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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 2002
[ ] 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 1-11277
----------------------
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 07470
(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 90,992,492 shares were outstanding as of
November 12, 2002.
TABLE OF CONTENTS
Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2002
and 2001 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 28
Item 4. Controls and Procedures 28
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
CERTIFICATIONS 31
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands, except for share data) September 30, December 31,
2002 2001
----------------- ------------------
Assets
Cash and due from banks $218,628 $311,850
Federal funds sold 155,000 0
Investment securities held to maturity, fair value of $524,397
and $476,872 in 2002 and 2001, respectively 516,130 503,061
Investment securities available for sale 2,158,928 2,171,695
----------------- ------------------
Total investments 2,675,058 2,674,756
Loans 5,569,075 5,275,582
Loans held for sale 51,745 56,225
----------------- ------------------
Total loans 5,620,820 5,331,807
Less: Allowance for loan losses (66,189) (63,803)
----------------- ------------------
Net loans 5,554,631 5,268,004
Premises and equipment, net 106,680 94,178
Accrued interest receivable 43,068 42,184
Bank owned life insurance 157,183 102,120
Other assets 111,569 90,673
----------------- ------------------
Total assets $9,021,817 $8,583,765
================= ==================
Liabilities
Deposits:
Non-interest bearing $1,457,090 $1,446,021
Interest bearing:
Savings 2,813,126 2,448,335
Time 2,348,517 2,412,618
----------------- ------------------
Total deposits 6,618,733 6,306,974
Short-term borrowings 209,619 304,262
Long-term debt 1,219,664 975,728
Accrued expenses and other liabilities 120,570 118,426
----------------- ------------------
Total liabilities 8,168,586 7,705,390
Company - obligated mandatorily redeemable preferred capital securities
of a subsidiary trust holding solely junior subordinated debentures
of the Company 200,000 200,000
Shareholders' Equity
Preferred stock, no par value, authorized 30,000,000 shares; none issued 0 0
Common stock, no par value, authorized 142,442,138
shares; issued 94,298,310 shares in 2002 and
97,753,698 shares in 2001 33,352 33,310
Surplus 319,315 406,608
Retained earnings 322,719 270,730
Unallocated common stock held by employee benefit plan (477) (602)
Accumulated other comprehensive income 41,332 19,638
----------------- ------------------
716,241 729,684
Treasury stock, at cost (2,354,061 shares in 2002 and
2,169,121 shares in 2001) (63,010) (51,309)
----------------- ------------------
Total shareholders' equity 653,231 678,375
----------------- ------------------
Total liabilities and shareholders' equity $9,021,817 $8,583,765
================= ==================
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Interest Income
Interest and fees on loans $93,407 $99,695 $276,195 $304,118
Interest and dividends on investment securities:
Taxable 34,301 32,810 103,455 101,999
Tax-exempt 2,531 2,648 7,614 7,900
Dividends 706 927 2,231 3,311
Interest on federal funds sold and other short-term
investments 308 809 1,272 4,171
------------------------------ -----------------------------
Total interest income 131,253 136,889 390,767 421,499
------------------------------ -----------------------------
Interest Expense
Interest on deposits:
Savings deposits 8,929 11,539 25,649 38,032
Time deposits 17,375 26,291 53,960 90,298
Interest on short-term borrowings 702 1,978 2,147 9,985
Interest on long-term debt 13,212 13,122 38,750 35,570
------------------------------ -----------------------------
Total interest expense 40,218 52,930 120,506 173,885
------------------------------ -----------------------------
Net Interest Income 91,035 83,959 270,261 247,614
Provision for loan losses 3,299 2,700 10,978 7,635
------------------------------ -----------------------------
Net Interest Income after Provision for Loan Losses 87,736 81,259 259,283 239,979
------------------------------ -----------------------------
Non-Interest Income
Trust and investment services 1,069 1,065 3,439 3,472
Service charges on deposit accounts 4,851 4,524 14,563 13,774
Gains on securities transactions, net 2,139 932 5,103 1,911
Fees from loan servicing 2,268 2,736 7,182 8,242
Credit card fee income 805 865 2,260 2,794
Gains on sales of loans, net 1,562 1,419 4,904 8,942
Bank owned life insurance 1,842 853 5,063 853
Other 6,219 3,591 16,707 10,421
------------------------------ -----------------------------
Total non-interest income 20,755 15,985 59,221 50,409
------------------------------ -----------------------------
Non-Interest Expense
Salary expense 22,311 19,949 64,275 58,946
Employee benefit expense 4,675 4,035 14,221 13,579
FDIC insurance premiums 271 286 821 869
Net occupancy expense 7,603 6,548 21,598 21,929
Credit card expense 315 318 926 1,223
Amortization of intangible assets 3,688 3,321 8,591 7,263
Advertising 1,555 2,549 5,326 4,857
Distributions on capital securities 3,932 0 11,797 0
Merger-related charges 0 0 0 9,017
Other 8,386 7,373 25,048 22,349
------------------------------ -----------------------------
Total non-interest expense 52,736 44,379 152,603 140,032
------------------------------ -----------------------------
Income Before Income Taxes 55,755 52,865 165,901 150,356
Income tax expense 16,799 16,860 48,449 51,229
------------------------------ -----------------------------
Net Income $38,956 $36,005 $117,452 $99,127
============================== =============================
Weighted Average Number of Shares Outstanding:
Basic 92,706,089 97,416,728 93,853,878 97,461,140
Diluted 93,262,194 98,234,619 94,423,405 98,235,583
Earnings Per Share:
Basic $0.42 $0.37 $1.25 $1.02
Diluted 0.42 0.37 1.24 1.01
Cash dividends declared per common share 0.225 0.21 0.66 0.62
See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP Nine Months Ended
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) September 30,
--------------------------------
(in thousands)
2002 2001
--------------- ----------------
Cash flows from operating activities:
Net income $117,452 $99,127
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 12,772 14,495
Amortization of compensation costs pursuant to
long-term stock incentive plan 1,926 1,637
Provision for loan losses 10,978 7,635
Net amortization of premiums and accretion of discounts 6,412 3,811
Net gains on securities transactions (5,103) (1,911)
Proceeds from sales of loans 169,899 159,326
Gains on sales of loans (4,904) (8,942)
Origination of loans held for sale (160,515) (171,886)
Proceeds from sale of premises and equipment 1,910 0
Gain on sale of premises and equipment (1,111) 0
Net increase in bank owned life insurance (5,063) (853)
Net (increase) decrease in accrued interest receivable and other assets (26,208) 14,018
Net (decrease) increase in accrued expenses and other liabilities (10,691) 15,445
--------------- ----------------
Net cash provided by operating activities 107,754 131,902
--------------- ----------------
Cash flows from investing activities:
Purchase of bank owned life insurance (50,000) (100,000)
Proceeds from sales of investment securities available for sale 444,721 210,492
Proceeds from maturities, redemptions and prepayments of investment
securities available for sale 755,417 938,251
Purchases of investment securities available for sale (1,155,017) (1,320,955)
Purchases of investment securities held to maturity (38,093) (54,904)
Proceeds from maturities, redemptions and prepayments of investment
securities held to maturity 24,633 33,600
Net (increase) decrease in federal funds sold and other
short-term investments (155,000) 85,000
Net increase in loans made to customers (301,854) (98,966)
Purchases of premises and equipment (20,175) (8,614)
--------------- ----------------
Net cash used in investing activities (495,368) (316,096)
--------------- ----------------
Cash flows from financing activities:
Net increase (decrease) in deposits 311,759 (14,969)
Net decrease in short-term borrowings (94,643) (119,931)
Advances of long-term debt 311,000 490,000
Repayments of long-term debt (67,064) (122,062)
Dividends paid to common shareholders (62,093) (55,697)
Purchase of common shares to treasury (109,174) (26,577)
Common stock issued, net of cancellations 4,607 2,649
--------------- ----------------
Net cash provided by financing activities 294,392 153,413
Net decrease in cash and cash equivalents (93,222) (30,781)
Cash and cash equivalents at January 1 311,850 239,105
--------------- ----------------
Cash and cash equivalents at September 30 $218,628 $208,324
=============== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest on deposits and borrowings $123,755 $173,151
Cash paid during the period for federal and state income taxes 56,658 20,519
Transfer of securities from held to maturity to available for sale** 0 162,433
Transfer of securities from available for sale to held to maturity** 0 50,044
See accompanying notes to consolidated financial statements.
