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SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 000-16931
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UNITED NATIONAL BANCORP
(Exact name of Registrant as specified in its Charter)
New Jersey 22-2894827
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1130 Route 22 East
Bridgewater, New Jersey 08807
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(Address of principal executive offices) (ZIP CODE)
(Registrant's telephone number, including area code) (908) 429-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock $2.50 par value NASDAQ National Market System
- ------------------------------- -----------------------------
(Title of each class) (Name of each exchange on which
registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of United National Bancorp's common stock held by
non-affiliates, as of January 31, 1996, amounted to $107,303,448.
The number of shares of Registrant's Common Stock, $2.50 par value,
outstanding as of March 15, 1996 was 3,633,794.
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Documents Incorporated by Reference
Part(s) Into
Documents Which Incorporated
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United's Annual Report to Shareholders
for the year ended December 31, 1995
("United's 1995 Annual Report"),
pages 13 through 59, except for the
table headed "Dividend Payments, 10
Year Schedule" on page 59. Part I, Part II
United's Proxy Statement to be used in
connection with the Annual Meeting of
Shareholders which is anticipated to be
held on April 16, 1996 ("United's Proxy
Statement for its 1996 Annual Meeting")
under the captions "Election of Directors",
"Stock Ownership of Management and Principal
Shareholder", "Corporation Executive
Compensation", and "Compensation Committee
Interlock and Insider Participation". Part III
With the exception of information specifically incorporated by reference,
United's 1995 Annual Report and United's Proxy Statement for its 1996 Annual
Meeting are not deemed to be part of this report.
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PART I
Item 1 - Business
(a) GENERAL DEVELOPMENT OF BUSINESS
United National Bancorp ("United", "Registrant" or the "Company") is a
bank holding company registered with the Board of Governors of the Federal
Reserve System (the "Board") under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). United was incorporated by United National Bank (the
"Bank") in the State of New Jersey on August 13, 1987 and commenced
operations August 1, 1988 as a bank holding company for the Bank, its only
wholly-owned subsidiary. The corporate headquarters of both United and the
Bank are located at 1130 Route 22 East, Bridgewater, New Jersey, and the
phone number is (908) 429-2200.
As of December 31, 1995, United had consolidated assets of approximately
$1 billion, deposits of $855 million and stockholders' equity of $81 million.
BANKING SUBSIDIARY
The Bank, a wholly-owned subsidiary of United, is a commercial bank
established in 1902 under the laws of the United States of America. The Bank
is a member of the Federal Reserve System and the Federal Home Loan Bank and
its deposits are insured by the Federal Deposit Insurance Corporation
("FDIC"). The Bank maintains its main office in Bridgewater, New Jersey and
operates 18 branches throughout Central New Jersey. The Bank operates three
branches in Hunterdon County, two branches in Middlesex County, six branches
in Somerset County, four branches in Union County and three branches in
Warren County, New Jersey. The Bank also operates 21 automatic teller
machines ("ATMs") affiliated with the MAC System, an eight-state network with
membership in the Plus Nationwide network and Honor, a Florida network.
The Bank provides a full range of commercial and retail bank services,
including the acceptance of demand, savings and time deposits. The Bank also
provides retail and commercial loans and mortgages to a variety of
individuals and businesses and offers full personal, corporate and pension
trust and other fiduciary services. The market value of trust assets under
management by the Bank was $842 million as of December 31, 1995.
GROWTH OF UNITED NATIONAL BANK
On January 23, 1995, the Bank acquired from the Resolution Trust
Corporation ("RTC") two branches of the former Carteret Federal Savings Bank.
In connection with the acquisition, the Bank assumed deposits, including
accrued interest, of approximately $99 million. The Bank paid a premium of
approximately $11.7 million to the RTC in the transaction.
On June 30, 1995, the Bank acquired all of the outstanding shares of New
Era Bank ("New Era") based in the Somerset section of Franklin Township, New
Jersey. Each share of New Era was converted into .7431 shares of the
Company's common stock, for a total of 684,904 shares. At the time of the
acquisition, New Era had approximately $120 million in assets. The
acquisition has been accounted for under the pooling of interests method of
accounting.
On November 3, 1995, the Bank and Hudson United Bank ("Hudson") formed a
joint venture under which each now participates equally as owners of a
financial services corporation providing data processing, check processing,
management information services and other automated record keeping functions
for the two banks. The financial services corporation, known as United
Financial Services, Inc., is located in Mahwah, New Jersey. The investment
is being accounted for by the equity method of accounting.
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(b) INDUSTRY SEGMENTS
The Company has one industry segment - commercial banking.
(c) NARRATIVE DESCRIPTION OF BUSINESS
PERSONAL BANKING SERVICES
The Bank, through its 18 branch network and 21 MAC installations, provides
both retail and commercial services. Among the services provided at the
branch locations are: checking accounts, money market accounts, Super NOW
accounts, certificates of deposit, statement and passbook savings accounts,
individual retirement accounts (IRAs), self-employed pension plans (SEPs),
safe deposit services, installment and other personal loans, home equity
loans, mortgage loans, lines of credit and other consumer financing. The Bank
also issues secured and unsecured credit cards.
The Bank offers a full range of trust services for individuals and
corporations. These services include: fiduciary services, estate planning,
custodial, employee benefits, pension as well as profit sharing plans. The
market value of trust assets under management was $842 million at December
31, 1995.
Discount Brokerage Service has been offered since 1986 as an additional
service to customers. It is currently managed by TradeStar Investor Services.
COMMERCIAL BANKING SERVICES
The Bank provides commercial customers with a wide array of financial
services which are administered at the branch level as well as at the
Headquarters Office in Bridgewater. These services include secured and
unsecured loans, term loans, lines of credit and corporate credit cards. The
Bank also participates in the New Jersey Economic Development Authority
programs which make tax-exempt, low interest financing programs available to
borrowers who wish to relocate or expand their activity in New Jersey. As a
Small Business Administration ("SBA") Preferred Lender, the Bank is able to
offer streamlined processing on SBA loans. In addition, the Bank makes other
Government loan programs available. As a member of the Automated Clearing
House, the Bank makes direct deposit services available.
OTHER SUBSIDIARY
In 1989, the Bank established a subsidiary corporation in New Jersey, UNB
Investment Co., Inc., to manage a portion of its investment portfolio and to
operate under state tax law as an investment company. As of December 31,
1995, approximately $169.1 million of the Bank's investment portfolio is
being managed by this New Jersey Corporation.
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 options of
its management to deploy assets and maximize income. Areas subject to
regulation and supervision by the bank regulatory agencies include: nature of
business activities; minimum capital levels; dividends; affiliate
transactions; expansion of locations; acquisitions and mergers; interest
rates paid on certain types of deposits; reserves against deposits; terms,
amounts and interest rates charged to various types of borrowers; and
investments.
BANK HOLDING COMPANY REGULATION
The Company is a bank holding company within the meaning of the BHCA, and is
registered as such with and is supervised by the Board of the Federal Reserve
System (the "Board"). The Company is required to file reports with the Board
and provide such additional information
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as the Board may require.
The Company is required to obtain the approval of the Board before it may
acquire all or substantially all of the assets of any bank, or direct or
indirect ownership of any voting securities of any bank if, after giving
effect to such acquisition, the Company would, directly or indirectly, own or
control more than 5% of the voting shares of such bank. The BHCA also
prohibits acquisition by the Company of more than 5% of the voting shares of a
bank located outside the State of New Jersey, unless such an acquisition is
specifically authorized by laws of the state in which such bank is located.
In addition to the approval of the Board, prior approval must also be obtained
from any other banking agency having supervisory jurisdiction over the bank to
be acquired before any bank acquisition can be completed. Many states,
including New Jersey, have adopted legislation which permits banks and bank
holding companies resident in New Jersey to acquire banks and bank holding
companies in states with reciprocal legislation. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act")
provides that effective September 29, 1995, the Board may approve an
acquisition by a bank holding company of a bank located in a state other than
the bank holding company's home state without regard to whether such
transaction is prohibited under the laws of any state. The Interstate Banking
Act also permits Federal banking agencies to approve interstate bank mergers
without regard to state law effective June 1, 1997. States have authority to
opt out of the legislation subject to certain conditions and states have the
authority to permit interstate merger transactions prior to the 1997 effective
date. In addition, the Interstate Banking Act permits de novo branching
across state lines effective June 1, 1997 but only with respect to states
which affirmatively adopt legislation authorizing de novo interstate
branching.
On February 29, 1996 the New Jersey General Assembly unanimously passed an
Interstate Banking/Branching Bill which "opts in", under the Interstate
Banking and Branching Act, but the method of entry would require domestic
out-of-state and international banks to acquire a bank or branch. The method of
entry into New Jersey would not be "de novo" under the legislation. The bill
has been sent to the Governor, but as of March 25, 1996 it had not yet been
signed into law. There can be no assurance the the bill will become law.
A bank holding company is prohibited from engaging in, or acquiring direct or
indirect control of more than 5% of the voting shares of any company engaged
in nonbanking activities unless the Board, by order or regulation, has found
such activities to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
Under the Board's policy, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and is
required to commit resources to support its subsidiary banks.
REGULATION OF THE BANK
The Bank is subject to regulation and examination by the Comptroller of the
Currency ("Comptroller"). The Bank is also subject to regulations of the
Federal Reserve System (the "Federal Reserve"). The deposits of the Bank are
insured by the FDIC to the extent provided by law, primarily through the Bank
Insurance Fund (the "BIF"). As a result of the Bank's acquisition of various
branches and deposits of Savings Association Insurance Fund ("SAIF") member
institutions, a portion of the Bank's deposit base is subject to deposit
insurance premiums calculated at assessment rates paid by SAIF-member
institutions. At December 31, 1995, the portion of the Bank's deposit base
assessed at the SAIF rate was approximately $96 million or 11.3% of the Bank
deposits.
During 1995, based on its capital and supervisory subgroups, each BIF-member
institution was assigned an annual FDIC assessment rate ranging between 23
cents and 31 cents per $100 of domestic deposits. In August, 1995, the FDIC,
in anticipation of the BIF's imminent achievement of a required 1.25% reserve
ratio, reduced the deposit insurance premium rates
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paid by BIF-member institutions to between 4 cents and 31 cents per $100 of
domestic deposits. The new rate schedule for the BIF was made effective June
1, 1995. The FDIC refunded to BIF-member institutions the excess premiums
that they had paid for the period beginning on June 1, 1995. On November 14,
1995, the FDIC voted to reduce annual assessments for the semi-annual period
beginning January 1, 1996 to the legal minimum of $2,000 for BIF-member
institutions, except for institutions that are not well capitalized and are
assigned to the higher supervisory risk categories.
Given the undercapitalized nature of the SAIF, the FDIC will continue the
range of annual assessment rates of 23 cents to 31 cents per $100 of deposits
for SAIF-members and BIF-insured institutions, like the Bank, required to pay
SAIF premiums with respect to SAIF deposits.
On July 28, 1995, the FDIC and the Treasury Department released statements
outlining a plan to recapitalize the SAIF, certain features of which were
subsequently approved by the House of Representatives and the Senate of the
United States in bills that provided for different resolutions of the BIF-SAIF
issues. In negotiations between members of the Banking Committees of the
House and Senate to reconcile the differences in the two bills, it was agreed
that all SAIF-member institutions would pay a special assessment to
recapitalize the SAIF. The amount of the special assessment required to
recapitalize the SAIF was estimated to be approximately 80 basis points of the
SAIF-assessable deposits, BIF-insured institutions with deposits subject to
SAIF assessments would be able to reduce such SAIF deposits by 20% in
computing the institutions special assessment.
Management cannot predict whether the above legislation will be enacted, or,
if enacted, the amount of any special SAIF assessment. A significant one-time
fee to recapitalize the SAIF may have an adverse effect on the operating
expenses and results of operation of the Bank in the quarter in which the
assessment is made.
The Company and the Bank are also subject to applicable provisions of New
Jersey law insofar as they do not conflict with or are not preempted by
Federal law.
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. The Bank received a "Satisfactory" CRA rating in its
most recent examination.
In April 1995, the OCC and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended
CRA regulations substitute for the prior process-based assessment factors a
new evaluation system that would rate an institution based on its actual
performance in meeting community needs. In particular, the proposed system
would focus on three tests: (I) a lending test, to evaluate the institution's
record of making loans in its service areas; (ii) an investment test, to
evaluate the institution's record of investing in community development
projects, affordable housing and programs benefiting low or moderate income
individuals and businesses; and (iii) a service test, to evaluate the
institution's delivery of services through its branches, ATMs and other
offices. The amended CRA regulations also clarify how an institution's CRA
performance would be considered in the application process.
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DIVIDEND RESTRICTIONS AND OTHER ACTIONS
The Company is a legal entity, separate and distinct from the Bank. Most of
the Company's revenues, including funds available for the payment of dividends
and for operating expenses, are provided by dividends paid by the Bank. There
are statutory and regulatory limitations on the amount of dividends which may
be paid to the Company by the Bank. The prior approval of the Comptroller is
required if the total of all dividends declared by the Bank in any calendar
year exceeds the Bank's net profits for that year combined with its retained
net profits for the preceding two years, less any required transfers to
surplus.
The Comptroller has the authority to prohibit a national bank from engaging in
what, in the Comptroller's opinion, constitutes an unsafe or unsound practice
in conducting its business. It is possible that the Comptroller could assert
that the payment of dividends or other payments might, under some
circumstances, be an unsafe or unsound practice for a national bank.
If, in the opinion of the Comptroller, a bank under its jurisdiction is
engaged in or is about to engage in an unsafe or unsound practice (which,
depending on the financial condition of the bank, could include the payment of
dividends), the Comptroller may require, after notice and hearing, that such
bank cease and desist from such practice or, as a result of an unrelated
practice, require the bank to limit dividends in the future. The Federal
Reserve Board has similar authority with respect to bank holding companies.
In addition, the Federal Reserve Board and the Comptroller have issued policy
statements which provide that insured banks and bank holding companies should
generally only pay dividends out of current operating earnings. Regulatory
pressures to reclassify and charge-off loans and to establish additional loan
loss reserves can have the effect of reducing current operating earnings and
thus impact an institution's ability to pay dividends. The regulatory
authorities have established guidelines with respect to the maintenance of
appropriate levels of capital by a bank or bank holding company under their
jurisdiction.
See "Capital" on pages 18 and 19 of United's 1995 Annual Report.
CAPITAL REQUIREMENTS
The Board measures capital adequacy for bank holding companies on the basis of
a risk-based capital framework and a leverage ratio. The minimum ratio of
total risk-based capital to risk-weighted assets is 8%. At least half of the
total capital must be common stockholders' equity (not inclusive of net
unrealized gains and losses on available for sale securities) and perpetual
preferred stock, less goodwill and other nonqualifying intangible assets
("Tier 1 capital"). The remainder (i.e., the "Tier 2 risk-based capital") may
consist of hybrid capital instruments, perpetual debt, term subordinated debt,
other preferred stock and a limited amount of the allowance for loan losses.
At December 31, 1995, the Company had Tier 1 capital as a percentage of risk-
weighted assets of 10.33% and total risk-based capital as a percentage of
risk-weighted assets of 11.47%.
In addition, the Board has established minimum leverage ratio guidelines for
bank holding companies. These guidelines currently provide for a minimum
ratio of Tier 1 capital as a percentage of total assets (the "Leverage Ratio")
of 3% for bank holding companies that meet certain criteria, including that
they maintain the highest regulatory rating. All other bank holding companies
are required to maintain a Leverage Ratio of at least 100 to 200 basis points
above the minimum. At December 31, 1995, the Company had a Leverage Ratio of
6.80%.
The Bank is subject to the FDIC's Statement of Policy on Risk-Based Capital,
the requirements of which are substantially identical to the Board's risk-based
capital framework. As of December 31, 1995, the Bank had Tier 1 capital
as a percentage of risk-weighted assets of 9.65% and a total risk-based
capital ratio of 10.79%.
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In addition to the Statement of Policy on Risk-Based Capital, the FDIC
requires banks to operate with a minimum Leverage Ratio of 3%. Under these
guidelines, institutions operating at the 3% minimum are expected to have well
diversified risk profiles, including no undue interest rate risk, excellent
asset quality, high liquidity and good earnings. Institutions not meeting
these characteristics, as well as institutions experiencing growth, would be
expected to maintain capital levels at least 100 to 200 basis points above the
minimum. The FDIC is authorized to set higher capital requirements for an
individual bank when the bank's particular circumstances so warrant. At
December 31, 1995, the Bank had a Leverage Ratio of 6.36%.
The Board and the FDIC have adopted regulations effective January 17, 1995
which identify concentration of credit risk and certain risks arising from
nontraditional activities, as well as an institution's ability to manage these
risks, as important factors in assessing an institution's overall capital
adequacy. The Board adopted amendments to its capital adequacy guidelines
effective April 1, 1995 which limit the amount of certain deferred tax assets
that may be included in a bank holding company's Tier 1 capital for risk-based
and leverage capital purposes. These regulatory amendments, as adopted, had
no material impact on the Company's or the Bank's overall capital adequacy.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 ("FIRREA")
Under FIRREA, a bank 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 insured depository institution in danger of default. The term
"default" is defined to mean the appointment of a conservator or receiver for
such institution and "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
in the absence of regulatory assistance. Thus, the Bank could incur liability
to the FDIC pursuant to this statutory provision in the event of the default
of any other insured depository institution owned or controlled by the
Company.
At the present time, the Bank is the only FDIC-insured depository institution
controlled by the Company. Such liability to the FDIC is subordinated in
right of payment to deposit liabilities, secured obligations, any other
general or senior liability and any obligation subordinated to depositors or
other general creditors, other than obligations owed to any affiliate of the
depository institution (with certain exceptions) any any obligations to
shareholders in such capacity. The imposition of such liability in sufficient
amounts, however, could lead to the appointment of the FDIC as conservator or
receiver for the Bank.
FIRREA also broadened the enforcement powers of the Federal banking agencies,
including the power to impose fines and penalties, over all financial
institutions. FIRREA also prohibits an insured depository institution from
entering into a written or oral contract with any person for goods, products
or services that would jeopardize the safety or soundness of the institution.
Further, under FIRREA the failure to meet capital guidelines could subject a
financial institution to a variety of regulatory actions, including the
termination of deposit insurance by the FDIC.
In addition, if any insured depository institution becomes insolvent and the
FDIC is appointed its conservator or receiver, within a reasonable period
following such appointment the FDIC may disaffirm or repudiate any contract or
lease to which such institution is a party, the performance of which it
determines to be burdensome, and the disaffirmance or repudiation of which it
determines to promote the orderly administration of the institution's affairs.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")
FDICIA was enacted in December 1991 and was primarily designed to provide
additional
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financing for the FDIC by increasing its borrowing ability. The FDIC was
given the authority to increase deposit insurance premiums to repay any such
borrowing. In addition, FDICIA identifies the following capital standard
categories for financial institutions: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. As a result of FDICIA, the various banking regulatory
agencies have set certain capital and other measures for determining the
categories into which financial institutions fall. FDICIA imposes
progressively more restrictive constraints on operations, management and
capital distributions depending on the category in which an institution is
classified. Pursuant to FDICIA, undercapitalized institutions must submit
recapitalization plans, and a company controlling a failing institution must
guarantee such institution's compliance with its plan. FDICIA also required
the various regulatory agencies to prescribe certain non-capital standards for
safety and soundness relating generally to operations and management, asset
quality and executive compensation, and permits regulatory action against a
financial institution that does not meet such standards.
SECURITIES AND EXCHANGE COMMISSION
The Company's Common Stock is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "1934 Act").
As a result of such registration, the Company and its officers, directors and
major shareholders are obligated to file certain reports with the SEC.
Furthermore, the Company is subject to proxy and tender offer rules
promulgated pursuant to the 1934 Act.
MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings and business of the Company and the Bank are affected by the
policies of regulatory authorities, including the Federal Reserve Board
("FRB"). The monetary policies of the FRB have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future. Because of the changing conditions in the
national and international economy and in the money markets, as a result of
actions by monetary and fiscal authorities, interest rates, credit
availability and deposit levels may change due to circumstances beyond the
control of the Company and the Bank.
From time to time various proposals are made in the United States Congress and
the New Jersey Legislature and before various bank regulatory authorities
which would alter the powers of, and restrictions on, different types of
banking companies and other financial institutions. It is impossible to
predict whether any of the proposals will be adopted and the impact, if any,
of such adoption on the business of the Bank or the Company.
EFFECTS OF INFLATION
A bank's asset and liability structure differs from that of an industrial
company, since its assets and liabilities fluctuate over time based upon
monetary policies and changes in interest rates. The growth in the bank's
earning assets, regardless of the effects of inflation, will increase net
interest income if the bank is able to maintain a consistent interest spread
between earning assets and supporting liabilities.
A purchasing power gain or loss from holding net monetary assets during the
year represents the effect of general inflation on monetary assets and
liabilities. Almost all of the assets and liabilities of the Company are
considered monetary because they are fixed in terms of dollars and therefore,
are not materially affected by inflation.
CONCENTRATION OF CUSTOMERS AND SEASONALITY OF BUSINESS
No single person, group of persons, enterprise or other entity produces a
material portion of the Bank's deposits or loans. No customer accounts for as
much as two percent of the
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Bank's overall business. There is no material impact on the Bank's volume,
deposits or loans, as a result of seasonal changes.
COMPETITION
Banking in New Jersey has become increasingly competitive. The Bank competes
for loans and deposits with commercial banks, non-bank banks, savings and loan
associations, savings banks, finance companies, credit unions and other large
interstate and foreign banks now allowed to bank in New Jersey. Money market
funds increasingly compete for the deposit dollar. Larger financial
institutions with larger lending limits and a greater array of sophisticated
services provide an additional competitive feature.
EMPLOYEES
On December 31, 1995, there were 488 persons, employed by the Company and the
Bank.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Not Applicable
(e) STATISTICAL INFORMATION
The statistical disclosures for a bank holding company required pursuant
to Industry Guide 3 are contained in United's 1995 Annual Report on pages
13 through 35.
