UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-Q (Mark One) [X] Quarter Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Period Ended June 30, 1998 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 0-11179 ---------------------- VALLEY NATIONAL BANCORP (Exact name of registrant as specified in its charter) New Jersey (State or other Jurisdiction of incorporation or organization) 22-2477875 (I.R.S. Employer Identification No.) 1455 Valley Road, Wayne, New Jersey 07474-0558 (Address of principal executive offices) 973-305-8800 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock (No par value), of which 52,789,345 shares were outstanding as of August 3, 1998.
TABLE OF CONTENTS PART I FINANCIAL INFORMATION .................................Page Number Item 1. Financial Statements Consolidated Statements of Financial Condition (Unaudited)... June 30, 1998 and December 31, 1997........................3 Consolidated Statements of Income (Unaudited) Six and Three Months Ended June 30, 1998 and 1997..........4 Consolidated Statements of Cash Flows Six Months Ended June 30, 1998 and 1997 (Unaudited).......5 Notes to Consolidated Financial Statements......................6 Item 2. Management's Discussion and Analysis of................... Financial Condition and Results of Operations..............8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................... ......20 SIGNATURES ......... .................21
VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) ($ in thousands) <TABLE> <CAPTION> June 30, December 31, 1998 1997 <S> <C> <C> Assets Cash and due from banks $ 147,181 $ 148,175 Federal funds sold 66,000 30,000 Securities held to maturity, fair value of $152,680 and $163,444 in 1998 and 1997, respectively 150,788 161,552 Trading account securities 1,444 -- Securities available for sale 932,802 1,017,225 Loans 3,660,509 3,605,681 Loans held for sale 19,685 16,651 Less: Allowance for possible loan losses (46,600) (46,372) Loans, net 3,633,594 3,575,960 Premises and equipment 75,393 74,553 Due from customers on acceptances outstanding 685 304 Accrued interest receivable 27,982 29,313 Other assets 61,273 53,573 Total assets $5,097,142 $5,090,655 Liabilities Deposits: Non-interest bearing deposits $ 768,424 $ 769,887 Interest bearing: Savings 1,861,385 1,841,039 Time 1,746,894 1,792,028 Total deposits 4,376,703 4,402,954 Federal funds purchased and securities sold under repurchase agreements 23,553 32,882 Treasury tax and loan account and other short-term borrowings 50,570 24,056 Other borrowings 107,982 114,012 Bank acceptances outstanding 685 304 Accrued expenses and other liabilities 45,195 41,088 Total liabilities 4,604,688 4,615,296 Shareholders' Equity Common stock, no par value, authorized 98,437,500 shares, issued 53,052,614 shares in 1998 and 53,066,174 in 1997 23,283 23,282 Surplus 291,494 291,943 Retained earnings 181,645 159,116 Accumulated other comprehensive income 3,505 3,296 499,927 477,637 Treasury stock, at cost (267,909 shares in 1998 and 116,766 shares in 1997) (7,473) (2,278) Total shareholders' equity 492,454 475,359 Total liabilities and shareholders' equity $5,097,142 $5,090,655 </TABLE> See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($ in thousands, except for per share data) <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, June 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Interest Income Interest and fees on loans $150,311 $143,510 $ 75,562 $ 72,267 Interest and dividends on investment securities: Taxable 27,399 30,895 13,361 15,633 Tax-exempt 4,264 5,487 2,072 2,669 Dividends 902 781 441 363 Interest on federal funds sold and other short term investments 2,164 2,170 1,096 627 Total interest income 185,040 182,843 92,532 91,559 Interest Expense Interest on deposits: Savings 20,769 21,505 10,444 11,050 Time 50,081 53,731 24,717 26,118 Interest on federal funds purchased and securities sold under repurchase agreements 451 563 262 303 Interest on other short-term borrowings 779 640 455 402 Interest on other borrowings 3,385 962 1,671 476 Total interest expense 75,465 77,401 37,549 38,349 Net interest income 109,575 105,442 54,983 53,210 Provision for possible loan losses 5,825 3,100 3,325 1,900 Net interest income after provision for possible loan losses 103,750 102,342 51,658 51,310 Non-Interest Income Trust income 710 501 370 243 Service charges on deposit accounts 5,884 5,849 3,065 2,940 Gains on securities transactions, net 965 2,169 48 1,053 Fees from loan servicing 3,576 2,663 2,001 1,328 Credit card fee income 5,198 5,800 2,675 2,904 Gains on sales of loans, net 2,642 1,195 1,578 818 Other 2,001 2,448 1,014 1,224 Total non-interest income 20,976 20,625 10,751 10,510 Non-Interest Expense Salary expense 24,060 22,378 12,079 11,109 Employee benefit