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 June 30, 2003 [ ] 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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 93,764,722 shares were outstanding as of August 6, 2003.
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands, except for share data) June 30, December 31,
2003 2002
-----------------------------------
Assets
Cash and due from banks $ 241,325 $ 243,923
Investment securities held to maturity, fair value of $639,447
and $597,480 in 2003 and 2002, respectively 605,695 590,892
Investment securities available for sale 2,126,734 2,140,366
Trading securities 3,524 0
Loans held for sale 98,528 58,952
Loans 6,034,860 5,703,536
Less: Allowance for loan losses (67,477) (64,087)
-----------------------------------
Net loans 5,967,383 5,639,449
Premises and equipment, net 116,549 113,755
Accrued interest receivable 41,219 41,591
Bank owned life insurance 161,910 158,832
Other assets 143,703 146,914
-----------------------------------
Total assets $9,506,570 $9,134,674
===================================
Liabilities
Deposits:
Non-interest bearing $1,598,087 $1,569,921
Interest bearing:
Savings 3,159,926 2,942,763
Time 2,268,063 2,170,703
-----------------------------------
Total deposits 7,026,076 6,683,387
Short-term borrowings 466,384 378,433
Long-term debt 1,072,599 1,119,642
Accrued expenses and other liabilities 112,377 121,474
-----------------------------------
Total liabilities 8,677,436 8,302,936
-----------------------------------
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(1)
Preferred stock, no par value, authorized 30,000,000 shares; none issued 0 0
Common stock, no par value, authorized 149,564,245
shares; issued 94,249,841 shares in 2003 and
99,007,032 shares in 2002 33,332 33,332
Surplus 319,140 318,964
Retained earnings 254,078 338,770
Unallocated common stock held by employee benefit plan (352) (435)
Accumulated other comprehensive income 36,123 41,319
-----------------------------------
642,321 731,950
Treasury stock, at cost (500,326 shares in 2003 and 3,957,498 shares
in 2002) (13,187) (100,212)
-----------------------------------
Total shareholders' equity 629,134 631,738
-----------------------------------
Total liabilities and shareholders' equity $9,506,570 $9,134,674
===================================
See accompanying notes to consolidated financial statements.
- ----------------------------------------------------------------------------
(1) Share data reflects the 5 percent stock dividend issued on May 16, 2003.
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data) Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Interest Income
Interest and fees on loans $ 92,225 $ 91,902 $ 184,052 $182,788
Interest and dividends on investment securities:
Taxable 29,786 35,724 60,483 69,154
Tax-exempt 2,767 2,579 5,451 5,083
Dividends 1,176 825 2,312 1,525
Interest on federal funds sold and other short-term
investments 86 327 173 964
---------------------------------------------------------
Total interest income 126,040 131,357 252,471 259,514
---------------------------------------------------------
Interest Expense
Interest on deposits:
Savings deposits 6,427 8,632 13,137 16,720
Time deposits 12,218 18,019 24,171 36,585
Interest on short-term borrowings 1,404 619 2,789 1,445
Interest on long-term debt 13,236 12,640 26,463 25,537
---------------------------------------------------------
Total interest expense 33,285 39,910 66,560 80,287
---------------------------------------------------------
Net Interest Income 92,755 91,447 185,911 179,227
Provision for loan losses 1,755 3,974 5,010 7,679
---------------------------------------------------------
Net Interest Income after Provision for Loan Losses 91,000 87,473 180,901 171,548
---------------------------------------------------------
Non-Interest Income
Trust and investment services 2,156 1,192 4,230 2,370
Insurance fees, commissions and premiums 4,202 735 9,004 1,521
Service charges on deposit accounts 5,682 4,827 10,959 9,712
Gains on securities transactions, net 2,968 2,609 6,179 2,964
Fees from loan servicing 2,459 2,415 4,451 4,913
Gains on sales of loans, net 2,727 1,562 5,315 3,342
Bank owned life insurance 1,564 1,806 3,078 3,222
Other 4,464 5,275 8,646 10,421
---------------------------------------------------------
