ITEM 1. BUSINESS
Valley National Bancorp ("Valley") is a New Jersey corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("Holding Company Act"). At December 31, 2000, Valley had consolidated total assets of $6.4 billion, total deposits of $5.1 billion, and total shareholders' equity of $545.1 million. Its principal subsidiary is Valley National Bank ("VNB").
VNB is a national banking association chartered in 1927 under the laws of the United States. VNB provides a full range of commercial and retail banking services through 118 branch offices located in northern New Jersey. These services include the following: the acceptance of demand, savings and time deposits; extension of consumer, real estate, Small Business Administration ("SBA") and other commercial credits; title insurance; investment services; and full personal and corporate trust, as well as pension and fiduciary services.
VNB has several wholly-owned subsidiaries which include a mortgage servicing company, a company which holds, maintains and manages investment assets for VNB, a subsidiary which owns and services auto loans, a subsidiary which owns and services commercial mortgage loans, a title insurance company, asset management companies which are SEC registered investment companies and an Edge Act Corporation which is the holding company for a wholly-owned finance company located in Toronto, Canada. Many of these subsidiaries transact business with VNB as well as third parties.
RECENT DEVELOPMENTS
On January 19, 2001 Valley completed its merger with Merchants New York Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York headquartered in Manhattan. Under the terms of the merger agreement, each outstanding share of Merchants common stock was exchanged for 0.7634 shares of Valley common stock. As a result, a total of approximately 14 million shares of Valley common stock were exchanged. This merger added seven branches in Manhattan. The transaction was accounted for utilizing the pooling-of-interests method of accounting. In accordance with generally accepted accounting principles, the consolidated financial statements of Valley, included herein, have not been restated to include Merchants. See Part II, Item 8, "Financial Statements and Supplementary Data-- Note 2 of the Notes to Consolidated Financial Statements", which provides proforma data summarizing the combined financial data of Valley and Merchants as if the merger had been consummated on December 31, 1999 for Statement of Financial Condition purposes and January 1, 1998 for Income Statement purposes.
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc. ("Hallmark"), a Fairfield, NJ-based investment management firm with $195 million of assets under management. Hallmark's purchase was a stock merger with subsequent earn out payments. Hallmark's operations are continuing as a wholly-owned subsidiary of VNB. The transaction was accounted for as a purchase and resulted in goodwill of approximately $1.2 million which is being amortized over a period of 10 years.
During August 2000, Valley entered into a contract to sell its ShopRite credit card portfolio to American Express. The transaction closed and was recorded during the first quarter of 2001, with a balance of approximately $65.4 million of credit card receivables sold. This transaction will reduce both credit card fee income and related credit card expense during 2001.*
For many years, Valley National Bank has maintained an automobile loan program with a major insurance company. While the loans generated by this program have been important to Valley, recent changes in market conditions for automobile lending have reduced the volume and profitability of the program relative to other loans and investments available to the bank. As a result of the expansion of the insurance company's banking activities, Valley expects to phase out the origination of loans under this program during 2001*. All loans originated by Valley during the program will remain under the bank's ownership, and Valley expects the portfolio to amortize in its normal course.* As of December 31, 2000, this portfolio represents 9.7 percent of Valley's interest earning assets and the amount of the portfolio had decreased by 12.3 percent during the last twelve-month period. The gross yield of the portfolio for the year 2000 was 8.20 percent, prior to payments to the insurance company, loan losses and all costs associated with originating and maintaining the portfolio. Management anticipates that the phasing out of this program should not have a material adverse effect on future net income and, in fact, may have a positive effect.*
COMPETITION
The market for banking and bank-related services is highly competitive. Valley and its subsidiary compete with other providers of financial services such as other bank holding companies, commercial and savings banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, title agencies, asset managers and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressure. Competition is expected to intensify as a consequence of the Gramm-Leach-Bliley Act (discussed below) and interstate banking laws now in effect or that may be in effect in the future. Valley and its subsidiary compete by offering quality products and convenient services at competitive prices. In order to maintain and enhance its competitive position, Valley regularly reviews its products, locations and various acquisition prospects and periodically engages in discussions regarding such possible acquisitions.
EMPLOYEES
At December 31, 2000, VNB and its subsidiaries employed 1,858 full-time equivalent persons. Management considers relations with employees to be satisfactory.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company's cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the bank. It is intended only to briefly summarize some material provisions.
BANK HOLDING COMPANY REGULATION
Valley is a bank holding company within the meaning of the Holding Company Act. As a bank holding company, Valley is supervised by the Board of Governors of the Federal Reserve System ("FRB") and is required to file reports with the FRB and provide such additional information as the FRB may require.
The Holding Company Act prohibits Valley, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking "as to be a proper incident thereto." The Holding Company Act requires prior approval by the FRB of the acquisition by Valley of more than five percent of the voting stock of any additional bank. Satisfactory capital ratios and Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy. Acquisitions through VNB require approval of the Comptroller of the Currency of the United States ("OCC"). The Holding Company Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows Valley to expand into insurance, securities, merchant banking activities, and other activities that are financial in nature.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Banking and Branching Act") enables bank holding companies to acquire banks in states other than its home state, regardless of applicable state law. The Interstate Banking and Branching Act also authorizes banks to merge across state lines, thereby creating interstate branches. Under the legislation, each state had the opportunity to "opt-out" of this provision. Furthermore, a state may "opt-in" with respect to de novo branching, thereby permitting a bank to open new branches in a state in which the bank does not already have a branch. Without de novo branching, an out-of-state commercial bank can enter the state only by acquiring an existing bank or branch. The vast majority of states have allowed interstate banking by merger but have not authorized de novo branching.
New Jersey enacted legislation to authorize interstate banking and branching and the entry into New Jersey of foreign country banks. New Jersey did not authorize de novo branching into the state. However, under federal law, federal savings banks which meet certain conditions may branch de novo into a state, regardless of state law.
RECENT LEGISLATION
The Gramm-Leach-Bliley Financial Modernization Act of 1999 became effective in early 2000. The Modernization Act:
o allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than currently is permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies;
o allows insurers and other financial services companies to acquire banks;
o removes various restrictions that currently apply to bank holding company ownership of securities firms and mutual fund advisory companies; and
o establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.
If a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals.
The OCC has adopted rules to allow national banks to form subsidiaries to engage in financial activities allowed for financial holding companies. Electing national banks must meet the same management and capital standards as financial holding companies but may not engage in insurance underwriting, real estate development or merchant banking. Sections 23A and 23B of the Federal Reserve Act apply to financial subsidiaries and the capital invested by a bank in its financial subsidiaries will be eliminated from the bank's capital in measuring all capital ratios.
The Modernization Act modified other financial laws, including laws related to financial privacy and community reinvestment.
In late 2000 the American Home Ownership and Economic Act of 2000 instituted a number of regulatory relief provisions applicable to national banks, such as permitting national banks to have classified directors and to merge their business subsidiaries into the bank.
Additional proposals to change the laws and regulations governing the banking and financial services industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on Valley cannot be determined at this time.
REGULATION OF BANK SUBSIDIARY
VNB is subject to the supervision of, and to regular examination by, the OCC.
Various laws and the regulations thereunder applicable to Valley and its bank subsidiary impose restrictions and requirements in many areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of loans and investments, consumer protection, employment practices and entry into new types of business. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company's non-bank subsidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.
DIVIDEND LIMITATIONS
Valley is a legal entity separate and distinct from its subsidiaries. Valley's revenues (on a parent company only basis) result in substantial part from dividends paid to Valley by VNB. Payment of dividends to Valley by its subsidiary bank, without prior regulatory approval, is subject to regulatory limitations. Under the National Bank Act, dividends may be declared only if, after payment thereof, capital would be unimpaired and remaining surplus would equal 100 percent of capital. Moreover, a national bank may declare, in any one year, dividends only in an amount aggregating not more than the sum of its net profits for such year and its retained net profits for the preceding two
years. In addition, the bank regulatory agencies have the authority to prohibit a bank subsidiary from paying dividends or otherwise supplying funds to Valley if the supervising agency determines that such payment would constitute an unsafe or unsound banking practice.
LOANS TO RELATED PARTIES
VNB's authority to extend credit to its directors, executive officers and 10 percent stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of the National Bank Act and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital. In addition, extensions of credit in excess of certain limits must be approved by the bank's board of directors.
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), as implemented by OCC regulations, a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a national bank, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. VNB received a "satisfactory" CRA rating in its most recent examination.
RESTRICTIONS ON ACTIVITIES OUTSIDE THE UNITED STATES
Valley's activities in Canada are conducted through VNB and in the United States are subject to Section 25 and 25A of the Federal Reserve Act, certain regulations under the National Bank Act and, primarily, Regulation K promulgated by the FRB. Under these provisions, VNB may invest no more than 10 percent of its capital in foreign banking operations. In addition to investments, VNB may extend credit or guarantee loans for these entities and such loans or guarantees are generally not subject to the loans to one person limitation, although they are subject to prudent banking limitations. The foreign banking operations of VNB are subject to supervision by the FRB, as well as the OCC. In Canada, VNB's activities also are subject to the laws and regulations of Canada and to regulation by Canadian banking authorities. Regulation K generally restricts activities by United States banks outside of the United States to activities that are permitted for banks within the United States. As a consequence, activities by VNB through its subsidiaries outside of the United States would generally be limited to banking and activities closely related to banking with certain significant exceptions.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. These provisions have commonly been referred to as FIRREA's "cross guarantee" provisions. Further, under FIRREA the failure to meet capital guidelines could subject a bank to a variety of enforcement remedies available to federal regulatory authorities.
FIRREA also imposes certain independent appraisal requirements upon a bank's real estate lending activities and further imposes certain loan-to-value restrictions on a bank's real estate lending activities. The bank regulators have promulgated regulations in these areas.
FDICIA
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be
considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial activities under the Modernization Act, all depository institutions must be "well capitalized". The financial holding company of a national bank will be put under directives to raise its capital levels or divest its activities if the depository institution falls from that level.
The OCC's regulations implementing these provisions of FDICIA provide that an institution will be classified as "well capitalized" if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, and (iv) meets certain other requirements. An institution will be classified as "adequately capitalized" if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0 percent, (iii) has Tier 1 leverage ratio of (a) at least 4.0 percent or (b) at least 3.0 percent if the institution was rated 1 in its most recent examination, and (iv) does not meet the definition of "well capitalized." An institution will be classified as "undercapitalized" if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1 leverage ratio of (a) less than 4.0 percent or (b) less than 3.0 percent if the institution was rated 1 in its most recent examination. An institution will be classified as "significantly undercapitalized" if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as "critically undercapitalized" if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating.
In addition, significant provisions of FDICIA required federal banking regulators to impose standards in a number of other important areas to assure bank safety and soundness, including internal controls, information systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation and interest rate exposure.
ITEM 2.
ITEM 2. PROPERTIES
VNB's corporate headquarters consist of three office buildings located adjacent to each other in Wayne, New Jersey. These headquarters encompass commercial, mortgage and consumer lending, the operations and data processing center, and the executive offices of both Valley and VNB. Two of the three buildings are owned by VNB, the other building is leased.
VNB owns another office building in Wayne which is occupied by those departments providing trust and investment management services.
VNB provides banking services at 118 locations of which 51 locations are owned and 67 locations are leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings to which Valley or any of its direct or indirect subsidiaries were a party, or to which their property was subject, other than ordinary routine litigations incidental to business and which had no material effect on the presentation of the financial statements contained in this report.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Special Meeting of Shareholders was held December 5, 2000 to approve the merger of Merchants New York Bancorp, Inc. and Valley. The results of the votes thereon are as follows:
FOR AGAINST ABSTAIN ---------- --------- ------- 39,264,957 510,799 141,300
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
All officers serve at the pleasure of the Board of Directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Valley's common stock trades on the New York Stock Exchange ("NYSE") under the symbol VLY. The following table sets forth for each quarter period indicated the high and low sales prices for the common stock of Valley, as reported by the NYSE, and the dividends paid per share for each quarter. The amounts shown in the table below have been adjusted for all stock dividends and stock splits.
Federal laws and regulations contain restrictions on the ability of Valley and VNB to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, "Business--Dividend Limitations" and Part II, Item 8, "Financial Statements and Supplementary Data--Note 15 of the Notes to Consolidated Financial Statements."
There were 8,371 shareholders of record as of December 31, 2000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with Valley's Consolidated Financial Statements and the accompanying notes presented elsewhere herein.
