10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549 ----------------- FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2000 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 1-11277 ---------------------- VALLEY NATIONAL BANCORP (Exact name of registrant as specified in its charter) New Jersey (State or other Jurisdiction of incorporation or organization) 22-2477875 (I.R.S. Employer Identification No.) 1455 Valley Road, Wayne, New Jersey 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 59,974,850 shares were outstanding as of November 8, 2000. TABLE OF CONTENTS Page Number PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition (Unaudited) September 30, 2000 and December 31, 1999 3 Consolidated Statements of Income (Unaudited) Nine and Three Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 27 PART I Item 1. Financial Statements VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (in thousands, except per share data)
September 30, December 31, 2000 1999 Assets Cash and due from banks $ 172,939 $ 161,561 Federal funds sold - 123,000 Investment securities held to maturity, fair value of $298,576 and $318,329 in 2000 and 1999, respectively 341,576 351,501 Investment securities available for sale 989,505 1,005,419 Loans 4,592,211 4,542,567 Loans held for sale 10,296 12,185 Total loans 4,602,507 4,554,752 Less: Allowance for loan losses (55,363) (55,120) Net loans 4,547,144 4,499,632 Premises and equipment, net 86,236 84,790 Accrued interest receivable 38,225 35,504 Other assets 90,773 98,987 Total assets $ 6,266,398 $ 6,360,394 Liabilities Deposits: Non-interest bearing $ 958,278 $ 931,016 Interest bearing: Savings 1,910,657 2,018,530 Time 2,062,200 2,101,709 Total deposits 4,931,135 5,051,255 Short-term borrowings 168,055 129,065 Long-term debt 591,828 564,881 Accrued expenses and other liabilities 51,812 61,693 Total liabilities 5,742,830 5,806,894 Shareholders' Equity Preferred stock, no par value, authorized 30,000,000 shares; none issued - - Common stock, no par value, authorized 108,527,344 shares; issued 60,610,684 shares in 2000 and 60,621,040 shares in 1999 25,963 25,943 Surplus 325,901 325,147 Retained earnings 203,801 244,605 Unallocated common stock held by employee benefit plan (822) (965) Accumulated other comprehensive loss (14,178) (16,733) 540,665 577,997 Treasury stock, at cost (671,212 shares in 2000 and 927,750 shares in 1999) (17,097) (24,497) Total shareholders' equity 523,568 553,500 Total liabilities and shareholders' equity $ 6,266,398 $ 6,360,394 See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) Nine Months Ended Three Months Ended September 30, September 30, 2000 1999 2000 1999 Interest Income Interest and fees on loans $277,498 $250,977 $ 94,475 $ 85,839 Interest and dividends on investment securities: Taxable 55,811 55,626 18,632 18,903 Tax-exempt 5,471 5,506 1,789 1,920 Dividends 2,124 1,782 693 608 Interest on federal funds sold and other short-term investments 2,695 2,954 1,131 636 Total interest income 343,599 316,845 116,720 107,906 Interest Expense Interest on deposits: Savings deposits 36,288 30,401 12,104 10,298 Time deposits 82,953 75,864 28,873 25,410 Interest on short-term borrowings 4,787 2,007 1,776 761 Interest on long-term debt 26,549 15,260 9,177 5,965 Total interest expense 150,577 123,532 51,930 42,434 Net Interest Income 193,022 193,313 64,790 65,472 Provision for loan losses 5,430 6,095 1,730 2,320 Net Interest Income after Provision for Loan Losses 187,592 187,218 63,060 63,152 Non-Interest Income Trust and investment services 2,443 1,632 940 535 Service charges on deposit accounts 12,232 10,691 4,272 3,599 Gains on securities transactions, net 117 2,570 117 140 Fees from loan servicing 8,281 5,990 2,769 2,137 Credit card fee income 6,162 6,497 2,110 2,299 Gains on sales of loans, net 1,787 1,890 437 442 Other 5,789 6,583 1,901 2,179 Total non-interest income 36,811 35,853 12,546 11,331 Non-Interest Expense Salary expense 46,590 43,186 15,950 14,721 Employee benefit expense 10,003 9,978 3,423 3,667 FDIC insurance premiums 783 927 258 303 Occupancy and equipment expense 15,896 14,937 5,956 5,141 Credit card expense 3,808 3,932 1,233 1,286 Amortization of intangible assets 5,579 3,647 2,000 1,505 Advertising 3,108 3,389 895 1,155 Merger-related charges - 3,005 - - Other 17,913 18,423 5,740 6,145 Total non-interest expense 103,680 101,424 35,455 33,923 Income Before Income Taxes 120,723 121,647 40,151 40,560 Income tax expense 40,738 42,482 13,768 13,281 Net Income $ 79,985 $ 79,165 $ 26,383 $ 27,279 Earnings Per Share: Basic $ 1.32 $ 1.24 $ 0.44 $ 0.43 Diluted $ 1.30 $ 1.23 $ 0.44 $ 0.43 Weighted Average Number of Shares Outstanding: Basic 60,803,028 63,905,848 60,004,266 63,241,185 Diluted 61,363,585 64,554,774 60,596,952 63,907,683 See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Nine Months Ended September 30, 2000 1999 Cash flows from operating activities: Net income $ 79,985 $ 79,165 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,747 9,217 Amortization of compensation costs pursuant to long-term stock incentive plan 1,175 654 Provision for loan losses 5,430 6,095 Net amortization of premiums and accretion of discounts 1,562 3,307 Gains on securities transactions, net (117) (2,570) Proceeds from sales of loans 34,089 67,489 Gain on sales of loans, net (1,787) (1,890) Proceeds from recoveries of previously charged-off loans 2,677 2,800 Net decrease (increase) in accrued interest receivable and other assets 896 (16,414) Net (decrease) increase in accrued expenses and other liabilities (12,141) 10,696 Net cash provided by operating activities 123,516 158,549 Cash flows from investing activities: Purchases and originations of mortgage servicing rights (1,119) (8,005) Proceeds from sales of investment securities available for sale 10,141 26,774 Proceeds from maturing investment securities available