Total non-interest income 26,222 20,421 51,862 38,465
---------------------------------------------------------
Non-Interest Expense
Salary expense 24,647 20,882 49,067 41,963
Employee benefit expense 5,892 4,701 12,198 9,547
Net occupancy expense 8,767 7,118 17,182 13,995
Amortization of intangible assets 3,609 2,714 6,375 4,903
Advertising 2,014 2,335 3,872 3,773
Distributions on capital securities 3,932 3,932 7,864 7,865
Other 11,014 8,879 21,387 17,821
---------------------------------------------------------
Total non-interest expense 59,875 50,561 117,945 99,867
---------------------------------------------------------
Income Before Income Taxes 57,347 57,333 114,818 110,146
Income tax expense 19,618 17,437 39,107 31,650
---------------------------------------------------------
Net Income $ 37,729 $ 39,896 $ 75,711 $ 78,496
=========================================================
Weighted Average Number of Shares Outstanding(1)
Basic 93,798,729 98,709,539 94,226,287 99,159,149
Diluted 94,313,570 99,344,567 94,685,855 99,778,533
Earnings Per Share: (1)
Basic $0.40 $0.40 $0.80 $0.79
Diluted 0.40 0.40 0.80 0.79
Cash dividends declared per common share(1) 0.225 0.21 0.44 0.42
See accompanying notes to consolidated financial statements.
- ---------------------------------------------------------------------------------
(1) Share data reflects the 5 percent stock dividend issued on May 16, 2003.
VALLEY NATIONAL BANCORP Six Months Ended
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) June 30,
-----------------------------------
(in thousands)
2003 2002
---------------- ---------------
Cash flows from operating activities:
Net income $75,711 $78,496
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 11,839 9,442
Amortization of compensation costs pursuant to
long-term stock incentive plan 1,488 1,290
Provision for loan losses 5,010 7,679
Net amortization of premiums and accretion of discounts 5,612 4,495
Net gains on securities transactions (6,179) (2,964)
Proceeds from sales of loans 156,312 141,932
Gain on sales of loans (5,315) (3,342)
Origination of loans held for sale (190,573) (110,623)
Purchases of trading securities (166,570) 0
Proceeds from sales of trading securities 163,046 0
Net increase in bank owned life insurance (3,078) (3,222)
Net decrease (increase) in accrued interest receivable and other assets 14,366 (11)
Net decrease in accrued expenses and other liabilities (6,378) (17,170)
---------------- ---------------
Net cash provided by operating activities 55,291 106,002
---------------- ---------------
Cash flows from investing activities:
Purchase of bank owned life insurance 0 (50,000)
Proceeds from sales of investment securities available for sale 402,722 282,439
Proceeds from maturities, redemptions and prepayments of investment
securities available for sale 765,005 535,227
Purchases of investment securities available for sale (1,161,072) (877,420)
Purchases of investment securities held to maturity (50,752) (23,013)
Proceeds from sales of investment securities held to maturity 1,630 0
Proceeds from maturities, redemptions and prepayments of investment
securities held to maturity 33,932 14,501
Net increase in loans made to customers (349,875) (195,189)
Purchases of premises and equipment (8,144) (15,628)
---------------- ---------------
Net cash used in investing activities (366,554) (329,083)
---------------- ---------------
Cash flows from financing activities:
Net increase in deposits 342,689 284,463
Net increase (decrease) in short-term borrowings 87,951 (21,679)
Advances of long-term debt 23,000 0
Repayments of long-term debt (70,043) (52,042)
Dividends paid to common shareholders (41,391) (41,239)
Purchase of common shares to treasury (35,249) (65,805)
Common stock issued, net of cancellations 1,708 3,230
---------------- ---------------
Net cash provided by financing activities 308,665 106,928
---------------- ---------------
Net decrease in cash and cash equivalents (2,598) (116,153)
Cash and cash equivalents at January 1 243,923 311,850
---------------- ---------------
Cash and cash equivalents at June 30 $241,325 $195,697
================ ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest on deposits and borrowings $67,402 $82,878
Cash paid during the period for federal and state income taxes 44,560 28,898
See accompanying notes to consolidated financial statements.