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(1) All per share amounts have been restated to reflect the 5 percent stock dividend issued May 16, 2000, and all prior stock splits and dividends.
(2) Share and earnings per share data for the year 1996 has not been restated for the acquisition of Wayne Bancorp, Inc. as the issuance of capital stock in connection with the conversion from the mutual to stock form of Wayne Savings Bank occurred on June 27, 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this analysis is to provide the reader with information relevant to understanding and assessing Valley's results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis the reader is encouraged to review the consolidated financial statements and statistical data presented in this document.
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-K, both in the MD & A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities, technology and market conditions. These statements may be identified by an "asterisk" (*) or such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to, the direction of interest rates, continued levels of loan quality and origination volume, continued relationships with major customers including sources for loans, expectations of mergers and acquisitions, as well as the effects of economic conditions and legal and regulatory barriers and structure. Actual results may differ materially from such forward-looking statements. Valley assumes no obligation for updating any such forward-looking statement at any time.
Recent Developments
On January 19, 2001 Valley completed its merger with Merchants New York Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York headquartered in Manhattan. Under the terms of the merger agreement, each outstanding share of Merchants common stock was exchanged for 0.7634 shares of Valley common stock. As a result, a total of approximately 14 million shares of Valley common stock were exchanged. This merger added seven branches in Manhattan. The transaction was accounted for utilizing the pooling-of-interests method of accounting. In accordance with generally accepted accounting principles, the consolidated financial statements of Valley, included herein, have not been restated to include Merchants. See Part II, Item 8, "Financial Statements and Supplementary Data-- Note 2 of the Notes to Consolidated Financial Statements," which provides proforma data summarizing the combined financial data of Valley and Merchants as if the merger had been consummated on December 31, 1999 for Statement of Financial Condition purposes and January 1, 1998 for Income Statement purposes.
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc. ("Hallmark"), a Fairfield, NJ-based investment management firm with $195 million of assets under management. Hallmark's purchase was a stock merger with subsequent earn out payments. Hallmark's operations are continuing as a wholly-owned subsidiary at VNB. The transaction was accounted for as a purchase and resulted in goodwill of approximately $1.2 million which is being amortized over a 10 year period.
During August 2000, Valley entered into a contract to sell its ShopRite credit card portfolio to American Express. The transaction closed and was recorded during the first quarter of 2001, with a balance of approximately $65.4 million of credit card receivables sold. This transaction will reduce both credit card fee income and related credit card expense during 2001.*
For many years, Valley National Bank has maintained an automobile loan program with a major insurance company. While the loans generated by this program have been important to Valley, recent changes in market conditions for automobile lending have reduced the volume and profitability of the program relative to other loans and investments available to the bank. As a result of the expansion of the insurance company's banking activities, Valley expects to phase out the origination of loans under this program during 2001*. All loans originated by Valley during the program will remain under the bank's ownership, and Valley expects the portfolio to amortize in its normal course.* As of December 31, 2000, this portfolio represents 9.7 percent of Valley's interest earning assets and the amount of the portfolio had decreased by 12.3 percent during the last twelve-month period. The gross yield of the portfolio for the year 2000 was 8.20 percent, prior to payments to the insurance company, loan losses and all costs associated with originating and maintaining the portfolio. Management anticipates that the phasing out of this program should not have a material adverse effect on future net income and, in fact, may have a positive effect.*
Earnings Summary
Net income was $106.8 million, or $1.75 per diluted share, in 2000 compared with $106.3 million, or $1.65 per diluted share, in 1999. Return on average assets for 2000 was 1.72 percent compared with 1.75 percent in 1999, while the return on average equity rose to 20.28 percent in 2000 compared with 18.35 percent in 1999. Net income for 2000 was negatively impacted as a result of increased interest rates, which contributed to higher funding costs and narrower margins. In addition, a stock repurchase plan throughout the fourth quarter of 1999 and much of 2000 utilized approximately $90.5 million of cash to acquire Valley common stock. Net interest income and net income would have been higher if these funds were invested in interest earning assets.
Net Interest Income
Net interest income continues to be the largest source of Valley's operating income. Net interest income on a tax equivalent basis remained basically unchanged at $262.4 million for 2000 compared with $262.8 million for 1999. Although net interest income remained relatively unchanged, higher average balances of total interest earning assets, primarily loans, combined with higher average interest rates for these interest earning assets were recorded during 2000. For 2000 total interest bearing liabilities increased as well as the interest rates associated with these liabilities compared to 1999. Net interest income was also negatively impacted by the increase in the average balance and the rate associated with short-term borrowings and long-term debt and the use of funds for the repurchase of the Valley common stock. The net interest margin decreased to 4.38 percent for 2000 compared with 4.53 percent for 1999. While loans have been growing, competition for loans has caused rates on new loans and total interest earning assets to increase at a slower pace than rates on interest bearing liabilities.
Average interest earning assets increased $188.2 million or 3.2 percent in 2000 over the 1999 amount. This was mainly the result of the increase in average balance of loans of $299.1 million or 7.0 percent offset by the decrease in average balance of taxable investments of $76.2 million or 6.0 percent. Included in taxable investments is Valley's portfolio of trust preferred securities of $249.0 million, at December 31, 2000. Valley purchased these securities in the latter part of the fourth quarter of 1998 through early second quarter of 1999 as part of a leverage strategy to increase interest earning assets and net interest income. These securities were funded by borrowings from the Federal Home Loan Bank ("FHLB") which are included in long-term debt.
Average interest bearing liabilities for 2000 increased $180.2 million or 4.0 percent from 1999. Average demand deposits increased by $59.9 million or 6.7 percent over 1999 balances. Average savings deposits decreased $53.6 million or 2.6 percent and average time deposits remained relatively unchanged from 1999. Average short-term borrowings increased $50.8 million or 73.3 percent over 1999 balances. Average long-term debt, which includes primarily FHLB advances, increased $195.4 million, or 50.4 percent. The increase in long-term debt can be attributed to the leverage strategy discussed above.
Average interest rates, in all categories of interest earning assets, increased during 2000 compared to 1999. The average interest rate for loans increased 21 basis points to 8.15 percent. Average interest rates on total interest earning assets increased 32 basis points to 7.77 percent. Average interest rates also increased on total interest bearing liabilities by 56 basis points to 4.28 percent from 3.72 percent. Average interest rates on deposits increased by 49 basis points to 3.99 percent. The decline in the net interest margin from 4.53 percent in 1999 to 4.38 percent in 2000 resulted from a slight decline in net interest income in relationship to the growth in average interest earning assets.
The following table reflects the components of net interest income for each of the three years ended December 31, 2000, 1999 and 1998.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
(1) Interest income is presented on a tax equivalent basis using a 35 percent tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) The yield for securities that are classified as available for sale is based on the average historical amortized cost.
(4) Net interest income on a tax equivalent basis as a percentage of 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
- ------------- (1) Interest income is adjusted to a tax equivalent basis using a 35 percent tax rate.
(2) Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category.
Non-Interest Income
The following table prese-nts the components of non-interest income for the years ended December 31, 2000, 1999 and 1998.
NON-INTEREST INCOME
Non-interest income continues to represent a considerable source of income for Valley. Excluding gainson securities transactions, total non-interest income amounted to $50.5 million for 2000 compared with $44.7 million for 1999.
Trust and investment services includes income from trust operations, brokerage commissions, and asset management fees.
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc. ("Hallmark"), a Fairfield, NJ-based investment management firm with $195 million of assets under management. Hallmark's purchase was a stock acquisition with subsequent earn out payments. Hallmark's operations are continuing as a wholly-owned subsidiary of VNB. The transaction was accounted for as a purchase and resulted in goodwill of approximately $1.2 million. Hallmark contributed additional fee income to the operations of Valley of $717 thousand in 2000 which is included in trust and investment services.
On July 30, 1999, VNB acquired New Century Asset Management, Inc. ("New Century"), a NJ-based money manager with approximately $120 million of assets under management. At closing, Valley paid an initial consideration of $640 thousand. The balance due will be paid on an earn-out basis over a five-year period, based upon a pre-determined formula. New Century is continuing its operation as a wholly owned subsidiary of VNB. The transaction was accounted for as a purchase and resulted in goodwill of $1.3 million. New Century contributed additional fee income to the operations of Valley of $881 thousand in 2000 and $326 thousand in 1999 which is included in trust and investment services.
Service charges on deposit accounts increased $2.0 million or 13.9 percent from $14.5 million for the year ended December 31, 1999 to $16.5 million in 2000. A majority of this increase is due to the implementation of new service fees and increased emphasis placed on collection efforts.
Included in fees from loan servicing are fees for servicing residential mortgage loans and SBA loans. Fees from loan servicing increased by 30.0 percent from $8.4 million for 1999 to $10.9 million for 2000 due to an increase in the size of the servicing portfolio. The increase in the servicing portfolio was due to the acquisition of servicing of several residential mortgage portfolios at the end of 1999 with an unpaid principal balance of approximately $668.2 million, the origination of new loans by VNB and their subsequent sale with servicing retained, offset by principal paydowns and prepayments. The aggregate principal balances of mortgage loans serviced by VNB Mortgage Services, Inc., ("MSI") for others approximated $2.5 billion, $2.2 billion and $1.6 billion at December 31, 2000, 1999 and 1998, respectively.
Included in credit card fee income is fee income from both the co-branded Shop-Rite credit card portfolio and Valley's own credit card portfolio. During August 2000, Valley entered into a contract to sell its co-branded Shop-Rite credit card portfolio to American Express. The transaction closed and was recorded during the first quarter of 2001. This transaction is expected to reduce both credit card fee income and related credit card expense during 2001.*
Gains on the sales of loans were $2.2 million in 2000 compared to $2.5 million in 1999. Gains are recorded primarily from the sale of SBA loans into the secondary market. The decrease of $264 thousand resulted from a decline in the volume of SBA loans being sold by Valley into the secondary market during 2000.
Other non-interest income increased $642 thousand to $8.9 million in 2000 as compared to 1999. This increase is primarily attributed to an increase of commission revenues from the sale of title insurance policies from a title insurance business acquired by VNB in the second quarter of 1999. VNB received approval and a license from the New Jersey Department of Banking and Insurance to sell title insurance through a separate subsidiary, known as Wayne Title, Inc. The increase is also attributed to the gain recorded on the sale of a building owned by Valley.
Non-Interest Expense
The following table presents the components of non-interest expense for the years ended December 31, 2000, 1999 and 1998.
NON-INTEREST EXPENSE
Non-interest expense totaled $141.0 million for 2000, an increase of $6.1 million or 4.5 percent from the 1999 level, excluding merger-related charges. The largest components of non-interest expense are salaries and employee benefit expense which totaled $76.6 million in 2000 compared to $72.0 million in 1999. At December 31, 2000, full-time equivalent staff was 1,858 compared to 1,863 at the end of 1999. The acquisition of three companies, increases in sales-related incentives, and a tight labor market resulted in a higher salary expense in 2000 over 1999.
The efficiency ratio measures a bank's gross operating expense as a percentage of fully-taxable equivalent net interest income and other non-interest income without taking into account security gains and losses and other non-recurring items. Valley's efficiency ratio for the year ended December 31, 2000 was 45.2 percent, one of the lowest in the industry, compared with an efficiency ratio for 1999 of 43.9 percent. Valley strives to control its efficiency ratio and expenses as a means of producing increased earnings for its shareholders.
Both net occupancy expense and furniture and equipment expense increased during 2000 in comparison to 1999. The increase in these expenses can be attributed to an overall increase in the cost of operating bank facilities.
Credit card expense includes cardmember rebates, processing expenses and fraud losses for both the co-branded Shop-Rite credit card portfolio and Valley's own credit card portfolio. During August 2000, Valley entered into a contract to sell its ShopRite credit card portfolio to American Express. The transaction closed and was recorded during the first quarter of 2001. This transaction is expected to reduce both credit card fee income and related credit card expense.*
Amortization of intangible assets was $7.6 million in 2000 compared with $5.3 million in 1999, representing an increase of $2.4 million or 44.8 percent. The majority of this expense resulted from the amortization of residential mortgage servicing rights totaling $5.9 million during 2000, compared with $3.6 million for 1999. The increased amortization is mainly the result of portfolio acquisitions during the latter part of 1999. An impairment analysis is completed quarterly to determine the adequacy of the mortgage servicing asset valuation allowance.
