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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / 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
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VALLEY NATIONAL BANCORP
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2477875
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1455 VALLEY ROAD
WAYNE, NEW JERSEY 07474
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(Address of principal executive office) (Zip code)
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973-305-8800
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of each class Name of each exchange on which registered
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COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $1.8 billion on December 31, 2000.
There were 74,334,952 shares of Common Stock outstanding at February 1,
2001.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Registrant's Definitive Proxy Statement (the "2001
Proxy Statement") for the 2001 Annual Meeting of shareholders to be held April
4, 2001 will be incorporated by reference in Part III.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business ........................................................................... 3
Item 2. Properties ......................................................................... 7
Item 3. Legal Proceedings .................................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders ................................ 7
Item 4A. Executive Officers of the Registrant ............................................... 8
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters ............... 9
Item 6. Selected Financial Data ............................................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................... 31
Item 8. Financial Statements and Supplementary Data:
Valley National Bancorp and Subsidiaries:
Consolidated Statements of Financial Condition ................................. 32
Consolidated Statements of Income .............................................. 33
Consolidated Statements of Changes in Shareholders' Equity ..................... 34
Consolidated Statements of Cash Flows .......................................... 35
Notes to Consolidated Financial Statements ..................................... 36
Independent Auditors' Report ................................................... 63
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................................. 64
PART III
Item 10. Directors and Executive Officers of the Registrant ................................. 64
Item 11. Executive Compensation ............................................................. 64
Item 12. Security Ownership of Certain Beneficial Owners and Management ..................... 64
Item 13. Certain Relationships and Related Transactions ..................................... 64
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................... 64
Signatures ..................................................................................... 67
2
PART I
ITEM 1. BUSINESS
Valley National Bancorp ("Valley") is a New Jersey corporation registered
as a bank holding company under the Bank Holding Company Act of 1956, as amended
("Holding Company Act"). At December 31, 2000, Valley had consolidated total
assets of $6.4 billion, total deposits of $5.1 billion, and total shareholders'
equity of $545.1 million. Its principal subsidiary is Valley National Bank
("VNB").
VNB is a national banking association chartered in 1927 under the laws of
the United States. VNB provides a full range of commercial and retail banking
services through 118 branch offices located in northern New Jersey. These
services include the following: the acceptance of demand, savings and time
deposits; extension of consumer, real estate, Small Business Administration
("SBA") and other commercial credits; title insurance; investment services; and
full personal and corporate trust, as well as pension and fiduciary services.
VNB has several wholly-owned subsidiaries which include a mortgage
servicing company, a company which holds, maintains and manages investment
assets for VNB, a subsidiary which owns and services auto loans, a subsidiary
which owns and services commercial mortgage loans, a title insurance company,
asset management companies which are SEC registered investment companies and an
Edge Act Corporation which is the holding company for a wholly-owned finance
company located in Toronto, Canada. Many of these subsidiaries transact business
with VNB as well as third parties.
RECENT DEVELOPMENTS
On January 19, 2001 Valley completed its merger with Merchants New York
Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York
headquartered in Manhattan. Under the terms of the merger agreement, each
outstanding share of Merchants common stock was exchanged for 0.7634 shares of
Valley common stock. As a result, a total of approximately 14 million shares of
Valley common stock were exchanged. This merger added seven branches in
Manhattan. The transaction was accounted for utilizing the pooling-of-interests
method of accounting. In accordance with generally accepted accounting
principles, the consolidated financial statements of Valley, included herein,
have not been restated to include Merchants. See Part II, Item 8, "Financial
Statements and Supplementary Data-- Note 2 of the Notes to Consolidated
Financial Statements", which provides proforma data summarizing the combined
financial data of Valley and Merchants as if the merger had been consummated on
December 31, 1999 for Statement of Financial Condition purposes and January 1,
1998 for Income Statement purposes.
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc.
("Hallmark"), a Fairfield, NJ-based investment management firm with $195 million
of assets under management. Hallmark's purchase was a stock merger with
subsequent earn out payments. Hallmark's operations are continuing as a
wholly-owned subsidiary of VNB. The transaction was accounted for as a purchase
and resulted in goodwill of approximately $1.2 million which is being amortized
over a period of 10 years.
During August 2000, Valley entered into a contract to sell its ShopRite
credit card portfolio to American Express. The transaction closed and was
recorded during the first quarter of 2001, with a balance of approximately $65.4
million of credit card receivables sold. This transaction will reduce both
credit card fee income and related credit card expense during 2001.*
For many years, Valley National Bank has maintained an automobile loan
program with a major insurance company. While the loans generated by this
program have been important to Valley, recent changes in market conditions for
automobile lending have reduced the volume and profitability of the program
relative to other loans and investments available to the bank. As a result of
the expansion of the insurance company's banking activities, Valley expects to
phase out the origination of loans under this program during 2001*. All loans
originated by Valley during the program will remain under the bank's ownership,
and Valley expects the portfolio to amortize in its normal course.* As of
December 31, 2000, this portfolio represents 9.7 percent of Valley's interest
earning assets and the amount of the portfolio had decreased by 12.3 percent
during the last twelve-month period. The gross yield of the portfolio for the
year 2000 was 8.20 percent, prior to payments to the insurance company, loan
losses and all costs associated with originating and maintaining the portfolio.
Management anticipates that the phasing out of this program should not have a
material adverse effect on future net income and, in fact, may have a positive
effect.*
3
COMPETITION
The market for banking and bank-related services is highly competitive.
Valley and its subsidiary compete with other providers of financial services
such as other bank holding companies, commercial and savings banks, savings and
loan associations, credit unions, money market and mutual funds, mortgage
companies, title agencies, asset managers and a growing list of other local,
regional and national institutions which offer financial services. Mergers
between financial institutions within New Jersey and in neighboring states have
added competitive pressure. Competition is expected to intensify as a
consequence of the Gramm-Leach-Bliley Act (discussed below) and interstate
banking laws now in effect or that may be in effect in the future. Valley and
its subsidiary compete by offering quality products and convenient services at
competitive prices. In order to maintain and enhance its competitive position,
Valley regularly reviews its products, locations and various acquisition
prospects and periodically engages in discussions regarding such possible
acquisitions.
EMPLOYEES
At December 31, 2000, VNB and its subsidiaries employed 1,858 full-time
equivalent persons. Management considers relations with employees to be
satisfactory.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory controls
increase a bank holding company's cost of doing business and limit the options
of its management to deploy assets and maximize income. The following discussion
is not intended to be a complete list of all the activities regulated by the
banking laws or of the impact of such laws and regulations on the bank. It is
intended only to briefly summarize some material provisions.
BANK HOLDING COMPANY REGULATION
Valley is a bank holding company within the meaning of the Holding Company
Act. As a bank holding company, Valley is supervised by the Board of Governors
of the Federal Reserve System ("FRB") and is required to file reports with the
FRB and provide such additional information as the FRB may require.
The Holding Company Act prohibits Valley, with certain exceptions, from
acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any company which is not a bank and from engaging in any
business other than that of banking, managing and controlling banks or
furnishing services to subsidiary banks, except that it may, upon application,
engage in, and may own shares of companies engaged in, certain businesses found
by the FRB to be so closely related to banking "as to be a proper incident
thereto." The Holding Company Act requires prior approval by the FRB of the
acquisition by Valley of more than five percent of the voting stock of any
additional bank. Satisfactory capital ratios and Community Reinvestment Act
ratings are generally prerequisites to obtaining federal regulatory approval to
make acquisitions. The policy of the FRB provides that a bank holding company is
expected to act as a source of financial strength to its subsidiary bank and to
commit resources to support the subsidiary bank in circumstances in which it
might not do so absent that policy. Acquisitions through VNB require approval of
the Comptroller of the Currency of the United States ("OCC"). The Holding
Company Act does not place territorial restrictions on the activities of
non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act,
discussed below, allows Valley to expand into insurance, securities, merchant
banking activities, and other activities that are financial in nature.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Banking and Branching Act") enables bank holding companies to
acquire banks in states other than its home state, regardless of applicable
state law. The Interstate Banking and Branching Act also authorizes banks to
merge across state lines, thereby creating interstate branches. Under the
legislation, each state had the opportunity to "opt-out" of this provision.
Furthermore, a state may "opt-in" with respect to de novo branching, thereby
permitting a bank to open new branches in a state in which the bank does not
already have a branch. Without de novo branching, an out-of-state commercial
bank can enter the state only by acquiring an existing bank or branch. The vast
majority of states have allowed interstate banking by merger but have not
authorized de novo branching.
New Jersey enacted legislation to authorize interstate banking and
branching and the entry into New Jersey of foreign country banks. New Jersey did
not authorize de novo branching into the state. However, under federal law,
federal savings banks which meet certain conditions may branch de novo into a
state, regardless of state law.
4
RECENT LEGISLATION
The Gramm-Leach-Bliley Financial Modernization Act of 1999 became effective
in early 2000. The Modernization Act:
o allows bank holding companies meeting management, capital and Community
Reinvestment Act standards to engage in a substantially broader range of
nonbanking activities than currently is permissible, including insurance
underwriting and making merchant banking investments in commercial and
financial companies;
o allows insurers and other financial services companies to acquire banks;
o removes various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
o establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
If a bank holding company elects to become a financial holding company, it
files a certification, effective in 30 days, and thereafter may engage in
certain financial activities without further approvals.
The OCC has adopted rules to allow national banks to form subsidiaries to
engage in financial activities allowed for financial holding companies. Electing
national banks must meet the same management and capital standards as financial
holding companies but may not engage in insurance underwriting, real estate
development or merchant banking. Sections 23A and 23B of the Federal Reserve Act
apply to financial subsidiaries and the capital invested by a bank in its
financial subsidiaries will be eliminated from the bank's capital in measuring
all capital ratios.
The Modernization Act modified other financial laws, including laws related
to financial privacy and community reinvestment.
In late 2000 the American Home Ownership and Economic Act of 2000
instituted a number of regulatory relief provisions applicable to national
banks, such as permitting national banks to have classified directors and to
merge their business subsidiaries into the bank.
Additional proposals to change the laws and regulations governing the
banking and financial services industry are frequently introduced in Congress,
in the state legislatures and before the various bank regulatory agencies. The
likelihood and timing of any such changes and the impact such changes might have
on Valley cannot be determined at this time.
REGULATION OF BANK SUBSIDIARY
VNB is subject to the supervision of, and to regular examination by, the
OCC.
Various laws and the regulations thereunder applicable to Valley and its
bank subsidiary impose restrictions and requirements in many areas, including
capital requirements, the maintenance of reserves, establishment of new offices,
the making of loans and investments, consumer protection, employment practices
and entry into new types of business. There are various legal limitations,
including Sections 23A and 23B of the Federal Reserve Act, which govern the
extent to which a bank subsidiary may finance or otherwise supply funds to its
holding company or its holding company's non-bank subsidiaries. Under federal
law, no bank subsidiary may, subject to certain limited exceptions, make loans
or extensions of credit to, or investments in the securities of, its parent or
the non-bank subsidiaries of its parent (other than direct subsidiaries of such
bank which are not financial subsidiaries) or take their securities as
collateral for loans to any borrower. Each bank subsidiary is also subject to
collateral security requirements for any loans or extensions of credit permitted
by such exceptions.
DIVIDEND LIMITATIONS
Valley is a legal entity separate and distinct from its subsidiaries.
Valley's revenues (on a parent company only basis) result in substantial part
from dividends paid to Valley by VNB. Payment of dividends to Valley by its
subsidiary bank, without prior regulatory approval, is subject to regulatory
limitations. Under the National Bank Act, dividends may be declared only if,
after payment thereof, capital would be unimpaired and remaining surplus would
equal 100 percent of capital. Moreover, a national bank may declare, in any one
year, dividends only in an amount aggregating not more than the sum of its net
profits for such year and its retained net profits for the preceding two
5
years. In addition, the bank regulatory agencies have the authority to prohibit
a bank subsidiary from paying dividends or otherwise supplying funds to Valley
if the supervising agency determines that such payment would constitute an
unsafe or unsound banking practice.
LOANS TO RELATED PARTIES
VNB's authority to extend credit to its directors, executive officers and
10 percent stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of the National Bank Act and Regulation O
of the FRB thereunder. Among other things, these provisions require that
extensions of credit to insiders (i) be made on terms that are substantially the
same as, and follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with unaffiliated persons and
that do not involve more than the normal risk of repayment or present other
unfavorable features and (ii) not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the bank's capital. In addition, extensions
of credit in excess of certain limits must be approved by the bank's board of
directors.
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), as implemented by OCC
regulations, a national bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OCC, in connection with
its examination of a national bank, to assess the association's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings. VNB
received a "satisfactory" CRA rating in its most recent examination.
RESTRICTIONS ON ACTIVITIES OUTSIDE THE UNITED STATES
Valley's activities in Canada are conducted through VNB and in the United
States are subject to Section 25 and 25A of the Federal Reserve Act, certain
regulations under the National Bank Act and, primarily, Regulation K promulgated
by the FRB. Under these provisions, VNB may invest no more than 10 percent of
its capital in foreign banking operations. In addition to investments, VNB may
extend credit or guarantee loans for these entities and such loans or guarantees
are generally not subject to the loans to one person limitation, although they
are subject to prudent banking limitations. The foreign banking operations of
VNB are subject to supervision by the FRB, as well as the OCC. In Canada, VNB's
activities also are subject to the laws and regulations of Canada and to
regulation by Canadian banking authorities. Regulation K generally restricts
activities by United States banks outside of the United States to activities
that are permitted for banks within the United States. As a consequence,
activities by VNB through its subsidiaries outside of the United States would
generally be limited to banking and activities closely related to banking with
certain significant exceptions.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default. These provisions have
commonly been referred to as FIRREA's "cross guarantee" provisions. Further,
under FIRREA the failure to meet capital guidelines could subject a bank to a
variety of enforcement remedies available to federal regulatory authorities.
FIRREA also imposes certain independent appraisal requirements upon a
bank's real estate lending activities and further imposes certain loan-to-value
restrictions on a bank's real estate lending activities. The bank regulators
have promulgated regulations in these areas.
FDICIA
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), each federal banking agency has promulgated regulations,
specifying the levels at which a financial institution would be
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considered "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," and to take
certain mandatory and discretionary supervisory actions based on the capital
level of the institution. To qualify to engage in financial activities under the
Modernization Act, all depository institutions must be "well capitalized". The
financial holding company of a national bank will be put under directives to
raise its capital levels or divest its activities if the depository institution
falls from that level.
The OCC's regulations implementing these provisions of FDICIA provide that
an institution will be classified as "well capitalized" if it (i) has a total
risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based
capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at
least 5.0 percent, and (iv) meets certain other requirements. An institution
will be classified as "adequately capitalized" if it (i) has a total risk-based
capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital
ratio of at least 4.0 percent, (iii) has Tier 1 leverage ratio of (a) at least
4.0 percent or (b) at least 3.0 percent if the institution was rated 1 in its
most recent examination, and (iv) does not meet the definition of "well
capitalized." An institution will be classified as "undercapitalized" if it (i)
has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1
risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1
leverage ratio of (a) less than 4.0 percent or (b) less than 3.0 percent if the
institution was rated 1 in its most recent examination. An institution will be
classified as "significantly undercapitalized" if it (i) has a total risk-based
capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital
ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less
than 3.0 percent. An institution will be classified as "critically
undercapitalized" if it has a tangible equity to total assets ratio that is
equal to or less than 2.0 percent. An insured depository institution may be
deemed to be in a lower capitalization category if it receives an unsatisfactory
examination rating.
In addition, significant provisions of FDICIA required federal banking
regulators to impose standards in a number of other important areas to assure
bank safety and soundness, including internal controls, information systems and
internal audit systems, credit underwriting, asset growth, compensation, loan
documentation and interest rate exposure.
ITEM 2. PROPERTIES
VNB's corporate headquarters consist of three office buildings located
adjacent to each other in Wayne, New Jersey. These headquarters encompass
commercial, mortgage and consumer lending, the operations and data processing
center, and the executive offices of both Valley and VNB. Two of the three
buildings are owned by VNB, the other building is leased.
VNB owns another office building in Wayne which is occupied by those
departments providing trust and investment management services.
VNB provides banking services at 118 locations of which 51 locations are
owned and 67 locations are leased.
ITEM 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings to which Valley or any of
its direct or indirect subsidiaries were a party, or to which their property was
subject, other than ordinary routine litigations incidental to business and
which had no material effect on the presentation of the financial statements
contained in this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Special Meeting of Shareholders was held December 5, 2000
to approve the merger of Merchants New York Bancorp, Inc. and Valley. The
results of the votes thereon are as follows:
FOR AGAINST ABSTAIN
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39,264,957 510,799 141,300
7
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE
AGE AT OFFICER
NAMES DECEMBER 31, 2000 SINCE OFFICE
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Gerald H. Lipkin ...................... 59 1975 Chairman of the Board, President
and Chief Executive Officer of
Valley and VNB
Peter Southway ........................ 66 1965 Vice Chairman of Valley and VNB
Peter Crocitto ........................ 43 1991 Executive Vice President of Valley
and VNB
Alan D. Eskow ......................... 52 1993 Executive Vice President and Chief
Financial Officer of Valley and
VNB
Robert M. Meyer ....................... 54 1997 Executive Vice President of Valley
and VNB
Peter John Southway ................... 40 1989 Executive Vice President of Valley
and VNB
Albert L. Engel ....................... 52 1998 First Senior Vice President of VNB
Robert J. Farnon ...................... 62 1998 First Senior Vice President of VNB
Robert E. Farrell ..................... 54 1990 First Senior Vice President of VNB
Richard P. Garber ..................... 57 1992 First Senior Vice President of VNB
D. Franklin Larsen .................... 66 1999 First Senior Vice President of VNB
Alan D. Lipsky ........................ 56 1994 First Senior Vice President of VNB
Robert Mulligan ....................... 53 1991 First Senior Vice President of VNB
John H. Prol .......................... 63 1992 First Senior Vice President of VNB
Jack M. Blackin ....................... 58 1993 Senior Vice President of Valley
and VNB
All officers serve at the pleasure of the Board of Directors.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Valley's common stock trades on the New York Stock Exchange ("NYSE") under
the symbol VLY. The following table sets forth for each quarter period indicated
the high and low sales prices for the common stock of Valley, as reported by the
NYSE, and the dividends paid per share for each quarter. The amounts shown in
the table below have been adjusted for all stock dividends and stock splits.
YEAR 2000 YEAR 1999
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HIGH LOW DIVIDEND HIGH LOW DIVIDEND
------ ------- -------- ------ ------ ---------
First Quarter ................. $26.68 $20.18 $0.25 $26.76 $22.22 $0.23
Second Quarter ................ 27.02 23.81 0.26 27.98 22.34 0.25
Third Quarter ................. 27.63 23.50 0.26 28.10 23.15 0.25
Fourth Quarter ................ 33.63 25.88 0.26 26.67 22.80 0.25
Federal laws and regulations contain restrictions on the ability of Valley
and VNB to pay dividends. For information regarding restrictions on dividends,
see Part I, Item 1, "Business--Dividend Limitations" and Part II, Item 8,
"Financial Statements and Supplementary Data--Note 15 of the Notes to
Consolidated Financial Statements."
There were 8,371 shareholders of record as of December 31, 2000.
9
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Valley's Consolidated Financial Statements and the accompanying notes presented
elsewhere herein.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS:
Interest income (taxable equivalent) ...... $465,164 $431,945 $416,261 $413,206 $394,554
Interest expense .......................... 202,756 169,177 167,658 172,182 168,595
-------- -------- -------- -------- --------
Net interest income (taxable equivalent) .. 262,408 262,768 248,603 241,024 225,959
Less: tax equivalent adjustment ........... 4,311 4,410 4,968 6,388 7,710
-------- -------- -------- -------- --------
Net interest income ..................... 258,097 258,358 243,635 234,636 218,249
Provision for loan losses ................. 6,130 9,120 12,645 13,130 3,956
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses ....................... 251,967 249,238 230,990 221,506 214,293
Gains on securities transactions, net ..... 355 2,532 1,419 2,136 765
Non-interest income ....................... 50,528 44,720 43,955 43,058 31,845
Non-interest expense ...................... 141,013 137,946 144,713 139,246 134,586
-------- -------- -------- -------- --------
Income before income taxes ................ 161,837 158,544 131,651 127,454 112,317
Income tax expense ........................ 55,064 52,220 30,380 37,303 37,757
-------- -------- -------- -------- --------
Net income .............................. $106,773 $106,324 $101,271 $ 90,151 $ 74,560
======== ======== ======== ======== ========
PER COMMON SHARE (1)(2):
Earnings per share:
Basic ................................... $ 1.76 $ 1.67 $ 1.57 $ 1.40 $ 1.20
Diluted ................................. 1.75 1.65 1.55 1.39 1.19
Dividends ................................. 1.03 0.98 0.89 0.77 0.69
Book value ................................ 9.08 8.83 9.11 8.36 7.42
Weighted average shares outstanding:
Basic ................................... 60,561,075 63,732,045 64,428,341 64,329,417 62,308,485
Diluted ................................. 61,108,974 64,370,957 65,294,355 64,903,173 62,780,824
RATIOS:
Return on average assets .................. 1.72% 1.75% 1.79% 1.60% 1.36%
Return on average shareholders' equity .... 20.28 18.35 18.10 17.51 15.47
Average shareholders' equity to
average assets .......................... 8.46 9.56 9.89 9.16 8.82
Dividend payout ........................... 58.10 56.45 52.60 50.30 51.83
Risk-based capital:
Tier 1 capital .......................... 10.83 11.62 13.39 13.43 12.68
Total capital ........................... 11.90 12.75 14.61 14.54 13.96
Leverage capital .......................... 8.73 9.11 10.12 9.40 8.60
FINANCIAL CONDITION AT YEAR-END:
Assets .................................... $6,425,837 $6,360,394 $5,878,969 $5,646,425 $5,631,152
Loans, net of allowance ................... 4,607,679 4,499,632 4,093,008 3,919,370 3,730,606
Deposits .................................. 5,123,717 5,051,255 4,970,149 4,852,081 4,985,901
Shareholders' equity ...................... 545,074 553,500 589,809 540,600 496,331
- -----------
(1) All per share amounts have been restated to reflect the 5 percent stock
dividend issued May 16, 2000, and all prior stock splits and dividends.