(f) EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are executive officers of the Company of the Bank
who do not also serve as directors.
Executive
Officer Principal Occupation or Employment
Name Age Since for the Past Five Years
- ---- --- ----- -----------------------
Pierce A.R. Baugh 65 1988 Vice President and Secretary of the Company
since September 28, 1995. Secretary of the
Company since August 1, 1988. Executive
Vice President and Cashier of the Bank
since December 18, 1990.
Alex A. Gantt 60 1990 Executive Vice President -Branch
Administration of the Bank since
September 30, 1995 and Executive Vice
President and Chief Operations Officer
since December 18, 1990.
Warren R. Gerleit 48 1994 Executive Vice President - Lending since
December 20, 1994; Senior Vice President -
Lending since May 25, 1992; previously
Vice President - Lending of National
Westminster Bank NJ and its predecessors.
Donald W. Malwitz 52 1988 Vice President and Treasurer of the Company
since September 28, 1995. Treasurer of the
Company since August 1,1988; Executive Vice
President and Chief Financial Officer of
the Bank since January 1, 1990.
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Ralph L. Straw, Jr. 53 1993 Executive Vice President and General
Counsel Of the Bank since December 21,
1995; Senior Vice President and General
Counsel since September 13, 1993;
previously Vice President and Counsel of
National Westminster Bank NJ and its
predecessors.
A. Richard Abrahamian 36 1992 Senior Vice President and Chief Accounting
Officer of the Bank since August 3, 1992;
previously Vice President of Financial
Reporting of Constellation Bancorp.
John J. Cannon 51 1995 Senior Vice President and Senior Trust
Officer of the Bank since December 21,
1995; Vice President and Trust Officer
since July 11, 1994; formerly Vice
President and Trust Administrator of
National Westminster Bank NJ and its
predecessors.
Joanne F. Herb 45 1993 Senior Vice President and Corporate
Strategic Planning Manager of the Bank
since May 16, 1995; Vice President and
Corporate Strategic Planning Manager since
May 31, 1993; previously Vice President and
Manager of On-Site Banking 1992-1993 and
Vice President of Business Coordination
1989-1992 of National Westminster Bank NJ
and its predecessors.
Charles E. Nunn, Jr. 42 1995 Senior Vice President and Director of Human
Resources since December 21, 1995; Vice
President and Director of Human Resources
1994-1995; Vice President of Human
Resources 1992-1994; Vice President and
Training and Education Coordinator 1989-
1992.
Donald E. Reinhard 41 1995 Vice President and Marketing Director
since 12/21/95; Vice President Marketing
since 11/93, previously Senior Vice
President, Director of Marketing,
Carteret Federal Savings Bank.
ITEM 2 - PROPERTIES
The corporate headquarters of United is located in a three story
facility in Bridgewater, New Jersey. The building, which is leased, is
approximately 65,000 square feet and houses the executive offices of the
Company, the Bank, and a branch office of the Bank. The Bank occupies 17
additional branch offices, of which 12 are owned and 5 are leased. The Bank
also owns a two story building of approximately 30,000 square feet, in
Branchburg, New Jersey, which is utilized as the Bank's operations center.
United's 1995 Annual Report contains information on page 48, Note 7,
page 49, Note 11 and page 53, Note 15 that is incorporated herein by
reference.
ITEM 3 - LEGAL PROCEEDINGS
United's 1995 Annual Report contains on pages 53 to 54, Note 15, the
information required by Item 3 and that information is incorporated herein by
reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted to a vote of Shareholders during the
fourth quarter of the fiscal year ended December 31, 1995.
11
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The only voting securities of the Company consist of its common stock
outstanding. The shares are traded on the NASDAQ Stock Market, formerly known
as the National Association of Securities Dealers Automated Quotation National
Market System, under the symbol UNBJ. The stock is quoted in the Star Ledger,
Courier News, New York Times and Wall Street Journal.
The market makers are Ryan, Beck & Co., West Orange, New Jersey; F.J.
Morrissey & Co., Philadelphia, Pennsylvania; Sandler O'Neill & Partners, New
York and Keefe, Bruyette & Woods Inc., New York.
On December 31, 1995, there were 1,457 shareholders of the Company's
common stock.
United's 1995 Annual Report, contains on page 59, under the heading
"Market and Dividend Information", the information required by Item 5 and that
information is incorporated herein by reference. The table headed "Dividend
Payments, 10 Year Schedule" on page 59 is specifically excluded from the
incorporation by reference.
ITEM 6 - SELECTED FINANCIAL DATA
United's 1995 Annual Report contains on pages 33 and 40 through 42 (Note
1) information required by Item 6 and that information is incorporated herein
by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
United's 1995 Annual Report contains on pages 13 through 35 information
required by Item 7 and that information is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
United's 1995 Annual Report contains on pages 36 through 58 information
required by Item 8 and that information is incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
United's Proxy Statement for its 1996 Annual Meeting contains under the
caption "Selection of Independent Certified Public Accountants for the year
1996" information required by Item 9 and that information is incorporated
herein by reference.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
United's Proxy Statement for its 1996 Meeting contains, under the
caption "Election of Directors", the information required by Item 10 with
respect to directors of United and certain information with respect to
executive officers and that information is incorporated herein by reference.
Certain additional information regarding executive officers of United, who are
not also directors, appears in Part I, Item 1(f).
ITEM 11 - EXECUTIVE COMPENSATION
United's Proxy Statement for its 1996 Meeting contains, under the
captions "Corporation Executive Compensation", "Compensation Committee
Interlocks and Insider
12
<PAGE>
Participation" and "Board of Directors Report on Executive Compensation", the
information required by Item 11 and that information is incorporated herein by
reference
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
United's Proxy Statement for its 1996 Annual Meeting contains, under the
caption "Stock Ownership of Management and Principal Shareholder", the
information required by Item 12 and that information is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
United's Proxy Statement for its 1996 Annual Meeting contains, under the
caption "Compensation Committee Interlocks and Insider Participation", the
information required by Item 13 and that information is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The below listed consolidated financial statements and report of
independent public accountants of United National Bancorp, included in
United's 1995 Annual Report, are incorporated herein by reference.
Page *
------
Report of Independent Public Accountants 58
Consolidated Balance Sheets at December
31, 1995 and 1994 36
Consolidated Statements of Income for the
Three Years Ended December 31,1995 37
Consolidated Statements of Changes in
Stockholders' Equity for the Three
Years Ended December 31, 1995 38
Consolidated Statements of Cash Flows
for the Three Years Ended
December 31, 1995 39
Notes to Consolidated Financial Statements 40-57
Unaudited Quarterly Financial Data 32
*Refers to respective page numbers of United National Bancorp 1995 Annual
Report to Shareholders included as Exhibit 13. Such pages are incorporated
herein by reference.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted as the required information is
not available or the information is presented in the financial statements or
related notes thereto.
(a)(3) OTHER EXHIBITS
List of Exhibits
(3)(a) Certificate of Incorporation of the Company.
(b) By-laws of the Company (incorporated by reference to the Company's
Annual Report on Form 10-K for the Year Ended December 31, 1994
filed with the Securities and Exchange Commission on March 30, 1995
(Exhibit 3(b)).
13
<PAGE>
(10) Material Contracts
(a) Change of Control Agreements for six executive officers are
incorporated by reference to the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1994 filed with the
Securities and Exchange Commission on March 30, 1995 (Exhibits
10(a) through 10(f)).
(b) Agreement and Plan of Merger dated February 2, 1995 by and among
United National Bancorp, United National Bank and New Era Bank
(Incorporated by reference to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on March 22,
1995).
(c) Stock Purchase and Stockholder Agreement dated as of October 24,
1995 among HUB Financial Services, Inc., HUBCO, Inc., Hudson
United Bank, United National Bancorp and United National Bank
(Incorporated by reference to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on November 17,
1995).
(d) Data Processing Service and Clearing Agency Agreement dated
November 2, 1995 between United National Bank and HUB Financial
Services, Inc. (Incorporated by reference to the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on
November 17, 1995).
(e) Data Processing Service and Clearing Agency Agreement dated
November 2, 1995 between Hudson United Bank and HUB Financial
Services, Inc.(Incorporated by reference to the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on
November 17, 1995).
(f) Administrative Services Agreement dated November 2, 1995 between
Hudson United Bank and HUB Financial Services, Inc.(Incorporated
by reference to the Company's Report on Form 8-K filed with the
Securities and Exchange Commission on November 17, 1995).
(13) Portions of United National Bancorp's Annual Report to its
Shareholders for the fiscal Year Ended December 31, 1995, are
incorporated by reference into this Annual Report on Form 10-K.
(21) List of Subsidiaries (incorporated by reference to the Company's
Annual Report on Form 10-K for the Year Ended December 31, 1994
filed with the Securities and Exchange Commission on March 30,
1995
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K filed November 17, 1995 (Date of earliest event reported) -
November 3, 1995 to report the acquisition of a 50% ownership in United
Financial Services, Inc., a third party data processing service bureau.
14
<PAGE>
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.
UNITED NATIONAL BANCORP
By: /s/ Thomas C. Gregor
--------------------------------------
Thomas C. Gregor
Chairman of the Board,
President and Chief Executive Officer
Dated: March 26, 1996
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 and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas C. Gregor Chairman of the March 26, 1996
- --------------------- Board, President --------------
Thomas C. Gregor and Director
/s/ Donald W. Malwitz V.P. & Treasurer March 26, 1996
- ---------------------- --------------
Donald W. Malwitz
/s/ Pierce A.R. Baugh V.P. & Secretary March 26, 1996
- --------------------- --------------
Pierce A.R. Baugh
/s/ Donald A. Buckley Director March 26, 1996
- --------------------- --------------
Donald A. Buckley
/s/ Richard C. Marder Director March 26, 1996
- --------------------- --------------
Richard C. Marder
/s/ C.Douglas Cherry Director March 26, 1996
- --------------------- --------------
C. Douglas Cherry
/s/ Charles E. Hance Director March 26, 1996
- --------------------- --------------
Charles E. Hance
/s/ John R. Kopicki Director March 26, 1996
- --------------------- --------------
John R. Kopicki
/s/ Kenneth W.Turnbull Director March 26, 1996
- --------------------- --------------
Kenneth W. Turnbull
/s/ George J. Wickard Director March 26, 1996
- --------------------- --------------
George J. Wickard
/s/ Antonia S.Marotta Director March 26, 1996
- --------------------- --------------
Antonia S. Marotta
/s/ David R.Walker Director March 26, 1996
- --------------------- --------------
David R. Walker
/s/ Ronald E. West Director March 26, 1996
- --------------------- --------------
Ronald E. West
/s/ George W. Blank Director March 26, 1996
- --------------------- --------------
George W. Blank
15
<PAGE>
Exhibit 3A
CERTIFICATE OF INCORPORATION
OF
UNITED NATIONAL BANCORP
PURSUANT TO THE NEW JERSEY BUSINESS
CORPORATION ACT, N.J.S.A. SECTION 14A:1-1 ET SEQ
------------------------------------------------
As amended through December 31, 1995
ARTICLE 1
1. The name of this Corporation is: UNITED NATIONAL BANCORP.
2. The principal office of this Corporation is: 65 Readington Road,
Branchburg, New Jersey 08876.
ARTICLE 2
1. The purpose for which this Corporation is organized is to act to the
fullest extent permitted by law as a bank holding company and to otherwise
engage in any activity within the purposes for which corporations may be
organized under the New Jersey Business Corporation Act.
ARTICLE 3
1. The total authorized capital stock of the Corporation shall be
4,300,000 shares, consisting of 4,000,000 shares of Common Stock and 300,000
shares of Preferred Stock which may be issued in one or more classes or series.
The shares of Common Stock shall constitute a single class and shall have a par
value of $2.50 per share. The shares of Preferred Stock of each class or series
shall be without nominal or par value, except that the amendment authorizing the
initial issuance of any class or series, adopted by the board of directors as
provided herein, may provide that shares of any class or series shall have a
specified par value per share, in which event all of the shares of such class
or series shall have the par value per share so specified.
2. The Board of Directors of the Corporation is expressly authorized from
time to time to adopt and to cause to be executed and filed without further
approval of the shareholders amendments to this Certificate of Incorporation
authorizing the issuance of one or more classes or series of Preferred Stock for
such consideration as the Board of Directors may fix. In an amendment
authorizing any class or series of Preferred Stock, the Board of Directors is
expressly authorized to determine:
(a) The distinctive designation of the class or series and the number
of shares which will constitute the class or series, which number may be
increased or decreased (but not below the number of shares then outstanding in
that class or above the total shares authorized herein) from time to time by
action of the Board of Directors.
(b) The dividend rate on the shares of the class or series, whether
dividends will be cumulative, and, if so, from what date or dates;
(c) The price or prices at which, and the terms and conditions on
which, the shares of the class or series may be redeemed at the option of the
Corporation;
(d) Whether or not the shares of the class or series will be entitled
to the benefit of a retirement or sinking fund to be applied to the purchase or
redemption of such shares and, if so entitled, the amount of such fund and the
terms and provisions relative to the operation thereof;
(e) Whether or not the shares of the class or series will be
convertible into, or exchangeable for, any other shares of stock of the
Corporation or other securities, and if so convertible or exchangeable, the
conversion price or prices, or the rates of exchange, and any adjustments
thereof, at which such conversion or exchange may be made, and any other terms
and conditions of such conversion or exchange;
(f) The rights of the shares of the class or series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation;
(g) Whether or not the shares of the class or series will have
priority over, parity with, or be junior to the shares of any other class or
series in any respect, whether or not the shares of the class or series will
be entitled to the benefit of limitations restricting the issuance of shares
of any other class or series having priority over or on parity with the
shares of such class or series and whether or not the shares of the class or
series are entitled to restrictions on the payment of dividends on, the
making of other distributions in respect of, and the purchase or redemption
of shares of any other class or series of Preferred Stock or Common Stock
ranking junior to the shares of the class or series;
(h) Whether the class or series will have voting rights, in addition
to any voting rights provided by law, and if so, the terms of such voting
rights; and
(i) Any other preferences, qualifications, privileges, options and
other relative or special rights and limitations of that class or series.
ARTICLE 4
1. ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS. A director of the
Corporation shall not be personally liable
<PAGE>
to the Corporation or its shareholders for damages for breach of any duty owed
to the Corporation or its shareholders, except for liability for any breach of
duty based upon an act or omission (a) in breach of such person's duty of
loyalty to the Corporation or its shareholders, (b) not in good faith or
involving a knowing violation of law or (c) resulting in receipt by such person
of an improper personal benefit.
2. ELIMINATION OF CERTAIN LIABILITY OF OFFICERS. Unless provided
otherwise by law, an officer of the Corporation shall not be personally liable
to the Corporation or its shareholders for damages for breach of any duty owed
to the Corporation or its shareholders, except for liability for any breach of
duty based upon an act or omission (a) in breach of such person's duty of
loyalty to the Corporation or its shareholders, (b) not in good faith or
involving a knowing violation of law or (c) resulting in receipt by such person
of an improper personal benefit.
3. REPEAL OR MODIFICATION OF THIS ARTICLE. Any repeal or modification of
the foregoing paragraphs by the shareholders of the Corporation shall not
adversely affect any right or protection of a director or an officer of the
Corporation existing at the time of such repeal or modification.
ARTICLE 5
1. (a) Except as otherwise provided herein, no purchase by the
Corporation from any Interested Person (as
-2-
<PAGE>
hereinafter defined) of shares of any stock of the Corporation owned by such
Interested Person shall be made at a price exceeding the average price paid by
such Interested Person for all shares of stock of the Corporation acquired by
such Interested Person during the two-year period preceding the date of such
proposed purchase unless such purchase is approved by the affirmative vote of
not less than two-thirds of the votes cast by Disinterested Shareholders (as
hereinafter defined) entitled to vote thereon.
(b) The provisions of this Section 1 of ARTICLE FIVE shall not apply
to (i) any offer to purchase made by the Corporation which is made on the same
terms and conditions to all holders of shares of stock of the Corporation, (ii)
any purchase by the Corporation of shares owned by an Interested Person
occurring after the end of two years following the date of the last acquisition
by such Interested Person of stock of the Corporation, (iii) any transaction
which may be deemed to be a purchase by the Corporation of shares of its stock
which is made in connection with the terms or operation of any stock option or
other employee benefit plan now or hereafter maintained by the Corporation, or
(iv) any purchase by the Corporation of shares of its stock at prevailing market
prices pursuant to a stock repurchase program.
2. Notwithstanding any other provisions of this Certificate of
Incorporation or the By-Laws of the Corporation, no Transaction (as hereinafter
defined) between the Corporation and any Interested Person shall be valid nor
-3-
<PAGE>
shall any such Transaction be consummated unless (i) such Transaction is
expressly approved by at least the affirmative vote of Disinterested Directors
(as hereinafter defined) which vote at the time constitutes at least a majority
vote of the entire Board of Directors of the Corporation, or (ii) such
Transaction is approved by the affirmative vote of not less than two-thirds of
the votes cast by Disinterested Shareholders entitled to vote thereon, or (iii)
if such Transaction would result in payment of cash or other property to the
shareholders of the Corporation, such transaction provides for the payment to
each of the Disinterested Shareholders upon the consummation thereof, in
exchange for all the shares of the Corporation's capital stock held by each of
such Disinterested Shareholders, consideration which, as to both amount and
kind, is equal to or greater than the highest per share price actually paid by
or for the account of such Interested Person for the same class of shares of
capital stock held by such Disinterested Shareholders during both the two-year
period prior to the time any such Interested Person became such and the two-year
period prior to the consummation of such Transaction.
3. For purposes of this Article: (i) the term "Interested Person" means
any individual, corporation, partnership, trust, association or other
organization or entity (including any group formed for the purpose of acquiring,
voting or holding securities of the Corporation) which beneficially or of
record, owns or controls by agreement, voting
-4-
<PAGE>
trust or otherwise, at least 3% of the voting power of any class of capital
stock of the Corporation and who (a) is offering shares to the Corporation for
repurchase or (b) is party to a proposed Transaction with the Corporation, as
the case may be, and such term also includes any corporation, partnership,
trust, association, or other organization or entity in which one or more
Interested Persons have the power, trough the ownership of voting securities, by
contract, or otherwise, to influence significantly any of the management,
activities or policies of such corporation, partnership, trust, association, or
other organization or entity; (ii) the term "Disinterested Director" means a
director (excluding any directly who is an Interested Person) who was either a
member of the Board of Directors of the Corporation prior to the time the
Interested Person in the proposed transaction became an Interested Person or who
subsequently became a director of the Corporation and whose election, or
nomination for election, was approved by the vote of at least a majority of the
Disinterested Directors of the Corporation voting on such nomination or
election; (iii) the term "Disinterested Shareholders" means those holders of the
Corporation's capital stock entitled to vote on the transaction, none of which
is an Interested Person; and (iv) the term "Transaction" includes a merger,
consolidation, liquidation, or other form of corporate reorganization deemed to
involve the purchase or transfer of the shares of the Corporation.
-5-
<PAGE>
4. The provisions of this Article shall not be amended without the
affirmative vote of not less than two-thirds of the votes cast by the
shareholders entitled to vote thereon; provided, however, that if, at the time
of such vote, there shall be one or more Interested Persons, (i) in the case of
amendment of Section 1 or 2 of this ARTICLE FIVE, such affirmative vote shall
include the affirmative vote in favor of such amendment of not less than two-
thirds of the votes cast by Disinterested Shareholders entitled to vote thereon,
or (ii) in the case of Section 2 of this ARTICLE FIVE, such amendment shall have
been approved by the affirmative vote of Disinterested Directors, which vote at
the time constitutes at least a majority vote of the entire Board of Directors
of the Corporation,
5. The provisions of this Article shall be in addition to any other
provisions of the New Jersey Business Corporation Law or this Certificate of
Incorporation or the By-Laws of the Corporation, each as amended from time to
time, applicable to the authorization and consummation by the Corporation of any
transaction or amendment contemplated by this ARTICLE FIVE.
ARTICLE 6
1. The address of the Corporation's initial registered office is: 202
Park Avenue, Plainfield, New Jersey 07061.
-6-
<PAGE>
2. The name of the Corporation's initial registered agent at such address
is: Pierce Baugh.
ARTICLE 7
1. The number of directors constituting the Corporation's first Board of
Directors, and the names and addresses of the persons who are to serve as such
directors are as follows:
The initial Board of Directors shall consist of four persons:
Kenneth W. Turnbull
George F. Hetfield, Sr.
Lowell F. Johnson
Mrs. C. Northrop Pond
The address for each of them shall be c/o United National Bank, 202 Park Avenue,
Plainfield, New Jersey 07061.
ARTICLE 8
1. The names and addresses of the Corporation's incorporators are as
follows: George F. Hetfield, Sr., 102 North Avenue, Plainfield, New Jersey
07061.
ARTICLE 9
1. The duration of the Corporation shall be perpetual.
-7-
<PAGE>
ARTICLE 10
1. This Certificate of Incorporation shall be effective on the date of
its filing.
ARTICLE 11
The directors of the Corporation shall be divided into three classes, as
nearly equal in number as possible, designated Class I, Class II and Class III.
Class I directors shall initially serve until the 1996 annual meeting of
shareholders; Class II directors shall initially serve until the 1997 annual
meeting of shareholders; and Class III directors shall initially serve until the
1998 annual meeting of shareholders. At each annual meeting of shareholders,
successors to the class of directors whose term expires at the annual meeting
shall be elected for a term expiring at the third succeeding annual meeting of
shareholders after their election. Except as otherwise provided by law, if the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible. In no case shall a decrease in the number of directors
shorten the term of any incumbent directors.
