UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-11179
----------------------
VALLEY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
(State or other Jurisdiction of
incorporation or organization)
22-2477875
(I.R.S. Employer Identification No.)
1455 Valley Road, Wayne, New Jersey 07474-0558
(Address of principal executive offices)
973-305-8800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (No par value), of which 60,404,825 shares were outstanding as of
August 9, 1999.
TABLE OF CONTENTS
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income (Unaudited)
Six and Three Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
<PAGE>
PART I
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Assets
Cash and due from banks $ 176,720 $ 185,921
Federal Funds sold -- 108,100
Investment securities held to maturity, fair value
of $316,960 and $288,312 in 1999 and 1998,
respectively 335,157 286,890
Investment securities available for sale 1,152,431 1,023,188
Trading account securities -- 1,592
Loans 4,298,824 4,124,194
Loans held for sale 9,902 23,455
Less: Allowance for possible loan losses (54,894) (54,641)
Net loans 4,253,832 4,093,008
Premises and equipment 82,170 82,808
Accrued interest receivable 34,946 32,197
Other assets 74,848 65,265
Total assets $6,110,104 $5,878,969
Liabilities
Deposits:
Non-interest bearing deposits $ 925,109 $ 924,217
Interest bearing:
Savings 2,057,977 2,130,125
Time 2,062,389 1,915,807
Total deposits 5,045,475 4,970,149
Federal funds purchased and securities sold under
repurchase agreements 41,839 34,950
Treasury tax and loan account and other short-term
borrowings 49,332 22,667
Other borrowings 364,916 212,949
Accrued expenses and other liabilities 45,332 48,445
Total liabilities 5,546,894 5,289,160
Shareholders' Equity
Common stock, no par value, authorized 103,359,375
shares, issued 60,623,939 shares in 1999 and
58,951,595 in 1998 25,988 26,079
Surplus 325,492 331,337
Retained earnings 222,350 235,879
Unallocated common stock held by Employee
Benefit Plan (1,229) (1,331)
Accumulated other comprehensive (loss) income (2,809) 4,031
569,792 595,995
Treasury stock, at cost (234,081 shares in 1999
and 236,735 shares in 1998) (6,582) (6,186)
Total shareholders' equity 563,210 589,809
Total liabilities and shareholders' equity $ 6,110,104 $ 5,878,969
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
(in thousands, except per share data)
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 165,138 $ 164,582 $ 83,316 $82,773
Interest and dividends on investment
securities:
Taxable 36,722 32,677 18,626 16,102
Tax-exempt 3,587 4,437 1,843 2,163
Dividends 1,174 985 580 483
Interest on federal funds sold and other
short-term investments 2,318 2,560 1,429 1,307
Total interest income 208,939 205,241 105,794 102,828
Interest Expense
Interest on deposits:
Savings deposits 20,103 23,410 10,097 11,810
Time deposits 50,454 55,035 25,538 27,235
Interest on federal funds purchased and
securities sold under repurchase
agreements 529 561 277 346
Interest on other short-term borrowings 717 779 390 455
Interest on other borrowings 9,295 4,451 5,235 2,197
Total interest expense 81,098 84,236 41,537 42,043
Net Interest Income 127,841 121,005 64,257 60,785
Provision for possible loan losses 3,775 6,105 1,775 3,460
Net Interest Income after Provision for
Possible Loan Losses 124,066 114,900 62,482 57,325
Non-Interest Income
Trust income 1,096 940 554 492
Service charges on deposit accounts 7,091 6,722 3,572 3,495
Gains on securities transactions, net 2,431 1,040 456 128
Fees from loan servicing 3,853 3,576 1,921 2,001
Credit card fee income 4,199 5,198 2,208 2,675
Gains on sales of loans, net 1,448 2,642 785 1,578
Other 4,404 2,476 2,303 1,250
Total non-interest income 24,522 22,594 11,799 11,619
Non-Interest Expense
Salary expense 28,465 27,569 14,047 13,768
Employee benefit expense 6,311 6,084 3,171 3,053
FDIC insurance premiums 624 641 311 314
Occupancy and equipment expense 9,796 10,689 5,054 5,584
Credit card expense 2,646 5,514 1,332 2,369
Amortization of intangible assets 2,142 2,250 818 1,261
Merger-related charges 3,005 -- 3,005 --
Other 14,512 14,725 7,498 7,412
Total non-interest expense 67,501 67,472 35,236 33,761
Income Before Income Taxes 81,087 70,022 39,045 35,183
Income tax expense 29,201 19,671 13,648 9,313
Net Income $ 51,886 $ 50,351 $ 25,397 $ 25,870
Earnings Per Share:
Basic $ 0.85 $ 0.82 $ 0.42 $ 0.42
Diluted $ 0.84 $ 0.81 $ 0.41 $ 0.42
Weighted Average Number of Shares Outstanding:
Basic 61,184,464 61,370,668 60,885,740 61,341,156
Diluted 61,814,801 62,228,962 61,558,760 62,218,153
</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,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 51,886 $ 50,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,838 6,655
Amortization of compensation costs pursuant to long
term stock incentive plan 440 792
Provision for possible loan losses 3,775 6,105
Net amortization of premiums and accretion of discounts 2,253 1,418
Net gains on securities transactions (2,431) (1,040)
Proceeds from sales of loans 57,675 78,669
Gain on sales of loans (1,448) (2,642)
Proceeds from recoveries on previously charged-off loans 1,884 1,392
Net increase in accrued interest receivable and other
assets (9,914) (1,264)
Net increase (decrease) in accrued expenses and other
liabilities 405 (178)
Net cash provided by operating activities 110,363 140,258
Cash flows from investing activities:
Proceeds from maturing investment securities held
to maturity 27,764 28,654
Purchases of investment securities held to maturity (119,055) (24,771)
Proceeds from sales of investment securities available
for sale 8,497 40,348
Proceeds from maturing investment securities available
for sale 235,416 208,921
Purchases of investment securities available for sale (341,697) (181,313)
Proceeds from sales of trading account securities 1,415 --
Purchases of mortgage servicing rights (4,212) (9,564)
Net decrease (increase) in federal funds sold and
other short-term investments 108,100 (40,325)
Net increase in loans made to customers (222,710) (148,686)
Purchases of premises and equipment, net of sales (3,058) (5,265)
Net cash used in investing activities (309,540) (132,001)
Cash flows from financing activities:
Net increase in deposits 75,326 10,186
Net increase in federal funds purchased and other
short-term borrowings 33,554 23,052
Advances of other borrowings 183,000 --
Repayments of other borrowings (31,033) (8,030)
Dividends paid to common shareholders (29,276) (23,943)
Addition of common shares to treasury (46,036) (6,674)
Common stock issued, net of cancellations 4,441 347
Net cash provided by (used in) financing activities 189,976 (5,062)
Net (decrease) increase in cash and due from banks (9,201) 3,195