During 1999, Valley recorded merger-related charges of $3.0 million related to the acquisition of Ramapo Financial Corporation ("Ramapo"). The major components of merger-related charges, consisting of real estate dispositions, professional fees, personnel expenses and other expenses totaling $300 thousand, $1.1 million, $1.1 million and $500 thousand, respectively. All amounts expensed as merger-related charges were paid with the exception of contracts which will be paid over their remaining terms.
The significant components of other non-interest expense include data processing, professional fees, postage, telephone and stationery expense which totaled approximately $12.8 million for 2000.
Income Taxes
Income tax expense as a percentage of pre-tax income was 34.0 percent for the year ended December 31, 2000 compared to 32.9 percent in 1999. The effective tax rate for 2001 is expected to approximate 34 percent.*
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 to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting. For financial data on the four business segments see Part II, Item 8, "Financial Statements and Supplementary Data--Note 19 of the Notes to Consolidated Financial Statements."
The consumer lending segment had a return on average interest-earning assets before taxes of 2.52 percent for the year ended December 31, 2000 compared to 2.54 percent for the year ended December 31, 1999. Average interest-earning assets increased $90.2 million, which is attributable to an increase in home equity and residential mortgage lending. Interest rates on consumer loans increased by 37 basis points. This increase was mitigated by an increase in the cost of funds by 47 basis points. Income before income taxes increased $1.7 million primarily as a result of an increase in average interest-earning assets. Also contributing to the increase in income before taxes was a $3.3 million decrease in the provision for loan losses due to a decrease in net charge-offs and a decline in non-interest expense due to decreased usage of credit cards.
The return on average interest-earning assets before taxes for the commercial lending segment decreased 17 basis points to 3.64 percent for the year ended December 31, 2000. Average interest-earning assets increased $131.5 million as a result of an increased volume of loans. Interest rates on commercial loans increased by 30 basis points, offset by an increase in cost of funds by 47 basis points. Interest funding costs during most of 2000 rose faster than rates earned. Income before income taxes increased $1.9 million primarily as a result of an increase in average interest-earning assets, offset by a decline in fee income during the period.
The investment management segment had a return on average interest-earning assets, before taxes, of 2.03 percent for the year ended December 31, 2000, 4 basis points less than the year ended December 31, 1999. Average interest-earning assets decreased by $33.4 million. The yield on interest earning assets increased by 15 basis points to 6.4 percent, and was offset by an increase of 47 basis points in the cost of funds. Income before income taxes decreased 4.4 percent to $27.8 million, principally reflecting higher interest funding costs.
The corporate segment represents income and expense items not directly attributable to a specific segment including merger-related charges, gains on sales of securities, service charges on deposit accounts, and certain revenues and expenses recorded by acquired banks that could not be allocated to a line of business. The loss before taxes decreased to $2.8 million for the year ended December 31, 2000.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Valley's success is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of Valley's net interest income to the movement in interest rates. Valley does not currently use
derivatives to manage market and interest rate risks. Valley's interest rate risk management is the responsibility of the Asset/Liability Management Committee ("ALCO"), which reports to the Board of Directors. ALCO establishes policies that monitor and coordinate Valley's sources, uses and pricing of funds.
Valley uses a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twelve and twenty-four month period. The model is based on the actual maturity and repricing characteristics of rate sensitive assets and liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rates of certain assets and liabilities. According to the model, over a twelve month period, an interest rate increase of 100 basis points resulted in a decrease in net interest income of approximately $9.4 million while an interest rate decrease of 100 basis points resulted in an increase in net interest income of approximately $7.7 million. Management cannot provide any assurance about the actual effect of changes in interest rates on Valley's net interest income. Assuming a declining interest rate environment, the net interest margin and net interest income are expected to increase, and conversely, in a rising interest rate environment, the net interest margin and net interest income are expected to decline.*
The following table shows the financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair value at December 31, 2000. Market risk sensitive instruments are generally defined as on-and-off balance sheet financial instruments.
Expected maturities are contractual maturities adjusted for all payments of principal. Valley uses certain assumptions to estimate fair values and expected maturities. For investment securities and loans, expected maturities are based upon contractual maturity, projected repayments and prepayments of principal. The prepayment experience reflected herein is based on historical experience. The actual maturities of these instruments could vary substantially if future prepayments differ from historical experience. For deposit liabilities, in accordance with standard industry practice and Valley's own historical experience, "decay factors" were used to estimate deposit runoff for savings. Off-balance sheet items are not considered material.
The total negative gap repricing within 1 year as of December 31, 2000 was $24.6 million, representing a ratio of interest sensitive assets to interest sensitive liabilities of (0.99:1). Management does not view this amount as presenting an unusually high risk potential, although no assurances can be given that Valley is not at risk from interest rate increases or decreases.*
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost. On the asset side, liquid funds are maintained in the form of cash and due from banks, federal funds sold, investments securities held to maturity maturing within one year, securities available for sale and loans held for sale. Liquid assets amounted to $1.3 billion at both December 31, 2000 and 1999. This represents 21.6 percent and 22.0 percent of earning assets, and 20.4 percent and 20.9 percent of total assets at December 31, 2000 and 1999, respectively.
On the liability side, the primary source of funds available to meet liquidity needs is Valley's core deposit base, which generally excludes certificates of deposit over $100 thousand. Core deposits averaged approximately $4.3 billion for the year ended December 31, 2000 and $4.4 billion for the year ended December 31, 1999, representing 72.5 percent and 73.3 percent of average earning assets. Demand deposits have continued to increase, while both savings deposits and time deposits have been relatively unchanged during the last three years. The level of time deposits is affected by interest rates offered, which is often influenced by Valley's need for funds. Short-term and long-term borrowings through Federal funds lines, repurchase agreements, Federal Home Loan Bank ("FHLB") advances and large dollar certificates of deposit, generally those over $100 thousand, are used as supplemental funding sources. Valley previously borrowed from the FHLB as part of a leverage strategy to increase earning assets and net interest income. As of December 31, 2000, Valley had outstanding advances of $461.5 million with the FHLB. In the future Valley may, as part of its operations, purchase earning assets and utilize borrowings to increase net interest income and net income. Additional liquidity is derived from scheduled loan and investment payments of principal and interest, as well as prepayments received. In 2000 proceeds from the sales of investment securities available for sale were $10.8 million, and proceeds of $220.3 million were generated from investment maturities. Purchases of investment securities in 2000 were $224.9 million. Short-term borrowings and certificates of deposit over $100 thousand amounted to $768.9 million and $637.1 million, on average, for the years ended December 31, 2000 and 1999, respectively.
During 2000 a substantial amount of loan growth was funded from a combination of deposit growth, maturities and normal payments of the investment portfolio, normal loan payments and prepayments, and borrowings. Valley anticipates using funds from all of the above sources to fund loan growth during 2001.*
The following table lists, by maturity, all certificates of deposit of $100 thousand and over at December 31, 2000. These certificates of deposit are generated primarily from core deposit customers and are not brokered funds.
(IN THOUSANDS)
Less than three months ............... $549,063 Three to six months .................. 67,768 Six to twelve months ................. 49,073 More than twelve months .............. 67,370 -------- $733,274 ========
Valley's cash requirements consist primarily of dividends to shareholders. This cash need is routinely satisfied by dividends collected from its subsidiary bank along with cash and investments owned. Projected cash flows from this source are expected to be adequate to pay dividends, given the current capital levels and current profitable operations of its subsidiary.* In addition, Valley has, as approved by the Board of Directors, repurchased 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. At December 31, 2000 Valley maintained a floating rate line of credit in the amount of $35.0 million, of which $10.0 million was outstanding. This line is available for general corporate purposes and expires June 15, 2001. Borrowings under this facility are collateralized by mortgage-backed and equity securities of no less than 120 percent of the loan balance.
Investment Securities
The amortized cost of securities held to maturity at December 31, 2000, 1999 and 1998 were as follows:
INVESTMENT SECURITIES HELD TO MATURITY
The fair value of securities available for sale at December 31, 2000, 1999 and 1998 were as follows:
INVESTMENT SECURITIES AVAILABLE FOR SALE
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES HELD TO MATURITY AT DECEMBER 31, 2000
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 2000
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(1) Amortized costs are stated at cost less principal reductions, if any, and adjusted for accretion of discounts and amortizationof premiums.
(2) Average yields are calculated on a yield-to-maturity basis.
(3) Average yields on obligations of states and political subdivisions are generally tax-exempt and calculated on a tax-equivalent basis using a statutory federal income tax rate of 35 percent.
(4) Excludes equity securities which have indefinite maturities.
(5) Mortgage-backed securities are shown using an estimated average remaining life.
Valley's investment portfolio is comprised of U.S. government and federal agency securities, tax-exempt issues of states and political subdivisions, mortgage-backed securities, equity and other securities. There were no securities in the name of any one issuer exceeding 10 percent of shareholders' equity, except for securities issued by the United States and its political subdivisions and agencies. The portfolio generates substantial cash flow. The decision to purchase or sell securities is based upon the current assessment of long and short term economic and financial conditions, including the interest rate environment and other statement of financial condition components.
At December 31, 2000, Valley had $35.4 million of mortgaged-backed securities classified as held to maturity and $742.8 million of mortgage-backed securities classified as available for sale. Substantially all the mortgage-backed securities held by Valley are issued or backed by federal agencies. The mortgage-backed securities portfolio is a source of significant liquidity to Valley through the monthly cash flow of principal and interest. Mortgage-backed securities, like all securities, are sensitive to changes in the interest rate environment, increasing and decreasing in value as interest rates fall and rise. As interest rates fall, the increase in prepayments can reduce the yield on the mortgage-backed securities portfolio, and reinvestment of the proceeds will be at lower interest rates.
Included in the mortgage-backed securities portfolio at December 31, 2000 were $199.8 million of collateralized mortgage obligations ("CMO's") of which $28.2 million were privately issued. CMO's had a yield of 6.65 percent and an unrealized loss of $4.7 million at December 31, 2000. Substantially all of the CMO portfolio was classified as available for sale.
As of December 31, 2000, Valley had $1.0 billion of securities available for sale, unchanged from December 31, 1999. Those securities are recorded at their fair value. As of December 31, 2000, the investment securities available for sale had an unrealized loss of $4.2 million, net of deferred taxes, compared to an unrealized loss of $16.3 million, net of deferred taxes, at December 31, 1999. This change was primarily due to an increase in prices resulting from a decreasing interest rate environment for these investments. 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. In 1999, in connection with the Ramapo acquisition, Valley reassessed the classification of securities held in the Ramapo portfolio and transferred $42.4 million of securities held to maturity to securities available for sale to conform with Valley's investment objectives. In 1998, in connection with the Wayne acquisition, Valley reassessed the classification of securities held in the Wayne portfolio and transferred $1.6 million of securities held to maturity to securities available for sale to conform with Valley's investment objectives.
Loan Portfolio
As of December 31, 2000, total loans were $4.7 billion, compared to $4.6 billion at December 31, 1999, an increase of 2.3 percent. The following table reflects the composition of the loan portfolio for the five years ended December 31, 2000.
LOAN PORTFOLIO
The majority of the increase in loans for 2000 was divided among construction, residential and commercial mortgage loans. It is not known if the trend of increased lending in these loan types will continue.*
The commercial mortgage loan portfolio has continued its steady increase. Valley targets small-to-medium size businesses within the market area of the bank for this type of lending.
During 1996, Valley issued a co-branded credit card. Of the $94.3 million of credit card loans outstanding at December 31, 2000, approximately $70.1 million were the result of this co-branded credit card program. The decrease in the credit card portfolio is primarily attributable to a decrease in card usage. During August 2000, Valley entered into a contract to sell its co-branded credit card loans to American Express. The transaction closed and was recorded during the first quarter of 2001. This transaction will substantially reduce the total credit card portfolio.*
For many years, Valley National Bank has maintained an automobile loan program with a major insurance company. While the loans generated by this program have been important to Valley, recent changes in market conditions for automobile lending have reduced the volume and profitablility of the program relative to other loans and investments available to the bank. As a result of the expansion of the insurance company's banking activities, Valley expects to phase out the origination of loans under this program during 2001.*
All loans originated by Valley during the program will remain under the bank's ownership, and Valley expects the portfolio to amortize in its normal course.* As of December 31, 2000, this portfolio represents 9.7 percent of Valley's earning assets and the amount of the portfolio had decreased by 12.3 percent during the last twelve-month period. The gross yield of the portfolio for the year 2000 was 8.20 percent, prior to payments to the insurance company, loan losses and all costs associated with originating and maintaining the portfolio. Management anticipates that the phasing out of this program should not have a material adverse effect on future net income and, in fact, may have a positive effect.*
These automobile loans are subject to Valley's normal underwriting criteria. This program was expanded during Valley's over 40 year relationship with the company to 12 states from Maine to Florida, as well as Canada.
