-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, UqAPz3DDQ4bEZAQTotiDWaqHxmUJ1t0rZNt/98u2AQKEAMFTh68uZ8qQOEthAeWH yU45LqTrcnfk+stzfOjldg== 0000714310-94-000014.txt : 19940823 0000714310-94-000014.hdr.sgml : 19940823 ACCESSION NUMBER: 0000714310-94-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALLEY NATIONAL BANCORP CENTRAL INDEX KEY: 0000714310 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 222477875 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11277 FILM NUMBER: 94543915 BUSINESS ADDRESS: STREET 1: 1445 VALLEY RD CITY: WAYNE STATE: NJ ZIP: 07474 BUSINESS PHONE: 2013058800 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period Ended June 30, 1994 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________. Commission File Number 0-11179 VALLEY NATIONAL BANCORP (Exact name of registrant as specified in its charter) New Jersey (State or other Jurisdiction of incorporation or organization) 22-2477875 (I.R.S. Employer Identification No.) 1445 Valley Road, Wayne, New Jersey 07474-0558 (Address of principal executive offices) (Zip Code) (201)305-8800 (Registrant's Telephone Number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XXX NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock (No par value), of which 27,043,653 shares were outstanding as of July 29, 1994. VALLEY NATIONAL BANCORP INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition 3 June 30, 1994 and December 31, 1993 (Unaudited) Consolidated Statements of Income 4 Six and Three Months Ended June 30, 1994 and 1993 (Unaudited) Consolidated Statements of Cash Flows 5 Six Months Ended June 30, 1994 and 1993 (Unaudited) Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 7 - 11 Financial Condition and Results of Operations SIGNATURES 12 - 2 - VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) ($ in thousands) June 30, December 31, 1994 1993 Assets Cash and due from banks $ 114317 $ 67455 Federal funds sold 42600 88050 Investment securities held to maturity, fair value of $856,388 and $960,813 in 1994 and 1993, respectively 874100 939993 Investment securites available for sale, fair value of $448,818 in 1993 430176 441482 Loans, net of unearned income 1958692 1802000 Less: Allowance for possible loan losses -35743 -35205 Loans, net 1922949 1766795 Premises and equipment, net 40274 40248 Due from customers on acceptances outstanding 1594 1192 Accrued interest receivable 23106 23650 Other assets 52429 44637 Total assets $ 3501545 $ 3413502 Liabilities Deposits: Non-interest bearing deposits $ 415004 $ 408605 Interest bearing: Savings deposits 1621764 1637381 Time deposits 1102128 1033771 Total deposits 3138896 3079757 Federal funds purchased and securities sold under repurchase agreements 56503 35110 Treasury tax and loan account 5953 7834 Bank acceptances outstanding 1594 1192 Accrued expenses and other liabilities 22747 22514 Other borrowings 2466 2667 Total liabilities 3228159 3149074 Shareholders' Equity Common stock, no par value, authorized 37,537,500 shares, issued 27,121,647 shares in 1994 and 24,529,552 in 1993 15112 8660 Surplus 115150 46438 Retained earnings 154155 211296 Unrealized loss on investment securities available for sale -9065 - - 275352 266394 Cost of shares in treasury (113,003 common shares in 1994 and 1993) -1966 -1966 Total shareholders' equity 273386 264428 Total liabilities and shareholders' equity $ 3501545 $ 3413502 See accompanying notes to consolidated financial statements. - 3 - VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($ in thousands except for per share data) Six Months Ended June 30, June 30, Interest Income 1994 1993 1994 1993 Loans, including fees $ 72121 $ 65491 $ 36616 $ 33079 Loans held for sale 473 - - 151 - - Investment securities held to maturity Tax-exempt 6974 6089 3627 3032 Dividends 30 40 15 18 Investments securities available for sale Taxable 10878 10110 5542 5202 Dividends 43 18 24 9 Federal funds sold and other short term investments 647 551 355 269 Total Interest Income 111182 110499 56032 55270 Interest Expense Savings deposits 19397 20112 9900 9950 Time deposits 21379 23993 11056 11709 Federal funds purchased and securities sold under repurchase agreements 501 361 276 191 Other short-term borrowings 91 81 52 39 Other borrowings 10 338 5 170 Total Interest Expense 41378 44885 21289 22059 Net interest income 69804 65614 34743 33211 Provision for possible loan losses 1800 3500 900 2000 Net interest income after provision for possible loan losses 68004 62114 33843 31211 Non-Interest Income Fees from trust services 374 340 194 180 Service charges on deposit accounts 2868 2469 1472 1307 Net gains on securities transactions 3964 5574 622 2302 Fees from mortgage servicing 1696 2178 851 923 Gains on sales of loans 240 775 0 318 Other 2377 2242 1181 1261 Total Non-Interest Income 11519 13578 4320 6291 Non-Interest Expense Salaries and other compensation 13580 12268 6796 6211 Employee benefits expense 3623 3269 1838 1678 FDIC insurance premiums 3429 3339 1715 1686 Occupancy and equipment expense 5536 4648 2750 2293 