** In connection with the Merchants acquisition in January 2001.
VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
The Consolidated Statements of Financial Condition as of September 30, 2002 and
December 31, 2001, the Consolidated Statements of Income for the three and nine
month periods ended September 30, 2002 and 2001 and the Consolidated Statements
of Cash Flows for the nine month periods ended September 30, 2002 and 2001 have
been prepared by Valley National Bancorp ("Valley") without audit. In the
opinion of management, all adjustments (which included only normal recurring
adjustments) necessary to present fairly Valley's financial position, results of
operations and cash flows at September 30, 2002 and for all periods presented
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted. These consolidated financial
statements are to be read in conjunction with the consolidated financial
statements and notes thereto included in Valley's December 31, 2001 report on
Form 10-K. Certain prior period amounts have been restated to conform to 2002
financial presentations.
2. Earnings Per Share(1)
For Valley, the numerator of both the Basic and Diluted EPS is equivalent to net
income. The weighted average number of shares outstanding used in the
denominator for Diluted EPS is increased over the denominator used for Basic EPS
by the effect of potentially dilutive common stock equivalents utilizing the
treasury stock method. For Valley, common stock equivalents are common stock
options outstanding.
The following table shows the calculation of both Basic and Diluted earnings per
share for the three and nine months ended September 30, 2002 and 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------------------------- ---------------------------------
Net income (in thousands) $38,956 $36,005 $117,452 $99,127
================================ =================================
Basic weighted-average number of shares
outstanding 92,706,089 97,416,728 93,853,878 97,461,140
Plus: Common stock equivalents 556,105 817,891 569,527 774,443
-------------------------------- ---------------------------------
Diluted weighted-average number
of shares outstanding 93,262,194 98,234,619 94,423,405 98,235,583
================================ =================================
Earnings per share:
Basic $0.42 $0.37 $1.25 $1.02
Diluted 0.42 0.37 1.24 1.01
Common stock equivalents for both the three and nine months ended September 30,
2002 exclude approximately 4 thousand and 2 thousand common stock options,
because the exercise prices exceeded the average market value. For the three and
nine months ended September 30, 2001, approximately 2.5 thousand and 134
thousand common stock options were excluded from common stock equivalents
because the exercise
(1) Earnings per share ("EPS") amounts and weighted average shares
outstanding reflect the 5 for 4 stock split declared April 10, 2002 to
shareholders of record on May 3, 2002 and issued May 17, 2002.
prices exceeded the average market value. Inclusion of
these common stock equivalents would be anti-dilutive to the diluted earnings
per share calculation.
3. Recent Developments
On November 1, 2002, Valley National Bank ("VNB"), the wholly-owned
subsidiary of Valley, acquired NIA/Lawyers Title Agency, LLC ("NIA/Lawyers"), a
title insurance agency based in Paramus, NJ. For 2001, NIA/Lawyers' annual
revenues were approximately $5.0 million. It is anticipated that management and
employees will remain with the firm to assure continuity.* NIA/Lawyers has
become part of Valley's Financial Services Division.
In August 2002, Valley completed its acquisition of Masters Coverage Corp.
("Masters"), an independent insurance agency. Masters is an all-line insurance
agency offering property and casualty, life and health insurance. The purchase
of Masters was a cash acquisition with subsequent earn-out payments. The Masters
operation is now a wholly-owned subsidiary of VNB and is part of Valley's
Financial Services Division.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. The Act increases federal regulation of corporate governance and
accounting, creates new federal crimes in connection with corporate activity and
expands criminal penalties for existing federal crimes.
On July 25, 2002, VNB announced the signing of a purchase agreement to
acquire Glen Rauch Securities, Inc., a Wall Street brokerage firm specializing
in municipal securities with more than $1 billion in assets in its customer
accounts. The purchase of Glen Rauch Securities, Inc., will be a cash
acquisition with subsequent earn-out payments. Under the terms of the agreement,
it is anticipated that management and employees will remain with the firm to
assure continuity.* Completion of the transaction is expected to take place
during the fourth quarter of 2002*. Upon completion of the transaction, Glen
Rauch Securities, Inc. will become part of Valley's Financial Services
Division.*
In July 2002, Valley announced that it will expense the cost of all stock
options the company grants beginning with options granted and earnings reported
for the calendar year 2002. While the impact of expensing stock options will not
be material to Valley's financial statements for 2002, the impact on Valley's
net income is expected to increase over time as options vest and new options are
granted*. Based on Valley's historical levels of earnings and stock options
issuance, the effect of expensing options is expected to amount to approximately
$0.02 per diluted share annually when it makes its full impact on earnings at
the end of its vesting years.* For the nine months ended September 30, 2002,
Valley's expense for stock options was not material to its financial statements.
During the quarter ended June 30, 2002, a two-year Federal investigation
culminated in the arrest of an officer of the International Private Banking
Department of the Merchants Bank Division and the seizure of 39 accounts that
the officer managed. The officer was charged with money laundering in
furtherance of narcotic trafficking activity, tax evasion, and unlicensed money
transmitting. Valley became aware of the investigation by Federal Law
Enforcement Officials during the course of its own due diligence investigation,
prior to the acquisition of Merchants Bank. Valley representatives met with the
office of the U.S. Attorney and continued the ongoing cooperation with the
investigation into the International Private Banking Department. Throughout the
course of the investigation, there was never any adverse impact upon Valley, its
funds, its legitimate customers or its operations. Valley is continuing its
policy of full and complete cooperation with State and Federal Law Enforcement
Authorities in the investigation of criminal conduct that in any way affects the
integrity of Valley National Bank and its customers' accounts.
On May 1, 2002, Valley completed the sale of its subsidiary VNB Financial
Services, Inc., a Canadian finance company, to State Farm Mutual Automobile
Insurance Company for a purchase price equal to Valley's equity in the
subsidiary plus a premium of approximately $1.6 million. The subsidiary
primarily originated fixed rate auto loans in Canada through a marketing program
with State Farm.
4. Comprehensive Income
Valley's comprehensive income consists of foreign currency translation
adjustments and unrealized gains (losses) on securities available for sale. The
following table shows each component of comprehensive income for the three and
nine months ended September 30, 2002 and 2001.
Three Months Ended
September 30,
--------------------------------------------------------
2002 2001
--------------------------------------------------------
(in thousands)
Net income $38,956 $36,005
Other comprehensive income, net of tax:
Foreign currency:
Translation adjustment 0 (300)
Unrealized gains on securities:
Unrealized holding gains arising during period $4,510 $20,619
Reclassification adjustment for gains realized in
net income (1,384) (598)
------------- -------------
Net unrealized gains 3,126 20,021
---------------- ----------------
Other comprehensive income 3,126 19,721
---------------- ----------------
Comprehensive income $42,082 $55,726
================ ================
Nine Months Ended
September 30,
--------------------------------------------------------
2002 2001
--------------------------------------------------------
(in thousands)
Net income $117,452 $99,127
Other comprehensive income, net of tax:
Foreign currency:
Translation adjustment $118 ($372)
Reclassification adjustment for loss realized on sale
of Canadian subsidiary 995 0
------------- -------------
Net foreign currency 1,113 (372)
Unrealized gains on securities:
Unrealized holding gains arising during period 22,507 35,112
Reclassification adjustment for gains realized in
net income (1,926) (1,266)
------------- -------------
Net unrealized gains 20,581 33,846
---------------- ----------------
Other comprehensive income 21,694 33,474
---------------- ----------------
Comprehensive income $139,146 $132,601
================ ================
5. Statement of Financial Accounting Standards No. 142, "Goodwill and
Intangible Assets"
Valley adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Intangible Assets" (SFAS No. 142), effective January 1, 2002. SFAS
No. 142 eliminates the amortization of existing goodwill and requires evaluating
goodwill for impairment on an annual basis or whenever circumstances occur that
could affect the fair value. SFAS No. 142 also requires allocation of goodwill
to reportable segments defined by SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." As of September 30, 2002, management
evaluated the goodwill in each segment and determined that an impairment
allowance was not required to be recorded. Management will continue to evaluate
the need for an impairment allowance on an annual basis.