In 1996 VNB established a finance company in Toronto, Canada to make auto loans. This Canadian subsidiary had interest income of approximately $2.7 million for the year ended December 31, 2000, and auto loans of $30.8 million at December 31, 2000. These loans are partially funded by a capital investment by VNB of $7.4 million, with additional funding requirements satisfied by lines of credit in Canadian funds. Any foreign exchange risk is limited to the capital investment by VNB.
Much of Valley's lending is in northern New Jersey, with the exception of the out-of-state auto lending program. However, efforts are made to maintain a diversified portfolio as to type of borrower and loan to guard against a downward turn in any one economic sector.*
The following table reflects the contractual maturity distribution of the commercial and construction loan portfolios as of December 31, 2000:
Prior to maturity of each loan with a balloon payment and if the borrower requests an extension, Valley generally conducts a review which normally includes an analysis of the borrower's financial condition and, if applicable, a review of the adequacy of collateral. A rollover of the loan at maturity may require a principal paydown.
VNB is a preferred U. S. Small Business Administration ("SBA") lender with authority to make loans without the prior approval of the SBA. VNB currently has approval to make SBA loans in New Jersey, Pennsylvania, New York, Delaware, Maryland, North and South Carolina, Virginia, Connecticut and the District of Columbia. Between 75 percent and 80 percent of each loan is guaranteed by the SBA and may be sold into the secondary market, with the balance retained in VNB's portfolio. VNB intends to continue expanding this area of lending because it provides a good source of fee income and loans with floating interest rates tied to the prime lending rate.*
During 2000 and 1999, VNB originated approximately $29.4 million and $34.8 million of SBA loans, respectively and sold $21.9 million and $24.8 million, respectively. At December 31, 2000 and 1999, $39.9 million and $37.5 million, respectively, of SBA loans were held in VNB's portfolio and VNB serviced for others approximately $92.2 million and $89.0 million, respectively, of SBA loans.
Non-performing Assets
Non-performing assets include non-accrual loans and other real estate owned ("OREO"). Loans are generally placed on a non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO is reported at the lower of cost or fair value at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter.
Non-performing assets continued to decrease, and totaled $2.8 million at December 31, 2000, compared with $5.7 million at December 31, 1999, a decrease of $2.9 million or 51.4 percent. Non-performing assets at December 31, 2000 and 1999, respectively, amounted to 0.06 percent and 0.13 percent of loans and OREO. Non-performing assets have declined steadily over the past five years. Valley cannot predict whether or for how long this trend will continue.* The decrease in troubled debt restructured loans was the result of one loan which paid off during the year.
Loans 90 days or more past due and still accruing which were not included in the non-performing category totaled $13.0 million at December 31, 2000, compared to $11.7 million at December 31, 1999. These loans are primarily residential mortgage loans, commercial mortgage loans and commercial loans which are generally well-secured and in the process of collection. Also included are matured commercial mortgage loans in the process of being renewed, which totaled $2.8 million and $1.5 million at December 31, 2000 and 1999, respectively. Loans 90 days or more past due and still accruing have remained at relatively stable levels during the past two years. It is not known if this trend will continue.*
The allowance for loan losses as a percent of loans has declined since 1996. Valley provides additions to the allowance based upon net charge-offs and changes in the composition of the loan portfolio.
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
During 2000, recovered interest on non-accrual loans amounted to $180 thousand, compared with recovered interest of $720 thousand in 1999.
Although substantially all risk elements at December 31, 2000 have been disclosed in the categories presented above, management believes that for a variety of reasons, including economic conditions, certain borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial loans. As part of the analysis of the loan portfolio by management, it has been determined that there are approximately $18.0 million in potential problem loans at December 31, 2000, which have not been classified as non-accrual, past due or restructured.* Potential problem loans are defined as performing loans for which management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in a non-performing loan. Of these potential problem loans, only $2.4 million is considered at risk after collateral values and guarantees are taken into consideration. There can be no assurance that Valley has identified all of its problem loans. At December 31, 1999, Valley had identified approximately $7.7 million of potential problem loans which were not classified as non-accrual, past due or restructured.
Asset Quality and Risk Elements
Lending is one of the most important functions performed by Valley and, by its very nature, lending is also the most complicated, risky and profitable part of Valley's business. For commercial loans, construction loans and commercial mortgage loans, a separate credit department is responsible for risk assessment, credit file maintenance and periodically evaluating overall creditworthiness of a borrower. Additionally, efforts are made to limit concentrations of credit so as to minimize the impact of a downturn in any one economic sector. These loans are diversified as to type of borrower and loan. However, most of these loans are in northern New Jersey, presenting a geographical and credit risk if there was a significant downturn of the economy within the region.
Residential mortgage loans are secured primarily by 1-4 family properties located mainly within northern New Jersey. Conservative underwriting policies are adhered to and loan to value ratios are generally less than 80 percent.
Consumer loans are comprised of home equity loans, credit card loans and automobile loans. Home equity and automobile loans are secured loans and are made based on an evaluation of the collateral and the borrower's creditworthiness. The majority of automobile loans have been originated through a program with a major insurance company, whose customer base generally has a good credit profile and generally have resulted in delinquencies and charge-offs equal to that typically experienced from traditional sources. These automobile loans are from 12 states, and Canada, including New Jersey and generally present no more risk than those made within New Jersey.* All loans are subject to Valley's underwriting criteria, therefore, each loan or group of loans presents a geographical risk and credit risk based upon the economy of the region.
The co-branded credit card portfolio was substantially generated through a pre-approved mailing during 1996 utilizing automated credit scoring techniques and additional underwriting standards.
Management realizes that some degree of risk must be expected in the normal course of lending activities. Allowances are maintained to absorb such loan and off-balance sheet credit losses inherent in the portfolio. The allowance for loan losses and related provision are an expression of management's evaluation of the credit portfolio and economic climate.
The following table sets forth the relationship among loans, loans charged-off and loan recoveries, the provision for loan losses and the allowance for loan losses for the past five years:
The allowance for loan losses is maintained at a level estimated to absorb loan losses of the loan portfolio as well as other credit risk related charge-offs. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. 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 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."
VNB's allocated allowance is calculated by applying loss factors to outstanding loans. The formula is based on the internal risk grade of loans or pools of loans. Any change in the risk grade of performing and/or non-performing loans affects the amount of the related allowance. Loss factors are based on VNB's historical loss experience and may be adjusted for significant circumstances that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.
Management establishes an unallocated portion of the allowance to cover any losses incurred within a given loan category which have not been otherwise identified or measured on an individual basis. Such unallocated allowance includes management's evaluation of local and national economic and business conditions, portfolio concentrations, information risk, operational risk, credit quality and delinquency trends. The unallocated portion of the allowance reflects management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of expected credit losses.
The underwriting, growth and delinquency experience in the credit card portfolio will substantially influence the level of the allowance needed to absorb credit losses in the portfolio. Although credit card loans are generally considered more risky than other types of lending, a higher interest rate is charged to compensate for this increased risk. VNB continues to monitor the need for additions to the allowance.
During 2000, continued emphasis was placed on the current economic climate and the condition of the real estate market in the northern New Jersey area. Management addressed these economic conditions and applied that information to changes in the composition of the loan portfolio and net charge-off levels. The provision charged to operations was $6.1 million in 2000 compared to $9.1 million in 1999. The provision for loan losses was reduced as a result of Valley's declining trend in non-performing loans during the year and due to the expected sale of the Shop-Rite credit card portfolio, which eliminated the need for additional provisioning the bank was maintaining for that portfolio.
The following table summarizes the allocation of the allowance for loan losses to specific loan categories for the past five years:
At December 31, 2000 the allowance for loan losses amounted to $53.7 million or 1.15 percent of loans, as compared to $55.1 million or 1.21 percent at December 31, 1999.
The allowance is adjusted by provisions charged against income and loans charged-off, net of recoveries. Net loan charge-offs were $7.5 million for the year ended December 31, 2000 compared with $8.6 million for the year ended December 31, 1999. The ratio of net charge-offs to average loans decreased to 0.16 percent for 2000 compared with 0.20 percent for 1999. While consumer loan charge-offs decreased during 2000, they were at a level less than the level reported throughout the industry on a national basis. Non-accrual loans decreased in 2000 in comparison to 1999, and to its lowest level in five years, while loans past due 90 days and still accruing in 2000 were higher than during 1999.
The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific and general allocations to the allowance for loan losses totaled $2.2 million and $338 thousand, respectively, at December 31, 2000 and $13.4 million and $1.8 million, respectively, at December 31, 1999. The average balance of impaired loans during 2000 and 1999 was approximately $9.6 million and $13.2 million, respectively. The amount of cash
basis interest income that was recognized on impaired loans during 2000, 1999 and 1998 was $106 thousand, $559 thousand and $1.1 million, respectively.
Capital Adequacy
A significant measure of the strength of a financial institution is its shareholders' equity. At December 31, 2000, shareholders' equity totaled $545.1 million or 8.5 percent of total assets, compared with $553.5 million or 8.7 percent at year-end 1999.
On May 23, 2000 Valley's Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company's outstanding common stock. As of September 19, 2000 Valley had repurchased 571,070 shares of its common stock under this repurchase program, which was rescinded in connection with the signing of the definitive merger agreement with Merchants. This is in addition to the 3,000,000 shares purchased pursuant to an authorization by the Board of Directors in December 1999, the majority of which were used for the stock dividend issued on May 16, 2000. Reacquired shares are held in treasury and are expected to be used for employee benefit programs, stock dividends and other corporate purposes.
On February 12, 2000, the Board of Directors unanimously approved an amendment to Valley's Certificate of Incorporation to authorize 30,000,000 shares of a new class of "blank check" preferred stock. The purpose of the preferred stock is to maximize Valley's ability to expand its capital base. The amendment was approved by the Valley shareholders on April 6, 2000. At December 31, 2000, there were no shares of preferred stock issued.
Included in shareholders' equity as components of accumulated other comprehensive income at December 31, 2000 was a $4.2 million unrealized loss on investment securities available for sale, net of tax, and a currency translation adjustment loss of $678 thousand related to the Canadian subsidiary of VNB, compared to an unrealized loss of $16.3 million and a $418 thousand currency translation adjustment loss at December 31, 1999.
Risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common shareholders' equity less disallowed intangibles, while Total risk-based capital consists of Tier 1 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.
Valley's capital position at December 31, 2000 under risk-based capital guidelines was $544.1 million, or 10.8 percent of risk-weighted assets, for Tier 1 capital and $597.8 million, or 11.9 percent, for Total risk-based capital. The comparable ratios at December 31, 1999 were 11.6 percent for Tier 1 capital and 12.8 percent for Total risk-based capital. At December 31, 2000 and 1999, Valley was in compliance with the leverage requirement having Tier 1 leverage ratios of 8.7 percent and 9.1 percent, respectively. Valley's ratios at December 31, 2000 were all 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 $9.08 at December 31, 2000 compared with $8.83 per share at December 31, 1999.
The primary source of capital growth is through retention of earnings. Valley's rate of earnings retention, derived by dividing undistributed earnings by net income, was 41.9 percent at December 31, 2000, compared to 43.5 percent at December 31, 1999. Cash dividends declared amounted to $1.03 per share, equivalent to a dividend payout ratio of 58.1 percent for 2000, compared to 56.5 percent for the year 1999. The current quarterly dividend rate of $0.26 per share provides for an annual rate of $1.04 per share. Valley's Board of Directors continues to believe that cash dividends are an important component of shareholder value and that, at its current level of performance and capital, Valley expects to continue its current dividend policy of a quarterly distribution of earnings to its shareholders.*
Results of Operations-1999 Compared to 1998
Valley reported net income for 1999 of $106.3 million or $1.65 earnings per diluted share, compared to the $101.3 million, or $1.55 earnings per diluted share earned in 1998.
Net interest income on a tax equivalent basis increased $14.2 million, or 5.7 percent, to $262.8 million in 1999. The increase in 1999 was due primarily to a $402.4 million increase in the average balance of interest bearing assets offset slightly by a $316.7 million increase in the average balance of interest bearing liabilities. Average rates on interest earning assets and interest bearing liabilities decreased 27 basis points and 24 basis points, respectively.