for sale 121,044 360,067 Purchases of investment securities available for sale (111,044) (396,211) Purchases of investment securities held to maturity (21,695) (157,123) Proceeds from maturing investment securities held to maturity 30,931 46,271 Proceeds from sales of trading account securities - 1,415 Net decrease in federal funds sold and other short-term investments 123,000 108,100 Net increase in loans made to customers (87,921) (323,148) Purchases of premises and equipment, net of sales (7,614) (5,117) Net cash provided by (used in) investing activities 55,723 (346,977) Cash flows from financing activities: Net decrease in deposits (120,120) (8,542) Net increase in short-term borrowings 38,990 58,041 Advances of long-term debt 55,000 283,000 Repayments of long-term debt (28,053) (81,050) Dividends paid to common shareholders (46,648) (44,301) Addition of common shares to treasury (70,035) (46,036) Common stock issued, net of cancellations 3,005 3,081 Net cash (used in) provided by financing activities (167,861) 164,193 Net increase (decrease) in cash and cash equivalents 11,378 (24,235) Cash and cash equivalents at beginning of period 161,561 185,921 Cash and cash equivalents at end of period 172,939 $ 161,686 Supplemental disclosure of cash flow information: Cash paid during the period for interest on deposits and borrowings 148,858 121,888 Cash paid during the period for federal and state income taxes 40,007 40,329 Transfer of securities from held to maturity to available for sale - 42,387 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 September 30, 2000 and December 31, 1999, the Consolidated Statements of Income for the nine and three month periods ended September 30, 2000 and 1999 and the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2000 and 1999 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, 2000 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, 1999 Annual Report to Shareholders. Certain prior period amounts have been reclassified to conform to 2000 financial presentations. 2. Earnings Per Share Earnings per share ("EPS") amounts and weighted average shares outstanding have been restated to reflect the 5 percent stock dividend declared April 6, 2000 to shareholders of record on May 5, 2000 and issued May 16, 2000. For Valley, the numerator of both the Basic and Diluted EPS is equivalent to net income. The weighted average number of shares outstanding used in the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect of potentially dilutive common stock equivalents utilizing the treasury stock method. For Valley, common stock equivalents are common stock options outstanding. The following table shows the calculation of both Basic and Diluted earnings per share for the nine and three months ended September 30, 2000 and 1999. Nine Months Ended Three Months Ended September 30, September 30, 2000 1999 2000 1999 (in thousands, except per share data) Net income $ 79,985 $ 79,165 $ 26,383 $ 27,279 Basic weighted-average number of shares outstanding 60,803,028 63,905,848 60,004,266 63,241,185 Plus: Common stock equivalents 560,557 648,926 592,686 666,498 Diluted weighted-average number of shares outstanding 61,363,585 64,554,774 60,596,952 63,907,683 Earnings per share: Basic $ 1.32 $ 1.24 $ 0.44 $ 0.43 Diluted 1.30 1.23 0.44 0.43 Common stock equivalents for the nine and three months ended September 30, 2000 exclude 254 thousand common stock options in both periods, because the exercise prices exceed the average market value. 3. Recent Developments On September 6, 2000, Valley and Merchants New York Bancorp, Inc. ("Merchants") jointly announced that they have entered into a definitive merger agreement by which Valley will acquire Merchants. Merchants is the holding company for The Merchants Bank of New York ("Merchants Bank"), a commercial bank with $1.4 billion in assets operating seven offices all located in Manhattan. Merchants will be merged into Valley and Merchants Bank will be merged into Valley National Bank. The Merchants Bank will continue to operate in Manhattan, under its existing name, as a division of Valley National Bank. The acquisition of Merchants is structured as a tax-free merger to be accounted for as a pooling-of-interests. Each of the 18,647,543 outstanding shares of Merchants common stock will be exchanged for .7634 shares of Valley common stock. Valley will issue approximately 14,235,534 shares of its common stock in exchange for the outstanding shares of Merchants. At September 30, 2000, Merchants had $104.3 million of shareholders equity. The acquisition is conditioned upon necessary regulatory approvals, the approval of Valley and Merchants' shareholders and other customary conditions. The parties anticipate that the merger will be consummated in the first quarter of 2001. Consummation of the merger requires approval of the Office of the Comptroller of the Currency ("OCC"). Valley filed an application for OCC approval on October 30, 2000. Valley also corresponded with the Federal Reserve Board on October 30, 2000 to obtain confirmation that it will waive its approval requirement to complete the merger based upon the OCC approval. Both Valley and Merchants will hold their special shareholder meetings on Tuesday, December 5, 2000. On September 19, 2000, Valley announced, in connection with the signing of the merger agreement, the termination of its common stock repurchase program of 3,000,000 shares as previously approved by its Board of Directors on May 23, 2000. As of September 19, 2000, 571,070 shares had been repurchased under this program. 4. Other Comprehensive Income (Loss) Valley's other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains (losses) on securities. The following table shows the related tax effects on each component of other comprehensive income for the nine and three months ended September 30, 2000 and 1999.