(2) Share and earnings per share data for the year 1996 has not been restated
for the acquisition of Wayne Bancorp, Inc. as the issuance of capital
stock in connection with the conversion from the mutual to stock form of
Wayne Savings Bank occurred on June 27, 1996.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this analysis is to provide the reader with information
relevant to understanding and assessing Valley's results of operations for each
of the past three years and financial condition for each of the past two years.
In order to fully appreciate this analysis the reader is encouraged to review
the consolidated financial statements and statistical data presented in this
document.
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-K, both in the MD & A and elsewhere, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about
management's confidence and strategies and management's expectations about new
and existing programs and products, relationships, opportunities, technology and
market conditions. These statements may be identified by an "asterisk" (*) or
such forward-looking terminology as "expect," "look," "believe," "anticipate,"
"may," "will," or similar statements or variations of such terms. Such
forward-looking statements involve certain risks and uncertainties. These
include, but are not limited to, the direction of interest rates, continued
levels of loan quality and origination volume, continued relationships with
major customers including sources for loans, expectations of mergers and
acquisitions, as well as the effects of economic conditions and legal and
regulatory barriers and structure. Actual results may differ materially from
such forward-looking statements. Valley assumes no obligation for updating any
such forward-looking statement at any time.
Recent Developments
On January 19, 2001 Valley completed its merger with Merchants New York
Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York
headquartered in Manhattan. Under the terms of the merger agreement, each
outstanding share of Merchants common stock was exchanged for 0.7634 shares of
Valley common stock. As a result, a total of approximately 14 million shares of
Valley common stock were exchanged. This merger added seven branches in
Manhattan. The transaction was accounted for utilizing the pooling-of-interests
method of accounting. In accordance with generally accepted accounting
principles, the consolidated financial statements of Valley, included herein,
have not been restated to include Merchants. See Part II, Item 8, "Financial
Statements and Supplementary Data-- Note 2 of the Notes to Consolidated
Financial Statements," which provides proforma data summarizing the combined
financial data of Valley and Merchants as if the merger had been consummated on
December 31, 1999 for Statement of Financial Condition purposes and January 1,
1998 for Income Statement purposes.
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc.
("Hallmark"), a Fairfield, NJ-based investment management firm with $195 million
of assets under management. Hallmark's purchase was a stock merger with
subsequent earn out payments. Hallmark's operations are continuing as a
wholly-owned subsidiary at VNB. The transaction was accounted for as a purchase
and resulted in goodwill of approximately $1.2 million which is being amortized
over a 10 year period.
During August 2000, Valley entered into a contract to sell its ShopRite
credit card portfolio to American Express. The transaction closed and was
recorded during the first quarter of 2001, with a balance of approximately $65.4
million of credit card receivables sold. This transaction will reduce both
credit card fee income and related credit card expense during 2001.*
For many years, Valley National Bank has maintained an automobile loan
program with a major insurance company. While the loans generated by this
program have been important to Valley, recent changes in market conditions for
automobile lending have reduced the volume and profitability of the program
relative to other loans and investments available to the bank. As a result of
the expansion of the insurance company's banking activities, Valley expects to
phase out the origination of loans under this program during 2001*. All loans
originated by Valley during the program will remain under the bank's ownership,
and Valley expects the portfolio to amortize in its normal course.* As of
December 31, 2000, this portfolio represents 9.7 percent of Valley's interest
earning assets and the amount of the portfolio had decreased by 12.3 percent
during the last twelve-month period. The gross yield of the portfolio for the
year 2000 was 8.20 percent, prior to payments to the insurance company, loan
losses and all costs associated with originating and maintaining the portfolio.
Management anticipates that the phasing out of this program should not have a
material adverse effect on future net income and, in fact, may have a positive
effect.*
11
Earnings Summary
Net income was $106.8 million, or $1.75 per diluted share, in 2000 compared
with $106.3 million, or $1.65 per diluted share, in 1999. Return on average
assets for 2000 was 1.72 percent compared with 1.75 percent in 1999, while the
return on average equity rose to 20.28 percent in 2000 compared with 18.35
percent in 1999. Net income for 2000 was negatively impacted as a result of
increased interest rates, which contributed to higher funding costs and narrower
margins. In addition, a stock repurchase plan throughout the fourth quarter of
1999 and much of 2000 utilized approximately $90.5 million of cash to acquire
Valley common stock. Net interest income and net income would have been higher
if these funds were invested in interest earning assets.
Net Interest Income
Net interest income continues to be the largest source of Valley's
operating income. Net interest income on a tax equivalent basis remained
basically unchanged at $262.4 million for 2000 compared with $262.8 million for
1999. Although net interest income remained relatively unchanged, higher average
balances of total interest earning assets, primarily loans, combined with higher
average interest rates for these interest earning assets were recorded during
2000. For 2000 total interest bearing liabilities increased as well as the
interest rates associated with these liabilities compared to 1999. Net interest
income was also negatively impacted by the increase in the average balance and
the rate associated with short-term borrowings and long-term debt and the use of
funds for the repurchase of the Valley common stock. The net interest margin
decreased to 4.38 percent for 2000 compared with 4.53 percent for 1999. While
loans have been growing, competition for loans has caused rates on new loans and
total interest earning assets to increase at a slower pace than rates on
interest bearing liabilities.
Average interest earning assets increased $188.2 million or 3.2 percent in
2000 over the 1999 amount. This was mainly the result of the increase in average
balance of loans of $299.1 million or 7.0 percent offset by the decrease in
average balance of taxable investments of $76.2 million or 6.0 percent. Included
in taxable investments is Valley's portfolio of trust preferred securities of
$249.0 million, at December 31, 2000. Valley purchased these securities in the
latter part of the fourth quarter of 1998 through early second quarter of 1999
as part of a leverage strategy to increase interest earning assets and net
interest income. These securities were funded by borrowings from the Federal
Home Loan Bank ("FHLB") which are included in long-term debt.
Average interest bearing liabilities for 2000 increased $180.2 million or
4.0 percent from 1999. Average demand deposits increased by $59.9 million or 6.7
percent over 1999 balances. Average savings deposits decreased $53.6 million or
2.6 percent and average time deposits remained relatively unchanged from 1999.
Average short-term borrowings increased $50.8 million or 73.3 percent over 1999
balances. Average long-term debt, which includes primarily FHLB advances,
increased $195.4 million, or 50.4 percent. The increase in long-term debt can be
attributed to the leverage strategy discussed above.
Average interest rates, in all categories of interest earning assets,
increased during 2000 compared to 1999. The average interest rate for loans
increased 21 basis points to 8.15 percent. Average interest rates on total
interest earning assets increased 32 basis points to 7.77 percent. Average
interest rates also increased on total interest bearing liabilities by 56 basis
points to 4.28 percent from 3.72 percent. Average interest rates on deposits
increased by 49 basis points to 3.99 percent. The decline in the net interest
margin from 4.53 percent in 1999 to 4.38 percent in 2000 resulted from a slight
decline in net interest income in relationship to the growth in average interest
earning assets.
12
The following table reflects the components of net interest income for each
of the three years ended December 31, 2000, 1999 and 1998.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2000 1999 1998
--------------------------------- --------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- --------- ----- ----------- -------- ---- --------- -------- --------
(IN THOUSANDS)
ASSETS
Interest earning assets
Loans(1)(2) .............. $4,579,554 $373,168 8.15% $4,280,426 $339,882 7.94% $4,009,604 $331,219 8.26%
Taxable investments(3) ... 1,194,560 77,729 6.51 1,270,737 76,784 6.04 1,073,794 65,376 6.09
Tax-exempt
investments(1)(3) ...... 158,372 10,964 6.92 166,963 11,330 6.79 182,686 12,731 6.97
Federal funds sold and
other short-term
investments ............ 52,550 3,303 6.29 78,661 3,949 5.02 128,329 6,935 5.40
Total interest earning --------- -------- ---- --------- -------- ---- --------- -------- ----
assets ................. 5,985,036 $465,164 7.77 5,796,787 $431,945 7.45 5,394,413 $416,261 7.72
-------- ---- -------- ---- -------- ----
Allowance for
loan losses ............ (55,792) (55,154) (53,909)
Cash and due from
banks .................. 144,400 152,770 143,489
Other assets ............. 175,721 172,123 169,446
Unrealized (loss) gain
on securities available
for sale ............... (25,421) (6,886) 7,789
---------- ---------- ----------
Total assets ............. $6,223,944 $6,059,640 $5,661,228
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities
Savings deposits .......... $1,972,760 $ 47,950 2.43% $2,026,367 $ 41,358 2.04% $1,985,675 $ 46,833 2.36%
Time deposits ............. 2,058,035 112,955 5.49 2,070,416 102,154 4.93 2,050,383 109,228 5.33
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest
bearing deposits ........ 4,030,795 160,905 3.99 4,096,783 143,512 3.50 4,036,058 156,061 3.87
Short-term borrowings ..... 120,128 6,427 5.35 69,317 2,968 4.28 58,831 2,791 4.74
Long-term debt ............ 582,980 35,424 6.08 387,571 22,697 5.86 142,087 8,806 6.20
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest bearing
liabilities ............. 4,733,903 202,756 4.28 4,553,671 169,177 3.72 4,236,976 167,658 3.96
-------- ---- -------- ---- -------- ----
Demand deposits ........... 956,854 896,911 828,555
Other liabilities ......... 6,691 29,588 36,080
Shareholders' equity ...... 526,496 579,470 559,617
---------- ---------- ----------
Total liabilities and
shareholders' equity .... $6,223,944 $6,059,640 $5,661,228
========== ========== ==========
Net interest income
(tax equivalent basis) .. 262,408 262,768 248,603
Tax equivalent
adjustment .............. (4,311) (4,410) (4,968)
-------- -------- --------
Net interest income ....... $258,097 $258,358 $243,635
======== ======== ========
Net interest rate
differential ............ 3.49% 3.73% 3.76%
---- ---- ----
Net interest margin(4) .... 4.38% 4.53% 4.61%
==== ==== ====
- ------------
(1) Interest income is presented on a tax equivalent basis using a 35 percent
tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is based
on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of earning
assets.
13
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
2000 COMPARED TO 1999 1999 COMPARED TO 1998
INCREASE(DECREASE)(2) INCREASE(DECREASE)(2)
------------------------------------- --------------------------------------
INTEREST VOLUME RATE INTEREST VOLUME RATE
-------- -------- -------- --------- ------- ---------
(IN THOUSANDS)
Interest income:
Loans (1) ......................... $33,286 $24,205 $ 9,081 $ 8,663 $21,821 $(13,158)
Taxable investments ............... 945 (4,758) 5,703 11,408 11,904 (496)
Tax-exempt investments(1) ......... (366) (591) 225 (1,401) (1,074) (327)
Federal funds sold and other
short-term investments .......... (646) (1,499) 853 (2,986) (2,523) (463)
------- ------- ------- ------- ------- --------
33,219 17,357 15,862 15,684 30,128 (14,444)
------- ------- ------- ------- ------- --------
Interest expense:
Savings deposits .................. 6,592 (1,120) 7,712 (5,475) 943 (6,418)
Time deposits ..................... 10,801 (614) 11,415 (7,074) 1,058 (8,132)
Short-term borrowings ............. 3,459 2,581 878 177 466 (289)
Long-term debt .................... 12,727 11,844 883 13,891 14,402 (511)
------- ------- ------- ------- ------- --------
33,579 12,691 20,888 1,519 16,869 (15,350)
------- ------- ------- ------- ------- --------
Net interest income
(tax equivalent basis) ............ $ (360) $ 4,666 $(5,026) $14,165 $13,259 $ 906
======= ======= ======= ======= ======= ========
- -------------
(1) Interest income is adjusted to a tax equivalent basis using a 35 percent
tax rate.
(2) Variances resulting from a combination of changes in volume and rates are
allocated to the categories in proportion to the absolute dollar amounts of
the change in each category.
14
Non-Interest Income
The following table prese-nts the components of non-interest income for the
years ended December 31, 2000, 1999 and 1998.
NON-INTEREST INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- ------- -------
(IN THOUSANDS)
Trust and investment services ..................... $ 3,563 $ 2,414 $ 1,813
Service charges on deposit accounts ............... 16,486 14,468 14,019
Gains on securities transactions, net ............. 355 2,532 1,419
Fees from loan servicing .......................... 10,902 8,387 7,382
Credit card fee income ............................ 8,403 8,655 10,153
Gains on sales of loans, net ...................... 2,227 2,491 4,863
Other ............................................. 8,947 8,305 5,725
------- ------- -------
Total non-interest income ..................... $50,883 $47,252 $45,374
======= ======= =======
Non-interest income continues to represent a considerable source of income
for Valley. Excluding gainson securities transactions, total non-interest income
amounted to $50.5 million for 2000 compared with $44.7 million for 1999.
Trust and investment services includes income from trust operations,
brokerage commissions, and asset management fees.
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc.
("Hallmark"), a Fairfield, NJ-based investment management firm with $195 million
of assets under management. Hallmark's purchase was a stock acquisition with
subsequent earn out payments. Hallmark's operations are continuing as a
wholly-owned subsidiary of VNB. The transaction was accounted for as a purchase
and resulted in goodwill of approximately $1.2 million. Hallmark contributed
additional fee income to the operations of Valley of $717 thousand in 2000 which
is included in trust and investment services.
On July 30, 1999, VNB acquired New Century Asset Management, Inc. ("New
Century"), a NJ-based money manager with approximately $120 million of assets
under management. At closing, Valley paid an initial consideration of $640
thousand. The balance due will be paid on an earn-out basis over a five-year
period, based upon a pre-determined formula. New Century is continuing its
operation as a wholly owned subsidiary of VNB. The transaction was accounted for
as a purchase and resulted in goodwill of $1.3 million. New Century contributed
additional fee income to the operations of Valley of $881 thousand in 2000 and
$326 thousand in 1999 which is included in trust and investment services.
Service charges on deposit accounts increased $2.0 million or 13.9 percent
from $14.5 million for the year ended December 31, 1999 to $16.5 million in
2000. A majority of this increase is due to the implementation of new service
fees and increased emphasis placed on collection efforts.
Included in fees from loan servicing are fees for servicing residential
mortgage loans and SBA loans. Fees from loan servicing increased by 30.0 percent
from $8.4 million for 1999 to $10.9 million for 2000 due to an increase in the
size of the servicing portfolio. The increase in the servicing portfolio was due
to the acquisition of servicing of several residential mortgage portfolios at
the end of 1999 with an unpaid principal balance of approximately $668.2
million, the origination of new loans by VNB and their subsequent sale with
servicing retained, offset by principal paydowns and prepayments. The aggregate
principal balances of mortgage loans serviced by VNB Mortgage Services, Inc.,
("MSI") for others approximated $2.5 billion, $2.2 billion and $1.6 billion at
December 31, 2000, 1999 and 1998, respectively.
Included in credit card fee income is fee income from both the co-branded
Shop-Rite credit card portfolio and Valley's own credit card portfolio. During
August 2000, Valley entered into a contract to sell its co-branded Shop-Rite
credit card portfolio to American Express. The transaction closed and was
recorded during the first quarter of 2001. This transaction is expected to
reduce both credit card fee income and related credit card expense during 2001.*
15
Gains on the sales of loans were $2.2 million in 2000 compared to $2.5
million in 1999. Gains are recorded primarily from the sale of SBA loans into
the secondary market. The decrease of $264 thousand resulted from a decline in
the volume of SBA loans being sold by Valley into the secondary market during
2000.
Other non-interest income increased $642 thousand to $8.9 million in 2000
as compared to 1999. This increase is primarily attributed to an increase of
commission revenues from the sale of title insurance policies from a title
insurance business acquired by VNB in the second quarter of 1999. VNB received
approval and a license from the New Jersey Department of Banking and Insurance
to sell title insurance through a separate subsidiary, known as Wayne Title,
Inc. The increase is also attributed to the gain recorded on the sale of a
building owned by Valley.
Non-Interest Expense
The following table presents the components of non-interest expense for the
years ended December 31, 2000, 1999 and 1998.
NON-INTEREST EXPENSE
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Salary expense .................................... $ 62,847 $ 58,339 $ 56,717
Employee benefit expense .......................... 13,774 13,645 13,143
FDIC insurance premiums ........................... 1,037 1,239 1,301
Net occupancy expense ............................. 12,651 11,943 13,740
Furniture and equipment expense ................... 9,289 8,370 9,037
Credit card expense ............................... 5,032 5,070 9,066
Amortization of intangible assets ................. 7,611 5,255 5,666
Advertising ....................................... 4,529 5,178 4,677
Merger-related charges ............................ -- 3,005 4,539
Other ............................................. 24,243 25,902 26,827
-------- -------- --------
Total non-interest expense .................... $141,013 $137,946 $144,713
======== ======== ========
Non-interest expense totaled $141.0 million for 2000, an increase of $6.1
million or 4.5 percent from the 1999 level, excluding merger-related charges.
The largest components of non-interest expense are salaries and employee benefit
expense which totaled $76.6 million in 2000 compared to $72.0 million in 1999.
At December 31, 2000, full-time equivalent staff was 1,858 compared to 1,863 at
the end of 1999. The acquisition of three companies, increases in sales-related
incentives, and a tight labor market resulted in a higher salary expense in 2000
over 1999.
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 year ended December
31, 2000 was 45.2 percent, one of the lowest in the industry, compared with an
efficiency ratio for 1999 of 43.9 percent. Valley strives to control its
efficiency ratio and expenses as a means of producing increased earnings for its
shareholders.
Both net occupancy expense and furniture and equipment expense increased
during 2000 in comparison to 1999. The increase in these expenses can be
attributed to an overall increase in the cost of operating bank facilities.
Credit card expense includes cardmember rebates, processing expenses and
fraud losses for both the co-branded Shop-Rite credit card portfolio and
Valley's own credit card portfolio. During August 2000, Valley entered into a
contract to sell its ShopRite credit card portfolio to American Express. The
transaction closed and was recorded during the first quarter of 2001. This
transaction is expected to reduce both credit card fee income and related credit
card expense.*
Amortization of intangible assets was $7.6 million in 2000 compared with
$5.3 million in 1999, representing an increase of $2.4 million or 44.8 percent.
The majority of this expense resulted from the amortization of residential
mortgage servicing rights totaling $5.9 million during 2000, compared with $3.6
million for 1999. The increased amortization is mainly the result of portfolio
acquisitions during the latter part of 1999. An impairment analysis is completed
quarterly to determine the adequacy of the mortgage servicing asset valuation
allowance.
16
During 1999, Valley recorded merger-related charges of $3.0 million related
to the acquisition of Ramapo Financial Corporation ("Ramapo"). The major
components of merger-related charges, consisting of real estate dispositions,
professional fees, personnel expenses and other expenses totaling $300 thousand,
$1.1 million, $1.1 million and $500 thousand, respectively. All amounts expensed
as merger-related charges were paid with the exception of contracts which will
be paid over their remaining terms.
The significant components of other non-interest expense include data
processing, professional fees, postage, telephone and stationery expense which
totaled approximately $12.8 million for 2000.
Income Taxes
Income tax expense as a percentage of pre-tax income was 34.0 percent for
the year ended December 31, 2000 compared to 32.9 percent in 1999. The effective
tax rate for 2001 is expected to approximate 34 percent.*
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
to any other financial institution. The accounting for each segment includes
internal accounting policies designed to measure consistent and reasonable
financial reporting. For financial data on the four business segments see Part
II, Item 8, "Financial Statements and Supplementary Data--Note 19 of the Notes
to Consolidated Financial Statements."
