Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended March 31, 2005

For the transition period from                      to                     

Commission File Number 1-11277

VALLEY NATIONAL BANCORP

(Exact name of registrant as specified in its charter)

New Jersey

(State or other Jurisdiction of

Incorporation or Organization)

22-2477875

(I.R.S. Employer Identification No.)

1455 Valley Road, Wayne, New Jersey 07470

(Address of principal executive offices)

973-305-8800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock (no par value), of which 108,489,183 shares were outstanding as of May 9, 2005.

Table of Contents

TABLE OF CONTENTS

2

Table of Contents

PART I – FINANCIAL INFORMATION

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

See accompanying notes to consolidated financial statements.

3

Table of Contents

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

See accompanying notes to consolidated financial statements.

4

Table of Contents

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes to consolidated financial statements.

5

Table of Contents

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Consolidated Statements of Financial Condition as of March 31, 2005 and December 31, 2004, the Consolidated Statements of Income for the three month periods ended March 31, 2005 and 2004 and the Consolidated Statements of Cash Flows for the three month periods ended March 31, 2005 and 2004 have been prepared by Valley National Bancorp (“Valley”) without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations and cash flows at March 31, 2005 and for all periods presented have been made. Share data reflects the 5 percent stock dividend declared on April 6, 2005, to be issued May 20, 2005 to shareholders of record on May 6, 2005.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements are to be read in conjunction with the consolidated financial statements and notes thereto included in Valley’s December 31, 2004 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current presentation.

On March 31, 2005, Valley completed the Shrewsbury Bancorp acquisition using the purchase method of accounting. Under the purchase method, assets and liabilities are recorded at their fair value and are included in Valley’s March 31, 2005 Statement of Financial Condition (see Footnote 11).

For Valley, the numerator of both the Basic and Diluted EPS is equivalent to net income. The weighted average number of shares outstanding used in the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect of potentially dilutive common stock equivalents utilizing the treasury stock method. For Valley, common stock equivalents are common stock options outstanding.

The following table shows the calculation of both Basic and Diluted EPS for the three months ended March 31, 2005 and 2004.

6

Table of Contents

Common stock equivalents for the three months ended March 31, 2005 and 2004 exclude common stock options of approximately 755 thousand and 389 thousand, respectively, because the exercise prices exceeded the average market value. Inclusion of these common stock equivalents would be anti-dilutive to the diluted earnings per share calculation.

Valley adopted on a prospective basis the fair value provisions of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), effective January 1, 2002. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and is based on certain assumptions including dividend yield, stock volatility, risk free rate of return and the expected term. The fair value of each option is expensed over its vesting period.

For the three months ended March 31, 2005 and 2004, Valley recorded stock-based employee compensation expense for incentive stock options of $214 thousand and $151 thousand, net of tax, respectively, and will continue to amortize the remaining cost of these grants of approximately $3.1 million, net of tax, over the vesting period of approximately five years. Stock-based employee compensation cost under the fair value method was measured using the following weighted-average assumptions for options granted:

Prior to January 1, 2002, Valley applied APB Opinion No. 25 (“Opinion”) and related Interpretations in accounting for its stock options granted. Had compensation expense for the options issued prior to January 1, 2002, been recorded consistent with the fair value provisions of SFAS No. 123 for those periods, net income and earnings per share would have been reduced to the pro forma amounts indicated below:

The Financial Accounting Standards Board (“FASB”), issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) in December 2004. SFAS 123R is a revision of SFAS No. 123. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS No.

7

Table of Contents

123 as originally issued. This Statement eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in SFAS No. 123 as originally issued. Valley does not expect the requirements of SFAS No. 123R to have a material impact on its consolidated financial statements.

Valley’s comprehensive income consists of unrealized gains (losses) on securities available for sale and derivative financial instruments, net of tax. The following table shows each component of comprehensive income for the three months ended March 31, 2005 and 2004.

The information under the caption “Business Segments” in Management’s Discussion and Analysis is incorporated herein by reference.