Cash and due from banks at January 1 185,921 161,170
Cash and due from banks at June 30 $ 176,720 $ 164,365
Supplemental cash flow disclosures:
Cash paid for interest on deposits and other
borrowings $ 80,585 $ 84,959
Cash paid for federal and state income taxes 28,179 15,949
Transfer of Ramapo securities from held to maturity
to available for sale 42,387 --
</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,
1999 and December 31, 1998, the Consolidated Statements of Income for the six
and three month periods ended June 30, 1999 and 1998 and the Consolidated
Statements of Cash Flows for the six month periods ended June 30, 1999
and 1998 have been prepared by Valley National Bancorp ("Valley") without
audit. In the opinion of management, all adjustments (which included
only normal recurring adjustments) necessary to present fairly Valley's
financial position, results of operations, and cash flows at June 30,
1999 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements are to
be read in conjunction with the financial statements and notes thereto
included in Valley's December 31, 1998 Annual Report to Shareholders. Certain
prior period amounts have been reclassified to conform to 1999 financial
presentations. The consolidated financial statements of Valley have been
restated to include Ramapo for all periods presented.
2. Earnings Per Share
Earnings per share amounts and weighted average shares outstanding
have been restated to reflect the 5 percent stock dividend declared
April 7, 1999 to Shareholders of record on May 7, 1999 and issued May 18, 1999.
3. Recent Developments
On June 11, 1999, Valley acquired Ramapo Financial Corporation
("Ramapo"), parent of The Ramapo Bank headquartered in Wayne, New Jersey.
At the date of acquisition, Ramapo had total assets of $344.0 million and
deposits of $299.5 million, with 8 branch offices. The transaction was
accounted for using the pooling of interests method of accounting and resulted
in the issuance of approximately 4.0 million shares of Valley common stock.
Each share of common stock of Ramapo was exchanged for 0.44625 shares of Valley
common stock. The consolidated financial statements of Valley have been
restated to include Ramapo for all periods presented.
During the second quarter of 1999, Valley recorded merger-related
charges of $3.0 million related to the acquisition of Ramapo. On an after
tax basis, these charges totaled $2.2 million or $0.04 per diluted share.
These charges include only identified direct and incremental costs associated
with this acquisition. Items included in these charges include the following:
personnel expenses which include severance payments and benefits for terminated
employees, principally, senior executives of Ramapo; real estate expenses
related to the closing of a duplicate branch; professional fees which include
investment banking, accounting and legal fees; and other expenses which
include data processing and the write-off of supplies and other assets not
considered useful in the operation of the combined entity. The major
components of merger-related charges, consisting of real estate dispositions,
professional fees, personnel expenses and other expenses totaled $300
thousand, $1.1 million, $1.1 million and $500 thousand, respectively.
Of the total merger-related charges $2.6 million, or 87.4 percent were paid
through June 30, 1999. It is expected that the remaining liability will be
fully utilized in 1999.
During the second quarter, Valley National Bank received approval and
a license from the New Jersey Department of Banking and Insurance to sell title
insurance through a separate subsidiary, known as Wayne Title, Inc. After
the close of the second quarter, Valley acquired the assets of an agency
office of Commonwealth Land Title Insurance Company and began to sell both
commercial and residential title insurance policies.
On July 30, 1999, Valley acquired New Century Asset Management Company
("New Century"), a NJ-based money manager with $120 million of assets under
management. New Century was purchased on an earn-out basis and will continue
its operation as a wholly owned subsidiary of Valley National Bank.
<PAGE>
4. Accumulated Other Comprehensive (Loss) Income
Valley's accumulated other comprehensive income consists of foreign currency
translation adjustments and unrealized gains (losses) on securities. The
following table shows the related tax effects on each component of
accumulated other comprehensive income for the six and three months ended
June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Net income $51,886 $50,351
Accumulated other comprehensive (loss) income,
net of tax:
Foreign currency translation adjustments 349 (184)
Unrealized gains(losses) on securities:
Unrealized holding losses arising during
period $(8,733) $(280)
Less: reclassification adjustment for
gains realized in net income 1,544 624
Net unrealized (losses) gains (7,189) 344
Other comprehensive (loss) income (6,840) 160
Accumulated other comprehensive income $45,046 $50,511
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Net income $25,397 $25,870
Accumulated other comprehensive (loss) income,
net of tax:
Foreign currency translation adjustments 205 (234)
Unrealized gains(losses) on securities:
Unrealized holding losses arising
during period $(4,836) $(791)
Less: reclassification adjustment
for gains realized in net income 290 30
Net unrealized losses (4,546) (761)
Other comprehensive loss (4,341) (995)
Accumulated other comprehensive income $21,056 $24,875
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-Q, both in the MD & A and elsewhere, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements are not historical facts and include
expressions about management's confidence and strategies and management's
expectations about new and existing programs and products, relationships,
opportunities, technology and market conditions. These statements may be
identified by an "asterisk" (*) or such forward-looking terminology as
"expect," "look," "believe," "anticipate," "may," "will," or similar
statements or variations of such terms. Such forward-looking statements
involve certain risks and uncertainties. These include, but are not limited
to, the direction of interest rates, continued levels of loan quality and
origination volume, continued relationships with major customers including
sources for loans, successful completion of the implementation of Year 2000
technology changes, as well as the effects of economic conditions and legal
and regulatory barriers and structure. Actual results may differ materially
from such forward-looking statements. Valley assumes no obligation for
updating any such forward-looking statement at any time.