expense 5,091 5,788 2,545 2,877 FDIC insurance premiums 566 508 276 301 Occupancy and equipment expense 9,569 8,950 5,010 4,488 Credit card expense 5,514 8,476 2,369 4,400 Amortization of intangible assets 2,185 1,699 1,235 850 Other 12,047 12,470 6,090 6,845 Total non-interest expense 59,032 60,269 29,604 30,870 Income before income taxes 65,694 62,698 32,805 30,950 Income tax expense 17,978 21,323 8,375 10,475 Net income $47,716 $41,375 $24,430 $20,475 Earnings per share: Basic $ 0.90 $ 0.78 $ 0.46 $ 0.39 Diluted $ 0.89 $ 0.78 $ 0.46 $ 0.38 Weighted average number of shares outstanding: Basic 52,812,130 52,813,063 52,782,903 52,831,467 Diluted 53,350,825 53,174,423 53,330,102 53,211,604 </TABLE> See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in thousands) <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Cash flows from operating activities: Net income $ 47,716 $ 41,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,188 5,464 Amortization of compensation costs pursuant to long term stock incentive plan 402 273 Provision for possible loan losses 5,825 3,100 Net amortization of premiums and discounts 1,311 460 Net gains on securities transactions (965) (2,169) Proceeds from sale of loans 78,669 19,296 Gain on sales of loans (2,642) (1,195) Proceeds from recoveries on previously charged-off loans 1,392 975 Net decrease in accrued interest receivable and other assets 828 1,215 Net increase in accrued expenses and other liabilities 2,410 2,135 Net cash provided by operating activities 141,134 70,929 Cash flows from investing activities: Proceeds from maturing investment securities held to maturity 19,834 34,979 Purchases of investment securities held to maturity (9,236) (11,858) Proceeds from sales of investment securities available for sale 34,354 95,193 Proceeds from maturing investment securities available for sale 193,084 105,729 Purchases of investment securities available for sale (144,102) (176,224) Purchases of mortgage servicing rights (9,564) (880) Net (increase) decrease in federal funds sold and other short term investments (36,000) 31,450 Net increase in loans made to customers (140,878) (61,651) Purchases of premises and equipment, net of sales (4,843) (6,159) Net decrease (increase) in due from customers on acceptances outstanding (381) 360 Net cash (used in)provided by investing activities (97,732) 10,939 Cash flows from financing activities: Net decrease in deposits (26,251) (43,690) Net increase in federal funds purchased and other short term borrowings 17,185 38,006 Repayments of other borrowings (6,030) (4,029) Net increase (decrease) in bank acceptances outstanding 381 (360) Dividends paid to common shareholders (23,255) (19,158) Addition of common shares to treasury (6,658) -- Common stock issued, net of cancellations 232 878 Net cash used in financing activities (44,396) (28,353) Net decrease in cash and due from banks (994) (53,515) Cash and due from banks at January 1 148,175 196,995 Cash and due from banks at June 30 $ 147,181 $ 250,510 Supplemental cash flow disclosure: Cash paid for interest on deposits and other borrowings $ 76,196 $ 76,554 Cash paid for federal and state income taxes 14,480 14,938 Transfer of Midland securities held to maturity to securities available for sale -- 39,833 </TABLE> See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Consolidated Financial Statements The Consolidated Statements of Financial Condition as of June 30, 1998 and December 31, 1997, the Consolidated Statements of Income for the six and three month periods ended June 30, 1998 and 1997 and the Consolidated Statements of Cash Flows for the six month periods ended June 30, 1998 and 1997 have been prepared by Valley National Bancorp ("Valley"), without audit. In the opinion of management, all adjustments (which included only normal recurring adjustments) necessary to present fairly Valley's financial position, results of operations, and cash flows at June 30, 1998 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These consolidated financial statements are to be read in conjunction with the financial statements and notes thereto included in Valley's December 31, 1997 Annual Report to Shareholders. 2. Earnings Per Share Earnings per share amounts and weighted average shares outstanding for 1997 have been restated to reflect the 5 for 4 stock split declared April 9, 1998 to Shareholders of record on May 1, 1998 and issued May 18, 1998. 3. Comprehensive Income On January 1, 1998, Valley adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS 130 requires that an enterprise (1) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This statement was effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 did not have a material effect on Valley's financial position or results of operation.