Guarantees that have been entered into by Valley include standby letters of credit (“Standbys”) of $187.9 million as of March 31, 2005. Standbys represent the guarantee by Valley 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. Of the total Standbys, 65 percent are secured and in the event of non performance by the customer, Valley has rights to the underlying collateral which includes commercial real estate, business assets (physical plant or property, inventory or receivables), marketable securities and cash in the form of bank savings accounts and certificates of deposit.

8

Table of Contents

Valley has a non-contributory defined benefit pension plan covering substantially all of its employees. The determination of the benefit obligation and pension expense is based upon actuarial assumptions used in calculating such amounts. Those assumptions include the discount rate, expected long-term rate of return on plan assets and the rate of increase in future compensation levels.

The following table sets forth the components of net periodic pension expense for each of the three month periods ended March 31, 2005 and 2004:

During 2004, Valley entered into interest rate swap transactions which effectively converted $300 million of its prime-based floating rate loans to a fixed rate. This interest rate swap involves the receipt of fixed-rate amounts in exchange for variable-rate payments over the life of the agreements without exchange of the underlying principal amount.

Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, Valley records all derivatives on the balance sheet at fair value.

Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Valley assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

At March 31, 2005, derivatives designated as cash flow hedges with a fair value of $3.0 million were included in other liabilities. Valley had no derivatives designated as cash flow hedges outstanding at March 31, 2004. The unrealized loss of $1.8 million as of March 31, 2005 for derivatives designated as cash flow hedges is separately disclosed in the statement of comprehensive income, net of related income taxes of $1.2 million. No hedge ineffectiveness existed on cash flow hedges during the three months ended March 31, 2005.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received on Valley’s variable-rate loans. During

9

Table of Contents

the three months ended March 31, 2005, $0.4 million was reclassified out of other comprehensive income as the hedged forecasted transactions occurred. During the next twelve months, Valley estimates the unrealized loss of $1.2 million, net of tax, will be reclassified out of other comprehensive income as a reduction to interest income.

SFAS No. 123 (Revised 2004), “Share-Based Payment”

The FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment”, (“SFAS 123R”) in December 2004. SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS 123R requires all share-based payments to employees to be recognized in the financial statements based on their fair value. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS No. 123 as originally issued. This Statement eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in SFAS No. 123 as originally issued.

Valley is required to adopt SFAS 123R by March 31, 2006. This method requires Valley to recognize a fair value expense for all grants made in or after the year in which the new standard is adopted and any unvested portions of grants made in prior years. As Valley previously adopted the fair value recognition of SFAS 123 on January 1, 2002, Valley does not expect the requirements of SFAS 123R to have a material impact on the consolidated financial statements.

The Emerging Issues Task Force (“EITF”) Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”

EITF Issue 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and Valley began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (“FSP”) to provide additional implementation guidance.

On April 6, 2005, the Board of Directors declared a 5 percent stock dividend to be issued May 20, 2005 to shareholders of record on May 6, 2005 and also agreed to increase the annual cash dividend rate to $0.88 per share, on an after-stock-dividend basis, representing an increase of 3 percent in the cash payout.

10

Table of Contents

On March 31, 2005, Valley completed its merger with Shrewsbury Bancorp (“Shrewsbury”), the holding company for Shrewsbury State Bank, a commercial bank with approximately $425 million in assets and 12 branch offices located in 10 communities in Monmouth County. The acquisition was accounted for as purchase transaction. Pursuant to the merger agreement, Shrewsbury State Bank merged into Valley National Bank. Valley paid approximately $136 million for Shrewsbury of which approximately 87 percent was paid in Valley common stock. Valley recorded approximately $81 million in goodwill and intangibles.

