10-Q 1 secii.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 June 30, 2002 [ ] 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 92,669,807 shares were outstanding as of August 12, 2002. TABLE OF CONTENTS Page Number PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition June 30, 2002 and December 31, 2001 3 Consolidated Statements of Income Six and Three Months Ended June 30, 2002 and 2001 4 Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 28 Item 6. Exhibits and Reports on Form 8-K 29 SIGNATURES 30
PART I Item 1. Financial Statements VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (in thousands, except for share data)
June 30, December 31, 2002 2001 Assets Cash and due from banks $ 195,697 $311,850 Investment securities held to maturity, fair value of $500,393 and $476,872 in 2002 and 2001, respectively 511,237 503,061 Investment securities available for sale 2,258,258 2,171,695 Loans 5,461,605 5,275,582 Loans held for sale 28,258 56,225 Total loans 5,489,863 5,331,807 Less: Allowance for loan losses (64,299) (63,803) Net loans 5,425,564 5,268,004 Premises and equipment, net 105,381 94,178 Accrued interest receivable 45,110 42,184 Bank owned life insurance 155,342 102,120 Other assets 86,128 90,673 Total assets $ 8,782,717 $ 8,583,765 Liabilities Deposits: Non-interest bearing $ 1,464,336 $1,446,021 Interest bearing: Savings 2,697,104 2,448,335 Time 2,429,997 2,412,618 Total deposits 6,591,437 6,306,974 Short-term borrowings 282,583 304,262 Long-term debt 923,686 975,728 Accrued expenses and other liabilities 111,891 118,426 Total liabilities 7,909,597 7,705,390 Company - obligated mandatorily redeemable preferred capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company 200,000 200,000 Shareholders' Equity Preferred stock, no par value, authorized 30,000,000 shares; none issued -- -- Common stock, no par value, authorized 142,442,138 shares; issued 94,307,019 shares in 2002 and 97,753,698 shares in 2001 33,347 33,310 Surplus 318,851 406,608 Retained earnings 304,919 270,730 Unallocated common stock held by employee benefit plan (519) (602) Accumulated other comprehensive income 38,206 19,638 694,804 729,684 Treasury stock, at cost (792,407 shares in 2002 and 2,169,121 shares in 2001) (21,684) (51,309) Total shareholders' equity 673,120 678,375 Total liabilities and shareholders' equity $ 8,782,717 $ 8,583,765 See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except for share data)
Six Months Ended Three Months Ended June 30, June 30, 2002 2001 2002 2001 Interest Income Interest and fees on loans $ 182,788 $ 204,423 $ 91,902 $ 100,090 Interest and dividends on investment securities: Taxable 69,154 69,189 35,724 34,540 Tax-exempt 5,083 5,252 2,579 2,633 Dividends 1,525 2,383 825 1,421 Interest on federal funds sold and other short-term investments 964 3,362 327 1,723 Total interest income 259,514 284,609 131,357 140,407 Interest Expense Interest on deposits: Savings deposits 16,720 26,493 8,632 12,688 Time deposits 36,585 64,007 18,019 30,159 Interest on short-term borrowings 1,445 8,007 619 2,246 Interest on long-term debt 25,537 22,448 12,640 12,685 Total interest expense 80,287 120,955 39,910 57,778 Net Interest Income 179,227 163,654 91,447 82,629 Provision for loan losses 7,679 4,935 3,974 2,835 Net Interest Income after Provision for Loan Losses 171,548 158,719 87,473 79,794 Non-Interest Income Trust and investment services 2,370 2,408 1,192 1,197 Service charges on deposit accounts 9,712 9,250 4,827 4,702 Gains on securities transactions, net 2,964 979 2,609 816 Fees from loan servicing 4,913 5,506 2,415 2,821 Credit card fee income 1,456 1,929 784 932 Gain on sales of loans, net 3,342 7,523 1,562 1,886 Bank owned life insurance 3,222 -- 1,806 -- Other 10,486 6,830 5,226 3,388 Total non-interest income 38,465 34,425 20,421 15,742 Non-Interest Expense Salary expense 41,963 38,996 20,882 19,548 Employee benefit expense 9,547 9,544 4,701 4,686 FDIC insurance premiums 549 584 274 292 Occupancy and equipment expense 13,995 15,381 7,118 7,544 Credit card expense 612 905 304 279 Amortization of intangible assets 4,903 3,942 2,714 2,124 Advertising 3,773 2,308 2,335 1,513 Distributions on capital securities 7,865 -- 3,932 -- Merger-related charges -- 9,017 -- -- Other 16,660 14,976 8,301 7,712 Total non-interest expense 99,867 95,653 50,561 43,698 Income Before Income Taxes 110,146 97,491 57,333 51,838 Income tax expense 31,650 34,369 17,437 17,279 Net Income $ 78,496 $ 63,122 $ 39,896 $ 34,559 Weighted Average Number of Shares Outstanding: Basic 94,437,285 97,483,709 94,009,085 97,547,706 Diluted 95,027,174 98,016,774 94,613,873 98,070,091 Earnings Per Share: Basic $0.83 $0.65 $0.42 $0.35 Diluted 0.83 0.64 0.42 0.35 Cash Dividends Declared Per Common Share 0.44 0.41 0.225 0.21 See accompanying notes to consolidated financial statements.
VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended June 30, 2002 2001 Cash flows from operating activities: Net income $ 78,496 $ 63,122 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,442 9,320 Amortization of compensation costs pursuant to long-term stock incentive plan 1,290 1,061 Provision for loan losses 7,679 4,935 Net amortization of premiums and accretion of discounts 4,495 3,436 Net gains on securities transactions (2,964) (979) Proceeds from sales of loans 141,932 92,119 Gain on sales of loans (3,342) (7,523) Origination of loans held for sale (110,623) (99,793) Net increase in bank owned life insurance (3,222) -- Net (increase) decrease in accrued interest receivable and other assets (11) 26,977 Net decrease in accrued expenses and other liabilities (17,170) (11,461) Net cash provided by operating activities 106,002 81,214 Cash flows from investing activities: Purchase of bank owned life insurance (50,000) -- Proceeds from sales of investment securities available for sale 282,439 142,293 Proceeds from maturities, redemptions and prepayments of investment securities available for sale 535,227 283,136 Purchases of investment securities available for sale (877,420) (653,977) Purchases of investment securities held to maturity (23,013) (5,659) Proceeds from maturities, redemptions and prepayments of investment securities held to maturity 14,501 26,645 Net increase in federal funds sold and other short-term investments -- (59,000) Net increase in loans made to customers (195,189) (577) Purchases of premises and equipment, net of sales (15,628) (4,893) Net cash used in investing activities (329,083) (272,032) Cash flows from financing activities: Net increase in deposits 284,463 59,351 Net decrease in short-term borrowings (21,679) (233,503) Advances of long-term debt -- 410,000 Repayments of long-term debt (52,042) (52,040) Dividends paid to common shareholders (41,239) (34,938) Purchase of common shares to treasury (65,805) -- Common stock issued, net of cancellations 3,230 1,020 Net cash provided by financing activities 106,928 149,890 Net decrease in cash and cash equivalents (116,153) (40,928) Cash and cash equivalents at January 1 311,850 239,105 Cash and cash equivalents at June 30 $ 195,697 $198,177 Supplemental disclosure of cash flow information: Cash paid during the period for interest on deposits and borrowings $ 82,878 $119,279 Cash paid during the period for federal and state income taxes 28,898 19,988 Transfer of securities from held to maturity to available for sale (1) -- 162,433 Transfer of securities from available for sale to held to maturity (1) -- 50,044 See accompanying notes to consolidated financial statements.
