-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, meBKTcMe/faOr6CZqMXxMy4gb0rwP1RyUAd2O8JfFzOJ7yja+JarLWf9dVx8SROw D5ZP+AMHuvApTiaJY89u8A== 0000714310-94-000023.txt : 19941116 0000714310-94-000023.hdr.sgml : 19941116 ACCESSION NUMBER: 0000714310-94-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALLEY NATIONAL BANCORP CENTRAL INDEX KEY: 0000714310 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 222477875 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11277 FILM NUMBER: 94559604 BUSINESS ADDRESS: STREET 1: 1445 VALLEY RD CITY: WAYNE STATE: NJ ZIP: 07474 BUSINESS PHONE: 2013058800 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period Ended September 30, 1994 [ ] 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.) 1445 Valley Road, Wayne, New Jersey 07474-0558 (Address of principal executive offices) (Zip Code) (201)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 for 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 XXX 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 27,071,257 shares were outstanding as of November 3, 1994. VALLEY NATIONAL BANCORP INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition 3 September 30, 1994 and December 31, 1993 (Unaudited) Consolidated Statements of Income 4 Nine and Three Months Ended September 30, 1994 and 1993 (Unaudited) Consolidated Statements of Cash Flows 5 Nine Months Ended September 30, 1994 and 1993 (Unaudited) Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 7 - 12 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 EXHIBIT INDEX 15 -2- VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) ($ in thousands) September 30, December 31, 1994 1993 Assets Cash and due from banks $ 106441 $ 67455 Federal funds sold 36875 88050 Investment securities held to maturity, fair value of $846,888 and $960,813 in 1994 and 1993, respectively 869935 939993 Investment securites available for sale, fair value of $448,818 in 1993 399669 441482 Loans, net of unearned income 2028649 1802000 Less: Allowance for possible loan losses -35890 -35205 Loans, net 1992759 1766795 Premises and equipment, net 40893 40248 Due from customers on acceptances outstanding 1642 1192 Accrued interest receivable 21120 23650 Other assets 56064 44637 Total assets $ 3525398 $ 3413502 Liabilities Deposits: Non-interest bearing deposits $ 409502 $ 408605 Interest bearing: Savings deposits 1604491 1637381 Time deposits 1166742 1033771 Total deposits 3180735 3079757 Federal funds purchased and securities sold under repurchase agreements 31106 35110 Treasury tax and loan account 5950 7834 Bank acceptances outstanding 1642 1192 Accrued expenses and other liabilities 22949 22514 Other borrowings 2378 2667 Total liabilities 3244760 3149074 Shareholders' Equity Common stock, no par value, authorized 37,537,500 shares, issued 27,177,567 shares in 1994 and 24,529,552 in 1993 15274 8660 Surplus 115821 46438 Retained earnings 161485 211296 Unrealized loss on investment securities available for sale -9976 - - 282604 266394 Cost of shares in treasury (113,003 common shares in 1994 and 1993) -1966 -1966 Total shareholders' equity 280638 264428 Total liabilities and shareholders' equity $ 3525398 $ 3413502 See accompanying notes to consolidated financial statements. -3- VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($ in thousands except for per share data) Nine Months Ended Three Months Ended September 30, September 30, 1994 1993 1994 1993 Interest Income Loans, including fees $111405 $100889 $ 39284 $ 35399 Loans held for sale 580 335 106 335 Investment securities held to maturity Taxable 28926 40199 8910 11999 Tax-exempt 10686 9258 3712 3169 Dividends 46 54 15 14 Investment securities available for sale Taxable 16425 16615 5547 6505 Dividends 89 28 46 9 Federal funds sold and other short term investments 1203 770 557 219 Total Interest Income 169360 168148 58177 57649 Interest Expense Savings deposits 30020 30223 10623 10110 Time deposits 33847 35595 12467 11602 Federal funds purchased and securities sold under repurchase agreements 726 556 224 196 Other borrowings 150 681 50 262 Total Interest Expense 64743 67055 23364 22170 Net interest income 104617 101093 34813 35479 Provision for possible loan losses 2700 5000 900 1500 Net interest income after provision for possible loan losses 101917 96093 33913 33979 Non-Interest Income Fees from trust services 560 495 186 155 Service charges on deposit accounts 4301 4037 1434 1569 Gains on securities transactions, net 5212 6664 1248 1089 Fees from mortgage servicing 2482 2891 785 928 Gains on sales of loans 240 2422 0 1647 Other 3827 