Non-interest income, net of security gains amounted to $44.7 million, in 1999, relatively unchanged compared with 1998. Income from trust and investment services increased $601 thousand or 33.1 percent due primarily to additional fee income contributed by the acquisition of an investment management company during July 1999. Fees from loan servicing, which include both servicing fees from residential mortgage loans and SBA loans, increased $1.0 million or 13.6 percent. This increase can be attributed to the acquisition of several residential mortgage portfolios, and the origination of both SBA and residential mortgage loans by VNB which were sold to third-party investors with servicing retained. Credit card income declined by $1.5 million due to a decrease in card usage. Other non-interest income increased $2.6 million or 45.1 percent, attributed primarily to the gain on the sale of one OREO property during 1999 and commission fees earned on the outsourcing of check processing which began in the fourth quarter of 1998.
Non-interest expense totaled $137.9 million in 1999, a decrease of $6.8 million. Non-interest expense for 1999 includes a $3.0 million merger-related charge from the acquisition of Ramapo and for 1998 includes a $4.5 million merger-related charge from the acquisition of Wayne. Salary and benefit expense for 1999 increased $2.1 million or 3.0 percent. This increase was offset by a decrease in credit card expense of $4.0 million, attributable to a decreased usage of the card.
Income tax expense as a percentage of pre-tax income was 32.9 percent for the year ended December 31, 1999 compared to 23.1 percent in 1998. The increase in the effective tax rate is attributable to tax benefits realized prior to 1999 that were not available during 1999.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding Quantitative and Qualitative Disclosures About Market Risk, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Sensitivity."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Note 1)
BUSINESS
Valley National Bancorp ("Valley") is a bank holding company whose principal wholly-owned subsidiary is Valley National Bank ("VNB"), a national banking association providing a full range of commercial, retail and trust and investment services through its branch and ATM network throughout northern New Jersey. VNB also lends, through its consumer division and SBA program, to borrowers covering territories outside of its branch network and New Jersey. VNB is subject to intense competition from other financial services companies and is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by certain regulatory authorities.
VNB has several wholly-owned subsidiaries which include a mortgage servicing company, a company which holds, maintains and manages investment assets for VNB, a subsidiary which owns and services auto loans, a subsidiary which owns and services commercial mortgage loans, a title insurance company, asset management companies which are SEC registered investment advisors and an Edge Act Corporation which is the holding company for a wholly-owned finance company located in Toronto, Canada. Many of these subsidiaries transact business with VNB as well as third parties.
BASIS OF PRESENTATION
The consolidated financial statements of Valley include the accounts of its principal commercial bank subsidiary, VNB and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. Certain reclassifications have been made in the consolidated financial statements for 1999 and 1998 to conform to the classifications presented for 2000.
In preparing the consolidated financial statements, management has made estimates and assumptions that effect the reported amounts of assets and liabilities as of the date of the statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.
INVESTMENT SECURITIES
Investments are classified into three categories: held to maturity; available for sale; and trading. Valley's investment portfolio consists of each of these three categories.
Investment securities held to maturity, except for equity securities, are carried at cost and adjusted for amortization of premiums and accretion of discounts by using the interest method over the term of the investment.
Management has identified those investment securities which may be sold prior to maturity. These investment securities are classified as available for sale in the accompanying consolidated statements of financial condition and are recorded at fair value on an aggregate basis. Unrealized holding gains and losses on such securities are excluded from earnings, but are included as a component of accumulated other comprehensive income which is included in shareholders' equity, net of deferred tax. Realized gains or losses on the sale of investment securities available for sale are recognized by the specific identification method and shown as a separate component of non-interest income.
Trading securities are recorded at market value. Market value adjustments resulting from unrealized gains (losses) on such securities are included in non-interest income.
LOANS AND LOAN FEES
Loan origination and commitment fees, net of related costs, are deferred and amortized as an adjustment of loan yield over the estimated life of the loans approximating the effective interest method.
Loans held for sale consist of residential mortgage loans and SBA loans, and are carried at the lower of cost or estimated fair market value using the aggregate method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest income is not accrued on loans where interest or principal is 90 days or more past due or if in management's judgement the ultimate collectibility of the interest is doubtful. Exceptions may be made if the loan is sufficiently collateralized and in the process of collection. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it becomes well secured and in the process of collection and all past due amounts have been collected.
The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. Valley has defined the population of impaired loans to be all non-accrual loans and other loans considered to be impaired as to principal and interest, consisting primarily of commercial real estate loans. The impaired loan portfolio is primarily collateral dependent. Impaired loans are individually assessed to determine that each loan's carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows.
Valley originates loans guaranteed by the SBA. The principal amount of these loans is guaranteed between 75 percent and 80 percent, subject to certain dollar limitations. Valley generally sells the guaranteed portions of these loans and retains the unguaranteed portions as well as the rights to service the loans. Gains are recorded on loan sales based on the cash proceeds in excess of the assigned value of the loan, as well as the value assigned to the rights to service the loan.
Credit card loans primarily represent revolving MasterCard credit card loans. Interest on credit card loans is recognized based on the balances outstanding according to the related cardmember agreements. Direct origination costs are deferred and amortized over 24 months, the term of the cardmember agreement, on a straight-line basis. Net direct origination costs include costs associated with credit card originations that are incurred in transactions with independent third parties and certain costs relating to loan origination programs and the preparation and processing of loan documents, net of fees received. Ineligible direct origination costs are expensed as incurred.
Valley's lending is primarily in northern New Jersey, with the exception of an out-of-state auto lending program.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses ("allowance") is increased through provisions charged against current earnings and additionally by crediting amounts of recoveries received, if any, on previously charged-off loans. The allowance is reduced by charge-offs on loans which are determined to be a loss, in accordance with established policies, when all efforts of collection have been exhausted.
The allowance for loan losses is maintained at a level estimated to absorb loan losses inherent in the loan portfolio as well as other credit risk related charge-offs. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. 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 and 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 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."
VNB's allocated allowance is calculated by applying loss factors to outstanding loans. The formula is based on the internal risk grade of loans or pools of loans. Any change in the risk grade of performing and/or non-performing loans affects the amount of the related allowance. Loss factors are based on VNB's historical loss experience and may be adjusted for significant circumstances that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.
Management establishes an unallocated portion of the allowance to cover inherent losses incurred within a given loan category which have not been otherwise identified or measured on an individual basis. Such unallocated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
allowance includes management's evaluation of local and national economic and business conditions, portfolio concentrations, information risk, operational risk, credit quality and delinquency trends. The unallocated portion of the allowance reflects management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of expected credit losses.
PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are stated at cost less accumulated amortization computed on a straight-line basis over the term of the lease or estimated useful life of the asset, whichever is shorter. Major improvements are capitalized, while repairs and maintenance costs are charged to operations as incurred. Upon retirement or disposition, any gain or loss is credited or charged to operations.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO"), acquired through foreclosure on loans secured by real estate, is reported at the lower of cost or fair value, as established by a current appraisal, less estimated costs to sell, and is included in other assets. Any write-downs at the date of foreclosure are charged to the allowance for loan losses.
An allowance for OREO has been established to record subsequent declines in estimated net realizable value. Expenses incurred to maintain these properties and realized gains and losses upon sale of the properties are included in other non-interest expense and other non-interest income, as appropriate.
INTANGIBLE ASSETS
Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill and core deposit intangibles. Goodwill recorded prior to 1987 is being amortized on a straight-line basis over 25 years. Goodwill recorded in 2000 and 1999 is being amortized on a straight-line basis over 10 years. Core deposit intangibles are amortized on accelerated methods over the estimated lives of the assets. Goodwill and core deposit intangibles are included in other assets.
LOAN SERVICING RIGHTS
Loan servicing rights are generally recorded when purchased or originated loans are sold, with servicing rights retained. The cost of each loan is allocated between the servicing right and the loan (without the servicing right) based on their relative fair values. Loan servicing rights, which are classified in other assets, are amortized over the estimated net servicing life and are evaluated on a quarterly basis for impairment based on their fair value. The fair value is estimated using the present value of expected future cash flows along with numerous assumptions including servicing income, cost of servicing, discount rates, prepayment speeds, and default rates. Impairment adjustments, if any, are recognized through the use of a valuation allowance.
STOCK-BASED COMPENSATION
Valley accounts for its stock option plan in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no compensation expense is recognized for stock options issued to employees since the options have an exercise price equal to the market value of the common stock on the day of the grant. Valley provides the fair market disclosure required by Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-based Compensation."
INCOME TAXES
Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" established standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Valley's components of other comprehensive income include unrealized gains (losses) on securities available for sale, net of tax, and the foreign currency translation adjustment. Valley provides the required disclosure in the Consolidated Statements of Changes in Shareholders' Equity.
EARNINGS PER SHARE
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.
All share and per share amounts have been restated to reflect the 5 percent stock dividend issued May 16, 2000, and all prior stock dividends and splits.
The following table shows the calculation of both Basic and Diluted earnings per share for the years ended December 31, 2000, 1999 and 1998.
At December 31, 2000 and 1999 there were 66 thousand and 272 thousand stock options not included as common stock equivalents because the exercise prices exceeded the average market value.
TREASURY STOCK
Treasury stock is recorded using the cost method and accordingly is presented as an unallocated reduction of shareholders' equity.
IMPACT OF FUTURE ACCOUNTING CHANGES
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued by the FASB in June 1998. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial condition at fair value. Valley
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
would have had to adopt SFAS No. 133 by January 1, 2000. However, SFAS No. 137 extended the adoption of SFAS No. 133 to periods beginning after June 15, 2000. In June of 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133 and 137," which amends the accounting and reporting standards of SFAS No. 133 for derivative instruments. Upon adoption, the provisions of SFAS No. 133 must be applied prospectively. The adoption of SFAS No. 133, SFAS No. 137 and SFAS No. 138 effective on January 1, 2001 did not have a material impact on the financial statements.
The FASB has issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 replaces SFAS No. 125. SFAS No. 140 resolves certain implementation issues, but it carries forward most of SFAS No. 125's provisions without change. SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Valley anticipates that the adoption of SFAS No. 140 will not have a material impact on the financial statements.
ACQUISITIONS (Note 2)
On January 19, 2001 Valley completed its merger with Merchants New York Bancorp, Inc. ("Merchants"), parent of The Merchants Bank of New York headquartered in Manhattan. Under the terms of the merger agreement, each outstanding share of Merchants common stock was exchanged for 0.7634 shares of Valley common stock. As a result, a total of approximately 14 million shares of Valley common stock were exchanged. This merger added seven branches in Manhattan. The transaction was accounted for utilizing the pooling of interests method of accounting.
In accordance with generally accepted accounting principles, the consolidated financial statements of Valley, included herein, have not been restated to include Merchants.
The following proforma data summarizes the combined financial data of Valley and Merchants as if the merger had been consummated on December 31, 1999 for Statement of Financial Condition purposes and January 1, 1998 for Income Statement purposes:
DECEMBER 31, ------------------------ 2000 1999 ---------- ---------- (IN THOUSANDS)
Total assets ...................... $7,902,628 $7,755,707 Total investments ................. 2,203,537 2,204,840 Total loans ....................... 5,190,478 4,991,849 Total deposits .................... 6,136,828 6,010,233
YEARS ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 ---------- ---------- --------- (IN THOUSANDS, EXCEPT FOR SHARE DATA)
Interest income ................... $ 568,206 $ 517,820 $ 497,561 Interest expense .................. 252,648 208,793 208,531 Net interest income ............... 315,558 309,027 289,030 Net income ........................ 127,626 125,341 117,173 Earnings per share-basic .......... 1.70 1.60 1.48 Earnings per share-diluted ........ 1.69 1.58 1.46
On July 6, 2000, Valley acquired Hallmark Capital Management, Inc. ("Hallmark"), a Fairfield, NJ based investment management firm with $195 million of assets under management. Hallmark's purchase was a stock merger with subsequent earn out payments. Hallmark's operations will continue as a wholly-owned subsidiary of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
VNB. The transaction was accounted for as a purchase and resulted in goodwill of approximately $1.2 million which is being amortized over a 10 year period.
On June 11, 1999, Valley acquired Ramapo Financial Corporation ("Ramapo"), parent of The Ramapo Bank headquartered in Wayne, New Jersey. At the date of acquisition, Ramapo had total assets of $344.0 million and deposits of $299.5 million, with eight branch offices. The transaction was accounted for using the pooling of interests method of accounting and resulted in the issuance of approximately 4.0 million shares of Valley common stock. Each share of common stock of Ramapo was exchanged for 0.44625 shares of Valley common stock. The consolidated financial statements of Valley have been restated to include Ramapo for all periods presented.