On November 9, 2004, Valley announced that it had entered into a merger agreement to acquire NorCrown Bank. NorCrown is a commercial bank with approximately $600 million in assets and 15 branch offices located in 12 communities in Essex, Hudson and Morris Counties. Pursuant to the agreement, NorCrown will be merged into Valley National Bank. Valley will pay approximately $141 million for NorCrown of which 50 percent will be cash and 50 percent will be Valley common stock. Closing of the acquisition, which Valley anticipates will occur in the second quarter of 2005, is contingent on regulatory approvals and the satisfaction of certain closing conditions by NorCrown. The purchase price of $141 million may be reduced based on NorCrown’s shareholders’ equity at closing.

11

Table of Contents

Cautionary Statement Concerning Forward-Looking Statements

This Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by an (*) or such forward-looking terminology as “expect,” “anticipate,” “look,” “view,” “opportunities,” “allow,” “continues,” “reflects,” “believe,” “may,” “should,” “will” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from such forward-looking statements. Valley assumes no obligation for updating any such forward-looking statement at any time. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, unanticipated changes in the direction of interest rates, changes in loan, investment and mortgage prepayment assumptions, relationships with major customers, changes in effective income tax rates, higher or lower cash flow levels than anticipated, slowdown in levels of deposit growth, a decline in the economy in New Jersey and New York, a decrease in loan origination volume, as well as a change in legal and regulatory barriers including compliance issues related to AML/BSA compliance, the development of new tax strategies or the disallowance of prior tax strategies, consummation of the acquisition of NorCrown including the receipt of regulatory approval for NorCrown and the ability of Valley to successfully integrate NorCrown without the loss of significant loan and deposit business.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by Valley conform, in all material respects, to accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.

Valley’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The most significant accounting policies followed by Valley are presented in Note 1 of the Notes to Consolidated Financial Statements included in Valley’s Annual Report on Form 10-K, for the year ended December 31, 2004. Valley has identified its policies on the allowance for loan losses and income tax liabilities to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and could be subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the Consolidated Statements of Financial Condition. Note 1 of the Notes to Consolidated Financial Statements in Valley’s Annual Report on Form 10-K for the year ended December 31, 2004, describes the methodology used to determine the allowance for loan losses and a

12

Table of Contents

discussion of the factors driving changes in the amount of the allowance for loan losses is included in this MD&A.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in Valley’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact Valley’s consolidated financial condition or results of operations.* Notes 1 and 14 of the Notes to Consolidated Financial Statements in Valley’s Annual Report on Form 10-K for the year ended December 31, 2004, include additional discussion on the accounting for income taxes.

Executive Summary³

For the quarter ended March 31, 2005 and 2004, net income per diluted share was $0.37 or $38.3 million compared with $38.4 million for the first quarter of 2004. Net interest income for the current quarter grew $4.5 million on a tax equivalent basis to $96.2 million and the net interest margin decreased to 3.80 percent from 4.02 percent from the first quarter of 2004. The decline in the margin was mainly the result of the flattening of the yield curve and competitive loan and deposit pricing in Valley’s market causing a larger increase in deposit and borrowing costs than loan and investment yields.

Loans grew by $1.0 billion between March 31, 2004 and 2005 or 16.6 percent as a result of new business development, consolidation in the marketplace, expansion of existing customer borrowings and the merger of Shrewsbury State Bank on March 31, 2005 which added approximately $275 million of loans. The yield on loans increased to 5.80 percent representing only a one basis point increase from the prior quarter.

Deposits increased $637.3 million or 8.8 percent for the first quarter of 2005, compared with the same period in 2004, including approximately $340 million from the Shrewsbury merger. Borrowings increased by $551.6 million compared to the prior year in order to fund loan and investment growth. The cost of deposits and borrowings increased by 36 basis points over the prior year period. While deposits continue to increase, there was a decline in average demand deposits from the prior quarter as well as a small decline in time deposits. Exclusive of government deposits, savings deposits had a minimal increase. The small growth in deposits during the quarter necessitated the increase in borrowings which contributed to the decline in the margin. The annualized return on average shareholders’ equity was 21.39 percent for the three months ended March 31, 2005 compared with 23.22 percent for the same period in 2004 while the annualized return on average assets was 1.42 percent for the three months ended March 31, 2005 compared with 1.57 percent recorded in the first quarter of 2004.