The related tax effects to each component of comprehensive income for the six and three months June 30, 1998 and 1997 are as follows: Six Months Ended Six Months Ended June 30, 1998 June 30, 1997 (in thousands) Net income $ 47,716 $ 41,375 Other comprehensive income, net of tax Foreign currency translation adjustments (184) (58) Unrealized gains(losses) on securities: Unrealized holding gains(losses) arising during period $ (219) $(1,393) Less:reclassification adjustment for gains realized in net income 612 668 Net unrealized gains(losses) 393 (725) Other comprehensive income (loss) 209 (783) Comprehensive income $ 47,925 $ 40,592 Three Months Ended Three Months Ended June 30, 1998 June 30, 1997 (in thousands) Net income $ 24,430 $ 20,475 Other comprehensive income, net of tax Foreign currency translation adjustments (234) 16 Unrealized gains(losses) on securities: Unrealized holding gains(losses) arising during period $ (885) $(6,288) Less: reclassification adjustment for gains realized in net income 30 708 Net unrealized gains(losses) (855) (5,580) Other comprehensive income (loss) (1,089) (5,564) Comprehensive income $ 23,341 $ 14,911
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Concerning Forward-Looking Statements This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities, technology and market conditions. These statements may be identified by such forward-looking terminology as "expect", "look", "believe", "anticipate", "may", "will" or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to, the direction of interest rates, continued levels of loan quality and origination volume, continued relationships with major customers including sources for loans, successful completion of the implementation of Year 2000 technology changes, as well as the effects of economic conditions and legal and regulatory barriers and structure. Actual results may differ materially from such forward-looking statements. Valley assumes no obligation for updating any such forward-looking statement at any time. Recent Development On May 29, 1998 Valley signed a definitive merger agreement with Wayne Bancorp, Inc. ("Wayne"), parent of Wayne Savings Bank, F.S.B., a six-branch federally- chartered savings bank headquartered in Wayne, New Jersey. At June 30, 1998 Wayne had total assets of $275.3 million and deposits of $207.8 million. The transaction is scheduled to close early in the fourth quarter of 1998 and will be accounted for using the pooling of interests method of accounting. Wayne is expected to reissue approximately 175,000 shares of Wayne Common Stock currently held by Wayne as treasury stock (the "Wayne Treasury Stock") prior to consummation of the Merger in order that the Merger will not fail to qualify for pooling-of-interests accounting treatment by virtue of the number of shares of Wayne Treasury Stock. It is currently expected that the offering of the shares of Wayne Treasury Stock will occur on or about the closing of the Merger. There were approximately 2.0 million shares of Wayne common stock outstanding at June 30, 1998. The merger agreement provides that 1.1 shares of Valley common stock will be exchanged for each share of Wayne common stock. Consummation of the Merger is subject, among other things, to prior receipt of all necessary regulatory approvals. An application for approval was filed with the OCC. Valley received a waiver of the requirement for approval of the Merger from the Federal Reserve Board. Valley expects to open approximately three de novo branches during the next six months. Locations include Morristown, West New York and Secaucus. Valley anticipates opening 25-30 de novo branches during the next five years. Earnings Summary Net income for the six months ended June 30, 1998 was $47.7 million, or $0.89 per diluted share. These results compare to net income of $41.4 million, or $0.78 per diluted share for the same period in 1997. The annualized return on average assets increased to 1.89% from 1.63%, while the annualized return on average equity also increased to 19.80% from 18.93%, for the six months ended June 30, 1998 and 1997, respectively. Net income was $24.4 million, or $0.46 per diluted share for the three month period ended June 30, 1998, compared with $20.5 million, or $0.38 per diluted share for the same period in 1997. The increase in net income for both the six and three month periods ended June 30, 1998 can be primarily attributed to an increase in net interest income and a reduction in both non-interest expense and income tax expense, offset by an increase in the provision for possible loan losses. Net Interest Income Net interest income is the largest source of Valley's operating income. Net interest income on a tax equivalent