6. Business Segments
The information under the caption "Business Segments" in Management's
Discussion and Analysis is incorporated herein by reference.
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, acquisitions, relationships, opportunities,
taxation, technology and market conditions. These statements may be identified
by an (*) or such forward-looking terminology as "expect," "anticipate," "view,"
"opportunity," "allow," "continues," "reflects," or similar statements or
variations of such terms. Actual results may differ materially from such
forward-looking statements. Factors that may cause actual results to differ from
those contained in such forward-looking statements include, among others, the
following: unanticipated changes in the direction of interest rates, tax
strategies and effective income tax rates, loan prepayment assumptions, levels
of loan quality and origination volume, relationships with major customers
including sources of loans, as well as the effects of economic conditions and
legal and regulatory barriers and structure. Valley assumes no obligation for
updating any such forward-looking statement at any time.
Earnings Summary(2)
For the three months ended September 30, 2002, net income increased to
$39.0 million or $0.42 per diluted share compared with $36.0 million or $0.37
per diluted share for the same period in 2001, an increase of 8.2 percent in net
income and a 13.51 percent increase in net income per diluted share. This
increase was primarily attributed to higher net interest income as a result of
increased loan and investment activity. Increases were also recorded in
non-interest income due primarily to gains on the sales of securities, gain from
the sale of an office building and earnings from Masters Coverage Corp., an
insurance agency acquired on August 1, 2002. These increases were offset by
increases in salaries, benefit expenses and distributions on capital securities.
The annualized return on average shareholders' equity increased to 23.59
percent from 20.67 percent for the three month period ended September 30, 2002,
compared with the same period in 2001 and the annualized return on average
assets remained unchanged at 1.79 percent for the three months ended September
30, 2002 and 2001.
Net income for the nine months ended September 30, 2002 was $117.5 million
or $1.24 per diluted share compared with $99.1 million or $1.01 per diluted
share for the same period in 2001, an increase of 18.5 percent in net income and
22.8 percent in net income per diluted share. This increase was primarily
attributed to the reasons noted above for the third quarter 2002, as well as a
gain from the sale of Valley's Canadian subsidiary and a tax benefit realized as
a result of the restructuring of an existing subsidiary into a REIT.
For the nine months ended September 30, 2002, the annualized return on
average shareholders' equity increased to 23.65 percent from 19.33 percent
compared with the same period in 2001. The annualized return on average assets
increased to 1.83 percent for the nine months ended September 30, 2002 up from
1.66 percent, for the same period in 2001.
(2) Earnings per share data reflects the 5 for 4 stock split issued on May
17, 2002.
Net Interest Income
Net interest income continues to be the largest component of Valley's
operating income, a stable traditional source of income, in spite of the current
economic climate. For the three month period ended September 30, 2002, net
interest income on a tax equivalent basis increased to $92.5 million or 8.2
percent, compared with $85.5 million for the three months ended September 30,
2001. This increase was mainly due to increased loan volume and investment
activity. Average loans increased $320.4 million or 6.1 percent as consumer and
commercial lending reflected growth during the period, while average
investments, primarily consisting of mortgage-backed securities increased $177.3
million or 7.5 percent over the comparable 2001 period.
Savings accounts continue to provide a low cost source of funding and
increased on average $343.1 million or 14.2 percent for the three month period
ended September 30, 2002 compared with the same period in 2001. This increase
was partly attributed to the addition of new branches, increased customer
activity and new savings products, including VNB's Kids First Savings Club
program.(sm)
Average long-term debt, which consists primarily of Federal Home Loan Bank
advances, increased $30.7 million or 3.2 percent, compared with the third
quarter of 2001, as Valley took advantage of $300 million in low rate
intermediate term financing in the latter part of the quarter. $100 million will
be used to re-finance higher rate borrowings maturing in November 2002 while the
balance is expected to benefit future periods by more closely matching the
duration of interest earning assets with interest bearing liabilities.*
The net interest margin on a tax equivalent basis increased slightly or by
seven basis points as loan volume and investment activity increased for the
quarter. This increase was primarily due to a decrease of 98 basis points in the
average cost of funds, offset by a decrease of 72 basis points in the average
yield on interest earning assets.
For the nine month period ended September 30, 2002, net interest income on
a tax equivalent basis increased to $274.6 million or 8.9 percent, compared with
$252.2 million for the nine months ended September 30, 2001. This increase was
primarily attributed to increased loan volume and investment activity, partly
offset by increases in long-term debt and savings deposits. Average loans
increased $264.2 million or 5.1 percent while average investments increased
$185.0 million or 7.9 percent. Average long-term debt increased $103.8 million
or 12.2 percent, while average savings deposits increased by $284.7 million or
12.0 percent.
The net interest margin on a tax equivalent basis increased to 4.55 percent
for the nine months ended September 30, 2002 compared with 4.41 percent for the
nine month period ended September 30, 2001. This increase was mainly attributed
to Valley's interest bearing liabilities re-pricing at a faster pace than
interest earning assets. During 2001, the Federal Reserve decreased short-term
interest rates 475 basis points and in November 2002, decreased short-term
interest rates 50 basis points, in an effort to stimulate the economy. This
recent decrease may have some negative impact on the net interest margin and net
interest income.*
The following table reflects the components of net interest income for each
of the three months ended September 30, 2002 and 2001.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Three Months Ended September 30,
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------
(in thousands)
Assets
Interest earning assets:
Loans (1)(2) $5,551,898 $93,477 6.73% $5,231,510 $99,796 7.63%
Taxable investments (3) 2,314,344 35,007 6.05% 2,141,961 33,737 6.30%
Tax-exempt investments(1)(3) 228,597 3,894 6.81% 223,633 4,074 7.29%
Federal funds sold and other short-
term investments 70,825 308 1.74% 74,934 809 4.32%
----------------------------------------------------------------------------------
Total interest earning assets 8,165,664 $132,686 6.50% 7,672,038 $138,416 7.22%
Allowance for loan losses (65,748) (63,123)
Cash and due from banks 180,849 170,646
Other assets 363,663 208,679
Unrealized gain on securities available
for sale 62,763 35,467
----------------- ----------------
Total assets $8,707,191 $8,023,707
================= ================
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $2,762,605 $8,929 1.29% $2,419,471 $11,539 1.91%
Time deposits 2,386,056 17,375 2.91% 2,444,483 26,291 4.30%
----------------------------------------------------------------------------------
Total interest bearing deposits 5,148,661 26,304 2.04% 4,863,954 37,830 3.11%
Short-term borrowings 201,195 702 1.40% 196,817 1,978 4.02%
Long-term debt 978,916 13,212 5.40% 948,227 13,122 5.54%
----------------------------------------------------------------------------------
Total interest bearing liabilities 6,328,772 40,218 2.54% 6,008,998 52,930 3.52%
Demand deposits 1,443,294 1,311,530
Other liabilities 74,664 6,403
Capital securities 200,000 0
Shareholders' equity 660,461 696,776
Total liabilities and
----------------- ----------------
shareholders' equity $8,707,191 $8,023,707
================= ================
Net interest income
(tax equivalent basis) 92,468 85,486
Tax equivalent adjustment (1,433) (1,527)
-------------- --------------
Net interest income $91,035 $83,959
============== ==============
Net interest rate differential 3.96% 3.70%
------------- ------------
Net interest margin (4) 4.53% 4.46%
============= ============
(1) Interest income is presented on a tax equivalent basis using a 35
percent federal 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 total
average interest earning assets.