3886 1450 1427 Total Non-Interest Income 16622 20395 5103 6815 Non-Interest Expense Salaries and other compensation 20622 19296 7042 7028 Employee benefits expense 5504 4867 1881 1597 FDIC insurance premiums 5166 5005 1736 1667 Occupancy and equipment expense 8346 7686 2810 3038 Amortization of intangible assets 2108 3864 597 1481 Other 11950 11841 3844 4327 Total Non-Interest Expense 53696 52559 17910 19138 Income before income taxes 64843 63929 21106 21656 Income tax expense 21774 22676 7008 8124 Income before cumulative effect of accounting change 43069 41253 14098 13532 Cumulative effect of accounting change - - -402 - - - - Net Income $ 43069 $ 40851 $14098 $ 13532 Per share data: Income before cumulative effect of accounting change $ 1.6 $ 1.55 $ 0.52 $ 0.51 Cumulative effect of accounting change 0 -0.02 0 0 Net Income $ 1.6 $ 1.53 $ 0.52 $ 0.51 Weighted average shares outstanding 26976466 26470457 27047818 26808256 See accompanying notes to consolidated financial statements. -4- VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in thousands) Nine Months Ended September 30, 1994 1993 Cash flows from operating activities: Net income $ 43069 $ 40851 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangible assets 5547 6786 Amortization of compensation costs pursuant to long term stock incentive plan 222 178 Provision for possible loan losses 2700 5000 Net amortization(accretion) of premiums and discounts 4907 4283 Net deferred income tax benefit -7035 -3424 Net gains on securities transactions -5212 -6664 Gain on sale of loans -240 -2442 Gain on sale of premises and equipment -213 - - Net increase(decrease) in unearned income 66 501 Proceeds from sale of loans held for sale 0 90313 Proceeds from recoveries on charged-off loans 1595 1018 Net increase in accrued interest receivable and other assets 4147 9033 Net decrease in accrued expenses and other liabilities -957 -6356 Net cash provided by operating activities: 48596 139077 Cash flows from investing activities: Proceeds from sales of investment securities held for sale 178738 319336 Proceeds from maturing investment securities held for sale 47327 12849 Purchases of investment securities held for sale -197390 -242281 Proceeds from maturing investment securities held to maturity 207700 243374 Proceeds from sales of investment securities held to maturity 41084 - - Purchases of investment securities held to maturity -182278 -278915 Purchases of mortgage servicing rights -1099 -249 Net decrease in federal funds sold 51175 63700 Net increase in loans made to customers -230085 -189688 Purchases of premises and equipment, net of sales -3870 -6816 Net (increase) decrease in due from customers on acceptances outstanding -450 292 Net cash used in investing activities: -89148 -70832 Cash flows from financing activities: Net increase (decrease) in deposits 100978 -36174 Net increase (decrease) in federal funds purchased and other short term borrowings -5888 348 Net increase (decrease) in bank acceptances outstanding 450 -292 Dividends paid to common shareholders -18248 -15399 Addition of common shares to treasury - - -780 Common stock issued, net of cancellations 2535 1897 Repayments of other borrowings -289 47 Net cash provided by(used in) financing activities 79538 -50353 Net increase in cash and due from banks 38986 17892 Cash and due from banks at January 1 67455 89695 Cash and due from banks at September 30 $ 106441 $ 107587 Cash paid during the period for: Interest on deposits and other borrowings $ 63892 $ 68302 Federal and state income taxes 23208 25493 See accompanying notes to consolidated financial statements -5- VALLEY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Consolidated Financial Statements The Consolidated Statements of Financial Condition as of September 30, 1994, the Consolidated Statements of Income for the nine and three month periods ended September 30, 1994 and 1993 and the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1994 and 1993 have been prepared by Valley National Bancorp ("Valley"), without audit. In the opinion of management, all adjustments (which included only normal recurring adjustments) necessary to present fairly Valley's financial position, results of operations, and cash flows at September 30, 1994 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, 1993 Annual Report to Shareholders. 