Amortization of intangible assets 1512 2383 627 1425 Other 8104 7514 4244 4041 Total Non-Interest Expense 35784 33421 17970 17334 Income before income taxes 43739 42271 20193 20168 Income tax expense 14766 14552 6711 7101 Income before cumulative effect of accounting change 28973 27719 13482 13067 Cumulative effect of accounting change - - -402 - - - - Net Income $ 28973 $ 27317 $ 13482 $13067 Per share data: Income before cumulative effect of accounting change $1.08 $1.06 $0.5 $0.5 Cumulative effect of accounting change 0 -0.02 0 0 Net Income $1.08 $1.04 $0.5 $0.5 Weighted average shares outstanding 26940198 26298758 26990965 26361555 See accompanying notes to consolidated financial statements. - 4 - VALLEY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in thousands) Six Months Ended June 30, 1994 1993 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangible assets 3766 4236 Amortization of compensation costs pursuant to long term stock incentive plan 143 124 Provision for possible loan losses 1800 3500 Net amortization(accretion) of premiums and discounts 3455 2533 Net deferred income tax benefit -4300 -1118 Net gains on securities transactions -3964 -5574 Gain on sale of loans -240 -775 Net increase(decrease) in unearned income -65 219 Proceeds from recoveries on charged-off loans 783 668 Net decrease in accrued interest receivable and other assets 2581 5542 Net increase(decrease) in accrued expenses and other liabilities 233 -7357 Net cash provided by operating activities: 33165 29315 Cash flows from investing activities: Cash received pursuant to acquisitios - - 7566 Proceeds from maturing investment securities held to maturity 151669 166551 Proceeds from sales of investment securities held to maturity 41084 - - Purchases of investment securities held to maturity -129232 -180071 Purchases of mortgage servicing rights -556 -10 Proceeds from sales of investment securities held for sale 157866 184050 Proceeds from maturing investment securities held for sale 28162 4711 Purchases of investment securities held for sale -187391 -133826 Net decrease in federal funds sold 45450 53400 Net increase in loans made to customers -158432 -98209 Purchases of premises and equipment -2280 -5768 Net increase in due from customers on acceptances outstanding -402 -286 Net cash used in investing activities: -54062 -1892 Cash flows from financing activities: Net increase(decrease) in deposits 59139 -11129 Net increase(decrease) in federal funds purchased and other short term borrowings 19512 -1970 Net increase in bank acceptances outstanding 402 286 Dividends paid to common shareholders -12874 -10035 Addition of common shares to treasury - - -655 Common stock issued, net of cancellations 1781 1426 Repayments of other borrowings -201 - - Net cash provided by(used in) financing activities 67759 -22077 Net increase in cash and due from banks 46862 5346 Cash and due from banks at January 1 67455 89695 Cash and due from banks at June 30 $ 114317 $ 95041 Cash paid during the period for: Interest on deposits and other borrowings $ 41308 $ 46061 Federal and state income taxes $ 16000 $ 17273 See accompanying notes to consolidated financial statements - 5 - VALLEY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Consolidated Financial Statements The Consolidated Statements of Financial Condition as of June 30, 1994, the Consolidated Statements of Income for the six and three month periods ended June 30, 1994 and 1993 and the Consolidated Statements of Cash Flows for the six month periods ended June 30, 1994 and 1993 have been prepared by Valley National Bancorp ("Valley"), without audit. In the opinion of management, all adjustments (which included only normal recurring adjustments) necessary to present fairly Valley's financial position, results of operations, and cash flows at June 30, 1994 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These consolidated financial statements are to be read in conjunction with the financial statements and notes thereto included in Valley's December 31, 1993 Annual Report to Shareholders. 2. Earnings Per Share All share and per share amounts have been restated to reflect the 10% stock dividend declared March 22, 1994 to shareholders of record on April 15, 1994 and payable May 3, 1994. - 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Earnings Summary Valley National Bancorp's (Valley) net income for the three and six month period ending June 30, 1994 was $13.5 million and $29.0 million, or $0.50 and $1.08 per share, respectively (the 1993 per share amounts have been restated to give effect to a 10% stock dividend declared March 22, 1994 to shareholders of record April 15, 1994 and payable May 3, 1994). This compares with $13.1 million and $27.3 million or $0.50 and $1.04 per share for the same periods in 1993. The increase in net income is largely attributable to an increase in net interest income of $1.5 million and $4.2 million or 4.6% and 6.4% over the same periods in 1993. A reduction in the provision for possible loan losses of $1.1 million and $1.7 