The following table reflects the components of net interest income for each
of the nine months ended September 30, 2002 and 2001.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Nine Months Ended September 30,
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------
(in thousands)
Assets
Interest earning assets:
Loans (1)(2) $5,421,635 $276,410 6.80% $5,157,459 $304,467 7.87%
Taxable investments (3) 2,307,194 105,686 6.11% 2,127,360 105,310 6.60%
Tax-exempt investments(1)(3) 227,158 11,714 6.88% 222,035 12,155 7.30%
Federal funds sold and other short-
term investments 97,829 1,272 1.73% 116,727 4,171 4.76%
----------------------------------------------------------------------------------
Total interest earning assets 8,053,816 $395,082 6.54% 7,623,581 $426,103 7.45%
Allowance for loan losses (65,815) (63,213)
Cash and due from banks 181,481 179,956
Other assets 337,541 205,359
Unrealized gain on securities available
for sale 46,508 20,711
---------------- ----------------
Total assets $8,553,531 $7,966,394
================ ================
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $2,661,930 $25,649 1.28% $2,377,182 $38,032 2.13%
Time deposits 2,400,972 53,960 3.00% 2,474,216 90,298 4.87%
----------------------------------------------------------------------------------
Total interest bearing deposits 5,062,902 79,609 2.10% 4,851,398 128,330 3.53%
Short-term borrowings 190,270 2,147 1.50% 272,612 9,985 4.88%
Long-term debt 953,195 38,750 5.42% 849,355 35,570 5.58%
----------------------------------------------------------------------------------
Total interest bearing liabilities 6,206,367 120,506 2.59% 5,973,365 173,885 3.88%
Demand deposits 1,428,850 1,276,165
Other liabilities 56,024 32,949
Capital securities 200,000 0
Shareholders' equity 662,290 683,915
Total liabilities and
---------------- ----------------
shareholders' equity $8,553,531 $7,966,394
================ ================
Net interest income
(tax equivalent basis) 274,576 252,218
Tax equivalent adjustment (4,315) (4,604)
--------------- --------------
Net interest income $270,261 $247,614
=============== ==============
Net interest rate differential 3.95% 3.57%
------------- ------------
Net interest margin (4) 4.55% 4.41%
============= ============
(1) Interest income is presented on a tax equivalent basis using a 35
percent federal 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 total
average interest earning assets.
The following table demonstrates the relative impact on net interest income
of changes in volume of interest earning assets and interest bearing liabilities
and changes in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Three Months Ended September 30, Nine Months Ended September 30,
2002 Compared with 2001 2002 Compared with 2001
Increase (Decrease) (1) Increase (Decrease) (1)
----------------------------------------- ------------------------------------------
Interest Volume Rate Interest Volume Rate
(in thousands)
Interest income:
Loans (2) ($6,319) $5,866 ($12,185) ($28,057) $15,015 ($43,072)
Taxable investments 1,270 2,643 (1,373) 376 8,549 (8,173)
Tax-exempt investments(2) (180) 89 (269) (441) 276 (717)
Federal funds sold and other
short-term investments (501) (42) (459) (2,899) (588) (2,311)
----------------------------------------- ------------------------------------------
(5,730) 8,556 (14,286) (31,021) 23,252 (54,273)
----------------------------------------- ------------------------------------------
Interest expense:
Savings deposits (2,610) 1,475 (4,085) (12,383) 4,136 (16,519)
Time deposits (8,916) (614) (8,302) (36,338) (2,600) (33,738)
Short-term borrowings (1,276) 43 (1,319) (7,838) (2,382) (5,456)
Long-term debt 90 419 (329) 3,180 4,246 (1,066)
----------------------------------------- ------------------------------------------
(12,712) 1,323 (14,035) (53,379) 3,400 (56,779)
----------------------------------------- ------------------------------------------
Net interest income (tax
----------------------------------------- ------------------------------------------
equivalent basis) $6,982 $7,233 ($251) $22,358 $19,852 $2,506
========================================= ==========================================
(1) 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.
(2) Interest income is adjusted to a tax equivalent basis using a 35
percent federal tax rate.
Non-Interest Income
The following table presents the components of non-interest income for the
three and nine months ended September 30, 2002 and 2001.
NON-INTEREST INCOME
Three Months Ended Nine Months Ended
September 30,
------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------
(in thousands)
Trust and investment services $1,069 $1,065 $3,439 $3,472
Service charges on deposit accounts 4,851 4,524 14,563 13,774
Gains on securities transactions, net 2,139 932 5,103 1,911
Fees from loan servicing 2,268 2,736 7,182 8,242
Credit card fee income 805 865 2,260 2,794
Gains on sales of loans, net 1,562 1,419 4,904 8,942
Bank owned life insurance 1,842 853 5,063 853
Other 6,219 3,591 16,707 10,421
------------------------------------------------------------
Total non-interest income $20,755 $15,985 $59,221 $50,409
============================================================
Non-interest income continues to represent a considerable source of income
for Valley, representing 13.65 percent of gross income for the three months
ended September 30, 2002. Excluding gains on securities transactions, net, total
non-interest income increased to $18.6 million for the three months ended
September 30, 2002, a 23.7 percent increase, compared with the $15.1 million
recorded for the three months ended September 30, 2001. For the nine months
ended September 30, 2002, total non-interest income excluding gains on
securities transactions, net, was $54.1 million or 11.6 percent higher than the
$48.5 million recorded for the nine months ended September 30, 2001. Increased
income from Bank Owned Life Insurance ("BOLI"), the sale of a subsidiary, the
gain from the sale of an office building and insurance commission income from
the Masters acquisition contributed to this increase.
For the three and nine month periods ended September 30, 2002, service
charges on deposit accounts increased $327 thousand or 7.2 percent and $789
thousand or 5.7 percent, respectively, compared with the same periods in 2001,
due to increases in service fees charged.
Gains on securities transactions, net, increased $1.2 million or 129.5
percent to $2.1 million for the three months ended September 30, 2002, compared
with $932 thousand for the same period in 2001 and increased $3.2 million or
167.0 percent for the nine months ended September 30, 2002 compared with the
same period in 2001. The majority of the gains were generated from appreciated
equity securities sold in the second and third quarter of 2002.
Fees from loan servicing decreased $468 thousand or 17.1 percent and $1.1
million or 12.9 percent for the three and nine month periods ended September 30,
2002, respectively, as compared with the same periods in 2001. This decrease was
mainly attributed to a reduction in fee income on serviced mortgages due to
heavy refinancing activity as borrowers took advantage of lower interest rates.
Gains on sales of loans, net for the nine months ended September 30, 2002
were $4.9 million, a decrease of $4.0 million or 45.2 percent compared with
gains of $8.9 million for the nine months ended September 30,
2001. This decrease was primarily attributed to the sale of the Shop Rite
credit card portfolio resulting in a $4.9 million pre-tax gain recorded in
January 2001.
During the first quarter of 2002, Valley invested an additional $50.0
million in BOLI to help offset the rising cost of employee benefits. This was in
addition to the $100.0 million invested during the third quarter of 2001. The
investment portfolio was reduced by a like amount during the respective periods
to fund these insurance purchases. For the three and nine months ended September
30, 2002 and 2001, income from BOLI increased by $989 thousand or 115.9 percent
and $4.2 million or 493.7 percent, respectively.