Earnings Summary
Net income for the six months ended June 30, 1999 was $51.9 million, or
$0.84 per diluted share including a merger related charge of $2.2 million,
net of tax or $0.04 per diluted share. These results compare to net income
of $50.4 million, or $0.81 per diluted share for the same period in 1998
(all data has been restated for the Ramapo merger and earnings per share
amounts have been restated to give effect to a 5 percent stock dividend
issued May 18, 1999). The annualized return on average assets decreased to
1.74 percent from 1.79 percent, while the annualized return on average
equity decreased to 17.60 percent from 18.37 percent, for the six months ended
June 30, 1999 and 1998, respectively.
Net income was $25.4 million or $0.41 per diluted share for the three month
period ended June 30, 1999, compared with $25.9 million or $0.42 per diluted
share for the same period in 1998.
Net income for both the six and three month periods ended June 30, 1999
reflect higher net interest income, a lower provision for possible loan
losses, offset by higher non-interest expenses including merger-related charges
and a higher provision for income taxes.
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 $130.0 million from
$123.7 million for the six months ended June 30, 1999 as compared to the six
months ended June 30, 1998. The increase in net interest income is due to
higher average balances of total interest earning assets, primarily loans
and taxable investments, partially offset by lower average interest rates
for these interest earning assets. Also contributing to the increase was a
decline in average interest rates on average balances of total interest
bearing liabilities. The net interest margin was 4.56 percent for the six
months ended June 30, 1999 compared with 4.63 percent for the same period in
1998.
Average interest earning assets increased $361.0 million, or 6.2 percent
for the first six months of 1999 over the comparable 1998 amount. This was
mainly the result of the increase in average balance of loans of $217.6
million or 5.5 percent and the increase in average balance of taxable
investments of $180.0 million, or 16.5 percent. Included in taxable
investments is Valley's portfolio of trust preferred securities of $220.1
million, at June 30, 1999. Valley began purchasing these securities in the
latter part of the fourth quarter of 1998 as part of a leverage strategy to
increase interest-earning assets and net interest income. These securities
are funded by borrowings from the Federal Home Loan Bank ("FHLB") which are
included in other borrowings.
Average interest-bearing liabilities for the first six months of 1999
increased $260.5 million or 6.2 percent from the same period in 1998. Average
demand deposits increased by $64.9 million or 8.1 percent over the comparable
1998 balance. Average savings deposits increased $70.3 million or 3.6
percent and average time deposits, mostly rate sensitive municipal
deposits, remained relatively unchanged from 1998. Average other borrowings,
which include Federal Home Loans Bank advances, increased $183.5 million, or
128.2 percent.
Average interest rates, in all categories of interest earning assets,
declined during the six months ended June 30, 1999 compared to the same period
in 1998. The largest decline in average rates was for loans, which
decreased by 41 basis points to 7.91 percent. Average interest rates on
total interest earning assets declined 38 basis points to 7.40 percent.
Average interest rates also declined on all interest bearing liabilities
by 37 basis points to 3.62 percent from 3.99 percent. Average interest rates
on deposits declined by 45 basis points to 3.45 percent. Overall, the decline
in average interest rates coupled with the growth in interest earning
assets, as compared to 1998, caused the net interest margin to decline to
4.56 percent from 4.63 percent.
Net interest income on a tax equivalent basis increased to $65.4 million
from $62.1 million for the three months ended June 30, 1999 as compared with
the same period in 1998. This can be attributed to a $436.5 million increase
in average interest earning assets offset by an increase in average
interest bearing liabilities of $344.8 million. The net interest margin
decreased to 4.51 percent for the three months ended June 30, 1999 compared
with 4.63 percent for the same period in 1998 as a result of increased average
earning assets in conjunction with the decline in average interest rates.
<PAGE>
The following table reflects the components of net interest income for
each of the six months ended June 30, 1999 and 1998.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST EARNINGS ON A TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 Six Months Ended June, 1998
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) $4,182,369 $ 165,358 7.91% $3,964,793 $ 164,858 8.32%
Taxable
investments(3) 1,268,900 37,896 5.97 1,088,915 33,662 6.18
Tax-exempt
investments(1)(3) 162,580 5,518 6.79 195,145 6,826 7.00
Federal funds sold
and other short-
term investments 93,317 2,318 4.97 97,335 2,560 5.26
Total interest
earning assets 5,707,166 $ 211,090 7.40 5,346,188 $ 207,906 7.78
Allowance for
possible loan
losses (54,929) (53,464)
Cash and due
from banks 148,703 141,336
Other assets 174,173 173,199
Unrealized gain
on securities
available for
sale 2,590 6,973
Total assets $5,977,703 $ 5,614,232
Liabilities and
Shareholders' Equity
Interest bearing liabilities
Savings
deposits $2,032,227 $ 20,103 1.98% $ 1,961,951 $ 23,410 2.39%
Time deposits 2,058,298 50,454 4.90 2,056,333 55,035 5.35
Total interest
bearing
deposits 4,090,525 70,557 3.45 4,018,284 78,445 3.90
Federal funds
purchased and
other short-term
borrowings 60,700 1,246 4.11 55,957 1,340 4.79
Other borrowings 326,661 9,295 5.69 143,161 4,451 6.22
Total interest
bearing
liabilities 4,477,886 81,098 3.62 4,217,402 84,236 3.99
Demand deposits 869,578 804,725
Other liabilities 40,703 43,838
Shareholders'
equity 589,536 548,267
Total liabilities
and shareholders'
equity $5,977,703 $ 5,614,232
Net interest income
(tax equivalent
basis) 129,992 123,670
Tax equivalent adjustment (2,151) (2,665)
Net interest income $ 127,841 $ 121,005
Net interest rate differential 3.78% 3.79%
Net interest margin (4) 4.56% 4.63%
</TABLE>
(1) Interest income is presented on a tax equivalent basis using a 35 percent
tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is
based on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of earning
assets.