million for the three and six month periods ending June 30, 1994 as compared to the same periods in 1993, was substantially offset by decreases in securities gains, decreases in gains from the sale of mortgage loans and decreases in mortgage servicing income. The annualized return on average assets decreased to 1.68% from 1.72% while the annualized return on average equity decreased to 21.0% from 23.4%, for the six months ended June 30, 1994 and 1993, respectively. Book value per share amounted to $10.12 at June 30, 1994 compared with $9.24 per share at June 30, 1993. Merger Activity On July 5, 1994, Valley entered into a letter of intent to acquire Rock Financial Corporation, holding company of Rock Bank. Rock Bank, a commercial bank headquartered in North Plainfield, New Jersey, with total assets at $190 million and five branches, is a preferred SBA lender, which will introduce a new line of business to Valley. A definitive merger agreement is expected to be signed during August, 1994 and the merger is expected to take place by the end of 1994 or early 1995 at the latest. Net Interest Income Net interest income on a fully tax equivalent basis ("FTE") increased by $1.9 million and $4.8 million or 5.4% and 6.9%, respectively, for the quarter and six months ended June 30, 1994 compared to the same periods in 1993. The increase was due primarily to the decrease in interest rates on interest bearing deposit accounts and increased loan volume. Average interest earning assets increased $244.1 million during the six months ended June 30, 1994, or 8.1% over the 1993 amount for the same period, which includes approximately $207.7 million from the Peoples Bank, N.A. ("Peoples") merger. The average balance of all investment securities for the six month period ended June 30, 1994, including those available for sale totalled $1.34 billion, and includes approximately $47.5 million from Peoples. This amount decreased by $62.0 million or 4.4% over the 1993 average balance to fund new loans. Loan demand continued to increase, especially commercial mortgage loans and various types of consumer loans causing the average balance of all loans to increase by $301.6 million or 19.3% at June 30 1994 compared to June 30 1993, including $139.3 million from Peoples. The yield on loans decreased 60 basis points from June 30, 1993 to June 30, 1994, offsetting the increase in volume of new loans. Average interest-bearing liabilities grew 5.4% or $140.4 million including $164.1 million from Peoples during the six months ended June 30, 1994 over the prior year. Average savings deposit balances increased $165.6 million or 11.4% including the $110.5 million from Peoples during the six months ended June 30, 1994 over June 30, 1993, while average time deposits decreased $24.4 million or 2.2% during the same period including the $53.6 million from Peoples. Average demand deposits during 1994 continued to grow and increased by $78.2 million or 23.6% over the 1993 six month average balance, of which approximately $42.3 million was from the Peoples merger. The net interest margin decreased to 4.51% and 4.56% for the second quarter and six month period ended June 30, 1993 from 4.65% and 4.61% for the same period in 1993 and was mainly the result of changes in market interest rates. The yield on average earning assets declined 45 basis points from 7.56% for the three months ended June 30, 1993 to 7.11% for the three months ended June 30, 1994, while the cost of interest-bearing liabilities dropped 31 basis points, from 3.39% to 3.08% for the same periods. For the six month period ended June 30, 1994 the yield on average earning assets - 7 - declined 50 basis points from 7.61% to 7.11% over 1993, while the cost of interest bearing liabilities dropped 43 basis points from 3.46% to 3.03% during the same period. The decrease in the net interest margin of 5 basis points for the six months ended June 30, 1994 was offset by the increased amount of average earning assets over average interest-bearing liabilities causing net interest income to increase. Non-Interest Income Non-interest income continues to represent a considerable source of income for Valley. Excluding gains on securities transactions, total non-interest income amounted to $3.7 and $7.6 million for the quarter and six months ended June 30, 1994 compared with $4.0 and $8.0 million for the same period in 1993. Service charges on deposit accounts increased $165 thousand or 12.6% and $399 thousand or 16.2% for the quarter and six months ended June 30, 1994 over the comparable period in 1993. An expanded customer base and the related volume of transactions generated most of the increase to service charges. Fees from mortgage servicing decreased by $72 thousand or 7.8% for the second quarter ending June 30, 1994 compared to 1993, while decreasing $482 thousand or 22.1% for the six months ended June 30, 1994 over the same 1993 period. At June 30, 1994 VNB Mortgage Services, Inc. ("MSI") serviced a total of $1.12 billion of loans, of which $494.0 million are serviced for