan calls for either system modification to, or replacement of
existing business systems applications. The cost of this Year 2000 compliance
program related to system modifications is not expected to be material to
Valley' earnings in 1998 or thereafter. Such costs will be charged to expense
as incurred. As of June 30, 1998, Valley anticipates that substantially all
of the remaining work under this program, including the testing of critical
systems, which will be initially completed by the end of 1998, with further
testing to be performed during 1999.
Valley continues to bear some risk related to the Year 2000 issues and could be
adversely affected, if other entities (i.e., vendors) not affiliated with Valley
do not appropriately address their own Year 2000 compliance issues.
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. Management cannot
provide any assurance about the actual effect of changes in interest rates on
Valley's net interest income.
The total negative gap repricing within 1 year as of June 30, 1998 is $(357.4)
million or (0.82:1). Management does not view this amount as presenting an
unusually high risk potential, although no assurances can be given that
Valley is not at risk from rate increases or decreases.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs
as they become due. Maintaining a level of liquid funds through
asset-liability management seeks to ensure that these needs are met at a
reasonable cost. On the asset side, liquid funds are maintained in the form
of cash and due from banks, federal funds sold, investments securities held
to maturity maturing within one year, securities available for sale, trading
account securities and loans held for sale. At June 30, 1998, liquid assets
amounted to $1.2 billion, unchanged from December 31, 1997. This represents
24.8 % and 25.6% of earning assets, and 23.5% and 24.3% of total assets at
June 30, 1998 and year-end 1997, respectively.
<PAGE>
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 $3.19 billion
and $3.25 billion for the six months ended June 30, 1998 and year ended
December 31, 1997, respectively, representing 66.6% and 67.4% 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, 1998, Valley had outstanding advances of $107.5 million with the FHLB.
Additional liquidity is derived from scheduled loan and investment payments
of principal and interest, as well as prepayments received. During the six
months ended June 30, 1998 proceeds from the sales of investment
securities available for sale were $34.4 million, proceeds of $212.9 million
were generated from investment maturities, and purchases of investment
securities were $153.3 million. Short term borrowings and certificates of
deposit over $100 thousand amounted to $483.8 million and $592.0 million, on
average, for the six months ended June 30, 1998 and year ending December 31,
1997, respectively.
Valley's cash requirements consist primarily of dividends to shareholders. This
cash need is routinely satisfied by dividends collected from its subsidiary
bank. Projected cash flows from this source are expected to be adequate to pay
dividends, given the current capital levels and current profitable operations
of its subsidiary.
As of June 30, 1998, Valley had $933 million of securities available for sale
compared with $1.0 billion at December 31, 1997. Those securities are
recorded at their fair value on an aggregate basis. As of June 30, 1998,
the investment securities available for sale had an unrealized gain of $4.0
million, net of deferred taxes, compared to an unrealized gain of $3.6 million,
net of deferred taxes, at December 31, 1997. This change was primarily due
to an increase in prices resulting from a decreasing 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.
<PAGE>
Loan Portfolio
As of June 30, 1998, total loans were $3.7 billion, compared to $3.6 billion at
December 31, 1997, an increase of 1.6%.
The following table reflects the composition of the loan portfolio as of
June 30, 1998 and December 31, 1997.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
<S> <C> <C>
Commercial
Total commercial loans $ 452,654 $ 453,174
Construction 101,330 81,033
Residential mortgage 888,475 903,201
Commercial mortgage 885,520 850,234
Total mortgage loans $1,875,325 $1,834,468
Home equity 158,040 168,888
Credit card 121,768 145,485
Automobile 989,004 930,247
Other consumer 83,403 90,070
Total consumer loans 1,352,215 1,334,690
Loans $3,680,194 $3,622,332
As a percent of total loans:
Commercial loans 12.3% 12.5%
Mortgage loans 51.0 50.6
Consumer loans 36.7 36.9
Total loans 100.0% 100.0%
</TABLE>
During the second quarter of 1998, Valley commenced a home-equity promotion.
Valley anticipates that home equity loans will increase by approximately $25.0
million during the third quarter of 1998 as a result of this promotion.
Non-Performing Assets
Non-performing assets include non-accrual loans and other real estate owned
(OREO). Non-performing assets continued to decrease, and totaled $9.0 million
at June 30, 1998, compared with $9.5 million at December 31, 1997, a decrease
of $477 thousand or 5.0%. Non-performing assets at June 30, 1998 and
December 31, 1997, respectively, amounted to 0.24% and 0.26% of loans and OREO.
Loans 90 days or more past due and not included in the non-performing category
totaled $7.7 million at June 30, 1998, compared to $16.4 million at
December 31, 1997. 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 $1.4 million and $2.0
million at June 30, 1998 and December 31, 1997, respectively.
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.
LOAN QUALITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
<S> <C> <C>
Loans past due in excess of 90 days and
still accruing $ 7,698 $ 16,351
Non-accrual loans 6,343 7,307
Other real estate owned 2,665 2,178
Total non-performing assets $ 9,008 $ 9,485
Troubled debt restructured loans $ 5,189 $ 5,248
Non-performing loans as a % of loans 0.17% 0.20%
Non-performing assets as a % of loans plus other real
estate owned 0.24% 0.26%
Allowance as a % of loans 1.27% 1.28%
Allowance as a % of non-performing assets 517 489
</TABLE>
At June 30, 1998 the allowance for loan losses amounted to $46.6 million or
1.27% of loans, as compared to $46.4 million or 1.28% at year-end 1997.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $5.6 million for
the six months ended June 30, 1998 compared with $3.6 million for the six
months ended June 30, 1997.