Other non-interest income increased $2.6 million or 73.2 percent and $6.3
million or 60.3 percent for the three and nine months ended September 30, 2002
and 2001, respectively. These increases include a $1.1 million gain recorded in
the third quarter of 2002 from the sale of an office building acquired in an
acquisition; insurance commission income from the Masters acquisition in August
2002; a $1.6 million gain from the sale of a Canadian subsidiary during the
second quarter of 2002 and an $800 thousand settlement of a lawsuit during the
first quarter of 2002.
Non-Interest Expense
The following table presents the components of non-interest expense for the
three and nine months ended September 30, 2002 and 2001.
NON-INTEREST EXPENSE
Three Months Ended Nine Months Ended
September 30,
----------------------------------------------------------------------------
2002 2001 2002 2001
------------------------------------- -------------------------------------
(in thousands)
Salary expense $22,311 $19,949 $64,275 $58,946
Employee benefit expense 4,675 4,035 14,221 13,579
FDIC insurance premiums 271 286 821 869
Net occupancy expense 7,603 6,548 21,598 21,929
Credit card expense 315 318 926 1,223
Amortization of intangible assets 3,688 3,321 8,591 7,263
Advertising 1,555 2,549 5,326 4,857
Distributions on capital securities 3,932 0 11,797 0
Merger-related charges 0 0 0 9,017
Other 8,386 7,373 25,048 22,349
------------------------------------- -------------------------------------
Total non-interest expense $52,736 $44,379 $152,603 $140,032
===================================== =====================================
Non-interest expense increased by $8.4 million or 18.8 percent and $21.6
million or 16.5 percent, respectively, for the three and nine months ended
September 30, 2002 and 2001 (excluding merger-related charges.) The largest
components of non-interest expense are salaries and employee benefit expense
representing 51.2 percent and 51.4 percent of total non-interest expense for the
three and nine months ended September 30, 2002.
The efficiency ratio measures a bank's gross operating expense as a
percentage of fully-taxable equivalent net interest income and other
non-interest income without taking into account security gains and losses and
other non-recurring items. Valley's efficiency ratio for the nine months ended
September 30, 2002 was 46.3 percent, one of the better ratios in the U.S.
banking industry, compared with an efficiency ratio of 44.3 percent for the same
period in 2001. This increase was mainly attributed to the distributions on
capital securities. Valley strives to control its efficiency ratio and expenses
as a means of producing increased earnings for its shareholders.*
Salary expense increased by $2.4 million or 11.8 percent and $5.3 million
or 9.0 percent for the three and nine month periods ended September 30, 2002,
respectively, compared with the same periods in the prior year. These increases
were primarily due to business expansion, including increased branch and lending
staff and the recent acquisition of Masters. At September 30, 2002, Valley's
full-time equivalent staff was 2,189 compared with 2,070 at September 30, 2001.
Employee benefit expense increased by $640 thousand or 15.9 percent and
$642 thousand or 4.7 percent for the three and nine month periods ended
September 30, 2002, respectively, as compared with the same periods last year.
These increases were primarily due to increased staff and retirement benefit
costs. During the third quarter of 2002, Valley adopted the fair value based
method of recording stock options in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation", which is considered the preferable accounting
method for stock-based employee compensation. For the period ended September 30,
2002, the expense recorded was not material to Valley's consolidated financial
statements.
For the three months ended September 30, 2002, net occupancy expense
increased by $1.1 million or 16.1 percent compared with the same period in 2001.
The increase was mainly due to business expansion including new branches and the
recent Masters acquisition, while the year to date occupancy expense decrease
can be attributed to the continuing overall lower cost of repairs, utilities and
depreciation expense.
Amortization of intangible assets increased $367 thousand or 11.1 percent
to $3.7 million for the three month period ended September 30, 2002 and
increased $1.3 million or 18.3 percent to $8.6 million for the nine months ended
September 30, 2002 compared with the same periods in 2001. These increases were
primarily attributed to the impairment of mortgage servicing rights as a result
of increased refinancing. This impairment amounted to $1.9 million and $3.4
million for the three and nine months periods ended September 30, 2002,
respectively. Based upon current mortgage interest rates and the amount of
refinancing activity during October 2002, it is expected that additional
impairment expense will be recorded in the fourth quarter, 2002.* These
increases were partly offset by the elimination of goodwill amortization. Under
new accounting rules effective January 1, 2002, amortization of goodwill ceased.
As of September 30, 2002, management evaluated the goodwill in each segment and
determined that an impairment allowance was not required to be recorded.
Management will continue to evaluate the need for an impairment allowance on an
annual basis.
Advertising expense decreased by $994 thousand or 39.0 percent and
increased by $469 thousand or 9.7 percent for the three and nine months ended
September 30, 2002, respectively, over the same periods last year. The increase
for the nine months was due to increased promotional programs including the Kids
First Savings Program television commercials featuring VNB's newly named mascots
and various branch-related incentives.
Distributions on capital securities consist primarily of amounts paid or
accrued on the $200 million of 7.75 percent trust preferred securities issued in
November of 2001. The cost for the three and nine month periods ended September
30, 2002 was $3.9 million and $11.8 million, respectively.
During the first quarter of 2001, Valley recorded merger-related charges of
$9.0 million related to the acquisition of Merchants. On an after tax basis,
these charges totaled $7.0 million or $0.07 per diluted share. These charges
include only identified direct and incremental costs associated with this
acquisition such as: personnel expenses which include severance payments for
terminated directors at Merchants; professional fees which include investment
banking, accounting and legal fees; and other expenses which include the
disposal of data processing equipment and the write-off of supplies and other
assets not considered useful in the operation of the combined entities. The
major components of the merger-related charges, consisting of professional fees,
personnel and the disposal of data processing equipment, totaled $4.4 million,
$3.2 million and $486 thousand, respectively.
The significant components of other non-interest expense include data
processing, professional fees, postage, telephone and stationery expenses
totaling approximately $4.4 million and $3.6 million for the three months ended
September 30, 2002 and 2001, respectively. These expenses totaled $13.2 million
and $10.9 million for the nine months ended September 30, 2002 and 2001,
respectively. The increases were primarily due to legal and professional fees in
connection with the restructuring of an existing subsidiary into a REIT.
Income Taxes
Income tax expense as a percentage of pre-tax income was 30.1 percent and
29.2 percent for the three and nine months ended September 30, 2002,
respectively, compared with 31.9 percent and 34.1 percent for the same periods
in 2001, respectively. The decrease in the effective tax rate was primarily due
to a reduction in income tax expense, as a result of the restructuring of an
existing subsidiary into a REIT. The effective tax rate for both the three and
nine months ended September 30, 2002, were also positively impacted by
non-taxable income from the $157 million investment in BOLI. This decrease was
partially offset by additional tax expense being recorded due to the changes in
New Jersey's Corporate Business Tax, effective retroactively to January 1, 2002.
The effect of these State tax law changes is approximately $1.5 million of
additional tax expense per year, or a net income reduction of approximately
$0.01 per diluted share.* The effective tax rate is expected to continue at
approximately 30 percent for the remainder of 2002.* Beginning in 2003,
recurring annual benefits from the REIT restructuring are expected to be
significantly lower.*
Business Segments
VNB has four business segments it monitors and reports on to manage its
business operations. These segments are consumer lending, commercial lending,
investment management and corporate and other adjustments. Lines of business and
actual structure of operations determine each segment. Each is reviewed
routinely for its asset growth, contribution to pretax net income and return on
assets. Expenses related to the branch network, all other components of retail
banking, along with the back office departments of the bank are allocated from
the corporate and other adjustments segment to each of the other three business
segments. The financial reporting for each segment contains allocations and
reporting in line with VNB's operations, which may not necessarily be compared
with 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 months
ended September 30, 2002 and 2001.