Valley National Bank ("VNB"). The portfolio declined during the second quarter of 1994 as a result of payments, which were partially offset by Valley's loan origination volume added to the portfolio, causing the decline in mortgage servicing revenue. Other income totalled $1.2 and $2.4 million, respectively, for the quarter and six month periods ended June 30, 1994 compared with $1.3 and $2.2 million for the same periods in 1993. The decrease of 6.4% for the second quarter ended June 30, 1994 was mainly caused by the recording of an unrealized loss on loans held for sale of $271 thousand. There were no gains on the sale of loans and $240 thousand of gains, during the quarter and six months ending June 30, 1994 as compared to $318 thousand and $775 thousand during the same period in 1993. Net gains on securities transactions decreased $1.7 million and $1.6 million for the quarter and six months ended June 30, 1994 to $622 thousand and $4.0 million, respectively, compared with $2.3 million and $5.6 million, respectively, for the same periods in 1993. Non-Interest Expense Non-interest expense totalled $18.0 and $35.8 million for the quarter and six months ending June 30, 1994, $636 thousand or 3.7% and $2.4 million or 7.1% above the same periods in 1993. The largest component of non-interest expense is salaries and employee benefit expense which totalled $8.6 million and $17.2 million for the quarter and six months ended June 30, 1994 compared to $7.9 million and $15.5 million in 1993, an increase of $745 thousand or 9.4% and $1.7 million or 10.7% over the same 1993 periods. This increase was attributable to increased salaries mostly from expanded operations and the increased cost of employee benefits. Occupancy and equipment expense increased by $457 thousand or 19.9% and $888 thousand or 19.1% for the quarter and six months ended June 30, 1994 over the same periods in 1993. The increase represents additional branches and related costs incurred as a result of the merger with Peoples in 1993. Amortization of intangible assets decreased by $798 thousand or 56.0% and $871 or 36.6% for the quarter and six months ended June 30, 1994 over the same periods in 1993. The majority of this decrease represents the decreased amortization of purchased mortgage servicing rights due to the slow down of pre-payments during 1994. Income Taxes Income tax expense as a percentage of pre-tax income decreased to 33.8% for the six months ending June 30, 1994 compared to 34.4% for the same period in 1993. During the second quarter of 1994 income tax expense as a percentage of pre-tax income decreased to 33.2% from 35.2% partly due to a lower tax rate on a new investment subsidiary and the elimination in the State of New Jersey corporate income tax surcharge of .375%. - 8 - FUNDS MANAGEMENT Interest Rate Sensitivity Managing net interest margin continues to be the single most important factor in maximizing earnings. Through its Asset/Liability Policy, Valley strives to maintain a consistent net interest rate differential by managing the sensitivity and repricing of its assets and liabilities to interest rate fluctuations. Valley seeks to achieve a sufficient level of rate sensitive assets to equal its rate sensitive liabilities, and analyzes the maturity and repricing of earning assets and sources of funds at various intervals. The level by which repricing earning assets exceed or are exceeded by repricing sources of funds is expressed as a ratio and dollar value (interest sensitivity gap) and is used as a measure of interest rate risk. At June 30, 1994, rate sensitive liabilities exceeded rate sensitive assets at the 90 day interval and resulted in a negative gap of $163.8 million or a ratio of .87:1. Rate sensitive liabilities exceeded rate sensitive assets at the 91 to 365 day interval by $250.3 million or a ratio of .37:1 and resulted in a negative gap. The total negative gap repricing within 365 days as of June 30, 1994 is $414.1 million or .75:1. In view of the present economic climate, management does not view these amounts as presenting an unusually high risk potential, although no assurances can be given that Valley is not at risk from rate increase or decreases. The above gap results take into account repricing and maturities of assets and liabilities, but fails to consider the interest rate sensitivities of those asset and liability accounts. Management has prepared for its use an income simulation technique to project future net interest income streams in light of the current gap position. Management has also prepared for its use alternative scenarios to measure levels of net interest income associated with various changes in interest rates. According to this computer model, an interest rate increase of 300 basis points or a decrease of 100 basis points had a minimal impact on Valley's net interest income. Management cannot provide any assurance about the actual effects of changes in interest rates on Valley's net interest income. Liquidity Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Maintaining