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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11179
VALLEY NATIONAL BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW JERSEY 22-2477875
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1455 VALLEY ROAD 07474
WAYNE, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 201-305-8800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, no par value New York Stock Exchange, Inc.
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $831,051,000 on January 31, 1996.
There were 35,713,374 shares of Common Stock outstanding at January 31,
1996.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Registrant's Definitive Proxy Statement (the "1996
Proxy Statement") for the 1996 Annual Meeting of shareholders to be held April
2, 1996 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.................................................................... 1
Item 2. Properties.................................................................. 6
Item 3. Legal Proceedings........................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......................... 7
Item 4A. Executive Officers of the Registrant........................................ 7
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters....... 7
Item 6. Selected Financial Data..................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 9
Item 8. Financial Statements and Supplementary Data:
Valley National Bancorp and Subsidiaries:
Consolidated Statements of Income...................................... 26
Consolidated Statements of Financial Condition......................... 27
Consolidated Statements of Changes in Shareholders' Equity............. 28
Consolidated Statements of Cash Flows.................................. 29
Notes to Consolidated Financial Statements............................. 30
Independent Auditors' Report........................................... 50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 51
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 51
Item 11. Executive Compensation...................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 51
Item 13. Certain Relationships and Related Transactions.............................. 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 51
Signatures.............................................................................. 53
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PART I
ITEM 1. BUSINESS
Valley National Bancorp ("Valley") is a New Jersey corporation incorporated
as a bank holding company under the Bank Holding Company Act of 1956, as amended
("Holding Company Act"). At December 31, 1995, Valley had consolidated total
assets of $4.6 billion, total deposits of $4.1 billion, and total shareholders'
equity of $400.2 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 80 branch offices located in northern New Jersey. These
services include the acceptance of demand, savings and time deposits; extension
of consumer, real estate, Small Business Administration and other commercial
credits; and full personal and corporate trust services, as well as pension and
fiduciary services.
VNB has five New Jersey wholly-owned subsidiaries which include a mortgage
servicing company, a real estate company which holds and disposes of real estate
which VNB may acquire through foreclosure, an investment company which holds,
maintains and manages tangible investment assets for VNB, an investment banking
company which offers investment banking services to middle market companies, and
an Edge Act Corporation which is the holding company for a wholly-owned finance
company located in Toronto, Canada. The mortgage servicing company services
loans for others as well as VNB.
RECENT DEVELOPMENTS
On February 28, 1995, Valley acquired American Union Bank ("American"),
headquartered in Union, New Jersey, with two branches and approximately $58
million in assets. The transaction resulted in the issuance of 288,734 shares of
Valley common stock and was accounted for using the pooling of interests method
of accounting. The financial statements for Valley have not been restated to
include American as they would not have been materially different from those
presented. American's financial statements are included in Valley's consolidated
financial statements as of January 1, 1995. Each share of common stock of
American was exchanged for 0.50 shares of Valley common stock.
On June 30, 1995 Valley acquired the $671 million asset Lakeland First
Financial Group, Inc. ("LFG"), the holding company for Lakeland Savings Bank
("Lakeland"), a state chartered savings bank headquartered in Succasunna, New
Jersey, with sixteen branches in Morris, Sussex and Warren counties, New Jersey.
The transaction resulted in the issuance of 5,136,446 shares of Valley common
stock and was accounted for using the pooling of interests method of accounting.
Each share of common stock of LFG was exchanged for 1.286 shares of Valley
common stock.
Valley began offering investment banking services to middle market
companies in 1995 through its recently chartered investment banking subsidiary,
Halidon Hill & Co., which provides a full range of merger and acquisition
advisory services, private placement of debt and equity, strategic planning
services, and also offers advice to middle market firms with respect to
management buyouts, capital formation strategies and recapitalizations.
During the fourth quarter of 1995, Valley received all the necessary
approvals to establish a finance company in Toronto, Canada. The finance company
will make consumer loans in Canada, primarily auto loans, utilizing Valley's
expertise in the area and extending to Canada the existing referral program
Valley has with a major insurance company. Valley anticipates that the Canadian
finance company will become operational during the first quarter of 1996.
VNB is a credit card issuer and has initiated several successful affinity
programs during 1994 and 1995, primarily with local municipalities in New
Jersey. In late 1995, VNB signed a letter of intent with a proposed partner for
a substantial co-branding credit card program. VNB anticipates this program, if
it occurs, could add a significant number of credit card accounts to VNB within
two years. The program is subject to the execution of a definitive agreement and
if the parties reach a definitive agreement, VNB anticipates this program will
begin in the second quarter of 1996. Management can offer no assurance that VNB
and its proposed partner will enter into a definitive agreement.
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During 1995 the Board of Directors authorized the repurchase of up to one
million shares of Valley's common stock. As of December 31, 1995 the company has
purchased 563,160 shares, all of which have been reissued under the company's
stock option plan and expired warrant program. Subsequent to December 31, 1995,
through February 15, 1996, approximately 115,000 additional shares were
purchased for the treasury. On February 20, 1996, the Board of Directors
authorized the repurchase of an additional one million shares of Valley's common
stock to be used for employee benefit programs and other general corporate
purposes.
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, 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 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 year-end 1995, VNB and its subsidiaries employed 1,304 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. Under current law, a New Jersey based bank holding company,
like Valley, is permitted to acquire banks located in New Jersey and in certain
other states if the states had enacted laws specifically to permit acquisitions
of banks by out-of-state bank holding companies having the largest proportion of
their deposits in New Jersey. Satisfactory capital ratios and Community
Reinvestment Act ratings are generally prerequisites to obtaining federal
regulatory approval to make acquisitions. Acquisitions through Valley National
Bank require approval of the Comptroller of the Currency of the United States
("OCC"). Statewide branching is permitted in New Jersey. The Holding Company Act
does not place territorial restrictions on the activities of non-bank
subsidiaries of bank holding companies.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking and Branching Act") passed by Congress and signed into
law on September 29, 1994, significantly changed interstate banking rules.
Pursuant to the Interstate Banking and Branching Act, bank holding companies are
able to acquire banks in states other than its home state effective September
29, 1995, regardless of applicable state law.
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The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches, beginning June 1,
1997. Under such legislation, each state has the opportunity either to "opt out"
of this provision, thereby prohibiting interstate branching in such states, or
to "opt in" at an earlier time, thereby allowing interstate branching within
that state prior to June 1, 1997. 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 bank can enter the state only by acquiring an existing bank.
The New Jersey legislature is presently examining whether it will opt-in
with respect to earlier interstate banking and branching, as well as whether it
will authorize de novo branching and the entry into New Jersey of foreign
country banks.
Proposals to change the laws and regulations governing the banking 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.
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 such subsidiary bank in circumstances in which it might not
do so absent such policy.
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 other matters. There are various legal limitations, including Sections 23A
and 23B of the Federal Reserve Act, to the extent 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) 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 part from dividends
paid to Valley by VNB. Payment of dividends to the Company 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 years. Under
this limitation, VNB could declare dividends in 1996 without prior approval of
the OCC of up to $59,540,000 plus an amount equal to VNB's net profits for 1996
to the date of such dividend declaration. 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.
TRANSACTIONS WITH RELATED PARTIES
VNB's authority to extend credit to its directors, executive officers and
10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of 12 U.S.C. 375 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
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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.
In April 1995, the OCC and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (i) a lending test, to evaluate the institution's record of making
loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing and programs benefiting low or moderate income individuals and
businesses; and (iii) a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices. The amended CRA
regulations also clarify how an institution's CRA performance would be
considered in the application process.
RESTRICTIONS ON ACTIVITIES OUTSIDE THE UNITED STATES
The Corporation's activities in Canada 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% 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 are subject to supervision by the FRB, as well as
the OCC. 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.
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. "Default" is defined
generally as the appointment of a conservatory or receiver and "in danger of
default" is defined generally as the existence of certain conditions, including
a failure to meet minimum capital requirements, indicating that a "default" is
likely to occur in the absence of regulatory assistance. 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,
including the termination of deposit insurance by the FDIC.
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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
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), which became law in December of 1991, required each federal banking
agency to revise its risk-based capital standards to ensure that those standards
take adequate account of interest rate risk, concentration of credit risk and
the risks of non-traditional activities. In addition, pursuant to FDICIA, each
federal banking agency has promulgated regulations, specifying the levels at
which a financial institution would be 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.
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.
Insured institutions are generally prohibited from paying dividends or
management fees if after making such payments, the institution would be
"undercapitalized". An "undercapitalized" institution also is required to
develop and submit to the appropriate federal banking agency a capital
restoration plan, and each company controlling such institution must guarantee
the institution's compliance with such plan. The liability of a holding company
under any such guarantee is limited to the lesser of five percent of the
institution's total assets at the time it became undercapitalized or the amount
needed to comply with all applicable capital standards. The FDIC is accorded a
priority over the claims of unsecured creditors in any bankruptcy proceeding of
a holding company that has guaranteed an institution's compliance with a capital
restoration plan. Further, "undercapitalized", "significantly undercapitalized",
and "critically undercapitalized" institutions are subject to increasingly
extensive requirements and limitations, including mandatory sale of stock,
forced mergers, and ultimately receivership or conservatorship. A "critical
undercapitalized" institution, beginning 60 days after it becomes "critically
undercapitalized", generally is prohibited from making any payment of principal
or interest on the institution's subordinated debt.
FDICIA also contained the Truth in Savings Act, which requires certain
disclosures to be made in connection with deposit accounts offered to consumers.
The FRB has adopted regulations implementing the provisions of the Truth in
Savings Act.
In addition, significant provisions of FDICIA required federal banking
regulators to draft 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. FDICIA also required the regulators to
establish maximum ratios of classified assets to capital, and minimum earnings
sufficient to absorb losses without impairing capital. The legislation also
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contained other provisions which restricted the activities of state-chartered
banks, amended various consumer banking laws, limited the ability of
"undercapitalized" banks to borrow from the Federal Reserve's discount window,
and required federal banking regulators to perform annual onsite bank
examinations and set standards for real estate lending.
BIF PREMIUMS AND RECAPTURE OF SAIF
VNB is a member of the Bank Insurance Fund ("BIF") of the FDIC. The FDIC
also maintains another insurance fund, the Savings Association Insurance Fund
("SAIF"), which primarily covers savings and loan association deposits but also
covers deposits that are acquired by a BIF-insured institution from a savings
and loan association. VNB has approximately $1.3 billion of deposits at December
31, 1995, with respect to which VNB pays SAIF insurance premiums.
For the first three quarters of 1995, both SAIF-member institutions and
BIF-member institutions paid deposit insurance premiums based on a schedule from
$0.23 to $0.31 per $100 of deposits. In August, 1995, the FDIC, in anticipation
of the BIF's imminent achievement of a required 1.25% reserve ratio, reduced the
deposit insurance premium rates paid by BIF-insured banks from a range of $0.23
to $0.31 per $100 of deposits to a range of $0.04 to $0.31 per $100 of deposits.
The new rate schedule for the BIF was made effective June 1, 1995. The FDIC
refunded to BIF-insured institutions the premiums they had paid for the period
beginning on June 1, 1995. On November 14, 1995, the FDIC voted to reduce annual
assessments for the semi-annual period beginning January 1, 1996 to the legal
minimum of $2,000 for BIF-insured institutions, except for institutions that are
not well capitalized and are assigned to the higher supervisory risk categories.
Given the undercapitalized nature of the SAIF, the FDIC will continue the
range of assessment rates of $0.23 to $0.31 per $100 of deposits for
SAIF-insured institutions and BIF-insured institutions, like VNB,
required to pay SAIF premiums with respect to SAIF deposits.
On July 28, 1995, the FDIC and the Treasury Department released statements
outlining a plan to recapitalize the SAIF, certain features of which were
subsequently approved by the House of Representatives and the Senate of the
United States in bills that provided for different resolutions of the BIF-SAIF
issues. In negotiations between members of the Banking Committees of the House
and Senate to reconcile the differences in the two bills, it was agreed that all
SAIF-member institutions would pay a special assessment to recapitalize the
SAIF. The amount of the special assessment required to recapitalize the SAIF was
estimated to be approximately 80 basis points of the SAIF-assessable deposits.
BIF-insured institutions with deposits subject to SAIF assessments would be able
to reduce such SAIF deposits by 20% in computing the institutions special
assessment.
Management cannot predict whether the above legislation will be enacted,
or, if enacted, the amount of any special SAIF assessment. A significant
one-time fee to recapitalize the SAIF may have an adverse effect on the
operating expenses and results of operations of VNB in the quarter in which the
assessment is made.
ITEM 2. PROPERTIES
The corporate headquarters and principal office of Valley are located in a
facility owned by VNB in Wayne, New Jersey. The operations and data processing
center for the bank is located in a facility owned by VNB in Passaic, New Jersey
and retail lending is located in a leased facility in Wayne, New Jersey. During
1996, Valley plans to continue its consolidation of operations by relocating its
operations and data processing center to a building purchased during the first
quarter of 1996 which is across the street from Valley's corporate headquarters
in Wayne.
VNB provides banking services at 80 locations of which 43 locations are
owned and 37 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
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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
None
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
AGE AT
DECEMBER 31, IN OFFICE
NAMES 1995 SINCE OFFICE
- ------------------------- ------------ --------- --------------------------------------
Gerald H. Lipkin......... 54 1989 Chairman of the Board and Chief
Executive Officer
Peter Southway........... 61 1987 President and Chief Operating Officer
Sam P. Pinyuh............ 63 1990 Executive Vice President
Peter Crocitto........... 38 1992 First Senior Vice President
Robert E. Farrell........ 49 1992 First Senior Vice President
Richard P. Garber........ 52 1992 First Senior Vice President
Alan D. Lipsky........... 51 1994 First Senior Vice President
Robert Mulligan.......... 48 1993 First Senior Vice President
Peter John Southway...... 35 1992 First Senior Vice President
Jack M. Blackin.......... 53 1993 Senior Vice President
Alan D. Eskow............ 47 1993 Senior Vice President
All officers serve at the pleasure of the Board of Directors.
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.
YEAR 1995 YEAR 1994
-------------------------- --------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- ---- -------- ---- ---- --------
First Quarter........... $27 7/8 $23 7/8 $ 0.24 $28 5/8 $20 1/4 $ 0.22
Second Quarter.......... $26 1/4 $22 7/8 $ 0.25 $30 1/8 $24 7/8 $ 0.24
Third Quarter........... $26 $23 $ 0.25 $26 1/4 $24 3/8 $ 0.24
Fourth Quarter.......... $25 1/2 $23 1/2 $ 0.25 $25 7/8 $23 1/4 $ 0.24
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 6,457 registered shareholders of record as of December 31, 1995.