2. Earnings Per Share All share and per share amounts have been restated to reflect the 10% stock dividend declared March 22, 1994 to shareholders of record on April 15, 1994 and payable May 3, 1994. -6- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Earnings Summary Valley National Bancorp's (Valley) net income for the three and nine month period ending September 30, 1994 was $14.1 million and $43.1 million, or $0.52 and $1.60 per share. This compares with $13.5 million and $40.9 million or $0.51 and $1.53 per share for the same periods in 1993 (the 1993 per share amounts have been restated to give effect to a 10% stock dividend declared March 22, 1994 to shareholders of record April 15, 1994 and payable May 3, 1994). The increase in net income for the nine month period ending September 30, 1994 is largely attributable to an increase in net interest income of $3.5 million or 3.5% over the same periods in 1993. A reduction in the provision for possible loan losses of $600 thousand and $2.3 million for the three and nine month periods ending September 30, 1994 as compared to the same periods in 1993, was substantially offset by decreases in securities gains and decreases in gains from the sale of mortgage loans. The annualized return on average assets decreased to 1.64% from 1.67% while the annualized return on average equity decreased to 20.71% from 22.65%, for the nine months ended September 30, 1994 as compared to the same period in 1993. Book value per share increased to $10.37 at September 30, 1994 compared with $9.55 per share at September 30, 1993. Merger Activity On October 17, 1994, Valley entered into a letter of intent to acquire American Union Bank, a $55 million, two-office bank headquartered in Union, New Jersey. A definitive merger agreement was signed November 9, 1994, and the merger is expected to take place by March 31, 1995. On July 5, 1994, Valley entered into a letter of intent to acquire Rock Financial Corporation, holding company of Rock Bank. Rock Bank, a commercial bank headquartered in North Plainfield, New Jersey, with total assets at $190 million and five branches, is a preferred SBA lender, which will introduce a new line of business to Valley. A definitive merger agreement was signed August 26, 1994 and the merger is expected to take place by the end of 1994 or early 1995. Net Interest Income Net interest income on a fully tax equivalent basis ("FTE") decreased by $500 thousand or 1.4%, for the quarter ended September 30, 1994, and increased $4.2 million or 4.0% for the nine months ended September 30, 1994 compared to the same periods in 1993. The increase in net interest income for the nine months ended September 30, 1994 was the result of an increase in the volume of interest earning assets and a decrease in interest rates on deposit liabilities, partially offset by decreased rates on interest earning assets. The decrease in net interest income for the three months ended September 30, 1994 over the same quarter in 1993 was due to a decrease in interest rates on interest earning assets and an increase in rates on interest bearing liabilities. This was partially offset by the increased volume of interest earning assets. Average interest earning assets increased $212.6 million during the nine months ended September 30, 1994, or 6.9% over the 1993 amount for the same period, which includes average assets from Peoples Bank, N.A. ("Peoples") for the nine months of 1994 versus only three months in 1993. The average balance of all investment securities for the nine month period ended September 30, 1994, including those available for sale totalled $1.32 billion. This amount decreased by $99.0 million or 7.5% over the 1993 average balance and the decrease was used to fund new loans. Loan demand continued to increase, especially commercial mortgage loans and various types of consumer loans causing the average balance of all loans to increase by $298.7 million or 18.3% at September 30 1994 compared to September 30 1993. The yield on loans decreased 55 basis points from September 30, 1993 to September 30, 1994, offsetting the increase in volume of new loans. Average interest-bearing liabilities grew 5.1% or $136.4 million during the nine months ended September 30, 1994 over the prior year, which includes average liabilities from Peoples for the nine monthns of 1994 versus only three months in 1993. Average savings deposit balances increased $116.0 million or 7.7% during the nine months ended September 30, 1994 over September 30, 1993, while average time deposits increased $19.1 million or 1.8% during the same period. Average demand deposits during 1994 continued to grow and increased by $62.2 million or 17.7% over the 1993 nine month average balance. -7- The net interest margin decreased to 4.44% and 4.49% for the third quarter and nine month period