Three Months Ended September 30, 2002
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(in thousands)
----------------------------------------------------------------------------
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
----------------------------------------------------------------------------
Average interest earning assets $2,795,326 $2,788,367 $2,581,971 $0 $8,165,664
Income (loss) before income taxes $19,897 $18,808 $19,672 ($2,622) $55,755
Return on average interest-earning
assets (pre-tax) 2.85% 2.70% 3.05% 0% 2.73%
----------------------------------------------------------------------------
Three Months Ended September 30, 2001
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(in thousands)
----------------------------------------------------------------------------
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
----------------------------------------------------------------------------
Average interest earning assets $2,636,449 $2,602,927 $2,432,662 $0 $7,672,038
Income before income taxes $19,284 $19,835 $13,671 $75 $52,865
Return on average interest earning
assets (pre-tax) 2.93% 3.05% 2.25% 0% 2.76%
----------------------------------------------------------------------------
Consumer Lending
The consumer lending segment had a return on average interest earning
assets before taxes of 2.85 percent for the three months ended September 30,
2002 compared with 2.93 percent for the three months ended September 30, 2001.
Average interest earning assets increased $158.9 million, attributed primarily
from volume gains in home equity and automobile loans. Increases in home equity
loans were driven by favorable interest rates and marketing efforts. Increases
in automobile loans were achieved primarily through strategic repositioning and
expansion of Valley's auto loan dealer base. Average interest rates on consumer
loans decreased 92 basis points, while the expenses associated with funding
sources decreased 79 basis points to 1.97 percent. Income before income taxes
increased $613 thousand to $19.9 million primarily as a result of increased
volume.
Commercial Lending
The net return on average interest earning assets before taxes decreased 35
basis points to 2.7 percent for the three months ended September 30, 2002,
compared with 3.05 percent for the three months ended September 30, 2001.
Average interest earning assets increased $185.4 million as a result of an
increased volume of loans. Interest rates on commercial loans decreased by 106
basis points and the expenses associated with funding sources decreased by 79
basis points to 1.97 percent. Income before income taxes decreased by $1.0
million, driven by a lower net interest margin, higher provision for loan
losses, increases in operating expenses and a larger allocation of the internal
expense transfer resulting from increased average volume.
Investment Management
The net return on average interest earning assets before taxes increased 80
basis points to 3.05 percent for the three months ended September 30, 2002
compared with 2.25 percent for the three months ended September 30, 2001. The
yield on interest earning assets decreased by 13 basis points to 6.11 percent,
and the expenses associated with funding sources decreased 79 basis points to
1.97 percent. Average interest earning assets increased by $149.3 million and
income before income taxes increased $6.0 million primarily as a result of a
lower funding sources and increased average balance of investments. The
investment portfolio is comprised predominantly of mortgage-backed securities
that have generated significant cash flow over the course of the third quarter,
as low mortgage rates have triggered record refinancing activity. During the
quarter, Valley added high quality mortgage-backed paper that provides a liquid,
short duration based on the current interest rate environment and an attractive
spread.
Corporate Segment
The corporate segment represents income and expense items not directly
attributable to a specific segment such as gain on investment sales not included
with investment management above, income from BOLI, distributions on capital
securities, and may include non-recurring items such as: merger-related charges,
gain on sales of loans, and service charges on deposit accounts. The loss before
taxes for the corporate segment was $2.6 million for the three months ended
September 30, 2002, compared with an income of $75 thousand for the three months
ended September 30, 2001.
The following table represents the financial data for the nine months ended
September 30, 2002 and 2001.
Nine Months Ended September 30, 2002
------------------------------------------------------------------------------
------------------------------------------------------------------------------
(in thousands)
------------------------------------------------------------------------------
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
------------------------------------------------------------------------------
Average interest earning assets $2,718,476 $2,738,404 $2,596,936 $0 $8,053,816
Income (loss) before income taxes $60,499 $55,368 $56,569 ($6,535) $165,901
Return on average interest-earning
assets (pre-tax) 2.97% 2.70% 2.90% 0% 2.75%
------------------------------------------------------------------------------
Nine Months Ended September 30, 2001
------------------------------------------------------------------------------
------------------------------------------------------------------------------
(in thousands)
------------------------------------------------------------------------------
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
------------------------------------------------------------------------------
Average interest earning assets $2,667,723 $2,513,415 $2,442,443 $0 $7,623,581
Income (loss) before income taxes $56,131 $59,906 $42,409 ($8,090) $150,356
Return on average interest earning
assets (pre-tax) 2.81% 3.18% 2.32% 0% 2.63%
------------------------------------------------------------------------------
Consumer Lending
The net return on average interest earning assets before taxes increased 16
basis points to 2.97 percent for the nine months ended September 30, 2002
compared with 2.81 percent for the nine months ended September 30, 2001. Average
interest earning assets remained relatively unchanged at $2.7 billion. Average
interest rates on consumer loans decreased by 80 basis points while the expenses
associated with funding sources decreased 105 basis points. Income before income
taxes increased $4.4 million to $60.5 million from $56.1 million, primarily as a
result of the increase in net interest margin, partially offset by an increase
in operating expenses.
Commercial Lending
The net return on average interest earning assets before taxes decreased 48
basis points to 2.70 percent for the nine months ended September 30, 2002
compared with 3.18 percent for the nine months ended September 30, 2001. Average
interest earning assets increased $225.0 million as a result of an increased
volume of loans. Decrease in the prime lending rate resulted in a 140 basis
point reduction in commercial loan rates, primarily due to a portion of loans
tied to the prime rate index. The expenses associated with funding sources also
decreased by 104 basis points. Income before income taxes decreased $4.5 million
mainly as a result of the decreased margin, a higher provision for loan losses,
higher non-interest expenses and a larger allocation of the internal expense
transfer due to increased average volume.
Investment Management
The net return on average interest earning assets before taxes increased to
2.90 percent for the nine months ended September 30, 2002 compared with 2.32
percent for the nine months ended September 30, 2001. The yield on interest
earning assets decreased 52 basis points to 6.04 percent as a result of larger
prepayments and lower yields on new investments and the expenses associated with
funding sources decreased 104 basis points to 2.0 percent. Average interest
earning assets increased $154.5 million to $2.6 billion. Income before income
taxes increased $14.2 million as a result of higher outstanding average earning
assets and the decrease in the expenses
associated with funding sources in excess of the decrease in asset yield.
Corporate Segment
The corporate segment represents income and expense items not directly
attributable to a specific segment which may include items such as:
merger-related charges, non-recurring gains on sales of loans, service charges
on deposit accounts and gains on investment sales not allocable to the
investment segment. The loss before taxes for the corporate segment was $6.5
million for the nine months ended September 30, 2002, compared with a loss
before taxes of $8.1 million for the nine months ended September 30, 2001. The
decrease in the loss before taxes is primarily due to the pre-tax merger related
charges of $9.0 million incurred in the nine months ended September 30, 2001
partly offset by distributions on capital securities and income from BOLI in the
nine months ended September 30, 2002.
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"). ALCO establishes policies that monitor and coordinate
Valley's sources, uses and pricing of funds as well as interest earning asset
pricing and volume.
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 re-pricing
characteristics of rate sensitive assets and liabilities. The model incorporates
certain assumptions regarding the impact of changing interest rates on the
prepayment rates of certain assets and liabilities. According to the model run
for the period ended September 30, 2002, over a twelve month period, an
immediate interest rate increase of 100 basis points resulted in a minimal
change while an immediate interest rate decrease of 100 basis points resulted in
a decrease in net interest income of approximately 2.1% or $7.3 million.