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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. The data for the years 1994 and prior have been restated for
the acquisition of Lakeland First Financial Group and Rock Financial
Corporation.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS:
Interest income (taxable
equivalent)........................ $ 325,098 $ 301,366 $ 288,471 $ 281,308 $ 253,221
Interest expense..................... 143,271 117,465 114,021 133,690 135,582
---------- ---------- ---------- ---------- ----------
Net interest income (taxable
equivalent)........................ 181,827 183,901 174,450 147,618 117,639
Less: tax equivalent adjustment...... 8,448 8,783 7,778 7,385 7,838
---------- ---------- ---------- ---------- ----------
Net interest income............. 173,379 175,118 166,672 140,233 109,801
Provision for possible loan losses... 2,669 5,197 7,966 18,855 13,551
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for possible loan
losses........................ 170,710 169,921 158,706 121,378 96,250
Gains on securities transactions..... 1,471 5,974 7,494 7,319 2,601
Non-interest income.................. 19,497 17,993 20,496 25,273 12,836
Non-interest expense................. 90,203 90,594 85,671 79,947 61,296
---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of accounting
change............................. 101,475 103,294 101,025 74,023 50,391
Income tax expense................... 38,879 38,723 35,638 25,272 15,716
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
accounting change.................. 62,596 64,571 65,387 48,751 34,675
Cumulative effect of accounting
change, net of tax................. -- -- (402) 473 --
---------- ---------- ---------- ---------- ----------
Net income(1)................... $ 62,596 $ 64,571 $ 64,985 $ 49,224 $ 34,675
========== ========== ========== ========== ==========
PER COMMON SHARE(2):
Income before cumulative effect of
accounting change.................. $ 1.76 $ 1.83 $ 1.88 $ 1.43 $ 1.02
Cumulative effect of accounting
change............................. -- -- (.01) .01 --
Net income........................... 1.76 1.83 1.87 1.44 1.02
Dividends............................ 0.99 0.94 0.74 0.67 0.63
Book value........................... 11.19 9.90 9.65 8.30 7.49
Weighted average shares
outstanding........................ 35,615,339 35,302,341 34,736,301 34,244,003 34,101,148
RATIOS:
Return on average assets(3).......... 1.40% 1.48% 1.58% 1.33% 1.22%
Return on average shareholders'
equity(3).......................... 16.60 18.66 20.95 18.33 14.11
Average shareholders' equity to
average assets..................... 8.45 7.96 7.56 7.28 8.68
Dividend payout...................... 56.48 51.94 38.81 43.74 58.56
Risk-based capital:
Tier 1 capital..................... 13.89 13.96 14.55 14.17 12.88
Total capital...................... 15.14 15.21 15.80 15.42 14.13
Leverage ratio....................... 8.41 8.23 7.70 7.47 7.34
FINANCIAL CONDITION AT
YEAR-END:
Assets............................... $4,585,811 $4,418,586 $4,257,739 $3,937,660 $3,461,638
Loans, net of allowance.............. 2,753,505 2,550,732 2,230,647 1,901,127 1,732,173
Deposits............................. 4,083,873 3,880,002 3,770,228 3,532,996 3,075,479
Shareholders' equity................. 400,237 350,616 333,240 280,376 251,924
8
11
- ---------------
(1) Net income before merger expenses was $67,972 thousand and $69,240 thousand
for 1995 and 1994, respectively. Merger expenses consist primarily of income
tax expense and professional fees.
(2) All per share amounts have been restated for stock dividends and splits.
(3) Return on average assets and return on average equity before merger expenses
was 1.52% and 18.03% for 1995, respectively, and 1.59% and 20.01% for 1994,
respectively.
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.
RECENT DEVELOPMENTS
On February 28, 1995, Valley acquired American Union Bank ("American"),
headquartered in Union, New Jersey, with two branches and approximately $58
million in assets. The transaction resulted in the issuance of 288,734 shares of
Valley common stock and was accounted for using the pooling of interests method
of accounting. The financial statements for Valley have not been restated as
they would not have been materially different from those presented. American's
financial statements are included in Valley's consolidated financial statements
as of January 1, 1995. Each share of common stock of American was exchanged for
0.50 shares of Valley common stock.
On June 30, 1995 Valley acquired the $671 million asset Lakeland First
Financial Group, Inc. ("LFG"), the holding company for Lakeland Savings Bank
("Lakeland"), a state chartered savings bank headquartered in Succasunna, New
Jersey, with sixteen branches in Morris, Sussex and Warren counties, New Jersey.
The transaction resulted in the issuance of 5,136,446 shares of Valley common
stock and was accounted for using the pooling of interests method of accounting.
Each share of common stock of LFG was exchanged for 1.286 shares of Valley
common stock.
Valley began offering investment banking services to middle market
companies in 1995 through its recently chartered investment banking subsidiary,
Halidon Hill & Co., which provides a full range of merger and acquisition
advisory services, private placement of debt and equity, strategic planning
services, and also offers advice to middle market firms with respect to
management buyouts, capital formation strategies and recapitalizations.
During the fourth quarter of 1995, Valley received all the necessary
approvals to establish a finance company in Toronto, Canada. The finance company
will make consumer loans in Canada, primarily auto loans, utilizing Valley's
expertise in the area and extending to Canada the existing referral program
Valley has with a major insurance company. Valley anticipates that the Canadian
finance company will become operational during the first quarter of 1996.
VNB is a credit card issuer and has initiated several successful affinity
programs during 1994 and 1995, primarily with local municipalities in New
Jersey. In late 1995, VNB signed a letter of intent with a proposed partner for
a substantial co-branding credit card program. VNB anticipates this program, if
it occurs, could add a significant number of credit card accounts to VNB within
two years. The program is subject to the execution of a definitive agreement and
if the parties reach a definitive agreement, VNB anticipates this program will
begin in the second quarter of 1996. Management can offer no assurance that VNB
and its proposed partner will enter into a definitive agreement.
During 1995 the Board of Directors authorized the repurchase of up to one
million shares of Valley's common stock. As of December 31, 1995 the company has
purchased 563,160 shares, all of which have been reissued under the company's
stock option plan and expired warrant program. Subsequent to December 31, 1995,
through February 15, 1996, approximately 115,000 additional shares were
purchased for the treasury.
9
12
EARNINGS SUMMARY
Net income was $62.6 million, or $1.76 per share in 1995 compared with
$64.6 million or $1.83 per share in 1994 (all amounts have been restated for the
Lakeland First Financial Group merger and the per share amounts have been
restated to give effect to a 5% stock dividend paid in May 1995). Return on
average assets decreased in 1995 to 1.40% from 1.48% in 1994, while the return
on average equity also decreased to 16.60% in 1995 from 18.66% in 1994.
Net operating income, defined as net income before merger expenses and
securities gains, increased $1.4 million to $67.0 million from $65.6 million in
1994. This increase in net operating income is largely attributable to a
decrease in the provision for loan losses of $2.5 million and an increase in
non-interest income of $1.5 million, which was offset by a decrease in net
interest income of $1.7 million or 1.0%. Net operating income produced a return
on average assets of 1.50% in 1995 compared to 1.51% in 1994, and a return on
average equity of 17.78% in 1995 compared to 18.97% in 1994.
NET INTEREST INCOME
Net interest income is the largest source of Valley's operating income. Net
interest income on a tax equivalent basis decreased to $181.8 million for 1995
as compared to $183.9 million for 1994. The decrease in 1995 was due primarily
to the increase in the average rate of interest bearing liabilities of 68 basis
points during 1995, partially offset by an increase in rates on interest earning
assets of 31 basis points in the same period. The net interest margin decreased
20 basis points to 4.28% for 1995 compared to 4.48% in 1994.
The decrease in net interest margin was partially due to the upward
movement in interest rates during 1994. This increase in rates caused depositors
to shift funds from short term savings accounts to longer term certificates of
deposit. Deposit rates increased faster than loan rates in 1994 and continued
throughout 1995, leading to a decline in the net interest margin during 1995.
Average interest earning assets increased $144.2 million in 1995, or 3.5%
over the 1994 amount. This increase was mainly the result of increased volume of
automobile loans, commercial mortgages and commercial loans. Average loans
increased by $288.3 million or 11.8% over the 1994 amount. The average rate on
loans increased 24 basis points, and combined with the increase in average loan
volume, interest income on loans for 1995 increased by $30.0 million over 1994.
Offsetting this increase, was a decline in average taxable investment securities
of $120.8 million or 9.3% from the amount in the portfolio during 1994. Average
tax-exempt investments remained almost unchanged during 1995 as compared to
1994.
Average interest-bearing liabilities grew 1.48% or $52.1 million. Deposit
growth, similar to the past few years, was held to a small increase due to
competitive factors and alternative investment opportunities for consumers.
Average demand deposits continued to grow and increased by $22.0 million or 4.8%
over 1994 balances. Average savings deposits decreased by $188.7 million or
9.9%, while average time deposits increased $266.8 million or 18.2%.
10
13
The following table reflects the components of net interest income, for
each of the three years ended December 31, 1995.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AND NET INTEREST EARNINGS ON A TAX EQUIVALENT BASIS
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(IN THOUSANDS)
ASSETS
Interest earning assets
Loans(1)(2)............... $2,721,443 $226,260 8.31% $2,433,167 $196,278 8.07% $2,110,804 $174,226 8.25%
Taxable investments....... 1,179,567 75,470 6.40 1,300,320 80,558 6.20 1,473,901 93,222 6.32
Tax-exempt
investments(1).......... 311,156 21,473 6.90 325,017 22,580 6.95 255,351 19,667 7.70
Federal funds sold and
other short term
investments(1).......... 36,513 1,895 5.19 45,934 1,950 4.25 42,503 1,356 3.19
---------- -------- ----- ---------- -------- ---- - ---------- -------- ---- -
Total interest earning
assets.................. 4,248,679 $325,098 7.65% 4,104,438 $301,366 7.34% 3,882,559 $288,471 7.43%
-------- ----- -------- ---- - -------- ---- -
Allowance for possible
loan losses............. (41,544) (43,136) (39,592)
Cash and due from banks... 146,467 140,929 125,919
Other assets.............. 109,206 147,001 136,255
---------- ---------- ----------
Total assets.............. $4,462,808 $4,349,232 $4,105,141
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities
Savings deposits.......... $1,726,888 $ 45,975 2.66% $1,915,596 $ 48,645 2.54% $1,853,691 $ 49,028 2.64%
Time deposits............. 1,732,902 91,986 5.31 1,466,092 63,412 4.33 1,397,634 60,662 4.34
---------- -------- ----- ---------- -------- ---- - ---------- -------- ---- -
Total interest bearing
deposits................ 3,459,790 137,961 3.99 3,381,688 112,057 3.31 3,251,325 109,690 3.37
Federal funds purchased
and securities sold
under repurchase
agreements.............. 52,718 2,833 5.37 78,425 3,114 3.97 47,533 1,560 3.28
Other borrowings.......... 49,727 2,477 4.98 50,028 2,294 4.59 59,081 2,771 4.69
---------- -------- ----- ---------- -------- ---- - ---------- -------- ---- -
Total interest bearing
liabilities............. 3,562,235 143,271 4.02 3,510,141 117,465 3.35 3,357,939 114,021 3.40
-------- ----- -------- ---- - -------- ---- -
Demand deposits........... 481,477 459,434 404,350
Other liabilities......... 42,099 33,642 32,627
Shareholders' equity...... 376,997 346,015 310,225
---------- ---------- ----------
Total liabilities and
shareholders' equity.... $4,462,808 $4,349,232 $4,105,141
========== ========== ==========
Net interest income (tax
equivalent basis)....... 181,827 183,901 174,450
Tax equivalent
adjustment.............. (8,448) (8,783) (7,778)
-------- -------- --------
Net interest income....... $173,379 $175,118 $166,672
-------- -------- --------
Net interest rate
differential............ 3.63% 3.99% 4.03%
----- ---- - ---- -
Net interest margin(3).... 4.28% 4.48% 4.49%
----- ---- - ---- -
- ---------------
(1) Interest income is presented on a tax equivalent basis using a 35% tax rate.
(2) Loans are stated net of unearned income.
(3) Net interest income on a tax equivalent basis as a percentage of earning
assets.
11
14
The following table demonstrates the relative impact on net interest income
of changes in volume of earning assets and interest bearing liabilities and
changes in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN INTEREST INCOME AND EXPENSE ON A TAX EQUIVALENT BASIS
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------------ -----------------------------
INCREASE(DECREASE)(2) INCREASE(DECREASE)(2)
------------------------------ -----------------------------
INTEREST VOLUME RATE INTEREST VOLUME RATE
-------- -------- -------- -------- ------- --------
(IN THOUSANDS)
Interest income:
Loans (1)......................... $ 29,982 $ 23,821 $ 6,161 $ 22,052 $26,082 $ (4,030)
Taxable investments............... (5,088) (7,662) 2,574 (12,664) (10,787) (1,877)
Tax-exempt investments(1)......... (1,107) (957) (150) 2,913 4,979 (2,066)
Federal funds sold and other short
term investments(1)............ (55) (443) 388 594 118 476
------- ------- -------- -------- -------- -------
23,732 14,759 8,973 12,895 20,392 (7,497)
------- ------- -------- -------- -------- -------
Interest expense:
Savings deposits.................. (2,670) (4,948) 2,278 (383) 1,608 (1,991)
Time deposits..................... 28,574 12,706 15,868 2,750 2,962 (212)
Federal funds purchased and
securities sold under
repurchase agreements.......... (281) (1,194) 913 1,554 1,175 379
Other borrowings.................. 183 (14) 197 (477) (416) (61)
------- ------- -------- -------- -------- -------
25,806 6,550 19,256 3,444 5,329 (1,885)
------- ------- -------- -------- -------- -------
Net interest income................. $ (2,074) $ 8,209 $(10,283) $ 9,451 $15,063 $ (5,612)
======= ======= ======== ======== ======== =======
- ---------------
(1) Interest income is adjusted to a tax equivalent basis using a 35% tax rate.
(2) Variances resulting from a combination of changes in volume and rates are
allocated to the categories in proportion to the absolute dollar amounts of
the change in each category.
NON-INTEREST INCOME
The following table presents the components of non-interest income for the
years ended December 31, 1995, 1994 and 1993.
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Trust income.................................. $ 950 $ 805 $ 665
Service charges on deposit accounts........... 7,957 7,303 6,805
Gains on securities transactions, net......... 1,471 5,974 7,494
Fees from mortgage servicing.................. 3,776 3,320 3,812
Gains on sales of loans....................... 846 539 3,505
Other income.................................. 5,968 6,026 5,709
------- ------- -------
Total............................... $20,968 $23,967 $27,990
======= ======= =======
Non-interest income continues to represent a considerable source of income
for Valley. Excluding gains on securities transactions, total non-interest
income amounted to $19.5 million in 1995 compared with $18.0 million in 1994.
12
15
Service charges on deposit accounts increased $654 thousand or 9.0% from
$7.3 million in 1994 to $8.0 million in 1995. A majority of this increase is due
to the expansion of account volume and increased fees charged on deposit
accounts.
Fees from mortgage servicing increased by 13.7% from $3.3 million in 1994
to $3.8 million in 1995. These fees represent gross servicing fees and related
ancillary fees for servicing mortgage portfolios by VNB Mortgage Services, Inc.
("MSI"), VNB's mortgage servicing subsidiary, after eliminating in consolidation
mortgage servicing fees earned by MSI on loans serviced for VNB. MSI serviced a
total of $1.69 billion and $1.20 billion of loans as of December 31, 1995 and
1994, respectively, of which $816.5 and $536.6 million, respectively, are
serviced for VNB. The increase in the servicing portfolio was due to the
acquisition of several portfolios totalling approximately $305.7 million, the
new origination of loans by VNB of $82.4 million and the addition of loans from
Lakeland of approximately $259.1 million, less principal paydowns and
prepayments totaling $154.3 million. Amortization expense on servicing rights
increased during 1995 to $1.8 million from $1.6 million in 1994, reflecting the
increase in the size of the serviced portfolio. An analysis is completed
quarterly to determine amortization expense, based on all expected future cash
flows.
Gains on the sales of loans were $846 thousand for 1995 compared to $539
thousand for 1994. The gains recorded in 1995 are primarily from the sale of SBA
loans. In 1994 Valley stopped selling its newly originated residential mortgage
loans in order to maintain its loan growth.