During the second quarter of 1999, Valley recorded a merger-related charge of $3.0 million related to the acquisition of Ramapo. On an after tax basis, the charge totaled $2.2 million or $0.03 per diluted share. The charge includes only identified direct and incremental costs associated with this acquisition. Items included in the charge include the following: personnel expenses which include severance payments and benefits for terminated employees, principally, two senior executives of Ramapo; real estate expenses related to the closing of a duplicate branch; professional fees which include investment banking, accounting and legal fees; and other expenses which include termination of data processing service contracts and the write-off of supplies and other assets not considered useful in the operation of the combined entity. The major components of the merger-related charge, consisting of real estate dispositions, professional fees, personnel expenses and other expenses, totaled $300 thousand, $1.1 million,$1.1 million and $500 thousand, respectively. Of the total merger-related charge $2.8 million, or 92.7 percent was paid through December 31, 2000. The remaining liability represents contracts which will be paid over their remaining terms.
During the second quarter of 1999, Valley National Bank received approval and a license from the New Jersey Department of Banking and Insurance to sell title insurance through a separate subsidiary, known as Wayne Title, Inc. After the close of the second quarter, Valley acquired the assets of an agency office of Commonwealth Land Title Insurance Company for $784 thousand and began to sell both commercial and residential title insurance policies. The transaction was accounted for as a purchase, at which time goodwill of $728 thousand was recorded.
On July 30, 1999, Valley acquired New Century Asset Management, Inc., a registered investment advisor and NJ-based money manager with approximately $120 million of assets under management. At closing, Valley paid an initial consideration of $640 thousand. The balance due will be paid on an earn-out basis over a five-year period, based upon a pre-determined formula. New Century will continue its operations as a wholly-owned subsidiary of Valley National Bank. The transaction was accounted for as a purchase, at which time goodwill of $1.3 million was recorded.
On October 16, 1998, Valley acquired Wayne Bancorp, Inc. ("Wayne"), parent of Wayne Savings Bank, F.S.B., headquartered in Wayne, New Jersey. At the date of acquisition, Wayne had total assets of $272.0 million and deposits of $206.0 million, with six branch offices. The transaction was accounted for using the pooling of interests method of accounting and resulted in the issuance of approximately 2.4 million shares of Valley common stock. Each share of common stock of Wayne was exchanged for 1.1 shares of Valley common stock. The consolidated financial statements of Valley have been restated to include Wayne for all periods presented.
During 1998, Valley recorded a merger-related charge of $4.5 million, related to the acquisition of Wayne. On an after tax basis, the charge totaled $3.2 million or $0.05 per diluted share. The charge includes only identified direct and incremental costs associated with this acquisition. Items included in the charge include the following: personnel expenses which include severance payments and benefits for terminated employees, principally, ten senior executives and directors at Wayne; real estate expenses related to the closing of duplicate facilities, professional fees which include investment banking, accounting and legal fees; and other expenses which include termination of data processing service contracts and the write-off of supplies and other assets not considered useful in the operation of the combined entity. The major components of the merger-related charge are for real estate dispositions, professional fees, personnel expenses and other expenses total $1.5 million, $1.4 million, $1.0 million and $600 thousand, respectively. Of the total merger-related charge, $4.1 million or 91.1 percent was paid through December 31, 2000. The remaining liability represents contracts which will be paid over their remaining terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INVESTMENT SECURITIES HELD TO MATURITY (Note 3)
The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at December 31, 2000 and 1999 were as follows:
The contractual maturities of investments in debt securities held to maturity at December 31, 2000, are set forth in the following table:
DECEMBER 31, 2000 ---------------------- AMORTIZED FAIR COST VALUE -------- -------- (IN THOUSANDS)
Due in one year ................................ $ 20,341 $ 20,378 Due after one year through five years .......... 75 75 Due after five years through ten years ......... -- -- Due after ten years ............................ 248,954 209,739 -------- -------- 269,370 230,192 Mortgage-backed securities ..................... 35,422 35,977 -------- -------- Total debt securities held to maturity ..... $304,792 $266,169 ======== ========
Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted-average remaining life for mortgage-backed securities held to maturity was 2.7 years at December 31, 2000, and 3.0 years at December 31, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1999, in connection with the Ramapo acquisition, Valley reassessed the classification of securities held in the Ramapo investment portfolio and transferred $42.4 million of securities held to maturity to securities available for sale to conform to Valley's investment objectives. In 1998, in connection with the Wayne acquisition, Valley reassessed the classification of securities held in the Wayne portfolio and transferred $1.6 million of securities held to maturity to securities available for sale to conform with Valley's investment objectives.
INVESTMENT SECURITIES AVAILABLE FOR SALE (Note 4)
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at December 31, 2000 and 1999 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The contractual maturities of investments in debt securities available for sale at December 31, 2000, are set forth in the following table:
DECEMBER 31, 2000 ------------------------- AMORTIZED FAIR COST VALUE ---------- ---------- (IN THOUSANDS)
Due in one year ................................. $ 53,289 $ 53,224 Due after one year through five years ........... 149,887 149,056 Due after five years through ten years .......... 57,482 57,588 Due after ten years ............................. 3,747 4,011 ---------- ---------- 264,405 263,879 Mortgage-backed securities ...................... 747,998 742,815 ---------- ---------- Total debt securities available for sale ...... $1,012,403 $1,006,694 ========== ==========
Actual maturities on debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted-average remaining life for mortgage-backed securities available for sale at December 31, 2000 and 1999 was 6.1 years and 5.7 years, respectively.
Gross gains (losses) realized on sales, maturities and other securities transactions, related to securities available for sale, and (losses) gains on trading account securities included in earnings for the years ended December 31, 2000, 1999 and 1998 were as follows:
Cash proceeds from sales transactions were $10.8 million, $29.7 million and $113.6 million for the years ended 2000, 1999 and 1998, respectively. For 1999 cash proceeds include $1.4 million from sales of trading account securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LOANS (Note 5)
The detail of the loan portfolio as of December 31, 2000 and 1999 was as follows:
2000 1999 ---------- ---------- (IN THOUSANDS)
Commercial .............................. $ 530,351 $ 512,164 ---------- ---------- Total commercial loans .............. 530,351 512,164 ---------- ---------- Construction ............................ 160,932 123,531 Residential mortgage .................... 1,298,948 1,247,721 Commercial mortgage ..................... 1,232,162 1,164,065 ---------- ---------- Total mortgage loans ................ 2,692,042 2,535,317 ---------- ---------- Home equity ............................. 306,038 276,261 Credit card ............................. 94,293 92,097 Automobile .............................. 975,258 1,053,457 Other consumer .......................... 63,432 85,456 ---------- ---------- Total consumer loans ................ 1,439,021 1,507,271 ---------- ---------- Total loans ............................. $4,661,414 $4,554,752 ========== ==========
Included in the table above are loans held for sale in the amount of $17.9 million and $12.2 million at December 31, 2000 and 1999, respectively.
VNB grants loans in the ordinary course of business to its directors, executive officers and their affiliates, on the same terms and under the same risk conditions as those prevailing for comparable transactions with outside borrowers.
The following table summarizes the change in the total amounts of loans and advances to directors, executive officers, and their affiliates during the year 2000:
------- (IN THOUSANDS)
Outstanding at beginning of year ................ $25,793 New loans and advances .......................... 11,766 Repayments ...................................... (6,374) ------- Outstanding at end of year ...................... $31,185 =======
The outstanding balances of loans which are 90 days or more past due as to principal or interest payments and still accruing, non-performing assets and troubled debt restructured loans at December 31, 2000 and 1999 were as follows:
The amount of interest income that would have been recorded on non-accrual loans in 2000, 1999 and 1998 had payments remained in accordance with the original contractual terms approximated $404 thousand, $619 thousand and $1.4 million, respectively, while the actual amount of interest income recorded on these types of assets in 2000, 1999 and 1998 totaled $584 thousand, $1.3 million and $375 thousand, respectively, resulting in (recovered) lost interest income of ($180) thousand and ($720) thousand and $1.0 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, there were no commitments to lend additional funds to borrowers whose loans were non-accrual, classified as troubled debt restructured loans, or contractually past due in excess of 90 days and still accruing interest.
The impaired loan portfolio is primarily collateral dependent. Impaired loans and their related specific and general allocations to the allowance for loan losses totaled $2.2 million and $338 thousand, respectively, at December 31, 2000 and $13.4 million and $1.8 million, respectively, at December 31, 1999. The average balance of impaired loans during 2000 and 1999 was approximately $9.6 million and $13.2 million, respectively. The amount of cash basis interest income that was recognized on impaired loans during 2000, 1999 and 1998 was $106 thousand, $559 thousand and $1.1 million, respectively.
ALLOWANCE FOR LOAN LOSSES (Note 6)
Transactions recorded in the allowance for loan losses during 2000, 1999 and 1998 were as follows:
2000 1999 1998 ------- ------- ------- (IN THOUSANDS)
Balance at beginning of year ............... $55,120 $54,641 $53,170 Provision charged to operating expense ..... 6,130 9,120 12,645 ------- ------- ------- 61,250 63,761 65,815 ------- ------- ------- Less net loan charge-offs:
Loans charged-off ........................ (10,954) (12,131) (14,963) Less recoveries on loan charge-offs ...... 3,439 3,490 3,789 ------- ------- ------- Net loan charge-offs ....................... (7,515) (8,641) (11,174) ------- ------- ------- Balance at end of year ..................... $53,735 $55,120 $54,641 ======= ======= =======
LOAN SERVICING (Note 7)
VNB Mortgage Services, Inc. ("MSI"), a subsidiary of VNB, is a servicer of residential mortgage loan portfolios. MSI is compensated for loan administrative services performed for mortgage servicing rights purchased in the secondary market and originated by VNB. The aggregate principal balances of mortgage loans serviced by MSI for others approximated $2.5 billion, $2.2 billion and $1.6 billion at December 31, 2000, 1999 and 1998, respectively. The outstanding balance of loans serviced for others is not included in the consolidated statements of financial condition.
VNB is a servicer of SBA loans, and is compensated for loan administrative services performed for SBA loans originated and sold by VNB. VNB serviced a total of $92.2 million, $89.0 million and $78.1 million of SBA loans at December 31, 2000, 1999 and 1998, respectively, for third-party investors.
The unamortized costs associated with acquiring loan servicing rights are included in other assets in the consolidated financial statements and are being amortized over the estimated life of net servicing income.
The following table summarizes the change in loan servicing rights during the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 ------- ------- ------- (IN THOUSANDS)
Balance at beginning of year ........... $36,809 $20,765 $13,514 Purchase and origination of loan servicing rights ..................... 2,696 20,419 11,986 Amortization expense ................... (6,776) (4,375) (4,735) ------- ------- ------- Balance at end of year ................. $32,729 $36,809 $20,765 ======= ======= =======
Amortization expense is included in amortization of intangible assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PREMISES AND EQUIPMENT, NET (Note 8)
At December 31, 2000 and 1999, premises and equipment, net consisted of:
2000 1999 -------- -------- (IN THOUSANDS)
Land ....................................... $ 20,406 $ 19,531 Buildings .................................. 57,784 56,147 Leasehold improvements ..................... 17,247 16,639 Furniture and equipment .................... 78,293 72,770 -------- -------- 173,730 165,087 Less: Accumulated depreciation and amortization ......................... (88,336) (80,297) -------- -------- Total premises and equipment, net ........ $ 85,394 $ 84,790 ======== ========
Depreciation and amortization included in non-interest expense for the years ended December 31, 2000, 1999 and 1998 amounted to approximately $8.6 million, $7.6 million and $9.0 million, respectively.
OTHER ASSETS (Note 9)
At December 31, 2000 and 1999, other assets consisted of the following:
2000 1999 ------- ------- (IN THOUSANDS)
Loan servicing rights .............. $32,729 $36,809 Goodwill ........................... 5,249 4,393 Core deposit intangible ............ 884 1,142 Other real estate owned ............ 129 2,256 Deferred tax asset ................. 24,065 31,757 Other .............................. 24,139 22,630 ------- ------- Total other assets ............. $87,195 $98,987 ======= =======
DEPOSITS (Note 10)
Included in time deposits at December 31, 2000 and 1999 are certificates of deposit over $100 thousand of $733.3 million and $647.3 million, respectively.