ended September 30, 1994 from 4.67% and 4.63% for the same period in 1993 and was mainly the result of changes in market interest rates. The yield on average earning assets declined 18 basis points from 7.43% for the three months ended September 30, 1993 to 7.25% for the three months ended September 30, 1994, while the cost of interest-bearing liabilities increased 7 basis points, from 3.24% to 3.31% for the same periods. For the nine month period ended September 30, 1994 the yield on average earning assets declined 42 basis points from 7.53% to 7.11% over 1993, while the cost of interest bearing liabilities dropped 28 basis points from 3.38% to 3.10% during the same period. The decrease in the net interest margin of 14 basis points for the nine months ended September 30, 1994 was offset by the increased amount of average earning assets over average interest-bearing liabilities causing net interest income to increase. Neither Valley nor its subsidiary Valley National Bank ("VNB") attempted to hedge their interest positions through the use of derivative transactions. The net interest margin declined during the last two quarters ending June 30, 1994 and September 30, 1994 by ten basis points and seven basis points, respectively, to 4.51% and 4.44% from 4.61% at March 31, 1994. Since September 30, 1993 the net interest margin declined twenty-three basis points from 4.67% to the current 4.44% at September 30, 1994. This decline is the result of interest costs on deposit liabilities rising faster than the interest income on interest earning assets. If interest rates continue to increase, this downward trend in net interest margin may continue. Non-Interest Income Non-interest income continues to represent a considerable source of income for Valley. Excluding gains on securities transactions, total non-interest income amounted to $3.9 and $11.4 million for the quarter and nine months ended September 30, 1994 compared with $5.7 and $13.7 million for the same period in 1993. Service charges on deposit accounts decreased $135 thousand or 8.6% for the quarter ended September 30, 1994 and increased $264 thousand or 6.5% for the nine months ended September 30, 1994 over the comparable periods in 1993. The decrease in the third quarter is a result of modifying service charges on deposit accounts. An expanded customer base and the related volume of transactions generated most of the increase to service charges for the nine months ended September 30, 1994. Fees from mortgage servicing decreased by $143 thousand or 15.4% for the third quarter ending September 30, 1994 compared to 1993, while decreasing $409 thousand or 14.1% for the nine months ended September 30, 1994 over the same 1993 period. At September 30, 1994 VNB Mortgage Services, Inc. ("MSI") serviced a total of $1.19 billion of loans, of which $506.0 million are serviced for VNB. On average the portfolio declined during 1994 as a result of payments, which were partially offset by newly acquired servicing and VNB's loan origination volume added to the portfolio, causing the decline in mortgage servicing revenue. Other income totalled $1.5 and $3.8 million, respectively, for the quarter and nine month periods ended September 30, 1994 compared with $1.4 and $3.9 million for the same periods in 1993. The decrease of 1.7% for the nine month period ended September 30, 1994 was mainly caused by the recording of an unrealized loss on loans held for sale of $336 thousand. There were no gains on the sale of loans and $240 thousand of gains on sale of loans, during the quarter and nine months ending September 30, 1994 as compared to $1.6 million and $2.4 million during the same period in 1993. Net gains on securities transactions increased $159 thousand and decreased $1.5 million for the quarter and nine months ended September 30, 1994 to $1.2 million and $5.2 million, respectively, compared with $1.1 million and $6.7 million, respectively, for the same periods in 1993. Non-Interest Expense Non-interest expense totalled $17.9 and $53.7 million for the quarter and nine months ending September 30, 1994, a decrease $1.2 million or 6.4% and an increase of $1.1 million or 2.2% above the same periods in 1993. The largest component of non-interest expense is salaries and employee benefit expense which totalled $8.9 million and $26.1 million for the quarter and nine months ended September 30, 1994 compared to $8.6 million and $24.2 million in 1993, an increase of $298 thousand or 3.5% and $2.0 million or 8.1% over the same 1993 periods. This increase was attributable to increased salaries mostly from