<PAGE>
The following table reflects the components of net interest income for
each of the three months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
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) $4,225,243 $ 83,425 7.90% $3,986,440 $ 82,909 8.32%
Taxable investments (3) 1,290,515 19,206 5.95 1,083,203 16,585 6.12
Tax-exempt
investments(1)(3) 168,279 2,841 6.75 189,993 3,328 7.01
Federal funds sold and
other short-term
investments 111,196 1,429 5.14 99,072 1,307 5.28
Total interest earning
assets 5,795,233 $106,901 7.38 5,358,708 $104,129 7.77
Allowance for possible
loan losses (54,323) (53,092)
Cash and due from banks 147,557 140,378
Other assets 171,528 177,625
Unrealized gain(loss)on
securities
available for sale (541) 7,497
Total assets $ 6,059,454 $5,631,116
Liabilities and
Shareholders' Equity
Interest bearing liabilities
Savings deposits $ 2,036,849 $ 10,097 1.98% $1,975,309 $ 11,810 2.39%
Time deposits 2,093,593 25,538 4.88 2,032,860 27,235 5.36
Total interest bearing
deposits 4,130,442 35,635 3.45 4,008,169 39,045 3.90
Federal funds purchased
and other short-term
borrowings 64,321 667 4.15 65,956 801 4.86
Other borrowings 366,437 5,235 5.71 142,274 2,197 6.18
Total interest bearing
liabilities 4,561,200 41,537 3.64 4,216,399 42,043 3.99
Demand deposits 876,182 819,073
Other liabilities 37,802 41,977
Shareholders' equity 584,270 553,667
Total liabilities and
shareholders' equity $ 6,059,454 $ 5,631,116
Net interest income
(tax equivalent basis) 65,364 62,086
Tax equivalent adjustment (1,107) (1,301)
Net interest income $64,257 $60,785
Net interest rate differential 3.74% 3.78%
Net interest margin (4) 4.51% 4.63%
</TABLE>
(1) Interest income is presented on a tax equivalent basis using a 35 percent
tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is
based on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of earning
assets.
<PAGE>
The following table demonstrates the relative impact on net interest income
of changes in volume of interest earning assets and interest bearing liabilities
and changes in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 Compared to 1998
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans (1) $ 500 $ 8,812 $ (8,312)
Taxable investments 4,234 5,407 (1,173)
Tax-exempt investments (1) (1,308) (1,110) (198)
Federal funds sold and
other short-term investments (242) (103) (139)
3,184 13,006 (9,822)
Interest expense:
Savings deposits (3,307) 814 (4,121)
Time deposits (4,581) 53 (4,634)
Federal funds purchased and
other short-term borrowings (94) 107 (201)
Other borrowings 4,844 5,251 (407)
(3,138) 6,225 (9,363)
Net interest income (tax equivalent basis)$ 6,322 $ 6,781 $ (459)
</TABLE>
(1) Interest income is adjusted to a tax equivalent basis using a 35 percent
tax rate.
(2) Variances resulting from a combination of changes in volume and rates
are allocated to the categories in proportion to the absolute dollar
amounts of the change in each category.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 Compared to 1998
Increase(Decrease)(2)
Interest Volume Rate
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans (1) $ 516 $ 4,830 $ (4,314)
Taxable investments 2,621 3,097 (476)
Tax-exempt investments (1) (487) (370) (117)
Federal funds sold and
other short-term investments 122 157 (35)
2,772 7,714 (4,942)
Interest expense:
Savings deposits (1,713) 358 (2,071)
Time deposits (1,697) 795 (2,492)
Federal funds purchased and
other short-term borrowings (134) (19) (115)
Other borrowings 3,038 3,214 (176)
(506) 4,348 (4,854)
Net interest income (tax equivalent basis) $ 3,278 $ 3,366 $ (88)
</TABLE>
(1) Interest income is adjusted to a tax equivalent basis using a 35 percent
tax rate.
(2) Variances resulting from a combination of changes in volume and rates are
allocated to the categories in proportion to the absolute dollar amounts
of the change in each category.
Non-Interest Income
The following table presents the components of non-interest income for the
six and three months ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
NON-INTEREST INCOME
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
(in thousands)
<S> <C> <C> <C> <C>
Trust income $ 1,096 $ 940 $ 554 $ 492
Service charges on deposit accounts 7,091 6,722 3,572 3,495
Gains on securities transactions, net 2,431 1,040 456 128
Fees from loan servicing 3,853 3,576 1,921 2,001
Credit card fee income 4,199 5,198 2,208 2,675
Gains on sales of loans, net 1,448 2,642 785 1,578
Other 4,404 2,476 2,303 1,250
Total $ 24,522 $22,594 $ 11,799 $11,619
</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 $22.1 million for the six months ended June 30, 1999
compared with $21.6 million for the six months ended June 30, 1998. For the
quarter ended June 30, 1999 total non interest income, excluding security
gains transactions, was $11.3 million or compared with $11.5 million for the
quarter ended June 30, 1998.
On July 30, 1999, Valley acquired New Century Asset Management Company
("New Century"), a NJ-based money manager with $120 million of assets under
management. New Century was purchased on an earn-out basis and will continue
its operation as a wholly owned subsidiary of Valley National Bank. The
generation of this fee-based business is expected to contribute additional
fee income to the operations of Valley beginning in the third quarter of 1999.*
Service charges on deposit accounts increased $369 thousand or 5.5 percent
from $6.7 million for the six months ended June 30, 1998 to $7.1 million for
the same period in 1999. A majority of this increase is due to the
implementation of new service fees and increased emphasis placed on collection
efforts.
Included in fees from loan servicing are fees for servicing residential
mortgage loans and SBA loans. Fees from loan servicing increased by 7.7
percent from $3.6 million for the six months ended June 30, 1998 to $3.9
million for the six months ended June 30, 1999 due to an increase in the
servicing portfolio. The increase in the servicing portfolio was due to the
acquisition of a portfolio, the origination of new loans by VNB and their
subsequent sale with servicing retained, offset by principal paydowns and
prepayments.