Net gains on securities transactions in 1995 and 1994 amounted to $1.5
million and $6.0 million, respectively. The gains recorded in 1995 were the
result of the sale of securities due to rising interest rates beginning in early
1994 and Valley's decision to take advantage of the increased yields available.
Valley began offering investment banking services to middle market
companies in 1995 through its recently chartered investment banking subsidiary,
Halidon Hill & Co., which provides a full range of merger and acquisition
advisory services, private placement of debt and equity, strategic planning
services, and also offers advice to middle market firms with respect to
management buyouts, capital formation strategies and recapitalizations.
Operations began in the latter part of 1995 and had no material impact on the
financial results of Valley.
NON-INTEREST EXPENSE
The following table presents the components of non-interest expense for the
years ended December 31, 1995, 1994 and 1993.
NON-INTEREST EXPENSE
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Salary expense................................ $35,030 $34,098 $31,636
Employee benefit expense...................... 8,145 9,266 7,923
FDIC insurance premiums....................... 5,884 8,473 8,180
Net occupancy expense......................... 8,191 7,757 6,933
Furniture and equipment expense............... 5,661 5,646 5,161
Amortization of intangible assets............. 2,812 3,147 5,527
Other......................................... 24,480 22,207 20,311
------- ------- -------
Total............................... $90,203 $90,594 $85,671
======= ======= =======
Non-interest expense totalled $90.2 million for 1995, relatively unchanged
from the 1994 level. The largest component of non-interest expense is salaries
and employee benefit expense which totalled $43.2 million in 1995 compared to
$43.4 million in 1994. At December 31, 1995, full-time equivalent staff was
1,304, compared to 1,294 at the end of 1994.
13
16
Insurance premiums assessed by the Federal Deposit Insurance Corporation
("FDIC") decreased by $2.6 million, or 30.6% to $5.9 million in 1995. This
reduction reflects the refund received from the FDIC and the decrease in premium
rate from $0.23 to $0.04 per hundred on bank insurance fund ("BIF") deposits. It
is expected that the savings insurance fund ("SAIF") will be recapitalized
during 1996 and that Valley will be required to pay a one-time special
assessment. After this payment, it is anticipated that future premiums on these
deposits will also be reduced from $0.23 to the legal minimum of $2,000. The
one-time payment to the FDIC and the anticipated future reduction in premiums
are based upon the legislative process for which Valley has no control over the
effective date or final payments or reduction of premiums. (See Part I, Item
1 -- BIF Premiums and Recapture of SAIF).
Net occupancy expense increased to $8.2 million in 1995 from $7.8 million
in 1994. The increase of $434 thousand represents additional rent, utilities,
tax and maintenance expense on facilities utilized by Valley. During the first
quarter of 1996 Valley acquired an 80,000 square foot building located across
the street from its current administrative headquarters in Wayne, New Jersey in
order to continue consolidating its operations. Renovations are currently being
made to prepare the building for Valley's use during 1996.
Amortization of intangible assets decreased to $2.8 million in 1995 from
$3.1 million in 1994, representing a decrease of $335 thousand or 10.6%. The
majority of this decrease resulted from the reduction of amortization of core
deposit intangibles, offset by an increase in amortization of purchased mortgage
servicing rights totaling $1.8 million during 1995, compared with $1.6 million
for 1994.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS
122"), which applies prospectively to financial statements for fiscal years
beginning after December 31, 1995. SFAS 122 amends SFAS 65, "Accounting for
Certain Mortgage Banking Activities". SFAS 122 requires that a mortgage banking
enterprise recognize, as separate assets, rights to service mortgage loans,
however those servicing rights are acquired. SFAS 122 eliminates the previously
existing accounting distinction between servicing rights acquired through
purchase transactions and those acquired through loan originations. SFAS 122
also requires that a mortgage banking entity assess its capitalized mortgage
servicing rights ("MSRs") periodically for impairment, based on the fair value
of those rights. Valley has determined that there will be no material impact
expected on the financial position or results of operations of Valley as a
result of adopting this statement prospectively during 1996.
Other expenses were $24.5 million in 1995 compared to $22.2 million in
1994. Advertising and marketing expense increased $427 thousand to $2.9 million,
data processing expense increased $395 thousand to $1.8 million, other real
estate owned expense decreased $153 thousand to $1.2 million, stationary expense
increased $88 thousand to $1.2 million, postage and delivery expense increased
$247 thousand to $1.8 million, legal expense increased $158 thousand to $1.4
million, and telecommunication expense increased $218 thousand to $1.4 million.
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 as of December 31, 1995 is
43.6%, one of the lowest in the industry, compared with an efficiency ratio for
1994 and 1993 of 43.2% and 43.9%, respectively. Valley strives to control its
efficiency ratio and expenses as a means of producing increased earnings for its
shareholders.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective beginning in 1996. SFAS 123
allows companies either to continue to account for stock-based employee
compensation plans under existing accounting standards or adopt a fair value
based method of accounting as defined in the new standard. Valley will continue
to follow the existing accounting standards for these plans. As a result, the
new standard is not expected to have an impact on Valley.
14
17
INCOME TAXES
Income tax expense as a percentage of pre-tax income increased to 38.3% in
1995 compared to 37.5% in 1994. This increase was attributable to a decrease in
tax-exempt interest income and an increase in state tax expense.
Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes," was issued by the Financial Accounting Standards
Board in February 1992. Valley adopted SFAS No. 109 prospectively as of January
1, 1993. The cumulative effect of this change in accounting for income taxes
reduced net income by $402 thousand and is reported separately in the
consolidated statement of income for the year ended December 31, 1993.
15
18
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
The following table illustrates Valley's interest rate gap position as of
December 31, 1995 on a 90 day, between 90 and 365 days and after 365 day basis.
INTEREST RATE SENSITIVITY ANALYSIS
NON-INTEREST
RATE
REPRICING SENSITIVE
AFTER TOTAL OR
REPRICING 90 BUT REPRICING REPRICING
WITHIN WITHIN WITHIN AFTER
90 DAYS 365 DAYS 365 DAYS 365 DAYS TOTAL
---------- --------- ---------- ---------- ----------
(IN THOUSANDS)
Earning assets
Federal funds sold............. $ 108,500 $ -- $ 108,500 $ -- $ 108,500
Investments held to maturity... 5,256 90,908 96,164 170,190 266,354
Investments available for
sale........................ 1,146,285 -- 1,146,285 -- 1,146,285
Loans.......................... 1,139,821 93,379 1,233,200 1,559,975 2,793,175
---------- -------- ---------- ---------- ----------
Total earning assets........ $2,399,862 $ 184,287 $2,584,149 $1,730,165 $4,314,314
---------- -------- ---------- ---------- ----------
Percentage of total earning
assets.................... 55.6% 4.3% 59.9% 40.1% 100.0%
---------- -------- ---------- ---------- ----------
Sources of funds
Non-interest bearing
deposits.................... $ 325,337 $ -- $ 325,337 $ 216,892 $ 542,229
Savings deposits............... 611,145 -- 611,145 1,088,726 1,699,871
Time deposits.................. 675,961 590,554 1,266,515 575,258 1,841,773
Federal funds purchased and
securities sold under
repurchase agreements....... 26,921 -- 26,921 -- 26,921
Other short term borrowings.... 10,524 -- 10,524 -- 10,524
Other borrowings............... -- 14,002 14,002 14,677 28,679
Non-interest bearing sources... -- -- -- 164,317 164,317
---------- -------- ---------- ---------- ----------
Total sources of funds...... $1,649,888 $ 604,556 $2,254,444 $2,059,870 $4,314,314
---------- -------- ---------- ---------- ----------
Percentage of total sources
of funds.................. 38.2% 14.0% 52.2% 47.8% 100.0%
---------- -------- ---------- ---------- ----------
Interest sensitivity gap......... $ 749,974 $(420,269) $ 329,705 $ (329,705) $ --
---------- -------- ---------- ---------- ----------
Cumulative interest sensitivity
gap............................ $ 749,974 $ 329,705 $ 329,705 $ -- $ --
---------- -------- ---------- ---------- ----------
Ratio of earning assets to
sources of funds............... 1.46:1 .30:1 1.15:1 .84:1 1:1
---------- -------- ---------- ---------- ----------
Cumulative ratio of earning
assets to sources of funds..... 1.46:1 1.15:1 1.15:1 1:1 1:1
---------- -------- ---------- ---------- ----------
Managing net interest margin continues to be one of the most important
factors in maximizing earnings. Through its Asset/Liability Policy, Valley
strives to maintain a consistent net interest rate differential by managing the
sensitivity and repricing of its assets and liabilities to interest rate
fluctuations.
Valley seeks to achieve a sufficient level of rate sensitive assets to
equal its rate sensitive liabilities, and analyzes the maturity and repricing of
earning assets and sources of funds at various intervals. The level by which
repricing earning assets exceed or are exceeded by repricing sources of funds is
expressed as a ratio and dollar value (interest sensitivity gap) and is used as
a measure of interest rate risk.
16
19
At December 31, 1995, rate sensitive assets exceeded rate sensitive
liabilities at the 90 day interval and resulted in a positive gap of $750.0
million or a ratio of 1.46:1. Rate sensitive liabilities exceeded rate sensitive
assets at the 91 to 365 day interval by $420.3 million or a ratio of .30:1 and
resulted in a negative gap. The total positive gap repricing within 365 days as
of December 31, 1995 is $329.7 million or 1.15:1. Management does not view these
amounts as presenting an unusually high risk potential, although no assurances
can be given that Valley is not at risk from rate increases or decreases.
The above gap results take into account repricing and maturities of assets
and liabilities, but fail to consider the interest rate sensitivities of those
asset and liability accounts. Management has prepared for its use an income
simulation model to project future net interest income streams in light of the
current gap position. Management has also prepared for its use alternative
scenarios to measure levels of net interest income associated with various
changes in interest rates. According to this computer model, an interest rate
increase of 300 basis points and a decrease of 100 basis points resulted in an
impact on future net interest income which is consistent with target levels
contained in Valley's Asset/Liability Policy. Management cannot provide any
assurance about the actual effect of changes in interest rates on Valley's net
interest income.
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. At December 31, 1995, liquid assets amounted to $1.5 billion, as
compared to $950.0 million at December 31, 1994. This represents 34.1% and 22.9%
of earning assets, and 32.1% and 21.5% of total assets at December 31, 1995 and
year-end 1994, respectively.
On the liability side, the primary source of funds available to meet
liquidity needs is Valley's core deposit base, which generally excludes
certificates of deposit over $100 thousand. Core deposits averaged approximately
$3.05 billion and $3.14 billion at December 31, 1995 and year-end 1994,
respectively, representing 70.6% and 76.3% of average earning assets. Short term
borrowings and large dollar certificates of deposit, generally those over $100
thousand, are used as supplemental funding sources during periods when growth in
the core deposit base does not keep pace with that of earning assets. Additional
liquidity is derived from scheduled loan and investment payments of principal
and interest, as well as prepayments received. Proceeds from the sales of
investment securities available for sale were $105.3 million, and proceeds of
$265.8 million were generated from investment maturities. Purchases of
investment securities were $200.0 million. Short term borrowings and
certificates of deposit over $100 thousand amounted to $465.8 million and $377.7
million, on average, for the year ending December 31, 1995 and 1994,
respectively.
Lakeland had advances outstanding with the Federal Home Loan Bank of New
York ("FHLB") which were assigned to VNB as part of the merger. During early
1996, VNB was approved as a member of the FHLB. VNB intends to utilize
borrowings from the FHLB as a source of funds for its asset growth and
asset/liability management. These advances are collateralized by pledges of FHLB
stock and a blanket assignment of qualifying mortgage loans. As of December 31,
1995, Valley had outstanding advances of $28.5 million.
The following table lists, by maturity, all certificates of deposit of
$100,000 and over at December 31, 1995. These certificates of deposit are
generated primarily from core deposit customers and are not brokered funds.
(IN THOUSANDS)
Less than three months....................................... $353,975
Three to six months.......................................... 67,000
Six to twelve months......................................... 30,082
More than twelve months...................................... 49,882
--------
$500,939
========
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Valley's cash requirements consist primarily of dividends to shareholders.
This cash need is routinely satisfied by dividends collected from its subsidiary
bank. Projected cash flows from this source are expected to be adequate to pay
dividends, given the current capital levels and current profitable operations of
its subsidiary.
INVESTMENT SECURITIES
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES HELD TO MATURITY AT
DECEMBER 31, 1995
US TREASURY
SECURITIES AND
OTHER GOVERNMENT OBLIGATIONS OF
STATES AND
AND AGENCIES POLITICAL MORTGAGE-BACKED OTHER DEBT
AND CORPORATIONS SUBDIVISIONS SECURITIES SECURITIES TOTAL(4)
----------------- ----------------- ------------------- ----------------- -----------------
AMORTIZED YIELD AMORTIZED YIELD AMORTIZED YIELD AMORTIZED YIELD AMORTIZED YIELD
COST(1) (2) COST(1) (2)(3) COST(1) (2) COST(1) (2) COST(1) (2)
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(IN THOUSANDS)
0-1 years........... $ -- -- % $ 39,717 5.03 % $ 26,981 5.35 % $ 10 5.50 % $ 66,708 5.16 %
1-5 years........... 115 8.63 60,636 6.96 94,148 7.38 444 6.93 155,343 7.22
5-10 years.......... -- -- 5,368 8.76 21,592 7.73 25 5.50 26,985 7.93
Over 10 years....... 6,627 8.54 1,027 8.90 1,921 6.87 -- -- 9,575 8.24
------ ---- -------- ---- -------- ---- ---- ---- ------ ----
Total
securities.... $ 6,742 8.54 % $106,748 6.35 % $144,642 7.05 % $ 479 6.83 % $258,611 6.80 %
====== ==== ======== ==== ======== ==== ==== ==== ====== ====
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE AT
DECEMBER 31, 1995
US TREASURY
SECURITIES AND
OTHER GOVERNMENT OBLIGATIONS OF
STATES AND
AGENCIES POLITICAL MORTGAGE-BACKED
AND CORPORATIONS SUBDIVISIONS SECURITIES 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...................... $ 68,267 4.93 % $ 33,895 6.24% $ 11,978 6.88 % $ 114,140 5.52 %
1-5 years...................... 107,723 5.38 141,597 6.58 305,442 6.68 554,762 6.40
5-10 years..................... -- -- 22,207 7.29 433,036 6.45 455,243 6.49
Over 10 years.................. -- -- 3,951 11.19 4,891 6.40 8,842 8.54
-------- ---- -------- ---- -------- ---- --------- ----
Total securities........... $175,990 5.21 % $201,650 6.69% $755,347 6.55 % $1,132,987 6.37 %
======== ==== ======== ==== ======== ===== ========= ====
- ---------------
(1) Maturities are stated at cost less principal reductions, if any, and
adjusted for accretion of discounts and amortization of 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%.
(4) Excludes equity securities which have indefinite maturities.
Valley's investment portfolio is comprised of U.S. government and federal
agency securities, tax-exempt issues of states and municipalities, mortgage
backed securities and equity and other securities. There were no securities in
the name of any one issuer exceeding 10% of shareholders' equity, except for
securities issued by the United States and its political subdivisions and
agencies. The portfolio generates substantial interest income which serves as a
source of liquidity. 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.