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------------
Net income (in thousands) $37,729 $39,896 $75,711 $78,496
===========================================================
Basic weighted-average number of shares
outstanding 93,798,729 98,709,539 94,226,287 99,159,149
Plus: Common stock equivalents 514,841 635,028 459,568 619,384
-----------------------------------------------------------
Diluted weighted-average number
of shares outstanding 94,313,570 99,344,567 94,685,855 99,778,533
============================================================
Earnings per share:
Basic $0.40 $0.40 $0.80 $0.79
Diluted 0.40 0.40 0.80 0.79
Common stock equivalents for the three and six months ended June 30, 2003
exclude approximately 29 thousand and 65 thousand common stock options because
the exercise prices exceeded the average market value. For the three and six
months ended June 30, 2002, approximately 2 thousand shares were excluded from
common stock equivalents. Inclusion of these common stock equivalents would be
anti-dilutive to the diluted earnings per share calculation.
4. Stock-Based Compensation
Valley prospectively adopted the fair value method provision of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," effective January 1, 2002. Under SFAS No. 123, entities recognize
stock-based employee compensation costs under the fair value method for awards
granted during the year. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model and is based on
certain assumptions including dividend yield, stock volatility, risk free rate
of return, expected term and turnover rate.
For the three and six months ended June 30, 2003, Valley recorded
stock-based employee compensation expense of $68 thousand and $145 thousand,
respectively, net of tax and will continue to amortize approximately $925
thousand, net of tax, of the remaining cost of these grants over the vesting
period of approximately five years. Stock-based employee compensation cost under
the fair value method was measured using the following weighted-average
assumptions for options granted from the date of adoption to June 30, 2003:
dividend yield of 3.19 percent, risk-free interest rate of 3.08 percent,
expected volatility of 23.79 percent, expected term of 5.29 years and turnover
rate of 7.27 percent.
Prior to January 1, 2002, Valley applied APB Opinion No. 25 and related
Interpretations in accounting for its stock option plan. Had compensation cost
for the options issued prior to January 1, 2002, been
- -------------------------------------------------------------------------
(1) Share data reflects the 5 percent stock dividend issued on May 16, 2003.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
--------------------------------------------------------
(in thousands, except for share data)
Net income
As reported $37,729 $ 39,896 $75,711 $ 78,496
Stock-based compensation cost, net of tax (206) (280) (413) (560)
________________________________________________________
Pro forma net income $37,523 $ 39,616 $75,298 $ 77,936
========================================================
Earnings per share
As reported:
Basic $ 0.40 $ 0.40 $ 0.80 $ 0.79
Diluted 0.40 0.40 0.80 0.79
Pro forma:
Basic $ 0.40 $ 0.40 $ 0.80 $ 0.79
Diluted 0.40 0.40 0.80 0.78
5. Recent Accounting Pronouncements
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS No. 150"). This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity as well as their
classification in the issuer's statement of financial position. It requires that
an issuer classify a financial instrument that is within its scope as a
liability when that instrument embodies an obligation of the issuer. Such
financial instruments include mandatorily redeemable shares. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have
a material impact on Valley's financial statements. Although there will be no
impact on net income, costs on Valley's trust preferred securities will be
recorded as interest expense from the present classification of non-interest
expense which will affect the net interest margin.
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. With a number of exceptions, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have a material impact on the consolidated
financial statements.