/s/ Thomas C. Gregor
------------------------------
THOMAS C. GREGOR
DATED: July 17, 1995
-8-
<PAGE>
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATION
This section is presented to assist in understanding the operating results of
United National Bancorp (the "Parent Company") and its wholly-owned subsidiary,
United National Bank (the "Bank", or when consolidated with the Parent Company,
the "Company") for each of the past three years and financial condition for each
of the past two years. This section should be read in conjunction with the
consolidated financial statements, the accompanying notes and selected financial
data provided within this report.
OVERVIEW
The Company's operating income for 1995, defined as net income excluding
one-time merger-related and restructuring charges, was $10,463,000, a 6.5%
increase over the $9,820,000 for the year ended December 31, 1994. The one-time
charges, related to the acquisition of New Era Bank ("New Era") and the
investment in a joint venture, United Financial Services, Inc. ("United
Financial"), a newly formed third party service provider, were $2,089,000, or
$0.58 per share, net of taxes. Operating income per share, adjusted for the 6%
stock dividend paid on November 1, 1995, was $2.91, a 4.7% increase over the
$2.78 reported for the year ended December 31, 1994.
The Company reported net income, after one-time charges, of $8,374,000, a
decrease of 14.7% from the $9,820,000 earned in 1994. On a per share basis, net
income in 1995 was $2.33 as compared to the $2.78 reported in 1994.
The Company reported net income for 1994 of $9,820,000, up 13.5% over the
$8,654,000 earned in 1993. Per share results for 1994 rose 12.6% to $2.78 from
$2.47 reported in 1993. The results for 1993 included a one-time cumulative
benefit of $973,000 or $.28 per share from the adoption of Financial Accounting
Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes", which
was recognized in the first quarter of 1993. Income before the effects of
Statement No. 109 rose $2,139,000 or 27.8% in 1994. For more information, see
Note 12 in the Notes to Consolidated Financial Statements.
Key performance ratios based on operating income remained strong, although they
declined in 1995. Based on operating income, return on average assets ("ROA")
and return on average equity ("ROE") were 1.08% and 13.93%, respectively, in
1995, compared to 1.15% and 14.20%, respectively, in 1994. The performance
ratios were down in 1995 as the full operating efficiencies resulting from the
acquisition of New Era and outsourcing of data processing to United Financial
have not yet been realized. It is anticipated that the expense reductions from
these changes will be more fully realized in 1996. ROA and ROE in 1993, before
the cumulative effect of the change in accounting for income taxes, were 0.93%
and 11.94%, respectively.
On net income, ROA was 0.86% in 1995 as compared to 1.15% in 1994 and 1.04% in
1993, while ROE was 11.15% in 1995, down from 14.20% in 1994 and 13.46% in 1993.
As shown in the accompanying graphs, ROA and ROE, before one-time items, have
averaged 0.90% and 11.61%, respectively, over the past five years.
The Company's favorable operating results for 1995 before the one-time charges
were the result of continued improvement in net interest income and non-interest
income, as well as a $1,140,000 reduction in the provision for loan losses.
These increases were offset in part by an increase in non-interest expense.
The Company's net income for 1995, however, declined as a result of the one-time
charges due to merger-related and restructuring charges incurred in 1995.
Loan demand throughout 1995 continued to show improvement as business and
consumer confidence in the economic recovery increased. Interest rates, as
measured by the prime rate, rose early in the year, then declined in the third
and fourth quarters to end the year where it started at 8.50%. Consolidated
assets at year-end 1995 totaled $1,010,545,000, which represented an increase of
14.2% over 1994. As in 1994, the composition of the balance sheet continued to
change in 1995.
On the asset side of the balance sheet, securities available for sale increased
to $334,156,000 or
OPERATING INCOME
Adjusted for merger & restructuring charges and extraordinary item (In Millions)
OPERATING INCOME [Bar Chart]
A bar chart that describes operating income (adjusted for merger &
restructuring charges and extraordinary income) in millions for the following
years: 1991, $3.888, 1992, $6.380; 1993, $7.681; 1994, $9.820; 1995, $10.463.
RETURN ON AVERAGE ASSETS
Adjusted for merger & restructuring charges and extraordinary item (Percent)
RETURN ON AVERAGE ASSETS [Bar Chart]
A bar chart that describes the return on average assets (adjusted for merger &
restructuring charges and extraordinary item for the following years:
1991, 0.53%; 1992, 0.81%; 1993, 0.93%; 1994, 1.15%; 1995, 1.08%.
RETURN ON AVERAGE EQUITY
Adjusted for merger & restructuring charges and extraordinary item (Percent)
RETURN ON AVERAGE EQUITY [Bar Chart]
A bar chart that describes the return on average equity (adjusted for merger &
restructuring charges and extraordinary item for the following years:
1991, 7.04%, 1992, 10.95%; 1993, 11.94%; 1994, 14.20%; 1995, 13.93%.
<PAGE>
14
33.1% of the total asset base at December 31, 1995 as compared to $223,976,000
or 25.3% at year-end 1994. Conversely, securities held to maturity decreased
$71,516,000 and accounted for 2.5% of total assets versus 10.9% last year.
Loans, net of unearned income, rose $69,783,000 and represented 54.5% of total
assets as compared to 54.4% in 1994. On the liability side of the balance
sheet, the funding composition was greatly influenced by the acquisition of two
branches from the Resolution Trust Corporation ("RTC") and the rate environment
in 1995. Shorter term deposit products and savings deposits became less
prevalent throughout the year as consumers began moving monies into higher
yielding fixed rate certificates of deposit, in an attempt to lock in higher
rates before the anticipated decline in interest rates. In fact, time deposits
grew by $110,618,000 or 50.0% to $331,972,000 at December 31, 1995 compared to
$221,354,000 at year-end 1994. Demand deposits grew moderately to $153,095,000
at year-end 1995, a 2.7% increase over the prior year-end. In contrast, savings
deposits decreased by $17,854,000 or 4.6% from 1994 to $369,561,000 at year-end
1995. On average, time deposits were up $123,789,000 or 60.3% from 1994 while
demand and savings were down $25,543,000 or 4.7%.
EARNINGS ANALYSIS
OPERATING REVENUE
The Company's earnings have two major components. Net interest income generates
one source of revenue with the remaining balance comprised of non-interest
income, including net gains from securities transactions. Operating revenue,
excluding securities gains, increased $1,293,000 or 2.5% in 1995 as compared to
1994 and decreased 0.1% in 1994 as compared to 1993.
NET INTEREST INCOME
Net interest income, the amount by which interest earned on assets exceeds
interest paid to depositors and other creditors, is the Company's principal
source of revenue. For purposes of this review, interest exempt from Federal
taxation has been restated to a taxable-equivalent basis, which places
tax-exempt income and yields on a comparable basis with taxable income to
facilitate analysis. The Federal income tax rate used for 1995, 1994 and 1993
was 34%. In calculating loan yields, the applicable loan fees have been included
in interest income and non-performing loans are included in the average loan
balances.
Net interest income increased $1,011,000 or 2.3% to a level of $44,063,000 in
1995 following a $1,379,000 or 3.3% increase in the prior year. The primary
reason for the increase was the result of an increase in interest earning
assets, partly offset by a decline in the net interest margin as a result of
increased competition for both lending and deposit products. Additionally, the
Company had to compete for deposits in a competitive market to fund the growth
experienced in the loan portfolio. The higher yielding loan portfolio increased
to 57.4% of average earning assets, up from 53.0% in 1994.
Average interest earning assets increased $102,645,000 or 13.0% over the prior
year coupled with higher rates on earning assets, which increased 47 basis
points. Accordingly, interest income increased $12,160,000 or 19.9% from 1994.
For 1994, average interest earning assets increased $29,043,000 or 3.8% over
1993 while rates declined 24 basis points, creating an increase in total
interest income of $399,000 or 0.7% from 1993.
The Company continued to closely monitor the rates paid on all categories of
interest bearing liabilities to reflect existing market conditions. However,
the increase in interest rates during the first half of 1995 had put upward
pressure on the rates the Company currently pays on its deposit products. In
addition, primarily as a result of the two branches acquired from the RTC,
average interest-bearing deposits increased $106,386,000 or 17.7% from 1994.
Other borrowings also increased by $3,689,000 or 14.2% to the 1995 average
balance of $29,638,000. These were the primary factors which resulted in an
increase in total interest expense of $11,149,000 in 1995 from the prior year,
which declined $980,000 from 1993. The effect of the above changes in 1995
created a 58 basis point and 52 basis point decline in the Company's net
interest spread and net interest margin, respectively.
<PAGE>
15
The net interest margin, which represents net interest income as a percentage of
average interest earning assets, is a key indicator of net interest income
performance. For 1995, the net interest margin decreased to 4.95% from 5.47% in
1994 and 5.49% in 1993. The decrease in 1995 was the result of a shift, on
average, to higher rate time deposits from lower rate savings type deposits and
a decrease in the demand deposit ratio to total deposits. Conversely, during
1994, the net interest margin decrease of 2 basis points from 1993 was due
primarily to the shift from higher rate time deposits to lower rate savings type
deposits. These trends are reflected in the Analysis of Changes in Net Interest
Income below, which presents an analysis of the impact on interest income and
expense resulting from changes in average volumes and rates, as well as in the
analysis of average balances and interest rates, which appears on pages 34 and
35:
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1995 Compared with 1994 1994 Compared with 1993
--------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Total Due to Change in: Total Due to Change in:
Increase --------------------- Increase ---------------------
(In Thousands) (Decrease) Volume Rate (Decrease) Volume Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $ 10,076 $ 8,051 $ 2,025 $ 3,478 $ 4,246 $ (768)
Securities Available for Sale:
Taxable (1,879) (2,546) 667 11,315 10,631 684
Non-Taxable 380 372 8 1,527 1,527 --
Securities Held to Maturity:
Taxable 3,671 3,503 168 (14,935) (15,423) 488
Non-Taxable (553) (577) 24 (933) (778) (155)
Trading Account Securities 4 2 2 9 8 1
Federal Funds Sold and Deposits with
Federal Home Loan Bank 461 269 192 (62) (288) 226
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 12,160 9,074 3,086 399 (77) 476
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits (120) (424) 304 (679) 340 (1,019)
Time Deposits 10,163 6,760 3,403 (798) (172) (626)
Short-Term Borrowings 593 309 284 497 310 187
Other Borrowings 513 513 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 11,149 7,158 3,991 (980) 478 (1,458)
- ------------------------------------------------------------------------------------------------------------------------------
Changes in Net Interest Income $ 1,011 $ 1,916 $ (905) $ 1,379 $ (555) $ 1,934
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NON-INTEREST INCOME
Non-interest income, which has become an increasingly important source of
revenue for the Company, consists primarily of trust income, service charges on
deposit accounts, other service charges, commissions and fees, and securities
gains. In 1995, total non-interest income amounted to $12,329,000, an increase
of $466,000 or 3.9% from 1994, as compared with a 7.6% decrease in 1994 from
1993. Included in these figures were net gains from securities transactions of
$1,135,000 in 1995 as compared to $871,000 in 1994 and $583,000 in 1993.
Non-interest income, not including securities gains, was up $202,000 or 1.8%
over 1994, compared to a decline of $1,270,000 or 10.4% in 1994 from 1993.
<PAGE>
16
The following table represents the components of non-interest income for the
years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Income $ 4,222 $ 4,005 $ 3,558
Service Charges on Deposit Accounts 3,443 3,588 3,344
Other Service Charges, Commissions and Fees 2,145 2,193 3,801
Other Income 1,384 1,206 1,559
- ----------------------------------------------------------------------------
11,194 10,992 12,262
Net Gains from Securities Transactions 1,135 871 583
- ----------------------------------------------------------------------------
Total Non-Interest Income $12,329 $11,863 $12,845
- ----------------------------------------------------------------------------
</TABLE>
TRUST INCOME (In Millions)
TRUST INCOME [Bar Chart]
A bar chart that describes trust income for the years: 1991, $3.280;
1992, $3.392; 1993, $3.558; 1994, $4.005; 1995, $4.222.
Trust income continues to be the major contributor to fee income, representing
34.2% of the total, and has grown steadily over the years. Trust income rose
$217,000 or 5.4% to $4,222,000 in 1995 compared to a $447,000 or 12.6% increase
from 1993 to 1994. This increase was due to growth in the level of assets under
management, assisted through the expansion of new client relationships, as well
as the addition of new investment products. The Trust Division offers a full
range of fiduciary services, ranging from mutual funds to personal trust,
investment advisory and employee benefits. Trust services will continue to play
an important role in the Company's future.
Service charges on deposit accounts decreased $145,000 or 4.0% to $3,443,000 in
1995 as compared to a $244,000 or 7.3% increase in 1994 compared to 1993. The
decrease in 1995 was primarily due to increased relationship pricing strategies
with customers maintaining higher balances in lieu of paying service charges.
In 1994, selective pricing changes on retail and commercial transaction account
services along with increased customer activity accounted for the increase over
1993.
Other service charges, commissions and fees declined $48,000 or 2.2% from
1994 to $2,145,000 in 1995 due to reduced credit card fees, partly offset by
increases in other fees. The credit card fees declined $67,000 or 4.1% to
$1,562,000 from $1,629,000 as a result of a decline in the number of credit
cards in the Bank's portfolio. In 1994, other service charges, commissions
and fees decreased $1,608,000 or 42.3% from 1993 due mostly to the decision
to discontinue the merchant bank aspect of its credit card business at the
end of 1993, and to a decline in credit card fees. Merchant bank fees
included in 1993 totaled $1,088,000. A portion of those fees were required
to be remitted to the card-issuing banks, which were recorded as "Other
Expenses", which also declined in 1994. Additionally, a decline in the
number of credit cards in the Bank's portfolio resulted in reduced credit
card fees in 1994.
Other income increased $178,000 or 14.8% from 1994 to $1,384,000 in 1995 due
primarily to a $247,000 gain on the sale of the Bank's Bridgewater branch
facility, increases in safe deposit box rentals and check printing commissions,
partly offset by lower gains on both sales of other real estate owned and on
sales of Small Business Administration ("SBA") loans. This compares to a
decrease of $353,000 or 22.6% in 1994 from 1993 due primarily to lower gains on
sales of SBA loans.
Net gains on securities transactions of $1,135,000 were recorded in 1995
compared with $871,000 in 1994 and $583,000 in 1993. The gains in 1995 and 1994
were the outcome of restructuring the investment portfolio to alter maturities,
due to the changing interest rate environment, as well as reducing the
prepayment risk associated with the mortgage-backed securities. In December
1995, the FASB allowed banks to make a one-time transfer of securities from the
held to maturity portfolio to another classification without "tainting" the
remaining held to maturity securities. This provided banks with the opportunity
to realign their securities
<PAGE>
17
portfolio. The gains in 1993 were recognized as certain government
collateralized mortgage obligations were sold to reduce prepayment risk
resulting from the declining interest rate environment.
NON-INTEREST EXPENSE
Non-interest expense in 1995 totaled $42,748,000, an increase of $5,127,000 or
13.6% compared to 1994. This compared to a $139,000 or 0.4% increase in 1994
over 1993. The one-time charges were incurred in connection with both the New
Era merger and with the joint venture investment in United Financial. Excluding
these one-time charges, non-interest expense increased $1,887,000 or 5% over
1994. Management continues to seek opportunities to control non-interest expense
levels. Non-interest expense categories for the years 1995, 1994 and 1993 are
shown in the accompanying table.
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and Employee Benefits $ 20,817 $ 20,181 $ 19,148
Occupancy and Equipment Expense 6,346 5,441 5,198
Amortization of Intangible Assets 1,663 651 882
Net Cost to Operate Other Real Estate 412 513 611
Other Expenses 10,270 10,835 11,643
- ----------------------------------------------------------------------------
39,508 37,621 37,482
One-Time Charges:
Merger Related Charge-New Era Acquisition 1,670 -- --
Restructuring Charge-
United Financial Services, Inc. 1,570 -- --
- ----------------------------------------------------------------------------
Total Non-Interest Expense $ 42,748 $ 37,621 $ 37,482
- ----------------------------------------------------------------------------
</TABLE>
The largest component of non-interest expense is salaries and employee benefits,
which accounted for 48.7% (52.7% excluding one-time charges) of total
non-interest expense in 1995 compared to 53.6% and 51.1% in 1994 and 1993,
respectively. Management continues to carefully monitor staff levels, employee
benefits and operational consolidations. Compared to the previous year, the 1995
expense of $20,817,000 represents a 3.2% increase versus a 5.4% increase between
1994 and 1993. Specifically, salaries and wages rose $631,000 while employee
benefits rose $5,000. Medical healthcare costs, which have risen considerably
in prior years, declined $44,000 from 1994 and had declined $652,000 in 1994
from 1993. This expense is based on the level of medical claims and there can
be no assurance that these costs will not increase in the future. The Company's
goal to closely control this expense has been, and will continue to be, a high
priority. Full-time equivalent employees were 465 at December 31, 1995 compared
with 507 and 537 at December 31, 1994 and 1993, respectively. The reduction in
full-time equivalent employees during 1995 was achieved through the elimination
of certain positions resulting from the acquisition of New Era and by
outsourcing data processing through the joint venture investment in United
Financial.
Net occupancy and equipment expense increased $905,000 or 16.6% in 1995 to
$6,346,000 as compared to an increase of $243,000 or 4.7% in 1994 from 1993.
The increase in 1995 was principally the result of acquiring two branches from
the RTC in January and expenses relating to the new headquarters facility.
Additionally, there were increases in rentals and maintenance of equipment, and
repairs and maintenance relating to the Company's owned and leased premises. As
part of the plan to more efficiently organize the Company's departments and
staff, in May of 1995, Senior Management and certain departments moved to the
Company's new headquarters in Bridgewater, NJ.
Net cost to operate other real estate, which results from costs of holding other
real estate in addition to valuation adjustments, amounted to $412,000 in 1995,
a decrease of $101,000 from 1994. These costs in 1994 were $513,000 compared to
$611,000 in 1993. The decrease in 1995 was due to lower carrying costs and
writedowns
<PAGE>
18
associated with these holdings. For additional discussion on other real estate,
see Asset Quality beginning on page 24.
Other expenses, excluding the one-time charges, amounted to $10,270,000 in 1995,
a decrease of $565,000 or 5.2% compared to the prior year while 1994's expense
was $808,000 or 6.9% lower than that of 1993. The decrease in 1995 was
primarily due to expense reductions achieved through the consolidation of
operations resulting from the acquisition of New Era, the reduction of expenses
related to outsourcing the Company's data processing function, and lower FDIC
premiums which went into effect in the third quarter. These savings were offset
in part by a loss of $220,000 from the sale of the Bank's Knowlton branch
facility and expenses relating to the acquisition of branches from the RTC.
The decrease from 1993 to 1994 was primarily as a result of the Bank's decision
to discontinue the merchant bank portion of the credit card business, which
reduced data processing charges and other credit card processing costs.
In 1995, the one-time charges related to the New Era acquisition consisted
primarily of payouts on existing employment contracts, a termination penalty on
New Era's data processing service, the write-off of unusable fixed assets and
supplies, professional services directly attributable to the acquisition, and
severance costs. The one-time restructuring charge related to United Financial
consisted primarily of lease termination penalties on data processing equipment,
severance costs, professional services directly attributable to the joint
venture, and the write-off of unusable equipment and supplies.
INCOME TAXES
The provision for income taxes decreased $984,000 in 1995 to $3,623,000 compared
to an increase in 1994 of $632,000. This decrease resulted from $1,151,000 in
merger and restructuring charges incurred during 1995, partially offset by
changes in the levels of taxable income relative to tax-exempt income and
certain other differences. The table below sets forth the Company's income tax
expense and effective tax rates for the years 1995, 1994 and 1993.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for Federal Income Taxes $3,335 $3,844 $3,028
Provision for State Income Taxes 288 763 947
Total Provision for Income Taxes $3,623 $4,607 $3,975
Effective Tax Rate 30% 32% 34%
</TABLE>
For further information regarding the provision for income taxes and the
Company's adoption of FASB Statement No. 109, "Accounting for Income Taxes", see
Note 12 to Consolidated Financial Statements.
CAPITAL
The Company is committed to maintaining a strong capital position. Capital
adequacy is monitored in relation to the size, composition and quality of its
asset base and with consideration given to regulatory guidelines and
requirements, as well as industry standards.
At December 31, 1995, total stockholders' equity was $81,399,000, an increase of
$15,597,000 or 23.7% from year-end 1994. The increase was due primarily to the
FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," change in net unrealized gain adjustment, net of tax, of
$10,484,000. Additional contributors to the increase in capital were the result
of net income of $8,374,000, additional stock issued as a result of a debenture
conversion and stock options exercised resulting from the acquisition of New
Era. This was offset in part by cash dividends of $3,541,000 and net purchases
of treasury stock of $1,558,000.
U.S. bank regulators have issued guidelines for a risk-based capital approach to
measure capital adequacy. These guidelines assign various levels of risk to
different categories of bank assets requiring higher levels of capital for
assets with
<PAGE>
19
greater risk potential. The guidelines also take into account the credit risk
exposures that result from off-balance sheet contracts and commitments, such as
stand-by letters of credit and unused portions of loan commitments. Under the
guidelines, all banks are required to have core capital (Tier I) of at least 4%
of risk-weighted assets and total capital (Tier I and Tier II) of at least 8% of
risk-weighted assets. Tier I capital consists of stockholders' equity less
intangible assets, while Tier II capital includes the allowance for possible
loan losses, subject to certain limitations.
Bank regulatory agencies issued a final rule in December 1994 directing
institutions not to include in Tier I capital net unrealized gains and losses on
securities available for sale resulting from the FASB Statement No. 115. Net
unrealized losses on marketable equity securities (equity securities with
readily determinable fair values), however, will continue to be deducted from
Tier I capital.
At December 31, 1995 and 1994, the Company's Tier I capital ratio was 10.33% and
13.64%, respectively, while the combined Tier I and Tier II capital ratio was
11.47% and 14.97%, respectively. The ratios for both years are well in excess
of the regulatory minimum requirements.