Nine Months Ended Nine Months Ended September 30, 2000 September 30, 1999 (in thousands) Net income $79,985 $79,165 Other comprehensive income, net of tax: Foreign currency translation adjustments (280) 285 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period $2,909 $(13,160) Less reclassification adjustment for gains realized in net income (74) (1,631) Net unrealized gains (losses) 2,835 (14,791) Other comprehensive income (loss) 2,555 (14,506) Total other comprehensive income $82,539 $64,659 Three Months Ended Three Months Ended September 30, 2000 September 30, 1999 (in thousands) Net income $26,383 $27,279 Other comprehensive income, net of tax: Foreign currency translation adjustments (108) (63) Unrealized gains(losses) on securities: Unrealized holding gains (losses) arising during period $4,706 $(7,516) Less reclassification adjustment for gains realized in net income (74) (87) Net unrealized gains (losses) 4,632 (7,603) Other comprehensive income (loss) 4,524 (7,666) Total other comprehensive income $30,907 $ 19,613
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Concerning Forward-Looking Statements This Form 10-Q, both in the MD & A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities, technology and market conditions. These statements may be identified by an "asterisk" (*) or such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to, the direction of interest rates, continued levels of loan quality and origination volume, continued relationships with major customers including sources for loans, 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. Earnings Summary Net income for the nine months ended September 30, 2000 was $80.0 million, or $1.30 per diluted share. These results compare with net income of $79.2 million, or $1.23 per diluted share for the same period in 1999 (1999 earnings per share amounts have been restated to give effect to a 5 percent stock dividend issued May 16, 2000). The annualized return on average equity increased to 20.28 percent from 18.14 percent, while the annualized return on average assets decreased to 1.71 percent from 1.76 percent, for the nine months ended September 30, 2000 and 1999, respectively. Net income was $26.4 million or $0.44 per diluted share for the three month period ended September 30, 2000, compared with $27.3 million or $0.43 per diluted share for the same period in 1999. The annualized return on average equity increased to 20.35 percent from 19.25 percent, while the annualized return on average assets decreased to 1.70 percent from 1.80 percent, for the three months ended September 30, 2000 and 1999, respectively. The nine month net income and net income per diluted share for 1999 include a pre tax merger -related charge of $3.0 million. Net Interest Income Net interest income continues to be the largest source of Valley's operating income. Net interest income on a tax equivalent basis remained basically unchanged at $196.3 million for the nine months ended September 30, 2000 compared with $196.6 million for the same period in 1999. Although net interest income remained relatively unchanged, higher average balances of total interest earning assets, primarily loans, combined with higher average interest rates for these interest earning assets were recorded during 2000. For the nine months ended September 30, 2000, compared with the same period in the prior year, total interest bearing liabilities increased as well as the interest rates associated with these liabilities. Net interest income was also negatively impacted by the increase in the average balance and the rate associated with short-term borrowings and long-term debt and the use of funds for the repurchase of the Valley common stock. The net interest margin decreased to 4.37 percent for the nine months ended September 30, 2000 compared with 4.56 percent for the same period in 1999. Assuming a rising interest rate environment, the net interest margin is expected to continue to decline.* While loans have been growing, competition for loans has caused rates on new loans and total interest earning assets to increase at a slower pace than rates on interest bearing liabilities. Average interest earning assets increased $241.1 million or 4.2 percent for the nine months ended September 30, 2000 over the same period in 1999. This was the result of the increase in average balance of loans of $344.0 million or 8.1 percent. Total investments decreased $102.9 million or 6.8 percent. Average interest bearing liabilities for the nine months ended September 30, 2000 increased $228.0 million or 5.1 percent from the same period in 1999. Average savings deposits decreased $44.9 million or 2.2 percent and average time deposits decreased $13.9 million or 0.7 percent. Average short-term borrowings increased $55.1 million or 85.9 percent and long-term debt, which includes primarily FHLB advances, increased $231.8 million, or 65.8 percent. Average demand deposits increased $69.9 million or 7.9 percent over 1999 balances. Average interest rates, in all categories of interest earning assets, increased during the nine months ended September 30, 2000 compared with the nine months ended September 30, 1999. The average interest rate for loans increased 18 basis points to 8.11 percent. Average interest rates on total interest earning assets increased 29 basis points to 7.72 percent. Average interest rates on deposits increased by 48 basis points to 3.94 percent. Average interest rates also increased on total interest bearing liabilities by 58 basis points to 4.23 percent from 3.65 percent. Although both interest earning assets and interest bearing liabilities increased relatively at the same volume, the decline in the net interest margin from 4.56 percent for the nine months ended September 30, 1999 to 4.37 percent in 2000 resulted from interest rates on total interest bearing liabilities increasing at a faster pace than interest rates on total interest earning assets. Additionally, the use of capital to purchase treasury shares during the quarter and nine months ended September 30, 2000 contributed to the decline in the net interest margin. Net interest income on a tax equivalent basis decreased to $65.9 million from $66.6 million for the three months ended September 30, 2000 compared with the same period in 1999, with an increase of $158.4 million in average balance and an increase of 39 basis points in the rate earned on total interest earning assets. The average balance of loans increased $269.6 million or 6.3 percent, while the average balance of investments decreased $111.2 million or 7.3 percent. The average interest rate for loans increased by 29 basis points, and the average interest rate on all investments increased by 52 basis points. Increases in the average balance and rate earned on total interest earning assets were offset by a $148.3 million increase in average balance and an increase of 69 basis points in the rate paid on total interest bearing liabilities. Average savings deposits decreased $68.3 million or 3.3 percent, and average time deposits decreased $33.5 million or 1.6 percent, while average short-term borrowings and long-term debt increased by $60.1 million or 84.7 percent and $189.9 million or 47.1 percent, respectively. The average interest rates on deposits increased 62 basis points to 4.09 percent, and also increased 69 basis points on all interest-bearing liabilities to 4.39 percent. The net interest margin decreased to 4.40 percent for the three months ended September 30, 2000 compared with 4.58 percent for the same period in 1999 as a result of the increase of 39 basis points in the rate earned on average interest earning assets offset by the greater increase of 69 basis points in the rate paid on average interest bearing liabilities.