basis increased to $112.1 million from $108.8 million for the six months ended June 30, 1998 as compared to the six months ended June 30, 1997. The increase in net interest income is due to a widening spread between the yield earned on interest-earning assets and funding costs, and the movement of earning assets out of the investment portfolio and into higher yielding loans. The net interest margin increased to 4.67% for the six months ended June 30, 1998 compared to 4.53% for the same period in 1997. Average interest earning assets decreased slightly for the first six months of 1998 over the 1997 amount. Average loans increased by $162.2 million or 4.7% over the 1997 amount. The average rate on loans remained relatively unchanged. The increase in average loan volume caused interest income on loans for 1998 to increase by $6.7 million over 1997. Offsetting this increase was a decline of $160.2 million in average investment securities or 12.6% from the amount in the portfolio during 1997. Average interest-bearing liabilities for the first six months of 1998 decreased $126.6 million or 3.2% from 1997. Average savings deposits decreased by $55.5 million or 3.1%, and average time deposits, mostly rate sensitive municipal deposits, decreased by $151.7 million or 7.5%. Average demand deposits continued to grow and increased by $51.2 million or 7.5% over 1997 balances. Average other borrowings increased $78.7 for the six months ended June 30, 1998 in comparison to the same period of 1997. Net interest income on a tax equivalent basis increased to $56.2 million from $54.8 million for the three months ended June 30, 1998 as compared to the same period in 1997. This can be attributed to a $33.4 million increase in interest earning assets and a $89.4 million decrease in interest bearing liabilities. The net interest margin increased to 4.69% for the three months ended June 30, 1998 compared to 4.60% for the same period in 1997.
The following table reflects the components of net interest income for each of the six and three months ended June 30, 1998 and 1997. ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST EARNINGS ON A TAX EQUIVALENT BASIS <TABLE> <CAPTION> Six Months Six Months Ended June 30, 1998 Ended June 30, 1997 Average Average Average Average Balance Interest Rate Balance Interest Rate (in thousands) <S> <C> <C> <C> <C> <C> <C> Assets Interest earning assets Loans (1) (2) $3,610,021 $150,587 8.34% $3,447,777 $143,874 8.35% Taxable investments (3) 920,605 28,300 6.15 1,021,903 31,676 6.20 Tax-exempt investments (1)(3) 187,494 6,561 7.00 246,396 8,442 6.85 Federal funds sold and other short-term investments 79,613 2,164 5.44 82,293 2,170 5.27 Total interest earnings assets 4,797,733 $187,612 7.82% 4,798,369 $186,162 7.76% Allowance for possible loan losses (46,786) (46,125) Cash and due from banks 129,288 165,871 Other assets 154,609 161,600 Unrealized gain (loss) on Securities available for sale 6,803 (3,236) Total assets $5,041,647 $5,076,479 Liabilities and Shareholders' Equity Interest bearing liabilities Savings deposits $1,752,974 $20,769 2.37% $1,808,438 $ 21,505 2.38% Time deposits 1,873,384 50,081 5.35 2,025,087 53,731 5.31 Total interest bearing deposits 3,626,358 70,850 3.91 3,833,525 75,236 3.93 Federal funds purchased and other short-term borrowings 51,598 1,230 4.77 49,715 1,203 4.84 Other borrowings 111,867 3,385 6.05 33,153 962 5.80 Total interest bearing liabilities 3,789,823 75,465 3.98 3,916,393 77,401 3.95 Demand deposits 731,972 680,793 Other liabilities 37,939 42,074 Shareholders' equity 481,913 437,219 Total liabilities and Shareholders' equity $5,041,647 $5,076,479 Net interest income (tax equivalent basis) 112,147 108,761 Tax equivalent adjustment (2,572) (3,319) Net interest income $109,575 $105,442 Net interest rate differential 3.84% 3.81% Net interest margin (4) 4.67% 4.53% </TABLE>
<TABLE> <CAPTION> Three Months Ended Three Months Ended June 30, 1998 June 30, 1997 Average Average Average Average Balance Interest Rate Balance Interest Rate (in thousands) <S> <C> <C> <C> <C> <C> <C> Assets Interest earning assets Loans (1) (2) $3,629,476 $ 75,698 8.34% $3,455,788 $72,449 8.39% Taxable investments (3) 908,145 13,802 6.08 1,023,975 15,996 6.25 Tax-exempt investments (1)(3) 181,875 3,188 7.01 239,726 4,106 6.85 Federal funds sold and other short-term investments 80,011 1,096 5.48 44,650 627 5.62 Total interest earnings assets 4,799,507 $ 93,784 7.82% 4,764,139 $93,178 7.82% Allowance for possible loan Losses (46,764) (46,012) Cash and due from banks 127,938 164,865 Other assets 158,220 163,927 Unrealized gain (loss) on Securities available for sale 7,223 (5,041) Total assets $5,046,124 $5,041,878 Liabilities and Shareholders' Equity