The consumer lending segment had a return on average interest-earning
assets before taxes of 2.52 percent for the year ended December 31, 2000
compared to 2.54 percent for the year ended December 31, 1999. Average
interest-earning assets increased $90.2 million, which is attributable to an
increase in home equity and residential mortgage lending. Interest rates on
consumer loans increased by 37 basis points. This increase was mitigated by an
increase in the cost of funds by 47 basis points. Income before income taxes
increased $1.7 million primarily as a result of an increase in average
interest-earning assets. Also contributing to the increase in income before
taxes was a $3.3 million decrease in the provision for loan losses due to a
decrease in net charge-offs and a decline in non-interest expense due to
decreased usage of credit cards.
The return on average interest-earning assets before taxes for the
commercial lending segment decreased 17 basis points to 3.64 percent for the
year ended December 31, 2000. Average interest-earning assets increased $131.5
million as a result of an increased volume of loans. Interest rates on
commercial loans increased by 30 basis points, offset by an increase in cost of
funds by 47 basis points. Interest funding costs during most of 2000 rose faster
than rates earned. Income before income taxes increased $1.9 million primarily
as a result of an increase in average interest-earning assets, offset by a
decline in fee income during the period.
The investment management segment had a return on average interest-earning
assets, before taxes, of 2.03 percent for the year ended December 31, 2000, 4
basis points less than the year ended December 31, 1999. Average
interest-earning assets decreased by $33.4 million. The yield on interest
earning assets increased by 15 basis points to 6.4 percent, and was offset by an
increase of 47 basis points in the cost of funds. Income before income taxes
decreased 4.4 percent to $27.8 million, principally reflecting higher interest
funding costs.
The corporate segment represents income and expense items not directly
attributable to a specific segment including merger-related charges, gains on
sales of securities, service charges on deposit accounts, and certain revenues
and expenses recorded by acquired banks that could not be allocated to a line of
business. The loss before taxes decreased to $2.8 million for the year ended
December 31, 2000.
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
17
derivatives to manage market and interest rate risks. Valley's interest rate
risk management is the responsibility of the Asset/Liability Management
Committee ("ALCO"), which reports to the Board of Directors. ALCO establishes
policies that monitor and coordinate Valley's sources, uses and pricing of
funds.
Valley uses a simulation model to analyze net interest income sensitivity
to movements in interest rates. The simulation model projects net interest
income based on various interest rate scenarios over a twelve and twenty-four
month period. The model is based on the actual maturity and repricing
characteristics of rate sensitive assets and liabilities. The model incorporates
assumptions regarding the impact of changing interest rates on the prepayment
rates of certain assets and liabilities. According to the model, over a twelve
month period, an interest rate increase of 100 basis points resulted in a
decrease in net interest income of approximately $9.4 million while an interest
rate decrease of 100 basis points resulted in an increase in net interest income
of approximately $7.7 million. Management cannot provide any assurance about the
actual effect of changes in interest rates on Valley's net interest income.
Assuming a declining interest rate environment, the net interest margin and net
interest income are expected to increase, and conversely, in a rising interest
rate environment, the net interest margin and net interest income are expected
to decline.*
18
The following table shows the financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments' fair value at December 31, 2000. Market risk sensitive instruments
are generally defined as on-and-off balance sheet financial instruments.
INTEREST RATE SENSITIVITY ANALYSIS
TOTAL FAIR
RATE 2001 2002 2003 2004 2005 THEREAFTER BALANCE VALUE
---- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
(IN THOUSANDS)
INTEREST SENSITIVE ASSETS:
Federal funds sold ............ 5.06% $ 50,000 $ -- $ -- $ -- $ -- $ -- $ 50,000 $ 50,000
Investment securities
held to maturity ............ 8.05 28,191 6,236 5,229 4,408 3,770 285,590 333,424 294,801
Investment securities
available for sale .......... 6.63 534,302 87,962 81,582 71,015 81,262 179,646 1,035,769 1,035,769
Loans:
Commercial .................. 9.43 440,666 27,471 20,616 19,374 11,450 10,774 530,351 531,885
Mortgage .................... 7.84 680,453 357,724 394,059 457,723 253,372 548,711 2,692,042 2,663,916
Consumer .................... 8.35 717,831 300,437 204,421 110,721 42,830 62,781 1,439,021 1,451,322
---- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total interest sensitive
assets ...................... 7.88% $2,451,443 $ 779,830 $705,907 $663,241 $392,684 $1,087,502 $6,080,607 $6,027,693
---- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
INTEREST SENSITIVE LIABILITIES:
Deposits:
Savings ..................... 2.34% $ 396,496 $ 792,993 $485,708 $104,080 $104,080 $99,125 $1,982,482 $1,982,482
Time ........................ 5.67 1,844,457 151,844 64,186 8,174 46,836 7,259 2,122,756 2,125,144
Short-term borrowings ......... 3.50 108,022 -- -- -- -- -- 108,022 108,022
Long-term debt ................ 6.13 127,079 117,086 82,060 102,016 53,018 110,549 591,808 593,939
---- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total interest sensitive
liabilities ................. 4.30% $2,476,054 $1,061,923 $631,954 $214,270 $203,934 $ 216,933 $4,805,068 $4,809,587
---- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Interest sensitivity gap ...... $ (24,611) $ (282,093) $ 73,953 $448,471 $188,750 $ 870,569 $1,275,539 $1,218,106
---------- ---------- -------- -------- -------- ---------- ---------- ----------
Ratio of interest sensitive
assets to interest
sensitive liabilities ....... (0.99:1) (0.74:1) 1.12:1 3.10:1 1.93:1 5.02:1 1.27:1 1.25:1
---------- ---------- -------- -------- -------- ---------- ---------- ----------
Expected maturities are contractual maturities adjusted for all payments of
principal. Valley uses certain assumptions to estimate fair values and expected
maturities. For investment securities and loans, expected maturities are based
upon contractual maturity, projected repayments and prepayments of principal.
The prepayment experience reflected herein is based on historical experience.
The actual maturities of these instruments could vary substantially if future
prepayments differ from historical experience. For deposit liabilities, in
accordance with standard industry practice and Valley's own historical
experience, "decay factors" were used to estimate deposit runoff for savings.
Off-balance sheet items are not considered material.
The total negative gap repricing within 1 year as of December 31, 2000 was
$24.6 million, representing a ratio of interest sensitive assets to interest
sensitive liabilities of (0.99:1). Management does not view this amount as
presenting an unusually high risk potential, although no assurances can be given
that Valley is not at risk from interest rate increases or decreases.*
19
Liquidity
Liquidity measures the ability to satisfy current and future cash flow
needs as they become due. Maintaining a level of liquid funds through
asset/liability management seeks to ensure that these needs are met at a
reasonable cost. On the asset side, liquid funds are maintained in the form of
cash and due from banks, federal funds sold, investments securities held to
maturity maturing within one year, securities available for sale and loans held
for sale. Liquid assets amounted to $1.3 billion at both December 31, 2000 and
1999. This represents 21.6 percent and 22.0 percent of earning assets, and 20.4
percent and 20.9 percent of total assets at December 31, 2000 and 1999,
respectively.
On the liability side, the primary source of funds available to meet
liquidity needs is Valley's core deposit base, which generally excludes
certificates of deposit over $100 thousand. Core deposits averaged approximately
$4.3 billion for the year ended December 31, 2000 and $4.4 billion for the year
ended December 31, 1999, representing 72.5 percent and 73.3 percent of average
earning assets. Demand deposits have continued to increase, while both savings
deposits and time deposits have been relatively unchanged during the last three
years. The level of time deposits is affected by interest rates offered, which
is often influenced by Valley's need for funds. Short-term and long-term
borrowings through Federal funds lines, repurchase agreements, Federal Home Loan
Bank ("FHLB") advances and large dollar certificates of deposit, generally those
over $100 thousand, are used as supplemental funding sources. Valley previously
borrowed from the FHLB as part of a leverage strategy to increase earning assets
and net interest income. As of December 31, 2000, Valley had outstanding
advances of $461.5 million with the FHLB. In the future Valley may, as part of
its operations, purchase earning assets and utilize borrowings to increase net
interest income and net income. Additional liquidity is derived from scheduled
loan and investment payments of principal and interest, as well as prepayments
received. In 2000 proceeds from the sales of investment securities available for
sale were $10.8 million, and proceeds of $220.3 million were generated from
investment maturities. Purchases of investment securities in 2000 were $224.9
million. Short-term borrowings and certificates of deposit over $100 thousand
amounted to $768.9 million and $637.1 million, on average, for the years ended
December 31, 2000 and 1999, respectively.
During 2000 a substantial amount of loan growth was funded from a
combination of deposit growth, maturities and normal payments of the investment
portfolio, normal loan payments and prepayments, and borrowings. Valley
anticipates using funds from all of the above sources to fund loan growth during
2001.*
The following table lists, by maturity, all certificates of deposit of $100
thousand and over at December 31, 2000. These certificates of deposit are
generated primarily from core deposit customers and are not brokered funds.
(IN THOUSANDS)
Less than three months ............... $549,063
Three to six months .................. 67,768
Six to twelve months ................. 49,073
More than twelve months .............. 67,370
--------
$733,274
========
Valley's cash requirements consist primarily of dividends to shareholders.
This cash need is routinely satisfied by dividends collected from its subsidiary
bank along with cash and investments owned. Projected cash flows from this
source are expected to be adequate to pay dividends, given the current capital
levels and current profitable operations of its subsidiary.* In addition, Valley
has, as approved by the Board of Directors, repurchased 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. At December 31, 2000 Valley maintained a floating rate
line of credit in the amount of $35.0 million, of which $10.0 million was
outstanding. This line is available for general corporate purposes and expires
June 15, 2001. Borrowings under this facility are collateralized by
mortgage-backed and equity securities of no less than 120 percent of the loan
balance.
20
Investment Securities
The amortized cost of securities held to maturity at December 31, 2000,
1999 and 1998 were as follows:
INVESTMENT SECURITIES HELD TO MATURITY
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury securities and other government agencies
and corporations ............................................. $ -- $ -- $ 34,451
Obligations of states and
political subdivisions ....................................... 20,306 28,729 45,550
Mortgage-backed securities ..................................... 35,422 46,599 67,561
Other debt securities .......................................... 249,064 249,936 115,148
---------- ---------- ----------
Total debt securities .................................... 304,792 325,264 262,710
FRB & FHLB stock ............................................... 28,632 26,237 24,180
---------- ---------- ----------
Total investment securities held to maturity ............. $ 333,424 $ 351,501 $ 286,890
========== ========== ==========
The fair value of securities available for sale at December 31, 2000, 1999
and 1998 were as follows:
INVESTMENT SECURITIES AVAILABLE FOR SALE
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury securities and other government agencies
and corporations ............................................. $ 145,689 $ 112,650 $ 154,025
Obligations of states and
political subdivisions ....................................... 118,190 133,564 118,295
Mortgage-backed securities ..................................... 742,815 730,131 719,790
---------- ---------- ----------
Total debt securities .................................... 1,006,694 976,345 992,110
Equity securities .............................................. 29,075 29,074 31,078
---------- ---------- ----------
Total investment securities available for sale ........... $1,035,769 $1,005,419 $1,023,188
========== ========== ==========
21
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
HELD TO MATURITY AT DECEMBER 31, 2000
OBLIGATIONS OF MORTGAGE-
STATES AND POLITICAL BACKED OTHER DEBT
SUBDIVISIONS SECURITIES (5) SECURITIES TOTAL (4)
-------------------- ----------------- ----------------- -----------------
AMORTIZED YIELD AMORTIZED YIELD AMORTIZED YIELD AMORTIZED YIELD
COST (1) (2)(3) COST (1) (2) COST (1) (2) COST (1) (2)
--------- ------ --------- ----- --------- ----- -------- -----
(IN THOUSANDS)
0-1 years .................... $20,306 7.26% $ 463 5.35% $ 35 8.46% $ 20,804 7.22%
1-5 years .................... -- -- 34,533 7.51 75 6.70 34,608 7.51
5-10 years ................... -- -- 426 7.46 -- -- 426 7.46
Over 10 years ................ -- -- -- -- 248,954 7.49 248,954 7.49
------- ---- ------- ---- -------- ---- -------- ----
Total securities .......... $20,306 7.26% $35,422 7.49% $249,064 7.49% $304,792 7.47%
======= ==== ======= ==== ======== ==== ======== ====
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
AVAILABLE FOR SALE AT DECEMBER 31, 2000
US TREASURY
SECURITIES AND
OTHER GOVERNMENT OBLIGATIONS OF MORTGAGE-
AGENCIES STATES AND POLITICAL BACKED
AND CORPORATIONS SUBDIVISIONS SECURITIES (5) TOTAL (4)
----------------- -------------------- ----------------- -----------------
AMORTIZED YIELD AMORTIZED YIELD AMORTIZED YIELD AMORTIZED YIELD
COST (1) (2) COST (1) (2)(3) COST (1) (2) COST (1) (2)
------- ----- --------- ------ --------- ----- -------- -----
(IN THOUSANDS)
0-1 years .................... $ 27,499 5.25% $ 25,790 6.81% $ 6,595 5.41% $ 59,884 5.94%
1-5 years .................... 113,940 6.18 35,947 6.28 383,471 6.09 533,358 6.12
5-10 years ................... 4,988 7.12 52,494 7.26 255,802 6.53 313,284 6.66
Over 10 years ................ -- -- 3,747 9.50 102,130 7.33 105,877 7.33
-------- ---- -------- ---- -------- ---- ---------- ----
Total securities ......... $146,427 6.03% $117,978 6.93% $747,998 6.39% $1,012,403 6.40%
======== ==== ======== ==== ======== ==== ========== ====
- ------------
(1) Amortized costs are stated at cost less principal reductions, if any, and
adjusted for accretion of discounts and amortizationof premiums.
(2) Average yields are calculated on a yield-to-maturity basis.
(3) Average yields on obligations of states and political subdivisions are
generally tax-exempt and calculated on a tax-equivalent basis using a
statutory federal income tax rate of 35 percent.
(4) Excludes equity securities which have indefinite maturities.
(5) Mortgage-backed securities are shown using an estimated average remaining
life.
22
Valley's investment portfolio is comprised of U.S. government and federal
agency securities, tax-exempt issues of states and political subdivisions,
mortgage-backed securities, equity and other securities. There were no
securities in the name of any one issuer exceeding 10 percent of shareholders'
equity, except for securities issued by the United States and its political
subdivisions and agencies. The portfolio generates substantial cash flow. The
decision to purchase or sell securities is based upon the current assessment of
long and short term economic and financial conditions, including the interest
rate environment and other statement of financial condition components.
At December 31, 2000, Valley had $35.4 million of mortgaged-backed
securities classified as held to maturity and $742.8 million of mortgage-backed
securities classified as available for sale. Substantially all the
mortgage-backed securities held by Valley are issued or backed by federal
agencies. The mortgage-backed securities portfolio is a source of significant
liquidity to Valley through the monthly cash flow of principal and interest.
Mortgage-backed securities, like all securities, are sensitive to changes in the
interest rate environment, increasing and decreasing in value as interest rates
fall and rise. As interest rates fall, the increase in prepayments can reduce
the yield on the mortgage-backed securities portfolio, and reinvestment of the
proceeds will be at lower interest rates.
Included in the mortgage-backed securities portfolio at December 31, 2000
were $199.8 million of collateralized mortgage obligations ("CMO's") of which
$28.2 million were privately issued. CMO's had a yield of 6.65 percent and an
unrealized loss of $4.7 million at December 31, 2000. Substantially all of the
CMO portfolio was classified as available for sale.
As of December 31, 2000, Valley had $1.0 billion of securities available
for sale, unchanged from December 31, 1999. Those securities are recorded at
their fair value. As of December 31, 2000, the investment securities available
for sale had an unrealized loss of $4.2 million, net of deferred taxes, compared
to an unrealized loss of $16.3 million, net of deferred taxes, at December 31,
1999. This change was primarily due to an increase in prices resulting from a
decreasing interest rate environment for these investments. 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. In 1999, in connection with the Ramapo
acquisition, Valley reassessed the classification of securities held in the
Ramapo portfolio and transferred $42.4 million of securities held to maturity to
securities available for sale to conform with Valley's investment objectives. In
1998, in connection with the Wayne acquisition, Valley reassessed the
classification of securities held in the Wayne portfolio and transferred $1.6
million of securities held to maturity to securities available for sale to
conform with Valley's investment objectives.
23
Loan Portfolio
As of December 31, 2000, total loans were $4.7 billion, compared to $4.6
billion at December 31, 1999, an increase of 2.3 percent. The following table
reflects the composition of the loan portfolio for the five years ended December
31, 2000.
LOAN PORTFOLIO
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial ........................ $ 530,351 $ 512,164 $ 477,231 $ 468,947 $ 480,240
---------- ---------- ---------- ---------- ----------
Total commercial loans .......... 530,351 512,164 477,231 468,947 480,240
---------- ---------- ---------- ---------- ----------
Construction ...................... 160,932 123,531 112,819 94,162 98,435
Residential mortgage .............. 1,298,948 1,247,721 1,055,278 1,056,436 1,060,526
Commercial mortgage ............... 1,232,162 1,164,065 1,050,420 955,052 877,617
---------- ---------- ---------- ---------- ----------
Total mortgage loans .......... 2,692,042 2,535,317 2,218,517 2,105,650 2,036,578
---------- ---------- ---------- ---------- ----------
Home equity ....................... 306,038 276,261 226,231 225,899 230,265
Credit card ....................... 94,293 92,097 108,180 146,151 150,233
Automobile ........................ 975,258 1,053,457 1,033,938 931,579 813,058
Other consumer .................... 63,432 85,456 83,552 94,370 73,714
---------- ---------- ---------- ---------- ----------
Total consumer loans .......... 1,439,021 1,507,271 1,451,901 1,397,999 1,267,270
---------- ---------- ---------- ---------- ----------
Less: unearned income ............. -- -- -- (56) (556)
---------- ---------- ---------- ---------- ----------
Total loans ................... $4,661,414 $4,554,752 $4,147,649 $3,972,540 $3,783,532
========== ========== ========== ========== ==========
As a percent of total loans:
Commercial loans ................ 11.4% 11.2% 11.5% 11.8% 12.7%
Mortgage loans .................. 57.7 55.7 53.5 53.0 53.8
Consumer loans .................. 30.9 33.1 35.0 35.2 33.5
----- ----- ----- ----- -----
Total ......................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The majority of the increase in loans for 2000 was divided among
construction, residential and commercial mortgage loans. It is not known if the
trend of increased lending in these loan types will continue.*
The commercial mortgage loan portfolio has continued its steady increase.
Valley targets small-to-medium size businesses within the market area of the
bank for this type of lending.
During 1996, Valley issued a co-branded credit card. Of the $94.3 million
of credit card loans outstanding at December 31, 2000, approximately $70.1
million were the result of this co-branded credit card program. The decrease in
the credit card portfolio is primarily attributable to a decrease in card usage.
During August 2000, Valley entered into a contract to sell its co-branded credit
card loans to American Express. The transaction closed and was recorded during
the first quarter of 2001. This transaction will substantially reduce the total
credit card portfolio.*
For many years, Valley National Bank has maintained an automobile loan
program with a major insurance company. While the loans generated by this
program have been important to Valley, recent changes in market conditions for
automobile lending have reduced the volume and profitablility of the program
relative to other loans and investments available to the bank. As a result of
the expansion of the insurance company's banking activities, Valley expects to
phase out the origination of loans under this program during 2001.*
24
All loans originated by Valley during the program will remain under the
bank's ownership, and Valley expects the portfolio to amortize in its normal
course.* As of December 31, 2000, this portfolio represents 9.7 percent of
Valley's earning assets and the amount of the portfolio had decreased by 12.3
percent during the last twelve-month period. The gross yield of the portfolio
for the year 2000 was 8.20 percent, prior to payments to the insurance company,
loan losses and all costs associated with originating and maintaining the
portfolio. Management anticipates that the phasing out of this program should
not have a material adverse effect on future net income and, in fact, may have a
positive effect.*
These automobile loans are subject to Valley's normal underwriting
criteria. This program was expanded during Valley's over 40 year relationship
with the company to 12 states from Maine to Florida, as well as Canada.
In 1996 VNB established a finance company in Toronto, Canada to make auto
loans. This Canadian subsidiary had interest income of approximately $2.7
million for the year ended December 31, 2000, and auto loans of $30.8 million at
December 31, 2000. These loans are partially funded by a capital investment by
VNB of $7.4 million, with additional funding requirements satisfied by lines of
credit in Canadian funds. Any foreign exchange risk is limited to the capital
investment by VNB.
Much of Valley's lending is in northern New Jersey, with the exception of
the out-of-state auto lending program. However, efforts are made to maintain a
diversified portfolio as to type of borrower and loan to guard against a
downward turn in any one economic sector.*
The following table reflects the contractual maturity distribution of the
commercial and construction loan portfolios as of December 31, 2000:
1 YR. OR LESS OVER 1 TO 5 YRS. OVER 5 YRS. TOTAL
------------- ---------------- ----------- ---------
(IN THOUSANDS)
Commercial--fixed rate .................. $ 12,291 $ 91,339 $ 21,837 $125,467
Commercial--adjustable rate ............. 353,193 35,629 16,062 404,884
Construction--fixed rate ................ 19,378 7,867 -- 27,245
Construction--adjustable rate ........... 64,320 69,367 -- 133,687
-------- -------- -------- --------
$449,182 $204,202 $ 37,899 $691,283
======== ======== ======== ========
Prior to maturity of each loan with a balloon payment and if the borrower
requests an extension, Valley generally conducts a review which normally
includes an analysis of the borrower's financial condition and, if applicable, a
review of the adequacy of collateral. A rollover of the loan at maturity may
require a principal paydown.