expanded operations and the increased cost of employee benefits. -8- Occupancy and equipment expense decreased by $228 thousand or 7.5% and increased $660 thousand or 8.6% for the quarter and nine months ended September 30, 1994 over the same periods in 1993. The comparative quarterly decrease is the result of additional rental income from buildings owned by Valley. The increase for the nine month period represents additional branches and related costs incurred as a result of the merger with Peoples in 1993. Amortization of intangible assets decreased by $884 thousand or 60.0% and $1.8 million or 45.4% for the quarter and nine months ended September 30, 1994 over the same periods in 1993. The majority of this decrease represents the decreased amortization of purchased mortgage servicing rights due to the change in the expected life of the servicing portfolio. Income Taxes Income tax expense as a percentage of pre-tax income decreased to 33.6% for the nine months ending September 30, 1994 compared to 35.5% for the same period in 1993. During the third quarter of 1994 income tax expense as a percentage of pre-tax income decreased to 33.2% from 37.5%. These decrease are the result of a lower tax rate on a new investment subsidiary and the elimination in the State of New Jersey corporate income tax surcharge of .375%. FUNDS MANAGEMENT Interest Rate Sensitivity Managing net interest margin continues to be the single most important factor 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. 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. At September 30, 1994, rate sensitive liabilities exceeded rate sensitive assets at the 90 day interval and resulted in a negative gap of $107.4 million or a ratio of .91:1. Rate sensitive liabilities exceeded rate sensitive assets at the 91 to 365 day interval by $246.5 million or a ratio of .41:1 and resulted in a negative gap. The total negative gap repricing within 365 days as of September 30, 1994 is $353.9 million or .77:1. The above gap results take into account repricing and maturities of assets and liabilities, but fails to consider the interest rate sensitivities of those asset and liability accounts. Management has prepared for its use an income simulation technique 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 or a decrease of 100 basis points had a negative impact of approximately 3.6% and 1.5%, respectively on Valley's net interest income over a twelve month period. Management cannot provide any assurance about the actual effects 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, investment securities maturing in one year or less and securities available for sale. At September 30, 1994, liquid assets amounted to $635.3 million as compared to $751.7 million at December 31, 1993. This represents 19.0% and 23.0% of earning assets and 18.0% and 22.0% of total assets at September 30, 1994 and year end 1993, respectively. -9- 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 $2.53 billion and $2.45 billion at September 30, 1994 and year end 1993, respectively, representing 76.8% and 78.9% 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. During the quarter ended September 30, 1994, proceeds from the sales of investment securities available for sale were $20.9 million, and proceeds of $75.2 million were generated from investment maturities from the portfolio and available for sale categories. Purchases of investment securities available for sale were $10.0 million and purchases for the portfolio were $53.0 million during the same quarter of 1994. Short term borrowings and certificates of deposit over $100 thousand amounted to $243.9 million and $178.4 million, on average, at September 30, 1994 and December 31, 1993, respectively. The parent company'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 is expected to be adequate to pay dividends, given the current strong capital levels and current profitable operations of its subsidiary. Investment Securities Effective January 1, 1994, Valley adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investment in Debt and Equity Securities". The financial impact of adoption represented an addition to Shareholders' Equity of $4.5 million, net of taxes. At September 30, 1994, the unrealized loss, net of deferred taxes, resulted in a decrease to Shareholders' Equity of $10.0 million. As of September 30, 1994 Valley had $399.7 million of securities available for sale compared with $441.5 million at December 31, 1993. Available for sale securities are recorded at fair value with unrealized gains or losses reported as a separate