Consolidation of Variable Interest Entities
On January 17, 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 changes the
method of determining whether certain entities should be included in the
consolidated financial statements. A variable interest entity ("VIE") is an
entity that either (a) does not have equity investors with voting rights or (b)
has equity investors that do not provide sufficient financial resources for the
entity to support its activities. A company that consolidates a VIE is called
the "primary beneficiary" of that entity. The primary beneficiary of a VIE is
Three Months Ended
June 30,
------------------------------------------------------
2003 2002
-------------------------- --------------------------
(in thousands)
Net income $37,729 $39,896
Other comprehensive income, net of tax:
Foreign currency:
Translation adjustment $ 0 $ 126
Reclassification adjustment for loss realized on sale
of Canadian subsidiary 0 0 995 1,121
-------------- -------------
Unrealized gains on securities:
Change in unrealized gains arising during the period 2,683 20,252
Reclassification adjustment for gains realized in net
income (1,789) (1,926)
-------------- -------------
Net change in unrealized gains 894 18,326
------------- --------------
Other comprehensive income 894 19,447
------------- --------------
Comprehensive income $38,623 $59,343
============= ==============
Six Months Ended
June 30,
-------------------------------------------------------
2003 2002
-------------------------- ---------------------------
(in thousands)
Net income $75,711 $78,496
Other comprehensive income, net of tax:
Foreign currency:
Translation adjustment $ 0 $ 118
Reclassification adjustment for loss realized on sale
of Canadian subsidiary
0 0 995 1,113
-------------- -------------
Unrealized gains on securities:
Change in unrealized gains arising during the period (1,400) 19,381
Reclassification adjustment for gains realized in net
income (3,796) (1,926)
-------------- -------------
Net change in unrealized gains (5,196) 17,455
------------- ---------------
Other comprehensive income (5,196) 18,568
------------- ---------------
Comprehensive income $70,515 $97,064
============= ===============
8. Business Segments
The information under the caption "Business Segments" in Management's
Discussion and Analysis is incorporated herein by reference.
The following table reflects the components of net interest income for each
of the three months ended June 30, 2003 and 2002.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Three Months Ended June 30,
----------------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------
(in thousands)
Assets
Interest earning assets:
Loans (1)(2) $6,050,578 $92,283 6.10% $5,389,510 $91,974 6.83%
Taxable investments 2,375,933 30,962 5.21% 2,345,559 36,549 6.23%
Tax-exempt investments (1) 244,754 4,257 6.96% 230,963 3,967 6.87%
Federal funds sold and other short-
term investments 21,700 86 1.59% 73,611 327 1.78%
----------------------------------------------------------------------------------
Total interest earning assets 8,692,965 $127,588 5.87% 8,039,643 $132,817 6.61%
Allowance for loan losses (67,938) (65,923)
Cash and due from banks 191,002 178,182
Other assets 435,716 345,601
Unrealized gain on securities available
for sale 56,582 45,244
----------------- ----------------
Total assets $9,308,327 $8,542,747
================= ================
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $3,096,965 $ 6,427 0.83% $2,674,772 $ 8,632 1.29%
Time deposits 2,229,817 12,218 2.19% 2,423,577 18,019 2.97%
----------------------------------------------------------------------------------
Total interest bearing deposits 5,326,782 18,645 1.40% 5,098,349 26,651 2.09%
Short-term borrowings 478,997 1,404 1.17% 173,841 619 1.42%
Long-term debt 1,072,829 13,236 4.93% 924,383 12,640 5.47%
----------------------------------------------------------------------------------
Total interest bearing liabilities 6,878,608 33,285 1.94% 6,196,573 39,910 2.58%
Demand deposits 1,536,919 1,432,362
Other liabilities 70,926 53,266
Capital securities 200,000 200,000
Shareholders' equity 621,874 660,546
Total liabilities and ----------------- ----------------
shareholders' equity $9,308,327 $8,542,747
================= ================
Net interest income
(tax equivalent basis) 94,303 92,907
Tax equivalent adjustment (1,548) (1,460)
-------------- --------------