Interest bearing liabilities Savings deposits $1,758,328 $ 10,444 2.38% $1,824,388 $11,050 2.42% Time deposits 1,848,913 24,717 5.35 1,953,306 26,118 5.35 Total interest bearing deposits 3,607,241 35,161 3.90 3,777,694 37,168 3.94 Federal funds purchased and other short-term borrowings 59,547 717 4.82 56,329 705 5.01 Other borrowings 110,421 1,671 6.05 32,589 476 5.84 Total interest bearing liabilities 3,777,209 37,549 3.98 3,866,612 38,349 3.97 Demand deposits 745,075 691,619 Other liabilities 37,160 44,438 Shareholders' equity 486,680 439,209 Total liabilities and shareholders' equity $5,046,124 $5,041,878 Net interest income (tax equivalent basis) 56,235 54,829 Tax equivalent adjustment (1,252) (1,619) Net interest income $ 54,983 $ 53,210 Net interest rate differential 3.84% 3.85% Net interest margin (4) 4.69% 4.60% </TABLE> (1) Interest income is presented on a tax equivalent basis using a 35% tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Net interest income on a tax equivalent basis as a percentage of earning assets.
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 <TABLE> <CAPTION> Six Months Ended June 30, 1998 Compared to 1997 Increase(Decrease)(2) Interest Volume Rate (in thousands) <S> <C> <C> <C> Interest income: Loans (1) $ 6,713 $ 6,768 $ (55) Taxable investments (3,376) (3,116) (260) Tax-exempt investments(1) (1,881) (2,057) 176 Federal funds sold and other short term investments (6) (72) 66 1,450 1,523 (73) Interest expense: Savings deposits (736) (657) (79) Time deposits (3,650) (4,053) 403 Federal funds purchased and other short-term borrowings 27 45 (18) Other borrowings 2,423 2,380 43 (1,936) (2,285) 349 Net interest income (tax equivalent basis) $ 3,386 $ 3,808 $ (422) </TABLE> <TABLE> <CAPTION> Three Months Ended June 30, 1998 Compared to 1997 Increase(Decrease)(2) Interest Volume Rate (in thousands) <S> <C> <C> <C> Interest income: Loans (1) $ 3,249 $ 3,624 $ (375) Taxable investments (2,194) (1,770) (424) Tax-exempt investments(1) (918) (1,012) 94 Federal funds sold and other short term investments 469 485 (16) 606 1,327 (721) Interest expense: Savings deposits (606) (395) (211) Time deposits (1,401) (1,396) (5) Federal funds purchased and other short-term borrowings 12 39 (27) Other borrowings 1,195 1,177 18 (800) (575) (225) Net interest income (tax equivalent basis) $ 1,406 $ 1,902 $ (496) </TABLE> (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 six and three months ended June 30, 1998 and 1997. NON-INTEREST INCOME <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, June 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> (in thousands) Trust income $ 710 $ 501 $ 370 $ 243 Service charges on deposit accounts 5,884 5,849 3,065 2,940 Gains on securities transactions, net 965 2,169 48 1,053 Fees from loan servicing 3,576 2,663 2,001 1,328 Credit card fee income 5,198 5,800 2,675 2,904 Gains on sales of loans, net 2,642 1,195 1,578 818 Other 2,001 2,448 1,014 1,224 Total $20,976 $20,625 $10,751 $10,510 </TABLE> Non-interest income continues to represent a considerable source of income for Valley. Excluding gains on securities transactions, total non-interest income amounted to $20.0 million for the six months ended June 30, 1998 compared with $18.5 million for the six months ended June 30, 1997. Included in fees from loan servicing are fees for servicing residential mortgage loans and SBA loans, which increased by 34.3% from $2.7 million for the six months ended June 30, 1997 to $3.6 million for the six months ended June 30, 1998. This reflects the increase in the size of the serviced portfolios, including the purchases of mortgage servicing rights during the first six months of 1998 to service approximately $583.0 million of mortgage loans. Credit card fee income declined during the quarter by $602 thousand or 10.4%. The decrease was the result of the sale of the merchant processing operation during 1997 and the reduced volume of co-branded credit card transactions. Gains on the sales of loans were $2.6 million for the six months ended June 30, 1998 compared to $1.2 million for the six months ended June 30, 1997. The gains recorded are primarily from increased mortgage banking activity and the increased sales volume of the guaranteed portion of SBA loans. The significant components of other non-interest income include safe deposit rentals which totaled $462 thousand and residential mortgage application fees totaling $654 thousand for the first six months of 1998. Other non-interest income decreased $447 thousand to $2.0 million for the six months ended June 30, 1998 in comparison to the same period in 1997. The decrease resulted from the gain on the sale of REO property which occurred during the first quarter of 1997.