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As of December 31, 1995 Valley has $1.1 billion of securities available for
sale compared with $696.4 million at December 31, 1994. Those securities are
recorded at their fair value on an aggregate basis. If the aggregate fair value
of these securities should decline below cost, then the value would be written
down to market. As of December 31, 1995 the investment securities available for
sale had an unrealized gain of $3.7 million, net of deferred taxes, compared to
an unrealized loss of $17.8 million, net of deferred taxes, at December 31,
1994. This change was primarily due to an increase in prices, resulting from a
decreasing interest rate environment. These securities are not considered
trading account securities, which may be sold on a continuous basis, but rather
securities which may be sold to meet the various liquidity and interest rate
requirements of Valley.
Pursuant to the provisions and implementation guidance contained within the
special report "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities", on December 29, 1995 Valley
reassessed the classification of all securities within its portfolio and
transferred $516.9 million from its held to maturity investment portfolio to its
available for sale portfolio. These securities had a market value of $521.9
million which resulted in Valley recording an unrealized gain on securities
available for sale, net of tax, within shareholders' equity of $3.0 million.
LOAN PORTFOLIO
The following table reflects the composition of the loan portfolio for the
five years ended December 31, 1995.
LOAN PORTFOLIO
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial........................... $ 351,885 $ 298,337 $ 240,412 $ 238,860 $ 260,402
Construction......................... 73,664 70,192 81,584 74,735 92,042
Commercial mortgage.................. 619,326 571,596 472,073 381,588 352,901
Residential mortgage................. 1,017,453 1,004,203 880,553 741,688 598,297
Installment.......................... 731,772 650,329 599,729 500,890 459,904
-------- -------- -------- --------
2,794,100 2,594,657 2,274,351 1,937,761 1,763,546
Less: unearned income................ (925) (1,901) (2,360) (1,783) (2,060)
--------- --------- --------- --------- ---------
Total loans........................ $2,793,175 $2,592,756 $2,271,991 $1,935,978 $1,761,486
========= ========= ========= ========= =========
The composition of Valley's loan portfolio continues to change due to the
local economy and loan demand. Commercial lending increased by the largest
percentage during both 1995 and 1994, and installment loans and commercial
mortgage loans have continued their steady increase. Residential loans increased
steadily throughout 1994, but slowed considerably as interest rates began to
rise in 1994. The increase in installment loans is reflective of Valley's
increased market penetration in automobile lending. There is no guarantee that
the level of lending will continue at this brisk pace during 1996.
Residential mortgage loans represent 36.4% of the loan portfolio.
Installment loans, including predominantly automobile and credit card loans,
totalled $731.8 million at December 31, 1995, increasing by $81.4 million over
1994 or 12.5% and representing 26.2% of the loan portfolio. Commercial mortgages
increased 8.4% or $47.7 million from December 1994 to December 1995, and
commercial loans increased 17.9% or $53.5 million from December 1994 to December
1995.
Valley has continued to offer various types of fixed rate residential
mortgage loans and is also offering a large array of adjustable rate loans.
During 1993 Valley periodically sold some of its 15 year fixed rate loans into
the secondary market, allowing Valley to keep its portfolio mixed between fixed
rate and variable rate loans, as well as maintaining a shorter maturity of its
portfolio. Beginning in 1994 and continuing into 1995
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Valley decided to keep its residential mortgage loans being originated so that
the portfolio could grow as demand by Valley for loans increased.
Installment loans outstanding at year end include automobile loans referred
to VNB by a major insurance company, which are subject to Valley's underwriting
criteria. Approximately 52% of the automobile loan portfolio and 12% of the
total loan portfolio outstanding at December 31, 1995 represent loans originated
by VNB through this referral program. Over the last several years the amount of
loans referred through this program has grown. VNB intends to extend this
program, as all approvals were received in late 1995 to establish a finance
company in Toronto, Canada. The new finance company will make consumer loans,
primarily auto loans, in several provinces in Canada. VNB anticipates that the
Canadian finance company will become operational in the first quarter of 1996.
VNB is a credit card issuer and has initiated several successful affinity
programs during 1994 and 1995, primarily with local municipalities in New
Jersey. In late 1995, VNB signed a letter of intent with a proposed partner for
a substantial co-branding credit card program. VNB anticipates this program, if
it occurs, could add a significant number of credit card accounts to VNB within
two years. The program is subject to the execution of a definitive agreement and
if the parties reach a definitive agreement, VNB anticipates this program will
begin in the second quarter of 1996. Management can offer no assurance that VNB
and its proposed partner will enter into a definitive agreement.
Much of Valley's lending is in Northern New Jersey. 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. There were no loan
concentrations at December 31, 1995 other than those disclosed above.
The following table reflects the maturity distribution of the commercial
and construction loan portfolio as of December 31, 1995:
OVER 1
1 YR. TO 5 OVER
OR LESS YRS. 5 YRS. TOTAL
------- -------- -------- --------
(IN THOUSANDS)
Commercial -- fixed rate............................... $10,302 $ 49,762 $ 34,497 $ 94,561
Commercial -- adjustable rate.......................... 11,277 34,552 211,495 257,324
Real estate construction -- fixed rate................. 1,464 174 1,102 2,740
Real estate construction -- adjustable rate............ 24,699 41,746 4,479 70,924
------ ------- ------- -------
$47,742 $126,234 $251,573 $425,549
====== ======= ======= =======
Prior to maturity of each loan, 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.
As part of the acquisition of Rock Bank during 1994, VNB became a preferred
Small Business Administration ("SBA") lender with authority to make loans
without the prior approval of the SBA. Approximately 70% 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 expand this area of lending
as it provides a solid source of fee income and loans with floating interest
rates tied to the prime lending rate.
During 1995, VNB originated approximately $13.8 million of SBA loans and
sold $4.5 million. At December 31, 1995, $28.7 million of SBA loans were held in
VNB's portfolio and VNB serviced approximately $38.7 million of SBA loans at
December 31, 1995.
It is not known if the trend of increased lending will continue. VNB
continues to take advantage of loan demand in those sectors of the economy where
it is most prevalent.
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
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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 totalled $18.8 million at
December 31, 1995 compared with $30.3 million at December 31, 1994, a decrease
of $11.5 million, or 37.8%. Non-performing assets at December 31, 1995 and 1994,
respectively, amounted to 0.67% and 1.16% of loans and other real estate owned.
The following table sets forth non-performing assets and accruing loans
which are 90 days or more past due as to principal or interest payments on the
dates indicated, in conjunction with asset quality ratios for Valley.
LOAN QUALITY
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(IN THOUSANDS)
Loans past due in excess of 90 days and
still accruing......................... $ 8,117 $ 8,695 $ 8,718 $11,192 $13,956
------- ------- ------- ------- -------
Non-performing loans..................... $11,795 $22,622 $27,542 $34,667 $40,210
Other real estate owned.................. 7,015 7,638 6,628 7,020 6,828
------- ------- ------- ------- -------
Total non-performing assets......... $18,810 $30,260 $34,170 $41,687 $47,038
======= ======= ======= ======= =======
Troubled debt restructured loans......... $ 5,209 $ -- $ -- $ 5,900 $ --
------- ------- ------- ------- -------
Non-performing loans as a % of loans..... 0.42% 0.87% 1.21% 1.79% 2.28%
------- ------- ------- ------- -------
Non-performing assets as a % of loans
plus other real estate owned........... 0.67% 1.16% 1.50% 2.15% 2.66%
------- ------- ------- ------- -------
Allowance as a % of loans................ 1.42% 1.62% 1.82% 1.80% 1.47%
------- ------- ------- ------- -------
Allowance as a % of non-performing
assets................................. 210.90% 138.88% 121.00% 83.60% 55.07%
------- ------- ------- ------- -------
During 1995, lost interest on non-accrual loans amounted to $806 thousand,
compared with $1.7 million in 1994.
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. 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 within the loan portfolio so as to minimize the impact
of a downturn in any one economic sector. Valley's portfolio, in total, is
diversified as to type of borrower and loan. Most of Valley's portfolio is in
northern New Jersey, presenting a geographical and credit risk if there were a
significant downturn of the economy within New Jersey.
Management realizes that some degree of risk must be expected in the normal
course of lending activities. Reserves are maintained to absorb such potential
loan and off-balance sheet credit losses. The allowance for loan losses and
related provision are an expression of management's evaluation of the credit
portfolio and economic climate.
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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,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Average loans outstanding....... $2,721,443 $2,433,167 $2,110,804 $1,832,367 $1,773,870
---------- ---------- ---------- ---------- ----------
Beginning balance -- Allowance
for loan losses............... $ 42,024 $ 41,344 $ 34,852 $ 25,904 $ 18,718
---------- ---------- ---------- ---------- ----------
Balance from acquisition........ -- -- 4,466 -- --
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Commercial.................... 1,212 1,805 2,899 5,797 3,001
Construction.................. 2,498 835 441 813 300
Mortgage-Commercial........... 646 1,359 1,136 -- --
Mortgage-Residential.......... 499 76 366 802 307
Installment................... 2,787 2,645 2,510 3,696 4,239
---------- ---------- ---------- ---------- ----------
7,642 6,720 7,352 11,108 7,847
---------- ---------- ---------- ---------- ----------
Charge-off loans recovered:
Commercial.................... 1,321 595 454 267 511
Construction.................. -- 603 -- -- --
Mortgage-Commercial........... 83 61 -- -- --
Mortgage-Residential.......... 23 12 83 -- 2
Installment................... 1,192 932 875 934 969
---------- ---------- ---------- ---------- ----------
2,619 2,203 1,412 1,201 1,482
---------- ---------- ---------- ---------- ----------
Net charge-offs................. 5,023 4,517 5,940 9,907 6,365
Provision charged to
operations.................... 2,669 5,197 7,966 18,855 13,551
---------- ---------- ---------- ---------- ----------
Ending Balance -- Allowance for
loan losses................... $ 39,670 $ 42,024 $ 41,344 $ 34,852 $ 25,904
---------- ---------- ---------- ---------- ----------
Ratio of net charge offs during
the period to average loans
outstanding during the
period........................ .18% .19% .28% .54% .36%
The allowance for possible loan losses is maintained at a level necessary
to absorb potential loan losses and other credit risk related charge-offs. It is
the result of an analysis which relates outstanding balances to expected reserve
levels required to absorb future credit losses. Current economic problems are
addressed through management's assessment of anticipated changes in the regional
economic climate, changes in composition and volume of the loan portfolio and
variances in levels of classified loans, non-performing assets and other past
due amounts. Additional factors include consideration of exposure to loss
including size of credit, existence and nature of collateral, credit record,
profitability and general economic conditions.
During the year, 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 current economic conditions and applied that
information to changes in the composition of the loan portfolio. The decline in
non-performing assets, coupled with the continued recovery of the economy, among
other things, was responsible for the decision to decrease the provision from
$5.2 million in 1994 to $2.7 million in 1995.
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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,
-------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------------- --------------------- --------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS)
Loan
category:
Commercial... $ 12,593 12.6% $ 10,717 11.5% $ 11,257 10.6% $ 9,167 12.3% $ 10,254 14.8%
Real
estate... 8,664 61.2 10,667 63.4 9,490 63.0 9,067 61.8 7,168 59.1
Consumer... 7,084 26.2 7,441 25.1 7,604 26.4 5,378 25.9 4,203 26.1
Unallocated... 11,329 N/A 13,199 N/A 12,993 N/A 11,240 N/A 4,279 N/A
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$ 39,670 100.0% $ 42,024 100.0% $ 41,344 100.0% $ 34,852 100.0% $ 25,904 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
At December 31, 1995 the allowance for loan losses amounted to $39.7
million or 1.42% of loans, net of unearned income, as compared to $42.0 million
or 1.62% at year-end 1994.
The allowance is adjusted by provisions charged against income and loans
charged-off, net of recoveries. Net loan charge-offs were $5.0 million for the
year ended December 31, 1995 compared with $4.5 million for the year ended
December 31, 1994. Charge-offs from the Lakeland merger added approximately $2.7
million to total net charge-offs during 1995. The ratio of net charge-offs to
average loans amounted to 0.18% for 1995 compared with 0.19% for 1994.
Although substantially all risk elements at December 31, 1995 have been
disclosed in the categories presented above, Management believes that the
current economic conditions may affect the ability of certain borrowers 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 $5.5 million in potential
problem loans at December 31, 1995 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 nonperforming loan. Approximately $1.3 million has been provided for
in the allowance for loan losses for these potential problem loans. There can be
no assurance that Valley has identified all of its problem loans. At December
31, 1994, Valley had identified approximately $8.0 million of problem loans.
In May of 1993, FASB issued Statement of Financial Accounting Standard No.
114, "Accounting by Creditors for Impairment of a Loan" and Statement of
Financial Accounting Standard No. 118 "Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosure" which applies to financial statements
for fiscal years beginning after December 15, 1994. These Statements require
that impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. There was no material impact on
the financial position or results of operations as a result of Valley adopting
these statements during 1995.
CAPITAL ADEQUACY
A significant measure of the strength of a financial institution is its
shareholders' equity, which should expand in close proportion to asset growth.
At December 31, 1995, shareholders' equity totalled $400.2 million or 8.7% of
total assets, compared with $350.6 million or 7.9% at year-end 1994. Valley has
achieved steady internal capital generation throughout the past five years.
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% 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.
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The following table details Valley's capital components and ratios as of
December 31, 1995, 1994 and 1993.
CAPITAL ANALYSIS
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
Total shareholders' equity
(excluding fair value adjustment)(1)................. $ 396,504 $ 368,458 $ 333,240
Less: Disallowed intangible assets..................... 4,386 4,459 5,806
---------- ---------- ----------
Tier 1 capital......................................... 392,118 363,999 327,434
Allowance for loan losses(2)........................... 35,310 32,592 28,126
---------- ---------- ----------
Total risk-based capital............................... $ 427,428 $ 396,591 $ 355,560
========== ========== ==========
Risk-adjusted assets................................... $2,823,703 $2,607,355 $2,250,072
---------- ---------- ----------
Adjusted average assets................................ $4,663,308 $4,421,239 $4,250,438
---------- ---------- ----------
- ---------------
(1) During 1994, the regulatory agencies determined that the FASB 115 fair value
adjustment does not enter into the calculation of capital ratios.
(2) Limited to 1.25% of risk-adjusted assets, with the excess deducted from
risk-adjusted assets.
CAPITAL RATIOS
"WELL
CAPITALIZED"
REQUIREMENTS 1995 1994 1993
------------ ---- ---- ----
Tier 1 capital/risk-adjusted assets..................... 6.0% 13.9% 14.0% 14.6%
Total risk-based capital/risk-adjusted assets........... 10.0% 15.1% 15.2% 15.8%
Tier 1 capital/quarterly average assets less disallowed
intangibles (leverage ratio).......................... 5.0% 8.4% 8.2% 7.7%
Shareholders equity/total assets........................ -- 8.7% 7.9% 7.8%
Valley's capital position at December 31, 1995 under risk-based capital
guidelines was $392.1 million, or 13.9% of risk-weighted assets, for Tier 1
capital and $427.4 million, or 15.1% for Total risked-based capital. The
comparable ratios at December 31, 1994 were 14.0.% for Tier 1 capital and 15.2.%
for Total risk-based capital. Valley's ratios at December 31, 1995 are above the
"well capitalized" requirements, which require Tier I capital of at least 6% and
Total risk-based capital of 10%. The Federal Reserve Board requires "well
capitalized" bank holding companies to maintain a minimum leverage ratio of
5.0%. At December 31, 1995 and 1994, Valley was in compliance with the leverage
requirement having a Tier 1 leverage ratio of 8.4% and 8.2%, respectively.