component of shareholder's equity. Total investment securities, including securities classified as held to maturity and available for sale, decreased $111.8 million from year-end 1993 to the third quarter of 1994 to $1.27 billion. This decrease was used to fund the increase in new loans. Loan Portfolio Residential mortgage and home equity loans, including residential mortgages held for sale increased by 5.1% or $31.5 million to a total of $645.9 million at September 30, 1994 since December 31, 1993 and represents 31.8% of the loan portfolio. The volume of residential mortgage loan applications continued to decline during the quarter as interest rates increased. Installment loans, including predominantly automobile and credit card loans, totalled $612.7 million at September 30, 1994, increasing by $84.1 million over the balance at December 31, 1993 or 15.9% and representing 30.2% of the loan portfolio. Commercial mortgages increased 20.9% or $81.0 million from December 31, 1993 to September 30, 1994, partially as a result of new business. It is expected that the increase in volume of installment and commercial mortgage loans will continue into the fourth quarter of 1994, while residential mortgage loan volume declines due to higher interest rates causing the recent slow-down in refinancing activity. Non-Performing Assets Non-performing assets include non-accrual loans and other real estate owned (OREO). Non-performing assets were $23.0 million or 1.1% of loans, net of unearned income at September 30, 1994, compared with $21.7 million, or 1.20% of loans net of unearned income at December 31, 1993 and $27.0 million, or 1.5% of loans at September 30, 1993. Loans past due in excess of 90 days and still accruing interst, were $3.9 million at September 30, 1994, compared with $8.5 million at December 31, 1993 and $11.7 million at September 30, 1993. -10- In May of 1993, FASB issued Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan" which applied to financial statements for fiscal years beginning after December 15, 1994. This Statement requires 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. Valley has not yet determined the impact of this statement. Asset Quality and Risk Elements The level of the allowance is the result of an ongoing analysis by management and Valley's Board of Directors. This analysis attempts to take into account various data so as to assess the level of the allowance. Emphasis is 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 level of non-performing assets as well as the level of the allowance, coupled with the continued recovery of the economy was responsible for the decision to decrease the provision from $5.0 million during the first nine months of 1993 to $2.7 million in the first nine months of 1994. Valley's loan loss allowance has increased by $685 thousand since year end 1993. At September 30, 1994 the allowance for loan losses amounted to $35.9 million or 1.8% of loans, including loans held for sale, net of unearned income, as compared to $35.2 million or 1.9% at year end 1993 and was 156.0% of non-performing assets at September 30, 1994. The allowance is adjusted by provisions charged against income and loans charged-off, net of recoveries. The provision for possible loan losses amounted to $900 thousand and $2.7 million for the quarter and nine months ended September 30, 1994 compared to $1.5 million and $5.0 million for the same periods in 1993. Net loan charge-offs were $2.0 million for the nine months ended September 30, 1994 compared with $2.6 million for the same period in 1993. The ratio of net charge-offs to average loans amounted to 0.14% and 0.21%, respectively, at September 30, 1994 and 1993. Capital Adequacy A significant measure of the strength of a financial institution is a strong capital base which can expand in close proportion to asset growth. It is the capital base which provides the primary risk insurance to depositors. Also, it is an important consideration to federal regulators, analysts of Valley's common stock, as well as others in the marketplace. At September 30, 1994, shareholders' equity totalled $280.6 million or 7.96% of total assets, compared with $264.4 million or 7.75% at year-end 1993. 