Net interest income $92,755 $91,447
============== ==============
Net interest rate differential 3.93% 4.03%
------------- ------------
Net interest margin (3) 4.34% 4.62%
============= ============
- -------------------------------------------------------------------------------
(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) 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 the
six months ended June 30, 2003 and 2002.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Six Months Ended June 30,
----------------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------
(in thousands)
Assets
Interest earning assets:
Loans (1)(2) $5,954,306 $184,170 6.19% $5,355,424 $182,933 6.83%
Taxable investments 2,370,344 62,795 5.30% 2,303,560 70,679 6.14%
Tax-exempt investments (1) 245,222 8,387 6.84% 226,426 7,821 6.91%
Federal funds sold and other short-
term investments 18,831 173 1.84% 111,555 964 1.73%
----------------------------------------------------------------------------------
Total interest earning assets 8,588,703 $255,525 5.95% 7,996,965 $262,397 6.56%
Allowance for loan losses (66,855) (65,849)
Cash and due from banks 194,498 181,803
Other assets 419,795 324,263
Unrealized gain on securities available
for sale 58,554 38,245
----------------- ----------------
Total assets $9,194,695 $8,475,427
================= ================
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $3,039,919 $ 13,137 0.86% $2,610,759 $ 16,720 1.28%
Time deposits 2,176,896 24,171 2.22% 2,408,553 36,585 3.04%
----------------------------------------------------------------------------------
Total interest bearing deposits 5,216,815 37,308 1.43% 5,019,312 53,305 2.12%
Short-term borrowings 475,446 2,789 1.17% 184,717 1,445 1.56%
Long-term debt 1,085,182 26,464 4.88% 940,121 25,537 5.43%
----------------------------------------------------------------------------------
Total interest bearing liabilities 6,777,443 66,561 1.96% 6,144,150 80,287 2.61%
Demand deposits 1,532,697 1,421,508
Other liabilities 57,903 46,550
Capital securities 200,000 200,000
Shareholders' equity 626,652 663,219
Total liabilities and
----------------- ----------------
shareholders' equity $9,194,695 $8,475,427
================= ================
Net interest income
(tax equivalent basis) 188,964 182,110
Tax equivalent adjustment (3,053) (2,883)
-------------- --------------
Net interest income $185,911 $179,227
============== ==============
Net interest rate differential 3.99% 3.95%
------------- ------------
Net interest margin (3) 4.40% 4.55%
============= ============
- -------------------------------------------------------------------------------
(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) 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 June 30, Six Months Ended June 30,
2003 Compared with 2002 2003 Compared with 2002
Increase (Decrease) (1) Increase (Decrease) (1)
--------------------------------- ----------------------------------
Interest Volume Rate Interest Volume Rate
--------------------------------- ----------------------------------
(in thousands)
Interest income:
Loans (2) $ 309 $10,639 $(10,330) $ 1,237 $19,409 $(18,172)
Taxable investments (5,587) 468 (6,055) (7,884) 2,000 (9,884)
Tax-exempt investments (2) 290 239 51 566 644 (78)
Federal funds sold and other
short-term investments (241) (209) (32) (791) (848) 57
--------------------------------------------------------------------
(5,229) 11,137 (16,366) (6,872) 21,205 (28,077)
--------------------------------- ----------------------------------
Interest expense:
Savings deposits (2,205) 1,213 (3,418) (3,583) 2,448 (6,031)
Time deposits (5,801) (1,352) (4,449) (12,414) (3,269) (9,145)
Short-term borrowings 785 912 (127) 1,344 1,783 (439)
Long-term debt 596 1,907 (1,311) 927 3,698 (2,771)
--------------------------------- ----------------------------------
(6,625) 2,680 (9,305) (13,726) 4,660 (18,386)
--------------------------------- ----------------------------------
Net interest income (tax equivalent basis) $1,396 $ 8,457 $(7,061) $ 6,854 $16,545 $ (9,691)
--------------------------------- ----------------------------------
- ------------------------------------------------------------------------------
(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.
The following table presents the components of non-interest income for the three and six months ended June 30, 2003 and 2002.