a level of liquid funds through asset-liability management seeks to ensure that these needs are met at a reasonable cost. On the asset side, liquid funds are maintained in the form of cash and due from banks, federal funds sold, investment securities maturing in one year or less and securities available for sale. At June 30, 1994, liquid assets amounted to $687.9 million as compared to $751.7 million at December 31, 1993. This represents 20.8% and 23.0% of earning assets and 19.7% and 22.0% of total assets at June 30, 1994 and year end 1993, 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 $2.51 billion and $2.45 billion at June 30, 1994 and year end 1993, respectively, representing 77.4% and 78.9% of average earning assets. Short term borrowings and large dollar certificates of deposit, generally those over $100 thousand, are used as supplemental funding sources during periods when growth in the core deposit base does not keep pace with that of earning assets. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. During the quarter ended June 30, 1994, proceeds from the sales of investment securities available for sale were $26.8 million, proceeds from the sale of investment securities held to maturity were $41.1 million sold within the three months of maturity and proceeds of $79.2 million were generated from investment maturities from the portfolio and available for sale categories. Purchases of investment securities available for sale were $38.2 million and purchases for the portfolio were $50.2 million during the same quarter of 1994. Short term borrowings and certificates of deposit over $100 thousand amounted to $222.5 million and $178.4 million, on average, at June 30, 1994 and December 31, 1993, respectively. - 9 - The parent company's cash requirements consist primarily of dividends to shareholders. This cash need is routinely satisfied by dividends collected from its subsidiary bank. Projected cash flows from this source is expected to be adequate to pay dividends, given the current strong capital levels and current profitable operations of its subsidiary. Investment Securities Effective January 1, 1994, Valley adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investment in Debt and Equity Securities". The financial impact of adoption represented an addition to Shareholders' Equity of $4.5 million, net of taxes. At June 30, 1994, the unrealized loss, net of deferred taxes, resulted in a decrease to Shareholders' Equity of $9.1 million. As of June 30, 1994 Valley had $430.2 million of securities available for sale compared with $441.5 million at December 31, 1993. As of January 1, 1994, those securities are recorded at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholder's equity. Total investment securities, including securities classified as held to maturity and available for sale, decreased $77.2 million from year-end 1993 to the second quarter of 1994 to $1.30 billion. This decrease was used to fund the increase in new loans. Loan Portfolio Residential mortgage and home equity loans, including residential mortgages held for sale increased by 3.2% or $19.4 million to a total of $633.8 million at June 30, 1994 since December 31, 1993 and represents 32.3% of the loan portfolio. The volume of residential mortgage loan applications began to decline during the quarter as interest rates increased. Installment loans, including predominantly automobile and credit card loans, totalled $580.0 million at June 30, 1994, increasing by $51.4 million over the balance at December 31, 1993 or 9.7% and representing 29.6% of the loan portfolio. Commercial mortgages increased 15.5% or $59.9 million from December 31, 1993 to June 30, 1994, partially as a result of refinancing activity. It is expected that the increase in volume of installment and commercial mortgage loans will continue into the third quarter of 1994, while residential mortgage loan volume declined due to higher interest rates causing the recent slow-down in refinancing activity. Non-Performing Assets Non-performing assets include non-accrual loans, other real estate owned (OREO) and loans past due in excess of 90 days as to the collection of principal or interest payments. Non-performing assets were $30.1 million or 1.5% of loans, net of unearned income at June 30, 1994, compared with $30.2 million, or 1.67% of loans net of unearned income at December 31, 1993 and $36.0 million, or 2.27% of loans at June 30, 1993. During the six months ended June 30, 1994 one loan became 90 days past due, and subsequently non-accrual, adding $7.7 million in non-performing assets while a series of the loans were taken out of the category. In May of 1993, FASB issued Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan" which applied to financial statements for fiscal years beginning after December 15, 1994. This Statement requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. Valley has not yet determined the impact of this statement. Asset Quality and Risk Elements The level of the allowance is the result