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 excluding SFAS 115 net unrealized gains or losses less disallowed intangibles, while total Tier 1 and Tier 2 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. Valley's capital position at September 30, 1994 under risk-based capital guidelines was $286.1 million, or 13.29% of risk- weighted assets, for Tier 1 capital and $313.1 million, or 14.55% for total Tier 1 and Tier 2 capital. The comparable ratios at December 31, 1993 were 13.93% for Tier 1 capital 15.18% for total Tier 1 and Tier 2 capital. Valley's ratios at September 30, 1994 are above the risk-based capital standards, which require all bank holding companies to have Tier 1 capital of at least 4% and total Tier 1 and Tier 2 capital of 8%. The Federal Reserve Board requires each bank holding company to maintain a minimum leverage ratio of 3.0% (Tier 1 capital to average total assets). The minimum 3.0% leverage requirement applies only to top-rated banking organizations without any operating, financial or supervisory deficiencies. Other organizations will be expected to hold an additional capital cushion of at least 100 to 200 basis points of Tier 1 capital. In all cases, banking organizations should hold capital commensurate with the level and nature of all the risks to which they are exposed. At September 30, 1994 and December 31, 1993, Valley was in compliance with the leverage requirement having a Tier 1 leverage ratio of 8.09% and 7.62%, respectively. -11- VNB is also subject to similar but separate capital adequacy guidelines. VNB is subject to risk-based capital rules and leverage rules issued by the Comptroller of the Currency. As of September 30, 1994, VNB's total Tier 1 and Tier 2 capital ratio was 13.13% and its leverage ratio was 7.22%. 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 54.4% for the nine months ended September 30, 1994 compared to 62.3% for the nine months ended September 30, 1993. Cash dividends for the first nine months of 1994 amounted to $.73 per share, equivalent to a dividend payout ratio of 45.6%, up from the 37.7% for the same period in 1993. 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. -12- PART II Item 6. Exhibits and Reports on Form 8-K a) Exhibits (10) Material Contracts "Stock Option Agreement" dated April 1, 1992 between Valley National Bancorp and Michael Guilfoile. b) Reports on Form 8-K (1) On July 5, 1994 to report letter of intent to acquire Rock Financial Corporation. (2) On August 29, 1994 to report signing of definitive agreement to acquire Rock Financial Corporation. -13- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VALLEY NATIONAL BANCORP (Registrant) Date: November 10, 1994 /s/Peter Southway PETER SOUTHWAY PRESIDENT AND CHIEF OPERATING OFFICER Date: November 10, 1994 /s/Alan D. Eskow ALAN D. ESKOW SENIOR VICE PRESIDENT FINANCIAL ADMINISTRATION -14- EXHIBIT INDEX Number Description 10 Stock Option Agreement, dated April 1, 1992 -15- EXHIBIT 10 VALLEY NATIONAL BANCORP STOCK OPTION AGREEMENT VALLEY NATIONAL BANCORP, a New Jersey corporation (the "Company"), this 1st day of April, 1992, (the "Option Date") hereby grants to MICHAEL GUILFOILE, residing at 369 Rowayton Avenue, Rowayton, Connecticut 06853 ("Guilfoile") an option to purchase shares of the Common Stock, no par value, of the Company ("Common Stock") in the amount and on the terms and conditions hereinafter set forth. 1. Grant of Option. The Company hereby grants to Guilfoile the option (the "Option") to purchase all or any part of an aggregate of 5000 shares of Common Stock ("Shares") on the terms and conditions herein set forth. 2. Purchase Price. The purchase price of the shares of Common Stock subject to the Option shall be $26.00 per share subject to adjustment as provided in Section (8) below. 3. Final Termination. This Option shall be exercisable from the date hereof until November 18, 2001 or such shorter as is prescribed in this Agreement. 4. Restrictions. This Option is subject to all the following conditions: a. This Option is not assignable or transferable by Guilfoile; b. This Option may be exercised only by the legal representative of Guilfoile in the event of his death or mentaldisability. 5. Exercise. This Option shall be exercised by notice to the Company, accompanied by full payment in cash or check. 