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 43.5% at December 31, 1995, compared to 50.7% at December 31,
1994. Cash dividends declared amounted to $.99 per share, equivalent to a
dividend payout ratio of 56.5%, up from the 49.3% for the year 1994. The current
quarterly dividend rate of $.25 per share provides for an annual rate of $1.00
per share. Valley's Board of Directors continues to believe that cash dividends
are an important component of shareholder value and that at its current level of
performance and capital, Valley expects to continue its current dividend policy
of a quarterly distribution of earnings to its shareholders.
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RESULTS OF OPERATIONS -- 1994 COMPARED TO 1993
Valley reported net income for 1994 of $64.6 million, or $1.83 per share,
compared to the $65.0 million, or $1.87 per share earned in 1993 (the per share
amounts have been restated to give effect to a 5% stock dividend in 1995, a 10%
stock dividend in 1994 and a five for four stock split in 1993).
Net interest income on a tax equivalent basis rose $9.5 million, or 5.4% to
$183.9 million in 1994. The increase in 1994 was due primarily to the movement
of funds from taxable investments to higher yielding interest earning loans.
Average loan balances increased $322.4 million, earning an average rate of
8.07%, while taxable investments which earned an average of 6.20%, decreased
$173.6 million. The net interest margin remained unchanged for 1994 at 4.48%
compared to 4.49% for 1993.
The provision for loan losses totaled $5.2 million in 1994 compared with
$8.0 million in 1993. The decline in nonperforming assets coupled with the
continued recovery of the economy among other things was responsible for the
decrease.
Non-interest income in 1994 amounted to $24.0 million, a decrease of $4.0
million, or 14.4% compared with 1993. Excluding securities gains of $6.0 million
in 1994 and $7.5 million in 1993, total non-interest income totaled $18.0 in
1994 compared with $20.5 in 1993. The decrease in non-interest income resulted
primarily from a decrease in gains on the sale of loans of $3.0 million and a
decline in mortgage servicing fees by MSI of $500 thousand. These decreases were
partially offset by a $500 thousand increase in service charges on deposit
accounts.
Non-interest expense totalled $90.6 million in 1994, an increase of $4.9
million, or 5.7% compared with 1993. Excluding merger expenses of $4.7 million
included in 1994 for the acquisition of Lakeland First Financial Group (see
Notes to Consolidated Financial Statements -- Acquisitions, Note 2), total
non-interest expense remained unchanged in 1994 compared to 1993. Salaries and
employee benefit expense increased $3.8 million or 9.6%. FDIC insurance premiums
increased $293 thousand or 3.6% during 1994 and was attributable to the growth
of deposits in 1994. Net occupancy expense, and furniture and equipment expense
increased $1.3 million, or 10.8%, which is indicative of the growth of
operations during 1994. Amortization of intangible assets decreased $2.4 million
or 43.1% representing the decrease in amortization of purchased mortgage
servicing rights.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements which are not historical facts contained in this
Management's Discussion and Analysis are forward looking statements that involve
risks and uncertainties including, but not limited to, the impact of economic
conditions (both generally and more specifically in the markets in which Valley
operates), the impact of competition for Valley's customers from other providers
of financial services, the impact of government legislation and regulation
(which changes from time to time and over which Valley has no control), and
other risks detailed in this Annual Report on Form 10-K and in Valley's other
Securities and Exchange Commission filings.
25
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
INTEREST INCOME
Interest and fees on loans (Note 5)........................ $225,346 $195,398 $173,328
Interest and dividends on investment securities
Taxable.................................................. 74,779 79,858 92,579
Tax-exempt............................................... 13,939 14,677 12,788
Dividends................................................ 691 700 642
Interest on federal funds sold and other short term
investments.............................................. 1,895 1,950 1,356
-------- -------- --------
Total interest income............................ 316,650 292,583 280,693
-------- -------- --------
INTEREST EXPENSE
Interest on deposits:
Savings deposits......................................... 45,975 48,646 49,028
Time deposits (Note 10).................................. 91,986 63,411 60,662
Interest on federal funds purchased and securities sold
under repurchase agreements.............................. 2,833 3,114 1,560
Interest on other short term borrowings.................... 698 227 161
Interest on other borrowings............................... 1,779 2,067 2,610
-------- -------- --------
Total interest expense........................... 143,271 117,465 114,021
-------- -------- --------
NET INTEREST INCOME........................................ 173,379 175,118 166,672
Provision for possible loan losses (Note 6)................ 2,669 5,197 7,966
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN
LOSSES................................................... 170,710 169,921 158,706
-------- -------- --------
NON-INTEREST INCOME
Trust income............................................... 950 805 665
Service charges on deposit accounts........................ 7,957 7,303 6,805
Gains on securities transactions, net (Note 4)............. 1,471 5,974 7,494
Fees from mortgage servicing (Note 7)...................... 3,776 3,320 3,812
Gains on sales of loans.................................... 846 539 3,505
Other...................................................... 5,968 6,026 5,709
-------- -------- --------
Total non-interest income........................ 20,968 23,967 27,990
-------- -------- --------
NON-INTEREST EXPENSE
Salary expense (Note 12)................................... 35,030 34,098 31,636
Employee benefit expense (Note 12)......................... 8,145 9,266 7,923
FDIC insurance premiums.................................... 5,884 8,473 8,180
Net occupancy expense (Notes 8 and 14)..................... 8,191 7,757 6,933
Furniture and equipment expense (Note 8)................... 5,661 5,646 5,161
Amortization of intangible assets (Note 7)................. 2,812 3,147 5,527
Other...................................................... 24,480 22,207 20,311
-------- -------- --------
Total non-interest expense....................... 90,203 90,594 85,671
-------- -------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE........................................ 101,475 103,294 101,025
Income tax expense (Note 13)............................... 38,879 38,723 35,638
-------- -------- --------
Income before cumulative effect of accounting change....... 62,596 64,571 65,387
Cumulative effect of accounting change..................... -- -- (402)
-------- -------- --------
NET INCOME................................................. $ 62,596 $ 64,571 $ 64,985
======== ======== ========
PER SHARE DATA:
Income before cumulative effect of accounting change..... $ 1.76 $ 1.83 $ 1.88
Net income............................................... $ 1.76 $ 1.83 $ 1.87
Weighted average number of shares outstanding.............. 35,615,339 35,302,341 34,736,301
See accompanying notes to consolidated financial statements.
26
29
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks (Note 14)................................... $ 167,349 $ 168,072
Federal funds sold.................................................. 108,500 --
Investment securities held to maturity, fair value of $270,622 and
$817,660 in 1995 and 1994, respectively (Note 3).................. 266,354 853,983
Investment securities available for sale (Note 4)................... 1,146,285 696,438
Loans, net of unearned income (Note 5).............................. 2,793,175 2,592,756
Less: Allowance for possible loan losses (Note 6)................. (39,670) (42,024)
---------- ----------
Net loans................................................. 2,753,505 2,550,732
---------- ----------
Premises and equipment (Note 8)..................................... 58,053 51,123
Due from customers on acceptances outstanding....................... 838 1,498
Accrued interest receivable......................................... 30,450 29,545
Other assets (Notes 7, 9 and 13).................................... 54,477 67,195
---------- ----------
Total assets.............................................. $4,585,811 $4,418,586
========== ==========
LIABILITIES
Deposits (Note 10):
Non-interest bearing.............................................. $ 542,229 $ 509,457
Interest bearing:
Savings........................................................ 1,699,871 1,833,326
Time........................................................... 1,841,773 1,537,219
---------- ----------
Total deposits............................................ 4,083,873 3,880,002
---------- ----------
Federal funds purchased and securities sold under repurchase
agreements (Note 3)............................................... 26,921 102,804
Treasury tax and loan account and other short term borrowings (Note
3)................................................................ 10,524 15,549
Other borrowings (Note 11).......................................... 28,679 35,567
Bank acceptances outstanding........................................ 838 1,498
Accrued expenses and other liabilities.............................. 34,739 32,550
---------- ----------
Total liabilities......................................... 4,185,574 4,067,970
---------- ----------
Commitments and Contingencies (Note 14)
SHAREHOLDERS' EQUITY (Notes 2, 12 and 15)
Common stock, no par value, authorized 39,414,375 shares; issued
35,889,721 shares in 1995 and 33,848,875 shares in 1994........... 20,025 18,869
Surplus............................................................. 216,377 172,321
Retained earnings................................................... 162,012 179,432
Unrealized gain (loss) on investment securities available for sale,
net of tax........................................................ 3,733 (17,842)
---------- ----------
402,147 352,780
Treasury stock, at cost (107,413 shares in 1995 and 121,696 shares
in 1994).......................................................... (1,910) (2,164)
---------- ----------
Total shareholders' equity................................ 400,237 350,616
---------- ----------
Total liabilities and shareholders' equity................ $4,585,811 $4,418,586
========== ==========
See accompanying notes to consolidated financial statements.
27
30
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED
GAIN
(LOSS)
ON
INVESTMENT
SECURITIES TOTAL
COMMON RETAINED AVAILABLE TREASURY SHAREHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY
------- -------- --------- -------- -------------- -------------
(IN THOUSANDS)
BALANCE -- DECEMBER 31, 1992............... $10,529 $ 76,879 $ 194,351 $ -- $ (1,384) $ 280,375
Net income................................. -- -- 64,985 -- -- 64,985
Cash dividends............................. -- -- (25,221) -- -- (25,221)
Warrants exercised......................... 315 1,624 -- -- -- 1,939
Effect of stock incentive plan, net........ 128 852 -- -- -- 980
Stock dividend............................. 162 4,480 (4,642) -- -- --
Purchase of treasury stock................. -- -- -- -- (780) (780)
Shares issued pursuant to merger........... 1,054 9,908 -- -- -- 10,962
------- -------- -------- -------- -------- --------
BALANCE -- DECEMBER 31, 1993............... 12,188 93,743 229,473 -- (2,164) 333,240
Net income................................. -- -- 64,571 -- -- 64,571
Cash dividends............................. -- -- (33,535) -- -- (33,535)
Warrants exercised......................... 396 2,178 -- -- -- 2,574
Effect of stock incentive plan, net........ 156 1,452 -- -- -- 1,608
Stock dividend............................. 6,129 74,948 (81,077) -- -- --
Unrealized gain on investment securities
available for sale as of January 1,
1994..................................... -- -- -- 4,100 -- 4,100
Net change in unrealized gain (loss)on
investment securities available for
sale..................................... -- -- -- (21,942) -- (21,942)
------- -------- -------- -------- -------- --------
BALANCE -- DECEMBER 31, 1994............... 18,869 172,321 179,432 (17,842) (2,164) 350,616
Net income................................. -- -- 62,596 -- -- 62,596
Cash dividends............................. -- -- (35,324) -- -- (35,324)
Warrants exercised......................... 33 771 (5,506) -- 11,944 7,242
Effect of stock incentive plan, net 30 327 (1,149) -- 1,980 1,188
Stock dividend............................. 949 37,802 (38,831) -- -- (80)
Purchase of treasury stock................. -- -- -- -- (13,670) (13,670)
Acquisition of American Union.............. 154 5,345 (1,076) -- -- 4,423
Tax benefit from exercise of stock
options.................................. -- 508 -- -- -- 508
Adjustment for the pooling of a company
with a different fiscal year end......... (10 ) (697) 1,870 -- -- 1,163
Net change in unrealized gain (loss) on
investment securities available for
sale..................................... -- -- -- 21,575 -- 21,575
------- -------- -------- -------- -------- --------
BALANCE -- DECEMBER 31, 1995............... $20,025 $216,377 $ 162,012 $ 3,733 $ (1,910) $ 400,237
======= ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
28
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 62,596 $ 64,571 $ 64,985
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of intangible assets.................... 8,039 8,699 10,395
Amortization of compensation costs pursuant to long term stock
incentive plan....................................................... 322 254 232
Provision for possible loan losses.................................... 2,669 5,197 7,966
Net amortization of premiums and discounts............................ 5,095 6,907 9,193
Net deferred income tax expense (benefit)............................. 1,549 (492) (2,370)
Net gains on securities transactions.................................. (1,471) (5,974) (7,494)
Gain on sale of loans................................................. (846) (539) (3,505)
Proceeds from recoveries on previously charged-off loans.............. 2,619 2,203 1,412
Net (increase) decrease in accrued interest receivables and other
assets............................................................... (3,789) (3,964) 8,665
Net increase (decrease) in accrued expenses and other liabilities..... 991 6,814 (7,681)
Net increase in shareholders' equity due to acquisition of American
Union Bank........................................................... 4,423 -- --
Adjustment for the pooling of a company with a different fiscal year
end.................................................................. 1,163 -- --
--------- --------- ---------
Net cash provided by operating activities............................. 83,360 83,676 81,798
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received pursuant to acquisitions................................... -- -- 7,566
Purchases of mortgage servicing rights................................... (3,902) (1,390) (249)
Proceeds from sales of investment securities available for sale.......... 105,336 190,472 336,745
Proceeds from maturing investment securities available for sale.......... 119,475 86,170 25,082
Purchases of investment securities available for sale.................... (115,348) (267,581) (277,510)
Purchases of investment securities held to maturity...................... (84,675) (169,676) (454,017)
Proceeds from maturing investment securities held to maturity............ 146,284 286,188 442,481
Net (increase) decrease in federal funds sold and other short term
investments........................................................... (108,500) 95,182 (6,413)
Net increase in loans made to customers.................................. (207,215) (324,794) (199,176)
Purchases of premises and equipment, net of sales........................ (12,353) (6,588) (9,014)
Net (increase) decrease in acceptances................................... 660 (306) (369)
--------- --------- ---------
Net cash used in investing activities.................................... (160,238) (112,323) (134,874)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits................................................. 203,871 107,746 32,433
Net increase (decrease) in federal funds purchased and other short term
borrowings............................................................ (80,908) 41,812 23,016
Advances of other borrowings............................................. -- -- 17,000
Repayments of other borrowings........................................... (6,888) (9,344) (14,101)
Net (decrease) increase in acceptances................................... (660) 306 369
Dividends paid to common shareholders.................................... (33,618) (31,695) (24,614)
Addition of common shares to treasury.................................... (13,670) -- (780)
Common stock issued, net of cancellations................................ 8,028 3,925 2,688
--------- --------- ---------
Net cash provided by financing activities................................ 76,155 112,750 36,011
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents..................... (723) 84,103 (17,065)
Cash and cash equivalents at beginning of year........................... 168,072 83,969 101,034
--------- --------- ---------
Cash and cash equivalents at end of year................................. $ 167,349 $ 168,072 $ 83,969
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and other borrowings............................. $ 139,178 $ 116,123 $ 116,824
Federal and state income taxes........................................ 38,021 37,291 38,972
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisition...................................... $ -- $ -- $ 10,962
Assets acquired in acquisition, net of cash received..................... -- -- 215,683
Transfer of investment securities held to maturity to investment
securities available for sale......................................... 516,854 23,577 176,321
Transfer of loans to loans held for sale................................. -- -- 23,190
See accompanying notes to consolidated financial statements.
29
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (NOTE 1)
Basis of Presentation
The consolidated financial statements of Valley National Bancorp and its
wholly-owned subsidiary ("Valley") include the accounts of its principal
commercial bank subsidiary, Valley National Bank ("VNB") and its wholly-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated. The financial statements of prior years have been restated to
include Lakeland First Financial Group ("LFG"), which was acquired on June 30,
1995 in a transaction accounted for as a pooling of interest. Certain
reclassifications have been made in the consolidated financial statements for
1994 and 1993 to conform to the classifications presented for 1995.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect 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. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for possible loan losses and the valuation of other real estate owned. In
connection with the determination of these allowances, management generally
obtains independent appraisals.