(1) In connection with the Merchants acquisition in January 2001. VALLEY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Consolidated Financial Statements The Consolidated Statements of Financial Condition as of June 30, 2002 and December 31, 2001, the Consolidated Statements of Income for the six and three month periods ended June 30, 2002 and 2001 and the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2002 and 2001 have been prepared by Valley National Bancorp ("Valley") without audit. In the opinion of management, all adjustments (which included only normal recurring adjustments) necessary to present fairly Valley's financial position, results of operations and cash flows at June 30, 2002 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements are to be read in conjunction with the consolidated financial statements and notes thereto included in Valley's December 31, 2001 report on Form 10-K. Certain prior period amounts have been restated to conform to 2002 financial presentations. 2. Earnings Per Share Earnings per share ("EPS") amounts and weighted average shares outstanding reflect the 5 for 4 stock split declared April 10, 2002 to shareholders of record on May 3, 2002 and issued May 17, 2002. 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 six and three months ended June 30, 2002 and 2001.
Six Months Ended Three Months Ended June 30, June 30, 2002 2001 2002 2001 Net income (in thousands) $ 78,496 $ 63,122 $ 39,896 $ 34,559 Basic weighted-average number of shares outstanding 94,437,285 97,483,709 94,009,085 97,547,706 Plus: Common stock equivalents 589,889 533,065 604,788 522,385 Diluted weighted-average number of shares outstanding 95,027,174 98,016,774 94,613,873 98,070,091 Earnings per share: Basic $0.83 $0.65 $0.42 $0.35 Diluted 0.83 0.64 0.42 0.35
Common stock equivalents for both the six and three months ended June 30, 2002 exclude approximately 2 thousand common stock options, because the exercise prices exceeded the average market value. For the six and three months ended June 30, 2001, approximately 378 thousand common stock options were excluded from common stock equivalents because the exercise prices exceeded the average market value. Inclusion of these common stock equivalents would be anti-dilutive to the earnings per share calculation. 3. Recent Developments On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Act increases federal regulation of corporate governance and accounting, creates new federal crimes in connection with corporate activity and expands criminal penalties for existing federal crimes. On July 25, 2002, Valley National Bank (VNB), the wholly-owned subsidiary of Valley, announced the signing of a purchase agreement to acquire Glen Rauch Securities, Inc., a Wall Street brokerage firm specializing in municipal securities with more than $1 billion in assets in its customer accounts. The purchase of Glen Rauch Securities, Inc., will be a cash acquisition with subsequent earn-out payments. Under the terms of the agreement, it is anticipated that management and employees will remain with the firm to assure continuity.* Completion of the transaction is subject to regulatory approval, including approval by the Comptroller of the Currency and the National Association of Securities Dealers and is expected to take place during the third quarter of 2002. Upon completion of the transaction, Glen Rauch Securities will become part of Valley's Financial Services Division.* On July 17, 2002, Valley announced that it will expense the cost of all stock options the company grants beginning with options granted and earnings reported for the calendar year 2002. While the impact of expensing stock options will not be material to Valley's financial statements for 2002, the impact on Valley's net income is expected to increase over time as options vest and new options are granted.* Based on Valley's historical levels of earnings and stock options issuance, the effect of expensing options is expected to amount to approximately $0.02 per diluted share annually when it makes its full impact on earnings at the end of five years.* A recently announced review of accounting principles by the Financial Accounting Standards Board regarding stock options could affect the phase-in of this amount. During the quarter ended June 30, 2002, a two-year Federal investigation culminated in the arrest of an officer of the International Private Banking Department of Merchants Bank and the seizure of 39 accounts that the officer managed. The officer was charged with money laundering in furtherance of narcotic trafficking activity, tax evasion, and unlicensed money transmitting. Valley became aware of the investigation by Federal Law Enforcement Officials during the course of its own due diligence investigation, prior to the acquisition of Merchants Bank. Valley representatives met with the office of the U.S. Attorney and continued the ongoing cooperation with the investigation into the International Private Banking Department. Throughout the course of the investigation, there was never any adverse impact upon Valley, its funds, its customers or its operations. Valley will continue its policy of full and complete cooperation with State and Federal Law Enforcement Authorities in the investigation of criminal conduct that in any way affects the integrity of Valley National Bank and its customers' accounts. On June 18, 2002, Valley announced that it had entered into a Purchase Agreement to acquire the assets of Masters Coverage Corp. ("Masters"), an independent insurance agency. Masters is an all-line insurance agency offering property and casualty, life and health insurance. The purchase of Masters will be a cash acquisition with subsequent earn-out payments. Under the terms of the agreement, Masters' operation will continue as a wholly-owned subsidiary of Valley National Bank and their entire management team and staff are expected to remain with the firm to assure continuity.* The transaction is subject to the satisfaction of certain conditions and is expected to close during the third quarter of this year.* Upon completion of the transaction, Masters will become part of Valley's Financial Services Division.* On May 1, 2002, Valley completed the sale of its subsidiary VNB Financial Services, a Canadian finance company, to State Farm Mutual Automobile Insurance Company for a purchase price equal to Valley's equity in the subsidiary plus a premium of approximately $1.6 million. The subsidiary primarily originated fixed rate auto loans in Canada through a marketing program with State Farm. 4. Comprehensive Income Valley's comprehensive income consists of foreign currency translation adjustments and unrealized gains (losses) on securities available for sale. The following table shows each component of comprehensive income for the six and three months ended June 30, 2002 and 2001.
Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 (in thousands) Net income $ 78,496 $ 63,122 Other comprehensive income, net of tax: Foreign currency: Translation adjustment $ 118 $ (72) Reclassification adjustment for loss realized on sale of Canadian subsidiary 995 -- Net foreign currency 1,113 (72) Unrealized gains on securities: Unrealized holding gains arising during period 19,381 14,496 Reclassification adjustment for gains realized in net income (1,926) (671) Net unrealized gains 17,455 13,825 Other comprehensive income 18,568 13,753 Comprehensive income $ 97,064 $ 76,875 Three Months Ended Three Months Ended June 30, 2002 June 30, 2001 (in thousands) Net income $ 39,896 $ 34,559 Other comprehensive income, net of tax: Foreign currency: Translation adjustment $ 126 $ 273 Reclassification adjustment for loss realized on sale of Canadian subsidiary 995 -- Net foreign currency 1,121 273 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 20,252 (710) Reclassification adjustment for gains realized in net income (1,926) (567) Net unrealized gains (losses) 18,326 (1,277) Other comprehensive income (loss) 19,447 (1,004) Comprehensive income $ 59,343 $ 33,555
5. Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" Valley adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" (SFAS No. 142), effective January 1, 2002. SFAS No. 142 eliminates the amortization of existing goodwill and requires evaluating goodwill for impairment on an annual basis whenever circumstances occur that would reduce the fair value. SFAS No. 142 also requires allocation of goodwill to reporting segments defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". As of June 30, 2002, management identified and evaluated the segments to which goodwill applies and an impairment allowance was not required to be recorded. Management will continue to evaluate the need for an impairment allowance on a quarterly basis. 6. Business Segments The information under the caption "Business Segments" in Management's Discussion and Analysis is incorporated herein by reference. 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, acquisitions, relationships, opportunities, taxation, technology and market conditions. These statements may be identified by an (*) or such forward-looking terminology as "expect", "anticipate", "view", "opportunity", "allow", "continues", "reflects", or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ from those contained in such forward-looking statements include, among others, the following: unanticipated changes in the direction of interest rates, effective income tax rates, loan prepayment assumptions, levels of loan quality and origination volume, relationships with major customers including sources of loans, as well as the effects of economic conditions and legal and regulatory barriers and structure. Valley assumes no obligation for updating any such forward-looking statement at any time. Earnings Summary(2) Net income for the six months ended June 30, 2002 was $78.5 million or $0.83 per diluted share compared with $63.1 million or $0.64 per diluted share for the same period in 2001, an increase of 24.4 percent in net income and 29.7 percent in net income per diluted share. For the six months ended June 30, 2002, the annualized return on average shareholders' equity increased to 23.67 percent from 18.64 percent for the same period in 2001 and the annualized return on average assets increased to 1.85 percent for the six months ended June 30, 2002 from 1.59 percent, for the same period in 2001. For the three months ended June 30, 2002, net income was $39.9 million or $0.42 per diluted share compared with $34.6 million or $0.35 per diluted share for the same period in 2001, an increase of 15.4 percent in net income and a 20.0 percent increase in net income per diluted share. For the three months ended June 30, 2002, the annualized return on average shareholders' equity increased to 24.16 percent from 20.04 percent and the annualized return on average assets increased to 1.87 percent for the three months ended June 30, 2002 from 1.72 percent for the same period in 2001. Valley also presents core earnings data that exclude items that relate to one time non-recurring events.(3) Core earnings for the six months ended June 30, 2002 were $73.3 million or $0.77 per diluted share compared with $67.2 million or $0.69 per diluted share for the same period in 2001, an increase of 9.0 percent in core earnings and an 11.6 percent increase in core earnings per diluted share. Core earnings for the three month period ended June 30, 2002 were $37.8 million or $0.40 per diluted share compared with $34.6 million, or $0.35 per diluted share for the same period in 2001, an increase of 9.5 percent in core earnings and a 14.3 percent increase in core earnings per diluted share. (2) Earnings per share data reflects the 5 for 4 stock split issued on May 17, 2002. (3) Core earnings include gains from sales of investment securities and gains from sales of loans which are considered recurring and part of normal operations. The following table summarizes the significant non-recurring items, net of tax, excluded in core earnings:
Six Months Ended June 30, Three Months Ended June 30, 2002 2001 2002 2001 (in thousands) Net income $ 78,496 $ 63,122 $ 39,896 $ 34,559 Non-recurring items, net of tax: Net one-time non-recurring items 14 -- (316) -- Merger (Merchants New York Bancorp) related charge -- 7,000 -- -- Gain on sale of credit card portfolio -- (2,940) -- -- Income tax expense reduction ** (5,250) -- (1,750) -- Core Earnings $ 73,260 $ 67,182 $ 37,830 $ 34,559
** Due to the restructuring of an existing subsidiary into a Real Estate Investment Trust (REIT). Net Interest Income Net interest income continues to be the largest source of Valley's operating income. For the six month period ended June 30, 2002, net interest income on a tax equivalent basis increased to $182.1 million or 9.2 percent, compared with $166.7 million for the six months ended June 30, 2001. The increase in net interest income is mainly attributed to higher average balances of total interest earning assets, primarily loans and taxable investments in addition to overall lower average interest rates for the period. Net interest margin on a tax equivalent basis increased to 4.55 percent for the six months ended June 30, 2002 compared with 4.39 percent for the six month period ended June 30, 2001. This increase is mainly attributed to Valley's interest bearing liabilities repricing at a faster pace than interest bearing assets in a declining interest rate environment. During 2001, the Federal Reserve decreased short-term interest rates 475 basis points due to general weakness in the economy. The Federal Reserve has not changed interest rates in 2002. There can be no assurances of how and when interest rates will move in the future and the related effect these changes may have on net interest income.