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, 1998, shareholders' equity totaled $492.5 million or 9.7% of total
assets, compared with $475.4 million or 9.3% at year-end 1997. Valley has
achieved steady internal capital generation throughout the past five years.
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, to comply with certain of
the pooling-of-interests accounting rules as recently interpreted by the
Securities and Exchange Commission.
Included in shareholders equity at June 30, 1998 was a $4.0 million unrealized
gain on investment securities available for sale, net of tax, compared to
an unrealized gain of $3.6 million at December 31, 1997. Also included
in shareholders equity at June 30, 1998 is a translation adjustment of ($526)
thousand related to the Canadian subsidiary of Valley National Bank.
Valley's capital position at June 30, 1998 under risk-based capital
guidelines was $483.3 million, or 13.0% of risk-weighted assets, for Tier 1
capital and $529.9 million, or 14.2% for Total risked-based capital. The
comparable ratios at December 31, 1997 were 12.9% for Tier 1 capital and 14.1%
for Total risk-based capital. Valley's ratios at June 30, 1998 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, 1998 and December 31, 1997, Valley was in
compliance with the leverage requirement having a Tier 1 leverage ratio of 9.6%
and 9.2%, respectively.
Book value per share amounted to $9.33 at June 30, 1998 compared with $8.98 per
share at December 31, 1997.
<PAGE>
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 48.0% for the six month period ended June 30, 1998,
compared to 47.6% for the six month period ended June 30, 1997. Cash
dividends declared amounted to $0.47 per share for the six months ended June 30,
1998 equivalent to a dividend payout ratio of 52.0%, compared to 52.4% for
the same period in 1998. Valley declared a five for four stock split on
April 9, 1998 to shareholders of record on May 1, 1998, which was issued
May 18, 1998. Effective with the July 1, 1997 dividend payment, the annual
dividend rate was increased to $1.00 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 Pronouncement
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), was issued by the
Financial Accounting Standards Board ("FASB") in June 1998. SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under the standard,
entities are required to carry all derivative instruments in the statements of
financial position at fair value.
Valley must adopt SFAS No. 133 by January 1, 2000; however, early adoption is
permitted. On adoption, the provisions of SFAS No. 133 must be applied
prospectively. Valley anticipates that the adoption of SFAS No. 133 will not
have a material imapct in the financial statements.
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits.
This statement is effective for fiscal years beginning after December 15,
1997. The adoption is not expected to materially affect the financial
statements. Restatement of disclosures for earlier periods provided for
comparative purposes is required unless the information is not readily
available.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(27) Financial Data Schedule
b) Reports on Form 8-K
1) Filed April 15, 1998 to report a five for four common stock split
issued May 18, 1998.
2) Filed June 5, 1998 to report the signing of the Agreement and Plan of
Merger dated May 29, 1998 between Valley National Bancorp and Wayne
Bancorp, 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)
Date: August 14, 1998 /s/ PETER SOUTHWAY
PETER SOUTHWAY
VICE CHAIRMAN
Date: August 14, 1998 /s/ ALAN D. ESKOW
ALAN D. ESKOW
SENIOR VICE PRESIDENT
FINANCIAL ADMINISTRATION
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000714310
<NAME> Dianne M. Grenz
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 147,181
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 66,000
<TRADING-ASSETS> 1,444
<INVESTMENTS-HELD-FOR-SALE> 932,802
<INVESTMENTS-CARRYING> 150,788
<INVESTMENTS-MARKET> 152,680
<LOANS> 3,680,194
<ALLOWANCE> 46,600
<TOTAL-ASSETS> 5,097,142
<DEPOSITS> 4,376,703
<SHORT-TERM> 74,123
<LIABILITIES-OTHER> 45,880
<LONG-TERM> 107,982
0
0
<COMMON> 23,283
<OTHER-SE> 469,171
<TOTAL-LIABILITIES-AND-EQUITY> 5,097,142
<INTEREST-LOAN> 150,311
<INTEREST-INVEST> 32,565
<INTEREST-OTHER> 2,164
<INTEREST-TOTAL> 185,040
<INTEREST-DEPOSIT> 70,850
<INTEREST-EXPENSE> 75,465
<INTEREST-INCOME-NET> 109,575
<LOAN-LOSSES> 5,825
<SECURITIES-GAINS> 965
<EXPENSE-OTHER> 59,032
<INCOME-PRETAX> 65,694
<INCOME-PRE-EXTRAORDINARY> 65,694
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,716
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 4.69
<LOANS-NON> 6,343
<LOANS-PAST> 7,698
<LOANS-TROUBLED> 5,189
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 46,372
<CHARGE-OFFS> 7,007
<RECOVERIES> 1,410
<ALLOWANCE-CLOSE> 46,600
<ALLOWANCE-DOMESTIC> 36,128
<ALLOWANCE-FOREIGN> 69
<ALLOWANCE-UNALLOCATED> 10,403
</TABLE>