VNB is a preferred U. S. Small Business Administration ("SBA") lender with
authority to make loans without the prior approval of the SBA. VNB currently has
approval to make SBA loans in New Jersey, Pennsylvania, New York, Delaware,
Maryland, North and South Carolina, Virginia, Connecticut and the District of
Columbia. Between 75 percent and 80 percent of each loan is guaranteed by the
SBA and may be sold into the secondary market, with the balance retained in
VNB's portfolio. VNB intends to continue expanding this area of lending because
it provides a good source of fee income and loans with floating interest rates
tied to the prime lending rate.*
During 2000 and 1999, VNB originated approximately $29.4 million and $34.8
million of SBA loans, respectively and sold $21.9 million and $24.8 million,
respectively. At December 31, 2000 and 1999, $39.9 million and $37.5 million,
respectively, of SBA loans were held in VNB's portfolio and VNB serviced for
others approximately $92.2 million and $89.0 million, respectively, of SBA
loans.
25
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 land or 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 continued to decrease, and totaled $2.8 million at
December 31, 2000, compared with $5.7 million at December 31, 1999, a decrease
of $2.9 million or 51.4 percent. Non-performing assets at December 31, 2000 and
1999, respectively, amounted to 0.06 percent and 0.13 percent of loans and OREO.
Non-performing assets have declined steadily over the past five years. Valley
cannot predict whether or for how long this trend will continue.* The decrease
in troubled debt restructured loans was the result of one loan which paid off
during the year.
Loans 90 days or more past due and still accruing which were not included
in the non-performing category totaled $13.0 million at December 31, 2000,
compared to $11.7 million at December 31, 1999. These loans are primarily
residential mortgage loans, commercial mortgage loans and commercial loans which
are generally well-secured and in the process of collection. Also included are
matured commercial mortgage loans in the process of being renewed, which totaled
$2.8 million and $1.5 million at December 31, 2000 and 1999, respectively. Loans
90 days or more past due and still accruing have remained at relatively stable
levels during the past two years. It is not known if this trend will continue.*
The allowance for loan losses as a percent of loans has declined since
1996. Valley provides additions to the allowance based upon net charge-offs and
changes in the composition of the loan portfolio.
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
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
Loans past due in excess of
90 days and still accruing ..................... $13,040 $11,698 $ 7,418 $16,463 $10,318
------- ------- ------- ------- -------
Non-accrual loans ................................ $ 2,661 $ 3,482 $ 7,507 $10,380 $16,311
Other real estate owned .......................... 129 2,256 4,261 4,450 6,077
------- ------- ------- ------- -------
Total non-performing assets ...................... $ 2,790 $ 5,738 $11,768 $14,830 $22,388
------- ------- ------- ------- -------
Troubled debt restructured loans ................. $ 949 $ 4,852 $ 6,387 $ 6,723 $ 7,116
------- ------- ------- ------- -------
Non-performing loans as a % of loans ............. 0.06% 0.08% 0.18% 0.26% 0.43%
------- ------- ------- ------- -------
Non-performing assets as a % of
loans plus other real estate owned ............. 0.06% 0.13% 0.28% 0.37% 0.59%
------- ------- ------- ------- -------
Allowance as a % of loans ........................ 1.15% 1.21% 1.32% 1.34% 1.40%
------- ------- ------- ------- -------
During 2000, recovered interest on non-accrual loans amounted to $180
thousand, compared with recovered interest of $720 thousand in 1999.
26
Although substantially all risk elements at December 31, 2000 have been
disclosed in the categories presented above, management believes that for a
variety of reasons, including economic conditions, certain borrowers may be
unable to comply with the contractual repayment terms on certain real estate and
commercial loans. As part of the analysis of the loan portfolio by management,
it has been determined that there are approximately $18.0 million in potential
problem loans at December 31, 2000, which have not been classified as
non-accrual, past due or restructured.* Potential problem loans are defined as
performing loans for which management has serious doubts as to the ability of
such borrowers to comply with the present loan repayment terms and which may
result in a non-performing loan. Of these potential problem loans, only $2.4
million is considered at risk after collateral values and guarantees are taken
into consideration. There can be no assurance that Valley has identified all of
its problem loans. At December 31, 1999, Valley had identified approximately
$7.7 million of potential problem loans which were not classified as
non-accrual, past due or restructured.
Asset Quality and Risk Elements
Lending is one of the most important functions performed by Valley and, by
its very nature, lending is also the most complicated, risky and profitable part
of Valley's business. For commercial loans, construction loans and commercial
mortgage loans, a separate credit department is responsible for risk assessment,
credit file maintenance and periodically evaluating overall creditworthiness of
a borrower. Additionally, efforts are made to limit concentrations of credit so
as to minimize the impact of a downturn in any one economic sector. These loans
are diversified as to type of borrower and loan. However, most of these loans
are in northern New Jersey, presenting a geographical and credit risk if there
was a significant downturn of the economy within the region.
Residential mortgage loans are secured primarily by 1-4 family properties
located mainly within northern New Jersey. Conservative underwriting policies
are adhered to and loan to value ratios are generally less than 80 percent.
Consumer loans are comprised of home equity loans, credit card loans and
automobile loans. Home equity and automobile loans are secured loans and are
made based on an evaluation of the collateral and the borrower's
creditworthiness. The majority of automobile loans have been originated through
a program with a major insurance company, whose customer base generally has a
good credit profile and generally have resulted in delinquencies and charge-offs
equal to that typically experienced from traditional sources. These automobile
loans are from 12 states, and Canada, including New Jersey and generally present
no more risk than those made within New Jersey.* All loans are subject to
Valley's underwriting criteria, therefore, each loan or group of loans presents
a geographical risk and credit risk based upon the economy of the region.
The co-branded credit card portfolio was substantially generated through a
pre-approved mailing during 1996 utilizing automated credit scoring techniques
and additional underwriting standards.
Management realizes that some degree of risk must be expected in the normal
course of lending activities. Allowances are maintained to absorb such loan and
off-balance sheet credit losses inherent in the portfolio. The allowance for
loan losses and related provision are an expression of management's evaluation
of the credit portfolio and economic climate.
27
The following table sets forth the relationship among loans, loans
charged-off and loan recoveries, the provision for loan losses and the allowance
for loan losses for the past five years:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Average loans outstanding ............ $4,579,554 $4,280,426 $4,009,604 $3,817,092 $3,494,950
========== ========== ========== ========== ==========
Beginning balance-
Allowance for loan losses .......... $55,120 $54,641 $53,170 $52,926 $50,433
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Commercial ......................... 1,223 337 216 4,650 493
Construction ....................... -- -- -- -- 110
Mortgage-Commercial ................ 490 983 2,166 1,440 1,214
Mortgage-Residential ............... 249 761 1,274 522 932
Consumer ........................... 8,992 10,050 11,307 8,394 4,110
---------- ---------- ---------- ---------- ----------
10,954 12,131 14,963 15,006 6,859
---------- ---------- ---------- ---------- ----------
Charged-off loans recovered:
Commercial ......................... 483 702 484 562 2,669
Construction ....................... -- 218 222 89 58
Mortgage-Commercial ................ 372 268 1,074 227 1,462
Mortgage-Residential ............... 49 133 329 167 222
Consumer ........................... 2,535 2,169 1,680 1,075 985
---------- ---------- ---------- ---------- ----------
3,439 3,490 3,789 2,120 5,396
---------- ---------- ---------- ---------- ----------
Net charge-offs ...................... 7,515 8,641 11,174 12,886 1,463
Provision charged to operations ...... 6,130 9,120 12,645 13,130 3,956
---------- ---------- ---------- ---------- ----------
Ending balance-Allowance
for loan losses .................... $53,735 $55,120 $54,641 $53,170 $52,926
========== ========== ========== ========== ==========
Ratio of net charge-offs
during the period to
average loans outstanding
during the period .................. 0.16% 0.20% 0.28% 0.34% 0.04%
The allowance for loan losses is maintained at a level estimated to absorb
loan losses of the loan portfolio as well as other credit risk related
charge-offs. 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 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."
VNB's allocated allowance is calculated by applying loss factors to
outstanding loans. The formula is based on the internal risk grade of loans or
pools of loans. Any change in the risk grade of performing and/or non-performing
loans affects the amount of the related allowance. Loss factors are based on
VNB's historical loss experience and may be adjusted for significant
circumstances that, in management's judgment, affect the collectibility of the
portfolio as of the evaluation date.
Management establishes an unallocated portion of the allowance to cover any
losses incurred within a given loan category which have not been otherwise
identified or measured on an individual basis. Such unallocated allowance
includes management's evaluation of local and national economic and business
conditions, portfolio concentrations, information risk, operational risk, credit
quality and delinquency trends. The unallocated portion of the allowance
reflects management's attempt to ensure that the overall allowance reflects a
margin for imprecision and the uncertainty that is inherent in estimates of
expected credit losses.
28
The underwriting, growth and delinquency experience in the credit card
portfolio will substantially influence the level of the allowance needed to
absorb credit losses in the portfolio. Although credit card loans are generally
considered more risky than other types of lending, a higher interest rate is
charged to compensate for this increased risk. VNB continues to monitor the need
for additions to the allowance.
During 2000, continued emphasis was placed on the current economic climate
and the condition of the real estate market in the northern New Jersey area.
Management addressed these economic conditions and applied that information to
changes in the composition of the loan portfolio and net charge-off levels. The
provision charged to operations was $6.1 million in 2000 compared to $9.1
million in 1999. The provision for loan losses was reduced as a result of
Valley's declining trend in non-performing loans during the year and due to the
expected sale of the Shop-Rite credit card portfolio, which eliminated the need
for additional provisioning the bank was maintaining for that portfolio.
The following table summarizes the allocation of the allowance for loan
losses to specific loan categories for the past five years:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
(IN THOUSANDS)
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
CATEGORY CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS
---------- -------- ---------- -------- ---------- --------
Loan category:
Commercial ............. $15,974 11.4% $15,501 11.2% $14,491 11.5%
Mortgage ............... 11,827 57.7 13,282 55.7 14,363 53.5
Consumer ............... 12,559 30.9 12,813 33.1 12,417 35.0
Unallocated ............ 13,375 N/A 13,524 N/A 13,370 N/A
------- ----- ------- ----- ------- -----
$53,735 100.0% $55,120 100.0% $54,641 100.0%
======= ===== ======= ===== ======= =====
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996
--------------------- --------------------
PERCENT PERCENT
OF LOAN OF LOAN
CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
ALLOCATION LOANS ALLOCATION LOANS
---------- -------- ---------- --------
Loan category:
Commercial ............. $13,525 11.8% $19,097 12.7%
Mortgage ............... 16,861 53.0 13,743 53.8
Consumer ............... 11,625 35.2 7,667 33.5
Unallocated ............ 11,159 N/A 12,419 N/A
------- ----- ------- -----
$53,170 100.0% $52,926 100.0%
======= ===== ======= =====
At December 31, 2000 the allowance for loan losses amounted to $53.7
million or 1.15 percent of loans, as compared to $55.1 million or 1.21 percent
at December 31, 1999.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $7.5 million for the
year ended December 31, 2000 compared with $8.6 million for the year ended
December 31, 1999. The ratio of net charge-offs to average loans decreased to
0.16 percent for 2000 compared with 0.20 percent for 1999. While consumer loan
charge-offs decreased during 2000, they were at a level less than the level
reported throughout the industry on a national basis. Non-accrual loans
decreased in 2000 in comparison to 1999, and to its lowest level in five years,
while loans past due 90 days and still accruing in 2000 were higher than during
1999.
The impaired loan portfolio is primarily collateral dependent. Impaired
loans and their related specific and general allocations to the allowance for
loan losses totaled $2.2 million and $338 thousand, respectively, at December
31, 2000 and $13.4 million and $1.8 million, respectively, at December 31, 1999.
The average balance of impaired loans during 2000 and 1999 was approximately
$9.6 million and $13.2 million, respectively. The amount of cash
29
basis interest income that was recognized on impaired loans during 2000, 1999
and 1998 was $106 thousand, $559 thousand and $1.1 million, respectively.
Capital Adequacy
A significant measure of the strength of a financial institution is its
shareholders' equity. At December 31, 2000, shareholders' equity totaled $545.1
million or 8.5 percent of total assets, compared with $553.5 million or 8.7
percent at year-end 1999.
On May 23, 2000 Valley's Board of Directors authorized the repurchase of up
to 3,000,000 shares of the Company's outstanding common stock. As of September
19, 2000 Valley had repurchased 571,070 shares of its common stock under this
repurchase program, which was rescinded in connection with the signing of the
definitive merger agreement with Merchants. This is in addition to the 3,000,000
shares purchased pursuant to an authorization by the Board of Directors in
December 1999, the majority of which were used for the stock dividend issued on
May 16, 2000. Reacquired shares are held in treasury and are expected to be used
for employee benefit programs, stock dividends and other corporate purposes.
On February 12, 2000, the Board of Directors unanimously approved an
amendment to Valley's Certificate of Incorporation to authorize 30,000,000
shares of a new class of "blank check" preferred stock. The purpose of the
preferred stock is to maximize Valley's ability to expand its capital base. The
amendment was approved by the Valley shareholders on April 6, 2000. At December
31, 2000, there were no shares of preferred stock issued.
Included in shareholders' equity as components of accumulated other
comprehensive income at December 31, 2000 was a $4.2 million unrealized loss on
investment securities available for sale, net of tax, and a currency translation
adjustment loss of $678 thousand related to the Canadian subsidiary of VNB,
compared to an unrealized loss of $16.3 million and a $418 thousand currency
translation adjustment loss at December 31, 1999.
Risk-based guidelines define a two-tier capital framework. Tier 1 capital
consists of common shareholders' equity less disallowed intangibles, while Total
risk-based capital consists of Tier 1 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.
Valley's capital position at December 31, 2000 under risk-based capital
guidelines was $544.1 million, or 10.8 percent of risk-weighted assets, for Tier
1 capital and $597.8 million, or 11.9 percent, for Total risk-based capital. The
comparable ratios at December 31, 1999 were 11.6 percent for Tier 1 capital and
12.8 percent for Total risk-based capital. At December 31, 2000 and 1999, Valley
was in compliance with the leverage requirement having Tier 1 leverage ratios of
8.7 percent and 9.1 percent, respectively. Valley's ratios at December 31, 2000
were all 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 amounted to $9.08 at December 31, 2000 compared with
$8.83 per share at December 31, 1999.
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 41.9 percent at December 31, 2000, compared to 43.5 percent
at December 31, 1999. Cash dividends declared amounted to $1.03 per share,
equivalent to a dividend payout ratio of 58.1 percent for 2000, compared to 56.5
percent for the year 1999. The current quarterly dividend rate of $0.26 per
share provides for an annual rate of $1.04 per share. Valley's Board of
Directors continues to believe that cash dividends are an important component of
shareholder value and that, at its current level of performance and capital,
Valley expects to continue its current dividend policy of a quarterly
distribution of earnings to its shareholders.*
Results of Operations-1999 Compared to 1998
Valley reported net income for 1999 of $106.3 million or $1.65 earnings per
diluted share, compared to the $101.3 million, or $1.55 earnings per diluted
share earned in 1998.
Net interest income on a tax equivalent basis increased $14.2 million, or
5.7 percent, to $262.8 million in 1999. The increase in 1999 was due primarily
to a $402.4 million increase in the average balance of interest bearing assets
offset slightly by a $316.7 million increase in the average balance of interest
bearing liabilities. Average rates on interest earning assets and interest
bearing liabilities decreased 27 basis points and 24 basis points, respectively.
30
Non-interest income, net of security gains amounted to $44.7 million, in
1999, relatively unchanged compared with 1998. Income from trust and investment
services increased $601 thousand or 33.1 percent due primarily to additional fee
income contributed by the acquisition of an investment management company during
July 1999. Fees from loan servicing, which include both servicing fees from
residential mortgage loans and SBA loans, increased $1.0 million or 13.6
percent. This increase can be attributed to the acquisition of several
residential mortgage portfolios, and the origination of both SBA and residential
mortgage loans by VNB which were sold to third-party investors with servicing
retained. Credit card income declined by $1.5 million due to a decrease in card
usage. Other non-interest income increased $2.6 million or 45.1 percent,
attributed primarily to the gain on the sale of one OREO property during 1999
and commission fees earned on the outsourcing of check processing which began in
the fourth quarter of 1998.
Non-interest expense totaled $137.9 million in 1999, a decrease of $6.8
million. Non-interest expense for 1999 includes a $3.0 million merger-related
charge from the acquisition of Ramapo and for 1998 includes a $4.5 million
merger-related charge from the acquisition of Wayne. Salary and benefit expense
for 1999 increased $2.1 million or 3.0 percent. This increase was offset by a
decrease in credit card expense of $4.0 million, attributable to a decreased
usage of the card.
Income tax expense as a percentage of pre-tax income was 32.9 percent for
the year ended December 31, 1999 compared to 23.1 percent in 1998. The increase
in the effective tax rate is attributable to tax benefits realized prior to 1999
that were not available during 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding Quantitative and Qualitative Disclosures About
Market Risk, see Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Interest Rate Sensitivity."
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
--------------------------
2000 1999
---------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
ASSETS
Cash and due from banks ................................................ $ 186,720 $ 161,561
Federal funds sold ..................................................... 50,000 123,000
Investment securities held to maturity, fair value of $294,801 and
$318,329 in 2000 and 1999, respectively (Notes 3 and 11) ............. 333,424 351,501
Investment securities available for sale (Notes 4 and 11) .............. 1,035,769 1,005,419
Loans (Notes 5 and 11) ................................................. 4,643,487 4,542,567
Loans held for sale (Note 5) ........................................... 17,927 12,185
---------- ----------
Total loans ............................................................ 4,661,414 4,554,752
Less: Allowance for loan losses (Note 6) ............................. (53,735) (55,120)
---------- ----------
Net loans ............................................................ 4,607,679 4,499,632
---------- ----------
Premises and equipment, net (Note 8) ................................... 85,394 84,790
Accrued interest receivable ............................................ 39,656 35,504
Other assets (Notes 7, 9 and 13) ....................................... 87,195 98,987
---------- ----------
Total assets ................................................... $6,425,837 $6,360,394
========== ==========
LIABILITIES
Deposits:
Non-interest bearing ................................................. $1,018,479 $ 931,016
Interest bearing:
Savings ............................................................ 1,982,482 2,018,530
Time (Note 10) ..................................................... 2,122,756 2,101,709
---------- ----------
Total deposits ................................................. 5,123,717 5,051,255
---------- ----------
Short-term borrowings (Notes 3 and 11) ................................. 108,022 129,065
Long-term debt (Notes 3 and 11) ........................................ 591,808 564,881
Accrued expenses and other liabilities (Note 12) ....................... 57,216 61,693
---------- ----------
Total liabilities .............................................. 5,880,763 5,806,894
---------- ----------
Commitments and contingencies (Note 14)
SHAREHOLDERS' EQUITY (Notes 2, 12 and 15)
Preferred stock, no par value, authorized 30,000,000 shares,
none issued .......................................................... -- --
Common stock, no par value, authorized 108,527,344 shares;
issued 60,540,047 shares in 2000 and 60,621,040 shares in 1999 ....... 25,886 25,943
Surplus ................................................................ 324,300 325,147
Retained earnings ...................................................... 213,362 244,605
Unallocated common stock held by employee benefit plan ................. (775) (965)
Accumulated other comprehensive loss ................................... (4,923) (16,733)
---------- ----------
557,850 577,997
Treasury stock, at cost (502,471 shares in 2000 and
927,750 shares in 1999) .............................................. (12,776) (24,497)
---------- ----------
Total shareholders' equity ..................................... 545,074 553,500
---------- ----------
Total liabilities and shareholders' equity ..................... $6,425,837 $6,360,394
========== ==========
See accompanying notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
INTEREST INCOME
Interest and fees on loans (Note 5) .......................... $ 372,695 $ 339,438 $ 330,701
Interest and dividends on investment securities:
Taxable .................................................... 74,851 74,381 63,430
Tax-exempt ................................................. 7,126 7,364 8,281
Dividends .................................................. 2,878 2,403 1,946
Interest on federal funds sold and other short-term
investments ................................................ 3,303 3,949 6,935
--------- --------- ---------
Total interest income .................................. 460,853 427,535 411,293
--------- --------- ---------
INTEREST EXPENSE
Interest on deposits:
Savings deposits ........................................... 47,950 41,358 46,833
Time deposits (Note 10) .................................... 112,955 102,154 109,228
Interest on short-term borrowings (Note 11) .................. 6,427 2,968 2,791
Interest on long-term debt (Note 11) ......................... 35,424 22,697 8,806
--------- --------- ---------
Total interest expense ................................. 202,756 169,177 167,658
--------- --------- ---------
NET INTEREST INCOME .......................................... 258,097 258,358 243,635
Provision for loan losses (Note 6) ........................... 6,130 9,120 12,645
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .......... 251,967 249,238 230,990
--------- --------- ---------
NON-INTEREST INCOME
Trust and investment services ................................ 3,563 2,414 1,813
Service charges on deposit accounts .......................... 16,486 14,468 14,019
Gains on securities transactions, net (Note 4) ............... 355 2,532 1,419
Fees from loan servicing (Note 7) ............................ 10,902 8,387 7,382
Credit card fee income ....................................... 8,403 8,655 10,153
Gains on sales of loans, net ................................. 2,227 2,491 4,863
Other ........................................................ 8,947 8,305 5,725
--------- --------- ---------
Total non-interest income .............................. 50,883 47,252 45,374
--------- --------- ---------
NON-INTEREST EXPENSE
Salary expense (Note 12) ..................................... 62,847 58,339 56,717
Employee benefit expense (Note 12) ........................... 13,774 13,645 13,143
FDIC insurance premiums ...................................... 1,037 1,239 1,301
Net occupancy expense (Notes 8 and 14) ....................... 12,651 11,943 13,740
Furniture and equipment expense (Note 8) ..................... 9,289 8,370 9,037
Credit card expense .......................................... 5,032 5,070 9,066
Amortization of intangible assets (Note 7) ................... 7,611 5,255 5,666
Advertising .................................................. 4,529 5,178 4,677
Merger-related charges (Note 2) .............................. -- 3,005 4,539
Other ........................................................ 24,243 25,902 26,827
--------- --------- ---------
Total non-interest expense ............................. 141,013 137,946 144,713
--------- --------- ---------
INCOME BEFORE INCOME TAXES ................................... 161,837 158,544 131,651
Income tax expense (Note 13) ................................. 55,064 52,220 30,380
--------- --------- ---------
NET INCOME ................................................... $ 106,773 $ 106,324 $ 101,271
========= ========= =========
EARNINGS PER SHARE:
Basic ...................................................... $ 1.76 $ 1.67 $ 1.57
Diluted .................................................... 1.75 1.65 1.55
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic ...................................................... 60,561,075 63,732,045 64,428,341
Diluted .................................................... 61,108,974 64,370,957 65,294,355
See accompanying notes to consolidated financial statements.