* Average total interest earning assets increased $398.0 million or 5.2 percent for the six months ended June 30, 2002 over the same period in 2001. This was mainly the result of increases in average loan balances of $235.6 million or 4.6 percent and investment securities of $188.8 million or 8.1 percent, partly offset by a decrease in average federal funds sold and other short-term investments of $26.4 million or 19.1 percent. Average interest bearing liabilities increased $188.9 million or 3.2 percent for the six months ended June 30, 2002 over the same period in 2001. Average savings deposits increased $255.1 million or 10.8 percent and average time deposits decreased $80.8 million or 3.2 percent. Average short-term borrowings decreased $126.4 million or 40.6 percent and long-term debt, which includes primarily FHLB advances, increased $141.0 million, or 17.6 percent. Average demand deposits increased $163.3 million or 13.0 percent. During 2001, in conjunction with declining interest rates, Valley began to extend maturities of its short-term borrowings by converting to longer term Federal Home Loan Bank advances. The extension of maturities is part of an effort to more closely match a portion of Valley's funding sources with its mortgage portfolio and reduce future interest rate risk.* The average interest rate on total interest earning assets was 6.56 percent for the six months ended June 30, 2002 compared with 7.57 percent for the six months ended June 30, 2001. The average interest rate for loans decreased 117 basis points to 6.83 percent; the average interest rate for taxable investment securities decreased 61 basis points to 6.14 percent; and the average interest rate for federal funds sold and other short-term investments decreased 314 basis points to 1.73 percent. The average interest rate on total interest bearing liabilities was 2.61 percent for the six months ended June 30, 2002 compared with 4.06 percent for the six months ended June 30, 2001. Average interest rates on interest-bearing deposits decreased 162 basis points to 2.12 percent, the average interest rate for short-term borrowings decreased 359 basis points to 1.56 percent and the average interest rate for long-term debt decreased 19 basis points to 5.43 percent. For the three month period ended June 30, 2002, net interest income on a tax equivalent basis increased to $92.9 million or 10.4 percent, compared with $84.2 million for the three months ended June 30, 2001. This can be attributed to an increase of $343.1 million in average interest earning assets, primarily loans and investments, partly offset with a decrease of 77 basis points in the average interest rate earned. These changes were further offset by an increase of $172.2 million in average interest bearing liabilities and a decrease of 126 basis points in the average interest rate paid. The net interest margin on a tax equivalent basis increased to 4.62 percent for the three months ended June 30, 2002 compared with 4.37 percent for the same period in 2001. The following table reflects the components of net interest income for each of the six months ended June 30, 2002 and 2001. ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001 Average Average Average Average Balance Interest Rate Balance Interest Rate (in thousands) Assets Interest earning assets Loans (1)(2) $5,355,424 $182,933 6.83% $ 5,119,820 $ 204,671 8.00% Taxable investments (3) 2,303,560 70,679 6.14 2,119,939 71,572 6.75 Tax-exempt investments(1)(3) 226,426 7,821 6.91 221,222 8,081 7.31 Federal funds sold and other short-term investments 111,555 964 1.73 3,362 4.87 137,970 Total interest earning assets 7,996,965 $262,397 6.56 7,598,951 $ 287,686 7.57 Allowance for loan losses (65,849) (63,259) Cash and due from banks 181,803 184,688 Other assets 324,263 203,672 Unrealized gain on securities available for sale 38,245 13,210 Total assets $8,475,427 $7,937,262 Liabilities and Shareholders' Equity Interest bearing liabilities Savings deposits $2,610,759 $16,720 1.28% $2,355,687 $26,493 2.25% Time deposits 2,408,553 36,585 3.04 2,489,329 64,007 5.14 Total interest bearing deposits 5,019,312 53,305 2.12 4,845,016 90,500 3.74 Short-term borrowings 184,717 1,445 1.56 311,138 8,007 5.15 Long-term debt 940,121 25,537 5.43 799,100 22,448 5.62 Total interest bearing liabilities 6,144,150 80,287 2.61 5,955,254 120,955 4.06 Demand deposits 1,421,508 1,258,189 Other liabilities 46,550 46,442 Capital securities 200,000 -- Shareholders' equity 663,219 677,377 Total liabilities and shareholders' equity $8,475,427 $ 7,937,262 Net interest income (tax equivalent basis) 182,110 166,731 Tax equivalent adjustment (2,883) (3,077) Net interest income $ 179,227 $163,654 Net interest rate Differential 3.95% 3.51% Net interest margin (4) 4.55% 4.39%
(1) Interest income is presented on a tax equivalent basis using a 35 percent federal 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 average interest earning assets. The following table reflects the components of net interest income for each of the three months ended June 30, 2002 and 2001. ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Three Months Ended June 30, 2002 Three Months Ended June 30, 2001 Average Average Average Average Balance Interest Rate Balance Interest Rate (in thousands) Assets Interest earning assets Loans (1)(2) $5,389,510 $ 91,974 6.83% $ 5,122,966 $100,208 7.82% Taxable investments (3) 2,345,559 36,549 6.23 2,189,678 35,961 6.57 Tax-exempt investments(1)(3) 230,963 3,967 6.87 224,212 4,051 7.23 Federal funds sold and other short-term investments 1.78 159,661 1,723 4.32 73,611 327 Total interest earning assets 8,039,643 $132,817 6.61 7,696,517 $ 141,943 7.38 Allowance for loan losses (65,923) (63,122) Cash and due from banks 178,182 182,181 Other assets 345,601 209,617 Unrealized gain on securities available for sale 45,244 18,911 Total assets $8,542,747 $8,044,104 Liabilities and Shareholders' Equity Interest bearing liabilities Savings deposits $2,674,772 $ 8,632 1.29% $2,414,064 $12,688 2.10% Time deposits 2,423,577 18,019 2.97 2,478,493 30,159 4.87 Total interest bearing deposits 5,098,349 26,651 2.09 4,892,557 42,847 3.50 Short-term borrowings 173,841 619 1.42 197,627 2,246 4.55 Long-term debt 924,383 12,640 5.47 934,143 12,685 5.43 Total interest bearing liabilities 6,196,573 39,910 2.58 6,024,327 57,778 3.84 Demand deposits 1,432,362 1,265,039 Other liabilities 53,266 64,873 Capital securities 200,000 -- Shareholders' equity 660,546 689,865 Total liabilities and shareholders' equity $8,542,747 $ 8,044,104 Net interest income (tax equivalent basis) 92,907 84,165 Tax equivalent adjustment (1,460) (1,536) Net interest income $ 91,447 $ 82,629 Net interest rate differential 4.03% 3.54% Net interest margin (4) 4.62% 4.37%
(1) Interest income is presented on a tax equivalent basis using a 35 percent federal 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 average 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
Six Months Ended June 30, Three Months Ended June 30, 2002 Compared with 2001 2002 Compared with 2001 Increase (Decrease) (2) Increase (Decrease) (2) Interest Volume Rate Interest Volume Rate (in thousands) Interest income: Loans (1) $ (21,738) $9,089 $ (30,827) $ (8,234) $ 5,021 $ (13,255) Taxable investments (893) 5,924 (6,817) 588 2,484 (1,896) Tax-exempt investments(1) (260) 187 (447) (84) 120 (204) Federal funds sold and other short-term investments (2,398) (549) (1,849) (1,396) (667) (729) (25,289) 14,651 (39,940) (9,126) 6,958 (16,084) Interest expense: Savings deposits (9,773) 2,620 (12,393) (4,056) 1,255 (5,311) Time deposits (27,422) (2,015) (25,407) (12,140) (654) (11,486) Short-term borrowings (6,562) (2,419) (4,143) (1,627) (243) (1,384) Long-term debt 3,089 3,851 (762) (45) (133) 88 (40,668) 2,037 (42,705) (17,868) 225 (18,093) Net interest income (tax equivalent basis) $15,379 $12,614 $ 2,765 $ 8,742 $ 6,733 $ 2,009
(1) Interest income is adjusted to a tax equivalent basis using a 35 percent federal 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 six and three months ended June 30, 2002 and 2001.