Statement of Cash Flows
The Consolidated Statements of Cash Flows are presented using the indirect
method. Cash and cash equivalents are defined as cash and due from banks.
Investment Securities
Valley adopted prospectively on January 1, 1994 Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investment in
Debt and Equity Securities". Under the provisions of SFAS 115, investments will
be classified into three categories: held to maturity, available for sale and
trading.
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 on the accompanying consolidated statements of financial condition and are
recorded at fair value on an aggregate basis and unrealized holding gains and
losses (net of related tax effects) on such securities are excluded from
earnings, but are included as a separate component of shareholders' equity, net
of deferred tax.
Transfers of securities between investment categories are at fair value as
of the transfer date with the accounting treatment of unrealized gains and
losses determined by the category into which the security is transferred.
Realized gains or losses on the sale of investment securities are
recognized by the specific identification method and shown as a separate
component of non-interest income.
Loans and Loan Fees
Loans are stated net of unearned income. Unearned income on discounted
loans is recognized based upon methods which approximate a level yield. Loan
origination and commitment fees, net of related costs, are deferred and
amortized as an adjustment of loan yield over the estimated lives of the loans
approximating the effective interest method.
30
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 1, 1995, Valley adopted Statement of Financial Accounting
Standards No. 118 "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures," ("SFAS 118"). Valley has chosen to maintain its
existing income recognition policies with respect to non-accrual loans.
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, 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 again becomes well secured and in the process of collection and
all past due amounts have been collected.
On January 1, 1995, Valley adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS
114"). SFAS 114 requires that the value of an impaired loan be measured based
upon the present value of expected future cash flows discounted at the loans
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, consisting
primarily of commercial real estate loans. The impaired loan portfolio is
primarily collateral dependent, as defined by SFAS 114. 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 Small Business
Administration("SBA"). The principal amount of these loans is guaranteed up to
70% by the SBA. Valley may sell the guaranteed portions of these loans and
retain the unguaranteed portions as well as the rights to service the loans.
Gains are recorded on loan sales based on premiums paid by the purchasers.
Allowance for Possible Loan Losses
The allowance for possible 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 is maintained at a level necessary to absorb potential loan
losses and other credit risk related charge-offs. It is the result of an
analysis which relates outstanding balances to expected reserve levels required
to absorb future credit losses. Current and economic problems are addressed
through management's assessment of anticipated changes in the regional economic
climate, changes in composition and volume of the loan portfolio and variances
in levels of classified loans, non-performing loans and other past due amounts.
Premises and Equipment
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.
31
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Real Estate Owned
Real estate formally acquired in partial or full satisfaction of loans is
classified as other real estate owned. These assets are recorded at the lower of
cost or fair value at the time of acquisition, with any excess charged to the
allowance for loan losses. Subsequently, other real estate owned is carried at
the lower of fair value, less estimated costs to sell, or cost.
An allowance for other real estate owned has been established to maintain
these properties at the lower of cost or fair value less estimated cost to sell.
Other real estate owned is shown net of the allowance. The allowance is
established through charges to other real estate owned expense.
Intangible Assets
Intangible assets resulting from acquisitions under the purchase method of
accounting consist of goodwill and core deposit intangibles. Goodwill, which was
recorded prior to 1987, is being amortized on a straight-line basis over 25
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.
Mortgage Servicing
Servicing fee income, representing reimbursement for loan administrative
services performed on contractually serviced mortgages, are credited to income
as earned.
Purchased mortgage servicing rights are capitalized and amortized over the
estimated lives of related loans and approximate the amount by which the present
value of estimated future servicing revenues exceeds the present value of
expected servicing costs.
Income Taxes
Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes", required a change from the deferred method under
APB Opinion 11 to the asset and liability method of SFAS 109. 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 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. Under SFAS 109, the effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
Effective January 1, 1993, Valley adopted SFAS 109 prospectively and has
reported the cumulative effect of that change in method of accounting for income
taxes in the 1993 consolidated statement of income.
Earnings Per Share
Earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during each period. All share and per share
amounts have been restated to reflect the five percent stock dividend on May 2,
1995, the ten percent stock dividend on May 3, 1994 and the five for four stock
split on April 16, 1993. Shares issuable upon exercise of options and warrants
are not included in the calculation of earnings per share since their effect is
not material.
Treasury Stock
Treasury stock is recorded using the cost method and accordingly is
presented as an unallocated reduction of shareholders' equity.
32
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACQUISITIONS (NOTE 2)
On June 30, 1995, Valley acquired by merger the $671 million asset Lakeland
First Financial Group, Inc. ("LFG"), based in Succasunna, New Jersey and its
sixteen branch subsidiary, Lakeland Savings Bank ("Lakeland"). Each share of LFG
common stock outstanding was converted into 1.286 shares of Valley common stock,
resulting in the issuance by Valley of 5,136,446 shares of Valley common stock.
The acquisition has been accounted for as a pooling of interests. Prior to the
merger, Lakeland's fiscal year ended on June 30th. In recording the pooling of
interests combination, LFG's statement of financial condition as of June 30,
1995 was combined with Valley's statement of financial condition as of December
31, 1994. LFG's statements of income for the years ended June 30, 1995 and 1994,
were combined with Valley's statements of income for the years ended December
31, 1994 and 1993, respectively. An adjustment has been made to shareholders'
equity to eliminate the effect of including LFG's results of operations for the
six months ended June 30, 1995 in both the year ended December 31, 1995 and the
year ended December 31, 1994. The consolidated financial statements of Valley
include the accounts of LFG for all periods presented. Separate results of the
combining companies are as follows:
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
1995 1994 1993
---------- ------------ ------------
(IN THOUSANDS)
Net interest income after provision for
possible loan losses:
Valley....................................... $ 72,677 $145,561 $137,675
LFG.......................................... 12,560 24,360 21,031
------- ------- -------
$ 85,237 $169,921 $158,706
======= ======= =======
Net income:
Valley....................................... $ 27,341 $ 59,044 $ 56,444
LFG.......................................... 605 5,527 8,541
------- ------- -------
$ 27,946 $ 64,571 $ 64,985
======= ======= =======
On February 28, 1995, Valley acquired American Union Bank ("American"),
headquartered in Union, New Jersey, with two branches and approximately $58
million in assets. The transaction resulted in the issuance of 288,734 shares of
Valley common stock and was accounted for using the pooling of interests method
of accounting. The financial statements for Valley have not been restated as
they would not have been materially different from those presented. American's
financial statements are included in Valley's consolidated financial statements
as of January 1, 1995. Each share of common stock of American was exchanged for
0.50 shares of Valley common stock.
On November 30, 1994, Valley acquired approximately $190 million in assets
of Rock Financial Corporation ("RFC"), based in North Plainfield, New Jersey and
its five branch subsidiary, Rock Bank ("Rock"). Each share of RFC common stock
outstanding was converted into 1.85 shares of Valley common stock for a total of
approximately 1.7 million shares. The acquisition has been accounted for as a
pooling of interests and the consolidated financial statements of Valley include
the accounts of RFC for all periods presented.
On June 18, 1993, Valley issued approximately 421,000 shares of its common
stock at a cost of $10,962,000 in exchange for approximately 661,000 shares of
common stock of Peoples Bancorp ("Peoples") of Fairfield, New Jersey, a New
Jersey corporation and a registered bank holding company of Peoples Bank,
National Association, a banking association. The merger was accounted for under
the purchase method of accounting, and as such, the consolidated financial
statements include the results of operations and assets and liabilities of
Peoples from June 18, 1993 forward. The proforma results of operations for the
period January 1
33
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to June 18, 1993, assuming Peoples had been acquired as of January 1, 1993,
would not have been significantly different from those presented in the
Consolidated Statements of Income.
INVESTMENT SECURITIES HELD TO MATURITY(NOTE 3)
The amortized cost, fair value and unrealized gains and losses of
securities held to maturity at December 31, 1995 and 1994 were as follows:
DECEMBER 31, 1995
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
(IN THOUSANDS)
U.S. Treasury securities and other government agencies
and corporations.................................... $ 6,742 $ 44 $ (18) $ 6,768
Obligations of states and political subdivisions...... 106,748 1,425 (132) 108,041
Mortgage-backed securities............................ 144,642 3,301 (360) 147,583
Other debt securities................................. 479 8 -- 487
-------- ------- ----- -------
Total debt securities............................ 258,611 4,778 (510) 262,879
Equity securities..................................... 6,936 -- -- 6,936
Other securities...................................... 807 -- -- 807
-------- ------- ----- -------
Total investment securities held to maturity........ $266,354 $4,778 $ (510) $270,622
======== ======= ===== =======
DECEMBER 31, 1994
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
(IN THOUSANDS)
U.S. Treasury securities and other government agencies
and corporations.................................... $ 16,288 $ 38 $ (1,186) $ 15,140
Obligations of states and political subdivisions...... 328,659 1,270 (7,394) 322,535
Mortgage-backed securities............................ 501,120 144 (29,195) 472,069
Other debt securities................................. 779 -- -- 779
-------- ----- -------- --------
Total debt securities............................ 846,846 1,452 (37,775) 810,523
Equity securities..................................... 6,539 -- -- 6,539
Other securities...................................... 598 -- -- 598
-------- ----- -------- --------
Total investment securities held to maturity..... $853,983 $1,452 $ (37,775) $817,660
======== ===== ======== ========
34
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The contractual maturities of investments in debt securities held to
maturity at December 31, 1995 are set forth in the following table:
AMORTIZED COST FAIR VALUE
-------------- -----------
(IN THOUSANDS)
Due in one year................................... $ 39,727 $ 39,806
Due after one year thru five years................ 61,196 62,056
Due after five years thru ten years............... 5,393 5,691
Due after ten years............................... 7,653 7,743
-------- --------
113,969 115,296
Mortgage-backed securities........................ 144,642 147,583
-------- --------
Total debt securities........................ 258,611 262,879
Equity securities................................. 6,936 6,936
Other securities.................................. 807 807
-------- --------
Total investment securities held to
maturity................................... $266,354 $ 270,622
======== ========
Actual maturities of debt securities may differ from those presented above
as certain obligations provide the issuer the right to call or prepay the
obligation prior to scheduled maturity without penalty. Equity and other
securities do not have contractual maturities.
The amortized cost of securities pledged to secure public deposits,
treasury tax and loan deposits, repurchase agreements and for other purposes
required by law approximated $123,297,000 and $140,261,000 at December 31, 1995
and 1994, respectively.
INVESTMENT SECURITIES AVAILABLE FOR SALE (NOTE 4)
The amortized cost, fair value and unrealized gains and losses of
securities available for sale at December 31, 1995 and 1994 were as follows:
DECEMBER 31, 1995
--------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ----------- -----------
(IN THOUSANDS)
U.S. Treasury securities and other
government agencies and corporations...... $ 175,990 $ 547 $ (175) $ 176,362
Obligations of states and political
subdivisions.............................. 201,650 2,687 (344) 203,993
Mortgage-backed securities.................. 755,347 7,286 (4,499) 758,134
---------- ------- ------- --------
Total debt securities.................. 1,132,987 10,520 (5,018) 1,138,489
Equity securities........................... 6,624 1,176 (4) 7,796
---------- ------- ------- --------
Total investment securities available
for sale............................. $1,139,611 $ 11,696 $ (5,022) $ 1,146,285
========== ======= ======= ========
35
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
--------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ----------- -----------
(IN THOUSANDS)
U.S. Treasury securities and other
government agencies and corporations...... $ 194,889 $ -- $ (9,868) $ 185,021
Mortgage-backed securities.................. 526,974 861 (21,898) 505,937
---------- ------- ------- ----------
Total debt securities.................. 721,863 861 (31,766) 690,958
Equity securities........................... 4,792 768 (80) 5,480
---------- ------- ------- ----------
Total investment securities available
for sale............................. $ 726,655 $ 1,629 $ (31,846) $ 696,438
========== ======= ======= ==========
The contractual maturities of investments in debt securities available for
sale at December 31, 1995 are set forth in the following table:
AMORTIZED COST FAIR VALUE
-------------- -----------
(IN THOUSANDS)
Due in one year................................... $ 102,162 $ 102,305
Due after one year thru five years................ 249,318 251,057
Due after five years thru ten years............... 22,207 22,599
Due after ten years............................... 3,953 4,394
-------- --------
377,640 380,355
Mortgage-backed securities........................ 755,347 758,134
-------- --------
Total debt securities........................ 1,132,987 1,138,489
Equity securities................................. 6,624 7,796
-------- --------
Total investment securities available for
sale....................................... $1,139,611 $ 1,146,285
======== ========
Actual maturities on debt securities may differ from those presented above
as certain obligations provide the issuer the right to call or prepay the
obligation prior to scheduled maturity without penalty. Equity securities do not
have contractual maturities.
Gross gains(losses) realized on sales, maturities and other securities
transactions for the years ended December 31, 1995, 1994 and 1993 were as
follows:
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Sales transactions:
Gross gains.................................... $1,674 $6,081 $7,764
Gross losses................................... (209) (185) (297)
------ ------ ------
1,465 5,896 7,467
------ ------ ------
Maturities and other securities transactions:
Gross gains.................................... 6 78 27
Gross losses................................... -- -- --
------ ------ ------
6 78 27
------ ------ ------
Net gains on securities transactions........... $1,471 $5,974 $7,494
====== ====== ======
Cash proceeds from sales transactions approximated $105,336,000,
$190,472,000 and $336,745,000 for the years ended 1995, 1994 and 1993,
respectively.
36
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOANS (NOTE 5)
The detail of the loan portfolio as of December 31, 1995 and 1994 was as
follows:
1995 1994
---------- ----------
(IN THOUSANDS)
Commercial.......................................... $ 351,885 $ 298,337
Construction........................................ 73,664 70,192
Commercial mortgage................................. 619,326 571,596
Residential mortgage................................ 1,017,453 1,004,203
Installment......................................... 731,772 650,329
---------- ----------
2,794,100 2,594,657
Less: Unearned income............................... (925) (1,901)
---------- ----------
Loans, net of unearned income....................... $2,793,175 $2,592,756
========== ==========
VNB grants loans in the ordinary course of business to their 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
1995:
(IN THOUSANDS)
--------------
Outstanding at beginning of year............................... $ 29,692
New loans and advances......................................... 10,211
Repayments..................................................... (12,855)
--------
Outstanding at end of year..................................... $ 27,048
========
Non-performing assets include non-accrual loans and other real estate
owned.
The outstanding balances of accruing loans which are 90 days or more past
due as to principal or interest payments and non-performing assets at December
31, 1995 and 1994 were as follows:
1995 1994
------- -------
(IN THOUSANDS)
Loans past due in excess of 90 days and still accruing... $ 8,117 $ 8,695
======= =======
Non-accrual loans........................................ $11,795 $22,622
Other real estate owned.................................. 7,015 7,638
------- -------
Total non-performing assets.................... $18,810 $30,260
======= =======
Troubled debt restructured loans......................... $ 5,209 $ --
======= =======
The amount of interest income that would have been recorded on non-accrual
loans in 1995, 1994 and 1993 had payments remained in accordance with the
original contractual terms approximated $1,569,000, $2,742,000 and $3,558,000
while the actual amount of interest income recorded on these types of assets in
1995, 1994 and 1993 totalled $763,000, $996,000 and $960,000, resulting in lost
interest income of $806,000, $1,746,000 and $2,598,000, respectively.