33
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNALLOCATED ACCUMULATED
COMMON OTHER
STOCK HELD COMPREHENSIVE TOTAL
PREFERRED COMMON RETAINED BY EMPLOYEE (LOSS) TREASURY SHAREHOLDERS'
STOCK STOCK SURPLUS EARNINGS BENEFIT PLAN INCOME STOCK EQUITY
--------- ------- -------- -------- ------------ ------------- -------- ------------
(IN THOUSANDS)
BALANCE--DECEMBER 31, 1997 .............. $ -- $25,999 $330,258 $189,078 $(1,604) $ 3,564 $ (6,695) $540,600
Comprehensive income:
Net income .............................. -- -- -- 101,271 -- -- -- 101,271
Other comprehensive income, net of tax:
Unrealized gains on securities
available for sale, net of tax
of $1,052 ........................... -- -- -- -- -- 1,871 --
Less reclassification adjustment for
gains included in net income, net
of tax of $(524) .................... -- -- -- -- -- (895) --
Foreign currency translation
adjustment .......................... -- -- -- -- -- (509) --
--------
Other comprehensive income .............. -- -- -- -- -- 467 -- 467
-------- --------
Total comprehensive income .............. -- -- -- -- -- -- -- 101,738
Cash dividends .......................... -- -- -- (53,271) -- -- -- (53,271)
Effect of stock incentive plan, net ..... -- 56 (392) (850) -- -- 3,713 2,527
Common stock repurchased and retired .... -- (65) -- (349) -- -- -- (414)
Allocation of employee benefit
plan shares ........................... -- -- 381 -- 273 -- -- 654
Issuance of shares from treasury ........ -- 89 1,090 -- -- -- 3,454 4,633
Purchase of treasury stock .............. -- -- -- -- -- -- (6,658) (6,658)
------ ------- -------- -------- ------- -------- -------- --------
BALANCE--DECEMBER 31, 1998 .............. -- 26,079 331,337 235,879 (1,331) 4,031 (6,186) 589,809
Comprehensive income:
Net income .............................. -- -- -- 106,324 -- -- -- 106,324
Other comprehensive loss, net of tax:
Unrealized losses on securities
available for sale, net of tax
of $(13,095) ........................ -- -- -- -- -- (19,591) --
Less reclassification adjustment
for gains included in net income,
net of tax of $(925) ................ -- -- -- -- -- (1,607) --
Foreign currency translation
adjustment .......................... -- -- -- -- -- 434 --
--------
Other comprehensive loss ................ -- -- -- -- -- (20,764) -- (20,764)
-------- --------
Total comprehensive income .............. -- -- -- -- -- -- -- 85,560
Cash dividends .......................... -- -- -- (60,019) -- -- -- (60,019)
Effect of stock incentive plan, net ..... -- (8) (151) (1,522) -- -- 4,067 2,386
Stock dividend .......................... -- (128) (7,164) (36,057) -- -- 44,207 858
Allocation of employee benefit
plan shares ........................... -- -- 1,125 -- 366 -- 370 1,861
Purchase of treasury stock .............. -- -- -- -- -- -- (66,955) (66,955)
------ ------- -------- -------- ------- -------- -------- --------
BALANCE--DECEMBER 31, 1999 .............. -- 25,943 325,147 244,605 (965) (16,733) (24,497) 553,500
Comprehensive income:
Net income .............................. -- -- -- 106,773 -- -- -- 106,773
Other comprehensive income, net of tax:
Unrealized gains on securities
available for sale, net of tax
of $8,343 ........................... -- -- -- -- -- 12,297 --
Less reclassification adjustment for
gains included in net income,
net of tax of $(129) ................ -- -- -- -- -- (226) --
Foreign currency translation
adjustment .......................... -- -- -- -- -- (261) --
--------
Other comprehensive income .............. -- -- -- -- -- 11,810 -- 11,810
-------- --------
Total comprehensive income .............. -- -- -- -- -- -- -- 118,583
Cash dividends .......................... -- -- -- (62,039) -- -- -- (62,039)
Effect of stock incentive plan, net ..... -- (57) (1,768) (2,969) -- -- 8,175 3,381
Stock dividend .......................... -- -- -- (73,008) -- -- 73,008 --
Allocation of employee benefit
plan shares ........................... -- -- 921 -- 190 -- 573 1,684
Purchase of treasury stock .............. -- -- -- -- -- -- (70,035) (70,035)
------ ------- -------- -------- ------- -------- -------- --------
BALANCE--DECEMBER 31, 2000 .............. $ -- $25,886 $324,300 $213,362 $ (775) $ (4,923) $(12,776) $545,074
====== ======= ======== ======== ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 106,773 $ 106,324 $ 101,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................ 16,203 12,877 14,782
Amortization of compensation costs pursuant to
long-term stock incentive plan ............................. 1,532 1,091 1,036
Provision for loan losses .................................... 6,130 9,120 12,645
Net amortization of premiums and accretion of discounts ...... 2,267 4,187 3,312
Net deferred income tax benefit .............................. (522) (255) (2,540)
Net gains on securities transactions ......................... (355) (2,532) (1,419)
Proceeds from sales of loans ................................. 40,758 76,113 181,020
Gain on sales of loans ....................................... (2,227) (2,491) (4,863)
Originations of loans held for sale .......................... (44,273) (62,352) (182,961)
Proceeds from sale of premises and equipment ................. 626 -- --
Gain on sale of premises and equipment ....................... (474) -- --
Net (increase) decrease in accrued interest receivable
and other assets ........................................... (4,682) (19,960) 4,864
Net (decrease) increase in accrued expenses and other
liabilities ................................................ (4,550) 25,475 (3,334)
---------- ---------- ----------
Net cash provided by operating activities .................... 117,206 147,597 123,813
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and originations of mortgage servicing rights ........ (2,696) (20,419) (11,986)
Proceeds from sales of investment securities available
for sale ..................................................... 10,761 28,317 113,597
Proceeds from maturing investment securities available
for sale ..................................................... 181,622 412,335 418,068
Purchases of investment securities available for sale .......... (203,001) (416,297) (416,359)
Purchases of investment securities held to maturity ............ (21,866) (161,986) (153,486)
Proceeds from maturing investment securities held to
maturity ..................................................... 38,662 53,993 71,734
Proceeds from sales of trading account securities .............. -- 1,415 --
Net decrease (increase) in federal funds sold and other
short-term investments ....................................... 73,000 (14,900) (63,975)
Net increase in loans made to customers ........................ (108,435) (427,014) (179,048)
Purchases of premises and equipment, net of sales .............. (9,349) (9,577) (10,698)
---------- ---------- ----------
Net cash used in investing activities .......................... (41,302) (554,133) (232,153)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ....................................... 72,462 81,106 118,068
Net (decrease) increase in short-term borrowings ............... (21,043) 71,448 (998)
Advances of long-term debt ..................................... 80,000 402,000 120,000
Repayments of long-term debt ................................... (53,073) (50,068) (53,063)
Dividends paid to common shareholders .......................... (62,355) (58,126) (51,189)
Addition of common shares to treasury .......................... (70,035) (66,955) (6,658)
Common stock issued, net of cancellations ...................... 3,299 2,771 6,931
---------- ---------- ----------
Net cash (used in) provided by financing activities ............ (50,745) 382,176 133,091
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........... 25,159 (24,360) 24,751
Cash and cash equivalents at beginning of year ................. 161,561 185,921 161,170
---------- ---------- ----------
Cash and cash equivalents at end of year ....................... $ 186,720 $ 161,561 $ 185,921
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest on deposits
and borrowings ............................................... $ 199,115 $ 168,146 $ 169,081
Cash paid during the year for federal and state
income taxes ................................................. 53,039 55,047 32,516
Transfer of securities from held to maturity to
available for sale ........................................... -- 42,387 1,592
See accompanying notes to consolidated financial statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1)
BUSINESS
Valley National Bancorp ("Valley") is a bank holding company whose
principal wholly-owned subsidiary is Valley National Bank ("VNB"), a national
banking association providing a full range of commercial, retail and trust and
investment services through its branch and ATM network throughout northern New
Jersey. VNB also lends, through its consumer division and SBA program, to
borrowers covering territories outside of its branch network and New Jersey. VNB
is subject to intense competition from other financial services companies and is
subject to the regulation of certain federal and state agencies and undergoes
periodic examinations by certain regulatory authorities.
VNB has several wholly-owned subsidiaries which include a mortgage
servicing company, a company which holds, maintains and manages investment
assets for VNB, a subsidiary which owns and services auto loans, a subsidiary
which owns and services commercial mortgage loans, a title insurance company,
asset management companies which are SEC registered investment advisors and an
Edge Act Corporation which is the holding company for a wholly-owned finance
company located in Toronto, Canada. Many of these subsidiaries transact business
with VNB as well as third parties.
BASIS OF PRESENTATION
The consolidated financial statements of Valley include the accounts of its
principal commercial bank subsidiary, VNB and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made in the consolidated financial statements for
1999 and 1998 to conform to the classifications presented for 2000.
In preparing the consolidated financial statements, management has made
estimates and assumptions that effect the reported amounts of assets and
liabilities as of the date of the statements of condition and results of
operations for the periods indicated. Actual results could differ significantly
from those estimates.
INVESTMENT SECURITIES
Investments are classified into three categories: held to maturity;
available for sale; and trading. Valley's investment portfolio consists of each
of these three categories.
Investment securities held to maturity, except for equity securities, are
carried at cost and adjusted for amortization of premiums and accretion of
discounts by using the interest method over the term of the investment.
Management has identified those investment securities which may be sold
prior to maturity. These investment securities are classified as available for
sale in the accompanying consolidated statements of financial condition and are
recorded at fair value on an aggregate basis. Unrealized holding gains and
losses on such securities are excluded from earnings, but are included as a
component of accumulated other comprehensive income which is included in
shareholders' equity, net of deferred tax. Realized gains or losses on the sale
of investment securities available for sale are recognized by the specific
identification method and shown as a separate component of non-interest income.
Trading securities are recorded at market value. Market value adjustments
resulting from unrealized gains (losses) on such securities are included in
non-interest income.
LOANS AND LOAN FEES
Loan origination and commitment fees, net of related costs, are deferred
and amortized as an adjustment of loan yield over the estimated life of the
loans approximating the effective interest method.
Loans held for sale consist of residential mortgage loans and SBA loans,
and are carried at the lower of cost or estimated fair market value using the
aggregate method.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest income is not accrued on loans where interest or principal is 90
days or more past due or if in management's judgement the ultimate
collectibility of the interest is doubtful. Exceptions may be made if the loan
is sufficiently collateralized and in the process of collection. When a loan is
placed on non-accrual status, interest accruals cease and uncollected accrued
interest is reversed and charged against current income. Payments received on
non-accrual loans are applied against principal. A loan may only be restored to
an accruing basis when it becomes well secured and in the process of collection
and all past due amounts have been collected.
The value of an impaired loan is measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral if the loan is collateral dependent. Smaller
balance homogeneous loans that are collectively evaluated for impairment, such
as residential mortgage loans and installment loans, are specifically excluded
from the impaired loan portfolio. Valley has defined the population of impaired
loans to be all non-accrual loans and other loans considered to be impaired as
to principal and interest, consisting primarily of commercial real estate loans.
The impaired loan portfolio is primarily collateral dependent. Impaired loans
are individually assessed to determine that each loan's carrying value is not in
excess of the fair value of the related collateral or the present value of the
expected future cash flows.
Valley originates loans guaranteed by the SBA. The principal amount of
these loans is guaranteed between 75 percent and 80 percent, subject to certain
dollar limitations. Valley generally sells the guaranteed portions of these
loans and retains the unguaranteed portions as well as the rights to service the
loans. Gains are recorded on loan sales based on the cash proceeds in excess of
the assigned value of the loan, as well as the value assigned to the rights to
service the loan.
Credit card loans primarily represent revolving MasterCard credit card
loans. Interest on credit card loans is recognized based on the balances
outstanding according to the related cardmember agreements. Direct origination
costs are deferred and amortized over 24 months, the term of the cardmember
agreement, on a straight-line basis. Net direct origination costs include costs
associated with credit card originations that are incurred in transactions with
independent third parties and certain costs relating to loan origination
programs and the preparation and processing of loan documents, net of fees
received. Ineligible direct origination costs are expensed as incurred.
Valley's lending is primarily in northern New Jersey, with the exception of
an out-of-state auto lending program.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses ("allowance") is increased through provisions
charged against current earnings and additionally by crediting amounts of
recoveries received, if any, on previously charged-off loans. The allowance is
reduced by charge-offs on loans which are determined to be a loss, in accordance
with established policies, when all efforts of collection have been exhausted.
The allowance for loan losses is maintained at a level estimated to absorb
loan losses inherent in the loan portfolio as well as other credit risk related
charge-offs. 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 and 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 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."
VNB's allocated allowance is calculated by applying loss factors to
outstanding loans. The formula is based on the internal risk grade of loans or
pools of loans. Any change in the risk grade of performing and/or non-performing
loans affects the amount of the related allowance. Loss factors are based on
VNB's historical loss experience and may be adjusted for significant
circumstances that, in management's judgment, affect the collectibility of the
portfolio as of the evaluation date.
Management establishes an unallocated portion of the allowance to cover
inherent losses incurred within a given loan category which have not been
otherwise identified or measured on an individual basis. Such unallocated
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
allowance includes management's evaluation of local and national economic and
business conditions, portfolio concentrations, information risk, operational
risk, credit quality and delinquency trends. The unallocated portion of the
allowance reflects management's attempt to ensure that the overall allowance
reflects a margin for imprecision and the uncertainty that is inherent in
estimates of expected credit losses.
PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost less accumulated depreciation
computed using the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are stated at cost less accumulated
amortization computed on a straight-line basis over the term of the lease or
estimated useful life of the asset, whichever is shorter. Major improvements are
capitalized, while repairs and maintenance costs are charged to operations as
incurred. Upon retirement or disposition, any gain or loss is credited or
charged to operations.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO"), acquired through foreclosure on loans
secured by real estate, is reported at the lower of cost or fair value, as
established by a current appraisal, less estimated costs to sell, and is
included in other assets. Any write-downs at the date of foreclosure are charged
to the allowance for loan losses.
An allowance for OREO has been established to record subsequent declines in
estimated net realizable value. Expenses incurred to maintain these properties
and realized gains and losses upon sale of the properties are included in other
non-interest expense and other non-interest income, as appropriate.
INTANGIBLE ASSETS
Intangible assets resulting from acquisitions under the purchase method of
accounting consist of goodwill and core deposit intangibles. Goodwill recorded
prior to 1987 is being amortized on a straight-line basis over 25 years.
Goodwill recorded in 2000 and 1999 is being amortized on a straight-line basis
over 10 years. Core deposit intangibles are amortized on accelerated methods
over the estimated lives of the assets. Goodwill and core deposit intangibles
are included in other assets.
LOAN SERVICING RIGHTS
Loan servicing rights are generally recorded when purchased or originated
loans are sold, with servicing rights retained. The cost of each loan is
allocated between the servicing right and the loan (without the servicing right)
based on their relative fair values. Loan servicing rights, which are classified
in other assets, are amortized over the estimated net servicing life and are
evaluated on a quarterly basis for impairment based on their fair value. The
fair value is estimated using the present value of expected future cash flows
along with numerous assumptions including servicing income, cost of servicing,
discount rates, prepayment speeds, and default rates. Impairment adjustments, if
any, are recognized through the use of a valuation allowance.
STOCK-BASED COMPENSATION
Valley accounts for its stock option plan in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25"). In accordance with APB 25, no compensation expense is recognized for stock
options issued to employees since the options have an exercise price equal to
the market value of the common stock on the day of the grant. Valley provides
the fair market disclosure required by Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock-based Compensation."
INCOME TAXES
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" established standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Valley's components of other comprehensive income include unrealized
gains (losses) on securities available for sale, net of tax, and the foreign
currency translation adjustment. Valley provides the required disclosure in the
Consolidated Statements of Changes in Shareholders' Equity.
EARNINGS PER SHARE
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.
All share and per share amounts have been restated to reflect the 5 percent
stock dividend issued May 16, 2000, and all prior stock dividends and splits.
The following table shows the calculation of both Basic and Diluted
earnings per share for the years ended December 31, 2000, 1999 and 1998.
YEARS ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
Net income .................................................. $ 106,773 $ 106,324 $ 101,271
=========== =========== ===========
Basic weighted-average number of shares outstanding ......... 60,561,075 63,732,045 64,428,341
Plus: Common stock equivalents .............................. 547,899 638,912 866,014
----------- ----------- -----------
Diluted weighted-average number of shares outstanding ....... 61,108,974 64,370,957 65,294,355
=========== =========== ===========
Earnings per share:
Basic ..................................................... $ 1.76 $ 1.67 $ 1.57
Diluted ................................................... 1.75 1.65 1.55
At December 31, 2000 and 1999 there were 66 thousand and 272 thousand stock
options not included as common stock equivalents because the exercise prices
exceeded the average market value.
TREASURY STOCK
Treasury stock is recorded using the cost method and accordingly is
presented as an unallocated reduction of shareholders' equity.
IMPACT OF FUTURE ACCOUNTING CHANGES
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued by
the FASB in June 1998. SFAS No. 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial condition at fair value. Valley
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
would have had to adopt SFAS No. 133 by January 1, 2000. However, SFAS No. 137
extended the adoption of SFAS No. 133 to periods beginning after June 15, 2000.
In June of 2000, the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of FASB Statement No. 133 and 137," which amends the
accounting and reporting standards of SFAS No. 133 for derivative instruments.
Upon adoption, the provisions of SFAS No. 133 must be applied prospectively. The
adoption of SFAS No. 133, SFAS No. 137 and SFAS No. 138 effective on January 1,
2001 did not have a material impact on the financial statements.
The FASB has issued Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 140"). SFAS No. 140 replaces SFAS No. 125. SFAS No.
140 resolves certain implementation issues, but it carries forward most of SFAS
No. 125's provisions without change. SFAS No. 140 is effective for transfers
occurring after March 31, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Valley anticipates that the adoption of SFAS No. 140 will not have a material
impact on the financial statements.
ACQUISITIONS (Note 2)
On January 19, 2001 Valley completed its merger with Merchants New York
Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York
headquartered in Manhattan. Under the terms of the merger agreement, each
outstanding share of Merchants common stock was exchanged for 0.7634 shares of
Valley common stock. As a result, a total of approximately 14 million shares of
Valley common stock were exchanged. This merger added seven branches in
Manhattan. The transaction was accounted for utilizing the pooling of interests
method of accounting.