Interest expense on time deposits of $100 thousand or more totaled approximately $45.3 million, $27.9 million and $20.2 million in 2000, 1999 and 1998, respectively.
The scheduled maturities of time deposits as of December 31, 2000 are as follows:
(IN THOUSANDS)
2001 ........................ $1,844,457 2002 ........................ 151,844 2003 ........................ 64,186 2004 ........................ 8,174 2005 ........................ 46,836 Thereafter .................. 7,259 ---------- $2,122,756 ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BORROWED FUNDS (Note 11)
Short-term borrowings at December 31, 2000 and 1999 consisted of the following:
2000 1999 -------- -------- (IN THOUSANDS)
Federal funds purchased .................. $ -- $ 9,990 Securities sold under agreements to repurchase ............................. 52,310 59,436 Treasury tax and loan .................... 21,231 40,000 Bankers acceptances ...................... 24,481 19,639 Line of credit ........................... 10,000 -- -------- -------- Total short-term borrowings .......... $108,022 $129,065 ======== ========
At December 31, 2000 and 1999, long-term debt consisted of the following:
2000 1999 -------- -------- (IN THOUSANDS)
FHLB advances ............................ $461,500 $464,500 Securities sold under agreements to repurchase ............................. 130,000 100,000 Other .................................... 308 381 -------- -------- Total long-term debt ................. $591,808 $564,881 ======== ========
The Federal Home Loan Bank (FHLB) advances had a weighted average interest rate of 6.04 percent at December 31, 2000 and 5.93 percent at December 31, 1999. These advances are secured by pledges of FHLB stock, mortgage-backed securities and a blanket assignment of qualifying mortgage loans. The advances are scheduled for repayment as follows:
(IN THOUSANDS)
2001 ......................... $ 127,000 2002 ......................... 17,000 2003 ......................... 82,000 2004 ......................... 102,000 2005 ......................... 23,000 Thereafter ................... 110,500 --------- $ 461,500 =========
Interest expense of $27.2 million, $21.7 million and $8.8 million was recorded on FHLB advances during the years ended December 31, 2000, 1999, and 1998, respectively.
The securities sold under agreements to repurchase included in long-term debt had a weighted average interest rate of 6.43 percent and 6.22 percent at December 31, 2000 and 1999, respectively. $100 million of securities sold under agreements to repurchase are due November, 2002 and $30 million are due March, 2005. Interest expense of $8.0 million and $942 thousand was recorded on this debt during the years ended December 31, 2000 and 1999, respectively. There was no interest expense recorded during 1998.
At December 31, 2000, Valley maintained a floating rate revolving line of credit in the amount of $35.0 million of which $10.0 million was outstanding. Interest expense of $1.4 million was recorded on this debt during the year ended December 31, 2000. This line is available for general corporate purposes and expires June 15, 2001. Borrowings under this facility are collateralized by mortgage-backed securities and equity securities of no less than 120 percent of the loan balance.
The amortized cost of securities pledged to secure public deposits, treasury tax and loan deposits, repurchase agreements, lines of credit, FHLB advances and for other purposes required by law approximated $408.9 million and $289.2 million at December 31, 2000 and 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BENEFIT PLANS (Note 12)
PENSION PLAN
VNB has a non-contributory benefit plan covering substantially all of its employees. The benefits are based upon years of credited service, primary social security benefits and the employee's highest average compensation as defined. It is VNB's funding policy to contribute annually the maximum amount that can be deducted for federal income tax purposes. In addition, VNB has a supplemental non-qualified, non-funded retirement plan which is designed to supplement the pension plan for key officers.
The following table sets forth change in projected benefit obligation, change in fair value of plan assets, funded status and amounts recognized in Valley's financial statements for the pension plans at December 31, 2000 and 1999:
Net periodic pension expense for 2000, 1999 and 1998 included the following components:
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of benefit obligations for the plan were 7.40 percent and 4.50 percent, respectively, for 2000 and 7.75 percent and 4.50 percent, respectively, for 1999. The expected long-term rate of return on assets was
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9.00 percent for 2000 and 9.50 percent for 1999 and the weighted average discount rate used in computing pension cost was 7.75 percent and 6.75 percent for 2000 and 1999, respectively. The pension plan held 54,949 shares of Valley National Bancorp stock at both December 31, 2000 and 1999.
BONUS PLAN
VNB and its subsidiaries award incentive and merit bonuses to its officers and employees based upon a percentage of the covered employees' compensation as determined by the achievement of certain performance objectives. Amounts charged to salaries expense during 2000, 1999 and 1998 were $3.4 million, $3.1 million and $2.6 million, respectively.
SAVINGS PLAN
Effective May 1, 1999, VNB's 401(k) Plan was amended to merge the Employee Stock Ownership Plan ("ESOP") from the acquisition of Wayne into the VNB 401(k) Plan, creating a KSOP (a 401(k) plan with an employee stock ownership feature). This plan covers eligible employees of VNB and its subsidiaries and allows employees to contribute 1 percent to 15 percent of their salary, with VNB matching a certain percentage of the employee contribution. Beginning in May 1999, the VNB match is in shares of Valley stock. In 2000, VNB matched employee contributions with 48,955 shares, of which 23,065 shares were allocated from the former Wayne ESOP Plan and 26,719 shares were issued from Treasury stock. In 1999, VNB matched employee contributions with 30,723 shares, of which 16,057 shares were allocated from the former Wayne ESOP Plan and 14,666 shares were issued from treasury stock. VNB charged expense for contributions to the plan, net of forfeitures, for 2000, 1999 and 1998 amounting to $1.2 million, $944 thousand and $746 thousand, respectively. At December 31, 2000 the KSOP had 95,048 unallocated shares.
In 1999 and 1998, 32,117 shares and 25,428 shares, respectively, were allocated to participants of the former Wayne ESOP Plan. ESOP expense for 1999 and 1998 was $865 thousand and $607 thousand, respectively. No shares were allocated in 2000 to participants of the former Wayne ESOP Plan.
STOCK OPTION PLAN
At December 31, 2000, Valley had a stock option plan which is described below. Valley applies APB Opinion No. 25 and related Interpretations in accounting for its plan. Had compensation cost for the plan been determined consistent with FASB Statement No. 123, net income and earnings per share would have been reduced to the proforma amounts indicated below:
2000 1999 1998 -------- -------- -------- (IN THOUSANDS, EXCEPT FOR SHARE DATA)
Net income As reported ................... $106,773 $106,324 $101,271 Proforma ...................... 105,525 105,279 100,246 Earnings per share As reported: Basic ....................... $ 1.76 $ 1.67 $ 1.57 Diluted ..................... 1.75 1.65 1.55 Proforma: Basic ....................... $ 1.74 $ 1.65 $ 1.55 Diluted ..................... 1.73 1.64 1.53
Under the Employee Stock Option Plan, Valley may grant options to its employees for up to 2.8 million shares of common stock in the form of stock options, stock appreciation rights and restricted stock awards. The exercise price of options equal 100 percent of the market price of Valley's stock on the date of grant, and an option's maximum term is ten years. The options granted under this plan are exercisable not earlier than one year after the date of grant, expire not more than ten years after the date of the grant, and are subject to a vesting schedule. Non-qualified options granted by Midland Bancorporation, Inc. and assumed by Valley have no vesting period and a maximum term of fifteen years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998: dividend yield of 3.12 percent for 2000, 3.71 percent for 1999 and 3.50 percent for 1998; weighted-average risk-free interest rate of 5.11 percent for 2000, 6.44 percent for 1999 and 5.00 percent for 1998; and expected volatility of 24.5 percent for 2000, 21.8 percent for 1999 and 18.5 percent for 1998. The effects of applying SFAS No. 123 on the proforma net income may not be representative of the effects on proforma net income for future years.
A summary of the status of qualified and non-qualified stock options as of December 31, 2000, 1999 and 1998 and changes during the years ended on those dates is presented below:
The following table summarizes information about stock options outstanding at December 31, 2000:
During 1998, stock appreciation rights granted in tandem with stock options were 11,438. There were 28,557, 50,559 and 50,559 stock appreciation rights outstanding as of December 31, 2000, 1999 and 1998, respectively.
Restricted stock is awarded to key employees providing for the immediate award of Valley's common stock subject to certain vesting and restrictions. The awards are recorded at fair market value and amortized into salary expense over the vesting period. The following table sets forth the changes in restricted stock awards outstanding for the years ended December 31, 2000, 1999 and 1998.
RESTRICTED STOCK AWARDS 2000 1999 1998 ------------ ------- ------- ------- Outstanding at beginning of year ....... 217,437 217,957 213,509 Granted ................................ 64,196 61,401 61,214 Vested ................................. (66,689) (58,577) (54,576) Forfeited .............................. (7,440) (3,344) (2,190) ------- ------- ------- Outstanding at end of year ............. 207,504 217,437 217,957 ======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amount of compensation costs related to restricted stock awards included in salary expense in 2000, 1999 and 1998 amounted to $1.3 million, $1.1 million and $1.0 million, respectively.
INCOME TAXES (Note 13)
Income tax expense (benefit) included in the financial statements consisted of the following:
2000 1999 1998 ------- ------- ------- (IN THOUSANDS)
Income tax from operations: Current: Federal ....................... $53,993 $50,434 $29,520 State ......................... 1,593 2,041 3,400 ------- ------- ------- 55,586 52,475 32,920
Deferred: Federal and State ............... (522) (255) (2,540) ------- ------- ------- Total income tax expense .... $55,064 $52,220 $30,380 ======= ======= =======
The tax effects of temporary differences that gave rise to deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows:
2000 1999 ------- ------- (IN THOUSANDS)
Deferred tax assets: Allowance for loan losses ....................... $21,715 $22,270 Investment securities available for sale ........ 2,803 11,017 State privilege year taxes ...................... -- 277 Non-accrual loan interest ....................... 182 317 Other ........................................... 7,396 7,054 ------- ------- Total deferred tax assets ..................... 32,096 40,935 ------- ------- Deferred tax liabilities: Tax over book depreciation ...................... 2,476 2,969 Purchase accounting adjustments ................. 212 443 Unearned discount on investments ................ 188 428 State privilege year taxes ...................... 34 -- Other ........................................... 5,121 5,338 ------- ------- Total deferred tax liabilities ................ 8,031 9,178 ------- ------- Net deferred tax assets ........................... $24,065 $31,757 ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation between the reported income tax expense and the amount computed by multiplying income before taxes by the statutory federal income tax rate is as follows:
COMMITMENTS AND CONTINGENCIES (NOTE 14)
LEASE COMMITMENTS
Certain bank facilities are occupied under non-cancelable long-term operating leases which expire at various dates through 2047. Certain lease agreements provide for renewal options and increases in rental payments based upon increases in the consumer price index or the lessor's cost of operating the facility. Minimum aggregate lease payments for the remainder of the lease terms are as follows:
(IN THOUSANDS)
2001 .................................. $ 5,678 2002 .................................. 5,164 2003 .................................. 4,757 2004 .................................. 4,190 2005 .................................. 2,774 Thereafter ............................ 16,854 ------- Total lease commitments ............. $39,417 =======
Net occupancy expense for 2000, 1999 and 1998 included approximately $3.0 million, $2.3 million and $3.2 million, respectively, of rental expenses for leased bank facilities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the ordinary course of business of meeting the financial needs of its customers, Valley, through its subsidiary VNB, is a party to various financial instruments which are properly not reflected in the consolidated financial statements. These financial instruments include standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these instruments is an indicator of VNB's level of involvement in each type of instrument as well as the exposure to credit loss in the event of non-performance by the other party to the financial instrument. VNB seeks to limit any exposure of credit loss by applying the same credit underwriting standards, including credit review, interest rates and collateral requirements or personal guarantees, as for on-balance sheet lending facilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 2000 and 1999:
Standby letters of credit represent the guarantee by VNB of the obligations or performance of a customer in the event the customer is unable to meet or perform its obligations to a third party. Obligations to advance funds under commitments to extend credit, including commitments under unused lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have specified expiration dates, which may be extended upon request, or other termination clauses and generally require payment of a fee.
At December 31, 2000, VNB had commitments to sell residential mortgage loans and SBA loans totaling $7.5 million.
The amounts set forth above do not necessarily represent future cash requirements as it is anticipated that many of these commitments will expire without being fully drawn upon. Most of VNB's lending activity is to customers within the state of New Jersey, except for automobile loans, which are to customers from 12 states, including New Jersey, and Canada.