In addition to the risk-based guidelines discussed above, the Federal Reserve
Board and the Office of the Comptroller of the Currency require that a bank
holding company and bank, which meet the regulators' highest performance and
operation standards, maintain a minimum leverage ratio (Tier I capital as a
percent of quarterly average tangible assets) of 3%. For those financial
institutions with higher level of risk or that are experiencing or anticipating
significant growth, the minimum leverage ratio will be increased by at least 100
to 200 basis points. At December 31, 1995 and 1994, the Company's leverage
ratio was 6.80% and 8.29%, respectively, and was well above the minimum
regulatory requirement.
The Company's capital ratios declined in 1995 as a result of the increase in
intangible assets related to the branches acquired from the RTC and the
investment in the joint venture. Intangible assets are deducted from regulatory
capital when calculating the ratios.
Bank regulators apply substantially the same capital requirements to the
Company's banking subsidiary. A bank is considered "well capitalized", the
highest regulatory category, if it has minimum Tier I and combined Tier I and
Tier II risk-based capital ratios of 6% and 10%, respectively, and a minimum
leverage ratio of 5%. The Bank has Tier I and combined Tier I and Tier II
capital ratios of 9.65% and 10.79%, respectively, and a leverage ratio of 6.36%.
Based upon these ratios, the Bank would qualify as "well capitalized" at
December 31, 1995.
CAPITAL RATIOS (At Year End 1995) [Bar Chart]
A bar chart that describes capital ratios at year-end 1995:
Actual - Leverage 6.81%; Tier I 10.33%; and Tier I and Tier II 11.47%
Regulatory Minimum Requirement - Leverage 4.00%; Tier I 4.00%; and Tier I and
Tier II 8.00%
Management is not aware of any current recommendations by the regulatory
authorities which, if they were to be implemented, would have a material effect
on the capital resources, liquidity or operations of the Company. The following
table reflects the Company's capital ratios, as of December 31, 1995:
(Dollars In Thousands)
RISK-BASED CAPITAL RATIOS:
Tier I Capital
Actual $ 67,112 10.33%
-------------------------------------------------------------------------
Regulatory Minimum Requirement $ 25,989 4.00%
-------------------------------------------------------------------------
Combined Tier I and Tier II Capital
Actual $ 74,524 11.47%
-------------------------------------------------------------------------
Regulatory Minimum Requirement $ 51,978 8.00%
-------------------------------------------------------------------------
LEVERAGE RATIO
Actual $ 67,112 6.80%
-------------------------------------------------------------------------
Regulatory Minimum Requirement $ 39,490 4.00%
-------------------------------------------------------------------------
<PAGE>
20
1995 AVERAGE INTEREST EARNING ASSET ALLOCATION
(DOLLARS IN MILLIONS)
1995 AVERAGE INTEREST EARNING ASSET ALLOCATION [Pie Chart]
A pie chart that describes the 1995 average interest earning asset
allocation: Loans $511 (57.4%); Securities $364 (40.9%) and Short-term
Investments $15 (1.7%).
FINANCIAL CONDITION
Total average assets increased $117,648,000 or 13.8% to $972,873,000 in 1995,
while total assets reached $1,010,545,000 at year-end, an increase of 14.2%
from the December 31, 1994 balance. Average interest earning assets, which
represents 91.5% of total average assets, increased $102,645,000 or 13.0%
from 1994 to $890,250,000 in 1995. Specifically, average loans increased
$92,886,000 or 22.2% in 1995 to $510,593,000, average total securities
increased $5,106,000 or 1.4% from 1994 and short-term investments increased
$4,653,000 or 44.0%.
SECURITIES
Total securities, which include securities held to maturity, securities
available for sale and trading account securities, averaged $364,426,000 in
1995, an increase of $5,106,000 or 1.4% from 1994. The portfolio represented
40.9% of average earning assets for 1995 and 45.6% for 1994. The yield on
the total portfolio (on a tax-equivalent basis) increased 35 basis points to
6.95% due primarily to changes in the composition of the portfolio.
As of January 1, 1994, the Company adopted FASB Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". This Statement requires
entities to classify their securities into either held to maturity, available
for sale or trading category, based on the Company's intent with respect to
holding the security. Each of these classifications requires a different basis
of accounting. Held to maturity securities are reported at amortized cost.
Securities available for sale are reported at fair value with unrealized gains
and losses reported as a separate component of stockholders' equity, net of
income taxes. Trading securities are reported at fair value, with unrealized
gains and losses reflected in current period earnings. The Company
prospectively adopted this statement effective January 1, 1994. At December 31,
1995, the effect of Statement No. 115 was an increase in the carrying value of
the securities available for sale portfolio of $3,387,000.
On average, the net unrealized loss on securities available for sale amounted to
$4,816,000 in 1995. For purposes of the following comparative analysis,
securities are shown on a cost basis and do not consider the mark to market
valuation for FASB Statement No. 115 in 1995 and 1994.
U.S. Treasury and government agency securities declined $18,547,000 to average
$119,757,000 in 1995. The yield on this portfolio increased 15 basis points to
6.98% from the reported yield of 6.83% in 1994. The prevailing market rates of
new investments were higher than those of maturing securities.
Tax-exempt securities, consisting primarily of obligations of states and
political subdivisions, averaged $43,616,000 in 1995, a decrease of $1,830,000
from 1994. As a part of its tax planning strategy, the Company continues to
invest in these securities, although maturities outpaced purchases. At
year-end, tax-exempt securities were $43,061,000, down $1,845,000 from December
31, 1994. The average tax-equivalent yield on these securities decreased 7
basis points to 7.68% in 1995 from 7.75% in 1994.
Government guaranteed mortgage-backed securities averaged $176,307,000 in 1995,
an increase of $28,062,000 or 18.9% from 1994. These securities have relatively
short average lives and provide liquidity through periodic principal and
interest repayment. For risk-based capital, they carry a lower risk-weighting
than corporate collateralized mortgage-backed securities. The yield on
mortgage-backed securities averaged 6.84% compared to 6.31% in 1994.
Equity securities, which consist primarily of money market mutual funds, are
utilized as a source of managing comfortable levels of liquidity. Money
market mutual funds averaged $21,442,000 in 1995 compared to $26,318,000 in
1994. The remaining equity securities averaged $3,304,000, up from the
average in 1994 of $1,007,000. The yield on equity securities increased 122
basis points to 6.08% from 4.86% in 1994.
<PAGE>
21
Short-term investments, which included Federal funds sold and Federal Home Loan
Bank deposits averaged $15,231,000 in 1995 compared to $10,578,000 in 1994, an
increase of 44.0%. For 1995, the yield on short-term investments averaged
5.91%, up from 4.15% in 1994.
The following table sets forth the book value of the Company's securities held
to maturity portfolio at year-end 1995, 1994 and 1993. See Note 4 in the Notes
to Consolidated Financial Statements for additional information relating to
these securities.
<TABLE>
<CAPTION>
December 31,
---------------------------------------
(In Thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ -- $ 12,635 $ 90,576
Obligations of U.S. Government
Agencies and Corporations 21,151 49,073 61,605
Obligations of States and Political Subdivisions 3,612 22,099 41,472
Mortgage-Backed Securities -- 12,497 850
Securities Issued by Foreign Governments 75 50 25
- ------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $ 24,838 $ 96,354 $ 194,528
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the amortized cost of the Company's available for
sale portfolio at year-end 1995, 1994 and 1993. At December 31, 1995 and 1994,
these securities are carried at market. This portfolio was carried at the lower
of aggregate cost or market at December 31, 1993. At that date, the market
value was in excess of cost. See Note 5 in the Notes to Consolidated Financial
Statements for additional information relating to these securities.
<TABLE>
<CAPTION>
December 31,
---------------------------------------
(In Thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ 6,521 $ 27,884 $ --
Obligations of U.S. Government
Agencies and Corporations 74,546 29,186 --
Obligations of States and Political Subdivisions 39,449 22,807 --
Mortgage-Backed Securities 186,217 135,441 158,948
- ------------------------------------------------------------------------------------------------------------------------------
Total Debt Securities 306,733 215,318 158,948
- ------------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 19,817 19,986 50,574
Federal Reserve Bank and Federal
Home Loan Bank Stock 4,219 1,170 609
- ------------------------------------------------------------------------------------------------------------------------------
Total Equity Securities 24,036 21,156 51,183
- ------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 330,769 $ 236,474 $ 210,131
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The contractual maturity distribution and weighted average yields (calculated on
the basis of the stated yields to maturity, considering applicable premium or
discount), on a tax-equivalent basis (assuming a 34% Federal income tax rate),
of the Company's securities held to maturity and securities available for sale
portfolio at December 31, 1995, excluding equity securities, were as follows:
<PAGE>
22
MATURITIES AND WEIGHTED AVERAGE YIELDS
<TABLE>
<CAPTION>
After 1 Year After 5 Years
Within but Within but Within After
(Dollars In Thousands) 1 Year 5 Years 10 Years 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
Obligations of U.S. Government Agencies
and Corporations:
Book Value $ -- $ 7,951 $13,200 $ -- $ 21,151
Weighted Average Yield --% 6.84% 7.91% --% 7.51%
Obligations of States and Political
Subdivisions:
Book Value 2,992 620 -- -- 3,612
Weighted Average Yield 9.11% 10.82% --% --% 9.40%
Securities Issued by Foreign Governments:
Book Value -- -- 75 -- 75
Weighted Average Yield --% --% 5.83% --% 5.83%
- ------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity:
Book Value $ 2,992 $ 8,571 $13,275 $ -- $ 24,838
Weighted Average Yield 9.11% 7.13% 7.90% --% 7.78%
- ------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury Securities:
Book Value $ 5,509 $ 1,012 $ -- $ -- $ 6,521
Weighted Average Yield 6.18% 5.55% --% --% 6.08%
Obligations of U.S. Government Agencies
and Corporations:
Book Value 26,005 28,573 14,968 5,000 74,546
Weighted Average Yield 6.42% 7.12% 7.58% 7.29% 6.98%
Obligations of States and Political
Subdivisions:
Book Value 727 15,192 16,897 6,633 39,449
Weighted Average Yield 5.02% 7.61% 7.28% 8.29% 7.53%
Mortgage-Backed Securities:
Book Value -- 14,784 49,412 122,021 186,217
Weighted Average Yield --% 6.75% 7.05% 6.69% 6.79%
- ------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale:
Book Value $32,241 $59,561 $81,277 $133,654 $306,733
Weighted Average Yield 6.35% 7.13% 7.20% 6.79% 6.92%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE LOAN PORTFOLIO (In Millions)
AVERAGE LOAN PORTFOLIO [Bar Chart]
A bar chart that describes the average loan portfolio: Credit Cards -
1993, $25.6; 1994, $19.7 and 1995, $18.4; Installment - 1993, $91.9;
1994, $139.6 and 1995, $188.8; Real Estate - 1993, $135.9; 1994, $171.0 and
1995, $197.6; Commercial - 1993, $97.3; 1994, $87.4 and 1995, $101.5;
Total - 1993, $350.7; 1994, $417.7 and 1995, $506.3
LOANS
The continuing efforts of a comprehensive calling program designed to increase
the loan portfolio continued to show positive results in 1995. Total loans
averaged $510,593,000 during 1995, an increase of $92,886,000 or 22.2% compared
with the prior year. At year-end, total loans amounted to $551,222,000, up
$69,783,000 or 14.5% compared to 1994. Loan demand over the past two years has
shown improvement as business and consumer confidence in the economy increased
and real estate market values began to stabilize. The Company's largest loan
concentration is in loans secured by real estate, which totaled $291,187,000 at
December 31, 1995 and represented 52.8% of loans, net of unearned income. A
number of distinctly different lending categories are included within this broad
classification of real estate related loans. The largest category is loans
secured by 1-4 family residential properties, which amounted to $147,126,000 at
year-end 1995. Within that total, $28,838,000
<PAGE>
23
represented home equity lines of credit. Loans secured by borrower-occupied
commercial property amounted to $133,578,000 at year-end 1995 while construction
and land development loans totaled $21,938,000. Loans to individuals for
household, family and other personal expenditures amounted to $205,231,000 and
were the Bank's second largest loan concentration.
The following schedule presents the components of gross loans, by type, as of
December 31 for each of the last five years.
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 129,992 $ 88,701 $ 93,730 $ 92,072 $ 83,589
Real Estate 213,149 207,015 167,768 142,158 148,569
Installment 230,290 204,674 123,277 111,392 118,546
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans Outstanding 573,431 500,390 384,775 345,622 350,704
Less: Unearned Income on Loans 22,209 18,951 7,983 4,608 5,652
- ------------------------------------------------------------------------------------------------------------------------------
Loans, Net of Unearned Income $ 551,222 $ 481,439 $ 376,792 $ 341,014 $ 345,052
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Average commercial loans increased 33.2% to $125,421,000 from $94,155,000 in
1994 and represented 24.6% of the total average loan portfolio as compared to
22.5% in 1994. The tax-equivalent yield on the commercial loan portfolio was
8.46% in 1995, down from 8.48% in 1994. The yield on this portfolio remained
relatively stable despite the decline in the interest rate environment during
the second half of the year.
Real estate mortgage loans averaged $183,102,000, an increase of 7.1% from 194
and represented 35.9% of the total average loan portfolio. This increase was
primarily the result of borrower-occupied commercial and construction mortgage
loan products coupled with the favorable mortgage rate environment. The
tax-equivalent yield on the total mortgage portfolio increased 135 basis points
to 9.40% from 8.05% last year. This portfolio consists of residential and
commercial mortgages, as well as construction loans, and carries fixed and
adjustable interest rates.
As a result of the acquisition of New Era, the Company now has a nationwide
secured credit card program, along with unsecured and affinity card programs
throughout New Jersey. Credit card loans averaged $18,397,000 in 1995, declining
$1,311,000 or 6.7% from 1994. The average yield in 1995 on credit cards was
19.43%, down from 24.56% in 1994, reflecting the increased competition on fees
charged for the secured credit card product.
Installment loans, on average, increased 35.0% to $179,363,000 from $132,876,000
in 1994 and represented 35.1% of the average loan portfolio. This increase was
led by a rise in indirect automobile loans of $29,265,000 and is reflective of
the Company's increased market penetration. The average yield on the installment
loan portfolio was 8.30% in 1995 compared to 7.74% in 1994. Management
recognizes the risks inherent in the indirect automobile loans which may be more
prevalent at times of faster growth in the portfolio. The Company believes it is
adequately addressing those issues and believes that its charge-offs in the
indirect automobile portfolio have been below the peer group averages.
It is expected that this trend of increased installment, residential and
commercial mortgage loans will continue if the economy continues to move into
its next phase of recovery. The Company will continue to take advantage of loan
demand in those sectors of the business community where it is most prevalent.
1995 AVERAGE INTEREST BEARING LIABILITIES ALLOCATION (Dollars in Millions)
1995 AVERAGE INTEREST BEARING LIABILITIES ALLOCATION [Pie Chart]
A pie chart that describes the 1995 average interest bearing liabilities
allocation: Savings $377 (50.8%); Time $329 (44.3%) and Borrowed Funds $36
(4.9%).
DEPOSITS AND OTHER BORROWINGS
The Company's deposit base is the primary source of funds supporting its
interest earning assets. Total average deposits increased to $852,164,000 in
1995, up $98,246,000 or 13.0% from $753,918,000 in 1994. At year-end, total
deposits amounted to $854,628,000, up 12.8% from the $757,884,000 reported last
year. The increase in deposits was primarily attributable to the acquisition of
two branches from the RTC.
For 1995, time deposits experienced the largest increase, which comprised 38.6%
of total average deposits as compared to 27.2% in 1994. These
<PAGE>
24
deposits, which consist primarily of retail certificates of deposit and
individual retirement accounts, rose $123,789,000 or 60.3% to average
$329,141,000 during 1995, primarily as a result of the acquisition of two
branches from the RTC. At December 31, 1995, time deposits increased by
$110,618,000 or 50.0% over year-end 1994. The cost of time deposits increased
166 basis points to 5.47% in 1995 as a result of increased competition from
mutual funds and credit unions. During 1995, certificates of deposit $100,000
and over averaged $54,049,000, an increase of 72.2% over last year.
Savings deposits, which include savings accounts, money market accounts and
interest bearing transaction accounts, averaged $376,630,000, a decrease of
$17,403,000 or 4.4% from 1994. As interest rates began to decline over the
latter part of 1995, consumer preference began to shift from savings type
products to higher paying investment alternatives, including certificates of
deposit. The cost of savings deposits increased 8 basis points to 2.36% in
1995.
Demand deposits, including non-interest bearing secured credit card deposits,
averaged $146,393,000, down 5.3% from the 1994 average of $154,533,000. These
deposits at year-end were $153,095,000, up 2.7% over the prior year.
Short-term borrowings are available as an additional source of funding for the
loan and investment portfolios. Short-term borrowings consist primarily of
Federal funds purchased, securities sold under agreements to repurchase, demand
notes-U.S. Treasury and Federal Home Loan Bank advances. During the year,
short-term borrowings rose $3,689,000 or 14.2% to average $29,638,000. The cost
of short-term borrowings rose 109 basis points from 4.41% in 1994 to 5.50% in
1995 due to the higher average interest rate environment during 1995 as compared
to 1994.
In September 1994, the Bank became a member of the Federal Home Loan Bank of New
York (the "FHLB"). As a result, the Company has access to financing from the
FHLB with terms ranging from overnight up to 10 years. The FHLB borrowings are
secured by securities and loans receivable under a blanket collateral agreement.
The following table reflects the average balances and average rates paid on
deposits and short-term borrowings for the years 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars In Thousands) Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand and Non-Interest
Bearing Savings $146,393 -- $154,533 -- $149,310 --
- ------------------------------------------------------------------------------------------------------------------------------
Interest Bearing Transaction
Accounts 125,392 1.99% 122,003 1.98% 116,937 2.21%
Other Savings 251,238 2.54% 272,030 2.42% 262,212 2.70%
Time 329,141 5.47% 205,352 3.81% 209,891 4.11%
- ------------------------------------------------------------------------------------------------------------------------------
Total Savings and Time 705,771 3.81% 599,385 2.81% 589,040 3.11%
- ------------------------------------------------------------------------------------------------------------------------------
Total Deposits $852,164 -- $753,918 -- $738,350 --
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings $ 29,638 5.50% $ 25,949 4.41% $ 18,913 3.42%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET QUALITY
The Company manages asset quality and controls credit risk through a review
process of careful and comprehensive analysis of credit applications along with
a continued examination and monitoring of outstanding loans, commitments and
delinquencies. This has resulted in early detection and timely follow-up on
problem loans. Credit risk is also controlled by limiting exposures to specific
borrowers, industries and markets.
NON-PERFORMING ASSETS
The Company defines non-performing assets as non-accrual loans, impaired loans,
loans past due 90 days or more and still accruing, renegotiated loans, other
real estate owned and other assets owned. In accordance with FASB Statement No.
114, "Accounting by Creditors for Impairment of
<PAGE>
25
a Loan", loans previously classified as in-substance foreclosure, but for which
the Company had not taken possession of the collateral, have been reclassified
to loans for all periods presented. This reclassification did not impact the
Company's financial condition.
The following table provides an analysis of non-performing assets as of December
31 for each of the last five years.
<TABLE>
<CAPTION>
(Dollars In Thousands) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans (1):
Commercial and Industrial $ 705 $ 2,046 $ 1,721 $ 1,324 $ 834
Loans Secured by Real Estate 4,926 6,520 5,089 6,197 5,883
Loans to Individuals for Household,
Family and Other Personal
Expenditures 483 401 28 140 287
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Accrual Loans 6,114 8,967 6,838 7,661 7,004
- ------------------------------------------------------------------------------------------------------------------------------
Loans Past Due 90 Days or More (2):
Commercial and Industrial 61 730 3,410 71 197
Loans Secured by Real Estate 593 339 984 715 3,556
Loans to Individuals for
Household, Family and Other
Personal Expenditures 698 363 188 407 1,136
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans Past Due 90 Days or More 1,352 1,432 4,582 1,193 4,889
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Loans 7,466 10,399 11,420 8,854 11,893
- ------------------------------------------------------------------------------------------------------------------------------
Other Real Estate Owned (3) 2,747 1,366 2,326 2,724 3,110
Other Assets Owned (4) 223 181 75 52 164
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets $ 10,436 $ 11,946 $ 13,821 $ 11,630 $ 15,167
- ------------------------------------------------------------------------------------------------------------------------------
Non-Performing Loans as a
Percentage of Loans (year-end) 1.35% 2.16% 3.03% 2.60% 3.45%
- ------------------------------------------------------------------------------------------------------------------------------
Non-Performing Assets as a
Percentage of Loans, Other
Real Estate Owned and Other
Assets Owned (year-end) 1.88% 2.47% 3.64% 3.38% 4.35%
- ------------------------------------------------------------------------------------------------------------------------------
Non-Performing Assets as a
Percentage of Total Assets (year-end) 1.03% 1.35% 1.61% 1.41% 1.97%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Generally represents those loans on which Management has determined that
borrowers may be unable to meet contractual principal and/or interest
obligations or where interest or principal is past due for a period of 90 days
or more (except when such loans are both well-secured and in the process of
collection). When loans are placed on non-accrual status, all accrued but
unpaid interest is reversed.
(2) Represents loans on which payments of interest and/or principal are
contractually past due 90 days or more, but are currently accruing interest at
the previously negotiated rates, based on a determination that such loans are
both well-secured and in the process of collection.
(3) Consists of real estate acquired through foreclosure.
(4) Consists of assets, other than real estate, acquired through repossession,
forfeiture or abandonment.
Renegotiated or troubled debt restructured loans involve transactions in which
the terms or interest rates have been renegotiated because of a weakening in the
financial position of the borrower. Interest on troubled debt restructured
loans is only recognized in current income at the renegotiated rate and then
only to the extent such interest is deemed collectible. The Company currently
has one troubled debt restructured loan, which is classified as past due 90 days
or more and still accruing. At December 31, 1995, this loan totaled $84,000 and
is secured by a 1-4 family residential property.