In accordance with generally accepted accounting principles, the
consolidated financial statements of Valley, included herein, have not been
restated to include Merchants.
The following proforma data summarizes the combined financial data of
Valley and Merchants as if the merger had been consummated on December 31, 1999
for Statement of Financial Condition purposes and January 1, 1998 for Income
Statement purposes:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Total assets ...................... $7,902,628 $7,755,707
Total investments ................. 2,203,537 2,204,840
Total loans ....................... 5,190,478 4,991,849
Total deposits .................... 6,136,828 6,010,233
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
---------- ---------- ---------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
Interest income ................... $ 568,206 $ 517,820 $ 497,561
Interest expense .................. 252,648 208,793 208,531
Net interest income ............... 315,558 309,027 289,030
Net income ........................ 127,626 125,341 117,173
Earnings per share-basic .......... 1.70 1.60 1.48
Earnings per share-diluted ........ 1.69 1.58 1.46
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc.
("Hallmark"), a Fairfield, NJ based investment management firm with $195 million
of assets under management. Hallmark's purchase was a stock merger with
subsequent earn out payments. Hallmark's operations will continue as a
wholly-owned subsidiary of
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
VNB. The transaction was accounted for as a purchase and resulted in goodwill of
approximately $1.2 million which is being amortized over a 10 year period.
On June 11, 1999, Valley acquired Ramapo Financial Corporation ("Ramapo"),
parent of The Ramapo Bank headquartered in Wayne, New Jersey. At the date of
acquisition, Ramapo had total assets of $344.0 million and deposits of $299.5
million, with eight branch offices. The transaction was accounted for using the
pooling of interests method of accounting and resulted in the issuance of
approximately 4.0 million shares of Valley common stock. Each share of common
stock of Ramapo was exchanged for 0.44625 shares of Valley common stock. The
consolidated financial statements of Valley have been restated to include Ramapo
for all periods presented.
During the second quarter of 1999, Valley recorded a merger-related charge
of $3.0 million related to the acquisition of Ramapo. On an after tax basis, the
charge totaled $2.2 million or $0.03 per diluted share. The charge includes only
identified direct and incremental costs associated with this acquisition. Items
included in the charge include the following: personnel expenses which include
severance payments and benefits for terminated employees, principally, two
senior executives of Ramapo; real estate expenses related to the closing of a
duplicate branch; professional fees which include investment banking, accounting
and legal fees; and other expenses which include termination of data processing
service contracts and the write-off of supplies and other assets not considered
useful in the operation of the combined entity. The major components of the
merger-related charge, consisting of real estate dispositions, professional
fees, personnel expenses and other expenses, totaled $300 thousand, $1.1
million,$1.1 million and $500 thousand, respectively. Of the total
merger-related charge $2.8 million, or 92.7 percent was paid through December
31, 2000. The remaining liability represents contracts which will be paid over
their remaining terms.
During the second quarter of 1999, Valley National Bank received approval
and a license from the New Jersey Department of Banking and Insurance to sell
title insurance through a separate subsidiary, known as Wayne Title, Inc. After
the close of the second quarter, Valley acquired the assets of an agency office
of Commonwealth Land Title Insurance Company for $784 thousand and began to sell
both commercial and residential title insurance policies. The transaction was
accounted for as a purchase, at which time goodwill of $728 thousand was
recorded.
On July 30, 1999, Valley acquired New Century Asset Management, Inc., a
registered investment advisor and NJ-based money manager with approximately $120
million of assets under management. At closing, Valley paid an initial
consideration of $640 thousand. The balance due will be paid on an earn-out
basis over a five-year period, based upon a pre-determined formula. New Century
will continue its operations as a wholly-owned subsidiary of Valley National
Bank. The transaction was accounted for as a purchase, at which time goodwill of
$1.3 million was recorded.
On October 16, 1998, Valley acquired Wayne Bancorp, Inc. ("Wayne"), parent
of Wayne Savings Bank, F.S.B., headquartered in Wayne, New Jersey. At the date
of acquisition, Wayne had total assets of $272.0 million and deposits of $206.0
million, with six branch offices. The transaction was accounted for using the
pooling of interests method of accounting and resulted in the issuance of
approximately 2.4 million shares of Valley common stock. Each share of common
stock of Wayne was exchanged for 1.1 shares of Valley common stock. The
consolidated financial statements of Valley have been restated to include Wayne
for all periods presented.
During 1998, Valley recorded a merger-related charge of $4.5 million,
related to the acquisition of Wayne. On an after tax basis, the charge totaled
$3.2 million or $0.05 per diluted share. The charge includes only identified
direct and incremental costs associated with this acquisition. Items included in
the charge include the following: personnel expenses which include severance
payments and benefits for terminated employees, principally, ten senior
executives and directors at Wayne; real estate expenses related to the closing
of duplicate facilities, professional fees which include investment banking,
accounting and legal fees; and other expenses which include termination of data
processing service contracts and the write-off of supplies and other assets not
considered useful in the operation of the combined entity. The major components
of the merger-related charge are for real estate dispositions, professional
fees, personnel expenses and other expenses total $1.5 million, $1.4 million,
$1.0 million and $600 thousand, respectively. Of the total merger-related
charge, $4.1 million or 91.1 percent was paid through December 31, 2000. The
remaining liability represents contracts which will be paid over their remaining
terms.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INVESTMENT SECURITIES HELD TO MATURITY (Note 3)
The amortized cost, gross unrealized gains and losses and fair value of
securities held to maturity at December 31, 2000 and 1999 were as follows:
DECEMBER 31, 2000
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
Obligations of states and political subdivisions ........... $ 20,306 $ 37 $ (1) $ 20,342
Mortgage-backed securities ................................. 35,422 600 (45) 35,977
Other debt securities ...................................... 249,064 -- (39,214) 209,850
-------- ---- -------- --------
Total debt securities .................................. 304,792 637 (39,260) 266,169
FRB & FHLB stock ........................................... 28,632 -- -- 28,632
-------- ---- -------- --------
Total investment securities held to maturity ........... $333,424 $637 $(39,260) $294,801
======== ==== ======== ========
DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
Obligations of states and political subdivisions ........... $ 28,729 $141 $ (4) $ 28,866
Mortgage-backed securities ................................. 46,599 174 (300) 46,473
Other debt securities ...................................... 249,936 -- (33,183) 216,753
-------- ---- -------- --------
Total debt securities .................................. 325,264 315 (33,487) 292,092
FRB & FHLB stock ........................................... 26,237 -- -- 26,237
-------- ---- -------- --------
Total investment securities held to maturity ........... $351,501 $315 $(33,487) $318,329
======== ==== ======== ========
The contractual maturities of investments in debt securities held to
maturity at December 31, 2000, are set forth in the following table:
DECEMBER 31, 2000
----------------------
AMORTIZED FAIR
COST VALUE
-------- --------
(IN THOUSANDS)
Due in one year ................................ $ 20,341 $ 20,378
Due after one year through five years .......... 75 75
Due after five years through ten years ......... -- --
Due after ten years ............................ 248,954 209,739
-------- --------
269,370 230,192
Mortgage-backed securities ..................... 35,422 35,977
-------- --------
Total debt securities held to maturity ..... $304,792 $266,169
======== ========
Actual maturities of debt securities may differ from those presented above
since certain obligations provide the issuer the right to call or prepay the
obligation prior to scheduled maturity without penalty.
The weighted-average remaining life for mortgage-backed securities held to
maturity was 2.7 years at December 31, 2000, and 3.0 years at December 31, 1999.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1999, in connection with the Ramapo acquisition, Valley reassessed the
classification of securities held in the Ramapo investment portfolio and
transferred $42.4 million of securities held to maturity to securities available
for sale to conform to Valley's investment objectives. In 1998, in connection
with the Wayne acquisition, Valley reassessed the classification of securities
held in the Wayne portfolio and transferred $1.6 million of securities held to
maturity to securities available for sale to conform with Valley's investment
objectives.
INVESTMENT SECURITIES AVAILABLE FOR SALE (Note 4)
The amortized cost, gross unrealized gains and losses and fair value of
securities available for sale at December 31, 2000 and 1999 were as follows:
DECEMBER 31, 2000
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury securities and other government
agencies and corporations ........................... $ 146,427 $ 453 $ (1,191) $ 145,689
Obligations of states and political subdivisions ...... 117,978 607 (395) 118,190
Mortgage-backed securities ............................ 747,998 1,975 (7,158) 742,815
---------- ------ -------- ----------
Total debt securities ............................. 1,012,403 3,035 (8,744) 1,006,694
Equity securities ..................................... 30,514 1,842 (3,281) 29,075
---------- ------ -------- ----------
Total investment securities available for sale .... $1,042,917 $4,877 $(12,025) $1,035,769
========== ====== ======== ==========
DECEMBER 31, 1999
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury securities and other government
agencies and corporations ........................... $ 115,750 $ 2 $ (3,102) $ 112,650
Obligations of states and political subdivisions ...... 135,659 505 (2,600) 133,564
Mortgage-backed securities ............................ 751,262 227 (21,358) 730,131
---------- ------ -------- ----------
Total debt securities ............................. 1,002,671 734 (27,060) 976,345
Equity securities ..................................... 30,172 1,252 (2,350) 29,074
---------- ------ -------- ----------
Total investment securities available for sale .... $1,032,843 $1,986 $(29,410) $1,005,419
========== ====== ======== ==========
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The contractual maturities of investments in debt securities available for
sale at December 31, 2000, are set forth in the following table:
DECEMBER 31, 2000
-------------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
Due in one year ................................. $ 53,289 $ 53,224
Due after one year through five years ........... 149,887 149,056
Due after five years through ten years .......... 57,482 57,588
Due after ten years ............................. 3,747 4,011
---------- ----------
264,405 263,879
Mortgage-backed securities ...................... 747,998 742,815
---------- ----------
Total debt securities available for sale ...... $1,012,403 $1,006,694
========== ==========
Actual maturities on debt securities may differ from those presented above
since certain obligations provide the issuer the right to call or prepay the
obligation prior to scheduled maturity without penalty.
The weighted-average remaining life for mortgage-backed securities
available for sale at December 31, 2000 and 1999 was 6.1 years and 5.7 years,
respectively.
Gross gains (losses) realized on sales, maturities and other securities
transactions, related to securities available for sale, and (losses) gains on
trading account securities included in earnings for the years ended December 31,
2000, 1999 and 1998 were as follows:
2000 1999 1998
----- ------ ------
(IN THOUSANDS)
Sales transactions:
Gross gains ..................................... $ 355 $2,870 $ 724
Gross losses .................................... -- (138) (21)
----- ------ ------
355 2,732 703
----- ------ ------
Maturities and other securities transactions:
Gross gains ..................................... -- -- 124
Gross losses .................................... -- (23) --
----- ------ ------
-- (23) 124
----- ------ ------
(Losses) gains on trading account securities ...... -- (177) 592
----- ------ ------
Gains on securities transactions, net ........... $ 355 $2,532 $1,419
===== ====== ======
Cash proceeds from sales transactions were $10.8 million, $29.7 million and
$113.6 million for the years ended 2000, 1999 and 1998, respectively. For 1999
cash proceeds include $1.4 million from sales of trading account securities.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LOANS (Note 5)
The detail of the loan portfolio as of December 31, 2000 and 1999 was as
follows:
2000 1999
---------- ----------
(IN THOUSANDS)
Commercial .............................. $ 530,351 $ 512,164
---------- ----------
Total commercial loans .............. 530,351 512,164
---------- ----------
Construction ............................ 160,932 123,531
Residential mortgage .................... 1,298,948 1,247,721
Commercial mortgage ..................... 1,232,162 1,164,065
---------- ----------
Total mortgage loans ................ 2,692,042 2,535,317
---------- ----------
Home equity ............................. 306,038 276,261
Credit card ............................. 94,293 92,097
Automobile .............................. 975,258 1,053,457
Other consumer .......................... 63,432 85,456
---------- ----------
Total consumer loans ................ 1,439,021 1,507,271
---------- ----------
Total loans ............................. $4,661,414 $4,554,752
========== ==========
Included in the table above are loans held for sale in the amount of $17.9
million and $12.2 million at December 31, 2000 and 1999, respectively.
VNB grants loans in the ordinary course of business to its directors,
executive officers and their affiliates, on the same terms and under the same
risk conditions as those prevailing for comparable transactions with outside
borrowers.
The following table summarizes the change in the total amounts of loans and
advances to directors, executive officers, and their affiliates during the year
2000:
2000
-------
(IN THOUSANDS)
Outstanding at beginning of year ................ $25,793
New loans and advances .......................... 11,766
Repayments ...................................... (6,374)
-------
Outstanding at end of year ...................... $31,185
=======
The outstanding balances of loans which are 90 days or more past due as to
principal or interest payments and still accruing, non-performing assets and
troubled debt restructured loans at December 31, 2000 and 1999 were as follows:
2000 1999
------- -------
(IN THOUSANDS)
Loans past due in excess of 90 days and still accruing ....... $13,040 $11,698
======= =======
Non-accrual loans ............................................ $ 2,661 $ 3,482
Other real estate owned ...................................... 129 2,256
------- -------
Total non-performing assets .................................. $ 2,790 $ 5,738
======= =======
Troubled debt restructured loans ............................. $ 949 $ 4,852
======= =======
The amount of interest income that would have been recorded on non-accrual
loans in 2000, 1999 and 1998 had payments remained in accordance with the
original contractual terms approximated $404 thousand, $619 thousand and $1.4
million, respectively, while the actual amount of interest income recorded on
these types of assets in 2000, 1999 and 1998 totaled $584 thousand, $1.3 million
and $375 thousand, respectively, resulting in (recovered) lost interest income
of ($180) thousand and ($720) thousand and $1.0 million, respectively.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, there were no commitments to lend additional funds to
borrowers whose loans were non-accrual, classified as troubled debt restructured
loans, or contractually past due in excess of 90 days and still accruing
interest.
The impaired loan portfolio is primarily collateral dependent. Impaired
loans and their related specific and general allocations to the allowance for
loan losses totaled $2.2 million and $338 thousand, respectively, at December
31, 2000 and $13.4 million and $1.8 million, respectively, at December 31, 1999.
The average balance of impaired loans during 2000 and 1999 was approximately
$9.6 million and $13.2 million, respectively. The amount of cash basis interest
income that was recognized on impaired loans during 2000, 1999 and 1998 was $106
thousand, $559 thousand and $1.1 million, respectively.
ALLOWANCE FOR LOAN LOSSES (Note 6)
Transactions recorded in the allowance for loan losses during 2000, 1999
and 1998 were as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year ............... $55,120 $54,641 $53,170
Provision charged to operating expense ..... 6,130 9,120 12,645
------- ------- -------
61,250 63,761 65,815
------- ------- -------
Less net loan charge-offs:
Loans charged-off ........................ (10,954) (12,131) (14,963)
Less recoveries on loan charge-offs ...... 3,439 3,490 3,789
------- ------- -------
Net loan charge-offs ....................... (7,515) (8,641) (11,174)
------- ------- -------
Balance at end of year ..................... $53,735 $55,120 $54,641
======= ======= =======
LOAN SERVICING (Note 7)
VNB Mortgage Services, Inc. ("MSI"), a subsidiary of VNB, is a servicer of
residential mortgage loan portfolios. MSI is compensated for loan administrative
services performed for mortgage servicing rights purchased in the secondary
market and originated by VNB. The aggregate principal balances of mortgage loans
serviced by MSI for others approximated $2.5 billion, $2.2 billion and $1.6
billion at December 31, 2000, 1999 and 1998, respectively. The outstanding
balance of loans serviced for others is not included in the consolidated
statements of financial condition.
VNB is a servicer of SBA loans, and is compensated for loan administrative
services performed for SBA loans originated and sold by VNB. VNB serviced a
total of $92.2 million, $89.0 million and $78.1 million of SBA loans at December
31, 2000, 1999 and 1998, respectively, for third-party investors.
The unamortized costs associated with acquiring loan servicing rights are
included in other assets in the consolidated financial statements and are being
amortized over the estimated life of net servicing income.
The following table summarizes the change in loan servicing rights during
the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year ........... $36,809 $20,765 $13,514
Purchase and origination of loan
servicing rights ..................... 2,696 20,419 11,986
Amortization expense ................... (6,776) (4,375) (4,735)
------- ------- -------
Balance at end of year ................. $32,729 $36,809 $20,765
======= ======= =======
Amortization expense is included in amortization of intangible assets.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PREMISES AND EQUIPMENT, NET (Note 8)
At December 31, 2000 and 1999, premises and equipment, net consisted of:
2000 1999
-------- --------
(IN THOUSANDS)
Land ....................................... $ 20,406 $ 19,531
Buildings .................................. 57,784 56,147
Leasehold improvements ..................... 17,247 16,639
Furniture and equipment .................... 78,293 72,770
-------- --------
173,730 165,087
Less: Accumulated depreciation
and amortization ......................... (88,336) (80,297)
-------- --------
Total premises and equipment, net ........ $ 85,394 $ 84,790
======== ========
Depreciation and amortization included in non-interest expense for the
years ended December 31, 2000, 1999 and 1998 amounted to approximately $8.6
million, $7.6 million and $9.0 million, respectively.
OTHER ASSETS (Note 9)
At December 31, 2000 and 1999, other assets consisted of the following:
2000 1999
------- -------
(IN THOUSANDS)
Loan servicing rights .............. $32,729 $36,809
Goodwill ........................... 5,249 4,393
Core deposit intangible ............ 884 1,142
Other real estate owned ............ 129 2,256
Deferred tax asset ................. 24,065 31,757
Other .............................. 24,139 22,630
------- -------
Total other assets ............. $87,195 $98,987
======= =======
DEPOSITS (Note 10)
Included in time deposits at December 31, 2000 and 1999 are certificates of
deposit over $100 thousand of $733.3 million and $647.3 million, respectively.
Interest expense on time deposits of $100 thousand or more totaled
approximately $45.3 million, $27.9 million and $20.2 million in 2000, 1999 and
1998, respectively.
The scheduled maturities of time deposits as of December 31, 2000 are as
follows:
(IN THOUSANDS)
2001 ........................ $1,844,457
2002 ........................ 151,844
2003 ........................ 64,186
2004 ........................ 8,174
2005 ........................ 46,836
Thereafter .................. 7,259
----------
$2,122,756
==========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BORROWED FUNDS (Note 11)
Short-term borrowings at December 31, 2000 and 1999 consisted of the
following:
2000 1999
-------- --------
(IN THOUSANDS)
Federal funds purchased .................. $ -- $ 9,990
Securities sold under agreements to
repurchase ............................. 52,310 59,436
Treasury tax and loan .................... 21,231 40,000
Bankers acceptances ...................... 24,481 19,639
Line of credit ........................... 10,000 --
-------- --------
Total short-term borrowings .......... $108,022 $129,065
======== ========
At December 31, 2000 and 1999, long-term debt consisted of the following:
2000 1999
-------- --------
(IN THOUSANDS)
FHLB advances ............................ $461,500 $464,500
Securities sold under agreements to
repurchase ............................. 130,000 100,000
Other .................................... 308 381
-------- --------
Total long-term debt ................. $591,808 $564,881
======== ========
The Federal Home Loan Bank (FHLB) advances had a weighted average interest
rate of 6.04 percent at December 31, 2000 and 5.93 percent at December 31, 1999.
These advances are secured by pledges of FHLB stock, mortgage-backed securities
and a blanket assignment of qualifying mortgage loans. The advances are
scheduled for repayment as follows:
(IN THOUSANDS)
2001 ......................... $ 127,000
2002 ......................... 17,000
2003 ......................... 82,000
2004 ......................... 102,000
2005 ......................... 23,000
Thereafter ................... 110,500
---------
$ 461,500
=========
Interest expense of $27.2 million, $21.7 million and $8.8 million was
recorded on FHLB advances during the years ended December 31, 2000, 1999, and
1998, respectively.
The securities sold under agreements to repurchase included in long-term
debt had a weighted average interest rate of 6.43 percent and 6.22 percent at
December 31, 2000 and 1999, respectively. $100 million of securities sold under
agreements to repurchase are due November, 2002 and $30 million are due March,
2005. Interest expense of $8.0 million and $942 thousand was recorded on this
debt during the years ended December 31, 2000 and 1999, respectively. There was
no interest expense recorded during 1998.
At December 31, 2000, Valley maintained a floating rate revolving line of
credit in the amount of $35.0 million of which $10.0 million was outstanding.
Interest expense of $1.4 million was recorded on this debt during the year ended
December 31, 2000. This line is available for general corporate purposes and
expires June 15, 2001. Borrowings under this facility are collateralized by
mortgage-backed securities and equity securities of no less than 120 percent of
the loan balance.
The amortized cost of securities pledged to secure public deposits,
treasury tax and loan deposits, repurchase agreements, lines of credit, FHLB
advances and for other purposes required by law approximated $408.9 million and
$289.2 million at December 31, 2000 and 1999, respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BENEFIT PLANS (Note 12)
PENSION PLAN
VNB has a non-contributory benefit plan covering substantially all of its
employees. The benefits are based upon years of credited service, primary social
security benefits and the employee's highest average compensation as defined. It
is VNB's funding policy to contribute annually the maximum amount that can be
deducted for federal income tax purposes. In addition, VNB has a supplemental
non-qualified, non-funded retirement plan which is designed to supplement the
pension plan for key officers.