Non-Interest Expense The following table presents the components of non-interest expense for the six and three months ended June 30, 1998 and 1997. NON-INTEREST EXPENSE <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30 June 30, 1998 1997 1998 1997 (in thousands) <S> <C> <C> <C> <C> Salary expense $24,060 $22,378 $12,079 $11,109 Employee benefit expense 5,091 5,788 2,545 2,877 FDIC insurance premiums 566 508 276 301 Occupancy and equipment expense 9,569 8,950 5,010 4,488 Credit card expense 5,514 8,476 2,369 4,400 Amortization of intangible assets 2,185 1,699 1,235 850 Other 12,047 12,470 6,090 6,845 $59,032 $60,269 $29,604 $30,870 </TABLE> Non-interest expense totaled $59.0 million for the six month period ended June 30, 1998, relatively unchanged from the 1997 level. The largest components of non-interest expense are salaries and employee benefit expense which totaled $29.2 million in 1998 compared to $28.2 million in 1997. At June 30, 1998, full-time equivalent staff was 1,675 compared to 1,558 at June 30, 1997. The efficiency ratio measures a bank's gross operating expense as a percentage of fully-taxable equivalent net interest income and other non-interest income without taking into account security gains and losses and other non-recurring items. Valley's efficiency ratio for the six months end June 30, 1998 was 44.65%, one of the lowest in the industry, compared with an efficiency ratio of 47.7% for the year ended December 31, 1997 and 48.06% for the six months ended June 30, 1997. The efficiency ratio during 1997 had been impacted by the acquisition of Midland and net expenses incurred from the credit card program that began during 1996. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders. Credit card expense includes cardmember rebates, processing expenses, and fraud losses. The decrease in credit card expenses is directly attributable to an amendment made to the co-branded credit card program during the fourth quarter of 1997, which reduced the amount of cardmember rebates paid by Valley. Amortization of intangible assets increased to $2.2 million for the six months ended June 30, 1998 from $1.7 million for the same period in 1997, representing an increase of $486 thousand or 28.6%. The majority of this increase resulted from the additional amortization of purchased and originated loan servicing rights, due to growth in the serviced portfolio. The significant components of other non-interest expense include advertising, professional fees, stationery and postage, and telephone expense which total approximately $6.5 million for the first six months of 1998. Income Taxes Income tax expense as a percentage of pre-tax income was 27.4% for the six months ended June 30, 1998 compared to 34.0% for the same period in 1997. The reduction in the effective tax rate is attributable to a realignment of corporate entities and a lower effective tax rate for state taxes. The reduction in the effective tax rate is limited in duration, but may have a continued impact on some future periods.