The following table reflects the components of net interest income for each of the nine months ended September 30, 2000 and 1999. ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS Nine Months Ended September 30, 2000 Nine Months Ended September 30,1999 Average Average Average Average Balance Interest Rate Balance Interest Rate (in thousands) Assets Interest earning assets Loans(1)(2) $4,568,706 $277,854 8.11% $ 4,224,704 $251,337 7.93% Taxable invest- ments(3) 1,197,923 57,935 6.45 1,275,208 57,408 6.00 Tax-exempt invest- ments(1)(3) 163,556 8,417 6.86 166,374 8,471 6.79 Federal funds sold and other short-term investments 57,611 2,695 6.24 80,392 2,954 4.90 Total interest earning assets 5,987,796 $346,901 7.72 5,746,678 $320,170 7.43 Allowance for loan losses (55,857) (55,068) Cash and due from banks 142,753 148,100 Other assets 176,714 171,848 Unrealized loss on securities available for sale (29,003) (1,774) Total assets $6,222,403 $6,009,784 Liabilities and Shareholders' Equity Interest bearing liabilities Savings deposits $1,990,921 $36,288 2.43% $2,035,833 $ 30,401 1.99% Time deposits 2,048,413 82,953 5.40 2,062,319 75,864 4.90 Total interest bearing deposits 4,039,334 119,241 3.94 4,098,152 106,265 3.46 Short-term borrowings 119,298 4,787 5.35 64,185 2,007 4.17 Long-term debt 584,098 26,549 6.06 352,345 15,260 5.77 Total interest bearing liabilities 4,742,730 150,577 4.23 4,514,682 123,532 3.65 Demand deposits 949,444 879,576 Other liabilities 4,475 33,624 Shareholders' equity 525,754 581,902 Total liabilities and shareholders' equity $6,222,403 $6,009,784 Net interest income (tax equivalent basis) 196,324 196,638 Tax equivalent adjustment (3,302) (3,325) Net interest income $ 193,022 $ 193,313 Net interest rate differential 3.49% 3.78% Net interest margin (4) 4.37% 4.56%
(1 ) Interest income is presented on a tax equivalent basis using a 35 percent tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Net interest income on a tax equivalent basis as a percentage of total interest earning assets. The following table reflects the components of net interest income for each of the three months ended September 30, 2000 and 1999.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS Three Months Ended September 30, 2000 Three Months Ended September 30, 1999 Average Average Average Average Balance Interest Rate Balance Interest Rate (in thousands) Assets Interest earning assets Loans(1)(2) $4,577,593 $94,593 8.27% $4,307,991 $85,980 7.98% Taxable invest- ments(3) 1,178,459 19,325 6.56 1,287,618 19,511 6.06 Tax-exempt invest- ments(1)(3) 158,148 2,753 6.96 173,840 2,953 6.79 Federal funds sold and other short- term investments 68,654 1,131 6.59 54,963 636 4.63 Total interest earning assets 5,982,854 $117,802 7.88 5,824,412 $109,080 7.49 Allowance for loan losses (55,989) (55,343) Cash and due from banks 141,569 146,913 Other assets 173,625 167,278 Unrealized loss on securities available for sale (26,286) (10,360) Total assets $6,215,773 $6,072,900 Liabilities and Shareholders' Equity Interest bearing liabilities Savings deposits $1,974,611 $12,104 2.45% $2,042,929 $10,298 2.02% Time deposits 2,036,763 28,873 5.67 2,070,230 25,410 4.91 Total interest bearing deposits 4,011,374 40,977 4.09 4,113,159 35,708 3.47 Short- term borrowings 131,190 1,776 5.42 71,041 761 4.28 Long-term debt 592,794 9,177 6.19 402,876 5,965 5.92 Total interest bearing liabilities 4,735,358 51,930 4.39 4,587,076 42,434 3.70 Demand deposits 958,052 899,247 Other liabilities 3,775 19,695 Shareholders' equity 518,588 566,882 Total liabilities and shareholders' equity $6,215,773 $6,072,900 Net interest income (tax equivalent basis) 65,872 66,646 Tax equivalent adjustment (1,082) (1,174) Net interest income $ 64,790 $ 65,472 Net interest rate differential 3.49% 3.79% Net interest margin (4) 4.40% 4.58% (1 ) Interest income is presented on a tax equivalent basis using a 35 percent tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Net interest income on a tax equivalent basis as a percentage of total interest earning assets.
The following table demonstrates the relative impact on net interest income of changes in volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by Valley on such assets and liabilities.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS Nine Months Ended September 30, Three Months Ended September 30, 2000 Compared With 1999 2000 Compared With 1999 Increase (Decrease) (2) Increase (Decrease) (2) Interest Volume Rate Interest Volume Rate (in thousands) Interest income: Loans (1) $ 26,517 $20,824 $ 5,693 $ 8,613 $ 5,502 $ 3,111 Taxable investments 527 (3,595) 4,122 (186) (1,723) 1,537 Tax-exempt investments(1) (54) (144) 90 (200) (272) 72 Federal funds sold and other short-term investments (259) (953) 694 495 183 312 26,731 16,132 10,599 8,722 3,690 5,032 Interest expense: Savings deposits 5,887 (684) 6,571 1,806 (354) 2,160 Time deposits 7,089 (515) 7,604 3,463 (417) 3,880 Short-term borrowings 2,780 2,090 690 1,015 774 241 Long-term debt 11,289 10,499 790 3,212 2,929 283 27,045 11,390 15,655 9,496 2,932 6,564 Net interest income (tax equivalent basis) $ (314) $ 4,742 $ (5,056) $ (774) $ 758 $(1,532) (1) Interest income is adjusted to a tax equivalent basis using a 35 percent tax rate. (2) Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category.
Non-Interest Income The following table presents the components of non-interest income for the nine and three months ended September 30, 2000 and 1999.