At December 31, 1995 there were two loans which were restructured at below
market interest rates and accounted for as troubled debt restructured loans
amounting to 5,209,000.
At December 31, 1995, there were no commitments to lend additional funds to
borrowers whose loans were non-accrual or contractually past due in excess of 90
days and still accruing interest.
SFAS 114 and SFAS 118 were adopted prospectively on January 1, 1995. The
adoption of these statements did not affect the level of the overall allowance
or operating results of Valley. Income recognition and charge-off policies were
not changed as a result of these statements. At December 31, 1995, the impaired
loan portfolio was primarily collateral dependent as defined under SFAS 114 and
totaled $24.4 million for
37
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which general and specific allocations to the allowance for loan losses of $7.0
million were identified. The average balance of impaired loans during 1995 was
approximately $30.2 million. The amount of cash basis interest income that was
recognized on impaired loans during 1995 was $2.1 million.
ALLOWANCE FOR POSSIBLE LOAN LOSSES (NOTE 6)
Transactions in the allowance for possible loan losses during 1995, 1994
and 1993 were as follows:
1995 1994 1993
------- ------- --------
(IN THOUSANDS)
Balance at beginning of year................. $42,024 $41,344 $ 34,852
Balance from acquisition..................... -- -- 4,466
Provision charged to operating expense....... 2,669 5,197 7,966
------- ------- -------
44,693 46,541 47,284
Less net loan charge-offs
Loans charged-off.......................... (7,642) (6,720) (7,352)
Less recoveries on loan charge-offs........ 2,619 2,203 1,412
------- ------- -------
Net loan charge-offs......................... (5,023) (4,517) (5,940)
------- ------- -------
Balance at end of year....................... $39,670 $42,024 $ 41,344
======= ======= =======
MORTGAGE SERVICING (NOTE 7)
VNB Mortgage Services, Inc. ("MSI"), a subsidiary of VNB, is a servicer of
residential mortgage loan portfolios. MSI purchases the rights to service these
portfolios in the secondary market and is compensated for loan administrative
services performed.
The aggregate principal balances of mortgage loans serviced by MSI
approximated $1,690,080,000, $1,204,980,000 and $1,174,939,000 at December 31,
1995, 1994 and 1993, respectively. These amounts included $816,513,000,
$536,601,000 and $467,003,000 as of December 31, 1995, 1994 and 1993,
respectively, of loans serviced on behalf of VNB. The outstanding balance of
loans serviced for others is not included in the consolidated statement of
financial condition.
The costs associated with acquiring mortgage servicing rights are included
in other assets in the consolidated financial statements and are being amortized
over the estimated periods which the related loans are expected to generate
income. The remaining unamortized costs at December 31, 1995, 1994 and 1993,
amounted to $8,094,000, $5,998,000 and $6,193,000, respectively. Amortization
expense for 1995, 1994 and 1993 amounted to $1,806,000, $1,585,000 and
$3,715,000, respectively, and is included in amortization of intangible assets.
38
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREMISES AND EQUIPMENT (NOTE 8)
At December 31, 1995 and 1994, premises and equipment consisted of:
1995 1994
-------- --------
(IN THOUSANDS)
Land................................................... $ 14,144 $ 13,734
Buildings.............................................. 36,130 33,354
Leasehold improvements................................. 5,717 5,087
Furniture and equipment................................ 39,462 30,561
-------- -------
95,453 82,736
Less accumulated depreciation and amortization......... (37,400) (31,613)
-------- -------
Net premises and equipment................... $ 58,053 $ 51,123
======== =======
Depreciation and amortization included in non-interest expense for the
years ended December 31, 1995, 1994 and 1993 amounted to approximately
$5,695,000, $5,551,000 and $4,890,000, respectively.
OTHER ASSETS (NOTE 9)
At December 31, 1995 and 1994, other assets consisted of the following:
1995 1994
------- -------
(IN THOUSANDS)
Mortgage servicing rights................................ $ 8,094 $ 5,998
Goodwill................................................. 3,420 3,668
Core deposits............................................ 3,146 3,578
Other real estate owned.................................. 7,015 7,638
Deferred tax asset....................................... 13,292 29,708
Other.................................................... 19,510 16,605
------- -------
Total other assets............................. $54,477 $67,195
======= =======
DEPOSITS (NOTE 10)
The carrying value of deposits at December 31, 1995 and 1994 were as
follows:
1995 1994
---------- ----------
(IN THOUSANDS)
Non-interest bearing demand deposits................ $ 542,229 $ 509,457
Savings accounts.................................... 1,699,871 1,833,326
Certificates of deposit of $100,000 or more......... 500,939 277,476
Other time deposits................................. 1,340,834 1,259,743
---------- ----------
Total deposits............................ $4,083,873 $3,880,002
========== ==========
Interest expense on certificates of deposit of $100,000 or more totaled
approximately $20,157,000, $14,881,000 and $5,042,000 in 1995, 1994 and 1993,
respectively.
39
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER BORROWINGS (NOTE 11)
At December 31, 1995 and 1994, other borrowings consisted of the following:
1995 1994
------- -------
(IN THOUSANDS)
FHLB advances............................................ $28,500 $33,000
Mortgage note............................................ 179 183
Capitalized lease obligation............................. -- 2,384
-------- --------
$28,679 $35,567
======== ========
The Federal Home Loan Bank (FHLB) advances have a weighted average interest
rate of 5.11% at December 31, 1995 and 5.03% at December 31, 1994. These
advances are secured by pledges of FHLB stock and a blanket assignment of
qualifying mortgage loans. The advances are scheduled for repayment as follows:
($ IN THOUSANDS)
Within one year............................................... $ 14,000
From one to three years....................................... 14,500
-------
$ 28,500
=======
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 1995, 1994 and 1993, contributions
totaling $502,000, $1,363,000 and $1,160,000 were made. In addition, VNB has a
supplemental non-qualified, non-funded retirement plan which is designed to
supplement the pension plan for key employees.
The following table sets forth the funded status of the plans and amounts
recognized in Valley's financial statements at December 31, 1995 and 1994:
1995 1994
------- -------
(IN THOUSANDS)
Plan assets at fair value, primarily government and corporate bonds,
corporate stocks, certificates of deposit and other miscellaneous
assets................................................................... $15,074 $12,935
Actuarial present value of benefit obligations:
Accumulated benefit obligation for service rendered to date, including
vested benefits of $11,469 in 1995 and $10,042 in 1994................ 12,521 10,684
Additional future benefits based on estimated salary levels.............. 3,684 3,608
------- -------
Projected benefit obligations.............................................. $16,205 $14,292
------- -------
Deficiency of plan assets over projected benefit obligations............... $(1,131) $(1,357)
Unrecognized net (gain)loss from past experience different from that
assumed and effects of changes in assumptions............................ (1,688) (808)
Unrecognized net asset at January 1, being recognized over an average of
15.6 years............................................................... 7 (253)
Prior service cost not yet recognized in net periodic pension cost......... 681 854
------- -------
Accrued pension cost included in other liabilities......................... $(2,131) $(1,564)
======= =======
40
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic pension expense for 1995, 1994 and 1993 included the following
components:
1995 1994 1993
------- ------ -----
(IN THOUSANDS)
Service cost-benefits earned during the period................... $ 1,221 $1,253 $ 983
Interest cost on projected benefit obligations................... 1,048 969 836
Actual return on plan assets..................................... (2,866) (804) (692)
Net amortization and deferral.................................... 1,810 (78) (212)
----- ----- -----
Total net periodic pension expense..................... $ 1,213 $1,340 $ 915
===== ===== =====
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 7.00% and 5.00%, respectively, for 1995 and 8.00%
and 6.00% for 1994. The expected long term rate of return on assets was 9.00%
for both 1995 and 1994 and the weighted average discount rate used in computing
pension cost was 8.00% and 7.50% for 1995 and 1994, respectively.
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 and
determined by the achievement of certain performance objectives. Amounts charged
to salaries expense during 1995, 1994 and 1993 were $1,265,000, $1,495,000 and
$1,439,000, respectively.
Savings Plan
VNB maintains a contribution matching 401K Savings and Investment Plan.
This plan covers eligible employees of VNB and its subsidiaries. The 401K plan
allows employees to contribute from 1% to 12% of their salary with VNB matching
a certain percentage out of its current years earnings with the distribution of
VNB's contributions subject to a vesting schedule. 401K expense for 1995, 1994
and 1993 amounts to $396,000, $586,000 and $663,000, respectively.
Stock Incentive Plan
Valley maintains a stock incentive plan pursuant to which 1,847,030 shares
of common stock have been authorized for issuance to certain key employees in
the form of stock options, stock appreciation rights and restricted stock
awards. Shares of Valley's common stock may be purchased under qualified and
non-qualified stock options at 100 percent and 80 percent, respectively, of the
fair market value of such shares on the date of the grant. The options granted
under this plan are, in general, exercisable not earlier than one year after the
date of grant, and expire not more than ten years after the date of the grant,
and are subject to a vesting schedule. Changes in total options outstanding
during 1995, 1994 and 1993 are as follows:
1995 1994 1993
----------------------- ------------------------ ------------------------
PER SHARE PER SHARE PER SHARE
QUALIFIED STOCK OPTIONS SHARES PRICE RANGE SHARES PRICE RANGE SHARES PRICE RANGE
- ----------------------- ------- ------------- -------- ------------- -------- -------------
Options outstanding at
beginning of year.... 511,335 $ 4.14-$24.78 680,651 $ 4.14-$22.08 666,944 $ 4.14-$19.74
Options granted........ 87,927 $24.00-$24.88 89,959 $23.57-$24.78 157,741 $12.72-$22.08
Options cancelled...... (15,156) $ 6.92-$24.75 (14,535) $ 4.14-$22.08 (6,889) $ 6.92-$19.74
Options exercised...... (84,242) $ 6.92-$22.07 (244,740) $ 4.14-$22.08 (137,145) $ 4.14-$19.74
------- --------------- -------- --------------- -------- ---------------
Options outstanding at
end of year.......... 499,864 $ 4.14-$24.88 511,335 $ 4.14-$24.78 680,651 $ 4.14-$22.08
======= =============== ======== =============== ======== ================
41
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995, 1994 and 1993, 217,959, 188,601 and 331,638 options
were exercisable under the Plan's vesting schedule.
There are 15,902 stock appreciation rights outstanding as of December 31,
1995. These were granted in tandem with qualified stock options.
1995 1994 1993
--------------------- -------------------- --------------------
PER SHARE PER SHARE PER SHARE
NON-QUALIFIED STOCK OPTIONS SHARES PRICE RANGE SHARES PRICE RANGE SHARES PRICE RANGE
- ------------------------------------ ------ ------------ ------ ----------- ------ -----------
Options outstanding at beginning
of year........................... 11,694 $ 9.42 11,694 $9.42 11,694 $9.42
Options granted..................... 19,795 24.88 -- -- -- --
------ ----------- ------ ----- ------ -----
Options outstanding at end of
year.............................. 31,489 $9.42-$24.88 11,694 $9.42 11,694 $9.42
====== =========== ====== ===== ====== =====
At December 31, 1995, 1994 and 1993, 11,694, 11,694 and 9,355 options were
exercisable under the Plan's vesting schedule.
During 1995, 8,749 stock appreciation rights were granted in tandem with
non-qualified stock options.
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 salaries expense
over the vesting period. The following table sets forth the changes in
restricted stock awards outstanding at December 31, 1995, 1994 and 1993.
RESTRICTED STOCK 1995 1994 1993
---------------------------------------------------- ------- ------- -------
Awards outstanding at beginning of year............. 53,494 52,387 44,389
Awards granted...................................... 30,300 18,534 21,382
Awards vested....................................... (15,471) (17,138) (12,763)
Awards forfeited.................................... (1,003) (289) (621)
------- ------- -------
Awards outstanding at end of year................... 67,320 53,494 52,387
======= ======= =======
The amount of compensation costs included in salaries expense in 1995, 1994
and 1993 amounted to $322,000, $254,000 and $232,000, respectively.
INCOME TAXES (NOTE 13)
As discussed in Note 1, Valley adopted SFAS No. 109 as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes of $402
thousand is determined as of January 1, 1993 and is reported separately in the
consolidated statement of income for year ended December 31, 1993.
Income tax expense(benefit) included in the financial statements consisted
of the following:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Income tax from operations:
Current:
Federal........................................ $31,230 $32,131 $30,680
State.......................................... 6,100 7,084 7,328
------- ------- ------
37,330 39,215 38,008
Deferred:
Federal & State................................ 1,549 (492) (2,370)
------- ------- ------
Total income tax from operations............... $38,879 $38,723 $35,638
======= ======= ======
42
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 1995 and 1994 are as follows:
1995 1994
------- -------
(IN THOUSANDS)
Deferred tax assets:
Allowance for possible loan losses........................... $16,205 $16,397
State privilege year taxes................................... 1,738 1,471
Non-accrual loan interest.................................... 927 637
Investment securities available for sale..................... -- 12,375
Other........................................................ 1,644 4,239
------- -------
Total deferred tax assets................................. 20,514 35,119
Deferred tax liabilities:
Tax over book depreciation................................... 2,753 1,905
Purchase accounting adjustments.............................. 888 1,176
Unearned discount on investments............................. 701 646
Investment securities available for sale..................... 2,492 --
Other........................................................ 388 1,684
------- -------
Total deferred tax liabilities............................ 7,222 5,411
Net deferred tax assets...................................... $13,292 $29,708
======= =======
Also included in shareholders' equity are income tax expense and benefits
attributable to net unrealized gains and (losses) on investment securities
available for sale in the amounts of $2,492,000 and ($12,375,000) for the years
ended December 31, 1995 and 1994, respectively.
A reconciliation between the reported income tax expense from operations
and the amount computed by multiplying income before taxes by the statutory
federal income tax rate is as follows:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Tax at statutory federal income tax rate............ $35,516 $36,153 $35,359
Increases(decreases) resulted from:
Tax-exempt interest, net of interest incurred to
carry
tax-exempts.................................... (4,921) (5,241) (4,666)
State income tax, net of federal tax benefit...... 4,187 3,860 4,856
Provision for recapture of bad debt deduction upon
merger......................................... 3,115 3,115 --
Other, net........................................ 982 836 89
------- ------- -------
Income tax expense................................ $38,879 $38,723 $35,638
======= ======= =======
COMMITMENTS AND CONTINGENCIES (NOTE 14)
Cash Reserves
At December 31, 1995, cash reserves maintained in accordance with Federal
Reserve regulations amounted to $47,783,000.
Lease Commitments
Certain bank facilities are occupied under non-cancelable long term
operating leases which expire at various dates through 2027. Certain lease
agreements provide for renewal options and increases in rental
43
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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)
1996........................................................... $ 2,706
1997........................................................... 2,448
1998........................................................... 2,260
1999........................................................... 2,115
2000........................................................... 1,142
2001-2027...................................................... 4,363
-------
Total lease commitments.............................. $ 15,034
=======
Net occupancy expense for 1995, 1994 and 1993 includes approximately
$2,163,000, $2,053,000 and $2,502,000, respectively, of rental expenses for 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.
The following table provides a summary of financial instruments with
off-balance sheet risk at December 31, 1995 and 1994:
1995 1994
-------- --------
(IN THOUSANDS)
Standby and commercial letters of credit....................... $ 29,210 $ 26,233
Commitments under unused lines of credit....................... 427,000 405,910
Outstanding loan commitments................................... 182,874 159,467
-------- --------
Total financial instruments with off-balance sheet
risk............................................... $639,084 $591,610
======== ========
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.