Net Interest Income⁴

Net interest income represents the largest component of Valley’s operating income and as a result, is the area that management focuses most of its efforts. For the three months ended March 31, 2005, net interest income on a tax equivalent basis was $96.2 million compared with $91.8 million for the quarter ended March 31, 2004 and $97.6 million for the quarter ended December 31, 2004. The increase over the prior year was due to higher loan and investment volume and partially offset by higher deposit and borrowing costs. Compared to the fourth quarter of 2004, net interest income declined due to higher deposit and borrowing costs partially offset by higher loan and investment balances.

For the first quarter of 2005, average loans increased $756.5 million or 12.1 percent while average investments increased $250.3 million or 8.7 percent over the same period in 2004. Compared to the fourth quarter of 2004, average loans grew $73.4 million or 4.25 percent annualized, while the average balance on investments increased $62.0 million or 8.1 percent annualized. Average loans increased at a slower pace

13

Table of Contents

during the first quarter compared to the fourth quarter of 2004 due to seasonality in commercial lines of credit in Manhattan and a lower level of automobile lending during the winter months. Both of these are expected to accelerate during the second quarter of 2005, as was the trend in prior years.*

Average interest bearing liabilities for the quarter ended March 31, 2005 increased $878.1 million or 11.9 percent compared with the quarter ended March 31, 2004 and increased $136.6 million or 1.7 percent or 6.8 percent annualized compared with the quarter ended December 31, 2004. Average total interest bearing deposits increased $210.3 million or 3.8 percent for the quarter ended March 31, 2005 compared with the same period in 2004 and increased $24.8 million or 1.7 percent annualized compared with the quarter ended December 31, 2004. Average short-term borrowings increased $354.1 million or 149.7 percent for the quarter ended March 31, 2005, compared with the same period last year, and increased $82.6 million or 16.3 percent or 65.2 percent annualized compared with the quarter ended December 31, 2004. Average long-term debt, which includes Federal Home Loan Bank (“FHLB”) advances, increased $313.7 million, or 19.9 percent for the quarter ended March 31, 2005 compared with the same quarter ended March 31, 2004 and increased $29.3 million or 6.3 percent annualized compared with the quarter ended December 31, 2004. The increase in borrowings is used as an alternative to deposits and is evaluated based upon need, cost and term.

Interest on loans increased $1.2 million for the first quarter of 2005 compared to the fourth quarter of 2004 due to increased volume of loans and higher short-term interest rates. Interest from investments increased $706 thousand for the three month period ended March 31, 2005 compared with the quarter ended December 31, 2004 mainly due to lower amortization expense and higher average balances. During the second half of 2004 and into the first quarter of 2005, the Federal Reserve (“Fed”) increased short-term interest rates seven times and subsequently moved for the eighth time. Valley’s prime rate moved in conjunction with each interest rate increase which resulted in higher interest income during the quarter. Anticipated additional increases in the prime rate could further increase interest income for the remainder of 2005, should the increases continue to occur.*

Interest expense for the three months ended March 31, 2005 increased $3.2 million compared with the quarter ended December 31, 2004 mainly due to higher rates paid on deposits and borrowings. This increase was mostly due to increased deposit rates due to pressures on deposit pricing from the market place and from other institutions and higher borrowings costs due to the rise in short-term rates. Part of the increase in interest expense is a result of higher amounts of short-term borrowings.

14

Table of Contents

The following table reflects the components of net interest income for each of the three months ended March 31, 2005 and 2004.

ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY AND

NET INTEREST INCOME ON A TAX EQUIVALENT BASIS

15

Table of Contents

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

16

Table of Contents

Non-Interest Income

For the three months ended March 31, 2005, non-interest income decreased $3.6 million or 15.8 percent, mainly due to lower security gains compared with the same period in 2004.

The following table presents the components of non-interest income for each of the three months ended March 31, 2005 and 2004.