Credit card fee income declined by $999 thousand or 19.2 percent and by $467
thousand or 17.5 percent for the three month and six month period ended
June 30, 1999, respectively, compared with the same period in 1998. The
decrease can be attributed to a change in the co-branded credit card program
during the fourth quarter of 1997 which reduced cardmember rebates, resulting
in a decline in outstanding credit card balances. The decline in balances
and usage of the card caused a reduction in the volume of co-branded credit
card transactions.
Gains on the sales of loans were $800 thousand and $1.4 million for the three
and six months ended June 30, 1999 compared to $1.6 million and $2.6 million
for the comparable periods in 1998. Gains are recorded primarily from
mortgage banking activity related to residential mortgage loans and the sale
of SBA loans in the secondary market. The decrease of $1.2 million and $800
thousand for the six and three months ended June 30, 1999, respectively,
resulted from a decline in the volume of residential mortgage loans being sold
by Valley into the secondary market.
During the second quarter, Valley National Bank received approval and a
license from the New Jersey Department of Banking and Insurance to sell title
insurance through a separate subsidiary, known as Wayne Title, Inc. After
the close of the second quarter, Valley acquired the assets of an agency
office of Commonwealth Land Title Insurance Company and began to sell both
commercial and residential title insurance policies. Valley expects gross
annual commissions revenues from the sale of title insurance policies to be
approximately $1.7 million during the first year of operations.*
The largest component of other non-interest income is safe deposit rental
income. Other non-interest income increased $1.1 million and $1.9 million
to $2.3 million and $4.4 million for the three and six months ended
June 30, 1999 in comparison to the same period in 1998. The increase for the
six months can be attributed primarily to the $525 thousand gain on sale of
OREO property and $560 thousand for the recovery of previously charged off
property. The increase for the three months can be attributed primarily to the
$203 thousand gain on sale of OREO property and $560 thusand for the recovery
of previously charged off property.
<PAGE>
Non-Interest Expense
The following table presents the components of non-interest expense for the
six and three months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
Six Months Ended June 30 Three Months Ended June 30
1999 1998 1999 1998
(in thousands)
<S> <C> <C> <C> <C>
Salary expense $ 28,465 $ 27,569 $ 14,047 $ 3,768
Employee benefit expense 6,311 6,084 3,171 3,053
FDIC insurance premiums 624 641 311 314
Occupancy and equipment expense 9,796 10,689 5,054 5,584
Credit card expense 2,646 5,514 1,332 2,369
Amortization of intangible assets 2,142 2,250 818 1,261
Merger-related charges 3,005 -- 3,005 --
Other 14,512 14,725 7,498 7,412
Total $ 67,501 $ 67,472 $ 35,236 $33,761
</TABLE>
Non-interest expense totaled $35.2 million and $67.5 million for the three
and six months ended June 30, 1999. Excluding the merger-related charges
non-interest expense totaled $32.2 million and $64.5 million for the three
and six months ended June 30, 1999, a decrease of $1.5 million and $3.0 million
for the comparable three and six months ending June 30, 1998. The largest
components of non-interest expense are salaries and employee benefit expense
which totaled $17.2 million and $34.8 million for the three and six months
ended June 30, 1999 compared to $16.8 million and $33.7 million in the
comparable period of 1998. At June 30, 1999, full-time equivalent staff was
1,813, compared to 1,850 at June 30, 1998.
The efficiency ratio measures a bank's gross operating expense as a percentage
of fully-taxable equivalent net interest income and other non-interest income
without taking into account security gains and losses and other
non-recurring items. Valley's efficiency ratio for the six months ended
June 30, 1999 was 42.6 percent, one of the lowest in the industry, compared
with an efficiency ratio of 46.7 percent for the year ended December 31, 1998
and 44.7 percent for the six months ended June 30, 1998. Valley strives to
control its efficiency ratio and expenses as a means of producing increased
earnings for its shareholders.
Credit card expense includes cardmember rebates, processing expenses and
fraud losses. The decrease in credit card expenses of $1.0 million or 43.8
percent and $2.9 million or 52.0 percent for the three months and six months
ending June 30, 1999 respectively, is directly attributable to an amendment
made to the co-branded credit card program during the fourth quarter of 1997,
which reduced the amount of cardmember rebates paid by Valley.
Amortization of intangible assets decreased $443 and $108 thousand for the
three and six months ended June 30, 1999 to $818 thousand and $2.1 million. The
decrease is from reduced loan servicing amortization expense An impairment
analysis of loan servicing rights is completed quarterly to determine the
adequacy of the mortgage servicing asset valuation allowance.
The significant components of other non-interest expense include
advertising, data processing, professional fees, postage, telephone and
stationery expense which totaled approximately $3.2 million and $7.0 million
for the three and six months ended June 30, 1999.
Income Taxes
Income tax expense as a percentage of pre-tax income was 35.0 percent and
36.0 percent for the three and six months ended June 30, 1999, respectively,
compared to 26.5 percent and 28.1 percent for the same periods in 1998. The
increase in the effective tax rate is attributable to tax benefits realized
in 1998 that were no longer available in 1999. Valley implemented a tax
strategy during the second quarter of 1999 to minimize state tax expense.
The effective tax rate is expected to remain at current levels for the
remainder of 1999, compared to the lower effective tax rate for 1998.*
Business Segments
Valley has three major business segments it monitors and reports on to manage
its business operations. These segments are commercial lending, consumer
lending and investment management. Lines of business and actual
structure of operations determine each segment. Each is reviewed routinely
for its asset growth, contribution to pretax net income and return on assets.
Expenses related to the branch network, all other components of retail
banking, along with the back office departments of the bank are allocated to
each of the three business segments. The financial reporting for each
segment contains allocations and reporting in line with Valley's operations,
which may not necessarily be compared to any other financial institution. The
accounting for each segment includes internal accounting policies designed to
measure consistent and reasonable financial reporting.