NON-INTEREST INCOME Nine Months Ended Three Months Ended September 30, September 30, 2000 1999 2000 1999 (in thousands) Trust and investment services $ 2,443 $ 1,632 $ 940 $ 535 Service charges on deposit accounts 12,232 10,691 4,272 3,599 Gains on securities transactions, net 117 2,570 117 140 Fees from loan servicing 8,281 5,990 2,769 2,137 Credit card fee income 6,162 6,497 2,110 2,299 Gains on sales of loans, net 1,787 1,890 437 442 Other 5,789 6,583 1,901 2,179 Total non-interest income $ 36,811 $ 35,853 $ 12,546 11,331
Non-interest income continues to represent a considerable source of income for Valley. Excluding gains on securities transactions, total non-interest income amounted to $36.7 million for the nine months ended September 30, 2000 while the comparable amount for the prior year period was $33.3 million. For the quarter ended September 30, 2000 total non-interest income, excluding security gains, was $12.4 million compared with $11.2 million for the quarter ended September 30, 1999. Trust and investment services includes income from trust operations, brokerage commissions, and asset management fees. Trust and investment services income increased $811 thousand or 49.7 percent for the nine months ended September 30, 2000 from the same period in 1999 and $405 thousand or 75.7% for the quarter. Additional fee income to the operations of Valley resulted primarily from the July 30, 1999 acquisition of New Century Asset Management, Inc. ("New Century"), as well as the acquisition on July 6, 2000 of Hallmark Capital Management, Inc. ("Hallmark") both NJ-based money and investment management firms. These transactions were accounted for as purchase accounting transactions. Service charges on deposit accounts increased $1.5 million or 14.4 percent from $10.7 million for the nine months ended September 30, 1999 to $12.2 million for the same period in 2000 and increased $673 thousand from $3.6 million for the quarter ended September 30, 1999 to $4.3 million for the quarter ended September 30, 2000. A majority of this increase is due to the implementation of new service fees and increased emphasis placed on collection efforts. Included in fees from loan servicing are fees for servicing residential mortgage loans and SBA loans. Fees from loan servicing increased by 38.2 percent from $6.0 million for the nine months ended September 30, 1999 to $8.3 million for the nine months ended September 30, 2000 due to an increase in the size of the servicing portfolio. The increase in the servicing portfolio was due mainly to the acquisition of servicing of several residential mortgage loan portfolios with an unpaid principal balance of approximately $668.2 million, which were acquired at the end of 1999. For the three months ended September 30, 2000 fees from loan servicing were $2.8 million, an increase of $632 thousand or 29.6% percent from the same period in 1999. Included in credit card fee income is fee income from both the ShopRite credit card portfolio and Valley's own credit card portfolio. During August 2000, Valley entered into a contract to sell its ShopRite credit card portfolio to American Express and expects to record and close the transaction during the first quarter of 2001. This transaction is expected to reduce both credit card fee income and related credit card expense. * Other non-interest income decreased $794 thousand to $5.8 million for the nine months ended September 30, 2000 compared with $6.6 million for the nine months ended September 30, 1999. The largest components of other non-interest income included fees from the sale of title insurance policies, safe deposit box fees and letter of credit fees. Fees from the sale of title insurance increased to $1.5 million for the nine months ended September 30, 2000 compared with $452 thousand for the same period in 1999. These fees resulted from the acquisition of a title insurance business during the second quarter of 1999. This increase was offset primarily by a decline in the gain on sale of OREO property recorded during 1999. Non-Interest Expense The following table presents the components of non-interest expense for the nine and three months ended September 30, 2000 and 1999.
NON-INTEREST EXPENSE Nine Months Ended Three Months Ended September 30, September 30, 2000 1999 2000 1999 (in thousands) Salary expense $ 46,590 $ 43,186 $ 15,950 $ 14,721 Employee benefit expense 10,003 9,978 3,423 3,667 FDIC insurance premiums 783 927 258 303 Occupancy and equipment expense 15,896 14,937 5,956 5,141 Credit card expense 3,808 3,932 1,233 1,286 Amortization of intangible assets 5,579 3,647 2,000 1,505 Advertising 3,108 3,389 895 1,155 Merger-related charges - 3,005 - - Other 17,913 18,423 5,740 6,145 Total non-interest expense $ 103,680 $ 101,424 $ 35,455 $ 33,923
Non-interest expense totaled $103.7 million and $35.5 million for the nine and three months ended September 30, 2000. This represents an increase of 5.3 percent and an increase of 4.5 percent over the respective nine month and three month 1999 levels after excluding the $3.0 million merger-related charge reported during the nine month period ended September 30, 1999. The largest components of non-interest expense are salaries and employee benefit expense which totaled $56.6 million for the nine months ended September 30, 2000 compared with $53.2 million in the comparable period of 1999 and $19.4 million for the quarter ended September 30, 2000 compared with $18.4 million for the quarter ended September 30, 1999. At September 30, 2000, full-time equivalent staff was 1,831 compared with 1,800 at September 30, 1999. The efficiency ratio measures a bank's gross operating expense as a percentage of fully-taxable equivalent net interest income and other non- interest income without taking into account security gains and losses and other non-recurring items. Valley's efficiency ratio for the nine months ended September 30, 2000 was 44.6 percent, one of the lowest in the industry, compared with an efficiency ratio of 43.9 percent for the year ended December 31, 1999 and 42.9 percent for the nine months ended September 30, 1999. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders. Occupancy and equipment expense increased $959 thousand and $815 thousand for the nine months and three months ended September 30, 2000, respectively, compared to the same periods in the prior year. This increase can be attributed to an overall increase in the cost of operating bank facilities. Amortization of intangible assets increased to $5.6 million for the nine months ended September 30, 2000 from $3.6 million in 1999, representing an increase of $1.9 million or 53.0 percent. The majority of this expense resulted from the amortization of residential mortgage servicing rights totaling $4.3 million during 2000. An increase in the servicing portfolio is responsible for the increase in amortization expense. An impairment analysis is completed quarterly to determine the adequacy of the mortgage servicing asset valuation allowance. For the three months ended September 30, 2000, amortization of intangible assets increased $495 thousand or 32.9 percent to $2.0 million. The majority of this increase is also due to the additional amount of loans being serviced. The $3.0 million of merger-related charges resulted from the June 1999 acquisition of Ramapo Financial Corporation. The significant components of other non-interest expense include data processing, professional fees, postage, telephone and stationery expense which totaled approximately $9.5 million and $8.7 million for the nine months ended September 30, 2000 and 1999, respectively, and $3.3 million and $2.9 million for the three months ended September 30, 2000 and 1999, respectively. Income Taxes Income tax expense as a percentage of pre-tax income was 33.7 percent and 34.3 percent for the nine and three months ended September 30, 2000 respectively, compared with 34.9 percent and 32.7 percent for the same periods in 1999. The effective tax rate for the remainder of 2000 is expected to approximate 34 percent.* Business Segments Valley has four business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, investment management and corporate and other adjustments. Lines of business and actual structure of operations determine each segment. Each is reviewed routinely for its asset growth, contribution to pretax net income and return on assets. Internal expense transfer, defined as income and expenses related to the branch network, all other components of retail banking, along with the back office departments are allocated from the corporate and other adjustments segment to each of the other three business segments. The financial reporting for each segment contains allocations and reporting in line with Valley's operations, which may not necessarily be compared to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. The following table represents the financial data for the nine months ended September 30, 2000 and 1999.