Non-performing loans decreased during 1995 as reflected in the above chart. The
$2,933,000 or 28.2% decrease from 1994 was primarily in the commercial and
industrial loans, as well as in loans
<PAGE>
26
secured by real estate, which declined $2,010,000 and $1,340,000, respectively.
A majority of the non-performing loans are well-secured and Management does not
anticipate significant losses to materialize.
At December 31, 1995, the Company's holdings in other real estate owned amounted
to $2,747,000 as compared to $1,366,000 at December 31, 1994. Foreclosures have
occurred during the past five years and will continue to result in assets
migrating from non-performing loans to other real estate owned. It is the
Company's intent to actively negotiate and dispose of these properties at fair
market values which are considered reasonable under the circumstances. In 1995,
the Company incurred $412,000 of costs related to maintaining these properties
as compared to $513,000 in 1994. Other assets owned amounted to $223,000 at
year-end, an increase of $42,000 from 1994.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company's year-end 1995 allowance for possible loan losses totaled
$7,412,000 andrepresented 1.34% of total loans. This compared with a loan loss
allowance at year-end 1994 of $9,597,000 and a ratio to total loans of 1.99%.
Loan loss provisions amounted to $450,000 in 1995, down from the $1,590,000 in
1994 and $4,287,000 in 1993.
The accompanying table sets forth the allocation of the allowance for
possible loan losses (the "Allowance") by category of loans and the
percentage of loans in each category to total loans. The determination of an
appropriate level of the Allowance is based upon an analysis of the risks
inherent in the Bank's loan portfolio. The analysis is performed on a
continuous basis by account officers, various loan committees, and the Bank's
Loan Review Department.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------
% % % % %
Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans
of to Total of to Total of to Total of to Total of to Total
(Dollars In Thousands) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 2,086 23% $ 3,387 18% $ 7,364 24% $ 5,166 27% $ 5,204 24%
Real Estate 1,138 37 1,289 41 1,883 44 2,323 41 1,486 42
Installment 4,188 40 4,921 41 1,565 32 1,750 32 1,689 34
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 7,412 100% $ 9,597 100% $10,812 100% $ 9,239 100% $ 8,379 100%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
One tool used in establishing these risks is a risk rating system, consisting of
eight loan grading categories. In assigning a rating to a given loan, various
factors are weighted, including (a) the financial condition and past credit
history of the borrower; (b) available collateral, and its valuation; (c)
documentation of the loan; and (d) concentrations within industries and
geographic locales.
In conjunction with the review of the loan portfolio, the Commercial Credit
Department performs a quarterly analysis of the adequacy of the Allowance. This
analysis consists primarily of evaluating the inherent risk to loss on all loans
and applying risk to loss ratios derived from this review.
Management then determines the adequacy of the Allowance based on the review of
the loan portfolio. Appropriate recommendations are then made to the Board of
Directors regarding the amount of the quarterly charge against earnings (i.e.,
the provision for possible loan losses), needed to maintain the Allowance at a
level deemed adequate by Management. The Allowance is increased by the amount of
such provisions and by the amount of loan recoveries, and is decreased by the
amount of loan charge-offs. Based on anticipated loan growth, the provision for
possible loan losses for 1996 will be increased over that in 1995.
Net charge-offs were $2,635,000 or .52% of average loans outstanding in 1995
compared with $2,805,000 or .67% in 1994. Commercial loan
<PAGE>
27
net charge-offs decreased from $1,301,000 in 1994 to $5,000 in 1995. Net
charge-offs in installment lending increased to $2,168,000 in 1995, compared
with $1,635,000 in 1994, while real estate loans increased to $462,000, as
compared to net recoveries of $131,000 in 1994. The charged off loans are in
various stages of collection and litigation.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
(Dollars In Thousands) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, Net of Unearned Income (year-end) $551,222 $481,439 $376,792 $341,014 $345,052
- ------------------------------------------------------------------------------------------------------------------------------
Average Loans Outstanding $510,593 $417,707 $350,761 $336,242 $356,464
- ------------------------------------------------------------------------------------------------------------------------------
Allowance Balance (beginning of year) $ 9,597 $ 10,812 $ 9,239 $ 8,379 $ 4,064
Loans Charged Off:
Commercial (229) (1,608) (1,052) (1,972) (1,642)
Real Estate (462) (19) (58) (1) (334)
Installment (2,619) (2,203) (2,102) (1,975) (1,925)
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans Charged Off (3,310) (3,830) (3,212) (3,948) (3,901)
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries of Loans:
Commercial 224 307 189 318 462
Real Estate -- 150 -- 6 13
Installment 451 568 309 346 193
- ------------------------------------------------------------------------------------------------------------------------------
Total Recoveries 675 1,025 498 670 668
- ------------------------------------------------------------------------------------------------------------------------------
Net Loans Charged Off (2,635) (2,805) (2,714) (3,278) (3,233)
Provision for Possible Loan Losses (1) 450 1,590 4,287 4,138 7,548
- ------------------------------------------------------------------------------------------------------------------------------
Allowance Balance (year-end) $ 7,412 $ 9,597 $ 10,812 $ 9,239 $ 8,379
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for Possible Loan Losses to
Non-Performing Loans (year-end) 99.28% 92.29% 94.68% 104.35% 70.45%
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for Possible Loan Losses to
Total Loans Outstanding (year-end) 1.34% 1.99% 2.87% 2.71% 2.43%
- ------------------------------------------------------------------------------------------------------------------------------
Net Loans Charged Off to
Average Loans Outstanding 0.52% 0.67% 0.77% 0.97% 0.91%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Note 1 (e) "Allowance for Possible Loan Losses" in Notes to
Consolidated Financial Statements.
As of January 1, 1995, the Company adopted FASB Statement No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by Statement No. 118,
"Accounting by Creditors for the Impairment of a Loan-Income Recognition and
Disclosures." This statement, as amended, requires that impaired loans that are
within the scope of Statement No. 114 be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent. If the measure of
the impaired loan is less than the recorded investment in the loan, the Company
is required to adjust its Allowance and reflect this adjustment in its provision
for loan losses.
A loan is impaired when it is probable that the Company will be unable to
collect all amounts owed by the borrower, principal and/or interest, in
accordance with the original contractual terms and conditions, payment amounts
and repayment timing of the loan.
All loans classified as loss, doubtful, substandard and non-accrual and which
are greater than $50,000 are evaluated for impairment on a loan-by-loan basis.
Loans under $50,000 are considered as a large group of smaller-balance
homogeneous loans and are aggregated as permitted by FASB Statement No. 114.
<PAGE>
28
As part of the quarterly review of the Company's adequacy of the Allowance, an
updated evaluation of the impaired loans is performed. The evaluation includes
a review of the discounted cash flow or a fair market collateral valuation. If
the evaluation determines that a loan's underlying collateral value or present
value of the discounted cash flow is less than the recorded investment of the
loan, the Company will either opt to charge the shortfall against the Allowance
as a partial charge off of the loan or it may set up a specific allocation equal
to the shortfall of each impaired loan.
It is the Company's policy that any non-accrual loan is considered impaired if
it is within policy parameters. An impaired loan will always be in non-accrual
status, with the exception of troubled debt restructurings, due to the
uncertainty of collecting any amounts, principal and/or interest.
At December 31, 1995, the recorded investment in loans that are considered to be
impaired under Statement No. 114 was $5,640,000, of which $5,556,000 were on a
non-accrual basis. There was one troubled debt restructured loan for $84,000,
which is currently 90 days past due and still accruing. The Allowance relating
to impaired loans amounted to $1,739,000.
The following chart discloses the aggregate amount of impaired loans measured
under each different measurement method and applicable Allowance at
December 31, 1995 (dollars in thousands).
Measurement Method Number of Loans Impaired Loans Allocated Allowance
- ----------------------------------------------------------------------------
Fair Market Value 32 $4,746 $1,240
Discounted Cash Flow 10 894 499
- ----------------------------------------------------------------------------
42 $5,640 $1,739
- ----------------------------------------------------------------------------
The average recorded investment in impaired loans during the year ended
December 31, 1995 was approximately $4,310,000.
For the year ended December 31, 1995, the Company recognized interest income on
impaired loans amounting to $668,000, all of which was recognized using the cash
basis method of income recognition.
NET INTEREST MARGIN ANALYSIS
(Percent)
NET INTEREST MARGIN ANALYSIS (Bar Chart)
A bar chart that describes the net interest margin and net interest spread:
Net Interest Margin - 1993, 5.49%; 1994, 5.47%; 1995, 4.95% and Net Interest
Spread - 1993, 4.87%; 1994, 4.94%, 1995, 4.33%.
ASSET/LIABILITY MANAGEMENT
The Company's Asset/Liability Committee ("ALCO") closely monitors the changes in
the movement of funds and rate and volume trends to enable quick management
responses to changing market and rate conditions.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the relationship between earning
assets and supporting funds which tend to be sensitive to changes in interest
rates during comparable time periods.
ALCO is charged with managing the Company's rate sensitivity to optimize net
interest income while maintaining an asset/liability mix which balances
liquidity needs and interest rate risk. Interest rate risk arises when an asset
matures, or its interest rate changes, during a time period different from that
of the supporting liability and vice versa. ALCO attempts to control that risk
by managing the gap between rate sensitive assets and rate sensitive
liabilities.
The process begins with a static analysis of the current interest rate
sensitivity mismatches (i.e., gaps). The sensitivity gap quantifies the
repricing mismatch between assets and liabilities over various time intervals.
The cumulative interest sensitive assets to liabilities position provides a
relative measure of the Company's interest rate risk exposure. The following
presents the Company's interest rate sensitivity position at December 31, 1995.
<PAGE>
29
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
As of December 31, 1995 Maturing or Repricing
--------------------------------------------------------------------------------------
Due Within Due Between Due Between Due After Rate
(Dollars In Thousands) 3 Months 4 & 12 Months 1 & 5 Years 5 Years Insensitive Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Securities (1) $ 44,570 $ 77,806 $ 153,475 $ 74,887 $ 5,209 $ 355,947
Federal Funds Sold 7,000 -- -- -- -- 7,000
Loans (Less Unearned Income):
Commercial 108,766 4,870 21,485 1,428 3,377 139,926
Real Estate 30,421 17,452 89,037 51,334 2,030 190,274
Installment 55,352 60,703 83,270 4,869 358 204,552
Credit Cards (2) -- -- -- -- 16,470 16,470
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans 194,539 83,025 193,792 57,631 22,235 551,222
- ------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gain-
Securities Available
for Sale and Trading
Account 3,464 -- -- -- -- 3,464
Investment in Joint Venture -- -- -- -- 3,151 3,151
Other Assets -- -- -- -- 89,761 89,761
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 249,573 $ 160,831 $ 347,267 $ 132,518 $ 120,356 $1,010,545
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Assets $ 249,573 $ 410,404 $ 757,671 $ 890,189 $1,010,545
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits:
Non-Interest Bearing (2) $ -- $ -- $ -- $ -- $ 164,320 $ 164,320
Interest Bearing
Transaction Accounts 67,929 -- -- 45,286 -- 113,215
Other Savings 147,035 -- 29,504 68,582 -- 245,121
Time 139,201 108,591 83,602 578 -- 331,972
- ------------------------------------------------------------------------------------------------------------------------------
Total Deposits 354,165 108,591 113,106 114,446 164,320 854,628
Short-Term Borrowings 51,513 1,834 -- -- -- 53,347
Other Borrowings -- -- -- -- 9,680 9,680
Other Liabilities -- -- -- -- 11,491 11,491
Stockholders' Equity -- -- -- -- 81,399 81,399
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 405,678 $ 110,425 $ 113,106 $ 114,446 $ 266,890 $1,010,545
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative Total
Liabilities and
Stockholders' Equity $ 405,678 $ 516,103 $ 629,209 $ 743,655 $1,010,545
- ------------------------------------------------------------------------------------------------------------------------------
Interest Sensitivity Gap $(156,105) $ 50,406 $ 234,161 $ 18,072 $ (146,534)
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative Interest
Sensitivity Gap $ (156,105) $ (105,699) $ 128,462 $ 146,534
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Interest Sensitive
Assets to Liabilities 0.62 X 1.46 X 3.07 X 1.16 X
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Cumulative
Interest Sensitive Assets to
Liabilities 0.62 X 0.80 X 1.20 X 1.20 X
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Securities reported at amortized cost.
(2) Credit card loans are included in the "Rate Insensitive" time frame as they
do not have a maturity date. Non-interest bearing credit card security deposits
are included in the "Rate Insensitive" time frame as they are used to fund the
credit card loans outstanding.
<PAGE>
30
An interest rate sensitivity table does not present a complete picture of the
impact of interest rate changes on net interest income. First, changes in the
general level of interest rates will not affect all categories of assets and
liabilities equally or simultaneously. Second, assets and liabilities which can
contractually reprice within the same period may not reprice at the same time or
to the same extent. Third, the table represents a one-day position; variations
occur daily as the Company adjusts its interest rate sensitivity throughout the
year. Fourth, assumptions must be made to construct such a table. For example,
approximately 60% of money market deposits, which have no contractual maturity,
are assigned a repricing interval of within 3 months, although they are repriced
less frequently than changes in the general level of interest rates. Finally,
the repricing distribution of interest sensitive assets may not be indicative of
the liquidity of those assets.
For these reasons, the Company utilizes simulation modeling to assist in
measuring and evaluating interest rate risk. These techniques, which expand
upon the static gap analysis, project future net interest income streams in
light of the current gap position, forecasted balance sheet mix, and anticipated
spread relationships between market rates and bank products. The Company's
interest rate sensitivity in 1995 was essentially neutral within reasonable
ranges; for example, at December 31, 1995, interest rate increases or decreases
of 200 basis points would not be expected to have a significant impact on the
Company's net interest income.
The following table shows the maturity of loans (excluding residential mortgages
of 1-4 family residences and installment loans) outstanding as of December 31,
1995. Also provided are the amounts due after one year classified according to
the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturing
--------------------------------------------------------
After One
Within But Within After
(Dollars In Thousands) One Year Five Years Five Years Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and Agricultural $ 123,324 $ 76,905 $ 6,306 $ 206,535
Real Estate-Construction 7,614 -- -- 7,614
- ------------------------------------------------------------------------------------------------------------------------------
$ 130,938 $ 76,905 $ 6,306 $ 214,149
- ------------------------------------------------------------------------------------------------------------------------------
Loans Maturing After One Year With:
Fixed Interest Rates $ 54,952 $ 6,306
Variable Interest Rates 21,953 --
- ------------------------------------------------------------------------------------------------------------------------------
$ 76,905 $ 6,306
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
Liquidity management involves the Company's ability to maintain prudent amounts
of liquid assets in its portfolio in order to meet the borrowing needs and
deposit withdrawal requirements of customers and to support asset growth.
Current and future liquidity needs are reviewed by ALCO to determine the
appropriate asset/liability mix.
The Company's securities portfolio plays a significant role in the
asset/liability management process. The Company intends to hold its investment
securities for the foreseeable future.
However, the level and composition of the portfolio may change as a result of
maturities and purchases undertaken as part of the asset/liability management
process. Unexpected changes in the financial environment are likely to affect
the Company's interest rate risk, liquidity position and the potential return on
the portfolio. Additionally, the Company may also purchase and sell those
securities which are available for sale in order to address these changes. In
addition, overall balance sheet size and capital adequacy are considered in
determining the appropriate level for the portfolio. When eco-
<PAGE>
31
nomic factors cause changes in the balance sheet or when the Company reassesses
its interest rate risk, liquidity or capital position, strategic changes may be
made in both the securities held to maturity and securities available for sale
portfolios based on opportunities to enhance the ongoing total return of the
balance sheet.
Asset liquidity is represented by the ease with which assets can be converted
into cash. This liquidity is provided by money market assets and debt
securities with maturity dates of one year or less, which totaled $81,705,000 at
year-end 1995. The market value of money market assets, which includes Federal
funds sold, money market mutual funds and corporate stock, amounted to
$28,473,000 at the end of 1995. Debt securities consist primarily of U.S.
Treasury notes and bonds, obligations of U.S. Government agencies, and
obligations of states and political subdivisions. All securities held by the
Company are readily marketable. As of December 31, 1995, debt securities
scheduled to mature within one year based upon estimated cash flows, amounted to
$53,232,000 and represented 15.9% of the total debt securities portfolio.
Approximately 37.9% of the entire debt portfolio is scheduled to mature within
five years, based upon estimated cash flows. There was no security issue held
which represented more than 10% of the Company's stockholders' equity.
Additional liquidity is derived from scheduled loan and investment payments of
principal and interest, as well as prepayments received.
On the liability side, the primary source of funds available to meet liquidity
needs is the Company's core deposit base, which generally excludes wholesale
certificates of deposit over $100,000. Core deposits amounted to $826,649,000
at December 31, 1995 and represented 90.1% of earning assets. Short-term
borrowings, consisting primarily of Federal funds purchased, securities sold
under agreements to repurchase and FHLB advances, and wholesale certificates of
deposit over $100,000 are used as supplemental funding sources during periods
when growth in the core deposit base does not keep pace with that of earning
assets. Short-term borrowings and wholesale certificates of deposit amount to
$81,326,000 at December 31, 1995.
As mentioned earlier, the Bank became a member of the FHLB system which provides
the Company with an additional source of liquidity by offering financing
alternatives. At year-end 1995, the Company had no advances outstanding with
the FHLB.
<PAGE>
32
The following table sets forth certain unaudited quarterly financial data for
the periods presented:
<TABLE>
<CAPTION>
First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Interest Income $17,009 $18,362 $18,179 $18,444
Interest Expense 6,269 7,292 7,724 7,843
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 10,740 11,070 10,455 10,601
Provision for Possible Loan Losses 450 -- -- --
Non-Interest Income, excluding
Securities Transactions 2,988 2,764 2,595 2,847
Net Gains from Securities Transactions 391 403 28 313
Non-Interest Expense 10,110 12,129 9,456 11,053
Provision for Income Taxes 1,012 749 1,052 810
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,547 $ 1,359 $ 2,570 $ 1,898
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share $ 0.71 $ 0.38 $ 0.71 $ 0.53
- ------------------------------------------------------------------------------------------------------------------------------
1994
Interest Income $14,118 $14,731 $15,258 $15,647
Interest Expense 4,258 4,189 4,512 5,020
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 9,860 10,542 10,746 10,627
Provision for Possible Loan Losses 600 450 540 --
Non-Interest Income, excluding
Securities Transactions 2,739 2,756 2,859 2,638
Net Gains (Losses) from
Securities Transactions 916 (83) (78) 116
Non-Interest Expense 9,242 9,307 9,438 9,634
Provision for Income Taxes 1,212 1,109 1,159 1,127
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,461 $ 2,349 $ 2,390 $ 2,620
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share $ 0.69 $ 0.67 $ 0.68 $ 0.74
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
33
SELECTED CONSOLIDATED FINANCIAL DATA (Unaudited)
The following selected financial data should be read in conjunction with the
financial statements and related notes thereto included elsewhere in this Annual
Report and "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
(Dollars In Thousands, Except Share Data) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest Income $ 71,994 $ 59,754 $ 59,539 $ 61,333 $ 62,656
Interest Expense 29,128 17,979 18,959 24,791 32,791
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 42,866 41,775 40,580 36,542 29,865
Provision for Possible Loan Losses 450 1,590 4,287 4,138 7,548
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for
Possible Loan Losses 42,416 40,185 36,293 32,404 22,317
Non-Interest Income 12,329 11,863 12,845 10,689 14,740
Non-Interest Expense 42,748 37,621 37,482 33,590 31,880
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes, Effect of Accounting Change
and Extraordinary Item 11,997 14,427 11,656 9,503 5,177
Provision for Income Taxes 3,623 4,607 3,975 3,123 1,289
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Effect of Accounting
Change and Extraordinary Item 8,374 9,820 7,681 6,380 3,888
Cumulative Effect of Change in Accounting for
Income Taxes -- -- 973 -- --
Extraordinary Item - Utilization of Net
Operating Loss Carry Forward -- -- -- 275 40
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 8,374 $ 9,820 $ 8,654 $ 6,655 $ 3,928
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Merger and Restructuring Charges,
Effect of Accounting Change and Extraordinary Item $ 10,463 $ 9,820 $ 7,681 $ 6,380 $ 3,888
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT YEAR-END):
Total Assets $1,010,545 $884,541 $859,368 $822,959 $768,986
Securities 359,411 320,651 404,955 394,045 328,711
Federal Funds Sold 7,000 11,545 8,270 17,775 24,135
Loans (net of unearned income) 551,222 481,439 376,792 341,014 345,052
Allowance for Possible Loan Losses 7,412 9,597 10,812 9,239 8,379
Deposits 854,628 757,884 758,508 740,123 678,810
Short-Term Borrowings (1) 53,347 52,301 26,681 12,629 23,233
Other Borrowings (2) 9,680 1,269 1,266 1,263 1,260
Stockholders' Equity 81,399 65,802 66,727 60,742 56,256
ADJUSTED FINANCIAL RATIOS: (3)
Return on Average Assets 1.08% 1.15% .93% .81% .53%
Return on Average Stockholders' Equity 13.93% 14.20% 11.94% 10.95% 7.04%
FINANCIAL RATIOS:
Return on Average Assets .86% 1.15% 1.04% .85% .54%
Return on Average Stockholders' Equity 11.15% 14.20% 13.46% 11.42% 7.12%
Average Stockholders' Equity to Average Assets (4) 8.02% 8.26% 7.76% 7.40% 7.53%
Leverage Ratio (year-end) (4) 6.80% 8.29% 7.76% 7.45% 7.27%
Tier I Capital to Risk-Weighted Assets (year-end) (4) 10.33% 13.64% 15.74% 15.48% 13.53%
Combined Tier I and Tier II Capital
to Risk-Weighted Assets (year-end) (4) 11.47% 14.97% 17.30% 17.07% 15.10%
Loans to Deposits (year-end) 64.50% 63.52% 49.68% 46.08% 50.83%
Non-Performing Loans to Loans (year-end)(5) 1.35% 2.16% 3.03% 2.60% 3.45%
Allowance for Possible Loan Losses to Loans
(year-end) 1.34% 1.99% 2.87% 2.71% 2.43%
Dividend Payout Ratio 41.21% 27.77% 30.15% 32.61% 53.60%
COMMON SHARE DATA: (6)
Net Income Per Share $ 2.33 $ 2.78 $ 2.47 $ 1.91 $ 1.13
Income Per Share Before Merger-Related and
Restructuring Charges, Effect of Accounting
Change and Extraordinary Item $ 2.91 $ 2.78 $ 2.19 $ 1.83 $ 1.12
Cash Dividends Declared Per Share (6) (7) $ 1.03 $ .94 $ .83 $ .75 $ .74
Book Value Per Share (year-end) $ 22.71 $ 18.75 $ 19.08 $ 17.45 $ 16.16
Average Shares Outstanding (in thousands) 3,600 3,531 3,501 3,488 3,483
OTHER DATA:
Number of Employees (full-time equivalent) 465 507 537 517 495
Number of Stockholders 1,457 1,470 1,523 1,521 1,519
</TABLE>
(1) Includes Federal funds purchased, securities sold under agreements to
repurchase, Federal Home Loan Bank advances, and demand notes-U.S.