Year 2000 Valley has established an overall plan to address system-related Year 2000 issues. The plan calls for either system modification to, or replacement of existing business systems applications. The cost of this Year 2000 compliance program related to system modifications is not expected to be material to Valley' earnings in 1998 or thereafter. Such costs will be charged to expense as incurred. As of June 30, 1998, Valley anticipates that substantially all of the remaining work under this program, including the testing of critical systems, which will be initially completed by the end of 1998, with further testing to be performed during 1999. Valley continues to bear some risk related to the Year 2000 issues and could be adversely affected, if other entities (i.e., vendors) not affiliated with Valley do not appropriately address their own Year 2000 compliance issues. ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity Valley's success is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of Valley's net interest income to the movement in interest rates. Valley does not currently use derivatives to manage market and interest rate risks. Valley's interest rate risk management is the responsibility of the Asset/Liability Management Committee ("ALCO"), which reports to the Board of Directors. ALCO establishes policies that monitor and coordinate Valley's sources, uses and pricing of funds. Valley uses a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twelve and twenty-four month period. The model is based on the actual maturity and repricing characteristics of rate sensitive assets and liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rates of certain assets and liabilities. Management cannot provide any assurance about the actual effect of changes in interest rates on Valley's net interest income. The total negative gap repricing within 1 year as of June 30, 1998 is $(357.4) million or (0.82:1). Management does not view this amount as presenting an unusually high risk potential, although no assurances can be given that Valley is not at risk from rate increases or decreases. Liquidity Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Maintaining a level of liquid funds through asset-liability management seeks to ensure that these needs are met at a reasonable cost. On the asset side, liquid funds are maintained in the form of cash and due from banks, federal funds sold, investments securities held to maturity maturing within one year, securities available for sale, trading account securities and loans held for sale. At June 30, 1998, liquid assets amounted to $1.2 billion, unchanged from December 31, 1997. This represents 24.8 % and 25.6% of earning assets, and 23.5% and 24.3% of total assets at June 30, 1998 and year-end 1997, 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 $3.19 billion and $3.25 billion for the six months ended June 30, 1998 and year ended December 31, 1997, respectively, representing 66.6% and 67.4% of average earning assets. Short term borrowings through Federal funds lines and Federal Home Loan Bank advances and large dollar certificates of deposit, generally those over $100 thousand, are used as supplemental funding sources. As of June 30, 1998, Valley had outstanding advances of $107.5 million with the FHLB. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. During the six months ended June 30, 1998 proceeds from the sales of investment securities available for sale were $34.4 million, proceeds of $212.9 million were generated from investment maturities, and purchases of investment securities were $153.3 million. Short term borrowings and certificates of deposit over $100 thousand amounted to $483.8 million and $592.0 million, on average, for the six months ended June 30, 1998 and year ending December 31, 1997, respectively. 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. As of June 30, 1998, Valley had $933 million of securities available for sale compared with $1.0 billion at December 31, 1997. Those securities are recorded at their fair value on an aggregate basis. As of June 30, 1998, the investment securities available for sale had an unrealized gain of $4.0 million, net of deferred taxes, compared to an unrealized gain of $3.6 million, net of deferred taxes, at December 31, 1997. This change was primarily due to an increase in prices resulting from a decreasing interest rate environment. These securities are not considered trading account securities, which may be sold on a continuous basis, but rather are securities which may be sold to meet the various liquidity and interest rate requirements of Valley.
Loan Portfolio As of June 30, 1998, total loans were $3.7 billion, compared to $3.6 billion at December 31, 1997, an increase of 1.6%. The following table reflects the composition of the loan portfolio as of June 30, 1998 and December 31, 1997. LOAN PORTFOLIO <TABLE> <CAPTION> June 30, December 31, 1998 1997 (in thousands) <S> <C> <C> Commercial Total commercial loans $ 452,654 $ 453,174 Construction 101,330 81,033 Residential mortgage 888,475 903,201 Commercial mortgage 885,520 850,234 Total mortgage loans $1,875,325 $1,834,468 Home equity 158,040 168,888 Credit card 121,768 145,485 Automobile 989,004 930,247 Other consumer 83,403 90,070 Total consumer loans 1,352,215 1,334,690 Loans $3,680,194 $3,622,332 As a percent of total loans: Commercial loans 12.3% 12.5% Mortgage loans 51.0 50.6 Consumer loans 36.7 36.9 Total loans 100.0% 100.0% </TABLE> During the second quarter of 1998, Valley commenced a home-equity promotion. Valley anticipates that home equity loans will increase by approximately $25.0 million during the third quarter of 1998 as a result of this promotion. Non-Performing Assets Non-performing assets include non-accrual loans and other real estate owned (OREO). Non-performing assets continued to decrease, and totaled $9.0 million at June 30, 1998, compared with $9.5 million at December 31, 1997, a decrease of $477 thousand or 5.0%. Non-performing assets at June 30, 1998 and December 31, 1997, respectively, amounted to 0.24% and 0.26% of loans and OREO. Loans 90 days or more past due and not included in the non-performing category totaled $7.7 million at June 30, 1998, compared to $16.4 million at December 31, 1997. These loans are primarily residential mortgage loans, commercial mortgage loans and commercial loans which are generally well-secured and in the process of collection. Also included are matured commercial mortgage loans in the process of being renewed, which totaled $1.4 million and $2.0 million at June 30, 1998 and December 31, 1997, respectively. 