LITIGATION
In the normal course of business, Valley may be a party to various outstanding legal proceedings and claims. In the opinion of management, the consolidated financial position or results of operations of Valley will not be materially affected by the outcome of such legal proceedings and claims.
SHAREHOLDERS' EQUITY (Note 15)
CAPITAL REQUIREMENTS
Valley is subject to the regulatory capital requirements administered by the Federal Reserve Bank. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Valley's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Valley must meet specific capital guidelines that involve quantitative measures of Valley's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Valley to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as defined in the regulations. As of December 31, 2000, Valley exceeded all capital adequacy requirements to which it was subject.
The most recent notification received from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized Valley must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Valley's actual capital amounts and ratios as of December 31, 2000 and 1999 are presented in the following table:
DIVIDEND RESTRICTIONS
VNB, a national banking association, is subject to a limitation in the amount of dividends it may pay to Valley, VNB's only shareholder. Prior approval by the Comptroller of the Currency ("OCC") is required to the extent that the total of all dividends to be declared by VNB in any calendar year exceeds net profits, as defined, for that year combined with its retained net profits from the preceding two calendar years, less any transfers to capital surplus. Under this limitation, VNB could declare dividends in 2001 without prior approval from the OCC equal to VNB's net profits for 2001 to the date of such dividend declaration less $7.3 million of excess dividends paid in the preceding two calendar years. In addition to dividends received from its subsidiary bank, Valley can satisfy its cash requirements by utilizing its own funds, cash and investments, as well as borrowed funds.
PREFERRED STOCK
On February 12, 2000, the Board of Directors unanimously approved an amendment to Valley's Certificate of Incorporation to authorize 30,000,000 shares of a new class of "blank check" preferred stock. The purpose of the preferred stock is to maximize Valley's ability to expand its capital base. The amendment was approved by the Valley shareholders on April 6, 2000. At December 31, 2000, there were no shares of preferred stock issued.
SHARES OF COMMON STOCK
The following table summarizes the share transactions for the three years ended December 31, 2000:
SHARES IN SHARES ISSUED TREASURY ------------- -----------
BALANCE, DECEMBER 31, 1997 .................... 58,966,200 (356,082) Effect of stock incentive plan, net ......... (14,607) 152,472 Purchase of treasury stock .................. -- (220,125) Issuance of stock from treasury ............. -- 187,000 ---------- ---------- BALANCE, DECEMBER 31, 1998 .................... 58,951,593 (236,735) Stock dividend (5 percent) .................. 1,236,450 1,537,876 Effect of stock incentive plan, net ......... 432,997 168,366 Purchase of treasury stock .................. -- (2,397,257) ---------- ---------- BALANCE, DECEMBER 31, 1999 .................... 60,621,040 (927,750) Stock dividend (5 percent) .................. -- 2,884,669 Effect of stock incentive plan, net ......... (80,993) 311,380 Purchase of treasury stock .................. -- (2,770,770) ---------- ---------- BALANCE, DECEMBER 31, 2000 .................... 60,540,047 (502,471) ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
TREASURY STOCK
On May 23, 2000 Valley's Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company's outstanding common stock. As of September 19, 2000 Valley had repurchased 571,070 shares of its common stock under this repurchase program, which was rescinded in connection with the signing of the definitive merger agreement with Merchants. This is in addition to the 3,000,000 shares purchased pursuant to an authorization by the Board of Directors in December 1999, the majority of which were used for the stock dividend issued on May 16, 2000. Reacquired shares are held in treasury and are expected to be used for employee benefit programs, stock dividends and other corporate purposes.
On June 10, 1999 Valley's Board of Directors rescinded the stock repurchase program it had announced on April 28, 1999 after 1.6 million shares of Valley common stock had been repurchased. Approximately 1.5 million treasury shares were issued in conjunction with the 5 percent dividend issued May 18, 1999. Rescinding the remaining authorization was undertaken in connection with Valley's acquisition of Ramapo.
On May 26, 1998 Valley's Board of Directors rescinded its previously announced stock repurchase program after 220,125 shares of Valley common stock had been repurchased. Rescinding the remaining authorization was undertaken in connection with Valley's acquisition of Wayne.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 16)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PARENT COMPANY INFORMATION (Note 17)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, -------------------- 2000 1999 -------- -------- (IN THOUSANDS) ASSETS Cash ................................................. $ 2,478 $ 3,242 Interest bearing deposits with banks ................. 22,125 36,127 Investment securities available for sale ............. 44,752 55,909 Investment in subsidiary ............................. 495,391 474,462 Loan to subsidiary bank employee benefit plan ........ 893 1,071 Other assets ......................................... 5,523 4,195 -------- -------- Total assets ....................................... $571,162 $575,006 ======== ======== LIABILITIES Dividends payable to shareholders .................... $ 15,605 $ 15,724 Short-term borrowings ................................ 10,000 -- Other liabilities .................................... 483 5,782 -------- -------- Total liabilities .................................. 26,088 21,506 -------- -------- SHAREHOLDERS' EQUITY Preferred stock ...................................... -- -- Common stock ......................................... 25,886 25,943 Surplus .............................................. 324,300 325,147 Retained earnings .................................... 213,362 244,605 Unallocated common stock held by employee benefit plan ....................................... (775) (965) Accumulated other comprehensive loss ................. (4,923) (16,733) -------- -------- 557,850 577,997 Treasury stock, at cost .............................. (12,776) (24,497) -------- -------- Total shareholders' equity ......................... 545,074 553,500 -------- -------- Total liabilities and shareholders' equity ......... $571,162 $575,006 ======== ========
FAIR VALUES OF FINANCIAL INSTRUMENTS (Note 18)
Limitations: The fair value estimates made at December 31, 2000 and 1999 were based on pertinent market data and relevant information on the financial instruments at that time. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portfolio of financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation and trust and investment department) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments and mortgage servicing rights:
Cash and short-term investments: For such short-term investments, the carrying amount is considered to be a reasonable estimate of fair value.
Investment securities held to maturity and investment securities available for sale: Fair values are based on quoted market prices.
Loans: Fair values are estimated by obtaining quoted market prices, when available. The fair value of other loans is estimated by discounting the future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loan.
Deposit liabilities: Current carrying amounts approximate estimated fair value of demand deposits and savings accounts. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for deposits of similar remaining maturity.
Short-term borrowings: Current carrying amounts approximate estimated fair value.
Long-term debt: The fair value is estimated by discounting future cash flows based on rates currently available for debt with similar terms and remaining maturity.
The carrying amounts and estimated fair values of financial instruments were as follows at December 31, 2000 and 1999:
The estimated fair value of financial instruments with off-balance sheet risk, consisting of unamortized fee income at December 31, 2000 and 1999 is not material.
BUSINESS SEGMENTS (Note 19)
VNB has four major 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting.
Consumer lending delivers loan and banking products and services mainly to individuals and small businesses through its branches, ATM machines, PC banking and sales, service and collection force within each lending department. The products and services include residential mortgages, home equity loans, automobile loans, credit card loans, trust and investment services and mortgage servicing for investors. Automobile lending is generally available throughout New Jersey, but is also currently available in twelve states and Canada as part of a referral program with a major insurance company.
The commercial lending division provides loan products and services to small and medium commercial establishments throughout northern New Jersey. These include lines of credit, term loans, letters of credit, asset-based lending, construction, development and permanent real estate financing for owner occupied and leased properties and Small Business Administration ("SBA") loans. The SBA loans are offered through a sales force covering New Jersey and a number of surrounding states and territories. The commercial lending division serves numerous businesses through departments organized into product or specific geographic divisions.
The investment function handles the management of the investment portfolio, asset/liability management and government banking for VNB. The objectives of this department are production of income and liquidity through the investment of VNB's funds. The bank purchases and holds a mix of bonds, notes, U.S. and other governmental securities and other investments.
The corporate and other adjustments segment represents assets and income and expense items not directly attributable to a specific segment.
The following table represents the financial data for the four business segments for the years ended 2000, 1999 and 1998.
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
KPMG LLP Certified Public Accountants
New Jersey Headquarters 150 John F. Kennedy Parkway Short Hills, NJ 07078
THE BOARD OF DIRECTORS AND SHAREHOLDERS VALLEY NATIONAL BANCORP:
We have audited the accompanying consolidated statements of financial condition of Valley National Bancorp and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valley National Bancorp and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
[KPMG LLP LOGO]
January 17, 2001
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information which will be set forth under the captions "Director Information"and "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2001 Proxy Statement is incorporated herein by reference. Certain information on Executive Officers of the registrant is included in Part I, Item 4A of this report, which is also incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information which will be set forth under the caption "Executive Compensation" in the 2001 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information which will be set forth under the caption "Stock Ownership of Management and Principal Shareholders" in the 2001 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information which will be set forth under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions with Management" in the 2001 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules:
The following Financial Statements and Supplementary Data are filed as part of this annual report:
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K:
On October 20, 2000 to report earnings for the three and nine months ended September 30, 2000.
On December 1, 2000 to report the phase out of an automobile loan program with a major insurance company.
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
A. Restated Certificate of Incorporation of the Registrant as in effect on May 9, 2000 (and as currently in effect) is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
B. By-laws of the Registrant adopted as of March 14, 1989 and amended March 19, 1991 are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1998.
(10) MATERIAL CONTRACTS:
A. Restated and amended "Change in Control Agreements" dated January 1, 1999 between Valley, VNB and Gerald H. Lipkin, Peter Southway, Peter John Southway, Robert Meyer, and Peter Crocitto are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1998.
B. "Change in Control Agreements" dated January 1, 1995 between Valley, VNB and Robert Farrell, Richard Garber and Robert Mulligan are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1999.
C. "Change in Control Agreement" dated February 1, 1996 between Valley, VNB and Jack Blackin is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996.
D. "Change in Control Agreement" dated April 15, 1996 between Valley, VNB and John Prol is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996.
E. "The Valley National Bancorp Long-term Stock Incentive Plan" dated January 19, 1999 and amended April 6, 2000.
F. "Severance Agreements" dated August 17, 1994 between Valley, VNB and Gerald H. Lipkin and Peter Southway are incorporated by reference to Registrant's Registration Statement on Form S-4 (No. 33-55765) filed with the Securities and Exchange Commission on October 4, 1994.
G. "Stock Option Agreement" dated April 1, 1992 between Valley and Michael Guilfoile is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1999.
H. "Split-Dollar Agreement" dated July 7, 1995 between Valley, VNB, and Gerald H. Lipkin.
I. "Employment Arrangement" dated June 6, 1996 between Valley, VNB and Peter Southway is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1996.
J. "Severance Agreements" as of January 1, 1998 between Valley, VNB and Peter Crocitto, Robert M. Meyer and Peter John Southway are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1997.
K. "Change in Control Agreement" dated January 1, 1998 between Valley, VNB and Alan Lipsky is incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
L. "Change in Control Agreements" dated January 1, 1999 between Valley, VNB and Alan D. Eskow and Robert J. Farnon are incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1998.
M. "Change in Control Agreement" dated January 3, 2000 between Valley, VNB and Albert L. Engel is incorporated herein by reference to the Registrant's Form 10-K Annual Report for the year ended December 31, 1999.
N. "The Valley National Bancorp Long-Term Stock Incentive Plan" dated January 10, 1989 and amended March 16, 1993, January 18, 1994 and April 6, 2000.
O. Amendment to the "Severance Agreement" dated November 28, 2000 between Valley, VNB and Gerald H. Lipkin.
P. Agreement and Plan of Merger dated September 5, 2000 among Valley, Merchants, and Merchants Bank of New York is incorporated herein by reference to Valley's Report on Form 8-K filed with the Commission on September 21, 2000.
Q. Stock Option Agreement dated September 5, 2000 between Valley and Merchants is incorporated herein by reference to Valley's Report on Form 8-K filed with the Commission on September 5, 2000.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VALLEY NATIONAL BANCORP
By ------------------------------------------ GERALD H. LIPKIN, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: February 23, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
EXHIBIT INDEX.doc EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------ -------------------
(10)E Valley National Bancorp Long- Term Stock Incentive Plan dated January 19, 1999
(10)H Split Dollar Agreement-- Gerald H. Lipkin
(10)N Valley National Bancorp Long- Term Stock Incentive Plan dated January 10, 1989
(10)O Amendment to Severance Agreement--Gerald H. Lipkin
(23) Consent of KPMG LLP
(24) Power of Attorney