Nine Months Ended September 30, 2000 (in thousands) Corporate Consumer Commercial Investment and Other Lending Lending Management Adjustments Total Average interest earning assets $ 2,792,758 $ 1,811,940 $ 1,383,098 $ -- $ 5,987,796 Income (loss) before income taxes $ 52,309 $ 49,253 $ 21,396 $ (2,235) $ 120,723 Return on average interest earning assets (pre-tax) 2.50% 3.62% 2.06% --% 2.69% Nine Months Ended September 30, 1999 (in thousands) Corporate Consumer Commercial Investment and Other Lending Lending Management Adjustments Total Average interest earning assets $ 2,576,943 $ 1,689,029 $ 1,480,706 $ -- $ 5,746,678 Income (loss) before income taxes $ 52,960 $ 48,856 $ 21,998 $ (2,167) $ 121,647 Return on average interest earning assets (pre-tax) 2.74% 3.86% 1.98% --% 2.82%
Consumer Lending The consumer lending segment had a return on average interest earning assets before taxes of 2.50 percent for the nine months ended September 30, 2000 compared with 2.74 percent for the nine months ended September 30, 1999. Average interest earning assets increased $215.8 million, attributable to an increase in residential lending. Average interest rates on consumer loans increased by 7 basis points, while the cost of funds increased by 48 basis points. Income before income taxes remained relatively unchanged. Commercial Lending The return on average interest earning assets before taxes decreased 24 basis points to 3.62 percent for the nine months ended September 30, 2000. Average interest earning assets increased $122.9 million as a result of an increased volume of loans. Interest rates on commercial loans increased by 29 basis points, offset by an increase in the cost of funds of 48 basis points. Income before income taxes increased by $397 thousand as a result of an increase in average interest earning assets. Investment Management The return on average interest earning assets before taxes increased to 2.06 percent for the nine months ended September 30, 2000 compared with 1.98 percent for the nine months ended September 30, 1999. The yield on interest earning assets increased by 43 basis points to 6.40 percent, offset by an increase in the cost of funds of 48 basis points to 3.35 percent. Average interest earning assets decreased by $98 thousand and income before income taxes decreased $602 thousand. Corporate and Other Adjustments Corporate and other adjustments represent income and expense items not directly attributable to a specific segment which may include merger- related charges, gains on sales of securities, service charges on deposit accounts, and certain revenues and expenses recorded by acquired banks that could not be allocated to a line of business. The loss before taxes was $2.2 million for both the nine months ended September 30, 2000 and 1999. Included in the 1999 loss before taxes was the pre-tax merger related charges of $3.0 million incurred during 1999. In 2000, Valley incurred an increase in expense items not directly attributable to as specific segment and a reduction in security gains, partially offset by an increase in deposit account charges. The following table represents the financial data for the three months ended September 30, 2000 and 1999.
Three Months Ended September 30, 2000 (in thousands) Corporate Consumer Commercial Investment and Other Lending Lending Management Adjustments Total Average interest earning assets $ 2,825,749 $ 1,764,416 $ 1,392,689 $ -- $ 5,982,854 Income (loss) before income taxes $ 16,779 $ 17,282 $ 6,935 $ (845) $ 40,151 Return on average interest earning assets (pre-tax) 2.38% 3.92% 1.99% --% 2.68% Three Months Ended September 30, 1999 (in thousands) Corporate Consumer Commercial Investment and Other Lending Lending Management Adjustments Total Average interest earning assets $ 2,611,801 $ 1,711,876 $ 1,500,735 $ -- $5,824,412 Income (loss) before income taxes $ 16,977 $ 16,664 $ 7,286 $ (367) $ 40,560 Return on average interest earning assets (pre-tax) 2.60% 3.89% 1.94% --% 2.79%
Consumer Lending The consumer lending segment had a return on average interest earning assets before taxes of 2.38 percent for the three months ended September 30, 2000 compared with 2.60 percent for the three months ended September 30, 1999. Average interest earning assets increased $213.9 million, attributable to an increase in residential lending. Average interest rates on consumer loans increased by 4 basis points, while the cost of funds increased by 61 basis points. Income before income taxes decreased $198 thousand to $16.8 million as a result of an increase in the internal expense transfer. Commercial Lending The return on average interest earning assets before taxes increased 3 basis points to 3.92 percent for the three months ended September 30, 2000. Average interest earning assets increased $52.5 million as a result of an increased volume of loans. Interest rates on commercial loans increased by 56 basis points, offset by an increase in the cost of funds of 49 basis points. Income before income taxes increased to $17.3 million. Investment Management The return on average interest earning assets before taxes increased to 1.99 percent for the three months ended September 30, 2000 compared with 1.94 percent for the three months ended September 30, 1999. The yield on interest earning assets increased by 47 basis points to 6.42 percent, offset by an increase in the cost of funds of 54 basis points to 3.47 percent. Average interest earning assets decreased by $108.0 million and income before income taxes decreased $351 thousand. Corporate and Other Adjustments Corporate and other adjustments represent income and expense items not directly attributable to a specific segment which may include merger- related charges, gains on sales of securities, service charges on deposit accounts, and certain revenues and expenses recorded by acquired banks that could not be allocated to a line of business. The loss before taxes was $845 thousand for the three months ended September 30, 2000 compared with a loss of $367 thousand for the three months ended September 30, 1999. The increase in the loss was the result of an increase in expense items not directly attributable to a specific segment. 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. Assuming a rising interest rate environment, the net interest margin and net interest income are expected to continue to decline.