NON-INTEREST INCOME Six Months Ended June 30, Three Months Ended June 30, 2002 2001 2002 2001 (in thousands) Trust and investment services $ 2,370 $ 2,408 $ 1,192 $ 1,197 Service charges on deposit accounts 9,712 9,250 4,827 4,702 Gains on securities transactions, net 2,964 979 2,609 816 Fees from loan servicing 4,913 5,506 2,415 2,821 Credit card fee income 1,456 1,929 784 932 Gains on sales of loans, net 3,342 7,523 1,562 1,886 Bank owned life insurance 3,222 -- 1,806 -- Other 10,486 6,830 5,226 3,388 Total non-interest income $ 38,465 $ 34,425 $ 20,421 $ 15,742
Non-interest income continues to represent a considerable source of income for Valley, representing 12.9 percent of gross income for the six months ended June 30, 2002. Excluding gains on securities transactions, net, total non-interest income increased to $35.5 million for the six months ended June 30, 2002, a 6.1 percent increase compared with the $33.4 million recorded for the six months ended June 30, 2001. For the quarter ended June 30, 2002, total non-interest income excluding gains on securities transactions, net, was $17.8 million or 19.3 percent higher than the $14.9 million recorded for the quarter ended June 30, 2001. For the six and three month periods ended June 30, 2002, service charges on deposit accounts increased $462 thousand or 5.0 percent and $125 thousand or 2.7 percent respectively, compared with the same periods in 2001, due to increases in service fees charged. Gains on securities transactions, net, increased $2.0 million or 202.8 percent to $3.0 million for the six months ended June 30, 2002 compared with $1.0 million for the same period in 2001 and increased $1.8 million for the quarter ended June 30, 2002 compared with the same period in 2001. The majority of the gains were on appreciated equity securities sold in the quarter ended June 30, 2002. Fees from loan servicing decreased $593 thousand or 10.8 percent and $406 thousand or 14.4 percent for the six and three month periods ended June 30, 2002, as compared with the same periods in 2001. This decrease was mainly attributed to a reduction in fee income on serviced mortgages due to heavy refinancing activity as borrowers took advantage of lower interest rates. Gains on the sales of loans,net for the six months ended June 30, 2002 were $3.3 million, a decrease of $4.2 million or 55.6 percent compared with gains of $7.5 million for the six months ended June 30, 2001. This decrease is primarily attributed to the sale of the Shop Rite credit card portfolio resulting in a $4.9 million gain recorded in January 2001. For the quarter ended March 31, 2002, Valley invested an additional $50.0 million in Bank Owned Life Insurance ("BOLI") to help offset the rising cost of employee benefits. This was in addition to the $100.0 million invested during the third quarter of 2001. The investment portfolio was reduced by a like amount during the respective periods to fund these insurance purchases. For the six and three months ended June 30, 2002, income from BOLI of $3.2 million and $1.8 million, respectively, is included in non-interest income. Other non-interest income increased $3.7 million or 53.5 percent to $10.5 million for the six months ended June 30, 2002 compared with $6.8 million for the six months ended June 30, 2001. For the quarter ended June 30, 2002, other non-interest income increased $1.8 million or 54.3 percent compared with the same period in 2001. These increases include an $800 thousand settlement of a lawsuit and a $1.6 million gain from the sale of a subsidiary to State Farm. Non-Interest Expense The following table presents the components of non-interest expense for the six and three months ended June 30, 2002 and 2001.
NON-INTEREST EXPENSE Six Months Ended Three Months Ended June 30, June 30, 2002 2001 2002 2001 (in thousands) Salary expense $ 41,963 $ 38,996 $ 20,882 $ 19,548 Employee benefit expense 9,547 9,544 4,701 4,686 FDIC insurance premiums 549 584 274 292 Occupancy and equipment expense 13,995 15,381 7,118 7,544 Credit card expense 612 905 304 279 Amortization of intangible assets 4,903 3,942 2,714 2,124 Advertising 3,773 2,308 2,335 1,513 Distributions on capital securities 7,865 -- 3,932 -- Merger-related charges -- 9,017 -- -- Other 16,660 14,976 8,301 7,712 Total non-interest expense $ 99,867 $ 95,653 $ 50,561 $ 43,698
Non-interest expense totaled $99.9 million and $50.6 million, respectively, for the six and three months ended June 30, 2002. This represents increases of 15.3 percent and 15.7 percent over the respective 2001 levels (exluding merger-related charges). The efficiency ratio measures a bank's gross operating expense as a percentage of fully-taxable equivalent net interest income and other non-interest income without taking into account security gains and losses and other non-recurring items. Valley's efficiency ratio for the six months ended June 30, 2002 was 45.6 percent, one of the lowest in the industry, compared with an efficiency ratio of 44.4 percent for the same period in 2001. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders.* The largest components of non-interest expense are salaries and employee benefit expense which totaled $51.5 million for the six months ended June 30, 2002 compared with $48.5 million for the same period in 2001, and $25.6 million for the quarter ended June 30, 2002 compared with $24.2 million for the quarter ended June 30, 2001. Valley's full-time equivalent staff remained at 2,126 as of June 30, 2002 and 2001. Salary expense increased $3.0 million or 7.6 percent and $1.3 million or 6.8 percent for the six and three month periods ended June 30, 2002 compared with the same periods in the prior year. These increases are primarily due to business expansion, including adding new branches, partially mitigated by a decrease in back office staff. Occupancy and equipment expense decreased $1.4 million or 9.0 percent to $14.0 million for the six months ended June 30, 2002 and decreased $426 thousand or 5.6 percent to $7.1 million for the three months ended June 30, 2002 compared with the same periods in 2001. These decreases can be attributed to the overall lower cost of repairs, utilities and depreciation expense. Amortization of intangible assets increased $961 thousand or 24.4 percent to $4.9 million for the six months ended June 30, 2002 and increased $590 thousand or 27.8 percent to $2.7 million for the three months ended June 30, 2002 compared with the same periods in 2001. These increases are primarily attributed to higher reserves for the impairment of mortgage servicing rights as a result of increased prepayments on higher interest rate mortgages, partly offset by the elimination of goodwill amortization. An impairment analysis is completed quarterly to determine the adequacy of the mortgage servicing asset impairment reserve. Subsequent to June 30, 2002, mortgage interest rates continued to decline resulting in an increase in residential mortgage refinancing activities. Consequently, management anticipates recording additional impairment reserves during the third quarter of 2002.* Under new accounting rules effective January 1, 2002, amortization of goodwill ceased. As of June 30, 2002, management identified and evaluated the segments to which goodwill applies and an impairment allowance was not required to be recorded. Management will continue to evaluate the need for an impairment allowance on a quarterly basis. Distributions on capital securities consist primarily of amounts required to be paid or accrued on the $200 million of 7.75 percent trust preferred securities issued in November of 2001. The cost for the six months and three months ended June 30, 2002 was $7.9 million and $3.9 million, respectively. During the first quarter of 2001, Valley recorded merger-related charges of $9.0 million related to the acquisition of Merchants. On an after tax basis, these charges totaled $7.0 million or $0.07 per diluted share. These charges include only identified direct and incremental costs associated with this acquisition such as: personnel expenses which include severance payments for terminated directors at Merchants; professional fees which include investment banking, accounting and legal fees; and other expenses which include the disposal of data processing equipment and the write-off of supplies and other assets not considered useful in the operation of the combined entities. The major components of the merger-related charges, consisting of professional fees, personnel and the disposal of data processing equipment, totaled $4.4 million, $3.2 million and $486 thousand, respectively. The significant components of other non-interest expense include data processing, professional fees, postage, telephone and stationery expenses totaling approximately $8.8 million and $7.3 million for the six months ended June 30, 2002 and 2001, respectively. These expenses totaled $4.5 million and $3.9 million for the three months ended June 30, 2002 and 2001, respectively. Income Taxes Income tax expense as a percentage of pre-tax income was 28.7 percent and 30.4 percent for the six and three months ended June 30, 2002, respectively, compared with 35.3 percent and 33.3 percent for the same periods in 2001, respectively. The decrease in the effective tax rate was primarily due to a reduction in income tax expense as a result of the restructuring of an existing subsidiary into a REIT. The effective tax rate for both the six and three months ended June 30, 2002 were positively impacted by non-taxable income from the $155 million investment in BOLI. This decrease was partially offset by additional tax expense being recorded due to the changes in New Jersey's Corporate Business Tax, effective retroactively to January 1, 2002. The effect of these State tax law changes is approximately $1.5 million of additional tax expense per year, or a net income reduction of approximately $0.01 per diluted share. The effective tax rate is expected to continue at approximately 30 percent for the remainder of 2002.* Beginning in 2003, recurring annual benefits from the REIT restructuring are expected to be significantly lower.* Business Segments VNB has four business segments it monitors and reports on to manage its business operations. These segments are consumer lending, commercial lending, investment management and corporate and other adjustments. Lines of business and actual structure of operations determine each segment. Each is reviewed routinely for its asset growth, contribution to pretax net income and return on assets. Expenses related to the branch network, all other components of retail banking, along with the back office departments of the bank are allocated from the corporate and other adjustments segment to each of the other three business segments. The financial reporting for each segment contains allocations and reporting in line with VNB's operations, which may not necessarily be compared with 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 six months ended June 30, 2002 and 2001.