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.
44
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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)
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 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 1996 without prior approval of the
OCC of up to $59,540,000 plus an amount equal to VNB's net profits for 1996 to
the date of such dividend declaration.
Treasury Stock
During 1995 the Board of Directors authorized the repurchase of up to one
million shares of Valley's common stock. As of December 31, 1995 the company has
purchased 563,160 shares, all of which have been reissued under the company's
stock option plan and expired warrant program.
Warrants for Purchase of Common Stock
Pursuant to the Merger Agreement between Valley and Mayflower Financial
Corp. ("Mayflower") during 1990, Valley issued 449,883 warrants valued at
approximately $225,000 in exchange for all issued and outstanding common shares
of Mayflower. The warrants, which became exercisable on June 30, 1991 and
expired on December 31, 1995, provided the warrant holder the right to acquire
2.1656 shares of Valley's common stock at a price of $27.50 per warrant. As of
December 31, 1995 approximately 430,000 warrants were exchanged for
approximately 931,000 shares of Valley common stock and approximately 20,000
warrants expired without being exercised.
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (NOTE 16)
QUARTERS ENDED 1995
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Interest income............................. $ 78,647 $ 79,711 $ 79,204 $ 79,088
Interest expense............................ 34,590 37,056 35,844 35,781
Net interest income......................... 44,057 42,655 43,360 43,307
Provision for possible loan losses.......... 826 650 600 593
Non-interest income......................... 5,103 4,737 5,935 5,193
Non-interest expense........................ 22,238 24,702 20,898 22,365
Income before income taxes.................. 26,096 22,040 27,797 25,542
Income tax expense.......................... 8,731 11,459 9,687 9,002
Net income.................................. 17,365 10,581 18,110 16,540
Net income per share........................ 0.49 0.30 0.51 0.46
Cash dividends per share.................... 0.24 0.25 0.25 0.25
Average shares outstanding.................. 35,688,763 35,770,240 35,738,452 35,706,386
45
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTERS ENDED 1994
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Interest income............................. $ 70,143 $ 71,561 $ 74,178 $ 76,701
Interest expense............................ 26,546 28,045 30,593 32,281
Net interest income......................... 43,597 43,516 43,585 44,420
Provision for possible loan losses.......... 1,692 1,547 1,267 691
Non-interest income......................... 7,919 4,917 5,826 5,305
Non-interest expense........................ 21,960 22,097 22,092 24,445
Income before income taxes.................. 27,864 24,789 26,052 24,589
Income tax expense.......................... 9,530 8,304 8,694 12,195
Net income.................................. 18,334 16,485 17,358 12,394
Net income per share........................ .52 .47 .49 .35
Cash dividends per share.................... .22 .24 .24 .24
Average shares outstanding.................. 35,142,050 35,228,586 35,297,581 35,390,180
PARENT COMPANY INFORMATION (NOTE 17)
Condensed Statements of Income
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Income
Dividends from subsidiary................................... $36,000 $31,800 $26,325
Interest from subsidiary.................................... 1,398 647 155
Gains on securities transactions, net....................... 1,374 2,111 134
Other interests and dividends............................... 153 715 1,256
------- ------- -------
38,925 35,273 27,870
Expenses...................................................... 2,334 2,778 2,714
------- ------- -------
Income before income taxes and equity in undistributed
earnings of subsidiary...................................... 36,591 32,495 25,156
Income tax expense............................................ 672 790 187
------- ------- -------
Income before equity in undistributed earnings of
subsidiary.................................................. 35,919 31,705 24,969
Equity in undistributed earnings of subsidiary................ 26,677 32,866 39,992
------- ------- -------
Net income before cumulative effect of accounting change...... 62,596 64,571 64,961
Cumulative effect of accounting change........................ -- -- 24
------- ------- -------
Net income.................................................... $62,596 $64,571 $64,985
======= ======= =======
46
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Financial Condition
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
Assets
Cash................................................................. $ 4,228 $ 942
Interest bearing deposits with banks................................. 26,500 32,655
Investment securities available for sale............................. 7,796 4,747
Investment in subsidiary............................................. 366,380 314,096
Other assets......................................................... 5,276 5,802
-------- --------
Total assets...................................................... $410,180 $358,242
======== ========
Liabilities
Dividends payable to shareholders.................................... $ 8,946 $ 7,207
Other liabilities.................................................... 997 419
-------- --------
Total liabilities................................................. 9,943 7,626
-------- --------
Shareholders' Equity
Common stock......................................................... 20,025 18,869
Surplus.............................................................. 216,377 172,321
Retained earnings.................................................... 162,012 179,432
Unrealized gain (loss) on investment securities available for sale,
net of tax........................................................ 3,733 (17,842)
-------- --------
402,147 352,780
Treasury stock at cost............................................... (1,910) (2,164)
-------- --------
Total shareholders' equity........................................ 400,237 350,616
-------- --------
Total liabilities and shareholders' equity........................ $410,180 $358,242
======== ========
47
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income............................................... $ 62,596 $ 64,571 $ 64,985
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary........ (26,677) (32,866) (39,992)
Depreciation and amortization of intangible assets.... 460 920 1,078
Amortization of compensation costs on non-qualified
stock options and restricted stock awards........... 322 254 232
Net deferred income tax benefit....................... 51 73 (28)
Net amortization of premiums and discounts............ -- 35 101
Net gains on securities transactions.................. (1,374) (2,111) (134)
Restricted stock issued............................... -- -- 114
Net decrease in other assets.......................... 65 402 241
Net increase(decrease) in other liabilities........... 357 (169) (182)
Other................................................. 1,798 -- --
------- ------- -------
Net cash provided by operating activities............. 37,598 31,109 26,415
------- ------- -------
Cash flows from investing activities:
Cash paid to retire preferred stock of Peoples Bancorp... -- -- (2,514)
Cash received pursuant to acquisitions and mergers....... -- -- 341
Proceeds from maturing investment securities............. -- 12,000 --
Proceeds from sales of investment securities............. 3,796 9,613 5,248
Purchases of investment securities....................... (5,003) (4,478) (5,220)
Net decrease (increase) in short term investments........ 6,155 (19,794) (1,446)
------- ------- -------
Net cash provided by (used in) investment
activities.......................................... 4,948 (2,659) (3,591)
------- ------- -------
Cash flows from financing activities:
Purchases of common shares added to treasury............. (13,670) -- (780)
Dividends paid to shareholders........................... (33,618) (31,694) (24,614)
Common stock issued...................................... 8,028 3,925 2,582
------- ------- -------
Net cash used in financing activities................. (39,260) (27,769) (22,812)
------- ------- -------
Net increase in cash....................................... 3,286 681 12
Cash at beginning of year.................................. 942 261 249
------- ------- -------
Cash at end of year........................................ $ 4,228 $ 942 $ 261
======= ======= =======
FAIR VALUES OF FINANCIAL INSTRUMENTS (NOTE 18)
Limitations: The fair value estimates made at December 31, 1995 and 1994
were based on pertinent market data and relevant information on the financial
instrument at that time. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire portion of the
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.
48
51
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 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:
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 were estimated by obtaining quoted market prices, when
available. The fair value of other loans were 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
was based on the discounted value of contractual cash flows using estimated
rates currently offered for deposits of similar remaining maturity.
Short term liabilities: Current carrying amounts approximate estimated fair
value.
Other borrowings: The fair value was 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, 1995 and 1994:
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks........... $ 167,349 $ 167,349 $ 168,072 $ 168,072
Federal funds sold................ 108,500 108,500 -- --
Investment securities held to
maturity....................... 266,354 270,622 853,983 817,660
Investment securities available
for sale....................... 1,146,285 1,146,285 696,438 696,438
Net loans......................... 2,753,505 2,761,926 2,550,732 2,469,118
Due from customers on acceptances
outstanding.................... 838 838 1,498 1,498
Financial liabilities:
Deposits with no stated
maturity....................... 2,242,100 2,242,100 2,342,783 2,342,783
Deposits with stated maturities... 1,841,773 1,963,170 1,537,219 1,524,611
Short-term borrowings............. 37,445 37,445 118,353 118,353
Other borrowings.................. 28,679 28,565 35,567 34,941
Bank acceptances outstanding...... 838 838 1,498 1,498
The estimated fair value of financial instruments with off-balance sheet
risk, consisting of unamortized fee income at December 31, 1995 and 1994 is not
material.
49
52
INDEPENDENT AUDITORS' REPORT
[KPMG Peat Marwick LLP LOGO]
KPMG Peat Marwick 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, 1995
and 1994 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, 1995. 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 did
not audit the consolidated statement of income of Lakeland First Financial Group
for the year ended December 31, 1993 which statement reflects total net interest
income constituting 13% of the related consolidated total. That statement was
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Lakeland First
Financial Group, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
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, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, Valley
National Bancorp and subsidiaries adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" in 1994
and Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" in 1993.
January 17, 1996
/S/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP LOGO
50
53
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 caption "Director
Information" in the 1996 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 1996 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 1996 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information which will be set forth under the captions "Certain
Transactions with Management" and "Personnel and Compensation Committee
Interlocks and Insider Participation" in the 1996 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 financial statements listed on the index of this Annual Report on Form
10-K are filed as part of this Annual 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) Current Reports on Form 8-K during the quarter ended December 31, 1995:
(1) Filed November 30, 1995 to report the authorization to purchase up to
500,000 shares of its outstanding common stock to be used for the
exercise of employee stock options and the exercise of outstanding
warrants.
(2) Filed December 12, 1995 to report approval by the Office of the
Supervision of Financial Institutions, the Canadian Banking and
Financial Institution Regulator, for Valley National Bank to establish a
finance company in Toronto, Canada; and to report that Valley National
Bank had signed a letter of intent with an undisclosed partner for a
substantial co-branding credit card program.
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
(3) Articles of Incorporation and Bylaws:
*** A. Restated Certificate of Incorporation of the Registrant dated March 22,
1994.
*** B. By-Laws of the Registrant adopted as of March 14, 1989 and amended March
19, 1991.
51
54
(10) Material Contracts:
* A. "Change in Control Agreements" dated January 1, 1995 between Valley, VNB
and Gerald H. Lipkin, Peter Southway, Sam P. Pinyuh, Peter Crocitto, Alan
Eskow, Robert Farrell, Richard Garber, Robert Mulligan and Peter John
Southway.
** B. "The Valley National Bancorp Long-term Stock Incentive Plan" dated January
18, 1994.
**** C. "Severance Agreements" dated August 17, 1994 between Valley, VNB and Gerald
H. Lipkin, Peter Southway, and Sam P. Pinyuh.
***** D. "Stock Option Agreement" dated April 1, 1992 between Valley National
Bancorp and Michael Guilfoile.
E. "Split-Dollar Agreement" dated July 7, 1995 between Valley National
Bancorp, Valley National Bank as Trustee, and Gerald H. Lipkin.
- ---------------
* This document is incorporated herein by reference from the Registrant's
Form 10-K Annual Report for period ending December 31, 1994.
** This document is incorporated herein by reference from the Registrant's
Notice of Annual Meeting of Shareholders and Proxy dated March 1, 1994.
*** This document is incorporated herein by reference from the Registrant's
Form 10-K Annual Report for the fiscal period ending December 31, 1993.
**** This document is 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.
***** This document is incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
(21) List of Subsidiaries:
(a) Subsidiary of Valley:
PERCENTAGE OF VOTING
JURISDICTION OF SECURITIES OWNED BY
NAME INCORPORATION THE PARENT
--------------------------------------------- --------------- --------------------
Valley National Bank (VNB) United States 100%
(b) Subsidiaries of VNB:
VNB Mortgage Services, Inc. New Jersey 100%
BNV Realty Incorporated New Jersey 100%
VN Investment, Inc. New Jersey 100%
VNB Financial Advisors, Inc. New Jersey 100%
VNB International Services, Inc. (ISI) New Jersey 100%
(c) Subsidiary of ISI:
VNB Financial Services, Inc. Canada 100%
(23) Consents of Experts and Counsel
Consent of KPMG Peat Marwick LLP.
(27) Financial Data Schedule
52
55
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: /s/ GERALD H. LIPKIN
---------------------------------------
Gerald H. Lipkin, Chairman of the Board
and Chief Executive Officer
Dated: February 27, 1996
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 on February 27, 1996.
The directors of Valley National Bancorp(including Peter Southway in his
capacities as of Director and Principal Financial Officer) and Alan D. Eskow in
his capacity as Principal Accounting Officer executed a power of attorney
appointing Gerald H. Lipkin as their attorney-in-fact, empowering him to sign
this report on his behalf.
Gerald H. Lipkin
Peter Southway
Alan D. Eskow
Andrew Abramson
Pamela Bronander
Joseph Coccia, Jr.
Austin C. Drukker
Michael Francis
Willard L. Hedden
Thomas P. Infusino
Gerald Korde
Robert L. Marcalus
Joleen J. Martin
Robert E. McEntee
William McNear
Sam P. Pinyuh
Robert Rachesky
Barnett Rukin
Richard F. Tice
Leonard Vorcheimer
Joseph L. Vozza
By: /s/ GERALD H. LIPKIN
--------------------------------------------------------
Attorney-in-fact
53
56
Exhibit Index
-------------
(3) Articles of Incorporation and Bylaws:
*** A. Restated Certificate of Incorporation of the Registrant dated March 22,
1994.
*** B. By-Laws of the Registrant adopted as of March 14, 1989 and amended March
19, 1991.
(10) Material Contracts:
* A. "Change in Control Agreements" dated January 1, 1995 between Valley, VNB
and Gerald H. Lipkin, Peter Southway, Sam P. Pinyuh, Peter Crocitto, Alan
Eskow, Robert Farrell, Richard Garber, Robert Mulligan and Peter John
Southway.
** B. "The Valley National Bancorp Long-term Stock Incentive Plan" dated January
18, 1994.
**** C. "Severance Agreements" dated August 17, 1994 between Valley, VNB and Gerald
H. Lipkin, Peter Southway, and Sam P. Pinyuh.
***** D. "Stock Option Agreement" dated April 1, 1992 between Valley National
Bancorp and Michael Guilfoile.
E. "Split-Dollar Agreement" dated July 7, 1995 between Valley National
Bancorp, Valley National Bank as Trustee, and Gerald H. Lipkin.
- ---------------
* This document is incorporated herein by reference from the Registrant's
Form 10-K Annual Report for period ending December 31, 1994.
** This document is incorporated herein by reference from the Registrant's
Notice of Annual Meeting of Shareholders and Proxy dated March 1, 1994.
*** This document is incorporated herein by reference from the Registrant's
Form 10-K Annual Report for the fiscal period ending December 31, 1993.
**** This document is 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.
***** This document is incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
(21) List of Subsidiaries:
(a) Subsidiary of Valley:
PERCENTAGE OF VOTING
JURISDICTION OF SECURITIES OWNED BY
NAME INCORPORATION THE PARENT
--------------------------------------------- --------------- --------------------
Valley National Bank (VNB) United States 100%
(b) Subsidiaries of VNB:
VNB Mortgage Services, Inc. New Jersey 100%
BNV Realty Incorporated New Jersey 100%
VN Investment, Inc. New Jersey 100%
VNB Financial Advisors, Inc. New Jersey 100%
VNB International Services, Inc. (ISI) New Jersey 100%
(c) Subsidiary of ISI:
VNB Financial Services, Inc. Canada 100%
(23) Consents of Experts and Counsel
Consent of KPMG Peat Marwick LLP.
(27) Financial Data Schedule