The following table represents the financial data for the three business
segments for the six months ended June 30, 1999 and 1998. No material change
has been made to the basis of segmentation or in the basis of measurement of
segment profit or loss.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
(in thousands)
Corporate
Consumer Commercial Investment and other
Lending Lending Management Adjustments Total
<S> <C> <C> <C> <C> <C>
Average interest-earning
assets $2,632,965 $1,658,465 $1,415,736 $ -- $5,707,166
Income before income taxes$ 35,983 $ 32,192 $ 14,712 $ (1,800)$ 81,087
Return on average
interest-earning
assets (pre-tax) 2.73% 3.88% 2.08% - % 2.84%
Six Months Ended June 30, 1998
(in thousands)
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
Average interest-earning
assets $2,425,668 $1,546,963 $1,373,557 $ -- $5,346,188
Income before income taxes $ 30,388 31,330 14,230 (5,926) 70,022
Return on average
interest-earning
assets (pre-tax) 2.51% 4.05% 2.07% --% 2.62%
</TABLE>
Consumer Lending
The consumer lending segment had a return on average interest-earning
assets before taxes of 2.73 percent for the six months ended June 30, 1999
compared to 2.51 percent for the six months ended June 30, 1998. Average
interest-earning assets increased $207.3 million, which is attributable to
an increase in home equity and automobile lending. Interest rates on consumer
loans declined by 48 basis points. This decrease was offset by a decrease
in the cost of funds by 31 basis points. Income before income taxes
increased $5.6 million primarily as a result of an increase in average
interest-earning assets.
Commercial Lending
The return on average interest-earning assets before taxes declined 17
basis points to 3.88 percent for the six months ended June 30, 1999. Average
interest-earning assets increased $111.5 million as a result of increased
volume of loans. Interest rates on commercial loans declined by 39 basis
points. This decrease was partially offset by a decrease in cost of funds by
31 basis points. Income before income taxes increased $862 thousand as a
result of an increase in average interest-earning assets.
Investment Management
The return on average interest earning assets before taxes was 2.08
percent for the six months ended June 30, 1999 relatively unchnaged from
the six months ended June 30, 1998. The yield on interest earning assets
decreased by 35 basis points to 6.26 percent, and was offset by a larger
decrease of 69 basis points in the cost of funds. Average interest-
earning assets increased by $42.2 million and income before income taxes
remained relatively unchanged.
Corporate Segment
The corporate segment represents income and expense items not directly
attributable to a specific segment including merger-related charges, gains
on sales of securities, service charges on deposit accounts, and certain
revenues and expenses recorded by acquired banks that could not be allocated
to a line of business. The loss before taxes decreased to $1.8 million for
the six months ended June 30, 1999.
<PAGE>
The following table represents the financial data for the three months ended
June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
(in thousands)
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
<S> <C> <C> <C> <C> <C>
Average interest-earning
assets $2,662,965 $1,706,532 $1,425,736 $ -- $5,795,233
Income before income
taxes $ 19,327 $ 17,796 $ 7,385 $ (5,463)$ 39,045
Return on average
interest-earning
assets (pre-tax) 2.90% 4.17% 2.07% -- % 2.69%
Three Months Ended June 30, 1998
(in thousands)
Corporate
Consumer Commercial Investment and Other
Lending Lending Management Adjustments Total
Average interest-earning
assets $2,434,188 $1,548,963 $1,375,557 $ -- $5,358,708
Income before income taxes $ 16,676 $ 16,541 $ 7,066 (5,100)$ 35,183
Return on average interest-
earning assets (pre-tax) 2.74 % 4.27 % 2.05 % -- % 2.63%
</TABLE>
Consumer Lending
The consumer lending segment had a return on average interest-earning assets
before taxes of 2.90 percent for the three
months ended June 30, 1999 compared to 2.74 percent for the three months
ended June 30, 1998. Average interest-earning assets increased $228.8
million, attributable to an increase in home equity and automobile lending.
Interest rates on consumer loans declined by 57 basis points. This decrease
was offset by a decrease in cost of funds by 24 basis points. Income before
income taxes increased $2.7 million primarily as a result of an increase in
average interest-earning assets.
Commercial Lending
The return on average interest-earning assets before taxes declined 10 basis
points to 4.17 percent for the three months ended June 30, 1999. Average
interest-earning assets increased $157.6 million as a result of increased
volume of loans. Interest rates on commercial loans declined by 41 basis
points. This decrease was partially offset by a decrease in cost of funds by
33 basis points. Income before income taxes increased by $1.3 million as a
result of an increase in average interest-earning assets, offset by the decline
in the interest spread.
Investment Management
The return on average interest earning assets before taxes increased to 2.07
percent for the three months ended June 30, 1999 compared to 2.05 percent for
the three months ended June 30, 1998. The yield on interest earning assets
decreased by 36 basis points to 6.10 percent, offset by a decrease in the cost
of funds. Average interest-earning assets increased by $50.2 million and
income before income taxes increased by $319 thousand.
Corporate Segment
The corporate segment represents income and expense items not directly
attributable to a specific segment, including merger-related charges, gains
on sales of securities, service charges on deposit accounts, and certain
revenues and expenses recorded by acquired banks that could not be allocated
to a line of business. The loss before taxes was $5.5 million for the three
months ended June 30, 1999.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Valley's success is largely dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of Valley's
net interest income to the movement in interest rates. Valley does not
currently use derivatives to manage market and interest rate risks. Valley's
interest rate risk management is the responsibility of the Asset/Liability
Management Committee ("ALCO"), which reports to the Board of Directors. ALCO
establishes policies that monitor and coordinate Valley's sources, uses and
pricing of funds.
Valley uses a simulation model to analyze net interest income sensitivity to
movements in interest rates. The simulation model projects net interest income
based on various interest rate scenarios over a twelve and twenty-four month
period. The model is based on the actual maturity and repricing
characteristics of rate sensitive assets and liabilities. The model
incorporates assumptions regarding the impact of changing interest rates on
the prepayment speeds of certain assets and liabilities. According to the
model, over a twelve month period, an interest rate increase of 100 basis
points resulted in an increase in net interest income of approximately $267.0
thousand while an interest rate decrease of 100 basis points resulted in a
decrease in net interest income of approximately $2.3 million.* 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, 1999 was $944.5
million, representing a ratio of interest sensitive assets to interest
sensitive liabilities of (0.63:1). 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. Liquid assets
amounted to $1.4 billion and $1.3 billion at June 30, 1999 and December
31, 1998, respectively. This represents 23.4 percent and 24.2 percent of
interest earning assets, and 22.2 percent and 22.9 percent of total assets
at June 30, 1999 and December 31, 1998, respectively.