* 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 held to maturity maturing within one year, securities available for sale and loans held for sale. Liquid assets amounted to $1.2 billion and $1.3 billion at September 30, 2000 and December 31, 1999, respectively. This represents 20.2 percent and 22.0 percent of earning assets, and 19.1 percent and 20.9 percent of total assets at September 30, 2000 and December 31, 1999, respectively. On the liability side, the primary source of funds available to meet liquidity needs is Valley's core deposit base, which generally excludes certificates of deposit over $100 thousand. Core deposits averaged approximately $4.4 billion for both the nine months ended September 30, 2000 and for the year ended December 31, 1999, representing 72.8 percent and 73.3 percent of average earning assets. Demand deposits have continued to increase, while both savings deposits and time deposits have been declining. The decreases are not considered to be substantial to Valley's deposit base. The level of time deposits is affected by interest rates offered, which is often influenced by Valley's need for funds. Short-term and long-term borrowings through Federal funds lines, repurchase agreements, Federal Home Loan Bank ("FHLB") advances and large dollar certificates of deposit, generally those over $100 thousand, are used as supplemental funding sources. Valley borrowed from the FHLB as part of a leverage strategy and matched funding to increase earning assets and net interest income. As of September 30, 2000, Valley had outstanding advances of $461.5 million with the FHLB and repurchase agreements of $130.0 million. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. For the nine months ended September 30, 2000 there were $10.1 million from the sales of investment securities available for sale, and proceeds of $152.0 million were generated from investment maturities. Purchases of investment securities for the nine months ended September 30, 2000 were $132.7 million. Short-term borrowings and certificates of deposit over $100 thousand amounted to $750.3 million and $637.1 million, on average, for the nine months ended September 30, 2000 and the year ended December 31, 1999, 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. In addition, Valley may repurchase shares of its outstanding common stock. The cash required for a purchase of shares can be met by using its own funds, dividends received from its subsidiary bank as well as borrowed funds. At September 30, 2000 Valley maintained a floating rate line of credit in the amount of $35 million, of which $20.0 million was drawn. This line is available for general corporate purposes and expires June 15, 2001. Borrowings under this facility are collateralized by mortgage-backed and equity securities. As of September 30, 2000, Valley had $989.5 million of securities available for sale recorded at their fair value, compared with $1.0 billion at December 31, 1999. As of September 30, 2000, the investment securities available for sale had an unrealized loss of $13.5 million, net of deferred taxes, compared to an unrealized loss of $16.3 million, net of deferred taxes, at December 31, 1999. This change was primarily due to a decrease in prices resulting from an increasing interest rate environment. These securities are not considered trading account securities, which may be sold on a continuous basis, but rather are securities that may be sold to meet the various liquidity and interest rate requirements of Valley. Loan Portfolio As of September 30, 2000, total loans were $4.6 billion, unchanged from December 31, 1999. The following table reflects the composition of the loan portfolio as of September 30, 2000 and December 31, 1999. LOAN PORTFOLIO September 30, December 31, 2000 1999 (in thousands) Commercial $ 523,654 $ 512,164 Total commercial loans 523,654 512,164 Construction 143,978 123,531 Residential mortgage 1,283,445 1,247,721 Commercial mortgage 1,202,779 1,164,065 Total mortgage loans 2,630,202 2,535,317 Home equity 300,979 276,261 Credit card 87,942 92,097 Automobile 993,998 1,053,457 Other consumer 65,732 85,456 Total consumer loans 1,448,651 1,507,271 Total loans 4,602,507 4,554,752 As a percent of total loans: Commercial loans 11.4% 11.2% Mortgage loans 57.1 55.7 Consumer loans 31.5 33.1 Total 100.0 l00.0 The majority of the increase in loans during 2000 was divided among commercial, construction, residential mortgage, commercial mortgage and home equity loans. It is not known if the trend of increased lending in these loan types will continue, especially if interest rates continue to increase. Automobile loan origination volume has been partially hampered by low interest rates offered by automobile manufacturers as incentives in their attempt to sell vehicles. These rates are substantially lower than what Valley can offer. Refinance activity has weakened during the first half of 2000, as a result of higher interest rates, but increased during the third quarter of 2000. New purchase originations have remained strong due to the demand for housing. Included in the credit card portfolio are both ShopRite MasterCard credit card loans and Valley's own credit card and revolving credit loans. During August 2000, Valley entered into a contract to sell its ShopRite Master Card credit card loans to American Express and expects to record and close the transaction during the first quarter of 2001. This transaction is expected to reduce the total credit card portfolio. * Of the $87.9 million of credit card loans outstanding at September 30, 2000, approximately $64.8 million are ShopRite MasterCard credit card loans. Non-performing Assets Non-performing assets include non-accrual loans and other real estate owned ("OREO"). Loans are generally placed on a non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO is reported at the lower of cost or fair value at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter. Non-performing assets totaled $3.5 million at September 30, 2000, compared with $5.7 million at December 31, 1999, a decrease of $2.2 million or 38.5 percent. OREO decreased $1.7 million from December 31, 1999 to September 30, 2000 due to sales of OREO properties. Non-accrual loans decreased $545 thousand during the same period. Non-performing assets at September 30, 2000 and December 31, 1999, respectively, amounted to 0.08 percent and 0.13 percent of loans and OREO, respectively. Both non-accrual loans and OREO have been on a downward trend over the past two years. It is not known if the trend will continue.* Loans 90 days or more past due and still accruing, not included in the non-performing category, totaled $13.8 million at September 30, 2000, compared with $11.7 million at December 31, 1999. These loans are primarily residential mortgage loans, commercial mortgage loans and commercial loans which are generally well-secured and in the process of collection. Also included are matured commercial mortgage loans in the process of being renewed, which totaled $4.3 million at September 30, 2000 and $1.5 million at December 31, 1999, respectively. Loans 90 days or more past due and still accruing have remained at relatively stable levels during the past two years. It is not known if this trend will continue.