The following table sets forth change in projected benefit obligation,
change in fair value of plan assets, funded status and amounts recognized in
Valley's financial statements for the pension plans at December 31, 2000 and
1999:
2000 1999
------- -------
(IN THOUSANDS)
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year ............ $19,207 $19,973
Service cost ............................................... 1,363 1,590
Interest cost .............................................. 1,433 1,353
Actuarial loss (gain) ...................................... 775 (2,626)
Benefits paid .............................................. (763) (1,083)
------- -------
Projected benefit obligation at end of year .................. $22,015 $19,207
======= =======
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of year ............... $24,319 $23,430
Actual return on plan assets ............................... 2,864 1,504
Employer contributions ..................................... 521 468
Benefits paid .............................................. (763) (1,083)
------- -------
Fair value of plan assets at end of year ..................... $26,941 $24,319
======= =======
Funded status ................................................ $ 4,926 $ 5,112
Unrecognized net asset ....................................... (253) (308)
Unrecognized prior service cost .............................. 171 262
Unrecognized net actuarial gain .............................. (8,412) (9,158)
------- -------
Accrued benefit cost ......................................... $(3,568) $(4,092)
======= =======
Net periodic pension expense for 2000, 1999 and 1998 included the following
components:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Service cost ...................................... $ 1,363 $ 1,590 $ 1,346
Interest cost ..................................... 1,433 1,353 1,212
Expected return on plan assets .................... (2,142) (1,982) (1,673)
Net amortization and deferral ..................... (55) (12) (56)
Recognized prior service cost ..................... 91 38 105
Recognized net gains .............................. (681) (631) (191)
------- ------- -------
Total net periodic pension expense ................ $ 9 $ 356 $ 743
======= ======= =======
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of benefit
obligations for the plan were 7.40 percent and 4.50 percent, respectively, for
2000 and 7.75 percent and 4.50 percent, respectively, for 1999. The expected
long-term rate of return on assets was
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9.00 percent for 2000 and 9.50 percent for 1999 and the weighted average
discount rate used in computing pension cost was 7.75 percent and 6.75 percent
for 2000 and 1999, respectively. The pension plan held 54,949 shares of Valley
National Bancorp stock at both December 31, 2000 and 1999.
BONUS PLAN
VNB and its subsidiaries award incentive and merit bonuses to its officers
and employees based upon a percentage of the covered employees' compensation as
determined by the achievement of certain performance objectives. Amounts charged
to salaries expense during 2000, 1999 and 1998 were $3.4 million, $3.1 million
and $2.6 million, respectively.
SAVINGS PLAN
Effective May 1, 1999, VNB's 401(k) Plan was amended to merge the Employee
Stock Ownership Plan ("ESOP") from the acquisition of Wayne into the VNB 401(k)
Plan, creating a KSOP (a 401(k) plan with an employee stock ownership feature).
This plan covers eligible employees of VNB and its subsidiaries and allows
employees to contribute 1 percent to 15 percent of their salary, with VNB
matching a certain percentage of the employee contribution. Beginning in May
1999, the VNB match is in shares of Valley stock. In 2000, VNB matched employee
contributions with 48,955 shares, of which 23,065 shares were allocated from the
former Wayne ESOP Plan and 26,719 shares were issued from Treasury stock. In
1999, VNB matched employee contributions with 30,723 shares, of which 16,057
shares were allocated from the former Wayne ESOP Plan and 14,666 shares were
issued from treasury stock. VNB charged expense for contributions to the plan,
net of forfeitures, for 2000, 1999 and 1998 amounting to $1.2 million, $944
thousand and $746 thousand, respectively. At December 31, 2000 the KSOP had
95,048 unallocated shares.
In 1999 and 1998, 32,117 shares and 25,428 shares, respectively, were
allocated to participants of the former Wayne ESOP Plan. ESOP expense for 1999
and 1998 was $865 thousand and $607 thousand, respectively. No shares were
allocated in 2000 to participants of the former Wayne ESOP Plan.
STOCK OPTION PLAN
At December 31, 2000, Valley had a stock option plan which is described
below. Valley applies APB Opinion No. 25 and related Interpretations in
accounting for its plan. Had compensation cost for the plan been determined
consistent with FASB Statement No. 123, net income and earnings per share would
have been reduced to the proforma amounts indicated below:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS,
EXCEPT FOR SHARE DATA)
Net income
As reported ................... $106,773 $106,324 $101,271
Proforma ...................... 105,525 105,279 100,246
Earnings per share
As reported:
Basic ....................... $ 1.76 $ 1.67 $ 1.57
Diluted ..................... 1.75 1.65 1.55
Proforma:
Basic ....................... $ 1.74 $ 1.65 $ 1.55
Diluted ..................... 1.73 1.64 1.53
Under the Employee Stock Option Plan, Valley may grant options to its
employees for up to 2.8 million shares of common stock in the form of stock
options, stock appreciation rights and restricted stock awards. The exercise
price of options equal 100 percent of the market price of Valley's stock on the
date of grant, and an option's maximum term is ten years. The options granted
under this plan are exercisable not earlier than one year after the date of
grant, expire not more than ten years after the date of the grant, and are
subject to a vesting schedule. Non-qualified options granted by Midland
Bancorporation, Inc. and assumed by Valley have no vesting period and a maximum
term of fifteen years.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: dividend yield of 3.12
percent for 2000, 3.71 percent for 1999 and 3.50 percent for 1998;
weighted-average risk-free interest rate of 5.11 percent for 2000, 6.44 percent
for 1999 and 5.00 percent for 1998; and expected volatility of 24.5 percent for
2000, 21.8 percent for 1999 and 18.5 percent for 1998. The effects of applying
SFAS No. 123 on the proforma net income may not be representative of the effects
on proforma net income for future years.
A summary of the status of qualified and non-qualified stock options as of
December 31, 2000, 1999 and 1998 and changes during the years ended on those
dates is presented below:
2000 1999 1998
------------------- -------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------- -------- --------- -------- --------- ---------
Outstanding at beginning of year .......... 1,895,026 $17 2,122,677 $ 4 2,006,039 $13
Granted ................................... 268,735 28 264,877 26 277,539 25
Exercised ................................. (219,496) 13 (471,029) 10 (138,343) 11
Forfeited ................................. (54,373) 24 (21,499) 23 (22,558) 20
--------- --------- ---------
Outstanding at end of year ................ 1,889,892 19 1,895,026 17 2,122,677 14
========= ========= =========
Options exercisable at year-end ........... 1,065,621 15 1,037,719 13 1,160,478 11
========= ========= =========
Weighted-average fair value of options
granted during the year ................. $7.11 $6.10 $5.09
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------
WEIGHTED-
AVERAGE
RANGE OF REMAINING WEIGHTED- WEIGHTED-
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ------------ ----------- -------------- ------------ --------------
$ 4-12 293,585 9.7 years $ 6 293,585 $ 6
12-19 630,141 5.0 15 496,989 15
19-24 212,569 7.2 23 106,894 23
24-29 753,597 8.7 26 168,153 25
--------- ---------
4-29 1,889,892 7.4 19 1,065,621 15
========= =========
During 1998, stock appreciation rights granted in tandem with stock options
were 11,438. There were 28,557, 50,559 and 50,559 stock appreciation rights
outstanding as of December 31, 2000, 1999 and 1998, respectively.
Restricted stock is awarded to key employees providing for the immediate
award of Valley's common stock subject to certain vesting and restrictions. The
awards are recorded at fair market value and amortized into salary expense over
the vesting period. The following table sets forth the changes in restricted
stock awards outstanding for the years ended December 31, 2000, 1999 and 1998.
RESTRICTED
STOCK AWARDS 2000 1999 1998
------------ ------- ------- -------
Outstanding at beginning of year ....... 217,437 217,957 213,509
Granted ................................ 64,196 61,401 61,214
Vested ................................. (66,689) (58,577) (54,576)
Forfeited .............................. (7,440) (3,344) (2,190)
------- ------- -------
Outstanding at end of year ............. 207,504 217,437 217,957
======= ======= =======
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amount of compensation costs related to restricted stock awards
included in salary expense in 2000, 1999 and 1998 amounted to $1.3 million, $1.1
million and $1.0 million, respectively.
INCOME TAXES (Note 13)
Income tax expense (benefit) included in the financial statements consisted
of the following:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Income tax from operations:
Current:
Federal ....................... $53,993 $50,434 $29,520
State ......................... 1,593 2,041 3,400
------- ------- -------
55,586 52,475 32,920
Deferred:
Federal and State ............... (522) (255) (2,540)
------- ------- -------
Total income tax expense .... $55,064 $52,220 $30,380
======= ======= =======
The tax effects of temporary differences that gave rise to deferred tax
assets and liabilities as of December 31, 2000 and 1999 are as follows:
2000 1999
------- -------
(IN THOUSANDS)
Deferred tax assets:
Allowance for loan losses ....................... $21,715 $22,270
Investment securities available for sale ........ 2,803 11,017
State privilege year taxes ...................... -- 277
Non-accrual loan interest ....................... 182 317
Other ........................................... 7,396 7,054
------- -------
Total deferred tax assets ..................... 32,096 40,935
------- -------
Deferred tax liabilities:
Tax over book depreciation ...................... 2,476 2,969
Purchase accounting adjustments ................. 212 443
Unearned discount on investments ................ 188 428
State privilege year taxes ...................... 34 --
Other ........................................... 5,121 5,338
------- -------
Total deferred tax liabilities ................ 8,031 9,178
------- -------
Net deferred tax assets ........................... $24,065 $31,757
======= =======
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation between the reported income tax expense and the amount
computed by multiplying income before taxes by the statutory federal income tax
rate is as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Tax at statutory federal income tax rate ........... $56,643 $55,490 $46,078
Increases (decreases) resulted from:
Tax-exempt interest, net of interest
incurred to carry tax-exempts .................. (2,776) (2,693) (2,903)
State income tax, net of federal tax benefit ..... 1,478 1,985 1,916
Realignment of corporate entities ................ -- (2,615) (15,406)
Other, net ....................................... (281) 53 695
------- ------- -------
Income tax expense ............................... $55,064 $52,220 $30,380
======= ======= =======
COMMITMENTS AND CONTINGENCIES (NOTE 14)
LEASE COMMITMENTS
Certain bank facilities are occupied under non-cancelable long-term
operating leases which expire at various dates through 2047. Certain lease
agreements provide for renewal options and increases in rental payments based
upon increases in the consumer price index or the lessor's cost of operating the
facility. Minimum aggregate lease payments for the remainder of the lease terms
are as follows:
(IN THOUSANDS)
2001 .................................. $ 5,678
2002 .................................. 5,164
2003 .................................. 4,757
2004 .................................. 4,190
2005 .................................. 2,774
Thereafter ............................ 16,854
-------
Total lease commitments ............. $39,417
=======
Net occupancy expense for 2000, 1999 and 1998 included approximately $3.0
million, $2.3 million and $3.2 million, respectively, of rental expenses for
leased bank facilities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the ordinary course of business of meeting the financial needs of its
customers, Valley, through its subsidiary VNB, is a party to various financial
instruments which are properly not reflected in the consolidated financial
statements. These financial instruments include standby and commercial letters
of credit, unused portions of lines of credit and commitments to extend various
types of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amounts recognized in the consolidated financial
statements. The commitment or contract amount of these instruments is an
indicator of VNB's level of involvement in each type of instrument as well as
the exposure to credit loss in the event of non-performance by the other party
to the financial instrument. VNB seeks to limit any exposure of credit loss by
applying the same credit underwriting standards, including credit review,
interest rates and collateral requirements or personal guarantees, as for
on-balance sheet lending facilities.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides a summary of financial instruments with
off-balance sheet risk at December 31, 2000 and 1999:
2000 1999
---------- ----------
(IN THOUSANDS)
Standby and commercial letters of credit ............... $ 92,626 $ 85,430
Commitments under unused lines of credit-credit card ... 832,613 867,230
Commitments under unused lines of credit-other ......... 587,804 549,405
Outstanding loan commitments ........................... 418,141 460,607
---------- ----------
Total financial instruments with off-balance
sheet risk ......................................... $1,931,184 $1,962,672
========== ==========
Standby letters of credit represent the guarantee by VNB of the obligations
or performance of a customer in the event the customer is unable to meet or
perform its obligations to a third party. Obligations to advance funds under
commitments to extend credit, including commitments under unused lines of
credit, are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have specified
expiration dates, which may be extended upon request, or other termination
clauses and generally require payment of a fee.
At December 31, 2000, VNB had commitments to sell residential mortgage
loans and SBA loans totaling $7.5 million.
The amounts set forth above do not necessarily represent future cash
requirements as it is anticipated that many of these commitments will expire
without being fully drawn upon. Most of VNB's lending activity is to customers
within the state of New Jersey, except for automobile loans, which are to
customers from 12 states, including New Jersey, and Canada.
LITIGATION
In the normal course of business, Valley may be a party to various outstanding
legal proceedings and claims. In the opinion of management, the consolidated
financial position or results of operations of Valley will not be materially
affected by the outcome of such legal proceedings and claims.
SHAREHOLDERS' EQUITY (Note 15)
CAPITAL REQUIREMENTS
Valley is subject to the regulatory capital requirements administered by
the Federal Reserve Bank. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on Valley's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Valley must meet specific capital
guidelines that involve quantitative measures of Valley's assets, liabilities
and certain off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Valley to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets, as
defined in the regulations. As of December 31, 2000, Valley exceeded all capital
adequacy requirements to which it was subject.
The most recent notification received from the Federal Reserve Bank
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized Valley must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Valley's actual capital amounts and ratios as of December 31, 2000 and 1999
are presented in the following table:
TO BE WELL CAPITALIZED
UNDER PROMPT
MINIMUM CAPITAL CORRECTIVE ACTION
ACTUAL REQUIREMENTS PROVISIONS
-------------------- -------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ----- -------- -----
(IN THOUSANDS)
As of December 31, 2000
Total Risk-based Capital ......... $597,796 11.9% $401,780 8.0% $502,225 10.0%
Tier I Risk-based Capital ........ 544,061 10.8 200,890 4.0 301,335 6.0
Tier I Leverage Capital .......... 544,061 8.7 249,351 4.0 311,689 5.0
As of December 31, 1999
Total Risk-based Capital ......... 620,514 12.8 389,421 8.0 486,776 10.0
Tier I Risk-based Capital ........ 565,394 11.6 194,710 4.0 292,065 6.0
Tier I Leverage Capital .......... 565,394 9.1 248,126 4.0 310,158 5.0
DIVIDEND RESTRICTIONS
VNB, a national banking association, is subject to a limitation in the
amount of dividends it may pay to Valley, VNB's only shareholder. Prior approval
by the Comptroller of the Currency ("OCC") is required to the extent that the
total of all dividends to be declared by VNB in any calendar year exceeds net
profits, as defined, for that year combined with its retained net profits from
the preceding two calendar years, less any transfers to capital surplus. Under
this limitation, VNB could declare dividends in 2001 without prior approval from
the OCC equal to VNB's net profits for 2001 to the date of such dividend
declaration less $7.3 million of excess dividends paid in the preceding two
calendar years. In addition to dividends received from its subsidiary bank,
Valley can satisfy its cash requirements by utilizing its own funds, cash and
investments, as well as borrowed funds.
PREFERRED STOCK
On February 12, 2000, the Board of Directors unanimously approved an
amendment to Valley's Certificate of Incorporation to authorize 30,000,000
shares of a new class of "blank check" preferred stock. The purpose of the
preferred stock is to maximize Valley's ability to expand its capital base. The
amendment was approved by the Valley shareholders on April 6, 2000. At December
31, 2000, there were no shares of preferred stock issued.
SHARES OF COMMON STOCK
The following table summarizes the share transactions for the three years
ended December 31, 2000:
SHARES IN
SHARES ISSUED TREASURY
------------- -----------
BALANCE, DECEMBER 31, 1997 .................... 58,966,200 (356,082)
Effect of stock incentive plan, net ......... (14,607) 152,472
Purchase of treasury stock .................. -- (220,125)
Issuance of stock from treasury ............. -- 187,000
---------- ----------
BALANCE, DECEMBER 31, 1998 .................... 58,951,593 (236,735)
Stock dividend (5 percent) .................. 1,236,450 1,537,876
Effect of stock incentive plan, net ......... 432,997 168,366
Purchase of treasury stock .................. -- (2,397,257)
---------- ----------
BALANCE, DECEMBER 31, 1999 .................... 60,621,040 (927,750)
Stock dividend (5 percent) .................. -- 2,884,669
Effect of stock incentive plan, net ......... (80,993) 311,380
Purchase of treasury stock .................. -- (2,770,770)
---------- ----------
BALANCE, DECEMBER 31, 2000 .................... 60,540,047 (502,471)
========== ==========
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
TREASURY STOCK
On May 23, 2000 Valley's Board of Directors authorized the repurchase of up
to 3,000,000 shares of the Company's outstanding common stock. As of September
19, 2000 Valley had repurchased 571,070 shares of its common stock under this
repurchase program, which was rescinded in connection with the signing of the
definitive merger agreement with Merchants. This is in addition to the 3,000,000
shares purchased pursuant to an authorization by the Board of Directors in
December 1999, the majority of which were used for the stock dividend issued on
May 16, 2000. Reacquired shares are held in treasury and are expected to be used
for employee benefit programs, stock dividends and other corporate purposes.
On June 10, 1999 Valley's Board of Directors rescinded the stock repurchase
program it had announced on April 28, 1999 after 1.6 million shares of Valley
common stock had been repurchased. Approximately 1.5 million treasury shares
were issued in conjunction with the 5 percent dividend issued May 18, 1999.
Rescinding the remaining authorization was undertaken in connection with
Valley's acquisition of Ramapo.