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 <TABLE> <CAPTION> June 30, December 31, 1998 1997 (in thousands) <S> <C> <C> Loans past due in excess of 90 days and still accruing $ 7,698 $ 16,351 Non-accrual loans 6,343 7,307 Other real estate owned 2,665 2,178 Total non-performing assets $ 9,008 $ 9,485 Troubled debt restructured loans $ 5,189 $ 5,248 Non-performing loans as a % of loans 0.17% 0.20% Non-performing assets as a % of loans plus other real estate owned 0.24% 0.26% Allowance as a % of loans 1.27% 1.28% Allowance as a % of non-performing assets 517 489 </TABLE> At June 30, 1998 the allowance for loan losses amounted to $46.6 million or 1.27% of loans, as compared to $46.4 million or 1.28% at year-end 1997. The allowance is adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $5.6 million for the six months ended June 30, 1998 compared with $3.6 million for the six months ended June 30, 1997. Capital Adequacy A significant measure of the strength of a financial institution is its shareholders' equity, which should expand in close proportion to asset growth. At June 30, 1998, shareholders' equity totaled $492.5 million or 9.7% of total assets, compared with $475.4 million or 9.3% at year-end 1997. Valley has achieved steady internal capital generation throughout the past five years. On May 26, 1998 Valley's Board of Directors rescinded its previously announced stock repurchase program after 220,125 shares of Valley common stock had been repurchased. Rescinding the remaining authorization was undertaken in connection with Valley's acquisition of Wayne, to comply with certain of the pooling-of-interests accounting rules as recently interpreted by the Securities and Exchange Commission. Included in shareholders equity at June 30, 1998 was a $4.0 million unrealized gain on investment securities available for sale, net of tax, compared to an unrealized gain of $3.6 million at December 31, 1997. Also included in shareholders equity at June 30, 1998 is a translation adjustment of ($526) thousand related to the Canadian subsidiary of Valley National Bank. Valley's capital position at June 30, 1998 under risk-based capital guidelines was $483.3 million, or 13.0% of risk-weighted assets, for Tier 1 capital and $529.9 million, or 14.2% for Total risked-based capital. The comparable ratios at December 31, 1997 were 12.9% for Tier 1 capital and 14.1% for Total risk-based capital. Valley's ratios at June 30, 1998 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 June 30, 1998 and December 31, 1997, Valley was in compliance with the leverage requirement having a Tier 1 leverage ratio of 9.6% and 9.2%, respectively. Book value per share amounted to $9.33 at June 30, 1998 compared with $8.98 per share at December 31, 1997.
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 48.0% for the six month period ended June 30, 1998, compared to 47.6% for the six month period ended June 30, 1997. Cash dividends declared amounted to $0.47 per share for the six months ended June 30, 1998 equivalent to a dividend payout ratio of 52.0%, compared to 52.4% for the same period in 1998. Valley declared a five for four stock split on April 9, 1998 to shareholders of record on May 1, 1998, which was issued May 18, 1998. Effective with the July 1, 1997 dividend payment, the annual dividend rate was increased to $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. Recent Accounting Pronouncement Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued by the Financial Accounting Standards Board ("FASB") in June 1998. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statements of financial position at fair value. Valley must adopt SFAS No. 133 by January 1, 2000; however, early adoption is permitted. On adoption, the provisions of SFAS No. 133 must be applied prospectively. Valley anticipates that the adoption of SFAS No. 133 will not have a material imapct in the financial statements. In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits. This statement is effective for fiscal years beginning after December 15, 1997. The adoption is not expected to materially affect the financial statements. Restatement of disclosures for earlier periods provided for comparative purposes is required unless the information is not readily available.
Item 6. Exhibits and Reports on Form 8-K a) Exhibits (27) Financial Data Schedule b) Reports on Form 8-K 1) Filed April 15, 1998 to report a five for four common stock split issued May 18, 1998. 2) Filed June 5, 1998 to report the signing of the Agreement and Plan of Merger dated May 29, 1998 between Valley National Bancorp and Wayne Bancorp, Inc. and to report the rescinding of its previously announced treasury stock repurchase program.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VALLEY NATIONAL BANCORP (Registrant) Date: August 14, 1998 /s/ PETER SOUTHWAY PETER SOUTHWAY VICE CHAIRMAN Date: August 14, 1998 /s/ ALAN D. ESKOW ALAN D. ESKOW SENIOR VICE PRESIDENT FINANCIAL ADMINISTRATION