6. Securities Law Restrictions. The Company is under no obligation to file a registration statement under the Securities Act of 1933 with respect to the Shares to be received upon exercise of the Option. Unless a registration statement under the Act has been filed and remains effective with respect to the Shares, the Company shall require that the offer and sale of such Shares be exempt from the registration provisions of the Act. As a condition of such exemption, the Company shall require a representation and undertaking, in form and substance satisfactory to counsel for the Company, that the optionee is acquiring the Shares for his own account for investment and not with a view to the distribution or resale thereof and shall otherwise require such representations and impose such conditions as shall establish to the Company's satisfaction that the offer and sale of the Shares issuable upon the exercise of the Option will not constitute a violation of the Act or any similar state act affecting the offer and sale. If the shares are issued in an exempt transaction, the Shares shall bear the following restrictive legend: THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR TRANSFER OF THE SHARES MAY BE AFFECTED WITHOUT AN OPINION OF COUNSEL TO THE COMPANY STATING THAT THE TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THAT THE SALE OR TRANSFER OF THE SHARES IS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SHARES. -2- 7. Restrictions on Transfer. This Option shall not be transferred, assigned, pledged or hypothecated by Guilfoile and shall not be subject to execution, attachment or similar process. In the event the terms of this paragraph are not complied with by Guilfoile, or if the Option is subject to execution, attachment or similar process, this Option shall immediately become null and void. 8. Anti-Dilution Provisions. If prior to expiration of the Option there shall occur any change in the outstanding Common Stock of the Company by reason of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, recapitalization, reorganization, liquidation, subscription rights offering, or the like, and as often as the same shall occur, then the kind and number of shares subject to the Option, or the purchase price per share of Common Stock, or both, shall be adjusted by the Board of Directors in such manner as it may deem equitable, the determination of which shall be binding and conclusive. Failure of the Board to provide for any such adjustment shall be conclusive evidence that no adjustment is required. The Company shall notify Guilfoile of any change. 9. Acceleration of Option Period. Notwithstanding anything to the contrary specified herein, if there is a Change-in- Control of the Company as defined in the Company's Long-Term Stock Incentive Plan (the "Incentive Plan"), the Company, upon prior written notice to Guilfoile, may terminate the Option 60 days after giving Guilfoile notice of the Change-in-Control and the earlier -3- termination date. During any sixty (60) day period following a Change-in-Control, Guilfoile may (i) exercise the Option, to the extent not previously exercised, or (ii) surrender this Option for cancellation and receive, to the extent the Option was not previously exercised, a cash payment equal to the Adjusted Fair Market Value (as defined in the Incentive Plan) of the Shares subject to the Option or portion thereof surrendered, over the aggregate purchase price for such Shares under this Option. This provision is intended to, and shall be interpreted to, give Guilfoile the same treatment as optionees under the Incentive Plan. 10. Acceptance of Provisions. The execution of this Agreement by Guilfoile shall constitute Guilfoile's acceptance of and agreement to all of the terms and conditions of this Agreement. 11. Notices. All notices and other communications required or permitted under this Agreement shall be in writing and shall be given either by (i) personal delivery or regular mail, in each case against receipt, or (ii) first class registered or certified mail, return receipt requested. Any such communication shall be deemed to have been given (i) on the date of receipt in the cases referred to in clause (i) of the preceding sentence and (ii) on the second day after the date of mailing in the cases referred to in clause (ii) of the preceding sentence. All such communications to the Company shall be addressed to it, to the attention of its Secretary or Treasurer, at its then principal office and to Guilfoile at his last address appearing on the records of the Company or, in each case, to such other person or -4- address as may be designated by like notice hereunder. 12. Miscellaneous. This Agreement contains a complete statement of all the arrangements between the parties with respect to their subject matter, and this Agreement cannot be changed except by a writing executed by both parties. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed exclusively in New Jersey. The headings in this Agreement are solely for convenience of reference and shall not affect its meaning or interpretation. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. VALLEY NATIONAL BANCORP By: Michael Guilfoile -5- -----END PRIVACY-ENHANCED MESSAGE-----