NON-INTEREST INCOME
Three Months Ended Six Months Ended
------------------------------------------------------
June 30,
------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------
(in thousands)
Trust and investment services $ 2,156 $ 1,192 $ 4,230 $ 2,370
Insurance fees, commissions and premiums 4,202 735 9,004 1,521
Service charges on deposit accounts 5,682 4,827 10,959 9,712
Gains on securities transactions, net 2,968 2,609 6,179 2,964
Fees from loan servicing 2,459 2,415 4,451 4,913
Gains on sales of loans, net 2,727 1,562 5,315 3,342
Bank owned life insurance ("BOLI") 1,564 1,806 3,078 3,222
Other 4,464 5,275 8,646 10,421
------------------------------------------------------
Total non-interest income $26,222 $20,421 $51,862 $38,465
------------------------------------------------------
For the three and six months ended June 30, 2003, trust and investment
services income increased $964 thousand or 80.9 percent and $1.9 million or 78.5
percent, respectively, as compared with the same periods in 2002, primarily due
to additional revenues from the newly acquired Glen Rauch operations.
Insurance fees, commissions and premiums increased $3.5 million or 472
percent and $7.5 million or 492 percent for the three and six months ended June
30, 2003, compared with the same periods in 2002, due to Valley's recent
acquisitions of Masters and NIA/Lawyers.
For the three and six month periods ended June 30, 2003, service charges on
deposit accounts increased $855 thousand or 17.7 percent and $1.2 million or
12.8 percent, respectively, compared with the same periods in 2002, due to
increases in service fees charged.
Gains on securities transactions, net, increased $359 thousand or 13.8
percent and $3.2 million or 108 percent for the three and six months ended June
30, 2003, compared with the same periods in 2002. The bond market has continued
to display significant strength resulting in record refinancing rates. During
the first half of 2003, Valley identified many individual bonds which
experienced fast prepayment speeds. Many of these securities had substantial
unrealized gains, low give-up yields and if not sold, had a strong likelihood of
paying off at par within a very short time. Management made the decision to sell
selected positions to realize these gains and will continue to monitor its
inventory for more opportunities as part of its program of active portfolio
management. The majority of these gains were generated from mortgage-backed
securities.
Fees from loan servicing increased slightly by $44 thousand or 1.8 percent
and decreased by $462 thousand or 9.4 percent for the three and six months ended
June 30, 2003, respectively, compared with
Non-Interest Expense
The following table presents the components of non-interest expense for the
three and six months ended June 30, 2003 and 2002.
NON-INTEREST EXPENSE
Three Months Ended Six Months Ended
--------------------------------------------------------
June 30,
--------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------
(in thousands)
Salary expense $24,647 $20,882 $49,067 $41,963
Employee benefit expense 5,892 4,701 12,198 9,547
Net occupancy expense 8,767 7,118 17,182 13,995
Amortization of intangible assets 3,609 2,714 6,375 4,903
Advertising 2,014 2,335 3,872 3,773
Distributions on capital securities 3,932 3,932 7,864 7,865
Other 11,014 8,879 21,387 17,821
--------------------------------------------------------
Total non-interest expense $59,875 $50,561 $117,945 $99,867
--------------------------------------------------------
Non-interest expense Non-interest expense increased by $9.3 million or 18.4
percent and $18.1 million or 18.1 percent for the three and six months ended
June 30, 2003, compared with 2002 levels. These increases were due largely to
increased salary expense for the recently acquired subsidiaries, business
expansion including new and refurbished branches, additional amortization of
loan servicing rights and higher expenses and depreciation charges in connection
with recent investments in technology systems. The largest components of
non-interest expense were salaries and employee benefit expense representing 51
percent and 52 percent of total non-interest expense for the three and six
months ended June 30, 2003.
The following table presents the financial data for the three months ended
June 30, 2003 and 2002.