The simulation model was subsequently updated to reflect the Federal
Reserve's decision to decrease short term interest rates by 50 basis points on
November 6, 2002. According to the revised model, an immediate interest rate
increase of 100 basis points resulted in a decrease in net interest income of
approximately 1.7% or $6.0 million while an immediate interest rate decrease of
100 basis points resulted in a decrease in net interest income of 4.6% or $16.5
million. Management cannot provide any assurance about the actual effect of
changes in interest rates on Valley's net interest income.* The model assumes
changes in interest rates without any proactive change in the balance sheet by
management.
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, strong cash-generating liquid funds are
maintained in the form of cash and due from banks, federal funds sold,
investment securities held to maturity maturing within one year, securities
available for sale and loans held for sale, giving Valley accessibility to funds
for immediate use. Liquid assets totaled $2.6 billion at September 30, 2002 and
$2.5 billion at December 31, 2001. This represents 30.6 percent and 31.7 percent
of earning assets and 28.7 percent and 29.6 percent of total assets at September
30, 2002 and December 31, 2001, respectively.
On the liability side, the primary source of funds available to meet
liquidity needs is VNB's core deposit base, which generally excludes
certificates of deposit over $100 thousand. Core deposits averaged approximately
$5.4 billion for the nine months ended September 30, 2002 and $5.1 billion for
the year ended December 31, 2001, representing 66.9 percent and 66.8 percent,
respectively, of average interest earning assets. Short-term and long-term
borrowings through federal funds lines, repurchase agreements, Federal Home Loan
Bank ("FHLB") advances, lines of credit and large dollar certificates of
deposit, generally those over $100 thousand, are used as supplemental funding
sources. Valley took advantage of $300 million in low rate intermediate term
financing in the latter part of the quarter. $100 million will be used to
re-finance higher rate borrowings maturing in November 2002 while the balance is
expected to benefit future periods by more closely matching the duration of
interest earning assets with interest bearing liabilities.*
Additional liquidity is derived from scheduled loan and investment payments
of principal and interest, as well as prepayments received. For the nine months
ended September 30, 2002, there were $444.7 million of proceeds from the sales
of investment securities available for sale and proceeds of $755.4 million from
maturities, redemptions and prepayments of principal on investment securities
available for sale. Purchases of investment securities for the nine months ended
September 30, 2002 were $1.2 billion. Short-term borrowings and certificates of
deposit over $100 thousand amounted to $1.3 billion, on average, for the nine
months ended September 30, 2002 and the year ended December 31, 2001.
Valley's recurring cash requirements consist primarily of dividends to
shareholders and distributions on trust preferred securities. This cash need is
routinely satisfied by dividends collected from its subsidiary bank along with
cash and investments owned. Projected cash flows from these sources are expected
to be adequate to pay dividends, given the current capital levels and current
profitable operations of its subsidiary.* In addition, Valley may repurchase
shares of its outstanding common stock.* The cash required for these purchases
of shares has been met by using its own funds, dividends received from its
subsidiary bank as well as borrowed funds and the proceeds from the issuance of
$200 million trust preferred securities. At September 30, 2002, Valley
maintained a floating rate line of credit with a third party in the amount of
$35 million, of which none was drawn. This line is available for general
corporate purposes and expires June 13, 2003. Borrowings under this facility, if
any, are collateralized by equity securities of no less than 120 percent of the
loan balance.
As of September 30, 2002 and December 31, 2001, Valley had a total of $2.2
billion of securities available for sale recorded at their fair value. As of
September 30, 2002, the investment securities available for sale had an
unrealized gain of $41.3 million, net of deferred taxes, compared with $20.8
million, net of deferred taxes, at December 31, 2001. 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.
Loan Portfolio
As of September 30, 2002, total loans were $5.62 billion, $5.49 billion at
June 30, 2002 and $5.33 billion at December 31, 2001. The following table
reflects the composition of the loan portfolio as of September 30, 2002, June
30, 2002 and December 31, 2001.
LOAN PORTFOLIO
September 30, June 30, December 31,
2002 2002 2001
(in thousands)
Commercial $1,120,705 $1,090,045 $1,080,852
-------------------- -------------------- ------------------
Total commercial loans 1,120,705 1,090,045 1,080,852
Construction 211,063 201,341 206,789
Residential mortgage 1,331,237 1,310,485 1,323,877
Commercial mortgage 1,453,317 1,441,810 1,365,344
-------------------- -------------------- ------------------
Total mortgage loans 2,995,617 2,953,636 2,896,010
Home equity 445,028 428,805 398,102
Credit card 11,214 11,220 12,740
Automobile 939,105 903,404 842,247
Other consumer 109,151 102,753 101,856
-------------------- -------------------- ------------------
Total consumer loans 1,504,498 1,446,182 1,354,945
-------------------- -------------------- ------------------
Total loans $5,620,820 $5,489,863 $5,331,807
==================== ==================== ==================
As a percent of total loans:
Commercial loans 19.9% 19.9% 20.3%
Mortgage loans 53.3 53.8 54.3
Consumer loans 26.8 26.3 25.4
-------------------- -------------------- ------------------
Total 100.0% 100.0% 100.0%
==================== ==================== ==================
Valley's loan portfolio continues a steady upward trend while maintaining
emphasis on credit quality. On an annualized basis, total loans increased 7.2
percent, reflecting overall growth in commercial, residential and consumer
lending.
For the nine month period ended September 30, 2002, commercial loans
increased 3.7 percent or 4.9 percent annualized, partly due to increased
commercial line draw downs as well as increased aviation and small business
administration loan financing.
For the nine month period ended September 30, 2002, total mortgage loans
increased 3.4 percent or 4.6 percent on an annual basis mainly due to a
favorable interest rate environment and stable economic conditions in Valley's
lending area. This growth was primarily due to a 6.4 percent or 8.6 percent
annualized increase in the commercial mortgage portfolio. Valley often sells
many of its newly originated conforming residential mortgage loans with low
long-term fixed rates into the secondary market, but may retain amounts
necessary to balance Valley's overall asset mix. Excluding these sales of
approximately $146.1 million, residential loans would have increased 11.6
percent or 15.5 percent on an annual basis.
Consumer loans, for the nine month period ended September 30, 2002, posted
an increase of 11.0 percent or 14.7 percent annualized primarily due to
increased automobile and home equity lending. On May 1, 2002, Valley sold its
Canadian finance subsidiary, VNB Financial Services with automobile loans
totaling $24.1 million to State Farm Mutual Automobile Insurance. Despite this
sale, Valley grew its automobile lending program 11.5 percent or 15.3 percent
annualized through increased indirect dealer activity while maintaining what it
believes to be high credit quality.* Excluding loans sold to State Farm,
automobile loans would have increased 14.4 percent or 19.1 percent annualized.
Automobile loan growth can be negatively impacted by manufacturers' based
incentives such as zero percent financing and therefore, Valley cannot guarantee
the same performance in future periods.*
Non-performing Assets
Non-performing assets include non-accrual loans and other real estate owned
("OREO"). Loans are generally placed on a non-accrual status when they become
past due in excess of 90 days as to payment of principal or interest. Exceptions
to the non-accrual policy may be permitted if the loan is sufficiently
collateralized and in the process of collection. OREO is acquired through
foreclosure on loans secured by real estate. OREO is reported at the lower of
cost or fair value at the time of acquisition and at the lower of fair value,
less estimated costs to sell, or cost thereafter. Non-performing assets totaled
$19.6 million at September 30, 2002, compared with $18.8 million at December 31,
2001, an increase of approximately $800 thousand. At September 30, 2002 and
December 31, 2001, non-performing assets amounted to 0.35 percent of loans and
OREO.
Loans 90 days or more past due and not included in the non-performing
category totaled $5.1 million at September 30, 2002, compared with $10.5 million
at December 31, 2001. These loans are primarily 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 $3.7 million at September 30, 2002 and $3.8
million at December 31, 2001.
Total loans past due in excess of 30 days were 1.03 percent of all loans at
September 30, 2002 compared with 1.29 percent at September 30, 2001 and 1.30
percent at December 31, 2001.