On the liability side, the primary source of funds available to meet liquidity
needs is Valley's core deposit base, which generally excludes certificates
of deposit over $100 thousand. Core deposits averaged approximately $3.6
billion for both the six months ended June 30, 1999 and the year ended December
31, 1998, respectively, representing 62.3 percent and 66.8 percent of average
interest earning assets. Short-term borrowings through Federal funds lines
and Federal Home Loan Bank ("FHLB") advances and large dollar certificates
of deposit, generally those over $100 thousand, are used as supplemental
funding sources. During the fourth quarter of 1998, Valley began
borrowing from the FHLB as part of a leveraging strategy to increase interest
earning assets and net interest income. This strategy has continued to expand
in 1999 and as of June 30, 1999, Valley had outstanding FHLB advances of
$364.5 million. Additional liquidity is derived from scheduled loan and
investment payments of principal and interest, as well as prepayments
received. For the six months ended June 30, 1999 proceeds from the sales of
investment securities available for sale were $8.5 million, and proceeds of
$235.4 million were generated from investment maturities. Purchases of
investment securities for the six months ended June 30, 1999 were $460.8
million. Short-term borrowings and certificates of deposit over $100
thousand amounted to $593.9 million and $503.6 million, on average, for
the six months ended June 30, 1999 and the year ended December 31, 1998
respectively.
Valley' 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, 1999, Valley had $1.2 billion of securities available for sale
compared with $1.0 billion at December 31, 1998. Those securities are
recorded at their fair value on an aggregate basis. As of June 30, 1999, the
investment securities available for sale had an unrealized loss of $2.3
million, net of deferred taxes, compared to an unrealized gain of $4.9
million, net of deferred taxes, at December 31, 1998. This change was
primarily due to a decrease in prices resulting from an increase in interest
rates. These securities are not considered trading account securities,
which may be sold on a continuous basis, but rather are securities which
may be sold to meet the various liquidity and interest rate requirements of
Valley.
<PAGE>
Loan Portfolio
As of June 30, 1999, total loans were $4.3 billion, compared to $4.1 billion
at December 31, 1998, an increase of 3.8 percent. The following table reflects
the composition of the loan portfolio as of June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
<S> <C> <C>
June 30, December 31,
1999 1998
Commercial $ 466,722 $ 477,231
Total commercial loans 466,722 477,231
Construction 121,717 112,819
Residential mortgage 1,102,139 1,055,278
Commercial mortgage 1,138,336 1,050,420
Total mortgage loans 2,362,192 2,218,517
Home equity 245,045 226,231
Credit card 95,426 108,180
Automobile 1,059,034 1,033,938
Other consumer 80,307 83,552
Total consumer loans 1,479,812 1,451,901
Total loans $4,308,726 $ 4,147,649
As a percent of total loans:
Commercial loans 10.8% 11.5%
Mortgage loans 54.8 53.5
Consumer loans 34.4 35.0
Total 100.0% 100.0%
</TABLE>
Non-Performing Assets
Non-performing assets include non-accrual loans and other real estate owned
(OREO). Non-performing assets totaled $9.8 million at June 30, 1999
compared with $11.8 million at December 31, 1998, a decrease of $2.0
million or 17.0 percent. Non-performing assets at June 30, 1999 and
December 31, 1998, respectively, amounted to 0.23 percent and 0.28 percent
of loans and OREO.
Loans past due in excess of 90 days and still accruing, and not included in
the non-performing category, totaled $7.7 million at June 30, 1999, compared
to $7.4 million at December 31, 1998. These loans are primarily residential
mortgage loans and commercial mortgage loans which are generally well-secured
and in the process of collection. Also included are matured commercial
mortgage loans in the process of being renewed, which totaled $3.0 million at
June 30, 1999.
The following table sets forth non-performing assets and accruing loans
which were 90 days or more past due as to principal or interest payments on the
dates indicated, in conjunction with asset quality ratios for Valley.
<TABLE>
<CAPTION>
LOAN QUALITY
June 30, December 31,
1999 1998
(in thousands)
<S> <C> <C>
Loans past due in excess of
90 days and still accruing $ 7,744 $ 7,418
Non-accrual loans $ 8,439 $ 7,507
Other real estate owned 1,381 4,261
Total non-performing assets $ 9,820 $ 11,768
Troubled debt restructured loans $ 5,064 $ 6,387
Non-performing loans as a % of loans 0.20% 0.18%
Non-performing assets as a % of
Loans plus other real estate owned 0.23% 0.28%
Allowance as a % of loans 1.27% 1.32%
</TABLE>
At June 30, 1999 the allowance for possible loan losses amounted to $54.9
million or 1.27 percent of loans, as compared to $54.6 million or 1.32 percent
at year-end 1998.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $1.6 million and
$3.5 million for the three and six months ended June 30, 1999 compared with
$3.6 million and $6.3 million for the three and six months ended June 30, 1998.
Capital Adequacy
A significant measure of the strength of a financial institution is its
shareholders' equity, which should expand in close proportion to asset
growth. At June 30, 1999, shareholders' equity totaled $563.2 million or 9.2
percent of total assets, compared with $589.8 million or 10.0 percent at
December 31, 1998. Valley has achieved steady internal capital generation
in excess of asset growth throughout the past five years.
Included in shareholders' equity as components of accumulated other
comprehensive income at June 30, 1999 was a $2.3 million unrealized loss on
investment securities available for sale, net of tax, and a negative
translation adjustment of $504 thousand related to the Canadian subsidiary of
VNB, compared to an unrealized gain of $4.9 million, net of tax, and an $852
thousand negative translation adjustment at December 31, 1998.
On June 10, 1999 Valley's Board of Directors rescinded its previously
announced stock repurchase program after 1.6 million shares of Valley
common stock had been repurchased. Approximately 1.5 million treasury
shares were issued in conjunction with the 5 percent stock dividend issued
May 18, 1999.