Treasury.
(2) Includes obligations under capital lease and long-term debt.
(3) Before merger-related charges, restructuring charges, effect of accounting
change and extraordinary item.
(4) Does not include the effects of FASB Statement No. 115.
(5) Non-performing loans consists of non-accrual loans, restructured loans and
loans past due 90 days or more and still accruing.
(6) Adjusted to reflect stock dividends of 6% in 1995, 1994 and 1993, and 3% in
1992 and 1991.
(7) Does not include the effect of dividends paid by New Era Bank in 1993.
<PAGE>
34 35
AVERAGE CONSOLIDATED BALANCE SHEETS WITH RESULTANT INTEREST AND AVERAGE RATES
(Unaudited)
The following table reflects the components of net interest income, setting
forth, for the three years presented, (1) average assets, liabilities and
stockholders' equity, (2) interest earned on earning assets and interest paid on
interest bearing liabilities, (3) average rates earned on earning assets and
average rates paid on interest bearing liabilities, (4) net interest spread
(i.e., the difference between the average rate earned on earning assets and the
average rate paid on interest bearing liabilities) and (5) the net interest
margin (i.e., net interest income divided by average earning assets). Dollar
amounts are presented on a tax-equivalent basis assuming a 34% tax rate (See
page 15 for additional information).
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------- ---------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars In Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST EARNING ASSETS:
Securities Available for Sale,
at Amortized Cost:
Taxable $229,519 $ 15,488 6.75% $267,165 $ 17,367 6.50% $103,681 $ 6,052 5.84%
Non-Taxable 26,283 1,907 7.26 21,188 1,527 7.21 -- -- --
Securities Held to Maturity:
Taxable 90,925 6,491 7.14 46,405 2,820 6.08 252,857 17,755 7.02
Non-Taxable 17,333 1,442 8.32 24,258 1,995 8.22 33,718 2,928 8.68
Trading Account Securities 366 14 3.83 304 10 3.29 49 1 2.04
- ----------------------------------------------------------------------------------------------------------------------------------
Total Securities 364,426 25,342 6.95 359,320 23,719 6.60 390,305 26,736 6.85
- ----------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 9,203 549 5.97 10,578 439 4.15 17,496 501 2.86
Federal Home Loan Bank Deposits 6,028 351 5.82 -- -- -- -- -- --
Loans (Net of Unearned Income) (1):
Commercial 123,626 10,432 8.44 91,907 7,745 8.43 99,559 7,034 7.07
Commercial-Tax Exempt 1,795 173 9.64 2,248 236 10.50 2,594 282 10.87
Real Estate 183,102 17,210 9.40 170,968 13,771 8.05 135,926 12,573 9.25
Credit Card 18,397 3,574 19.43 19,708 4,841 24.56 25,562 5,944 23.25
Installment 179,363 14,892 8.30 132,876 10,280 7.74 87,120 7,562 8.68
Impaired Loans 4,310 668 15.50 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans 510,593 46,949 9.19 417,707 36,873 8.83 350,761 33,395 9.52
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 890,250 73,191 8.22 787,605 61,031 7.75 758,562 60,632 7.99
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EARNING ASSETS:
Cash and Due From Banks 44,551 45,261 43,511
Other Assets 51,800 34,872 36,867
Net Unrealized Loss On Securities
Available for Sale (4,816) (2,404) --
Allowance for Possible Loan Losses (8,912) (10,109) (10,136)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Earning Assets 82,623 67,620 70,242
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $972,873 $855,225 $828,804
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST BEARING LIABILITIES:
Savings Deposits $376,630 8,882 2.36 $394,033 9,002 2.28 $379,149 9,681 2.55
Time Deposits 329,141 17,996 5.47 205,352 7,833 3.81 209,891 8,631 4.11
- ----------------------------------------------------------------------------------------------------------------------------------
Total Savings and Time Deposits 705,771 26,878 3.81 599,385 16,835 2.81 589,040 18,312 3.11
Other Borrowings 29,638 1,631 5.50 25,949 1,144 4.41 18,913 647 3.42
Obligations Under Capital Leases 6,495 619 9.53 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities 741,904 29,128 3.93 625,334 17,979 2.88 607,953 18,959 3.12
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST BEARING LIABILITIES:
Demand Deposits and Non-Interest
Bearing Savings 146,393 154,533 149,310
Other Liabilities 9,452 6,199 7,233
- ----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Bearing
Liabilities 155,845 160,732 156,543
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (2) 75,124 69,159 64,308
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $972,873 $855,225 $828,804
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (Tax Equivalent
Basis) 44,063 43,052 41,673
Tax Equivalent Adjustment (1,197) (1,277) (1,093)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 42,866 $ 41,775 $ 40,580
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread (Tax Equivalent
Basis) 4.29% 4.87% 4.87%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin (Tax Equivalent
Basis) 4.95% 5.47% 5.49%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES NON-PERFORMING LOANS.
(2) INCLUDES NET UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE, NET OF TAX,
OF $3,176 AND $1,603 FOR 1995 AND 1994, RESPECTIVELY.
<PAGE>
36
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
(In Thousands, Except Share Data) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks (Note 3) $ 45,572 $ 49,496
- ------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 7,000 11,545
- ------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity (Market Value of $25,370 and $94,557 for 1995
and 1994, respectively) (Notes 1 and 4) 24,838 96,354
- ------------------------------------------------------------------------------------------------------------------------------
Securities Available for Sale, at Market Value (Notes 1 and 5) 334,156 223,976
- ------------------------------------------------------------------------------------------------------------------------------
Trading Account Securities, at Market Value (Note 1) 417 321
- ------------------------------------------------------------------------------------------------------------------------------
Loans, Net (Notes 1 and 6) 551,222 481,439
Less: Allowance for Possible Loan Losses (Notes 1 and 7) 7,412 9,597
- ------------------------------------------------------------------------------------------------------------------------------
543,810 471,842
Premises and Equipment, Net (Notes 1 and 8) 22,730 12,225
Investment in Joint Venture (Note 1) 3,151 --
Other Real Estate (Note 1) 2,747 1,366
Intangible Assets (Note 1) 12,967 1,907
Other Assets 13,157 15,509
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,010,545 $884,541
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 9)
Demand $ 153,095 $149,115
Savings 369,561 387,415
Time 331,972 221,354
- ------------------------------------------------------------------------------------------------------------------------------
Total Deposits 854,628 757,884
Short-Term Borrowings (Notes 4 and 10) 53,347 52,301
Other Borrowings (Note 11) 9,680 1,269
Other Liabilities 11,491 7,285
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 929,146 818,739
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 13 and 15)
STOCKHOLDERS' EQUITY (Notes 1 and 14)
Preferred Stock, authorized 300,000 shares,
none issued and outstanding -- --
Common Stock ($2.50 Par Value Per Share)
Authorized Shares 4,000,000
Issued and Outstanding 3,633,794 Shares in 1995 and 3,311,324
Shares in 1994 9,085 8,279
Additional Paid-In Capital 52,411 44,100
Retained Earnings 19,563 21,961
Treasury Stock, at Cost - 48,905 Shares in 1995 and 355 Shares in 1994 (1,578) (9)
Restricted Stock (317) (280)
Net Unrealized Gain (Loss) on Securities Available for Sale, Net of Income Tax
Provision (Benefit) of $1,152 in 1995 and ($4,249) in 1994 2,235 (8,249)
- ------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 81,399 65,802
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,010,545 $884,541
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
<PAGE>
37
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------
(In Thousands, Except Share Data) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans (Note 1) $ 46,890 $ 36,794 $ 33,299
Interest and Dividends on Securities Held to Maturity (Note 4):
Taxable Income 6,491 2,820 17,755
Tax-Exempt Income 952 1,317 1,932
Interest and Dividends on Securities
Available for Sale (Note 5):
Taxable Income 15,488 17,367 6,052
Tax-Exempt Income 1,259 1,007 --
Dividends on Trading Account Securities 14 10 --
Interest on Federal Funds Sold and Deposits with
Federal Home Loan Bank 900 439 501
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 71,994 59,754 59,539
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Savings Deposits 8,882 9,002 9,681
Interest on Time Certificates of Deposit $100,000 or more 3,543 1,241 869
Interest on Other Time Deposits 14,453 6,592 7,762
Interest on Short-Term Borrowings 1,581 988 491
Interest on Other Borrowings 669 156 156
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 29,128 17,979 18,959
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 42,866 41,775 40,580
Provision for Possible Loan Losses (Notes 1 and 7) 450 1,590 4,287
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 42,416 40,185 36,293
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust Income (Note 1) 4,222 4,005 3,558
Service Charges on Deposit Accounts 3,443 3,588 3,344
Other Service Charges, Commissions and Fees 2,145 2,193 3,801
Net Gains from Securities Transactions (Notes 1,4, and 5) 1,135 871 583
Other Income 1,384 1,206 1,559
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 12,329 11,863 12,845
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Wages 15,771 15,140 13,797
Pensions and Other Employee Benefits (Note 13) 5,046 5,041 5,351
Occupancy Expense, Net 2,868 2,209 2,064
Furniture and Equipment Expense (Note 8) 3,478 3,232 3,134
Amortization of Intangible Assets (Note 1) 1,663 651 882
Net Cost to Operate Other Real Estate 412 513 611
Merger Related and Restructuring Charges 3,240 -- --
Other Expenses 10,270 10,835 11,643
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 42,748 37,621 37,482
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes and
Cumulative Effect of Accounting Change 11,997 14,427 11,656
Provision for Income Taxes (Note 12) 3,623 4,607 3,975
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change 8,374 9,820 7,681
Cumulative Effect of Change in Accounting
for Income Taxes (Note 12) -- -- 973
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,374 $ 9,820 $ 8,654
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (Note 1)
Income Before Cumulative Effect of Accounting Change $ 2.33 $ 2.78 $ 2.19
Cumulative Effect of Change in Accounting
for Income Taxes -- -- .28
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.33 $ 2.78 $ 2.47
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
<PAGE>
38
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
(In Thousands, Except Share Data) Additional Securities Total
For the Years Ended Common Paid-In Retained Treasury Restricted Available Stockholders'
December 31, 1993, 1994 and 1995 Stock Capital Earnings Stock Stock for Sale Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1993 $7,289 $33,773 $20,026 $(189) $ (123) $ (34) $60,742
Net Income-1993 -- -- 8,654 -- -- -- 8,654
Cash Dividends Declared -- -- (2,609) -- -- -- (2,609)
Stock Issued in Payment of
Stock Dividend-145,467 Shares 363 4,109 (4,472) -- -- -- --
Exercise of Stock Options-
5,661 Shares 14 72 (58) -- -- -- 28
Change in Unrealized Loss-
Marketable Equity Securities -- -- -- -- -- (150) (150)
Treasury Stock Sold-8,644 Shares -- (181) -- 187 -- -- 6
Restricted Stock (Note 14) -- -- -- -- 56 -- 56
- ------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1993 7,666 37,773 21,541 (2) (67) (184) 66,727
Net Income-1994 -- -- 9,820 -- -- -- 9,820
Cash Dividends Declared -- -- (2,727) -- -- -- (2,727)
Stock Issued in Payment of
Stock Dividend-232,703 Shares 581 6,034 (6,620) -- -- -- (5)
Exercise of Stock Options-
4,445 Shares 12 57 (53) -- -- -- 16
Change in Unrealized Loss on
Available for Sale Securities -- -- -- -- -- (8,065) (8,065)
Restricted Stock (Note 14) 20 236 -- (7) (213) -- 36
- ------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1994 8,279 44,100 21,961 (9) (280) (8,249) 65,802
Net Income-1995 -- -- 8,374 -- -- -- 8,374
Cash Dividends Declared -- -- (3,541) -- -- -- (3,541)
Stock Issued in Payment of
Stock Dividend-205,687 Shares 514 6,685 (7,199) -- -- -- --
Exercise of Stock Options-
57,112 Shares 143 421 (32) -- -- -- 532
Change in Unrealized Gain (Loss)
on Securities Available for Sale -- -- -- -- -- 10,484 10,484
Treasury Stock Purchased-
50,000 Shares -- -- -- (1,705) -- -- (1,705)
Treasury Stock Sold-4,375 Shares -- 8 -- 139 -- -- 147
Stock Issued from Debenture
Conversion-47,308 Shares 118 930 -- -- -- -- 1,048
Stock Issued from Equity
Contracts-10,013 Shares 25 196 -- -- -- -- 221
Restricted Stock (Note 14) 6 71 -- (3) (37) -- 37
- ------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1995 $9,085 $52,411 $19,563 $(1,578) $ (317) $2,235 $81,399
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
<PAGE>
39
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
(In Thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 8,374 $ 9,820 $ 8,654
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 3,280 1,913 2,089
Amortization of Securities Premiums, Net 423 1,236 1,874
Provision for Possible Loan Losses 450 1,590 4,287
Provision (Benefit) for Deferred Income Taxes (376) 579 (641)
Net Gain on Disposition of Premises and Equipment (77) (72) (11)
Net Gain on Sale of Securities Available for Sale (928) (889) (377)
Net Gain on Sale of Securities Held to Maturity -- -- (210)
Purchases of Trading Account Securities (176) (70) (300)
Proceeds from Sales of Trading Account Securities 287 27 --
Net Gain on Sale of Trading Account Securities (105) (3) --
Unrealized (Gain) Loss on Trading Account Securities (102) 21 4
(Increase) Decrease in Other Assets (2,674) 2,067 (636)
Increase (Decrease) in Other Liabilities 4,111 1,036 (2,021)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 12,487 17,255 12,712
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Money Market Mutual Funds 7,440 32,651 42,402
Purchases of Money Market Mutual Funds (6,578) (660) (30,561)
Securities Available for Sale:
Proceeds from Sales of Securities 40,918 92,941 12,839
Proceeds from Maturities of Securities 58,888 48,127 28,025
Purchases of Securities (98,900) (48,409) (80,100)
Securities Held to Maturity:
Proceeds from Sales of Securities -- -- 6,308
Proceeds from Maturities of Securities 28,056 19,005 29,874
Purchases of Securities (52,097) (72,089) (20,963)
Net Increase in Loans (72,418) (112,178) (35,250)
Investment in Joint Venture (4,215) -- --
Deposit Premium from Branch Acquisition (11,659) -- --
Expenditures for Premises and Equipment (3,476) (1,463) (854)
Proceeds from Sale of Premises and Equipment 1,047 350 143
(Increase) Decrease in Other Real Estate (1,381) 5,649 489
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (114,375) (36,076) (47,648)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (Decrease) Increase in Demand and Savings Deposits (13,874) (23,834) 29,738
Net Increase (Decrease) in Time Deposits 110,618 23,210 (11,353)
Net Increase in Short-Term Borrowings 2,616 25,612 13,650
Repayment of Other Borrowings (1,269) -- --
Repayment of Obligation Under Capital Lease (70) -- --
Net (Decrease) Increase in Demand Notes-U.S. Treasury (1,570) 8 402
Cash Dividends on Common Stock (3,312) (2,631) (2,521)
Proceeds from Exercise of Stock Options 532 16 28
Purchase of Treasury Stock (1,705) -- --
Sale of Treasury Stock 147 -- 6
Stock Issued from Debenture Conversion 1,048 -- --
Stock Issued from Equity Contracts 221 -- --
Restricted Stock 37 36 56
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 93,419 22,417 30,006
- ------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (8,469) 3,596 (4,930)
Cash and Cash Equivalents at Beginning of Year 61,041 57,445 62,375
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $52,572 $61,041 $57,445
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest $23,619 $17,973 $19,819
Income Taxes $ 2,690 $ 2,987 $ 4,583
Capital Lease Obligation Incurred $ 9,750 $ -- $ --
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
<PAGE>
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United National Bancorp owns United National Bank, which operates through a
branch network primarily located throughout Central and Northwestern Counties in
New Jersey. The Company's primary source of revenue is providing loans to small
and middle-market businesses, as well as individuals.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The significant policies are summarized as follows:
a. PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The accompanying consolidated financial statements include the accounts of
United National Bancorp (the "Parent Company") and its wholly-owned subsidiary,
United National Bank (the "Bank", or when consolidated with the Parent Company,
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation. The financial statements include the
consolidated accounts of New Era Bank ("New Era"), which was acquired on June
30, 1995, for all periods presented. The acquisition was accounted for under
the pooling of interests method of accounting.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
b. SECURITIES
Effective January 1, 1994, the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As permitted by the Statement, the Company did not
retroactively restate prior years' financial statements. This Statement
requires securities to be classified as: (1) held to maturity, (2) available for
sale, and (3) trading securities.
Securities for which the Company has the ability and intent to hold until
maturity are classified as "held to maturity." These securities are stated at
cost, adjusted for amortization of premium and accretion of discount, using the
interest method over the term of the investments.
Securities that may be held for indefinite periods of time which Management
intends to use as part of its asset/liability management strategy and that may
be sold in response to changes in interest rates, changes in prepayment risk, or
other similar factors, are classified as "available for sale" and reported at
market value. Unrealized holding gains and losses (net of related tax effects)
on such securities are excluded from earnings but are included in stockholders'
equity. Upon realization, such gains or losses are included in earnings using
the specific identification method. On June 30, 1993, the Company established
an available for sale securities category and accounted for these securities at
the lower of cost or market using the aggregate method. The balance of $184,000
in unrealized loss on securities available for sale at December 31, 1993 relates
to the marketable equity securities. This unrealized loss was previously
recorded as a reduction of retained earnings.
Trading account securities are carried at market value. Gains and losses
resulting from adjusting trading account securities to market value, as well as
security sales, are reported in non-interest income. This category includes
securities purchased specifically for short-term appreciation or to be available
for liquidity needs.
c. INVESTMENT IN JOINT VENTURE
In November 1995, the Company, through the Bank, acquired a 50% ownership in
United Financial Services, Inc., a third party data processing service bureau.
The investment is being accounted for by the equity method. As of December 31,
1995, the difference between the carrying value of the investment and the
underlying equity in the net assets (goodwill) was approximately $1,046,000,
which is being amortized to expense on a straight-line basis over a 10 year
period.
d. LOANS
Interest on substantially all loans is credited to interest income based upon
the principal amount outstanding. In addition, net fees/expenses associated
with originating loans are deferred and
<PAGE>
41
amortized over the lives of the respective loans as an adjustment to the yield.
When Management believes there is sufficient doubt as to the ultimate
collectibility of interest on any loan, the accrual of applicable interest is
discontinued.
When a loan (including a loan impaired under FASB Statement No. 114) is
classified as non-accrual, uncollected past due interest is reversed and charged
against current income. Interest income will not be recognized until the
financial condition of the borrower improves, payments are brought current and a
consistent payment history is established. As cash receipts are received on
non-accrual loans, including impaired loans, payments are first applied to all
principal amounts owed. Once all of the principal is paid, payments would then
be applied to interest income and fees.
In May 1993, the FASB issued Statement No. 114, "Accounting by Creditors for the
Impairment of a Loan." A subsequent amendment, Statement No. 118, "Accounting
by Creditors for the Impairment of a Loan-Income Recognition and Disclosures,"
was issued in October 1994. Adoption of Statement No. 114, as amended, is
required for financial statements issued for fiscal years beginning after
December 15, 1994. It prescribes the recognition criteria for loan impairment
and the measurement methods for certain impaired loans and loans whose terms are
modified in troubled debt restructurings and amends Statement No. 5, "Accounting
for Contingencies," and Statement No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings." The Company adopted Statement No. 114, as
amended, as of January 1, 1995 and the effect was not significant to the
Company's results of operations.
e. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
allowance is based on Management's evaluation of potential losses in the
portfolio, after consideration of appraised collateral values, financial
condition of the borrower as well as prevailing and anticipated economic
conditions. Management evaluates the adequacy of the allowance for possible
loan losses on a regular basis throughout the year.
f. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to forty years.
Leasehold improvements are amortized on a straight-line basis over the lives of
the related leases, or the life of the improvement, whichever is shorter.
g. OTHER REAL ESTATE
Other real estate owned consists of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. Only collateral of
which the Company has taken physical possession is classified as other real
estate.
Other real estate is carried at the lower of fair value of the related property,
as determined by current appraisals less estimated costs to sell, or the
recorded investment in the property. Write-downs on these properties, which
occur after the initial transfer from the loan portfolio, are recorded as
operating expenses. Costs of holding such properties are charged to expense
in the current period. Gains, to the extent allowable, and losses on the
disposition of these properties are reflected in current operations.
Prior to the adoption of FASB Statement No. 114, which is further described in
Note 1(d), other real estate also included in-substance foreclosures.