The following table sets forth non-performing assets and accruing loans
which were 90 days or more past due as to principal or interest payments on the
dates indicated, in conjunction with asset quality ratios for Valley.
LOAN QUALITY
September 30, June 30, December 31,
2002 2002 2001
(in thousands)
Loans past due in excess of
90 days and still accruing $5,146 $10,216 $10,456
===========================================================
Non-accrual loans $19,647 $19,553 $18,483
Other real estate owned 0 0 329
-----------------------------------------------------------
Total non-performing assets $19,647 $19,553 $18,812
-----------------------------------------------------------
Troubled debt restructured loans $ 0 $ 866 $ 891
-----------------------------------------------------------
Non-performing loans as a % of loans 0.35% 0.36% 0.35%
-----------------------------------------------------------
Non-performing assets as a % of
loans plus other real estate owned 0.35% 0.36% 0.35%
Allowance as a % of loans 1.18% 1.17% 1.20%
Allowance for loan losses
At September 30, 2002, the allowance for loan losses totaled $66.2 million
compared with $63.8 million at December 31, 2001. The allowance is adjusted by
provisions charged against income and loans charged-off net of recoveries. Net
loan charge-offs were $8.6 million and $1.4 million for the nine and three
months ended September 30, 2002 compared with $5.0 million and $24 thousand for
the nine and three months ended September 30, 2001, respectively.
The allowance for loan losses is maintained at a level estimated to absorb
probable loan losses of the loan portfolio.* The allowance is based on ongoing
evaluations of the probable estimated losses inherent in the loan portfolio.
VNB's methodology for evaluating the appropriateness of the allowance consists
of several significant elements, which include the allocated allowance, specific
allowances for identified problem loans, portfolio segments and the unallocated
allowance. The allowance also incorporates the results of measuring impaired
loans as called for in Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures."
Historically, Valley has made provisions based on net charge-off levels. In
the current economic environment, that information is applied to the composition
of the loan portfolio to provide adequate levels in the allowance for loan
losses*. The following summarizes the relationship among loans, loans
charged-off and loan recoveries, the provision for loan losses and the allowance
for loan losses for the three and nine months ended September 30, 2002 and 2001.
ALLOWANCE FOR LOAN LOSSES
Three Months Ended Nine Months Ended
September 30,
-----------------------------------------------------------------
2002 2001 2002 2001
-------------------------------- --------------------------------
(in thousands)
Average loans outstanding $5,551,898 $5,231,510 $5,421,635 $5,157,459
================================ ================================
Beginning balance:
Allowance for loan losses $64,299 $61,996 $63,803 $61,995
Loans charged-off (2,982) (1,390) (12,962) (8,232)
Recoveries 1,573 1,366 4,370 3,274
-------------------------------- --------------------------------
Net charge-offs (1,409) (24) (8,592) (4,958)
Provision charged to operations 3,299 2,700 10,978 7,635
Ending balance:
-------------------------------- --------------------------------
Allowance for loan losses $66,189 $64,672 $66,189 $64,672
================================ ================================
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.10% 0.002% 0.21% 0.13%
Capital Adequacy
A significant measure of the strength of a financial institution is its
shareholders' equity. At September 30, 2002, shareholders' equity totaled $653.2
million or 7.2 percent of total assets, compared with $678.4 million or 7.9
percent at year-end 2001. This decrease is primarily the result of Valley's
continued share repurchase program.
On August 21, 2001, Valley's Board of Directors authorized the repurchase
of up to 10,000,000 shares of the Company's outstanding common stock. Purchases
may be made from time to time in the open market or in privately negotiated
transactions generally not exceeding prevailing market prices. Reacquired shares
are held in treasury and are expected to be used for general corporate
purposes.* As of September 30, 2002, Valley had repurchased approximately 6.8
million shares of its common stock at an average cost of $25.60 per share. In
conjunction with the five for four stock split issued on May 2002, treasury
shares in the amount of $88.6
million were retired.
Included in shareholders' equity as components of accumulated other
comprehensive income at September 30, 2002 was a $41.3 million unrealized gain
on investment securities available for sale, net of tax, as compared with an
unrealized gain of $20.8 million at December 31, 2001.
Risk-based guidelines define a two-tier capital framework. Tier I capital
consists of common shareholders' equity and trust preferred securities, less
disallowed intangibles and adjusted to exclude unrealized gains and losses, net
of tax. Total risk-based capital consists of Tier I capital and the allowance
for loan losses up to 1.25 percent of risk-adjusted assets. Risk-adjusted assets
are determined by assigning various levels of risk to different categories of
assets and off-balance sheet activities.
In November 2001, Valley, through a wholly-owned subsidiary, sold $200.0
million of trust preferred securities, which qualify as Tier I capital, within
regulatory limitations. Including these securities, at September 30, 2002,
Valley's capital position under risk-based capital guidelines was $795.6 million
or 12.2 percent of risk-weighted assets for Tier 1 capital and $861.8 million or
13.3 percent for Total risk-based capital. The comparable ratios at December 31,
2001 were 14.1 percent for Tier 1 capital and 15.2 percent for Total risk-based
capital. At September 30, 2002 and December 31, 2001, Valley exceeded the
minimum leverage requirement having Tier 1 leverage ratios of 9.2 percent and
10.3 percent, respectively. Valley's ratios at September 30, 2002 were above the
"well capitalized" requirements, which require Tier I capital to risk-adjusted
assets of at least 6 percent, Total risk-based capital to risk-adjusted assets
of 10 percent and a minimum leverage ratio of 5 percent.
Book value per share remained at $7.10 as of September 30, 2002 and
December 31, 2001.
The primary source of capital growth is through retention of earnings.
Valley's rate of earnings retention, derived by dividing undistributed earnings
by net income, was 47.1 percent for the nine months ended September 30, 2002,
compared with 44.6 percent for the nine months ended September 30, 2001. Cash
dividends declared amounted to $0.66 per share, for the nine months ended
September 30, 2002, equivalent to a dividend pay-out ratio of 52.9 percent,
compared with 55.4 percent for the same period in 2001. Valley declared a five
for four stock split on April 10, 2002, to shareholders of record on May 3,
2002, issued May 17, 2002. The Board also approved an increase of the annual
dividend rate to $0.90 per share, compared with $0.85 per share, on an after
split basis. The increased cash dividend, which is payable quarterly, began on
July 1, 2002. 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 cash distribution of earnings to its
shareholders.*
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 142, "Goodwill and
Intangible Assets" (SFAS No. 142), was issued by the Financial Accounting
Standards Board on June 27, 2001. SFAS No. 142 eliminates the amortization of
existing goodwill and requires evaluating goodwill for impairment on an annual
basis whenever circumstances occur that would reduce the fair value. SFAS No.
142 also requires allocation of goodwill to reporting segments defined by SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This Statement is effective for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 142 did not have a material impact on the consolidated
financial statements and related disclosures.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), was issued by the
Financial Accounting Standards Board on October 3, 2001. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it
retains many of the fundamental provisions of that Statement. The Statement is
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS No. 144 did not have a material impact on the consolidated financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See page 22 for a discussion of interest rate sensitivity.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's President and Chief Executive
Officer and the Company's Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, they concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in this report. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
None
(b)Reports on Form 8-K
None
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: November 12, 2002
/s/ GERALD H. LIPKIN
GERALD H. LIPKIN
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: November 12, 2002
/s/ ALAN D. ESKOW
ALAN D. ESKOW
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
CERTIFICATIONS
I, Gerald H. Lipkin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valley
National Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ GERALD H. LIPKIN
Gerald H. Lipkin
Chairman, President and Chief Executive Officer
I, Alan D. Eskow, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valley
National Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ ALAN D. ESKOW
Alan D. Eskow
Executive Vice President and Chief Financial Officer