Six Months Ended June 30, 2002 (in thousands) Corporate Consumer Commercial Investment and other Lending Lending Management adjustments Total Average interest earning assets $ 2,680,149 $ 2,713,525 $ 2,603,291 $ -- $ 7,996,965 Income (loss) before income taxes $ 40,601 $ 36,558 $ 36,899 $ (3,912) $ 110,146 Return on average interest earning assets (pre-tax) 3.03% 2.69% 2.83% --% 2.75% Six Months Ended June 30, 2001 (in thousands) Corporate Consumer Commercial Investment and other Lending Lending Management adjustments Total Average interest earning assets $ 2,683,360 $ 2,468,659 $ 2,446,932 $ -- $ 7,598,951 Income (loss) before income taxes $ 36,823 $ 40,137 $ 28,696 $ (8,165) $ 97,491 Return on average interest earning assets (pre-tax) 2.74% 3.25% 2.35% --% 2.57%
Consumer Lending The return on average interest earning assets before taxes increased 29 basis points to 3.03 percent for the six months ended June 30, 2002 compared with 2.74 percent for the six months ended June 30, 2001. Average interest earning assets remained unchanged at $2.7 billion. Average interest rates on consumer loans decreased 75 basis points and the cost of funds decreased 117 basis points. Income before income taxes increased $3.8 million to $40.6 million from $36.8 million, primarily as a result of the increase in net interest margin, offset by an increase in operating expenses. Commercial Lending The return on average interest earning assets before taxes decreased 56 basis points to 2.69 percent for the six months ended June 30, 2002 compared with 3.25 percent for the six months ended June 30, 2001. Average interest earning assets increased $244.9 million as a result of an increased volume of loans. Decreases in the prime lending rate resulted in a 158 basis point reduction in commercial loan rates, primarily due to a portion of loans tied to the prime rate index. The cost of funds also decreased by 117 basis points. Income before income taxes decreased $3.6 million mainly as a result of a decreased margin, a higher provision for loan losses and a larger allocation of the internal expense transfer due to increased average volume. Investment Management The return on average interest earning assets before taxes increased to 2.83 percent for the six months ended June 30, 2002 compared with 2.35 percent for the six months ended June 30, 2001. The yield on interest earning assets decreased 71 basis points to 6.01 percent as a result of larger prepayments and lower yields on new investments and the cost of funds decreased 117 basis points to 2.01 percent. Average interest earning assets increased $156.4 million to $2.6 billion. Income before income taxes increased $8.2 million as a result of higher outstanding average earning assets and the decrease in the cost of funds in excess of the decrease in interest yield. Corporate and Segment The corporate segment represents income and expense items not directly attributable to a specific segment which may include non-recurring items such as: merger-related charges, non-recurring gains on sales of loans and service charges on deposit accounts. The loss before taxes for the corporate segment was $3.9 million for the six months ended June 30, 2002, compared with a loss before taxes of $8.2 million for the six months ended June 30, 2001. The decrease in the loss before taxes is primarily due to the pre-tax merger related charges of $9.0 million incurred in the six months ended June 30, 2001 partly offset by $7.9 million distributions on capital securities. The following table represents the financial data for the three months ended June 30, 2002 and 2001.
Three Months Ended June 30, 2002 (in thousands) Corporate Consumer Commercial Investment and other Lending Lending Management adjustments Total Average interest earning assets $ 2,697,783 $ 2,732,105 $ 2,609,755 $ -- $ 8,039,643 Income (loss) before income taxes $ 20,469 $ 17,460 $ 20,138 $ (734) $ 57,333 Return on average interest-earning assets (pre-tax) 3.03% 2.56% 3.09% --% 2.85% Three Months Ended June 30, 2001 (in thousands) Corporate Consumer Commercial Investment and other Lending Lending Management adjustments Total Average interest earning assets $ 2,637,862 $ 2,513,487 $ 2,545,168 $ -- $7,696,517 Income (loss) before income taxes $ 19,253 $ 19,398 $ 14,775 $ (1,588) $ 51,838 Return on average interest earning assets (pre-tax) 2.92% 3.09% 2.32% --% 2.69%
Consumer Lending The consumer lending segment had a return on average interest earning assets before taxes of 3.03 percent for the three months ended June 30, 2002 compared with 2.92 percent for the three months ended June 30, 2001. Average interest earning assets increased $59.9 million, primarily from higher volume of home equity and automobile loans. Average interest rates on consumer loans decreased 74 basis points, while the cost of funds decreased 101 basis points. Income before income taxes increased $1.2 million to $20.5 million primarily as a result of the increase in net interest margin and increased volume. Commercial Lending The return on average interest earning assets before taxes decreased 53 basis points to 2.56 percent for the three months ended June 30, 2002, compared with 3.09 percent for the three months ended June 30, 2001. Average interest earning assets increased $218.6 million as a result of increased volume of loans. Interest rates on commercial loans decreased by 138 basis points and the cost of funds decreased by 101 basis points. Income before income taxes decreased by $1.9 million, mainly as a result of the decreased margin, higher provision for loan losses, from increases in operating expenses and a larger allocation of the internal expense transfer resulting from increased average volume. Investment Management The return on average interest earning assets before taxes increased 77 basis points to 3.09 percent for the three months ended June 30, 2002 compared with 2.32 percent for the three months ended June 30, 2001. The yield on interest earning assets decreased by 19 basis points to 6.27 percent, and the cost of funds decreased 101 basis points. Average interest earning assets increased by $64.6 million and income before income taxes increased $5.4 million primarily as a result of a lower cost of funds and increased average balance of investments. Corporate Segment The corporate segment represents income and expense items not directly attributable to a specific segment which may include non-recurring items such as: merger-related charges, gain on sales of loans and service charges on deposit accounts. The loss before taxes for the corporate segment was $734 thousand for the three months ended June 30, 2002, compared with a loss of $1.6 million for the three months ended June 30, 2001. 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"). ALCO establishes policies that monitor and coordinate Valley's sources, uses and pricing of funds as well as interest earning asset pricing and volume. 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. There was no material change in the results of the model at June 30, 2002, compared with December 31, 2001. 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 totaled $2.5 billion at June 30, 2002 and December 31, 2001. This represents 30.1 percent and 31.7 percent of earning assets and 28.3 percent and 29.6 percent of total assets at June 30, 2002 and December 31, 2001, 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 $5.3 billion for the six months ended June 30, 2002 and $5.1 billion for the year ended December 31, 2001, representing 66.5 percent and 66.8 percent, respectively, of average earning assets. Short-term and long-term borrowings through federal funds lines, repurchase agreements, Federal Home Loan Bank ("FHLB") advances, lines of credit and large dollar certificates of deposit, generally those over $100 thousand, are used as supplemental funding sources. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. For the six months ended June 30, 2002 there were $282.4 million of proceeds from the sales of investment securities available for sale and proceeds of $549.7 million were generated from investment maturities, redemptions and prepayments of principal. Purchases of investment securities for the six months ended June 30, 2002 were $900.4 million. Short-term borrowings and certificates of deposit over $100 thousand amounted to $1.3 billion, on average, for the six months ended June 30, 2002 and the year ended December 31, 2001. Valley's recurring cash requirements consist primarily of dividends to shareholders and distributions on trust preferred securities. This cash need is routinely satisfied by dividends collected from its subsidiary bank along with cash and investments owned. Projected cash flows from these sources 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 these purchases of shares has been met by using its own funds, dividends received from its subsidiary bank as well as borrowed funds and the proceeds from the issuance of $200 million trust preferred securities. At June 30, 2002, Valley maintained a floating rate line of credit with a third party in the amount of $35 million, of which none was drawn. This line is available for general corporate purposes and expires June 13, 2003. Borrowings under this facility, if any, are collateralized by equity securities of no less than 120 percent of the loan balance. As of June 30, 2002, Valley had $2.3 billion of securities available for sale recorded at their fair value, compared with $2.2 billion at December 31, 2001. As of June 30, 2002, the investment securities available for sale had an unrealized gain of $38.2 million, net of deferred taxes, compared with $20.8 million, net of deferred taxes, at December 31, 2001. This change was primarily due to an increase in prices resulting from a decreasing interest rate environment. These securities are not considered trading account securities, which may be sold on a continuous basis, but rather, are securities which may be sold to meet the various liquidity and interest rate requirements of Valley. Loan Portfolio As of June 30, 2002, total loans were $5.5 billion, compared with $5.3 billion at December 31, 2001. The following table reflects the composition of the loan portfolio as of June 30, 2002 and December 31, 2001.
LOAN PORTFOLIO June 30, December 31, 2002 2001 (in thousands) Commercial $ 1,090,045 $ 1,080,852 Total commercial loans 1,090,045 1,080,852 Construction 201,341 206,789 Residential mortgage 1,310,485 1,323,877 Commercial mortgage 1,441,810 1,365,344 Total mortgage loans 2,953,636 2,896,010 Home equity 428,805 398,102 Credit card 11,220 12,740 Automobile 903,404 842,247 Other consumer 102,753 101,856 Total consumer loans 1,446,182 1,354,945 Total loans $5,489,863 $5,331,807 As a percent of total loans: Commercial loans 19.9% 20.3% Mortgage loans 53.8 54.3 Consumer loans 26.3 25.4 Total 100.0 100.0%
The largest increases in the loan portfolio were in commercial mortgage loans, home equity loans and automobile loans. Commercial mortgage loans increased $76.5 million or 5.6 percent to $1.4 billion, home equity loans increased $30.7 million or 7.7 percent to $428.8 million and automobile loans increased $61.2 million or 7.3 percent to $903.4 million. On May 1, 2002, Valley sold its Canadian finance subsidiary, VNB Financial Services with automobile loans totaling $24.1 million, to State Farm Mutual Automobile Insurance. Despite this sale, Valley has been able to expand its automobile lending program through increased indirect activity. Automobile lending increased 9.4% or $78.0 million in the second quarter of 2002 compared to the first quarter. Excluding the sale to State Farm, automobile lending would have increased 12.4% or $102.1 million in the second quarter 2002. Automobile loan growth can be negatively impacted by manufacturing based incentives such as zero percent financing and therefore, Valley cannot guarantee the same performance in future periods.* Newly originated conforming residential mortgage loans with low long-term fixed rates are being sold into the secondary market. Excluding these sales of approximately $127.7 million, residential mortgages would have increased 8.6 percent or $114.3 million. 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 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 $19.6 million at June 30, 2002, compared with $18.8 million at December 31, 2001, an increase of $741 thousand. Non-performing assets at June 30, 2002 and December 31, 2001, amounted to 0.36 percent and 0.35 percent of loans and OREO, respectively. Loans 90 days or more past due and not included in the non-performing category totaled $10.2 million at June 30, 2002, compared with $10.5 million at December 31, 2001. These loans are primarily 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 $4.2 million at June 30, 2002 and $3.8 million at December 31, 2001, respectively. Total loans past due in excess of 30 days were 1.05 percent of all loans at June 30, 2002 compared with 1.09 percent at June 30, 2001 and 1.30 percent at December 31, 2001. The following table sets forth non-performing assets and accruing loans which were 90 days or more past due as to principal or interest payments on the dates indicated, in conjunction with asset quality ratios for Valley. LOAN QUALITY June 30, December 31, 2002 2001 (in thousands) Loans past due in excess of 90 days and still accruing $ 10,216 $10,456 Non-accrual loans $ 19,553 $18,483 Other real estate owned $ -- $ 329 Total non-performing assets $ 19,553 $18,812 Troubled debt restructured loans $ 866 $ 891 Non-performing loans as a % of loans 0.36% 0.35% Non-performing assets as a % of loans plus other real estate owned 0.36% 0.35% Allowance as a % of loans 1.17% 1.20%
At June 30, 2002, the allowance for loan losses totaled $64.3 million, relatively unchanged from $63.8 million at December 31, 2001. The allowance is adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $7.2 million and $3.9 million for the six and three months ended June 30, 2002 compared with $4.9 million and $3.4 million for the six and three months ended June 30, 2001, respectively. The allowance for loan losses is maintained at a level estimated to absorb probable loan losses of the loan portfolio.* The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. VNB's methodology for evaluating the appropriateness of the allowance consists of several significant elements, which include the allocated allowance, specific allowances for identified problem loans, portfolio segments and the unallocated allowance. The allowance also incorporates the results of measuring impaired loans as called for in Statement of Financial Accounting Standards (SFAS) 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." Historically, Valley has made provisions based on net charge-off levels. In the current economic conditions, that information is applied to the composition of the loan portfolio to provide adequate levels in the allowance for loan losses. The provisions charged to operations for the six and three months ended June 30, 2002 were $7.7 million and $4.0 million, respectively, compared with $4.9 million and $2.8 million for the same periods in 2001. Capital Adequacy A significant measure of the strength of a financial institution is its shareholders' equity. At June 30, 2002, shareholders' equity totaled $673.1 million or 7.7 percent of total assets, compared with $678.4 million or 7.9 percent at year-end 2001. On August 21, 2001 Valley's Board of Directors authorized the repurchase of up to 10,000,000 shares of the Company's outstanding common stock. Purchases may be made from time to time in the open market or in privately negotiated transactions generally not exceeding prevailing market prices. Reacquired shares are held in treasury and are expected to be used for general corporate purposes. As