Valley's capital position at June 30, 1999 under risk-based capital
guidelines was $560.6 million, or 12.0 percent of risk-weighted assets, for
Tier 1 capital and $615.5 million, or 13.2 percent for Total
risked-based capital. The comparable ratios at December 31, 1998 were
13.3 percent for Tier 1 capital and 14.5 percent for Total risk-based
capital. At June 30, 1999 and December 31, 1998, Valley was in compliance
with the leverage requirement having a Tier 1 leverage ratio of 9.3 and 10.0
percent, respectively. Valley's ratios at June 30, 1999 were above the "well
capitalized" requirements, which require Tier 1 capital of at least 6
percent, total risk-based capital of 10 percent and a minimum leverage ratio
of 5 percent.
Book value per share amounted to $9.33 at June 30, 1999 compared with $9.57 per
share at December 31, 1998.
The primary source of capital is through retention
of earnings. Valley's rate of earnings retention, derived by dividing
undistributed earnings by net income, was 46.6 percent for the six month
period ended June 30, 1999, compared to 51.9 percent for the six month
period ended June 30, 1998. Cash dividends declared amounted to $0.50 per
share for the six months ended June 30, 1999 equivalent to a dividend payout
ratio of 57.6 percent, compared to 50.9 percent for the same period in 1998.
Valley declared a five percent stock dividend on April 7, 1999 to shareholders
of record on May 7, 1999, and issued May 18, 1999. The annual dividend rate
was increased from $0.95 per share, on an after stock dividend basis,
to $1.04 per share. Valley's Board of Directors continues to believe that
cash dividends are an important component of shareholder value and that at
its current level of performance and capital, Valley expects to continue
its current dividend policy of a quarterly distribution of earnings to its
shareholders.*
Year 2000
Most computer programs have historically been written using two digits rather
than four to define the applicable year. These programs were written without
considering the impact of the upcoming change in the century and the programs
may experience problems handling dates beyond the year 1999. This could
cause computer applications to fail or to create erroneous results unless
corrective measures are taken. Incomplete or untimely resolution of the
Year 2000 ("Y2K") issues could have a material adverse impact on Valley's
business, operations and financial condition in the future.
Valley has assessed the Y2K issue as it impacts its internal Information
Technology ("IT") systems (computer hardware and software systems) and its
non-IT systems (facilities, equipment and vendors) and has developed its
plan to address the Y2K issue. Valley operates its deposit, loan and general
ledger systems on one software system licensed to Valley through a third
party ("primary software vendor"). Valley received the software from its
primary software vendor and began testing during September 1998 to verify
the vendor's representation that the software is Y2K compliant. The
testing for the deposit, loan and general ledger systems has been completed
as of the end of 1998. Additional Y2K software systems have been purchased
from other vendors and Valley has substantially completed testing those
systems for Y2K compliance. Valley believes it has identified equipment
which needs to be upgraded and is in the process of remediation.*
Valley currently believes its Y2K compliance plan with respect to its
internal hardware and software systems will not have a material adverse
effect on Valley's financial condition or results of operations.* However, no
assurance can be given that the ultimate costs to address the Y2K issue or the
impact of any failure to timely achieve substantial Y2K compliance will not
have a material adverse effect on Valley's financial condition or results.*
Valley will utilize both internal and external sources to execute its Y2K
plan. Valley's main software system is licensed through its primary
software vendor for which Valley pays a normal annual licensing fee. As noted
above, the vendor has represented that this software system is Y2K compliant,
and Valley has completed testing this system for Y2K compliance. As a result,
Valley has been able to maintain a low level of expenditures to date. Since
implementing the assessment of Y2K issues, Valley's costs to external sources
have been approximately $130 thousand. Based on current information, Valley
estimates all expenditures related to the execution of its Y2K plan have
been incurred totaling $130 thousand.* These estimates of expenditures are
based on Valley's presently available information and may be updated as
information becomes available.
Valley has also communicated with its significant suppliers, vendors and
borrowing customers to determine the extent to which the company is vulnerable
to the failure of these third parties to remedy any Y2K issues. Valley can
give no assurances that failure to address Y2K issues by third parties on
whom Valley's systems, business processes or loan payments rely would not
have a material adverse effect on Valley's operations or financial
condition.* Valley has implemented a customer awareness program on its
website, in brochures in each of its branches and in messages on customer
statements to keep customers informed about Y2K as it relates to Valley.
Valley has established a contingency plan for the applications critical to its
operations. This plan includes trigger dates in which a contingency vendor
would be contacted. However, Valley does not foresee converting any of
these applications to a contingency vendor at this time.*
Recent Accounting Pronouncement
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued
by the Financial Accounting Standards Board ("FASB") in June 1998. SFAS No.
133 standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under the standard,
entities are required to carry all derivative instruments in the statement
of financial position at fair value. Valley must adopt SFAS No. 133 by
January 1, 2000; however, early adoption is permitted. On adoption, the
provisions of SFAS No. 133 must be applied prospectively. Valley anticipates
that the adoption of SFAS No. 133 will not have a material impact in the
financial statements.
In June of 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" which
amends SFAS No. 133 to be effective for all fiscal years beginning after
June 15, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See page 18 for a discussion of interest rate sensitivity.
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(27) Financial Data Schedule
b) Reports on Form 8-K
1) Filed April 9, 1999 to report earnings for the quarter ended March 31,
1999 and the declaration of the Company's 5 percent stock dividend on
the Company's outstanding common stock issued May 18, 1999.
2) Filed April 30, 1999 to report the purchase up to 2,750,000 shares of
it's outstanding common stock to be issued for its 5 percent stock
dividend to be issued May 18, 1999.
3) Filed June 17, 1999 to report the completion of the acquisition of
Ramapo Financial Corporation into Valley National Bancorp effective as
of the close of business on June 11, 1999 and to report that the Board
of Directors rescinded its previously announced treasury stock
repurchase program.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALLEY NATIONAL BANCORP
(Registrant)
Date: August 12, 1999 /s/ Peter Southway
PETER SOUTHWAY
VICE CHAIRMAN
Date: August 12, 1999 /s/ Alan D. Eskow
ALAN D. ESKOW
SENIOR VICE PRESIDENT AND
CONTROLLER
FINANCIAL ADMINISTRATION
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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