In-substance foreclosures are loans generally in the process of foreclosure.
Loans previously classified as in-substance foreclosure, but for which the
Company had not taken possession of the collateral, have been reclassified as
loans for all prior periods. This reclassification did not impact the Company's
financial condition or results of operations.
h. INTANGIBLE ASSETS
Intangible assets include: 1) the present value of the future earnings
potential of the core deposit base of acquired banks, which are being amortized
over a 10 year period, and 2) the difference between the carrying value of the
investment and the underlying equity in its net assets, which represents
goodwill. Goodwill is being amortized over periods ranging from 10 to 20 years.
Amortization expense of intangible assets, primarily core deposit intangibles,
was $1,663,000,
<PAGE>
42
$651,000, and $882,000 for 1995, 1994 and 1993, respectively.
i. TRUST ASSETS
Assets held in fiduciary or agency capacities for customers are not included in
the consolidated balance sheets since such items are not assets of the Company.
j. NET INCOME PER COMMON SHARE
Net income per common share is computed by dividing net income by the weighted
average number of shares outstanding during each year (3,600,000, 3,531,000 and
3,501,000 in 1995, 1994 and 1993, respectively), retroactively adjusted for the
impact of subsequent stock dividends. The effect of stock grants is not
significant. Stock options and equity contracts, which were dilutive, have been
considered in computing the weighted average number of common shares
outstanding.
k. STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and Federal funds sold. Generally, Federal funds are sold for a
one-day period.
l. CASH DIVIDEND RESTRICTIONS
Substantially all of the revenue of the Company available for the payment of
dividends on its stock will result from dividends paid to the Company by the
Bank. The Bank is restricted under applicable laws in the payment of cash
dividends to the Company. The Bank is required by Federal law to obtain the
prior approval of the Comptroller of the Currency for the payment of dividends
if the total of all dividends declared by the Board of Directors in any year
will exceed the total of the Bank's net profits for that year combined with the
retained net profits for the preceding two years ("earnings limitation" test).
In addition, a national bank may not pay a dividend in an amount greater than
its undivided profits then on hand after deducting its loan losses and bad debts
("undivided profits" test).
Under the earnings limitation test, the Bank had available $17,517,000 for the
payment of cash dividends at December 31, 1995.
m. RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 1995.
NOTE 2 - ACQUISITIONS
On January 20, 1995, the Company, through the Bank, assumed deposits, including
accrued interest, of approximately $99 million from the Resolution Trust
Corporation ("RTC"). In addition, the Bank received $417,000 in cash and cash
equivalents and approximately $803,000 in other assets. In connection with the
transaction, the Bank recorded an intangible asset of approximately $11,660,000,
representing the premium paid over the carrying amount of deposits acquired.
On June 30, 1995, the Bank acquired all of the outstanding shares of New Era,
which was based in the Somerset section of Franklin Township, New Jersey. Each
share of New Era common stock outstanding was converted into .7431 shares of the
Company's common stock, for a total of 684,904 shares. At the time of the
acquisition, New Era had approximately $120 million in assets. The acquisition
has been accounted for as a pooling of interests and accordingly, the
consolidated financial statements of the Company include the accounts of New Era
for all periods presented. Separate results of the combined entities are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(In Thousands) 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C>
Net Interest Income after Provision for
Possible Loan Losses
The Company $33,330 $31,311
New Era 6,855 4,982
- ----------------------------------------------------------------------------
$40,185 $36,293
- ----------------------------------------------------------------------------
Net Income
The Company $ 8,447 $ 7,906
New Era 1,373 748
- ----------------------------------------------------------------------------
$ 9,820 $ 8,654
- ----------------------------------------------------------------------------
</TABLE>
<PAGE>
43
NOTE 3 - CASH AND DUE FROM BANKS
Cash balances reserved to meet regulatory requirements amounted to $13,647,000
at December 31, 1995.
NOTE 4 - SECURITIES HELD TO MATURITY
Comparative amortized cost (book value) and estimated market values of
securities held to maturity at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government
Agencies and Corporations $ 21,151 $ 311 $ -- $ 21,462
Obligations of States and Political Subdivisions 3,612 220 (1) 3,831
Securities Issued by Foreign Governments 75 2 -- 77
- ----------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $ 24,838 $ 533 $ (1) $ 25,370
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 12,635 $ -- $ (595) $ 12,040
Obligations of U.S. Government
Agencies and Corporations 49,073 111 (2,212) 46,972
Obligations of States and Political Subdivisions 22,099 1,064 (51) 23,112
Mortgage-Backed Securities 12,497 11 (119) 12,389
Securities Issued by Foreign Governments 50 -- (6) 44
- ----------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $ 96,354 $ 1,186 $ (2,983) $ 94,557
- ----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market value of securities held to maturity at
December 31, 1995, by expected maturity, are shown in the adjacent table.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities are included based upon
estimated cash flows, assuming no change in the current interest rate
environment.
Estimated
Amortized Market
(In Thousands) Cost Value
- -------------------------------------------------------------------
Due in One Year or Less $ 2,993 $ 3,146
Due After One Year Through Five Years 8,570 8,677
Due After Five Years Through Ten Years 13,275 13,547
- --------------------------------------------------------------------
$ 24,838 $ 25,370
- --------------------------------------------------------------------
<PAGE>
44
Proceeds from sales of securities held to maturity and gross gains and gross
losses realized during 1995, 1994 and 1993, were as follows:
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------
Debt Securities:
Proceeds from Sales $ -- $ -- $ 6,308
- --------------------------------------------------------------------------
Gross Gains $ -- $ -- $ 228
Gross Losses -- -- --
- --------------------------------------------------------------------------
Net Gains $ -- $ -- $ 228
- --------------------------------------------------------------------------
Equity Securities:
Proceeds from Sales $ -- $ -- $40,641
- --------------------------------------------------------------------------
Gross Gains $ -- $ -- $ 1
Gross Losses -- -- (27)
- --------------------------------------------------------------------------
Net Losses $ -- $ -- $ (26)
- --------------------------------------------------------------------------
Total Proceeds from Sales $ -- $ - $46,949
- --------------------------------------------------------------------------
Total Net Gains* $ -- $ - $ 202
- --------------------------------------------------------------------------
* Total net gains for 1993 amounted to $210,000. Two securities called in
1993 had a book gain of $8,000.
Securities held to maturity and available for sale with amortized costs
totaling $31,966,000 and $10,000,000, respectively, on December 31, 1995,
were pledged to secure U.S. Government and other deposits and for other
purposes as required and permitted by law. In addition, securities held to
maturity and available for sale having amortized costs aggregating
$11,688,000 and $50,374,000, respectively, on December 31, 1995, were
available for sale under agreements to repurchase. Securities totaling
$50,592,000 were actually sold under agreements to repurchase. Such
securities remain under the custodial responsibility of the Company during
the period of the applicable agreements.
The securities held to maturity portfolio consists mainly of high quality issues
which are actively traded in bond markets and are rated by Moody and/or Standard
and Poor's. The few non-rated issues held are primarily small local bond issues
which the Company purchases to service municipalities in its market area. These
issues normally mature within one year and market value is provided through an
investment portfolio pricing service.
The table below reflects the securities held to maturity portfolio by Moody
rating on December 31, 1995.
Amortized Estimated
(In Thousands) Cost Market Value
- ------------------------------------------------------------
Moody Rating
AAA $ 22,433 $ 22,865
AA1 200 219
AA 570 621
A1 191 202
NR 1,369 1,386
Foreign Governments 75 77
- ------------------------------------------------------------
$ 24,838 $ 25,370
- ------------------------------------------------------------
Securities with a carrying value of $15,411,000 and a market value of
$15,474,000, previously held by New Era, which were classified as held to
maturity, were reclassified to available for sale upon consummation of the
merger on June 30, 1995 to maintain the Company's interest rate risk position.
<PAGE>
45
In November 1995, the FASB issued a special report -- "A Guide to Implementation
of Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities." This special report allowed the Company to make a one-time
reclassification of securities within the categories without tainting other
securities held to maturity. During December 1995, the Company reclassified
$80,183,000 of securities, at amortized cost, from held to maturity to available
for sale, at an unrealized gain of $2,194,000.
NOTE 5 - SECURITIES AVAILABLE FOR SALE
The amortized cost and the estimated market values of securities available for
sale at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ 6,521 $ 40 $ (1) $ 6,560
Obligations of U.S. Government
Agencies and Corporations 74,546 1,403 (74) 75,875
Obligations of States and
Political Subdivisions 39,449 623 (149) 39,923
Mortgage-Backed Securities 186,217 1,900 (1,594) 186,523
- -----------------------------------------------------------------------------------------------------
Total Debt Securities 306,733 3,966 (1,818) 308,881
- -----------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 19,817 1,635 (396) 21,056
Federal Reserve Bank and
Federal Home Loan Bank Stock 4,219 -- -- 4,219
- -----------------------------------------------------------------------------------------------------
Total Equity Securities 24,036 1,635 (396) 25,275
- -----------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 330,769 $ 5,601 $ (2,214) $ 334,156
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ 27,884 $ 57 $ (382) $ 27,559
Obligations of U.S. Government
Agencies and Corporations 29,186 88 (362) 28,912
Obligations of States and Political Subdivisions 22,807 10 (1,369) 21,448
Mortgage-Backed Securities 135,441 -- (11,470) 123,971
- -----------------------------------------------------------------------------------------------------
Total Debt Securities 215,318 155 (13,583) 201,890
- -----------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 19,986 1,542 (612) 20,916
Federal Reserve Bank and
Federal Home Loan Bank Stock 1,170 -- -- 1,170
- -----------------------------------------------------------------------------------------------------
Total Equity Securities 21,156 1,542 (612) 22,086
- -----------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 236,474 $ 1,697 $ (14,195) $ 223,976
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
46
The amortized cost and estimated market value of debt securities at December 31,
1995, by expected maturity, are shown in the table below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities are included based upon estimated cash flows,
assuming no change in the current interest rate environment.
<TABLE>
<CAPTION>
Amortized Estimated
(In Thousands) Cost Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $ 50,481 $ 50,086
Due After One Year Through Five Years 63,883 64,736
Due After Five Years Through Ten Years 81,277 82,344
Due After Ten Years 111,092 111,715
- -------------------------------------------------------------------------------
$ 306,733 $ 308,881
- -------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale and gross gains and gross
losses realized during 1995, 1994 and 1993, were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities:
Proceeds from Sales $ 40,271 $ 92,941 $ 12,839
- -------------------------------------------------------------------------------
Gross Gains $ 657 $ 1,250 $ 384
Gross Losses (89) -- --
- -------------------------------------------------------------------------------
Net Gains $ 568 $ 1,250 $ 384
- -------------------------------------------------------------------------------
Equity Securities:
Proceeds from Sales $ 8,087 $ 32,651 $ 1,761
- -------------------------------------------------------------------------------
Gross Gains $ 368 $ -- $ --
Gross Losses (17) (361) (7)
- -------------------------------------------------------------------------------
Net Gains (Losses) $ 351 $ (361) $ (7)
- -------------------------------------------------------------------------------
Total Proceeds from Sales $ 48,358 $ 125,592 $ 14,600
- -------------------------------------------------------------------------------
Total Net Gains * $ 919 $ 889 $ 377
- -------------------------------------------------------------------------------
</TABLE>
* Total net gains in 1995 amounted to $928,000. Three securities called in 1995
had a book gain of $9,000.
The securities available for sale portfolio consists mainly of high quality
issues which are actively traded in bond markets and are rated by Moody and/or
Standard and Poor's. The table below reflects the debt security portion of the
securities available for sale portfolio by Moody rating on December 31, 1995.
<TABLE>
<CAPTION>
Amortized Estimated
(In Thousands) Cost Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Moody Rating
AAA $ 280,735 $ 282,465
AA1 740 754
AA 12,279 12,421
A1 5,274 5,295
A 2,682 2,777
BAA1 505 537
NR 4,518 4,632
- -------------------------------------------------------------------------------
$ 306,733 $ 308,881
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
47
NOTE 6 - LOANS
Loans outstanding by classification at December 31, 1995 and 1994,
are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Loans Secured by Real Estate:
Construction and Land Development $ 21,938 $ 18,465
Secured by Farmland 955 970
Secured by 1-4 Family Residential Properties 145,628 148,725
Secured by Multifamily (5 or more) Residential Properties 720 2,048
Secured by Nonfarm Nonresidential Properties 121,946 96,138
Loans to Finance Agricultural Production and Other Loans to Farmers 9 11
Commercial and Industrial Loans 73,551 54,288
Loans to Individuals for Household, Family and Other Personal
Expenditures:
Retail Credit Card Plan 18,426 21,565
Other Installment and Single Payment Loans 186,805 156,830
Other Loans:
All other loans 2,761 502
- --------------------------------------------------------------------------------------------
Total Loans Outstanding 572,739 499,542
Less: Unearned Income on Loans 21,517 18,103
- --------------------------------------------------------------------------------------------
Loans, Net $ 551,222 $ 481,439
- --------------------------------------------------------------------------------------------
</TABLE>
The following information is presented only for those loans classified as
non-accrual at December 31:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income that would have been recorded under
original contract terms $ 618 $ 524 $ 236
Interest income received and recorded 61 15 24
- ----------------------------------------------------------------------------------------------
Lost income on non-accrual loans at year-end $ 557 $ 509 $ 212
- ----------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1995, the Company's recorded investment in loans considered
to be impaired under FASB Statement No. 114 was $5,640,000, with a related
valuation of $1,739,000. This valuation allowance is included in the allowance
for possible loan losses in the accompanying consolidated balance sheets.
Loans to officers, directors, employees and/or their affiliated interests
amounted to approximately $12,597,000 and $9,487,000 at December 31, 1995 and
1994, respectively. All such loans, which are primarily secured, were current as
to principal and interest payments, and in the opinion of Management, all were
granted on terms which were comparable to loans to unrelated parties at the
dates such loans were granted. An analysis of the 1995 activity in these loans
is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance Outstanding, Beginning of Year $ 9,487
New Loans 4,726
Repayments (1,616)
- ----------------------------------------------------------------------------
Balance Outstanding, End of Year $ 12,597
- ----------------------------------------------------------------------------
</TABLE>
<PAGE>
48
NOTE 7 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the allowance for possible loan losses activity for the years ended
December 31, 1995, 1994 and 1993, is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, Beginning of Year $ 9,597 $ 10,812 $ 9,239
Add:
Provision Charged to Expense 450 1,590 4,287
Deduct:
Losses Charged to Allowance (3,310) (3,830) (3,212)
Less - Recoveries 675 1,025 498
- --------------------------------------------------------------------------------
Net Loan Charge-offs (2,635) (2,805) (2,714)
- --------------------------------------------------------------------------------
Balance, End of Year $ 7,412 $ 9,597 $ 10,812
- --------------------------------------------------------------------------------
</TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1995 and 1994, is as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Premises (includes land of $1,768,000 and $1,809,000
in 1995 and 1994, respectively) $ 13,011 $ 13,256
Property Under Capital Lease 9,750 --
Equipment 10,536 8,240
Leasehold Improvements 633 289
Projects in Progress 98 601
- --------------------------------------------------------------------------------
Total 34,028 22,386
Less Accumulated Depreciation and Amortization 11,298 10,161
- --------------------------------------------------------------------------------
Premises and Equipment, Net $ 22,730 $ 12,225
- --------------------------------------------------------------------------------
</TABLE>
Depreciation expense amounted to $1,638,000 in 1995, $1,129,000 in 1994 and
$1,066,000 in 1993.
NOTE 9 - DEPOSITS
Time certificates of deposit $100,000 or more totaled $56,078,000 on December
31, 1995 and $33,989,000 on December 31, 1994.
NOTE 10 - SHORT-TERM BORROWINGS
Selected data relating to short-term borrowings for the years ended December 31,
1995, 1994 and 1993, are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
At Year-end:
Securities Sold Under Agreements
to Repurchase $ 50,592 $ 24,976 $ 22,364
Federal Funds Purchased -- 12,000 --
Federal Home Loan Bank Advances -- 11,000 --
Demand Notes - U.S. Treasury 2,755 4,325 4,317
- ---------------------------------------------------------------------------------
Total Short-Term Borrowings $ 53,347 $ 52,301 $ 26,681
- ---------------------------------------------------------------------------------
Weighted-Average Interest Rate 5.48% 3.19% 2.75%
For the Year Ended December 31:
Average Balance Outstanding $ 29,638 $ 25,949 $ 18,913
Weighted-Average Interest Rate 5.50% 4.41% 3.42%
Highest Month-End Balance $ 53,347 $ 52,301 $ 26,681
</TABLE>
<PAGE>
49
NOTE 11 - OTHER BORROWINGS
At December 31, 1995 and 1994, other borrowings consisted of the following:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Obligation Under Capital Lease $ 9,680 $ --
12% Redeemable Subordinated Debentures, Due March 31, 1996 -- 1,269
- -------------------------------------------------------------------------------
Total Other Borrowings $ 9,680 $ 1,269
- -------------------------------------------------------------------------------
</TABLE>
The 12% Redeemable Subordinated Debentures were called during 1995.
During 1995, the Company entered into a lease agreement on its new headquarters
building. The lease, which has been accounted for as a capital lease, expires
in 2015. Lease commitments under this agreement are as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 917
1997 917
1998 972
1999 999
2000 999
Thereafter 18,371
- --------------------------------------------------------------------------------
23,175
Less: Amount Representing Interest (13,495)
- --------------------------------------------------------------------------------
$ 9,680
- --------------------------------------------------------------------------------
</TABLE>
NOTE 12 -- INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 3,711 $ 3,265 $ 3,669
Deferred Provision (Benefit) (376) 579 (641)
- --------------------------------------------------------------------------------
Total Federal 3,335 3,844 3,028
State 288 763 947
- --------------------------------------------------------------------------------
Total Provision for Income Taxes $ 3,623 $ 4,607 $ 3,975
- --------------------------------------------------------------------------------
</TABLE>
Deferred income taxes result from accounting for certain income and expense
items in different time periods for financial statement purposes than for income
tax return purposes.
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying income before taxes by the statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Provision for Income Taxes $ 11,997 $ 14,427 $ 11,656
- --------------------------------------------------------------------------------
Tax Calculated at 34% $ 4,079 $ 4,905 $ 3,963
Increase (Decrease) in Tax Resulting from:
Tax-Exempt Income (792) (843) (721)
State Taxes-Net of Federal Tax Benefit 190 504 625
Other-Net 146 41 108
- --------------------------------------------------------------------------------
Provision for Income Taxes $ 3,623 $ 4,607 $ 3,975
- --------------------------------------------------------------------------------
Effective Tax Rate 30% 32% 34%
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
50
As of January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting
for Income Taxes." The statement changed the method of accounting for income
taxes from the deferred method, previously required under generally accepted
accounting principles, to the asset and liability method. The statement
addresses various matters related to temporary differences from both the
financial statement basis and the tax basis of assets and liabilities. In
adopting Statement No. 109, the Company recorded a deferred tax asset of
$1,561,000 at January 1, 1993.
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates sufficient net taxable
income. Additionally, the Company has sufficient refundable taxes in prior years
that are available through carry back for the realization of tax benefits
recorded. Accordingly, Management believes it is more likely than not that the
Company will realize the benefit of the deferred tax asset. However,
significant changes in the Company's operations and/or economic conditions could
affect its ability to fully utilize the benefits of the deferred tax asset.
The components of and changes in the Federal net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
Deferred
Jan. 1, Provision Dec. 31,
(In Thousands) 1995 (Benefit) 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Tax Assets:
Allowance for Possible Loan Losses $ 2,306 $ (519) $ 1,787
Unrealized Loss on Securities Available For Sale 4,249 (4,249) --
Postretirement Benefits 474 207 681
Deferred Directors Fees 42 26 68
Other 778 313 1,091
- --------------------------------------------------------------------------------------------
Total 7,849 (4,222) 3,627
- --------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Unrealized Gain on Securities Available For Sale -- (1,152) (1,152)
Depreciation (808) (6) (814)
Pension Plan (272) (97) (369)
Accretion of Discount (192) (161) (353)
Other (337) (139) (476)
- --------------------------------------------------------------------------------------------
Total (1,609) (1,555) (3,164)
- --------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 6,240 $ (5,777) $ 463
- --------------------------------------------------------------------------------------------
</TABLE>
NOTE 13 - PENSION AND RETIREMENT PLANS
The Company has a noncontributory defined benefit plan, funded through a
self-administered trust, covering substantially all full-time employees who have
attained age 21 and have completed one year of service. Annual contributions
are made to the plan equal to the minimum amount currently deductible for
Federal income tax purposes. In addition, the Company has supplemental pension
agreements with an officer and a director (a former officer), as well as
employees who retired prior to the formation of the current plan.
The net periodic pension cost for the above mentioned plans for 1995, 1994 and
1993 was $360,000, $200,000 and $140,000, respectively.
<PAGE>
51
PENSION PLAN
The following table sets forth the Pension Plan's funded status at December 31,
1995 and 1994.