On May 26, 1998 Valley's Board of Directors rescinded its previously
announced stock repurchase program after 220,125 shares of Valley common stock
had been repurchased. Rescinding the remaining authorization was undertaken in
connection with Valley's acquisition of Wayne.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 16)
QUARTERS ENDED 2000
------------------------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
Interest income ................................ $112,472 $114,407 $116,720 $117,254
Interest expense ............................... 48,151 50,496 51,930 52,179
Net interest income ............................ 64,321 63,911 64,790 65,075
Provision for loan losses ...................... 1,500 2,200 1,730 700
Non-interest income ............................ 11,629 12,635 12,546 14,073
Non-interest expense ........................... 33,586 34,637 35,455 37,335
Income before income taxes ..................... 40,864 39,709 40,151 41,113
Income tax expense ............................. 13,921 13,049 13,768 14,326
Net income ..................................... 26,943 26,660 26,383 26,787
Earnings per share:
Basic ........................................ 0.44 0.44 0.44 0.45
Diluted ...................................... 0.43 0.44 0.44 0.44
Cash dividends per share ....................... 0.25 0.26 0.26 0.26
Average shares outstanding:
Basic ........................................ 61,921,667 60,491,929 60,004,266 59,840,479
Diluted ...................................... 62,460,619 61,111,320 60,596,266 60,511,279
QUARTERS ENDED 1999
------------------------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
Interest income ................................ $103,145 $105,794 $107,906 $110,690
Interest expense ............................... 39,561 41,537 42,434 45,645
Net interest income ............................ 63,584 64,257 65,472 65,045
Provision for loan losses ...................... 2,000 1,775 2,320 3,025
Non-interest income ............................ 12,723 11,799 11,331 11,399
Non-interest expense ........................... 32,265 35,236 33,923 36,522
Income before income taxes ..................... 42,042 39,045 40,560 36,897
Income tax expense ............................. 15,553 13,648 13,281 9,738
Net income ..................................... 26,489 25,397 27,279 27,159
Earnings per share:
Basic ........................................ 0.41 0.40 0.43 0.43
Diluted ...................................... 0.41 0.39 0.43 0.43
Cash dividends per share ....................... 0.23 0.25 0.25 0.25
Average shares outstanding:
Basic ........................................ 64,560,826 63,930,027 63,241,185 63,216,305
Diluted ...................................... 65,379,353 64,636,698 63,907,683 63,835,891
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PARENT COMPANY INFORMATION (Note 17)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
ASSETS
Cash ................................................. $ 2,478 $ 3,242
Interest bearing deposits with banks ................. 22,125 36,127
Investment securities available for sale ............. 44,752 55,909
Investment in subsidiary ............................. 495,391 474,462
Loan to subsidiary bank employee benefit plan ........ 893 1,071
Other assets ......................................... 5,523 4,195
-------- --------
Total assets ....................................... $571,162 $575,006
======== ========
LIABILITIES
Dividends payable to shareholders .................... $ 15,605 $ 15,724
Short-term borrowings ................................ 10,000 --
Other liabilities .................................... 483 5,782
-------- --------
Total liabilities .................................. 26,088 21,506
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock ...................................... -- --
Common stock ......................................... 25,886 25,943
Surplus .............................................. 324,300 325,147
Retained earnings .................................... 213,362 244,605
Unallocated common stock held by employee
benefit plan ....................................... (775) (965)
Accumulated other comprehensive loss ................. (4,923) (16,733)
-------- --------
557,850 577,997
Treasury stock, at cost .............................. (12,776) (24,497)
-------- --------
Total shareholders' equity ......................... 545,074 553,500
-------- --------
Total liabilities and shareholders' equity ......... $571,162 $575,006
======== ========
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Income
Dividends from subsidiary ........................................... $ 98,000 $120,326 $ 89,320
Income from subsidiary .............................................. 844 1,313 1,291
Gains on securities transactions, net ............................... 249 2,591 743
Other interest and dividends ........................................ 2,432 2,741 683
-------- -------- --------
101,525 126,971 92,037
Expenses .............................................................. 3,308 3,271 3,976
-------- -------- --------
Income before income taxes and equity in undistributed
earnings of subsidiary .............................................. 98,217 123,700 88,061
Income tax (benefit) expense .......................................... (44) 1,580 118
-------- -------- --------
Income before equity in undistributed earnings
of subsidiary ....................................................... 98,261 122,120 87,943
Equity in undistributed earnings of subsidiary (excess dividends) ..... 8,512 (15,796) 13,328
-------- -------- --------
Net income ............................................................ $106,773 $106,324 $101,271
======== ======== ========
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $106,773 $106,324 $101,271
Adjustments to reconcile net income to net cash provided by
operating activities:
Excess dividends of (equity in undistributed earnings)
subsidiary ..................................................... (8,512) 15,796 (13,328)
Depreciation and amortization .................................... 380 365 479
Amortization of compensation costs pursuant to long-term
stock incentive plan ........................................... 1,037 1,091 1,036
Net accretion of discounts ....................................... (8) (49) (360)
Net gains on securities transactions ............................. (249) (2,591) (743)
Net (increase)decrease in other assets ........................... (1,707) 317 (342)
Net (decrease)increase in other liabilities ...................... (5,360) 4,576 (1,250)
-------- -------- --------
Net cash provided by operating activities ...................... 92,354 125,829 86,763
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale .... 24,413 8,735 16,918
Proceeds from maturing investment securities available for sale .... 3,197 81,146 15,000
Purchases of investment securities available for sale .............. (15,817) (78,666) (71,809)
Proceeds from sales of trading account securities .................. -- 1,415 --
Net decrease(increase) in short-term investments ................... 14,002 (14,445) 1,422
Decrease in advance to subsidiary .................................. -- -- 3,409
Payment of employee benefit plan loan .............................. 178 179 178
Purchases of premises and equipment ................................ -- -- (141)
-------- -------- --------
Net cash provided by (used in) investing activities .............. 25,973 (1,636) (35,023)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in other borrowings ................................... 10,000 -- --
Purchases of common shares added to treasury ....................... (70,035) (66,955) (6,658)
Dividends paid to common shareholders .............................. (62,355) (58,126) (51,189)
Common stock issued, net of cancellations .......................... 3,299 2,771 6,931
-------- -------- --------
Net cash used in financing activities .............................. (119,091) (122,310) (50,916)
-------- -------- --------
Net (decrease)increase in cash and cash equivalents .................. (764) 1,883 824
Cash and cash equivalents at beginning of year ....................... 3,242 1,359 535
-------- -------- --------
Cash and cash equivalents at end of year ............................. $ 2,478 $ 3,242 $ 1,359
======== ======== ========
FAIR VALUES OF FINANCIAL INSTRUMENTS (Note 18)
Limitations: The fair value estimates made at December 31, 2000 and 1999
were based on pertinent market data and relevant information on the financial
instruments at that time. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire portfolio of
financial instruments. Because no market exists for a portion of the financial
instruments, fair value estimates may be based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For instance, Valley has certain fee-generating business
lines (e.g., its mortgage servicing operation and trust and investment
department) that were not considered in these estimates since these activities
are not financial instruments. In addition, the tax implications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments and mortgage servicing rights:
Cash and short-term investments: For such short-term investments, the
carrying amount is considered to be a reasonable estimate of fair value.
Investment securities held to maturity and investment securities available
for sale: Fair values are based on quoted market prices.
Loans: Fair values are estimated by obtaining quoted market prices, when
available. The fair value of other loans is estimated by discounting the future
cash flows using market discount rates that reflect the credit and interest-rate
risk inherent in the loan.
Deposit liabilities: Current carrying amounts approximate estimated fair
value of demand deposits and savings accounts. The fair value of time deposits
is based on the discounted value of contractual cash flows using estimated rates
currently offered for deposits of similar remaining maturity.
Short-term borrowings: Current carrying amounts approximate estimated fair
value.
Long-term debt: The fair value is estimated by discounting future cash
flows based on rates currently available for debt with similar terms and
remaining maturity.
The carrying amounts and estimated fair values of financial instruments
were as follows at December 31, 2000 and 1999:
2000 1999
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Financial assets:
Cash and due from banks .......................... $ 186,720 $ 186,720 $ 161,561 $ 161,561
Federal funds sold ............................... 50,000 50,000 123,000 123,000
Investment securities held to maturity ........... 333,424 294,801 351,501 318,329
Investment securities available for sale ......... 1,035,769 1,035,769 1,005,419 1,005,419
Net loans ........................................ 4,607,679 4,593,388 4,499,632 4,442,927
Financial liabilities:
Deposits with no stated maturity ................. 3,000,961 3,000,961 2,949,546 2,949,546
Deposits with stated maturities .................. 2,122,756 2,125,144 2,101,709 2,102,149
Short-term borrowings ............................ 108,022 108,022 129,065 129,065
Long-term debt ................................... 591,808 593,939 564,881 548,043
The estimated fair value of financial instruments with off-balance sheet
risk, consisting of unamortized fee income at December 31, 2000 and 1999 is not
material.
BUSINESS SEGMENTS (Note 19)
VNB has four major 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
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 to any other
financial institution. The accounting for each segment includes internal
accounting policies designed to measure consistent and reasonable financial
reporting.
Consumer lending delivers loan and banking products and services mainly to
individuals and small businesses through its branches, ATM machines, PC banking
and sales, service and collection force within each lending department. The
products and services include residential mortgages, home equity loans,
automobile loans, credit card loans, trust and investment services and mortgage
servicing for investors. Automobile lending is generally available throughout
New Jersey, but is also currently available in twelve states and Canada as part
of a referral program with a major insurance company.
The commercial lending division provides loan products and services to
small and medium commercial establishments throughout northern New Jersey. These
include lines of credit, term loans, letters of credit, asset-based lending,
construction, development and permanent real estate financing for owner occupied
and leased properties and Small Business Administration ("SBA") loans. The SBA
loans are offered through a sales force covering New Jersey and a number of
surrounding states and territories. The commercial lending division serves
numerous businesses through departments organized into product or specific
geographic divisions.
The investment function handles the management of the investment portfolio,
asset/liability management and government banking for VNB. The objectives of
this department are production of income and liquidity through the investment of
VNB's funds. The bank purchases and holds a mix of bonds, notes, U.S. and other
governmental securities and other investments.
The corporate and other adjustments segment represents assets and income
and expense items not directly attributable to a specific segment.
The following table represents the financial data for the four business
segments for the years ended 2000, 1999 and 1998.
YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------------------
CORPORATE
CONSUMER COMMERCIAL INVESTMENT AND OTHER
LENDING LENDING MANAGEMENT ADJUSTMENTS TOTAL
---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
Average interest-earning assets ......... $2,786,273 $1,828,059 $1,370,704 $ -- $5,985,036
========== ========== ========== ========= ==========
Interest income ......................... $ 216,502 $ 159,207 $ 88,260 $ (3,116) $ 460,853
Interest expense ........................ 94,391 61,929 46,436 -- 202,756
---------- ---------- ---------- --------- ----------
Net interest income (loss) .............. 122,111 97,278 41,824 (3,116) 258,097
Provision for loan losses ............... 4,481 1,649 -- -- 6,130
---------- ---------- ---------- --------- ----------
Net interest income (loss) after
provision for loan losses ............. 117,630 95,629 41,824 (3,116) 251,967
Non-interest income ..................... 13,703 5,127 562 31,491 50,883
Non-interest expense .................... 24,201 10,025 122 106,665 141,013
Internal expense transfer ............... 36,817 24,156 14,474 (75,447) --
---------- ---------- ---------- --------- ----------
Income (loss) before income taxes ....... $ 70,315 $ 66,575 $ 27,790 $ (2,843) $ 161,837
========== ========== ========== ========= ==========
Return on average interest-bearing
assets (pre-tax) ...................... 2.52% 3.64% 2.03% -- 2.70%
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------
CORPORATE
CONSUMER COMMERCIAL INVESTMENT AND OTHER
LENDING LENDING MANAGEMENT ADJUSTMENTS TOTAL
---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
Average interest-earning assets ......... $2,696,100 $1,696,582 $1,404,105 $ -- $5,796,787
========== ========== ========== ========= ==========
Interest income ......................... $ 199,484 $ 142,725 $ 88,316 $ (2,990) $ 427,535
Interest expense ........................ 78,685 49,514 40,978 -- 169,177
---------- ---------- ---------- --------- ----------
Net interest income (loss) .............. 120,799 93,211 47,338 (2,990) 258,358
Provision for loan losses ............... 7,826 1,294 -- -- 9,120
---------- ---------- ---------- --------- ----------
Net interest income (loss) after
provision for loan losses ............. 112,973 91,917 47,338 (2,990) 249,238
Non-interest income ..................... 13,992 4,751 28 28,481 47,252
Non-interest expense .................... 27,019 9,679 113 101,135 137,946
Internal expense transfer ............... 31,360 22,300 18,176 (71,836) --
---------- ---------- ---------- --------- ----------
Income (loss) before income taxes ....... $ 68,586 $ 64,689 $ 29,077 $ (3,808) $ 158,544
========== ========== ========== ========= ==========
Return on average interest-bearing
assets (pre-tax) ...................... 2.54% 3.81% 2.07% -- 2.74%
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------
CORPORATE
CONSUMER COMMERCIAL INVESTMENT AND OTHER
LENDING LENDING MANAGEMENT ADJUSTMENTS TOTAL
---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
Average interest-earning assets ......... $2,443,388 $1,573,351 $1,369,640 $ 8,034 $5,394,413
========== ========== ========== ========= ==========
Interest income ......................... $ 192,830 $ 134,899 $ 89,761 $ (6,197) $ 411,293
Interest expense ........................ 75,940 48,900 42,568 250 167,658
---------- ---------- ---------- --------- ----------
Net interest income (loss) .............. 116,890 85,999 47,193 (6,447) 243,635
Provision for loan losses ............... 10,586 1,939 -- 120 12,645
---------- ---------- ---------- --------- ----------
Net interest income (loss) after
provision for loan losses ............. 106,304 84,060 47,193 (6,567) 230,990
Non-interest income ..................... 16,310 6,040 20 23,004 45,374
Non-interest expense .................... 29,973 9,208 111 105,421 144,713
Internal expense transfer ............... 34,650 23,424 20,820 (78,894) --
---------- ---------- ---------- --------- ----------
Income (loss) before income taxes ....... $ 57,991 $ 57,468 $ 26,282 $ (10,090) $ 131,651
========== ========== ========== ========= ==========
Return on average interest-bearing
assets (pre-tax) ...................... 2.37% 3.65% 1.92% -- 2.44%
62
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
KPMG LLP
Certified Public Accountants
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
THE BOARD OF DIRECTORS AND SHAREHOLDERS
VALLEY NATIONAL BANCORP:
We have audited the accompanying consolidated statements of financial
condition of Valley National Bancorp and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
National Bancorp and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
[KPMG LLP LOGO]
January 17, 2001
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information which will be set forth under the captions "Director
Information"and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
2001 Proxy Statement is incorporated herein by reference. Certain information on
Executive Officers of the registrant is included in Part I, Item 4A of this
report, which is also incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information which will be set forth under the caption "Executive
Compensation" in the 2001 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information which will be set forth under the caption "Stock Ownership
of Management and Principal Shareholders" in the 2001 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information which will be set forth under the captions "Compensation
Committee Interlocks and Insider Participation" and "Certain Transactions with
Management" in the 2001 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules:
The following Financial Statements and Supplementary Data are filed as part
of this annual report:
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
All financial statement schedules are omitted because they are either
inapplicable or not required, or because the required information is
included in the Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K:
On October 20, 2000 to report earnings for the three and nine months ended
September 30, 2000.
On December 1, 2000 to report the phase out of an automobile loan program
with a major insurance company.
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
A. Restated Certificate of Incorporation of the Registrant as in effect
on May 9, 2000 (and as currently in effect) is incorporated herein by
reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
64
B. By-laws of the Registrant adopted as of March 14, 1989 and amended
March 19, 1991 are incorporated herein by reference to the
Registrant's Form 10-K Annual Report for the year ended December 31,
1998.
(10) MATERIAL CONTRACTS:
A. Restated and amended "Change in Control Agreements" dated January 1,
1999 between Valley, VNB and Gerald H. Lipkin, Peter Southway, Peter
John Southway, Robert Meyer, and Peter Crocitto are incorporated
herein by reference to the Registrant's Form 10-K Annual Report for
the year ended December 31, 1998.
B. "Change in Control Agreements" dated January 1, 1995 between Valley,
VNB and Robert Farrell, Richard Garber and Robert Mulligan are
incorporated herein by reference to the Registrant's Form 10-K Annual
Report for the year ended December 31, 1999.
C. "Change in Control Agreement" dated February 1, 1996 between Valley,
VNB and Jack Blackin is incorporated herein by reference to the
Registrant's Form 10-K Annual Report for the year ended December 31,
1996.
D. "Change in Control Agreement" dated April 15, 1996 between Valley, VNB
and John Prol is incorporated herein by reference to the Registrant's
Form 10-K Annual Report for the year ended December 31, 1996.
E. "The Valley National Bancorp Long-term Stock Incentive Plan" dated
January 19, 1999 and amended April 6, 2000.
F. "Severance Agreements" dated August 17, 1994 between Valley, VNB and
Gerald H. Lipkin and Peter Southway are incorporated by reference to
Registrant's Registration Statement on Form S-4 (No. 33-55765) filed
with the Securities and Exchange Commission on October 4, 1994.
G. "Stock Option Agreement" dated April 1, 1992 between Valley and
Michael Guilfoile is incorporated herein by reference to the
Registrant's Form 10-K Annual Report for the year ended December 31,
1999.
H. "Split-Dollar Agreement" dated July 7, 1995 between Valley, VNB, and
Gerald H. Lipkin.
I. "Employment Arrangement" dated June 6, 1996 between Valley, VNB and
Peter Southway is incorporated herein by reference to the Registrant's
Form 10-K Annual Report for the year ended December 31, 1996.
J. "Severance Agreements" as of January 1, 1998 between Valley, VNB and
Peter Crocitto, Robert M. Meyer and Peter John Southway are
incorporated herein by reference to the Registrant's Form 10-K Annual
Report for the year ended December 31, 1997.
K. "Change in Control Agreement" dated January 1, 1998 between Valley,
VNB and Alan Lipsky is incorporated herein by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
L. "Change in Control Agreements" dated January 1, 1999 between Valley,
VNB and Alan D. Eskow and Robert J. Farnon are incorporated herein by
reference to the Registrant's Form 10-K Annual Report for the year
ended December 31, 1998.
M. "Change in Control Agreement" dated January 3, 2000 between Valley,
VNB and Albert L. Engel is incorporated herein by reference to the
Registrant's Form 10-K Annual Report for the year ended December 31,
1999.
N. "The Valley National Bancorp Long-Term Stock Incentive Plan" dated
January 10, 1989 and amended March 16, 1993, January 18, 1994 and
April 6, 2000.
O. Amendment to the "Severance Agreement" dated November 28, 2000 between
Valley, VNB and Gerald H. Lipkin.
P. Agreement and Plan of Merger dated September 5, 2000 among Valley,
Merchants, and Merchants Bank of New York is incorporated herein by
reference to Valley's Report on Form 8-K filed with the Commission on
September 21, 2000.
Q. Stock Option Agreement dated September 5, 2000 between Valley and
Merchants is incorporated herein by reference to Valley's Report on
Form 8-K filed with the Commission on September 5, 2000.
65
(21) LIST OF SUBSIDIARIES:
(a) Subsidiary of Valley:
JURISDICTION OF PERCENTAGE OF VOTING
NAME INCORPORATION SECURITIES OWNED BY THE PARENT
---- --------------- ------------------------------
Valley National Bank (VNB) United States 100%
(b) Subsidiaries of VNB:
VNB Mortgage Services, Inc. New Jersey 100%
BNV Realty Incorporated (BNV) New Jersey 100%
VNB Financial Advisors, Inc. New Jersey 100%
VNB Loan Services, Inc. New York 100%
VNB RSI, Inc. New Jersey 100%
Wayne Ventures, Inc. New Jersey 100%
Wayne Title, Inc. New Jersey 100%
VNB International Services, Inc. (ISI) New Jersey 100%
New Century Asset Management, Inc. New Jersey 100%
Valley CMC, Inc. (CMC) New Jersey 100%
Hallmark Capital Management, Inc. New Jersey 100%
(c) Subsidiary of ISI:
VNB Financial Services, Inc. Canada 100%
(d) Subsidiaries of BNV
SAR I, Inc. New Jersey 100%
SAR II, Inc. New Jersey 100%
(e) Subsidiary of CMC:
VN Investments, Inc. New Jersey 100%
(23) CONSENTS OF EXPERTS AND COUNSEL
Consent of KPMG LLP
(24) POWER OF ATTORNEY OF CERTAIN DIRECTORS AND OFFICERS OF VALLEY
66
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALLEY NATIONAL BANCORP
By
------------------------------------------
GERALD H. LIPKIN, CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: February 23, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GERALD H. LIPKIN Chairman of the Board, President and February 23, 2001
---------------------------------------- Chief Executive Officer and Director
GERALD H. LIPKIN
/s/ PETER SOUTHWAY Vice Chairman (Principal Financial February 23, 2001
---------------------------------------- Officer) and Director
PETER SOUTHWAY
/s/ SPENCER B. WITTY Vice Chairman and Director February 23, 2001
----------------------------------------
SPENCER B. WITTY
/s/ ALAN D. ESKOW Executive Vice President and Chief February 23, 2001
---------------------------------------- Financial Officer (Principal
ALAN D. ESKOW Accounting Officer)
ANDREW B. ABRAMSON* Director February 23, 2001
----------------------------------------
ANDREW B. ABRAMSON
CHARLES J. BAUM* Director February 23, 2001
----------------------------------------
CHARLES J. BAUM
PAMELA BRONANDER* Director February 23, 2001
----------------------------------------
PAMELA BRONANDER
JOSEPH COCCIA, JR.* Director February 23, 2001
----------------------------------------
JOSEPH COCCIA, JR.
HAROLD P. COOK, III* Director February 23, 2001
----------------------------------------
HAROLD P. COOK, III
AUSTIN C. DRUKKER* Director February 23, 2001
----------------------------------------
AUSTIN C. DRUKKER
WILLARD L. HEDDEN* Director February 23, 2001
----------------------------------------
WILLARD L. HEDDEN
GRAHAM O. JONES* Director February 23, 2001
----------------------------------------
GRAHAM O. JONES
WALTER H. JONES, III* Director February 23, 2001
----------------------------------------
WALTER H. JONES, III
67
SIGNATURE TITLE DATE
--------- ----- ----
GERALD KORDE* Director February 23, 2001
----------------------------------------
GERALD KORDE*
ROBINSON MARKEL* Director February 23, 2001
----------------------------------------
ROBINSON MARKEL
JOLEEN J. MARTIN* Director February 23, 2001
----------------------------------------
JOLEEN J. MARTIN
ROBERT E. MCENTEE* Director February 23, 2001
----------------------------------------
ROBERT E. MCENTEE
RICHARD S. MILLER* Director February 23, 2001
----------------------------------------
RICHARD S. MILLER
ROBERT RACHESKY* Director February 23, 2001
----------------------------------------
ROBERT RACHESKY
BARNETT RUKIN* Director February 23, 2001
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BARNETT RUKIN
RICHARD F. TICE* Director February 23, 2001
----------------------------------------
RICHARD F. TICE
LEONARD J. VORCHEIMER* Director February 23, 2001
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LEONARD J. VORCHEIMER
JOSEPH L. VOZZA* Director February 23, 2001
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JOSEPH L. VOZZA
* By Gerald H. Lipkin, as attorney-in-fact.
68
EXHIBIT INDEX.doc
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
------- ------ -------------------
(10)E Valley National Bancorp Long-
Term Stock Incentive Plan dated
January 19, 1999
(10)H Split Dollar Agreement--
Gerald H. Lipkin
(10)N Valley National Bancorp Long-
Term Stock Incentive Plan dated
January 10, 1989
(10)O Amendment to Severance
Agreement--Gerald H. Lipkin
(23) Consent of KPMG LLP
(24) Power of Attorney