of June 30, 2002, Valley had repurchased approximately 5.2 million shares of its common stock at an average cost of $25.32 per share. Included in shareholders' equity as components of accumulated other comprehensive income at June 30, 2002 was a $38.2 million unrealized gain on investment securities available for sale, net of tax, as compared with an unrealized gain of $20.8 million at December 31, 2001. Risk-based guidelines define a two-tier capital framework. Tier I capital consists of common shareholders' equity and trust preferred securities, less disallowed intangibles and adjusted to exclude unrealized gains and losses, net of tax. Total risk-based capital consists of Tier I capital and the allowance for loan losses up to 1.25 percent of risk-adjusted assets. Risk-adjusted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. In November 2001, Valley sold $200.0 million of trust preferred securities, which qualify as Tier I capital, within regulatory limitations. Including these securities, at June 30, 2002, Valley's capital position under risk-based capital guidelines was $822.8 million or 13.0 percent of risk-weighted assets for Tier 1 capital and $887.1 million or 14.0 percent for Total risk-based capital. The comparable ratios at December 31, 2001 were 14.1 percent for Tier 1 capital and 15.2 percent for Total risk-based capital. At June 30, 2002 and December 31, 2001, Valley was in compliance with the leverage requirement having Tier 1 leverage ratios of 9.7 percent and 10.3 percent, respectively. Valley's ratios at June 30, 2002 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 $7.20 at June 30, 2002 compared with $7.10 per share at December 31, 2001. The primary source of capital growth is through retention of earnings. Valley's rate of earnings retention, derived by dividing undistributed earnings by net income, was 48.6 percent for the six months ended June 30, 2002, compared with 44.6 percent for the six months ended June 30, 2001. Cash dividends declared amounted to $0.44 per share, for the six months ended June 30, 2002, equivalent to a dividend payout ratio of 51.4 percent, compared with 55.4 percent for the same period in 2001. Valley declared a five for four stock split on April 10, 2002, to shareholders of record on May 3, 2002, issued May 17, 2002. The Board also approved an increase of the annual dividend rate to $0.90 per share, compared with $0.85 per share, on an after split basis. The increased cash dividend, which is payable quarterly began on July 1, 2002. 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 Pronouncements Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" (SFAS No. 142), was issued by the Financial Accounting Standards Board on June 27, 2001. SFAS No. 142 eliminates the amortization of existing goodwill and requires evaluating goodwill for impairment on an annual basis whenever circumstances occur that would reduce the fair value. SFAS No. 142 also requires allocation of goodwill to reporting segments defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 did not have a material impact on the consolidated financial statements and related disclosures. Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), was issued by the Financial Accounting Standards Board on October 3, 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that Statement. The Statement is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the consolidated financial statements. Statement of Financial Accounting Standards No. 145, "Rescission of SFAS: No.'s 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections" was issued by the FASB in April of 2002. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt" and its amendment SFAS No. 64 "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements", are effective for fiscal years beginning after May 15, 2002. SFAS No. 145 also rescinds SFAS No. 44 "Accounting for Intangible Assets of Motor Carriers", and amends SFAS No. 13 "Accounting for Leases" and makes various "Technical Corrections" to existing accounting pronouncements. Valley anticipates that the adoption of SFAS No. 145 will not have a material impact on the consolidated financial statements.* In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. Valley anticipates that the adoption of SFAS No. 146 will not have a material impact on the consolidated financial statements.* Item 3. Quantitative and Qualitative Disclosures About Market Risk See page 22 for a discussion of interest rate sensitivity. PART II Item 4. Submission of Matters to a Vote of Security Holders (a) On April 10, 2002, the Annual Meeting of Shareholders of Valley National Bancorp was held. The Shareholders voted upon the election of 18 persons, named in the Proxy Statement, to serve as directors of the Corporation for the ensuing year. All directors were elected and there was no solicitation in opposition to management's nominees as listed in the Proxy Statement. The following is a list of directors elected at the Annual Meeting with the number of votes "For" and "Withheld". There were no abstentions. Name Number of Votes for Withheld Andrew B. Abramson 64,741,696 841,608 Charles J. Baum 64,701,963 881,340 Pamela Bronander 64,935,830 647,473 Joseph Coccia, Jr 64,924,449 658,853 Harold P. Cook, III 64,913,603 669,699 Graham O. Jones 64,604,057 979,246 Walter H. Jones, III 64,727,253 856,050 Gerald Korde 64,936,869 646,434 Gerald H. Lipkin 64,739,562 843,741 Robinson Markel 64,607,365 975,939 Robert E. McEntee 64,729,418 853,885 Richard S. Miller 64,739,131 844,171 Robert Rachesky 64,703,235 880,066 Barnett Rukin 64,736,850 846,452 Peter Southway 64,822,861 760,442 Richard F. Tice 64,892,509 690,791 Leonard Vorcheimer 64,640,427 942,875 Spencer B. Witty 64,779,994 803,307
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Title 99.1 Certification of Chief Executive Officer Pursuant to U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer Pursuant to U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K 1. Filed April 15, 2002, to report that the Company issued a press release on April 10, 2002 announcing the declaration of the Company's 5 for 4 stock split on the Company's outstanding common stock payable on May 17, 2002. 2. Filed April 23, 2002, to report a change in the Company's Certifying Accountants on April 18, 2002 from KPMG LLP to Ernst & Young LLP. 3. Form 8-K/A filed April 29, 2002, to amend the Company's Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on April 23, 2002. 4. Filed June 18, 2002, to report that the Company issued a press release on June 18, 2002 announcing that the Company entered into an agreement for the acquisition of Masters Coverage Corp. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VALLEY NATIONAL BANCORP (Registrant) Date: August 13, 2002 /s/ GERALD H. LIPKIN CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: August 13, 2002 /s/ ALAN D. ESKOW EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Exhibit 99.1 VALLEY NATIONAL BANCORP AND CONSOLIDATED SUBSIDIARIES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This Certification is to accompany the Quarterly Report of Valley National Bancorp (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission (the "Report"). I, Gerald H. Lipkin, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/__________________________________ GERALD H. LIPKIN CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, VALLEY NATIONAL BANCORP AUGUST 13, 2002 Exhibit 99.2 VALLEY NATIONAL BANCORP AND CONSOLIDATED SUBSIDIARIES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This Certification is to accompany the Quarterly Report of Valley National Bancorp (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission (the "Report"). I, Alan D. Eskow, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/_______________________________ ALAN D. ESKOW EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, VALLEY NATIONAL BANCORP AUGUST 13, 2002