Three Months Ended June 30, 2003
---------------------------------------------------------------------------
(in thousands)
---------------------------------------------------------------------------
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
---------------------------------------------------------------------------
Average interest earning assets $3,098,456 $2,972,887 $2,621,622 $0 $8,692,965
Income (loss) before income taxes $21,557 $20,703 $22,137 $(7,050) $57,347
Return on average interest-earning
assets (pre-tax) 2.78% 2.79% 3.38% 0% 2.64%
---------------------------------------------------------------------------
Three Months Ended June 30, 2002
---------------------------------------------------------------------------
(in thousands)
---------------------------------------------------------------------------
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
---------------------------------------------------------------------------
Average interest earning assets $2,697,783 $2,732,105 $2,609,755 $0 $8,039,643
Income (loss) before income taxes $20,469 $17,460 $20,138 $(734) $57,333
Return on average interest earning
assets (pre-tax) 3.03% 2.56% 3.09% 0% 2.85%
---------------------------------------------------------------------------
Consumer Lending
The consumer lending segment had a return on average interest earning
assets before taxes of 2.78 percent for the three months ended June 30, 2003
compared with 3.03 percent for the three months ended June 30, 2002. Average
interest earning assets increased $401 million or 14.9 percent, attributed to
volume gains in residential mortgages, home equity and automobile loans.
Increases in residential mortgage and home equity loans were driven by favorable
interest rates and ongoing marketing efforts. Increases in automobile loans were
achieved primarily as a result of increased indirect auto lending through
continued expansion of Valley's auto loan dealer base. Average interest rates on
consumer loans decreased 25 basis points, while the expenses associated with
funding sources decreased 46 basis points to 1.53 percent. Income before income
taxes increased $1.1 million to $21.6 million mainly due to additional fee
income from Masters, NIA/Lawyers and Glen Rauch; increased residential mortgage
fees and an increase in net interest income.
Commercial Lending
The return on average interest earning assets before taxes increased 23
basis points to 2.79 percent for the three months ended June 30, 2003, compared
with 2.56 percent for the three months ended June 30, 2002. Average interest
earning assets increased $241 million or 8.8 percent as a result of increased
loan volume, particularly in commercial loans and commercial mortgages. Interest
rates on commercial loans decreased by 53 basis points and the expenses
associated with funding sources decreased by 46 basis points to 1.53 percent.
Income before income taxes increased $3.2 million to $20.7 million due to
increased net interest income and a lower provision for loan losses partly
offset by the increase in allocation of the internal expense transfer resulting
from increased average volume.
Six Months Ended June 30, 2003
-----------------------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------------------
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
-----------------------------------------------------------------------------
Average interest earning assets $3,037,121 $2,937,116 $2,614,466 $0 $8,588,703
Income (loss) before income taxes $44,332 $39,881 $45,657 $(15,052) $114,818
Return on average interest-earning
assets (pre-tax) 2.92% 2.72% 3.49% 0% 2.67%
-----------------------------------------------------------------------------
Six Months Ended June 30, 2002
-----------------------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------------------
Corporate
Consumer Commercial Investment and other
Lending Lending Management adjustments Total
-----------------------------------------------------------------------------
Average interest earning assets $2,680,149 $2,713,525 $2,603,291 $0 $7,996,965
Income (loss) before income taxes $40,601 $36,558 $36,899 $(3,912) $110,146
Return on average interest earning
assets (pre-tax) 3.03% 2.69% 2.83% 0% 2.75%
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Loan Portfolio
The following table reflects the composition of the loan portfolio for the
periods presented.
LOAN PORTFOLIO
June 30, March 31, December 31, June 30,
2003 2003 2002 2002
---------------- -----------------------------------------------------
Commercial $1,163,176 $1,140,736 $1,115,784 $1,090,045
---------------- ---------------- ---------------- --------------
Total commercial loans 1,163,176 1,140,736 1,115,784 1,090,045
Construction 203,391 187,016 200,896 201,341
Residential mortgage 1,648,293 1,581,777 1,427,715 1,310,485
Commercial mortgage 1,564,096 1,568,991 1,515,095 1,441,810
---------------- ---------------- ---------------- --------------
Total mortgage loans 3,415,780 3,337,784 3,143,706 2,953,636
Home equity 467,322 449,919 451,543 428,805
Credit card 10,727 10,381 11,544 11,220
Automobile 958,900 928,114 932,672 921,304
Other consumer 117,483 102,174 107,239 84,853
---------------- ---------------- ---------------- --------------
Total consumer loans 1,554,432 1,490,588 1,502,998 1,446,182
---------------- ---------------- ---------------- --------------
Total loans $6,133,388 $5,969,108 $5,762,488 $5,489,863
================ ================ ================ ==============
As a percent of total loans:
Commercial loans 19.0 % 19.1% 19.4% 19.9%
Mortgage loans 55.7 55.9 54.5 53.8
Consumer loans 25.3 25.0 26.1 26.3
---------------- ---------------- ---------------- --------------
Total 100.0 % 100.0% 100.0% 100.0%
================ ================ ================ ==============
During the second quarter of 2003, Valley's total loan portfolio continued
to grow at a steady upward trend, while maintaining emphasis on credit quality.