* Loans past due in excess of 30 days delinquent, including non-accrual loans, as a percentage of the respective loan portfolio were 0.88% for commercial, commercial mortgage, and construction loans, 1.62% for residential mortgage loans, and 1.91% for consumer loans. The following table sets forth non-performing assets and accruing loans which were 90 days or more past due as to principal or interest payments on the dates indicated, in conjunction with loan quality ratios for Valley. LOAN QUALITY September 30, December 31, 2000 1999 (in thousands) Loans past due in excess of 90 days and still accruing $ 13,756 $ 11,698 Non-accrual loans $ 2,937 $ 3,482 Other real estate owned 591 2,256 Total non-performing assets $ 3,528 $ 5,738 Troubled debt restructured loans $ 4,737 $ 4,852 Non-performing loans as a % of Loans 0.06% 0.08% Non-performing assets as a % of loans plus other real estate owned 0.08% 0.13% Allowance as a % of loans 1.20% 1.21% At September 30, 2000 the allowance for loan losses amounted to $55.4 million, relatively unchanged from the $55.1 million at year-end 1999. The allowance is adjusted by provisions charged against income and loans charged-off, net of recoveries. The provisions charged to operations for the nine and three months ended September 30, 2000 were $5.4 million and $1.7 million, compared with $6.1 and $2.3 million for the same periods in 1999. Net loan charge-offs were $5.2 million and $1.5 million for the nine and three months ended September 30, 2000 compared with $6.0 million and $2.5 million for the nine and three months ended September 30, 1999. The allowance for loan losses is maintained at a level estimated to absorb loan losses inherent in the loan portfolio as well as other credit risk related charge-offs. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. Valley's methodology for evaluating the appropriateness of the allowance consists of several significant elements, which include the allocated allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. The allowance also incorporates the results of measuring impaired loans as required in Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." During the first nine months of 2000, continued emphasis was placed on the current economic climate and the condition of the real estate market in the northern New Jersey area. Management addressed these economic conditions and applied that information to changes in the composition of the loan portfolio and net charge-off levels. Capital Adequacy A significant measure of the strength of a financial institution is its shareholders' equity. At September 30, 2000, shareholders' equity totaled $523.6 million or 8.4 percent of total assets, compared with $553.5 million or 8.7 percent at year-end 1999. On May 23, 2000 Valley's Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company's outstanding common stock. This is in addition to the 3,000,000 shares authorized by the Board of Directors in December 1999 for which Valley has completed the purchase of 3,000,000 shares. The majority of these shares were used for the stock dividend which was issued May 16, 2000. As of September 19, 2000 Valley had repurchased 571,070 shares of its common stock under the new repurchase program. This repurchase program was terminated in connection with the signing of the definitive merger agreement with Merchants. Reacquired shares are held in treasury and are expected to be used for employee benefit programs, stock dividends and other corporate purposes. Included in shareholders' equity as components of accumulated other comprehensive loss at September 30, 2000 was a $13.5 million unrealized loss on investment securities available for sale, net of tax, and a translation adjustment loss of $699 thousand related to the Canadian subsidiary of Valley National Bank, compared with an unrealized loss of $16.3 million and a $418 thousand translation adjustment loss at December 31, 1999. Valley's capital position at September 30, 2000 under risk-based capital guidelines was $531.6 million, or 10.8 percent of risk-weighted assets, for Tier 1 capital and $587.0 million, or 12.0 percent for Total risk-based capital. The comparable ratios at December 31, 1999 were 11.6 percent for Tier 1 capital and 12.8 percent for Total risk-based capital. At September 30, 2000 and December 31,1999, Valley was in compliance with the leverage requirement having Tier 1 leverage ratios of 8.6 percent and 9.1 percent, respectively. Valley's ratios at September 30, 2000 were above the "well capitalized" requirements, which require Tier I capital to risk-adjusted assets of at least 6 percent, Total risk-based capital to risk-adjusted assets of 10 percent and a minimum leverage ratio of 5 percent. Book value per share amounted to $8.73 at September 30, 2000 compared with $8.83 per share at December 31, 1999. The primary source of capital growth is through retention of earnings. Valley's rate of earnings retention, derived by dividing undistributed earnings by net income, was 41.7 percent for the nine months ended September 30, 2000, compared with 44.4 percent for the nine months ended September 30, 1999. Cash dividends declared amounted to $0.77 per share, for the nine months ended September 30, 2000, equivalent to a dividend payout ratio of 58.3 percent, compared with 55.6 percent for the same period in 1999. Valley declared a five percent stock dividend on April 6, 2000 to shareholders of record on May 5, 2000, and issued May 16, 2000. The annual dividend rate was increased from $0.99 per share, on an after stock dividend basis, to $1.04 per share. The increased cash dividend, which is payable quarterly, began on July 3, 2000. 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 cash 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 FASB in June 1998. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial condition at fair value. Valley would have had to adopt SFAS No. 133 by January 1, 2000. However, SFAS No. 137 extended the adoption of SFAS No. 133 to fiscal years beginning after June 15, 2000. Upon 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 impact in the financial statements. In June of 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133 and 137," which amends the accounting and reporting standards of SFAS No. 133 for derivative instruments. The FASB has issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). Statement No. 140 replaces SFAS No. 125. SFAS 140 resolves certain implementation issues, but it carries forward most of SFAS No. 125's provisions without change. SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Valley anticipates that the adoption of SFAS No. 140 will not have a material impact in the financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk See page 19 for a discussion of interest rate sensitivity. PART II Item 6. Exhibits and Reports on Form 8-K a) Exhibits (10) Material Agreements Merger agreement with Merchants New York Bancorp. Inc., incorporated by reference from Form 8-K filed September 6,2000. (27) Financial Data Schedule b) Reports on Form 8-K 1) Filed July 6, 2000 to report the acquisition of Hallmark Capital Management, Inc. 2) Filed September 6, 2000 to report the merger agreement with Merchants New York Bancorp, Inc. and to report that the Board of Directors rescinded 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: November 14, 2000 /s/ Peter Southway PETER SOUTHWAY VICE CHAIRMAN Date: November 14, 2000 /s/ Alan D. Eskow ALAN D. ESKOW SENIOR VICE PRESIDENT AND CONTROLLER FINANCIAL ADMINISTRATION