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated Benefit Obligation:
Vested Benefits $ 15,565 $ 13,770
Non-Vested Benefits 250 170
- --------------------------------------------------------------------------------------------
Total Accumulated Benefit Obligation 15,815 13,940
Effect of Projected Future Compensation Levels 1,663 1,395
- --------------------------------------------------------------------------------------------
Projected Benefit Obligation 17,478 15,335
Plan's Assets at Fair Value, Primarily Listed Stocks,
U.S. Bonds and Commingled Funds 19,380 15,657
- --------------------------------------------------------------------------------------------
Plan's Assets in Excess of Projected Benefit Obligation 1,902 322
Unrecognized Prior Service Cost 944 1,108
Less:
Unrecognized Net Gain (Loss) Due to Past Experience
Different from Assumptions Made 1,165 (178)
Unrecognized Net Assets Being Recognized in the
Amount of Approximately $206 per year through 1998 609 820
- --------------------------------------------------------------------------------------------
Prepaid Pension Cost $ 1,072 $ 788
- --------------------------------------------------------------------------------------------
</TABLE>
Net periodic pension cost for 1995, 1994 and 1993 included the following:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost of Benefits Earned During Period $ 601 $ 629 $ 506
Interest Cost on Projected Benefit Obligation 1,150 1,076 1,035
Return on Plan Assets (1,363) 460 (1,344)
Net Amortization and Deferral (47) (1,994) (130)
- --------------------------------------------------------------------------------------------
Net Periodic Pension Cost $ 341 $ 171 $ 67
- --------------------------------------------------------------------------------------------
Discount Rate 7% 7.75% 7%
- --------------------------------------------------------------------------------------------
Rate of Increase in Future Salary Levels 6% 6% 6%
- --------------------------------------------------------------------------------------------
Expected Long-Term Rate of Return on Plan Assets 9% 9% 9%
- --------------------------------------------------------------------------------------------
</TABLE>
NON-QUALIFIED EXECUTIVE COMPENSATION SUPPLEMENTAL PLANS
The following table sets forth the Supplemental Plan's funded status at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated Benefit Obligation:
Vested Benefits $ 248 $ 322
Non-Vested Benefits -- --
- --------------------------------------------------------------------------------------------
Total Accumulated Benefit Obligation 248 322
Effect of Future Projected Compensation Levels -- --
- --------------------------------------------------------------------------------------------
Projected Benefit Obligation $ 248 $ 322
- --------------------------------------------------------------------------------------------
Projected Benefit Obligation in Excess of Plan's Assets $ 248 $ 322
Unrecognized Net Loss Due to Past Experience Different from
Assumptions Made (8) (58)
Less:
Unrecognized Net Obligation Recognized -- --
- --------------------------------------------------------------------------------------------
Unfunded Accrued Pension Cost $ 240 $ 264
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
52
Net periodic pension cost for 1995, 1994 and 1993 included the following:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost of Benefits Earned During Period $ -- $ -- $ --
Interest Cost on Projected Benefit Obligation 18 24 24
Return on Plan Assets -- -- --
Net Amortization and Deferral 1 5 49
- --------------------------------------------------------------------------------------------
Net Periodic Pension Cost $ 19 $ 29 $ 73
- --------------------------------------------------------------------------------------------
</TABLE>
In determining the projected benefit obligation, the weighted average assumed
discount rate was 7.00% in 1995, 7.75% in 1994 and 7.00% in 1993.
OTHER POSTRETIREMENT BENEFITS
In the first quarter of 1993, the Company adopted FASB Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement requires that the expected costs of providing these benefits,
including medical and life insurance coverage, must be charged to expense during
the years that the employees render service. This is a significant change from
the Company's prior practice of accounting for postretirement benefits on a cash
basis. The Company elected to amortize the discounted present value of the Net
Transition Obligation ("NTO") at January 1, 1993 to expense over a 20-year
period. The NTO, which is the Accumulated Postretirement Benefits Obligation
("APBO") since no assets have been funded for these benefits, amounted to
$6,745,000 and $6,766,000 at December 31, 1995 and 1994, respectively.
The Net Periodic Postretirement Benefit Cost ("NPPBC") is the amount to be
expensed for any given year. The NPPBC for 1995, 1994 and 1993 amounted to
$974,000, $1,050,000 and $922,000, respectively.
The NPPBC for 1995, 1994 and 1993 included the following components:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost of Benefits attributed to
employee service during the year $ 239 $ 276 $ 208
Interest Cost on APBO 445 484 424
Amortization of NTO over a twenty-year period 290 290 290
- --------------------------------------------------------------------------------------------
NPPBC $ 974 $ 1,050 $ 922
- --------------------------------------------------------------------------------------------
</TABLE>
The discount rate used in determining the APBO was 7.00%, 7.75% and 7.00% at
December 31, 1995, 1994 and 1993, respectively. The assumed healthcare cost
trend rate used in measuring the APBO ranged from 8.0% for post-age 65 and 9.5%
for pre-age 65 in 1995, declining by .5% per year to an ultimate level of 5.5%
per year in 2004 (pre-age 65) and 2001 (post-age 65).
If the healthcare cost trend rate assumptions were increased by 1%, the APBO at
December 31, 1995 would be increased by $766,000 or 11.4%. The effect of this
change on the sum of the service cost and interest cost components of the NPPBC
for 1995 would be an increase of $102,000 or 14.9%.
OTHER BENEFITS
Effective January 1, 1994, a 401(k) plan was made available to employees of the
Company. Employees can make contributions to the Plan by means of payroll
deductions of up to 10% of their compensation. Matching contributions are made
by the Company for up to 5% of the employee's compensation at the discretion of
the Board of Directors and totaled $463,000 and $472,000 in 1995 and 1994,
respectively.
<PAGE>
53
NOTE 14 - STOCK INCENTIVE PLAN
During 1991, the Company adopted a Stock Incentive Plan (the "Plan"), in which
approximately 252,700 shares, as adjusted for the effect of stock dividends, of
the Company's common stock may be granted to the Company's employees. The Plan
provides for the discretionary granting of stock options with or without stock
appreciation rights. In addition, the Plan provides for granting of Restricted
Stock awards which generally vest between two and four years. Transactions
involving the Plan are summarized as follows:
<TABLE>
<CAPTION>
Numbers of Option Price
Shares Per Share
- --------------------------------------------------------------------------------
<S> <C> <C>
Option Shares:
Outstanding - January 1, 1991
Granted 63,365 $10.76 - $12.11
- --------------------------------------------------------------------------------
Outstanding - December 31, 1991 63,365 $10.76 - $12.11
Exercised (9,197) $12.11
- --------------------------------------------------------------------------------
Outstanding - December 31, 1992 54,168 $10.76 - $12.11
Exercised (28,544) $10.76 - $12.11
- --------------------------------------------------------------------------------
Outstanding - December 31, 1993 25,624 $12.11
Granted 31,461 $28.15
Exercised (8,284) $12.11
- --------------------------------------------------------------------------------
Outstanding - December 31, 1994 48,801 $12.11 - $28.15
Granted 42,135 $28.15 - $30.66
Exercised (1,161) $12.11
- --------------------------------------------------------------------------------
Outstanding - December 31, 1995 89,775 $12.11 - $30.66
- --------------------------------------------------------------------------------
</TABLE>
As of December 31, 1995, 16,179 shares were exercisable. The number of shares
and option price per share in the table above have been adjusted for the effect
of stock dividends.
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Restricted Stock Awards:
Outstanding - January 1, 9,712 4,088 8,216
Granted 2,350 8,100 --
Canceled (100) (242) --
Vested (2,012) (2,234) (4,128)
- -------------------------------------------------------------------------------
Outstanding - December 31, 9,950 9,712 4,088
- -------------------------------------------------------------------------------
</TABLE>
During 1995, the Company adopted and the shareholders approved a "Stock Option
Plan for Non-Employee Directors" (the "Directors Plan") in which 37,100 shares,
as adjusted for the effect of stock dividends, of the Company's common stock may
be granted to Non-Employee Directors.
Each Non-Employee Director of the Company or its affiliates is eligible to
receive options under the Directors Plan. On June 20, 1995, each Non-Employee
Director received an option for 1,060 shares at an option price of $30.19. The
options granted have a term of ten years and vest over three years.
As of December 31, 1995, options to purchase 11,660 shares were outstanding at a
price of $30.19 per share. None of the options were exercisable. The number of
shares and option price per share have been adjusted for the effect of stock
dividends.
NOTE 15 - LITIGATION, COMMITMENTS AND CONTINGENT LIABILITIES
The Company is party, in the ordinary course of business, to litigation
involving collection matters, contract claims and other miscellaneous causes of
action arising from its business.
<PAGE>
54
Management does not consider that any such proceedings depart from usual routine
litigation and, in its judgment, the Company's financial position and results of
operations will not be materially affected by such proceedings.
The Company has lease commitments expiring at various dates through 2015. Rent
expense on these leases amounted to approximately $462,000, $289,000 and
$259,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The headquarters building lease has been accounted for as a capital lease, in
accordance with FASB Statement No. 13 "Accounting for Leases," (See Note 11).
The minimum annual rentals under the terms of the lease agreements, excluding
the capital lease, as of December 31, 1995, were as follows:
1996 $ 438,000
- ------------------------------------------
1997 389,000
- ------------------------------------------
1998 220,000
- ------------------------------------------
1999 180,000
- ------------------------------------------
2000 89,000
- ------------------------------------------
Thereafter 15,000
- ------------------------------------------
The above represents minimum rentals, not adjusted for possible future increases
due to property taxes and cost of living escalation provisions.
The Company also has certain equipment leases which do not exceed five-year
terms with level monthly payments. Equipment rental expense totaled $1,793,000,
$1,678,000 and $1,727,000 in 1995, 1994 and 1993, respectively.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. These financial instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the accompanying consolidated balance sheets. The contract or notional amounts
of these instruments express the extent of involvement the Company has in each
class of financial instrument.
The Company uses the same credit policies and collateral requirements in making
commitments and conditional obligations as it does for on-balance sheet
instruments. Commitments to extend credit are agreements to lend to customers as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and mayrequire payment of a fee. Since the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based upon Management's credit
evaluation of the borrower. Collateral held on these commitments varies.
Standby letters of credit are conditional commitments issued by the Company
insuring performance obligations of a customer to a third party. These
commitments commonly involve real estate transactions.
Financial Instruments Whose
Contract Amount Represent Contract or Notional Amount
Credit Risk at December 31, 1995
------------------------------------------------------------------
Outstanding Loan Commitments $ 111,187,000
Standby Letters of Credit 2,791,000
<PAGE>
55
Most of the Company's lending activity is with customers located within the
State of New Jersey.
In 1994, the Company entered into agreements with six executive officers
providing for the payment of cash and other benefits to them in the event of
their voluntary or involuntary termination within three years following a change
of control of the Company. Payment under these agreements in the event of a
change in control would consist of a lump sum payment equal to two or three
years of annual taxable compensation, depending on the officer involved. Under
these agreements, the payment would be reduced if it would be an excess
parachute payment under the federal tax code and would subject the officer to an
excise tax.
NOTE 16 - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY
The consolidated financial statements of United National Bancorp (parent company
only) are presented below:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS December 31,
-----------------------
(In Thousands) 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and Due from Banks $ 31 $ 96
Securities Available for Sale 2,709 3,074
Trading Account Securities 417 321
Investment in Subsidiary 78,150 62,086
Other Assets 1,237 1,065
- --------------------------------------------------------------------------------------------
Total Assets $ 82,544 $ 66,642
- --------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other Liabilities $ 1,145 $ 840
Stockholders' Equity 81,399 65,802
- --------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 82,544 $ 66,642
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME For the Years Ended December 31,
----------------------------------------
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inome
Dividends from Subsidiary $ 4,541 $ 3,732 $ 3,609
Interest and Dividends on Securities 196 121 76
- --------------------------------------------------------------------------------------------
Total Interest Income 4,737 3,853 3,685
Net Gain (Loss) from Securities Transactions 558 (20) (6)
- --------------------------------------------------------------------------------------------
Total Income 5,295 3,833 3,679
- --------------------------------------------------------------------------------------------
Expenses
Other Expenses 317 225 212
- --------------------------------------------------------------------------------------------
Income Before Taxes and Cumulative Effect
of Accounting Change 4,978 3,608 3,467
Income Tax Provision (Benefit) 154 (37) (46)
- --------------------------------------------------------------------------------------------
Income Before Cumulative Effect of
Accounting Change 4,824 3,645 3,513
- --------------------------------------------------------------------------------------------
Cumulative Effect of Change in Accounting for
Income Taxes -- -- (26)
- --------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Income
of Subsidiary 4,824 3,645 3,487
Equity in Undistributed Income of Subsidiary 3,550 6,175 5,167
- --------------------------------------------------------------------------------------------
Net Income $ 8,374 $ 9,820 $ 8,654
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
56
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31,
----------------------------------------
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 8,374 $ 9,820 $ 8,654
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net (Gain) Loss on Sale of Securities Available
or Sale (351) 2 2
Unrealized (Gain) Loss on Trading Account Securities (102) 21 4
Purchases of Trading Account Securities (176) (70) (300)
Proceeds from Sales of Trading Account Securities 287 27 --
Net Gain on Sale of Trading Account Securities (105) (3) --
Increase in Other Assets (172) (227) (332)
Increase in Other Liabilities 409 175 75
Equity in Undistributed Income of Subsidiaries (3,550) (6,175) (5,167)
- --------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 4,614 3,570 2,936
- --------------------------------------------------------------------------------------------
Investing Activities
Proceeds from Sales of Securities Available or Sale 3,712 241 414
Purchases of Securities Available for Sale (3,300) (1,041) (871)
- --------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Investing Activities 412 (800) (457)
- --------------------------------------------------------------------------------------------
Financing Activities
Cash Dividends on Common Stock (3,541) (2,732) (2,609)
Proceeds from Exercise of Stock Options 532 16 28
Purchase of Treasury Stock (1,705) -- --
Sale of Treasury Stock 147 -- 6
Stock Issued from Debenture Conversion 1,048 -- --
Stock Issued from Equity Contracts 221 -- --
Capital Contributed To Subsidiary (1,830) -- --
Restricted Stock 37 36 56
- --------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (5,091) (2,680) (2,519)
- --------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (65) 90 (40)
Cash at Beginning of Year 96 6 46
- --------------------------------------------------------------------------------------------
Cash at End of Year $ 31 $ 96 $ 6
- --------------------------------------------------------------------------------------------
</TABLE>
NOTE 17 - DISCLOSURE ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. The fair value estimates are made at a discrete point in time
based upon relevant market information and information about the financial
instruments. Because no market exists for a portion of the Company's financial
instruments, fair value estimates are based on judgment regarding a number of
factors. These estimates are subjective in nature and involve some
uncertainties. Changes in assumptions and methodologies may have a material
effect on these estimated fair values. In addition, reasonable comparability
between financial institutions may not be likely due to a wide range of
permitted valuation techniques and numerous estimates which must be made. This
lack of uniform valuation of methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
<PAGE>
57
CASH AND SHORT-TERM INVESTMENTS
For those short-term instruments, the carrying value is a reasonable estimate of
fair value.
SECURITIES
For the held to maturity and available for sale portfolios, fair values are
based on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities. The trading account securities are already carried at current
market value.
LOANS
The fair value of loans is estimated by discounting the future cash flows using
the build-up approach consisting of four components: the risk-free rate, credit
quality, operating expense, and prepayment option price.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the build-up approach consisting of four components: the
risk-free rate, credit quality of the Bank, operating income/expense and early
withdrawal options.
SHORT-TERM BORROWINGS
For those short-term instruments, the carrying value is a reasonable estimate of
fair value.
OTHER BORROWINGS
For the 12% Redeemable Subordinated Debentures at December 31, 1994, the
carrying value is a reasonable estimate of the fair value as the debentures were
called during 1995 at par value.
COMMITMENTS TO EXTEND CREDIT AND
STANDBY LETTERS OF CREDIT
At December 31, 1995 and 1994, the Bank had standby letters of credit
outstanding of $2,791,000 and $3,338,000, respectively. The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements and the present credit worthiness of the counterparties. On this
basis, these fees approximate the fair value.
At December 31, 1995 and 1994, the Bank had commitments to extend credit
totaling $111,187,000 and $112,346,000, respectively. The Bank does not
charge a fee on these loan commitments and, consequently, there is no basis
to calculate a fair value.
The estimated fair values of the Company's financial instruments as of December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------- -----------------------
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Short-Term Investments $ 52,572 $ 52,572 $ 61,041 $ 61,041
Securities Held to Maturity 24,838 25,370 96,354 94,557
Securities Available for Sale 334,156 334,156 223,976 223,976
Trading Account Securities 417 417 321 321
Loans, Net of Allowance for Possible
Loan Losses 543,810 554,948 471,842 440,785
Financial Liabilities:
Deposits:
Demand 153,095 153,095 149,115 149,115
Savings 369,561 369,561 387,415 387,415
Time 331,972 340,775 221,354 214,977
- ----------------------------------------------------------------------------------------------------------
Total Deposits 854,628 863,431 757,884 751,507
- ----------------------------------------------------------------------------------------------------------
Short-Term Borrowings 53,347 53,347 52,301 52,301
Other Borrowings -- -- 1,269 1,269
Obligation Under Capital Lease 9,680 10,088 -- --
Unrecognized Financial Instruments:
Commitments to Extend Credit -- -- -- --
Standby Letters of Credit -- 35 -- 42
</TABLE>
<PAGE>
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
58
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF UNITED NATIONAL BANCORP:
We have audited the accompanying consolidated balance sheets of United National
Bancorp ( a New Jersey corporation) and subsidiary as of December 31, 1995 and
1994 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of United National Bancorp and
subsidiary as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
As discussed in Notes 1, 4 and 5 to the consolidated financial statements,
during 1994, the Bank changed its method of accounting for securities. In
addition, as discussed in Notes 12 and 13, during 1993, the Bank changed its
method of accounting for income taxes and postretirement benefits other than
pensions.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 12, 1996
<PAGE>
CORPORATE INFORMATION
59
INFORMATION FOR STOCKHOLDERS
FORM 10-K
Stockholders of United National Bancorp are entitled to receive on request a
copy of Form 10-K United National Bancorp's Annual Report to the Securities and
Exchange Commission for the fiscal year 1995. Stockholder requests for that
report should be mailed to the Vice-President & Secretary, Pierce A.R. Baugh,
United National Bancorp, 1130 Route 22 East, Bridgewater, NJ, 08807.
ANNUAL MEETING
The annual meeting of Bancorp's stockholders is scheduled for April 16, 1996 at
10:00AM (prevailing local time) in the corporate headquarters building at 1130
Route 22 East, Bridgewater, NJ. Proxy materials are enclosed.
DIVIDEND REINVESTMENT PLAN
We remind you that an Automatic Dividend Reinvestment and Cash Payment Plan is
available to United National Bancorp shareholders.
Inquiries about the plan should be directed to The Bank of New York, Dividend
Reinvestment Service, P.O. Box 1958, Newark, NJ 07101-9774.
TRANSFER AGENT AND REGISTRAR
The Bank of New York, Church Street Station, P.O. Box 11258, New York, NY
10286-1258
MARKET AND DIVIDEND INFORMATION
United National Bancorp's shares are traded on the over-the counter market under
the NASDAQ symbol UNBJ. The stock is quoted in the Star-Ledger, Courier-News,
New York Times and Wall Street Journal.
Total trades in stock amounted to 340,200 shares in 1994 and 560,428 in 1995. In
addition, 155,011 new shares were issued in 1994 and 205,687 new shares in 1995
through the stock dividend program. Bancorp's Board of Directors designated The
Bank of New York as Registrar and Transfer Agent for United National Bancorp
stock for purposes of implementing a Dividend Reinvestment Plan for interested
stockholders.
Additional information about the market for the stock may be obtained from your
broker.
Market quotations for Bancorp's capital stock during the past two years as
reported on NASDAQ as follows:
<TABLE>
<CAPTION>
Cash Dividends
Year Quarter High* Low* Declared*
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 First $ 29.15 $ 27.37 $ .22
Second 31.37 27.37 .23
Third 32.48 29.37 .24
Fourth 34.67 30.90 .25
1995 First 31.84 30.19 .25
Second 31.13 29.48 .25
Third 36.56 29.95 .26
Fourth 35.38 32.50 .27
</TABLE>
* Adjusted for subsequent stock dividends.
<TABLE>
<CAPTION>
BANK FAMILY***
December 31,
-------------------------
1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Stockholders 1,457 1,049
Directors 12 12
Total Staff 488 466
Officers 128 123
Employees 360 343
</TABLE>
*** 1994 figures do not include effects of New Era acquisition.
<PAGE>
Exhibit 21
(21) LIST OF SUBSIDIARIES
UNITED NATIONAL BANCORP
/ \
|
|
UNITED NATIONAL BANK
(WHOLLY-OWNED SUBSIDIARY)
/ \
|
|
UNB INVESTMENT CO. INC.
(WHOLLY-OWNED SUBSIDIARY)
<PAGE>
ARTHUR ANDERSEN LLP
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To United National Bancorp:
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 12, 1996, included in
United National Bancorp's Annual Report to Shareholders. It should be noted that
we have not audited any financial statements of United National Bancorp
subsequent to December 31, 1995 or performed any audit procedures subsequent to
the date of our report.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 22, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 45,572
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,000
<TRADING-ASSETS> 417
<INVESTMENTS-HELD-FOR-SALE> 334,156
<INVESTMENTS-CARRYING> 24,838
<INVESTMENTS-MARKET> 25,370
<LOANS> 551,222
<ALLOWANCE> 7,412
<TOTAL-ASSETS> 1,010,545
<DEPOSITS> 854,628
<SHORT-TERM> 53,347
<LIABILITIES-OTHER> 11,491
<LONG-TERM> 9,680
0
0
<COMMON> 9,085
<OTHER-SE> 72,314
<TOTAL-LIABILITIES-AND-EQUITY> 1,010,545
<INTEREST-LOAN> 46,890
<INTEREST-INVEST> 24,190
<INTEREST-OTHER> 900
<INTEREST-TOTAL> 71,994
<INTEREST-DEPOSIT> 26,878
<INTEREST-EXPENSE> 29,128
<INTEREST-INCOME-NET> 42,866
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 1,135
<EXPENSE-OTHER> 42,748
<INCOME-PRETAX> 11,997
<INCOME-PRE-EXTRAORDINARY> 8,374
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,374
<EPS-PRIMARY> 2.33
<EPS-DILUTED> 2.33
<YIELD-ACTUAL> 4.95
<LOANS-NON> 6,114
<LOANS-PAST> 1,352
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,597
<CHARGE-OFFS> 3,310
<RECOVERIES> 675
<ALLOWANCE-CLOSE> 7,412
<ALLOWANCE-DOMESTIC> 7,412
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