During the quarter, total loans grew 2.8 percent from March 31, 2003, while on
an annualized basis, total loans increased 11.0 percent reflecting overall
growth in residential mortgage, commercial loans and consumer loans. Valley
cannot guarantee that the current level of loan growth will continue throughout
the year.*
For the three months ended June 30, 2003, commercial loans increased 2.0
percent or 7.9 percent annualized, partly due to increased commercial line draw
downs, new commercial loans, as well as increased aviation and equipment leasing
activity.
For the three months ended June 30, 2003, total mortgage loans increased
2.3 percent or 9.3 percent on an annual basis, mainly due to a favorable
interest rate environment and continuing stable economic conditions in Valley's
lending area. This growth was primarily due to a 4.2 percent or 16.8 percent
annualized increase in the residential 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 and loan growth strategy. For
the first half of 2003, Valley elected to sell approximately $144 million of the
$792 million in originated residential mortgage loans. As a result of current
increases in long term interest rates subsequent to June 30, 2003, the volume of
new residential mortgage applications has declined compared with the higher
volumes of refinancing activity over the first half of 2003. Valley anticipates
that it will close a majority of its residential mortgage applications presently
under commitment, many of which are contracted to be sold during the third
quarter of 2003.* Commercial mortgage loans decreased slightly for the three
months ended June 30, 2003, but increased $49 million or 3.2 percent for the
first half of 2003 or 6.5 percent on an annualized basis.
LOAN QUALITY
June 30, March 31, December 31, June 30,
2003 2003 2002 2002
-----------------------------------------------------------
(in thousands)
Loans past due in excess of
90 days and still accruing $ 3,023 $4,698 $ 4,931 $10,216
-----------------------------------------------------------
Non-accrual loans $23,894 $26,799 $21,524 $19,553
Other real estate owned 172 448 43 0
-----------------------------------------------------------
Total non-performing assets $24,066 $27,247 $21,567 $19,553
-----------------------------------------------------------
Troubled debt restructured loans $ 0 $ 0 $ 0 $ 866
-----------------------------------------------------------
Non-performing loans as a % of loans 0.39% 0.46% 0.37% 0.36%
-----------------------------------------------------------
Non-performing assets as a % of
loans plus other real estate owned 0.39% 0.46% 0.37% 0.36%
-----------------------------------------------------------
Allowance as a % of loans 1.10% 1.12% 1.11% 1.17%
-----------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Three Months Ended
----------------------------------------------------------------
June 30, March 31, December 31, June 30,
2003 2003 2002 2002
-------------------------------------------------------------------
(in thousands)
Average loans outstanding $6,050,578 $5,856,965 $5,690,264 $5,389,510
============================================================
Beginning balance:
Allowance for loan losses $ 66,791 $ 64,087 $ 66,189 $ 64,223
Loans charged-off (2,143) (2,167) (5,552) (5,265)
Recoveries 1,074 1,616 784 1,367
-----------------------------------------------------------
Net charge-offs (1,069) (551) (4,768) (3,898)
Provision charged to operations 1,755 3,255 2,666 3,974
-----------------------------------------------------------
Ending balance: Allowance for loan losses $ 67,477 $ 66,791 $ 64,087 $ 64,299
===========================================================
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.05% 0.04% 0.24% 0.27%
===========================================================