of an ongoing analysis by management and Valley's Board of Directors. This analysis attempts to take into account various data so as to assess the level of the allowance. Emphasis is placed on the current economic climate and the condition of the real estate market in the Northern New Jersey area. Management addressed these current economic conditions and applied that information to changes in the composition of the loan - 10 - portfolio. The level of non-performing assets as well as the level of the allowance, coupled with the continued recovery of the economy was responsible for the decision to decrease the provision from $3.5 million during the first six months of 1993 to $1.8 million in the first six months of 1994. Valley's level of the loan loss allowance has increased by $538 thousand since year end 1993. At June 30, 1994 the allowance for loan losses amounted to $35.7 million or 1.8% of loans, including loans held for sale, net of unearned income, as compared to $35.2 million or 1.9% at year end 1993 and was 119.0% of non-performing assets at June 30, 1994. The allowance is adjusted by provisions charged against income and loans charged-off, net of recoveries. The provision for possible loan losses amounted to $900 thousand and $1.8 million for the quarter and six months ended June 30, 1994 compared to $2.0 million and $3.5 million for the same periods in 1993. Net loan charge-offs were $1.3 million for the six months ended June 30, 1994 compared with $1.9 million for the same period in 1993. The ratio of net charge-offs to average loans amounted to 0.14% and 0.25%, respectively, at June 30, 1994 and 1993. Capital Adequacy A significant measure of the strength of a financial institution is a strong capital base which can expand in close proportion to asset growth. It is the capital base which provides the primary risk insurance to depositors. Also, it is an important consideration to federal regulators, analysts of Valley's common stock, as well as others in the marketplace. At June 30, 1994, shareholders' equity totalled $273.4 million or 7.81% of total assets, compared with $264.4 million or 7.75% at year-end 1993. Valley has achieved steady internal capital generation throughout the past five years. Risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common shareholders' equity excluding SFAS 115 net unrealized gains or losses less disallowed intangibles, while total Tier 1 and Tier 2 capital consists of Tier 1 capital and the allowance for loan losses up to 1.25% of risk-adjusted assets. Risk-adjusted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. Valley's capital position at June 30, 1994 under risk-based capital guidelines was $277.3 million, or 13.97% of risk-weighted assets, for Tier 1 capital and $302.2 million, or 15.23% for total Tier 1 and Tier 2 capital. The comparable ratios at December 31, 1993 were 13.93% for Tier 1 capital 15.18% for total Tier 1 and Tier 2 capital. Valley's ratios at June 30, 1994 are above the risk-based capital standards, which require all bank holding companies to have Tier 1 capital of at least 4% and total Tier 1 and Tier 2 capital of 8%. The Federal Reserve Board requires each bank holding company to maintain a minimum leverage ratio of 3.0% (Tier 1 capital to average total assets). The minimum 3.0% leverage requirement applies only to top-rated banking organizations without any operating, financial or supervisory deficiencies. Other organizations will be expected to hold an additional capital cushion of at least 100 to 200 basis points of Tier 1 capital. In all cases, banking organizations should hold capital commensurate with the level and nature of all the risks to which they are exposed. At June 30, 1994 and December 31, 1993, Valley was in compliance with the leverage requirement having a Tier 1 leverage ratio of 7.99% and 7.62%, respectively. VNB is also subject to similar but separate capital adequacy guidelines. VNB is subject to risk-based capital rules and leverage rules issued by the Comptroller of the Currency. As of June 30, 1994, VNB's total Tier 1 and Tier 2 capital ratio was 13.88% and its leverage ratio was 7.17%. 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 55.6% for the six months ended June 30, 1994 compared to 63.3% for the six months ended June 30, 1993. Cash dividends for the first six months of 1994 amounted to $.50 per share, equivalent to a dividend payout ratio of 44.4%, up from the 36.7% for the same period in 1993. Valley's Board of Directors continues to believe that cash dividends are an important component of shareholder value and that at its current level of performance and capital, Valley expects to continue its current dividend policy of a quarterly distribution of earnings to its shareholders. - 11 - 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 15, 1994 /s/Peter Southway PETER SOUTHWAY PRESIDENT AND CHIEF OPERATING OFFICER Date: August 15, 1994 /s/Alan D. Eskow ALAN D. ESKOW SENIOR VICE PRESIDENT FINANCIAL ADMINISTRATION - 12 - -----END PRIVACY-ENHANCED MESSAGE-----